<PAGE>
SCHWABFUNDS-REGISTERED TRADEMARK-
SCHWAB
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 TAX-FREE
BOND FUNDS
Semiannual Report
February 29, 2000
<PAGE>
SCHWAB TAX-FREE BOND FUNDS
We're pleased to bring you this semiannual report for the following funds (the
funds) for the six-month period ended February 29, 2000:
- Schwab Short/Intermediate Tax-Free Bond Fund
- Schwab Long-Term Tax-Free Bond Fund
During the reporting period, the funds continued to attempt to provide a high
level of current income exempt from federal income taxes, consistent with the
preservation of capital. In addition to performance and portfolio information,
this report contains information regarding dividends paid by the funds during
each fiscal year (or reporting period) since their inceptions.
The SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in debt
securities issued by or on behalf of the states, territories and possessions of
the United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities. Under normal market conditions, the fund seeks
to maintain a dollar-weighted average portfolio maturity of between two and five
years for the portfolio.
The SCHWAB LONG-TERM TAX-FREE BOND FUND invests primarily in debt securities
issued by or on behalf of the states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities. Under normal market conditions, the fund seeks to
maintain a dollar-weighted average portfolio maturity of 10 years or more for
the portfolio.
Income from the funds may be subject to state and local taxes and to the federal
alternative minimum tax (AMT).
CONTENTS
<TABLE>
<S> <C>
- ---------------------------------------------
A Message from the Chairman 1
- ---------------------------------------------
What Every Bond Fund Investor Should
Know 2
- ---------------------------------------------
Market Overview 4
- ---------------------------------------------
Schwab Short/Intermediate Tax-Free Bond
Fund
FUND PERFORMANCE 8
PORTFOLIO SNAPSHOT 10
- ---------------------------------------------
Schwab Long-Term Tax-Free Bond Fund
FUND PERFORMANCE 12
PORTFOLIO SNAPSHOT 14
- ---------------------------------------------
Dividends Paid 16
- ---------------------------------------------
The Portfolio Management Team 17
- ---------------------------------------------
Fund Discussion 18
- ---------------------------------------------
Glossary 20
- ---------------------------------------------
Financial Statements and Notes 23
- ---------------------------------------------
</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% for shares sold within
180 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-
*Some investors may be subject to the alternative minimum tax (AMT); consult
your tax advisor.
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.
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
SOURCE: BLOOMBERG L.P.
<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%
</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
SOURCE: BLOOMBERG L.P.
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%
</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
SOURCE: BLOOMBERG L.P.
<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
</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
SOURCE: BLOOMBERG L.P. 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%
</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 FIVE-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>
9/3/1999 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%
10/1/1999 102.5% 76.6%
10/8/1999 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%
11/5/1999 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%
12/3/1999 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%
1/7/2000 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%
2/4/2000 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 SHORT/INTERMEDIATE TAX-FREE BOND FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/29/00
<TABLE>
<CAPTION>
SINCE
SIX INCEPTION 30-DAY
MONTHS(1) ONE YEAR FIVE YEARS (4/21/93) SEC YIELD
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND(2) 0.44% (0.12)% 4.21% 3.88% 4.46%
- ---------------------------------------------------------------------------------------------------------------
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 end, 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 0.69%,
0.51%, 4.62% and 3.95%, respectively. The 30-day SEC yield as of 12/31/99 was
4.26%.(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 federal income tax
rate of 39.6%. Shareholder tax rates may be different.
<TABLE>
<CAPTION>
30-DAY TAXABLE-EQUIVALENT
SEC YIELD 30-DAY SEC YIELD
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
Schwab Short/Intermediate Tax-Free Bond Fund(2) 4.46% 7.38%
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Actual, not annualized, since period is less than one year.
(2) A portion of the fund's expenses were reduced during the reporting period.
Without such reductions, as of 2/29/00, the fund's 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 4.20%.
(3) A portion of the fund's expenses were reduced during the reporting period.
Without such reductions, as of 12/31/99, the fund's 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 4.10%.
8
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE LEHMAN BROTHERS 3-YEAR
TAX-FREE BOND FUND MUNICIPAL BOND INDEX
<S> <C> <C>
4/21/93 $10,000 $10,000
4/30/93 $9,990 $9,993
5/31/93 $10,038 $10,020
6/30/93 $10,129 $10,085
7/31/93 $10,151 $10,090
8/31/93 $10,283 $10,184
9/30/93 $10,344 $10,228
10/31/93 $10,366 $10,250
11/30/93 $10,326 $10,237
12/31/93 $10,462 $10,344
1/31/94 $10,567 $10,428
2/28/94 $10,412 $10,331
3/31/94 $10,218 $10,206
4/30/94 $10,280 $10,267
5/31/94 $10,323 $10,315
6/30/94 $10,312 $10,318
7/31/94 $10,407 $10,403
8/31/94 $10,429 $10,440
9/30/94 $10,377 $10,414
10/31/94 $10,317 $10,389
11/30/94 $10,245 $10,370
12/31/94 $10,346 $10,415
1/31/95 $10,445 $10,501
2/28/95 $10,563 $10,612
3/31/95 $10,655 $10,707
4/30/95 $10,691 $10,743
5/31/95 $10,881 $10,908
6/30/95 $10,884 $10,934
7/31/95 $10,987 $11,050
8/31/95 $11,079 $11,136
9/30/95 $11,115 $11,167
10/31/95 $11,175 $11,221
11/30/95 $11,255 $11,293
12/31/95 $11,305 $11,340
1/31/96 $11,383 $11,429
2/29/96 $11,364 $11,431
3/31/96 $11,313 $11,403
4/30/96 $11,306 $11,417
5/31/96 $11,312 $11,427
6/30/96 $11,371 $11,496
7/31/96 $11,443 $11,559
8/31/96 $11,447 $11,577
9/30/96 $11,519 $11,647
10/31/96 $11,605 $11,729
11/30/96 $11,712 $11,838
12/31/96 $11,705 $11,844
1/31/97 $11,742 $11,896
2/28/97 $11,801 $11,954
3/31/97 $11,737 $11,892
4/30/97 $11,776 $11,943
5/31/97 $11,876 $12,040
6/30/97 $11,938 $12,111
7/31/97 $12,096 $12,255
8/31/97 $12,065 $12,230
9/30/97 $12,141 $12,319
10/31/97 $12,194 $12,373
11/30/97 $12,222 $12,409
12/31/97 $12,310 $12,493
1/31/98 $12,384 $12,575
2/28/98 $12,397 $12,602
3/31/98 $12,417 $12,622
4/30/98 $12,386 $12,604
5/31/98 $12,502 $12,722
6/30/98 $12,543 $12,765
7/31/98 $12,574 $12,811
8/31/98 $12,689 $12,935
9/30/98 $12,793 $13,018
10/31/98 $12,837 $13,080
11/30/98 $12,862 $13,112
12/31/98 $12,898 $13,143
1/31/99 $13,022 $13,263
2/28/99 $12,997 $13,277
3/31/99 $13,004 $13,289
4/30/99 $13,033 $13,330
5/31/99 $13,000 $13,312
6/30/99 $12,876 $13,232
7/31/99 $12,946 $13,297
8/31/99 $12,925 $13,313
9/30/99 $12,967 $13,363
10/31/99 $12,922 $13,365
11/30/99 $12,991 $13,423
12/31/99 $12,964 $13,402
1/31/00 $12,952 $13,426
2/29/00 $12,982 $13,468
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Short/Intermediate Tax-Free Bond Fund, made at its inception, with a
similar investment in the Lehman Brothers Three-Year Municipal Bond Index.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the fund. Investors cannot invest in an index
directly.
