SCHWAB FUNDS-Registered TradeMark-
SCHWAB
CALIFORNIA
TAX-FREE
BOND FUNDS
Annual Report
August 31, 1999
<PAGE>
SCHWAB CALIFORNIA TAX-FREE BOND FUNDS
We're pleased to bring you this annual report for the following funds (the
funds) for the one-year period ended August 31, 1999:
- Schwab California Short/Intermediate
Tax-Free Bond Fund
- Schwab California 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 and state of California personal
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 CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in
debt securities issued by or on behalf of the state of California and its
political subdivisions, agencies and instrumentalities. Under normal market
conditions, the fund seeks to maintain a dollar-weighted average maturity of
between two and five years for the portfolio. The SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND invests primarily in debt securities issued by or on behalf
of the state of California and its political subdivisions, agencies and
instrumentalities. Under normal market conditions, the fund seeks to maintain a
dollar-weighted average maturity of 10 years or longer for the portfolio.
Income from the funds may be subject 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 California Short/Intermediate
Tax-Free Bond Fund
FUND PERFORMANCE 8
PORTFOLIO SNAPSHOT 10
- ---------------------------------------------
Schwab California 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
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 Employment Cost Index Monthly Consumer Price Index
<S> <C> <C>
Jan-90 5.50% 5.20%
Feb-90 5.50% 5.30%
Mar-90 5.50% 5.20%
Apr-90 5.40% 4.70%
May-90 5.40% 4.40%
Jun-90 5.40% 4.70%
Jul-90 5.20% 4.80%
Aug-90 5.20% 5.60%
Sep-90 5.20% 6.20%
Oct-90 4.90% 6.30%
Nov-90 4.90% 6.30%
Dec-90 4.90% 6.10%
Jan-91 4.60% 5.70%
Feb-91 4.60% 5.30%
Mar-91 4.60% 4.90%
Apr-91 4.60% 4.90%
May-91 4.60% 5.00%
Jun-91 4.60% 4.70%
Jul-91 4.30% 4.40%
Aug-91 4.30% 3.80%
Sep-91 4.30% 3.40%
Oct-91 4.30% 2.90%
Nov-91 4.30% 3.00%
Dec-91 4.30% 3.10%
Jan-92 4.00% 2.60%
Feb-92 4.00% 2.80%
Mar-92 4.00% 3.20%
Apr-92 3.60% 3.20%
May-92 3.60% 3.00%
Jun-92 3.60% 3.10%
Jul-92 3.50% 3.20%
Aug-92 3.50% 3.10%
Sep-92 3.50% 3.00%
Oct-92 3.50% 3.20%
Nov-92 3.50% 3.00%
Dec-92 3.50% 2.90%
Jan-93 3.50% 3.30%
Feb-93 3.50% 3.20%
Mar-93 3.50% 3.10%
Apr-93 3.60% 3.20%
May-93 3.60% 3.20%
Jun-93 3.60% 3.00%
Jul-93 3.60% 2.80%
Aug-93 3.60% 2.80%
Sep-93 3.60% 2.70%
Oct-93 3.50% 2.80%
Nov-93 3.50% 2.70%
Dec-93 3.50% 2.70%
Jan-94 3.20% 2.50%
Feb-94 3.20% 2.50%
Mar-94 3.20% 2.50%
Apr-94 3.20% 2.40%
May-94 3.20% 2.30%
Jun-94 3.20% 2.50%
Jul-94 3.20% 2.80%
Aug-94 3.20% 2.90%
Sep-94 3.20% 3.00%
Oct-94 3.00% 2.60%
Nov-94 3.00% 2.70%
Dec-94 3.00% 2.70%
Jan-95 2.90% 2.80%
Feb-95 2.90% 2.90%
Mar-95 2.90% 2.90%
Apr-95 2.90% 3.10%
May-95 2.90% 3.20%
Jun-95 2.90% 3.00%
Jul-95 2.70% 2.80%
Aug-95 2.70% 2.60%
Sep-95 2.70% 2.50%
Oct-95 2.70% 2.80%
Nov-95 2.70% 2.60%
Dec-95 2.70% 2.50%
Jan-96 2.80% 2.70%
Feb-96 2.80% 2.70%
Mar-96 2.80% 2.80%
Apr-96 2.90% 2.90%
May-96 2.90% 2.90%
Jun-96 2.90% 2.80%
Jul-96 2.80% 3.00%
Aug-96 2.80% 2.90%
Sep-96 2.80% 3.00%
Oct-96 2.90% 3.00%
Nov-96 2.90% 3.30%
Dec-96 2.90% 3.30%
Jan-97 2.90% 3.00%
Feb-97 2.90% 3.00%
Mar-97 2.90% 2.80%
Apr-97 2.80% 2.50%
May-97 2.80% 2.20%
Jun-97 2.80% 2.30%
Jul-97 3.00% 2.20%
Aug-97 3.00% 2.20%
Sep-97 3.00% 2.20%
Oct-97 3.30% 2.10%
Nov-97 3.30% 1.80%
Dec-97 3.30% 1.70%
Jan-98 3.30% 1.60%
Feb-98 3.30% 1.40%
Mar-98 3.30% 1.40%
Apr-98 3.50% 1.40%
May-98 3.50% 1.70%
Jun-98 3.50% 1.70%
Jul-98 3.70% 1.70%
Aug-98 3.70% 1.60%
Sep-98 3.70% 1.50%
Oct-98 3.40% 1.50%
Nov-98 3.40% 1.50%
Dec-98 3.40% 1.60%
Jan-99 3.00% 1.70%
Feb-99 3.00% 1.60%
Mar-99 3.00% 1.70%
Apr-99 3.20% 2.30%
May-99 3.20% 2.10%
Jun-99 3.20% 2.00%
Jul-99 2.10%
Aug-99 2.30%
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
Growth of a Hypothetical $1 Investment
Lehman Brothers
MSCI-EAFE S&P 500 Russell 2000 Aggregate
Index Index Index 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 14.9
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 25.5
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.2
Feb-93 24.25
Mar-93 24.22
Apr-93 23.2
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 20.1
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.9
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.2
Mar-95 16.5
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 19.3
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.6
Nov-96 21.05
Dec-96 20.7
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
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 33.9
May-99 32.74
Jun-99 34.7
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
MUNICIPAL BOND YIELDS
Bond Buyer 30 Muni Bond Yields Five-Year AAA GO Muni Bond Yields
<S> <C> <C>
8/28/1998 4.86% 3.92%
9/4/1998 5.25% 3.89%
9/11/1998 5.22% 3.87%
9/18/1998 5.18% 3.81%
9/25/1998 5.16% 3.79%
10/2/1998 5.01% 3.70%
10/9/1998 5.27% 3.71%
10/16/1998 5.20% 3.67%
10/23/1998 5.36% 3.73%
10/30/1998 5.34% 3.70%
11/6/1998 5.44% 3.78%
11/13/1998 5.36% 3.77%
11/20/1998 5.29% 3.74%
11/27/1998 5.28% 3.74%
12/4/1998 5.26% 3.73%
12/11/1998 5.24% 3.73%
12/18/1998 5.29% 3.74%
12/25/1998 5.42% 3.79%
1/1/1999 5.34% 3.77%
1/8/1999 5.41% 3.83%
1/15/1999 5.36% 3.76%
1/22/1999 5.29% 3.71%
1/29/1999 5.21% 3.63%
2/5/1999 5.32% 3.66%
2/12/1999 5.32% 3.64%
2/19/1999 5.29% 3.65%
2/26/1999 5.33% 3.70%
3/5/1999 5.44% 3.73%
3/12/1999 5.39% 3.82%
3/19/1999 5.30% 3.81%
3/26/1999 5.34% 3.84%
4/2/1999 5.43% 3.88%
4/9/1999 5.35% 3.83%
4/16/1999 5.39% 3.76%
4/23/1999 5.43% 3.78%
4/30/1999 5.47% 3.80%
5/7/1999 5.57% 3.85%
5/14/1999 5.65% 3.90%
5/21/1999 5.59% 3.89%
5/28/1999 5.62% 4.00%
6/4/1999 5.70% 4.07%
6/11/1999 5.90% 4.25%
