<PAGE> 1
SCHWABFUNDS(R)
[LOGO]
SCHWAB
CALIFORNIA TAX-FREE
BOND FUNDS
ANNUAL REPORT
AUGUST 31, 1996
[PHOTO OF THE SCHWAB BUILDING, SAN FRANCISCO, CALIFORNIA]
<PAGE> 2
Dear Shareholder,
[Photo of I'd like to take this opportunity to share some thoughts on
Charles mutual fund investing and tell you how we're working to expand
R. Schwab] our services to keep pace with your changing needs.
First, however, I want to extend a personal welcome to the many thousands of new
shareholders who've joined the SchwabFunds Family(R) since our last report to
you. With your support, we've become one of the largest and fastest-growing
organizations in the mutual fund industry. Today, Charles Schwab Investment
Management, Inc. serves nearly 2 million shareholders with total assets under
management in excess of $39 billion. SchwabFunds(R) has grown into a mutual fund
complex offering retail investors 26 funds covering a broad range of financial
markets and investing approaches.
TIME-TESTED INVESTING STRATEGIES THAT OFFER YOU AN EXPANDING RANGE OF
OPPORTUNITIES.
Over the past 12 months, we've introduced eight new funds, each built on
specific, time-tested strategies. The three Schwab Asset Director(R) Funds help
you diversify your portfolio through asset allocation, the Schwab S&P 500 Fund
seeks to track U.S. stock market performance through indexing, the Schwab
Analytics Fund(TM) uses advanced quantitative methods to identify attractive
investment opportunities, and the three Schwab OneSource Portfolios help you
diversify your portfolio across asset classes and fund management styles through
their fund-of-funds approach.* Along with our other offerings, these new funds
give you powerful tools you can use to help construct a custom investment
portfolio that matches your individual goals. And, of course, they also allow
you to tap into the combined investing expertise of our highly experienced team
of professional portfolio managers.
ENHANCING SHAREHOLDER COMMUNICATIONS.
Our commitment to shareholders goes beyond simply offering you new investment
opportunities. We also want to help you become a more-informed mutual fund
investor by providing the in-depth information you need to help manage your
portfolio more effectively. Toward that end, we've changed the format of this
report to make it more informative.
If you'd like more information on any of the funds in the SchwabFunds Family,
call 1-800-2 NO-LOAD (1-800-266-5623). Our representatives will be happy to
provide you with a free prospectus, which contains more complete information on
fund risks, charges and expenses. Please read it carefully before investing.
Thank you for placing your trust in us. We'll continue working hard to offer you
an even broader range of strategic investment opportunities.
/s/Charles R. Schwab
--------------------
Charles R. Schwab
*The Schwab OneSource Portfolios - Growth Allocation and Schwab OneSource
Portfolios - Balanced Allocation Funds are in subscription until November 15,
1996, unless the subscription period is extended, at an introductory share price
of $10. After that date the share price will fluctuate.
Cover: The Schwab Building, San Francisco, California
<PAGE> 3
----------------------------------
KEEP YOUR
MONEY WORKING
HARDER!
Use this envelope to easily add to
your Schwab Bond Fund:
-----------------------------------
- --------------------
CHARLES SCHWAB
- --------------------
- --------------------
Attn: Dept. MP333 4 --------------
- -------------------- NO POSTAGE
NECESSARY IF
MAILED IN THE
UNITED STATES
--------------
- ----------------------------------------------------------------------
BUSINESS REPLY MAIL
FIRST-CLASS MAIL PERMIT NO. 18125 SAN FRANCISCO, CA
- ----------------------------------------------------------------------
POSTAGE WILL BE PAID BY ADDRESSEE
CHARLES SCHWAB & CO INC.
PO BOX 7778
SAN FRANCISCO CA 94120-9419
[BAR CODE]
<PAGE> 4
WE'VE MADE IT EASIER FOR YOU! TAKE ADVANTAGE OF THIS OPPORTUNITY TO ADD TO YOUR
SCHWAB BOND FUND INVESTMENT.
Now, you can add to your account by using this convenient Schwab investment
coupon. It's a simple, easy way to increase your investment. You can also have
money transferred to your bond fund directly from your bank account or payroll
check using Schwab's free Automatic Investment Plan (AIP)(1). If you'd like more
information on AIP, just check the appropriate box on the coupon. We'll send
you everything you need to get started.
DON'T DELAY. USE THIS CONVENIENT INVESTMENT ENVELOPE AND SEND YOUR CHECK TODAY!
(1) The Automatic Investment Plan does not ensure profit or protect against
loss in declining markets.
- --------------------------------------------------------------------------------
PLEASE DETACH HERE.
SCHWAB BOND FUND
INVESTMENT COUPON
- --------------------
Please enclose your check and this ________________ - ________________
completed investment coupon in the SCHWAB ACCOUNT NUMBER
attached postage-paid envelope.
PLEASE INDICATE TO WHICH SCHWAB BOND
FUND YOUR INVESTMENT SHOULD GO:
____________________________________
NAME / / Schwab Long-Term Government Bond
Fund
$ / / Schwab Short/Intermediate
____________________________________ Government Bond Fund
AMOUNT OF INVESTMENT*
/ / Schwab California Long-Term
Tax-Free Bond Fund
____________________________________
SIGNATURE / / Schwab California
Short/Intermediate Tax-Free Bond
/ / Check here if you would like Fund
more investment coupons for
future use. / / Schwab Long-Term Tax-Free Fund
/ / Check here if you would like / / Schwab Short/Intermediate Tax-Free
more information on Schwab's Fund
Automatic Investment Plan (AIP).
IF NO FUND IS INDICATED, YOUR
INVESTMENT WILL GO INTO THE SWEEP
*THIS ENVELOPE MAY NOT BE USED FOR ACCOUNT YOU'VE DESIGNATED.
INITIAL INVESTMENTS. SUBSEQUENT
INVESTMENT MINIMUM IS $100.
(C) 1996 Charles Schwab & Co., Inc.
All rights reserved. Member SIPC/NYSE.
Printed on recycled paper.
TF4269(10/96) CBS 10552
(Lift here for more information.)
CHARLES SCHWAB
JUST FOLLOW THESE EASY STEPS TO INVEST IN YOUR SCHWAB BOND FUND:
Fill out the Schwab investment coupon completely, including your name,
1. account number, amount of your check and signature. Please use one
coupon for each account.
Make your check payable to CHARLES SCHWAB & CO., INC., and enclose
2. your check with the completed coupon in this postage-paid envelope.
Then just drop your Schwab Bond Fund investment envelope in the mail
3. today--and start putting your money to work! If you have any questions,
don't hesitate to call your local Schwab office or 1-800-2 NO-LOAD.
THIS ENVELOPE MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT SCHWAB BOND FUND
PROSPECTUS. THE PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST.
<PAGE> 5
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
DIVIDEND PAYMENT ................................................. 2
PERFORMANCE ...................................................... 3
TAXABLE EQUIVALENT YIELD ......................................... 6
FUND INVESTMENTS ................................................. 7
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
AND MARKET OVERVIEW ............................................. 9
FINANCIAL STATEMENTS AND NOTES ................................... 20
</TABLE>
We are pleased to report to you on the performance of the Schwab California
Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term
Tax-Free Bond Fund (the "Funds") for their fiscal year ended August 31, 1996.
During the fiscal year, both Funds continued to help you achieve your investment
goals by providing a relatively steady stream of monthly income, exempt from
federal and California personal income taxes and consistent with capital
preservation. Each Fund's individual performance is reviewed in detail in the
following pages.
1
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DIVIDEND PAYMENT FOR THE FISCAL YEAR
FROM EACH FUND'S INCEPTION DATE
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
============================================================================
<TABLE>
<CAPTION>
1993* 1994 1995 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Dividends $ 0.13 $ 0.37 $ 0.42 $ 0.43
- ----------------------------------------------------------------------------
Capital Gains -- -- -- --
- ----------------------------------------------------------------------------
*Commencement of operations April 21, 1993.
</TABLE>
<TABLE>
<CAPTION>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
============================================================================
1992* 1993 1994 1995 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Dividends $ 0.51 $ 0.38 $ 0.56 $ 0.56 $ 0.57
- ----------------------------------------------------------------------------
Capital Gains -- -- $ 0.12 -- --
- ----------------------------------------------------------------------------
*Commencement of operations February 24, 1992.
</TABLE>
2
<PAGE> 7
PERFORMANCE
<TABLE>
<CAPTION>
Schwab California Short/Intermediate Tax-Free Bond Fund
================================================================================
Yield and Total Return as of August 31, 1996
Average Annual
30-Day One-Year Total Return
SEC Yield Total Return Since Inception (4/21/93)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
4.20% 4.11% 4.19%
- --------------------------------------------------------------------------------
</TABLE>
Total return assumes reinvestment of all dividends and capital gain
distributions, if any. Past performance is no guarantee of future results.
