<PAGE>
<TABLE>
<S> <C>
Dear Shareholder,
[PHOTO] With the support of investors like you, SchwabFunds-Registered
Trademark- continues to be among the largest and fastest-growing
mutual fund families in the nation. Charles Schwab Investment
Management, Inc. (CSIM) now manages over $60 billion in assets for
more than 3.3 million SchwabFunds shareholders and offers 34 funds
spanning a spectrum of financial markets and investing styles.
</TABLE>
ASSET ALLOCATION AND BOND FUNDS
It is prudent to periodically scrutinize your investment portfolio--in
particular how your assets are allocated among various asset classes, namely
stocks, bonds and cash. Remember that diversifying your portfolio with bond
funds as part of your asset allocation plan can help stabilize your portfolio
over the long term while still providing competitive returns. This is because
changing market conditions may affect various asset classes differently--for
example, as stocks decrease, bonds may increase or vice versa. Of course, bear
in mind that share prices of bond funds, like all investments, fluctuate with
market conditions.
If you have any questions about your own investment plan or need help getting
started, contact your local Schwab branch to set up a free consultation with one
of our representatives. Additionally, I encourage you to visit our Web site at
WWW.SCHWAB.COM/SCHWABFUNDS, where you'll find online resources and tools to help
you evaluate or develop your investment plan.
NEW INVESTMENT OPPORTUNITIES
As a strong proponent of indexing as an investment strategy, we introduced the
converted Schwab Bond Index Funds--Schwab Short-Term Bond Market Index Fund and
Schwab Total Bond Market Index Fund--late last year.(1) Each Fund is broad-based
and diversified and seeks to track indices representing a broad spectrum of the
overall bond market. These Funds may provide excellent opportunities to
diversify your equity portfolio.
In addition, we introduced two new municipal money funds in early February. The
Schwab New Jersey Municipal Money Fund and the Schwab Pennsylvania Municipal
Money Fund are designed to offer taxpayers in those states opportunities for
additional tax savings.(2)
For a free prospectus on Schwab money funds, bond funds or any other SchwabFund,
please call us toll-free at 1-800-435-4000. The prospectus contains more
information, including fees and expenses. Please be sure to read the prospectus
before investing.
Thank you for placing your trust in SchwabFunds. We will continue to explore new
strategies to help you meet your investment goals and to provide you with timely
information on SchwabFunds.
/s/ Charles R. Schwab
Charles R. Schwab
(1) Formerly the Schwab Short/Intermediate Government Bond Fund and the Schwab
Long-Term Government Bond Fund, respectively.
(2) Income may be subject to the federal alternative minimum tax (AMT).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
A Word from SchwabFunds-Registered Trademark-................................... 2
Schwab Short-Term Bond Market Index Fund........................................ 3
Schwab Total Bond Market Index Fund............................................. 5
The Portfolio Management Team................................................... 7
Market Overview................................................................. 8
Questions to the Portfolio Management Team...................................... 14
Financial Statements and Notes.................................................. 17
</TABLE>
1
<PAGE>
A WORD FROM SCHWABFUNDS-REGISTERED TRADEMARK-
We are pleased to bring you the semi-annual report for the Schwab Short-Term
Bond Market Index Fund and the Schwab Total Bond Market Index Fund (the Funds)
for the six-month period ended February 28, 1998. Prior to November 1, 1997,
these two Funds were respectively known as the Schwab Short/Intermediate
Government Bond Fund and the Schwab Long-Term Government Bond Fund.
As we reported in our previous annual report, dated August 31, 1997,
shareholders approved the proposed changes to the Funds' investment objectives
at the shareholders' meeting held on September 22, 1997. Since November 1, 1997,
the Funds have been in a transitional period, converting from an actively
managed strategy to an index strategy. This transition was nearly complete by
the end of the reporting period and is explained in more detail in the QUESTIONS
TO THE PORTFOLIO MANAGEMENT TEAM section later in this report.
During the reporting period, the Funds continued to provide a high level of
current income consistent with preservation of capital. The chart below shows
the income dividends on a per-share basis paid by each Fund during each fiscal
year or reporting period since inception.
DIVIDENDS PAID BY THE SCHWAB BOND INDEX FUNDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INCOME DIVIDENDS PER SHARE
FISCAL YEAR 1991* 1992 1993** 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Schwab Short-Term Bond Market Index Fund (inception 11/5/91) $0.10 $0.60 $0.37 $0.54 $0.59 $0.59
Schwab Total Bond Market Index Fund (inception 3/5/93) $0.31 $0.60 $0.69 $0.65
<CAPTION>
INCOME DIVIDENDS PER SHARE
FISCAL YEAR 1997 1998***
<S> <C> <C>
Schwab Short-Term Bond Market Index Fund (inception 11/5/91) $0.59 $0.30
Schwab Total Bond Market Index Fund (inception 3/5/93) $0.65 $0.30
</TABLE>
* Period from inception (11/5/91) through 12/31/91.
** Period from inception (3/5/93) through 8/31/93 for Schwab Total Bond Market
Index Fund and for the eight-month period ended 8/31/93 for Schwab
Short-Term Bond Market Index Fund.
*** For the six-month period ended 2/28/98 for both Funds.
2
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
PORTFOLIO COMPOSITION
The Fund seeks to track the total return of the Lehman Brothers Mutual Fund
Short (1-5 Year) Government/Corporate Index (the Short-Term Index). The
Short-Term Index represents the performance of government and corporate bonds
that have average maturities of between 1 and 5 years.
The chart below presents the Fund's portfolio as of 2/28/98. This
information is not necessarily indicative of the Fund's future holdings. A
complete list of the Fund's investments, also as of 2/28/98, is located in the
SCHEDULE OF INVESTMENTS section later in this report.
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
Portfolio Composition as of February 28, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. Treasury Obligations 75%
Corporate Bonds* 16%
Agency Obligations 8%
Short-Term Investments 1%
* The credit quality of the securities, based on published ratings from
Standard & Poor's or Moody's Investors Service, is as follows: AA 9%; A 68%; BBB 23%.
</TABLE>
The chart on the following page compares the growth of a hypothetical
$10,000 investment in the Fund, made at inception, with a similar investment in
the Lehman Brothers Mutual Fund (MF) Short (1-3 Year) U.S. Government Index.
