<PAGE> 1
SCHWABFUNDS(R)
[LOGO]
SCHWAB
TAX-FREE
BOND FUNDS
SEMI-ANNUAL REPORT
FEBRUARY 29, 1996
[Photo of Schwab Building, San Francisco, California]
<PAGE> 2
Dear Shareholder,
The SchwabFunds Family(R) is celebrating substantial growth as
[Photo a mutual fund complex. By placing your trust in
of SchwabFunds(R), you've helped total assets under management
Charles grow by $10 billion over the last 12 months to reach $35
R. Schwab] billion.
We believe much of this success can be traced to the Schwab commitment to serve
the needs of shareholders, a commitment demonstrated by the entire SchwabFunds
staff and, in particular, by our experienced team of portfolio managers.
The professionals who make up our growing portfolio management team have over
200 years of combined experience and are devoted to monitoring the financial
markets for you. Through a careful and disciplined selection of securities, the
portfolio managers strive to construct optimal portfolios that provide
shareholders with competitive returns that meet their investment goals. And
shareholders continue to signal their trust in our SchwabFunds portfolio
management by keeping their money invested in SchwabFunds.
We believe an important part of serving your needs is keeping you informed about
your investments. For example, we added the question and answer section of this
report, developed by our portfolio managers to address what they feel were the
most pressing questions we've heard from shareholders over the period. It is one
way we hope to keep communication open between you and the people managing your
investments.
The SchwabFunds Family has grown to include a group of mutual funds that
addresses many "core" needs of investors. SchwabFunds offers a solution to
investors who want the convenience and competitive costs of a no-load mutual
fund family. The 20 no-load funds available to retail investors, including the
new Schwab S&P 500 Fund, offer diversification of the U.S. and international
equity markets, both taxable and tax-free bonds and a variety of money market
investments.
With this level of diversification, you may use SchwabFunds to create an
efficient, well-rounded portfolio. Or you may use them to serve as building
blocks to an overall investment program that includes more specialized
investments.
I invite you to learn more about the SchwabFunds Family. To receive a brochure
and prospectus for the SchwabFunds, please call our toll-free number, 1-800-2
NO-LOAD, or visit any one of our more than 200 Schwab offices. A Schwab
representative will be happy to provide you with a prospectus that includes more
complete information on the Funds, including charges and expenses. Please read
it carefully before investing.
I'd like to extend my personal gratitude for your trust in the SchwabFunds
Family as it continues to grow. You should feel confident that the outstanding
efforts of all those who are part of the SchwabFunds organization will continue
going forward. And we expect these efforts to help us to meet even higher
standards of excellence in the years ahead.
/s/ Charles R. Schwab
Charles R. Schwab
Cover: The Schwab Building, San Francisco, California
<PAGE> 3
COMMENTS FROM THE INVESTMENT ADVISER
We are pleased to report to you on the performance of the Schwab
Short/Intermediate Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond
Fund (the "Funds") for the six-month period ended February 29, 1996. During this
period, both Schwab Tax-Free Bond Funds continued to help you achieve your
investment goals by striving to pay a high level of monthly dividends exempt
from federal personal income tax. Each Fund's individual performance is reviewed
in detail in the following pages.
BOND MARKET PERFORMANCE
The bond market rallied during most of the reporting period, bolstered by low
inflationary expectations and a relatively low rate of economic growth. The
performance of both Schwab Tax-Free Bond Funds reflected the performance of the
bond market during the period. To help you put the Funds' performance into
perspective, the portfolio management team discusses broader economic trends and
their effects on the Funds' investment strategies in "Questions to the Portfolio
Management Team" following this letter.
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
On February 29, 1996, the Fund's 30-day SEC yield was 3.76%, six-month total
return was 2.57%, one-year total return was 7.58%, and average annual total
return since inception (4/21/93) was 4.57%. For investors in the top federal
personal income tax bracket of 39.6%, at the end of the period, the Fund's
30-day SEC yield was equivalent to a fully taxable yield of 6.23%. 1 As the
chart on the following page illustrates, the Fund's total return during the
reporting period substantially tracked the broader municipal bond market, as
measured by the Lehman 3-Year Municipal Bond Index, a widely recognized market
benchmark.
The Fund paid shareholders monthly cash dividends, free from federal income
taxes, totaling 21 cents per share during the six-month period ended February
29, 1996. Its net asset value (NAV) increased from $10.12 on August 31, 1995 to
$10.17 at the end of the reporting period, reflecting the overall price
appreciation in the bond market.
At the end of the reporting period, the Fund's portfolio was composed of
investment grade municipal bonds issued by state and municipal governments and
their agencies, and its average dollar-weighted portfolio maturity was 3.89
years.
1 Income may be subject to state and local taxes and the Alternative Minimum
Tax (AMT). Capital appreciation of discounted bonds may be subject to federal
and state income tax. Total return assumes reinvestment of all dividends. The
Investment Manager and Schwab have waived a portion of their fees during the
reporting period, and guaranteed maximum total operating expenses of 0.49%
through at least 12/31/96. Without such waivers and guarantee, the 30-day SEC
yield would have been 3.40%, taxable equivalent yield would have been 5.63%,
six-month total return would have been 2.37% one-year total return since
inception would have been 7.17%, and average annual total return since inception
would have been 4.09%. Past performance is no guarantee of future results.
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.
<PAGE> 4
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND AND
THE LEHMAN 3-YEAR MUNICIPAL BOND INDEX
Average Annual Total Returns
February 29, 1996
----------------------------
One Year Since Inception
7.58% 4.57%
[THE FOLLOWING IS A LINE GRAPH OF SHORT/INT. TAX-FREE BOND VS LEHMAN INDEX.]
<TABLE>
<CAPTION>
DOLLAR VALUE
Date INDEX FUND
-----------------------------
<S> <C> <C>
4/21-4/30/93 $9,993 $9,990
5/31/93 $10,020 $10,038
6/30/93 $10,085 $10,129
7/31/93 $10,090 $10,151
8/31/93 $10,184 $10,283
9/30/93 $10,228 $10,344
10/31/93 $10,250 $10,366
11/30/93 $10,237 $10,326
12/31/93 $10,344 $10,462
1/31/94 $10,428 $10,567
2/28/94 $10,331 $10,412
3/31/94 $10,206 $10,218
4/30/94 $10,267 $10,280
5/31/94 $10,315 $10,323
6/30/94 $10,318 $10,312
7/31/94 $10,403 $10,407
8/31/94 $10,440 $10,429
9/30/94 $10,414 $10,377
10/31/94 $10,389 $10,317
11/30/94 $10,370 $10,245
12/31/94 $10,415 $10,346
1/31/95 $10,501 $10,445
2/28/95 $10,612 $10,563
3/31/95 $10,707 $10,655
4/30/95 $10,743 $10,691
5/31/95 $10,908 $10,881
6/30/95 $10,934 $10,884
7/31/95 $11,050 $10,987
8/31/95 $11,136 $11,079
9/30/95 $11,167 $11,115
10/31/95 $11,221 $11,175
11/30/95 $11,293 $11,255
12/31/95 $11,340 $11,305
1/31/96 $11,429 $11,383
2/29/96 $11,451 $11,364
</TABLE>
Past performance is no guarantee of future results. 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.
The performance graph compares a hypothetical $10,000 investment in the
Schwab Short/Intermediate Tax-Free Bond Fund since inception with a
hypothetical investment in the Lehman 3-Year Municipal Bond Index. The
Index is unmanaged and assumes reinvestment of all dividends, and, unlike
the Fund, does not reflect the payment of advisory fees and other expenses
associated with an investment in the Fund. Fund total return assumes the
reinvestment of all dividends and capital gain distributions, if any.
SCHWAB LONG-TERM TAX-FREE BOND FUND
On February 29, 1996, the Fund's 30-day SEC yield was 4.98%, six-month total
return was 4.59%, one-year total return was 10.0%, and average annual total
return since inception (9/11/92) was 6.69%. For investors in the top federal
personal income tax bracket of 39.6%, the Fund's 30-day SEC yield at the end of
the reporting period was equivalent to a fully taxable yield of 8.25%. 2 As the
chart at right illustrates, the Fund's total return during the reporting period
substantially tracked the broader municipal bond market, as measured by the
Lehman General Municipal Bond Index, a widely recognized market benchmark.
The Fund paid shareholders monthly cash dividends, free from federal income
taxes, totaling 26 cents per share during the six-month period ended February
29, 1996. Its NAV increased from $10.16 on August 31, 1995 to $10.36 at the end
of the reporting period, reflecting the overall rally in the bond market.
