SCHWABFUNDS-Registered TradeMark-
SCHWAB
TAX-FREE
BOND FUNDS
Annual Report
August 31, 1999
<PAGE>
SCHWAB TAX-FREE BOND FUNDS
We're pleased to bring you this annual report for the following funds (the
funds) for the one year period ended August 31, 1999:
- Schwab Short/Intermediate Tax-Free Bond Fund
- Schwab Long-Term Tax-Free Bond Fund
During the reporting period, the funds continued to attempt to provide a high
level of current income exempt from federal income taxes, consistent with the
preservation of capital. 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.
Income from the funds may be subject to state and local taxes and to the federal
alternative minimum tax (AMT).
CONTENTS
<TABLE>
<S> <C>
- ---------------------------------------------
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 21
- ---------------------------------------------
Financial Statements and Notes 24
- ---------------------------------------------
</TABLE>
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Dear Shareholder,
[PHOTO]
During the past several years, the benefits of investing have been readily
apparent, while the risks have been somewhat less obvious. Over the past several
months, however, investors have witnessed sharp drops and big recoveries,
sometimes within the same day. After enjoying favorable 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 U.S. 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 these trends serve 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 plan. 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 SchwabFunds-Registered Trademark-
become one of the largest and fastest-growing mutual fund families in the
nation. Charles Schwab Investment Management (CSIM), the investment adviser, now
manages assets approaching $100 billion on behalf of more than 4.7 million
accounts. We offer a broad spectrum of 40 mutual funds for investors with
varying financial situations and goals.
Thank you for your investment in SchwabFunds. We continue to do our best to
warrant the trust you have placed in us.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
August 31, 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.
1
<PAGE>
WHAT EVERY BOND FUND INVESTOR SHOULD KNOW
WHY ASSET ALLOCATION MATTERS
As most investors know, one of the most compelling reasons to invest in a mutual
fund is diversification. By allocating your assets across many different
securities, a mutual fund helps reduce the risk that you might otherwise
encounter by owning just a few individual stocks or bonds.
Don't forget, however, that diversification across your portfolio is just as
important as diversification within 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 results.
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 professionals who
know and understand the intricacies of the bond market and its operations.
SIMPLICITY: Bond funds can be a good choice 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: SchwabFunds 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.
Bond index funds offer some of the same benefits as equity index funds,
including broad diversification, lower expenses, consistent investment style and
straightforward choices. In addition, certain 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
<PAGE>
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. 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.*
SCHWAB BOND FUNDS
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.
TAXABLE BOND FUNDS
SCHWAB YIELDPLUS FUND-TM- seeks to invest in fixed-income securities and its
overall portfolio is managed to maintain an average maturity of one year or
less.
SCHWAB SHORT-TERM BOND MARKET INDEX FUND seeks to track the Lehman Brothers
Short Mutual Fund (1-5 Year) Government/Corporate Bond Index. This index
represents the performance of U.S. government, U.S. corporate bonds and dollar
denominated foreign issues 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 California municipal bonds with 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 visit us at
WWW.SCHWAB.COM/SCHWABFUNDS or 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
SchwabFunds-Registered Trademark-. Our automated methods allow you to invest or
transfer money to your Schwab account on a regular basis; you can invest through
our Web site at WWW.SCHWAB.COM/SCHWABFUNDS; through our automated touch-tone
telephone service, TeleBroker,-Registered Trademark- by calling 800-272-4922; or
you can also visit us 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.
*Some investors may be subject to the alternative minimum tax (AMT); consult
your tax advisor.
3
<PAGE>
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic product (GDP), continued its
lengthy expansion with a strong real growth rate of 3.9% for the year ended June
1999--a rate in excess of the Federal Reserve's estimate of the long-term
maximum sustainable non-inflationary growth rate.
The slower second quarter growth rate of 1.6%, reflecting the drag from a
bloated trade deficit, marks the 33rd 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, in our opinion.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GROSS DOMESTIC PRODUCT REAL GDP
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED RATE)
<S> <C>
Q1 1990 3.90%
Q2 1990 1.20%
Q3 1990 -1.90%
Q4 1990 -4.00%
Q1 1991 -2.10%
Q2 1991 1.80%
Q3 1991 1.00%
Q4 1991 1.00%
Q1 1992 4.70%
Q2 1992 2.50%
Q3 1992 3.00%
Q4 1992 4.30%
Q1 1993 0.10%
Q2 1993 2.00%
Q3 1993 2.10%
Q4 1993 5.30%
Q1 1994 3.00%
Q2 1994 4.70%
Q3 1994 1.80%
Q4 1994 3.60%
Q1 1995 1.70%
Q2 1995 0.40%
Q3 1995 3.30%
Q4 1995 2.80%
Q1 1996 3.30%
Q2 1996 6.10%
Q3 1996 2.10%
Q4 1996 4.20%
Q1 1997 4.20%
Q2 1997 4.00%
Q3 1997 4.20%
Q4 1997 3.00%
Q1 1998 5.50%
Q2 1998 1.80%
Q3 1998 3.70%
Q4 1998 6.00%
Q1 1999 4.30%
Q2 1999 1.60%
Source: Bloomberg L.P.
</TABLE>
The consensus of most economists is that the U.S. economy appears poised for
continued growth, but at a more moderate pace than the 4.3% rate experienced
during 1998. High levels of consumer confidence and spending, low interest
rates, rising real wages and strong gains in stock prices have been the
principal factors continuing this lengthy expansion.
Last year's concerns over the impact of international economic problems have
been displaced by concerns over imbalances in the domestic economy, namely the
surging current account (trade) deficit, record high stock valuations, and the
negative savings rate. Looking ahead, the behavior of domestic consumers in
response to continued stock market volatility may also be a key determinant of
whether the economy continues on its current course or softens throughout the
remainder of 1999, in our opinion.
UNEMPLOYMENT
August's unemployment rate of 4.2% was a 28-year low. Labor markets continue to
be extremely tight in many areas of the country. Growth in the labor force has
slowed, and there continues to be concern that wage and benefits increases may
begin to put more pressure on labor costs (refer to Employment Cost Index on the
next page).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
Jan-90 5.40%
Feb-90 5.30%
Mar-90 5.20%
Apr-90 5.40%
May-90 5.40%
Jun-90 5.20%
Jul-90 5.50%
Aug-90 5.70%
Sep-90 5.90%
Oct-90 5.90%
Nov-90 6.20%
Dec-90 6.30%
Jan-91 6.40%
Feb-91 6.60%
Mar-91 6.80%
Apr-91 6.70%
May-91 6.90%
Jun-91 6.90%
Jul-91 6.80%
Aug-91 6.90%
Sep-91 6.90%
Oct-91 7.00%
Nov-91 7.00%
Dec-91 7.30%
Jan-92 7.30%
Feb-92 7.40%
Mar-92 7.40%
Apr-92 7.40%
May-92 7.60%
Jun-92 7.80%
Jul-92 7.70%
Aug-92 7.60%
Sep-92 7.60%
Oct-92 7.30%
Nov-92 7.40%
Dec-92 7.40%
Jan-93 7.30%
Feb-93 7.10%
Mar-93 7.00%
Apr-93 7.10%
May-93 7.10%
Jun-93 7.00%
Jul-93 6.90%
Aug-93 6.80%
Sep-93 6.70%
Oct-93 6.80%
Nov-93 6.60%
Dec-93 6.50%
Jan-94 6.80%
Feb-94 6.60%
Mar-94 6.50%
Apr-94 6.40%
May-94 6.10%
Jun-94 6.10%
Jul-94 6.30%
Aug-94 6.00%
Sep-94 5.80%
Oct-94 5.80%
Nov-94 5.60%
Dec-94 5.50%
Jan-95 5.60%
Feb-95 5.40%
Mar-95 5.30%
Apr-95 5.80%
May-95 5.80%
Jun-95 5.60%
Jul-95 5.60%
Aug-95 5.70%
Sep-95 5.60%
Oct-95 5.50%
Nov-95 5.70%
Dec-95 5.60%
Jan-96 5.60%
Feb-96 5.50%
Mar-96 5.60%
Apr-96 5.50%
May-96 5.60%
Jun-96 5.30%
Jul-96 5.50%
Aug-96 5.10%
Sep-96 5.20%
Oct-96 5.20%
Nov-96 5.30%
Dec-96 5.40%
Jan-97 5.30%
Feb-97 5.30%
Mar-97 5.10%
Apr-97 5.00%
May-97 4.70%
Jun-97 5.00%
Jul-97 4.70%
Aug-97 4.90%
Sep-97 4.70%
Oct-97 4.70%
Nov-97 4.60%
Dec-97 4.70%
Jan-98 4.50%
Feb-98 4.60%
Mar-98 4.60%
Apr-98 4.30%
May-98 4.30%
Jun-98 4.50%
Jul-98 4.50%
Aug-98 4.50%
Sep-98 4.50%
Oct-98 4.50%
Nov-98 4.40%
Dec-98 4.30%
Jan-99 4.30%
Feb-99 4.40%
Mar-99 4.20%
Apr-99 4.30%
May-99 4.20%
Jun-99 4.30%
Jul-99 4.30%
Aug-99 4.20%
Source: BLOOMBERG L.P.
