SCHWABFUNDS -Registered Trademark-
SCHWAB
CALIFORNIA
TAX-FREE
BOND FUNDS
Semiannual Report
February 28, 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 February 28, 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 provide a high level of
current income exempt from federal and state of California personal income
taxes, consistent with the preservation of capital.(1) In addition to
performance and portfolio information, this report contains information
regarding dividends paid by the Funds during each fiscal year (or reporting
period) since their inceptions.
The Schwab California Short/Intermediate Tax-Free Bond Fund invests primarily in
debt securities issued by or on behalf of the state of California and its
political subdivisions, agencies and instrumentalities. Under normal market
conditions, the Fund seeks to maintain a dollar-weighted average 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.
(1) Income from the Funds may be subject to the federal alternative minimum tax
(AMT).
CONTENTS
- ----------------------------------------------------
A Message from the Chairman 1
- ----------------------------------------------------
What Every Bond Fund Investor Should Know 2
- ----------------------------------------------------
Market Overview 4
- ----------------------------------------------------
Schwab 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 20
- ----------------------------------------------------
Financial Statements and Notes 23
- ----------------------------------------------------
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Dear Shareholder,
[PHOTO OMITTED]
Over the past six months, equity investors have been subject to sharp drops and
big recoveries--sometimes within the same day. After enjoying near-perfect
market conditions for the past several years, investors have had to adjust to
significant economic and political developments, both here and abroad, that have
contributed to rapid sentiment swings and market turbulence. These developments
have been accentuated by the lingering expectation that stock prices are long
overdue for a correction according to several traditional, widely followed
indicators. In spite of this recent volatility, however, the markets continue to
flourish, boosted by record low inflation, solid economic growth, low interest
rates, a strong dollar and an influx of money from investors.
All of this serves to remind us that although the market's extreme ups and downs
can be harrowing, they are a natural part of market dynamics. That's why we
think it's a good time to reaffirm one of our primary investment principles:
Regardless of short-term market trends, our philosophy has always been that
REGULAR INVESTING is the best strategy over the long term. And your investment
in a bond fund may play an important role in your asset allocation. We've
included some guidelines on the following pages that address some things you
should know about bond funds. You might also find that more than one kind of
bond fund may be appropriate for you, depending on your goals and financial
situation. As always, feel free to contact us if you have any questions.
The support of investors like you has helped Charles Schwab Investment
Management, Inc. (CSIM) become one of the largest and fastest-growing mutual
fund families in the nation. CSIM now manages more than $87 billion in assets on
behalf of more than 3.5 million SchwabFunds-Registered Trademark- shareholders.
We offer a broad spectrum of 38 mutual funds for investors with varying
financial situations and goals.
Thank you for your investment in SchwabFunds. We continue to do everything we
can to warrant the trust you have placed in us.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
February 28, 1999
YEAR 2000 ISSUES
One issue with the potential to disrupt fund operations and affect
performance is the inability of some computers to recognize the year 2000.
The investment adviser is taking steps to handle this issue. The investment
adviser also is seeking assurances that its service providers and business
partners are taking similar steps as well. It is impossible to know in
advance, however, exactly how this issue will affect fund administration,
fund performance or securities markets in general.
1
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WHAT EVERY BOND FUND INVESTOR SHOULD KNOW
WHY ASSET ALLOCATION MATTERS
As most investors know, one of the most compelling reasons to invest in a mutual
fund is diversification. By allocating your assets across many different
securities, a mutual fund helps reduce the risk that you might otherwise
encounter by owning just a few individual stocks or bonds.
Don't forget, however, that diversification across your portfolio is just as
important as diversification within one of the mutual funds you own. As you
probably know, stocks historically have offered higher long-term returns than
other asset classes, such as bonds or cash, but those returns have come at the
price of higher volatility. To help mitigate some of that risk, many investors
often include at least some bonds and cash in their portfolios.
THE ROLE OF BONDS IN A BALANCED PORTFOLIO
Maintaining the right mix of asset classes--stocks, bonds and cash--in your
portfolio is a smart strategy for every investor. In fact, asset allocation is
one of the most important factors in determining overall portfolio performance.
Over time, a portfolio composed of stocks and bonds can provide competitive
returns compared with an all-stock portfolio, but with less risk for you. And
over the long term, bond funds typically pay a higher return than even the
highest-yielding cash reserves, although with increased risk. Of course, past
performance is no guarantee of future returns.
WHY BOND FUNDS?
Investing in bond funds can provide several advantages over investing in
individual bonds:
DIVERSIFICATION: Bond funds can invest across a broad segment of the bond market
and can provide automatic diversification within one asset class.
PROFESSIONAL MANAGEMENT: Bond funds are managed by investment experts who know
and understand the intricacies of the bond market and its operations.
SIMPLICITY: Bond funds are ideal for investors who lack the time or expertise to
actively manage a bond portfolio.
LOW MINIMUM INITIAL INVESTMENT: At Schwab you can invest in a bond fund with
just $1,000.
CONVENIENCE: Bond fund investors can make purchases and redemptions at any time
without transaction fees and without having to wait until an individual bond
matures.
FLEXIBILITY: Dividends and/or capital gains can be reinvested or paid in cash.
LOW COSTS: By trading in large (institutional) blocks, funds can get much better
execution, which can lower trading costs and increase total returns.
BOND INDEX FUNDS
Schwab's Bond Index Funds seek to track the total returns of broadly diversified
bond indices. And because index funds generally have lower portfolio turnover
and fewer transactions--and therefore lower trading costs--you could potentially
realize higher returns.
In addition to some of the same benefits of equity index funds, including broad
diversification, lower expenses, consistent investment style and straightforward
choices, bond index funds can also provide the added benefit of
high-credit-quality investments. Schwab's Bond Index Funds are designed to
maintain high-credit-quality standards because the indices they seek to track
primarily comprise U.S. Treasuries, government agency securities and government
agency mortgage-backed securities; the remaining bonds in the indices are
investment-grade corporate bonds rated AAA through BBB, the four highest credit
ratings.
2
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TAX CONSIDERATIONS
If you're in a high tax bracket, investing in tax-free or municipal bond funds
may help take a bite out of your tax bill.(1) And, if you live in a state with a
high personal state income tax or other personal tax, you may be better served
by choosing a double tax-free fund that provides income free from federal, state
and, in some cases, local income taxes.
BOND FUNDS AT SCHWAB
Schwab offers a variety of bond funds, summarized below. When evaluating a bond
fund for potential investment, you should consider your attitude toward risk and
return, as well as your income tax bracket.
BOND INDEX FUNDS
SCHWAB SHORT-TERM BOND MARKET INDEX FUND seeks to track the Lehman Brothers
Short (1-5 Year) Government/ Corporate Index. This index represents the
performance of U.S. government and corporate bonds that have average maturities
between one and five years.
SCHWAB TOTAL BOND MARKET INDEX FUND seeks to track the Lehman Brothers Aggregate
Bond Index. This index is a broad-based index covering investment-grade bonds
with maturities greater than one year.
TAX-FREE BOND FUNDS
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in municipal
bonds with dollar-weighted average maturities of two to five years. Its share
price will generally be less volatile than that of longer-term bond funds but
will generally provide lower returns.
SCHWAB LONG-TERM TAX-FREE BOND FUND invests in municipal bonds with
dollar-weighted average maturities of 10 years or more. It is designed to
provide higher tax-free income than is usually available with shorter-term
funds; however, its net asset value may be more volatile than that of
shorter-term bond funds.
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in
California municipal bonds with dollar-weighted average maturities of two to
five years. Its share price will generally be less volatile than that of longer-
term bond funds but will generally provide lower returns.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
invests primarily in securities issued by or on behalf of the state of
California and its political subdivisions, agencies and instrumentalities, and
seeks to maintain a dollar-weighted average maturity of 10 years or longer. It
is designed to provide higher tax-free income than is available with
shorter-term funds; however, its net asset value may be more volatile than that
of shorter-term bond funds.
If you would like more information on any of these funds, please call us toll
free at 800-435-4000 and request a free prospectus, which contains more
information, including fees and expenses. Please be sure to read the prospectus
before investing.
WE MAKE IT EASY TO INVEST
We try to make it easy and convenient for you to invest in our
SchwabFunds.-Registered Trademark- In addition to our automated methods that
allow you to invest or transfer money to your Schwab account on a regular basis,
you can also invest through our Web site at WWW.SCHWAB.COM; through our
automated touch-tone telephone service, TeleBroker,-Registered Trademark- by
calling 800-272-4922; or in person at any of our nationwide branches.
KEEPING YOU INFORMED
One of our top priorities at Charles Schwab is to keep you informed about your
investments and potential opportunities in the marketplace. For a wealth of
information about our investment philosophy and funds, as well as about the
market and economic environment, visit our Web site:
WWW.SCHWAB.COM/SCHWABFUNDS.
(1) Some investors may be subject to AMT; consult your tax advisor.
3
<PAGE>
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic product (GDP), continued its
remarkable expansion with a strong real growth rate of 4.3% during 1998--a rate
well in excess of the Federal Reserve's target range of 2.5% to 3.0%. The
fourth-quarter growth rate of 6.0% marks the thirty-first consecutive quarter of
positive growth--the longest peacetime expansion ever. Strong consumer spending
leveraged by record domestic stock market levels and its associated wealth
effect continued to provide momentum for this historic expansion.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
REAL GDP GROWTH RATE
QUARTERLY PERCENTAGE CHANGE
(ANNUALIZED RATE)
Q1 1990 3.9%
Q2 1990 1.2%
Q3 1990 -1.9%
Q4 1990 -4.0%
Q1 1991 -2.1%
Q2 1991 1.8%
Q3 1991 1.0%
Q4 1991 1.0%
Q1 1992 4.7%
Q2 1992 2.5%
Q3 1992 3.0%
Q4 1992 4.3%
Q1 1993 0.1%
Q2 1993 2.0%
Q3 1993 2.1%
Q4 1993 5.3%
Q1 1994 3.0%
Q2 1994 4.7%
Q3 1994 1.8%
Q4 1994 3.6%
Q1 1995 1.7%
Q2 1995 0.4%
Q3 1995 3.3%
Q4 1995 2.8%
Q1 1996 3.3%
Q2 1996 6.1%
Q3 1996 2.1%
Q4 1996 4.2%
Q1 1997 4.2%
Q2 1997 4.0%
Q3 1997 4.2%
Q4 1997 3.0%
Q1 1998 5.5%
Q2 1998 1.8%
Q3 1998 3.7%
Q4 1998 6.0%
Source: BLOOMBERG L.P.
At the time of this writing, the consensus of most economists is that the U.S.
economy appears poised for continued growth, albeit at a more moderate rate than
in 1998. High levels of consumer confidence, low interest rates, rising real
wages and strong gains in stock prices have been the principal factors
contributing to this lengthy expansion. Although economic problems across the
globe continue to be an ongoing area of concern for the U.S. economy, the effect
of these problems thus far has been less severe than many originally predicted.
Going forward, the behavior of domestic consumers in response to recent stock
market volatility may also be a key determinant of whether the economy continues
on its current course or softens in 1999.