2 Income may be subject to state and local taxes and the Alternative Minimum
Tax (AMT). Capital appreciation of discounted bonds may be subject to federal
and state income tax. Total return assumes reinvestment of all dividends. The
Investment Manager and Schwab have waived a portion of their fees, during the
reporting period, and guaranteed maximum total operating expenses of 0.49%
through at least 12/31/96. Without such waivers and guarantee, the 30-day SEC
yield would have been 4.59%, the taxable equivalent yield would have been 7.60%,
six-month total return would have been 4.38%, one-year total return would have
been 9.60%, and average annual total return since inception would have been
6.10%. Past performance is no guarantee of future results. 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.
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COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SCHWAB LONG-TERM TAX-FREE BOND FUND AND
THE LEHMAN GENERAL MUNICIPAL BOND INDEX
Average Annual Total Returns
February 29, 1996
----------------------------
One Year Since Inception
10.0% 6.69%
[THE FOLLOWING IS A LONG-TERM TAX-FREE BOND FUND VS LEHMAN GENERAL MUNI BOND
INDEX.]
<TABLE>
<CAPTION>
DOLLAR VALUE
Date INDEX FUND
-------------------------
<S> <C> <C>
9/11-9/30/92 $9,923 $9,867
10/31/92 $9,826 $9,515
11/30/92 $10,002 $9,912
12/31/92 $10,104 $10,092
1/31/93 $10,221 $10,240
2/28/93 $10,591 $10,682
3/31/93 $10,479 $10,484
4/30/93 $10,585 $10,632
5/31/93 $10,644 $10,690
6/30/93 $10,822 $10,883
7/31/93 $10,836 $10,879
8/31/93 $11,062 $11,157
9/30/93 $11,188 $11,298
10/31/93 $11,209 $11,315
11/30/93 $11,111 $11,201
12/31/93 $11,345 $11,465
1/31/94 $11,475 $11,588
2/28/94 $11,177 $11,274
3/31/94 $10,722 $10,791
4/30/94 $10,813 $10,858
5/31/94 $10,907 $10,970
6/30/94 $10,840 $10,870
7/31/94 $11,044 $11,085
8/31/94 $11,083 $11,109
9/30/94 $10,920 $10,921
10/31/94 $10,726 $10,657
11/30/94 $10,532 $10,381
12/31/94 $10,764 $10,658
1/31/95 $11,072 $11,050
2/28/95 $11,394 $11,381
3/31/95 $11,524 $11,514
4/30/95 $11,538 $11,483
5/31/95 $11,906 $11,918
6/30/95 $11,802 $11,735
7/31/95 $11,914 $11,836
8/31/95 $12,065 $11,971
9/30/95 $12,141 $12,056
10/31/95 $12,317 $12,250
11/30/95 $12,521 $12,443
12/31/95 $12,642 $12,591
1/31/96 $12,738 $12,640
2/29/96 $12,651 $12,520
</TABLE>
Past performance is no guarantee of future results. 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.
The performance graph compares a hypothetical $10,000 investment in the
Schwab Long-Term Tax-Free Bond Fund since inception with a hypothetical
investment in the Lehman General Municipal Bond Index. The Index is
unmanaged and assumes reinvestment of all dividends, and, unlike the Fund,
does not reflect the payment of advisory fees and other expenses associated
with an investment in the Fund. Fund total return assumes the reinvestment
of all dividends and capital gain distributions, if any.
At the end of the reporting period, the Fund's portfolio was composed of
investment grade municipal bonds issued by state and municipal governments and
their agencies, and the Fund's average dollar-weighted portfolio maturity was
17.02 years.
BOND FUND ADVANTAGES
In view of the recent strength of the stock market, some investors may be
wondering whether investing in bond funds still makes sense. At Schwab, we
believe the answer is yes -- for several reasons. If you need a regular source
of income in retirement or as a supplement to your other financial resources,
bond funds may be a good investment choice. The federal tax-exempt income paid
by municipal bonds can help you reduce your tax bill and keep more of the income
you earn from your investment. Moreover, bond funds can be an important
component of
<PAGE> 6
a well-rounded investment portfolio. Since bonds have generally been less
volatile than stocks, investing in a bond fund may help increase the overall
stability of your portfolio, while also helping to provide regular income.
The Schwab Tax-Free Bond Funds offer you important advantages that are more
difficult to obtain by investing in bonds on your own, including experienced
professional management, monthly income, portfolio diversification, and daily
liquidity. Our portfolio management team closely monitors the economy and the
financial markets, carefully evaluates a wide range of securities for
investment, and adjusts portfolio composition and average maturity as this team
strives to achieve optimum performance. At the end of the reporting period, each
Fund's portfolio contained a mix of investment grade municipal bonds from a
variety of issuers that met our stringent investment guidelines. The average
portfolio maturity and credit quality of each Fund is described in the
"Portfolio Quality Summary" following the Question and Answer section. In
addition, you'll find a complete listing of each Fund's holdings at the end of
the period, along with their individual credit ratings, in the "Schedule of
Investments" included in this report.
LOWER COSTS HELP MAXIMIZE YOUR RETURNS
At Schwab, we're committed to keeping the cost of mutual fund investing low.
Lower fund expenses generally translate into higher returns to you, since the
less you pay in fees and expenses, the greater the portion of a fund's
investment returns you can receive. Both Schwab Tax-Free Bond Funds have an
operating expense ratio of 0.49%, compared with an industry average of 0.96% for
similar national municipal bond funds. 3 Of course, like all SchwabFunds(R), the
Funds charge no sales loads or 12b-1 fees, which can also reduce your returns
significantly over time.
LOOKING FORWARD IN 1996
Whatever direction the bond markets take in the balance of the year, we're
confident that the Schwab Tax-Free Bond Funds will strive to offer you a
relatively reliable stream of federal tax-exempt income and competitive taxable
equivalent yields.
Thank you for placing your trust in SchwabFunds. We value your confidence, and
we'll continue to do our best to help you achieve your investing goals in the
future.
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
3 Source: Morningstar, Inc. Average operating expense ratio of 524 national
municipal bond funds as of 2/29/96. Operating expenses in excess of 0.49% will
be waived or reimbursed through at least 12/31/96. Please see Note 4 in Notes to
Financial Statements for additional information on expenses.
<PAGE> 7
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM OF
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
Stephen B. Ward: Senior Vice President and Chief Investment Officer
Joanne Larkin: Portfolio Manager
Q. HOW WOULD YOU DESCRIBE THE ECONOMIC CLIMATE DURING THE SIX-MONTH PERIOD ENDED
FEBRUARY 29, 1996?
A. The Federal Reserve Board (the "Fed") appears to have been successful in its
attempt to engineer a "soft landing" for the economy. The goal of the soft
landing strategy was to raise interest rates sufficiently during 1994 and early
1995 to slow the rate of economic growth (thereby reducing the threat of rising
inflation) and yet not cause a recession. The growth rate of the real Gross
Domestic Product (GDP) slowed to 2.0% 4 during 1995, and the inflation rate, as
measured by the Consumer Price Index (CPI), was 2.6%, its fifth consecutive year
under 3.0%. In light of relatively low inflation and slow economic growth, the
Fed initiated a series of three 0.25% decreases in the federal funds rate target
in July and December of 1995, and again in January of 1996. As of February 29,
1996, the federal funds rate was 5.25%. Many observers believe the Fed is moving
towards a federal funds rate target equal to approximately 2.5% greater than the
rate of inflation.
The primary strengths in the current economy are strong exports, increased
capital spending, and a low rate of unemployment. The primary weaknesses are a
near record level of consumer debt, uncertainty surrounding the ongoing federal
budget deadlock, and the threat of lower corporate earnings associated with a
slower economic growth rate.
Q. HAVE RECENT POLITICAL EVENTS RELATED TO THE FEDERAL BUDGET DEADLOCK IMPACTED
SHORT-TERM INTEREST RATES?
A. As shown on the chart on the following page, interest rates declined causing
bond values to increase throughout most of the reporting period. During most of
the period, two-year notes offered yields that were below the federal funds
rate. This was an unusual condition which indicated that market participants
anticipated lower interest rates in the future. There was a significant reversal
in February, and the yield on two-year notes returned to a more usual pattern of
having a higher yield than the federal funds rate. As shown on the following
chart, the yields on 5-year and 30-year Treasury Bonds also experienced
significant increases in February. This reversal, due in part to Fed Chairman
Greenspan's Congressional testimony on the stable conditions of the economy, led
many market participants to discount the likelihood of near-term federal funds
rate reductions. Another factor contributing to February's fall of bond prices
and the rise in yields was that large amounts of notes and bonds were sold
primarily by investors who are not traditionally associated with the government
bond market.
4 All Gross Domestic Product (GDP) statistics used in this report are based
on the Commerce Department's new chain-weighted calculation methodology. As a
result, these statistics may differ from those in previous SchwabFunds(R)
shareholder reports, which used the prior fixed-weighted methodology. During
1996, the Commerce Department will revise all GDP growth rate reporting to a
chain-weighted basis.
