SCHWABFUNDS(REGISTRATION MARK)
SCHWAB
TAX-FREE
BOND FUNDS
Annual Report
August 31, 1998
<PAGE>
SCHWAB 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 Short/Intermediate Tax-Free Bond Fund
- Schwab 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 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 Short/Intermediate Tax-Free Bond Fund invests primarily in debt
securities issued by or on behalf of the states, territories and possessions of
the United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities. Under normal market conditions, the Fund seeks
to maintain a dollar-weighted average portfolio maturity of between two and five
years.
The Schwab Long-Term Tax-Free Bond Fund invests primarily in debt securities
issued by or on behalf of the states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities. Under normal market conditions, the Fund seeks to
maintain a dollar-weighted average portfolio maturity of 10 years or more.
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 Short/Intermediate Tax-Free Bond
Fund 10
- ----------------------------------------------------
Schwab Long-Term Tax-Free Bond Fund 12
- ----------------------------------------------------
Dividends Paid 14
- ----------------------------------------------------
Fund Discussion 15
- ----------------------------------------------------
Portfolio Highlights 17
- ----------------------------------------------------
Financial Statements and Notes 18
- ----------------------------------------------------
</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
MONTHLY CONSUMER PRICE INDEX QUARTERLY EMPLOYMENT COST INDEX
<S> <C> <C>
Jan-90 5.2% 5.5%
Feb-90 5.3% 5.5%
Mar-90 5.2% 5.5%
Apr-90 4.7% 5.4%
May-90 4.4% 5.4%
Jun-90 4.7% 5.4%
Jul-90 4.8% 5.2%
Aug-90 5.6% 5.2%
Sep-90 6.2% 5.2%
Oct-90 6.3% 4.9%
Nov-90 6.3% 4.9%
Dec-90 6.1% 4.9%
Jan-91 5.7% 4.6%
Feb-91 5.3% 4.6%
Mar-91 4.9% 4.6%
Apr-91 4.9% 4.6%
May-91 5.0% 4.6%
Jun-91 4.7% 4.6%
Jul-91 4.4% 4.3%
Aug-91 3.8% 4.3%
Sep-91 3.4% 4.3%
Oct-91 2.9% 4.3%
Nov-91 3.0% 4.3%
Dec-91 3.1% 4.3%
Jan-92 2.6% 4.0%
Feb-92 2.8% 4.0%
Mar-92 3.2% 4.0%
Apr-92 3.2% 3.6%
May-92 3.0% 3.6%
Jun-92 3.1% 3.6%
Jul-92 3.2% 3.5%
Aug-92 3.1% 3.5%
Sep-92 3.0% 3.5%
Oct-92 3.2% 3.5%
Nov-92 3.0% 3.5%
Dec-92 2.9% 3.5%
Jan-93 3.3% 3.5%
Feb-93 3.2% 3.5%
Mar-93 3.1% 3.5%
Apr-93 3.2% 3.6%
May-93 3.2% 3.6%
Jun-93 3.0% 3.6%
Jul-93 2.8% 3.6%
Aug-93 2.8% 3.6%
Sep-93 2.7% 3.6%
Oct-93 2.8% 3.5%
Nov-93 2.7% 3.5%
Dec-93 2.7% 3.5%
Jan-94 2.5% 3.2%
Feb-94 2.5% 3.2%
Mar-94 2.5% 3.2%
Apr-94 2.4% 3.2%
May-94 2.3% 3.2%
Jun-94 2.5% 3.2%
Jul-94 2.8% 3.2%
Aug-94 2.9% 3.2%
Sep-94 3.0% 3.2%
Oct-94 2.6% 3.0%
Nov-94 2.7% 3.0%
Dec-94 2.7% 3.0%
Jan-95 2.8% 2.9%
Feb-95 2.9% 2.9%
Mar-95 2.9% 2.9%
Apr-95 3.1% 2.9%
May-95 3.2% 2.9%
Jun-95 3.0% 2.9%
Jul-95 2.8% 2.7%
Aug-95 2.6% 2.7%
Sep-95 2.5% 2.7%
Oct-95 2.8% 2.7%
Nov-95 2.6% 2.7%
Dec-95 2.5% 2.7%
Jan-96 2.7% 2.8%
Feb-96 2.7% 2.8%
Mar-96 2.8% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.8% 2.9%
Jul-96 3.0% 2.8%
Aug-96 2.9% 2.8%
Sep-96 3.0% 2.8%
Oct-96 3.0% 2.9%
Nov-96 3.3% 2.9%
Dec-96 3.3% 2.9%
Jan-97 3.0% 2.9%
Feb-97 3.0% 2.9%
Mar-97 2.8% 2.9%
Apr-97 2.5% 2.8%
May-97 2.2% 2.8%
Jun-97 2.3% 2.8%
Jul-97 2.2% 3.0%
Aug-97 2.2% 3.0%
Sep-97 2.2% 3.0%
Oct-97 2.1% 3.3%
Nov-97 1.8% 3.3%
Dec-97 1.7% 3.3%
Jan-98 1.6% 3.3%
Feb-98 1.4% 3.3%
Mar-98 1.4% 3.3%
Apr-98 1.4% 3.5%
May-98 1.7% 3.5%
Jun-98 1.7% 3.5%
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 AGGREGATE
S&P 500-R- INDEX SMALL-CAP INDEX-R- INTERNATIONAL 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 MUNI BOND YIELDS FIVE-YEAR AAA GO 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 federal income tax rate of
39.6%. Shareholder tax rates may be different.