6/18/1999 5.72% 4.30%
6/25/1999 5.93% 4.40%
7/2/1999 5.86% 4.39%
7/9/1999 5.85% 4.35%
7/16/1999 5.76% 4.28%
7/23/1999 5.81% 4.29%
7/30/1999 5.94% 4.31%
8/6/1999 6.06% 4.40%
8/13/1999 6.30% 4.44%
8/20/1999 6.34% 4.47%
8/27/1999 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, in large part, this was 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
TREASURY BOND YIELDS FOR
30-YEAR AND FIVE-YEAR BONDS
30-Year Bond Yields Five-Year Bond Yields
<S> <C> <C>
8/28/1998 91.00% 80.00%
9/4/1998 99.30% 79.50%
9/11/1998 99.80% 83.30%
9/18/1998 100.60% 84.40%
9/25/1998 101.00% 86.80%
10/2/1998 103.50% 90.60%
10/9/1998 103.00% 83.10%
10/16/1998 104.50% 90.80%
10/23/1998 103.50% 86.70%
10/30/1998 103.50% 87.40%
11/6/1998 101.00% 82.30%
11/13/1998 102.10% 83.70%
11/20/1998 101.40% 81.40%
11/27/1998 102.30% 81.40%
12/4/1998 104.40% 85.00%
12/11/1998 104.30% 85.00%
12/18/1998 105.80% 85.70%
12/25/1998 103.90% 80.50%
1/1/1999 104.80% 83.00%
1/8/1999 102.60% 80.90%
1/15/1999 105.00% 82.60%
1/22/1999 104.10% 82.10%
1/29/1999 102.40% 79.80%
2/5/1999 99.50% 75.30%
2/12/1999 98.10% 73.30%
2/19/1999 98.20% 73.10%
2/26/1999 95.60% 70.90%
3/5/1999 97.20% 71.40%
3/12/1999 97.50% 75.60%
3/19/1999 95.30% 75.00%
3/26/1999 95.50% 75.70%
4/2/1999 99.50% 78.30%
4/9/1999 98.00% 77.30%
4/16/1999 96.70% 73.60%
4/23/1999 97.00% 73.60%
4/30/1999 96.60% 72.90%
5/7/1999 95.80% 71.60%
5/14/1999 95.40% 70.90%
5/21/1999 97.20% 71.70%
5/28/1999 96.40% 71.70%
6/4/1999 95.60% 71.00%
6/11/1999 95.80% 71.90%
6/18/1999 95.80% 75.10%
6/25/1999 96.40% 74.70%
7/2/1999 97.70% 77.10%
7/9/1999 97.50% 76.40%
7/16/1999 97.90% 77.10%
7/23/1999 96.40% 75.40%
7/30/1999 97.30% 74.40%
8/6/1999 98.10% 74.40%
8/13/1999 103.20% 75.80%
8/20/1999 105.90% 77.50%
8/27/1999 103.10% 76.00%
Source: BLOOMBERG L.P
</TABLE>
THIS MARKET OVERVIEW HAS BEEN PROVIDED BY THE PORTFOLIO MANAGEMENT TEAM.
7
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/99
<TABLE>
<CAPTION>
SINCE 30-DAY
INCEPTION SEC
ONE YEAR FIVE YEARS (4/21/93) YIELD
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND(1) 2.16% 4.62% 4.24% 3.87%
- -----------------------------------------------------------------------------------------------------------
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--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 3.17%, 4.79% and 4.28%,
respectively. The 30-day SEC yield as of 6/30/99 was 3.83%.(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 combined federal
and state of California personal income tax rate of 45.22%. Shareholder tax
rates may be different.
<TABLE>
<CAPTION>
30-DAY TAXABLE-EQUIVALENT
SEC YIELD 30-DAY SEC YIELD
<S> <C> <C>
- --------------------------------------------------------------------------------------------
Schwab California Short/Intermediate Tax-Free Bond Fund 3.87% 7.06%
- --------------------------------------------------------------------------------------------
</TABLE>
(1) A portion of the fund's expenses was 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 1.87%, 4.25%
and 3.84%, respectively. The 30-day SEC yield as of 8/31/99 would have been
3.63%.
(2) A portion of the fund's expenses was 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 2.96%, 4.42%
and 3.88%, respectively. The 30-day SEC yield as of 6/30/99 would have been
3.57%.
8
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Schwab CA Short/Intermediate Tax-Free Bond Fund Lehman Brothers Three-Year Municipal Bond Index
<S> <C> <C>
4/21/1993 $10,000 $10,000
4/30/1993 $9,990 $9,994
5/31/1993 $10,037 $10,021
6/30/1993 $10,136 $10,085
7/31/1993 $10,157 $10,090
8/31/1993 $10,257 $10,185
9/30/1993 $10,328 $10,229
10/31/1993 $10,340 $10,251
11/30/1993 $10,310 $10,237
12/31/1993 $10,444 $10,345
1/31/1994 $10,517 $10,429
2/28/1994 $10,372 $10,332
3/31/1994 $10,188 $10,207
4/30/1994 $10,239 $10,267
5/31/1994 $10,272 $10,315
6/30/1994 $10,253 $10,318
7/31/1994 $10,356 $10,404
8/31/1994 $10,390 $10,441
9/30/1994 $10,350 $10,415
10/31/1994 $10,280 $10,390
11/30/1994 $10,167 $10,371
12/31/1994 $10,227 $10,416
1/31/1995 $10,350 $10,502
2/28/1995 $10,503 $10,613
3/31/1995 $10,598 $10,708
4/30/1995 $10,614 $10,744
5/31/1995 $10,826 $10,909
6/30/1995 $10,809 $10,935
7/31/1995 $10,925 $11,050
8/31/1995 $11,030 $11,137
9/30/1995 $11,090 $11,168
10/31/1995 $11,174 $11,222
11/30/1995 $11,256 $11,294
12/31/1995 $11,296 $11,341
1/31/1996 $11,366 $11,430
2/29/1996 $11,358 $11,432
3/31/1996 $11,308 $11,404
4/30/1996 $11,325 $11,418
5/31/1996 $11,332 $11,428
6/30/1996 $11,393 $11,497
7/31/1996 $11,466 $11,560
8/31/1996 $11,483 $11,577
9/30/1996 $11,557 $11,648
10/31/1996 $11,634 $11,730
11/30/1996 $11,742 $11,839
12/31/1996 $11,737 $11,845
1/31/1997 $11,776 $11,897
2/28/1997 $11,837 $11,955
3/31/1997 $11,762 $11,893
4/30/1997 $11,815 $11,944
5/31/1997 $11,916 $12,041
6/30/1997 $11,991 $12,112
7/31/1997 $12,139 $12,256
8/31/1997 $12,120 $12,231
9/30/1997 $12,196 $12,319
10/31/1997 $12,227 $12,374
11/30/1997 $12,268 $12,410
12/31/1997 $12,346 $12,494
1/31/1998 $12,433 $12,576
2/28/1998 $12,459 $12,603
3/31/1998 $12,467 $12,623
4/30/1998 $12,435 $12,605
5/31/1998 $12,540 $12,723
6/30/1998 $12,568 $12,766
7/31/1998 $12,635 $12,812
8/31/1998 $12,749 $12,936
9/30/1998 $12,863 $13,019
10/31/1998 $12,892 $13,081
11/30/1998 $12,931 $13,113
12/31/1998 $12,942 $13,144
1/31/1999 $13,054 $13,264
2/28/1999 $13,054 $13,278
3/31/1999 $13,073 $13,290
4/30/1999 $13,088 $13,332
5/31/1999 $13,067 $13,313
6/30/1999 $12,966 $13,233
7/31/1999 $13,034 $13,298
8/31/1999 $13,024 $13,314
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab California Short/ Intermediate Tax-Free Bond Fund, made at its inception,
with a similar investment in the Lehman Brothers Three-Year Municipal Bond
Index.
