SCHWABFUNDS
SCHWAB
CALIFORNIA
TAX-FREE
BOND FUNDS
Annual Report
August 31, 1998
<PAGE>
SCHWAB CALIFORNIA TAX-FREE BOND FUNDS
We're pleased to bring you this annual report for the following funds (the
Funds) for the one-year period ended August 31, 1998:
- Schwab California Short/Intermediate
Tax-Free Bond Fund
- Schwab California Long-Term Tax-Free
Bond Fund
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 the preservation of
capital.(1) In addition to performance and portfolio information, this report
contains information regarding dividends paid by the Funds during each fiscal
year (or reporting period) since their inceptions.
The Schwab California Short/Intermediate Tax-Free Bond Fund invests primarily in
debt securities issued by or on behalf of the State of California and its
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 Schwab California Long-Term Tax-Free Bond Fund invests primarily in debt
securities issued by or on behalf of the State of California and its political
subdivisions, agencies and instrumentalities. Under normal market conditions,
the Fund seeks to maintain a dollar-weighted average portfolio maturity of 10
years or longer.
CONTENTS
<TABLE>
<S> <C>
- ----------------------------------------------------
A Message from the Chairman 1
- ----------------------------------------------------
What Every Bond Fund Investor Should Know 2
- ----------------------------------------------------
Market Overview 4
- ----------------------------------------------------
The Portfolio Management Team 8
- ----------------------------------------------------
Taxable-Equivalent Yield 9
- ----------------------------------------------------
Schwab California Short/Intermediate
Tax-Free Bond Fund 10
- ----------------------------------------------------
Schwab California Long-Term Tax-Free
Bond Fund 12
- ----------------------------------------------------
Dividends Paid 14
- ----------------------------------------------------
Fund Discussion 15
- ----------------------------------------------------
Portfolio Highlights 18
- ----------------------------------------------------
Financial Statements and Notes 19
- ----------------------------------------------------
</TABLE>
(1)Income from the Funds may be subject to state and local taxes and to the
federal alternative minimum tax (AMT).
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Dear Shareholder,
No doubt you've witnessed the extreme volatility in the stock market that you
frequently read about in shareholder communications such as this. The 12-month
reporting period ended August 31, 1998, has served as a clear example of how the
performance of different asset classes can vary substantially for a given
period. For the reporting period, domestic bonds generally outperformed both
domestic and international stocks. This was due to factors ranging from strong
bond total returns, which were fueled by declining interest rates all along the
yield curve, to August's drop in both domestic and
international equity valuations.
[PHOTO]
Despite the volatility, the U.S. economy, as measured by gross
domestic product (GDP), continued to provide a solid
foundation for U.S. business activity, though it was somewhat dampened during
the second quarter. But uncertainty persists as to the ultimate effect that
international economic crises and domestic political turmoil will have on the
U.S. economy. Corporate profitability and domestic consumers' responses to
recent stock market volatility may ultimately determine whether the economy will
continue on its current course.
Given all of these factors, this appears to be a good time to reaffirm one of
our primary investment principles: Regardless of short-term market trends, our
philosophy has always been that REGULAR INVESTING is the best strategy over the
long term. And your investment in a bond fund may play an important role in your
asset allocation. We've included some guidelines on the following pages that
address some things you should know about bond funds. You might also find that
more than one kind of bond fund may be appropriate for you, depending on your
goals and financial situation. As always, feel free to contact us if you have
any questions.
The support of investors like you has helped Charles Schwab Investment
Management, Inc. (CSIM) become one of the largest and fastest-growing mutual
fund families in the nation. CSIM now manages more than $71 billion in assets on
behalf of more than 3.2 million SchwabFunds-Registered Trademark- shareholders.
We offer a broad spectrum of 35 mutual funds for investors with varying
financial situations and goals.
Once again, thank you for your investment in SchwabFunds. We continue to do
everything we can to warrant the trust you have placed in us.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
August 31, 1998
1
<PAGE>
WHAT EVERY BOND FUND INVESTOR SHOULD KNOW
WHY ASSET ALLOCATION MATTERS
As most investors know, one of the most compelling reasons to invest in a mutual
fund is diversification. By allocating your assets across many different
securities, a mutual fund helps reduce the risk that you might otherwise
encounter by owning just a few individual stocks or bonds.
Don't forget, however, that diversification across your portfolio is just as
important as diversification within one of the mutual funds you own. As you
probably know, stocks historically have offered higher long-term returns than
other asset classes, such as bonds or cash, but those returns have come at the
price of higher volatility. To help mitigate some of that risk, many investors
often include at least some bonds and cash in their portfolios.
THE ROLE OF BONDS IN A BALANCED PORTFOLIO
Maintaining the right mix of asset classes--stocks, bonds and cash--in your
portfolio is a smart strategy for every investor. In fact, asset allocation is
one of the most important factors in determining overall portfolio performance.
Over time, a portfolio composed of stocks and bonds can provide competitive
returns compared with an all-stock portfolio, but with less risk for you. And
over the long term, bond funds typically pay a higher return than even the
highest-yielding cash reserves, although with increased risk. Of course, past
performance is no guarantee of future returns.
WHY BOND FUNDS?
Investing in bond funds can provide several advantages over investing in
individual bonds:
DIVERSIFICATION: Bond funds can invest across a broad segment of the bond market
and can provide automatic diversification within one asset class.
PROFESSIONAL MANAGEMENT: Bond funds are managed by investment experts who know
and understand the intricacies of the bond market and its operations.
SIMPLICITY: Bond funds are ideal for investors who lack the time or expertise to
actively manage a bond portfolio.
LOW MINIMUM INITIAL INVESTMENT: At Schwab you can invest in a bond fund with
just $1,000.
CONVENIENCE: Bond fund investors can make purchases and redemptions at any time
without transaction fees and without having to wait until an individual bond
matures.
FLEXIBILITY: Dividends and/or capital gains can be reinvested or paid in cash.
BOND INDEX FUNDS
Schwab's Bond Index Funds seek to track the total returns of broadly diversified
bond indices. And because index funds generally result in lower portfolio
turnover and fewer transactions--and therefore lower trading costs--you could
potentially realize higher returns.
In addition to some of the same benefits of equity index funds, including broad
diversification, lower expenses, consistent investment style and straightforward
choices, bond index funds can also provide the added benefit of high
credit-quality investments. Schwab's Bond Index Funds are designed to maintain
high credit-quality standards because the indices they seek to track primarily
comprise U.S. Treasuries, government agency securities and government agency
mortgage-backed securities; the remaining bonds in the indices are
investment-grade corporate bonds rated AAA through BBB, the four highest credit
ratings.
TAX CONSIDERATIONS
If you're in a high tax bracket, investing in tax-free or municipal bond funds
may help take a bite out of your
2
<PAGE>
tax bill.(1) And, if you live in a state with a high personal state income tax
or other personal tax, you may be better served by choosing a double tax-free
fund that provides income free from federal, state and, in some cases, local
income taxes.
BOND FUNDS AT SCHWAB
Schwab offers a variety of bond funds, summarized below. When evaluating a bond
fund for potential investment, you should consider your attitude toward risk and
return, as well as your income tax bracket.
BOND INDEX FUNDS
SCHWAB SHORT-TERM BOND MARKET INDEX FUND seeks to track the Lehman Brothers
Short (1-5 Year) Government/ Corporate Index. This index represents the
performance of government and corporate bonds that have maturities between one
and five years.
SCHWAB TOTAL BOND MARKET INDEX FUND seeks to track the Lehman Brothers Aggregate
Bond Index. This index is a broadbased index covering investment-grade bonds
with maturities greater than one year.
TAX-FREE BOND FUNDS
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in municipal
bonds with dollar-weighted average maturities of two to five years. Its share
price will generally be less volatile than that of longer-term bond funds but
will generally provide lower returns.
SCHWAB LONG-TERM TAX-FREE BOND FUND invests in municipal bonds with
dollar-weighted average maturities of 10 years or more. It is designed to
provide higher tax-free income than is usually available with shorter-term
funds; however, its net asset value may be more volatile than that of
shorter-term bond funds.
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in
California municipal bonds with dollar-weighted average maturities of two to
five years. Its share price will generally be less volatile than that of longer-
term bond funds but will generally provide lower returns.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND invests primarily in securities
issued by or on behalf of the State of California and its political
subdivisions, agencies and instrumentalities, and seeks to maintain a
dollar-weighted average maturity of 10 years or longer. It is designed to
provide higher tax-free income than is available with shorter-term funds;
however, its net asset value may be more volatile than that of shorter-term bond
funds.
If you would like more information on any of these funds, please call us toll
free at 1-800-435-4000 and request a free prospectus, which contains more
information, including fees and expenses. Please be sure to read the prospectus
before investing.
WE MAKE IT EASY TO INVEST
We try to make it easy and convenient for you to invest in our
SchwabFunds.-Registered Trademark- In addition to our automated methods that
allow you to invest or transfer money to your Schwab account on a regular basis,
you can also invest through our Web site at WWW. SCHWAB.COM; through our
automated touchtone telephone service, TeleBroker,-Registered Trademark- by
calling 1-800-272-4922; or in person at any of our nationwide branches.
KEEPING YOU INFORMED
One of our top priorities at Charles Schwab is to keep you informed about your
investments and potential opportunities in the marketplace. For a wealth of
information about our investment philosophy and funds, as well as about the
market and economic environment, visit our Web site:
WWW.SCHWAB.COM/SCHWABFUNDS
(1)Some investors may be subject to the alternative minimum tax; consult your
tax advisor.
3
<PAGE>
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
Although somewhat dampened during the second quarter, the U.S. economy, as
measured by gross domestic product (GDP), grew at a strong real rate of 3.7%
during the first half of 1998--well in excess of the Federal Reserve's estimated
noninflationary growth rate of 2.0% to 2.75%.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GDP GROWTH RATE
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED
RATE)
<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%
Q1 1998 5.5%
Q2 1998 1.8%
Source: Bloomberg L.P.
</TABLE>
At the time of this writing, the consensus of most economists is that the U.S.
economy appears poised for continued growth throughout 1998--perhaps at a more
moderate rate than over the previous six months, but nonetheless further
extending the current economic expansion that began in 1991. High levels of
consumer confidence, low interest rates, rising real wages and strong gains in
stock prices have been the engines continuing this lengthy expansion. Many
economists believe that the brunt of the economic crises in Asia and elsewhere
may be yet to come. Uncertainties persist as to the ultimate effect on the U.S.
economy, particularly on corporate earnings. Going forward, the behavior of
domestic consumers in response to recent stock market volatility may also be a
key determinant of whether the economy continues on its current course or
softens in 1999.
UNEMPLOYMENT
The U.S. unemployment rate stood at 4.5% in August, after declining to 4.3% in
April and May--the lowest level in 28 years. Labor markets have become extremely
tight, growth in the labor force has slowed and wage increases are beginning to
put more pressure on labor costs (see Employment Cost Index, below).
