N-CSRS 1 f97879nvcsrs.txt SCHWAB INVESTMENTS FORM N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-6200 Schwab Investments ------------------------------------------ (Exact name of registrant as specified in charter) 101 Montgomery Street, San Francisco, California 94104 --------------------------------------------------- (Address of principal executive offices) (Zip code) Randall W. Merk Schwab Investments 101 Montgomery Street, San Francisco, California 94104 ----------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (415) 627-7000 Date of fiscal year end: August 31 Date of reporting period: September 1, 2003 - February 29, 2004 ITEM 1: REPORT(S) TO SHAREHOLDERS. SCHWAB BOND FUNDS SEMIANNUAL REPORT February 29, 2004 Schwab YieldPlus Fund(R) Schwab Short-Term Bond Market Fund(TM) Schwab Total Bond Market Fund(TM) Schwab GNMA Fund(TM) [CHARLES SCHWAB LOGO] Four smart, cost-effective ways investors can use bonds in an asset allocation strategy. IN THIS REPORT Management's Discussion ............................................... 2 The president of SchwabFunds(R) and the funds' managers take a look at the factors that shaped fund performance during the report period. Performance at a Glance ............. 5 Schwab YieldPlus Fund Investor Shares: SWYPX Select Shares(R): SWYSX The fund seeks high current income with minimal changes in share price. Performance and Fund Facts .......... 7 Financial Statements ................ 17 Schwab Short-Term Bond Market Fund Ticker Symbol: SWBDX The fund seeks current income by tracking the performance of the Lehman Brothers Mutual Fund Short (1-5 Year) U.S. Government/Credit Index. Performance and Fund Facts .......... 10 Financial Statements ................ 32 Schwab Total Bond Market Fund Ticker symbol: SWLBX The fund seeks current income by tracking the performance of the Lehman Brothers U.S. Aggregate Bond Index. Performance and Fund Facts .......... 12 Financial Statements ................ 41 Schwab GNMA Fund Investor Shares: SWGIX Select Shares(R): SWGSX The fund seeks high current income consistent with preservation of capital. Performance and Fund Facts .......... 14 Financial Statements ................ 53 Financial notes ....................................................... 61 Fund Trustees ......................................................... 65 Glossary .............................................................. 68 Fund investment adviser: Charles Schwab Investment Management, Inc. (CSIM). Distributor and transfer agent: Charles Schwab & Co., Inc. (Schwab). [PHOTO OF CHARLES R. SCHWAB] Charles R. Schwab Chairman FROM THE CHAIRMAN With interest rates near historic lows, many of you are wondering if you should hold fixed-income investments in your portfolios. My answer, as I've stated throughout my long investment career, is that prudent investors should have at least some exposure to fixed-income securities. This is true because most types of investments generally have not moved in tandem. Bonds and the funds that hold them, for example, may perform well when stocks don't, and vice versa, which is why it's important to have some of each in your portfolio. In addition, bonds can help you manage your risk, reduce the overall volatility of your portfolio and generate income. Because mutual funds are one of the most cost-effective ways for individual investors to participate in the market, I always have been an advocate for them. While there are challenges we face in the industry to ensure that it remains useful and ethical, I believe we will meet them. In fact, Schwab has taken an active role in helping to get the industry back on track. At the end of February, we met with the U.S. Senate's Committee on Banking, Housing and Urban Affairs. At that session, we suggested several proposals for reform. We did this because we believe our proposal would increase investor choice, convenience and fairness. We have taken this role so that the millions of Americans who own mutual funds will understand that funds provide an important way to invest for their future goals. Whether the goals are a secure retirement, a vacation home or your children's education, bond mutual funds can help to grow your wealth and balance your risk. Sincerely, /s/ Charles Schwab MANAGEMENT'S DISCUSSION for the six months ended February 29, 2004 [PHOTO OF RANDALL W. MERK] RANDALL W. MERK is President and CEO of Charles Schwab Investment Management, Inc. and is president of each of the funds covered in this report. He joined the firm in August 2002, bringing with him 24 years of experience in the asset management industry. Dear Shareholder: The bond market, which experienced significant volatility in the first half of 2003, has become more stable. In fact, during this report period, which ended February 29, bonds have traded in a relatively narrow yield range. While bonds are generally less volatile than stocks, they still carry some price risk. Most investors realize this and understand that longer-maturity bonds are more sensitive to fluctuations in interest rates and, therefore, have greater price volatility than securities with shorter maturities. As investors worry about interest rates, they tend to shorten the maturity of their bond portfolios --a trend that has been more noticeable in recent months. A look at the shape of the yield curve suggests that expectations of higher rates already have been priced into the market, and the current yield premiums on longer-term securities, vs. shorter-maturity bonds, are generous by historical standards. As an investor you have choices to make, including how much of this type of risk you wish to assume. Given the trade-off, you may choose to add bond funds of varying maturities. It's up to you to decide which securities work best in your total portfolio. No matter which maturity you choose for your funds, we have portfolio managers in each area who will help you and also manage some of the other risks associated with bond investments, including prepayment, credit and call risk. By owning just a few funds that include bonds of different maturities and creditworthiness, you can help to reduce the volatility of your portfolio. At SchwabFunds(R), we have done and will do whatever it takes to ensure that our funds are transacted fairly and equitably during the trading day. We continue to scrutinize our operations because the trust of our shareholders is very important to us, and we invest with your outcomes in mind. Thank you for investing with us, and once more I want to remind you that we operate our business with the highest ethical standards and an unwavering commitment to you. Sincerely, /s/ Randall W. Merk 2 Schwab Bond Funds [PHOTO OF KIM DAIFOTIS, MICHAEL SHEARER, MATTHEW HASTINGS] KIM DAIFOTIS, CFA, at right, a senior vice president and head of fixed-income portfolio management, has overall responsibility for management of the funds. He joined the firm in 1997, and has worked in fixed-income asset management and research since 1982. MICHAEL SHEARER, PhD, at left, a vice-president and senior portfolio manager, has day-to-day responsibility for management of the funds. Prior to joining the firm in February 2003, he worked for more than 10 years in the financial industry as a portfolio manager and quantitative analyst/strategist. MATTHEW HASTINGS, CFA, in center, a director and portfolio manager, co-manages the funds. He joined the firm in 1999 and has worked in fixed-income and asset management since 1996. THE INVESTMENT ENVIRONMENT AND THE FUNDS THE ENCOURAGING ECONOMIC NEWS THAT WAS REPORTED TOWARD THE END OF SUMMER 2003 CONTINUED INTO THE NEW YEAR, BUT THEN LOST SOME OF ITS STRENGTH. There were three major pieces of good news from the business world. The first positive was that no new corporate scandals had emerged among U.S. companies. Second was the uptick in capital spending. Last, but perhaps most important to the Federal Reserve (Fed), came the word that companies were finally beginning to hire some workers. Yet despite this employment news, job growth was weak and most market watchers agree that this is the key to a real economic recovery. The weak employment data also may have been a reason that consumer spending, which had helped to buoy the economy over the past few years, showed signs of slowing. The mortgage- refinancing market, while still active and a big source of funds for consumer spending, lost some of its steam and was unable to match last year's torrid pace. In short, any good news was mitigated by the bad news, especially the news about weak job creation. WITH SHORT-TERM INTEREST RATES ALREADY LOW FOLLOWING 13 CUTS OVER THE PAST FEW YEARS, THE FED DECLINED TO LOWER RATES SINCE ITS LAST CUT IN JUNE 2003. By not acting, the Fed may have been acknowledging that the economy was showing signs of recovering. Nonetheless, the Fed's inaction, coupled with low inflation, slow-to-no job growth, high productivity and massive purchases of U.S. currency by foreign central banks (to keep the dollar strong relative to Asian currencies and to preserve cheap exports) kept a lid on bond yields, which had started to rise in the last half of 2003. YIELD CURVE: Average Yields of AAA Securities of Seven Maturities [LINE GRAPH]
AS OF AS OF 8/31/03 2/29/04 3 Months 0.97 0.94 6 Months 1.04 1.00 2 Years 1.97 1.64 3 Years 2.49 2.11 5 Years 3.46 2.94 10 Years 4.46 3.97 30 Years 5.22 4.84
THE YIELD CURVE FLATTENED DURING THE PERIOD AS INTERMEDIATE- AND LONG-TERM BOND YIELDS DECLINED. RATES AT THE SHORT-END DECLINED SLIGHTLY, BUT REMAINED RELATIVELY FLAT AS THE FED LEFT SHORT-TERM RATES UNCHANGED. 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, in part because they are presumed to carry higher risk. Data source: Bloomberg L.P. Schwab Bond Funds 3 MANAGEMENT'S DISCUSSION continued The mixed economic news pushed the domestic bond market into a holding pattern, while investors waited on the sidelines for any of the contributing factors to change. A closer look at the employment numbers revealed that while foreign outsourcing was grabbing the headlines, it was actually a strong increase in productivity that kept job growth slow in the U.S., where fewer workers produced more goods. At the same time, corporate profits have improved, pushing real GDP up to 4.3% year over year. One question on most market watchers' minds is--will the improved profit picture and rise in productivity be enough to boost hiring? The mixed economic news pushed the domestic bond market into a holding pattern, while investors waited on the sidelines for any of the contributing factors to change. Yields of the benchmark 10-year Treasury bonds, which had been drifting upward at the end of the summer, fell to third-quarter levels in the first two months of 2004. In keeping with their inverse relationship with yields, bond prices ended up a little higher. THE YIELD SPREADS BETWEEN TREASURYS AND ALL GRADES OF CORPORATES STAYED IN THE NARROW RANGE THROUGHOUT THE REPORT PERIOD. We believe that this narrow range indicated that investors felt that most corporations would no longer be negatively affected by serious financial setbacks in the near future. Consequently, the market interpreted the difference in risk between Treasurys and corporate bonds as being substantially less than it had been at the worst part in the cycle a few years ago. YIELDS OF U.S. TREASURY SECURITIES: Effective Yields of Two- and Ten-Year Treasurys YIELDS DECLINED OVER THE REPORT PERIOD FOR BOTH THE 2- AND 10-YEAR U.S. TREASURY NOTES. DURING THE PERIOD, THE SPREAD BETWEEN THE 2- AND 10-YEAR NARROWED SOMEWHAT AS THE DECLINE OF THE 10-YEAR OUTPACED THAT OF THE 2-YEAR. Yields, or interest rates, represent the cost of borrowing money. Rapid economic growth, waning investor interest in bonds, an increase in the issuance of bonds, or the expectation of higher inflation can drive rates up, while the opposite conditions can push rates down. Data source: Bloomberg L.P. [LINE GRAPH]
2-YEAR 10-YEAR 28-Feb-94 4.66 6.13 31-Mar-94 5.19 6.74 30-Apr-94 5.74 7.04 31-May-94 5.99 7.15 30-Jun-94 6.18 7.32 31-Jul-94 5.99 7.11 31-Aug-94 6.15 7.17 30-Sep-94 6.59 7.60 31-Oct-94 6.82 7.81 30-Nov-94 7.40 7.91 31-Dec-94 7.70 7.82 31-Jan-95 7.24 7.58 28-Feb-95 6.76 7.20 31-Mar-95 6.78 7.20 30-Apr-95 6.59 7.06 31-May-95 5.84 6.28 30-Jun-95 5.79 6.20 31-Jul-95 5.87 6.43 31-Aug-95 5.85 6.28 30-Sep-95 5.85 6.18 31-Oct-95 5.61 6.02 30-Nov-95 5.34 5.74 31-Dec-95 5.15 5.57 31-Jan-96 4.93 5.58 29-Feb-96 5.43 6.10 31-Mar-96 5.76 6.33 30-Apr-96 6.05 6.67 31-May-96 6.24 6.85 30-Jun-96 6.11 6.71 31-Jul-96 6.22 6.79 31-Aug-96 6.34 6.94 30-Sep-96 6.10 6.70 31-Oct-96 5.74 6.34 30-Nov-96 5.58 6.04 31-Dec-96 5.87 6.42 31-Jan-97 5.91 6.49 28-Feb-97 6.09 6.55 31-Mar-97 6.42 6.90 30-Apr-97 6.27 6.72 31-May-97 6.20 6.66 30-Jun-97 6.07 6.50 31-Jul-97 5.73 6.01 31-Aug-97 5.96 6.34 30-Sep-97 5.78 6.10 31-Oct-97 5.61 5.83 30-Nov-97 5.74 5.87 31-Dec-97 5.65 5.74 31-Jan-98 5.30 5.51 28-Feb-98 5.54 5.62 31-Mar-98 5.56 5.65 30-Apr-98 5.57 5.67 31-May-98 5.52 5.55 30-Jun-98 5.47 5.45 31-Jul-98 5.48 5.49 31-Aug-98 4.78 4.98 30-Sep-98 4.27 4.42 31-Oct-98 4.12 4.61 30-Nov-98 4.51 4.71 31-Dec-98 4.53 4.65 31-Jan-99 4.57 4.65 28-Feb-99 5.14 5.29 31-Mar-99 4.99 5.24 30-Apr-99 5.05 5.35 31-May-99 5.41 5.62 30-Jun-99 5.51 5.78 31-Jul-99 5.62 5.90 31-Aug-99 5.72 5.97 30-Sep-99 5.60 5.88 31-Oct-99 5.79 6.02 30-Nov-99 6.01 6.19 31-Dec-99 6.21 6.44 31-Jan-00 6.59 6.67 29-Feb-00 6.52 6.41 31-Mar-00 6.48 6.00 30-Apr-00 6.68 6.21 31-May-00 6.67 6.27 30-Jun-00 6.36 6.03 31-Jul-00 6.29 6.03 31-Aug-00 6.16 5.73 30-Sep-00 5.98 5.80 31-Oct-00 5.91 5.75 30-Nov-00 5.61 5.47 31-Dec-00 5.10 5.11 31-Jan-01 4.57 5.11 28-Feb-01 4.39 4.90 31-Mar-01 4.18 4.92 30-Apr-01 4.28 5.34 31-May-01 4.19 5.38 30-Jun-01 4.24 5.41 31-Jul-01 3.80 5.05 31-Aug-01 3.63 4.83 30-Sep-01 2.85 4.59 31-Oct-01 2.42 4.23 30-Nov-01 2.84 4.75 31-Dec-01 3.03 5.05 31-Jan-02 3.16 5.04 28-Feb-02 3.06 4.88 31-Mar-02 3.71 5.40 30-Apr-02 3.22 5.09 31-May-02 3.20 5.05 30-Jun-02 2.82 4.80 31-Jul-02 2.24 4.46 31-Aug-02 2.13 4.14 30-Sep-02 1.69 3.60 31-Oct-02 1.67 3.89 30-Nov-02 2.06 4.21 31-Dec-02 1.60 3.82 31-Jan-03 1.69 3.96 28-Feb-03 1.51 3.69 31-Mar-03 1.49 3.80 30-Apr-03 1.49 3.84 31-May-03 1.33 3.37 30-Jun-03 1.30 3.52 31-Jul-03 1.74 4.41 31-Aug-03 1.97 4.47 30-Sep-03 1.46 3.94 31-Oct-03 1.82 4.30 30-Nov-03 2.05 4.33 31-Dec-03 1.82 4.25 31-Jan-04 1.82 4.13 29-Feb-04 1.65 3.97
4 Schwab Bond Funds PERFORMANCE AT A GLANCE Total return for the six months ended 2/29/04 THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. SCHWAB YIELDPLUS FUND Investor Shares ................ 1.69% Select Shares .................. 1.66% Benchmark ...................... 0.88% Fund Category 1 ................ 1.09% Performance Details ............ pages 7-8 SCHWAB SHORT-TERM BOND MARKET FUND ............... 2.75% Benchmark ...................... 2.99% Performance Details ............ page 10 SCHWAB TOTAL BOND MARKET FUND .................... 4.78% Benchmark ...................... 4.92% Performance Details ............ page 12 SCHWAB GNMA FUND Investor Shares ................ 3.33% Select Shares .................. 3.37% Benchmark ...................... 3.68% Fund Category 1 ................ 4.13% Performance Details ............ pages 14-15
Overall, most sectors of the bond market reported positive total returns for the report period, although they lagged equity markets' more robust returns. Corporate bonds continued to lead the pack in terms of total returns for the period. Munis also did well, with yields nearing those of Treasurys. THE SCHWAB YIELDPLUS FUND performed very well, beating both its benchmark and category average returns. The fund was heavily invested in corporate bonds and benefited from their improved valuations over the report period. In addition, carefully selected lower-quality bonds outperformed higher-quality bonds. Our analysis also revealed that asset-backed securities were attractively valued relative to other types of bonds, so we increased the fund's weightings of these types of securities. THE SCHWAB SHORT-TERM BOND MARKET FUND and THE SCHWAB TOTAL BOND MARKET FUND posted net gains. During the early part of the report period, the funds were positioned to take advantage of positive economic news. At that time, we were focused on corporate bonds in economically sensitive sectors, such as home-building, leisure and entertainment companies. As market expectations of an economic recovery began to be reflected in bond prices, we moved toward higher-quality sectors that are less sensitive to cyclical changes. We continued to focus on industrials and the sectors discussed above. Since that short-lived rally during the first half of the report period, corporates have traded in a narrow range. During the report period, the yield curve flattened for intermediate-term bonds, as price appreciation and yield both played a role in total returns for the Schwab Short-Term Bond Market Fund and the Schwab Total Bond Market Fund. All fund and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Expenses may be partially absorbed by fund management. Without these reductions, the fund's total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 1 Source for category information: Morningstar, Inc. Schwab Bond Funds 5 As market expectations of an economic recovery began to be reflected in bond prices, we moved toward higher-quality sectors that are less sensitive to cyclical changes. THE SCHWAB GNMA FUND also reported positive returns. The 10-year Treasury rallied 50 basis points in September and then was range-bound through the rest of the report period. Mortgage prepayment activity was generally high and extremely volatile, adding uncertainty to the market. Unlike mortgage lenders and borrowers, who generally like low rates, mortgage investors don't like them because they tend to increase prepayment uncertainty. In addition to these factors, the bonds in the Schwab GNMA Fund were of shorter duration than those in its category, which is why we underperformed. All in all, it was a challenging period for investors in GNMA and other mortgage groups. Nothing in this report represents a recommendation of a security by the investment adviser. Manager views and portfolio holdings may have changed since the report date. YIELDS OF U.S. TREASURY SECURITIES: Effective Yields of Three-Month and Two-Year Treasurys THE 3-MONTH YIELD REMAINED RELATIVELY FLAT DURING THE PERIOD. IN REACTION TO THE CHANGING ECONOMIC NEWS, THE 2-YEAR YIELD EXPERIENCED MORE FLUCTUATION. Yields, or interest rates, represent the cost of borrowing money. Rapid economic growth, waning investor interest in bonds, an increase in the issuance of bonds, or the expectation of higher inflation can drive rates up, while the opposite conditions can push rates down. Data source: Bloomberg L.P. [LINE GRAPH]
3-MONTH 2-YEAR 28-Feb-94 3.43 4.66 31-Mar-94 3.55 5.19 30-Apr-94 3.95 5.74 31-May-94 4.24 5.99 30-Jun-94 4.22 6.18 31-Jul-94 4.36 5.99 31-Aug-94 4.66 6.15 30-Sep-94 4.77 6.59 31-Oct-94 5.15 6.82 30-Nov-94 5.71 7.40 31-Dec-94 5.69 7.70 31-Jan-95 6.00 7.24 28-Feb-95 5.94 6.76 31-Mar-95 5.87 6.78 30-Apr-95 5.86 6.59 31-May-95 5.80 5.84 30-Jun-95 5.57 5.79 31-Jul-95 5.58 5.87 31-Aug-95 5.45 5.85 30-Sep-95 5.41 5.85 31-Oct-95 5.51 5.61 30-Nov-95 5.49 5.34 31-Dec-95 5.08 5.15 31-Jan-96 5.05 4.93 29-Feb-96 5.03 5.43 31-Mar-96 5.14 5.76 30-Apr-96 5.15 6.05 31-May-96 5.18 6.24 30-Jun-96 5.16 6.11 31-Jul-96 5.31 6.22 31-Aug-96 5.28 6.34 30-Sep-96 5.03 6.10 31-Oct-96 5.15 5.74 30-Nov-96 5.13 5.58 31-Dec-96 5.17 5.87 31-Jan-97 5.15 5.91 28-Feb-97 5.22 6.09 31-Mar-97 5.32 6.42 30-Apr-97 5.23 6.27 31-May-97 4.94 6.20 30-Jun-97 5.17 6.07 31-Jul-97 5.23 5.73 31-Aug-97 5.22 5.96 30-Sep-97 5.10 5.78 31-Oct-97 5.20 5.61 30-Nov-97 5.20 5.74 31-Dec-97 5.35 5.65 31-Jan-98 5.18 5.30 28-Feb-98 5.31 5.54 31-Mar-98 5.12 5.56 30-Apr-98 4.97 5.57 31-May-98 5.01 5.52 30-Jun-98 5.08 5.47 31-Jul-98 5.08 5.48 31-Aug-98 4.83 4.78 30-Sep-98 4.36 4.27 31-Oct-98 4.32 4.12 30-Nov-98 4.48 4.51 31-Dec-98 4.45 4.53 31-Jan-99 4.45 4.57 28-Feb-99 4.67 5.14 31-Mar-99 4.48 4.99 30-Apr-99 4.54 5.05 31-May-99 4.63 5.41 30-Jun-99 4.78 5.51 31-Jul-99 4.75 5.62 31-Aug-99 4.97 5.72 30-Sep-99 4.85 5.60 31-Oct-99 5.09 5.79 30-Nov-99 5.30 6.01 31-Dec-99 5.33 6.21 31-Jan-00 5.69 6.59 29-Feb-00 5.78 6.52 31-Mar-00 5.87 6.48 30-Apr-00 5.83 6.68 31-May-00 5.62 6.67 30-Jun-00 5.85 6.36 31-Jul-00 6.22 6.29 31-Aug-00 6.31 6.16 30-Sep-00 6.21 5.98 31-Oct-00 6.39 5.91 30-Nov-00 6.20 5.61 31-Dec-00 5.90 5.10 31-Jan-01 4.99 4.57 28-Feb-01 4.86 4.39 31-Mar-01 4.29 4.18 30-Apr-01 3.88 4.28 31-May-01 3.62 4.19 30-Jun-01 3.66 4.24 31-Jul-01 3.52 3.80 31-Aug-01 3.37 3.63 30-Sep-01 2.37 2.85 31-Oct-01 2.01 2.42 30-Nov-01 1.73 2.84 31-Dec-01 1.73 3.03 31-Jan-02 1.76 3.16 28-Feb-02 1.76 3.06 31-Mar-02 1.78 3.71 30-Apr-02 1.77 3.22 31-May-02 1.73 3.20 30-Jun-02 1.69 2.82 31-Jul-02 1.70 2.24 31-Aug-02 1.67 2.13 30-Sep-02 1.55 1.69 31-Oct-02 1.45 1.67 30-Nov-02 1.22 2.06 31-Dec-02 1.20 1.60 31-Jan-03 1.17 1.69 28-Feb-03 1.20 1.51 31-Mar-03 1.11 1.49 30-Apr-03 1.11 1.49 31-May-03 1.10 1.33 30-Jun-03 0.85 1.30 31-Jul-03 0.94 1.74 31-Aug-03 0.97 1.97 30-Sep-03 0.94 1.46 31-Oct-03 0.95 1.82 30-Nov-03 0.93 2.05 31-Dec-03 0.92 1.82 31-Jan-04 0.91 1.82 29-Feb-04 0.94 1.65
6 Schwab Bond Funds SCHWAB YIELDPLUS FUND INVESTOR SHARES PERFORMANCE as of 2/29/04 AVERAGE ANNUAL TOTAL RETURNS 1,2 This bar chart compares performance of the fund's Investor Shares with its benchmark and Morningstar category. [BAR CHART]
Benchmark: Fund: LEHMAN BROTHERS Fund Category: INVESTOR U.S. SHORT TREASURY: MORNINGSTAR SHARES 9-12 MONTHS INDEX ULTRASHORT BOND 6 MONTHS 1.69% 0.88% 1.09% 1 YEAR 2.73% 1.53% 1.68% 3 YEARS 3.45% 3.21% 3.15% SINCE INCEPTION (10/1/99) 4.35% 4.26% 4.23%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1 This graph shows performance since inception of a hypothetical $10,000 investment in the fund's Investor Shares compared with a similar investment in its benchmark. $12,073 INVESTOR SHARES $12,025 LEHMAN BROTHERS U.S. SHORT TREASURY: 9-12 MONTHS INDEX [LINE GRAPH]
LEHMAN BROTHERS U.S. SHORT TREASURY: INVESTOR 9-12 MONTHS SHARES INDEX 01-Oct-99 10000 10000 31-Oct-99 10050 10034 30-Nov-99 10092 10060 31-Dec-99 10148 10088 31-Jan-00 10184 10124 29-Feb-00 10248 10175 31-Mar-00 10295 10226 30-Apr-00 10270 10276 31-May-00 10320 10321 30-Jun-00 10420 10401 31-Jul-00 10492 10457 31-Aug-00 10544 10490 30-Sep-00 10626 10552 31-Oct-00 10680 10601 30-Nov-00 10688 10671 31-Dec-00 10732 10771 31-Jan-01 10827 10890 28-Feb-01 10903 10937 31-Mar-01 10973 11012 30-Apr-01 11039 11063 31-May-01 11114 11126 30-Jun-01 11152 11159 31-Jul-01 11247 11230 31-Aug-01 11317 11262 30-Sep-01 11374 11366 31-Oct-01 11409 11433 30-Nov-01 11361 11452 31-Dec-01 11359 11480 31-Jan-02 11413 11491 28-Feb-02 11404 11517 31-Mar-02 11433 11500 30-Apr-02 11462 11570 31-May-02 11503 11595 30-Jun-02 11520 11650 31-Jul-02 11454 11691 31-Aug-02 11531 11705 30-Sep-02 11534 11751 31-Oct-02 11573 11774 30-Nov-02 11623 11778 31-Dec-02 11661 11820 31-Jan-03 11709 11830 28-Feb-03 11752 11845 31-Mar-03 11761 11865 30-Apr-03 11817 11877 31-May-03 11835 11890 30-Jun-03 11852 11914 31-Jul-03 11844 11909 31-Aug-03 11872 11921 30-Sep-03 11888 11956 31-Oct-03 11938 11951 30-Nov-03 11974 11952 31-Dec-03 12000 11988 31-Jan-04 12037 12003 29-Feb-04 12073 12025
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. Schwab Bond Funds 7 SCHWAB YIELDPLUS FUND SELECT SHARES PERFORMANCE as of 2/29/04 AVERAGE ANNUAL TOTAL RETURNS 1,2 This bar chart compares performance of the fund's Select Shares with its benchmark and Morningstar category.
Benchmark: Fund: LEHMAN BROTHERS Fund Category: SELECT U.S. SHORT TREASURY: MORNINGSTAR SHARES 9-12 MONTHS INDEX ULTRASHORT BOND 6 MONTHS 1.66% 0.88% 1.09% 1 YEAR 2.77% 1.53% 1.68% 3 YEARS 3.60% 3.21% 3.15% SINCE INCEPTION (10/1/99) 4.49% 4.26% 4.23%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $50,000 INVESTMENT 1 This graph 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 its benchmark. $60,700 SELECT SHARES $60,125 LEHMAN BROTHERS U.S. SHORT TREASURY: 9-12 MONTHS INDEX [LINE GRAPH]
LEHMAN BROTHERS U.S. SHORT TREASURY: SELECT 9-12 MONTHS SHARES INDEX 01-Oct-99 50000 50000 31-Oct-99 50260 50170 30-Nov-99 50470 50300 31-Dec-99 50755 50441 31-Jan-00 50945 50618 29-Feb-00 51270 50876 31-Mar-00 51515 51130 30-Apr-00 51395 51381 31-May-00 51650 51607 30-Jun-00 52105 52004 31-Jul-00 52475 52285 31-Aug-00 52790 52452 30-Sep-00 53210 52762 31-Oct-00 53485 53005 30-Nov-00 53535 53354 31-Dec-00 53760 53856 31-Jan-01 54240 54448 28-Feb-01 54575 54683 31-Mar-01 54985 55060 30-Apr-01 55325 55313 31-May-01 55710 55628 30-Jun-01 55850 55795 31-Jul-01 56390 56152 31-Aug-01 56750 56310 30-Sep-01 56985 56828 31-Oct-01 57225 57163 30-Nov-01 56990 57260 31-Dec-01 56985 57398 31-Jan-02 57205 57455 28-Feb-02 57225 57587 31-Mar-02 57380 57501 30-Apr-02 57530 57851 31-May-02 57745 57973 30-Jun-02 57835 58251 31-Jul-02 57515 58455 31-Aug-02 57905 58525 30-Sep-02 57930 58754 31-Oct-02 58135 58871 30-Nov-02 58395 58889 31-Dec-02 58585 59101 31-Jan-03 58835 59148 28-Feb-03 59060 59225 31-Mar-03 59115 59326 30-Apr-03 59400 59385 31-May-03 59500 59450 30-Jun-03 59595 59569 31-Jul-03 59560 59545 31-Aug-03 59710 59605 30-Sep-03 59795 59778 31-Oct-03 60055 59754 30-Nov-03 60245 59760 31-Dec-03 60380 59939 31-Jan-04 60515 60017 29-Feb-04 60700 60125
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. 8 Schwab Bond Funds SCHWAB YIELDPLUS FUND FUND FACTS as of 2/29/04 STATISTICS NUMBER OF HOLDINGS 297 -------------------------------------------------------------------------------- FUND CATEGORY 1 Interest Rate Sensitivity Short Credit Quality Medium -------------------------------------------------------------------------------- 30-DAY SEC YIELD 2 Investor Shares 2.50% Select Shares 2.65% -------------------------------------------------------------------------------- 12-MONTH DISTRIBUTION YIELD 2 Investor Shares 2.77% Select Shares 2.92% -------------------------------------------------------------------------------- WEIGHTED AVERAGE MATURITY 0.4 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE DURATION 0.3 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE CREDIT QUALITY A -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 3 44% --------------------------------------------------------------------------------
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. PORTFOLIO COMPOSITION These charts show three different views of the fund's portfolio: by type of security, credit quality of the security and remaining maturity. All figures are shown as a percentage of the fund's investments. BY SECURITY TYPE [PIE CHART] 48.3% CORPORATE BONDS 28.4% ASSET-BACKED OBLIGATIONS 14.4% MORTGAGE-BACKED SECURITIES 5.2% COMMERICAL PAPER & OTHER CORPORATE OBLIGATIONS 2.8% PREFERRED STOCK 0.7% MUNICIPAL BONDS 0.2% U.S. GOVERNMENT SECURITIES BY CREDIT QUALITY 4 [PIE CHART] 16.0% AAA 9.6% AA 33.3% A 29.4% BBB 8.0% BB 3.7% SHORT-TERM RATINGS OR UNRATED SECURITIES BY MATURITY [PIE CHART] 61.8% 0-6 MONTHS 15.7% 7-18 MONTHS 11.7% 19-30 MONTHS 10.8% MORE THAN 30 MONTHS Portfolio holdings may have changed since the report date. 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 2/29/04, and is not a precise indication of risk or performance--past, present or future. Definitions of fund 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. 2 The yields do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 3 Not annualized. 4 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. Schwab Bond Funds 9 SCHWAB SHORT-TERM BOND MARKET FUND PERFORMANCE as of 2/29/04 AVERAGE ANNUAL TOTAL RETURNS 1,2 This bar chart compares performance of the fund with its benchmark indices and Morningstar category. [BAR CHART]
Benchmark -- Blended: LEHMAN BROTHERS SHORT (1-3 YEAR) U.S. GOVERNMENT BOND INDEX Benchmark -- Current: and LEHMAN BROTHERS LEHMAN BROTHERS MUTUAL MUTUAL FUND SHORT FUND SHORT (1-5 YEAR) Fund Category: (1-5 YEAR) U.S. U.S. GOVERNMENT/ MORNINGSTAR FUND GOVERNMENT/CREDIT INDEX CREDIT INDEX SHORT-TERM BOND 6 MONTHS 2.75% 2.99% 2.27% 1 YEAR 3.37% 3.56% 2.48% 5 YEARS 5.92% 6.58% 5.27% 10 YEARS 5.52% 6.30% 6.38% 5.38%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1 This graph shows performance over ten years of a hypothetical $10,000 investment in the fund, compared with a similar investment in its benchmark indices. $17,118 FUND $18,427 LEHMAN BROTHERS SHORT (1-3 YEAR) U.S. GOVERNMENT BOND INDEX and LEHMAN BROTHERS MUTUAL FUND SHORT (1-5 YEAR) U.S. GOVERNMENT/CREDIT INDEX $18,582 LEHMAN BROTHERS MUTUAL FUND SHORT (1-5 YEAR) U.S. GOVERNMENT/ CREDIT INDEX [LINE GRAPH]
LEHMAN BROTHERS SHORT (1-3 YEAR) U.S. GOVERNMENT BOND INDEX and LEHMAN BROTHERS LEHMAN BROTHERS MUTUAL FUND MUTUAL FUND SHORT (1-5 YEAR) SHORT (1-5 YEAR) U.S. GOVERNMENT/ U.S. GOVERNMENT/ FUND CREDIT INDEX CREDIT INDEX 28-Feb-94 10000 10000 10000 31-Mar-94 9871 9949 9900 30-Apr-94 9785 9911 9843 31-May-94 9750 9925 9853 30-Jun-94 9762 9950 9870 31-Jul-94 9846 10039 9981 31-Aug-94 9871 10073 10014 30-Sep-94 9834 10049 9961 31-Oct-94 9841 10073 9973 30-Nov-94 9786 10030 9922 31-Dec-94 9796 10049 9943 31-Jan-95 9930 10188 10096 28-Feb-95 10061 10329 10270 31-Mar-95 10118 10388 10329 30-Apr-95 10202 10481 10437 31-May-95 10384 10663 10679 30-Jun-95 10425 10721 10742 31-Jul-95 10448 10765 10768 31-Aug-95 10523 10830 10845 30-Sep-95 10586 10883 10906 31-Oct-95 10672 10973 11011 30-Nov-95 10778 11067 11128 31-Dec-95 10865 11150 11225 31-Jan-96 10951 11244 11328 29-Feb-96 10880 11201 11251 31-Mar-96 10847 11193 11216 30-Apr-96 10846 11204 11207 31-May-96 10846 11229 11215 30-Jun-96 10932 11310 11314 31-Jul-96 10965 11355 11354 31-Aug-96 10985 11397 11383 30-Sep-96 11097 11500 11509 31-Oct-96 11235 11630 11670 30-Nov-96 11348 11716 11782 31-Dec-96 11300 11719 11752 31-Jan-97 11357 11775 11806 28-Feb-97 11373 11803 11829 31-Mar-97 11337 11794 11791 30-Apr-97 11441 11890 11906 31-May-97 11524 11974 11993 30-Jun-97 11613 12056 12087 31-Jul-97 11778 12188 12266 31-Aug-97 11750 12200 12249 30-Sep-97 11854 12293 12363 31-Oct-97 11962 12384 12474 30-Nov-97 11995 12415 12498 31-Dec-97 12078 12498 12589 31-Jan-98 12210 12618 12735 28-Feb-98 12188 12629 12735 31-Mar-98 12237 12673 12780 30-Apr-98 12291 12735 12843 31-May-98 12362 12813 12921 30-Jun-98 12430 12885 12993 31-Jul-98 12476 12939 13048 31-Aug-98 12647 13120 13230 30-Sep-98 12862 13365 13478 31-Oct-98 12907 13403 13516 30-Nov-98 12882 13392 13505 31-Dec-98 12915 13438 13551 31-Jan-99 12952 13505 13618 28-Feb-99 12832 13390 13503 31-Mar-99 12930 13490 13604 30-Apr-99 12943 13535 13649 31-May-99 12893 13481 13594 30-Jun-99 12919 13519 13632 31-Jul-99 12949 13532 13646 31-Aug-99 12979 13562 13676 30-Sep-99 13075 13670 13785 31-Oct-99 13096 13707 13823 30-Nov-99 13114 13731 13846 31-Dec-99 13114 13720 13835 31-Jan-00 13081 13692 13807 29-Feb-00 13183 13796 13912 31-Mar-00 13309 13898 14015 30-Apr-00 13305 13901 14018 31-May-00 13361 13943 14060 30-Jun-00 13540 14135 14254 31-Jul-00 13626 14236 14355 31-Aug-00 13754 14371 14492 30-Sep-00 13880 14505 14627 31-Oct-00 13943 14567 14690 30-Nov-00 14101 14726 14850 31-Dec-00 14311 14944 15070 31-Jan-01 14490 15171 15299 28-Feb-01 14585 15296 15424 31-Mar-01 14691 15421 15551 30-Apr-01 14716 15439 15569 31-May-01 14817 15531 15661 30-Jun-01 14885 15590 15721 31-Jul-01 15119 15842 15975 31-Aug-01 15244 15970 16105 30-Sep-01 15460 16232 16369 31-Oct-01 15588 16432 16570 30-Nov-01 15407 16332 16469 31-Dec-01 15356 16296 16433 31-Jan-02 15422 16356 16494 28-Feb-02 15465 16456 16594 31-Mar-02 15314 16290 16427 30-Apr-02 15471 16519 16658 31-May-02 15598 16650 16790 30-Jun-02 15676 16793 16934 31-Jul-02 15817 16995 17138 31-Aug-02 15987 17148 17292 30-Sep-02 16184 17372 17518 31-Oct-02 16190 17369 17515 30-Nov-02 16127 17346 17492 31-Dec-02 16368 17620 17769 31-Jan-03 16406 17631 17779 28-Feb-03 16559 17793 17943 31-Mar-03 16605 17825 17975 30-Apr-03 16697 17911 18061 31-May-03 16871 18115 18267 30-Jun-03 16898 18135 18287 31-Jul-03 16649 17881 18031 31-Aug-03 16660 17890 18040 30-Sep-03 16949 18190 18343 31-Oct-03 16844 18072 18224 30-Nov-03 16834 18074 18226 31-Dec-03 16941 18211 18365 31-Jan-04 16998 18284 18438 29-Feb-04 17118 18427 18582