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) $ 95,894
- ----------------------------------------------------------------------
Total net assets as of 8/31/99 (000s) $125,698
- ----------------------------------------------------------------------
Percentage growth over reporting period 31%
- ----------------------------------------------------------------------
</TABLE>
9
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO SNAPSHOT
The Schwab California Short/Intermediate Tax-Free Bond Fund invests primarily in
California 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 CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND PEER GROUP AVERAGE++
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Number of Issues 79 125
- -----------------------------------------------------------------------------------------------------------------
30-Day SEC Yield 3.87% 3.04%
- -----------------------------------------------------------------------------------------------------------------
Average Weighted Coupon 4.87% 5.60%
- -----------------------------------------------------------------------------------------------------------------
Average Weighted Maturity 3.73 years 3.90 years
- -----------------------------------------------------------------------------------------------------------------
Average Credit Quality AA AA
- -----------------------------------------------------------------------------------------------------------------
Average Effective Duration 3.44 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 $ 15,798 12.7% 12.7%
- ------------------------------------------------------------------
7 - 36 months $ 38,579 30.9% 43.6%
- ------------------------------------------------------------------
37 - 60 months $ 27,283 21.9% 65.5%
- ------------------------------------------------------------------
More than
60 months $ 42,984 34.5% 100.0%
- ------------------------------------------------------------------
</TABLE>
INVESTMENT STYLE BOX(1)
AS OF 8/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
WEIGHTED AVERAGE MATURITY
Short Int Long AVERAGE CREDIT QUALITY
X High
Medium
Low
(1) Source: Morningstar. The style box represents two of the main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the fund's portfolio as of 8/31/99. It is not
indicative of its holding 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>
Municipal Bonds 94.8%
Variable Rate Obligations 5.2%
</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 58.9%
AA 19.4%
A 13.7%
BBB 2.4%
Short-Term Ratings 4.0%
Unrated Securities 1.6%
</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.
(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.
TOP 10 HOLDINGS
% OF TOTAL NET ASSETS
<TABLE>
<S> <C>
- -----------------------------------------------
Long Beach Harbor, California, RB
Series 1998A,
5.50%, Maturity 5/15/05 3.32%
- -----------------------------------------------
Los Angeles County, California, Schools
Pooled Financing Program, COP Series
1999B, 4.00%, Maturity 09/29/00 3.19%
- -----------------------------------------------
Alameda County, California, COP,
5.00%, Maturity 12/01/06 2.85%
- -----------------------------------------------
California Statewide Community
Development Authority, COP
4.13%, Maturity 4/01/04 2.69%
- -----------------------------------------------
Orange County, California, Recovery COP
Series 1996A,
6.00%, Maturity 7/01/08 2.61%
- -----------------------------------------------
Los Angeles, California, Unified School
District, COP Series
1994B, 5.70%, Maturity 12/01/99 2.57%
- -----------------------------------------------
San Francisco, California, Bay Area
Rapid Transit District Sales
Tax, RB Series 1998, 5.50%, Maturity
7/01/05 2.52%
- -----------------------------------------------
Orange County, California Municipal
District Water Facilities,
COP Series 1996, 4.60%, Maturity
7/01/01 2.42%
- -----------------------------------------------
California State Public Works Board
Lease Revenue Refunding
Bonds, Series 1998B, 4.50%, Maturity
9/01/05 2.40%
- -----------------------------------------------
Contra Costa, California Transportation
Authority Sales Tax,
RB Series, 6.00% Maturity 03/01/03 2.13%
- -----------------------------------------------
</TABLE>
11
<PAGE>
SCHWAB CALIFORNIA 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 (2/24/92) SEC YIELD
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND(1) (1.57)% 6.05% 6.58% 5.13%
- ------------------------------------------------------------------------------------------------------------
Lehman Brothers General Municipal Bond Index 0.50% 6.45% 6.69% 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 1.97%, 6.95% and 7.00%,
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 combined federal
and state of California personal income tax rate of 45.22%. Shareholder tax
rates may be different.
<TABLE>
<CAPTION>
30-DAY TAXABLE-EQUIVALENT
SEC YIELD 30-DAY SEC YIELD
<S> <C> <C>
- --------------------------------------------------------------------------------------------
Schwab California Long-Term Tax-Free Bond Fund 5.13% 9.36%
- --------------------------------------------------------------------------------------------
</TABLE>
(1) A portion of the fund's expenses was 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 (1.82)%, 5.75%
and 6.21%, respectively. The 30-day SEC yield as of 8/31/99 would have been
4.90%.
(2) A portion of the fund's expenses was 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 1.76%, 6.65%
and 6.63%, respectively. The 30-day SEC yield as of 6/30/99 would have been
4.71%.
12
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
Schwab CA Long-Term Tax-Free Bond Fund Lehman Brothers General Municipal Bond Index
<S> <C> <C>
2/24/92 $10,000 $10,000
3/31/92 $10,099 $10,004
4/30/92 $10,217 $10,093
5/31/92 $10,410 $10,212
6/30/92 $10,633 $10,383
7/31/92 $11,082 $10,694
8/31/92 $10,786 $10,590
9/30/92 $10,835 $10,659
10/31/92 $10,474 $10,554
11/30/92 $10,921 $10,743
12/31/92 $11,110 $10,853
1/31/93 $11,256 $10,979
2/28/93 $11,775 $11,376
3/31/93 $11,561 $11,256
4/30/93 $11,674 $11,370
5/31/93 $11,736 $11,434
6/30/93 $11,969 $11,624
7/31/93 $11,957 $11,640
8/31/93 $12,235 $11,882
9/30/93 $12,371 $12,071
10/31/93 $12,412 $12,041
11/30/93 $12,263 $11,934
12/31/93 $12,541 $12,186
1/31/94 $12,671 $12,326
2/28/94 $12,304 $12,006
3/31/94 $11,683 $11,517
4/30/94 $11,768 $11,615
5/31/94 $11,867 $11,716
6/30/94 $11,747 $11,644
7/31/94 $12,008 $11,864
8/31/94 $12,026 $11,905
9/30/94 $11,824 $11,730
10/31/94 $11,508 $11,521
11/30/94 $11,235 $11,313
12/31/94 $11,420 $11,562
1/31/95 $11,901 $11,893
2/28/95 $12,295 $12,238
3/31/95 $12,414 $12,379
4/30/95 $12,407 $12,394
5/31/95 $12,825 $12,789
6/30/95 $12,613 $12,677
7/31/95 $12,685 $12,797
8/31/95 $12,866 $12,960
9/30/95 $12,972 $13,041
10/31/95 $13,228 $13,230
11/30/95 $13,507 $13,450
12/31/95 $13,690 $13,579
1/31/96 $13,785 $13,682
2/29/96 $13,664 $13,589
3/31/96 $13,436 $13,415
4/30/96 $13,369 $13,378
5/31/96 $13,379 $13,373
6/30/96 $13,550 $13,518
7/31/96 $13,700 $13,641
8/31/96 $13,693 $13,639
9/30/96 $13,920 $13,830
10/31/96 $14,073 $13,986
11/30/96 $14,365 $14,242
12/31/96 $14,283 $14,182
1/31/97 $14,294 $14,209
2/28/97 $14,429 $14,340
3/31/97 $14,175 $14,149
4/30/97 $14,316 $14,268
5/31/97 $14,581 $14,482
6/30/97 $14,706 $14,637
7/31/97 $15,266 $15,042
8/31/97 $15,056 $14,901
9/30/97 $15,253 $15,078
10/31/97 $15,359 $15,175
11/30/97 $15,475 $15,264
12/31/97 $15,717 $15,487
1/31/98 $15,918 $15,646
2/28/98 $15,906 $15,651
3/31/98 $15,879 $15,665
4/30/98 $15,802 $15,595
5/31/98 $16,078 $15,841
6/30/98 $16,124 $15,903
7/31/98 $16,145 $15,943
8/31/98 $16,405 $16,190
9/30/98 $16,645 $16,392
10/31/98 $16,638 $16,392
11/30/98 $16,728 $16,450
12/31/98 $16,725 $16,491
1/31/99 $16,903 $16,687
2/28/99 $16,846 $16,613
3/31/99 $16,888 $16,637
4/30/99 $16,879 $16,678
5/31/99 $16,727 $16,582
6/30/99 $16,438 $16,343
7/31/99 $16,418 $16,402
8/31/99 $16,144 $16,270
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab California Long-Term Tax-Free Bond Fund, made at its inception, with a
similar investment in the Lehman Brothers General 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) $190,197
- ----------------------------------------------------------------------
Total net assets as of 8/31/99 (000s) $201,682
- ----------------------------------------------------------------------
Percentage growth over reporting period 6%
- ----------------------------------------------------------------------
</TABLE>
13
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
PORTFOLIO SNAPSHOT
The Schwab California Long-Term Tax-Free Bond Fund invests primarily in
California 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 CALIFORNIA LONG-
TERM TAX-FREE BOND FUND PEER GROUP AVERAGE++
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Number of Issues 93 154
- ----------------------------------------------------------------------------------------------------------
30-Day SEC Yield 5.13% 3.78%
- ----------------------------------------------------------------------------------------------------------
Average Weighted Coupon 5.36% 5.57%
- ----------------------------------------------------------------------------------------------------------
Average Weighted Maturity 20.63 years 17.70 years
- ----------------------------------------------------------------------------------------------------------
Average Credit Quality AA AAA
- ----------------------------------------------------------------------------------------------------------
Average Effective Duration 10.79 years 8.60 years
- ----------------------------------------------------------------------------------------------------------
Expense Ratio 0.49%* 1.08%
- ----------------------------------------------------------------------------------------------------------
</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 110
California municipal long-term funds as tracked by Morningstar.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 8/31/99
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF FUND
VALUE OF FUND INVESTMENTS
MATURITY RANGE (000S) INVESTMENTS (CUMULATIVE)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
0 - 1 year $ 2,570 1.3% 1.3%
- ---------------------------------------------------------------------------------------------------------
2 - 10 years $ 5,506 2.7% 4.0%
- ---------------------------------------------------------------------------------------------------------
11 - 20 years $91,150 45.8% 49.8%
- ---------------------------------------------------------------------------------------------------------
21 - 30 years $92,836 46.6% 96.4%
- ---------------------------------------------------------------------------------------------------------
More than
30 years $ 7,107 3.6% 100.0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT STYLE BOX(1)
AS OF 8/31/99
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. It is not
indicative of its holding after that date, nor does it represent 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>
Municipal Bonds 98.7%
Variable Rate Obligations 1.3%
</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 62.3%
AA 18.1%
A 11.1%
BBB 6.5%
Unrated Securities 2.0%
</TABLE>
The above charts 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 or
Moody's Investors Service. Categories reflect the higher published ratings
for securities rated differently by the two agencies, and percentages are
dollar-weighted.