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 6.6%
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 5.4%
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 5.6%
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 5.5%
Aug-96 5.2%
Sep-96 5.2%
Oct-96 5.3%
Nov-96 5.4%
Dec-96 5.3%
Jan-97 5.3%
Feb-97 5.3%
Mar-97 5.2%
Apr-97 5.0%
May-97 4.8%
Jun-97 5.0%
Jul-97 4.9%
Aug-97 4.9%
Sep-97 4.9%
Oct-97 4.8%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.7%
Feb-98 4.6%
Mar-98 4.7%
Apr-98 4.3%
May-98 4.3%
Jun-98 4.5%
Jul-98 4.5%
Aug-98 4.5%
Source: Bloomberg L.P.
</TABLE>
INFLATION
Price inflation remained remarkably well contained.
The Consumer Price Index (CPI) rose just 1.6% for the year ended August
1998--reaching levels during the reporting period that were the lowest since
January 1987. Its core rate (which excludes the more volatile food and energy
components) rose 2.5%--also very low, but somewhat higher than the rates we have
seen since the second quarter of 1997.
The Employment Cost Index (ECI), which measures inflation in wages, salaries and
benefits, also remained in check, increasing 3.5% for the year ended June 30,
1998.
4
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
QUARTERLY EMPLOYMENT MONTHLY CONSUMER
COST INDEX PRICE INDEX
<S> <C> <C>
Feb-90 5.5% 5.3%
Mar-90 5.5% 5.2%
Apr-90 5.4% 4.7%
May-90 5.4% 4.4%
Jun-90 5.4% 4.7%
Jul-90 5.2% 4.8%
Aug-90 5.2% 5.6%
Sep-90 5.2% 6.2%
Oct-90 4.9% 6.3%
Nov-90 4.9% 6.3%
Dec-90 4.9% 6.1%
Jan-91 4.6% 5.7%
Feb-91 4.6% 5.3%
Mar-91 4.6% 4.9%
Apr-91 4.6% 4.9%
May-91 4.6% 5.0%
Jun-91 4.6% 4.7%
Jul-91 4.3% 4.4%
Aug-91 4.3% 3.8%
Sep-91 4.3% 3.4%
Oct-91 4.3% 2.9%
Nov-91 4.3% 3.0%
Dec-91 4.3% 3.1%
Jan-92 4.0% 2.6%
Feb-92 4.0% 2.8%
Mar-92 4.0% 3.2%
Apr-92 3.6% 3.2%
May-92 3.6% 3.0%
Jun-92 3.6% 3.1%
Jul-92 3.5% 3.2%
Aug-92 3.5% 3.1%
Sep-92 3.5% 3.0%
Oct-92 3.5% 3.2%
Nov-92 3.5% 3.0%
Dec-92 3.5% 2.9%
Jan-93 3.5% 3.3%
Feb-93 3.5% 3.2%
Mar-93 3.5% 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 3.5% 2.8%
Nov-93 3.5% 2.7%
Dec-93 3.5% 2.7%
Jan-94 3.2% 2.5%
Feb-94 3.2% 2.5%
Mar-94 3.2% 2.5%
Apr-94 3.2% 2.4%
May-94 3.2% 2.3%
Jun-94 3.2% 2.5%
Jul-94 3.2% 2.8%
Aug-94 3.2% 2.9%
Sep-94 3.2% 3.0%
Oct-94 3.0% 2.6%
Nov-94 3.0% 2.7%
Dec-94 3.0% 2.7%
Jan-95 2.9% 2.8%
Feb-95 2.9% 2.9%
Mar-95 2.9% 2.9%
Apr-95 2.9% 3.1%
May-95 2.9% 3.2%
Jun-95 2.9% 3.0%
Jul-95 2.7% 2.8%
Aug-95 2.7% 2.6%
Sep-95 2.7% 2.5%
Oct-95 2.7% 2.8%
Nov-95 2.7% 2.6%
Dec-95 2.7% 2.5%
Jan-96 2.8% 2.7%
Feb-96 2.8% 2.7%
Mar-96 2.8% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.9% 2.8%
Jul-96 2.8% 3.0%
Aug-96 2.8% 2.9%
Sep-96 2.8% 3.0%
Oct-96 2.9% 3.0%
Nov-96 2.9% 3.3%
Dec-96 2.9% 3.3%
Jan-97 2.9% 3.0%
Feb-97 2.9% 3.0%
Mar-97 2.9% 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 3.3% 2.1%
Nov-97 3.3% 1.8%
Dec-97 3.3% 1.7%
Jan-98 3.3% 1.6%
Feb-98 3.3% 1.4%
Mar-98 3.3% 1.4%
Apr-98 3.5% 1.4%
May-98 3.5% 1.7%
Jun-98 3.5% 1.7%
Jul-98 1.7%
Aug-98 1.6%
Source: Bloomberg L.P. and Bureau of Labor
Statistics
</TABLE>
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 allow companies to pay higher wages without raising prices.
Although strong in the first quarter, productivity growth was essentially flat
for the second quarter of 1998.
ASSET CLASS PERFORMANCE
The 12-month reporting period served as a textbook example of the benefits of
asset allocation and how asset classes can exhibit markedly different returns
for a given period.
In classic tortoise-and-hare fashion, domestic bond returns, as represented by
the Lehman Brothers Aggregate Bond Index, outperformed both domestic and
international stock returns for the reporting period--achieving a total return
of 10.6% for the period. This was a result of several factors, including strong
bond total returns fueled by declining interest rates all along the yield curve,
as well as August's drop in both domestic and international equity valuations.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
VALUE OF A HYPOTHETICAL $1 INVESTMENT
SCHWAB SCHWAB LEHMAN
S&P 500- SMALL-CAP INTERNATIONAL AGGREGATE
R- INDEX INDEX-R- INDEX-R- BOND INDEX
<S> <C> <C> <C> <C>
8/97 $1.00 $1.00 $1.00 $1.00
1.055 1.078 1.063 1.015
10/97 1.019 1.031 0.977 1.03
1.067 1.022 0.973 1.034
12/97 1.085 1.043 0.987 1.045
1.097 1.027 1.027 1.058
2/98 1.176 1.112 1.089 1.057
1.236 1.162 1.117 1.061
4/98 1.249 1.17 1.125 1.066
1.227 1.101 1.122 1.076
6/98 1.277 1.104 1.129 1.086
1.264 1.019 1.137 1.088
8/98 1.081 0.823 0.993 1.106
Compiled by Charles Schwab & Co., Inc.
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
represent 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.
Not surprisingly, domestic equity returns were negatively impacted by August's
significant stock market declines. The difference in performance between
large-cap stocks and small-cap stocks, however, was truly remarkable. Large-cap
stocks as represented by the S&P 500-Registered Trademark- Index, achieved a
total return of 8.1% for the 12-month period. Small-cap stocks, as represented
by the Schwab Small-Cap Index,-Registered Trademark- experienced a total DECLINE
in value of 17.7%-- resulting in a difference of 25.8% between the 12-month
returns for the two asset classes.
5
<PAGE>
MARKET OVERVIEW (continued)
Similar to the domestic equity situation, international stock returns were
characterized by the markedly divergent performance of Asian countries, which
experienced significant declines, and European countries, which experienced
healthy gains for the period. Combined, international stock returns, as
represented by the Schwab International Index,-Registered Trademark- experienced
a slightly negative total return of -0.7% for the 12-month reporting period.
U.S. EQUITY VALUATION
The price/earnings ratio for the S&P 500-Registered Trademark- Index reached
28.5 during the reporting period--its highest value ever--before declining
sharply to 22.8 at the end of August. Nonetheless, this ratio is still well
above 15.0, its 30-year average. The price/earnings ratio, also known as a
multiple, is the price of a stock divided by its earnings per share and
generally indicates how much investors are willing to pay for a company's
earning potential. Based on other traditional market valuation measures, such as
the price-to-book value ratio or dividend yield, the U.S. stock market continues
to remain at high valuation levels.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 PRICE/EARNINGS RATIO
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
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
Mar-98 27.76
Apr-98 26.51
May-98 26.12
Jun-98 27.09
Jul-98 26.78
Aug-98 22.77
30 Year Average 15.00
Source: Bloomberg L.P.
</TABLE>
TREASURY BOND YIELDS
Treasury yields fell significantly during the 12-month reporting period--by
1.27% to 5.34% for 30-year bonds and by 1.32% to 4.90% for five-year notes.
International economic problems were a major factor contributing to the decline
in yields. Investors seeking a safe haven from the volatile stock market
increased demand for U.S. Treasury securities and bid up prices, thereby
decreasing Treasury bond yields. Throughout the reporting period, the Federal
Reserve's decision to leave rates unchanged--in part due to international market
turbulence, as well as to acceptable domestic economic statistics showing strong
growth coupled with contained inflation--also contributed to favorable
fixed-income market conditions.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR TREASURY BOND
YIELDS
30-YEAR FIVE-YEAR
TREASURY BOND YIELD TREASURY NOTE YIELD
<S> <C> <C>
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%
3/6/98 6.02% 5.65%
3/13/98 5.89% 5.53%
3/20/98 5.89% 5.55%
3/27/98 5.96% 5.68%
4/3/98 5.79% 5.49%
4/10/98 5.88% 5.56%
4/17/98 5.88% 5.56%
4/24/98 5.95% 5.63%
5/1/98 5.93% 5.62%
5/8/98 5.98% 5.65%
5/15/98 5.97% 5.67%
5/22/98 5.90% 5.64%
5/29/98 5.80% 5.55%
6/5/98 5.79% 5.59%
6/12/98 5.66% 5.45%
6/19/98 5.67% 5.51%
6/26/98 5.63% 5.49%
7/3/98 5.60% 5.41%
7/10/98 5.63% 5.40%
7/17/98 5.75% 5.49%
7/24/98 5.69% 5.48%
7/31/98 5.71% 5.50%
8/7/98 5.63% 5.38%
8/14/98 5.54% 5.33%
8/21/98 5.43% 5.19%
8/28/98 5.34% 4.90%
Source: Bloomberg L.P.
</TABLE>
On September 29, 1998, following the close of the reporting period, the Federal
Reserve did lower the Federal Funds rate from 5.50% to 5.25%. This rate
reduction, widely anticipated by financial markets, was viewed as a pre-emptive
step to cushion the effects of increasing weakness in foreign economies on
prospective U.S. economic growth.
6
<PAGE>
MUNICIPAL BOND YIELDS
Municipal bond yields also declined along with Treasury bond yields. Thirty-year
AAA General Obligation Municipal Bonds fell 0.44% to 4.86%, and five-year AAA
General Obligation (GO) Municipal Bonds fell 0.42% to 3.92% during the period.