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 The fund changed its benchmark on 2/28/98, when it changed from being a government bond fund to its current strategy. Benchmark performance shown here is the Lehman Brothers Short (1-3 Year) U.S. Government Bond Index from fund inception through 2/28/98 and the Lehman Brothers Mutual Fund Short (1-5 Year) U.S. Government/Credit Index from 3/1/98 through the end of the report period. Benchmark performance for the one-year period is the Lehman Brothers Mutual Fund Short (1-5 Year) U.S. Government/Credit Index. Fund expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the fund's total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. 10 Schwab Bond Funds SCHWAB SHORT-TERM BOND MARKET FUND FUND FACTS as of 2/29/04 STATISTICS
FUND INDEX 1 -------------------------------------------------------------------------------- NUMBER OF HOLDINGS 128 1,906 -------------------------------------------------------------------------------- FUND CATEGORY 2 Interest Rate Sensitivity Short n/a Credit Quality High n/a -------------------------------------------------------------------------------- 30-DAY SEC YIELD 3 2.45% n/a -------------------------------------------------------------------------------- 30-DAY SEC YIELD - NO WAIVER 4 2.44% n/a -------------------------------------------------------------------------------- 12-MONTH DISTRIBUTION YIELD 3 3.00% n/a -------------------------------------------------------------------------------- YIELD TO MATURITY 2.68% 2.26% -------------------------------------------------------------------------------- WEIGHTED AVERAGE MATURITY 2.5 yrs 2.7 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE DURATION 2.4 yrs 2.5 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE CREDIT QUALITY AA AA -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 5 54% n/a --------------------------------------------------------------------------------
PORTFOLIO COMPOSITION These charts show three different views of the fund's portfolio: by type of security, credit quality of the security and remaining maturity. All figures are shown as a percentage of the fund's investments. BY SECURITY TYPE [PIE CHART] 53.3% U.S. GOVERNMENT SECURITIES 29.6% CORPORATE BONDS 8.1% ASSET-BACKED OBLIGATIONS 5.0% MORTGAGE-BACKED SECURITIES 2.4% COMMERICAL PAPER & OTHER CORPORATE OBLIGATIONS 1.0% PREFERRED STOCK 0.4% MUNICIPAL BONDS 0.2% OTHER INVESTMENT COMPANIES BY CREDIT QUALITY 6 [PIE CHART] 63.0% AAA 1.5% AA 9.0% A 19.1% BBB 4.8% BB 2.6% SHORT-TERM RATINGS OR UNRATED SECURITIES BY MATURITY [PIE CHART] 13.0% 0-6 MONTHS 15.9% 7-18 MONTHS 23.9% 19-30 MONTHS 47.2% MORE THAN 30 MONTHS Portfolio holdings may have changed since the report date. 1 The Lehman Brothers Mutual Fund Short (1-5 Year) U.S. Government/Credit Index. 2 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 2/29/04 and is not a precise indication of risk or performance --past, present or future. Definitions of fund 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. 3 Fund expenses have been partially absorbed by CSIM and Schwab. The yield does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 4 Yield if fund expenses had not been partially absorbed by CSIM and Schwab. 5 Not annualized. 6 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. Schwab Bond Funds 11 SCHWAB TOTAL BOND MARKET FUND PERFORMANCE as of 2/29/04 AVERAGE ANNUAL TOTAL RETURNS 1,2 This bar chart compares performance of the fund with its benchmark indices and Morningstar category. [BAR CHART]
Benchmark -- Blended: LEHMAN BROTHERS GENERAL U.S. GOVERNMENT BOND INDEX and Benchmark -- Current: Fund Category: LEHMAN BROTHERS LEHMAN BROTHERS MORNINGSTAR U.S. AGGREGATE U.S. AGGREGATE INTERMEDIATE-TERM FUND BOND INDEX BOND INDEX BOND 6 MONTHS 4.78% 4.92% 4.87% 1 YEAR 4.38% 4.54% 5.04% 5 YEARS 6.77% 7.24% 6.30% 10 YEARS 6.87% 7.07% 7.19% 6.31%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1 This graph shows performance over ten years of a hypothetical $10,000 investment in the fund, compared with a similar investment in its benchmark indices. $19,451 FUND $19,806 LEHMAN BROTHERS GENERAL U.S. GOVERNMENT BOND INDEX and LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX $20,025 LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX [LINE GRAPH]
LEHMAN BROTHERS GENERAL U.S. GOVERNMENT BOND INDEX and LEHMAN BROTHERS LEHMAN BROTHERS U.S. AGGREGATE U.S. AGGREGATE FUND BOND INDEX BOND INDEX 28-Feb-94 10000 10000 10000 31-Mar-94 9693 9775 9754 30-Apr-94 9590 9698 9676 31-May-94 9541 9685 9674 30-Jun-94 9510 9663 9653 31-Jul-94 9711 9841 9845 31-Aug-94 9705 9843 9857 30-Sep-94 9531 9704 9712 31-Oct-94 9518 9697 9703 30-Nov-94 9513 9680 9681 31-Dec-94 9600 9739 9748 31-Jan-95 9813 9920 9941 28-Feb-95 10098 10133 10178 31-Mar-95 10165 10197 10240 30-Apr-95 10325 10331 10383 31-May-95 10839 10747 10785 30-Jun-95 10855 10830 10864 31-Jul-95 10763 10790 10840 31-Aug-95 10969 10916 10971 30-Sep-95 11107 11021 11077 31-Oct-95 11315 11188 11221 30-Nov-95 11545 11363 11389 31-Dec-95 11756 11524 11549 31-Jan-96 11796 11594 11625 29-Feb-96 11452 11358 11423 31-Mar-96 11318 11263 11343 30-Apr-96 11159 11191 11279 31-May-96 11117 11172 11257 30-Jun-96 11272 11316 11408 31-Jul-96 11277 11345 11438 31-Aug-96 11220 11320 11419 30-Sep-96 11487 11508 11618 31-Oct-96 11809 11761 11876 30-Nov-96 12105 11965 12079 31-Dec-96 11890 11843 11966 31-Jan-97 11886 11856 12003 28-Feb-97 11908 11873 12033 31-Mar-97 11716 11747 11900 30-Apr-97 11956 11916 12078 31-May-97 12075 12019 12193 30-Jun-97 12252 12153 12338 31-Jul-97 12674 12499 12671 31-Aug-97 12473 12375 12564 30-Sep-97 12706 12561 12750 31-Oct-97 12981 12778 12934 30-Nov-97 12993 12843 12994 31-Dec-97 13067 12978 13125 31-Jan-98 13256 13173 13293 28-Feb-98 13219 13137 13283 31-Mar-98 13244 13182 13328 30-Apr-98 13311 13250 13397 31-May-98 13435 13376 13524 30-Jun-98 13527 13490 13639 31-Jul-98 13568 13518 13668 31-Aug-98 13823 13738 13891 30-Sep-98 14160 14060 14216 31-Oct-98 14078 13985 14140 30-Nov-98 14099 14065 14221 31-Dec-98 14166 14107 14264 31-Jan-99 14284 14207 14365 28-Feb-99 14008 13959 14114 31-Mar-99 14103 14036 14191 30-Apr-99 14107 14080 14237 31-May-99 13944 13957 14111 30-Jun-99 13893 13912 14066 31-Jul-99 13860 13853 14007 31-Aug-99 13841 13847 14000 30-Sep-99 14027 14007 14162 31-Oct-99 14067 14059 14215 30-Nov-99 14075 14058 14213 31-Dec-99 14019 13990 14145 31-Jan-00 13960 13944 14099 29-Feb-00 14118 14113 14269 31-Mar-00 14332 14299 14458 30-Apr-00 14244 14257 14416 31-May-00 14190 14250 14408 30-Jun-00 14511 14547 14708 31-Jul-00 14639 14679 14842 31-Aug-00 14858 14892 15057 30-Sep-00 14951 14986 15152 31-Oct-00 15034 15085 15252 30-Nov-00 15283 15332 15502 31-Dec-00 15573 15617 15790 31-Jan-01 15781 15872 16048 28-Feb-01 15918 16010 16187 31-Mar-01 16037 16090 16268 30-Apr-01 15985 16022 16200 31-May-01 16098 16118 16297 30-Jun-01 16188 16180 16359 31-Jul-01 16556 16542 16726 31-Aug-01 16742 16732 16918 30-Sep-01 16894 16927 17114 31-Oct-01 17197 17280 17472 30-Nov-01 16950 17042 17231 31-Dec-01 16844 16933 17120 31-Jan-02 16977 17070 17259 28-Feb-02 17087 17235 17427 31-Mar-02 16781 16949 17137 30-Apr-02 17016 17278 17470 31-May-02 17185 17425 17618 30-Jun-02 17317 17577 17772 31-Jul-02 17485 17789 17987 31-Aug-02 17773 18090 18291 30-Sep-02 18059 18383 18587 31-Oct-02 17927 18298 18501 30-Nov-02 17932 18293 18496 31-Dec-02 18323 18672 18879 31-Jan-03 18373 18688 18896 28-Feb-03 18636 18946 19156 31-Mar-03 18617 18931 19141 30-Apr-03 18777 19088 19300 31-May-03 19135 19443 19659 30-Jun-03 19081 19404 19620 31-Jul-03 18434 18752 18960 31-Aug-03 18565 18876 19086 30-Sep-03 19076 19376 19591 31-Oct-03 18928 19196 19409 30-Nov-03 18943 19242 19456 31-Dec-03 19120 19439 19654 31-Jan-04 19268 19594 19811 29-Feb-04 19451 19806 20025
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 The fund changed its benchmark on 2/28/98, when it changed from being a government bond fund to its current strategy. Benchmark performance shown here is the Lehman Brothers General U.S. Government Bond Index from fund inception through 2/28/98 and the Lehman Brothers U.S. Aggregate Bond Index from 3/1/98 through the end of the report period. Benchmark performance for the one-year period is the Lehman U.S. Aggregate Bond Index. Fund expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the fund's total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. 12 Schwab Bond Funds SCHWAB TOTAL BOND MARKET FUND FUND FACTS as of 2/29/04 STATISTICS
FUND INDEX 1 -------------------------------------------------------------------------------- NUMBER OF HOLDINGS 260 6,784 -------------------------------------------------------------------------------- FUND CATEGORY 2 Interest Rate Sensitivity Medium n/a Credit Quality High n/a -------------------------------------------------------------------------------- 30-DAY SEC YIELD 3 3.28% n/a -------------------------------------------------------------------------------- 12-MONTH DISTRIBUTION YIELD 3 3.43% n/a -------------------------------------------------------------------------------- YIELD TO MATURITY 4.42% 3.89% -------------------------------------------------------------------------------- WEIGHTED AVERAGE MATURITY 5.0 yrs 7.4 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE DURATION 4.2 yrs 4.4 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE CREDIT QUALITY AA AAA -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 4 140% n/a --------------------------------------------------------------------------------
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. PORTFOLIO COMPOSITION These charts show three different views of the fund's portfolio: by type of security, credit quality of the security and remaining maturity. All figures are shown as a percentage of the fund's investments. BY SECURITY TYPE [PIE CHART] 30.0% MORTGAGE-BACKED SECURITIES 27.3% CORPORATE BONDS 22.5% U.S. GOVERNMENT SECURITIES 16.2% ASSET-BACKED OBLIGATIONS 1.9% COMMERICAL PAPER & OTHER CORPORATE OBLIGATIONS 1.5% PREFERRED STOCK 0.5% MUNICIPAL BONDS 0.1% OTHER INVESTMENT COMPANIES BY CREDIT QUALITY 5 [PIE CHART] 62.7% AAA 3.6% AA 9.1% A 18.2% BBB 4.4% BB 2.0% SHORT-TERM RATINGS OR UNRATED SECURITIES BY MATURITY [PIE CHART] 25.4% 0-1 YEAR 63.8% 2-10 YEARS 5.6% 11-20 YEARS 5.2% 21-30 YEARS Portfolio holdings may have changed since the report date. 1 The Lehman Brothers U.S. Aggregate Bond Index. 2 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 2/29/04 and is not a precise indication of risk or performance--past, present or future. Definitions of fund 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. 3 The yield does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 4 Not annualized. 5 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. Schwab Bond Funds 13 SCHWAB GNMA FUND INVESTOR SHARES PERFORMANCE as of 2/29/04 TOTAL RETURNS 1,2 This bar chart compares performance of the fund's Investor Shares with its benchmark and Morningstar category. [BAR CHART]
Benchmark: Fund Category: Fund: LEHMAN MORNINGSTAR INVESTOR BROTHERS INTERMEDIATE SHARES GNMA INDEX GOVERNMENT 6 MONTHS 3.33% 3.68% 4.13% SINCE INCEPTION (3/3/03) 2.19% 3.27% 2.68%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1 This graph shows performance since inception of a hypothetical $10,000 investment in the fund's Investor Shares compared with a similar investment in its benchmark. $10,219 INVESTOR SHARES $10,327 LEHMAN BROTHERS GNMA INDEX [LINE GRAPH]
LEHMAN INVESTOR BROTHERS DATE SHARES GNMA INDEX 3-Mar-03 10000 10000 31-Mar-03 9984 10007 30-Apr-03 10009 10031 31-May-03 10035 10031 30-Jun-03 10048 10061 31-Jul-03 9887 9895 31-Aug-03 9889 9959 30-Sep-03 10056 10104 31-Oct-03 10006 10078 30-Nov-03 10053 10112 31-Dec-03 10113 10207 31-Jan-04 10161 10258 29-Feb-04 10219 10327
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 Fund expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the fund's total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. 14 Schwab Bond Funds SCHWAB GNMA FUND SELECT SHARES PERFORMANCE as of 2/29/04 TOTAL RETURNS 1,2 This bar chart compares performance of the fund's Select Shares with its benchmark and Morningstar category. [BAR CHART]
Benchmark: Fund Category: Fund: LEHMAN MORNINGSTAR SELECT BROTHERS INTERMEDIATE SHARES GNMA INDEX GOVERNMENT 6 MONTHS 3.37% 3.68% 4.13% SINCE INCEPTION (3/3/03) 2.23% 3.27% 2.68%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $50,000 INVESTMENT 1 This graph 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 its benchmark. $51,115 SELECT SHARES $51,633 LEHMAN BROTHERS GNMA INDEX [LINE GRAPH]
LEHMAN SELECT BROTHERS SHARES GNMA INDEX 03-Mar-03 50000 50000 31-Mar-03 49920 50035 30-Apr-03 50045 50155 31-May-03 50175 50155 30-Jun-03 50290 50306 31-Jul-03 49435 49476 31-Aug-03 49445 49797 30-Sep-03 50280 50519 31-Oct-03 50080 50388 30-Nov-03 50265 50559 31-Dec-03 50620 51034 31-Jan-04 50815 51290 29-Feb-04 51115 51633
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 Fund expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the fund's total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. Schwab Bond Funds 15 SCHWAB GNMA FUND FUND FACTS as of 2/29/04 STATISTICS
FUND INDEX 1 -------------------------------------------------------------------------------- NUMBER OF HOLDINGS 64 128 -------------------------------------------------------------------------------- FUND CATEGORY 2 Interest Rate Sensitivity Short n/a Credit Quality High n/a -------------------------------------------------------------------------------- 30-DAY SEC YIELD 3 Investor Shares 2.84% n/a Select Shares 3.03% n/a -------------------------------------------------------------------------------- 30-DAY SEC YIELD - NO WAIVER 4 Investor Shares 2.45% n/a Select Shares 2.60% n/a -------------------------------------------------------------------------------- 12-MONTH DISTRIBUTION YIELD 3 Investor Shares 3.67% n/a Select Shares 3.71% n/a -------------------------------------------------------------------------------- WEIGHTED AVERAGE MATURITY 4.5 yrs 6.1 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE DURATION 2.2 yrs 2.2 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE CREDIT QUALITY AAA AAA -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 5 106% n/a --------------------------------------------------------------------------------
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. PORTFOLIO COMPOSITION These charts show three different views of the fund's portfolio: by type of security, credit quality of the security and remaining maturity. All figures are shown as a percentage of the fund's investments. BY SECURITY TYPE [PIE CHART] 87.7% MORTGAGE-BACKED SECURITIES 5.3% U.S. GOVERNMENT SECURITIES 3.6% ASSET-BACKED OBLIGATIONS 2.1% COMMERICAL PAPER & OTHER CORPORATE OBLIGATIONS 1.3% OTHER INVESTMENT COMPANIES BY CREDIT QUALITY 6 [PIE CHART] 95.0% AAA 3.7% A 1.3% SHORT-TERM RATINGS OR UNRATED SECURITIES BY MATURITY [PIE CHART] 5.8% 0-6 MONTHS 2.5% 7-18 MONTHS 11.0% 19-30 MONTHS 80.7% MORE THAN 30 MONTHS Portfolio holdings may have changed since the report date. 1 The Lehman Brothers GNMA Index. 2 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 2/29/04 and is not a precise indication of risk or performance --past, present or future. Definitions of fund 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. 3 Fund expenses have been partially absorbed by CSIM and Schwab. The yields do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 4 Yield if fund expenses had not been partially absorbed by CSIM and Schwab. 5 Not annualized. 6 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 16 Schwab Bond Funds SCHWAB YIELDPLUS FUND FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
9/1/03- 9/1/02- 9/1/01- 9/1/00- 10/1/99 1- INVESTOR SHARES 2/29/04* 8/31/03 8/31/02 8/31/01 8/31/00 ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------------------------ Net asset value at beginning of period 9.70 9.75 10.00 9.92 10.00 ------------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.12 0.30 0.42 0.62 0.61 Net realized and unrealized gains or losses 0.04 (0.02) (0.23) 0.08 (0.08) ------------------------------------------------------------------------------------ Total income from investment operations 0.16 0.28 0.19 0.70 0.53 Less distributions: Dividends from net investment income (0.12) (0.33) (0.44) (0.62) (0.61) ------------------------------------------------------------------------------------ Net asset value at end of period 9.74 9.70 9.75 10.00 9.92 ------------------------------------------------------------------------------------ Total return (%) 1.69 2 2.95 1.89 7.33 5.44 2 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------------------------ Ratios to average net assets: Net operating expenses 0.59 3 0.59 0.55 0.55 0.56 3 4 Gross operating expenses 0.59 3 0.59 0.62 0.71 0.80 3 Net investment income 2.49 3 3.08 4.36 6.03 6.72 3 Portfolio turnover rate 44 2 109 42 106 81 2 Net assets, end of period ($ x 1,000,000) 452 410 392 185 53
* Unaudited. 1 Commencement of operations. 2 Not annualized. 3 Annualized. 4 The ratio of net operating expenses would have been 0.55% if certain non-routine expenses (proxy fees) had not been included. See financial notes. 17 SCHWAB YIELDPLUS FUND
9/1/03- 9/1/02- 9/1/01- 9/1/00- 10/1/99 1- SELECT SHARES 2/29/04* 8/31/03 8/31/02 8/31/01 8/31/00 ------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 9.70 9.75 10.00 9.92 10.00 ------------------------------------------------------------------- Income from investment operations: Net investment income 0.13 0.32 0.44 0.64 0.62 Net realized and unrealized gains or losses 0.03 (0.02) (0.24) 0.08 (0.08) ------------------------------------------------------------------- Total income from investment operations 0.16 0.30 0.20 0.72 0.54 Less distributions: Dividends from net investment income (0.13) (0.35) (0.45) (0.64) (0.62) ------------------------------------------------------------------- Net asset value at end of period 9.73 9.70 9.75 10.00 9.92 ------------------------------------------------------------------- Total return (%) 1.66 2 3.10 2.04 7.50 5.58 2 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net operating expenses 0.44 3 0.44 0.40 0.40 0.41 3 4 Gross operating expenses 0.44 3 0.44 0.47 0.56 0.65 3 Net investment income 2.64 3 3.23 4.52 6.18 6.88 3 Portfolio turnover rate 44 2 109 42 106 81 2 Net assets, end of period ($ x 1,000,000) 1,729 1,476 1,443 772 219
* Unaudited. 1 Commencement of operations. 2 Not annualized. 3 Annualized. 4 The ratio of net operating expenses would have been 0.40% if certain non-routine expenses (proxy fees) had not been included. 18 See financial notes. SCHWAB YIELDPLUS FUND PORTFOLIO HOLDINGS as of February 29, 2004, 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 ~ Variable rate security / Callable securities @ Collateral for futures contracts * Security is valued at fair value (see Accounting Policies) 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.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) --------------------------------------------------------------------------------- 51.1% CORPORATE BONDS 1,103,583 1,114,983 30.1% ASSET-BACKED OBLIGATIONS 649,352 655,995 15.3% MORTGAGE-BACKED SECURITIES 330,408 332,832 0.7% MUNICIPAL BONDS 15,000 15,049 0.2% U.S. GOVERNMENT SECURITIES 4,000 3,998 5.5% COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 119,368 119,368 3.0% PREFERRED STOCK 65,530 65,619 0.0% OTHER INVESTMENT COMPANIES 773 773 --------------------------------------------------------------------------------- 105.9% TOTAL INVESTMENTS 2,288,014 2,308,617 (5.9)% OTHER ASSETS AND LIABILITIES (127,845) -------------------------------------------------------------------------------- 100.0% NET ASSETS 2,180,772
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) CORPORATE BONDS 51.1% of net assets FINANCE 21.1% --------------------------------------------------------------------------- BANKING 8.3% AB SPINTAB, 144A /~ 2.16%, 04/30/04 6,500 6,608 @/ 7.50%, 08/14/49 900 1,001 /~ ARTESIA OVERSEAS, LTD. 1.87%, 05/25/04 10,000 10,000 /~ BANKBOSTON CAPITAL TRUST III 1.92%, 03/15/04 9,500 9,270 /~(7) BNP PARIBAS 1.80%, 03/22/04 27,500 27,247 /~ CHASE CAPITAL VI Series F 1.76%, 05/03/04 13,000 12,558 /~ CULLEN/FROST CAPITAL TRUST I 2.68%, 06/01/04 15,000 15,187 /~(4) DEUTSCHE BANK CAPITAL TRUST, 144A Class B 2.97%, 03/30/04 33,000 34,698 /~ FLEET CAPITAL TRUST V 2.17%, 03/18/04 15,000 15,000 /~ PNC CAPITAL TRUST 1.74%, 03/01/04 7,000 6,571 @ PNC FUNDING CORP. 7.75%, 06/01/04 1,350 1,371 / SOCGEN REAL ESTATE, L.L.C., 144A Series A 7.64%, 12/29/49 11,120 12,743 ~ SOCIETE GENERALE 1.75%, 04/21/04 17,100 17,353 @/ SVENSKA HANDELSBANKEN, 144A 7.13%, 03/07/49 10,000 11,153 ------- 180,760 BROKERAGE 6.9% ~(5) BEAR STEARNS CO., INC. 1.77%, 03/29/04 30,000 30,411 /~ CREDIT SUISSE FINANCIAL PRODUCTS 1.93%, 03/08/04 20,400 20,201
See financial notes. 19 SCHWAB YIELDPLUS FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) ~(3) GOLDMAN SACHS GROUP, INC. 1.29%, 04/09/04 40,000 40,010 MERRILL LYNCH & CO. Series B ~ 1.49%, 03/08/04 8,000 8,030 ~ 1.37%, 03/18/04 5,000 5,010 ~(2) MORGAN STANLEY 1.27%, 05/24/04 47,600 47,623 ------- 151,285 FINANCE COMPANIES 3.8% /~ CAPITAL ONE CAPITAL I, 144A 2.68%, 05/03/04 7,000 6,823 ~ COUNTRYWIDE HOME LOAN Series L 1.65%, 03/02/04 12,000 12,093 INTERNATIONAL LEASE FINANCE CORP. Series O ~ 2.42%, 04/15/04 10,000 10,165 ~ 2.33%, 05/03/04 10,000 10,157 @ PHH CORP. 6.00%, 03/01/08 13,000 14,137 ~(6) SLM CORP. 1.34%, 04/26/04 30,155 30,249 ------- 83,624 FINANCIAL OTHER 0.5% ~ NATIONAL CONSUMER COOPERATIVE BANK Series B 3.38%, 05/05/04 10,000 10,024 INSURANCE 1.1% @/ LINCOLN NATIONAL CORP. 9.13%, 10/01/24 5,500 5,946 @/ NATIONWIDE CSN TRUST, 144A 9.88%, 02/15/25 10,000 11,645 / NATIONWIDE MUTUAL INSURANCE, 144A 7.50%, 02/15/24 6,305 6,525 ------- 24,116 REAL ESTATE INVESTMENT TRUST 0.5% @ EOP OPERATING, L.P. 6.50%, 06/15/04 1,015 1,030 SIMON DEBARTOLO 6.75%, 07/15/04 10,000 10,187 ------- 11,217
INDUSTRIAL 25.2% -------------------------------------------------------------------------- BASIC INDUSTRY 0.7% GEORGIA-PACIFIC CORP. / 9.50%, 05/15/22 2,000 2,080 / 9.63%, 03/15/22 8,000 8,360 LOUISIANA PACIFIC CORP. 8.50%, 08/15/05 4,427 4,787 ------- 15,227 CAPITAL GOODS 2.2% @ ALLIED WASTE NORTH AMERICA Series B 7.63%, 01/01/06 7,000 7,455 BAE ASSET SYSTEMS 2001 ASSET TRUST, 144A Series 2001 Class G 6.66%, 09/15/13 7,604 8,552 NORTHROP GRUMMAN CORP. 9.38%, 10/15/24 5,505 5,994 ~ RAYTHEON CO. 1.64%, 03/10/04 5,000 5,002 @ TYCO INTERNATIONAL GROUP, SA 6.38%, 02/15/06 14,000 14,922 @/ WASTE MANAGEMENT, INC. 8.75%, 05/01/18 4,250 4,962 ------- 46,887 COMMUNICATIONS 6.8% @ CHANCELLOR MEDIA / CLEAR CHANNEL COMMUNICATION 8.00%, 11/01/08 9,570 11,173 @/ CONTINENTAL CABLEVISION 9.50%, 08/01/13 14,225 16,291 @/ DIRECTV HOLDINGS 8.38%, 03/15/13 8,000 9,140 ~/ ECHOSTAR DBS CORP., 144A 4.41%, 04/01/04 9,750 10,189 @ FRANCE TELECOM 8.70%, 03/01/06 5,422 6,006 @ NEWS AMERICA, INC. 6.70%, 05/21/04 8,200 8,276
20 See financial notes. SCHWAB YIELDPLUS FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) @~ ORANGE, PLC 9.00%, 06/01/09 13,365 14,182 @ ROGERS CABLE SYSTEMS, LTD. Series B 10.00%, 03/15/05 14,285 15,374 @ SPRINT CAPITAL CORP. 7.13%, 01/30/06 14,000 15,231 @(9) TELEFONOS DE MEXICO, SA 8.25%, 01/26/06 20,000 22,125 ~ VERIZON WIRELESS CAPITAL, 144A 1.19%, 05/24/04 20,300 20,281 ------- 148,268 CONSUMER CYCLICAL 10.9% / AMERICAN AXLE & MANUFACTURING, INC. 9.75%, 03/01/09 14,107 14,865 @ AUTONATION, INC. 9.00%, 08/01/08 10,550 12,238 @ CEASARS ENTERTAINMENT 8.50%, 11/15/06 9,080 10,101 CENTEX CORP. ~ Series D 3.24%, 03/02/04 10,000 10,388 ~ Series E 3.17%, 05/21/04 5,000 5,059 ~ DAIMLER-CHRYSLER, N.A. HOLDINGS 2.13%, 05/10/04 10,000 10,117 ~ FORD MOTOR CREDIT 1.56%, 04/19/04 10,000 9,935 GAP, INC. 9.90%, 12/15/05 5,000 5,612 ~ GENERAL MOTORS ACCEPTANCE CORP. 2.00%, 05/18/04 15,000 14,990 HYATT EQUITIES, L.L.C., 144A 6.88%, 06/15/07 1,080 1,169 INTERNATIONAL SPEEDWAY CORP. 7.88%, 10/15/04 14,000 14,508 @ LEAR CORP. Series B 7.96%, 05/15/05 14,560 15,579 ~ LIBERTY MEDIA CORP. 2.67%, 03/15/04 15,000 15,209 @ MANDALAY RESORT GROUP 6.45%, 02/01/06 9,975 10,474 @ MGM GRAND, INC. 6.95%, 02/01/05 9,475 9,890 @ MGM MIRAGE, INC. 6.75%, 08/01/07 4,000 4,320 MOHEGAN TRIBAL GAMING 8.13%, 01/01/06 2,500 2,700 @ PULTE HOMES, INC. 8.38%, 08/15/04 1,500 1,531 ROYAL CARIBBEAN CRUISES 8.25%, 04/01/05 1,490 1,579 @ 7.25%, 08/15/06 8,950 9,644 RYLAND GROUP, INC. @/ 9.75%, 09/01/10 14,430 16,450 @/ 9.13%, 06/15/11 500 569 SCHULER HOMES 9.38%, 07/15/09 9,464 10,600 ~ SEARS ROEBUCK ACCEPTANCE CORP. 3.12%, 04/23/04 14,000 14,025 / STANDARD PACIFIC CORP. 9.50%, 09/15/10 6,160 6,930 TOLL CORP. @/ 8.00%, 05/01/09 2,500 2,622 @/ 8.25%, 02/01/11 6,810 7,576 ------- 238,680 CONSUMER NON-CYCLICAL 2.6% / ANHEUSER-BUSCH COS., INC. 7.00%, 12/01/25 2,730 3,031 BAUSCH & LOMB, INC. 6.75%, 12/15/04 2,595 2,699 @ 6.50%, 08/01/05 10,205 10,779 CAREMARK RX, INC. 7.38%, 10/01/06 1,001 1,106 @ CONSTELLATION BRANDS, INC. 8.63%, 08/01/06 8,500 9,435 / EXPRESS SCRIPTS, INC. 9.63%, 06/15/09 1,905 2,038 HCA, INC. @ 7.15%, 03/30/04 7,168 7,190 @ 6.91%, 06/15/05 7,145 7,517
See financial notes. 21 SCHWAB YIELDPLUS FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) /~ LILLY DEL MAR, INC., 144A 2.33%, 05/05/04 5,000 4,991 ~ SAFEWAY, INC. 1.63%, 05/01/04 8,000 8,009 ------ 56,795 ENERGY 1.0% @/ HUSKY OIL LTD. 8.90%, 08/15/08 9,701 11,350 @ PIONEER NATURAL RESOURCES 8.25%, 08/15/07 9,050 10,434 ------ 21,784 TRANSPORTATION 1.0% @ ERAC U.S.A. FINANCE CO., 144A 6.95%, 03/01/04 3,575 3,575 ~ HERTZ CORP. 1.66%, 05/13/04 13,400 13,396 @ NORFOLK SOUTHERN CORP. 8.38%, 05/15/05 3,695 3,995 ------ 20,966 SOVEREIGN 0.9% -------------------------------------------------------------------------- ~ PEMEX PROJECT FUNDING MASTER TRUST 2.65%, 04/07/04 10,000 10,045 ~ UNITED MEXICAN STATES 1.84%, 04/13/04 10,000 10,085 ------ 20,130 UTILITIES 3.9% -------------------------------------------------------------------------- ELECTRIC 3.9% @ CINERGY CORP. 6.25%, 09/01/04 10,000 10,209 INDIANA MICHIGAN POWER Series A 6.88%, 07/01/04 10,000 10,190 /~ NISOURCE FINANCE CORP. 1.88%, 05/04/04 14,000 14,001 PENNSYLVANIA ELECTRIC CO. Series A 5.75%, 04/01/04 15,000 15,052 ~ PEPCO HOLDINGS, INC. 1.92%, 05/17/04 10,000 10,000 /~ PINNACLE WEST CAPITAL CORP. 1.93%, 05/03/04 10,175 10,184 @ RELIANT ENERGY RESOURCES Series B 8.13%, 07/15/05 9,876 10,575 ~ SOUTHERN CALIFORNIA EDISON 1.42%, 04/13/04 5,000 5,009 ------ 85,220 ASSET-BACKED OBLIGATIONS 30.1% of net assets ALTER MONETA RECEIVABLES, L.L.C. Series 2003-1 2.56%, 03/15/11 7,128 7,138 AMERIQUEST MORTGAGE SECURITIES, INC. ~ Series 2003-IA1 Class M2 2.74%, 03/25/04 3,891 3,963 ~ Series 2003-6 Class M2 2.94%, 03/25/04 5,000 5,175 ~ Series 2003-AR2 Class M2 3.12%, 03/25/04 5,000 5,160 ~ Series 2003-AR3 Class M2 3.14%, 03/25/04 5,000 5,161 ~ AMORTIZING RESIDENTIAL COLLATERAL TRUST Series 2002-BC1 Class M2 2.19%, 03/25/04 0,000 10,037 AQ FINANCE NIM TRUST Series 2003-N11A 7.14%, 08/25/33 2,618 2,629 ARGENT NIM TRUST * Series 2003-N7 Class 2A1 5.75%, 03/27/34 6,468 6,468 * Series 2003-N7 Class 2A2 9.75%, 03/27/34 2,000 2,000 ~ ARGENT SECURITIES, INC. Series 2003-W7 Class M2 2.84%, 03/25/04 15,750 16,094 ASSET BACKED FUNDING CERTIFICATES ~ Series 2003-AHL1 Class M1 1.94%, 03/25/04 7,500 7,568 *~= Series 2004-OPT2 Class M2 2.10%, 03/25/04 11,868 11,878 ~ Series 2003-OPT1 Class M2 2.64%, 03/25/04 5,000 5,045
22 See financial notes. SCHWAB YIELDPLUS FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) Series 2003-OPT1 6.90%, 07/26/33 3,590 3,603 ASSET BACKED SECURITIES CORP. HOME EQUITY ~ Series 2001-HE3 Class M2 2.14%, 03/15/04 6,000 6,014 ~ Series 2003-HE2 Class M2 2.99%, 03/15/04 4,460 4,571 ~ BEAR STEARNS ASSET BACKED SECURITIES, INC. Series 1999-1 Class MV1 1.74%, 03/25/04 12,011 12,041 ~ CAPITAL ONE MASTER TRUST Series 2001-2 Class C 2.19%, 03/15/04 14,920 14,974 CAPITAL ONE MULTI-ASSET EXECUTION TRUST ~ Series 2003-B6 Class B6 1.62%, 03/15/04 20,000 20,150 ~ Series 2003-C1 Class C1 3.64%, 03/15/04 3,500 3,737 CDC MORTGAGE CAPITAL TRUST ~ Series 2003-HE1 Class M1 1.99%, 03/25/04 18,000 18,196 ~ Series 2003-HE4 Class M2 2.74%, 03/25/04 4,000 4,118 ~ Series 2003-HE2 Class M2 2.99%, 03/25/04 5,000 5,185 ~ CENTEX HOME EQUITY Series 2003-B Class M2 2.79%, 03/25/04 6,500 6,667 ~ CHASE CREDIT CARD MASTER TRUST Series 2002-4 Class C 1.93%, 03/15/04 14,000 14,061 CHASE FUNDING NET INTEREST MARGIN Series 2003-3A 6.88%, 06/27/33 1,072 1,073 Series 2003-4A 6.75%, 07/27/33 2,589 2,595 *= Series 2004-1A 3.75%, 02/27/34 4,000 3,994 COUNTRYWIDE ASSET BACKED CERTIFICATES ~(8) Series 2000-2 Class MV2 1.99%, 03/25/04 24,000 24,068 ~ Series 2002-6 Class M1 2.19%, 03/25/04 3,000 3,043 ~ Series 2003-BC1 Class M2 3.09%, 03/25/04 14,500 14,993 ~ Series 2002-6 Class M2 3.19%, 03/25/04 4,800 4,925 DISTRIBUTION FINANCIAL SERVICES TRUST Series 2001-1 Class-D 7.73%, 11/15/22 8,250 8,446 ~ FIRST FRANKLIN MORTGAGE LOAN ASSET BACKED CERTIFICATES Series 1997-FF3 Class M1 1.51%, 03/22/04 4,023 4,027 ~ FREMONT HOME LOAN TRUST Series 2003-B Class M2 2.71%, 03/25/04 13,000 13,282 GSR MORTGAGE LOAN TRUST Series 2002-3F Class 2AB3 5.50%, 12/25/31 1,385 1,391 HERD TRUST Series 2003-2A Class A 11.00%, 07/25/32 1,220 1,220 ~ HOUSEHOLD MORTGAGE LOAN TRUST Series 2003-HC2 Class M 1.69%, 03/22/04 8,278 8,354 LONG BEACH ASSET HOLDINGS, CORP. Series 2003-4 Class N1 6.54%, 08/25/33 1,440 1,455 LONG BEACH MORTGAGE LOAN TRUST ~ Series 2003-2 Class M1 1.91%, 03/25/04 15,000 15,141 *~ Series 2004-1 Class M6 2.50%, 03/25/04 8,000 8,000 *~ Series 2004-1 Class M7 2.85%, 03/25/04 7,000 7,010 ~ Series 2003-2 Class M2 2.99%, 03/25/04 10,000 10,233 ~ Series 2003-2 Class M3 3.34%, 03/25/04 2,190 2,248 ~ Series 2003-4 Class M5A 5.09%, 03/25/04 3,000 3,234 *~ MAIN STREET WAREHOUSE FUNDING TRUST Series 2004-MSC 3.87%, 03/25/04 9,000 9,040 MASTER ASSET BACKED SECURITIES TRUST ~ Series 2003-OPT1 Class A2 1.51%, 03/25/04 15,614 15,686 ~ Series 2002-OPT1 Class M2 3.04%, 03/25/04 10,000 10,202
See financial notes. 23 SCHWAB YIELDPLUS FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) MBNA CREDIT CARD MASTER NOTE TRUST ~ Series 2003-B3 Class B3 1.47%, 03/15/04 10,000 10,012 ~ Series 2003-C3 Class C3 2.44%, 03/15/04 10,920 11,100 ~ MBNA MASTER CREDIT CARD TRUST Series 1999-L Class C 2.17%, 03/15/04 8,000 8,117 ~ MERRILL LYNCH MORTGAGE INVESTORS, INC. Series 2003-WMC3 Class M4 3.09%, 03/25/04 2,913 2,986 ~ MMCA AUTOMOBILE TRUST Series 2002-5 Class C 3.24%, 03/15/04 4,387 4,392 MORGAN STANLEY ABS CAPITAL I Series 2002-HE3N 9.50%, 12/27/32 1,475 1,477 Series 2003-NC8N 7.60%, 09/25/33 15,809 15,853 MORGAN STANLEY AUTO LOAN TRUST Series 2003-HB1 Class B 2.22%, 04/15/11 8,996 9,008 ~ NEW CENTURY HOME EQUITY LOAN TRUST Series 2003-3 Class M3 3.47%, 03/25/04 7,686 7,955 NOVASTAR HOME EQUITY LOAN ~ Series 2003-4 Class M1 1.80%, 03/25/04 20,000 20,204 ~ Series 2003-3 Class M2 2.74%, 03/25/04 10,000 10,335 ~ Series 2003-4 Class B1 3.59%, 03/25/04 2,500 2,600 ~ Series 2003-3 Class B2 4.99%, 03/25/04 3,000 3,137 NOVASTAR NIM TRUST Series 2003-N1 7.39%, 06/01/33 1,191 1,193 * Series 2004-N1 4.46%, 02/25/34 11,000 11,000 OPTION ONE MORTGAGE LOAN TRUST ~ Series 2003-2 Class M1 1.74%, 03/25/04 15,000 15,184 ~ Series 2003-1 Class M1 1.99%, 03/25/04 8,000 8,128 ~ Series 2004-1 Class M2 2.19%, 03/25/04 3,800 3,801 ~ Series 2004-1 Class M3 2.44%, 03/25/04 5,000 5,030 ~ Series 2003-4 Class M2 2.74%, 03/25/04 6,000 6,158 ~ Series 2003-2 Class M2 2.79%, 03/25/04 3,000 3,080 ~ Series 2003-4 Class M4 4.09%, 03/25/04 3,500 3,617 ~ Series 2003-2B Class N1 7.63%, 03/25/04 886 887 ~ Series 2003-3 Class N 1.40%, 03/26/04 2,675 2,676 ~ OVERTURE CDO (JERSEY) LTD. Series IA Class B1 2.27%, 07/08/04 10,000 10,076 RESIDENTIAL ASSET SECURITIES CORP. ~ Series 2004-KS2 Class M22 2.10%, 03/25/04 9,000 9,000 ~ Series 2003-KS6 Class M2 2.59%, 03/25/04 15,300 15,579 ~ Series 2003-KS1 Class M2 2.84%, 03/25/04 11,100 11,338 *~ Series 2003-KS2 Class MII2 2.84%, 03/25/04 5,000 5,114 RYDER VEHICLE LEASE TRUST Series 2001-A Class CTFS 6.75%, 03/15/12 5,000 5,410 * SAIL NET INTEREST MARGIN NOTES Series 2003-12A Class A 7.35%, 11/27/33 2,308 2,302 ~ SAKS CREDIT CARD MASTER TRUST Series 2001-2 Class B 1.74%, 03/15/04 2,800 2,822 *~ SAXON ASSET SECURITIES TRUST Series 2004-1 Class M3 2.45%, 03/19/04 4,250 4,250 ~ STRUCTURED ASSET SECURITIES CORP. Series 1998-8 Class B 2.39%, 03/25/04 2,268 2,261 ~ TERRAPIN FUNDING, L.L.C. Series 2003-1A Class B1 2.40%, 03/08/04 20,000 20,065
