-----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, Vp8uReyMrtd8bqBhAy0IVv7VowZXNvxjHC6ENe8s4WGELJB9+EWwT4B8I954l4/j AxxN2p1HdAdoMye+jM1CCw== 0000950149-02-000918.txt : 20020507 0000950149-02-000918.hdr.sgml : 20020507 ACCESSION NUMBER: 0000950149-02-000918 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: 02635576 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 f80778n-30d.txt SCHWAB YIELD PLUS SEMI-ANNUAL REPORT SCHWAB YIELDPLUS FUND(TM) February 28, 2002 Semiannual Report [CHARLES SCHWAB LOGO] [PHOTO 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 YIELDPLUS FUND(TM) SEMIANNUAL REPORT September 1, 2001 - February 28, 2002 1 Market Overview 5 Schwab YieldPlus Fund 21 Financial Notes ----------------------------------------------------------------------- 24 HOW TO READ THIS REPORT An illustrated guide to the financials, along with a glossary. MARKET OVERVIEW ECONOMY APPEARS TO BE RECOVERING FROM RECESSION. After a relatively mild recession that began in March 2001, the U.S. economy appeared to be strengthening as the six-month report period drew to a close. [PHOTO OF MANUFACTURING WORKER] The Institute for Supply Management report for February, a forward-looking measure of the nation's economic health, indicated growth in the manufacturing sector for the first time in a year and a half. The final calculations of the nation's Gross Domestic Product (GDP) for the last quarter of 2001 turned out to be sharply higher than earlier calculations. The two upward revisions that were made to the original estimate of Q4 GDP provided evidence that the recession was not only brief but was milder than expected. This news raised the possibility of a recovery earlier than many economists had previously anticipated. For most of the period, however, economic doubts prevailed. The Federal Reserve Board (the Fed) cut short-term interest rates throughout 2001, reducing the benchmark Fed Funds Rate from 6.50% to 1.75%. This cycle of interest rate reductions appears to have ended with the rate cut in December, the last of four cuts that occurred during the report period. ASSET CLASS PERFORMANCE COMPARISON % returns during the report period This graph compares the performance of various asset classes during the report period. [LINE CHART]
Lehman Aggregate MSCI EAFE Russell 2000 S&P 500 3 Month Bond Index Index Small-Cap Index Index T-Bill 31-Aug-01 0 0 0 0 0 7-Sep-01 0.14 -5 -4.97 -4.17 0.07 14-Sep-01 0.85 -10.89 -5.88 -3.58 0.09 21-Sep-01 0.54 -17.15 -19.07 -14.76 0.34 28-Sep-01 1.17 -10.03 -13.46 -8.04 0.38 5-Oct-01 1.72 -7.34 -11.28 -5.36 0.45 12-Oct-01 1.31 -6.11 -8.35 -3.57 0.48 19-Oct-01 1.8 -8.31 -8.96 -5.17 0.53 26-Oct-01 2.25 -5.38 -6.18 -2.42 0.58 2-Nov-01 2.86 6.66 -7.34 -3.87 0.64 9-Nov-01 3.33 -4.66 -6.24 -0.94 0.71 16-Nov-01 1.21 -4.04 -3.38 0.68 0.72 23-Nov-01 0.88 -4.46 -1.84 1.72 0.75 30-Nov-01 1.87 -4.31 -1.31 0.88 0.8 7-Dec-01 0.36 -2.85 3.09 2.55 0.84 14-Dec-01 0.38 -6.41 1.01 -0.57 0.86 21-Dec-01 0.82 -6.06 3.74 1.36 0.9 28-Dec-01 0.76 -4.27 5.87 2.79 0.93 4-Jan-02 0.97 -2.27 7.09 3.93 0.97 11-Jan-02 2.5 -5.16 5.11 1.54 1.02 18-Jan-02 2.33 -6.96 1.77 -0.05 1.04 25-Jan-02 1.79 -8.01 2.86 0.45 1.06 1-Feb-02 2.24 -9.07 3.04 -0.44 1.09 8-Feb-02 2.58 -10.37 0.19 -2.75 1.13 15-Feb-02 2.8 -8.16 0.78 -2.04 1.16 22-Feb-02 3 -10.13 -0.09 -3.31 1.19
LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX: measures the U.S. bond market THREE-MONTH U.S. TREASURY BILLS (T-BILLS): measures short-term U.S. Treasury obligations S&P 500(R) INDEX: measures U.S. large-cap stocks RUSSELL 2000(R) INDEX: measures U.S. small-cap stocks MSCI-EAFE(R) INDEX: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East These figures assume dividends and distributions were reinvested. Index figures don't include trading and management costs, which would lower performance. Indices are unmanaged and you can't invest in them directly. Remember that past performance isn't an indication of future results. Data source: Charles Schwab & Co., Inc. (Schwab). 1 Although unemployment rose during most of the report period, it is still not high by historical standards. MARKET OVERVIEW Continued JOBLESS RATE RISES SHARPLY, THEN BEGINS TO RETREAT AGAIN. [PHOTO OF PEOPLE WAITING FOR TRAIN] After reaching new lows in 2000, the U.S. unemployment rate began rising rapidly in 2001. By the end of December 2001 it was at 5.8%, the highest level in over six years. To the surprise of most economists, unemployment proceeded to drop in January and again in February. However, unemployment may rise again in the coming months, until the effects of the recovery reach the job market. Meanwhile, inflation remained low, in part because employers have enjoyed strong worker productivity, which has helped stabilize labor costs and consumer prices. PACED BY RATE CUTS, BOND PRICES RISE; U.S. STOCKS FALL, RECOVER. With U.S. equities ending the report period about where they began, foreign equities falling and money markets seeing their lowest yields in years, bonds emerged as one of the best performing asset classes for the report period (see chart, previous page). Two key factors combined to help create this situation. The Fed's continuing series of interest rate cuts during the report period meant steady downward pressure on yields and, consequently, upward pressure on bond prices. Demand from investors - ------------------------------------------------------------------------------- ECONOMIC FACTORS AND THEIR EFFECTS ON THESE FUNDS. The following charts show recent figures for common measures of the state of the U.S. economy and the interest rate environment. While the relationship of each of these factors to the performance of the funds is complex, the captions over each chart and the discussion above include analysis of how we believe these factors may have influenced market behavior during the report period. REAL GDP GROWTH Annualized growth rate for each quarter shown Growth of 1.7% in Q4 2001 surprised many, as earlier expectations were for negative GDP growth. With only one negative quarter (Q3 2001), the U.S. economy, by one traditional measure, did not see a recession in 2001. [BAR CHART] Q1 1992 3.8 Q2 1992 3.8 Q3 1992 3.1 Q4 1992 5.4 Q1 1993 -0.1 Q2 1993 2.5 Q3 1993 1.8 Q4 1993 6.2 Q1 1994 3.4 Q2 1994 5.7 Q3 1994 2.2 Q4 1994 5 Q1 1995 1.5 Q2 1995 0.8 Q3 1995 3.1 Q4 1995 3.2 Q1 1996 2.9 Q2 1996 6.8 Q3 1996 2 Q4 1996 4.6 Q1 1997 4.4 Q2 1997 5.9 Q3 1997 4.2 Q4 1997 2.8 Q1 1998 6.1 Q2 1998 2.2 Q3 1998 4.1 Q4 1998 6.7 Q1 1999 3.1 Q2 1999 1.7 Q3 1999 4.7 Q4 1999 8.3 Q1 2000 2.3 Q2 2000 5.7 Q3 2000 1.3 Q4 2000 1.9 Q1 2001 1.3 Q2 2001 0.3 Q3 2001 -1.3 Q4 2001 1.7