TOP 10 HOLDINGS
% OF TOTAL NET ASSETS
<TABLE>
<S> <C>
- -----------------------------------------------
Los Angeles, California, Unified School
District, GO Series 1999C,
5.25%, Maturity 07/01/24 4.13%
- -----------------------------------------------
South Orange County, California, Public
Financing Authority Special Tax, RB
Series 1999A, 5.25%,
Maturity 08/15/18 2.92%
- -----------------------------------------------
Pomona, California, Public Financing
Authority, RB Series 1999AA, 5.00%,
Maturity 05/01/29 2.54%
- -----------------------------------------------
California Health Facilities Financing
Authority Insured Hospital
Revenue Refunding Bonds, Series 1996,
5.38%, Maturity 7/01/16 2.54%
- -----------------------------------------------
Foothill Eastern Corridor Agency,
California, Toll Road, RB,
5.13%, Maturity 01/15/19 2.35%
- -----------------------------------------------
- -----------------------------------------------
San Joaquin County, California, COP,
Revenue Refunding Bond
5.00%, Maturity 09/01/20 2.32%
- -----------------------------------------------
California Statewide Community
Development Authority, COP,
5.38%, Maturity 04/01/17 2.30%
- -----------------------------------------------
Riverside County, California, Public
Financing Authority Tax Allocation,
RB Series 1997A, 5.63%,
Maturity 10/01/33 2.26%
- -----------------------------------------------
California Health Facilities Financing
Authority, RB Series 1998B,
5.00%, Maturity 10/01/18 2.21%
- -----------------------------------------------
California Health Facilities Financing
Authority Insured Hospital, RB Series
1992A, 6.63%, Maturity 11/01/22 2.16%
- -----------------------------------------------
</TABLE>
15
<PAGE>
DIVIDENDS PAID
During the reporting period, the funds continued to attempt to provide a high
level of current income 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.
DIVIDENDS PAID BY THE SCHWAB
CALIFORNIA TAX-FREE BOND FUNDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INCOME DIVIDENDS PER SHARE Schwab California Short/Intermediate Schwab California Long-Term
FISCAL YEAR Tax-Free Bond Fund Tax-Free Bond Fund
<S> <C> <C>
1992* $0.00 $0.51
1993** $0.13 $0.38
1994+ $0.37 $0.56
1995+ $0.42 $0.56
1996+ $0.43 $0.57
1997+ $0.43 $0.56
1998+ $0.42 $0.55
1999+ $0.39 $0.54
</TABLE>
* Period from the fund's inception on 2/24/92 through 12/31/92.
** Period from the fund's inception on 4/21/93 through 8/31/93 for Schwab
California Short/Intermediate Tax-Free Bond Fund and for the eight-month
period ended 8/31/93 for Schwab California Long-Term Tax-Free Bond Fund.
+ For the one-year period ended 8/31 for both funds.
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 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 the yields are based on fundamental economic
factors.
- - Callable Bonds--The majority of long-term municipal 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.
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
18
<PAGE>
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 Federal Reserve Bank to increase short-term interest rates. The
combination of these factors led to increased 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 CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND achieved a total
return of 2.16% for the one-year reporting period ended August 31, 1999. The
return came from a combination of dividend income of 3.82% and a decrease in the
fund's NAV of 1.66%. The decline in NAV was a result of the fund's increasing
yield, which rose from 3.57% at the beginning of the period to 3.87% at the end
of the period.
The SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND reported a negative total
return of 1.57% for the one-year reporting period ended August 31, 1999. The
return was derived from a combination of dividend income of 4.51% and a decrease
in the fund's NAV of 6.08%. The decline in NAV was a result of the fund's
increasing yield, which rose from 4.48% at the beginning of the period to 5.13%
at the end of the period.
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 primarily 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
19
<PAGE>
FUND DISCUSSION (continued)
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 CALIFORNIA
SHORT/INTERMEDIATE TAX-FREE BOND FUND maintained an average maturity throughout
the reporting period in a relatively narrow range from approximately 3.50 to
4.53 years. The fund's weighted average maturity at the end of the reporting
period was 3.73 years up from 3.57 years, at the beginning of the period.
The SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND maintained an average
maturity throughout the reporting period in a range from approximately 17.16 to
20.79 years. The fund's weighted average maturity at the end of the reporting
period was 20.63 years, up from 17.40 years at the beginning of the period.
Q. WHAT IS YOUR VIEW OF THE ECONOMIC CLIMATE IN CALIFORNIA?
A. California continues to enjoy a sustained economic recovery with employment
and income growth continuing to exceed expectations. Employment growth in the
1998 was 3.6% compared to the 3% achieved in 1997, and well above the national
rate of 2.6%. Looking forward, it is anticipated that California will see
continued moderate growth across most industry sectors with some, such as those
heavily dependent on exporting goods and services to Asia, growing at a slower
pace. However, the effect on California of the economic weakness in Asia should
be somewhat offset by strong export growth to Mexico and increasing exports to
Europe, Canada and Middle East, in our opinion.
The continued state economic improvement has allowed for a buildup of budget
reserves and an easing of some of the spending restrictions imposed during the
last recession. California ended the 1998-99 budget year with more than $2
billion in budget reserves. As a result the state budget was adopted on time, a
first in many years. Despite this improvement, as in prior years, budget
adjustments may be necessary to keep spending in line with revenues. Lawmakers
will continue to address the challenge of balancing mandated spending
requirements for education and public safety against the need for maintaining
and upgrading public infrastructure. Therefore the state's financial position
may be somewhat static over the next twelve months.
We are satisfied that the California securities held by the funds represent
relatively low credit risk and we will continue to monitor the state's economic
situation closely. California's current credit ratings are Aa3 from Moody's
Investor Service, AA- from Standard & Poor's Corporation, and AA- from Fitch
IBCA, Inc., three well-known rating agencies.
