<PAGE> 1
SCHWABFUNDS(R)
[LOGO]
SCHWAB
TAX-FREE
BOND FUNDS
SEMI-ANNUAL REPORT
FEBRUARY 28, 1997
<PAGE> 2
Dear Shareholder,
With the support of investors like you, the SchwabFunds
[Photo of Family(R) continues to be among the largest and
Charles fastest-growing mutual fund complexes in the nation. Charles
R. Schwab] Schwab Investment Management, Inc. (CSIM) manages over $46
billion in assets for more than 2.5 million shareholders.
Today CSIM offers investors 30 funds spanning a spectrum of
financial markets and investing styles. You'll find in-depth
information on the performance of your SchwabFunds(R)
investment in the following pages.
LONG-TERM INVESTMENT STRATEGIES
SchwabFunds' expanding family of quality mutual funds offers investors
time-tested strategies for long-term investing -- Asset Allocation, Indexing,
Tax-Efficiency, Quantitative Models and Fund-of-Funds. Each strategy was
developed to fit specific financial objectives. The SchwabFunds Family was
developed to provide you with smart, cost-efficient solutions and an easy,
convenient way to put your money to work. And we'll continue to explore new
strategies to help meet your financial goals.
EXPANDING CHANNELS OF COMMUNICATION
If you're among the millions of people exploring the Internet, I encourage you
to visit our Web site at www.schwab.com/funds. There you'll find a wealth of
online information about SchwabFunds as well as a wide range of investments and
resources available from Schwab. You can access the latest mutual fund
performance data, request a free fund prospectus, trade funds and more -- all
from the comfort of your home or office, 24 hours a day. It's just one more way
we're harnessing the latest technology to make investing easier and more
convenient.
Thank you for placing your trust in SchwabFunds. In the year ahead, we'll
continue working to provide you with an expanding range of investment
opportunities to meet your growing needs.
/s/ Charles R. Schwab
Charles R. Schwab
<PAGE> 3
KEEP YOUR
MONEY WORKING
HARDER!
----------------------------------
USE THIS ENVELOPE TO EASILY ADD TO
YOUR SCHWAB BOND FUND.
CHARLES SCHWAB
<PAGE> 4
WE'VE MADE IT EASIER FOR YOU! TAKE ADVANTAGE OF THIS OPPORTUNITY TO ADD TO YOUR
SCHWAB BOND FUND INVESTMENT.
Now, you can add to your account by using this convenient Schwab investment
coupon. It's a simple, easy way to increase your investment. You can also have
money transferred to your bond fund directly from your bank account or payroll
check using Schwab's free Automatic Investment Plan (AIP)(1). If you'd like
more information on AIP, just check the appropriate box on the coupon. We'll
send you everything you need to get started.
SO DON'T DELAY. USE THIS CONVENIENT INVESTMENT
ENVELOPE AND SEND YOUR CHECK TODAY!
(1) The Automatic Investment Plan does not ensure profit or protect against
loss in declining markets.
- --------------------------------------------------------------------------------
PLEASE DETACH HERE.
SCHWAB BOND FUND
INVESTMENT COUPON
- ------------------
Please enclose your check and this completed investment coupon
in the attached postage-paid envelope.
[ ][ ][ ][ ]-[ ][ ][ ][ ]
- -------------------------------------- SCHWAB ACCOUNT NUMBER
Name
$
- --------------------------------------
Amount of Investment*
- --------------------------------------
Signature
[ ] Check here if you would like more investment coupons for
future use.
[ ] Check here if you would like more information on Schwab's
Automatic Investment Plan (AIP).
* THIS ENVELOPE MAY NOT BE USED FOR INITIAL INVESTMENTS. SUBSEQUENT INVESTMENT
MINIMUM IS $100.
PLEASE INDICATE TO WHICH SCHWAB BOND FUND YOUR INVESTMENT SHOULD GO:
[ ] Schwab Long-Term Government Bond Fund
[ ] Schwab Short/Intermediate Government Bond Fund
[ ] Schwab California Long-Term Tax-Free Bond Fund
[ ] Schwab California Short/Intermediate Tax-Free Bond Fund
[ ] Schwab Long-Term Tax-Free Fund
[ ] Schwab Short/Intermediate Tax-Free Fund
IF NO FUND IS INDICATED, YOUR INVESTMENT WILL GO INTO THE SWEEP ACCOUNT YOU'VE
DESIGNATED.
----------------------------------------
(LIFT HERE FOR MORE INFORMATION)
----------------------------------------
(C) 1996 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE.
Printed on recycled paper. TF4269 (10/96) CRS 10552
<PAGE> 5
CharlesSchwab
JUST FOLLOW THESE EASY STEPS TO INVEST IN YOUR SCHWAB BOND FUND:
1. Fill out the Schwab investment coupon completely, This envelope must
including your name, account number, amount of be preceded or
your check and signature. Please use one coupon accompanied by a
for each account. current Schwab Bond
Fund prospectus. The
2. Make your check payable to CHARLES SCHWAB & CO., principal value and
INC., and enclose your check with the completed investment returns will
coupon in this postage-paid envelope. fluctuate so that an
investor's shares, when
3. Then just drop your Schwab Bond Fund investment redeemed, may be worth
envelope in the mail today--and start putting your more or less than their
money to work! If you have any questions, don't original cost.
hesitate to call your local Schwab office or
1-800-2 NO LOAD.
<PAGE> 6
Attn: Dept. AIP 333-4
--------------
NO POSTAGE
NECESSARY IF
MAILED IN THE
UNITED STATES
--------------
-------------------------------------
BUSINESS REPLY MAIL
FIRST-CLASS MAIL PERMIT NO. 18125 [BAR CODE]
SAN FRANCISCO, CA
-------------------------------------
POSTAGE WILL BE PAID BY ADDRESSEE
CHARLES SCHWAB & CO., INC.
PO BOX 7778
SAN FRANCISCO CA 94120-9419
<PAGE> 7
Table of Contents
<TABLE>
<S> <C>
PERFORMANCE ..................................................... 2
TAXABLE EQUIVALENT YIELD ........................................ 6
DIVIDEND PAYMENT ................................................ 7
TOP TEN HOLDINGS ................................................ 8
INVESTMENT QUALITY SUMMARY ...................................... 10
PORTFOLIO MANAGEMENT TEAM ....................................... 11
MARKET OVERVIEW ................................................. 12
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM ...................... 20
FINANCIAL STATEMENTS AND NOTES .................................. 23
</TABLE>
We are pleased to report to you on the performance of the Schwab
Short/Intermediate Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond
Fund (the "Funds") for the six-month period ended February 28, 1997. During the
period, both Funds continued to achieve their primary investment objective by
providing a relatively steady stream of monthly income, exempt from Federal
income taxes and consistent with capital preservation. (1) Each Fund's
individual performance is reviewed in detail in the following pages.
(1) Income from the Funds may be subject to the Alternative Minimum Tax (AMT).
1
<PAGE> 8
PERFORMANCE
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
Yield and Total Return as of February 28, 1997
(Fund Inception 4/21/93)
<TABLE>
<CAPTION>
Average Annual
30-Day 6-Month 1-Year Total Return
SEC Yield Total Return Total Return Since Inception
-----------------------------------------------------------------
<S> <C> <C> <C>
3.90% 3.10% 3.85% 4.38%
-----------------------------------------------------------------
</TABLE>
As of 12/31/96, the 30-day SEC yield and six-month, one-year and since inception
average annual total returns for the Fund were 3.98%, 2.94%, 3.54% and 4.35%,
respectively.
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The
Investment Manager and Schwab waived a portion of their fees during the period
and have guaranteed that maximum total operating expenses will not exceed 0.49%
through at least 12/31/97. Without fee waivers and guarantees, for the period
ended 2/28/97, the Fund's 30-day SEC yield and six-month, one-year and since
inception average annual total returns would have been 3.46%, 2.87%, 3.40% and
3.91%, respectively. For the period ended 12/31/96, the Fund's 30-day SEC yield
and six-month, one-year and since inception average annual total returns,
without fee waivers and guarantees, would have been 3.54%, 2.70%, 3.10% and
3.87%, respectively.
2
<PAGE> 9
COMPARISON OF CHANGE IN VALUE OF A
HYPOTHETICAL $10,000 INVESTMENT IN THE SCHWAB
SHORT/INTERMEDIATE TAX-FREE BOND FUND AND THE
LEHMAN 3-YEAR MUNICIPAL BOND INDEX
<TABLE>
<CAPTION>
4/21/93 4/30/93 5/30/93 6/30/93 7/30/93 8/30/93 9/30/93 10/30/93
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $10,000 $ 9,993 $10,020 $10,085 $10,090 $10,184 $10,228 $10,250
Fund $10,000 $ 9,990 $10,038 $10,129 $10,151 $10,283 $10,344 $10,366
<CAPTION>
11/30/93 12/30/93 1/30/94 2/28/94 3/30/94 4/30/94 5/30/94 6/30/94
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $10,237 $10,344 $10,428 $10,331 $10,206 $10,267 $10,315 $10,318
Fund $10,326 $10,462 $10,567 $10,412 $10,218 $10,280 $10,323 $10,312
<CAPTION>
7/30/94 8/30/94 9/30/94 10/30/94 11/30/94 12/30/94 1/30/95 2/28/95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $10,403 $10,440 $10,414 $10,389 $10,370 $10,415 $10,501 $10,612
Fund $10,407 $10,429 $10,377 $10,317 $10,245 $10,346 $10,445 $10,563
<CAPTION>
3/30/95 4/30/95 5/30/95 6/30/95 7/30/95 8/30/95 9/30/95 10/30/95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $10,707 $10,743 $10,908 $10,934 $11,050 $11,136 $11,167 $11,221
Fund $10,655 $10,691 $10,881 $10,884 $11,987 $11,079 $11,115 $11,175
<CAPTION>
11/30/95 12/30/95 1/30/95 2/29/96 3/30/96 4/30/96 5/30/96 6/30/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $11,293 $11,340 $11,429 $11,431 $11,403 $11,417 $11,427 $11,496
Fund $11,255 $11,305 $11,383 $11,364 $11,313 $11,306 $11,312 $11,371
<CAPTION>
7/30/96 8/30/96 9/30/96 10/30/96 11/30/96 12/30/96 1/30/97 2/28/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $11,559 $11,577 $11,647 $11,729 $11,838 $11,844 $11,896 $11,954
Fund $11,443 $11,447 $11,519 $11,605 $11,712 $11,705 $11,742 $11,801
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance graph compares a hypothetical $10,000 investment in the Schwab
Short/Intermediate Tax-Free Bond Fund since inception with a hypothetical
investment in the Lehman 3-Year Municipal Bond Index. The Index is unmanaged
and assumes reinvestment of all dividends, and, unlike the Fund, does not
reflect the payment of advisory fees and other expenses associated with an
investment in the Fund. Investors cannot invest in an index directly. Fund
total return assumes the reinvestment of all dividends and capital gain
distributions, if any. The Investment Manager and Schwab waived a portion of
their fees during the reporting period, and have guaranteed that maximum total
operating expenses will not exceed 0.49% through at least 12/31/97. Without fee
waivers and guarantees, the Fund's total return would have been lower.
