<PAGE>
<TABLE>
<S> <C>
Dear Shareholder,
[PHOTO] With the support of investors like you, SchwabFunds-Registered
Trademark- continues to be among the largest and fastest-growing
mutual fund families in the nation. Charles Schwab Investment
Management, Inc. (CSIM) now manages over $60 billion in assets for
more than 3.3 million SchwabFunds shareholders and offers 34 funds
spanning a spectrum of financial markets and investing styles.
</TABLE>
ASSET ALLOCATION AND BOND FUNDS
It is prudent to periodically scrutinize your investment portfolio--in
particular how your assets are allocated among various asset classes, namely
stocks, bonds and cash. Remember that diversifying your portfolio with bond
funds as part of your asset allocation plan can help stabilize your portfolio
over the long term while still providing competitive returns. This is because
changing market conditions may affect various asset classes differently--for
example, as stocks decrease, bonds may increase or vice versa. Of course, bear
in mind that share prices of bond funds, like all investments, fluctuate with
market conditions.
If you have any questions about your own investment plan or need help getting
started, contact your local Schwab branch to set up a free consultation with one
of our representatives. Additionally, I encourage you to visit our Web site at
WWW.SCHWAB.COM/SCHWABFUNDS, where you'll find online resources and tools to help
you evaluate or develop your investment plan.
NEW INVESTMENT OPPORTUNITIES
As a strong proponent of indexing as an investment strategy, we introduced the
converted Schwab Bond Index Funds--Schwab Short-Term Bond Market Index Fund and
Schwab Total Bond Market Index Fund--late last year.(1) Each Fund is broad-based
and diversified and seeks to track indices representing a broad spectrum of the
overall bond market. These Funds may provide excellent opportunities to
diversify your equity portfolio.
In addition, we introduced two new municipal money funds in early February. The
Schwab New Jersey Municipal Money Fund and the Schwab Pennsylvania Municipal
Money Fund are designed to offer taxpayers in those states opportunities for
additional tax savings.(2)
For a free prospectus on Schwab money funds, bond funds, or any other
SchwabFund, please call us toll-free at 1-800-435-4000. The prospectus contains
more information, including fees and expenses. Please be sure to read the
prospectus before investing.
Thank you for placing your trust in SchwabFunds. We will continue to explore new
strategies to help you meet your investment goals and to provide you with timely
information on SchwabFunds.
/s/ Charles R. Schwab
Charles R. Schwab
(1) Formerly the Schwab Short/Intermediate Government Bond Fund and the Schwab
Long-Term Government Bond Fund, respectively.
(2) Income may be subject to the federal alternative minimum tax (AMT).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
A Word from SchwabFunds-Registered Trademark-................................... 2
Schwab California Short/Intermediate Tax-Free Bond Fund......................... 4
Schwab California Long-Term Tax-Free Bond Fund.................................. 6
The Portfolio Management Team................................................... 8
Market Overview................................................................. 9
Questions to the Portfolio Management Team...................................... 17
Financial Statements and Notes.................................................. 21
</TABLE>
1
<PAGE>
A WORD FROM SCHWABFUNDS-REGISTERED TRADEMARK-
We are pleased to bring you the semi-annual report for Schwab California
Short/ Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund (the Funds) for the six-month period ended February 28, 1998.
During the reporting period, the Funds achieved their primary objectives of
providing a high level of current income exempt from federal and State of
California personal income taxes, consistent with preservation of capital.(1)
The chart below shows the income dividends on a per-share basis paid by the
Funds during each fiscal year or period since inception.
DIVIDENDS PAID BY THE SCHWAB CALIFORNIA TAX-FREE BOND FUNDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INCOME DIVIDENDS PER SHARE
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year
Schwab California Short/Intermediate 1992* 1993** 1994 1995 1996 1997 1998***
Tax-Free Bond Fund $0.00 $0.13 $0.37 $0.42 $0.43 $0.43 0.22
Schwab California Long-Term
Tax-Free Bond Fund $0.51 $0.38 $0.56 $0.56 $0.57 $0.56 0.29
</TABLE>
* Period from inception (2/24/92) through 12/31/91.
** Period from inception (4/21/93) through 8/31/93 for Schwab California
Short/Intermediate Tax-Free Bond Fund and for the eight-month period ended
8/31/93 for Schwab California Long-Term Tax-Free Bond Fund.
*** For the six-month period ended 2/28/98 for both Funds.
(1) Income from the Funds may be subject to the federal alternative minimum tax
(AMT).
2
<PAGE>
TAXABLE EQUIVALENT YIELD
The taxable equivalent yield represents the pre-tax yield a taxable
investment would have to pay to be equivalent to a tax-exempt yield on an
after-tax basis and may be helpful in evaluating the performance of a tax-exempt
investment. The table below shows the Funds' 30-day SEC yields as of 2/28/98 and
the taxable equivalent yields,(2) assuming a maximum combined federal and State
of California personal income tax rate of 45.22%. Shareholder tax rates may be
different.
<TABLE>
<CAPTION>
30-Day SEC Taxable Equivalent
Yield 30-Day SEC Yield
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
Schwab California Short/Intermediate Tax-Free Bond Fund 3.78% 6.90%
- ---------------------------------------------------------------------------------------------------
Schwab California Long-Term Tax-Free Bond Fund 4.83% 8.82%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(2) A portion of both Funds' expenses was reduced during the reporting period.
Without such reductions, both Funds' SEC yields would have been lower.
3
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO COMPOSITION
The Fund invests primarily in debt securities issued by or on behalf of the
State of California and its political subdivisions, agencies or
instrumentalities. Under normal market conditions, the Fund seeks to maintain a
dollar-weighted average portfolio maturity of between two and five years.
The chart below presents the Fund's portfolio as of 2/28/98 based on
published ratings from Standard & Poor's Ratings Group and/or Moody's Investors
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. This information is not necessarily indicative
of the Fund's future holdings.
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
Portfolio Composition as of February 28, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 45%
AA 23%
A 21%
Short-Term Investments 11%
</TABLE>
The chart on the following page compares the growth of a hypothetical
$10,000 investment in the Fund, made at inception, with a similar investment in
the Lehman Brothers Three-Year Municipal Bond Index (Lehman 3-Year Muni Index).
THIS INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
4
<PAGE>
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 MUNI INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB CALIFORNIA
SHORT/INTERMEDIATE LEHMAN BROTHERS 3-YEAR
TAX-FREE BOND FUND MUNICIPAL BOND INDEX
<S> <C> <C>
4/21/93 $10,000 $10,000
4/30/93 $9,990 $9,994
5/31/93 $10,037 $10,021
6/30/93 $10,136 $10,085
7/31/93 $10,157 $10,090
8/31/93 $10,257 $10,185
9/30/93 $10,328 $10,229
10/31/93 $10,340 $10,251
11/30/93 $10,310 $10,237
12/31/93 $10,444 $10,345
1/31/94 $10,517 $10,429
2/28/94 $10,372 $10,332
3/31/94 $10,188 $10,207
4/30/94 $10,239 $10,267
5/31/94 $10,272 $10,315
6/30/94 $10,253 $10,318
7/31/94 $10,356 $10,404
8/31/94 $10,390 $10,441
9/30/94 $10,350 $10,415
10/31/94 $10,280 $10,390
11/30/94 $10,167 $10,371
12/31/94 $10,227 $10,416
1/31/95 $10,350 $10,502
2/28/95 $10,503 $10,613
3/31/95 $10,598 $10,708
4/30/95 $10,614 $10,744
5/31/95 $10,826 $10,909
6/30/95 $10,809 $10,935
7/31/95 $10,925 $11,050
8/31/95 $11,030 $11,137
9/30/95 $11,090 $11,168
10/31/95 $11,174 $11,222
11/30/95 $11,256 $11,294
12/31/95 $11,296 $11,341
1/31/96 $11,366 $11,430
2/29/96 $11,358 $11,432
3/31/96 $11,308 $11,404
4/30/96 $11,325 $11,418
5/31/96 $11,332 $11,428
6/30/96 $11,393 $11,497
7/31/96 $11,466 $11,560
8/31/96 $11,483 $11,577
9/30/96 $11,557 $11,648
10/31/96 $11,634 $11,730
11/30/96 $11,742 $11,839
12/31/96 $11,737 $11,845
1/31/97 $11,776 $11,897
2/28/97 $11,837 $11,955
3/31/97 $11,762 $11,893
4/30/97 $11,815 $11,944
5/31/97 $11,916 $12,041
6/30/97 $11,991 $12,112
7/31/97 $12,139 $12,256
8/31/97 $12,120 $12,231
9/30/97 $12,196 $12,319
10/31/97 $12,227 $12,374
11/30/97 $12,268 $12,410
12/31/97 $12,346 $12,494
1/31/98 $12,433 $12,576
2/28/98 $12,459 $12,603
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/98
<TABLE>
<CAPTION>
Since
Inception 30-day SEC
6-Month(3) 1-Year (4/21/93) Yield
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Schwab California Short/Intermediate Tax-Free Bond
Fund(4) 2.80% 5.26% 4.62% 3.78%
- -----------------------------------------------------------------------------------------------------------
Lehman 3-Year Muni Index 3.04% 5.42% 4.87% --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
NASD regulations require that we report Fund performance data as of the most
recent calendar quarter. As of 12/31/97, the Fund's 6-month, 1-year and
since-inception average annual total returns were 2.96%, 5.19% and 4.58%,
respectively. The 30-day SEC yield was 3.98%.(5)
(3) Actual, not annualized, since period is less than one year.
(4) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/98, the Fund's 6-month, 1-year, and
since-inception average annual total returns would have been 2.55%, 4.78%
and 4.19%, respectively. The 30-day SEC yield would have been 3.31%.
(5) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/97, the Fund's 6-month, 1-year, and
since-inception average annual total returns would have been 2.71%, 4.73%
and 4.15%, respectively. The 30-day SEC yield would have been 3.48%.
5
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
PORTFOLIO COMPOSITION
The Fund invests primarily in debt securities issued by or on behalf of the
State of California and its political subdivisions, agencies or
instrumentalities. Under normal market conditions, the Fund seeks to maintain a
dollar-weighted average portfolio maturity of ten years or longer.