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 CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (IN THOUSANDS)
August 31, 1999
Par Value
------- --------
- -----------------------------
MUNICIPAL BONDS -- 94.0% (a)
Alameda, California Public
Financing Authority RB
4.85%, 09/02/06 $2,140 $ 2,089
Alameda County, California COP
(Reference & Capital
Projects) (e)
5.00%, 12/01/06 3,480 3,584
California Education Authority RB
(Pooled College & University
Projects) Series 1997A (e)
4.85%, 04/01/03 345 353
5.05%, 04/01/05 1,010 1,041
California Educational Facilities
Authority RB (Mills College)
Series 1992
6.88%, 09/01/02 500 546
California Educational Facilities
Authority Revenue Refunding Bonds
(Stanford University Project)
Series 1997M
5.25%, 12/01/01 1,600 1,648
California Educational Facilities
Authority Revenue Refunding Bonds
(University of San Diego) (e)
4.50%, 10/01/02 1,000 1,014
California Health Facility Financial
Authority RB (Catholic Health Care
West) Series 1997A
5.00%, 07/01/03 2,000 2,058
California Health Facility Financial
Authority RB (Kaiser Permanente)
Series 1998B
5.00%, 10/01/08 2,500 2,444
California Health Facility Financial
Authority RB (Valley Presbyterian
Hospital) Series 1997 (e)
5.25%, 05/01/03 1,000 1,035
California HFA Home Mortgage RB
Series 1994G
6.00%, 08/01/00 410 416
California State GO Series 1994 (e)
6.50%, 03/01/03 2,000 2,150
California State Intercommunity
Hospital Finance Authority COP
(North Bay Healthcare Project) (e)
4.40%, 11/01/06 1,745 1,682
Par Value
------- --------
California State Public Works Board
Energy Effeciency Revenue
Refunding Bonds Series B (e)
4.00%, 09/01/06 $1,155 $ 1,117
California State Public Works Board
Lease Revenue Refunding Bonds
(Department of Corrections State
Prisons Imperial County)
Series 1998B (e)
4.50%, 09/01/05 3,000 3,015
California State Public Works Board
Lease Revenue Refunding Bonds
(Department of Corrections State
Prisons) Series 1993A (e)
4.70%, 12/01/00 1,865 1,886
California State Public Works Board
Lease Revenue Refunding Bonds
(Department of Corrections State
Prisons) Series 1993D
4.40%, 06/01/00 1,000 1,005
California State Public Works Board
Lease Revenue Refunding Bonds
(The Regents of the University of
California Various Projects)
Series 1992A (e)
5.60%, 12/01/01 2,000 2,072
6.40%, 12/01/02 2,000 2,172
California State Public Works Board
Lease Revenue Refunding Bonds
(The Regents of the University of
California Various Projects)
Series 1993A
4.70%, 06/01/00 1,020 1,028
California State Public Works Board
Lease Revenue Refunding Bonds
(Various California Community
College Projects) Series 1993A
4.70%, 12/01/99 1,000 1,003
California State Public Works Board
Lease Revenue Refunding Bonds
(Various California State University
Projects) Series 1993A
4.30%, 12/01/99 2,000 2,003
California State West & Central Basin
Financing Authority RB (e)
6.13%, 08/01/02 1,425 1,528
24
<PAGE>
Par Value
------- --------
California Statewide Community
Development Authority COP
(St. Joseph Health System Group)
5.30%, 07/01/00 $2,035 $ 2,064
California Statewide Community
Development Authority COP
(St. Joseph Health System Group)
Series 1997
5.00%, 07/01/04 750 757
California Statewide Community
Development Authority COP
(The Internext Group)
4.13%, 04/01/04 3,500 3,382
California Statewide Community
Development Authority Hospital
Revenue Refunding Bonds COP
(Cedars-Sinai Medical Center)
Series 1993
4.40%, 11/01/00 1,235 1,241
California Statewide Community
Development Authority Revenue
Refunding Bonds (Sherman Oaks
Project) Series 1998A (e)
5.00%, 08/01/06 2,500 2,566
City of Santa Monica, California
Wastewater RB (Hyperion Project)
Series 1991A
6.25%, 01/01/02 1,250 1,330
Central Contra Costa County, California
Sanitary District Revenue Refunding Bonds
4.10%, 09/01/09 1,435 1,347
Contra Costa County, California
Transportation Authority Sales Tax
RB Series 1995A (e)
4.80%, 03/01/01 1,000 1,013
6.00%, 03/01/03 2,530 2,682
Fairfield, California TRAN
4.45%, 09/28/00 2,500 2,519
Fontana, California Special Tax
Revenue Refunding Bonds (Senior
Community Facilities District 2-A)
Series 1998 (e)
4.10%, 09/01/04 1,120 1,112
4.20%, 09/01/05 1,375 1,361
Par Value
------- --------
Fresno, California Community
Facilities District No.3 (Palm Bluffs
Corporate Center) Special Tax
Series 1998 (e)
4.75%, 09/01/05 $2,000 $ 1,988
Inglewood, California Redevelopement
Agency Tax Allocation Bond
(Merged Redeveloped Project)
Series 1998A (e)
3.88%, 05/01/05 525 510
Long Beach Harbor, California RB
Series 1998A (e)
5.50%, 05/15/05 3,985 4,174
Los Angeles, California Community
Redevelopment Pooled Financing
Authority Revenue Refunding Bonds
(Beacon Street Project) Series 1998F (e)
5.00%, 09/01/07 810 831
Los Angeles, California Community
Redevelopment Pooled Financing
Authority Revenue Refunding Bonds
(Monterey Project) Series 1998E (e)
5.00%, 09/01/07 1,570 1,611
Los Angeles, California Department of
Airports Revenue Refunding Bonds
Series 1995B (e)
6.50%, 05/15/03 2,300 2,481
Los Angeles, California Department of
Water & Power Electric Plant Revenue
Refunding Bonds Series 1994
4.50%, 08/15/01 2,270 2,296
Los Angeles, California State Building
Authority Lease Revenue Refunding
Bonds (California Department of
General Services) Series 1995A
5.60%, 05/01/04 1,000 1,054
Los Angeles, California Unified School
District COP (Multiple Properties
Project) Series 1994B (e)
5.70%, 12/01/99 3,215 3,232
Los Angeles County, California Public
Works Financing Authority Revenue
Refunding Bonds (Capital Construction
Flood Control District Project)
4.30%, 03/01/00 1,090 1,094
25
<PAGE>
Schwab California Short/Intermediate Tax-Free Bond Fund
Schedule of Investments (in thousands) (continued)
August 31, 1999
Par Value
------- --------
Los Angeles County, California Schools
Pooled Financing Program COP
Series 1999B (e)
4.00%, 09/29/00 $4,000 $ 4,010
Northern California Power Agency
Public Power Revenue Refunding
Bonds (Geothermal Project No. 3)
Series 1998A (e)
5.00%, 07/01/04 2,000 2,060
Orange County, California Municipal
District Water Facilities COP
(Allen-McColloch Pipeline Project)
Series 1996 (e)
4.60%, 07/01/01 3,000 3,038
Orange County, California Recovery
COP Series 1996A (e)
6.00%, 07/01/08 3,000 3,278
Rancho, California Water District
Financing Authority (e)
4.70%, 09/15/01 2,500 2,509
Rim of the World, California Unified
School District COP (Measure V
Capital Improvement Projects)
Series 1992 (e)
5.90%, 09/01/01 1,490 1,546
Riverside County, California Public
Financing Authority Special Tax RB
Senior Lien Bonds Series 1995A (e)
4.40%, 09/01/01 1,750 1,768
Sacramento, California City Financing
Authority Lease RB (State of
California EPA Building Project)
Series 1998A (e)
3.90%, 05/01/07 1,000 953
Sacramento, California Regional
County Sanitation District RB
5.00%, 08/01/03 2,100 2,166
San Bernardino County, California TRAN
4.50%, 09/30/99 2,000 2,001
San Francisco, California Bay Area
Transit Financing Authority RB
(Bridge Toll Notes) Series 1999 (d) (e)
5.00%, 02/01/07 500 496
San Francisco, California Bay Area
Rapid Transit District Sales Tax RB
Series 1998 (e)
5.50%, 07/01/05 3,000 3,169
Par Value
------- --------
San Francisco, California Port
Commission Revenue Refunding Bonds
5.00%, 07/01/00 $1,500 $ 1,516
San Francisco, California State
University Foundation Inc. RB
(Auxiliary Organization Student
Housing Project) (e)
4.30%, 07/01/05 540 532
5.00%, 07/01/08 400 403
San Joaquin, California Area Flood
Control Agency Improvement Bond
Act 1915 (Flood Protection
Restoration Assessment)
Series 1996 (e)
5.10%, 09/02/03 1,670 1,727
San Jose, California Financing
Authority Revenue Refunding Bonds
(Convention Center Project)
Series 1993C
5.90%, 09/01/04 2,500 2,625
San Ramon Valley, California Unified
School District COP (Measure A
Capital Project) Series 1993A (e)
4.90%, 10/01/99 1,100 1,101
Southern California Metropolitan
Water District GO Refunding Bonds
Series 1998A
5.00%, 03/01/07 1,025 1,056
Southern California Metropolitan
Water District RB Series 1991
6.63%, 07/01/01 1,000 1,065
Southern California Public Power Authority
Project RB (San Juan Power Project Unit 3)
Series 1993A (e)
5.00%, 01/01/04 1,600 1,646
Southern California Public Power
Authority Revenue Refunding Bonds
Series 1989
6.00%, 07/01/00 1,750 1,786
Stockton, California Insured Health
Facilities RB (St. Joseph Medical
Center of Stockton) Series 1993A (e)
4.60%, 06/01/00 200 201
--------
TOTAL MUNICIPAL BONDS
(Cost $118,822) 118,186
--------
26
<PAGE>
Par Value
------- --------
VARIABLE RATE OBLIGATIONS -- 5.1% (b) (e)
California Economic Development
Financing Authority (California
Independent System Operator)
Series 1998B
2.55%, 09/01/99 $1,700 $ 1,700
California Finance Authority Pollution
Control RB (Pacific Gas & Electric Co.)
