<PAGE> 1
SCHWABFUNDS
SCHWAB
CALIFORNIA
TAX-FREE
BOND FUNDS
Annual Report
August 31, 1997
<PAGE> 2
Dear Shareholder,
With the support of investors like you, SchwabFunds(R) continues
[Photo to be among the largest and fastest-growing mutual fund families
of in the nation. Charles Schwab Investment Management, Inc. (CSIM)
Charles now manages over $50 billion in assets for more than 2.5 million
Schwab] SchwabFunds shareholders and offers 31 funds spanning a spectrum
of financial markets and investing styles.
ENHANCING CHANNELS OF COMMUNICATION
We believe that an important part of serving your needs is keeping you informed
about your investments. This report, for example, contains performance and
financial data on your fund as well as an analysis of market trends during the
reporting period and the impact of those trends on our portfolio management
strategy. This is just one way we hope to keep communication open between you
and the people managing your investments.
In addition, if you're among the millions of people exploring the Internet, I
encourage you to visit our Web site at www.schwab.com/schwabfunds, where you'll
find a wealth of information--including monthly commentaries on market
conditions from our SchwabFunds portfolio managers.
NEW INVESTMENT OPPORTUNITIES
In our ongoing commitment to provide additional investment opportunities, we
recently introduced Schwab OneSource Portfolios-Small Company Fund--a
professionally managed portfolio of small company mutual funds in one convenient
investment. If you're looking for an easy, cost-effective way to tap into the
growth potential of small companies, this fund may be an appropriate investment
for you. For a free prospectus which contains more information including fees
and expenses, please call our toll-free line at 1-800-435-4000. 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 meet your investment needs and to provide you with timely
information on SchwabFunds.
/s/ Charles R. Schwab
Charles R. Schwab
<PAGE> 3
MAKE YOUR
MONEY WORK
HARDER!
Use this Envelope to easily add
to your Schwab Bond Fund.
CHARLES SCHWAB
<PAGE> 4
WE'VE MADE IT EASIER FOR YOU! TAKE ADVANTAGE OF THIS OPPORTUNITY TO ADD TO YOUR
SCHWAB BOND FUND INVESTMENT.
Now, you can easily add to your investment by using this convenient Schwab
investment coupon. 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 attached
postage-paid envelope.
- ---------------------------------------------
NAME
$
- ---------------------------------------------
AMOUNT OF INVESTMENT*
X
- ---------------------------------------------
SIGNATURE
/ / Check here if you would like more investment coupons for future use.
/ / Check here if you would like more information on Schwab's Automatic
Investment Plan (AIP).
*THIS ENVELOPE MAY NOT BE USED FOR INITIAL INVESTMENTS. SUBSEQUENT INVESTMENT
MINIMUM IS $100.
(c) 1997 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE.
Printed on recycled paper. TF5009(9/97) CRS 20155
- ---------------------------------------------
SCHWAB ACCOUNT NUMBER
PLEASE INDICATE INTO WHICH SCHWAB BOND FUND YOUR MONEY SHOULD BE INVESTED.
THIS ENVELOP MAY ONLY BE USED FOR PURCHASES OF FUNDS WHICH YOU ALREADY OWN AND
FOR WHICH YOU HAVE A CURRENT PROSPECTUS.
/ / Schwab Long-Term Government Bond Fund
/ / Schwab Short/Intermediate Government Bond Fund
/ / Schwab California Long-Term Tax-Free Bond Fund
/ / Schwab California Short/Intermediate Tax-Free Bond Fund
/ / Schwab Long-Term Tax-Free Fund
/ / Schwab Short/Intermediate Tax-Free Fund
IF NO FUND IS INDICATED, YOUR INVESTMENT WILL GO INTO THE SWEEP MONEY FUND
YOU'VE DESIGNATED IN YOUR SCHWAB ACCOUNT.
(Lift here for more information.)
<PAGE> 5
CHARLES SCHWAB
JUST FOLLOW THESE EASY STEPS:
1. Fill out the Schwab investment coupon completely, including your name,
account number, signature and the amount of your check. Please use a separate
coupon for each account.
2. Make your check payable to CHARLES SCHWAB & CO., INC., and enclose your check
with the completed coupon in this postage-paid envelope.
3. Then just drop your Schwab Bond Fund investment envelope in the mail
today--and start putting your money to work! If you have any questions, don't
hesitate to call your local Schwab office or 1-800-435-4000.
THIS ENVELOPE MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT SCHWAB BOND FUND
PROSPECTUS. 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> 6
Attn: Dept. AIP 333-4
- ----------------
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
<PAGE> 7
TABLE OF CONTENTS
A WORD FROM SCHWABFUNDS(R) ...................................... 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
1
<PAGE> 8
A WORD FROM SCHWABFUNDS(R)
We are pleased to bring you the annual report for Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund (the Funds) for the year ended August 31, 1997.
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.
Income Dividends per Share
<TABLE>
<CAPTION>
Label A B
- -------------------------------------------------------
Label SI LT
- -------------------------------------------------------
<S> <C> <C>
1 1992 0 0.51
2 1993 0.13 0.38
3 1994 0.37 0.56
4 1995 0.42 0.56
5 1996 0.43 0.57
6 1997 0.43 0.56
</TABLE>
Fiscal Year
Schwab California Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
* Period from Inception (2/24/92) through 12/31/92.
** 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.
1 Income from the Funds may be subject to federal Alternative Minimum Tax
(AMT).
2
<PAGE> 9
TAXABLE EQUIVALENT YIELD
The taxable equivalent yield represents the pre-tax yield a taxable investment
would have to pay to equal the tax-exempt yield of an investor's tax bracket 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 8/31/97 and the taxable
equivalent yields,2 assuming a maximum combined federal and State of California
personal income tax rate of 45.22%. Actual tax rates may vary.
<TABLE>
<CAPTION>
30-Day SEC Taxable Equivalent
Yield 30-Day SEC Yield
<S> <C> <C>
Schwab California Short/Intermediate
Tax-Free Bond Fund 4.00% 7.31%
Schwab California Long-Term
Tax-Free Bond Fund 5.01% 9.14%
</TABLE>
2 The Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least December 31, 1997 that
maximum total operating expenses will not exceed 0.49%. Without fee waivers and
guarantees, the Funds' yields would have been lower.
3
<PAGE> 10
SCHWAB CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND
The Fund invests primarily in debt securities issued by or on behalf of the
State of California, its political subdivisions, agencies or instrumentalities.
Under normal market conditions, the Fund seeks to maintain a dollar weighted
average portfolio maturity between two and five years.
The chart below presents the Fund's portfolio as of 8/31/97 based on published
ratings from Standard & Poor's Ratings Group and/or Moody's Investor Services,
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.
[PIE CHART]
<TABLE>
<CAPTION>
<S> <C> <C>
1 AAA 49%
2 AA 17%
3 A 22%
4 BBB 2%
5 Short-term Securities 10%
</TABLE>
The chart on the following page compares the growth of a $10,000 investment in
the Fund, made at inception, with a similar investment in the Lehman Brothers
3-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 GAIN
DISTRIBUTIONS. 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. 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> 11
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN SCHWAB CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND AND LEHMAN 3-YEAR MUNI INDEX
[ ] Schwab California Short/Intermediate
Tax-Free Bond Fund
[ ] Lehman 3-Year Muni Index
<TABLE>
<CAPTION>
Label A B
- ------------------------------------------------------------------------------
Schwab California Lehman 3-Year
Label Short/Intermediate Muni Index
Tax-Free Bond Fund
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Apr 21, 93 10000 10000
2 Apr-93 9990 9994
3 May-93 10037 10021
4 Jun-93 10136 10085
5 Jul-93 10157 10090
6 Aug-93 10257 10185
7 Sep-93 10328 10229
8 Oct-93 10340 10251
9 Nov-93 10310 10237
10 Dec-93 10444 10345
11 Jan-94 10517 10429
12 Feb-94 10372 10332
13 Mar-94 10188 10207
14 Apr-94 10239 10267
15 May-94 10272 10315
16 Jun-94 10253 10318
17 Jul-94 10356 10404
18 Aug-94 10390 10441
19 Sep-94 10350 10415
20 Oct-94 10280 10390
21 Nov-94 10167 10371
22 Dec-94 10227 10416
23 Jan-95 10350 10502
24 Feb-95 10503 10613
25 Mar-95 10598 10708
26 Apr-95 10614 10744
27 May-95 10826 10909
28 Jun-95 10809 10935
29 Jul-95 10925 11050
30 Aug-95 11030 11137
31 Sep-95 11090 11168
32 Oct-95 11174 11222
33 Nov-95 11256 11294
34 Dec-95 11296 11341
35 Jan-96 11366 11430
36 Feb-96 11358 11432
37 Mar-96 11308 11404
38 Apr-96 11325 11418
39 May-96 11332 11428
40 Jun-96 11393 11497
41 Jul-96 11466 11560
42 Aug-96 11483 11577
43 Sep-96 11557 11648
44 Oct-96 11634 11730
45 Nov-96 11742 11839
46 Dec-96 11737 11845
47 Jan-97 11776 11897
48 Feb-97 11837 11955
49 Mar-97 11762 11893
50 Apr-97 11815 11944
51 May-97 11916 12041
52 Jun-97 11991 12112
53 Jul-97 12139 12256
54 Aug-97 12120 12231
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 8/31/97
<TABLE>
<CAPTION>
1 Yr. Since 30-Day Value of a
Inception3 SEC Yield $10,000 Investment
<S> <C> <C> <C> <C>
Schwab California
Short/Intermediate
Tax-Free Bond Fund4 5.54% 4.50% 4.00% $12,120
Lehman 3-Year
Muni Index 5.65% 4.72% - $12,231
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 6/30/97
<TABLE>
<CAPTION>
1 Yr. Since 30-Day
Inception3 SEC Yield
<S> <C> <C> <C>
Schwab California
Short/Intermediate
Tax-Free Bond Fund4 5.25% 4.42% 4.07%
</TABLE>
3 Inception date was 4/21/93.
4 The Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least December 31, 1997 that
maximum total operating expenses will not exceed 0.49%. Without fee waivers and
guarantees, as of 8/31/97, the Fund's 30-day SEC yield and average annual
one-year and since inception total returns would have been 3.49%, 5.12%, and
4.08%, respectively. Without fee waivers and guarantees, as of 6/30/97, the
Fund's 30-day SEC yield and average annual one-year and since inception total
returns would have been 3.55%, 4.83%, and 4.00%, respectively.