As was the case with most other fixed-income securities, the "flight to quality"
initiated by international economic problems increased demand for more-stable
investments such as municipal bonds, thereby driving up prices and driving down
yields.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR AAA GENERAL
OBLIGATION
MUNICIPAL BOND YIELDS
30-YEAR AAA GO FIVE-YEAR 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%
3/6/98 5.04% 4.11%
3/13/98 5.04% 4.10%
3/20/98 5.01% 4.05%
3/27/98 5.04% 4.08%
4/3/98 5.00% 4.04%
4/10/98 5.03% 4.07%
4/17/98 5.04% 4.08%
4/24/98 5.10% 4.19%
5/1/98 5.13% 4.23%
5/8/98 5.11% 4.21%
5/15/98 5.09% 4.19%
5/22/98 5.03% 4.15%
5/29/98 4.97% 4.09%
6/5/98 4.96% 4.08%
6/12/98 4.92% 4.04%
6/19/98 4.94% 4.10%
6/26/98 4.94% 4.08%
7/3/98 4.93% 4.09%
7/10/98 4.93% 4.09%
7/17/98 5.00% 4.15%
7/24/98 4.98% 4.08%
7/31/98 4.97% 4.07%
8/7/98 4.94% 4.07%
8/14/98 4.93% 4.01%
8/21/98 4.88% 3.96%
8/28/98 4.86% 3.92%
Source: Bloomberg L.P.
</TABLE>
Although municipal bond yields did decline during the reporting period, their
decline was markedly less pronounced than the decline in Treasury bond yields.
As shown below, this caused the ratio of municipal bond yields to Treasury bond
yields to rise sharply during the reporting period. This occurred for two
reasons: First, the yield-reducing impact of investors' flight to quality is
typically more pronounced for Treasury securities than for municipal securities,
because they are backed by the full faith and credit of the U.S. government.
Second, in response to lower interest rates and healthier state and local fiscal
outlooks, there was an increase in the issuance of long-term municipal
securities. This increase in municipal bond supply most likely dampened the
decline in municipal rates during the reporting period.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RATIO OF MUNICIPAL BOND YIELDS TO
TREASURY BOND YIELDS FOR
30-YEAR AND FIVE-YEAR BONDS
30-YEAR BOND YIELDS FIVE-YEAR BOND YIELDS
<S> <C> <C>
8/29/97 80.2% 69.8%
9/5/97 79.2% 69.0%
9/12/97 79.4% 69.2%
9/19/97 80.7% 69.7%
9/26/97 80.8% 69.9%
10/3/97 81.6% 71.0%
10/10/97 81.0% 70.6%
10/17/97 81.5% 70.6%
10/24/97 82.9% 71.9%
10/31/97 83.3% 72.9%
11/7/97 83.6% 71.8%
11/14/97 84.1% 71.7%
11/21/97 85.4% 72.2%
11/28/97 85.5% 71.4%
12/5/97 84.0% 69.9%
12/12/97 84.5% 71.7%
12/19/97 84.1% 70.9%
12/26/97 84.4% 70.9%
1/2/98 84.9% 71.8%
1/9/98 85.0% 76.0%
1/16/98 83.1% 73.1%
1/23/98 82.6% 73.4%
1/30/98 84.8% 75.1%
2/6/98 83.3% 74.0%
2/13/98 83.6% 74.0%
2/20/98 83.3% 73.0%
2/27/98 83.8% 72.1%
3/6/98 83.7% 72.8%
3/13/98 85.5% 74.1%
3/20/98 85.1% 73.0%
3/27/98 84.6% 71.9%
4/3/98 86.3% 73.7%
4/10/98 85.5% 73.3%
4/17/98 85.8% 73.4%
4/24/98 85.8% 74.4%
5/1/98 86.5% 75.2%
5/8/98 85.5% 74.6%
5/15/98 85.2% 73.9%
5/22/98 85.3% 73.5%
5/29/98 85.7% 73.7%
6/5/98 85.7% 72.9%
6/12/98 86.9% 74.2%
6/19/98 87.1% 74.4%
6/26/98 87.7% 74.3%
7/3/98 88.1% 75.6%
7/10/98 87.6% 75.8%
7/17/98 87.0% 75.7%
7/24/98 87.6% 74.5%
7/31/98 87.0% 74.0%
8/7/98 87.7% 75.7%
8/14/98 89.0% 75.2%
8/21/98 89.8% 76.3%
8/28/98 91.0% 80.0%
Source: Bloomberg L.P.
</TABLE>
7
<PAGE>
PORTFOLIO MANAGEMENT
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 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 portfolio manager for the Shearson Lehman California Municipal Bond
Fund and E.F. Hutton's Municipal Cash Reserve Management.
8
<PAGE>
TAXABLE-EQUIVALENT YIELD
The taxable-equivalent yield represents the pre-tax yield that 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 8/31/98 and
the taxable equivalent yields,(1) assuming a maximum combined federal and State
of California personal income tax rate of 45.22%. Shareholder tax rates may be
different.
<TABLE>
<CAPTION>
TAXABLE
EQUIVALENT
30-DAY 30-DAY SEC
SEC YIELD YIELD
<S> <C> <C>
- --------------------------------------------------------------------------------
Schwab California Short/Intermediate
Tax-Free Bond Fund 3.57% 6.52%
- --------------------------------------------------------------------------------
Schwab California Long-Term
Tax-Free Bond Fund 4.48% 8.18%
- --------------------------------------------------------------------------------
</TABLE>
(1)A portion of both Funds' expenses was reduced during the reporting period.
Without such reductions, both Funds' SEC yields would have been lower.
9
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE YEAR FIVE YEARS (4/21/93)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND(1) 5.19% 4.45% 4.63%
- --------------------------------------------------------------------------------
Lehman Three-Year Municipal Bond Index 5.76% 4.90% 4.91%
- --------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 6/30/98. As of 6/30/98, the Fund's one-year, five-year and
since-inception average annual total returns were 4.81%, 4.40% and 4.50%,
respectively. The 30-day SEC yield as of 6/30/98 was 3.88%.(2)
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB CALIFORNIA
SHORT/INTERMEDIATE LEHMAN THREE-YEAR
TAX-FREE BOND FUND MUNICIPAL BOND INDEX
<S> <C> <C>
4/21/93 $10,000 $10,000
4/30/93 $9,990 $9,994
5/31/93 $10,037 $10,021
6/30/93 $10,136 $10,085
7/31/93 $10,157 $10,090
8/31/93 $10,257 $10,185
9/30/93 $10,328 $10,229
10/31/93 $10,340 $10,251
11/30/93 $10,310 $10,237
12/31/93 $10,444 $10,345
1/31/94 $10,517 $10,429
2/28/94 $10,372 $10,332
3/31/94 $10,188 $10,207
4/30/94 $10,239 $10,267
5/31/94 $10,272 $10,315
6/30/94 $10,253 $10,318
7/31/94 $10,356 $10,404
8/31/94 $10,390 $10,441
9/30/94 $10,350 $10,415
10/31/94 $10,280 $10,390
11/30/94 $10,167 $10,371
12/31/94 $10,227 $10,416
1/31/95 $10,350 $10,502
2/28/95 $10,503 $10,613
3/31/95 $10,598 $10,708
4/30/95 $10,614 $10,744
5/31/95 $10,826 $10,909
6/30/95 $10,809 $10,935
7/31/95 $10,925 $11,050
8/31/95 $11,030 $11,137
9/30/95 $11,090 $11,168
10/31/95 $11,174 $11,222
11/30/95 $11,256 $11,294
12/31/95 $11,296 $11,341
1/31/96 $11,366 $11,430
2/29/96 $11,358 $11,432
3/31/96 $11,308 $11,404
4/30/96 $11,325 $11,418
5/31/96 $11,332 $11,428
6/30/96 $11,393 $11,497
7/31/96 $11,466 $11,560
8/31/96 $11,483 $11,577
9/30/96 $11,557 $11,648
10/31/96 $11,634 $11,730
11/30/96 $11,742 $11,839
12/31/96 $11,737 $11,845
1/31/97 $11,776 $11,897
2/28/97 $11,837 $11,955
3/31/97 $11,762 $11,893
4/30/97 $11,815 $11,944
5/31/97 $11,916 $12,041
6/30/97 $11,991 $12,112
7/31/97 $12,139 $12,256
8/31/97 $12,120 $12,231
9/30/97 $12,196 $12,319
10/31/97 $12,227 $12,374
11/30/97 $12,268 $12,410
12/31/97 $12,346 $12,494
1/31/98 $12,433 $12,576
2/28/98 $12,459 $12,603
3/31/98 $12,467 $12,623
4/30/98 $12,435 $12,605
5/31/98 $12,540 $12,723
6/30/98 $12,568 $12,766
7/31/98 $12,635 $12,812
8/31/98 $12,749 $12,936
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab California Short/ Intermediate Tax-Free Bond Fund, made at its inception,
with a similar investment in the Lehman Brothers Three-Year Municipal Bond
Index.
(1)A portion of the Fund's expenses was reduced during the reporting
period. Without such reductions, as of 8/31/98, the Fund's one-year,
five-year and since-inception average annual total returns would have been
4.80%, 4.06% and 4.21%, respectively. The 30-day SEC yield as of 8/31/98
would have been 3.20%.
(2)A portion of the Fund's expenses was reduced during the reporting
period. Without such reductions, as of 6/30/98, the Fund's one-year,
five-year and since-inception average annual total returns would have been
4.29%, 3.98% and 4.06%, respectively. The 30-day SEC yield as of 6/30/98
would have been 3.48%.
THE INFORMATION PRESENTED IN THE GRAPH TO THE LEFT IS HISTORICAL AND DOES NOT
REPRESENT FUTURE RESULTS. TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND
CAPITAL GAIN 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.
10
<PAGE>
PORTFOLIO COMPOSITION
The Schwab California Short/Intermediate Tax-Free Bond Fund invests primarily in
California tax-exempt or municipal securities. The chart below illustrates the
composition of the Fund's portfolio as of 8/31/98 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. A complete list of the securities in the Fund's portfolio as of
8/31/98 is provided in the Schedule of Investments later in this report.
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(1)
as of 8/31/98
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 51.5%
AA 15.6%
A 16.8%
Short-term Investments 9.4%
Short-term Ratings 6.7%
</TABLE>
(1)These percentages do not take into account other assets and liabilities.