Principal value and investment returns will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than their original cost. The
Investment Manager and Schwab waived a portion of their fees during the fiscal
year and have guaranteed that maximum total operating expenses will not exceed
0.49% through at least 12/31/96. Without fee waivers and guarantees, for the
periods ended 8/31/96, the Fund's 30-day SEC yield, one-year total return and
average annual total return since inception would have been 3.53%, 3.72%, and,
3.77%, respectively.
<TABLE>
<CAPTION>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
================================================================================
Yield and Total Return as of August 31, 1996
Average Annual
30-Day One-Year Total Return
SEC Yield Total Return Since Inception (2/24/92)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5.34% 6.43% 7.20%
- --------------------------------------------------------------------------------
</TABLE>
Total return assumes reinvestment of all dividends and capital gain
distributions, if any. Past performance is no guarantee of future results.
Principal value and investment returns will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than their original cost. The
Investment Manager and Schwab waived a portion of their fees during the fiscal
year and have guaranteed that maximum total operating expenses will not exceed
0.49% through at least 12/31/96. Without fee waivers and guarantees, for the
periods ended 8/31/96, the Fund's 30-day SEC yield, one-year total return and
average annual total return since inception would have been 4.91%, 6.09%, and
6.80%, respectively.
3
<PAGE> 8
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND AND
THE LEHMAN 3-YEAR MUNICIPAL BOND INDEX
-------------------------------
AVERAGE ANNUAL TOTAL RETURNS
THROUGH AUGUST 31, 1996
-------------------------------
ONE YEAR SINCE INCEPTION
4.11% 4.19%
-------------------------------
[Line Graph of comparison of Schwab California Short/Intermediate Tax-Free Bond
Fund and the Lehman 3-Year Municipal Bond Index.]
<TABLE>
<CAPTION>
Schwab California Short/
Intermediate Tax-Free Lehman 3 year
Bond Fund Municipal Bond Index
- ---------------------------------------------------------------
Corrected
Dp Par Value
-------------------------------------------------
DATE Income Fund
- ---------------------------------------------------------------
<S> <C> <C>
10,000 $10,000
4/21-4/30/93 9,924 9,990
5/31/93 10,021 10,037
6/30/93 10,085 10,136
7/31/93 10,090 10,157
8/31/93 10,185 10,257
9/30/93 10,229 10,328
10/31/93 10,251 10,340
11/30/93 10,237 10,310
12/31/93 10,345 10,444
1/31/94 10,429 10,517
2/28/94 10,332 10,372
3/31/94 10,207 10,188
4/30/94 10,267 10,239
5/31/94 10,315 10,272
6/30/94 10,318 10,253
7/31/94 10,404 10,356
8/31/94 10,441 10,390
9/30/94 10,416 10,350
10/31/94 10,390 10,280
11/30/94 10,371 10,167
12/31/94 10,416 10,227
1/31/95 10,502 10,350
2/28/95 10,613 10,503
3/31/95 10,708 10,598
4/30/95 10,744 10,614
5/31/95 10,909 10,826
6/30/95 10,935 10,809
7/31/95 11,050 10,925
8/31/95 11,137 11,030
9/30/95 11,168 11,090
10/31/95 11,222 11,174
11/30/95 11,294 11,256
12/31/95 11,341 11,296
1/31/96 11,430 11,366
2/29/96 11,452 11,358
3/31/96 11,425 11,308
4/30/96 11,439 11,325
5/31/96 11,449 11,332
6/30/96 11,518 11,393
7/31/96 11,581 11,466
8/31/96 11,598 11,483
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance graph compares a hypothetical $10,000 investment in the Schwab
California Short/Intermediate Tax-Free Bond Fund since inception with a
hypothetical investment in the Lehman 3-Year Municipal Bond Index. The
Index is unmanaged and assumes reinvestment of all dividends, and, unlike the
Fund, does not reflect the payment of advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly. Fund total return assumes the reinvestment of all dividends and
capital gain distributions, if any. The Investment Manager and Schwab waived a
portion of their fees during the reporting period, and have guaranteed that
maximum total operating expenses will not exceed 0.49% through at least
12/31/96. Without fee waivers and guarantees, the Fund's total return would have
been lower.
4
<PAGE> 9
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
IN THE SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND AND
THE LEHMAN GENERAL MUNICIPAL BOND INDEX
----------------------------
Average Annual Total Returns
THROUGH AUGUST 31, 1996
----------------------------
ONE YEAR SINCE INCEPTION
6.43% 7.20%
----------------------------
[Line Graph of Comparison of Schwab California Long-Term Tax-Free Bond Fund and
the Lehman General Municipal Bond Index.]
<TABLE>
<CAPTION>
Schwab California Long-Term Lehman General
Date Tax-Free Bond Fund Municipal Bond Index
<S> <C> <C>
3/1/92 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 11,893 $11,901
2/28/95 12,238 $12,295
3/31/95 12,379 $12,414
4/30/95 12,394 $12,407
5/31/95 12,789 $12,825
6/30/95 12,677 $12,613
7/31/95 12,797 $12,685
8/31/95 12,960 $12,866
9/30/95 13,041 $12,972
10/31/95 13,230 $13,228
11/30/95 13,450 $13,507
12/31/95 13,579 $13,690
1/31/96 13,682 $13,785
2/29/96 13,589 $13,664
3/31/96 13,415 $13,436
4/30/96 13,378 $13,369
5/31/96 13,373 $13,379
6/30/96 13,518 $13,550
7/31/96 13,641 $13,700
8/31/96 13,639 $13,693
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance graph compares a hypothetical $10,000 investment in the Schwab
California Long-Term Tax-Free Bond Fund since inception with a hypothetical
investment in the Lehman General Municipal Bond Index. The Index is unmanaged
and assumes reinvestment of all dividends, and, unlike the Fund, does not
reflect the payment of advisory fees and other expenses associated with an
investment in the Fund. Investors cannot invest in an index directly. Fund
total return assumes the reinvestment of all dividends and capital gain
distributions, if any. The Investment Manager and Schwab waived a portion of
their fees during the reporting period, and have guaranteed that maximum total
operating expenses will not exceed 0.49% through at least 12/31/96. Without fee
waivers and guarantees, the Fund's total return would have been lower.
5
<PAGE> 10
TAXABLE EQUIVALENT YIELD
To evaluate the performance of a tax-free bond fund, you should pay special
attention to the fund's taxable equivalent yield. While hypothetical in nature,
this measure of performance offers you a convenient way to assess the additional
yield which would be required of a taxable bond fund in order for the yield of
that fund to be equivalent to a tax-exempt yield after you pay federal and
California personal income taxes.
1. If your 1996 combined federal and California
personal income tax bracket is...
<TABLE>
<CAPTION>
34% 35% 37% 42% 45%
California
Tax-Free Yield
<S> <C> <C> <C> <C> <C>
3.50% 5.30% 5.38% 5.56% 6.03% 6.36%
4.00% 6.06% 6.15% 6.35% 6.90% 7.27%
4.50% 6.82% 6.92% 7.14% 7.76% 8.18%
5.00% 7.58% 7.69% 7.94% 8.62% 9.09%
5.50% 8.33% 8.46% 8.73% 9.48% 10.00%
6.00% 9.09% 9.23% 9.52% 10.34% 10.91%
</TABLE>
2. And you have 3. Here is what you would have to earn
a tax-free from a taxable investment to match
investment the tax-free yield.
yielding...
The chart is for illustrative purposes only and does not
reflect the performance of either Fund.
FUND INVESTMENTS
The investment portfolios of both California Tax-Free Bond Funds consist of a
mix of investment-grade municipal bonds from a variety of California issuers.
More detailed information on each Fund's investments, as of August 31, 1996, can
be found in the Schedule of Investments section of this report following the
Question and Answer section. This information is not necessarily indicative of
the Funds' future holdings.
6
<PAGE> 11
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
TOP 10 HOLDINGS
BOND INVESTMENT % OF FUND INVESTMENTS
Los Angeles, California Unified School District 7.38%
Orange County, California Municipal Water Facilities 6.58%
Port of Long Beach, California Harbor 4.70%
California State Public Works
(University of California Projects) 4.61%
California Statewide Community Development
Authority 4.59%
Foothill, California Transit Zone 4.42%
California State Public Works
(California State University) 4.38%
Rancho, California Water District 4.35%
California State Public Works
(Department of Corrections) 4.14%
Los Angeles, California Wastewater System 4.10%
PORTFOLIO QUALITY SUMMARY
<TABLE>
<CAPTION>
AAA AA A BBB Other
<S> <C> <C> <C> <C>
38% 21% 30% 7% 4%*
</TABLE>
As of August 31, 1996 this summary reflects the published ratings (for the
investments in the portfolio) of Standard & Poor's Ratings Group and/or Moody's
Investor Service, which are recognized rating services. Categories reflect the
higher published ratings for securities rated differently by the two agencies
and percentages are dollar-weighted.