3
<PAGE> 10
SCHWAB LONG-TERM TAX-FREE BOND FUND
Yield and Total Return as of February 28, 1997
(Fund Inception 9/11/92)
<TABLE>
<CAPTION>
Average Annual
30-Day 6-Month 1-Year Total Return
SEC Yield Total Return Total Return Since Inception
--------------------------------------------------------------------
<S> <C> <C> <C>
5.12% 5.34% 5.62% 6.45%
--------------------------------------------------------------------
</TABLE>
As of 12/31/96, the 30-day SEC yield and six-month, one-year and since inception
average annual total returns for the Fund were 5.11%, 5.08%, 4.18% and 6.50%,
respectively.
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR OR LESS THAN THEIR ORIGINAL COST.
The Investment Manager and Schwab waived a portion of their fees during the
period and have guaranteed that maximum total operating expenses will not exceed
0.49% through at least 12/31/97. Without fee waivers and guarantees, for the
period ended 2/28/97, the Fund's 30-day SEC yield and six-month, one-year and
since inception average annual total returns would have been 4.54%, 5.04%, 5.07%
and 5.87%, respectively. For the period ended 12/31/96, the Fund's 30-day SEC
yield and six-month, one-year and since inception average annual total returns,
without fee waivers and guarantees, would have been 4.53%, 4.77%, 3.67% and
5.93%, respectively.
4
<PAGE> 11
COMPARISON OF CHANGE IN VALUE OF A
HYPOTHETICAL $10,000 INVESTMENT IN THE SCHWAB
LONG-TERM TAX-FREE BOND FUND AND THE
LEHMAN GENERAL MUNICIPAL BOND INDEX
AVERAGE ANNUAL TOTAL RETURNS
THROUGH FEBRUARY 28, 1997
ONE YEAR SINCE INCEPTION
5.62% 6.45%
<TABLE>
<CAPTION>
9/11/92 9/30/92 10/30/92 11/30/92 12/31/92 1/31/93 2/28/93 3/31/93
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $10,000 $ 9,923 $ 9,826 $10,002 $10,104 $10,221 $10,591 $10,479
Fund $10,000 $ 9,867 $ 9,515 $ 9,912 $10,092 $10,240 $10,682 $10,484
<CAPTION>
4/30/93 5/31/93 6/30/93 7/31/93 8/31/93 9/30/93 10/31/93 11/30/93
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $10,585 $10,644 $10,822 $10,836 $11,062 $11,188 $11,209 $11,111
Fund $10,632 $10,690 $10,883 $10,879 $11,157 $11,298 $11,315 $11,201
<CAPTION>
12/31/93 1/31/94 2/28/94 3/31/94 4/30/94 5/31/94 6/30/94 7/31/94
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $11,345 $11,475 $11,177 $10,722 $10,813 $10,907 $10,840 $11,044
Fund $11,465 $11,588 $11,274 $10,791 $10,858 $10,970 $10,870 $11,085
<CAPTION>
8/31/94 9/30/94 10/31/94 11/30/94 12/31/94 1/31/95 2/28/95 3/31/95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $11,083 $10,920 $10,726 $10,532 $10,764 $11,072 $11,394 $11,524
Fund $11,109 $10,921 $10,657 $10,381 $10,658 $11,050 $11,381 $11,514
<CAPTION>
4/30/95 5/31/95 6/30/95 7/31/95 8/31/95 9/30/95 10/31/95 11/30/95
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $11,538 $11,906 $11,802 $11,914 $12,065 $12,141 $12,317 $12,521
Fund $11,483 $11,918 $11,735 $11,836 $11,971 $12,056 $12,250 $12,443
<CAPTION>
12/31/95 1/31/96 2/29/96 3/31/96 4/30/96 5/31/96 6/30/96 7/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index $12,642 $12,738 $12,651 $12,489 $12,454 $12,449 $12,585 $12,699
Fund $12,591 $12,640 $12,520 $12,366 $12,319 $12,311 $12,484 $12,599
<CAPTION>
8/31/96 9/30/96 10/31/96 11/30/96 12/31/96 1/31/97 2/28/97
<S> <C> <C> <C> <C> <C> <C> <C>
Index $12,697 $12,875 $13,020 $13,258 $13,203 $13,228 $13,350
Fund $12,553 $12,780 $12,948 $13,188 $13,117 $13,097 $13,223
</TABLE>
Schwab Long-Term Tax-Free Bond Fund $13,223
Lehman General Municipal Bond Index $13,350
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance graph compares a hypothetical $10,000 investment in the Schwab
Long-Term Tax-Free Bond fund since inception with a hypothetical investment in
the Lehman General Municipal Bond Index. The Index is unmanaged and assumes
reinvestment of all dividends, and, unlike the Fund, does not reflect the
payment of advisory fees and other expenses associated with an investment in
the Fund. Investors cannot invest in an index directly. Fund total return
assumes the reinvestment of all dividends and capital gain distributions, if
any. The Investment Manager and Schwab waived a portion of their fees during
the reporting period, and have guaranteed that maximum total operating expenses
will not exceed 0.49% through at least 12/31/97. Without fee waivers and
guarantees, the Fund's total return would have been lower.
5
<PAGE> 12
TAXABLE EQUIVALENT YIELD
To evaluate the performance of a tax-free bond fund, you should pay special
attention to the Fund's taxable equivalent yield. While hypothetical in nature,
this measure of performance offers you a convenient way to assess the additional
yield which would be required of a taxable bond fund in order for the yield of
that fund to be equivalent to a tax-exempt yield after you pay federal income
taxes.
<TABLE>
<S> <C> <C> <C> <C>
(1) If your 1996 federal personal income tax bracket is ..... 28% 31% 36% 39.60%
Tax-Free Yield
3.50% 4.86% 5.07% 5.47% 5.79%
4.00% 5.56% 5.80% 6.25% 6.62%
4.50% 6.25% 6.52% 7.03% 7.45%
5.00% 6.94% 7.25% 7.81% 8.28%
5.50% 7.64% 7.97% 8.59% 9.11%
6.00% 8.33% 8.70% 9.38% 9.93%
[arrow pointing up] [arrow pointing up]
(2) And you have a tax-free investment yielding ... (3) Here is what you would have to
earn from a taxable investment to
match the tax-free yield.
</TABLE>
Chart is for illustrative purposes only and does not reflect
the performance of the Schwab Tax-Free Bond Funds.
6
<PAGE> 13
ANNUAL DIVIDEND PAYMENT AS OF FISCAL YEAR-END
FROM EACH FUND'S INCEPTION DATE
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
6-month
1993* 1994 1995 1996 Reporting Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Dividends $ 0.13 $ 0.37 $ 0.40 $ 0.41 $ 0.21
- --------------------------------------------------------------------------------
Capital Gains -- -- -- -- --
- --------------------------------------------------------------------------------
</TABLE>
*Commencement of operations April 21, 1993.
SCHWAB LONG-TERM TAX-FREE BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
6-month
1992* 1993 1994 1995 1996 Reporting Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Dividends $ 0.17 $ 0.36 $ 0.52 $ 0.53 $ 0.52 $ 0.27
- --------------------------------------------------------------------------------
Capital Gains -- -- 0.08 -- -- --
- --------------------------------------------------------------------------------
</TABLE>
*Commencement of operations September 11, 1992.
FUND INVESTMENTS
The investment portfolios of both Tax-Free Bond Funds consist of a mix of
investment-grade municipal bonds from a variety of state issuers. More detailed
information on each Fund's investments, as of February 28, 1997, can be found in
the Schedule of Investments section of this report, which follows the Question
and Answer section. This information is not necessarily indicative of the Funds'
future holdings.
7
<PAGE> 14
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
TOP 10 HOLDINGS
<TABLE>
<CAPTION>
BOND INVESTMENT % OF TOTAL INVESTMENTS
<S> <C>
Washington, Maryland Suburban Sanitation District
Sewage Disposal 6.00%, Aa1/AA, Maturity 11/01/99 5.97%
Port of Seattle, Washington Revenue Bonds
5.50%, Aaa/AAA, Maturity 09/01/92 5.46%
Knox County, Tennessee Health & Education Hospital
Facilities
7.00%, Aaa/AAA, Maturity 01/01/00 5.17%
Minnesota State Housing Finance Agency Rental Housing
4.80%, Aaa/AAA, Maturity 08/01/01 4.39%
Black Hawk County, Iowa Hospital Facilities
7.38%, Aaa/AAA, Maturity 02/01/01 4.27%
Connecticut State Special Tax Obligation Refunding Bonds
5.50%, Aaa/AAA, Maturity 10/01/00 3.96%
Massachusetts Municipal Wholesale Electric Co.