11
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE YEAR FIVE YEARS (2/24/92)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND(1) 8.96% 6.04% 7.88%
- --------------------------------------------------------------------------------
Lehman Brothers General Obligation
MunicipalBond Index 8.65% 6.38% 7.66%
- --------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 6/30/98. As of 6/30/98, the Fund's one-year, five-year and
since-inception average annual total returns were 9.64%, 6.14% and 7.81%,
respectively. The 30-day SEC yield as of 6/30/98 was 4.69%.(2)
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB CALIFORNIA LONG-TERM LEHMAN GENERAL OBLIGATION
TAX-FREE BOND FUND MUNICIPAL BOND INDEX
<S> <C> <C>
2/24/92 $10,000 $10,000
3/31/92 $10,099 $10,004
4/30/92 $10,217 $10,093
5/31/92 $10,410 $10,212
6/30/92 $10,633 $10,383
7/31/92 $11,082 $10,694
8/31/92 $10,786 $10,590
9/30/92 $10,835 $10,659
10/31/92 $10,474 $10,554
11/30/92 $10,921 $10,743
12/31/92 $11,110 $10,853
1/31/93 $11,256 $10,979
2/28/93 $11,775 $11,376
3/31/93 $11,561 $11,256
4/30/93 $11,674 $11,370
5/31/93 $11,736 $11,434
6/30/93 $11,969 $11,624
7/31/93 $11,957 $11,640
8/31/93 $12,235 $11,882
9/30/93 $12,371 $12,017
10/31/93 $12,412 $12,041
11/30/93 $12,263 $11,934
12/31/93 $12,541 $12,186
1/31/94 $12,671 $12,326
2/28/94 $12,304 $12,006
3/31/94 $11,683 $11,517
4/30/94 $11,768 $11,615
5/31/94 $11,867 $11,716
6/30/94 $11,747 $11,644
7/31/94 $12,008 $11,864
8/31/94 $12,026 $11,905
9/30/94 $11,824 $11,730
10/31/94 $11,508 $11,521
11/30/94 $11,235 $11,313
12/31/94 $11,420 $11,562
1/31/95 $11,901 $11,893
2/28/95 $12,295 $12,238
3/31/95 $12,414 $12,379
4/30/95 $12,407 $12,394
5/31/95 $12,825 $12,789
6/30/95 $12,613 $12,677
7/31/95 $12,685 $12,797
8/31/95 $12,866 $12,960
9/30/95 $12,972 $13,041
10/31/95 $13,228 $13,230
11/30/95 $13,507 $13,450
12/31/95 $13,690 $13,579
1/31/96 $13,785 $13,682
2/29/96 $13,664 $13,589
3/31/96 $13,436 $13,415
4/30/96 $13,369 $13,378
5/31/96 $13,379 $13,373
6/30/96 $13,550 $13,518
7/31/96 $13,700 $13,641
8/31/96 $13,693 $13,639
9/30/96 $13,920 $13,830
10/31/96 $14,073 $13,986
11/30/96 $14,365 $14,242
12/31/96 $14,283 $14,182
1/31/97 $14,294 $14,209
2/28/97 $14,429 $14,340
3/31/97 $14,175 $14,149
4/30/97 $14,316 $14,268
5/31/97 $14,581 $14,482
6/30/97 $14,706 $14,637
7/31/97 $15,266 $15,042
8/31/97 $15,056 $14,901
9/30/97 $15,253 $15,078
10/31/97 $15,359 $15,175
11/30/97 $15,475 $15,264
12/31/97 $15,717 $15,487
1/31/98 $15,918 $15,646
2/28/98 $15,906 $15,651
3/31/98 $15,879 $15,665
4/30/98 $15,802 $15,595
5/31/98 $16,078 $15,841
6/30/98 $16,124 $15,903
7/31/98 $16,145 $15,943
8/31/98 $16,405 $16,190
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab California Long-Term Tax-Free Bond Fund, made at its inception, with a
similar investment in the Lehman Brothers General Obligation Municipal Bond
Index.
(1)A portion of the Fund's expenses was reduced during the reporting
period. Without such reductions, as of 8/31/98, the Fund's one-year,
five-year and since-inception average annual total returns would have been
8.64%, 5.75% and 7.5%, respectively. The 30-day SEC yield as of 8/31/98 would
have been 4.17%.
(2)A portion of the Fund's expenses was reduced during the reporting
period. Without such reductions, as of 6/30/98, the Fund's one-year,
five-year and since-inception average annual total returns would have been
9.24%, 5.84% and 7.42%, respectively. The 30-day SEC yield as of 6/30/98
would have been 4.37%.
THE INFORMATION PRESENTED IN THE GRAPH TO THE LEFT IS HISTORICAL AND DOES NOT
REPRESENT FUTURE RESULTS. TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND
CAPITAL GAIN 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.
12
<PAGE>
PORTFOLIO COMPOSITION
The Schwab California Long-Term Tax-Free Bond Fund invests primarily in
California tax-exempt or municipal securities. The chart below illustrates the
composition of the Fund's portfolio as of 8/31/98 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. A complete list of the securities in the Fund's portfolio as of
8/31/98 is provided in the Schedule of Investments later in this report.
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(1)
as of 8/31/98
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 62.0%
AA 9.9%
A 12.9%
BAA 2.6%
Short-term Investments 9.7%
Short-term Rating 2.9%
</TABLE>
(1)These percentages do not take into account other assets and liabilities.
13
<PAGE>
DIVIDENDS PAID
During the reporting period, the Funds continued to provide a high level of
current income exempt from federal income taxes, consistent with the
preservation of capital.(1) The chart below illustrates the income dividends on
a per-share basis paid by each Fund during each fiscal year or reporting period
since inception.
DIVIDENDS PAID BY THE SCHWAB CALIFORNIA TAX-FREE BOND FUNDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INCOME DIVIDENDS PER SHARE
FISCAL YEAR
SCHWAB CALIFORNIA
SHORT/INTERMEDIATE SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND TAX-FREE BOND FUND
<S> <C> <C>
1992* $0.00 $0.51
1993** $0.13 $0.38
1994+ $0.37 $0.56
1995+ $0.42 $0.56
1996+ $0.43 $0.57
1997+ $0.43 $0.56
1998+ $0.42 $0.55
</TABLE>
* 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.
+ For the one-year period ended 8/31 for both Funds.
(1)Income from the Funds may be subject to state and local taxes and to the
federal alternative minimum tax.
14
<PAGE>
FUND DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
Q. WHAT IS YOUR VIEW OF THE MUNICIPAL BOND ENVIRONMENT?
A. At the beginning of the reporting period, municipal securities were trading
in a narrow range and the market was fairly stable. This climate then changed as
a series of events, including the economic crisis in Asia, the political scandal
in Washington, and the instability of both the Russian economy and Russia's
leadership, caused widespread turmoil in global equity markets. The result of
this turmoil has been an increased demand for U.S. Treasury securities, which
led to higher prices and lower yields in both Treasury and municipal markets.
Additionally, the relatively low volatility in the municipal market during the
reporting period has provided a safe haven for investors during these turbulent
times.
As interest rates continued to decline, the supply of municipal securities
increased dramatically as governments and agencies began to issue new bonds and
refinance older bonds to take advantage of the lower rates. This increased
supply caused municipal securities to trade at levels that were very attractive
when compared with Treasury securities. In fact, as illus- trated in the chart
on page 7 of the Market Overview section, the ratio of 30-year
Treasury-to-municipal security yields reached as high as 91%, which represents
historic levels. When the Treasury-to-municipal ratio reaches these levels, it
attracts what the industry refers to as "crossover" buyers to the municipal
market.
Crossover buyers are those who continually seek out the most competitively
priced sector of the fixed-income market, which, in this case, is the municipal
market. Once they locate that sector, the crossover buyers then reallocate their
assets accordingly. Cross- over buyers are seeking to maximize their returns by
selling their municipal bond positions at some point in the future when Treasury
security prices become relatively more attractive.
Q. HOW DID THE FUNDS PERFORM DURING THE 12-MONTH REPORTING PERIOD?
A. Both Funds achieved favorable total returns for the period, aided in part by
the overall decline in bond yields, which increased prices of the Funds'
portfolio securities, thereby increasing the Funds' net asset values (NAVs).
The SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND achieved a total
return of 5.19% for the 12-month reporting period ended August 31, 1998. This
return came from a combination of dividend income of 4.21% and an increase in
the Fund's NAV of 0.98%. The NAV increase was a result of the Fund's declining
yield, which fell from 4.00% at the beginning of the period to 3.57% at the end
of the period.
The SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND achieved a total return of
8.96% for the 12-month reporting period ended August 31, 1998. This return came
from a combination of both dividend income of 5.18% and an increase in the
Fund's NAV of 3.78%. The NAV increase was a result of the Fund's declining
yield, which fell from 5.02% at the beginning of the period to 4.48% at the
end of the period.
15
<PAGE>
FUND DISCUSSION (continued)
Q. HOW WERE THE FUNDS MANAGED DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE
TO THE PORTFOLIOS?
A. As shown in the Portfolio Quality Summary, we continued to maintain a
portfolio of high-quality securities (primarily AAA and AA) during the reporting
period. We feel that this is an appropriate strategy for the Funds given the
current market environment, since there is very little yield advantage
associated with lower-rated securities; we simply do not feel that 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 its target level
for short-term interest rates.
Reflecting our cautious outlook for the markets, the SCHWAB CALIFORNIA
SHORT/INTERMEDIATE TAX-FREE BOND FUND maintained an average maturity throughout
the reporting period in a relatively narrow range from approximately 3.27 to
3.98 years. The Fund's weighted average maturity at the end of the period was
3.57 years, up slightly from 3.50 years at the beginning of the period.
The SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND maintained its weighted
average maturity within a range from 17.08 to 21.51 years. Although the Fund has
extended its maturity beyond this range in the past, we do not believe that it
is advisable at this time, because the yield curve is very flat beyond 20 years,
indicating that there is very little yield advantage associated with the longer
maturities. Again, we do not believe that investors are being adequately
rewarded for the additional interest rate risk. The Fund's weighted average
maturity at the end of the period was 17.40 years, down from 19.11 years at the
beginning of the period.
Q. RECENTLY, THE STOCK MARKET SEEMS TO BE VERY VOLATILE. WHAT ROLE CAN BOND
INVESTMENTS PLAY IN REDUCING PORTFOLIO RISK?
A. Diversifying your portfolio with bonds or bond funds may help offset the
effects of stock market volatility and can generally help add stability to your
portfolio, as shown in the following example. Of course, share prices of bond
funds, like any investment, fluctuate with 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 the indices.(1) As shown in the chart, adding bonds to an all-stock portfolio
has reduced risk while still producing competitive returns.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HYPOTHETICAL PORTFOLIOS SHOWING THE
EFFECTS
OF ADDING BONDS TO AN ALL-STOCK
PORTFOLIO
1970-1997
AVERAGE ANNUAL HIGHEST ANNUAL LOWEST ANNUAL
RETURN RETURN RETURN
<S> <C> <C> <C>
100% Stocks 12.97% 37.43% -26.47%
90% Stocks/ 10% Bonds 12.68% 35.37% -23.25%
80% Stocks/ 20% Bonds 12.36% 33.30% -20.04%
70% Stocks/ 30% Bonds 12.02% 31.24% -16.82%
60% Stocks/ 40% Bonds 11.65% 29.18% -13.61%
</TABLE>
(1)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 expenses and cannot be invested in directly. Past
results are not indicative of future performance.
16
<PAGE>
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--for the portfolio invested 40% in bonds
and 60% in stocks--was actually a loss of 13.61%, about half of the 26.47% loss
in the all-stock portfolio. Of course, past performance does not guarantee
future results.