UNEMPLOYMENT
After declining to 4.3% in December and January-- the lowest level in 28
years--the U.S. unemployment rate stood at 4.4% in February. Labor markets
continue to be extremely tight as growth in the labor force has slowed, leading
to some concern that wage increases may begin to put more pressure on labor
costs (refer to Employment Cost Index below).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
U.S. UNEMPLOYMENT RATE
Jan-90 5.4%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.4%
Jun-90 5.2%
Jul-90 5.5%
Aug-90 5.7%
Sep-90 5.9%
Oct-90 5.9%
Nov-90 6.2%
Dec-90 6.3%
Jan-91 6.4%
Feb-91 6.6%
Mar-91 6.8%
Apr-91 6.7%
May-91 6.9%
Jun-91 6.9%
Jul-91 6.8%
Aug-91 6.9%
Sep-91 6.9%
Oct-91 7.0%
Nov-91 7.0%
Dec-91 7.3%
Jan-92 7.3%
Feb-92 7.4%
Mar-92 7.4%
Apr-92 7.4%
May-92 7.6%
Jun-92 7.8%
Jul-92 7.7%
Aug-92 7.6%
Sep-92 7.6%
Oct-92 7.3%
Nov-92 7.4%
Dec-92 7.4%
Jan-93 7.3%
Feb-93 7.1%
Mar-93 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
Jul-93 6.9%
Aug-93 6.8%
Sep-93 6.7%
Oct-93 6.8%
Nov-93 6.6%
Dec-93 6.5%
Jan-94 6.6%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.0%
Jun-94 6.1%
Jul-94 6.1%
Aug-94 6.1%
Sep-94 5.9%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.4%
Jan-95 5.6%
Feb-95 5.4%
Mar-95 5.4%
Apr-95 5.7%
May-95 5.6%
Jun-95 5.6%
Jul-95 5.7%
Aug-95 5.7%
Sep-95 5.7%
Oct-95 5.6%
Nov-95 5.6%
Dec-95 5.6%
Jan-96 5.7%
Feb-96 5.5%
Mar-96 5.5%
Apr-96 5.5%
May-96 5.6%
Jun-96 5.3%
Jul-96 5.5%
Aug-96 5.1%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.4%
Jan-97 5.3%
Feb-97 5.3%
Mar-97 5.1%
Apr-97 5.0%
May-97 4.7%
Jun-97 5.0%
Jul-97 4.7%
Aug-97 4.9%
Sep-97 4.7%
Oct-97 4.7%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.5%
Feb-98 4.6%
Mar-98 4.6%
Apr-98 4.3%
May-98 4.3%
Jun-98 4.5%
Jul-98 4.5%
Aug-98 4.5%
Sep-98 4.5%
Oct-98 4.5%
Nov-98 4.4%
Dec-98 4.3%
Jan-99 4.3%
Feb-99 4.4%
SOURCE: BLOOMBERG L.P.
INFLATION
Price inflation remained remarkably well contained. The Consumer Price Index
(CPI) rose just 1.6% for the 12-month period ended February 28, 1999. Its core
rate (which excludes the more volatile food and energy components) rose 2.1%.
For all of 1998, overall producer prices fell 0.1% after dropping 1.2% in 1997,
marking the first time that the index, which was created in 1947, has fallen for
two consecutive years.
4
<PAGE>
The Employment Cost Index (which measures inflation in wages, salaries and
benefits) increased 3.4% for the year ended December 1998, its largest
calendar-year increase since 1993.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
MEASURES OF INFLATION
QUARTERLY EMPLOYMENT COST INDEX MONTHLY CONSUMER PRICE INDEX
Jan-90 5.5% 5.2%
Feb-90 5.5% 5.3%
Mar-90 5.5% 5.2%
Apr-90 5.4% 4.7%
May-90 5.4% 4.4%
Jun-90 5.4% 4.7%
Jul-90 5.2% 4.8%
Aug-90 5.2% 5.6%
Sep-90 5.2% 6.2%
Oct-90 4.9% 6.3%
Nov-90 4.9% 6.3%
Dec-90 4.9% 6.1%
Jan-91 4.6% 5.7%
Feb-91 4.6% 5.3%
Mar-91 4.6% 4.9%
Apr-91 4.6% 4.9%
May-91 4.6% 5.0%
Jun-91 4.6% 4.7%
Jul-91 4.3% 4.4%
Aug-91 4.3% 3.8%
Sep-91 4.3% 3.4%
Oct-91 4.3% 2.9%
Nov-91 4.3% 3.0%
Dec-91 4.3% 3.1%
Jan-92 4.0% 2.6%
Feb-92 4.0% 2.8%
Mar-92 4.0% 3.2%
Apr-92 3.6% 3.2%
May-92 3.6% 3.0%
Jun-92 3.6% 3.1%
Jul-92 3.5% 3.2%
Aug-92 3.5% 3.1%
Sep-92 3.5% 3.0%
Oct-92 3.5% 3.2%
Nov-92 3.5% 3.0%
Dec-92 3.5% 2.9%
Jan-93 3.5% 3.3%
Feb-93 3.5% 3.2%
Mar-93 3.5% 3.1%
Apr-93 3.6% 3.2%
May-93 3.6% 3.2%
Jun-93 3.6% 3.0%
Jul-93 3.6% 2.8%
Aug-93 3.6% 2.8%
Sep-93 3.6% 2.7%
Oct-93 3.5% 2.8%
Nov-93 3.5% 2.7%
Dec-93 3.5% 2.7%
Jan-94 3.2% 2.5%
Feb-94 3.2% 2.5%
Mar-94 3.2% 2.5%
Apr-94 3.2% 2.4%
May-94 3.2% 2.3%
Jun-94 3.2% 2.5%
Jul-94 3.2% 2.8%
Aug-94 3.2% 2.9%
Sep-94 3.2% 3.0%
Oct-94 3.0% 2.6%
Nov-94 3.0% 2.7%
Dec-94 3.0% 2.7%
Jan-95 2.9% 2.8%
Feb-95 2.9% 2.9%
Mar-95 2.9% 2.9%
Apr-95 2.9% 3.1%
May-95 2.9% 3.2%
Jun-95 2.9% 3.0%
Jul-95 2.7% 2.8%
Aug-95 2.7% 2.6%
Sep-95 2.7% 2.5%
Oct-95 2.7% 2.8%
Nov-95 2.7% 2.6%
Dec-95 2.7% 2.5%
Jan-96 2.8% 2.7%
Feb-96 2.8% 2.7%
Mar-96 2.8% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.9% 2.8%
Jul-96 2.8% 3.0%
Aug-96 2.8% 2.9%
Sep-96 2.8% 3.0%
Oct-96 2.9% 3.0%
Nov-96 2.9% 3.3%
Dec-96 2.9% 3.3%
Jan-97 2.9% 3.0%
Feb-97 2.9% 3.0%
Mar-97 2.9% 2.8%
Apr-97 2.8% 2.5%
May-97 2.8% 2.2%
Jun-97 2.8% 2.3%
Jul-97 3.0% 2.2%
Aug-97 3.0% 2.2%
Sep-97 3.0% 2.2%
Oct-97 3.3% 2.1%
Nov-97 3.3% 1.8%
Dec-97 3.3% 1.7%
Jan-98 3.3% 1.6%
Feb-98 3.3% 1.4%
Mar-98 3.3% 1.4%
Apr-98 3.5% 1.4%
May-98 3.5% 1.7%
Jun-98 3.5% 1.7%
Jul-98 3.5% 1.7%
Aug-98 3.7% 1.6%
Sep-98 3.7% 1.5%
Oct-98 3.4% 1.5%
Nov-98 3.4% 1.5%
Dec-98 3.4% 1.6%
Jan-99 1.7%
Feb-99 1.6%
Source: Bloomberg L.P.
Although price inflation has been well contained, the combination of a tight
labor market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains allow companies to pay higher wages without raising prices.
Non-farm productivity grew at an annualized rate of 2.2% in 1998, continuing a
healthy trend that began in 1996.
ASSET CLASS PERFORMANCE
Following a sharp correction in July and August, the domestic equities market
rallied strongly during the six-month reporting period ended February 28, 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
TOTAL RETURN PERFORMANCE
VALUE OF A HYPOTHETICAL $1
INVESTMENT
S&P 500-REGISTERED
MSCI-EAFE-REGISTERED TRADEMARK-(ND)INDEX TRADEMARK INDEX
Aug-98 $1.000 $1.000
Sep-98 $0.969 $1.064
Oct-98 $1.070 $1.151
Nov-98 $1.125 $1.220
Dec-98 $1.170 $1.291
Jan-99 $1.166 $1.345
Feb-99 $1.138 $1.303
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
TOTAL RETURN PERFORMANCE
VALUE OF A HYPOTHETICAL $1
INVESTMENT
RUSSELL 2000-REGISTERED LEHMAN AGGREGATE
TRADEMARK INDEX BOND INDEX
Aug-98 $1.000 $1.000
Sep-98 $1.078 $1.023
Oct-98 $1.122 $1.018
Nov-98 $1.181 $1.024
Dec-98 $1.254 $1.027
Jan-99 $1.271 $1.034
Feb-99 $1.168 $1.016
COMPILED BY CHARLES SCHWAB & CO., INC.
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
represent returns of specific market sectors during the reporting period and do
not reflect the performance of any fund. Indices are unmanaged and, unlike a
fund, do not reflect the payment of advisory fees and other expenses associated
with an investment in a fund. Investors cannot invest in an index directly.
Large-cap domestic stocks, as represented by the S&P 500 Index, continued to be
the strongest-performing asset class, achieving a total return of 30.3% for the
six-month period. Within the S&P 500, the strongest performance was concentrated
in the very largest stocks. Small-cap stocks, as represented by the Russell 2000
Index, also experienced a strong total return of 16.8%.
International stock returns were characterized by the markedly divergent
performance between Asian markets, most of which languished, and European
markets, most of which experienced healthy gains for the period. Combined,
international stock returns, as represented by the Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI-EAFE) Index, experienced a
positive total return of 13.8% for the six-month reporting period.
5
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MARKET OVERVIEW (continued)
Reflecting the moderate rise in intermediate- and long-term interest rates,
fixed income returns were generally weak for the period. Bond returns, as
represented by the Lehman Brothers Aggregate Bond Index, were 1.6% for the
six-month reporting period.
U.S. EQUITY VALUATION
The price/earnings ratio (P/E) for the S&P 500 Index reached new record highs
during the reporting period and ended the period at a lofty 32.5 times earnings.
The P/E, also known as a multiple, is the price of a stock divided by its
earnings per share and generally indicates how much investors are willing to pay
for a company's earning potential. Based on other traditional market valuation
measures, such as the price-to-book value ratio or dividend yield, the U.S.
stock market continues to remain at high valuation levels.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
S&P 500 PRICE/EARNINGS RATIO
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24.00
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Mar-98 27.76
Apr-98 26.51
May-98 26.12
Jun-98 27.09
Jul-98 26.78
Aug-98 22.77
Sep-98 24.23
Oct-98 27.58
Nov-98 30.14
Dec-98 31.97
Jan-99 33.73
Feb-99 32.47
30-Year Average 15.08
Source: BLOOMBERG L.P.
TREASURY YIELDS
During the first two months of the reporting period, Treasury yields continued
to decline--a trend that began in the second quarter of 1997. This was largely a
response to international economic problems as investors seeking a safe haven
increased demand for U.S. Treasury securities and bid up prices, thereby
decreasing Treasury bond yields. Other factors that contributed to favorable
fixed income market conditions included the Federal Reserve's decision to leave
rates unchanged throughout most of 1998, which was due in part to international
market turbulence, and positive economic statistics. This showed strong growth
coupled with contained inflation.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
30-YEAR AND FIVE-YEAR TREASURY BOND YIELDS
30-YEAR TREASURY FIVE-YEAR TREASURY
BOND YIELD NOTE YIELD
8/7/98 5.63% 5.38%
8/14/98 5.54% 5.33%
8/21/98 5.43% 5.19%
8/28/98 5.34% 4.90%
9/4/98 5.29% 4.89%
9/11/98 5.23% 4.65%
9/18/98 5.15% 4.52%
9/25/98 5.11% 4.37%
10/2/98 4.84% 4.08%
10/9/98 5.12% 4.46%
10/16/98 4.98% 4.04%
10/23/98 5.18% 4.30%
10/30/98 5.16% 4.23%
11/6/98 5.39% 4.59%
11/13/98 5.25% 4.50%
11/20/98 5.22% 4.60%
11/27/98 5.16% 4.59%
12/4/98 5.04% 4.39%
12/11/98 5.02% 4.39%
12/18/98 5.00% 4.36%
12/25/98 5.22% 4.71%
1/1/99 5.10% 4.54%
1/8/99 5.27% 4.73%
1/15/99 5.11% 4.55%
1/22/99 5.08% 4.52%
1/29/99 5.09% 4.55%
2/5/99 5.35% 4.86%
2/12/99 5.42% 4.96%
2/19/99 5.39% 4.99%
2/26/99 5.58% 5.22%
SOURCE: BLOOMBERG L.P.
6
<PAGE>
In an effort to provide liquidity to financial markets and shelter the U.S.
economy from the impact of increasing weakness in foreign economies, the Federal
Reserve cut short-term interest rates three times during September and October.
At the time of this writing, the federal funds rate stands at 4.75%.
Toward the end of the reporting period, in response to both continued strong
domestic economic growth and scaled-back concerns about the impact of
international economic problems, Treasury yields reversed course, ending the
period approximately 1% higher than their lows reached in October.
