<PAGE>
<TABLE>
<S> <C>
Dear Shareholder,
[PHOTO] With the support of investors like you, SchwabFunds-Registered
Trademark- continues to be among the largest and fastest-growing
mutual fund families in the nation. Charles Schwab Investment
Management, Inc. (CSIM) now manages over $60 billion in assets for
more than 3.3 million SchwabFunds shareholders and offers 34 funds
spanning a spectrum of financial markets and investing styles.
</TABLE>
ASSET ALLOCATION AND BOND FUNDS
It is prudent to periodically scrutinize your investment portfolio--in
particular how your assets are allocated among various asset classes, namely
stocks, bonds and cash. Remember that diversifying your portfolio with bond
funds as part of your asset allocation plan can help stabilize your portfolio
over the long term while still providing competitive returns. This is because
changing market conditions may affect various asset classes differently--for
example, as stocks decrease, bonds may increase or vice versa. Of course, bear
in mind that share prices of bond funds, like all investments, fluctuate with
market conditions.
If you have any questions about your own investment plan or need help getting
started, contact your local Schwab branch to set up a free consultation with one
of our representatives. Additionally, I encourage you to visit our Web site at
WWW.SCHWAB.COM/SCHWABFUNDS, where you'll find online resources and tools to help
you evaluate or develop your investment plan.
NEW INVESTMENT OPPORTUNITIES
As a strong proponent of indexing as an investment strategy, we introduced the
converted Schwab Bond Index Funds--Schwab Short-Term Bond Market Index Fund and
Schwab Total Bond Market Index Fund--late last year.(1) Each Fund is broad-based
and diversified and seeks to track indices representing a broad spectrum of the
overall bond market. These Funds may provide excellent opportunities to
diversify your equity portfolio.
In addition, we introduced two new municipal money funds in early February. The
Schwab New Jersey Municipal Money Fund and the Schwab Pennsylvania Municipal
Money Fund are designed to offer taxpayers in those states opportunities for
additional tax savings.(2)
For a free prospectus on Schwab money funds, bond funds, or any other
SchwabFund, please call us toll-free at 1-800-435-4000. The prospectus contains
more information, including fees and expenses. Please be sure to read the
prospectus before investing.
Thank you for placing your trust in SchwabFunds. We will continue to explore new
strategies to help you meet your investment goals and to provide you with timely
information on SchwabFunds.
/s/ Charles R. Schwab
Charles R. Schwab
(1) Formerly the Schwab Short/Intermediate Government Bond Fund and the Schwab
Long-Term Government Bond Fund, respectively.
(2) Income may be subject to the federal alternative minimum tax (AMT).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
A Word from SchwabFunds-Registered Trademark-................................... 2
Schwab Short/Intermediate Tax-Free Bond Fund.................................... 4
Schwab Long-Term Tax-Free Bond Fund............................................. 6
The Portfolio Management Team................................................... 8
Market Overview................................................................. 9
Questions to the Portfolio Management Team...................................... 17
Financial Statements and Notes.................................................. 21
</TABLE>
1
<PAGE>
A WORD FROM SCHWABFUNDS-REGISTERED TRADEMARK-
We are pleased to bring you the semi-annual report for Schwab
Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund
(the Funds) for the six-month period ended February 28, 1998.
During the reporting period, the Funds achieved their primary objectives of
providing a high level of current income exempt from federal income taxes,
consistent with preservation of capital.(1) The chart below shows the income
dividends on a per-share basis paid by the Funds during each fiscal year or
period since inception.
DIVIDENDS PAID BY THE SCHWAB TAX-FREE BOND FUNDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INCOME DIVIDENDS PER SHARE FISCAL YEAR
1992* 1993** 1994 1995 1996 1997 1998***
<S> <C> <C> <C> <C> <C> <C> <C>
Schwab Short/Intermediate Tax-Free Bond Fund $0.13 $0.37 $0.40 $0.41 $0.41 0.21
Schwab Long-Term Tax-Free Bond Fund $0.17 $0.36 $0.52 $0.53 $0.52 $0.53 0.3
</TABLE>
* Period from inception (9/11/92) through 12/31/92.
** Period from inception (4/21/93) through 8/31/93 for Schwab
Short/Intermediate Tax-Free Bond Fund and for the eight-month period ended
8/31/93 for Schwab Long-Term Tax-Free Bond Fund.
*** For the six-month period ended 2/28/98 for both Funds.
(1) Income from the Funds may be subject to state and local taxes and to the
federal alternative minimum tax (AMT).
2
<PAGE>
TAXABLE EQUIVALENT YIELD
The taxable equivalent yield represents the pre-tax yield a taxable
investment would have to pay to be equivalent to a tax-exempt yield on an
after-tax basis and may be helpful in evaluating the performance of a tax-exempt
investment. The table below shows the Funds' 30-day SEC yields as of 2/28/98 and
the taxable equivalent yields,(2) assuming a maximum federal income tax rate of
39.6%. Shareholder tax rates may be different.
<TABLE>
<CAPTION>
30-Day SEC Taxable Equivalent
Yield 30-Day SEC Yield
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
Schwab Short/Intermediate Tax-Free Bond Fund 3.62% 5.99%
- -------------------------------------------------------------------------------------------------------
Schwab Long-Term Tax-Free Bond Fund 4.73% 7.83%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(2) A portion of both Funds' expenses was reduced during the reporting
period. Without such reductions, both Funds' SEC yields would have been
lower.
3
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO COMPOSITION
The Fund invests primarily in debt securities issued by or on behalf of the
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities. Under
normal market conditions, the Fund seeks to maintain a dollar-weighted average
portfolio maturity of between two and five years.
The chart below presents the Fund's portfolio as of 2/28/98 based on
published ratings from Standard & Poor's Ratings Group and/or Moody's 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. This
information is not
necessarily indicative of the Fund's future holdings.
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
Portfolio Composition as of February 28, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 60%
AA 28%
A 6%
BBB 2%
Short-Term Investments 4%
</TABLE>
The chart on the following page compares the growth of a hypothetical
$10,000 investment in the Fund, made at inception, with a similar investment in
the Lehman Brothers 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 GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
4
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN THE SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
AND THE LEHMAN 3-YEAR MUNI INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND LEHMAN 3-YEAR MUNI INDEX
<S> <C> <C>
4/21/93 $10,000 $10,000
4/30/93 $9,990 $9,993
5/31/93 $10,038 $10,020
6/30/93 $10,129 $10,085
7/31/93 $10,151 $10,090
8/31/93 $10,283 $10,184
9/30/93 $10,344 $10,228
10/31/93 $10,366 $10,250
11/30/93 $10,326 $10,237
12/31/93 $10,462 $10,344
1/31/94 $10,567 $10,428
2/28/94 $10,412 $10,331
3/31/94 $10,218 $10,206
4/30/94 $10,280 $10,267
5/31/94 $10,323 $10,315
6/30/94 $10,312 $10,318
7/31/94 $10,407 $10,403
8/31/94 $10,429 $10,440
9/30/94 $10,377 $10,414
10/31/94 $10,317 $10,389
11/30/94 $10,245 $10,370
12/31/94 $10,346 $10,415
1/31/95 $10,445 $10,501
2/28/95 $10,563 $10,612
3/31/95 $10,655 $10,707
4/30/95 $10,691 $10,743
5/31/95 $10,881 $10,908
6/30/95 $10,884 $10,934
7/31/95 $10,987 $11,050
8/31/95 $11,079 $11,136
9/30/95 $11,115 $11,167
10/31/95 $11,175 $11,221
11/30/95 $11,255 $11,293
12/31/95 $11,305 $11,340
1/31/96 $11,383 $11,429
2/29/96 $11,364 $11,431
3/31/96 $11,313 $11,403
4/30/96 $11,306 $11,417
5/31/96 $11,312 $11,427
6/30/96 $11,371 $11,496
7/31/96 $11,443 $11,559
8/31/96 $11,447 $11,577
9/30/96 $11,519 $11,647
10/31/96 $11,605 $11,729
11/30/96 $11,712 $11,838
12/31/96 $11,705 $11,844
1/31/97 $11,742 $11,896
2/28/97 $11,801 $11,954
3/31/97 $11,737 $11,892
4/30/97 $11,776 $11,943
5/31/97 $11,876 $12,040
6/30/97 $11,938 $12,111
7/31/97 $12,096 $12,255
8/31/97 $12,065 $12,230
9/30/97 $12,141 $12,319
10/31/97 $12,194 $12,373
11/30/97 $12,222 $12,409
12/31/97 $12,310 $12,493
1/31/98 $12,384 $12,575
2/28/98 $12,397 $12,602
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/98
<TABLE>
<CAPTION>
Since
Inception 30-day
6-Month(3) 1-Year (4/21/93) SEC Yield
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Schwab Short/Intermediate Tax-Free Bond Fund(4) 2.75% 5.05% 4.52% 3.62%
- ----------------------------------------------------------------------------------------------------------------
Lehman 3-Year Muni Index 3.04% 5.42% 4.87% --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NASD regulations require that we report Fund performance data as of the most
recent calendar quarter. As of 12/31/97, the Fund's 6-month, 1-year and
since-inception average annual total returns were 3.12%, 5.17% and 4.52%,
respectively. The 30-day SEC yield was 3.76%.(5)
(3) Actual, not annualized, since period is less than one year.
(4) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/98, the Fund's 6-month, 1-year, and
since-inception average annual total returns would have been 2.45%, 4.48%
and 4.03%, respectively. The 30-day SEC yield would have been 3.07%.
(5) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/97, the Fund's 6-month, 1-year, and
since-inception average annual total returns would have been 2.83%, 4.63%
and 4.04%, respectively. The 30-day SEC yield would have been 3.18%.