Q. WHAT IS YOUR VIEW OF THE ECONOMIC CLIMATE IN CALIFORNIA?
A. California is in its fifth year of economic recovery. As noted in the
Governor's 1998 Budget Highlights, the state's economy continues to grow at a
strong pace, with employment growth exceeding 3%, personal income up by more
than 7% and unemployment standing at an eight-year low. Looking forward, it is
anticipated that California will see continued moderate growth across most
industry sectors; however some, such as those heavily dependent upon exporting
goods and services to Asia, are expected to grow at a much slower pace. As noted
in the Governor's 1998/99 Budget Proposal, the effect on California of the
economic weakness in Asia should be somewhat offset by strong export growth to
Mexico and increasing exports to Europe.
The state's continued economic improvement has allowed for a buildup of budget
reserves and has eased some of the spending restrictions imposed during the
previous recession. California ended the 1997/98 budget year with total budget
reserves of more than $1 billion. As in prior years, however, budget
adjust- ments may be necessary to keep spending in line with revenues. Lawmakers
will continue to address the challenge of balancing mandated spending
requirements for education and public safety against the need for maintaining
and upgrading public infrastructure. Therefore, the state's financial position
may not change significantly over the next 12 months.
We are satisfied that the California securities held by the Fund present low
credit risk, and we will continue to monitor the state's economic situation
closely. California's current credit ratings are A1 from Moody's Investor
Service, A+ from Standard & Poor's Corporation and AA- from Fitch IBCA, Inc.,
three well-known rating agencies.
17
<PAGE>
PORTFOLIO HIGHLIGHTS
SCHWAB CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND
ASSETS
<TABLE>
<S> <C>
- ------------------------------------------------
Total net assets as of 8/31/97 (000s) $ 58,876
- ------------------------------------------------
Total net assets as of 8/31/98 (000s) $ 95,894
- ------------------------------------------------
Percentage growth over reporting
period 62.9%
- ------------------------------------------------
</TABLE>
MATURITY SCHEDULE: AVERAGE WEIGHTED
MATURITY AT 8/31/98
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF
VALUE OF PORTFOLIO
MATURITY RANGE (000S) PORTFOLIO (CUMULATIVE)
<S> <C> <C> <C>
- -----------------------------------------------------------
0-6 months $ 10,933 11.2% 11.2%
- -----------------------------------------------------------
7-36 months 35,194 36.2% 47.4%
- -----------------------------------------------------------
37-60 months 25,411 26.1% 73.5%
- -----------------------------------------------------------
More than
60 months 25,801 26.5% 100.0%
- -----------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY: 3.57 years
SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND
ASSETS
<TABLE>
<S> <C>
- -----------------------------------------------
Total net assets as of 8/31/97
(000s) $ 125,284
- -----------------------------------------------
Total net assets as of 8/31/98
(000s) $ 190,197
- -----------------------------------------------
Percentage growth over reporting
period 51.8%
- -----------------------------------------------
</TABLE>
MATURITY SCHEDULE: AVERAGE WEIGHTED
MATURITY AT 8/31/98
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF
VALUE OF PORTFOLIO
MATURITY RANGE (000S) PORTFOLIO (CUMULATIVE)
<S> <C> <C> <C>
- ------------------------------------------------------------
0-1 year $ 18,941 9.7% 9.7%
- ------------------------------------------------------------
1-10 years 18,312 9.4% 19.1%
- ------------------------------------------------------------
11-20 years 77,870 40.1% 59.2%
- ------------------------------------------------------------
21-30 years 62,704 32.2% 91.4%
- ------------------------------------------------------------
More than
30 years 16,758 8.6% 100.0%
- ------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY: 17.40 years
18
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1998
Par Value
------ ------
MUNICIPAL BONDS -- 92.0% (a)
California Education Authority RB
(Pooled College and University Projects)
Series 1997A / (MBIA Insurance)
(Aaa AAA)
4.85%, 04/01/03 $ 345 $ 360
5.05%, 04/01/05 1,010 1,072
California Educational Facilities
Authority RB (Mills College)
Series 1992 / (Prerefunded with U.S.
Government Securities (A2 -)
6.88%, 09/01/02 500 564
California Educational Facilities
Authority Revenue Refunding Bonds
(University of San Diego) / (AMBAC
Insurance) (Aaa -)
4.50%, 10/01/02 1,000 1,026
California Educational Facilities
Authority Revenue Refunding Bonds
(Stanford University Project)
Series 1997M (Aaa AAA)
5.25%, 12/01/01 1,600 1,678
California HFA Home Mortgage RB
Series 1994G (Aa2 AA-)
5.85%, 08/01/99 320 325
6.00%, 08/01/00 410 424
California HFA RB (Catholic Health Care
West) Series 1997A / (MBIA Insurance)
(Aaa AAA)
5.00%, 07/01/03 2,000 2,097
california HFA Revenue Refunding
Bonds (Valley Presbyterian Hospital)
Series 1997 / (MBIA Insurance)
(- AAA)
5.25%, 05/01/03 1,000 1,057
California State GO Series 1994 /
(AMBAC Insurance) (Aaa AAA)
6.50%, 03/01/03 2,000 2,222
California State Public Works Board
Lease RB (Various California
Community College Projects)
Series 1993A (A2 A)
4.70%, 12/01/99 1,000 1,015
California State Public Works Board
Lease RB (Various California State
University Projects) Series 1993A
(A2 A)
4.30%, 12/01/99 2,000 2,020
Par Value
------ ------
California State Public Works Board
Lease Revenue Refunding Bonds
(Department of Corrections Various
State Prisons) Series 1993A /
(AMBAC Insurance) (Aaa AAA)
4.70%, 12/01/00 $1,865 $1,909
California State Public Works Board
Lease Revenue Refunding Bonds
(Department of Corrections State
Prisons) Series 1993D (A2 A)
4.40%, 06/01/00 1,000 1,013
California State Public Works Board
Lease Revenue Refunding Bonds
(Department of Corrections State
Prisons ImperialCounty) Series
1998B / (MBIA Insurance) (Aaa AAA)
4.50%, 09/01/05 3,000 3,094
California State Public Works Board
Lease RB (The Regents of the University
of California Various Projects) Series
1992A / (AMBAC Insurance & Escrowed
to maturity in U.S. Government
Securities) (Aaa AAA)
6.40%, 12/01/02 2,000 2,235
5.60%, 12/01/01 2,000 2,115
California State Public Works Board
Lease RB (The Regents of the University
of California Various Projects) Series
1993A (Aa3 A+)
4.70%, 06/01/00 1,020 1,039
California State Rural Water Financing
Authority Public Projects Construction
Notes / (Societe Generale GIC)
4.25%, 03/01/00 (d) 2,500 2,521
California Statewide Community
Development Authority COP (St. Joseph
Health System) Series 1997 (Aa3 AA)
5.00%, 07/01/04 750 784
California Statewide Community
Development Authority COP
(St. Joseph Health System Obligated
Group) (Aa3 AAA)
5.30%, 07/01/00 2,035 2,094
California Statewide Community
Development Authority Hospital
Revenue Refunding Bonds COP Series 1993
(Cedars-Sinai Medical Center) (A1 -)
4.40%, 11/01/00 1,235 1,247
19
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
August 31, 1998
Par Value
------ ------
California Statewide Community
Development Authority Revenue
Refunding Bonds (Sherman Oaks
Project) Series 1998A / (AMBAC
Insurance) (Aaa AAA)
5.00%, 08/01/06 $2,500 $2,644
City of Santa Monica, California
Wastewater RB (Hyperion Project)
Series 1991A / (Escrowed to maturity with
U.S. Government Securities (A1 A+)
6.25%, 01/01/02 1,250 1,366
Contra Costa County, California
Transportation Authority Sales Tax
RB Series 1995A / (FGIC Insurance)
(Aaa AAA)
4.80%, 03/01/01 1,000 1,026
Fontana, California Special Tax
Revenue Refunding Bonds Senior
Community Facilities (District 2-A)
Series 1998 / (MBIA Insurance)
(Aaa AAA)
4.10%, 09/01/04 1,120 1,130
Fresno, California Community Facilities
District 3 (Palm Bluffs Corporate
Center) Special Tax Series 1998 /
(Rabobank International LOC) (- AAA)
4.75%, 09/01/05 2,000 2,003
Los Angeles, California Community
Redevelopment Pooled Financing
Authority Revenue Refunding Bonds
(Monterey Project) Series E / (FSA
Insurance) (Aaa AAA)
5.00%, 09/01/07 1,570 1,670
Los Angeles, California Community
Redevelopment Pooled Financing
Authority Revenue Refunding Bonds
(Beacon Street Project) Series F /
(FSA Insurance) (Aaa AAA)
5.00%, 09/01/07 810 862
Los Angeles, California Department of
Airports Revenue Refunding Bonds
Series 1995B / (FGIC Insurance)
(Aaa AAA)
6.50%, 05/15/03 2,300 2,562
Los Angeles, California Department of
Water & Power Electric Plant Revenue
Refunding Bonds Series 1994 (AA3 A+)
4.50%, 08/15/01 2,270 2,318
Par Value
------ ------
Los Angeles, California State Building
Authority Lease Revenue Refunding Bonds
(California Department of General
Services) Series 1995A (A A)
5.60%, 05/01/04 $1,000 $1,075
Los Angeles, California State Building
Authority Lease Revenue Refunding
Bonds (State of California Department
of General Services) Series 1993A (A A)
4.70%, 05/01/99 450 453
Los Angeles, California Unified School
District COP (Multiple Properties
Project) Series 1994B / (AMBAC
Insurance) (Aaa AAA)
5.70%, 12/01/99 3,215 3,303
Los Angeles, California Wastewater
System RB Series 1991A (A1 A+)
6.60%, 02/01/99 1,775 1,798
Los Angeles County, California Public
Works Financing Authority Refunding