THIS INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. Beginning
with the next report to shareholders, the annual report for the year ending
August 31, 1998, we will compare the Fund's performance against its new
benchmark index--the Short-Term Index.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
3
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SCHWAB SHORT-TERM BOND MARKET INDEX FUND AND
THE LEHMAN BROTHERS MF SHORT (1-3 YEAR) U.S. GOVERNMENT INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB SHORT-TERM BOND LEHMAN BROTHERS MF SHORT (1-3)
MARKET INDEX FUND U.S. GOV'T. INDEX
<S> <C> <C>
11/5/91 $10,000 $10,000
11/30/91 $10,117 $10,059
12/31/91 $10,381 $10,212
1/31/92 $10,241 $10,199
2/29/92 $10,240 $10,229
3/31/92 $10,190 $10,226
4/30/92 $10,282 $10,319
5/31/92 $10,440 $10,415
6/30/92 $10,595 $10,521
7/31/92 $10,794 $10,642
8/31/92 $10,898 $10,728
9/30/92 $11,053 $10,829
10/31/92 $10,924 $10,767
11/30/92 $10,868 $10,751
12/31/92 $11,012 $10,851
1/31/93 $11,202 $10,965
2/28/93 $11,355 $11,052
3/31/93 $11,395 $11,087
4/30/93 $11,499 $11,154
5/31/93 $11,462 $11,128
6/30/93 $11,622 $11,211
7/31/93 $11,661 $11,236
8/31/93 $11,823 $11,329
9/30/93 $11,851 $11,365
10/31/93 $11,892 $11,390
11/30/93 $11,819 $11,392
12/31/93 $11,873 $11,438
1/31/94 $11,973 $11,509
2/28/94 $11,780 $11,439
3/31/94 $11,628 $11,380
4/30/94 $11,527 $11,337
5/31/94 $11,485 $11,353
6/30/94 $11,500 $11,381
7/31/94 $11,599 $11,484
8/31/94 $11,628 $11,522
9/30/94 $11,585 $11,495
10/31/94 $11,593 $11,522
11/30/94 $11,528 $11,473
12/31/94 $11,540 $11,495
1/31/95 $11,697 $11,654
2/28/95 $11,852 $11,815
3/31/95 $11,919 $11,883
4/30/95 $12,018 $11,989
5/31/95 $12,232 $12,197
6/30/95 $12,281 $12,263
7/31/95 $12,308 $12,314
8/31/95 $12,396 $12,388
9/30/95 $12,470 $12,449
10/31/95 $12,572 $12,552
11/30/95 $12,696 $12,659
12/31/95 $12,799 $12,754
1/31/96 $12,900 $12,862
2/29/96 $12,817 $12,812
3/31/96 $12,778 $12,803
4/30/96 $12,776 $12,816
5/31/96 $12,777 $12,844
6/30/96 $12,878 $12,938
7/31/96 $12,917 $12,988
8/31/96 $12,940 $13,036
9/30/96 $13,072 $13,155
10/31/96 $13,235 $13,304
11/30/96 $13,368 $13,402
12/31/96 $13,311 $13,405
1/31/97 $13,378 $13,469
2/28/97 $13,397 $13,501
3/31/97 $13,355 $13,491
4/30/97 $13,477 $13,601
5/31/97 $13,575 $13,696
6/30/97 $13,680 $13,791
7/31/97 $13,874 $13,941
8/31/97 $13,841 $13,955
9/30/97 $13,964 $14,061
10/31/97 $14,091 $14,165
11/30/97 $14,130 $14,201
12/31/97 $14,228 $14,296
1/31/98 $14,383 $14,433
2/28/98 $14,358 $14,446
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/98
<TABLE>
<CAPTION>
Since
Inception 30-day SEC
6-Month(1) 1-Year 5-Year (11/5/91) Yield
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Schwab Short-Term Bond Market Index Fund(2) 3.74% 7.17% 4.80% 5.89% 5.44%
- --------------------------------------------------------------------------------------------------------------------
Lehman Brothers MF Short (1-3 Year) U.S.
Government Index 3.52% 7.00% 5.50% 5.99% --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NASD regulations require that we report performance data as of the most recent
calendar quarter. As of 12/31/97, the Fund's six-month, one-year, five-year and
since-inception average annual total returns were 4.00%, 6.89%, 5.26% and 5.89%,
respectively. The 30-day SEC yield was 5.66%.(3)
(1) Actual, not annualized, since period is less than one year.
(2) As discussed on previous pages, the Fund was called the Schwab
Short-Intermediate Government Bond Fund prior to 11/1/97. A portion of the
Fund's expenses was reduced during the reporting period. Without such
reductions, as of 2/28/98, the Fund's six-month, one-year, five-year, and
since-inception average annual total returns would have been 3.51%, 6.77%,
4.51% and 5.53%, respectively. The 30-day SEC yield would have been 4.97%.
(3) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/97, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
3.80%, 6.51%, 4.97% and 5.54%, respectively. The 30-day SEC yield would have
been 5.19%.
4
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
PORTFOLIO COMPOSITION
The Fund seeks to track the total return of the Lehman Brothers Aggregate
Bond Index (the Aggregate Index). The Aggregate Index is a broad-based index
that includes U.S. Government and other investment-grade debt securities, such
as corporate and international (dollar-denominated) bonds and asset-backed and
mortgage-backed securities with maturities over one year.
The chart below presents the Fund's portfolio as of 2/28/98. This
information is not necessarily indicative of the Fund's future holdings. A
complete list of the Fund's investments, also as of 2/28/98, is located in the
SCHEDULE OF INVESTMENTS section later in this report.
SCHWAB TOTAL BOND MARKET INDEX FUND
Portfolio Composition as of February 28, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. Treasury Obligations 62%
Corporate Bonds+# 18%
Asset-Backed Obligations+# 17%
Agency Obligations 2%
Short-Term Investments 1%
+ A combination of various corporate bonds and asset-backed obligations (approximately 30% of the Fund's portfolio)
is used to gain exposure to agency mortgage-backed securities.
# The credit quality of the securities, based on published ratings from Standard & Poor's or Moody's Investors
Service, is as follows: AA 54%; A 22%; BAA 6%; BBB 18%.
</TABLE>
The chart on the following page compares the growth of a hypothetical
$10,000 investment in the Fund, made at inception, with a similar investment in
the Lehman Brothers General U.S. Government Index. THIS INFORMATION IS
HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. Beginning with the next report
to shareholders, the annual report for the year ending August 31, 1998, we will
compare the Fund's performance against its new benchmark index-- the Aggregate
Index.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
5
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN THE SCHWAB TOTAL BOND MARKET INDEX FUND
AND THE LEHMAN BROTHERS GENERAL U.S. GOVERNMENT INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LEHMAN BROTHERS
SCHWAB TOTAL BOND GENERAL U.S.
MARKET INDEX FUND GOV'T. INDEX
<S> <C> <C>
3/5/93 $10,000 $10,000
3/31/93 $9,784 $10,077
4/30/93 $9,890 $10,066
5/31/93 $9,927 $10,289
6/30/93 $10,314 $10,352
7/31/93 $10,441 $10,583
8/31/93 $10,863 $10,623
9/30/93 $10,901 $10,664
10/31/93 $10,952 $10,546
11/30/93 $10,688 $10,587
12/31/93 $10,738 $10,732
1/31/94 $10,938 $10,505
2/28/94 $10,544 $10,269
3/31/94 $10,220 $10,187
4/30/94 $10,112 $10,174
5/31/94 $10,060 $10,151
6/30/94 $10,027 $10,338
7/31/94 $10,239 $10,340
8/31/94 $10,233 $10,194
9/30/94 $10,050 $10,187
10/31/94 $10,036 $10,168
11/30/94 $10,031 $10,230
12/31/94 $10,122 $10,421
1/31/95 $10,347 $10,645
2/28/95 $10,647 $10,712
3/31/95 $10,718 $10,852
4/30/95 $10,887 $11,289
5/31/95 $11,429 $11,376
6/30/95 $11,445 $11,334
7/31/95 $11,348 $11,467
8/31/95 $11,566 $11,577
9/30/95 $11,711 $11,753
10/31/95 $11,931 $11,936
11/30/95 $12,173 $12,106
12/31/95 $12,395 $12,180
1/31/96 $12,438 $11,931
2/29/96 $12,075 $11,832
3/31/96 $11,934 $11,756
4/30/96 $11,766 $11,736
5/31/96 $11,722 $11,888
6/30/96 $11,885 $11,918
7/31/96 $11,890 $11,891
8/31/96 $11,830 $12,089
9/30/96 $12,112 $12,355
10/31/96 $12,451 $12,570
11/30/96 $12,763 $12,441
12/31/96 $12,537 $12,455
1/31/97 $12,533 $12,473
2/28/97 $12,556 $12,340
3/31/97 $12,353 $12,518
4/30/97 $12,606 $12,626
5/31/97 $12,732 $12,767
6/30/97 $12,918 $13,130
7/31/97 $13,363 $13,000
8/31/97 $13,152 $13,195
9/30/97 $13,397 $13,423
10/31/97 $13,687 $13,491
11/30/97 $13,700 $13,633
12/31/97 $13,778 $13,838
1/31/98 $13,977 $13,800
2/28/98 $13,938 $13,800
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/98
<TABLE>
<CAPTION>
Since
Inception 30-day SEC
6-Month(4) 1-Year (3/5/93) Yield
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Schwab Total Bond Market Index Fund(5) 5.98% 11.00% 6.88% 5.39%
- --------------------------------------------------------------------------------------------------------------
Lehman Brothers General U.S. Government Index 4.59% 11.83% 6.67% --
- --------------------------------------------------------------------------------------------------------------
</TABLE>
NASD regulations require that we report performance data as of the most recent
calendar quarter. As of 12/31/97, the Fund's six-month, one-year and
since-inception average annual total returns were 6.66%, 9.99% and 6.86%,
respectively. The 30-day SEC yield was 5.62%.(6)
(4) Actual, not annualized, since period is less than one year.
