<PAGE> 1
SCHWABFUNDS
SCHWAB
ANALYTICS
FUND(R)
Annual Report
October 31, 1997
<PAGE> 2
[PHOTO OF CHARLES R. SCHWAB]
October 31, 1997
Dear Shareholder,
With the support of investors like you, SchwabFunds(R) continues to be
among the largest and fastest-growing mutual fund families in the nation.
Charles Schwab Investment Management, Inc. (CSIM) now manages over $53 billion
in assets for nearly 3 million SchwabFunds shareholders and offers 31 funds
spanning a spectrum of financial markets and investing styles.
MAINTAINING A LONG-TERM PERSPECTIVE
The recent volatility in both domestic and international markets reminds us that
investments can move in both directions, down as well as up, especially in the
short term. For this reason, it is extremely important that you develop and
stick with a long-term investment plan that is appropriate for your personal
goals, time horizon and tolerance for risk. While it's a good idea to
periodically review your portfolio, I would encourage you to avoid making
changes merely in response to short-term market movements.
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
We recently introduced the Schwab OneSource Portfolios - Small Company Fund -- a
professionally managed portfolio of small company mutual funds in one convenient
investment. If you're looking for an easy, cost-effective way to tap into the
growth potential of small companies, this Fund may be an appropriate investment
for you. For a free prospectus, which contains more information, including fees
and expenses, please call our toll-free line, 1-800-435-4000. 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 meet your investment needs and to provide you with timely
information on SchwabFunds.
/s/ Charles R. Schwab
Charles R. Schwab
<PAGE> 3
CONTENTS
A Word from SchwabFunds(R) 2
Schwab Analytics Fund(R) Performance 2
Schwab Analytics Fund Holdings 4
The Portfolio Management Team 5
Market Overview 6
Questions to the Portfolio Management Team 11
Financial Statements and Notes 13
1
<PAGE> 4
A WORD FROM SCHWABFUNDS(R)
We are pleased to bring you the annual report for the Schwab Analytics Fund(R)
(the Fund) for the fiscal year ended October 31, 1997.
The Fund seeks to achieve long-term capital growth. To achieve its objective,
the Fund uses quantitative techniques, proprietary software models, and
real-time databases to systematically select stocks that exhibit a combination
of attributes that historically have been associated with aggregate total
returns greater than that of the Standard & Poor's 500(R) Index (S&P 500 Index)
over the long term. The Fund also intends to maintain broad industry
diversification similar to that of the S&P 500 Index. By doing so, the Fund
seeks to outperform the S&P 500 Index over the long term without significantly
increasing the risk to the investor.
FUND PERFORMANCE
The graph on the following page compares the growth of a hypothetical $10,000
investment in the Schwab Analytics Fund, made at its inception, with a similar
investment in the S&P 500(R) Index. THIS INFORMATION IS HISTORICAL AND DOES NOT
REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE SO THAT 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.
2
<PAGE> 5
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN THE SCHWAB ANALYTICS FUND(R)
AND THE S&P 500(R) INDEX
<TABLE>
<CAPTION>
Date Analytics S&P 500
- --------------------------------------
<S> <C> <C>
Jul 1, 96 10,000 10,000
Jul 31, 96 9,690 9,558
Aug 31, 96 9,880 9,760
Sep 30, 96 10,620 10,309
Oct 31, 96 11,010 10,594
Nov 30, 96 11,640 11,394
Dec 31, 96 11,368 11,168
Jan 31, 97 11,959 11,865
Feb 28, 97 11,908 11,958
Mar 31, 97 11,287 11,468
Apr 30, 97 12,081 12,152
May 31, 97 12,722 12,890
Jun 30, 97 13,272 13,468
Jul 31, 97 14,462 14,539
Aug 31, 97 13,821 13,724
Sep 30, 97 14,646 14,475
Oct 31, 97 13,964 13,992
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 10/31/97
<TABLE>
<CAPTION>
1 Yr. Since Inception (7/1/96)
- ------------------------------------------------------------------------------------
<S> <C> <C>
SCHWAB ANALYTICS FUND 1 26.83% 28.37%
- ------------------------------------------------------------------------------------
S&P 500 INDEX 32.10% 28.56%
- ------------------------------------------------------------------------------------
AVERAGE LARGE-CAP FUND 2 26.28% 23.26%
- ------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 9/30/97
<TABLE>
<CAPTION>
1 Yr. Since Inception (7/1/96)
- -------------------------------------------------------------------------------------
<S> <C> <C>
SCHWAB ANALYTICS FUND 1 37.91% 35.63%
- -------------------------------------------------------------------------------------
</TABLE>
1 The Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least 2/28/98 that total
operating expenses will not exceed 0.75%. Without fee waivers and guarantees, as
of 10/31/97, the average annual one-year and since inception total returns would
have been 26.46% and 27.87%, respectively. As of 9/30/97, the average annual
one-year and since inception total returns would have been 37.34% and 35.01%,
respectively.
2 Based on data supplied by Morningstar, Inc. Average total returns for 1,134
and 1,117 large-cap funds, respectively, for the one-year and since inception
periods (load adjusted).
3
<PAGE> 6
FUND HOLDINGS
Schwab Analytics Fund(R) (the Fund) invests primarily in the common stocks of
large and medium capitalization publicly traded U.S. companies and will
typically invest in stocks of at least 50 issuers. The Fund intends to maintain
industry diversification similar to that of the S&P 500(R) Index. Following are
a list of the Fund's 10 largest holdings and a chart showing the economic
sectors in which the Fund is invested as of October 31, 1997.
