<PAGE>
SCHWABFUNDS-Registered Trademark-
SCHWAB
CALIFORNIA
TAX-FREE
BOND FUNDS
SEMIANNUAL REPORT
AND
AN IMPORTANT NOTICE REGARDING
DELIVERY OF SHAREHOLDER
DOCUMENTS
Semiannual Report
February 29, 2000
<PAGE>
IMPORTANT NOTICE REGARDING DELIVERY OF SHAREHOLDER DOCUMENTS
The Securities and Exchange Commission has adopted a rule permitting mutual
funds to deliver only one copy of shareholder documents, including prospectuses
and shareholder reports to fund investors with multiple accounts at the same
residential or post office box address. This practice is commonly called
"householding" and is intended to eliminate duplicate mailings of shareholder
documents.
As permitted by the rule, Schwab may begin indefinitely householding
prospectuses and shareholder reports for SchwabFunds.-Registered Trademark-
ADDITIONAL COPIES OF SHAREHOLDER DOCUMENTS
ALL SCHWABFUNDS PROSPECTUSES AND SHAREHOLDER REPORTS ARE AVAILABLE FREE OF
CHARGE, AND MAY BE REQUESTED AT ANY TIME BY CALLING SCHWAB AS INDICATED BELOW.
SCHWABFUNDS PROSPECTUSES ARE ALSO AVAILABLE ON OUR WEB SITE AT WWW.SCHWAB.COM.
If you would otherwise fall under our householding policy, but for any reason
prefer to receive multiple SchwabFunds prospectuses and shareholder reports,
please contact:
- - SCHWAB SIGNATURE SERVICES-TM- CLIENTS: Schwab Signature Services.
- - INVESTMENT MANAGER CLIENTS: Schwab at 800-515-2157, or your investment
manager.
- - ALL OTHER CLIENTS: Schwab at 800-435-4000.
Your instructions that householding not apply to your accounts holding
SchwabFunds will be effective within 30 days of receipt by Schwab.
<PAGE>
SCHWABFUNDS-Registered Trademark-
SCHWAB
CALIFORNIA
TAX-FREE
BOND FUNDS
Semiannual Report
February 29, 2000
<PAGE>
SCHWAB CALIFORNIA TAX-FREE BOND FUNDS
We're pleased to bring you this semiannual report for the following funds (the
funds) for the six-month period ended February 29, 2000:
- Schwab California Short/Intermediate
Tax-Free Bond Fund
- Schwab California Long-Term Tax-Free
Bond Fund
During the reporting period, the funds continued to attempt to provide a high
level of current income exempt from federal and state of California personal
income taxes, consistent with the preservation of capital. In addition to
performance and portfolio information, this report contains information
regarding dividends paid by the funds during each fiscal year (or reporting
period) since their inceptions.
The SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in
debt securities issued by or on behalf of the state of California and its
political subdivisions, agencies and instrumentalities. Under normal market
conditions, the fund seeks to maintain a dollar-weighted average maturity of
between two and five years for the portfolio.
The SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND invests primarily in debt
securities issued by or on behalf of the state of California and its political
subdivisions, agencies and instrumentalities. Under normal market conditions,
the fund seeks to maintain a dollar-weighted average maturity of 10 years or
longer for the portfolio.
Income from the funds may be subject to the federal alternative minimum tax
(AMT).
CONTENTS
<TABLE>
<S> <C>
- ---------------------------------------------
A Message from the Chairman 1
- ---------------------------------------------
What Every Bond Fund Investor Should
Know 2
- ---------------------------------------------
Market Overview 4
- ---------------------------------------------
Schwab California Short/Intermediate
Tax-Free Bond Fund
FUND PERFORMANCE 8
PORTFOLIO SNAPSHOT 10
- ---------------------------------------------
Schwab California Long-Term Tax-Free
Bond Fund
FUND PERFORMANCE 12
PORTFOLIO SNAPSHOT 14
- ---------------------------------------------
Dividends Paid 16
- ---------------------------------------------
The Portfolio Management Team 17
- ---------------------------------------------
Fund Discussion 18
- ---------------------------------------------
Glossary 21
- ---------------------------------------------
Financial Statements and Notes 24
- ---------------------------------------------
</TABLE>
<PAGE>
A MESSAGE FROM THE CHAIRMAN
[PHOTO]
Dear Shareholder,
As we begin a new year, I'd like to take this opportunity to reflect on last
year's milestones at Charles Schwab Investment Management, Inc. (CSIM), the
investment adviser for the SchwabFunds-Registered Trademark- Family.
First of all, SchwabFunds-Registered Trademark- assets topped the $100 billion
mark in September. SchwabFunds continues to be among the largest and fastest
growing fund families in the nation, with the support of investors like you.
Secondly, we added two new products to our SchwabFunds offering in 1999:
- - SCHWAB TOTAL STOCK MARKET INDEX FUND-TM- seeks to track the total return of
the entire U.S. stock market, as measured by the Wilshire 5000 Total Market
Index, the broadest measure of U.S. stock market performance. In one single,
low-cost investment, fund investors can benefit from exposure to U.S companies
of all types and sizes.
- - SCHWAB YIELDPLUS FUND-TM- seeks high current income with minimal changes in
share price. It is designed to provide the potential for higher yields than a
money fund and lower risk than a longer-term bond fund through a management
strategy designed to minimize price fluctuation. Intended for your long-term
(over one-year) cash needs, the fund seeks to increase the overall yield
potential of the cash portion of your portfolio.
For more information on either of these funds, please call 800-435-4000 and
request a free prospectus. The prospectus contains more information on fund fees
and expenses. Please read it carefully before investing.
I encourage you to take a moment to read this semiannual report as it is
designed to provide timely information about your SchwabFunds investments. You
will find information on each fund's total returns and performance, as well as
commentary on market conditions provided by the portfolio management team. In
the section "What Every Bond Fund Investor Should Know", we've also provided
guidelines that can help you reach your goals by establishing--or
maintaining--an ongoing investment program.
As a leader in online brokerage, we recognize the value of the web as a means of
communicating timely, relevant information to investors. Regular updates on all
of the SchwabFunds, including performance data, are available on our Web site at
WWW.SCHWAB.COM/SCHWABFUNDS. We encourage you to take advantage of this valuable
resource which can help you keep track of your funds' performance.
I'd like to make all of you aware that March 3, 2000 was designated as the
record date for a proxy and shareholders' meeting for the entire SchwabFunds
complex. Every SchwabFund has at least one proposal up for a vote. No matter how
many shares you own, your vote is important. Your prompt response will help
reduce proxy costs -- which are paid by the funds and their shareholders. Voting
by internet or phone lowers proxy costs even further. If you have questions
about the proxy, would like help in voting, or if you did not receive the proxy
materials, please call the funds' proxy solicitor, D.F. King & Co., at
800-431-9633.
At Schwab our philosophy has always been that a combination of regular investing
and diversification is the best strategy over the long term. By investing in
SchwabFunds, you've already taken an important step in building a portfolio that
can help you meet your future goals. Thank you for your investment in
SchwabFunds.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
February 29, 2000
1
<PAGE>
WHAT EVERY BOND FUND INVESTOR SHOULD KNOW
WHY ASSET ALLOCATION MATTERS
As most investors know, one of the most compelling reasons to invest in a mutual
fund is diversification. By allocating your assets across many different
securities, a mutual fund helps reduce the risk that you might otherwise
encounter by owning just a few individual stocks or bonds.
Don't forget, however, that diversification across your portfolio is just as
important as diversification within the mutual funds you own. As you probably
know, stocks historically have offered higher long-term returns than other asset
classes, such as bonds or cash, but those returns have come at the price of
higher volatility. To help mitigate some of that risk, many investors often
include at least some bonds and cash in their portfolios.
THE ROLE OF BONDS IN A BALANCED PORTFOLIO
Maintaining the right mix of asset classes--stocks, bonds and cash--in your
portfolio is a smart strategy for every investor. In fact, asset allocation is
one of the most important factors in determining overall portfolio performance.
Over time, a portfolio composed of stocks and bonds can provide competitive
returns compared with an all-stock portfolio, but with less risk for you. And
over the long term, bond funds typically pay a higher return than even the
highest-yielding cash reserves, although with increased risk. Of course, past
performance is no guarantee of future results.
WHY BOND FUNDS?
Investing in bond funds can provide several advantages over investing in
individual bonds:
DIVERSIFICATION: Bond funds can invest across a broad segment of the bond market
and can provide automatic diversification within one asset class.
PROFESSIONAL MANAGEMENT: Bond funds are managed by investment professionals who
know and understand the intricacies of the bond market and its operations.
SIMPLICITY: Bond funds can be a good choice for investors who lack the time or
expertise to actively manage a bond portfolio.
LOW MINIMUM INITIAL INVESTMENT: At Schwab you can invest in a bond fund with
just $2,500.
CONVENIENCE: SchwabFunds-Registered Trademark- 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.
Bond index funds offer some of the same benefits as equity index funds,
including broad diversification, lower expenses, consistent investment style and
straightforward choices. In addition, certain bond index funds can also provide
the added benefit of high credit quality investments. Schwab's bond index funds
are designed to maintain high credit quality standards because the indices they
seek to track primarily comprise U.S. Treasuries, government agency securities
and government agency mortgage-backed securities; a substantial portion of the
bonds in the funds are investment-grade corporate bonds rated AAA through BBB,
the four highest credit ratings.
*The Schwab YieldPlus Fund has a redemption fee of 0.25% on shares sold within
90 days of purchase.
2
<PAGE>
TAX CONSIDERATIONS
If you're in a high tax bracket, investing in tax-free or municipal bond funds
may help take a bite out of your tax bill. And, if you live in a state with a
high personal state income tax or other personal tax, you may be better served
by choosing a double tax-free fund that provides income free from federal, state
and, in some cases, local income taxes.*
SCHWAB BOND FUNDS
Schwab offers a variety of bond funds, summarized below. When evaluating a bond
fund for potential investment, you should consider your attitude toward risk and
return, as well as your income tax bracket.
TAXABLE BOND FUNDS
SCHWAB YIELDPLUS FUND-TM- seeks high current income with minimal changes in
share price and its overall portfolio is managed to maintain an average
effective maturity of one year or less.
SCHWAB SHORT-TERM BOND MARKET INDEX FUND seeks to track the Lehman Brothers
Short Mutual Fund (1-5 Year) Government/Corporate Bond Index. This index
represents the performance of U.S. government, U.S. corporate bonds and dollar
denominated foreign issues that have average maturities between one and five
years.
SCHWAB TOTAL BOND MARKET INDEX FUND seeks to track the Lehman Brothers Aggregate
Bond Index. This index is a broad-based index covering investment-grade bonds
with maturities greater than one year.
TAX-FREE BOND FUNDS
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in municipal
bonds with dollar-weighted average maturities of two to five years. Its share
price will generally be less volatile than that of longer-term bond funds but
will generally provide lower returns.
SCHWAB LONG-TERM TAX-FREE BOND FUND invests primarily in municipal bonds with
dollar-weighted average maturities of 10 years or more. It is designed to
provide higher tax-free income than is usually available with shorter-term
funds; however, its net asset value may be more volatile than that of
shorter-term bond funds.
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in
California municipal bonds with dollar-weighted average maturities of two to
five years. Its share price will generally be less volatile than that of longer-
term bond funds but will generally provide lower returns.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
invests primarily in California municipal bonds with dollar-weighted average
maturities of 10 years or longer. It is designed to provide higher tax-free
income than is available with shorter-term funds; however, its net asset value
may be more volatile than that of shorter-term bond funds.
If you would like more information on any of these funds, please visit us at
WWW.SCHWAB.COM/SCHWABFUNDS or call us toll free at 800-435-4000 and request a
free prospectus, which contains more information, including fees and expenses.
Please be sure to read the prospectus before investing.
WE MAKE IT EASY TO INVEST
We try to make it easy and convenient for you to invest in
SchwabFunds-Registered Trademark-. Our automated methods allow you to invest or
transfer money to your Schwab account on a regular basis; you can invest through
our Web site at WWW.SCHWAB.COM/SCHWABFUNDS; through our automated touch-tone
telephone service, TeleBroker,-Registered Trademark- by calling 800-272-4922; or
you can also visit us in person at any of our nationwide branches.
KEEPING YOU INFORMED
One of our top priorities at Charles Schwab is to keep you informed about your
investments and potential opportunities in the marketplace. For a wealth of
information about our investment philosophy and funds, as well as about the
market and economic environment, visit our Web site:
WWW.SCHWAB.COM/SCHWABFUNDS.
*Some investors may be subject to the alternative minimum tax (AMT); consult
your tax advisor.
