-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MCYY9ULx7TtBTxaosCaJqNNXEv1PHWR3NbGaUZS5cllVT0D0lagoDTjsc4NnfU2P VbDXyPftcfA4eWdCESnKLw== 0000950149-95-000726.txt : 19951118 0000950149-95-000726.hdr.sgml : 19951118 ACCESSION NUMBER: 0000950149-95-000726 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950831 FILED AS OF DATE: 19951109 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWAB INVESTMENTS CENTRAL INDEX KEY: 0000869365 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06200 FILM NUMBER: 95588486 BUSINESS ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST STREET 2: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 N-30D 1 SCHWAB CALIF. TAX FREE BOND FUNDS A.R. - 8/31/95 1 SCHWABFUNDS(R) [LOGO] SCHWAB CALIFORNIA TAX-FREE BOND FUNDS ANNUAL REPORT AUGUST 31, 1995 [Photo of the Schwab Building, San Francisco, California] 2 Dear Shareholder, This year, the SchwabFunds Family(R) celebrates its fifth [Photo anniversary as a mutual fund complex. This celebration follows an of exciting 1994 when the organization experienced tremendous Charles growth--the third largest asset growth of all mutual fund R. Schwab] companies. By placing your trust in SchwabFunds(R), you've helped total assets under management reach over $29 billion, ranking SchwabFunds in the top 6% of all mutual fund complexes. We believe much of this success can be traced to the Schwab commitment to serve the needs of the Fund shareholders, a commitment demonstrated by the entire SchwabFunds staff and, in particular, by our experienced team of portfolio managers. The 20 professionals that make up our growing portfolio management team are devoted to monitoring the financial markets for you. Through careful and disciplined selection of securities, they strive to construct optimal portfolios that provide shareholders with competitive returns that meet their investment goals. And shareholders continue to signal their trust in the 175 years of combined experience behind our SchwabFunds portfolio management by keeping their money invested in SchwabFunds. In fact, a large number of the 1.5 million shareholders have been investing in the SchwabFunds Family since its first year of operation. We believe an important part of serving your needs is keeping you informed about your investments. For example, last year we added the question and answer section of this report, developed by our portfolio managers to address what they feel were the most pressing questions we've heard from shareholders over the period. It is one way we hope to keep communication open between you and the people managing your investments. During its first five years, the SchwabFunds Family has grown to include a solid selection of funds that meet the "core" needs of investors. The 19 funds available to retail investors, including the new Schwab Asset Director(R) Funds,* offer effective diversification of the U.S. and international equity markets, both taxable and tax-free bonds, and a variety of different money market investments. With this added level of diversification, you may use the SchwabFunds to create an efficient, well-rounded portfolio. Or, they can serve as building blocks to an overall investment program that includes more specialized investments. I invite you to learn more about the SchwabFunds Family. To receive a brochure and prospectus for the SchwabFunds, please call our toll-free number, 1-800-2 NO-LOAD, or visit any one of our more than 200 Schwab offices. A Schwab representative will be happy to provide you with a prospectus that includes more complete information on the Funds, including charges and expenses. Please read it carefully before investing. If you normally invest in SchwabFunds with the help of an investment manager, he or she can give you more information on the other SchwabFunds. I'd like to extend my personal gratitude for your trust in the SchwabFunds Family as it continues to grow. You should feel confident that the outstanding efforts of all those who are part of the SchwabFunds organization will continue going forward. And, we expect these efforts to help us to meet even higher standards of excellence in the years ahead. /s/ Charles R. Schwab Charles R. Schwab Chairman * In subscription until November 17, 1995, at an introductory price of $10 per share. After that date, the share price will fluctuate unless subscription period is extended. Cover: The Schwab Building, San Francisco, California 3 COMMENTS FROM THE INVESTMENT ADVISER We are pleased to report the performance of the Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund for the fiscal year ended August 31, 1995. During this period, the Schwab California Tax-Free Bond Funds continued to provide a relatively steady stream of monthly income, exempt from both federal and California state personal income taxes, to help you achieve your income goals. While there was some instability in bond market conditions during the first half of the Funds' fiscal year, conditions in the latter half of the Funds' fiscal year stabilized, as the Federal Reserve (the "Fed") discontinued its year-long campaign of raising interest rates to head off inflation. With interest rates stabilizing and inflation effectively held at bay, bonds rallied. The performance of the Schwab California Tax-Free Bond Funds reflected this ongoing recovery. To help explain the Funds' performance, the portfolio management team discusses economic trends and the Funds' investment strategies in the section "Questions to the Portfolio Management Team," following this letter. The Schwab California Short/Intermediate Tax-Free Bond Fund experienced new share purchases totaling $12.5 million and the Schwab California Long-Term Tax-Free Bond Fund had new share purchases totaling $22.4 million during the 1995 fiscal year. However, both Funds experienced a net decline in total assets over the reporting period. ADVANTAGES OF INVESTING IN SCHWAB CALIFORNIA TAX-FREE BONDS FUNDS The Schwab California Tax-Free Bond Funds offer you several important advantages over investing in individual bonds, including professional management, liquidity and a relatively steady stream of monthly income. Our experienced portfolio managers and credit research staff closely monitor the financial markets and select a portfolio of investment grade securities which they believe have advantageous characteristics in light of the current interest rate environment. Each Fund's portfolio primarily contains a strategic mix of investment grade municipal bonds from a variety of California issuers. A complete listing of each Fund's portfolio holdings at the fiscal year end is provided in the "Schedule of Investments" section of this report. 4 PERFORMANCE REVIEW-- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND As of August 31, 1995, the Schwab California Short/Intermediate Tax-Free Bond Fund was primarily comprised of investment grade municipal bonds issued by the State of California, its political subdivisions and agencies. The portfolio's average dollar-weighted maturity was 3.64 years. The Schwab California Short/Intermediate Tax-Free Bond Fund paid shareholders monthly cash dividends exempt from both federal and California personal income taxes totaling 42 cents per share for the 12-month period ended August 31, 1995. The Fund's net asset value ("NAV") increased from $9.89 on August 31, 1994, to $10.06 at the end of the reporting period, in spite of unusual fluctuations in the bond market and rising interest rates during the first half of the fiscal year. The Fund's NAV increase reflects a recovery in the bond market during the latter half of the fiscal year. On August 31, 1995, the Fund's 30-day SEC yield was 4.30%, which is a taxable equivalent yield of 8.00% for those investors subject to the maximum combined federal and California personal income tax rate of 46.24% 1. COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN THE SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND AND THE LEHMAN 3-YEAR MUNICIPAL BOND INDEX Average Annual Total Returns Through August 31, 1995 ---------------------------- One Year Since Inception 6.17% 4.23% [Line graph comparing Schwab California Short/Intermediate Tax-Free Bond Fund with Lehman 3-Year Municipal Bond Index.]
DATE INDEX FUND - ---- ----- ---- 05/01/93 $ 9,994 $ 9,990.00 05/31/93 $10,021 $10,036.80 06/30/93 $10,085 $10,135.50 07/31/93 $10,090 $10,157.00 08/31/93 $10,185 $10,257.00 09/30/93 $10,229 $10,328.00 10/31/93 $10,251 $10,340.00 11/30/93 $10,237 $10,310.00 12/31/93 $10,345 $10,444.00 01/31/94 $10,429 $10,517.00 02/28/94 $10,332 $10,372.00 03/31/94 $10,207 $10,188.00 04/30/94 $10,267 $10,239.00 05/31/94 $10,315 $10,272.00 06/30/94 $10,318 $10,253.00 07/31/94 $10,404 $10,356.00 08/31/94 $10,441 $10,390.00 09/30/94 $10,415 $10,350.00 10/31/94 $10,390 $10,280.00 11/30/94 $10,371 $10,167.00 12/31/94 $10,416 $10,227.00 01/31/95 $10,502 $10,350.00 02/28/95 $10,613 $10,503.00 03/31/95 $10,708 $10,598.00 04/28/95 $10,744 $10,614.00 05/31/95 $10,909 $10,826.00 06/30/95 $10,935 $10,809.00 07/31/95 $11,050 $10,925.00 08/31/95 $11,137 $11,030.00
Past performance is no guarantee of future results. Principal value and investment returns will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The performance graph compares a hypothetical $10,000 investment in the Schwab California Short/Intermediate Tax-Free Bond Fund since inception with a hypothetical investment in the Lehman 3-Year Municipal Bond Index. The Index is unmanaged and assumes reinvestment of all dividends, but, unlike the Fund, does not reflect the payment of advisory fees and other expenses associated with an investment in the Fund. Fund total return assumes the reinvestment of all dividends and capital gain distributions. 5 At fiscal year-end, the Fund's one year total return was 6.17%, and its average annual total return since inception was 4.23%.1 As the chart at left illustrates, the Fund's total return during the period is consistent with the broader municipal bond market, as measured by the Lehman 3-Year Municipal Bond Index, the Fund's recognized industry benchmark. PERFORMANCE REVIEW-- SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND As of August 31, 1995, the Schwab California Long-Term Tax-Free Bond Fund was primarily comprised of investment grade municipal bonds issued by the State of California, its political subdivisions and agencies. The portfolio's average dollar-weighted maturity was 18.60 years. The Schwab California Long-Term Tax-Free Bond Fund paid shareholders monthly cash dividends which were exempt from both federal and California personal income taxes totaling 56 cents per share for the 12-month period ended August 31, 1995. The Fund's NAV increased from $10.40 on August 31, 1994 to COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN THE SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND AND THE LEHMAN GENERAL MUNICIPAL BOND INDEX Average Annual Total Returns Through August 31, 1995 ---------------------------- One Year Since Inception 6.98% 7.42% [Line graph comparing Schwab California Long-Term Tax-Free Bond Fund and Lehman General Municipal Bond Index.]