The chart below presents the Fund's portfolio as of 2/28/98 based on
published ratings from 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. Please note that this information is not
necessarily indicative of the Fund's future holdings.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
Portfolio Composition as of February 28, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 69%
AA 12%
A 14%
BAA 3%
Short-Term Investments 2%
</TABLE>
The chart on the following page compares the growth of a hypothetical
$10,000 investment in the Fund, made at inception, with a similar investment in
the Lehman Brothers General Obligation Municipal Bond Index (Lehman Muni Bond
Index). THIS INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
6
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN THE SCHWAB CALIFORNIA LONG-TERM TAX-FREE
BOND FUND AND THE LEHMAN MUNI BOND INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Schwab California Long-Term Lehman Brothers General
Tax-Free Bond Fund Municipal Bond Index
<S> <C> <C>
2/24/92 $10,000 $10,000
3/31/92 $10,099 $10,004
4/30/92 $10,217 $10,093
5/31/92 $10,410 $10,212
6/30/92 $10,633 $10,383
7/31/92 $11,082 $10,694
8/31/92 $10,786 $10,590
9/30/92 $10,835 $10,659
10/31/92 $10,474 $10,554
11/30/92 $10,921 $10,743
12/31/92 $11,110 $10,853
1/31/93 $11,256 $10,979
2/28/93 $11,775 $11,376
3/31/93 $11,561 $11,256
4/30/93 $11,674 $11,370
5/31/93 $11,736 $11,434
6/30/93 $11,969 $11,624
7/31/93 $11,957 $11,640
8/31/93 $12,235 $11,882
9/30/93 $12,371 $12,017
10/31/93 $12,412 $12,041
11/30/93 $12,263 $11,934
12/31/93 $12,541 $12,186
1/31/94 $12,671 $12,326
2/28/94 $12,304 $12,006
3/31/94 $11,683 $11,517
4/30/94 $11,768 $11,615
5/31/94 $11,867 $11,716
6/30/94 $11,747 $11,644
7/31/94 $12,008 $11,864
8/31/94 $12,026 $11,905
9/30/94 $11,824 $11,730
10/31/94 $11,508 $11,521
11/30/94 $11,235 $11,313
12/31/94 $11,420 $11,562
1/31/95 $11,901 $11,893
2/28/95 $12,295 $12,238
3/31/95 $12,414 $12,379
4/30/95 $12,407 $12,394
5/31/95 $12,825 $12,789
6/30/95 $12,613 $12,677
7/31/95 $12,685 $12,797
8/31/95 $12,866 $12,960
9/30/95 $12,972 $13,041
10/31/95 $13,228 $13,230
11/30/95 $13,507 $13,450
12/31/95 $13,690 $13,579
1/31/96 $13,785 $13,682
2/29/96 $13,664 $13,589
3/31/96 $13,436 $13,415
4/30/96 $13,369 $13,378
5/31/96 $13,379 $13,373
6/30/96 $13,550 $13,518
7/31/96 $13,700 $13,641
8/31/96 $13,693 $13,639
9/30/96 $13,920 $13,830
10/31/96 $14,073 $13,986
11/30/96 $14,365 $14,242
12/31/96 $14,283 $14,182
1/31/97 $14,294 $14,209
2/28/97 $14,429 $14,340
3/31/97 $14,175 $14,149
4/30/97 $14,316 $14,268
5/31/97 $14,581 $14,482
6/30/97 $14,706 $14,637
7/31/97 $15,266 $15,042
8/31/97 $15,056 $14,901
9/30/97 $15,253 $15,078
10/31/97 $15,359 $15,175
11/30/97 $15,475 $15,264
12/31/97 $15,717 $15,487
1/31/98 $15,918 $15,646
2/28/98 $15,906 $15,651
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/98
<TABLE>
<CAPTION>
Since
Inception 30-day SEC
6-Month(6) 1-Year 5-Year (4/21/93) Yield
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Schwab California Long-Term Tax-Free Bond
Fund(7) 5.65% 10.25% 6.20% 8.02% 4.83%
- ------------------------------------------------------------------------------------------------------------------
Lehman Muni Bond Index 5.04% 9.15% 6.59% 7.73% --
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NASD regulations require that we report Fund performance data as of the most
recent calendar quarter. As of 12/31/97, the Fund's 6-month, 1-year, 5-year and
since-inception average annual total returns were: 6.87%, 10.04%, 7.18% and
8.02%, respectively. The 30-day SEC yield was 4.94%.(8)
(6) Actual, not annualized, since period is less than one year.
(7) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/98, the Fund's 6-month, 1-year, 5-year
and since-inception average annual total returns would have been 5.45%,
9.85%, 5.90% and 7.62%, respectively. The 30-day SEC yield would have been
4.47%.
(8) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/97, the Fund's 6-month, 1-year, 5-year
and since-inception average annual total returns would have been 6.67%,
9.66%, 6.89% and 7.63%, respectively. The 30-day SEC yield would have been
4.56%.
7
<PAGE>
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD--Senior Vice President and Chief Investment Officer--has
overall responsibility for the management of the Funds' portfolios. Steve joined
Charles Schwab Investment Management, Inc. (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 had primary
responsibility for the day-to-day management of the Funds' portfolios since
their inceptions. Joanne joined CSIM as Portfolio Manager in February 1992 and
was promoted to her current position in December 1996. Prior to joining CSIM,
Joanne was the Portfolio Manager for the Shearson Lehman
California Municipal Bond Fund and for E.F. Hutton's Municipal Cash Reserve
Management.
THE FOLLOWING MARKET OVERVIEW AND ANSWERS TO QUESTIONS ARE PROVIDED BY THE
PORTFOLIO MANAGEMENT TEAM.
8
<PAGE>
MARKET OVERVIEW
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GDP GROWTH RATE
QUARTERLY PERCENT CHANGE (ANNUALIZED RATE)
SOURCE: BLOOMBERG L.P.
<S> <C>
Q1 1990 3.9%
Q2 1990 1.2%
Q3 1990 -1.9%
Q4 1990 -4.0%
Q1 1991 -2.1%
Q2 1991 1.8%
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 2.0%
Q3 1993 2.1%
Q4 1993 5.3%
Q1 1994 3.0%
Q2 1994 4.7%
Q3 1994 1.8%
Q4 1994 3.6%
Q1 1995 0.9%
Q2 1995 0.3%
Q3 1995 3.0%
Q4 1995 2.2%
Q1 1996 1.8%
Q2 1996 6.0%
Q3 1996 1.0%
Q4 1996 4.3%
Q1 1997 4.9%
Q2 1997 3.3%
Q3 1997 3.1%
Q4 1997 3.7%
</TABLE>
- - The real GDP growth rate was 3.2% for 1996 and 3.8% for 1997--healthy rates of
growth for the economy and well in excess of the Federal Reserve's estimated
non-inflationary growth rate of 2.0 to 2.75%.
- - The economy appears poised for continued growth, further extending the current
economic expansion that began in 1991. The direct impact of the economic
problems of Pacific Rim countries on 1998 U.S. GDP growth is anticipated to be
relatively minor. Estimates range from a reduction of 0.25 to 1.0%.
- - Prior to the fourth-quarter onset of the "Asian Flu," the strength of the
economy and tight labor markets led to speculation about a potential
acceleration in both wage and price inflation and whether more-restrictive
Federal Reserve policy was imminent. As Federal Reserve Chairman Alan
Greenspan said in his February congressional testimony, "The key question
going forward is whether the restraint building from the turmoil in Asia will
be sufficient to check inflationary tendencies that might otherwise result
from the strength of domestic spending and tightening labor markets." At the
time of this writing, there continues to be no clear consensus whether the
Federal Reserve's next move will be to raise or lower short-term rates.
9
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
Jan-90 5.4%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.4%
Jun-90 5.2%
Jul-90 5.5%
Aug-90 5.7%
Sep-90 5.9%
Oct-90 5.9%
Nov-90 6.2%
Dec-90 6.3%
Jan-91 6.4%
Feb-91 6.6%
Mar-91 6.8%
Apr-91 6.7%
May-91 6.9%
Jun-91 6.9%
Jul-91 6.8%
Aug-91 6.9%
Sep-91 6.9%
Oct-91 7.0%
Nov-91 7.0%
Dec-91 7.3%
Jan-92 7.3%
Feb-92 7.4%
Mar-92 7.4%
Apr-92 7.4%
May-92 7.6%
Jun-92 7.8%
Jul-92 7.7%
Aug-92 7.6%
Sep-92 7.6%
Oct-92 7.3%
Nov-92 7.4%
Dec-92 7.4%
Jan-93 7.3%
Feb-93 7.1%
Mar-93 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
Jul-93 6.9%
Aug-93 6.8%
Sep-93 6.7%
Oct-93 6.8%
Nov-93 6.6%
Dec-93 6.5%
Jan-94 6.7%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.0%
Jun-94 6.1%
Jul-94 6.1%
Aug-94 6.1%
Sep-94 5.9%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.4%
Jan-95 5.6%
Feb-95 5.5%
Mar-95 5.4%
Apr-95 5.7%
May-95 5.6%
Jun-95 5.6%
Jul-95 5.7%
Aug-95 5.7%
Sep-95 5.7%
Oct-95 5.5%
Nov-95 5.6%
Dec-95 5.6%
Jan-96 5.7%
Feb-96 5.5%
Mar-96 5.5%
Apr-96 5.5%
May-96 5.5%
Jun-96 5.3%
Jul-96 5.4%
Aug-96 5.2%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.3%
Jan-97 5.4%
Feb-97 5.3%
Mar-97 5.2%
Apr-97 4.9%
May-97 4.8%
Jun-97 5.0%
Jul-97 4.8%
Aug-97 4.9%
Sep-97 4.9%
Oct-97 4.7%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.7%
Feb-98 4.6%
Source: Bloomberg L.P.
</TABLE>
- - Job growth has remained robust, and the unemployment rate reached a new low
for this decade during the reporting
period. In fact, the 4.6% and 4.7% rates experienced during the reporting
period represent the lowest unemployment rates in 24 years.
- - Although inflation has been well contained, the combination of a tight labor
market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains, such as we experienced in 1997, allow manufacturers and
other businesses to limit price increases in the face of
rising wages, without sacrificing profit margins.
