<PAGE> 1
SCHWABFUNDS(R)
[LOGO]
SCHWAB
GOVERNMENT
BOND FUNDS
SEMI-ANNUAL REPORT
FEBRUARY 29, 1996
[Photo of the Schwab Building, San Francisco, California]
<PAGE> 2
Dear Shareholder,
[Photo of The SchwabFunds Family(R) is celebrating substantial growth as
Charles a mutual fund complex. By placing your trust in
R. Schwab] SchwabFunds(R), you've helped total assets under management
grow by $10 billion over the last 12 months to reach $35
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 Government Bond Fund and the Schwab Long-Term Government Bond
Fund (the "Funds") for the six-month period ended February 29, 1996. During this
period, the Schwab Government Bond Funds continued to help you achieve your
investment goals by striving to pay a high level of monthly dividends consistent
with capital preservation. Each Fund's 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 Government 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
the effects of those trends on the Funds' investment strategies in "Questions to
the Portfolio Management Team" following this letter.
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
On February 29, 1996, the Fund's 30-day SEC yield was 4.88%, six-month total
return was 3.40%, one-year total return was 8.15%, and average annual total
return since inception (11/5/91) was 5.91%. 1 Since inception, the Fund's
total return has closely tracked its market benchmark, the Lehman Mutual Fund
Short (1-3 Year) U.S. Government Index, as the chart on the following page
illustrates.
The Fund paid shareholders monthly cash dividends totaling 30 cents per share
during the six-month period ended February 29, 1996. Its net asset value (NAV)
increased from $9.84 on August 31, 1995 to $9.87 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 U.S.
Government agency securities, U.S. Treasury obligations, and a small percentage
of cash held in repurchase agreements; and its average dollar-weighted portfolio
maturity was 2.47 years.
1 Total return assumes reinvestment of all dividends and capital gain
distributions. 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 4.57%, six-month total return would have
been 3.24%, one-year total return would have been 7.88%, and average annual
total return since inception would have been 5.57%. 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 GOVERNMENT BOND FUND AND
THE LEHMAN MUTUAL FUND SHORT (1-3 YEAR) U.S. GOVERNMENT INDEX
Average Annual Total Returns
February 29, 1996
----------------------------
One Year Since Inception
8.15% 5.91%
[The following is a line graph comparing the change in value of a hypothetical
$10,000 investment in the Fund and the Lehman Index.]
<TABLE>
<CAPTION>
DOLLAR VALUE
----------------------
DATE INDEX FUND
- ------------------------------------------------------
<S> <C> <C>
11/6 TO 11/30/91 10,059 10,117
12/31/91 10,212 10,381
01/31/92 10,199 10,241
02/28/82 10,229 10,240
03/31/92 10,226 10,190
04/30/92 10,319 10,282
05/30/92 10,415 10,440
06/30/92 10,521 10,595
07/31/92 10,642 10,794
08/31/92 10,725 10,898
09/30/92 10,829 11,053
10/31/92 10,767 10,924
11/30/92 10,751 10,868
12/31/92 10,851 11,012
01/31/93 10,955 11,202
02/28/93 11,062 11,355
03/31/93 11,087 11,395
04/30/93 11,154 11,489
05/31/93 11,128 11,462
06/30/93 11,211 11,622
07/31/93 11,236 11,861
08/31/93 11,329 11,823
09/30/93 11,365 11,851
10/31/93 11,390 11,892
11/30/93 11,392 11,819
12/31/93 11,438 11,873
01/31/94 11,509 11,973
02/28/94 11,439 11,780
03/31/94 11,380 11,628
04/30/94 11,337 11,527
05/31/94 11,353 11,485
06/30/94 11,381 11,500
07/31/94 11,484 11,599
08/31/94 11,522 11,628
09/30/94 11,495 11,585
10/31/04 11,522 11,593
11/30/94 11,473 11,528
12/31/94 11,485 11,540
01/31/95 11,854 11,897
02/28/95 11,815 11,852
03/31/95 11,883 11,919
04/30/95 11,989 12,018
05/31/95 12,197 12,232
06/30/95 12,263 12,281
07/31/95 12,314 12,308
08/31/95 12,388 12,398
09/30/95 12,449 12,470
10/31/95 12,552 12,572
11/30/95 12,659 12,695
12/31/95 12,764 12,799
01/31/96 12,862 12,900
02/29/96 12,812 12,817
</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 Government Bond Fund since inception with a hypothetical
investment in the Lehman Mutual Fund Short (1-3 Year) U.S. Government 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 GOVERNMENT BOND FUND
On February 29, 1996, the Fund's 30-day SEC yield was 6.54%, six-month total
return was 4.40%, one-year total return was 13.42%, and average annual total
return since inception (3/5/93) was 6.51%. 2 Since inception, the Fund's total
return has closely tracked its market benchmark, the Lehman Mutual Fund General
U.S. Government Index, as the chart at right illustrates. In fact, at the end of
the reporting period, the Fund had slightly outperformed the Index.
