<PAGE> 1
SCHWABFUNDS(R)
[LOGO]
SCHWAB
CALIFORNIA TAX-FREE
BOND FUNDS
SEMI-ANNUAL REPORT
FEBRUARY 29, 1996
[Photo of the Schwab Building, San Francisco, California]
<PAGE> 2
Dear Shareholder,
[Photo The SchwabFunds Family(R) is celebrating substantial growth as
of a mutual fund complex. By placing your trust in
Charles SchwabFunds(R), you've helped total assets under management
R. Schwab] 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 California
Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term
Tax-Free Bond Fund (the "Funds") for the six-month period ended February 29,
1996. During the period, both Schwab California Tax-Free Bond Funds continued to
help you achieve your investment goals by striving to pay a high level of
monthly dividends exempt from federal and California personal income taxes. Each
Fund's individual performance is reviewed in detail in the following pages.
BOND MARKET PERFORMANCE
The bond market rallied during most of the reporting period, bolstered by low
inflationary expectations and a relatively low rate of economic growth. The
performance of both Schwab California Tax-Free Bond Funds reflected the
performance of the bond market during the period. We're especially pleased to
note that Lipper Analytical Services ranked the Schwab California
Short/Intermediate Tax-Free Bond Fund #1 among the 12 funds in the California
Short/Intermediate Muni Debt category, based on the Fund's one-year total return
of 10.46% as of December 31, 1995. 1 The Fund's total return since inception
(4/21/93) was 12.96% as of December 31, 1995. To help you put the Funds'
performance into perspective, the portfolio management team discusses broader
economic trends and their effects on the Funds' investment strategies in
"Questions to the Portfolio Management Team" following this letter.
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
On February 29, 1996, the Fund's 30-day SEC yield was 4.03%, six-month total
return was 2.98%, one-year total return was 8.15%, and average annual total
return since inception (4/21/93) was 4.55%. For investors in the top combined
federal and California personal income tax bracket of 45.22%, the Fund's 30-day
SEC yield at the end of the period was equivalent to a fully taxable yield of
7.36%. The Fund's total return during the six-month reporting period was 2.98%,
which slightly exceeded the 2.83% total return of the broader municipal bond
market, as measured by the Lehman 3-Year Municipal Bond Index, a widely
recognized market benchmark. 2 The chart on the following page illustrates how
the Fund's performance has tracked the broader municipal bond market since the
Fund's inception.
The Fund paid shareholders monthly cash dividends, free from federal and
California state personal income taxes, totaling 22 cents per share during the
six-month period ended February 29, 1996. Its net asset value (NAV) increased
from
1 Total return assumes reinvestment of all dividends and capital gain
distributions, if any. The Lipper ranking takes into account fund expenses but
not sales loads. There are no sales loads for any SchwabFunds(R), and the
Investment Manager and Schwab have waived a portion of their fees, during the
one-year period, and guaranteed maximum total operating expenses of 0.49%
through at least 12/31/96. Without such waivers and guarantee, the Fund's total
return would have been lower. Past performance does not guarantee future
results. Principal value and return will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. The Fund's
one-year total return as of 3/31/96 was 6.71%.
2 Income may be subject to the Alternative Minimum Tax (AMT). Capital
appreciation of discounted bonds may be subject to federal and state income tax.
Total return assumes reinvestment of all dividends and capital gains, if any.
The Investment Manager and Schwab have waived a portion of their fees, during
the reporting period, and guaranteed maximum total operating expenses of 0.49%
through at least 12/31/96. Without such waivers and guarantee, the 30-day SEC
yield would have been 3.68%, taxable equivalent yield would have been 6.09%,
six-month total return would have been 2.80%, one-year total return would have
been 7.78%, and average annual total return since inception would have been
4.12%. 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 CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND AND
THE LEHMAN 3-YEAR MUNICIPAL BOND INDEX
Average Annual Total Returns
February 29, 1996
One Year Since Inception
----------------------------
8.15% 4.55%
[Line graph Schwab California Short/Intermediate Tax-free Bond Fund and the
Lehman 3-Year Municipal Bond Index.]
<TABLE>
<CAPTION>
CALIFORNIA SHORT/INT. TAX-FREE VS BOND INDEX
DOLLAR VALUE
----------------------------
DATE INDEX FUND
- ---- ----- ----
<S> <C> <C>
04/21/-04/30/93 9,994 9,990.00
05/31/93 10,021 10,036.80
06/30/93 10,085 10,135.50
07/31/93 10,090 10,157.00
08/31/93 10,185 10,257.00
09/30/93 10,229 10,328.00
10/31/93 10,251 10,340.00
11/30/93 10,237 10,310.00
12/31/93 10,345 10,444.00
01/31/94 10,429 10,517.00
02/28/94 10,332 10,372.00
03/31/94 10,207 10,188.00
04/30/94 10,267 10,239.00
05/31/94 10,315 10,272.00
06/30/94 10,318 10,253.00
07/31/94 10,404 10,356.00
08/31/94 10,441 10,390.00
09/30/94 10,415 10,350.00
10/31/94 10,390 10,280.00
11/30/94 10,371 10,167.00
12/31/94 10,416 10,227.00
01/31/95 10,502 10,350.00
02/28/95 10,613 10,503.00
03/31/95 10,708 10,598.00
04/30/95 10,744 10,614.00
05/31/95 10,909 10,826.00
06/30/95 10,935 10,809.00
07/31/95 11,050 10,925.00
08/31/95 11,137 11,030.00
09/30/95 11,168 11,090.00
10/31/95 11,222 11,174.00
11/30/95 11,294 11,256.00
12/31/95 11,341 11,296.00
01/31/96 11,430 11,366.00
02/29/96 11,452 11,358.00
</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 California Short/Intermediate Tax-Free Bond Fund since inception
with a hypothetical investment in the Lehman 3-Year Municipal Bond
Index. The Index is unmanaged and assumes reinvestment of all
dividends, and, unlike the Fund, does not reflect the payment of
advisory fees and other expenses associated with an investment in the
Fund. Fund total return assumes the reinvestment of all dividends and
capital gain distributions, if any.
$10.06 on August 31, 1995 to $10.14 at the end of the period, reflecting the
overall rally in the bond market.
At the end of the reporting period, the Fund's portfolio was composed of
investment grade municipal bonds issued by the State of California, its
political subdivisions and agencies; and the Fund's average dollar-weighted
portfolio maturity was 3.47 years.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
On February 29, 1996, the Fund's 30-day SEC yield was 5.16%, six-month total
return was 6.20%, one-year total return was 11.14%, and average annual total
return since inception (2/24/92) was 8.08%. For investors in the top combined
federal and California personal income tax bracket of 45.22%, the Fund's 30-day
SEC yield at the end of the period was equivalent to a fully taxable yield of
9.42%. 3 As the chart at right illustrates, the Fund's total return during the
reporting period tracked and slightly exceeded the broader municipal bond
market, as measured by the Lehman General Municipal Bond Index, a widely
recognized market benchmark.
3 Income may be subject to the Alternative Minimum Tax (AMT). Capital
appreciation of discounted bonds may be subject to federal and state income tax.
Total return assumes reinvestment of all dividends. The Investment Manager and
Schwab have waived a portion of their fees, during the reporting period, and
guaranteed maximum total operating expenses of 0.49% through at least 12/31/96.
Without such waivers and guarantee, the 30-day SEC yield would have been 4.85%,
taxable equivalent yield would have been 8.55%, six-month total return would
have been 6.04%, one-year total return would have been 10.83% and average annual
total return since inception would have been 7.67%. 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> 5
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND AND
THE LEHMAN GENERAL MUNICIPAL BOND INDEX
Average Annual Total Returns
February 29, 1996
One Year Since Inception
-----------------------------
11.14% 8.08%
[Line graph comparing Schwab California Long-Term Tax-Free Bond Fund Lehman
General Municipal Bond Index.]
