SCHWAB FUNDS-Registered TradeMark-
SCHWAB
TAX-FREE
BOND FUNDS
Semiannual Report
February 28, 1999
<PAGE>
SCHWAB TAX-FREE BOND FUNDS
We're pleased to bring you this semiannual report for the following funds (the
Funds) for the six-month period ended February 28, 1999:
- Schwab Short/Intermediate Tax-Free Bond Fund
- Schwab Long-Term Tax-Free Bond Fund
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) 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 for the portfolio.
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 for
the portfolio.
(1) Income from the Funds may be subject to state and local taxes and to the
federal alternative minimum tax (AMT).
CONTENTS
- ----------------------------------------------------
A Message from the Chairman 1
- ----------------------------------------------------
What Every Bond Fund Investor Should Know 2
- ----------------------------------------------------
Market Overview 4
- ----------------------------------------------------
Schwab Short/Intermediate Tax-Free Bond
Fund
FUND PERFORMANCE 8
PORTFOLIO SNAPSHOT 10
- ----------------------------------------------------
Schwab Long-Term Tax-Free Bond Fund
FUND PERFORMANCE 12
PORTFOLIO SNAPSHOT 14
- ----------------------------------------------------
Dividends Paid 16
- ----------------------------------------------------
The Portfolio Management Team 17
- ----------------------------------------------------
Fund Discussion 18
- ----------------------------------------------------
Glossary 20
- ----------------------------------------------------
Financial Statements and Notes 23
- ----------------------------------------------------
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Dear Shareholder,
[PHOTO OMITTED]
Over the past six months, equity investors have been subject to sharp drops and
big recoveries--sometimes within the same day. After enjoying near-perfect
market conditions for the past several years, investors have had to adjust to
significant economic and political developments, both here and abroad, that have
contributed to rapid sentiment swings and market turbulence. These developments
have been accentuated by the lingering expectation that stock prices are long
overdue for a correction according to several traditional, widely followed
indicators. In spite of this recent volatility, however, the markets continue to
flourish, boosted by record low inflation, solid economic growth, low interest
rates, a strong dollar and an influx of money from investors.
All of this serves to remind us that although the market's extreme ups and downs
can be harrowing, they are a natural part of market dynamics. That's why we
think it's 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 $87 billion in assets on
behalf of more than 3.5 million SchwabFunds-Registered Trademark- shareholders.
We offer a broad spectrum of 38 mutual funds for investors with varying
financial situations and goals.
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
February 28, 1999
YEAR 2000 ISSUES
One issue with the potential to disrupt fund operations and affect
performance is the inability of some computers to recognize the year 2000.
The investment adviser is taking steps to handle this issue. The investment
adviser also is seeking assurances that its service providers and business
partners are taking similar steps as well. It is impossible to know in
advance, however, exactly how this issue will affect fund administration,
fund performance or securities markets in general.
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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.
LOW COSTS: By trading in large (institutional) blocks, funds can get much better
execution, which can lower trading costs and increase total returns.
BOND INDEX FUNDS
Schwab's Bond Index Funds seek to track the total returns of broadly diversified
bond indices. And because index funds generally have 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.
2
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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 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 U.S. government and corporate bonds that have average 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 broad-based 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 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 touch-tone telephone service, TeleBroker,-Registered Trademark- by
calling 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 AMT; consult your tax advisor.
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MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic product (GDP), continued its
remarkable expansion with a strong real growth rate of 4.3% during 1998--a rate
well in excess of the Federal Reserve's target range of 2.5% to 3.0%. The
fourth-quarter growth rate of 6.0% marks the thirty-first consecutive quarter of
positive growth--the longest peacetime expansion ever. Strong consumer spending
leveraged by record domestic stock market levels and its associated wealth
effect continued to provide momentum for this historic expansion.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
REAL GDP GROWTH RATE
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED RATE)
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 1.7%
Q2 1995 0.4%
Q3 1995 3.3%
Q4 1995 2.8%
Q1 1996 3.3%
Q2 1996 6.1%
Q3 1996 2.1%
Q4 1996 4.2%
Q1 1997 4.2%
Q2 1997 4.0%
Q3 1997 4.2%
Q4 1997 3.0%
Q1 1998 5.5%
Q2 1998 1.8%
Q3 1998 3.7%
Q4 1998 6.0%
Source: BLOOMBERG L.P.
At the time of this writing, the consensus of most economists is that the U.S.
economy appears poised for continued growth, albeit at a more moderate rate than
in 1998. High levels of consumer confidence, low interest rates, rising real
wages and strong gains in stock prices have been the principal factors
contributing to this lengthy expansion. Although economic problems across the
globe continue to be an ongoing area of concern for the U.S. economy, the effect
of these problems thus far has been less severe than many originally predicted.
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
After declining to 4.3% in December and January-- the lowest level in 28
years--the U.S. unemployment rate stood at 4.4% in February. Labor markets
continue to be extremely tight as growth in the labor force has slowed, leading
to some concern that wage increases may begin to put more pressure on labor
costs (refer to Employment Cost Index below).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
U.S. UNEMPLOYMENT RATE
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 5.6%
Jun-96 5.3%
Jul-96 5.5%
Aug-96 5.1%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.4%
Jan-97 5.3%
Feb-97 5.3%
Mar-97 5.1%
Apr-97 5.0%
May-97 4.7%
Jun-97 5.0%
Jul-97 4.7%
Aug-97 4.9%
Sep-97 4.7%
Oct-97 4.7%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.5%
Feb-98 4.6%
Mar-98 4.6%
Apr-98 4.3%
May-98 4.3%
Jun-98 4.5%
Jul-98 4.5%
Aug-98 4.5%
Sep-98 4.5%
Oct-98 4.5%
Nov-98 4.4%
Dec-98 4.3%
Jan-99 4.3%
Feb-99 4.4%
SOURCE: BLOOMBERG L.P.
INFLATION
Price inflation remained remarkably well contained. The Consumer Price Index
(CPI) rose just 1.6% for the 12-month period ended February 28, 1999. Its core
rate (which excludes the more volatile food and energy components) rose 2.1%.
For all of 1998, overall producer prices fell 0.1% after dropping 1.2% in 1997,
marking the first time that the index, which was created in 1947, has fallen for
two consecutive years.
4
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The Employment Cost Index (which measures inflation in wages, salaries and
benefits) increased
3.4% for the year ended December 1998, its largest calendar-year increase since
1993.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
MEASURES OF INFLATION
QUARTERLY EMPLOYMENT MONTHLY CONSUMER
COST INDEX PRICE INDEX
Jan-90 5.5% 5.2%
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 3.5% 1.7%
Aug-98 3.7% 1.6%
Sep-98 3.7% 1.5%
Oct-98 3.4% 1.5%
Nov-98 3.4% 1.5%
Dec-98 3.4% 1.6%
Jan-99 1.7%
Feb-99 1.6%
Source: Bloomberg L.P.
Although price 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.
Non-farm productivity grew at an annualized rate of 2.2% in 1998, continuing a
healthy trend that began in 1996.
ASSET CLASS PERFORMANCE
Following a sharp correction in July and August, the domestic equities market
rallied strongly during the six-month reporting period ended February 28, 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
TOTAL RETURN PERFORMANCE
VALUE OF A HYPOTHETICAL $1
INVESTMENT
MSCI-EAFE-REGISTERED S&P 500-REGISTERED
TRADEMARK-(ND)INDEX TRADEMARK INDEX
Aug-98 $1.000 $1.000
Sep-98 $0.969 $1.064
Oct-98 $1.070 $1.151
Nov-98 $1.125 $1.220
Dec-98 $1.170 $1.291
Jan-99 $1.166 $1.345
Feb-99 $1.138 $1.303
TOTAL RETURN PERFORMANCE
VALUE OF A HYPOTHETICAL $1
INVESTMENT
RUSSELL 2000-REGISTERED LEHMAN AGGREGATE
TRADEMARK INDEX BOND INDEX
Aug-98 $1.000 $1.000
Sep-98 $1.078 $1.023
Oct-98 $1.122 $1.018
Nov-98 $1.181 $1.024
Dec-98 $1.254 $1.027
Jan-99 $1.271 $1.034
Feb-99 $1.168 $1.016
COMPILED BY CHARLES SCHWAB & CO., INC.
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.
Large-cap domestic stocks, as represented by the S&P 500 Index, continued to be
the strongest-performing asset class, achieving a total return of 30.3% for the
six-month period. Within the S&P 500, the strongest performance was concentrated
in the very largest stocks. Small-cap stocks, as represented by the Russell 2000
Index, also experienced a strong total return of 16.8%.
International stock returns were characterized by the markedly divergent
performance between Asian markets, most of which languished, and European
markets, most of which experienced healthy gains for the period. Combined,
international stock returns, as represented by the Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI-EAFE) Index, experienced a
positive total return of 13.8% for the six-month reporting period.
5
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MARKET OVERVIEW (continued)
Reflecting the moderate rise in intermediate- and long-term interest rates,
fixed income returns were generally weak for the period. Bond returns, as
represented by the Lehman Brothers Aggregate Bond Index, were 1.6% for the
six-month reporting period.