The Fund paid shareholders monthly cash dividends totaling 33 cents per share
during the six-month period ended February 29, 1996, and its NAV increased from
$9.80 on August 31, 1995 to $9.90, reflecting the overall rally in the bond
market.
2 Total return assumes reinvestment of all dividends and capital gain
distributions. 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 5.46%, six-month total return would have
been 3.88%, one-year total return would have been 12.23%, and average annual
total return since inception would have been 3.50%. 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
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SCHWAB LONG-TERM GOVERNMENT BOND FUND AND
THE LEHMAN MUTUAL FUND GENERAL U.S. GOVERNMENT INDEX
Average Annual Total Returns
February 29, 1996
----------------------------
One Year Since Inception
13.42% 6.51%
[The following is a line graph comparing the change in value of a hypothetical
$10,000 investment between the Fund and the Lehman Index.]
<TABLE>
<CAPTION>
DOLLAR VALUE
----------------------------
DATE INDEX FUND
- ---- ----- ----
<S> <C> <C>
04/01/93 10,000 10,000
04/30/93 10,077 9,890
05/31/93 10,066 9,927
06/30/93 10,289 10,314
07/31/93 10,352 10,441
08/31/93 10,583 10,863
09/30/93 10,623 10,901
10/31/93 10,664 10,952
11/30/93 10,546 10,688
12/31/93 10,587 10,738
01/31/94 10,782 10,936
02/28/94 10,505 10,544
03/31/94 10,269 10,220
04/30/94 10,187 10,112
05/31/94 10,174 10,080
06/30/94 10,151 10,027
07/30/94 10,338 10,239
08/30/94 10,340 10,233
09/30/94 10,184 10,005
10/30/94 10,187 10,036
11/30/94 10,185 10,031
12/30/94 10,230 10,122
01/30/95 10,421 10,347
02/28/95 10,645 10,648
03/31/95 10,712 10,718
04/30/95 10,852 10,887
05/31/95 11,289 11,429
06/30/95 11,376 11,445
07/31/95 11,334 11,348
08/31/95 11,467 11,566
09/31/95 11,577 11,711
10/30/95 11,753 11,831
11/30/95 11,935 12,173
12/31/95 12,106 12,395
01/30/96 12,180 12,438
02/29/96 11,931 12,075
</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 Government Bond Fund since inception with a hypothetical investment in
the Lehman Mutual Fund General U.S. Government 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 U.S.
Government agency securities, U.S. Treasury obligations, and a small percentage
of cash held in short-term obligations. The Fund's average dollar-weighted
portfolio maturity was 11.74 years at the end of the period.
BOND FUND ADVANTAGES
In view of the recent strength of the stock market, some investors may be
wondering whether investing in a bond fund 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. Moreover, bond funds can be an
important component of a well-rounded investment portfolio. Since U.S.
Government bonds have been less volatile than stocks, investing in a U.S.
Government bond fund may increase the overall stability of your portfolio, while
also helping to provide regular income.
<PAGE> 6
The Schwab Government Bond Funds offer you important advantages that are more
difficult to obtain by investing in bonds on your own. These advantages include
experienced professional management, monthly income, portfolio diversification
and daily liquidity. Our portfolio management team closely monitors the economy
and 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.
The average portfolio maturity and composition of each Fund are illustrated in
the "Portfolio Summary." In addition, you'll find a complete listing of each
Fund's holdings at the end of the period 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. The Schwab Short/Intermediate Government
Bond Fund has an operating expense ratio of 0.49%. The Schwab Long-Term
Government Bond Fund was reimbursed all of its operating expenses during the
period, so shareholders did not bear any portion of the Fund's operating
expenses during the period. Both Funds' expense ratios were well below 1.11%,
the industry average for similar general government bond funds. 3 And 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, the Schwab
Government Bond Funds will strive to offer you a relatively reliable stream of
monthly dividends combined with the high credit quality of U.S. Government
securities.