<PAGE> 8
[THE FOLLOWING IS A LINE GRAPH OF 30-YEAR TREASURY BOND YIELD VS. 5-YEAR
TREASURY BOND YIELD.]
30-YEAR TREASURY BOND YIELD VS. 5-YEAR TREASURY BOND YIELD
<TABLE>
<CAPTION>
Date 5-Year 30-Year
<S> <C> <C>
31-Aug-95 6.066 6.648
1-Sep-95 6.015 6.617
4-Sep-95 6.004 6.611
5-Sep-95 5.967 6.567
6-Sep-95 5.963 6.593
7-Sep-95 6.022 6.599
8-Sep-95 6.025 6.587
11-Sep-95 6.021 6.589
12-Sep-95 5.955 6.502
13-Sep-95 5.988 6.521
14-Sep-95 5.881 6.467
15-Sep-95 5.925 6.48
18-Sep-95 5.968 6.53
19-Sep-95 5.939 6.486
20-Sep-95 5.913 6.47
21-Sep-95 6.016 6.557
22-Sep-95 6.059 6.585
25-Sep-95 6.078 6.58
26-Sep-95 6.111 6.575
27-Sep-95 6.107 6.578
28-Sep-95 6.099 6.587
29-Sep-95 6.015 6.501
2-Oct-95 5.975 6.476
3-Oct-95 5.949 6.456
4-Oct-95 5.902 6.432
5-Oct-95 5.883 6.417
6-Oct-95 5.883 6.42
9-Oct-95 5.882 6.419
10-Oct-95 5.930 6.442
11-Oct-95 5.908 6.434
12-Oct-95 5.864 6.387
13-Oct-95 5.798 6.304
16-Oct-95 5.787 6.304
17-Oct-95 5.775 6.284
18-Oct-95 5.837 6.331
19-Oct-95 5.819 6.306
20-Oct-95 5.895 6.362
23-Oct-95 5.928 6.393
24-Oct-95 5.847 6.326
25-Oct-95 5.818 6.325
26-Oct-95 5.834 6.393
27-Oct-95 5.827 6.356
30-Oct-95 5.812 6.354
31-Oct-95 5.808 6.328
1-Nov-95 5.743 6.297
2-Nov-95 5.659 6.245
3-Nov-95 5.699 6.284
6-Nov-95 5.735 6.294
7-Nov-95 5.764 6.308
8-Nov-95 5.699 6.254
9-Nov-95 5.720 6.284
10-Nov-95 5.764 6.338
13-Nov-95 5.713 6.277
14-Nov-95 5.694 6.286
15-Nov-95 5.731 6.292
16-Nov-95 5.654 6.224
17-Nov-95 5.650 6.232
20-Nov-95 5.665 6.247
21-Nov-95 5.690 6.266
22-Nov-95 5.720 6.282
23-Nov-95 5.712 6.278
24-Nov-95 5.686 6.25
27-Nov-95 5.661 6.233
28-Nov-95 5.660 6.229
29-Nov-95 5.609 6.198
30-Nov-95 5.516 6.131
1-Dec-95 5.495 6.087
4-Dec-95 5.440 6.027
5-Dec-95 5.476 6.051
6-Dec-95 5.498 6.033
7-Dec-95 5.548 6.078
8-Dec-95 5.552 6.054
11-Dec-95 5.530 6.046
12-Dec-95 5.552 6.052
13-Dec-95 5.566 6.082
14-Dec-95 5.566 6.086
15-Dec-95 5.566 6.098
18-Dec-95 5.650 6.201
19-Dec-95 5.533 6.115
20-Dec-95 5.562 6.123
21-Dec-95 5.547 6.088
22-Dec-95 5.500 6.064
25-Dec-95 5.504 6.066
26-Dec-95 5.479 6.04
27-Dec-95 5.453 6.01
28-Dec-95 5.417 5.985
29-Dec-95 5.381 5.949
1-Jan-96 5.374 5.951
2-Jan-96 5.388 5.963
3-Jan-96 5.356 5.958
4-Jan-96 5.410 6.032
5-Jan-96 5.413 6.045
8-Jan-96 5.417 6.044
9-Jan-96 5.460 6.122
10-Jan-96 5.525 6.183
11-Jan-96 5.485 6.15
12-Jan-96 5.430 6.148
15-Jan-96 5.430 6.149
16-Jan-96 5.322 6.057
17-Jan-96 5.293 6.01
18-Jan-96 5.249 5.985
19-Jan-96 5.267 5.974
22-Jan-96 6.360 6.044
23-Jan-96 5.379 6.093
24-Jan-96 5.332 6.036
25-Jan-96 5.409 6.113
26-Jan-96 5.333 6.045
29-Jan-96 5.380 6.096
30-Jan-96 6.297 6.036
31-Jan-96 5.236 6.029
1-Feb-96 5.221 6.017
2-Feb-96 5.261 6.163
5-Feb-96 5.297 6.158
6-Feb-96 5.264 6.13
7-Feb-96 5.271 6.156
8-Feb-96 5.248 6.147
9-Feb-96 5.232 6.098
12-Feb-96 5.159 6.034
13-Feb-96 5.131 6.031
14-Feb-96 5.163 6.089
15-Feb-96 5.239 6.168
16-Feb-96 5.297 6.243
19-Feb-96 5.297 6.24
20-Feb-96 5.523 6.396
21-Feb-96 5.527 6.371
22-Feb-96 5.446 6.343
23-Feb-96 5.509 6.405
26-Feb-96 5.554 6.455
27-Feb-96 5.635 6.476
28-Feb-96 5.676 6.474
29-Feb-96 5.731 6.47
</TABLE>
One of the most significant news stories during the reporting period was the
uncertainty surrounding the federal budget and debt ceiling negotiations between
Congress and the Clinton Administration, and the resulting government shutdowns.
While these events have received considerable national attention, the issues
relating to the deficit ceiling itself had a relatively minor impact on the
financial markets during the reporting period. Short-term interest rates
declined throughout most of the reporting period, largely as a result of weaker
economic growth, lower inflation, and the market's expectations that a balanced
budget agreement may be achieved.
Q. HOW HAVE TAX-EXEMPT YIELDS RESPONDED TO THE CHANGES IN TAXABLE YIELDS?
A. While the yields on tax-exempt securities have followed the general trend of
taxable securities, the distinct sectors of the tax-exempt market have responded
differently.
As shown on the graph at right, the ratio of 30-year municipal bond yields to
30-year U.S. Treasury Bond yields had declined, returning approximately to its
four-year average of 83% on 30-year U.S. Treasury Bond yields. This decline
represents relative strength in the long end of the municipal bond market
compared to the long end of the U.S. Treasury Bond market, perhaps an indication
of
<PAGE> 9
[THE FOLLOWING IS A LINE GRAPH OF THE RATIO BETWEEN YIELDS ON 30-YEAR AAA
MUNICIPAL BONDS AND 30-YEAR TREASURY BONDS, AND THE RATIO BETWEEN 5-YEAR
MUNICIPAL BONDS AND 5-YEAR TREASURY BONDS.]