TOP 10 HOLDINGS AS A PERCENTAGE
OF FUND INVESTMENTS 3
<TABLE>
<CAPTION>
INVESTMENT %
<S> <C>
General Electric Co. 3.8
BellSouth Corp. 3.2
Intel Corp. 3.1
Bristol-Myers Squibb Co. 3.0
TJX Companies, Inc. 2.7
Merck & Co., Inc. 2.3
Coca-Cola Co. 2.0
Microsoft Corp. 2.0
AT&T Corp. 1.9
Texaco, Inc. 1.9
TOTAL 25.9%
</TABLE>
PORTFOLIO BY ECONOMIC SECTOR 3
<TABLE>
<CAPTION>
<S> <C>
Capital Goods 8.1%
Consumer Non-Durables 31.8%
Energy 8.8%
Finance 17.1%
Materials & Services 8.8%
Technology 14.7%
Transportation 1.8%
Utilities 8.9%
</TABLE>
Source: Wilshire Associates
3 Both the top 10 holdings and the economic sector percentages are as of
10/31/97, may not be representative of current or future investments, and do not
include cash equivalents. A complete listing of the Fund's investments as of
10/31/97 can be found in the Schedule of Investments later in this report.
4
<PAGE> 7
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD - Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of the Fund's portfolio. Steve joined
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.
GERI HOM - Vice President and Senior Portfolio Manager, has primary
responsibility for the day-to-day management of the Fund's portfolio. Geri
joined CSIM in March 1995 as Portfolio Manager and was promoted to her current
position in December 1996. She currently manages approximately $6.1 billion in
assets. Prior to joining CSIM, Geri was a principal for Wells Fargo Nikko
Investment Advisors and Vice President and Manager of the Domestic Equity
Portfolio Management Group for Wells Fargo Nikko.
PRAVEEN GOTTIPALLI - Portfolio Manager, is director of Investments for Symphony
Asset Management (Symphony), the Fund's Sub-Adviser. Praveen joined Symphony in
May 1994. Prior to that, he was Director of the Active Strategies Group of
BARRA, Inc. Symphony, a wholly owned subsidiary of BARRA, Inc., serves as
Sub-Adviser to the Fund. BARRA, founded in 1975, provides innovative analytical
models, software, and services. Symphony, subject to the supervision of CSIM,
provides investment assistance and day-to-day management of the Fund's non-cash
investments, as well as investment research and statistical information.
The following Market Overview as well as the answers to questions for the Fund
are provided by the Portfolio Management Team.
5
<PAGE> 8
MARKET OVERVIEW
REAL GDP GROWTH RATE
Quarterly Percentage Change in Annual Rate
<TABLE>
<CAPTION>
<S> <C>
Q1 1990 0.041
Q2 1990 0.013
Q3 1990 -0.019
Q4 1990 -0.041
Q1 1991 -0.022
Q2 1991 0.017
Q3 1991 0.01
Q4 1991 0.01
Q1 1992 0.047
Q2 1992 0.025
Q3 1992 0.03
Q4 1992 0.043
Q1 1993 -0.001
Q2 1993 0.019
Q3 1993 0.023
Q4 1993 0.048
Q1 1994 0.025
Q2 1994 0.049
Q3 1994 0.035
Q4 1994 0.03
Q1 1995 0.004
Q2 1995 0.007
Q3 1995 0.038
Q4 1995 0.003
Q1 1996 0.02
Q2 1996 0.047
Q3 1996 0.021
Q4 1996 0.038
Q1 1997 0.049
Q2 1997 0.033
Q3 1997 0.033
</TABLE>
Source: Bloomberg L.P.
- - The economy, as measured by the growth of real GDP, continues to expand at
a healthy rate. The real GDP growth rate was 3.2% for the 1996 calendar
year and 3.9% (on an annualized basis) for the first nine months of 1997.
- - The strength of the economy and tight labor markets (refer to following
graph) continue to lead to speculation regarding potential acceleration in
both wage and price inflation and whether more restrictive Federal Reserve
policy is imminent. The Federal Reserve has indicated that it is "on alert"
for signs of accelerating inflation whether caused by tight labor markets
or by consumer spending fueled by a strong stock market.
- - At the time of this writing, the economy appears poised for continued
growth, extending the current economic expansion that began in 1991.
6
<PAGE> 9
U.S. UNEMPLOYMENT RATE
<TABLE>
<CAPTION>
<S> <C>
Jan-90 0.053
Feb-90 0.053
Mar-90 0.052
Apr-90 0.054
May-90 0.053
Jun-90 0.051
Jul-90 0.054
Aug-90 0.056
Sep-90 0.057
Oct-90 0.058
Nov-90 0.06
Dec-90 0.062
Jan-91 0.063
Feb-91 0.065
Mar-91 0.068
Apr-91 0.066
May-91 0.068
Jun-91 0.068
Jul-91 0.067
Aug-91 0.068
Sep-91 0.068
Oct-91 0.069
Nov-91 0.069
Dec-91 0.071
Jan-92 0.071
Feb-92 0.073
Mar-92 0.073
Apr-92 0.073
May-92 0.074
Jun-92 0.077
Jul-92 0.076
Aug-92 0.076
Sep-92 0.075
Oct-92 0.074
Nov-92 0.073
Dec-92 0.073
Jan-93 0.071
Feb-93 0.07
Mar-93 0.07
Apr-93 0.07
May-93 0.069
Jun-93 0.069
Jul-93 0.068
Aug-93 0.067
Sep-93 0.067
Oct-93 0.067
Nov-93 0.065
Dec-93 0.064
Jan-94 0.067
Feb-94 0.066
Mar-94 0.065
Apr-94 0.064
May-94 0.06
Jun-94 0.06
Jul-94 0.061
Aug-94 0.061
Sep-94 0.059
Oct-94 0.056
Nov-94 0.056
Dec-94 0.054
Jan-95 0.056
Feb-95 0.054
Mar-95 0.058
Apr-95 0.057
May-95 0.057
Jun-95 0.056
Jul-95 0.057
Aug-95 0.053
Sep-95 0.056
Oct-95 0.055
Nov-95 0.056
Dec-95 0.056
Jan-96 0.058
Feb-96 0.055
Mar-96 0.056
Apr-96 0.054
May-96 0.056
Jun-96 0.053
Jul-96 0.054
Aug-96 0.051
Sep-96 0.052
Oct-96 0.052
Nov-96 0.053
Dec-96 0.053
Jan-97 0.054
Feb-97 0.053
Mar-97 0.052
Apr-97 0.049
May-97 0.048
Jun-97 0.05
Jul-97 0.048
Aug-97 0.049
Sep-97 0.049
Oct-97 0.047
</TABLE>
Source: Bloomberg L.P.
