-----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, K88gMRkICI2WM0piEvPWHDAEHp3q9hNOBIZmbzXVfLgmpaxiOHQGsbdBVT4IXWUI dGtwoIRVjSrrMBGqMBH92A== 0000950149-02-000917.txt : 20020507 0000950149-02-000917.hdr.sgml : 20020507 ACCESSION NUMBER: 0000950149-02-000917 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: 02635575 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 f80777n-30d.txt SCHWAB TAX-FREE BOND FUNDS SEMI-ANNUAL REPORT SCHWAB TAX-FREE BOND FUNDS February 28, 2002 Semiannual Report [PHOTO OF WOMAN AND MAN CONVERSING] 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 [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 TAX-FREE BOND FUNDS SEMIANNUAL REPORT September 1, 2001 - February 28, 2002 1 Market Overview 5 Schwab Short/Intermediate Tax-Free Bond Fund 19 Schwab Long-Term Tax-Free Bond Fund 31 Schwab California Short/Intermediate Tax-Free Bond Fund 44 Schwab California Long-Term Tax-Free Bond Fund 58 Financial Notes --------------------------------------------------------------------------- 61 HOW TO READ THIS REPORT An illustrated guide to the financials, along with a glossary. MARKET OVERVIEW ECONOMY APPEARS TO BE RECOVERING FROM RECESSION. [PHOTO OF MANUFACTURING WORKER] 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. 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 Aggregate MSCI EAFE Russell 2000 S&P 500 3 Month Bond Index Index Small-Cap Index Index T-Bill 31-Aug-01 0.00 0.00 0.00 0.00 0.00 7-Sep-01 0.14 -5.00 -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 1.80 -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 0.80 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 0.90 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 2.50 -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 2.80 -8.16 0.78 -2.04 1.16 22-Feb-02 3.00 -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 3.80 Q2 1992 3.80 Q3 1992 3.10 Q4 1992 5.40 Q1 1993 -0.10 Q2 1993 2.50 Q3 1993 1.80 Q4 1993 6.20 Q1 1994 3.40 Q2 1994 5.70 Q3 1994 2.20 Q4 1994 5.00 Q1 1995 1.50 Q2 1995 0.80 Q3 1995 3.10 Q4 1995 3.20 Q1 1996 2.90 Q2 1996 6.80 Q3 1996 2.00 Q4 1996 4.60 Q1 1997 4.40 Q2 1997 5.90 Q3 1997 4.20 Q4 1997 2.80 Q1 1998 6.10 Q2 1998 2.20 Q3 1998 4.10 Q4 1998 6.70 Q1 1999 3.10 Q2 1999 1.70 Q3 1999 4.70 Q4 1999 8.30 Q1 2000 2.30 Q2 2000 5.70 Q3 2000 1.30 Q4 2000 1.90 Q1 2001 1.30 Q2 2001 0.30 Q3 2001 -1.30 Q4 2001 1.70
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 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. Inflation doesn't appear to be a problem for now. But convincing evidence of an economic revival could lead to interest rate increases. [PHOTO OF PERSON USING FORKLIFT] 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]
Unemployment Rate Dec-91 7.3 Jan-92 7.3 Feb-92 7.4 Mar-92 7.4 Apr-92 7.4 May-92 7.6 Jun-92 7.8 Jul-92 7.7 Aug-92 7.6 Sep-92 7.6 Oct-92 7.3 Nov-92 7.4 Dec-92 7.4 Jan-93 7.3 Feb-93 7.1 Mar-93 7.0 Apr-93 7.1 May-93 7.1 Jun-93 7.0 Jul-93 6.9 Aug-93 6.8 Sep-93 6.7 Oct-93 6.8 Nov-93 6.6 Dec-93 6.5 Jan-94 6.8 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 6.0 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 5.0 May-97 4.7 Jun-97 5.0 Jul-97 4.7 Aug-97 4.9 Sep-97 4.7 Oct-97 4.7 Nov-97 4.6 Dec-97 4.7 Jan-98 4.5 Feb-98 4.6 Mar-98 4.6 Apr-98 4.3 May-98 4.3 Jun-98 4.5 Jul-98 4.5 Aug-98 4.5 Sep-98 4.5 Oct-98 4.5 Nov-98 4.4 Dec-98 4.3 Jan-99 4.3 Feb-99 4.4 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 4.0 Feb-00 4.1 Mar-00 4.1 Apr-00 3.9 May-00 4.1 Jun-00 4.0 Jul-00 4.0 Aug-00 4.1 Sep-00 3.9 Oct-00 3.9 Nov-00 4.0 Dec-00 4.0 Jan-01 4.2 Feb-01 4.2 Mar-01 4.3 Apr-01 4.5 May-01 4.4 Jun-01 4.5 Jul-01 4.5 Aug-01 4.9 Sep-01 4.9 Oct-01 5.4 Nov-01 5.6 Dec-01 5.8 Jan-02 5.6 Feb-02 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]
Consumer Employment Date Price Index Qtr Cost Index Dec-91 3.1 Dec-91 4.3 Jan-92 2.6 Mar-92 4.0 Feb-92 2.8 Jun-92 3.6 Mar-92 3.2 Sep-92 3.5 Apr-92 3.2 Dec-92 3.5 May-92 3.0 Mar-93 3.5 Jun-92 3.1 Jun-93 3.6 Jul-92 3.2 Sep-93 3.6 Aug-92 3.1 Dec-93 3.5 Sep-92 3.0 Mar-94 3.2 Oct-92 3.2 Jun-94 3.2 Nov-92 3.0 Sep-94 3.2 Dec-92 2.9 Dec-94 3.0 Jan-93 3.3 Mar-95 2.9 Feb-93 3.2 Jun-95 2.9 Mar-93 3.1 Sep-95 2.7 Apr-93 3.2 Dec-95 2.7 May-93 3.2 Mar-96 2.8 Jun-93 3.0 Jun-96 2.9 Jul-93 2.8 Sep-96 2.8 Aug-93 2.8 Dec-96 2.9 Sep-93 2.7 Mar-97 2.9 Oct-93 2.8 Jun-97 2.8 Nov-93 2.7 Sep-97 3.0 Dec-93 2.7 Dec-97 3.3 Jan-94 2.5 Mar-98 3.3 Feb-94 2.5 Jun-98 3.5 Mar-94 2.5 Sep-98 3.7 Apr-94 2.4 Dec-98 3.4 May-94 2.3 Mar-99 3.0 Jun-94 2.5 Jun-99 3.2 Jul-94 2.8 Sep-99 3.1 Aug-94 2.9 Dec-99 3.4 Sep-94 3.0 Mar-00 4.3 Oct-94 2.6 Jun-00 4.4 Nov-94 2.7 Sep-00 4.3 Dec-94 2.7 Dec-00 4.1 Jan-95 2.8 Mar-01 4.1 Feb-95 2.9 Jun-01 3.9 Mar-95 2.9 Sep-01 4.1 Apr-95 3.1 Dec-01 4.1 May-95 3.2 Jun-95 3.0 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 3.0 Aug-96 2.9 Sep-96 3.0 Oct-96 3.0 Nov-96 3.3 Dec-96 3.3 Jan-97 3.0 Feb-97 3.0 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 2.0 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 3.0 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 Jan-01 3.7 Feb-01 3.5 Mar-01 2.9 Apr-01 3.3 May-01 3.6 Jun-01 3.2 Jul-01 2.7 Aug-01 2.7 Sep-01 2.6 Oct-02 2.1 Nov-01 1.9 Dec-01 1.6 Jan-02 1.1 Feb-02 1.1
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 U.S. 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 MUNICIPAL SECURITIES Effective yields of five-year and 30-year municipal bonds For both short- and long-term muni bonds, falling interest rates and strong demand drove yields down and prices up during the report period. [LINE CHART]
Bond Buyer Muni 5-Year 40 Index AAA GO 31-Dec-91 6.65 4.88 31-Jan-92 6.77 4.84 28-Feb-92 6.85 4.95 31-Mar-92 6.88 5.20 30-Apr-92 6.83 5.25 29-May-92 6.68 5.02 30-Jun-92 6.51 4.81 31-Jul-92 6.11 4.31 31-Aug-92 6.48 4.55 30-Sep-92 6.57 4.58 30-Oct-92 6.98 4.68 30-Nov-92 6.50 4.42 31-Dec-92 6.45 4.49 29-Jan-93 6.34 4.49 26-Feb-93 5.90 4.02 31-Mar-93 6.09 4.27 30-Apr-93 6.03 4.19 31-May-93 5.99 4.23 30-Jun-93 5.79 4.02 30-Jul-93 5.87 4.11 31-Aug-93 5.61 3.92 30-Sep-93 5.51 3.71 29-Oct-93 5.59 3.73 30-Nov-93 5.90 3.97 31-Dec-93 5.60 3.83 31-Jan-94 5.51 3.70 28-Feb-94 6.09 4.02 31-Mar-94 7.04 4.71 29-Apr-94 7.02 4.82 31-May-94 6.89 4.77 30-Jun-94 6.92 4.83 29-Jul-94 6.62 4.69 31-Aug-94 6.55 4.71 30-Sep-94 6.93 4.92 31-Oct-94 7.36 5.11 30-Nov-94 7.73 5.37 30-Dec-94 7.28 5.30 31-Jan-95 6.86 5.12 28-Feb-95 6.47 5.01 31-Mar-95 6.40 4.83 28-Apr-95 6.43 4.84 31-May-95 6.04 4.48 30-Jun-95 6.37 4.57 31-Jul-95 6.38 4.40 31-Aug-95 6.30 4.31 29-Sep-95 6.23 4.30 31-Oct-95 5.99 4.23 30-Nov-95 5.74 4.15 29-Dec-95 5.65 4.14 31-Jan-96 5.70 4.09 29-Feb-96 5.99 4.09 29-Mar-96 6.44 4.38 30-Apr-96 6.50 4.49 31-May-96 6.45 4.64 28-Jun-96 6.26 4.61 31-Jul-96 6.18 4.56 30-Aug-96 6.21 4.57 30-Sep-96 6.00 4.48 31-Oct-96 5.94 4.40 29-Nov-96 5.73 4.18 31-Dec-96 5.87 4.25 31-Jan-97 6.02 4.41 28-Feb-97 5.96 4.34 31-Mar-97 6.26 4.61 30-Apr-97 6.15 4.67 30-May-97 5.88 4.60 30-Jun-97 5.79 4.41 31-Jul-97 5.38 4.10 29-Aug-97 5.73 4.34 30-Sep-97 5.61 4.21 31-Oct-97 5.59 4.16 28-Nov-97 5.50 4.17 31-Dec-97 5.35 4.06 30-Jan-98 5.30 4.04 27-Feb-98 5.44 4.03 31-Mar-98 5.46 4.09 30-Apr-98 5.68 4.23 29-May-98 5.34 4.09 30-Jun-98 5.36 4.10 31-Jul-98 5.41 4.07 31-Aug-98 5.19 3.87 30-Sep-98 5.09 3.77 30-Oct-98 5.34 3.70 30-Nov-98 5.25 3.73 31-Dec-98 5.34 3.77 29-Jan-99 5.21 3.63 26-Feb-99 5.33 3.70 31-Mar-99 5.39 3.86 30-Apr-99 5.47 3.80 31-May-99 5.62 4.00 30-Jun-99 5.91 4.39 30-Jul-99 5.94 4.31 31-Aug-99 6.21 4.39 -Sep-99 6.31 4.45 29-Oct-99 6.53 4.62 30-Nov-99 6.42 4.55 31-Dec-99 6.55 4.72 31-Jan-00 6.68 4.94 29-Feb-00 6.43 4.94 31-Mar-00 6.09 4.85 28-Apr-00 6.21 4.95 31-May-00 6.46 5.11 30-Jun-00 6.02 4.80 31-Jul-00 5.84 4.62 31-Aug-00 5.75 4.47 30-Sep-00 5.93 4.54 31-Oct-00 5.80 4.49 30-Nov-00 5.79 4.46 31-Dec-00 5.40 4.23 31-Jan-01 5.37 3.85 28-Feb-01 5.39 3.82 30-Mar-01 5.39 3.75 30-Apr-01 5.77 3.95 31-May-01 5.61 3.79 29-Jun-01 5.57 3.74 31-Jul-01 5.33 3.59 31-Aug-01 5.11 3.38 30-Sep-01 5.31 3.31 31-Oct-01 5.26 3.14 30-Nov-01 5.45 3.44 31-Dec-01 5.64 3.76 31-Jan-02 5.45 3.45 28-Feb-02 5.33 3.29
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. YIELD ADVANTAGE OF MUNIS OVER TREASURIES Difference in yields for five-year bonds for the top federal and combined federal/CA tax brackets On an after-tax basis, short-term municipal bonds continued to outperform Treasuries during the report period for investors in the top two tax brackets. [LINE CHART]
Fed - 38.6% Combined - 44.31% Bracket Bracket 31-Dec-91 1.24 1.58 31-Jan-92 0.89 1.26 28-Feb-92 0.92 1.29 31-Mar-92 0.95 1.34 30-Apr-92 1.02 1.42 29-May-92 0.97 1.34 30-Jun-92 0.96 1.32 31-Jul-92 0.74 1.07 31-Aug-92 1.13 1.45 30-Sep-92 1.31 1.62 30-Oct-92 1.07 1.40 30-Nov-92 0.60 0.96 31-Dec-92 0.81 1.15 29-Jan-93 1.08 1.40 26-Feb-93 0.82 1.12 31-Mar-93 1.05 1.35 30-Apr-93 1.05 1.35 31-May-93 0.93 1.24 30-Jun-93 0.92 1.21 30-Jul-93 0.95 1.24 31-Aug-93 0.98 1.25 30-Sep-93 0.78 1.05 29-Oct-93 0.75 1.03 30-Nov-93 0.80 1.10 31-Dec-93 0.63 0.93 31-Jan-94 0.62 0.90 28-Feb-94 0.60 0.92 31-Mar-94 0.89 1.24 29-Apr-94 0.75 1.12 31-May-94 0.62 1.00 30-Jun-94 0.56 0.96 29-Jul-94 0.56 0.94 31-Aug-94 0.53 0.92 30-Sep-94 0.45 0.87 31-Oct-94 0.51 0.94 30-Nov-94 0.59 1.03 30-Dec-94 0.49 0.94 31-Jan-95 0.51 0.94 28-Feb-95 0.69 1.09 31-Mar-95 0.49 0.89 28-Apr-95 0.62 1.01 31-May-95 0.76 1.11 30-Jun-95 0.91 1.25 31-Jul-95 0.62 0.97 31-Aug-95 0.58 0.93 29-Sep-95 0.61 0.95 31-Oct-95 0.66 0.99 30-Nov-95 0.76 1.08 29-Dec-95 0.84 1.14 31-Jan-96 0.88 1.17 29-Feb-96 0.57 0.90 29-Mar-96 0.64 0.99 30-Apr-96 0.55 0.92 31-May-96 0.57 0.95 28-Jun-96 0.64 1.01 31-Jul-96 0.53 0.90 30-Aug-96 0.44 0.82 30-Sep-96 0.52 0.88 31-Oct-96 0.67 1.02 29-Nov-96 0.60 0.93 31-Dec-96 0.44 0.79 31-Jan-97 0.57 0.93 28-Feb-97 0.42 0.78 31-Mar-97 0.46 0.85 30-Apr-97 0.63 1.01 30-May-97 0.61 0.98 30-Jun-97 0.49 0.86 31-Jul-97 0.48 0.81 29-Aug-97 0.52 0.87 30-Sep-97 0.53 0.88 31-Oct-97 0.66 0.98 28-Nov-97 0.58 0.92 31-Dec-97 0.55 0.88 30-Jan-98 0.74 1.04 27-Feb-98 0.60 0.92 31-Mar-98 0.64 0.96 30-Apr-98 0.77 1.09 29-May-98 0.68 1.00 30-Jun-98 0.74 1.06 31-Jul-98 0.69 1.01 31-Aug-98 0.93 1.20 30-Sep-98 1.18 1.42 30-Oct-98 1.10 1.34 30-Nov-98 0.98 1.23 31-Dec-98 0.98 1.24 29-Jan-99 0.84 1.10 26-Feb-99 0.49 0.79 31-Mar-99 0.73 1.02 30-Apr-99 0.60 0.90 31-May-99 0.57 0.89 30-Jun-99 0.92 1.25 30-Jul-99 0.75 1.08 31-Aug-99 0.79 1.12 30-Sep-99 0.92 1.25 29-Oct-99 0.97 1.31 30-Nov-99 0.80 1.15 31-Dec-99 0.82 1.19 31-Jan-00 0.84 1.22 29-Feb-00 0.89 1.27 31-Mar-00 0.97 1.33 28-Apr-00 0.94 1.31 31-May-00 1.11 1.48 30-Jun-00 1.00 1.36 31-Jul-00 0.85 1.20 31-Aug-00 0.80 1.14 30-Sep-00 0.95 1.28 31-Oct-00 0.92 1.25 30-Nov-00 1.13 1.44 31-Dec-00 1.17 1.46 31-Jan-01 0.92 1.19 28-Feb-01 0.96 1.22 30-Mar-01 0.95 1.21 30-Apr-01 0.95 1.23 31-May-01 0.77 1.05 29-Jun-01 0.70 0.98 31-Jul-01 0.81 1.07 31-Aug-01 0.69 0.94 30-Sep-01 0.97 1.19 31-Oct-01 1.01 1.20 30-Nov-01 0.94 1.18 31-Dec-01 1.12 1.36 31-Jan-02 0.77 1.02 28-Feb-02 0.72 0.96
This chart shows how much more the average five-year muni yielded than the average five-year Treasury after federal (or combined California and federal) income tax. For example, if the line for the 38.6% bracket stood at 1% on a given date, it would mean that five-year munis were effectively yielding 1% more than five-year Treasuries for an investor in the 38.6% tax bracket. Data source: Bloomberg L.P. - -------------------------------------------------------------------------------- 4 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND [PHOTO OF JOANNE LARKIN] " With short-term interest rates falling and prices for short-term securities rising, the fund was able to outperform its peer group." Portfolio Manager Joanne Larkin JOANNE LARKIN, a vice president of the investment adviser, has had overall management responsibility for the fund since its inception. Prior to joining the firm in 1992, she worked for more than eight years in fixed income asset management and research. TICKER SYMBOL SWITX [GRAPHIC]
INTEREST RATE SENSITIVITY 1, 2 CREDIT QUALITY 1 SHORT MEDIUM LONG HIGH /X/ / / / / MEDIUM / / / / / / LOW / / / / / /
Individuals in higher tax brackets who are seeking tax-free income along with the potential for lower volatility may want to consider this fund. THE FUND SEEKS HIGH CURRENT INCOME THAT IS EXEMPT FROM FEDERAL INCOME TAX, CONSISTENT WITH CAPITAL PRESERVATION. 3 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. MUNI YIELDS DECLINED THROUGHOUT THE PERIOD, ALTHOUGH NOT AS SEVERELY AS THOSE OF TREASURIES. With yields at low levels, muni issuers were very active, seeking to lock in lower financing rates. The fund's share price did fluctuate with the volatility in bond yields and prices, although the net change for the period was relatively small. THE FUND MAINTAINED A RELATIVELY LONG AVERAGE MATURITY DURING THE REPORT PERIOD. We sold bond issues before they were called by issuers in response to falling interest rates. This helped us avoid having to reinvest the capital from these bonds at historically low rates. The fund also continued to focus on bonds in the two highest rating categories. 1 Source: Morningstar, Inc. 2 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 4.5 years; Medium, more than 4.5 years to less than seven years; Long, seven years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower. 3 The income you receive from the fund may be subject to state and local income taxes. A portion of income also may be subject to the alternative minimum tax (AMT). 5 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND PERFORMANCE AVERAGE ANNUAL TOTAL RETURNS as of 2/28/02 This chart compares performance of the fund with the Lehman Brothers 3-Year Municipal Bond Index and the Morningstar Municipal Short Bond Fund category. As of the end of the report period, the fund's 30-day SEC yield was 2.84% 1 and its taxable-equivalent yield was 4.63%. 1,2 [BAR GRAPH]