U.S. EQUITY VALUATION
The price/earnings ratio (P/E) for the S&P 500 Index reached new record highs
during the reporting period and ended the period at a lofty 32.5 times earnings.
The P/E, 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
S&P 500 PRICE/EARNINGS RATIO
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
Sep-98 24.23
Oct-98 27.58
Nov-98 30.14
Dec-98 31.97
Jan-99 33.73
Feb-99 32.47
30-Year Average 15.08
Source: BLOOMBERG L.P.
TREASURY YIELDS
During the first two months of the reporting period, Treasury yields continued
to decline--a trend that began in the second quarter of 1997. This was largely a
response to international economic problems as investors seeking a safe haven
increased demand for U.S. Treasury securities and bid up prices, thereby
decreasing Treasury bond yields. Other factors that contributed to favorable
fixed income market conditions included the Federal Reserve's decision to leave
rates unchanged throughout most of 1998, which was due in part to international
market turbulence, and positive economic statistics. This showed strong growth
coupled with contained inflation.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
30-YEAR AND FIVE-YEAR TREASURY BOND YIELDS
30-YEAR TREASURY FIVE-YEAR TREASURY
BOND YIELD NOTE YIELD
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%
9/4/98 5.29% 4.89%
9/11/98 5.23% 4.65%
9/18/98 5.15% 4.52%
9/25/98 5.11% 4.37%
10/2/98 4.84% 4.08%
10/9/98 5.12% 4.46%
10/16/98 4.98% 4.04%
10/23/98 5.18% 4.30%
10/30/98 5.16% 4.23%
11/6/98 5.39% 4.59%
11/13/98 5.25% 4.50%
11/20/98 5.22% 4.60%
11/27/98 5.16% 4.59%
12/4/98 5.04% 4.39%
12/11/98 5.02% 4.39%
12/18/98 5.00% 4.36%
12/25/98 5.22% 4.71%
1/1/99 5.10% 4.54%
1/8/99 5.27% 4.73%
1/15/99 5.11% 4.55%
1/22/99 5.08% 4.52%
1/29/99 5.09% 4.55%
2/5/99 5.35% 4.86%
2/12/99 5.42% 4.96%
2/19/99 5.39% 4.99%
2/26/99 5.58% 5.22%
SOURCE: BLOOMBERG L.P.
6
<PAGE>
In an effort to provide liquidity to financial markets and shelter the U.S.
economy from the impact of increasing weakness in foreign economies, the Federal
Reserve cut short-term interest rates three times during September and October.
At the time of this writing, the federal funds rate stands at 4.75%.
Toward the end of the reporting period, in response to both continued strong
domestic economic growth and scaled-back concerns about the impact of
international economic problems, Treasury yields reversed course, ending the
period approximately 1% higher than their lows reached in October.
MUNICIPAL BOND YIELDS
As was the case with Treasury yields, municipal bond yields appeared to end
their longer-term decline and settle into a trading range during the six-month
reporting period.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
30-YEAR AND FIVE-YEAR AAA GENERAL
OBLIGATION
MUNICIPAL BOND YIELDS
BOND BUYER 40 FIVE-YEAR AAA GO
MUNI BOND YIELDS MUNI BOND YIELDS
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%
9/4/98 5.15% 3.89%
9/11/98 5.13% 3.87%
9/18/98 5.10% 3.81%
9/25/98 5.09% 3.79%
10/2/98 4.97% 3.70%
10/9/98 5.12% 3.71%
10/16/98 5.05% 3.67%
10/23/98 5.14% 3.73%
10/30/98 5.13% 3.70%
11/6/98 5.18% 3.78%
11/13/98 5.14% 3.77%
11/20/98 5.12% 3.74%
11/27/98 5.11% 3.74%
12/4/98 5.11% 3.73%
12/11/98 5.10% 3.73%
12/18/98 5.13% 3.74%
12/25/98 5.20% 3.79%
1/1/99 5.16% 3.77%
1/8/99 5.20% 3.83%
1/15/99 5.17% 3.76%
1/22/99 5.14% 3.71%
1/29/99 5.09% 3.63%
2/5/99 5.15% 3.66%
2/12/99 5.15% 3.64%
2/19/99 5.15% 3.65%
2/26/99 5.17% 3.70%
Source: Bloomberg L.P.
The ratio of municipal-to-Treasury bond yields reached new highs during October.
This was the result of strong investor demand for Treasury securities typically
referred to as the "flight to quality." Later in the reporting period as
investors' concerns over international economic problems subsided, this ratio
backed off from its October highs. This reversal was most pronounced for shorter
maturities (refer to the five-year ratio below). This was the result of strong
retail investor demand. At the close of the reporting period, long-term
municipal bond yields continued to be very attractive relative to Treasury
yields.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
RATIO OF MUNICIPAL BOND YIELDS
TO
TREASURY BOND YIELDS FOR
30-YEAR AND FIVE-YEAR BONDS
30-YEAR BOND YIELDS FIVE-YEAR BOND YIELDS
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%
9/4/98 97.4% 79.5%
9/11/98 98.1% 83.3%
9/18/98 99.1% 84.4%
9/25/98 99.6% 86.8%
10/2/98 102.7% 90.6%
10/9/98 100.1% 83.1%
10/16/98 101.4% 90.8%
10/23/98 99.3% 86.7%
10/30/98 99.5% 87.4%
11/6/98 96.2% 82.3%
11/13/98 97.9% 83.7%
11/20/98 98.1% 81.4%
11/27/98 99.1% 81.4%
12/4/98 101.4% 85.0%
12/11/98 101.5% 85.0%
12/18/98 102.6% 85.7%
12/25/98 99.7% 80.5%
1/1/99 101.3% 83.0%
1/8/99 98.6% 80.9%
1/15/99 101.2% 82.6%
1/22/99 101.1% 82.1%
1/29/99 100.1% 79.8%
2/5/99 96.3% 75.3%
2/12/99 95.0% 73.3%
2/19/99 95.6% 73.1%
2/26/99 92.7% 70.9%
Source: Bloomberg L.P.
7
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/99
SINCE
SIX INCEPTION
MONTHS(1) ONE YEAR FIVE YEARS (4/21/93)
- -----------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND(2) 2.43% 4.85% 4.54% 4.57%
- -----------------------------------------------------------------------------
Lehman Brothers Three-Year
Municipal Bond Index 2.65% 5.36% 5.15% 4.95%
- -----------------------------------------------------------------------------
30-DAY SEC
YIELD
- -----------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND(2) 3.47%
- -----------------------------------------------------------------------------
Lehman Brothers Three-Year Municipal Bond Index N/A
- -----------------------------------------------------------------------------
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 12/31/98. As of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns were 2.84%, 4.78%,
4.28% and 4.57%, respectively. The 30-day SEC yield as of 12/31/98 was 3.62%.(3)
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 Fund's 30-day SEC yield as of 2/28/99 and
the taxable-equivalent yield,(1) assuming a maximum federal income tax rate of
39.6%. Shareholder tax rates may be different.
TAXABLE-
EQUIVALENT
30-DAY 30-DAY SEC
SEC YIELD YIELD
- ---------------------------------------------------------------------------
Schwab Short/Intermediate Tax-Free Bond Fund 3.47% 5.75%
- ---------------------------------------------------------------------------
(1) Actual, not annualized, since period is less than one year.
(2) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/99, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
2.25%, 4.55%, 4.11% and 4.12%, respectively. The 30-day SEC yield as of
2/28/99 would have been 3.06%.
(3) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
2.76%, 4.42%, 3.84% and 4.10%, respectively. The 30-day SEC yield as of
12/31/98 would have been 3.18%.
8
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
SCHWAB SHORT/INTERMEDIATE LEHMAN BROTHERS THREE-YEAR
TAX-FREE BOND FUND MUNICIPAL BOND INDEX
04/21/93 $10,000 $10,000
04/30/93 $9,990 $9,993
05/31/93 $10,038 $10,020
06/30/93 $10,129 $10,085
07/31/93 $10,151 $10,090
08/31/93 $10,283 $10,184
09/30/93 $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
01/31/94 $10,567 $10,428
02/28/94 $10,412 $10,331
03/31/94 $10,218 $10,206
04/30/94 $10,280 $10,267
05/31/94 $10,323 $10,315
06/30/94 $10,312 $10,318
07/31/94 $10,407 $10,403
08/31/94 $10,429 $10,440
09/30/94 $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
01/31/95 $10,445 $10,501
02/28/95 $10,563 $10,612
03/31/95 $10,655 $10,707
04/30/95 $10,691 $10,743
05/31/95 $10,881 $10,908
06/30/95 $10,884 $10,934
07/31/95 $10,987 $11,050
08/31/95 $11,079 $11,136
09/30/95 $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
01/31/96 $11,383 $11,429
02/29/96 $11,364 $11,431
03/31/96 $11,313 $11,403
04/30/96 $11,306 $11,417
05/31/96 $11,312 $11,427
06/30/96 $11,371 $11,496
07/31/96 $11,443 $11,559
08/31/96 $11,447 $11,577
09/30/96 $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
01/31/97 $11,742 $11,896
02/28/97 $11,801 $11,954
03/31/97 $11,737 $11,892
04/30/97 $11,776 $11,943
05/31/97 $11,876 $12,040
06/30/97 $11,938 $12,111
07/31/97 $12,096 $12,255
08/31/97 $12,065 $12,230
09/30/97 $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
01/31/98 $12,384 $12,575
02/28/98 $12,397 $12,602
03/31/98 $12,417 $12,622
04/30/98 $12,386 $12,604
05/31/98 $12,502 $12,722
06/30/98 $12,543 $12,765
07/31/98 $12,574 $12,811
08/31/98 $12,689 $12,935
09/30/98 $12,793 $13,018
10/31/98 $12,837 $13,080
11/30/98 $12,862 $13,112
12/31/98 $12,898 $13,143
01/31/99 $13,022 $13,263
02/28/99 $12,997 $13,277
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Short/Intermediate Tax-Free Bond Fund, made at its inception, with a
similar investment in the Lehman Brothers Three-Year Municipal Bond Index.