10
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
SOURCE: BLOOMBERG L.P.
QUARTERLY EMPLOYMENT COST INDEX MONTHLY CONSUMER PRICE INDEX
<S> <C> <C>
Jan-90 5.3% 5.2%
Feb-90 5.3% 5.3%
Mar-90 5.3% 5.2%
Apr-90 5.4% 4.7%
May-90 5.4% 4.4%
Jun-90 5.4% 4.7%
Jul-90 5.1% 4.8%
Aug-90 5.1% 5.6%
Sep-90 5.1% 6.2%
Oct-90 4.8% 6.3%
Nov-90 4.8% 6.3%
Dec-90 4.8% 6.1%
Jan-91 4.6% 5.7%
Feb-91 4.6% 5.3%
Mar-91 4.6% 4.9%
Apr-91 4.5% 4.9%
May-91 4.5% 5.0%
Jun-91 4.5% 4.7%
Jul-91 4.3% 4.4%
Aug-91 4.3% 3.8%
Sep-91 4.3% 3.4%
Oct-91 4.2% 2.9%
Nov-91 4.2% 3.0%
Dec-91 4.2% 3.1%
Jan-92 4.1% 2.6%
Feb-92 4.1% 2.8%
Mar-92 4.1% 3.2%
Apr-92 3.5% 3.2%
May-92 3.5% 3.0%
Jun-92 3.5% 3.1%
Jul-92 3.4% 3.2%
Aug-92 3.4% 3.1%
Sep-92 3.4% 3.0%
Oct-92 3.5% 3.2%
Nov-92 3.5% 3.0%
Dec-92 3.5% 2.9%
Jan-93 3.4% 2.9%
Feb-93 3.4% 3.2%
Mar-93 3.4% 3.1%
Apr-93 3.6% 3.2%
May-93 3.6% 3.2%
Jun-93 3.6% 3.0%
Jul-93 3.6% 2.8%
Aug-93 3.6% 2.8%
Sep-93 3.6% 2.7%
Oct-93 3.4% 2.8%
Nov-93 3.4% 2.7%
Dec-93 3.4% 2.7%
Jan-94 3.4% 2.7%
Feb-94 3.2% 2.5%
Mar-94 3.2% 2.5%
Apr-94 3.1% 2.4%
May-94 3.1% 2.3%
Jun-94 3.1% 2.5%
Jul-94 3.1% 2.8%
Aug-94 3.1% 2.9%
Sep-94 3.1% 3.0%
Oct-94 3.0% 2.6%
Nov-94 3.0% 2.7%
Dec-94 3.0% 2.7%
Jan-95 3.0% 2.8%
Feb-95 3.0% 2.9%
Mar-95 3.0% 2.9%
Apr-95 3.0% 3.1%
May-95 3.0% 3.2%
Jun-95 3.0% 3.0%
Jul-95 2.8% 2.8%
Aug-95 2.8% 2.6%
Sep-95 2.8% 2.5%
Oct-95 2.8% 2.8%
Nov-95 2.8% 2.6%
Dec-95 2.8% 2.5%
Jan-96 2.9% 2.7%
Feb-96 2.9% 2.7%
Mar-96 2.9% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.9% 2.8%
Jul-96 2.9% 3.0%
Aug-96 2.9% 2.9%
Sep-96 2.9% 3.0%
Oct-96 3.0% 3.0%
Nov-96 3.0% 3.3%
Dec-96 3.0% 3.3%
Jan-97 2.8% 3.0%
Feb-97 2.8% 3.0%
Mar-97 2.8% 2.8%
Apr-97 2.8% 2.5%
May-97 2.8% 2.2%
Jun-97 3.0% 3.3%
Jul-97 3.0% 2.2%
Aug-97 3.0% 2.2%
Sep-97 3.0% 2.2%
Oct-97 3.2% 2.1%
Nov-97 3.2% 1.8%
Dec-97 3.2% 1.7%
Jan-98 1.6%
Feb-98 1.4%
</TABLE>
- - Both the Employment Cost Index and Consumer Price Index (CPI) remained in
check throughout 1997, reflecting continued low levels of inflation.
- - The CPI rose 1.7% during 1997--the lowest rate of increase since 1986. Its
core rate (which excludes the more volatile food and energy components) rose
2.2%--the lowest rate of increase since 1965. The increase in the Employment
Cost Index, although low, was somewhat more of a concern, particularly the
Wages and Salaries component, which increased 3.8% during 1997.
- - Even though current levels of inflation continue to be very low, the Federal
Reserve indicated throughout most of the reporting period that the economy
remains in the zone where inflation risks are increasing, and that it is
poised to act preemptively by raising interest rates if necessary. The Federal
Reserve did take action in March 1997, increasing the Federal Funds Rate by
0.25% to 5.50%. At the end of the reporting period, however, sentiment was
mixed regarding the direction and timing of the Federal Reserve's next action.
11
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
<S> <C> <C> <C>
S&P 500-R- Index Schwab Small-Cap Index-R- Schwab Intnational Index-R-
8/97 $1.00 $1.00 $1.00
9/97 $1.06 $1.08 $1.06
10/97 $1.02 $1.03 $0.98
11/97 $1.07 $1.02 $0.97
12/97 $1.09 $1.04 $0.99
1/98 $1.10 $1.03 $1.03
2/98 $1.18 $1.11 $1.09
<CAPTION>
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
<S> <C>
Lehman MF General U.S. Govt. Index
8/97 $1.00
9/97 $1.02
10/97 $1.03
11/97 $1.04
12/97 $1.05
1/98 $1.06
2/98 $1.06
</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 reporting
period and do not reflect the performance of any fund. 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.
- - Domestic stocks continued to post the strongest total returns for the
six-month period ended 2/28/98, as represented by the respective 17.6% and
11.2% returns for the S&P 500 Index and the Schwab Small-Cap Index.
- - International stocks, as represented by the Schwab International Index,
achieved a return of 8.9% for the reporting period in spite of an Asian-lead
correction of 8.1% during October.
- - U.S. government bonds, as represented by the Lehman Mutual Fund General U.S.
Government Index, achieved a return of 6.2% for the six-month reporting
period.
12
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500-R- Index 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
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24.00
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Source: Bloomberg L.P.
</TABLE>
- - The price/earnings ratio for the S&P 500 Index was 26.4 at the close of the
reporting period, its highest month-end value ever, and well above its 30-year
average of 14.8.
- - Based on other traditional market valuation measures such as the price-to-book
value ratio or the dividend yield, the U.S. stock market, as measured by the
S&P 500 Index, also reached historical highs during the reporting period.
- - Although low inflation, low interest rates and strong cash flows into mutual
funds have helped the U.S. equity markets reach these levels, Federal Reserve
Chairman Greenspan has warned that current stock market values make sense only
if the outlook for corporate earnings growth remains positive, an assumption
which, as always, will be widely debated by
market participants.
13
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND 5-YEAR TREASURY BOND YIELDS
<S> <C> <C>
30-Year Treasury Bond Yield 5-Year Treasury Bond Yield
8/29/97 6.61% 6.22%
9/5/97 6.64% 6.23%
9/12/97 6.59% 6.17%
9/19/97 6.38% 6.01%
9/26/97 6.37% 5.99%
10/3/97 6.29% 5.87%
10/10/97 6.43% 6.02%
10/17/97 6.44% 6.08%
10/24/97 6.27% 5.90%
10/31/97 6.15% 5.71%
11/7/97 6.16% 5.81%
11/14/97 6.11% 5.80%
11/21/97 6.03% 5.75%
11/28/97 6.05% 5.84%
12/5/97 6.08% 5.88%
12/12/97 5.93% 5.69%
12/19/97 5.92% 5.71%
12/26/97 5.90% 5.71%
1/2/98 5.84% 5.61%
1/9/98 5.73% 5.25%
1/16/98 5.81% 5.40%
1/23/98 5.97% 5.52%
1/30/98 5.80% 5.38%
2/6/98 5.92% 5.47%
2/13/98 5.85% 5.42%
2/20/98 5.87% 5.49%
2/27/98 5.92% 5.59%
Source: Bloomberg L.P.
</TABLE>
- - Treasury bond yields fell significantly during the six-month reporting
period--by 0.53% and 0.48% for 30-year and 5-year Treasury bonds,
respectively.
- - The economic problems experienced by many Pacific Rim countries, collectively
referred to as the "Asian Flu," were the main cause of the decline in yields.
Investors seeking a safe haven increased demand for U.S. Treasury securities
and bid up prices, thereby decreasing Treasury bond yields.
- - The Federal Reserve's decision to leave rates unchanged due to international
market turbulence, as well as acceptable domestic economic statistics showing
strong growth coupled with contained inflation, also led to favorable fixed-
income market conditions.
14
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND 5-YEAR AAA GENERAL OBLIGATION MUNICIPAL BOND YIELDS
SOURCE: BLOOMBERG L.P.
30-YEAR 5-YEAR
AAA GO AAA GO
MUNI BOND MUNI BOND
YIELDS YIELDS
<S> <C> <C>
8/29/97 5.30% 4.34%
9/5/97 5.26% 4.30%
9/12/97 5.23% 4.27%
9/19/97 5.15% 4.19%
9/26/97 5.15% 4.19%
10/3/97 5.13% 4.17%
10/10/97 5.21% 4.25%
10/17/97 5.25% 4.29%
10/24/97 5.20% 4.24%
10/31/97 5.12% 4.16%
11/7/97 5.15% 4.17%
11/14/97 5.14% 4.16%
11/21/97 5.15% 4.15%
11/28/97 5.17% 4.17%
12/5/97 5.11% 4.11%
12/12/97 5.01% 4.08%
12/19/97 4.98% 4.05%
12/26/97 4.98% 4.05%
1/2/98 4.96% 4.03%
1/9/98 4.87% 3.99%
1/16/98 4.83% 3.95%
1/23/98 4.93% 4.05%
1/30/98 4.92% 4.04%
2/6/98 4.93% 4.05%
2/13/98 4.89% 4.01%
2/20/98 4.89% 4.01%
2/27/98 4.96% 4.03%
</TABLE>
- - During the reporting period, municipal bond yields declined slightly,
following a pattern similar to Treasury bond yields, and were approximately
0.15% to 0.18% below their levels at the start of the period.