</TABLE>
4
<PAGE>
INFLATION
Price inflation continued to remain well contained, in our opinion. The CPI rose
just 2.3% for the year ended August 1999. Its core rate (which excludes the more
volatile food and energy components) rose 1.9%. The GDP price deflator, the
broadest measure of inflation, indicated prices rising at an annual rate of 1.2%
for year ended June 1999. The Employment Cost Index, which measures inflation in
wages, salaries and benefits was also well contained, increasing 3.2% for the
year ended June 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION QUARTERLY MONTHLY
EMPLOYMENT CONSUMER
COST INDEX PRICE INDEX
<S> <C> <C>
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 3.7% 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 3.0% 1.7%
Feb-99 3.0% 1.6%
Mar-99 3.0% 1.7%
Apr-99 3.2% 2.3%
May-99 3.2% 2.1%
Jun-99 3.2% 2.0%
Jul-99 2.1%
Aug-99 2.3%
Source: Bloomberg L.P.
</TABLE>
Although there seems to be little evidence of accelerating core inflation, the
Federal Reserve has expressed concern that should labor markets continue to
tighten, increases in wages may outpace productivity growth. In that '
environment, productivity growth can become particularly critical, as it enables
companies to pay higher wages without raising prices. Non-farm productivity grew
2.2% in 1998 and at a 2.1% annualized rate in the first half of 1999, continuing
a healthy trend that began in 1996.*
ASSET CLASS PERFORMANCE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE MSCI-EAFE S&P 500 RUSSELL 2000 LEHMAN BROTHERS
GROWTH OF A HYPOTHETICAL $1 INVESTMENT INDEX INDEX INDEX AGGREGATE
BOND INDEX
<S> <C> <C> <C> <C>
Aug-98 $1.000 $1.000 $1.000 $1.000
Sep-98 $0.969 $1.064 $1.078 $1.023
Oct-98 $1.070 $1.151 $1.122 $1.018
Nov-98 $1.125 $1.220 $1.181 $1.024
Dec-98 $1.170 $1.291 $1.254 $1.027
Jan-99 $1.166 $1.345 $1.271 $1.034
Feb-99 $1.138 $1.303 $1.168 $1.016
Mar-99 $1.186 $1.355 $1.186 $1.022
Apr-99 $1.234 $1.407 $1.292 $1.025
May-99 $1.170 $1.374 $1.311 $1.016
Jun-99 $1.216 $1.450 $1.371 $1.013
Jul-99 $1.252 $1.405 $1.333 $1.008
Aug-99 $1.257 $1.398 $1.284 $1.008
COMPILED BY CHARLES SCHWAB & CO., INC.
</TABLE>
Large-cap domestic stocks, as represented by the S&P 500-Registered Trademark-
Index, continued to be the strongest performing asset class, achieving a total
return of 39.8% for year ended August 1999. Within the S&P 500, growth stocks
continued to be the strongest performing style for the period. Small-cap stocks
as represented by the Russell 2000-Registered Trademark- Index, also produced a
return of 28.4%.
Assisted by the rebound in Asian markets, international stock returns, as
represented by the MSCI-EAFE-Registered Trademark- Index, produced a total
return of 25.7% for the one-year reporting period.
* Source: Bloomberg L.P.
5
<PAGE>
MARKET OVERVIEW (continued)
Reflecting the rise in intermediate- and long-term interest rates, fixed income
returns were generally flat for the period. Bond returns, as represented by the
Lehman Brothers Aggregate Bond Index, were 0.8% for the one-year reporting
period.
U.S. EQUITY VALUATION
The price/earnings ratio for the S&P 500-Registered Trademark- Index reached
record highs during the reporting period and ended the period at a lofty 31.2
times earnings, more than twice its long-term average. The price/earnings ratio,
also known as a multiple, is the price of a stock divided by its earnings per
share, and generally indicates how much investors are willing to pay for a
company's earning potential. Based on other traditional market valuation
measures such as the price-to-book value ratio or dividend yield, the U.S. stock
market continues to remain at record high valuation levels.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 PRICE/EARNINGS RATIO
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24.00
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Mar-98 27.76
Apr-98 26.51
May-98 26.12
Jun-98 27.09
Jul-98 26.78
Aug-98 22.77
Sep-98 24.23
Oct-98 27.58
Nov-98 30.14
Dec-98 31.97
Jan-99 33.29
Feb-99 32.65
Mar-99 33.78
Apr-99 33.90
May-99 32.74
Jun-99 34.70
Jul-99 31.62
Aug-99 31.21
30-Year Average 15.26
Source: BLOOMBERG L.P.
</TABLE>
TREASURY BOND YIELDS
Continuing a trend which began in October 1998, both long-term and
intermediate-term rates climbed during the reporting period. Scaled back
concerns about the impact of international economic problems and the continued
growth of the domestic economy, were the primary drivers of this upward trend in
yields, in our opinion.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR TREASURY BOND YIELDS 30-YEAR TREASURY BOND YIELD FIVE-YEAR TREASURY NOTE YIELD
<S> <C> <C>
8/27/1998 5.34% 4.90%
9/4/1998 5.29% 4.89%
9/11/1998 5.23% 4.65%
9/18/1998 5.15% 4.52%
9/25/1998 5.11% 4.37%
10/2/1998 4.84% 4.08%
10/9/1998 5.12% 4.46%
10/16/1998 4.98% 4.04%
10/23/1998 5.18% 4.30%
10/30/1998 5.16% 4.23%
11/6/1998 5.39% 4.59%
11/13/1998 5.25% 4.50%
11/20/1998 5.22% 4.60%
11/27/1998 5.16% 4.59%
12/4/1998 5.04% 4.39%
12/11/1998 5.02% 4.39%
12/18/1998 5.00% 4.36%
12/25/1998 5.22% 4.71%
1/1/1999 5.10% 4.54%
1/8/1999 5.27% 4.73%
1/15/1999 5.11% 4.55%
1/22/1999 5.08% 4.52%
1/29/1999 5.09% 4.55%
2/5/1999 5.35% 4.86%
2/12/1999 5.42% 4.96%
2/19/1999 5.39% 4.99%
2/26/1999 5.58% 5.22%
3/5/1999 5.60% 5.22%
3/12/1999 5.53% 5.06%
3/19/1999 5.56% 5.08%
3/26/1999 5.59% 5.08%
4/2/1999 5.46% 4.96%
4/9/1999 5.46% 4.96%
4/16/1999 5.57% 5.11%
4/23/1999 5.60% 5.14%
4/30/1999 5.66% 5.21%
5/7/1999 5.81% 5.37%
5/14/1999 5.92% 5.50%
5/21/1999 5.75% 5.43%
5/28/1999 5.83% 5.58%
6/4/1999 5.96% 5.73%
6/11/1999 6.16% 5.91%
6/18/1999 5.97% 5.73%
6/25/1999 6.15% 5.89%
7/2/1999 6.00% 5.69%
7/9/1999 6.00% 5.69%
7/16/1999 5.88% 5.55%
7/23/1999 6.03% 5.69%
7/30/1999 6.10% 5.79%
8/6/1999 6.18% 5.91%
8/13/1999 6.10% 5.86%
8/20/1999 5.99% 5.77%
8/27/1999 5.98% 5.77%
Source: BLOOMBERG L.P.