5
<PAGE> 12
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
The Fund invests primarily in debt securities issued by or on behalf of the
State of California, 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 8/31/97 based on published
ratings from Standard & Poor's Ratings Group and/or Moody's Investor Services,
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.
[PIE CHART]
<TABLE>
<CAPTION>
<S> <C> <C>
1 AAA 71%
2 AA 7%
3 A 19%
4 Short-term Securities 3%
</TABLE>
The chart on the following page compares the growth of a $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 GAIN
DISTRIBUTIONS. 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. 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> 13
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND AND LEHMAN MUNI BOND INDEX
[ ] Schwab California Long-Term Tax-Free Bond Fund
[ ] Lehman Muni Bond Index
<TABLE>
<CAPTION>
Label A B
- ----------------------------------------------------------------------
Schwab California
Long-Term Lehman Muni Bond
Label Tax-Free Bond Fund Index
- ----------------------------------------------------------------------
<S> <C> <C> <C>
1 Feb 24, 92 10000 10000
2 Mar-92 10099 10004
3 Apr-92 10217 10093
4 May-92 10410 10212
5 Jun-92 10633 10383
6 Jul-92 11082 10694
7 Aug-92 10786 10590
8 Sep-92 10835 10659
9 Oct-92 10474 10554
10 Nov-92 10921 10743
11 Dec-92 11110 10853
12 Jan-93 11256 10979
13 Feb-93 11775 11376
14 Mar-93 11561 11256
15 Apr-93 11674 11370
16 May-93 11736 11434
17 Jun-93 11969 11624
18 Jul-93 11957 11640
19 Aug-93 12235 11882
20 Sep-93 12371 12017
21 Oct-93 12412 12041
22 Nov-93 12263 11934
23 Dec-93 12541 12186
24 Jan-94 12671 12326
25 Feb-94 12304 12006
26 Mar-94 11683 11517
27 Apr-94 11768 11615
28 May-94 11867 11716
29 Jun-94 11747 11644
30 Jul-94 12008 11864
31 Aug-94 12026 11905
32 Sep-94 11824 11730
33 Oct-94 11508 11521
34 Nov-94 11235 11313
35 Dec-94 11420 11562
36 Jan-95 11901 11893
37 Feb-95 12295 12238
38 Mar-95 12414 12379
39 Apr-95 12407 12394
40 May-95 12825 12789
41 Jun-95 12613 12677
42 Jul-95 12685 12797
43 Aug-95 12868 12960
44 Sep-95 12972 13041
45 Oct-95 13228 13230
46 Nov-95 13507 13450
47 Dec-95 13690 13579
48 Jan-96 13785 13682
49 Feb-96 13664 13589
50 Mar-96 13436 13415
51 Apr-96 13369 13378
52 May-96 13379 13373
53 Jun-96 13550 13518
54 Jul-96 13700 13641
55 Aug-96 13693 13639
56 Sep-96 13920 13830
57 Oct-96 14073 13986
58 Nov-96 14365 14242
59 Dec-96 14283 14182
60 Jan-97 14294 14209
61 Feb-97 14429 14340
62 Mar-97 14175 14149
63 Apr-97 14316 14268
64 May-97 14581 14482
65 Jun-97 14706 14637
66 Jul-97 15266 15042
67 Aug-97 15056 14901
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 8/31/97
<TABLE>
<CAPTION>
1 Yr. 5 Yr. Since 30-Day Value of a
Inception5 SEC Yield $10,000 Investment
<S> <C> <C> <C> <C> <C>
Schwab California
Long-Term Tax-Free
Bond Fund6 9.95% 6.90% 7.69% 5.01% $15,056
Lehman Muni
Bond Index 9.25% 7.07% 7.49% - $14,901
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 6/30/97
<TABLE>
<CAPTION>
1 Yr. 5 Yr. Since 30-Day
Inception5 SEC Yield
<S> <C> <C> <C> <C>
Schwab California
Long-Term Tax-Free
Bond Fund6 8.54% 6.70% 7.47% 5.13%
</TABLE>
5 Inception date was 2/24/92.
6 The Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least December 31, 1997 that
maximum total operating expenses will not exceed 0.49%. Without fee waivers and
guarantees, as of 8/31/97, the Fund's 30-day SEC yield and average annual
one-year, five-year, and since inception total returns would have been 4.63%,
9.60%, 6.61%, and 7.30%, respectively. Without fee waivers and guarantees, as of
6/30/97, the Fund's 30-day SEC yield and average annual one-year, five-year, and
since inception total returns would have been 4.74%, 8.18%, 6.40%, and 7.08%,
respectively.
7
<PAGE> 14
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD - Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of each Fund's portfolio. Steve joined
CSIM as Vice President and Portfolio Manager in April 1991 and was promoted to
his current position in August 1993. Prior to joining CSIM, Steve was Vice
President and Portfolio Manager at Federated Investors.
JOANNE LARKIN - Vice President and Senior Portfolio Manager, has had primary
responsibility for the day-to-day management of each Fund's portfolio since
their inception. 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 Portfolio Manager for the Shearson Lehman California Municipal Bond
Fund and E.F. Hutton's Municipal Cash Reserve Management.
8
<PAGE> 15
MARKET OVERVIEW
Real GDP Growth Rate
<TABLE>
<CAPTION>
Label A
- -------------------------------
Label REAL GDP
- -------------------------------
<S> <C> <C>
1 Q1 1990 0.041
2 Q2 1990 0.013
3 Q3 1990 -0.019
4 Q4 1990 -0.041
5 Q1 1991 -0.022
6 Q2 1991 0.017
7 Q3 1991 0.01
8 Q4 1991 0.01
9 Q1 1992 0.047
10 Q2 1992 0.025
11 Q3 1992 0.03
12 Q4 1992 0.043
13 Q1 1993 -0.001
14 Q2 1993 0.019
15 Q3 1993 0.023
16 Q4 1993 0.048
17 Q1 1994 0.025
18 Q2 1994 0.049
19 Q3 1994 0.035
20 Q4 1994 0.03
21 Q1 1995 0.004
22 Q2 1995 0.007
23 Q3 1995 0.038
24 Q4 1995 0.003
25 Q1 1996 0.02
26 Q2 1996 0.047
27 Q3 1996 0.021
28 Q4 1996 0.038
29 Q1 1997 0.049
30 Q2 1997 0.033
</TABLE>
Source: Bloomberg L.P.
- - The economy, as measured by the growth of real GDP, continues to expand at a
healthy rate. The real GDP growth rate was 3.2% for the 1996 calendar year
and 4.1% for the first six months of 1997.
- - The apparent strength of the economy and the tight labor markets (refer to
the next graph) continue to lead to speculation regarding the potential
impact on future inflation and whether more restrictive Federal Reserve
policy is imminent. The Federal Reserve has indicated that it is "on alert"
for signs of accelerating inflation caused by either tight labor markets or
by consumer spending fueled by a strong stock market.
- - At the time of this writing, the economy appears poised for growth,
continuing the current economic expansion which began in 1991.
9
<PAGE> 16
U.S. Unemployment Rate
<TABLE>
<CAPTION>
Label A
- ---------------------------------
Label Unemployment Rate
- ---------------------------------
<S> <C> <C>
1 Jan-90 0.053
2 Feb-90 0.053
3 Mar-90 0.052
4 Apr-90 0.054
5 May-90 0.053
6 Jun-90 0.051
7 Jul-90 0.054
8 Aug-90 0.056
9 Sep-90 0.057
10 Oct-90 0.058
11 Nov-90 0.06
12 Dec-90 0.062
13 Jan-91 0.063
14 Feb-91 0.065
15 Mar-91 0.068
16 Apr-91 0.066
17 May-91 0.068
18 Jun-91 0.068
19 Jul-91 0.067
20 Aug-91 0.068
21 Sep-91 0.068
22 Oct-91 0.069
23 Nov-91 0.069
24 Dec-91 0.071
25 Jan-92 0.071
26 Feb-92 0.073
27 Mar-92 0.073
28 Apr-92 0.073
29 May-92 0.074
30 Jun-92 0.077
31 Jul-92 0.076
32 Aug-92 0.076
33 Sep-92 0.075
34 Oct-92 0.074
35 Nov-92 0.073
36 Dec-92 0.073
37 Jan-93 0.071
38 Feb-93 0.07
39 Mar-93 0.07
40 Apr-93 0.07
41 May-93 0.069
42 Jun-93 0.069
43 Jul-93 0.068
44 Aug-93 0.067
45 Sep-93 0.067
46 Oct-93 0.067
47 Nov-93 0.065
48 Dec-93 0.064
49 Jan-94 0.067
50 Feb-94 0.066
51 Mar-94 0.065
52 Apr-94 0.064
53 May-94 0.06
54 Jun-94 0.06
55 Jul-94 0.061
56 Aug-94 0.061
57 Sep-94 0.059
58 Oct-94 0.056
59 Nov-94 0.056
60 Dec-94 0.054
61 Jan-95 0.056
62 Feb-95 0.054
63 Mar-95 0.058
64 Apr-95 0.057
65 May-95 0.057
66 Jun-95 0.056
67 Jul-95 0.057
68 Aug-95 0.053
69 Sep-95 0.056
70 Oct-95 0.055
71 Nov-95 0.056
72 Dec-95 0.056
73 Jan-96 0.058
74 Feb-96 0.055
75 Mar-96 0.056
76 Apr-96 0.054
77 May-96 0.056
78 Jun-96 0.053
79 Jul-96 0.054
80 Aug-96 0.051
81 Sep-96 0.052
82 Oct-96 0.052
83 Nov-96 0.053
84 Dec-96 0.053
85 Jan-97 0.054
86 Feb-97 0.053
87 Mar-97 0.052
88 Apr-97 0.049
89 May-97 0.048
90 Jun-97 0.05
91 Jul-97 0.048
92 Aug-97 0.049
</TABLE>
Source: Bloomberg L.P.