- - As was the case with most other fixed-income securities, the "flight to
quality" initiated by the economic problems of many Pacific Rim countries
increased demand for more-stable investments, such as municipal bonds, thereby
driving up prices and driving down yields.
15
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RATIO OF MUNICIPAL BOND YIELDS TO TREASURY BOND YIELDS
30-YEAR BOND YIELDS 5-YEAR BOND YIELDS
<S> <C> <C>
8/29/97 80.2% 69.8%
9/5/97 79.2% 69.0%
9/12/97 79.4% 69.2%
9/19/97 80.7% 69.7%
9/26/97 80.8% 69.9%
10/3/97 81.6% 71.0%
10/10/97 81.0% 70.6%
10/17/97 81.5% 70.6%
10/24/97 82.9% 71.9%
10/31/97 83.3% 72.9%
11/7/97 83.6% 71.8%
11/14/97 84.1% 71.7%
11/21/97 85.4% 72.2%
11/28/97 85.5% 71.4%
12/5/97 84.0% 69.9%
12/12/97 84.5% 71.7%
12/19/97 84.1% 70.9%
12/26/97 84.4% 70.9%
1/2/98 84.9% 71.8%
1/9/98 85.0% 76.0%
1/16/98 83.1% 73.1%
1/23/98 82.6% 73.4%
1/30/98 84.8% 75.1%
2/6/98 83.3% 74.0%
2/13/98 83.6% 74.0%
2/20/98 83.3% 73.0%
2/27/98 83.8% 72.1%
Source: Bloomberg L.P.
</TABLE>
- - As interest rates fell during the first half of the reporting period, many
municipalities began to "refund" or reissue outstanding debt to take advantage
of the lower rates, increasing the supply of municipal issues on the market.
Consequently, prices declined and municipal yields increased, especially in
comparison to those of
Treasury securities. Although the ratio of 30-year municipal to Treasury bond
yields peaked in late November, the ratio remained relatively high through the
end of the reporting period, indicating that municipal securities were priced
attractively relative to Treasury securities.
- - 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 differential of approximately 10% is that the
holders of long-term municipal bonds demand higher yields to compensate for
the increased credit risk associated with holding a long-term bond that is not
backed by the U.S. government.
16
<PAGE>
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
Q HOW WERE THE FUNDS MANAGED
DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE TO THE PORTFOLIOS?
A As shown in the portfolio quality summaries on pages 4 and 6, we continued to
maintain high-quality securities (primarily AAA and AA) in the Funds'
portfolios. We feel that this is an appropriate strategy in the current market
environment as there is very little yield advantage associated with lower-rated
securities--we simply do not feel that investors are being adequately compen-
sated for the higher credit risk.
CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
Reflecting our neutral outlook for the markets, we maintained the Fund's
weighted average maturity (WAM) throughout the reporting period within the
narrow range of 3.27 to 3.88 years. At the end of the reporting period, the
Fund's WAM was 3.46 years, down slightly from 3.50 years at the beginning of the
period.
CALIFORNIA LONG-TERM TAX-FREE BOND FUND
We maintained the Fund's weighted average maturity within the range of 19 to
21 years during the reporting period. Although the Fund has extended its
maturity beyond this range in the past, we do not feel that it is currently
advisable, as interest rates are approaching their historic lows-- again, we do
not feel that investors are being adequately rewarded for the additional
interest-rate risk associated with longer maturities. By the end of the
reporting
period, the Fund's WAM was 21.42 years, up slightly from 19.11 years at the
beginning of the period.
A surge in municipal bond issuance typical of January coupled with declining
interest rates enabled us to further enhance the Fund's portfolio during the
reporting period. For example, we were able to purchase securities with stronger
call-protection features and credit quality, which should add flexibility and
liquidity to the Fund's portfolio.
Q WHAT IS YOUR VIEW OF THE MUNICIPAL BOND ENVIRONMENT?
A At the beginning of the reporting
period, municipal securities were trading within a narrow range and the market
was fairly stable. This climate then changed as the "Asian Flu" hit the world's
financial markets during the fourth quarter of 1997. The resulting turmoil in
equity markets increased demand for U.S. Treasury securities, which led to
higher prices and lower yields in both Treasury and municipal markets.
As rates continued to decline, the municipal market was inundated with
refunding deals, increasing the supply of municipal securities. This increased
supply further reduced prices, yet was partially
offset by increased demand due to the relatively favorable pre-tax equivalent
yields offered by municipal securities. In fact, municipal securities were
priced attractively relative to Treasury securities, as evidenced by the
compressed ratio of Treasury-to-municipal security yields. This ratio reached a
level as high as 85% for 30-year bonds and remained within a close range during
the reporting period, as illustrated in the
17
<PAGE>
chart on page 16 of the MARKET OVERVIEW section.
Q WHAT IS YOUR VIEW OF THE ECONOMIC CLIMATE IN CALIFORNIA?
A California appears to be embarking on its fifth year of economic recovery. As
noted in the governor's budget highlights, 1997 was the best year in this decade
for the state's economy, with employment growth exceeding 3%, personal income up
by more than 7%, and a seven-year low in the unemployment rate. Looking forward,
it is anticipated that California could see continued moderate growth across
most industry
sectors, with some, such as those heavily dependent on exporting goods and
services to Asia, growing at a much slower pace. As noted in the governor's
1998/99 budget
proposal, the effect on California of the economic weakness in Asia may be
somewhat offset by strong export growth to Mexico and increasing exports to
Europe.
The state's continued economic improvement has allowed for an accumulation
of budget reserves and an easing of some of the spending restrictions imposed
during the last recession. For the 1997/98 budget year, the governor projects
budget reserves of more than 1% of total expenditures. As in prior years,
however, budget adjustments may be necessary to keep spending in line with
revenues. Lawmakers will continue to address the challenge of balancing mandated
spending requirements for education and public safety with the need for
maintaining and upgrading public infrastructure. Therefore, the state's
financial position may be somewhat static over the next 12 months.
We are satisfied that the California securities held by the Fund present
minimal credit risk and we will, as always, continue to monitor the state's
economic situation closely. California's current credit ratings are A1 from
Moody's Investors Service, A+ from Standard & Poor's Corporation and AA- from
Fitch IBCA, Inc., three well-known rating agencies.
Q WHAT ARE THE BENEFITS OF INVESTING
IN SCHWAB'S CALIFORNIA TAX-FREE BOND FUNDS, AND HOW MIGHT THEY FIT IN AN ASSET
ALLOCATION PLAN?
A Schwab's California Tax-Free Bond Funds offer the benefits of professional
management, low costs, double tax-free monthly income,(9) convenience and
liquidity. As shown in the example on page 3, for investors in a high tax
bracket, a taxable investment would have to yield about 80% more to achieve the
same yield after tax as that produced by the Schwab California Tax-Free Bond
Funds.
No matter what your investment profile, diversifying your portfolio with
bond funds as part of your asset allocation plan may help offset the effects of
stock market downturns and can generally help add stability to your portfolio,
as shown in the following example. Of course, share prices of bond funds, like
any investment, fluctuate with
(9) Income from the Funds may be subject to the federal alternative minimum tax
(AMT).
18
<PAGE>
market conditions. The chart below displays the high, low and average annual
returns from 1970 to 1997 for five hypothetical portfolios representing the
returns of stocks and bonds as measured by indices.(10) As shown in the chart,
adding bonds to an all-stock portfolio has reduced risk while still producing
competitive returns.
A portfolio comprising 40% bonds and 60% stocks, for example, achieved an
average annual return of 11.65%--only slightly over 1% less than the 12.97%
return of the all-stock portfolio--and did so with significantly less
volatility. The lowest annual return of the portfolio invested 40% in bonds and
60% in stocks, actually a loss of 13.61%, was about half of the 26.47% loss in
the all-stock portfolio. Of course, past performance does not guarantee future
results.
(10) The returns do not reflect actual investment in any security. The
hypothetical returns are all weighted averages and assume reinvestment of
dividends. The indices represented are the S&P 500-Registered Trademark-
Index and the Ibbotson Intermediate Government Bond Index. Indices are
unmanaged, do not incur costs and expenses, and cannot be invested in
directly.
HYPOTHETICAL PORTFOLIOS SHOWING THE EFFECTS OF ADDING BONDS
TO AN ALL-STOCK PORTFOLIO--1970-1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
<S> <C> <C> <C>
All Stocks 37.43% 12.97% -26.47%
90% Stocks 10% Bonds 35.37% 12.68% -23.25%
80% Stocks 20% Bonds 33.30% 12.36% -20.04%
70% Stocks 30% Bonds 31.24% 12.02% -16.82%
60% Stocks 40% Bonds 29.18% 11.65% -13.61%
</TABLE>
19
<PAGE>
Q AS THE STOCK MARKET CONTINUES TO REACH RECORD HIGHS, SHOULD I RECONSIDER MY
PORTFOLIO ALLOCATION TO BONDS?
A Whenever there has been significant divergence between returns of asset
classes, it can be prudent to review your portfolio asset allocation. As an
example, total returns produced by large-cap domestic stocks dwarfed those of
domestic bonds for the three-year period ended 12/31/97. This performance
discrepancy is illustrated by the respective 29.88% and 10.57% average annual
returns produced for that period by the Schwab 1000 Fund-Registered Trademark-,
which invests in large-cap domestic equities, and the Schwab Long-Term Tax-Free
Bond Fund.(11)
This discrepancy in total returns can cause an investor's portfolio asset
allocation to shift, as shown in the following example. Assume that an investor
had a hypothetical asset allocation of 60% stocks and 40% bonds (invested in
just these two Funds) at the beginning of the three-year period, reinvesting all
Fund distributions during the period. By the end of the period, the portfolio's
asset allocation mix would have shifted to 71% stocks and 29% bonds--a
significant shift from the investor's original strategy.