</TABLE>
6
<PAGE>
MUNICIPAL BOND YIELDS
As was the case with Treasury yields, municipal bond yields appeared to end
their longer-term decline in the third quarter of 1998, settled into a narrow
trading range during the first six-months of the reporting period, and then
advanced upward from March through August 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR AAA GENERAL OBLIGATION BOND BUYER 30 MUNI BOND YIELDS FIVE-YEAR AAA GO MUNI BOND YIELDS
MUNICIPAL BOND YIELDS
<S> <C> <C>
8/28/98 4.86% 3.92%
9/4/98 5.25% 3.89%
9/11/98 5.22% 3.87%
9/18/98 5.18% 3.81%
9/25/98 5.16% 3.79%
10/2/98 5.01% 3.70%
10/9/98 5.27% 3.71%
10/16/98 5.20% 3.67%
10/23/98 5.36% 3.73%
10/30/98 5.34% 3.70%
11/6/98 5.44% 3.78%
11/13/98 5.36% 3.77%
11/20/98 5.29% 3.74%
11/27/98 5.28% 3.74%
12/4/98 5.26% 3.73%
12/11/98 5.24% 3.73%
12/18/98 5.29% 3.74%
12/25/98 5.42% 3.79%
1/1/99 5.34% 3.77%
1/8/99 5.41% 3.83%
1/15/99 5.36% 3.76%
1/22/99 5.29% 3.71%
1/29/99 5.21% 3.63%
2/5/99 5.32% 3.66%
2/12/99 5.32% 3.64%
2/19/99 5.29% 3.65%
2/26/99 5.33% 3.70%
3/5/99 5.44% 3.73%
3/12/99 5.39% 3.82%
3/19/99 5.30% 3.81%
3/26/99 5.34% 3.84%
4/2/99 5.43% 3.88%
4/9/99 5.35% 3.83%
4/16/99 5.39% 3.76%
4/23/99 5.43% 3.78%
4/30/99 5.47% 3.80%
5/7/99 5.57% 3.85%
5/14/99 5.65% 3.90%
5/21/99 5.59% 3.89%
5/28/99 5.62% 4.00%
6/4/99 5.70% 4.07%
6/11/99 5.90% 4.25%
6/18/99 5.72% 4.30%
6/25/99 5.93% 4.40%
7/2/99 5.86% 4.39%
7/9/99 5.85% 4.35%
7/16/99 5.76% 4.28%
7/23/99 5.81% 4.29%
7/30/99 5.94% 4.31%
8/6/99 6.06% 4.40%
8/13/99 6.30% 4.44%
8/20/99 6.34% 4.47%
8/27/99 6.16% 4.38%
Source: BLOOMBERG L.P.
</TABLE>
The ratio of municipal to Treasury bond yields reached new highs during October,
a 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)--a 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. This was largely due to a function of
supply and demand conditions in the municipal bond market.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RATIO OF MUNICIPAL BOND YIELDS TO 30-YEAR BOND YIELDS FIVE-YEAR BOND YIELDS
TREASURY BOND YIELDS FOR
30-YEAR AND FIVE-YEAR BONDS
<S> <C> <C>
8/28/98 91.0% 80.0%
9/4/98 99.3% 79.5%
9/11/98 99.8% 83.3%
9/18/98 100.6% 84.4%
9/25/98 101.0% 86.8%
10/2/98 103.5% 90.6%
10/9/98 103.0% 83.1%
10/16/98 104.5% 90.8%
10/23/98 103.5% 86.7%
10/30/98 103.5% 87.4%
11/6/98 101.0% 82.3%
11/13/98 102.1% 83.7%
11/20/98 101.4% 81.4%
11/27/98 102.3% 81.4%
12/4/98 104.4% 85.0%
12/11/98 104.3% 85.0%
12/18/98 105.8% 85.7%
12/25/98 103.9% 80.5%
1/1/99 104.8% 83.0%
1/8/99 102.6% 80.9%
1/15/99 105.0% 82.6%
1/22/99 104.1% 82.1%
1/29/99 102.4% 79.8%
2/5/99 99.5% 75.3%
2/12/99 98.1% 73.3%
2/19/99 98.2% 73.1%
2/26/99 95.6% 70.9%
3/5/99 97.2% 71.4%
3/12/99 97.5% 75.6%
3/19/99 95.3% 75.0%
3/26/99 95.5% 75.7%
4/2/99 99.5% 78.3%
4/9/99 98.0% 77.3%
4/16/99 96.7% 73.6%
4/23/99 97.0% 73.6%
4/30/99 96.6% 72.9%
5/7/99 95.8% 71.6%
5/14/99 95.4% 70.9%
5/21/99 97.2% 71.7%
5/28/99 96.4% 71.7%
6/4/99 95.6% 71.0%
6/11/99 95.8% 71.9%
6/18/99 95.8% 75.1%
6/25/99 96.4% 74.7%
7/2/99 97.7% 77.1%
7/9/99 97.5% 76.4%
7/16/99 97.9% 77.1%
7/23/99 96.4% 75.4%
7/30/99 97.3% 74.4%
8/6/99 98.1% 74.4%
8/13/99 103.2% 75.8%
8/20/99 105.9% 77.5%
8/27/99 103.1% 76.0%
Source: BLOOMBERG L.P.
</TABLE>
THIS MARKET OVERVIEW HAS BEEN PROVIDED BY THE PORTFOLIO MANAGEMENT TEAM.
7
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION 30-DAY
ONE YEAR FIVE YEARS (4/21/93) SEC YIELD
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND(1) 1.86% 4.39% 4.11% 4.02%
- -----------------------------------------------------------------------------------------------------------
Lehman Brothers Three-Year Municipal Bond Index 2.92% 4.98% 4.59% N/A
- -----------------------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter end, in this
case, the quarter ended 6/30/99. As of 6/30/99, the fund's one-year, five-year
and since-inception average annual total returns were 2.66%, 4.54% and 4.17%,
respectively. The 30-day SEC yield as of 6/30/99 was 3.98%.(2)
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
8/31/99 and the taxable-equivalent yield; assuming a maximum federal income tax
rate of 39.6%. Shareholder tax rates may be different.
<TABLE>
<CAPTION>
30-DAY TAXABLE-EQUIVALENT
SEC YIELD 30-DAY SEC YIELD
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Schwab Short/Intermediate Tax-Free Bond Fund 4.02% 6.66%
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) A portion of the fund's expenses were reduced during the reporting period.
Without such reductions, as of 8/31/99, the fund's one-year, five- year and
since inception average annual total returns would have been 1.54%, 3.97%
and 3.67%, respectively. The 30-day SEC yield as of 8/31/99 would have been
3.76%.
(2) A portion of the fund's expenses were reduced during the reporting period.
Without such reductions, as of 6/30/99, the fund's one-year, five- year and
since inception average annual total returns would have been 2.44%, 4.12%,
and 3.72%, respectively. The 30-day SEC yield as of 6/30/99 would have been
3.71%.
8
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND LEHMAN BROTHERS THREE-YEAR MUNICIPAL BOND INDEX
<S> <C> <C>
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
03/31/99 $13,004 $13,289
04/30/99 $13,033 $13,330
05/31/99 $13,000 $13,312
06/30/99 $12,876 $13,232
07/31/99 $12,946 $13,297
08/31/99 $12,925 $13,314
</TABLE>
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
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
Total net assets as of 8/31/98 (000s) $68,281
- ---------------------------------------------------------------------
Total net assets as of 8/31/99 (000s) $86,968
- ---------------------------------------------------------------------
Percentage growth over reporting period 27%
- ---------------------------------------------------------------------
</TABLE>
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 8/31/99, and is not indicative of its composition after
that date. The terms used below are defined beginning on page 21. A complete
list of the securities in the fund's portfolio as of 8/31/99 is provided in the
Schedule of Investments later in this report.