<TABLE>
<CAPTION>
TAXABLE-
EQUIVALENT
30-DAY 30-DAY SEC
SEC YIELD YIELD
<S> <C> <C>
- -----------------------------------------------------------------------------
Schwab Short/Intermediate Tax-Free Bond Fund 3.71% 6.14%
- -----------------------------------------------------------------------------
Schwab Long-Term Tax-Free Bond Fund 4.68% 7.75%
- -----------------------------------------------------------------------------
</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 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 SHORT/INTERMEDIATE
TAX-FREE BOND FUND(1) 5.17% 4.29% 4.54%
- --------------------------------------------------------------------------------
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 5.07%, 4.37% and 4.46%,
respectively. The 30-day SEC yield as of 6/30/98 was 3.82%.(2)
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB 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 $9,993
5/31/93 $10,038 $10,020
6/30/93 $10,129 $10,085
7/31/93 $10,151 $10,090
8/31/93 $10,283 $10,184
9/30/93 $10,344 $10,228
10/31/93 $10,366 $10,250
11/30/93 $10,326 $10,237
12/31/93 $10,462 $10,344
1/31/94 $10,567 $10,428
2/28/94 $10,412 $10,331
3/31/94 $10,218 $10,206
4/30/94 $10,280 $10,267
5/31/94 $10,323 $10,315
6/30/94 $10,312 $10,318
7/31/94 $10,407 $10,403
8/31/94 $10,429 $10,440
9/30/94 $10,377 $10,414
10/31/94 $10,317 $10,389
11/30/94 $10,245 $10,370
12/31/94 $10,346 $10,415
1/31/95 $10,445 $10,501
2/28/95 $10,563 $10,612
3/31/95 $10,655 $10,707
4/30/95 $10,691 $10,743
5/31/95 $10,881 $10,908
6/30/95 $10,884 $10,934
7/31/95 $10,987 $11,050
8/31/95 $11,079 $11,136
9/30/95 $11,115 $11,167
10/31/95 $11,175 $11,221
11/30/95 $11,255 $11,293
12/31/95 $11,305 $11,340
1/31/96 $11,383 $11,429
2/29/96 $11,364 $11,431
3/31/96 $11,313 $11,403
4/30/96 $11,306 $11,417
5/31/96 $11,312 $11,427
6/30/96 $11,371 $11,496
7/31/96 $11,443 $11,559
8/31/96 $11,447 $11,577
9/30/96 $11,519 $11,647
10/31/96 $11,605 $11,729
11/30/96 $11,712 $11,838
12/31/96 $11,705 $11,844
1/31/97 $11,742 $11,896
2/28/97 $11,801 $11,954
3/31/97 $11,737 $11,892
4/30/97 $11,776 $11,943
5/31/97 $11,876 $12,040
6/30/97 $11,938 $12,111
7/31/97 $12,096 $12,255
8/31/97 $12,065 $12,230
9/30/97 $12,141 $12,319
10/31/97 $12,194 $12,373
11/30/97 $12,222 $12,409
12/31/97 $12,310 $12,493
1/31/98 $12,384 $12,575
2/28/98 $12,397 $12,602
3/31/98 $12,417 $12,622
4/30/98 $12,386 $12,604
5/31/98 $12,502 $12,722
6/30/98 $12,543 $12,765
7/31/98 $12,574 $12,811
8/31/98 $12,689 $12,935
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
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 4.76%, 3.86% and
4.07%, respectively. The 30-day SEC yield as of 8/31/98 would have been
3.25%.
(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 4.49%, 3.90% and
3.96%, respectively. The 30-day SEC yield as of 6/30/98 would have been
3.35%.
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 Short/Intermediate Tax-Free Bond Fund invests primarily in 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 54.6%
AA 21.8%
A 8.6%
Short-term Investments 7.5%
Short-term Ratings 4.5%
BAA 1.5%
BBB 1.5%
</TABLE>
(1)These percentages do not take into account other assets and liabilities.
11
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/98
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS SINCE INCEPTION
(9/11/92)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND(1) 9.81% 6.21% 7.11%
- --------------------------------------------------------------------------------
Lehman Brothers General Obligation
Municipal Bond Index 8.65% 6.38% 7.11%
- --------------------------------------------------------------------------------
</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 9.67%, 6.35% and 6.99%,
respectively. The 30-day SEC yield as of 6/30/98 was 4.77%.(2)
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB LONG-TERM LEHMAN GENERAL
TAX-FREE BOND FUND MUNICIPAL BOND INDEX
<S> <C> <C>
9/11/92 $10,000 $10,000
9/30/92 $9,867 $9,923
10/31/92 $9,515 $9,826
11/30/92 $9,912 $10,002
12/31/92 $10,092 $10,104
1/31/93 $10,240 $10,221
2/28/93 $10,682 $10,591
3/31/93 $10,484 $10,479
4/30/93 $10,632 $10,585
5/31/93 $10,690 $10,644
6/30/93 $10,883 $10,822
7/31/93 $10,879 $10,836
8/31/93 $11,157 $11,062
9/30/93 $11,298 $11,188
10/31/93 $11,315 $11,209
11/30/93 $11,201 $11,111
12/31/93 $11,465 $11,345
1/31/94 $11,588 $11,475
2/28/94 $11,274 $11,177
3/31/94 $10,791 $10,722
4/30/94 $10,858 $10,813
5/31/94 $10,970 $10,907
6/30/94 $10,870 $10,840
7/31/94 $11,085 $11,044
8/31/94 $11,109 $11,083
9/30/94 $10,921 $10,920
10/31/94 $10,657 $10,726
11/30/94 $10,381 $10,532
12/31/94 $10,658 $10,764
1/31/95 $11,050 $11,072
2/28/95 $11,381 $11,394
3/31/95 $11,514 $11,524
4/30/95 $11,483 $11,538
5/31/95 $11,918 $11,906
6/30/95 $11,735 $11,802
7/31/95 $11,836 $11,914
8/31/95 $11,971 $12,065
9/30/95 $12,056 $12,141
10/31/95 $12,250 $12,317
11/30/95 $12,443 $12,521
12/31/95 $12,591 $12,642
1/31/96 $12,640 $12,738
2/29/96 $12,520 $12,651
3/31/96 $12,366 $12,489
4/30/96 $12,319 $12,454
5/31/96 $12,311 $12,449
6/30/96 $12,484 $12,585
7/31/96 $12,599 $12,699
8/31/96 $12,553 $12,697
9/30/96 $12,780 $12,875
10/31/96 $12,948 $13,020
11/30/96 $13,188 $13,258
12/31/96 $13,117 $13,203
1/31/97 $13,097 $13,228
2/28/97 $13,223 $13,350
3/31/97 $12,987 $13,172
4/30/97 $13,146 $13,283
5/31/97 $13,358 $13,482
6/30/97 $13,502 $13,626
7/31/97 $13,933 $14,004
8/31/97 $13,728 $13,872
9/30/97 $13,927 $14,037
10/31/97 $14,025 $14,127
11/30/97 $14,146 $14,210
12/31/97 $14,408 $14,418
1/31/98 $14,556 $14,566
2/28/98 $14,529 $14,571
3/31/98 $14,565 $14,584
4/30/98 $14,488 $14,518
5/31/98 $14,750 $14,747
6/30/98 $14,806 $14,805
7/31/98 $14,853 $14,842
8/31/98 $15,074 $15,072
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab 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 9.36%, 5.73% and
6.56%, respectively. The 30-day SEC yield as of 8/31/98 would have been
4.26%.