- - Job growth has remained robust and the unemployment rate has reached a new
low for this decade. In fact, the October rate of 4.7% represents the
lowest rate in 24 years.
- - 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, as we
experienced in the second and third quarters, allow manufacturers to keep a
lid on prices in the face of rising wages, without trimming profit margins.
7
<PAGE> 10
MEASURES OF INFLATION
<TABLE>
<CAPTION>
- ----- MONTHLY CONSUMER PRICE INDEX
<S> <C>
Jan-90 0.052
Feb-90 0.053
Mar-90 0.052
Apr-90 0.047
May-90 0.044
Jun-90 0.047
Jul-90 0.048
Aug-90 0.056
Sep-90 0.062
Oct-90 0.063
Nov-90 0.063
Dec-90 0.061
Jan-91 0.057
Feb-91 0.053
Mar-91 0.049
Apr-91 0.049
May-91 0.05
Jun-91 0.047
Jul-91 0.044
Aug-91 0.038
Sep-91 0.034
Oct-91 0.029
Nov-91 0.03
Dec-91 0.031
Jan-92 0.026
Feb-92 0.028
Mar-92 0.032
Apr-92 0.032
May-92 0.03
Jun-92 0.031
Jul-92 0.032
Aug-92 0.031
Sep-92 0.03
Oct-92 0.032
Nov-92 0.03
Dec-92 0.029
Jan-93 0.033
Feb-93 0.032
Mar-93 0.031
Apr-93 0.032
May-93 0.032
Jun-93 0.03
Jul-93 0.028
Aug-93 0.028
Sep-93 0.027
Oct-93 0.028
Nov-93 0.027
Dec-93 0.027
Jan-94 0.025
Feb-94 0.025
Mar-94 0.025
Apr-94 0.024
May-94 0.023
Jun-94 0.025
Jul-94 0.028
Aug-94 0.029
Sep-94 0.03
Oct-94 0.026
Nov-94 0.027
Dec-94 0.027
Jan-95 0.028
Feb-95 0.029
Mar-95 0.029
Apr-95 0.031
May-95 0.032
Jun-95 0.03
Jul-95 0.028
Aug-95 0.026
Sep-95 0.025
Oct-95 0.028
Nov-95 0.026
Dec-95 0.025
Jan-96 0.027
Feb-96 0.027
Mar-96 0.028
Apr-96 0.029
May-96 0.029
Jun-96 0.028
Jul-96 0.03
Aug-96 0.029
Sep-96 0.03
Oct-96 0.03
Nov-96 0.033
Dec-96 0.033
Jan-97 0.03
Feb-97 0.03
Mar-97 0.028
Apr-97 0.025
May-97 0.022
Jun-97 0.023
Jul-97 0.022
Aug-97 0.022
Sep-97 0.022
Oct-9 0.021
</TABLE>
_______ QUARTERLY EMPLOYMENT COST INDEX
<TABLE>
<S> <C>
Jan-90 0.053
Feb-90 0.053
Mar-90 0.053
Apr-90 0.054
May-90 0.054
Jun-90 0.054
Jul-90 0.051
Aug-90 0.051
Sep-90 0.051
Oct-90 0.048
Nov-90 0.048
Dec-90 0.048
Jan-91 0.046
Feb-91 0.046
Mar-91 0.046
Apr-91 0.045
May-91 0.045
Jun-91 0.045
Jul-91 0.043
Aug-91 0.043
Sep-91 0.043
Oct-91 0.042
Nov-91 0.042
Dec-91 0.042
Jan-92 0.041
Feb-92 0.041
Mar-92 0.041
Apr-92 0.035
May-92 0.035
Jun-92 0.035
Jul-92 0.034
Aug-92 0.034
Sep-92 0.034
Oct-92 0.035
Nov-92 0.035
Dec-92 0.035
Jan-93 0.034
Feb-93 0.034
Mar-93 0.034
Apr-93 0.036
May-93 0.036
Jun-93 0.036
Jul-93 0.036
Aug-93 0.036
Sep-93 0.036
Oct-93 0.034
Nov-93 0.034
Dec-93 0.034
Jan-94 0.032
Feb-94 0.032
Mar-94 0.032
Apr-94 0.031
May-94 0.031
Jun-94 0.031
Jul-94 0.031
Aug-94 0.031
Sep-94 0.031
Oct-94 0.03
Nov-94 0.03
Dec-94 0.03
Jan-95 0.03
Feb-95 0.03
Mar-95 0.03
Apr-95 0.03
May-95 0.03
Jun-95 0.03
Jul-95 0.028
Aug-95 0.028
Sep-95 0.028
Oct-95 0.028
Nov-95 0.028
Dec-95 0.028
Jan-96 0.029
Feb-96 0.029
Mar-96 0.029
Apr-96 0.029
May-96 0.029
Jun-96 0.029
Jul-96 0.029
Aug-96 0.029
Sep-96 0.029
Oct-96 0.03
Nov-96 0.03
Dec-96 0.03
Jan-97 0.028
Feb-97 0.028
Mar-97 0.028
Apr-97 0.028
May-97 0.028
Jun-97 0.028
Jul-97 0.03
Aug-97 0.03
Sep-97 0.03
Oct-97 0.03
</TABLE>
Source: Bloomberg L.P.