- - The unemployment rate during 1996 remained near its lowest point for the
decade. This declining trend continued into 1997, with the May and July
rates of 4.8% representing the lowest rates since December 1973.
- - Low unemployment rates typically lead many economists to question whether
continued low levels of unemployment can persist without generating
inflationary pressures on wages and ultimately, prices.
10
<PAGE> 17
MEASURES OF INFLATION
[ ] Quarterly Employment Cost Index
[ ] Monthly Consumer Price Index
<TABLE>
<CAPTION>
Label A
- ----------------------------------------------------------
Label Monthly Consumer
Price Index
- ----------------------------------------------------------
<S> <C> <C>
1 Jan-90 0.052
2 Feb-90 0.053
3 Mar-90 0.052
4 Apr-90 0.047
5 May-90 0.044
6 Jun-90 0.047
7 Jul-90 0.048
8 Aug-90 0.056
9 Sep-90 0.062
10 Oct-90 0.063
11 Nov-90 0.063
12 Dec-90 0.061
13 Jan-91 0.057
14 Feb-91 0.053
15 Mar-91 0.049
16 Apr-91 0.049
17 May-91 0.05
18 Jun-91 0.047
19 Jul-91 0.044
20 Aug-91 0.038
21 Sep-91 0.034
22 Oct-91 0.029
23 Nov-91 0.03
24 Dec-91 0.031
25 Jan-92 0.026
26 Feb-92 0.028
27 Mar-92 0.032
28 Apr-92 0.032
29 May-92 0.03
30 Jun-92 0.031
31 Jul-92 0.032
32 Aug-92 0.031
33 Sep-92 0.03
34 Oct-92 0.032
35 Nov-92 0.03
36 Dec-92 0.029
37 Jan-93 0.033
38 Feb-93 0.032
39 Mar-93 0.031
40 Apr-93 0.032
41 May-93 0.032
42 Jun-93 0.03
43 Jul-93 0.028
44 Aug-93 0.028
45 Sep-93 0.027
46 Oct-93 0.028
47 Nov-93 0.027
48 Dec-93 0.027
49 Jan-94 0.025
50 Feb-94 0.025
51 Mar-94 0.025
52 Apr-94 0.024
53 May-94 0.023
54 Jun-94 0.025
55 Jul-94 0.028
56 Aug-94 0.029
57 Sep-94 0.03
58 Oct-94 0.026
59 Nov-94 0.027
60 Dec-94 0.027
61 Jan-95 0.028
62 Feb-95 0.029
63 Mar-95 0.029
64 Apr-95 0.031
65 May-95 0.032
66 Jun-95 0.03
67 Jul-95 0.028
68 Aug-95 0.026
69 Sep-95 0.025
70 Oct-95 0.028
71 Nov-95 0.026
72 Dec-95 0.025
73 Jan-96 0.027
74 Feb-96 0.027
75 Mar-96 0.028
76 Apr-96 0.029
77 May-96 0.029
78 Jun-96 0.028
79 Jul-96 0.03
80 Aug-96 0.029
81 Sep-96 0.03
82 Oct-96 0.03
83 Nov-96 0.033
84 Dec-96 0.033
85 Jan-97 0.03
86 Feb-97 0.03
87 Mar-97 0.028
88 Apr-97 0.025
89 May-97 0.022
90 Jun-97 0.023
91 Jul-97 0.022
92 Aug-97 0.022
</TABLE>
<TABLE>
<CAPTION>
Label A
- ----------------------------------------------------------
Label Quarterly Employment
Cost Index
- ----------------------------------------------------------
<S> <C> <C>
1 Jan-90 0.053
2 Feb-90 0.053
3 Mar-90 0.053
4 Apr-90 0.054
5 May-90 0.054
6 Jun-90 0.054
7 Jul-90 0.051
8 Aug-90 0.051
9 Sep-90 0.051
10 Oct-90 0.048
11 Nov-90 0.048
12 Dec-90 0.048
13 Jan-91 0.046
14 Feb-91 0.046
15 Mar-91 0.046
16 Apr-91 0.045
17 May-91 0.045
18 Jun-91 0.045
19 Jul-91 0.043
20 Aug-91 0.043
21 Sep-91 0.043
22 Oct-91 0.042
23 Nov-91 0.042
24 Dec-91 0.042
25 Jan-92 0.041
26 Feb-92 0.041
27 Mar-92 0.041
28 Apr-92 0.035
29 May-92 0.035
30 Jun-92 0.035
31 Jul-92 0.034
32 Aug-92 0.034
33 Sep-92 0.034
34 Oct-92 0.035
35 Nov-92 0.035
36 Dec-92 0.035
37 Jan-93 0.034
38 Feb-93 0.034
39 Mar-93 0.034
40 Apr-93 0.036
41 May-93 0.036
42 Jun-93 0.036
43 Jul-93 0.036
44 Aug-93 0.036
45 Sep-93 0.036
46 Oct-93 0.034
47 Nov-93 0.034
48 Dec-93 0.034
49 Jan-94 0.032
50 Feb-94 0.032
51 Mar-94 0.032
52 Apr-94 0.031
53 May-94 0.031
54 Jun-94 0.031
55 Jul-94 0.031
56 Aug-94 0.031
57 Sep-94 0.031
58 Oct-94 0.03
59 Nov-94 0.03
60 Dec-94 0.03
61 Jan-95 0.03
62 Feb-95 0.03
63 Mar-95 0.03
64 Apr-95 0.03
65 May-95 0.03
66 Jun-95 0.03
67 Jul-95 0.028
68 Aug-95 0.028
69 Sep-95 0.028
70 Oct-95 0.028
71 Nov-95 0.028
72 Dec-95 0.028
73 Jan-96 0.029
74 Feb-96 0.029
75 Mar-96 0.029
76 Apr-96 0.029
77 May-96 0.029
78 Jun-96 0.029
79 Jul-96 0.029
80 Aug-96 0.029
81 Sep-96 0.029
82 Oct-96 0.03
83 Nov-96 0.03
84 Dec-96 0.03
85 Jan-97 0.028
86 Feb-97 0.028
87 Mar-97 0.028
88 Apr-97 0.028
89 May-97 0.028
90 Jun-97 0.028
91 Jul-97 0.030
92 Aug-97 0.030
</TABLE>
Source: Bloomberg L.P.
- - Both the Employment Cost Index and Consumer Price Index (CPI) remained in
check throughout the first half of 1997, reflecting continued low levels of
inflation.
- - For the twelve months ended August 1997, the CPI rose 2.2%, the lowest rate
since February 1987. Its core rate (which excludes the more volatile food
and energy components) rose 2.3%, the lowest rate since 1965.
- - The Federal Reserve has indicated that the economy remains at risk to
inflation and that it is poised to act preemptively by raising interest
rates if necessary. The Federal Reserve did take action in March, increasing
the Federal Funds Rate by 0.25% to 5.50%, yet left interest rates unchanged
at the recent July 1997 Federal Open Market Committee meeting.
11
<PAGE> 18
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
<TABLE>
<CAPTION>
Label A B C D
- -----------------------------------------------------------------------------------------------
S&P 500 Schwab Small Schwab International Lehman Brothers General
Label Index Cap Index Index U.S. Gov't. Index
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 1 1 1 1
2 Sep-96 1.056 1.037 1.029 1.017
3 Oct-96 1.085 1.019 1.026 1.039
4 Nov-96 1.167 1.06 1.074 1.057
5 Dec-96 1.144 1.079 1.064 1.046
6 Jan-97 1.216 1.105 1.029 1.047
7 Feb-97 1.225 1.078 1.046 1.049
8 Mar-97 1.175 1.025 1.053 1.038
9 Apr-97 1.245 1.028 1.064 1.053
10 May-97 1.321 1.154 1.142 1.062
11 Jun-97 1.38 1.214 1.209 1.074
12 Jul-97 1.49 1.283 1.242 1.104
13 Aug-97 1.404 1.312 1.152 1.093
</TABLE>
[ ] Schwab Small-Cap Index(R) [ ] S&P 500(R) Index
[ ] Schwab International Index(R) [ ] Lehman Brothers General
U.S. Gov't. Index
Total return assumes reinvestment of all dividend 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 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.
- - Despite a 5.6% correction in August, large-cap domestic stocks, as
represented by the S&P 500 Index, continued to be the strongest performing
asset class, achieving a 40.6% return during the one-year reporting period
ended August 31, 1997.
- - As represented by the 31.2% return of the Schwab Small- CapIndex, small-cap
stocks also achieved very strong returns during the reporting period, well
in excess of their long-term averages.
- - International stocks, as represented by the Schwab International Index,
achieved a return of 15.2% for the reporting period, following a correction
of 7.2% during August which was led by Asian markets.
- - U.S. Government bonds, as represented by the Lehman Brothers General U.S.
Government Index, achieved a return of 9.3% for the one-year reporting
period.