2.65%, 09/01/99 300 300
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986D
2.60%, 09/01/99 400 400
California Pollution Control Financing
Authority Revenue Refunding Bonds
(Pacific Gas & Electric Co.) Series 1996F
2.65%, 09/01/99 100 100
California Pollution Control Financing
Authority Solid Waste Disposal RB
(Shell Martinez Refining) Series 1996A
2.55%, 09/01/99 400 400
Chula Vista, California IDRB (San Diego
Gas & Electric Co. Project) Series 1997A
2.50%, 09/01/99 600 600
Irvine Ranch, California Improvement
Bond Act 1915 RB (District Number
1997-16)
2.40%, 09/01/99 500 500
Irvine Ranch, California Water District RB
2.40%, 09/01/99 1,100 1,100
Orange County, California Sanitation District
COP (Districts 1, 2, 3, 5, 6, 7, 11, 13 & 14)
Series 1990-1992A
2.40%, 09/01/99 100 100
Orange County, California Sanitation
District COP (Districts 1-3, 5-7 & 11)
2.40%, 09/01/99 1,200 1,200
--------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $6,400) 6,400
--------
Shares Value
------- --------
OTHER INVESTMENT COMPANIES -- 0.1% (c)
Provident Institutional Funds - California
Money Fund Portfolio
2.50% 58 $ 58
--------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $58) 58
--------
TOTAL INVESTMENTS -- 99.2%
(Cost $125,280) 124,644
--------
OTHER ASSETS AND LIABILITIES-- 0.8%
Other assets 1,774
Liabilities (720)
--------
1,054
--------
TOTAL NET ASSETS-- 100.0% $125,698
--------
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
27
<PAGE>
Par Value
------- --------
MUNICIPAL BONDS -- 97.5% (a)
- -------------------------------
CALIFORNIA -- 97.0%
Alameda County, California COP
(Alameda Medical Center Project)
Series 1998 (e)
5.38%, 06/01/18 $3,400 $ 3,328
Alameda County, California Corridor
Transportation Authority RB
Series 1999A (e)
4.75%, 10/01/25 1,500 1,290
Bay Area Government Association,
California Revenue Tax Allocation
Bond (Redevelopment Agency Pool)
Series 1997A-6 (e)
5.25%, 12/15/17 1,200 1,170
Brea, California Public Financing
Authority Water RB (e)
4.75%, 07/01/21 4,060 3,552
California Educational Facilities
Authority RB (Loyola Marymount
University) Series 1992B
6.60%, 10/01/22 1,450 1,579
California Educational Facilities
Authority RB (University of
Southern California)
5.50%, 10/01/27 3,000 2,940
California Educational Facilities
Authority RB (University of Southern
California) Series 1997C
5.13%, 10/01/28 2,000 1,840
California Educational Facilities
Authority RB (University of Southern
California) Series 1998A
5.00%, 10/01/28 2,000 1,802
California Educational Facilities
Authority Revenue Refunding Bonds
(Santa Clara University)
5.25%, 09/01/26 2,330 2,210
California Health Facilities Financing
Authority Insured Health Facility RB
(Association of Retarded Citizens)
Series 1991 (e)
7.00%, 05/01/21 455 478
California Health Facilities Financing
Authority Insured Hospital RB
(Marshall Hospital) Series 1992A (e)
6.63%, 11/01/22 4,000 4,360
Par Value
------- --------
California Health Facilities Financing
Authority Insured Hospital Revenue
Refunding Bonds (Children's Hospital
San Diego) Series 1996 (e)
5.38%, 07/01/16 $5,180 $ 5,122
California Health Facilities Financing
Authority RB (Kaiser Permanente
Hospital) Series 1998A (e)
5.00%, 06/01/24 2,500 2,259
California Health Facilities Financing
Authority RB (Kaiser Permanente
Hospital) Series 1998B
5.00%, 10/01/18 5,000 4,462
California Health Facilities Financing
Authority RB (Stanford Health Care)
Series 1998B (e)
5.00%, 11/15/28 1,000 895
California Health Facilities Financing
Authority RB (Sutter Health)
Series 1999A (e)
5.00%, 08/15/19 1,000 924
California HFA Home Mortgage RB
Series 1994G
7.20%, 08/01/14 3,000 3,173
California HFA Home Mortgage RB
Series 1995L (e)
5.90%, 08/01/17 1,000 1,020
California HFA M/F Rental Housing RB
Series 1992B
6.70%, 08/01/15 1,000 1,057
California State Department of Water
Resources RB (Central Valley Project)
Series 1997S
5.00%, 12/01/22 1,200 1,098
California State GO
5.00%, 10/01/23 2,000 1,825
5.00%, 10/01/27 2,500 2,256
California State Public Works Board
Lease Revenue Refunding Bonds
(Various California State University
Projects) Series 1993A (e)
5.50%, 06/01/10 3,000 3,135
California State Public Works Board
Lease Revenue Refunding Bonds
(Various California State University
Projects) Series 1996A (e)
5.38%, 10/01/17 200 198
28
<PAGE>
Par Value
------- --------
California Statewide Communities
Development Authority COP (St. Joseph
Health Systems Obligated Group)
6.50%, 07/01/15 $2,000 $ 2,220
California Statewide Communities
Development Authority COP
(The Internext Group)
5.38%, 04/01/17 5,000 4,644
California Statewide Communities
Development Authority Hospital Revenue
COP (Cedars-Sinai Medical Center)
6.50%, 08/01/15 1,250 1,305
Chico, California Unified School District GO
Series 1998 (e)
5.00%, 08/01/16 1,155 1,099
Chico, California Unified School District
Series 1992C (e)
6.75%, 06/01/17 500 542
Colton, California Public Financing
Authority Special Tax RB Series 1996 (e)
5.45%, 09/01/19 3,020 2,975
Colton, California Public Financing
Authority Tax Allocation RB
Series 1998A (e)
5.00%, 08/01/18 2,715 2,535
Contra Costa County, California Public
Financing Authority Tax Allocation RB
(Pleasant Hill Bart Redevelopment Project)
5.25%, 08/01/28 3,750 3,441
East Bay, California Municipal Utility
District Water System RB Series 1998
5.25%, 06/01/19 2,600 2,502
East Bay, California Municipal Utility
District Water System Revenue
Refunding Bonds Series 1996
5.00%, 06/01/26 4,800 4,344
Foothill Eastern Corridor Agency,
California Toll Road RB (e)
5.13%, 01/15/19 5,000 4,731
Fresno, California Health Facility RB
(Holy Cross Health System - St. Agnes
Medical Center) Series 1991
6.50%, 06/01/02 550 593
Inglewood, California Redevelopment
Agency Tax Allocation Bond (Merged
Redevelopment Project) Series 1998A (e)
5.25%, 05/01/16 1,000 989
Par Value
------- --------
Lake Elsinore, California Unified School
District COP (e)
4.75%, 02/01/20 $1,200 $ 1,058
Los Angeles, California Department of
Airports RB Series 1995A (e)
5.50%, 05/15/10 560 578
Los Angeles, California Department of
Water & Power Electric Plant RB
6.00%, 01/15/11 865 912
Los Angeles, California Unified School
District GO Series 1999C (e)
5.25%, 07/01/24 8,800 8,327
Los Angeles County, California Public
Works Financing Authority Lease RB
(Multiple Capital Facilities Project V)
Series 1996A (e)
5.13%, 06/01/17 2,000 1,922
Los Angeles County, California Public
Works Financing Authority Lease
Revenue Refunding Bond (Master
Refunding Project) Series 1997A (e)
5.25%, 03/01/15 1,000 988
Los Angeles County, California
Transportation Commission Sales Tax
Revenue Refunding Bonds Series 1991B
6.50%, 07/01/13 555 583
Modesto, California Irrigation District
COP Refunding & Capital Improvement