THE INFORMATION PRESENTED 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.
ASSETS
- ---------------------------------------------------------------------
Total net assets as of 2/28/98 (000s) $ 60,739
- ---------------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $ 82,302
- ---------------------------------------------------------------------
Percentage growth over reporting period 36%
- ---------------------------------------------------------------------
9
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO SNAPSHOT
The Schwab Short/Intermediate Tax-Free Bond Fund invests primarily in tax-exempt
or municipal securities. The information below provides a snapshot of the Fund's
characteristics as of 2/28/99, and is not indicative of its composition after
that date. The terms used below are defined beginning on page 20. A complete
list of the securities in the Fund's portfolio as of 2/28/99 is provided in the
Schedule of Investments later in this report.
FUND FACTS
SCHWAB
SHORT/INTERMEDIATE
TAX-FREE BOND FUND PEER GROUP AVERAGE+
- -------------------------------------------------------------------------------
Number of Issues 55 107
- -------------------------------------------------------------------------------
30-Day SEC Yield 3.47% 2.55%
- -------------------------------------------------------------------------------
Average Coupon 5.21% 5.75%
- -------------------------------------------------------------------------------
Weighted Average Maturity 4.15 years 4.70 years
- -------------------------------------------------------------------------------
Average Quality AA AA
- -------------------------------------------------------------------------------
Average Duration 3.58 years 3.20 years
- -------------------------------------------------------------------------------
Expense Ratio 0.49%* 0.83%
- -------------------------------------------------------------------------------
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/99.
+ Source: Morningstar. This information is as of 2/28/99, and is for
illustrative purposes only. It is not intended to show, predict or guarantee
future composition of the Fund. The Peer Group Average is based on the 104
municipal short-term funds as tracked by Morningstar.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/28/99
PERCENTAGE OF
FUND
VALUE PERCENTAGE OF INVESTMENTS
MATURITY RANGE (000S) FUND INVESTMENTS (CUMULATIVE)
- ----------------------------------------------------------------------
0 - 6 months $ 7,418 9.1% 9.1%
- ----------------------------------------------------------------------
7 - 36 months $ 28,313 34.8% 43.9%
- ----------------------------------------------------------------------
37 - 60 months $ 13,879 17.0% 60.9%
- ----------------------------------------------------------------------
More than
60 months $ 31,792 39.1% 100.0%
- ----------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INVESTMENT STYLE BOX(1)
AS OF 2/28/99
WEIGHTED AVERAGE MATURITY
-Average Credit
Short Medium Long Quality-
X High
Medium
Low
(1) Source: Morningstar. The style box represents two of the main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the Fund's portfolio as of 2/28/99, and is
not indicative of its holdings after that date, nor does it represent a risk
rating or any type of forecast of future performance. Placement is based on
the Fund's weighted average maturity and the average credit quality of its
portfolio. The Fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than 10 years.
Credit quality is defined on page 20. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
10
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2)
as of 2/28/99
Municipal bonds 91.5%
Variable-rate obligations 8.4%
Temporary investments 0.1%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/28/99
AAA 61.7%
AA 19.7%
A 9.9%
BBB 2.5%
Short-term rating only 3.7%
Not rated 2.5%
The charts above illustrate the composition of the Fund's portfolio as of
2/28/99, and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities.
(3) Credit quality is 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.
LARGEST STATE CONCENTRATIONS
% OF TOTAL NET ASSETS
- ----------------------------------------------------------------
New York 9.4%
- ----------------------------------------------------------------
Washington 6.7%
- ----------------------------------------------------------------
South Carolina 6.4%
- ----------------------------------------------------------------
California 5.8%
- ----------------------------------------------------------------
Kentucky 5.8%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
District of Columbia 5.1%
- ----------------------------------------------------------------
Nebraska 5.0%
- ----------------------------------------------------------------
Ohio 4.7%
- ----------------------------------------------------------------
Missouri 4.3%
- ----------------------------------------------------------------
Arizona 4.2%
- ----------------------------------------------------------------
11
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/99
SINCE
SIX INCEPTION
MONTHS(1) ONE YEAR FIVE YEARS (9/11/92)
- --------------------------------------------------------------------------------
SCHWAB LONG-TERM
TAX-FREE BOND FUND(2) 1.96% 5.79% 6.39% 6.87%
- --------------------------------------------------------------------------------
Lehman Brothers General
Obligation Municipal Bond Index 2.62% 6.15% 6.71% 6.97%
- --------------------------------------------------------------------------------
30-DAY SEC
YIELD
- ------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND(2) 4.48%
- ------------------------------------------------------------------------
Lehman Brothers General Obligation Municipal Bond Index N/A
- ------------------------------------------------------------------------
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 12/31/98. As of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns were 3.29%, 6.16%,
5.93% and 6.97%, respectively. The 30-day SEC yield as of 12/31/98 was 4.64%.(3)
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 Fund's 30-day SEC yield as of 2/28/99 and
the taxable-equivalent yield,(1) assuming a maximum federal income tax rate of
39.6%. Shareholder tax rates may be different.
TAXABLE-
EQUIVALENT
30-DAY 30-DAY SEC
SEC YIELD YIELD
- -------------------------------------------------------------------------
Schwab Long-Term Tax-Free Bond Fund 4.48% 7.42%
- -------------------------------------------------------------------------
(1) Actual, not annualized, since period is less than one year.
(2) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/99, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
1.79%, 5.46%, 5.94% and 6.33%, respectively. The 30-day SEC yield as of
2/28/99 would have been 4.11%.
(3) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
3.18%, 5.78%, 5.48% and 6.43%, respectively. The 30-day SEC yield as of
12/31/98 would have been 4.26%.
12
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
LEHMAN BROTHERS GENERAL
SCHWAB LONG-TERM OBLIGATION MUNICIPAL BOND
TAX-FREE BOND FUND INDEX
09/11/92 $10,000 $10,000
09/30/92 $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
01/31/93 $10,240 $10,221
02/28/93 $10,682 $10,591
03/31/93 $10,484 $10,479
04/30/93 $10,632 $10,585
05/31/93 $10,690 $10,644
06/30/93 $10,883 $10,822
07/31/93 $10,879 $10,836
08/31/93 $11,157 $11,062
09/30/93 $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
01/31/94 $11,588 $11,475
02/28/94 $11,274 $11,177
03/31/94 $10,791 $10,722
04/30/94 $10,858 $10,813
05/31/94 $10,970 $10,907
06/30/94 $10,870 $10,840
07/31/94 $11,085 $11,044
08/31/94 $11,109 $11,083
09/30/94 $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
01/31/95 $11,050 $11,072
02/28/95 $11,381 $11,394
03/31/95 $11,514 $11,524
04/30/95 $11,483 $11,538
05/31/95 $11,918 $11,906
06/30/95 $11,735 $11,802
07/31/95 $11,836 $11,914
08/31/95 $11,971 $12,065
09/30/95 $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
01/31/96 $12,640 $12,738
02/29/96 $12,520 $12,651
03/31/96 $12,366 $12,489
04/30/96 $12,319 $12,454
05/31/96 $12,311 $12,449
06/30/96 $12,484 $12,585
07/31/96 $12,599 $12,699
08/31/96 $12,553 $12,697
09/30/96 $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
01/31/97 $13,097 $13,228
02/28/97 $13,223 $13,350
03/31/97 $12,987 $13,172
04/30/97 $13,146 $13,283
05/31/97 $13,358 $13,482
06/30/97 $13,502 $13,626
07/31/97 $13,933 $14,004
08/31/97 $13,728 $13,872
09/30/97 $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
01/31/98 $14,556 $14,566
02/28/98 $14,529 $14,571
03/31/98 $14,565 $14,584
04/30/98 $14,488 $14,518
05/31/98 $14,750 $14,747
06/30/98 $14,806 $14,805
07/31/98 $14,853 $14,842
08/31/98 $15,074 $15,072
09/30/98 $15,252 $15,260
10/31/98 $15,228 $15,260
11/30/98 $15,282 $15,314
12/31/98 $15,292 $15,352
01/31/99 $15,471 $15,535
02/28/99 $15,369 $15,466
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.