FUND FACTS
<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND PEER GROUP AVERAGE++
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Number of Issues 57 125
- -----------------------------------------------------------------------------------------------------------
30-Day SEC Yield 4.02% 3.04%
- -----------------------------------------------------------------------------------------------------------
Average Weighted Coupon 4.99% 5.60%
- -----------------------------------------------------------------------------------------------------------
Average Weighted Maturity 4.30 years 3.90 years
- -----------------------------------------------------------------------------------------------------------
Average Credit Quality AA AA
- -----------------------------------------------------------------------------------------------------------
Average Effective Duration 3.62 years 2.80 years
- -----------------------------------------------------------------------------------------------------------
Expense Ratio 0.49%* 0.84%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* 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 8/31/99, 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 102
municipal short-term funds as tracked by Morningstar.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 8/31/99
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF FUND
OF FUND INVESTMENTS
MATURITY RANGE VALUE (000S) INVESTMENTS (CUMULATIVE)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
0 - 6 months $ 10,039 11.7% 11.7%
- ----------------------------------------------------------------------------------------------------------------
7 - 36 months $ 22,654 26.4% 38.1%
- ----------------------------------------------------------------------------------------------------------------
37 - 60 months $ 19,029 22.1% 60.2%
- ----------------------------------------------------------------------------------------------------------------
More than
60 months $ 34,138 39.8% 100.0%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTED AVERAGE MATURITY
<S> <C> <C> <C>
Short Int Long Average Credit Quality
X High
Medium
Low
</TABLE>
(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 8/31/99, 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 21. 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
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION AS A
PERCENTAGE OF FUND INVESTMENTS(2)
AS OF 8/31/99
<S> <C>
Variable Rate Obligations 4.7%
Municipal Bonds 95.3%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION BY
CREDIT QUALITY(3)
AS OF 8/31/99
<S> <C>
AAA 64.0%
AA 22.1%
A 9.3%
BBB 2.3%
Unrated 2.3%
</TABLE>
The charts above illustrate the composition of the fund's portfolio as of
8/31/99, and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities of
the funds.
(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
<TABLE>
<S> <C>
- -----------------------------------------------
New York 11.1%
- -----------------------------------------------
Kentucky 6.4%
- -----------------------------------------------
Washington 6.1%
- -----------------------------------------------
South Carolina 5.8%
- -----------------------------------------------
Texas 4.7%
- -----------------------------------------------
- -----------------------------------------------
District of Columbia 4.6%
- -----------------------------------------------
Nebraska 4.5%
- -----------------------------------------------
Ohio 4.4%
- -----------------------------------------------
Arizona 3.9%
- -----------------------------------------------
Minnesota 3.5%
- -----------------------------------------------
</TABLE>
11
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION 30-DAY
ONE YEAR FIVE YEARS (9/11/92) SEC YIELD
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND(1) -3.34% 5.57% 5.54% 5.20%
- -----------------------------------------------------------------------------------------------------------------
Lehman Brothers General Municipal Bond Index 0.50% 6.45% 6.14% N/A
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 6/30/99. As of 6/30/99, the fund's one-year, five-year and
since-inception average annual total returns were 0.67%, 6.51% and 6.04%,
respectively. The 30-day SEC yield as of 6/30/99 was 4.99%.(2)
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
8/31/99 and the taxable-equivalent yield, assuming a maximum federal income tax
rate of 39.6%. Shareholder tax rates may be different.
<TABLE>
<CAPTION>
30-DAY TAXABLE-EQUIVALENT
SEC YIELD 30-DAY SEC YIELD
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
Schwab Long-Term Tax-Free Bond Fund 5.20% 8.61%
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) A portion of the fund's expenses were reduced during the reporting period.
Without such reductions, as of 8/31/99, the fund's one-year, five-year and
since-inception average annual total returns would have been -3.66%, 5.13%,
and 5.03%, respectively. The 30-day SEC yield as of 8/31/99 would have been
4.94%.
(2) A portion of the fund's expenses were reduced during the reporting period.
Without such reductions, as of 6/30/99, the fund's one-year, five-year and
since-inception average annual total returns would have been 0.40%, 6.07%
and 5.52%, respectively. The 30-day SEC yield as of 6/30/99 would have been
4.73%.
12
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB LONG-TERM TAX-FREE BOND FUND LEHMAN BROTHERS GENERAL OBLIGATION MUNICIPAL BOND INDEX
<S> <C> <C>
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
03/31/99 $15,405 $15,488
04/30/99 $15,421 $15,527
05/31/99 $15,257 $15,437
06/30/99 $14,904 $15,214
07/31/99 $14,909 $15,269
08/31/99 $14,570 $15,147
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Long-Term Tax-Free Bond Fund, made at its inception, with a similar
investment in the Lehman Brothers General Obligation Municipal Bond Index.
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
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
Total net assets as of 8/31/98 (000s) $69,925
- ---------------------------------------------------------------------
Total net assets as of 8/31/99 (000s) $89,848
- ---------------------------------------------------------------------
Percentage growth over reporting period 28%
- ---------------------------------------------------------------------
</TABLE>
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
portfolio characteristics as of 8/31/99, and is not indicative of its
composition after that date. The terms used below are defined beginning on
page 21. A complete list of the securities in the fund's portfolio as of 8/31/99
is provided in the Schedule of Investments later in this report.
FUND FACTS
<TABLE>
<CAPTION>
SCHWAB LONG-TERM TAX-FREE
BOND FUND PEER GROUP AVERAGE++
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Number of Issues 52 162
- -----------------------------------------------------------------------------------------------------------
30-Day SEC Yield 5.20% 3.84%
- -----------------------------------------------------------------------------------------------------------
Average Weighted Coupon 5.14% 5.78%
- -----------------------------------------------------------------------------------------------------------
Average Weighted Maturity 21.29 years 16.30 years
- -----------------------------------------------------------------------------------------------------------
Average Credit Quality AAA AA
- -----------------------------------------------------------------------------------------------------------
Average Effective Duration 11.76 years 8.10 years
- -----------------------------------------------------------------------------------------------------------
Expense Ratio 0.49%* 1.11%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* 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 8/31/99, 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
308 municipal national long-term funds as tracked by Morningstar.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 8/31/99
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF FUND
OF FUND INVESTMENTS
MATURITY RANGE VALUE (000S) INVESTMENTS (CUMULATIVE)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
0 - 1 year $ 906 1.0% 1.0%
- ----------------------------------------------------------------------------------------------------------------
2 - 10 years $ 3,423 3.9% 4.9%
- ----------------------------------------------------------------------------------------------------------------
11 - 20 years $ 35,798 40.4% 45.3%
- ----------------------------------------------------------------------------------------------------------------
21 - 30 years $ 42,649 48.1% 93.4%
- ----------------------------------------------------------------------------------------------------------------
More than
30 years $ 5,834 6.6% 100.0%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTED AVERAGE MATURITY
<S> <C> <C> <C>
Short Int Long Average Credit Quality
X High
Medium
Low
</TABLE>
(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 8/31/99 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 21. 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
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION AS A
PERCENTAGE OF FUND
INVESTMENTS(2)
AS OF 8/31/99
<S> <C>
Variable Rate Obligations 1.1%
Municipal Bonds 98.9%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITON BY
CREDIT QUALITY(3)
AS OF 8/31/99
<S> <C>
AAA 77.5%
AA 14.6%
A 7.9%
</TABLE>
The charts above illustrate the composition of the fund's portfolio as of
8/31/99, and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities of
the funds.
(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
<TABLE>
<S> <C>
- -----------------------------------------------
Texas 16.1%
- -----------------------------------------------
New York 13.4%
- -----------------------------------------------
Illinois 10.0%
- -----------------------------------------------
Pennsylvania 9.1%
- -----------------------------------------------
Washington 7.9%
- -----------------------------------------------
- -----------------------------------------------
California 6.9%
- -----------------------------------------------
Massachusetts 5.0%
- -----------------------------------------------
Michigan 3.3%
- -----------------------------------------------
Nebraska 3.1%
- -----------------------------------------------
Mississippi 2.5%
- -----------------------------------------------
</TABLE>
15
<PAGE>
DIVIDENDS PAID
During the reporting period, the funds continued to attempt to provide a high
level of current income exempt from federal income taxes, consistent with the
preservation of capital. 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
<TABLE>
<CAPTION>
DIVIDENDS PAID BY THE SCHWAB TAX-FREE BOND FUNDS 1992* 1993** 1994+ 1995+ 1996+ 1997+ 1998+ 1999+++
INCOME DIVIDENDS PER SHARE
FISCAL YEAR
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Schwab Short/Intermediate Tax-Free Bond Fund $0.13 $0.37 $0.40 $0.41 $0.41 0.42 0.4
Schwab Long-Term Tax-Free Bond Fund $0.17 $0.36 $0.52 $0.53 $0.52 $0.53 0.53 0.5
</TABLE>
* 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.
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 day-to-day management of each fund's portfolio since
their inception. Joanne joined CSIM as portfolio manager in February 1992, and
was promoted to her current position in December 1996. Prior to joining CSIM
Joanne was portfolio manager for the Shearson Lehman California Municipal Bond
Fund and E.F. Hutton's Municipal Cash Reserve Management.