Bonds Series 1999B
5.30%, 07/01/22 4,340 4,145
Modesto, California Public Financing
Authority Lease RB (Capital Imports &
Refunding Project) (e)
5.13%, 09/01/20 3,740 3,516
Northern California Power Agency
Multiple Capital Facilities RB
Series 1992A (e)
6.50%, 08/01/02 1,425 1,542
6.50%, 08/01/12 1,875 2,004
Oakland, California Joint Powers
Financing Authority Reassessment RB
5.50%, 09/02/24 1,000 961
Oceanside, California Building Authority
COP Refunding Bonds Series 1993A
6.38%, 04/01/12 1,250 1,323
29
<PAGE>
Schwab California Long-Term Tax-Free Bond Fund
Schedule of Investments (in thousands) (continued)
August 31, 1999
Par Value
------- --------
Orange County, California Community
Facilities District Special Tax Number
87-4 RB Series 1997A (e)
5.25%, 08/15/19 $2,000 $ 1,925
Pomona, California Public Financing
Authority RB (Water Facilities Project)
Series 1999AA (e)
5.00%, 05/01/19 3,000 2,790
5.00%, 05/01/29 5,700 5,130
Rancho Cucamonga, California
Redevelopment Agency Tax Allocation
Revenue Refunding Bonds (Rancho
Redevelopment Project) (e)
5.25%, 09/01/20 4,315 4,105
Redlands, California Financing Authority
Wastewater Revenue Refunding Bonds
Series 1999A (e)
5.00%, 09/01/17 3,600 3,388
Riverside County, California Asset Leasing
Corp. Leasehold RB (Riverside County
Hospital Project) Series 1997B (e)
5.00%, 06/01/19 3,000 2,790
Riverside County, California Public
Financing Authority Tax Allocation RB
(Redevelopment Projects) Series 1997A
5.63%, 10/01/33 4,905 4,568
Sacramento, California Cogeneration
Authority Revenue Refunding Bonds
(Cogeneration Project) (e)
5.20%, 07/01/21 1,000 941
Sacramento, California Regional Transit
District COP Series 1992A
6.38%, 03/01/05 250 266
Sacramento, California Regional Transit
District Refunding COP (Light Rail
Transportation Project)
6.75%, 07/01/07 2,000 2,110
Salida, California Area Public Facilities
Financing Agency District Special Tax
Series 1988-1 (e)
5.25%, 09/01/28 2,000 1,880
Salinas, California COP (Golf Course and
Animal Shelter) Series 1999A (e)
5.00%, 09/01/25 1,845 1,674
San Bernardino County, California COP
(West Valley Detention Center) (e)
6.50%, 11/01/12 420 451
Par Value
------- --------
San Diego, California Public Facilities
Financing Authority Sewer RB (e)
5.25%, 05/15/22 $2,200 $ 2,093
San Diego, California Redevelopment
Agency Tax Allocation Bond (Centre
City Project) Series 1999C (e)
4.75%, 09/01/24 1,000 864
San Diego County, California Water
Authority Revenue COP Revenue
Refunding Bonds Series 1997A
4.75%, 05/01/20 3,000 2,644
San Francisco State University
Foundation Inc., California Auxillary
Organization Student Housing RB (e)
5.20%, 07/01/19 1,150 1,081
San Francisco, California Bay Area Rapid
Transit District Sales Tax RB
5.25%, 07/01/18 2,680 2,590
San Francisco, California City & County
Airport Commission International
Airport RB 2nd Series, Issue 11 (e)
6.20%, 05/01/19 2,000 2,105
San Francisco, California City & County
Airport Commission International
Airport RB 2nd Series, Issue 12-B (e)
5.63%, 05/01/21 2,000 2,005
San Francisco, California Downtown
Parking Corp. RB
6.65%, 04/01/18 500 533
San Joaquin County, California COP
Reveue Refunding Bond (General
Hospital Project) (e)
5.00%, 09/01/20 5,065 4,672
San Jose, California Redevelopment
Agency Tax Allocation Bond (Merged
Area Redevelopment Project) (e)
4.75%, 08/01/30 3,000 2,539
San Mateo County, California Power
Authority Lease RB (Capital Projects)
Series 1999A (e)
4.75%, 07/15/23 2,000 1,735
Santa Clara, California Redevelopment
Agency Tax Allocation Revenue
Refunding Bonds (Bayshore North
Project) (e)
7.00%, 07/01/10 1,500 1,727
30
<PAGE>
Par Value
------- --------
Santa Clara County, California Financing
Authority Lease RB (VMC Facility
Replacement Project) Series 1994A (e)
7.75%, 11/15/10 $1,460 $ 1,799
6.88%, 11/15/14 2,000 2,267
South Gate, California Public Financing
Authority Tax Allocation RB (Housing
Redevelopment Project No. 1)
Series 1998A (e)
5.00%, 09/01/19 1,415 1,316
South Orange County, California Public
Financing Authority Special Tax RB
Series 1999A (e)
4.63%, 08/15/08 1,000 995
5.25%, 08/15/18 6,095 5,889
Temecula, California Community
Services District COP (Community
Recreation Center Project) Series 1992
7.13%, 10/01/12 1,000 1,076
Tri City, California Hospital District RB
Series 1996A (e)
5.63%, 02/15/17 1,000 1,008
Turlock, California Irrigation District
Revenue Refunding Bonds
Series 1998A (e)
5.00%, 01/01/26 4,000 3,620
University of California RB (University
of California Hospital Medical Center
Project) (e)
5.75%, 07/01/24 2,000 2,018
Vallejo, California Revenue Refunding
Bonds (Water Improvement Project)
Series 1996A (e)
5.70%, 05/01/16 2,000 2,043
West Basin County, California Municipal
Water District COP Revenue Refunding
Bonds Series 1997A (e)
5.50%, 08/01/17 500 501
5.50%, 08/01/22 1,000 988
Westminster, California Public Financing
Authority COP (Civic Center & Street
Improvement Project)
7.00%, 06/01/19 3,325 3,687
--------
195,565
--------
Par Value
------- --------
Puerto Rico -- 0.5% (e)
Puerto Rico Commonwealth Infrastructure
Financing Authority RB Series 1998A
5.25%, 07/01/10 $1,000 $ 1,034
--------
TOTAL MUNICIPAL BONDS
(Cost $199,837) 196,599
--------
VARIABLE RATE OBLIGATIONS -- 1.2% (b) (e)
California Pollution Control Financing
Authority Pollution Control RB (Pacific
Gas & Electric Company) Series 1996E
2.55%, 09/01/99 900 900
California Pollution Control Financing
Authority Pollution Control RB
(Southern California Edison)
Series 1986D
2.60%, 09/01/99 300 300
Irvine Ranch, California Improvement
Bond Act 1915 RB (Assessment
District No. 94-15)
2.40%, 09/01/99 1,300 1,300
--------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $2,500) 2,500
--------
Shares
---------
OTHER INVESTMENT COMPANIES -- 0.0% (C)
Provident Institutional Funds - California
Money Fund Portfolio
2.50% 70 70
--------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $70) 70
--------
TOTAL INVESTMENTS -- 98.7%
(Cost $202,407) 199,169
--------
OTHER ASSETS AND LIABILITIES--1.3%
Other assets 3,001
Liabilities (488)
--------
2,513
--------
TOTAL NET ASSETS-- 100.0% $201,682
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
31
<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 traded on a delayed-delivery basis. Payment and delivery is
scheduled for a future time, generally within two weeks of entering into the
transaction. The transaction is subject to market fluctuation and to the
risk that the value may be more or less than the purchase price when the
transaction was initiated. The Fund has set aside sufficient investment
securities as collateral for securities purchased on a delayed-delivery
basis.
(e) Security has one or more third party credit enhancements.