MUNICIPAL BOND YIELDS
As was the case with Treasury yields, municipal bond yields appeared to end
their longer-term decline and settle into a trading range during the six-month
reporting period.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
30-YEAR AND FIVE-YEAR AAA GENERAL
OBLIGATION
MUNICIPAL BOND YIELDS
Bond Buyer 40 Muni Bond Yields Five-Year AAA GO Muni Bond Yields
8/29/97 5.30% 4.34%
9/5/97 5.26% 4.30%
9/12/97 5.23% 4.27%
9/19/97 5.15% 4.19%
9/26/97 5.15% 4.19%
10/3/97 5.13% 4.17%
10/10/97 5.21% 4.25%
10/17/97 5.25% 4.29%
10/24/97 5.20% 4.24%
10/31/97 5.12% 4.16%
11/7/97 5.15% 4.17%
11/14/97 5.14% 4.16%
11/21/97 5.15% 4.15%
11/28/97 5.17% 4.17%
12/5/97 5.11% 4.11%
12/12/97 5.01% 4.08%
12/19/97 4.98% 4.05%
12/26/97 4.98% 4.05%
1/2/98 4.96% 4.03%
1/9/98 4.87% 3.99%
1/16/98 4.83% 3.95%
1/23/98 4.93% 4.05%
1/30/98 4.92% 4.04%
2/6/98 4.93% 4.05%
2/13/98 4.89% 4.01%
2/20/98 4.89% 4.01%
2/27/98 4.96% 4.03%
3/6/98 5.04% 4.11%
3/13/98 5.04% 4.10%
3/20/98 5.01% 4.05%
3/27/98 5.04% 4.08%
4/3/98 5.00% 4.04%
4/10/98 5.03% 4.07%
4/17/98 5.04% 4.08%
4/24/98 5.10% 4.19%
5/1/98 5.13% 4.23%
5/8/98 5.11% 4.21%
5/15/98 5.09% 4.19%
5/22/98 5.03% 4.15%
5/29/98 4.97% 4.09%
6/5/98 4.96% 4.08%
6/12/98 4.92% 4.04%
6/19/98 4.94% 4.10%
6/26/98 4.94% 4.08%
7/3/98 4.93% 4.09%
7/10/98 4.93% 4.09%
7/17/98 5.00% 4.15%
7/24/98 4.98% 4.08%
7/31/98 4.97% 4.07%
8/7/98 4.94% 4.07%
8/14/98 4.93% 4.01%
8/21/98 4.88% 3.96%
8/28/98 4.86% 3.92%
9/4/98 5.15% 3.89%
9/11/98 5.13% 3.87%
9/18/98 5.10% 3.81%
9/25/98 5.09% 3.79%
10/2/98 4.97% 3.70%
10/9/98 5.12% 3.71%
10/16/98 5.05% 3.67%
10/23/98 5.14% 3.73%
10/30/98 5.13% 3.70%
11/6/98 5.18% 3.78%
11/13/98 5.14% 3.77%
11/20/98 5.12% 3.74%
11/27/98 5.11% 3.74%
12/4/98 5.11% 3.73%
12/11/98 5.10% 3.73%
12/18/98 5.13% 3.74%
12/25/98 5.20% 3.79%
1/1/99 5.16% 3.77%
1/8/99 5.20% 3.83%
1/15/99 5.17% 3.76%
1/22/99 5.14% 3.71%
1/29/99 5.09% 3.63%
2/5/99 5.15% 3.66%
2/12/99 5.15% 3.64%
2/19/99 5.15% 3.65%
2/26/99 5.17% 3.70%
Source: Bloomberg L.P.
The ratio of municipal-to-Treasury bond yields reached new highs during October.
This was the result of strong investor demand for Treasury securities typically
referred to as the "flight to quality." Later in the reporting period as
investors' concerns over international economic problems subsided, this ratio
backed off from its October highs. This reversal was most pronounced for shorter
maturities (refer to the five-year ratio below). This was the result of strong
retail investor demand. At the close of the reporting period, long-term
municipal bond yields continued to be very attractive relative to Treasury
yields.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
RATIO OF MUNICIPAL BOND YIELDS
TO
TREASURY BOND YIELDS FOR
30-YEAR AND FIVE-YEAR BONDS
30-Year Bond Yields Five-Year Bond Yields
8/29/97 80.2% 69.8%
9/5/97 79.2% 69.0%
9/12/97 79.4% 69.2%
9/19/97 80.7% 69.7%
9/26/97 80.8% 69.9%
10/3/97 81.6% 71.0%
10/10/97 81.0% 70.6%
10/17/97 81.5% 70.6%
10/24/97 82.9% 71.9%
10/31/97 83.3% 72.9%
11/7/97 83.6% 71.8%
11/14/97 84.1% 71.7%
11/21/97 85.4% 72.2%
11/28/97 85.5% 71.4%
12/5/97 84.0% 69.9%
12/12/97 84.5% 71.7%
12/19/97 84.1% 70.9%
12/26/97 84.4% 70.9%
1/2/98 84.9% 71.8%
1/9/98 85.0% 76.0%
1/16/98 83.1% 73.1%
1/23/98 82.6% 73.4%
1/30/98 84.8% 75.1%
2/6/98 83.3% 74.0%
2/13/98 83.6% 74.0%
2/20/98 83.3% 73.0%
2/27/98 83.8% 72.1%
3/6/98 83.7% 72.8%
3/13/98 85.5% 74.1%
3/20/98 85.1% 73.0%
3/27/98 84.6% 71.9%
4/3/98 86.3% 73.7%
4/10/98 85.5% 73.3%
4/17/98 85.8% 73.4%
4/24/98 85.8% 74.4%
5/1/98 86.5% 75.2%
5/8/98 85.5% 74.6%
5/15/98 85.2% 73.9%
5/22/98 85.3% 73.5%
5/29/98 85.7% 73.7%
6/5/98 85.7% 72.9%
6/12/98 86.9% 74.2%
6/19/98 87.1% 74.4%
6/26/98 87.7% 74.3%
7/3/98 88.1% 75.6%
7/10/98 87.6% 75.8%
7/17/98 87.0% 75.7%
7/24/98 87.6% 74.5%
7/31/98 87.0% 74.0%
8/7/98 87.7% 75.7%
8/14/98 89.0% 75.2%
8/21/98 89.8% 76.3%
8/28/98 91.0% 80.0%
9/4/98 97.4% 79.5%
9/11/98 98.1% 83.3%
9/18/98 99.1% 84.4%
9/25/98 99.6% 86.8%
10/2/98 102.7% 90.6%
10/9/98 100.1% 83.1%
10/16/98 101.4% 90.8%
10/23/98 99.3% 86.7%
10/30/98 99.5% 87.4%
11/6/98 96.2% 82.3%
11/13/98 97.9% 83.7%
11/20/98 98.1% 81.4%
11/27/98 99.1% 81.4%
12/4/98 101.4% 85.0%
12/11/98 101.5% 85.0%
12/18/98 102.6% 85.7%
12/25/98 99.7% 80.5%
1/1/99 101.3% 83.0%
1/8/99 98.6% 80.9%
1/15/99 101.2% 82.6%
1/22/99 101.1% 82.1%
1/29/99 100.1% 79.8%
2/5/99 96.3% 75.3%
2/12/99 95.0% 73.3%
2/19/99 95.6% 73.1%
2/26/99 92.7% 70.9%
Source: Bloomberg L.P.
7
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/99
SINCE
SIX INCEPTION
MONTHS(1) ONE YEAR FIVE YEARS (4/21/93)
- ----------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/
INTERMEDIATE TAX-FREE
BOND FUND(2) 2.39% 4.78% 4.71% 4.65%
- ----------------------------------------------------------------------------
Lehman Brothers Three-Year
Municipal Bond Index 2.65% 5.36% 5.15% 4.95%
- ----------------------------------------------------------------------------
30-DAY SEC
YIELD
- -----------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND(2) 3.46%
- -----------------------------------------------------------------------
Lehman Brothers Three-Year Municipal Bond Index N/A
- -----------------------------------------------------------------------
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 12/31/98. As of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns were 2.98%, 4.83%,
4.38% and 4.63%, respectively. The 30-day SEC yield as of 12/31/98 was 3.57%.(3)
TAXABLE-EQUIVALENT YIELD
The taxable-equivalent yield represents the pre-tax yield that a taxable
investment would have to pay to be equivalent to a tax-exempt yield on an
after-tax basis and may be helpful in evaluating the performance of a tax-exempt
investment. The table below shows the Fund's 30-day SEC yield as of 2/28/99 and
the taxable-equivalent yield,(1) assuming a maximum combined federal and state
of California personal income tax rate of 45.22%. Shareholder tax rates may be
different.
TAXABLE-
EQUIVALENT
30-DAY 30-DAY SEC
SEC YIELD YIELD
- -----------------------------------------------------------------------
Schwab California Short/Intermediate
Tax-Free Bond Fund 3.46% 6.32%
- -----------------------------------------------------------------------
(1) Actual, not annualized, since period is less than one year.
(2) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/99, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
2.24%, 4.49%, 4.34% and 4.24%, respectively. The 30-day SEC yield as of
2/28/99 would have been 3.12%.
(3) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
2.90%, 4.49%, 4.01% and 4.21%, respectively. The 30-day SEC yield as of
12/31/98 would have been 3.22%.
8
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
SCHWAB CA SHORT/INTERMEDIATE LEHMAN BROTHERS 3-YEAR
TAX-FREE BOND FUND MUNICIPAL BOND INDEX
4/21/93 $10,000 $10,000
4/30/93 $9,990 $9,994
5/31/93 $10,037 $10,021
6/30/93 $10,136 $10,085
7/31/93 $10,157 $10,090
8/31/93 $10,257 $10,185
9/30/93 $10,328 $10,229
10/31/93 $10,340 $10,251
11/30/93 $10,310 $10,237
12/31/93 $10,444 $10,345
1/31/94 $10,517 $10,429
2/28/94 $10,372 $10,332
3/31/94 $10,188 $10,207
4/30/94 $10,239 $10,267
5/31/94 $10,272 $10,315
6/30/94 $10,253 $10,318
7/31/94 $10,356 $10,404
8/31/94 $10,390 $10,441
9/30/94 $10,350 $10,415
10/31/94 $10,280 $10,390
11/30/94 $10,167 $10,371
12/31/94 $10,227 $10,416
1/31/95 $10,350 $10,502
2/28/95 $10,503 $10,613
3/31/95 $10,598 $10,708
4/30/95 $10,614 $10,744
5/31/95 $10,826 $10,909
6/30/95 $10,809 $10,935
7/31/95 $10,925 $11,050
8/31/95 $11,030 $11,137
9/30/95 $11,090 $11,168
10/31/95 $11,174 $11,222
11/30/95 $11,256 $11,294
12/31/95 $11,296 $11,341
1/31/96 $11,366 $11,430
2/29/96 $11,358 $11,432
3/31/96 $11,308 $11,404
4/30/96 $11,325 $11,418
5/31/96 $11,332 $11,428
6/30/96 $11,393 $11,497
7/31/96 $11,466 $11,560
8/31/96 $11,483 $11,577
9/30/96 $11,557 $11,648
10/31/96 $11,634 $11,730
11/30/96 $11,742 $11,839
12/31/96 $11,737 $11,845
1/31/97 $11,776 $11,897
2/28/97 $11,837 $11,955
3/31/97 $11,762 $11,893
4/30/97 $11,815 $11,944
5/31/97 $11,916 $12,041
6/30/97 $11,991 $12,112
7/31/97 $12,139 $12,256
8/31/97 $12,120 $12,231
9/30/97 $12,196 $12,319
10/31/97 $12,227 $12,374
11/30/97 $12,268 $12,410
12/31/97 $12,346 $12,494
1/31/98 $12,433 $12,576
2/28/98 $12,459 $12,603
3/31/98 $12,467 $12,623
4/30/98 $12,435 $12,605
5/31/98 $12,540 $12,723
6/30/98 $12,568 $12,766
7/31/98 $12,635 $12,812
8/31/98 $12,749 $12,936
9/30/98 $12,863 $13,019
10/31/98 $12,892 $13,081
11/30/98 $12,931 $13,113
12/31/98 $12,942 $13,144
1/31/99 $13,054 $13,264
2/28/99 $13,054 $13,278
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
- ---------------------------------------------------------------------------
Total net assets as of 2/28/98 (000s) $ 70,949
- ---------------------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $ 114,987
- ---------------------------------------------------------------------------
Percentage growth over reporting period 62%
- ---------------------------------------------------------------------------
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 2/28/99 and is not indicative of
its composition after that date. The terms used below are defined beginning on
page 20. A complete list of the securities in the Fund's portfolio as of 2/28/99
is provided in the Schedule of Investments later in this report.