(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 9.11%, 5.86% and
6.43%, respectively. The 30-day SEC yield as of 6/30/98 would have been
4.34%.
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 Long-Term Tax-Free Bond Fund invests primarily in 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 57.9%
AA 23.7%
Short-term Investments 12.5%
A 5.9%
</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 TAX-FREE BOND FUNDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INCOME DIVIDENDS PER SHARE FISCAL YEAR
<S> <C> <C> <C> <C> <C> <C> <C>
1992* 1993** 1994+ 1995+ 1996+ 1997+ 1998+
Schwab Short/Intermediate Tax-Free Bond Fund $0.13 $0.37 $0.40 $0.41 $0.41 0.42
Schwab Long-Term Tax-Free Bond Fund $0.17 $0.36 $0.52 $0.53 $0.52 $0.53 0.53
</TABLE>
* Period from inception (9/11/92) through 12/31/91.
** Period from inception (4/21/93) through 8/31/93 for Schwab Short/Intermediate
Tax-Free Bond Fund and for the eight-month period ended 8/31/93 for Schwab
Long-Term Tax-Free Bond Fund.
+ For the 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 illustrated 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. Crossover 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 SHORT/INTERMEDIATE TAX-FREE BOND FUND achieved a total return of
5.17% for the 12-month reporting period ended August 31, 1998. This return came
from a combination of tax-free dividend income of 4.19% 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 3.89% at the beginning of the period to 3.71% at the end
of the period.
The SCHWAB LONG-TERM TAX-FREE BOND FUND achieved a total return of 9.81% for the
12-month reporting period ended August 31, 1998. This return came from a
combination of tax-free dividend income of 5.25% and an increase in the Fund's
NAV of 4.56%. The NAV increase was a result of the Fund's declining yield, which
fell from 5.02% at the beginning of the period to 4.68% at the end of the
period.
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
15
<PAGE>
FUND DISCUSSION (continued)
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 SHORT/INTERMEDIATE
TAX-FREE BOND FUND maintained an average maturity throughout the reporting
period in a relatively narrow range from approximately 3.10 to 3.98 years. The
Fund's weighted average maturity at the end of the one-year reporting period was
3.56 years, up slightly from 3.46 years at the beginning of the period.
The SCHWAB LONG-TERM TAX-FREE BOND FUND maintained its weighted average maturity
within a range from approximately 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 18.07 years, down from 19.96 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 invest-ment, 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 RETURN HIGHEST ANNUAL RETURN LOWEST ANNUAL 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>
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.
(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>
PORTFOLIO HIGHLIGHTS
SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND
ASSETS
<TABLE>
<S> <C>
- ------------------------------------------------
Total net assets as of 8/31/97 (000s) $ 54,397
- ------------------------------------------------
Total net assets as of 8/31/98 (000s) $ 68,281
- ------------------------------------------------
Percentage growth over reporting
period 25.5%
- ------------------------------------------------
</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 $ 5,032 7.5% 7.5%
- --------------------------------------------------------
7-36 months 31,048 46.2% 53.7%
- --------------------------------------------------------
37-60 months 14,943 22.2% 75.9%
- --------------------------------------------------------
More than
60 months 16,227 24.1% 100.0%
- --------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY: 3.56 years
SCHWAB LONG-TERM
TAX-FREE BOND FUND
ASSETS
<TABLE>
<S> <C>
- ------------------------------------------------
Total net assets as of 8/31/97 (000s) $ 46,767
- ------------------------------------------------
Total net assets as of 8/31/98 (000s) $ 69,925
- ------------------------------------------------
Percentage growth over reporting
period 49.5%
- ------------------------------------------------
</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 $ 8,679 12.5% 12.5%
- ------------------------------------------------------------
2-10 years 2,458 3.5% 16.0%
- ------------------------------------------------------------
11-20 years 29,591 42.7% 58.7%
- ------------------------------------------------------------
