<PAGE> 1
SCHWABFUNDS(R)
[LOGO]
SCHWAB
TAX-FREE
BOND FUNDS
ANNUAL REPORT
AUGUST 31,1996
[Photo of the Schwab Building, San Francisco, California]
<PAGE> 2
Dear Shareholder,
[Photo I'd like to take this opportunity to share some thoughts on
of mutual fund investing and tell you how we're working to expand
Charles our services to keep pace with your changing needs.
R. Schwab]
First, however, I want to extend a personal welcome to the many thousands of new
shareholders who've joined the SchwabFunds Family(R) since our last report to
you. With your support, we've become one of the largest and fastest-growing
organizations in the mutual fund industry. Today, Charles Schwab Investment
Management, Inc. serves nearly 2 million shareholders with total assets under
management in excess of $39 billion. SchwabFunds(R) has grown into a mutual fund
complex offering retail investors 26 funds covering a broad range of financial
markets and investing approaches.
TIME-TESTED INVESTING STRATEGIES THAT OFFER YOU AN EXPANDING RANGE OF
OPPORTUNITIES.
Over the past 12 months, we've introduced eight new funds, each built on
specific, time-tested strategies. The three Schwab Asset Director(R) Funds help
you diversify your portfolio through asset allocation, the Schwab S&P 500 Fund
seeks to track U.S. stock market performance through indexing, the Schwab
Analytics Fund(TM) uses advanced quantitative methods to identify attractive
investment opportunities, and the three Schwab OneSource Portfolios help you
diversify your portfolio across asset classes and fund management styles through
their fund-of-funds approach.* Along with our other offerings, these new funds
give you powerful tools you can use to help construct a custom investment
portfolio that matches your individual goals. And, of course, they also allow
you to tap into the combined investing expertise of our highly experienced team
of professional portfolio managers.
ENHANCING SHAREHOLDER COMMUNICATIONS.
Our commitment to shareholders goes beyond simply offering you new investment
opportunities. We also want to help you become a more-informed mutual fund
investor by providing the in-depth information you need to help manage your
portfolio more effectively. Toward that end, we've changed the format of this
report to make it more informative.
If you'd like more information on any of the funds in the SchwabFunds Family,
call 1-800-2 NO-LOAD (1-800-266-5623). Our representatives will be happy to
provide you with a free prospectus, which contains more complete information on
fund risks, charges and expenses. Please read it carefully before investing.
Thank you for placing your trust in us. We'll continue working hard to offer you
an even broader range of strategic investment opportunities.
/s/ Charles R. Schwab
Charles R. Schwab
*The Schwab OneSource Portfolios-Growth Allocation and Schwab OneSource
Portfolios-Balanced Allocation Funds are in subscription until November 15,
1996, unless the subscription period is extended, at an introductory share price
of $10. After that date the share price will fluctuate.
Cover: The Schwab Building, San Francisco, California
<PAGE> 3
Keep Your
Money Working
Harder!
Use this envelope to easily add to
your Schwab Bond Fund.
Charles Schwab
Attn: Dept. AIP 333-4
--------------
NO POSTAGE
NECESSARY IF
MAILED IN THE
UNITED STATES
- ------------------------------------------------------- --------------
BUSINESS REPLY MAIL
FIRST-CLASS MAIL PERMIT NO. 18125 SAN FRANCISCO, CA
- -------------------------------------------------------
POSTAGE WILL BE PAID BY ADDRESSEE
CHARLES SCHWAB & CO INC
P O BOX 7778
SAN FRANCISCO CA 94120-9419
[BARCODE]
<PAGE> 4
WE'VE MADE IT EASIER FOR YOU! TAKE ADVANTAGE OF THIS OPPORTUNITY TO ADD TO YOUR
SCHWAB BOND FUND INVESTMENT.
Now you can add to your account by using this convenient Schwab investment
coupon. It's a simple, easy way to increase your investment. You can also have
money transferred to your bond fund directly from your bank account or payroll
check using Schwab's free Automatic Investment Plan (AIP)(1). If you'd like more
information on AIP, just check the appropriate box on the coupon. We'll send you
everything you need to get started.
DON'T DELAY. USE THIS CONVENIENT INVESTMENT ENVELOPE AND SEND YOUR CHECK TODAY!
(1) The Automatic Investment Plan does not ensure profit or protect against
loss in declining markets.
- --------------------------------------------------------------------------------
PLEASE DETACH HERE
SCHWAB BOND FUND
INVESTMENT COUPON
- --------------------
Please enclose your check and this _______________ - ________________
completed investment coupon in the SCHWAB ACCOUNT NUMBER
attached postage-paid envelope.
- ------------------------------------- PLEASE INDICATE TO WHICH SCHWAB BOND
NAME FUND YOUR INVESTMENT SHOULD GO:
$ / / Schwab Long-Term Government Bond
- ------------------------------------- Fund
AMOUNT OF INVESTMENT*
/ / Schwab Short/Intermediate
- ------------------------------------- Government Bond Fund
SIGNATURE
/ / Schwab California Long-Term
/ / Check here if you would like more Tax-Free Bond Fund
investment coupons for future use.
/ / Schwab California Short/
/ / Check here if you would like more Intermediate Tax-Free Bond Fund
information on Schwab's Automatic
Investment Plan (AIP). / / Schwab Long-Term Tax-Free Fund
*THIS ENVELOPE MAY NOT BE USED FOR / / Schwab Short/Intermediate
INITIAL INVESTMENTS. SUBSEQUENT Tax-Free Fund
INVESTMENT MINIMUM IS $100.
IF NO FUND IS INDICATED, YOUR
(C)1996 Charles Schwab & Co., Inc. INVESTMENT WILL GO INTO THE SWEEP
All rights reserved. Member SIPC/NYSE. ACCOUNT YOU'VE DESIGNATED.
Printed on recycled paper.
TF4269(10/96) CBS 10552 (Lift here for more information.)
CHARLES SCHWAB
JUST FOLLOW THESE EASY STEPS TO INVEST IN YOUR SCHWAB BOND FUND:
1. Fill out the Schwab investment coupon completely, including your name,
account number, amount of your check and signature. Please use one coupon for
each account.
2. Make your check payable to CHARLES SCHWAB & CO., INC., and enclose your
check with the completed coupon in this postage-paid envelope.
3. Then just drop your Schwab Bond Fund investment envelope in the mail
today--and start putting your money to work! If you have any questions,
don't hesitate to call your local Schwab office or 1-800-2 NO-LOAD.
THIS ENVELOPE MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT SCHWAB BOND FUND
PROSPECTUS. THE 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> 5
-----------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------------------------------------------------------------------
DIVIDEND PAYMENT ................................................ 2
PERFORMANCE ..................................................... 3
TAXABLE EQUIVALENT YIELD ........................................ 6
FUND INVESTMENTS ................................................ 7
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
AND MARKET OVERVIEW ............................................. 9
FINANCIAL STATEMENTS AND NOTES .................................. 19
-----------------------------------------------------------------------------
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 their fiscal year ended August 31, 1996. During the
fiscal year, both Funds continued to help you achieve your investment goals by
providing a relatively steady stream of monthly income, exempt from federal
income taxes and consistent with capital preservation. Each Fund's individual
performance is reviewed in detail in the following pages.
1
<PAGE> 6
DIVIDEND PAYMENT FOR THE FISCAL YEAR
FROM EACH FUND'S INCEPTION DATE
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1993* 1994 1995 1996
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Dividends $0.13 $0.37 $0.40 $0.41
- --------------------------------------------------------------------
Capital Gains -- -- -- --
- --------------------------------------------------------------------
</TABLE>
*Commencement of operations April 21, 1993.