6 MONTHS 4 1 YEAR 5 YEAR SINCE INCEPTION: 4/21/93 FUND 1 1.83% 5.18% 4.60% 4.50% LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX 2.78% 6.71% 5.31% 5.05% PEER GROUP AVERAGE 3 1.69% 4.95% 4.40% --
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 the Lehman Brothers 3-Year Municipal Bond Index. [LINE GRAPH]
Lehman Brothers 3-Year Municipal Fund Bond Index 21-Apr-93 10,000 10,000 29-Apr-93 9,990 9,993 30-May-93 10,038 10,020 29-Jun-93 10,129 10,085 30-Jul-93 10,151 10,090 30-Aug-93 10,283 10,184 29-Sep-93 10,344 10,228 10-Oct-93 10,366 10,250 29-Nov-93 10,326 10,237 30-Dec-93 10,462 10,344 30-Jan-94 10,567 10,428 27-Feb-94 10,412 10,331 30-Mar-94 10,218 10,206 29-Apr-94 10,280 10,267 30-May-94 10,323 10,315 29-Jun-94 10,312 10,318 30-Jul-94 10,407 10,403 30-Aug-94 10,429 10,440 29-Sep-94 10,377 10,414 30-Oct-94 10,317 10,389 29-Nov-94 10,245 10,370 30-Dec-94 10,346 10,415 30-Jan-95 10,445 10,501 27-Feb-95 10,563 10,612 30-Mar-95 10,655 10,707 29-Apr-95 10,691 10,743 30-May-95 10,881 10,908 29-Jun-95 10,884 10,934 30-Jul-95 10,987 11,050 30-Aug-95 11,079 11,136 29-Sep-95 11,115 11,167 30-Oct-95 11,175 11,221 29-Nov-95 11,255 11,293 30-Dec-95 11,305 11,340 30-Jan-96 11,383 11,429 28-Feb-96 11,364 11,431 30-Mar-96 11,313 11,403 29-Apr-96 11,306 11,417 30-May-96 11,312 11,427 29-Jun-96 11,371 11,496 30-Jul-96 11,443 11,559 30-Aug-96 11,447 11,577 29-Sep-96 11,519 11,647 30-Oct-96 11,605 11,729 29-Nov-96 11,712 11,838 30-Dec-96 11,705 11,844 30-Jan-97 11,742 11,896 27-Feb-97 11,801 11,954 30-Mar-97 11,737 11,892 29-Apr-97 11,776 11,943 30-May-97 11,876 12,040 29-Jun-97 11,938 12,111 30-Jul-97 12,096 12,255 30-Aug-97 12,065 12,230 29-Sep-97 12,141 12,319 30-Oct-97 12,194 12,373 29-Nov-97 12,222 12,409 30-Dec-97 12,310 12,493 30-Jan-98 12,384 12,575 27-Feb-98 12,397 12,602 30-Mar-98 12,417 12,622 29-Apr-98 12,386 12,604 30-May-98 12,502 12,722 29-Jun-98 12,543 12,765 30-Jul-98 12,574 12,811 30-Aug-98 12,689 12,935 29-Sep-98 12,793 13,018 30-Oct-98 12,837 13,080 29-Nov-98 12,862 13,112 30-Dec-98 12,898 13,143 30-Jan-99 13,022 13,263 27-Feb-99 12,997 13,277 30-Mar-99 13,004 13,289 29-Apr-99 13,033 13,330 30-May-99 13,000 13,312 29-Jun-99 12,876 13,232 30-Jul-99 12,946 13,297 30-Aug-99 12,925 13,313 29-Sep-99 12,967 13,363 30-Oct-99 12,922 13,365 29-Nov-99 12,991 13,423 30-Dec-99 12,964 13,402 30-Jan-00 12,952 13,426 28-Feb-00 12,982 13,468 30-Mar-00 13,108 13,536 29-Apr-00 13,073 13,539 30-May-00 13,053 13,553 29-Jun-00 13,283 13,725 30-Jul-00 13,382 13,836 30-Aug-00 13,507 13,941 30-Sep-00 13,512 13,946 31-Oct-00 13,586 14,024 30-Nov-00 13,643 14,080 31-Dec-00 13,831 14,238 31-Jan-01 14,006 14,453 28-Feb-01 14,047 14,509 31-Mar-01 14,136 14,610 30-Apr-01 14,057 14,589 31-May-01 14,172 14,721 30-Jun-01 14,243 14,788 31-Jul-01 14,357 14,907 31-Aug-01 14,510 15,062 30-Sep-01 14,552 15,138 31-Oct-01 14,649 15,236 30-Nov-01 14,533 15,189 31-Dec-01 14,442 15,174 31-Jan-02 14,638 15,366 28-Feb-02 14,775 15,482
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 index is unmanaged, and you cannot invest in it 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 Fund yield and returns reflect expense reductions by the fund's investment adviser (CSIM) and transfer agent and shareholder services agent (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. 2 This is the taxable-equivalent 30-day SEC yield for a hypothetical investor in the highest federal tax bracket (38.6%). Your tax rate may be different. 3 Source: Morningstar, Inc. As of 2/28/02, the total number of funds in the Municipal Short Bond Fund category for the six-month, one- and five-year periods was 113, 112 and 83, respectively. 4 Not annualized. 6 FUND FACTS TOP TEN HOLDINGS 1 as of 2/28/02
PERCENTAGE OF SECURITY RATE MATURITY DATE INVESTMENTS (1) WILLIAM S. HART UNION HIGH SCHOOL DISTRICT School Facilities Bridge Funding Program 2.40% 01/15/04 4.2% (2) PHILADELPHIA Water & Wastewater Revenue, Series 2001B 5.50% 11/01/11 3.8% (3) WASHINGTON STATE PUBLIC POWER SUPPLY SYSTEM Nuclear Project No. 2, Revenue, Series 1993A 5.70% 07/01/08 3.7% (4) WASHINGTON CONVENTION CENTER AUTHORITY Dedicated Tax Senior Lien Revenue 5.00% 10/01/06 3.7% (5) CLARKSVILLE TENNESSEE PUBLIC BUILDING AUTHORITY Pooled Financing Revenue 1.30% 03/01/02 3.4% (6) OHIO BUILDING AUTHORITY Administrative Building Fund Project, Revenue, Series 1998A 5.13% 10/01/06 3.3% (7) KENTUCKY STATE PROPERTY & BUILDINGS COMMISSION Project No. 71, Revenue 5.50% 08/01/09 3.3% (8) PUERTO RICO MUNICIPAL FINANCE AGENCY General Obligation, Series 1999A 5.50% 08/01/08 2.8% (9) OHIO HIGHER EDUCATION Capital Facilities Project, Revenue, Series II-A 5.50% 12/01/08 2.8% (10) NORTH CAROLINA MUNICIPAL POWER AGENCY NO. 1 Catawaba Electric, Revenue, Series 1999A 5.75% 01/01/09 2.8% - ------------------------------------------------------------------------------------------------------------ TOTAL 33.8%
DIVIDENDS PAID in each fiscal year [BAR CHART]
INCOME DIVIDENDS PER SHARE 1993 2 0.13 1994 0.37 1995 0.4 1996 0.41 1997 0.41 1998 0.42 1999 0.4 2000 0.41 2001 0.39 2002 3 0.17
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 4/21/93 through 8/31/93. 3 For the six-month period ended 2/28/02. 7 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND 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. 100.0% Municipal Bonds BY CREDIT QUALITY 1 [PIE CHART] 1. 71.8% AAA 2. 22.0% AA 3. 4.4% A 4. 1.8% Unrated Securities
BY MATURITY [PIE CHART] 1. 16.4% 0-6 Months 2. 21.5% 7-36 Months 3. 14.4% 37-60 Months 4. 47.7% More than 60 Months
STATISTICS as of 2/28/02
PEER GROUP FUND AVERAGE 2 ============================================================== Number of Holdings 65 150 - -------------------------------------------------------------- 12-Month Yield 3.49% 3.63% - -------------------------------------------------------------- Weighted Average Rate 5.00% 5.16% - -------------------------------------------------------------- Weighted Average Maturity 4.6 yrs N/A - -------------------------------------------------------------- Weighted Average Duration 3.4 yrs 2.9 yrs - -------------------------------------------------------------- Weighted Average Credit Quality AAA AA - --------------------------------------------------------------
EXPENSE RATIO as of 2/28/02 [BAR GRAPH] FUND 0.49% PEER GROUP AVERAGE 0.88% 2
1 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 2 Source: Morningstar, Inc. As of 2/28/02, there were 115 funds in the Municipal Short Bond Fund category. 8 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND 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 ($) =================================================================================================================== Net asset value at beginning of period 10.42 10.08 10.05 10.26 10.16 10.04 ---------------------------------------------------------------- Income from investment operations: Net investment income 0.18 0.39 0.41 0.40 0.42 0.41 Net realized and unrealized gains or losses 0.01 0.34 0.03 (0.21) 0.10 0.12 ---------------------------------------------------------------- Total income from investment operations 0.19 0.73 0.44 0.19 0.52 0.53 Less distributions: Dividends from net investment income (0.17) (0.39) (0.41) (0.40) (0.42) (0.41) ---------------------------------------------------------------- Net asset value at end of period 10.44 10.42 10.08 10.05 10.26 10.16 ================================================================ Total return (%) 1.83 1 7.42 4.50 1.86 5.17 5.40 RATIOS/SUPPLEMENTAL DATA (%) =================================================================================================================== Ratio of net operating expenses to average net assets 0.49 2 0.49 0.49 3 0.49 0.49 0.49 Expense reductions reflected in above ratio 0.22 2 0.24 0.25 0.32 0.36 0.47 Ratio of net investment income to average net assets 3.37 2 3.84 4.11 3.87 3.99 4.08 Portfolio turnover rate 19 14 11 8 22 20 Net assets, end of period ($ x 1,000,000) 116 109 76 87 68 54
1 Not annualized. 2 Annualized. 3 Would have been 0.50% if non-routine expenses (proxy fees) had been included. See the Financial Notes, which are integral to this information. 9 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND 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 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 + Credit-enhanced security o Certificate of Participation = 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] 100.0% MUNICIPAL BONDS Market Value: $118,004 Cost: $115,503 OTHER INVESTMENT COMPANIES Market Value: $1 Cost: $1 - ------------------------------------ 100.0% TOTAL INVESTMENTS Market Value: $118,005 Cost: $115,504
MUNICIPAL BONDS 100.0% of investments
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) FIXED-RATE OBLIGATIONS 85.4% ============================================================================================================= ARIZONA 4.8% + MARICOPA COUNTY ELEMENTARY SCHOOL DISTRICT NO. 068 General Obligation, Series 1994A 6.80% 07/01/12 2,000 2,226 + MARICOPA COUNTY UNIFIED SCHOOL DISTRICT NO. 93 Cave Creek Project General Obligation, Series 1997A 5.00% 07/01/03 2,325 2,425 PHOENIX CIVIC IMPROVEMENT CORP. Airport Project Senior Lien Revenue Refunding 5.00% 07/01/04 1,000 1,053 --------- 5,704 CALIFORNIA 6.0% ALAMEDA PUBLIC FINANCING AUTHORITY Revenue 4.95% 09/02/07 2,065 2,082 +o(1) WILLIAM S. HART UNION HIGH SCHOOL DISTRICT School Facilities Bridge Funding Program 2.40% 01/15/04 5,000 4,991 --------- 7,073 COLORADO 2.5% GRAND JUNCTION Dayton Hudson Corp. Project Industrial Development Revenue Refunding 5.25% 05/01/03 2,000 2,049
See the Financial Notes, which are integral to this information. 10
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) + SUPERIOR DISTRICT NO. 2 Metropolitan Revenue Refunding 4.63% 12/01/13 920 940 --------- 2,989 DISTRICT OF COLUMBIA 3.7% +(4) WASHINGTON CONVENTION CENTER AUTHORITY Dedicated Tax Senior Lien Revenue 5.00% 10/01/06 4,000 4,318 FLORIDA 1.1% +o ORANGE COUNTY SCHOOL BOARD Series 1997A 4.80% 08/01/02 1,300 1,318 GEORGIA 1.8% PRIVATE COLLEGES & UNIVERSITIES FACILITIES AUTHORITY Emory University Project Revenue, Series 1992C 6.00% 10/01/05 2,000 2,085 ILLINOIS 0.9% + CHICAGO PUBLIC BUILDING COMMISSION Building Revenue, Series 1999C 5.50% 02/01/06 1,000 1,086 INDIANA 2.9% + LAKE COUNTY INDUSTRIAL BUILDING CORP First Mortgage Revenue 5.25% 08/01/09 2,040 2,214 + MONROE COUNTY INDUSTRIAL HOSPITAL AUTHORITY Bloomington Hospital, Inc. Project Hospital Revenue Refunding 4.60% 05/01/04 1,105 1,157 --------- 3,371 IOWA 0.6% + CEDAR RAPIDS HOSPITAL FACILITY St. Luke's Methodist Hospital Project Revenue, Series 1993 6.13% 08/15/03 600 650 KENTUCKY 3.3% (7) KENTUCKY STATE PROPERTY & BUILDINGS COMMISSION Project No. 71 Revenue 5.50% 08/01/09 3,500 3,864 LOUISIANA 1.4% + NEW ORLEANS General Obligation Refunding, Series 1998B 4.50% 12/01/05 1,600 1,699 MASSACHUSETTS 2.3% MASSACHUSETTS General Obligation Refunding, Series 2001A 5.50% 01/01/11 2,500 2,763
See the Financial Notes, which are integral to this information. 11 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) MICHIGAN 1.2% + DETROIT SCHOOL DISTRICT General Obligation, Series 1998B 5.00% 05/01/04 1,390 1,467 NEBRASKA 2.2% + AMERICAN PUBLIC ENERGY AGENCY Nebraska Public Gas Agency Project Gas Supply Revenue, Series 1998C 4.00% 09/01/07 500 499 + NEBRASKA PUBLIC POWER DISTRICT Revenue, Series 1998A 5.25% 01/01/05 2,000 2,133 --------- 2,632 NEVADA 1.4% HENDERSON LOCAL IMPROVEMENT DISTRICT NO. T-10 Special Assessment, Series 2001A 4.63% 08/01/11 1,600 1,647 NEW JERSEY 0.9% + BRICK TOWNSHIP MUNICIPAL UTILITIES AUTHORITY Revenue, Series 1996 5.50% 12/01/03 1,000 1,065 NEW YORK 7.9% + FRANKLIN COUNTY General Obligation 4.25% 11/01/06 715 758 NEW YORK CITY General Obligation, Series 1994H 4.75% 03/15/07 3,000 3,140 General Obligation, Series 1997L 5.10% 08/01/02 800 811 NEW YORK CITY MUNICIPAL ASSISTANCE CORP Revenue, Series 1997L 5.50% 07/01/03 2,000 2,102 NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY Future Tax Secured Revenue, Series 1998B 5.25% 11/15/04 1,300 1,405 NEW YORK STATE URBAN DEVELOPMENT CORP Correctional Facility Service Contract Revenue, Series 1998A 5.00% 01/01/05 1,000 1,061 --------- 9,277 NORTH CAROLINA 4.6% + NORTH CAROLINA MUNICIPAL POWER AGENCY NO. 1 Catawaba Electric Revenue, Series 1995A 5.10% 01/01/07 2,000 2,134 (10) Revenue, Series 1999A 5.75% 01/01/09 3,000 3,307 --------- 5,441
See the Financial Notes, which are integral to this information. 12