THE INFORMATION PRESENTED 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.
ASSETS
- ---------------------------------------------------------------
Total net assets as of 2/28/98 (000s) $ 55,625
- ---------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $ 96,558
- ---------------------------------------------------------------
Percentage growth over reporting period 74%
- ---------------------------------------------------------------
13
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
PORTFOLIO SNAPSHOT
The Schwab Long-Term Tax-Free Bond Fund invests primarily in tax-exempt or
municipal securities. The information below provides a snapshot of the Fund's
characteristics as of 2/28/99, and is not indicative of its composition after
that date. The terms used below are defined beginning on page 20. A complete
list of the securities in the Fund's portfolio as of 2/28/99 is provided in the
Schedule of Investments later in this report.
FUND FACTS
SCHWAB LONG-TERM
TAX-FREE BOND FUND PEER GROUP AVERAGE+
- -----------------------------------------------------------------------
Number of Issues 62 149
- -----------------------------------------------------------------------
30-Day SEC Yield 4.48% 3.14%
- -----------------------------------------------------------------------
Average Coupon 5.27% 5.88%
- -----------------------------------------------------------------------
Weighted Average Maturity 19.35 years 16.60 years
- -----------------------------------------------------------------------
Average Quality AAA AA
- -----------------------------------------------------------------------
Average Duration 9.12 years 7.80 years
- -----------------------------------------------------------------------
Expense Ratio 0.49%* 1.12%
- -----------------------------------------------------------------------
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/99.
+ Source: Morningstar. This information is as of 2/28/99, and is for
illustrative purposes only. It is not intended to show, predict or guarantee
future composition of the Fund. The Peer Group Average is based on the 296
municipal national long-term funds as tracked by Morningstar.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/28/99
PERCENTAGE
PERCENTAGE OF FUND
VALUE OF FUND INVESTMENTS
MATURITY RANGE (000S) INVESTMENTS (CUMULATIVE)
- --------------------------------------------------------------------
0 - 1 year $ 5,104 4.9% 4.9%
- --------------------------------------------------------------------
2 - 10 years $ 7,412 7.2% 12.1%
- --------------------------------------------------------------------
11 - 20 years $ 43,583 42.2% 54.3%
- --------------------------------------------------------------------
21 - 30 years $ 47,242 45.7% 100.0%
- --------------------------------------------------------------------
More than
30 years 0 0.0% 100.0%
- --------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INVESTMENT STYLE BOX(1)
AS OF 2/28/99
WEIGHTED AVERAGE MATURITY
-Average Credit
Short Medium Long Quality-
X High
Medium
Low
(1) Source: Morningstar. The style box represents two of the main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the Fund's portfolio as of 2/28/99 and is not
indicative of its holdings after that date, nor does it represent a risk
rating or any type of forecast of future performance. Placement is based on
the Fund's weighted average maturity and the average credit quality of its
portfolio. The Fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than 10 years.
Credit quality is defined on page 20. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
14
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2)
as of 2/28/99
Municipal bonds 95.1%
Variable-rate obligations 4.9%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/28/99
AAA 70.9%
AA 24.3%
A 4.8%
The charts above illustrate the composition of the Fund's portfolio as of
2/28/99, and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities.
(3) Credit quality is 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.
LARGEST STATE CONCENTRATIONS
% OF TOTAL NET ASSETS
- ----------------------------------------------------------------
Texas 14.1%
- ----------------------------------------------------------------
New York 12.1%
- ----------------------------------------------------------------
Pennsylvania 10.6%
- ----------------------------------------------------------------
Michigan 8.3%
- ----------------------------------------------------------------
California 7.9%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Illinois 7.5%
- ----------------------------------------------------------------
Washington 6.2%
- ----------------------------------------------------------------
Massachusetts 6.0%
- ----------------------------------------------------------------
District of Columbia 3.3%
- ----------------------------------------------------------------
Alaska 3.1%
- ----------------------------------------------------------------
15
<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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DIVIDENDS PAID BY THE SCHWAB TAX-FREE BOND FUNDS
INCOME DIVIDENDS PER SHARE
FISCAL YEAR
Schwab Short/Intermediate Schwab Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
1992* $0.17
1993** $0.13 $0.36
1994+ $0.37 $0.52
1995+ $0.40 $0.53
1996+ $0.41 $0.52
1997+ $0.41 $0.53
1998+++ $0.42 $0.53
1999(TRIANGLE) $0.198 $0.244
* Period from the Fund's inception on 9/11/92 through 12/31/92.
** Period from the Fund's inception on 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.
++ The Schwab Long-Term Tax-Free Bond Fund paid short- and long-term capital
gains of $0.04 and $0.02, respectively, on 12/31/98.
TRIANGLE For the six-month period ended 2/28/99 for both Funds.
(1) Income from the Funds may be subject to state and local taxes and to AMT.
16
<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 dayto-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.
17
<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, securities markets faced volatile
conditions due to the Asian economic crisis, the political scandal in Washington
and the instability of other countries' economies such as Brazil and Russia.
These events caused widespread turmoil in global equity markets. The result of
the turmoil initially increased demand for U.S. Treasury securities, which led
to higher prices and lower yields in the Treasury market. During the rally in
the Treasury market, investors overlooked municipal securities, which had become
extremely attractive relative to Treasury securities. Additionally, the
relatively low volatility in the municipal market has provided a safe haven for
investors during these turbulent times. The combination of these factors
attracted 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 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.
During 1998 we saw record supply in the municipal market due to the low interest
rate environment. Because of the low interest rate environment, we saw many
municipalities refinance their outstanding long-term debt, which added supply to
the municipal market. The increased supply helped the yields on municipal
securities stay very attractive relative to Treasuries. In fact, the ratio of
the 30-year Treasury-to-municipal security yields reached historic levels when
it went as high as 103% on October 5, 1998.
Let's take a look at some of the other numbers:(1)
- - Municipal security supply was up approximately 38% in 1998 from the previous
year.
- - During 1998 the yield on municipal securities averaged approximately 92% of
Treasury yields.
- - Since July the yield on municipal securities averaged approximately 96% of
Treasury yields.
- - At the end of the reporting period, municipal securities traded at
approximately 92% of Treasury yields.
For comparison purposes, in 1997 the yield on municipal securities averaged 84%
of Treasury yields. This is a more typical spread, based on historical data.
Q. HOW DID THE FUNDS PERFORM DURING THE SIX-MONTH REPORTING PERIOD?
A. Both Funds achieved positive total returns for the period, derived
predominantly from dividend income, with changes in Funds' net asset values
(NAVs) playing a relatively minor role.
The SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND achieved a total return of
2.43% for the six-month reporting period ended February 28, 1999. The return
came from a combination of dividend income of 1.94% and an increase in the
Fund's NAV of 0.49%. The NAV increase was a result of the Fund's declining
(1) Source: Bond Buyer
18
<PAGE>
yield, which fell from 3.71% at the beginning of the period to 3.47% at the end
of the period.
The SCHWAB LONG-TERM TAX-FREE BOND FUND achieved a total return of 1.96% for the
six-month reporting period ended February 28, 1999. The return came from a
combination of dividend income of 2.69% and a decrease in the Fund's NAV of
0.73%. The NAV decrease was a result of the abundance of municipal securities in
the market, which caused the value of the portfolio securities to decline.
Q. HOW WERE THE FUNDS MANAGED DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE
TO THE PORTFOLIO?
A. 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. Because 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 approach the markets cautiously, carefully
watching economic indicators and monitoring Federal Reserve Bank communications
regarding its target 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 3.49 to 4.48 years. The
Fund's weighted average maturity at the end of the reporting period was 4.15
years, up from 3.56 years at the beginning of the period.
The SCHWAB LONG-TERM TAX-FREE BOND FUND maintained an average maturity
throughout the reporting period in a range from approximately 16.47 to 19.35
years. The Fund's weighted average maturity at the end of the reporting period
was 19.35 years, up from 18.07 years at the beginning of the period.
19
<PAGE>
GLOSSARY
ALTERNATIVE MINIMUM TAX (AMT)--A federal tax designed to help ensure that at
least a minimum amount of income tax is paid by high- income corporate and
non-corporate taxpayers (including estates and trusts) who reap large tax
savings by making generous use of certain tax deductions and exemptions. The AMT
functions as a recapture mechanism, reclaiming some of the tax breaks primarily
available to high-income taxpayers, who without the AMT might be able to escape
taxation entirely.
BOND--A bond can be thought of as a loan agreement in which the bondholder lends
a set amount of money to a corporation, government agency or municipality and
expects to be repaid with interest. Although bonds are loans and contain no
rights of ownership, they do embody a legally enforceable promise to repay.
CALL--The right of bonds issuer to redeem a bond before its stated maturity
date. Bonds can be called for many reasons, but a call typically occurs when
interest rates drop and issuers are able to obtain lower interest rates to
finance their debts.
CALL PROTECTION--When managers seek call protection, they're looking for bonds
whose issuers cannot redeem them before their stated maturities, or who cannot
redeem them until a far-off date. Such bonds protect yield but are subject to
interest rate sensitivity.
