-----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, O8CfZnGV1630rCIeJ2d3eIDg9XapoELVDi2q5jMCcHyWCq0W0Ga9/CaiRlJZv5D3 2jAINHjOUk4p6ZzT+b0Wkw== 0000950149-02-000916.txt : 20020507 0000950149-02-000916.hdr.sgml : 20020507 ACCESSION NUMBER: 0000950149-02-000916 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWAB INVESTMENTS CENTRAL INDEX KEY: 0000869365 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: 02635574 BUSINESS ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 N-30D 1 f80776n-30d.txt SCHWAB BOND INDEX SEMI-ANNUAL REPORT SCHWAB BOND INDEX FUNDS February 28, 2002 Semiannual Report SCHWAB SHORT-TERM BOND MARKET INDEX FUND SCHWAB TOTAL BOND MARKET INDEX FUND [PHOTO OF PEOPLE IN MEETING] [CHARLES SCHWAB LOGO] [PHOTO OF CHARLES SCHWAB] Dear Shareholder, In the six months covered by this report, investor confidence was tested by the events of September 11, concerns about corporate accounting and continuing economic weakness. While many investors remain nervous about these events, we believe that the best way to create wealth is by participating in the financial markets, and the present time is no exception. We at Schwab believe that you are more likely to reach your financial goals by both maintaining a diversified portfolio across and within asset classes and by staying in the market for the long term. By investing in SchwabFunds(R), you've already taken an important step. Our spectrum of mutual funds is designed to help you meet your financial objectives. Thank you for the trust that you have placed in SchwabFunds. Sincerely, /s/ Charles Schwab - ------------------ Charles Schwab SCHWAB BOND INDEX FUNDS SEMIANNUAL REPORT September 1, 2001 - February 28, 2002 1 Market Overview 5 Schwab Short-Term Bond Market Index Fund 16 Schwab Total Bond Market Index Fund 28 Financial Notes ---------------------------------------------------------------------- 32 HOW TO READ THIS REPORT An illustrated guide to the financials, along with a glossary. MARKET OVERVIEW ECONOMY APPEARS TO BE RECOVERING FROM RECESSION. After a relatively mild recession that began in March 2001, the U.S. economy appeared to be strengthening as the six-month report period drew to a close. [PHOTO OF MANUFACTURING WORKER] The Institute for Supply Management report for February, a forward-looking measure of the nation's economic health, indicated growth in the manufacturing sector for the first time in a year and a half. The final calculations of the nation's Gross Domestic Product (GDP) for the last quarter of 2001 turned out to be sharply higher than earlier calculations. The two upward revisions that were made to the original estimate of Q4 GDP provided evidence that the recession was not only brief but was milder than expected. This news raised the possibility of a recovery earlier than many economists had previously anticipated. For most of the period, however, economic doubts prevailed. The Federal Reserve Board (the Fed) cut short-term interest rates throughout 2001, reducing the benchmark Fed Funds Rate from 6.50% to 1.75%. This cycle of interest rate reductions appears to have ended with the rate cut in December, the last of four cuts that occurred during the report period. ASSET CLASS PERFORMANCE COMPARISON % returns during the report period This graph compares the performance of various asset classes during the report period. [LINE CHART]
Lehman MSCI Russell 2000 Aggregate EAFE Small-Cap S&P 500 3 Month Bond Index Index Index Index T-Bill 31-Aug-01 0 0 0 0 0 7-Sep-01 0.14 -5 -4.97 -4.17 0.07 14-Sep-01 0.85 -10.89 -5.88 -3.58 0.09 21-Sep-01 0.54 -17.15 -19.07 -14.76 0.34 28-Sep-01 1.17 -10.03 -13.46 -8.04 0.38 5-Oct-01 1.72 -7.34 -11.28 -5.36 0.45 12-Oct-01 1.31 -6.11 -8.35 -3.57 0.48 19-Oct-01 1.8 -8.31 -8.96 -5.17 0.53 26-Oct-01 2.25 -5.38 -6.18 -2.42 0.58 2-Nov-01 2.86 -6.66 -7.34 -3.87 0.64 9-Nov-01 3.33 -4.66 -6.24 -0.94 0.71 16-Nov-01 1.21 -4.04 -3.38 0.68 0.72 23-Nov-01 0.88 -4.46 -1.84 1.72 0.75 30-Nov-01 1.87 -4.31 -1.31 0.88 0.8 7-Dec-01 0.36 -2.85 3.09 2.55 0.84 14-Dec-01 0.38 -6.41 1.01 -0.57 0.86 21-Dec-01 0.82 -6.06 3.74 1.36 0.9 28-Dec-01 0.76 -4.27 5.87 2.79 0.93 4-Jan-02 0.97 -2.27 7.09 3.93 0.97 11-Jan-02 2.5 -5.16 5.11 1.54 1.02 18-Jan-02 2.33 -6.96 1.77 -0.05 1.04 25-Jan-02 1.79 -8.01 2.86 0.45 1.06 1-Feb-02 2.24 -9.07 3.04 -0.44 1.09 8-Feb-02 2.58 -10.37 0.19 -2.75 1.13 15-Feb-02 2.8 -8.16 0.78 -2.04 1.16 22-Feb-02 3 -10.13 -0.09 -3.31 1.19
LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX: measures the U.S. bond market THREE-MONTH U.S. TREASURY BILLS (T-BILLS): measures short-term U.S. Treasury obligations S&P 500(R) INDEX: measures U.S. large-cap stocks RUSSELL 2000(R) INDEX: measures U.S. small-cap stocks MSCI-EAFE(R) INDEX: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East These figures assume dividends and distributions were reinvested. Index figures don't include trading and management costs, which would lower performance. Indices are unmanaged and you can't invest in them directly. Remember that past performance isn't an indication of future results. Data source: Charles Schwab & Co., Inc. (Schwab). 1 Although unemployment rose during most of the report period, it is still not high by historical standards. MARKET OVERVIEW Continued JOBLESS RATE RISES SHARPLY, THEN BEGINS TO RETREAT AGAIN. [PHOTO OF PEOPLE WAITING FOR A TRAIN] After reaching new lows in 2000, the U.S. unemployment rate began rising rapidly in 2001. By the end of December 2001 it was at 5.8%, the highest level in over six years. To the surprise of most economists, unemployment proceeded to drop in January and again in February. However, unemployment may rise again in the coming months, until the effects of the recovery reach the job market. Meanwhile, inflation remained low, in part because employers have enjoyed strong worker productivity, which has helped stabilize labor costs and consumer prices. PACED BY RATE CUTS, BOND PRICES RISE; U.S. STOCKS FALL, RECOVER. With U.S. equities ending the report period about where they began, foreign equities falling and money markets seeing their lowest yields in years, bonds emerged as one of the best performing asset classes for the report period (see chart, previous page). Two key factors combined to help create this situation. The Fed's continuing series of interest rate cuts during the report period meant steady downward pressure on yields and, consequently, upward pressure on bond prices. Demand from investors - -------------------------------------------------------------------------------- ECONOMIC FACTORS AND THEIR EFFECTS ON THESE FUNDS. The following charts show recent figures for common measures of the state of the U.S. economy and the interest rate environment. While the relationship of each of these factors to the performance of the funds is complex, the captions over each chart and the discussion above include analysis of how we believe these factors may have influenced market behavior during the report period. REAL GDP GROWTH Annualized growth rate for each quarter shown Growth of 1.7% in Q4 2001 surprised many, as earlier expectations were for negative GDP growth. With only one negative quarter (Q3 2001), the U.S. economy, by one traditional measure, did not see a recession in 2001. [BAR CHART] Q1 1992 3.8 Q2 1992 3.8 Q3 1992 3.1 Q4 1992 5.4 Q1 1993 -0.1 Q2 1993 2.5 Q3 1993 1.8 Q4 1993 6.2 Q1 1994 3.4 Q2 1994 5.7 Q3 1994 2.2 Q4 1994 5 Q1 1995 1.5 Q2 1995 0.8 Q3 1995 3.1 Q4 1995 3.2 Q1 1996 2.9 Q2 1996 6.8 Q3 1996 2 Q4 1996 4.6 Q1 1997 4.4 Q2 1997 5.9 Q3 1997 4.2 Q4 1997 2.8 Q1 1998 6.1 Q2 1998 2.2 Q3 1998 4.1 Q4 1998 6.7 Q1 1999 3.1 Q2 1999 1.7 Q3 1999 4.7 Q4 1999 8.3 Q1 2000 2.3 Q2 2000 5.7 Q3 2000 1.3 Q4 2000 1.9 Q1 2001 1.3 Q2 2001 0.3 Q3 2001 -1.3 Q4 2001 1.7
Gross domestic product (GDP), a broad measure of the goods and services produced in the United States during a given time period, is a prime indicator of the health of the country's economy. Typically, investors see increases in GDP as a positive, since it indicates stronger demand, production and corporate earnings. The figures shown here are adjusted for inflation. Data source: Bloomberg L.P. - -------------------------------------------------------------------------------- 2 Inflation doesn't appear to be a problem for now. But convincing evidence of an economic revival could lead to interest rate increases. fleeing stocks also helped push bond prices up. In fact, investors' preference for Treasuries was so strong that the yield difference between Treasuries and investment-grade corporate bonds grew wider than at any point in the last ten years, including the previous recession. Prices of U.S. equities, which began the report period well below the all-time highs of early 2000, fell further in the wake of the tragic events of 9/11. But overall, by the end of the report period, U.S. stocks were able to recover the ground they lost in September. [PHOTO OF INSIDE WAREHOUSE] LOOKING AHEAD: NEGATIVE FACTORS SEEM UNLIKELY TO DERAIL RECOVERY. There is enough evidence to support the view that the economy is improving, and is likely to continue to do so throughout 2002. More businesses appear ready to resume making capital expenditures and have already begun rebuilding inventories, which fell during 2001 as they typically do in a recession. - -------------------------------------------------------------------------------- U.S. UNEMPLOYMENT RATE Adjusted for seasonal variations After a decade of declines, unemployment rose sharply in 2001, to 5.8%--nearly two percentage points above its three-decade low of 3.9% in 2000. Since then, small declines indicate that the biggest increases may be over for now. [LINE CHART] Dec-91 7.3 Jan-92 7.3 Feb-92 7.4 Mar-92 7.4 Apr-92 7.4 May-92 7.6 Jun-92 7.8 Jul-92 7.7 Aug-92 7.6 Sep-92 7.6 Oct-92 7.3 Nov-92 7.4 Dec-92 7.4 Jan-93 7.3 Feb-93 7.1 Mar-93 7 Apr-93 7.1 May-93 7.1 Jun-93 7 Jul-93 6.9 Aug-93 6.8 Sep-93 6.7 Oct-93 6.8 Nov-93 6.6 Dec-93 6.5 Jan-94 6.8 Feb-94 6.6 Mar-94 6.5 Apr-94 6.4 May-94 6.1 Jun-94 6.1 Jul-94 6.3 Aug-94 6 Sep-94 5.8 Oct-94 5.8 Nov-94 5.6 Dec-94 5.5 Jan-95 5.6 Feb-95 5.4 Mar-95 5.3 Apr-95 5.8 May-95 5.8 Jun-95 5.6 Jul-95 5.6 Aug-95 5.7 Sep-95 5.6 Oct-95 5.5 Nov-95 5.7 Dec-95 5.6 Jan-96 5.6 Feb-96 5.5 Mar-96 5.6 Apr-96 5.5 May-96 5.6 Jun-96 5.3 Jul-96 5.5 Aug-96 5.1 Sep-96 5.2 Oct-96 5.2 Nov-96 5.3 Dec-96 5.4 Jan-97 5.3 Feb-97 5.3 Mar-97 5.1 Apr-97 5 May-97 4.7 Jun-97 5 Jul-97 4.7 Aug-97 4.9 Sep-97 4.7 Oct-97 4.7 Nov-97 4.6 Dec-97 4.7 Jan-98 4.5 Feb-98 4.6 Mar-98 4.6 Apr-98 4.3 May-98 4.3 Jun-98 4.5 Jul-98 4.5 Aug-98 4.5 Sep-98 4.5 Oct-98 4.5 Nov-98 4.4 Dec-98 4.3 Jan-99 4.3 Feb-99 4.4 Mar-99 4.2 Apr-99 4.3 May-99 4.2 Jun-99 4.3 Jul-99 4.3 Aug-99 4.2 Sep-99 4.2 Oct-99 4.1 Nov-99 4.1 Dec-99 4.1 Jan-00 4 Feb-00 4.1 Mar-00 4.1 Apr-00 3.9 May-00 4.1 Jun-00 4 Jul-00 4 Aug-00 4.1 Sep-00 3.9 Oct-00 3.9 Nov-00 4 Dec-00 4 1-Jan 4.2 1-Feb 4.2 1-Mar 4.3 1-Apr 4.5 1-May 4.4 1-Jun 4.5 1-Jul 4.5 1-Aug 4.9 1-Sep 4.9 1-Oct 5.4 1-Nov 5.6 1-Dec 5.8 2-Jan 5.6 2-Feb 5.5
This measures the portion of the U.S. labor force that is unemployed and is either seeking a job or waiting to return to one. Low unemployment often accompanies prosperity and is generally a positive factor for investors, although very low unemployment may boost inflation as employers raise pay to compete for workers. Rising unemployment may mean a softening economy. Data source: Bloomberg L.P. MEASURES OF INFLATION Annualized figures for the Consumer Price Index (monthly) and Employment Cost Index (quarterly) CPI was up 1.1% for the 12 months ended February 28, 2002 (2.6% if food and energy are excluded). ECI rose 4.1% for the 12 months ended December 31, 2001. [LINE CHART]