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 for Treasury securities. During the rally in
the Treasury markets, investors overlooked municipal securities, which became
extremely attractive relative to Treasury securities. 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
cross-over buyers to the municipal market early in the reporting period.
Crossover buyers are those who continually seek out the most competitively
priced sector of the fixed-income market, which in this case was 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.
As the second half of the reporting period began, municipal bond yields
continued to remain stable, especially compared to the volatility of the
Treasury markets. The Treasury yield volatility was approximately 3 times as
great as municipal yield volatility for most of 1998 and early 1999. The lack of
volatility in the municipal market can be attributed to three main factors:
- - Supply and Demand--As yields decline municipal bond supply tends to increase
as municipalities refinance their debt. However, as rates decline individual
investors become hesitant to invest in lower yielding securities. When
individual investor demand for municipal securities falls to lower levels,
issuers tend to reduce the level of supply creating an equilibrium in the
market. Taken together these factors reduce the magnitude of the volatility
even as Treasury yields fall to lower levels.
- - International Factors--When market participants face an international
financial crisis, such as the events in Brazil and Russia, investors look for
safer investments. The "flight to quality" causes Treasury yields to drop as
investors' demand the safety of U.S. Treasury securities. Municipal bonds are
less affected by these events as their yields are based more on fundamental
economic factors.
- - Callable Bonds--The majority of long-term muni-cipal bonds are callable.
Callable bonds tend to be less volatile than noncallable bonds for a given
change in yield.
The landscape in the municipal markets began to change as renewed concerns about
inflation caused bond yields to increase. Yields slowly increased through May
and June as market participants watched for an indication from the Federal
Reserve Bank regarding the level of short-term interest rates.
18
<PAGE>
The upward pressure on yields continued as we entered the last two months of the
reporting period. Yields on long-term municipal bonds rose 0.35% to 0.40% in
July, substantially more than the increase in Treasury yields over the same
period. The increase in municipal yields at the end of the reporting period can
be attributed to four factors:
- - The decision by the Federal Reserve Bank to increase short-term interest rates
by 0.25% at the end of June.
- - Institutional Participants--Many of the key institutional investors, such as
bond funds and insurance companies, have had little new cash to invest in the
municipal markets. Additionally, insurance companies have underperformed over
the past year from a profit standpoint limiting their ability to hold
municipal securities. These factors have dampened demand and caused yields to
increase.
- - Year 2000--Many investors who usually focus on the municipal market have been
attracted to the taxable market as issuers have dramatically increased supply
in anticipation of year 2000. The increased supply has led to attractive
yields in the taxable market. As market participants have moved their
attention to the taxable market from the municipal market, demand for
municipal securities has fallen, which has resulted in higher municipal bond
yields.
- - Crossover Buyers--Many of the non-traditional buyers who entered the municipal
market when yields were high relative to Treasury yields during the first half
of the reporting period liquidated their positions, reallocating assets to the
taxable market putting additional upward pressure on municipal bond yields.
Q. HOW DID THE FUNDS PERFORM DURING THE ONE-YEAR REPORTING PERIOD?
A. The funds achieved favorable total returns during the first part of the
reporting period. However, during the second half of the period the markets
became increasingly concerned about the possibility that inflation would rise
causing the Federal Reserve Bank to increase short-term interest rates. The
combination of these factors led to an increase in bond yields, which in turn,
decreased the value of the fund's portfolio securities and net asset value
(NAV). The downward pressure on prices reversed the gains achieved on a total
return basis during the first part of the reporting period.
The SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND achieved a total return of
1.86% for the one-year reporting period ended August 31, 1999. The return came
from a combination of dividend income of 3.91% and a decrease in the fund's NAV
of 2.05%. The NAV decrease was a result of the fund's increasing yield, which
rose from 3.71% at the beginning of the period to 4.02% at the end of
the period.
The SCHWAB LONG-TERM TAX-FREE BOND FUND reported a negative total return of
3.34% for the one-year reporting period ended August 31, 1999. The return was
derived from a combination of dividend income of 4.83% and a decrease in the
fund's NAV of 8.17%. The NAV decrease was a result of the fund's increasing
yield, which rose from 4.68% at the beginning of the period to 5.20% at the end
of the period.
19
<PAGE>
FUND DISCUSSION (continued)
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, since there is very
little yield advantage associated with lower-rated securities; we simply do not
feel that investors are being adequately compensated for the higher credit risk.
Given the current environment we have taken the opportunity to add higher coupon
securities to the portfolio, which has the effect of reducing volatility and
increasing current income to shareholders. 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 4.30
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 21.29
years. The fund's weighted average maturity at the end of the reporting period
was 21.29 years, up from 18.07 years at the beginning of the period.
20
<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 a bond's 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 help 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
21
<PAGE>
GLOSSARY (continued)
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 net asset, 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. However, interest paid by certain municipal
bonds is subject to the 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
22
<PAGE>
planned. If yields fall, his reinvestment income and, consequently, his total
return from holding the bond may fall relative to the original yield.
Conversely, if yields rise, total return may 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 better return when all taxes--federal,
state and local--are taken into consideration.
TOTAL RETURN--The sum of interest income, 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.
23
<PAGE>
Schwab Short/Intermediate Tax-Free Bond Fund
Schedule of Investments (in thousands)
August 31, 1999
Par Value
------ -------
MUNICIPAL BONDS -- 94.2% (A)
Alabama -- 1.2%
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 $ 1,052
-------
Arizona -- 3.9%
Maricopa County, Arizona Unified
School District No. 93 (Cave Creek Project)
Series 1997A (d)
5.00%, 07/01/03 2,325 2,377
Phoenix, Arizona Civic Improvement
Corp. RB (Senior Lien Airport Project)
5.00%, 07/01/04 1,000 1,012
-------
3,389
-------
California -- 2.3%
Alameda, California Public
Financing Authority RB
4.95%, 09/02/07 2,065 2,011
-------
Colorado -- 3.5%
Grand Junction, Colorado IDRB
(Dayton Hudson Corp. Project)
5.25%, 05/01/03 2,000 2,025
Superior, Colorado Metropolitan
Revenue Refunding Bonds
(District No. 2) (d)
4.63%, 12/01/13 1,000 987
-------
3,012
-------
District of Columbia -- 4.6% (d)
Washington, DC Convention Center
Authority Dedicated Tax Senior Lien RB
5.00%, 10/01/06 4,000 4,025
-------
Florida -- 1.5% (d)
Orange County, Florida COP Series 1997A
4.80%, 08/01/02 1,300 1,319
-------
Georgia -- 2.4%
Georgia Private Colleges & University
Facilities Authority RB (Emory
University Project) Series 1992C
6.00%, 10/01/05 2,000 2,117
-------
Illinois -- 1.3%
Illinois Health Facility Authority RB
(OSF Healthcare System) Series 1993
5.13%, 11/15/00 $1,145 $ 1,156
-------
Indiana -- 1.3% (d)
Monroe County, Indiana Industrial
Hospital Authority Revenue Refunding
Bonds (Bloomington Hospital Project)
4.60%, 05/01/04 1,105 1,105
-------
Iowa -- 2.5% (d)
Black Hawk County, Iowa Hospital
Facilities RB (Allen Memorial Hospital)
Series 1990
7.38%, 02/01/01 2,000 2,128
-------
Kentucky -- 6.4%
Carrollton & Henderson, Kentucky
Public Energy Authority Gas RB
Series 1998B (d)
4.25%, 01/01/08 3,000 2,858
Kentucky Housing Corp.