(5) As discussed on previous pages, the Fund was called the Schwab Long-Term
Government Bond Fund prior to 11/1/97. A portion of the Fund's expenses was
reduced during the reporting period. Without such reductions, as of 2/28/98,
the Fund's six-month, one-year and since-inception average annual total
returns would have been 5.57%, 10.08% and 4.64%, respectively. The 30-day
SEC yield would have been 4.83%.
(6) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/97, the Fund's six-month, one-year and
since-inception average annual total returns would have been 6.17%, 9.03%
and 4.57%, respectively. The 30-day SEC yield would have been 5.02%.
6
<PAGE>
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD--Senior Vice President and Chief Investment Officer--has
overall responsibility for the management of each Fund's portfolio. Steve joined
Charles Schwab Investment Management, Inc. (CSIM) as Vice President and
Portfolio Manager in April 1991 and was promoted to his current position in
August 1993. Prior to joining CSIM, Steve was Vice President and Portfolio
Manager at Federated Investors.
KIMON DAIFOTIS--Vice President and Senior Portfolio Manager--has had primary
responsibility for the day-to-day management of each Fund's portfolio since he
joined CSIM in November 1997. Prior to joining CSIM, Kim spent five years at
Lehman Brothers, where he served as Vice President and Fixed-Income
Institutional Salesman, as well as Senior Portfolio Strategist. Prior to Lehman
Brothers, Kim spent three years as a Senior Portfolio Manager for Barclays
Global Investors.
THE FOLLOWING MARKET OVERVIEW AND ANSWERS TO QUESTIONS ARE PROVIDED BY THE
PORTFOLIO MANAGEMENT TEAM.
7
<PAGE>
MARKET OVERVIEW
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GDP GROWTH RATE
QUARTERLY PERCENT CHANGE (ANNUALIZED RATE)
SOURCE: BLOOMBERG L.P.
<S> <C>
Q1 1990 3.9%
Q2 1990 1.2%
Q3 1990 -1.9%
Q4 1990 -4.0%
Q1 1991 -2.1%
Q2 1991 1.8%
Q3 1991 1.0%
Q4 1991 1.0%
Q1 1992 4.7%
Q2 1992 2.5%
Q3 1992 3.0%
Q4 1992 4.3%
Q1 1993 0.1%
Q2 1993 2.0%
Q3 1993 2.1%
Q4 1993 5.3%
Q1 1994 3.0%
Q2 1994 4.7%
Q3 1994 1.8%
Q4 1994 3.6%
Q1 1995 0.9%
Q2 1995 0.3%
Q3 1995 3.0%
Q4 1995 2.2%
Q1 1996 1.8%
Q2 1996 6.0%
Q3 1996 1.0%
Q4 1996 4.3%
Q1 1997 4.9%
Q2 1997 3.3%
Q3 1997 3.1%
Q4 1997 3.7%
</TABLE>
- - The real GDP growth rate was 3.2% for 1996 and 3.8% for 1997--healthy rates of
growth for the economy and well in excess of the Federal Reserve's estimated
non-inflationary growth rate of 2.0 to 2.75%.
- - The economy appears poised for continued growth, further extending the current
economic expansion that began in 1991. The direct impact of the economic
problems of Pacific Rim countries on 1998 U.S. GDP growth is anticipated to be
relatively minor. Estimates range from a reduction of 0.25 to 1.0%.
- - Prior to the fourth-quarter onset of the "Asian Flu," the strength of the
economy and tight labor markets led to speculation about a potential
acceleration in both wage and price inflation and whether more-restrictive
Federal Reserve policy was imminent. As Federal Reserve Chairman Alan
Greenspan said in his February congressional testimony, "The key question
going forward is whether the restraint building from the turmoil in Asia will
be sufficient to check inflationary tendencies that might otherwise result
from the strength of domestic spending and tightening labor markets." At the
time of this writing, there continues to be no clear consensus whether the
Federal Reserve's next move will be to raise or lower short-term rates.
8
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
Jan-90 5.4%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.4%
Jun-90 5.2%
Jul-90 5.5%
Aug-90 5.7%
Sep-90 5.9%
Oct-90 5.9%
Nov-90 6.2%
Dec-90 6.3%
Jan-91 6.4%
Feb-91 6.6%
Mar-91 6.8%
Apr-91 6.7%
May-91 6.9%
Jun-91 6.9%
Jul-91 6.8%
Aug-91 6.9%
Sep-91 6.9%
Oct-91 7.0%
Nov-91 7.0%
Dec-91 7.3%
Jan-92 7.3%
Feb-92 7.4%
Mar-92 7.4%
Apr-92 7.4%
May-92 7.6%
Jun-92 7.8%
Jul-92 7.7%
Aug-92 7.6%
Sep-92 7.6%
Oct-92 7.3%
Nov-92 7.4%
Dec-92 7.4%
Jan-93 7.3%
Feb-93 7.1%
Mar-93 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
Jul-93 6.9%
Aug-93 6.8%
Sep-93 6.7%
Oct-93 6.8%
Nov-93 6.6%
Dec-93 6.5%
Jan-94 6.7%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.0%
Jun-94 6.1%
Jul-94 6.1%
Aug-94 6.1%
Sep-94 5.9%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.4%
Jan-95 5.6%
Feb-95 5.5%
Mar-95 5.4%
Apr-95 5.7%
May-95 5.6%
Jun-95 5.6%
Jul-95 5.7%
Aug-95 5.7%
Sep-95 5.7%
Oct-95 5.5%
Nov-95 5.6%
Dec-95 5.6%
Jan-96 5.7%
Feb-96 5.5%
Mar-96 5.5%
Apr-96 5.5%
May-96 5.5%
Jun-96 5.3%
Jul-96 5.4%
Aug-96 5.2%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.3%
Jan-97 5.4%
Feb-97 5.3%
Mar-97 5.2%
Apr-97 4.9%
May-97 4.8%
Jun-97 5.0%
Jul-97 4.8%
Aug-97 4.9%
Sep-97 4.9%
Oct-97 4.7%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.7%
Feb-98 4.6%
Source: Bloomberg L.P.
</TABLE>
- - Job growth has remained robust, and the unemployment rate reached a new low
for this decade during the reporting
period. In fact, the 4.6% and 4.7% rates experienced during the reporting
period represent the lowest unemployment rates in 24 years.
- - Although inflation has been well contained, the combination of a tight labor
market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains, such as we experienced in 1997, allow manufacturers and
other businesses to limit price increases in the face of
rising wages, without sacrificing profit margins.
9
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
SOURCE: BLOOMBERG L.P.