Power Supply Systems 5.50%, Aaa/AAA, Maturity 01/01/00 3.94%
New York State Dormitory Authority (State University
Dormitory Facilities) 5.10%, Aaa/AAA, Maturity 07/01/01 3.90%
Mississippi Hospital Equipment & Facilities Authority
5.25%, Aaa/AAA, Maturity 05/01/01 3.90%
Ohio State Public Facilities Commission Higher Education
Capital Facilities 5.00%, Aaa/AAA, Maturity 11/01/01 3.89%
</TABLE>
8
<PAGE> 15
SCHWAB LONG-TERM TAX-FREE BOND FUND
TOP 10 HOLDINGS
<TABLE>
<CAPTION>
BOND INVESTMENT % OF TOTAL INVESTMENTS
<S> <C>
Chicago General Obligation Refunding Bonds
6.00%, Aaa/AAA, Maturity 01/01/11 5.86%
Kodiak Island Borough, Alaska General Obligation Bonds
5.40%, Aaa/AAA, Maturity 02/15/10 5.44%
Seattle, Washington Municipal Light & Power
Revenue Refunding Bonds 5.90%, Aa/AA, Maturity 05/01/08 5.12%
Maricopa County, Arizona Alhambra Elementary School
District 68 6.80%, Aaa/AAA, Maturity 07/01/12 4.93%
Mississippi Hospital Equipment & Facilities Authority
6.00%, Aaa/AAA, Maturity 05/01/13 4.90%
Pennsylvania Higher Education Facilities
5.75%, Aa/AA, Maturity 01/01/07 4.41%
Irvine Ranch, California Water District
3.35%, NR/AAA, Maturity 03/01/99 4.39%
Eastern Michigan University Board of Regents
5.50%, Aaa/AAA, Maturity 06/01/17 4.35%
Nevada State Municipal General Obligation Bonds
5.50%, Aaa/AAA, Maturity 11/01/25 4.34%
New York State General Obligation Bonds
5.30%, A/A-, Maturity 07/15/15 4.25%
</TABLE>
9
<PAGE> 16
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
INVESTMENT QUALITY SUMMARY
[PIE GRAPH]
<TABLE>
<S> <C>
AAA 57%
AA 20%
A 14%
Other 9%*
</TABLE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
INVESTMENT QUALITY SUMMARY
[PIE GRAPH]
<TABLE>
<S> <C>
AAA 60%
AA 23%
A 10%
Other 7%*
</TABLE>
As of February 28, 1997, these portfolio summaries reflect the published
ratings (for the investments in the portfolio) of Standard & Poor's Ratings
Group and/or Moody's Investor Service, which are recognized rating services.
Categories reflect the higher published ratings for securities rated
differently by the two agencies, and percentages are dollar-weighted.
* Includes short-term securities.
10
<PAGE> 17
PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD - Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of each Fund's portfolio. Steve joined
CSIM as Vice President and Portfolio Manager in April 1991, and was promoted to
his current position in August 1993. Prior to joining CSIM, Steve was Vice
President and Portfolio Manager at Federated Investors.
JOANNE LARKIN - Vice President and Senior Portfolio Manager, has primary
responsibility for the day-to-day management of each Fund's portfolio. Joanne
joined CSIM as Portfolio Manager in February 1992. Prior to joining CSIM, Joanne
was Portfolio Manager for the Shearson Lehman California Municipal Bond Fund and
E.F. Hutton's Municipal Cash Reserve Management.
The following market overviews and answers to questions are provided by the
Portfolio Management Team.
11
<PAGE> 18
MARKET OVERVIEW
REAL GDP GROWTH RATE
[BAR GRAPH]
<TABLE>
<CAPTION>
Real
GDP
------
<S> <C>
Q1 1990 4.1%
Q2 1990 1.3%
Q3 1990 -1.9%
Q4 1990 -4.1%
Q1 1991 -2.2%
Q2 1991 1.7%
Q3 1991 1.0%
Q4 1991 1.0%
Q1 1992 4.7%
Q2 1992 2.5%
Q3 1992 3.0%
Q4 1992 4.3%
Q1 1993 -0.1%
Q2 1993 1.9%
Q3 1993 2.3%
Q4 1993 4.8%
Q1 1994 2.5%
Q2 1994 4.9%
Q3 1994 3.5%
Q4 1994 3.0%
Q1 1995 0.4%
Q2 1995 0.7%
Q3 1995 3.8%
Q4 1995 0.3%
Q1 1996 2.0%
Q2 1996 4.7%
Q3 1996 2.1%
Q4 1996 3.9%
</TABLE>
Source: Bloomberg L.P.
- - The economy continued to expand at a healthy rate during the reporting
period. The GDP growth rate was 2.1% and 3.9% for the third and fourth
quarters, and 3.2% for the full year (1996).
- - The particularly strong second and fourth quarter 1996 growth rates of 4.7%
and 3.9% respectively, resulted in sentiment focusing on the apparent
strength of the economy and its potential impact on future inflation and
Federal Reserve Board (Fed) policy.
- - At the time of this writing, the economy appears to be on track for moderate
growth, continuing the six year expansion which began in 1991.
12
<PAGE> 19
U.S. UNEMPLOYMENT RATE
[GRAPH]
<TABLE>
<CAPTION>
Unemployment
Rate
------------
<S> <C>
Jan-90 5.3%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.3%
Jun-90 5.1%
Jul-90 5.4%
Aug-90 5.6%
Sep-90 5.7%
Oct-90 5.8%
Nov-90 6.0%
Dec-90 6.2%
Jan-91 6.3%
Feb-91 6.5%
Mar-91 6.8%
Apr-91 6.6%
May-91 6.8%
Jun-91 6.8%
Jul-91 6.7%
Aug-91 6.8%
Sep-91 6.8%
Oct-91 6.9%
Nov-91 6.9%
Dec-91 7.1%
Jan-92 7.1%
Feb-92 7.3%
Mar-92 7.3%
Apr-92 7.3%
May-92 7.4%
Jun-92 7.7%
Jul-92 7.6%
Aug-92 7.6%
Sep-92 7.5%
Oct-92 7.4%
Nov-92 7.3%
Dec-92 7.3%
Jan-93 7.1%
Feb-93 7.0%
Mar-93 7.0%
Apr-93 7.0%
May-93 6.9%
Jun-93 6.9%
Jul-93 6.8%
Aug-93 6.7%
Sep-93 6.7%
Oct-93 6.7%
Nov-93 6.5%
Dec-93 6.4%
Jan-94 6.7%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.0%
Jun-94 6.0%
Jul-94 6.1%
Aug-94 6.1%
Sep-94 5.9%
Oct-94 5.6%
Nov-94 5.6%
Dec-94 5.4%
Jan-95 5.6%
Feb-95 5.4%
Mar-95 5.8%
Apr-95 5.7%
May-95 5.7%
Jun-95 5.6%
Jul-95 5.7%
Aug-95 5.3%
Sep-95 5.6%
Oct-95 5.5%
Nov-95 5.6%
Dec-95 5.6%
Jan-96 5.8%
Feb-96 5.5%
Mar-96 5.6%
Apr-96 5.4%
May-96 5.6%
Jun-96 5.3%
Jul-96 5.4%
Aug-96 5.1%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.3%
Jan-97 5.4%
Feb-97 5.3%
</TABLE>
Source: Bloomberg L.P.
- - Although trending up during the second half of the year, the unemployment
rate during 1996 remained near its lows for the decade, leading many
economists to question whether such low levels can continue without
generating inflationary pressures on wages and, ultimately, prices.