SCHWAB LONG-TERM TAX-FREE BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1992* 1993 1994 1995 1996
- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Dividends $0.17 $0.36 $0.52 $0.53 $0.52
- -----------------------------------------------------------
Capital Gains -- -- $0.08 -- --
- -----------------------------------------------------------
</TABLE>
*Commencement of operations September 11, 1992.
2
<PAGE> 7
PERFORMANCE
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- --------------------------------------------------------------
Yield and Total Return as of August 31, 1996
<TABLE>
<CAPTION>
Average Annual
30-Day One-Year Total Return
SEC Yield Total Return Since Inception (4/21/93)
- --------------------------------------------------------------
<S> <C> <C>
4.03% 3.32% 4.09%
- --------------------------------------------------------------
</TABLE>
Total return assumes reinvestment of all dividends and capital gain
distributions, if any. 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
Investment Manager and Schwab waived a portion of their fees during the fiscal
year and have guaranteed that maximum total operating expenses will not exceed
0.49% through at least 12/31/96. Without fee waivers and guarantees, for the
periods ended 8/31/96, the Fund's 30-day SEC yield, one-year total return and
average annual total return since inception would have been 3.38%, 2.90%, and
3.62%, respectively.
SCHWAB LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------
YIELD AND TOTAL RETURN AS OF AUGUST 31, 1996
<TABLE>
<CAPTION>
Average Annual
30-Day One-Year Total Return
SEC Yield Total Return Since Inception (9/11/92)
- --------------------------------------------------------------
<S> <C> <C>
5.30% 4.87% 5.89%
- --------------------------------------------------------------
</TABLE>
Total return assumes reinvestment of all dividends and capital gain
distributions, if any. 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
Investment Manager and Schwab waived a portion of their fees during the fiscal
year and have guaranteed that maximum total operating expenses will not exceed
0.49% through at least 12/31/96. Without fee waivers and guarantees, for the
periods ended 8/31/96, the Fund's 30-day SEC yield, one-year total return and
average annual total return since inception would have been 4.32%, 4.40%, and
5.32%, respectively.
3
<PAGE> 8
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
THROUGH AUGUST 31, 1996
-------------------------------
ONE YEAR SINCE INCEPTION
3.32% 4.09%
-------------------------------
[Line graph of comparison of Schwab Short/Intermediate Tax-Free Bond Fund and
the Lehman 3-Year Municipal Bond Index.]
<TABLE>
<CAPTION>
Lehman 3-Year Schwab Short/Intermediate
Date Municipal Bond Index Tax-Free Bond Fund
- --------- -------------------- -------------------------
<S> <C> <C>
$10,000 $10,000
4/21-4/30 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 11,431 11,364
3/31/96 11,403 11,313
4/30/96 11,417 11,306
5/31/96 11,427 11,312
6/30/96 11,496 11,371
7/31/96 11,559 11,443
8/31/96 11,577 11,447
</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. Investors cannot invest in an index directly. Fund
total return assumes the reinvestment of all dividends and capital gain
distributions, if any. The Investment Manager and Schwab waived a portion of
their fees during the reporting period, and have guaranteed that maximum total
operating expenses will not exceed 0.49% through at least 12/31/96. Without fee
waivers and guarantees, the Fund's total return would have been lower.
4
<PAGE> 9
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
THROUGH AUGUST 31, 1996
-------------------------------
ONE YEAR SINCE INCEPTION
4.87% 5.89%
-------------------------------
[Line graph of Comparison of Schwab Long-Term Tax-Free Bond Fund and the Lehman
General Municipal Bond Index.]
<TABLE>
<CAPTION>
Schwab Long-Term Lehman General
Tax-Free Bond Municipal Bond
Date Fund Index
<S> <C> <C>
10,000 $10,000
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
3/31/96 12,489 12,366
4/30/96 12,454 12,319
5/31/96 12,449 12,311
6/30/96 12,585 12,484
7/31/96 12,699 12,599
8/31/96 12,697 12,553
</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. Investors cannot invest in an index directly. Fund total return
assumes the reinvestment of all dividends and capital gain distributions, if
any. The Investment Manager and Schwab waived a portion of their fees during
the reporting period, and have guaranteed that maximum total operating expenses
will not exceed 0.49% through at least 12/31/96. Without fee waivers and
guarantees, the Fund's total return would have been lower.
5
<PAGE> 10
TAXABLE EQUIVALENT YIELD
To evaluate the performance of a tax-free bond fund, you should pay special
attention to the fund's taxable equivalent yield. While hypothetical in nature,
this measure of performance offers you a convenient way to assess the additional
yield which would be required of a taxable bond fund in order for the yield of
that fund to be equivalent to a tax-exempt yield after you pay federal income
taxes.
1. If your 1996 federal personal income tax bracket is...
<TABLE>
<CAPTION>
28% 31% 36% 39.60%
Tax-Free Yield
<S> <C> <C> <C> <C>
3.50% 4.86% 5.07% 5.47% 5.79%
4.00% 5.56% 5.80% 6.25% 6.62%
4.50% 6.25% 6.52% 7.03% 7.45%
5.00% 6.94% 7.25% 7.81% 8.28%
5.50% 7.64% 7.97% 8.59% 9.11%
6.00% 8.33% 8.70% 9.38% 9.93%
</TABLE>
2. And you have 3. Here is what you would have to
a tax-free earn from a taxable investment
investment to match the tax-free yield.
yielding...
This chart is for illustrative purposes only and does not reflect the
performance of either Fund.
FUND INVESTMENTS
The investment portfolios of both Schwab Tax-Free Bond Funds consist of a mix of
investment-grade municipal bonds from a variety of state issuers. More detailed
information on each Fund's investments, as of August 31, 1996, can be found in
the Schedule of Investments section of this report following the Question and
Answer section. This information is not necessarily indicative of the Funds'
future holdings.
6
<PAGE> 11
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
TOP 10 HOLDINGS
<TABLE>
<CAPTION>
BOND INVESTMENT % OF FUND INVESTMENTS
<S> <C>
New York State Dormitory Authority 7.60%
Washington, Maryland Suburban Sanitation District 5.86%
Port of Seattle, Washington 5.29%
Knox County, Tennessee Health & Education
Hospital Facilities 5.09%
Minnesota State Housing Finance Agency 4.44%
Black Hawk County, Iowa Hospital Facilities 4.19%
Connecticut State Special Tax Obligation 3.86%
Massachusetts Municipal Wholesale Electric Company
Power Supply Systems 3.84%
Mississippi Hospital Equipment & Facilities Authority 3.78%
Washington State Public Power Supply System 3.73%
</TABLE>
PORTFOLIO QUALITY SUMMARY
<TABLE>
<CAPTION>
AAA AA A Other
<S> <C> <C> <C>
56% 26% 14% 4%*
</TABLE>
As of August 31, 1996 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.
*Includes short-term securities.
7
<PAGE> 12
SCHWAB LONG-TERM TAX-FREE BOND FUND
TOP 10 HOLDINGS
<TABLE>
<CAPTION>
BOND INVESTMENT % OF FUND INVESTMENTS
<S> <C>
Kodiak Island Borough, Alaska 5.55%
Seattle, Washington Municipal Light and Power 5.26%
Maricopa County, Arizona
Alhambra Elementary School District 5.16%
Mississippi Hospital Equipment & Facilities Authority 5.07%
Pennsylvania Higher Education Facilities Authority 4.51%
Nevada State Municipal Bonds 4.39%
New York State 4.33%
Valdez, Alaska Marine Terminal 4.27%
Chesapeake Bay Bridge & Tunnel Commission, Virginia 4.23%
Michigan State Hospital Finance Authority 4.14%
</TABLE>
PORTFOLIO QUALITY SUMMARY
<TABLE>
<CAPTION>
AAA AA A Other
<S> <C> <C> <C>
62% 27% 10% 1%*
</TABLE>
As of August 31, 1996 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.