PORTFOLIO ABBREVIATIONS
COP Certificates of Participation
GO General Obligation
HFA Housing Finance Agency
IDRB Industrial Development Revenue Bond
M/F Multi-Family
RB Revenue Bond
TRAN Tax and Revenue Anticipation Notes
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
Statements of Assets and Liabilities (in thousands)
August 31, 1999
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
----------------- ----------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $125,280, $202,407, respectively) $124,644 $199,169
Receivables:
Interest 1,771 2,770
Fund shares sold -- 228
Prepaid expenses 3 3
-------- --------
Total assets 126,418 202,170
-------- --------
LIABILITIES
Payables:
Dividends 77 163
Investments purchased 494 --
Fund shares redeemed 101 261
Investment advisory and administration fees 4 7
Transfer agency and shareholder service fees 6 10
Other liabilities 38 47
-------- --------
Total liabilities 720 488
-------- --------
Net assets applicable to outstanding shares $125,698 $201,682
======== ========
NET ASSETS CONSIST OF:
Paid-in capital $127,126 $205,251
Distributions in excess of net investment income (28) (65)
Accumulated net realized loss on investments sold (764) (266)
Net unrealized depreciation on investments (636) (3,238)
-------- --------
$125,698 $201,682
======== ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 12,460 18,634
Net asset value, offering and redemption price per share $10.09 $10.82
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the year ended August 31, 1999
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Interest income $ 4,895 $ 10,625
------- --------
Expenses:
Investment advisory and administration fees 467 840
Transfer agency and shareholder service fees 284 512
Custodian and portfolio accounting fees 72 101
Registration fees 6 8
Professional fees 10 16
Shareholder reports 18 36
Trustees' fees 7 8
Other expenses 12 17
------- --------
876 1,538
Less: expenses reduced (see Note 4) (318) (533)
------- --------
Total expenses incurred by fund 558 1,005
------- --------
Net investment income 4,337 9,620
------- --------
Net realized gain on investments sold 24 327
Net unrealized depreciation on investments (2,238) (13,671)
------- --------
Net loss on investments (2,214) (13,344)
------- --------
Increase (decrease) in net assets resulting from operations $ 2,123 $ (3,724)
======= ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
For the year ended August 31,
<TABLE>
<CAPTION>
Schwab Schwab
California California
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 $ 4,337 $ 2,864 $ 9,620 $ 7,231
Net realized gain on investments sold 24 9 327 695
Net unrealized appreciation (depreciation) on
investments (2,238) 856 (13,671) 4,874
-------- -------- -------- --------
Increase (decrease) in net assets resulting
from operations 2,123 3,729 (3,724) 12,800
-------- -------- -------- --------
Dividends to shareholders from net investment
income (See Note 2) (4,341) (2,906) (9,629) (7,338)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 81,467 60,105 91,493 83,165
Net asset value of shares issued in reinvestment
of dividends 3,386 2,209 6,339 4,672
Less payments for shares redeemed (52,831) (26,119) (72,994) (28,386)
-------- -------- -------- --------
Increase in net assets from capital share
transactions 32,022 36,195 24,838 59,451
-------- -------- -------- --------
Total increase in net assets 29,804 37,018 11,485 64,913
Net assets:
Beginning of period 95,894 58,876 190,197 125,284
-------- -------- -------- --------
End of period (including distributions in excess
of net investment income of ($28), ($25), ($65)
and ($61), respectively) $125,698 $ 95,894 $201,682 $190,197
======== ======== ======== ========
Number of fund shares:
Sold 7,935 5,893 7,967 7,311
Reinvested 331 217 556 411
Redeemed (5,151) (2,562) (6,399) (2,503)
-------- -------- -------- --------
Net increase in shares outstanding 3,115 3,548 2,124 5,219
Shares outstanding:
Beginning of period 9,345 5,797 16,510 11,291
-------- -------- -------- --------
End of period 12,460 9,345 18,634 16,510
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Schwab California Short/Intermediate Tax-Free Bond Fund
- -------------------------------------------------------------------------------------------------------------
FISCAL PERIOD ENDED 8/31 1999 1998 1997 1996 1995
PER SHARE DATA ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 10.26 10.16 10.04 10.06 9.89
-------------------------------------------------
From investment operations:
Net investment income 0.39 0.41 0.43 0.43 0.42
Net realized andunrealized gain (loss)
on investments (0.17) 0.11 0.12 (0.02) 0.17
-------------------------------------------------
Total from investment operations 0.22 0.52 0.55 0.41 0.59
Less distributions:
Dividends from net investment income (0.39) (0.42) (0.43) (0.43) (0.42)
-------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.09 10.26 10.16 10.04 10.06
=================================================
Total return (%) 2.16 5.19 5.54 4.11 6.17
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.49 0.49 0.49 0.49 0.50
Reductions reflected in above expense ratio 0.28 0.30 0.40 0.38 0.34
Ratio of net investment income to average net assets 3.81 4.02 4.21 4.23 4.29
Portfolio turnover rate 7 8 23 20 62
Net assets, end of period ($ X 1,000) 125,698 95,894 58,876 45,788 40,639
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Schwab California Long-Term Tax-Free Bond Fund
- ----------------------------------------------------------------------------------------------------------
FISCAL PERIOD ENDED 8/31 1999 1998 1997 1996 1995
PER SHARE DATA ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 11.52 11.10 10.63 10.53 10.40
-------------------------------------------------
From investment operations:
Net investment income 0.54 0.54 0.56 0.57 0.56
Net realized andunrealized gain (loss)
on investments (0.70) 0.43 0.47 0.10 0.13
-------------------------------------------------
Total from investment operations (0.16) 0.97 1.03 0.67 0.69
Less distributions:
Dividends from net investment income (0.54) (0.55) (0.56) (0.57) (0.56
-------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.82 11.52 11.10 10.63 10.53
=================================================
Total return (%) (1.57) 8.96 9.95 6.43 6.98
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.49 0.49 0.49 0.49 0.58
Reductions reflected in above expense ratio 0.26 0.27 0.33 0.33 0.23
Ratio of net investment income to average net assets 4.69 4.79 5.17 5.30 5.54
Portfolio turnover rate 55 28 35 36 46
Net assets, end of period ($ X 1,000) 201,682 190,197 125,284 101,616 90,045
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
37
<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 California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund (the "funds") are series of Schwab
Investments (the "Trust"), a no-load, open-end, investment management company
organized as a Massachusetts business trust on October 26, 1990 and registered
under the Investment Company Act of 1940 (the "Act"), as amended.
In addition to the funds, the Trust also offers the Schwab 1000
Fund(REGISTRATION MARK), Schwab Short-Term Bond Market Index Fund, Schwab Total
Bond Market Index Fund, Schwab Short/Intermediate Tax-Free Bond Fund, Schwab
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.
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 federal
income tax purposes.
38
<PAGE>
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 California Short/Intermediate Tax-Free Bond Fund $ (636) $ 519 $(1,155)
Schwab California Long-Term Tax-Free Bond Fund $(3,238) $3,693 $(6,931)
</TABLE>
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1999, the unused capital loss
carryforwards for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
<S> <C> <C>
Expiring in:
08/31/03 $ 68 $ --
08/31/04 696 334
---- ----
Total capital loss carryforwards $764 $334
==== ====
</TABLE>
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 California Short/Intermediate Tax-Free Bond Fund $1 $-- $ (1)
Schwab California Long-Term Tax-Free Bond Fund $5 $(39) $34
</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"). 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.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
OFFICERS AND TRUSTEES -- Certain officers and trustees of the Trust are also
officers and/or directors of the investment 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 Act, as amended.
The funds incurred fees aggregating $15 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 $54,645 and $69,400 for the Schwab California Short/Intermediate
Tax-Free Bond Fund and Schwab California Long-Term Tax-Free Bond Fund,
respectively.
4. EXPENSES REDUCED BY THE INVESTMENT 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 $318 for the Schwab California Short/Intermediate
Tax-Free Bond Fund, and $533 for the Schwab California Long-Term Tax-Free Bond
Fund.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1999, were as follows:
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
Purchases $40,323 $144,418
Proceeds of sales and maturities $ 7,600 $110,051
40
<PAGE>
To the Board of Trustees and Shareholders of
Schwab California Short/Intermediate Tax-Free Bond Fund and
Schwab California Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund (two portfolios of Schwab Investments, hereafter referred to as the
"Funds") at August 31, 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
41
<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.
42
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THE SCHWAB FUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money market
funds.
Please 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. MKT3657-1 (10/99)
<PAGE>