Date Consumer Price Index Dec-91 3.1 Jan-92 2.6 Feb-92 2.8 Mar-92 3.2 Apr-92 3.2 May-92 3 Jun-92 3.1 Jul-92 3.2 Aug-92 3.1 Sep-92 3 Oct-92 3.2 Nov-92 3 Dec-92 2.9 Jan-93 3.3 Feb-93 3.2 Mar-93 3.1 Apr-93 3.2 May-93 3.2 Jun-93 3 Jul-93 2.8 Aug-93 2.8 Sep-93 2.7 Oct-93 2.8 Nov-93 2.7 Dec-93 2.7 Jan-94 2.5 Feb-94 2.5 Mar-94 2.5 Apr-94 2.4 May-94 2.3 Jun-94 2.5 Jul-94 2.8 Aug-94 2.9 Sep-94 3 Oct-94 2.6 Nov-94 2.7 Dec-94 2.7 Jan-95 2.8 Feb-95 2.9 Mar-95 2.9 Apr-95 3.1 May-95 3.2 Jun-95 3 Jul-95 2.8 Aug-95 2.6 Sep-95 2.5 Oct-95 2.8 Nov-95 2.6 Dec-95 2.5 Jan-96 2.7 Feb-96 2.7 Mar-96 2.8 Apr-96 2.9 May-96 2.9 Jun-96 2.8 Jul-96 3 Aug-96 2.9 Sep-96 3 Oct-96 3 Nov-96 3.3 Dec-96 3.3 Jan-97 3 Feb-97 3 Mar-97 2.8 Apr-97 2.5 May-97 2.2 Jun-97 2.3 Jul-97 2.2 Aug-97 2.2 Sep-97 2.2 Oct-97 2.1 Nov-97 1.8 Dec-97 1.7 Jan-98 1.6 Feb-98 1.4 Mar-98 1.4 Apr-98 1.4 May-98 1.7 Jun-98 1.7 Jul-98 1.7 Aug-98 1.6 Sep-98 1.5 Oct-98 1.5 Nov-98 1.5 Dec-98 1.6 Jan-99 1.7 Feb-99 1.6 Mar-99 1.7 Apr-99 2.3 May-99 2.1 Jun-99 2 Jul-99 2.1 Aug-99 2.3 Sep-99 2.6 Oct-99 2.6 Nov-99 2.6 Dec-99 2.7 Jan-00 2.7 Feb-00 3.2 Mar-00 3.7 Apr-00 3 May-00 3.1 Jun-00 3.7 Jul-00 3.7 Aug-00 3.4 Sep-00 3.5 Oct-00 3.4 Nov-00 3.4 Dec-00 3.4 1-Jan 3.7 1-Feb 3.5 1-Mar 2.9 1-Apr 3.3 1-May 3.6 1-Jun 3.2 1-Jul 2.7 1-Aug 2.7 1-Sep 2.6 1-Oct 2.1 1-Nov 1.9 1-Dec 1.6 2-Jan 1.1 2-Feb 1.1
Qtr Employment Cost Index Dec-91 4.3 Mar-92 4 Jun-92 3.6 Sep-92 3.5 Dec-92 3.5 Mar-93 3.5 Jun-93 3.6 Sep-93 3.6 Dec-93 3.5 Mar-94 3.2 Jun-94 3.2 Sep-94 3.2 Dec-94 3 Mar-95 2.9 Jun-95 2.9 Sep-95 2.7 Dec-95 2.7 Mar-96 2.8 Jun-96 2.9 Sep-96 2.8 Dec-96 2.9 Mar-97 2.9 Jun-97 2.8 Sep-97 3 Dec-97 3.3 Mar-98 3.3 Jun-98 3.5 Sep-98 3.7 Dec-98 3.4 Mar-99 3 Jun-99 3.2 Sep-99 3.1 Dec-99 3.4 Mar-00 4.3 Jun-00 4.4 Sep-00 4.3 Dec-00 4.1 1-Mar 4.1 1-Jun 3.9 1-Sep 4.1 1-Dec 4.1
The Consumer Price Index (CPI) tracks changes in the cost of goods and services and is the most common measure of inflation. The Employment Cost Index (ECI) measures the cost of employing workers, including benefits costs. Financial markets are very sensitive to increases in inflation because of the potentially negative impact on corporate earnings, investors and consumers. Data source: Bloomberg L.P. - -------------------------------------------------------------------------------- 3 MARKET OVERVIEW Continued [PHOTO OF AMERICAN FLAG] Consumer spending should remain strong in 2002. However, as it did not retrench much during the recession (except for a fairly brief period after 9/11), consumer spending is not likely to grow significantly, which it typically does after a recession. Any realistic assessment of economic prospects must encompass negative factors as well. Recent concerns about corporate accounting practices have understandably made investors nervous. However, this situation should not undermine the view of improving economic conditions. There are still uncertainties associated with the ongoing war on terrorism which may affect the economy and financial markets. A rise in petroleum prices, which might occur if the antiterrorism coalition were to lose support from some Middle Eastern countries, would be a setback for the U.S. economy. A decline in consumer spending would be damaging to the economy, while stock prices would likely retreat if corporations reported sub-par earnings. Although inflation presently looks benign, a stronger increase in economic activity may prompt the Fed to raise interest rates earlier than expected as a preemptive move. In spite of these issues, however, the overall economic outlook remains positive. - -------------------------------------------------------------------------------- YIELDS OF U.S. TREASURY BONDS Effective yields of five-year and ten-year Treasuries For most of 2001 (and the report period), Treasury prices soared and yields plunged as investors sought security. Falling interest rates and a decreasing supply of Treasuries aided this trend. [LINE CHART]
5 YEAR 10 YEAR TREASURY BOND YIELD TREASURY BOND YIELD 31-Dec-91 5.93 6.7 31-Jan-92 6.43 7.27 29-Feb-92 6.56 7.25 31-Mar-92 6.92 7.53 30-Apr-92 6.88 7.58 31-May-92 6.6 7.32 30-Jun-92 6.27 7.12 31-Jul-92 5.82 6.71 31-Aug-92 5.58 6.6 30-Sep-92 5.32 6.35 31-Oct-92 5.89 6.79 30-Nov-92 6.22 6.94 31-Jan-93 5.55 6.36 28-Feb-93 5.21 6.02 31-Mar-93 5.24 6.02 30-Apr-93 5.11 6.01 31-May-93 5.37 6.15 30-Jun-93 5.05 5.78 31-Jul-93 5.15 5.81 31-Aug-93 4.79 5.45 30-Sep-93 4.77 5.38 31-Oct-93 4.85 5.43 30-Nov-93 5.16 5.82 31-Dec-93 5.21 5.79 31-Jan-94 5.02 5.64 28-Feb-94 5.57 6.13 31-Mar-94 6.23 6.74 30-Apr-94 6.64 7.04 31-May-94 6.76 7.15 30-Jun-94 6.95 7.32 31-Jul-94 6.73 7.11 31-Aug-94 6.8 7.17 30-Sep-94 7.28 7.6 31-Oct-94 7.49 7.81 30-Nov-94 7.79 7.91 31-Dec-94 7.83 7.82 31-Jan-95 7.51 7.58 28-Feb-95 7.04 7.2 31-Mar-95 7.07 7.2 30-Apr-95 6.88 7.06 31-May-95 6.05 6.28 30-Jun-95 5.97 6.2 31-Jul-95 6.16 6.43 31-Aug-95 6.07 6.28 30-Sep-95 6.02 6.18 31-Oct-95 5.81 6.02 30-Nov-95 5.52 5.74 31-Dec-95 5.38 5.57 31-Jan-96 5.24 5.58 29-Feb-96 5.73 6.1 31-Mar-96 6.09 6.33 30-Apr-96 6.41 6.67 31-May-96 6.63 6.85 30-Jun-96 6.46 6.71 31-Jul-96 6.57 6.79 31-Aug-96 6.73 6.94 30-Sep-96 6.46 6.7 31-Oct-96 6.07 6.34 30-Nov-96 5.83 6.04 31-Dec-96 6.21 6.42 31-Jan-97 6.25 6.49 28-Feb-97 6.39 6.55 31-Mar-97 6.75 6.9 30-Apr-97 6.57 6.72 31-May-97 6.5 6.66 30-Jun-97 6.38 6.5 31-Jul-97 5.9 6.01 31-Aug-97 6.22 6.34 30-Sep-97 5.99 6.1 31-Oct-97 5.71 5.83 30-Nov-97 5.84 5.87 31-Dec-97 5.71 5.74 31-Jan-98 5.38 5.51 28-Feb-98 5.59 5.62 31-Mar-98 5.62 5.65 30-Apr-98 5.64 5.67 31-May-98 5.55 5.55 30-Jun-98 5.47 5.45 31-Jul-98 5.5 5.49 31-Aug-98 4.8 4.98 30-Sep-98 4.22 4.42 31-Oct-98 4.23 4.61 30-Nov-98 4.48 4.71 31-Dec-98 4.54 4.65 31-Jan-99 4.55 4.65 28-Feb-99 5.22 5.29 31-Mar-99 5.1 5.24 30-Apr-99 5.21 5.35 31-May-99 5.58 5.62 30-Jun-99 5.65 5.78 31-Jul-99 5.79 5.9 31-Aug-99 5.87 5.97 30-Sep-99 5.75 5.88 31-Oct-99 5.96 6.02 30-Nov-99 6.11 6.19 31-Dec-99 6.34 6.44 31-Jan-00 6.68 6.67 29-Feb-00 6.6 6.41 31-Mar-00 6.31 6 30-Apr-00 6.54 6.21 31-May-00 6.52 6.27 30-Jun-00 6.19 6.03 31-Jul-00 6.15 6.03 31-Aug-00 5.97 5.73 30-Sep-00 5.85 5.8 31-Oct-00 5.81 5.75 30-Nov-00 5.43 5.47 31-Dec-00 4.98 5.11 31-Jan-01 4.77 5.11 28-Feb-01 4.66 4.9 31-Mar-01 4.56 4.92 30-Apr-01 4.89 5.34 31-May-01 4.91 5.38 30-Jun-01 4.95 5.41 31-Jul-01 4.53 5.05 31-Aug-01 4.38 4.83 30-Sep-01 3.8 4.59 31-Oct-01 3.48 4.23 30-Nov-01 4.06 4.75 31-Dec-01 4.3 5.05 31-Jan-02 4.37 5.03 28-Feb-02 4.19 4.88
Yields, or interest rates, represent the cost of borrowing money. Rapid economic growth or the expectation of higher inflation can drive rates up, while the opposite conditions can push rates down. Data source: Bloomberg L.P. YIELD CURVE Average yields of AAA securities of six maturities The shift in the yield curve shows the effects of the Fed's rate cuts, with short-term rates down sharply, intermediate rates down somewhat and long-term rates virtually unchanged. [LINE CHART]
Yield Curve Maturity 09/01/01 02/28/02 3 Month 3.43 1.75 6 Month 3.40 1.86 2 Year 3.79 3.06 5 Year 4.53 4.19 10 Year 4.96 4.88 30 Year 5.48 5.42
Note from Schwab: 1 year is no longer being issued; therefore, it is NOT included in the yield curve. This chart shows where yields stood at the beginning of the report period and at the end of the period. For debt securities of comparable quality, those with longer maturities typically pay higher interest rates, because they are assumed to carry higher risk. An inverted yield curve generally means that investors expect rates to fall. Data source: Bloomberg L.P. - -------------------------------------------------------------------------------- 4 SCHWAB SHORT-TERM BOND MARKET INDEX FUND [PHOTO OF KIM DAIFOTIS] "Although prices and yields were volatile during the report period, bonds--particularly those with shorter maturities--continued to perform well relative to other asset classes." Portfolio Manager Kim Daifotis KIM DAIFOTIS, CFA, a vice president of the investment adviser, has overall responsibility for management of the fund. Prior to joining the firm in 1997, he worked for more than 17 years in research and asset management. TICKER SYMBOL SWBDX [GRAPHIC]
INTEREST RATE SENSITIVITY 1 SHORT MEDIUM LONG CREDIT QUALITY 1 HIGH /X/ / / / / MEDIUM / / / / / / LOW / / / / / /
Investors who are seeking a diversified source of current income and want potentially lower volatility and lower returns, compared to a long-term fund, may want to consider this fund. THE FUND SEEKS CURRENT INCOME BY TRACKING THE PERFORMANCE OF THE LEHMAN BROTHERS MUTUAL FUND SHORT (1-5 YEAR) U.S. GOVERNMENT/CREDIT INDEX. MANAGER'S PERSPECTIVE A SERIES OF NEGATIVE EVENTS RATTLED INVESTOR CONFIDENCE DURING THE REPORT PERIOD. The events of 9/11, credit concerns in corporate markets and continued economic weakness created a difficult environment for investors. The Fed acted quickly to renew confidence by further reducing short-term rates from 3.50% to 1.75% over the last four months of 2001. Despite volatility in bond yields and prices, fixed income securities continued to perform well relative to other asset classes as the report period closed. WORRIES ABOUT ACCOUNTING PRACTICES HURT CORPORATE BONDS. The Enron debacle created higher volatility in the corporate bond market and in the fund's share price. Compared to its benchmark, the Lehman Brothers 1-5 Year U.S. Government/Credit Index, the fund's particular mix of securities was more strongly affected by the risks associated with the report period. As a result, the fund underperformed its benchmark during the period. SHORT-TERM RATES BEGAN TO RISE NEAR THE END OF THE PERIOD AS SIGNS OF A STRONGER ECONOMY APPEARED. Seeking to capitalize on low financing rates before they vanished, corporate issuers revitalized the supply of new debt securities in the first two months of 2002. With equity markets still looking uncertain, investors reacted favorably to these new issues. 1 Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two main components of bond performance. The assessment reflects the fund's portfolio as of 2/28/02, which may have changed since then, and is not a precise indication of risk or performance--past, present or future. Definitions of style box categories: Sensitivity (measured as duration): Short, up to 3.5 years; Medium, more than 3.5 years to less than six years; Long, six years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower. 5 SCHWAB SHORT-TERM BOND MARKET INDEX FUND PERFORMANCE AVERAGE ANNUAL TOTAL RETURNS as of 2/28/02 This chart compares performance of the fund with the Lehman Brothers Mutual Fund Short (1-5 Year) U.S. Government/Credit Index, the fund's benchmark index 1 and the Morningstar Short-Term Bond Fund category. As of the end of the report period, the fund's 30-day SEC yield was 4.83%. 2 [BAR CHART]
LEHMAN BROTHERS SHORT 1-5 YEAR GOVERNMENT/CREDIT PEER GROUP FUND 2 BENCHMARK 1 INDEX AVERAGE 3 Total Return 2 6 MONTHS 4 1.46% 3.03% 3.03% 2.02% 1 YEAR 6.04% 7.56% 7.56% 5.95% 5 YEAR 6.35% 6.86% 6.99% 6.04% 10 YEAR 5.93% 6.27% 6.61% 5.98%
PERFORMANCE OF A $10,000 INVESTMENT Shows performance since inception of a hypothetical $10,000 investment in the fund, compared with a similar investment in two indices: the Lehman Brothers Mutual Fund Short (1-5 Year) U.S. Government/Credit Index and the fund's benchmark index. 1 [LINE CHART]