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 investment goals in the
future.
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
3 Source: Morningstar, Inc. Average operating expense ratio of 399 general
government bond funds as of 2/29/96. Operating expenses in excess of 0.49% for
the Schwab Short/Intermediate Government Bond Fund and all operating expenses
for the Schwab Long-Term Government Bond Fund will be waived at least through
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
Andrea Regan: 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 inflation, as measured
by the Consumer Price Index (CPI), was 2.6%, its fifth consecutive year under
3.0%. In light of the relatively low inflation and the economy's slow rate of
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. At the
end of the reporting period, 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 INVOLVING 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
expected 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
being higher 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
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
30 - YEAR TREASURY BOND YIELD VS. 5-YEAR TREASURY BOND YIELD
[The following is a line graph of 30-Year Treasury Bond Yield vs. 5-Year
Treasury Bond Yield.]
<TABLE>
<CAPTION>
30-YEAR TREASURY BOND YIELD VS.
- ---------------------------------------
DATE 5-YEAR 30-YEAR
- ---- ------ -------
<S> <C> <C>
31-Aug 6.066 6.648
1-Sep 6.015 6.617
4-Sep 6.004 6.611
5-Sep 5.967 6.567
6-Sep 5.963 6.593
7-Sep 6.022 6.599
8-Sep 6.025 6.587
11-Sep 6.021 6.589
12-Sep 5.955 6.502
13-Sep 5.988 6.521
14-Sep 5.881 6.467
15-Sep 5.925 6.48
18-Sep 5.968 6.53
19-Sep 5.939 6.486
20-Sep 5.913 6.47
21-Sep 6.016 6.557
22-Sep 6.059 6.585
25-Sep 6.078 6.58
26-Sep 6.111 6.575
27-Sep 6.107 6.578
28-Sep 6.099 6.587
29-Sep 6.015 6.501
2-Oct 5.975 6.476
3-Oct 5.949 6.456
4-Oct 5.902 6.432
5-Oct 5.883 6.417
6-Oct 5.883 6.42
9-Oct 5.882 6.419
10-Oct 5.930 6.442
11-Oct 5.908 6.434
12-Oct 5.864 6.387
13-Oct 5.798 6.304
16-Oct 5.787 6.304
17-Oct 5.775 6.284
18-Oct 5.837 6.331
19-Oct 5.819 6.306
20-Oct 5.895 6.362
23-Oct 5.928 6.393
24-Oct 5.847 6.326
25-Oct 5.818 6.325
26-Oct 5.834 6.393
27-Oct 5.827 6.355
30-Oct 5.812 6.354
31-Oct 5.808 6.328
1-Nov 5.743 6.297
2-Nov 5.659 6.245
3-Nov 5.699 6.284
6-Nov 5.735 6.294
7-Nov 5.764 6.308
8-Nov 5.699 6.254
9-Nov 5.720 6.284
10-Nov 5.764 6.338
13-Nov 5.713 6.277
14-Nov 5.694 6.286
15-Nov 5.731 6.292
16-Nov 5.654 6.224
17-Nov 6.650 6.232
20-Nov 5.665 6.247
21-Nov 5.690 6.266
22-Nov 5.720 6.282
23-Nov 5.712 6.278
24-Nov 5.686 6.25
27-Nov 5.661 6.233
28-Nov 5.660 6.229
29-Nov 5.609 6.198
30-Nov 5.516 6.131
1-Dec 5.495 6.087
4-Dec 5.440 6.027
5-Dec 5.476 6.051
6-Dec 5.498 6.033
7-Dec 5.548 6.078
8-Dec 5.552 6.054
11-Dec 5.530 6.046
12-Dec 5.552 6.052
13-Dec 5.566 6.082
14-Dec 5.566 6.086
15-Dec 5.566 6.098
18-Dec 5.650 6.201
19-Dec 5.533 6.115
20-Dec 5.562 6.123
21-Dec 5.547 6.088
22-Dec 5.500 6.064
25-Dec 5.504 6.066
26-Dec 5.479 6.04
27-Dec 5.453 6.01
28-Dec 5.417 5.985
29-Dec 5.381 5.949
1-Jan 5.374 5.951
2-Jan 5.388 5.963
3-Jan 5.356 5.958
4-Jan 5.410 6.032
5-Jan 5.413 6.045
8-Jan 5.417 6.044
9-Jan 5.460 6.122
10-Jan 5.525 6.183
11-Jan 5.485 6.15
12-Jan 5.430 6.148
15-Jan 5.430 6.149
16-Jan 5.322 6.057
17-Jan 5.293 6.01
18-Jan 5.249 5.985
19-Jan 5.267 5.974
22-Jan 6.350 6.044
23-Jan 5.379 6.093
24-Jan 5.332 6.036
25-Jan 5.409 6.113
26-Jan 5.333 6.045
29-Jan 5.380 6.096
30-Jan 5.297 6.036
31-Jan 5.236 6.029
1-Feb 5.221 6.017
2-Feb 5.261 6.163
5-Feb 5.297 6.158
6-Feb 5.264 6.13
7-Feb 5.271 6.156
8-Feb 5.246 6.147