- - Both the Employment Cost Index and Consumer Price Index (CPI) remained in
check throughout the first three quarters of 1997, reflecting continued low
levels of inflation.
- - For the one-year period ended October 31, 1997, the CPI rose 2.1%, the
lowest rate since February 1987. Its core rate (which excludes the more
volatile food and energy components) rose 2.3%, the lowest rate since 1965.
- - Even though current levels of inflation are very low, the Federal Reserve
has indicated its belief that the economy remains in the zone where
inflation risks are on the upside and that it is poised to act preemptively
by raising interest rates if necessary. The Federal Reserve did take action
in March, increasing the Federal Funds Rate by 0.25% to 5.50%.
8
<PAGE> 11
TOTAL RETURN PERFORMANCE
Value of a Hypothetical $1 Investment
<TABLE>
<CAPTION>
LEHMAN
SCHWAB SCHWAB BROTHERS
S&P 500(R) SMALL-CAP INTERNATIONAL GENERAL U.S.
INDEX INDEX(R) INDEX(R) GOV'T. INDEX
<S> <C> <C> <C> <C>
Oct-96 1 1 1 1
Nov-96 1.076 1.04 1.046 1.017
Dec-96 1.054 1.059 1.037 1.007
Jan-97 1.12 1.084 1.003 1.008
Feb-97 1.129 1.058 1.019 1.01
Mar-97 1.083 1.006 1.026 0.999
Apr-97 1.147 1.009 1.037 1.013
May-97 1.217 1.132 1.114 1.022
Jun-97 1.271 1.191 1.179 1.033
Jul-97 1.373 1.259 1.21 1.063
Aug-97 1.296 1.288 1.123 1.052
Sep-97 1.367 1.389 1.194 1.068
Oct-97 1.321 1.328 1.097 1.086
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
are representative returns of specific market sectors during the one-year
reporting period and do not reflect the performance of any fund. Indices are
unmanaged, and unlike funds, 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.
- - Despite corrections in March, August, and October, domestic equity
investments continued to be the best performing asset class and achieved
strong returns for the one-year reporting period. Large-cap domestic stocks,
as represented by the S&P 500 Index, achieved a total return of 32.1%, while
small-cap stocks, as represented by the Schwab Small-Cap Index, achieved a
total return of 32.8%.
- - International stocks, as represented by the Schwab International Index,
achieved a return of 9.7% for the one-year reporting period, following an
Asian-led correction of 9.7% during the month of October.
- - U.S. government bonds, as represented by the Lehman Brothers General U.S.
Government Index, achieved a lower, albeit less volatile, return of 8.6% for
the one-year reporting period.
9
<PAGE> 12
S&P 500(R) PRICE/EARNINGS RATIO
<TABLE>
<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 14.9
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 25.5
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.2
Feb-93 24.25
Mar-93 24.22
Apr-93 23.2
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 20.1
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.9
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.2
Mar-95 16.5
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 19.3
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.6
Nov-96 21.05
Dec-96 20.7
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
Oct-97 22.84
</TABLE>
Source: Bloomberg L.P.
The price/earnings ratio, also known as a multiple, is the price of a stock
divided by its earnings per share and generally indicates how much investors are
willing to pay for a company's earning potential.
- - The price/earnings ratio for the S&P 500 was 22.8 at the close of the
reporting period, well above its 30-year average of 14.7.
- - Based on other traditional measures such as the price-to-book value ratio or
dividend yield, the U.S. stock market valuation, as measured by the S&P 500,
reached historical highs during the reporting period.
- - Although low inflation and interest rates and strong 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.
10
<PAGE> 13
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
Q. HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A. As shown in the Market Overview section, both large-cap and small-cap
domestic stock returns were impressive. The Schwab Analytics Fund(R) achieved a
total return of 26.83% for the one-year period ended October 31, 1997.
Although the Fund's performance for the one-year reporting period was
impressive, it did not outperform the 32.10% return of its benchmark, the S&P
500(R) Index. The primary reason for the underperformance is that the Fund held
approximately 15% to 20% of its assets in mid-cap stocks which are not included
in the S&P 500 Index. During the first six months of the reporting period,
mid-cap stocks significantly underperformed large-cap stocks. On an
inception-to-date basis, the Fund's average annual total return of 28.37%
remains very close to the 28.56% total return of the S&P 500 Index. Although
there may be short-term deviations, the objective of the Fund is to outperform
this benchmark over the long term.
Q. HOW DO THE HOLDINGS OF THE SCHWAB ANALYTICS FUND DIFFER FROM THE STOCKS IN
THE S&P 500 INDEX?