Long-Term California Tax-Free
General Muni Bond
DOLLAR VALUE
<TABLE>
<CAPTION>
Date INDEX FUND
------- ------- -------
<S> <C> <C>
3/1/92 $10,000 $10,000
3/31/92 $10,004 $10,099
4/30/92 $10,093 $10,217
5/30/92 $10,212 $10,410
6/30/92 $10,383 $10,633
7/31/92 $10,694 $11,082
8/31/92 $10,590 $10,786
9/30/92 $10,659 $10,835
10/31/92 $10,554 $10,474
11/30/92 $10,743 $10,921
12/31/92 $10,853 $11,110
1/31/93 $10,979 $11,256
2/28/93 $11,376 $11,775
3/31/93 $11,256 $11,561
4/30/93 $11,370 $11,674
5/31/93 $11,434 $11,736
6/30/93 $11,624 $11,969
7/30/93 $11,640 $11,957
8/30/93 $11,882 $12,235
9/30/93 $12,017 $12,371
10/30/93 $12,041 $12,412
11/30/93 $11,934 $12,263
12/30/93 $12,186 $12,541
1/30/94 $12,326 $12,671
2/28/94 $12,006 $12,304
3/30/94 $11,517 $11,683
4/30/94 $11,615 $11,768
5/30/94 $11,716 $11,867
6/30/94 $11,644 $11,747
7/30/94 $11,864 $12,008
8/30/94 $11,905 $12,026
9/30/94 $11,730 $11,824
10/30/94 $11,521 $11,508
11/30/94 $11,313 $11,235
12/30/94 $11,562 $11,420
1/30/95 $11,893 $11,901
2/28/95 $12,238 $12,295
3/31/95 $12,379 $12,414
4/30/95 $12,394 $12,407
5/31/95 $12,789 $12,825
6/30/95 $12,677 $12,613
7/31/95 $12,797 $12,685
8/31/95 $12,960 $12,866
9/30/95 $13,041 $12,972
10/31/95 $13,230 $13,228
11/30/95 $13,450 $13,507
12/31/95 $13,579 $13,690
1/31/96 $13,682 $13,785
2/29/96 $13,589 $13,664
</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 California Long-Term Tax-Free Bond Fund since inception with a
hypothetical investment in the Lehman General Municipal Bond Index. The
Index is unmanaged and assumes reinvestment of all dividends, and,
unlike the Fund, does not reflect the payment of advisory fees and
other expenses associated with an investment in the Fund. Fund total
return assumes the reinvestment of all dividends and capital gain
distributions, if any.
The Fund paid shareholders monthly cash dividends, free from federal and
California state personal income taxes, totaling 29 cents per share during the
six-month period ended February 29, 1996. Its NAV increased from $10.53 on
August 31, 1995 to $10.89 at the end of the period, reflecting the overall rally
in the bond market.
At the end of the reporting period, the Fund's portfolio was composed of
investment grade municipal bonds issued by the State of California, its
political subdivisions and agencies; and the Fund's average dollar-weighted
portfolio maturity was 18.19 years.
BOND FUND ADVANTAGES
In view of the recent strength of the stock market, some investors may be
wondering whether investing in bond funds still makes sense. At Schwab, we
believe the answer is yes -- for several reasons. If you need a regular source
of income in
<PAGE> 6
retirement or as a supplement to your other financial resources, bond funds may
be a good investment choice. The double tax-exempt income paid by California
municipal bonds can help you reduce your tax liability and keep more of the
income you earn from your investment. Moreover, a bond fund may be an important
component of a well-rounded investment portfolio. Since bonds have been
generally less volatile than stocks, investing in a bond fund may increase the
overall stability of your portfolio, while also helping to provide regular
income.
The Schwab California Tax-Free 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 national and state economies and the financial markets, carefully
evaluates a wide range of securities for investment, and adjusts portfolio
composition and average maturity as necessary in an attempt to achieve optimum
performance. At the end of the reporting period, each Fund's portfolio contained
a mix of investment grade municipal bonds from a variety of California issuers
that meet our stringent investment guidelines. The average portfolio maturity
and credit quality of each Fund are illustrated in the "Portfolio Quality
Summary" following the Question and Answer section. In addition, you'll find a
complete listing of each Fund's holdings at the end of the period, along with
their individual credit ratings, in the "Schedule of Investments" included in
this report.
LOWER COSTS HELP MAXIMIZE YOUR RETURNS
At Schwab, we're committed to keeping the cost of mutual fund investing low.
Lower fund expenses generally translate into higher returns to shareholders,
since the less you have to pay in fees and expenses, the greater the portion of
a fund's investment returns you can receive. Both Schwab California Tax-Free
Bond Funds have an operating expense ratio of 0.49%, well below the industry
average of 0.92% for similar California municipal bond funds. 4 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
California Tax-Free Bond Funds will continue to strive to offer you a relatively
reliable stream of double tax-exempt income and competitive taxable-equivalent
yields.
Thank you for placing your trust in SchwabFunds. We value your confidence, and
we'll continue to do our best to help you achieve your investing goals in the
future.
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
4 Source: Morningstar, Inc. Average operating expense ratio of 165 California
municipal bond funds as of 2/29/96. Operating expenses in excess of 0.49% 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
Joanne Larkin: Portfolio Manager
Q. HOW WOULD YOU DESCRIBE THE ECONOMIC CLIMATE DURING THE SIX-MONTH PERIOD ENDED
FEBRUARY 29, 1996?
A. The Federal Reserve Board Bank (known as 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% 5 during 1995, and the
inflation rate, as measured by the Consumer Price Index (CPI), was 2.6%, its
fifth consecutive year under 3.0%. In light of relatively low inflation and an
economy growing at a relatively slow rate, the Fed initiated a series of three
0.25% decreases in the federal funds rate target in July and December of 1995,
and again in January of 1996. As of February 29, 1996, the federal funds rate
target 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, the 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 is an unusual condition which indicated that market participants
anticipated lower interest rates in the future. There was a significant reversal
in February, and the yield on two-year notes returned to a more usual pattern of
having a higher yield than the federal funds rate. As shown on the following
chart, the yields on 5-year and 30-year Treasury bonds also experienced
significant increases in February. This reversal, due in part, to Fed Chairman
Greenspan's Congressional testimony on the stable conditions of the economy, led
many market participants to discount the likelihood of near-term federal funds
rate reductions. Another factor contributing to February's fall of bond prices
and 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.
5 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
[Line graph comparing 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 6.586
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 6.356
30-0CT 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 5.650 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
38-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 6.479 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 5.526 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 5.350 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>
One of the most significant news stories during the reporting period was the
uncertainty surrounding the federal budget and debt ceiling negotiations between
Congress and the Clinton Administration, and the resulting government shutdowns.
While these events have received considerable national attention, the issues
relating to the deficit ceiling itself had a relatively minor impact on the
financial markets during the reporting period. Short-term interest rates
declined throughout most of the reporting period, largely as a result of weaker
economic growth, lower inflation, and the market's expectations that a balanced
budget agreement may be achieved.
Q. HOW HAVE TAX-EXEMPT YIELDS RESPONDED TO THE CHANGES IN TAXABLE YIELDS?
A. While the yields on tax-exempt securities have followed the general trend of
taxable securities, different sectors of the tax-exempt market have responded
differently.
As shown on the graph at right, at the long end of the market, the yields on 30-
year municipal securities declined relative to 30-year U.S. Treasury Bonds
during the reporting period. By the end of the period, the ratio of 30-year
municipal bond yields to 30-year U.S. Treasury Bond yields had declined,
returning approximately to its four-year average of 83% of the yield on 30-year
U.S. Treasury Bonds. This decline represents relative strength in the long end
of the municipal bond market compared to the long end of the Treasury Bond
market, perhaps an
<PAGE> 9
THE RATIO BETWEEN YIELDS ON 30-YEAR AAA MUNICIPAL BONDS
AND 30-YEAR TREASURY BONDS, AND THE RATIO BETWEEN
5-YEAR AAA MUNICIPAL BONDS AND 5-YEAR TREASURY BONDS
[Line graph indicating the ratio between Yields on 30-Year AAA Municipal Bonds
and 30-Year Treasury Bonds, and the ratio between 5-Year AAA Municipal Bonds and
5-Year Treasury Bonds.]