DATE INDEX FUND - ---- ----- ---- 03/01/92 $10,000 $10,000 03/31/92 $10,004 $10,099 04/30/92 $10,093 $10,217 05/30/92 $10,212 $10,410 06/30/92 $10,383 $10,633 07/31/92 $10,694 $11,082 08/31/92 $10,590 $10,786 09/30/92 $10,659 $10,835 10/31/92 $10,554 $10,479 11/30/92 $10,743 $10,921 12/31/92 $10,853 $11,110 01/31/93 $10,979 $11,256 02/28/93 $11,376 $11,775 03/31/93 $11,256 $11,561 04/30/93 $11,370 $11,674 05/31/93 $11,434 $11,737 06/30/93 $11,624 $11,969 07/30/93 $11,640 $11,957 08/30/93 $11,882 $12,235 09/30/93 $12,017 $12,372 10/30/93 $12,041 $12,413 11/30/93 $11,934 $12,265 12/30/93 $12,186 $12,541 01/30/94 $12,326 $12,672 02/28/94 $12,006 $12,304 03/30/94 $11,517 $11,683 04/30/94 $11,615 $11,768 05/30/94 $11,716 $11,867 06/30/94 $11,644 $11,747 07/30/94 $11,864 $12,008 08/30/94 $11,905 $12,026 09/30/94 $11,730 $11,824 10/30/94 $11,521 $11,508 11/30/94 $11,313 $11,235 12/30/94 $11,562 $11,420 01/30/95 $11,893 $11,901 02/28/95 $12,238 $12,295 03/31/95 $12,379 $12,414 04/28/95 $12,394 $12,407 05/31/95 $12,789 $12,825 06/30/95 $12,677 $12,613 07/31/95 $12,797 $12,685 08/31/95 $12,960 $12,866
Past performance is no guarantee of future results. Principal value and investment returns will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The performance graph compares a hypothetical $10,000 investment in the Schwab California Long-Term Tax-Free Bond Fund since inception with a hypothetical investment in the Lehman General Municipal Bond Index. The Index is unmanaged and assumes reinvestment of all dividends, but, unlike the Fund, does not reflect the payment of advisory fees and other expenses associated with an investment in the Fund. Fund total return assumes the reinvestment of all dividends and capital gain distributions. 1 Income may be subject to local taxes and the Alternative Minimum Tax (AMT). Capital appreciation of discounted bonds may be subject to federal and state income tax. Total return assumes reinvestment of all dividend and capital gain distributions. A portion of the Fund's fees were waived or reimbursed during the period. Without the waivers or reimbursement, the 30-day SEC yield would have been 4.01%, the one year total return would have been 5.80%, and the average annual total return since inception would have been 3.79%. 6 $10.53 at the end of the reporting period, reflecting a rebound in the bond market during the latter half of the fiscal year. On August 31, 1995, the Fund's 30-day SEC yield was 5.61%, which is a taxable equivalent yield of 10.44% for those investors subject to the maximum combined federal and California state personal income tax rate of 46.24%. 2 At fiscal year end, the Fund's one year total return was 6.98%, and its average annual total return since inception was 7.42%. 2 As the chart on the previous page illustrates, the Fund's total return during the period is consistent with the broader municipal bond market, as measured by the Lehman General Municipal Bond Index, the Fund's recognized industry benchmark. LOWER FUND EXPENSES To enhance your return potential, the maximum operating expense ratios of the Schwab California Tax-Free Bond Funds were lowered, effective July 1, 1995. Lower fund expenses can make a real difference in the returns you realize from your mutual fund investment. Generally speaking, lower fees translate into higher returns--the less you pay in fees and expenses, the greater the portion of a fund's potential return you can receive. The Schwab California Short/Intermediate Tax-Free Bond Fund's expense ratio was lowered from 0.50% to 0.49%. 3 The expense ratio of the Schwab California Long-Term Tax-Free Bond Fund was reduced from 0.60% to 0.49%. 3 While the reduction occurred too late in the period for its full impact to be felt in the 1995 fiscal year, we believe the new, lower expense ratios will help you earn higher potential returns going forward. BALANCING YOUR INCOME PORTFOLIO To position your portfolio to respond to fluctuating interest rates or to create a balanced combination of maturities, you may want to consider investing in both Schwab California Tax-Free Bond Funds. Short/intermediate funds historically have offered greater price stability in exchange for lower yields, while funds with longer weighted average maturities historically have paid higher yields with correspondingly greater price volatility. Additionally, funds with longer weighted average maturities have historically offered a more stable income stream, because they can lock in rates on individual bonds for longer periods of time. By investing in both Schwab California Tax-Free Bond Funds, you may have the opportunity to 2 Income may be subject to local taxes and the Alternative Minimum Tax (AMT). Capital appreciation of discounted bonds may be subject to federal and state income tax. Total return assumes reinvestment of all dividend and capital gain distributions. A portion of the Fund's fees were waived or reimbursed during the period. Without the waivers or reimbursement, the 30-day SEC yield would have been 5.30%, the one year total return would have been 6.75%, and the average annual total return since inception would have been 7.01%. 3 Excess operating expenses will be waived or reimbursed through at least April 30, 1996. Please see Note 4 in "Notes to Financial Statements" later in this report for further information on fees and expenses. 7 earn a higher level of income than you would receive from a short/intermediate fund alone, while potentially reducing swings in the value of your portfolio due to changing interest rates. LOOKING FORWARD Regardless of the course of the economy and the direction of interest rates in the year ahead, the Schwab California Tax-Free Bond Funds will continue to strive to provide a relatively reliable stream of monthly income exempt from both federal and California state personal income taxes. With their competitive tax equivalent yields, the Funds may offer you an effective way to achieve your tax-free investing goals. Thank you for placing your confidence in SchwabFunds(R). We recognize that we earn your trust day-by-day, and we look forward to continuing to serve your investment needs. CHARLES SCHWAB INVESTMENT MANAGEMENT, INC. 8 - -------------------------------------------------------------------------------- TAXABLE EQUIVALENT YIELD: A YARDSTICK FOR MEASURING FUND PERFORMANCE To evaluate the performance of a tax-free bond fund, pay special attention to its taxable equivalent yield. While hypothetical in nature, this measure of performance offers you a convenient way to see what yield level would be required of a taxable bond fund in order for it to be equivalent after you pay state and federal income taxes. A double tax-free yield of 6%, for example, is the equivalent of a 11.16% yield after you pay federal and California state personal income taxes -- assuming you are in the top combined federal and California state personal income tax bracket of 46.24%. In other words, you would have to earn at least an 11.16% yield from a fully taxable investment to get the same amount of after-tax income. Of course, if you're in a lower tax bracket, the after-tax yield advantage you realize from a tax-free investment would be lower. 1 If your 1995 combined federal and California personal income tax bracket is...