24 See financial notes. SCHWAB YIELDPLUS FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) * WFS FINANCIAL OWNER TRUST Series 2004-1 Class C 2.49%, 08/22/11 7,000 6,984 WHOLE AUTO LOAN TRUST Series 2003-1 Class B 2.24%, 03/15/10 17,455 17,571 ------- 655,995 MORTGAGE-BACKED SECURITIES 15.3% of net assets U.S. GOVERNMENT AGENCY MORTGAGES 5.8% -------------------------------------------------------------------------- FANNIE MAE Pool# 401049 7.00%, 08/01/07 57 58 Pool# 500521 7.00%, 06/01/09 246 265 Pool# 250499 7.00%, 03/01/11 225 241 Pool# 323970 7.00%, 10/01/14 341 365 Pool# 536005 7.00%, 12/01/14 1,104 1,183 Pool# 252977 7.00%, 01/01/15 121 129 Pool# 526933 7.00%, 01/01/15 174 186 Pool# 529057 7.00%, 03/01/15 79 85 Pool# 536367 7.00%, 05/01/15 36 39 Pool# 541800 7.00%, 06/01/15 172 184 Pool# 535461 7.00%, 07/01/15 661 709 Pool# 542497 7.00%, 07/01/15 33 36 Pool# 253541 7.00%, 12/01/15 51 55 Pool# 535631 7.00%, 12/01/15 3,244 3,479 Pool# 535740 7.00%, 12/01/15 787 844 Pool# 545034 7.00%, 12/01/15 305 327 Pool# 535662 7.00%, 01/01/16 537 576 Pool# 535675 7.00%, 01/01/16 587 629 Pool# 548205 7.00%, 01/01/16 232 249 Pool# 567601 7.00%, 02/01/16 151 162 Pool# 535801 7.00%, 03/01/16 172 184 Pool# 595654 7.00%, 03/01/16 90 97 Pool# 545202 7.00%, 07/01/16 236 253 Pool# 660726 7.00%, 08/01/16 123 132 Pool# 606440 6.50%, 09/01/16 167 178 Pool# 545369 7.00%, 09/01/16 787 844 Pool# 254272 7.00%, 03/01/17 962 1,031 Pool# 254291 7.00%, 04/01/17 326 350 Pool# 555532 7.00%, 12/01/17 5,381 5,770 =(1) 7.00%, 03/01/18 50,000 53,562 Pool# 544849 3.86%, 05/01/19 10,094 10,263 Pool# 621636 5.15%, 01/31/31 3,635 3,764 Pool# 586276 5.80%, 06/01/31 669 697 Pool# 563434 6.05%, 07/01/31 999 1,016 Pool# 598596 6.10%, 07/01/31 1,547 1,588 Pool# 607308 6.05%, 08/01/31 2,628 2,696 Pool# 606857 5.53%, 10/01/31 3,759 3,869 Pool# 613101 5.56%, 11/01/31 2,010 2,073 Pool# 610546 5.80%, 11/01/31 2,019 2,087 Pool# 544869 4.08%, 08/01/35 12,403 12,621
See financial notes. 25 SCHWAB YIELDPLUS FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) Pool# 535314 6.24%, 08/01/39 2,346 2,420 FREDDIE MAC Pool# M80685 6.00%, 05/01/08 569 586 Pool# G11226 5.50%, 08/01/11 1,346 1,413 Series 61 Class D 9.30%, 11/15/20 823 825 Pool# 786823 6.10%, 07/01/29 3,943 4,072 Pool# 846902 6.53%, 04/01/31 1,691 1,741 Pool# 788677 5.45%, 10/01/31 2,479 2,563 ------- 126,496 COLLATERALIZED MORTGAGE OBLIGATIONS 9.5% -------------------------------------------------------------------------- BANK OF AMERICA MORTGAGE SECURITIES Series 2003-D Class 2A2 3.60%, 03/25/08 9,450 9,462 Series 2001-H Class A1 5.37%, 12/31/31 1,097 1,113 Series 2002-A Class A1 5.24%, 02/25/32 1,181 1,202 Series 2002-J Class A2 4.88%, 09/25/32 6,239 6,333 COUNTRYWIDE HOME LOANS Series 2001-23 Class 2A1 5.41%, 10/31/31 968 983 Series 2001-23 Class 3A1 6.25%, 10/31/31 1,301 1,321 Series 2001-HYB2 Class 2A1 6.35%, 11/30/31 1,829 1,857 Series 2002-1 Class 1A1 5.36%, 12/19/31 1,782 1,832 Series 2002-HYB1 Class 1A1 5.43%, 05/25/32 3,236 3,286 Series 2002-HYB2 Class 4A1 5.00%, 08/20/32 1,993 2,024 Series 2003-HYB1 Class 1A1 3.85%, 05/19/33 13,906 14,006 Series 2003-HYB2 Class 1A1 3.45%, 07/19/33 13,118 13,057 CS FIRST BOSTON MORTGAGE SECURITIES CORP. ~ Series 2000-HE1 Class M2 2.16%, 03/15/04 5,000 5,015 Series 2002-AR27 Class 1A1 5.42%, 10/25/32 4,772 4,861 Series 2002-AR28 Class 1A2 4.98%, 11/25/32 6,118 6,251 FANNIE MAE ~ Series 2003-37 Class FK 1.89%, 03/25/04 10,605 10,615 Series 2003-22 Class UK 4.00%, 09/25/31 13,672 13,684 FANNIE MAE (INTEREST ONLY) Series 2003-57 Class IB 5.00%, 06/25/18 22,956 2,739 FIFTH THIRD MORTGAGE LOAN TRUST ~ Series 2002-FTB1 Class 3A1 3.91%, 03/01/04 5,460 5,552 ~ Series 2002-FTB1 Series 2A1 6.27%, 03/01/04 6,588 6,798 FREDDIE MAC STRUCTURED PASS THROUGH SECURITIES Series H008 Class A2 1.77%, 06/15/07 3,316 3,312 Series H004 Class A2 2.59%, 12/15/07 12,900 12,905 IMPAC SECURED ASSET COMMON OWNER TRUST Series 2001-8 Class A1 6.50%, 02/25/31 1,241 1,259 MASTER ADJUSTABLE RATE MORTGAGES TRUST Series 2002-4 Class 3A1 5.27%, 11/25/32 4,045 4,135 Series 2002-4 Class 1A1 5.27%, 11/25/32 7,045 7,200 Series 2002-4 Class 2A1 5.48%, 11/25/32 4,289 4,363 Series 2003-1 Class 1A1 4.15%, 12/25/32 2,719 2,741 RESIDENTIAL ACCREDIT LOANS, INC. Series 1999-QS8 Class A1 6.50%, 06/25/14 4,856 5,049 Series 2000-QS4 Class NB 7.50%, 03/25/15 231 232 RESIDENTIAL FUNDING SECURITIES CORP. Series 2001-RM1 Class A 6.18%, 12/25/29 331 331
26 See financial notes. SCHWAB YIELDPLUS FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) SEQUOIA MORTGAGE TRUST (INTEREST ONLY) Series 2003-8 Class X1 0.80%, 01/20/34 356,591 4,381 WASHINGTON MUTUAL Series 2002-AR19 Class A7 4.68%, 01/01/33 9,796 10,094 Series 2003-AR1 Class A6 4.56%, 01/25/33 4,858 4,917 Series 2003-AR8 Class A 4.03%, 08/25/33 13,559 13,667 Series 2003-AR9 Class 1A2A 2.34%, 09/25/33 15,176 15,206 WASHINGTON MUTUAL MSC MORTGAGE PASS-THROUGH TRUST Series 2001-AR1 Class A 6.03%, 12/12/31 1,493 1,549 WELLS FARGO MORTGAGE BACKED SECURITIES TRUST Series 2001-25 Class IA1 6.20%, 09/25/31 166 166 Series 2002-E Class 2A1 5.22%, 09/25/32 2,797 2,838 ------- 206,336 MUNICIPAL BONDS 0.7% of net assets CALIFORNIA DEPARTMENT OF WATER RESOURCES Power Supply Revenue Bonds, Series 2002E 3.59%, 05/01/04 15,000 15,049 U.S. GOVERNMENT SECURITIES 0.2% of net assets U.S. TREASURY BILLS @ 0.95%, 03/04/04 1,000 1,000 @ 1.00%, 03/18/04 2,000 1,999 @ 1.02%, 04/29/04 1,000 999 ----- 3,998 COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 5.5% of net assets ATLANTIS TWO FUNDING CORP., SECTION 4(2) 1.13%, 03/01/04 15,000 15,000 1.15%, 03/01/04 10,267 10,267 1.15%, 03/10/04 10,000 9,997 1.15%, 03/16/04 9,540 9,535 CONOCO PHILLIPS, SECTION 4(2) 1.05%, 03/01/04 14,000 14,000 1.04%, 03/02/04 7,900 7,900 COUNTRYWIDE HOME LOAN 1.05%, 03/05/04 10,000 9,999 GENERAL MOTORS ACCEPTANCE CORP. 1.18%, 03/09/04 10,000 9,997 1.22%, 03/15/04 10,290 10,285 1.23%, 03/22/04 1,000 999 1.21%, 03/24/04 4,000 3,997 1.21%, 03/26/04 10,000 9,992 VIACOM, INC., SECTION 4(2) 1.05%, 03/01/04 7,400 7,400 ------- 119,368
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) PREFERRED STOCK 3.0% of net assets /(10) ABN AMRO XIX CUSTODIAL RECEIPTS 200,000 20,978 / GRAND METRO DELAWARE, L.P. 500,000 13,080 / NOVA CHEMICALS CORP. 230,000 5,750 RC TRUST I 200,000 10,749 / ZURICH REGCAPS FUNDING TRUST III, 144A 155,000 15,062 ------ 65,619 OTHER INVESTMENT COMPANIES 0.0% of net assets PROVIDENT INSTITUTIONAL FUNDS-- FED FUNDS PORTFOLIO 772,664 773
END OF INVESTMENTS. For totals, please see the first page of holdings for this fund. See financial notes. 27 SCHWAB YIELDPLUS FUND PORTFOLIO HOLDINGS continued In addition to the above, the fund held the following at 2/29/04. All numbers are x 1,000 except number of futures contracts. FUTURES CONTRACTS
Number of Contract Unrealized Contracts Value Losses 2 Year, Short U.S. Treasury Note, expires 3/29/04 1,000 215,641 (2,500) 5 Year, Short U.S. Treasury Note, expires 3/22/04 1,500 170,648 (3,891) ------ (6,391)
28 See financial notes. SCHWAB YIELDPLUS FUND Statement of ASSETS AND LIABILITIES As of February 29, 2004; unaudited. All numbers are x 1,000 except NAV. ASSETS --------------------------------------------------------------------------------- Investments, at value $2,308,617 a Receivables: Fund shares sold 16,924 Interest 12,603 Dividends 410 Investments matured 255 Prepaid expenses + 137 ------------ TOTAL ASSETS 2,338,946 LIABILITIES --------------------------------------------------------------------------------- Payables: Fund shares redeemed 6,236 Dividends to shareholders 806 Due to brokers for futures 625 Investments bought 150,373 Investment adviser and administrator fees 56 Transfer agent and shareholder service fees 23 Accrued expenses + 55 ------------ TOTAL LIABILITIES 158,174 NET ASSETS --------------------------------------------------------------------------------- TOTAL ASSETS 2,338,946 TOTAL LIABILITIES - 158,174 ------------ NET ASSETS $2,180,772 NET ASSETS BY SOURCE Capital received from investors 2,223,629 Distributions in excess of net investment income (1,168) Net realized capital losses (55,901) b Net unrealized capital gains 14,212 b NET ASSET VALUE (NAV) BY SHARE CLASS SHARES SHARE CLASS NET ASSETS / OUTSTANDING = NAV Investor Shares $452,057 46,434 $9.74 Select Shares(R) $1,728,715 177,603 $9.73
Unless stated, all numbers are x 1,000. a The amortized cost of the fund's securities was $2,288,014, which includes certain restricted but deemed liquid 144A and Section 4(2) securities worth $229,114, or 10.5% of the fund's total net assets. Not counting short-term obligations and government securities, the fund's security transactions during the period were: Purchases $373,184 Sales/maturities $377,383 The fund's long-term government security transactions were: Purchases $90,061 Sales/maturities $39,414 The fund's total security transactions with other SchwabFunds during the period were $3,184. b These derive from investments, futures and short sales. FEDERAL TAX DATA ----------------------------------------- PORTFOLIO COST $2,288,014 NET UNREALIZED GAINS AND LOSSES: Gains $23,279 Losses + (2,676) ------------- $20,603
AS OF AUGUST 31, 2003: UNDISTRIBUTED EARNINGS: Ordinary income $4,013 Long-term capital gains $-- UNUSED CAPITAL LOSSES: Expires 08/31 of: 2009 $1,318 2010 2,061 2011 + 47,204 ------------ $50,583 DEFERRED CAPITAL LOSSES $2,978
See financial notes. 29 SCHWAB YIELDPLUS FUND Statement of OPERATIONS For September 1, 2003 through February 29, 2004; unaudited. All numbers are x 1,000. INVESTMENT INCOME --------------------------------------------------------------------------------- Interest $28,625 Dividends 915 ----------- TOTAL INVESTMENT INCOME 29,540 NET REALIZED GAINS AND LOSSES --------------------------------------------------------------------------------- Net realized gains on investments sold 4,391 Net realized losses on futures contracts (7,211) Net realized gains on short sales + 73 ----------- NET REALIZED LOSSES (2,747) NET UNREALIZED GAINS AND LOSSES --------------------------------------------------------------------------------- Net unrealized gains on investments 15,060 Net unrealized losses on futures contracts + (5,983) ----------- NET UNREALIZED GAINS 9,077 EXPENSES --------------------------------------------------------------------------------- Investment adviser and administrator fees 3,001 a Transfer agent and shareholder service fees: Investor Shares 523 b Select Shares 750 b Trustees' fees 10 c Custodian and portfolio accounting fees 100 Professional fees 23 Registration fees 63 Shareholder reports 59 Other expenses + 16 ----------- TOTAL EXPENSES 4,545 INCREASE IN NET ASSETS FROM OPERATIONS --------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 29,540 TOTAL EXPENSES - 4,545 ----------- NET INVESTMENT INCOME 24,995 NET REALIZED LOSSES (2,747) d NET UNREALIZED GAINS + 9,077 d ----------- INCREASE IN NET ASSETS FROM OPERATIONS $31,325
Unless stated, all numbers are x 1,000. 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. These fees are paid to Charles Schwab & Co. c For the fund's independent trustees only. d These add up to a net gain on investments of $6,330. 30 See financial notes. SCHWAB YIELDPLUS FUND Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers are x 1,000. Figures for current period are unaudited.
OPERATIONS --------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 Net investment income $24,995 $57,763 Net realized losses (2,747) (9,559) Net unrealized gains + 9,077 7,361 --------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 31,325 55,565 DISTRIBUTIONS PAID --------------------------------------------------------------------------------- DIVIDENDS FROM NET INVESTMENT INCOME Investor Shares 5,307 13,311 Select Shares + 20,168 50,614 --------------------------------- TOTAL DIVIDENDS FROM NET INVESTMENT INCOME $25,475 $63,925 a
TRANSACTIONS IN FUND SHARES --------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES VALUE SHARES VALUE SHARES SOLD Investor Shares 16,507 $160,423 23,619 $229,942 Select Shares + 77,295 751,197 81,350 791,784 --------------------------------------------- TOTAL SHARES SOLD 93,802 $911,620 104,969 $1,021,726 SHARES REINVESTED Investor Shares 527 $5,121 1,195 $11,632 Select Shares + 1,940 18,843 4,298 41,834 --------------------------------------------- TOTAL SHARES REINVESTED 2,467 $23,964 5,493 $53,466 SHARES REDEEMED Investor Shares (12,834) ($124,706) (22,812) ($221,943) Select Shares + (53,749) (522,131) (81,619) (794,027) --------- --------- -------- ----------- TOTAL SHARES REDEEMED (66,583) ($646,837) (104,431) ($1,015,970) b NET TRANSACTIONS IN FUND SHARES 29,686 $288,747 6,031 $59,222
SHARES OUTSTANDING AND NET ASSETS --------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES NET ASSETS SHARES NET ASSETS Beginning of period 194,351 $1,886,175 188,320 $1,835,313 Total increase + 29,686 294,597 6,031 50,862 c -------------------------------------------- END OF PERIOD 224,037 $2,180,772 194,351 $1,886,175 d
Unless stated, all numbers are x 1,000. a The tax-basis components of distributions for the period ended 08/31/03 are: Ordinary income $63,925 Long-term capital gains $--
b Dollar amounts for the period ended 08/31/03 are net of proceeds received from the 0.25% early withdrawal fee the fund charges on shares sold 90 days or less after buying them: Investor Shares $6 Select Shares + 10 ------- TOTAL $16
Effective November 16, 2002, the early withdrawal fee was eliminated. Therefore, there are no current period amounts. c Figures for shares represent shares sold plus shares reinvested, minus shares redeemed. Figures for net assets represent the changes in net assets from operations plus the changes in value of transactions in fund shares, minus distributions paid. d Includes distributions in excess of net investment income in the amount of $1,168 and $688 for the current and prior period, respectively. See financial notes. 31 SCHWAB SHORT-TERM BOND MARKET FUND FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
9/1/03- 9/1/02- 9/1/01- 9/1/00- 9/1/99- 9/1/98- 2/29/04* 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------------------------ Net asset value at beginning of period 10.14 10.07 10.08 9.65 9.66 9.90 --------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.15 0.34 0.50 0.59 0.57 0.50 Net realized and unrealized gains or losses 0.13 0.07 (0.02) 0.43 (0.01) (0.24) --------------------------------------------------------------------------------- Total income from investment operations 0.28 0.41 0.48 1.02 0.56 0.26 Less distributions: Dividends from net investment income (0.15) (0.34) (0.49) (0.59) (0.57) (0.50) --------------------------------------------------------------------------------- Net asset value at end of period 10.27 10.14 10.07 10.08 9.65 9.66 --------------------------------------------------------------------------------- Total return (%) 2.75 1 4.16 4.88 10.84 5.97 2.66 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------------------------ Ratios to average net assets: Net operating expenses 0.51 2 0.43 0.35 0.35 0.363 0.35 Gross operating expenses 0.57 2 0.58 0.63 0.66 0.68 0.77 Net investment income 2.88 2 3.34 4.95 5.90 5.91 5.11 Portfolio turnover rate 54 1 124 150 248 129 195 Net assets, end of period ($ x 1,000,000) 742 648 493 369 219 218
* Unaudited. 1 Not annualized. 2 Annualized. 3 The ratio of net operating expenses would have been 0.35% if certain non-routine expenses (proxy fees) had not been included. 32 See financial notes. SCHWAB SHORT-TERM BOND MARKET FUND PORTFOLIO HOLDINGS as of February 29, 2004, unaudited This section shows all the securities in the fund's portfolio and their market value, as of the report date. We use the symbol below to designate the top ten holdings; the number in the circle is the security's rank among the top ten. (1) Top ten holding ~ Variable rate security / Callable securities @ Collateral for futures contracts * Security is valued at fair value (see Accounting Policies) 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.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) -------------------------------------------------------------------------------- 52.8% U.S. GOVERNMENT SECURITIES 387,107 392,504 29.4% CORPORATE BONDS 213,246 217,972 8.0% ASSET-BACKED OBLIGATIONS 59,519 59,742 5.0% MORTGAGE-BACKED SECURITIES 37,465 36,969 0.4% MUNICIPAL BONDS 3,000 3,010 2.4% COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 18,000 18,000 1.0% PREFERRED STOCK 7,076 7,112 0.2% OTHER INVESTMENT COMPANIES 1,312 1,312 -------------------------------------------------------------------------------- 99.2% TOTAL INVESTMENTS 726,725 736,621 29.9% COLLATERAL INVESTED FOR SECURITIES ON LOAN 221,597 221,597 (29.1)% OTHER ASSETS AND LIABILITIES (215,883) -------------------------------------------------------------------------------- 100.0% NET ASSETS 742,335
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) U.S. GOVERNMENT SECURITIES 52.8% of net assets U.S. TREASURY OBLIGATIONS 35.9% ------------------------------------------------------------------------- U.S. TREASURY BILLS @ 0.87%, 03/18/04 1,000 1,000 @ 1.01%, 04/29/04 1,000 998 U.S. TREASURY NOTES (5) 1.63%, 01/31/05 15,000 15,073 7.50%, 02/15/05 10,000 10,607 1.50%, 02/28/05 10,000 10,038 1.63%, 03/31/05 2,000 2,010 6.75%, 05/15/05 3,150 3,358 1.25%, 05/31/05 2,000 2,001 1.13%, 06/30/05 6,500 6,490 5.75%, 11/15/05 8,000 8,577 2.00%, 05/15/06 12,000 12,071 6.88%, 05/15/06 3,500 3,888 7.00%, 07/15/06 10,000 11,198 (1) 2.38%, 08/15/06 64,800 65,595 6.50%, 10/15/06 9,000 10,042 2.63%, 11/15/06 4,000 4,066 (3) 2.25%, 02/15/07 20,000 20,083 6.25%, 02/15/07 5,000 5,593 4.38%, 05/15/07 3,000 3,198 3.25%, 08/15/07 11,000 11,335 3.00%, 11/15/07 5,000 5,103 3.00%, 02/15/08 950 966 2.63%, 05/15/08 11,000 10,992 5.63%, 05/15/08 6,000 6,711 3.25%, 08/15/08 11,000 11,228 (9) 3.13%, 09/15/08 12,020 12,186 3.13%, 10/15/08 750 760 3.38%, 11/15/08 3,000 3,067 3.38%, 12/15/08 6,000 6,130 3.25%, 01/15/09 2,500 2,537 ---------- 266,901 U.S. GOVERNMENT AGENCY SECURITIES 16.9% ------------------------------------------------------------------------- FANNIE MAE (8) 1.88%, 12/15/04 13,000 13,073 3.88%, 03/15/05 10,000 10,276 2.88%, 10/15/05 10,000 10,216 4.38%, 10/15/06 5,000 5,282 (10) 2.63%, 11/15/06 12,000 12,136 5.00%, 01/15/07 5,000 5,370
See financial notes. 33 SCHWAB SHORT-TERM BOND MARKET FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) 4.25%, 07/15/07 5,000 5,276 @ 3.25%, 11/15/07 5,000 5,095 @ 2.50%, 06/15/08 5,000 4,913 (2) FEDERAL HOME LOAN BANK 5.13%, 03/06/06 20,000 21,311 FREDDIE MAC 3.00%, 07/15/04 5,000 5,037 1.88%, 01/15/05 10,000 10,060 5.25%, 01/15/06 3,000 3,195 2.75%, 08/15/06 4,000 4,066 3.50%, 09/15/07 10,000 10,297 ----------- 125,603 CORPORATE BONDS 29.4% of net assets FINANCE 9.0% -------------------------------------------------------------------------- BANKING 6.0% @/ AB SPINTAB, 144A 7.50%, 08/14/49 5,000 5,560 CITICORP Series F 6.38%, 11/15/08 5,000 5,603 /~ DEUTSCHE BANK CAPITAL TRUST, 144A Class B 2.97%, 03/30/04 8,000 8,412 POPULAR NORTH AMERICA, INC. 4.25%, 04/01/08 5,820 5,977 @ 3.88%, 10/01/08 4,000 4,056 @/ SOCGEN REAL ESTATE, L.L.C., 144A Series A 7.64%, 12/29/49 8,000 9,168 @/ SVENSKA HANDELSBANKEN, 144A 7.13%, 03/07/49 5,000 5,576 ----------- 44,352 BROKERAGE 1.1% /~ CREDIT SUISSE FINANCIAL PRODUCTS 1.93%, 03/08/04 3,000 2,971 MORGAN STANLEY 3.88%, 01/15/09 5,000 5,073 ----------- 8,044 FINANCE COMPANIES 1.9% CAPITAL ONE FINANCIAL 7.13%, 08/01/08 4,470 5,013 @ GENERAL ELECTRIC CAPITAL CORP. Series A 4.25%, 01/15/08 4,000 4,182 INTERNATIONAL LEASE FINANCE CORP. Series P 3.30%, 01/23/08 5,000 5,017 ----------- 14,212 INDUSTRIAL 18.2% -------------------------------------------------------------------------- BASIC INDUSTRY 0.1% / GEORGIA PACIFIC CORP. 9.50%, 05/15/22 950 991 CAPITAL GOODS 2.2% BAE ASSET SYSTEMS 2001 ASSET TRUST, 144A Series 2001 Class G 6.66%, 09/15/13 7,984 8,980 TYCO INTERNATIONAL GROUP, SA 6.38%, 02/15/06 4,000 4,263 @ WASTE MANAGEMENT, INC. 7.00%, 10/15/06 2,825 3,136 ----------- 16,379 COMMUNICATIONS 5.0% @ CHANCELLOR MEDIA / CLEAR CHANNEL COMMUNICATION 8.00%, 11/01/08 2,000 2,335 CONTINENTAL CABLEVISION 9.00%, 09/01/08 2,100 2,564 @/ 9.50%, 08/01/13 3,000 3,436 / DIRECTV HOLDINGS 8.38%, 03/15/13 3,000 3,427 @ GTE CALIFORNIA, INC. Series G 5.50%, 01/15/09 5,415 5,847 @/ JONES INTERCABLE, INC. (COMCAST CORP.) 8.88%, 04/01/07 2,000 2,085 @/ ORANGE, PLC 9.00%, 06/01/09 5,605 5,948 ROGERS CABLE SYSTEMS, LTD. Series B 10.00%, 03/15/05 2,500 2,691
34 See financial notes. SCHWAB SHORT-TERM BOND MARKET FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) TELEFONOS DE MEXICO, SA 8.25%, 01/26/06 2,000 2,212 @ TELEFONOS DE MEXICO, SA, 144A 4.50%, 11/19/08 2,000 2,034 @ TELUS CORP. 7.50%, 06/01/07 2,000 2,262 @/ TRITEL PCA, INC. 10.38%, 01/15/11 2,000 2,384 ---------- 37,225 CONSUMER CYCLICAL 6.9% @/ AMERICAN AXLE & MANUFACTURING, INC. 9.75%, 03/01/09 7,000 7,376 @ AUTONATION, INC. 9.00%, 08/01/08 2,000 2,320 CENDANT CORP. 6.25%, 01/15/08 3,000 3,310 D.R. HORTON, INC. 7.50%, 12/01/07 1,000 1,105 5.00%, 01/15/09 1,000 1,015 @ FORD MOTOR CREDIT CO. 5.80%, 01/12/09 5,000 5,174 ~ GENERAL MOTORS ACCEPTANCE CORP. 2.00%, 05/18/04 5,000 4,997 @ INTERNATIONAL SPEEDWAY CORP. 7.88%, 10/15/04 1,000 1,036 @ LEAR CORP. Series B 7.96%, 05/15/05 5,000 5,350 ~ LIBERTY MEDIA CORP. 2.67%, 03/15/04 5,000 5,069 MANDALAY RESORT GROUP 6.45%, 02/01/06 541 568 MGM MIRAGE, INC. @ 7.25%, 10/15/06 1,000 1,087 @ 6.75%, 08/01/07 2,000 2,160 @ 6.75%, 02/01/08 300 325 ROYAL CARIBBEAN CRUISES 8.25%, 04/01/05 1,000 1,060 7.25%, 08/15/06 2,000 2,155 @/ RYLAND GROUP, INC. 9.13%, 06/15/11 4,500 5,119 @/ SCHULER HOMES 9.38%, 07/15/09 972 1,089 @ TOLL CORP. 8.13%, 02/01/09 1,014 1,061 ---------- 51,376 CONSUMER NON-CYCLICAL 1.8% @ GENERAL MILLS, INC. 5.13%, 02/15/07 5,000 5,345 HCA, INC. @ 7.15%, 03/30/04 1,430 1,434 @ 6.91%, 06/15/05 4,100 4,313 @ MILLER BREWING CO., 144A 4.25%, 08/15/08 2,000 2,064 ---------- 13,156 ENERGY 1.3% @/ HUSKY OIL LTD. 8.90%, 08/15/28 4,009 4,691 @ PIONEER NATURAL RESOURCE 6.50%, 01/15/08 4,244 4,646 ---------- 9,337 TRANSPORTATION 0.9% @ HERTZ CORP. 4.70%, 10/02/06 4,000 4,080 @/ UNION PACIFIC CORP. 8.35%, 05/01/25 2,000 2,208 ---------- 6,288 SOVEREIGN 0.7% ------------------------------------------------------------------------- @ REPUBLIC OF SOUTH AFRICA 9.13%, 05/19/09 2,000 2,448 ~ UNITED MEXICAN STATES 1.85%, 04/13/04 2,500 2,521 ---------- 4,969 UTILITIES 1.5% ------------------------------------------------------------------------- ELECTRIC 1.1% @ APPALACHIAN POWER CO. 3.60%, 05/15/08 4,000 4,002 @ PUBLIC SERVICES ELECTRIC & GAS Series C 4.00%, 11/01/08 2,000 2,049
See financial notes. 35 SCHWAB SHORT-TERM BOND MARKET FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) @ RELIANT ENERGY RESOURCES Series B 8.13%, 07/15/05 2,150 2,302 ---------- 8,353 NATURAL GAS 0.4% @/ COLUMBIA ENERGY GROUP Series F 7.42%, 11/28/15 3,000 3,290 ASSET-BACKED OBLIGATIONS 8.0% of net assets ALTER MONETA RECEIVABLES, L.L.C. Series 2003-1 2.56%, 03/15/11 2,376 2,379 CAPITAL ONE MASTER TRUST ~ Series 2001-2 Class C 2.19%, 03/15/04 5,000 5,018 @ Series 2000-2 Class A 7.20%, 08/15/08 5,000 5,361 ~ CHASE CREDIT CARD MASTER TRUST Series 2002-4 Class C 1.93%, 03/15/04 6,000 6,026 ~ FREMONT HOME LOAN TRUST Series 2003-B Class M2 2.71%, 03/25/04 5,000 5,108 ~ HOUSEHOLD MORTGAGE LOAN TRUST Series 2003-HC2 Class M 1.69%, 03/22/04 2,939 2,954 ~ LONG BEACH MORTGAGE LOAN TRUST Series 2003-4 Class M3 3.24%, 03/25/04 4,200 4,333 ~ MBNA CREDIT CARD MASTER NOTE TRUST Series 2003-B3 Class B3 1.48%, 03/15/04 5,000 5,006 MORGAN STANLEY ABS CAPITAL I Series 2002-HE3N 9.50%, 12/27/32 469 470 Series 2003-NC8N 7.60%, 09/25/33 2,275 2,282 * NOVASTAR NIM TRUST Series 2004-N1 4.46%, 02/25/34 3,250 3,250 ~ OPTION ONE MORTGAGE LOAN TRUST Series 2003-3 Class N 1.40%, 03/26/04 2,675 2,676 RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC. Series 2003-RZ3 Class A3 2.14%, 02/25/30 10,000 9,862 ~ TERRAPIN FUNDING, L.L.C. Series 2003-1A Class B1 2.40%, 03/08/04 5,000 5,017 ---------- 59,742 MORTGAGE-BACKED SECURITIES 5.0% of net assets U.S. GOVERNMENT AGENCY MORTGAGES 5.0% ------------------------------------------------------------------------- FREDDIE MAC Series 2574 Class JM 5.00%, 03/31/33 7,423 7,653 FREDDIE MAC STRUCTURED PASS THROUGH SECURITIES (6) Series H006 Class A2 2.84%, 02/15/10 15,000 14,964 (7) Series H010 Class A3 2.72%, 04/15/10 15,000 14,352 ---------- 36,969 MUNICIPAL BONDS 0.4% of net assets CALIFORNIA DEPARTMENT OF WATER RESOURCES Power Supply Revenue Bonds, Series 2002E 3.59%, 05/01/04 3,000 3,010
36 See financial notes. SCHWAB SHORT-TERM BOND MARKET FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 2.4% of net assets (4) CONOCO PHILLIPS, SECTION 4(2) 1.05%, 03/01/04 18,000 18,000
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) PREFERRED STOCK 1.0% of net assets RC TRUST I 60,000 3,225 / ZURICH REGCAPS FUNDING TRUST III, 144A 40,000 3,887 ---------- 7,112 OTHER INVESTMENT COMPANIES 0.2% of net assets PROVIDENT INSTITUTIONAL FUNDS -- FED FUNDS PORTFOLIO 1,311,727 1,312
END OF INVESTMENTS. For totals, please see the first page of holdings for this fund.
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) COLLATERAL INVESTED FOR SECURITIES ON LOAN 29.9% of net assets SHORT-TERM INVESTMENTS 4.2% -------------------------------------------------------------------------- FORTIS BANK TIME DEPOSIT 1.04%, 03/01/04 30,765 30,765
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) OTHER INVESTMENT COMPANIES 25.7% -------------------------------------------------------------------------- INSTITUTIONAL MONEY MARKET TRUST 190,831,868 190,832
END OF COLLATERAL INVESTED FROM SECURITIES ON LOAN. For totals, please see the first page of holdings for this fund. In addition to the above, the fund held the following at 2/29/04. All numbers are x 1,000 except number of futures contracts. FUTURES CONTRACTS
Number of Contract Unrealized Contracts Value Gains/(Losses) 2 Year, Long Morgan Stanley, expires 03/29/04 300 64,692 736 5 Year, Short Morgan Stanley, expires 03/22/04 300 34,130 (783) ----- (47)
See financial notes. 37 SCHWAB SHORT-TERM BOND MARKET FUND Statement of ASSETS AND LIABILITIES As of February 29, 2004; unaudited. All numbers are x 1,000 except NAV. ASSETS ------------------------------------------------------------------------------ Investments, at value (including $217,933 of securities on loan) $736,621 a Collateral held for securities on loan 221,597 Receivables: Fund shares sold 1,638 Dividends 210 Interest 6,421 Investments sold 7,110 Prepaid expenses + 37 ------------- TOTAL ASSETS 973,634 LIABILITIES ------------------------------------------------------------------------------ Collateral held for securities on loan 221,597 Payables: Fund shares redeemed 886 Dividends to shareholders 395 Investments bought 8,308 Due to brokers for futures 49 Investment adviser and administrator fees 16 Transfer agent and shareholder service fees 15 Accrued expenses + 33 ------------- TOTAL LIABILITIES 231,299 NET ASSETS ------------------------------------------------------------------------------ TOTAL ASSETS 973,634 TOTAL LIABILITIES - 231,299 ------------- NET ASSETS $742,335 NET ASSETS BY SOURCE Capital received from investors 732,926 Distributions in excess of net investment income (43) Net realized capital losses (397) b Net unrealized capital gains 9,849 b NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $742,335 72,297 $10.27
Unless stated, all numbers are x 1,000. a The amortized cost of the fund's securities was $726,725, which includes certain restricted but deemed liquid 144A and Section 4(2) securities worth $63,681, or 8.6% of the fund's total net assets. Not counting short-term obligations and government securities, the fund's security transactions during the period were: Purchases $156,998 Sales/maturities $152,178 The fund's long-term government security transactions were: Purchases $232,324 Sales/maturities $184,307 The fund's total security transactions with other SchwabFunds during the period were $6,617. b These derive from investments, futures and short sales. FEDERAL TAX DATA ---------------------------------------------------- PORTFOLIO COST $727,152 NET UNREALIZED GAINS AND LOSSES: Gains $10,619 Losses + (1,150) ------------ $9,469 AS OF AUGUST 31, 2003: UNDISTRIBUTED EARNINGS: Ordinary income $1,706 Long-term capital gains $-- CAPITAL LOSSES UTILIZED $4,116 UNUSED CAPITAL LOSSES: Expires 08/31 of: Loss amount: 2004 1,737 2005 173 2008 + 1,241 ------------ $3,151
38 See financial notes. SCHWAB SHORT-TERM BOND MARKET FUND Statement of OPERATIONS For September 1, 2003 through February 29, 2004; unaudited. All numbers are x 1,000. INVESTMENT INCOME ------------------------------------------------------------------------------ Interest $11,119 Securities on loan 183 Dividends + 271 ------------- TOTAL INVESTMENT INCOME 11,573 NET REALIZED GAINS AND LOSSES ------------------------------------------------------------------------------ Net realized gains on investments sold 3,606 Net realized losses on futures contracts (365) Net realized losses on short sales + (55) ------------- NET REALIZED GAINS 3,186 NET UNREALIZED GAINS AND LOSSES ------------------------------------------------------------------------------ Net unrealized gains on investments 5,557 Net unrealized losses on futures contracts (102) Net unrealized gains on short sales + 19 ------------- NET UNREALIZED GAINS 5,474 EXPENSES ------------------------------------------------------------------------------ Investment adviser and administrator fees 950 a Transfer agent and shareholder service fees 854 b Trustees' fees 6 c Custodian and portfolio accounting fees 32 Professional fees 16 Registration fees 27 Shareholder reports 35 Other expenses + 8 ------------- Total expenses 1,928 Expense reduction - 187 d ------------- NET EXPENSES 1,741 INCREASE IN NET ASSETS FROM OPERATIONS ------------------------------------------------------------------------------ TOTAL INVESTMENT INCOME 11,573 NET EXPENSES - 1,741 ------------- NET INVESTMENT INCOME 9,832 NET REALIZED GAINS 3,186 e NET UNREALIZED GAINS + 5,474 e ------------- INCREASE IN NET ASSETS FROM OPERATIONS $18,492
Unless stated, all numbers are x 1,000. 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. These fees are paid to Charles Schwab & Co. c For the fund's independent trustees only. d This reduction was made by the investment adviser (CSIM). It reflects a guarantee by CSIM and Schwab to limit the annual operating expenses of this fund through at least November 15, 2004, to 0.55% of average daily net assets. Prior to November 16, 2003, this limit was 0.45%. This limit doesn't include interest, taxes and certain non-routine expenses. e These add up to a net gain on investments of $8,660. See financial notes. 39 SCHWAB SHORT-TERM BOND MARKET FUND Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers are x 1,000. Figures for current period are unaudited.