5
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
PORTFOLIO COMPOSITION
The Fund invests primarily in debt securities issued by or on behalf of the
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities. Under
normal market conditions, the Fund seeks to maintain a dollar-weighted average
portfolio maturity of ten years or longer.
The chart below presents the Fund's portfolio as of 2/28/98 based on
published ratings from Standard & Poor's Ratings Group and/or Moody's Investor
Service, which are recognized rating services. Categories reflect the higher
published ratings for securities rated
differently by the two agencies, and percentages are dollar weighted. Please
note that this
information is not necessarily indicative of the Fund's future holdings.
SCHWAB LONG-TERM TAX-FREE BOND FUND
Portfolio Composition as of February 28, 1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 62%
AA 27%
A 7%
Short-Term Investments 4%
</TABLE>
The chart on the following page compares the growth of a hypothetical
$10,000 investment in the Fund, made at inception, with a similar investment in
the Lehman Brothers General Obligation Municipal Bond Index (Lehman Muni Bond
Index). THIS INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDEND AND CAPITAL GAINS
DISTRIBUTIONS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. Indices are
unmanaged and do not reflect advisory fees and other expenses associated with an
investment in the Fund. Investors cannot invest in an index directly.
6
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN THE SCHWAB LONG-TERM TAX-FREE BOND FUND
AND THE LEHMAN MUNI BOND INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB LONG-TERM LEHMAN MUNI
TAX-FREE BOND FUND BOND INDEX
<S> <C> <C>
9/11/92 $10,000 $10,000
9/30/92 $9,867 $9,923
10/31/92 $9,515 $9,826
11/30/92 $9,912 $10,002
12/31/92 $10,092 $10,104
1/31/93 $10,240 $10,221
2/28/93 $10,682 $10,591
3/31/93 $10,484 $10,479
4/30/93 $10,632 $10,585
5/31/93 $10,690 $10,644
6/30/93 $10,883 $10,822
7/31/93 $10,879 $10,836
8/31/93 $11,157 $11,062
9/30/93 $11,298 $11,188
10/31/93 $11,315 $11,209
11/30/93 $11,201 $11,111
12/31/93 $11,465 $11,345
1/31/94 $11,588 $11,475
2/28/94 $11,274 $11,177
3/31/94 $10,791 $10,722
4/30/94 $10,858 $10,813
5/31/94 $10,970 $10,907
6/30/94 $10,870 $10,840
7/31/94 $11,085 $11,044
8/31/94 $11,109 $11,083
9/30/94 $10,921 $10,920
10/31/94 $10,657 $10,726
11/30/94 $10,381 $10,532
12/31/94 $10,658 $10,764
1/31/95 $11,050 $11,072
2/28/95 $11,381 $11,394
3/31/95 $11,514 $11,524
4/30/95 $11,483 $11,538
5/31/95 $11,918 $11,906
6/30/95 $11,735 $11,802
7/31/95 $11,836 $11,914
8/31/95 $11,971 $12,065
9/30/95 $12,056 $12,141
10/31/95 $12,250 $12,317
11/30/95 $12,443 $12,521
12/31/95 $12,591 $12,642
1/31/96 $12,640 $12,738
2/29/96 $12,520 $12,651
3/31/96 $12,366 $12,489
4/30/96 $12,319 $12,454
5/31/96 $12,311 $12,449
6/30/96 $12,484 $12,585
7/31/96 $12,599 $12,699
8/31/96 $12,553 $12,697
9/30/96 $12,780 $12,875
10/31/96 $12,948 $13,020
11/30/96 $13,188 $13,258
12/31/96 $13,117 $13,203
1/31/97 $13,097 $13,228
2/28/97 $13,223 $13,350
3/31/97 $12,987 $13,172
4/30/97 $13,146 $13,283
5/31/97 $13,358 $13,482
6/30/97 $13,502 $13,626
7/31/97 $13,933 $14,004
8/31/97 $13,728 $13,872
9/30/97 $13,927 $14,037
10/31/97 $14,025 $14,127
11/30/97 $14,146 $14,210
12/31/97 $14,408 $14,418
1/31/98 $14,556 $14,566
2/28/98 $14,529 $14,571
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/98
<TABLE>
<CAPTION>
Since
Inception 30-day SEC
6-Month(6) 1-Year 5-Year (9/11/92) Yield
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Schwab Long-Term Tax-Free Bond Fund(7) 5.83% 9.87% 6.34% 7.07% 4.73%
- -------------------------------------------------------------------------------------------------------
Lehman Muni Bond Index 5.04% 9.15% 6.59% 7.13% --
- -------------------------------------------------------------------------------------------------------
</TABLE>
NASD regulations require that we report Fund performance data as of the most
recent calendar quarter. As of 12/31/97, the Fund's 6-month, 1-year, 5-year and
since-inception average annual total returns were 6.71%, 9.84%, 7.38% and 7.12%,
respectively. The 30-day SEC yield was 4.89%.(8)
(6) Actual, not annualized, since period is less than one year.
(7) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/98, the Fund's 6-month, 1-year, 5-year
and since-inception average annual total returns would have been 5.55%,
9.32%, 5.83% and 6.49%, respectively. The 30-day SEC yield would have been
4.22%.
(8) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/97, the Fund's 6-month, 1-year, 5-year
and since-inception average annual total returns would have been 6.43%,
9.27%, 6.85% and 6.55%, respectively. The 30-day SEC yield would have been
4.36%.
7
<PAGE>
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD--Senior Vice President and Chief Investment Officer--has
overall responsibility for the management of the Funds' portfolios. Steve joined
Charles Schwab Investment Management, Inc. (CSIM) as Vice President and
Portfolio Manager in April 1991 and was promoted to his current position in
August 1993. Prior to joining CSIM, Steve was Vice President and Portfolio
Manager at Federated Investors.
JOANNE LARKIN--Vice President and Senior Portfolio Manager--has had primary
responsibility for the day-to-day management of the Funds' portfolios since
their inceptions. Joanne joined CSIM as Portfolio Manager in February 1992 and
was
promoted to her current position in
December 1996. Prior to joining CSIM, Joanne was the Portfolio Manager for the
Shearson Lehman California Municipal Bond Fund and for E.F. Hutton's Municipal
Cash Reserve Management.
THE FOLLOWING MARKET OVERVIEW AND ANSWERS TO QUESTIONS ARE PROVIDED BY THE
PORTFOLIO MANAGEMENT TEAM.
8
<PAGE>
MARKET OVERVIEW
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GDP GROWTH RATE
QUARTERLY PERCENT CHANGE (ANNUALIZED RATE)
SOURCE: BLOOMBERG L.P.
<S> <C>
Q1 1990 3.9%
Q2 1990 1.2%
Q3 1990 -1.9%
Q4 1990 -4.0%
Q1 1991 -2.1%
Q2 1991 1.8%
Q3 1991 1.0%
Q4 1991 1.0%
Q1 1992 4.7%
Q2 1992 2.5%
Q3 1992 3.0%
Q4 1992 4.3%
Q1 1993 0.1%
Q2 1993 2.0%
Q3 1993 2.1%
Q4 1993 5.3%
Q1 1994 3.0%
Q2 1994 4.7%
Q3 1994 1.8%
Q4 1994 3.6%
Q1 1995 0.9%
Q2 1995 0.3%
Q3 1995 3.0%
Q4 1995 2.2%
Q1 1996 1.8%
Q2 1996 6.0%
Q3 1996 1.0%
Q4 1996 4.3%
Q1 1997 4.9%
Q2 1997 3.3%
Q3 1997 3.1%
Q4 1997 3.7%
</TABLE>
- - The real GDP growth rate was 3.2% for 1996 and 3.8% for 1997--healthy rates of
growth for the economy and well in excess of the Federal Reserve's estimated
non-inflationary growth rate of 2.0 to 2.75%.
- - The economy appears poised for continued growth, further extending the current
economic expansion that began in 1991. The direct impact of the economic
problems of Pacific Rim countries on 1998 U.S. GDP growth is anticipated to be
relatively minor. Estimates range from a reduction of 0.25 to 1.0%.
- - Prior to the fourth-quarter onset of the "Asian Flu," the strength of the
economy and tight labor markets led to speculation about a potential
acceleration in both wage and price inflation and whether more-restrictive
Federal Reserve policy was imminent. As Federal Reserve Chairman Alan
Greenspan said in his February congressional testimony, "The key question
going forward is whether the restraint building from the turmoil in Asia will
be sufficient to check inflationary tendencies that might otherwise result
from the strength of domestic spending and tightening labor markets." At the
time of this writing, there continues to be no clear consensus whether the
Federal Reserve's next move will be to raise or lower short-term rates.
9
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
Jan-90 5.4%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.4%
Jun-90 5.2%
Jul-90 5.5%
Aug-90 5.7%
Sep-90 5.9%
Oct-90 5.9%
Nov-90 6.2%
Dec-90 6.3%
Jan-91 6.4%
Feb-91 6.6%
Mar-91 6.8%
Apr-91 6.7%
May-91 6.9%
Jun-91 6.9%
Jul-91 6.8%
Aug-91 6.9%
Sep-91 6.9%
Oct-91 7.0%
Nov-91 7.0%
Dec-91 7.3%
Jan-92 7.3%
Feb-92 7.4%
Mar-92 7.4%
Apr-92 7.4%
May-92 7.6%
Jun-92 7.8%
Jul-92 7.7%
Aug-92 7.6%
Sep-92 7.6%
Oct-92 7.3%
Nov-92 7.4%
Dec-92 7.4%
Jan-93 7.3%
Feb-93 7.1%
Mar-93 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
Jul-93 6.9%
Aug-93 6.8%
Sep-93 6.7%
Oct-93 6.8%
Nov-93 6.6%
Dec-93 6.5%
Jan-94 6.7%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.0%
Jun-94 6.1%
Jul-94 6.1%
Aug-94 6.1%
Sep-94 5.9%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.4%
Jan-95 5.6%
Feb-95 5.5%
Mar-95 5.4%
Apr-95 5.7%
May-95 5.6%
Jun-95 5.6%
Jul-95 5.7%
Aug-95 5.7%
Sep-95 5.7%
Oct-95 5.5%
Nov-95 5.6%
Dec-95 5.6%
Jan-96 5.7%
Feb-96 5.5%
Mar-96 5.5%
Apr-96 5.5%
May-96 5.5%
Jun-96 5.3%
Jul-96 5.4%
Aug-96 5.2%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.3%
Jan-97 5.4%
Feb-97 5.3%
Mar-97 5.2%
Apr-97 4.9%
May-97 4.8%
Jun-97 5.0%
Jul-97 4.8%
Aug-97 4.9%
Sep-97 4.9%
Oct-97 4.7%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.7%
Feb-98 4.6%
Source: Bloomberg L.P.