CALIFORNIA TAX-FREE YIELD 34.70% 37.42% 41.95% 45.64% 46.24% - ---------- ------ ------ ------ ------ ------ 4.50% 6.89% 7.19% 7.75% 8.28% 8.37% 5.00% 7.66% 7.99% 8.61% 9.20% 9.30% 5.50% 8.42% 8.79% 9.47% 10.12% 10.23% 6.00% 9.19% 9.59% 10.34% 11.04% 11.16% 6.50% 9.95% 10.39% 11.20% 11.96% 12.09% 7.00% 10.72% 11.19% 12.06% 12.88% 13.02%
(Up arrow) (Up arrow) 2 And you have 3 Here is what you would have to earn from a a tax-free taxable investment to match the tax-free yield investment yielding Chart is for illustrative purposes only and does not reflect the performance of either Schwab California Tax-Free Bond Fund. - -------------------------------------------------------------------------------- 9 QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM OF CHARLES SCHWAB INVESTMENT MANAGEMENT, INC. Stephen B. Ward - Senior Vice President and Chief Investment Officer Joanne Keighley - Portfolio Manager Q. WHAT HAS BEEN THE ECONOMIC CLIMATE DURING THE 12-MONTH REPORTING PERIOD? A. Following an impressive 4.1% growth rate of the Gross Domestic Product ("GDP") during 1994, the highest annual growth rate in ten years, economic activity showed persistent signs of slowing during the first half of 1995. Recent evidence of this trend includes slowdowns in auto sales, consumer spending and retail sales, home building and home sales, and a significant slowdown in the labor markets. The GDP growth rate for the first quarter of 1995 was 2.7%, and 1.1% for the second quarter versus 5.1% for the fourth quarter of 1994. The primary reason for the slowdown in GDP growth has been a series of increases in the federal funds rate (the rate paid on overnight funds between banks) by the Fed throughout 1994 and into 1995. With the high growth rate in 1994 and a falling unemployment rate, the potential for inflation emerged as a major concern at the Fed. As a result, the Fed initiated a series of increases in the federal funds rate from 3.0% in January 1994 to 6.0% in February 1995. The Fed appears to be signaling that these increases have accomplished their desired effect of slowing the rate of economic growth to more moderate levels and reducing the likelihood of increases in the rate of inflation. This was evidenced by the Fed's 0.25% reduction in the federal funds rate in July 1995. Q. HOW HAVE THE ECONOMIC EVENTS OF THE FISCAL YEAR IMPACTED INTEREST RATES? A. In an effort to curb the inflationary impact of a strong economy, the Fed raised short-term interest rates seven times during 1994 and early 1995. The economy began to show signs of strain due to the higher interest rates in the fourth quarter of 1994. Decreases in retail and auto sales, as well as a slowdown in mortgage lending provided evidence that the Fed's policy actions were being felt throughout the economy. 30-year Treasury Bond rates peaked in November at 8.20% and 2-year Treasury rates reached a high of 7.70% in December. By year end, most market participants were anticipating higher interest rates, as inflation was still a concern. As we moved into 1995, it was clear the economy had begun to slow. Additionally, concerns regarding inflation began to subside as the Producer Price Index & Consumer Price Index posted modest gains of 1.3% and 2.6%, respectively, during the 12-month period. 10 A combination of factors led to a rally in the bond market in through the latter half of the reporting period. As a result, 30-year Treasury Bond rates fell to 6.50% from a peak of 8.20%, and 2-year Treasury note rates fell to 5.35% from a peak of 7.70%. The primary factors responsible for the rally were: - - The slowdown in the economy made it unnecessary for the Fed to continue raising interest rates. In fact, the Fed actually lowered the federal funds rate by 0.25% in July 1995. - - Inflation concerns subsided as the Fed's policy actions were successful in slowing the economy. This gave investors confidence that inflation was under control. - - The Congress which was elected in November 1994 brought renewed attention to reducing the budget deficit. This attention, along with a stated commitment to reducing the deficit, put additional downward pressure on long-term interest rates. - - The Fed and several foreign central banks acted in concert to support the U.S. dollar during its slide in the first half of 1995. This resulted in the increased purchase of U.S. dollar-denominated assets, such as U.S. Treasury securities. The purchases increased demand for these securities, adding momentum to price appreciation and falling yields, which helped reduce interest rates. Although municipal interest rates followed the same general trends as taxable interest rates during the reporting period, there were several developments which had particular impact on the municipal securities market and municipal interest rates. These developments will be addressed in the following questions. The chart below illustrates 30-year and 5-year Treasury bond yields during the reporting period. 30-YEAR TREASURY BOND YIELD VS. 5-YEAR TREASURY BOND YIELD [Line graph comparing 30-Year Treasury Bond Yield vs. 5-Year Treasury Bond Yield.] DATE 5-YEAR 30-YEAR ---- ------ ------- 09/02/94 6.807 7.49 09/09/94 7.044 7.703 09/16/94 7.117 7.772 09/23/94 7.198 7.793 09/30/94 7.28 7.817 10/07/94 7.333 7.909 10/14/94 7.249 7.829 10/21/94 7.442 7.978 10/28/94 7.469 7.958 11/04/94 7.71 8.159 11/11/94 7.695 8.149 11/18/94 7.784 8.131 11/25/94 7.643 7.931 12/02/94 7.707 7.906 12/09/94 7.741 7.859 12/16/94 7.752 7.854 12/23/94 7.831 7.828 12/30/94 7.827 7.881 01/06/95 7.865 7.86 01/13/95 7.626 7.792 01/20/95 7.783 7.891 01/27/95 7.544 7.73 02/03/95 7.407 7.626 02/10/95 7.538 7.669 02/17/95 7.334 7.586 02/24/95 7.144 7.528 03/03/95 7.177 7.541 03/10/95 7.056 7.463 03/17/95 6.953 7.368 03/24/95 6.91 7.364 03/31/95 7.071 7.431 04/07/95 6.931 7.39 04/14/95 6.81 7.35 04/21/95 6.752 7.333 04/28/95 6.881 7.337 05/05/95 6.441 7.019 05/12/95 6.447 6.989 05/19/95 6.442 6.917 05/26/95 6.173 6.748 06/02/95 5.822 6.529 06/09/95 6.205 6.727 06/16/95 5.943 6.616 06/23/95 5.809 6.501 06/30/95 5.966 6.618 07/07/95 5.75 6.524 07/14/95 5.9 6.604 07/21/95 6.262 6.962 07/28/95 6.213 6.901 08/04/95 6.202 6.909 08/11/95 6.374 6.99 08/18/95 6.351 6.897 08/25/95 6.107 6.704
11 Q. HOW HAS THE ECONOMIC CLIMATE IN CALIFORNIA AFFECTED THE FUNDS? A. The economic recovery that began in mid-1993 appears to be continuing at a modest pace. Over the remainder of 1995 and into 1996, it is believed that California will continue to work toward reducing its approximate $2 billion budget deficit. The challenge facing California, and most states across the country, is to provide necessary services, such as education, health, welfare and public safety, and replace or upgrade sewers, highways and other infrastructure while providing for budget reductions. Los Angeles County is facing many of the same issues as the State, and the County's ability to address these concerns in a timely manner will affect the State's overall ability to return to full financial strength. Although the Funds do not hold any direct, unenhanced Los Angeles County obligations, we will continue to closely monitor the financial situation in Los Angeles County. Each Funds' performance over the 12-month reporting period has not been significantly affected by California's economic and budget difficulties in that the credit profile of the Funds have not changed significantly. The Funds continued to maintain a strong credit quality posture. For the Schwab Short/Intermediate Tax-Free Bond Bond Fund, 94% of the long-term securities (securities with maturities of one year or more) were rated A or higher and 100% of the