3
<PAGE>
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
February 2000 marked the 107th month of the current expansion, making it the
longest in U.S. history. Annualized GDP growth accelerated from 2.8% during the
first half of 1999 to 6.5% in the second half, averaging 4.2% for the year--the
fourth consecutive year at 4% or more. This rate is considered by most
economists and the Federal Reserve (Fed) to be in excess of what the economy can
absorb without experiencing inflationary pressures. High levels of consumer
spending and business capital investment, as well as rising real wages,
productivity, and strong gains in stock prices have been the principal factors
continuing this lengthy expansion.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GROSS DOMESTIC PRODUCT
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED RATE)
<S> <C>
Q1 1990 5.00%
Q2 1990 1.00%
Q3 1990 -0.60%
Q4 1990 -3.00%
Q1 1991 -1.70%
Q2 1991 2.60%
Q3 1991 1.30%
Q4 1991 2.50%
Q1 1992 4.30%
Q2 1992 4.00%
Q3 1992 3.10%
Q4 1992 5.20%
Q1 1993 -0.70%
Q2 1993 2.10%
Q3 1993 1.50%
Q4 1993 6.00%
Q1 1994 3.60%
Q2 1994 5.70%
Q3 1994 2.20%
Q4 1994 5.10%
Q1 1995 1.50%
Q2 1995 0.80%
Q3 1995 3.20%
Q4 1995 3.30%
Q1 1996 2.90%
Q2 1996 6.90%
Q3 1996 2.20%
Q4 1996 4.90%
Q1 1997 4.90%
Q2 1997 5.10%
Q3 1997 4.00%
Q4 1997 3.10%
Q1 1998 6.70%
Q2 1998 2.10%
Q3 1998 3.80%
Q4 1998 5.90%
Q1 1999 3.70%
Q2 1999 1.90%
Q3 1999 5.70%
Q4 1999 7.30%
Source: BLOOMBERG L.P.
</TABLE>
The Commerce Department, after revising the GDP benchmark data for the past four
decades, has reported stronger growth, higher personal savings and lower
inflation than was previously calculated for the 1990s.
Looking ahead, the availability of increasingly scarce labor resources and the
behavior of domestic consumers in response to continued stock market volatility
may be key determinants of whether the economy continues on its current course
or softens throughout 2000. The consensus of most economists is that the U.S.
economy appears poised for continued strong growth and additional intervention
by the Fed (increases in the federal funds rate) until the growth rate of the
economy slows to a more sustainable level.
UNEMPLOYMENT
The unemployment rate dropped to 4.0% in January, a 29-year low, before inching
back up to 4.1% in February. Labor markets continue to be extremely tight in
many areas of the country and there has been some regional evidence of labor
shortages driving up wages. Growth in the labor force has slowed, and the Fed
has expressed its concern that a continuation of strong demand and tight labor
markets may put pressure on manufacturers and service providers to raise prices.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
1/90 5.40%
2/90 5.30%
3/90 5.20%
4/90 5.40%
5/90 5.40%
6/90 5.20%
7/90 5.50%
8/90 5.70%
9/90 5.90%
10/90 5.90%
11/90 6.20%
12/90 6.30%
1/91 6.40%
2/91 6.60%
3/91 6.80%
4/91 6.70%
5/91 6.90%
6/91 6.90%
7/91 6.80%
8/91 6.90%
9/91 6.90%
10/91 7.00%
11/91 7.00%
12/91 7.30%
1/92 7.30%
2/92 7.40%
3/92 7.40%
4/92 7.40%
5/92 7.60%
6/92 7.80%
7/92 7.70%
8/92 7.60%
9/92 7.60%
10/92 7.30%
11/92 7.40%
12/92 7.40%
1/93 7.30%
2/93 7.10%
3/93 7.00%
4/93 7.10%
5/93 7.10%
6/93 7.00%
7/93 6.90%
8/93 6.80%
9/93 6.70%
10/93 6.80%
11/93 6.60%
12/93 6.50%
1/94 6.80%
2/94 6.60%
3/94 6.50%
4/94 6.40%
5/94 6.10%
6/94 6.10%
7/94 6.30%
8/94 6.00%
9/94 5.80%
10/94 5.80%
11/94 5.60%
12/94 5.50%
1/95 5.60%
2/95 5.40%
3/95 5.30%
4/95 5.80%
5/95 5.80%
6/95 5.60%
7/95 5.60%
8/95 5.70%
9/95 5.60%
10/95 5.50%
11/95 5.70%
12/95 5.60%
1/96 5.60%
2/96 5.50%
3/96 5.60%
4/96 5.50%
5/96 5.60%
6/96 5.30%
7/96 5.50%
8/96 5.10%
9/96 5.20%
10/96 5.20%
11/96 5.30%
12/96 5.40%
1/97 5.30%
2/97 5.30%
3/97 5.10%
4/97 5.00%
5/97 4.70%
6/97 5.00%
7/97 4.70%
8/97 4.90%
9/97 4.70%
10/97 4.70%
11/97 4.60%
12/97 4.70%
1/98 4.50%
2/98 4.60%
3/98 4.60%
4/98 4.30%
5/98 4.30%
6/98 4.50%
7/98 4.50%
8/98 4.50%
9/98 4.50%
10/98 4.50%
11/98 4.40%
12/98 4.30%
1/99 4.30%
2/99 4.40%
3/99 4.20%
4/99 4.30%
5/99 4.20%
6/99 4.30%
7/99 4.30%
8/99 4.20%
9/99 4.20%
10/99 4.10%
11/99 4.10%
12/99 4.10%
1/00 4.00%
2/00 4.10%
Source: BLOOMBERG L.P.
</TABLE>
4
<PAGE>
INFLATION
Price inflation continued to remain well contained, but trending upward. The CPI
rose 3.2% for the year ended February 29, 2000. Its core rate (which excludes
the more volatile food and energy components) rose just 2.1%. The Personal
Consumption Expenditures Index, a measure of inflation closely watched by the
Fed, rose 2.0% for the same period. The GDP price deflator, the broadest measure
of inflation, indicated prices rising at an annual rate of 1.4% for 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
QUARTERLY EMPLOYMENT MONTHLY CONSUMER
COST INDEX PRICE INDEX
<S> <C> <C>
1/90 5.5% 5.2%
2/90 5.5% 5.3%
3/90 5.5% 5.2%
4/90 5.4% 4.7%
5/90 5.4% 4.4%
6/90 5.4% 4.7%
7/90 5.2% 4.8%
8/90 5.2% 5.6%
9/90 5.2% 6.2%
10/90 4.9% 6.3%
11/90 4.9% 6.3%
12/90 4.9% 6.1%
1/91 4.6% 5.7%
2/91 4.6% 5.3%
3/91 4.6% 4.9%
4/91 4.6% 4.9%
5/91 4.6% 5.0%
6/91 4.6% 4.7%
7/91 4.3% 4.4%
8/91 4.3% 3.8%
9/91 4.3% 3.4%
10/91 4.3% 2.9%
11/91 4.3% 3.0%
12/91 4.3% 3.1%
1/92 4.0% 2.6%
2/92 4.0% 2.8%
3/92 4.0% 3.2%
4/92 3.6% 3.2%
5/92 3.6% 3.0%
6/92 3.6% 3.1%
7/92 3.5% 3.2%
8/92 3.5% 3.1%
9/92 3.5% 3.0%
10/92 3.5% 3.2%
11/92 3.5% 3.0%
12/92 3.5% 2.9%
1/93 3.5% 3.3%
2/93 3.5% 3.2%
3/93 3.5% 3.1%
4/93 3.6% 3.2%
5/93 3.6% 3.2%
6/93 3.6% 3.0%
7/93 3.6% 2.8%
8/93 3.6% 2.8%
9/93 3.6% 2.7%
10/93 3.5% 2.8%
11/93 3.5% 2.7%
12/93 3.5% 2.7%
1/94 3.2% 2.5%
2/94 3.2% 2.5%
3/94 3.2% 2.5%
4/94 3.2% 2.4%
5/94 3.2% 2.3%
6/94 3.2% 2.5%
7/94 3.2% 2.8%
8/94 3.2% 2.9%
9/94 3.2% 3.0%
10/94 3.0% 2.6%
11/94 3.0% 2.7%
12/94 3.0% 2.7%
1/95 2.9% 2.8%
2/95 2.9% 2.9%
3/95 2.9% 2.9%
4/95 2.9% 3.1%
5/95 2.9% 3.2%
6/95 2.9% 3.0%
7/95 2.7% 2.8%
8/95 2.7% 2.6%
9/95 2.7% 2.5%
10/95 2.7% 2.8%
11/95 2.7% 2.6%
12/95 2.7% 2.5%
1/96 2.8% 2.7%
2/96 2.8% 2.7%
3/96 2.8% 2.8%
4/96 2.9% 2.9%
5/96 2.9% 2.9%
6/96 2.9% 2.8%
7/96 2.8% 3.0%
8/96 2.8% 2.9%
9/96 2.8% 3.0%
10/96 2.9% 3.0%
11/96 2.9% 3.3%
12/96 2.9% 3.3%
1/97 2.9% 3.0%
2/97 2.9% 3.0%
3/97 2.9% 2.8%
4/97 2.8% 2.5%
5/97 2.8% 2.2%
6/97 2.8% 2.3%
7/97 3.0% 2.2%
8/97 3.0% 2.2%
9/97 3.0% 2.2%
10/97 3.3% 2.1%
11/97 3.3% 1.8%
12/97 3.3% 1.7%
1/98 3.3% 1.6%
2/98 3.3% 1.4%
3/98 3.3% 1.4%
4/98 3.5% 1.4%
5/98 3.5% 1.7%
6/98 3.5% 1.7%
7/98 3.7% 1.7%
8/98 3.7% 1.6%
9/98 3.7% 1.5%
10/98 3.4% 1.5%
11/98 3.4% 1.5%
12/98 3.4% 1.6%
1/99 3.0% 1.7%
2/99 3.0% 1.6%
3/99 3.0% 1.7%
4/99 3.2% 2.3%
5/99 3.2% 2.1%
6/99 3.2% 2.0%
7/99 3.1% 2.1%
8/99 3.1% 2.3%
9/99 3.1% 2.6%
10/99 3.4% 2.6%
11/99 3.4% 2.6%
12/99 3.4% 2.7%
1/00 2.7%
2/00 3.2%
Source: BLOOMBERG L.P.
</TABLE>
In spite of the record length and strength of the current expansion, and labor
markets tighter than we have experienced in a generation, wage inflation has
remained largely subdued. The Employment Cost Index, which measures inflation in
wages, salaries and benefits, was well contained, increasing just 3.4% during
1999.
Although there is little evidence of accelerating core inflation, the Fed has
expressed concern that if labor markets continue to tighten, increases in wages
could outpace productivity growth. In such an environment, productivity growth
becomes particularly critical, as it enables companies to pay higher wages
without raising prices. Non-farm productivity grew 2.8% in 1998 and 3.0% during
1999, continuing a healthy trend that began in 1996.
ASSET CLASS PERFORMANCE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
GROWTH OF A HYPOTHETICAL $1 INVESTMENT
COMPILED BY CHARLES SCHWAB & CO., INC.
RUSSELL 2000 LEHMAN AGGREGATE
S&P 500 SMALL-CAP INDEX MSCE EAFE (ND) INDEX BOND INDEX
<S> <C> <C> <C> <C>
8/99 $1.000 $1.000 $1.000 $1.000
9/99 $0.973 $1.000 $1.010 $1.012
10/99 $1.034 $1.004 $1.048 $1.015
11/99 $1.055 $1.064 $1.084 $1.015
12/99 $1.117 $1.185 $1.182 $1.010
1/00 $1.061 $1.166 $1.107 $1.007
2/00 $1.041 $1.358 $1.136 $1.019
</TABLE>
Reversing a five-year period of relative under performance, small-cap stocks
significantly outperformed both large-cap stocks and international stocks for
the six-month reporting period ended 2/29/00. Small-cap stocks as represented by
the Russell 2000 Index achieved a total return of 35.8%, leaving large caps, as
represented by the S&P 500 Index, well behind with a six-month return of 4.1%.
Within the S&P 500, the technology stocks' out-performance of the so-
5
<PAGE>
MARKET OVERVIEW (continued)
called "old economy" stocks was truly remarkable. For example, during 1999, the
performance of the technology-laden NASDAQ Composite was 85.6% versus 21.0% for
the S&P 500 (which itself had a 25.4% technology weighting as of 12/31/99).
Although dampened by relatively weak foreign currencies, international stocks,
as represented by the MSCI EAFE Index, achieved a strong return of 13.6% for the
period. Reflecting the 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 1.9% for the year.