A. The Fund's Investment Manager monitors approximately 1,300 companies with
current market capitalizations of at least $500 million. This universe of large
and medium-sized companies is then narrowed down to between 50 and 100 stocks
that the Investment Manager identifies as having the best return potential based
on valuation factors, projections of analysts identified for their superior
forecasting skills, and insider selling activity.
Throughout the reporting period, the Fund held approximately 15% to 20% of its
holdings in stocks of companies outside the S&P 500 Index. As previously
mentioned, these non-index stocks, as a group, had mid-cap or smaller size bias
relative to the S&P 500 Index. With the exception of this differential, there
were no significant differences between the characteristics of the index stocks
and the stocks owned by the Fund. The Fund is designed not to have significant
industry or market sensitivity deviations from the S&P 500 Index and seeks to
enhance performance by selecting the most attractive companies within a given
industry.
Q. OF THOSE STOCKS HELD BY THE FUND AT THE CLOSE OF THE PERIOD, WHICH
EXPERIENCED THE GREATEST APPRECIATION SINCE BEING ACQUIRED BY THE FUND?
A. The five stocks with the greatest appreciation as of the close of the
reporting period were: 4
<TABLE>
<CAPTION>
Initial 10/31/97
Acquisition % % Fund
Security Date Appreciation Investments
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Bristol-Myers
Squibb Co. 6/28/96 97 3.0
- -----------------------------------------------------------------------
UAL Corp. 8/14/96 90 0.3
- -----------------------------------------------------------------------
SLM
Holding Corp. 6/28/96 87 1.6
- -----------------------------------------------------------------------
SunTrust Banks,
Inc. 6/28/96 72 1.5
- -----------------------------------------------------------------------
Quantum Corp. 4/3/97 58 0.7
- -----------------------------------------------------------------------
</TABLE>
4 Information is as of 10/31/97 and may not be indicative of current or future
investments. A complete listing of the Fund's investments as of 10/31/97 can be
found in the Schedule of Investments later in this report.
11
<PAGE> 14
Q. HOW HAS THE RECENT MARKET VOLATILITY AFFECTED THE PERFORMANCES OF THE S&P
500(R) INDEX AND THE FUND? WHAT IMPACT SHOULD THIS HAVE ON MY INVESTMENT
ALLOCATION TO THE FUND?
A. Although both domestic and international markets experienced significant
volatility during, and especially towards the end of the reporting period, it is
important to maintain a long-term perspective. Even with corrections in excess
of 10% during the month of October 1997, the respective total returns for the
S&P 500 Index and the Schwab Analytics Fund(R) were still in excess of 26% for
the one-year period ended October 31, 1997. In fact, market declines of at least
10% are not particularly unusual and occur on average about once every three
years. 5 These corrections, however, may not be so apparent over a longer
period, which tends to smooth out the impacts of short-term volatility.
We think the most meaningful way for investors to evaluate their exposure to
domestic as well as international market risk is not on an individual fund
basis, but in regard to their overall investment portfolio. One of the greatest
risks of a bear market is the risk of selling at the bottom of a market
downturn. It is for this reason that your asset allocation strategy and total
portfolio market exposure should be set at an appropriate level for you--one
that allows you to "ride out" market downturns over the long term.
5 Source: Mark W. Riepe and Derek A. Sasveld, "Equity Investments," Scott L.
Lummer and Mark W. Riepe (ed.), Pension Investment Handbook 1998 Supplement, New
York: Panel Publishing, 1998.
12
<PAGE> 15
SCHWAB ANALYTICS FUND(R)
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
COMMON STOCK--97.5%
AEROSPACE/DEFENSE--1.4%
Boeing Co. 15,378 $ 736
General Dynamics Corp. 17,200 1,397
--------
2,133
--------
AIR TRANSPORTATION--0.7%
Continental Airlines, Inc.
Class B+ 12,000 519
UAL Corp.+ 5,500 482
--------
1,001
--------
APPAREL--0.9%
Liz Claiborne, Inc. 25,100 1,272
--------
BANKS--8.2%
City National Corp. 77,700 2,336
J.P. Morgan & Co., Inc. 14,400 1,580
NationsBank Corp. 8,000 479
Regions Financial Corp. 7,200 265
Republic New York Corp. 22,300 2,359
Southtrust Corp. 23,800 1,142
Star Bank Corp. 36,600 1,796
SunTrust Banks, Inc. 34,600 2,243
--------
12,200
--------
BUSINESS MACHINES & SOFTWARE--8.5%
Compaq Computer Corp.+ 37,000 2,359
Computer Associates
International, Inc. 11,000 820
Dell Computer Corp.+ 9,000 721
Diebold, Inc. 36,000 1,586