*Includes short-term securities.
8
<PAGE> 13
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM OF CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
STEPHEN B. WARD - Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of each 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. He holds an MBA from the
Wharton School, a B.A. in economics from Virginia Tech, and has been a Chartered
Financial Analyst since 1985.
JOANNE LARKIN - Portfolio Manager, has primary responsibility for the day-to-day
management of each Fund's portfolio. Joanne joined CSIM as Portfolio Manager in
February 1992. Prior to joining CSIM, Joanne was Portfolio Manager for the
Shearson Lehman California Municipal Bond Fund and E.F. Hutton's Municipal Cash
Reserve Management. She holds a B.A. in sociology from Rosemont College.
MARKET OVERVIEW
ECONOMIC HIGHLIGHTS
At the beginning of the fiscal year there was concern about the likelihood of an
economic recession. However, as time progressed the economic climate changed. By
August 31, 1996 sentiment was focused on the apparent strength of the economy
and its potential impact on future inflation. During the first half of 1996,
many economic observers were surprised by the increase in the real Gross
Domestic Product (GDP) growth rate and the strength of the labor market. The
real GDP growth rate was 2.0% for the first quarter of 1996 and 4.7% for the
second quarter. The average monthly increase in payroll employment jumped from
185,000 in 1995 to 234,000 during the first eight months of 1996, leading to the
lowest unemployment rates in this decade.
The economy continues to exhibit signs of strong economic growth as evidenced by
the growth in jobs, retail sales, auto sales and construction spending.
Inflation has remained relatively low, as evidenced by the
9
<PAGE> 14
3.0% increase in the Consumer Price Index (CPI) for the 12 months ended August
31, 1996. However, there still remains a concern that the economy is performing
at or near its employment and manufacturing capacity. As a result, the Federal
Reserve (the Fed) has indicated it will maintain a posture of "heightened
surveillance" and remain diligent in its effort to prevent increases in
inflation.
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
[Line Graph of Total Return Performance for the S&P 500, Schwab Small-Cap
Index, Schwab International Index, and the Lehman IV General U.S. Govt. Index.]
<TABLE>
<CAPTION>
Schwab Schwab Lehman MF
Small Cap International General US
S&P 500 Index Index Govt. Index
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aug-95 $1.000 $1.000 $1.000 $1.000
Sep-95 1.042 1.020 1.024 1.010
Oct-95 1.038 0.971 1.007 1.025
Nov-95 1.084 1.017 1.035 1.041
Dec-95 1.105 1.042 1.075 1.056
Jan-96 1.142 1.039 1.078 1.062
Feb-96 1.153 1.081 1.080 1.040
Mar-96 1.164 1.100 1.101 1.032
Apr-96 1.181 1.158 1.127 1.025
May-96 1.212 1.197 1.113 1.024
Jun-96 1.216 1.159 1.121 1.037
Jul-96 1.162 1.066 1.092 1.039
Aug-96 1.187 1.133 1.101 1.037
</TABLE>
Total return assumes reinvestment of all dividends and capital gain
distributions. Past performance is no guarantee of future results. The indices
are representative returns of specific market sectors from 9/1/95 through
8/31/96 and do not reflect a fund's performance. Indices are unmanaged, and
unlike a fund, do not reflect advisory fees and other expenses associated with
an investment in a fund. Investors cannot invest in an index directly.
DOMESTIC EQUITY MARKET HIGHLIGHTS
As shown in the graph above, large-cap stocks, as represented by the S&P 500,
outperformed small-cap stocks, international stocks and bonds, achieving a total
return of 18.7% for the fiscal year. The S&P 500
10
<PAGE> 15
reached its fiscal year high late in May, marking the end of (or at least a
pause in) a remarkable 52.4% total return since the beginning of 1995.
Many segments of the equity market reached record highs and demonstrated
significant volatility during the fiscal year. The Dow Jones Industrial Average
and the S&P 500 reached record highs of 5,778.0 on May 22 and 678.5 on May 24,
respectively. The NASDAQ Index reached a record high of 1,249.1 on June 5, then
proceeded to drop 8.6% by the end of the fiscal year. Three of the eight
all-time largest daily point losses for the Dow occurred during the fiscal year
- -- two of which were a result of stronger than expected payroll growth and the
attendant fears that the Fed might raise short-term interest rates.
Using most traditional measures, such as price-to-book value and dividend yield,
many major market indices remain valued near their historic highs. The primary
exception is the price-to-earnings ratio which, at 19 times earnings (for the
S&P 500), is well above its historical average, but below its 1991 and 1987
highs of 26 and 22, respectively.
INTERNATIONAL EQUITY MARKET HIGHLIGHTS
International equity returns were more modest and were heavily influenced by the
strengthening dollar. In local currency terms, the total return of the Schwab
International Index(R) 1 for the 12 months ended August 31, 1996 was 13.43%.
However, because the U.S. dollar increased in value against most other
currencies, the total return for U.S. dollar-denominated investors was 10.14%.
1 The Schwab International Index is representative of the international equity
market. This Index is comprised of the stocks of the 350 largest non-U.S.
companies located in countries with developed securities markets and excludes
investment companies.
11
<PAGE> 16
30-YEAR AND 5-YEAR TREASURY BOND YIELDS
[Line Graph of Comparison of 30-Year Treasury Bond Yield and 5-Year Treasury
Bond Yield.]
<TABLE>
<CAPTION>
30-YEAR 5-YEAR
TREASURY BOND YIELD TREASURY BOND YIELD
<S> <C> <C>
9/1/95 6.62% 6.02%
9/8/95 6.59 6.03
9/15/95 6.48 5.93
9/22/95 6.59 6.06
9/29/95 6.50 6.02
10/6/95 6.42 5.88
10/13/95 6.30 5.80
10/20/95 6.36 5.90
10/27/95 6.36 5.83
11/3/95 6.28 5.70
11/10/95 6.34 5.76
11/17/95 6.23 5.65
11/24/95 6.25 5.69
12/1/95 6.09 5.49
12/8/95 6.05 5.55
12/15/95 6.10 5.57
12/22/95 6.06 5.50
12/29/95 5.95 5.38
1/5/96 6.05 5.41
1/12/96 6.15 5.43
1/19/96 5.97 5.27
1/26/96 6.05 5.33
2/2/96 6.16 5.26
2/9/96 6.10 5.23
2/16/96 6.24 5.30
2/23/96 6.41 5.51
3/1/96 6.37 5.58
3/8/96 6.71 6.06
3/15/96 6.74 6.18
3/22/96 6.66 6.06
3/29/96 6.67 6.09
4/5/96 6.82 6.38
4/12/96 6.80 6.29
4/19/96 6.79 6.32
4/26/96 6.79 6.28
5/3/96 7.12 6.60
5/10/96 6.93 6.47
5/17/96 6.83 6.41
5/24/96 6.83 6.41
5/31/96 6.99 6.63
6/7/96 7.03 6.70
6/14/96 7.09 6.70
6/21/96 7.10 6.72
6/28/96 6.87 6.46
7/5/96 7.19 6.82
7/12/96 7.03 6.65
7/19/96 6.97 6.57
7/26/96 7.01 6.63
8/2/96 6.74 6.27
8/9/96 6.69 6.22
8/16/96 6.77 6.30
8/23/96 6.96 6.51
8/30/96 7.12 6.72
</TABLE>
DOMESTIC BOND MARKET HIGHLIGHTS
As shown in the chart above, during the first half of the fiscal year, both
intermediate and long-term Treasury bond yields declined, causing a
corresponding increase in the value of bonds. This decline in rates was a result
of concerns over a potential recession, an anticipated decline in demand for
borrowing and reduced inflationary expectations. The domestic bond market
experienced a dramatic reversal in sentiment during February, which marked the
beginning of a sharp increase in Treasury bond yields and a corresponding
decrease in the value of bonds. The increase in rates was a result of strong
economic data and concerns that the economy may be growing too fast, which could
result in higher inflation levels in the future.