RB Series 1993B (d)
4.45%, 07/01/00 1,000 1,004
Kentucky State Property & Buildings
Commission Revenue Refunding
Bonds (Project 55)
4.15%, 09/01/99 1,735 1,735
-------
5,597
-------
Louisiana -- 1.8% (d)
New Orleans, Louisiana RB Series 1998B
4.50%, 12/01/05 1,600 1,588
-------
Massachusetts -- 3.5% (d)
Massachusetts Municipal Wholesale
Electric Co. Power Supply Systems
RB Series 1992E
5.50%, 07/01/00 2,000 2,028
Massachusetts State Water Reserves
Authority RB Series 1998A
5.00%, 08/01/05 1,000 1,020
-------
3,048
-------
24
<PAGE>
Par Value
------ -------
Michigan -- 2.8% (d)
Detroit, Michigan City School District
GO Series 1998B
5.00%, 05/01/04 $1,390 $ 1,409
Michigan State Hospital Finance
Authority RB (McLaren Obligated Group)
7.00%, 09/15/00 1,000 1,053
-------
2,462
-------
Minnesota -- 3.5% (d)
Minneapolis, Minnesota Community
Development Agency Tax Increment RB
7.00%, 09/01/00 1,000 1,031
Minnesota State HFA Rental Housing RB
Series 1995D
4.80%, 08/01/01 2,020 2,035
-------
3,066
-------
Mississippi -- 2.3% (d)
Mississippi Hospital Equipment &
Facilities Authority Revenue Refunding
Bonds (Mississippi Baptist Medical Center)
5.25%, 05/01/01 2,000 2,035
-------
Missouri -- 3.5%
Missouri Rural Water Finance Corp.
(Public Construction Project) Series 1998
4.50%, 11/15/99 3,000 3,005
-------
Nebraska -- 4.5% (d)
Nebraska Public Energy Agency Gas
Supply RB (Nebraska Public Gas Agency
Project) Series 1998C
4.00%, 09/01/07 2,000 1,885
Nebraska Public Power District RB
Series 1998A
5.25%, 01/01/05 2,000 2,060
-------
3,945
-------
New Jersey -- 1.2% (d)
Brick Township, New Jersey Municipal
Utility Authority RB Series 1996
5.50%, 12/01/03 1,000 1,045
-------
New York -- 10.3%
Franklin County, New York GO (d)
4.25%, 11/01/06 715 695
New York City, New York GO Series 1997L
5.10%, 08/01/02 800 815
Par Value
------ -------
New York City, New York Municipal
Assistance Corp. RB Series 1997L
5.50%, 07/01/03 $2,000 $ 2,080
New York City, New York Transitional
Finance Authority RB Series 1998B
5.25%, 11/15/04 1,300 1,346
New York, New York GO Series 1999H
4.75%, 03/15/07 3,000 2,959
New York State Urban Development
Corp. RB (Correctional Facilities
Service Contract) Series 1998A
5.00%, 01/01/05 1,000 1,010
-------
8,905
-------
North Carolina -- 2.3% (d)
North Carolina Municipal Power Agency
No. 1 (Catawaba Electric) RB Series 1995A
5.10%, 01/01/07 2,000 2,020
-------
Ohio -- 4.4% (d)
Ohio State Public Facilities Commission
Higher Education Capital Facilities RB
Series II-A
4.38%, 11/01/00 1,750 1,761
Ohio State Public Facilities Commission
Higher Education Capital Facilities RB
Series II-B
5.00%, 11/01/01 2,000 2,043
-------
3,804
-------
Pennsylvania -- 1.3% (d)
Pennsylvania State IDA RB (Economic
Development Project)
7.00%, 07/01/07 1,000 1,130
-------
South Carolina -- 5.8%
Charleston County, South Carolina RB
(Care Alliance Health Services)
Series 1999A (d)
4.25%, 08/15/07 3,000 2,865
Charleston, South Carolina Public
Facilities COP (Public Improvement
Project) Series 1993 (d)
4.30%, 09/01/00 1,085 1,091
Greenville, South Carolina Hospital Facilities
Revenue Refunding Bonds Series 1993C
5.00%, 05/01/00 1,090 1,097
-------
5,053
-------
25
<PAGE>
Schwab Short/Intermediate Tax-Free Bond Fund
Schedule of Investments (in thousands) (continued)
August 31, 1999
Par Value
------ -------
Tennessee -- 3.0% (d)
Knox County, Tennessee Health &
Education Hospital Facilities RB
(Fort Sanders Alliance) Series 1990C
7.00%, 01/01/00 $2,500 $ 2,576
-------
Texas -- 4.7%
Houston, Texas GO Refunding and
Public Improvement Bonds Series 1999A
5.00%, 03/01/04 3,000 3,060
Houston, Texas GO Refunding Bonds
Series 1995A
5.30%, 03/01/01 1,000 1,006
-------
4,066
-------
Washington -- 6.1%
Port of Seattle, Washington Passenger
Facilities RB Series 1998B (d)
5.00%, 12/01/07 1,395 1,395
Port of Seattle, Washington RB
Series 1998B (d)
5.50%, 09/01/02 2,775 2,851
Washington State GO Refunding Bonds
Series 1991R-92B
6.30%, 09/01/02 1,000 1,048
-------
5,294
-------
Wisconsin -- 2.3%
Wisconsin State Health & Educational
Facilities Authority RB (Aurora
Medical Group Inc. Project)
Series 1996 (d)
4.90%, 11/15/02 1,000 1,016
Wisconsin State Health & Educational
Facilities Authority RB (Carroll
College Inc. Project)
4.80%, 10/01/06 1,000 968
-------
1,984
-------
TOTAL MUNICIPAL BONDS
(Cost $82,681) 81,937
-------
Par Value
------ -------
VARIABLE RATE OBLIGATIONS -- 4.5% (B) (D)
California -- 2.9%
California Health Facilities Financing
Authortiy RB (St. Joseph Health
System Project) Series 1985A
2.30%, 09/01/99 $1,200 $ 1,200
California Pollution Control Financing
Authority Pollution Control RB
(Southern California Edison)
Series 1986D
2.60%, 09/01/99 400 400
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds
Series 1993A
2.55%, 09/01/99 195 195
Irvine Ranch, California Water District RB
2.40%, 09/01/99 700 700
-------
2,495
-------
New York -- 0.8%
Long Island, New York Power Authority
Electrical System Subordinated RB
Series 5
2.70%, 09/01/99 400 400
New York City, New York Municipal
Water Finance Authority Water &
Sewer System RB Series 1994G
2.70%, 09/01/99 300 300
-------
700
-------
Mississippi -- 0.7%
Jackson County, Mississippi Pollution
Control Revenue Refunding Bonds
(Chevron USA, Inc. Project)
2.70%, 09/07/99 600 600
-------
Wyoming -- 0.1%
Unita County, Wyoming Pollution
Control RB (Chevron USA Inc. Project)
Series 1992-E17
2.70%, 09/01/99 100 100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $3,895) 3,895
-------
26
<PAGE>
Shares Value
------ -------
OTHER INVESTMENT COMPANIES -- 0.0% (C)
Provident Institutional Funds -
Muni Fund Portfolio
2.83% 28 $ 28
-------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $28) 28
-------
TOTAL INVESTMENTS -- 98.7%
(Cost $86,604) 85,860
-------
OTHER ASSETS AND LIABILITIES-- 1.3%
Other assets 1,254
Liabilities (146)
-------
1,108
-------
TOTAL NET ASSETS-- 100.0% $86,968
=======
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
27
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (IN THOUSANDS)
August 31, 1999
Par Value
------ -------
MUNICIPAL BONDS -- 97.5% (A)
Arizona -- 2.4% (d)
Maricopa County, Arizona Alhambra
Elementary School District 68 School
Improvement GO Refunding Bonds
Series 1994A
6.80%, 07/01/12 $2,000 $ 2,192
-------
California -- 6.3% (d)
Los Angeles, California Unified School
District GO Series 1999C
5.25%, 07/01/24 3,200 3,028
Santa Clara County, California Financing
Authority Lease RB (VMC Facility
Replacement Project) Series 1994A
7.75%, 11/15/10 1,000 1,232
Santa Clara County, California Financing