21-30 years 23,034 33.3% 92.0%
- ------------------------------------------------------------
More than
30 years 5,507 8.0% 100.0%
- ------------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY: 18.07 years
17
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1998
Par Value
------- -------
MUNICIPAL BONDS -- 91.1% (a)
ALABAMA -- 1.6%
Birmingham, Alabama Special Care
Facilities Hospital Finance Authority
RB (Daughters of Charity National
Health System - St. Vincent's Hospital
& Providence) Series 1995 (Aa2 AA)
7.00%, 11/01/01 $ 1,000 $ 1,090
-------
ALASKA -- 1.7%
Anchorage, Alaska Refunding School
Bonds Series 1993A / (MBIA
Insurance) (Aaa AAA)
5.10%, 08/01/99 1,145 1,161
-------
ARIZONA -- 6.6%
Maricopa County, Arizona Unified
School District No. 93 (Cave Creek
Project) Series 1997A / (FGIC
Insurance) (Aaa AAA)
5.00%, 07/01/03 2,325 2,435
Phoenix, Arizona Civic Improvement
Corp. RB (Senior Lien Airport Project)
(Aa2 AA+)
5.00%, 07/01/04 1,000 1,047
Phoenix, Arizona Civic Improvement
Corp. Wastewater Systems Lease RB
Series 1993 (Aa3 A)
5.10%, 07/01/99 1,005 1,018
-------
4,500
-------
COLORADO -- 1.5%
Superior, Colorado Metropolitan
Revenue Refunding Bonds
(District No. 2) / (Banque Nationale
de Paris LOC) (- A+)
4.63%, 12/01/13 1,000 1,000
-------
FLORIDA -- 2.0%
Orange County, Florida COP Series A /
(MBIA Insurance) (Aaa -)
4.80%, 08/01/02 1,300 1,344
-------
Par Value
------- -------
GEORGIA -- 3.2%
Georgia Private Colleges & University
Facilities Authority RB (Emory
University Project) Series 1992C
(Aa1 AA)
6.00%, 10/01/05 $ 2,000 $ 2,177
-------
ILLINOIS -- 1.7%
Illinois Health Facility Authority RB
(OSF Healthcare System)
Series 1993 (A1 A+)
5.13%, 11/15/00 1,145 1,171
-------
INDIANA -- 1.7%
Monroe County, Indiana Industrial
Hospital Authority Revenue
Refunding Bonds (Bloomington
Hospital Project) / (MBIA Insurance)
(Aaa -)
4.60%, 05/01/04 1,105 1,126
-------
IOWA -- 3.2%
Black Hawk County, Iowa Hospital
Facilities RB (Allen Memorial Hospital)
Series 1990 / (AMBAC Insurance &
Escrowed to Maturity with Government
Securities) (Aaa -)
7.38%, 02/01/01 2,000 2,205
-------
KENTUCKY -- 4.0%
Kentucky Housing Corp. RB
Series 1993B / (Multiple Credit
Enhancements) (Aaa AAA)
4.45%, 07/01/00 1,000 1,012
Kentucky State Property & Buildings
Commission Revenue Refunding
Bonds (Project 55) (A2 A+)
4.15%, 09/01/99 1,735 1,747
-------
2,759
-------
LOUISIANA -- 2.4%
New Orleans, Louisiana RB Series B /
(FSA Insurance) (Aaa AAA)
4.50%, 12/01/05 1,600 1,634
-------
18
<PAGE>
Par Value
------- -------
MARYLAND -- 4.5%
Washington, Maryland Suburban
Sanitation District Sewage Disposal
Revenue Refunding Bonds
(Montgomery & Prince George
Counties) (Aa1 AA)
6.00%, 11/01/99 $ 3,000 $ 3,090
-------
MASSACHUSETTS -- 4.6%
Massachusetts Municipal Wholesale
Electric Co. Power Supply Systems RB
Series 1992E / (AMBAC Insurance)
(Aaa AAA)
5.50%, 07/01/00 2,000 2,060
Massachusetts State Water Reserves
Authority RB Series A /
(FSA Insurance) (Aaa AAA)
5.00%, 08/01/05 1,000 1,045
-------
3,105
-------
MICHIGAN -- 1.6%
Michigan State Hospital Finance
Authority RB (McLaren Obligated
Group) / (Escrowed to Maturity with
Government Securities) (- AAA)
7.00%, 09/15/00 1,000 1,084
-------
MINNESOTA -- 4.7%
Minneapolis, Minnesota Community
Development Agency Tax Increment
RB / (MBIA Insurance) (Aaa AAA)
7.00%, 09/01/00 1,000 1,065
Minnesota State HFA Rental Housing
RB Series D / (MBIA Insurance)
(Aaa AAA)
4.80%, 08/01/01 2,120 2,168
-------
3,233
-------
MISSISSIPPI -- 3.0%
Mississippi Hospital Equipment &
Facilities Authority Revenue Refunding
Bonds (Mississippi Baptist Medical
Center) / (MBIA Insurance)
(Aaa AAA)
5.25%, 05/01/01 2,000 2,070
------
Par Value
------- -------
MISSOURI -- 5.2%
Missouri Rural Water Finance Corp.
(Public Construction Project)
Series 1998
4.50%, 11/15/99 $ 3,000 $ 3,028
Missouri State Environmental
Improvement & Energy Resources
Authority Water Pollution Control RB
(State Revolving Fund Program)
Series 1992A (Aa1 -)
5.80%, 07/01/99 500 509
-------
3,537
-------
NEBRASKA -- 3.1%
Nebraska Public Power District RB
Series A /(MBIA Insurance) (Aaa -)
5.25%, 01/01/05 2,000 2,122
-------
NEW YORK -- 7.9%
New York City, New York GO
Series L (A3 A-)
5.10%, 08/01/02 800 830
New York City, New York Municipal
Assistance Corp. RB Series L (Aa2 AA)
5.50%, 07/01/03 2,000 2,135
New York City, New York Transitional
Finance Authority RB Series B (Aa3 AA)
5.25%, 11/15/04 1,300 1,383
New York State Urban Development Corp.