12
<PAGE> 17
Q. WHAT ACTIONS DID THE PORTFOLIO MANAGERS TAKE ON BEHALF OF THE FUNDS TO
RESPOND TO CHANGES IN INTEREST RATES?
A. In response to the strong economic reports, heightened market volatility and
the possibility of restrictive action by the Fed, we adopted a defensive
portfolio strategy in both of the Funds. By maintaining the Funds' weighted
average maturity in a moderately short to neutral position, we were able to
minimize the effects of short-term market volatility as well as minimize any
decline in the value of portfolio holdings resulting from rising interest rates.
During most of the fiscal year, the average maturity of the Schwab Short/
Intermediate Tax-Free Bond Fund was maintained in the range of 3.5 to 3.9
years. The Schwab Long-Term Tax-Free Bond Fund maintained an average maturity of
approximately 18 years throughout much of the fiscal year. Given the Funds'
typical maturity ranges, this represents a cautious strategy, reflecting our
concern over the strong economic data, while also taking into account the
relative strength of the municipal bond market during the latter half of the
fiscal year.
During the fiscal year, we made moderate adjustments to each Fund's weighted
average portfolio maturity in an effort to lock in higher yields during periods
when we felt the market had overreacted to some of the strong employment and
other economic reports. Short-term supply and demand conditions also played an
important role. As is typical in July, there was a significant degree of
liquidity in the market resulting from the fact that many bonds mature or first
become callable in June. The proceeds from these maturing bonds are reinvested
in various sectors of the market based on investors' expectations of future
market performance. This is called a rollover. Our view was that there would be
more than normal demand for long-term municipal bonds, relative to a typical
rollover period. We held this view primarily because we felt investors would be
less likely to invest rollover proceeds into an equity market
13
<PAGE> 18
30-YEAR AND 5-YEAR MUNICIPAL BOND YIELDS
[Line Graph of Comparison of 30-Year Municipal Bond Yield
and 5-Year Municipal Bond Yield.]
<TABLE>
<CAPTION>
30-year 5-year
Municipal Municipal
Bond Bond
Yield Yield
<S> <C> <C>
9/1/95 5.85% 4.29%
9/8/95 5.79 4.23
9/15/95 5.69 4.13
9/22/95 5.81 4.30
9/29/95 5.81 4.30
10/6/95 5.71 4.24
10/13/95 5.62 4.15
10/20/95 5.62 4.19
10/27/95 5.65 4.27
11/3/95 5.54 4.20
11/10/95 5.57 4.25
11/17/95 5.52 4.20
11/24/95 5.53 4.21
12/1/95 5.39 4.13
12/8/95 5.28 4.08
12/15/95 0.0532 4.18
12/22/95 5.36 4.22
12/29/95 5.28 4.14
1/5/96 5.27 4.20
1/12/96 5.32 4.25
1/19/96 5.23 4.16
1/26/96 5.29 4.20
2/2/96 5.23 4.08
2/9/96 5.16 3.98
2/16/96 5.17 3.94
2/23/96 5.30 4.04
3/1/96 5.34 4.06
3/8/96 5.62 4.32
3/15/96 5.81 4.51
3/22/96 5.69 4.38
3/29/96 5.69 4.38
4/5/96 5.82 4.51
4/12/96 5.78 4.48
4/19/96 5.72 4.57
4/26/96 5.66 4.42
5/3/96 5.86 4.62
5/10/96 5.80 4.56
5/17/96 5.73 4.55
5/24/96 5.69 4.51
5/31/96 5.82 4.64
6/7/96 5.97 4.79
6/14/96 5.92 4.74
6/21/96 5.89 4.71
6/28/96 5.77 4.61
7/5/96 5.94 4.78
7/12/96 5.82 4.68
7/19/96 5.74 4.60
7/26/96 5.70 4.59
8/2/96 5.51 4.40
8/9/96 5.44 4.33
8/16/96 5.49 4.37
8/23/96 5.61 4.47
8/30/96 5.71 4.57
</TABLE>
which was near all-time highs. As the graph above and on the next page show,
there was a reduction in municipal bond yields in July, as well as a reduction
in municipal bond yields relative to Treasury bond yields. We were able to
capitalize on this market move by extending the weighted average maturity of the
Schwab Long-Term Tax-Free Bond Fund from 16.7 years at the end of May to 19.7
years at the beginning of July. This extension enhanced the positive impact of
these market movements.
In view of the strong outlook for economic growth at the end of the fiscal year,
we expect to remain cautious in our strategies for managing both Funds. We will
continue to focus on the economic and political environment and to monitor the
various sectors of the municipal securities market that may impact our
investment strategies.
14
<PAGE> 19
RATIO OF TAX-EXEMPT TO TAXABLE BOND YIELD
[Line Graph of Ratio of Tax-Exempt to Taxable Bond Yield of 30-Year and 5-Year.]
<TABLE>
<CAPTION>
30-Year 5-Year
<S> <C> <C>
9/1/95 88.4% 71.3%
9/8/95 87.9 70.2
9/15/95 87.8 69.7
9/22/95 88.2 71.0
9/29/95 89.4 71.5
10/6/95 88.9 72.1
10/13/95 89.1 71.6
10/20/95 88.3 71.1
10/27/95 88.9 73.3
11/3/95 88.2 73.7
11/10/95 87.9 73.7
11/17/95 88.6 74.3
11/24/95 88.5 74.0
12/1/95 88.6 75.2
12/8/95 87.2 73.5
12/15/95 87.2 75.1
12/22/95 88.4 76.7
12/29/95 88.8 76.9
1/5/96 87.2 77.6
1/12/96 86.5 78.3
1/19/96 87.5 79.0
1/26/96 87.5 78.8
2/2/96 84.9 77.6
2/9/96 84.6 76.1
2/16/96 82.8 74.4
2/23/96 82.7 73.3
3/1/96 83.9 72.8
3/8/96 83.7 71.3
3/15/96 86.2 73.0
3/22/96 85.5 72.3
3/29/96 85.3 72.0
4/5/96 85.3 70.7
4/12/96 85.0 71.2
4/19/96 84.3 72.3
4/26/96 83.4 70.4
5/3/96 82.3 70.0
5/10/96 83.7 70.4
5/17/96 83.9 71.0
5/24/96 83.3 70.4
5/31/96 83.3 70.0
6/7/96 84.9 71.5
6/14/96 83.5 70.7
6/21/96 83.0 70.1
6/28/96 84.0 71.3
7/5/96 82.6 70.1
7/12/96 82.8 70.3
7/19/96 82.3 70.0
7/26/96 81.3 69.3
8/2/96 81.7 70.2
8/9/96 81.3 69.6
8/16/96 81.1 69.4
8/23/96 80.6 68.7
8/30/96 80.2 68.0
</TABLE>
Q. HOW DO THE SCHWAB TAX-FREE BOND FUNDS FIT INTO AN ASSET ALLOCATION PLAN?
A. The Schwab Tax-Free Bond Funds can be used to fulfill all or a portion of the
bond component of an asset allocation plan. Bond funds can be an important
element in an asset allocation plan because of their ability to generate income
and reduce overall portfolio volatility. The choice of a taxable or tax-exempt
bond fund, in part, depends on whether or not you plan to hold the fund in a
tax-deferred account, such as an IRA or 401(k). If not, your marginal tax
bracket will play an important role in your choice of a taxable or tax-exempt
fund.