12
<PAGE> 19
S&P 500(R) Price/Earnings Ratio
<TABLE>
<CAPTION>
Label A
- ----------------------------------------------------
Label S&P 500 Price/Earnings Ratio
- ----------------------------------------------------
<S> <C> <C>
1 Jan-90 14.37
2 Feb-90 14.21
3 Mar-90 14.77
4 Apr-90 14.82
5 May-90 15.84
6 Jun-90 16.66
7 Jul-90 16.65
8 Aug-90 15.57
9 Sep-90 14.9
10 Oct-90 14.36
11 Nov-90 14.59
12 Dec-90 15.19
13 Jan-91 14.95
14 Feb-91 16.82
15 Mar-91 17.48
16 Apr-91 17.85
17 May-91 17.92
18 Jun-91 17.96
19 Jul-91 18.07
20 Aug-91 19.72
21 Sep-91 19.88
22 Oct-91 19.92
23 Nov-91 21.02
24 Dec-91 21.85
25 Jan-92 23.35
26 Feb-92 23.83
27 Mar-92 25.45
28 Apr-92 25.51
29 May-92 25.71
30 Jun-92 25.08
31 Jul-92 25.61
32 Aug-92 25.5
33 Sep-92 24.37
34 Oct-92 23.94
35 Nov-92 24.08
36 Dec-92 24.01
37 Jan-93 24.2
38 Feb-93 24.25
39 Mar-93 24.22
40 Apr-93 23.2
41 May-93 23.21
42 Jun-93 22.58
43 Jul-93 22.52
44 Aug-93 23.02
45 Sep-93 23.74
46 Oct-93 23.97
47 Nov-93 22.55
48 Dec-93 23.55
49 Jan-94 22.98
50 Feb-94 21.17
51 Mar-94 20.34
52 Apr-94 20.1
53 May-94 20.16
54 Jun-94 19.76
55 Jul-94 18.64
56 Aug-94 18.9
57 Sep-94 18.26
58 Oct-94 17.55
59 Nov-94 16.58
60 Dec-94 16.98
61 Jan-95 16.23
62 Feb-95 16.2
63 Mar-95 16.5
64 Apr-95 16.02
65 May-95 16.43
66 Jun-95 16.82
67 Jul-95 16.55
68 Aug-95 16.18
69 Sep-95 16.86
70 Oct-95 16.18
71 Nov-95 17.14
72 Dec-95 17.41
73 Jan-96 18.11
74 Feb-96 18.56
75 Mar-96 18.94
76 Apr-96 19.16
77 May-96 19.48
78 Jun-96 19.3
79 Jul-96 18.31
80 Aug-96 18.62
81 Sep-96 19.75
82 Oct-96 19.6
83 Nov-96 21.05
84 Dec-96 20.7
85 Jan-97 20.55
86 Feb-97 20.98
87 Mar-97 19.87
88 Apr-97 20.24
89 May-97 21.43
90 Jun-97 22.45
91 Jul-97 23.92
92 Aug-97 22.64
</TABLE>
Source: Bloomberg L.P.
- - The price/earnings ratio for the S&P 500 was 22.6 at the close of the
reporting period, well above its 30-year average of 14.7.
- - Based on other traditional measures such as the price-to-book value ratio or
dividend yield, the U.S. stock market valuation, as measured by the S&P 500,
reached historical highs during the reporting period.
- - Although low inflation and interest rates, as well as strong flows into
mutual funds, have helped the U.S. equity markets reach such 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 should be widely debated by market participants.
13
<PAGE> 20
30-Year and 5-Year Treasury Bond Yields
[] 30-Year Treasury Bond Yield
[] 5-Year Treasury Bond Yield
<TABLE>
<CAPTION>
Label A B
- ----------------------------------------------------------------------
30-Year Treasury 5-Year Treasury
Label Bond Yield Bond Yield
- ----------------------------------------------------------------------
<S> <C> <C> <C>
1 Sep 6, 96 0.0711 0.067
2 Sep 13, 96 0.0695 0.0647
3 Sep 20, 96 0.0704 0.0662
4 Sep 27, 96 0.0691 0.0644
5 Oct 4, 96 0.0674 0.0621
6 Oct 11, 96 0.0685 0.0628
7 Oct 18, 96 0.068 0.0625
8 Oct 25, 96 0.0682 0.0626
9 Nov 1, 96 0.0668 0.0611
10 Nov 8, 96 0.0651 0.0603
11 Nov 15, 96 0.0646 0.0596
12 Nov 22, 96 0.0644 0.0593
13 Nov 29, 96 0.0635 0.0583
14 Dec 6, 96 0.0651 0.0599
15 Dec 13, 96 0.0657 0.0605
16 Dec 20, 96 0.0661 0.0614
17 Dec 27, 96 0.0656 0.0608
18 Jan 3, 97 0.0673 0.0627
19 Jan 10, 97 0.0685 0.0638
20 Jan 17, 97 0.0682 0.0631
21 Jan 24, 97 0.0689 0.0639
22 Jan 31, 97 0.0679 0.0625
23 Feb 7, 97 0.067 0.0615
24 Feb 14, 97 0.0652 0.0606
25 Feb 21, 97 0.0664 0.0616
26 Feb 28, 97 0.068 0.0639
27 Mar 7, 97 0.0681 0.0637
28 Mar 14, 97 0.0694 0.0652
29 Mar 21, 97 0.0697 0.0662
30 Mar 28, 97 0.0709 0.0678
31 Apr 4, 97 0.0712 0.0676
32 Apr 11, 97 0.0717 0.0684
33 Apr 18, 97 0.0705 0.0671
34 Apr 25, 97 0.0714 0.0684
35 May 2, 97 0.0687 0.0651
36 May 9, 97 0.0689 0.0652
37 May 16, 97 0.069 0.0655
38 May 23, 97 0.0699 0.0658
39 May 30, 97 0.0691 0.065
40 Jun 6, 97 0.0677 0.0637
41 Jun 13, 97 0.0672 0.0625
42 Jun 20, 97 0.0666 0.0627
43 Jun 27, 97 0.0674 0.0633
44 Jul 4, 97 0.0663 0.0619
45 Jul 11, 97 0.0653 0.0612
46 Jul 18, 97 0.0653 0.0614
47 Jul 25, 97 0.0645 0.0608
48 Aug 1, 97 0.0645 0.0607
49 Aug 8, 97 0.0664 0.0622
50 Aug 15, 97 0.0655 0.0606
51 Aug 22, 97 0.0665 0.0619
52 Aug 29, 97 0.0661 0.0622
</TABLE>
Source: Bloomberg L.P.
- - Although bond yields moved within a fairly narrow trading range throughout
most of the reporting period, they were heavily influenced by reports
indicating the relative strength of the economy.
- - Yields declined during the third and into the fourth quarter of 1996
following reports of weaker economic data and a slowing of the GDP growth
rate to 2.1% during the third quarter. The fourth quarter's lower interest
rates prompted renewed refinancing activity and consumer spending, resulting
in better employment growth, higher rates, and stronger GDP growth through
the first quarter of 1997.
- - Yields experienced another decline during the second quarter of 1997, again
in response to reports of weaker economic activity.
14
<PAGE> 21
30-YEAR AND 5-YEAR AAA GENERAL OBLIGATION (GO)
MUNICIPAL BOND YIELDS
<TABLE>
<CAPTION>
Label A B
- ------------------------------------------------------------------
30-year AAA GO 5-year AAA GO
Label Muni Bond Yields Muni Bond Yields
- ------------------------------------------------------------------
<C> <S> <C> <C>
1 Sep 6, 96 0.0575 0.0458
2 Sep 13, 96 0.0564 0.0448
3 Sep 20, 96 0.0569 0.0454
4 Sep 27, 96 0.056 0.0445
5 Oct 4, 96 0.0547 0.044
6 Oct 11, 96 0.0555 0.0448
7 Oct 18, 96 0.0557 0.0449
8 Oct 25, 96 0.0562 0.0448
9 Nov 1, 96 0.0555 0.0441
10 Nov 8, 96 0.0549 0.0435
11 Nov 15, 96 0.0544 0.043
12 Nov 22, 96 0.0541 0.0425
13 Nov 29, 96 0.0532 0.0418
14 Dec 6, 96 0.054 0.0426
15 Dec 13, 96 0.0542 0.0428
16 Dec 20, 96 0.0542 0.0428
17 Dec 27, 96 0.0538 0.0424
18 Jan 3, 97 0.0544 0.043
19 Jan 10, 97 0.0555 0.0441
20 Jan 17, 97 0.0553 0.0443
21 Jan 24, 97 0.0554 0.0444
22 Jan 31, 97 0.0551 0.0441
23 Feb 7, 97 0.0545 0.0435
24 Feb 14, 97 0.0533 0.0423
25 Feb 21, 97 0.0539 0.0429
26 Feb 28, 97 0.0544 0.0434
27 Mar 7, 97 0.0547 0.0437
28 Mar 14, 97 0.055 0.044
29 Mar 21, 97 0.0557 0.0447
30 Mar 28, 97 0.0563 0.0458
31 Apr 4, 97 0.0566 0.0466
32 Apr 11, 97 0.0564 0.0464
33 Apr 18, 97 0.0562 0.0466
34 Apr 25, 97 0.0567 0.0475
35 May 2, 97 0.0556 0.0467
36 May 9, 97 0.0553 0.0464
37 May 16, 97 0.0549 0.046
38 May 23, 97 0.055 0.0461
39 May 30, 97 0.0547 0.046
40 Jun 6, 97 0.054 0.0453
41 Jun 13, 97 0.0529 0.0437
42 Jun 20, 97 0.0527 0.0435
43 Jun 27, 97 0.0533 0.0436
44 Jul 4, 97 0.0529 0.0432
45 Jul 11, 97 0.0523 0.0426
46 Jul 18, 97 0.0517 0.042
47 Jul 25, 97 0.0511 0.0414
48 Aug 1, 97 0.0514 0.0418
49 Aug 8, 97 0.0522 0.0426
50 Aug 15, 97 0.0524 0.0428
51 Aug 22, 97 0.0529 0.0433
52 Aug 29, 97 0.053 0.0434
</TABLE>
[ ] 30-Year AAA GO Muni Bond Yields [ ] 5-Year AAA GO Muni Bond Yields
Source: Bloomberg L.P.
- - Municipal bond yields experienced a pattern similar to Treasury bond yields
and finished the reporting period approximately 0.25% to 0.45% lower than at
the start of the period.