</TABLE>
- - Job growth has remained robust, and the unemployment rate reached a new low
for this decade during the reporting
period. In fact, the 4.6% and 4.7% rates experienced during the reporting
period represent the lowest unemployment rates in 24 years.
- - Although inflation has been well contained, the combination of a tight labor
market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains, such as we experienced in 1997, allow manufacturers and
other businesses to limit price increases in the face of
rising wages, without sacrificing profit margins.
10
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
SOURCE: BLOOMBERG L.P.
QUARTERLY EMPLOYMENT COST INDEX MONTHLY CONSUMER PRICE INDEX
<S> <C> <C>
Jan-90 5.3% 5.2%
Feb-90 5.3% 5.3%
Mar-90 5.3% 5.2%
Apr-90 5.4% 4.7%
May-90 5.4% 4.4%
Jun-90 5.4% 4.7%
Jul-90 5.1% 4.8%
Aug-90 5.1% 5.6%
Sep-90 5.1% 6.2%
Oct-90 4.8% 6.3%
Nov-90 4.8% 6.3%
Dec-90 4.8% 6.1%
Jan-91 4.6% 5.7%
Feb-91 4.6% 5.3%
Mar-91 4.6% 4.9%
Apr-91 4.5% 4.9%
May-91 4.5% 5.0%
Jun-91 4.5% 4.7%
Jul-91 4.3% 4.4%
Aug-91 4.3% 3.8%
Sep-91 4.3% 3.4%
Oct-91 4.2% 2.9%
Nov-91 4.2% 3.0%
Dec-91 4.2% 3.1%
Jan-92 4.1% 2.6%
Feb-92 4.1% 2.8%
Mar-92 4.1% 3.2%
Apr-92 3.5% 3.2%
May-92 3.5% 3.0%
Jun-92 3.5% 3.1%
Jul-92 3.4% 3.2%
Aug-92 3.4% 3.1%
Sep-92 3.4% 3.0%
Oct-92 3.5% 3.2%
Nov-92 3.5% 3.0%
Dec-92 3.5% 2.9%
Jan-93 3.4% 3.3%
Feb-93 3.4% 3.2%
Mar-93 3.4% 3.1%
Apr-93 3.6% 3.2%
May-93 3.6% 3.2%
Jun-93 3.6% 3.0%
Jul-93 3.6% 2.8%
Aug-93 3.6% 2.8%
Sep-93 3.6% 2.7%
Oct-93 3.4% 2.8%
Nov-93 3.4% 2.7%
Dec-93 3.4% 2.7%
Jan-94 3.2% 2.5%
Feb-94 3.2% 2.5%
Mar-94 3.2% 2.5%
Apr-94 3.1% 2.4%
May-94 3.1% 2.3%
Jun-94 3.1% 2.5%
Jul-94 3.1% 2.8%
Aug-94 3.1% 2.9%
Sep-94 3.1% 3.0%
Oct-94 3.0% 2.6%
Nov-94 3.0% 2.7%
Dec-94 3.0% 2.7%
Jan-95 3.0% 2.8%
Feb-95 3.0% 2.9%
Mar-95 3.0% 2.9%
Apr-95 3.0% 3.1%
May-95 3.0% 3.2%
Jun-95 3.0% 3.0%
Jul-95 2.8% 2.8%
Aug-95 2.8% 2.6%
Sep-95 2.8% 2.5%
Oct-95 2.8% 2.8%
Nov-95 2.8% 2.6%
Dec-95 2.8% 2.5%
Jan-96 2.9% 2.7%
Feb-96 2.9% 2.7%
Mar-96 2.9% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.9% 2.8%
Jul-96 2.9% 3.0%
Aug-96 2.9% 2.9%
Sep-96 2.9% 3.0%
Oct-96 3.0% 3.0%
Nov-96 3.0% 3.3%
Dec-96 3.0% 3.3%
Jan-97 2.8% 3.0%
Feb-97 2.8% 3.0%
Mar-97 2.8% 2.8%
Apr-97 2.8% 2.5%
May-97 2.8% 2.2%
Jun-97 2.8% 2.3%
Jul-97 3.0% 2.2%
Aug-97 3.0% 2.2%
Sep-97 3.0% 2.2%
Oct-97 3.2% 2.1%
Nov-97 3.2% 1.8%
Dec-97 3.2% 1.7%
Jan-98 1.6%
Feb-98 1.4%
</TABLE>
- - Both the Employment Cost Index and Consumer Price Index (CPI) remained in
check throughout 1997, reflecting continued low levels of inflation.
- - The CPI rose 1.7% during 1997--the lowest rate of increase since 1986. Its
core rate (which excludes the more volatile food and energy components) rose
2.2%--the lowest rate of increase since 1965. The increase in the Employment
Cost Index, although low, was somewhat more of a concern, particularly the
Wages and Salaries component, which increased 3.8% during 1997.
- - Even though current levels of inflation continue to be very low, the Federal
Reserve indicated throughout most of the reporting period that the economy
remains in the zone where inflation risks are increasing, and that it is
poised to act preemptively by raising interest rates if necessary. The Federal
Reserve did take action in March 1997, increasing the Federal Funds Rate by
0.25% to 5.50%. At the end of the reporting period, however, sentiment was
mixed regarding the direction and timing of the Federal Reserve's next action.
11
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
<S> <C> <C> <C>
S&P 500-R- Index Schwab Small-Cap Index-R- Schwab International Index-R-
8/97 $1.00 $1.00 $1.00
9/97 $1.06 $1.08 $1.06
10/97 $1.02 $1.03 $0.98
11/97 $1.07 $1.02 $0.97
12/97 $1.09 $1.04 $0.99
1/98 $1.10 $1.03 $1.03
2/98 $1.18 $1.11 $1.09
<CAPTION>
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
<S> <C>
Lehman MF General U.S. Govt. Index
8/97 $1.00
9/97 $1.02
10/97 $1.03
11/97 $1.04
12/97 $1.05
1/98 $1.06
2/98 $1.06
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
are representative returns of specific market sectors during the reporting
period and do not reflect the performance of any fund. Indices are unmanaged
and, unlike a fund, do not reflect the payment of advisory fees and other
expenses associated with an investment in a fund. Investors cannot invest in
an index directly.
- - Domestic stocks continued to post the strongest total returns for the
six-month period ended 2/28/98, as represented by the respective 17.6% and
11.2% returns for the S&P 500 Index and the Schwab Small-Cap Index.
- - International stocks, as represented by the Schwab International Index,
achieved a return of 8.9% for the reporting period in spite of an Asian-lead
correction of 8.1% during October.
- - U.S. government bonds, as represented by the Lehman Mutual Fund General U.S.
Government Index, achieved a return of 6.2% for the six-month reporting
period.
12
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500-R- Index Price/Earnings Ratio
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24.00
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Source: Bloomberg L.P.
</TABLE>
- - The price/earnings ratio for the S&P 500 Index was 26.4 at the close of the
reporting period, its highest month-end value ever, and well above its 30-year
average of 14.8.
- - Based on other traditional market valuation measures such as the price-to-book
value ratio or the dividend yield, the U.S. stock market, as measured by the
S&P 500 Index, also reached historical highs during the reporting period.
- - Although low inflation, low interest rates and strong cash flows into mutual
funds have helped the U.S. equity markets reach these levels, Federal Reserve
Chairman Greenspan has warned that current stock market values make sense only
if the outlook for corporate earnings growth remains positive, an assumption
which, as always, will be widely debated by
market participants.
13
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND 5-YEAR TREASURY BOND YIELDS
<S> <C> <C>
30-Year Treasury Bond Yield 5-Year Treasury Bond Yield
8/29/97 6.61% 6.22%
9/5/97 6.64% 6.23%
9/12/97 6.59% 6.17%
9/19/97 6.38% 6.01%
9/26/97 6.37% 5.99%
10/3/97 6.29% 5.87%
10/10/97 6.43% 6.02%
10/17/97 6.44% 6.08%
10/24/97 6.27% 5.90%
10/31/97 6.15% 5.71%
11/7/97 6.16% 5.81%
11/14/97 6.11% 5.80%
11/21/97 6.03% 5.75%
11/28/97 6.05% 5.84%
12/5/97 6.08% 5.88%
12/12/97 5.93% 5.69%
12/19/97 5.92% 5.71%
12/26/97 5.90% 5.71%
1/2/98 5.84% 5.61%
1/9/98 5.73% 5.25%
1/16/98 5.81% 5.40%
1/23/98 5.97% 5.52%
1/30/98 5.80% 5.38%
2/6/98 5.92% 5.47%
2/13/98 5.85% 5.42%
2/20/98 5.87% 5.49%
2/27/98 5.92% 5.59%
Source: Bloomberg L.P.
</TABLE>
- - Treasury bond yields fell significantly during the six-month reporting
period--by 0.53% and 0.48% for 30-year and 5-year Treasury bonds,
respectively.