<TABLE>
<CAPTION>
Ratio of Ratio of
Date 30-year 5-year
- ----- -------- --------
<S> <C> <C>
1-SEP 0.8845 0.7132
4-SEP 0.8845 0.7132
5-SEP 0.8851 0.7122
6-SEP 0.8815 0.7127
7-SEP 0.8777 0.7025
8-SEP 0.8793 0.7021
11-SEP 0.8791 0.7026
12-SEP 0.8801 0.6986
13-SEP 0.8744 0.6914
14-SEP 0.8755 0.6971
15-SEP 0.8769 0.6954
18-SEP 0.8747 0.6953
19-SEP 0.8792 0.6971
20-SEP 0.8799 0.7069
21-SEP 0.8758 0.7032
22-SEP 0.8827 0.7096
25-SEP 0.8864 0.7108
26-SEP 0.887 0.7069
27-SEP 0.8958 0.7172
28-SEP 0.8885 0.7115
29-SEP 0.894 0.7149
2-OCT 0.8929 0.7163
3-OCT 0.8926 0.7177
4-OCT 0.8928 0.7235
5-OCT 0.8917 0.7224
6-OCT 0.8897 0.7208
9-OCT 0.8899 0.7208
10-OCT 0.8836 0.7116
11-OCT 0.8847 0.7143
12-OCT 0.8897 0.718
13-OCT 0.8918 0.7158
16-OCT 0.8887 0.7137
17-OCT 0.8883 0.7151
18-OCT 0.8818 0.7075
19-OCT 0.8852 0.7132
20-OCT 0.8838 0.7108
23-OCT 0.8826 0.7102
24-OCT 0.8872 0.72
25-OCT 0.8873 0.7237
26-OCT 0.8794 0.7233
27-OCT 0.8893 0.7328
30-OCT 0.8833 0.7312
31-OCT 0.8837 0.7283
1-NOV 0.8833 0.7314
2-NOV 0.8875 0.7422
3-NOV 0.882 0.737
6-NOV 0.8806 0.7323
7-NOV 0.8818 0.7321
8-NOV 0.8829 0.737
9-NOV 0.882 0.7377
10-NOV 0.8792 0.7373
13-NOV 0.8861 0.7422
14-NOV 0.8865 0.7463
15-NOV 0.8841 0.7398
16-NOV 0.8889 0.7446
17-NOV 0.8861 0.7433
20-NOV 0.8841 0.7414
21-NOV 0.8829 0.7398
22-NOV 0.8807 0.7361
23-NOV 0.8812 0.737
24-NOV 0.8852 0.7404
27-NOV 0.8843 0.7384
28-NOV 0.8801 0.742
29-NOV 0.8814 0.7488
30-NOV 0.8828 0.7523
1-DEC 0.8859 0.7517
4-DEC 0.8848 0.7481
5-DEC 0.8796 0.7414
6-DEC 0.8722 0.7385
7-DEC 0.8658 0.7317
8-DEC 0.8726 0.7349
11-DEC 0.8703 0.7378
12-DEC 0.8729 0.7421
13-DEC 0.8701 0.7456
14-DEC 0.8728 0.7492
15-DEC 0.8728 0.751
18-DEC 0.8777 0.7611
19-DEC 0.8933 0.7808
20-DEC 0.8839 0.7677
21-DEC 0.8857 0.7661
22-DEC 0.8843 0.7672
25-DEC 0.884 0.7667
26-DEC 0.8845 0.7666
27-DEC 0.8823 0.7628
28-DEC 0.8826 0.7642
29-DEC 0.888 0.7693
1-JAN 0.8877 0.7707
2-JAN 0.8825 0.7646
3-JAN 0.8732 0.7674
4-JAN 0.864 0.7653
5-JAN 0.8722 0.7759
8-JAN 0.8723 0.7754
9-JAN 0.8609 0.7674
10-JAN 0.8575 0.7656
11-JAN 0.8654 0.7748
12-JAN 0.8658 0.7826
15-JAN 0.8656 0.7826
16-JAN 0.8737 0.793
17-JAN 0.8872 0.7935
18-JAN 0.8742 0.7925
19-JAN 0.8758 0.7898
22-JAN 0.869 0.7813
23-JAN 0.8653 0.7808
24-JAN 0.8701 0.7802
25-JAN 0.8657 0.7765
26-JAN 0.8755 0.7875
29-JAN 0.8653 0.777
30-JAN 0.8651 0.7759
31-JAN 0.8629 0.7812
1-FEB 0.8602 0.7814
2-FEB 0.8489 0.7755
5-FEB 0.8513 0.7703
6-FEB 0.8486 0.7674
7-FEB 0.8418 0.7626
8-FEB 0.8397 0.7625
9-FEB 0.8465 0.7608
12-FEB 0.8522 0.7675
13-FEB 0.8493 0.764
14-FEB 0.8379 0.7554
15-FEB 0.8304 0.7445
16-FEB 0.8284 0.7439
19-FEB 0.8289 0.7439
20-FEB 0.8243 0.7314
21-FEB 0.8291 0.7309
22-FEB 0.8312 0.7363
23-FEB 0.8277 0.7333
26-FEB 0.8291 0.7365
27-FEB 0.8264 0.7258
28-FEB 0.8237 0.717
29-FEB 0.8303 0.7137
</TABLE>
indication of the market's increasing skepticism that any of the flat tax
proposals would actually be adopted. If adopted, such proposals could have a
negative impact on municipal bond values.
Unlike the long end of the market, the ratio of 5-year municipal bond yields to
5-year Treasury Bond yields moved within a range near its four-year average of
76%. This ratio of 5-year municipal bond yields to 5-year U.S. Treasury Bond
yields increased during the first five months of the reporting period to a high
of 79%, then dropped to 72% at the close of the period. Unlike the longer end of
the municipal bond market, which is more sensitive to the flat tax debate, the
fluctuations in the intermediate-term municipal and taxable relative bond yields
have been more a function of supply and demand.
The numerous flat tax proposals have been the source of a significant degree of
uncertainty in the municipal bond market. As referred to above, the market has
already been responding to this uncertainty for some time. Although we will
continue to monitor the status of these proposals, we feel it is critical to
point out that there is currently no way of predicting when, if, or in what form
any flat tax proposal would be enacted. If a proposal were enacted, it is not
known what provisions may be employed to ease the burdens on current municipal
securities owners.
<PAGE> 10
Q. HOW HAS THE ECONOMIC AND INTEREST RATE ENVIRONMENT AFFECTED THE FUNDS'
PERFORMANCE DURING THE REPORTING PERIOD?
A. Yields on municipal bonds dropped in response to lower market interest rates,
and for the second consecutive year, new issuance of municipal bonds was very
low. As buyers of municipal bonds competed for the available securities, they
bid up the bond prices, thereby causing a further reduction in yields on
tax-exempt securities.
The decrease in municipal yields had a positive impact which resulted in an
increase in each Fund's NAV. The Schwab California Short/Intermediate Tax-Free
Bond Fund's NAV increased from $10.06 at the beginning of the reporting period
to $10.14 at the end of the period. The Schwab California Long-Term Tax-Free
Bond Fund's NAV increased from $10.53 at the beginning of the reporting period
to $10.89 at the end of the period.
Q. WHAT ACTIONS DID THE INVESTMENT MANAGER TAKE DURING THE REPORTING PERIOD ON
BEHALF OF THE FUNDS TO RESPOND TO THE CHANGE IN THE INTEREST RATE ENVIRONMENT?