15
<PAGE> 22
RATIO OF MUNICIPAL BOND YIELDS TO TREASURY BOND YIELDS
<TABLE>
<CAPTION>
LABEL A B
- --------------------------------------------------------------------
LABEL 30-year Bond Yields 5-year Bond Yields
- --------------------------------------------------------------------
<S> <C> <C> <C>
1 Sep 6, 96 0.809 0.684
2 Sep 13, 96 0.812 0.692
3 Sep 20, 96 0.808 0.686
4 Sep 27, 96 0.811 0.692
5 Oct 4, 96 0.811 0.709
6 Oct 11, 96 0.811 0.714
7 Oct 18, 96 0.819 0.718
8 Oct 25, 96 0.825 0.716
9 Nov 1, 96 0.831 0.722
10 Nov 8, 96 0.844 0.722
11 Nov 15, 96 0.842 0.722
12 Nov 22, 96 0.841 0.717
13 Nov 29, 96 0.838 0.717
14 Dec 6, 96 0.829 0.711
15 Dec 13, 96 0.825 0.707
16 Dec 20, 96 0.82 0.697
17 Dec 27, 96 0.82 0.697
18 Jan 3, 97 0.808 0.686
19 Jan 10, 97 0.811 0.691
20 Jan 17, 97 0.811 0.703
21 Jan 24, 97 0.804 0.695
22 Jan 31, 97 0.812 0.706
23 Feb 7, 97 0.813 0.708
24 Feb 14, 97 0.817 0.698
25 Feb 21, 97 0.811 0.696
26 Feb 28, 97 0.8 0.68
27 Mar 7, 97 0.803 0.686
28 Mar 14, 97 0.792 0.675
29 Mar 21, 97 0.799 0.675
30 Mar 28, 97 0.794 0.675
31 Apr 4, 97 0.794 0.69
32 Apr 11, 97 0.787 0.678
33 Apr 18, 97 0.797 0.695
34 Apr 25, 97 0.794 0.695
35 May 2, 97 0.809 0.717
36 May 9, 97 0.802 0.712
37 May 16, 97 0.796 0.703
38 May 23, 97 0.787 0.7
39 May 30, 97 0.792 0.708
40 Jun 6, 97 0.797 0.711
41 Jun 13, 97 0.787 0.699
42 Jun 20, 97 0.791 0.694
43 Jun 27, 97 0.791 0.689
44 Jul 4, 97 0.798 0.697
45 Jul 11, 97 0.801 0.697
46 Jul 18, 97 0.792 0.684
47 Jul 25, 97 0.792 0.681
48 Aug 1, 97 0.797 0.689
49 Aug 8, 97 0.787 0.685
50 Aug 15, 97 0.8 0.706
51 Aug 22, 97 0.796 0.699
52 Aug 29, 97 0.802 0.698
</TABLE>
[ ] 30-Year Bond Yields [ ] 5-Year Bond Yields
Source: Bloomberg L.P.
- - An upward slope in these lines indicates that municipal yields are rising
relative to Treasury yields and that municipal bond values are falling (or
not rising as fast) relative to Treasury values. A downward slope indicates
the reverse. The reason for the yield differential of approximately 10%
between the long-term and short-term ratios is that the holders of long-term
tax-exempt bonds demand higher yields to compensate for the increased credit
risk associated with holding any long-term bond not backed by the U.S.
Government.
- - Although impacted by seasonal supply and demand conditions, the relationship
between five-year Treasury and municipal bond yields remained fairly
constant during the reporting period. Likewise, the ratio between
thirty-year municipal bond and Treasury bond yields remained within a fairly
narrow range, and finished out the reporting period with slightly lower
municipal yields relative to those of Treasuries.
16
<PAGE> 23
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
Q. HOW WERE THE FUNDS MANAGED DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE
TO THE PORTFOLIO?
A. We have continued to maintain portfolios of high-quality securities
(primarily AAA and AA). In the current market environment, we believe this is an
appropriate strategy for the Funds since there is very little yield advantage
associated with lower-rated securities -- we simply do not believe investors are
being adequately compensated for the higher credit risk. In both Funds, we
continue to execute a cautious strategy, carefully watching economic indicators
and monitoring Federal Reserve Bank communications regarding the target level
for short-term interest rates.
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
Reflecting the uncertainty of future movements in interest rates, we have
maintained the Fund's weighted average maturity (WAM) in a range comparable to
those of other funds with similar investment objectives. During the reporting
period, the Fund's WAM ranged from approximately 3.2 to 3.8 years. As of the end
of the reporting period, the Fund's WAM was 3.50 years, down slightly from 3.62
years at the beginning of the period.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
The Fund maintained its WAM within a range from 17 to 20 years. In early
December, we extended the Fund's WAM from 17.5 years to approximately 18.5
years, reflecting our assessment that municipal securities were competitively
priced at that time. Although the Fund has extended its maturity beyond this
range in the past, the yield curve is currently very flat beyond 20 years,
indicating that there is very little yield advantage associated with the longer
maturities. Again, we do not believe investors are being adequately rewarded for
the additional interest rate risk. The Fund's WAM at the end of the period was
19.11 years, up slightly from 18.79 years at the beginning of the period.
17
<PAGE> 24
Q. WHAT IS YOUR VIEW OF THE ECONOMIC CLIMATE IN CALIFORNIA?
A. California is in its fourth straight year of economic recovery, has replaced
jobs lost in the last recession, and continues to excel at new job formation.
For the twelve months ended May 31, 1997, California's annual employment gains
(as measured by the California Department of Finance) outpaced those of any
other state. This vitality has reduced the State's unemployment rate to the
lowest level in seven years. Looking forward, it is anticipated that California
will see moderate growth across all industry sectors with some, such as real
estate, growing at a much slower pace than that of the pre-recession period
prior to 1991. California's economic diversification may reduce the impact of a
national economic downturn should one develop in the future.
The economic improvements of the last several years have reduced the State's
accumulated budget deficit to less than 1% of the total budget. The Governor's
1998 budget projects a positive budget reserve at year-end. However, given the
major welfare reform program and assumptions regarding further economic growth,
adjustments to the budget may be necessary to prevent current spending
requirements from growing faster than revenues. Lawmakers should continue to
address the challenge of balancing mandated spending requirements for education
and public safety against those designated for maintaining and upgrading public
infrastructure.
We are satisfied that the California securities in the Funds' portfolios
represent minimal credit risk and we continue to closely monitor the State's
economic situation. The State's current ratings are A1 from Moody's Investor
Service and A+ from both Standard & Poor's Corporation and Fitch Investor
Services, Inc., three well known rating agencies.
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 to help reduce overall portfolio volatility. The selection
of a taxable or tax-exempt bond fund should be a function of whether you plan to
hold the
18
<PAGE> 25
fund in a tax-deferred account (such as an IRA or 401(k) account) or not; and if
not, a function of your marginal tax bracket. Under most market conditions,
tax-exempt investments held outside of a tax-deferred account are generally more
attractive to higher tax-bracket investors.
Short/intermediate bond funds historically have offered greater price stability
in exchange for lower and somewhat more volatile yields. Conversely, funds with
longer WAMs historically have paid higher and somewhat more stable yields with
correspondingly greater price volatility. The selection of the most appropriate
fund will depend on your own degree of risk tolerance, need for income, and time
horizon. To position your portfolio to respond to fluctuating interest rates or
to create a balanced combination of maturities, you may want to consider
investing in both Schwab California Tax-Free Bond Funds.
Q. SINCE THE STOCK MARKET HAS ACHIEVED RECORD HIGHS, IS IT TIME TO THINK ABOUT
INCREASING MY ALLOCATION TO BONDS?
A. Whenever there has been a significant divergence between returns of asset
classes, it is prudent to review your portfolio asset allocation. For the
three-year period ended 8/31/97, total returns on large-cap domestic stocks far
exceeded those of domestic bonds. For example, Schwab 1000 Fund(R), a large-cap
domestic equity portfolio, produced an average annual total return of 25.28% for
the three-year period ended 8/31/97 while Schwab Long-Term Government Bond Fund
returned 8.73% over the same period.7 This divergence between asset class
returns can affect portfolio allocation over time.
As shown on the following page, if an investor had a hypothetical asset
allocation of 60% stocks and 40% bonds (investing in just these two funds) at
the beginning of the three-year period, and reinvested all fund distributions,
the asset allocation mix would have shifted to 70% stocks and 30% bonds by the
end of the period -- a significant shift from the investor's original strategy
caused by the variance in returns of stocks and bonds.8
7 TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The
Investment Manager and Schwab waived a portion of both Funds' fees during the
period. Without the waiver, each Fund's total return would have been lower.
8 Note that these are hypothetical asset allocations only.
19
<PAGE> 26
<TABLE>
<CAPTION>
8/31/94 Portfolio Three-Year 8/31/97 Portfolio
Value Allocation Growth Value Allocation
<S> <C> <C> <C> <C> <C>
Schwab 1000 Fund(R) $6,000 60% $5,798 $11,798 70%
Schwab Long-Term
Government Bond Fund $4,000 40% $1,142 $ 5,142 30%
Total Portfolio Value $10,000 100% $6,940 $16,940 100%
</TABLE>
Rather than trying to time markets, we believe investors should focus on their
own risk profiles and income needs to determine the most appropriate level of
bonds in their portfolios. In addition to providing income, bonds have
performance characteristics which may make them an attractive element of a
well-diversified investment portfolio. Since bond returns have historically not
been well correlated with stock returns, combining bonds in a portfolio with
other asset classes can be an effective tool to help reduce overall portfolio
volatility.9
9 For the 20-year period ended 12/31/96 the correlation of large-cap stock
returns and government bond returns has been 0.37. Source: Symphony Asset
Management.
20
<PAGE> 27
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 8/31/97 as of 8/31/96 Reporting
(000s) (000s) Period
- -------------------------------------------------
<S> <C> <C>
$58,876 $45,788 28.6%
- -------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1997
<TABLE>
<CAPTION>
Maturity Value % of % of
Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------------
(cum.)
<S> <C> <C> <C> <C>
1 - 6 Months $ 1,815 3.0% 3.0%
7 - 36 Months 23,051 38.9 41.9
37 - 60 Months 21,594 36.5 78.4
Over 60 Months 12,806 21.6 100.0%
--------- ---------
$59,266 100.0%
======== ========
Average Weighted Maturity--3.50 Years
</TABLE>
21
<PAGE> 28
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 8/31/97 as of 8/31/96 Reporting
(000s) (000s) Period
- -------------------------------------------------
<S> <C> <C>
$ 125,284 $ 101,616 23.3%
- -------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1997
<TABLE>
<CAPTION>
Maturity Value % of % of
Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------------
(cum.)