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) OHIO 6.1% (6) OHIO BUILDING AUTHORITY Administrative Building Fund Project Revenue, Series 1998A 5.13% 10/01/06 3,580 3,888 (9) OHIO HIGHER EDUCATION Capital Facilities Project Revenue, Series II-A 5.50% 12/01/08 3,000 3,331 --------- 7,219 OREGON 2.5% +o= OREGON DEPARTMENT OF ADMINISTRATIVE SERVICES Series 2002C 5.00% 11/01/07 2,705 2,908 PENNSYLVANIA 4.8% + PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY Economic Development Revenue 7.00% 07/01/07 1,000 1,170 +(2) PHILADELPHIA Water & Wastewater Revenue, Series 2001B 5.50% 11/01/11 4,000 4,432 --------- 5,602 PUERTO RICO 2.8% +(8) PUERTO RICO MUNICIPAL FINANCE AGENCY General Obligation, Series 1999A 5.50% 08/01/08 3,000 3,345 SOUTH CAROLINA 2.6% + CHARLESTON COUNTY Care Alliance Health Services Revenue, Series 1999A 4.25% 08/15/07 3,000 3,097 TEXAS 4.8% + DENTON UTILITY SYSTEM Revenue Refunding & Improvement 5.00% 12/01/12 2,030 2,147 FORT WORTH Refunding & Improvement General Obligation 5.00% 03/01/10 1,090 1,157 HOUSTON PORT AUTHORITY Harris County Port Improvement Project General Obligation, Series 2001B 5.25% 10/01/10 2,205 2,354 --------- 5,658 WASHINGTON 10.5% + PORT OF SEATTLE Revenue, Series 1996B 5.50% 09/01/02 2,775 2,828 Passenger Facility Revenue, Series 1998B 5.00% 12/01/07 1,395 1,482 + SNOHOMISH COUNTY General Obligation Refunding 4.50% 12/01/12 1,920 1,936
See the Financial Notes, which are integral to this information. 13 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) +o WASHINGTON STATE DEPARTMENT OF ECOLOGY Refunding 4.75% 04/01/12 1,710 1,752 +(3) WASHINGTON STATE PUBLIC POWER SUPPLY SYSTEM Nuclear Project No. 2 Revenue, Series 1993A 5.70% 07/01/08 4,000 4,412 --------- 12,410 WISCONSIN 1.8% WISCONSIN HEALTH & EDUCATIONAL FACILITIES AUTHORITY + Aurora Medical Group, Inc. Project Revenue, Series 1996 4.90% 11/15/02 1,000 1,024 Carroll College, Inc. Project Revenue, Series 1998 4.80% 10/01/06 1,000 1,042 --------- 2,066 VARIABLE RATE OBLIGATIONS 14.6% ------------------------------------------------------------------------------------------------------------ ALASKA 2.5% + VALDEZ MARINE TERMINAL Exxon Pipeline Co. Project Revenue Refunding, Series 1993A 1.25% 03/01/02 700 700 Revenue Refunding, Series 1993B 1.25% 03/01/02 1,450 1,450 Revenue Refunding, Series 1993C 1.25% 03/01/02 850 850 --------- 3,000 CALIFORNIA 0.8% + WESTERN RIVERSIDE COUNTY REGIONAL WASTEWATER AUTHORITY Regulated Wastewater Treatment Revenue 1.30% 03/01/02 900 900 GEORGIA 0.1% + FULTON COUNTY RESIDENTIAL CARE FACILITIES Lenbrook Square Foundation Revenue Refunding 1.30% 02/28/02 100 100 MISSISSIPPI 1.3% + JACKSON COUNTY POLLUTION CONTROL Chevron U.S.A., Inc. Project Revenue Refunding 1.25% 03/01/02 1,500 1,500 NEW MEXICO 0.8% + FARMINGTON Arizona Public Service Co. Pollution Control Revenue Refunding, Series 1994A 1.30% 03/01/02 1,000 1,000 NEW YORK 1.1% + LONG ISLAND POWER AUTHORITY Electric System Revenue, Series 2 Subseries 2B 1.25% 03/01/02 1,300 1,300
See the Financial Notes, which are integral to this information. 14
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) OREGON 1.2% + OREGON ECONOMIC DEVELOPMENT AUTHORITY Newsprint Co. Project Revenue, Series 202 1.45% 03/01/02 1,400 1,400 TENNESSEE 3.4% +(5) CLARKSVILLE TENNESSEE PUBLIC BUILDING AUTHORITY Pooled Financing Revenue 1.30% 03/01/02 4,000 4,000 TEXAS 1.8% + GULF COAST WASTE DISPOSAL AUTHORITY Amoco Oil Project Pollution Control Revenue Refunding 1.25% 03/01/02 900 900 + LOWER NECHES VALLEY RIVER AUTHORITY ExxonMobil Project Revenue Refunding, Series 2001A 1.25% 03/01/02 1,300 1,300 --------- 2,200 WYOMING 1.6% + LINCOLN COUNTY ExxonMobil Project Pollution Control Revenue, Series 1987C 1.35% 03/01/02 50 50 + UINTA COUNTY Chevron USA, Inc. Project Pollution Control Revenue Refunding 1.25% 03/01/02 1,300 1,300 Pollution Control Revenue, Series 1992-E17 1.25% 03/01/02 500 500 --------- 1,850
OTHER INVESTMENT COMPANIES 0.0% of investments
MKT. VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) PROVIDENT INSTITUTIONAL FUNDS -- MUNI FUND PORTFOLIO 1,139 1
END OF PORTFOLIO HOLDINGS. For totals, please see the first page of holdings for this fund. See the Financial Notes, which are integral to this information. 15 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND -- FINANCIALS Statement of ASSETS AND LIABILITIES As of February 28, 2002; unaudited. All numbers x 1,000 except NAV. ASSETS - ----------------------------------------------------------------- Investments, at market value $ 118,005 a Receivables: Fund shares sold 136 Interest 1,159 Prepaid expenses + 21 ------------ TOTAL ASSETS 119,321 LIABILITIES - ----------------------------------------------------------------- Payables: Fund shares redeemed 168 Dividends to shareholders 87 Investments bought 2,912 Investment advisor and administrator fees 1 Transfer agent and shareholder service fees 4 Accrued expenses + 35 ------------ TOTAL LIABILITIES 3,207 NET ASSETS - ----------------------------------------------------------------- TOTAL ASSETS 119,321 TOTAL LIABILITIES - 3,207 ------------ NET ASSETS $ 116,114 NET ASSETS BY SOURCE Capital received from investors 114,145 Net investment income not yet distributed 51 b Net realized capital losses (583) Net unrealized capital gains 2,501 b
NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $116,114 11,121 $10.44 a The fund's amortized cost for these securities was $115,504. Not counting short-term obligations, the fund paid $21,764 for securities during the reporting period, and received $18,880 from securities it sold or that matured. This includes $39,850 in transactions with other SchwabFunds(R). b Beginning this year, the fund is required to recognize discount of fixed income securities as part of interest income resulting in the following reclassification: Net unrealized capital gains ($9) Reclassified as: Net investment income not yet distributed $9
FEDERAL TAX DATA COST BASIS OF PORTFOLIO $115,504 NET UNREALIZED GAINS AND LOSSES: Gains $ 2,584 Losses + (83) ---------- $ 2,501
UNUSED CAPITAL LOSSES:
Expires 08/31 of: Loss amount 2003 $ 108 2004 296 2009 + 146 ---------- $ 550 DEFERRED CAPITAL LOSSES $ 66
See the Financial Notes, which are integral to this information. 16 Statement of OPERATIONS For September 1, 2001 through February 28, 2002; unaudited. All numbers x 1,000. INVESTMENT INCOME - ------------------------------------------------------------- Interest $ 2,208 NET REALIZED GAINS - ------------------------------------------------------------- Net realized gains on investments sold 34 NET UNREALIZED LOSSES - ------------------------------------------------------------- Net unrealized losses on investments (128) EXPENSES - ------------------------------------------------------------- Investment adviser and administrator fees 171 a Transfer agent and shareholder service fees 143 b Trustees' fees 6 c Custodian and portfolio accounting fees 36 Professional fees 12 Registration fees 18 Shareholder reports 14 Other expenses + 7 ----------- Total expenses 407 Expense reduction - 127 d ----------- NET EXPENSES 280 INCREASE IN NET ASSETS FROM OPERATIONS - ------------------------------------------------------------- TOTAL INVESTMENT INCOME 2,208 NET EXPENSES - 280 ----------- NET INVESTMENT INCOME 1,928 NET REALIZED GAINS 34 e NET UNREALIZED LOSSES + (128) e ----------- INCREASE IN NET ASSETS FROM OPERATIONS $ 1,834
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 0.49% 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 $94. See the Financial Notes, which are integral to this information. 17 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND -- FINANCIALS 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 $1,928 $3,393 Net realized gains or losses 34 (66) Net unrealized gains or losses + (128) 3,074 ---------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 1,834 6,401 DISTRIBUTIONS PAID - --------------------------------------------------------------------------- Dividends from net investment income $1,858 $3,399
TRANSACTIONS IN FUND SHARES - --------------------------------------------------------------------------- 9/1/01-2/28/02 9/1/00-8/31/01 QUANTITY VALUE QUANTITY VALUE Shares sold 3,828 $ 39,865 4,579 $ 46,950 Shares reinvested 128 1,330 236 2,418 Shares redeemed + (3,317) (34,313) (1,893) (19,359) --------------------------------------------------- NET INCREASE 639 $ 6,882 2,922 $ 30,009
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 10,482 $109,256 7,560 $ 76,245 Total increase + 639 6,858 2,922 33,011 a --------------------------------------------------- END OF PERIOD 11,121 $116,114 10,482 $109,256 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 $51 at the end of the current period and distributions in excess of net investment income in the amount of $28 at the end of the prior period. See the Financial Notes, which are integral to this information. 18 SCHWAB LONG-TERM TAX-FREE BOND FUND [PHOTO OF JOANNE LARKIN] "Despite the market volatility, the fund performed well relative to its peer group." Portfolio Manager Joanne Larkin JOANNE LARKIN, a vice president of the investment adviser, has had overall management responsibility for the fund since its inception. Prior to joining the firm in 1992, she worked for more than eight years in fixed income asset management and research. TICKER SYMBOL SWNTX [GRAPHIC]
INTEREST RATE SENSITIVITY 1,2 CREDIT QUALITY 1 SHORT MEDIUM LONG HIGH / / / / /X/ MEDIUM / / / / / / LOW / / / / / /
This fund is designed for individuals in higher tax brackets who are interested in high current tax-free income and can accept a higher degree of risk to their investment. THE FUND SEEKS HIGH CURRENT INCOME THAT IS EXEMPT FROM FEDERAL INCOME TAX, CONSISTENT WITH CAPITAL PRESERVATION. 3 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. MUNI YIELDS DECLINED THROUGHOUT THE PERIOD, ALTHOUGH NOT AS SEVERELY AS THOSE OF TREASURIES. With yields at low levels, muni issuers were very active, seeking to lock in lower financing rates. The fund's share price did fluctuate with the volatility in bond yields and prices, although the net change for the period was relatively small. THE FUND MAINTAINED A RELATIVELY LONG AVERAGE MATURITY DURING THE REPORT PERIOD. We sold bond issues before they were called by issuers in response to falling interest rates. This helped us avoid having to reinvest the capital from these bonds at historically low rates. The fund also continued to focus on bonds in the two highest rating categories. 1 Source: Morningstar, Inc. 2 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 4.5 years; Medium, more than 4.5 years to less than seven years; Long, seven years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower. 3 The income you receive from the fund may be subject to state and local income taxes. A portion of income also may be subject to the alternative minimum tax (AMT). 19 SCHWAB LONG-TERM TAX-FREE BOND FUND PERFORMANCE AVERAGE ANNUAL TOTAL RETURNS as of 2/28/02 This chart compares performance of the fund with the Lehman Brothers General Municipal Bond Index and the Morningstar Municipal National Long Bond Fund category. As of the end of the report period, the fund's 30-day SEC yield was 4.45% 1 and its taxable-equivalent yield was 7.25%. 1,2 [BAR CHART]
6 MONTHS 4 1 YEAR 5 YEAR SINCE INCEPTION: 9/11/92 FUND 1 1.60% 6.66% 5.83% 6.12% LEHMAN BROTHERS GENERAL MUNICIPAL BOND INDEX 1.99% 6.84% 6.37% 6.51% PEER GROUP AVERAGE 3 0.72% 5.60% 5.00% --
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 the Lehman Brothers General Municipal Bond Index. [LINE CHART]
Lehman Brothers General Municipal Fund Bond Index 11-Sep-92 10,000 10,000 30-Sep-92 9,867 9,923 31-Oct-92 9,515 9,826 30-Nov-92 9,912 10,002 31-Dec-92 10,092 10,104 31-Jan-93 10,240 10,221 28-Feb-93 10,682 10,591 31-Mar-93 10,484 10,479 30-Apr-93 10,632 10,585 31-May-93 10,690 10,644 30-Jun-93 10,883 10,822 31-Jul-93 10,879 10,836 31-Aug-93 11,157 11,062 30-Sep-93 11,298 11,188 31-Oct-93 11,315 11,209 30-Nov-93 11,201 11,111 31-Dec-93 11,465 11,345 31-Jan-94 11,588 11,475 28-Feb-94 11,274 11,177 31-Mar-94 10,791 10,722 30-Apr-94 10,858 10,813 31-May-94 10,970 10,907 30-Jun-94 10,870 10,840 31-Jul-94 11,085 11,044 31-Aug-94 11,109 11,083 30-Sep-94 10,921 10,920 31-Oct-94 10,657 10,726 30-Nov-94 10,381 10,532 31-Dec-94 10,658 10,764 31-Jan-95 11,050 11,072 28-Feb-95 11,381 11,394 31-Mar-95 11,514 11,524 30-Apr-95 11,483 11,538 31-May-95 11,918 11,906 30-Jun-95 11,735 11,802 31-Jul-95 11,836 11,914 31-Aug-95 11,971 12,065 30-Sep-95 12,056 12,141 31-Oct-95 12,250 12,317 30-Nov-95 12,443 12,521 31-Dec-95 12,591 12,642 31-Jan-96 12,640 12,738 29-Feb-96 12,520 12,651 31-Mar-96 12,366 12,489 30-Apr-96 12,319 12,454 31-May-96 12,311 12,449 30-Jun-96 12,484 12,585 31-Jul-96 12,599 12,699 31-Aug-96 12,553 12,697 30-Sep-96 12,780 12,875 31-Oct-96 12,948 13,020 30-Nov-96 13,188 13,258 31-Dec-96 13,117 13,203 31-Jan-97 13,097 13,228 28-Feb-97 13,223 13,350 31-Mar-97 12,987 13,172 30-Apr-97 13,146 13,283 31-May-97 13,358 13,482 30-Jun-97 13,502 13,626 31-Jul-97 13,933 14,004 31-Aug-97 13,728 13,872 30-Sep-97 13,927 14,037 31-Oct-97 14,025 14,127 30-Nov-97 14,146 14,210 31-Dec-97 14,408 14,418 31-Jan-98 14,556 14,566 28-Feb-98 14,529 14,571 31-Mar-98 14,565 14,584 30-Apr-98 14,488 14,518 31-May-98 14,750 14,747 30-Jun-98 14,806 14,805 31-Jul-98 14,853 14,842 31-Aug-98 15,074 15,072 30-Sep-98 15,252 15,260 31-Oct-98 15,228 15,260 30-Nov-98 15,282 15,314 31-Dec-98 15,292 15,352 31-Jan-99 15,471 15,535 28-Feb-99 15,369 15,466 31-Mar-99 15,405 15,488 30-Apr-99 15,421 15,527 31-May-99 15,257 15,437 30-Jun-99 14,904 15,214 31-Jul-99 14,909 15,269 31-Aug-99 14,570 15,147 30-Sep-99 14,499 15,153 31-Oct-99 14,172 14,989 30-Nov-99 14,388 15,148 31-Dec-99 14,180 15,035 31-Jan-00 14,064 14,970 29-Feb-00 14,297 15,144 31-Mar-00 14,787 15,475 30-Apr-00 14,640 15,384 31-May-00 14,497 15,304 30-Jun-00 15,007 15,710 31-Jul-00 15,237 15,928 31-Aug-00 15,527 16,173 30-Sep-00 15,376 16,089 31-Oct-00 15,625 16,265 30-Nov-00 15,809 16,388 31-Dec-00 16,387 16,793 31-Jan-01 16,416 16,959 28-Feb-01 16,458 17,014 31-Mar-01 16,605 17,167 30-Apr-01 16,371 16,981 31-May-01 16,533 17,165 30-Jun-01 16,675 17,280 31-Jul-01 16,947 17,535 31-Aug-01 17,279 17,825 30-Sep-01 17,164 17,764 31-Oct-01 17,404 17,976 30-Nov-01 17,258 17,825 31-Dec-01 17,009 17,655 31-Jan-02 17,350 17,961 28-Feb-02 17,555 18,178