Gross domestic product (GDP), a broad measure of the goods and services produced in the United States during a given time period, is a prime indicator of the health of the country's economy. Typically, investors see increases in GDP as a positive, since it indicates stronger demand, production and corporate earnings. The figures shown here are adjusted for inflation. Data source: Bloomberg L.P. - ------------------------------------------------------------------------------- 2 Inflation doesn't appear to be a problem for now. But convincing evidence of an economic revival could lead to interest rate increases. fleeing stocks also helped push bond prices up. In fact, investors' preference for Treasuries was so strong that the yield difference between Treasuries and investment-grade corporate bonds grew wider than at any point in the last ten years, including the previous recession. Prices of U.S. equities, which began the report period well below the all-time highs of early 2000, fell further in the wake of the tragic events of 9/11. But overall, by the end of the report period, U.S. stocks were able to recover the ground they lost in September. [PHOTO OF WAREHOUSE] LOOKING AHEAD: NEGATIVE FACTORS SEEM UNLIKELY TO DERAIL RECOVERY. There is enough evidence to support the view that the economy is improving, and is likely to continue to do so throughout 2002. More businesses appear ready to resume making capital expenditures and have already begun rebuilding inventories, which fell during 2001 as they typically do in a recession. U.S. UNEMPLOYMENT RATE Adjusted for seasonal variations After a decade of declines, unemployment rose sharply in 2001, to 5.8% -- nearly two percentage points above its three-decade low of 3.9% in 2000. Since then, small declines indicate that the biggest increases may be over for now. [LINE CHART] Dec-91 7.3 Jan-92 7.3 Feb-92 7.4 Mar-92 7.4 Apr-92 7.4 May-92 7.6 Jun-92 7.8 Jul-92 7.7 Aug-92 7.6 Sep-92 7.6 Oct-92 7.3 Nov-92 7.4 Dec-92 7.4 Jan-93 7.3 Feb-93 7.1 Mar-93 7 Apr-93 7.1 May-93 7.1 Jun-93 7 Jul-93 6.9 Aug-93 6.8 Sep-93 6.7 Oct-93 6.8 Nov-93 6.6 Dec-93 6.5 Jan-94 6.8 Feb-94 6.6 Mar-94 6.5 Apr-94 6.4 May-94 6.1 Jun-94 6.1 Jul-94 6.3 Aug-94 6 Sep-94 5.8 Oct-94 5.8 Nov-94 5.6 Dec-94 5.5 Jan-95 5.6 Feb-95 5.4 Mar-95 5.3 Apr-95 5.8 May-95 5.8 Jun-95 5.6 Jul-95 5.6 Aug-95 5.7 Sep-95 5.6 Oct-95 5.5 Nov-95 5.7 Dec-95 5.6 Jan-96 5.6 Feb-96 5.5 Mar-96 5.6 Apr-96 5.5 May-96 5.6 Jun-96 5.3 Jul-96 5.5 Aug-96 5.1 Sep-96 5.2 Oct-96 5.2 Nov-96 5.3 Dec-96 5.4 Jan-97 5.3 Feb-97 5.3 Mar-97 5.1 Apr-97 5 May-97 4.7 Jun-97 5 Jul-97 4.7 Aug-97 4.9 Sep-97 4.7 Oct-97 4.7 Nov-97 4.6 Dec-97 4.7 Jan-98 4.5 Feb-98 4.6 Mar-98 4.6 Apr-98 4.3 May-98 4.3 Jun-98 4.5 Jul-98 4.5 Aug-98 4.5 Sep-98 4.5 Oct-98 4.5 Nov-98 4.4 Dec-98 4.3 Jan-99 4.3 Feb-99 4.4 Mar-99 4.2 Apr-99 4.3 May-99 4.2 Jun-99 4.3 Jul-99 4.3 Aug-99 4.2 Sep-99 4.2 Oct-99 4.1 Nov-99 4.1 Dec-99 4.1 Jan-00 4 Feb-00 4.1 Mar-00 4.1 Apr-00 3.9 May-00 4.1 Jun-00 4 Jul-00 4 Aug-00 4.1 Sep-00 3.9 Oct-00 3.9 Nov-00 4 Dec-00 4 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]
Date Consumer Price Index Dec-91 3.1 Jan-92 2.6 Feb-92 2.8 Mar-92 3.2 Apr-92 3.2 May-92 3 Jun-92 3.1 Jul-92 3.2 Aug-92 3.1 Sep-92 3 Oct-92 3.2 Nov-92 3 Dec-92 2.9 Jan-93 3.3 Feb-93 3.2 Mar-93 3.1 Apr-93 3.2 May-93 3.2 Jun-93 3 Jul-93 2.8 Aug-93 2.8 Sep-93 2.7 Oct-93 2.8 Nov-93 2.7 Dec-93 2.7 Jan-94 2.5 Feb-94 2.5 Mar-94 2.5 Apr-94 2.4 May-94 2.3 Jun-94 2.5 Jul-94 2.8 Aug-94 2.9 Sep-94 3 Oct-94 2.6 Nov-94 2.7 Dec-94 2.7 Jan-95 2.8 Feb-95 2.9 Mar-95 2.9 Apr-95 3.1 May-95 3.2 Jun-95 3 Jul-95 2.8 Aug-95 2.6 Sep-95 2.5 Oct-95 2.8 Nov-95 2.6 Dec-95 2.5 Jan-96 2.7 Feb-96 2.7 Mar-96 2.8 Apr-96 2.9 May-96 2.9 Jun-96 2.8 Jul-96 3 Aug-96 2.9 Sep-96 3 Oct-96 3 Nov-96 3.3 Dec-96 3.3 Jan-97 3 Feb-97 3 Mar-97 2.8 Apr-97 2.5 May-97 2.2 Jun-97 2.3 Jul-97 2.2 Aug-97 2.2 Sep-97 2.2 Oct-97 2.1 Nov-97 1.8 Dec-97 1.7 Jan-98 1.6 Feb-98 1.4 Mar-98 1.4 Apr-98 1.4 May-98 1.7 Jun-98 1.7 Jul-98 1.7 Aug-98 1.6 Sep-98 1.5 Oct-98 1.5 Nov-98 1.5 Dec-98 1.6 Jan-99 1.7 Feb-99 1.6 Mar-99 1.7 Apr-99 2.3 May-99 2.1 Jun-99 2 Jul-99 2.1 Aug-99 2.3 Sep-99 2.6 Oct-99 2.6 Nov-99 2.6 Dec-99 2.7 Jan-00 2.7 Feb-00 3.2 Mar-00 3.7 Apr-00 3 May-00 3.1 Jun-00 3.7 Jul-00 3.7 Aug-00 3.4 Sep-00 3.5 Oct-00 3.4 Nov-00 3.4 Dec-00 3.4 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-01 2.1 Nov-01 1.9 Dec-01 1.6 Jan-02 1.1 Feb-02 1.1
Qtr Employment Cost Index Dec-91 4.3 Mar-92 4 Jun-92 3.6 Sep-92 3.5 Dec-92 3.5 Mar-93 3.5 Jun-93 3.6 Sep-93 3.6 Dec-93 3.5 Mar-94 3.2 Jun-94 3.2 Sep-94 3.2 Dec-94 3 Mar-95 2.9 Jun-95 2.9 Sep-95 2.7 Dec-95 2.7 Mar-96 2.8 Jun-96 2.9 Sep-96 2.8 Dec-96 2.9 Mar-97 2.9 Jun-97 2.8 Sep-97 3 Dec-97 3.3 Mar-98 3.3 Jun-98 3.5 Sep-98 3.7 Dec-98 3.4 Mar-99 3 Jun-99 3.2 Sep-99 3.1 Dec-99 3.4 Mar-00 4.3 Jun-00 4.4 Sep-00 4.3 Dec-00 4.1 Mar-01 4.1 Jun-01 3.9 Sep-01 4.1 Dec-01 4.1
The Consumer Price Index (CPI) tracks changes in the cost of goods and services and is the most common measure of inflation. The Employment Cost Index (ECI) measures the cost of employing workers, including benefits costs. Financial markets are very sensitive to increases in inflation because of the potentially negative impact on corporate earnings, investors and consumers. Data source: Bloomberg L.P. 3 MARKET OVERVIEW Continued [PHOTO OF AMERICAN FLAG] Consumer spending should remain strong in 2002. However, as it did not retrench much during the recession (except for a fairly brief period after 9/11), consumer spending is not likely to grow significantly, which it typically does after a recession. Any realistic assessment of economic prospects must encompass negative factors as well. Recent concerns about corporate accounting practices have understandably made investors nervous. However, this situation should not undermine the view of improving economic conditions. There are still uncertainties associated with the ongoing war on terrorism which may affect the economy and financial markets. A rise in petroleum prices, which might occur if the antiterrorism coalition were to lose support from some Middle Eastern countries, would be a setback for the U.S. economy. A decline in consumer spending would be damaging to the economy, while stock prices would likely retreat if corporations reported sub-par earnings. Although inflation presently looks benign, a stronger increase in economic activity may prompt the Fed to raise interest rates earlier than expected as a preemptive move. In spite of these issues, however, the overall economic outlook remains positive. YIELDS OF U.S. TREASURY BONDS Effective yields of five-year and ten-year Treasuries For most of 2001 (and the report period), Treasury prices soared and yields plunged as investors sought security. Falling interest rates and a decreasing supply of Treasuries aided this trend. [LINE CHART]