A. The average weighted maturity of the Schwab California Short/Intermediate
Tax-Free Bond Fund's portfolio was maintained at approximately 3.5 years -- near
the longer end of the Fund's permissible range. Many market participants felt
confident that the short end of the municipal securities market would be immune
to the negative effects of a potential flat tax, as any proposal would take
several years to implement and the bonds at the shorter end of the maturity
spectrum would have matured by that time. As a result, the Fund remained fully
invested during most of the period and was able to take advantage of the
positive impact of rising bond prices. The Fund's portfolio was composed
primarily of bonds with investment grade ratings, with 84% of the portfolio
rated A or better, heavily concentrated in issues backed by essential services
such as transportation, water, and power. As the reporting period progressed and
the municipal bond market continued its upswing, we maintained a relatively low
cash position.
The average weighted maturity of the Schwab California Long-Term Tax-Free Bond
Fund's portfolio was maintained at approximately 17 years throughout the
reporting period -- a strategy designed to minimize the volatility of the longer
maturity bonds caused by the uncertainty surrounding the flat tax debate. The
Fund's portfolio was composed of investment grade bonds, with 95% of the
portfolio rated A or better, heavily concentrated in issues backed by essential
services such as transportation, water, and power. As the longer end of the
maturity spectrum reacted negatively to tax reform proposals, the Fund reduced
its position in bonds and overweighted its cash position relative to its normal
target. The increased cash position allowed the Fund to purchase bonds at lower
prices following the increase in longer-term rates.
<PAGE> 11
Q. CAN YOU DISCUSS THE ECONOMIC CLIMATE IN CALIFORNIA?
A. The economic recovery in California during the last two years has slowed
somewhat, consistent with the reduction in the growth rate of the national
economy. Although California has regained nearly all of the jobs it lost during
the last recession, the state's unemployment rate, during the reporting period,
exceeded the national average. Persistent softness in the real estate market,
particularly new home construction, is likely to keep unemployment levels above
the national average in the near future. Further, if the real estate market does
not experience sustained recovery during 1996, there may be ongoing negative
implications for the state's economy and budget.
Currently, California is expected to eliminate its accumulated budget deficit of
approximately $2 billion in 1996. However, lawmakers will continue to face the
challenges of providing necessary services, such as education, health, welfare,
and public safety, as well as replacing or upgrading sewers, highways, and other
infrastructure with available tax revenues. The Governor's budget proposal
includes assumptions regarding federal assistance and state economic growth that
may not be realized. Therefore, the State's financial position may not improve
significantly during 1996.
We are satisfied with the credit quality of the California securities which each
Fund owned at the end of the reporting period. We will, of course, continue to
monitor the State's economic situation closely. The State's current credit
ratings from three well-known agencies are A1 from Moody's Investor Service, A
from Standard & Poor's Corporation, and A+ from Fitch Investors Services, Inc.
<PAGE> 12
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO SUMMARY
(Unaudited)
- --------------------------------------------------------------------------------
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 2/29/96 as of 8/31/95 Reporting
(000s) (000s) Period
- -------------------------------------------------------------
<S> <C> <C>
$42,612 $40,639 5%
- -------------------------------------------------------------
</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 $ 2,713 6.5% 6.5%
7 - 36 Months 8,483 20.1 26.6
37 - 60 Months 24,764 58.8 85.4
Over 60 Months 6,153 14.6 100.0%
---------- -------
$42,113 100.0%
========== =======
</TABLE>
Average Weighted Maturity -- 3.47 Years
[The following is a pie chart of the summary of the published ratings for the
investments in the portfolio.]
Portfolio Quality Summary
(as of February 29, 1996)
<TABLE>
<CAPTION>
<S> <C>
AAA 0.22
AA 0.22
A 0.40
Other 0.11*
</TABLE>
This summary reflects the published ratings (for the investments in the
portfolio) of Standard & Poor's Ratings Group and/or Moody's Investor Service,
which are recognized rating services. Categories reflect the higher published
ratings for securities rated differently by the two agencies and percentages
are dollar-weighted.
*Short-term securities
<PAGE> 13
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
PORTFOLIO SUMMARY
(Unaudited)
- --------------------------------------------------------------------------------
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 2/29/96 as of 8/31/95 Reporting
(000s) (000s) Period
- -------------------------------------------------------------
<S> <C> <C>
$100,167 $90,045 11%
- -------------------------------------------------------------
</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 $ 5,132 5.2% 5.2%
2 - 10 Years 269 0.3 5.5
11 - 20 Years 53,875 54.4 59.9
21 - 30 Years 37,823 38.2 98.1
Over 30 Years 1,853 1.9 100.0%
---------- -------
$98,952 100.0%
========== =======
</TABLE>
Average Weighted Maturity -- 18.19 Years
[The following is a pie chart of the summary of the published ratings for the
investments in the portfolio.]
Portfolio Quality Summary
(as of February 29, 1996)
<TABLE>
<CAPTION>
<S> <C>
AAA 0.50
AA 0.12
A 0.33
Other 0.05*
</TABLE>
This summary reflects the published ratings (for the investments in the
portfolio) of Standard & Poor's Ratings Group and/or Moody's Investor Service,
which are recognized rating services. Categories reflect the higher published
ratings for securities rated differently by the two agencies and percentages
are dollar-weighted.
*Short-term securities
<PAGE> 14
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE
OBLIGATIONS--6.4%(a)
California Pollution Control
Financing Authority Pollution
Control Refunding Revenue
Bonds (Southern California
Edison) Series 1986A (VMIG1
A-1+)
3.50%, 03/01/96 $1,500 $1,500
California Pollution Control
Financing Authority Pollution
Control Refunding Revenue
Bonds (Southern California
Edison) Series 1986C (P-1
A-1+)
3.50%, 03/01/96 100 100
California Pollution Control
Financing Authority Pollution
Control Refunding Revenue
Bonds (Southern California
Edison) Series 1986D (P-1
A-1+)
3.50%, 03/01/96 100 100
California Pollution Control
Financing Authority Pollution
Control Revenue Bonds (Shell
Oil Corp. Project)/(Energy
Resource & Services) (VMIG1
A-1+)