LEHMAN 1-5 YEAR FUND BENCHMARK 1 INDEX 5-Nov-91 $10,000 $10,000 $10,000 30-Nov-91 $10,117 $10,098 $10,097 31-Dec-91 $10,381 $10,251 $10,287 31-Jan-92 $10,241 $10,238 $10,243 29-Feb-92 $10,240 $10,269 $10,272 31-Mar-92 $10,190 $10,265 $10,251 30-Apr-92 $10,282 $10,359 $10,349 31-May-92 $10,440 $10,455 $10,477 30-Jun-92 $10,595 $10,560 $10,614 31-Jul-92 $10,794 $10,682 $10,778 31-Aug-92 $10,898 $10,768 $10,884 30-Sep-92 $11,053 $10,869 $11,012 31-Oct-92 $10,924 $10,807 $10,903 30-Nov-92 $10,868 $10,791 $10,868 31-Dec-92 $11,012 $10,892 $10,990 31-Jan-93 $11,202 $11,006 $11,164 28-Feb-93 $11,355 $11,093 $11,298 31-Mar-93 $11,395 $11,127 $11,339 30-Apr-93 $11,499 $11,195 $11,428 31-May-93 $11,462 $11,168 $11,394 30-Jun-93 $11,622 $11,251 $11,518 31-Jul-93 $11,661 $11,276 $11,541 31-Aug-93 $11,823 $11,369 $11,679 30-Sep-93 $11,851 $11,406 $11,718 31-Oct-93 $11,892 $11,431 $11,748 30-Nov-93 $11,819 $11,433 $11,725 31-Dec-93 $11,873 $11,478 $11,773 31-Jan-94 $11,973 $11,550 $11,873 28-Feb-94 $11,780 $11,480 $11,754 31-Mar-94 $11,628 $11,422 $11,637 30-Apr-94 $11,527 $11,378 $11,569 31-May-94 $11,485 $11,394 $11,582 30-Jun-94 $11,500 $11,422 $11,602 31-Jul-94 $11,599 $11,525 $11,732 31-Aug-94 $11,628 $11,563 $11,770 30-Sep-94 $11,585 $11,537 $11,708 31-Oct-94 $11,593 $11,563 $11,722 30-Nov-94 $11,528 $11,515 $11,662 31-Dec-94 $11,540 $11,538 $11,688 31-Jan-95 $11,697 $11,694 $11,867 28-Feb-95 $11,852 $11,854 $12,072 31-Mar-95 $11,919 $11,920 $12,141 30-Apr-95 $12,018 $12,027 $12,268 31-May-95 $12,232 $12,232 $12,553 30-Jun-95 $12,281 $12,298 $12,627 31-Jul-95 $12,308 $12,347 $12,657 31-Aug-95 $12,396 $12,421 $12,747 30-Sep-95 $12,470 $12,481 $12,820 31-Oct-95 $12,572 $12,585 $12,943 30-Nov-95 $12,696 $12,692 $13,080 31-Dec-95 $12,799 $12,788 $13,194 31-Jan-96 $12,900 $12,896 $13,315 29-Feb-96 $12,817 $12,846 $13,225 31-Mar-96 $12,778 $12,837 $13,184 30-Apr-96 $12,776 $12,849 $13,173 31-May-96 $12,777 $12,878 $13,182 30-Jun-96 $12,878 $12,972 $13,298 31-Jul-96 $12,917 $13,022 $13,346 31-Aug-96 $12,940 $13,069 $13,380 30-Sep-96 $13,072 $13,188 $13,528 31-Oct-96 $13,235 $13,337 $13,717 30-Nov-96 $13,368 $13,436 $13,849 31-Dec-96 $13,311 $13,438 $13,813 31-Jan-97 $13,378 $13,502 $13,877 28-Feb-97 $13,397 $13,535 $13,904 31-Mar-97 $13,355 $13,524 $13,860 30-Apr-97 $13,477 $13,635 $13,994 31-May-97 $13,575 $13,730 $14,097 30-Jun-97 $13,680 $13,824 $14,208 31-Jul-97 $13,874 $13,975 $14,418 31-Aug-97 $13,841 $13,989 $14,398 30-Sep-97 $13,964 $14,096 $14,532 31-Oct-97 $14,091 $14,201 $14,663 30-Nov-97 $14,130 $14,236 $14,691 31-Dec-97 $14,228 $14,332 $14,798 31-Jan-98 $14,383 $14,469 $14,969 28-Feb-98 $14,358 $14,482 $14,969 31-Mar-98 $14,415 $14,532 $15,022 30-Apr-98 $14,479 $14,604 $15,095 31-May-98 $14,563 $14,693 $15,188 30-Jun-98 $14,643 $14,775 $15,273 31-Jul-98 $14,697 $14,838 $15,337 31-Aug-98 $14,898 $15,046 $15,551 30-Sep-98 $15,152 $15,326 $15,842 31-Oct-98 $15,204 $15,369 $15,887 30-Nov-98 $15,175 $15,357 $15,874 31-Dec-98 $15,214 $15,409 $15,928 31-Jan-99 $15,258 $15,486 $16,008 28-Feb-99 $15,116 $15,354 $15,871 31-Mar-99 $15,232 $15,470 $15,990 30-Apr-99 $15,247 $15,521 $16,043 31-May-99 $15,188 $15,459 $15,979 30-Jun-99 $15,219 $15,502 $16,024 31-Jul-99 $15,254 $15,517 $16,040 31-Aug-99 $15,289 $15,551 $16,075 30-Sep-99 $15,402 $15,675 $16,204 31-Oct-99 $15,427 $15,717 $16,247 30-Nov-99 $15,448 $15,743 $16,275 31-Dec-99 $15,448 $15,731 $16,262 31-Jan-00 $15,409 $15,699 $16,230 29-Feb-00 $15,530 $15,818 $16,353 31-Mar-00 $15,678 $15,934 $16,474 30-Apr-00 $15,673 $15,938 $16,477 31-May-00 $15,739 $15,987 $16,527 30-Jun-00 $15,950 $16,207 $16,755 31-Jul-00 $16,051 $16,322 $16,874 31-Aug-00 $16,202 $16,477 $17,035 30-Sep-00 $16,351 $16,631 $17,193 31-Oct-00 $16,425 $16,702 $17,267 30-Nov-00 $16,611 $16,883 $17,455 31-Dec-00 $16,858 $17,132 $17,713 31-Jan-01 $17,069 $17,393 $17,983 28-Feb-01 $17,181 $17,535 $18,130 31-Mar-01 $17,306 $17,679 $18,279 30-Apr-01 $17,335 $17,699 $18,301 31-May-01 $17,454 $17,804 $18,409 30-Jun-01 $17,534 $17,871 $18,479 31-Jul-01 $17,810 $18,160 $18,778 31-Aug-01 $17,958 $18,307 $18,930 30-Sep-01 $18,212 $18,606 $19,241 31-Oct-01 $18,363 $18,834 $19,477 30-Nov-01 $18,149 $18,720 $19,358 31-Dec-01 $18,089 $18,679 $19,316 31-Jan-02 $18,167 $18,748 $19,387 28-Feb-02 $18,218 $18,861 $19,506
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. The indices are unmanaged, and you cannot invest in them directly. The fund's share price and principal value changes, and when you sell your shares they may be worth more or less than what you paid for them. Keep in mind that past performance isn't an indication of future results. 1 The fund changed its benchmark on 2/28/98, when it changed from being a government bond fund to its current strategy. Benchmark performance shown here is the Lehman Brothers Short (1-3 Year) U.S. Government Bond Index from fund inception through 2/28/98 and the Lehman Brothers Mutual Fund Short (1-5 Year) U.S. Government/Credit Index from 3/1/98 through the end of the report period. Benchmark performance for the 6 month and 1 year periods is the Lehman 1-5 Year Index. 2 Fund yield and returns reflect expense reductions by the fund's investment adviser (CSIM) and Schwab. Without these reductions, the fund's yield and returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 3 Source: Morningstar, Inc. As of 2/28/02, the total number of funds in the Short-Term Bond Fund category for the six-month, one-, five- and ten-year periods was 250, 237, 168 and 49, respectively. 4 Not annualized. 6 FUND FACTS TOP TEN HOLDINGS 1 as of 2/28/02
PERCENTAGE OF SECURITY RATE MATURITY DATE INVESTMENTS (1) U.S. TREASURY NOTES 3.50% 11/15/06 4.0% (2) U.S. TREASURY NOTES 6.63% 05/15/07 2.6% (3) FANNIE MAE 5.00% 01/15/07 2.4% (4) PROTECTIVE LIFE U.S. FUNDING TRUST, 144A 5.50% 05/14/04 2.2% (5) U.S. TREASURY NOTES 5.25% 05/15/04 2.0% (6) FREDDIE MAC 5.25% 01/15/06 2.0% (7) U.S. TREASURY NOTES 6.00% 08/15/04 1.8% (8) VIACOM, INC., 144A 6.40% 01/30/06 1.7% (9) U.S. TREASURY NOTES 5.88% 11/15/04 1.7% (10) ERAC USA FINANCE CO., 144A 6.95% 03/01/04 1.6% - -------------------------------------------------------------------------------------------- TOTAL 22.0%
DIVIDENDS PAID IN EACH FISCAL YEAR [BAR CHART] [INSERT PLOT POINTS HERE] 1 This list is not a recommendation of any security by the adviser. Portfolio holdings may have changed since the report date. 2 Period from the fund's inception on 11/5/91 through 12/31/91. 3 For the eight-month period ended 8/31/93. 4 For the six-month period ended 2/28/02. 7 SCHWAB SHORT-TERM BOND MARKET INDEX FUND FUND FACTS Continued COMPOSITION OF THE FUND'S PORTFOLIO as of 2/28/02 All figures are shown as a percentage of the fund's investments. Portfolio holdings may have changed since the report date. BY SECURITY TYPE [PIE CHART] 1. 50.8% Corporate Bonds 2. 46.7% U.S. Government Securities 3. 2.5% Commercial Paper & Other Corporate Obligations
BY CREDIT QUALITY 1 [PIE CHART] 1. 48.0% AAA 2. 7.0% AA 3. 18.7% A 4. 19.4% BBB 5. 4.4% BB 6. 2.5% Short-term rating
BY MATURITY [PIE CHART] 1. 8.2% 0-6 Months 2. 50.6% 7-36 Months 3. 37.6% 37-60 Months 4. 3.6% More than 60 Months
STATISTICS as of 2/28/02
FUND INDEX 2 =============================================================== Number of Holdings 88 2,098 - --------------------------------------------------------------- Yield to Maturity 5.00% 4.06% - --------------------------------------------------------------- Weighted Average Rate 5.74% 5.75% - --------------------------------------------------------------- Weighted Average Maturity 2.8 yrs 2.8 yrs - --------------------------------------------------------------- Weighted Average Duration 2.5 yrs 2.5 yrs - --------------------------------------------------------------- Weighted Average Credit Quality AA AAA - ---------------------------------------------------------------
EXPENSE RATIO as of 2/28/02 [BAR CHART] FUND 0.35% PEER GROUP AVERAGE 0.89% 3
1 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 2 The Lehman Brothers Mutual Fund Short (1-5 Year) U.S. Government/Credit Index. 3 Source: Morningstar, Inc. As of 2/28/02, there were 251 funds in the Short-Term Bond Fund category. 8 SCHWAB SHORT-TERM BOND MARKET INDEX FUND -- FINANCIALS FINANCIAL TABLES These pages provide additional data on the fund's performance, portfolio holdings, expenses and business operations. Because this is a semiannual report, the figures for the current report period are unaudited. Two other sections of this report provide context for the data in these financials. The FINANCIAL NOTES section contains information about the fund's business structure, accounting practices and other matters, completing the data given in these tables. The final section, HOW TO READ THIS REPORT, includes guides designed to make the financials easy to read and understand. FINANCIAL HIGHLIGHTS
9/1/01- 9/1/00- 9/1/99- 9/1/98- 9/1/97- 9/1/96- 2/28/02 8/31/01 8/31/00 8/31/99 8/31/98 8/31/97 - --------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) =============================================================================================================== Net asset value at beginning of period 10.08 9.65 9.66 9.90 9.74 9.67 -------------------------------------------------------------- Income from investment operations: Net investment income 0.26 0.59 0.57 0.50 0.56 0.59 Net realized and unrealized gains or losses (0.11) 0.43 (0.01) (0.24) 0.17 0.07 -------------------------------------------------------------- Total income from investment operations 0.15 1.02 0.56 0.26 0.73 0.66 Less distributions: Dividends from net investment income (0.25) (0.59) (0.57) (0.50) (0.57) (0.59) -------------------------------------------------------------- Net asset value at end of period 9.98 10.08 9.65 9.66 9.90 9.74 ============================================================== Total return (%) 1.46 1 10.84 5.97 2.66 7.64 6.96 RATIOS/SUPPLEMENTAL DATA (%) =============================================================================================================== Ratio of net operating expenses to average net assets 0.35 2 0.35 0.35 3 0.35 0.46 0.49 Expense reductions reflected in above ratio 0.29 2 0.31 0.32 0.42 0.39 0.33 Ratio of net investment income to average net assets 5.10 2 5.90 5.91 5.11 5.58 6.02 Portfolio turnover rate 103 248 129 195 128 71 Net assets, end of period ($ x 1,000,000) 419 369 219 218 157 127
1 Not annualized. 2 Annualized. 3 Would have been 0.36% if certain non-routine expenses (proxy fees) had been included. See the Financial Notes, which are integral to this information. 9 SCHWAB SHORT-TERM BOND MARKET INDEX FUND -- FINANCIALS PORTFOLIO HOLDINGS As of February 28, 2002; unaudited. This section shows all the securities in the fund's portfolio and their market value, as of the report date. We use the symbol below to designate the top ten holdings; the number in the circle is the security's rank among the top ten. (1) Top ten holding = Delayed-delivery security For fixed-rate obligations, the rate shown is the interest rate (the rate established when the obligation was issued) and the maturity date shown is the legal stated maturity. For variable-rate obligations, the rate shown is the rate as of the report date, and the maturity shown is the later of the next interest rate change date or demand date. The pie chart below shows the fund's major asset categories and the market value and cost of the securities in each category. ALL DOLLAR VALUES ARE IN THOUSANDS. [PIE CHART] 50.8% CORPORATE BONDS Market Value: $215,586 Cost: $214,592 46.7% U.S. GOVERNMENT SECURITIES Market Value: $198,037 Cost: $194,570 2.5% COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS Market Value: $10,500 Cost: $10,500 OTHER INVESTMENT COMPANIES Market Value: $167 Cost: $167 - ----------------------------------------------------- 100.0% TOTAL INVESTMENTS Market Value: $424,290 Cost: $419,829
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) CORPORATE BONDS 50.8% of investments FIXED RATE OBLIGATIONS 48.0% ========================================================================= AB SPINTAB, 144A 7.50%, 08/14/49 5,000 5,287 AES CORP. 8.75%, 12/15/02 5,000 4,350 ALCOA, INC. 7.25%, 08/01/05 5,000 5,401 BURLINGTON RESOURCES FINANCE, 144A 5.60%, 12/01/06 4,000 3,999 CAPITAL ONE BANK 6.38%, 02/15/03 5,570 5,472 CENDANT CORP. 7.75%, 12/01/03 4,250 4,262 CENDANT CORP., 144A 6.88%, 08/15/06 3,500 3,367 CINERGY CORP. 6.25%, 09/01/04 5,000 5,055 CIT GROUP, INC. 7.38%, 03/15/03 2,000 1,984 COUNTRYWIDE HOME LOAN, INC. Series J 5.25%, 06/15/04 5,000 5,120 CREDIT SUISSE FIRST BOSTON U.S.A., INC. 5.88%, 08/01/06 5,000 5,176 CVS CORP. 5.63%, 03/15/06 5,000 5,071 DAIMLERCHRYSLER NA HOLDINGS 6.90%, 09/01/04 3,000 3,136 DANA CREDIT CORP., 144A 7.25%, 12/16/02 5,500 5,296 DOLE FOODS CO. 7.00%, 05/15/03 2,000 2,045 EOP OPERATING, L.P. 6.50%, 01/15/04 5,000 5,183 (10) ERAC USA FINANCE CO., 144A 6.95%, 03/01/04 6,640 6,846 FORD MOTOR CREDIT 6.88%, 02/01/06 4,000 4,022 GENERAL ELECTRIC CAPITAL CORP. 7.25%, 02/01/05 5,000 5,449