FUND FACTS
SCHWAB CALIFORNIA
SHORT/INTERMEDIATE
TAX-FREE BOND FUND PEER GROUP AVERAGE+
- -----------------------------------------------------------------------------
Number of Issues 69 107
- -----------------------------------------------------------------------------
30-Day SEC Yield 3.46% 2.50%
- -----------------------------------------------------------------------------
Average Coupon 5.126% 5.75%
- -----------------------------------------------------------------------------
Weighted Average Maturity 4.23 years 4.70 years
- -----------------------------------------------------------------------------
Average Quality AA AA
- -----------------------------------------------------------------------------
Average Duration 3.57 years 3.20 years
- -----------------------------------------------------------------------------
Expense Ratio 0.49%* 0.83%
- -----------------------------------------------------------------------------
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/99.
+ Source: Morningstar. This information is as of 2/28/99, and is for
illustrative purposes only. It is not intended to show, predict or guarantee
future composition of the Fund. The Peer Group Average is based on the 104
municipal short-term funds as tracked by Morningstar.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/28/99
PERCENTAGE OF
FUND
VALUE PERCENTAGE OF INVESTMENTS
MATURITY RANGE (000s) FUND INVESTMENTS (CUMULATIVE)
- -----------------------------------------------------------------------
0 - 6 months $ 8,837 7.7% 7.7%
- -----------------------------------------------------------------------
7 - 36 months $ 43,021 37.4% 45.1%
- -----------------------------------------------------------------------
37 - 60 months $ 17,215 15.0% 60.1%
- -----------------------------------------------------------------------
More than
60 months $ 45,843 39.9% 100.0%
- -----------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INVESTMENT STYLE BOX(1)
AS OF 2/28/99
WEIGHTED AVERAGE MATURITY
Short Medium 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 2/28/99. 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 20. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
10
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2)
as of 2/28/99
Municipal bonds 93.4%
Variable-rate
obligations 6.5%
Temporary investments 0.1%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/28/99
AAA 56.5%
AA 18.3%
A 20.0%
Short-term ratings 3.5%
Unrated securities 1.7%
The charts above illustrate the composition of the Fund's portfolio as of
2/28/99, and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities.
(3) Credit quality is based on published ratings from Standard & Poor's Ratings
Group and/or Moody's Investor Service, which are recognized rating services.
Categories reflect the higher published ratings for securities rated
differently by the two agencies, and percentages are dollar-weighted.
TOP 10 HOLDINGS
% OF TOTAL NET ASSETS
- ----------------------------------------------------------------
Long Beach Harbor, California, RB Series 1998A,
5.50%, Maturity 5/15/05 3.76%
- ----------------------------------------------------------------
Alameda County, California, COP, 5.00%, Maturity
12/01/06 3.23%
- ----------------------------------------------------------------
Orange County, California, Recovery COP, Series
1996A, 6.00%, Maturity 7/01/08 2.98%
- ----------------------------------------------------------------
Los Angeles, California, Unified School District, COP
Series 1994B, 5.70%, Maturity 12/01/99 2.86%
- ----------------------------------------------------------------
San Francisco, California, Bay Area Rapid Transit
District Sales Tax, RB Series 1998, 5.50%, Maturity
7/01/05 2.85%
- ----------------------------------------------------------------
California State Public Works Board Lease Revenue
Refunding Bonds, Series 1998B, 4.50%, Maturity
9/01/05 2.71%
- ----------------------------------------------------------------
Orange County, California Municipal District Water
Facilities, COP Series 1996, 4.60%, Maturity 7/01/01 2.68%
- ----------------------------------------------------------------
San Jose, California, Financing Authority Revenue
Refunding Bonds, Series 1993C, 5.90%, Maturity
9/01/04 2.33%
- ----------------------------------------------------------------
California Statewide Community Development Authority
Revenue Refunding Bonds, Series 1998A, 5.00%,
Maturity 8/01/06 2.31%
- ----------------------------------------------------------------
California Health Facility Financial Authority RB
Series B, 5.00%, Maturity 10/01/08 2.26%
- ----------------------------------------------------------------
11
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/28/99
SINCE
SIX INCEPTION
MONTHS(1) ONE YEAR FIVE YEARS (2/24/92)
- --------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND(2) 2.71% 5.92% 6.47% 7.72%
- --------------------------------------------------------------------------------
Lehman Brothers General
Obligation Municipal Bond Index 2.62% 6.15% 6.71% 7.51%
- --------------------------------------------------------------------------------
30-DAY SEC
YIELD
- ------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND(2) 4.53%
- ------------------------------------------------------------------------------
Lehman Brothers General Obligation Municipal Bond Index N/A
- ------------------------------------------------------------------------------
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 12/31/98. As of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns were 3.75%, 6.43%,
5.93% and 7.79%, respectively. The 30-day SEC yield as of 12/31/98 was 4.62%.(3)
TAXABLE-EQUIVALENT YIELD
The taxable-equivalent yield represents the pre-tax yield that a taxable
investment would have to pay to be equivalent to a tax-exempt yield on an
after-tax basis and may be helpful in evaluating the performance of a tax-exempt
investment. The table below shows the Fund's 30-day SEC yield as of 2/28/99 and
the taxable-equivalent yield,(1) assuming a maximum combined federal and state
of California personal income tax rate of 45.22%. Shareholder tax rates may be
different.
TAXABLE-
EQUIVALENT
30-DAY 30-DAY SEC
SEC YIELD YIELD
- --------------------------------------------------------------------------------
Schwab California Long-Term Tax-Free Bond Fund 4.53% 8.27%
- --------------------------------------------------------------------------------
(1) Actual, not annualized, since period is less than one year.
(2) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/28/99, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
2.58%, 5.69%, 6.17% and 7.34%, respectively. The 30-day SEC yield as of
2/28/99 would have been 4.23%.
(3) A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/98, the Fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
3.66%, 6.16%, 5.64% and 7.41%, respectively. The 30-day SEC yield as of
12/31/98 would have been 4.32%.
12
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
SCHWAB CA LONG-TERM LEHMAN BROTHERS GENERAL OBLIGATION
TAX-FREE BOND FUND MUNICIPAL BOND INDEX
2/24/92 $10,000 $10,000
3/31/92 $10,099 $10,004
4/30/92 $10,217 $10,093
5/31/92 $10,410 $10,212
6/30/92 $10,633 $10,383
7/31/92 $11,082 $10,694
8/31/92 $10,786 $10,590
9/30/92 $10,835 $10,659
10/31/92 $10,474 $10,554
11/30/92 $10,921 $10,743
12/31/92 $11,110 $10,853
1/31/93 $11,256 $10,979
2/28/93 $11,775 $11,376
3/31/93 $11,561 $11,256
4/30/93 $11,674 $11,370
5/31/93 $11,736 $11,434
6/30/93 $11,969 $11,624
7/31/93 $11,957 $11,640
8/31/93 $12,235 $11,882
9/30/93 $12,371 $12,017
10/31/93 $12,412 $12,041
11/30/93 $12,263 $11,934
12/31/93 $12,541 $12,186
1/31/94 $12,671 $12,326
2/28/94 $12,304 $12,006
3/31/94 $11,683 $11,517
4/30/94 $11,768 $11,615
5/31/94 $11,867 $11,716
6/30/94 $11,747 $11,644
7/31/94 $12,008 $11,864
8/31/94 $12,026 $11,905
9/30/94 $11,824 $11,730
10/31/94 $11,508 $11,521
11/30/94 $11,235 $11,313
12/31/94 $11,420 $11,562
1/31/95 $11,901 $11,893
2/28/95 $12,295 $12,238
3/31/95 $12,414 $12,379
4/30/95 $12,407 $12,394
5/31/95 $12,825 $12,789
6/30/95 $12,613 $12,677
7/31/95 $12,685 $12,797
8/31/95 $12,866 $12,960
9/30/95 $12,972 $13,041
10/31/95 $13,228 $13,230
11/30/95 $13,507 $13,450
12/31/95 $13,690 $13,579
1/31/96 $13,785 $13,682
2/29/96 $13,664 $13,589
3/31/96 $13,436 $13,415
4/30/96 $13,369 $13,378
5/31/96 $13,379 $13,373
6/30/96 $13,550 $13,518
7/31/96 $13,700 $13,641
8/31/96 $13,693 $13,639
9/30/96 $13,920 $13,830
10/31/96 $14,073 $13,986
11/30/96 $14,365 $14,242
12/31/96 $14,283 $14,182
1/31/97 $14,294 $14,209
2/28/97 $14,429 $14,340
3/31/97 $14,175 $14,149
4/30/97 $14,316 $14,268
5/31/97 $14,581 $14,482
6/30/97 $14,706 $14,637
7/31/97 $15,266 $15,042
8/31/97 $15,056 $14,901
9/30/97 $15,253 $15,078
10/31/97 $15,359 $15,175
11/30/97 $15,475 $15,264
12/31/97 $15,717 $15,487
1/31/98 $15,918 $15,646
2/28/98 $15,906 $15,651
3/31/98 $15,879 $15,665
4/30/98 $15,802 $15,595
5/31/98 $16,078 $15,841
6/30/98 $16,124 $15,903
7/31/98 $16,145 $15,943
8/31/98 $16,405 $16,190
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
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab California Long-Term Tax-Free Bond Fund, made at its inception, with a
similar investment in the Lehman Brothers General Obligation Municipal Bond
Index.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
ASSETS
- -------------------------------------------------------------
Total net assets as of 2/28/98 (000s) $ 152,295
- -------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $ 213,594
- -------------------------------------------------------------
Percentage growth over reporting period 40%
- -------------------------------------------------------------
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 2/28/99, and is not indicative of
its composition after that date. The terms used below are defined beginning on
page 20. A complete list of the securities in the Fund's portfolio as of 2/28/99
is provided in the Schedule of Investments later in this report.
FUND FACTS
SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND PEER GROUP AVERAGE+
- ------------------------------------------------------------------------------
Number of Issues 108 137
- ------------------------------------------------------------------------------
30-Day SEC Yield 4.53% 3.40%
- ------------------------------------------------------------------------------
Average Coupon 5.46% 5.70%
- ------------------------------------------------------------------------------
Weighted Average Maturity 18.10 years 17.50 years
- ------------------------------------------------------------------------------
Average Quality AA AAA
- ------------------------------------------------------------------------------
Average Duration 7.90 years 7.70 years
- ------------------------------------------------------------------------------
Expense Ratio 0.49%* 1.09%
- ------------------------------------------------------------------------------
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/99.
+ Source: Morningstar. This information is as of 2/28/99, and is for
illustrative purposes only. It is not intended to show, predict or guarantee
future composition of the Fund. The Peer Group Average is based on the 115
municipal California long-term funds as tracked by Morningstar.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/28/99
PERCENTAGE OF
FUND
VALUE PERCENTAGE OF INVESTMENTS
MATURITY RANGE (000S) FUND INVESTMENTS (CUMULATIVE)
- ----------------------------------------------------------------------
0 - 1 year $ 9,960 4.5% 4.5%
- ----------------------------------------------------------------------
2 - 10 years $19,480 8.8% 13.3%
- ----------------------------------------------------------------------
11 - 20 years $90,334 40.8% 54.1%
- ----------------------------------------------------------------------
21 - 30 years $93,143 42.1% 96.2%
- ----------------------------------------------------------------------
More than
30 years $ 8,511 3.8% 100.0%
- ----------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INVESTMENT STYLE BOX(1)
AS OF 2/28/99
WEIGHTED AVERAGE MATURITY
Short Medium Long AVERAGE CREDIT QUALITY
X High
Medium
Low
(1) Source: Morningstar. The style box represents two of teh main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the Fund's portfolio as of 2/28/99. 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 20. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
14
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2)
as of 2/28/99
Municipal bonds 95.5%
Variable-rate obligations 4.5%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/28/99
AAA 66.5%
AA 12.2%
A 16.3%
BAA 2.3%
Short-term ratings 2.7%
The above charts illustrate the composition of the Fund's portfolio as of
2/28/99, and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities.