RB (Correctional Facilities Service
Contract) Series1998A (Baa1 BBB+)
5.00%, 01/01/05 1,000 1,039
------
5,387
-------
OHIO -- 5.6%
Ohio State Public Facilities Commission
Higher Education Capital Facilities
RB Series II-A / (MBIA Insurance)
(Aaa AAA)
4.38%, 11/01/00 1,750 1,774
Ohio State Public Facilities Commission
Higher Education Capital Facilities
RB Series II-B / (FSA Insurance)
(Aaa AAA)
5.00%, 11/01/01 2,000 2,073
-------
3,847
-------
19
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
August 31, 1998
Par Value
------- -------
PENNSYLVANIA -- 1.7%
Pennsylvania State IDA RB (Economic
Development Project) / (AMBAC
Insurance) (Aaa AAA)
7.00%, 07/01/07 $ 1,000 $ 1,191
-------
SOUTH CAROLINA -- 3.2%
Charleston, South Carolina Public
Facilities COP (Public Improvement
Project) Series 1993 / (AMBAC
Insurance) (Aaa AAA)
4.30%, 09/01/00 1,085 1,099
Greenville, South Carolina Hospital
Facilities Revenue Refunding Bonds
Series 1993C (Aa3 AA)
5.00%, 05/01/00 1,090 1,110
-------
2,209
-------
TENNESSEE -- 3.9%
Knox County, Tennessee Health &
Education Hospital Facilities RB (Fort
Sanders Alliance) Series 1990C /
(MBIA Insurance) (Aaa AAA)
7.00%, 01/01/00 2,500 2,656
-------
TEXAS -- 1.5%
Houston, Texas GO Refunding Bonds
Series 1995A (Aa3 AA)
5.30%, 03/01/01 1,000 1,021
-------
WASHINGTON -- 8.0%
Port of Seattle, Washington Passenger
Facilities RB Series 1998B / (AMBAC
Insurance) (Aaa AAA)
5.00%, 12/01/07 1,395 1,456
Port of Seattle, Washington RB Series
1998B / (FGIC Insurance) (Aaa AAA)
5.50%, 09/01/02 2,775 2,924
Washington State GO Refunding Bonds
Series 1991 R-92 B (Aa1 AA+)
6.30%, 09/01/02 1,000 1,078
-------
5,458
-------
Par Value
------- -------
WISCONSIN -- 3.0%
Wisconsin State Health & Educational
Facilities Authority RB (Aurora Medical
Group Inc. Project) Series 1996 /
(FSA Insurance) (Aaa AAA)
4.90%, 11/15/02 $ 1,000 $ 1,035
Wisconsin State Health & Educational
Facilities Authority RB (Carroll
College Inc.) (- BBB)
4.80%, 10/01/06 1,000 1,006
-------
2,041
-------
TOTAL MUNICIPAL BONDS
(Cost $61,064) 62,218
-------
VARIABLE RATE OBLIGATIONS -- 7.3% (b)
ARIZONA -- 1.9%
Tempe, Arizona Excise Tax RB
(Aa2 AA+)
3.30%, 09/01/98 1,300 1,300
-------
CALIFORNIA -- 4.2%
California Pollution Control Financing
Authority Revenue Refunding Bonds
(Pacific Gas & Electric) Series 1996F /
(Banque Nationale de Paris LOC) (- AA+)
3.15%, 09/01/98 2,000 2,000
Chula Vista, California IDRB (San Diego
Gas & Electric Co. Project)
Series 1997A (A2 A)
3.25%, 09/01/98 800 800
Irvine Ranch, California Water District
Consolidated GO Revenue Refunding
Bonds Series 1985B / (Landesbank
Hessen-Thuringen Girozentrale LOC)
(- AAA)
3.00%, 09/01/98 100 100
-------
2,900
-------
NEW YORK -- 0.9%
New York City, New York Municipal
Water Finance Authority Water &
Sewer System RB Series 1995A /
(FGIC Insurance) (Aaa AAA)
3.75%, 09/01/98 600 600
-------
20
<PAGE>
Par Value
------- -------
TEXAS -- 0.3%
Brazos River, Texas River Authority
Revenue Refunding Bonds (Utilities
Electric Co. Project) Series 1996B /
(AMBAC Insurance) (Aaa AAA)
3.95%, 09/01/98 $ 200 $ 200
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $5,000) 5,000
-------
SHORT-TERM INVESTMENTS -- 0.1% (c)
Provident Institutional Funds -
Muni Fund Portfolio
3.15% 32 32
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $32) 32
-------
TOTAL INVESTMENTS -- 98.5%
(Cost $66,096) 67,250
-------
OTHERASSETS ANDLIABILITIES -- 1.5%
Other Assets 1,424
Liabilities (393)
-------
1,031
-------
NET ASSETS -- 100.0% $68,281
=======
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
21
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1998
Par Value
------- -------
MUNICIPAL BONDS -- 86.7% (a)
ALASKA -- 2.9%
Valdez, Alaska Marine Terminal
Revenue Refunding Bonds (BP
Pipeline Project) Series 1993B
(Aa2 AA)
5.50%, 10/01/28 $ 2,000 $ 2,038
-------
ARIZONA -- 3.3%
Maricopa County, Arizona Alhambra
Elementary School District 68 School
Improvement GO Refunding Bonds
Series 1994A / (AMBAC Insurance)
(Aaa AAA)
6.80%, 07/01/12 2,000 2,300
-------
CALIFORNIA -- 4.0%
Santa Clara County, California
Financing Authority Lease RB
(VMC Facility Replacement Project)
Series 1994A / (AMBAC Insurance)
(Aaa AAA)
7.75%, 11/15/10 1,000 1,309
Santa Clara County, California
Financing Authority Lease Revenue
Refunding Bonds Series A / (AMBAC
Insurance) (Aaa AAA)
5.00%, 11/15/17 1,500 1,505
-------
2,814
-------
FLORIDA -- 1.9%
Hillsborough County, Florida Aviation
Authority RB (Tampa International
Airport) Series 1996B / (FGIC Insurance)
(Aaa AAA)
5.88%, 10/01/23 1,250 1,356
-------
ILLINOIS -- 6.7%
Illinois Health Facilities Authority
Revenue Refunding Bonds
(Northwestern Medical Faculty
Foundation) / (MBIA Insurance)
(Aaa -)
5.13%, 11/15/28 3,500 3,469
Illinois State Toll Highway Authority