See the Financial Notes, which are integral to this information. 10
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) GENERAL MILLS, INC. 5.13%, 02/15/07 5,000 5,003 GENERAL MOTORS ACCEPTANCE CORP. 6.38%, 01/30/04 5,000 5,128 GS ESCROW CORP. 7.00%, 08/01/03 4,000 4,059 J.C. PENNEY CO., INC. 7.25%, 04/01/02 5,275 5,275 6.50%, 06/15/02 650 651 = JP MORGAN CHASE & CO. 5.35%, 03/01/07 5,000 4,997 KELLOGG CO. Series B 6.00%, 04/01/06 3,500 3,615 LIMESTONE ELECTRON TRUST, 144A 8.63%, 03/15/03 5,600 5,696 MASCO CORP. 6.00%, 05/03/04 6,000 6,143 NORDBANKEN AB, 144A 7.25%, 11/12/09 4,000 4,295 NORDSTROM CREDIT, INC. Series E 7.25%, 04/30/02 3,000 3,024 PHILLIPS PETROLEUM CO. 8.50%, 05/25/05 2,000 2,233 POPULAR NA, INC. Series E 6.13%, 10/15/06 5,000 5,019 (4) PROTECTIVE LIFE U.S. FUNDING TRUST, 144A 5.50%, 05/14/04 9,000 9,287 QWEST CAPITAL FUNDING, INC., 144A 5.88%, 08/03/04 6,000 5,577 ROYAL BANK OF SCOTLAND GROUP, PLC Series 3 7.82%, 03/01/02 3,000 3,235 ROYAL CARIBBEAN CRUISES 7.13%, 09/18/02 5,150 5,099 SALOMON SMITH BARNEY HOLDINGS, INC. 5.88%, 03/15/06 5,000 5,164 SKANDINAVISKA ENSKILDA, 144A 6.50%, 06/04/03 3,000 3,097 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. 6.75%, 11/15/05 2,000 2,008 SVENSKA HANDELSBANKEN, 144A 7.13%, 03/07/49 5,000 5,272 TYCO INTERNATIONAL GROUP, SA 6.25%, 06/15/03 5,000 4,754 UNION BANK OF NORWAY, 144A 7.35%, 07/09/03 5,000 5,164 (8) VIACOM, INC., 144A 6.40%, 01/30/06 7,000 7,262 WASTE MANAGEMENT, INC. 6.38%, 12/01/03 2,195 2,251 WORLDCOM, INC. 7.55%, 04/01/04 4,000 3,942 ------- 203,771 VARIABLE RATE OBLIGATIONS 2.8% ========================================================================= CENTEX CORP. Series E 3.52%, 04/22/02 5,000 4,992 FORD MOTOR CREDIT CO. 3.68%, 04/25/02 4,900 4,822 MBNA CORP. Series F 3.65%, 05/28/02 2,000 2,001 ------- 11,815 U.S. GOVERNMENT SECURITIES 46.7% of investments U.S. TREASURY OBLIGATIONS 38.3% ========================================================================= U.S. TREASURY NOTES 4.00%, 04/30/03 3,000 3,059 4.25%, 05/31/03 1,000 1,023 5.50%, 05/31/03 5,800 6,023 3.88%, 06/30/03 1,000 1,019 5.38%, 06/30/03 5,000 5,192 3.88%, 07/31/03 4,000 4,075 5.25%, 08/15/03 5,000 5,192 3.63%, 08/31/03 1,500 1,522 2.75%, 09/30/03 2,000 2,002 2.75%, 10/31/03 2,000 2,000 4.25%, 11/15/03 2,000 2,049 3.00%, 11/30/03 6,500 6,519 3.25%, 12/31/03 6,000 6,037
See the Financial Notes, which are integral to this information. 11 SCHWAB SHORT-TERM BOND MARKET INDEX FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
SECURITY FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) 3.00%, 01/31/04 5,000 5,002 4.75%, 02/15/04 4,000 4,135 3.00%, 02/29/04 5,000 4,995 (5) 5.25%, 05/15/04 8,000 8,358 (7) 6.00%, 08/15/04 7,100 7,553 (9) 5.88%, 11/15/04 6,600 7,012 7.88%, 11/15/04 3,500 3,895 7.50%, 02/15/05 5,000 5,550 6.75%, 05/15/05 5,000 5,459 6.50%, 08/15/05 5,000 5,438 5.88%, 11/15/05 5,000 5,341 5.63%, 02/15/06 5,000 5,300 4.63%, 05/15/06 4,000 4,086 7.00%, 07/15/06 5,000 5,565 6.50%, 10/15/06 5,000 5,475 = (1) 3.50%, 11/15/06 17,500 16,996 6.25%, 02/15/07 5,000 5,435 (2) 6.63%, 05/15/07 10,000 11,046 -------- 162,353 AGENCY OBLIGATIONS 8.4% ------------------------------------------------------------------------- FANNIE MAE 3.88%, 03/15/05 5,000 4,999 5.50%, 02/15/06 4,000 4,163 (3) 5.00%, 01/15/07 10,000 10,139 FREDDIE MAC 5.00%, 01/15/04 3,000 3,105 5.05%, 04/02/04 5,000 5,012 (6) 5.25%, 01/15/06 8,000 8,266 -------- 35,684 COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 2.5% of investments ATLANTIS TWO FUNDING CORP. 2.25%, 03/01/02 5,000 5,000 KINDER MORGAN ENERGY PARTNERS 2.50%, 03/01/02 5,500 5,500 -------- 10,500
SECURITY AND NUMBER OF SHARES MKT. VALUE ($ x 1,000) OTHER INVESTMENT COMPANIES 0.0% of investments PROVIDENT INSTITUTIONAL FUNDS-- FED FUNDS PORTFOLIO 167,294 167
END OF PORTFOLIO HOLDINGS. For totals, please turn to the first page of holdings for this fund. See the Financial Notes, which are integral to this information. 12 Statement of ASSETS AND LIABILITIES As of February 28, 2002; unaudited. All numbers x 1,000 except NAV. ASSETS - -------------------------------------------------------------------- Investments, at market value (including $126,211 of securities on loan) $424,290 a Collateral held for securities on loan 128,274 Receivables: Fund shares sold 1,010 Interest 5,327 Investments sold 53,806 Prepaid expenses + 30 ------------ TOTAL ASSETS 612,737 LIABILITIES - -------------------------------------------------------------------- Collateral held for securities on loan 128,274 Payables: Fund shares redeemed 678 Dividends to shareholders 343 Investments bought 64,441 Transfer agent and shareholder service fees 14 Accrued expenses + 55 ------------ TOTAL LIABILITIES 193,805 NET ASSETS - -------------------------------------------------------------------- TOTAL ASSETS 612,737 TOTAL LIABILITIES - 193,805 ------------ NET ASSETS $418,932 NET ASSETS BY SOURCE Capital received from investors 424,737 Net investment income not yet distributed 202 Net realized capital losses (10,468) b Net unrealized capital gains 4,461
NET ASSET VALUE (NAV)
SHARES NET ASSETS / OUTSTANDING = NAV $418,932 41,965 $9.98
a The fund's amortized cost for these securities was $419,829. Not counting short-term obligations and government securities, the fund paid $186,869 for securities during the reporting period, and received $133,086 from securities it sold or that matured. For long-term government securities, the fund paid $257,111 during the reporting period and received $244,513 for securities it sold or that matured. This includes $29,544 in transactions with other SchwabFunds(R). b These derive from investments and short sales. FEDERAL TAX DATA - -------------------------------------------------- COST BASIS OF PORTFOLIO $420,120 NET UNREALIZED GAINS AND LOSSES: Gains $ 6,801 Losses + (2,631) ----------- $ 4,170
UNUSED CAPITAL LOSSES:
Expires 08/31 of: Loss amount 2003 $ 4,246 2004 2,216 2005 174 2008 + 1,241 ----------- $ 7,877
See the Financial Notes, which are integral to this information. 13 SCHWAB SHORT-TERM BOND MARKET INDEX FUND -- FINANCIALS Statement of OPERATIONS For September 1, 2001 through February 28, 2002; unaudited. All numbers x 1,000. INVESTMENT INCOME - -------------------------------------------------------------------- Interest $10,490 Lending of securities + 314 ------------ TOTAL INVESTMENT INCOME 10,804 NET REALIZED LOSSES - -------------------------------------------------------------------- Net realized losses on investments sold (2,231) Net realized losses on short sales + (180) ------------ NET REALIZED LOSSES (2,411) NET UNREALIZED LOSSES - -------------------------------------------------------------------- Net unrealized losses on investments (2,300) EXPENSES - -------------------------------------------------------------------- Investment adviser and administrator fees 595 a Transfer agent and shareholder service fees 496 b Trustees' fees 7 c Custodian and portfolio accounting fees 88 Professional fees 12 Registration fees 38 Shareholder reports 29 Other expenses + 6 ------------ Total expenses 1,271 Expense reduction - 577 d ------------ NET EXPENSES 694 INCREASE IN NET ASSETS FROM OPERATIONS - -------------------------------------------------------------------- TOTAL INVESTMENT INCOME 10,804 NET EXPENSES - 694 ------------ NET INVESTMENT INCOME 10,110 NET REALIZED LOSSES (2,411)e NET UNREALIZED LOSSES + (2,300)e ------------ INCREASE IN NET ASSETS FROM OPERATIONS $5,399
a Calculated as a percentage of average daily net assets: 0.30% of the first $500 million and 0.22% of assets beyond that. b Calculated as a percentage of average daily net assets: for transfer agent services, 0.05% of the fund's assets; for shareholder services, 0.20% of the fund's assets. c For the fund's independent trustees only. d This reduction was made by the investment adviser (CSIM). It reflects a guarantee by CSIM and Schwab to limit the operating expenses of this fund through at least November 15, 2002, to 0.35% of average daily net assets. This limit doesn't include interest, taxes and certain non-routine expenses. e These add up to a net loss on investments of $4,711. See the Financial Notes, which are integral to this information. 14 Statements of CHANGES IN NET ASSETS For the current and prior reporting periods. All numbers x 1,000. Figures for 9/1/01-2/28/02 are unaudited. OPERATIONS - --------------------------------------------------------------------------------
9/1/01-2/28/02 9/1/00-8/31/01 Net investment income $10,110 $16,077 Net realized gains or losses (2,411) 4,406 Net unrealized gains or losses + (2,300) 7,178 ----------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 5,399 27,661 DISTRIBUTIONS PAID - -------------------------------------------------------------------------------- Dividends from net investment income $ 9,775 $16,144
TRANSACTIONS IN FUND SHARES - --------------------------------------------------------------------------------
9/1/01-2/28/02 9/1/00-8/31/01 QUANTITY VALUE QUANTITY VALUE Shares sold 18,584 $187,481 23,621 $ 234,256 Shares reinvested 779 7,837 1,331 13,155 Shares redeemed + (13,962) (140,516) (11,051) (109,221) ---------------------------------------------------------- NET INCREASE 5,401 $ 54,802 13,901 $ 138,190
SHARES OUTSTANDING AND NET ASSETS - --------------------------------------------------------------------------------
9/1/01-2/28/02 9/1/00-8/31/01 SHARES NET ASSETS SHARES NET ASSETS Beginning of period 36,564 $368,506 22,663 $218,799 Total increase + 5,401 50,426 13,901 149,707 a ---------------------------------------------------------- END OF PERIOD 41,965 $418,932 36,564 $368,506 b
a Figures for shares represent the net changes in shares from the transactions described above. Figures for net assets represent the changes in net assets from operations plus the changes in value from transactions in fund shares, minus distributions paid. b Includes net investment income not yet distributed in the amount of $202 at the end of the current period and distributions in excess of net investment income in the amount of $133 at the end of the prior period. See the Financial Notes, which are integral to this information. 15 SCHWAB TOTAL BOND MARKET INDEX FUND [PHOTO OF KIM DAIFOTIS] "The Enron situation, September 11, and the large wave of mortgage refinancing made for a volatile report period." Portfolio Manager Kim Daifotis KIM DAIFOTIS, CFA, a vice president of the investment adviser, has overall responsibility for management of the fund. Prior to joining the firm in 1997, he worked for more than 17 years in research and asset management. TICKER SYMBOL SWLBX [GRAPHIC]
INTEREST RATE SENSITIVITY 1 CREDIT QUALITY 1 SHORT MEDIUM LONG HIGH / / / / /X/ MEDIUM / / / / / / LOW / / / / / /