short-term securities (securities with maturities less than one year) were in the top two rating categories. For the Schwab Long-Term Tax-Free Bond Fund, 100% of the securities were rated A or higher. In addition, we are satisfied with the credit quality of the securities owned by the Funds. The State's current credit ratings are A1 from Moody's Investors Service and A from both Standard and Poor's Corporation and Fitch Investors Services, Inc., three well known rating agencies. These ratings have remained consistent during the reporting period. Of course, we will continue to monitor the State's economic situation closely. Q. THERE HAS BEEN A LOT OF TALK ABOUT "FLAT TAX" PROPOSALS. CAN YOU DISCUSS THESE PROPOSALS? A. The flat tax proposals currently being debated in Washington represent the latest effort to respond to the public's frustration with what many consider to be an overly complex and inefficient system of taxation. These reform proposals are referred to as "flat tax" proposals because, in the purest form, they would eliminate the current multiple tax rates in favor of one "flat tax" rate. Even though some of the proposals call for more than just one tax rate, these tax simplification proposals are, as a group, referred to as flat tax proposals. 12 The basic concept which most of these proposals have in common is eliminating the current vast array of deductions and credits and, as a result, taxing a substantially greater base of income. Since the amount of income which would be subject to income tax would be significantly increased, the government could collect the same level of revenues using a lower tax rate. Most of the flat tax proposals have the following common elements: - - A reduction in the number of tax brackets. Currently there are five tax brackets, which range from 15% to 39.6%. A pure flat tax proposal would include just one rate. - - The elimination of most income tax deductions and credits, such as those for home mortgage interest, state and local taxes and charitable contributions. - - Investment income, such as interest, dividends and capital gains would not be taxed. Only "earned income," such as income from wages would be taxed. This would eliminate the double taxation of corporate dividends. Most proposals also share the following objectives: - - Simplification of the tax code and tax calculation process. - - Encouraging savings as a result of the elimination of taxation on investment income and capital gains. - - Eliminating many of the tax-motivated incentives of the current system. Currently, interest income on municipal bonds enjoys a special exemption from income tax. Exempting investment income on all investments from income tax could have a negative impact on municipal bond owners by, in effect, taking away their special tax treatment. As discussed below, many observers feel that the municipal securities market has already responded to some of the uncertainty surrounding these flat tax proposals. Although we will continue to monitor the status of these proposals, it is important to point out that there is currently no way of predicting whether, a flat tax proposal will ever be enacted; and, if enacted, what provisions may be incorporated to ease the burdens on current owners of municipal securities. 13 Q. WOULD YOU DISCUSS SOME OF THE CHANGES THAT TOOK PLACE IN THE MUNICIPAL BOND MARKET DURING THE REPORTING PERIOD AND HOW THESE MAY HAVE AFFECTED THE PERFORMANCE OF THE FUNDS? A. As we have previously noted, the 12-month reporting period was one of unusual and relatively volatile movements in interest rates. Municipal rates were affected by several factors unique to municipal securities. As shown in the graph on the previous page, the impact of these factors can be seen by comparing the relationship between 30-year municipal and 30-year Treasury Bond yields. Over the past four years, the yields on AAA 30-year municipal bonds has averaged approximately 82% of the yields on 30-year Treasury bonds. During the reporting period, this ratio ranged from a low of 79% (representing relative strength in the municipal bond market) to a high of 89% (representing relative weakness in the municipal bond market). Some of the factors responsible for these swings are described below. Late in 1994, municipal bond returns were underperforming Treasury Bond returns for two reasons. First, toward the end of the year, there was a significant amount of tax-motivated selling by owners of municipal securities in an effort to realize losses prior to year end. Second, the investment losses and bankruptcy declarations by Orange County and the Orange County Investment Pool had a negative impact on the municipal securities market. THE RATIO BETWEEN YIELDS ON 30-YEAR AAA MUNICIPAL BONDS AND 30-YEAR TREASURY BONDS [Line graph indicating the ratio between yields on 30-year AAA Municipal Bonds and 30-Year Treasury Bonds.] DATE DIFFERENCE - ---- ---------- 09/02/94 0.79973298 09/09/94 0.78800467 09/16/94 0.79001544 09/23/94 0.79558578 09/30/94 0.79685301 10/07/94 0.79643444 10/14/94 0.79179972 10/21/94 0.78829281 10/28/94 0.80409651 11/04/94 0.81370266 11/11/94 0.8369125 11/18/95 0.85352355 11/25/94 0.87378641 12/02/94 0.83733873 12/09/94 0.85252577 12/16/94 0.84542908 12/23/95 0.83673991 12/30/95 0.8260373 01/06/95 0.82824427 01/13/95 0.8226386 01/20/95 0.80724876 01/27/95 0.81241915 02/03/95 0.8025177 02/10/95 0.78889034 02/17/95 0.78961244 02/24/95 0.78639745 03/03/95 0.78504177 03/10/95 0.79458663 03/17/95 0.79261672 03/24/95 0.79576317 03/31/95 0.78993406 04/07/95 0.78484438 04/14/95 0.78527607 04/21/95 0.78276285 04/28/95 0.80550634 05/05/95 0.83630147 05/12/95 0.8284447 05/19/95 0.83128524 05/26/95 0.84765857 06/02/95 0.85005361 06/09/95 0.83097963 06/16/95 0.87666264 06/23/95 0.88140286 06/30/95 0.88697492 07/07/95 0.88136113 07/14/95 0.8646275 07/21/95 0.85033036 07/28/95 0.85060136 08/04/95 0.86264293 08/11/95 0.85693848 08/18/95 0.87574308 08/25/95 0.89051313 09/01/95 0.88408644
14 Early in 1995, as the initial reaction to the Orange County situation faded, municipal securities began trading at yield levels which were in line with historical averages when compared to Treasury securities. One significant factor which has had the effect of bolstering the prices of municipal securities prices was the relatively low supply of municipal securities. Local governments and municipalities are generally funding fewer new projects, and are pre-refunding far fewer existing bond issues since interest rates reached their low levels in late 1993. During the second quarter of 1995, municipal securities yields again began to climb relative to Treasury yields. As discussed above, some market analysts attribute this latest move to concerns over proposed flat tax proposals. Both Funds maintained relatively stable weighted average maturities throughout the reporting period. The Funds' weighted average maturities were reduced moderately in the first half of the reporting period. Later in the reporting period, maturities were moderately extended as municipal bond yields increased relative to treasury bond yields, making municipal bonds relatively more attractive. 15 SchwabFunds(R) - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO SUMMARY - -------------------------------------------------------------------------------- ASSET CHANGE
Total Total Percentage Net Assets Net Assets Change Over as of 8/31/95 as of 8/31/94 Reporting (000s) (000s) Period - ----------------------------------------------------------------- $40,639 $48,649 (16%) - -----------------------------------------------------------------