QUARTERLY EMPLOYMENT COST INDEX MONTHLY CONSUMER PRICE INDEX
<S> <C> <C>
Jan-90 5.3% 5.2%
Feb-90 5.3% 5.3%
Mar-90 5.3% 5.2%
Apr-90 5.4% 4.7%
May-90 5.4% 4.4%
Jun-90 5.4% 4.7%
Jul-90 5.1% 4.8%
Aug-90 5.1% 5.6%
Sep-90 5.1% 6.2%
Oct-90 4.8% 6.3%
Nov-90 4.8% 6.3%
Dec-90 4.8% 6.1%
Jan-91 4.6% 5.7%
Feb-91 4.6% 5.3%
Mar-91 4.6% 4.9%
Apr-91 4.5% 4.9%
May-91 4.5% 5.0%
Jun-91 4.5% 4.7%
Jul-91 4.3% 4.4%
Aug-91 4.3% 3.8%
Sep-91 4.3% 3.4%
Oct-91 4.2% 2.9%
Nov-91 4.2% 3.0%
Dec-91 4.2% 3.1%
Jan-92 4.1% 2.6%
Feb-92 4.1% 2.8%
Mar-92 4.1% 3.2%
Apr-92 3.5% 3.2%
May-92 3.5% 3.0%
Jun-92 3.5% 3.1%
Jul-92 3.4% 3.2%
Aug-92 3.4% 3.1%
Sep-92 3.4% 3.0%
Oct-92 3.5% 3.2%
Nov-92 3.5% 3.0%
Dec-92 3.5% 2.9%
Jan-93 3.4% 3.3%
Feb-93 3.4% 3.2%
Mar-93 3.4% 3.1%
Apr-93 3.6% 3.2%
May-93 3.6% 3.2%
Jun-93 3.6% 3.0%
Jul-93 3.6% 2.8%
Aug-93 3.6% 2.8%
Sep-93 3.6% 2.7%
Oct-93 3.4% 2.8%
Nov-93 3.4% 2.7%
Dec-93 3.4% 2.7%
Jan-94 3.2% 2.5%
Feb-94 3.2% 2.5%
Mar-94 3.2% 2.5%
Apr-94 3.1% 2.4%
May-94 3.1% 2.3%
Jun-94 3.1% 2.5%
Jul-94 3.1% 2.8%
Aug-94 3.1% 2.9%
Sep-94 3.1% 3.0%
Oct-94 3.0% 2.6%
Nov-94 3.0% 2.7%
Dec-94 3.0% 2.7%
Jan-95 3.0% 2.8%
Feb-95 3.0% 2.9%
Mar-95 3.0% 2.9%
Apr-95 3.0% 3.1%
May-95 3.0% 3.2%
Jun-95 3.0% 3.0%
Jul-95 2.8% 2.8%
Aug-95 2.8% 2.6%
Sep-95 2.8% 2.5%
Oct-95 2.8% 2.8%
Nov-95 2.8% 2.6%
Dec-95 2.8% 2.5%
Jan-96 2.9% 2.7%
Feb-96 2.9% 2.7%
Mar-96 2.9% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.9% 2.8%
Jul-96 2.9% 3.0%
Aug-96 2.9% 2.9%
Sep-96 2.9% 3.0%
Oct-96 3.0% 3.0%
Nov-96 3.0% 3.3%
Dec-96 3.0% 3.3%
Jan-97 2.8% 3.0%
Feb-97 2.8% 3.0%
Mar-97 2.8% 2.8%
Apr-97 2.8% 2.5%
May-97 2.8% 2.2%
Jun-97 2.8% 2.3%
Jul-97 3.0% 2.2%
Aug-97 3.0% 2.2%
Sep-97 3.0% 2.2%
Oct-97 3.2% 2.1%
Nov-97 3.2% 1.8%
Dec-97 3.2% 1.7%
Jan-98 1.6%
Feb-98 1.4%
</TABLE>
- - Both the Employment Cost Index and Consumer Price Index (CPI) remained in
check throughout 1997, reflecting continued low levels of inflation.
- - The CPI rose 1.7% during 1997--the lowest rate of increase since 1986. Its
core rate (which excludes the more volatile food and energy components) rose
2.2%--the lowest rate of increase since 1965. The increase in the Employment
Cost Index, although low, was somewhat more of a concern, particularly the
Wages and Salaries component, which increased 3.8% during 1997.
- - Even though current levels of inflation continue to be very low, the Federal
Reserve indicated throughout most of the reporting period that the economy
remains in the zone where inflation risks are increasing, and that it is
poised to act preemptively by raising interest rates if necessary. The Federal
Reserve did take action in March 1997, increasing the Federal Funds Rate by
0.25% to 5.50%. At the end of the reporting period, however, sentiment was
mixed regarding the direction and timing of the Federal Reserve's next action.
10
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
<S> <C> <C> <C>
S&P 500-R- Index Schwab Small-Cap Index-R- Schwab International Index-R-
8/97 $1.00 $1.00 $1.00
9/97 $1.06 $1.08 $1.06
10/97 $1.02 $1.03 $0.98
11/97 $1.07 $1.02 $0.97
12/97 $1.09 $1.04 $0.99
1/98 $1.10 $1.03 $1.03
2/98 $1.18 $1.11 $1.09
<CAPTION>
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
<S> <C>
Lehman MF General U.S. Govt. Index
8/97 $1.00
9/97 $1.02
10/97 $1.03
11/97 $1.04
12/97 $1.05
1/98 $1.06
2/98 $1.06
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
are representative returns of specific market sectors during the reporting
period and do not reflect the performance of any fund. Indices are unmanaged
and, unlike a fund, do not reflect the payment of advisory fees and other
expenses associated with an investment in a fund. Investors cannot invest in
an index directly.
- - Domestic stocks continued to post the strongest total returns for the
six-month period ended 2/28/98, as represented by the respective 17.6% and
11.2% returns for the S&P 500 Index and the Schwab Small-Cap Index.
- - International stocks, as represented by the Schwab International Index,
achieved a return of 8.9% for the reporting period in spite of an Asian-lead
correction of 8.1% during October.
- - U.S. government bonds, as represented by the Lehman Mutual Fund General U.S.
Government Index, achieved a return of 6.2% for the six-month reporting
period.
11
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500-R- Index Price/Earnings Ratio
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24.00
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Source: Bloomberg L.P.
</TABLE>
- - The price/earnings ratio for the S&P 500 Index was 26.4 at the close of the
reporting period, its highest month-end value ever, and well above its 30-year
average of 14.8.
- - Based on other traditional market valuation measures such as the price-to-book
value ratio or the dividend yield, the U.S. stock market, as measured by the
S&P 500 Index, also reached historical highs during the reporting period.
- - Although low inflation, low interest rates and strong cash flows into mutual
funds have helped the U.S. equity markets reach these levels, Federal Reserve
Chairman Greenspan has warned that current stock market values make sense only
if the outlook for corporate earnings growth remains positive, an assumption
which, as always, will be widely debated by
market participants.
12
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR TREASURY BOND YIELD 5-YEAR TREASURY BOND YIELD
<S> <C> <C>
8/29/97 6.61% 6.22%
9/5/97 6.64% 6.23%
9/12/97 6.59% 6.17%
9/19/97 6.38% 6.01%
9/26/97 6.37% 5.99%
10/3/97 6.29% 5.87%
10/10/97 6.43% 6.02%
10/17/97 6.44% 6.08%
10/24/97 6.27% 5.90%
10/31/97 6.15% 5.71%
11/7/97 6.16% 5.81%
11/14/97 6.11% 5.80%
11/21/97 6.03% 5.75%
11/28/97 6.05% 5.84%
12/5/97 6.08% 5.88%
12/12/97 5.93% 5.69%
12/19/97 5.92% 5.71%
12/26/97 5.90% 5.71%
1/2/98 5.84% 5.61%
1/9/98 5.73% 5.25%
1/16/98 5.81% 5.40%
1/23/98 5.97% 5.52%
1/30/98 5.80% 5.38%
2/6/98 5.92% 5.47%
2/13/98 5.85% 5.42%
2/20/98 5.87% 5.49%
2/27/98 5.92% 5.59%
Source: Bloomberg L.P.
</TABLE>
- - Treasury bond yields fell significantly during the six-month reporting
period--by 0.53% and 0.48% for 30-year and 5-year Treasury bonds,
respectively.
- - The economic problems experienced by many Pacific Rim countries, collectively
referred to as the "Asian Flu," were the main cause of the decline in yields.