Short/intermediate bond funds historically have offered greater price stability
in exchange for lower yields, while funds with longer weighted average
maturities historically have paid higher yields with correspondingly greater
price volatility. Funds with longer weighted average maturities historically
have offered more stable income streams because they can
15
<PAGE> 20
lock in rates on individual bonds for longer periods of time. The selection of
the most appropriate fund will depend on your degree of risk tolerance and your
investing time frame. To position your income portfolio to respond to
fluctuating interest rates or to create a balanced combination of maturities,
you may wish to consider investing in both Schwab Tax-Free Bond Funds.
Q. HOW ARE THE FUNDS' MONTHLY DIVIDEND DISTRIBUTIONS DETERMINED?
A. Our general dividend policy is to pay out 100% of each Fund's net investment
income to shareholders on an annual basis. Since net investment income is
accrued daily, and some months have more days than others, we apply a
"normalization" factor to each month's dividend. This factor is designed to
smooth out the normal monthly variations in dividends that would result from the
varying number of days in different months. However, this does not mean that the
monthly dividend will not fluctuate. Fund holdings are constantly changing as
new investors invest in the Fund, or as we make changes in the portfolio to
respond to changing market conditions. For example, if interest rates fall, we
invest new shareholder contributions and reinvested dividends at the new lower
rates, which in turn has the effect of reducing the monthly dividend. We believe
that this is not necessarily bad, since a fall in rates is typically associated
with a rise in the Fund's net asset value. Some bond funds make an effort to
maintain a constant monthly dividend. We believe that this is not always a wise
strategy, because in times of falling interest rates, the manager may be taking
on additional portfolio risk in order to maintain the dividend level.
16
<PAGE> 21
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 8/31/96 as of 8/31/95 Reporting
(000s) (000s) Period
- --------------------------------------------------------------
<S> <C> <C>
$54,132 $52,504 3%
- --------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1996
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
1 - 6 Months $ 1,295 2.4% 2.4%
7 - 36 Months 10,651 19.9 22.3
37 - 60 Months 36,669 68.5 90.8
Over 60 Months 4,915 9.2 100.0%
------- -----
$53,530 100.0%
======= =====
</TABLE>
Average Weighted Maturity - 3.75 Years
17
<PAGE> 22
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 8/31/96 as of 8/31/95 Reporting
(000s) (000s) Period
- -----------------------------------------------------------
<S> <C> <C>
$43,672 $41,413 5%
- -----------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1996
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- ------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
0 - 1 Year $ 294 0.7% 0.7%
2 - 20 Years 22,037 51.1 51.8
21 - 30 Years 18,928 43.9 95.7
Over 30 Years 1,840 4.3 100.0%
------- -----
$43,099 100.0%
======= =====
</TABLE>
Average Weighted Maturity -- 20.25 Years
18
<PAGE> 23
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--97.6%(a)
ALABAMA--2.0%
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 $1,087
-----
ALASKA--2.2%
Anchorage, Alaska Refunding School Bonds Series
1993A/(MBIA Insurance)(Aaa AAA)
5.10%, 08/01/99 1,145 1,161
-----
ARIZONA--3.8%
Phoenix, Arizona Civic Improvement Corp.
Wastewater Systems Lease Revenue Bonds Series
1993 (A1 A)
5.10%, 07/01/99 1,005 1,021
Phoenix, Arizona Senior Lien Street & Highway
Revenue Refunding Bonds Series 1992 (A1 AA)
5.95%, 07/01/00 1,000 1,039
-----
2,060
-----
CALIFORNIA--2.8%
Sacramento County, California Transportation
Authority Tax & Revenue Anticipation Notes
(MIG1 SP1+)
4.50%, 09/30/97 1,500 1,507
-----
CONNECTICUT--6.7%
Connecticut State Special Tax Obligation
Refunding Bonds (Transportation Infrastructure
Purposes) Series 1995C/(FGIC Insurance)
(Aaa AAA)
5.50%, 10/01/00 2,000 2,065
Connecticut State Unlimited General Obligation
Series 1996B (Aa AA-)
5.00%, 08/15/01 1,500 1,522
-----
3,587
-----
ILLINOIS--2.2%
Illinois Health Facility 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 (A1 AA-)
4.00%, 08/01/97 800 798
-----
</TABLE>
19
<PAGE> 24
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
IOWA--4.2%
Black Hawk County, Iowa Hospital Facilities
Revenue Bonds (Allen Memorial Hospital) Series
1990 (Pre-Refunded)/(AMBAC Insurance & Escrowed to
Maturity with Government Securities)(Aaa AAA)
7.38%, 02/01/01 $2,000 $2,245
-----
KENTUCKY--5.0%
Kentucky Housing Corp. Housing Revenue Bonds
Series 1993B/(Multiple Credit Enhancements)
(Aaa AAA)
4.45%, 07/01/00 1,000 987
Kentucky State Property & Buildings Commission
Revenue Refunding Bonds (Project 55)(A A+)
4.15%, 09/01/99 1,735 1,712
-----
2,699
-----
MARYLAND--5.9%
Washington, Maryland Suburban Sanitation District
Sewage Disposal Refunding Bonds (Montgomery &
Prince George Counties, Maryland)(Aa1 AA)
6.00%, 11/01/99 3,000 3,135
-----
MASSACHUSETTS--5.7%
Massachusetts Municipal Wholesale Electric Co.