Authority Lease Revenue Refunding
Bonds Series 1997A
5.00%, 11/15/17 1,500 1,412
-------
5,672
-------
Colorado -- 2.0% (d)
Colorado State Public Highway
Authority RB (E-470) Series 1997A
5.00%, 09/01/26 2,000 1,782
-------
Florida -- 2.4% (d)
Hillsborough County, Florida Aviation
Authority RB (Tampa International
Airport) Series 1996B
5.88%, 10/01/23 1,250 1,276
Tallahassee, Florida Energy System
Revenue Refunding Bonds Series 1998A
4.75%, 10/01/21 1,000 861
-------
2,137
-------
Illinois -- 10.0% (d)
Chicago, Illinois Park District GO
Series 1999B
4.75%, 01/01/26 2,750 2,317
Cook County, Illinois Capital Improvement
Bond Series 1999A
5.00%, 11/15/23 4,000 3,550
Par Value
------ -------
Illinois Health Facilities Authority
Revenue Refunding Bonds (Northwestern
Medical Faculty Foundation)
5.13%, 11/15/28 $3,500 $ 3,132
-------
8,999
-------
Indiana -- 2.3% (d)
Fort Wayne, Indiana Hospital
Authority RB (Parkview Health
System Inc. Project)
4.75%, 11/15/28 2,500 2,069
-------
Iowa -- 0.7% (d)
Cedar Rapids, Iowa Hospital
Facilities RB (St. Luke's Methodist
Project) Series 1993
6.13%, 08/15/13 600 648
-------
Kentucky -- 1.7% (d)
Carrollton & Henderson, Kentucky
Public Energy Authority Gas RB
Series 1998B
4.25%, 01/01/08 625 595
Jefferson County, Kentucky Health
Facilities RB (University Medical
Center Project)
5.25%, 07/01/22 1,000 950
-------
1,545
-------
Louisiana -- 1.1% (d)
New Orleans, Louisiana GO Refunding
Bonds Series 1998B
5.00%, 12/01/12 1,000 973
-------
Maryland -- 0.5%
Maryland State Department of Housing
& Community Development RB
Series 1996A
5.88%, 07/01/16 400 408
-------
Massachusetts -- 5.0%
Massachusetts State Industrial
Financing Agency RB (Suffolk
University) (d)
5.25%, 07/01/27 2,000 1,858
Massachusetts State Port Authority RB
Series 1998D
5.00%, 07/01/28 3,000 2,640
-------
4,498
-------
28
<PAGE>
Par Value
------ -------
Michigan -- 3.3% (d)
Eastern Michigan University Board of
Regents RB
5.50%, 06/01/17 $2,000 $ 2,003
Wayne County, Michigan Community
College Improvement GO
5.50%, 07/01/19 1,000 980
-------
2,983
-------
Mississippi -- 2.5% (d)
Mississippi Hospital Equipment &
Facilities Authority RB (Mississippi
Baptist Medical Center)
6.00%, 05/01/13 2,150 2,233
-------
Nebraska -- 3.1% (d)
Nebraska Public Energy Agency Gas
Supply RB (Nebraska Public Gas Agency
Project) Series 1998C
4.00%, 09/01/07 3,000 2,828
-------
New York -- 12.9%
Long Island, New York Power Authority
Electric System RB Series 1998A (d)
5.13%, 12/01/22 1,500 1,380
New York City, New York Municipal
Finance Authority Water & Sewer
System RB Series 1997A
5.13%, 06/15/21 2,500 2,300
New York City, New York Municipal
Finance Authority Water & Sewer
System RB Series 1998A (d)
4.75%, 06/15/31 3,000 2,509
New York City, New York Transitional
Finance Authority Future Tax RB
Series 1999B (d)
4.75%, 11/01/23 4,000 3,415
New York State GO Refunding Bonds
Series 1996A
5.30%, 07/15/15 2,000 1,955
-------
11,559
-------
North Carolina -- 1.8%
North Carolina Medical Care
Community Health Care Facilities RB
(Carolina Medi Corp. Project)
5.25%, 05/01/21 1,750 1,636
-------
Par Value
------ -------
Pennsylvania -- 9.1%
Pennsylvania State Higher Education
Facilities Authority RB (University of
Pennsylvania Health Services)
Series 1996A
5.75%, 01/01/17 $2,000 $ 1,935
Pennsylvania Turnpike Commision Oil
Franchise Tax RB Series 1998A (d)
4.75%, 12/01/27 3,000 2,546
Philadelphia, Pennsylvania GO (d)
4.75%, 03/15/17 2,500 2,247
Seneca Valley, Pennsylvania School
District GO Refunding Bonds
Series 1998AA (d)
5.15%, 02/15/20 1,500 1,408
-------
8,136
-------
Rhode Island -- 1.1%
Rhode Island Housing & Mortgage
Finance Corp. Homeownership
Opportunity RB Series 10A
6.50%, 10/01/22 1,000 1,031
-------
Texas -- 16.1%
Austin, Texas Utilities System Revenue
Refunding Bonds (d)
5.13%, 11/15/16 3,000 2,839
Brazos River, Texas River Authority RB
(Houston Industries Project) (d)
5.13%, 05/01/19 1,750 1,623
Conroe, Texas Independent School
District GO Refunding Bonds (d)
5.25%, 02/15/21 1,000 945
Elgin, Texas Independent School District
GO Refunding Bonds (d)
5.25%, 10/01/24 2,000 1,875
Houston, Texas Higher Education
Financing Corp. RB (Rice University)
Series 1999A
5.38%, 11/15/29 3,500 3,325
Texas Southern University Revenue
Refunding Bond Series 1998A-1 (d)
4.75%, 11/01/17 1,545 1,358
Texas State Coastal Water Authority
Contract RB (City of Houston
Projects) (d)
5.00%, 12/15/25 2,000 1,777
29
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (IN THOUSANDS) (CONTINUED)
August 31, 1999
Par Value
------ -------
University of Texas Revenue Unrefunded
Balance RB Series 1991B
6.75%, 08/15/13 $ 680 $ 716
-------
14,458
-------
Utah -- 2.0% (d)
Utah State HFA S/F Mortgage RB
Series 1998E-1
5.38%, 07/01/18 1,875 1,798
-------
Virginia -- 2.2%
Virginia State Public Building Authority
Public Facilities RB Series 1997A
5.50%, 08/01/16 2,000 1,993
-------
Washington -- 7.9%
Clark County, Washington School
District #117 Camas GO (d)
5.50%, 12/01/17 3,000 2,959
King County, Washington Lease RB
(King Street Center Project) (d)
5.13%, 06/01/17 1,000 940
King County, Washington School
District No. 415 GO Refunding Bonds
Series 1993A
5.55%, 12/01/11 500 513
Washington State GO Series 1998A
4.75%, 07/01/20 1,000 871
Washington State Health Care Facilities
Authority RB (Swedish Health System) (d)
5.13%, 11/15/18 2,000 1,853
-------
7,136
-------
Wisconsin -- 1.1% (d)
Wisconsin State Health & Education
Facilities Authority RB (Medical College
of Wisconsin Project)
5.50%, 03/01/17 1,000 990
-------
TOTAL MUNICIPAL BONDS
(Cost $91,553) 87,704
-------
Par Value
------ -------
VARIABLE RATE OBLIGATIONS -- 1.1% (B) (D)
California -- 0.6%
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986D
2.60%, 09/01/99 $ 500 $ 500
-------
New York -- 0.5%
Long Island, New York Power Authority
Electric System Subordinated RB
2.70%, 09/01/99 400 400
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $900) 900
-------
Shares
------
OTHER INVESTMENT COMPANIES -- 0.0% (C)
Provident Institutional Funds -
Muni Fund Portfolio
2.83% 6 6
-------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $6) 6
-------
TOTAL INVESTMENTS -- 98.6%
(Cost $92,459) 88,610
-------
OTHER ASSETS AND LIABILITIES-- 1.4%
Other assets 1,393
Liabilities (155)
-------
1,238
-------
TOTAL NET ASSETS-- 100.0% $89,848
=======
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
30
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
August 31, 1999
(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) Rate shown is the yield as of the report date.