9-Feb 5.232 6.098
12-Feb 5.159 6.034
13-Feb 5.131 6.031
14-Feb 5.163 6.089
15-Feb 5.239 6.168
16-Feb 5.297 6.243
19-Feb 5.297 6.24
20-Feb 5.523 6.396
21-Feb 5.527 6.371
22-Feb 5.446 6.343
23-Feb 5.509 6.405
26-Feb 5.554 6.455
27-Feb 5.635 6.476
28-Feb 5.676 6.474
29-Feb 5.731 6.47
</TABLE>
likelihood of near-term federal funds rate reductions. Another factor
contributing to February's fall of bond prices and 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.
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 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 HAS THE ECONOMIC AND INTEREST RATE ENVIRONMENT AFFECTED THE FUNDS'
PERFORMANCE DURING THE REPORTING PERIOD?
A. The total return performance of the Schwab Short/Intermediate Government Bond
Fund closely tracked the total return of its benchmark, the Lehman Short (1-3
Year) Government Index, during the reporting period. Reflecting the pattern in
bond market yields, the yield on the Fund dropped from 5.93% on August 31,
<PAGE> 9
1995 to a low of 5.74% on February 13, and ended the period at 5.97% on
February 29, 1996. The Fund's net asset value (NAV) demonstrated a similar
pattern, starting the period at $9.84 on 8/31/95, then rising to $10.00 on
February 13, and ending the period at $9.87.
The total return performance of the Schwab Long-Term Government Bond Fund
modestly exceeded the total return of its benchmark, the Lehman Mutual Fund
General U.S. Government Index, during the reporting period. Reflecting the
pattern in market yields, the yield on the Fund dropped from 6.57% on August 31,
1995 to a low of 6.22% on February 14, and ended the period at 6.55% on February
29, 1996. The NAV demonstrated a similar pattern, starting the period at $9.80
on 8/31/95, then rising to $10.25 on February 13, and ending the period at
$9.90.
Q. WHAT ACTIONS DID THE INVESTMENT MANAGER TAKE ON BEHALF OF THE FUNDS TO
RESPOND TO CHANGES IN THE INTEREST RATE ENVIRONMENT?
A. The average maturity of the Schwab Short/Intermediate Government Bond Fund's
portfolio remained at approximately 2.5 years. By holding longer-term securities
having a higher yield than subsequently issued bonds, the Fund was positioned to
benefit from the reduction in rates during most of the reporting period. The
Fund maintained a relatively high dividend payout compared to current market
yields by continuing to hold higher yielding securities purchased in late 1994.
During the reporting period, the Schwab Long-Term Government Bond Fund
maintained an average dollar-weighted portfolio maturity of approximately 12
years in an effort to benefit from the price appreciation in the bond market as
well as a steepening of the interest rate differential between short-maturity
and longer-maturity securities. Typically, in a bond market rally, long-term
yields don't drop as much as short-term yields due to the perception that future
inflation may impact longer-term interest rates. The Schwab Long-Term Government
Bond Fund is required to maintain a minimum of 10 years weighted average
maturity. Maintaining an average maturity near this minimum requirement may tend
to lessen the impact of the recent volatility we have experienced in the U.S.
Government bond market.
We will continue to focus on the economy and the federal budget situation as
well as monitor various sectors of the government securities market that may
impact our investment strategies. Our goal is to provide a mix of securities
that will help both Funds reach their investment objective of providing a high
level of current income consistent with preservation of capital.