ASSETS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $82,302
- ---------------------------------------------------------------------
Total net assets as of 2/29/00 (000s) $80,656
- ---------------------------------------------------------------------
Percentage growth over reporting period (2)%
- ---------------------------------------------------------------------
</TABLE>
9
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO SNAPSHOT
The Schwab Short/Intermediate Tax-Free Bond Fund invests primarily in tax-exempt
or municipal securities. The information below provides a snapshot of the fund's
characteristics as of 2/29/00, and is not indicative of its composition after
that date. The terms used below are defined beginning on page 20. A complete
list of the securities in the fund's portfolio as of 2/29/00 is provided in the
Schedule of Investments later in this report.
FUND FACTS
<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND PEER GROUP AVERAGE++
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Number of Issues 52 118
- -----------------------------------------------------------------------------------------------------------
30-Day SEC Yield 4.46% 3.77%
- -----------------------------------------------------------------------------------------------------------
Average Weighted Coupon 5.26% 5.60%
- -----------------------------------------------------------------------------------------------------------
Weighted Average Maturity 4.61 years 4.90 years
- -----------------------------------------------------------------------------------------------------------
Average Credit Quality AAA AA
- -----------------------------------------------------------------------------------------------------------
Average Effective Duration 3.74 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 $ 4,088 5.2% 5.2%
- ----------------------------------------------------------------------------------------------------------------
7 - 36 months $ 22,875 28.7% 33.9%
- ----------------------------------------------------------------------------------------------------------------
37 - 60 months $ 18,845 23.5% 57.4%
- ----------------------------------------------------------------------------------------------------------------
More than
60 months $ 33,941 42.6% 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, and is
not indicative of its holdings after that date, nor does it represent a risk
rating or any type of forecast of future performance. Placement is based on
the fund's weighted average maturity and the average credit quality of its
portfolio. The fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than 10 years.
Credit quality is defined on page 21. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
10
<PAGE>
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>
Variable Rate Obligations 1.1%
Temporary Investments 0.1%
Municipal Bonds 98.8%
</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 69.9%
AA 13.8%
A 11.3%
BBB 2.5%
Unrated Securities 2.5%
</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 of
the funds.
(3) Credit quality is based on published ratings from Standard & Poor's Ratings
Group and/or Moody's Investor Service, which are recognized rating services.
Categories reflect the higher published ratings for securities rated
differently by the two agencies, and percentages are dollar-weighted.
LARGEST STATE CONCENTRATIONS
% OF TOTAL NET ASSETS
<TABLE>
<S> <C>
- -----------------------------------------------
New York 11.1%
- -----------------------------------------------
Arizona 6.8%
- -----------------------------------------------
Washington 6.5%
- -----------------------------------------------
South Carolina 6.1%
- -----------------------------------------------
Minnesota 5.5%
- -----------------------------------------------
- -----------------------------------------------
Texas 5.2%
- -----------------------------------------------
District of Columbia 4.9%
- -----------------------------------------------
Nebraska 4.7%
- -----------------------------------------------
Puerto Rico 3.8%
- -----------------------------------------------
Massachusetts 3.7%
- -----------------------------------------------
</TABLE>
11
<PAGE>
SCHWAB 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 (9/11/92) SEC YIELD
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
SCHWAB LONG-TERM TAX-FREE BOND FUND(2) (1.88)% (7.00)% 4.67% 4.90% 5.27%
- -------------------------------------------------------------------------------------------------------------------------
Lehman Brothers General Municipal Bond Index (0.02)% (2.08)% 5.85% 5.71% 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 (4.89)%,
(7.31)%, 5.88% and 4.90%, respectively. The 30-day SEC yield as of 12/31/99 was
5.37%.(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 federal income tax
rate of 39.6%. Shareholder tax rates may be different.
<TABLE>
<CAPTION>
30-DAY TAXABLE-EQUIVALENT
SEC YIELD 30-DAY SEC YIELD
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
Schwab Long-Term Tax-Free Bond Fund(2) 5.27% 8.73%
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Actual, not annualized, since period is less than one year.
(2) A portion of the fund's expenses were 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 4.98%.
(3) A portion of the fund's expenses were 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 5.21%.