U.S. EQUITY VALUATION
The price/earnings ratio for the S&P 500-Registered Trademark- Index remained at
very high levels during the reporting period and ended the period at a lofty
28.6 times earnings, slightly less than twice its long-term average. The
price/earnings ratio, also known as a multiple, is the price of a stock divided
by its earnings per share, and generally indicates how much investors are
willing to pay for a company's earning potential. Based on other traditional
market valuation measures such as the price-to-book value ratio or dividend
yield, the U.S. stock market continues to remain at record high valuation
levels. Reflecting the extraordinary valuations of the technology sector, the
price/earnings ratio (12 months trailing) for the NASDAQ 100 Index was 144.2.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 PRICE/EARNINGS RATIO
<S> <C> <C>
1/90 14.37
2/90 14.21
3/90 14.77
4/90 14.82
5/90 15.84
6/90 16.66
7/90 16.65
8/90 15.57
9/90 14.9
10/90 14.36
11/90 14.59
12/90 15.19
1/91 14.95
2/91 16.82
3/91 17.48
4/91 17.85
5/91 17.92
6/91 17.96
7/91 18.07
8/91 19.72
9/91 19.88
10/91 19.92
11/91 21.02
12/91 21.85
1/92 23.35
2/92 23.83
3/92 25.45
4/92 25.51
5/92 25.71
6/92 25.08
7/92 25.61
8/92 25.5
9/92 24.37
10/92 23.94
11/92 24.08
12/92 24.01
1/93 24.2
2/93 24.25
3/93 24.22
4/93 23.2
5/93 23.21
6/93 22.58
7/93 22.52
8/93 23.02
9/93 23.74
10/93 23.97
11/93 22.55
12/93 23.55
1/94 22.98
2/94 21.17
3/94 20.34
4/94 20.1
5/94 20.16
6/94 19.76
7/94 18.64
8/94 18.9
9/94 18.26
10/94 17.55
11/94 16.58
12/94 16.98
1/95 16.23
2/95 16.2
3/95 16.5
4/95 16.02
5/95 16.43
6/95 16.82
7/95 16.55
8/95 16.18
9/95 16.86
10/95 16.18
11/95 17.14
12/95 17.41
1/96 18.11
2/96 18.56
3/96 18.94
4/96 19.16
5/96 19.48
6/96 19.3
7/96 18.31
8/96 18.62
9/96 19.75
10/96 19.6
11/96 21.05
12/96 20.7
1/97 20.55
2/97 20.98
3/97 19.87
4/97 20.24
5/97 21.43
6/97 22.45
7/97 23.92
8/97 22.64
9/97 24
10/97 22.84
11/97 24.02
12/97 24.51
1/98 24.99
2/98 26.44
3/98 27.76
4/98 26.51
5/98 26.12
6/98 27.09
7/98 26.78
8/98 22.77
9/98 24.23
10/98 27.58
11/98 30.14
12/98 31.97
1/99 33.29
2/99 32.65
3/99 33.78
4/99 33.9
5/99 32.74
6/99 34.7
7/99 31.62
8/99 31.21
9/99 29.9
10/99 29.92
11/99 30.65
12/99 32.53
1/00 29.78
2/00 28.59
30-Year Mean 15.7
Source: BLOOMBERG L.P.
</TABLE>
TREASURY BOND YIELDS
Continuing a trend which began in October 1998, both long-term and intermediate
term rates continued to climb upward during the reporting period. The primary
driver of this upward trend was the continued strong growth of the domestic
economy, which shows no immediate signs of slowing.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR TREASURY BOND YIELDS 30-YEAR TREASURY BOND YIELD FIVE-YEAR TREASURY NOTE YIELD
<S> <C> <C>
9/99 6.02% 5.77%
9/99 6.04% 5.78%
9/99 6.06% 5.75%
9/99 5.97% 5.66%
10/99 6.13% 5.86%
10/99 6.20% 5.95%
10/99 6.26% 5.97%
10/99 6.35% 6.10%
10/99 6.16% 5.95%
11/99 6.06% 5.86%
11/99 6.04% 5.86%
11/99 6.16% 5.99%
11/99 6.23% 6.05%
12/99 6.25% 6.07%
12/99 6.17% 5.98%
12/99 6.37% 6.19%
12/99 6.49% 6.31%
12/99 6.48% 6.34%
1/00 6.55% 6.41%
1/00 6.70% 6.58%
1/00 6.69% 6.63%
1/00 6.45% 6.66%
2/00 6.27% 6.65%
2/00 6.27% 6.70%
2/00 6.16% 6.68%
2/00 6.13% 6.47%
Source: BLOOMBERG L.P.
</TABLE>
6
<PAGE>
Typically the yields on 30-year treasury securities exceed those on five-year
securities to compensate investors for the additional interest rate risk
associated with longer duration securities. As shown in the graph above, late in
January, this normal relationship reversed resulting in what is referred to as a
negatively sloped yield curve. This situation is a result of the accumulating
budget surpluses, which are allowing the Federal government to downsize its
debt. The Treasury Department announced that it plans to buy back $30 billion in
debt in 2000 starting with longer-dated maturities since those payments carry
the steepest interest payment. The anticipated reduction in supply resulting
from this buyback program, as well as scaled back issuance, bid up the price of
the longer-term securities and resulted in a reduction in yields.
MUNICIPAL BOND YIELDS
Municipal bond yields followed an upward trend similar to treasuries during the
six-month reporting period increasing between a quarter and a half percent.
The ratio of municipal to Treasury bond yields remained at near record highs
during the six-month reporting period, meaning that they remain particilarly
attractive relative to Treasury securities.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR AAA GENERAL OBLIGATION
MUNICIPAL BOND YIELDS BOND BUYER 40 MUNI BOND YIELD 5 YEAR AAA GO MUNI BOND YIELDS
<S> <C> <C>
9/3/99 6.16% 4.35%
9/10/99 6.19% 4.42%
9/17/99 6.23% 4.44%
9/24/99 6.21% 4.42%
10/1/99 6.29% 4.49%
10/8/99 6.36% 4.51%
10/15/99 6.55% 4.57%
10/22/99 6.63% 4.60%
10/29/99 6.53% 4.62%
11/5/99 6.24% 4.61%
11/12/99 6.25% 4.54%
11/19/99 6.32% 4.51%
11/26/99 6.37% 4.53%
12/3/99 6.39% 4.55%
12/10/99 6.35% 4.59%
12/17/99 6.46% 4.67%
12/24/99 6.53% 4.72%
12/31/99 6.55% 4.72%
1/7/00 6.61% 4.80%
1/14/00 6.67% 4.85%
1/21/00 6.70% 4.89%
1/28/00 6.67% 4.92%
2/4/00 6.57% 4.90%
2/11/00 6.57% 4.93%
2/18/00 6.49% 4.95%
2/25/00 6.44% 4.95%
Source: BLOOMBERG L.P.
</TABLE>
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
<TABLE>
<CAPTION>
30-YEAR BOND YIELDS FIVE-YEAR BOND YIELDS
<S> <C> <C>
9.03.1999 102.4% 75.4%
9.10.1999 102.5% 76.5%
9.17.1999 102.9% 77.2%
9.24.1999 104.0% 78.1%
10.01.1999 102.5% 76.6%
10.08.1999 102.7% 75.8%
10.15.1999 104.7% 76.6%
10.22.1999 104.4% 75.4%
10.29.1999 106.0% 77.7%
11.05.1999 103.0% 78.6%
11.12.1999 103.5% 77.5%
11.19.1999 102.6% 75.3%
11.26.1999 102.2% 74.8%
12.03.1999 102.2% 74.9%
12.10.1999 103.0% 76.8%
12.17.1999 101.3% 75.4%
12.24.1999 100.7% 74.8%
12.31.1999 101.1% 74.4%
1.07.2000 101.0% 74.9%
1.14.2000 99.6% 73.8%
1.21.2000 100.1% 73.7%
1.28.2000 103.3% 73.9%
2.04.2000 104.8% 73.7%
2.11.2000 104.8% 73.5%
2.18.2000 105.4% 74.1%
2.25.2000 105.1% 76.5%
</TABLE>
Source: BLOOMBERG L.P.
7
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/29/00
<TABLE>
<CAPTION>
SINCE 30-DAY
SIX INCEPTION SEC
MONTHS(1) ONE YEAR FIVE YEARS (4/21/93) YIELD
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
SCHWAB CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND(2) 0.93% 0.70% 4.59% 4.07% 4.14%
- ------------------------------------------------------------------------------------------------------------------
Lehman Brothers Three-Year
Municipal Bond Index 1.17% 1.43% 4.88% 4.44% N/A
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 12/31/99. As of 12/31/99, the fund's six-month, one-year,
five-year and since-inception average annual total returns were 0.47%, 0.66%,
4.96% and 4.03%, respectively. The 30-day SEC yield as of 12/31/99 was 4.10%.(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
2/29/00 and the taxable-equivalent yield, assuming a maximum combined federal
and state of California personal income tax rate of 45.22%. Shareholder tax
rates may be different.
<TABLE>
<CAPTION>
30-DAY TAXABLE-EQUIVALENT
SEC YIELD 30-DAY SEC YIELD
<S> <C> <C>
- --------------------------------------------------------------------------------------------
Schwab California Short/Intermediate Tax-Free Bond Fund(2) 4.14% 7.56%
- --------------------------------------------------------------------------------------------
</TABLE>
(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 2/29/00, the fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
lower. The 30-day SEC yield as of 2/29/00 would have been 3.92%.
(3) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/99, the fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
lower. The 30-day SEC yield as of 12/31/99 would have been 3.96%.
8
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB CA LEHMAN BROTHERS
SHORT/INTERMEDIATE THREE-YEAR MUNICIPAL
TAX-FREE BOND FUND BOND INDEX
<S> <C> <C>
4/21/1993 $10,000 $10,000
4/30/1993 $9,990 $9,994
5/31/1993 $10,037 $10,021
6/30/1993 $10,136 $10,085
7/31/1993 $10,157 $10,090
8/31/1993 $10,257 $10,185
9/30/1993 $10,328 $10,229
10/31/1993 $10,340 $10,251
11/30/1993 $10,310 $10,237
12/31/1993 $10,444 $10,345
1/31/1994 $10,517 $10,429
2/28/1994 $10,372 $10,332
3/31/1994 $10,188 $10,207
4/30/1994 $10,239 $10,267
5/31/1994 $10,272 $10,315
6/30/1994 $10,253 $10,318
7/31/1994 $10,356 $10,404
8/31/1994 $10,390 $10,441
9/30/1994 $10,350 $10,415
10/31/1994 $10,280 $10,390
11/30/1994 $10,167 $10,371
12/31/1994 $10,227 $10,416
1/31/1995 $10,350 $10,502
2/28/1995 $10,503 $10,613
3/31/1995 $10,598 $10,708
4/30/1995 $10,614 $10,744
5/31/1995 $10,826 $10,909
6/30/1995 $10,809 $10,935
7/31/1995 $10,925 $11,050
8/31/1995 $11,030 $11,137
9/30/1995 $11,090 $11,168
10/31/1995 $11,174 $11,222
11/30/1995 $11,256 $11,294
12/31/1995 $11,296 $11,341
1/31/1996 $11,366 $11,430
2/29/1996 $11,358 $11,432
3/31/1996 $11,308 $11,404
4/30/1996 $11,325 $11,418
5/31/1996 $11,332 $11,428
6/30/1996 $11,393 $11,497
7/31/1996 $11,466 $11,560
8/31/1996 $11,483 $11,577
9/30/1996 $11,557 $11,648
10/31/1996 $11,634 $11,730
11/30/1996 $11,742 $11,839
12/31/1996 $11,737 $11,845
1/31/1997 $11,776 $11,897
2/28/1997 $11,837 $11,955
3/31/1997 $11,762 $11,893
4/30/1997 $11,815 $11,944
5/31/1997 $11,916 $12,041
6/30/1997 $11,991 $12,112
7/31/1997 $12,139 $12,256
8/31/1997 $12,120 $12,231
9/30/1997 $12,196 $12,319
10/31/1997 $12,227 $12,374
11/30/1997 $12,268 $12,410
12/31/1997 $12,346 $12,494
1/31/1998 $12,433 $12,576
2/28/1998 $12,459 $12,603
3/31/1998 $12,467 $12,623
4/30/1998 $12,435 $12,605
5/31/1998 $12,540 $12,723
6/30/1998 $12,568 $12,766
7/31/1998 $12,635 $12,812
8/31/1998 $12,749 $12,936
9/30/1998 $12,863 $13,019
10/31/1998 $12,892 $13,081
11/30/1998 $12,931 $13,113
12/31/1998 $12,942 $13,144
1/31/1999 $13,054 $13,264
2/28/1999 $13,054 $13,278
3/31/1999 $13,073 $13,290
4/30/1999 $13,088 $13,332
5/31/1999 $13,067 $13,313
6/30/1999 $12,966 $13,233
7/31/1999 $13,034 $13,298
8/31/1999 $13,024 $13,314
9/30/1999 $13,090 $13,364
10/31/1999 $13,042 $13,366
11/30/1999 $13,108 $13,425
12/31/1999 $13,027 $13,403
1/31/2000 $13,092 $13,427
2/29/2000 $13,145 $13,469
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab California Short/ Intermediate Tax-Free Bond Fund, made at its inception,
with a similar investment in the Lehman Brothers Three-Year Municipal Bond
Index.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the fund. Investors cannot invest in an index
directly.