COUPON--The coupon rate is the annual rate of interest on the bond's face value
that the issuer agrees to pay the holder until maturity. The coupon is
established at the time of issue and is determined by the then prevailing level
of interest rates in the marketplace. AVERAGE COUPON is the average interest
rate paid on the securities held by a fund. It is expressed as a percentage of
face value.
CREDIT RATINGS--Bonds are generally rated by one or both of the two major credit
rating agencies accepted in the industry: Moody's Investor Service and the
Standard & Poor's Corporation. They assign ratings based on the issuer's ability
to make the scheduled interest and principal payments. These ratings are
reviewed periodically and may be revised at any time.
MOODY'S S&P DESCRIPTION
- --------------------------------------------------------------
INVESTMENT GRADE
Aaa AAA Strongest capacity to pay interest and
repay principal
Aa AA Very strong capacity to pay interest and
repay principal
A A Strong capacity to pay interest and
repay principal
Baa BBB Adequate capacity to pay interest and
repay principal
BELOW INVESTMENT GRADE
Ba BB Lowest degree of speculation with
respect to capacity to pay interest and
repay principal
B B Greater vulnerability to default but
currently has the capacity to meet
interest and principal payment
Caa CCC Currently vulnerable to default--
dependent on favorable conditions
Ca CC Highly speculative
C C Highest degree of speculation-- no
interest is paid
- - D In payment default
20
<PAGE>
CREDIT RISK--The risk that an issuer of a debt security or a borrower may
default on its obligation.
DIVIDEND--The portion of a company's earnings paid to investors on a per-share
basis.
DURATION--The common objective behind the different definitions of DURATION is
to measure the price sensitivity--and therefore market risk--of a fixed income
security to changes in its yield.
EXPENSE RATIO--Amount, expressed as a percentage of total investment, that
shareholders pay annually for mutual fund operating expenses and management
fees.
GENERAL OBLIGATION BONDS (GOs)--General obligation bonds are backed by a pledge
of the issuer's full faith and credit with the timely payment of principal and
interest secured by the taxing power of the issuer.
INTEREST--Compensation, usually paid semiannually, to bondholders by the issuer.
Usually expressed as an annual percentage rate.
INTEREST RATE RISK--Risk associated with fluctuations of bond prices in response
to the general movement of interest rates and to changes in investor perceptions
of government monetary policy and economic data.
MARKET RISK--The possibility that the actual return of an investment will be
less than what's expected.
MATURITY--The maturity of a security is the date the issuer makes the final
payment to the security holder. WEIGHTED AVERAGE MATURITY is the average length
of time until the bonds held by a fund reach maturity (or are called) and are
repaid. In general, the longer the average maturity, the more a fund's share
price will fluctuate in response to changes in market interest rates.
MORTGAGE-BACKED SECURITIES--Represent an ownership interest in mortgage loans
made by financial institutions to finance the borrower's purchase of a home or
other real estate. The most basic mortgage securities, known as PASS-THROUGHs,
or participation certificates, represent a direct ownership interest in a trust
composed of a pool of mortgage loans. The majority of mortgage securities are
issued and/or guaranteed by the Government National Mortgage Association (Ginnie
Mae), the Federal National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac).
MUNICIPAL BONDS--Debt obligations of states, cities, towns, municipalities,
municipal authorities and governmental entities. They are issued to build
schools, tunnels and bridges or to finance infrastructure repairs or
improvements. The interest earned typically is free of federal income taxes and,
in some cases, also may be free of state and/or local income taxes if purchased
by residents of the issuing state. Income for some investors may be subject to
AMT.
PREPAYMENT RISK--When interest rates are falling, many homeowners will refinance
their mortgages to take advantage of the new lower rates. As a result, when
interest rates decline, prepayments of mortgage-backed securities accelerate
beyond the initial pricing assumptions, which causes the average life and
maturity of the security to shorten.
REINVESTMENT RISK--The risk that a bondholder may be able to reinvest only at
a lower rate than originally planned. If yields fall, his reinvestment income
and,
21
<PAGE>
GLOSSARY (continued)
consequently, his total return from holding the bond will fall relative to
the original yield. Conversely, if yields rise, total return will also rise.
REVENUE BONDS--Bonds with interest that is payable from a specific source of
revenue. They are generally issued to finance public projects such as bridges,
tunnels and water treatment facilities. The interest payments on a revenue bond
are typically derived from the revenues produced by the facility.
TAXABLE-EQUIVALENT YIELD--The yield needed on a taxable investment in order to
match the return offered on a tax-exempt investment. This calculation is an
important resource for determining which investments--taxable or
tax-exempt--would yield more. The taxable-equivalent yield calculation can
determine which investment offers the best return when all taxes--federal, state
and local--are taken into consideration.
TOTAL RETURN--The sum of interest, plus capital gains (or losses).
YIELD--The income generated by an investment, expressed as a percentage of its
price. Yield is only a measure of income and does not take into account the
appreciation (or depreciation) of a bond's value.
YIELD TO MATURITY--The overall rate of return an investor would receive if the
securities in a fund's portfolio were held to their maturity dates.
22
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1999 (Unaudited)
Par Value
-------- --------
MUNICIPAL BONDS -- 90.5% (a)
ALABAMA -- 1.3%
Birmingham, Alabama Special Care
Facilities Hospital Finance Authority RB
(Daughters of Charity National Health
System - St. Vincent's Hospital &
Providence) Series 1995
7.00%, 11/01/01 $ 1,000 $ 1,091
--------
ARIZONA -- 4.2%
Maricopa County, Arizona Unified School
District No. 93 (Cave Creek Project)
Series 1997A (e)
5.00%, 07/01/03 2,325 2,441
Phoenix, Arizona Civic Improvement
Corp. RB (Senior Lien Airport Project)
5.00%, 07/01/04 1,000 1,048
-------
3,489
-------
CALIFORNIA -- 2.5%
Alameda, California Public Financing
Authority RB
4.95%, 09/02/07 2,065 2,075
-------
COLORADO -- 3.8%
Grand Junction, Colorado IDRB (Dayton
Hudson Corp. Project)
5.25%, 05/01/03 2,000 2,077
Superior, Colorado Metropolitan Revenue
Refunding Bonds (District No. 2) (e)
4.63%, 12/01/13 1,000 1,013
-------
3,090
-------
DISTRICT OF COLUMBIA -- 5.1% (e)
Washington, DC Convention Center
Authority Dedicated Tax Senior Lien RB
5.00%, 10/01/06 4,000 4,225
-------
FLORIDA -- 1.6% (e)
Orange County, Florida COP Series A
4.80%, 08/01/02 1,300 1,349
-------
GEORGIA -- 2.6%
Georgia Private Colleges & University
Facilities Authority RB (Emory
University Project) Series 1992C
6.00%, 10/01/05 2,000 2,172
-------
Par Value
-------- --------
ILLINOIS -- 1.4%
Illinois Health Facility Authority RB
(OSF Healthcare System) Series 1993