(3) Credit quality is based on published ratings from Standard & Poor's 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
- ----------------------------------------------------------------
Modesto, California, Public Financing Authority
Lease, RB Series, 5.13%, Maturity 9/01/20 3.18%
- ----------------------------------------------------------------
California State Rural Water Finance Authority Public
Projects Construction, RB Series 1998, 4.25%,
Maturity 3/01/00 2.61%
- ----------------------------------------------------------------
Calfornia Health Facilities Financing Authority
Insured Hospital Revenue Refunding Bonds, Series
1996, 5.38%, Maturity 7/01/16 2.51%
- ----------------------------------------------------------------
Imperial Valley, California, Irrigation District
Electric System Revenue Refunding Bonds, 5.00%,
Maturity 11/01/18 2.34%
- ----------------------------------------------------------------
Riverside County, California, Public Financing
Authority Tax Allocation Bonds, 5.63%, Maturity
10/01/33 2.33%
- ----------------------------------------------------------------
Calfornia Health Facilities Financing Authority, RB
Series 1998B, 5.00%, Maturity 10/01/18 2.29%
- ----------------------------------------------------------------
Beverly Hills, California, Public Financing Authority
Lease Revenue Refunding Bonds, Series 1999A, 5.13%,
Maturity 6/01/20 2.24%
- ----------------------------------------------------------------
East Bay, California, Municipal Utility District
Water System Revenue Refunding Bonds, Series 1996,
5.00%, Maturity 6/01/26 2.23%
- ----------------------------------------------------------------
San Bernardino County, California, Transportation
Authority Tax Revenue, Series A, 6.25%, Maturity
3/01/10 2.19%
- ----------------------------------------------------------------
California Health Facilities Financing Authority
Insured Hospital, RB Series, 1992A, 6.63%, Maturity
11/01/22 2.10%
- ----------------------------------------------------------------
15
<PAGE>
DIVIDENDS PAID
During the reporting period, the Funds continued to provide a high level of
current income consistent with the preservation of capital.(1) The chart below
illustrates the income dividends on a per-share basis paid by each Fund during
each fiscal year or reporting period since inception.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DIVIDENDS PAID BY THE SCHWAB CALIFORNIA TAX-FREE BOND FUNDS
INCOME DIVIDENDS PER SHARE
FISCAL YEAR
SCHWAB CALIFORNIA
SHORT/INTERMEDIATE SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND TAX-FREE BOND FUND
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++ $0.19 $0.26
* 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.
++ For the six-month period ended 2/28/99 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 inceptions. Joanne joined CSIM as portfolio manager in February 1992 and
was promoted to her current position in December 1996. Prior to joining CSIM,
Joanne was portfolio manager for the Shearson Lehman California Municipal Bond
Fund and E. F. Hutton's Municipal Cash Reserve Management.
17
<PAGE>
FUND DISCUSSION
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
Q. WHAT IS YOUR VIEW OF THE MUNICIPAL BOND ENVIRONMENT?
A. At the beginning of the reporting period, securities markets faced volatile
conditions due to the Asian economic crisis, the political scandal in Washington
and the instability of other countries' economies such as Brazil and Russia.
These events caused widespread turmoil in global equity markets. The result of
the turmoil initially increased demand for U.S. Treasury Securities, which led
to higher prices and lower yields in the Treasury market. During the rally in
the Treasury market, investors overlooked municipal securities, which had become
extremely attractive relative to Treasury securities. Additionally, the
relatively low volatility in the municipal market has provided a safe haven for
investors during these turbulent times. The combination of these factors
attracted crossover buyers to the municipal market.
Crossover buyers are those who continually seek out the most competitively
priced sector of the fixed-income market, which in this case is the municipal
market. Once they locate that sector, the crossover buyers reallocate their
assets accordingly. Crossover buyers are seeking to maximize their returns by
selling their municipal bond positions at some point in the future when Treasury
security prices become relatively more attractive.
During 1998 we saw record supply in the municipal market due to the low interest
rate environment. Because of the low interest rate environment, we saw many
municipalities refinance their outstanding long-term debt, which added supply to
the municipal market. The increased supply helped the yields on municipal
securities stay very attractive relative to Treasuries. In fact, the ratio of
the 30-year Treasury-to-municipal security yields reached historic levels when
it went as high as 103% on October 5, 1998.
Let's take a look at some of the other numbers:(1)
- Municipal security supply was up approximately 38% in 1998 from the
previous year.
- During 1998 the yield on municipal securities averaged approximately 92% of
Treasury yields.
- Since July the yield on municipal securities averaged approximately 96% of
Treasury yields.
- At the end of the reporting period, municipal securities traded at
approximately 92% of Treasury yields.
For comparison purposes, in 1997 the yield on municipal securities averaged 84%
of Treasury yields. This is a more typical spread, based on historical data.
Q. HOW DID THE FUNDS PERFORM DURING THE SIX-MONTH REPORTING PERIOD?
A. Both Funds achieved positive total returns for the period, derived
predominantly from dividend income, with changes in Funds' net asset values
(NAVs) playing a relatively minor role.
The SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND achieved a total
return of 2.39% for the six-month reporting period ended February 28, 1999. The
return came from a combination of dividend income of 1.90% and an increase in
the Fund's NAV of 0.49%. The NAV increase was a result of the Fund's declining
yield, which fell from 3.61% at the beginning of the period to 3.47% at the end
of the period.
The SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND achieved a total return of
2.71% for the six-month reporting period ended February 28, 1999. The return
came from a combination of dividend income of 2.28% and an increase in the
Fund's NAV of 0.43%.
(1) Source: Bond Buyer
18
<PAGE>
The Fund's 4.54% yield at the end of the period was almost identical to its
yield of 4.51% at the beginning 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 high-quality securities (primarily
AAA and AA) during the reporting period. We feel that this is an appropriate
strategy for the Funds given the current market environment. Because there is
very little yield advantage associated with lower-rated securities, we simply do
not feel that investors are being adequately compensated for the higher credit
risk. In both Funds we continue to approach the markets cautiously, carefully
watching economic indicators and monitoring Federal Reserve Bank communications
regarding its target for short-term interest rates.
Reflecting our cautious outlook for the markets, the SCHWAB 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 4.23 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
18.71 years. The Fund's weighted average maturity at the end of the reporting
period was 18.10 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. As noted in the
governor's 1998/99 Budget Highlights, employment growth through the first half
of 1998 was 3.5% compared with the same period in 1997, 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 much
slower pace. The effect of the economic weakness in Asia on California could, in
our opinion, be somewhat offset by strong export growth to Mexico and increasing
exports to Europe, Canada and the Middle East.
The continued economic improvement in the state has allowed for a buildup of
budget reserves and an easing of some of the spending restrictions imposed
during the last recession. At the end of the 1997/98 budget year, the state had
a budget surplus of approximately $1 billion. Although the surplus was a
welcomed event, it delayed the adoption of the final 1998/99 budget, as
lawmakers sought to reach a consensus on how to handle the surplus. As in
previous 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 12 months.
We are satisfied that the California securities held by the Fund represent 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, A+ from Standard & Poor's Corporation and AA- from Fitch IBCA, Inc.,
three well-known rating agencies.
19
<PAGE>
GLOSSARY
ALTERNATIVE MINIMUM TAX (AMT)--A federal tax designed to help ensure that at
least a minimum amount of income tax is paid by high-income corporate and
non-corporate taxpayers (including estates and trusts) who reap large tax
savings by making generous use of certain tax deductions and exemptions. The AMT
functions as a recapture mechanism, reclaiming some of the tax breaks primarily
available to high-income taxpayers, who without the AMT might be able to escape
taxation entirely.
BOND--A bond can be thought of as a loan agreement in which the bondholder lends
a set amount of money to a corporation, government agency or municipality and
expects to be repaid with interest. Although bonds are loans and contain no
rights of ownership, they do embody a legally enforceable promise to repay.
CALL--The right of bonds issuer to redeem a bond before its stated maturity
date. Bonds can be called for many reasons, but a call typically occurs when
interest rates drop and issuers are able to obtain lower interest rates to
finance their debts.
CALL PROTECTION--When managers seek call protection, they're looking for bonds
whose issuers cannot redeem them before their stated maturities, or who cannot
redeem them until a far-off date. Such bonds protect yield but are subject to
interest rate sensitivity.
COUPON--The coupon rate is the annual rate of interest on the bond's face value
that the issuer agrees to pay the holder until maturity. The coupon is
established at the time of issue and is determined by the then prevailing level
of interest rates in the marketplace. AVERAGE COUPON is the average interest
rate paid on the securities held by a fund. It is expressed as a percentage of
face value.
CREDIT RATINGS--Bonds are generally rated by one or both of the two major credit
rating agencies accepted in the industry: Moody's Investor Service and the
Standard & Poor's Corporation. They assign ratings based on the issuer's ability
to make the scheduled interest and principal payments. These ratings are
reviewed periodically and may be revised at any time.
MOODY'S S&P DESCRIPTION
- --------------------------------------------------------------
INVESTMENT GRADE
Aaa AAA Strongest capacity to pay interest and
repay principal
Aa AA Very strong capacity to pay interest and
repay principal
A A Strong capacity to pay interest and
repay principal
Baa BBB Adequate capacity to pay interest and
repay principal
BELOW INVESTMENT GRADE
Ba BB Lowest degree of speculation with
respect to capacity to pay interest and
repay principal
B B Greater vulnerability to default but
currently has the capacity to meet
interest and principal payment
Caa CCC Currently vulnerable to default--
dependent on favorable conditions
Ca CC Highly speculative
C C Highest degree of speculation-- no
interest is paid
- - D In payment default
20
<PAGE>
CREDIT RISK--The risk that an issuer of a debt security or a borrower may
default on its obligation.
DIVIDEND--The portion of a company's earnings paid to investors on a per-share
basis.
DURATION--The common objective behind the different definitions of DURATION is
to measure the price sensitivity--and therefore market risk--of a fixed income
security to changes in its yield.
EXPENSE RATIO--Amount, expressed as a percentage of total investment, that
shareholders pay annually for mutual fund operating expenses and management
fees.
GENERAL OBLIGATION BONDS (GOS)--General obligation bonds are backed by a pledge
of the issuer's full faith and credit with the timely payment of principal and
interest secured by the taxing power of the issuer.
INTEREST--Compensation, usually paid semiannually, to bondholders by the issuer.
Usually expressed as an annual percentage rate.
INTEREST RATE RISK--Risk associated with fluctuations of bond prices in response
to the general movement of interest rates and to changes in investor perceptions
of government monetary policy and economic data.
MARKET RISK--The possibility that the actual return of an investment will be
less than what's expected.
MATURITY--The maturity of a security is the date the issuer makes the final
payment to the security holder. WEIGHTED AVERAGE MATURITY is the average length
of time until the bonds held by a fund reach maturity(or are called) and are
repaid. In general, the longer the average maturity, the more a fund's share
price will fluctuate in response to changes in market interest rates.
MORTGAGE-BACKED SECURITIES--Represent an ownership interest in mortgage loans
made by financial institutions to finance the borrower's purchase of a home or
other real estate. The most basic mortgage securities, known as PASS-THROUGHS,
or participation certificates, represent a direct ownership interest in a trust
composed of a pool of mortgage loans. The majority of mortgage securities are
issued and/or guaranteed by the Government National Mortgage Association (Ginnie
Mae), the Federal National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac).
MUNICIPAL BONDS--Debt obligations of states, cities, towns, municipalities,
municipal authorities and governmental entities. They are issued to build
schools, tunnels and bridges or to finance infrastructure repairs or
improvements. The interest earned typically is free of federal income taxes and,
in some cases, also may be free of state and/or local income taxes if purchased
by residents of the issuing state. Income for some investors may be subject to
AMT.
PREPAYMENT RISK--When interest rates are falling, many homeowners will refinance
their mortgages to take advantage of the new lower rates. As a result, when
interest rates decline, prepayments of mortgage-backed securities accelerate
beyond the initial pricing assumptions, which causes the average life and
maturity of the security to shorten.
REINVESTMENT RISK--The risk that a bondholder may be able to reinvest only at a
lower rate than originally planned. If yields fall, his reinvestment income and,
21
<PAGE>
GLOSSARY (continued)
consequently, his total return from holding the bond will fall relative to the
original yield. Conversely, if yields rise, total return will also rise.
REVENUE BONDS--Bonds with interest that is payable from a specific source of
revenue. They are generally issued to finance public projects such as bridges,
tunnels and water treatment facilities. The interest payments on a revenue bond
are typically derived from the revenues produced by the facility.
TAXABLE-EQUIVALENT YIELD--The yield needed on a taxable investment in order to
match the return offered on a tax-exempt investment. This calculation is an
important resource for determining which investments--taxable or
tax-exempt--would yield more. The taxable-equivalent yield calculation can
determine which investment offers the best return when all taxes--federal, state
and local--are taken into consideration.