5 YEAR 10 YEAR TREASURY BOND YIELD TREASURY BOND YIELD 31-Dec-91 5.93 6.7 31-Jan-92 6.43 7.27 29-Feb-92 6.56 7.25 31-Mar-92 6.92 7.53 30-Apr-92 6.88 7.58 31-May-92 6.6 7.32 30-Jun-92 6.27 7.12 31-Jul-92 5.82 6.71 31-Aug-92 5.58 6.6 30-Sep-92 5.32 6.35 31-Oct-92 5.89 6.79 30-Nov-92 6.22 6.94 31-Jan-93 5.55 6.36 28-Feb-93 5.21 6.02 31-Mar-93 5.24 6.02 30-Apr-93 5.11 6.01 31-May-93 5.37 6.15 30-Jun-93 5.05 5.78 31-Jul-93 5.15 5.81 31-Aug-93 4.79 5.45 30-Sep-93 4.77 5.38 31-Oct-93 4.85 5.43 30-Nov-93 5.16 5.82 31-Dec-93 5.21 5.79 31-Jan-94 5.02 5.64 28-Feb-94 5.57 6.13 31-Mar-94 6.23 6.74 30-Apr-94 6.64 7.04 31-May-94 6.76 7.15 30-Jun-94 6.95 7.32 31-Jul-94 6.73 7.11 31-Aug-94 6.8 7.17 30-Sep-94 7.28 7.6 31-Oct-94 7.49 7.81 30-Nov-94 7.79 7.91 31-Dec-94 7.83 7.82 31-Jan-95 7.51 7.58 28-Feb-95 7.04 7.2 31-Mar-95 7.07 7.2 30-Apr-95 6.88 7.06 31-May-95 6.05 6.28 30-Jun-95 5.97 6.2 31-Jul-95 6.16 6.43 31-Aug-95 6.07 6.28 30-Sep-95 6.02 6.18 31-Oct-95 5.81 6.02 30-Nov-95 5.52 5.74 31-Dec-95 5.38 5.57 31-Jan-96 5.24 5.58 29-Feb-96 5.73 6.1 31-Mar-96 6.09 6.33 30-Apr-96 6.41 6.67 31-May-96 6.63 6.85 30-Jun-96 6.46 6.71 31-Jul-96 6.57 6.79 31-Aug-96 6.73 6.94 30-Sep-96 6.46 6.7 31-Oct-96 6.07 6.34 30-Nov-96 5.83 6.04 31-Dec-96 6.21 6.42 31-Jan-97 6.25 6.49 28-Feb-97 6.39 6.55 31-Mar-97 6.75 6.9 30-Apr-97 6.57 6.72 31-May-97 6.5 6.66 30-Jun-97 6.38 6.5 31-Jul-97 5.9 6.01 31-Aug-97 6.22 6.34 30-Sep-97 5.99 6.1 31-Oct-97 5.71 5.83 30-Nov-97 5.84 5.87 31-Dec-97 5.71 5.74 31-Jan-98 5.38 5.51 28-Feb-98 5.59 5.62 31-Mar-98 5.62 5.65 30-Apr-98 5.64 5.67 31-May-98 5.55 5.55 30-Jun-98 5.47 5.45 31-Jul-98 5.5 5.49 31-Aug-98 4.8 4.98 30-Sep-98 4.22 4.42 31-Oct-98 4.23 4.61 30-Nov-98 4.48 4.71 31-Dec-98 4.54 4.65 31-Jan-99 4.55 4.65 28-Feb-99 5.22 5.29 31-Mar-99 5.1 5.24 30-Apr-99 5.21 5.35 31-May-99 5.58 5.62 30-Jun-99 5.65 5.78 31-Jul-99 5.79 5.9 31-Aug-99 5.87 5.97 30-Sep-99 5.75 5.88 31-Oct-99 5.96 6.02 30-Nov-99 6.11 6.19 31-Dec-99 6.34 6.44 31-Jan-00 6.68 6.67 29-Feb-00 6.6 6.41 31-Mar-00 6.31 6 30-Apr-00 6.54 6.21 31-May-00 6.52 6.27 30-Jun-00 6.19 6.03 31-Jul-00 6.15 6.03 31-Aug-00 5.97 5.73 30-Sep-00 5.85 5.8 31-Oct-00 5.81 5.75 30-Nov-00 5.43 5.47 31-Dec-00 4.98 5.11 31-Jan-01 4.77 5.11 28-Feb-01 4.66 4.9 31-Mar-01 4.56 4.92 30-Apr-01 4.89 5.34 31-May-01 4.91 5.38 30-Jun-01 4.95 5.41 31-Jul-01 4.53 5.05 31-Aug-01 4.38 4.83 30-Sep-01 3.8 4.59 31-Oct-01 3.48 4.23 30-Nov-01 4.06 4.75 31-Dec-01 4.3 5.05 31-Jan-02 4.37 5.03 28-Feb-02 4.19 4.88
Yields, or interest rates, represent the cost of borrowing money. Rapid economic growth or the expectation of higher inflation can drive rates up, while the opposite conditions can push rates down. Data source: Bloomberg L.P. YIELD CURVE Average yields of AAA securities of six maturities The shift in the yield curve shows the effects of the Fed's rate cuts, with short-term rates down sharply, intermediate rates down somewhat and long-term rates virtually unchanged. [LINE GRAPH]
Yield Curve Maturity 09/01/01 02/28/02 3 Month 3.43 1.75 6 Month 3.40 1.86 2 Year 3.79 3.06 5 Year 4.53 4.19 10 Year 4.96 4.88 30 Year 5.48 5.42
Note from Schwab: 1 year is no longer being issued; therefore, it is NOT included in the yield curve. This chart shows where yields stood at the beginning of the report period and at the end of the period. For debt securities of comparable quality, those with longer maturities typically pay higher interest rates, because they are assumed to carry higher risk. An inverted yield curve generally means that investors expect rates to fall. Data source: Bloomberg L.P. 4 SCHWAB YIELDPLUS FUND(TM) "The Enron situation, September 11 and the large wave of mortgage refinancing made for a volatile report period." Portfolio Manager Kim Daifotis [PHOTO OF KIM DAIFOTIS] KIM DAIFOTIS, CFA, a vice president of the investment adviser, has overall responsibility for management of the fund. Prior to joining the firm in 1997, he worked for more than 17 years in research and asset management. TICKER SYMBOLS INVESTOR SHARES SWYPX SELECT SHARES(R) SWYSX [GRAPHIC]
INTEREST RATE SENSITIVITY 1 CREDIT QUALITY 1 SHORT MEDIUM LONG HIGH / / / / / / MEDIUM /X/ / / / / LOW / / / / / /
Investors with investment horizons of one year or more who are seeking an alternative to a money fund or other fixed-income fund may want to consider this fund. THE FUND SEEKS HIGH CURRENT INCOME WITH MINIMAL CHANGES IN SHARE PRICE. MANAGER'S PERSPECTIVE A SERIES OF NEGATIVE EVENTS RATTLED INVESTOR CONFIDENCE DURING THE REPORT PERIOD. The events of 9/11, credit concerns in corporate markets and continued economic weakness created a difficult environment for investors. The Fed acted quickly to renew confidence by further reducing short-term rates from 3.50% to 1.75% over the last four months of 2001. Despite volatility in bond yields and prices, fixed income securities continued to perform well relative to other asset classes as the report period closed. WORRIES ABOUT ACCOUNTING PRACTICES HURT CORPORATE BONDS. The Enron debacle created higher volatility in the corporate bond market and in the fund's share price. Mortgage securities also faced uncertainty, in their case because of a large wave of refinancing. During the report period, the mortgage sector slightly outperformed Treasuries with comparable maturities, while corporates slightly underperformed Treasuries. THE FUND CONTINUED TO FAVOR SHORT-TERM CORPORATE AND MORTGAGE BACKED SECURITIES. Buying opportunities for these securities arose as investors traded them for longer-maturity, higher yield securities. Towards the end of the report period, we focused on securities with floating rate coupons in anticipation of a rise in short-term rates. 1 Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two main components of bond performance. The assessment reflects the fund's portfolio as of 2/28/02, which may have changed since then, and is not a precise indication of risk or performance -- past, present or future. Definitions of style box categories: Sensitivity (measured as duration): Short, up to 3.5 years; Medium, more than 3.5 years to less than six years; Long, six years or greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or lower. 5 SCHWAB YIELDPLUS FUND(R) PERFORMANCE: INVESTOR SHARES AVERAGE ANNUAL TOTAL RETURNS as of 2/28/02 This chart compares performance of the fund's Investor Shares with the Lehman Brothers U.S. Short Treasury: 9-12 Months Index and the Morningstar Ultrashort Bond Fund category. As of the end of the report period, the shares' 30-day SEC yield was 4.47%. 1 [BAR CHART - PLOT POINTS TO COME] PERFORMANCE OF A $10,000 INVESTMENT Shows performance since inception of a hypothetical $10,000 investment in the fund's Investor Shares, compared with a similar investment in the Lehman Brothers U.S. Short Treasury: 9-12 Months Index. [LINE GRAPH - PLOT POINTS TO COME] 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 Source: Morningstar, Inc. As of 2/28/02, the total number of funds in the Morningstar Ultrashort Bond Fund category for the six-month and one-year periods was 93 and 89, respectively. 3 Not annualized. 6 PERFORMANCE: SELECT SHARES(R) AVERAGE ANNUAL TOTAL RETURNS as of 2/28/02 This chart compares performance of the fund's Select Shares with the Lehman Brothers U.S. Short Treasury: 9-12 Months Index and the Morningstar Ultrashort Bond Fund category. As of the end of the report period, the shares' 30-day SEC yield was 4.62%. 1 [BAR CHART - PLOT POINTS TO COME] PERFORMANCE OF A $50,000 INVESTMENT Shows performance since inception of a hypothetical $50,000 investment (the minimum investment for this share class) in the fund's Select Shares, compared with a similar investment in the Lehman Brothers U.S. Short Treasury: 9-12 Months Index. [LINE GRAPH - PLOT POINTS TO COME] 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 Source: Morningstar, Inc. As of 2/28/02, the total number of funds in the Morningstar Ultrashort Bond Fund category for the six-month and one-year periods was 93 and 89, respectively. 3 Not annualized. 7 SCHWAB YIELDPLUS FUND(R) FUND FACTS TOP TEN HOLDINGS 1 as of 2/28/02