<S> <C> <C> <C> <C>
0 - 1 Year $ 3,609 2.9% 2.9%
2 - 10 Years 4,489 3.6 6.5
11 - 20 Years 58,044 46.5 53.0
21 - 30 Years 57,124 45.9 98.9
Over 30 Years 1,432 1.1 100.0%
--------- ---------
$ 124,698 100.0%
========= ========
Average Weighted Maturity--19.11 Years
</TABLE>
22
<PAGE> 29
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--97.0%(a)
California Education Authority Revenue Refunding
Bonds
(Stanford University) Series M (Aaa AAA)
5.25%, 12/01/01 $1,600 $ 1,670
California Education Facilities Authority Revenue
Bonds (Pooled College and University Projects)
Series 1997A / (MBIA Insurance) (Aaa AAA)
4.85%, 04/01/03 345 352
5.05%, 04/01/05 1,010 1,039
California Health Facilities Finance Authority
(Valley Presbyterian Hospital) / (MBIA
Insurance) (- AAA) (d)
5.25%, 05/01/03 1,000 1,032
California Housing Finance Agency Home Mortgage
Revenue Bonds Series G (Aa2 AA-)
5.85%, 08/01/99 320 328
6.00%, 08/01/00 410 425
California State General Obligation
Bonds / (AMBAC Insurance) (Aaa AAA)
6.50%, 03/01/03 2,000 2,205
California State Public Works Board Lease Revenue
Refunding Bonds (California Community College
Projects) Series 1993A (A A)
4.70%, 12/01/99 1,000 1,013
California State Public Works Board Lease Revenue
Refunding Bonds (California State University
Projects) Series 1993A (A A)
4.30%, 12/01/99 2,000 2,010
California State Public Works Board Lease Revenue
Refunding Bonds (Department of Corrections
State Prisons) Series 1993A / (AMBAC Insurance)
(Aaa AAA)
4.70%, 12/01/00 1,865 1,902
California State Public Works Board Lease Revenue
Refunding Bonds (Department of
Corrections-California State Prison-Susanville)
Series D (A A)
4.40%, 06/01/00 1,000 1,005
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 2,228
California State Public Works Board Lease Revenue
Refunding Bonds (Various University of
California Projects) Series A (A1 A)
4.70%, 06/01/00 1,020 1,034
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 2,108
</TABLE>
23
<PAGE> 30
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates
of Participation (St. Joseph Health System)
(Aa3 AA)
5.30%, 07/01/00 $2,035 $ 2,088
California Statewide Community Development
Authority Hospital Revenue Refunding Bonds
Certificates of Participation (Cedars-Sinai
Medical Center) (A1 -)
4.40%, 11/01/00 1,235 1,235
Contra Costa County, California Transportation
Authority Sales Tax Revenue Bonds Series
A / (FGIC Insurance) (Aaa AAA)
4.80%, 03/01/01 1,000 1,023
Garden Grove, California Tax Allocation Refunding
Bonds (Community Development Projects) (- BBB+)
4.70%, 10/01/98 1,060 1,065
Los Angeles County, California Flood Control
District Revenue Bonds (Aa1 AA-)
4.30%, 03/01/00 1,090 1,093
Los Angeles, California Airport Development
Revenue Bonds / (FGIC Insurance) (Aaa AAA)
6.50%, 05/15/03 2,300 2,547
Los Angeles, California Department of Water &
Power Electric Plant Revenue Refunding Bonds
(Aa3 A+)
4.50%, 08/15/01 2,270 2,287
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 3,324
Los Angeles, California Wastewater System Revenue
Bonds Series A (A1 A)
6.60%, 02/01/99 1,775 1,833
Morgan Hill, California Unified School District
Certificates of Participation (A1 -)
4.80%, 08/01/99 510 514
Orange County, California Municipal Water
Facilities Certificates of Participation
(Allen-Mccolloch Pipeline) / (MBIA Insurance)
(Aaa AAA)
4.60%, 07/01/01 3,000 3,041
Rancho, California Water District Financing
Authority Revenue Bonds / (Toronto-Dominion
Bank LOC) (- AA)
4.70%, 08/15/21 2,500 2,516
</TABLE>
24
<PAGE> 31
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
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 $ 1,583
Riverside County, California Public Financing
Authority Special Tax Revenue Bonds Series
A / (MBIA Insurance) (Aaa AAA)
4.40%, 09/01/01 1,750 1,765
San Diego County California Tax and Revenue
Anticipation Notes Series 97-98 (Multiple
Credit Enhancements)
4.50%, 09/30/98 2,000 2,012
San Francisco California Unified School District
Tax and Revenue Anticipation Notes
4.50%, 10/30/98 2,000 2,012
San Francisco, California Port Commission Revenue
Refunding Bonds (A BBB+)
5.00%, 07/01/00 1,500 1,519
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 1,700 1,756
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 1,117
Santa Monica, California Wastewater Enterprise
Revenue Bonds (Hyperion Project) Series A
(Pre-Refunded) (A1 A+)
6.25%, 01/01/02 1,250 1,364
Southern California Metropolitan Water District
Revenue Bonds (Aa AA)
6.63%, 07/01/01 1,000 1,100
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 1,648
Stockton, California Health Facilities Revenue
Bonds (St. Joseph Medical Center) Series A /
(MBIA Insurance) (Aaa AAA)
4.60%, 06/01/00 200 203
-------
TOTAL MUNICIPAL BONDS
(Cost $56,705) 57,451
-------
</TABLE>
25
<PAGE> 32
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--3.0%(b)
California Pollution Control Financing Authority
Revenue
Bonds (Southern California Edison) Series 1986B
(A1 A+)
3.50%, 09/01/97 $ 400 $ 400
California Pollution Control Financing Authority
Solid Waste Disposal Revenue Bonds (Shell
Martinez) Series 96A (Shell Corp. Guaranty)
(Aa1 AAA)
3.40%, 09/01/97 300 300
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds Series
1985A-2 / (Landesbank Hessen-Thuringen
Girozentrale LOC) (- AAA)
3.40%, 09/01/97 200 200
Orange County, California Sanitation District
Certificates of Participation Series
1990-92A / (National Westminster Bank PLC LOC)
(Aa2 AA)
3.40%, 09/01/97 900 900
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $1,800) 1,800
-------
SHORT-TERM INVESTMENTS--0.0%(c)
Provident Institutional Funds--
California Money Fund Portfolio
2.82%, 09/07/97 15 15
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $15) 15
-------
TOTAL INVESTMENTS--100%
(Cost $58,520) $59,266
=======
</TABLE>
See accompanying Notes to Schedule of Investments.
26
<PAGE> 33
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
MUNICIPAL BONDS--96.7%(a)
Alta Loma, California Elementary School District
General
Obligation Bonds Series 2 / (AMBAC Insurance)
(Aaa AAA)
5.88%, 06/01/08 $ 840 $ 901
5.88%, 06/01/09 860 918
Anaheim, California Public Finance Authority
Lease Revenue Bonds / (FSA Insurance)
(Aaa AAA)
5.00%, 09/01/27 1,000 933
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 2,050
Bay Area Government Assoc. of California Revenue
Bonds Series 1997A6 / (FSA Insurance)
(Aaa AAA)
5.25%, 12/15/17 1,200 1,169
California Educational Facilities Authority
Revenue Bonds (Loyola Marymount University)
Series 1992B (A1 -)
6.60%, 10/01/22 1,450 1,559
California Educational Facilities Authority
Revenue Bonds (Mills College) Series 1992
(A -)
6.88%, 09/01/22 500 548
California Educational Facilities Authority
Revenue Bonds (St. Mary's College) Series 1993
(A -)
5.00%, 10/01/12 3,000 2,869
California Educational Facilities Authority
Revenue Refunding Bonds (Stanford University)
Series M (Aaa AAA)
5.25%, 12/01/26 2,320 2,276
California Health Facilities Financing Authority
Revenue Bonds (Assoc. of Retarded Citizens)
Series 1991 / (California Mortgage Insurance)
(- A+)
7.00%, 05/01/21 455 490
California Health Facilities Financing Authority
Revenue Bonds (Children's Hospital) / (MBIA
Insurance) (Aaa AAA)
5.38%, 07/01/16 5,180 5,089
5.38%, 07/01/20 3,400 3,315
California Health Facilities Financing Authority
Revenue Bonds (Marshall Hospital) Series
1992A / (California Mortgage Insurance) (- A+)
6.63%, 11/01/22 4,000 4,265
California Housing Finance Agency Home Mortgage
Revenue Bonds Series 1994G (Aa2 AA-)
7.20%, 08/01/14 3,000 3,262
</TABLE>
27
<PAGE> 34
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
California Housing Finance Agency Home Mortgage
Revenue Bonds Series 1995L / (MBIA Insurance)
(Aaa AAA)
5.90%, 08/01/17 $1,000 $ 1,028
California Housing Finance Agency Multi Unit
Rental Housing Revenue Bonds II Series 1992B
(A1 A+)
6.70%, 08/01/15 1,000 1,063
California State Public Works Board Lease
Revenue Refunding Bonds (Various California
State University Projects) / (AMBAC Insurance)
(Aaa AAA)
5.38%, 10/01/17 200 198
California State Public Works Board Lease
Revenue Refunding Bonds (Various California
State University Projects) Series 1992A (A1 A)
5.50%, 06/01/10 3,000 3,135
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 1,331
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates
of Participation (St. Joseph Health Systems)
(Aa3 AA)
6.50%, 07/01/15 2,000 2,195
Central Coast Water Authority Revenue Bonds
(State Water Project Regional
Facilities) / (AMBAC Insurance) (Aaa AAA)
5.00%, 10/01/22 5,000 4,700
Chico, California Unified School District
General Obligation Bonds Series C / (MBIA
Insurance) (Aaa AAA)
6.75%, 06/01/17 500 548
Colton, California Public Financing Authority
Revenue Bonds / (FSA Insurance) (Aaa AAA)
5.45%, 09/01/19 3,020 3,020
Contra Costa County, California Certificates of
Participation (Merrithew Memorial Hospital
Project) / (MBIA Insurance) (Aaa AAA)
5.38%, 11/01/17 2,180 2,155
East Bay Municipal Utility District Water System
Revenue Refunding Bonds / (FGIC Insurance)
(Aaa AAA)
5.00%, 06/01/26 4,800 4,488
Encina, California Financing Joint Powers
Authority Wastewater Revenue Bonds / (AMBAC
Insurance) (Aaa AAA)
5.13%, 08/01/14 3,160 3,093
Fresno, California Health Facility Revenue Bonds
(Holy Cross Health System--St. Agnes Medical
Center) Series 1991 (Aa AA)
6.50%, 06/01/11 550 582
</TABLE>
28
<PAGE> 35
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
Los Angeles County, California Public Works
Finance Authority Lease Revenue Multiple
Certificates of Participation (Facilities
Project V) Series 1996A / (AMBAC Insurance)
(Aaa AAA)
5.13%, 06/01/17 $2,000 $ 1,930
Los Angeles County, California Public Works
Finance Authority Lease Revenue Multiple
Certificates of Participation (Facilities
Project) Series 1997A / (MBIA Insurance)
(Aaa AAA)
5.25%, 09/01/15 1,070 1,055
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 1,995
Los Angeles County, California Transportation
Commission Sales Tax Revenue Refunding Bonds
Series 1991B (A1 AA)
6.50%, 07/01/13 555 593
Los Angeles, California Department of Airports
Revenue Bonds Series 1995A / (FGIC Insurance)
(Aaa AAA)
5.50%, 05/15/10 560 579
Los Angeles, California Department of Water &
Power Electric Plant Revenue Bonds (Aa3 A+)
6.00%, 01/15/11 865 910
Northern California Power Agency Multiple
Capital Facilities Revenue Bonds Series
1992A / (MBIA Insurance) (Aaa AAA)
6.50%, 08/01/12 3,300 3,613
Oceanside, California Building Authority
Certificates of Participation Refunding Bonds
Series 1993A (A BBB+)
6.38%, 04/01/12 1,250 1,308
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 1,945
Orange County, California Water District
Certificates of Participation (1989 Project)
(Aa AA)
6.50%, 08/15/11 1,150 1,225
Petaluma, California Consolidated Public
Facilities Lease Certificates of Participation
Series 1993A / (AMBAC Insurance) (Aaa AAA)
5.50%, 08/01/08 750 784
Riverside County, California Asset Leasing Corp.