This fund is designed for investors seeking to fill the fixed income component of their asset allocation plan, and who can accept higher risk in exchange for potentially higher long-term returns compared to a short-term fund. THE FUND SEEKS CURRENT INCOME BY TRACKING THE PERFORMANCE OF THE LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX. MANAGER'S PERSPECTIVE A SERIES OF NEGATIVE EVENTS RATTLED INVESTOR CONFIDENCE DURING THE REPORT PERIOD. The events of 9/11, credit concerns in corporate markets and continued economic weakness created a difficult environment for investors. The Fed acted quickly to renew confidence by further reducing short-term rates from 3.50% to 1.75% over the last four months of 2001. Despite volatility in bond yields and prices, fixed income securities continued to perform well relative to other asset classes as the report period closed. WORRIES ABOUT ACCOUNTING PRACTICES HURT CORPORATE BONDS. The Enron debacle created higher volatility in the corporate bond market and in the fund's share price. Mortgage securities also faced uncertainty, in their case because of a large wave of refinancing. During the report period, the mortgage sector slightly outperformed Treasuries with comparable maturities, while corporates slightly underperformed Treasuries. SHORT-TERM RATES BEGAN TO RISE NEAR THE END OF THE PERIOD AS SIGNS OF A STRONGER ECONOMY APPEARED. Seeking to capitalize on low financing rates before they vanished, corporate issuers revitalized the supply of new debt securities in the first two months of 2002. With equity markets still looking uncertain, investors reacted favorably to these new issues. 1 Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two main components of bond performance. The assessment reflects the fund's portfolio as of 2/28/02, which may have changed since then, and is not a precise indication of risk or performance--past, present or future. Definitions of style box categories: Sensitivity (measured as duration): Short, up to 3.5 years; Medium, more than 3.5 years to less than six years; Long, six years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower. 16 PERFORMANCE AVERAGE ANNUAL TOTAL RETURNS as of 2/28/02 This chart compares performance of the fund with the Lehman Brothers U.S. Aggregate Bond Index, the fund's benchmark index 1 and the Morningstar Intermediate-Term, Bond Fund category. As of the end of the report period, the fund's 30-day SEC yield was 4.42%. 2 [BAR CHART]
LEHMAN BROTHERS U.S. AGGREGATE PEER GROUP FUND 2 BENCHMARK 1 BOND INDEX AVERAGE 3 Total Return 2 6 MONTHS 4 2.08% 3.02% 3.02% 1.98% 1 YEAR 7.35% 7.67% 7.67% 6.04% 5 YEAR 7.49% 7.79% 6.69% 6.45% SINCE INCEPTION: 3/5/93 6.77% 6.85% 6.92% --
PERFORMANCE OF A 10,000 INVESTMENT Shows performance since inception of a hypothetical 10,000 investment in the fund, compared with a similar investment in two indices: the Lehman Brothers U.S. Aggregate Bond Market Index and the fund's benchmark index. 1 [LINE CHART]
LEHMAN AGGREGATE FUND BOND INDEX BENCHMARK 5-Mar-93 10,000 10,000 10,000 31-Mar-93 9,784 10,000 9,979 30-Apr-93 9,890 10,077 10,048 31-May-93 9,927 10,066 10,061 30-Jun-93 10,314 10,289 10,244 31-Jul-93 10,441 10,352 10,302 31-Aug-93 10,863 10,583 10,482 30-Sep-93 10,901 10,623 10,511 31-Oct-93 10,952 10,663 10,550 30-Nov-93 10,688 10,546 10,460 31-Dec-93 10,738 10,587 10,517 31-Jan-94 10,938 10,732 10,659 28-Feb-94 10,544 10,505 10,474 31-Mar-94 10,220 10,269 10,216 30-Apr-94 10,112 10,188 10,134 31-May-94 10,060 10,175 10,133 30-Jun-94 10,027 10,151 10,110 31-Jul-94 10,239 10,338 10,311 31-Aug-94 10,233 10,340 10,324 30-Sep-94 10,050 10,194 10,172 31-Oct-94 10,036 10,187 10,163 30-Nov-94 10,031 10,168 10,140 31-Dec-94 10,122 10,230 10,210 31-Jan-95 10,347 10,420 10,412 28-Feb-95 10,647 10,645 10,660 31-Mar-95 10,718 10,711 10,726 30-Apr-95 10,887 10,851 10,875 31-May-95 11,429 11,289 11,296 30-Jun-95 11,445 11,376 11,379 31-Jul-95 11,348 11,334 11,354 31-Aug-95 11,566 11,467 11,491 30-Sep-95 11,711 11,577 11,602 31-Oct-95 11,931 11,754 11,753 30-Nov-95 12,173 11,937 11,929 31-Dec-95 12,395 12,106 12,096 31-Jan-96 12,438 12,180 12,176 29-Feb-96 12,075 11,932 11,964 31-Mar-96 11,934 11,833 11,881 30-Apr-96 11,766 11,757 11,814 31-May-96 11,722 11,737 11,790 30-Jun-96 11,885 11,889 11,948 31-Jul-96 11,890 11,918 11,981 31-Aug-96 11,830 11,892 11,960 30-Sep-96 12,112 12,089 12,168 31-Oct-96 12,451 12,355 12,439 30-Nov-96 12,763 12,570 12,651 31-Dec-96 12,537 12,442 12,534 31-Jan-97 12,533 12,455 12,572 28-Feb-97 12,556 12,473 12,604 31-Mar-97 12,353 12,340 12,464 30-Apr-97 12,606 12,519 12,651 31-May-97 12,732 12,627 12,771 30-Jun-97 12,918 12,768 12,923 31-Jul-97 13,363 13,131 13,272 31-Aug-97 13,152 13,001 13,159 30-Sep-97 13,397 13,196 13,354 31-Oct-97 13,687 13,425 13,548 30-Nov-97 13,700 13,493 13,610 31-Dec-97 13,778 13,634 13,747 31-Jan-98 13,977 13,838 13,923 28-Feb-98 13,938 13,828 13,912 31-Mar-98 13,964 13,876 13,959 30-Apr-98 14,035 13,948 14,032 31-May-98 14,166 14,080 14,165 30-Jun-98 14,263 14,200 14,286 31-Jul-98 14,306 14,230 14,316 31-Aug-98 14,575 14,462 14,549 30-Sep-98 14,930 14,800 14,890 31-Oct-98 14,844 14,722 14,811 30-Nov-98 14,866 14,805 14,895 31-Dec-98 14,937 14,850 14,940 31-Jan-99 15,061 14,956 15,046 28-Feb-99 14,770 14,695 14,783 31-Mar-99 14,870 14,776 14,864 30-Apr-99 14,874 14,823 14,911 31-May-99 14,703 14,693 14,780 30-Jun-99 14,649 14,646 14,733 31-Jul-99 14,614 14,584 14,671 31-Aug-99 14,594 14,577 14,664 30-Sep-99 14,790 14,746 14,834 31-Oct-99 14,832 14,800 14,889 30-Nov-99 14,841 14,799 14,887 31-Dec-99 14,782 14,728 14,816 31-Jan-00 14,719 14,680 14,767 29-Feb-00 14,886 14,857 14,945 31-Mar-00 15,112 15,053 15,143 30-Apr-00 15,019 15,010 15,099 31-May-00 14,962 15,003 15,091 30-Jun-00 15,300 15,315 15,405 31-Jul-00 15,435 15,454 15,545 31-Aug-00 15,666 15,678 15,771 30-Sep-00 15,764 15,777 15,870 31-Oct-00 15,852 15,881 15,975 30-Nov-00 16,114 16,141 16,237 31-Dec-00 16,420 16,440 16,539 31-Jan-01 16,640 16,709 16,808 28-Feb-01 16,784 16,855 16,955 31-Mar-01 16,909 16,939 17,039 30-Apr-01 16,855 16,869 16,968 31-May-01 16,974 16,971 17,070 30-Jun-01 17,069 17,035 17,135 31-Jul-01 17,457 17,416 17,518 31-Aug-01 17,653 17,615 17,720 30-Sep-01 17,813 17,820 17,925 31-Oct-01 18,132 18,193 18,300 30-Nov-01 17,872 17,942 18,047 31-Dec-01 17,760 17,828 17,932 31-Jan-02 17,901 17,973 18,077 28-Feb-02 18,017 18,147 18,253
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. The indices are unmanaged, and you cannot invest in them directly. The fund's share price and principal value changes, and when you sell your shares they may be worth more or less than what you paid for them. Keep in mind that past performance isn't an indication of future results. 1 The fund changed its benchmark on 2/28/98, when it changed from being a government bond fund to its current strategy. Benchmark performance shown here is the Lehman Brothers General U.S. Government Bond Index from fund inception through 2/28/98 and the Lehman Brothers U.S. Aggregate Bond Index from 3/1/98 through the end of the report period. Benchmark performance for the 6 month and 1 year periods is the Lehman U.S. Aggregate Bond Index. 2 Fund yield and returns reflect expense reductions by the fund's investment adviser (CSIM) and Schwab. Without these reductions, the fund's yield and returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. 3 Source: Morningstar, Inc. As of 2/28/02, the total number of funds in the Intermediate-Term Bond Fund category for the six-month, one- and five-year periods was 658, 616 and 375, respectively. 4 Not annualized. 17 SCHWAB TOTAL BOND MARKET INDEX FUND FUND FACTS TOP TEN HOLDINGS 1 AS OF 2/28/02
PERCENTAGE OF SECURITY RATE MATURITY DATE INVESTMENTS (1) FANNIE MAE 6.50% 03/01/32 4.5% (2) FANNIE MAE 7.00% 03/01/32 3.3% (3) FANNIE MAE 6.00% 03/01/32 2.2% (4) FANNIE MAE 7.50% 03/01/32 2.0% (5) FANNIE MAE 8.00% 03/01/32 1.6% (6) FORD MOTOR CREDIT CO. 3.68% 04/25/02 1.6% (7) DRESDNER FUNDING TRUST I, 144A 8.15% 06/30/31 1.4% (8) GINNIE MAE 7.00% 03/01/32 1.4% (9) ALLETE 2.62% 04/22/02 1.2% (10) GINNIE MAE 8.00% 03/01/32 1.2% - ------------------------------------------------------------------------------------ TOTAL 20.4%
DIVIDENDS PAID in each fiscal year [BAR CHART, PLOT POINTS TO COME] 1 This list is not a recommendation of any security by the adviser. Portfolio holdings may have changed sine the report date. 2 Period from the fund's inception on 3/5/93 through 8/31/93. 3 For the six-month period ended 2/28/02. 18 COMPOSITION OF THE FUND'S PORTFOLIO as of 2/28/02 All figures are shown as a percentage of the fund's investments. Holdings may have changed since the report date. BY SECURITY TYPE [PIE CHART] 1. 49.1% U.S. Government Securities 2. 45.1% Corporate Bonds 3. 3.8% Asset-Backed Obligations 4. 1.7% Commercial Paper & Other Corporate Obligations 5. 0.3% Preferred Stock
BY CREDIT QUALITY 1 [PIE CHART] 1. 51.1% AAA 2. 6.5% AA 3. 23.2% A 4. 17.5% BBB 5. 0.9% BB 6. 0.8% Short-Term Ratings
BY MATURITY [PIE CHART] 1. 28.9% 0-1 Year 2. 61.4% 2-10 Years 3. 3.2% 11-20 Years 4. 6.5% 21-30 Years
FUND FACTS as of 2/28/02
FUND INDEX 2 ================================================================= Number of Holdings 158 6,786 - ----------------------------------------------------------------- Yield to Maturity 6.13% 5.42% - ----------------------------------------------------------------- Weighted Average Rate 6.58% 6.50% - ----------------------------------------------------------------- Weighted Average Maturity 7.8 yrs 8.0 yrs - ----------------------------------------------------------------- Weighted Average Duration 4.5 yrs 4.5 yrs - ----------------------------------------------------------------- Weighted Average Credit Quality AA AAA - -----------------------------------------------------------------
EXPENSE RATIO as of 2/28/02 [BAR CHART] FUND 0.35% PEER GROUP AVERAGE 0.99% 3
1 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 2 The Lehman Brothers U.S. Aggregate Bond Index. 3 Source: Morningstar, Inc. As of 2/28/02, there were 669 funds in the Intermediate-Term Bond Fund category. 19 SCHWAB TOTAL BOND MARKET INDEX FUND -- FINANCIALS FINANCIAL TABLES These pages provide additional data on the fund's performance, portfolio holdings, expenses and business operations. Because this is a semiannual report, the figures for the current report period are unaudited. Two other sections of this report provide context for the data in these financials. The FINANCIAL NOTES section contains information about the fund's business structure, accounting practices and other matters, completing the data given in these tables. The final section, HOW TO READ THIS REPORT, includes guides designed to make the financials easy to read and understand. FINANCIAL HIGHLIGHTS
9/1/01- 9/1/00- 9/1/99- 9/1/98- 9/1/97- 9/1/96- 2/28/02 8/31/01 8/31/00 8/31/99 8/31/98 8/31/97 - ----------------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) =================================================================================================================================== Net asset value at beginning of period 10.24 9.65 9.58 10.18 9.75 9.38 ------------------------------------------------------------------------ Income from investment operations: Net investment income 0.25 0.60 0.61 0.55 0.60 0.65 Net realized and unrealized gains or losses (0.04) 0.59 0.07 (0.53) 0.43 0.37 ------------------------------------------------------------------------ Total income from investment operations 0.21 1.19 0.68 0.02 1.03 1.02 Less distributions: Dividends from net investment income (0.24) (0.60) (0.61) (0.55) (0.60) (0.65) Distributions from net realized gains (0.16) -- -- (0.07) -- -- ------------------------------------------------------------------------ Total distributions (0.40) (0.60) (0.61) (0.62) (0.60) (0.65) ------------------------------------------------------------------------ Net asset value at end of period 10.05 10.24 9.65 9.58 10.18 9.75 ======================================================================== Total return (%) 2.08 1 12.68 7.36 0.14 10.83 11.18 RATIOS/SUPPLEMENTAL DATA (%) =================================================================================================================================== Ratio of net operating expenses to average net assets 0.35 2 0.35 0.35 3 0.35 0.31 0.20 Expense reductions reflected in above ratio 0.22 2 0.23 0.27 0.39 0.51 0.98 Ratio of net investment income to average net assets 4.84 2 6.00 6.42 5.55 5.86 6.74 Portfolio turnover rate 36 153 135 174 285 51 Net assets, end of period ($ x 1,000,000) 995 926 647 480 294 25