ASSETS
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $114,987
- ----------------------------------------------------------------------
Total net assets as of 2/29/00 (000s) $110,780
- ----------------------------------------------------------------------
Percentage growth over reporting period (4)%
- ----------------------------------------------------------------------
</TABLE>
9
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO SNAPSHOT
The Schwab California Short/Intermediate Tax-Free Bond Fund invests primarily in
California tax-exempt or municipal securities. The information below provides a
snapshot of the fund's characteristics as of 2/29/00 and is not indicative of
its composition after that date. The terms used below are defined beginning on
page 21. A complete list of the securities in the fund's portfolio as of 2/29/00
is provided in the Schedule of Investments later in this report.
FUND FACTS
<TABLE>
<CAPTION>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE
TAX-FREE BOND FUND PEER GROUP AVERAGE++
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Number of Issues 66 118
- -----------------------------------------------------------------------------------------------------------------
30-Day SEC Yield 4.14% 3.77%
- -----------------------------------------------------------------------------------------------------------------
Average Weighted Coupon 5.22% 5.60%
- -----------------------------------------------------------------------------------------------------------------
Weighted Average Maturity 4.53 years 4.90 years
- -----------------------------------------------------------------------------------------------------------------
Average Credit Quality AA AA
- -----------------------------------------------------------------------------------------------------------------
Average Effective Duration 4.14 years 2.80 years
- -----------------------------------------------------------------------------------------------------------------
Expense Ratio 0.49%* 0.85%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/00.
++ Source: Morningstar. This information is as of 2/29/00, and is for
illustrative purposes only. It is not intended to show, predict or guarantee
future composition of the fund. The Peer Group Average is based on the 102
municipal short-term funds as tracked by Morningstar.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/29/00
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF FUND
OF FUND INVESTMENTS
MATURITY RANGE VALUE (000S) INVESTMENTS (CUMULATIVE)
<S> <C> <C> <C>
- ------------------------------------------------------------------
0 - 6 months $ 1,383 1.3% 1.3%
- ------------------------------------------------------------------
7 - 36 months $33,317 30.1% 31.4%
- ------------------------------------------------------------------
37 - 60 months $26,520 23.9% 55.3%
- ------------------------------------------------------------------
More than
60 months $49,522 44.7% 100.0%
- ------------------------------------------------------------------
</TABLE>
INVESTMENT STYLE BOX(1)
AS OF 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTED AVERAGE MATURITY
SHORT INT LONG AVERAGE CREDIT QUALITY
<S> <C> <C> <C>
X High
Medium
Low
</TABLE>
(1) Source: Morningstar. The style box represents two of the main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the fund's portfolio as of 2/29/00. It is not
indicative of its holding after that date, nor does it represent a risk
rating or any type of forecast of future performance. Placement is based on
the fund's weighted average maturity and the average credit quality of its
portfolio. The fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than 10 years.
Credit quality is defined on page 21. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
10
<PAGE>
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2)
as of 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Municipal Bonds 99.9%
Temporary Investments 0.1%
</TABLE>
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 64.0%
AA 17.1%
A 13.5%
BBB 3.6%
Unrated Securities 1.8%
</TABLE>
The charts above illustrate the composition of the fund's portfolio as of
2/29/00, and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities.
(3) Credit quality is based on published ratings from Standard & Poor's Ratings
Group and/or Moody's Investor Service, which are recognized rating services.
Categories reflect the higher published ratings for securities rated
differently by the two agencies, and percentages are dollar-weighted.
TOP 10 HOLDINGS
% OF TOTAL NET ASSETS
<TABLE>
<S> <C>
- -----------------------------------------------
California Health Facilities Financing
Authority Insured Hospital RB
(Marshall Hospital) Series 1992A,
6.625%, Maturity 11/01/2002 3.9%
- -----------------------------------------------
Long Beach Harbor, California, RB
Series 1998A, 5.500%, Maturity
05/15/2005 3.7%
- -----------------------------------------------
Alameda County, California, COP
(Reference & Capital Projects),
5.000%, Maturity 12/01/2006 3.2%
- -----------------------------------------------
California Statewide Community
Development Authority, COP (The
Internext Group Project) 4.125%,
Maturity 4/01/2004 2.9%
- -----------------------------------------------
Orange County, California, Recovery COP
Series 1996A,
6.00%, Maturity 07/01/2008 2.9%
- -----------------------------------------------
San Francisco, California, Bay Area
Rapid Transit District Sales Tax RB
Series 1998, 5.500%, Maturity
07/01/2005 2.8%
- -----------------------------------------------
Orange County, California Municipal
District Water Facilities COP
(Allen-McColloch Pipeline Project)
Series 1996, 4.600%, Maturity
07/01/2001 2.7%
- -----------------------------------------------
California State Public Works Board
Lease Revenue Refunding Bonds
(Department of Corrections State
Prisons Imperial County), Series
1998B, 4.500%, Maturity 9/01/2005 2.7%
- -----------------------------------------------
Contra Costa, California Transportation
Authority Sales Tax, RB,
6.00% Maturity 03/01/2003 2.4%
- -----------------------------------------------
San Jose, California, Financing
Authority Revenue Refunding Bonds
(Convention Center Project) Series
1993C, 5.900% Maturity 09/01/2004 2.3%
- -----------------------------------------------
</TABLE>
11
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/29/00
<TABLE>
<CAPTION>
SINCE
INCEPTION 30-DAY
SIX MONTHS(1) ONE YEAR FIVE YEARS (2/24/92) SEC YIELD
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND(2) (1.82)% (5.91)% 5.22% 5.92% 5.43%
- ------------------------------------------------------------------------------------------------------------------------
Lehman Brothers General Municipal Bond Index (0.02)% (2.08)% 5.85% 6.26% N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 12/31/99. As of 12/31/99, the fund's six-month, one-year,
five-year and since-inception average annual total returns were (4.50%),
(6.14%), 6.53% and 5.91%, respectively. The 30-day SEC yield as of 12/31/99 was
5.47%.(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
2/29/00 and the taxable-equivalent yield, assuming a maximum combined federal
and state of California personal income tax rate of 45.22%. Shareholder tax
rates may be different.
<TABLE>
<CAPTION>
30-DAY TAXABLE-EQUIVALENT
SEC YIELD 30-DAY SEC YIELD
<S> <C> <C>
- --------------------------------------------------------------------------------------------
Schwab California Long-Term Tax-Free Bond Fund(2) 5.43% 9.91%
- --------------------------------------------------------------------------------------------
</TABLE>
(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 2/29/00, the fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
lower. The 30-day SEC yield as of 2/29/00 would have been 5.24%.
(3) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/99, the fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
lower. The 30-day SEC yield as of 12/31/99 would have been 5.34%.
12
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB CA LEHMAN BROTHERS
LONG-TERM GENERAL MUNICIPAL
TAX-FREE BOND FUND BOND INDEX
<S> <C> <C>
2/24/92 $10,000 $10,000
3/31/92 $10,099 $10,004
4/30/92 $10,217 $10,093
5/31/92 $10,410 $10,212
6/30/92 $10,633 $10,383
7/31/92 $11,082 $10,694
8/31/92 $10,786 $10,590
9/30/92 $10,835 $10,659
10/31/92 $10,474 $10,554
11/30/92 $10,921 $10,743
12/31/92 $11,110 $10,853
1/31/93 $11,256 $10,979
2/28/93 $11,775 $11,376
3/31/93 $11,561 $11,256
4/30/93 $11,674 $11,370
5/31/93 $11,736 $11,434
6/30/93 $11,969 $11,624
7/31/93 $11,957 $11,640
8/31/93 $12,235 $11,882
9/30/93 $12,371 $12,071
10/31/93 $12,412 $12,041
11/30/93 $12,263 $11,934
12/31/93 $12,541 $12,186
1/31/94 $12,671 $12,326
2/28/94 $12,304 $12,006
3/31/94 $11,683 $11,517
4/30/94 $11,768 $11,615
5/31/94 $11,867 $11,716
6/30/94 $11,747 $11,644
7/31/94 $12,008 $11,864
8/31/94 $12,026 $11,905
9/30/94 $11,824 $11,730
10/31/94 $11,508 $11,521
11/30/94 $11,235 $11,313
12/31/94 $11,420 $11,562
1/31/95 $11,901 $11,893
2/28/95 $12,295 $12,238
3/31/95 $12,414 $12,379
4/30/95 $12,407 $12,394
5/31/95 $12,825 $12,789
6/30/95 $12,613 $12,677
7/31/95 $12,685 $12,797
8/31/95 $12,866 $12,960
9/30/95 $12,972 $13,041
10/31/95 $13,228 $13,230
11/30/95 $13,507 $13,450
12/31/95 $13,690 $13,579
1/31/96 $13,785 $13,682
2/29/96 $13,664 $13,589
3/31/96 $13,436 $13,415
4/30/96 $13,369 $13,378
5/31/96 $13,379 $13,373
6/30/96 $13,550 $13,518
7/31/96 $13,700 $13,641
8/31/96 $13,693 $13,639
9/30/96 $13,920 $13,830
10/31/96 $14,073 $13,986
11/30/96 $14,365 $14,242
12/31/96 $14,283 $14,182
1/31/97 $14,294 $14,209
2/28/97 $14,429 $14,340
3/31/97 $14,175 $14,149
4/30/97 $14,316 $14,268
5/31/97 $14,581 $14,482
6/30/97 $14,706 $14,637
7/31/97 $15,266 $15,042
8/31/97 $15,056 $14,901
9/30/97 $15,253 $15,078
10/31/97 $15,359 $15,175
11/30/97 $15,475 $15,264
12/31/97 $15,717 $15,487
1/31/98 $15,918 $15,646
2/28/98 $15,906 $15,651
3/31/98 $15,879 $15,665
4/30/98 $15,802 $15,595
5/31/98 $16,078 $15,841
6/30/98 $16,124 $15,903
7/31/98 $16,145 $15,943
8/31/98 $16,405 $16,190
9/30/98 $16,645 $16,392
10/31/98 $16,638 $16,392
11/30/98 $16,728 $16,450
12/31/98 $16,725 $16,491
1/31/99 $16,903 $16,687
2/28/99 $16,846 $16,613
3/31/99 $16,888 $16,637
4/30/99 $16,879 $16,678
5/31/99 $16,727 $16,582
6/30/99 $16,438 $16,343
7/31/99 $16,418 $16,402
8/31/99 $16,144 $16,270
9/30/99 $16,135 $16,277
10/31/99 $15,756 $16,101
11/30/99 $15,957 $16,272
12/31/99 $15,699 $16,150
1/31/00 $15,540 $16,080
2/29/00 $15,850 $16,267
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab California Long-Term Tax-Free Bond Fund, made at its inception, with a
similar investment in the Lehman Brothers General Municipal Bond Index.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the fund. Investors cannot invest in an index
directly.
ASSETS
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $213,594
- ----------------------------------------------------------------------
Total net assets as of 2/29/00 (000s) $162,559
- ----------------------------------------------------------------------
Percentage growth over reporting period (24)%
- ----------------------------------------------------------------------
</TABLE>
13
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
PORTFOLIO SNAPSHOT
The Schwab California Long-Term Tax-Free Bond Fund invests primarily in
California tax-exempt or municipal securities. The information below provides a
snapshot of the fund's characteristics as of 2/29/00, and is not indicative of
its composition after that date. The terms used below are defined beginning on
page 21. A complete list of the securities in the fund's portfolio as of 2/29/00
is provided in the Schedule of Investments later in this report.
FUND FACTS
<TABLE>
<CAPTION>
SCHWAB CALIFORNIA LONG-
TERM TAX-FREE BOND FUND PEER GROUP AVERAGE++
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Number of Issues 87 153
- ----------------------------------------------------------------------------------------------------------
30-Day SEC Yield 5.43% 3.78%
- ----------------------------------------------------------------------------------------------------------
Average Weighted Coupon 5.59% 5.57%
- ----------------------------------------------------------------------------------------------------------
Weighted Average Maturity 19.43 years 20.10 years
- ----------------------------------------------------------------------------------------------------------
Average Credit Quality AA AAA
- ----------------------------------------------------------------------------------------------------------
Average Effective Duration 10.42 years 9.20 years
- ----------------------------------------------------------------------------------------------------------
Expense Ratio 0.49%* 1.08%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/00.