TOTAL RETURN--The sum of interest, plus capital gains (or losses).
YIELD--The income generated by an investment, expressed as a percentage of its
price. Yield is only a measure of income and does not take into account the
appreciation (or depreciation) of a bond's value.
YIELD TO MATURITY--The overall rate of return an investor would receive if the
securities in a fund's portfolio were held to their maturity dates.
22
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1999 (Unaudited)
Par Value
------ ------
MUNICIPAL BONDS -- 93.4% (a)
Alameda, California Public Financing
Authority RB
4.85%, 09/02/06 $2,140 $2,151
Alameda County, California COP
(Reference & Capital Projects) (e)
5.00%, 12/01/06 3,480 3,711
California Education Authority RB
(Pooled College & University Projects)
Series 1997A (e)
4.85%, 04/01/03 345 361
5.05%, 04/01/05 1,010 1,076
California Educational Facilities Authority
RB (Mills College) Series 1992
6.88%, 09/01/02 500 563
California Educational Facilities Authority
Revenue Refunding Bonds (Stanford
University Project) Series 1997M
5.25%, 12/01/01 1,600 1,684
California Educational Facilities Authority
Revenue Refunding Bonds (University
of San Diego) (e)
4.50%, 10/01/02 1,000 1,034
California Health Facility Financial
Authority RB (Catholic Health Care West)
Series 1997A
5.00%, 07/01/03 2,000 2,107
California Health Facility Financial
Authority RB (Kaiser Permanente)
Series B
5.00%, 10/01/08 2,500 2,600
California Health Facility Financial
Authority RB (Valley Presbyterian
Hospital) Series 1997 (e)
5.25%, 05/01/03 1,000 1,061
California HFA Home Mortgage RB
Series 1994G
5.85%, 08/01/99 320 323
6.00%, 08/01/00 410 421
California State GO Series 1994 (e)
6.50%, 03/01/03 2,000 2,215
California State Public Works Board
Energy Effeciency Revenue Refunding
Bonds Series B (e)
4.00%, 09/01/06 1,155 1,159
Par Value
------ ------
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 $3,112
California State Public Works Board Lease
Revenue Refunding Bonds (Department
of Corrections State Prisons)
Series 1993A (e)
4.70%, 12/01/00 1,865 1,916
California State Public Works Board Lease
Revenue Refunding Bonds (Department
of Corrections State Prisons)
Series 1993D
4.40%, 06/01/00 1,000 1,016
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 2,120
6.40%, 12/01/02 2,000 2,240
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 1,040
California State Public Works Board Lease
Revenue Refunding Bonds (Various
California Community College Projects)
Series 1993A
4.70%, 12/01/99 1,000 1,014
California State Public Works Board Lease
Revenue Refunding Bonds (Various
California State University Projects)
Series 1993A
4.30%, 12/01/99 2,000 2,022
California State Rural Water Financing
Authority Public Projects Construction
Notes
4.25%, 03/01/00 2,500 2,534
California Statewide Community
Development Authority COP (St. Joseph
Health System Obligated Group)
5.30%, 07/01/00 2,035 2,094
California Statewide Community
Development Authority COP (St. Joseph
Health System) Series 1997
5.00%, 07/01/04 750 788
23
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 28, 1999 (Unaudited)
Par Value
------ ------
California Statewide Community
Development Authority Hospital
Revenue Refunding Bonds COP
(Cedars-Sinai Medical Center)
Series 1993
4.40%, 11/01/00 $1,235 $1,258
California Statewide Community
Development Authority Revenue
Refunding Bonds (Sherman Oaks
Project) Series 1998A (e)
5.00%, 08/01/06 2,500 2,659
City of Santa Monica, California
Wastewater RB (Hyperion Project)
Series 1991A
6.25%, 01/01/02 1,250 1,366
Contra Costa County, California Sanitary
District Revenue Refunding Bonds
4.10%, 09/01/09 1,435 1,421
Contra Costa County, California
Transportation Authority Sales Tax RB
Series 1995A (e)
4.80%, 03/01/01 1,000 1,029
Fontana, California Special Tax Revenue
Refunding Bonds Senior Community
Facilities (District 2-A) Series 1998 (e)
4.10%, 09/01/04 1,120 1,140
4.20%, 09/01/05 1,375 1,402
Fresno, California Community Facilities
District No. 3 (Palm Bluffs Corporate
Center) Special Tax Series 1998 (e)
4.75%, 09/01/05 2,000 2,004
Inglewood, California Redevelopment
Agency Tax Allocation Bond (Merged
Redeveloped Project) Series 1998A (e)
3.88%, 05/01/05 525 526
Long Beach Harbor, California RB
Series 1998A (e)
5.50%, 05/15/05 3,985 4,324
Los Angeles, California Community
Redevelopment Pooled Financing
Authority Revenue Refunding Bonds
(Beacon Street Project) Series F (e)
5.00%, 09/01/07 810 865
Los Angeles, California Community
Redevelopment Pooled Financing
Authority Revenue Refunding Bonds
(Monterey Project) Series E (e)
5.00%, 09/01/07 1,570 1,676
Par Value
------ ------
Los Angeles, California Department of
Airports Revenue Refunding Bonds
Series 1995B (e)
6.50%, 05/15/03 $2,300 $2,559
Los Angeles, California Department of
Water & Power Electric Plant Revenue
Refunding Bonds Series 1994
4.50%, 08/15/01 2,270 2,332
Los Angeles, California State Building
Authority Lease Revenue Refunding
Bonds (California Department of
General Services) Series 1993A
4.70%, 05/01/99 450 451
Los Angeles, California State Building
Authority Lease Revenue Refunding
Bonds (California Department of
General Services) Series 1995A
5.60%, 05/01/04 1,000 1,081
Los Angeles, California Unified School
District COP (Multiple Properties
Project) Series 1994B (e)
5.70%, 12/01/99 3,215 3,283
Los Angeles County, California Public
Works Financing Authority Refunding
Bonds (Capital Construction Flood
Control District Project)
4.30%, 03/01/00 1,090 1,104
Morgan Hill, California Unified School
District COP Series 1993
4.80%, 08/01/99 510 514
Northern California Power Agency Public
Power Revenue Refunding Bonds
(Geothermal Project No. 3) Series 1998A (e)
5.00%, 07/01/04 2,000 2,120
Orange County, California Municipal
District Water Facilities COP
(Allen-McColloch Pipeline Project)
Series 1996 (e)
4.60%, 07/01/01 3,000 3,083
Orange County, California Recovery COP
Series 1996A (e)
6.00%, 07/01/08 3,000 3,424
Rancho, California Water District
Financing Authority (e)
4.70%, 09/15/01 2,500 2,547
24
<PAGE>
Par Value
------ ------
Rim of the World, California Unified
School District COP (Measure V Capital
Improvement Projects) Series 1992 (e)
5.90%, 09/01/01 $1,490 $1,581
Riverside County, California Public
Financing Authority Special Tax RB
Senior Lien Bonds Series 1995A (e)
4.40%, 09/01/01 1,750 1,796
Sacramento, California City Financing
Authority Lease RB (State of California
EPA Building Project) Series A (e)
3.90%, 05/01/07 1,000 990
Sacramento, California Regional County
Sanitation District
5.00%, 08/01/03 2,100 2,218
San Bernardino County, California TRAN
4.50%, 09/30/99 2,000 2,018
San Francisco, California Bay Area Rapid
Transit District Sales Tax RB Series 1998 (e)
5.50%, 07/01/05 3,000 3,274
San Francisco, California Port Commission
Revenue Refunding Bonds
5.00%, 07/01/00 1,500 1,538
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 1,731
San Jose, California Financing Authority
Revenue Refunding Bonds (Convention
Center Project) Series 1993C
5.90%, 09/01/04 2,500 2,681
San Ramon Valley, California Unified
School District COP (Measure A Capital
Project) Series 1993A (e)
4.90%, 10/01/99 1,100 1,113
Southern California Metropolitan Water
District GO Refunding Bonds
Series 1998A
5.00%, 03/01/07 1,025 1,097
Southern California Metropolitan Water
District RB Series 1991
6.63%, 07/01/01 1,000 1,093
Par Value
------ ------
Southern California Public Power
Authority Project RB (San Juan Power
Project Unit 3) Series 1993A (e)
5.00%, 01/01/04 $1,600 $1,688
Southern California Public Power
Authority Revenue Refunding Bonds
Series 1989
6.00%, 07/01/00 1,750 1,816
Stockton, California Insured Health
Facilities RB (St. Joseph Medical Center
of Stockton) Series 1993A (e)
4.60%, 06/01/00 200 204
---------
TOTAL MUNICIPAL BONDS
(Cost $105,390) 107,368
---------
VARIABLE RATE OBLIGATIONS -- 6.5% (B) (E)
California Pollution Control Financing
Authority RB (Southern California
Edison Project) Series 1986A
3.55%, 03/01/99 1,400 1,400
Chula Vista, California IDRB (San Diego
Gas & Electric Co. Project) Series 1997A
3.15%, 03/01/99 600 600
Irvine Ranch, California Water District
Consolidated RB (Districts 105, 140, 240
& 250) Series 1995
3.10%, 03/01/99 2,000 2,000
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds
Series 1993A
3.00%, 03/01/99 1,190 1,190
Orange County, California Sanitation
District COP (Districts 1, 2, 3, 5,
6, 7, 11, 13 & 14) Series 1990-1992A
3.10%, 03/01/99 2,300 2,300
-----
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $7,490) 7,490
-----
25
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 28, 1999 (Unaudited)
Shares Value
--------- ---------
TEMPORARY INVESTMENTS -- 0.0% (c)
Provident Institutional Funds -
California Money Fund Portfolio
2.25% 58 $ 58
--------
TOTAL TEMPORARY INVESTMENTS
(Cost $58) 58
--------
Total Investments -- 99.9%
(Cost $112,938) 114,916
--------
OTHER ASSETS AND LIABILITIES-- 0.1%
Other assets 1,699
Liabilities (1,628)
--------
71
--------
TOTAL Net Assets-- 100.0% $114,987
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
26
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1999 (Unaudited)
Par Value
------ ------
MUNICIPAL BONDS -- 99.0% (a)
CALIFORNIA -- 98.5%
Alameda County, California COP (Medical
Center Project) Series 1998 (e)
5.38%, 06/01/18 $3,400 $3,527
Alta Loma, California Elementary School
District GO Series 2 (e)
5.88%, 06/01/08 840 924
5.88%, 06/01/09 860 940
Antioch Area, California Public Facilities
Financing Agency (Special Tax
Community) Series 1989-1 (e)
5.25%, 08/01/07 1,985 2,099
Association of Bay Area Government,
California RB (California Redevelopment
Agency Pool) Series 1997A-6 (e)
5.25%, 12/15/17 1,200 1,237
Beverly Hills, California Public Financing
Authority Lease Revenue Refunding
Bonds Series 1999A (e)
5.13%, 06/01/20 4,735 4,776
Burbank, California Public Service
Department Electric Revenue Refunding
Bonds (e)
4.75%, 06/01/23 2,000 1,925
California Educational Facilities Authority
RB (Loyola Marymount University)
Series 1992B
6.60%, 10/01/22 1,450 1,626
California Educational Facilities Authority
RB (University of Southern California)
Series C
5.13%, 10/01/28 2,000 2,010
California Educational Facilities Authority
Revenue Refunding Bonds (St. Mary's
College of California) Series 1993
5.00%, 10/01/12 3,000 3,064
California Educational Facilities Financing
Authority Revenue Refunding Bonds
(Stanford University Project) Series 1997M
5.25%, 12/01/26 2,320 2,372
California Health Facilities Financing
Authority Insured Health Facility RB
(Association of Retarded Citizens)
Series 1991 (e)
7.00%, 05/01/21 455 490
Par Value
------ ------
California Health Facilities Financing
Authority Insured Hospital RB
(Marshall Hospital) Series 1992A (e)
6.63%, 11/01/22 $4,000 $4,490
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 5,368
5.38%, 07/01/20 3,400 3,476
California Health Facilities Financing
Authority RB (Kaiser Permanente
Hospital) Series 1998A (e)
5.00%, 06/01/24 2,500 2,469
California Health Facilities Financing
Authority RB (Kaiser Permanente
Hospital) Series 1998B