1 Not annualized. 2 Annualized. 3 Would have been 0.36% if non-routine expenses (proxy fees) had been included. See the Financial Notes, which are integral to this information. 20 PORTFOLIO HOLDINGS As of February 28, 2002; unaudited. This section shows all the securities in the fund's portfolio and their market value, as of the report date. We use the symbols below to designate certain characteristics. With the top ten holdings, the number in the circle is the security's rank among the top ten. (1) Top ten holding = Delayed-delivery security For fixed-rate obligations, the rate shown is the interest rate (the rate established when the obligation was issued) and the maturity date shown is the stated legal maturity. For variable-rate obligations, the rate shown is the rate as of the report date, and the maturity shown is the later of the next interest rate change date or demand date. The pie chart below shows the fund's major asset categories and the market value and cost of the securities in each category. ALL DOLLAR VALUES ARE IN THOUSANDS. 49.1% U.S. GOVERNMENT SECURITIES Market Value: $635,115 Cost: $627,355 45.1% CORPORATE BONDS Market Value: $583,104 Cost: $575,349 3.8% ASSET-BACKED OBLIGATIONS Market Value: $49,538 Cost: $49,284 1.7% COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS Market Value: $21,500 Cost: $21,500 0.3% PREFERRED STOCK Market Value: $3,651 Cost: $3,500 OTHER INVESTMENT COMPANIES Market Value: $120 Cost: $120 - ------------------------------------- 100.0% TOTAL INVESTMENTS Market Value: $1,293,028 Cost: $1,277,108
SECURITY FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) U.S. GOVERNMENT SECURITIES 49.1% of investments U.S. TREASURY OBLIGATIONS 23.1% ------------------------------------------------------------------- U.S. TREASURY BONDS 10.38%, 11/15/12 5,000 6,431 9.88%, 11/15/15 5,000 7,152 7.25%, 05/15/16 9,000 10,569 9.00%, 11/15/18 6,000 8,241 7.63%, 11/15/22 4,000 4,977 6.13%, 08/15/29 4,000 4,305 6.25%, 05/15/30 7,630 8,379 5.38%, 02/15/31 4,600 4,576 U.S. TREASURY NOTES 4.75%, 01/31/03 3,000 3,073 5.50%, 02/28/03 3,000 3,098 4.25%, 03/31/03 1,000 1,022 4.00%, 04/30/03 2,200 2,243 5.75%, 04/30/03 4,000 4,158 4.25%, 05/31/03 5,000 5,115 3.88%, 06/30/03 2,300 2,343 5.38%, 06/30/03 2,700 2,804 3.88%, 07/31/03 3,000 3,056 3.63%, 08/31/03 1,500 1,522 2.75%, 10/31/03 7,000 7,001 4.25%, 11/15/03 9,000 9,220 3.00%, 11/30/03 10,000 10,029 3.25%, 12/31/03 11,000 11,068 3.00%, 01/31/04 13,000 13,006 4.75%, 02/15/04 5,000 5,169 3.00%, 02/29/04 5,000 4,995 5.25%, 05/15/04 5,500 5,746 6.00%, 08/15/04 5,500 5,851 5.88%, 11/15/04 5,000 5,312 7.88%, 11/15/04 5,000 5,564 7.50%, 02/15/05 7,000 7,770 6.75%, 05/15/05 3,000 3,276 5.75%, 11/15/05 2,000 2,127 5.88%, 11/15/05 7,000 7,477 5.63%, 02/15/06 7,000 7,420 4.63%, 05/15/06 3,000 3,064 7.00%, 07/15/06 5,000 5,565 6.50%, 10/15/06 8,000 8,760 = 3.50%, 11/15/06 13,000 12,626 6.25%, 02/15/07 7,000 7,608 6.63%, 05/15/07 3,000 3,314 6.13%, 08/15/07 3,000 3,247
See the Financial Notes, which are integral to this information. 21 SCHWAB TOTAL BOND MARKET INDEX FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
SECURITY FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) 5.50%, 02/15/08 7,000 7,365 5.63%, 05/15/08 3,000 3,172 4.75%, 11/15/08 4,250 4,278 5.50%, 05/15/09 5,000 5,239 6.00%, 08/15/09 5,000 5,385 6.50%, 02/15/10 5,000 5,548 5.75%, 08/15/10 5,000 5,304 5.00%, 02/15/11 3,500 3,527 5.00%, 08/15/11 5,000 5,034 4.88%, 02/15/12 15,000 15,014 ----------- 298,145 MORTGAGE-BACKED OBLIGATIONS 22.4% ------------------------------------------------------------------- FANNIE MAE = 5.50%, 03/01/17 9,000 8,969 = 6.00%, 03/01/17 9,000 9,135 = 6.50%, 03/01/17 15,000 15,464 = 7.00%, 03/01/17 9,000 9,383 = 7.50%, 03/01/17 7,000 7,389 =(3) 6.00%, 03/01/32 28,000 27,834 =(1) 6.50%, 03/01/32 57,000 57,855 =(2) 7.00%, 03/01/32 41,000 42,243 =(4) 7.50%, 03/01/32 25,000 26,047 =(5) 8.00%, 03/01/32 20,000 21,100 = 8.50%, 03/01/32 3,000 3,204 GINNIE MAE = 6.00%, 03/01/32 3,000 2,991 = 6.50%, 03/01/32 9,000 9,163 =(8) 7.00%, 03/01/32 17,000 17,568 = 7.50%, 03/01/32 15,000 15,703 =(10) 8.00%, 03/01/32 15,000 15,863 ----------- 289,911 AGENCY OBLIGATIONS 3.6% ------------------------------------------------------------------- FANNIE MAE 5.75%, 04/15/03 5,000 5,182 5.13%, 02/13/04 5,000 5,183 3.88%, 03/15/05 5,000 4,999 5.50%, 02/15/06 6,000 6,245 6.00%, 05/15/08 5,000 5,260 FREDDIE MAC 5.05%, 04/02/04 10,000 10,024 5.75%, 01/15/12 10,000 10,166 ----------- 47,059 CORPORATE BONDS 45.1% of investments FIXED RATE OBLIGATIONS 25.9% ------------------------------------------------------------------- AB SPINTAB, 144A 7.50%, 08/14/06 6,300 6,662 ALCOA INC. 7.38%, 08/01/10 5,000 5,491 ANDERSON EXPLORATION, LTD. 6.75%, 03/15/11 7,000 6,715 AOL TIME WARNER, INC. 6.95%, 01/15/28 7,000 6,691 AXA FINANCIAL, INC. 7.75%, 08/01/10 4,000 4,402 BAE SYSTEMS ASSET TRUST, 144A Series 2001 Class B 7.16%, 12/15/11 5,962 6,284 BANK OF AMERICA CORP. 7.80%, 02/15/10 5,000 5,560 CARDINAL HEALTHCARE INC. 6.75%, 02/15/11 10,000 10,613 CAPITAL ONE BANK 6.65%, 03/15/04 3,050 2,975 CASE CREDIT CORP. 6.15%, 03/01/02 2,945 2,945 CENDANT CORP. 7.75%, 12/01/03 13,600 13,640 CENDANT CORP., 144A 6.88%, 08/15/06 3,500 3,367 CENTEX CORP. 7.50%, 01/15/12 10,000 10,264 CIT HOLDINGS, L.L.C. 6.88%, 02/16/05 10,000 9,645 CREDIT SUISSE FIRST BOSTON U.S.A., INC. 5.88%, 08/01/06 5,000 5,176 6.13%, 11/15/11 10,000 9,961 CSC HOLDINGS, INC. 8.13%, 07/15/09 4,000 4,032 CVS CORP. 5.63%, 03/15/06 10,000 10,142 DANA CREDIT CORP., 144A 7.25%, 12/16/02 4,000 3,852
See the Financial Notes, which are integral to this information. 22
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) DOLE FOODS CO. 7.00%, 05/15/03 3,000 3,067 (7) DRESDNER FUNDING TRUST I, 144A 8.15%, 06/30/31 16,000 17,573 ERAC USA FINANCE CO., 144A 7.35%, 06/15/08 7,000 7,254 FORD MOTOR CO. 7.45%, 07/16/31 10,000 9,608 FORD MOTOR CREDIT 6.88%, 02/01/06 6,000 6,033 GENERAL ELECTRIC CAPITAL CORP. 7.50%, 06/05/03 10,000 10,592 GS ESCROW CORP. 7.00%, 08/01/03 1,325 1,344 ITT CORP. 7.38%, 11/15/15 3,400 3,135 J.C. PENNEY CO., INC. 7.25%, 04/01/02 3,320 3,320 6.50%, 06/15/02 4,450 4,456 MAY DEPARTMENT STORES CO. 6.90%, 01/15/32 5,000 4,996 NORSKE SKOGINDUSTRIER, 144A 7.63%, 10/15/11 7,000 7,288 PHILLIPS PETROLEUM CO. 9.38%, 02/15/11 5,000 6,068 POPULAR NA, INC. Series E 6.13%, 10/15/06 10,000 10,038 QWEST COMMUNICATIONS INTERNATIONAL Series B 7.50%, 11/01/08 5,000 4,699 RAYTHEON CO. 6.45%, 08/15/02 1,983 2,005 ROYAL BANK OF SCOTLAND GROUP, PLC 7.82%, 03/01/02 7,000 7,549 7.65%, 09/30/31 7,500 8,012 SALOMON SMITH BARNEY HOLDINGS, INC. 5.88%, 03/15/06 13,000 13,428 STANDARD CHARTERED BANK, 144A 8.00%, 05/30/31 5,000 5,303 STARWOOD HOTELS & RESORTS WORLDWIDE, INC. 6.75%, 11/15/05 2,000 2,008 SVENSKA HANDELSBANKEN, 144A 7.13%, 03/07/07 15,000 15,815 TYCO INTERNATIONAL GROUP SA 6.38%, 10/15/11 5,000 4,503 VERIZON COMMUNICATIONS 8.75%, 11/01/21 5,000 6,058 VERIZON NEW ENGLAND, INC. 6.50%, 09/15/11 7,000 7,181 VIACOM INC. 6.63%, 05/15/11 12,000 12,314 WASTE MANAGEMENT, INC. 7.38%, 08/01/10 5,000 5,086 WORLDCOM, INC. 6.50%, 05/15/04 8,000 7,728 8.25%, 05/15/31 10,000 9,643 ----------- 334,521 VARIABLE RATE OBLIGATIONS 19.2% ------------------------------------------------------------------- (9) ALLETE 2.62%, 04/22/02 16,000 16,032 AON CORP., 144A 2.83%, 04/15/02 10,000 10,002 BEAR STEARNS CO., INC. Series B 2.29%, 03/21/02 15,500 15,406 BOISE CASCADE CO. Series A 3.82%, 04/15/02 10,000 10,004 BOMBARDIER CAPITAL INC., 144A 4.15%, 05/21/02 10,000 10,048 COASTAL CORP., 144A 2.53%, 03/01/02 10,000 10,000 CONAGRA FOODS INC. 2.72%, 03/11/02 12,500 12,514 COX COMMUNICATIONS, INC. 2.60%, 05/07/02 12,840 12,887 ERP OPERATING, L.P. 2.53%, 05/21/02 10,000 10,036 (6) FORD MOTOR CREDIT CO. 3.68%, 04/25/02 20,500 20,173 GENERAL MILLS, INC. 6.00%, 02/15/12 10,000 10,064
See the Financial Notes, which are integral to this information. 23 SCHWAB TOTAL BOND MARKET INDEX FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) GENERAL MOTORS ACCEPTANCE CORP. 2.22%, 04/17/02 10,000 9,929 2.68%, 05/04/04 10,000 9,809 GULF STATES UTILITIES, 144A 3.38%, 03/01/02 5,000 5,005 INDIANA MICHIGAN POWER 2.71%, 03/04/02 6,500 6,503 LEHMAN BROTHERS HOLDINGS, INC. Series F 2.63%, 04/15/02 3,200 3,207 MBNA CORP. Series F 3.65%, 05/28/02 2,000 2,001 2.88%, 03/12/04 5,000 5,000 2.96%, 08/16/04 12,000 11,945 NATIONAL CONSUMER COOPERATIVE BANK Series B 4.17%, 05/06/02 10,000 10,002 POPULAR NA INC. 3.48%, 04/15/02 10,000 10,007 PSEP CAPITAL CORP., 144A 3.12%, 03/11/02 10,500 10,499 PUBLIC SERVICE ENTERPRISE 2.78%, 05/21/02 8,000 7,987 QWEST CAPITAL FUNDING, INC., 144A 2.32%, 04/08/02 6,540 6,545 RAYTHEON CO., 144A 2.71%, 03/01/02 6,000 6,000 UTILICORP UNITED, INC., 144A 2.78%, 05/15/02 7,000 6,978 ----------- 248,583 ASSET-BACKED OBLIGATIONS 3.8% of investments AIRPLANES PASS THROUGH TRUST Series 1R Class A8 2.22%, 03/15/02 15,000 15,003 COUNTRYWIDE ASSET-BACKED CERTIFICATES Series 2001-3 Class M1 2.35%, 03/25/02 3,000 3,004 Series 2001-BC3 Class M1 2.40%, 03/25/02 5,000 5,014 MBNA MASTER CREDIT CARD TRUST II Series 2000-C Class A 2.01%, 03/15/02 10,000 10,032 PEAGSUS AVIATION LEASE SECURITIZATION Series 2001-1A Class A3 2.52%, 03/11/02 10,991 11,188 PROVIDENT BANK HOME EQUITY LOAN TRUST Series 1997-2 Class A5 2.08%, 03/25/02 5,301 5,297 ----------- 49,538 COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 1.7% of investments ATLANTIS TWO FUNDING CORP. 2.25%, 03/01/02 10,000 10,000 KINDER MORGAN ENERGY PARTNERS 2.50%, 03/01/02 11,500 11,500 ----------- 21,500
PREFERRED STOCK 0.3% of investments
SECURITY AND NUMBER OF SHARES MKT. VALUE ($ x 1,000) COBANK, 144A 70,000 3,651 OTHER INVESTMENT COMPANIES 0.0% of investments PROVIDENT INSTITUTIONAL FUNDS -- FED FUNDS PORTFOLIO 120,275 120
END OF PORTFOLIO HOLDINGS. For totals, please turn to the first page of holdings for this fund. See the Financial Notes, which are integral to this information. 24 Statement of ASSETS AND LIABILITIES As of February 28, 2002; unaudited. All numbers x 1,000 except NAV.
ASSETS - ---------------------------------------------------------------------- Investments, at market value (including $123,463 of securities on loan) $1,293,028 a Collateral held for securities on loan 125,698 Receivables: Fund shares sold 926 Interest 10,816 Investments sold 29,734 Prepaid expenses + 68 ----------- TOTAL ASSETS 1,460,270 LIABILITIES - ---------------------------------------------------------------------- Collateral held for securities on loan 125,698 Payables: Fund shares redeemed 326 Dividends to shareholders 299 Investments bought 339,331 Investment adviser and administrator fees 6 Transfer agent and shareholder service fees 34 Accrued expenses + 30 ------------ TOTAL LIABILITIES 465,724 NET ASSETS TOTAL ASSETS 1,460,270 TOTAL LIABILITIES - 465,724 ------------ NET ASSETS $994,546 - ---------------------------------------------------------------------- NET ASSETS BY SOURCE Capital received from investors 981,568 Net investment income not yet distributed 533 Net realized capital losses (3,475) b Net unrealized capital gains 15,920
NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $994,546 98,960 $10.05
a The fund's amortized cost for these securities was $1,277,108. Not counting short-term obligations and government securities, the fund paid $140,321 for securities during the reporting period, and received $138,335 from securities it sold or that matured. For long-term government securities, the fund paid $271,140 during the reporting period and received $205,928 for securities it sold or that matured. This includes $72,563 in transactions with other SchwabFunds(R). b These derive from investments, swap agreements and short sales.