<TABLE>
<CAPTION>
12/31/94 Portfolio 12/31/97 Portfolio
------------------------ 3-Year ------------------------
Value Allocation Growth Value Allocation
--------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Schwab 1000 Fund-Registered Trademark- $ 6,000 60% $ 7,146 $ 13,146 71%
Schwab Long-Term Tax-Free Bond Fund $ 4,000 40% $ 1,407 $ 5,407 29%
--------- --- ----------- --------- ---
Total Portfolio Value $ 10,000 100% $ 8,553 $ 18,553 100%
</TABLE>
We believe 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 that can
make them an attractive element of a well-diversified investment portfolio. As
shown in the example in the previous question, since bond returns have
historically not been well correlated with stock returns,(12) combining bonds in
a portfolio with other asset classes can be an effective way to reduce overall
portfolio volatility.
(11) Total return assumes reinvestment of all dividends and capital gains
distributions, if any. Past performance is no guarantee of future results.
Principal value and investment returns will fluctuate, so an investor's
shares, when redeemed, may be worth more or less than their original cost.
A portion of both Funds' expenses was reduced during the period. Without
these reductions, the Funds' total returns would have been lower.
(12) For the 20-year period ended 12/31/97, the correlation of large-cap stock
returns and government bond returns has been 0.38. Source: Symphony Asset
Management.
20
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total
Net Assets Net Assets Percentage
as of as of Growth Over
02/28/98 08/31/97 Reporting
(000s) (000s) Period
<S> <C> <C>
- ---------------------------------------------
$ 70,949 $ 58,876 21%
- ---------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1998
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------
(cum.)
<S> <C> <C> <C>
1 - 6 Months $ 8,042 10.6% 10.6%
7 - 36 Months 23,007 30.4 41.0
37 - 60 Months 21,851 28.9 69.9
Over 60 Months 22,722 30.1 100.0%
--------- -----
$ 75,622 100.0%
--------- -----
--------- -----
</TABLE>
Average Weighted Maturity--3.46 Years
- --------------------------------------------------------------------------------
21
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total
Net Assets Net Assets Percentage
as of as of Growth Over
02/28/98 08/31/97 Reporting
(000s) (000s) Period
- ---------------------------------------------
<S> <C> <C>
$ 152,295 $ 125,284 22%
- ---------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1998
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------
(cum.)
<S> <C> <C> <C>
0 - 1 Year $ 2,465 1.6% 1.6%
2 - 10 Years 4,533 2.8 4.4
11 - 20 Years 67,776 42.6 47.0
21 - 30 Years 57,501 36.1 83.1
Over 30 Years 26,807 16.9 100.0%
--------- -----
$ 159,082 100.0%
--------- -----
--------- -----
</TABLE>
Average Weighted Maturity--21.42 Years
- --------------------------------------------------------------------------------
22
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
MUNICIPAL BONDS--89.3%(a)
California Education Authority
Refunding Revenue Bonds
(Stanford University) Series
M (Aaa AAA)
5.25%, 12/01/01 $ 1,600 $ 1,678
California Education Authority
Revenue Bonds (Pooled College
and University Projects)
Series 1997A / (MBIA
Insurance) (Aaa AAA)
4.85%, 04/01/03 345 357
5.05%, 04/01/05 1,010 1,061
California Educational
Facilities Authority Revenue
Bonds (University of San
Diego) / (AMBAC Insurance)
(Aaa -)
4.50%, 10/01/02 1,000 1,023
California Health Facilities
Finance Authority Revenue
Bonds (Catholic Health Care
West--A) (Aaa AAA)
5.00%, 07/01/03 2,000 2,088
California Health Facilities
Finance Authority Revenue
Bonds (Valley Presbyterian
Hospital) / (MBIA Insurance)
(- AAA)
5.25%, 05/01/03 1,000 1,050
California Housing Finance
Agency Home Mortgage Revenue
Bonds Series G (Aa2 AA-)
5.85%, 08/01/99 320 327
6.00%, 08/01/00 410 425
California State General
Obligation Bonds / (AMBAC
Insurance) (Aaa AAA)
6.50%, 03/01/03 2,000 2,225
California State Public Works
Board Lease Revenue Refunding
Bonds (California Community
College Projects) Series
1993A (A2 A)
4.70%, 12/01/99 1,000 1,016
California State Public Works
Board Lease Revenue Refunding
Bonds (California State
University Projects) Series
1993A (A2 A)
4.30%, 12/01/99 2,000 2,020
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 1,914
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
California State Public Works
Board Lease Revenue Refunding
Bonds (Department of
Corrections-California State
Prison-Susanville) Series D
(A2 A)
4.40%, 06/01/00 $ 1,000 $ 1,013
California State Public Works
Board Lease Revenue Refunding
Bonds (Various Universities
Projects) Series A / (AMBAC
Insurance) (Aaa AAA)
6.40%, 12/01/02 2,000 2,238
California State Public Works
Board Lease Revenue Refunding
Bonds (Various University of
California Projects) Series A
(Aa3 A)
4.70%, 06/01/00 1,020 1,039
California State Public Works
Board Lease Revenue Refunding
Bonds (Various University of
California Projects) Series A
/ (AMBAC Insurance) (Aaa AAA)
5.60%, 12/01/01 2,000 2,120
California Statewide Community
Development Authority
Hospital Revenue Bonds
Certificate of Participation
(St. Joseph Health System)
(Aa3 AA)
5.00%, 07/01/04 750 782
California Statewide Community
Development Authority
Hospital Revenue Bonds
Certificates of Participation
(St. Joseph Health System)
(Aa3 AA)
5.30%, 07/01/00 2,035 2,099
California Statewide Community
Development Authority
Hospital Revenue Refunding
Bonds Certificates of
Participation (Cedars-Sinai
Medical Center) (A1-)
4.40%, 11/01/00 1,235 1,247
Contra Costa County,
California Transportation
Authority Sales Tax Revenue
Bonds Series A / (FGIC
Insurance) (Aaa AAA)
4.80%, 03/01/01 1,000 1,026
Los Angeles County, California
Flood Control District
Revenue Bonds (Aa1 AA-)
4.30%, 03/01/00 1,090 1,100
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
Los Angeles, California
Airport Development Revenue
Bonds / (FGIC Insurance) (Aaa
AAA)
6.50%, 05/15/03 $ 2,300 $ 2,565
Los Angeles, California
Department of Water & Power
Electric Plant Revenue
Refunding Bonds (Aa3 A+)
4.50%, 08/15/01 2,270 2,310
Los Angeles, California State
Building Authority Revenue
Refunding Bonds (California
Department of General
Services) (A A)
5.60%, 05/01/04 1,000 1,071
Los Angeles, California State
Building Authority Revenue
Refunding Bonds (California
Department of General
Services) Series A (A A)
4.70%, 05/01/99 450 455
Los Angeles, California
Unified School District
Certificates of Participation
(Multiple Properties) Series
1994B / (AMBAC Insurance)
(Aaa AAA)
5.70%, 12/01/99 3,215 3,328
Los Angeles, California
Wastewater System Revenue
Bonds Series A (A1 A)
6.60%, 02/01/99 1,775 1,821
Morgan Hill, California
Unified School District
Certificates of Participation
(A1-)
4.80%, 08/01/99 510 516
Orange County, California
Municipal Water Facilities
Certificates of Participation
(Allen-Mccolloch Pipeline) /
(MBIA Insurance) (Aaa AAA)
4.60%, 07/01/01 3,000 3,071
Rancho, California Water
District Financing Authority
Revenue Bonds /
(Toronto-Dominion Bank LOC)
(- AA)
4.70%, 09/15/01 2,500 2,547
Rim World, California Unified
School District Certificates
of Participation (Measure V
Capital Improvement Projects)
/ (AMBAC Insurance) (Aaa AAA)
5.90%, 09/01/01 1,490 1,589
Riverside County, California
Public Financing Authority
Special Tax Revenue Bonds
Series A / (MBIA Insurance)
(Aaa AAA)
4.40%, 09/01/01 1,750 1,785
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
Sacramento, California
Regional County Sanitation
District (AA2 AA)(d)
5.00%, 08/01/03 $ 2,100 $ 2,200
San Francisco, California Bay
Area Rapid Transit District
Sales Tax Revenue Bonds (AA3
AA-)(d)
5.50%, 07/01/05 3,000 3,244
San Francisco, California Port
Commission Revenue Refunding
Bonds (A BBB+)
5.00%, 07/01/00 1,500 1,528
San Joaquin, California Area
Flood Control Agency
Improvement Bond Act 1914
Special Assessment Bonds
(Flood Protection Restoration
Assessment) / (FSA Insurance)
(Aaa AAA)
5.10%, 09/02/03 1,670 1,728
San Jose, California Financing
Authority Revenue Bonds
(Convention Center) Series C
(A1 A+)
5.90%, 09/01/04 2,500 2,681
San Ramon Valley, California
Unified School District
Certificates of Participation
(Measure A Capital Project)
Series A / (Escrowed to
Maturity with Government
Securities) (A2 -)
4.90%, 10/01/99 1,100 1,119
Santa Monica, California
Wastewater Enterprise Revenue
Bonds (Hyperion Project)
Series A (Pre-Refunded) (A1
A+)
6.25%, 01/01/02 1,250 1,367
Southern California
Metropolitan Water District
Revenue Bonds (Aa2 AA)
6.63%, 07/01/01 1,000 1,098
Southern California Public
Power Authority Project
Revenue Bonds (San Juan Power
Project Unit 3) Series A /
(MBIA Insurance) (Aaa AAA)
5.00%, 01/01/04 1,600 1,672
Southern California Public
Power Authority Refunding
Project Series A
(Pre-Refunded) (Aaa AAA)
6.00%, 07/01/00 1,750 1,833
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
Stockton, California Health
Facilities Revenue Bonds (St.