<PAGE> 10
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
PORTFOLIO SUMMARY
(Unaudited)
- --------------------------------------------------------------------------------
ASSET CHANGE
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Change Over
as of 2/29/96 as of 8/31/95 Reporting
(000s) (000s) Period
- -------------------------------------------------------------
<S> <C> <C>
$148,298 $ 157,191 (6%)
- -------------------------------------------------------------
</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 $ 13,062 8.6% 8.6%
7 - 36 Months 77,017 50.6 59.2
37 - 60 Months 57,382 37.7 96.9
Over 60 Months 4,678 3.1 100.0%
------------ -------
$ 152,139 100.0%
============ ==========
</TABLE>
Average Weighted Maturity -- 2.47 Years
PORTFOLIO COMPOSITION AT FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Security Type % of Portfolio
--------------------------------------------------------
<S> <C>
Agency Obligations 39.1%
U.S. Treasury Obligations 52.3
Repurchase Agreement 8.6
-------
Total Investments 100.0%
--------------------------------------------------------
</TABLE>
<PAGE> 11
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM GOVERNMENT 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>
$16,225 $12,949 25%
- -------------------------------------------------------------
</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 $ 448 2.8% 2.8%
2 - 10 Years 11,652 71.8 74.6
11 - 20 Years 1,473 9.1 83.7
21 - 30 Years 2,653 16.3 100.0%
------------ -------
$16,226 100.0%
============ ==========
</TABLE>
Average Weighted Maturity -- 11.74 Years
PORTFOLIO COMPOSITION AT FEBRUARY 29, 1996
<TABLE>
<CAPTION>
Security Type % of Portfolio
--------------------------------------------------------
<S> <C>
Agency Obligations 66.4%
U.S. Treasury Obligations 30.8
Short-term Investment 2.8
-------
Total Investments 100.0%
--------------------------------------------------------
</TABLE>
<PAGE> 12
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
AGENCY
OBLIGATIONS--39.1%(a)
Federal Home Loan Bank
7.59%, 02/03/97 $ 9,425 $ 9,611
7.76%, 05/30/97 5,000 5,142
7.28%, 02/24/98 6,340 6,559
Federal Home Loan Mortgage Corp.
8.40%, 11/30/01 2,500 2,626
Federal National Mortgage Assoc.
7.07%, 11/18/96 10,000 10,116
6.57%, 08/10/00 5,000 5,082
6.75%, 08/24/00 5,000 5,077
6.38%, 10/13/00 5,000 5,054
Student Loan Marketing Assoc.
7.56%, 12/09/96 10,000 10,161
--------
TOTAL AGENCY OBLIGATIONS
(Cost $58,284) 59,428
--------
U.S. TREASURY OBLIGATIONS--52.3%(a)
U.S. Treasury Notes
7.50%, 01/31/97 7,000 7,138
5.63%, 08/31/97 5,000 5,018
7.38%, 11/15/97 7,000 7,219
7.88%, 01/15/98 2,700 2,816
7.25%, 02/15/98 5,000 5,166
5.88%, 08/15/98 8,000 8,071
6.88%, 07/31/99 3,000 3,118
<CAPTION>
Par Value
------- --------
<S> <C> <C>
7.13%, 09/30/99 $10,000 $ 10,481
7.75%, 12/31/99 5,000 5,359
5.88%, 06/30/00 8,000 8,053
6.13%, 09/30/00 10,000 10,156
5.75%, 10/31/00 5,000 5,002
6.38%, 08/15/02 2,000 2,052
--------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $78,867) 79,649
--------
<CAPTION>
Maturity
-------
<S> <C> <C>
REPURCHASE AGREEMENT--8.6%(b)
Donaldson, Lufkin & Jenrette
Securities Corp. 5.44%
Dated 02/29/96
Due 03/01/96
Collateralized By:
Federal Home Loan
Mortgage Corp.: $13,360 Par;
5.25% Due 06/15/10 13,064 13,062
--------
TOTAL REPURCHASE AGREEMENT
(Cost $13,062) 13,062
--------
TOTAL INVESTMENTS--100.0%
(Cost $150,213) $152,139
========
</TABLE>
See accompanying Notes to Schedules of Investments.