PERCENTAGE OF SECURITY RATE MATURITY DATE INVESTMENTS (1) ATLANTIS TWO FUNDING CORP. 2.35% 03/01/02 1.8% (2) SKANDINAVISKA ENSKILDA BANKEN, 144A 6.50% 06/04/03 1.7% (3) FIRST HORIZON ASSSET SECURITIES, INC. Series 2002-2 Class PA 5.50% 06/25/30 1.5% (4) VIACOM, INC. 2.10% 03/05/02 1.4% (5) FORD MOTOR CREDIT CO. 3.68% 04/25/02 1.4% (6) LIMESTONE ELECTRON TRUST, 144A 8.63% 03/15/03 1.3% (7) SIMON PROPERTY GROUP LP, INC. 6.63% 06/15/03 1.2% (8) TCI COMMUNICATIONS, INC. 6.38% 05/01/03 1.2% (9) GEORGIA PACIFIC CORP. 9.95% 06/15/02 1.2% (10) KELLOGG CO. 2.00% 03/01/02 1.2% ------------------------------------------------------------------------------------------------------- TOTAL 13.9%
DAILY NAV HISTORY as of 2/28/02 This chart shows the fund's daily NAV history for Investor Shares and Select Shares over the reporting period. [LINE GRAPH - PLOT POINTS TO COME] DIVIDENDS PAID in each fiscal year [BAR CHART - PLOT POINTS TO COME] 1 This list is not a recommendation of any security by the investment adviser. Portfolio holdings may have changed since the report date. 2 Period from the fund's inception on 10/1/99 through 8/31/00. 3 For the six-month period ended 2/28/02. 8 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. 63.3% Corporate Bonds 2. 25.8% Collaterized Mortgage Obligations 3. 10.5% Commercial Paper and Other Corporate Obligations 4. 0.3% Preferred Stock 5. 0.1% U.S. Government securities and Other Investment Companies
BY CREDIT QUALITY 1 [PIE CHART] 1. 26.6% AAA 2. 0.6% AA 3. 16.4% A 4. 41.4% BBB 5. 4.5% BB 6. 10.5% Short-Term Ratings
BY MATURITY [PIE CHART] 1. 41.7% 0-6 Months 2. 44.3% 7-18 Months 3. 13.7% 19-30 Months 4. 0.3% More than 30 Months
STATISTICS as of 2/28/02
PEER GROUP FUND AVERAGE 2 - ---------------------------------------------------------- Number of Holdings 208 175 - ---------------------------------------------------------- 12-Month Yield 4.95% 5.26% - ---------------------------------------------------------- Weighted Average Rate 5.69% 4.56% - ---------------------------------------------------------- Weighted Average Maturity 0.8 yrs 2.6 yrs - ---------------------------------------------------------- Weighted Average Duration 0.8 yrs 0.9 yrs - ---------------------------------------------------------- Weighted Average Credit Quality A AA - ----------------------------------------------------------
EXPENSE RATIO as of 2/28/02 [BAR CHART - PLOT POINTS TO COME] 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 93 funds in the Morningstar Ultrashort Bond Fund category. 9 SCHWAB YIELDPLUS FUND(R)- 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- 10/1/99 1- Investor Shares 2/28/02 8/31/01 8/31/00 - ----------------------------------------------------------------------------------------- PER-SHARE DATA ($) - ----------------------------------------------------------------------------------------- Net asset value at beginning of period 10.00 9.92 10.00 ------------------------------------- Income from investment operations: Net investment income 0.23 0.62 0.61 Net realized and unrealized losses (0.15) 0.08 (0.08) ------------------------------------- Total income from investment operations 0.08 0.70 0.53 Less distributions: Dividends from net investment income (0.23) (0.62) (0.61) ------------------------------------- Net asset value at end of period 9.85 10.00 9.92 ===================================== Total return (%) 0.77 2 7.33 5.44 2 RATIOS/SUPPLEMENTAL DATA (%) - ----------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.55 3 0.55 0.55 3,4 Expense reductions reflected in above ratio 0.08 3 0.16 0.24 3 Ratio of net investment income to average net assets 4.43 3 6.03 6.72 3 Portfolio turnover rate 19 106 81 Net assets, end of period ($ x 1,000,000) 349 185 53
1 Commencement of operations. 2 Not annualized. 3 Annualized. 4 Would have been 0.56% if non-routine expenses (proxy fees) had been included. See the Financial Notes, which are integral to this information. 10
9/1/01 9/1/00- 10/1/99 1- SELECT SHARES(R) 2/28/02 8/31/01 8/31/00 - ------------------------------------------------------------------------------------- PER-SHARE DATA ($) - ------------------------------------------------------------------------------------- Net asset value at beginning of period 10.00 9.92 10.00 --------------------------------- Income from investment operations: Net investment income 0.23 0.64 0.62 Net realized and unrealized losses (0.15) 0.08 (0.08) --------------------------------- Total income from investment operations 0.08 0.72 0.54 Less distributions: Dividends from net investment income (0.23) (0.64) (0.62) --------------------------------- Net asset value at end of period 9.85 10.00 9.92 ================================= Total return (%) 0.85 2 7.50 5.58 2 RATIOS/SUPPLEMENTAL DATA (%) - ------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.40 3 0.40 0.40 3,4 Expense reductions reflected in above ratio 0.08 3 0.16 0.24 3 Ratio of net investment income to average net assets 4.59 3 6.18 6.88 3 Portfolio turnover rate 19 106 81 Net assets, end of period ($ x 1,000,000) 1,430 772 219
1 Commencement of operations. 2 Not annualized. 3 Annualized. 4 Would have been 0.41% if non-routine expenses (proxy fees) had been included. See the Financial Notes, which are integral to this information. 11 SCHWAB YIELDPLUS FUND(R) - 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 ++ Delayed-delivery security * Collateral for futures contracts For fixed-rate obligations, the rate shown is the interest rate (the rate established when the obligation was issued) and the maturity date shown is the stated legal maturity. For variable-rate obligations, the rate shown is the rate as of the report date, and the maturity shown is the later of the next interest rate change date or demand date. The pie chart below shows the fund's major asset categories and the market value and cost of the securities in each category. ALL DOLLAR VALUES ARE IN THOUSANDS. [PIE CHART] 63.3% CORPORATE BONDS Market Value: $1,138,554 Cost: $1,141,745 25.8% COLLATERIZED MORTGAGE OBLIGATIONS Market Value: $464,098 Cost: $461,425 10.5% COMMERCIAL PAPER AND OTHER CORPORATE OBLIGATIONS Market Value: $188,610 Cost: $188,610 0.3% PREFERRED STOCK Market Value: $6,188 Cost: $5,873 0.1% U.S. GOVERNMENT SECURITIES AND OTHER INVESTMENT COMPANIES Market Value: $1,791 Cost: $1,791 ------------------------------ 100.0% TOTAL INVESTMENTS Market Value: $1,799,241 Cost: $1,799,444
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) CORPORATE BONDS 63.3% of investments FIXED RATE OBLIGATIONS 46.5% -------------------------------------------------------------- AES CORP. 8.75%, 12/15/02 7,000 6,090 AMERCO 7.20%, 04/01/02 4,500 4,503 ARCHSTONE-SMITH TRUST 7.15%, 10/15/03 14,500 15,018 BEAR STEARNS COMPANY, INC. 6.13%, 02/01/03 2,675 2,752 BECKMA COULTER, INC., 144A 7.10%, 03/04/03 12,465 12,778 BELO (A.H.) CORP. 6.88%, 06/01/02 12,190 12,264 CANADIAN OCCIDENTAL PETROLEUM 7.13%, 02/04/04 5,000 5,247 CAPITAL ONE BANK 6.38%, 02/15/03 4,950 4,863 6.50%, 07/30/04 10,000 9,677 CAPITAL ONE FINANCIAL 7.25%, 12/01/03 5,000 4,898 CARPENTER TECHNOLOGY Series B 6.28%, 04/07/03 6,808 7,002 CASE CREDIT CORP. 6.15%, 03/01/02 15,000 15,000 CEMEX, S.A., 144A 8.63%, 07/18/03 17,500 18,594 CENDANT CORP. 7.75%, 12/01/03 19,966 20,024 CINERGY CORP. 6.25%, 09/01/04 10,000 10,109 CIT GROUP, INC. 7.38%, 03/15/03 5,000 4,960 * CLEAR CHANNEL COMMUNICATIONS, INC. 7.25%, 09/15/03 20,000 20,518 COLUMBIA/HCA HEALTHCARE CORP. 6.63%, 07/15/02 8,650 8,739