13
<PAGE> 20
MEASURES OF INFLATION
[BAR GRAPH]
<TABLE>
<CAPTION>
Monthly Quarterly Employment Employment
Consumer Price Employment Cost Cost Index - Cost Index - 4 Employment Cost
Index - YOY % Index - YOY % Quarterly quarter rolling Index % Change
Change Change (annualized) average (SA) Index (1/90=0)
-------------- --------------- ------------ --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Jan-90 5.2% 5.3% 5.3% 5.1% 1.3% 1.065
Feb-90 5.3% 5.3% 5.3% 5.1% 1.3% 1.065
Mar-90 5.2% 5.3% 5.3% 5.1% 1.3% 1.065
Apr-90 4.7% 5.4% 5.3% 5.3% 1.3% 1.078
May-90 4.4% 5.4% 5.3% 5.3% 1.3% 1.078
Jun-90 4.7% 5.4% 5.3% 5.3% 1.3% 1.078
Jul-90 4.8% 5.1% 4.5% 5.4% 1.1% 1.090
Aug-90 5.6% 5.1% 4.5% 5.4% 1.1% 1.090
Sep-90 6.2% 5.1% 4.5% 5.4% 1.1% 1.090
Oct-90 6.3% 4.8% 4.1% 5.1% 1.0% 1.101
Nov-90 6.3% 4.8% 4.1% 5.1% 1.0% 1.101
Dec-90 6.1% 4.8% 4.1% 5.1% 1.0% 1.101
Jan-91 5.7% 4.6% 4.5% 4.8% 1.1% 1.113
Feb-91 5.3% 4.6% 4.5% 4.8% 1.1% 1.113
Mar-91 4.9% 4.6% 4.5% 4.8% 1.1% 1.113
Apr-91 4.9% 4.5% 4.9% 4.6% 1.2% 1.127
May-91 5.0% 4.5% 4.9% 4.6% 1.2% 1.127
Jun-91 4.7% 4.5% 4.9% 4.6% 1.2% 1.127
Jul-91 4.4% 4.3% 3.6% 4.5% 0.9% 1.137
Aug-91 3.8% 4.3% 3.6% 4.5% 0.9% 1.137
Sep-91 3.4% 4.3% 3.6% 4.5% 0.9% 1.137
Oct-91 2.9% 4.2% 3.6% 4.3% 0.9% 1.147
Nov-91 3.0% 4.2% 3.6% 4.3% 0.9% 1.147
Dec-91 3.1% 4.2% 3.6% 4.3% 0.9% 1.147
Jan-92 2.6% 4.1% 4.1% 4.2% 1.0% 1.159
Feb-92 2.8% 4.1% 4.1% 4.2% 1.0% 1.159
Mar-92 3.2% 4.1% 4.1% 4.2% 1.0% 1.159
Apr-92 3.2% 3.5% 2.8% 4.1% 0.7% 1.167
May-92 3.0% 3.5% 2.8% 4.1% 0.7% 1.167
Jun-92 3.1% 3.5% 2.8% 4.1% 0.7% 1.167
Jul-92 3.2% 3.4% 3.2% 3.5% 0.8% 1.176
Aug-92 3.1% 3.4% 3.2% 3.5% 0.8% 1.176
Sep-92 3.0% 3.4% 3.2% 3.5% 0.8% 1.176
Oct-92 3.2% 3.5% 4.1% 3.4% 1.0% 1.188
Nov-92 3.0% 3.5% 4.1% 3.4% 1.0% 1.188
Dec-92 2.9% 3.5% 4.1% 3.4% 1.0% 1.188
Jan-93 3.3% 3.4% 3.6% 3.5% 0.9% 1.198
Feb-93 3.2% 3.4% 3.6% 3.5% 0.9% 1.198
Mar-93 3.1% 3.4% 3.6% 3.5% 0.9% 1.198
Apr-93 3.2% 3.6% 3.6% 3.4% 0.9% 1.209
May-93 3.2% 3.6% 3.6% 3.4% 0.9% 1.209
Jun-93 3.0% 3.6% 3.6% 3.4% 0.9% 1.209
Jul-93 2.8% 3.6% 3.2% 3.6% 0.8% 1.219
Aug-93 2.8% 3.6% 3.2% 3.6% 0.8% 1.219
Sep-93 2.7% 3.6% 3.2% 3.6% 0.8% 1.219
Oct-93 2.8% 3.4% 3.2% 3.6% 0.8% 1.229
Nov-93 2.7% 3.4% 3.2% 3.6% 0.8% 1.229
Dec-93 2.7% 3.4% 3.2% 3.6% 0.8% 1.229
Jan-94 2.5% 3.2% 2.8% 3.4% 0.7% 1.237
Feb-94 2.5% 3.2% 2.8% 3.4% 0.7% 1.237
Mar-94 2.5% 3.2% 2.8% 3.4% 0.7% 1.237
Apr-94 2.4% 3.1% 3.2% 3.2% 0.8% 1.247
May-94 2.3% 3.1% 3.2% 3.2% 0.8% 1.247
Jun-94 2.5% 3.1% 3.2% 3.2% 0.8% 1.247
Jul-94 2.8% 3.1% 3.2% 3.1% 0.8% 1.257
Aug-94 2.9% 3.1% 3.2% 3.1% 0.8% 1.257
Sep-94 3.0% 3.1% 3.2% 3.1% 0.8% 1.257
Oct-94 2.6% 3.0% 2.8% 3.1% 0.7% 1.266
Nov-94 2.7% 3.0% 2.8% 3.1% 0.7% 1.266
Dec-94 2.7% 3.0% 2.8% 3.1% 0.7% 1.266
Jan-95 2.8% 3.0% 2.8% 3.0% 0.7% 1.275
Feb-95 2.9% 3.0% 2.8% 3.0% 0.7% 1.275
Mar-95 2.9% 3.0% 2.8% 3.0% 0.7% 1.275
Apr-95 3.1% 3.0% 3.2% 3.0% 0.8% 1.285
May-95 3.2% 3.0% 3.2% 3.0% 0.8% 1.285
Jun-95 3.0% 3.0% 3.2% 3.0% 0.8% 1.285
Jul-95 2.8% 2.8% 2.4% 3.0% 0.6% 1.293
Aug-95 2.6% 2.8% 2.4% 3.0% 0.6% 1.293
Sep-95 2.5% 2.8% 2.4% 3.0% 0.6% 1.293
Oct-95 2.8% 2.8% 2.8% 2.8% 0.7% 1.302
Nov-95 2.6% 2.8% 2.8% 2.8% 0.7% 1.302
Dec-95 2.5% 2.8% 2.8% 2.8% 0.7% 1.302
Jan-96 2.7% 2.9% 3.2% 2.8% 0.8% 1.312
Feb-96 2.7% 2.9% 3.2% 2.8% 0.8% 1.312
Mar-96 2.8% 2.9% 3.2% 2.8% 0.8% 1.312
Apr-96 2.9% 2.9% 3.2% 2.9% 0.8% 1.323
May-96 2.9% 2.9% 3.2% 2.9% 0.8% 1.323
Jun-96 2.8% 2.9% 3.2% 2.9% 0.8% 1.323
Jul-96 3.0% 2.9% 2.4% 2.9% 0.6% 1.331
Aug-96 2.9% 2.9% 2.4% 3.9% 0.6% 1.331
Sep-96 3.0% 2.9% 2.4% 2.9% 0.6% 1.331
Oct-96 3.0% 3.0% 3.2% 2.9% 0.8% 1.341
Nov-96 3.3% 3.0% 3.2% 2.9% 0.8% 1.341
Dec-96 3.3% 3.0% 3.2% 2.9% 1.341
Jan-97 3.0% 2.2% 0.0% 3.0% 1.341
Feb-97 3.0% 2.2% 0.0% 3.0% 1.341
</TABLE>
Source: Bloomberg L.P.
- - Although trending slightly upward, both Employment Cost and CPI remained
relatively stable during 1996, reflecting continued low levels of inflation.
- - CPI rose 3.3% in 1996, the highest annual rate since 1990. However, the core
rate (which excludes the more volatile food and energy components) rose just
2.6%, the lowest rate since 1965.
- - The Fed has indicated its belief that the economy remains in the zone where
inflation risks are on the upside and that it is poised to act preemptively
by raising interest rates if necessary. The Fed did take action in March by
increasing the Fed Funds Rate by 0.25%.
14
<PAGE> 21
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
[GRAPH]
<TABLE>
<CAPTION>
Monthly Total Return
--------------------------------------------
Lehman
MF
Schwab Schwab General
Small Cap Int'l US Govt.
S&P 500 Index Index Index
------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Sep-96 5.62% 3.68% 2.94% 1.66%
Oct-96 2.76% -1.71% -0.34% 2.20%
Nov-96 7.56% 3.98% 4.64% 1.74%
Dec-96 -1.98% 1.86% -0.88% -1.02%
Jan-97 6.24% 2.36% -3.32% 0.11%
Feb-97 0.79% -2.44% 1.67% 0.14%
</TABLE>
<TABLE>
<CAPTION>
Growth of a $ Investment
--------------------------------------------
Lehman
MF
Schwab Schwab General
Small Cap Int'l US Govt.
S&P 500 Index Index Index
------- --------- ----------- ---------
<S> <C> <C> <C> <C>
$1.000 $1.000 $1.000 $1.000
Sep-96 1.056 1.037 1.029 1.017
Oct-96 1.085 1.019 1.026 1.039
Nov-96 1.167 1.060 1.074 1.057
Dec-96 1.144 1.079 1.064 1.046
Jan-97 1.216 1.105 1.029 1.047
Feb-97 1.225 1.078 1.046 1.049
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The
indices are representative returns of specific market sectors during
the Fund's reporting period and do not reflect Fund performance.
Indices are unmanaged and, unlike a fund, do not reflect the payment of
advisory fees and other expenses associated with an investment in a
fund. Investors cannot invest in an index directly.
- - Large cap domestic stocks, as represented by the S&P 500, were clearly the
strongest performing asset class, achieving a 22.5% return during the
six-month reporting period.
- - Although positive, domestic small cap stock (as represented by the Schwab
Smal-Cap Index) and international stock total returns (as represented by the
Schwab International Index) both lagged the S&P 500 with six-month returns of
7.8% and 4.6%, respectively.
- - The six-month total return for U.S. Government bonds (as represented by the
Lehman Mutual Fund General U.S. Government Index) was 4.9%.
15
<PAGE> 22
S&P PRICE EARNINGS RATIO
[GRAPH]
<TABLE>
<CAPTION>
S&P 500
Price
Earnings
Ratio
--------
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
</TABLE>
Source: Bloomberg L.P.
- - The price earnings ratio for the S&P 500 was 21 at the close of the reporting
period, well above its 30-year mean of 15, but below its 1992 and 1987 highs
of 26 and 22, respectively.
- - Based on other traditional measures such as the price-to-book value ratio or
dividend yield, the U.S. stock market valuation, as measured by the S&P 500,
reached historical highs during the reporting period.
16
<PAGE> 23
30-YEAR AND 5-YEAR TREASURY BOND YIELDS
[GRAPH]
<TABLE>
<CAPTION>
Thirty
Year Five Year
Treasury Treasury
Bond Bond
-------- ---------
<S> <C> <C>
9/6/96 7.11% 6.70%
9/13/96 6.95% 6.47%
9/20/96 7.04% 6.62%
9/27/96 6.91% 6.44%
10/4/96 6.74% 6.21%
10/11/96 6.85% 6.28%
10/18/96 6.80% 6.25%
10/25/96 6.82% 6.26%
11/1/96 6.68% 6.11%
11/8/96 6.51% 6.03%
11/15/96 6.46% 5.96%
11/22/96 6.44% 5.93%
11/29/96 6.35% 5.83%
12/6/96 6.51% 5.99%
12/13/96 6.57% 6.05%
12/20/96 6.61% 6.14%
12/27/96 6.56% 6.08%
1/3/97 6.73% 6.27%
1/10/97 6.85% 6.38%
1/17/97 6.82% 6.31%
1/24/97 6.89% 6.39%
1/31/97 6.79% 6.25%
2/7/97 6.70% 6.15%
2/14/97 6.52% 6.06%
2/21/97 6.64% 6.16%
2/28/97 6.80% 6.39%
</TABLE>
Source: Bloomberg L.P.