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1995
Value Maturity Schedule (000s) % of Portfolio % of Portfolio - --------------------------------------------------------------------------------------- (cum.) 1 - 6 Months $ 774 1.9% 1.9% 7 - 36 Months 9,520 23.7 25.6 37 - 60 Months 24,432 60.8 86.4 Over 60 Months 5,452 13.6 100.0% ------- ----- $40,178 100.0% ======= =====
Average Weighted Maturity -- 3.64 Years PORTFOLIO QUALITY SUMMARY (as of August 31, 1995) [Pie chart indicating summary of published ratings] This summary reflects the published ratings (for the investments in the portfolio) of 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. A 42% AA 18% AAA 19% Other 21%*
*Includes short-term securities (16%) and two securities rated in the Baa category (5%). 16 SchwabFunds(R) - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND PORTFOLIO SUMMARY - -------------------------------------------------------------------------------- ASSET CHANGE
Total Total Percentage Net Assets Net Assets Change Over as of 8/31/95 as of 8/31/94 Reporting (000s) (000s) Period - ----------------------------------------------------------------- $90,045 $106,432 (15%) - -----------------------------------------------------------------
AVERAGE WEIGHTED MATURITY AT AUGUST 31, 1995
Value Maturity Schedule (000s) % of Portfolio % of Portfolio - --------------------------------------------------------------------------------------- (cum.) 0 - 1 Years $ 914 1.0% 1.0% 2 - 10 Years 267 0.3 1.3 11 - 20 Years 59,378 67.0 68.3 21 - 30 Years 28,032 31.7 100.0% ------- ----- $88,591 100.0% ======= =====
Average Weighted Maturity -- 18.60 Years PORTFOLIO QUALITY SUMMARY (as of August 31, 1995) [Pie chart indicating summary of published ratings] This summary reflects the published ratings (for the investments in the portfolio) of 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. A 36% AA 13% AAA 51%
17 SchwabFunds(R) 1 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS (in thousands) August 31, 1995 - --------------------------------------------------------------------------------
Par Value ------ ------- VARIABLE RATE OBLIGATIONS--1.7%(a) Irvine Ranch, California Water District Consolidated Revenue Refunding Bonds Series 1985B-2/(Sumitomo Bank LOC) (- A-1) 3.60%, 09/01/95 $ 200 $ 200 Irvine Ranch, California Water District Election 1988 Waterworks Improvement District 182, Series A/ (Sumitomo Bank LOC) (- A-1) 3.60%, 09/01/95 500 500 ------- TOTAL VARIABLE RATE OBLIGATIONS (Cost $700) 700 ------- TAX AND REVENUE ANTICIPATION NOTES--15.0%(b) San Diego County, California Tax and Revenue Anticipation Notes (MIG1 SP-1) 4.50%, 09/30/96 2,000 2,009 San Diego, California Area Local Governments Pooled Tax and Revenue Anticipation Notes/ (Mitsubishi Bank LOC) (- SP-1+) 4.75%, 10/18/96 2,000 2,013 San Diego, California Unified School District Tax and Revenue Anticipation Notes Series A/(Westdeutsche Landesbank LOC) (MIG1 -) 4.75%, 10/10/96 2,000 2,013 ------- TOTAL TAX AND REVENUE ANTICIPATION NOTES (Cost $6,035) 6,035 ------- MUNICIPAL BONDS--83.1%(b) California Health Facilities Financing Authority Revenue Bonds (Downey Community Hospital) (- A-) 4.75%, 05/15/99 2,220 2,181 California Housing Finance Agency Revenue Bonds Home Mortgage Series G (Aa AA-) 5.65%, 02/01/98 500 509 5.65%, 08/01/98 585 597 5.85%, 08/01/99 320 329 6.00%, 08/01/00 410 423 California State Public Works Board Lease Revenue Refunding Bonds (California Community College Project) Series 1993A (A A-) 4.70%, 12/01/99 1,000 999 California State Public Works Board Lease Revenue Refunding Bonds (California State University) Series A (A A-) 4.30%, 12/01/99 2,000 1,955 California State Public Works Board Lease Revenue Refunding Bonds (Department of Corrections State Prisons) Series A/(AMBAC Insurance) (Aaa AAA) 4.70%, 12/01/00 1,865 1,884 California State Public Works Board Lease Revenue Refunding Bonds (Department of Corrections - California State Prison - Susanville) Series D (A A-) 4.40%, 06/01/00 1,000 978 California State Public Works Board Lease Revenue Refunding Bonds (Various University of California Projects) Series A (A A-) 4.70%, 06/01/00 1,020 1,016 California Statewide Communities Development Authority Revenue Refunding Bonds Certificate of Participation (Cedars - Sinai Medical Center) (A1 -) 4.40%, 11/01/00 1,235 1,175 California Statewide Community Development Authority Revenue Bonds Certificate of Participation (St. Joseph Health Systems) (Aa AA) 5.30%, 07/01/00 2,035 2,066 Contra Costa County, California Transportation Authority Sales Tax Revenue Bonds Series A/ (FGIC Insurance) (Aaa AAA) 4.80%, 03/01/01 1,000 1,009 Foothill, California Transit Zone Certificates of Participation Refunding Bond Referendum Series A (Baa1 -) 4.50%, 05/01/97 1,000 991 4.50%, 11/01/97 1,000 989 Garden Grove, California Community Development Projects Tax Allocation Refunding Bonds (- A) 4.70%, 10/01/98 1,060 1,048 Los Angeles County, California Public Works Financing Authority District Revenue Refunding Bonds (Capital Construction) (Aa1 AA-) 4.30%, 03/01/00 1,090 1,087
18 SchwabFunds(R) 2 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS (in thousands) August 31, 1995 - --------------------------------------------------------------------------------
Par Value ------ ------- Los Angeles, California Convention & Exhibit Center Authority Certificates of Participation Series A/ (Escrowed to Maturity with Government Securities) (Aaa AAA) 7.375%, 08/15/99 $1,000 $ 1,128 Los Angeles, California State Building Authority Revenue Refunding Bonds (California Department of General Services) Series A (A A-) 4.50%, 05/01/98 400 399 4.70%, 05/01/99 450 448 Los Angeles, California Unified School District Certificates of Participation (Multiple Properties) Series 1994B/ (AMBAC Insurance) (Aaa AAA) 5.70%, 12/01/99 3,215 3,384 Los Angeles, California Wastewater System Revenue Bonds Series A (A1 A) 6.60%, 02/01/99 1,775 1,886 Morgan Hill, California Unified School District Certificates of Participation (A1 -) 4.80%, 08/01/99 510 509 Port of Long Beach, California Harbor Revenue Bonds (Aa AA-) 7.10%, 05/15/99 2,000 2,188 San Francisco, California Port Commission Revenue Refunding Bonds (A BBB+) 5.00%, 07/01/00 1,500 1,526 San Ramon Valley, California Unified School District Certificates of Participation (Measure A Capital Project) Series A (A -) 4.90%, 10/01/99 1,100 1,084 Santa Monica, California Wastewater Enterprise Revenue-Hyperion Project Series A (A1 A+) 6.25%, 01/01/02 1,250 1,384 Stockton, California Health Facilities Revenue Bonds (St. Joseph Medical Center) Series A/(MBIA Insurance) (Aaa AAA) 4.60%, 06/01/00 200 197 ------- TOTAL MUNICIPAL BONDS (Cost $33,043) 33,369 -------
Shares ------ SHORT-TERM INVESTMENTS--0.2%(c) Provident Institutional Funds - California Money Fund Portfolio 3.32%, 09/07/95 74 74 ------- TOTAL SHORT-TERM INVESTMENTS (Cost $74) 74 ------- TOTAL INVESTMENTS--100.0% (Cost $39,852) $40,178 =======
See accompanying Notes to Schedules of Investments. 19 SchwabFunds(R) 3 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS (in thousands) August 31, 1995 - --------------------------------------------------------------------------------