THE RATIO BETWEEN YIELDS ON 30-YEAR AAA MUNICIPAL BONDS
AND 30-YEAR TREASURY BONDS, AND THE RATIO BETWEEN
5-YEAR MUNICIPAL BONDS AND 5-YEAR TREASURY BONDS
<TABLE>
<CAPTION>
Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of
Date 30-year 5-year Date 30-year 5-year Date 30-year 5-year
- ------- -------- -------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-Sep-95 0.8845 0.7132 7-Nov-95 0.8818 0.7321 15-Jan-96 0.8656 0.7826
4-Sep-95 0.8845 0.7132 8-Nov-95 0.8829 0.737 16-Jan-96 0.8737 0.793
5-Sep-95 0.8851 0.7122 9-Nov-95 0.882 0.7377 17-Jan-96 0.8872 0.7935
6-Sep-95 0.8815 0.7127 10-Nov-95 0.8792 0.7373 18-Jan-96 0.8742 0.7925
7-Sep-95 0.8777 0.7025 13-Nov-95 0.8861 0.7422 19-Jan-96 0.8758 0.7898
8-Sep-95 0.8793 0.7021 14-Nov-95 0.8865 0.7463 22-Jan-96 0.869 0.7813
11-Sep-95 0.8791 0.7026 15-Nov-95 0.8841 0.7398 23-Jan-96 0.8653 0.7808
12-Sep-95 0.8801 0.6986 16-Nov-95 0.8889 0.7446 24-Jan-96 0.8701 0.7802
13-Sep-95 0.8744 0.6914 17-Nov-95 0.8861 0.7433 25-Jan-96 0.8657 0.7765
14-Sep-95 0.8755 0.6971 20-Nov-95 0.8841 0.7414 26-Jan-96 0.8755 0.7875
15-Sep-95 0.8769 0.6954 21-Nov-95 0.8829 0.7398 29-Jan-96 0.8653 0.777
18-Sep-95 0.8747 0.6953 22-Nov-95 0.8807 0.7361 30-Jan-96 0.8651 0.7759
19-Sep-95 0.8792 0.6971 23-Nov-95 0.8812 0.737 31-Jan-96 0.8629 0.7812
20-Sep-95 0.8799 0.7069 24-Nov-95 0.8852 0.7404 1-Feb-96 0.8602 0.7814
21-Sep-95 0.8758 0.7032 27-Nov-95 0.8843 0.7384 2-Feb-96 0.8489 0.7755
22-Sep-95 0.8827 0.7096 28-Nov-95 0.8801 0.742 5-Feb-96 0.8513 0.7703
25-Sep-95 0.8864 0.7108 29-Nov-95 0.8814 0.7488 6-Feb-96 0.8486 0.7674
26-Sep-95 0.887 0.7069 30-Nov-95 0.8828 0.7523 7-Feb-96 0.8418 0.7626
27-Sep-95 0.8958 0.7172 1-Dec-95 0.8859 0.7517 8-Feb-96 0.8397 0.7625
28-Sep-95 0.8885 0.7115 4-Dec-95 0.8848 0.7481 9-Feb-96 0.8465 0.7608
29-Sep-95 0.894 0.7149 5-Dec-95 0.8796 0.7414 12-Feb-96 0.8522 0.7675
2-Oct-95 0.8929 0.7163 6-Dec-95 0.8722 0.7385 13-Feb-96 0.8493 0.764
3-Oct-95 0.8926 0.7177 7-Dec-95 0.8658 0.7317 14-Feb-96 0.8379 0.7554
4-Oct-95 0.8928 0.7235 8-Dec-95 0.8726 0.7349 15-Feb-96 0.8304 0.7445
5-Oct-95 0.8917 0.7224 11-Dec-95 0.8703 0.7378 16-Feb-96 0.8284 0.7439
6-Oct-95 0.8897 0.7208 12-Dec-95 0.8729 0.7421 19-Feb-96 0.8289 0.7439
9-Oct-95 0.8899 0.7208 13-Dec-95 0.8701 0.7456 20-Feb-96 0.8243 0.7314
10-Oct-95 0.8836 0.7116 14-Dec-95 0.8728 0.7492 21-Feb-96 0.8291 0.7309
11-Oct-95 0.8847 0.7143 15-Dec-95 0.8728 0.751 22-Feb-96 0.8312 0.7363
12-Oct-95 0.8897 0.718 18-Dec-95 0.8777 0.7611 23-Feb-96 0.8277 0.7333
13-Oct-95 0.8918 0.7158 19-Dec-95 0.8933 0.7808 26-Feb-96 0.8291 0.7365
16-Oct-95 0.8887 0.7137 20-Dec-95 0.8839 0.7677 27-Feb-96 0.8264 0.7258
17-Oct-95 0.8883 0.7151 21-Dec-95 0.8857 0.7661 28-Feb-96 0.8237 0.717
18-Oct-95 0.8818 0.7075 22-Dec-95 0.8843 0.7672 29-Feb-96 0.8303 0.7137
19-Oct-95 0.8852 0.7132 25-Dec-95 0.884 0.7667
20-Oct-95 0.8838 0.7108 26-Dec-95 0.8845 0.7666
23-0ct-95 0.8826 0.7102 27-Dec-95 0.8823 0.7628
24-Oct-95 0.8872 0.72 28-Dec-95 0.8826 0.7642
25-Oct-95 0.8873 0.7237 29-Dec-95 0.888 0.7693
26-Oct-95 0.8794 0.7233 1-Jan-96 0.8877 0.7707
27-Oct-95 0.8893 0.7328 2-Jan-96 0.8825 0.7648
30-Oct-95 0.8833 0.7312 3-Jan-96 0.8732 0.7674
31-Oct-95 0.8837 0.7283 4-Jan-96 0.864 0.7653
1-Nov-95 0.8833 0.7314 5-Jan-96 0.8722 0.7759
2-Nov-95 0.8875 0.7422 8-Jan-96 0.8723 0.7754
3-Nov-95 0.882 0.737 9-Jan-96 0.8609 0.7674
6-Nov-95 0.8806 0.7323 10-Jan-96 0.8575 0.7656
11-Jan-96 0.8654 0.7748
12-Jan-96 0.8668 0.7826
</TABLE>
the market's increasing skepticism that any of the flat tax proposals would
actually be adopted. If adopted, such proposals could have a negative impact on
municipal bond values.
Unlike the long end of the market, the ratio of 5-year municipal bond yields to
5-year U.S. Treasury Bond yields moved within a range near its four-year average
of 76%. This ratio of 5-year municipal bond yields to 5-year Treasury Bond
yields increased during the first five months of the reporting period to a high
of 79%, then dropped to 72% at the close of the period. Unlike the longer end of
the municipal bond market, which is more sensitive to the flat tax debate, the
fluctuations in the intermediate-term municipal and taxable relative bond yields
have been more a function of supply and demand.
The numerous flat tax proposals have been the source of a significant degree of
uncertainty in the municipal bond market. As referred to above, the market has
already been responding to this uncertainty for some time. Although we will
continue to monitor the status of these proposals, there is currently no way of
predicting when, if, or in what form any flat tax proposal would be enacted. If
a proposal were enacted, it is not known what provisions may be employed to ease
the burdens on current municipal securities owners.
<PAGE> 10
Q. HOW HAS THE ECONOMIC AND INTEREST RATE ENVIRONMENT AFFECTED THE FUNDS'
PERFORMANCE DURING THE REPORTING PERIOD?
A. Yields on municipal bonds dropped in response to lower market interest rates
and for the second consecutive year, new issuance of municipal bonds was very
low. As buyers of municipal bonds competed for the available securities, they
bid up the bond prices, thereby causing a further reduction in yields on
tax-exempt securities.
The decrease in municipal yields had a positive impact, resulting in an increase
in each Fund's NAV. The Schwab Short/Intermediate Tax-Free Bond Fund's NAV
increased from $10.12 at the beginning of the reporting period to $10.17 at the
end of the period. The Schwab Long-Term Tax-Free Bond Fund's NAV increased from
$10.16 at the beginning of the reporting period to $10.36 at the end of the
period.
Q. WHAT ACTIONS DID THE INVESTMENT MANAGER TAKE DURING THE REPORTING PERIOD ON
BEHALF OF THE FUNDS TO RESPOND TO THE CHANGING INTEREST RATE ENVIRONMENT?
A. The average weighted maturity of the Schwab Short/Intermediate Tax-Free Bond
Fund's portfolio was extended from 3.41 years at the beginning of the period to
3.89 years on February 29 -- near the longer end of the permissible range. Many
market participants felt confident that the short end of the municipal
securities market would be immune to the negative effects of a potential flat
tax, as any proposal would take several years to implement and the bonds at the
shorter end of the maturity spectrum would have matured by that time. As a
result, the Fund remained fully invested during most of the period and was able
to take advantage of the positive impact of rising bond prices. The Fund's
portfolio was composed primarily of municipal bonds with high credit ratings,
with 77% of the portfolio rated AAA or AA, and heavily concentrated in issues
backed by essential services such as transportation, water and power. As the
reporting period progressed and the municipal bond market rallied, the Fund
maintained a relatively low cash position.
The average weighted maturity of the Schwab Long-Term Tax-Free Bond Fund's
portfolio was maintained at approximately 17 years throughout the reporting
period -- a strategy designed to minimize the volatility of the longer maturity
bonds caused by the uncertainty surrounding the flat tax debate. The Fund's
portfolio was also composed primarily of bonds with high credit ratings, with
76% of the portfolio rated AAA or AA, and heavily concentrated in issues backed
by essential services such as transportation, water, and power. As the longer
end of the maturity spectrum reacted negatively to tax reform proposals, the
Fund reduced its position in bonds and overweighted its cash position relative
to its normal target.
<PAGE> 11
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO SUMMARY
(Unaudited)
- --------------------------------------------------------------------------------
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 2/29/96 as of 8/31/95 Reporting
(000s) (000s) Period
- -------------------------------------------------------------
<S> <C> <C>
$52,769 $52,504 1%
- -------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Value
Maturity Schedule (000s) % of Portfolio % of Portfolio
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
(cum.)
1 - 6 Months $ 1,048 2.0% 2.0%
7 - 36 Months 8,350 16.1 18.1
37 - 60 Months 30,864 59.3 77.4
Over 60 Months 11,768 22.6 100.0%
------- -----
$52,030 100.0%
======= =====
</TABLE>
Average Weighted Maturity -- 3.89 Years
[THE FOLLOWING IS A PIE CHART OF THE PUBLISHED RATINS FOR THE INVESTMENTS IN
THE PORTFOLIO.]