- - Yields remained in a somewhat narrow range during the six-month reporting
period. The first three months were characterized by weaker economic data.
Lower interest rates prompted renewed refinancing activity and consumer
spending, resulting in better employment growth which lead to higher rates
during the second half of the period.
17
<PAGE> 24
30-YEAR AND 5-YEAR AAA GENERAL OBLIGATION
MUNICIPAL BOND YIELDS
[GRAPH]
<TABLE>
<CAPTION>
30 year 5 year
AAA GO AAA GO
Muni Muni
Bond Bond
Yields Yields
------- -------
<S> <C> <C>
9/6/96 5.75% 4.58%
9/13/96 5.64% 4.48%
9/20/96 5.69% 4.54%
9/27/96 5.60% 4.45%
10/4/96 5.47% 4.40%
10/11/96 5.55% 4.48%
10/18/96 5.57% 4.49%
10/25/96 5.62% 4.48%
11/1/96 5.55% 4.41%
11/8/96 5.49% 4.35%
11/15/96 5.44% 4.30%
11/22/96 5.41% 4.25%
11/29/96 5.32% 4.18%
12/6/96 5.40% 4.26%
12/13/96 5.42% 4.28%
12/20/96 5.42% 4.28%
12/27/96 5.38% 4.24%
1/3/97 5.44% 4.30%
1/10/97 5.55% 4.41%
1/17/97 5.53% 4.43%
1/24/97 5.54% 4.44%
1/31/97 5.51% 4.41%
2/7/97 5.45% 4.35%
2/14/97 5.33% 4.23%
2/21/97 5.39% 4.29%
2/28/97 5.44% 4.34%
</TABLE>
Source: Bloomberg L.P.
- - Municipal bond yields experienced a pattern similar to Treasury bond yields
and finished the reporting period approximately 0.25% lower than the start of
the period.
18
<PAGE> 25
RATIO OF MUNICIPAL TO TREASURY BOND YIELDS
[GRAPH]
<TABLE>
<CAPTION>
30 Year 5 Year
------- ------
<S> <C> <C>
9/6/96 80.9% 68.4%
9/13/96 81.2% 69.2%
9/20/96 80.8% 68.6%
9/27/96 81.1% 69.2%
10/4/96 81.1% 70.9%
10/11/96 81.1% 71.4%
10/18/96 81.9% 71.8%
10/25/96 82.5% 71.6%
11/1/96 83.1% 72.2%
11/8/96 84.4% 72.2%
11/15/96 84.2% 72.2%
11/22/96 84.1% 71.7%
11/29/96 83.8% 71.7%
12/6/96 82.9% 71.1%
12/13/96 82.5% 70.7%
12/20/96 82.0% 69.7%
12/27/96 82.0% 69.7%
1/3/97 80.8% 68.6%
1/10/97 81.1% 69.1%
1/17/97 81.1% 70.3%
1/24/97 80.4% 69.5%
1/31/97 81.2% 70.6%
2/7/97 81.3% 70.8%
2/14/97 81.7% 69.8%
2/21/97 81.1% 69.6%
2/28/97 80.0% 68.0%
</TABLE>
Source: Bloomberg L.P.
- - An upward slope in these lines indicates that municipal yields are rising
relative to Treasury yields and that municipal bond values are falling (or
not rising as fast) relative to Treasury yields. A downward slope indicates
the reverse. The reason for the yield differential of approximately 10% is
that the holders of long-term tax-exempt bonds demand higher yields to
compensate for the increased credit risk associated with holding any
long-term bond not backed by the U.S. Government.
- - Although impacted by seasonal supply and demand conditions, the relationship
between Treasury and municipal bond yields remained fairly constant during
the reporting period.
19
<PAGE> 26
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
Q. SINCE THE STOCK MARKET HAS ACHIEVED RECORD HIGHS, IS IT TIME TO THINK ABOUT
CHANGING MY ASSET ALLOCATION PLAN?
A. Whenever there has been a significant divergence in returns between asset
classes, it is often a good time to review your portfolio asset allocation. For
example, for the three year period ended 12/31/96, total returns on large-cap
domestic stocks far exceeded domestic bond returns. The Schwab 1000 Fund(R) and
the Schwab Long-Term Government Bond Fund experienced three year total returns
of 75.4% and 20.2%, respectively#. 1 As shown in the hypothetical example
below, if an investor had a portfolio with an asset allocation of 60% stocks and
40% bonds (investing in just these two funds) at the beginning of the period,
and reinvested all fund distributions, the asset allocation mix would have
shifted to 69% stocks and 31% bonds by the end of the period -- a significant
shift from the investor's intended strategy.
<TABLE>
<CAPTION>
12/31/93 Portfolio Three Year 12/31/96 Portfolio
------------------ ------------------
Value Allocation Growth Value Allocation
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Schwab 1000 Fund $ 6,000 60% $4,524 $10,524 69%
Schwab Long-Term
Government Bond Fund $ 4,000 40% $ 808 $ 4,808 31%
Total Portfolio Value $10,000 100% $5,332 $15,332 100%
</TABLE>
Rather than trying to time markets, we feel that investors should focus on their
own risk profiles and income needs to determine the most appropriate level of
bonds in their portfolios. In addition to providing income, bonds have
performance characteristics which make them an attractive element of a well
diversified investment portfolio. Since bond returns have historically not been
well correlated with stock returns, 2 combining bonds in a portfolio with
stocks can be an effective tool to reduce total portfolio volatility.
1 Total return assumes reinvestment of all dividends and capital gain
distributions, if any. Past performance is no guarantee of future results.
Principal value and investment returns will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than their original cost. The
Investment Manager and Schwab waived a portion of both Funds' fees during the
period. Without the waiver, each Fund's total return would have been lower.
2 Source: Symphony Asset Management. For the 20-year period ended 12/31/96,
the correlation of large-cap stock returns and government bond returns has been
0.37.
20
<PAGE> 27
Q. HOW WERE THE FUNDS MANAGED DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE
TO THE PORTFOLIO?
A. As shown in the Investment Quality Summary, the investment portfolio
consisted primarily of high quality securities (primarily AAA and AA). We felt
this was an appropriate strategy for the Funds since there was evidence of very
little yield advantage associated with lower rated securities -- it simply did
not appear that investors were being adequately compensated for the higher risk.
In both Funds, we continue to execute a cautious strategy, carefully watching
economic indicators and monitoring Federal Reserve Bank communications regarding
its target level for short term interest rates.
Reflecting our cautious outlook for the market, the Short/Intermediate Tax-Free
Bond Fund maintained an average maturity throughout the reporting period in a
narrow range from 3.1 to 3.7 years. The Fund's weighted average maturity at the
end of the period was 3.28 years, down slightly from 3.75 years at the beginning
of the period.
The Long-Term Tax-Free Bond Fund maintained its weighted average maturity within
a range from 17 to 20 years. In early December, we did extend the Fund from
approximately 18 to approximately 19.25 years, reflecting our assessment that
municipal securities were competitively priced. Currently, it does not appear
advisable to extend the maturity beyond this range because the yield curve is
very flat beyond 20 years, indicating that there may be very little yield
advantage associated with the longer maturities. We saw insufficient evidence
that investors were being adequately rewarded for the additional risk. The
Fund's weighted average maturity at the end of the period was 18.01 years,
compared to 20.25 years at the beginning of the period.
Q. IS MY INVESTMENT GUARANTEED BY THE FEDERAL GOVERNMENT OR ANY OF THE STATES?
A. No. As shown in the Schedule of Investments at the end of this report, each
Fund invests primarily in bonds issued by state and local governments. There is
no explicit or implicit guarantee of repayment by any of these agencies. A
municipal bond fund can help minimize credit risk by diversifying among issuers,
21
<PAGE> 28
and maintaining adequate portfolio credit quality. As shown on page 10, at the
close of the reporting period, 91% of the Short/Intermediate Tax-Free Bond
Fund's assets were in credit quality investments (AAA, AA, or A) and 93% of the
Long-Term Tax-Free Bond Fund's assets were invested in AAA, AA, or A rated
securities.
Having said this, tax-free bond funds, like corporate or government bond funds,
are subject to the same type of net asset value fluctuations resulting from
interest rate changes. Rising interest rates will cause bond values to fall, and
funds with longer maturities will experience the most significant declines.
Although tax-free bond funds can reduce credit-related risk exposure by being
well diversified and maintaining credit quality, shareholders have no guarantees
protecting them from either credit or interest rate-related losses.
22
<PAGE> 29
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- --------------------------------------------------------------
PORTFOLIO SUMMARY
(Unaudited)
ASSET CHANGE
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Change Over
as of 2/28/97 as of 8/31/96 Reporting
(000s) (000s) Period
- --------------------------------------------------------------
<S> <C> <C>
$53,625 $ 54,132 (1%)
- --------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1997
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
1 - 6 Months $ 3,744 7.1% 7.1%
7 - 36 Months 14,690 27.8 34.9
37 - 60 Months 30,412 57.7 92.6
Over 60 Months 3,900 7.4 100.0%
------- -----
$52,746 100.0%
======= =====
Average Weighted Maturity--3.28 Years
</TABLE>
23
<PAGE> 30
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------
PORTFOLIO SUMMARY
(Unaudited)
ASSET CHANGE
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Change Over
as of 2/28/97 as of 8/31/96 Reporting
(000s) (000s) Period
- ------------------------------------------------------------
<S> <C> <C>
$43,482 $ 43,672 0%
- ------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1997
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- ------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
0 - 1 Year $ 3,163 6.9% 6.9%
2 - 20 Years 25,523 56.1 63.0
21 - 30 Years 14,995 32.9 95.9
Over 30 Years 1,875 4.1 100.0%
------- -----
$45,556 100.0%
======= =====
Average Weighted Maturity--18.01 Years
</TABLE>
24
<PAGE> 31
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
MUNICIPAL BONDS--95.7%(a)
ALABAMA--2.1%
Birmingham, Alabama Special Care Facilities
Finance Authority Hospital Revenue Bonds
(Daughters of Charity National Health
System--St. Vincent's Hospital & Providence)
Series 1995 (Aa AA)
7.00%, 11/01/01 $1,000 $1,095
-----
ALASKA--2.2%
Anchorage, Alaska Refunding School Bonds Series
1993A/ (MBIA Insurance) (Aaa AAA)
5.10%, 08/01/99 1,145 1,171
-----
ARIZONA--3.9%
Phoenix, Arizona Civic Improvement Corp.