International Business
Machines Corp. 20,000 1,961
Microsoft Corp.+ 22,500 2,925
Pitney Bowes, Inc. 15,000 1,190
Quantum Corp.+ 35,100 1,110
--------
12,672
--------
BUSINESS SERVICES--2.3%
Browning-Ferris Industries,
Inc. 8,000 260
Ecolab, Inc. 5,700 271
Interpublic Group of
Companies, Inc. 25,050 1,190
Keane, Inc.+ 9,200 273
Symantec Corp.+ 62,000 1,356
--------
3,350
--------
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
CHEMICAL--1.4%
E.I. du Pont de Nemours & Co. 25,500 $ 1,450
Lyondell Petrochemical Co.+ 27,200 697
--------
2,147
--------
CONSTRUCTION--0.2%
Southdown, Inc.+ 6,000 332
--------
CONSUMER-NONDURABLE--1.1%
Fort James Corp.+ 12,500 496
Fortune Brands, Inc. 33,500 1,108
--------
1,604
--------
ELECTRONICS--5.2%
Intel Corp. 59,200 4,558
Lucent Technologies, Inc.+ 1,000 82
National Semiconductor Corp.+ 39,600 1,426
Tektronix, Inc. 28,800 1,703
--------
7,769
--------
ENERGY-DEVELOPMENT--2.7%
Burlington Resources, Inc. 25,100 1,228
Global Marine, Inc.+ 30,200 940
Occidental Petroleum Corp. 65,100 1,815
--------
3,983
--------
FOOD-AGRICULTURE--5.8%
Campbell Soup Co. 28,000 1,444
Coca-Cola Co. 53,500 3,022
Interstate Bakeries Corp. 40,000 2,555
Quaker Oats Co. 21,000 1,005
Universal Corp. 15,000 577
--------
8,603
--------
GOLD--0.3%
Newmont Mining Corp. 11,100 389
--------
HEALTHCARE--12.0%
Bristol-Myers Squibb Co. 50,000 4,389
Eli Lilly & Co. 27,400 1,832
Guidant Corp.+ 40,500 2,329
Johnson & Johnson 37,200 2,134
McKesson Corp.+ 10,500 1,127
Merck & Co., Inc. 37,900 3,383
Mylan Laboratories, Inc.+ 47,200 1,035
Schering-Plough Corp. 30,400 1,704
--------
17,933
--------
</TABLE>
13
<PAGE> 16
SCHWAB ANALYTICS FUND(R)
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
HOUSEHOLD PRODUCTS--1.6%
Colgate-Palmolive Co. 23,300 $ 1,509
Gillette Co. 9,100 810
--------
2,319
--------
INSURANCE--3.1%
CIGNA Corp. 13,400 2,080
Equitable Companies, Inc. 26,000 1,071
Torchmark Corp. 38,200 1,523
--------
4,674
--------
MEDIA--2.6%
McGraw Hill Companies, Inc. 13,000 850
New York Times Co. Class A 17,000 931
Tribune Co. 1,100 61
Washington Post Co. 4,800 2,082
--------
3,924
--------
MISCELLANEOUS FINANCE--5.3%
Freddie Mac 23,400 886
Fannie Mae 14,200 688
H.F. Ahmanson & Co. 12,000 708
Lehman Brothers Holdings,
Inc. 13,000 612
Merrill Lynch & Co., Inc.+ 5,000 338
SLM Holding Corp. 16,900 2,372
Travelers Group, Inc. 32,600 2,282
--------
7,886
--------
MOTOR VEHICLE--1.8%
Arvin Industries, Inc. 64,900 2,430
Navistar International Corp.+ 10,000 232
--------
2,662
--------
OIL-DOMESTIC--0.9%
Sun, Inc. 20,000 801
Unocal Corp. 14,100 582
--------
1,383
--------
OIL-INTERNATIONAL--4.9%
Chevron Corp. 29,100 2,413
Exxon Corp. 22,000 1,352
Royal Dutch Petroleum Co.-
Sponsored ADR** 16,000 842
Texaco, Inc. 48,400 2,756
--------
7,363
--------
PAPER--1.0%
Georgia-Pacific Corp.+ 18,000 1,527
--------
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
PRODUCER GOODS & MANUFACTURING--7.3%
Caterpillar, Inc. 42,000 $ 2,153
General Electric Co. 87,400 5,641
Herman Miller, Inc. 19,000 929
Precision Castparts Corp. 27,100 1,594
Timken Co. 17,000 570
--------
10,887
--------
RAILROAD--1.1%
Kansas City Southern
Industries, Inc.+ 25,000 763
Norfolk Southern Corp. 26,100 838
--------
1,601
--------
REAL PROPERTY--0.7%
Host Marriott Corp.+ 50,000 1,044
--------
RETAIL--5.7%
Dayton Hudson Corp. 30,000 1,884
Kroger Co.+ 25,700 838
Rite Aid Corp. 10,000 594
Safeway, Inc.+ 6,600 384
Sotheby's Holdings, Inc.
Class A+ 40,000 750
TJX Companies, Inc. 137,000 4,059
--------
8,509
--------
STEEL--0.2%
USX-U.S. Steel Group 10,500 357
--------
TELEPHONE--6.3%
AT&T Corp.+ 57,900 2,833
Bell Atlantic Corp. 21,800 1,741
BellSouth Corp. 100,500 4,756
--------
9,330
--------
TOBACCO--1.1%
Gallaher Group PLC-Sponsored
ADR**+ 8,500 163
Philip Morris Companies.,
Inc. 37,200 1,474
--------
1,637
--------
TRAVEL & RECREATION--0.7%
Hilton Hotels Corp. 31,000 955
MGM Grand, Inc.+ 1,200 53
--------
1,008
--------
</TABLE>
14
<PAGE> 17
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
UTILITIES--2.5%
Cinergy Corp. 5,000 $ 165
Edison International 75,000 1,921
Houston Industries, Inc. 22,000 479
Ipalco Enterprises, Inc. 7,400 259
National Fuel Gas Co. 16,100 710
Public Service Enterprise
Group, Inc. 6,000 156
--------
3,690
--------
TOTAL COMMON STOCK
(Cost $126,055) 145,189
--------
</TABLE>
<TABLE>
<CAPTION>
Value
Par (000s)
---------- --------
<S> <C> <C>
CASH EQUIVALENTS--2.5%
Temporary Investment Fund,
Inc.- TempCash Portfolio
5.30%*, 11/07/97 $3,749,055 $ 3,749
--------
TOTAL CASH EQUIVALENTS
(Cost $3,749) 3,749
--------
TOTAL INVESTMENTS--100%
(Cost $129,804) $148,938
========
</TABLE>
- ---------------
+ Non-Income Producing Security.