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 Fund yield and returns reflect expense reductions by the fund's investment adviser (CSIM) and transfer agent and shareholder services agent (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. 2 This is the taxable-equivalent 30-day SEC yield for a hypothetical investor in the highest federal tax bracket (38.6%). Your tax rate may be different. 3 Source: Morningstar, Inc. As of 2/28/02, the total number of funds in the Municipal National Long Bond Fund category for the six-month, one- and five-year periods was 334, 336 and 248, respectively. 4 Not annualized. 20 FUND FACTS TOP TEN HOLDINGS 1 as of 2/28/02
PERCENTAGE OF SECURITY RATE MATURITY DATE INVESTMENTS (1) KING COUNTY General Obligation, Series D 5.75% 12/01/11 4.7% (2) DALLAS FORT WORTH INTERNATIONAL AIRPORT Revenue, Series 2000A 6.00% 11/01/24 4.5% (3) HOUSTON HIGHER EDUCATION FINANCING CORP. Rice University Project, Revenue, Series 1999A 5.38% 11/15/29 4.3% (4) WASHINGTON STATE HEALTH CARE FACILITIES AUTHORITY Catholic Health Initiatives, Revenue, Series 2000A 6.00% 12/01/20 4.0% (5) CLARK COUNTY SCHOOL DISTRICT NO. 117 General Obligation 5.50% 12/01/17 3.8% (6) HOUSTON AIRPORT SYSTEM Revenue, Series 2000B 5.50% 07/01/30 3.7% (7) AUSTIN UTILITIES SYSTEM Revenue Refunding 5.13% 11/15/16 3.7% (8) AMERICAN PUBLIC ENERGY AGENCY Nebraska Public Gas Agency Project, Gas Supply Revenue, Series 1998C 4.00% 09/01/07 3.6% (9) ESCAMBIA COUNTY HEALTH FACILITIES AUTHORITY Ascension Health Credit, Revenue, Series 1999A-1 5.75% 11/15/29 3.2% (10) ILLINOIS HEALTH FACILITIES AUTHORITY Northwestern Memorial Hospital, Revenue, Series 2002A 1.25% 03/07/02 3.0% - --------------------------------------------------------------------------------------------------------- TOTAL 38.5%
DIVIDENDS PAID in each fiscal year [BAR CHART]
INCOME DIVIDENDS PER SHARE 1992 2 0.17 1993 3 0.36 1994 0.52 1995 0.53 1996 0.52 1997 0.53 1998 0.53 1999 0.50 2000 0.50 2001 0.50 2002 4 0.23
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 9/11/92 through 12/31/92. 3 For the eight-month period ended 8/31/93. 4 For the six-month period ended 2/28/02. 21 SCHWAB LONG-TERM TAX-FREE BOND 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. 100.0% Municipal Bonds
BY CREDIT QUALITY 1 [PIE CHART} 1. 85.5% AAA 2. 14.4% AA 3. 0.1% A
BY MATURITY [PIE CHART} 1. 6.5% 0-1 Year 2. 11.1% 2-10 Years 3. 47.9% 11-20 Years 4. 34.5% 21-30 Years 5. 0.0% More than 30 Years
STATISTICS as of 2/28/02
PEER GROUP FUND AVERAGE 2 ============================================================= Number of Holdings 46 203 - ------------------------------------------------------------- 12-Month Yield 4.47% 4.55% - ------------------------------------------------------------- Weighted Average Rate 5.40% 5.68% - ------------------------------------------------------------- Weighted Average Maturity 17.5 yrs N/A - ------------------------------------------------------------- Weighted Average Duration 10.5 yrs 8.2 yrs - ------------------------------------------------------------- Weighted Average Credit Quality AAA AA - -------------------------------------------------------------
EXPENSE RATIO as of 2/28/02 [BAR CHART] FUND 0.49% PEER GROUP AVERAGE 1.18% 2
1 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 2 Source: Morningstar, Inc. As of 2/28/02, there were 347 funds in the Municipal National Long Bond Fund category. 22 SCHWAB LONG-TERM TAX-FREE BOND 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 10.87 10.24 10.11 11.01 10.53 10.13 --------------------------------------------------------------- Income from investment operations: Net investment income 0.24 0.50 0.50 0.50 0.53 0.53 Net realized and unrealized gains or losses (0.07) 0.63 0.13 (0.85) 0.48 0.40 --------------------------------------------------------------- Total income or loss from investment operations 0.17 1.13 0.63 (0.35) 1.01 0.93 Less distributions: Dividends from net investment income (0.23) (0.50) (0.50) (0.50) (0.53) (0.53) Distributions from net realized gains -- -- -- (0.05) -- -- --------------------------------------------------------------- Total distributions (0.23) (0.50) (0.50) (0.55) (0.53) (0.53) --------------------------------------------------------------- Net asset value at end of period 10.81 10.87 10.24 10.11 11.01 10.53 =============================================================== Total return (%) 1.60 1 11.29 6.59 (3.34) 9.81 9.36 RATIOS/SUPPLEMENTAL DATA (%) ======================================================================================================================= Ratio of net operating expenses to average net assets 0.49 2 0.49 0.49 3 0.49 0.49 0.49 Expense reductions reflected in above ratio 0.26 2 0.25 0.26 0.32 0.37 0.53 Ratio of net investment income to average net assets 4.47 2 4.73 5.11 4.59 4.76 5.09 Portfolio turnover rate 11 35 25 35 39 61 Net assets, end of period ($ x 1,000,000) 81 88 76 90 70 47
1 Not annualized. 2 Annualized. 3 Would have been 0.50% if certain non-routine expenses (proxy fees) had been included. See the Financial Notes, which are integral to this information. 23 SCHWAB LONG-TERM TAX-FREE BOND 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 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 + Credit-enhanced security o Certificate of Participation = 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] 100.0% MUNICIPAL BONDS Market Value: $82,365 Cost: $78,751 OTHER INVESTMENT COMPANIES Market Value: $24 Cost: $24 - ----------------------------------- 100.0% TOTAL INVESTMENTS Market Value: $82,389 Cost: $78,775
MUNICIPAL BONDS 100.0% of investments
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) FIXED-RATE OBLIGATIONS 93.5% ------------------------------------------------------------------------------------------------------------- COLORADO 1.3% + DENVER CITY & COUNTY EXCISE TAX Colorado Convention Center Project Revenue, Series 2001A 5.50% 09/01/17 1,000 1,061 FLORIDA 3.2% +(9) ESCAMBIA COUNTY HEALTH FACILITIES AUTHORITY Ascension Health Credit Revenue, Series 1999A-1 5.75% 11/15/29 2,500 2,643 GEORGIA 1.5% +o GEORGIA MUNICIPAL ASSOCIATION, INC City Court Atlanta Project 5.25% 12/01/26 1,250 1,270 HAWAII 2.1% + HAWAII General Obligation, Series 1999 5.88% 09/01/09 1,500 1,717 INDIANA 1.2% + MARION COUNTY CONVENTION & RECREATIONAL FACILITIES AUTHORITY Excise Tax Lease Revenue, Series A 5.00% 06/01/21 1,000 1,001 KENTUCKY 1.2% + JEFFERSON COUNTY HEALTH FACILITIES University Medical Center, Inc. Project Revenue 5.25% 07/01/22 1,000 1,006
See the Financial Notes, which are integral to this information. 24
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) MARYLAND 0.5% MARYLAND DEPARTMENT OF HOUSING & COMMUNITY DEVELOPMENT Revenue, Series 1996A 5.88% 07/01/16 355 374 MICHIGAN 4.0% + EASTERN MICHIGAN UNIVERSITY BOARD OF REGENTS Revenue 5.50% 06/01/17 2,000 2,238 + WAYNE COUNTY COMMUNITY COLLEGE Community College Improvement General Obligation 5.50% 07/01/19 1,000 1,045 --------- 3,283 MINNESOTA 2.4% + MINNEAPOLIS ST. PAUL METROPOLITAN AIRPORT COMMISSION Revenue, Sub-Series C 5.25% 01/01/26 2,000 2,012 MISSISSIPPI 5.5% + MISSISSIPPI HOSPITAL EQUIPMENT & FACILITIES AUTHORITY Mississippi Baptist Medical Center Revenue Refunding 6.00% 05/01/13 2,150 2,342 +o WALNUT GROVE CORRECTIONAL AUTHORITY 6.00% 11/01/19 2,000 2,195 --------- 4,537 NEBRASKA 3.6% +(8) AMERICAN PUBLIC ENERGY AGENCY Nebraska Public Gas Agency Project Gas Supply Revenue, Series 1998C 4.00% 09/01/07 3,000 2,996 NEVADA 2.5% + DIRECTOR OF THE STATE OF NEVADA DEPARTMENT OF BUSINESS & INDUSTRY Las Vegas Monorail Project 1st Tier Revenue 5.63% 01/01/32 2,000 2,080 OREGON 4.5% + COLUMBIA RIVER PEOPLES UTILITY DISTRICT Electric Systems Revenue, Series 2000B 5.50% 12/01/19 1,180 1,234 + MORROW COUNTY SCHOOL DISTRICT NO. 001 General Obligation 5.63% 06/15/16 2,235 2,436 --------- 3,670 PENNSYLVANIA 6.1% PENNSYLVANIA HIGHER EDUCATION FACILITIES AUTHORITY University of Pennsylvania Health Services Revenue, Series 1996A 5.75% 01/01/17 2,000 2,039 + PHILADELPHIA AUTHORITY FOR INDUSTRIAL DEVELOPMENT Lease Revenue, Series B 5.13% 10/01/26 1,500 1,493 + SENECA VALLEY SCHOOL DISTRICT General Obligation Refunding, Series 1998AA 5.15% 02/15/20 1,500 1,518 --------- 5,050
See the Financial Notes, which are integral to this information. 25 SCHWAB LONG-TERM TAX-FREE BOND FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) RHODE ISLAND 1.3% RHODE ISLAND HOUSING & MORTGAGE FINANCE CORP. Homeownership Opportunity Project Revenue, Series 10A 6.50% 10/01/22 1,000 1,027 TEXAS 28.2% +(7) AUSTIN UTILITIES SYSTEM Revenue Refunding 5.13% 11/15/16 3,000 3,064 + BRAZOS RIVER AUTHORITY Houston Industries, Inc. Project Revenue, Series 1998A 5.13% 05/01/19 1,750 1,768 + CONROE INDEPENDENT SCHOOL DISTRICT General Obligation Refunding, Series 1997B 5.25% 02/15/21 1,000 1,011 +(2) DALLAS FORT WORTH INTERNATIONAL AIRPORT Revenue, Series 2000A 6.00% 11/01/24 3,500 3,682 + ELGIN INDEPENDENT SCHOOL DISTRICT General Obligation Refunding 5.25% 10/01/24 2,000 2,019 + HARRIS COUNTY HOSPITAL DISTRICT Revenue Refunding 6.00% 02/15/16 1,000 1,101 +(6) HOUSTON AIRPORT SYSTEM Revenue, Series 2000B 5.50% 07/01/30 3,000 3,070 (3) HOUSTON HIGHER EDUCATION FINANCING CORP. Rice University Project Revenue, Series 1999A 5.38% 11/15/29 3,500 3,549 * HOUSTON WATER & SEWER SYSTEM Junior Lien Revenue Refunding, Series A 5.00% 12/01/30 2,500 2,426 + TEXAS SOUTHERN UNIVERSITY Revenue Refunding, Series 1998A-1 4.75% 11/01/17 1,545 1,523 --------- 23,213 VERMONT 2.6% + VERMONT EDUCATIONAL & HEALTH BUILDINGS FINANCING AGENCY Fletcher Allen Health Hospital Revenue, Series 2000A 6.00% 12/01/23 2,000 2,163 WASHINGTON 20.5% +(5) CLARK COUNTY SCHOOL DISTRICT NO. 117 General Obligation 5.50% 12/01/17 3,000 3,124 KING COUNTY (1) General Obligation, Series 1997D 5.75% 12/01/11 3,500 3,863 + King Street Center Project Lease Revenue 5.13% 06/01/17 1,000 1,015 KING COUNTY SCHOOL DISTRICT NO. 415 General Obligation, Series 1993A 5.55% 12/01/11 500 555 + OCEAN SHORES Water & Sewer Revenue 5.50% 12/01/21 2,000 2,069
See the Financial Notes, which are integral to this information. 26
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) WASHINGTON STATE General Obligation, Series 1998A 4.75% 07/01/20 1,000 961 + WASHINGTON STATE HEALTH CARE FACILITIES AUTHORITY (4) Catholic Health Initiatives Revenue, Series 2000A 6.00% 12/01/20 3,000 3,282 Swedish Health System Revenue 5.13% 11/15/18 2,000 2,013 --------- 16,882 WISCONSIN 1.3% + WISCONSIN HEALTH & EDUCATION FACILITIES AUTHORITY Medical College of Wisconsin, Inc. Project Revenue 5.50% 03/01/17 1,000 1,030 VARIABLE RATE OBLIGATIONS 6.5% ------------------------------------------------------------------------------------------------------------ CALIFORNIA 0.1% + IRVINE RANCH WATER DISTRICT Districts 105, 140, 240 & 290 Consolidated Revenue Refunding, Series 1995 1.35% 03/01/02 50 50 ILLINOIS 3.0% +(10) ILLINOIS HEALTH FACILITIES AUTHORITY Northwestern Memorial Hospital Revenue, Series 2002A 1.25% 03/07/02 2,500 2,500 MISSISSIPPI 0.9% + JACKSON COUNTY POLLUTION CONTROL Chevron U.S.A., Inc. Project Revenue Refunding 1.25% 03/01/02 700 700 NEW YORK 0.2% + LONG ISLAND POWER AUTHORITY Electric System Revenue, Series 1998-2B 1.25% 03/01/02 200 200 TEXAS 2.3% + GULF COAST WASTE DISPOSAL AUTHORITY Amoco Oil Project Pollution Control Revenue Refunding 1.25% 03/01/02 1,900 1,900
OTHER INVESTMENT COMPANIES 0.0% of investments
MKT. VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) PROVIDENT INSTITUTIONAL FUNDS -- MUNI FUND PORTFOLIO 23,969 24
END OF PORTFOLIO HOLDINGS. For totals, please see the first page of holdings for this fund. See the Financial Notes, which are integral to this information. 27 SCHWAB LONG-TERM TAX-FREE BOND FUND -- FINANCIALS Statement of ASSETS AND LIABILITIES As of February 28, 2002; unaudited. All numbers x 1,000 except NAV.