3.15%, 03/01/96 200 200
Irvine Ranch, California
Water District Consolidated
Bonds Series 1985/
(Sumitomo Bank LOC) (- A-1)
3.30%, 03/01/96 200 200
Irvine Ranch, California
Water District Consolidated
Refunding Bonds Series 1985B/
(Sumitomo Bank LOC) (- A-1)
3.30%, 03/01/96 400 400
3.75%, 03/01/96 100 100
Irvine Ranch, California
Water District Consolidated
General Obligations
(Improvement District
Numbers 140, 240,
105, 250) Series 1993/
(Bank of America LOC) (VMIG1
A-1+)
3.55%, 03/01/96 100 100
-------
TOTAL VARIABLE RATE OBLIGATIONS (Cost
$2,700) 2,700
-------
<CAPTION>
Par Value
------ -------
<S> <C> <C>
TAX AND REVENUE
ANTICIPATION NOTES--4.8%(b)
San Diego, California
Area Local Governments
Pooled Tax and Revenue
Anticipation Notes/
(Mitsubishi Bank LOC)
(- SP-1)
4.75%, 10/18/96 $2,000 $2,011
-------
TOTAL TAX AND REVENUE ANTICIPATION
NOTES (Cost $2,007) 2,011
-------
MUNICIPAL BONDS--88.8%(b)
California Health Facilities
Financing Authority Hospital
Revenue Bonds (Downey
Community Hospital)
Series 1993 (- A-)
4.75%, 05/15/99 2,220 2,201
California Housing Finance
Agency Home Mortgage
Revenue Bonds
Series 1994G (Aa AA-)
5.65%, 02/01/98 500 509
5.65%, 08/01/98 585 598
5.85%, 08/01/99 320 330
6.00%, 08/01/00 410 426
California State Public Works
Board Lease Revenue Bonds
(California State University
Projects) Series 1993A (A A-)
4.30%, 12/01/99 2,000 1,995
California State Public Works
Board Lease Revenue
Refunding Bonds
(California Community Project)
Series 1993A (A A-)
4.70%, 12/01/99 1,000 1,010
California State Public Works
Board Lease Revenue
Refunding Bonds (Department of
Corrections State Prisons)
Series 1993A/(AMBAC
Insurance) (Aaa AAA)
4.70%, 12/01/00 1,865 1,900
California State Public Works
Board Lease Revenue
Refunding Bonds (Department of
Corrections State
Prison - Susanville)
Series 1993D (A A-)
4.40%, 06/01/00 1,000 996
California State Public Works
Board Lease Revenue
Refunding Bonds (Various
University of California
Projects)
Series 1993A (A A-)
4.70%, 06/01/00 1,020 1,024
California Statewide
Communities Development
Authority Hospital Revenue
Bonds Certificates of
Participation (Saint Joseph
Health System Obligated Group)
(Aa AA)
5.30%, 07/01/00 2,035 2,081
</TABLE>
<PAGE> 15
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
California Statewide
Communities Development
Authority Hospital Revenue
Refunding Bonds Certificates
of Participation
(Cedars - Sinai Medical
Center) Series 1993 (A1 -)
4.40%, 11/01/00 $1,235 $1,216
Contra Costa County, California
Transportation Authority Sales
Tax Revenue Bonds Series
1995A/(FGIC Insurance) (Aaa
AAA)
4.80%, 03/01/01 1,000 1,023
Foothill, California Transit
Zone Certificates of
Participation Refunding Bonds
Referendum Series 1993A
(Baa1 -)
4.50%, 05/01/97 1,000 999
4.50%, 11/01/97 1,000 999
Garden Grove, California
Community Development Agency
Projects Tax Allocation
Refunding Bonds (- A)
4.70%, 10/01/98 1,060 1,069
Long Beach, California
Harbor Revenue Bonds
(Aa AA-)
7.10%, 05/15/99 2,000 2,175
Los Angeles County, California
Public Works Financing
Authority Capital Construction
and Refunding Bonds (Flood
Control District) (Aa1 AA-)
4.30%, 03/01/00 1,090 1,097
Los Angeles, California
Convention & Exhibition Center
Authority Certificates of
Participation Refunding
Revenue Bonds Series 1989A/
(Escrowed to Maturity with
Government Securities) (Aaa
AAA)
7.375%, 08/15/99 1,000 1,123
Los Angeles, California
State Building Authority
Lease Revenue Refunding
Bonds (California Department
of General Services Lease)
Series 1993A (A A-)
4.50%, 05/01/98 400 401
4.70%, 05/01/99 450 452
Los Angeles, California
Unified School District
Certificates of Participation
(Multiple Properties Project)
Series 1994B/(AMBAC Insurance)
(Aaa AAA)
5.70%, 12/01/99 3,215 3,392
Los Angeles, California
Wastewater System Revenue
Bonds Series 1991A (A1 A)
6.60%, 02/01/99 1,775 1,897
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Morgan Hill, California
Unified School District
Certificates of Participation
(Measure B Capital Projects)
Series 1993 (A1 -)
4.80%, 08/01/99 $ 510 $ 514
Rancho, California
Water District Financing
Authority Revenue Bonds
Series 1996/(Toronto-Dominion
Bank LOC) (Aa2 AA)
4.70%, 09/15/01 2,000 1,988
Riverside County, California
Public Financing Authority
Special Tax Revenue Bonds
(Senior Lien Bonds) Series
1995A/(MBIA Insurance) (Aaa
AAA)
4.40%, 09/01/01 1,750 1,754
San Francisco, California
Port Commission Revenue
Refunding Bonds
Series 1994 (A BBB+)
5.00%, 07/01/00 1,500 1,521
San Ramon Valley, California
Unified School District
Refunding Certificates of
Participation (Measure A
Capital Project)
Series A (A -)
4.90%, 10/01/99 1,100 1,108
Santa Monica, California
Wastewater Enterprise Revenue
Bonds (Hyperion Project)
Series 1991A/(Escrowed to
Maturity with Government
Securities) (A1 A+)
6.25%, 01/01/02 1,250 1,388
Stockton, California
Health Facilities Revenue
Bonds (St. Joseph's Medical
Center) Series 1993A/
(MBIA Insurance) (Aaa AAA)
4.60%, 06/01/00 200 203
-------
TOTAL MUNICIPAL BONDS (Cost $36,754)
37,389
-------
</TABLE>
<TABLE>
<CAPTION>
Shares
------
<S> <C> <C>
SHORT-TERM INVESTMENT--0.0%(c)
Provident Institutional Funds -
California Money Fund
Portfolio
2.75%, 03/07/96 13 13
-------
TOTAL SHORT-TERM INVESTMENT
(Cost $13) 13
-------
TOTAL INVESTMENTS--100.0%
(Cost $41,474) $42,113
=========
</TABLE>
See accompanying Notes to Schedules of Investments.
<PAGE> 16
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--5.2%(a)
California Pollution Control
Financing Authority Pollution
Control Refunding Revenue
Bonds (Southern California
Edison) Series 1986A (VMIG1
A-1+)
3.50%, 03/01/96 $ 200 $ 200
California Pollution Control
Financing Authority Pollution
Control Refunding Revenue
Bonds (Southern California
Edison) Series 1986D (P-1
A-1+)
3.50%, 03/01/96 100 100
Irvine Ranch, California
Water District Consolidated
Bonds Series 1985/
(Sumitomo Bank LOC)
(- A-1)
3.30%, 03/01/96 200 200
Irvine Ranch, California
Water District Consolidated
Improvement District Revenue
Refunding Bonds Series A/
(Industrial Bank of Japan LOC)
(VMIG1 A-1)
3.75%, 03/01/96 100 100
Irvine Ranch, California
Water District Sewer Bonds
(Improvement District No. 282)
Series 1988A/(Sumitomo
Bank LOC) (- A-1)
3.75%, 03/01/96 2,500 2,500
Irvine Ranch, California
Water District Sewer Bonds
(Improvement District No. 284)
Series 1988A/(Sumitomo Bank
LOC) (- A-1)
3.75%, 03/01/96 2,000 2,000
-------
TOTAL VARIABLE RATE OBLIGATIONS (Cost
$5,100) 5,100
-------
MUNICIPAL BONDS--94.8%(b)
Alameda County, California
Public Facilities Corp.
Certificates of Participation
(1992 Capital Projects) (A A)
6.25%, 06/01/06 1,000 1,059
Alta Loma, California
Elementary School District
General Obligation Bonds
Series 2/(AMBAC
Insurance) (Aaa AAA)
5.875%, 06/01/08 840 894
5.875%, 06/01/09 860 908
Antioch Area, California
Public Facilities Financing
Agency Special Tax Community
Facilities District No.