Wastewater Systems Lease Revenue Bonds Series
1993 (A1 A)
5.10%, 07/01/99 1,005 1,025
Phoenix, Arizona Senior Lien Street & Highway
Revenue Refunding Bonds Series 1992 (A1 AA)
5.95%, 07/01/00 1,000 1,051
-----
2,076
-----
CONNECTICUT--6.9%
Connecticut State Special Tax Obligation
Refunding Bonds (Transportation Infrastructure
Purposes) Series 1995C/ (FGIC Insurance) (Aaa AAA)
5.50%, 10/01/00 2,000 2,090
Connecticut State Unlimited General Obligation
Bonds Series 1996B (Aa AA-)
5.00%, 08/15/01 1,500 1,545
-----
3,635
-----
ILLINOIS--2.2%
Illinois Health Facility Authority Revenue Bonds
(OSF Healthcare System) Series 1993 (A1 AA-)
5.13%, 11/15/00 1,145 1,165
-----
IOWA--4.3%
Black Hawk County, Iowa Hospital Facilities
Revenue Bonds (Allen Memorial Hospital) Series
1990 (Pre-Refunded)/ (AMBAC Insurance &
Escrowed to Maturity with Government
Securities) (Aaa AAA)
7.38%, 02/01/01 2,000 2,253
-----
</TABLE>
25
<PAGE> 32
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
KENTUCKY--5.2%
Kentucky Housing Corp. Revenue Bonds Series
1993B/(Multiple Credit Enhancements) (Aaa AAA)
4.45%, 07/01/00 $1,000 $1,000
Kentucky State Property & Buildings Commission
Revenue Refunding Bonds (Project 55) (A A+)
4.15%, 09/01/99 1,735 1,728
-----
2,728
-----
MARYLAND--6.0%
Washington, Maryland Suburban Sanitation District
Sewage Disposal Refunding Bonds (Montgomery &
Prince George Counties) (Aa1 AA)
6.00%, 11/01/99 3,000 3,150
-----
MASSACHUSETTS--5.8%
Massachusetts Municipal Wholesale Electric Co.
Power Supply Systems Revenue Bonds Series
1992E/(AMBAC Insurance) (Aaa AAA)
5.50%, 07/01/00 2,000 2,080
Massachusetts State Health & Educational
Facilities Authority Revenue Bonds (Brigham &
Womens Hospital) Series E (A1 A+)
4.40%, 07/01/00 1,000 1,001
-----
3,081
-----
MICHIGAN--2.1%
Michigan State Hospital Finance Authority Revenue
Bonds (McLaren Obligated Group)/(Escrowed to
Maturity with Government Securities) (Aaa -)
7.00%, 09/15/00 1,000 1,106
-----
MINNESOTA--8.6%
Minneapolis, Minnesota Community Development
Agency Tax Increment Revenue Bonds/(MBIA
Insurance) (Aaa AAA)
7.00%, 09/01/00 1,000 1,093
Minnesota State Housing Finance Agency Rental
Housing Revenue Bonds Series D/(MBIA Insurance)
(Aaa AAA)
4.80%, 08/01/01 2,310 2,315
St. Paul, Minnesota Sewer Revenue Bonds Series A
(A BBB+)
8.00%, 12/01/98 1,050 1,125
-----
4,533
-----
</TABLE>
26
<PAGE> 33
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
MISSISSIPPI--3.9%
Mississippi Hospital Equipment & Facilities
Authority Revenue Refunding Bonds (Mississippi
Baptist Medical Center)/(MBIA Insurance) (Aaa AAA)
5.25%, 05/01/01 $2,000 $2,055
-----
MISSOURI--1.0%
Missouri State Environmental Improvement & Energy
Resources Authority Water Pollution Control
Revenue Bonds (State Revolving Fund Program)
Series 1992A (Aa2 -)
5.80%, 07/01/99 500 519
-----
NEW YORK--3.9%
New York State Dormitory Authority Lease Revenue
Refunding Bonds (State University Dormitory
Facilities) Series 1995A/(AMBAC Insurance) (Aaa AAA)
5.10%, 07/01/01 2,000 2,058
-----
OHIO--7.7%
Ohio State Public Facilities Commission Higher
Education Capital Facilities Revenue Bonds
Series II-A/(MBIA Insurance) (Aaa AAA)
4.38%, 11/01/00 2,000 2,005
Ohio State Public Facilities Commission Higher
Education Capital Facilities Revenue Bonds
Series II-B/(FSA LOC) (Aaa AAA)
5.00%, 11/01/01 2,000 2,050
-----
4,055
-----
PENNSYLVANIA--2.3%
Pennsylvania State Industrial Development
Authority Revenue Bonds/(AMBAC Insurance) (Aaa AAA)
4.50%, 07/01/98 1,230 1,239
-----
RHODE ISLAND--2.8%
Rhode Island Student Loan Authority Revenue Put
Bonds Series 96-1/(National Westminster Bank
LOC) (- AA)
4.00%, 06/01/97 1,500 1,500
-----
</TABLE>
27
<PAGE> 34
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
SOUTH CAROLINA--6.5%
Charleston, South Carolina Public Facilities
Certificates of Participation (Public
Improvement Project) Series 1993/ (AMBAC
Insurance) (Aaa AAA)
4.30%, 09/01/00 $1,085 $ 1,080
Greenville Hospital System Board of Trustees,
South Carolina Hospital Facilities Revenue
Refunding Bonds Series 1993C (- AA-)
5.00%, 05/01/00 1,090 1,100
South Carolina State Public Service Authority
Power Electric Revenue Refunding Bonds (Santee
Cooper) Series 1991A (Aa A+)
5.60%, 07/01/00 1,200 1,244
------
3,424
------
TENNESSEE--5.2%
Knox County, Tennessee Health & Education
Hospital Facilities Revenue Bonds (Fort Sanders
Alliance) Series 1990C (Pre-Refunded)/(MBIA
Insurance) (Aaa AAA)
7.00%, 01/01/00 2,500 2,725
------
TEXAS--1.9%
Houston, Texas General Obligation Revenue Bonds
Series 1995A (Aa3 AA)
5.30%, 03/01/01 1,000 1,026
------
WASHINGTON--9.3%
Port of Seattle, Washington Revenue Bonds Series
B/ (FGIC Insurance) (Aaa AAA)
5.50%, 09/01/02 2,775 2,882
Washington State Public Power Supply System
Revenue Refunding Bonds (Nuclear Project #2)
Series A (Aa1 AA-)
4.63%, 07/01/98 2,000 2,008
------
4,890
------
WISCONSIN--1.9%
Wisconsin State Health & Education Facilities
Authority Revenue Bonds (Aurora Medical Group
Project) Series 1996/(FSA Insurance) (Aaa AAA)
4.90%, 11/15/02 1,000 1,018
------
TOTAL MUNICIPAL BONDS (Cost $49,998) 50,502
------
</TABLE>
28
<PAGE> 35
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--4.2%(b)
CALIFORNIA--3.1%
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986A (VMIG1 A-1+)
3.45%, 03/01/97 $800 $ 800
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds (District Nos. 102, 103, 105,
106)/(Commerzbank AG LOC) (VMIG1 A-1+)
3.35%, 03/01/97 90 90
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds (District Nos. 140, 240, 105,
250) Series 1985B/(Bank of America LOC) (VMIG1 A-1+)
3.35%, 03/01/97 100 100
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985B-2/(Landesbank
Hessen-Thuringen Girozentrale LOC) (- A-1+)
3.25%, 03/01/97 200 200
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1993A-1/(Landesbank
Hessen-Thuringen Girozentrale LOC) (- A-1+)
3.25%, 03/01/97 400 400
-----
1,590
-----
FLORIDA--0.2%
Hillsborough County, Florida Industrial
Development Pollution Control Revenue Refunding
Bonds (Tampa Electric/Gannon Coal Conversion)
Series 1992 (VMIG1 A-1+)
3.45%, 03/01/97 100 100
-----
WYOMING--0.9%
Lincoln County, Wyoming Pollution Control Revenue
Bonds (Exxon Project) Series 1987B (P-1 A-1+)
3.50%, 03/01/97 500 500
-----
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $2,190) 2,190
-----
SHORT-TERM INVESTMENTS--0.1%(c)
Provident Institutional Funds--MuniFund Portfolio
2.92%, 03/07/97 54 54
------
TOTAL SHORT-TERM INVESTMENTS
(Cost $54) 54
------
TOTAL INVESTMENTS--100%
(Cost $52,242) $52,746
======
</TABLE>
See accompanying Notes to Schedules of Investments.