ASSETS - ---------------------------------------------------------------- Investments, at market value $82,389 a Receivables: Fund shares sold 5 Interest 1,053 Prepaid expenses + 11 ------------ TOTAL ASSETS 83,458 LIABILITIES - ---------------------------------------------------------------- Payables: Fund shares redeemed 52 Dividends to shareholders 97 Investments bought 2,397 Transfer agent and shareholder service fees 3 Accrued expenses + 27 ------------ TOTAL LIABILITIES 2,576 NET ASSETS - ---------------------------------------------------------------- TOTAL ASSETS 83,458 TOTAL LIABILITIES - 2,576 ------------ NET ASSETS $80,882 NET ASSETS BY SOURCE Capital received from investors 80,217 Net investment income not yet distributed 122 b Net realized capital losses (3,071) Net unrealized capital gains 3,614 b
NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $80,882 7,480 $10.81 a The fund's amortized cost for these securities was $78,775. Not counting short-term obligations, the fund paid $8,490 for securities during the reporting period, and received $9,829 from securities it sold or that matured. This includes $21,070 in transactions with other SchwabFunds(R). b Beginning this year, the fund is required to recognize discount of fixed income securities as part of interest income resulting in the following reclassification: Net unrealized capital gains ($72) Reclassified as: Net investment income not yet distributed $72
FEDERAL TAX DATA COST BASIS OF PORTFOLIO $78,775 NET UNREALIZED GAINS AND LOSSES: Gains $ 3,614 Losses + -- ----------- $ 3,614
UNUSED CAPITAL LOSSES:
Expires 08/31 of: Loss amount 2008 $ 703 2009 + 2,253 ----------- $ 2,956 DEFERRED CAPITAL LOSSES $ 237
See the Financial Notes, which are integral to this information. 28 Statement of OPERATIONS For September 1, 2001 through February 28, 2002; unaudited. All numbers x 1,000. INVESTMENT INCOME - ------------------------------------------------------------- Interest $2,074 NET REALIZED GAINS - ------------------------------------------------------------- Net realized gains on investments sold 122 NET UNREALIZED LOSSES - ------------------------------------------------------------- Net unrealized losses on investments (657) EXPENSES - ------------------------------------------------------------- Investment adviser and administrator fees 125 a Transfer agent and shareholder service fees 104 b Trustees' fees 6 c Custodian and portfolio accounting fees 28 Professional fees 11 Registration fees 13 Shareholder reports 17 Other expenses + 6 --------- Total expenses 310 Expense reduction - 106 d --------- NET EXPENSES 204 INCREASE IN NET ASSETS FROM OPERATIONS - ------------------------------------------------------------- TOTAL INVESTMENT INCOME 2,074 NET EXPENSES - 204 --------- NET INVESTMENT INCOME 1,870 NET REALIZED GAINS 122 e NET UNREALIZED LOSSES + (657) e --------- INCREASE IN NET ASSETS FROM OPERATIONS $1,335
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 0.49% 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 $535. See the Financial Notes, which are integral to this information. 29 SCHWAB LONG-TERM TAX-FREE BOND FUND -- FINANCIALS 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 $ 1,870 $ 3,821 Net realized gains or losses 122 (167) Net unrealized gains or losses + (657) 4,998 ----------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 1,335 8,652 DISTRIBUTIONS PAID - -------------------------------------------------------------------------- Dividends from net investment income $ 1,793 $ 3,828
TRANSACTIONS IN FUND SHARES
- ------------------------------------------------------------------------------ 9/1/01-2/28/02 9/1/00-8/31/01 QUANTITY VALUE QUANTITY VALUE Shares sold 1,251 $ 13,421 2,464 $ 25,967 Shares reinvested 108 1,163 233 2,447 Shares redeemed + (2,012) (21,666) (1,954) (20,514) ------------------------------------------------- NET INCREASE OR DECREASE (653) $ (7,082) 743 $ 7,900
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 8,133 $ 88,422 7,390 $ 75,698 Total increase or decrease + (653) (7,540) 743 12,724 a ------------------------------------------------ END OF PERIOD 7,480 $ 80,882 8,133 $ 88,422 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 $122 at the end of the current period and distributions in excess of net investment income in the amount of $27 at the end of the prior period. See the Financial Notes, which are integral to this information. 30 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND [PHOTO OF JOANNE LARKIN] " A dynamic market for short-term bonds helped the fund perform well, in spite of looming concerns about the state's budget." Portfolio Manager Joanne Larkin JOANNE LARKIN, a vice president of the investment adviser, has had overall management responsibility for the fund since its inception. Prior to joining the firm in 1992, she worked for more than eight years in fixed income asset management and research. TICKER SYMBOL SWCSX [GRAPHIC]
INTEREST RATE SENSITIVITY 1, 2 CREDIT QUALITY 1 SHORT MEDIUM LONG HIGH /X/ / / / / MEDIUM / / / / / / LOW / / / / / /
California taxpayers who are seeking double tax-free income along with the potential for lower volatility may want to consider this fund. THE FUND SEEKS HIGH CURRENT INCOME EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL INCOME TAX THAT IS CONSISTENT WITH CAPITAL PRESERVATION. 3 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. MUNI YIELDS DECLINED THROUGHOUT THE PERIOD, ALTHOUGH NOT AS SEVERELY AS THOSE OF TREASURIES. With yields at low levels, muni issuers were very active, seeking to lock in lower financing rates. The fund's share price did fluctuate with the volatility in bond yields and prices, although the net change for the period was relatively small. WE MAINTAINED A RELATIVELY LONG AVERAGE MATURITY DURING THE REPORT PERIOD. We sold bond issues before they were called by issuers in response to falling interest rates. This helped us avoid reinvesting the capital from these bonds at historically low rates. The fund also continued to focus on bonds in the two highest rating categories. CALIFORNIA'S ECONOMIC SLOWDOWN IN 2001 REDUCED TAX REVENUES, and the state continued to cope with its energy situation. We are closely monitoring both the state's credit situation and the fund's holdings. 1 Source: Morningstar, Inc. 2 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 4.5 years; Medium, more than 4.5 years to less than seven years; Long, seven years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower. 3 A portion of income may be subject to the alternative minimum tax (AMT). 31 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND PERFORMANCE AVERAGE ANNUAL TOTAL RETURNS as of 2/28/02 This chart compares performance of the fund with the Lehman Brothers 3-Year Municipal Bond Index and the Morningstar Municipal Short Bond Fund category. As of the end of the report period, the fund's 30-day SEC yield was 2.52%1 and its taxable-equivalent yield was 4.53%. 1,2 [BAR CHART]
6 MONTHS 4 1 YEAR 5 YEAR SINCE INCEPTION: 4/21/93 FUND 1 1.69% 5.13% 4.74% 4.62% LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX 2.78% 6.71% 5.31% 5.06% PEER GROUP AVERAGE 3 1.69% 4.95% 4.40% --
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 the Lehman Brothers 3-Year Municipal Bond Index. [LINE CHART]
Lehman Brothers 3-Year Municipal Fund Bond Index 21-Apr-93 10,000 10,000 30-Apr-93 9,990 9,994 31-May-93 10,037 10,021 30-Jun-93 10,136 10,085 31-Jul-93 10,157 10,090 31-Aug-93 10,257 10,185 30-Sep-93 10,328 10,229 31-Oct-93 10,340 10,251 30-Nov-93 10,310 10,237 31-Dec-93 10,444 10,345 31-Jan-94 10,517 10,429 28-Feb-94 10,372 10,332 31-Mar-94 10,188 10,207 30-Apr-94 10,239 10,267 31-May-94 10,272 10,315 30-Jun-94 10,253 10,318 31-Jul-94 10,356 10,404 31-Aug-94 10,390 10,441 30-Sep-94 10,350 10,415 31-Oct-94 10,280 10,390 30-Nov-94 10,167 10,371 31-Dec-94 10,227 10,416 31-Jan-95 10,350 10,502 28-Feb-95 10,503 10,613 31-Mar-95 10,598 10,708 30-Apr-95 10,614 10,744 31-May-95 10,826 10,909 30-Jun-95 10,809 10,935 31-Jul-95 10,925 11,050 31-Aug-95 11,030 11,137 30-Sep-95 11,090 11,168 31-Oct-95 11,174 11,222 30-Nov-95 11,256 11,294 31-Dec-95 11,296 11,341 31-Jan-96 11,366 11,430 29-Feb-96 11,358 11,432 31-Mar-96 11,308 11,404 30-Apr-96 11,325 11,418 31-May-96 11,332 11,428 30-Jun-96 11,393 11,497 31-Jul-96 11,466 11,560 31-Aug-96 11,483 11,577 30-Sep-96 11,557 11,648 31-Oct-96 11,634 11,730 30-Nov-96 11,742 11,839 31-Dec-96 11,737 11,845 31-Jan-97 11,776 11,897 28-Feb-97 11,837 11,955 31-Mar-97 11,762 11,893 30-Apr-97 11,815 11,944 31-May-97 11,916 12,041 30-Jun-97 11,991 12,112 31-Jul-97 12,139 12,256 31-Aug-97 12,120 12,231 30-Sep-97 12,196 12,319 31-Oct-97 12,227 12,374 30-Nov-97 12,268 12,410 31-Dec-97 12,346 12,494 31-Jan-98 12,433 12,576 28-Feb-98 12,459 12,603 31-Mar-98 12,467 12,623 30-Apr-98 12,435 12,605 31-May-98 12,540 12,723 30-Jun-98 12,568 12,766 31-Jul-98 12,635 12,812 31-Aug-98 12,749 12,936 30-Sep-98 12,863 13,019 31-Oct-98 12,892 13,081 30-Nov-98 12,931 13,113 31-Dec-98 12,942 13,144 31-Jan-99 13,054 13,264 28-Feb-99 13,054 13,278 31-Mar-99 13,073 13,290 30-Apr-99 13,088 13,332 31-May-99 13,067 13,313 30-Jun-99 12,966 13,233 31-Jul-99 13,034 13,298 31-Aug-99 13,024 13,314 30-Sep-99 13,090 13,364 31-Oct-99 13,042 13,366 30-Nov-99 13,108 13,425 31-Dec-99 13,027 13,403 31-Jan-00 13,092 13,427 29-Feb-00 13,145 13,469 31-Mar-00 13,257 13,537 30-Apr-00 13,193 13,540 31-May-00 13,238 13,554 30-Jun-00 13,440 13,726 31-Jul-00 13,579 13,837 31-Aug-00 13,717 13,943 30-Sep-00 13,680 13,947 31-Oct-00 13,766 14,025 30-Nov-00 13,810 14,081 31-Dec-00 13,971 14,239 31-Jan-01 14,189 14,454 28-Feb-01 14,189 14,510 31-Mar-01 14,253 14,612 30-Apr-01 14,119 14,590 31-May-01 14,290 14,722 30-Jun-01 14,361 14,789 31-Jul-01 14,502 14,908 31-Aug-01 14,670 15,064 30-Sep-01 14,669 15,139 31-Oct-01 14,794 15,237 30-Nov-01 14,720 15,190 31-Dec-01 14,655 15,175 31-Jan-02 14,823 15,368 28-Feb-02 14,917 15,483
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 Fund yield and returns reflect expense reductions by the fund's investment adviser (CSIM) and transfer agent and shareholder services agent (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. 2 This is the taxable-equivalent 30-day SEC yield for a hypothetical investor in the highest combined federal and California tax bracket (44.31%). Your tax rate may be different. 3 Source: Morningstar, Inc. As of 2/28/02, the total number of funds in the Municipal Short Bond Fund category for the six-month, one- and five-year periods was 113, 112 and 83, respectively. 4 Not annualized. 32 FUND FACTS TOP TEN HOLDINGS 1 as of 2/28/02
PERCENTAGE OF SECURITY RATE MATURITY DATE INVESTMENTS (1) CALIFORNIA RAN 3.25% 06/28/02 3.9% (2) ALAMENDA COUNTY Certificate of Participation, Series 2001A 5.38% 12/01/09 3.6% (3) SAN JOSE REDEVELOPMENT AGENCY Merged Area Redevelopment Project, Tax Allocation 4.00% 08/01/10 3.3% (4) BAY AREA GOVERNMENT ASSOCIATION Bay Area Rapid Transit Captial Grant, Revenue Tax Allocation, Series 1997A-6 4.50% 06/15/02 3.3% (5) WILLIAM S. HART UNION HIGH SCHOOL DISTRICT School Facilities Bridge Funding Project, Certificates of Participation 2.40% 01/15/04 3.2% (6) LOS ANGELES UNIFIED SCHOOL DISTRICT General Obligation, Series 2000D 5.50% 07/01/10 2.9% (7) LONG BEACH HARBOR Revenue, Series 2000A 5.50% 05/15/10 2.9% (8) LONG BEACH HARBOR Revenue Refunding, Series 1998A 5.50% 05/15/05 2.8% (9) CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY Marshall Hospital, Insured Hospital Revenue, Series 1992A 6.63% 11/01/02 2.7% (10) ABAG FINANCE AUTHORITY FOR NONPROFIT CORPORATIONS Brandeis Hillel Day School Project, Revenue 3.75% 08/01/06 2.6% - --------------------------------------------------------------------------------------------------------------- TOTAL 31.2%
DIVIDENDS PAID in each fiscal year [BAR CHART]
INCOME DIVIDENDS PER SHARE 1993 2 0.13 1994 0.37 1995 0.42 1996 0.43 1997 0.43 1998 0.41 1999 0.39 2000 0.39 2001 0.40 2002 3 0.17
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 4/21/93 through 8/31/93. 3 For the six-month period ended 2/28/02. 33 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND 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. 100.0% Municipal Bonds
BY CREDIT QUALITY 1 [PIE CHART] 1. 56.9% AAA 2. 20.7% AA 3. 14.8% A 4. 2.3% BBB 5. 5.3% Short-Term Ratings
BY MATURITY [PIE CHART] 1. 15.8% 0-6 Months 2. 22.4% 7-36 Months 3. 23.3% 37-60 Months 4. 38.5% More than 60 Months
STATISTICS as of 2/28/02
PEER GROUP FUND AVERAGE 2 ============================================================= Number of Holdings 74 150 - ------------------------------------------------------------- 12-Month Yield 3.47% 3.63% - ------------------------------------------------------------- Weighted Average Rate 5.10% 5.16% - ------------------------------------------------------------- Weighted Average Maturity 4.2 yrs N/A - ------------------------------------------------------------- Weighted Average Duration 3.7 yrs 2.9 yrs - ------------------------------------------------------------- Weighted Average Credit Quality AA AA - -------------------------------------------------------------
EXPENSE RATIO as of 2/28/02 [BAR CHART] FUND 0.49% PEER GROUP AVERAGE 0.88% 2
1 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 2 Source: Morningstar, Inc. As of 2/28/02, there were 115 funds in the Municipal Short Bond Fund category. 34 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND 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 10.51 10.22 10.09 10.26 10.16 10.04 ------------------------------------------------------------------------ Income from investment operations: Net investment income 0.17 0.40 0.39 0.39 0.41 0.43 Net realized and unrealized gains or losses 0.02 0.29 0.13 (0.17) 0.11 0.12 ------------------------------------------------------------------------ Total income from investment operations 0.19 0.69 0.52 0.22 0.52 0.55 Less distributions: Dividends from net investment income (0.17) (0.40) (0.39) (0.39) (0.42) (0.43) ------------------------------------------------------------------------ Net asset value at end of period 10.53 10.51 10.22 10.09 10.26 10.16 ======================================================================== Total return (%) 1.69 1 6.95 5.32 2.16 5.19 5.54 RATIOS/SUPPLEMENTAL DATA (%) =================================================================================================================================== Ratio of net operating expenses to average net assets 0.49 2 0.49 0.49 3 0.49 0.49 0.49 Expense reductions reflected in above ratio 0.17 2 0.18 0.21 0.28 0.30 0.40 Ratio of net investment income to average net assets 3.29 2 3.83 3.91 3.81 4.02 4.21 Portfolio turnover rate 11 30 42 7 8 23 Net assets, end of period ($ x 1,000,000) 157 145 124 126 96 59