OPERATIONS --------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 Net investment income $9,832 $19,584 Net realized gains 3,186 12,104 Net unrealized gains or losses + 5,474 (9,681) --------------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 18,492 22,007 DISTRIBUTIONS PAID --------------------------------------------------------------------------------- Dividends from net investment income $9,875 $19,817 a
TRANSACTIONS IN FUND SHARES --------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES VALUE SHARES VALUE Shares sold 22,263 $227,781 45,091 $459,837 Shares reinvested 830 8,472 1,451 14,788 Shares redeemed + (14,657) (150,055) (31,673) (322,739) ------------------------------------------------- NET TRANSACTIONS IN FUND SHARES 8,436 $86,198 14,869 $151,886
SHARES OUTSTANDING AND NET ASSETS --------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES NET ASSETS SHARES NET ASSETS Beginning of period 63,861 $647,520 48,992 $493,444 Total increase + 8,436 94,815 14,869 154,076 b ------------------------------------------------- END OF PERIOD 72,297 $742,335 63,861 $647,520 c
Unless stated, all numbers are x 1,000. a The tax-basis components of distributions for the period ended 08/31/03 are: Ordinary income $19,817 Long-term capital gains $--
b Figures for shares represent shares sold plus shares reinvested, minus shares redeemed. 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. c Include net investment income not yet distributed in the amount of $43 at the end of the current period. 40 See financial notes. SCHWAB TOTAL BOND MARKET FUND FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
9/1/03- 9/1/02- 9/1/01- 9/1/00- 9/1/99- 9/1/98- 2/29/04* 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 ---------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ---------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 10.20 10.22 10.24 9.65 9.58 10.18 ------------------------------------------------------------------------- Income from investment operations: Net investment income 0.16 0.34 0.47 0.60 0.61 0.55 Net realized and unrealized gains or losses 0.32 0.10 0.13 0.59 0.07 (0.53) ------------------------------------------------------------------------- Total income from investment operations 0.48 0.44 0.60 1.19 0.68 0.02 Less distributions: Dividends from net investment income (0.17) (0.37) (0.46) (0.60) (0.61) (0.55) Distributions from net realized gains (0.35) (0.09) (0.16) -- -- (0.07) ------------------------------------------------------------------------- Total distributions (0.52) (0.46) (0.62) (0.60) (0.61) (0.62) ------------------------------------------------------------------------- Net asset value at end of period 10.16 10.20 10.22 10.24 9.65 9.58 ------------------------------------------------------------------------- Total return (%) 4.78 1 4.37 6.18 12.68 7.36 0.14 RATIOS/SUPPLEMENTAL DATA (%) ---------------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net operating expenses 0.50 2 0.43 0.35 0.35 0.36 3 0.35 Gross operating expenses 0.54 2 0.54 0.57 0.58 0.63 0.74 Net investment income 3.15 2 3.36 4.66 6.00 6.42 5.55 Portfolio turnover rate 140 1 121 74 153 135 174 Net assets, end of period ($ x 1,000,000) 1,081 1,025 1,053 926 647 480
* Unaudited. 1 Not annualized. 2 Annualized. 3 The ratio of net operating expenses would have been 0.35% if certain non-routine expenses (proxy fees) had not been included. See financial notes. 41 SCHWAB TOTAL BOND MARKET FUND PORTFOLIO HOLDINGS as of February 28, 2004, 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 ~ Variable rate security / Callable securities @ Collateral for futures contracts * Security is valued at fair value (see Accounting Policies) 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.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) --------------------------------------------------------------------------------- 36.5% MORTGAGE-BACKED SECURITIES 410,148 394,540 33.2% CORPORATE BONDS 348,356 358,555 27.3% U.S. GOVERNMENT SECURITIES 268,880 295,317 19.8% ASSET-BACKED OBLIGATIONS 212,078 213,418 0.6% MUNICIPAL BONDS 7,000 7,023 2.4% COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 25,399 25,399 1.8% PREFERRED STOCK 19,062 19,101 0.0% OTHER INVESTMENT COMPANIES 510 510 --------------------------------------------------------------------------------- 121.6% TOTAL INVESTMENTS 1,291,433 1,313,863 24.2% COLLATERAL INVESTED FOR SECURITIES ON LOAN 261,609 261,609 (45.8)% OTHER ASSETS AND LIABILITIES (494,653) --------------------------------------------------------------------------------- 100.0% NET ASSETS 1,080,819
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) MORTGAGE-BACKED SECURITIES 36.5% of net assets U.S. GOVERNMENT AGENCY MORTGAGES 33.6% -------------------------------------------------------------------------- FANNIE MAE Pool# 313346 7.00%, 04/16/06 357 373 Pool# 177450 7.00%, 06/21/07 17 18 Pool# 187589 7.00%, 07/21/07 34 36 Pool# 199468 7.00%, 08/26/07 209 221 Pool# 234418 7.00%, 05/30/08 185 199 Pool# 243050 7.00%, 06/21/08 221 237 Pool# 535662 7.00%, 09/24/08 3,937 4,221 Pool# 536805 7.00%, 11/14/08 4 5 Pool# 622533 7.00%, 06/21/09 234 251 Pool# 322816 7.00%, 09/09/09 41 44 Pool# 327130 7.00%, 10/30/09 99 106 Pool# 344397 7.00%, 06/28/10 19 20 Pool# 404280 7.00%, 10/09/10 56 60 Pool# 417450 7.00%, 07/06/11 36 38 Pool# 392512 7.00%, 09/24/11 10 10 Pool# 390378 7.00%, 10/02/11 28 30 Pool# 550860 7.00%, 12/06/11 37 39 Pool# 323437 5.50%, 05/08/12 470 493 Pool# 613008 7.00%, 05/08/12 465 499 Pool# 482675 5.50%, 07/27/12 157 165 Pool# 488587 5.50%, 08/11/12 94 99
42 See financial notes. SCHWAB TOTAL BOND MARKET FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) Pool# 535633 5.50%, 08/11/12 8 8 Pool# 440789 5.50%, 09/02/12 11 11 Pool# 491110 5.50%, 09/02/12 161 169 Pool# 496816 5.50%, 10/15/12 45 47 Pool# 482550 5.50%, 11/21/12 39 41 Pool# 492793 5.50%, 11/28/12 52 55 Pool# 527268 7.00%, 01/11/13 11 11 Pool# 537374 7.00%, 01/18/13 10 10 Pool# 498293 7.00%, 05/30/13 17 19 Pool# 539782 7.00%, 07/13/13 16 17 Pool# 556587 7.00%, 11/14/13 71 76 Pool# 253430 7.00%, 01/04/14 278 298 Pool# 574866 5.50%, 03/04/14 38 39 Pool# 550568 7.00%, 03/11/14 319 343 Pool# 550415 7.00%, 03/25/14 69 74 Pool# 572123 5.50%, 04/09/14 37 38 Pool# 572726 7.00%, 04/09/14 69 74 Pool# 570681 5.50%, 05/30/14 5 5 Pool# 253666 7.00%, 06/14/14 277 297 Pool# 253797 5.50%, 06/21/14 1,219 1,272 Pool# 572133 7.00%, 06/28/14 48 51 Pool# 572794 7.00%, 07/13/14 30 32 Pool# 535944 7.00%, 08/04/14 438 470 Pool# 580055 5.50%, 09/09/14 39 41 Pool# 505038 5.50%, 10/01/14 12 13 Pool# 569314 5.50%, 10/16/14 31 33 Pool# 604966 5.50%, 01/19/15 25 26 Pool# 587851 5.50%, 01/26/15 45 47 Pool# 545400 5.50%, 02/03/15 518 540 Pool# 545411 5.50%, 02/03/15 611 638 Pool# 609703 5.50%, 02/17/15 532 555 Pool# 622466 5.50%, 02/24/15 27 28 Pool# 711583 5.50%, 03/26/15 24 25 Pool# 638392 5.50%, 04/24/15 1,001 1,044 Pool# 608827 7.00%, 04/24/15 20 21 Pool# 625942 5.50%, 05/30/15 36 38 Pool# 555291 5.50%, 06/29/15 1,162 1,212 Pool# 623761 7.00%, 07/13/15 95 102 Pool# 555352 5.50%, 09/02/15 528 551 Pool# 644496 5.50%, 09/10/15 666 695 Pool# 663217 5.50%, 09/24/15 52 54 Pool# 650126 7.00%, 09/24/15 102 109 Pool# 681185 5.50%, 11/07/15 43 45 Pool# 647546 5.50%, 11/22/15 38 40 Pool# 254607 7.00%, 11/22/15 596 640 Pool# 545967 5.50%, 11/29/15 55 57 Pool# 555456 5.50%, 11/29/15 724 756 Pool# 545034 7.00%, 12/01/15 161 173
See financial notes. 43 SCHWAB TOTAL BOND MARKET FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) Pool# 643839 7.00%, 12/06/15 171 184 Pool# 651274 7.00%, 12/06/15 807 865 Pool# 680035 5.50%, 12/14/15 90 93 Pool# 626827 5.50%, 01/05/16 57 59 Pool# 664109 5.50%, 01/27/16 51 54 Pool# 678973 5.50%, 01/27/16 47 49 Pool# 674151 5.50%, 02/10/16 55 57 Pool# 639919 5.50%, 02/25/16 522 545 Pool# 671599 5.50%, 03/25/16 56 59 Pool# 673022 5.50%, 03/25/16 644 672 Pool# 687154 5.50%, 04/01/16 45 47 Pool# 679284 7.00%, 04/09/16 54 57 Pool# 681386 5.50%, 05/15/16 55 57 Pool# 357350 5.50%, 05/22/16 183 191 Pool# 674742 5.50%, 05/22/16 662 691 Pool# 677469 5.50%, 05/22/16 1,485 1,549 Pool# 677606 5.50%, 05/22/16 42 44 Pool# 682986 5.50%, 06/28/16 31 33 Pool# 699526 5.50%, 11/06/16 40 42 Pool# 731473 5.50%, 08/01/17 1,431 1,494 = 5.00%, 03/01/19 17,000 17,457 Pool# 254472 6.50%, 09/01/22 7,004 7,393 Pool# 628209 6.50%, 09/09/24 1,247 1,313 Pool# 635861 6.50%, 09/09/24 6,136 6,458 Pool# 545762 6.50%, 10/23/24 1,885 1,984 Pool# 644590 6.50%, 10/23/24 3,708 3,901 Pool# 670402 6.50%, 12/13/24 426 448 Pool# 555708 7.50%, 12/28/24 9,264 9,929 Pool# 656434 6.50%, 02/17/25 1,461 1,537 Pool# 680982 6.00%, 09/02/25 11,450 11,934 =(1) 5.50%, 03/01/33 56,000 57,295 Pool# 646817 6.00%, 04/01/33 8,579 8,942 Pool# 720769 6.00%, 08/01/33 5,849 6,096 Pool# 727107 6.00%, 08/01/33 2,261 2,356 Pool# 740241 6.50%, 09/01/33 8,605 9,054 =(5) 5.00%, 03/01/34 25,000 25,047 =(3) 6.00%, 03/01/19 28,000 29,496 Pool# C65062 6.50%, 08/25/24 9,821 10,334 Pool# G01477 6.00%, 10/23/24 9,520 9,911 = FREDDIE MAC GOLD POOL 5.00%, 03/15/34 15,000 15,023 GINNIE MAE Pool# 781478 7.50%, 03/15/32 3,917 4,213 Pool# 614544 6.00%, 06/15/33 6,580 6,879 =(4) 6.00%, 03/01/34 27,000 28,198 =(2) 6.50%, 03/01/34 30,000 31,669 =(9) 7.00%, 03/01/34 19,000 20,241 = 8.00%, 03/01/34 10,000 10,913 ---------- 362,967
44 See financial notes. SCHWAB TOTAL BOND MARKET FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) COLLATERALIZED MORTGAGE OBLIGATIONS 2.9% ------------------------------------------------------------------------- FANNIE MAE Series 2574 Class JM 5.00%, 03/31/33 7,423 7,653 (7) FREDDIE MAC STRUCTURED PASS THROUGH SECURITIES Series H010 Class A3 2.72%, 04/15/10 25,000 23,920 ---------- 31,573 CORPORATE BONDS 33.2% of net assets FINANCE 9.4% ------------------------------------------------------------------------- BANKING 4.9% / AB SPINTAB, 144A 7.50%, 08/14/49 6,300 7,006 /~ BANKBOSTON CAPITAL TRUST IV 1.75%, 03/08/04 10,000 9,370 /~ CHASE CAPITAL VI Series F 1.79%, 05/03/04 5,000 4,830 /~ CULLEN/FROST CAPITAL TRUST I 2.68%, 06/01/04 5,000 5,062 /~ DEUTSCHE BANK CAPITAL TRUST, 144A Class B 2.97%, 03/30/04 10,000 10,515 @/ HBOS, PLC, 144A 5.38%, 11/29/49 5,000 5,156 / SOCGEN REAL ESTATE, L.L.C., 144A Series A 7.64%, 12/29/49 5,000 5,730 / SVENSKA HANDELSBANKEN, 144A 7.13%, 03/07/49 5,000 5,576 ---------- 53,245 BROKERAGE 1.5% /~ CREDIT SUISSE FINANCIAL PRODUCTS 1.93%, 03/08/04 4,000 3,961 GOLDMAN SACHS CAPITAL I 6.35%, 02/15/34 5,000 5,095 @ GOLDMAN SACHS GROUP, INC. 4.75%, 07/15/13 7,000 6,950 ---------- 16,006 FINANCE COMPANIES 1.1% /~ CAPITAL ONE CAPITAL I, 144A 2.71%, 05/03/04 4,000 3,899 GENERAL ELECTRIC CAPITAL CORP. Series A 6.00%, 06/15/12 5,000 5,531 @ INTERNATIONAL LEASE FINANCE CORP. 5.88%, 05/01/13 2,000 2,167 ---------- 11,597 FINANCIAL OTHER 0.9% ~ NATIONAL CONSUMER COOPERATIVE BANK Series B 3.38%, 05/05/04 10,000 10,024 INSURANCE 1.0% / EXECUTIVE RISK CAPITAL TRUST Series B 8.68%, 02/01/27 5,000 5,919 */~ MANGROVE BAY PASSTHRU TRUST, 144A 6.10%, 07/15/04 5,000 5,122 ---------- 11,041 INDUSTRIAL 20.9% ------------------------------------------------------------------------- BASIC INDUSTRY 0.5% / GEORGIA PACIFIC CORP. 9.50%, 05/15/22 5,020 5,221 CAPITAL GOODS 2.1% BAE ASSET SYSTEMS 2001 ASSET TRUST, 144A Series 2001 Class G 6.66%, 09/15/13 12,547 14,111 @ TYCO INTERNATIONAL GROUP, SA 6.38%, 06/15/05 2,000 2,101 WASTE MANAGEMENT, INC. 7.38%, 08/01/10 5,000 5,860 ---------- 22,072
See financial notes. 45 SCHWAB TOTAL BOND MARKET FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) COMMUNICATIONS 4.3% CHANCELLOR MEDIA / CLEAR CHANNEL COMMUNICATION 8.00%, 11/01/08 3,000 3,502 COMCAST CORP. 7.05%, 03/15/33 5,000 5,528 / CONTINENTAL CABLEVISION 9.50%, 08/01/13 3,000 3,436 / DIRECTV HOLDINGS 8.38%, 03/15/13 5,000 5,712 FRANCE TELECOM 10.00%, 03/01/31 5,000 6,635 / JONES INTERCABLE, INC. (COMCAST CORP.) 8.88%, 04/01/07 5,000 5,212 ROGERS CABLE SYSTEMS, LTD. Series B 10.00%, 03/15/05 3,500 3,767 TELEFONOS DE MEXICO, SA, 144A 4.50%, 11/19/08 3,000 3,051 TELUS CORP. 7.50%, 06/01/07 2,000 2,263 @ VERIZON NEW ENGLAND, INC. 6.50%, 09/15/11 7,000 7,856 ---------- 46,962 CONSUMER CYCLICAL 8.6% @/ AMERICAN AXLE & MANUFACTURING, INC. 9.75%, 03/01/09 10,745 11,323 AMERICAN AXLE & MANUFACTURING, INC., 144A 5.25%, 02/11/14 5,000 5,091 AUTONATION, INC. 9.00%, 08/01/08 3,000 3,480 CENDANT CORP. 7.38%, 01/15/13 3,000 3,497 CVS CORP., 144A 6.12%, 01/10/13 6,723 7,356 D.R. HORTON, INC. 7.50%, 12/01/07 1,000 1,105 5.00%, 01/15/09 4,000 4,060 FORD MOTOR CREDIT CO. 7.38%, 10/28/09 5,000 5,507 GENERAL MOTORS 8.38%, 07/15/33 5,000 5,683 @ LEAR CORP. Series B 7.96%, 05/15/05 9,090 9,726 ~ LIBERTY MEDIA CORP. 2.64%, 03/17/04 7,500 7,604 MANDALAY RESORT GROUP 6.45%, 02/01/06 2,000 2,100 @ MGM MIRAGE, INC. 7.25%, 10/15/06 4,000 4,350 ROYAL CARIBBEAN CRUISES 7.00%, 10/15/07 2,000 2,155 @ RYLAND GROUP, INC. 5.38%, 06/01/08 5,000 5,187 TIME WARNER, INC. 9.15%, 02/01/23 5,000 6,557 TOLL CORP. / 8.25%, 02/01/11 5,000 5,563 / 8.25%, 12/01/11 2,000 2,230 ---------- 92,574 CONSUMER NON-CYCLICAL 2.5% GENERAL MILLS, INC. 6.00%, 02/15/12 5,000 5,462 HCA, INC. 7.15%, 03/30/04 5,800 5,818 6.91%, 06/15/05 4,668 4,911 HIGHMARK, INC., 144A 6.80%, 08/15/13 5,000 5,555 @ MILLER BREWING CO., 144A 4.25%, 08/15/08 5,000 5,158 ---------- 26,904 ENERGY 1.8% / HUSKY OIL LTD. 8.90%, 08/15/28 6,000 7,020 PHILLIPS PETROLEUM CO. 9.38%, 02/15/11 5,000 6,487 XTO ENERGY, INC. 7.50%, 04/15/12 5,000 5,900 ---------- 19,407 TRANSPORTATION 1.1% HERTZ CORP. 4.70%, 10/02/06 6,000 6,120
46 See financial notes. SCHWAB TOTAL BOND MARKET FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) / UNION PACIFIC CORP. 8.35%, 05/01/25 5,000 5,520 ---------- 11,640 SOVEREIGN 0.8% ------------------------------------------------------------------------- @ REPUBLIC OF SOUTH AFRICA 9.13%, 05/19/09 3,000 3,671 ~ UNITED MEXICAN STATES 1.85%, 04/13/04 5,000 5,043 ---------- 8,714 UTILITIES 2.1% ------------------------------------------------------------------------- ELECTRIC 2.1% APPALACHIAN POWER CO. Series H 5.95%, 05/15/33 3,000 2,995 / COLUMBIA ENERGY GROUP Series F 7.42%, 11/28/15 5,800 6,361 / ENTERGY GULF STATES 5.25%, 08/01/15 5,000 4,948 PUBLIC SERVICES ELECTRIC & GAS Series C 4.00%, 11/01/08 3,000 3,073 RELIANT ENERGY RESOURCES Series B 8.13%, 07/15/05 5,390 5,771 ---------- 23,148 U.S. GOVERNMENT SECURITIES 27.3% of net assets U.S. TREASURY OBLIGATIONS 21.8% ------------------------------------------------------------------------- @ TREASURY INFLATION PROTECTION SECURITY 1.88%, 07/15/13 6,500 6,728 U.S. TREASURY BILLS @ 0.87%, 03/18/04 1,000 1,000 @ 0.93%, 03/18/04 1,000 1,000 U.S. TREASURY BONDS 9.88%, 11/15/15 5,000 7,607 7.25%, 05/15/16 7,500 9,578 9.00%, 11/15/18 5,000 7,397 8.00%, 11/15/21 7,000 9,732 7.25%, 08/15/22 6,500 8,455 6.25%, 08/15/23 16,000 18,831 6.13%, 11/15/27 7,500 8,750 5.25%, 02/15/29 5,000 5,224 6.13%, 08/15/29 1,000 1,172 6.25%, 05/15/30 10,000 11,925 5.38%, 02/15/31 3,000 3,234 U.S. TREASURY NOTES 1.63%, 01/31/05 5,000 5,024 7.50%, 02/15/05 8,000 8,485 1.63%, 03/31/05 5,000 5,026 6.50%, 05/15/05 5,000 5,316 1.50%, 07/31/05 5,000 5,014 2.00%, 05/15/06 3,000 3,018 2.38%, 08/15/06 5,500 5,567 6.50%, 10/15/06 6,000 6,694 6.63%, 05/15/07 2,000 2,272 3.25%, 08/15/07 1,500 1,546 6.13%, 08/15/07 4,000 4,503 (8) 3.00%, 02/15/08 22,175 22,554 3.13%, 09/15/08 6,750 6,843 3.13%, 10/15/08 2,000 2,025 3.38%, 12/15/08 1,000 1,022 3.25%, 01/15/09 18,000 18,270 3.00%, 02/15/09 2,000 2,004 6.50%, 02/15/10 600 707 (6) 5.00%, 02/15/11 22,000 24,076 4.25%, 11/15/13 5,100 5,217 ---------- 235,816 U.S. GOVERNMENT AGENCY SECURITIES 5.5% ------------------------------------------------------------------------- FANNIE MAE 6.00%, 05/15/08 5,000 5,605 2.50%, 06/15/08 8,000 7,860 6.63%, 09/15/09 2,500 2,895 4.69%, 10/15/13 15,000 15,279 7.25%, 05/15/30 2,500 3,159 FREDDIE MAC 7.00%, 03/15/10 5,000 5,913 5.75%, 01/15/12 5,000 5,557 5.13%, 07/15/12 5,000 5,330 4.50%, 01/15/13 5,000 5,083 6.25%, 07/15/32 2,500 2,820 ---------- 59,501
See financial notes. 47 SCHWAB TOTAL BOND MARKET FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) ASSET-BACKED OBLIGATIONS 19.8% of net assets ~ AEGIS ASSET BACKED SECURITIES TRUST Series 2003-1 Class A1 1.50%, 03/25/04 14,296 14,363 ~ ASSET BACKED SECURITIES CORP. HOME EQUITY LOAN TRUST Series 2003-HE1 Class A2 1.59%, 03/15/04 8,796 8,859 CAPITAL ONE MASTER TRUST ~ Series 2001-2 Class C 2.19%, 03/15/04 6,000 6,022 Series 2000-2 Class A 7.20%, 08/15/08 5,000 5,361 ~ CAPITAL ONE MULTI-ASSET EXECUTION TRUST Series 2003-A1 Class A1 1.48%, 03/15/04 10,000 10,049 ~ CDC MORTGAGE CAPITAL TRUST Series 2003-HE2 Class M2 2.99%, 03/25/04 5,410 5,572 ~ CENTEX HOME EQUITY LOAN TRUST Series 2003-B Class M1 1.80%, 03/25/04 19,000 19,198 ~ CHASE CREDIT CARD MASTER TRUST Series 2003-5 Class B 1.42%, 03/15/04 17,000 17,025 CITIBANK CREDIT CARD MASTER TRUST I Series 1999-5 Class A 6.10%, 05/15/08 5,000 5,447 COUNTRYWIDE ASSET-BACKED CERTIFICATES ~ Series 2001-3 Class M1 1.60%, 03/15/04 3,000 3,011 ~ Series 2001-BC3 Class M1 1.65%, 03/25/04 5,000 5,008 ~ Series 2002-3 Class M1 1.85%, 03/25/04 4,000 4,039 ~ FIRST FRANKLIN MORTGAGE LOAN ASSET-BACKED CERTIFICATES Series 2002-FF3 Class A2 1.56%, 03/25/04 13,687 13,768 LONG BEACH MORTGAGE LOAN TRUST ~ Series 2003-1 Class A2 1.50%, 03/25/04 3,456 3,471 ~ Series 2003-4 Class M3 3.24%, 03/25/04 5,500 5,675 ~ MASTER ASSET BACKED SECURITIES TRUST Series 2003-OPT1 Class A2 1.52%, 03/25/04 12,954 13,014 MBNA CREDIT CARD MASTER NOTE TRUST ~ Series 2003-B3 Class B3 1.48%, 03/15/04 10,000 10,012 ~ Series 2003-C3 Class C3 2.45%, 03/15/04 4,500 4,574 Series 2002-A1 Class A1 4.95%, 06/15/09 5,000 5,361 MORGAN STANLEY ABS CAPITAL I Series 2002-HE3N 9.50%, 12/27/32 805 805 Series 2003-NC8N 7.60%, 09/25/33 3,575 3,586 *@ NOVASTAR NIM TRUST Series 2004-N1 4.46%, 02/25/34 5,000 5,000 ~(10) OPTION ONE MORTGAGE LOAN TRUST Series 2003-6 Class A2 1.45%, 03/25/04 19,166 19,220 ~ PROVIDENT BANK HOME EQUITY LOAN TRUST Series 1997-2 Class A5 1.33%, 03/25/04 2,555 2,556 RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC. ~ Series 2003-RS1 Class AII 1.49%, 03/25/04 10,477 10,524 Series 2003-RZ4 Class A4 4.04%, 12/25/30 11,700 11,898 ---------- 213,418 MUNICIPAL BONDS 0.6% of net assets @ CALIFORNIA DEPARTMENT OF WATER RESOURCES Power Supply Revenue Bonds Series 2002E 3.59%, 05/01/04 7,000 7,023
48 See financial notes. SCHWAB TOTAL BOND MARKET FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 2.4% of net assets ATLANTIS TWO FUNDING CORP., SECTION 4(2) 1.15%, 03/01/04 11,900 11,900 CONOCO PHILLIPS, SECTION 4(2) 1.04%, 03/02/04 13,500 13,499 ---------- 25,399
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) PREFERRED STOCK 1.8% of net assets COBANK, ACB, 144A 115,000 5,953 RC TRUST I 100,000 5,374 / ZURICH REGCAPS FUNDING TRUST III, 144A 80,000 7,774 ---------- 19,101 OTHER INVESTMENT COMPANIES 0.0% of net assets PROVIDENT INSTITUTIONAL FUNDS-- FED FUNDS PORTFOLIO 509,876 510
END OF INVESTMENTS. For totals, please see the first page of holdings for this fund.
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) COLLATERAL INVESTED FOR SECURITIES ON LOAN 24.2% of net assets SHORT-TERM INVESTMENTS 3.4% ------------------------------------------------------------------------- FORTIS BANK TIME DEPOSIT 1.04%, 03/01/04 36,320 36,320
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) OTHER INVESTMENT COMPANIES 20.8% ------------------------------------------------------------------------- INSTITUTIONAL MONEY MARKET TRUST 225,288,981 225,289
END OF COLLATERAL INVESTED FROM SECURITIES ON LOAN. For totals, please see the first page of holdings for this fund. In addition to the above, the fund held the following at 2/29/04. All numbers are x 1,000 except number of futures contracts. FUTURES CONTRACTS
Number of Contract Unrealized Contracts Value Gains 2 Year, Long Morgan Stanley, expires 3/29/04 200 43,128 491
See financial notes. 49 SCHWAB TOTAL BOND MARKET FUND Statement of ASSETS AND LIABILITIES As of February 29, 2004; unaudited. All numbers are x 1,000 except NAV.
ASSETS ------------------------------------------------------------------------------ Investments, at value (including $257,966 of securities on loan) $1,313,863 a Collateral held for securities on loan 261,609 Cash 88 Receivables: Fund shares sold 704 Investments sold 20,285 Dividends 402 Interest 9,491 Due from brokers for futures 31 Prepaid expenses + 39 ------------- TOTAL ASSETS 1,606,512 LIABILITIES ------------------------------------------------------------------------------ Collateral held for securities on loan 261,609 Payables: Fund shares redeemed 1,334 Dividends to shareholders 210 Investments bought 262,445 Investment adviser and administration fees 22 Transfer agent and shareholder service fees 22 Accrued expenses + 51 ------------- TOTAL LIABILITIES 525,693 NET ASSETS ------------------------------------------------------------------------------ TOTAL ASSETS 1,606,512 TOTAL LIABILITIES - 525,693 ------------- NET ASSETS $1,080,819 NET ASSETS BY SOURCE Capital received from investors 1,055,302 Distributions in excess of net investment income (1,493) Net realized capital gains 4,089 b Net unrealized capital gains 22,921
NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $1,080,819 106,340 $10.16 Unless stated, all numbers are x 1,000. a The amortized cost of the fund's securities was $1,291,433 which includes certain restricted but deemed liquid 144A and Section 4(2) securities worth $122,452, or 11.3% of the fund's total net assets. Not counting short-term obligations and government securities, the fund's security transactions during the period were: Purchases $245,105 Sales/maturities $223,126 The fund's long-term government security transactions were: Purchases $1,503,083 Sales/maturities $1,530,238 The fund's total security transactions with other SchwabFunds during the period were $6,763. b These derive from investments, futures, swap agreements and short sales. FEDERAL TAX DATA ------------------------------------------------- PORTFOLIO COST $1,291,607 NET UNREALIZED GAINS AND LOSSES: Gains $23,938 Losses + (1,682) ----------- $22,256 AS OF AUGUST 31, 2003: UNDISTRIBUTED EARNINGS: Ordinary income $18,753 Long-term capital gains $15,766
50 See financial notes. SCHWAB TOTAL BOND MARKET FUND Statement of OPERATIONS For September 1, 2003 through February 29, 2004; unaudited. All numbers are x 1,000.
INVESTMENT INCOME ------------------------------------------------------------------------------ Interest $18,356 Securities on loan 129 Dividends + 633 ------------ TOTAL INVESTMENT INCOME 19,118 NET REALIZED GAINS AND LOSSES ------------------------------------------------------------------------------ Net realized gains on investments sold 7,459 Net realized gains on futures contracts 935 Net realized losses on short sales + (69) ------------ NET REALIZED GAINS 8,325 NET UNREALIZED GAINS AND LOSSES ------------------------------------------------------------------------------ Net unrealized gains on investments 23,736 Net unrealized appreciation on futures + 492 ------------ NET UNREALIZED GAINS $24,228 EXPENSES ------------------------------------------------------------------------------ Investment adviser and administrator fees 1,351 a Transfer agent and shareholder service fees 1,309 b Trustees' fees 7 c Custodian and portfolio accounting fees 60 Professional fees 18 Registration fees 28 Shareholder reports 46 Other expenses + 13 ------------ Total expenses 2,832 Expense reduction - 202 d ------------ NET EXPENSES 2,630 INCREASE IN NET ASSETS FROM OPERATIONS ------------------------------------------------------------------------------ TOTAL INVESTMENT INCOME 19,118 NET EXPENSES - 2,630 ------------ NET INVESTMENT INCOME 16,488 NET REALIZED GAINS 8,325 e NET UNREALIZED GAINS + 24,228 e ------------ INCREASE IN NET ASSETS FROM OPERATIONS $49,041
Unless stated, all numbers are x 1,000. 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. These fund's are paid to Charles Schwab & Co. 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 annual operating expenses of this fund through at least November 15, 2004, to 0.55% of average daily net assets. Prior to November 16, 2003, this limit was 0.45%. This limit doesn't include interest, taxes and certain non-routine expenses. e These add up to a net gain on investments of $32,553. See financial notes. 51 SCHWAB TOTAL BOND MARKET FUND Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers are x 1,000. Figures for current period are unaudited.
OPERATIONS --------------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 Net investment income $16,488 $35,167 Net realized gains 8,325 43,377 Net unrealized gains or losses + 24,228 (33,179) ------------------------------------ INCREASE IN NET ASSETS FROM OPERATIONS 49,041 45,365 DISTRIBUTIONS PAID --------------------------------------------------------------------------------------- Dividends from net investment income 17,463 37,803 Distributions from net realized gains on investments + 35,223 9,120 ------------------------------------ TOTAL DISTRIBUTIONS PAID $52,686 $46,923 a
TRANSACTIONS IN FUND SHARES --------------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES VALUE SHARES VALUE Shares sold 12,095 $123,387 34,089 $351,983 Shares reinvested 5,362 54,178 4,171 43,002 Shares redeemed + (11,572) (118,244) (40,877) (421,166) ---------------------------------------------------- NET TRANSACTIONS IN FUND SHARES 5,885 $59,321 (2,617) ($26,181)
SHARES OUTSTANDING AND NET ASSETS -------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES NET ASSETS SHARES NET ASSETS Beginning of period 100,455 $1,025,143 103,072 $1,052,882 Total increase or decrease + 5,885 55,676 (2,617) (27,739) b ---------------------------------------------------- END OF PERIOD 106,340 $1,080,819 100,455 $1,025,143 c
Unless stated, all numbers are x 1,000. a The tax-basis components of distributions for the period ended 08/31/03 are: Ordinary income $43,912 Long-term capital gains $3,011
b Figures for shares represent shares sold plus shares reinvested, minus shares redeemed. 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. c Includes distributions in excess of net investment income in the amount of $1,493 and $518 for the current and prior period, respectively. Percent of fund shares owned by other SchwabFunds(R) as of the end of the current period: SCHWAB MARKETTRACK PORTFOLIOS Growth Portfolio 8.8% Balanced Portfolio 17.6% Conservative Portfolio 15.5% SCHWAB ANNUITY PORTFOLIOS Growth Portfolio II 0.4% 52 See financial notes. SCHWAB GNMA FUND FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
9/1/03- 3/3/03 1- INVESTOR SHARES 2/29/04* 8/31/03 ------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 9.69 10.00 ------------------------------------------------------------- Income from investment operations: Net investment income 0.07 0.06 Net realized and unrealized gains or losses 0.25 (0.17) ------------------------------------------------------------- Total income or loss from investment operations 0.32 (0.11) Less distributions: Dividends from net investment income (0.16) (0.20) ------------------------------------------------------------- Net asset value at end of period 9.85 9.69 ------------------------------------------------------------- Total return (%) 3.33 2 (1.11) 2 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net operating expenses 0.30 3 -- Gross operating expenses 1.12 3 0.99 3 Net investment income 1.61 3 1.37 3 Portfolio turnover rate 106 2 105 2 Net assets, end of period ($ x 1,000,000) 20 21
* Unaudited. 1 Commencement of operations. 2 Not annualized. 3 Annualized. See financial notes. 53 SCHWAB GNMA FUND
9/1/03- 3/3/03 1- SELECT SHARES 2/29/04* 8/31/03 ------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 9.69 10.00 ---------------------------------------------------------------- Income from investment operations: Net investment income 0.07 0.06 Net realized and unrealized gains or losses 0.25 (0.17) ---------------------------------------------------------------- Total income or loss from investment operations 0.32 (0.11) Less distributions: Dividends from net investment income (0.16) (0.20) ---------------------------------------------------------------- Net asset value at end of period 9.85 9.69 ---------------------------------------------------------------- Total return (%) 3.37 2 (1.11) 2 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net operating expenses 0.23 3 -- Gross operating expenses 0.96 3 0.83 3 Net investment income 1.75 3 1.37 3 Portfolio turnover rate 106 2 105 2 Net assets, end of period ($ x 1,000,000) 23 28
* Unaudited. 1 Commencement of operations. 2 Not annualized. 3 Annualized. 54 See financial notes. SCHWAB GNMA FUND PORTFOLIO HOLDINGS as of February 29, 2004, 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 ~ Variable rate security * Security is valued at fair value (see Accounting Policies) 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.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) -------------------------------------------------------------------------------- 97.0% MORTGAGE-BACKED SECURITIES 40,910 41,444 5.9% U.S. GOVERNMENT SECURITIES 2,500 2,515 4.0% ASSET-BACKED OBLIGATIONS 1,709 1,712 2.3% COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 1,000 1,000 1.5% OTHER INVESTMENT COMPANIES 624 624 -------------------------------------------------------------------------------- 110.7% TOTAL INVESTMENTS 46,743 47,295 (10.7)% OTHER ASSETS AND LIABILITIES (4,588) -------------------------------------------------------------------------------- 100.0% NET ASSETS 42,707
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) MORTGAGE-BACKED SECURITIES 97.0% of net assets U.S. GOVERNMENT AGENCY MORTGAGES 97.0% -------------------------------------------------------------------------- FANNIE MAE Pool# 628210 6.50%, 03/01/32 1,331 1,401 GINNIE MAE Pool# 3556 8.00%, 06/15/04 4 5 Pool# 3895 8.00%, 06/15/04 3 3 Pool# 3936 8.00%, 07/15/04 8 9 Pool# 6368 8.00%, 06/15/05 25 26 Pool# 6371 8.00%, 08/15/05 1 1 Pool# 6524 8.00%, 08/15/05 15 15 Pool# 6797 8.00%, 08/15/05 32 33 Pool# 7378 8.00%, 09/15/05 40 41 Pool# 10840 8.00%, 06/15/06 13 14 Pool# 11366 8.00%, 08/15/06 41 43 Pool# 12016 8.00%, 09/15/06 14 15 Pool# 13919 8.00%, 12/15/06 40 42 Pool# 15531 8.00%, 01/15/07 18 20 Pool# 17250 8.00%, 09/15/07 1 1 Pool# 24200 8.00%, 05/15/08 33 35 Pool# 25484 8.00%, 05/15/08 90 96 Pool# 23178 8.00%, 06/15/08 68 73 Pool# 23912 8.00%, 08/15/08 61 65 Pool# 33545 8.00%, 08/15/09 40 43
See financial notes. 55 SCHWAB GNMA FUND PORTFOLIO HOLDINGS continued
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) Pool# 585163 5.00%, 02/15/18 1,620 1,674 Pool# 604782 5.50%, 11/15/18 1,603 1,682 Pool# 358813 7.50%, 07/15/23 576 623 Pool# 345964 7.00%, 11/15/23 227 243 Pool# 780168 6.50%, 05/15/24 102 109 Pool# 780560 6.50%, 05/15/24 193 204 Pool# 780034 7.00%, 08/15/24 637 683 Pool# 416898 7.50%, 04/15/26 256 276 Pool# 780421 7.50%, 08/15/26 263 284 Pool# 451364 8.50%, 08/15/27 25 27 Pool# 454376 7.50%, 03/15/28 18 19 Pool# 780770 6.00%, 04/15/28 504 528 Pool# 458886 7.00%, 05/15/28 209 223 Pool# 780794 8.50%, 05/15/28 135 147 Pool# 478297 7.50%, 06/15/28 489 527 Pool# 490807 7.00%, 11/15/28 337 360 Pool# 510418 9.00%, 09/15/29 8 8 Pool# 434648 8.50%, 12/15/29 10 11 Pool# 520466 9.00%, 01/15/30 15 16 Pool# 515763 9.00%, 06/15/30 11 12 Pool# 515799 9.00%, 06/15/30 6 7 Pool# 515814 9.00%, 06/15/30 13 14 Pool# 511872 7.00%, 01/15/31 383 408 Pool# 538229 6.50%, 08/15/31 502 531 Pool# 563325 7.00%, 08/15/31 1,042 1,110 Pool# 590373 6.50%, 08/15/32 654 691 (2) Pool# 552763 6.50%, 09/15/32 2,965 3,132 (9) Pool# 599752 6.50%, 10/15/32 1,916 2,024 Pool# 603324 6.00%, 12/15/32 1,810 1,892 (8) Pool# 581491 6.00%, 02/15/33 2,250 2,353 (1) Pool# 604141 6.00%, 03/15/33 3,539 3,700 Pool# 604338 5.00%, 05/15/33 1,419 1,426 (6) Pool# 614544 6.00%, 06/15/33 2,389 2,497 (10) Pool# 613876 5.50%, 08/15/33 1,919 1,973 Pool# 619619 5.00%, 09/15/33 1,000 1,005 Pool# 622095 5.00%, 09/15/33 1,456 1,463 Pool# 615538 (7) 5.50%, 09/15/33 2,310 2,375 =(4) 5.50%, 03/01/34 2,500 2,567 =(3) 6.50%, 03/01/34 2,500 2,639 --------- 41,444 U.S. GOVERNMENT SECURITIES 5.9% of net assets (5) U.S. TREASURY NOTES 1.88%, 12/31/05 2,500 2,515 ASSET-BACKED OBLIGATIONS 4.0% of net assets * NOVASTAR NIM TRUST Series 2004-N1 4.46%, 02/25/34 750 750 ~ OPTION ONE MORTGAGE LOAN TRUST Series 2003-6 Class A2 1.42%, 03/25/04 958 962 --------- 1,712
56 See financial notes. SCHWAB GNMA FUND
SECURITY SERIES FACE AMOUNT VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 2.3% of net assets GENERAL MOTORS ACCEPTANCE CORP. 1.18%, 03/09/04 1,000 1,000
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) OTHER INVESTMENT COMPANIES 1.5% of net assets PROVIDENT INSTITUTIONAL FUNDS-- FED FUNDS PORTFOLIO 624,232 624
END OF INVESTMENTS. For totals, please see the first page of holdings for this fund. See financial notes. 57 SCHWAB GNMA FUND Statement of ASSETS AND LIABILITIES As of February 29, 2004; unaudited. All numbers are x 1,000 except NAV. ASSETS ------------------------------------------------------------------------------ Investments, at value $ 47,295 a Receivables: Fund shares sold 535 Interest 203 Due from advisor 1 Prepaid expenses + 23 ----------- TOTAL ASSETS 48,057 LIABILITIES ------------------------------------------------------------------------------ Payables: Fund shares redeemed 54 Dividends to shareholders 30 Investments bought 5,223 Accrued expenses + 43 ----------- TOTAL LIABILITIES 5,350 NET ASSETS ------------------------------------------------------------------------------ TOTAL ASSETS 48,057 TOTAL LIABILITIES - 5,350 ----------- NET ASSETS $ 42,707 NET ASSETS BY SOURCE Capital received from investors 43,701 Distributions in excess of net investment income (374) Net realized capital losses (1,172) b Net unrealized capital gains 552 b NET ASSET VALUE (NAV) BY SHARE CLASS SHARES SHARE CLASS NET ASSETS / OUTSTANDING = NAV Investor Shares $19,455 1,976 $9.85 Select Shares(R) $23,252 2,361 $9.85
Unless stated, all numbers are x 1,000. a The fund's amortized cost for these securities was $46,743. Not counting short-term obligations and government securities, the fund's security transactions during the period were: Purchases $750 Sales/maturities $772 The fund's long-term government security transactions were: Purchases $48,133 Sales/maturities $51,935 b These derive from investments. FEDERAL TAX DATA ------------------------------------------------- PORTFOLIO COST $46,743 NET UNREALIZED GAINS AND LOSSES: Gains $584 Losses + (32) ---------- $552 AS OF AUGUST 31, 2003: UNDISTRIBUTED EARNINGS: Ordinary income $168 Long-term capital gains $-- DEFERRED CAPITAL LOSSES $969
58 See financial notes. SCHWAB GNMA FUND Statement of OPERATIONS For March 3, 2003 through February 29, 2004; unaudited. All numbers are x 1,000. INVESTMENT INCOME ------------------------------------------------------------------------------- Interest $437 NET REALIZED GAINS AND LOSSES ------------------------------------------------------------------------------- Net realized losses on investments sold (203) NET UNREALIZED GAINS AND LOSSES ------------------------------------------------------------------------------- Net unrealized gains on investments 1,268 EXPENSES ------------------------------------------------------------------------------- Investment adviser and administrator fees 101 a Transfer agent and shareholder service fees: Investor Shares 25 b Select Shares 13 b Trustees' fees 2 c Custodian and portfolio accounting fees 21 Professional fees 15 Registration fees 37 Shareholder reports 14 Other expenses + 3 ------------ Total expenses 231 Expense reduction - 173 d ------------ NET EXPENSES 58 INCREASE IN NET ASSETS FROM OPERATIONS ------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 437 NET EXPENSES - 58 ------------ NET INVESTMENT INCOME 379 NET REALIZED LOSSES (203) e NET UNREALIZED GAINS + 1,268 e ------------ INCREASE IN NET ASSETS FROM OPERATIONS $1,444
Unless stated, all numbers are x 1,000. a Calculated as 0.45% of average daily net assets. 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. These fees are paid to Charles Schwab & Co. c For the fund's independent trustees only. d Includes $97 from the investment adviser (CSIM) and $27 from the transfer agent and shareholder service agent (Schwab). CSIM and Schwab has guaranteed through August 31, 2004 to limit the annual operating expenses (excluding interest, taxes and certain non-routine expenses) to 0.74% for Investor Shares and 0.55% for Select Shares. CSIM and Schwab voluntarily waived an additional $49 to further reduce annual operating expenses during the period. The combination of these reductions resulted in net operating expenses of 0.30% for investor Shares and 0.23% for Select Shares. e These add up to a net gain on investments of $1,065. See financial notes. 59 SCHWAB GNMA FUND Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers are x 1,000. Figures for current period are unaudited.