Investors seeking a safe haven increased demand for U.S. Treasury securities
and bid up prices, thereby decreasing Treasury bond yields.
- - The Federal Reserve's decision to leave rates unchanged due to international
market turbulence, as well as acceptable domestic economic statistics showing
strong growth coupled with contained inflation, also led to favorable fixed-
income market conditions.
13
<PAGE>
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
Q HOW DID THE FUNDS PERFORM DURING THE SIX-MONTH REPORTING PERIOD?
A Both Funds achieved favorable total returns for the period, aided in part by
the overall decline in bond yields, which increased prices of the Funds'
portfolio securities, thereby increasing the Funds'
net asset values (NAVs).
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
The Schwab Short-Term Bond Market Index Fund achieved a total return of
3.74% for the six-month period ended February 28, 1998, comprising 3.02% in
income return and 0.72% in capital appreciation. The NAV increase was a result
of the Fund's declining 30-day SEC yield, which fell from 5.79% at the beginning
of the period to 5.44% by the end of the period. The Fund's weighted average
maturity (WAM), 2.87 years as of February 28, 1998, remained fairly consistent
throughout the reporting period.
SCHWAB TOTAL BOND MARKET INDEX FUND
The Schwab Total Bond Market Index Fund achieved a total return of 5.98% for
the six-month period ended February 28, 1998, comprising 3.11% in income return
and 2.87% in capital appreciation. The NAV increase was a result of the Fund's
declining 30-day SEC yield, which fell from 6.63% at the beginning of the period
to 5.39% by the end of the period. The Fund's weighted average maturity had been
reduced significantly from 11.05 as of 8/31/97 to 7.68 years by the end of the
reporting period. This change in WAM was implemented in response to the Fund's
new investment objective and to more closely align the Fund's WAM with that of
its new benchmark index--the Lehman Brothers Aggregate Bond Index.
Q WHAT IS THE STATUS OF THE FUNDS'
CONVERSION TO INDEX FUNDS?
A As we reported in the August 31, 1997, annual report, Fund shareholders
overwhelmingly approved the proposal to change each Fund's investment objective
from an actively managed government bond strategy to an index strategy designed
to track the Lehman Brothers Short (1-5 Year) Government/Corporate Index (Schwab
Short-Term Bond Market Index Fund) and the Lehman Brothers Aggregate Bond Index
(Schwab Total Bond Market Index Fund).
During the reporting period, the portfolio management team nearly completed
all the portfolio transactions required to implement the indexing strategy.
Effective March 1, 1998, we will be evaluating and reporting the Funds'
performance relative to each Fund's respective Lehman Brothers index.
Please note that in this report, the performance graphs on pages 4 and 6
compare each Fund's performance to its previous benchmark index. In future
reports, each Fund will use its recently designated Lehman Brothers index as a
basis for comparison.
Q WHAT ARE THE BENEFITS OF INVESTING IN SCHWAB'S BOND INDEX FUNDS, AND HOW MIGHT
THEY FIT IN AN ASSET ALLOCATION PLAN?
14
<PAGE>
A Simply put, with Schwab's bond index funds, you can diversify your portfolio
holdings while getting the advantages of an indexing approach. Benefits of an
indexing strategy include broad portfolio diversification, a consistent
investment style and potentially lower trading costs as a result of lower
portfolio turnover. And, all other things being equal, lower fund costs can
translate into higher returns for investors.
No matter what your investment profile, diversifying your portfolio with
bond funds as part of your asset allocation plan may help offset the effects of
stock market downturns and can generally help add stability to your portfolio,
as shown in the following example. Of course, share prices of bond funds, like
any investment, fluctuate with market conditions. The chart below displays the
high, low and average annual returns from 1970 to 1997 for five hypothetical
portfolios representing the returns of stocks and bonds as measured by
indices.(7) As shown in the chart, adding bonds to an all-stock portfolio has
reduced risk while still producing competitive returns.
A portfolio comprising 40% bonds and 60% stocks, for example, achieved an
average annual return of 11.65%--only slightly over 1% less than the 12.97%
return of the all-stock portfolio--and did so with significantly less
volatility. The lowest annual return of the portfolio invested 40% in bonds and
60% in stocks, which was actually a loss of 13.61%, was about half of the 26.47%
loss in the all-stock portfolio. Of course, past performance does not guarantee
future results.
(7) The returns do not reflect actual investment in any security. The
hypothetical returns are all weighted averages and assume reinvestment of
dividends.
The indices represented are the S&P 500-Registered Trademark- Index and the
Ibbotson Intermediate Government Bond Index. Indices are unmanaged, do not
incur costs and expenses, and cannot be invested in directly.
HYPOTHETICAL PORTFOLIOS SHOWING THE EFFECTS OF ADDING BONDS
TO AN ALL-STOCK PORTFOLIO--1970-1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
<S> <C> <C> <C>
All Stocks 37.43% 12.97% -26.47%
90% Stocks 10% Bonds 35.37% 12.68% -23.25%
80% Stocks 20% Bonds 33.30% 12.36% -20.04%
70% Stocks 30% Bonds 31.24% 12.02% -16.82%
60% Stocks 40% Bonds 29.18% 11.65% -13.61%
</TABLE>
15
<PAGE>
Q AS THE STOCK MARKET CONTINUES TO REACH RECORD HIGHS, SHOULD I RECONSIDER MY
PORTFOLIO ALLOCATION TO BONDS?
A Whenever there has been significant divergence between returns of asset
classes, it can be prudent to review your portfolio asset allocation. As an
example, total returns produced by large-cap domestic stocks dwarfed those of
domestic bonds for the three-year period ended 12/31/97. This performance
discrepancy is illustrated by the respective 29.88% and 10.83% average annual
returns produced for that period by the Schwab 1000 Fund-Registered Trademark-,
which invests in large-cap domestic equities, and the Schwab Total Bond Market
Index Fund.(8)
This discrepancy in total returns can cause an investor's portfolio asset
allocation to shift, as shown in the following example. Assume that an investor
had a hypothetical asset allocation of 60% stocks and 40% bonds (invested in
just these two Funds) at the beginning of the three-year period, reinvesting all
Fund distributions during the period. By the end of the period, the portfolio's
asset allocation mix would have shifted to 71% stocks and 29% bonds--a
significant shift from the investor's original strategy.
<TABLE>
<CAPTION>
12/31/94 Portfolio 12/31/97 Portfolio
------------------------ 3-Year ------------------------
Value Allocation Growth Value Allocation
--------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Schwab 1000 Fund-Registered Trademark- $ 6,000 60% $ 7,146 $ 13,146 71%
Schwab Total Bond Market Index Fund $ 4,000 40% $ 1,445 $ 5,445 29%
--------- --- ----------- --------- ---
Total Portfolio Value $ 10,000 100% $ 8,591 $ 18,591 100%
</TABLE>
We believe that investors should focus on their own risk profiles and income
needs to determine the most appropriate level of bonds in their portfolios. In
addition to providing income, bonds have performance characteristics that can
make them an attractive element of a well-diversified investment portfolio. As
shown in the example in the previous question, since bond returns have
historically not been well correlated with stock returns,(9) combining bonds in
a portfolio with other asset classes can be an effective way to reduce overall
portfolio volatility.
(8) Total return assumes reinvestment of all dividends and capital gains
distributions, if any. Past performance is no guarantee of future results.
Principal value and investment returns will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than their original cost. A
portion of both Funds' expenses was reduced during the period. Without these
reductions, the Funds' total returns would have been lower.
(9) For the 20-year period ended 12/31/97, the correlation of large-cap stock
returns and government bond returns has been 0.38. Source: Symphony Asset
Management.