12
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB LONG-TERM LEHMAN BROTHERS GENERAL
TAX-FREE BOND FUND MUNICIPAL BOND INDEX
<S> <C> <C>
9/11/92 $10,000 $10,000
9/30/92 $9,867 $9,923
10/31/92 $9,515 $9,826
11/30/92 $9,912 $10,002
12/31/92 $10,092 $10,104
1/31/93 $10,240 $10,221
2/28/93 $10,682 $10,591
3/31/93 $10,484 $10,479
4/30/93 $10,632 $10,585
5/31/93 $10,690 $10,644
6/30/93 $10,883 $10,822
7/31/93 $10,879 $10,836
8/31/93 $11,157 $11,062
9/30/93 $11,298 $11,188
10/31/93 $11,315 $11,209
11/30/93 $11,201 $11,111
12/31/93 $11,465 $11,345
1/31/94 $11,588 $11,475
2/28/94 $11,274 $11,177
3/31/94 $10,791 $10,722
4/30/94 $10,858 $10,813
5/31/94 $10,970 $10,907
6/30/94 $10,870 $10,840
7/31/94 $11,085 $11,044
8/31/94 $11,109 $11,083
9/30/94 $10,921 $10,920
10/31/94 $10,657 $10,726
11/30/94 $10,381 $10,532
12/31/94 $10,658 $10,764
1/31/95 $11,050 $11,072
2/28/95 $11,381 $11,394
3/31/95 $11,514 $11,524
4/30/95 $11,483 $11,538
5/31/95 $11,918 $11,906
6/30/95 $11,735 $11,802
7/31/95 $11,836 $11,914
8/31/95 $11,971 $12,065
9/30/95 $12,056 $12,141
10/31/95 $12,250 $12,317
11/30/95 $12,443 $12,521
12/31/95 $12,591 $12,642
1/31/96 $12,640 $12,738
2/29/96 $12,520 $12,651
3/31/96 $12,366 $12,489
4/30/96 $12,319 $12,454
5/31/96 $12,311 $12,449
6/30/96 $12,484 $12,585
7/31/96 $12,599 $12,699
8/31/96 $12,553 $12,697
9/30/96 $12,780 $12,875
10/31/96 $12,948 $13,020
11/30/96 $13,188 $13,258
12/31/96 $13,117 $13,203
1/31/97 $13,097 $13,228
2/28/97 $13,223 $13,350
3/31/97 $12,987 $13,172
4/30/97 $13,146 $13,283
5/31/97 $13,358 $13,482
6/30/97 $13,502 $13,626
7/31/97 $13,933 $14,004
8/31/97 $13,728 $13,872
9/30/97 $13,927 $14,037
10/31/97 $14,025 $14,127
11/30/97 $14,146 $14,210
12/31/97 $14,408 $14,418
1/31/98 $14,556 $14,566
2/28/98 $14,529 $14,571
3/31/98 $14,565 $14,584
4/30/98 $14,488 $14,518
5/31/98 $14,750 $14,747
6/30/98 $14,806 $14,805
7/31/98 $14,853 $14,842
8/31/98 $15,074 $15,072
9/30/98 $15,252 $15,260
10/31/98 $15,228 $15,260
11/30/98 $15,282 $15,314
12/31/98 $15,292 $15,352
1/31/99 $15,471 $15,535
2/28/99 $15,369 $15,466
3/31/99 $15,405 $15,488
4/30/99 $15,421 $15,527
5/31/99 $15,257 $15,437
6/30/99 $14,904 $15,214
7/31/99 $14,909 $15,269
8/31/99 $14,570 $15,147
9/30/99 $14,499 $15,153
10/31/99 $14,172 $14,989
11/30/99 $14,388 $15,148
12/31/99 $14,180 $15,035
1/31/00 $14,064 $14,970
2/29/00 $14,297 $15,144
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Long-Term Tax-Free Bond Fund, made at its inception, with a similar
investment in the Lehman Brothers General Obligation Municipal Bond Index.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the fund. Investors cannot invest in an index
directly.
ASSETS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
Total net assets as of 2/28/99 (000s) $96,558
- ---------------------------------------------------------------------
Total net assets as of 2/29/00 (000s) $73,579
- ---------------------------------------------------------------------
Percentage growth over reporting period (24)%
- ---------------------------------------------------------------------
</TABLE>
13
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
PORTFOLIO SNAPSHOT
The Schwab Long-Term Tax-Free Bond Fund invests primarily in tax-exempt or
municipal securities. The information below provides a snapshot of the fund's
portfolio characteristics as of 2/29/00, and is not indicative of its
composition after that date. The terms used below are defined beginning on
page 20. A complete list of the securities in the fund's portfolio as of 2/29/00
is provided in the Schedule of Investments later in this report.
FUND FACTS
<TABLE>
<CAPTION>
SCHWAB LONG-TERM TAX-FREE
BOND FUND PEER GROUP AVERAGE++
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Number of Issues 51 161
- -----------------------------------------------------------------------------------------------------------
30-Day SEC Yield 5.27% 4.05%
- -----------------------------------------------------------------------------------------------------------
Average Weighted Coupon 5.30% 5.82%
- -----------------------------------------------------------------------------------------------------------
Weighted Average Maturity 19.49 years 16.60 years
- -----------------------------------------------------------------------------------------------------------
Average Credit Quality AAA AA
- -----------------------------------------------------------------------------------------------------------
Average Effective Duration 11.53 years 8.30 years
- -----------------------------------------------------------------------------------------------------------
Expense Ratio 0.49%* 1.11%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/00.
++ 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
309 municipal national long-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 - 1 year $ 4,911 6.8% 6.8%
- ----------------------------------------------------------------------------------------------------------------
2 - 10 years $ 2,662 3.7% 10.5%
- ----------------------------------------------------------------------------------------------------------------
11 - 20 years $ 32,423 44.7% 55.2%
- ----------------------------------------------------------------------------------------------------------------
21 - 30 years $ 32,482 44.8% 100.0%
- ----------------------------------------------------------------------------------------------------------------
More than
30 years $ 0 0.0% 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 and is not
indicative of its holdings after that date, nor does it represent a risk
rating or any type of forecast of future performance. Placement is based on
the fund's weighted average maturity and the average credit quality of its
portfolio. The fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than
10 years. Credit quality is defined on page 21. Average credit quality is
considered high if it is AA or better, medium if it is BBB or A, and low if
it is below BBB.
14
<PAGE>
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 93.2%
Variable Rate Obligations 6.7%
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 76.7%
AA 16.4%
A 5.5%
Unrated Securities 1.4%
</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 of
the funds.
(3) Credit quality is based on published ratings from Standard & Poor's Ratings
Group and/or Moody's Investor Service, which are recognized rating services.
Categories reflect the higher published ratings for securities rated
differently by the two agencies, and percentages are dollar-weighted.