1 Not annualized. 2 Annualized. 3 Would have been 0.50% if non-routine expenses (proxy fees) had been included. See the Financial Notes, which are integral to this information. 35 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND 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 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 + Credit-enhanced security o Certificate of Participation 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] 100.0% MUNICIPAL BONDS Market Value: $154,770 Cost: $150,072 OTHER INVESTMENT COMPANIES Market Value: $6 Cost: $6 - ------------------------------------ 100.0% TOTAL INVESTMENTS Market Value: $154,776 Cost: $150,078
MUNICIPAL BONDS 100.0% of investments
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ X 1,000) ($ X 1,000) FIXED-RATE OBLIGATIONS 92.7% ----------------------------------------------------------------------------------------------------------------- CALIFORNIA 88.3% +(10) ABAG FINANCE AUTHORITY FOR NONPROFIT CORPORATIONS Brandeis Hillel Day School Project Revenue 3.75% 08/01/06 4,000 4,082 o(2) ALAMENDA COUNTY Series 2001A 5.38% 12/01/09 5,000 5,612 +o ALAMEDA COUNTY Reference & Capital Projects 5.00% 12/01/06 3,480 3,834 ALAMEDA PUBLIC FINANCING AUTHORITY Revenue 4.85% 09/02/06 2,140 2,159 + BAY AREA GOVERNMENT ASSOCIATION Bay Area Rapid Transit Capital Grant Revenue Tax Allocation, Series A 5.00% 06/15/08 1,000 1,008 (4) Revenue Tax Allocation, Series 1997A-6 4.50% 06/15/02 5,000 5,045 + CALIFORNIA General Obligation 4.00% 11/01/05 3,000 3,137 General Obligation 5.50% 12/01/11 1,665 1,891 (1) RAN 3.25% 06/28/02 6,000 6,037 CALIFORNIA EDUCATIONAL FACILITIES AUTHORITY Loyola Marymount University Revenue, Series 1992B 6.60% 10/01/02 1,450 1,523 Mills College Revenue, Series 1992 6.88% 09/01/02 500 524
See the Financial Notes, which are integral to this information. 36
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ X 1,000) ($ X 1,000) + Pooled College & University Projects Revenue, Series 1997A 5.05% 04/01/05 1,010 1,089 + University of San Diego Revenue Refunding 4.50% 10/01/02 1,000 1,019 CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY Catholic Health Care West Insured Revenue, Series 1997A 5.00% 07/01/03 2,000 2,087 Kaiser Permanente Hospital Revenue, Series 1998B 5.00% 10/01/08 2,500 2,646 +(9) Marshall Hospital Insured Hospital Revenue, Series 1992A 6.63% 11/01/02 4,000 4,222 CALIFORNIA PUBLIC WORKS BOARD Energy Efficiency Revenue Refunding, Series 1998B 4.00% 09/01/06 1,155 1,217 Regents University of California Lease Revenue Refunding, Series 1998A 5.25% 12/01/07 2,000 2,194 + Various Universities of California Projects Lease Revenue, Series 1992A 6.40% 12/01/02 2,000 2,117 CALIFORNIA STATEWIDE COMMUNITY DEVELOPMENT AUTHORITY Kaiser Permanente Project Revenue, Series A 2.00% 01/02/03 3,000 3,006 + Sherman Oaks Project Revenue Refunding, Series 1998A 5.00% 08/01/06 2,500 2,732 o St. Joseph Health Systems Group Series 1994 6.50% 07/01/04 2,000 2,250 Series 1997 5.00% 07/01/04 750 787 o The Internet Group 4.13% 04/01/04 3,500 3,540 + EL DORADO COUNTY PUBLIC AGENCY FINANCE AUTHORITY Revenue 5.60% 02/15/12 3,000 3,265 + FONTANA Senior Community Facilities District No. 2-A Special Tax Refunding, Series 1998 4.10% 09/01/04 1,120 1,178 FREMONT UNIFIED HIGH SCHOOL DISTRICT OF SANTA CLARA COUNTY General Obligation, Series 2000B 5.75% 09/01/08 1,520 1,733 FRESNO + Community Facilities District No. 3 Special Tax, Series 1998 4.75% 09/01/05 1,240 1,251 Holy Cross Health System - St. Agnes Medical Center Health Facility Revenue, Series 1991 6.50% 06/01/02 550 568 HUNTINGTON BEACH Huntington Village Multi-Family Housing Revenue, Series 2000A 4.80% 09/01/07 2,970 2,975 + INGLEWOOD REDEVELOPMENT AGENCY Merged Redeveloped Project Tax Allocation Refunding, Series 1998A 3.88% 05/01/05 525 548 + INTERMODAL CONTAINER TRANSFER FACILITY JOINT POWERS AUTHORITY Revenue Refunding, Series 1999A 5.00% 11/01/08 1,210 1,334 Revenue Refunding, Series 1999A 5.00% 11/01/09 1,375 1,508
See the Financial Notes, which are integral to this information. 37 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) LONG BEACH HARBOR +(8) Revenue Refunding, Series 1998A 5.50% 05/15/05 3,985 4,318 (7) Revenue, Series 2000A 5.50% 05/15/10 4,000 4,416 +o LOS ANGELES American Academy of Dramatic Arts Series 2000A 4.70% 11/01/05 1,300 1,376 + LOS ANGELES COMMUNITY REDEVELOPMENT POOLED FINANCING AUTHORITY Beacon Street Project Revenue Refunding, Series 1998F 5.00% 09/01/07 810 890 Monterey Project Revenue Refunding, Series 1998E 5.00% 09/01/07 1,570 1,725 LOS ANGELES COUNTY TRANSPORTATION COMMISSION Proposition C Sales Tax Revenue, Second Series 1992A 6.20% 07/01/04 3,000 3,284 LOS ANGELES STATE BUILDING AUTHORITY California Department of General Services Lease Revenue Refunding, Series 1995A 5.60% 05/01/04 1,000 1,074 (6) LOS ANGELES UNIFIED SCHOOL DISTRICT General Obligation, Series 2000D 5.50% 07/01/10 4,000 4,496 + NORTHERN CALIFORNIA POWER AGENCY Geothermal Project No. 3 Public Power Revenue, Series 1993A 5.60% 07/01/06 2,000 2,240 + OCEANSIDE COMMUNITY DEVELOPMENT COMMISSION Vista del Ora Rental Housing Project Multi-Family Revenue Refunding, Series 2001A 4.45% 04/01/11 1,250 1,281 +o ORANGE COUNTY RECOVERY Series 1996A 6.00% 07/01/08 3,000 3,444 + RANCHO WATER DISTRICT FINANCING AUTHORITY Revenue 5.88% 11/01/10 1,500 1,661 + SAN BERNARDINO Alta Park Mountain Vista Apartments Multi-Family Housing Revenue Refunding, Series 2001A 4.45% 05/01/11 1,300 1,314 + SAN FRANCISCO BAY AREA TRANSIT FINANCING AUTHORITY Bridge Toll Revenue, Series 1999 5.00% 02/01/07 500 533 + SAN FRANCISCO CITY & COUNTY AIRPORT COMMISSION International Airport Revenue, 2nd Series - Issue 15A 5.50% 05/01/09 2,000 2,208 + SAN FRANCISCO STATE UNIVERSITY FOUNDATION, INC Auxiliary Organization Student Housing Revenue 4.30% 07/01/05 540 563 Student Housing Revenue 5.00% 07/01/08 400 427 + SAN JOAQUIN AREA FLOOD CONTROL AGENCY Improvement Bond Act 1915 Flood Protection Restoration Assessment, Series 1996 5.10% 09/02/03 1,305 1,366
See the Financial Notes, which are integral to this information. 38
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) +(3) SAN JOSE REDEVELOPMENT AGENCY Merged Area Redevelopment Project Tax Allocation 4.00% 08/01/10 5,000 5,107 + SANTA CLARA COUNTY FINANCING AUTHORITY Multi-Facilities Projects Lease Revenue, Series 2000B 5.50% 05/15/05 3,290 3,596 VMC Facility Replacement Project Lease Revenue, Series 1994A 7.75% 11/15/10 1,000 1,290 + SOUTHERN CALIFORNIA PUBLIC POWER AUTHORITY San Juan Power Project Unit 3 Power Revenue, Series 1993A 5.00% 01/01/04 1,600 1,674 + WEST & CENTRAL BASIN FINANCING AUTHORITY Revenue Refunding 6.13% 08/01/02 1,425 1,482 West Basin Project Revenue Refunding, Series 1993A 5.30% 08/01/09 3,665 3,843 (5) WILLIAM S. HART UNION HIGH SCHOOL DISTRICT School Facilities Bridge Funding Project 2.40% 01/15/04 5,000 4,991 ----------- 136,717 PUERTO RICO 4.4% + PUERTO RICO COMMONWEALTH AQUEDUCT & SEWER AUTHORITY Revenue Refunding 6.00% 07/01/06 3,000 3,380 + PUERTO RICO ELECTRIC POWER AUTHORITY Revenue Refunding, Series 1997CC 5.50% 07/01/08 3,000 3,333 ----------- 6,713 VARIABLE RATE OBLIGATIONS 7.3% - ---------------------------------------------------------------------------------------------------------------------- CALIFORNIA 7.3% + IRVINE IMPROVEMENT BOND ACT 1915 Assessment District No. 89-10 Special Assessment 1.30% 03/01/02 245 245 Assessment District No. 94-15 Special Assessment 1.30% 03/01/02 100 100 Assessment District No. 97-16 Special Assessment 1.30% 03/01/02 800 800 + IRVINE RANCH WATER DISTRICT Consolidated Revenue 1.30% 03/01/02 350 350 Consolidated Revenue Refunding, Series 1985B 1.40% 03/01/02 700 700 Districts 105, 140, 240 & 250 General Obligation 1.30% 03/01/02 1,000 1,000 General Obligation, Series 1995 1.35% 03/01/02 300 300 + METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA Waterworks Revenue, Series 2000B-1 1.25% 03/01/02 1,400 1,400 Waterworks Revenue, Series 2000B-3 1.30% 03/01/02 200 200
See the Financial Notes, which are integral to this information. 39 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) +o ORANGE COUNTY SANITATION DISTRICT Series 2000A 1.30% 03/01/02 2,445 2,445 Series 2000B 1.30% 03/01/02 3,700 3,700 + WESTERN RIVERSIDE COUNTY REGIONAL WASTEWATER AUTHORITY Regulated Wastewater Treatment Project Revenue 1.30% 03/01/02 100 100 ----------- 11,340
OTHER INVESTMENT COMPANIES 0.0% of investments
MKT. VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) PROVIDENT INSTITUTIONAL FUNDS-- CALIFORNIA MONEY FUND PORTFOLIO 6,269 6
END OF PORTFOLIO HOLDINGS. For totals, please see the first page of holdings for this fund. See the Financial Notes, which are integral to this information. 40 Statement of ASSETS AND LIABILITIES As of February 28, 2002; unaudited. All numbers x 1,000 except NAV. ASSETS - -------------------------------------------------------------------- Investments, at market value $154,776 a Receivables: Fund shares sold 234 Interest 1,740 Prepaid expenses + 1 ------------ TOTAL ASSETS 156,751 LIABILITIES - -------------------------------------------------------------------- Payables: Fund shares redeemed 89 Dividends to shareholders 114 Investment adviser and administrator fees 3 Transfer agent and shareholder service fees 5 Accrued expenses + 30 ------------ TOTAL LIABILITIES 241 NET ASSETS - -------------------------------------------------------------------- TOTAL ASSETS 156,751 TOTAL LIABILITIES - 241 ------------ NET ASSETS $156,510 NET ASSETS BY SOURCE Capital received from investors 152,181 Net investment income not yet distributed 53 b Net realized capital losses (422) Net unrealized capital gains 4,698 b
NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $156,510 14,857 $10.53 a The fund's amortized cost for these securities was $150,078. Not counting short-term obligations, the fund paid $19,765 for securities during the reporting period, and received $14,089 from securities it sold or that matured. This includes $35,655 in transactions with other SchwabFunds(R). b Beginning this year, the fund is required to recognize discount of fixed income securities as part of interest income resulting in the following reclassification: Net unrealized capital gains ($10) Reclassified as: Net investment income not yet distributed $10
FEDERAL TAX DATA COST BASIS OF PORTFOLIO $150,078 NET UNREALIZED GAINS AND LOSSES: Gains $ 4,716 Losses + (18) ----------- $ 4,698
UNUSED CAPITAL LOSSES:
Expires 08/31 of: Loss amount 2004 $ 539 2008 + 27 ----------- $ 566
See the Financial Notes, which are integral to this information. 41 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND -- FINANCIALS Statement of OPERATIONS For September 1, 2001 through February 28, 2002; unaudited. All numbers x 1,000. INVESTMENT INCOME - -------------------------------------------------------------------- Interest $2,752 NET REALIZED GAINS - -------------------------------------------------------------------- Net realized gains on investments sold 144 NET UNREALIZED GAINS - -------------------------------------------------------------------- Net unrealized gains on investments 125 EXPENSES - -------------------------------------------------------------------- Investment adviser and administrator fees 218 a Transfer agent and shareholder service fees 182 b Trustees' fees 6 c Custodian and portfolio accounting fees 41 Professional fees 12 Registration fees 2 Shareholder reports 15 Other expenses + 8 ------------ Total expenses 484 Expense reduction - 127 d ------------ NET EXPENSES 357 INCREASE IN NET ASSETS FROM OPERATIONS - -------------------------------------------------------------------- TOTAL INVESTMENT INCOME 2,752 NET EXPENSES - 357 ------------ NET INVESTMENT INCOME 2,395 NET REALIZED GAINS 144 e NET UNREALIZED GAINS + 125 e ------------ INCREASE IN NET ASSETS FROM OPERATIONS $2,664
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 0.49% of average daily net assets. This limit doesn't include interest, taxes and certain non-routine expenses. e These add up to a net gain on investments of $269. See the Financial Notes, which are integral to this information. 42 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 $2,395 $5,202 Net realized gains 144 248 Net unrealized gains + 125 3,705 ------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 2,664 9,155 DISTRIBUTIONS PAID - -------------------------------------------------------------------------------- Dividends from net investment income $2,315 $5,214
TRANSACTIONS IN FUND SHARES
- -------------------------------------------------------------------------------- 9/1/01-2/28/02 9/1/00-8/31/01 QUANTITY VALUE QUANTITY VALUE Shares sold 4,118 $ 43,219 5,830 $ 60,109 Shares reinvested 160 1,678 378 3,901 Shares redeemed + (3,170) (33,306) (4,548) (46,945) ------------------------------------------------------- NET INCREASE 1,108 $ 11,591 1,660 $ 17,065