See the Financial Notes, which are integral to this information. 12
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) COUNTRYWIDE HOME LOAN,INC. Series J 5.25%, 05/22/03 17,000 17,439 5.25%, 06/15/04 5,000 5,120 COX COMMUNICATIONS, INC. 6.50%, 11/15/02 940 958 COX RADIO, INC., 144A 6.25%, 05/15/03 12,705 13,014 CUMMINS, INC. 6.25%, 03/01/03 9,800 9,894 *DANA CREDIT CORP., 144A 7.25%, 12/16/02 10,000 9,629 DILLIARDS, INC. 6.31%, 08/01/02 5,000 4,990 DIME BANCORP, INC. 9.00%, 12/19/02 14,275 14,939 DOLE FOODS CO. 7.00%, 05/15/03 11,415 11,671 DR. HORTON, INC. 8.38%, 06/15/04 5,000 5,150 EOP OPERATING, L.P. 6.38%, 02/15/03 8,200 8,415 ERAC USA FINANCE CO., 144A 6.38%, 05/15/03 12,500 12,753 7.50%, 06/15/03 6,050 6,274 6.95%, 03/01/04 3,575 3,686 ERP OPERATING,L.P. 7.95%, 04/15/02 4,000 4,020 6.65%, 11/15/03 1,500 1,568 FEDERATED DEPARTMENT STORES, INC. 8.13%, 10/15/02 4,105 4,223 FLORIDA POWER & LIGHT CO. 6.88%, 03/30/02 4,000 4,010 GAP, INC. 5.63%, 05/01/03 15,680 15,248 GENERAL MOTORS ACCEPTANCE CORP. 5.48%, 12/16/02 3,000 3,061 *(9) GEORGIA PACIFIC CORP. 9.95%, 06/15/02 21,115 21,112 GS ESCROW CORP. 7.00%, 08/01/03 4,300 4,363 HEALTH CARE PROPERTIES Series B 6.66%, 03/06/03 5,000 5,154 HEALTHSOUTH CORP., 144A 3.25%, 04/01/03 10,000 9,688 HELLER FINANCIAL, INC. 7.88%, 05/15/03 7,500 7,971 HRPT PROPERTIES TRUST Series CL-A 6.75%, 12/18/02 10,000 10,211 ITT CORP. 6.75%, 11/15/03 12,500 12,517 * J.C. PENNEY & CO. 7.25%, 04/01/02 18,250 18,251 6.50%, 06/15/02 2,900 2,904 6.13%, 11/15/03 2,185 2,112 KN ENERGY, INC. 6.45%, 03/01/03 9,300 9,551 LEHMAN BROTHERS HOLDINGS, INC., 144A 7.00%, 05/15/03 5,000 5,218 *(6) LIMESTONE ELECTRON TRUST, 144A 8.63%, 03/15/03 23,460 23,863 LITTON INDUSTRIES, INC. 6.05%, 04/15/03 5,000 5,124 MASCO CORP. 6.00%, 05/03/04 14,500 14,846 MBNA CORP. Series F 4.31%, 03/12/02 5,000 5,000 MCI WORLDCOM, INC. 6.13%, 04/15/02 5,000 4,989 MCKESSON CORP. 6.88%, 03/01/02 6,500 6,500 MCKESSON FINANCE OF CANADA, 144A 6.55%, 11/01/02 2,050 2,078 MERITA BANK YANKEE, 144A 7.15%, 09/11/02 20,125 20,486 MILLIPORE CORP. 7.20%, 04/01/02 5,000 5,012 NATIONAL CONSUMER COOPERATIVE BANK 6.21%, 01/13/03 5,000 5,149
See the Financial Notes, which are integral to this information. 13 SCHWAB YIELDPLUS FUND(R) - FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) NAVISTAR INTERNATIONAL Series B 7.00%, 02/01/03 2,900 2,900 NEWMONT MINING CORP. 8.63%, 04/01/02 14,170 14,239 NEWS AMERICA, INC. 6.70%, 05/21/04 4,500 4,705 NORDSTROM CREDIT, INC. 7.25%, 04/30/02 6,000 6,048 PDVSA FINANCE, LTD. Series 1998-1 6.45%, 02/15/04 4,003 3,873 Series 1999-F 8.75%, 02/15/04 10,302 10,224 PETROLEOS MEXICANOS, 144A 6.50%, 02/01/05 5,000 5,150 POTLATCH CORP. 6.25%, 03/15/02 3,850 3,853 PROTECTIVE LIFE U.S. FUNDING TRUST, 144A 5.50%, 05/14/04 3,000 3,096 PSEG CAPITAL CORP., 144A 6.94%, 07/02/02 2,000 2,028 PULTES HOMES, INC. 9.50%, 04/01/03 5,000 5,223 QWEST CAPITAL FUNDING, INC. 5.88%, 08/03/04 9,000 8,365 QWEST CORP. 7.63%, 06/09/03 2,000 1,964 *RAYTHEON CO. 6.45%, 08/15/02 3,674 3,714 7.90%, 03/01/03 16,055 16,634 ROGERS CABLE SYSTEM 9.63%, 08/01/02 2,500 2,531 ROYAL CARIBBEAN 7.13%, 09/18/02 15,526 15,373 RYDER SYSTEM, INC. Series 14 6.14%, 10/27/03 5,000 5,099 (7) SIMON PROPERTY GROUP LP, INC. 6.63%, 06/15/03 20,870 21,537 (2) SKANDINAVISKA ENSKILDA BANKEN, 144A 6.50%, 06/04/03 28,860 29,784 SPRINT CAPITAL CORP. 5.70%, 11/15/03 18,585 17,611 SUPERVALU, INC. 7.80%, 11/15/02 6,565 6,663 *(8) TCI COMMUNICATIONS, INC. 6.38%, 05/01/03 21,000 21,479 TXU CORP. Series D 5.52%, 08/16/03 10,000 10,097 TYCO INTERNATIONAL GROUP, SA 6.25%, 06/15/03 10,000 9,508 UNION BANK OF NORWAY,144A 7.35%, 07/09/03 7,000 7,229 US WEST CAPITAL FUNDING, INC. 6.13%, 07/15/02 3,500 3,402 USA WASTE SERVICES, INC. 6.50%, 12/15/02 14,200 14,457 WASTE MANAGEMENT, INC. 6.63%, 07/15/02 2,670 2,693 7.70%, 10/01/02 7,400 7,555 WILLIAMS HOLDINGS OF DELAWARE 6.13%, 12/01/03 8,400 8,224 WORLDCOM,INC. 7.88%, 05/15/03 8,265 8,243 6.25%, 08/15/03 5,000 4,862 WORLDCOM, INC., 144A 7.38%, 01/15/03 4,150 4,048 YORK INTERNATIONAL CORP. 6.75%, 03/01/03 3,500 3,602 ------- 837,210 VARIABLE RATE OBLIGATIONS 16.8% ------------------------------------------------------------- AB SPINTAB 2.87%, 04/30/02 6,500 6,353 ALLETE 2.62%, 04/22/02 5,000 5,010 BANK OF BOSTON 2.62%, 03/15/02 10,000 9,018 BNP PARIBAS 2.54%, 03/20/02 5,500 5,403 BOISE CASCADE CORP. Series A 3.82%, 04/15/02 15,000 15,005
See the Financial Notes, which are integral to this information. 14
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) BOMBARDIER CAPITAL, INC., 144A 4.03%, 05/21/02 5,000 5,023 4.15%, 05/21/02 15,000 15,072 CENTEX CORP. Series E 3.52%, 04/22/02 15,000 14,977 CHRYSLER FINANCIAL CO., L.L.C. Series R 1.97%, 03/20/02 800 786 DAIMLER CHRYSLER, N.A. Series C 2.38%, 08/02/04 20,000 19,517 (5) FORD MOTOR CREDIT CO. 3.68%, 04/25/02 24,600 24,208 FRANCE TELECOM, 144A 3.61%, 03/14/02 15,000 14,969 GENERAL MOTORS ACCEPTANCE CORP. 2.13%, 04/05/02 10,000 9,702 2.68%, 05/06/02 10,000 9,809 GOLDEN STATE HOLDINGS 2.86%, 05/01/02 10,500 10,374 GULF STATES UTILITIES, 144A 3.38%, 03/01/02 15,000 15,014 HELLER FINANCIAL, INC. Series I 2.03%, 04/22/02 5,000 5,012 INDIANA MICHIGAN POWER 2.71%, 03/04/02 2,500 2,501 KINDER MORGAN, INC.,144A 2.79%, 04/10/02 15,000 15,001 LILLY DEL MAR, INC., 144A 3.12%, 05/05/02 5,000 4,936 MBNA CORP. Series F 2.96%, 05/16/02 13,000 12,940 3.65%, 05/28/02 11,000 11,003 NATIONAL CONSUMER COOP BANK Series B 3.93%, 04/08/02 10,000 10,006 4.17%, 05/06/02 10,000 10,002 NATIONS BANK CAPITAL TRUST III 2.38%, 04/15/02 3,500 3,095 NEVADA POWER CO. 3.48%, 04/15/02 5,000 5,004 POPULAR NA, INC. 3.48%, 04/15/02 15,000 15,010 PSEG CAPITAL CORP., 144A 3.12%, 03/11/02 7,500 7,499 QWEST CAPITAL FUNDING, INC., 144A 2.32%, 04/08/02 5,000 5,004 SOCIETE GENERALE 2.34%, 04/18/02 6,200 6,016 TRW, INC. Series E 2.33%, 03/25/02 100 100 UTILICORP UNITED, INC., 144A 2.78%, 05/15/02 8,000 7,975 ------- 301,344 COLLATERALIZED MORTGAGE OBLIGATIONS 25.8% of investments NON-U.S. GOVERNMENT AGENCY SECURITIES 15.9% ------------------------------------------------------------------- ABN AMRO MORTGAGE CORP. Series 2001-1 Class A1 6.00%, 05/25/31 9,314 9,482 BANK OF AMERICA MORTGAGE SECURITIES Series 2001-E Class A2 5.62%, 09/25/31 15,000 15,569 Series 2001-F Class A2 5.61%, 11/25/31 9,011 9,105 Series 2001-H Class A1 5.37%, 12/25/31 9,934 9,857 Series 2002-A Class A1 5.24%, 02/25/32 7,970 7,968 CHASE MORTGAGE FINANCE CORP. Series 2000-S1 Class A1 7.25%, 02/25/30 965 971 Series 2002-S4 Class A3 5.75%, 03/25/32 20,000 20,550 COUNTRYWIDE ALTERNATIVE LOAN TRUST Series 2001-5 Class A1 6.50%, 06/25/31 8,785 9,024 Series 2001-7 Class A10 6.50%, 08/25/31 8,926 9,178
See the Financial Notes, which are integral to this information. 15 SCHWAB YIELDPLUS FUND(R) - FINANCIALS PORTFOLIO HOLDINGS Continued As of February 28, 2002; unaudited.