LARGEST STATE CONCENTRATIONS
% OF TOTAL NET ASSETS
<TABLE>
<S> <C>
- -----------------------------------------------
Texas 20.6%
- -----------------------------------------------
Washington 9.3%
- -----------------------------------------------
New York 7.8%
- -----------------------------------------------
Mississippi 7.1%
- -----------------------------------------------
Pennsylvania 7.1%
- -----------------------------------------------
- -----------------------------------------------
Illinois 7.0%
- -----------------------------------------------
Massachusetts 5.8%
- -----------------------------------------------
Michigan 5.2%
- -----------------------------------------------
Florida 4.4%
- -----------------------------------------------
Indiana 4.1%
- -----------------------------------------------
</TABLE>
15
<PAGE>
DIVIDENDS PAID
During the reporting period, the funds continued to attempt to provide a high
level of current income exempt from federal income taxes, consistent with the
preservation of capital. The chart below illustrates the income dividends on a
per-share basis paid by each fund during each fiscal year or reporting period
since inception.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DIVIDENDS PAID BY THE SCHWAB TAX-FREE BOND FUNDS
INCOME DIVIDENDS PER SHARE
FISCAL YEAR 1992* 1993** 1994+ 1995+ 1996+ 1997+ 1998+ 1999+ 2000++
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Schwab Short/Intermediate Tax-Free Bond Fund $0.13 $0.37 $0.40 $0.41 $0.41 $0.42 $0.40 $0.20
Schwab Long-Term Tax-Free Bond Fund $0.17 $0.36 $0.52 $0.53 $0.52 $0.53 $0.53 $0.50 $0.25
</TABLE>
* Period from the fund's inception on 9/11/92 through 12/31/92.
** Period from the fund's inception on 4/21/93 through 8/31/93 for Schwab
Short/Intermediate Tax-Free Bond Fund and for the eight-month period ended
8/31/93 for Schwab Long-Term Tax-Free Bond Fund.
+ For the one-year period ended 8/31 for both funds.
++ 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
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%, had 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 SHORT/INTERMEDIATE TAX-FREE BOND FUND achieved a 0.44% total
return for the six-month reporting period ended February 29, 2000. The return
was derived from a combination of dividend income of 2.03% and the fund's NAV
change of -1.59%. The decline in NAV was a result of the rising short-term
interest rate environment and the fund's increasing yield, which rose from 4.02%
at the beginning of the period to 4.46% at the end of the period.
The SCHWAB LONG-TERM TAX-FREE BOND FUND reported a -1.88% total return for the
six-month reporting period ended February 29, 2000. The return was derived from
a combination of dividend income of 2.47% and the fund's NAV change of -4.35%.
The NAV decrease was a result of the fund's increasing yield, which rose from
5.19% at the beginning of the period to 5.27% at the end of the period.
18
<PAGE>
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, since 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 SHORT/INTERMEDIATE TAX-FREE BOND FUND maintained an average maturity
throughout the reporting period in a relatively narrow range from approximately
4.01 to 4.66 years. The fund's weighted average maturity at the end of the
reporting period was 4.61 years, up from 4.30 years at the beginning of the
period.
The SCHWAB LONG-TERM TAX-FREE BOND FUND maintained an average maturity
throughout the reporting period in a range from approximately 19.28 to 21.29
years. The fund's weighted average maturity at the end of the reporting period
was 19.49 years, up from 19.35 years at the beginning of the period.
19
<PAGE>
GLOSSARY
ALTERNATIVE MINIMUM TAX (AMT)--A federal tax designed to help ensure that at
least a minimum amount of income tax is paid by high-income corporate and
non-corporate taxpayers (including estates and trusts) who reap large tax
savings by making generous use of certain tax 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>
20
<PAGE>
CREDIT RISK--The risk that an issuer of a debt security or a borrower may
default on its obligation.
DIVIDEND--The portion of a company's earnings paid to investors on a per-share
basis.
DURATION--The common objective behind the different definitions of DURATION is
to measure the price sensitivity--and therefore market risk--of a fixed income
security to changes in its yield.
EXPENSE RATIO--Amount, expressed as a percentage of total 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
21
<PAGE>
GLOSSARY (continued)
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.
22
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 2000 (Unaudited)
Par Value
------ -------
MUNICIPAL BONDS -- 97.7% (a)
ALABAMA -- 1.3%
Birmingham, Alabama Special Care Facilities
Hospital Finance Authority RB (Daughters of
Charity National Health System - St. Vincent's
Hospital & Providence) Series 1995
7.00%, 11/01/01 $1,000 $ 1,037
-------
ARIZONA -- 6.8%
Maricopa County, Arizona Unified School
District No 93 (Cave Creek Project) Series
1997A (d)
5.00%, 07/01/03 2,325 2,342
Maricopa County, Arizona Elementary School
District No 068 Alhambra Revenue
Refunding Bonds Series 1994A (d)
6.80%, 07/01/12 2,000 2,153
Phoenix, Arizona Civic Improvement Corp.