OPERATIONS ------------------------------------------------------------------------------- 9/1/03-2/29/04 3/3/03-8/31/03 Net investment income $379 $367 Net realized losses (203) (241) Net unrealized gains or losses + 1,268 (716) ------------------------------ INCREASE OR DECREASE IN NET ASSETS FROM OPERATIONS 1,444 (590) DISTRIBUTIONS PAID ------------------------------------------------------------------------------- DIVIDENDS FROM NET INVESTMENT INCOME Investor Shares 332 427 Select Shares + 421 668 ------------------------------ TOTAL DIVIDENDS FROM NET INVESTMENT INCOME 753 $1,095 a
TRANSACTIONS IN FUND SHARES ------------------------------------------------------------------------------- 9/1/03-2/29/04 3/3/03-8/31/03 SHARES VALUE SHARES VALUE SHARES SOLD Investor Shares 426 $4,177 2,781 $27,703 Select Shares + 450 4,418 4,705 46,833 ----------------------------------------------- TOTAL SHARES SOLD 876 $8,595 7,486 $74,536 SHARES REINVESTED Investor Shares 32 $307 27 $274 Select Shares + 38 372 42 412 ----------------------------------------------- TOTAL SHARES REINVESTED 70 $679 69 $686 SHARES REDEEMED Investor Shares (627) ($6,133) (663) ($6,523) Select Shares + (1,055) (10,303) (1,819) (17,836) ----------------------------------------------- TOTAL SHARES REDEEMED (1,682) ($16,436) (2,482) ($24,359) NET TRANSACTIONS IN FUND SHARES (736) ($7,162) 5,073 $50,863
SHARES OUTSTANDING AND NET ASSETS ------------------------------------------------------------------------------- 9/1/03-2/29/04 3/3/03-8/31/03 SHARES NET ASSETS SHARES NET ASSETS Beginning of period 5,073 $49,178 -- $-- Total increase or decrease + (736) (6,471) 5,073 49,178 b ----------------------------------------------- END OF PERIOD 4,337 $42,707 5,073 $49,178 c
Unless stated, all numbers are x 1,000. a The tax-basis components of distributions for the period ended 08/31/03 are: Ordinary income $1,095 Long-term capital gains $--
The difference of net investment income between financial statement and tax purposes are: Paydown gains $728 b Figures for shares represent shares sold plus shares reinvested, minus shares redeemed. Figures for net assets represent the changes in net assets from operations plus the changes in value of transactions in fund shares, minus distributions paid. c Includes distributions in excess of net investment income in the amount of $374 for the current period. 60 See financial notes. SCHWAB TAXABLE BOND FUND 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. BOTH SCHWAB YIELDPLUS FUND AND SCHWAB GNMA FUND OFFER TWO SHARE CLASSES: Investor Shares and Select Shares. Shares of each class represent interest in the same portfolio, but each class has different expenses and investment minimums. Schwab Short-Term Bond Market and Total Bond Market Funds each offers one share class. Shares are bought and sold at net asset value, or 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 Schwab YieldPlus Fund Schwab Short-Term Bond Market Fund Schwab Total Bond Market Fund Schwab GNMA Fund 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 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, as described below. Other policies concerning the funds' business operations also are described here. THE FUNDS DECLARE DIVIDENDS EVERY DAY THEY ARE OPEN FOR BUSINESS. These dividends, which are substantially equal to a fund's net investment income for that day, are paid out to shareholders once a month. The funds may make distributions from any net realized capital gains once a year. THE FUNDS MAY ENTER INTO SWAP AGREEMENTS. In these transactions, a fund and a counterparty agree to swap payments that are based on two different rates. The counterparty is typically a large financial institution, and the term of the swap is specified in advance. For example, a fund may agree that for six months it will pay the counterparty the equivalent of the interest on a given amount invested at LIBOR (the London Interbank Offered Rate). In exchange, the counter-party might agree to pay a fund the equivalent of the same amount invested in a certain bond index during this same six months. Swap agreements carry certain risks. Because the net gains or losses stemming from a swap agreement depend on the movements of one rate relative to another, a fund could experience unanticipated losses if one or both rates failed to behave as expected. A fund also could lose money if a counterparty failed to honor the terms of a swap agreement. THE FUNDS MAY LOAN SECURITIES TO CERTAIN BROKERS, DEALERS AND OTHER FINANCIAL INSTITUTIONS WHO PAY THE FUNDS NEGOTIATED FEES. The funds receive cash, letters of credit or U.S. Government securities as collateral on these loans. All of the cash collateral received is reinvested in high quality, short-term investments. The value of the collateral must be at least 102% of the market 61 SCHWAB BOND FUNDS value of the loaned securities as of the first day of the loan, and at least 100% each day thereafter. THE FUNDS MAY BUY SECURITIES ON A DELAYED-DELIVERY BASIS. In these transactions, a fund agrees to buy a security for a stated price, with settlement generally occurring within two weeks. If the security's value falls before settlement occurs, a fund could end up paying more for the security than its market value at the time of settlement. The funds have set aside sufficient securities as collateral for those securities bought on a delayed-delivery basis. THE FUNDS MAY ALSO SELL SECURITIES SHORT (SELL SECURITIES THEY DO NOT OWN). When they do so, the funds also place assets worth at least 100% of the value of the short securities into segregated accounts, as collateral. If the market value of the short securities subsequently falls, the funds can realize a gain by closing the position. However, if the value rises, the funds typically would have to add to their collateral or close out their short position at a loss. The potential for losses associated with short positions is much greater than the original value of the securities sold short and may exceed amounts recorded in the Statements of Assets and Liabilities. THE FUNDS 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 a fund to close out a position in a futures contract, due to a difference in trading hours or to market conditions that may reduce the liquidity for a futures contract or its underlying securities. Because futures carry inherent risks, a 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 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. A fund records the change in market value of futures, and also the change in the amount of margin deposit required ("variation margin"). THE FUNDS MAY ENTER INTO "TBA" (TO BE ANNOUNCED) PURCHASE COMMITMENTS TO PURCHASE SECURITIES FOR A FIXED PRICE AT A FUTURE DATE, TYPICALLY NOT EXCEEDING 45 DAYS. TBAs may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to settlement date. This risk is in addition to the risk of decline in a fund's other assets. THE FUNDS MAY ENTER INTO MORTGAGE DOLLAR ROLL TRANSACTIONS. In these transactions, a fund sells mortgage-backed securities for delivery in the current month and simultaneously agrees to buy back, on a given date in the future, securities of a similar type, coupon rate and maturity. Dollar roll transactions involve the risk that the market value of the security sold short by the fund may decline below the repurchase price of similar securities. THE FUNDS PAY FEES TO AFFILIATES OF THE INVESTMENT ADVISOR FOR VARIOUS SERVICES. Through their trust, the funds have agreements with Charles Schwab Investment Management, Inc. (CSIM) to provide investment advisory and administrative services and with Charles Schwab & Co., Inc. (Schwab) to provide transfer agent and shareholder services. Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds that may limit the total expenses charged. The rates and limitations for these fees vary from fund to fund, and are described in each fund's Statement of Operations. 62 SCHWAB BOND FUNDS THE FUNDS MAY ENGAGE IN CERTAIN TRANSACTIONS INVOLVING AFFILIATES. For instance, a fund may let other SchwabFunds(R) buy and sell fund shares, particularly Schwab MarketTrack Portfolios. 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. Pursuant to an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions within the SchwabFunds(R). All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the SchwabFunds(R). 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 report 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 BORROW MONEY FROM BANKS AND CUSTODIANS. The funds may obtain temporary bank loans through the trusts to which they belong, to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The trusts have custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with PNC Bank, N.A. and Bank of America, N.A., respectively. The funds pay interest on the amounts they borrow at rates that are negotiated periodically. 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. The net investment income and realized capital gains and losses may differ for financial statement and tax purposes primarily due to differing treatments of paydown gains and losses and amortization of bond discounts and premiums. As long as a fund meets the tax requirements, it is not required to pay federal income tax. UNDER THE FUNDS' ORGANIZATIONAL DOCUMENTS, THE OFFICERS AND TRUSTEES ARE INDEMNIFIED AGAINST CERTAIN LIABILITY ARISING OUT OF THE PERFORMANCE OF THEIR DUTIES TO THE FUNDS. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide general indemnifications. The funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss to be remote. 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. 63 SCHWAB BOND FUNDS SWAP AGREEMENTS: each open contract is valued at a formula that varies with the specific terms of the agreement. 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 a 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 A FUND SELLS SECURITIES SHORT, it records the proceeds received as an asset and the obligation to buy back the securities as a liability. At the time a short sale is initiated, the asset and the liability are of equal value and effectively cancel each other out. Subsequently, the fund values the liability side of the transaction according to the market price of the securities sold short, and values the asset side according to the value of the proceeds. When the fund closes out a short position (buys the security), it records the outcome as a realized gain or loss. Interest accrued on securities sold short is recorded as an expense on the fund's records. SECURITY TRANSACTIONS are recorded as of the date the order to buy or sell the security is executed. INTEREST INCOME is recorded as it accrues. If a fund bought a debt security at a discount (that is, for less than its face value) or a premium (more than face value), it amortizes the discount or premium from the current date up to maturity. The fund then increases (in the case of discounts) or reduces (in the case of premiums) the income it records from the security. If the security is callable (meaning that the issuer has the option to pay it off before its maturity date), then the fund amortizes the premium to the security's call date and price, rather than the maturity date and price. REALIZED GAINS AND LOSSES from security transactions are based on the identified costs of the securities involved. Gains and losses from paydowns on mortgage and asset backed securities are recorded as adjustments to interest income. EXPENSES that are specific to a fund or a class are charged directly to that fund or class. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their net assets. FOR FUNDS OFFERING MULTIPLE SHARE CLASSES, all of the realized and unrealized gains or losses and net investment income, other than class specific expenses, are allocated daily to each class in proportion to its 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. 64 SCHWAB BOND FUNDS FUND TRUSTEES A fund's Board of Trustees is responsible for protecting the interests of that fund's shareholders. The tables below give information about the people who serve as trustees and officers for the SchwabFunds(R), including the funds covered in this report. Trustees remain in office until they resign, retire or are removed by shareholder vote. 1 Under the Investment Company Act of 1940, any officer, director, or employee of Schwab or CSIM is considered an "interested person," meaning that he or she is considered to have a business interest in Schwab or CSIM. These individuals are listed as "interested trustees." The "independent trustees" are individuals who, under the 1940 Act, are not considered to have a business interest in Schwab or CSIM. Each of the SchwabFunds(R) (of which there were 49 as of 2/29/04) belongs to one of these trusts: The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust or Schwab Annuity Portfolios. Currently all these trusts have the same trustees and officers. The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000. INDIVIDUALS WHO ARE INTERESTED TRUSTEES AND OFFICERS OF THE TRUST
TRUST POSITION(S); NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS ------------------------------------------------------------------------------------------------------------------------------------ CHARLES R. SCHWAB 2 Chair, Trustee: Chair, Director, The Charles Schwab Corp., Charles Schwab & Co., Inc. 7/29/37 Family of Funds, 1989; Charles Schwab Investment Management, Inc., Charles Schwab Investments, 1991; Holdings (UK); CEO, Director, Charles Schwab Holdings, Inc.; Chair, Capital Trust, 1993; CEO Schwab (SIS) Holdings, Inc. I, Schwab International Holdings, Inc.; Annuity Portfolios, 1994. Director, U.S. Trust Corp., United States Trust Co. of New York, The Gap, Inc. (clothing retailer), Siebel Systems (software), Xsign, Inc. (electronic payment systems); Trustee, Stanford University. Until 2003: Co-CEO, The Charles Schwab Corp. Until 2002: Director, Audiobase, Inc. (Internet audio solutions). Until 5/02: Director, Vodaphone AirTouch PLC (telecommunications). Until 3/01: Director, The Charles Schwab Trust Co. Until 1999: Director, Schwab Retirement Plan Services, Inc., Mayer & Schweitzer, Inc. (securities brokerage subsidiary of The Charles Schwab Trust Co.), TrustMark, Inc.
1 The SchwabFunds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010. 2 In addition to their positions with the investment adviser and the distributor, Ms. Lepore and Messrs. Schwab and Lyons, as well as some of Mr. Lyons's immediate family members, also own stock of The Charles Schwab Corporation. 65 SCHWAB BOND FUNDS INDIVIDUALS WHO ARE INTERESTED TRUSTEES BUT NOT OFFICERS OF THE TRUST
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS ------------------------------------------------------------------------------------------------------------------------------------ DAWN G. LEPORE 1 Trustee: 2003 Vice Chair, The Charles Schwab Corp.; Until 10/01: CIO, The 3/21/54 (all trusts). Charles Schwab Corporation. Until 1999: EVP, The Charles Schwab Corporation. Director, Wal-Mart Stores, eBay, Inc. ------------------------------------------------------------------------------------------------------------------------------------ JEFFREY M. LYONS 1 Trustee: 2002 EVP, Asset Management Products and Services, Charles Schwab & 2/22/55 (all trusts). Co., Inc.; Trustee, Laudus Trust, Laudus Variable Insurance Trust. Until 9/01: EVP, Mutual Funds, Charles Schwab & Co., Inc.
INDIVIDUALS WHO ARE OFFICERS OF THE TRUST BUT NOT TRUSTEES
NAME AND BIRTHDATE TRUST OFFICE(S) HELD MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS ------------------------------------------------------------------------------------------------------------------------------------ RANDALL W. MERK President, CEO President, CEO, Charles Schwab Investment Management, Inc; 7/25/54 (all trusts). EVP, Charles Schwab & Co., Inc.; Director, Charles Schwab Worldwide Funds PLC, Charles Schwab Asset Management (Ireland) Ltd. Until 9/02: President, CIO, American Century Investment Management; Director, American Century Cos., Inc. Until 6/01: CIO, Fixed Income, American Century Cos., Inc. Until 1997: SVP, Director, Fixed Income and Quantitative Equity Portfolio Management, Twentieth Century Investors, Inc. ------------------------------------------------------------------------------------------------------------------------------------ TAI-CHIN TUNG Treasurer, Principal SVP, CFO, Charles Schwab Investment Management, Inc.; SVP, The Charles Schwab 3/7/51 Financial Officer Trust Co.; Director, Charles Schwab Asset Management (Ireland) Ltd., Charles (all trusts). Schwab Worldwide Funds PLC. ------------------------------------------------------------------------------------------------------------------------------------ STEPHEN B. WARD SVP, Chief Investment SVP, Chief Investment Officer, Director, Charles Schwab Investment Management, 4/5/55 Officer Inc.; CIO, The Charles Schwab Trust Co. (all trusts). ------------------------------------------------------------------------------------------------------------------------------------ KOJI E. FELTON Secretary SVP, Chief Counsel, Assistant Corporate Secretary, Charles Schwab Investment 3/13/61 (all trusts). Management, Inc. Until 6/98: Branch Chief in Enforcement, U.S. Securities and Exchange Commission, San Francisco.
1 In addition to their positions with the investment adviser and the distributor, Ms. Lepore and Messrs. Schwab and Lyons, as well as some of Mr. Lyons's immediate family members, also own stock of The Charles Schwab Corporation. 66 SCHWAB BOND FUNDS INDIVIDUALS WHO ARE INDEPENDENT TRUSTEES
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS ------------------------------------------------------------------------------------------------------------------------------------ MARIANN BYERWALTER 2000 (all trusts). Chair, JDN Corp. Advisory LLC; Trustee, Stanford University, America 8/13/60 First Cos., (venture capital/fund management), Redwood Trust, Inc. (mortgage finance), Stanford Hospitals and Clinics, SRI International (research), PMI Group, Inc. (mortgage insurance), Lucile Packard Children's Hospital, Laudus Trust, Laudus Variable Insurance Trust. 2001: Special Advisor to the President, Stanford University. Until 2002: Director, LookSmart, Ltd. (Internet infrastructure). Until 2001: VP, Business Affairs, CFO, Stanford University. ------------------------------------------------------------------------------------------------------------------------------------ DONALD F. DORWARD Family of Funds, 1989; CEO, Dorward & Associates (corporate management, marketing and 9/23/31 Investments, 1991; communications consulting). Until 1999: EVP, Managing Director, Capital Trust, 1993; Grey Advertising. Annuity Portfolios, 1994. ------------------------------------------------------------------------------------------------------------------------------------ WILLIAM A. HASLER 2000 (all trusts). Co-CEO, Aphton Corp. (bio-pharmaceuticals). Trustee, Solectron Corp. 11/22/41 (manufacturing), Airlease Ltd. (aircraft leasing), Mission West Properties (commercial real estate), Stratex Corp. (network equipment); Public Governor, Laudus Trust, Laudus Variable Insurance Trust; Member, executive committee, Pacific Stock & Options Exchange. Until 2003: Trustee, Tenera, Inc. (services and software). Until 1998: Dean, Haas School of Business, University of California, Berkeley. ------------------------------------------------------------------------------------------------------------------------------------ ROBERT G. HOLMES Family of Funds, 1989; Chair, CEO, Director, Semloh Financial, Inc. (international financial 5/15/31 Investments, 1991; services and investment advice). Capital Trust, 1993; Annuity Portfolios, 1994. ------------------------------------------------------------------------------------------------------------------------------------ GERALD B. SMITH 2000 (all trusts). Chair, CEO, Founder, Smith Graham & Co. (investment advisors); 9/28/50 Trustee, Rorento N.V. (investments--Netherlands), Cooper Industries (electrical products, tools and hardware); Member, audit committee, Northern Border Partners, L.P. (energy). Until 2002: Director, Pennzoil- Quaker State Co. (oil and gas). ------------------------------------------------------------------------------------------------------------------------------------ DONALD R. STEPHENS Family of Funds, 1989; Managing Partner, D.R. Stephens & Co. (investments). Until 1996: 6/28/38 Investments, 1991; Chair, CEO, North American Trust (real estate investment trust). Capital Trust, 1993; Annuity Portfolios, 1994. ------------------------------------------------------------------------------------------------------------------------------------ MICHAEL W. WILSEY Family of Funds, 1989; Chair, CEO, Wilsey Bennett, Inc. (transportation, real estate 8/18/43 Investments, 1991; and investments). Capital Trust, 1993; Annuity Portfolios, 1994.
67 SCHWAB BOND FUNDS 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 SECURITIES Bond or other debt securities that represent 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. CERTIFICATE OF PARTICIPATION A municipal bond that is repaid from an annual budget appropriation rather than being backed by the full faith and credit of the issuer. 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 chart below. 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. DIVIDEND Money from earnings that is distributed to shareholders as a given amount per share. 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 CREDIT-WORTHINESS OF THEIR BONDS. THE SPECTRUM OF THESE RATINGS IS DIVIDED INTO TWO MAJOR CATEGORIES: INVESTMENT GRADE AND BELOW INVESTMENT GRADE (SOMETIMES CALLED "JUNK BONDS"). BONDS RATED BELOW INVESTMENT GRADE RANGE FROM THOSE THAT ARE CONSIDERED TO HAVE SOME VULNERABILITY TO DEFAULT TO THOSE THAT APPEAR ON THE BRINK OF DEFAULT OR ARE IN DEFAULT.
CREDIT CAPACITY TO QUALITY MAKE PAYMENTS INVESTMENT GRADE BONDS AAA Strongest AA A BBB Adequate [UP AND DOWN ARROW SPANNING TABLE AND CHANGING DARK TO LIGHT FROM TOP TO BOTTOM] -------------------------------------------------------------------------------- BELOW INVESTMENT GRADE BONDS BB Somewhat speculative B CCC CC C Highly speculative D In default
68 SCHWAB BOND FUNDS DURATION A measure of a bond's sensitivity to interest rates. Calculations of duration generally take into account the investment's yield, interest payments, maturity date and call features. Like maturity, duration is expressed in years, but is more accurate than maturity in determining the effect of interest rate movements on a bond investment's price. The duration of a portfolio equals the market value weighted average of the duration of the bonds held in the portfolio. 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 BONDS Municipal bonds that are 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 SECURITIES Bond or other debt securities that represent ownership in a pool of mortgage loans. MUNI, MUNICIPAL BONDS, MUNICIPAL SECURITIES 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. RESTRICTED SECURITIES Securities that are subject to contractual restrictions on resale and may be sold only to "qualified institutional buyers" under Securities Act Rule 144A. These securities are often purchased in private placement transactions. REVENUE BONDS Municipal bonds that are issued to finance public works projects and are secured by revenue generated by the project (such as water and sewer fees) rather than the full faith and credit of the issuer. SECTION 4(2)/144A SECURITIES Securities exempt from registration under Section 4(2) of the Securities Act of 1933. These securities may be sold only to qualified institutional buyers under Securities Act Rule 144A. 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 percentage that an investor would have earned or lost on an investment in the fund assuming dividends and distributions were reinvested. 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 bond-holder 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. 69 NOTES NOTES NOTES CONTACT SCHWAB SchwabFunds(R) offers you a complete family of mutual funds, each one based on a clearly defined investment approach and using disciplined management strategies. The list at right shows all currently available SchwabFunds(R). Whether you're an experienced investor or just starting out, SchwabFunds(R) can help you achieve your financial goals. An investor should consider a fund's investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund's prospectus. Please call 1-800-435-4000 for a prospectus and brochure for any SchwabFund(R). Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus. METHODS FOR PLACING ORDERS The following information outlines how Schwab 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) 2 Use our automated voice service or speak to a representative. Call 1-800-435-4000, day or night (for TDD service, call 1-800-345-2550). TELEBROKER(R) Automated touch-tone phone service at 1-800-272-4922. MAIL Write to SchwabFunds(R) at: P.O. Box 3812 Englewood, CO 80155-3812 When selling or exchanging shares, be sure to include the signatures of at least one of the persons whose name is on the account. PROXY VOTING POLICIES AND PROCEDURES A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab's web site at www.schwab.com/schwabfunds, the SEC's web site at http://www.sec.gov, or by contacting SchwabFunds at 1-800-435-4000. 1 Shares of Sweep Investments(TM) may not be purchased directly over the Internet. 2 Orders placed in person or through a telephone representative may be subject to a service fee payable to Schwab. THE SCHWABFUNDS FAMILY(R) 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 Core Equity Fund(TM) Schwab Dividend Equity Fund(TM) Schwab Small-Cap Equity Fund(TM) Schwab Hedged Equity Fund(TM) Schwab Focus Funds Communications Focus Fund Financial Services Focus Fund Health Care Focus Fund Technology Focus Fund Schwab MarketMasters Funds(TM) Schwab U.S. MarketMasters Fund(TM) Schwab Small-Cap MarketMasters Fund(TM) Schwab International MarketMasters Fund(TM) Schwab Balanced MarketMasters Fund(TM) ASSET ALLOCATION FUNDS Schwab MarketTrack Portfolios(R) Schwab MarketTrack All Equity Portfolio(TM) Schwab MarketTrack Growth Portfolio(TM) Schwab MarketTrack Balanced Portfolio(TM) Schwab MarketTrack Conservative Portfolio(TM) BOND FUNDS Schwab YieldPlus Fund(R) Schwab Short-Term Bond Market Fund(TM) Schwab Total Bond Market Fund(TM) Schwab GNMA Fund(TM) Schwab Short/Intermediate Tax-Free Bond Fund(TM) Schwab Long-Term Tax-Free Bond Fund(TM) Schwab California Short/Intermediate Tax-Free Bond Fund(TM) Schwab California Long-Term Tax-Free Bond Fund(TM) SCHWAB MONEY FUNDS Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity.3 Choose from taxable or tax-advantaged alternatives. Many can be linked to your Schwab account to "sweep" cash balances automatically, subject to availability, when you're between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments(R). 3 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 SchwabFunds(R) P.O. Box 3812, Englewood, CO 80155-3812 This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. (C)2004 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE. Printed on recycled paper. REG13480-07 SCHWAB TAX-FREE BOND FUNDS SEMIANNUAL REPORT February 29, 2004 Schwab Short/Intermediate Tax-Free Bond Fund(TM) Schwab Long-Term Tax-Free Bond Fund(TM) Schwab California Short/Intermediate Tax-Free Bond Fund(TM) Schwab California Long-Term Tax-Free Bond Fund(TM) [CHARLES SCHWAB LOGO] Four funds designed to offer tax-free income. IN THIS REPORT Management's Discussion ............................................... 2 The president of SchwabFunds(R) and the funds' manager take a look at the factors that shaped fund performance during the report period. Performance at a Glance .............. 5 Schwab Short/Intermediate Tax-Free Bond Fund Ticker Symbol: SWITX The fund seeks high current income that is exempt from federal income tax, consistent with capital preservation. 1 Performance and Fund Facts ........... 7 Financial Statements ................. 15 Schwab Long-Term Tax-Free Bond Fund Ticker symbol: SWNTX The fund seeks high current income that is exempt from federal income tax, consistent with capital preservation. 1 Performance and Fund Facts ........... 9 Financial Statements ................. 25 Schwab California Short/Intermediate Tax-Free Bond Fund Ticker symbol: SWCSX The fund seeks high current income exempt from federal and California personal income tax that is consistent with capital preservation. 1 Performance and Fund Facts ........... 11 Financial Statements ................. 34 Schwab California Long-Term Tax-Free Bond Fund Ticker symbol: SWCAX The fund seeks high current income exempt from federal and California personal income tax that is consistent with capital preservation. 1 Performance and Fund Facts ........... 13 Financial Statements ................. 43 Financial notes ....................................................... 52 Fund Trustees ......................................................... 55 Glossary .............................................................. 58 Fund investment adviser: Charles Schwab Investment Management, Inc. (CSIM). Distributor and transfer agent: Charles Schwab & Co., Inc. (Schwab). 1 A portion of income may be subject to the alternative minimum tax (AMT) and, for the national funds, state and local income taxes as well. [PHOTO OF CHARLES R. SCHWAB] Charles R. Schwab Chairman FROM THE CHAIRMAN With interest rates near historic lows, many of you are wondering if you should hold fixed-income investments in your portfolios. My answer, as I've stated throughout my long investment career, is that prudent investors should have at least some exposure to fixed-income securities. This is true because most types of investments generally have not moved in tandem. Bonds and the funds that hold them, for example, may perform well when stocks don't, and vice versa, which is why it's important to have some of each in your portfolio. In addition, bonds can help you manage your risk, reduce the overall volatility of your portfolio and generate income. Because mutual funds are one of the most cost-effective ways for individual investors to participate in the market, I always have been an advocate for them. While there are challenges we face in the industry to ensure that it remains useful and ethical, I believe we will meet them. In fact, Schwab has taken an active role in helping to get the industry back on track. At the end of February, we met with the U.S. Senate's Committee on Banking, Housing and Urban Affairs. At that session, we suggested several proposals for reform. We did this because we believe our proposal would increase investor choice, convenience and fairness. We have taken this role so that the millions of Americans who own mutual funds will understand that funds provide an important way to invest for their future goals. Whether the goals are a secure retirement, a vacation home or your children's education, bond mutual funds can help to grow your wealth and balance your risk. Sincerely, /s/ Charles Schwab MANAGEMENT'S DISCUSSION for the six months ended February 29, 2004 [PHOTO OF RANDALL W. MERK] RANDALL W. MERK is President and CEO of Charles Schwab Investment Management, Inc. and is president of each of the funds covered in this report. He joined the firm in August 2002, bringing with him 24 years of experience in the asset management industry. Dear Shareholder: The bond market, which experienced significant volatility in the first half of 2003, has become more stable. In fact, during this report period, which ended February 29, bonds have traded in a relatively narrow yield range. While bonds are generally less volatile than stocks, they still carry some price risk. Most investors realize this and understand that longer-maturity bonds are more sensitive to fluctuations in interest rates and, therefore, have greater price volatility than securities with shorter maturities. As investors worry about interest rates, they tend to shorten the maturity of their bond portfolios -- a trend that has been more noticeable in recent months. A look at the shape of the yield curve suggests that expectations of higher rates already have been priced into the market, and the current yield premiums on longer-term securities, vs. shorter-maturity bonds, are generous by historical standards. As an investor you have choices to make, including how much of this type of risk you wish to assume. Given the trade-off, you may choose to add bond funds of varying maturities. It's up to you to decide which securities work best in your total portfolio. No matter which maturity you choose for your funds, we have portfolio managers in each area who will help you and also manage some of the other risks associated with bond investments, including prepayment, credit and call risk. By owning just a few funds that include bonds of different maturities and creditworthiness, you can help to reduce the volatility of your portfolio. At SchwabFunds(R), we have done and will do whatever it takes to ensure that our funds are transacted fairly and equitably during the trading day. We continue to scrutinize our operations because the trust of our shareholders is very important to us, and we invest with your outcomes in mind. Thank you for investing with us, and once more I want to remind you that we operate our business with the highest ethical standards and an unwavering commitment to you. Sincerely, /s/ Randall W. Merk 2 Schwab Tax-Free Bond Funds [PHOTO OF JOANNE LARKIN] JOANNE LARKIN, a vice president of the investment adviser, has had overall management responsibility for the funds since their inception. She joined the firm in 1992, and has worked in fixed-income asset management and research since 1984. THE INVESTMENT ENVIRONMENT AND THE FUNDS THE ENCOURAGING ECONOMIC NEWS THAT WAS REPORTED TOWARD THE END OF SUMMER 2003 CONTINUED INTO THE NEW YEAR, BUT THEN LOST SOME OF ITS STRENGTH. There were three major pieces of good news from the business world. The first positive was that no new corporate scandals had emerged among U.S. companies. Second was the uptick in capital spending. Last, but perhaps most important to the Federal Reserve (Fed), came the word that companies were finally beginning to hire some workers. Yet despite this employment news, job growth was weak and most market watchers agree that this is the key to a real economic recovery. The weak employment data also may have been a reason that consumer spending, which had helped to buoy the economy over the past few years, showed signs of slowing. The mortgage-refinancing market, while still active and a big source of funds for consumer spending, lost some of its steam and was unable to match last year's torrid pace. In short, any good news was mitigated by the bad news, especially the news about weak job creation. WITH SHORT-TERM INTEREST RATES ALREADY LOW FOLLOWING 13 CUTS OVER THE PAST FEW YEARS, THE FED DECLINED TO LOWER RATES SINCE ITS LAST CUT IN JUNE 2003. By not acting, the Fed may have been acknowledging that the economy was showing signs of recovering. Nonetheless, the Fed's inaction, coupled with low inflation, slow-to-no job growth, high productivity and massive purchases of U.S. currency by foreign central banks (to keep the dollar strong relative to Asian currencies and to preserve cheap exports) kept a lid on bond yields, which had started to rise in the last half of 2003. YIELDS OF MUNICIPAL SECURITIES: Effective Yields of Five-Year and 30-Year Municipal Bonds [LINE GRAPH]
5-YEAR AAA GO BOND 30-YEAR BOND BUYER 40 INDEX 28-Feb-94 4.02 6.09 31-Mar-94 4.71 7.04 29-Apr-94 4.82 7.02 31-May-94 4.77 6.89 30-Jun-94 4.83 6.92 29-Jul-94 4.69 6.62 31-Aug-94 4.71 6.55 30-Sep-94 4.92 6.93 31-Oct-94 5.11 7.36 30-Nov-94 5.37 7.73 30-Dec-94 5.30 7.28 31-Jan-95 5.12 6.86 28-Feb-95 5.01 6.47 31-Mar-95 4.83 6.40 28-Apr-95 4.84 6.43 31-May-95 4.48 6.04 30-Jun-95 4.57 6.37 31-Jul-95 4.40 6.38 31-Aug-95 4.31 6.30 29-Sep-95 4.30 6.23 31-Oct-95 4.23 5.99 30-Nov-95 4.15 5.74 29-Dec-95 4.14 5.65 31-Jan-96 4.09 5.70 29-Feb-96 4.09 5.99 29-Mar-96 4.38 6.44 30-Apr-96 4.49 6.50 31-May-96 4.64 6.45 28-Jun-96 4.61 6.26 31-Jul-96 4.56 6.18 30-Aug-96 4.57 6.21 30-Sep-96 4.48 6.00 31-Oct-96 4.40 5.94 29-Nov-96 4.18 5.73 31-Dec-96 4.25 5.87 31-Jan-97 4.41 6.02 28-Feb-97 4.34 5.96 31-Mar-97 4.61 6.26 30-Apr-97 4.67 6.15 30-May-97 4.60 5.88 30-Jun-97 4.41 5.79 31-Jul-97 4.10 5.38 29-Aug-97 4.34 5.73 30-Sep-97 4.21 5.61 31-Oct-97 4.16 5.59 28-Nov-97 4.17 5.50 31-Dec-97 4.06 5.35 30-Jan-98 4.04 5.30 27-Feb-98 4.03 5.44 31-Mar-98 4.09 5.46 30-Apr-98 4.23 5.68 29-May-98 4.09 5.34 30-Jun-98 4.10 5.36 31-Jul-98 4.07 5.41 31-Aug-98 3.87 5.19 30-Sep-98 3.77 5.09 30-Oct-98 3.70 5.34 30-Nov-98 3.73 5.25 31-Dec-98 3.77 5.34 29-Jan-99 3.63 5.21 26-Feb-99 3.70 5.33 31-Mar-99 3.86 5.39 30-Apr-99 3.80 5.47 31-May-99 4.00 5.62 30-Jun-99 4.39 5.91 30-Jul-99 4.31 5.94 31-Aug-99 4.39 6.21 30-Sep-99 4.45 6.31 29-Oct-99 4.62 6.53 30-Nov-99 4.55 6.42 31-Dec-99 4.72 6.55 31-Jan-00 4.94 6.68 29-Feb-00 4.94 6.43 31-Mar-00 4.85 6.09 28-Apr-00 4.95 6.21 31-May-00 5.11 6.46 30-Jun-00 4.80 6.02 31-Jul-00 4.62 5.84 31-Aug-00 4.47 5.75 30-Sep-00 4.54 5.93 31-Oct-00 4.49 5.80 30-Nov-00 4.46 5.79 31-Dec-00 4.23 5.40 31-Jan-01 3.85 5.37 28-Feb-01 3.82 5.39 30-Mar-01 3.75 5.39 30-Apr-01 3.95 5.77 31-May-01 3.79 5.61 29-Jun-01 3.74 5.57 31-Jul-01 3.59 5.33 31-Aug-01 3.38 5.11 30-Sep-01 3.31 5.31 31-Oct-01 3.14 5.26 30-Nov-01 3.44 5.45 31-Dec-01 3.76 5.64 31-Jan-02 3.45 5.45 28-Feb-02 3.29 5.33 31-Mar-02 3.95 5.71 30-Apr-02 3.46 5.47 31-May-02 3.40 5.53 30-Jun-02 3.19 5.40 31-Jul-02 2.93 5.27 31-Aug-02 2.83 5.14 30-Sep-02 2.53 4.67 31-Oct-02 2.91 5.09 30-Nov-02 2.92 5.29 31-Dec-02 2.59 4.99 31-Jan-03 2.55 5.14 28-Feb-03 2.37 4.97 31-Mar-03 2.50 4.91 30-Apr-03 2.44 4.84 31-May-03 2.12 4.57 30-Jun-03 2.17 4.66 31-Jul-03 2.83 5.45 31-Aug-03 2.82 5.30 30-Sep-03 2.30 4.90 31-Oct-03 2.52 5.01 30-Nov-03 2.48 4.85 31-Dec-03 2.45 4.80 31-Jan-04 2.39 4.73 29-Feb-04 2.19 4.46
DURING THE PERIOD, THE SPREAD BETWEEN THE SHORT- AND LONG-TERM MUNI YIELDS GRADUALLY NARROWED AS LONG-TERM YIELDS FELL FASTER THAN SHORT-TERM YIELDS. Yields, or interest rates, represent the cost of borrowing money. Rapid economic growth, waning investor interest in bonds, an increase in the issuance of bonds, or the expectation of higher inflation can drive rates up, while the opposite conditions can push rates down. Data source: Bloomberg L.P. Schwab Tax-Free Bond Funds 3 MANAGEMENT'S DISCUSSION continued The mixed economic news pushed the domestic bond market into a holding pattern, while investors waited on the sidelines for any of the contributing factors to change. A closer look at the employment numbers revealed that while foreign outsourcing was grabbing the headlines, it was actually a strong increase in productivity that kept job growth slow in the U.S., where fewer workers produced more goods. At the same time, corporate profits have improved, pushing real GDP up to 4.3% year over year. One question on most market watchers' minds is -- will the improved profit picture and rise in productivity be enough to boost hiring? The mixed economic news pushed the domestic bond market into a holding pattern, while investors waited on the sidelines for any of the contributing factors to change. Yields of the benchmark 10-year Treasury bonds, which had been drifting upward at the end of the summer, fell to third-quarter levels in the first two months of 2004. In keeping with their inverse relationship with yields, bond prices ended up a little higher. THE YIELD SPREADS BETWEEN TREASURYS AND ALL GRADES OF CORPORATES STAYED IN THE NARROW RANGE THROUGHOUT THE REPORT PERIOD. We believe that this narrow range indicated that investors felt that most corporations would no longer be negatively affected by serious financial setbacks in the near future. Consequently, the market interpreted the difference in risk between Treasurys and corporate bonds as being substantially less than it had been at the worst part in the cycle a few years ago. YIELD ADVANTAGE OF MUNIS OVER TREASURYS: For Five-Year Bonds; Tax Brackets Shown are the Highest Applicable HIGH DEMAND FOR MUNIS DURING THE PERIOD DROVE UP MUNI PRICES, CAUSING THE YIELDS TO FALL. TREASURY YIELDS ALSO FELL, BUT AT A SLOWER RATE THAN MUNIS. THEREFORE, THE YIELD ADVANTAGE OF MUNIS OVER TREASURYS DECLINED DURING THE PERIOD. 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. Data source: Bloomberg L.P. [LINE GRAPH]
FEDERAL 35.0% BRACKET FEDERAL/CA 41.05% BRACKET 28-Feb-94 0.40 0.73 31-Mar-94 0.66 1.04 29-Apr-94 0.51 0.91 31-May-94 0.38 0.78 30-Jun-94 0.31 0.73 29-Jul-94 0.32 0.72 31-Aug-94 0.29 0.70 30-Sep-94 0.19 0.63 31-Oct-94 0.24 0.70 30-Nov-94 0.31 0.78 30-Dec-94 0.21 0.69 31-Jan-95 0.24 0.70 28-Feb-95 0.43 0.86 31-Mar-95 0.23 0.66 28-Apr-95 0.37 0.78 31-May-95 0.55 0.91 30-Jun-95 0.69 1.05 31-Jul-95 0.40 0.77 31-Aug-95 0.37 0.73 29-Sep-95 0.39 0.75 31-Oct-95 0.45 0.81 30-Nov-95 0.56 0.90 29-Dec-95 0.64 0.97 31-Jan-96 0.69 1.00 29-Feb-96 0.36 0.71 29-Mar-96 0.42 0.79 30-Apr-96 0.32 0.71 31-May-96 0.33 0.73 28-Jun-96 0.41 0.80 31-Jul-96 0.29 0.69 30-Aug-96 0.20 0.61 30-Sep-96 0.28 0.67 31-Oct-96 0.46 0.82 29-Nov-96 0.39 0.74 31-Dec-96 0.21 0.59 31-Jan-97 0.35 0.73 28-Feb-97 0.19 0.57 31-Mar-97 0.22 0.63 30-Apr-97 0.40 0.80 30-May-97 0.37 0.77 30-Jun-97 0.26 0.65 31-Jul-97 0.27 0.62 29-Aug-97 0.30 0.67 30-Sep-97 0.32 0.68 31-Oct-97 0.45 0.80 28-Nov-97 0.37 0.73 31-Dec-97 0.35 0.69 30-Jan-98 0.54 0.87 27-Feb-98 0.40 0.74 31-Mar-98 0.44 0.78 30-Apr-98 0.57 0.91 29-May-98 0.48 0.82 30-Jun-98 0.55 0.88 31-Jul-98 0.50 0.83 31-Aug-98 0.75 1.04 30-Sep-98 1.03 1.29 30-Oct-98 0.95 1.21 30-Nov-98 0.82 1.09 31-Dec-98 0.82 1.09 29-Jan-99 0.67 0.95 26-Feb-99 0.31 0.62 31-Mar-99 0.54 0.85 30-Apr-99 0.41 0.73 31-May-99 0.37 0.71 30-Jun-99 0.72 1.06 30-Jul-99 0.55 0.90 31-Aug-99 0.58 0.93 30-Sep-99 0.71 1.06 29-Oct-99 0.76 1.11 30-Nov-99 0.58 0.95 31-Dec-99 0.60 0.98 31-Jan-00 0.60 1.00 29-Feb-00 0.65 1.05 31-Mar-00 0.75 1.13 28-Apr-00 0.70 1.10 31-May-00 0.87 1.27 30-Jun-00 0.78 1.15 31-Jul-00 0.63 1.00 31-Aug-00 0.59 0.95 30-Sep-00 0.74 1.09 31-Oct-00 0.71 1.07 30-Nov-00 0.93 1.26 31-Dec-00 0.99 1.29 31-Jan-01 0.75 1.04 28-Feb-01 0.79 1.07 30-Mar-01 0.79 1.06 30-Apr-01 0.77 1.07 31-May-01 0.60 0.89 29-Jun-01 0.52 0.82 31-Jul-01 0.65 0.92 31-Aug-01 0.53 0.80 30-Sep-01 0.84 1.07 31-Oct-01 0.88 1.09 30-Nov-01 0.80 1.04 31-Dec-01 0.96 1.22 31-Jan-02 0.61 0.87 28-Feb-02 0.57 0.82 31-Mar-02 0.83 1.12 30-Apr-02 0.60 0.86 31-May-02 0.57 0.83 30-Jun-02 0.57 0.81 31-Jul-02 0.69 0.90 31-Aug-02 0.74 0.93 30-Sep-02 0.86 1.02 31-Oct-02 1.14 1.30 30-Nov-02 0.79 0.99 31-Dec-02 0.81 0.98 31-Jan-03 0.64 0.82 28-Feb-03 0.64 0.80 31-Mar-03 0.74 0.90 30-Apr-03 0.65 0.82 31-May-03 0.63 0.77 30-Jun-03 0.60 0.75 31-Jul-03 0.74 0.93 31-Aug-03 0.57 0.78 30-Sep-03 0.46 0.63 31-Oct-03 0.41 0.61 30-Nov-03 0.30 0.50 31-Dec-03 0.34 0.53 31-Jan-04 0.35 0.54 29-Feb-04 0.28 0.46