*Includes short-term securities.
7
<PAGE> 12
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
TOP 10 HOLDINGS
BOND INVESTMENT % OF FUND INVESTMENTS
California Health Facilities
Financing Authority (Children's Hospital) 4.86%
Southern California Public Power Authority
(San Juan Power Project) 4.24%
California State Public Works (California State University) 4.23%
California Health Facilities
Financing Authority (Marshall Hospital) 4.11%
Santa Clara County, California Financing Authority 3.95%
Orange County, California Sanitation District 3.59%
San Diego, California Public Facilities Finance Authority 3.54%
Northern California Power Agency
Multiple Capital Facilities 3.51%
Westminster, California Public Financing Authority 3.47%
San Francisco, California Bay Area Rapid Transit 3.35%
PORTFOLIO QUALITY SUMMARY
<TABLE>
<CAPTION>
AAA AA A Other
<S> <C> <C> <C>
54% 13% 29% 4%*
</TABLE>
As of August 31, 1996 this summary reflects the published ratings (for the
investments in the portfolio) of Standard & Poor's Ratings Group and/or Moody's
Investor Service, which are recognized rating services. Categories reflect the
higher published ratings for securities rated differently by the two agencies
and percentages are dollar-weighted.
*Includes short-term securities.
8
<PAGE> 13
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM OF
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
STEPHEN B. WARD - Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of each Fund's portfolio. Steve joined
CSIM as Vice President and Portfolio Manager in April 1991, and was promoted to
his current position in August 1993. Prior to joining CSIM, Steve was Vice
President and Portfolio Manager at Federated Investors. He holds an MBA from the
Wharton School, a B.A. in economics from Virginia Tech, and has been a Chartered
Financial Analyst since 1985.
JOANNE LARKIN - Portfolio Manager, has primary responsibility for the day-to-day
management of each Fund's portfolio. Joanne joined CSIM as Portfolio Manager in
February 1992. Prior to joining CSIM, Joanne was Portfolio Manager for the
Shearson Lehman California Municipal Bond Fund and E.F. Hutton's Municipal Cash
Reserve Management. She holds a B.A. in sociology from Rosemont College.
MARKET OVERVIEW
ECONOMIC HIGHLIGHTS
At the beginning of the fiscal year there was concern about the likelihood of an
economic recession. However, as time progressed the economic climate changed. By
August 31, 1996, sentiment was focused on the apparent strength of the economy
and its potential impact on future inflation. During the first half of 1996,
many economic observers were surprised by the increase in the real Gross
Domestic Product (GDP) growth rate and the strength of the labor market. The
real GDP growth rate was 2.0% for the first quarter of 1996 and 4.7% for the
second quarter. The average monthly increase in payroll employment jumped from
185,000 in 1995 to 234,000 during the first eight months of 1996, leading to the
lowest unemployment rates in this decade.
The economy continues to exhibit signs of strong economic growth as evidenced by
the growth in jobs, retail sales, auto sales and construction spending.
Inflation has remained relatively low, as evidenced by the
9
<PAGE> 14
3.0% increase in the Consumer Price Index (CPI) for the 12 months ended
August 31, 1996. However, there still remains a concern that the economy is
performing at or near its employment and manufacturing capacity. As a result,
the Federal Reserve (the Fed) has indicated it will maintain a posture of
"heightened surveillance" and remain diligent in its effort to prevent increases
in inflation.
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
[Line Graph of Total Return Performance of the Schwab Small-Cap Index, S & P
500, Schwab International Index, and the Lehman M F General U.S. Govt. Index.]
<TABLE>
<CAPTION>
Schwab Schwab Lehman MF
Small Cap International General US
S&P 500 Index Index Govt. Index
<S> <C> <C> <C> <C>
Aug-95 $1.000 $1.000 $1.000 $1.000
Sep-95 1.042 1.020 1.024 1.010
Oct-95 1.038 0.971 1.007 1.025
Nov-95 1.084 1.017 1.035 1.041
Dec-95 1.105 1.042 1.075 1.056
Jan-96 1.142 1.039 1.078 1.062
Feb-96 1.153 1.081 1.080 1.040
Mar-96 1.164 1.100 1.101 1.032
Apr-96 1.181 1.158 1.127 1.025
May-96 1.212 1.197 1.113 1.024
Jun-96 1.216 1.159 1.121 1.037
Jul-96 1.162 1.066 1.092 1.039
Aug-96 1.187 1.133 1.101 1.037
</TABLE>
Total return assumes reinvestments of all dividends and capital gain
distributions. Past performance is no guarantee of future results. The indices
are representative returns of specific market sectors from 9/1/95 through
8/31/96 and do not reflect a fund's performance. Indices are unmanaged, and
unlike a fund, do not reflect advisory fees and other expenses associated with
an investment in a fund. Investors cannot invest in an index directly.
DOMESTIC EQUITY MARKET HIGHLIGHTS
As shown in the graph above, large-cap stocks, as represented by the S&P 500,
outperformed small-cap stocks, international stocks and bonds, achieving a total
return of 18.7% for the fiscal year. The S&P 500
10
<PAGE> 15
reached its fiscal year high late in May, marking the end of (or at least a
pause in) a remarkable 52.4% total return since the beginning of 1995.
Many segments of the equity market reached record highs and demonstrated
significant volatility during the fiscal year. The Dow Jones Industrial Average
and the S&P 500 reached record highs of 5,778.0 on May 22 and 678.5 on May 24,
respectively. The NASDAQ Index reached a record high of 1,249.1 on June 5, then
proceeded to drop 8.6% by the end of the fiscal year. Three of the eight
all-time largest daily point losses for the Dow occurred during the fiscal year
- -- two of which were a result of stronger than expected payroll growth and the
attendant fears that the Fed might raise short-term interest rates.
Using most traditional measures, such as price-to-book value and dividend yield,
many major market indices remain valued near their historic highs. The primary
exception is the price-to-earnings ratio which, at 19 times earnings (for the
S&P 500), is well above its historical average, but below its 1991 and 1987
highs of 26 and 22, respectively.
INTERNATIONAL EQUITY MARKET HIGHLIGHTS
International equity returns were more modest and were heavily influenced by the
strengthening dollar. In local currency terms, the total return of the Schwab
International Index(R) 1 for the 12 months ended August 31, 1996 was 13.43%.
However, because the U.S. dollar increased in value against most other
currencies, the total return for U.S. dollar-denominated investors was 10.14%.
1 The Schwab International Index is representative of the international equity
market. This Index is comprised of the stocks of the 350 largest non-U.S.
companies located in countries with developed securities markets and excludes
investment companies.
11
<PAGE> 16
30-YEAR AND 5-YEAR TREASURY BOND YIELDS
[Line Graph of Comparison of 30-Year Treasury Bond Yield and 5-Year Treasury
Bond Yield.]
<TABLE>
<CAPTION>
30-Year 5-Year
Treasury Bond Treasury Bond
Yield Yield
<S> <C> <C>
9/1/95 6.62% 6.02%
9/8/95 6.59 6.03
9/15/95 6.48 5.93
9/22/95 6.59 6.06
9/29/95 6.50 6.02
10/6/95 6.42 5.88
10/13/95 6.30 5.80
10/20/95 6.36 5.90
10/27/95 6.36 5.83
11/3/95 6.28 5.70
11/10/95 6.34 5.76
11/17/95 6.23 5.65
11/24/95 6.25 5.69
12/1/95 6.09 5.49
12/8/95 6.05 5.55
12/15/95 6.10 5.57
12/22/95 6.06 5.50
12/29/95 5.95 5.38
1/5/96 6.05 5.41
1/12/96 6.15 5.43
1/19/96 5.97 5.27
1/26/96 6.05 5.33
2/2/96 6.16 5.26
2/9/96 6.10 5.23
2/16/96 6.24 5.30
2/23/96 6.41 5.51
3/1/96 6.37 5.58
3/8/96 6.71 6.06
3/15/96 6.74 6.18
3/22/96 6.66 6.06
3/29/96 6.67 6.09
4/5/96 6.82 6.38
4/12/96 6.80 6.29
4/19/96 6.79 6.32
4/26/96 6.79 6.28
5/3/96 7.12 6.60
5/10/96 6.93 6.47
5/17/96 6.83 6.41
5/24/96 6.83 6.41
5/31/96 6.99 6.63
6/7/96 7.03 6.70
6/14/96 7.09 6.70
6/21/96 7.10 6.72
6/28/96 6.87 6.46
7/5/96 7.19 6.82
7/12/96 7.03 6.65
7/19/96 6.97 6.57
7/26/96 7.01 6.63
8/2/96 6.74 6.27
8/9/96 6.69 6.22
8/16/96 6.77 6.30
8/23/96 6.96 6.51
8/30/96 7.12 6.72
</TABLE>
DOMESTIC BOND MARKET HIGHLIGHTS
As shown in the chart above, during the first half of the fiscal year, both
intermediate and long-term Treasury bond yields declined, causing a
corresponding increase in the value of bonds. This decline in rates was a result
of concerns over a potential recession, an anticipated decline in demand for
borrowing and reduced inflationary expectations. The domestic bond market
experienced a dramatic reversal in sentiment during February, which marked the
beginning of a sharp increase in Treasury bond yields and a corresponding
decrease in the value of bonds. The increase in rates was a result of strong
economic data and concerns that the economy may be growing too fast, which could
result in higher inflation levels in the future.