RB (Senior Lien Airport Project)
5.00%, 07/01/04 1,000 992
------
5,487
------
CALIFORNIA -- 2.5%
Alameda, California Public Financing
Authority RB
4.95%, 09/02/07 2,065 1,980
-------
COLORADO -- 3 7%
Grand Junction, Colorado IDRB (Dayton
Hudson Corp. Project)
5.25%, 05/01/03 2,000 1,997
Superior, Colorado Metropolitan Revenue
Refunding Bonds (District No. 2) (d)
4.63%, 12/01/13 1,000 974
-------
2,971
-------
DISTRICT OF COLUMBIA -- 4.9% (d)
Washington, DC Convention Center Authority
Dedicated Tax Senior Lien RB
5.00%, 10/01/06 4,000 3,970
-------
FLORIDA -- 1.6% (d)
Orange County, Florida COP Series 1997A
4.80%, 08/01/02 1,300 1,303
-------
Par Value
------ -------
GEORGIA -- 2.6%
Georgia Private Colleges & University Facilities
Authority RB (Emory University Project)
Series 1992C
6.00%, 10/01/05 $2,000 $ 2,090
-------
ILLINOIS -- 2 7%
Chicago, Illinois Public Building Commission
Building RB Series 1999C (d)
5.50%, 02/01/06 1,000 1,021
Illinois Health Facility Authority RB (OSF
Healthcare System) Series 1993
5.13%, 11/15/00 1,145 1,148
-------
2,169
-------
INDIANA -- 1.3% (d)
Monroe County, Indiana Industrial Hospital
Authority Revenue Refunding Bonds
(Bloomington Hospital Project)
4.60%, 05/01/04 1,105 1,082
-------
IOWA -- 3.4% (d)
Black Hawk County, Iowa Hospital Facilities
RB (Allen Memorial Hospital) Series 1990
7.38%, 02/01/01 2,000 2,094
Cedar Rapids, Iowa Hospital Facilities RB
(St. Luke's Methodist Project) Series 1993
6.13%, 08/15/03 600 634
-------
2,728
-------
KENTUCKY -- 3.3% (d)
Carrollton & Henderson, Kentucky Public
Energy Authority Gas RB Series 1998B
4.25%, 01/01/08 3,000 2,670
-------
LOUISIANA -- 1.9% (d)
New Orleans, Louisiana RB Series 1998B
4.50%, 12/01/05 1,600 1,550
-------
MASSACHUSETTS -- 3.7% (d)
Massachusetts Municipal Wholesale Electric
Co. Power Supply Systems RB Series 1992E
5.50%, 07/01/00 2,000 2,009
Massachusetts State Water Reserves Authority
RB Series 1998A
5.00%, 08/01/05 1,000 997
-------
3,006
-------
23
<PAGE>
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 29, 2000 (Unaudited)
Par Value
------ -------
MICHIGAN -- 3.0% (d)
Detroit, Michigan City School District GO
Series 1998B
5.00%, 05/01/04 $1,390 $ 1,395
Michigan State Hospital Finance Authority RB
(McLaren Obligated Group)
7.00%, 09/15/00 1,000 1,035
-------
2,430
-------
MINNESOTA -- 5.5% (d)
Arden Hills, Minnesota Housing & Health Care
Facilities Revenue Refunding Bonds
(Presbyterian Homes Project) Series 1999A
4.33%, 09/01/01 1,500 1,500
Minneapolis, Minnesota Community
Development Agency Tax Increment RB
7.00%, 09/01/00 1,000 1,014
Minnesota State HFA Rental Housing RB
Series 1995D
4.80%, 08/01/01 1,955 1,965
-------
4,479
-------
MISSISSIPPI -- 2.5% (d)
Mississippi Hospital Equipment & Facilities
Authority Revenue Refunding Bonds
(Mississippi Baptist Medical Center)
5.25%, 05/01/01 2,000 2,013
-------
NEBRASKA -- 4.7% (d)
Nebraska Public Energy Agency Gas Supply
RB (Nebraska Public Gas Agency Project)
Series 1998C
4.00%, 09/01/07 2,000 1,760
Nebraska Public Power District RB
Series 1998A
5.25%, 01/01/05 2,000 2,020
-------
3,780
-------
NEW JERSEY -- 1.3% (d)
Brick Township, New Jersey Municipal Utility
Authority Series 1996
5.50%, 12/01/03 1,000 1,024
-------
NEW YORK -- 10.8%
Franklin County, New York GO (d)
4.25%, 11/01/06 715 670
New York City, New York GO Series 1997L
5.10%, 08/01/02 800 804
Par Value
------ -------
New York City, New York Municipal Assistance
Corp. RB Series 1997L
5.50%, 07/01/03 $2,000 $ 2,045
New York City, New York Transitional Finance
Authority RB Series 1998B
5.25%, 11/15/04 1,300 1,318
New York State Urban Development Corp. RB
(Correctional Facilities Service Contract)
Series1998A
5.00%, 01/01/05 1,000 991
New York, New York GO
4.75%, 03/15/07 3,000 2,858
-------
8,686
-------
NORTH CAROLINA -- 2.5% (d)
North Carolina Municipal Power Agency
No. 1 (Catawaba Electric) RB Series 1995A
5.10%, 01/01/07 2,000 1,985
-------
OHIO -- 2.5% (d)
Ohio State Public Facilities Commission Higher
Education Capital Facilities RB Series II-B
5.00%, 11/01/01 2,000 2,015
-------
PENNSYLVANIA -- 1.4% (d)
Pennsylvania State IDA RB (Economic
Development Project)
7.00%, 07/01/07 1,000 1,103
-------
PUERTO RICO -- 3.8% (d)
Puerto Rico Municipal Finance Agency GO
Series 1999A
5.50%, 08/01/08 3,000 3,079
-------
SOUTH CAROLINA -- 6.1%
Charleston County, South Carolina RB (Care
Alliance Health Services) Series 1999A (d)
4.25%, 08/15/07 3,000 2,768
Charleston, South Carolina Public Facilities
COP (Public Improvement Project)
Series 1993 (d)
4.30%, 09/01/00 1,085 1,086
Greenville, South Carolina Hospital Facilities
Revenue Refunding Bonds Series 1993C
5.00%, 05/01/00 1,090 1,091
-------
4,945
-------
24
<PAGE>
Par Value
------ -------
TEXAS -- 5.0%
Houston, Texas GO Refunding and Public
Improvement Bonds Series 1999A
5.00%, 03/01/04 $3,000 $ 3,004
Houston, Texas GO Refunding Bonds
Series 1995A
5.30%, 03/01/01 1,000 1,005
-------
4,009
-------
WASHINGTON -- 6.5%
Port of Seattle, Washington Passenger Facilities
RB Series 1998B (d)
5.00%, 12/01/07 1,395 1,367
Port of Seattle, Washington RB Series
1998B (d)
5.50%, 09/01/02 2,775 2,820
Washington State GO Refunding Bonds
Series 1991R-92B
6.30%, 09/01/02 1,000 1,033
-------
5,220
-------
WISCONSIN -- 2.4%
Wisconsin State Health & Educational
Facilities Authority RB (Aurora Medical
Group Inc. Project) Series 1996 (d)
4.90%, 11/15/02 1,000 1,004
Wisconsin State Health & Educational
Facilities Authority RB (Carroll College
Inc. Project)
4.80%, 10/01/06 1,000 947
-------
1,951
-------
TOTAL MUNICIPAL BONDS
(Cost $80,835) 78,762
-------
VARIABLE RATE OBLIGATIONS -- 1.1% (b)(d)
NEW MEXICO -- 0.6%
Farmington, New Mexico Pollution Control
Revenue Refunding Bonds (Arizona Public
Service Company) Series 1994B
3.80%, 03/01/00 500 500
-------
NEW YORK -- 0.3%
Long Island, New York Power Authority
Electrical System Subordinated RB Sub Series 5
3.75%, 03/01/00 200 200
-------
TEXAS -- 0.2%
Brazos River, Texas Authority Revenue
Refunding Bonds ( Utilities Electric Co.