Joseph Medical Center) Series
A / (MBIA Insurance) (Aaa
AAA)
4.60%, 06/01/00 $ 200 $ 204
------------
TOTAL MUNICIPAL BONDS
(Cost $66,370) 67,580
------------
VARIABLE RATE OBLIGATIONS--10.6%(b)
California Pollution Control
Financing Authority Revenue
Bonds (Pacific Gas & Electric
Company) Series 1996F /
(Banque Nationale de Paris
LOC) (- AA+)
3.60%, 03/02/98 100 100
California Pollution Control
Financing Authority Revenue
Bonds (Southern California
Edison) Series 1986A (A1 A+)
3.90%, 03/02/98 100 100
California Pollution Control
Financing Authority Revenue
Bonds (Southern California
Edison) Series 1986B (A1 A+)
3.90%, 03/02/98 300 300
California Pollution Control
Financing Authority Revenue
Bonds (Southern California
Edison) Series 1986C (A1 A+)
3.90%, 03/02/98 800 800
California Pollution Control
Financing Authority Revenue
Bonds (Southern California
Edison) Series 1986D (A1 A+)
3.90%, 03/02/98 600 600
California Pollution Control
Financing Authority Revenue
Bonds / (Kredietbank, N.V. &
Societe Generale LOC) (- AA-)
3.65%, 03/02/98 1,200 1,200
California Pollution Control
Financing Authority Solid
Waste Disposal Revenue Bonds
(Shell Martinez) Series 1996A
(Shell Corp. Guaranty) (Aa1
AAA)
3.50%, 03/02/98 500 500
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
California State Economic
Development Financing
Authority Industrial
Development Revenue Bonds
(Serra Mission Project)
Series 1997A / (Dresdner Bank
AG LOC) (- A+)
3.65%, 03/02/98 $ 900 $ 900
California Statewide Community
Development Authority
Certificates of Participation
(California Retired Officers)
/ (Dresdner Bank LOC) (Aa1-)
3.60%, 03/02/98 700 700
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds (Districts
105, 250 & 290) Series 1991 /
(National Westminster Bank
PLC LOC) (Aa2 AA)
3.65%, 03/02/98 100 100
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds (Districts
140, 240, 105, 250 / (Bank of
America LOC) (Aa2 AA-)
3.65%, 03/02/98 100 100
Irvine, California Improvement
Bonds Act 1915 / (Canadian
Imperial Bank of Commerce
LOC) (Aa3 AA-)
3.65%, 03/02/98 2,000 2,000
Orange County, California
Sanitation District
Certificates of Participation
(Districts 1, 2, 3, 6, 7 &
11) Series 1992C / (FGIC
Insurance & FGIC SPA) (Aaa
AAA)
3.60%, 03/02/98 600 600
------------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $8,000) 8,000
------------
SHORT-TERM INVESTMENTS--0.1%(C)
Provident Institutional
Funds-- California Money Fund
Portfolio
2.85%, 03/07/98 42 42
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $42) 42
------------
TOTAL INVESTMENTS--100%
(Cost $74,412) $ 75,622
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
- --------------------------------------------------------------------------------
25
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
MUNICIPAL BONDS--98.5%(a)
Alta Loma, California Elementary
School District General Obligation
Bonds Series 2 / (AMBAC Insurance)
(Aaa AAA)
5.88%, 06/01/08 $ 840 $ 915
5.88%, 06/01/09 860 932
Antioch Area, California Public
Facilities Financing Agency
Special Tax Community Facilities
Revenue Bonds Series 1989-1 /
(FGIC Insurance) (Aaa AAA)
5.25%, 08/01/07 1,985 2,087
Bay Area Government Assoc. of
California Revenue Bonds Series
1997A-6 / (FSA Insurance) (Aaa
AAA)
5.25%, 12/15/17 1,200 1,215
California Educational Facilities
Authority Revenue Bonds (Loyola
Marymount University) Series 1992B
(A1-)
6.60%, 10/01/22 1,450 1,628
California Educational Facilities
Authority Revenue Bonds (Mills
College) Series 1992 (A -)
6.88%, 09/01/22 500 566
California Educational Facilities
Authority Revenue Bonds (St.
Mary's College) Series 1993 (A -)
5.00%, 10/01/12 3,000 2,978
California Educational Facilities
Authority Revenue Bonds
(University of Southern
California) Series C (Aa3 AA)
5.13%, 10/01/28 2,000 1,995
California Educational Facilities
Authority Revenue Refunding Bonds
(Stanford University) Series M
(Aaa AAA)
5.25%, 12/01/26 2,320 2,349
California Health Facilities
Financing Authority Revenue Bond
(Sutter Health) Series A / (FSA
Insurance) (Aaa AAA)
5.00%, 08/15/37 4,000 3,855
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
California Health Facilities
Financing Authority Revenue Bonds
(Assoc. of Retarded Citizens)
Series 1991 / (California Mortgage
Insurance)
(- A+)
7.00%, 05/01/21 $ 455 $ 493
California Health Facilities
Financing Authority Revenue Bonds
(Children's Hospital) / (MBIA
Insurance) (Aaa AAA)
5.38%, 07/01/16 5,180 5,284
5.38%, 07/01/20 3,400 3,443
California Health Facilities
Financing Authority Revenue Bonds
(Marshall Hospital) Series 1992A /
(California Mortgage Insurance) (-
A+)
6.63%, 11/01/22 4,000 4,340
California Housing Finance Agency
Home Mortgage Revenue Bonds Series
1994G (Aa2 AA-)
7.20%, 08/01/14 3,000 3,308
California Housing Finance Agency
Home Mortgage Revenue Bonds Series
1995L / (MBIA Insurance) (Aaa AAA)
5.90%, 08/01/17 1,000 1,055
California Housing Finance Agency
Multi Unit Rental Housing Revenue
Bonds II Series 1992B (A1 A+)
6.70%, 08/01/15 1,000 1,071
California State Department of
Water Revenue Bonds (Center Valley
Project) Series S (Aa2 AA)
5.00%, 12/01/22 1,200 1,176
California State Public Works Board
Lease Revenue Refunding Bonds
(Various California State
University Projects) / (AMBAC
Insurance) (Aaa AAA)
5.38%, 10/01/17 200 205
California State Public Works Board
Lease Revenue Refunding Bonds
(Various California State
University Projects) Series 1992A
(Aa3 A)
5.50%, 06/01/10 3,000 3,266
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
California Statewide Community
Development Authority Hospital
Revenue Bonds Certificates of
Participation (Cedars-Sinai
Medical Center) Series 1992 (A1-)
6.50%, 08/01/15 $ 1,250 $ 1,345
California Statewide Community
Development Authority Hospital
Revenue Bonds Certificates of
Participation
(St. Joseph Health Systems) (Aa3
AA)
6.50%, 07/01/15 2,000 2,290
Central Coast Water Authority
Revenue Bonds (State Water Project
Regional Facilities) / (AMBAC
Insurance) (Aaa AAA)
5.00%, 10/01/22 1,000 979
Chico, California Unified School
District General Obligation Bonds
Series C / (MBIA Insurance) (Aaa
AAA)
6.75%, 06/01/17 500 553
Colton, California Public Financing
Authority Revenue Bonds / (FSA
Insurance) (Aaa AAA)
5.45%, 09/01/19 3,020 3,107
Contra Costa County, California
Certificates of Participation
(Merrithew Memorial Hospital
Project) / (MBIA Insurance) (Aaa
AAA)
5.38%, 11/01/17 2,180 2,243
Dublin San Ramon Service District,
California Revenue Bonds / (AMBAC
Insurance) (Aaa AAA)
5.00%, 12/01/20 1,865 1,821
East Bay Municipal Utility District
Water System Revenue Refunding
Bonds / (FGIC Insurance) (Aaa AAA)
5.00%, 06/01/26 4,800 4,686
Encina, California Financing Joint
Powers Authority Wastewater
Revenue Bonds / (AMBAC Insurance)
(Aaa AAA)
5.13%, 08/01/14 3,160 3,200
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
Fresno, California Health Facility
Revenue Bonds (Holy Cross Health
System--St. Agnes Medical Center)
Series 1991 (Aa AA)
6.50%, 06/01/11 $ 550 $ 588
Los Angeles County, California
Public Works Financing Authority
Lease Revenue Bonds (Multiple
Capital Facilities Project V-B) /
(AMBAC Insurance) (Aaa AAA)
5.20%, 12/01/09 1,680 1,781
Los Angeles County, California
Public Works Financing Authority
Lease Revenue Bonds (Master
Refunding Project) / (FSA
Insurance) (Aaa AAA)
5.25%, 03/01/15 1,000 1,010
Los Angeles County, California
Public Works Financing Authority
Lease Revenue Multiple Certificate
of Participation (Facilities
Project) Series 1997A / (MBIA
Insurance) (Aaa AAA)
5.25%, 09/01/15 1,070 1,099
Los Angeles County, California
Public Works Financing Authority
Lease Revenue Multiple
Certificates of Participation
(Facilities Project V) Series
1996A / (AMBAC Insurance) (Aaa
AAA)
5.13%, 06/01/17 2,000 1,998