5.00%, 10/01/18 5,000 4,894
California Health Facilities Financing
Authority RB (Stanford Health Care)
Series 1998B (e)
5.00%, 11/15/28 1,000 991
California Health Facilities Financing
Authority RB (Sutter Health)
Series 1999A (e)
5.00%, 08/15/19 1,000 994
California HFA Home Mortgage RB
Series 1994G
7.20%, 08/01/14 3,000 3,247
California HFA Home Mortgage RB
Series 1995L (e)
5.90%, 08/01/17 1,000 1,047
California HFA M/F Rental Housing RB
Series 1992B
6.70%, 08/01/15 1,000 1,069
California State Department of Water
Resources RB (Central Valley Project)
Series 1997S
5.00%, 12/01/22 1,200 1,194
California State Department of Water
Resources RB (Central Valley Project)
Series 1998U
5.13%, 12/01/15 1,000 1,030
California State GO
5.00%, 10/01/23 2,000 1,985
California State GO Refunding Bonds
Series 1998
5.00%, 02/01/16 2,000 2,017
27
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 28, 1999 (Unaudited)
Par Value
------ ------
California State Public Works Board Lease
Revenue Refunding Bonds (Various
California State University Projects)
Series 1992A (e)
5.50%, 06/01/10 $3,000 $3,322
5.38%, 10/01/17 200 207
California State Rural Water Finance
Authority Public Projects Construction RB
Series 1998
4.25%, 03/01/00 5,500 5,575
California Statewide Communities
Development Authority COP (St. Joseph
Health Systems Obligated Group)
6.50%, 07/01/15 2,000 2,302
California Statewide Communities
Development Authority Hospital RB COP
(Cedars-Sinai Medical Center)
Series 1992
6.50%, 08/01/15 1,250 1,336
Chico, California Unified School
District GO Series 1998 (e)
5.00%, 08/01/16 1,155 1,167
Chico, California Unified School
District Series C (e)
6.75%, 06/01/17 500 559
Colton, California Public Financing
Authority Special Tax RB Series 1996 (e)
5.45%, 09/01/19 3,020 3,133
Colton, California Public Financing Tax
Allocation RB (e)
5.00%, 08/01/18 2,715 2,718
Contra Costa County, California Refunding
COP (Merrithew Memorial Hospital
Project) Series 1997 (e)
5.38%, 11/01/17 2,180 2,259
East Bay, California Municipal Utility
District Water System RB Series 1998
5.25%, 06/01/18 1,895 1,947
5.25%, 06/01/19 2,600 2,665
East Bay, California Municipal Utility
District Water System Revenue
Refunding Bonds Series 1996 (e)
5.00%, 06/01/26 4,800 4,758
Encina, California Financing Joint Powers
Authority Wastewater Revenue
Refunding Bonds Series 1997A (e)
5.13%, 08/01/14 3,160 3,267
Par Value
------ ------
Fresno, California Health Facility RB
(Holy Cross Health System - St. Agnes
Medical Center) Series 1991
6.50%, 06/01/02 $ 550 $ 610
Imperial Valley, California Irrigation
District Electric System Revenue
Refunding Bonds (e)
5.00%, 11/01/18 5,000 5,006
Inglewood, California Redevelopment
Agency Tax Allocation Bond (Merged
Redevelopment Project) Series 1998A (e)
5.25%, 05/01/16 1,000 1,056
Lake Elsinore, California Unified School
District COP (e)
4.75%, 02/01/20 1,200 1,162
Los Angeles, California Department of
Airports RB Series 1995A (e)
5.50%, 05/15/10 560 605
Los Angeles, California Department of
Water & Power Electric Plant RB
6.00%, 01/15/11 865 942
Los Angeles, California Unified School
District Series 1998B (e)
4.30%, 07/01/07 1,750 1,781
Los Angeles County, California Public
Works Financing Authority Lease RB
(Multiple Capital Facilities Project V-B) (e)
5.20%, 12/01/09 1,680 1,810
Los Angeles County, California Public
Works Financing Authority Lease
Revenue Multiple COP (Facilities
Project V) Series 1996A (e)
5.13%, 06/01/17 2,000 2,032
Los Angeles County, California Public
Works Financing Authority Lease
Revenue Multiple COP (Facilities Project)
Series 1997A (e)
5.25%, 09/01/15 1,070 1,110
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 1,039
Los Angeles County, California Public
Works Financing Authority Lease
Revenue Refunding Bond Series 1996A (e)
5.25%, 09/01/13 2,000 2,103
28
<PAGE>
Par Value
------ ------
Los Angeles County, California
Transportation Commission Sales Tax
Revenue Refunding Bonds Series 1991B
6.50%, 07/01/13 $ 555 $ 599
Metropolitan Water District of Southern
California Waterworks RB Series 1997A
5.00%, 07/01/26 2,500 2,478
Modesto, California Public Financing
Authority Lease RB (Capital Imports &
Refunding Project) (e)
5.13%, 09/01/20 6,740 6,799
Northern California Power Agency Multiple
Capital Facilities RB Series A (e)
6.50%, 08/01/02 1,425 1,587
6.50%, 08/01/12 1,875 2,070
Northern California Power Agency Public
Power Revenue Refunding Bonds
(Geothermal Project No. 3) Series A (e)
5.00%, 07/01/04 1,845 1,956
Oakland, California State Building
Authority Lease RB (Elihu M. Harris)
Series A (e)
5.00%, 04/01/23 2,000 1,985
Oceanside, California Building Authority
COP Refunding Bonds Series 1993A
6.38%, 04/01/12 1,250 1,370
Orange County, California Community
Facilities District Special Tax RB
(Number 87-4) Series A (e)
5.25%, 08/15/19 2,000 2,048
Orange County, California Water District
COP (1989 Project)
6.50%, 08/15/11 1,150 1,191
Riverside County, California Asset Leasing
Corp. RB (Riverside County Hospital
Project) Series B (e)
5.00%, 06/01/19 1,000 1,000
Riverside County, California Public
Financing Authority Tax Allocation
Bonds (Redevelopment Project A)
5.63%, 10/01/33 4,905 4,985
Sacramento, California Cogeneration
Authority RB (Cogeneration Project)
5.20%, 07/01/21 1,000 1,006
Sacramento, California Regional Transit
District COP Series 1992A (e)
6.38%, 03/01/05 250 273
Par Value
------ ------
Sacramento, California Regional Transit
District Refunding COP (Light Rail
Transportation Project)
6.75%, 07/01/07 $2,000 $2,163
Saddleback Valley, California Unified
School District Public Financing
Authority Special Tax RB Series 1998A (e)
4.75%, 09/01/20 3,215 3,115
Salida, California Area Public Facilities
Financing Agency District Special Tax
Series 1988-1 (e)
5.25%, 09/01/28 3,000 3,060
Salinas, California COP Series 1999A (d) (e)
5.00%, 09/01/20 4,400 4,389
San Bernardino County, California COP
(West Valley Detention Center) (e)
6.50%, 11/01/12 420 466
San Bernardino County, California
Transportation Authority Tax Revenue
Series A (e)
6.25%, 03/01/10 4,000 4,680
San Diego, California Public Facilities
Financing Authority Sewer RB (e)
5.25%, 05/15/22 2,200 2,244
5.00%, 05/15/25 4,045 4,010
San Diego, California Redevelopment
Agency Tax Allocation Bond (Centre
City Project) Series 1999C (e)
4.75%, 09/01/24 1,000 961
San Diego County, California Water
Authority COP RB Series 1997A
4.75%, 05/01/20 3,000 2,906
San Francisco, California Bay Area Rapid
Transit District Sales Tax RB Series 1995 (e)
5.50%, 07/01/15 1,500 1,584
San Francisco, California City & County
Airports RB 2nd Series, Issue 11 (e)
6.20%, 05/01/19 2,000 2,203
5.63%, 05/01/21 2,000 2,113
San Francisco, California Downtown
Parking Corp. RB
6.65%, 04/01/18 500 551
San Francisco, California Port Commission
Revenue Refunding Bonds Series 1994
5.50%, 07/01/04 1,000 1,076
29
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 28, 1999 (Unaudited)
Par Value
------ ------
San Francisco, California Unified School
District COP (e)
4.75%, 08/01/24 $3,045 $2,916
San Mateo County, California Power
Authority Lease RB (Capital Projects)
Series 1999A (e)
4.75%, 07/15/23 1,000 963
Santa Clara, California Redevelopment
Agency Tax Allocation Revenue
Refunding Bonds (Bayshore North
Project) (e)
7.00%, 07/01/10 1,500 1,832
Santa Clara County, California Financing
Authority Lease RB (VMC Facility
Replacement Project) Series 1994A (e)
7.75%, 11/15/10 1,460 1,913
6.88%, 11/15/14 2,000 2,355
Santa Clara County, California Financing
Authority Lease Revenue Refunding
Bonds Series A (e)
5.00%, 11/15/17 3,500 3,522
Southern California Metropolitan Water
District 1966 Election Series 1998H
5.00%, 03/01/06 610 650
Southern California Metropolitan Water
District Series 1998A
5.00%, 03/01/06 740 788
South Gate, California Public Financing
Authority Tax Allocation Revenue
Housing Bond (Redevelopment Authority
Project No. 1) Series A (e)
5.00%, 09/01/19 1,415 1,415
Stockton, California Revenue COP
(Wastewater Systems Project) Series A (e)
5.20%, 09/01/29 3,500 3,526
Temecula, California Community
Services District COP (Community
Recreation Center Project) Series 1992
7.13%, 10/01/12 1,000 1,111
Tri City, California Hospital District RB
Series 1996A (e)
5.63%, 02/15/17 1,000 1,069
University of California RB (University of
California Hospital Medical Center
Project) (e)
5.75%, 07/01/24 2,000 2,150
Par Value
-------- --------
Vallejo, California Revenue Refunding
Bonds Water Import Series A (e)
5.70%, 05/01/16 $2,000 $ 2,178
West Basin County, California Municipal
Water District COP Revenue Refunding
Bonds Series 1997A (e)
5.50%, 08/01/17 500 532
5.50%, 08/01/22 1,000 1,051
Westminster, California Public Financing
Authority COP (1994 Civic Center &
Street Improvement Project)
7.00%, 06/01/19 3,325 3,815
--------
210,386
--------
PUERTO RICO -- 0.5% (E)
Puerto Rico Commonwealth Infrastructure
Financing Authority RB Series 1998A
5.25%, 07/01/10 1,000 1,082
--------
TOTAL MUNICIPAL BONDS
(Cost $200,622) 211,468
--------
VARIABLE RATE OBLIGATIONS -- 4.6% (b) (e)
California Economic Development
Financing Authority (California
Independent System Operator) Series B
3.50%, 03/01/99 1,600 1,600
California Health Facilities Financing
Authority RB (Adventist Health)
Series 1998A
3.10%, 03/01/99 1,300 1,300
California Pollution Control Financing
Authority RB (Shell Oil Company Project)
3.00%, 03/01/99 1,100 1,100
California Pollution Control Financing
Authority Solid Waste Disposal RB
(Shell Martinez Refining) Series A
3.00%, 03/01/99 600 600
California State Economic Development
Financing Authority IDRB
(Serra Microchassis Project)
3.15%, 03/01/99 800 800
Irvine Ranch, California Improvement
Bond Act 1915 RB (District Number
1997-16)
3.10%, 03/01/99 1,700 1,700
30
<PAGE>
Par Value
-------- --------
Irvine Ranch, California Water District RB
Series 1993A
3.00%, 03/01/99 $ 200 $ 200
Orange County, California Sanitation
District COP (Districts 1, 2, 3, 5, 6,
7, 11, 13 & 14)
3.10%, 03/01/99 2,600 2,600
--------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $9,900) 9,900
--------
Shares
-------
TEMPORARY INVESTMENTS -- 0.1% (c)
Provident Institutional Funds -
California Money Fund Portfolio
4.51% 60 60
--------
TOTAL TEMPORARY INVESTMENTS
(Cost $60) 60
--------
TOTAL INVESTMENTS -- 103.7%
(Cost $210,582) 221,428
--------
OTHER ASSETS AND LIABILITIES-- (3.7%)
Other assets 4,618
Liabilities (12,452)
--------
(7,834)
--------
TOTAL NET ASSETS-- 100.0% $213,594
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
31
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
For the six months ended February 28, 1999 (Unaudited)
(a) Interest rates represent coupon rate of security.
(b) Variable rate obligations -- Interest rates vary periodically based on
current market rates. Rates shown are the effective rates as of the report
date. Dates shown represent the later of the demand date or next interest
rate change date. For variable rate obligations without demand features, the
next interest reset date is shown. All dates shown are considered the
maturity date for financial reporting purposes.