PORTFOLIO QUALITY SUMMARY
(as of February 29, 1996)
AAA
50%
AA
27%
Other
5%*
A
18%
This summary reflects the published ratings (for the investments in the
portfolio) of Standard & Poor's Ratings Group and/or Moody's Investor Service,
which are recognized rating services. Categories reflect the higher published
ratings for securities rated differently by the two agencies and percentages are
dollar-weighted.
*Short-term securities
<PAGE> 12
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND
PORTFOLIO SUMMARY
(Unaudited)
- --------------------------------------------------------------------------------
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 2/29/96 as of 8/31/95 Reporting
(000s) (000s) Period
- -------------------------------------------------------------
<S> <C> <C>
$44,826 $41,413 8%
- -------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Value
Maturity Schedule (000s) % of Portfolio % of Portfolio
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
(cum.)
0 - 1 Year $ 6,519 14.5% 14.5%
2 - 20 Years 22,920 51.0 65.5
21 - 30 Years 11,796 26.2 91.7
Over 30 Years 3,743 8.3 100.0%
------- -----
$44,978 100.0%
======= =====
</TABLE>
Average Weighted Maturity -- 17.02 Years
[THE FOLLOWING IS A PIE CHART OF THE PUBLISHED RATINGS FOR THE INVESTMENTS IN
THE PORTFOLIO.]
PORTFOLIO QUALITY SUMMARY
(as of February 29, 1996)
AAA
50%
AA
26%
A
9%
Other
15%*
This summary reflects the published ratings (for the investments in the
portfolio) of Standard & Poor's Ratings Group and/or Moody's Investor Service,
which are recognized rating services. Categories reflect the higher published
ratings for securities rated differently by the two agencies and percentages are
dollar-weighted.
*Short-term securities
<PAGE> 13
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--1.9%(a)
NEW YORK--1.9%
New York City, New York
General Obligation Bonds
Series 1993B Subseries B-4/
(Union Bank of Switzerland
LOC) (VMIG1 A-1+)
3.35%, 03/01/96 $ 300 $ 300
New York City, New York
General Obligation Bonds
Series 1994B Subseries B-4/
(MBIA Insurance &
National Westminster
Bank SBPA) (VMIG1 A-1+)
3.35%, 03/01/96 700 700
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $1,000) 1,000
-------
MUNICIPAL BONDS--98.0%(b)
ALABAMA--2.1%
Alabama Special Care Facilities
Finance Authority of
Birmingham Hospital Revenue
Bonds (Daughters of
Charity National Health
System St. Vincent's
Hospital & Providence)
Series 1995 (Aa AA)
7.00%, 11/01/01 1,000 1,101
-------
ALASKA--2.3%
Anchorage, Alaska
Refunding School Bonds
Series 1993 A/ (MBIA
Insurance) (Aaa AAA)
5.10%, 08/01/99 1,145 1,184
-------
ARIZONA--4.0%
Phoenix, Arizona
Civic Improvement Corp.
Wastewater Systems
Lease Revenue Bonds
Series 1993 (A1 A)
5.10%, 07/01/99 1,005 1,038
Phoenix, Arizona Senior Lien
Street and Highway User
Revenue Refunding Bonds
Series 1992 (A1 AA)
5.95%, 07/01/00 1,000 1,058
-------
2,096
-------
CONNECTICUT--4.0%
Connecticut State Special
Tax Obligation Refunding Bonds
(Transportation Infrastructure
Purposes)
Series 1995C/(FGIC Insurance)
(Aaa AAA)
5.50%, 10/01/00 2,000 2,105
-------
ILLINOIS--2.2%
Illinois Health Facilities
Authority Revenue Bonds (OSF
Healthcare System)
Series 1993 (A1 A+)
5.13%, 11/15/00 1,145 1,152
-------
INDIANA--1.5%
Indiana University Student Fee
Revenue Bonds Series J (Aa
AA-)
4.00%, 08/01/97 $ 800 $ 801
-------
IOWA--7.3%
Black Hawk County, Iowa
Hospital Facilities
Revenue Bonds
(Allen Memorial Hospital)
Series 1990/(Escrowed to
Maturity with Government
Securities & AMBAC Insurance)
(Aaa AAA)
7.38%, 02/01/01 2,000 2,308
Le Claire, Iowa
Electric Revenue Bonds
Series 1986B (- SP-1+)
4.13%, 09/01/96 1,495 1,501
-------
3,809
-------
KENTUCKY--5.3%
Kentucky Housing Corp.
Housing Revenue Bonds
Series 1993B/(Multiple Credit
Enhancements) (Aaa AAA)
4.45%, 07/01/00 1,000 1,000
Kentucky State Property and
Buildings Commission Revenue
Refunding Bonds (Project 55)
(A A+)
4.15%, 09/01/99 1,735 1,731
-------
2,731
-------
MARYLAND--6.1%
Washington, Maryland
Suburban Sanitation District
(Montgomery & Prince George
Counties, Maryland) Sewage
Disposal Refunding Bonds
(Aa1 AA)
6.00%, 11/01/99 3,000 3,199
-------
MASSACHUSETTS--8.9%
Massachusetts Municipal
Wholesale Electric Company
Power Supply Systems Revenue
Bonds Series 1992E/ (AMBAC
Insurance) (Aaa AAA)
5.50%, 07/01/00 2,000 2,103
Massachusetts State Health and
Educational Facilities
Authority Revenue Bonds
(Brigham and Womens Hospital)
Series E (A1 A+)
4.40%, 07/01/00 1,000 1,000
Massachusetts State Housing
Finance Agency Bonds (Housing
Project)
Series 1993A (A1 A+)
4.60%, 04/01/97 1,500 1,505
-------
4,608
-------
</TABLE>
<PAGE> 14
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MINNESOTA--6.7%
Minneapolis, Minnesota
Community Development Agency
Tax Increment
Revenue Bonds/
(MBIA Insurance)
(Aaa AAA)
7.00%, 09/01/00 $1,000 $1,115
Minnesota State Housing
Finance Agency Rental
Housing Bonds Series D/
(MBIA Insurance)
(Aaa AAA)
4.80%, 08/01/01 2,390 2,393
-------
3,508
-------
MISSISSIPPI--4.0%
Mississippi Hospital Equipment
& Facilities Authority Revenue
Refunding Bonds (Mississippi
Baptist Medical Center)
Series 1995/(MBIA Insurance)
(Aaa AAA)
5.25%, 05/01/01 2,000 2,068
-------
MISSOURI--1.0%
Missouri State Environmental
Improvement & Energy Resources
Authority Water Pollution
Control Revenue Bonds (State
Revolving Fund Program) Series
1992A
(Aa -)
5.80%, 07/01/99 500 528
-------
NEW YORK--8.0%
New York State Dormitory
Authority Lease Revenue
Refunding Bonds (State
University Dormitory
Facilities) Series
1995A/(AMBAC Insurance) (Aaa
AAA)
5.10%, 07/01/01 4,000 4,170
-------
OHIO--3.9%
Ohio State Public Finance
Commission (Higher
Education Capital Facilities)
Revenue Bonds Series IIA/
(MBIA Insurance) (Aaa AAA)
4.38%, 11/01/00 2,000 2,013
-------
SOUTH CAROLINA--6.6%
Charleston, South Carolina
Public Facilities Corp.
Certificates of Participation
(Public Improvement Project)/
Series 1993 (AMBAC Insurance)
(Aaa AAA)
4.30%, 09/01/00 1,085 1,074
Greenville Hospital System,
Board of Trustees
South Carolina Hospital
Facilities Revenue Refunding
Bonds Series 1993C (- AA-)
5.00%, 05/01/00 1,090 1,100
<CAPTION>
Par Value
------ -------
<S> <C> <C>
South Carolina State
Public Service Authority
(Santee Cooper)
Power/Electric Revenue
Refunding and Improvement
Bonds Series 1991A (A1 A+)
5.60%, 07/01/00 $1,200 $ 1,254
-------
3,428
-------
TENNESSEE--5.4%
Knox County, Tennessee Health &
Education
(Fort Sanders Alliance)
Series 1990C (Pre-Refunded)/
(MBIA Insurance) (Aaa AAA)
7.00%, 01/01/00 2,500 2,788
-------
TEXAS--10.0%
Houston, Texas
Public Improvement Refunding
Bonds
Series 1995A (Aa AA-)
5.20%, 03/01/00 1,000 1,036
5.30%, 03/01/01 1,000 1,036
Houston, Texas
Water Conveyance System
Contract Certificates of
Participation Series 1993E/
(AMBAC Insurance) (Aaa AAA)
5.50%, 12/15/97 1,000 1,031
Tarrant County, Texas
Water Control Improvement
District No. 1 Water Revenue
Refunding Bonds Series 1993
(A1 AA)
5.40%, 03/01/99 2,000 2,078
-------
5,181
-------
WASHINGTON--6.8%
Washington State Certificates
of Participation (State
Equipment)
Series 1993B (A A)
4.13%, 04/01/97 1,500 1,502
Washington State Public Power
Supply System Revenue
Refunding Bonds (Nuclear
Project #2) Series A (Aa AA)
4.63%, 07/01/98 2,000 2,010
-------
3,512
-------
WISCONSIN--1.9%
Wisconsin State Health &
Educational Facilities
Authority Revenue Bonds
(Aurora Medical Group Project)
Series 1996/(FSA Insurance)
(Aaa AAA)
4.90%, 11/15/02 1,000 1,000
-------
TOTAL MUNICIPAL BONDS
(Cost $50,264) 50,982
-------
<CAPTION>
Shares
------
<S> <C> <C>
SHORT-TERM INVESTMENT--0.1%(c)
Provident Institutional Funds - MuniFund
2.79%, 03/07/96 48 48
-------
TOTAL SHORT-TERM INVESTMENT
(Cost $48) 48
-------
TOTAL INVESTMENTS--100.0%
(Cost $51,312) $52,030
=========
</TABLE>
See accompanying Notes to Schedules of Investments.