++ Source: Morningstar. This information is as of 2/29/00, and is for
illustrative purposes only. It is not intended to show, predict or guarantee
future composition of the fund. The Peer Group Average is based on the 110
California municipal long-term funds as tracked by Morningstar.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/29/00
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF FUND
VALUE OF FUND INVESTMENTS
MATURITY RANGE (000S) INVESTMENTS (CUMULATIVE)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
0 - 1 year $ 4,437 2.7% 2.7%
- ---------------------------------------------------------------------------------------------------------
2 - 10 years $ 3,862 2.4% 5.1%
- ---------------------------------------------------------------------------------------------------------
11 - 20 years $93,059 57.5% 62.6%
- ---------------------------------------------------------------------------------------------------------
21 - 30 years $56,217 34.8% 97.4%
- ---------------------------------------------------------------------------------------------------------
More than
30 years $ 4,182 2.6% 100.0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT STYLE BOX(1)
AS OF 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTED AVERAGE MATURITY
SHORT INT LONG AVERAGE CREDIT QUALITY
<S> <C> <C> <C>
X High
Medium
Low
</TABLE>
(1) Source: Morningstar. The style box represents two of the main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the fund's portfolio as of 2/29/00. It is not
indicative of its holding after that date, nor does it represent risk rating
or any type of forecast of future performance. Placement is based on the
fund's weighted average maturity and the average credit quality of its
portfolio. The fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than 10 years.
Credit quality is defined on page 21. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
14
<PAGE>
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2)
as of 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Municipal Bonds 97.3%
Variable Rate Obligations 2.7%
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 60.5%
AA 16.0%
A 14.2%
BBB 6.8%
Unrated Securities 2.5%
</TABLE>
The above charts illustrate the composition of the fund's portfolio as of
2/29/00, and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities of
the funds.
(3) Credit quality is based on published ratings from Standard & Poor's or
Moody's Investors Service. Categories reflect the higher published ratings
for securities rated differently by the two agencies, and percentages are
dollar-weighted.
TOP 10 HOLDINGS
% OF TOTAL NET ASSETS
<TABLE>
<S> <C>
- -----------------------------------------------
South Orange County, California, Public
Financing Authority Special Tax RB
Series 1999A, 5.250%,
Maturity 08/15/2018 3.5%
- -----------------------------------------------
California Health Facilities Financing
Authority Insured Hospital
Revenue Refunding Bonds (Children's
Hospital San Diego), Series 1996,
5.375%, Maturity 7/01/2016 3.1%
- -----------------------------------------------
Foothill Eastern Corridor Agency,
California, Toll Road, RB
5.125%, Maturity 01/15/2019 2.8%
- -----------------------------------------------
San Joaquin County, California, COP,
Revenue Refunding Bond
(General Hospital Project)
5.000%, Maturity 09/01/2020 2.8%
- -----------------------------------------------
California Educational Facilities
Authority RB (University of Southern
California)
5.500%, Maturity 10/01/2027 2.6%
- -----------------------------------------------
Riverside County, California, Public
Financing Authority Tax Allocation,
RB (Redevelopment Projects) Series
1997A, 5.625%, Maturity 10/01/2033 2.6%
- -----------------------------------------------
- -----------------------------------------------
California Statewide Communities
Development Authority, COP (The
Internext Group),
5.375%, Maturity 04/01/2017 2.5%
- -----------------------------------------------
California Health Facilities Financing
Authority, RB (Kaiser Permanente
Hospital) Series 1998B,
5.000%, Maturity 10/01/2018 2.5%
- -----------------------------------------------
Rancho Cucamonga, California,
Redevelopment Agency Tax Allocation
Revenue Refunding Bonds (Rancho
Redevelopment Project) 5.250%,
Maturity 9/1/2020 2.4%
- -----------------------------------------------
Modesto, California, Irrigation
District COP Refunding & Capital
Improvement Bonds Series 1999B
5.300%, Maturity 7/1/2022 2.4%
- -----------------------------------------------
</TABLE>
15
<PAGE>
DIVIDENDS PAID
During the reporting period, the funds continued to attempt to provide a high
level of current income consistent with the preservation of capital. The chart
below illustrates the income dividends on a per-share basis paid by each fund
during each fiscal year or reporting period since inception.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DIVIDENDS PAID BY THE SCHWAB CALIFORNIA TAX-FREE BOND FUNDS
INCOME DIVIDENDS PER SHARE
SCHWAB CALIFORNIA SHORT/INTERMEDIATE SCHWAB CALIFORNIA LONG-TERM
FISCAL YEAR TAX-FREE BOND FUND TAX-FREE BOND FUND
<S> <C> <C>
1992* $0.51
1993** $0.13 $0.38
1994+ $0.37 $0.56
1995+ $0.42 $0.56
1996+ $0.43 $0.57
1997+ $0.43 $0.56
1998+ $0.42 $0.55
1999+ $0.39 $0.54
2000++ $0.19 $0.27
</TABLE>
* Period from the fund's inception on 2/24/92 through 12/31/92.
** Period from the fund's inception on 4/21/93 through 8/31/93 for Schwab
California Short/Intermediate Tax-Free Bond Fund and for the eight-month
period ended 8/31/93 for Schwab California Long-Term Tax-Free Bond Fund.
+ For the one-year period ended 8/31 for both funds.
++ For the six-month period ended 2/29/00 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 the Vice
President and Portfolio Manager at Federated Investors.
JOANNE LARKIN--Vice President and Senior Portfolio Manager, has had primary
responsibility for the day-to-day management of each fund's portfolio since
their inception. Joanne joined CSIM as Portfolio Manager in February 1992, and
was promoted to her current position in December 1996. Prior to joining CSIM
Joanne was portfolio Manager for the Shearson Lehman California Municipal Bond
Fund and E.F. Hutton's Municipal Cash Reserve Management.
17
<PAGE>
FUND DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
Q. WHAT IS YOUR VIEW OF THE MUNICIPAL BOND ENVIRONMENT?
A. During the reporting period the international economy continued its recovery
from the financial turmoil experienced over the last 18 months. The domestic
economy, fueled by technology breakthroughs and higher productivity, celebrated
its ninth consecutive year of expansion, the nation's longest growth period.
Benefiting from this strong growth, equity and real estate prices reached record
levels. However, fixed income securities, particularly municipal bonds, lagged
behind other asset classes, as inflation fears exerted upward pressure on
interest rates. The Federal Reserve Bank raised the federal funds target rate
from 5.25% at the beginning of the period to 5.75% at the end of the period. As
a result, the yield on the Bond Buyer 40, an index of 40 long-term municipal
bonds, advanced from 6.21% on August 31, 1999 to 6.70% on January 21, 2000, the
highest level in more than three years. Because bond yields and prices are
inversely related, rising interest rates caused the market value of municipal
securities to erode significantly.
Demand and supply imbalances also had a negative impact on municipal securities
during the reporting period. In September and October, municipal issuers, in
anticipation of year 2000, came to market, which dramatically increased the
supply of new bond issues, thereby leading to higher yields for municipal
securities. The increased supply of new issues was especially difficult for the
municipal market to absorb as fixed-income investors shifted their attention to
more attractive taxable yields. Additionally, soaring equity markets, year-end
tax loss selling and reduced demand from institutional investors and insurance
companies further depressed municipal bond prices. The combination of these
factors reduced demand for municipal bonds, which in turn, led to higher
municipal bond yields.
Toward the end of the reporting period, the municipal market, along with the
fixed-income market in general, began to improve. Bond issuance slowed to more
manageable levels while redemptions from bond funds slowed significantly. These
factors combined to increase demand for municipal securities. The Bond Buyer 40
yield, which peaked on January 21 at 6.70%, dropped to 6.43% as the reporting
period came to a close.
Q. HOW DID THE FUNDS PERFORM DURING THE SIX-MONTH REPORTING PERIOD?
A. The SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND achieved a 0.93%
total return for the six-month reporting period ended February 29, 2000. The
return was derived from a combination of dividend income of 1.92% and the fund's
NAV change of -0.99%. The decline in NAV was a result of the fund's increasing
yield, which rose from 3.87% at the beginning of the period to 4.14% at the end
of the period.
The SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND reported a -1.82% total
return for the six-month reporting period ended February 29, 2000. The return
was derived from a combination of dividend income of 2.52% and the fund's NAV
change of -4.34%. The decline in NAV was a result of the fund's increasing
yield, which rose from 5.12% at the
18
<PAGE>
beginning of the period to 5.43% at the end of the period.
Q. HOW WERE THE FUNDS MANAGED DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE
TO THE PORTFOLIO?
A. We continued to maintain a portfolio of high-quality securities (primarily
AAA and AA) during the reporting period. We feel that this has been an
appropriate strategy for the funds given the market environment during the first
half of the reporting period. There was very little yield advantage associated
with lower-rated securities and we felt that investors were not being adequately
compensated for the higher credit risk. However, as the reporting period came to
an end, the spread between AAA/AA and lower rated securities began to widen. We
will continue to monitor this spread relationship in the coming months, seeking
to add higher yielding securities when appropriate. 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.
The SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND maintained an
average maturity throughout the reporting period in a relatively narrow range
from approximately 3.67 to 4.58 years. The fund's weighted average maturity at
the end of the reporting period was 4.53 years, up from 3.73 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 19.30 to
21.06 years. The fund's weighted average maturity at the end of the reporting
period was 19.43 years, down from 20.63 years at the beginning of the period.
Q. WHAT IS YOUR VIEW OF THE ECONOMIC CLIMATE IN CALIFORNIA?
A. Our opinion is that California continues to enjoy a sustained economic
recovery with employment and income growth continuing to exceed expectations.
During 1999, California's non-farm employment gains were 3.3%, 50% higher than
the nation's growth rate and continuing a several year trend of surpassing the
national trend. Looking forward, non-farm employment is estimated to grow by
2.9% in 2000, adding over 400,000 new jobs, then up again 2.5% in 2001 as
reported by the State of California Governor's Budget Summary 2000-01. It is
anticipated that California will see continued moderate growth across most
industry sectors. However, California should benefit from increased economic
vibrancy in Asia as well as continued strong export growth to Mexico and
increasing exports to Europe, Canada and Middle East, in our opinion.
The continued state economic improvement has allowed for a buildup of budget
reserves and an easing of some of the spending restrictions imposed during the
last recession. At fiscal year end, June 30, 1999, California state had a budget
surplus of approximately $2.4 billion. Due to continued strong revenue growth
during the first half of the current fiscal year, the state now projects an
approximate $3 billion budget reserve at fiscal year end June 30, 2000. As in
prior years, budget adjustments may be necessary to keep spending in line with
revenues. Lawmakers should continue to address the challenge of balancing
mandated spending requirements for education and public safety against the need
for maintaining and
19
<PAGE>
FUND DISCUSSION (continued)
upgrading public infrastructure. Therefore the state's financial position may be
somewhat static over the next 12 months, in our opinion.
We are satisfied that the California securities held by the funds represent low
credit risk and we will, as always, continue to monitor the state's economic
situation closely. California's current credit ratings are Aa3 from Moody's
Investor Service, AA- from Standard & Poor's Corporation, and AA- from Fitch
IBCA, Inc., three well-known rating agencies.
20
<PAGE>
GLOSSARY
ALTERNATIVE MINIMUM TAX (AMT)--A federal tax designed to help ensure that at
least a minimum amount of income tax is paid by high-income corporate and
non-corporate taxpayers (including estates and trusts) who reap large tax
savings by making generous use of certain tax deductionsand exemptions. The AMT
functions as a recapture mechanism, reclaiming some of the tax breaks primarily
available to high-income taxpayers, who without the AMT might be able to escape
taxation entirely.
BOND--A bond can be thought of as a loan agreement in which the bondholder lends
a set amount of money to a corporation, government agency or municipality and
expects to be repaid with interest. Although bonds are loans and contain no
rights of ownership, they do embody a legally enforceable promise to repay.
CALL--The right of a bond's issuer to redeem a bond before its stated maturity
date. Bonds can be called for many reasons, but a call typically occurs when
interest rates drop and issuers are able to obtain lower interest rates to
finance their debts.
CALL PROTECTION--When managers seek call protection, they're looking for bonds
whose issuers cannot redeem them before their stated maturities, or who cannot
redeem them until a far-off date. Such bonds help protect yield but are subject
to interest rate sensitivity.
COUPON--The coupon rate is the annual rate of interest on the bond's face value
that the issuer agrees to pay the holder until maturity. The coupon is
established at the time of issue and is determined by the then prevailing level
of interest rates in the marketplace. AVERAGE COUPON is the average interest
rate paid on the securities held by a fund. It is expressed as a percentage of
face value.