Project) Series 1996B
3.95%, 03/01/00 $ 200 $ 200
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $900) 900
-------
Shares
-------
OTHER INVESTMENT COMPANIES -- 0.1% (c)
Provident Institutional Funds - Muni Fund
Portfolio
3.35% 87 87
-------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $87) 87
-------
TOTAL INVESTMENTS -- 98.9%
(Cost $81,822) 79,749
-------
OTHER ASSETS AND LIABILITIES -- 1.1%
Other assets 1,254
Liabilities (347)
-------
907
-------
TOTAL NET ASSETS -- 100.0% $80,656
=======
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
25
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands)
February 29, 2000 (Unaudited)
Par Value
------ --------
MUNICIPAL BONDS -- 91.8% (a)
CALIFORNIA -- 1.6% (d)
Santa Clara County, California Financing
Authority Lease RB (VMC Facility
Replacement Project) Series 1994
7.75%, 11/15/10 $1,000 $ 1,206
-------
COLORADO -- 2 3% (d)
Colorado State Public Highway Authority RB
(E-470) Series 1997A
5.00%, 09/01/26 2,000 1,685
-------
FLORIDA -- 4.4%
Escambia County, Florida, Health Facilities
Authority RB (Ascension Health Credit)
Series 1999A-1
5.75%, 11/15/29 2,500 2,397
Tallahassee, Florida Energy System Revenue
Refunding Bonds Series 1998A (d)
4.75%, 10/01/21 1,000 837
-------
3,234
-------
HAWAII -- 2.0% (d)
Hawaii State GO Series 1999
5.88%, 09/01/19 1,500 1,502
-------
ILLINOIS -- 7.0% (d)
Chicago, Illinois Park District GO
Series 1999B
4.75%, 01/01/26 2,750 2,186
Illinois Health Facilities Authority Revenue
Refunding Bonds (Northwestern Medical
Faculty Foundation)
5.13%, 11/15/28 3,500 2,927
-------
5,113
-------
INDIANA -- 2.7% (d)
Fort Wayne, Indiana Hospital Authority RB
(Parkview Health System Inc. Project)
4.75%, 11/15/28 2,500 1,969
-------
KENTUCKY -- 1.2% (d)
Carrollton & Henderson, Kentucky Public
Energy Authority Gas RB Series 1998B
4.25%, 01/01/08 25 22
Jefferson County, Kentucky Health Facilities
RB (University Medical Center Project)
5.25%, 07/01/22 1,000 886
-------
908
-------
Par Value
------ --------
LOUISIANA -- 0.8% (d)
New Orleans, Louisiana GO Refunding Bonds
Series B
5.00%, 12/01/12 $ 600 $ 568
-------
MARYLAND -- 0.5%
Maryland State Department of Housing &
Community Development RB Series 1996A
5.88%, 07/01/16 390 388
-------
MASSACHUSETTS -- 5.8%
Massachusetts State Industrial Financing
Agency RB (Suffolk University) (d)
5.25%, 07/01/27 2,000 1,767
Massachusetts State Port Authority RB
Series 1998D
5.00%, 07/01/28 3,000 2,509
-------
4,276
-------
MICHIGAN -- 5.2% (d)
Detroit, Michigan Water Supply System Sr Lien
Series 1999A
5.75%, 07/21/26 1,000 959
Eastern Michigan University Board of
Regents RB
5.50%, 06/01/17 2,000 1,948
Wayne County, Michigan Community College
Improvement GO
5.50%, 07/01/19 1,000 952
-------
3,859
-------
MISSISSIPPI -- 5.7% (d)
Mississippi Hospital Equipment & Facilities
Authority RB (Mississippi Baptist Medical
Center)
6.00%, 05/01/13 2,150 2,177
Walnut Grove, Mississippi Correctional
Authority COP
6.00%, 11/01/19 2,000 1,992
-------
4,169
-------
NEBRASKA -- 3.6% (d)
Nebraska Public Energy Agency Gas Supply RB
(Nebraska Public Gas Agency Project) Series 1998C
4.00%, 09/01/07 3,000 2,640
-------
26
<PAGE>
Par Value
------ --------
NEW YORK -- 7.3%
Long Island, New York Power Authority
Electric System RB Series 1998A (d)
5.13%, 12/01/22 $1,500 $ 1,309
New York City, New York Municipal Finance
Authority Water & Sewer System RB
Series 1997A
5.13%, 06/15/21 2,500 2,175
New York State GO Refunding Bonds
Series 1996A
5.30%, 07/15/15 2,000 1,880
-------
5,364
-------
NORTH CAROLINA -- 2.0%
North Carolina Medical Care Community
Health Care Facilities RB (Carolina Medi
Corp. Project)
5.25%, 05/01/21 1,750 1,507
-------
PENNSYLVANIA -- 7.1%
Pennsylvania State Higher Education
Facilities Authority RB (University of
Pennsylvania Health Services) Series 1996A
5.75%, 01/01/17 2,000 1,733
Philadelphia, Pennsylvania GO (d)
4.75%, 03/15/17 2,500 2,144
Seneca Valley, Pennsylvania School District
GO Refunding Bonds Series AA (d)
5.15%, 02/15/20 1,500 1,329
-------
5,206
-------
RHODE ISLAND -- 1.4%
Rhode Island Housing & Mortgage Finance
Corp. Homeownership Opportunity RB
Series 10A
6.50%, 10/01/22 1,000 1,019
-------
TEXAS -- 18.8%
Austin, Texas Utilities System Revenue
Refunding Bonds (d)
5.13%, 11/15/16 3,000 2,726
Brazos River, Texas River Authority RB
(Houston Industries Project) (d)
5.13%, 05/01/19 1,750 1,553
Conroe, Texas Independent School District
GO Refunding Bonds (d)
5.25%, 02/15/21 1,000 898
Par Value
------ --------
Elgin, Texas Independent School District
GO Refunding Bonds (d)
5.25%, 10/01/24 $2,000 $ 1,765
Houston, Texas Higher Education Financing
Corp. RB (Rice University) Series 1999A
5.38%, 11/15/29 3,500 3,159
Texas Southern University Revenue
Refunding Bond Series 1998A-1 (d)
4.75%, 11/01/17 1,545 1,309
Texas State Coastal Water Authority Contract
RB (City of Houston Projects) (d)
5.00%, 12/15/25 2,000 1,693
University of Texas Revenue Unrefunded
Balance RB Series 1991B
6.75%, 08/15/13 680 706
-------
13,809
-------
VIRGINIA -- 1.8%
Virginia State Public Building Authority
Public Facilities RB Series 1997A
5.50%, 08/01/16 1,350 1,311
-------
WASHINGTON -- 9.3%
Clark County, Washington School District
#117 Camas GO (d)
5.50%, 12/01/17 3,000 2,865
King County, Washington Lease RB
(King Street Center Project) (d)
5.13%, 06/01/17 1,000 904
King County, Washington School District No.