<PAGE> 15
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--14.5%(a)
CALIFORNIA--8.7%
California Pollution Control
Financing Authority Pollution
Control Refunding Revenue
Bonds (Southern California
Edison) Series 1986A (VMIG1
A-1+)
3.50%, 03/01/96 $ 900 $ 900
Irvine Ranch, California
Water District
Consolidated General
Obligation Revenue Bonds
(Improvement District Numbers
140, 240, 105, 250) Series
1993/(Bank of
America LOC) (VMIG1 A-1+)
3.55%, 03/01/96 1,700 1,700
Irvine Ranch, California
Water District
Consolidated Revenue
Refunding Bonds Series
1985B/(Sumitomo
Bank LOC) (- A-1)
3.75%, 03/01/96 1,200 1,200
Irvine Ranch, California
Water District
Sewer Bonds (Improvement
District No. 282) Series
1988A/(Sumitomo
Bank LOC) (- A-1)
3.75%, 03/01/96 100 100
-------
3,900
-------
NEW YORK--3.4%
New York City, New York
General Obligation Bonds
Series 1993A Subseries A-5/
(Kredietbank, N.V. LOC)
(VMIG1 A-1+)
3.35%, 03/01/96 100 100
New York City, New York
General Obligation Bonds
Series 1994 Subseries B-4/
(Union Bank of
Switzerland LOC) (VMIG1 A-1+)
3.35%, 03/01/96 905 905
New York City, New York
General Obligation Bonds
Series 1994 Subseries B-2/
(Dai-Ichi Kangyo
Bank LOC)
(VMIG1 A-1)
3.40%, 03/01/96 200 200
New York City, New York
Municipal Water Finance
Authority Water & Sewer System
Revenue Bonds Series
1994G/(FGIC SPA &
FGIC Insurance) (VMIG1 A-1+)
3.35%, 03/01/96 300 300
-------
1,505
-------
<CAPTION>
Par Value
------ -------
<S> <C> <C>
WYOMING--2.4%
Lincoln County, Wyoming
Pollution Control
Revenue Bonds
(Exxon Project)
Series 1984A (P-1 A-1+)
3.35%, 03/01/96 $ 800 $ 800
Platte County, Wyoming
Pollution Control
Revenue Refunding Bonds
(Tri-State Generation and
Transmission Project) Series
1984A/
(Societe Generale LOC)
(P-1 -)
3.45%, 03/01/96 300 300
-------
1,100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $6,505) 6,505
-------
MUNICIPAL BONDS--85.5%(b)
ALASKA--14.1%
Alaska Revenue Bonds/
(MBIA Insurance)
(Aaa AAA)
5.88%, 12/01/24 2,000 1,985
Kodiak Island Borough, Alaska
General Obligation Bonds
Series 1994A/(AMBAC
Insurance) (Aaa AAA)
5.40%, 02/15/10 2,500 2,475
Valdez, Alaska
Marine Terminal
Revenue Refunding Bonds (BP
Pipeline Project)
Series 1993B (Aa3 AA-)
5.50%, 10/01/28 2,000 1,870
-------
6,330
-------
ARIZONA--5.0%
Maricopa County, Arizona
Alhambra Elementary School
District 68 Series 1994A/
(AMBAC Insurance)
(Aaa AAA)
6.80%, 07/01/12 2,000 2,253
-------
CALIFORNIA--6.2%
San Francisco, California
Downtown Parking Corp. Parking
Revenue Bonds Series 1993
(A -)
6.65%, 04/01/18 500 522
Santa Clara County, California
Financing Authority
Lease Revenue Bonds
(VMC Facility Replacement
Project) Series 1994A/
(AMBAC Insurance)
(Aaa AAA)
7.75%, 11/15/10 1,000 1,260
</TABLE>
<PAGE> 16
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
University of California
Regents Refunding Certificates
of Participation (UCLA Central
Chiller Cogeneration Facility)
(Aa -)
5.30%, 11/01/08 $1,000 $1,010
-------
2,792
-------
CONNECTICUT--1.3%
Connecticut State Housing
Finance Authority Bonds
(Housing Mortgage Finance
Program) Series 1990B
Subseries B1 (Aa AA)
7.55%, 11/15/08 570 584
-------
ILLINOIS--3.8%
Illinois State Special
State Obligation Bonds
(Civic Center)/
(AMBAC Insurance)
(Aaa AAA)
6.25%, 12/15/20 500 544
Illinois State Toll Highway
Authority Priority Revenue
Bonds Series 1992A (A1 A+)
6.38%, 01/01/15 1,100 1,170
-------
1,714
-------
IOWA--5.4%
Ames, Iowa
Hospital Revenue Bonds
(Mary Greeley Medical
Center Project) Series 1993/
(AMBAC Insurance) (Aaa AAA)
5.70%, 08/15/12 500 510
Cedar Rapids, Iowa
Hospital Revenue Bonds
(St. Luke's Methodist Project)
Series 1993/
(FGIC Insurance)
(Aaa AAA)
6.13%, 08/15/13 600 617
Woodbury County, Iowa Health
Systems Revenue Refunding
Bonds (St. Luke's Obligated
Group) Series 1995A/(MBIA
Insurance) (Aaa AAA)
5.50%, 09/01/16 1,350 1,320
-------
2,447
-------
MASSACHUSETTS--5.0%
Massachusetts Bay
Transportation Authority Bonds
(General Transportation
System) Series 1995A (A1 A+)
5.75%, 03/01/18 1,400 1,402
Massachusetts State
Housing Finance Agency
Multi Family Residential
Housing Revenue Bonds
Series 1989A (A A+)
7.80%, 08/01/22 800 833
-------
2,235
-------
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MICHIGAN--4.2%
Michigan State Hospital
Financing Authority
Hospital Revenue Bonds
(St. John's Hospital
and Medical Center)/
(AMBAC Insurance)
(Aaa AAA)
5.25%, 05/15/26 $2,000 $ 1,873
-------
MISSISSIPPI--5.0%
Mississippi Hospital
Equipment & Facilities
Authority
Revenue Refunding Bonds
(Mississippi Baptist
Medical Center)
Series 1995/
(MBIA Insurance)
(Aaa AAA)
6.00%, 05/01/13 2,150 2,233
-------
MISSOURI--2.2%
Kansas City, Missouri
School District Building
Revenue Bonds
(Capital Improvement Project)
Series 1993/(FGIC Insurance)
(Aaa AAA)
5.15%, 02/01/08 1,000 1,009
-------
NEW HAMPSHIRE--1.7%
New Hampshire Higher
Educational & Health
Facilities Authority Hospital
Revenue Bonds
(Mary Hitchcock
Memorial Hospital) Series
1993/
(FGIC Insurance)
(Aaa AAA)
5.25%, 08/15/08 750 754
-------
NEW MEXICO--1.1%
Santa Fe, New Mexico
Utility Revenue Bonds
Series 1995A/
(AMBAC Insurance) (Aaa AAA)
5.25%, 06/01/17 500 483
-------
PENNSYLVANIA--5.0%
Philadelphia, Pennsylvania
Hospitals and Higher Education
Facilities Authority Revenue
Refunding Bonds (Children's
Hospital Project) Series 1993A
(Aa AA)
5.25%, 02/15/08 1,000 984
Pittsburgh, Pennsylvania
Water & Sewer Authority
Revenue Bonds Series B/
(FSA Insurance)
(Aaa AAA)
5.75%, 09/01/25 1,250 1,250
-------
2,234
-------
</TABLE>
<PAGE> 17
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
RHODE ISLAND--2.3%
Rhode Island Housing and
Mortgage Finance Corp.