- - The economic problems experienced by many Pacific Rim countries, collectively
referred to as the "Asian Flu," were the main cause of the decline in yields.
Investors seeking a safe haven increased demand for U.S. Treasury securities
and bid up prices, thereby decreasing Treasury bond yields.
- - The Federal Reserve's decision to leave rates unchanged due to international
market turbulence, as well as acceptable domestic economic statistics showing
strong growth coupled with contained inflation, also led to favorable fixed-
income market conditions.
14
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND 5-YEAR AAA GENERAL OBLIGATION MUNICIPAL BOND YIELDS
SOURCE: BLOOMBERG L.P.
30-YEAR 5-YEAR
AAA GO AAA GO
MUNI BOND YIELDS MUNI BOND YIELDS
<S> <C> <C>
8/29/97 5.30% 4.34%
9/5/97 5.26% 4.30%
9/12/97 5.23% 4.27%
9/19/97 5.15% 4.19%
9/26/97 5.15% 4.19%
10/3/97 5.13% 4.17%
10/10/97 5.21% 4.25%
10/17/97 5.25% 4.29%
10/24/97 5.20% 4.24%
10/31/97 5.12% 4.16%
11/7/97 5.15% 4.17%
11/14/97 5.14% 4.16%
11/21/97 5.15% 4.15%
11/28/97 5.17% 4.17%
12/5/97 5.11% 4.11%
12/12/97 5.01% 4.08%
12/19/97 4.98% 4.05%
12/26/97 4.98% 4.05%
1/2/98 4.96% 4.03%
1/9/98 4.87% 3.99%
1/16/98 4.83% 3.95%
1/23/98 4.93% 4.05%
1/30/98 4.92% 4.04%
2/6/98 4.93% 4.05%
2/13/98 4.89% 4.01%
2/20/98 4.89% 4.01%
2/27/98 4.96% 4.03%
</TABLE>
- - During the reporting period, municipal bond yields declined slightly,
following a pattern similar to Treasury bond yields, and were approximately
0.15% to 0.18% below their levels at the start of the period.
- - As was the case with most other fixed-income securities, the "flight to
quality" initiated by the economic problems of many Pacific Rim countries
increased demand for more-stable investments, such as municipal bonds, thereby
driving up prices and driving down yields.
15
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RATIO OF MUNICIPAL BOND YIELDS TO TREASURY BOND YIELDS
30-YEAR BOND YIELDS 5-YEAR BOND YIELDS
<S> <C> <C>
8/29/97 80.0% 69.8%
9/5/97 79.2% 69.0%
9/12/97 79.4% 69.2%
9/19/97 80.7% 69.7%
9/26/97 80.8% 69.9%
10/3/97 81.6% 71.0%
10/10/97 81.0% 70.6%
10/17/97 81.5% 70.6%
10/24/97 82.9% 71.9%
10/31/97 83.3% 72.9%
11/7/97 83.6% 71.8%
11/14/97 84.1% 71.7%
11/21/97 85.4% 72.2%
11/28/97 85.5% 71.4%
12/5/97 84.0% 69.9%
12/12/97 84.5% 71.7%
12/19/97 84.1% 70.9%
12/26/97 84.4% 70.9%
1/2/98 84.9% 71.8%
1/9/98 85.0% 76.0%
1/16/98 83.1% 73.1%
1/23/98 82.6% 73.4%
1/30/98 84.8% 75.1%
2/6/98 83.3% 74.0%
2/13/98 83.6% 74.0%
2/20/98 83.3% 73.0%
2/27/98 83.8% 72.1%
Source: Bloomberg L.P.
</TABLE>
- - As interest rates fell during the first half of the reporting period, many
municipalities began to "refund" or reissue outstanding debt to take advantage
of the lower rates, increasing the supply of municipal issues on the market.
Consequently, prices declined and municipal yields increased, especially in
comparison to those of
Treasury securities. Although the ratio of 30-year municipal to Treasury bond
yields peaked in late November, the ratio remained relatively high through the
end of the reporting period, indicating that municipal securities were priced
attractively relative to Treasury securities.
- - An upward slope in these lines indicates that municipal yields are rising
relative to Treasury yields and that municipal bond values are falling (or not
rising as fast) relative to Treasury yields. A downward slope indicates the
reverse. The reason for the differential of approximately 10% is that the
holders of long-term municipal bonds demand higher yields to compensate for
the increased credit risk associated with holding a long-term bond that is not
backed by the U.S. government.
16
<PAGE>
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
Q HOW WERE THE FUNDS MANAGED
DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE TO THE PORTFOLIO?
A As shown in the portfolio quality summaries on pages 4 and 6, we continued to
maintain high-quality securities (primarily AAA and AA) in the Funds'
portfolios. We feel that this is an appropriate strategy in the current market
environment as there is very little yield advantage associated with lower-rated
securities--we simply do not feel that investors are being adequately compen-
sated for the higher credit risk.
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
In the Schwab Short/Intermediate Tax-Free Bond Fund, we maintained a neutral
strategy relative to funds with similar investment objectives. Reflecting our
neutral outlook for the markets, we maintained the Fund's weighted average
maturity (WAM) throughout the reporting period within a narrow range of
approximately 3.1 to 3.5 years. At the end of the reporting period, the Fund's
WAM was 3.38 years, down slightly from 3.46 years at the beginning of the
period. We continue to carefully monitor economic indicators and Federal Reserve
Bank communications regarding the target level for short-term interest rates.
SCHWAB LONG-TERM TAX-FREE BOND FUND
In the Schwab Long-Term Tax-Free Bond Fund, we maintained a weighted average
maturity within a range of approximately 18 to 20 years during the reporting
period. We also continually seek opportunities to moderately extend the
portfolio's WAM as higher-yielding securities come to market at attractive
prices.
In December, for example, we extended the Fund's WAM slightly from 18.53
years to 20.61 years as supply increased. Although we have extended the Fund's
WAM beyond this range in the past, we do not feel that it is currently
advisable, as interest rates are approaching their historic lows--again, we do
not feel that investors are being adequately rewarded for the additional
interest rate risk associated with longer maturities. By the end of the
reporting period, the Fund's WAM of 19.81 years was just marginally lower than
the 19.96 year WAM at the beginning of the period.
A surge in municipal bond issuance typical of January coupled with declining
interest rates enabled us to further enhance the Fund's portfolio during the
reporting period. For example, we were able to purchase securities with stronger
call protection features and credit quality, which should add flexibility and
liquidity to the Fund's portfolio.
17
<PAGE>
Q WHAT IS YOUR VIEW OF THE MUNICIPAL BOND ENVIRONMENT?
A At the beginning of the reporting
period, municipal securities were trading within a narrow range and the market
was fairly stable. This climate then changed as the "Asian Flu" hit the world's
financial markets during the fourth quarter of 1997. The resulting turmoil in
equity markets increased demand for U.S. Treasury securities, which led to
higher prices and lower yields in both Treasury and municipal markets.
As rates continued to decline, the municipal market was inundated with
refunding deals, increasing the supply of municipal securities. This increased
supply further reduced prices, yet was partially offset by increased demand due
to the relatively favorable pre-tax equivalent yields offered by municipal
securities. In fact, municipal securities were priced attractively relative to
Treasury securities, as evidenced by the compressed ratio of Treasury to
municipal security yields. This ratio reached a level as high as 85% for 30-year
bonds and remained within a close range during the reporting period, as
illustrated in the chart on page 16 of the MARKET OVERVIEW section.
Q WHAT ARE THE BENEFITS OF INVESTING IN SCHWAB'S TAX-FREE BOND FUNDS AND HOW
MIGHT THEY FIT IN AN ASSET ALLOCATION PLAN?
A Schwab's Tax-Free Bond Funds offer the benefits of broad diversification
across many issuers, professional management, low costs, tax-free monthly
income,(9) convenience and liquidity. As shown in the example on page 3, for
investors in a high tax bracket, a taxable investment would have to yield about
66% more to achieve the same yield after tax as that produced by the Schwab
Tax-Free Bond Funds.
No matter what your investment profile, diversifying your portfolio with
bond funds as part of your asset allocation plan may help offset the effects of
stock market downturns and can generally help add stability to your portfolio,
as shown in the following example. Of course, remember that share prices of bond
funds, like any investment,
(9) Income from the Funds may be subject to state and local tax and the federal
alternative minimum tax (AMT).
18
<PAGE>
fluctuate with market conditions. The chart below displays the high, low and
average annual returns from 1970 to 1997 for five hypothetical portfolios
representing the returns of stocks and bonds as measured by indices.(10) As
shown in the chart, adding bonds to an all-stock portfolio has reduced risk
while still producing competitive returns.
A portfolio comprising 40% bonds and 60% stocks, for example, achieved an
average annual return of 11.65%--only slightly over 1% less than the 12.97%
return of the all-stock portfolio--and did so with significantly less
volatility. The lowest annual return of the portfolio invested 40% in bonds and
60% in stocks, actually a loss of 13.61%, was about half of the 26.47% loss in
the all-stock portfolio. Of course, past performance does not guarantee future
results.
(10) The returns do not reflect actual investment in any security. The
hypothetical returns are all weighted averages and assume reinvestment of
dividends.
The indices represented are the S&P 500-Registered Trademark- Index and
the Ibbotson Intermediate Government Bond Index.
Indices are unmanaged, do not incur costs and expenses, and cannot be invested
in directly.
HYPOTHETICAL PORTFOLIOS SHOWING THE EFFECTS OF ADDING BONDS
TO AN ALL-STOCK PORTFOLIO--1970-1997
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
<S> <C> <C> <C>
All Stocks 37.43% 12.97% -26.47%
90% Stocks 10% Bonds 35.37% 12.68% -23.25%
80% Stocks 20% Bonds 33.30% 12.36% -20.04%
70% Stocks 30% Bonds 31.24% 12.02% -16.82%
60% Stocks 40% Bonds 29.18% 11.65% -13.61%
</TABLE>
19
<PAGE>
Q AS THE STOCK MARKET CONTINUES TO REACH RECORD HIGHS, SHOULD I RECONSIDER MY
PORTFOLIO ALLOCATION TO BONDS?