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 13,749 $144,570 12,089 $123,564 Total increase + 1,108 11,940 1,660 21,006 a ------------------------------------------------------- END OF PERIOD 14,857 $156,510 13,749 $144,570 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 total distributions paid. b Includes net investment income not yet distributed in the amount of $56 at the end of the current period and distributions in excess of net investment income in the amount of $37 at the end of the prior period. See the Financial Notes, which are integral to this information. 43 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND [PHOTO OF JOANNE LARKIN] "Selling bonds before they were called allowed us to avoid having to reinvest the proceeds at lower interest rates." Portfolio Manager Joanne Larkin JOANNE LARKIN, a vice president of the investment adviser, has had overall management responsibility for the fund since its inception. Prior to joining the firm in 1992, she worked for more than eight years in fixed income asset management and research. TICKER SYMBOL SXCAX [GRAPHIC]
INTEREST RATE SENSITIVITY 1, 2 CREDIT QUALITY 1 SHORT MEDIUM LONG HIGH / / / / /X/ MEDIUM / / / / / / LOW / / / / / /
This fund is designed for California taxpayers who want double tax-free income and can accept higher risk in exchange for potentially higher long-term returns. THE FUND SEEKS HIGH CURRENT INCOME EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL INCOME TAX THAT IS CONSISTENT WITH CAPITAL PRESERVATION. 3 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. MUNI YIELDS DECLINED THROUGHOUT THE PERIOD, ALTHOUGH NOT AS SEVERELY AS THOSE OF TREASURIES. With yields at low levels, muni issuers were very active, seeking to lock in lower financing rates. The fund's share price did fluctuate with the volatility in bond yields and prices, although the net change for the period was relatively small. WE MAINTAINED A RELATIVELY LONG AVERAGE MATURITY DURING THE REPORT PERIOD. We sold bond issues before they were called by issuers in response to falling interest rates. This helped us avoid reinvesting the capital from these bonds at historically low rates. The fund also continued to focus on bonds in the two highest rating categories. CALIFORNIA'S ECONOMIC SLOWDOWN IN 2001 REDUCED TAX REVENUES, and the state continued to cope with its energy situation. We are closely monitoring both the state's credit situation and the fund's holdings. 1 Source: Morningstar, Inc. 2 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 4.5 years; Medium, more than 4.5 years to less than seven years; Long, seven years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower. 3 A portion of income may be subject to the alternative minimum tax (AMT). 44 PERFORMANCE AVERAGE ANNUAL TOTAL RETURNS as of 2/28/02 This chart compares performance of the fund with the Lehman Brothers General Municipal Bond Index and the Morningstar Municipal California Long Bond Fund category. As of the end of the report period, the fund's 30-day SEC yield was 4.58% 1 and its taxable-equivalent yield was 8.22%. 1,2 [BAR CHART]
6 MONTHS 4 1 YEAR 5 YEAR 10 YEAR FUND 1 1.32% 6.66% 6.15% 6.77% LEHMAN BROTHERS GENERAL MUNICIPAL BOND INDEX 1.99% 6.84% 6.37% 6.91% PEER GROUP AVERAGE 3 0.85% 5.52% 5.51% 6.48%
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 the Lehman Brothers General Municipal Bond Index. [LINE GRAPH]
Lehman Brothers General Municipal Fund Bond Index 24-Feb-92 10,000 10,000 31-Mar-92 10,099 10,004 30-Apr-92 10,217 10,093 31-May-92 10,410 10,212 30-Jun-92 10,633 10,383 31-Jul-92 11,082 10,694 31-Aug-92 10,786 10,590 30-Sep-92 10,835 10,659 31-Oct-92 10,474 10,554 30-Nov-92 10,921 10,743 31-Dec-92 11,110 10,853 31-Jan-93 11,256 10,979 28-Feb-93 11,775 11,376 31-Mar-93 11,561 11,256 30-Apr-93 11,674 11,370 31-May-93 11,736 11,434 30-Jun-93 11,969 11,624 31-Jul-93 11,957 11,640 31-Aug-93 12,235 11,882 30-Sep-93 12,371 12,017 31-Oct-93 12,412 12,041 30-Nov-93 12,263 11,934 31-Dec-93 12,541 12,186 31-Jan-94 12,671 12,326 28-Feb-94 12,304 12,006 31-Mar-94 11,683 11,517 30-Apr-94 11,768 11,615 31-May-94 11,867 11,716 30-Jun-94 11,747 11,644 31-Jul-94 12,008 11,864 31-Aug-94 12,026 11,905 30-Sep-94 11,824 11,730 31-Oct-94 11,508 11,521 30-Nov-94 11,235 11,313 31-Dec-94 11,420 11,562 31-Jan-95 11,901 11,893 28-Feb-95 12,295 12,238 31-Mar-95 12,414 12,379 30-Apr-95 12,407 12,394 31-May-95 12,825 12,789 30-Jun-95 12,613 12,677 31-Jul-95 12,685 12,797 31-Aug-95 12,866 12,960 30-Sep-95 12,972 13,041 31-Oct-95 13,228 13,230 30-Nov-95 13,507 13,450 31-Dec-95 13,690 13,579 31-Jan-96 13,785 13,682 29-Feb-96 13,664 13,589 31-Mar-96 13,436 13,415 30-Apr-96 13,369 13,378 31-May-96 13,379 13,373 30-Jun-96 13,550 13,518 31-Jul-96 13,700 13,641 31-Aug-96 13,693 13,639 30-Sep-96 13,920 13,830 31-Oct-96 14,073 13,986 30-Nov-96 14,365 14,242 31-Dec-96 14,283 14,182 31-Jan-97 14,294 14,209 28-Feb-97 14,429 14,340 31-Mar-97 14,175 14,149 30-Apr-97 14,316 14,268 31-May-97 14,581 14,482 30-Jun-97 14,706 14,637 31-Jul-97 15,266 15,042 31-Aug-97 15,056 14,901 30-Sep-97 15,253 15,078 31-Oct-97 15,359 15,175 30-Nov-97 15,475 15,264 31-Dec-97 15,717 15,487 31-Jan-98 15,918 15,646 28-Feb-98 15,906 15,651 31-Mar-98 15,879 15,665 30-Apr-98 15,802 15,595 31-May-98 16,078 15,841 30-Jun-98 16,124 15,903 31-Jul-98 16,145 15,943 31-Aug-98 16,405 16,190 30-Sep-98 16,645 16,392 31-Oct-98 16,638 16,392 30-Nov-98 16,728 16,450 31-Dec-98 16,725 16,491 31-Jan-99 16,903 16,687 28-Feb-99 16,846 16,613 31-Mar-99 16,888 16,637 30-Apr-99 16,879 16,678 31-May-99 16,727 16,582 30-Jun-99 16,438 16,343 31-Jul-99 16,418 16,402 31-Aug-99 16,144 16,270 30-Sep-99 16,135 16,277 31-Oct-99 15,756 16,101 30-Nov-99 15,957 16,272 31-Dec-99 15,699 16,150 31-Jan-00 15,540 16,080 29-Feb-00 15,850 16,267 31-Mar-00 16,384 16,623 30-Apr-00 16,191 16,525 31-May-00 16,125 16,439 30-Jun-00 16,659 16,875 31-Jul-00 16,951 17,109 31-Aug-00 17,382 17,373 30-Sep-00 17,310 17,283 31-Oct-00 17,447 17,471 30-Nov-00 17,628 17,604 31-Dec-00 18,088 18,038 31-Jan-01 18,191 18,217 28-Feb-01 18,225 18,275 31-Mar-01 18,370 18,440 30-Apr-01 18,054 18,241 31-May-01 18,277 18,438 30-Jun-01 18,349 18,561 31-Jul-01 18,703 18,836 31-Aug-01 19,187 19,147 30-Sep-01 19,073 19,082 31-Oct-01 19,311 19,309 30-Nov-01 19,213 19,146 31-Dec-01 18,978 18,965 31-Jan-02 19,238 19,293 28-Feb-02 19,439 19,526
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 Fund yield and returns reflect expense reductions by the fund's investment adviser (CSIM) and transfer agent and shareholder services agent (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. 2 This is the taxable-equivalent 30-day SEC yield for a hypothetical investor in the highest combined federal and California tax bracket (44.31%). Your tax rate may be different. 3 Source: Morningstar, Inc. As of 2/28/02, the total number of funds in the Municipal California Long Bond Fund category for the six-month, one-, five- and ten-year periods was 119, 118, 95 and 43, respectively. 4 Not annualized. 45 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND FUND FACTS TOP TEN HOLDINGS 1 as of 2/28/02
PERCENTAGE OF SECURITY RATE MATURITY DATE INVESTMENTS (1) ORANGE COUNTY SANITATION DISTRICTS Series 2000A 1.30% 03/01/02 3.1% (2) SOUTH ORANGE COUNTY PUBLIC FINANCING AUTHORITY Special Tax Revenue, Series 1999A 5.25% 08/15/18 2.8% (3) SANTA ANA UNIFIED SCHOOL DISTRICT General Obligation 5.70% 08/01/29 2.8% (4) STOCKTON COMMUNITY FACILITIES DISTRICT Mello Roos Weston Ranch, Special Tax Revenue, Series 1998A 5.80% 09/01/14 2.6% (5) CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY Children's Hospital of San Diego, Insured Hospital Revenue Refunding, Series 1996 5.38% 07/01/16 2.4% (6) MENLO PARK COMMUNITY DEVELOPMENT AGENCY Las Pulgas Community Development Project, Tax Allocation 5.55% 06/01/30 2.3% (7) FOOTHILL EASTERN CORRIDOR AGENCY Toll Road Revenue Refunding 5.13% 01/15/19 2.2% (8) CALIFORNIA INFRASTRUCTURE & ECONOMIC DEVELOPMENT BANK Revenue 5.25% 06/01/30 2.2% (9) LOS ANGELES COUNTY Antelope Valley Courthouse, Series 2000A 5.25% 11/01/27 2.2% (10) CALIFORNIA General Obligation 5.25% 09/01/30 2.2% - ------------------------------------------------------------------------------------------------------------- TOTAL 24.8%
DIVIDENDS PAID in each fiscal year [BAR CHART]
INCOME DIVIDENDS PER SHARE 1992 2 0.51 1993 3 0.38 1994 0.56 1995 0.56 1996 0.57 1997 0.56 1998 0.55 1999 0.54 2000 0.55 2001 0.55 2002 4 0.25
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 2/24/92 through 12/31/92. 3 For the eight-month period ended 8/31/93. 4 For the six-month period ended 2/28/02. 46 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. 100.0% Municipal Bonds
BY CREDIT QUALITY 1 [PIE CHART] 1. 70.4% AAA 2. 12.0% AA 3. 10.2% A 4. 7.4% BBB
BY MATURITY [PIE CHART] 1. 6.5% 0-1 Year 2. 4.0% 2-10 Years 3. 47.8% 11-20 Years 4. 36.5% 21-30 Years 5. 5.2% More than 30 Years
STATISTICS as of 2/28/02
PEER GROUP FUND AVERAGE 2 =========================================================== Number of Holdings 94 151 - ----------------------------------------------------------- 12-Month Yield 4.58% 4.36% - ----------------------------------------------------------- Weighted Average Rate 5.60% 5.35% - ----------------------------------------------------------- Weighted Average Maturity 19.1 yrs N/A - ----------------------------------------------------------- Weighted Average Duration 9.2 yrs 8.3 yrs - ----------------------------------------------------------- Weighted Average Credit Quality AA AA - -----------------------------------------------------------
EXPENSE RATIO as of 2/28/02 [BAR CHART] FUND 0.49% PEER GROUP AVERAGE 1.09% 2
1 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 2 Source: Morningstar, Inc. As of 2/28/02, there were 121 funds in the Municipal California Long Bond Fund category. 47 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND 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 11.63 11.06 10.82 11.52 11.10 10.63 ------------------------------------------------------------------------ Income from investment operations: Net investment income 0.26 0.55 0.55 0.54 0.54 0.56 Net realized and unrealized gains or losses (0.11) 0.57 0.24 (0.70) 0.43 0.47 ------------------------------------------------------------------------ Total income or loss from investment operations 0.15 1.12 0.79 (0.16) 0.97 1.03 Less distributions: Dividends from net investment income (0.25) (0.55) (0.55) (0.54) (0.55) (0.56) ------------------------------------------------------------------------ Net asset value at end of period 11.53 11.63 11.06 10.82 11.52 11.10 ======================================================================== Total return (%) 1.32 1 10.38 7.67 (1.57) 8.96 9.95 RATIOS/SUPPLEMENTAL DATA (%) =================================================================================================================================== Ratio of net operating expenses to average net assets 0.49 2 0.49 0.49 3 0.49 0.49 0.49 Expense reductions reflected in above ratio 0.16 2 0.16 0.19 0.26 0.27 0.33 Ratio of net investment income to average net assets 4.53 2 4.86 5.19 4.69 4.79 5.17 Portfolio turnover rate 19 37 36 55 28 35 Net assets, end of period ($ x 1,000,000) 225 215 179 202 190 125
1 Not annualized. 2 Annualized. 3 Would have been 0.50% if certain non-routine expenses (proxy fees) had been included. See the Financial Notes, which are integral to this information. 48 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 + Credit-enhanced security o Certificate of Participation = 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] 100.0% MUNICIPAL BONDS Market Value: $231,355 Cost: $222,401 OTHER INVESTMENT COMPANIES Market Value: $115 Cost: $115 - ----------------------------------- 100.0% TOTAL INVESTMENTS Market Value: $231,470 Cost: $222,516
MUNICIPAL BONDS 100.0% of investments
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) FIXED-RATE OBLIGATIONS 93.5% ------------------------------------------------------------------------------------------------------------------- CALIFORNIA 93.5% ABAG FINANCE AUTHORITY FOR NONPROFIT CORPORATIONS + Brandeis Hillel Day School Project Revenue 3.75% 08/01/31 1,700 1,735 +o Lytton Gardens, Inc. Insured Revenue 6.00% 02/15/30 3,000 3,136 Schools of Sacred Heart Revenue, Series 2000A 6.45% 06/01/30 1,500 1,607 + ALAMEDA CORRIDOR TRANSPORTATION AUTHORITY Senior Lien Revenue, Series 1999A 5.13% 10/01/16 1,170 1,232 o ALAMEDA COUNTY Alameda Medical Center Project Series 1998 5.38% 06/01/18 3,400 3,595 + BAY AREA GOVERNMENT ASSOCIATION Redevelopment Agency Pool Revenue Tax Allocation, Series 1997A-6 5.25% 12/15/17 1,200 1,271 + BISHOP UNION HIGH SCHOOL DISTRICT Joint General Obligation 5.50% 08/01/25 1,175 1,235 + BREA OLINDA UNIFIED SCHOOL DISTRICT General Obligation, Series 1999A 5.60% 08/01/20 1,000 1,080 + CALIFORNIA General Obligation 5.25% 10/01/15 2,500 2,647 (10) General Obligation 5.25% 09/01/30 5,000 5,079
See the Financial Notes, which are integral to this information. 49 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND -- FINANCIALS
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) += CALIFORNIA DEPARTMENT OF VETERAN AFFAIRS Home Purchase Revenue, Series 2002A 5.30% 12/01/21 5,000 5,067 CALIFORNIA EDUCATIONAL FACILITIES AUTHORITY Revenue 5.75% 06/01/25 1,800 1,815 Pepperdine University Revenue 5.75% 09/15/30 3,000 3,213 Santa Clara University Revenue Refunding 5.25% 09/01/26 2,330 2,392 + St. Mary's College of California Project Revenue, Series 2001A 5.13% 10/01/26 1,560 1,580 Revenue, Series 2001A 5.13% 10/01/31 1,000 1,010 University of Southern California Revenue 5.50% 10/01/27 4,570 4,776 CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY Cedars Sinai Medical Center Revenue, Series 1999A 6.13% 12/01/19 2,750 2,952 +(5) Children's Hospital of San Diego Insured Hospital Revenue Refunding, Series 1996 5.38% 07/01/16 5,180 5,504 Kaiser Permanente Hospital Revenue, Series 1998B 5.00% 10/01/18 5,000 4,950 CALIFORNIA HOUSING FINANCE AGENCY Home Mortgage Revenue, Series 1994G 7.20% 08/01/14 2,980 3,126 + Home Mortgage Revenue, Series 1995L 5.90% 08/01/17 1,000 1,040 Multi-Unit Rental Housing Revenue, Series 1992B-II 6.70% 08/01/15 1,000 1,027 + Revenue, Series 1995J 6.00% 08/01/17 3,000 3,120 + CALIFORNIA INFRASTRUCTURE & ECONOMIC DEVELOPMENT BANK (8) Revenue 5.25% 06/01/30 5,000 5,100 J. David Gladstone Institution Project Revenue 5.50% 10/01/19 1,250 1,290 += CALIFORNIA PUBLIC WORKS BOARD Department of Corrections Lease Revenue 5.25% 03/01/20 4,570 4,720 CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY + Cedars-Sinai Medical Center Hospital Revenue 6.50% 08/01/15 1,250 1,285 + Sunnyside Vermont Revenue, Series 2001A 7.00% 04/20/36 4,000 4,535 o The Internext Group 5.38% 04/01/17 5,000 4,931 + COLTON PUBLIC FINANCING AUTHORITY Special Tax Revenue, Series 1996 5.45% 09/01/19 3,020 3,189 EAST BAY MUNICIPAL UTILITY DISTRICT Water System Revenue, Series 1998 5.25% 06/01/19 2,600 2,710 +o ESCONDIDO Revenue, Series 2000A 6.00% 09/01/31 2,000 2,207 +(7) FOOTHILL EASTERN CORRIDOR AGENCY Toll Road Revenue Refunding 5.13% 01/15/19 5,000 5,146