* Interest rate represents the yield on report date.
** ADR--American Depository Receipt.
See accompanying Notes to Financial Statements.
15
<PAGE> 18
SCHWAB ANALYTICS FUND(R)
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (in thousands)
October 31, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost: $129,804) $148,938
Dividends receivable 216
Receivable for Fund shares sold 241
Receivable for securities sold 2,551
Prepaid expenses 6
Deferred organization costs 16
--------
Total Assets 151,968
--------
LIABILITIES
Payable for securities purchased 1,811
Payable for Fund shares redeemed 216
Investment advisory fee payable 9
Transfer agency and shareholder services fees payable 7
Accrued expenses 53
--------
Total Liabilities 2,096
--------
Net assets applicable to outstanding shares $149,872
========
NET ASSETS CONSIST OF:
Paid-in-capital $115,157
Undistributed net investment income 1,023
Accumulated net realized gain on investments sold 14,558
Net unrealized appreciation on investments 19,134
--------
$149,872
========
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 10,920
Net asset value, offering and redemption price per share $13.72
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 19
SCHWAB ANALYTICS FUND(R)
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (in thousands)
For the year ended October 31, 1997
<TABLE>
<S> <C>
Investment income:
Dividends $ 2,210
-------
Total investment income 2,210
-------
Expenses:
Investment advisory and administration fee 912
Transfer agency and shareholder service fees 310
Custodian fees 70
Registration fees 38
Professional fees 24
Shareholder reports 53
Trustees' fees 7
Amortization of deferred organization costs 4
Insurance and other expenses 7
-------
1,425
Less expenses reduced (see Note 4) (502)
-------
Net expenses incurred by Fund 923
-------
Net investment income 1,287
-------
Net realized gain on investments sold 14,558
Net unrealized appreciation on investments 11,723
-------
Net gain on investments 26,281
-------
Increase in net assets resulting from operations $27,568
=======
</TABLE>
See accompanying Notes to Financial Statements.
17
<PAGE> 20
SCHWAB ANALYTICS FUND(R)
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Year ended Period ended
October 31, October 31,
1997 1996*
----------- ------------
<S> <C> <C>
Operations:
Net investment income $ 1,287 $ 418
Net realized gain on investments sold 14,558 1,141
Net unrealized appreciation on investments 11,723 7,411
-------- -------
Increase in net assets resulting from operations 27,568 8,970
-------- -------
Dividends to shareholders from net investment income (682) --
Dividends to shareholders from net capital gains (1,141) --
-------- -------
Total dividends to shareholders (1,823) --
-------- -------
Capital Share Transactions:
Proceeds from shares sold 68,744 99,367
Net asset value of shares issued in reinvestment of dividends 1,706 --
Less payments for shares redeemed (44,112) (10,548)
-------- -------
Increase in net assets from capital share transactions 26,338 88,819
-------- -------
Total increase in net assets 52,083 97,789
Net Assets:
Beginning of period 97,789 --
-------- -------
End of period (including undistributed net investment income of $1,023 and $418,
respectively) $ 149,872 $ 97,789
======== =======
Number of Fund shares:
Sold 5,463 9,915
Reinvested 150 --
Redeemed (3,574) (1,034)
-------- -------
Net increase in shares outstanding 2,039 8,881
Shares outstanding:
Beginning of period 8,881 --
-------- -------
End of period 10,920 8,881
======== =======
</TABLE>
- ---------------
* For the period from July 1, 1996 (commencement of operations) to October 31,
1996.
See accompanying Notes to Financial Statements.
18
<PAGE> 21
SCHWAB ANALYTICS FUND(R)
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Year ended Period ended
October 31, October 31,
1997 1996**
----------- ------------
<S> <C> <C>
Net asset value at beginning of period $ 11.01 $ 10.00
Income from investment operations
Net investment income 0.13 0.05
Net realized and unrealized gain on investments 2.79 0.96
-------- -------
Total from investment operations 2.92 1.01
Less distributions
Dividends from net investment income (0.08) --
Distributions from realized gain on investments (0.13) --
-------- -------
Total distributions (0.21) --
-------- -------
Net asset value at end of period $ 13.72 $ 11.01
======== =======
Total return (not annualized) 26.83% 10.10%
Ratios/Supplemental data
Net assets, end of period (000's) $ 149,872 $ 97,789
Ratio of expenses to average net assets+ 0.74% 0.75%*
Ratio of net investment income to average net assets+ 1.04% 1.41%*
Portfolio turnover rate 120% 33%
Average commission rate $ 0.0232 $ 0.0288
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C>
+ The information contained in the above table is based on actual expenses for the year, after giving effect
to the portion of expenses reduced and absorbed by the Investment Manager and Schwab. Had these expenses not
been reduced and absorbed, the Fund's expense and net investment income ratios would have been:
Ratio of expenses to average net assets 1.15% 1.51%*
Ratio of net investment income to average net assets 0.63%* 0.65%*
* Annualized
** For the period from July 1, 1996 (commencement of operations) to October 31,
1996.
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE> 22
SCHWAB ANALYTICS FUND(R)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1997
1. DESCRIPTION OF THE FUND
The Schwab Analytics Fund (the "Fund") is a series of Schwab Capital Trust (the
"Trust"), a no-load, open-end, investment management company organized as a
Massachusetts business trust on May 7, 1993 and registered under the Investment
Company Act of 1940, as amended. The investment objective of the Fund is to seek
long-term capital growth.