Revenue Bonds (Riverside County Hospital
Project) Series B / (MBIA Insurance) (Aaa AAA)
5.00%, 06/01/19 2,000 1,880
</TABLE>
29
<PAGE> 36
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
Sacramento, California Regional Transit District
Certificates of Participation Series 1992A
(A1 -)
6.38%, 03/01/05 $ 250 $ 267
Sacramento, California Regional Transit District
Refunding Certificates of Participation (Light
Rail Transportation Project) (A2 A+)
6.75%, 07/01/07 2,000 2,172
San Bernardino County, California Transportation
Authority Tax Revenue Series A / (MBIA
Insurance) (Aaa AAA)
6.25%, 03/01/10 4,000 4,500
San Bernardino County, California Certificates
of Participation (West Valley Detention
Center) / (MBIA Insurance) (Aaa AAA)
6.50%, 11/01/12 420 459
San Diego, California Public Facilities Finance
Authority Sewer Revenue Bonds / (FGIC
Insurance) (Aaa AAA)
5.00%, 05/15/25 4,045 3,777
San Diego, California Public Facilities
Financing Authority Sewer Revenue
Bonds / (FGIC Insurance) (Aaa AAA)
5.25%, 05/15/22 2,500 2,431
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 1,508
5.50%, 07/01/20 2,000 1,995
San Francisco, California City & County Airports
Revenue Bonds 2nd Series, Issue 11 / (FGIC
Insurance) (Aaa AAA)
6.20%, 05/01/19 2,000 2,107
5.63%, 05/01/21 2,000 2,023
San Francisco, California Downtown Parking Corp.
Revenue Bonds (A -)
6.65%, 04/01/18 500 536
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 1,845
6.88%, 11/15/14 2,000 2,255
Santa Clara, California Redevelopment Agency Tax
Allocation Revenue Refunding Bonds (Bayshore
North Project) / (AMBAC Insurance) (Aaa AAA)
7.00%, 07/01/10 1,500 1,789
Southern California Public Power Authority
Revenue Bonds (San Juan Power Project Unit 3)
Series 1993A / (MBIA Insurance) (Aaa AAA)
5.38%, 01/01/08 1,000 1,035
5.00%, 01/01/20 2,000 1,880
</TABLE>
30
<PAGE> 37
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
Temecula, California Community Services District
Certificates of Participation (Community
Recreation Center Project) Series 1992 (- A)
7.12%, 10/01/12 $1,000 $ 1,100
Tri City, California Hospital District Revenue
Bonds Series 1996A / (MBIA Insurance)
(Aaa AAA)
5.63%, 02/15/17 1,000 1,009
University of California Revenue Refunding Bonds
(Multi Purpose Projects) Series C / (AMBAC
Insurance) (Aaa AAA)
5.13%, 09/01/18 2,500 2,409
Vallejo, California Revenue Refunding Bonds
Water Import Series A / (FSA Insurance)
(Aaa AAA)
5.70%, 05/01/16 2,000 2,037
West & Central Basin Financing Authority West
Basin Revenue Bonds Series 1997A / (AMBAC
Insurance) (Aaa AAA) (d)
5.13%, 08/01/22 3,500 3,338
West Basin County, California Municipal Water
District Certificates of Participation Revenue
Refunding Bonds Series 1997A / (AMBAC
Insurance) (Aaa AAA)
5.50%, 08/01/22 1,000 999
West Basin Municipal Water District Certificates
of Participation Revenue Refunding Bonds
Series 1997A / (AMBAC Insurance) (Aaa AAA)
5.50%, 08/01/17 500 501
Westminster, California Public Financing
Authority Certificates of Participation (1994
Civic Center & Street Improvement Project)
(- A-)
7.00%, 06/01/19 3,325 3,620
--------
TOTAL MUNICIPAL BONDS
(Cost $115,030) 120,589
--------
VARIABLE RATE OBLIGATIONS--3.3%(b)
California Pollution Control Financing Authority
Revenue
Bonds (Burney Forest Production Project)
Series 1988A / (Fleet Bank N.A. LOC) (A1 -)
3.60%, 09/01/97 300 300
California Pollution Control Financing Authority
Revenue Bonds (Shell Oil Corp. Project) Series
1991B (Aa1 AAA)
3.35%, 09/01/97 100 100
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986A (A1 A+)
3.50%, 09/01/97 300 300
</TABLE>
31
<PAGE> 38
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1997
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986D (A1 A+)
3.50%, 09/01/97 $ 200 $ 200
California Pollution Control Financing Authority
Solid Waste Disposal Revenue Bonds (Shell
Martinez) Series 96A (Shell Corp. Guaranty)
(Aaa AAA)
3.40%, 09/01/97 500 500
Irvine Ranch Water District Capital Improvement
Revenue Bonds Series 1986 / (Toronto-Dominion
Bank LOC) (Aa2 -)
3.40%, 09/01/97 100 100
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds (Districts 105, 250 & 290)
Series 1991 / (National Westminster Bank PLC
LOC) (Aa2 AA)
3.40%, 09/01/97 300 300
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985A-3 / (Landesbank
Hessen-Thuringen Girozentrale LOC) (- AAA)
3.40%, 09/01/97 100 100
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985B-3 / (Landesbank
Hessen-Thuringen Girozentrale LOC) (- AAA)
3.35%, 09/01/97 200 200
Irvine Ranch Water District Variable Improvement
Bond District 284 Series 1988A / (Landesbank
Hessen-Thuringen Girozentrale LOC) (- AAA)
3.35%, 09/01/97 300 300
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds Election
(Improvement District No. 282) Series
1988A / (Landesbank Hessen-Thuringen
Girozentrale LOC) (- AAA)
3.35%, 09/01/97 300 300
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds Series
1993A / (Bank of America LOC) (Aa2 AA-)
3.35%, 09/01/97 700 700
Orange County, California Water District
Improvement Bond Act 1915 Revenue Bonds
(Irvine Coast Assessment District) Number
88-1 / (Kredietbank, N.V. & Societe Generale
LOC) (Aa3 AA-)
3.55%, 09/01/97 700 700
--------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $4,100) 4,100
--------
</TABLE>
32
<PAGE> 39
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
SHORT-TERM INVESTMENTS--0.0%(c)
Provident Institutional Funds-- California Money
Fund Portfolio
2.82%, 09/07/97 $ 9 $ 9
--------
TOTAL SHORT-TERM INVESTMENTS
(Cost $9) 9
--------
TOTAL INVESTMENTS--100%
(Cost $119,139) $124,698
========
</TABLE>
33
<PAGE> 40
- ------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investor Services, Inc. and
Standard & Poor's Ratings Group which were in effect on the report date.
(a) Interest rates represent coupon rate of security.
(b) Interest rates vary periodically based on current market rates. Rates shown
are the effective rates on report date. Dates shown represent the latter of
the demand date or next interest rate change date, which is considered the
maturity date for financial reporting purposes. For variable rate securities
without demand features and which mature in less than one year, the next
interest reset date is shown.
(c) Interest rates represent the yield on 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>
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
</TABLE>
See accompanying Notes to Financial Statements.
34
<PAGE> 41
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1997
<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: $58,520 and $119,139, respectively) $59,266 $124,698
Interest receivable 740 1,809
Receivable for Fund shares sold -- 391
Deferred organization costs 1 2
Prepaid expenses 1 1
------- --------
Total assets 60,008 126,901
------- --------
LIABILITIES
Payable for:
Dividends 38 100
Fund shares redeemed 8 22
Investments purchased 1,039 1,441
Investment advisory and administration fees -- 1
Other 47 53
------- --------
Total liabilities 1,132 1,617
------- --------
Net assets applicable to outstanding shares $58,876 $125,284
======= ========
NET ASSETS CONSIST OF:
Paid-in-capital $58,915 $120,937
Undistributed net investment income 12 37
Accumulated net realized loss on
investments sold (797) (1,249)
Net unrealized gain on investments 746 5,559
------- --------
$58,876 $125,284
======= ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 5,797 11,291
Net asset value, offering and redemption
price per share $10.16 $11.10
</TABLE>
See accompanying Notes to Financial Statements.