Priority RB Series 1992A /(A1 A+)
6.38%, 01/01/15 1,100 1,198
-------
4,667
-------
Par Value
------- -------
IOWA -- 1.0%
Cedar Rapids, Iowa Hospital Facilities
RB (St. Luke's Methodist Project)
Series 1993 / (FGIC Insurance)
(Aaa AAA)
6.13%, 08/15/13 $ 600 $ 670
-------
KENTUCKY -- 1.5%
Jefferson County, Kentucky Health
Facilities RB (University Medical
Center Project) (MBIA Insurance)
(Aaa AAA)
5.25%, 07/01/22 1,000 1,016
-------
LOUISIANA -- 1.5%
New Orleans, Louisiana GO Refunding
Bonds Series B / (FSA Insurance)
(Aaa AAA)
5.00%, 12/01/12 1,000 1,020
-------
MARYLAND -- 2.1%
Baltimore, Maryland Project Revenue
Refunding Bonds (Water Project) Series
1998A / (FGIC Insurance ) (Aaa AAA)
5.00%, 07/01/18 1,000 1,005
Maryland State Department of Housing
& Community Development RB
Series 1996A / (Aa2 -)
5.88%, 07/01/16 400 428
-------
1,433
-------
MASSACHUSETTS -- 4.1%
Massachusetts State HFA M/F
Residential Housing RB Series 1989A
(A3 A+)
7.80%, 08/01/22 800 832
Massachusetts State Industrial
Financing Agency RB (Suffolk
University) / (AMBAC Insurance)
(Aaa AAA)
5.25%, 07/01/27 2,000 2,035
-------
2,867
-------
22
<PAGE>
Par Value
------- -------
MICHIGAN -- 4.4%
Eastern Michigan University Board of
Regents RB / (FGIC Insurance)
(Aaa AAA)
5.50%, 06/01/17 $ 2,000 $ 2,112
Wayne Charter County, Michigan Airport
RB (Detroit Airport) Series 1998A /
(MBIA Insurance) (Aaa AAA)
5.00%, 12/01/19 1,000 988
-------
3,100
-------
MISSISSIPPI -- 3.4%
Mississippi Hospital Equipment &
Facilities Authority RB (Mississippi
Baptist Medical Center) (MBIA
Insurance) (Aaa AAA)
6.00%, 05/01/13 2,150 2,357
-------
NEW YORK -- 8.7%
Long Island, New York Power Authority
Electric System RB Series 1998A /
(FSA Insurance) (Aaa AAA)
5.13%, 12/01/22 1,500 1,504
New York State GO Refunding Bonds
Series 1996A (A2 A+)
5.30%, 07/15/15 2,000 2,057
New York Triborough Bridge & Tunnel
Authority General Purpose RB
Series 1996B (Aa3 AA)
5.20%, 01/01/27 2,500 2,525
------
6,086
-------
NORTH CAROLINA -- 2.9%
North Carolina Medical Care Community
Health Care Facilities RB (Carolina
Medi Corp. Project) (Aa3 AA)
5.25%, 05/01/21 2,000 2,018
-------
PENNSYLVANIA -- 7.1%
Pennsylvania State Higher Education
Facilities Authority RB (University of
Pennsylvania Health Services)
Series 1996A (A1 AA)
5.75%, 01/01/17 2,000 2,110
Par Value
------- -------
Pittsburgh, Pennsylvania Water & Sewer
Authority RB Series B / (FSA
Insurance) (Aaa AAA)
5.75%, 09/01/25 $ 1,250 $ 1,370
Seneca Valley, Pennslyvania School
District GO Refunding Bonds Series AA /
(FGIC Insurance) (Aaa AAA)
5.15%, 02/15/20 1,500 1,517
-------
4,997
-------
RHODE ISLAND -- 1.5%
Rhode Island Housing & Mortgage
Finance Corp. Homeownership
Opportunity RB Series 10A
(Aa2 AA+)
6.50%, 10/01/22 1,000 1,066
-------
TEXAS -- 13.9%
Austin, Texas Utilities System Revenue
Refunding Bonds / (FSA Insurance)
(Aaa AAA)
5.13%, 11/15/16 3,000 3,049
Brazos River, Texas River Authority RB
(Houston Industries Project) / AMBAC
Insurance) (Aaa AAA)
5.13%, 05/01/19 1,750 1,759
Conroe, Texas Independent School
District GO Refunding Bonds /
(Permanent School Fund Guaranty)
(Aaa AAA)
5.25%, 02/15/21 1,000 1,014
Elgin, Texas Independent School District
GO Refunding Bonds / (Permanent
School Fund Guaranty) (Aaa AAA)
5.25%, 10/01/24 2,000 2,030
Texas State Public Financing Authority
GO Series 1994B (Aa2 AA)
5.75%, 10/01/14 1,025 1,112
University of Texas Revenue Unrefunded
Balance RB Series 1991B (Aa1 AAA)
6.75%, 08/15/13 680 740
-------
9,704
-------
23
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
August 31, 1998
Par Value
------- -------
UTAH -- 2.7%
Utah State HFA S/F Mortgage RB
Series E-1/ (FHA VA Mortgages)
(Aaa AAA)
5.38%, 07/01/18 $ 1,880 $ 1,901
-------
VIRGINIA -- 3.0%
Virginia State Public Building Authority
Public Facilities RB Series 1997A
(Aa2 AA)
5.50%, 08/01/16 2,000 2,105
-------
WASHINGTON -- 8.6%
King County, Washington Lease RB
(King Street Center Project) /
(MBIA Insurance) (Aaa AAA)
5.13%, 06/01/17 1,000 1,016
King County, Washington School
District No. 415 GO Refunding Bonds
Series 1993A (A1 AA-)
5.55%, 12/01/11 500 547
Seattle, Washington Municipal Light &
Power Revenue Refunding Bonds
Series 1993 (Aa2 AA)
5.40%, 05/01/08 2,300 2,458
Washington State Health Care Facilities
Authority RB (Swedish Health System)
(AMBAC Insurance) (Aaa -)
5.13%, 11/15/18 2,000 2,005
-------
6,026
-------
WISCONSIN -- 1.5%
Wisconsin State Health & Education
Facilities Authority RB (Medical
College of Wisconsin Project) /
(MBIA Insurance) (Aaa AAA)
5.50%, 03/01/17 1,000 1,049
-------
TOTAL MUNICIPAL BONDS
(Cost $56,945) 60,590
-------
VARIABLE RATE OBLIGATIONS -- 12.4% (b)
ALASKA -- 1.5%
Valdez, Alaska Marine Terminal Revenue
Refunding Bonds (Exxon Pipeline Co.
Project) Series 1993C /(Exxon Corp.