Homeownership Opportunity
Bonds Series 10A (Aa AA+)
6.50%, 10/01/22 $1,000 $1,033
-------
SOUTH CAROLINA--3.4%
Piedmont Municipal Power
Agency, South Carolina
Electric Revenue Refunding
Bonds Series 1992/
(MBIA Insurance)
(Aaa AAA)
6.20%, 01/01/08 1,400 1,549
-------
TEXAS--10.4%
Copperas Cove, Texas
Health Facilities Development
Corp. Hospital Revenue
Bonds (Adventist Health
Systems/Sunbelt Obligated
Group) Series 1995/
(MBIA Insurance)
(Aaa AAA)
5.88%, 11/15/25 1,500 1,515
San Antonio, Texas
Electric & Gas Systems Revenue
Refunding Bonds
Series 1992
(Aa1 AA)
5.75%, 02/01/11 1,000 1,021
Texas State Public Finance
Authority General Obligation
Bonds Series 1994B (Aa AA)
5.75%, 10/01/14 1,025 1,052
University of Texas
Board of Regents
Revenue Refunding Bonds
Series 1991B
(Aa1 AA+)
6.75%, 08/15/13 1,000 1,096
-------
4,684
-------
<CAPTION>
Par Value
------ -------
<S> <C> <C>
UTAH--2.0%
Intermountain Power Agency,
Utah Power Supply
Revenue Refunding Bonds
Series 1996D
(AA AA-)
5.00%, 07/01/21 $1,000 $ 909
-------
VIRGINIA--2.2%
Capitol Region, Virginia
Airport Commission
Airport Revenue Bonds
(Richmond International
Airport Projects) Series
1995A/
(AMBAC Insurance) (Aaa AA)
5.63%, 07/01/15 1,000 1,006
-------
WASHINGTON--5.2%
Seattle, Washington
Municipal Light and Power
Revenue Refunding Bonds
Series 1993
(Aa AA)
5.40%, 05/01/08 2,300 2,337
-------
TOTAL MUNICIPAL BONDS
(Cost $37,144) 38,459
-------
<CAPTION>
Shares
------
<S> <C> <C>
SHORT-TERM INVESTMENT--0.0%(c)
Provident Institutional Funds -
MuniFund
2.79%, 03/07/96
14 14
-------
TOTAL SHORT-TERM INVESTMENT
(Cost $14) 14
-------
TOTAL INVESTMENTS--100.0%
(Cost $43,663) $44,978
=========
</TABLE>
See accompanying Notes to Schedules of Investments.
<PAGE> 18
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULES OF INVESTMENTS (in thousands)
February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
Parenthetical disclosures which follow each security represent independent
bond ratings, where available, as provided by Moody's Investor Services,
Inc. and Standard & Poor's Corp. which were in effect at February 29, 1996.
(a) Variable rate securities. Interest rates vary periodically based on
current market rates. Rates shown are the effective rates on February
29, 1996. Dates shown represent the latter of the demand date or next
interest rate change date, which is considered the maturity date for
financial reporting purposes. For variable rate securities without
demand features and which mature in less than one year the next
interest reset date is shown.
(b) Interest rates represent coupon rate of security.
(c) Interest rates represent the yield on February 29, 1996.
Abbreviations
<TABLE>
<S> <C>
AMBAC AMBAC Indemnity Corporation
Financial Guaranty Insurance Company
FGIC
FSA Financial Security Assurance Inc.
LOC Letter of Credit
Municipal Bond Investors Assurance Corporation
MBIA
Standby Purchase Agreement
SBPA
SPA Securities Purchase Agreement
Variable Moody's Investment Guide
VMIG
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 19
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $51,312 and $43,663, respectively) $ 52,030 $ 44,978
Interest receivable 689 585
Receivable for fund shares sold 59 192
Deferred organization costs 38 25
Prepaid expenses 17 8
------- -------
Total assets 52,833 45,788
------- -------
LIABILITIES
Payable for:
Dividends 18 18
Investments purchased -- 913
Fund shares redeemed 3 6
Investment advisory and administration
fee 5 3
Deferred organization costs -- 4
Other 38 18
------- -------
Total liabilities 64 962
------- -------
Net assets applicable to outstanding shares $ 52,769 $ 44,826
======= =======
NET ASSETS CONSIST OF:
Capital paid in $ 52,677 $ 43,871
Accumulated overdistributed
net investment income (11) (8)
Accumulated net realized loss
on investments sold (615) (352)
Net unrealized gain on investments 718 1,315
------- -------
$ 52,769 $ 44,826
======= =======
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 5,191 4,325
Net asset value, offering and
redemption price per share $10.17 $10.36
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 20
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Interest income $ 1,183 $ 1,164
-------- --------
Expenses:
Investment advisory and administration
fee 107 87
Transfer agency and shareholder service
fees 65 53
Custodian fees 19 15
Registration fees 8 4
Professional fees 6 6
Shareholder reports 9 7
Trustees' fees 2 1
Amortization of deferred organization
costs 7 8
Insurance and other expenses 6 6
-------- --------
229 187
Less expenses reduced (101) (83)
-------- --------
Total expenses incurred by Fund 128 104
-------- --------
Net investment income 1,055 1,060
-------- --------
Net realized gain (loss) on investments:
Proceeds from sales of investments 39,911 30,031
Cost of investments sold (39,839) (29,570)
-------- --------
Net realized gain on investments sold 72 461
-------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 531 929
End of period 718 1,315
-------- --------
Increase in net unrealized gain
on investments 187 386
-------- --------
Net gain on investments 259 847
-------- --------
Increase in net assets resulting
from operations $ 1,314 $ 1,907
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 21
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------------- -------------------------
\--------------------- For the ----------------------\
six months six months
ended year ended
February 29, ended February 29, year ended
1996 August 31, 1996 August 31,
(Unaudited) 1995 (Unaudited) 1995
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,055 $ 2,261 $ 1,060 $ 2,238
Net realized gain (loss) on
investments sold 72 (448) 461 (806)
Increase in net unrealized
gain on investments 187 1,372 386 1,600
------- -------- ------- --------
Increase in net assets
resulting from operations 1,314 3,185 1,907 3,032
------- -------- ------- --------
Dividends to shareholders from
net investment income (1,079) (2,255) (1,083) (2,232)
------- -------- ------- --------
Capital share transactions:
Proceeds from shares sold 7,750 17,344 10,132 21,437
Net asset value of shares
issued in reinvestment
of dividends 868 1,746 790 1,626
Less payments for
shares redeemed (8,588) (31,405) (8,333) (26,425)
------- -------- ------- --------
Increase (decrease) in
net assets from
capital share transactions 30 (12,315) 2,589 (3,362)
------- -------- ------- --------
Total increase (decrease) in
net assets 265 (11,385) 3,413 (2,562)
Net assets:
Beginning of period 52,504 63,889 41,413 43,975
------- -------- ------- --------
End of period (including
undistributed
(overdistributed)
net investment income
of ($11), $13, ($8)
and $15, respectively) $ 52,769 $ 52,504 $ 44,826 $ 41,413
======= ======== ======= ========
Number of Fund shares:
Sold 762 1,754 977 2,196
Reinvested 85 176 76 166
Redeemed (844) (3,185) (804) (2,707)
------- -------- ------- --------
Net increase (decrease) in
shares outstanding 3 (1,255) 249 (345)
Shares outstanding:
Beginning of period 5,188 6,443 4,076 4,421
------- -------- ------- --------
End of period 5,191 5,188 4,325 4,076
======= ======== ======= ========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 22
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free
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, as amended.
In addition to the two funds described above, the Trust also offers -- the
Schwab 1000 Fund(R), Schwab Short/Intermediate Government Bond Fund, Schwab
Long-Term Government Bond Fund, Schwab California Short/Intermediate Tax-Free
Bond Fund and Schwab California Long-Term Tax-Free Bond Fund. The assets of
each series are segregated and accounted for separately.
The investment objective of the Funds is to seek to provide a high level of
current income that is exempt from federal income tax, consistent with
preservation of capital. The Funds, which are not "diversified" within the
meaning of the Investment Company Act of 1940, as amended, each invest
primarily in debt obligations issued by or on behalf of states, territories and
possessions of the United States Government, its agencies or instrumentalities,
the interest of which is not subject to federal income tax.
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 representative quoted 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). Interest income is recorded on the accrual basis and includes
amortization of premium on investments. Realized gains and losses from security
transactions are determined on an identified cost basis. 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.
<PAGE> 23
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dividends to shareholders -- Each Fund declares a daily dividend, from 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 and with various states 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 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.
At February 29, 1996, (for financial reporting and federal income tax
purposes), net unrealized gain for the Schwab Short/Intermediate Tax-Free Bond
Fund aggregated $718,000, of which $763,000 related to appreciated securities
and $45,000 related to depreciated securities, and net unrealized gain for the
Schwab Long-Term Tax-Free Bond Fund aggregated $1,315,000, of which $1,397,000
related to appreciated securities and $82,000 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 Funds each pay an annual fee, payable monthly, of
.41% of each Fund's average daily net assets. Under this agreement, the Schwab
Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund
incurred investment advisory and administration fees of $107,000 and $87,000,
respectively, for the six months ended February 29, 1996, before the Investment
Manager reduced its fee (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 .05% of each Fund's average daily net assets
for transfer agency services and .20% of such assets for shareholder services.