4 Schwab Tax-Free Bond Funds PERFORMANCE AT A GLANCE Total return for the six months ended 2/29/04 THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND ............. 4.00% Benchmark ...................... 2.55% Fund Category 1 ................ 2.39% Performance Details ............ page 7 SCHWAB LONG-TERM TAX-FREE BOND FUND ............. 6.34% Benchmark ...................... 6.52% Fund Category 1 ................ 6.61% Performance Details ............ page 9 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND ............. 3.50% Benchmark ...................... 2.55% Fund Category 1 ................ 4.91% Performance Details ............ page 11 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND ............. 6.49% Benchmark ...................... 6.52% Fund Category 1 ................ 6.92% Performance Details ............ page 13
Overall, most sectors of the bond market reported positive total returns for the report period, although they lagged equity markets' more robust returns. Corporate bonds continued to lead the pack in terms of total returns for the period. Munis also did well, with yields nearing those of Treasurys. ALL OF THE FUNDS POSTED NET GAINS AND MET THE GOAL OF PROVIDING TAX-FREE INCOME. We continued to focus on high-quality bonds, with at least 70% of each fund's assets in the top two credit categories at the end of the period. At the beginning of the period, there was strong investor demand for munis, which were relatively cheap versus Treasurys. At that time, when munis were so attractive, we extended the average maturities of our holdings. Later in the period, when munis started to outperform Treasurys, we started shortening up the maturity of all our bond funds. In so doing, we kept the volatility low. It was a challenging credit environment. Investors were concerned about credit quality of several states, as revenues from income taxes declined significantly due to reduced payrolls and stock-related income. The state with the most widely publicized budget problems was California, where bonds were on a bit of a roller-coaster ride. When supply was low and there was uncertainty, such as that surrounding the gubernatorial recall, spreads widened. On the flip side, when supply was ample and when it became fairly obvious who would win the election, spreads tightened. Taking advantage of this situation, our credit group, with extensive knowledge of the many hundreds of California bond issuers, was able to identify bonds that offered attractive yields without exposing shareholders to undue credit risks. All fund and index figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Expenses may be partially absorbed by fund management. Without these reductions, the fund's total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. A portion of income may be subject to the alternative minimum tax (AMT) and, for the national funds, state and local income tax as well. 1 Source for category information: Morningstar, Inc. Schwab Tax-Free Bond Funds 5 Our intent was to take advantage of the attractiveness of California bonds relative to other bonds and the strategy allowed us to realize price appreciation during the period. In terms of credit, some of the higher-quality AAA- and AA-rated names continued to be popular. As to sector performance, our avoidance of tobacco and unenhanced airline and airport bonds which helped us in the earlier report period, came back to hurt us in the most recent period as the bonds rebounded late in 2003. THE SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND and SCHWAB LONG-TERM TAX-FREE BOND FUND did well, with the Schwab Short/Intermediate Fund outperforming its benchmark, and the Schwab Long-Term Fund closely tracking its benchmark. Within these funds, we continued to hold California General Obligation bonds. When we anticipated that the bonds would get cheaper based on supply, we reduced our holdings. Our intent was to take advantage of the attractiveness of California bonds relative to other bonds and the strategy allowed us to realize price appreciation during the period. As to the weighted average-maturity front, as rates fell, we shortened our maturity over the course of the period. In the SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND and SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND, we continued to do well. The California Short/Intermediate Fund outperformed its benchmark, while the California Long-Term Fund's results were in line with its benchmark. Similar to the rest of the nation, California enjoyed a strong fourth quarter, following several bad years. This helped to boost revenues, though not enough in California for the state to pass any money down to local governments. And when the growth slowed, the revenue problems remained. Nonetheless, we were able to capitalize on the volatility in the California bond market. Nothing in this report represents a recommendation of a security by the investment adviser. Manager views and portfolio holdings may have changed since the report date. 6 Schwab Tax-Free Bond Funds SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND PERFORMANCE as of 2/29/04 AVERAGE ANNUAL TOTAL RETURNS 1,2 This bar chart compares performance of the fund with its benchmark and Morningstar category. [BAR CHART]
Benchmark: Fund Category: LEHMAN BROTHERS MORNINGSTAR 3-YEAR MUNICIPAL MUNICIPAL FUND BOND INDEX SHORT BOND 6 MONTHS 4.00% 2.55% 2.39% 1 YEAR 3.93% 2.92% 2.61% 5 YEARS 4.63% 4.85% 3.96% 10 YEARS 4.58% 4.99% 4.26%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1 This graph shows performance over ten years of a hypothetical $10,000 investment in the fund, compared with a similar investment in its benchmark. $15,656 FUND $16,290 LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX [LINE GRAPH]
LEHMAN BROTHERS 3-YEAR MUNICIPAL FUND BOND INDEX 28-Feb-94 10000 10000 31-Mar-94 9814 9879 30-Apr-94 9873 9938 31-May-94 9915 9984 30-Jun-94 9904 9987 31-Jul-94 9995 10070 31-Aug-94 10016 10106 30-Sep-94 9966 10080 31-Oct-94 9909 10056 30-Nov-94 9840 10038 31-Dec-94 9937 10082 31-Jan-95 10032 10165 28-Feb-95 10145 10272 31-Mar-95 10233 10364 30-Apr-95 10268 10400 31-May-95 10450 10559 30-Jun-95 10453 10584 31-Jul-95 10552 10696 31-Aug-95 10641 10780 30-Sep-95 10675 10810 31-Oct-95 10733 10862 30-Nov-95 10810 10931 31-Dec-95 10858 10977 31-Jan-96 10933 11063 29-Feb-96 10914 11065 31-Mar-96 10865 11038 30-Apr-96 10859 11052 31-May-96 10864 11062 30-Jun-96 10921 11128 31-Jul-96 10990 11189 31-Aug-96 10994 11206 30-Sep-96 11063 11274 31-Oct-96 11146 11353 30-Nov-96 11249 11459 31-Dec-96 11242 11465 31-Jan-97 11277 11515 28-Feb-97 11334 11571 31-Mar-97 11273 11511 30-Apr-97 11310 11561 31-May-97 11406 11654 30-Jun-97 11466 11723 31-Jul-97 11617 11863 31-Aug-97 11588 11839 30-Sep-97 11661 11924 31-Oct-97 11711 11977 30-Nov-97 11738 12011 31-Dec-97 11823 12093 31-Jan-98 11894 12173 28-Feb-98 11906 12198 31-Mar-98 11926 12218 30-Apr-98 11896 12201 31-May-98 12007 12314 30-Jun-98 12047 12356 31-Jul-98 12076 12401 31-Aug-98 12187 12521 30-Sep-98 12287 12601 31-Oct-98 12329 12662 30-Nov-98 12353 12692 31-Dec-98 12388 12722 31-Jan-99 12507 12838 28-Feb-99 12483 12852 31-Mar-99 12489 12864 30-Apr-99 12517 12904 31-May-99 12486 12886 30-Jun-99 12367 12808 31-Jul-99 12434 12871 31-Aug-99 12414 12887 30-Sep-99 12454 12936 31-Oct-99 12411 12937 30-Nov-99 12477 12994 31-Dec-99 12451 12973 31-Jan-00 12439 12996 29-Feb-00 12468 13037 31-Mar-00 12589 13103 30-Apr-00 12556 13106 31-May-00 12536 13119 30-Jun-00 12757 13285 31-Jul-00 12852 13393 31-Aug-00 12973 13495 30-Sep-00 12977 13499 31-Oct-00 13048 13575 30-Nov-00 13103 13629 31-Dec-00 13284 13782 31-Jan-01 13452 13990 28-Feb-01 13491 14044 31-Mar-01 13577 14143 30-Apr-01 13501 14121 31-May-01 13611 14250 30-Jun-01 13679 14314 31-Jul-01 13789 14430 31-Aug-01 13936 14580 30-Sep-01 13976 14653 31-Oct-01 14069 14748 30-Nov-01 13958 14703 31-Dec-01 13871 14688 31-Jan-02 14059 14874 28-Feb-02 14190 14986 31-Mar-02 13970 14763 30-Apr-02 14225 14980 31-May-02 14278 15067 30-Jun-02 14412 15196 31-Jul-02 14548 15315 31-Aug-02 14684 15413 30-Sep-02 14860 15534 31-Oct-02 14732 15449 30-Nov-02 14697 15454 31-Dec-02 14928 15676 31-Jan-03 14920 15726 28-Feb-03 15063 15827 31-Mar-03 15057 15808 30-Apr-03 15120 15851 31-May-03 15368 15973 30-Jun-03 15305 15947 31-Jul-03 14960 15804 31-Aug-03 15055 15884 30-Sep-03 15389 16123 31-Oct-03 15312 16047 30-Nov-03 15377 16063 31-Dec-03 15443 16097 31-Jan-04 15494 16153 29-Feb-04 15656 16290
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. Schwab Tax-Free Bond Funds 7 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND FUND FACTS as of 2/29/04 STATISTICS NUMBER OF HOLDINGS 66 -------------------------------------------------------------------------------- FUND CATEGORY 1 Interest Rate Sensitivity Short Credit Quality High -------------------------------------------------------------------------------- 30-DAY SEC YIELD 2 1.70% -------------------------------------------------------------------------------- TAXABLE-EQUIVALENT YIELD 3 2.62% -------------------------------------------------------------------------------- 12-MONTH DISTRIBUTION YIELD 2 2.80% -------------------------------------------------------------------------------- WEIGHTED AVERAGE MATURITY 4.0 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE DURATION 3.5 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE CREDIT QUALITY AAA -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 4 4% --------------------------------------------------------------------------------
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. PORTFOLIO COMPOSITION These charts show three different views of the fund's portfolio: by type of security, credit quality of the security and remaining maturity. All figures are shown as a percentage of the fund's investments. BY SECURITY TYPE [PIE CHART] 55.5% REVENUE BONDS 18.3% GENERAL OBLIGATION BONDS 9.4% CERTIFICATES OF PARTICIPATION 8.7% VARIABLE RATE DEMAND NOTES 5.9% REVENUE ANTICIPATION WARRANTS 1.0% SPECIAL TAX BONDS 1.0% PUT BONDS 0.2% OTHER INVESTMENT COMPANIES BY CREDIT QUALITY 5 [PIE CHART] 68.8% AAA 15.0% AA 7.9% A 1.0% BBB 7.3% SHORT-TERM RATINGS OR UNRATED SECURITIES BY MATURITY [PIE CHART] 18.7% 0-6 MONTHS 12.1% 7-36 MONTHS 29.5% 37-60 MONTHS 39.7% MORE THAN 60 MONTHS Portfolio holdings may have changed since the report date. 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 2/29/04 and is not a precise indication of risk or performance -- past, present or future. Definitions of fund 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. 2 The yield does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 3 This is the taxable-equivalent 30-day SEC yield for a hypothetical investor in the highest federal tax bracket (35.00%). Your tax rate may be different. 4 Not annualized. 5 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 8 Schwab Tax-Free Bond Funds SCHWAB LONG-TERM TAX-FREE BOND FUND PERFORMANCE as of 2/29/04 AVERAGE ANNUAL TOTAL RETURNS 1,2 This bar chart compares performance of the fund with its benchmark and Morningstar category. [BAR CHART]
Benchmark: Fund Category: LEHMAN BROTHERS MORNINGSTAR FUND GENERAL MUNICIPAL MUNICIPAL NATIONAL BOND INDEX LONG BOND 6 MONTHS 6.34% 6.52% 6.61% 1 YEAR 6.29% 6.30% 6.06% 5 YEARS 5.72% 6.10% 4.87% 10 YEARS 6.06% 6.40% 5.39%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1 This graph shows performance over ten years of a hypothetical $10,000 investment in the fund, compared with a similar investment in its benchmark. $18,018 FUND $18,613 LEHMAN BROTHERS GENERAL MUNICIPAL BOND INDEX [LINE GRAPH]
LEHMAN BROTHERS GENERAL MUNICIPAL FUND BOND INDEX 28-Feb-94 10000 10000 31-Mar-94 9572 9593 30-Apr-94 9631 9674 31-May-94 9730 9758 30-Jun-94 9642 9698 31-Jul-94 9832 9881 31-Aug-94 9854 9915 30-Sep-94 9687 9770 31-Oct-94 9453 9596 30-Nov-94 9208 9423 31-Dec-94 9454 9630 31-Jan-95 9801 9905 28-Feb-95 10095 10193 31-Mar-95 10213 10310 30-Apr-95 10185 10323 31-May-95 10571 10652 30-Jun-95 10409 10559 31-Jul-95 10498 10659 31-Aug-95 10618 10794 30-Sep-95 10694 10862 31-Oct-95 10866 11020 30-Nov-95 11037 11202 31-Dec-95 11168 11310 31-Jan-96 11212 11396 29-Feb-96 11105 11318 31-Mar-96 10969 11174 30-Apr-96 10927 11142 31-May-96 10920 11138 30-Jun-96 11073 11259 31-Jul-96 11175 11362 31-Aug-96 11134 11359 30-Sep-96 11336 11518 31-Oct-96 11485 11649 30-Nov-96 11698 11862 31-Dec-96 11635 11812 31-Jan-97 11617 11834 28-Feb-97 11729 11943 31-Mar-97 11519 11784 30-Apr-97 11660 11883 31-May-97 11849 12062 30-Jun-97 11976 12191 31-Jul-97 12359 12528 31-Aug-97 12177 12411 30-Sep-97 12353 12558 31-Oct-97 12440 12639 30-Nov-97 12547 12713 31-Dec-97 12780 12899 31-Jan-98 12911 13032 28-Feb-98 12887 13036 31-Mar-98 12919 13047 30-Apr-98 12851 12989 31-May-98 13083 13194 30-Jun-98 13133 13245 31-Jul-98 13175 13278 31-Aug-98 13371 13484 30-Sep-98 13528 13653 31-Oct-98 13507 13653 30-Nov-98 13555 13701 31-Dec-98 13564 13735 31-Jan-99 13723 13898 28-Feb-99 13632 13837 31-Mar-99 13664 13857 30-Apr-99 13678 13891 31-May-99 13533 13811 30-Jun-99 13220 13612 31-Jul-99 13224 13661 31-Aug-99 12924 13551 30-Sep-99 12861 13557 31-Oct-99 12571 13410 30-Nov-99 12762 13553 31-Dec-99 12578 13451 31-Jan-00 12475 13393 29-Feb-00 12681 13549 31-Mar-00 13116 13845 30-Apr-00 12986 13764 31-May-00 12859 13692 30-Jun-00 13311 14055 31-Jul-00 13515 14250 31-Aug-00 13772 14470 30-Sep-00 13638 14394 31-Oct-00 13859 14551 30-Nov-00 14023 14662 31-Dec-00 14535 15024 31-Jan-01 14561 15173 28-Feb-01 14598 15221 31-Mar-01 14729 15358 30-Apr-01 14521 15193 31-May-01 14665 15357 30-Jun-01 14791 15459 31-Jul-01 15032 15688 31-Aug-01 15326 15947 30-Sep-01 15224 15893 31-Oct-01 15437 16082 30-Nov-01 15308 15947 31-Dec-01 15087 15795 31-Jan-02 15389 16069 28-Feb-02 15571 16263 31-Mar-02 15272 15944 30-Apr-02 15577 16255 31-May-02 15679 16354 30-Jun-02 15838 16528 31-Jul-02 16060 16741 31-Aug-02 16282 16942 30-Sep-02 16692 17313 31-Oct-02 16454 17026 30-Nov-02 16377 16954 31-Dec-02 16733 17312 31-Jan-03 16707 17268 28-Feb-03 16951 17510 31-Mar-03 17022 17521 30-Apr-03 17154 17636 31-May-03 17573 18049 30-Jun-03 17461 17971 31-Jul-03 16820 17342 31-Aug-03 16943 17473 30-Sep-03 17476 17986 31-Oct-03 17367 17896 30-Nov-03 17532 18082 31-Dec-03 17656 18233 31-Jan-04 17761 18336 29-Feb-04 18018 18613
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 Fund expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the fund's total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. Schwab Tax-Free Bond Funds 9 SCHWAB LONG-TERM TAX-FREE BOND FUND FUND FACTS as of 2/29/04 STATISTICS NUMBER OF HOLDINGS 47 -------------------------------------------------------------------------------- FUND CATEGORY 1 -------------------------------------------------------------------------------- Interest Rate Sensitivity Long Credit Quality High -------------------------------------------------------------------------------- 30-DAY SEC YIELD 2 3.61% -------------------------------------------------------------------------------- 30-DAY SEC YIELD - NO WAIVER 3 3.60% -------------------------------------------------------------------------------- TAXABLE-EQUIVALENT YIELD 4 5.55% -------------------------------------------------------------------------------- 12-MONTH DISTRIBUTION YIELD 2 3.90% -------------------------------------------------------------------------------- WEIGHTED AVERAGE MATURITY 12.7 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE DURATION 7.1 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE CREDIT QUALITY AAA -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 5 5% --------------------------------------------------------------------------------
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. PORTFOLIO COMPOSITION These charts show three different views of the fund's portfolio: by type of security, credit quality of the security and remaining maturity. All figures are shown as a percentage of the fund's investments. BY SECURITY TYPE [PIE CHART] 65.0% REVENUE BONDS 21.3% GENERAL OBLIGATION BONDS 8.1% VARIABLE RATE DEMAND NOTES 5.4% CERTIFICATES OF PARTICIPATION 0.2% OTHER INVESTMENT COMPANIES BY CREDIT QUALITY 6 [PIE CHART] 83.0% AAA 8.7% AA 4.4% A 3.7% BBB 0.2% SHORT-TERM RATINGS OR UNRATED SECURITIES BY MATURITY [PIE CHART] 8.3% 0-1 YEAR 16.1% 2-10 YEARS 67.3% 11-20 YEARS 8.3% 21-30 YEARS Portfolio holdings may have changed since the report date. 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 2/29/04 and is not a precise indication of risk or performance -- past, present or future. Definitions of fund 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. 2 Fund expenses have been partially absorbed by CSIM and Schwab. The yield does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 3 Yield if fund expenses had not been partially absorbed by CSIM and Schwab. 4 This is the taxable-equivalent 30-day SEC yield for a hypothetical investor in the highest federal tax bracket (35.00%). Your tax rate may be different. 5 Not annualized. 6 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 10 Schwab Tax-Free Bond Funds SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND PERFORMANCE as of 2/29/04 AVERAGE ANNUAL TOTAL RETURNS 1,2 This bar chart compares performance of the fund with its benchmark and Morningstar category. [BAR CHART]
Benchmark: Fund Category: LEHMAN BROTHERS MORNINGSTAR 3-YEAR MUNICIPAL MUNICIPAL CALIFORNIA FUND BOND INDEX INTERMEDIATE/SHORT BOND 6 MONTHS 3.50% 2.55% 4.91% 1 YEAR 3.69% 2.92% 4.38% 5 YEARS 4.45% 4.85% 4.81% 10 YEARS 4.58% 4.99% 5.10%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1 This graph shows performance over ten years of a hypothetical $10,000 investment in the fund, compared with a similar investment in its benchmark. $15,653 FUND $16,290 LEHMAN BROTHERS 3-YEAR MUNICIPAL BOND INDEX [LINE GRAPH]
LEHMAN BROTHERS 3-YEAR MUNICIPAL FUND BOND INDEX 28-Feb-94 10000 10000 31-Mar-94 9823 9879 30-Apr-94 9872 9938 31-May-94 9904 9984 30-Jun-94 9885 9987 31-Jul-94 9985 10070 31-Aug-94 10017 10106 30-Sep-94 9979 10080 31-Oct-94 9911 10056 30-Nov-94 9802 10038 31-Dec-94 9860 10082 31-Jan-95 9979 10165 28-Feb-95 10126 10272 31-Mar-95 10218 10364 30-Apr-95 10233 10400 31-May-95 10438 10559 30-Jun-95 10421 10584 31-Jul-95 10533 10696 31-Aug-95 10634 10780 30-Sep-95 10692 10810 31-Oct-95 10773 10862 30-Nov-95 10852 10931 31-Dec-95 10891 10977 31-Jan-96 10958 11063 29-Feb-96 10951 11065 31-Mar-96 10902 11038 30-Apr-96 10919 11052 31-May-96 10926 11062 30-Jun-96 10984 11128 31-Jul-96 11055 11189 31-Aug-96 11071 11206 30-Sep-96 11142 11274 31-Oct-96 11217 11353 30-Nov-96 11321 11459 31-Dec-96 11316 11465 31-Jan-97 11354 11515 28-Feb-97 11412 11571 31-Mar-97 11340 11511 30-Apr-97 11391 11561 31-May-97 11489 11654 30-Jun-97 11561 11723 31-Jul-97 11704 11863 31-Aug-97 11685 11839 30-Sep-97 11759 11924 31-Oct-97 11788 11977 30-Nov-97 11828 12011 31-Dec-97 11903 12093 31-Jan-98 11987 12173 28-Feb-98 12012 12198 31-Mar-98 12020 12218 30-Apr-98 11989 12201 31-May-98 12090 12314 30-Jun-98 12117 12356 31-Jul-98 12182 12401 31-Aug-98 12292 12521 30-Sep-98 12402 12601 31-Oct-98 12430 12662 30-Nov-98 12467 12692 31-Dec-98 12478 12722 31-Jan-99 12586 12838 28-Feb-99 12586 12852 31-Mar-99 12604 12864 30-Apr-99 12619 12904 31-May-99 12598 12886 30-Jun-99 12501 12808 31-Jul-99 12567 12871 31-Aug-99 12557 12887 30-Sep-99 12621 12936 31-Oct-99 12574 12937 30-Nov-99 12638 12994 31-Dec-99 12560 12973 31-Jan-00 12622 12996 29-Feb-00 12674 13037 31-Mar-00 12782 13103 30-Apr-00 12720 13106 31-May-00 12763 13119 30-Jun-00 12958 13285 31-Jul-00 13092 13393 31-Aug-00 13225 13495 30-Sep-00 13189 13499 31-Oct-00 13272 13575 30-Nov-00 13315 13629 31-Dec-00 13470 13782 31-Jan-01 13680 13990 28-Feb-01 13680 14044 31-Mar-01 13742 14143 30-Apr-01 13613 14121 31-May-01 13777 14250 30-Jun-01 13846 14314 31-Jul-01 13982 14430 31-Aug-01 14144 14580 30-Sep-01 14143 14653 31-Oct-01 14263 14748 30-Nov-01 14192 14703 31-Dec-01 14129 14688 31-Jan-02 14291 14874 28-Feb-02 14382 14986 31-Mar-02 14163 14763 30-Apr-02 14368 14980 31-May-02 14464 15067 30-Jun-02 14558 15196 31-Jul-02 14667 15315 31-Aug-02 14803 15413 30-Sep-02 15007 15534 31-Oct-02 14782 15449 30-Nov-02 14791 15454 31-Dec-02 14996 15676 31-Jan-03 14979 15726 28-Feb-03 15096 15827 31-Mar-03 15105 15808 30-Apr-03 15171 15851 31-May-03 15365 15973 30-Jun-03 15288 15947 31-Jul-03 15027 15804 31-Aug-03 15124 15884 30-Sep-03 15405 16123 31-Oct-03 15344 16047 30-Nov-03 15382 16063 31-Dec-03 15449 16097 31-Jan-04 15501 16153 29-Feb-04 15653 16290
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. Schwab Tax-Free Bond Funds 11 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND FUND FACTS as of 2/29/04 STATISTICS NUMBER OF HOLDINGS 73 -------------------------------------------------------------------------------- FUND CATEGORY 1 Interest Rate Sensitivity Short Credit Quality High -------------------------------------------------------------------------------- 30-DAY SEC YIELD 2 1.82% -------------------------------------------------------------------------------- TAXABLE-EQUIVALENT YIELD 3 3.09% -------------------------------------------------------------------------------- 12-MONTH DISTRIBUTION YIELD 2 2.93% -------------------------------------------------------------------------------- WEIGHTED AVERAGE MATURITY 4.2 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE DURATION 3.3 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE CREDIT QUALITY AA -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 4 9% --------------------------------------------------------------------------------
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. PORTFOLIO COMPOSITION These charts show three different views of the fund's portfolio: by type of security, credit quality of the security and remaining maturity. All figures are shown as a percentage of the fund's investments. BY SECURITY TYPE [PIE CHART] 56.5% REVENUE BONDS 15.1% CERTIFICATES OF PARTICIPATION 13.2% GENERAL OBLIGATION BONDS 5.1% REVENUE ANTICIPATION WARRANTS 4.6% VARIABLE RATE DEMAND NOTES 3.4% TAX ALLOCATION BONDS 1.5% PUT BONDS 0.6% SPECIAL TAX BONDS BY CREDIT QUALITY 5 [PIE CHART] 58.9% AAA 17.3% AA 15.6% A 3.1% BBB 5.1% SHORT-TERM RATINGS OR UNRATED SECURITIES BY MATURITY [PIE CHART] 14.9% 0-6 MONTHS 26.4% 7-36 MONTHS 16.0% 37-60 MONTHS 42.7% MORE THAN 60 MONTHS Portfolio holdings may have changed since the report date. 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 2/29/04 and is not a precise indication of risk or performance -- past, present or future. Definitions of fund 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. 2 The yield does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 3 This is the taxable-equivalent 30-day SEC yield for a hypothetical investor in the highest combined federal and California tax bracket (41.05%). Your tax rate may be different. 4 Not annualized. 5 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 12 Schwab Tax-Free Bond Funds SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND PERFORMANCE as of 2/29/04 AVERAGE ANNUAL TOTAL RETURNS 1,2 This bar chart compares performance of the fund with its benchmark and Morningstar category. [BAR CHART]
Benchmark: Fund Category: LEHMAN BROTHERS MORNINGSTAR GENERAL MUNICIPAL MUNICIPAL CALIFORNIA FUND BOND INDEX LONG BOND 6 MONTHS 6.49% 6.52% 6.92% 1 YEAR 5.53% 6.30% 5.80% 5 YEARS 5.42% 6.10% 4.92% 10 YEARS 5.95% 6.40% 5.57%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN PERFORMANCE DATA QUOTED. TO OBTAIN MORE CURRENT PERFORMANCE INFORMATION, PLEASE VISIT WWW.SCHWAB.COM/SCHWABFUNDS. PERFORMANCE OF A HYPOTHETICAL $10,000 INVESTMENT 1 This graph shows performance over ten years of a hypothetical $10,000 investment in the fund, compared with a similar investment in its benchmark. $17,841 FUND $18,613 LEHMAN BROTHERS GENERAL MUNICIPAL BOND INDEX [LINE GRAPH]
LEHMAN BROTHERS GENERAL MUNICIPAL FUND BOND INDEX 28-Feb-94 10000 10000 31-Mar-94 9495 9593 30-Apr-94 9564 9674 31-May-94 9645 9758 30-Jun-94 9547 9698 31-Jul-94 9759 9881 31-Aug-94 9774 9915 30-Sep-94 9610 9770 31-Oct-94 9353 9596 30-Nov-94 9131 9423 31-Dec-94 9282 9630 31-Jan-95 9672 9905 28-Feb-95 9993 10193 31-Mar-95 10089 10310 30-Apr-95 10084 10323 31-May-95 10423 10652 30-Jun-95 10251 10559 31-Jul-95 10310 10659 31-Aug-95 10457 10794 30-Sep-95 10543 10862 31-Oct-95 10751 11020 30-Nov-95 10978 11202 31-Dec-95 11126 11310 31-Jan-96 11204 11396 29-Feb-96 11105 11318 31-Mar-96 10920 11174 30-Apr-96 10866 11142 31-May-96 10874 11138 30-Jun-96 11013 11259 31-Jul-96 11135 11362 31-Aug-96 11129 11359 30-Sep-96 11313 11518 31-Oct-96 11438 11649 30-Nov-96 11675 11862 31-Dec-96 11608 11812 31-Jan-97 11617 11834 28-Feb-97 11727 11943 31-Mar-97 11521 11784 30-Apr-97 11635 11883 31-May-97 11851 12062 30-Jun-97 11952 12191 31-Jul-97 12407 12528 31-Aug-97 12237 12411 30-Sep-97 12397 12558 31-Oct-97 12483 12639 30-Nov-97 12577 12713 31-Dec-97 12774 12899 31-Jan-98 12937 13032 28-Feb-98 12928 13036 31-Mar-98 12906 13047 30-Apr-98 12843 12989 31-May-98 13067 13194 30-Jun-98 13105 13245 31-Jul-98 13122 13278 31-Aug-98 13333 13484 30-Sep-98 13528 13653 31-Oct-98 13522 13653 30-Nov-98 13596 13701 31-Dec-98 13593 13735 31-Jan-99 13738 13898 28-Feb-99 13691 13837 31-Mar-99 13726 13857 30-Apr-99 13718 13891 31-May-99 13595 13811 30-Jun-99 13360 13612 31-Jul-99 13344 13661 31-Aug-99 13121 13551 30-Sep-99 13114 13557 31-Oct-99 12806 13410 30-Nov-99 12969 13553 31-Dec-99 12759 13451 31-Jan-00 12630 13393 29-Feb-00 12882 13549 31-Mar-00 13316 13845 30-Apr-00 13159 13764 31-May-00 13105 13692 30-Jun-00 13539 14055 31-Jul-00 13777 14250 31-Aug-00 14127 14470 30-Sep-00 14069 14394 31-Oct-00 14180 14551 30-Nov-00 14327 14662 31-Dec-00 14701 15024 31-Jan-01 14785 15173 28-Feb-01 14812 15221 31-Mar-01 14930 15358 30-Apr-01 14673 15193 31-May-01 14855 15357 30-Jun-01 14913 15459 31-Jul-01 15201 15688 31-Aug-01 15594 15947 30-Sep-01 15501 15893 31-Oct-01 15695 16082 30-Nov-01 15615 15947 31-Dec-01 15424 15795 31-Jan-02 15636 16069 28-Feb-02 15799 16263 31-Mar-02 15436 15944 30-Apr-02 15704 16255 31-May-02 15807 16354 30-Jun-02 15937 16528 31-Jul-02 16153 16741 31-Aug-02 16395 16942 30-Sep-02 16860 17313 31-Oct-02 16414 17026 30-Nov-02 16358 16954 31-Dec-02 16686 17312 31-Jan-03 16611 17268 28-Feb-03 16908 17510 31-Mar-03 16923 17521 30-Apr-03 17079 17636 31-May-03 17525 18049 30-Jun-03 17366 17971 31-Jul-03 16704 17342 31-Aug-03 16755 17473 30-Sep-03 17194 17986 31-Oct-03 17123 17896 30-Nov-03 17301 18082 31-Dec-03 17467 18233 31-Jan-04 17546 18336 29-Feb-04 17841 18613
All figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Results for the report period are not annualized. 1 Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 2 Source for category information: Morningstar, Inc. Schwab Tax-Free Bond Funds 13 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND FUND FACTS as of 2/29/04 STATISTICS NUMBER OF HOLDINGS 75 -------------------------------------------------------------------------------- FUND CATEGORY 1 Interest Rate Sensitivity Long Credit Quality High -------------------------------------------------------------------------------- 30-DAY SEC YIELD 2 4.08% -------------------------------------------------------------------------------- TAXABLE-EQUIVALENT YIELD 3 6.92% -------------------------------------------------------------------------------- 12-MONTH DISTRIBUTION YIELD 2 4.12% -------------------------------------------------------------------------------- WEIGHTED AVERAGE MATURITY 16.4 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE DURATION 8.1 yrs -------------------------------------------------------------------------------- WEIGHTED AVERAGE CREDIT QUALITY AA -------------------------------------------------------------------------------- PORTFOLIO TURNOVER RATE 4 14% --------------------------------------------------------------------------------
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. PORTFOLIO COMPOSITION These charts show three different views of the fund's portfolio: by type of security, credit quality of the security and remaining maturity. All figures are shown as a percentage of the fund's investments. BY SECURITY TYPE [PIE CHART] 68.5% REVENUE BONDS 10.5% CERTIFICATES OF PARTICIPATION 9.2% GENERAL OBLIGATION BONDS 5.6% TAX ALLOCATION BONDS 4.4% VARIABLE RATE DEMAND NOTES 1.7% SPECIAL TAX BONDS 0.1% OTHER INVESTMENT COMPANIES BY CREDIT QUALITY 5 [PIE CHART] 64.1% AAA 6.4% AA 9.0% A 20.4% BBB 0.1% SHORT-TERM RATINGS OR UNRATED SECURITIES BY MATURITY [PIE CHART] 5.4% 0-1 YEAR 7.7% 2-10 YEARS 58.0% 11-20 YEARS 25.1% 21-30 YEARS 3.8% MORE THAN 30 YEARS Portfolio holdings may have changed since the report date. 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 2/29/04 and is not a precise indication of risk or performance -- past, present or future. Definitions of fund 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. 2 The yield does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. 3 This is the taxable-equivalent 30-day SEC yield for a hypothetical investor in the highest combined federal and California tax bracket (41.05%). Your tax rate may be different. 4 Not annualized. 5 Based on ratings by Standard & Poor's and Moody's. Where ratings are different, the chart uses the higher rating. 14 Schwab Tax-Free Bond Funds SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
9/1/03- 9/1/02- 9/1/01- 9/1/00- 9/1/99- 9/1/98- 2/29/04* 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 -------------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) -------------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 10.59 10.63 10.42 10.08 10.05 10.26 ----------------------------------------------------------------------------- Income from investment operations: Net investment income 0.15 0.30 0.35 0.39 0.41 0.40 Net realized and unrealized gains or losses 0.27 (0.04) 0.20 0.34 0.03 (0.21) ----------------------------------------------------------------------------- Total income from investment operations 0.42 0.26 0.55 0.73 0.44 0.19 Less distributions: Dividends from net investment income (0.15) (0.30) (0.34) (0.39) (0.41) (0.40) ----------------------------------------------------------------------------- Net asset value at end of period 10.86 10.59 10.63 10.42 10.08 10.05 ----------------------------------------------------------------------------- Total return (%) 4.00 1 2.50 5.37 7.42 4.50 1.86 RATIOS/SUPPLEMENTAL DATA (%) -------------------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net operating expenses 0.63 2 0.60 0.49 0.49 0.50 3 0.49 Gross operating expenses 0.63 2 0.63 0.70 0.73 0.75 0.81 Net investment income 2.83 2 2.83 3.29 3.84 4.11 3.87 Portfolio turnover rate 4 1 11 28 14 11 8 Net assets, end of period ($ x 1,000,000) 172 159 139 109 76 87
* Unaudited. 1 Not annualized. 2 Annualized. 3 The ratio of net operating expenses would have been 0.49% if certain non-routine expenses (proxy fees) had not been included. See financial notes. 15 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO HOLDINGS as of February 29, 2004, 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 ~ Liquidity-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 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.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) ----------------------------------------------------------- 98.7% MUNICIPAL BONDS 161,845 169,968 0.2% OTHER INVESTMENT COMPANIES 267 267 ----------------------------------------------------------- 98.9% TOTAL INVESTMENTS 162,112 170,235 1.1% OTHER ASSETS AND LIABILITIES 1,954 ----------------------------------------------------------- 100.0% NET ASSETS 172,189
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) MUNICIPAL BONDS 98.7% of net assets FIXED-RATE OBLIGATIONS 89.2% ------------------------------------------------------------------------------------------------------------------------- ARIZONA 5.0% ALHAMBRA SCHOOL DISTRICT NO. 68 OF MARICOPA COUNTY + Refunding Bonds, Series 1994A 6.80% 07/01/04 1,485 1,543 + Refunding Bonds, Series 1994A 6.80% 07/01/12 515 535 o+(3) ARIZONA STATE Refunding Bonds, Series 2002B 5.00% 09/01/07 5,000 5,561 PHOENIX CIVIC IMPROVEMENT CORP. Airport Terminal Senior Lien Excise Tax Revenue Refunding Bonds, Series 1998 5.00% 07/01/04 1,000 1,012 ------ 8,651 CALIFORNIA 13.4% ALAMEDA PUBLIC FINANCING AUTHORITY 1997 Revenue Bond Refinancing Revenue Bonds, Series 1999 4.95% 09/02/07 2,065 2,136 CALIFORNIA DEPARTMENT OF WATER RESOURCES Power Supply Revenue Bonds, Series 2002A 5.50% 05/01/10 1,000 1,143 + CALIFORNIA PUBLIC WORKS BOARD UCLA Replacement Hospitals Lease Revenue Bonds, Series 2002A 4.75% 10/01/09 3,005 3,368 ~(1) CALIFORNIA STATE Revenue Anticipation Warrants, Series 2003B 2.00% 06/16/04 10,000 10,017 CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY Kaiser Permanente Project Revenue Bonds, Series 2002D 4.35% 03/01/07 3,000 3,163
16 See financial notes. SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) SANTA CLARA COUNTY FINANCING AUTHORITY Measure B Transportation Improvement Program Special Obligation Bonds, Series 2003 4.00% 08/01/06 3,000 3,170 ------ 22,997 DISTRICT OF COLUMBIA 2.5% +(7) WASHINGTON D.C. CONVENTION CENTER AUTHORITY Dedicated Tax Senior Lien Revenue Bonds, Series 1998 5.00% 10/01/06 4,000 4,358 GEORGIA 4.3% +(9) ATLANTA Airport General Revenue Refunding Bonds, Series 2003RF-A 5.00% 01/01/10 3,660 4,141 GEORGIA STATE General Obligation Bonds, Series 2000D 6.00% 10/01/07 2,865 3,294 ------ 7,435 ILLINOIS 0.6% + CHICAGO PUBLIC BUILDING COMMISSION Board of Education Building Revenue Bonds, Series 1999C 5.50% 02/01/06 1,000 1,079 INDIANA 2.0% + LAKE COUNTY First Mortgage Lease Revenue Bonds, Series 2000 5.25% 08/01/09 2,040 2,332 + MONROE COUNTY Bloomington Hospital, Inc. Hospital Revenue Refunding Bonds, Series 1997 4.60% 05/01/04 1,105 1,111 ------ 3,443 KENTUCKY 2.4% (10) KENTUCKY PROPERTY & BUILDINGS COMMISSION Project No. 71 Revenue Bonds 5.50% 08/01/09 3,500 4,072 LOUISIANA 1.0% o+ NEW ORLEANS Refunding Bonds, Series 1998B 4.50% 12/01/05 1,600 1,688 MASSACHUSETTS 3.0% MASSACHUSETTS STATE General Obligation Refunding Bonds, Series 2001A 5.50% 01/01/11 2,500 2,907 + Consolidated Loan of 2002 Special Obligation Revenue Bonds, Series A 5.00% 06/01/10 2,000 2,283 ------ 5,190 MICHIGAN 4.0% + DETROIT Limited Tax General Obligation Capital Improvement Bonds, Series 2002A 5.00% 04/01/07 1,000 1,100
See financial notes. 17 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO HOLDINGS continued
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) + DETROIT CITY SCHOOL DISTRICT Unlimited Tax General Obligation School Building & Site Improvement Bonds, Series 1998B 5.00% 05/01/04 1,390 1,399 +(8) WAYNE COUNTY Detroit Metropolitan Wayne County Airport Revenue Refunding Bonds, Series 2002D 5.00% 12/01/10 3,900 4,350 ------ 6,849 MISSOURI 1.3% + ST. LOUIS MUNICIPAL FINANCE CORP. Convention Center Project Leasehold Revenue Refunding Bonds, Series 2003 5.25% 07/15/10 2,000 2,312 NEBRASKA 2.2% + AMERICAN PUBLIC ENERGY AUTHORITY Nebraska Public Gas Agency Project Gas Supply Revenue Bonds, Series 1998C 4.00% 09/01/07 3,500 3,757 NEVADA 1.0% + HENDERSON Seven Hills Senior Limited Obligation Refunding Bonds, Series 2001A 4.63% 08/01/11 1,550 1,731 NEW JERSEY 2.3% o+ NEW JERSEY TRANSIT CORP. Federal Transit Administration Grants Series 2000B 5.50% 09/15/07 3,500 3,938 NEW YORK 9.9% + FRANKLIN COUNTY General Obligation Public Improvement Bonds, Series 1998 4.25% 11/01/06 715 768 NEW YORK CITY General Obligation Bonds, Series 1999H 4.75% 03/15/07 3,000 3,247 General Obligation Bonds, Series 2003A 5.25% 08/01/09 1,825 2,059 General Obligation Bonds, Series 2003B 5.25% 08/01/09 1,000 1,128 General Obligation Bonds, Series 2003J 5.00% 06/01/09 2,500 2,787 NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY Future Tax Secured Revenue Bonds, Series 1998B 5.25% 11/15/04 1,300 1,338 +(5) NEW YORK STATE THRUWAY AUTHORITY General Highway & Bridge Trust Fund Revenue Bonds, Series 2003A 5.25% 04/01/12 4,000 4,635 NEW YORK STATE URBAN DEVELOPMENT CORP. Correctional Facility Service Contract Revenue Bonds, Series 1998A 5.00% 01/01/05 1,000 1,032 ------ 16,994
18 See financial notes. SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) NORTH CAROLINA 4.3% + DURHAM COUNTY Enterprise System Revenue Bonds, Series 2002 5.00% 06/01/09 1,495 1,699 NORTH CAROLINA MUNICIPAL POWER AGENCY Catawaba Electric + Revenue Bonds, Series 1995A 5.10% 01/01/07 2,000 2,171 + Revenue Bonds, Series 1999A 5.75% 01/01/09 3,000 3,481 ------ 7,351 OHIO 4.3% OHIO STATE Higher Education Capital Facilities Bonds, Series II-2001A 5.50% 12/01/08 3,000 3,462 Administrative Building Fund Projects State Facilities Bonds, Series 1998A 5.13% 10/01/06 3,580 3,913 ------ 7,375 OREGON 1.7% o+ OREGON STATE Department of Administrative Services Refunding Bonds, Series 2002C 5.00% 11/01/07 2,705 3,018 PENNSYLVANIA 3.4% + PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY Economic Development Revenue Bonds, Series 1994 7.00% 07/01/07 1,000 1,170 +(4) PHILADELPHIA WATER & SEWER Water & Wastewater Revenue Refunding Bonds, Series 2001B 5.50% 11/01/11 4,000 4,722 ------ 5,892 PUERTO RICO 3.3% + PUERTO RICO HIGHWAY & TRANSPORTATION AUTHORITY Revenue Refunding Bonds, Series 2003H 5.00% 07/01/35 2,000 2,251 + PUERTO RICO MUNICIPAL FINANCE AGENCY General Obligation Bonds, Series 1999A 5.50% 08/01/08 3,000 3,440 ------ 5,691 SOUTH CAROLINA 1.9% + CHARLESTON COUNTY Care Alliance Health Services Revenue Bonds, Series 1999A 4.25% 08/15/07 3,000 3,243 TEXAS 8.9% +(2) DALLAS WATER & SEWER UTILITIES Revenue Refunding & Improvement Bonds, Series 2003 5.00% 10/01/10 5,000 5,699 + DENTON UTILITY SYSTEM Revenue Refunding & Improvement Bonds, Series 2001 5.00% 12/01/12 2,030 2,270 FORT WORTH General Purpose Improvement & Refunding Bonds, Series 2001 5.00% 03/01/10 1,090 1,231
See financial notes. 19 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO HOLDINGS continued
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) + HOUSTON PORT AUTHORITY Port Improvement General Obligation Bonds, Series 2001B 5.25% 10/01/10 2,205 2,513 + TARRANT REGIONAL WATER DISTRICT Water Revenue Refunding & Improvement Bonds, Series 2002 5.00% 03/01/10 3,140 3,561 ------ 15,274 WASHINGTON 5.9% + PORT OF SEATTLE Passenger Facility Charge Revenue Bonds, Series 1998B 5.00% 12/01/07 1,395 1,549 + SNOHOMISH COUNTY Refunding Limited General Obligation Bonds 4.50% 12/01/12 1,920 2,092 o+ WASHINGTON STATE Department of Ecology State Building Project Refunding Bonds 4.75% 04/01/12 1,710 1,869 +(6) WASHINGTON STATE PUBLIC POWER SUPPLY SYSTEM Nuclear Project No. 2 Refunding Revenue Bonds, Series 1993A 5.70% 07/01/08 4,000 4,616 ------ 10,126 WISCONSIN 0.6% WISCONSIN HEALTH & EDUCATIONAL FACILITIES AUTHORITY Carroll College, Inc. Project Revenue Bonds, Series 1998 4.80% 10/01/06 1,000 1,063 VARIABLE RATE OBLIGATIONS 9.5% ------------------------------------------------------------------------------------------------------------------------------ CALIFORNIA 2.8% ~+ CALIFORNIA DEPARTMENT OF WATER RESOURCES Power Supply Revenue Bonds, Series 2002B-5 0.97% 03/01/04 3,900 3,900 + IRVINE ASSESSMENT DISTRICT Limited Obligation Improvement Bonds Adjustable Rate Series 0.97% 03/01/04 991 991 ------ 4,891 GEORGIA 0.3% ~+ ATLANTA Water & Wastewater Revenue Bonds, Series 2001C 0.98% 03/01/04 500 500 MISSISSIPPI 2.3% JACKSON COUNTY Chevron U.S.A., Inc. Project Pollution Control Revenue Refunding Bonds, Series 1992 0.98% 03/01/04 4,000 4,000 NEW YORK 1.7% ~+ NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY Water & Sewer System Revenue Bonds, Series 1993C 0.97% 03/01/04 3,000 3,000
20 See financial notes. SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) TEXAS 1.0% GULF COAST WASTE DISPOSAL AUTHORITY Waste Management of Texas, Inc. Brazoria County Project Solid Waste Disposal Revenue Bonds, Series 2003A 2.85% 05/01/04 1,650 1,650 WYOMING 1.4% UINTA COUNTY Chevron U.S.A., Inc. Project Pollution Control Revenue Refunding Bonds, Series 1993 0.98% 03/01/04 2,400 2,400
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) OTHER INVESTMENT COMPANIES 0.2% of net assets PROVIDENT INSTITUTIONAL FUNDS -- MUNI FUND PORTFOLIO 267,148 267
END OF INVESTMENTS. For totals, please see the first page of holdings for this fund. See financial notes. 21 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND Statement of ASSETS AND LIABILITIES As of February 29, 2004; unaudited. All numbers are x 1,000 except NAV. ASSETS --------------------------------------------------------------------------------- Investments, at value $170,235 a Receivables: Fund shares sold 145 Interest 2,057 Prepaid expenses + 19 ----------- TOTAL ASSETS 172,456 LIABILITIES --------------------------------------------------------------------------------- Payables: Fund shares redeemed 132 Dividends to shareholders 99 Investment adviser and administrator fees 4 Transfer agent and shareholder service fees 4 Accrued expenses + 28 ----------- TOTAL LIABILITIES 267 NET ASSETS --------------------------------------------------------------------------------- TOTAL ASSETS 172,456 TOTAL LIABILITIES - 267 ----------- NET ASSETS $172,189 NET ASSETS BY SOURCE Capital received from investors 164,522 Net investment income not yet distributed 19 Net realized capital losses (475) Net unrealized capital gains 8,123 NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $172,189 15,858 $10.86
Unless stated, all numbers are x 1,000. a The amortized cost of the fund's securities was $162,112. Not counting short-term obligations, the fund's security transactions during the period were: Purchases $5,951 Sales/maturities $6,550 The fund's total security transactions with other SchwabFunds during the period were $28,742. FEDERAL TAX DATA ------------------------------------------------------- PORTFOLIO COST $162,093 NET UNREALIZED GAINS AND LOSSES: Gains $8,153 Losses + (11) ----------- $8,142 AS OF AUGUST 31, 2003: UNDISTRIBUTED EARNINGS: Tax-exempt income $402 Long-term capital gains $-- CAPITAL LOSSES UTILIZED $74 UNUSED CAPITAL LOSSES: Expires 08/31 of: 2004 296 2009 146 2010 + 33 ----------- $475
22 See financial notes. SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND Statement of OPERATIONS For September 1, 2003 through February 29, 2004; unaudited. All numbers are x 1,000. INVESTMENT INCOME ------------------------------------------------------------------------------- Interest $2,784 NET REALIZED GAINS AND LOSSES ------------------------------------------------------------------------------- Net realized gains on investments sold -- NET UNREALIZED GAINS AND LOSSES ------------------------------------------------------------------------------- Net unrealized gains on investments 4,025 EXPENSES ------------------------------------------------------------------------------- Investment adviser and administrator fees 241 a Transfer agent and shareholder service fees 201 b Trustees' fees 4 c Custodian and portfolio accounting fees 8 Professional fees 14 Registration fees 18 Shareholder reports 15 Other expenses + 7 ------------ TOTAL EXPENSES 508 d INCREASE IN NET ASSETS FROM OPERATIONS ------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 2,784 TOTAL EXPENSES - 508 ------------ NET INVESTMENT INCOME 2,276 NET UNREALIZED GAINS + 4,025 ------------ INCREASE IN NET ASSETS FROM OPERATIONS $6,301
Unless stated, all numbers are x 1,000. 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. These fees are paid to Charles Schwab & Co. c For the fund's independent trustees only. d CSIM and Schwab have guaranteed that the net operating expenses (excluding interest, taxes and certain non-routine expenses) will not exceed 0.65% of the fund's average daily net assets through November 15, 2004. See financial notes. 23 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers are x 1,000. Figures for current period are unaudited.