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) COUNTRYWIDE HOME LOANS Series 2000-5 Class 1A1 7.75%, 10/25/30 345 346 Series 2001-HYB2 Class 2A 6.35%, 09/19/31 14,255 14,495 Series 2001-23 Class 2A 5.41%, 12/25/31 10,941 11,147 Series 2001-23 Class 3A2 6.25%, 12/25/31 13,192 13,340 Series 2002-1 Class 1A1 5.36%, 03/19/32 10,285 10,394 ++(3) FIRST HORIZON ASSET SECURITIES,INC. Series 2002-2 Class PA 5.50%, 06/25/30 26,253 26,811 GE CAPITAL MORTGAGE SERVICES,INC. Series 1996-6 Class A10 7.00%, 04/25/26 423 423 IMPAC SECURED ASSET COMMON OWNER TRUST Series 2001-8 Class A1 6.50%, 01/25/32 6,735 6,875 LTC COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES Series 1993-1 Class A 7.10%, 11/28/12 4,582 4,685 PNC MORTGAGE SECURITIES CORP. Series 1998-1 Class 5A3 6.48%, 02/25/28 600 600 PRUDENTIAL HOME MORTGAGE SECURITIES Series 1994-20 Class A8 6.55%, 05/25/09 1,387 1,413 Series 1993-1 Class A7 7.50%, 02/25/23 561 561 RESIDENTIAL ACCREDIT LOANS, INC. Series 2000-QS2 Class A4 7.75%, 02/25/30 5,000 5,065 RESIDENTIAL FUNDING MORTGAGE SECURITIES I TRUST Series 1993-S13 Class A9 6.52%, 03/25/08 3,712 3,705 Series 1993-S15 Class A6 6.92%, 04/25/08 93 93 Series 1999-S21 Class A7 7.00%, 09/25/10 1,555 1,608 Series 1999-S13 Class A4 6.00%, 05/25/29 10,000 10,142 Series 2001-S15 Class A1 6.75%, 07/25/31 11,313 11,600 RESIDENTIAL FUNDING SECURITIES CORP. Series 2001-RM1 Class A 6.18%, 12/25/29 6,921 7,029 RYLAND MORTGAGE SECURITIES CORP. Series 1993-3 Class 9 6.71%, 08/25/08 1,601 1,632 SEARS MORTGAGE SECURITIES Series 1993-11 Class T5 7.04%, 07/25/23 6,591 6,724 STRUCTURED ASSET SECURITIES CORP. Series 2001-14A Class 2A1 6.05%, 08/25/31 10,990 11,107 WASHINGTON MUTUAL MSC MORTGAGE PASS-THROUGH Series 2001-AR1 Class A 6.03%, 12/26/31 14,321 14,514 WELLS FARGO MORTGAGE BACKED SECURITIES TRUST Series 2000-8 Class A1 7.00%, 09/25/30 3,858 3,950 Series 2001-15 Class 2A1 6.00%, 07/25/31 15,000 15,347 Series 2001-25 Class IA1 6.20%, 10/25/31 10,369 10,495 ------- 285,805
U.S. GOVERNMENT AGENCY SECURITIES 9.9% -----------------------------------------------------------------
FANNIE MAE 5.15%, 01/01/32 8,049 8,199 5.80%, 06/01/31 5,991 6,108 6.05%, 07/01/31 6,485 6,620 6.10%, 07/01/31 8,859 9,101 6.24%, 08/01/39 11,576 11,918 5.53%, 10/01/31 8,439 8,547 6.05%, 10/01/31 14,623 14,978 5.56%, 11/01/31 10,442 10,570 5.80%, 11/01/31 14,150 14,410 Series G93-31 Class PJ 6.55%, 10/25/20 10,000 10,335 Series 1993-20 Class G 7.00%, 02/25/21 9,938 10,227 Series 1999-40 Class OC 6.30%, 11/25/21 3,900 3,975 Series 1996-35 Class D 7.00%, 03/25/23 407 407 Series 2000-53 Class A 7.00%, 11/25/23 2,338 2,360 Series 1996-51 Class AL 7.00%, 12/18/24 2,098 2,109
See the Financial Notes, which are integral to this information. 16
SECURITY SERIES FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) FREDDIE MAC 6.00%, 05/01/08 3,854 3,938 6.10%, 07/01/29 17,468 17,799 6.53%, 04/01/31 10,006 10,285 5.45%, 10/01/31 9,844 9,851 Series 61 Class D 9.30%, 11/15/20 2,070 2,171 Series 1350 Class H 7.50%, 03/15/21 420 421 Series 1993 Class PB 6.50%, 01/15/22 3,225 3,250 Series 1768 Class PG 7.50%, 03/15/22 589 590 Series 1921 Class C 6.50%, 07/15/24 2,700 2,800 VENDEE MORTGAGE TRUST Series 2001-2 Class B 6.75%, 11/15/14 3,000 3,112 Series 2001-1 Class 2B 7.00%, 12/15/22 4,000 4,212 ------- 178,293
COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 10.5% of investments
SECURITY FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) ATLANTIS TWO FUNDING CORP. 2.25%, 03/01/02 12,675 12,675 (1) 2.35%, 03/01/02 33,000 33,000 2.25%, 03/27/02 5,761 5,752 BOMBARDIER CAPITAL 2.18%, 03/14/02 10,000 9,992 2.25%, 03/28/02 6,500 6,489 DUKE ENERGY FIELD SERVICE, L.L.C. 2.10%, 03/04/02 6,000 5,999 2.12%, 03/04/02 10,000 9,998 GENERAL MOTORS ACCEPTANCE CORP. 2.15%, 03/13/02 21,000 20,985 HERTZ CORP. 2.25%, 03/22/02 19,000 18,975 (10) KELLOGG CO. 2.00%, 03/01/02 21,000 21,000 KINDER MORGAN ENERGY PARTNERS 2.25%, 03/13/02 4,250 4,247 2.30%, 03/22/02 15,000 14,980 (4) VIACOM, INC. 2.10%, 03/05/02 24,524 24,518 ------- 188,610
U.S. GOVERNMENT SECURITIES 0.1% of investments
* U.S. TREASURY BILLS 1.71%, 06/27/02 1,000 994
PREFERRED STOCK 0.3% of investments
SECURITY AND NUMBER OF SHARES MKT. VALUE ($ x 1,000) CREDIT LYONNAISE CAPITAL SCA 144A 205,761 5,288 ROYAL BANK OF SCOTLAND GROUP, PLC 35,300 900 ----- 6,188 OTHER INVESTMENT COMPANIES 0.0% of investments PROVIDENT INSTITUTIONAL FUNDS -- FED FUNDS PORTFOLIO 796,786 797
--------------------------------------------------------------------- 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. 17 SCHWAB YIELDPLUS FUND(TM) - FINANCIALS Statement of ASSETS AND LIABILITIES As of February 28, 2002; unaudited. All numbers x 1,000 except NAV.