Los Angeles County, California
Public Works Financing Authority
Lease Revenue Refunding Bonds
Series 1996A / (MBIA Insurance)
(Aaa AAA)
5.25%, 09/01/13 2,000 2,063
Los Angeles County, California
Transportation Commission Sales
Tax Revenue Refunding Bonds Series
1991B (A1 AA-)
6.50%, 07/01/13 555 598
Los Angeles, California Department
of Airports Revenue Bonds Series
1995A / (FGIC Insurance) (Aaa AAA)
5.50%, 05/15/10 560 594
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
Los Angeles, California Department
of Water & Power Electric Plant
Revenue Bonds (Aa3 A+)
6.00%, 01/15/11 $ 865 $ 929
Metropolitan Water District of
Southern California Waterworks
Revenue Bonds Series A (Aa2 AA)
5.00%, 07/01/26 2,500 2,441
Modesto, California Public
Financing Authority Lease Revenue
Bonds (Capital Imports & Refunding
Project) / (AMBAC Insurance) (Aaa
AAA)(d)
5.13%, 09/01/20 6,740 6,683
Northern California Power Agency
Multiple Capital Facilities
Revenue Bonds Series 1992A / (MBIA
Insurance) (Aaa AAA)
6.50%, 08/01/12 3,300 3,638
Oceanside, California Building
Authority Certificates of
Participation Refunding Bonds
Series 1993A (A BBB+)
6.38%, 04/01/12 1,250 1,347
Orange County, California Community
Facilities District Special Tax
Revenue Bonds (Number 87-4) Series
A / (MBIA Insurance) (Aaa AAA)
5.25%, 08/15/19 2,000 2,015
Orange County, California Water
District Certificates of
Participation (1989 Project) (Aa
AA)
6.50%, 08/15/11 1,150 1,218
Reedly, California Redevelopment
Agency Tax Allocation
(Redevelopment Project) Series A /
(MBIA Insurance) (Aaa AAA)
5.00%, 11/01/23 1,620 1,571
Riverside County, California Asset
Leasing Corp. Revenue Bonds
(Riverside County Hospital
Project) Series B / (MBIA
Insurance) (Aaa AAA)
5.00%, 06/01/19 1,000 981
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
Riverside County, California Public
Financing Authority Tax Allocation
Bonds (Redevelopment Project A)
(Baa2 BBB-)
5.63%, 10/01/33 $ 4,905 $ 5,003
Sacramento, California Regional
Transit District Certificates of
Participation Series 1992A (A1-)
6.38%, 03/01/05 250 268
Sacramento, California Regional
Transit District Refunding
Certificates of Participation
(Light Rail Transportation
Project) (A2 A+)
6.75%, 07/01/07 2,000 2,178
Salidas, California Area Public
Facilities Financing Agency
Facilities District Special Tax
Series 1988-1 / (FSA Insurance)
(Aaa AAA)
5.25%, 09/01/28 3,000 3,004
San Bernadino County, California
Transportation Authority Tax
Revenue Series A / (MBIA
Insurance) (Aaa AAA)
6.25%, 03/01/10 4,000 4,655
San Bernardino County, California
Certificates of Participation
(West Valley Detention Center) /
(MBIA Insurance) (Aaa AAA)
6.50%, 11/01/12 420 463
San Diego, California Public
Facilities Financing Authority
Sewer Revenue Bonds / (FGIC
Insurance) (Aaa AAA)
5.25%, 05/15/22 2,200 2,214
5.00%, 05/15/25 4,045 3,944
San Diego, California Water
Authority Certificate of
Participation Series A
(Aa3 AA-)(d)
4.75%, 05/01/18 1,500 1,436
San Francisco, California Bay Area
Rapid Transit District Sales Tax
Revenue Bonds / (AMBAC Insurance)
(AAA AAA)(d)
5.00%, 07/01/28 2,000 1,948
San Francisco, California Bay Area
Rapid Transit District Sales Tax
Revenue Bonds Series 1995 / (FGIC
Insurance) (Aaa AAA)
5.50%, 07/01/15 1,500 1,566
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
San Francisco, California City &
County Airports Revenue Bonds 2nd
Series, Issue 11 / (FGIC
Insurance) (Aaa AAA)
6.20%, 05/01/19 $ 2,000 $ 2,163
5.63%, 05/01/21 2,000 2,090
San Francisco, California Downtown
Parking Corp. Revenue Bonds (A -)
6.65%, 04/01/18 500 543
San Joaquin Hills, California
Transportation Corridor Agency
Toll Road Revenue Bonds Series
1997A / (MBIA Insurance) (Aaa AAA)
5.25%, 01/15/30 4,000 4,020
San Mateo, California JT Powers
Authority Lease Revenue Bonds
Series A / (FSA Insurance) (Aaa
AAA)
5.13%, 07/15/32 3,500 3,491
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 1,911
6.88%, 11/15/14 2,000 2,353
Santa Clara County, California
Financing Authority Lease Revenue
Bonds / (AMBAC Insurance) (Aaa
AAA)
5.00%, 11/15/17 3,500 3,465
Santa Clara, California
Redevelopment Agency Tax
Allocation Revenue Refunding Bonds
(Bayshore North Project) / (AMBAC
Insurance) (Aaa AAA)
7.00%, 07/01/10 1,500 1,841
Stockton, California Revenue
Certificates of Participation
(Wastewater Systems Project)
Series A / (MBIA Insurance) (Aaa
AAA)
5.20%, 09/01/29 3,500 3,491
Temecula, California Community
Services District Certificates of
Participation (Community
Recreation Center Project) Series
1992 (- A)
7.12%, 10/01/12 1,000 1,111
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
Tri City, California Hospital
District Revenue Bonds Series
1996A / (MBIA Insurance) (Aaa AAA)
5.63%, 02/15/17 $ 1,000 $ 1,051
University of California Revenue
Bonds (University of California
Hospital Medical Center Project) /
(AMBAC Insurance) (Aaa AAA)
5.75%, 07/01/24 2,000 2,120
Vallejo, California Revenue
Refunding Bonds Water Import
Series A / (FSA Insurance) (Aaa
AAA)
5.70%, 05/01/16 2,000 2,118
West Basin County, California
Municipal Water District
Certificates of Participation
Revenue Refunding Bonds Series
1997A / (AMBAC Insurance) (Aaa
AAA)
5.50%, 08/01/22 1,000 1,038
West Basin Municipal Water District
Certificates of Participation
Revenue Refunding Bonds Series
1997A / (AMBAC Insurance) (Aaa
AAA)
5.50%, 08/01/17 500 523
Westminster, California Public
Financing Authority Certificates
of Participation (1994 Civic
Center & Street Improvement
Project) (- A-)
7.00%, 06/01/19 3,325 3,670
---------
TOTAL MUNICIPAL BONDS
(Cost $147,793) 156,617
---------
VARIABLE RATE OBLIGATIONS--1.5%(b)
California Pollution Control
Financing Authority Revenue Bonds
/ (Kredietbank, N.V. & Societe
Generale LOC) (- AA-)
3.65%, 03/02/98 200 200
Chula Vista, California Industrial
Development Revenue Bonds (San
Diego Gas & Electric) Series 1996A
(A2 A)
3.50%, 03/02/98 400 400
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds (Districts 102,
103, 105 & 106) / (Commerzbank AG
LOC) (Aa2 AA-)
3.65%, 03/02/98 100 100
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds Election
(Improvement District No. 284)
Series 1988A / (Landesbank
Hessen-Thuringen Girozentrale LOC)
(- AAA)
3.55%, 03/02/98 $ 300 $ 300
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds Series 1985A-3 /
(Landesbank Hessen-Thuringen
Girozentrale LOC) (- AAA)
3.65%, 03/02/98 200 200
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds Series 1985B-2 /
(Landesbank Hessen-Thuringen
Girozentrale LOC) (- AAA)
3.55%, 03/02/98 300 300
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds Series 1993A /
(Bank of America LOC) (Aa2 AA-)
3.55%, 03/02/98 200 200
<CAPTION>
Par Value
--------- ---------
<S> <C> <C>
Irvine, California Improvement
Bonds Act 1915 / (Canadian
Imperial Bank of Commerce LOC)
(Aa3 AA-)
3.65%, 03/02/98 $ 700 $ 700
---------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $2,400) 2,400
---------
SHORT-TERM INVESTMENTS--0.0%(c)
Provident Institutional Funds--
California Money Fund Portfolio
2.85%, 03/07/98 65 65
---------
TOTAL SHORT-TERM INVESTMENTS
(Cost $65) 65
---------
TOTAL INVESTMENTS--100%
(Cost $150,258) $ 159,082
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
February 28, 1998 (Unaudited)
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody's Investors Service, Inc. and
Standard & Poor's Ratings Group which were in effect on the report date.
(a) Interest rates represent coupon rate of security.
(b) Variable rate securities. Interest rates vary periodically based on current
market rates. Rates shown are the effective rates on report date. Dates
shown represent the earlier 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 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 American Municipal Bond Assurance Corp.