OPERATIONS ------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 Net investment income $2,276 $4,438 Net realized gains -- 74 Net unrealized gains or losses + 4,025 (801) ------------------------------ INCREASE IN NET ASSETS FROM OPERATIONS 6,301 3,711 DISTRIBUTIONS PAID ------------------------------------------------------------------------------- Dividends from net investment income $2,274 $4,474
TRANSACTIONS IN FUND SHARES ------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES VALUE SHARES VALUE Shares sold 4,513 $48,561 9,957 $106,591 Shares reinvested 177 1,898 297 3,175 Shares redeemed + (3,875) (41,632) (8,327) (89,036) ----------------------------------------------- NET TRANSACTIONS IN FUND SHARES 815 $8,827 1,927 $20,730
SHARES OUTSTANDING AND NET ASSETS ------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES NET ASSETS SHARES NET ASSETS Beginning of period 15,043 $159,335 13,116 $139,368 Total increase + 815 12,854 1,927 19,967 a ----------------------------------------------- END OF PERIOD 15,858 $172,189 15,043 $159,335 b
Unless stated, all numbers are x 1,000. a Figures for shares represent shares sold plus shares reinvested, minus shares redeemed. 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 $19 and $17 for the current and prior period, respectively. 24 See financial notes. SCHWAB LONG-TERM TAX-FREE BOND FUND FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
9/1/03- 9/1/02- 9/1/01- 9/1/00- 9/1/99- 9/1/98- 2/29/04* 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------------------------ Net asset value at beginning of period 11.04 11.05 10.87 10.24 10.11 11.01 --------------------------------------------------------------------------------- Income from investment operations: Net investment income 0.22 0.45 0.49 0.50 0.50 0.50 Net realized and unrealized gains or losses 0.47 (0.01) 0.17 0.63 0.13 (0.85) --------------------------------------------------------------------------------- Total income from investment operations 0.69 0.44 0.66 1.13 0.63 (0.35) Less distributions: Dividends from net investment income (0.22) (0.45) (0.48) (0.50) (0.50) (0.50) Distributions from net realized gains -- -- -- -- -- (0.05) --------------------------------------------------------------------------------- Total distributions (0.22) (0.45) (0.48) (0.50) (0.50) (0.55) --------------------------------------------------------------------------------- Net asset value at end of period 11.51 11.04 11.05 10.87 10.24 10.11 --------------------------------------------------------------------------------- Total return (%) 6.34 1 4.01 6.24 11.29 6.59 (3.34) RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------------------------ Ratios to average net assets: Net operating expenses 0.65 2 0.62 0.49 0.49 0.50 3 0.49 Gross operating expenses 0.66 2 0.65 0.74 0.74 0.76 0.81 Net investment income 4.03 2 4.06 4.49 4.73 5.11 4.59 Portfolio turnover rate 5 1 22 25 35 25 35 Net assets, end of period ($ x 1,000,000) 87 81 85 88 76 90
* Unaudited. 1 Not annualized. 2 Annualized. 3 The ratio of net operating expenses would have been 0.49% if certain non-routine expenses (proxy fees) had not been included. See financial notes. 25 SCHWAB LONG-TERM TAX-FREE BOND FUND PORTFOLIO HOLDINGS as of February 29, 2004, 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 ~ Liquidity-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 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.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) -------------------------------------------------------------------------------- 98.6% MUNICIPAL BONDS 78,464 86,121 0.1% OTHER INVESTMENT COMPANIES 139 139 -------------------------------------------------------------------------------- 98.7% TOTAL INVESTMENTS 78,603 86,260 1.3% OTHER ASSETS AND LIABILITIES 1,096 -------------------------------------------------------------------------------- 100.0% NET ASSETS 87,356
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) MUNICIPAL BONDS 98.6% of net assets FIXED-RATE OBLIGATIONS 90.6% --------------------------------------------------------------------------------------------------------------------- CALIFORNIA 5.1% CALIFORNIA Various Purpose General Obligation Bonds 5.25% 11/01/17 2,000 2,149 CALIFORNIA DEPARTMENT OF WATER RESOURCES Power Supply Revenue Bonds, Series 2002A 5.88% 05/01/16 2,000 2,290 -------- 4,439 COLORADO 5.3% +(10) COLORADO DEPARTMENT OF TRANSPORTATION Revenue Anticipation Notes, Series 2002B 5.50% 06/15/15 2,000 2,368 DENVER CITY & COUNTY + Airport System Revenue Refunding Bonds, Series 2002E 5.50% 11/15/15 1,000 1,115 + Colorado Convention Center Expansion Project Excise Tax Revenue Bonds, Series 2001A 5.50% 09/01/17 1,000 1,138 -------- 4,621 DISTRICT OF COLUMBIA 2.6% o+ DISTRICT OF COLUMBIA District's Public Safety & Emergency Preparedness Communications Center and Related Technology Series 2003A 5.50% 01/01/17 2,000 2,314 FLORIDA 3.4% +(7) ESCAMBIA COUNTY HEALTH FACILITIES AUTHORITY Ascension Health Credit Group Revenue Bonds, Series 1999A-2 5.75% 11/15/09 2,500 2,955
26 See financial notes. SCHWAB LONG-TERM TAX-FREE BOND FUND
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) GEORGIA 1.5% + FULTON COUNTY DEVELOPMENT AUTHORITY Tuff Morehouse LLC Project Revenue Bonds, Series 2002A 5.50% 02/01/22 1,180 1,309 HAWAII 2.1% + HAWAII General Obligation Bonds, Series 1999CT 5.88% 09/01/09 1,500 1,791 INDIANA 1.2% + MARION COUNTY CONVENTION & RECREATIONAL FACILITIES AUTHORITY Excise Tax Lease Revenue Refunding Senior Bonds, Series 2001A 5.00% 06/01/21 1,000 1,057 KENTUCKY 1.2% + JEFFERSON COUNTY University Medical Center, Inc. Health Facilities Revenue Bonds, Series 1997 5.25% 07/01/22 1,000 1,062 MARYLAND 0.4% MARYLAND DEPARTMENT OF HOUSING & COMMUNITY DEVELOPMENT Housing Revenue Bonds, Series 1996A 5.88% 07/01/16 320 338 MICHIGAN 5.9% DELTA COUNTY ECONOMIC DEVELOPMENT CORP. MeadWestvaco-Escanaba Paper Company Project Environmental Improvement Revenue Refunding Bonds, Series 2002A 6.25% 04/15/27 1,000 1,075 +(6) DETROIT Water Supply System Revenue Refunding Senior Lien Bonds, Series 2003C 5.25% 07/01/16 2,620 2,982 + WAYNE COUNTY COMMUNITY COLLEGE Improvement Bonds, Series 1999 5.50% 07/01/19 1,000 1,125 -------- 5,182 MISSISSIPPI 5.4% + MISSISSIPPI HOSPITAL EQUIPMENT & FACILITIES AUTHORITY Mississippi Baptist Medical Center Revenue Refunding Bonds, Series 1995 6.00% 05/01/13 2,150 2,302 o+(9) WALNUT GROVE CORRECTIONAL AUTHORITY Walnut Grove Correctional Facility Project Series 1999 6.00% 11/01/19 2,000 2,379 -------- 4,681 NEVADA 2.5% + NEVADA STATE DEPARTMENT OF BUSINESS & INDUSTRY Las Vegas Monorail Project First Tier Revenue Bonds, Series 2000 5.63% 01/01/32 2,000 2,220
See financial notes. 27 SCHWAB LONG-TERM TAX-FREE BOND FUND PORTFOLIO HOLDINGS continued
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) NEW YORK 4.3% + METROPOLITAN TRANSPORTATION AUTHORITY Revenue Refunding Bonds, Series A 5.50% 11/15/18 2,000 2,291 NEW YORK CITY General Obligation Bonds, Series 2002G 5.75% 08/01/16 1,325 1,496 -------- 3,787 OREGON 4.5% + COLUMBIA RIVER PEOPLES UTILITY DISTRICT Electric Systems Revenue Obligations, Series 2000B 5.50% 12/01/19 1,180 1,339 +(8) MORROW COUNTY SCHOOL DISTRICT NO. 001 General Obligation Bonds, Series 2001 5.63% 06/15/16 2,235 2,561 -------- 3,900 PENNSYLVANIA 4.2% PENNSYLVANIA HIGHER EDUCATION FACILITIES AUTHORITY University of Pennsylvania Health Services Revenue Bonds, Series 1996A 5.75% 01/01/17 2,000 2,081 + SENECA VALLEY SCHOOL DISTRICT General Obligation Refunding Bonds, Series 1998AA 5.15% 02/15/20 1,500 1,592 -------- 3,673 RHODE ISLAND 0.0% RHODE ISLAND HOUSING & MORTGAGE FINANCE CORP. Homeownership Opportunity Revenue Bonds, Series 10A 6.50% 10/01/22 20 20 TEXAS 17.3% +(5) AUSTIN ELECTRIC WATER & SEWER SYSTEM Revenue Refunding Bonds, Series 1997 5.13% 11/15/16 3,000 3,243 + BRAZOS RIVER AUTHORITY Houston Industries, Inc. Revenue Refunding Bonds, Series 1998A 5.13% 05/01/19 1,750 1,866 + CONROE INDEPENDENT SCHOOL DISTRICT Unlimited Tax School House & Refunding Bonds, Series 1997 5.25% 02/15/21 1,000 1,062 +(2) DALLAS FORT WORTH INTERNATIONAL AIRPORT Joint Revenue Bonds, Series 2000A 6.00% 11/01/24 3,500 3,896 + HARRIS COUNTY HOSPITAL DISTRICT Revenue Refunding Bonds, Series 2000 6.00% 02/15/16 1,000 1,179 + NORTH TEXAS TOLLWAY AUTHORITY Dallas North Tollway System Revenue Refunding Bonds, Series 2003C 5.00% 07/01/08 2,000 2,232 + TEXAS PUBLIC FINANCE AUTHORITY Texas Southern University Revenue Financing System Refunding Bonds, Series 1998A-1 4.75% 11/01/17 1,545 1,615 -------- 15,093
28 See financial notes. SCHWAB LONG-TERM TAX-FREE BOND FUND
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) VERMONT 2.7% + VERMONT EDUCATIONAL & HEALTH BUILDINGS FINANCING AGENCY Fletcher Allen Health Care Project Hospital Revenue Bonds, Series 2000A 6.00% 12/01/23 2,000 2,332 WASHINGTON 19.7% +(3) CLARK COUNTY SCHOOL DISTRICT NO. 117 Unlimited Tax General Obligation Bonds, Series 1999 5.50% 12/01/17 3,000 3,519 KENT SCHOOL DISTRICT NO. 415 Unlimited Tax General Obligation Refunding Bonds, Series 1993A 5.55% 12/01/11 500 589 KING COUNTY (1) Baseball Stadium Limited Tax General Obligation Demand Notes, Series 1997D 5.75% 12/01/11 3,500 4,043 + King Street Center Project Lease Revenue Bonds, Series 1997 5.13% 06/01/17 1,000 1,067 + OCEAN SHORES Water & Sewer Revenue Bonds, Series 2001 5.50% 12/01/21 2,000 2,367 WASHINGTON STATE HEALTH CARE FACILITIES AUTHORITY +(4) Catholic Health Initiatives Revenue Bonds, Series 2000A 6.00% 12/01/20 3,000 3,495 + Swedish Health System Revenue Bonds, Series 1998 5.13% 11/15/18 2,000 2,153 -------- 17,233 WISCONSIN 1.3% + WISCONSIN HEALTH & EDUCATION FACILITIES AUTHORITY Medical College of Wisconsin, Inc. Project Revenue Bonds, Series 1997 5.50% 03/01/17 1,000 1,114 VARIABLE RATE OBLIGATIONS 8.0% -------------------------------------------------------------------------------------------------------------------- CALIFORNIA 2.9% o~ ORANGE COUNTY SANITATION DISTRICT Refunding Bonds, Series 2000A 0.98% 03/01/04 500 500 ~ SOUTHERN CALIFORNIA METROPOLITAN WATER DISTRICT Waterworks Revenue Bonds, Series 2000B-1 0.98% 03/01/04 2,000 2,000 -------- 2,500 GEORGIA 1.4% ~+ ATLANTA Water & Wastewater Revenue Bonds, Series 2001C 0.98% 03/01/04 1,200 1,200 NEW YORK 2.5% ~+ NEW YORK CITY MUNICIPAL WATER FINANCE AUTHORITY Waster & Sewer System Revenue Bonds, Series 1994G 0.98% 03/01/04 2,200 2,200
See financial notes. 29 SCHWAB LONG-TERM TAX-FREE BOND FUND PORTFOLIO HOLDINGS continued
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) WYOMING 1.2% UINTA COUNTY Chevron U.S.A., Inc. Project Pollution Control Revenue Refunding Bonds, Series 1993 0.98% 03/01/04 1,100 1,100
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) OTHER INVESTMENT COMPANIES 0.1% of net assets PROVIDENT INSTITUTIONAL FUNDS -- MUNI FUND PORTFOLIO 139,039 139
END OF INVESTMENTS. For totals, please see the first page of holdings for this fund. 30 See financial notes. SCHWAB LONG-TERM TAX-FREE BOND FUND Statement of ASSETS AND LIABILITIES As of February 29, 2004; unaudited. All numbers are x 1,000 except NAV. ASSETS ------------------------------------------------------------------------------- Investments, at value + $86,260 a Receivables: Fund shares sold 195 Interest 999 Prepaid expenses + 10 ---------- TOTAL ASSETS 87,464 LIABILITIES ------------------------------------------------------------------------------- Payables: Fund shares redeemed 3 Dividends to shareholders 78 Investment adviser and administrator fees 2 Transfer agent and shareholder service fees 2 Accrued expenses + 23 ---------- TOTAL LIABILITIES 108 NET ASSETS ------------------------------------------------------------------------------- TOTAL ASSETS 87,464 TOTAL LIABILITIES - 108 ---------- NET ASSETS $87,356 NET ASSETS BY SOURCE Capital received from investors 81,472 Net investment income not yet distributed 139 Net realized capital losses (1,912) Net unrealized capital gains 7,657 NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $87,356 7,589 $11.51
Unless stated, all numbers are x 1,000. a The amortized cost of the fund's securities was $78,603. Not counting short-term obligations, the fund's security transactions during the period were: Purchases $4,263 Sales/maturities $7,952 The fund's total security transactions with other SchwabFunds during the period were $16,360.
FEDERAL TAX DATA ----------------------------------------------- PORTFOLIO COST $78,470 NET UNREALIZED GAINS AND LOSSES: Gains $7,790 Losses + -- --------- $7,790 AS OF AUGUST 31, 2003: UNDISTRIBUTED EARNINGS: Tax-exempt income $309 Long-term capital gains $ -- CAPITAL LOSS UTILIZED $491 UNUSED CAPITAL LOSSES: Expires 08/31 of: 2008 $111 2009 + 2,253 --------- $2,364
See financial notes. 31 SCHWAB LONG-TERM TAX-FREE BOND FUND Statement of OPERATIONS For September 1, 2003 through February 29, 2004; unaudited. All numbers are x 1,000. INVESTMENT INCOME ------------------------------------------------------------------------------- Interest $1,915 NET REALIZED GAINS AND LOSSES ------------------------------------------------------------------------------- Net realized gains on investments sold 452 NET UNREALIZED GAINS AND LOSSES ------------------------------------------------------------------------------- Net unrealized gains on investments 2,969 EXPENSES ------------------------------------------------------------------------------- Investment adviser and administrator fees 123 a Transfer agent and shareholder service fees 102 b Trustees' fees 4 c Custodian and portfolio accounting fees 5 Professional fees 14 Registration fees 9 Shareholder reports 9 Other expenses + 5 ---------- Total expenses 271 Expense reduction - 5 d ---------- NET EXPENSES 266 INCREASE IN NET ASSETS FROM OPERATIONS ------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 1,915 NET EXPENSES - 266 ---------- NET INVESTMENT INCOME 1,649 NET REALIZED GAINS 452 e NET UNREALIZED GAINS + 2,969 e ---------- INCREASE IN NET ASSETS FROM OPERATIONS $5,070
Unless stated, all numbers are x 1,000. 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. These fees are paid to Charles Schwab & Co. 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 annual operating expenses of this fund through at least November 15, 2004, to 0.65% of average daily net assets. e These add up to a net gain on investments of $3,421. 32 See financial notes. SCHWAB LONG-TERM TAX-FREE BOND FUND Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers are x 1,000. Figures for current period are unaudited.
OPERATIONS ------------------------------------------------------------------------------ 9/1/03-2/29/04 9/1/02-8/31/03 Net investment income $1,649 $3,541 Net realized gains 452 477 Net unrealized gains or losses + 2,969 (474) ---------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 5,070 3,544 DISTRIBUTIONS PAID ------------------------------------------------------------------------------ Dividends from net investment income $1,635 $3,518
TRANSACTIONS IN FUND SHARES ------------------------------------------------------------------------------ 9/1/03-2/29/04 9/1/02-8/31/03 SHARES VALUE SHARES VALUE Shares sold 1,606 $18,196 4,912 $55,091 Shares reinvested 115 1,310 204 2,296 Shares redeemed + (1,500) (16,916) (5,470) (61,388) ---------------------------------------------- NET TRANSACTIONS IN FUND SHARES 221 $2,590 (354) ($4,001)
SHARES OUTSTANDING AND NET ASSETS ------------------------------------------------------------------------------ 9/1/03-2/29/04 9/1/02-8/31/03 SHARES VALUE SHARES VALUE Beginning of period 7,368 $81,331 7,722 $85,306 Total increase or decrease + 221 6,025 (354) (3,975) a ---------------------------------------------- END OF PERIOD 7,589 $87,356 7,368 $81,331 b
Unless stated, all numbers are x 1,000. a Figures for shares represent shares sold plus shares reinvested, minus shares redeemed. 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 $139 and $125 for the current and prior period, respectively. See financial notes. 33 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
9/1/03- 9/1/02- 9/1/01- 9/1/00- 9/1/99- 9/1/98- 2/29/04* 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------------------------ Net asset value at beginning of period 10.57 10.66 10.51 10.22 10.09 10.26 ------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.16 0.32 0.34 0.40 0.39 0.39 Net realized and unrealized gains or losses 0.21 (0.09) 0.15 0.29 0.13 (0.17) ------------------------------------------------------------------------------ Total income from investment operations 0.37 0.23 0.49 0.69 0.52 0.22 Less distributions: Dividends from net investment income (0.16) (0.32) (0.34) (0.40) (0.39) (0.39) ------------------------------------------------------------------------------ Net asset value at end of period 10.78 10.57 10.66 10.51 10.22 10.09 ------------------------------------------------------------------------------ Total return (%) 3.50 1 2.15 4.66 6.95 5.32 2.16 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------------------------ Ratios to average net assets: Net operating expenses 0.61 2 0.58 0.49 0.49 0.50 3 0.49 Gross operating expenses 0.61 2 0.60 0.66 0.67 0.71 0.77 Net investment income 2.97 2 2.96 3.29 3.83 3.91 3.81 Portfolio turnover rate 9 1 11 17 30 42 7 Net assets, end of period ($ x 1,000,000) 175 174 184 145 124 126
* Unaudited. 1 Not annualized. 2 Annualized. 3 The ratio of net operating expenses would have been 0.49% if certain non-routine expenses (proxy fees) had not been included. 34 See financial notes. SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO HOLDINGS as of February 29, 2004, 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 ~ Liquidity-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 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.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) ---------------------------------------------------------------------- 101.8% MUNICIPAL BONDS 169,282 177,690 0.0% OTHER INVESTMENT COMPANIES 3 3 ---------------------------------------------------------------------- 101.8% TOTAL INVESTMENTS 169,285 177,693 (1.8)% OTHER ASSETS AND LIABILITIES (3,175) ---------------------------------------------------------------------- 100.0% NET ASSETS 174,518
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) MUNICIPAL BONDS 101.8% of net assets FIXED-RATE OBLIGATIONS 95.7% -------------------------------------------------------------------------------------------------------------------------- CALIFORNIA 91.8% ALAMEDA COUNTY Refunding & Capital Projects o+ Series 1998A 5.00% 12/01/06 3,480 3,832 o+(2) Series 2001A 5.38% 12/01/09 5,000 5,852 ASSOCIATION OF BAY AREA GOVERNMENTS +(8) Brandeis Hillel Day School Project Revenue Bonds, Series 2001 3.75% 08/01/31 4,000 4,182 + FTA Capital Grant Bart SFO Extension Bonds, Series 2001A 5.00% 06/15/08 630 632 + BURBANK UNIFIED SCHOOL DISTRICT Election of 1997 General Obligation Bonds, Series C 3.00% 08/01/06 1,820 1,896 CALIFORNIA DEPARTMENT OF WATER RESOURCES Power Supply Revenue Bonds, Series 2002A 5.50% 05/01/10 1,315 1,503 + CALIFORNIA EDUCATIONAL FACILITIES AUTHORITY Pooled College & University Projects Revenue Bonds, Series 1997A 5.05% 04/01/05 1,010 1,054 CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY Kaiser Permanente Hospital Revenue Bonds, Series 1998B 5.00% 10/01/08 2,500 2,842 CALIFORNIA POLLUTION CONTROL FINANCE AUTHORITY Waste Management, Inc. Project Solid Waste Disposal Revenue Bonds, Series 2002B 4.45% 07/01/05 2,000 2,068
See financial notes. 35 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO HOLDINGS continued
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) CALIFORNIA STATE =+ Department of Transportation Federal Highway Grant Anticipation Bonds, Series 2004A 4.00% 02/01/07 3,500 3,749 =+ Department of Transportation Federal Highway Grant Anticipation Bonds, Series 2004A 5.00% 02/01/08 1,360 1,521 General Obligation Bonds, Series 1992 6.30% 09/01/06 2,235 2,472 + General Obligation Bonds, Series 1998 5.50% 12/01/11 1,665 1,971 General Obligation Bonds, Series 2001 4.00% 11/01/05 1,000 1,037 General Obligation Bonds, Series 2002 5.25% 02/01/11 3,500 3,900 +(6) General Obligation Refunding Bonds, Series 2002 5.00% 02/01/12 4,000 4,526 ~(1) Revenue Anticipation Warrants, Series 2003B 2.00% 06/16/04 9,000 9,015 CALIFORNIA STATE PUBLIC WORKS BOARD + Energy Efficiency Revenue Refunding Bonds, Series 1998B 4.00% 09/01/06 1,155 1,228 The Regents University of California Lease Revenue Refunding Bonds, Series 1998A 5.25% 12/01/07 2,000 2,230 CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY Kaiser Permanente Project Revenue Bonds, Series 2002D 4.35% 03/01/07 2,000 2,108 + Sherman Oaks Project Revenue Refunding Bonds, Series 1998A 5.00% 08/01/06 2,500 2,716 o St. Joseph Health System Series 1997 5.00% 07/01/04 750 759 o St. Joseph Health System Obligated Group Series 1994 6.50% 07/01/04 2,000 2,076 o The Internext Group Series 1999 4.13% 04/01/04 3,500 3,505 + EL DORADO COUNTY PUBLIC AGENCY FINANCING AUTHORITY Revenue Bonds, Series 1996 5.60% 02/15/12 3,000 3,309 + FONTANA COMMUNITY FACILITIES DISTRICT NO. 2 Senior Special Tax Refunding Bonds, Series 1998A 4.10% 09/01/04 1,120 1,137 FREMONT UNION HIGH SCHOOL DISTRICT Election of 1998 General Obligation Bonds, Series 2000B 5.75% 09/01/08 1,520 1,775 + INGLEWOOD REDEVELOPMENT AGENCY Merged Redeveloped Project Tax Allocation Refunding Bonds, Series 1998A 3.88% 05/01/05 525 542 INTERMODAL CONTAINER TRANSFER FACILITY JOINT POWERS AUTHORITY + Refunding Revenue Bonds, Series 1999A 5.00% 11/01/08 1,210 1,377 + Refunding Revenue Bonds, Series 1999A 5.00% 11/01/09 1,375 1,579 (8) LONG BEACH Harbor Revenue Refunding Bonds, Series 2000A 5.50% 05/15/10 4,000 4,586 +(9) LONG BEACH HARBOR FACILITIES CORP. Revenue Refunding Bonds, Series 1998A 5.50% 05/15/05 3,985 4,178 + LOS ANGELES COMMUNITY REDEVELOPMENT AGENCY Beacon Street, Crenshaw & Pico Union 1 Redevelopment Projects Pooled Financing Revenue Refunding Bonds, Series 1998F 5.00% 09/01/07 810 902
36 See financial notes. SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) LOS ANGELES COUNTY METROPOLITAN TRANSPORTATION AUTHORITY Proposition C Sales Tax Revenue Bonds, Second Series 1992A 6.20% 07/01/04 3,000 3,051 + LOS ANGELES STATE BUILDING AUTHORITY California Department of General Services Lease Revenue Refunding Bonds, Series 1993A 5.63% 05/01/11 3,500 4,108 (4) LOS ANGELES UNIFIED SCHOOL DISTRICT Election of 1997 General Obligation Bonds, Series 2000D 5.50% 07/01/10 4,000 4,685 NORTHERN CALIFORNIA POWER AGENCY Geothermal Project No. 3 Revenue Refunding Bonds, Series 1993A 5.60% 07/01/06 2,000 2,205 OAKLAND Oakland Museum o+ Refunding Bonds, Series 2002A 5.00% 04/01/10 2,015 2,310 o+ Refunding Bonds, Series 2002A 5.00% 04/01/11 1,460 1,673 + OCEANSIDE COMMUNITY DEVELOPMENT COMMISSION Vista del Ora Apartments Multi-Family Rental Housing Revenue Refunding Bonds, Series 2001A 4.45% 04/01/31 1,250 1,330 o+ ORANGE COUNTY Recovery Series 1996A 6.00% 07/01/08 3,000 3,502 + PORT OF OAKLAND Revenue Bonds, Series 2000K 5.50% 11/01/08 3,000 3,422 + RANCHO WATER DISTRICT FINANCING AUTHORITY Refunding Revenue Bonds, Series 1995 5.88% 11/01/10 1,500 1,648 + REDDING JOINT POWERS FINANCING AUTHORITY Electric System Revenue Bonds, Series 1996A 5.50% 06/01/11 2,000 2,223 RIVERSIDE Capital Improvement Projects o+ Series 2003 5.00% 09/01/14 1,470 1,658 o+ Series 2003 5.00% 09/01/15 1,545 1,731 + RIVERSIDE COUNTY ASSET LEASING CORP. County of Riverside Hospital Project Leasehold Revenue Bonds, Series 2003A 5.00% 06/01/09 2,555 2,887 SACRAMENTO FINANCE AUTHORITY Revenue Refunding Bonds, Series 2002 4.50% 07/01/08 2,865 3,136 + SAN BERNARDINO Alta Park/Mountain Vista Apartments Multi-Family Housing Refunding Revenue Bonds, Series 2001A 4.45% 05/01/31 1,300 1,370 SAN FRANCISCO AIRPORTS COMMISSION San Francisco International Airport + Second Series Revenue Bonds, Issue 15A 5.50% 05/01/09 2,000 2,262 + Second Series Revenue Bonds, Issue 22 5.25% 05/01/11 3,065 3,421 SAN FRANCISCO BAY AREA TRANSIT FINANCING AUTHORITY Bridge Toll Notes, Series 1999 5.00% 02/01/07 500 544
See financial notes. 37 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO HOLDINGS continued
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) SAN FRANCISCO STATE UNIVERSITY FOUNDATION, INC. Auxiliary Organization Student Housing Revenue Bonds, Series 1999 4.30% 07/01/05 540 560 Student Housing Revenue Bonds, Series 1999 5.00% 07/01/08 400 442 + SAN JOSE Airport Revenue Refunding Bonds, Series 2002B 5.00% 03/01/11 2,625 2,942 +(3) SAN JOSE REDEVELOPMENT AGENCY Merged Area Redevelopment Project Tax Allocation Bonds, Series 2002 4.00% 08/01/10 5,000 5,442 + SANTA CLARA Insurance Funding Bonds, Series 1987 3.25% 04/01/12 4,000 4,097 SANTA CLARA COUNTY FINANCING AUTHORITY (10) Measure B Transportation Improvement Program Special Obligation Bonds, Series 2003 4.00% 08/01/05 4,000 4,157 + Multi-Facilities Projects Lease Revenue Bonds, Series 2000B 5.50% 05/15/05 3,290 3,463 + VMC Facility Replacement Project Lease Revenue Bonds, Series 1994A 7.75% 11/15/10 1,000 1,311 + TEMECULA VALLEY UNIFIED SCHOOL DISTRICT General Obligation Refunding Bonds, Series 2004 6.00% 08/01/07 1,000 1,148 VERNON Malburg Generating Station Project Electric System Revenue Bonds, Series 2003C 5.00% 04/01/11 1,320 1,422 Electric System Revenue Bonds, Series 2003C 5.25% 04/01/15 1,905 2,023 ------- 160,232 PUERTO RICO 3.9% + PUERTO RICO AQUEDUCT & SEWERAGE AUTHORITY Refunding Bonds, Series 1995 6.00% 07/01/06 3,000 3,318 + PUERTO RICO ELECTRIC POWER AUTHORITY Power Revenue Refunding Bonds, Series 1997CC 5.50% 07/01/08 3,000 3,393 ------- 6,711 VARIABLE RATE OBLIGATIONS 6.1% ------------------------------------------------------------------------------------------------------------------------------ CALIFORNIA 6.1% + CALIFORNIA DEPARTMENT OF WATER RESOURCES Power Supply Revenue Bonds, Series 2002B, Subseries B-2 0.96% 03/01/04 2,100 2,100 o~+ FONTANA UNIFIED SCHOOL DISTRICT School Facility Bridge Funding Program Series 2004B 3.00% 09/01/05 1,250 1,283 + IRVINE RANCH WATER DISTRICT Consolidated General Obligation Bonds, Series 1993 0.98% 03/01/04 500 500 o+ LOS ANGELES American Academy of Dramatic Arts Series 2000A 4.70% 11/01/05 1,300 1,364
38 See financial notes. SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) ORANGE COUNTY SANITATION DISTRICT o~ Refunding Bonds, Series 2000A 0.98% 03/01/04 700 700 o~ Refunding Bonds, Series 2000B 0.98% 03/01/04 600 600 ~(7) SOUTHERN CALIFORNIA METROPOLITAN WATER DISTRICT Waterworks Revenue Bonds, Series 2000B-1 0.98% 03/01/04 4,200 4,200 ------- 10,747
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) OTHER INVESTMENT COMPANIES 0.0% of net assets PROVIDENT INSTITUTIONAL FUNDS -- CALIFORNIA MONEY FUND PORTFOLIO 2,967 3
END OF INVESTMENTS. For totals, please see the first page of holdings for this fund. See financial notes. 39 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND Statement of ASSETS AND LIABILITIES As of February 29, 2004; unaudited. All numbers are x 1,000 except NAV. ASSETS --------------------------------------------------------------------------------- Investments, at value $177,693 a Receivables: Fund shares sold 317 Interest 1,943 Prepaid expenses + 2 ------------ TOTAL ASSETS 179,955 LIABILITIES --------------------------------------------------------------------------------- Payables: Dividends to shareholders 114 Investment bought 5,285 Investment adviser and administrator fees 4 Transfer agent and shareholder service fees 4 Accrued expenses + 30 ------------ TOTAL LIABILITIES 5,437 NET ASSETS --------------------------------------------------------------------------------- TOTAL ASSETS 179,955 TOTAL LIABILITIES - 5,437 ------------ NET ASSETS $174,518 NET ASSETS BY SOURCE Capital received from investors 166,270 Net investment income not yet distributed 28 Net realized capital losses (188) Net unrealized capital gains 8,408 NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $174,518 16,185 $10.78
Unless stated, all numbers are x 1,000. a The amortized cost of the fund's securities was $169,285. Not counting short-term obligations, the fund's security transactions during the period were: Purchases $14,896 Sales/maturities $16,225 The fund's total security transactions with other SchwabFunds during the period were $24,637. FEDERAL TAX DATA ------------------------------------------------------- PORTFOLIO COST $169,257 NET UNREALIZED GAINS AND LOSSES: Gains $8,449 Losses + (13) ----------- $8,436 AS OF AUGUST 31, 2003: UNDISTRIBUTED EARNINGS: Tax-exempt income $458 Long-term capital gains $-- CAPITAL LOSS UTILIZED $141 UNUSED CAPITAL LOSSES: Expires 08/31 of: 2004 $197 2008 + 27 ----------- $224 DEFERRED CAPITAL LOSSES $5
40 See financial notes. SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND Statement of OPERATIONS For September 1, 2003 through February 29, 2004; unaudited. All numbers are x 1,000. INVESTMENT INCOME --------------------------------------------------------------------------------- Interest $3,049 NET REALIZED GAINS AND LOSSES --------------------------------------------------------------------------------- Net realized gains on investments sold 41 NET UNREALIZED GAINS AND LOSSES --------------------------------------------------------------------------------- Net unrealized gains on investments 3,368 EXPENSES --------------------------------------------------------------------------------- Investment adviser and administrator fees 256 a Transfer agent and shareholder service fees 213 b Trustees' fees 4 c Custodian and portfolio accounting fees 8 Professional fees 15 Registration 1 Shareholder reports 15 Other expenses + 7 -------------- TOTAL EXPENSES 519 d INCREASE IN NET ASSETS FROM OPERATIONS --------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 3,049 TOTAL EXPENSES - 519 -------------- NET INVESTMENT INCOME 2,530 NET REALIZED GAINS 41 e NET UNREALIZED GAINS + 3,368 e -------------- INCREASE IN NET ASSETS FROM OPERATIONS $5,939
Unless stated, all numbers are x 1,000. 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. These fees are paid to Charles Schwab & Co. c For the fund's independent trustees only. d CSIM and Schwab have guaranteed that the net operating expenses (excluding interest, taxes and certain non-routine expenses) will not exceed 0.65% of the fund's average daily net assets through November 15, 2004. e These add up to a net gain on investments of $3,409. See financial notes. 41 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers are x 1,000. Figures for current period are unaudited.