CREDIT RATINGS--Bonds are generally rated by one or both of the two major credit
rating agencies accepted in the industry: Moody's Investor Service and the
Standard & Poor's Corporation. They assign ratings based on the issuer's ability
to make the scheduled interest and principal payments. These ratings are
reviewed periodically and may be revised at any time.
<TABLE>
<CAPTION>
MOODY'S S&P DESCRIPTION
<S> <C> <C>
- ---------------------------------------------------------
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
</TABLE>
21
<PAGE>
GLOSSARY (continued)
CREDIT RISK--The risk that an issuer of a debt security or a borrower may
default on its obligation.
DIVIDEND--The portion of a company's earnings paid to investors on a per-share
basis.
DURATION--The common objective behind the different definitions of DURATION is
to measure the price sensitivity--and therefore market risk--of a fixed income
security to changes in its yield.
EXPENSE RATIO--Amount, expressed as a percentage of total net assets, that
shareholders pay annually for mutual fund operating expenses and
management fees.
GENERAL OBLIGATION BONDS (GOS)--General obligation bonds are backed by a pledge
of the issuer's full faith and credit with the timely payment of principal and
interest secured by the taxing power of the issuer.
INTEREST--Compensation, usually paid semiannually, to bondholders by the issuer.
Usually expressed as an annual percentage rate.
INTEREST RATE RISK--Risk associated with fluctuations of bond prices in response
to the general movement of interest rates and to changes in investor perceptions
of government monetary policy and economic data.
MARKET RISK--The possibility that the actual return of an investment will be
less than what's expected.
MATURITY--The maturity of a security is the date the issuer makes the final
payment to the security holder. WEIGHTED AVERAGE MATURITY is the average length
of time until the bonds held by a fund reach maturity (or are called) and are
repaid. In general, the longer the average maturity, the more a fund's share
price will fluctuate in response to changes in market interest rates.
MORTGAGE-BACKED SECURITIES--Represent an ownership interest in mortgage loans
made by financial institutions to finance the borrower's purchase of a home or
other real estate. The most basic mortgage securities, known as PASS-THROUGHS,
or participation certificates, represent a direct ownership interest in a trust
composed of a pool of mortgage loans. The majority of mortgage securities are
issued and/or guaranteed by the Government National Mortgage Association (Ginnie
Mae), the Federal National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac).
MUNICIPAL BONDS--Debt obligations of states, cities, towns, municipalities,
municipal authorities and governmental entities. They are issued to build
schools, tunnels and bridges or to finance infrastructure repairs or
improvements. The interest earned typically is free of federal income taxes and,
in some cases, also may be free of state and/or local income taxes if purchased
by residents of the issuing state. However, interest paid by certain municipal
bonds is subject to the AMT.
PREPAYMENT RISK--When interest rates are falling, many homeowners will refinance
their mortgages to take advantage of the new lower rates. As a result, when
interest rates decline, prepayments of mortgage-backed securities accelerate
beyond the initial pricing assumptions, which causes the average life and
maturity of the security to shorten.
REINVESTMENT RISK--The risk that a bondholder may be able to reinvest only at a
lower rate than originally
22
<PAGE>
planned. If yields fall, the reinvestment income and, consequently, the total
return from holding the bond may fall relative to the original yield.
Conversely, if yields rise, total return may also rise.
REVENUE BONDS--Bonds with interest that is payable from a specific source of
revenue. They are generally issued to finance public projects such as bridges,
tunnels and water treatment facilities. The interest payments on a revenue bond
are typically derived from the revenues produced by the facility.
TAXABLE-EQUIVALENT YIELD--The yield needed on a taxable investment in order to
match the return offered on a tax-exempt investment. This calculation is an
important resource for determining which investments--taxable or
tax-exempt--would yield more. The taxable-equivalent yield calculation can
determine which investment offers the better return when all taxes--federal,
state and local--are taken into consideration.
TOTAL RETURN--The sum of interest income, plus capital gains (or losses).
YIELD--The income generated by an investment, expressed as a percentage of its
price. Yield is only a measure of income and does not take into account the
appreciation (or depreciation) of a bond's value.
YIELD TO MATURITY--The overall rate of return an investor would receive if the
securities in a fund's portfolio were held to their maturity dates.
23
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 2000 (Unaudited)
Par Value
------ --------
MUNICIPAL BONDS -- 99.9% (a)
CALIFORNIA -- 98.2%
Adelanto, California Public Utility
Authority RB (Utility System Project)
Series 2000A (e)
4.45%, 11/01/01 $2,375 $ 2,375
Alameda County, California COP
(Reference & Capital Projects) (e)
5.00%, 12/01/06 3,480 3,537
Alameda, California Public
Financing Authority RB
4.85%, 09/02/06 2,140 2,068
Anaheim, California Public Financing
Authority RB (Electric System
Distribution Facility Project) (e)
4.63%, 10/01/05 2,000 1,995
California Education Authority RB
(Pooled College & University Projects)
Series 1997A (e)
4.85%, 04/01/03 345 349
5.05%, 04/01/05 1,010 1,029
California Educational Facilities
Authority RB (Loyola Marymount
University) Series 1992B
6.60%, 10/01/02 1,450 1,546
California Educational Facilities
Authority RB (Mills College)
Series 1992
6.88%, 09/01/02 500 536
California Educational Facilities
Authority Revenue Refunding Bonds
(Stanford University Project)
Series 1997M
5.25%, 12/01/01 1,600 1,630
California Educational Facilities
Authority Revenue Refunding Bonds
(University of San Diego) (e)
4.50%, 10/01/02 1,000 1,005
California Health Facilities Financing
Authority Insured Hospital RB
(Marshall Hospital) Series 1992A (e)
6.63%, 11/01/02 4,000 4,275
California Health Facility Financial
Authority RB (Catholic Health
Care West) Series 1997A
5.00%, 07/01/03 2,000 2,032
Par Value
------ --------
California Health Facility Financial
Authority RB (Kaiser Permanente)
Series B
5.00%, 10/01/08 $2,500 $ 2,316
California Health Facility Financial
Authority RB (Valley Presbyterian
Hospital) Series 1997 (e)
5.25%, 05/01/03 1,000 1,022
California Intermodal Container
Transfer Facility Joint Powers
Authority Revenue Refunding
Bonds Series 1999A (e)
5.00%, 11/01/08 1,210 1,216
5.00%, 11/01/09 1,375 1,375
California State GO Series 1994 (e)
6.50%, 03/01/03 2,000 2,112
California State Intercommunity
Hospital Finance Authority COP
(North Bay Healthcare Project) (e)
4.40%, 11/01/06 1,745 1,662
California State Public Works Board
Energy Effeciency Revenue Refunding
Bonds Series B (e)
4.00%, 09/01/06 1,155 1,093
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 2,981
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 2,047
6.40%, 12/01/02 2,000 2,132
California State West & Central Basin
Financing Authority RB (e)
6.13%, 08/01/02 1,425 1,503
California Statewide Community
Development Authority COP
(St. Joseph Health System) Series 1997
5.00%, 07/01/04 750 747
California Statewide Community
Development Authority COP
(The Internext Group Project)
4.13%, 04/01/04 3,500 3,264
24
<PAGE>
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 $ 1,239
California Statewide Community
Development Authority Revenue
Refunding Bonds (Sherman Oaks Project)
Series 1998A (e)
5.00%, 08/01/06 2,500 2,528
Central Contra Costa Sanitary District,
California Revenue Refunding Bonds
4.10%, 09/01/09 1,435 1,311
City of Santa Monica, California
Wastewater RB (Hyperion Project)
Series 1991A
6.25%, 01/01/02 1,250 1,311
Contra Costa, California
Transportation Authority Sales Tax RB
Series 1995A (e)
4.80%, 03/01/01 1,000 1,012
Contra Costa, California Transportation
Authority Sales Tax RB (e)
6.00%, 03/01/03 2,530 2,638
Fontana, California Special Tax Revenue
Refunding Bonds Senior Community
Facilities (District 2-A) Series 1998 (e)
4.10%, 09/01/04 1,120 1,093
4.20%, 09/01/05 1,375 1,337
Fresno, California Community Facilities
District No. 3 (Palm Bluffs Corporate
Center) Special Tax Series 1998 (e)
4.75%, 09/01/05 2,000 2,000
Fresno, California Health Facility RB
(Holy Cross Health System - St. Agnes
Medical Center) Series 1991
6.50%, 06/01/02 550 583
Inglewood, California Redevelopement
Agency Tax Allocation Bond (Merged
Redeveloped Project) Series 1998A (e)
3.88%, 05/01/05 525 501
Long Beach Harbor, California RB
Series 1998A (e)
5.50%, 05/15/05 3,985 4,124
Los Angeles County, California Public
Works Financing Authority Refunding
Bonds (Capital Construction Flood Control
District Project)
4.30%, 03/01/00 1,090 1,090
Par Value
------ --------
Los Angeles, California Community
Redevelopment Pooled Financing
Authority Revenue Refunding Bonds
(Beacon Street Project) Series F (e)
5.00%, 09/01/07 $ 810 $ 820
Los Angeles, California Community
Redevelopment Pooled Financing
Authority Revenue Refunding Bonds
(Monterey Project) Series E (e)
5.00%, 09/01/07 1,570 1,590
Los Angeles, California Department of
Airports Revenue Refunding Bonds
Series 1995B (e)
6.50%, 05/15/03 2,300 2,435
Los Angeles, California Department of
Water & Power Electric Plant Revenue
Refunding Bonds Series 1994
4.50%, 08/15/01 2,270 2,281
Los Angeles, California State Building
Authority Lease Revenue Refunding
Bonds (California Department of
General Services) Series 1995A
5.60%, 05/01/04 1,000 1,036
Northern California Power Agency Public
Power RB (Geothermal Project 3-A) (e)
5.60%, 07/01/06 2,000 2,072
Northern California Power Agency Public
Power Revenue Refunding Bonds
(Geothemal Project No. 3)
Series 1998A (e)
5.00%, 07/01/04 2,000 2,038
Orange County, California Municipal
District Water Facilities COP (Allen-
McColloch Pipeline Project)
Series 1996 (e)
4.60%, 07/01/01 3,000 3,015
Orange County, California Recovery
COP Series 1996A (e)
6.00%, 07/01/08 3,000 3,210
Rancho, California Water District
Financing Authority (e)
4.70%, 09/15/01 2,500 2,494
Rim of the World, California Unified
School District COP (Measure V Capital
Improvement Projects) Series 1992 (e)
5.90%, 09/01/01 1,490 1,527
25
<PAGE>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)(continued)
February 29, 2000 (Unaudited)
Par Value
------ --------
Riverside County, California Public
Financing Authority Special Tax RB
Senior Lein Bonds Series 1995A (e)
4.40%, 09/01/01 $1,750 $ 1,757
Sacramento, California City Financing
Authority Lease RB (State of California
EPA Building Project) Series A (e)
3.90%, 05/01/07 1,000 928
Sacramento, California Regional County
Sanitation District
5.00%, 08/01/03 2,100 2,139
San Diego County, California COP
(East Mesa) (e)
4.75%, 10/01/08 880 870
4.75%, 10/01/09 505 496
San Francisco, California Bay Area Rapid
Transit District Sales Tax RB
Series 1998 (e)
5.50%, 07/01/05 3,000 3,124
San Francisco, California Bay Area Transit
Financing Authority RB (Bridge Toll
Notes) Series 1999 (e)
5.00%, 02/01/07 500 499
San Francisco, California City & County
Airport Commission International
Airport RB 2nd Series - 15A (e)
5.50%, 05/01/09 2,000 2,055
San Francisco, California State University
Foundation Inc. RB (Auxiliary
Organization Student Housing) (e)
4.30%, 07/01/05 540 522
5.00%, 07/01/08 400 396
San Joaquin, California Area Flood
Control Agency Improvement Bond
Act 1915 (Flood Protection Restoration
Assessment) Series 1996 (e)
5.10%, 09/02/03 1,360 1,391
San Jose, California Financing Authority
Revenue Refunding Bonds (Convention
Center Project) Series 1993C
5.90%, 09/01/04 2,500 2,597