5.13%, 11/15/00 $ 1,145 $ 1,175
-------
INDIANA -- 1.4% (e)
Monroe County, Indiana Industrial
Hospital Authority Revenue Refunding
Bonds (Bloomington Hospital Project)
4.60%, 05/01/04 1,105 1,135
-------
IOWA -- 2.7% (e)
Black Hawk County, Iowa Hospital
Facilities RB (Allen Memorial Hospital)
Series 1990
7.38%, 02/01/01 2,000 2,182
-------
KENTUCKY -- 5.8%
Carrollton & Henderson, Kentucky
Public Energy Authority Gas RB
Series 1998B (e)
4.25%, 01/01/08 2,000 1,995
Kentucky Housing Corp. RB Series 1993B (e)
4.45%, 07/01/00 1,000 1,011
Kentucky State Property & Buildings
Commission Revenue Refunding Bonds
(Project 55)
4.15%, 09/01/99 1,735 1,745
-------
4,751
-------
LOUISIANA -- 2.0% (e)
New Orleans, Louisiana RB Series B
4.50%, 12/01/05 1,600 1,648
-------
MASSACHUSETTS -- 3.8% (e)
Massachusetts Municipal Wholesale
Electric Co. Power Supply Systems RB
Series 1992E
5.50%, 07/01/00 2,000 2,057
Massachusetts State Water Reserves
Authority RB Series A
5.00%, 08/01/05 1,000 1,058
-------
3,115
-------
23
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 28, 1999 (Unaudited)
Par Value
-------- --------
MICHIGAN -- 3.1% (e)
Detroit, Michigan City School District GO
Series 1998B
5.00%, 05/01/04 $ 1,390 $ 1,460
Michigan State Hospital Finance
Authority RB (McLaren Obligated Group)
7.00%, 09/15/00 1,000 1,075
-------
2,535
-------
MINNESOTA -- 3.8% (e)
Minneapolis, Minnesota Community
Development Agency Tax Increment RB
7.00%, 09/01/00 1,000 1,055
Minnesota State HFA Rental Housing RB
Series D
4.80%, 08/01/01 2,060 2,099
-------
3,154
-------
MISSISSIPPI -- 2.5% (e)
Mississippi Hospital Equipment &
Facilities Authority Revenue Refunding
Bonds (Mississippi Baptist Medical Center)
5.25%, 05/01/01 2,000 2,073
-------
MISSOURI -- 4.3%
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
Water Pollution Control RB (State
Revolving Fund Program) Series 1992A
5.80%, 07/01/99 500 505
-------
3,533
-------
NEBRASKA -- 5.0% (e)
Nebraska Public Energy Agency Gas
Supply RB (Nebraska Public Gas Agency
Project) Series 1998C
4.00%, 09/01/07 2,000 1,980
Nebraska Public Power District RB Series A
5.25%, 01/01/05 2,000 2,135
-------
4,115
-------
Par Value
-------- --------
NEW YORK -- 7.5%
Franklin County, New York GO (e)
4.25%, 11/01/06 $ 715 $ 725
New York City, New York GO Series L
5.10%, 08/01/02 800 834
New York City, New York Municipal
Assistance Corp. RB Series L
5.50%, 07/01/03 2,000 2,135
New York City, New York Transitional
Finance Authority RB Series B
5.25%, 11/15/04 1,300 1,397
New York State Urban Development
Corp. RB (Correctional Facilities
Service Contract) Series 1998A
5.00%, 01/01/05 1,000 1,045
-------
6,136
-------
OHIO -- 4.7% (e)
Ohio State Public Facilities Commission
Higher Education Capital Facilities RB
Series II-A
4.38%, 11/01/00 1,750 1,783
Ohio State Public Facilities Commission
Higher Education Capital Facilities RB
Series II-B
5.00%, 11/01/01 2,000 2,077
-------
3,860
-------
PENNSYLVANIA -- 1.4% (e)
Pennsylvania State IDA RB (Economic
Development Project)
7.00%, 07/01/07 1,000 1,185
-------
SOUTH CAROLINA -- 6.4%
Charleston County, South Carolina RB
(Care Alliance Health Services)
Series 1999A (e)
4.25%, 08/15/07 3,000 3,019
Charleston, South Carolina Public
Facilities COP (Public Improvement
Project) Series 1993 (e)
4.30%, 09/01/00 1,085 1,102
Greenville, South Carolina Hospital
Facilities Revenue Refunding Bonds
Series 1993C
5.00%, 05/01/00 1,090 1,112
-------
5,233
-------
24
<PAGE>
Par Value
-------- --------
TENNESSE -- 3.2% (e)
Knox County, Tennessee Health &
Education Hospital Facilities RB
(Fort Sanders Alliance) Series 1990C
7.00%, 01/01/00 $ 2,500 $ 2,629
-------
TEXAS -- 1.2%
Houston, Texas GO Refunding Bonds
Series 1995A
5.30%, 03/01/01 1,000 1,017
-------
WASHINGTON -- 6.7%
Port of Seattle, Washington Passenger
Facilities RB Series 1998B (e)
5.00%, 12/01/07 1,395 1,466
Port of Seattle, Washington RB
Series 1998B (e)
5.50%, 09/01/02 2,775 2,928
Washington State GO Refunding Bonds
Series 1991 R-92 B
6.30%, 09/01/02 1,000 1,073
-------
5,467
-------
WISCONSIN -- 2.5%
Wisconsin State Health & Educational
Facilities Authority RB (Aurora Medical
Group Inc. Project) Series 1996 (e)
4.90%, 11/15/02 1,000 1,043
Wisconsin State Health & Educational
Facilities Authority RB
(Carroll College Inc. Project)
4.80%, 10/01/06 1,000 1,011
-------
2,054
-------
TOTAL MUNICIPAL BONDS
(Cost $73,093) 74,488
-------
VARIABLE RATE OBLIGATIONS -- 8.3% (b) (e)
CALIFORNIA -- 3.3%
California Health Facilities Finance
Authority RB (Adventist Hospital Health)
Series 1998A
3.10%, 03/01/99 200 200
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986A
3.55%, 03/01/99 500 500
Par Value
-------- --------
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986B
3.55%, 03/01/99 $ 1,000 $ 1,000
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986C
3.55%, 03/01/99 300 300
California Pollution Control Financing
Authority Revenue Refunding Bonds
(Pacific Gas & Electric) Series 1996F
3.10%, 03/01/99 100 100
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds
Series 1993A
3.00%, 03/01/99 600 600
-------
2,700
-------
NEW MEXICO -- 2.7%
Farmington, New Mexico Pollution
Control Revenue Refunding Bonds
(Arizona Public Service Company)
Series 1994B
3.20%, 03/01/99 2,200 2,200
-------
NEW YORK -- 1.9%
Long Island, New York Power Authority
Electrical System Subordinated RB
Series 5
3.20%, 03/01/99 1,600 1,600
-------
WYOMING -- 0.4%
Uinta County, Wyoming Pollution
Control RB (Chevron USA Inc. Project)
Series 1993
3.20%, 03/01/99 300 300
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $6,800) 6,800
-------
25
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 28, 1999 (Unaudited)
Shares Value
-------- --------
TEMPORARY INVESTMENTS -- 0.1% (c)
Provident Institutional Funds -
Muni Fund Portfolio
4.51% 114 $ 114
-------
TOTAL TEMPORARY INVESTMENTS
(Cost $114) 114
-------
TOTAL INVESTMENTS -- 98.9%
(Cost $80,007) 81,402
-------
OTHER ASSETS AND LIABILITIES-- 1.1%
Other assets 1,497
Liabilities (597)
-------
900
-------
TOTAL NET ASSETS-- 100.0% $82,302
=======
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
26
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1999 (Unaudited)
Par Value
-------- --------
MUNICIPAL BONDS -- 101.7% (a)
ALASKA -- 2.1%
Valdez, Alaska Marine Terminal Revenue
Refunding Bonds (BP Pipeline Project)
Series 1993B
5.50%, 10/01/28 $ 2,000 $ 2,035
--------
ARIZONA -- 2.4% (e)
Maricopa County, Arizona Alhambra
Elementary School District 68 School
Improvement GO Refunding Bonds
Series 1994A
6.80%, 07/01/12 2,000 2,300
--------
CALIFORNIA -- 6.9% (e)
Oxnard, California COP
4.75%, 06/01/19 1,000 962
San Mateo County, California Authority
Lease RB (Capital Projects)
Series 1999A
4.75%, 07/15/23 3,000 2,888
Santa Clara County, California Financing
Authority Lease RB (VMC Facility
Replacement Project) Series 1994A
7.75%, 11/15/10 1,000 1,310
Santa Clara County, California Financing
Authority Lease Revenue Refunding
Bonds Series A
5.00%, 11/15/17 1,500 1,509
---------
6,669
---------
COLORADO -- 2.0% (e)
Colorado State Public Highway Authority
RB (E-470) Series 1997A
5.00%, 09/01/26 2,000 1,955
--------
DISTRICT OF COLUMBIA -- 3.2% (e)
Washington D.C. Convention Center
Authority Dedicated Tax Senior Lien RB
5.25%, 10/01/12 3,000 3,146
--------
FLORIDA -- 2.4% (e)
Hillsborough County, Florida Aviation
Authority RB (Tampa International
Airport) Series 1996B