29
<PAGE> 36
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
MUNICIPAL BONDS--93.1%(a)
ALASKA--9.7%
Kodiak Island Borough, Alaska General Obligation
Bonds Series 1994A/(AMBAC Insurance) (Aaa AAA)
5.40%, 02/15/10 $2,500 $2,477
Valdez, Alaska Marine Terminal Revenue Refunding
Bonds (BP Pipeline Project) Series 1993B (Aaa AAA)
5.50%, 10/01/28 2,000 1,875
-----
4,352
-----
ARIZONA--4.9%
Maricopa County, Arizona Alhambra Elementary School
District 68 School Improvement & Refunding Bonds
Series 1994A/(AMBAC Insurance) (Aaa AAA)
6.80%, 07/01/12 2,000 2,245
-----
CALIFORNIA--8.0%
California State Public Works Board Lease Revenue
Refunding Bonds (Various California State
University Projects)/(AMBAC Insurance) (Aaa AAA)
5.38%, 10/01/17 800 777
San Diego, California Public Facilities Financing
Authority Sewer Revenue Bond/(FGIC Insurance)
(Aaa AAA)(d)
5.25%, 05/15/22 1,700 1,617
Santa Clara County, California Financing Authority
Lease Revenue Bonds (VMC Facility Replacement
Project) Series 1994A/(AMBAC Insurance) (Aaa AAA)
7.75%, 11/15/10 1,000 1,253
-----
3,647
-----
CONNECTICUT--0.2%
Connecticut State Housing Finance Authority Bonds
(Housing Mortgage Finance Program) Series 1990B
Subseries B-1 (Aa AA)
7.55%, 11/15/08 85 89
-----
FLORIDA--2.8%
Hillsborough County, Florida Aviation Revenue Bonds
(Tampa International Airport) Series B/(FGIC
Insurance) (Aaa AAA)
5.88%, 10/01/23 1,250 1,275
-----
</TABLE>
30
<PAGE> 37
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
ILLINOIS--8.4%
Chicago, Illinois General Obligation Refunding
Bonds Series A-2/(AMBAC Insurance) (Aaa AAA)
6.00%, 01/01/11 $2,500 $2,671
Illinois State Toll Highway Authority Priority
Revenue Bonds Series 1992A (A1 A+)
6.38%, 01/01/15 1,100 1,161
-----
3,832
-----
IOWA--2.5%
Ames, Iowa Hospital Revenue Bonds (Mary Greeley
Medical Center Project) Series 1993/ (AMBAC
Insurance) (Aaa AAA)
5.70%, 08/15/12 500 510
Cedar Rapids, Iowa Hospital Facilities Revenue
Bonds (St. Luke's Methodist Project) Series 1993/
(FGIC Insurance) (Aaa AAA)
6.13%, 08/15/13 600 619
-----
1,129
-----
MARYLAND--0.9%
Maryland State Community Development Administration
Department of Housing & Community Development
Revenue Bonds Series A (Aa -)
5.88%, 07/01/16 400 404
-----
MASSACHUSETTS--1.9%
Massachusetts State Housing Finance Agency Multi
Family Residential Housing Revenue Bonds Series
1989A (A A+)
7.80%, 08/01/22 800 845
-----
MICHIGAN--7.4%
Eastern Michigan University Board of Regents
Revenue Bonds/ (FGIC Insurance) (Aaa AAA)
5.50%, 06/01/17 2,000 1,982
Michigan State Hospital Finance Authority Hospital
Revenue Bonds (St. John's Hospital & Medical
Center)/(AMBAC Insurance) (Aaa AAA)
5.25%, 05/15/26 1,500 1,401
-----
3,383
-----
MISSISSIPPI--4.9%
Mississippi Hospital Equipment & Facilities
Authority Revenue Refunding Bonds (Mississippi
Baptist Medical Center) Series 1995/(MBIA
Insurance) (Aaa AAA)
6.00%, 05/01/13 2,150 2,233
-----
</TABLE>
31
<PAGE> 38
SCHWAB LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
NEVADA--4.3%
Nevada State Municipal General Obligation Bonds
Series A/(FGIC Insurance) (Aaa AAA)
5.50%, 11/01/25 $2,000 $1,978
-----
NEW HAMPSHIRE--1.7%
New Hampshire Higher Education & Health Facilities
Authority Hospital Revenue Bonds (Mary Hitchcock
Memorial Hospital) Series 1993A/(FGIC Insurance)
(Aaa AAA)
5.25%, 08/15/08 750 755
-----
NEW YORK--4.2%
New York State General Obligation Bonds Series
1996A (A2 A-)
5.30%, 07/15/15 2,000 1,935
-----
NORTH CAROLINA--4.1%
North Carolina Medical Care Community Health Care
Facilities Revenue Bonds (Care Medical Project)
(Aa3 AA)
5.25%, 05/01/21 2,000 1,888
-----
PENNSYLVANIA--9.4%
Pennsylvania Higher Education Facilities Authority
Revenue Bonds (University of Pennsylvania Health
Services) Series 1996A (Aa AA)
5.75%, 01/01/17 2,000 2,010
Philadelphia, Pennsylvania Hospitals & Higher
Education Facilities Authority Revenue Refunding
Bonds (Children's Hospital) Series 1993A (Aa3 AA)
5.25%, 02/15/08 1,000 1,000
Pittsburgh, Pennsylvania Water & Sewer Authority
Revenue Bonds Series B/(FSA Insurance) (Aaa AAA)
5.75%, 09/01/25 1,250 1,253
-----
4,263
-----
RHODE ISLAND--2.3%
Rhode Island Housing & Mortgage Finance Corp.
Homeownership Opportunity Bonds Series 10A (Aa AA+)
6.50%, 10/01/22 1,000 1,038
-----
SOUTH CAROLINA--3.3%
Piedmont, South Carolina Municipal Power Agency
Electric Revenue Refunding Bonds Series 1992/
(MBIA Insurance) (Aaa AAA)
6.20%, 01/01/08 1,400 1,526
------
</TABLE>
32
<PAGE> 39
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
TEXAS--6.0%
Conroe, Texas Independent School District General
Obligation Bonds/(Permanent School Fund Guaranty
LOC) (Aaa AAA)(d)
5.25%, 02/21/21 $1,000 $ 943
Texas State Public Finance Authority General
Obligation Bonds Series 1994B (Aa AA)
5.75%, 10/01/14 1,025 1,052
University of Texas Revenue Refunding Bonds Series
B (Aa1 AAA)
6.75%, 08/15/13 680 740
------
2,735
------
WASHINGTON--6.2%
King County, Washington School District General
Obligation Bonds No. 415 Series A (A1 AA-)
5.55%, 12/01/11 500 508
Seattle, Washington Municipal Light & Power Revenue
Refunding Bonds Series 1993 (Aa AA)
5.40%, 05/01/08 2,300 2,334
------
2,842
------
TOTAL MUNICIPAL BONDS
(Cost $41,105) 42,394
------
VARIABLE RATE OBLIGATIONS--6.8%(B)
CALIFORNIA--6.4%
California Pollution Control Financing Authority
Pollution Control Revenue Bonds (Southern
California Edison) Series 1986D (P-1 A-1+)
3.45%, 03/01/97 100 100
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985A-2/(Landesbank
Hessen-Thuringen Girozentrale LOC) (- A-1+)
3.35%, 03/01/97 2,000 2,000
Orange County, California Water District
Improvement Bond Act 1915 Revenue Bonds (Irvine
Coast Assessment District) Number
88-1/(Kredietbank & Societe Generale LOC) (VMIG1 A-1+)
3.40%, 03/01/97 800 800
------
2,900
------
</TABLE>
33
<PAGE> 40
SCHWAB LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--- -----
<S> <C> <C>
NORTH CAROLINA--0.4%
Wake County, North Carolina Pollution Control
Revenue Bonds (Carolina Power & Light)/(Sumitomo
Bank LOC) (A1 P-1)
3.55%, 03/01/97 $200 $ 200
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $3,100) 3,100
-------
SHORT-TERM INVESTMENTS--0.1%(c)
Provident Institutional Funds--MuniFund Portfolio
2.92%, 03/07/97 62 62
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $62) 62
-------
TOTAL INVESTMENTS--100%
(Cost $44,267) $45,556
=======
</TABLE>
34
<PAGE> 41
- ------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investor Services, Inc. and
Standard & Poor's Ratings Group which were in effect on the report date.
(a) Interest rates represent the coupon rate of security.
(b) Variable rate securities. Interest rates vary periodically based on
current market rates. Rates shown are the effective rates on the report
date. 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.
(c) Interest rates represent the yield on the report date.
(d) Security traded on a delayed-delivery basis. Payment and delivery is
scheduled for a future time, generally within two weeks of entering
into the transaction. The transaction is subject to market fluctuation
and to the risk that the value may be more or less than the purchase
price when the transaction was initiated. The Fund has set aside
sufficient investment securities as collateral for securities purchased
on a delayed-delivery basis.
<TABLE>
<CAPTION>
Abbreviations
- --------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
VMIG Variable Moody's Investment Grade
</TABLE>
See accompanying Notes to Financial Statements.
35
<PAGE> 42
- --------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $52,242 and $44,267,
respectively) $52,746 $45,556
Interest receivable 716 572
Receivable for Fund shares sold 204 4
Deferred organization costs 24 8
Prepaid expenses 21 2
------- -------
Total assets 53,711 46,142
------- -------
LIABILITIES
Payable for:
Dividends 18 18
Investments purchased -- 2,595
Fund shares redeemed 22 9
Investment advisory and administration
fee -- 3
Other 46 35
------- -------
Total liabilities 86 2,660
------- -------
Net assets applicable to outstanding
shares $53,625 $43,482
======= =======
NET ASSETS CONSIST OF:
Paid-in-capital $53,649 $42,400
Overdistributed net investment income (11) (8)
Accumulated net realized loss on
investments sold (517) (199)
Net unrealized gain on investments 504 1,289
------- -------
$53,625 $43,482
======= =======
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 5,287 4,181
Net asset value, offering and
redemption price per share $ 10.14 $ 10.40
</TABLE>
See accompanying Notes to Financial Statements.
36
<PAGE> 43
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Six months ended February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
Interest income $1,209 $1,207
------ ------
Expenses:
Investment advisory and administration fee 109 88
Transfer agency and shareholder service
fees 66 54
Custodian fees 19 16
Registration fees 17 33
Professional fees 10 14
Shareholder reports 11 9
Trustees' fees 2 1
Amortization of deferred organization costs 7 8
Insurance and other expenses 4 4
------ ------
245 227
Less expenses reduced (see Note 4) (115) (122)
------ ------
Total expenses incurred by Fund 130 105
------ ------
Net investment income 1,079 1,102
------ ------
Net realized gain on investments sold 20 191
Increase in net unrealized gain on
investments 563 995
------ ------
Net gain on investments 583 1,186
------ ------
Increase in net assets resulting from
operations $1,662 $2,288
====== ======
</TABLE>
See accompanying Notes to Financial Statements.