415 GO Refunding Bonds Series 1993A
5.55%, 12/01/11 500 502
Washington State GO Series 1998A
4.75%, 07/01/20 1,000 836
Washington State Health Care Facilities
Authority RB (Swedish Health System) (d)
5.13%, 11/15/18 2,000 1,765
-------
6,872
-------
WISCONSIN -- 1.3% (d)
Wisconsin State Health & Education
Facilities Authority RB (Medical College
of Wisconsin Project)
5.50%, 03/01/17 1,000 962
-------
TOTAL MUNICIPAL BONDS
(Cost $73,225) 67,567
-------
27
<PAGE>
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS (in thousands) (continued)
February 29, 2000 (Unaudited)
Par Value
------ --------
VARIABLE RATE OBLIGATIONS -- 6.6% (b) (d)
CALIFORNIA -- 0.2%
California Pollution Control Financing
Authority RB (Southern California
Edison) Series 1986C
3.35%, 03/01/00 $ 50 $ 50
Irvine Ranch, California Improvement
Bond Act 1915 RB (Assessment District
No. 94-15)
3.25%, 03/01/00 100 100
-------
150
-------
INDIANA -- 1.4%
Indianapolis, Indiana Resource Recovery RB
(Ogden Martin Systems Inc. Project)
Series 1987
3.90%, 03/01/00 1,000 1,000
-------
MISSISSIPI -- 1.4%
Jackson County, Mississippi Pollution
Control Revenue Refunding Bonds
(Chevron U.S. ., Inc. Project)
3.75%, 03/07/00 1,000 1,000
-------
NEW MEXICO -- 1.3%
Farmington, New Mexico Pollution
Control Revenue Refunding Bonds
(Arizona Public Service Company)
Series 1994A
3.80%, 03/01/00 1,000 1,000
-------
NEW YORK -- 0 5%
Long Island, New York Power Authority
Electric System Subordinated RB
3.75%, 03/01/00 400 400
-------
TEXAS -- 1.8%
Brazos River, Texas River Authority
Pollution Control Revenue Refunding
Bonds (Utilities Electric Co. Project)
Series 1996
3.95%, 03/01/00 1,300 1,300
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $4,850) 4,850
-------
Shares Value
------ --------
OTHER INVESTMENT COMPANIES -- 0.1% (c)
Provident Institutional Funds - Muni Fund
Portfolio
3.34% 61 $ 61
-------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $61) 61
-------
TOTAL INVESTMENTS -- 98.5%
(Cost $78,136) 72,478
-------
OTHER ASSETS AND LIABILITIES -- 1.5%
Other assets 1,242
Liabilities (141)
-------
1,101
-------
TOTAL NET ASSETS -- 100.0% $73,579
=======
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
28
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS (in thousands)
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 has one or more third party credit enhancements.
PORTFOLIO ABBREVIATIONS
COP Certificates of Participation
GO General Obligation
HFA Housing Finance Agency
IDA Industrial Development Authority
IDRB Industrial Development Revenue Bond
RB Revenue Bond
VMC Valley Medical Center
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 29, 2000 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------ -----------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $81,822, $78,136, respectively) $79,749 $72,478
------- -------
Receivables:
Interest 1,225 1,183
Fund shares sold -- 26
Prepaid expenses 29 33
------- -------
Total assets 81,003 73,720
------- -------
LIABILITIES
Payables:
Dividends 39 44
Fund shares redeemed 293 84
Transfer agency and shareholder service fees 3 2
Other liabilities 12 11
------- -------
Total liabilities 347 141
------- -------
Net assets applicable to outstanding shares $80,656 $73,579
======= =======
NET ASSETS CONSIST OF:
Paid-in capital $83,147 $81,535
Distributions in excess of net investment income (14) (11)
Accumulated net realized loss on investments sold (404) (2,287)
Net unrealized depreciation on investments (2,073) (5,658)
------- -------
$80,656 $73,579
======= =======
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 8,151 7,609
Net asset value, offering and redemption price per share $9.89 $9.67
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 29, 2000 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ------------
<S> <C> <C>
Interest income $ 1,943 $ 2,336
------- -------
Expenses:
Investment advisory and administration fees 146 145
Transfer agency and shareholder service fees 105 104
Custodian and portfolio accounting fees 29 29
Registration fees 3 4
Professional fees 6 5
Shareholder reports 6 7
Trustees' fees 3 2
Other expenses 6 6
------- -------
304 302
Less: expenses reduced (see Note 4) (97) (98)
------- -------
Total expenses incurred by fund 207 204
------- -------
Net investment income 1,736 2,132
------- -------
Net realized gain (loss) on investments sold 1 (2,159)
Net unrealized depreciation on investments (1,329) (1,809)
------- -------
Net loss on investments (1,328) (3,968)
------- -------
Increase (decrease) in net assets resulting from operations $ 408 $(1,836)
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
----------------------- ----------------------
Six months Year Six months Year
ended ended ended ended
February 29, 2000 August 31, February 29, 2000 August 31,
(Unaudited) 1999 (Unaudited) 1999
----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,736 $ 3,074 $ 2,132 $ 4,092
Net realized gain (loss) on investments sold 1 82 (2,159) (120)
Net unrealized depreciation on investments (1,329) (1,898) (1,809) (7,494)
-------- ------- ------- -------
Increase (decrease) in net assets resulting from operations 408 1,258 (1,836) (3,522)
-------- ------- ------- -------
Distributions:
Dividends to shareholders from net investment income (See Note 2) (1,734) (3,125) (2,117) (4,162)
Distributions to shareholders from net realized gains -- -- -- (395)
-------- ------- ------- -------
Total distributions to shareholders (1,734) (3,125) (2,117) (4,557)
-------- ------- ------- -------
Capital share transactions:
Proceeds from shares sold 20,542 51,955 10,997 55,396
Net asset value of shares issued in reinvestment of dividends 1,306 2,374 1,484 3,306
Payments for shares redeemed (26,834) (33,775) (24,797) (30,700)
-------- ------- ------- -------
Increase (decrease) in net assets from capital share transactions (4,986) 20,554 (12,316) 28,002
-------- ------- ------- -------
Total increase (decrease) in net assets (6,312) 18,687 (16,269) 19,923
Net assets:
Beginning of period 86,968 68,281 89,848 69,925
-------- ------- ------- -------
End of period (including distributions in excess of net investment
income of ($14), ($16), ($11) and ($26), respectively) $ 80,656 $86,968 $73,579 $89,848
======== ======= ======= =======
Number of fund shares:
Sold 2,061 5,071 1,120 5,077
Reinvested 131 232 152 307
Redeemed (2,694) (3,302) (2,547) (2,852)
-------- ------- ------- -------
Net increase (decrease) in shares outstanding (502) 2,001 (1,275) 2,532
Shares outstanding:
Beginning of period 8,653 6,652 8,884 6,352
-------- ------- ------- -------
End of period 8,151 8,653 7,609 8,884
======== ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Short/Intermediate Tax-Free Bond Fund
<S> <C> <C> <C> <C> <C> <C>
FISCAL PERIOD ENDED 8/31 2000 1 1999 1998 1997 1996 1995
PER SHARE DATA ($)
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 10.05 10.26 10.16 10.04 10.12 9.92
-------------------------------------------------------------------
From investment operations:
Net investment income 0.20 0.40 0.42 0.41 0.41 0.40
Net realized andunrealized gain (loss)
on investments (0.16) (0.21) 0.10 0.12 (0.08) 0.20
-------------------------------------------------------------------
Total from investment operations 0.04 0.19 0.52 0.53 0.33 0.60
Less distributions:
Dividends from net investment income (0.20) (0.40) (0.42) (0.41) (0.41) (0.40)
-------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 9.89 10.05 10.26 10.16 10.04 10.12
-------------------------------------------------------------------
Total return (%) 0.44** 1.86 5.17 5.40 3.32 6.23
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.49* 0.49 0.49 0.49 0.49 0.49
Reductions reflected in above expense ratio 0.23* 0.32 0.36 0.47 0.41 0.40
Ratio of net investment income to average net assets 4.11* 3.87 3.99 4.08 4.06 4.06
Portfolio turnover rate 10 8 22 20 44 35
Net assets, end of period ($ X 1,000) 80,656 86,968 68,281 54,397 54,132 52,504
<FN>
1 For the six months ended February 29, 2000 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Long-Term Tax-Free Bond Fund
<S> <C> <C> <C> <C> <C> <C>
FISCAL PERIOD ENDED 8/31 2000 1 1999 1998 1997 1996 1995
PER SHARE DATA ($)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 10.11 11.01 10.53 10.13 10.16 9.95
-----------------------------------------------------------------
From investment operations:
Net investment income 0.25 0.50 0.53 0.53 0.52 0.53
Net realized andunrealized gain (loss)
on investments (0.44) (0.85) 0.48 0.40 (0.03) 0.21
-----------------------------------------------------------------
Total from investment operations (0.19) (0.35) 1.01 0.93 0.49 0.74
Less distributions:
Dividends from net investment income (0.25) (0.50) (0.53) (0.53) (0.52) (0.53)
Distributions from realized gain on
investments -- (0.05) -- -- -- --
-----------------------------------------------------------------
Total distributions (0.25) (0.55) (0.53) (0.53) (0.52) (0.53)
-----------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 9.67 10.11 11.01 10.53 10.13 10.16
-----------------------------------------------------------------
Total return (%) (1.88)** (3.34) 9.81 9.36 4.87 7.76
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.49* 0.49 0.49 0.49 0.49 0.54
Reductions reflected in above expense ratio 0.24* 0.32 0.37 0.53 0.45 0.39
Ratio of net investment income to average net assets 5.13* 4.59 4.76 5.09 5.06 5.40
Portfolio turnover rate 11 35 39 61 50 70
Net assets, end of period ($ X 1,000) 73,579 89,848 69,925 46,767 43,672 41,413
<FN>
1 For the six months ended February 29, 2000 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For six months ended February 29, 2000 (Unaudited)
(All dollar amounts are in thousands unless otherwise noted)
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free
Bond Fund (the "funds") are series of Schwab Investments (the "Trust"), a no
load, open-end, investment management company organized as a Massachusetts
business trust on October 26, 1990 and registered under the Investment Company
Act of 1940 (the "Act"), as amended.
In addition to the funds, the Trust also offers the Schwab 1000 Fund(R), Schwab
Short-Term Bond Market Index Fund, Schwab Total Bond Market Index Fund, Schwab
California Short/Intermediate Tax-Free Bond Fund, Schwab California Long-Term
Tax-Free Bond Fund, and Schwab YieldPlus Fund(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.
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
FEDERAL INCOME TAXES -- It is each fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute 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.
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 Short/Intermediate Tax-Free Bond Fund $(2,073) $101 $(2,174)
Schwab Long-Term Tax-Free Bond Fund $(5,658) $338 $(5,996)
</TABLE>
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1999, the unused capital loss
carryforwards, for federal income tax purposes were as follows:
Schwab Short/Intermediate
Tax-Free Bond Fund
----------------------
Expiring in:
08/31/03 $108
08/31/04 296
----
Total capital loss carryforwards $404
====
Under current law, net capital losses realized after October 31 may be deferred
and treated as occuring on the first day of the following fiscal year. At August
31, 1999, the Schwab Long-Term Tax-Free Bond Fund had deferred losses occuring
between November 1, 1998 and August 31, 1999 of $128.
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 year 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.
36
<PAGE>
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 the
Act, as amended. The funds incurred fees aggregating $5 related to the Trust's
unaffiliated trustees.
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 $28,739 and $27,040 for the Schwab Short/Intermediate Tax-Free Bond
Fund and Schwab Long-Term Tax-Free Bond Fund, respectively.
4. EXPENSES REDUCED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser and Schwab guarantee that, through at least October 31,
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 $97 for the Schwab Short/Intermediate Tax-Free Bond Fund
and $98 for the Schwab Long-Term Tax-Free Bond Fund.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the period ended February 29, 2000, were as follows:
<TABLE>
<CAPTION>
Schwab Short/Intermediate Schwab Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
---------------------- ------------------
<S> <C> <C>
Purchases $ 8,435 $ 8,794
Proceeds of sales and maturities $10,106 $24,968
</TABLE>
37
<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. MKT3482-2 (4/00)