Par Value ------ ------- VARIABLE RATE OBLIGATIONS--1.0%(a) Irvine Ranch, California Water District Consolidated Revenue Refunding Bonds Series 1985B-2/(Sumitomo Bank LOC) (- A-1) 3.60%, 09/01/95 $ 300 $ 300 Irvine Ranch, California Water District Consolidated Revenue Refunding Bonds Series 1985B-3/(Sumitomo Bank LOC) (- A-1) 3.60%, 09/01/95 100 100 Irvine Ranch, California Water District Consolidated Revenue Refunding Bonds Series A/ (Industrial Bank of Japan LOC) (VMIG1 A-1) 3.60%, 09/01/95 400 400 Irvine Ranch, California Water District Improvement District No. 284 Series A/(Sumitomo Bank LOC) (- A-1) 3.60%, 09/01/95 100 100 ------- TOTAL VARIABLE RATE OBLIGATIONS (Cost $900) 900 ------- MUNICIPAL BONDS--99.0%(b) Alameda County, California Certificates of Participation (Capital Projects) (A A) 6.25%, 06/01/06 1,000 1,028 Alta Loma, California Elementary School District Series 2 General Obligation Bonds/(AMBAC Insurance) (Aaa AAA) 5.875%, 06/01/08 840 868 5.875%, 06/01/09 860 882 Antioch Area, Public Facilities Financing Agency California Special Tax Series 89-1/ (FGIC Insurance) (Aaa AAA) 5.25%, 08/01/07 1,985 1,970 Bakersfield, California Hospital Revenue Bonds (Bakersfield Memorial Hospital) Series A (A A-) 6.50%, 01/01/22 1,000 1,003 California Educational Facilities Authority Revenue Bonds (Loyola Marymount University) Series B (A1 -) 6.60%, 10/01/22 1,450 1,510 California Educational Facilities Authority Revenue Bonds (Mills College) (A -) 6.875%, 09/01/22 500 523 California Educational Facilities Authority Revenue Bonds (Saint Mary's College) (A -) 5.00%, 10/01/12 3,000 2,693 California Health Facilities Financing Authority Revenue Bonds (Association of Retarded Citizens)/(California Mortgage Insurance) (- A) 7.00%, 05/01/21 455 470 California Health Facilities Financing Authority Revenue Bonds (Marshall Hospital) Series A/(California Mortgage Insurance) (- A) 6.625%, 11/01/22 4,000 4,025 California Housing Finance Agency Home Mortgage Revenue Bonds Series G (Aa AA-) 7.20%, 08/01/14 3,000 3,203 California Housing Finance Agency Multi Unit Rental Housing Revenue Bonds Series BII 1992 (A1 A+) 6.70%, 08/01/15 1,000 1,024 California State Public Works Board Lease Revenue Refunding Bonds (Various California State University Projects) Series A (A A-) 6.70%, 10/01/17 1,250 1,298 California State Public Works Board Lease Revenue Refunding Bonds (Various University of California Projects) Series A (A A-) 5.50%, 06/01/10 3,000 2,846 California Statewide Communities Development Authority Certificates of Participation Revenue Bonds (Cedars-Sinai Medical Center) Series 1992 (A1 -) 6.50%, 08/01/15 1,250 1,281 California Statewide Communities Development Authority Hospital Revenue Bonds Certificates of Participation (Saint Joseph Health Systems) (Aa AA) 6.50%, 07/01/15 2,000 2,078 Central Coast Water Authority Revenue Bonds (State Water Project Regional Facilities)/ (AMBAC Insurance) (Aaa AAA) 6.60%, 10/01/22 1,500 1,581 Chico, California Unified School District General Obligations Bonds Series C/(MBIA Insurance) (Aaa AAA) 6.75%, 06/01/17 500 529 Fresno, California Health Facility Revenue Bonds (Holy Cross Health System - St. Agnes Medical Center) (A1 AA-) 6.50%, 06/01/11 550 568
20 SchwabFunds(R) 4 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS (in thousands) August 31, 1995 - --------------------------------------------------------------------------------
Par Value ------ ------- Loma Linda, California Hospital Revenue Refunding Bonds (Loma Linda University Medical Center) Series C/(MBIA Insurance) (Aaa AAA) 5.375%, 12/01/22 $3,000 $2,719 Los Angeles County, California Metropolitan Transit Authority Sales Tax Revenue Bond (C 2nd) Series A/(AMBAC Insurance) (Aaa AAA) 5.50%, 07/01/17 3,000 2,824 Los Angeles County, California Public Works Financing Authority Lease Revenue Bonds (Multi Capital Facilities Project IV)/(MBIA Insurance) (Aaa AAA) 5.00%, 12/01/07 2,000 1,940 Los Angeles County, California Transportation Commission Sales Tax Revenue Refunding Bonds Series B (A1 A+) 6.50%, 07/01/13 555 574 Los Angeles, California Department of Airports Revenue Bonds Series A/(FGIC Insurance) (Aaa AAA) 5.50%, 05/15/09 3,000 2,993 5.50%, 05/15/10 560 553 Los Angeles, California Department of Water and Power Electric Plant Revenue Bonds (Aa AA-) 6.00%, 01/15/11 865 876 Los Angeles, California Harbor Revenue Bonds Series A (Aa AA) 6.50%, 08/01/25 3,000 3,128 Los Angeles, California Wastewater System Revenue Bonds Series B/(AMBAC Insurance) (Aaa AAA) 6.25%, 06/01/12 1,260 1,292 Northern California Power Agency Multiple Capital Facilities Revenue Bonds Series A/(MBIA Insurance) (Aaa AAA) 6.50%, 08/01/12 3,300 3,465 Oceanside, California Certificates of Participation Refunding Bonds Series A (A BBB+) 6.375%, 04/01/12 1,250 1,247 Orange County, California Water District Certificates of Participation (Aa AA) 6.50%, 08/15/11 1,150 1,169 Petaluma, California Certificates of Participation Series A/(AMBAC Insurance) (Aaa AAA) 5.50%, 08/01/08 750 754 Sacramento, California Certificates of Participation (Light Rail Transportation Project) (A1 A+) 6.75%, 07/01/07 2,000 2,195 Sacramento, California Regional Transit District Certificates of Participation Series 1992A (A1 -) 6.375%, 03/01/05 250 267 San Bernardino County, California Certificates of Participation (Medical Center Financing Project) Series A/ (MBIA Insurance) (Aaa AAA) 5.50%, 08/01/22 5,500 5,081 San Bernardino County, California Certificates of Participation (West Valley Detention Center)/(MBIA Insurance) (Aaa AAA) 6.50%, 11/01/12 420 441 San Francisco, California Bay Area Rapid Transit District Sales Tax Revenue Bonds/(FGIC Insurance) (Aaa AAA) 5.50%, 07/01/15 2,725 2,589 San Francisco, California City and County (Library Facilities Project) Series D (A1 AA-) 5.75%, 06/15/12 685 679 San Francisco, California Port Commission Revenue Refunding Bonds (A BBB+) 5.90%, 07/01/09 5,000 4,838 Santa Clara County, California Financing Authority Lease Revenue Bonds (VMC Facility Replacement Project) Series A/ (AMBAC Insurance) (Aaa AAA) 7.75%, 11/15/10 1,460 1,781 6.875%, 11/15/14 2,000 2,178 Santa Clara, California Redevelopment Agency Tax Allocation Revenue Refunding Bonds (Bayshore North Project)/(AMBAC Insurance) (Aaa AAA) 7.00%, 07/01/10 1,500 1,712 Southern California Public Power Authority Revenue Bonds (San Juan Unit 3) Series A/ (MBIA Insurance) (Aaa AAA) 5.375%, 01/01/08 5,000 4,975 Southern California Rapid Transit District Revenue Bonds/(AMBAC Insurance) (Aaa AAA) 6.00%, 09/01/08 3,500 3,640
21 SchwabFunds(R) 5 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Par Value ------ ------- Temecula, California Community Services District Certificates of Participation (Community Recreation Center Project) (- A) 7.125%, 10/01/12 $1,000 $ 1,046 Westminster, California Public Financing Authority Bonds Certificates of Participation (1994 Civic Center and Street Improvement Project) (- A-) 7.00%, 06/01/19 3,325 3,341 ------- TOTAL MUNICIPAL BONDS (Cost $86,103) 87,677 ------- Shares ------ SHORT-TERM INVESTMENTS--0.0%(c) Provident Institutional Funds - California Money Fund Portfolio 3.32%, 09/07/95 14 $ 14 ------- TOTAL SHORT-TERM INVESTMENTS (Cost $14) 14 ------- TOTAL INVESTMENTS--100.0% (Cost $87,017) $88,591 =======
NOTES TO SCHEDULES OF INVESTMENTS. Parenthetical disclosures which follow each security represent independent bond ratings, where available, as provided by Moody Investor Services, Inc. and Standard & Poor's Corporation, which were in effect at August 31, 1995. These ratings are unaudited. (a) Variable rate securities. Interest rates vary periodically based on current market rates. Rates shown are the effective rates on August 31, 1995. Dates shown represent the latter of the demand date or next interest rate change date, which is considered the maturity date for financial reporting purposes. For variable rate securities without demand features and which mature in less than one year, the next interest reset date is shown. (b) Interest rates represent coupon rate of security. (c) Interest rates represent the yield on August 31, 1995.