A Whenever there has been significant divergence between returns of asset
classes, it can be prudent to review your portfolio asset allocation. As an
example, total returns produced by large-cap domestic stocks dwarfed those of
domestic bonds for the three-year period ended 12/31/97. This performance
discrepancy is illustrated by the respective 29.88% and 10.57% average annual
returns produced for that period by the Schwab 1000 Fund-Registered Trademark-,
which invests in large-cap domestic equities, and the Schwab Long-Term Tax-Free
Bond Fund.(11)
This discrepancy in total returns can cause an investor's portfolio asset
allocation to shift, as shown in the following example. Assume that an investor
had a hypothetical asset allocation of 60% stocks and 40% bonds (invested in
just these two Funds) at the beginning of the three-year period, reinvesting all
Fund distributions during the period. By the end of the period, the portfolio's
asset allocation mix would have shifted to 71% stocks and 29% bonds--a
significant shift from the investor's original strategy.
<TABLE>
<CAPTION>
12/31/94 Portfolio 3-Year 12/31/97 Portfolio
------------------------ ----------- ------------------------
Value Allocation Growth Value Allocation
--------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Schwab 1000 Fund-Registered Trademark- $ 6,000 60% $ 7,146 $ 13,146 71%
Schwab Long-Term Tax-Free Bond Fund $ 4,000 40% $ 1,407 $ 5,407 29%
--------- --- ----------- --------- ---
Total Portfolio Value $ 10,000 100% $ 8,553 $ 18,553 100%
</TABLE>
We believe that investors should focus on their own risk profiles and income
needs to determine the most appropriate level of bonds in their portfolios. In
addition to providing income, bonds have performance characteristics that can
make them an attractive element of a well-diversified investment portfolio. As
shown in the example in the previous question, since bond returns have
historically not been well correlated with stock returns,(12) combining bonds in
a portfolio with other asset classes can be an effective way to reduce overall
portfolio volatility.
(11) Total return assumes reinvestment of all dividends and capital gains
distributions, if any. Past performance is no guarantee of future results.
Principal value and investment returns will fluctuate, so an investors
shares, when redeemed, may be worth more or less than their original cost.
A portion of both Funds' expenses was reduced during the period. Without
these reductions, the Funds' total returns would have been lower.
(12) For the 20-year period ended 12/31/97, the correlation of large-cap stock
returns and government bond returns has been 0.38. Source: Symphony Asset
Management.
20
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total
Total Net Assets Percentage
Net Assets as of Growth Over
as of 02/28/98 08/31/97 Reporting
(000s) (000s) Period
<S> <C> <C>
- -------------------------------------------
$60,739 $54,397 12%
- -------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1998
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------
<S> <C> <C> <C>
(cum.)
1 - 6 Months $ 2,169 3.6% 3.6%
7 - 36 Months 28,634 47.1 50.7
37 - 60 Months 17,738 29.1 79.8
Over 60 Months 12,317 20.2 100.0%
--------- -----
$60,858 100.0%
--------- -----
--------- -----
</TABLE>
Average Weighted Maturity--3.38 Years
- --------------------------------------------------------------------------------
21
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
ASSET GROWTH
<TABLE>
<CAPTION>
Total
Total Net Assets Percentage
Net Assets as of Growth Over
as of 02/28/98 08/31/97 Reporting
(000s) (000s) Period
<S> <C> <C>
- -------------------------------------------
$55,625 $46,767 19%
- -------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1998
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- --------------------------------------------------------
<S> <C> <C> <C>
(cum.)
0 - 1 Year $ 2,256 4.0% 4.0%
2 - 10 Years 1,736 3.1 7.1
11 - 20 Years 27,863 48.8 55.9
21 - 30 Years 23,181 40.6 96.5
Over 30 Years 2,020 3.5 100.0%
--------- -----
$57,056 100.0%
--------- -----
--------- -----
</TABLE>
Average Weighted Maturity--19.81 Years
- --------------------------------------------------------------------------------
22
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
MUNICIPAL BONDS--96.4%(a)
ALABAMA--1.8%
Birmingham, Alabama Special
Care Facilities Finance
Authority Revenue Bonds
(Daughters of Charity
National Health System--St.
Vincents Hospital &
Providence) Series 1995 (Aa2
AA+)
7.00%, 11/01/01 $ 1,000 $ 1,096
------------
ALASKA--1.9%
Anchorage, Alaska Refunding
School Bonds Series 1993A /
(MBIA Insurance) (Aaa AAA)
5.10%, 08/01/99 1,145 1,166
------------
ARIZONA--7.4%
Maricopa County, Arizona
Unified School District No.
93 (Cave Creek Project)
Series 1997A / (FGIC
Insurance) (Aaa AAA)
5.00%, 07/01/03 2,325 2,423
Phoenix, Arizona Civic
Improvement Corp. Revenue
Bonds (Sr-Lien Airport) (Aa2
AA+)(d)
5.00%, 07/01/04 1,000 1,034
Phoenix, Arizona Civic
Improvement Corp. Wastewater
Systems Lease Revenue Bonds
Series 1993 (Aa3 A)
5.10%, 07/01/99 1,005 1,023
------------
4,480
------------
CONNECTICUT--3.4%
Connecticut State Special Tax
Obligation Refunding Bonds
(Transportation
Infrastructure Purposes)
Series 1995C / (FGIC
Insurance) (Aaa AAA)
5.50%, 10/01/00 2,000 2,083
------------
FLORIDA--2.2%
Orange County, Florida
Certificates of Participation
Series A / (MBIA Insurance)
(Aaa -)
4.80%, 08/01/02 1,300 1,333
------------
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
GEORGIA--3.6%
Private Colleges & University
Facilities Authority Revenue
Bonds (Emory University
Project) (Aa1 AA)
6.00%, 10/01/05 $ 2,000 $ 2,193
------------
ILLINOIS--1.9%
Illinois Health Facility
Authority Revenue Bonds (OSF
Healthcare System) Series
1993 (A1 A+)
5.13%, 11/15/00 1,145 1,171
------------
INDIANA--1.8%
Monroe County, Indiana
Industrial Hospital Authority
Revenue Refunding Bonds
(Bloomington Hospital
Project) / (MBIA Insurance)
(Aaa-)
4.60%, 05/01/04 1,105 1,119
------------
IOWA--3.7%
Black Hawk County, Iowa
Hospital Facilities Revenue
Bonds (Allen Memorial
Hospital) Series 1990 (Pre-
Refunded) / (AMBAC Insurance
& Escrowed to Maturity with
Government Securities) (Aaa
AAA)
7.38%, 02/01/01 2,000 2,223
------------
KENTUCKY--4.5%
Kentucky Housing Corp. Housing
Revenue Bonds Series 1993B /
(Multiple Credit
Enhancements) (Aaa AAA)
4.45%, 07/01/00 1,000 1,014
Kentucky State Property &
Buildings Commission Revenue
Refunding Bonds (Project 55)
(A2 A+)
4.15%, 09/01/99 1,735 1,741
------------
2,755
------------
MARYLAND--5.1%
Washington, Maryland Suburban
Sanitation District Sewage
Disposal Refunding Bonds
(Montgomery & Prince George
Counties) (Aa1 AA)
6.00%, 11/01/99 3,000 3,116
------------
</TABLE>
- --------------------------------------------------------------------------------
23
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
MASSACHUSETTS--5.1%
Massachusetts Municipal
Wholesale Electric Company
Power Supply Systems Revenue
Bonds Series 1992E / (AMBAC
Insurance) (Aaa AAA)
5.50%, 07/01/00 $ 2,000 $ 2,077
Massachusetts State Water
Reserves Authority Revenue
Bonds Series A / (FSA
Insurance) (Aaa AAA)
5.00%, 08/01/05 1,000 1,048
------------
3,125
------------
MICHIGAN--1.8%
Michigan State Hospital
Finance Authority Revenue
Bonds (McLaren Obligated
Group) / (Escrowed to
Maturity with Government
Securities) (Aaa -)
7.00%, 09/15/00 1,000 1,093
------------
MINNESOTA--7.2%
Minneapolis, Minnesota
Community Development Agency
Tax Increment Revenue Bonds /
(MBIA Insurance) (Aaa AAA)
7.00%, 09/01/00 1,000 1,076
Minnesota State Housing
Finance Agency Rental Housing
Revenue Bonds Series D /
(MBIA Insurance) (Aaa AAA)
4.80%, 08/01/01 2,175 2,222
St. Paul, Minnesota Sewer
Revenue Bonds Series 1988A
(Aa2 A)
8.00%, 12/01/98 1,050 1,091
------------
4,389
------------
MISSISSIPPI--3.4%
Mississippi Hospital Equipment
& Facilities Authority
Revenue Refunding Bonds
(Mississippi Baptist Medical
Center) / (MBIA Insurance)
(Aaa AAA)
5.25%, 05/01/01 2,000 2,070
------------