Bonds (Capital Construction Flood
Control District Project) (Aa1 AA-)
4.30%, 03/01/00 1,090 1,101
Morgan Hill, California Unified School
District COP (Measure B Capital
Projects) Series 1993 (A1 -)
4.80%, 08/01/99 510 516
Northern California Power Agency
Public Power Revenue Refunding
Bonds (Geothermal Project No. 3) Series
1998A / (AMBAC Insurance) (-AAA)
5.00%, 07/01/04 2,000 2,110
Orange County, California Municipal
District Water Facilities COP (Allen-
McColloch Pipeline Project) Series 1996 /
(MBIA Insurance) (Aaa AAA)
4.60%, 07/01/01 3,000 3,068
Rancho, California Water District
Financing Authority / (Toronto-
Dominion Bank LOC) (Aa2 AA)
4.70%, 09/15/01 2,500 2,553
Rim of the World, California Unified
School District COP (Measure V Capital
Projects) Series 1992 / (AMBAC
Insurance) (Aaa AAA)
5.90%, 09/01/01 1,490 1,583
20
<PAGE>
Par Value
------- -------
Riverside County, California Public
Financing Authority Special Tax RB
Senior Lein Bonds Series 1995A /
(MBIA Insurance) (Aaa AAA)
4.40%, 09/01/01 $1,750 $1,785
Riverside County, California TRAN
4.50%, 09/30/99 2,000 2,019
Sacramento, California Regional County
Sanitation District (Aa2 AA)
5.00%, 08/01/03 2,100 2,208
San Bernardino County, California
TRAN
4.50%, 09/30/99 2,000 2,019
San Francisco, California Bay Area Rapid
Transit District Sales Tax RB Series 1998 /
(AMBAC Insurance) (Aa3 AA-)
5.50%, 07/01/05 3,000 3,270
San Francisco, California Port
Commission Revenue Refunding
Bonds (A1 BBB+)
5.00%, 07/01/00 1,500 1,530
San Joaquin, California Area Flood Control
Agency Act 1915 (Flood Protection
Restoration Assessment) Series 1996 /
(FSA Insurance) (Aaa AAA)
5.10%, 09/02/03 1,670 1,729
San Jose, California Financing Authority
Revenue Refunding Bonds (Convention
Center Project) Series 1993C (A1 A+)
5.90%, 09/01/04 2,500 2,678
San Ramon Valley, California Unified
School District COP (Measure A
Capital Project) Series 1993A /
(Escrowed to Maturity with Government
Securities) (A1 -)
4.90%, 10/01/99 1,100 1,115
Southern California Metropolitan Water
District RB Series 1991 (Aa2 AA)
6.63%, 07/01/01 1,000 1,094
Southern California Public Power
Authority Project RB (San Juan Power
Project Unit 3) Series 1993A / (MBIA
Insurance) (Aaa AAA)
5.00%, 01/01/04 1,600 1,680
Southern California Public Power
Authority Revenue Refunding Bonds
Series 1989 (Aaa AAA)
6.00%, 07/01/00 1,750 1,822
Par Value
------- -------
Stockton, California Insured Health Facilities
RB (St. Joseph Medical Center of Stockton)
Series 1993A / (MBIA Insurance) (Aaa AAA)
4.60%, 06/01/00 $ 200 $ 203
-------
TOTAL MUNICIPAL BONDS
(Cost $86,602) 88,204
-------
VARIABLE RATE OBLIGATIONS -- 9.4% (b)
California HFA RB (St. Joseph Health
Systems), Series 1985A
3.10%, 09/01/98 285 285
California Pollution Control Financing
Authority RB (Southern California
Edison Project) Series 1986A (A1 A+)
3.80%, 09/01/98 1,400 1,400
California Pollution Control Financing
Authority Revenue Refunding Bonds
(Pacific Gas & Electric) Series 1996F /
(Banque Nationale de Paris LOC)
(A-1+ AA+)
3.15%, 09/01/98 100 100
California Pollution Control Financing
Authority Revenue Refunding Bonds
(Shell Oil Co. Project) Series 1991A
3.10%, 09/01/98 400 400
California Statewide Community
Development Authority COP (Northern
California Retired Officers Community
Project) Series 1996 / (Dresdner Bank
AG LOC) (AA1 -)
3.10%, 09/01/98 3,000 3,000
Irvine Ranch, California Improvement
Bond Act 1915 RB (Assessment
Districts 94-13) / (Canadian Imperial
Bank of Commerce LOC) (Aa3 AA-)
3.15%, 09/01/98 253 253
Irvine Ranch, California Water District
Consolidated Revenue Refunding
Bonds Series 1985B / (Landesbank
Hessen-Thuringen Girozentrale LOC)
(- AAA)
3.00%, 09/01/98 3,000 3,000
Irvine Ranch, California Water District
Consolidated RB (Districts 105, 140,
240 & 250) Series 1995 /
(Commerzbank A.G. LOC) (A-1+ AA-)
3.15%, 09/01/98 400 400
21
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
August 31, 1998
Par Value
------- -------
Orange County, California Sanitation
District COP (Districts 1, 2, 3, 5, 6, 7,
11, 13 & 14) Series 1990-1992A / (National
Westminster Bank LOC) (Aa2 AA)
3.15%, 09/01/98 $ 200 $ 200
-------
TOTAL VARIABLE RATE OBLIGATIONS
(COST $9,038) 9,038
-------
SHORT-TERM INVESTMENTS -- 0.1% (c)
Provident Institutional Funds -
California Money Fund Portfolio
2.61% 97 97
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $97) 97
-------
TOTAL INVESTMENTS -- 101.5%
(Cost $95,737) 97,339
-------
OTHER ASSETS AND LIABILITIES-- (1.5%)
Other Assets 1,706
Liabilities (3,151)
-------
(1,445)
-------
NET ASSETS -- 100.0% $95,894
=======
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO
FINANCIAL STATEMENTS.
22
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1998
Par Value
------ --------
MUNICIPAL BONDS -- 92.3% (A)
Alameda County, California COP
(Medical Center) Series 1998 / (MBIA
Insurance) (Aaa AAA)
5.38%, 06/01/18 $3,400 $ 3,510
Alta Loma, California Elementary
School District GO Series 2 /(AMBAC
Insurance) (Aaa AAA)
5.88%, 06/01/08 840 918
5.88%, 06/01/09 860 934
Antioch Area, California Public
Facilities Financing Agency (Special
Tax Community) Series 1989-1 /
(FGIC Insurance) (Aaa AAA)
5.25%, 08/01/07 1,985 2,097
Association of Bay Area Government,
California RB (California Redevelopment
Agency Pool) Series 1997A6 /
(FSA Insurance) (Aaa AAA)
5.25%, 12/15/17 1,200 1,230
California Educational Facilities
Authority RB (Loyola Marymount
University) Series 1992B (A1 -)
6.60%, 10/01/22 1,450 1,626
California Educational Facilities
Refunding Bonds (St. Mary's College
of California) Series 1993 (A -)
5.00%, 10/01/12 3,000 3,030
California Educational Facilities
Authority RB (University of Southern
California) Series C (Aa3 AA)
5.13%, 10/01/28 2,000 1,995
California Educational Facilities
Authority RB (California Western
School of Law) Series 1998 / (MBIA
Insurance) (Aaa AAA)
5.00%, 10/01/28 2,205 2,186
California Educational Facilities
Financing Authority Revenue
Refunding Bonds (Stanford University
Project) Series 1997M (Aaa AAA)
5.25%, 12/01/26 2,320 2,363
California Health Facilities Finance
Authority Insured Hospital RB (Marshall
Hospital) Series 1992A / (California
Mortgage Insurance) (A+ -)
6.63%, 11/01/22 4,000 4,490
Par Value
------ --------
California Health Facilities Finance
Authority RB (Kaiser Permanente Hospital)
Series 1998A / (FSA Insurance) (Aaa AAA)
5.00%, 06/01/24 $2,500 $2,466
California Health Facilities Finance
Authority RB (Stanford Health Care)
Series 1998B / (AMBAC Insurance)
(AAA AAA)
5.00%, 11/15/28 1,000 982
California Health Facilities Financing
Authority Insured Health Facility RB
(Assoc. of Retarded Citizens)
Series 1991 / (California
Mortgage Insurance) (A+ -)
7.00%, 05/01/21 455 492
California HFA Home Mortgage RB
Series 1994G (Aa2 AA-)
7.20%, 08/01/14 3,000 3,311
California HFA Home Mortgage RB
Series 1995L / (MBIA Insurance) (Aaa AAA)
5.90%, 08/01/17 1,000 1,064
California HFA Insured Hospital Revenue
Refunding Bonds (Children's Hospital
San Diego) / (MBIA Insurance)
Series 1996 (Aaa AAA)
5.38%, 07/01/16 5,180 5,348
5.38%, 07/01/20 3,400 3,472
California HFA M/F Rental Housing RB
Series 1992B (A1 A+)
6.70%, 08/01/15 1,000 1,072
California State Department of Water
Resources RB (Center Valley Project)
Series 1997S (Aa2 AA)
5.00%, 12/01/22 1,200 1,189
California State GO Refunding
Series 1998 (A1 A+)
5.00%, 02/01/16 4,000 4,030
California State Public Works Board
Lease Revenue Refunding Bonds
(Various California State University
Projects) / (AMBAC Insurance)
(Aaa AAA)
5.38%, 10/01/17 200 207
23
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
August 31, 1998
Par Value
------ --------
California State Public Works Board
Lease Revenue Refunding Bonds
(Various California State University
Projects) Series 1992A (Aaa AAA)
5.50%, 06/01/10 $3,000 $ 3,274
California State Rural Water Finance
Authority Public Projects Construction
Notes Series 1998 (d)
4.25%, 03/01/00 5,500 5,547
California Statewide Communities
Development Authority Hospital RB
COP (Cedars-Sinai Medical Center)
Series 1992 (A1 -)
6.50%, 08/01/15 1,250 1,347
California Statewide Communities
Development Authority COP (St. Joseph
Health Systems Obligated Group)
(Aa3 AA)
6.50%, 07/01/15 2,000 2,290
Chico, California Unified School District
Series C / (MBIA Insurance) (Aaa AAA)
6.75%, 06/01/17 500 551
Colton, California Public Financing
Authority Special Tax RB Series 1996 /
(FSA Insurance) (Aaa AAA)
5.45%, 09/01/19 3,020 3,126
Colton, California Public Financing
Tax Allocation RB / (MBIA
Insurance) Series 1998A (Aaa AAA)
5.00%, 08/01/18 2,715 2,712
Contra Costa County, California Refunding
COP (Merrithew Memorial Hospital
Project) Series 1997 / (MBIA Insurance)
(Aaa AAA)
5.38%, 11/01/17 2,180 2,248
East Bay, California Municipal Utility
District Water System RB Series 1998
(Aa3 AA-)
5.25%, 06/01/18 1,895 1,938
5.25%, 06/01/19 2,600 2,658
East Bay, California Municipal Utility
District Water System Revenue Refunding
Bonds Series 1996 / (FGIC Insurance)
(Aaa AAA)
5.00%, 06/01/26 4,800 4,758
Par Value
------ --------
Encina, California Financing Joint
Powers Authority Wastewater Revenue
RefundingBonds Series 1997A /
(AMBAC Insurance) (Aaa AAA)
5.13%, 08/01/14 $3,160 $ 3,251
Fontana, California Special Tax Refunding
Bonds Senior Community Facility
District 2A Series 1998 /
(MBIA Insurance) (Aaa AAA)
4.20%, 09/01/05 1,375 1,392