5.88%, 10/01/23 1,250 1,359
Par Value
-------- --------
Tallahassee, Florida Energy System
Revenue Refunding Bonds Series 1998A
4.75%, 10/01/21 $ 1,000 $ 960
--------
2,319
--------
ILLINOIS -- 7.5%
Chicago, Illinois Park District GO
Series 1999B (d) (e)
4.75%, 01/01/26 2,750 2,575
Illinois Health Facilities Authority
Revenue Refunding Bonds (Northwestern
Medical Faculty Foundation) (e)
5.13%, 11/15/28 3,500 3,425
Illinois State Toll Highway Authority
Priority RB Series 1992A
6.38%, 01/01/15 1,100 1,221
-------
7,221
-------
IOWA -- 0.7% (e)
Cedar Rapids, Iowa Hospital Facilities RB
(St. Luke's Methodist Project)
Series 1993
6.13%, 08/15/13 600 669
-------
KENTUCKY -- 3.1% (e)
Carrollton & Henderson, Kentucky Public
Energy Authority Gas RB Series 1998B
4.25%, 01/01/08 2,000 1,995
Jefferson County, Kentucky Health
Facilities RB (University Medical
Center Project)
5.25%, 07/01/22 1,000 1,016
-------
3,011
-------
LOUISIANA -- 1.1% (e)
New Orleans, Louisiana GO Refunding
Bonds Series B
5.00%, 12/01/12 1,000 1,034
-------
MARYLAND -- 1.5%
Baltimore, Maryland Revenue Refunding
Bonds (Water Project) Series 1998A (e)
5.00%, 07/01/18 1,000 1,001
Maryland State Department of Housing
& Community Development RB Series 1996A
5.88%, 07/01/16 400 421
-------
1,422
-------
27
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 28, 1999 (Unaudited)
Par Value
-------- --------
MASSACHUSETTS -- 6.0%
Massachusetts State HFA M/F Residential
Housing RB Series 1989A
7.80%, 08/01/22 $ 800 $ 828
Massachusetts State Industrial Financing
Agency RB (Suffolk University) (e)
5.25%, 07/01/27 2,000 2,013
Massachusetts State Port Authority RB
Series 1998D
5.00%, 07/01/28 3,000 2,925
--------
5,766
--------
MICHIGAN -- 8.3% (e)
Detroit, Michigan City School District GO
Series 1998B
5.00%, 05/01/17 5,000 4,969
Eastern Michigan University Board of
Regents RB
5.50%, 06/01/17 2,000 2,105
Wayne Charter County, Michigan
Airport RB (Detroit Airport) Series 1998A
5.00%, 12/01/19 1,000 970
--------
8,044
--------
MISSISSIPPI -- 2.4% (e)
Mississippi Hospital Equipment &
Facilities Authority RB (Mississippi
Baptist Medical Center)
6.00%, 05/01/13 2,150 2,365
--------
NEBRASKA -- 3.1% (e)
Nebraska Public Energy Agency Gas
Supply RB (Nebraska Public Gas Agency
Project) Series 1998C
4.00%, 09/01/07 3,000 2,970
---------
NEW YORK -- 10.2%
Long Island, New York Power Authority
Electric System RB Series 1998A (e)
5.13%, 12/01/22 1,500 1,507
New York City, New York Municipal Finance
Authority Water & Sewer System RB
Series 1997A
5.13%, 06/15/21 2,500 2,484
New York City, New York Transitional
Finance Authority Future Tax RB
Series 1999B (d)
4.75%, 11/01/23 4,000 3,815
Par Value
-------- --------
New York State GO Refunding Bonds
Series 1996A
5.30%, 07/15/15 $ 2,000 $ 2,063
--------
9,869
--------
NORTH CAROLINA -- 2.1%
North Carolina Medical Care Community
Health Care Facilities RB (Carolina Medi
Corp. Project)
5.25%, 05/01/21 2,000 2,000
--------
PENNSYLVANIA -- 10.6%
Pennsylvania State Higher Education
Facilities Authority RB (University of
Pennsylvania Health Services)
Series 1996A
5.75%, 01/01/17 2,000 2,100
Pennsylvania Turnpike Commission Oil
Franchise Tax RB Series 1998A (e)
4.75%, 12/01/27 3,000 2,850
Philadelphia, Pennsylvania GO (e)
4.75%, 03/15/17 2,500 2,419
Pittsburgh, Pennsylvania Water & Sewer
Authority RB Series B (e)
5.75%, 09/01/25 1,250 1,381
Seneca Valley, Pennsylvania School
District GO Refunding Bonds Series AA (e)
5.15%, 02/15/20 1,500 1,506
--------
10,256
--------
RHODE ISLAND -- 1.1%
Rhode Island Housing & Mortgage
Finance Corp. Homeownership
Opportunity RB Series 10A
6.50%, 10/01/22 1,000 1,055
--------
TEXAS -- 13.6%
Austin, Texas Utilities System Revenue
Refunding Bonds (e)
5.13%, 11/15/16 3,000 3,026
Brazos River, Texas River Authority RB
(Houston Industries Project) (e)
5.13%, 05/01/19 1,750 1,754
Conroe, Texas Independent School
District GO Refunding Bonds (e)
5.25%, 02/15/21 1,000 1,010
28
<PAGE>
Par Value
-------- --------
Elgin, Texas Independent School
District GO Refunding Bonds (e)
5.25%, 10/01/24 $ 2,000 $ 2,015
Texas Southern University Revenue
Refunding Bond Series 1998A-1 (e)
4.75%, 11/01/17 1,545 1,489
Texas State Coastal Water Authority
Contract RB (City of Houston
Projects) (d) (e)
5.00%, 12/15/25 2,000 1,953
Texas State Public Financing Authority GO
Series 1994B
5.75%, 10/01/14 1,025 1,122
University of Texas Revenue Unrefunded
Balance RB Series 1991B
6.75%, 08/15/13 680 732
--------
13,101
--------
UTAH -- 2.0% (e)
Utah State HFA S/F Mortgage RB Series E-1
5.38%, 07/01/18 1,880 1,897
--------
VIRGINIA -- 2.1%
Virginia State Public Building Authority
Public Facilities RB Series 1997A
5.50%, 08/01/16 2,000 2,088
--------
WASHINGTON -- 6.2%
King County, Washington Lease RB
(King Street Center Project) (e)
5.13%, 06/01/17 1,000 1,006
King County, Washington School
District No. 415 GO Refunding Bonds
Series 1993A
5.55%, 12/01/11 500 547
Seattle, Washington Municipal Light &
Power Revenue Refunding Bonds
Series 1993
5.40%, 05/01/08 2,300 2,447
Washington State Health Care Facilities
Authority RB (Swedish Health System) (e)
5.13%, 11/15/18 2,000 1,995
--------
5,995
--------
Par Value
-------- --------
WISCONSIN -- 1.1% (e)
Wisconsin State Health & Education
Facilities Authority RB (Medical College
of Wisconsin Project)
5.50%, 03/01/17 $ 1,000 $ 1,050
--------
TOTAL MUNICIPAL BONDS
(Cost $94,903) 98,237
--------
VARIABLE RATE OBLIGATIONS -- 5.2% (b) (e)
ALASKA -- 1.0%
Valdez, Alaska Marine Terminal Revenue
Refunding Bonds (Exxon Pipeline Co.
Project) Series 1993C
3.15%, 03/01/99 1,000 1,000
--------
CALIFORNIA -- 1.0%
California Pollution Control Financing
Authority RB (Shell Oil Co. Project)
Series 1991B
3.00%, 03/01/99 750 750
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds
(Districts 105, 140, 240 & 290) Series 1995
3.10%, 03/01/99 200 200
--------
950
--------
NEW MEXICO -- 0.4%
Farmington, New Mexico Pollution Control
Revenue Refunding Bonds (Arizona
Public Service Co.) Series 1994A
3.20%, 03/01/99 400 400
--------
NEW YORK -- 1.9%
Long Island, New York Power Authority
Electric System Subordinated RB
3.20%, 03/01/99 800 800
New York City, New York GO Series 1993B-4
3.30%, 03/01/99 1,000 1,000
--------
1,800
--------
TEXAS -- 0.5%
Brazos River, Texas River Authority
Pollution Control Revenue Refunding
Bonds (Utilities Electric Co. Project)
Series 1996B (e)
3.65%, 03/01/99 500 500
--------
29
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 28, 1999 (Unaudited)
Par Value
-------- --------
WYOMING -- 0.4%
Unita County, Wyoming Pollution Control
Revenue Refunding Bonds
(Chevron USA Inc. Project)
3.20%, 03/01/99 $ 400 $ 400
--------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $5,050) 5,050
--------
Shares
--------
TEMPORARY INVESTMENTS -- 0.1% (c)
Provident Institutional Funds -
Muni Fund Portfolio
4.51% 54 54
--------
TOTAL TEMPORARY INVESTMENTS
(Cost $54) 54
--------
TOTAL INVESTMENTS -- 107.0%
(Cost $100,007) 103,341
--------
OTHER ASSETS AND LIABILITIES-- (7.0%)
Other assets 1,910
Liabilities (8,693)
--------
(6,783)
--------
TOTAL NET ASSETS-- 100.0% $ 96,558
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
30
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
For the six months ended February 28, 1999 (Unaudited)
(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.
(e) Security has one or more third party credit enhancements.