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
MISSOURI--0.8%
Missouri State Environmental
Improvement & Energy
Resources Authority Water
Pollution Control Revenue
Bonds (State Revolving Fund
Program) Series 1992A (Aa1 -)
5.80%, 07/01/99 $ 500 $ 513
------------
NEW JERSEY--1.7%
New Jersey Health Care
Facilities Financing
Authority Revenue Bonds
(Community Medical Center/
Kimball) / (FSA Insurance)
(Aaa AAA)
4.50%, 07/01/99 1,000 1,009
------------
NEW YORK--10.6%
Municipal Assistance Corp. for
the City of New York Revenue
Bonds Series L (Aa2 AA-)
5.50%, 07/01/03 2,000 2,125
New York City Transitional
Finance Authority Revenue
Bonds Series B (Aa3 AA)
5.25%, 11/15/04 1,300 1,380
New York City, New York
General Obligation Bonds
Series L (A3 BBB+)
5.10%, 08/01/02 800 825
New York State Dormitory
Authority Lease Revenue
Refunding Bonds (State
University Dormitory
Facilities) Series 1995A /
(AMBAC Insurance) (Aaa AAA)
5.10%, 07/01/01 2,000 2,068
------------
6,398
------------
OHIO--6.3%
Ohio State Public Facilities
Commission Higher Education
Capital Facilities Revenue
Bonds Series II-A / (MBIA
Insurance) (Aaa AAA)
4.38%, 11/01/00 1,750 1,772
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
Ohio State Public Facilities
Commission Higher Education
Capital Facilities Revenue
Bonds Series II-B / (FSA
Insurance) (Aaa AAA)
5.00%, 11/01/01 $ 2,000 $ 2,067
------------
3,839
------------
PENNSYLVANIA--2.6%
Pennsylvania State Turnpike
Revenue Bonds Series C /
(Escrowed to Maturity with
Government Securities) (Aaa
AAA)
7.55%, 12/01/98 1,500 1,572
------------
SOUTH CAROLINA--3.6%
Charleston, South Carolina
Public Facilities
Certificates of Participation
(Public Improvement Project)
Series 1993 / (AMBAC
Insurance) (Aaa AAA)
4.30%, 09/01/00 1,085 1,099
Greenville, South Carolina
Hospital Facilities Revenue
Refunding Bonds Series 1993C
(- AA)
5.00%, 05/01/00 1,090 1,111
------------
2,210
------------
TENNESSEE--4.4%
Knox County, Tennessee Health
& Education Hospital
Facilities Revenue Bonds
(Fort Sanders Alliance)
Series 1990C (Pre-Refunded) /
(MBIA Insurance) (Aaa AAA)
7.00%, 01/01/00 2,500 2,684
------------
TEXAS--1.7%
Houston, Texas General
Obligation Revenue Bonds
Series 1995A (Aa3 AA-)
5.30%, 03/01/01 1,000 1,025
------------
WASHINGTON--6.6%
Port of Seattle, Washington
Revenue Bonds Series B /
(FGIC Insurance) (Aaa AAA)
5.50%, 09/01/02 2,775 2,921
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
Washington State General
Obligation Refunding Bonds
Series 1991 R-92 B (Aa1 AA+)
6.30%, 09/01/02 $ 1,000 $ 1,081
------------
4,002
------------
WISCONSIN--3.3%
Wisconsin State Health &
Education Facilities
Authority Revenue Bonds
(Aurora Medical Group
Project) Series 1996 / (FSA
Insurance) (Aaa AAA)
4.90%, 11/15/02 1,000 1,031
Wisconsin State Health and
Educational Facilities
Authority Revenue Bonds
(Carroll College Incorporated
PJ) (- BBB)
4.80%, 10/01/06 1,000 994
------------
2,025
------------
TOTAL MUNICIPAL BONDS
(Cost $57,743) 58,689
------------
VARIABLE RATE OBLIGATIONS--3.5%(b)
CALIFORNIA--1.9%
California Pollution Control
Financing Authority Revenue
Bonds (Southern California
Edison) Series 1986A (A1 A+)
3.90%, 03/02/98 900 900
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds (Districts
102, 103, 105 & 106) /
(Commerzbank AG LOC) (Aa2
AA-)
3.65%, 03/02/98 200 200
------------
1,100
------------
NEW YORK--1.6%
New York City General
Obligation Bonds Series
1993A-8 / (Morgan Guaranty
Trust LOC) (Aa1 AAA)
3.65%, 03/02/98 1,000 1,000
------------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $2,100) 2,100
------------
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
SHORT-TERM INVESTMENTS--0.1%(c)
Provident Institutional
Funds-- MuniFund Portfolio
3.02%, 03/07/98 $ 69 $ 69
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $69) 69
------------
TOTAL INVESTMENTS--100%
(Cost $59,912) $ 60,858
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
- --------------------------------------------------------------------------------
26
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
MUNICIPAL BONDS - 96.0%(a)
ALASKA--3.5%
Valdez, Alaska Marine Terminal
Revenue Bonds (BP Pipeline
Project) Series 1993B (Aa2
AA)
5.50%, 10/01/28 $ 2,000 $ 2,020
------------
ARIZONA--4.0%
Maricopa County, Arizona
Alhambra Elementary School
District 68 School
Improvement & Refunding Bonds
Series 1994A / (AMBAC
Insurance) (Aaa AAA)
6.80%, 07/01/12 2,000 2,285
------------
CALIFORNIA--4.9%
Santa Clara County, California
Financing Authority Lease
Revenue Bonds (VMC Facility
Replacement Project) Series
1994A / (AMBAC Insurance)
(Aaa AAA)
7.75%, 11/15/10 1,000 1,309
Santa Clara County, California
Financing Authority Lease
Revenue Bonds / (AMBAC
Insurance) (Aaa AAA)
5.00%, 11/15/17 1,500 1,485
------------
2,794
------------
FLORIDA--2.4%
Hillsborough County, Florida
Aviation Revenue Bonds (Tampa
International Airport) Series
B / (FGIC Insurance) (Aaa
AAA)
5.88%, 10/01/23 1,250 1,342
------------
GEORGIA--4.4%
Atlanta, Georgia Water and
Sewer System Revenue Bonds /
(FGIC Insurance) (Aaa AAA)
5.25%, 01/01/27 2,500 2,509
------------
ILLINOIS--2.1%
Illinois State Toll Highway
Authority Priority Revenue
Bonds Series 1992A (A1 A+)
6.38%, 01/01/15 1,100 1,180
------------
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
IOWA--1.1%
Cedar Rapids, Iowa Hospital
Facilities Revenue Bonds (St.
Luke's Methodist Project)
Series 1993 / (FGIC
Insurance) (Aaa AAA)
6.13%, 08/15/13 $ 600 $ 643
------------
KENTUCKY--1.8%
Jefferson County, Kentucky
Health Facilities Revenue
Bonds (University Medical
Center Project) / (MBIA
Insurance) (Aaa AAA)
5.25%, 07/01/22 1,000 1,001
------------
MARYLAND--0.7%
Maryland State Community
Development Administration
Department of Housing &
Community Development Revenue
Bonds Series A (Aa2 -)
5.88%, 07/01/16 400 424
------------
MASSACHUSETTS--5.0%
Massachusetts State Housing
Finance Agency Multi-Family
Residential Housing Revenue
Bonds Series 1989A (A A+)
7.80%, 08/01/22 800 839
Massachusetts State Industrial
Financing Agency Revenue
Bonds (Suffolk University) /
(AMBAC Insurance) (Aaa AAA)
5.25%, 07/01/27 2,000 2,013
------------
2,852
------------
MICHIGAN--8.7%
Detroit, Michigan Water Supply
System Senior Lien Revenue
Bonds Series 1997A / (MBIA
Insurance) (Aaa AAA)
5.00%, 07/01/27 3,000 2,902
Eastern Michigan University
Board of Regents Revenue
Bonds / (FGIC Insurance) (Aaa
AAA)
5.50%, 06/01/17 2,000 2,088
------------
4,990
------------
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
MISSISSIPPI--4.1%
Mississippi Hospital Equipment
& Facilities Authority
Revenue Bonds (Mississippi
Baptist Medical Center) /
(MBIA Insurance) (Aaa AAA)
6.00%, 05/01/13 $ 2,150 $ 2,338
------------
NEW JERSEY--1.8%
New Jersey Health Care
Facilities Financing
Authority Revenue Bonds
(Community Medical
Center/Kimball) / (FSA
Insurance) (Aaa AAA)
4.50%, 07/01/99 1,000 1,009
------------
NEW YORK--3.6%
New York State General
Obligation Bonds Series 1996A
(A2 A)
5.30%, 07/15/15 2,000 2,035
------------
NORTH CAROLINA--3.5%
North Carolina Medical Care
Community Health Care
Facilities Revenue Bonds
(Care Medical Project) (Aa3
AA)
5.25%, 05/01/21 2,000 2,003
------------
PENNSYLVANIA--9.8%
Pennsylvania Higher Education
Facilities Authority Revenue
Bonds (University of
Pennsylvania Health Services)
Series 1996A (Aa AA)
5.75%, 01/01/17 2,000 2,108
Philadelphia, Pennsylvania
Hospital & Higher Education
Facilities Authority Revenue
Refunding Bonds (Childrens
Hospital) (Aa3 AA)
5.25%, 02/15/08 700 727
Pittsburgh, Pennsylvania Water
& Sewer Authority Revenue
Bonds Series B / (FSA
Insurance) (Aaa AAA)
5.75%, 09/01/25 1,250 1,314
Seneca Valley, Pennslyvania
School District Revenue Bonds
/ (FGIC Insurance) (Aaa
AAA)(d)
5.15%, 02/15/20 1,500 1,481
------------
5,630
------------
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
PUERTO RICO--3.5%
Puerto Rico Commonwealth
Infrastructure Financing
Authority Revenue Bonds /
(AMBAC Insurance) (Aaa AAA)
5.00%, 07/01/21 $ 2,000 $ 1,970
------------
RHODE ISLAND--1.9%
Rhode Island Housing &
Mortgage Finance Corp.