(d) 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
RB Revenue Bond
S/F Single-Family
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1999
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------- ---------
<S> <C> <C>
Assets
Investments, at value (Cost: $86,604, $92,459, respectively) $85,860 $88,610
Receivables:
Interest 1,239 1,332
Fund shares sold -- 4
Prepaid expenses 15 57
------- -------
Total assets 87,114 90,003
------- -------
Liabilities
Payables:
Dividends 56 73
Fund shares redeemed 38 29
Investment advisory and administration fees 2 --
Transfer agency and shareholder service fees 4 4
Other liabilities 46 49
------- -------
Total liabilities 146 155
------- -------
Net assets applicable to outstanding shares $86,968 $89,848
======= =======
Net assets consist of:
Paid-in capital $88,133 $93,851
Distributions in excess of net investment income (16) (26)
Accumulated net realized loss on investments sold (405) (128)
Net unrealized depreciation on investments (744) (3,849)
------- -------
$86,968 $89,848
======= =======
Pricing of Shares
Outstanding shares, $0.00001 par value (unlimited shares authorized) 8,653 8,884
Net asset value, offering and redemption price per share $10.05 $10.11
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the year ended August 31, 1999
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
Interest income $ 3,463 $ 4,529
------- -------
Expenses:
Investment advisory and administration fees 326 366
Transfer agency and shareholder service fees 199 223
Custodian and portfolio accounting fees 55 62
Registration fees 9 14
Professional fees 15 14
Shareholder reports 24 25
Trustees' fees 7 7
Other expenses 11 12
------- -------
646 723
Less: expenses reduced (see Note 4) (257) (286)
------- -------
Total expenses incurred by fund 389 437
------- -------
Net investment income 3,074 4,092
------- -------
Net realized gain (loss) on investments sold 82 (120)
Net unrealized depreciation on investments (1,898) (7,494)
------- -------
Net loss on investments (1,816) (7,614)
------- -------
Increase (decrease) in net assets resulting from operations $ 1,258 $(3,522)
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
For the year ended August 31,
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 3,074 $ 2,341 $ 4,092 $ 2,651
Net realized gain (loss) on investments sold 82 54 (120) 405
Net unrealized appreciation (depreciation) on investments (1,898) 627 (7,494) 2,070
-------- -------- -------- --------
Increase (decrease) in net assets resulting from operations 1,258 3,022 (3,522) 5,126
-------- -------- -------- --------
Distributions:
Dividends to shareholders from net investment income (See Note 2) (3,125) (2,393) (4,162) (2,706)
Distributions to shareholders from net realized gains -- -- (395) (25)
-------- -------- -------- --------
Total distributions to shareholders (3,125) (2,393) (4,557) (2,731)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 51,955 32,802 55,396 37,753
Net asset value of shares issued in reinvestment of dividends 2,374 1,829 3,306 1,952
Less payments for shares redeemed (33,775) (21,376) (30,700) (18,942)
-------- -------- -------- --------
Increase in net assets from capital share transactions 20,554 13,255 28,002 20,763
-------- -------- -------- --------
Total increase in net assets 18,687 13,884 19,923 23,158
Net assets:
Beginning of period 68,281 54,397 69,925 46,767
-------- -------- -------- --------
End of period (including distributions in excess of net investment
income and undistributed net investment income of
($16), $27, ($26) and $42, respectively) $ 86,968 $ 68,281 $ 89,848 $ 69,925
======== ======== ======== ========
Number of fund shares:
Sold 5,071 3,211 5,077 3,473
Reinvested 232 179 307 180
Redeemed (3,302) (2,094) (2,852) (1,743)
-------- -------- -------- --------
Net increase in shares outstanding 2,001 1,296 2,532 1,910
Shares outstanding:
Beginning of period 6,652 5,356 6,352 4,442
-------- -------- -------- --------
End of period 8,653 6,652 8,884 6,352
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Short/Intermediate Tax-Free Bond Fund
- ---------------------------------------------------------------------------------------------
FISCAL PERIOD ENDED 8/31 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
PERSHAREDATA ($)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 10.26 10.16 10.04 10.12 9.92
--------------------------------------
From investment operations:
Net investment income 0.40 0.42 0.41 0.41 0.40
Net realized andunrealized gain (loss)
on investments (0.21) 0.10 0.12 (0.08) 0.20
--------------------------------------
Total from investment operations 0.19 0.52 0.53 0.33 0.60
Less distributions:
Dividends from net investment income (0.40) (0.42) (0.41) (0.41) (0.40
--------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.05 10.26 10.16 10.04 10.12
--------------------------------------
Total return (%) 1.86 5.17 5.40 3.32 6.23
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.49 0.49 0.49 0.49 0.49
Reductions reflected in above expense ratio 0.32 0.36 0.47 0.41 0.40
Ratio of net investment income to average net assets 3.87 3.99 4.08 4.06 4.06
Portfolio turnover rate 8 22 20 44 35
Net assets, end of period ($ X 1,000) 86,968 68,281 54,397 54,132 52,504
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Long-Term Tax-Free Bond Fund
- ---------------------------------------------------------------------------------------------
FISCAL PERIOD ENDED 8/31 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
PERSHAREDATA ($)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 11.01 10.53 10.13 10.16 9.95
--------------------------------------
From investment operations:
Net investment income 0.50 0.53 0.53 0.52 0.53
Net realized andunrealized gain (loss)
on investments (0.85) 0.48 0.40 (0.03) 0.21
--------------------------------------
Total from investment operations (0.35) 1.01 0.93 0.49 0.74
Less distributions:
Dividends from net investment income (0.50) (0.53) (0.53) (0.52) (0.53
Distributions from realized gain on
investments (0.05) -- -- -- --
--------------------------------------
Total distributions (0.55) (0.53) (0.53) (0.52) (0.53
--------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.11 11.01 10.53 10.13 10.16
--------------------------------------
Total return (%) (3.34) 9.81 9.36 4.87 7.76
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.49 0.49 0.49 0.49 0.54
Reductions reflected in above expense ratio 0.32 0.37 0.53 0.45 0.39
Ratio of net investment income to average net assets 4.59 4.76 5.09 5.06 5.40
Portfolio turnover rate 35 39 61 50 70
Net assets, end of period ($ X 1,000) 89,848 69,925 46,767 43,672 41,413
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1999
(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,
Schwab California Long-Term Tax-Free Bond Fund, and Schwab YieldPlus Fund(TRADE
MARK) (effective on 7/21/99 and commencement of operations on 10/1/99). 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 realized net
capital gains, if any, to shareholders. Therefore, no federal income tax
provision is required. Each fund is considered a separate entity for tax
purposes.
Net unrealized appreciation (depreciation) at August 31, 1999, (for financial
reporting and federal income tax purposes) was as follows:
<TABLE>
<CAPTION>
Net unrealized Appreciated Depreciated
depreciation securities securities
-------------- ----------- -----------
<S> <C> <C> <C>
Schwab Short/Intermediate Tax-Free Bond Fund $ (744) $350 $(1,094)
Schwab Long-Term Tax-Free Bond Fund $(3,849) $891 $(4,740)
</TABLE>
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1999, 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 $108
08/31/04 296
----
Total capital loss carryforwards $404
====
Under current law, net capital losses realized after October 31 may be deferred
and treated as occuring on the first day of the following fiscal year. At August
31, 1999, the Schwab Long-Term Tax-Free Bond Fund has deferred losses occuring
between November 1, 1998 and August 31, 1999 of $128.
RECLASSIFICATIONS -- Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial and tax reporting. These reclassifications have no
effect on net assets or net asset values per share.
On the Statement of Assets and Liabilities the following adjustments were made:
<TABLE>
<CAPTION>
Accumulated
Undistributed Net Realized
Net Investment Loss on
Income Investments Paid-In Capital
-------------- ------------ ---------------
<S> <C> <C> <C>
Schwab Short/Intermediate Tax-Free Bond Fund $8 $(26) $18
Schwab Long-Term Tax-Free Bond Fund $2 $(10) $ 8
</TABLE>
3. Transactions with affiliates
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "investment adviser").
38
<PAGE>
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 year ended August
31, 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
year ended August 31, 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 $14 related to the Trust's
unaffiliated trustees.
INTERFUND TRANSACTIONS -- During the year ended August 31, 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, as amended,
aggregated $40,515 and $51,450 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.
For the year ended August 31, 1999, the total of such fees reduced by the
investment adviser was $257 for the Schwab Short/Intermediate Tax-Free Bond
Fund, and $286 for the Schwab Long-Term Tax-Free Bond Fund.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1999, were as follows:
Schwab Short/Intermediate Schwab Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------------- ------------------
Purchases $27,814 $64,242
Proceeds of sales and maturities $ 5,864 $29,511
39
<PAGE>
To the Board of Trustees and Shareholders of
Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab Short/Intermediate Tax-Free
Bond Fund and Schwab Long-Term Tax-Free Bond Fund (two portfolios of Schwab
Investments, hereafter referred to as the "Funds") at August 31, 1999, and the
results of each of their operations for the year then ended, the changes in each
of their net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
San Francisco, CA
October 5, 1999
40
<PAGE>
Tax Designations (unaudited)
Pursuant to Section 852(b)(5)(A) of the Internal Revenue Code, the Funds hereby
designate 100% of the dividends paid from net investment income for the year
ended August 31, 1999 as exempt-interest dividends.
41
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THE SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help 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 visit us at WWW.SCHWAB.COM/SCHWABFUNDS or 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-
Shwab Total Stock Market Index Fund
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 YieldPlus Fund-TM-
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>
[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. MKT3656-1 (10/99)