PORTFOLIO ABBREVIATIONS
COP Certificates of Participation
GO General Obligation
HFA Housing Finance Agency
IDA Industrial Development Authority
IDRB Industrial Development Revenue Bond
M/F Multi-Family
RB Revenue Bond
S/F Single-Family
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 28, 1999 (Unaudited)
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
ASSETS
Investments, at value (Cost:$80,007,
$100,007, respectively) $81,402 $103,341
Receivables:
Interest 1,067 1,297
Fund shares sold 423 549
Prepaid expenses 7 64
------- --------
Total assets 82,899 105,251
------- --------
LIABILITIES
Payables:
Dividends 28 40
Investments purchased -- 8,421
Fund shares redeemed 505 167
Investment advisory and
administration fees 14 10
Transfer agency and
shareholder sevice fees -- 4
Other liabilities 50 51
------- --------
Total liabilities 597 8,693
------- --------
Net assets applicable to
outstanding shares $82,302 $ 96,558
======= ========
NET ASSETS CONSIST OF:
Paid-in-capital $81,278 $ 93,138
Undistributed net investment
income 8 21
Accumulated net realized gain
(loss) on investments sold (379) 65
Net unrealized appreciation
on investments 1,395 3,334
------- --------
$82,302 $ 96,558
======= ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 7,983 8,835
Net asset value, offering and redemption
price per share $10.31 $10.93
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 28, 1999 (Unaudited)
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
Interest income $1,575 $2,003
------ ------
Expenses:
Investment advisory and
administration fees 149 167
Transfer agency and
shareholder service fees 91 102
Custodian and portfolio
accounting fees 25 28
Registration fees 15 20
Professional fees 8 6
Shareholder reports 13 14
Trustees' fees 4 3
Insurance and other expenses 9 10
------ ------
314 350
Less: expenses reduced (see Note 4) (136) (151)
------ ------
Total expenses incurred by Fund 178 199
------ ------
Net investment income 1,397 1,804
------ ------
Net realized gain on investments sold 82 63
Net unrealized appreciation
(depreciation) on investments 241 (311)
------ ------
Net gain (loss) on investments 323 (248)
------ ------
Increase in net assets resulting
from operations $1,720 $1,556
====== ======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
----------------------------- ------------------------------
Six months Year Six months Year
ended ended ended ended
February 28, 1999 August 31, February 28, 1999 August 31,
(Unaudited) 1998 (Unaudited) 1998
----------------- --------- ----------------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,397 $ 2,341 $ 1,804 $ 2,651
Net realized gain on investments sold 82 54 63 405
Net unrealized appreciation (depreciation)
on investments 241 627 (311) 2,070
-------- -------- -------- --------
Increase in net assets resulting from operations 1,720 3,022 1,556 5,126
-------- -------- -------- --------
Distributions:
Dividends to shareholders from net investment income (1,416) (2,393) (1,825) (2,706)
Distributions to shareholders
from net realized gains -- -- (395) (25)
-------- -------- -------- --------
Total distributions to shareholders (1,416) (2,393) (2,220) (2,731)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 27,144 32,802 39,066 37,753
Net asset value of shares issued in
reinvestment of dividends 1,086 1,829 1,632 1,952
Less payments for shares redeemed (14,513) (21,376) (13,401) (18,942)
-------- -------- -------- --------
Increase in net assets from capital
share transactions 13,717 13,255 27,297 20,763
-------- -------- -------- --------
Total increase in net assets 14,021 13,884 26,633 23,158
Net assets:
Beginning of period 68,281 54,397 69,925 46,767
-------- -------- -------- --------
End of period (including undistributed
net investment income of $8, $27, $21
and $42, respectively) $ 82,302 $ 68,281 $ 96,558 $ 69,925
======== ======== ======== ========
Number of Fund shares:
Sold 2,633 3,211 3,551 3,473
Reinvested 106 179 149 180
Redeemed (1,408) (2,094) (1,217) (1,743)
-------- -------- -------- --------
Net increase in shares outstanding 1,331 1,296 2,483 1,910
Shares outstanding:
Beginning of period 6,652 5,356 6,352 4,442
-------- -------- -------- --------
End of period 7,983 6,652 8,835 6,352
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Short/Intermediate Tax-Free Bond Fund
-----------------------------------------------------------
1999 1 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
Net asset value at beginning of period $ 10.26 $ 10.16 $ 10.04 $ 10.12 $ 9.92 $ 10.15
------- ------- ------- ------- ------- ------
From investment operations:
Net investment income 0.20 0.42 0.41 0.41 0.40 0.37
Net realized andunrealized gain (loss)
on investments 0.05 0.10 0.12 (0.08) 0.20 (0.23)
------- ------- ------- ------- ------- ------
Total from investment operations 0.25 0.52 0.53 0.33 0.60 0.14
Less distributions:
Dividends from net investment income (0.20) (0.42) (0.41) (0.41) (0.40) (0.37)
------- ------- ------- ------- ------- ------
Total distributions (0.20) (0.42) (0.41) (0.41) (0.40) (0.37)
------- ------- ------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 10.31 $ 10.26 $ 10.16 $ 10.04 $ 10.12 $ 9.92
======= ======= ======= ======= ======= ======
Total return (%) 2.43** 5.17 5.40 3.32 6.23 1.42
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------
Ratio of net operating expenses
to average net assets 0.49* 0.49 0.49 0.49 0.49 0.48
Reductions reflected in above expense ratio 0.37* 0.36 0.47 0.41 0.40 0.43
Ratio of net investment income
to average net assets 3.91* 3.99 4.08 4.06 4.06 3.71
Portfolio turnover rate 8 22 20 44 35 19
Net assets, end of period (000s) $82,302 $68,281 $54,397 $54,132 $52,504 $63,889
<FN>
1 For the six months ended February 28, 1999 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Long-Term Tax-Free Bond Fund
-----------------------------------------------------------
1999 1 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
Net asset value at beginning of period $ 11.01 $ 10.53 $ 10.13 $ 10.16 $ 9.95 $ 10.59
------- ------- ------- ------- ------- ------
From investment operations:
Net investment income 0.25 0.53 0.53 0.52 0.53 0.52
Net realized andunrealized gain (loss)
on investments (0.03) 0.48 0.40 (0.03) 0.21 (0.56)
------- ------- ------- ------- ------- ------
Total from investment operations 0.22 1.01 0.93 0.49 0.74 (0.04)
Less distributions:
Dividends from net investment income (0.25) (0.53) (0.53) (0.52) (0.53) (0.52)
Distributions from net realized gain
on investments (0.05) -- -- -- -- (0.08)
------- ------- ------- ------- ------- ------
Total distributions (0.30) (0.53) (0.53) (0.52) (0.53) (0.60)
------- ------- ------- ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 10.93 $ 11.01 $ 10.53 $ 10.13 $ 10.16 $ 9.95
======= ======= ======= ======= ======= ======
Total return (%) 1.96** 9.81 9.36 4.87 7.76 (0.42)
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------
Ratio of net operating expenses
to average net assets 0.49* 0.49 0.49 0.49 0.54 0.51
Reductions reflected in above expense ratio 0.37* 0.37 0.53 0.45 0.39 0.48
Ratio of net investment income
to average net assets 4.50* 4.76 5.09 5.06 5.40 5.05
Portfolio turnover rate 4 39 61 50 70 62
Net assets, end of period (000s) $96,558 $69,925 $46,767 $43,672 $41,413 $43,975
<FN>
1 For the six months ended February 28, 1999 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 28, 1999 (Unaudited)
(All dollar amounts are in thousands unless otherwise noted)
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. 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 original issue 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.
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.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its net investment income and net realized
capital gains, if any, to shareholders. Therefore, no federal income tax
provision is required. Each Fund is considered a separate entity for tax
purposes.
Net unrealized appreciation (depreciation) at February 28, 1999, (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 $1,395 $1,413 $ (18)
Schwab Long-Term Tax-Free
Bond Fund $3,334 $3,488 $(154)
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
08/31/04 296
----
Total capital loss carryforwards $486
====
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 Adviser"). 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 Adviser has reduced a portion of its
fee for the six months ended February 28, 1999 (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.
OFFICERS AND TRUSTEES -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Adviser and/or Schwab. During the
six months ended February 28, 1999, the Trust made no direct payments to its
officers or trustees who are "interested persons" within the meaning of the the
act, as amended. The Funds incurred fees aggregating $7 related to the Trust's
unaffiliated trustees.
38
<PAGE>
INTERFUND TRANSACTIONS -- During the six months ended February 28, 1999, the
Funds engaged in purchase and sale transactions with funds that have a common
investment adviser, common trustees, and common officers. These transactions,
made at current market value pursuant to Rule 17a-7 under the Act, aggregated
$20,000 and $33,790 for the Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund, respectively.
4. EXPENSES REDUCED BY THE INVESTMENT ADVISER AND SCHWAB
The Investment Adviser and Schwab guarantee that, through at least October 31,
1999, each Fund's total operating expenses will not exceed 0.49% of the Fund's
average daily net assets after reductions. For the purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses and
taxes.
During the six months ended February 28, 1999, the total of such fees reduced by
the Investment Adviser was $136 for the Schwab Short/Intermediate Tax-Free Bond
Fund, and $151 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 six months ended February 28, 1999, were as follows:
Schwab Short/Intermediate Schwab Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------------- ------------------
Purchases $17,474 $40,836
Proceeds of sales
and maturities $ 5,324 $ 2,940
39
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THE SCHWAB FUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money market
funds.
Please call 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.
METHODS FOR PLACING ORDERS
The information below outlines how Schwab brokerage account investors can place
orders. If you are investing through a third-party investment provider, methods
for placing orders may be different.
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
MAIL
Write to SchwabFunds-Registered Trademark- at:
P.O. Box 7575, San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signatures of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab office.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab MarketManager Growth Portfolio
Schwab MarketManager Balanced Portfolio
SCHWAB STOCK FUNDS
Schwab S&P 500 Fund
Schwab 1000 Fund-Registered Trademark-
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager Small Cap Portfolio
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio
SCHWAB BOND FUNDS
Schwab Total Bond Market Index Fund
Schwab Short-Term Bond Market Index Fund
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(1) that seek high current income
consistent 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) Investments in money market funds are neither insured nor guaranteed by the
Federal Deposit Insurance Corporation (FDIC) or any other government agency
and, although they seek to preserve the value of your investment at $1 per
share, it is possible to lose money.
<PAGE>
SCHWAB FUNDS
[LOGO]
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc.
P.O. Box 7575, San Francisco, CA 94120-7575
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
-C- 1999 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. (0099-1495) MKT3482-1 (4/99)