Abbreviations ------------- AMBAC AMBAC Indemnity Corporation FGIC Financial Guaranty Insurance Company LOC Letter of Credit MBIA Municipal Bond Investors Assurance VMIG Variable Moody's Investment Grade
See accompanying Notes to Financial Statements. 22 SchwabFunds(R) 6 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND STATEMENTS OF ASSETS AND LIABILITIES (in thousands) August 31, 1995 - --------------------------------------------------------------------------------
Schwab California Schwab California Short/Intermediate Long-Term Tax-Free Tax-Free Bond Fund Bond Fund ----------------- ----------------- ASSETS Investments, at value (Cost: $39,852 and $87,017, respectively) $40,178 $88,591 Interest receivable 458 1,244 Receivable for fund shares sold 93 463 Deferred organization costs 3 4 Prepaid expenses 2 2 ------- ------- Total assets 40,734 90,304 ------- ------- LIABILITIES Payable for: Dividends 28 79 Fund shares redeemed 20 113 Investment advisory and administration fee 11 23 Transfer agency and shareholder service fees 2 3 Other 34 41 ------- ------- Total liabilities 95 259 ------- ------- Net assets applicable to outstanding shares $40,639 $90,045 ======= ======= NET ASSETS CONSIST OF: Capital paid in $41,138 $91,162 Accumulated undistributed net investment income 11 36 Accumulated net realized loss on investments sold (836) (2,727) Net unrealized appreciation on investments 326 1,574 ------- ------- $40,639 $90,045 ======= ======= THE PRICING OF SHARES Outstanding shares, $0.00001 par value (unlimited shares authorized) 4,040 8,554 Net asset value, offering and redemption price per share $10.06 $10.53
See accompanying Notes to Financial Statements. 23 SchwabFunds(R) 7 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND STATEMENTS OF OPERATIONS (in thousands) For the year ended August 31, 1995 - --------------------------------------------------------------------------------
Schwab California Schwab California Short/Intermediate Long-Term Tax-Free Tax-Free Bond Fund Bond Fund ----------------- ----------------- Interest income $ 1,999 $ 5,607 --------- --------- Expenses: Investment advisory and administration fee 171 375 Transfer agency and shareholder service fees 104 229 Custodian fees 31 63 Professional fees 19 31 Shareholder reports 9 19 Trustees' fees 3 6 Amortization of deferred organization costs 1 1 Insurance and other expenses 12 17 --------- --------- 350 741 Less expenses reduced (142) (208) --------- --------- Total expenses incurred by Fund 208 533 --------- --------- Net investment income 1,791 5,074 --------- --------- Net realized gain (loss) on investments: Proceeds from sales of investments 65,090 128,612 Cost of investments sold (65,857) (130,492) --------- --------- Net realized loss on investments sold (767) (1,880) --------- --------- Change in net unrealized appreciation (depreciation) on investments: Beginning of period (893) (512) End of period 326 1,574 --------- --------- Increase in net unrealized appreciation on investments 1,219 2,086 --------- --------- Increase in net assets resulting from operations $ 2,243 $ 5,280 ========= =========
See accompanying Notes to Financial Statements. 24 SchwabFunds(R) 8 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND STATEMENTS OF CHANGES IN NET ASSETS (in thousands) - --------------------------------------------------------------------------------
Schwab California Schwab California Short/Intermediate Long-Term Tax-Free Tax-Free Bond Fund Bond Fund ------------------- -------------------- For the year ended August 31, 1995 1994 1995 1994 ------- ------- ------- -------- Operations: Net investment income $ 1,791 $ 1,931 $ 5,074 $ 6,215 Net realized loss on investments sold (767) (69) (1,880) (403) Increase (decrease) in net unrealized appreciation (depreciation) on investments 1,219 (1,387) 2,086 (7,834) ------- ------- ------- -------- Increase (decrease) in net assets resulting from operations 2,243 475 5,280 (2,022) ------- ------- ------- -------- Distributions to shareholders from: Net investment income (1,786) (1,928) (5,061) (6,205) Capital gains -- -- -- (1,427) ------- ------- ------- -------- Total distributions to shareholders (1,786) (1,928) (5,061) (7,632) ------- ------- ------- -------- Capital Share Transactions: Proceeds from shares sold 12,494 40,720 22,400 39,322 Net asset value of shares issued in reinvestment of dividends 1,403 1,525 3,479 5,578 Less payments for shares redeemed (22,364) (36,688) (42,485) (66,881) ------- ------- ------- -------- Increase (decrease) in net assets from capital share transactions (8,467) 5,557 (16,606) (21,981) Total increase (decrease) in net assets (8,010) 4,104 (16,387) (31,635) Net Assets: Beginning of period 48,649 44,545 106,432 138,067 ------- ------- ------- -------- End of period (including undistributed net investment income of $11, $6, $36 and $23 respectively) $40,639 $48,649 $90,045 $106,432 ======= ======= ======= ======== Number of Fund Shares: Sold 1,271 4,035 2,201 3,601 Reinvested 143 152 342 512 Redeemed (2,293) (3,664) (4,220) (6,147) ------- ------- ------- -------- Net increase (decrease) in shares outstanding (879) 523 (1,677) (2,034) Shares Outstanding: Beginning of period 4,919 4,396 10,231 12,265 ------- ------- ------- -------- End of period 4,040 4,919 8,554 10,231 ======= ======= ======= ========
See accompanying Notes to Financial Statements. 25 SchwabFunds(R) 9 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND NOTES TO FINANCIAL STATEMENTS For the year ended August 31, 1995 - -------------------------------------------------------------------------------- 1. DESCRIPTION OF THE FUNDS The Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund (the "Funds"), are series of Schwab Investments (the "Trust"), an open-end, management investment company organized as a Massachusetts business trust on October 26, 1990 and registered under the Investment Company Act of 1940, as amended. In addition to the two funds described above, the Trust also offers -- the Schwab 1000 Fund(R), the Schwab Short/Intermediate Government Bond Fund, the Schwab Long-Term Government Bond Fund, the Schwab Short/Intermediate Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond Fund. The assets of each series are segregated and accounted for separately. The investment objective of the Funds is to seek to provide a high level of current income that is exempt from federal income and State of California personal income taxes, consistent with preservation of capital. The Funds, which are not "diversified" within the meaning of the Investment Company Act of 1940, as amended, each invest in a portfolio of debt obligations issued by or on behalf of the State of California, its political subdivisions, agencies or instrumentalities. 2. SIGNIFICANT ACCOUNTING POLICIES 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 representative quoted bid and asked prices, or if such prices are not available, at prices for securities of comparable maturity, quality and type. Short term securities within 60 days or less of maturity are stated at amortized cost which approximates market value. Security transactions and interest income -- Security transactions, in the accompanying financial statements, are accounted for on a trade date basis (date the order to buy or sell is executed). Interest income is recorded on the accrual basis and includes amortization of premium on investments. Realized gains and losses from security transactions are determined on an identified cost basis. 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. Dividends to shareholders -- Each Fund declares a daily dividend, from its net investment income for that day, payable monthly. Distributions of net capital gains are recorded on ex-dividend date, payable annually on a calendar year basis. Deferred organization costs -- Costs incurred in connection with the organization of the Funds, their initial registration with the Securities and Exchange Commission and with various states are amortized on a straight-line basis over a five year period from each Fund's commencement of operations. Expenses -- Expenses arising in connection with a Fund are charged directly to that Fund. Expenses common to all series of the Trust are allocated to each series in proportion to their relative net assets. 26 SchwabFunds(R) 10 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND NOTES TO FINANCIAL STATEMENTS For the year ended August 31, 1995 - -------------------------------------------------------------------------------- Federal income taxes -- It is each Fund's policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all net investment income and realized net capital gains, if any, to shareholders. Therefore, no federal income tax provision is required. Each Fund is considered a separate entity for tax purposes. All distributions paid by the Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund during the year ended August 31, 1995 qualify as exempt-interest dividends for federal tax purposes. At August 31, 1995, (for financial reporting and federal income tax purposes), net unrealized appreciation for the Schwab California Short/Intermediate Tax-Free Bond Fund aggregated $326,000, of which $513,000 related to appreciated securities and $187,000 related to depreciated securities, and net unrealized appreciation for the Schwab California Long-Term Tax-Free Bond Fund aggregated $1,574,000, of which $2,316,000 related to appreciated securities and $742,000 related to depreciated securities. 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 Manager"). For advisory services and facilities furnished, the Funds each pay an annual fee, payable monthly, of .41% of each Fund's average daily net assets. Under this agreement, the Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax- Free Bond Fund incurred investment advisory and administration fees of $171,000 and $375,000, respectively, during the year ended August 31, 1995, before the Investment Manager reduced its fee (see Note 4). Transfer agency and shareholder service agreements -- The Trust has transfer agency and shareholder service agreements with Charles Schwab & Co., Inc. ("Schwab"). For services provided under these agreements, Schwab receives an annual fee, payable monthly, of .05% of average daily net assets of each Fund for transfer agency services and .20% of such assets for shareholder services. For the year ended August 31, 1995, the Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund incurred transfer agency and shareholder service fees of $104,000, and $229,000, respectively, before Schwab reduced its fees (see Note 4). Officers and trustees -- Certain officers and trustees of the Trust are also officers or directors of the Investment Manager and Schwab. During the year ended August 31, 1995, the Trust made no direct payments to its officers or trustees who are "interested persons" within the meaning of the Investment Company Act of 1940, as amended. The Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund incurred fees aggregating $9,000 related to the Trust's unaffiliated trustees. 27 SchwabFunds(R) 11 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB During the year ended August 31, 1995, the Investment Manager and Schwab reduced a portion of their fees in order to limit each Fund's ratio of operating expenses to average net assets. The total of such fee reductions by the Investment Manager were $94,000 and $130,000 for the Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund, respectively, and the total of such fee reductions by Schwab were $48,000 and $78,000 for the Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund, respectively. 5. INVESTMENT TRANSACTIONS Purchases, sales and maturities of investment securities, other than short-term obligations, during the year ended August 31, 1995, were as follows (in thousands):