ASSETS - ------------------------------------------------------------------- Investments, at market value $1,799,241 (a) Receivables: Fund shares sold 3,035 Interest 20,168 Due from brokers for futures 95 Prepaid expenses + 329 ------------ TOTAL ASSETS 1,822,868 LIABILITIES - ------------------------------------------------------------------- Payables: Fund shares redeemed 4,734 Dividends to shareholders 1,169 Investments bought 37,213 Transfer agent and shareholder service fees 31 Investment adviser and administrator fees 57 Accrued expenses + 146 ------------ TOTAL LIABILITIES 43,350 NET ASSETS - ------------------------------------------------------------------- TOTAL ASSETS 1,822,868 TOTAL LIABILITIES - 43,350 ------------ NET ASSETS $1,779,518 NET ASSETS BY SOURCE Capital received from investors 1,798,860 Distributions in excess of net investment income (830) Net realized capital losses (17,549) (b) Net unrealized capital losses (963)
NET ASSET VALUE (NAV)
SHARES SHARE CLASS NET ASSETS / OUTSTANDING = NAV Investor Shares $349,242 35,448 $9.85 Select Shares(R) $1,430,276 145,186 $9.85
(a) The fund's amortized cost for these securities was $1,799,444. Not counting short-term obligations and government securities, the fund paid $565,424 for securities during the reporting period, and received $154,651 from securities it sold or that matured. For long-term government securities, the fund paid $70,254 during the reporting period and received $35,023 for securities it sold or that matured. This includes $61,389 in transactions with other SchwabFunds(R). (b) These derive from investments, futures and short sales. As of the report date, the fund held five hundred fifty U.S. Treasury Note futures contracts due to expire on March 28, 2002, with a contract value of $115,715 and an unrealized loss of $760.
FEDERAL TAX DATA - ---------------------------------------------------- COST BASIS OF PORTFOLIO $1,799,444 NET UNREALIZED GAINS AND LOSSES: Gains $ 10,094 Losses + (10,297) ------------ $ (203) UNUSED CAPITAL LOSSES: Expires 08/31 of: 2009 $ 1,318 DEFERRED CAPITAL LOSSES $ 342
See the Financial Notes, which are integral to this information. 18 Statement of OPERATIONS For September 1, 2001 through February 28, 2002; unaudited. All numbers x 1,000.
INVESTMENT INCOME - --------------------------------------------------------------------- Interest $ 35,531 NET REALIZED GAINS AND LOSSES - --------------------------------------------------------------------- Net realized losses on investments sold (14,465) Net realized losses on futures contracts (1,428) Net realized gains on short sales + 70 -------------- NET REALIZED LOSSES (15,823) NET UNREALIZED LOSSES - --------------------------------------------------------------------- Net unrealized losses on investments (5,689) Net unrealized losses on futures contracts + (750) -------------- NET UNREALIZED LOSSES (6,439) EXPENSES - --------------------------------------------------------------------- Investment adviser and administrator fees 2,251 a Transfer agent and shareholder service fees Investor Shares 335 b Select Shares(R) 574 b Trustees' fees 9 c Custodian and portfolio accounting fees 143 Professional fees 14 Registration fees 251 Shareholder reports 38 Other expenses + 11 -------------- Total expenses 3,626 Expense reduction - 575 d -------------- NET EXPENSES 3,051 INCREASE IN NET ASSETS FROM OPERATIONS - --------------------------------------------------------------------- TOTAL INVESTMENT INCOME 35,531 NET EXPENSES - 3,051 -------------- NET INVESTMENT INCOME 32,480 NET REALIZED LOSSES (15,823) e NET UNREALIZED LOSSES + (6,439) e -------------- INCREASE IN NET ASSETS FROM OPERATIONS $ 10,218
(a) Calculated as a percentage of average daily net assets: 0.35% of the first $500 million and 0.30% 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% and 0.05% of the assets of each respective share class. (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, as follows:
% OF AVERAGE SHARE CLASS DAILY NET ASSETS Investor Shares 0.55 Select Shares(R) 0.40
This limit doesn't include interest, taxes and certain non-routine expenses. (e) These add up to a net loss on investments of $22,262. See the Financial Notes, which are integral to this information. 19 SCHWAB YIELDPLUS FUND(TM) - 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 $ 32,480 $26,487 Net realized losses (15,823) (268) Net unrealized gains or losses + (6,439) 5,428 ---------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 10,218 31,647 DISTRIBUTIONS PAID - -------------------------------------------------------------------------------------------- DIVIDENDS FROM NET INVESTMENT INCOME Investor Shares 6,128 5,271 Select Shares(R) + 27,182 21,240 ---------------------------------------- TOTAL DIVIDENDS FROM NET INVESTMENT INCOME $ 33,310 $26,511
TRANSACTIONS IN FUND SHARES - ----------------------------------------------------------------------------------- 9/1/01 - 2/28/02 9/1/00 - 8/31/01 QUANTITY VALUE QUANTITY VALUE SHARES SOLD Investor Shares 24,561 $ 244,122 18,004 $179,021 Select Shares + 97,558 970,055 68,609 682,293 ------------------------------------------------------ TOTAL SHARES SOLD 122,119 $1,214,177 86,613 $861,314 SHARES REINVESTED Investor Shares 547 $ 5,425 461 $ 4,576 Select Shares + 2,197 21,779 1,772 17,592 ------------------------------------------------------ TOTAL SHARES REINVESTED 2,744 $ 27,204 2,233 $ 22,168 SHARES REDEEMED Investor Shares 8,123 $ 80,556 5,303 $ 52,651 Select Shares + 31,837 315,202 15,214 150,912 ------------------------------------------------------ TOTAL SHARES REDEEMED 39,960 $ 395,758 20,517 $203,563 (a) NET INCREASE 84,903 $ 845,623 68,329 $679,919 (b)
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 95,731 $ 956,987 27,402 $271,932 Total increase + 84,903 822,531 68,329 685,055 (c) ---------------------------------------------------- END OF PERIOD 180,634 $1,779,518 95,731 $956,987 (d)
(a) Dollar amounts are net of proceeds received from the 0.25% early with- drawal fee the fund charges on shares sold 90 days or less after buying them: CURRENT PERIOD Investor Shares $ 32 Select Shares(R) + 138 ------- TOTAL $170 PRIOR PERIOD Investor Shares $ 19 Select Shares(R) + 62 ------- TOTAL $ 81
(b) Represents shares sold plus shares reinvested, minus shares redeemed. (c) Figures for shares represent the net changes in shares from the transac- tions 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. (d) Percent of fund shares owned by other SchwabFunds(R) as of the end of the current period: SCHWAB MARKETMANAGER PORTFOLIOS(R) Growth Portfolio 2.7% Balanced Portfolio 0.9%
See the Financial Notes, which are integral to this information. 20 FINANCIAL NOTES FINANCIAL NOTES Unaudited BUSINESS STRUCTURE OF THE FUNDS THE FUND DISCUSSED IN THIS REPORT IS A SERIES OF SCHWAB INVESTMENTS, A NO-LOAD, OPEN-END MANAGE- MENT 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 FUND OFFERS TWO SHARE CLASSES: Investor Shares and Select Shares(R). Shares of each class represent interests in the same portfolio, but each class has different expenses and investment minimums. 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 fund discussed in this report is 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 fund's investments are described in the sections earlier in this report. However, there are certain other investments and policies that may affect the fund's financials. The most significant of these are described below. Other policies concerning the fund's business operations also are described here. THE FUND DECLARES DIVIDENDS EVERY DAY IT IS OPEN FOR BUSINESS. These dividends, which are equal to the fund's net investment income for that day, are paid out to shareholders once a month. The fund may make distributions from any net realized capital gains once a year. THE FUND MAY BUY SECURITIES ON A DELAYED-DELIVERY BASIS. In these transactions, the 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, the fund could end up paying more for the security than its market value at the time of settlement. The fund has set aside sufficient securities as collateral for those securities bought on a delayed-delivery basis. THE FUND MAY INVEST IN FUTURES CONTRACTS. Futures contracts involve certain risks because they can be very sensitive to market movements. One risk is that the price of a futures contract may not move in perfect correlation with the price of the underlying securities. Another risk is that, at certain times, it may be impossible for the fund to close out a position in a future, due to a difference in trading hours or to market conditions that may reduce the liquidity for a future or its underlying securities. Because futures carry inherent risks, the fund must give the broker a deposit of cash and/or securities (the "initial margin") whenever it enters into the futures contract. The amount of the deposit may vary 21 FINANCIAL NOTES from one contract to another, but it is generally a percentage of the contract amount. Futures are traded publicly on exchanges, and their market value changes daily. The fund records the change in market value of futures, and also the change in the amount of margin deposit required ("variation margin"). THE FUND MAY ALSO SELL SECURITIES SHORT (SELL SECURITIES IT DOES NOT OWN). When it does so, the fund also places assets worth at least 100% of the value of the shorted securities into a segregated account, as collateral. If the market value of the shorted securities subsequently falls, the fund can realize a gain. However, if the value rises, the fund typically would have to add to its collateral or close out its short position at a loss. THE FUND PAYS FEES FOR VARIOUS SERVICES. Through its trust, the fund has 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 fund that may limit the total expenses charged. The rates and limitations for these fees are described in the 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 the fund's Statement of