FEDERAL TAX DATA - --------------------------------------------------------------------- COST BASIS OF PORTFOLIO $1,278,945 NET UNREALIZED GAINS AND LOSSES: Gains $18,085 Losses + (4,002) ------------- $14,083
See the Financial Notes, which are integral to this information. 25 SCHWAB TOTAL BOND MARKET INDEX FUND - FINANCIALS Statement of OPERATIONS For September 1, 2001 through February 28, 2002; unaudited. All numbers x 1,000.
INVESTMENT INCOME - --------------------------------------------------------------------- Interest $24,298 Lending of securities + 346 ---------- TOTAL INVESTMENT INCOME 24,644 NET REALIZED GAINS AND LOSSES - --------------------------------------------------------------------- Net realized gains on investments sold 2,611 Net realized losses on short sales + (100) ---------- NET REALIZED GAINS 2,511 NET UNREALIZED LOSSES - --------------------------------------------------------------------- Net unrealized losses on investments (5,720) EXPENSES - --------------------------------------------------------------------- Investment adviser and administrator fees 1,242 a Transfer agent and shareholder service fees 1,186 b Trustees' fees 11 c Custodian and portfolio accounting fees 116 Professional fees 14 Registration fees 64 Shareholder reports 44 Other expenses + 10 ---------- Total expenses 2,687 Expense reduction - 1,026 d ---------- NET EXPENSES 1,661 INCREASE IN NET ASSETS FROM OPERATIONS - --------------------------------------------------------------------- TOTAL INVESTMENT INCOME 24,644 NET EXPENSES - (1,661) NET INVESTMENT INCOME 22,983 NET REALIZED GAINS 2,511 e NET UNREALIZED LOSSES + (5,720) e ---------- INCREASE IN NET ASSETS FROM OPERATIONS $19,774
a Calculated as a percentage of average daily net assets: 0.30% of the first $500 million and 0.22% of assets beyond that. b Calculated as a percentage of average daily net assets: for transfer agent services, 0.05% of the fund's assets; for shareholder services, 0.20% of the fund's assets. c For the fund's independent trustees only. d This reduction was made by the investment adviser (CSIM). It reflects a guarantee by CSIM and the transfer agent and shareholder service agent (Schwab) to limit the operating expenses of this fund through at least November 15, 2002, to 0.35% of average daily net assets. This limit doesn't include interest, taxes and certain non-routine expenses. e These add up to a net loss on investments of $3,209. See the Financial Notes, which are integral to this information. 26 Statements of CHANGES IN NET ASSETS For the current and prior reporting periods. All numbers x 1,000. Figures for 9/1/01-2/28/02 are unaudited.
OPERATIONS - ----------------------------------------------------------------------------- 9/1/01-2/28/02 9/1/00-8/31/01 Net investment income $22,983 $46,327 Net realized gains 2,511 25,408 Net unrealized gains or losses + (5,720) 20,972 ----------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 19,774 92,707 DISTRIBUTIONS PAID - ----------------------------------------------------------------------------- Dividends from net investment income $22,218 $46,451 Dividends from realized gains on investments + 15,184 -- ----------------------------- TOTAL DIVIDENDS AND DISTRIBUTIONS PAID $37,402 $46,451
TRANSACTIONS IN FUND SHARES - -------------------------------------------------------------------------------- 9/1/01-2/28/02 9/1/00-8/31/01 QUANTITY VALUE QUANTITY VALUE Shares sold 20,821 $ 211,985 40,081 $ 398,466 Shares reinvested 3,562 35,793 4,360 43,287 Shares redeemed + (15,936) (162,041) (20,933) (208,107) ------------------------------------------- NET INCREASE 8,447 $ 85,737 23,508 $ 233,646
SHARES OUTSTANDING AND NET ASSETS - ------------------------------------------------------------------------------- 9/1/01-2/28/02 9/1/00-8/31/01 SHARES NET ASSETS SHARES NET ASSETS Beginning of period 90,513 $926,437 67,005 $646,535 Total increase + 8,447 68,109 123,508 279,902 a ------------------------------------------ END OF PERIOD 98,960 $994,546 90,513 $926,437 b
a Figures for shares represent the net changes in shares from the transactions described above. Figures for net assets represent the changes in net assets from operations plus the changes in value from transactions in fund shares, minus distributions paid. b Includes net investment income not yet distributed in the amount of $533 at the end of the current period and distributions in excess of net investment income in the amount of $232 at the end of the prior period. Percent of fund shares owned by other SchwabFunds(R) as of the end of the current period:
SCHWAB MARKETTRACK PORTFOLIOS(R) Growth Portfolio 10.4% Balanced Portfolio 23.2% Conservative Portfolio 15.7% SCHWAB ANNUITY PORTFOLIOS Growth Portfolio II 0.4%
See the Financial Notes, which are integral to this information. 27 FINANCIAL NOTES Unaudited BUSINESS STRUCTURE OF THE FUNDS EACH OF THE FUNDS DISCUSSED IN THIS REPORT IS A SERIES OF SCHWAB INVESTMENTS, A NO-LOAD, OPEN-END MANAGEMENT INVESTMENT COMPANY. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The sidebar shows the funds in this report and their trust. THE FUNDS OFFER ONE SHARE CLASS. Shares are bought and sold at net asset value, or NAV, which is the price for all outstanding shares. Each share has a par value of 1/1,000 of a cent, and the trustees may issue as many shares as necessary. - -------------------------------------------------------------------------------- THE TRUST AND ITS FUNDS This list shows all of the funds included in Schwab Investments. The funds discussed in this report are highlighted. SCHWAB INVESTMENTS Organized October 26, 1990 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 Schwab Short/Intermediate Tax-Free Bond Fund Schwab Long-Term Tax-Free Bond Fund Schwab YieldPlus Fund(R) - -------------------------------------------------------------------------------- FUND OPERATIONS Most of the funds' investments are described in the fund-by-fund sections earlier in this report. However, there are certain other investments and policies that may affect a fund's financials. The most significant of these are described below. Other policies concerning the funds' business operations also are described here. THE FUNDS DECLARE DIVIDENDS EVERY DAY THEY ARE OPEN FOR BUSINESS. These dividends, which are substantially equal to a fund's net investment income for that day, are paid out to shareholders once a month. The funds may make distributions from any net realized capital gains once a year. THE FUNDS MAY ENTER INTO SWAP AGREEMENTS. In these transactions, a fund and a counterparty agree to swap payments that are based on two different rates. The counterparty is typically a large financial institution, and the term of the swap is specified in advance. For example, a fund may agree that for six months it will pay the counterparty the equivalent of the interest on a given amount invested at LIBOR (the London Interbank Offered Rate). In exchange, the counterparty might agree to pay a fund the equivalent of the same amount invested in a certain bond index during this same six months. Swap agreements carry certain risks. Because the net gains or losses stemming from a swap agreement depend on the movements of one rate relative to another, a fund could experience unanticipated losses if one or both rates failed to behave as expected. A fund also could lose money if a counterparty failed to honor the terms of a swap agreement. 28 THE FUNDS MAY LOAN SECURITIES TO CERTAIN BROKERS, DEALERS AND OTHER FINANCIAL INSTITUTIONS WHO PAY THE FUNDS NEGOTIATED FEES. The funds receive cash, letters of credit or U.S. Government securities as collateral on these loans. The value of the collateral must be at least 102% of the market value of the loaned securities as of the first day of the loan, and at least 100% each day thereafter. THE FUNDS MAY BUY SECURITIES ON A DELAYED-DELIVERY BASIS. In these transactions, a fund agrees to buy a security for a stated price, with settlement generally occurring within two weeks. If the security's value falls before settlement occurs, a fund could end up paying more for the security than its market value at the time of settlement. The funds have set aside sufficient securities as collateral for those securities bought on a delayed-delivery basis. THE FUNDS MAY ALSO SELL SECURITIES SHORT (SELL SECURITIES THEY DO NOT OWN). When they do so, the funds also place assets worth at least 100% of the value of the shorted securities into segregated accounts, as collateral. If the market value of the shorted securities subsequently falls, the funds can realize a gain. However, if the value rises, the funds typically would have to add to their collateral or close out their short position at a loss. THE SCHWAB TOTAL BOND MARKET INDEX FUND MAY ENTER INTO MORTGAGE DOLLAR ROLL TRANSACTIONS. In these transactions, the fund sells mortgage-backed securities for delivery in the current month and simultaneously agrees to buy back, on a given date in the future, securities of a similar type, coupon rate and maturity. THE FUNDS PAY FEES FOR VARIOUS SERVICES. Through their trust, the funds have agreements with Charles Schwab Investment Management, Inc. (CSIM) to provide investment advisory and administrative services and with Charles Schwab & Co., Inc. (Schwab) to provide transfer agent and shareholder services. Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds that may limit the total expenses charged. The rates and limitations for these fees vary from fund to fund, and are described in each fund's Statement of Operations. TRUSTEES MAY INCLUDE PEOPLE WHO ARE OFFICERS AND/ OR DIRECTORS OF THE INVESTMENT ADVISER OR SCHWAB. Federal securities law limits the percentage of such "interested persons" who may serve on a trust's board, and the trust was in compliance with these limitations throughout the reporting period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in each fund's Statement of Operations. THE FUNDS MAY ENGAGE IN CERTAIN TRANSACTIONS INVOLVING AFFILIATES. For instance, a fund may let other SchwabFunds(R) buy and sell fund shares, particularly Schwab MarketTrack Portfolios(R). The funds may make direct transactions with certain other SchwabFunds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. THE FUNDS INTEND TO MEET FEDERAL INCOME AND EXCISE TAX REQUIREMENTS FOR REGULATED INVESTMENT COMPANIES. Accordingly, the funds distribute substantially all of their net investment income and realized net capital gains (if any) to their respective shareholders each year. As long as a fund meets the tax requirements, it is not required to pay federal income tax. 29 ACCOUNTING POLICIES The following are the main policies the funds use in preparing their financial statements. THE FUNDS VALUE THE SECURITIES IN THEIR PORTFOLIOS EVERY BUSINESS DAY. The funds use the following policies to value various types of securities: BONDS AND NOTES: valued at halfway between the most recent bid and asked quotes or, if such quotes are unavailable, at prices for securities of comparable maturity, credit quality and type. Valuations for bonds and notes are provided by an independent bond-pricing service. SECURITIES FOR WHICH NO QUOTED VALUE IS AVAILABLE, INCLUDING RESTRICTED SECURITIES: valued at fair value, as determined in good faith by the fund's investment adviser using guidelines adopted by the fund's Board of Trustees. SWAP AGREEMENTS: each open contract is valued at a formula that varies with the specific terms of the agreement. SHORT-TERM SECURITIES (60 DAYS OR LESS TO MATURITY): valued at amortized cost. IF A FUND SELLS SECURITIES SHORT, it records the proceeds received as an asset and the obligation to buy back the securities as a liability. At the time a short sale is initiated, the asset and the liability are of equal value and effectively cancel each other out. Subsequently, the fund values the liability side of the transaction according to the market price of the securities sold short, and values the asset side according to the value of the proceeds. When the fund closes out a short position (buys the security), it records the outcome as a realized gain or loss. Interest accrued on securities sold short is recorded as an expense on the fund's records. SECURITY TRANSACTIONS are recorded as of the date the order to buy or sell the security is executed. INTEREST INCOME is recorded as it accrues. If a fund bought a debt instrument at a discount (that is, for less than its face value) or a premium (more than face value), it amortizes the discount or premium from the current date up to maturity. The fund then increases (in the case of discounts) or reduces (in the case of premiums) the income it records from the security. If the security is callable (meaning that the issuer has the option to pay it off before its maturity date), then the fund amortizes the premium to the security's call date and price, rather than the maturity date and price. REALIZED GAINS AND LOSSES from security transactions are based on the identified costs of the securities involved. Gains and losses from paydowns on mortgage and asset backed securities are recorded as adjustments to interest income. EXPENSES that are specific to a fund are charged directly to that fund. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their net assets. EACH FUND MAINTAINS ITS OWN ACCOUNT FOR PURPOSES OF HOLDING ASSETS AND ACCOUNTING, and is considered a separate entity for tax purposes. Within its account, each fund also keeps certain assets in segregated accounts, as may be required by securities law. 30 THE ACCOUNTING POLICIES DESCRIBED ABOVE CONFORM WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It's possible that once the results are known, they may turn out to be different from these estimates. 31 HOW TO READ THIS REPORT This report, including the financial tables, has been designed to be EASY TO READ. The next few pages provide additional information that can help you more fully understand the financial tables and why they are important to ALL FUND INVESTORS. In this section, we take a closer look at the types of information presented in the financial tables. Brief CALLOUTS add context to some of the most important elements in the tables, and help explain certain fund operations and accounting principles. At the end, a GLOSSARY defines many of the financial terms that are used in this report. [GRAPHIC OF SAMPLE OF FINANCIAL HIGHLIGHTS TABLE] Table is for illustration only. The financial highlights summarize the fund's activities over the past five years (or since inception, if the fund doesn't yet have five years of operating history). The figures in the first part of the table are for a single share of the fund that was "outstanding," or in existence, during the periods indicated. These lines show how much the fund earned per share, and where these earnings came from: how much was from interest and dividends, and how much from capital appreciation (that is, price increases of investments the fund owned). A fund may show losses in this section if its expenses exceeded its income or its capital losses exceeded its capital gains. Some funds, such as money funds, typically receive all their earnings as interest, while some equity funds may have only appreciation, or may receive interest and dividends only occasionally. Total return shows what an investor in the fund would have earned or lost during each period indicated, assuming that all dividends and distributions were reinvested. Because the numbers in the financial highlights are for a fund's fiscal year, they will be different from calendar year numbers, except for funds whose fiscal year is the same as the calendar year. 32 [GRAPHIC OF SAMPLE OF FINANCIAL HIGHLIGHTS TABLE] Table is for illustration only. In some cases, such as with funds that started partway through their planned fiscal year or have changed their fiscal year, the financial highlights may contain a "stub period" that is less than 12 months. In financial tables, parentheses around numbers are used to indicate a negative number, such as a loss, or a number that is being subtracted, such as a distribution paid by a fund to its shareholders. The figures in this part of the table disclose a fund's annual operating expenses. The expenses are shown as a percentage of a fund's average net assets, because they are paid from these assets. For some funds, the annual expenses are capped at a certain level. With these funds, there are two sets of expense figures: net expenses and the amounts of any expense reductions. The net figures reflect what the expenses actually were, after the reductions. This shows you how much a fund netted in dividend and interest income (i.e., total dividends and interest minus expenses), expressed as a percentage of the fund's average net assets. The turnover rate tells you how actively a fund has traded securities. A rate of 100% would be the equivalent of replacing every security in the portfolio over the period of a year. Consistently high turnover can result in taxable distributions, which can lower after-tax performance -- although this is not a concern if your investment is held in an IRA, 401(k) or other tax-deferred account. 