Southern California Metropolitan Water
District RB Series 1991
6.63%, 07/01/01 1,000 1,049
Southern California Public Power Authority
Project RB (San Juan Power Project Unit 3)
Series 1993A (e)
5.00%, 01/01/04 1,600 1,626
Par Value
------ --------
Stockton, California Insured Health
Facilities RB (St. Joseph Medical Center
of Stockton) Series 1993A (e)
4.60%, 06/01/00 $ 200 $ 200
--------
108,781
--------
PUERTO RICO -- 1.7% (e)
Puerto Rico Municipal Finance Agency
GO Series 1999A
5.50%, 08/01/08 1,820 1,868
--------
TOTAL MUNICIPAL BONDS
(Cost $112,548) 110,649
--------
Shares
------
OTHER INVESTMENT COMPANIES -- 0.1% (c)
Provident Institutional Funds - California
Money Fund Portfolio
2.29% 93 93
--------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $93) 93
--------
TOTAL INVESTMENTS -- 100.0%
(Cost $112,641) 110,742
--------
OTHER ASSETS AND LIABILITIES -- 0.0%
Other assets 2,332
Liabilities (2,294)
--------
38
--------
TOTAL NET ASSETS -- 100.0% $110,780
========
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
26
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 2000 (Unaudited)
Par Value
------ --------
MUNICIPAL BONDS -- 96.8% (a)
ABAG, California Revenue Tax
Allocation Bond (Redevelopment
Agency Pool) Series 1997A-6 (e)
5.25%, 12/15/17 $1,200 $ 1,134
ABAG Finance Authority For Nonprofit
Corporations, California Industrial
Revenue COP (Lytton Gardens, Inc.) (e)
6.00%, 02/15/30 3,000 2,902
Alameda County, California COP
(Alameda Medical Center Project)
Series 1998 (e)
5.38%, 06/01/18 3,400 3,192
Alameda County, California Corridor
Transportation Authority RB
Series 1999A (e)
4.75%, 10/01/25 1,500 1,234
Brea Olinda, California Unified School
District GO Series 1999A (e)
5.60%, 08/01/20 1,000 971
California Educational Facilities
Authority RB (University of Southern
California)
5.50%, 10/01/27 4,570 4,267
California Educational Facilities
Authority RB (University of Southern
California) Series 1997C
5.13%, 10/01/28 2,000 1,755
California Educational Facilities
Authority RB (University of Southern
California) Series 1998A
5.00%, 10/01/28 2,000 1,707
California Educational Facilities Authority
Revenue Refunding Bonds (Santa Clara
University)
5.25%, 09/01/26 2,330 2,100
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 4,979
California Health Facilities Financing
Authority RB (Association of Retarded
Citizens) Series 1991 (e)
7.00%, 05/01/21 455 471
Par Value
------ --------
California Health Facilities Financing
Authority RB (Cedars Sinai Medical
Center) Series 1999A
6.13%, 12/01/19 $2,750 $ 2,688
California Health Facilities Financing
Authority RB (Kaiser Permanente
Hospital) Series 1998A (e)
5.00%, 06/01/24 2,500 2,153
California Health Facilities Financing
Authority RB (Kaiser Permanente
Hospital) Series 1998B
5.00%, 10/01/18 5,000 4,019
California Health Facilities Financing
Authority RB (Stanford Health Care)
Series 1998B (e)
5.00%, 11/15/28 1,000 850
California Health Facilities Financing
Authority RB (Sutter Health)
Series 1999A (e)
5.00%, 08/15/19 1,000 887
California HFA Home Mortgage RB
Series 1994G
7.20%, 08/01/14 3,000 3,139
California HFA Home Mortgage RB
Series 1995L (e)
5.90%, 08/01/17 1,000 1,001
California HFA M/F Rental Housing RB
Series 1992B
6.70%, 08/01/15 1,000 1,045
California HFA RB Series 1995J (e)
6.00%, 08/01/17 3,000 3,011
California State Department of Water
Resources RB (Central Valley Project)
Series 1997S
5.00%, 12/01/22 1,200 1,047
California State Public Works Board Lease
Revenue Refunding Bonds (Various
California State University Projects)
Series 1996A (e)
5.38%, 10/01/17 200 192
California Statewide Communities
Development Authority COP (St. Joseph
Health Systems Obligated Group)
6.50%, 07/01/15 2,000 2,172
California Statewide Communities
Development Authority COP
(The Internext Group)
5.38%, 04/01/17 5,000 4,106
27
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)(continued)
February 29, 2000 (Unaudited)
Par Value
------ --------
California Statewide Communities
Development Authority Hospital
Revenue COP (Cedars-Sinai Medical
Center)
6.50%, 08/01/15 $1,250 $ 1,267
Capistrano, California Unified School
District School Facilities Improvement
GO (District No. 1) Series 2000A (d) (e)
6.00%, 08/01/24 1,525 1,538
Chico, California Unified School District
GO Series 1998 (e)
5.00%, 08/01/16 1,155 1,052
Chico, California Unified School District
Series 1992C (e)
6.75%, 06/01/17 500 533
Colton, California Public Financing
Authority Special Tax RB Series 1996 (e)
5.45%, 09/01/19 3,020 2,888
Colton, California Public Financing
Authority Tax Allocation RB
Series 1998A (e)
5.00%, 08/01/18 2,715 2,437
Contra Costa County, California Public
Financing Authority Tax Allocation RB
(Pleasant Hill Bart Redevelopment
Project)
5.25%, 08/01/28 3,750 3,014
East Bay, California Municipal Utility
District Water System RB Series 1998
5.25%, 06/01/19 2,600 2,395
Foothill Eastern Corridor Agency,
California Toll Road RB (e)
5.13%, 01/15/19 5,000 4,544
Inglewood, California Redevelopment
Agency Tax Allocation Bond (Merged
Redevelopment Project) Series 1998A (e)
5.25%, 05/01/16 1,000 965
Lake Elsinore, California Unified School
District COP (e)
4.75%, 02/01/20 1,200 1,012
Los Angeles County, California Public
Works Financing Authority Lease RB
(Multiple Capital Facilities Project V)
Series 1996A (e)
5.13%, 06/01/17 2,000 1,865
Par Value
------ --------
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 $ 967
Los Angeles County, California
Transportation Commission Sales Tax
Revenue Refunding Bonds Series 1991B
6.50%, 07/01/13 555 577
Los Angeles, California Department of
Water & Power Electric Plant RB
6.00%, 01/15/11 865 900
Modesto, California Irrigation District
COP Refunding & Capital Improvement
Bonds Series 1999B
5.30%, 07/01/22 4,340 3,814
Modesto, California Public Financing
Authority Lease RB (Capital Imports
& Refunding Project) (e)
5.13%, 09/01/20 3,740 3,361
Northern California Power Agency Multiple
Capital Facilities RB Series 1992A (e)
6.50%, 08/01/02 1,425 1,514
6.50%, 08/01/12 1,875 1,983
Oakland, California Joint Powers Financing
Authority Reassessment RB
5.50%, 09/02/24 1,000 855
Oceanside, California Building Authority
COP Refunding Bonds Series 1993A
6.38%, 04/01/12 1,250 1,300
Orange County, California Community
Facilities District Special Tax Number
87-4 RB Series 1997A (e)
5.25%, 08/15/19 2,000 1,862
Pomona, California Public Financing
Authority RB (Water Facilities Project)
Series 1999AA (e)
5.00%, 05/01/19 3,000 2,659
Rancho Cucamonga, California
Redevelopment Agency Tax Allocation
Revenue Refunding Bonds (Rancho
Redevelopment Project) (e)
5.25%, 09/01/20 4,315 3,932
Redlands, California Financing Authority
Wastewater Revenue Refunding Bonds
Series 1999A (e)
5.00%, 09/01/17 2,600 2,353
28
<PAGE>
Par Value
------ --------
Riverside County, California Asset Leasing
Corp. Leasehold RB (Riverside County
Hospital Project) Series 1997B (e)
5.00%, 06/01/19 $3,000 $ 2,655
Riverside County, California Public
Financing Authority Tax Allocation RB
(Redevelopment Projects) Series 1997A
5.63%, 10/01/33 4,905 4,182
Sacramento, California City Financing
Authority Capital Improvement RB
(Solid Waste & Redevelopment Project) (e)
5.88%, 12/01/29 3,000 2,977
Sacramento, California Cogeneration
Authority Revenue Refunding Bonds
(Cogeneration Project) (e)
5.20%, 07/01/21 1,000 905
Sacramento, California Regional Transit
District COP Series 1992A
6.38%, 03/01/05 250 263
Sacramento, California Regional Transit
District Refunding COP (Light Rail
Transportation Project)
6.75%, 07/01/07 2,000 2,085
Salida, California Area Public Facilities
Financing Agency District Special Tax
Series 1988-1 (e)
5.25%, 09/01/28 2,000 1,790
Salinas, California COP (Golf Course and
Animal Shelter) Series 1999A (e)
5.00%, 09/01/25 1,845 1,596
San Bernardino County, California COP
(West Valley Detention Center) (e)
6.50%, 11/01/12 420 446
San Diego County, California Water
Authority COP Revenue Refunding Bonds
Series 1997A
4.75%, 05/01/20 3,000 2,539
San Francisco, California Bay Area Rapid
Transit District Sales Tax RB (e)
5.25%, 07/01/18 2,680 2,489
5.50%, 07/01/26 1,000 940
San Francisco, California City & County
Airport Commission International
Airport RB 2nd Series, Issue 11 (e)
6.20%, 05/01/19 2,000 2,038
San Francisco, California City & County
Airport Commission International
Airport RB 2nd Series, Issue 12-B (e)
5.63%, 05/01/21 2,000 1,943
Par Value
------ --------
San Francisco, California Downtown
Parking Corp. RB
6.65%, 04/01/18 $ 500 $ 523
San Francisco, California State University
Foundation Inc., Auxillary Organization
Student Housing (e)
5.20%, 07/01/19 1,150 1,005
San Joaquin County, California COP
Revenue Refunding Bond (General
Hospital Project) (e)
5.00%, 09/01/20 5,065 4,464
San Mateo County, California Power
Authority Lease RB (Capital Projects)
Series 1999A (e)
4.75%, 07/15/23 2,000 1,658
Santa Clara County, California Financing
Authority Lease RB (VMC Facility
Replacement Project) Series 1994A (e)
7.75%, 11/15/10 1,460 1,761
6.88%, 11/15/14 2,000 2,215
Santa Clara, California Redevelopment
Agency Tax Allocation Revenue Refunding
Bonds (Bayshore North Project) (e)
7.00%, 07/01/10 1,500 1,710
South Gate, California Public Financing
Authority Tax Allocation RB (Housing
Redevelopment Project No. 1)
Series 1998A (e)
5.00%, 09/01/19 1,415 1,258
South Orange County, California Public
Financing Authority Special Tax RB
Series 1999A (e)
5.25%, 08/15/18 6,095 5,676
Temecula, California Community Services
District COP (Community Recreation
Center Project) Series 1992
7.13%, 10/01/12 1,000 1,059
Tri City, California Hospital District RB
Series 1996A (e)
5.63%, 02/15/17 1,000 986
University of California RB (University of
California Hospital Medical Center
Project) (e)
5.75%, 07/01/24 500 487
Vallejo, California Revenue Refunding
Bonds (Water Improvement Project)
Series 1996A (e)
5.70%, 05/01/16 2,000 2,008
29
<PAGE>
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)(continued)
February 29, 2000 (Unaudited)
Par Value
------ --------
West Basin County, California Municipal
Water District COP Revenue Refunding
Bonds Series 1997A (e)
5.50%, 08/01/17 $ 500 $ 489
5.50%, 08/01/22 1,000 946
Westminster, California Public Financing
Authority COP (Civic Center & Street
Improvement Project)
7.00%, 06/01/19 3,325 3,616
--------
TOTAL MUNICIPAL BONDS
(Cost $166,054) 157,318
--------
VARIABLE RATE OBLIGATIONS -- 2.7%(b)(e)
California Pollution Control Financing
Authority Pollution Control Revenue
Refunding Bonds (Pacific Gas & Electric
Company) Series 1996C
3.15%, 03/01/00 300 300
California Pollution Control Financing
Authority Pollution Control Revenue
Refunding Bonds (Shell Oil Co. Project)
Series 1991C
3.20%, 03/01/00 400 400
Irvine Ranch, California Improvement Bond
Act 1915 RB (Assement District No. 97-16)
3.25%, 03/01/00 700 700
Irvine Ranch, California Water District
Consolidated Revenue Refunding Bonds
Series 1985A1
3.25%, 03/01/00 900 900
Irvine Ranch, California Water District RB
Series 1993A
3.25%, 03/01/00 195 195
Irvine Ranch, California Water District
Revenue Refunding Bonds
(District No. 102, 103,105, & 106)
3.25%, 03/01/00 600 600
Orange County, California Sanitation
District COP (Districts 1, 2, 3, 5, 6, 7,
11, 13 & 14)
3.25%, 03/01/00 1,300 1,300
--------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $4,395) 4,395
--------
Shares Value
------ --------
OTHER INVESTMENT COMPANIES -- 0.0%(c)
Provident Institutional Funds - California
Money Fund Portfolio
2.29% 44 $ 44
--------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $44) 44
--------
TOTAL INVESTMENTS -- 99.5%
(Cost $170,493) 161,757
--------
OTHER ASSETS AND LIABILITIES -- 0.5%
Other assets 2,676
Liabilities (1,834)
--------
842
--------
TOTAL NET ASSETS -- 100.0% $162,599
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
30
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
February 29, 2000 (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) Rate shown is the yield as of the report date.