37
<PAGE> 44
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab
Schwab Long-Term
Short/Intermediate Tax-Free Bond Fund
Tax-Free Bond Fund -------------------------
-------------------------- Six months
Six months ended
ended Year February Year
February 28, ended 28, ended
1997 August 31, 1997 August 31,
(Unaudited) 1996 (Unaudited) 1996
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,079 $ 2,146 $ 1,102 $ 2,193
Net realized gain on investments sold 20 150 191 423
Increase (decrease) in net unrealized gain
on investments 563 (590) 995 (635)
------- -------- ------- --------
Increase in net assets resulting from
operations 1,662 1,706 2,288 1,981
------- -------- ------- --------
Dividends to shareholders from net
investment income (1,102) (2,147) (1,125) (2,193)
------- -------- ------- --------
Capital share transactions:
Proceeds from shares sold 7,696 19,101 5,581 18,452
Net asset value of shares issued in
reinvestment of dividends 884 1,701 790 1,569
Less payments for shares redeemed (9,647) (18,733) (7,724) (17,550)
------- -------- ------- --------
Increase (decrease) in net assets from
capital share transactions (1,067) 2,069 (1,353) 2,471
------- -------- ------- --------
Total increase (decrease) in net assets (507) 1,628 (190) 2,259
Net assets:
Beginning of period 54,132 52,504 43,672 41,413
------- -------- ------- --------
End of period (including
(over)undistributed net investment income
of ($11), $12, ($8) and $15,
respectively) $53,625 $54,132 $43,482 $ 43,672
======= ======== ======= ========
Number of Fund shares:
Sold 761 1,891 540 1,797
Reinvested 87 168 76 153
Redeemed (954) (1,854) (747) (1,714)
------- -------- ------- --------
Net increase (decrease) in shares
outstanding (106) 205 (131) 236
Shares outstanding:
Beginning of period 5,393 5,188 4,312 4,076
------- -------- ------- --------
End of period 5,287 5,393 4,181 4,312
======= ======== ======= ========
</TABLE>
See accompanying Notes to Financial Statements.
38
<PAGE> 45
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Six months ended February 28, 1997 (Unaudited)
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free
Bond Fund (the "Funds") are series of Schwab Investments (the "Trust"), a no
load, open-end, management investment company organized as a Massachusetts
business trust on October 26, 1990 and registered under the Investment Company
Act of 1940, as amended.
In addition to the Funds, the Trust also offers -- the Schwab 1000 Fund(R),
Schwab Short/Intermediate Government Bond Fund, Schwab Long-Term Government Bond
Fund, Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund. The assets of each series are
segregated and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities within 60 days or less of maturity are stated at amortized
cost, which approximates market value.
Security transactions and interest income -- Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Realized
gains and losses from security transactions are determined on an identified cost
basis. Interest income is accrued on a daily basis and includes amortization of
premium on investments. 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.
39
<PAGE> 46
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
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 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 generally 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 28, 1997, (for financial reporting and federal income tax purposes),
net unrealized gain for the Schwab Short/Intermediate Tax-Free Bond Fund
aggregated $504,000, of which $556,000 related to appreciated securities and
$52,000 related to depreciated securities, and net unrealized gain for the
Schwab Long-Term Tax-Free Bond Fund aggregated $1,289,000, of which $1,331,000
related to appreciated securities and $42,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. The Investment Manager has reduced a portion of its
fee for the six months ended February 28, 1997 (see Note 4).
40
<PAGE> 47
- ------------------------------------------------------------------------------
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
Schwab has reduced a portion of its fees for the six months ended February 28,
1997 (see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
six months ended February 28, 1997, the Trust made no direct payments to its
officers or trustees who are "interested persons" within the meaning of the
Investment Company Act of 1940, as amended. The Funds incurred fees aggregating
$3,000 related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit each Fund's ratio of operating expenses to average net assets for each
Fund. During the six months ended February 28, 1997, the total of such fees
reduced by the Investment Manager and Schwab were $49,000 and $66,000 for the
Schwab Short/Intermediate Tax-Free Bond Fund, respectively, and $68,000 and
$54,000 for the Schwab Long-Term Tax-Free Bond Fund, respectively (see Note 6).
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the six months ended February 28, 1997, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
<S> <C> <C>
Purchases $3,293 $11,236
Proceeds of sales and
maturities $5,456 $12,834
</TABLE>
41
<PAGE> 48
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
6. FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate
Tax-Free Bond Fund
---------------------------------------------------
Six months
ended Period
February 28, ended
1997 Year ended August 31, August 31,
(Unaudited) 1996 1995 1994 1993**
------------ ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.04 $ 10.12 $ 9.92 $ 10.15 $ 10.00
Income from investment operations
- ---------------------------------
Net investment income 0.21 0.41 0.40 0.37 0.13
Net realized and unrealized
gain (loss) on investments 0.10 (0.08) 0.20 (0.23) 0.15
------- ------- ------- ------- -------
Total from investment operations 0.31 0.33 0.60 0.14 0.28
Less distributions
- ------------------
Dividends from net investment income (0.21) (0.41) (0.40) (0.37) (0.13)
Distributions from realized gain on
investments -- -- -- -- --
------- ------- ------- ------- -------
Total distributions (0.21) (0.41) (0.40) (0.37) (0.13)
------- ------- ------- ------- -------
Net asset value at end of period $ 10.14 $ 10.04 $ 10.12 $ 9.92 $ 10.15
======= ======= ======= ======= =======
Total return (not annualized) 3.10% 3.32% 6.23% 1.42% 2.83%
- -----------------------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $53,625 $54,132 $52,504 $63,889 $54,450
Ratio of expenses to average net assets+ 0.49%* 0.49% 0.49% 0.48% 0.45%*
Ratio of net investment income to average net
assets+ 4.07%* 4.06% 4.06% 3.71% 3.63%*
Portfolio turnover rate 6% 44% 35% 19% 11%
</TABLE>
- ---------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 0.93%* 0.90% 0.89% 0.91% 1.26%*
Ratio of net investment income 3.64%* 3.65% 3.66% 3.28% 2.82%*
</TABLE>
* Annualized
** For the period April 21, 1993 (commencement of operations) to August 31,
1993.
42
<PAGE> 49
- ------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Schwab Long-Term Tax-Free Bond Fund
------------------------------------------------------------------
Six months Eight
ended months Period
February 28, ended ended
1997 Year ended August 31, August 31, December 31,
(Unaudited) 1996 1995 1994 1993 1992**
------------ ------- ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92 $ 10.00
Income from investment
- ----------------------
operations
----------
Net investment income 0.26 0.52 0.53 0.52 0.36 0.17
Net realized and unrealized
gain (loss) on investments 0.28 (0.03) 0.21 (0.56) 0.67 (0.08)
------- ------- ------- ------- ------- -------
Total from investment operations 0.54 0.49 0.74 (0.04) 1.03 0.09
Less distributions
- ------------------
Dividends from net investment
income (0.27) (0.52) (0.53) (0.52) (0.36) (0.17)
Distributions from realized
gain on investments -- -- -- (0.08) -- --
------- ------- ------- ------- ------- -------
Total distributions (0.27) (0.52) (0.53) (0.60) (0.36) (0.17)
------- ------- ------- ------- ------- -------
Net asset value at
end of period $ 10.40 $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92
======= ======= ======= ======= ======= =======
Total return (not annualized) 5.34% 4.87% 7.76% (0.42)% 10.56% 0.92%
- -----------------------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $43,482 $43,672 $41,413 $43,975 $50,413 $28,034
Ratio of expenses to average net
assets+ 0.49%* 0.49% 0.54% 0.51% 0.45%* 0.45%*
Ratio of net investment income to
average net assets+ 5.09%* 5.06% 5.40% 5.05% 5.30%* 5.61%*
Portfolio turnover rate 27% 50% 70% 62% 91% 54%
</TABLE>
- ---------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net
assets 1.05%* 0.94% 0.93% 0.99% 1.18%* 1.53%*
Ratio of net investment income 4.53%* 4.61% 5.01% 4.57% 4.57%* 4.53%*
</TABLE>
* Annualized
** For the period September 11, 1992 (commencement of operations) to December
31, 1992.
43
<PAGE> 50
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 51
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money funds.
SCHWAB ASSET ALLOCATION FUNDS
Schwab Asset Director(R) -- High Growth Fund
Schwab Asset Director -- Balanced Growth Fund
Schwab Asset Director -- Conservative Growth Fund
Schwab OneSource Portfolios -- Growth Allocation
Schwab OneSource Portfolios -- Balanced Allocation
SCHWAB STOCK FUNDS
Schwab 1000 Fund(R)
Schwab S&P 500 Fund
Schwab Analytics Fund(TM)
Schwab Small-Cap Index Fund(R)
Schwab International Index Fund(R)
Schwab OneSource Portfolios -- International
SCHWAB BOND FUNDS
Schwab Government Bond Funds -- Long-Term and Short/Intermediate
Schwab Tax-Free Bond Funds -- Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds -- Long-Term and Short/Intermediate
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds* that seek high current income with
safety and liquidity. Choose from taxable or tax-advantaged alternatives. Many
can be linked to your Schwab account to "sweep" cash balances automatically when
you're between investments. Or, for your larger cash reserves, choose one of our
Value Advantage Investments(R).
Please call 1-800-2 NO-LOAD for a free prospectus and brochure for any of the
SchwabFunds(R).
Each prospectus provides more complete information, including charges and
expenses. Please read it carefully before investing.
This report must be preceded or accompanied by a current prospectus.
* 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> 52
--------------
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
--------------
[SCHWABFUNDS FAMILY(TM) LOGO]
101 Montgomery Street
San Francisco, California 94104
INVESTMENT ADVISOR
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
(C)1997 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