16
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
- ------------------------------------------------------------------------------
(Formerly Schwab Short/Intermediate Government Bond Fund)
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total
Net Assets Net Assets Percentage
as of as of Growth Over
02/28/98 08/31/97 Reporting
(000s) (000s) Period
<S> <C> <C>
- ---------------------------------------------
$ 146,190 $ 127,460 15%
- ---------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1998
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------
(cum.)
<S> <C> <C> <C>
1 - 6 Months $ 941 0.7% 0.7%
7 - 36 Months 78,620 54.3 55.0
37 - 60 Months 61,101 42.2 97.2
Over 60 Months 4,028 2.8 100.0%
--------- -----
$ 144,690 100.0%
--------- -----
--------- -----
</TABLE>
Average Weighted Maturity--2.87 Years
- --------------------------------------------------------------------------------
17
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
- ------------------------------------------------------------------------------
(Formerly Schwab Long-Term Government Bond Fund)
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total
Net Assets Net Assets Percentage
as of as of Growth Over
02/28/98 08/31/97 Reporting
(000s) (000s) Period
- ---------------------------------------------
<S> <C> <C>
$ 119,469 $ 24,778 382%
- ---------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1998
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------
(cum.)
<S> <C> <C> <C>
0 - 1 Year $ 20,981 17.7% 17.7%
2 - 10 Years 77,942 65.9 83.6
11 - 20 Years 7,376 6.2 89.8
21 - 30 Years 12,066 10.2 100.0
Over 30 Years 0 0.0 100.0%
--------- -----
$ 118,365 100.0%
--------- -----
--------- -----
</TABLE>
Average Weighted Maturity--7.68 Years
- --------------------------------------------------------------------------------
18
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND-REGISTERED TRADEMARK-
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS--74.7%(a)
U.S. Treasury Notes
6.25%, 05/31/99 $ 10,000 $ 10,086
6.88%, 07/31/99 5,800 5,902
6.88%, 08/31/99 5,000 5,094
7.12%, 09/30/99 5,000 5,116
5.63%, 12/31/99 1,250 1,251
5.38%, 01/31/00 17,000 16,947
5.50%, 02/29/00 20,000 19,987
6.75%, 04/30/00 5,000 5,117
8.00%, 05/15/01 2,600 2,780
6.38%, 09/30/01 5,000 5,121
5.88%, 11/30/01 18,000 18,151
6.63%, 03/31/02 4,000 4,143
6.63%, 04/30/02 2,000 2,073
5.75%, 11/30/02 1,400 1,407
5.50%, 02/28/03 5,000 4,983
---------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $107,622) 108,158
---------
CORPORATE BONDS--16.3%(b)
American General Finance
6.25%, 12/18/02 2,000 2,005
American Home Products
7.70%, 02/15/00 2,000 2,065
Bank of New York Co., Inc.
6.63%, 06/15/03 2,000 2,035
Bank One Corp.
7.25%, 08/01/02 2,000 2,078
Columbia Gas Systems
6.39%, 11/28/00 2,000 2,020
Comdisco, Inc.
6.38%, 11/30/01 1,500 1,513
Ford Motor Credit
7.00%, 09/25/01 2,000 2,058
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
Hertz Corp.
7.00%, 05/01/02 $ 2,000 $ 2,043
Lehman Brothers
6.20%, 01/15/02 1,500 1,493
Quebec Province
7.50%, 07/15/02 2,000 2,095
Walmart Stores
5.65%, 02/01/10 2,000 1,993
WestPac Banking Corp.
9.13%, 08/15/01 2,000 2,183
---------
TOTAL CORPORATE BONDS (Cost
$23,596) 23,581
---------
AGENCY OBLIGATIONS--8.3%(a)
Federal Home Loan Bank
6.26%, 08/09/99 5,000 5,033
Federal National Mortgage
Assoc.
6.45%, 03/26/01 5,000 5,019
5.25%, 01/15/03 2,000 1,958
---------
TOTAL AGENCY OBLIGATIONS (Cost
$11,994) 12,010
---------
SHORT-TERM INVESTMENTS--0.7%(b)
Provident Institutional Funds--
Fed Funds Portfolio
5.21%, 03/07/98 941 941
---------
TOTAL SHORT-TERM INVESTMENTS
(Cost $941) 941
---------
TOTAL INVESTMENTS--100% (Cost
$144,153) $ 144,690
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
- --------------------------------------------------------------------------------
19
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND-REGISTERED TRADEMARK-
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS--62.9%(a)
U.S. Treasury Bond
6.13%, 11/15/27 $ 1,900 $ 1,957
U.S. Treasury Notes
5.63%, 11/30/99 25,000 25,022
5.75%, 11/30/02 20,250 20,348
5.50%, 02/28/03 5,500 5,481
6.13%, 08/15/07 16,300 16,303
6.38%, 08/15/27 5,000 5,301
---------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $74,274) 74,412
---------
CORPORATE BONDS--17.7%(b)
BRE Properties, Inc.
7.12%, 02/15/13 3,000 2,981
Delta Air Lines Inc., Debenture
9.75%, 05/15/21 2,000 2,575
Hydro Quebec
8.05%, 07/07/06 (c) 2,000 2,320
Lehman Brothers
6.20%, 01/15/02 1,500 1,493
Nabisco, Inc.
6.00%, 02/15/11 2,000 1,988
NationsBank Corp.
6.50%, 03/15/06 2,000 2,018
Sony Corp.
6.13%, 03/04/03 (c) 3,000 2,999
Swiss Bank Corp.
7.75%, 09/01/26 (c) 2,000 2,233
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
USX Corp.
9.38%, 02/15/12 $ 2,000 $ 2,407
---------
TOTAL CORPORATE BONDS (Cost
$21,066) 21,014
---------
ASSET BACKED OBLIGATIONS--16.9%(b) (c)
Morgan Stanley Aircraft
Financing
5.90%, 03/15/23 20,000 20,000
---------
TOTAL ASSET BACKED OBLIGATIONS
(Cost $20,000) 20,000
---------
AGENCY OBLIGATIONS--1.7%(a)
Federal National Mortgage
Assoc.
5.25%, 01/15/03 2,000 1,958
---------
TOTAL AGENCY OBLIGATIONS (Cost
$1,993) 1,958
---------
SHORT-TERM INVESTMENTS--0.8%(b)
Provident Institutional Funds--
Fed Funds Portfolio
5.21%, 03/07/98 981 981
---------
TOTAL SHORT-TERM INVESTMENTS
(Cost $981) 981
---------
TOTAL INVESTMENTS--100% (Cost
$118,314) $ 118,365
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
February 28, 1998 (Unaudited)
(a) Interest rates represent coupon rate of security.
(b) Interest rate represents the yield as of report date.