Power Supply Systems Revenue Bonds Series
1992E/ (AMBAC Insurance)(Aaa AAA)
5.50%, 07/01/00 2,000 2,055
Massachusetts State Health & Educational
Facilities Authority Revenue Bonds (Brigham &
Womens Hospital) Series E (A1 A+)
4.40%, 07/01/00 1,000 990
-----
3,045
-----
MICHIGAN--2.1%
Michigan State Hospital Finance Authority Revenue
Bonds (McLaren Obligated Group)/(Escrowed to
Maturity with Government Securities)(Aaa -)
7.00%, 09/15/00 1,000 1,104
-----
</TABLE>
20
<PAGE> 25
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MINNESOTA--8.6%
Minneapolis, Minnesota Community Development
Agency Tax Increment Revenue Bonds/(MBIA
Insurance)(Aaa AAA)
7.00%, 09/01/00 $1,000 $1,087
Minnesota State Housing Finance Agency Rental
Housing Revenue Bonds Series D/(MBIA
Insurance)(Aaa AAA)
4.80%, 08/01/01 2,390 2,378
St. Paul, Minnesota Sewer Revenue Bonds Series A
(A BBB+)
8.00%, 12/01/98 1,050 1,133
-----
4,598
-----
MISSISSIPPI--3.8%
Mississippi Hospital Equipment & Facilities
Authority Revenue Refunding Bonds (Mississippi
Baptist Medical Center)/(MBIA Insurance)
(Aaa AAA)
5.25%, 05/01/01 2,000 2,025
-----
MISSOURI--1.0%
Missouri State Environmental Improvement & Energy
Resources Authority Water Pollution Control
Revenue Bonds (State Revolving Fund Program)
Series 1992A (Aa -)
5.80%, 07/01/99 500 518
-----
NEW YORK--7.6%
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 4,070
-----
OHIO--3.7%
Ohio State Public Facilities Higher Education
Capital Facilities Revenue Bonds Series
IIA/(MBIA Insurance)(Aaa AAA)
4.38%, 11/01/00 2,000 1,982
-----
RHODE ISLAND--2.8%
Rhode Island Student Loan Authority Student Loan
Revenue Put Bonds Series 96-1/(National
Westminster Bank LOC)(- AA)
4.00%, 06/01/97 1,500 1,498
-----
</TABLE>
21
<PAGE> 26
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
SOUTH CAROLINA--6.3%
Charleston, South Carolina Public Facilities
Certificates of Participation (Public
Improvement Project) Series 1993/(AMBAC
Insurance)(Aaa AAA)
4.30%, 09/01/00 $1,085 $ 1,061
Greenville Hospital System Board of Trustees,
South Carolina Hospital Facilities Revenue
Refunding Bonds Series 1993C (- AA-)
5.00%, 05/01/00 1,090 1,089
South Carolina State Public Service Authority
Power/Electric Revenue Refunding Bonds Series
1991A (Santee Cooper)(A1 A+)
5.60%, 07/01/00 1,200 1,229
------
3,379
------
TENNESSEE--5.1%
Knox County, Tennessee Health & Education
Hospital Facilities Revenue Bonds (Fort Sanders
Alliance) Series 1990C (Pre-Refunded)/(MBIA
Insurance)
(Aaa AAA)
7.00%, 01/01/00 2,500 2,725
------
TEXAS--3.8%
Houston, Texas General Obligation Revenue Bonds
Series 1995A (Aa AA-)
5.30%, 03/01/01 1,000 1,017
Houston, Texas Water Conveyance System Contract
Certificates of Participation Series 1993E/
(AMBAC Insurance)(Aaa AAA)
5.50%, 12/15/97 1,000 1,018
------
2,035
------
WASHINGTON--8.9%
Port of Seattle, Washington Revenue Bonds
Series B/(FGIC Insurance)(Aaa AAA)
5.50%, 09/01/02 2,775 2,834
Washington State Public Power Supply System
Revenue Refunding Bonds (Nuclear Project #2)
Series A (Aa AA)
4.63%, 07/01/98 2,000 1,997
------
4,831
------
WISCONSIN--1.9%
Wisconsin State Health & Education Facilities
Authority Revenue Bonds (Aurora Medical Group
Project) Series 1996/(FSA Insurance)(Aaa AAA)
4.90%, 11/15/02 1,000 994
------
TOTAL MUNICIPAL BONDS
(Cost $52,294) 52,235
------
</TABLE>
22
<PAGE> 27
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--2.2%(b)
CALIFORNIA--1.4%
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985A-1/(Sumitomo Bank
LOC)(- A-1)
3.75%, 09/01/96 $800 $ 800
-------
GEORGIA--0.6%
Hapeville, Georgia Industrial Development
Authority Revenue Bonds (Hapeville Hotel Ltd. Project)/
(Deutsche Bank LOC)(P-1 -)
3.80%, 09/01/96 300 300
------
NEW YORK--0.2%
New York City General Obligation Bonds Series
1993B-2 Subseries B-5/(Morgan Guaranty Trust
LOC)(VMIG1 A-1)
4.00%, 09/01/96 100 100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $1,200) 1,200
-------
Shares
------
CASH EQUIVALENTS--0.2%(c)
Provident Institutional Funds--MuniFund Portfolio
3.01%, 09/07/96 95 95
-------
TOTAL CASH EQUIVALENTS
(Cost $95) 95
-------
TOTAL INVESTMENTS--100.0%
(Cost $53,589) $53,530
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
23
<PAGE> 28
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--99.3%(a)
ALASKA--9.8%
Kodiak Island Borough, Alaska General Obligation
Bonds Series 1994A/(AMBAC Insurance)(Aaa AAA)
5.40%, 02/15/10 $2,500 $2,393
Valdez, Alaska Marine Terminal Revenue Refunding
Bonds (BP Pipeline Project) Series 1993B
(Aa3 AA-)
5.50%, 10/01/28 2,000 1,840
-----
4,233
-----
ARIZONA--5.2%
Maricopa County, Arizona Alhambra Elementary School
District 68 School Improvement & Refunding Bonds
Series 1994A/(AMBAC Insurance)(Aaa AAA)
6.80%, 07/01/12 2,000 2,225
-----
CALIFORNIA--4.0%
San Francisco, California Downtown Parking Corp.
Parking Revenue Bonds Series 1993 (A -)
6.65%, 04/01/18 500 510
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 1,216
-----
1,726
-----
CONNECTICUT--0.5%
Connecticut State Housing Finance Authority Bonds
(Housing Mortgage Finance Program) Series 1990B
Subseries B-1 (Aa AA)
7.55%, 11/15/08 225 230
-----
FLORIDA--2.9%
Hillsborough County, Florida Aviation Revenue Bonds
(Tampa International Airport) Series B/
(FGIC Insurance)(Aaa AAA)
5.88%, 10/01/23 1,250 1,247
-----
ILLINOIS--2.6%
Illinois State Toll Highway Authority Priority
Revenue Bonds Series 1992A (A1 A+)
6.38%, 01/01/15 1,100 1,140
-----
</TABLE>
24
<PAGE> 29
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
INDIANA--2.5%
Indiana State Office Building Correctional
Facilities Revenue Bonds Series A/(AMBAC Insurance)
(Aaa AAA)
5.50%, 07/01/20 $1,170 $1,097
-----
IOWA--2.6%
Ames, Iowa Hospital Revenue Bonds (Mary Greeley
Medical Center Project) Series 1993/
(AMBAC Insurance)(Aaa AAA)
5.70%, 08/15/12 500 497
Cedar Rapids, Iowa Hospital Facilities Revenue
Bonds (St. Luke's Methodist Project) Series 1993/
(FGIC Insurance)(Aaa AAA)
6.13%, 08/15/13 600 608
-----
1,105
-----
MARYLAND--2.2%
Maryland State Health & Educational Facilities
Authority Revenue Bonds (Mercy Medical Center)/
(FSA Insurance)(Aaa AAA)
5.63%, 07/01/17 1,000 967
-----
MASSACHUSETTS--2.0%
Massachusetts State Housing Finance Agency Multi
Family Residential Housing Revenue Bonds
Series 1989A (A A+)
7.80%, 08/01/22 800 846
-----
MICHIGAN--4.1%
Michigan State Hospital Finance Authority
Revenue Bonds (St. John's Hospital & Medical
Center)/(AMBAC Insurance)(Aaa AAA)
5.25%, 05/15/26 2,000 1,782
-----
MISSISSIPPI--5.1%
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 2,185
-----
MISSOURI--2.3%
Kansas City, Missouri School District Building
Revenue Bonds (Capital Improvement Project)
Series 1993/(FGIC Insurance)(Aaa AAA)
5.15%, 02/01/08 1,000 974
-----
</TABLE>
25
<PAGE> 30
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
NEVADA--4.4%
Nevada State Municipal Bonds General Obligation
Series A/(FGIC Insurance)(Aaa AAA)
5.50%, 11/01/25 $2,000 $1,890
-----
NEW HAMPSHIRE--1.7%
New Hampshire Higher Education & Health Facilities
Authority Hospital Revenue Bonds (Mary Hitchcock
Memorial Hospital) Series 1993A/(FGIC Insurance)
(Aaa AAA)
5.25%, 08/15/08 750 728
-----
NEW MEXICO--1.1%
Santa Fe, New Mexico Utility Sewer Revenue Bonds
Series 1995A/(AMBAC Insurance)(Aaa AAA)
5.25%, 06/01/17 500 461
-----
NEW YORK--4.3%
New York State General Obligation Bonds
Series 1996A (A A-)
5.30%, 07/15/15 2,000 1,867
-----
PENNSYLVANIA--9.6%
Pennsylvania Higher Education Facilities Authority
Revenue Bonds (University of Pennsylvania Health
Services) Series 1996A (Aa AA)
5.75%, 01/01/17 2,000 1,945
Philadelphia, Pennsylvania Hospitals & Higher
Education Facilities Authority Revenue Refunding
Bonds (Children's Hospital) Series 1993A (Aa AA)
5.25%, 02/15/08 1,000 970
Pittsburgh, Pennsylvania Water & Sewer Authority
Revenue Bonds Series B/(FSA Insurance)(Aaa AAA)
5.75%, 09/01/25 1,250 1,208
-----
4,123
-----
RHODE ISLAND--2.4%
Rhode Island Housing & Mortgage Finance Corp.