Schwab California Schwab California Short/Intermediate Long-Term Tax-Free Bond Fund Tax-Free Bond Fund ------------------- ------------------- Purchases $25,133 $41,470 Proceeds of sales and maturities $31,309 $53,564
28 SchwabFunds(R) 12 - -------------------------------------------------------------------------------- SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND NOTES TO FINANCIAL STATEMENTS For the year ended August 31, 1995 - -------------------------------------------------------------------------------- 6. FINANCIAL HIGHLIGHTS Per share income and capital changes for a share outstanding throughout the period:
Schwab California Short/Intermediate Tax-Free Bond Fund ------------------------------------------------- For the period April 21, 1993 (commencement For the year ended of operations) to August 31, August 31, 1995 1994 1993 ------------ ------------ ----------------- Net asset value at beginning of period $ 9.89 $ 10.13 $ 10.00 Income from Investment Operations - --------------------------------- Net investment income .42 .37 .13 Net realized and unrealized gain (loss) on investments .17 (.24) .13 -------- -------- ------- Total from investment operations .59 .13 .26 Less Distributions - ------------------ Dividends from net investment income (.42) (.37) (.13) Distributions from realized gain on investments -- -- -- -------- -------- ------- Total distributions (.42) (.37) (.13) -------- -------- ------- Net asset value at end of period $ 10.06 $ 9.89 $ 10.13 ======== ======== ======= Total return (%) 6.17 1.29 2.57 - ---------------- Ratios/Supplemental Data - ------------------------ Net assets, end of period (000s) $40,639 $48,649 $44,545 Ratio of expenses to average net assets (%) .50 .48 .45* Ratio of net investment income to average net assets (%) 4.29 3.69 3.49* Portfolio turnover rate (%) 62 35 0
The Investment Manager and Schwab have reduced a portion of their fees and absorbed certain expenses in order to limit each Fund's ratio of operating expenses to average net assets. Had these fees and expenses not been reduced and absorbed, the ratio of expenses to average net assets for the Schwab California Short/Intermediate Tax-Free Bond Fund for the periods ended August 31, 1995, 1994 and 1993 would have been .84%, .86% and 1.25%*, respectively, and the ratio of net investment income to average net assets would have been 3.95%, 3.31% and 2.69%*, respectively. * Annualized 29 SchwabFunds(R) 13 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Schwab California Long-Term Tax-Free Bond Fund ----------------------------------------------------------- For the period For the February 24, 1992 eight (commencement For the year ended months ended of operations) to August 31, August 31, December 31, 1995 1994 1993 1992 ------------ ------------ ------------ ----------------- Net asset value at beginning of period $ 10.40 $ 11.26 $ 10.58 $ 10.00 Income from Investment Operations - --------------------------------- Net investment income .56 .56 .38 .51 Net realized and unrealized gain (loss) on investments .13 (.74) .68 .58 -------- -------- -------- ------- Total from investment operations .69 (.18) 1.06 1.09 Less Distributions - ------------------ Dividends from net investment income (.56) (.56) (.38) (.51) Distributions from realized gain on investments -- (.12) -- -- -------- -------- -------- ------- Total distributions (.56) (.68) (.38) (.51) -------- -------- -------- ------- Net asset value at end of period $ 10.53 $ 10.40 $ 11.26 $ 10.58 ======== ======== ======== ======= Total return (%) 6.98 (1.70) 10.13 11.10 - ---------------- Ratios/Supplemental Data - ------------------------ Net assets, end of period (000s) $90,045 $106,432 $138,067 $72,969 Ratio of expenses to average net assets (%) .58 .60 .60* .45* Ratio of net investment income to average net assets (%) 5.54 5.12 5.18* 5.72* Portfolio turnover rate (%) 46 48 47 124
The Investment Manager and Schwab have reduced a portion of their fees and absorbed certain expenses in order to limit each Fund's ratio of operating expenses to average net assets. Had these fees and expenses not been reduced and absorbed, the ratio of expenses to average net assets for the Schwab California Long-Term Tax-Free Bond Fund for the periods ended August 31, 1995, 1994, 1993 and December 31, 1992 would have been .81%, .80%, .87%* and 1.05%*, respectively, and the ratio of net investment income to average net assets would have been 5.31%, 4.92%, 4.91%* and 5.12%*, respectively. * Annualized 30 SchwabFunds(R) 14 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To the Trustees and Shareholders of the Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of the Schwab California Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term Tax-Free Bond Fund (two series constituting part of Schwab Investments, hereafter referred to as the "Trust") at August 31, 1995, and the results of their operations and the changes in their net assets for the periods presented, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 1995 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Francisco, California September 29, 1995 31 THE SCHWABFUNDS FAMILY(R) The SchwabFunds Family includes a variety of funds to meet your investment needs. You can diversify into several different equity markets with our three equity index funds, choose from different maturities with our bond fund selection, and take advantage of an array of money market fund choices. [Figure 1] SCHWAB 1000 FUND(R) is designed to allow investors to participate in the overall price and dividend performance of the U.S. stock market as represented by the Schwab 1000 Index(R). This index reflects the performance of the 1,000 largest publicly traded U.S. companies based on market capitalization. 1 [Figure 2] SCHWAB SMALL-CAP INDEX FUND(R) is designed to replicate the Schwab Small-Cap Index(TM) which tracks the performance of smaller capitalization companies. The Schwab Small-Cap Index represents the second 1,000 largest publicly traded U.S. companies based on market capitalization. 1 [Figure 3] SCHWAB INTERNATIONAL INDEX FUND(TM) gives investors the opportunity to participate in the price and dividend performance of some of the world's largest companies. This Fund makes it simple to effectively invest in 350 of the largest publicly traded companies (based on market capitalization) from countries around the world, as represented by the Schwab International Index(TM). 2 [Figure 4] SCHWAB GOVERNMENT BOND FUNDS include two different Funds designed to offer high current yields with the credit safety of high-quality U.S. Government securities. The level of income you're seeking and your tolerance for fluctuation in share price should determine your selection of either our Short/Intermediate Fund or the Long-Term Fund. 3 [Figure 5] SCHWAB TAX-FREE BOND FUNDS help investors take advantage of one of the last remaining tax breaks: tax-free municipal bonds. We offer a Short/Intermediate Fund and a Long-Term Fund, both of which pay monthly income free from federal personal income tax. 4, 5 [Figure 6] SCHWAB CALIFORNIA TAX-FREE BOND FUNDS give California residents two different opportunities to earn double tax-free income--free from both federal and California state personal income taxes. Choose from the Short/Intermediate Fund or the Long-Term Fund. 5 [Figure 7] SCHWAB MONEY FUNDS include seven different money market funds that seek high current income with safety and liquidity. Most can be linked to your Schwab account to "sweep" cash balances automatically when you're in between other investments. These Funds are managed to maintain a stable $1 share price. Keep in mind, however, that investments in money market funds are neither insured nor guaranteed by the U.S. Government, and there is no assurance that the Funds will be able to maintain a stable share price of $1. Schwab will be happy to provide you with a free prospectus and brochure on any of the SchwabFunds(R). The prospectus provides more complete information including charges and expenses. Please read it carefully before investing. Also keep in mind that the principal value and investment returns of your investment in the SchwabFunds (except Schwab Money Funds) will fluctuate with market conditions, and Fund shares, when redeemed, may be worth more or less than their original cost. 1-800-2 NO-LOAD 1-800-266-5623 1 The Schwab 1000 Fund and the Schwab Small Cap-Index Fund do not include privately held companies, investment companies and companies incorporated outside the United States. 2 Companies in the Schwab International Index Fund must be from countries with developed securities markets. The Fund is currently invested in 15 countries and excludes investment companies and companies from the United States. 3 Investors in the Schwab Government Bond Funds may experience a decline in share price due to pre-payment of obligations held by the Funds. 4 Income may be subject to state and local taxes. 5 Income may be subject to the Alternative Minimum Tax (AMT) and capital appreciation from discounted bonds may be subject to state and federal income tax. 32 -------------- BULK RATE U.S. POSTAGE PAID CHARLES SCHWAB -------------- [SCHWABFUNDS FAMILY(R) LOGO] 101 Montgomery Street San Francisco, California 94104 INVESTMENT ADVISER Charles Schwab Investment Management, Inc. 101 Montgomery Street, San Francisco, CA 94104 DISTRIBUTOR Charles Schwab & Co., Inc. 101 Montgomery Street, San Francisco, CA 94104 This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. 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