12
<PAGE> 17
Q. WHAT ACTIONS DID THE PORTFOLIO MANAGERS TAKE ON BEHALF OF THE FUNDS TO
RESPOND TO CHANGES IN INTEREST RATES?
A. In response to the strong economic reports, heightened market volatility and
the possibility of restrictive action by the Fed, we adopted a defensive
portfolio strategy in both of the Funds. By maintaining the Funds' weighted
average maturity in a moderately short to neutral position, we were able to
minimize the effects of short-term market volatility as well as minimize any
decline in the value of portfolio holdings resulting from rising interest rates.
During most of the fiscal year, the average maturity of the Schwab California
Short/Intermediate Tax-Free Bond Fund was maintained in the range of 3.5 to 3.9
years. The Schwab California Long-Term Tax-Free Bond Fund maintained an average
maturity of approximately 18 years throughout much of the fiscal year. Given the
Funds' typical maturity ranges, this represents a cautious strategy, reflecting
our concern over the strong economic data, while also taking into account the
relative strength of the municipal bond market during the latter half of the
fiscal year.
During the fiscal year, we made moderate adjustments to each Fund's weighted
average portfolio maturity in an effort to lock in higher yields during periods
when we felt the market had overreacted to some of the strong employment and
other economic reports. Short-term supply and demand conditions also played an
important role. As is typical in July, there was a significant degree of
liquidity in the market resulting from the fact that many bonds mature or first
become callable in June. The proceeds from these maturing bonds are reinvested
in various sectors of the market based on investors' expectations of future
market performance. This is called a rollover. Our view was that there would be
more than normal demand for long-term municipal bonds, relative to a typical
rollover period. We held this view primarily because we felt investors would be
less likely to invest rollover proceeds into an equity market
13
<PAGE> 18
30-YEAR AND 5-YEAR MUNICIPAL BOND YIELDS
[Line Graph of Comparison of 30-Year Municipal Bond Yield and 5-Year Municipal
Bond Yield.]
<TABLE>
<CAPTION>
30-Year 5-Year
Muni Muni
Bond Bond
Yield Yield
- --------------------------------------
<S> <C> <C>
9/1/95 5.85% 4.29%
9/8/95 5.79 4.23
9/15/95 5.69 4.13
9/22/95 5.81 4.30
9/29/95 5.81 4.30
10/6/95 5.71 4.24
10/13/95 5.62 4.15
10/20/95 5.62 4.19
10/27/95 5.65 4.27
11/3/95 5.54 4.20
11/10/95 5.57 4.25
11/17/95 5.52 4.20
11/24/95 5.53 4.21
12/1/95 5.39 4.13
12/8/95 5.28 4.08
12/15/95 0.0532 4.18
12/22/95 5.36 4.22
12/29/95 5.28 4.14
1/5/96 5.27 4.20
1/12/96 5.32 4.25
1/19/96 5.23 4.16
1/26/96 5.29 4.20
2/2/96 5.23 4.08
2/9/96 5.16 3.98
2/16/96 5.17 3.94
2/23/96 5.30 4.04
3/1/96 5.34 4.06
3/8/96 5.62 4.32
3/15/96 5.81 4.51
3/22/96 5.69 4.38
3/29/96 5.69 4.38
4/5/96 5.82 4.51
4/12/96 5.78 4.48
4/19/96 5.72 4.57
4/26/96 5.66 4.42
5/3/96 5.86 4.62
5/10/96 5.80 4.56
5/17/96 5.73 4.55
5/24/96 5.69 4.51
5/31/96 5.82 4.64
6/7/96 5.97 4.79
6/14/96 5.92 4.74
6/21/96 5.89 4.71
6/28/96 5.77 4.61
7/5/96 5.94 4.78
7/12/96 5.82 4.68
7/19/96 5.74 4.60
7/26/96 5.70 4.59
8/2/96 5.51 4.40
8/9/96 5.44 4.33
8/16/96 5.49 4.37
8/23/96 5.61 4.47
8/30/96 5.71 4.57
</TABLE>
which was near all-time highs. As the graph above and on the next page show,
there was a reduction in municipal bond yields in July, as well as a reduction
in municipal bond yields relative to Treasury bond yields. We were able to
capitalize on this market move by extending the average maturity of the Schwab
California Long-Term Tax-Free Bond Fund from 17.5 years to 19.4 years during
June. This extension enhanced the positive impact of these market movements.
In view of the strong outlook for economic growth at the end of the fiscal year,
we expect to remain cautious in our strategies for managing both Funds. We will
continue to focus on the economic and political environment and to monitor the
various sectors of the municipal securities market that may impact our
investment strategies.
14
<PAGE> 19
RATIO OF TAX-EXEMPT TO TAXABLE BOND YIELD
[Line Graph of Ratio of Tax-Exempt to Taxable Bond Yield of 30-Year and
5-Year.]
<TABLE>
<CAPTION>
30-YEAR 5-YEAR
- -------- ------- ------
<S> <C> <C>
9/1/95 88.4% 71.3%
9/8/95 87.9 70.2
9/15/95 87.8 69.7
9/22/95 88.2 71.0
9/29/95 89.4 71.5
10/6/95 88.9 72.1
10/13/95 89.1 71.6
10/20/95 88.3 71.1
10/27/95 88.9 73.3
11/3/95 88.2 73.7
11/10/95 87.9 73.7
11/17/95 88.6 74.3
11/24/95 88.5 74.0
12/1/95 88.6 75.2
12/8/95 87.2 73.5
12/15/95 87.2 75.1
12/22/95 88.4 76.7
12/29/95 88.8 76.9
1/5/96 87.2 77.6
1/12/96 86.5 78.3
1/19/96 87.5 79.0
1/26/96 87.5 78.8
2/2/96 84.9 77.6
2/9/96 84.6 76.1
2/16/96 82.8 74.4
2/23/96 82.7 73.3
3/1/96 83.9 72.8
3/8/96 83.7 71.3
3/15/96 86.2 73.0
3/22/96 85.5 72.3
3/29/96 85.3 72.0
4/5/96 85.3 70.7
4/12/96 85.0 71.2
4/19/96 84.3 72.3
4/26/96 83.4 70.4
5/3/96 82.3 70.0
5/10/96 83.7 70.4
5/17/96 83.9 71.0
5/24/96 83.3 70.4
5/31/96 83.3 70.0
6/7/96 84.9 71.5
6/14/96 83.5 70.7
6/21/96 83.0 70.1
6/28/96 84.0 71.3
7/5/96 82.6 70.1
7/12/96 82.8 70.3
7/19/96 82.3 70.0
7/26/96 81.3 69.3
8/2/96 81.7 70.2
8/9/96 81.3 69.6
8/16/96 81.1 69.4
8/23/96 80.6 68.7
8/30/96 80.2 68.0
</TABLE>
Q. HOW DO THE SCHWAB CALIFORNIA TAX-FREE BOND FUNDS FIT INTO AN ASSET ALLOCATION
PLAN?
A. The Schwab California Tax-Free Bond Funds can be used to fulfill all or a
portion of the bond component of an asset allocation plan. Bond funds can be an
important element in an asset allocation plan because of their ability to
generate income and reduce overall portfolio volatility. The choice of a taxable
or tax-exempt bond fund, in part, depends on whether or not you plan to hold the
fund in a tax-deferred account, such as an IRA or 401(k). If not, your marginal
tax bracket will play an important role in your choice of a taxable or
tax-exempt fund.