Homeownership Opportunity Bonds Series 10A
(Aa AA+)
6.50%, 10/01/22 1,000 1,026
-----
SOUTH CAROLINA--3.5%
Piedmont, South Carolina Municipal Power Agency
Electric Revenue Refunding Bonds Series 1992/
(MBIA Insurance)(Aaa AAA)
6.20%, 01/01/08 1,400 1,498
-----
</TABLE>
26
<PAGE> 31
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
TEXAS--9.6%
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 $ 1,458
Harris County, Texas Revenue Refunding Bonds
(Toll Road Senior Lien) Series 1994/(FGIC
Insurance) (Aaa AAA)
5.38%, 08/15/20 1,000 929
Texas State Public Finance Authority General
Obligation Bonds Series 1994B (Aa AA)
5.75%, 10/01/14 1,025 1,029
University of Texas Revenue Refunding Bonds
Series B (Aa1 AAA)
6.75%, 08/15/13 680 738
------
4,154
------
UTAH--4.0%
Intermountain Power Agency, Utah Power Supply
Revenue Bonds Series 1996D (Aa AA-)
5.00%, 07/01/21 2,000 1,737
------
VIRGINIA--6.5%
Capital Region, Virginia Airport Commission Revenue
Bonds (Richmond International Airport) Series
1995A/(AMBAC Insurance)(Aaa AAA)
5.63%, 07/01/15 1,000 975
Chesapeake Bay Bridge & Tunnel Commission,
Virginia Revenue Refunding Bonds/
(MBIA Insurance)(Aaa AAA)
5.25%, 07/01/19 2,000 1,825
------
2,800
------
WASHINGTON--6.4%
King County, Washington School District General
Obligation Bonds No. 415 Series A (A1 AA-)
5.55%, 12/01/11 500 498
Seattle, Washington Municipal Light & Power Revenue
Refunding Bonds Series 1993 (Aa AA)
5.40%, 05/01/08 2,300 2,266
------
2,764
------
TOTAL MUNICIPAL BONDS
(Cost $42,511) 42,805
------
</TABLE>
27
<PAGE> 32
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--0.5%(b)
CALIFORNIA--0.2%
California Pollution Control Financing Authority
Pollution Control Revenue Bonds (Burney Forest
Project) Series 1988A/(Fleet Bank LOC)(- P-1)
3.70%, 09/01/96 $100 $ 100
------
FLORIDA--0.3%
Hillsborough County, Florida Industrial Development
Agency Pollution Control Revenue Refunding Bonds
(Tampa Electric/Gannon Coal Conversion Project)
Series 1992 (VMIG1 A-1+)
3.75%, 09/01/96 100 100
------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $200) 200
------
Shares
------
CASH EQUIVALENTS--0.2%(c)
Provident Institutional Funds--MuniFund Portfolio
3.01%, 09/07/96 94 94
--------
TOTAL CASH EQUIVALENTS
(Cost $94) 94
--------
TOTAL INVESTMENTS--100.0%
(Cost $42,805) $43,099
========
</TABLE>
28
<PAGE> 33
- ------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
August 31, 1996
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investor Services, Inc. and
Standard & Poor's Corporation which were in effect at August 31, 1996. These
ratings are unaudited.
(a) Interest rates represent coupon rate of security.
(b) Interest rates vary periodically based on current market rates. Rates
shown are the effective rates on August 31, 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 the next interest
reset date is shown.
(c) Interest rates represent the yield on August 31, 1996.
<TABLE>
<CAPTION>
Abbreviations
-------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
VMIG Variable Moody's Investment Grade
</TABLE>
See accompanying Notes to Financial Statements.
29
<PAGE> 34
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $53,589 and $42,805,
respectively) $ 53,530 $43,099
Interest receivable 705 600
Receivable from advisor -- 11
Receivable for Fund shares sold 2 --
Deferred organization costs 31 16
Prepaid expenses 19 27
------- -------
Total assets 54,287 43,753
------- -------
LIABILITIES
Payable for:
Dividends 29 31
Fund shares redeemed 69 3
Deferred organization costs -- 4
Other 57 43
------- -------
Total liabilities 155 81
------- -------
Net assets applicable to outstanding
shares $ 54,132 $43,672
======= =======
NET ASSETS CONSIST OF:
Capital paid in $ 54,716 $43,753
Accumulated undistributed net
investment income 12 15
Accumulated net realized loss on
investments sold (537) (390)
Net unrealized gain (loss) on
investments (59) 294
------- -------
$ 54,132 $43,672
======= =======
PRICING OF SHARES
Outstanding shares, $0.00001 par
value (unlimited shares authorized) 5,393 4,312
Net asset value, offering and
redemption price per share $ 10.04 $ 10.13
</TABLE>
See accompanying Notes to Financial Statements.
30
<PAGE> 35
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
Interest income $ 2,404 $ 2,405
-------- --------
Expenses:
Investment advisory and
administration fee 216 177
Transfer agency and shareholder
service fees 132 108
Custodian fees 37 31
Registration fees 18 13
Professional fees 22 29
Shareholder reports 21 17
Trustees' fees 4 4
Amortization of deferred organization
costs 15 17
Insurance and other expenses 9 10
-------- --------
474 406
Less expenses reduced and absorbed (216) (194)
-------- --------
Total expenses incurred by Fund 258 212
-------- --------
Net investment income 2,146 2,193
-------- --------
Net realized gain (loss) on investments
sold:
Proceeds from sales of investments 67,974 61,630
Cost of investments sold (67,824) (61,207)
-------- --------
Net realized gain on investments
sold 150 423
-------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 531 929
End of period (59) 294
-------- --------
Decrease in net unrealized gain on
investments (590) (635)
-------- --------
Net loss on investments (440) (212)
-------- --------
Increase in net assets resulting from
operations $ 1,706 $ 1,981
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
31
<PAGE> 36
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
Year ended August 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,146 $ 2,261 $ 2,193 $ 2,238
Net realized gain (loss) on
investments sold 150 (448) 423 (806)
Increase (decrease) in net unrealized
gain on investments (590) 1,372 (635) 1,600
-------- -------- -------- --------
Increase in net assets resulting from
operations 1,706 3,185 1,981 3,032
-------- -------- -------- --------
Dividends to shareholders from
net investment income (2,147) (2,255) (2,193) (2,232)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 19,101 17,344 18,452 21,437
Net asset value of shares issued in
reinvestment of dividends 1,701 1,746 1,569 1,626
Less payments for shares redeemed (18,733) (31,405) (17,550) (26,425)
-------- -------- -------- --------
Increase (decrease) in net assets
from capital share transactions 2,069 (12,315) 2,471 (3,362)
-------- -------- -------- --------
Total increase (decrease) in net assets 1,628 (11,385) 2,259 (2,562)
-------- -------- -------- --------
Net assets:
Beginning of period 52,504 63,889 41,413 43,975
-------- -------- -------- --------
End of period (including
undistributed net investment income
of $12, $13, $15 and $15,
respectively) $ 54,132 $ 52,504 $ 43,672 $ 41,413
======== ======== ======== ========
Number of Fund shares:
Sold 1,891 1,754 1,797 2,196
Reinvested 168 176 153 166
Redeemed (1,854) (3,185) (1,714) (2,707)
-------- -------- -------- --------
Net increase (decrease) in shares
outstanding 205 (1,255) 236 (345)
Shares outstanding:
Beginning of period 5,188 6,443 4,076 4,421
-------- -------- -------- --------
End of period 5,393 5,188 4,312 4,076
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
32
<PAGE> 37
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
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 Funds, 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" investment
companies 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 most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities within 60 days or less of maturity are stated at amortized
cost which approximates market value.