35
<PAGE> 42
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1997
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
-------------- ----------
<S> <C> <C>
Interest income $2,401 $ 6,360
------ -------
Expenses:
Investment advisory and administration fees 209 460
Transfer agency and shareholder service
fees 128 281
Custodian fees 36 73
Professional fees 30 32
Shareholder reports 26 46
Trustees' fees 7 7
Registration fees 3 4
Amortization of deferred organization costs 1 1
Other expenses 17 21
------ -------
457 925
Less expenses reduced (see Note 4) (207) (375)
------ -------
Total expenses incurred by Fund 250 550
------ -------
Net investment income 2,151 5,810
------ -------
Net realized gain on investments sold 51 1,036
Increase in net unrealized gain on
investments 522 3,626
------ -------
Net gain on investments 573 4,662
------ -------
Increase in net assets resulting from
operations $2,724 $10,472
====== =======
</TABLE>
See accompanying Notes to Financial Statements.
36
<PAGE> 43
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------------- -------------------------
Year ended August 31,
1997 1996 1997 1996
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,151 $ 1,820 $ 5,810 $ 5,205
Net realized gain (loss) on investments
sold 51 (12) 1,036 442
Increase (decrease) in net unrealized gain
on investments 522 (102) 3,626 359
------- ------- -------- --------
Increase in net assets resulting from
operations 2,724 1,706 10,472 6,006
------- ------- -------- --------
Dividends to shareholders from net
investment income (2,150) (1,820) (5,809) (5,205)
------- ------- -------- --------
Capital share transactions:
Proceeds from shares sold 27,426 19,657 38,540 31,008
Net asset value of shares issued in
reinvestment of dividends 1,635 1,443 3,624 3,436
Less payments for shares redeemed (16,547) (15,837) (23,159) (23,674)
------- ------- -------- --------
Increase in net assets from capital share
transactions 12,514 5,263 19,005 10,770
------- ------- -------- --------
Total increase in net assets 13,088 5,149 23,668 11,571
Net assets:
Beginning of period 45,788 40,639 101,616 90,045
------- ------- -------- --------
End of period (including undistributed net
investment income of $12, $11, $37 and
$36, respectively) $58,876 $ 45,788 $ 125,284 $101,616
======= ======= ======== ========
Number of Fund shares:
Sold 2,711 1,951 3,532 2,893
Reinvested 162 143 333 321
Redeemed (1,638) (1,572) (2,132) (2,210)
------- ------- -------- --------
Net increase in shares outstanding 1,235 522 1,733 1,004
Shares outstanding:
Beginning of period 4,562 4,040 9,558 8,554
------- ------- -------- --------
End of period 5,797 4,562 11,291 9,558
======= ======= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
37
<PAGE> 44
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Schwab California Short/Intermediate
Tax-Free Bond Fund
-----------------------------------------------------
Period
Year ended August 31, ended
---------------------------------------- August 31,
1997 1996 1995 1994 1993++
------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.04 $ 10.06 $ 9.89 $ 10.13 $ 10.00
Income from investment operations
- ---------------------------------
Net investment income 0.43 0.43 0.42 0.37 0.13
Net realized and unrealized gain (loss) on
investments 0.12 (0.02) 0.17 (0.24) 0.13
------- ------- ------- ------- -------
Total from investment operations 0.55 0.41 0.59 0.13 0.26
Less distributions
- ------------------
Dividends from net investment income (0.43) (0.43) (0.42) (0.37) (0.13)
Distributions from realized gain on
investments -- -- -- -- --
------- ------- ------- ------- -------
Total distributions (0.43) (0.43) (0.42) (0.37) (0.13)
------- ------- ------- ------- -------
Net asset value at end of period $ 10.16 $ 10.04 $ 10.06 $ 9.89 $ 10.13
======= ======= ======= ======= =======
Total return (not annualized) 5.54% 4.11% 6.17% 1.29% 2.57%
- ------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $58,876 $45,788 $40,639 $48,649 $ 44,545
Ratio of expenses to average net assets+ 0.49% 0.49% 0.50% 0.48% 0.45%*
Ratio of net investment income
to average net assets+ 4.21% 4.23% 4.29% 3.69% 3.49%*
Portfolio turnover rate 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 and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets 0.89% 0.87% 0.84% 0.86% 1.25%*
Ratio of net investment income to average
net assets 3.81% 3.85% 3.95% 3.31% 2.69%*
</TABLE>
++ For the period April 21, 1993 (commencement of operations) to August 31,
1993.
* Annualized
See accompanying Notes to Financial Statements.
38
<PAGE> 45
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Schwab California Long-Term Tax-Free Bond Fund
-------------------------------------------------------------------
Eight
months Period
Year ended August 31, ended ended
---------------------------------------- August 31, December 31,
1997 1996 1995 1994 1993 1992++
-------- -------- ------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.63 $ 10.53 $ 10.40 $ 11.26 $ 10.58 $ 10.00
Income from investment
- ----------------------
operations
----------
Net investment income 0.56 0.57 0.56 0.56 0.38 0.51
Net realized and unrealized
gain (loss) on investments 0.47 0.10 0.13 (0.74) 0.68 0.58
-------- -------- ------- -------- -------- --------
Total from investment
operations 1.03 0.67 0.69 (0.18) 1.06 1.09
Less distributions
- ------------------
Dividends from
net investment income (0.56) (0.57) (0.56) (0.56) (0.38) (0.51)
Distributions from realized
gain on investments -- -- -- (0.12) -- --
-------- -------- ------- -------- -------- --------
Total distributions (0.56) (0.57) (0.56) (0.68) (0.38) (0.51)
-------- -------- ------- -------- -------- --------
Net asset value at end of
period $ 11.10 $ 10.63 $ 10.53 $ 10.40 $ 11.26 $ 10.58
======== ======== ======= ======== ======== ========
Total return (not annualized) 9.95% 6.43% 6.98% (1.70)% 10.13% 11.10%
- ------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period
(000s) $125,284 $101,616 $90,045 $106,432 $138,067 $ 72,969
Ratio of expenses to average
net assets+ 0.49% 0.49% 0.58% 0.60% 0.60%* 0.45%*
Ratio of net investment income
to average net assets+ 5.17% 5.30% 5.54% 5.12% 5.18%* 5.72%*
Portfolio turnover rate 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 and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average
net assets 0.82% 0.82% 0.81% 0.80% 0.87%* 1.05%*
Ratio of net investment
income
to average net assets 4.84% 4.97% 5.31% 4.92% 4.91%* 5.12%*
</TABLE>
++ For the period February 24, 1992 (commencement of operations) to December
31, 1992.
* Annualized
See accompanying Notes to Financial Statements.
39
<PAGE> 46
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1997
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.
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 by the issuer, any
remaining premium is amortized through the final maturity date.
40
<PAGE> 47
- ------------------------------------------------------------------------------
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 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.
All distributions paid by Schwab California Short/Intermediate Tax-Free Bond
Fund and Schwab California Long-Term Tax-Free Bond Fund during the year ended
August 31, 1997 qualify as exempt interest dividends for federal tax purposes.
At August 31, 1997, (for financial reporting and federal income tax purposes),
net unrealized gain for the Schwab California Short/Intermediate Tax-Free Bond
Fund aggregated $746,000, of which $763,000 related to appreciated securities
and $17,000 related to depreciated securities, and net unrealized gain for the
Schwab California Long-Term Tax-Free Bond Fund aggregated $5,559,000, of which
$5,616,000 related to appreciated securities and $57,000 related to depreciated
securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. The Investment
41
<PAGE> 48
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Manager has reduced a portion of its fee for the year ended August 31, 1997 (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.
Schwab has reduced a portion of its fees for the year ended August 31, 1997 (see
Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1997, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Funds incurred fees aggregating $14,000
related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit each Fund's ratio of operating expenses to average net assets. For the
year ended August 31, 1997, the total of such fees reduced by the Investment
Manager and Schwab was $110,000 and $97,000 for the Schwab California
Short/Intermediate Tax-Free Bond Fund, respectively, and $222,000 and $153,000
for the Schwab California Long-Term Tax-Free Bond Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1997, 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 $ 24,242 $ 58,412
Proceeds of sales and
maturities $ 11,638 $ 38,505
</TABLE>
42
<PAGE> 49
- ------------------------------------------------------------------------------
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, 1997, the results of each of
their operations for the year then ended, the changes in each of their net
assets for each of the two years in the period then ended 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, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
September 30, 1997
43
<PAGE> 50
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 51
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money funds.
SCHWAB ASSET ALLOCATION FUNDS
Schwab Asset Director(R)-High Growth Fund
Schwab Asset Director-Balanced Growth Fund
Schwab Asset Director-Conservative Growth Fund
Schwab OneSource Portfolios-Growth Allocation
Schwab OneSource Portfolios-Balanced Allocation
SCHWAB STOCK FUNDS
Schwab 1000 Fund(R)
Schwab S&P 500 Fund
Schwab Analytics Fund(R)
Schwab Small-Cap Index Fund(R)
Schwab OneSource Portfolios-Small Company
Schwab International Index Fund(R)
Schwab OneSource Portfolios-International
SCHWAB BOND FUNDS
Schwab Government Bond Funds-Long-Term and Short/Intermediate
Schwab Tax-Free Bond Funds-Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds-Long-Term and Short/Intermediate
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds* that seek high current income with
safety and liquidity. Choose from taxable or tax-advantaged alternatives. Many
can be linked to your Schwab account to "sweep" cash balances automatically when
you're between investments. Or, for your larger cash reserves, choose one of our
Value Advantage Investments(R).
Please call 1-800-435-4000 for a free prospectus and brochure for any of the
SchwabFunds(R).
Each prospectus provides more complete information, including charges and
expenses. Please read it carefully before investing.
This report must be preceded or accompanied by a current prospectus.
* Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the funds will be able to
maintain a stable share price of $1.
<PAGE> 52
SCHWABFUNDS BULK RATE
FAMILY U.S. POSTAGE
PAID
101 Montgomery Street CHARLES SCHWAB
San Francisco, California 94104
Investment Advisor
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
Distributor
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
(C)1997 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
TF5006(10/97) CRS 20155 Printed on recycled paper.