1989-1/ (FGIC Insurance) (Aaa
AAA)
5.25%, 08/01/07 1,985 2,025
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Bakersfield, California
Hospital Revenue Bonds
(Bakersfield Memorial
Hospital) Series 1992A (A A-)
6.50%, 01/01/22 $1,000 $1,020
California Educational
Facilities Authority Revenue
Bonds (Loyola Marymount
University) Series 1992B (A1-)
6.60%, 10/01/22 1,450 1,561
California Educational
Facilities Authority Revenue
Bonds
(Mills College)
Series 1992 (A -)
6.875%, 09/01/22 500 538
California Educational
Facilities Authority Revenue
Refunding Bonds (Saint Mary's
College) Series 1993 (A -)
5.00%, 10/01/12 3,000 2,824
California Health Facilities
Financing Authority Hospital
Revenue Bonds (Marshall
Hospital) Series 1992A/
(California Mortgage
Insurance) (- A)
6.625%, 11/01/22 4,000 4,155
California Health Facilities
Financing Authority Revenue
Bonds (Association of Retarded
Citizens - San Diego) Series
1991/(California Mortgage
Insurance) (- A)
7.00%, 05/01/21 455 482
California Housing Finance
Agency Home Mortgage Revenue
Bonds Series 1994G (Aa AA-)
7.20%, 08/01/14 3,000 3,188
California Housing Finance
Agency Home Mortgage Revenue
Bonds Series 1995L/ (MBIA
Insurance) (Aaa AAA)
5.90%, 08/01/17 1,000 999
California Housing Finance
Agency Multi Unit Rental
Housing Revenue Bonds II, 1992
Series B (A1 A+)
6.70%, 08/01/15 1,000 1,046
California State Public Works
Board Lease Revenue Refunding
Bonds (Various California
State University Projects)
Series 1992A (A A-)
6.70%, 10/01/17 1,250 1,331
California State Public Works
Board Lease Revenue Refunding
Bonds (Various University of
California Projects) Series
1993A (A A-)
5.50%, 06/01/10 3,000 3,041
</TABLE>
<PAGE> 17
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
California Statewide
Communities Development
Authority Hospital Revenue
Bonds Certificates of
Participation (St. Joseph
Health System Obligated Group)
(Aa AA)
6.50%, 07/01/15 $2,000 $2,118
California Statewide
Communities Development
Authority Hospital Revenue
Bonds Certificates of
Participation (Cedars - Sinai
Medical Center) Series 1992
(A1 -)
6.50%, 08/01/15 1,250 1,303
Central Coast Water Authority
Revenue Bonds (State Water
Project Regional Facilities)
Series 1992/(AMBAC Insurance)
(Aaa AAA)
6.60%, 10/01/22 1,500 1,654
Chico, California
Unified School District
1988 Election Bonds Series C/
(MBIA Insurance) (Aaa AAA)
6.75%, 06/01/17 500 554
East Bay Municipal Utility
District, California
Wastewater System Revenue
Refunding Subordinate Bonds
Series 1996/(FGIC Insurance)
(Aaa AAA)
5.00%, 06/01/26 2,000 1,853
Fresno, California
Health Facility Revenue Bonds
(Holy Cross Health System -
St. Agnes Medical Center)
Series 1991 (A1 AA-)
6.50%, 06/01/11 550 575
Loma Linda, California
Hospital Revenue Refunding
Bonds (Loma Linda University
Medical Center) Series 1993C/
(MBIA Insurance) (Aaa AAA)
5.375%, 12/01/22 3,000 2,888
Los Angeles County, California
Convention & Exhibition Center
Authority Lease Revenue
Refunding Bonds Series
1993A/(MBIA Insurance) (Aaa
AAA)
5.125%, 08/15/21 4,000 3,720
Los Angeles County, California
Transportation Commission
Sales Tax Refunding Revenue
Bonds Series 1991B (A1 A+)
6.50%, 07/01/13 555 585
Los Angeles, California
Department of Airports Revenue
Refunding Bonds Series
1995A/(FGIC Insurance) (Aaa
AAA)
5.50%, 05/15/10 560 574
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Los Angeles, California
Department of Water and Power
Electric Plant Revenue Bonds
(Aa AA-)
6.00%, 01/15/11 $ 865 $ 906
Los Angeles, California
Harbor Department Revenue
Bonds Series 1995A (Aa AA)
6.50%, 08/01/25 3,000 3,225
Northern California Power
Agency Multiple Capital
Facilities Revenue Bonds
Series 1992A/(MBIA Insurance)
(Aaa AAA)
6.50%, 08/01/12 3,300 3,581
Oceanside, California
Building Authority
Certificates of Participation
Refunding Bonds Series 1993A
(A BBB+)
6.375%, 04/01/12 1,250 1,281
Ontario, California
Redevelopment Financing
Authority (Redevelopment
Project #1)/(MBIA Insurance &
Escrowed to Maturity with
Government Securities) (Aaa
AA)
5.50%, 08/01/18 2,000 1,975
Orange County, California
Water District Certificates of
Participation (1989 Project)
(Aa AA)
6.50%, 08/15/11 1,150 1,199
Oxnard, California
Finance Authority Lease
Revenue Bonds Series 1993/
(FSA Insurance) (Aaa AAA)
5.375%, 06/01/16 2,000 1,923
Petaluma, California
Consolidated Public Facilities
Lease Certificates of
Participation Series 1993A/
(AMBAC Insurance) (Aaa AAA)
5.50%, 08/01/08 750 775
Sacramento, California
Regional Transit District
Refunding Certificates of
Participation (Light Rail
Transportation Project)
(A1 A+)
6.75%, 07/01/07 2,000 2,205
Sacramento, California
Transit Finance Corp.
Certificates of Participation
(Regional Transit District)
Series 1992A (A1 -)
6.375%, 03/01/05 250 269
</TABLE>
<PAGE> 18
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 1996
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
San Bernardino County,
California Certificates of
Participation (West Valley
Detention Center Refinancing
Project)/(MBIA Insurance) (Aaa
AAA)
6.50%, 11/01/12 $ 420 $ 456
San Francisco, California
Bay Area Rapid Transit
District Sales Tax
Revenue Bonds Series 1995/
(FGIC Insurance) (Aaa AAA)
5.50%, 07/01/15 1,725 1,714
San Francisco, California
City & County Port
Commission Revenue Refunding
Bonds Series 1994
(A BBB+)
5.90%, 07/01/09 5,000 5,106
San Francisco, California
City & County
General Obligation Bonds
(Library Facilities Project)
Series 1992D
(A1 AA-)
5.75%, 06/15/12 685 697
San Jose - Santa Clara,
California Water Financing
Authority Sewer Revenue Bonds
Series A/(FGIC Insurance) (Aaa
AAA)
5.375%, 11/15/20 1,250 1,213
Santa Clara County, California
Financing Authority Lease
Revenue Bonds (VMC Facility
Replacement Project) Series
1994A/(AMBAC Insurance) (Aaa
AAA)
7.75%, 11/15/10 1,460 1,840
6.875%, 11/15/14 2,000 2,250
Santa Clara, California
Redevelopment Agency Tax
Allocation Revenue Refunding
Bonds (Bayshore North
Project)/(AMBAC Insurance)
(Aaa AAA)
7.00%, 07/01/10 1,500 1,770
Southern California Public
Power Authority Revenue Bonds
(San Juan Power Project Unit
3) Series 1993A/(MBIA
Insurance) (Aaa AAA)
5.375%, 01/01/08 5,000 5,113
5.00%, 01/01/20 2,000 1,818
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Southern California Rapid
Transit District Revenue Bonds
(Special Benefit Assessment
District A1) Series 1992A/
(AMBAC Insurance) (Aaa AAA)
6.00%, 09/01/08 $3,500 $ 3,741
Temecula, California
Community Services District
Certificates of Participation
(Community Recreation Center
Project) Series 1992 (- A)
7.125%, 10/01/12 1,000 1,101
University of California
Regents Housing System Revenue
Bonds Series 1993A/(MBIA
Insurance) (Aaa AAA)
5.50%, 11/01/18 2,000 1,963
University of California
Revenue Refunding Bonds (Multi
Purpose Projects) Series C/
(AMBAC Insurance) (Aaa AAA)
5.125%, 09/01/18 3,500 3,268
Westminster, California
Public Financing Authority
Certificates of Participation
(1994 Civic Center and
Street Improvement Project)
(- A-)
7.00%, 06/01/19 3,325 3,536
-------
TOTAL MUNICIPAL BONDS
(Cost $89,832) 93,820
-------
</TABLE>
<TABLE>
<CAPTION>
Shares
------
<S> <C> <C>
SHORT-TERM
INVESTMENT--0.0%(c)
Provident Institutional Funds -
California Money Fund
Portfolio
2.75%, 03/07/96 32 32
-------
TOTAL SHORT-TERM INVESTMENT
(Cost $32) 32
-------
TOTAL INVESTMENTS--100.0%
(Cost $94,964) $98,952
=========
</TABLE>
<PAGE> 19
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
Parenthetical disclosures which follow each security represent independent
bond ratings, where available, as provided by Moody's Investor Services,
Inc. and Standard & Poor's Corp. which were in effect at February 29, 1996.