(d) Security traded on a delayed-delivery basis. Payment and delivery is
scheduled for a future time, generally within two weeks of entering into the
transaction. The transaction is subject to market fluctuation and to the
risk that the value may be more or less than the purchase price when the
transaction was initiated. The fund has set aside sufficient investment
securities as collateral for securities purchased on a delayed-delivery
basis.
(e) Security has one or more third party credit enhancements.
PORTFOLIO ABBREVIATIONS
ABAG Association of Bay Area Governments
COP Certificates of Participation
EPA Environmental Protection Agency
GO General Obligation
HFA Housing Finance Agency
M/F Multi-Family
RB Revenue Bond
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 29, 2000 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ------------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $112,641, $170,493, respectively) $110,742 $161,757
Receivables:
Interest 1,779 2,504
Fund shares sold 544 121
Prepaid expenses 9 11
-------- --------
Total assets 113,074 164,393
-------- --------
LIABILITIES
Payables:
Dividends 50 99
Investments purchased 2,078 1,525
Fund shares redeemed 152 191
Investment advisory and administration fees 1 2
Transfer agency and shareholder service fees 4 6
Other liabilities 9 11
-------- --------
Total liabilities 2,294 1,834
-------- --------
Net assets applicable to outstanding shares $110,780 $162,559
======== ========
NET ASSETS CONSIST OF:
Paid-in capital $113,441 $174,654
Distributions in excess of net investment income (16) (36)
Accumulated net realized loss on investments sold (746) (3,323)
Net unrealized depreciation on investments (1,899) (8,736)
-------- --------
$110,780 $162,559
======== ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 11,089 15,704
Net asset value, offering and redemption price per share $9.99 $10.35
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 29, 2000 (Unaudited)
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ----------
Interest income $ 2,606 $ 5,151
------- -------
Expenses:
Investment advisory and administration fees 207 314
Transfer agency and shareholder service fees 149 225
Custodian and portfolio accounting fees 37 46
Professional fees 9 8
Shareholder reports 5 9
Trustees' fees 3 3
Other expenses 6 9
------- -------
416 614
Less: expenses reduced (see Note 4) (124) (173)
------- -------
Total expenses incurred by fund 292 441
------- -------
Net investment income 2,314 4,710
------- -------
Net realized gain (loss) on investments sold 18 (3,057)
Net unrealized depreciation on investments (1,263) (5,498)
------- -------
Net loss on investments (1,245) (8,555)
------- -------
Increase (decrease) in net assets resulting
from operations $ 1,069 $(3,845)
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
<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 29, 2000 August 31, February 29, 2000 August 31,
(Unaudited) 1999 (Unaudited) 1999
----------------- ---------- ------------------ ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,314 $ 4,337 $ 4,710 $ 9,620
Net realized gain (loss) on investments sold 18 24 (3,057) 327
Net unrealized depreciation on investments (1,263) (2,238) (5,498) (13,671)
--------- --------- --------- ---------
Increase (decrease) in net assets resulting from operations 1,069 2,123 (3,845) (3,724)
--------- --------- --------- ---------
Dividends to shareholders from net investment income (See Note 2) (2,302) (4,341) (4,681) (9,629)
--------- --------- --------- ---------
Capital share transactions:
Proceeds from shares sold 27,716 81,467 16,094 91,493
Net asset value of shares issued in reinvestment of dividends 1,781 3,386 3,020 6,339
Payments for shares redeemed (43,182) (52,831) (49,711) (72,994)
--------- --------- --------- ---------
Increase (decrease) in net assets from capital share transactions (13,685) 32,022 (30,597) 24,838
--------- --------- --------- ---------
Total increase (decrease) in net assets (14,918) 29,804 (39,123) 11,485
Net assets:
Beginning of period 125,698 95,894 201,682 190,197
--------- --------- --------- ---------
End of period (including distributions in excess of net
investment income of ($16), ($28), ($36)
and ($65), respectively) $ 110,780 $ 125,698 $ 162,559 $ 201,682
========= ========= ========= =========
Number of fund shares:
Sold 2,764 7,935 1,534 7,967
Reinvested 178 331 289 556
Redeemed (4,313) (5,151) (4,753) (6,399)
--------- --------- --------- ---------
Net increase (decrease) in shares outstanding (1,371) 3,115 (2,930) 2,124
Shares outstanding:
Beginning of period 12,460 9,345 18,634 16,510
--------- --------- --------- ---------
End of period 11,089 12,460 15,704 18,634
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab California Short/Intermediate Tax-Free Bond Fund
FISCAL PERIOD ENDED 8/31 2000 1 1999 1998 1997 1996 1995
PER SHARE DATA ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period 10.09 10.26 10.16 10.04 10.06 9.89
-----------------------------------------------------------
From investment operations:
Net investment income 0.19 0.39 0.41 0.43 0.43 0.42
Net realized and unrealized gain (loss)
on investments (0.10) (0.17) 0.11 0.12 (0.02) 0.17
-----------------------------------------------------------
Total from investment operations 0.09 0.22 0.52 0.55 0.41 0.59
Less distributions:
Dividends from net investment income (0.19) (0.39) (0.42) (0.43) (0.43) (0.42)
-----------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 9.99 10.09 10.26 10.16 10.04 10.06
===========================================================
Total return (%) 0.93** 2.16 5.19 5.54 4.11 6.17
RATIOS/SUPPLEMENTAL DATA (%)
- -----------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.49* 0.49 0.49 0.49 0.49 0.50
Reductions reflected in above expense ratio 0.21* 0.28 0.30 0.40 0.38 0.34
Ratio of net investment income to
average net assets 3.88* 3.81 4.02 4.21 4.23 4.29
Portfolio turnover rate 21 7 8 23 20 62
Net assets, end of period ($ x 1,000) 110,780 125,698 95,894 58,876 45,788 40,639
<FN>
1 For the six months ended February 29, 2000 (Unaudited).
* Annualized.
**Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab California Long-Term Tax-Free Bond Fund
FISCAL PERIOD ENDED 8/31 2000 1 1999 1998 1997 1996 1995
PER SHARE DATA ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period 10.82 11.52 11.10 10.63 10.53 10.40
-----------------------------------------------------------
From investment operations:
Net investment income 0.27 0.54 0.54 0.56 0.57 0.56
Net realized and unrealized gain (loss)
on investments (0.47) (0.70) 0.43 0.47 0.10 0.13
-----------------------------------------------------------
Total from investment operations (0.20) (0.16) 0.97 1.03 0.67 0.69
Less distributions:
Dividends from net investment income (0.27) (0.54) (0.55) (0.56) (0.57) (0.56)
-----------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.35 10.82 11.52 11.10 10.63 10.53
===========================================================
Total return (%) (1.82)** (1.57) 8.96 9.95 6.43 6.98
RATIOS/SUPPLEMENTAL DATA (%)
- -----------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.49* 0.49 0.49 0.49 0.49 0.58
Reductions reflected in above expense ratio 0.19* 0.26 0.27 0.33 0.33 0.23
Ratio of net investment income to
average net assets 5.23* 4.69 4.79 5.17 5.30 5.54
Portfolio turnover rate 9 55 28 35 36 46
Net assets, end of period ($ x 1,000) 162,559 201,682 190,197 125,284 101,616 90,045
<FN>
1 For the six months ended February 29, 2000 (Unaudited).
* Annualized.
**Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 2000 (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-Registered Trademark-, Schwab Short-Term Bond Market Index Fund, Schwab
Total Bond Market Index Fund, Schwab Short/Intermediate Tax-Free Bond Fund,
Schwab Long-Term Tax-Free Bond Fund, and Schwab YieldPlus Fund-TM-. The
assets of each series are segregated and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
SECURITY VALUATION -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities with 60 days or less to maturity are stated at amortized
cost, which approximates market value.
SECURITY TRANSACTIONS, INTEREST INCOME AND REALIZED GAINS (LOSSES) -- Security
transactions are accounted for on a trade date basis (date the order to buy or
sell is executed). Interest income is accrued on a daily basis and includes
accretion of original issue discount and amortization of market premium. For
callable bonds purchased at a premium, the excess of the purchase price over the
call value is amortized against interest income through the call date. If the
call provision is not exercised, any remaining premium is amortized through the
final maturity date. Realized gains and losses from security transactions are
determined on an identified cost basis.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Each fund declares a dividend
daily, substantially equal to its net investment income for that day, payable
monthly. Net realized capital gains, if any, are normally distributed 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 all of its net investment income and realized net capital gains, if
any, to shareholders. Therefore, no federal income tax provision is required.
Each fund is considered a separate entity for federal income tax purposes.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
Net unrealized appreciation (depreciation) at February 29, 2000, (was
substantially the same for financial reporting and federal income tax purposes)
was as follows:
<TABLE>
<CAPTION>
Net unrealized Appreciated Depreciated
Depreciation Securities Securities
-------------- ----------- -----------
<S> <C> <C> <C>
Schwab California Short/Intermediate Tax-Free Bond Fund $(1,899) $ 164 $ (2,063)
Schwab California Long-Term Tax-Free Bond Fund $(8,736) $2,176 $(10,912)
</TABLE>
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1999, the unused capital loss
carryforwards for federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
<S> <C> <C>
Expiring in:
08/31/03 $ 68 $ --
08/31/04 696 334
---- ----
Total capital loss carryforwards $764 $334
==== ====
</TABLE>
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 a graduated annual fee, payable monthly, of 0.30% of each
fund's average daily net assets of the first $500 million, and 0.22% of such
assets over $500 million. The investment adviser has reduced a portion of its
fee for the period ended February 29, 2000 (see Note 4).
Prior to November 15, 1999, for its advisory and administration services, the
investment adviser was entitled to receive an annual fee, payable monthly from
each fund of 0.41% of each fund's average daily net assets.
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
period ended February 29, 2000, 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 $6 related to the Trust's
unaffiliated trustees.
38
<PAGE>
INTERFUND TRANSACTIONS -- During the period ended February 29, 2000, the funds
engaged in purchase and sale transactions with funds that have a common
investment adviser, common trustees, and common officers. These transactions,
made at current market value pursuant to Rule 17a-7 under the Act, as amended,
aggregated $58,549 and $36,242 for the Schwab California Short/Intermediate
Tax-Free Bond Fund and Schwab California Long-Term Tax-Free Bond Fund,
respectively.
4. EXPENSES REDUCED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser and Schwab guarantee that, through at least October 31,
2000, 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,
including proxy-related expenses, and taxes.
For the period ended February 29, 2000, the total of such fees reduced by the
investment adviser was $124 for the Schwab California Short/Intermediate
Tax-Free Bond Fund and $173 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 period ended February 29, 2000, were as follows:
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
Purchases $24,679 $16,636
Proceeds of sales and maturities $30,653 $47,354
39
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THE SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money market
funds.
Please visit us at WWW.SCHWAB.COM/SCHWABFUNDS or call 800-435-4000 for a free
prospectus and brochure for any of these SchwabFunds.
This report must be preceded or accompanied by a current prospectus.
METHODS FOR PLACING ORDERS
The information below outlines how Schwab brokerage account investors can place
orders. If you are investing through a third-party investment provider, methods
for placing orders may be different.
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
MAIL
Write to SchwabFunds-Registered Trademark- at:
P.O. Box 7575, San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signatures of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab office.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab MarketManager Growth Portfolio
Schwab MarketManager Balanced Portfolio
SCHWAB STOCK FUNDS
Schwab S&P 500 Fund
Schwab 1000 Fund-Registered Trademark-
Shwab Total Stock Market Index Fund
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager Small Cap Portfolio
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio
SCHWAB BOND FUNDS
Schwab YieldPlus Fund-TM-
Schwab Total Bond Market Index Fund
Schwab Short-Term Bond Market Index Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate
Tax-Free Bond Fund
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds(1) that seek high current income
consistent with safety and liquidity. Choose from taxable or tax-advantaged
alternatives. Many can be linked to your Schwab account to "sweep" cash balances
automatically when you're between investments. Or, for your larger cash
reserves, choose one of our Value Advantage Investments-Registered Trademark-.
(1) Investments in money market funds are neither insured nor guaranteed by
the Federal Deposit Insurance Corporation (FDIC) or any other government
agency and, although they seek to preserve the value of your investment at
$1 per share, it is possible to lose money.
<PAGE>
[LOGO]
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
P.O. Box 7575, San Francisco, CA 94120-7575
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
-C- 2000 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. MKT3481-2 (4/00)