Fresno, California Health Facility RB
(Holy Cross Health System - St. Agnes
Medical Center) Series 1991 (Aa3 AA)
6.50%, 06/01/02 550 610
Los Angeles County, California Public
Works Financing Authority Lease RB
(Multiple Capital Facilities Project
V-B) / (AMBAC Insurance) (Aaa AAA)
5.20%, 12/01/09 1,680 1,800
Los Angeles County, California Public
Works Financing Authority Lease RB
(Master Refunding Project) / (FSA
Insurance) (Aaa AAA)
5.25%, 03/01/15 1,000 1,032
Los Angeles County, California Public
Works Financing Authority Lease
Revenue Multiple COP (Facilities
Project V) Series 1996A / (AMBAC
Insurance) (Aaa AAA)
5.13%, 06/01/17 2,000 2,025
Los Angeles County, California Public
Works Financing Authority Lease
Revenue Multiple COP (Facilities
Project) Series 1997A / (MBIA
Insurance) (Aaa AAA)
5.25%, 09/01/15 1,070 1,103
Los Angeles County, California Public
Works Financing Authority Lease
Revenue Refunding Bonds Series
1996A / (MBIA Insurance) (Aaa AAA)
5.25%, 09/01/13 2,000 2,085
Los Angeles County, California
Transportation Commission Sales Tax
Revenue Refunding Bonds
Series 1991B (A1 AA-)
6.50%, 07/01/13 555 600
24
<PAGE>
Par Value
------ --------
Los Angeles, California Department of
Airports RB Series 1995A / (FGIC
Insurance) (Aaa AAA)
5.50%, 05/15/10 $ 560 $ 600
Los Angeles, California Department of
Water & Power Electric Plant RB
(Aa3 A+)
6.00%, 01/15/11 865 937
Los Angeles, California Unified School
District Series 1998B /(FGIC Insurance)
(Aaa AAA)
4.30%, 07/01/07 1,750 1,770
Metropolitan Water District of Southern
California Waterworks RB Series 1996C /
(MBIA Insurance) (Aaa AAA)
5.00%, 07/01/27 2,000 1,982
Metropolitan Water District of Southern
California Waterworks RB
Series 1997A (Aa2 AA)
5.00%, 07/01/26 2,500 2,478
Modesto, California Public Financing
Authority Lease RB (Capital Imports
& Refunding Project) / (AMBAC
Insurance) (Aaa AAA)
5.13%, 09/01/20 6,740 6,807
Northern California Power Agency
Multiple Capital Facilities RB
Series A / (MBIA Insurance) (Aaa AAA)
6.50%, 08/01/04 1,425 1,587
Northern California Power Agency
Multiple Capital Facilities RB Series A /
(MBIA Insurance) (- AAA)
6.50%, 08/01/12 1,875 2,072
Northern California Power Agency
Public Power Revenue Refunding
Bonds (Geothermal Project No. 3)
Series A / (AMBAC Insurance)
(- AAA)
5.00%, 07/01/04 1,845 1,946
Oakland, California State Building
Authority Lease RB (Elihu M Harris)
Series A / (AMBAC Insurance) (Aaa AAA)
5.00%, 04/01/23 2,000 1,982
Oceanside, California Building
Authority COP Refunding Bonds
Series 1993A (A3 -)
6.38%, 04/01/12 1,250 1,361
Par Value
------ --------
Orange County, California Community
Facilities District Special Tax RB
(Number 87-4) Series A / (MBIA
Insurance) (Aaa AAA)
5.25%, 08/15/19 $2,000 $ 2,043
Orange County, California Water
District COP (1989 Project) (Aa AA)
6.50%, 08/15/11 1,150 1,205
Riverside County, California Asset
Leasing Corp. RB (Riverside County
Hospital Project) Series B / (MBIA
Insurance) (Aaa AAA)
5.00%, 06/01/19 1,000 999
Riverside County, California Public
Financing Authority Tax Allocation
Bonds (Redevelopment Project A)
(Baa2 BBB-)
5.63%, 10/01/33 4,905 5,015
Sacramento, California Cogeneration
Authority Project RB / (MBIA
Insurance) (- AAA) (d)
5.20%, 07/01/21 1,000 1,004
Sacramento, California Regional Transit
District COP Series 1992A (A1 -)
6.38%, 03/01/05 250 273
Sacramento, California Regional Transit
District Refunding COP (Light Rail
Transportation Project) (A2 A+)
6.75%, 07/01/07 2,000 2,173
Salida, California Area Public Facilities
Financing Agency District Special Tax
Series 1988-1 / (FSA Insurance)
(Aaa AAA)
5.25%, 09/01/28 3,000 3,049
San Bernardino County, California
Transportation Authority Tax Revenue
Series A / (MBIA Insurance) (Aaa AAA)
6.25%, 03/01/10 4,000 4,665
San Bernardino County, California COP
(West Valley Detention Center) /
(MBIA Insurance) (Aaa AAA)
6.50%, 11/01/12 420 464
San Diego, California Public Facilities
Financing Authority Sewer RB / (FGIC
Insurance) (Aaa AAA)
5.25%, 05/15/22 2,200 2,244
5.00%, 05/15/25 4,045 4,010
25
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
August 31, 1998
Par Value
------ --------
San Francisco, California Bay Area
Rapid Transit District Sales Tax RB
Series 1995 / (FGIC Insurance)
(Aaa AAA)
5.50%, 07/01/15 $1,500 $ 1,573
San Francisco, California City & County
Airports RB 2nd Series, Issue 11 /
(FGIC Insurance) (Aaa AAA)
6.20%, 05/01/19 2,000 2,173
5.63%, 05/01/21 2,000 2,095
San Francisco, California Downtown
Parking Corp. RB (- A)
6.65%, 04/01/18 500 547
Santa Clara County, California Financing
Authority Lease RB (VMC Facility
Replacement Project) Series 1994A /
(AMBAC Insurance) (Aaa AAA)
7.75%, 11/15/10 1,460 1,911
6.88%, 11/15/14 2,000 2,345
Santa Clara County, California Financing
Authority Lease Revenue Refunding
Bonds Series A / (AMBAC Insurance)
(Aaa AAA)
5.00%, 11/15/17 3,500 3,513
Santa Clara, California Redevelopment
Agency Tax Allocation Revenue
Refunding Bonds (Bayshore North
Project) / (AMBAC Insurance)
(Aaa AAA)
7.00%, 07/01/10 1,500 1,826
South Gate, California Public Financing
Authority Tax Allocation Revenue
Housing Bond (Redevelopment Authority
Project No. 1) Series A (MBIA Insurance)
(Aaa AAA)
5.00%, 09/01/19 1,415 1,413
Stockton, California Revenue COP
(Wastewater Systems Project) Series A /
(MBIA Insurance) (Aaa AAA)
5.20%, 09/01/29 3,500 3,531
Temecula, California Community
Services District COP (Community
Recreation Center Project)
Series 1992 (- A)
7.13%, 10/01/12 1,000 1,110
Tri City, California Hospital District RB
Series 1996A / (MBIA Insurance)
(Aaa AAA)
5.63%, 02/15/17 1,000 1,059
Par Value
------ --------
University of California RB (University
of California Hospital Medical Center
Project) / (AMBAC Insurance)
(Aaa AAA)
5.75%, 07/01/24 $2,000 $ 2,130
Vallejo, California Revenue Refunding
Bonds Water Import Series A /
(FSA Insurance) (Aaa AAA)
5.70%, 05/01/16 2,000 2,163
West Basin County, California Municipal
Water District COP Revenue Refunding
Bonds Series 1997A / (AMBAC
Insurance) (Aaa AAA)
5.50%, 08/01/17 500 526
5.50%, 08/01/22 1,000 1,046
Westminster, California Public Financing
COP (1994 Civic Center &
Street Improvement Project) (A- -)
7.00%, 06/01/19 3,325 3,658
--------
TOTAL MUNICIPAL BONDS
(Cost $165,211) 175,644
--------
VARIABLE RATE OBLIGATIONS -- 9.9% (B)
California Economic Development
Finance Authority (California
Independent System Operator)
Series B / (Bank of America NT &
SA LOC)(Aa2 Aa-)
3.20%, 09/01/98 2,000 2,000
California Pollution Control Financing
Authority Solid Waste Disposal RB
(Shell Martinez Refining) Series A /
(Comerica Bank LOC) (Aa1 AAA)
3.20%, 09/01/98 2,000 2,000
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986A (National
Westminster LOC) (A1 A+)
3.80%, 09/01/98 3,000 3,000
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986B (National
Westminster LOC) (A1 A+)
3.80%, 09/01/98 1,600 1,600
26
<PAGE>
Par Value
------ --------
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986C (National
Westminster LOC) (A1 A+)
3.80%, 09/01/98 $1,300 $ 1,300
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986D (National
Westminster LOC) (A1 A+)
3.80%, 09/01/98 2,800 2,800
California Pollution Control Financing
Authority RB (Shell Oil Co. Project)
(Aa1 AAA)
3.10%, 09/01/98 500 500
California Statewide Communities
Development Authority COP
(Northern California Retired Officers
Community Project) Series 1996 (Aa1 -)
3.10%, 09/01/98 3,000 3,000
Irvine Ranch, California Improvement
Bond Act 1915 RB (District Number
1997-16) / (Societe Generale LOC)
(Aa3 AA-)
3.15%, 09/01/98 200 200
Irvine Ranch, California Water District
Consolidated Revenue Refunding
Bonds Series 1985B / (Landesbank
Hessen-Thuringen Girozentrale LOC)
(- AAA)
3.00%, 09/01/98 2,300 2,300
Irvine Ranch, California Water District
COP (Capital Improvement Project) /
(Toronto Dominion LOC) (Aa2 -)
3.00%, 09/01/98 100 100
--------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $18,800) 18,800
--------
Par Value
------ --------
SHORT-TERM INVESTMENTS -- 0.1% (c)
Provident Institutional Funds -
California Money Fund Portfolio
2.61% $ 141 $ 141
--------
TOTAL SHORT-TERM INVESTMENTS
(Cost $141) 141
--------
TOTAL INVESTMENTS -- 102.3%
(Cost $184,152) 194,585
--------
OTHER ASSETS AND LIABILITIES -- (2.3%)
Other Assets 2,619
Liabilities (7,007)
--------
(4,388)
--------
NET ASSETS -- 100.0% $190,197
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO
FINANCIAL STATEMENTS.
27
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
August 31, 1998
Parenthetical disclosures that follow each security represent independent bond
ratings, where available, as provided by Moody Investors Service, Inc. and
Standard & Poor's Ratings Group that were in effect on the report date.
(a) Interest rates represent coupon rate of security.
(b) Variable rate obligations -- Interest rates vary periodically based on
current market rates. Rates shown are the effective rates as of the report
date. Dates shown represent the later of the demand date or next interest
rate change date. For variable rate obligations without demand features, the
next interest reset date is shown. All dates shown are considered the
maturity date for financial reporting purposes.
(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.
PORTFOLIO ABBREVIATIONS
AMBAC American Municipal Bond Assurance Corp.