<PAGE> 13
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM GOVERNMENT BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
AGENCY
OBLIGATIONS--66.4%(a)
Federal Farm Credit Bank
8.06%, 01/04/05 $ 815 $ 905
6.27%, 01/26/16 1,000 942
Federal Home Loan Bank
6.45%, 06/08/05 1,000 1,004
6.43%, 09/19/05 1,000 1,002
Federal Home Loan Mortgage Corp.
7.65%, 05/10/05 1,000 1,042
7.18%, 08/25/05 1,000 1,019
8.57%, 10/26/09 500 531
Federal National Mortgage Assoc.
7.55%, 06/10/04 1,000 1,039
8.50%, 02/01/05 500 541
7.88%, 02/24/05 1,135 1,249
6.35%, 06/10/05 1,000 996
Tennessee Valley Authority
6.38%, 06/15/05 500 501
-------
TOTAL AGENCY OBLIGATIONS
(Cost $10,581) 10,771
-------
U.S. TREASURY OBLIGATIONS--30.8%(a)
U.S. Treasury Bonds
7.25%, 05/15/16 300 322
7.50%, 11/15/16 1,050 1,156
8.13%, 08/15/19 1,000 1,175
<CAPTION>
Par Value
------ -------
<S> <C> <C>
U.S. Treasury Notes
5.75%, 08/15/03 $110 $ 108
7.25%, 08/15/04 500 538
6.50%, 05/15/05 450 461
6.50%, 08/15/05 500 512
5.88%, 11/15/05 750 735
-------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $4,832) 5,007
-------
<CAPTION>
Shares
------
<S> <C> <C>
SHORT-TERM INVESTMENT--2.8%(c)
Provident Institutional Funds--
Fed Fund Portfolio
4.92%, 03/07/96 448 448
-------
TOTAL SHORT-TERM INVESTMENT
(Cost $448) 448
-------
TOTAL INVESTMENTS--100.0%
(Cost $15,861) $16,226
=========
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS
(a) Interest rates represent stated coupon rate of security.
(b) Interest rate represents effective yield at the time of purchase.
(c) Interest rate represents the yield on February 29, 1996.
See accompanying Notes to Financial Statements.
<PAGE> 14
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $150,213 and $15,861,
respectively) $152,139 $ 16,226
Interest receivable 1,805 200
Receivable from advisor -- 10
Receivable for fund shares sold 27 75
Deferred organization costs 10 29
Prepaid expenses 32 17
Dividends receivable 2 1
-------- -------
Total assets 154,015 16,558
-------- -------
LIABILITIES
Payable for:
Dividends 73 9
Investments purchased 5,081 --
Fund shares redeemed 508 299
Investment advisory and administration
fee 11 --
Transfer agency and shareholder service
fees 5 --
Other 39 25
-------- -------
Total liabilities 5,717 333
-------- -------
Net assets applicable to outstanding
shares $148,298 $ 16,225
======== =======
NET ASSETS CONSIST OF:
Capital paid in $156,489 $ 16,000
Accumulated overdistributed
net investment income (34) (7)
Accumulated net realized loss
on investments sold (10,083) (133)
Net unrealized gain on investments 1,926 365
-------- -------
$148,298 $ 16,225
======== =======
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 15,026 1,639
Net asset value, offering and
redemption price per share $9.87 $9.90
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 15
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Investment income:
Interest $ 4,984 $ 470
Dividends 30 6
--------- --------
Total investment income 5,014 476
--------- --------
Expenses:
Investment advisory and administration
fee 316 30
Transfer agency and shareholder service
fees 194 18
Custodian fees 42 6
Registration fees 8 5
Professional fees 12 2
Shareholder reports 15 2
Trustees' fees 5 --
Amortization of deferred organization
costs 8 6
Insurance and other expenses 6 3
--------- --------
606 72
Less expenses reduced and absorbed (228) (72)
--------- --------
Total expenses incurred by Fund 378 0
--------- --------
Net investment income 4,636 476
--------- --------
Net realized gain (loss) on investments:
Proceeds from sales of investments 83,271 11,038
Cost of investments sold (82,609) (10,903)
--------- --------
Net realized gain on investments sold 662 135
--------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 2,002 433
End of period 1,926 365
--------- --------
Decrease in net unrealized gain
on investments (76) (68)
--------- --------
Net gain on investments 586 67
--------- --------
Increase in net assets resulting
from operations $ 5,222 $ 543
========= ========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 16
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Bond Fund Government Bond Fund
------------------------- -------------------------
\------------------- For the ---------------------\
six months six months
ended year ended year