(c) Security traded on a delayed-delivery basis. Payment and delivery is
scheduled for a future time, generally within two weeks of entering into
the transaction. The transaction is subject to market fluctuation and to
the risk that the value may be more or less than the purchase price when
the transaction was initiated. The Fund has set aside sufficient investment
securities as collateral for securities purchased on a delayed-delivery
basis.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
21
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
------------ ------------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $144,153 and $118,314, respectively) $ 144,690 $ 118,365
Receivables:
Interest 2,287 919
Investments sold 61,817 37,849
Fund shares sold 120 207
Deferred organization costs -- 5
Prepaid expenses 88 22
------------ ------------
Total assets 209,002 157,367
------------ ------------
LIABILITIES
Payables:
Dividends 74 58
Investments purchased 62,576 37,683
Fund shares redeemed 57 65
Other liabilities 105 92
------------ ------------
Total liabilities 62,812 37,898
------------ ------------
Net assets applicable to outstanding shares $ 146,190 $ 119,469
------------ ------------
------------ ------------
NET ASSETS CONSIST OF:
Paid-in-capital $ 155,457 $ 118,447
Distributions in excess of net investment income (44) (62)
Accumulated net realized gain (loss) on investments sold (9,760) 1,033
Net unrealized appreciation on investments 537 51
------------ ------------
$ 146,190 $ 119,469
------------ ------------
------------ ------------
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 14,902 11,913
Net asset value, offering and redemption price per share $9.81 $10.03
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
22
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
------------- -------------
<S> <C> <C>
Interest income $ 4,248 $ 1,809
------------- -------------
Expenses:
Investment advisory and administration fees 277 122
Transfer agency and shareholder service fees 170 74
Custodian fees 39 21
Professional fees 10 18
Shareholder reports 45 11
Trustees' fees 6 8
Registration fees 7 14
Amortization of deferred organization costs -- 6
Other expenses 19 14
------------- -------------
573 288
Less: expenses reduced (see Note 4) (292) (199)
------------- -------------
Total expenses incurred by Fund 281 89
------------- -------------
Net investment income 3,967 1,720
------------- -------------
Net realized gain on investments sold 1,083 1,382
Net unrealized depreciation on investments (108) (364)
------------- -------------
Net gain on investments 975 1,018
------------- -------------
Increase in net assets resulting from operations $ 4,942 $ 2,738
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
23
<PAGE>
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
------------------------- -------------------------
Six months Six months
ended Year ended Year
February 28, ended February 28, ended
1998 August 31, 1998 August 31,
(Unaudited) 1997 (Unaudited) 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 3,967 $ 7,863 $ 1,720 $ 1,476
Net realized gain (loss) on investments sold 1,083 (105) 1,382 (51)
Net unrealized appreciation (depreciation) on investments (108) 1,132 (364) 869
------------ ----------- ------------ -----------
Increase in net assets resulting from operations 4,942 8,890 2,738 2,294
------------ ----------- ------------ -----------
Dividends to shareholders from net investment income (4,015) (7,869) (1,727) (1,475)
Dividends in excess of net investment income (44) -- (62) --
------------ ----------- ------------ -----------
Total distributions (4,059) (7,869) (1,789) (1,475)
Capital share transactions
Proceeds from shares sold 34,547 28,648 99,350 16,059
Net asset value of shares issued in reinvestment of
dividends 3,119 6,022 1,416 970
Less payments for shares redeemed (19,819) (42,250) (7,024) (15,831)
------------ ----------- ------------ -----------
Increase (decrease) in net assets from capital share
transactions 17,847 (7,580) 93,742 1,198
------------ ----------- ------------ -----------
Total increase (decrease) in net assets 18,730 (6,559) 94,691 2,017
Net assets:
Beginning of period 127,460 134,019 24,778 22,761
------------ ----------- ------------ -----------
End of period (including distributions in excess of net
investment income and undistributed net investment
income of ($44), $48, ($62) and $7, respectively) $ 146,190 $ 127,460 $ 119,469 $ 24,778
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Number of Fund shares:
Sold 3,515 2,944 9,932 1,658
Reinvested 318 620 141 100
Redeemed (2,017) (4,343) (702) (1,642)
------------ ----------- ------------ -----------
Net increase (decrease) in shares outstanding 1,816 (779) 9,371 116
Shares outstanding:
Beginning of period 13,086 13,865 2,542 2,426
------------ ----------- ------------ -----------
End of period 14,902 13,086 11,913 2,542
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
24
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Six months
ended Eight months Year
February 28, Year ended August 31, ended ended
1998 -------------------------------------- August 31, December 31,
(Unaudited) 1997 1996 1995 1994 1993 1992
------------ -------- -------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.74 $ 9.67 $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28
------------ -------- -------- -------- -------- ------------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.28 0.59 0.59 0.59 0.54 0.37 0.60
Net realized and unrealized gain
(loss) on investments 0.08 0.07 (0.17) 0.03 (0.71) 0.38 0.01
------------ -------- -------- -------- -------- ------------- ------------
Total from investment operations 0.36 0.66 0.42 0.62 (0.17) 0.75 0.61
LESS DISTRIBUTIONS
Dividends from net investment income (0.29) (0.59) (0.59) (0.59) (0.54) (0.37) (0.60)
Dividends in excess of net investment
income++ -- -- -- -- -- -- --
Dividends from realized gain on
investments -- -- -- -- (0.12) -- (0.03)
------------ -------- -------- -------- -------- ------------- ------------
Total distributions (0.29) (0.59) (0.59) (0.59 (0.66) (0.37) (0.63)
------------ -------- -------- -------- -------- ------------- ------------
Net asset value at end of period $ 9.81 $ 9.74 $ 9.67 $ 9.84 $ 9.81 $ 10.64 $ 10.26
------------ -------- -------- -------- -------- ------------- ------------
------------ -------- -------- -------- -------- ------------- ------------
TOTAL RETURN (not annualized) 3.74% 6.96% 4.39% 6.61% (1.67)% 7.39% 6.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s) $146,190 $127,460 $134,019 $157,191 $190,479 $273,973 $226,223
Ratio of expenses to average net
assets+ 0.41%* 0.49% 0.49% 0.58% 0.60% 0.60%* 0.43%
Ratio of net investment income to
average net assets+ 5.85%* 6.02% 6.03% 6.11% 5.28% 5.28%* 5.78%
Portfolio turnover rate 82% 71% 80% 203% 91% 107% 185%
</TABLE>
- --------------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced by the
Investment Manager and Schwab. Had these expenses not been reduced, the
Fund's expense and net investment income ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net
assets 0.84%* 0.82% 0.80% 0.81% 0.81% 0.84%* 0.89%
Ratio of net investment income to
average net assets 5.42%* 5.69% 5.72% 5.88% 5.07% 5.04%* 5.32%
</TABLE>
++ Amount per share does not round to a full penny.
* Annualized
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
25
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Six months
ended Period
February 28, Year ended August 31, ended
1998 --------------------------------- August 31,
(Unaudited) 1997 1996 1995 1994 1993**
------------ ------- ------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.75 $ 9.38 $ 9.80 $ 9.33 $10.53 $10.00
------------ ------- ------- ------- ------ ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.29 0.65 0.65 0.69 0.60 0.31
Net realized and unrealized gain (loss) on investments 0.29 0.37 (0.42) 0.47 (1.20) 0.53
------------ ------- ------- ------- ------ ----------
Total from investment operations 0.58 1.02 0.23 1.16 (0.60) 0.84
LESS DISTRIBUTIONS
Dividends from net investment income (0.29) (0.65) (0.65) (0.69) (0.60) (0.31)
Dividends in excess of net investment income (0.01) -- -- -- -- --
------------ ------- ------- ------- ------ ----------
Total distributions (0.30) (0.65) (0.65) (0.69) (0.60) (0.31)
------------ ------- ------- ------- ------ ----------
Net asset value at end of period $ 10.03 $ 9.75 $ 9.38 $ 9.80 $ 9.33 $10.53
------------ ------- ------- ------- ------ ----------
------------ ------- ------- ------- ------ ----------
TOTAL RETURN (not annualized) 5.98% 11.18% 2.29% 13.03% (5.80)% 8.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s) $119,469 $24,778 $22,761 $12,949 $7,108 $2,806
Ratio of expenses to average net assets+ 0.30%* 0.20% 0.00% 0.00% 0.10% 0.26%*
Ratio of net investment income to average net assets+ 5.76%* 6.74% 6.67% 7.38% 6.27% 6.36%*
Portfolio turnover rate 239% 51% 66% 240% 123% 42%
</TABLE>
- --------------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
reimbursed by the Investment Manager and Schwab. Had these expenses not been
reduced and reimbursed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 0.97%* 1.18% 1.17% 1.18% 2.19% 19.19%*
Ratio of net investment income to average net assets 5.10%* 5.76% 5.50% 6.20% 4.18% (12.57)%*
</TABLE>
* Annualized
** For the period March 5, 1993 (commencement of operations) to August 31,
1993.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 28, 1998 (Unaudited)
1. DESCRIPTION OF THE FUNDS
The Schwab Short-Term Bond Market Index Fund (formerly Schwab Short/Intermediate
Government Bond Fund), and Schwab Total Bond Market Index Fund (formerly Schwab
Long-Term Government Bond Fund) (the "Funds") are series of Schwab Investments
(the "Trust"), a no-load, open-end, management investment company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940 (the "Act"), as amended. Effective November 1,
1997, each of the Funds changed its name pursuant to changes in investment
objective approved by shareholders.