Homeownership Opportunity
Bonds Series 10A (Aa2 AA+)
6.50%, 10/01/22 1,000 1,065
------------
TEXAS--16.7%
Austin, Texas Utilities System
Revenue Bonds / (FSA
Insurance) (Aaa AAA)
5.13%, 11/15/16 3,000 3,002
Brazos River Authority Texas
Revenue Bonds (Houston
Industrial Project) / (AMBAC
Insurance) (Aaa AAA)
5.13%, 05/01/19 1,750 1,726
Conroe, Texas Independent
School District General
Obligation Bonds / (Permanent
School Fund Guaranty) (Aaa
AAA)
5.25%, 02/15/21 1,000 1,008
Elgin, Texas Independent
School District General
Obligation Bonds / (Permanent
School Fund Guaranty LOC)
(Aaa AAA)
5.25%, 10/01/24 2,000 2,008
Texas State Public Financing
Authority General Obligation
Bonds Series 1994B (Aa2 AA)
5.75%, 10/01/14 1,025 1,112
University of Texas Revenue
Refunding Bonds Series B (Aa1
-)
6.75%, 08/15/13 680 746
------------
9,602
------------
VIRGINIA--3.7%
Virginia State Public Building
Authority Revenue Bonds
Public Facilities Series A
(Aa2 AA)
5.50%, 08/01/16 2,000 2,100
------------
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
WASHINGTON--7.0%
King County, Washington Lease
Revenue Bonds (King Street
Center Project) / (MBIA
Insurance) (Aaa AAA)
5.13%, 06/01/17 $ 1,000 $ 996
King County, Washington School
District General Obligation
Bonds No. 415 Series A (A1
AA-)
5.55%, 12/01/11 500 534
Seattle, Washington Municipal
Light & Power Revenue
Refunding Bonds Series 1993
(Aa2 AA)
5.40%, 05/01/08 2,300 2,442
------------
3,972
------------
WISCONSIN--1.8%
Wisconsin State Health &
Education Facilities Revenue
Bonds (Medical College of
Wisconsin Project) / (MBIA
Insurance) (Aaa AAA)
5.50%, 03/01/17 1,000 1,036
------------
TOTAL MUNICIPAL BONDS
(Cost $51,860) 54,800
------------
VARIABLE RATE OBLIGATIONS--3.9%(b)
CALIFORNIA--3.0%
California Pollution Control
Financing Authority Revenue
Bonds (Pacific Gas & Electric
Company) Series 1996F /
(Banque Nationale de Paris
LOC) (- AA+)
3.60%, 03/02/98 200 200
California Pollution Control
Financing Authority Revenue
Bonds (Southern California
Edison) Series 1986A (A1 A+)
3.90%, 03/02/98 300 300
California Pollution Control
Financing Authority Revenue
Bonds (Southern California
Edison) Series 1986B (A1 A+)
3.90%, 03/02/98 400 400
<CAPTION>
Par Value
--------- ------------
<S> <C> <C>
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds (Districts
105, 250 & 290) Series 1991 /
(National Westminster Bank
PLC LOC) (Aa2 AA)
3.65%, 03/02/98 $ 200 $ 200
Irvine Ranch, California Water
District Consolidated Revenue
Refunding Bonds (Various
Improvement District Number
182) Series A / (Landesbank
Hessen-Thuringen Girozentrale
LOC) (- AAA)
3.55%, 03/02/98 300 300
Orange County, California
Sanitation District
Certificates of Participation
(Districts 1, 2, 3, 6, 7 &
11) Series 1992C / (FGIC
Insurance & FGIC SPA) (Aaa
AAA)
3.60%, 03/02/98 200 200
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-)
3.60%, 03/02/98 100 100
------------
1,700
------------
NEW YORK--0.9%
New York City General
Obligation Bonds Series
1993A-8 / (Morgan Guaranty
Trust LOC) (Aa1 AAA)
3.65%, 03/02/98 500 500
------------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $2,200) 2,200
------------
SHORT-TERM INVESTMENTS--0.1%(c)
Provident Institutional
Funds-- MuniFund Portfolio
3.02%, 03/07/98 56 56
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $56) 56
------------
TOTAL INVESTMENTS--100%
(Cost $54,116) $ 57,056
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
February 28, 1998 (Unaudited)
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investors Service, Inc. and
Standard & Poor's Ratings Group which were in effect on the report date.
(a) Interest rates represent coupon rate of security.
(b) Variable rate securities. Interest rates vary periodically based on current
market rates. Rates shown are the effective rates on report date. Dates
shown represent the earlier of the demand date or next interest rate change
date, which is considered the maturity date for financial reporting
purposes. For variable rate securities without demand features and which
mature in less than one year, the next interest reset date is shown.
(c) Interest rates represent the yield on report date.
(d) Security traded on a delayed-delivery basis. Payment and delivery is
scheduled for a future time, generally within two weeks of entering into
the transaction. The transaction is subject to market fluctuation and to
the risk that the value may be more or less than the purchase price when
the transaction was initiated. The Fund has set aside sufficient investment
securities as collateral for securities purchased on a delayed-delivery
basis.
Abbreviations
-------------
<TABLE>
<S> <C>
AMBAC American Municipal Bond Assurance Corp.
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.
- --------------------------------------------------------------------------------
30
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
----------------- -----------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $59,912 and $54,116, respectively) $ 60,858 $ 57,056
Receivables:
Interest 837 683
Fund shares sold 187 27
Deferred organization costs 9 --
Prepaid expenses 9 17
-------- -----------
Total assets 61,900 57,783
-------- -----------
LIABILITIES
Payables:
Dividends 22 24
Investments purchased 1,040 1,493
Fund shares redeemed 2 551
Other liabilities 97 90
-------- -----------
Total liabilities 1,161 2,158
-------- -----------
Net assets applicable to outstanding shares $ 60,739 $ 55,625
-------- -----------
-------- -----------
NET ASSETS CONSIST OF:
Paid-in-capital $ 60,306 $ 52,469
Distributions in excess of net investment income (13) (13)
Accumulated net realized gain (loss) on investments sold (500) 229
Net unrealized appreciation on investments 946 2,940
-------- -----------
$ 60,739 $ 55,625
-------- -----------
-------- -----------
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 5,935 5,117
Net asset value, offering and redemption price per share $10.23 $10.87
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
31
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 28, 1998 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------- -------------
<S> <C> <C>
Interest Income $ 1,221 $ 1,338
------- -------------
Expenses:
Investment advisory and administration fee 111 103
Transfer agency and shareholder service fees 68 63
Custodian fees 19 18
Professional fees 16 22
Shareholder reports 32 30
Trustees' fees 7 7
Registration fees 15 --
Amortization of deferred organization costs 7 1
Insurance and other expenses 14 12
------- -------------
289 256
Less: expenses reduced (see Note 4) (156) (133)
------- -------------
Total expenses incurred by Fund 133 123
------- -------------
Net investment income 1,088 1,215
------- -------------
Net realized gain on investments sold 15 237
Net unrealized appreciation on investments 419 1,365
------- -------------
Net gain on investments 434 1,602
------- -------------
Increase in net assets resulting from operations $ 1,522 $ 2,817
------- -------------
------- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
32
<PAGE>
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
-------------------------- -------------------------
Six months Six months
ended ended
February 28, Year ended February 28, Year ended
1998 August 31, 1998 August 31,
(Unaudited) 1997 (Unaudited) 1997
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,088 $ 2,169 $ 1,215 $ 2,228
Net realized gain on investments sold 15 22 237 407
Net unrealized appreciation on investments 419 586 1,365 1,281
------------- ----------- ------------ -----------
Increase in net assets resulting from operations 1,522 2,777 2,817 3,916
------------- ----------- ------------ -----------
Dividends to shareholders from net investment income (1,100) (2,169) (1,230) (2,228)
Dividends in excess of net investment income (13) -- (13) --
Dividends from realized gain on investments -- -- (25) --
------------- ----------- ------------ -----------
Total distributions (1,113) (2,169) (1,268) (2,228)
------------- ----------- ------------ -----------
Capital share transactions
Proceeds from shares sold 13,724 15,680 16,414 14,726
Net asset value of shares issued in reinvestment of
dividends 871 1,698 901 1,547
Less payments for shares redeemed (8,662) (17,721) (10,006) (14,866)
------------- ----------- ------------ -----------
Increase (decrease) in net assets from capital share
transactions 5,933 (343) 7,309 1,407
------------- ----------- ------------ -----------
Total increase in net assets 6,342 265 8,858 3,095
Net assets:
Beginning of period 54,397 54,132 46,767 43,672
------------- ----------- ------------ -----------
End of period (including distributions in excess of
net investment income and undistributed net
investment income of ($13), $12, ($13) and $15,
respectively) $ 60,739 $ 54,397 $ 55,625 $ 46,767
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Number of Fund shares:
Sold 1,342 1,549 1,520 1,415
Reinvested 86 168 84 149
Redeemed (849) (1,754) (929) (1,434)
------------- ----------- ------------ -----------
Net increase (decrease) in shares outstanding 579 (37) 675 130
Shares outstanding:
Beginning of period 5,356 5,393 4,442 4,312
------------- ----------- ------------ -----------
End of period 5,935 5,356 5,117 4,442
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
33
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Six months
ended Period
February 28, Year ended August 31, ended
1998 ---------------------------------- August 31,
(Unaudited) 1997 1996 1995 1994 1993**
------------ ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.16 $ 10.04 $ 10.12 $ 9.92 $ 10.15 $ 10.00
------------ ------- ------- ------- ------- ----------
Income from investment operations
Net investment income 0.20 0.41 0.41 0.40 0.37 0.13
Net realized and unrealized gain
(loss) on investments 0.08 0.12 (0.08) 0.20 (0.23) 0.15
------------ ------- ------- ------- ------- ----------
Total from investment operations 0.28 0.53 0.33 0.60 0.14 0.28
Less distributions
Dividends from net investment income (0.21) (0.41) (0.41) (0.40) (0.37) (0.13)
Dividends in excess of net investment
income++ -- -- -- -- -- --
Dividends from realized gain on
investments -- -- -- -- -- --
------------ ------- ------- ------- ------- ----------
Total distributions (0.21) (0.41) (0.41) (0.40) (0.37) (0.13)
------------ ------- ------- ------- ------- ----------
Net asset value at end of period $ 10.23 $ 10.16 $ 10.04 $ 10.12 $ 9.92 $ 10.15
------------ ------- ------- ------- ------- ----------
------------ ------- ------- ------- ------- ----------
Total return (not annualized) 2.75% 5.40% 3.32% 6.23% 1.42% 2.83%
Ratios/Supplemental data
Net assets, end of period (000s) $60,739 $54,397 $54,132 $52,504 $63,889 $54,450
Ratio of expenses to average net
assets+ 0.49%* 0.49% 0.49% 0.49% 0.48% 0.45%*
Ratio of net investment income to
average net assets+ 4.01%* 4.08% 4.06% 4.06% 3.71% 3.63%*
Portfolio turnover rate 7% 20% 44% 35% 19% 11%
</TABLE>
- --------------------
+The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced by the
Investment Manager and Schwab. Had these expenses not been reduced, the
Fund's expense and net investment income ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net
assets 1.06%* 0.96% 0.90% 0.89% 0.91% 1.26%*
Ratio of net investment income to
average net
assets 3.43%* 3.61% 3.65% 3.66% 3.28% 2.82%*
</TABLE>
++ Amount per share does not round to a full penny.