February 29, ended February 29, ended
1996 August 31, 1996 August 31,
(Unaudited) 1995 (Unaudited) 1995
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 4,636 $ 10,033 $ 476 $ 730
Net realized gain (loss) on
investments sold 662 (3,232) 135 22
Increase (decrease) in
net unrealized gain
on investments (76) 3,191 (68) 626
-------- -------- ------- -------
Increase in net assets
resulting from operations 5,222 9,992 543 1,378
-------- -------- ------- -------
Dividends to shareholders from
net investment income (4,741) (10,006) (487) (727)
-------- -------- ------- -------
Capital share transactions:
Proceeds from shares sold 14,935 32,379 9,008 14,400
Net asset value of shares
issued in reinvestment
of dividends 3,755 7,729 340 486
Less payments for
shares redeemed (28,064) (73,382) (6,128) (9,696)
-------- -------- ------- -------
Increase (decrease) in
net assets from
capital share transactions (9,374) (33,274) 3,220 5,190
-------- -------- ------- -------
Total increase (decrease) in
net assets (8,893) (33,288) 3,276 5,841
Net assets:
Beginning of period 157,191 190,479 12,949 7,108
-------- -------- ------- -------
End of period (including
undistributed
(overdistributed)
net investment income
of ($34), $71, ($7)
and $4, respectively) $148,298 $157,191 $ 16,225 $ 12,949
======== ======== ======= =======
Number of Fund shares:
Sold 1,508 3,324 894 1,535
Reinvested 379 794 34 51
Redeemed (2,829) (7,560) (610) (1,027)
-------- -------- ------- -------
Net increase (decrease) in
shares outstanding (942) (3,442) 318 559
Shares outstanding:
Beginning of period 15,968 19,410 1,321 762
-------- -------- ------- -------
End of period 15,026 15,968 1,639 1,321
======== ======== ======= =======
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 17
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Government Bond Fund and Schwab Long-Term
Government Bond Fund (the "Funds") are series of Schwab Investments (the
"Trust"), a no-load, open-end management investment company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940, as amended.
In addition to the two funds described above, the Trust also offers -- the
Schwab 1000 Fund(R), Schwab California Short/Intermediate Tax-Free Bond Fund,
Schwab California Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund. The assets of each
series are segregated and accounted for separately.
The investment objective of the Funds is to seek to provide a high level of
current income consistent with preservation of capital. The Funds each invest
primarily in securities issued or guaranteed by the United States Government,
its agencies or instrumentalities, and repurchase agreements collateralized by
these securities.
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 investment 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 and accretion of discount on investments; dividend income is recorded on
the ex-dividend date. 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.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or Government agency securities. All collateral is held by each Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
<PAGE> 18
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
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 Government Bond Fund
aggregated $1,926,000 of which $2,117,000 related to appreciated securities and
$191,000 related to depreciated securities, and net unrealized gain for the
Schwab Long-Term Government Bond Fund aggregated $365,000, of which $512,000
related to appreciated securities and $147,000 related to depreciated
securities.
At August 31, 1995, the Schwab Short/Intermediate Government Bond Fund and
Schwab Long-Term Government Bond Fund had unused capital loss carryforwards, for
federal income tax purposes, of $8,355,000 and $265,000, respectively. These
carryforwards expire August 31, 2003.
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
Government Bond Fund and Schwab Long-Term Government Bond Fund incurred
investment advisory and administration fees of $316,000 and $30,000,
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 Government
Bond Fund and Schwab Long-Term Government Bond Fund incurred transfer agency and
shareholder service fees of $194,000 and $18,000, respectively, before Schwab
reduced its fees (see Note 4).