In addition to the Funds, the Trust also offers--the Schwab 1000 Fund-Registered
Trademark-, Schwab California Short/Intermediate Tax-Free Bond Fund, Schwab
California Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate Tax-Free Bond
Fund and Schwab Long-Term Tax-Free Bond Fund. The assets of each series are
segregated and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
SECURITY VALUATION--Bonds and notes are generally valued at prices obtained from
an independent bond-pricing service. These securities are valued at the mean
between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities within 60 days or less of maturity are stated at amortized
cost, which approximates market value.
SECURITY TRANSACTIONS AND INTEREST INCOME--Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Realized
gains and losses from security transactions are determined on an identified cost
basis. Interest income is accrued on a daily basis and includes amortization of
premium and accretion of discount on investments. For callable bonds purchased
at a premium, the excess of the purchase price over the call value is amortized
against interest income through the call date. If the call provision is not
exercised, any remaining premium is amortized through the final maturity date.
SWAP AGREEMENTS--Each Fund may enter into swap agreements, which are an exchange
of one security or asset for another. A swap may be entered into in order to,
among other things,
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
change the maturity of a Fund's portfolio, to protect a Fund's value from
changes in interest rates, to expose a Fund to a different security or market,
or to help a Fund track its Index. By entering into a swap agreement, a Fund is
exposed to the risks of unanticipated movements in interest rates or in the
value of an underlying security or index, or that the counterparty will not
fulfill its obligation under the agreement.
As of February 28, 1998, the Total Bond Market Index Fund had an outstanding
mortgage index swap agreement with the following terms:
<TABLE>
<CAPTION>
Notional Termination Payments Made Payments Received Net
Swap Counterparty Amount Date by the Fund by the Fund Payable
- --------------------------------- ----------- ----------- --------------- ------------------------- -----------
<S> <C> <C> <C> <C> <C>
Lehman Brothers Special Finance $37,000,000 2/26/99 LIBOR less Total Return of the $ 5,683
0.15% Lehman
Mortgage Bond Index
</TABLE>
Net amounts payable under the agreement are included in other liabilities in the
Statement of Assets and Liabilities. Net income or loss from the swap agreement
is included in net investment income. The Fund has set aside investment
securities as collateral in a segregated account in an amount at least equal to
net amounts payable under the agreement.
DIVIDENDS TO SHAREHOLDERS--Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
DEFERRED ORGANIZATION COSTS--Costs incurred in connection with the organization
of the Funds and their initial registration with the Securities and Exchange
Commission are amortized on a straight-line basis over a five-year period from
each Fund's commencement of operations.
EXPENSES--Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
FEDERAL INCOME TAXES--It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
At February 28, 1998, (for financial reporting and federal income tax purposes):
<TABLE>
<CAPTION>
Net Unrealized Appreciated Depreciated
Appreciation Securities Securities
-------------- ----------- -----------
<S> <C> <C> <C>
Schwab Short-Term Bond Market Index Fund $ 537,000 $ 621,000 $ 84,000
Schwab Total Bond Market Index Fund $ 51,000 $ 176,000 $ 125,000
</TABLE>
CAPITAL LOSS CARRYFORWARDS--As of August 31, 1997, the unused capital loss
carryforwards, for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Schwab Short-Term Schwab Total Bond
Bond Market Index Fund Market Index Fund
----------------------- ------------------
<S> <C> <C>
Expiring in:
08/31/03 $ 8,355,000 $ 237,000
08/31/04 2,216,000 --
08/31/05 183,000 94,000
------------ ------------------
Total capital loss carryforwards $ 10,754,000 $ 331,000
------------ ------------------
------------ ------------------
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT--The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. The Investment Manager has reduced and reimbursed a
portion of its fee for the six months ended February 28, 1998 (see Note 4).
TRANSFER AGENCY AND SHAREHOLDER SERVICE AGREEMENTS--The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
Schwab has reduced and reimbursed a portion of its fees for the six months ended
February 28, 1998 (see Note 4).
OFFICERS AND TRUSTEES--Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
six months ended February 28, 1998, the Trust made no direct payments to its
officers or trustees who are "interested persons" within the meaning of the Act,
as amended. The Funds incurred fees aggregating $14,000 related to the Trust's
unaffiliated trustees.
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
OTHER AFFILIATED PARTIES AND TRANSACTIONS--As of February 28, 1998, The Schwab
Total Bond Market Index Fund had outstanding shares of 22% and 40% owned by
Schwab Asset Director--Conservative Growth Fund and Schwab Asset
Director--Balanced Growth Fund, respectively.
INTERFUND TRANSACTIONS--During the six months ended February 28, 1998, Schwab
Total Bond Market Index Fund engaged in sale transactions with funds that have a
common investment adviser, common trustees, and common officers. These sale
transactions, made at current market value pursuant to Rule 17a-7 under the Act,
were $56,755,000.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab guarantee that, effective November 1, 1997
through at least October 31, 1998, the Schwab Short-Term Bond Market Index Fund
and Schwab Total Bond Market Index Funds' total operating expenses will not
exceed 0.38% and 0.30%, respectively, of each Fund's average daily net assets,
after reductions and reimbursements. For the purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses and
taxes.
For the six months ended February 28, 1998, the total of such fees reduced and
reimbursed by the Investment Manager and Schwab was $268,000 and $24,000 for the
Schwab Short-Term Bond Market Index Fund and $142,000 and $57,000 for the Schwab
Total Bond Market Index Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the six months ended February 28, 1998, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Bond Market Total Bond Market
Index Fund Index Fund
----------------------- -----------------
<S> <C> <C>
Purchases $ 128,740 $ 238,419
Proceeds of sales and maturities $ 110,553 $ 146,194
</TABLE>
- --------------------------------------------------------------------------------
30
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money funds.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack-TM- Portfolios--High**
Schwab MarketTrack-TM- Portfolios--Balanced**
Schwab MarketTrack-TM- Portfolios--Conservative**
Schwab MarketManager-TM- Portfolios--Growth***
Schwab MarketManager-TM- Portfolios--Balanced***
SCHWAB STOCK FUNDS
Schwab 1000 Fund-Registered Trademark-
Schwab S&P 500 Fund
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager-TM- Portfolios--Small Company***
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager-TM- Portfolios--International***
SCHWAB BOND FUNDS
Schwab Bond Index Funds--Total and Short-Term Bond Market Index Funds*
Schwab Tax-Free Bond Funds--Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds--Long-Term and Short/Intermediate
SCHWAB MONEY FUNDS
Schwab offers an array of money funds that seek high current income with safety
and liquidity.+ Choose from taxable or tax-advantaged alternatives. Many can be
linked to your Schwab account to "sweep" cash balances automatically when you're
between investments. Or, for your larger cash reserves, choose one of our Value
Advantage Investments-Registered Trademark-.
Please call 1-800-435-4000 for a free prospectus and brochure for any of the
SchwabFunds-Registered Trademark-. This report must be preceded or accompanied
by a current prospectus.
EACH PROSPECTUS PROVIDES MORE COMPLETE INFORMATION, INCLUDING CHARGES AND
EXPENSES.
PLEASE READ IT CAREFULLY BEFORE INVESTING.
* Formerly known as the Schwab Government Bond Funds--Long-Term and
Short/Intermediate.
+ Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the funds will be able to
maintain a stable share price of $1.
** Formerly called the Schwab Asset Director-Registered Trademark- Funds.
*** Formerly called the Schwab OneSource Portfolios.