(a) Variable rate securities. Interest rates vary periodically based on
current market rates. Rates shown are the effective rates on February
29, 1996. Dates shown represent the latter of the demand date or next
interest rate change date, which is considered the maturity date for
financial reporting purposes. For variable rate securities without
demand features and which mature in less than one year, the next
interest reset date is shown.
(b) Interest rates represent coupon rate of security.
(c) Interest rates represent the yield on February 29, 1996.
<TABLE>
<CAPTION>
Abbreviations
---------------------------------------------------------------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance, Inc.
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
VMIG Variable Moody's Investment Grade
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 20
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
----------------- -----------------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $41,474 and $94,964,
respectively) $42,113 $ 98,952
Interest receivable 508 1,287
Receivable for fund shares sold 75 123
Deferred organization costs 2 4
Prepaid expenses -- 3
------- --------
Total assets 42,698 100,369
------- --------
LIABILITIES
Payable for:
Dividends 15 43
Fund shares redeemed 44 122
Investment advisory and administration
fee 3 8
Other 24 29
------- --------
Total liabilities 86 202
------- --------
Net assets applicable to outstanding
shares $42,612 $ 100,167
======= ========
NET ASSETS CONSIST OF:
Capital paid in $42,804 $ 98,157
Accumulated overdistributed
net investment income (9) (20)
Accumulated net realized loss on
investments sold (822) (1,958)
Net unrealized gain on investments 639 3,988
------- --------
$42,612 $ 100,167
======= ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 4,204 9,201
Net asset value, offering and
redemption price per share $10.14 $10.89
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 21
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
----------------- -----------------
<S> <C> <C>
Interest income $ 977 $ 2,733
-------- --------
Expenses:
Investment advisory and administration
fee 85 195
Transfer agency and shareholder
service fees 52 119
Custodian fees 15 33
Professional fees 10 16
Shareholder reports 5 10
Trustees' fees 1 3
Registration fees -- 1
Amortization of deferred organization
costs 1 1
Insurance and other expenses 5 6
-------- --------
174 384
Less expenses reduced (73) (151)
-------- --------
Total expenses incurred by Fund 101 233
-------- --------
Net investment income 876 2,500
-------- --------
Net realized gain (loss) on investments:
Proceeds from sales of investments 15,586 60,111
Cost of investments sold (15,572) (59,342)
-------- --------
Net realized gain on investments
sold 14 769
-------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 326 1,574
End of period 639 3,988
-------- --------
Increase in net unrealized gain
on investments 313 2,414
-------- --------
Net gain on investments 327 3,183
-------- --------
Increase in net assets resulting from
operations $ 1,203 $ 5,683
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 22
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free 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 $ 876 $ 1,791 $ 2,500 $ 5,074
Net realized gain (loss) on
investments sold 14 (767) 769 (1,880)
Increase in net unrealized
gain on investments 313 1,219 2,414 2,086
------- -------- -------- -------
Increase in net assets
resulting from operations 1,203 2,243 5,683 5,280
------- -------- -------- -------
Dividends to shareholders from
net investment income (896) (1,786) (2,556) (5,061)
------- -------- -------- -------
Capital share transactions:
Proceeds from shares sold 7,071 12,494 15,232 22,400
Net asset value of shares
issued in reinvestment
of dividends 714 1,403 1,740 3,479
Less payments for
shares redeemed (6,119) (22,364) (9,977) (42,485)
------- -------- -------- -------
Increase (decrease) in
net assets from
capital share transactions 1,666 (8,467) 6,995 (16,606)
------- -------- -------- -------
Total increase (decrease) in
net assets 1,973 (8,010) 10,122 (16,387)
Net assets:
Beginning of period 40,639 48,649 90,045 106,432
------- -------- -------- -------
End of period (including
undistributed
(overdistributed)
net investment income
of ($9), $11, ($20)
and $36 respectively) $ 42,612 $ 40,639 $100,167 $ 90,045
======= ======== ======== =======
Number of Fund shares:
Sold 697 1,271 1,406 2,201
Reinvested 70 143 161 342
Redeemed (603) (2,293) (920) (4,220)
------- -------- -------- -------
Net increase (decrease) in
shares outstanding 164 (879) 647 (1,677)
Shares outstanding:
Beginning of period 4,040 4,919 8,554 10,231
------- -------- -------- -------
End of period 4,204 4,040 9,201 8,554
======= ======== ======== =======
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 23
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUNDS
The Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund (the "Funds") are series of Schwab
Investments (the "Trust"), a no-load, open-end management investment company
organized as a Massachusetts business trust on October 26, 1990 and registered
under the Investment Company Act of 1940, as amended.
In addition to the two funds described above, the Trust also offers -- the
Schwab 1000 Fund(R), Schwab Short/Intermediate Government Bond Fund, Schwab
Long-Term Government Bond Fund, Schwab 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 that is exempt from federal income and State of California
personal income taxes, consistent with preservation of capital. The Funds,
which are not "diversified" within the meaning of the Investment Company Act of
1940, as amended, each invest in a portfolio of debt obligations issued by or
on behalf of the State of California, its political subdivisions, agencies or
instrumentalities.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the representative quoted bid and asked prices, or if such prices
are not available, at prices for securities of comparable maturity, quality and
type. Short-term securities within 60 days or less of maturity are stated at
amortized cost which approximates market value.
Security transactions and interest income -- Security transactions are
accounted for on a trade date basis (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis and includes
amortization of premium on investments. Realized gains and losses from security
transactions are determined on an identified cost basis. For callable bonds
purchased at a premium, the excess of the purchase price over the call value is
amortized against interest income through the call date. If the call provision
is not exercised, any remaining premium is amortized through the final maturity
date.
Dividends to shareholders -- Each Fund declares a daily dividend, from net
investment income for that day, payable monthly. Distributions of net capital
<PAGE> 24
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 1996 (Unaudited)
- --------------------------------------------------------------------------------
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 California Short/Intermediate
Tax-Free Bond Fund aggregated $639,000, of which $679,000 related to
appreciated securities and $40,000 related to depreciated securities, and net
unrealized gain for the Schwab California Long-Term Tax-Free Bond Fund
aggregated $3,988,000, of which $4,250,000 related to appreciated securities
and $262,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment
Management, Inc. (the "Investment Manager"). For advisory services and
facilities furnished, the Funds each pay an annual fee, payable monthly, of
.41% of each Fund's average daily net assets. Under this agreement, the Schwab
California Short/Intermediate Tax-Free Bond Fund and Schwab California
Long-Term Tax-Free Bond Fund incurred investment advisory and administration
fees of $85,000 and $195,000, 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 California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund incurred transfer agency and shareholder service fees of $52,000, and
$119,000, respectively, before Schwab reduced its fees (see Note 4).
<PAGE> 25
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Officers and trustees -- Certain officers and trustees of the Trust are also
officers 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 California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund incurred fees aggregating $4,000 related to the Trust's unaffiliated
trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the ratio of operating expenses to average net assets for each Fund.