Operations. THE FUND MAY ENGAGE IN CERTAIN TRANSACTIONS INVOLVING AFFILIATES. For instance, the fund may let other SchwabFunds(R) buy and sell fund shares, particularly Schwab MarketManager Portfolios(R). The fund may make direct transactions with certain other SchwabFunds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. THE FUND INTENDS TO MEET FEDERAL INCOME AND EXCISE TAX REQUIREMENTS FOR REGULATED INVESTMENT COMPANIES. Accordingly, the fund distributes substantially all of its net investment income and realized net capital gains (if any) to its shareholders each year. As long as the fund meets the tax requirements, it is not required to pay federal income tax. ACCOUNTING POLICIES The following are the main policies the fund uses in preparing its financial statements. THE FUND VALUES THE SECURITIES IN ITS PORTFOLIO EVERY BUSINESS DAY. The fund uses 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, 22 as determined in good faith by the fund's investment adviser using guidelines adopted by the fund's Board of Trustees. FUTURES AND FORWARDS: open contracts are valued at their settlement prices as of the close of their exchanges (for futures) or at a market value based on that day's exchange rates (for forwards). When the fund closes out a futures or forwards position, it calculates the difference between the value of the position at the beginning and at the end, and records a realized gain or loss accordingly. SHORT-TERM SECURITIES (60 DAYS OR LESS TO MATURITY): valued at amortized cost. IF THE FUND SELLS SECURITIES SHORT, it records the proceeds received as an asset and the obligation to buy back the securities as a liability. At the time a short sale is initiated, the asset and the liability are of equal value and effectively cancel each other out. Subsequently, the fund values the liability side of the transaction according to the market price of the securities sold short, and values the asset side according to the value of the proceeds. When the fund closes out a short position (buys the security), it records the outcome as a realized gain or loss. Interest accrued on securities sold short is recorded as an expense on the fund's records. SECURITY TRANSACTIONS are recorded as of the date the order to buy or sell the security is executed. INTEREST INCOME is recorded as it accrues. If a fund bought a debt instrument at a discount (that is, for less than its face value) or a premium (more than face value), it amortizes the discount or premium from the current date up to maturity. The fund then increases (in the case of discounts) or reduces (in the case of premiums) the income it records from the security. If the security is callable (meaning that the issuer has the option to pay it off before its maturity date), then the fund amortizes the premium to the security's call date and price, rather than the maturity date and price. REALIZED GAINS AND LOSSES from security transactions are based on the identified costs of the securities involved. Gains and losses from paydowns on mortgage and asset-backed securities are recorded as adjustments to interest income. EXPENSES that are specific to the fund are charged directly to the fund. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their net assets. THE FUND MAINTAINS ITS OWN ACCOUNT FOR PURPOSES OF HOLDING ASSETS AND ACCOUNTING, and is considered a separate entity for tax purposes. Within its account, the 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. 23 HOW TO READ THIS REPORT This report, including the financial tables, has been designed to be EASY TO READ. The next few pages provide additional information that can help you more fully understand the financial tables and why they are important to ALL FUND INVESTORS. In this section, we take a closer look at the types of information presented in the financial tables. Brief CALLOUTS add context to some of the most important elements in the tables, and help explain certain fund operations and accounting principles. At the end, a GLOSSARY defines many of the financial terms that are used in this report. [GRAPHIC OF SAMPLE 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 operat- ing 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. 24 [GRAPHIC OF SAMPLE 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. 25 HOW TO READ THIS REPORT Continued [GRAPHIC OF SAMPLE PORTFOLIO HOLDINGS] 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. ** 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 obli- gations 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. 26 [GRAPHIC OF SAMPLE PORTFOLIO HOLDINGS] Table is for illustration only. For all bonds, the report shows the issuer, the rate the security pays and the maturity date. The maturity date is the date when the bond is retired and the issuer returns the money borrowed ("principal" or "face value") to the bondholder. Most equity and bond funds keep at least a small percentage of assets in high quality, liquid investments, in order to manage their cash flow needs. In this example, the investment shown is one that seeks to maintain a stable $1.00 share price, so the number of shares is typically the same as the market value (allowing for rounding in the value column). During its lifetime, a bond may trade at a premium or a discount to its face value, depending on interest rate trends and other factors. When a bond begins to approach maturity, its market value typically moves closer to its face value. In some cases, securities are organized into sub-groups. For each sub-group, there are figures showing the percentage of investments represented and the total market value of the securities in the sub-group. Note that for all dollar values, you need to add three zeroes after each number to get the approximate value. 27 HOW TO READ THIS REPORT Continued [GRAPHIC OF SAMPLE ASSETS AND LIABILITIES] 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. 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. [GRAPHIC OF SAMPLE FEDERAL TAX DATA] Table is for illustration only. 28 [GRAPHIC OF SAMPLE STATEMENT OF OPERATIONS] 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 com- pute 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. 29 HOW TO READ THIS REPORT Continued [GRAPHIC OF SAMPLE CHANGES IN NET ASSETS] 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 in- vestors buying and selling shares (as opposed to changes due to fund per- formance, 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 divi- dends 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. These are the figures for the current report period. These are the figures for the previous report period. For mutual funds, the number of "shares outstanding" is the number of shares in existence. 30 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. - -------------------------------------------------------------------------------- [GRAPHIC OF CREDIT RATING SCALE] 31 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. 32 CONTACT SCHWAB The SchwabFunds(R) Family includes a variety of funds to help meet your investment needs. You can diversify your portfolio in a single step with our asset allocation funds. Or you can customize your portfolio with a combination of our stock funds as well as our taxable and tax-advantaged bond and money market funds. Please call 800-435-4000 for a free prospectus and brochure for any of these SchwabFunds. This report must be preceded or accompanied by a current prospectus. METHODS FOR PLACING ORDERS The following information outlines how Schwab brokerage account investors can place orders. If you are investing through a third-party investment provider, methods for placing orders may be different. INTERNET 1 www.schwab.com SCHWAB BY PHONE(TM) Use our automated voice service or speak to a representative. Call 800-435-4000, day or night (for TDD service, call 800-345-2550). TELEBROKER(R) Automated touch-tone phone service at 800-272-4922 MAIL Write to SchwabFunds at: PO Box 7575 San Francisco, CA 94120-7575 When selling or exchanging shares, be sure to include the signatures of at least one of the persons whose name is on the account. THE SCHWABFUNDS FAMILY STOCK FUNDS Schwab S&P 500 Fund Schwab 1000 Fund(R) Schwab Small-Cap Index Fund(R) Schwab Total Stock Market Index Fund(R) Schwab International Index Fund(R) Schwab Analytics Fund(R) Schwab Focus Funds Communications Focus Fund Financial Services Focus Fund Health Care Focus Fund Technology Focus Fund Schwab MarketManager Portfolios(R) Small Cap Portfolio International Portfolio ASSET ALLOCATION FUNDS Schwab MarketTrack Portfolios(R) All Equity Portfolio Growth Portfolio Balanced Portfolio Conservative Portfolio Schwab MarketManager Portfolios Growth Portfolio Balanced Portfolio BOND FUNDS Schwab Short-Term Bond Market Index Fund Schwab Total Bond Market Index Fund Schwab YieldPlus Fund(R) Schwab Short/Intermediate Tax-Free Bond Fund Schwab Long-Term Tax-Free Bond Fund Schwab California Short/Intermediate Tax-Free Bond Fund Schwab California Long-Term Tax-Free Bond Fund SCHWAB MONEY FUNDS Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity. 2 Choose from taxable or tax-advantaged alternatives. Many can be linked to your Schwab account to "sweep" cash balances automatically when you're between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments.(R) 1 Shares of Sweep Investments(TM) may not be purchased over the internet. 2 Investments in money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency and, although they seek to preserve the value of your investment at $1 per share, it is possible to lose money. [CHARLES SCHWAB LOGO] INVESTMENT ADVISER Charles Schwab Investment Management, Inc. 101 Montgomery Street, San Francisco, CA 94104 DISTRIBUTOR Charles Schwab & Co., Inc. PO Box 7575, San Francisco, CA 94120 - 7575 This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. (C) 2002 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE. Printed on recycled paper. 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