Short/intermediate bond funds historically have offered greater price stability
in exchange for lower yields, while funds with longer weighted average
maturities historically have paid higher yields with correspondingly greater
price volatility. Funds with longer weighted average maturities historically
have offered more stable income streams because they can
15
<PAGE> 20
lock in rates on individual bonds for longer periods of time. The selection of
the most appropriate fund will depend on your degree of risk tolerance and your
investing time frame. To position your income portfolio to respond to
fluctuating interest rates or to create a balanced combination of maturities,
you may wish to consider investing in both Schwab California Tax-Free Bond
Funds.
Q. HOW ARE THE FUNDS' MONTHLY DIVIDEND DISTRIBUTIONS DETERMINED?
A. Our general dividend policy is to pay out 100% of each Fund's net investment
income to shareholders on an annual basis. Since net investment income is
accrued daily, and some months have more days than others, we apply a
"normalization" factor to each month's dividend. This factor is designed to
smooth out the normal monthly in dividends which would result from the varying
number of days in different months. However, this does not mean that the monthly
dividend will not fluctuate. Fund holdings are constantly changing as new
investors invest in the Fund, or as we make changes in the portfolio to respond
to changing market conditions. For example, if interest rates fall, we invest
new shareholder contributions and reinvested dividends at the new lower rates,
which in turn has the effect of reducing the monthly dividend. We believe that
this is not necessarily bad, since a fall in rates is typically associated with
a rise in the Fund's net asset value. Some bond funds make an effort to maintain
a constant monthly dividend. We believe that this is not always a wise strategy,
because in times of falling interest rates, the manager may be taking on
additional portfolio risk in order to maintain the dividend level.
16
<PAGE> 21
Q. WHAT IS YOUR VIEW OF THE ECONOMIC CLIMATE IN CALIFORNIA?
A. During the last two years, California's economic recovery has broadly
reflected the movement and pace of national trends. While California has
regained all the jobs it lost during the last recession, the State's
unemployment rate continues to exceed the national average. Moreover, a
persistent softness in the real estate market -- and sluggish figures for new
home construction -- will likely keep unemployment levels above the national
average in the near future.
While California has eliminated its accumulated budget deficit of approximately
$2 billion, lawmakers will continue to face the challenges of maintaining
necessary services -- education, infrastructure improvements, public health,
welfare and safety -- with available tax revenues against a backdrop of budget
reductions. Governor Pete Wilson's current budget proposal assumes levels of
federal assistance and state economic growth that may or may not be realized.
Consequently, the state's financial position over the next 12 months is yet to
be determined.
We are satisfied with the credit quality of the California securities the Funds
own, and we will continue to monitor the state's economic situation closely.
California's current long-term credit ratings are A1 from Moody's Investor
Service, A+ from Standard & Poor's Corporation and A+ from Fitch Investors
Services, three well known rating agencies. These ratings reflect recent
upgrades by Standard & Poor's and Fitch, which are indications of California's
recovering economy.
17
<PAGE> 22
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 8/31/96 as of 8/31/95 Reporting
(000s) (000s) Period
- --------------------------------------------------------------
<S> <C> <C>
$45,788 $40,639 13%
- --------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1996
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
1 - 6 Months $ 836 1.9% 1.9%
7 - 36 Months 13,810 30.5 32.4
37 - 60 Months 21,765 48.1 80.5
Over 60 Months 8,830 19.5 100.0%
------- -----
$45,241 100.0%
======= =====
</TABLE>
Average Weighted Maturity--3.62 Years
18
<PAGE> 23
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Growth Over
as of 8/31/96 as of 8/31/95 Reporting
(000s) (000s) Period
- --------------------------------------------------------------
<S> <C> <C>
$101,616 $90,045 13%
- --------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1996
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
0 - 1 Year $ 4,390 4.4% 4.4%
2 - 10 Years 1,303 1.3 5.7
11 - 20 Years 51,505 51.3 57.0
21 - 30 Years 43,206 43.0 100.0%
-------- -----
$100,404 100.0%
======== =====
</TABLE>
Average Weighted Maturity--18.79 Years
19
<PAGE> 24
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--98.1%(a)
California Housing Finance Agency Home Mortgage
Revenue Bonds Series G (Aa AA-)
5.65%, 02/01/98 $ 500 $ 506
5.65%, 08/01/98 585 594
5.85%, 08/01/99 320 328
6.00%, 08/01/00 410 422
California State Public Works Board Lease Revenue
Refunding Bonds (California Community College
Projects) Series 1993A (A A-)
4.70%, 12/01/99 1,000 1,002
California State Public Works Board Lease Revenue
Refunding Bonds (California State University)
Series 1993A (A A-)
4.30%, 12/01/99 2,000 1,982
California State Public Works Board Lease Revenue
Refunding Bonds (Department of Corrections State
Prisons) Series A/(AMBAC Insurance) (Aaa AAA)
4.70%, 12/01/00 1,865 1,874
California State Public Works Board Lease Revenue
Refunding Bonds (Department of Corrections-State
Prison-Susanville) Series D (A A-)
4.40%, 06/01/00 1,000 986
California State Public Works Board Lease Revenue
Refunding Bonds (Various University of
California Projects) Series A (A A-)
4.70%, 06/01/00 1,020 1,011
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 2,085
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates of
Participation (St. Joseph Health Systems)
(Aa AA)
5.30%, 07/01/00 2,035 2,078
California Statewide Community Development
Authority Hospital Revenue Refunding Bonds
Certificates of Participation (Cedars-Sinai
Medical Center) (A1 -)
4.40%, 11/01/00 1,235 1,204
Contra Costa County, California Transportation
Authority Sales Tax Revenue Bonds Series A/
(FGIC Insurance) (Aaa AAA)
4.80%, 03/01/01 1,000 1,005
Foothill, California Transit Zone Certificates of
Participation Refunding Bonds Referendum
Series A (Baa1 -)
4.50%, 05/01/97 1,000 1,000
4.50%, 11/01/97 1,000 1,000
</TABLE>
20
<PAGE> 25
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Garden Grove, California Tax Allocation Refunding
Bonds (Community Development Projects) (- A)
4.70%, 10/01/98 $1,060 $1,059
Los Angeles County, California Flood Control
District Revenue Bonds (Aa1 AA-)
4.30%, 03/01/00 1,090 1,082
Los Angeles, California Convention & Exhibition
Center Authority Certificates of Participation
Series A/(Escrowed to Maturity with Government
Securities) (Aaa AAA)
7.38%, 08/15/99 1,000 1,095
Los Angeles, California State Building Authority
Revenue Refunding Bonds (California Department
of General Services) Series A (A A-)
4.50%, 05/01/98 400 399
4.70%, 05/01/99 450 449
Los Angeles, California Unified School District
Certificates of Participation (Multiple
Properties) Series 1994B/(AMBAC Insurance)
(Aaa AAA)
5.70%, 12/01/99 3,215 3,339
Los Angeles, California Wastewater System Revenue
Bonds Series A (A1 A)
6.60%, 02/01/99 1,775 1,857
Morgan Hill, California Unified School District
Certificates of Participation (A1 -)
4.80%, 08/01/99 510 509
Northern California Power Agency Revenue Bonds
(Geothermal Project No. 3) Series B/(AMBAC
Insurance) (Aaa AAA)
5.00%, 07/01/99 1,360 1,382
Orange County, California Municipal Water
Facilities Certificates of Participation
(Allen-McColloch Pipeline)/(MBIA Insurance)
(Aaa AAA)
4.60%, 07/01/01 3,000 2,977
Port of Long Beach, California Harbor Revenue
Bonds (Aa AA-)
7.10%, 05/15/99 2,000 2,127
Rancho, California Water District Financing
Authority Revenue Bonds/(Toronto-Dominion Bank
LOC) (Aa2 AA)
4.70%, 09/15/01 2,000 1,967
Riverside County, California Public Financing
Authority Special Tax Revenue Bonds Series
A/(MBIA Insurance) (Aaa AAA)
4.40%, 09/01/01 1,750 1,724
San Diego County, California Tax & Revenue
Anticipation Notes (MIG1 SP1+)
4.38%, 09/30/97 1,500 1,505
San Francisco, California Port Commission Revenue
Refunding Bonds (A BBB+)
5.00%, 07/01/00 1,500 1,500
</TABLE>
21
<PAGE> 26
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
San Joaquin, California Area Flood Control Agency
Special Assessment Bonds/(FSA Insurance) (Aaa -)
5.10%, 09/02/03 $1,700 $1,702
San Ramon Valley, California Unified School
District Certificates of Participation (Measure
A Capital Project) Series A/(Escrowed to
Maturity with Government Securities) (A -)
4.90%, 10/01/99 1,100 1,104
Santa Monica, California Wastewater Enterprise
Revenue Bonds (Hyperion Project) Series A
(Pre-Refunded) (A1 A+)
6.25%, 01/01/02 1,250 1,352
Stockton, California Health Facilities Revenue
Bonds (St. Joseph Medical Center) Series A/(MBIA
Insurance) (Aaa AAA)
4.60%, 06/01/00 200 199
TOTAL MUNICIPAL BONDS -------
(Cost $44,181) 44,405
-------
VARIABLE RATE OBLIGATIONS--1.7%(b)
California Pollution Control Financing Authority
Revenue Bonds (Burney Forest Project) Series
1988A/(National Westminster Bank LOC) (Aa3 -)
3.70%, 09/01/96 100 100
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986A (VMIG1 A-1+)
3.75%, 09/01/96 100 100
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985A-1/(Landesbank
Hessen-Thuringen Girozentrale LOC) (- A-1)
3.75%, 09/01/96 50 50
Irvine, California Improvement Bond Act 1915
Revenue Bonds (Assessment District No. 89-10)
(VMIG1 A-1+)
3.75%, 09/01/96 100 100
Irvine, California Improvement Bond Act 1915
Revenue Bonds (Assessment District No. 95-12)
Series 1996A/ (Kredietbank LOC) (Aa2 AA-)
3.75%, 09/01/96 300 300
</TABLE>
22
<PAGE> 27
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Orange County, California Sanitation District No.