* Annualized
** For the period April 21, 1993 (commencement of operations) to August 31,
1993.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
34
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Six months Eight
ended months Period
February 28, Year ended August 31, ended ended
1998 ---------------------------------- August 31, December 31,
(Unaudited) 1997 1996 1995 1994 1993 1992**
------------ ------- ------- ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.53 $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92 $ 10.00
------------ ------- ------- ------- ------- ---------- ------------
Income from investment operations
Net investment income 0.25 0.53 0.52 0.53 0.52 0.36 0.17
Net realized and unrealized gain
(loss) on investments 0.36 0.40 (0.03) 0.21 (0.56) 0.67 (0.08)
------------ ------- ------- ------- ------- ---------- ------------
Total from investment operations 0.61 0.93 0.49 0.74 (0.04) 1.03 0.09
Less distributions
Dividends from net investment income (0.26) (0.53) (0.52) (0.53) (0.52) (0.36) (0.17)
Dividends in excess of net investment
income++ -- -- -- -- -- -- --
Dividends from realized gain on
investments (0.01) -- -- -- (0.08) -- --
------------ ------- ------- ------- ------- ---------- ------------
Total distributions (0.27) (0.53) (0.52) (0.53) (0.60) (0.36) (0.17)
------------ ------- ------- ------- ------- ---------- ------------
Net asset value at end of period $ 10.87 $ 10.53 $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92
------------ ------- ------- ------- ------- ---------- ------------
------------ ------- ------- ------- ------- ---------- ------------
Total return (not annualized) 5.83% 9.36% 4.87% 7.76% (0.42)% 10.56% 0.92%
Ratios/Supplemental data
Net assets, end of period (000s) $55,625 $46,767 $43,672 $41,413 $43,975 $50,413 $28,034
Ratio of expenses to average net
assets+ 0.49%* 0.49% 0.49% 0.54% 0.51% 0.45%* 0.45%*
Ratio of net investment income to
average net assets+ 4.83%* 5.09% 5.06% 5.40% 5.05% 5.30%* 5.61%*
Portfolio turnover rate 20% 61% 50% 70% 62% 91% 54%
</TABLE>
- --------------------
+The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced by the
Investment Manager and Schwab. Had these expenses not been reduced, the
Fund's expense and net investment income ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net
assets 1.02%* 1.02% 0.94% 0.93% 0.99% 1.18%* 1.53%*
Ratio of net investment income to
average net assets 4.31%* 4.56% 4.61% 5.01% 4.57% 4.57%* 4.53%*
</TABLE>
++ Amount per share does not round to a full penny.
* Annualized
** For the period September 11, 1992 (commencement of operations) to December
31, 1992.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
35
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 28, 1998 (Unaudited)
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free
Bond Fund (the "Funds") are series of Schwab Investments (the "Trust"), a no
load, open-end, management investment company organized as a Massachusetts
business trust on October 26, 1990 and registered under the Investment Company
Act of 1940 (the "Act"), as amended.
In addition to the Funds, the Trust also offers--the Schwab 1000 Fund-Registered
Trademark-, Schwab Short-Term Bond Market Index Fund, Schwab Total Bond Market
Index Fund, Schwab California Short/ Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund. The assets of each series are
segregated and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
SECURITY VALUATION--Bonds and notes are generally valued at prices obtained from
an independent bond-pricing service. These securities are valued at the mean
between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities within 60 days or less of maturity are stated at amortized
cost, which approximates market value.
SECURITY TRANSACTIONS AND INTEREST INCOME--Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Realized
gains and losses from security transactions are determined on an identified cost
basis. Interest income is accrued on a daily basis and includes amortization of
premium on investments. For callable bonds purchased at a premium, the excess of
the purchase price over the call value is amortized against interest income
through the call date. If the call provision is not exercised, any remaining
premium is amortized through the final maturity date.
DIVIDENDS TO SHAREHOLDERS--Each Fund declares a daily dividend, from net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
DEFERRED ORGANIZATION COSTS--Costs incurred in connection with the organization
of the Funds and their initial registration with the Securities and Exchange
Commission are amortized on a straight-line basis over a five-year period from
each Fund's commencement of operations.
EXPENSES--Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
FEDERAL INCOME TAXES--It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
At February 28, 1998, (for financial reporting and federal income tax purposes):
<TABLE>
<CAPTION>
Net Unrealized Appreciated Depreciated
Appreciation Securities Securities
-------------- ------------- -----------
<S> <C> <C> <C>
Schwab Short/Intermediate Tax-Free Bond Fund $ 946,000 $ 989,000 $ 43,000
Schwab Long-Term Tax-Free Bond Fund $ 2,940,000 $ 2,987,000 $ 47,000
</TABLE>
CAPITAL LOSS CARRYFORWARDS--As of August 31, 1997, the unused capital loss
carryforwards, for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
Schwab Short/Intermediate
Tax-Free Bond Fund
-------------------------
<S> <C>
Expiring in:
08/31/03 $ 244,000
08/31/04 296,000
----------
Total capital loss carryforwards $ 540,000
----------
----------
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT--The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. The Investment Manager has reduced a portion of its
fee for the six months ended February 28, 1998 (see Note 4).
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%
- --------------------------------------------------------------------------------
37
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
of each fund's average daily net assets for transfer agency services and 0.20%
of such assets for shareholder services. Schwab has reduced a portion of its
fees for the six months ended February 28, 1998 (see Note 4).
OFFICERS AND TRUSTEES--Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
six months ended February 28, 1998, the Trust made no direct payments to its
officers or trustees who are "interested persons" within the meaning of the Act.
The Funds incurred fees aggregating $14,000 related to the Trust's unaffiliated
trustees.
INTERFUND TRANSACTIONS--During the six months ended February 28, 1998, the Funds
engaged in purchase and sale transactions with funds that have a common
investment advisor, common trustees, and common officers. These transactions,
made at current market value pursuant to Rule 17a-7 under the Act, were
$13,300,000 and $21,100,000 for the Schwab Short/Intermediate Tax-Free Bond Fund
and Schwab Long-Term Tax-Free Bond Fund, respectively.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab guarantee that, through at least October 31,
1998, each Fund's total operating expenses will not exceed 0.49% of the Fund's
average daily net assets after reductions. For the purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses and
taxes.
During the six months ended February 28, 1998, the total of such fees reduced by
the Investment Manager and Schwab was $111,000 and $45,000 for the Schwab
Short/Intermediate Tax-Free Bond Fund, and $103,000 and $30,000 for the Schwab
Long-Term Tax-Free Bond Fund, respectively (see Financial Highlights).
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the six months ended February 28, 1998, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Short/Intermediate Schwab Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------------- -------------------
<S> <C> <C>
Purchases $ 9,247 $ 17,148
Proceeds of sales and maturities $ 3,575 $ 9,796
</TABLE>
- --------------------------------------------------------------------------------
38
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money funds.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack-TM- Portfolios--High**
Schwab MarketTrack-TM- Portfolios--Balanced**
Schwab MarketTrack-TM- Portfolios--Conservative**
Schwab MarketManager-TM- Portfolios--Growth***
Schwab MarketManager-TM- Portfolios--Balanced***
SCHWAB STOCK FUNDS
Schwab 1000 Fund-Registered Trademark-
Schwab S&P 500 Fund
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager-TM- Portfolios--Small Company***
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager-TM- Portfolios--International***
SCHWAB BOND FUNDS
Schwab Bond Index Funds--Total and Short-Term Bond Market Index Funds*
Schwab Tax-Free Bond Funds--Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds--Long-Term and Short/Intermediate
SCHWAB MONEY FUNDS
Schwab offers an array of money funds that seek high current income with safety
and liquidity.+ Choose from taxable or tax-advantaged alternatives. Many can be
linked to your Schwab account to "sweep" cash balances automatically when you're
between investments. Or, for your larger cash reserves, choose one of our Value
Advantage Investments-Registered Trademark-.
Please call 1-800-435-4000 for a free prospectus and brochure for any of the
SchwabFunds-Registered Trademark-. This report must be preceded or accompanied
by a current prospectus.
EACH PROSPECTUS PROVIDES MORE COMPLETE INFORMATION, INCLUDING CHARGES AND
EXPENSES.
PLEASE READ IT CAREFULLY BEFORE INVESTING.
* Formerly known as the Schwab Government Bond Funds--Long-Term and
Short/Intermediate.
+ Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the funds will be able to
maintain a stable share price of $1.
** Formerly called the Schwab Asset Director-Registered Trademark- Funds.
*** Formerly called the Schwab OneSource Portfolios.