In addition to the Fund, the Trust also offers the Schwab International Index
Fund(R), Schwab Small-Cap Index Fund(R), Schwab Asset Director(R) -- High Growth
Fund, Schwab Asset Director -- Balanced Growth Fund, Schwab Asset Director --
Conservative Growth Fund, Schwab S&P 500 Fund, Schwab OneSource Portfolios --
International, Schwab OneSource Portfolios -- Growth Allocation, Schwab
OneSource Portfolios -- Balanced Allocation and Schwab OneSource Portfolios
- -- Small Company. 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 -- Investments in securities traded on an exchange are valued
at the last sale price for a given day, or if a sale is not reported for that
day, at the mean between the most recent quoted bid and asked prices. Unlisted
securities for which market quotations are readily available are valued at the
mean between the most recent bid and asked prices. Securities for which no
quotations are readily available are valued at fair value as determined by the
Fund's investment manager pursuant to guidelines adopted in good faith by the
Board of Trustees. Short-term securities with 60 days or less to maturity are
stated at amortized cost, which approximates market value.
Security transactions and investment income -- Security transactions are
accounted for on a trade date basis (date the order to buy or sell is executed).
Dividend income and distributions to shareholders are recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Realized
gains and losses from security transactions are determined on an identified cost
basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund are amortized on a straight-line basis over a five-year
period from the Fund's commencement of operations.
20
<PAGE> 23
SCHWAB ANALYTICS FUND(R)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Expenses -- Expenses arising in connection with the Fund are charged directly to
the 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 the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all net investment income and realized net capital gains, if any, to
shareholders. Therefore, no federal income tax provision is required. The Fund
is considered a separate entity for tax purposes.
At October 31, 1997, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $19,134,000 of which $21,609,000 related
to appreciated securities and $2,475,000 related to depreciated securities.
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 Fund pays an annual fee, payable monthly, of 0.74% of the first $1 billion
of average daily net assets, 0.69% of the next $1 billion and 0.64% of such
assets over $2 billion. The Investment Manager has reduced a portion of its fee
for the year ended October 31, 1997 (see Note 4).
Sub-advisory agreement -- The Investment Manager has a sub-advisory agreement
with Symphony Asset Management, Inc. ("Symphony") to serve as sub-adviser to the
Fund. Symphony does not receive compensation directly from the Fund. However,
the Investment Manager pays Symphony an annual fee, payable monthly of 0.20% of
the Fund's average daily net assets on the first $300 million, 0.15% of the next
$500 million, and 0.10% of such net assets over $800 million.
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 the average daily net assets for
transfer agency services and 0.20% of such assets for shareholder services.
Schwab has reduced a portion of its fee for the year ended October 31, 1997 (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
year ended October 31, 1997, the Trust made no direct payments to its officers
or trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Fund incurred fees of $7,000 related to the
Trust's unaffiliated trustees.
21
<PAGE> 24
SCHWAB ANALYTICS FUND(R)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab guarantee that, through at least February 28,
1998, the Fund's total operating expenses will not exceed 0.75% of the Fund's
average daily net assets, after waivers and reimbursements. For purpose of this
guarantee, operating expenses do not include interest expenses, extraordinary
expenses, taxes, foreign taxes and capital items.
For the year ended October 31, 1997 the totals of such fees and expenses reduced
and absorbed by the Investment Manager were $483,000 and $19,000, respectively.
5. BORROWING AGREEMENT
The Trust has a line of credit arrangement with PNC Bank, N.A., the Fund's
custodian, whereby the Fund may borrow up to $10,000,000, on a temporary basis,
to fund redemptions. Amounts borrowed under this arrangement bear interest at
periodically negotiated rates and may be collateralized by the assets of the
Fund. During the year ended October 31, 1997, no borrowings were made under this
arrangement.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated (in thousands) $168,873 and $146,374, respectively, for the year
ended October 31, 1997.
22
<PAGE> 25
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of
Schwab Analytics Fund(R)
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab Analytics Fund (one series
constituting part of Schwab Capital Trust, hereafter referred to as the "Trust")
at October 31, 1997, the results of its operations for the year then ended and
the changes in its net assets and the financial highlights for the year then
ended and for the period presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
San Francisco, California
December 5, 1997
23
<PAGE> 26
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 27
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 28
SCHWABFUNDS FAMILY(R)
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 Asset Director(R) - High Growth Fund
Schwab Asset Director - Balanced Growth Fund
Schwab Asset Director - Conservative Growth Fund
Schwab OneSource Portfolios - Growth Allocation
Schwab OneSource Portfolios - Balanced Allocation
SCHWAB STOCK FUNDS
Schwab 1000 Fund(R)
Schwab S&P 500 Fund
Schwab Analytics Fund(R)
Schwab Small-Cap Index Fund(R)
Schwab OneSource Portfolios - Small Company
Schwab International Index Fund(R)
Schwab OneSource 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 MARKET FUNDS
Schwab offers an array of money market 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(R).
Please call 1-800-435-4000 for a free prospectus and brochure for any of the
SchwabFunds(R).
Each prospectus provides more complete information, including fees and expenses.
Please read it carefully before investing.
This report must be preceded or accompanied by a current prospectus.
*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.
<PAGE> 29
----------------
SCHWAB FUNDS BULK RATE
FAMILY (R) U.S. POSTAGE
PAID
101 Montgomery Street CHARLES SCHWAB
San Francisco, California 94104 ----------------
INVESTMENT ADVISOR
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
(C)1997 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. CRS 20204 TF5269R(12/97)