33
<PAGE> 38
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
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.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds, 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.
All distributions paid by the Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund during the year ended August 31, 1996
qualify as exempt interest dividends for federal tax purposes.
34
<PAGE> 39
- ------------------------------------------------------------------------------
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized loss for the Schwab Short/Intermediate Tax-Free Bond Fund
aggregated $59,000, of which $218,000 related to appreciated securities and
$277,000 related to depreciated securities, and net unrealized gain for the
Schwab Long-Term Tax-Free Bond Fund aggregated $294,000, of which $866,000
related to appreciated securities and $572,000 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 0.41% 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 $216,000 and $177,000, respectively, for the
year ended August 31, 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 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
For the year ended August 31, 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 $132,000 and $108,000, respectively, before Schwab
reduced its fees (see Note 4).
35
<PAGE> 40
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
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 August 31, 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 Funds incurred fees aggregating $8,000
related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit the ratio of operating expenses to average
net assets for each Fund. During the year ended August 31, 1996, the total of
such fees and expenses reduced and absorbed by the Investment Manager were
$84,000 and $86,000 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 $132,000 and $108,000 for the Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund, respectively, (see
Note 6).
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 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 $28,329 $24,831
Proceeds of sales and
maturities $22,168 $19,569
</TABLE>
36
<PAGE> 41
- ------------------------------------------------------------------------------
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
----------------------------------------------
Period ended
Year ended August 31, August 31,
1996 1995 1994 1993++
------- ------- ------- ------------
<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 0.41 0.40 0.37 0.13
Net realized and unrealized gain
(loss) on investments (0.08) 0.20 (0.23) 0.15
------- ------- ------- -------
Total from investment operations 0.33 0.60 0.14 0.28
Less distributions
- ------------------
Dividends from net investment
income (0.41) (0.40) (0.37) (0.13)
Distributions from realized gain
on investments -- -- -- --
------- ------- ------- -------
Total distributions (0.41) (0.40) (0.37) (0.13)
------- ------- ------- -------
Net asset value at end of period $ 10.04 $ 10.12 $ 9.92 $ 10.15
======= ======= ======= =======
Total return (%) 3.32 6.23 1.42 2.83
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $54,132 $52,504 $63,889 $ 54,450
Ratio of expenses to average net
assets (%) 0.49 0.49 0.48 0.45*
Ratio of net investment income to
average net assets (%) 4.06 4.06 3.71 3.63*
Portfolio turnover rate (%) 44 35 19 11
- ---------------
Ratio of expenses to average net
assets prior to reduced fees
and absorbed expenses (%)+ 0.90 0.89 0.91 1.26*
Ratio of net investment income to
average net assets prior to
reduced fees and absorbed
expenses (%)+ 3.65 3.66 3.28 2.82*
</TABLE>
++ For the period April 21, 1993 (commencement of operations) to August 31,
1993.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
37
<PAGE> 42
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
6. FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Schwab Long-Term Tax-Free Bond Fund
-----------------------------------------------------------------
Eight months Period
ended ended
Year ended August 31, August 31, December 31,
1996 1995 1994 1993 1992++
----------- ----------- ----------- ------------ ------------
<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 0.52 0.53 0.52 0.36 0.17
Net realized and unrealized
gain (loss) on investments (0.03) 0.21 (0.56) 0.67 (0.08)
------- ------- ------- ------- -------
Total from investment
operations 0.49 0.74 (0.04) 1.03 0.09
Less distributions
- ------------------
Dividends from net investment
income (0.52) (0.53) (0.52) (0.36) (0.17)
Distributions from realized
gain on investments -- -- (0.08) -- --
------- ------- ------- ------- -------
Total distributions (0.52) (0.53) (0.60) (0.36) (0.17)
------- ------- ------- ------- -------
Net asset value at end of
period $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92
======= ======= ======= ======= =======
Total return (%) 4.87 7.76 (0.42) 10.56 0.92
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period
(000s) $43,672 $41,413 $43,975 $ 50,413 $ 28,034
Ratio of expenses to average
net assets (%) 0.49 0.54 0.51 0.45* 0.45*
Ratio of net investment
income to average net
assets (%) 5.06 5.40 5.05 5.30* 5.61*
Portfolio turnover rate (%) 50 70 62 91 54
- ---------------
Ratio of expenses to average
net assets prior to reduced
fees and absorbed expenses
(%)+ 0.94 0.93 0.99 1.18* 1.53*
Ratio of net investment
income to average net
assets prior to reduced
fees and absorbed expenses
(%)+ 4.61 5.01 4.57 4.57* 4.53*
</TABLE>
++ For the period September 11, 1992 (commencement of operations) to December
31, 1992.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
38
<PAGE> 43
- ------------------------------------------------------------------------------
To the Trustees and Shareholders of
the Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules 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 the Schwab Short/Intermediate
Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond Fund (two series
constituting part of Schwab Investments, hereafter referred to as the "Trust")
at August 31, 1996, the results of each of their operations, the changes in each
of their net assets and the financial highlights for the periods 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 August
31, 1996 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
39
<PAGE> 44
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 45
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 our three
asset allocation funds, choose from several equity markets with our equity
funds, or diversify your portfolio across asset classes and fund management
styles with our OneSource Portfolios. You can also select from different
maturities with our bond fund choices, and take advantage of an array of money
market 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 EQUITY FUNDS
Schwab Analytics Fund(TM)
Schwab 1000 Fund(R)
Schwab International Index Fund(TM)
Schwab Small-Cap Index Fund(R)
Schwab S&P 500 Fund
SCHWAB FUND OF FUNDS 1
Schwab OneSource Portfolios -- International
Schwab OneSource Portfolios -- Growth Allocation 2
Schwab OneSource Portfolios -- Balanced Allocation 2
SCHWAB BOND FUNDS
Schwab Government Bond Funds -- Long-Term
and Short/Intermediate
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 3 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).
Please call 1-800-2 NO-LOAD for a free prospectus and brochure for any of the
SchwabFunds(R).
Each prospectus provides more complete information, including charges and
expenses. Please read it carefully before investing.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
1. Funds that invest primarily in other mutual funds.
2. In subscription until November 15, 1996, unless the subscription period is
extended, at an introductory share price of $10. After that date the share
price will fluctuate.
3. 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> 46
----------------
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.
(C)1996 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
TF4267R(9/96) CRS 10552 Printed on recycled paper.