During the six months ended February 29, 1996, the total of such fees reduced
by the Investment Manager were $21,000 and $48,000 for the Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund, respectively, and the total of such fees reduced by Schwab were
$52,000 and $103,000 for the Schwab California Short/Intermediate Tax-Free Bond
Fund and the Schwab California Long-Term Tax-Free Bond Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the six months ended February 29, 1996, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------- -------------------
<S> <C> <C>
Purchases $ 3,741 $19,812
Proceeds of sales and maturities $ 4,029 $16,859
</TABLE>
<PAGE> 26
SchwabFunds(R) 13
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND &
SCHWAB CALIFORNIA LONG-TERM TAX-FREE 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 California
Short/Intermediate Tax-Free Bond Fund
--------------------------------------------------
Six months
ended Period
February 29, ended
1996 Year ended August 31, August 31,
(Unaudited) 1995 1994 1993(1)
------------ ------- ------- ----------
<S> <C> <C> <C> <C>
Net asset value at beginning of
period $ 10.06 $ 9.89 $ 10.13 $ 10.00
Income from investment operations
- ----------------------------------
Net investment income .21 .42 .37 .13
Net realized and unrealized
gain (loss) on investments .09 .17 (.24) .13
------- ------- ------- -------
Total from investment operations .30 .59 .13 .26
Less distributions
- -----------------
Dividends from net investment
income (.22) (.42) (.37) (.13)
Distributions from realized gain
on investments -- -- -- --
------- ------- ------- -------
Total distributions (.22) (.42) (.37) (.13)
------- ------- ------- -------
Net asset value at end of period $ 10.14 $ 10.06 $ 9.89 $ 10.13
======= ======= ======= =======
Total return (%) 2.98 6.17 1.29 2.57
- ----------------
Ratios/Supplemental data
- --------------------------
Net assets, end of period (000s) $ 42,612 $40,639 $48,649 $ 44,545
Ratio of expenses to
average net assets (%) .49* .50 .48 .45*
Ratio of net investment income to
average net assets (%) 4.22* 4.29 3.69 3.49*
Portfolio turnover rate (%) 10 62 35 0
</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 California
Short/Intermediate Tax-Free Bond Fund for the periods ended February 29, 1996,
August 31, 1995, 1994 and 1993 would have been .84%*, .84%, .86% and 1.25%*,
respectively, and the ratio of net investment income to average net assets would
have been 3.87%*, 3.95%, 3.31% and 2.69%*, respectively.
(1) For the period April 21, 1993 (commencement of operations) to August 31,
1993.
* Annualized
<PAGE> 27
SchwabFunds(R) 14
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California
Long-Term Tax-Free Bond Fund
------------------------------------------------------------
Six months
ended Eight Period
February 29, Year ended months ended ended
1996 August 31, August 31, December 31,
(Unaudited) 1995 1994 1993 1992(1)
------------ ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.53 $ 10.40 $ 11.26 $ 10.58 $ 10.00
Income from investment
- ----------------------
operations
-----------
Net investment income .28 .56 .56 .38 .51
Net realized and
unrealized gain (loss)
on investments .37 .13 (.74) .68 .58
-------- ------- -------- -------- -------
Total from
investment operations .65 .69 (.18) 1.06 1.09
Less distributions
- ----------------
Dividends from
net investment income (.29) (.56) (.56) (.38) (.51)
Distributions from
realized gain on
investments -- -- (.12) -- --
-------- ------- -------- -------- -------
Total distributions (.29) (.56) (.68) (.38) (.51)
-------- ------- -------- -------- -------
Net asset value at
end of period $ 10.89 $ 10.53 $ 10.40 $ 11.26 $ 10.58
======== ======= ======== ======== =======
Total return (%) 6.20 6.98 (1.70) 10.13 11.10
- ---------------
Ratios/Supplemental data
- ------------------------
Net assets, end of
period (000s) $100,167 $90,045 $106,432 $138,067 $ 72,969
Ratio of expenses to
average net assets (%) .49* .58 .60 .60* .45*
Ratio of net investment
income to average
net assets (%) 5.24* 5.54 5.12 5.18* 5.72*
Portfolio turnover rate
(%) 19 46 48 47 124
</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 California
Long-Term Tax-Free Bond Fund for the periods ended February 29, 1996, August 31,
1995, 1994, 1993 and December 31, 1992 would have been .81%*, .81%, .80%, .87%*
and 1.05%*, respectively, and the ratio of net investment income to average net
assets would have been 4.92%*, 5.31%, 4.92%, 4.91%* and 5.12%*, respectively.
(1) For the period February 24, 1992 (commencement of operations) to December
31, 1992.
* Annualized
<PAGE> 28
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 29
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 30
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 31
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio with one investment in any of the three
Asset Director(R) Funds, or choose several different equity markets with our
three equity index funds. You can also select from different maturities with our
bond fund choices, and take advantage of an array of money market funds.
SCHWAB ASSET DIRECTOR FUNDS
- - HIGH GROWTH FUND seeks to provide high capital growth with less volatility
than an all-stock portfolio. This Fund has the largest stock component and
offers the highest risk and return potential.
- - BALANCED GROWTH FUND seeks to provide maximum total return, including capital
growth and income. This Fund invests in a more balanced mix of stocks and
bonds and offers moderate risk and return potential.
- - CONSERVATIVE GROWTH FUND seeks to provide income with growth potential. This
Fund has the smallest stock component, which is designed to help offset
inflation, and generally keeps the majority of its assets invested in bonds.
It offers the lowest risk and return potential.
SCHWAB INDEX FUNDS
- - SCHWAB 1000 FUND(R) is designed to match the total return of the Schwab 1000
Index(R), composed of the largest 1,000 publicly traded U.S. companies -- the
stocks of which represent about 85% of the total market capitalization of the
U.S. stock market. 1
- - SCHWAB SMALL-CAP INDEX FUND(R) is designed to track the total return of the
Schwab Small-Cap Index(TM), which tracks the performance of
small-capitalization companies. The Schwab Small-Cap Index is composed of the
second 1,000 largest publicly traded companies in the U.S. 1
- - SCHWAB INTERNATIONAL INDEX FUND(TM) is designed to track the total return of
the Schwab International Index(R), composed of 350 of the largest companies,
based on market capitalization, in foreign countries with developed
securities markets. 2
SCHWAB BOND FUNDS
- - SCHWAB GOVERNMENT BOND FUNDS include two Funds designed to offer high current
yields with the credit safety of U.S. government securities. The income level
you are seeking and your tolerance for fluctuation in share price should
determine your selection of either our Short/Intermediate Fund or our
Long-Term Fund. 3
- - SCHWAB TAX-FREE BOND FUNDS help investors take advantage of one of the last
remaining tax breaks: tax-free municipal bonds. We offer a national
Short/Intermediate Fund and a Long-Term Fund, both of which pay monthly
income free from federal personal income tax. 4, 5
- - SCHWAB CALIFORNIA TAX-FREE BOND FUNDS give California taxpayers two different
opportunities to earn double tax-free income -- free from both federal and
California state personal income taxes. 5
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money funds that seek high current income with safety
and liquidity. Choose from taxable or tax-exempt alternatives. Many can be
linked to your Schwab account to "sweep" cash balances automatically when you're
between investments. Or, for your larger cash reserves, choose one of our Value
Advantage Investments(TM). 6
We will be happy to provide you with a free prospectus and brochure on any of
the SchwabFunds(R). Each prospectus provides more complete information,
including charges and expenses. Please read it carefully before investing.
1-800-2 NO-LOAD (1-800-266-5623)
1. The Schwab 1000 Index and the Schwab Small-Cap Index consist of publicly
traded companies ranked by market capitalization. These indices do not
include privately held companies, investment companies and companies
incorporated outside of the United States.
2. The Schwab International Index is composed of publicly traded companies
ranked by market capitalization in countries with developed securities
markets. Currently invested in 15 countries, the Index does not include
privately held companies, investment companies or companies from the United
States.
3. Investors in the Schwab Government Bond Funds may experience a decline in
share price due to prepayment of obligations held by the Funds.
4. Income may be subject to state and local taxes.
5. Income may be subject to the Alternative Minimum Tax (AMT). Capital
appreciation from discounted bonds may be subject to state and federal income
tax.
6. Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the Funds will be able to
maintain a stable share price of $1.
<PAGE> 32
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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.
TF4031R (4/96) CRS 10407 Printed on recycled paper.