Guaranty) (Aaa AAA)
3.20%, 09/01/98 1,000 1,000
-------
Par Value
------- -------
CALIFORNIA -- 9.0%
California Health Facilities Financing
Authority RB (Adventist Health)
Series A /(MBIA Insurance) (Aaa AAA)
2.70%, 09/07/98 $ 100 $ 100
California Health Facilities Financing
Authority RB (Sutter Health Project)
Series 1990A /(Morgan Guaranty Trust
Co.-New York LOC) (Aa2 AA+)
3.15%, 09/01/98 300 300
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986A (A1 A+)
3.80%, 09/01/98 200 200
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986C (A1 A+)
3.80%, 09/01/98 100 100
Irvine Ranch, California Water District
Consolidated GO RB (Districts 140,
240, 105, 250)/ (Bank of America LOC)
(Aa2 AA-)
3.15%, 09/01/98 500 500
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds
(Districts 105, 140, 240 & 290)
Series1995 / (Commerzbank A.G. LOC)
(Aa2 AA-)
3.15%, 09/01/98 3,200 3,200
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds
Series 1993A / (Bank of America LOC)
(Aa2 AA-)
3.00%, 09/01/98 560 560
Irvine Ranch, California Water District
Improvement Bonds GO (District 284)
Series 1988A / (Landesbank Hessen-
Thuringen Girozentrale LOC) (- AAA)
3.00%, 09/01/98 300 300
Orange County, California Sanitation
District COP (Districts 1, 2, 3, 5, 6, 7,
11, 13 & 14) / (National Westminster
Bank LOC) (Aa2 AA)
3.15%, 09/01/98 500 500
24
<PAGE>
Par Value
------- -------
Orange County, California Special
Assessment Improvement Bonds
(District 88-1) / (Societe Generale &
Kredietbank LOC) (Aa3 AA-)
3.15%, 09/01/98 $ 500 $ 500
-------
6,260
-------
NEW MEXICO -- 0.1%
Farmington, New Mexico Pollution Control
Revenue Refunding Bonds (Arizona
Public Service Company) Series 1994A /
(Barclays Bank PLC Direct Pay) (P-1 AA)
3.25%, 09/01/98 100 100
-------
NEW YORK -- 0.4%
New York City, New York Municipal
Water Finance Authority Water & Sewer
System RB Series 1995A /
(FGIC Insurance) (Aaa AAA)
3.75%, 09/01/98 300 300
-------
WYOMING -- 1.4%
Unita County, Wyoming Pollution
Control Revenue Refunding Bonds
(Chevron USA Inc. Project) (Aa2 -)
3.25%, 09/01/98 1,000 1,000
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $8,660) 8,660
-------
SHORT-TERM INVESTMENTS -- 0.0% (c)
Provident Institutional Funds -
Muni Fund Portfolio
2.61% 19 19
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $19) 19
-------
TOTAL INVESTMENTS -- 99.1%
(Cost $65,624) 69,269
-------
OTHER ASSETS AND LIABILITIES -- 0.9%
Other Assets 1,073
Liabilities (417)
-------
656
-------
NET ASSETS -- 100.0% $69,925
=======
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
25
<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.
PORTFOLIO ABBREVIATIONS
AMBAC American Municipal Bond Assurance Corp.
COP Certificates of Participation
FGIC Financial Guaranty Insurance Company
FHA Federal Housing Authority
FSA Financial Security Assurance
GO General Obligation
HFA Housing Finance Agency
IDA Industrial Development Authority
IDRB Industrial Development Revenue Bond
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
M/F Multi-Family
RB Revenue Bond
S/F Single-Family
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
Statements of Assets and Liabilities (IN THOUSANDS)
August 31, 1998
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ------------
ASSETS
Investments, at value
(Cost:$66,096, $65,624,
respectively) $67,250 $69,269
Receivables:
Interest 929 876
Fund shares sold 494 196
Prepaid expenses 1 1
------- -------
Total assets 68,674 70,342
------- -------
LIABILITIES
Payables:
Dividends 43 51
Fund shares redeemed 208 260
Investment advisory
and administration fees 28 19
Transfer agency and
shareholder service fees 71 42
Other liabilities 43 45
------- -------
Total liabilities 393 417
------- -------
Net assets applicable to outstanding
shares $68,281 $69,925
======= ========
NET ASSETS CONSIST OF:
Paid-in-capital $67,561 $65,841
Undistributed net investment income 27 42
Accumulated net realized gain
(loss) on investments sold (461) 397
Net unrealized appreciation on
investments 1,154 3,645
------- -------
$68,281 $69,925
======= =======
PRICING OF SHARES
Outstanding shares, $0.00001
par value (unlimited shares authorized) 6,652 6,352
Net asset value, offering and
redemption price per share $10.26 $11.01
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the year ended August 31, 1998
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ------------
Interest income $2,629 $2,924
------- -------
Expenses:
Investment advisory and administration fees 240 228
Transfer agency and shareholder service fees 147 139
Custodian and portfolio accounting fees 41 40
Registration fees 31 31
Professional fees 12 10
Shareholder reports 7 20
Trustees' fees 6 7
Insurance and other expenses 16 7
------- -------
500 482
Less:expenses reduced (see Note 4) (212) (209)
------- -------
Total expenses incurred by Fund 288 273
------- -------
Net investment income 2,341 2,651
------- -------
Net realized gain on investments sold 54 405
Net unrealized appreciation on investments 627 2,070
------- -------
Net gain on investments 681 2,475
------- -------
Increase in net assets resulting from operations $3,022 $5,126
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ------------
Year ended August 31,
1998 1997 1998 1997
------ ------ ------ ------
Operations:
Net investment income $ 2,341 $ 2,169 $ 2,651 $ 2,228
Net realized gain on
investments sold 54 22 405 407
Net unrealized appreciation
on investments 627 586 2,070 1,281
------- -------- ------- --------
Increase in net assets
resulting from operations 3,022 2,777 5,126 3,916
------- -------- ------- --------
Dividends to shareholders
from net investment income (2,393) (2,169) (2,706) (2,228)
Distributions from realized
gain on investments -- -- (25) --
------- -------- ------- --------
Total dividends and
distributions (2,393) (2,169) (2,731) (2,228)
------- -------- ------- --------
Capital share transactions:
Proceeds from shares sold 32,802 15,680 37,753 14,726
Net asset value of shares
issued in reinvestment of
dividends 1,829 1,698 1,952 1,547
Less payments for shares redeemed (21,376) (17,721) (18,942) (14,866)
------- -------- ------- --------
Increase (decrease) in net assets
from capital share transactions 13,255 (343) 20,763 1,407
------- -------- ------- --------
Total increase in net assets 13,884 265 23,158 3,095
Net assets:
Beginning of period 54,397 54,132 46,767 43,672
------- -------- ------- --------
End of period (including
undistributed net investment
income of $27, $12, $42 and