(c) Interest rates represent the yield on report date.
(d) Security traded on a delayed-delivery basis. Payment and delivery is
scheduled for a future time, generally within two weeks of entering into the
transaction. The transaction is subject to market fluctuation and to the
risk that the value may be more or less than the purchase price when the
transaction was initiated. The Fund has set aside sufficient investment
securities as collateral for securities purchased on a delayed-delivery
basis.
(e) Security has one or more third party credit enhancements.
PORTFOLIO ABBREVIATIONS
COP Certificates of Participation
GO General Obligation
HFA Housing Finance Agency
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)
February 28, 1999 (Unaudited)
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ----------
ASSETS
Investments, at value
(Cost: $112,938, $210,582, respectively) $114,916 $221,428
Receivables:
Interest 1,531 2,968
Investments sold -- 1,401
Fund shares sold 167 244
Prepaid expenses 1 5
-------- --------
Total assets 116,615 226,046
-------- --------
LIABILITIES
Payables:
Dividends 39 87
Investments purchased 1,403 12,135
Fund shares redeemed 116 142
Investment advisory and administration fees 26 42
Transfer agency and shareholder service fees 5 9
Other liabilities 39 37
-------- --------
Total liabilities 1,628 12,452
-------- --------
Net assets applicable to outstanding shares $114,987 $213,594
======== ========
NET ASSETS CONSIST OF:
Paid-in-capital $113,799 $203,114
Distributions in excess of net
investment income (16) (39)
Accumulated net realized loss on
investments sold (774) (327)
Net unrealized appreciation on investments 1,978 10,846
-------- --------
$114,987 $213,594
======== ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 11,157 18,465
Net asset value, offering and
redemption price per share $10.31 $11.57
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 28, 1999 (Unaudited)
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ----------
Interest income $2,260 $4,971
------ ------
Expenses:
Investment advisory and administration fees 215 403
Transfer agency and shareholder service fees 131 246
Custodian and portfolio accounting fees 35 48
Registration fees 4 5
Professional fees 6 6
Shareholder reports 13 18
Trustees' fees 3 5
Insurance and other expenses 11 10
------ ------
418 741
Less: expenses reduced (see Note 4) (161) (260)
------ ------
Total expenses incurred by Fund 257 481
------ ------
Net investment income 2,003 4,490
------ ------
Net realized gain on investments sold 14 227
Net unrealized appreciation on investments 376 413
------ ------
Net gain on investments 390 640
------ ------
Increase in net assets resulting from operations $2,393 $5,130
====== ======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
--------------------------- ----------------------------
Six months Year Six months Year
ended ended ended ended
February 28, 1999 August 31, February 28, 1999 August 31,
(Unaudited) 1998 (Unaudited) 1998
---------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,003 $ 2,864 $ 4,490 $ 7,231
Net realized gain on investments sold 14 9 227 695
Net unrealized appreciation on investments 376 856 413 4,874
--------- --------- --------- ---------
Increase in net assets resulting from operations 2,393 3,729 5,130 12,800
--------- --------- --------- ---------
Dividends to shareholders from net investment income (1,994) (2,906) (4,468) (7,338)
--------- --------- --------- ---------
Capital share transactions:
Proceeds from shares sold 44,013 60,105 51,043 83,165
Net asset value of shares issued in reinvestment of dividends 1,575 2,209 2,983 4,672
Less payments for shares redeemed (26,894) (26,119) (31,291) (28,386)
--------- --------- --------- ---------
Increase in net assets from capital share transactions 18,694 36,195 22,735 59,451
--------- --------- --------- ---------
Total increase in net assets 19,093 37,018 23,397 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 ($16), ($25), ($39) and ($61),
respectively) $ 114,987 $ 95,894 $ 213,594 $ 190,197
========= ========= ========= =========
Number of Fund shares:
Sold 4,269 5,893 4,397 7,311
Reinvested 153 217 257 411
Redeemed (2,610) (2,562) (2,699) (2,503)
--------- --------- --------- ---------
Net increase in shares outstanding 1,812 3,548 1,955 5,219
Shares outstanding:
Beginning of period 9,345 5,797 16,510 11,291
--------- --------- --------- ---------
End of period 11,157 9,345 18,465 16,510
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab California Short/Intermediate Tax-Free Bond Fund
---------------------------------------------------------------------------
1999 1 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
Net asset value at beginning of period $ 10.26 $ 10.16 $ 10.04 $ 10.06 $ 9.89 $ 10.13
-------- ------- ------- ------- ------ -------
From investment operations:
Net investment income 0.19 0.41 0.43 0.43 0.42 0.37
Net realized and unrealized gain (loss)
on investments 0.05 0.11 0.12 (0.02) 0.17 (0.24)
-------- ------- ------- ------- ------ -------
Total from investment operations 0.24 0.52 0.55 0.41 0.59 0.13
Less distributions:
Dividends from net investment income (0.19) (0.42) (0.43) (0.43) (0.42) (0.37)
-------- ------- ------- ------- ------ -------
Total distributions (0.19) (0.42) (0.43) (0.43) (0.42) (0.37)
-------- ------- ------- ------- ------ -------
NET ASSET VALUE AT END OF PERIOD $ 10.31 $ 10.26 $ 10.16 $ 10.04 $10.06 $ 9.89
======== ======= ======= ======= ====== =======
Total return (%) 2.39** 5.19 5.54 4.11 6.17 1.29
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------
Ratio of net operating expenses to average
net assets 0.49* 0.49 0.49 0.49 0.50 0.48
Reductions reflected in above expense ratio 0.31* 0.30 0.40 0.38 0.34 0.38
Ratio of net investment income to average
net assets 3.82* 4.02 4.21 4.23 4.29 3.69
Portfolio turnover rate 4 8 23 20 62 35
Net assets, end of period (000s) $114,987 $95,894 $58,876 $45,788 $40,639 $48,649
<FN>
1 For the six months ended February 28, 1999 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab California Long-Term Tax-Free Bond Fund
-----------------------------------------------------------------------
1999 1 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
Net asset value at beginning of period $ 11.52 $ 11.10 $ 10.63 $ 10.53 $ 10.40 $ 11.26
-------- -------- -------- -------- -------- --------
From investment operations:
Net investment income 0.26 0.54 0.56 0.57 0.56 0.56
Net realized andunrealized gain (loss)
on investments 0.05 0.43 0.47 0.10 0.13 (0.74)
-------- -------- -------- -------- -------- --------
Total from investment operations 0.31 0.97 1.03 0.67 0.69 (0.18)
Less distributions:
Dividends from net investment income (0.26) (0.55) (0.56) (0.57) (0.56) (0.56)
Distributions from net realized gain on investments -- -- -- -- -- (0.12)
-------- -------- -------- -------- ------- --------
Total distributions (0.26) (0.55) (0.56) (0.57) (0.56) (0.68)
-------- -------- -------- -------- ------- --------
NET ASSET VALUE AT END OF PERIOD $ 11.57 $ 11.52 $ 11.10 $ 10.63 $ 10.53 $ 10.40
======== ======== ======== ======== ======= ========
Total return (%) 2.71** 8.96 9.95 6.43 6.98 (1.70)
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------
Ratio of net operating expenses to average net assets 0.49* 0.49 0.49 0.49 0.58 0.60
Reductions reflected in above expense ratio 0.26* 0.27 0.33 0.33 0.23 0.20
Ratio of net investment income to average net assets 4.57* 4.79 5.17 5.30 5.54 5.12
Portfolio turnover rate 6 28 35 36 46 48
Net assets, end of period (000s) $213,594 $190,197 $125,284 $101,616 $90,045 $106,432
<FN>
1 For the six months ended February 28, 1999 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 28, 1999 (Unaudited)
(All dollar amounts are in thousands unless otherwise noted)
1. DESCRIPTION OF THE FUNDS
The Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund (the "Funds") are series of Schwab
Investments (the "Trust"), a no-load, open-end investment management company
organized as a Massachusetts business trust on October 26, 1990 and registered
under the Investment Company Act of 1940 (the "Act"), as amended.
In addition to the Funds, the Trust also offers the Schwab 1000
Fund(REGISTRATION MARK), Schwab Short-Term Bond Market Index Fund, Schwab Total
Bond Market Index Fund, Schwab Short/Intermediate Tax-Free Bond Fund and Schwab
Long-Term Tax-Free Bond Fund. The assets of each series are segregated and
accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles. 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 issued 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 net realized
capital gains, if any, to shareholders. Therefore, no federal income tax
provision is required. Each Fund is considered a separate entity for tax
purposes.
38
<PAGE>
Net unrealized appreciation (depreciation) at February 28, 1999, (for financial
reporting and federal income tax purposes) was as follows:
Net unrealized Appreciated Depreciated
appreciation securities securities
------------ ---------- ----------
Schwab California Short/
Intermediate Tax-Free Bond Fund $ 1,978 $ 2,002 $(24)
Schwab California Long-Term
Tax-Free Bond Fund $10,846 $10,936 $(90)
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1998, the unused capital loss
carryforwards for federal income tax purposes, were as follows:
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
Expiring in:
08/31/03 $ 92 --
08/31/04 696 $593
---- ----
Total capital loss carryforwards $788 $593
==== ====
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Adviser"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. The Investment Adviser has reduced a portion of its
fee for the six months ended February 28, 1999 (see Note 4).
TRANSFER AGENCY AND SHAREHOLDER SERVICE AGREEMENTS -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
OFFICERS AND TRUSTEES -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Adviser and/or Schwab. During the
six months ended February 28, 1999, the Trust made no direct payments to its
officers or trustees who are "interested persons" within the meaning of the act,
as amended. The Funds incurred fees aggregating $8 related to the Trust's
unaffiliated trustees.
INTERFUND TRANSACTIONS -- During the six months ended February 28, 1999, the
Funds engaged in purchase and sale transactions with funds that have a common
investment adviser, common trustees, and common officers. These transactions,
made at current market value pursuant to Rule 17a-7 under the Act, aggregated
$29,790 and $30,100 for the Schwab California Short/Intermediate Tax-Free Bond
Fund and Schwab California Long-Term Tax-Free Bond Fund, respectively.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
4. EXPENSES REDUCED BY THE INVESTMENT ADVISER AND SCHWAB
The Investment Adviser and Schwab guarantee that, through at least October 31,
1999, each Fund's total operating expenses will not exceed 0.49% of the Fund's
average daily net assets after reductions. For the purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses and
taxes.
During the six months ended February 28, 1999, the total of such fees reduced by
the Investment Adviser was $161 for the Schwab California Short/Intermediate
Tax-Free Bond Fund, and $260 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 six months ended February 28, 1999, were as follows:
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
Purchases $22,813 $45,984
Proceeds of sales and maturities $ 3,799 $10,747
40
<PAGE>
THE SCHWAB FUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money market
funds.
Please call 800-435-4000 for a free prospectus and brochure for any of these
SchwabFunds.
This report must be preceded or accompanied by a current prospectus.
METHODS FOR PLACING ORDERS
The information below outlines how Schwab brokerage account investors can place
orders. If you are investing through a third-party investment provider, methods
for placing orders may be different.
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
MAIL
Write to SchwabFunds-Registered Trademark- at:
P.O. Box 7575, San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signatures of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab office.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab MarketManager Growth Portfolio
Schwab MarketManager Balanced Portfolio
SCHWAB STOCK FUNDS
Schwab S&P 500 Fund
Schwab 1000 Fund-Registered Trademark-
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager Small Cap Portfolio
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio
SCHWAB BOND FUNDS
Schwab Total Bond Market Index Fund
Schwab Short-Term Bond Market Index Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate
Tax-Free Bond Fund
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds(1) that seek high current income
consistent with safety and liquidity. Choose from taxable or tax-advantaged
alternatives. Many can be linked to your Schwab account to "sweep" cash balances
automatically when you're between investments. Or, for your larger cash
reserves, choose one of our Value Advantage Investments.-Registered Trademark-
(1) Investments in money market funds are neither insured nor guaranteed by the
Federal Deposit Insurance Corporation (FDIC) or any other government agency
and, although they seek to preserve the value of your investment at $1 per
share, it is possible to lose money.
<PAGE>
SCHWAB FUNDS [LOGO]
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc.
P.O. Box 7575
San Francisco, CA 94120-7575
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
-C- 1999 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. (0099-1495) MKT3481-1 (4/99)