See the Financial Notes, which are integral to this information. 50
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) + HUNTINGTON BEACH PUBLIC FINANCING AUTHORITY Capital Improvement Project Lease Revenue, Series 2000A 5.50% 09/01/20 1,500 1,589 +o IMPERIAL Wastewater Treatment Facility Project Refunding 5.00% 10/15/20 2,500 2,544 + INGLEWOOD REDEVELOPMENT AGENCY Merged Redevelopment Project Tax Allocation, Series 1998A 5.25% 05/01/16 1,000 1,089 + LONG BEACH BOND FINANCE AUTHORITY Aquarium of The South Pacific Project Lease Revenue Refunding 5.00% 11/01/26 3,000 2,987 LOS ANGELES Sanitation Equipment Revenue, Series 2001A 5.25% 02/01/17 3,965 4,196 +o(9) LOS ANGELES COUNTY Antelope Valley Courthouse Series 2000A 5.25% 11/01/27 5,000 5,090 LOS ANGELES DEPARTMENT OF WATER & POWER Electric Plant Revenue 6.00% 01/15/11 865 917 +(6) MENLO PARK COMMUNITY DEVELOPMENT AGENCY Las Pulgas Community Development Project Tax Allocation 5.55% 06/01/30 5,000 5,275 + MODESTO PUBLIC FINANCING AUTHORITY Capital Imports & Refining Project Lease Revenue 5.13% 09/01/20 3,740 3,816 + NORTHERN CALIFORNIA POWER AGENCY Multiple Capital Facilities Revenue, Series 1992A 6.50% 08/01/12 1,875 1,951 Multiple Capital Facilities Revenue Refunding, Series 1999A 5.25% 08/01/16 3,000 3,210 OAKLAND JOINT POWERS FINANCING AUTHORITY Reassessment Revenue 5.50% 09/02/24 990 1,018 + OCEANSIDE BUILDING AUTHORITY Refunding, Series 1993A 6.38% 04/01/12 1,250 1,316 + OXNARD FINANCING AUTHORITY Water Revenue Refunding 5.00% 06/01/26 1,925 1,917 Water Revenue Refunding 5.13% 06/01/30 1,350 1,362 + PORT OF OAKLAND Revenue Series 2000K 5.75% 11/01/29 3,500 3,662 RIVERSIDE COUNTY PUBLIC FINANCING AUTHORITY Redevelopment Projects Tax Allocation Revenue, Series 1997A 5.63% 10/01/33 4,905 4,976 ROSEVILLE JOINT UNION HIGH SCHOOL DISTRICT General Obligation, Series 2001E 5.25% 08/01/26 2,435 2,478 SACRAMENTO COUNTY SANITATION DISTRICT FINANCING AUTHORITY Revenue, Series 2000A 5.88% 12/01/27 1,000 1,125
See the Financial Notes, which are integral to this information. 51 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) + SACRAMENTO FINANCING AUTHORITY Solid Waste & Redevelopment Capital Improvement Revenue 5.88% 12/01/29 3,000 3,320 SACRAMENTO MUNICIPAL UTILITY DISTRICT Electric Revenue Refunding, Series 2001P 5.00% 08/15/23 2,000 2,004 o SACRAMENTO REGIONAL TRANSIT DISTRICT Series 1992A 6.38% 03/01/05 250 260 Light Rail Transportation Refunding 6.75% 07/01/07 2,000 2,046 o SAN BERNARDINO COUNTY West Valley Detention Center 6.50% 11/01/12 420 441 SAN DIEGO REDEVELOPMENT AGENCY Horton Plaza Project Tax Allocation 5.80% 11/01/21 2,500 2,570 SAN DIEGO UNIFIED SCHOOL DISTRICT General Obligation, Series 2001C 5.00% 07/01/18 1,730 1,783 General Obligation, Series 2001C 5.00% 07/01/19 2,000 2,043 + SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT Sales Tax Revenue 5.50% 07/01/26 1,000 1,056 Sales Tax Revenue 5.50% 07/01/34 2,500 2,643 + SAN FRANCISCO CITY & COUNTY AIRPORT COMMISSION International Airport Revenue, 2nd Series, Issue 11 6.20% 05/01/05 2,000 2,247 International Airport Revenue, 2nd Series, Issue 12B 5.63% 05/01/21 2,000 2,117 International Airport Revenue, 2nd Series, Issue 22 5.00% 05/01/19 2,000 1,988 o SAN FRANCISCO COMMUNITY COLLEGE DISTRICT 5.38% 03/01/25 3,090 3,091 SAN FRANCISCO DOWNTOWN PARKING CORP. Revenue 6.65% 04/01/18 500 526 + SAN FRANCISCO STATE UNIVERSITY FOUNDATION, INC. Auxiliary Organization Student Housing Revenue 5.20% 07/01/19 1,150 1,137 + SAN LUIS OBISPO COUNTY FINANCE AUTHORITY Lopez Dam Improvement Project Revenue, Series 2000A 5.38% 08/01/24 1,000 1,036 +(3) SANTA ANA UNIFIED SCHOOL DISTRICT General Obligation 5.70% 08/01/29 6,000 6,405 + SANTA CLARA COUNTY FINANCING AUTHORITY VMC Facility Replacement Project Lease Revenue, Series 1994A 7.75% 11/15/10 1,460 1,883 + SANTA CLARA REDEVELOPMENT AGENCY Bayshore North Project Tax Allocation Refunding 7.00% 07/01/10 1,500 1,782 SANTA MARIA JOINT UNIFIED HIGH SCHOOL DISTRICT General Obligation, Series 2001A 5.25% 08/01/25 1,435 1,462 + SANTA ROSA Waste Water Revenue, Series 2001B 5.00% 09/01/24 1,000 1,000
See the Financial Notes, which are integral to this information. 52
ISSUER PROJECT MATURITY FACE VALUE MKT. VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) +(2) SOUTH ORANGE COUNTY PUBLIC FINANCING AUTHORITY Special Tax Revenue, Series 1999A 5.25% 08/15/18 6,095 6,435 (4) STOCKTON COMMUNITY FACILITIES DISTRICT Mello Roos Weston Ranch Special Tax Revenue, Series 1998A 5.80% 09/01/14 5,875 6,116 + TAFT CITY ELEMENTARY SCHOOL DISTRICT General Obligation, Series 2001A 4.90% 08/01/20 1,080 1,085 o TEMECULA COMMUNITY SERVICES DISTRICT Community Recreation Center Project Series 1992 7.13% 10/01/12 1,000 1,053 + TRI-CITY HOSPITAL DISTRICT Insured Revenue Refunding, Series 1996A 5.63% 02/15/17 1,000 1,066 TRUCKEE PUBLIC FINANCING AUTHORITY Lease Revenue, Series 2000A 5.88% 11/01/25 1,490 1,641 + UNIVERSITY OF CALIFORNIA University of California Hospital Medical Center Project Hospital Revenue 5.75% 07/01/24 500 534 + VALLEJO Water Improvement Project Revenue Refunding, Series 1996A 5.70% 05/01/16 2,000 2,163 +o WEST BASIN COUNTY MUNICIPAL WATER DISTRICT Revenue Refunding, Series 1997A 5.50% 08/01/17 500 534 Revenue Refunding, Series 1997A 5.50% 08/01/22 1,000 1,059 WHITTIER PRESBYTERIAN INTERCOMMUNITY HOSPITAL Health Facility Revenue 5.60% 06/01/22 2,000 2,009 ----------- 216,355 VARIABLE RATE OBLIGATIONS 6.5% ------------------------------------------------------------------------------------------------------------------- CALIFORNIA 6.5% + CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY Adventist Health Insured Hospital Revenue, Series 1998A 1.25% 03/01/02 4,500 4,500 + IRVINE IMPROVEMENT BOND ACT 1915 Assessment District No. 94-15 Special Assessment 1.30% 03/01/02 700 700 Assessment District No. 97-16 Special Assessment 1.30% 03/01/02 1,200 1,200 + IRVINE RANCH WATER DISTRICT Consolidated Revenue 1.30% 03/01/02 900 900 + METROPOLITAN WATER DISTRICT Waterworks Revenue, Series 2000B1 1.25% 03/01/02 600 600 +o(1) ORANGE COUNTY SANITATION DISTRICTS Series 2000A 1.30% 03/01/02 7,100 7,100 ----------- 15,000
See the Financial Notes, which are integral to this information. 53 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND -- FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited. OTHER INVESTMENT COMPANIES 0.0% of investments
MKT. VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) PROVIDENT INSTITUTIONAL FUNDS -- CALIFORNIA MONEY FUND PORTFOLIO 114,761 115
END OF PORTFOLIO HOLDINGS. For totals, please see the first page of holdings for this fund. See the Financial Notes, which are integral to this information. 54 Statement of ASSETS AND LIABILITIES As of February 28, 2002; unaudited. All numbers x 1,000 except NAV. ASSETS - -------------------------------------------------------------------- Investments, at market value $231,470 a Receivables: Fund shares sold 207 Interest 3,039 Prepaid expenses + 1 ------------ TOTAL ASSETS 234,717 LIABILITIES - -------------------------------------------------------------------- Payables: Fund shares redeemed 9 Dividends to shareholders 296 Investments bought 9,766 Investment adviser and administrator fees 4 Transfer agent and shareholder service fees 8 Accrued expenses + 38 ------------ TOTAL LIABILITIES 10,121 NET ASSETS - -------------------------------------------------------------------- TOTAL ASSETS 234,717 TOTAL LIABILITIES - 10,121 ------------ NET ASSETS $224,596 NET ASSETS BY SOURCE Capital received from investors 217,303 Net investment income not yet distributed 299 b Net realized capital losses (1,960) Net unrealized capital gains 8,954 b
NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $224,596 19,472 $11.53 a The fund's amortized cost for these securities was $222,516. Not counting short-term obligations, the fund paid $57,455 for securities during the reporting period, and received $39,344 from securities it sold or that matured. This includes $36,895 in transactions with other SchwabFunds(R). b Beginning this year, the fund is required to recognize discount on fixed income securities as part of interest income resulting in the following reclassification: Net unrealized capital gains ($148) Reclassified as: Net investment income not yet distributed $148
FEDERAL TAX DATA COST BASIS OF PORTFOLIO $222,516 NET UNREALIZED GAINS AND LOSSES: Gains $ 9,109 Losses + (155) ----------- $ 8,954
UNUSED CAPITAL LOSSES:
Expires 08/31 of: Loss amount 2004 $ 334 2008 3 2009 + 2,708 ----------- $ 3,045
See the Financial Notes, which are integral to this information. 55 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND -- FINANCIALS Statement of OPERATIONS For September 1, 2001 through February 28, 2002; unaudited. All numbers x 1,000. INVESTMENT INCOME - -------------------------------------------------------------------- Interest $ 5,490 NET REALIZED GAINS - -------------------------------------------------------------------- Net realized gains on investments sold 1,055 NET UNREALIZED LOSSES - -------------------------------------------------------------------- Net unrealized losses on investments (3,031) EXPENSES - -------------------------------------------------------------------- Investment adviser and administrator fees 326 a Transfer agent and shareholder service fees 271 b Trustees' fees 6 c Custodian and portfolio accounting fees 52 Professional fees 12 Registration fees 4 Shareholder reports 23 Other expenses + 9 ------------ Total expenses 703 Expense reduction - 171 d ------------ NET EXPENSES 532 INCREASE IN NET ASSETS FROM OPERATIONS - -------------------------------------------------------------------- TOTAL INVESTMENT INCOME 5,490 NET EXPENSES - 532 ------------ NET INVESTMENT INCOME 4,958 NET REALIZED GAINS 1,055 e NET UNREALIZED LOSSES + (3,031) e ------------ INCREASE IN NET ASSETS FROM OPERATIONS $ 2,982
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 0.49% 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 $1,976. See the Financial Notes, which are integral to this information. 56 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 $ 4,958 $ 9,330 Net realized gains 1,055 1,646 Net unrealized gains or losses + (3,031) 8,325 --------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 2,982 19,301 DISTRIBUTIONS PAID - -------------------------------------------------------------------------------- Dividends from net investment income $ 4,755 $ 9,349
TRANSACTIONS IN FUND SHARES - --------------------------------------------------------------------------------
9/1/01-2/28/02 9/1/00-8/31/01 QUANTITY VALUE QUANTITY VALUE Shares sold 2,995 $ 34,488 5,394 $ 60,788 Shares reinvested 260 2,988 521 5,860 Shares redeemed + (2,263) (26,006) (3,604) (40,583) ------------------------------------------------------ NET INCREASE 992 $ 11,470 2,311 $ 26,065
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 18,480 $214,899 16,169 $178,882 Total increase + 992 9,697 2,311 36,017 a ------------------------------------------------------ END OF PERIOD 19,472 $224,596 18,480 $214,899 b
a Figures for shares represent the net changes in shares from the trans- actions 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 total distributions paid. b Includes net investment income not yet distributed in the amount of $299 at the end of the current period and distributions in excess of net investment income in the amount of $52 at the end of the prior period. See the Financial Notes, which are integral to this information. 57 FINANCIAL NOTES - -------------------------------------------------------------------------------- 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 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 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 58 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. The funds may make direct transactions with certain other SchwabFunds(R) 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. 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. SHORT-TERM SECURITIES (60 DAYS OR LESS TO MATURITY): valued at amortized cost. 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. 59 FINANCIAL NOTES REALIZED GAINS AND LOSSES from security transactions are based on the identified costs of the securities involved. 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. 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. 60 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. 61 HOW TO READ THIS REPORT Continued [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. 62 [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. 63 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. 64 [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 subgroup. Note that for all dollar values, you need to add three zeroes after each number to get the approximate value. 65 HOW TO READ THIS REPORT Continued [GRAPHIC OF SAMPLE 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. Table is for illustration only. 66 [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. 67 HOW TO READ THIS REPORT Continued [GRAPHIC OF SAMPLE OF STATEMENTS 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. These are the figures for the current report period. These are the figures for the previous report period. 68 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 [GRAPHIC OF 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
----------------------------------------------------------------------- 69 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. 70 NOTES NOTES 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. REG13481-04 (04/02) -----END PRIVACY-ENHANCED MESSAGE-----