123 Certificates of Participation (Capital
Improvement Program 1990-92) Series C/(FGIC
Insurance) (VMIG1 A-1+)
3.65%, 09/01/96 $100 $100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $750) 750
-------
Shares
------
CASH EQUIVALENTS--0.2%(c)
Provident Institutional Funds--
California Money Fund Portfolio
2.97%, 09/07/96 86 86
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $86) 86
-------
TOTAL INVESTMENTS--100.0%
(Cost $45,017) $45,241
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
23
<PAGE> 28
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
MUNICIPAL BONDS--95.6%(a)
Alameda County, California Public Facilities
Corp. Certificates of Participation (Capital
Projects) (A A+)
6.25%, 06/01/06 $1,000 $1,041
Alta Loma, California Elementary School District
General Obligation Bonds Series 2/(AMBAC
Insurance) (Aaa AAA)
5.88%, 06/01/08 840 868
5.88%, 06/01/09 860 884
Antioch Area, California Public Facilities
Financing Agency Special Tax Community
Facilities Revenue Bonds Series 89-1/(FGIC
Insurance) (Aaa AAA)
5.25%, 08/01/07 1,985 1,973
Bakersfield, California Hospital Revenue Bonds
(Bakersfield Memorial Hospital) Series 1992A
(A A-)
6.50%, 01/01/22 1,000 1,005
California Educational Facilities Authority
Revenue Bonds (Loyola Marymount University)
Series 1992B (A1 -)
6.60%, 10/01/22 1,450 1,537
California Educational Facilities Authority
Revenue Bonds (Mills College) Series 1992
(A -)
6.88%, 09/01/22 500 527
California Educational Facilities Authority
Revenue Bonds (St. Mary's College) Series 1993
(A -)
5.00%, 10/01/12 3,000 2,707
California Health Facilities Financing Authority
Revenue Bonds (Assoc. of Retarded Citizens)
Series 1991/(California Mortgage Insurance)
(- A)
7.00%, 05/01/21 455 477
California Health Facilities Financing Authority
Revenue Bonds (Children's Hospital)/(MBIA
Insurance) (Aaa AAA)
5.38%, 07/01/16 5,180 4,882
California Health Facilities Financing Authority
Revenue Bonds (Marshall Hospital)
Series 1992A/(California Mortgage Insurance)
(- A)
6.63%, 11/01/22 4,000 4,125
California Housing Finance Agency Home Mortgage
Revenue Bonds Series 1994G (Aa AA-)
7.20%, 08/01/14 3,000 3,150
California Housing Finance Agency Home Mortgage
Revenue Bonds Series 1995L/(MBIA Insurance)
(Aaa AAA)
5.90%, 08/01/17 1,000 986
</TABLE>
24
<PAGE> 29
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
California Housing Finance Agency Multi Unit
Rental Housing Revenue Bonds II Series 1992B
(A1 A+)
6.70%, 08/01/15 $1,000 $1,039
California State Department of Water Resources
Revenue Bonds (Central Valley Project)
Series O (Aa AA)
5.00%, 12/01/22 2,200 1,928
California State Public Works Board Lease
Revenue Refunding Bonds (Various California
State University Projects) Series 1992A (A A-)
5.50%, 06/01/10 3,000 2,947
6.70%, 10/01/17 1,250 1,305
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 1,277
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates
of Participation (St. Joseph Health Systems)
(Aa AA)
6.50%, 07/01/15 2,000 2,082
Central Coast Water Authority Revenue Bonds
(State Water Project Regional Facilities)
Series 1992/ (AMBAC Insurance) (Aaa AAA)
6.60%, 10/01/22 1,500 1,620
Chico, California Unified School District
General Obligation Bonds Series C/(MBIA
Insurance) (Aaa AAA)
6.75%, 06/01/17 500 539
Fresno, California Health Facility Revenue Bonds
(Holy Cross Health System--St. Agnes Medical
Center) Series 1991 (A1 AA-)
6.50%, 06/01/11 550 566
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 1,897
Los Angeles County, California Transportation
Commission Sales Tax Revenue Refunding Bonds
Series 1991B (A1 A+)
6.50%, 07/01/13 555 572
Los Angeles, California Convention & Exhibition
Center Authority Lease Revenue Refunding Bonds
Series 1993A/(MBIA Insurance) (Aaa AAA)
5.13%, 08/15/21 1,000 890
</TABLE>
25
<PAGE> 30
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
Los Angeles, California Department of Airports
Revenue Refunding Bonds Series 1995A/(FGIC
Insurance) (Aaa AAA)
5.50%, 05/15/10 $560 $556
Los Angeles, California Department of Water &
Power Electric Plant Revenue Bonds (Aa AA-)
6.00%, 01/15/11 865 881
Los Angeles, California Harbor Department
Revenue Bonds Series 1995A (Aa AA)
6.50%, 08/01/25 3,000 3,124
Monterey Bay, California Unified Air Pollution
Control Certificates of Participation
(Administration Building Project)/
(AMBAC Insurance) (- AAA)
5.70%, 12/01/15 875 856
Northern California Power Agency Multiple
Capital Facilities Revenue Bonds Series
1992A/(MBIA Insurance) (Aaa AAA)
6.50%, 08/01/12 3,300 3,523
Oceanside, California Building Authority
Certificates of Participation Refunding Bonds
Series 1993A (A BBB+)
6.38%, 04/01/12 1,250 1,259
Ontario, California Redevelopment Authority
Revenue Bonds (Project #1)/(MBIA Insurance &
Escrowed to Maturity with Government
Securities) (Aaa AA)
5.50%, 08/01/18 2,000 1,915
Orange County, California Water District
Certificates of Participation (1989 Project)
(Aa AA)
6.50%, 08/15/11 1,150 1,182
Oxnard, California Housing Finance Authority
Lease Revenue Bonds Series 1993/
(FSA Insurance) (Aaa AAA)
5.38%, 06/01/16 2,000 1,872
Petaluma, California Consolidated Public
Facilities Lease Certificates of Participation
Series 1993A/ (AMBAC Insurance) (Aaa AAA)
5.50%, 08/01/08 750 754
Sacramento, California Regional Transit District
Certificates of Participation
Series 1992A (A1 -)
6.38%, 03/01/05 250 262
Sacramento, California Regional Transit District
Refunding Certificates of Participation (Light
Rail Transportation Project) (A1 A+)
6.75%, 07/01/07 2,000 2,157
</TABLE>
26
<PAGE> 31
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
Saddleback Community College District,
California Certificates of Participation
(Capital Improvement Project) Series
1996/(MBIA Insurance) (Aaa AAA)
5.50%, 06/01/21 $1,500 $1,417
San Bernardino County, California Certificates
of Participation (West Valley Detention
Center)/ (MBIA Insurance) (Aaa AAA)
6.50%, 11/01/12 420 448
San Diego County, California Regional
Communication System Certificates of Participation
Series 1996/(AMBAC Insurance) (Aaa AAA)
5.50%, 08/15/18 2,700 2,592
San Diego, California Public Facilities Finance
Authority Sewer Revenue Bonds/(FGIC Insurance)
(Aaa AAA)
5.00%, 05/15/25 4,045 3,555
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 1,451
5.50%, 07/01/20 2,000 1,915
San Francisco, California City & County Airports
Revenue Bonds 2nd Series, Issue 11/(FGIC
Insurance) (Aaa AAA)
6.20%, 05/01/19 2,000 2,032
San Francisco, California Port Commission
Revenue Refunding Bonds Series 1994 (A BBB+)
5.90%, 07/01/09 2,500 2,475
San Jose--Santa Clara, California Water
Financing Authority Sewer Revenue Bonds
Series A/(FGIC Insurance) (Aaa AAA)
5.38%, 11/15/20 1,500 1,402
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 1,776
6.88%, 11/15/14 2,000 2,192
Santa Clara, California Redevelopment Agency Tax
Allocation Revenue Refunding Bonds (Bayshore
North Project)/(AMBAC Insurance) (Aaa AAA)
7.00%, 07/01/10 1,500 1,712
Southern California Public Power Authority
Revenue Bonds (San Juan Power Project Unit 3)
Series 1993A/(MBIA Insurance) (Aaa AAA)
5.38%, 01/01/08 2,500 2,487
5.00%, 01/01/20 2,000 1,767
</TABLE>
27
<PAGE> 32
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
Temecula, California Community Services District
Certificates of Participation (Community
Recreation Center Project) Series 1992 (- A)
7.13%, 10/01/12 $1,000 $1,080
University of California Regents Housing System
Revenue Bonds Series 1993A/(MBIA Insurance)
(Aaa AAA)
5.50%, 11/01/18 2,000 1,907
University of California Revenue Refunding Bonds
(Multi Purpose Projects) Series C/(AMBAC
Insurance) (Aaa AAA)
5.13%, 09/01/18 3,500 3,154