FGIC Federal Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
31
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
----------------- -----------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $74,412 and $150,258, respectively) $ 75,622 $ 159,082
Receivables:
Interest 861 2,047
Fund shares sold 81 41
Deferred organization costs -- 1
Prepaid expenses -- 1
-------- -----------
Total assets 76,564 161,172
-------- -----------
LIABILITIES
Payables:
Dividends 25 66
Investments purchased 5,451 8,639
Fund shares redeemed 42 55
Investment advisory fee -- 1
Other liabilities 97 116
-------- -----------
Total liabilities 5,615 8,877
-------- -----------
Net assets applicable to outstanding shares $ 70,949 $ 152,295
-------- -----------
-------- -----------
NET ASSETS CONSIST OF:
Paid-in-capital $ 70,545 $ 144,002
Distributions in excess of net investment income (17) (40)
Accumulated net realized loss on investments sold (789) (491)
Net unrealized appreciation on investments 1,210 8,824
-------- -----------
$ 70,949 $ 152,295
-------- -----------
-------- -----------
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 6,934 13,314
Net asset value, offering and redemption price per share $10.23 $11.44
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
32
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------- -------------
<S> <C> <C>
Interest Income $ 1,408 $ 3,627
------- -------------
Expenses:
Investment advisory and administration fee 125 275
Transfer agency and shareholder service fees 77 168
Custodian fees 22 40
Professional fees 21 15
Shareholder reports 32 51
Trustees' fees 7 7
Registration fees 1 2
Amortization of deferred organization costs 1 1
Insurance and other expenses 14 22
------- -------------
300 581
Less: expenses reduced (see Note 4) (150) (252)
------- -------------
Total expenses incurred by Fund 150 329
------- -------------
Net investment income 1,258 3,298
------- -------------
Net realized gain on investments sold 8 758
Net unrealized appreciation on investments 464 3,265
------- -------------
Net gain on investments 472 4,023
------- -------------
Increase in net assets resulting from operations $ 1,730 $ 7,321
------- -------------
------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
33
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
-------------------------- -------------------------
Six months Six months
ended Year ended Year
February 28, ended February 28, ended
1998 August 31, 1998 August 31,
(Unaudited) 1997 (Unaudited) 1997
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,258 $ 2,151 $ 3,298 $ 5,810
Net realized gain on investments sold 8 51 758 1,036
Net unrealized appreciation on investments 464 522 3,265 3,626
------------- ----------- ------------ -----------
Increase in net assets resulting from operations 1,730 2,724 7,321 10,472
------------- ----------- ------------ -----------
Dividends to shareholders from net investment income (1,270) (2,150) (3,335) (5,809)
Dividends in excess of net investment income (17) -- (40) --
Dividends from realized gain on investments -- -- -- --
------------- ----------- ------------ -----------
Total distributions (1,287) (2,150) (3,375) (5,809)
------------- ----------- ------------ -----------
Capital share transactions
Proceeds from shares sold 22,859 27,426 33,539 38,540
Net asset value of shares issued in reinvestment of
dividends 972 1,635 2,153 3,624
Less payments for shares redeemed (12,201) (16,547) (12,627) (23,159)
------------- ----------- ------------ -----------
Increase in net assets from capital share transactions 11,630 12,514 23,065 19,005
------------- ----------- ------------ -----------
Total increase in net assets 12,073 13,088 27,011 23,668
Net assets:
Beginning of period 58,876 45,788 125,284 101,616
------------- ----------- ------------ -----------
End of period (including distributions in excess of net
investment income and undistributed net investment
income of ($17), $12, ($40) and $37, respectively) $ 70,949 $ 58,876 $ 152,295 $ 125,284
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Number of Fund shares:
Sold 2,238 2,711 2,951 3,532
Reinvested 95 162 190 333
Redeemed (1,196) (1,638) (1,118) (2,132)
------------- ----------- ------------ -----------
Net increase in shares outstanding 1,137 1,235 2,023 1,733
Shares outstanding:
Beginning of period 5,797 4,562 11,291 9,558
------------- ----------- ------------ -----------
End of period 6,934 5,797 13,314 11,291
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
34
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Six months
ended Period
February 28, Year ended August 31, ended
1998 ---------------------------------- August 31,
(Unaudited) 1997 1996 1995 1994 1993**
------------ ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.16 $ 10.04 $ 10.06 $ 9.89 $ 10.13 $ 10.00
------------ ------- ------- ------- ------- ----------
Income from investment operations
Net investment income 0.21 0.43 0.43 0.42 0.37 0.13
Net realized and unrealized gain (loss) on
investments 0.07 0.12 (0.02) 0.17 (0.24) 0.13
------------ ------- ------- ------- ------- ----------
Total from investment operations 0.28 0.55 0.41 0.59 0.13 0.26
Less distributions
Dividends from net investment income (0.21) (0.43) (0.43) (0.42) (0.37) (0.13)
Dividends in excess of net investment
income++ -- -- -- -- -- --
Dividends from realized gain on investments -- -- -- -- -- --
------------ ------- ------- ------- ------- ----------
Total distributions (0.21) (0.43) (0.43) (0.42) (0.37) (0.13)
------------ ------- ------- ------- ------- ----------
Net asset value at end of period $ 10.23 $ 10.16 $ 10.04 $ 10.06 $ 9.89 $ 10.13
------------ ------- ------- ------- ------- ----------
------------ ------- ------- ------- ------- ----------
Total return (not annualized) 2.80% 5.54% 4.11% 6.17% 1.29% 2.57%
Ratios/Supplemental data
Net assets, end of period (000s) $70,949 $58,876 $45,788 $40,639 $48,649 $44,545
Ratio of expenses to average net assets+ 0.49%* 0.49% 0.49% 0.50% 0.48% 0.45%*
Ratio of net investment income to average
net assets+ 4.11%* 4.21% 4.23% 4.29% 3.69% 3.49%*
Portfolio turnover rate 9% 23% 20% 62% 35% 0%
</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 by the
Investment Manager and Schwab. Had these expenses not been reduced, 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 0.98%* 0.89% 0.87% 0.84% 0.86% 1.25%*
Ratio of net investment income to average
net assets 3.62%* 3.81% 3.85% 3.95% 3.31% 2.69%*
</TABLE>
++ Amount per share does not round to a full penny.
* Annualized
** For the period April 21, 1993 (commencement of operations) to August 31,
1993.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
35
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Six months
ended Eight months Period
February 28, Year ended August 31, ended ended
1998 ------------------------------------- August 31, December 31,
(Unaudited) 1997 1996 1995 1994 1993 1992**
------------ -------- -------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 11.10 $ 10.63 $ 10.53 $ 10.40 $ 11.26 $ 10.58 $ 10.00
Income from investment operations
Net investment income 0.27 0.56 0.57 0.56 0.56 0.38 0.51
Net realized and unrealized gain (loss) on
investments 0.35 0.47 0.10 0.13 (0.74) 0.68 0.58
------------ -------- -------- ------- -------- ------------ ------------
Total from investment operations 0.62 1.03 0.67 0.69 (0.18) 1.06 1.09
Less distributions
Dividends from net investment income (0.28) (0.56) (0.57) (0.56) (0.56) (0.38) (0.51)
Dividends in excess of net investment
income++ -- -- -- -- -- -- --
Dividends from realized gain on investments -- -- -- -- (0.12) -- --
------------ -------- -------- ------- -------- ------------ ------------
Total distributions (0.28) (0.56) (0.57) (0.56) (0.68) (0.38) (0.51)
------------ -------- -------- ------- -------- ------------ ------------
Net asset value at end of period $ 11.44 $ 11.10 $ 10.63 $ 10.53 $ 10.40 $ 11.26 $ 10.58
------------ -------- -------- ------- -------- ------------ ------------
------------ -------- -------- ------- -------- ------------ ------------
Total return (not annualized) 5.65% 9.95% 6.43% 6.98% (1.70% 10.13% 11.10%
Ratios/Supplemental data
Net assets, end of period (000s) $152,295 $125,284 $101,616 $90,045 $106,432 $138,067 $72,969
Ratio of expenses to average net assets+ 0.49%* 0.49% 0.49% 0.58% 0.60% 0.60%* 0.45%*
Ratio of net investment income to average
net assets+ 4.91%* 5.17% 5.30% 5.54% 5.12% 5.18%* 5.72%*
Portfolio turnover rate 15% 35% 36% 46% 48% 47% 124%
</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 by the
Investment Manager and Schwab. Had these expenses not been reduced, the
Fund's expense and net investment income ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 0.86%* 0.82% 0.82% 0.81% 0.80% 0.87%* 1.05%*
Ratio of net investment income to
average net assets 4.53%* 4.84% 4.97% 5.31% 4.92% 4.91%* 5.12%*
</TABLE>
++ Amount per share does not round to a full penny.
* Annualized
** For the period February 24, 1992 (commencement of operations) to December
31, 1992.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 28, 1998 (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 (the "Act"), as amended.
In addition to the Funds, the Trust also offers--the Schwab 1000 Fund-Registered
Trademark-, Schwab Short-Term Bond Market Index Fund, Schwab Total Bond Market
Index 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.
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.
DIVIDENDS TO SHAREHOLDERS--Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
- --------------------------------------------------------------------------------
37
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
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, 1998, (for financial reporting and federal income tax purposes):
<TABLE>
<CAPTION>
Net Unrealized Appreciated Depreciated
Appreciation Securities Securities
-------------- ------------- -----------
<S> <C> <C> <C>
Schwab California Short/Intermediate Tax-Free Bond Fund $ 1,210,000 $ 1,215,000 $ 5,000
Schwab California Long-Term Tax-Free Bond Fund $ 8,824,000 $ 8,880,000 $ 56,000
</TABLE>
CAPITAL LOSS CARRYFORWARDS--As of August 31, 1997, the unused capital loss
carryforwards, for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------- -------------------
<S> <C> <C>
Expiring in:
08/31/03 $ 100,000 --
08/31/04 696,000 $ 1,268,000
---------- -------------------
Total capital loss carryforwards $ 796,000 $ 1,268,000
---------- -------------------
---------- -------------------
</TABLE>
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, 1998 (see Note 4).
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
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,
1998 (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, 1998, the Trust made no direct payments to its
officers or trustees who are "interested persons" within the meaning the Act.
The Funds incurred fees aggregating $14,000 related to the Trust's unaffiliated
trustees.
INTERFUND TRANSACTIONS--During the six months ended February 28, 1998, the Funds
engaged in purchase and sale transactions with funds that have a common
investment adviser, common trustees, and common officers. These transactions,
made at current market value pursuant to Rule 17a-7 under the Act, were
$14,300,000 and $28,600,000 for the Schwab California Short/ Intermediate
Tax-Free Bond Fund and Schwab California Long-Term Tax-Free Bond Fund,
respectively.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab guarantee that, through at least October 31,
1998, each Fund's total operating expenses will not exceed 0.49% of the Fund's
average daily net assets after reductions. For the purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses and
taxes.
For the six months ended February 28, 1998, the total of such fees reduced by
the Investment Manager and Schwab was $125,000 and $25,000 for the Schwab
California Short/Intermediate Tax-Free Bond Fund, respectively, and the total of
such fees reduced by the Investment Manager was $252,000 for the Schwab
California Long-Term Tax-Free Bond Fund, respectively (see Financial
Highlights).
- --------------------------------------------------------------------------------
39
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the six months ended February 28, 1998, 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 $ 14,883 $ 52,586
Proceeds of sales and maturities $ 5,118 $ 20,569
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE>
SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
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 MarketTrack-TM- Portfolios--High**
Schwab MarketTrack-TM- Portfolios--Balanced**
Schwab MarketTrack-TM- Portfolios--Conservative**
Schwab MarketManager-TM- Portfolios--Growth***
Schwab MarketManager-TM- Portfolios--Balanced***
SCHWAB STOCK FUNDS
Schwab 1000 Fund-Registered Trademark-
Schwab S&P 500 Fund
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager-TM- Portfolios--Small Company***
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager-TM- Portfolios--International***
SCHWAB BOND FUNDS
Schwab Bond Index Funds--Total and Short-Term Bond Market Index Funds*
Schwab Tax-Free Bond Funds--Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds--Long-Term and Short/Intermediate
SCHWAB MONEY FUNDS
Schwab offers an array of money 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-Registered Trademark-.
Please call 1-800-435-4000 for a free prospectus and brochure for any of the
SchwabFunds-Registered Trademark-. This report must be preceded or accompanied
by a current prospectus.
EACH PROSPECTUS PROVIDES MORE COMPLETE INFORMATION, INCLUDING CHARGES AND
EXPENSES.
PLEASE READ IT CAREFULLY BEFORE INVESTING.
* Formerly known as the Schwab Government Bond Funds--Long-Term and
Short/Intermediate.
+ 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.
** Formerly called the Schwab Asset Director-Registered Trademark- Funds.
*** Formerly called the Schwab OneSource Portfolios.