OPERATIONS ------------------------------------------------------------------------------------ 9/1/03-2/29/04 9/1/02-8/31/03 Net investment income $2,530 $5,460 Net realized gains 41 136 Net unrealized gains or losses + 3,368 (1,823) --------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 5,939 3,773 DISTRIBUTIONS PAID ------------------------------------------------------------------------------------ Dividends from net investment income $2,527 $5,495
TRANSACTIONS IN FUND SHARES ------------------------------------------------------------------------------------ 9/1/03-2/29/04 9/1/02-8/31/03 SHARES VALUE SHARES VALUE Shares sold 2,308 $24,695 6,749 $72,161 Shares reinvested 196 2,095 362 3,865 Shares redeemed + (2,745) (29,333) (7,905) (84,278) ---------------------------------------------------- NET TRANSACTIONS IN FUND SHARES (241) ($2,543) (794) ($8,252)
SHARES OUTSTANDING AND NET ASSETS ------------------------------------------------------------------------------------ 9/1/03-2/29/04 9/1/02-8/31/03 SHARES NET ASSETS SHARES NET ASSETS Beginning of period 16,426 $173,649 17,220 $183,623 Total increase or decrease + (241) 869 (794) (9,974) a ---------------------------------------------------- END OF PERIOD 16,185 $174,518 16,426 $173,649 b
Unless stated, all numbers are x 1,000. a Figures for shares represent shares sold plus shares reinvested, minus shares redeemed. 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 $28 and $25 for the current and prior period, respectively. 42 See financial notes. SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------------------------------------------------------------ 9/1/03- 9/1/02- 9/1/01- 9/1/00- 9/1/99- 9/1/98- 2/29/04* 8/31/03 8/31/02 8/31/01 8/31/00 8/31/99 PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------------------------ Net asset value at beginning of period 11.45 11.69 11.63 11.06 10.82 11.52 ------------------------------------------------------------------------------ Income from investment operations: Net investment income 0.25 0.49 0.53 0.55 0.55 0.54 Net realized and unrealized gains or losses 0.49 (0.24) 0.05 0.57 0.24 (0.70) ------------------------------------------------------------------------------ Total income from investment operations 0.74 0.25 0.58 1.12 0.79 (0.16) Less distributions: Dividends from net investment income (0.25) (0.49) (0.52) (0.55) (0.55) (0.54) ------------------------------------------------------------------------------ Net asset value at end of period 11.94 11.45 11.69 11.63 11.06 10.82 ------------------------------------------------------------------------------ Total return (%) 6.49 1 2.14 5.14 10.38 7.67 (1.57) RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------------------------ Ratios to average net assets: Net operating expenses 0.61 2 0.58 0.49 0.49 0.50 3 0.49 Gross operating expenses 0.61 2 0.60 0.64 0.65 0.69 0.75 Net investment income 4.27 2 4.16 4.58 4.86 5.19 4.69 Portfolio turnover rate 14 1 29 34 37 36 55 Net assets, end of period ($ x 1,000,000) 195 194 238 215 179 202
* Unaudited. 1 Not annualized. 2 Annualized. 3 The ratio of net operating expenses would have been 0.49% if certain non-routine expenses (proxy fees) had not been included. See financial notes. 43 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND PORTFOLIO HOLDINGS as of February 29, 2004, 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 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.
COST VALUE HOLDINGS BY CATEGORY ($x1,000) ($x1,000) ----------------------------------------------------------------------------- 98.6% MUNICIPAL BONDS 179,451 192,816 0.1% OTHER INVESTMENT COMPANIES 184 184 ----------------------------------------------------------------------------- 98.7% TOTAL INVESTMENTS 179,635 193,000 1.3% OTHER ASSETS AND LIABILITIES 2,454 ----------------------------------------------------------------------------- 100.0% NET ASSETS 195,454
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) MUNICIPAL BONDS 98.6% of net assets FIXED-RATE OBLIGATIONS 94.3% -------------------------------------------------------------------------------------------------------------------- CALIFORNIA 94.3% + ALAMEDA CORRIDOR TRANSPORTATION AUTHORITY Senior Lien Revenue Bonds, Series 1999A 5.13% 10/01/16 1,170 1,292 o+ ALAMEDA COUNTY Alameda Medical Center Project Series 1998 5.38% 06/01/18 3,400 3,749 +(3) ANAHEIM PUBLIC FINANCING AUTHORITY Public Improvements Project Senior Lease Revenue Bonds, Series 1997A 6.00% 09/01/24 5,000 6,012 ASSOCIATION OF BAY AREA GOVERNMENTS + Brandeis Hillel Day School Project Revenue Bonds, Series 2001 3.75% 08/01/31 1,700 1,777 o Lytton Gardens, Inc. Insured Revenue Bonds, Series 1999 6.00% 02/15/30 3,000 3,195 + Redevelopment Agency Pool Tax Allocation Revenue Bonds, Series 1997A-6 5.25% 12/15/17 1,200 1,329 Schools of Sacred Heart - San Francisco Revenue Bonds, Series 2000A 6.45% 06/01/30 1,500 1,616 + BREA OLINDA UNIFIED SCHOOL DISTRICT Election of 1999 General Obligation Bonds, Series 1999A 5.60% 08/01/20 1,000 1,141 BURBANK PUBLIC FINANCE AUTHORITY Golden State Redevelopment Project + Revenue Bonds, Series 2003A 5.25% 12/01/17 2,825 3,208 + Revenue Bonds, Series 2003A 5.25% 12/01/18 2,175 2,449
44 See financial notes. SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) CALIFORNIA DEPARTMENT OF WATER RESOURCES Power Supply Revenue Bonds, Series 2002A 5.75% 5/01/17 3,000 3,395 CALIFORNIA EDUCATIONAL FACILITIES AUTHORITY College of Arts & Crafts Revenue Bonds, Series 2001 5.75% 6/01/25 1,800 1,886 Pepperdine University Revenue Bonds, Series 2000 5.75% 9/15/30 3,000 3,310 CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY Cedars-Sinai Medical Center Revenue Bonds, Series 1999A 6.13% 2/01/19 2,750 2,989 +(4) Children's Hospital - San Diego Insured Hospital Revenue Refunding Bonds, Series 1996 5.38% 7/01/16 5,180 5,627 CALIFORNIA HOUSING FINANCE AGENCY + Home Mortgage Revenue Bonds, Series 1995L 5.90% 8/01/17 425 442 Multi-Unit Rental Housing Revenue Bonds II, Series 1992B 6.70% 8/01/15 1,000 1,007 CALIFORNIA INFRASTRUCTURE & ECONOMIC DEVELOPMENT BANK The J. David Gladstone Institution Project Revenue Bonds, Series 2001 5.50% 0/01/19 1,250 1,371 (5) CALIFORNIA PUBLIC WORKS BOARD DEPARTMENT OF CORRECTIONS Lease Revenue Bonds, Series 2003C 5.50% 6/01/17 5,000 5,473 CALIFORNIA STATE General Obligation Bonds, Series 2000 5.63% 5/01/18 1,000 1,090 Various Purpose General Obligation Bonds 5.25% 1/01/17 4,000 4,298 +(7) Department of Veterans Affairs Home Purchase Revenue Bonds, Series 2002A 5.30% 2/01/21 5,000 5,284 CALIFORNIA STATEWIDE COMMUNITIES DEVELOPMENT AUTHORITY o Cedars-Sinai Medical Center Hospital Revenue, Series 1992 6.50% 8/01/15 365 370 Kaiser Permanente Project Revenue Bonds, Series 2002D 4.35% 3/01/07 2,000 2,108 + Sunnyside/Vermont Project FHA Insured GNMA Collateralized Revenue Bonds, Series 2001A 7.00% 4/20/36 4,000 4,631 o(9) The Internext Group Series 1999 5.38% 4/01/17 5,000 5,116 o CALIFORNIA TRANSIT FINANCE CORP. Sacramento Regional Transit District Series 1992A 6.38% 3/01/05 250 250 + COLTON PUBLIC FINANCE AUTHORITY Special Tax Revenue Bonds, Series 1996 5.45% 9/01/19 3,020 3,291 (8) CONTRA COSTA COUNTY, PUBLIC FINANCING AUTHORITY Multiple Project Areas Tax Allocation Revenue Bonds, Series 2003A 5.63% 8/01/33 5,000 5,202 EAST BAY MUNICIPAL UTILITY DISTRICT Water System Subordinate Revenue Bonds, Series 1998 5.25% 6/01/19 2,600 2,827 o+ ESCONDIDO Revenue Bonds, Series 2000A 6.00% 9/01/31 1,975 2,287
See financial notes. 45 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND PORTFOLIO HOLDINGS continued
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) FONTANA REDEVELOPMENT AGENCY Jurupa Hills Redevelopment Project Tax Allocation Refunding Bonds, Series 1997A 5.50% 10/01/19 3,500 3,715 +(6) FOOTHILL-EASTERN TRANSPORTATION CORRIDOR AGENCY Toll Road Revenue Refunding Bonds, Series 1999 5.13% 01/15/19 5,000 5,427 + HUNTINGTON BEACH Capital Improvement Financing Project Lease Revenue Bonds, Series 2000A 5.50% 09/01/20 1,500 1,692 + INGLEWOOD REDEVELOPMENT AGENCY Merged Redevelopment Project Tax Allocation Revenue Refunding Bonds, Series 1998A 5.25% 05/01/16 1,000 1,156 + LOS ANGELES MUNICIPAL IMPROVEMENT CORP. City of Los Angeles Central Library Project Leasehold Revenue Refunding Bonds, Series 2003A 5.25% 06/01/13 3,730 4,351 + LYNWOOD PUBLIC FINANCING AUTHORITY Public Capital Improvement Project Lease Revenue Refunding Bonds, Series 2003 5.00% 09/01/18 1,000 1,099 OAKLAND JOINT POWER FINANCING AUTHORITY Reassessment Revenue Bonds, Series 1999 5.50% 09/02/24 990 1,068 + OAKLAND REDEVELOPMENT AGENCY Central District Redevelopment Project Subordinated Tax Allocation Bonds, Series 2003 5.50% 09/01/14 1,615 1,868 o+ ORANGE COUNTY Recovery, Series 1996A 5.70% 07/01/10 1,450 1,626 + PORT OF OAKLAND Revenue Bonds, Series 2000K 5.75% 11/01/29 3,500 3,821 RIVERSIDE COUNTY PUBLIC FINANCE AUTHORITY Riverside County Redevelopment Projects Tax Allocation Revenue Bonds, Series 1997A 5.63% 10/01/33 4,905 5,073 SACRAMENTO CITY FINANCE AUTHORITY + California EPA Building Project Lease Revenue Bonds, Series 1998A 5.25% 05/01/19 1,575 1,756 + City Hall & Redevelopment Projects Revenue Bonds, Series 2002A 5.38% 12/01/20 2,875 3,232 + Solid Waste & Redevelopment Projects Capital Improvement Revenue Bonds, Series 1999 5.88% 12/01/29 3,000 3,442 SACRAMENTO COUNTY SANITATION DISTRICT Revenue Bonds, Series 2000A 5.88% 12/01/27 1,000 1,071 + SALINAS VALLEY SOLID WASTE AUTHORITY Revenue Bonds, Series 2002 5.13% 08/01/22 2,210 2,342 SAN DIEGO REDEVELOPMENT AGENCY Horton Plaza Redevelopment Project Subordinate Tax Allocation Bonds, Series 2000 5.80% 11/01/21 2,500 2,705 + SAN DIEGO UNIFIED SCHOOL DISTRICT Election of 1998 General Obligation Bonds, Series 2001C 5.00% 07/01/18 1,730 1,900
46 See financial notes. SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) SAN FRANCISCO AIRPORTS COMMISSION + San Francisco International Airport + Second Series Revenue Bonds, Issue 11 6.20% 05/01/05 2,000 2,138 + Second Series Revenue Bonds, Issue 12B 5.63% 05/01/21 2,000 2,174 + Second Series Revenue Bonds, Issue 22 5.00% 05/01/19 2,000 2,117 + Second Series Revenue Bonds, Issue 30 5.00% 05/01/17 2,000 2,198 SAN FRANCISCO BAY AREA RAPID TRANSIT + Sales Tax Revenue Bonds, Series 1999 5.50% 07/01/26 1,000 1,109 + Sales Tax Revenue Bonds, Series 1999 5.50% 07/01/34 2,500 2,758 SAN FRANCISCO STATE UNIVERSITY Auxilary Organization Student Housing Revenue Bonds, Series 1999 5.20% 07/01/19 1,150 1,219 + SAN LUIS OBISPO COUNTY FINANCE AUTHORITY Lopez Dam Improvement Revenue Bonds, Series 2000A 5.38% 08/01/24 1,000 1,086 +(1) SANTA ANA UNIFIED SCHOOL DISTRICT Election of 1999 General Obligation Bonds, Series 2000 5.70% 08/01/29 6,000 6,600 + SANTA CLARA COUNTY FINANCING AUTHORITY VMC Facility Replacement Project Lease Revenue Bonds, Series 1994A 7.75% 11/15/10 1,460 1,914 + SANTA CLARA REDEVELOPMENT AGENCY Bayshore North Project Tax Allocation Revenue Refunding Bonds 7.00% 07/01/10 1,500 1,801 + SHASTA UNION HIGH SCHOOL DISTRICT General Obligation Bonds, Series 2002 5.25% 08/01/19 1,360 1,515 + SOUTH ORANGE COUNTY PUBLIC FINANCING AUTHORITY Special Tax Revenue Bonds, Series 1999A 5.25% 08/15/18 3,095 3,461 (2) STOCKTON COMMUNITY FACILITIES DISTRICT Mello Roos Community Facilities District No.1 Weston Ranch Special Tax Revenue Bonds, Series 1998A 5.80% 09/01/14 5,875 6,137 + TAFT CITY ELEMENTARY SCHOOL DISTRICT Election of 2001 General Obligation Bonds, Series 2001A 4.90% 08/01/20 1,080 1,151 + TRI CITY HOSPITAL DISTRICT Insured Revenue Refunding Bonds, Series 1996A 5.63% 02/15/17 1,000 1,092 + TRUCKEE PUBLIC FINANCING AUTHORITY Lease Revenue Bonds, Series 2000A 5.88% 11/01/25 1,490 1,697 + UNIVERSITY OF CALIFORNIA UC Davis Medical Center Hospital Revenue Bonds, Series 1996 5.75% 07/01/06 500 558 + VALLEJO Water Improvement Project Revenue Refunding Bonds, Series 1996A 5.70% 05/01/16 2,000 2,222 WEST BASIN WATER DISTRICT o+ Revenue Refunding Bonds, Series 2003A 5.25% 08/01/14 2,500 2,878 o+ 1992 Projects Revenue Refunding Bonds, Series 1997A 5.50% 08/01/22 1,000 1,096
See financial notes. 47 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND PORTFOLIO HOLDINGS continued
ISSUER PROJECT MATURITY FACE AMOUNT VALUE TYPE OF SECURITY, SERIES RATE DATE ($ x 1,000) ($ x 1,000) WHITTIER Presbyterian Intercommunity Hospital Revenue Bonds, Series 2002 5.60% 06/01/22 2,000 2,079 ------- 184,366 VARIABLE RATE OBLIGATIONS 4.3% -------------------------------------------------------------------------------------------------------------------- CALIFORNIA 4.3% + CALIFORNIA STATE General Obligation Bonds, Series 2003A-2 0.97% 03/01/04 3,150 3,150 + IRVINE ASSESSMENT DISTRICT Limited Obligation Improvement Bonds Adjustable Rate Series 0.97% 03/01/04 200 200 ~(10) ORANGE COUNTY SANITATION DISTRICT Refunding Bonds, Series 2000A 0.98% 03/01/04 5,100 5,100 ------- 8,450
VALUE SECURITY AND NUMBER OF SHARES ($ x 1,000) OTHER INVESTMENT COMPANIES 0.1% of net assets PROVIDENT INSTITUTIONAL FUNDS -- CALIFORNIA MONEY FUND PORTFOLIO 183,667 184
END OF INVESTMENTS. For totals, please see the first page of holdings for this fund. 48 See financial notes. SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND Statement of ASSETS AND LIABILITIES As of February 29, 2004; unaudited. All numbers are x 1,000 except NAV. ASSETS --------------------------------------------------------------------------------- Investments, at value $193,000 a Receivables: Fund shares sold 210 Interest 2,557 Prepaid expenses + 3 ------------ TOTAL ASSETS 195,770 LIABILITIES --------------------------------------------------------------------------------- Payables: Fund shares redeemed 27 Dividends to shareholders 246 Investment adviser and administrator fees 5 Transfer agent and shareholder service fees 4 Accrued expenses + 34 ------------- TOTAL LIABILITIES 316 NET ASSETS --------------------------------------------------------------------------------- TOTAL ASSETS 195,770 TOTAL LIABILITIES - 316 ------------- NET ASSETS $195,454 NET ASSETS BY SOURCE Capital received from investors 181,218 Net investment income not yet distributed 204 Net realized capital gains 667 Net unrealized capital gains 13,365 NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $195,454 16,367 $11.94
Unless stated, all numbers are x 1,000. a The amortized cost of the fund's securities was $179,635. Not counting short-term obligations, the fund's security transactions during the period were: Purchases $25,420 Sales/maturities $42,094 The fund's total security transactions with other SchwabFunds during the period were $38,090. FEDERAL TAX DATA ------------------------------------------------------- PORTFOLIO COST $179,431 NET UNREALIZED GAINS AND LOSSES: Gains $13,587 Losses + (18) ------------- $13,569 AS OF AUGUST 31, 2003: UNDISTRIBUTED EARNINGS: Tax-exempt income $781 Long-term capital gains $-- CAPITAL LOSS UTILIZED $1,073 UNUSED CAPITAL LOSSES: Expires 08/31 of: 2009 $115
See financial notes. 49 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND Statement of OPERATIONS For September 1, 2003 through February 29, 2004; unaudited. All numbers are x 1,000. INVESTMENT INCOME --------------------------------------------------------------------------------- Interest $4,676 NET REALIZED GAINS AND LOSSES --------------------------------------------------------------------------------- Net realized gains on investments sold 782 NET UNREALIZED GAINS AND LOSSES --------------------------------------------------------------------------------- Net unrealized gains on investments 7,302 EXPENSES --------------------------------------------------------------------------------- Investment adviser and administrator fees 288 a Transfer agent and shareholder service fees 240 b Trustees' fees 5 c Custodian and portfolio accounting fees 9 Professional fees 15 Registration fees 1 Shareholder reports 17 Other expenses + 9 ------------- TOTAL EXPENSES 584 INCREASE IN NET ASSETS FROM OPERATIONS --------------------------------------------------------------------------------- TOTAL INVESTMENT INCOME 4,676 TOTAL EXPENSES - 584 ------------- NET INVESTMENT INCOME 4,092 NET REALIZED GAINS 782 d NET UNREALIZED GAINS + 7,302 d ------------- INCREASE IN NET ASSETS FROM OPERATIONS $12,176
Unless stated, all numbers are x 1,000. 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. These fees are paid to Charles Schwab & Co. c For the fund's independent trustees only. d These add up to a net gain on investments of $8,084. 50 See financial notes. SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers are x 1,000. Figures for current period are unaudited.
OPERATIONS --------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 Net investment income $4,092 $9,455 Net realized gains 782 1,036 Net unrealized gains or losses + 7,302 (5,190) -------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 12,176 5,301 DISTRIBUTIONS PAID -------------------------------------------------------------------------------- Dividends from net investment income $4,062 $9,540
TRANSACTIONS IN FUND SHARES --------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES VALUE SHARES VALUE Shares sold 1,252 $14,708 3,343 $39,473 Shares reinvested 250 2,924 500 5,879 Shares redeemed + (2,041) (23,884) (7,268) (85,134) --------------------------------------------------- NET TRANSACTIONS IN FUND SHARES (539) ($6,252) (3,425) ($39,782)
SHARES OUTSTANDING AND NET ASSETS --------------------------------------------------------------------------------- 9/1/03-2/29/04 9/1/02-8/31/03 SHARES NET ASSETS SHARES NET ASSETS Beginning of period 16,906 $193,592 20,331 $237,613 Total increase or decrease + (539) 1,862 (3,425) (44,021) a ---------------------------------------------------- END OF PERIOD 16,367 $195,454 16,906 $193,592 b
Unless stated, all numbers are x 1,000. a Figures for shares represent shares sold plus shares reinvested minus shares redeemed. 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 $204 and $174 for the current and prior period, respectively. See financial notes. 51 SCHWAB TAX-FREE BOND FUNDS 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. 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, as described below. Other policies concerning the funds' business operations also are described here. 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 Schwab YieldPlus Fund Schwab Short-Term Bond Market Fund Schwab Total Bond Market Fund Schwab GNMA Fund 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 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 TO AFFILIATES OF THE INVESTMENT ADVISOR FOR VARIOUS SERVICES. Through their trust, the funds have agreements with Charles Schwab Investment Management, Inc. (CSIM) to provide investment advisory and administrative services and with Charles Schwab & Co., Inc. (Schwab) to provide transfer agent and shareholder services. Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds that may limit the total expenses charged. The rates and limitations for these fees vary from fund to fund, and are described in each fund's Statement of Operations. THE FUNDS MAY ENGAGE IN CERTAIN TRANSACTIONS INVOLVING AFFILIATES. The funds may make direct transactions with certain other SchwabFunds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. Pursuant to an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions within the Schwab Funds(R). All loans are for temporary or emergency purposes only. The interest rate charged on the loan is the average of 52 SCHWAB TAX-FREE BOND FUNDS the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the SchwabFunds(R). 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 report 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 BORROW MONEY FROM BANKS AND CUSTODIANS. The funds may obtain temporary bank loans through the trusts to which they belong, to use for meeting shareholder redemptions or for extraordinary or emergency purposes. The trusts have custodian overdraft facilities and line of credit arrangements of $150 million and $100 million with PNC Bank, N.A. and Bank of America, N.A., respectively. The funds pay interest on the amounts they borrow at rates that are negotiated periodically. 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. UNDER THE FUNDS' ORGANIZATIONAL DOCUMENTS, THE OFFICERS AND TRUSTEES ARE INDEMNIFIED AGAINST CERTAIN LIABILITY ARISING OUT OF THE PERFORMANCE OF THEIR DUTIES TO THE FUNDS. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide general indemnifications. The funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss to be remote. 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 security 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. 53 SCHWAB TAX-FREE BOND FUNDS EXPENSES that are specific to a fund or a class are charged directly to that fund or class. 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. 54 SCHWAB TAX-FREE BOND FUNDS FUND TRUSTEES A fund's Board of Trustees is responsible for protecting the interests of that fund's shareholders. The tables below give information about the people who serve as trustees and officers for the SchwabFunds(R), including the funds covered in this report. Trustees remain in office until they resign, retire or are removed by shareholder vote. 1 Under the Investment Company Act of 1940, any officer, director, or employee of Schwab or CSIM is considered an "interested person," meaning that he or she is considered to have a business interest in Schwab or CSIM. These individuals are listed as "interested trustees." The "independent trustees" are individuals who, under the 1940 Act, are not considered to have a business interest in Schwab or CSIM. Each of the SchwabFunds(R) (of which there were 49 as of 2/29/04) belongs to one of these trusts: The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust or Schwab Annuity Portfolios. Currently all these trusts have the same trustees and officers. The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000. INDIVIDUALS WHO ARE INTERESTED TRUSTEES AND OFFICERS OF THE TRUST
TRUST POSITION(S); NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS ------------------------------------------------------------------------------------------------------------------------------------ CHARLES R. SCHWAB 2 Chair, Trustee: Chair, Director, The Charles Schwab Corp., Charles Schwab & Co., Inc. 7/29/37 Family of Funds, 1989; Charles Schwab Investment Management, Inc., Charles Schwab Investments, 1991; Holdings (UK); CEO, Director, Charles Schwab Holdings, Inc.; Chair, Capital Trust, 1993; CEO Schwab (SIS) Holdings, Inc. I, Schwab International Holdings, Inc.; Annuity Portfolios, Director, U.S. Trust Corp., United States Trust Co. of New York, 1994. The Gap, Inc. (clothing retailer), Siebel Systems (software), Xsign, Inc. (electronic payment systems); Trustee, Stanford University. Until 2003: Co-CEO, The Charles Schwab Corp. Until 2002: Director, Audiobase, Inc. (Internet audio solutions). Until 5/02: Director, Vodaphone AirTouch PLC (telecommunications). Until 3/01: Director, The Charles Schwab Trust Co. Until 1999: Director, Schwab Retirement Plan Services, Inc., Mayer & Schweitzer, Inc. (securities brokerage subsidiary of The Charles Schwab Trust Co.), TrustMark, Inc.
1 The SchwabFunds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010. 2 In addition to their positions with the investment adviser and the distributor, Ms. Lepore and Messrs. Schwab and Lyons, as well as some of Mr. Lyons's immediate family members, also own stock of The Charles Schwab Corporation. 55 SCHWAB TAX-FREE BOND FUNDS INDIVIDUALS WHO ARE INTERESTED TRUSTEES BUT NOT OFFICERS OF THE TRUST
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS ------------------------------------------------------------------------------------------------------------------------------- DAWN G. LEPORE 1 Trustee: 2003 Vice Chair, The Charles Schwab Corp.; Until 10/01: CIO, The 3/21/54 (all trusts). Charles Schwab Corporation. Until 1999: EVP, The Charles Schwab Corporation. Director, Wal-Mart Stores, eBay, Inc. ------------------------------------------------------------------------------------------------------------------------------- JEFFREY M. LYONS 1 Trustee: 2002 EVP, Asset Management Products and Services, Charles Schwab & 2/22/55 (all trusts). Co., Inc.; Trustee, Laudus Trust, Laudus Variable Insurance Trust. Until 9/01: EVP, Mutual Funds, Charles Schwab & Co., Inc.
INDIVIDUALS WHO ARE OFFICERS OF THE TRUST BUT NOT TRUSTEES
NAME AND BIRTHDATE TRUST OFFICE(S) HELD MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS ------------------------------------------------------------------------------------------------------------------------------- RANDALL W. MERK President, CEO President, CEO, Charles Schwab Investment Management, Inc; 7/25/54 (all trusts). EVP, Charles Schwab & Co., Inc.; Director, Charles Schwab Worldwide Funds PLC, Charles Schwab Asset Management (Ireland) Ltd. Until 9/02: President, CIO, American Century Investment Management; Director, American Century Cos., Inc. Until 6/01: CIO, Fixed Income, American Century Cos., Inc. Until 1997: SVP, Director, Fixed Income and Quantitative Equity Portfolio Management, Twentieth Century Investors, Inc. ------------------------------------------------------------------------------------------------------------------------------- TAI-CHIN TUNG Treasurer, Principal SVP, CFO, Charles Schwab Investment Management, Inc.; SVP, 3/7/51 Financial Officer The Charles Schwab Trust Co.; Director, Charles Schwab Asset (all trusts). Management (Ireland) Ltd., Charles Schwab Worldwide Funds PLC. ------------------------------------------------------------------------------------------------------------------------------- STEPHEN B. WARD SVP, Chief Investment SVP, Chief Investment Officer, Director, Charles Schwab Investment 4/5/55 Officer Management, Inc.; CIO, The Charles Schwab Trust Co. (all trusts). ------------------------------------------------------------------------------------------------------------------------------- KOJI E. FELTON Secretary SVP, Chief Counsel, Assistant Corporate Secretary, Charles Schwab 3/13/61 (all trusts). Investment Management, Inc. Until 6/98: Branch Chief in Enforcement, U.S. Securities and Exchange Commission, San Francisco.
1 In addition to their positions with the investment adviser and the distributor, Ms. Lepore and Messrs. Schwab and Lyons, as well as some of Mr. Lyons's immediate family members, also own stock of The Charles Schwab Corporation. 56 SCHWAB TAX-FREE BOND FUNDS INDIVIDUALS WHO ARE INDEPENDENT TRUSTEES
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS ------------------------------------------------------------------------------------------------------------------------------- MARIANN BYERWALTER 2000 (all trusts). Chair, JDN Corp. Advisory LLC; Trustee, Stanford University, America 8/13/60 First Cos., (venture capital/fund management), Redwood Trust, Inc. (mortgage finance), Stanford Hospitals and Clinics, SRI International (research), PMI Group, Inc. (mortgage insurance), Lucile Packard Children's Hospital, Laudus Trust, Laudus Variable Insurance Trust. 2001: Special Advisor to the President, Stanford University. Until 2002: Director, LookSmart, Ltd. (Internet infrastructure). Until 2001: VP, Business Affairs, CFO, Stanford University. ------------------------------------------------------------------------------------------------------------------------------- DONALD F. DORWARD Family of Funds, 1989; CEO, Dorward & Associates (corporate management, marketing and 9/23/31 Investments, 1991; communications consulting). Until 1999: EVP, Managing Director, Capital Trust, 1993; Grey Advertising. Annuity Portfolios, 1994. ------------------------------------------------------------------------------------------------------------------------------- WILLIAM A. HASLER 2000 (all trusts). Co-CEO, Aphton Corp. (bio-pharmaceuticals). Trustee, Solectron Corp. 11/22/41 (manufacturing), Airlease Ltd. (aircraft leasing), Mission West Properties (commercial real estate), Stratex Corp. (network equipment); Public Governor, Laudus Trust, Laudus Variable Insurance Trust; Member, executive committee, Pacific Stock & Options Exchange. Until 2003: Trustee, Tenera, Inc. (services and software). Until 1998: Dean, Haas School of Business, University of California, Berkeley. ------------------------------------------------------------------------------------------------------------------------------- ROBERT G. HOLMES Family of Funds, 1989; Chair, CEO, Director, Semloh Financial, Inc. (international financial 5/15/31 Investments, 1991; services and investment advice). Capital Trust, 1993; Annuity Portfolios, 1994. ------------------------------------------------------------------------------------------------------------------------------- GERALD B. SMITH 2000 (all trusts). Chair, CEO, Founder, Smith Graham & Co. (investment advisors); 9/28/50 Trustee, Rorento N.V. (investments -- Netherlands), Cooper Industries (electrical products, tools and hardware); Member, audit committee, Northern Border Partners, L.P. (energy). Until 2002: Director, Pennzoil- Quaker State Co. (oil and gas). ------------------------------------------------------------------------------------------------------------------------------- DONALD R. STEPHENS Family of Funds, 1989; Managing Partner, D.R. Stephens & Co. (investments). Until 1996: 6/28/38 Investments, 1991; Chair, CEO, North American Trust (real estate investment trust). Capital Trust, 1993; Annuity Portfolios, 1994. ------------------------------------------------------------------------------------------------------------------------------- MICHAEL W. WILSEY Family of Funds, 1989; Chair, CEO, Wilsey Bennett, Inc. (transportation, real estate 8/18/43 Investments, 1991; and investments). Capital Trust, 1993; Annuity Portfolios, 1994.
57 SCHWAB TAX-FREE BOND FUNDS 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 SECURITIES Bond or other debt securities that represent 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. CERTIFICATE OF PARTICIPATION A municipal bond that is repaid from an annual budget appropriation rather than being backed by the full faith and credit of the issuer. 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 chart below. 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. DIVIDEND Money from earnings that is distributed to shareholders as a given amount per share. 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 CREDIT-WORTHINESS OF THEIR BONDS. THE SPECTRUM OF THESE RATINGS IS DIVIDED INTO TWO MAJOR CATEGORIES: INVESTMENT GRADE AND BELOW INVESTMENT GRADE (SOMETIMES CALLED "JUNK BONDS"). BONDS RATED BELOW INVESTMENT GRADE RANGE FROM THOSE THAT ARE CONSIDERED TO HAVE SOME VULNERABILITY TO DEFAULT TO THOSE THAT APPEAR ON THE BRINK OF DEFAULT OR ARE IN DEFAULT.
CREDIT CAPACITY TO QUALITY MAKE PAYMENTS INVESTMENT GRADE BONDS AAA Strongest AA A BBB Adequate [UP AND DOWN ARROW SPANNING TABLE AND CHANGING DARK TO LIGHT FROM TOP TO BOTTOM] -------------------------------------------------------------------------------- BELOW INVESTMENT GRADE BONDS BB Somewhat speculative B CCC CC C Highly speculative D In default
58 SCHWAB TAX-FREE BOND FUNDS DURATION A measure of a bond's sensitivity to interest rates. Calculations of duration generally take into account the investment's yield, interest payments, maturity date and call features. Like maturity, duration is expressed in years, but is more accurate than maturity in determining the effect of interest rate movements on a bond investment's price. The duration of a portfolio equals the market value weighted average of the duration of the bonds held in the portfolio. 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 BONDS Municipal bonds that are 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 SECURITIES Bond or other debt securities that represent ownership in a pool of mortgage loans. MUNI, MUNICIPAL BONDS, MUNICIPAL SECURITIES 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. RESTRICTED SECURITIES Securities that are subject to contractual restrictions on resale and may be sold only to "qualified institutional buyers" under Securities Act Rule 144A. These securities are often purchased in private placement transactions. REVENUE BONDS Municipal bonds that are issued to finance public works projects and are secured by revenue generated by the project (such as water and sewer fees) rather than the full faith and credit of the issuer. SECTION 4(2)/144A SECURITIES Securities exempt from registration under Section 4(2) of the Securities Act of 1933. These securities may be sold only to qualified institutional buyers under Securities Act Rule 144A. 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 percentage that an investor would have earned or lost on an investment in the fund assuming dividends and distributions were reinvested. 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 bond-holder 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. 59 NOTES CONTACT SCHWAB SchwabFunds(R) offers you a complete family of mutual funds, each one based on a clearly defined investment approach and using disciplined management strategies. The list at right shows all currently available SchwabFunds(R). Whether you're an experienced investor or just starting out, SchwabFunds(R) can help you achieve your financial goals. An investor should consider a fund's investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information can be found in the fund's prospectus. Please call 1-800-435-4000 for a prospectus and brochure for any SchwabFund(R). Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus. METHODS FOR PLACING ORDERS The following information outlines how Schwab 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) 2 Use our automated voice service or speak to a representative. Call 1-800-435-4000, day or night (for TDD service, call 1-800-345-2550). TELEBROKER(R) Automated touch-tone phone service at 1-800-272-4922. MAIL Write to SchwabFunds(R) at: P.O. Box 3812 Englewood, CO 80155-3812 When selling or exchanging shares, be sure to include the signatures of at least one of the persons whose name is on the account. PROXY VOTING POLICIES AND PROCEDURES A description of the proxy voting policies and procedures used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting Schwab's web site at www.schwab.com/schwabfunds, the SEC's web site at http://www.sec.gov, or by contacting SchwabFunds at 1-800-435-4000. 1 Shares of Sweep Investments(TM) may not be purchased directly over the Internet. 2 Orders placed in person or through a telephone representative may be subject to a service fee payable to Schwab. THE SCHWABFUNDS FAMILY(R) 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 Core Equity Fund(TM) Schwab Dividend Equity Fund(TM) Schwab Small-Cap Equity Fund(TM) Schwab Hedged Equity Fund(TM) Schwab Focus Funds Communications Focus Fund Financial Services Focus Fund Health Care Focus Fund Technology Focus Fund Schwab MarketMasters Funds(TM) Schwab U.S. MarketMasters Fund(TM) Schwab Small-Cap MarketMasters Fund(TM) Schwab International MarketMasters Fund(TM) Schwab Balanced MarketMasters Fund(TM) ASSET ALLOCATION FUNDS Schwab MarketTrack Portfolios(R) Schwab MarketTrack All Equity Portfolio(TM) Schwab MarketTrack Growth Portfolio(TM) Schwab MarketTrack Balanced Portfolio(TM) Schwab MarketTrack Conservative Portfolio(TM) BOND FUNDS Schwab YieldPlus Fund(R) Schwab Short-Term Bond Market Fund(TM) Schwab Total Bond Market Fund(TM) Schwab GNMA Fund(TM) Schwab Short/Intermediate Tax-Free Bond Fund(TM) Schwab Long-Term Tax-Free Bond Fund(TM) Schwab California Short/Intermediate Tax-Free Bond Fund(TM) Schwab California Long-Term Tax-Free Bond Fund(TM) SCHWAB MONEY FUNDS Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity. 3 Choose from taxable or tax-advantaged alternatives. Many can be linked to your Schwab account to "sweep" cash balances automatically, subject to availability, when you're between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments(R). 3 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 SchwabFunds(R) P.O. Box 3812, Englewood, CO 80155-3812 This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. (C)2004 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE. Printed on recycled paper. REG13481-06 ITEM 2: CODE OF ETHICS. Not applicable to this semi-annual report. ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable to this semi-annual report. ITEM 4: PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable to this semi-annual report. ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6: [RESERVED]. ITEM 7: DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 9: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 10: CONTROLS AND PROCEDURES. (a) Based on their evaluation of Registrant's disclosure controls and procedures, as of a date within 90 days of the filing date, Registrant's Chief Executive Officer, Randall W. Merk and Registrant's Principal Financial Officer, Tai-Chin Tung, have concluded that Registrant's disclosure controls and procedures are: (i) reasonably designed to ensure that information required to be disclosed in this report is appropriately communicated to Registrant's officers to allow timely decisions regarding disclosures required in this report; (ii) reasonably designed to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported in a timely manner; and (iii) are effective in achieving the goals described in (i) and (ii) above. (b) During Registrant's last fiscal half-year, there have been no changes in Registrant's internal control over financial reporting that the above officers believe to have materially affected, or to be reasonably likely to materially affect, Registrant's internal control over financial reporting. ITEM 11: EXHIBITS. (a)(1) Code of ethics - not applicable to this semi-annual report. (2) Separate certifications for Registrant's principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the 1940 Act, are attached. (3) Not applicable. (b) A certification for Registrant's principal executive officer and principal financial officer, as required by Rule 30a-2(b) under the 1940 Act, is attached. This certification is being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. section 1350 and is not being filed as part of the Form N-CSR with the Commission. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) Schwab Investments By: /s/ Randall W. Merk ---------------------------------- Randall W. Merk Chief Executive Officer Date: April 16, 2004 -------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Randall W. Merk --------------------------------- Randall W. Merk Chief Executive Officer Date: April 16, 2004 -------------- By: /s/ Tai-Chin Tung ---------------------------------- Tai-Chin Tung Principal Financial Officer Date: April 16, 2004 --------------