Westminster, California Public Financing
Authority Certificates of Participation (1994
Civic Center & Street Improvement Project)
(- A-)
7.00%, 06/01/19 3,325 3,487
TOTAL MUNICIPAL BONDS ------
(Cost $94,081) 96,014
------
VARIABLE RATE OBLIGATIONS--4.3%(b)
California Pollution Control Financing Authority
Revenue Bonds (Aa3 AA)
3.75%, 09/01/96 100 100
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986C (P-1 A-1+)
3.75%, 09/01/96 400 400
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986D (P-1 A-1+)
3.75%, 09/01/96 100 100
Irvine, California Improvement Bond Act 1915
Revenue Bonds (Assessment District No. 95-12)
Series 1996A/(Kredietbank LOC) (VMIG1 A-1+)
3.75%, 09/01/96 100 100
Orange County, California Sanitation District
No. 123 Certificates of Participation (Capital
Improvement Program 1990-92) Series C/(FGIC
Insurance) (VMIG1 A-1+)
3.65%, 09/01/96 3,600 3,600
------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $4,300) 4,300
------
</TABLE>
28
<PAGE> 33
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
------- --------
<S> <C> <C>
CASH EQUIVALENTS -- 0.1%(c)
Provident Institutional Funds--California Money
Fund Portfolio
2.97%, 09/07/96 90 $90
--------
TOTAL CASH EQUIVALENTS
(Cost $90) 90
--------
TOTAL INVESTMENTS--100.0%
(Cost $98,471) $100,404
========
</TABLE>
See accompanying Notes to Schedules of Investments.
29
<PAGE> 34
- ------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
August 31, 1996
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investor Services, Inc. and
Standard & Poor's Corporation which were in effect at August 31, 1996. These
ratings are unaudited.
(a) Interest rates represent coupon rate of security.
(b) Interest rates vary periodically based on current market rates. Rates shown
are the effective rates on August 31, 1996. Dates shown represent the
latter of the demand date or next interest rate change date, which is
considered the maturity date for financial reporting purposes. For variable
rate securities without demand features, the next interest reset date is
shown.
(c) Interest rates represent the yield on August 31, 1996.
<TABLE>
<CAPTION>
Abbreviations
- -------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
VMIG Variable Moody's Investment Grade
</TABLE>
See accompanying Notes to Financial Statements.
30
<PAGE> 35
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1996
<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: $45,017 and $98,471,
respectively) $45,241 $100,404
Interest receivable 532 1,298
Receivable for Fund shares sold 96 75
Deferred organization costs 2 3
Prepaid expenses 9 1
------- --------
Total assets 45,880 101,781
------- --------
LIABILITIES
Payable for:
Dividends 26 72
Fund shares redeemed 16 35
Investment advisory and administration
fee -- 4
Other 50 54
------- --------
Total liabilities 92 165
------- --------
Net assets applicable to outstanding
shares $45,788 $101,616
======= ========
NET ASSETS CONSIST OF:
Capital paid in $46,401 $101,932
Accumulated undistributed
net investment income 11 36
Accumulated net realized loss on
investments sold (848) (2,285)
Net unrealized gain on investments 224 1,933
------- --------
$45,788 $101,616
======= ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 4,562 9,558
Net asset value, offering and redemption
price per share $10.04 $10.63
</TABLE>
See accompanying Notes to Financial Statements.
31
<PAGE> 36
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
---------------- ---------
<S> <C> <C>
Interest income $ 2,030 $ 5,685
-------- --------
Expenses:
Investment advisory and administration
fee 175 401
Transfer agency and shareholder service
fees 107 246
Custodian fees 31 67
Professional fees 32 37
Shareholder reports 13 28
Trustees' fees 4 6
Registration fees 2 4
Amortization of deferred organization
costs 1 1
Insurance and other expenses 9 13
-------- --------
374 803
Less expenses reduced (164) (323)
-------- --------
Total expenses incurred by Fund 210 480
-------- --------
Net investment income 1,820 5,205
-------- --------
Net realized gain (loss) on investments
sold:
Proceeds from sales of investments 45,305 111,367
Cost of investments sold (45,317) (110,925)
-------- --------
Net realized gain (loss) on
investments sold (12) 442
-------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 326 1,574
End of period 224 1,933
-------- --------
Increase (decrease) in net
unrealized gain on investments (102) 359
-------- --------
Net gain (loss) on investments (114) 801
-------- --------
Increase in net assets resulting
from operations $ 1,706 $ 6,006
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
32
<PAGE> 37
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
-------------------- --------------------
Year ended August 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,820 $ 1,791 $ 5,205 $ 5,074
Net realized gain (loss) on
investments sold (12) (767) 442 (1,880)
Increase (decrease) in net
unrealized gain on investments (102) 1,219 359 2,086
-------- -------- -------- --------
Increase in net assets
resulting from operations 1,706 2,243 6,006 5,280
-------- -------- -------- --------
Dividends to shareholders from
net investment income (1,820) (1,786) (5,205) (5,061)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 19,657 12,494 31,008 22,400
Net asset value of shares issued in
reinvestment of dividends 1,443 1,403 3,436 3,479
Less payments for shares redeemed (15,837) (22,364) (23,674) (42,485)
-------- -------- -------- --------
Increase (decrease) in net assets
from capital share transactions 5,263 (8,467) 10,770 (16,606)
-------- -------- -------- --------
Total increase (decrease) in net
assets 5,149 (8,010) 11,571 (16,387)
Net assets:
Beginning of period 40,639 48,649 90,045 106,432
-------- -------- -------- --------
End of period (including
undistributed net investment
income of $11, $11, $36 and $36,
respectively) $ 45,788 $ 40,639 $101,616 $ 90,045
======== ======== ======== ========
Number of Fund shares:
Sold 1,951 1,271 2,893 2,201
Reinvested 143 143 321 342
Redeemed (1,572) (2,293) (2,210) (4,220)
-------- -------- -------- --------
Net increase (decrease) in
shares outstanding 522 (879) 1,004 (1,677)
Shares outstanding:
Beginning of period 4,040 4,919 8,554 10,231
-------- -------- -------- --------
End of period 4,562 4,040 9,558 8,554
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
33
<PAGE> 38
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
1. DESCRIPTION OF THE FUNDS
The Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund (the "Funds") are series of Schwab
Investments (the "Trust"), a no-load, open-end management investment company
organized as a Massachusetts business trust on October 26, 1990 and registered
under the Investment Company Act of 1940, as amended.
In addition to the Funds, the Trust also offers -- the Schwab 1000 Fund(R),
Schwab Short/Intermediate Government Bond Fund, Schwab Long-Term Government Bond
Fund, Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free
Bond Fund. The assets of each series are segregated and accounted for
separately.
The investment objective of the Funds is to seek to provide a high level of
current income that is exempt from federal income and State of California
personal income taxes, consistent with preservation of capital. The Funds, which
are not "diversified" investment companies within the meaning of the Investment
Company Act of 1940, as amended, each invest primarily in debt obligations
issued by or on behalf of the State of California, its political subdivisions,
agencies or instrumentalities, the interest of which is not subject to federal
income and State of California personal income taxes.