$15, respectively) $68,281 $ 54,397 $69,925 $ 46,767
======= ======== ======= ========
Number of Fund shares:
Sold 3,211 1,549 3,473 1,415
Reinvested 179 168 180 149
Redeemed (2,094) (1,754) (1,743) (1,434)
------- -------- ------- --------
Net increase (decrease) in
shares outstanding 1,296 (37) 1,910 130
Shares outstanding:
Beginning of period 5,356 5,393 4,442 4,312
------- -------- ------- --------
End of period 6,652 5,356 6,352 4,442
======= ======== ======= ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
Income from
Investment Operations
----------------------------------------
Net
Fiscal Net Asset Realized & Total
Period Value At Net Unrealized from
Ended Beginning Investment Gain (Loss) on Investment
August 31, of Period Income Investments Operations
- --------- --------- ---------- ------------- ----------
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
1998 $10.16 $0.42 $ 0.10 $ 0.52
1997 $10.04 $0.41 $ 0.12 $ 0.53
1996 $10.12 $0.41 $(0.08) $ 0.33
1995 $ 9.92 $0.40 $ 0.20 $ 0.60
1994 $10.15 $0.37 $(0.23) $ 0.14
SCHWAB LONG-TERM TAX-FREE BOND FUND
1998 $10.53 $0.53 $ 0.48 $ 1.01
1997 $10.13 $0.53 $ 0.40 $ 0.93
1996 $10.16 $0.52 $(0.03) $ 0.49
1995 $ 9.95 $0.53 $ 0.21 $ 0.74
1994 $10.59 $0.52 $(0.56) $(0.04)
Less Distributions
- ----------------------------------------
Dividends Distributions Net Asset
from Net from Realized Value at
Investment Gain on Total End of
Income Investments Distributions Period
- ---------- ------------- ------------- -------
$(0.42)1 $ -- $(0.42) $10.26
$(0.41) $ -- $(0.41) $10.16
$(0.41) $ -- $(0.41) $10.04
$(0.40) $ -- $(0.40) $10.12
$(0.37) $ -- $(0.37) $ 9.92
$(0.53)1 $ --2 $(0.53) $11.01
$(0.53) $ -- $(0.53) $10.53
$(0.52) $ -- $(0.52) $10.13
$(0.53) $ -- $(0.53) $10.16
$(0.52) $ (0.08) $(0.60) $ 9.95
(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:
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- -----------------------------------------------------------
Fiscal Ratio of Net
Period Ratio of Expenses Investment Income
Ended to Average Net Assets to Average Net Assets
August 31, (%) (%)
- ---------- --------------------- ---------------------
1998 0.85 3.62
1997 0.96 3.61
1996 0.90 3.65
1995 0.89 3.66
1994 0.91 3.28
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ---------------------------------------------------------
Fiscal Ratio of Net
Period Ratio of Expenses Investment Income
Ended to Average Net Assets to Average Net Assets
August 31, (%) (%)
- ---------- --------------------- ---------------------
1998 0.86 4.38
1997 1.02 4.56
1996 0.94 4.61
1995 0.93 5.01
1994 0.99 4.57
1 The amounts shown include certain reclassifications related to book to tax
differences (see Note 2 of Notes to Financial Statements).
2 Amount is less than $0.01 per share.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
Ratios/Supplemental Data
- ----------------------------------------------------------------------------
Ratio of Ratio of Net
Expenses Investment
Total to Average Income to Portfolio
Return Net Assets Net Assets Average Net Turnover
(not annualized) End of Period (DAGGER) Assets(DAGGER) Rate
(%) (000's) (%) (%) (%)
- ---------------- ------------- ----------- -------------- ----------
5.17 $68,281 0.49 3.99 22
5.40 $54,397 0.49 4.08 20
3.32 $54,132 0.49 4.06 44
6.23 $52,504 0.49 4.06 35
1.42 $63,889 0.48 3.71 19
9.81 $69,925 0.49 4.76 39
9.36 $46,767 0.49 5.09 61
4.87 $43,672 0.49 5.06 50
7.76 $41,413 0.54 5.40 70
(0.42) $43,975 0.51 5.05 62
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1998
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free
Bond Fund (the "Funds") are series of Schwab Investments (the "Trust"), a no
load, open-end, 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 California Short/Intermediate Tax-Free Bond Fund
and Schwab California Long-Term Tax-Free Bond Fund. The assets of each series
are segregated and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
SECURITY VALUATION -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities 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.
32
<PAGE>
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.
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:
Net Unrealized Appreciated Depreciated
Appreciation Securities Securities
-------------- ----------- -----------
Schwab Short/Intermediate
Tax-Free Bond Fund $1,154,000 $1,172,000 $(18,000)
Schwab Long-Term Tax-Free
Bond Fund $3,645,000 $3,645,000 $ --
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1998, the unused capital loss
carryforwards, for federal income tax purposes were as follows:
Schwab Short/Intermediate
Tax-Free Bond Fund
----------------------
Expiring in:
08/31/03 $190,000
08/31/04 296,000
---------
Total capital loss carryforwards $486,000
=========
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 $67,000 and $82,000 for the Schwab Short/Intermediate Tax-Free
Bond Fund and Schwab 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).
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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).
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 $13,000
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
$34,338,000 and $42,860,000 for the Schwab Short/Intermediate Tax-Free Bond Fund
and Schwab Long-Term Tax-Free Bond Fund, respectively.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab guarantee that, through at least October 31,
1998, each Fund's total operating expenses will not exceed 0.49% of the Fund's
average daily net assets after reductions. For the purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses and
taxes.
During the year ended August 31, 1998, the total of such fees reduced by the
Investment Manager was $212,000 for the Schwab Short/Intermediate Tax-Free Bond
Fund, and $209,000 for the Schwab 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 Short/Intermediate Schwab Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------------- ------------------
Purchases $21,571,000 $32,645,000
Proceeds of sales
and maturities $12,416,000 $20,383,000
34
<PAGE>
To the Board of Trustees and Shareholders of
Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab 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 Short/Intermediate Tax-Free
Bond Fund and Schwab 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
35
<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(REGISTRATION MARK)
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 (1098-3791) MKT3656(10/98)