COP Certificates of Participation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
GIC Guaranteed Investment Contract
GO General Obligation
HFA Housing Finance Agency
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
M/F Multi-Family
RB Revenue Bond
TRAN Tax and Revenue Anticipation Notes
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1998
<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:$95,737, $184,152, respectively) $97,339 $194,585
Receivables:
Interest 1,147 2,506
Fund shares sold 558 112
Prepaid expenses 1 1
------- --------
Total assets 99,045 197,204
------- --------
LIABILITIES
Payables:
Dividends 59 138
Investments purchased 2,524 6,547
Fund shares redeemed 422 142
Investment advisory and administration fees 70 119
Transfer agency and shareholder service fees 32 8
Other liabilities 44 53
------- --------
Total liabilities 3,151 7,007
------- --------
Net assets applicable to outstanding shares $95,894 $190,197
======= ========
NET ASSETS CONSIST OF:
Paid-in-capital $95,105 $180,379
Distributions in excess of net investment income (25) (61)
Accumulated net realized loss on investments sold (788) (554)
Net unrealized appreciation on investments 1,602 10,433
------- --------
$95,894 $190,197
======= ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 9,345 16,510
Net asset value, offering and redemption price per share $10.26 $11.52
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the year ended August 31, 1998
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------- -----------
<S> <C> <C>
Interest income $3,213 $ 7,970
------ -------
Expenses:
Investment advisory and administration fees 292 618
Transfer agency and shareholder service fees 178 377
Custodian and portfolio accounting fees 50 87
Registration fees 15 23
Professional fees 4 --
Shareholder reports 8 22
Trustees' fees 6 9
Insurance and other expenses 11 12
------ -------
564 1,148
Less:expenses reduced (see Note 4) (215) (409)
------ -------
Total expenses incurred by Fund 349 739
------ -------
Net investment income 2,864 7,231
------ -------
Net realized gain on investments sold 9 695
Net unrealized appreciation on investments 856 4,874
------ -------
Net gain on investments 865 5,569
------ -------
Increase in net assets resulting from operations $3,729 $12,800
------ -------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
-------------------- --------------------
Year ended August 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,864 $ 2,151 $ 7,231 $ 5,810
Net realized gain on investments sold 9 51 695 1,036
Net unrealized appreciation on investments 856 522 4,874 3,626
-------- -------- -------- --------
Increase in net assets resulting from operations 3,729 2,724 12,800 10,472
-------- -------- -------- --------
Dividends to shareholders from net investment income (2,906) (2,150) (7,338) (5,809)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 60,105 27,426 83,165 38,540
Net asset value of shares issued in reinvestment of
dividends 2,209 1,635 4,672 3,624
Less payments for shares redeemed (26,119) (16,547) (28,386) (23,159)
-------- -------- -------- --------
Increase in net assets from capital share transactions 36,195 12,514 59,451 19,005
-------- -------- -------- --------
Total increase in net assets 37,018 13,088 64,913 23,668
Net assets:
Beginning of period 58,876 45,788 125,284 101,616
-------- -------- -------- --------
End of period (including distributions in excess of net
investment income and undistributed net investment
income of ($25), $12, ($61) and $37, respectively) $ 95,894 $ 58,876 $190,197 $125,284
======== ======== ======== ========
Number of Fund shares:
Sold 5,893 2,711 7,311 3,532
Reinvested 217 162 411 333
Redeemed (2,562) (1,638) (2,503) (2,132)
-------- -------- -------- --------
Net increase in shares outstanding 3,548 1,235 5,219 1,733
Shares outstanding:
Beginning of period 5,797 4,562 11,291 9,558
-------- -------- -------- --------
End of period 9,345 5,797 16,510 11,291
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
--------------------------------------- -------------------------------------------
Net
Fiscal Net Asset Realized & Total Dividends Dividends Net Asset
Period Value At Net Unrealized from from Net from Realized Value at
Ended Beginning Investment Gain (Loss) on Investment Investment Gain on Total End of
August 31, of Period Income Investments Operations Income Investments Distributions Period
- ---------- --------- ---------- -------------- ---------- ---------- -------------- ------------- ----------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $10.16 $0.41 $ 0.11 $ 0.52 $(0.42)1 $ -- $(0.42) $10.26
1997 $10.04 $0.43 $ 0.12 $ 0.55 $(0.43) $ -- $(0.43) $10.16
1996 $10.06 $0.43 $(0.02) $ 0.41 $(0.43) $ -- $(0.43) $10.04
1995 $ 9.89 $0.42 $ 0.17 $ 0.59 $(0.42) $ -- $(0.42) $10.06
1994 $10.13 $0.37 $(0.24) $ 0.13 $(0.37) $ -- $(0.37) $ 9.89
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
1998 $11.10 $0.54 $ 0.43 $ 0.97 $(0.55)1 $ -- $(0.55) $11.52
1997 $10.63 $0.56 $ 0.47 $ 1.03 $(0.56) $ -- $(0.56) $11.10
1996 $10.53 $0.57 $ 0.10 $ 0.67 $(0.57) $ -- $(0.57) $10.63
1995 $10.40 $0.56 $ 0.13 $ 0.69 $(0.56) $ -- $(0.56) $10.53
1994 $11.26 $0.56 $(0.74) $(0.18) $(0.56) $(0.12) $(0.68) $10.40
<FN>
(DAGGER) 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 Funds' expense and net investment income
ratios would have been:
</FN>
</TABLE>
<TABLE>
<CAPTION>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------- -----------------------------------------------
Ratio of Ratio of Net Ratio of Ratio of Net
Expenses Investment Income Expenses Investment Income
Fiscal Period to Average to Average Fiscal Period to Average to Average
Ended Net Assets Net Assets Ended Net Assets Net Assets
August 31, (%) (%) August 31, (%) (%)
- -------------- ---------- ----------------- ------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
1998 0.79 3.72 1998 0.76 4.52
1997 0.89 3.81 1997 0.82 4.84
1996 0.87 3.85 1996 0.82 4.97
1995 0.84 3.95 1995 0.81 5.31
1994 0.86 3.31 1994 0.80 4.92
<FN>
1 The amounts shown include certain reclassifications related to book to tax
differences (see Note 2 of Notes to Financial Statements).
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Fiscal Total Expenses Income Portfolio
Period Return Net Assets to Average to Average Turnover
Ended (not annualized) End of Period Net Assets(DAGGER) Net Assets(DAGGER) Rate
August 31, (%) (000's) (%) (%) (%)
- ---------- ---------------- ------------- ------------------ ------------------ ---------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
<S> <C> <C> <C> <C> <C>
1998 5.19 $ 95,894 0.49 4.02 8
1997 5.54 $ 58,876 0.49 4.21 23
1996 4.11 $ 45,788 0.49 4.23 20
1995 6.17 $ 40,639 0.50 4.29 62
1994 1.29 $ 48,649 0.48 3.69 35
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
1998 8.96 $190,197 0.49 4.79 28
1997 9.95 $125,284 0.49 5.17 35
1996 6.43 $101,616 0.49 5.30 36
1995 6.98 $ 90,045 0.58 5.54 46
1994 (1.70) $106,432 0.60 5.12 48
</TABLE>
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1998
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 investment management 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(REGISTRATION MARK), Schwab Short-Term Bond Market Index Fund, Schwab Total
Bond Market Index Fund, Schwab Short/Intermediate Tax-Free Bond Fund and Schwab
Long-Term Tax-Free Bond Fund. The assets of each series are segregated and
accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
SECURITY VALUATION -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities with 60 days or less to maturity are stated at amortized
cost, which approximates market value.
SECURITY TRANSACTIONS, INTEREST INCOME AND REALIZED GAINS (LOSSES) -- Security
transactions are accounted for on a trade date basis (date the order to buy or
sell is executed). Interest income is accrued on a daily basis and includes
accretion of market discount and amortization of market premium. 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. Realized gains and losses from security transactions are
determined on an identified cost basis.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Each Fund declares a dividend
daily, substantially equal to its net investment income for that day, payable
monthly. Distributions from net realized capital gains, if any, are recorded on
ex-dividend date, payable annually on a calendar year basis.
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 all of its 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.
34
<PAGE>
All distributions paid by the Funds from net investment income for the year
ended August 31, 1998 qualify as exempt interest dividends for federal income
tax purposes.
Net unrealized appreciation (depreciation) at August 31, 1998, (for financial
reporting and federal income tax purposes) was as follows:
<TABLE>
<CAPTION>
Net Unrealized Appreciated Depreciated
Appreciation Securities Securities
-------------- ----------- -----------
<S> <C> <C> <C>
Schwab California Short/Intermediate Tax-Free Bond Fund $ 1,602,000 $ 1,602,000 $--
Schwab California Long-Term Tax-Free Bond Fund $10,433,000 $10,433,000 $--
</TABLE>
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1998, the unused capital loss
carryforwards for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
Expiring in:
<S> <C> <C>
08/31/03 $ 92,000 --
08/31/04 696,000 $593,000
-------- --------
Total capital loss carryforwards $788,000 $593,000
======== ========
</TABLE>
RECLASSIFICATIONS -- Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial and tax reporting. Accordingly, permanent book/tax
differences of $5,000 and $9,000 for the Schwab California Short/Intermediate
Tax-Free Bond Fund and Schwab California Long-Term Tax-Free Bond Fund,
respectively, were reclassified from paid-in-capital to undistributed net
investment income. These reclassifications have no effect on net assets or net
asset values per share.
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 year ended August 31, 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% 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, 1998 (see
Note 4).
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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, 1998, 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 $15,000
related to the Trust's unaffiliated trustees.
INTERFUND TRANSACTIONS -- During the year ended August 31, 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, aggregated
$30,860,000 and $58,900,000 for the Schwab California Short/Intermediate
Tax-Free Bond Fund and Schwab California Long-Term Tax-Free Bond Fund,
respectively.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab guarantee that, through at least October 31,
1998, each Fund's total operating expenses will not exceed 0.49% of the Fund's
average daily net assets after reductions. For the purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses and
taxes.
During the year ended August 31, 1998, the total of such fees reduced by the
Investment Manager was $215,000 for the Schwab California Short/Intermediate
Tax-Free Bond Fund, and $409,000 for the Schwab California Long-Term Tax-Free
Bond Fund.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1998, were as follows:
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
Purchases $35,279,000 $89,488,000
Proceeds of sales and maturities $ 5,117,000 $39,968,000
36
<PAGE>
To the Board of Trustees and Shareholders of
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 Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund (two portfolios of Schwab Investments, hereafter referred to as the
"Funds") at August 31, 1998, and 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 each of the five
years in the period then ended, in conformity with generally accepted accounting
principles.These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
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 audits 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, 1998, by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Francisco, CA
October 5, 1998
37
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THE SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help you meet your
investment goals. 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
market funds.
Please call 1-800-435-4000 for a free prospectus and brochure for any of these
SchwabFunds.
This report must be preceded or accompanied by a current prospectus.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio(1)
Schwab MarketTrack Growth Portfolio(1)
Schwab MarketTrack Balanced Portfolio(1)
Schwab MarketTrack Conservative Portfolio(1)
Schwab MarketManager Growth Portfolio(2)
Schwab MarketManager Balanced Portfolio(2)
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 Small Cap Portfolio(2)
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio(2)
SCHWAB BOND FUNDS
Schwab Total Bond Market Index Fund(3)
Schwab Short-Term Bond Market Index Fund(3)
Schwab Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds(4) 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-
(1)Formerly the Schwab Asset Director-Registered Trademark- Funds.
(2)Formerly the Schwab OneSource-TM- Portfolios.
(3)Formerly the Schwab Government Bond Funds.
(4)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>
SCHWABFUNDS
FAMILY
101 Montgomery Street
San Francisco, California 94104
INVESTMENT ADVISOR
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
(COPYRIGHT) 1998 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. CRS 20375 (20+9-3791) MKT3655(10/98)