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.
34
<PAGE> 39
- ------------------------------------------------------------------------------
Security transactions and interest income -- Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Interest
income is recorded on the accrual basis and includes amortization of premium on
investments. Realized gains and losses from security transactions are determined
on an identified cost basis. For callable bonds purchased at a premium, the
excess of the purchase price over the call value is amortized against interest
income through the call date. If the call provision is not exercised, any
remaining premium is amortized through the final maturity date.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds, their initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five-year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
All distributions paid by the Schwab California Short/Intermediate Tax-Free Bond
Fund and Schwab California Long-Term Tax-Free Bond Fund during the year ended
August 31, 1996, qualify as exempt interest dividends for federal tax purposes.
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized gain for the Schwab California Short/Intermediate Tax-Free Bond
Fund aggregated $224,000, of which $363,000 related to appreciated securities
and $139,000 related to depreciated
35
<PAGE> 40
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
securities, and net unrealized gain for the Schwab California Long-Term Tax-Free
Bond Fund aggregated $1,933,000, of which $2,662,000 related to appreciated
securities and $729,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. Under this agreement, the Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund incurred investment advisory and administration fees of $175,000 and
$401,000, respectively, for the year ended August 31, 1996, before the
Investment Manager reduced its fee (see Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
For the year ended August 31, 1996, the Schwab California Short/Intermediate
Tax-Free Bond Fund and Schwab California Long-Term Tax-Free Bond Fund incurred
transfer agency and shareholder service fees of $107,000, and $246,000,
respectively, before Schwab reduced its fees (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
year ended August 31, 1996, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Funds incurred fees aggregating $10,000
related to the Trust's unaffiliated trustees.
36
<PAGE> 41
- ------------------------------------------------------------------------------
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the ratio of operating expenses to average net assets for each Fund.
During the year ended August 31, 1996, the total of such fees reduced by the
Investment Manager was $57,000 and $104,000 for the Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund, respectively, and the total of such fees reduced by Schwab was
$107,000 and $219,000 for the Schwab California Short/Intermediate Tax-Free Bond
Fund and the Schwab California Long-Term Tax-Free Bond Fund, respectively (see
Note 6).
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1996, were as follows
(in thousands):
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------- -------------------
<S> <C> <C>
Purchases $13,425 $40,919
Proceeds of sales and
maturities $ 8,224 $33,408
</TABLE>
37
<PAGE> 42
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab California Short/Intermediate
Tax-Free Bond Fund
---------------------------------------------
Period ended
Year ended August 31, August 31,
1996 1995 1994 1993++
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Net asset value at beginning of
period $ 10.06 $ 9.89 $ 10.13 $ 10.00
Income from investment operations
- ---------------------------------
Net investment income 0.43 0.42 0.37 0.13
Net realized and unrealized gain
(loss) on investments (0.02) 0.17 (0.24) 0.13
------- ------- ------- --------
Total from investment operations 0.41 0.59 0.13 0.26
Less distributions
- ------------------
Dividends from
net investment income (0.43) (0.42) (0.37) (0.13)
Distributions from realized
gain on investments -- -- -- --
------- ------- ------- --------
Total distributions (0.43) (0.42) (0.37) (0.13)
------- ------- ------- --------
Net asset value at end of period $ 10.04 $ 10.06 $ 9.89 $ 10.13
======= ======= ======= ========
Total return (%) 4.11 6.17 1.29 2.57
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $45,788 $40,639 $48,649 $ 44,545
Ratio of expenses to
average net assets (%) 0.49 0.50 0.48 0.45*
Ratio of net investment income to
average net assets (%) 4.23 4.29 3.69 3.49*
Portfolio turnover rate (%) 20 62 35 0
- ---------------
Ratio of expenses to average net
assets prior to reduced fees and
absorbed expenses (%)+ 0.87 0.84 0.86 1.25*
Ratio of net investment income to
average net assets prior to
reduced fees and absorbed
expenses (%)+ 3.85 3.95 3.31 2.69*
</TABLE>
++ For the period April 21, 1993 (commencement of operations) to August 31,
1993.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
38
<PAGE> 43
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Long-Term Tax-Free Bond Fund
-------------------------------------------------------------
Eight months
ended Period ended
Year ended August 31, August 31, December 31,
1996 1995 1994 1993 1992++
-------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.53 $ 10.40 $ 11.26 $ 10.58 $ 10.00
Income from investment
- ----------------------
operations
Net investment income 0.57 0.56 0.56 0.38 0.51
Net realized and unrealized
gain (loss) on investments 0.10 0.13 (0.74) 0.68 0.58
-------- ------- -------- --------- -------
Total from investment
operations 0.67 0.69 (0.18) 1.06 1.09
Less distributions
- ------------------
Dividends from
net investment income (0.57) (0.56) (0.56) (0.38) (0.51)
Distributions from realized
gain on investments -- -- (.12) -- --
-------- ------- -------- --------- -------
Total distributions (0.57) (0.56) (0.68) (0.38) (0.51)
-------- ------- -------- --------- -------
Net asset value at end of period $ 10.63 $ 10.53 $ 10.40 $ 11.26 $ 10.58
======== ======= ======== ========= =======
Total return (%) 6.43 6.98 (1.70) 10.13 11.10
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period
(000s) $101,616 $90,045 $106,432 $ 138,067 $72,969
Ratio of expenses to
average net assets (%) 0.49 0.58 0.60 0.60* 0.45*
Ratio of net investment income
to average net assets (%) 5.30 5.54 5.12 5.18* 5.72*
Portfolio turnover rate (%) 36 46 48 47 124
- ---------------
Ratio of expenses to average
net assets prior to reduced
fees
and absorbed expenses (%)+ 0.82 0.81 0.80 0.87* 1.05*
Ratio of net investment income
to average net assets prior
to reduced fees and absorbed
expenses (%)+ 4.97 5.31 4.92 4.91* 5.12*
</TABLE>
++ For the period February 24, 1992 (commencement of operations) to December 31,
1992.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
39
<PAGE> 44
- ------------------------------------------------------------------------------
To the Trustees and Shareholders of
the Schwab California Short/Intermediate Tax-Free Bond Fund and
Schwab California Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Schwab California
Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term
Tax-Free Bond Fund (two series constituting part of Schwab Investments,
hereafter referred to as the "Trust") at August 31, 1996, the results of each of
their operations, the changes in each of their net assets and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles. These financial statements and the financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at August 31, 1996 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
40
<PAGE> 45
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio with one investment in any of our three
asset allocation funds, choose from several equity markets with our equity
funds, or diversify your portfolio across asset classes and fund management
styles with our OneSource Portfolios. You can also select from different
maturities with our bond fund choices, and take advantage of an array of money
market funds.
SCHWAB ASSET ALLOCATION FUNDS
Schwab Asset Director(R) -- High Growth Fund
Schwab Asset Director -- Balanced Growth Fund
Schwab Asset Director -- Conservative Growth Fund
SCHWAB EQUITY FUNDS
Schwab Analytics Fund(TM)
Schwab 1000 Fund(R)
Schwab International Index Fund(TM)
Schwab Small-Cap Index Fund(R)
Schwab S&P 500 Fund
SCHWAB FUND OF FUNDS 1
Schwab OneSource Portfolios -- International
Schwab OneSource Portfolios -- Growth Allocation 2
Schwab OneSource Portfolios -- Balanced Allocation 2
SCHWAB BOND FUNDS
Schwab Government Bond Funds -- Long-Term
and Short/Intermediate
Schwab Tax-Free Bond Funds -- Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds -- Long-Term
and Short/Intermediate
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds 3 that seek high current income
with safety and liquidity. Choose from taxable or tax-exempt alternatives. Many
can be linked to your Schwab account to "sweep" cash balances automatically when
you're between investments. Or, for your larger cash reserves, choose one of
our Value Advantage Investments(TM).
Please call 1-800-2 NO-LOAD for a free prospectus and brochure for any of the
SchwabFunds(R).
Each prospectus provides more complete information, including charges and
expenses. Please read it carefully before investing.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
1. Funds that invest primarily in other mutual funds.
2. In subscription until November 15, 1996, unless the subscription period
is extended, at an introductory share price of $10. After that date the
share price will fluctuate.
3. Investments in money market funds are neither insured nor guaranteed by
the U.S. government, and there is no assurance that the Funds will be
able to maintain a stable share price of $1.
<PAGE> 46
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BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
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[SCHWABFUNDS FAMILY(R) LOGO]
101 Montgomery Street
San Francisco, California 94104
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current prospectus.
(C)1996 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
TF4266R(9/96) CRS 10552 Printed on recycled paper.