33 HOW TO READ THIS REPORT Continued [GRAPHIC OF SAMPLE OF PORTFOLIO HOLDINGS PAGE] Table is for illustration only. The Portfolio Holdings (sometimes also called the Schedule of Investments) is a snapshot of all securities a fund held on the last day of the report period. Symbols that may appear in the Portfolio Holdings: (1) Top ten holding -- shows a fund's ten largest positions, as measured by market value. + Credit-enhanced security -- indicates a security that is backed by the credit of a third party (usually a large financial institution). An issuer uses credit enhancement to give its securities a higher credit rating, which means that the issuer can pay a lower interest rate. From a fund's standpoint, credit enhancements can help lower the risk of default on those securities that carry them and may also make a security more liquid. = Delayed-delivery security -- indicates a security a fund has arranged to buy but has not yet received. A fund may incur a gain or loss if the value of the security rises or falls between the time the purchase was arranged and the time the security is delivered. o Certificate of participation -- indicates a security that offers "participation" in municipal lease revenues. A certificate of participation typically is associated with a facility that is leased to (and was built for) a municipal entity, and is generally considered somewhat riskier than a general obligation bond. / Collateral for open futures contracts -- indicates a security the fund has set aside in a separate account to cover possible losses that may result from a futures contract. The fund is not permitted to sell a security while it is pledged as collateral. With most types of bonds (and other debt obligations), the interest rate is set at the time of issue and doesn't change. However, some types of obligations are structured so that the rate may be reset at certain times, typically to reflect changes in market interest rates. A fund may own some of both types of securities. This shows a breakdown of holdings by asset type. To the right of the pie chart are figures showing the total market value of securities of each asset type, and also what a fund paid for those securities. 34 [GRAPHIC OF SAMPLE OF PORTFOLIO HOLDINGS PAGE] Table is for illustration only. For all bonds, the report shows the issuer, the rate the security pays and the maturity date. The maturity date is the date when the bond is retired and the issuer returns the money borrowed ("principal" or "face value") to the bondholder. Most equity and bond funds keep at least a small percentage of assets in high quality, liquid investments, in order to manage their cash flow needs. In this example, the investment shown is one that seeks to maintain a stable $1.00 share price, so the number of shares is typically the same as the market value (allowing for rounding in the value column). During its lifetime, a bond may trade at a premium or a discount to its face value, depending on interest rate trends and other factors. When a bond begins to approach maturity, its market value typically moves closer to its face value. In some cases, securities are organized into sub-groups. For each sub-group, there are figures showing the percentage of investments represented and the total market value of the securities in the sub- group. Note that for all dollar values, you need to add three zeroes after each number to get the approximate value. 35 HOW TO READ THIS REPORT Continued [GRAPHIC OF SAMPLE OF STATEMENT OF ASSETS AND LIABILITIES TABLE] Table is for illustration only. The Statement of Assets and Liabilities is a snapshot of a fund's balance sheet on the last day of the report period. At any given time, a fund is likely to be owed money from various sources that it has not yet received, and to owe money it hasn't yet paid. This section gathers the totals from the first two sections in order to compute net assets. This section shows where the assets described above came from. "Capital received from investors" is money a fund received from investors buying its shares during the report period, and is a net figure (meaning that money the fund remitted to investors who redeemed their shares has already been subtracted from it). As with the Portfolio Holdings, the figures in these statements need to be multiplied by 1,000. This includes the figures in the notes. The collateral is simultaneously counted as an asset (because the fund held it as of the report date) and as a liability (because it is owned by the institutions that provided it as collateral). A fund may treat capital losses that are realized after October 31 of a given year as occurring at the beginning of the following fiscal year. This can help avoid certain unintentional tax consequences created by the required timing of dividend payments relative to the fund's fiscal year end. [GRAPHIC OF SAMPLE OF FEDERAL TAX DATA TABLE] Table is for illustration only. Although a mutual fund doesn't expect to pay federal income tax, it does have to file a return with the IRS. In some cases, the requirements of tax accounting differ from the requirements of the accounting practices used in keeping a fund's books, so the figures in this box may differ from those shown elsewhere in the financials. These differences may require that some values be reclassified in the financials, but this does not affect a fund's NAV. 36 [GRAPHIC OF SAMPLE OF STATEMENT OF OPERATIONS TABLE] Table is for illustration only. The Statement of Operations tells you how much money a fund earned and spent over the course of the report period, and how much it gained and lost on its investments. These are the capital gains or losses resulting from securities a fund sold during the report period. These represent the change in unrealized gains or losses over the report period. To safeguard the interests of shareholders, mutual funds must keep their portfolio securities in accounts at a financial institution, whose tasks include maintaining records of a fund's holdings. Covers most activities related to managing a fund's portfolio. Covers most activities associated with shareholders, including processing transactions in fund shares and providing services such as account statements and information. This section gathers the totals from the first four sections in order to compute the net earnings or losses that resulted from a fund's operations during the report period. These figures also appear, in summary form, on the Statements of Changes in Net Assets. 37 HOW TO READ THIS REPORT Continued [GRAPHIC OF SAMPLE OF STATEMENT OF CHANGES IN NET ASSETS TABLE] Table is for illustration only. The Statements of Changes in Net Assets compare a fund's performance during the current report period with its performance from the previous report period. Keep in mind that if the current report is a semiannual report, its figures are only for six months, whereas the figures for the previous period are generally for a full year. From this section, you can see how the size of a fund was affected by investors buying and selling shares (as opposed to changes due to fund performance, shown above in "Operations"). The information shows how many shares the fund sold to investors, how many shares the fund issued in connection with investors who reinvested their dividends or distributions, and how many shares the fund redeemed (bought back from investors). In funds with more than one share class, these figures are reported by class. For mutual funds, the number of "shares outstanding" is the number of shares in existence. For mutual funds, the number of "shares outstanding" is the number of shares in existence. These are the figures for the current report period. These are the figures for the previous report period. 38 GLOSSARY ALTERNATIVE MINIMUM TAX (AMT) A federal income tax designed to limit the extent to which high-income taxpayers (including individuals, estates, trusts and corporations) can benefit from certain deductions and exemptions. For example, some types of income that are exempt from regular federal income tax are not exempt from the AMT. ASSET ALLOCATION The practice of dividing a portfolio among different asset classes, with each asset class assigned a particular percentage. ASSET-BACKED SECURITY A bond or other debt security that represents ownership in a pool of debt obligations such as credit card debt. ASSET CLASS A group of securities with similar structure and basic characteristics. Stocks, bonds and cash are the three main examples of asset classes. AVERAGE RATE The average rate of interest paid annually by the fixed income securities in a fund or portfolio. BOND A security representing a loan from the investor to the issuer. A bond typically pays interest at a fixed rate (the "coupon rate") until a specified date (the "maturity date"), at which time the issuer returns the money borrowed ("principal" or "face value") to the bondholder. Because of their structure, bonds are sometimes called "fixed income securities" or "debt securities." CALL An early repayment of a bond's principal by the issuer, usually done because the issuer is able to refinance its bond debt at a lower rate. CALL PROTECTION A term used in reference to a bond that cannot be called by the issuer before maturity, or at least for many years from the present date. A bond that offers call protection can more reliably be expected to provide a given yield over a given number of years than a bond that could be called (assuming both bonds are of the same credit quality). CAPITAL GAIN, CAPITAL LOSS The difference between the amount paid for an investment and its value at a later time. If the investment has been sold, the capital gain or loss is considered a realized gain or loss. If the investment is still held, the gain or loss is still "on paper" and is considered unrealized. COUPON, COUPON RATE The annual rate of interest paid until maturity by the issuer of a debt security. CREDIT QUALITY The capacity of an issuer to make its interest and principal payments. See sidebar. CREDIT RISK The risk that a bond issuer may be unable to pay interest or principal to its bondholders. DISCOUNT RATE The implied rate on a debt security that does not pay interest but is bought at a discount and redeemed at face value when it matures. ----------------------------------------------------------------------- CREDIT RATINGS Most major bond issuers arrange with a recognized independent rating organization, such as Standard & Poor's (S&P) or Moody's Investors Service, to rate the creditworthiness of their bonds. The spectrum of these ratings is divided into two major categories: investment grade and below investment grade (sometimes called "junk bonds"). Bonds rated below investment grade range from those that are considered to have some vulnerability to default to those that appear on the brink of default or are in default.
Credit Capacity to quality make payments ------- ------------- INVESTMENT GRADE BONDS AAA Strongest AA A BBB Adequate [UP AND DOWN ARROW SPANNING TABLE AND CHANGING DARK TO LIGHT FROM TOP TO BOTTOM] ----------------------------------------------------------------------- BELOW INVESTMENT GRADE BONDS BB Somewhat speculative B CCC CC C Highly speculative D In default -----------------------------------------------------------------------
39 GLOSSARY Continued DIVIDEND Money from earnings that is distributed to shareholders as a given amount per share. DURATION A measure of a bond investment's sensitivity to interest rates. Calculations of duration take into account the investment's yield, interest payments, maturity date and call features. Like maturity, duration is expressed in years, but typically is more accurate than maturity in determining the effect of interest rate movements on a bond investment's price. EXPENSE RATIO The amount that is taken from a mutual fund's assets each year to cover the fund's operating expenses. An expense ratio of 0.50% means that a fund's expenses amount to half of one percent of its average net assets a year. GENERAL OBLIGATION BOND A municipal bond that is secured by the issuer's full faith and credit, which typically is backed by the power of the issuer to levy taxes. INTEREST Payments to bondholders (usually made twice a year) as compensation for loaning the bond principal to the issuer. INTEREST RATE RISK The risk that a bond's value will fluctuate if market interest rates change or are expected to change. Bond prices tend to move in the opposite direction of interest rates: when interest rates rise, bond prices tend to fall. MARKET RISK Those elements of risk that are common to all securities in an asset class, and therefore cannot be significantly reduced by diversification within the asset class. Also known as "systematic risk." MATURITY The date a bond is scheduled to be "retired" and its principal amount returned to the bondholder. MORTGAGE-BACKED SECURITY A bond or other debt security that represents ownership in a pool of mortgage loans. MUNI, MUNICIPAL BOND, MUNICIPAL SECURITY Debt securities issued by a state, its counties, municipalities, authorities and other subdivisions, or the territories and possessions of the United States and the District of Columbia, including their subdivisions, agencies and instrumentalities and corporations. These securities may be issued to obtain money for various public purposes, including the construction of a wide range of public facilities such as airports, bridges, highways, housing, hospitals, mass transportation, public utilities, schools, streets, and water and sewer works. NET ASSET VALUE (NAV) The value of one share of a mutual fund. NAV is calculated by taking the fund's total assets, subtracting liabilities, and dividing by the number of shares outstanding. OUTSTANDING SHARES, SHARES OUTSTANDING When speaking of a company or mutual fund, indicates all shares currently held by investors. PREPAYMENT RISK The risk that a mortgage-backed security may be paid off early, typically because interest rates have fallen and the homeowners who hold the underlying mortgages have refinanced those mortgages at lower rates. In this type of situation, the investor who held the mortgage-backed security will usually have to settle for a lower rate when reinvesting the principal. REVENUE BOND A municipal bond that is issued to finance public works and is secured by revenue from a public works project (such as a highway or stadium) rather than the full faith and credit of the issuer. TAXABLE-EQUIVALENT YIELD The yield an investor would need to get from a taxable investment in order to match the yield paid by a given tax-exempt investment, once the effect of all applicable taxes is taken into account. For example, if your tax rate were 25%, a tax-exempt investment paying 4.5% would have a taxable-equivalent yield for you of 6.0% (4.5% / [1 - 0.25%] = 6.0%). TOTAL RETURN The overall performance of an investment over a given period, including any expenses, any income or distributions paid out and any capital gain or loss (increases or decreases in portfolio value). WEIGHTED AVERAGE For mutual funds, an average that gives the same weight to each security as the security represents in the fund's portfolio. WEIGHTED AVERAGE MATURITY For mutual funds, the maturity of all the bonds in its portfolio, calculated as a weighted average. As a rule, the longer a fund's weighted average maturity, the greater its interest rate risk. YIELD The income paid out by an investment, expressed as a percentage of the investment's market value. YIELD TO MATURITY The annualized rate of return a bondholder could expect if the bond were held to maturity. In addition to interest payments, yield to maturity also factors in any difference between a bond's current price and its principal amount, or face value. 40 CONTACT SCHWAB The SchwabFunds(R) Family includes a variety of funds to help meet your investment needs. You can diversify your portfolio in a single step with our asset allocation funds. Or you can customize your portfolio with a combination of our stock funds as well as our taxable and tax-advantaged bond and money market funds. Please call 800-435-4000 for a free prospectus and brochure for any of these SchwabFunds. This report must be preceded or accompanied by a current prospectus. METHODS FOR PLACING ORDERS The following information 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. INTERNET 1 www.schwab.com SCHWAB BY PHONE(TM) Use our automated voice service or speak to a representative. Call 800-435-4000, day or night (for TDD service, call 800-345-2550). TELEBROKER(R) Automated touch-tone phone service at 800-272-4922 MAIL Write to SchwabFunds at: PO 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. THE SCHWABFUNDS FAMILY STOCK FUNDS Schwab S&P 500 Fund Schwab 1000 Fund(R) Schwab Small-Cap Index Fund(R) Schwab Total Stock Market Index Fund(R) Schwab International Index Fund(R) Schwab Analytics Fund(R) Schwab Focus Funds Communications Focus Fund Financial Services Focus Fund Health Care Focus Fund Technology Focus Fund Schwab MarketManager Portfolios(R) Small Cap Portfolio International Portfolio ASSET ALLOCATION FUNDS Schwab MarketTrack Portfolios(R) All Equity Portfolio Growth Portfolio Balanced Portfolio Conservative Portfolio Schwab MarketManager Portfolios Growth Portfolio Balanced Portfolio BOND FUNDS Schwab Short-Term Bond Market Index Fund Schwab Total Bond Market Index Fund Schwab YieldPlus Fund(R) Schwab Short/Intermediate Tax-Free Bond Fund Schwab Long-Term Tax-Free Bond Fund Schwab California Short/Intermediate Tax-Free Bond Fund Schwab California Long-Term Tax-Free Bond Fund SCHWAB MONEY FUNDS Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity. 2 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.(R) 1 Shares of Sweep Investments(TM) may not be purchased over the Internet. 2 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. [CHARLES SCHWAB LOGO] INVESTMENT ADVISER Charles Schwab Investment Management, Inc. 101 Montgomery Street, San Francisco, CA 94104 DISTRIBUTOR Charles Schwab & Co., Inc. PO 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) 2002 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE. Printed on recycled paper. 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