<PAGE> 19
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
Government Bond Fund and Schwab Long-Term Government Bond Fund incurred fees
aggregating $5,000 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 six months ended February 29, 1996, the
total of such fees and expenses reduced and absorbed by the Investment Manager
were $77,000 and $54,000 for the Schwab Short/Intermediate Government Bond Fund
and Schwab Long-Term Government Bond Fund, respectively, and the total of such
fees reduced by Schwab were $151,000 and $18,000 for the Schwab
Short/Intermediate Government Bond Fund and Schwab Long-Term Government 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
Government Government
Bond Fund Bond Fund
------------------- -----------
<S> <C> <C>
Purchases $53,622 $ 8,724
Proceeds of sales and maturities $67,510 $ 5,881
</TABLE>
<PAGE> 20
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND &
SCHWAB LONG-TERM GOVERNMENT BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate
Government Bond Fund
--------------------------------------------------------------------------------
Six months
ended Eight months Year Period
February 29, Year ended ended ended ended
1996 August 31, August 31, December 31, December 31,
(Unaudited) 1995 1994 1993 1992 1991(1)
------------ -------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28 $ 10.00
Income from investment
- ------------------
operations
--------
Net investment income .30 .59 .54 .37 .60 .10
Net realized and
unrealized gain (loss)
on investments .03 .03 (.71) .38 .01 .28
-------- -------- -------- -------- -------- -------
Total from
investment operations .33 .62 (.17) .75 .61 .38
Less distributions
- -------------
Dividends from
net investment income (.30) (.59) (.54) (.37) (.60) (.10)
Distributions from realized
gain on investments -- -- (.12) -- (.03) --
-------- -------- -------- -------- -------- -------
Total distributions (.30) (.59) (.66) (.37) (.63) (.10)
-------- -------- -------- -------- -------- -------
Net asset value at
end of period $ 9.87 $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28
======== ======== ======== ======== ======== =======
Total return (%) 3.40 6.61 (1.67) 7.39 6.08 3.79
- -------------
Ratios/Supplemental data
- --------------------
Net assets, end
of period (000s) $148,298 $157,191 $190,479 $ 273,973 $226,223 $ 66,404
Ratio of expenses to
average net assets (%) .49* .58 .60 .60* .43 .35*
Ratio of net investment
income to average
net assets (%) 5.98* 6.11 5.28 5.28* 5.78 6.14*
Portfolio turnover rate (%) 36 203 91 107 185 4
</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 Government Bond Fund for the periods ended February 29, 1996,
August 31, 1995, 1994, 1993, December 31, 1992 and 1991 would have been .78%*,
.81%, .81%, .84%*, .89% and 1.47%*, respectively, and the ratio of net
investment income to average net assets would have been 5.69%*, 5.88%, 5.07%,
5.04%*, 5.32% and 5.02%*, respectively.
(1) For the period November 5, 1991 (commencement of operations) to December 31,
1991.
* Annualized
<PAGE> 21
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Long-Term
Government Bond Fund
-----------------------------------------------
Six months
ended Period
February 29, Year ended ended
1996 August 31, August 31,
(Unaudited) 1995 1994 1993(1)
------------ ------- ------ -------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.80 $ 9.33 $10.53 $ 10.00
Income from investment operations
- ----------------------------------
Net investment income .32 .69 .60 .31
Net realized and unrealized
gain (loss) on investments .11 .47 (1.20) .53
------- ------- ------ ------
Total from investment operations .43 1.16 (.60) .84
Less distributions
- -----------------
Dividends from net investment income (.33) (.69) (.60) (.31)
Distributions from realized
gain on investments -- -- -- --
------- ------- ------ ------
Total distributions (.33) (.69) (.60) (.31)
------- ------- ------ ------
Net asset value at end of period $ 9.90 $ 9.80 $ 9.33 $ 10.53
======= ======= ====== ======
Total return (%) 4.40 13.03 (5.80) 8.63
- ----------------
Ratios/Supplemental data
- -------------------------
Net assets, end of period (000s) $ 16,225 $12,949 $7,108 $ 2,806
Ratio of expenses to
average net assets (%) .00* .00 .10 .26*
Ratio of net investment income to
average net assets (%) 6.49* 7.38 6.27 6.36*
Portfolio turnover rate (%) 41 240 123 42
</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
Government Bond Fund for the periods ended February 29, 1996, August 31, 1995,
1994 and 1993 would have been .98%*, 1.18%, 2.19% and 19.19%*, respectively, and
the ratio of net investment income to average net assets would have been 5.51%*,
6.20%, 4.18% and (12.57%)*, respectively.
(1) For the period March 5, 1993 (commencement of operations) to August 31,
1993.
* Annualized
<PAGE> 22
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 23
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 24
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
- - THE SCHWAB CALIFORNIA TAX-FREE BOND FUNDS gives 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.
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BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
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[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.
TF4030R (4/96) CRS 10407 Printed on recycled paper.