For the six months ended February 29, 1996, the Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund incurred transfer
agency and shareholder service fees of $65,000 and $53,000, respectively,
before Schwab reduced its fees (see Note 4).
<PAGE> 24
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
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 29, 1996, 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 Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund incurred fees
aggregating $3,000 related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the ratio of operating expenses to average net assets for each Fund.
During the six months ended February 29, 1996, the total of such fees reduced
by the Investment Manager were $35,000 and $30,000 for the Schwab
Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund,
respectively, and the total of such fees reduced by Schwab were $66,000 and
$53,000 for the Schwab Short/Intermediate Tax-Free Bond Fund and Schwab
Long-Term Tax-Free Bond Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the six months ended February 29, 1996, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
<S> <C> <C>
Purchases $ 15,518 $ 10,676
Proceeds of sales and maturities $ 12,574 $ 10,822
</TABLE>
<PAGE> 25
SchwabFunds(R) 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate
Tax-Free Bond Fund
-----------------------------------------------
Six months
ended
February 29, Year ended Period ended
1996 August 31, August 31,
(Unaudited) 1995 1994 1993(1)
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
Net asset value at beginning of
period $ 10.12 $ 9.92 $ 10.15 $ 10.00
Income from investment operations
- ----------------------------------
Net investment income .20 .40 .37 .13
Net realized and unrealized
gain (loss) on investments .06 .20 (.23) .15
------- ------- ------- -------
Total from investment operations .26 .60 .14 .28
Less distributions
- -----------------
Dividends from net investment
income (.21) (.40) (.37) (.13)
Distributions from realized
gain on investments -- -- -- --
------- ------- ------- -------
Total distributions (.21) (.40) (.37) (.13)
------- ------- ------- -------
Net asset value at end of period $ 10.17 $ 10.12 $ 9.92 $ 10.15
======= ======= ======= =======
Total return (%) 2.57 6.23 1.42 2.83
- ----------------
Ratios/Supplemental data
- -------------------------
Net assets, end of period (000s) $ 52,769 $52,504 $63,889 $ 54,450
Ratio of expenses to
average net assets (%) .49* .49 .48 .45*
Ratio of net investment income to
average net assets (%) 4.03* 4.06 3.71 3.63*
Portfolio turnover rate (%) 23 35 19 11
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab
Short/Intermediate Tax-Free Bond Fund for the periods ended February 29, 1996,
August 31, 1995, 1994 and 1993 would have been .87%*, .89%, .91% and 1.26%*,
respectively, and the ratio of net investment income to average net assets would
have been 3.65%*, 3.66%, 3.28% and 2.82%*, respectively.
(1) For the period April 21, 1993 (commencement of operations) to August 31,
1993.
* Annualized
<PAGE> 26
SchwabFunds(R) 14
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Long-Term
Tax-Free Bond Fund
--------------------------------------------------------
Six months Eight
ended months Period
February 29, Year ended ended ended
1996 August 31, August 31, December 31,
(Unaudited) 1995 1994 1993 1992(1)
------------ ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.16 $ 9.95 $ 10.59 $ 9.92 $ 10.00
Income from investment
- ----------------------
operations
-----------
Net investment income .27 .53 .52 .36 .17
Net realized and unrealized
gain (loss) on investments .19 .21 (.56) .67 (.08)
------- ------- ------- ------- -------
Total from
investment operations .46 .74 (.04) 1.03 .09
Less distributions
- ----------------
Dividends from
net investment income (.26) (.53) (.52) (.36) (.17)
Distributions from realized
gain on investments -- -- (.08) -- --
------- ------- ------- ------- -------
Total distributions (.26) (.53) (.60) (.36) (.17)
------- ------- ------- ------- -------
Net asset value at
end of period $ 10.36 $ 10.16 $ 9.95 $ 10.59 $ 9.92
======= ======= ======= ======= =======
Total return (%) 4.59 7.76 (.42) 10.56 .92
- ---------------
Ratios/Supplemental data
- ------------------------
Net assets, end of
period (000s) $ 44,826 $41,413 $43,975 $ 50,413 $ 28,034
Ratio of expenses to
average net assets (%) .49* .54 .51 .45* .45*
Ratio of net investment
income to average
net assets (%) 5.00* 5.40 5.05 5.30* 5.61*
Portfolio turnover rate (%) 28 70 62 91 54
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab Long-Term
Tax-Free Bond Fund for the periods ended February 29, 1996, August 31, 1995,
1994, 1993 and December 31, 1992 would have been .89%*, .93%, .99%, 1.18%* and
1.53%*, respectively, and the ratio of net investment income to average net
assets would have been 4.60%*, 5.01%, 4.57%, 4.57%* and 4.53%*, respectively.
(1) For the period September 11, 1992 (commencement of operations) to December
31, 1992.
* Annualized
<PAGE> 27
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio with one investment in any of the three
Asset Director(R) Funds, or choose several different equity markets with our
three equity index funds. You can also select from different maturities with our
bond fund choices, and take advantage of an array of money market funds.
SCHWAB ASSET DIRECTOR FUNDS
- - HIGH GROWTH FUND seeks to provide high capital growth with less volatility
than an all-stock portfolio. This Fund has the largest stock component and
offers the highest risk and return potential.
- - BALANCED GROWTH FUND seeks to provide maximum total return, including
capital growth and income. This Fund invests in a more balanced mix of
stocks and bonds and offers moderate risk and return potential.
- - CONSERVATIVE GROWTH FUND seeks to provide income with growth potential.
This Fund has the smallest stock component, which is designed to help
offset inflation, and generally keeps the majority of its assets invested
in bonds. It offers the lowest risk and return potential.
SCHWAB INDEX FUNDS
- - SCHWAB 1000 FUND(R) is designed to match the total return of the Schwab
1000 Index(R), composed of the largest 1,000 publicly traded U.S. companies
-- the stocks of which represent about 85% of the total market
capitalization of the U.S. stock market. 1
- - SCHWAB SMALL-CAP INDEX FUND(R) is designed to track the total return of the
Schwab Small-Cap Index(TM), which tracks the performance of
small-capitalization companies. The Schwab Small-Cap Index is composed of
the second 1,000 largest publicly traded companies in the U.S. 1
- - SCHWAB INTERNATIONAL INDEX FUND(TM) is designed to track the total return
of the Schwab International Index(R), composed of 350 of the largest
companies, based on market capitalization, in foreign countries with
developed securities markets. 2
SCHWAB BOND FUNDS
- - SCHWAB GOVERNMENT BOND FUNDS include two Funds designed to offer high
current yields with the credit safety of U.S. government securities. The
income level you are seeking and your tolerance for fluctuation in share
price should determine your selection of either our Short/Intermediate Fund
or our Long-Term Fund. 3
- - SCHWAB TAX-FREE BOND FUNDS help investors take advantage of one of the last
remaining tax breaks: tax-free municipal bonds. We offer a national
Short/Intermediate Fund and a Long-Term Fund, both of which pay monthly
income free from federal personal income tax. 4, 5
- - SCHWAB CALIFORNIA TAX-FREE BOND Funds give California taxpayers two
different opportunities to earn double tax-free income -- free from both
federal and California state personal income taxes. 5
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money funds that seek high current income with
safety and liquidity. Choose from taxable or tax-exempt 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(TM). 6
We will be happy to provide you with a free prospectus and brochure on any
of the SchwabFunds(R). Each prospectus provides more complete information,
including charges and expenses. Please read it carefully before investing.
1-800-2 NO-LOAD (1-800-266-5623)
1. The Schwab 1000 Index and the Schwab Small-Cap Index consist of publicly
traded companies ranked by market capitalization. These indices do not
include privately held companies, investment companies and companies
incorporated outside of the United States.
2. The Schwab International Index is composed of publicly traded companies
ranked by market capitalization in countries with developed securities
markets. Currently invested in 15 countries, the Index does not include
privately held companies, investment companies or companies from the United
States.
3. Investors in the Schwab Government Bond Funds may experience a decline in
share price due to prepayment of obligations held by the Funds.
4. Income may be subject to state and local taxes.
5. Income may be subject to the Alternative Minimum Tax (AMT). Capital
appreciation from discounted bonds may be subject to state and federal
income tax.
6. 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> 28
--------------
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
--------------
[SCHWABFUNDS FAMILY(R) LOGO]
101 Montgomery Street
San Francisco, California 94104
INVESTMENT ADVISER
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.
TF4032R (4/96) CRS 10407 Printed on recycled paper.
