SchwabFunds-Registered Trademark-
SCHWAB
BOND INDEX
FUNDS
Annual Report
August 31, 1999
<PAGE>
SCHWAB BOND INDEX FUNDS
We're pleased to bring you this annual report for the following funds (the
funds) for the one-year period ended August 31, 1999:
- Schwab Short-Term Bond Market Index Fund
- Schwab Total Bond Market Index Fund
During the reporting period, the funds continued to attempt to provide a high
level of current income consistent with the preservation of capital. In addition
to performance and portfolio information, this report contains information
regarding dividends paid by the funds during each fiscal year (or reporting
period) since their inceptions.
The SCHWAB SHORT-TERM BOND MARKET INDEX FUND seeks to track the total return of
the Lehman Brothers Short (1-5 Year) Government/Corporate Bond Index, which
represents the performance of U.S. government and corporate bonds that have
average maturities between one and five years. The SCHWAB TOTAL BOND MARKET
INDEX FUND seeks to track the total return of the Lehman Brothers Aggregate Bond
Index, a broad-based index that includes U.S. government and investment-grade
debt securities, such as corporate and international (dollar-denominated) bonds
and asset-backed and mortgage-backed securities with maturities greater than one
year.
CONTENTS
<TABLE>
<S> <C>
- ---------------------------------------------
A Message from the Chairman 1
- ---------------------------------------------
What Every Bond Fund Investor Should
Know 2
- ---------------------------------------------
Market Overview 4
- ---------------------------------------------
Schwab Short-Term Bond Market Index Fund
FUND PERFORMANCE 7
PORTFOLIO SNAPSHOT 9
- ---------------------------------------------
Schwab Total Bond Market Index Fund
FUND PERFORMANCE 11
PORTFOLIO SNAPSHOT 13
- ---------------------------------------------
Dividends Paid 15
- ---------------------------------------------
The Portfolio Management Team 16
- ---------------------------------------------
Fund Discussion 17
- ---------------------------------------------
Glossary 19
- ---------------------------------------------
Financial Statements and Notes 22
- ---------------------------------------------
</TABLE>
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Dear Shareholder,
[PHOTO]
During the past several years, the benefits of investing have been readily
apparent, while the risks have been somewhat less obvious. Over the past several
months, however, investors have witnessed sharp drops and big recoveries,
sometimes within the same day. After enjoying favorable market conditions for
the past several years, investors have had to adjust to significant economic and
political developments, both here and abroad, that have contributed to rapid
sentiment swings and market turbulence. These developments have been accentuated
by the lingering expectation that stock prices are long overdue for a correction
according to several traditional, widely followed indicators. In spite of this
recent volatility, however, the U.S. markets continue to flourish, boosted by
record low inflation, solid economic growth, low interest rates, a strong dollar
and an influx of money from investors.
All these trends serve to remind us that although the market's extreme ups and
downs can be harrowing, they are a natural part of market dynamics. That's why
we think it's a good time to reaffirm one of our primary investment principles:
regardless of short-term market trends, our philosophy has always been that
REGULAR INVESTING is the best strategy over the long term. And your investment
in a bond fund may play an important role in your asset allocation plan. We've
included some guidelines on the following pages that address some things you
should know about bond funds. You might also find that more than one kind of
bond fund may be appropriate for you, depending on your goals and financial
situation. As always, feel free to contact us if you have any questions.
The support of investors like you has helped SchwabFunds-Registered Trademark-
become one of the largest and fastest-growing mutual fund families in the
nation. Charles Schwab Investment Management (CSIM), the investment adviser, now
manages assets approaching $100 billion on behalf of more than 4.7 million
accounts. We offer a broad spectrum of 40 mutual funds for investors with
varying financial situations and goals.
Thank you for your investment in SchwabFunds. We continue to do our best to
warrant the trust you have placed in us.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
August 31, 1999
YEAR 2000 ISSUES
One issue with the potential to disrupt fund operations and affect
performance is the inability of some computers to recognize the year 2000.
The investment adviser is taking steps to handle this issue. The investment
adviser also is seeking assurances that its service providers and business
partners are taking similar steps as well. It is impossible to know in
advance, however, exactly how this issue will affect fund administration,
fund performance or securities markets in general.
1
<PAGE>
WHAT EVERY BOND FUND INVESTOR SHOULD KNOW
WHY ASSET ALLOCATION MATTERS
As most investors know, one of the most compelling reasons to invest in a mutual
fund is diversification. By allocating your assets across many different
securities, a mutual fund helps reduce the risk that you might otherwise
encounter by owning just a few individual stocks or bonds.
Don't forget, however, that diversification across your portfolio is just as
important as diversification within the mutual funds you own. As you probably
know, stocks historically have offered higher long-term returns than other asset
classes, such as bonds or cash, but those returns have come at the price of
higher volatility. To help mitigate some of that risk, many investors often
include at least some bonds and cash in their portfolios.
THE ROLE OF BONDS IN A BALANCED PORTFOLIO
Maintaining the right mix of asset classes--stocks, bonds and cash--in your
portfolio is a smart strategy for every investor. In fact, asset allocation is
one of the most important factors in determining overall portfolio performance.
Over time, a portfolio composed of stocks and bonds can provide competitive
returns compared with an all-stock portfolio, but with less risk for you. And
over the long term, bond funds typically pay a higher return than even the
highest-yielding cash reserves, although with increased risk. Of course, past
performance is no guarantee of future results.
WHY BOND FUNDS?
Investing in bond funds can provide several advantages over investing in
individual bonds:
DIVERSIFICATION: Bond funds can invest across a broad segment of the bond market
and can provide automatic diversification within one asset class.
PROFESSIONAL MANAGEMENT: Bond funds are managed by investment professionals who
know and understand the intricacies of the bond market and its operations.
SIMPLICITY: Bond funds can be a good choice for investors who lack the time or
expertise to actively manage a bond portfolio.
LOW MINIMUM INITIAL INVESTMENT: At Schwab you can invest in a bond fund with
just $1,000.
CONVENIENCE: SchwabFunds bond fund investors can make purchases and redemptions
at any time without transaction fees and without having to wait until an
individual bond matures.
FLEXIBILITY: Dividends and/or capital gains can be reinvested or paid in cash.
LOW COSTS: By trading in large (institutional) blocks, funds can get much better
execution, which can lower trading costs and increase total returns.
BOND INDEX FUNDS
Schwab's bond index funds seek to track the total returns of broadly diversified
bond indices. And because index funds generally have lower portfolio turnover
and fewer transactions--and therefore lower trading costs--you could potentially
realize higher returns.
Bond index funds offer some of the same benefits as equity index funds,
including broad diversification, lower expenses, consistent investment style and
straightforward choices. In addition, certain bond index funds can also provide
the added benefit of high credit quality investments. Schwab's bond index funds
are designed to maintain high credit quality standards because the indices they
seek to track primarily comprise U.S. Treasuries, government agency securities
and government agency mortgage-backed securities; the remaining bonds in the
indices are investment-grade corporate bonds rated AAA through BBB, the four
highest credit ratings.
2
<PAGE>
TAX CONSIDERATIONS
If you're in a high tax bracket, investing in tax-free or municipal bond funds
may help take a bite out of your tax bill. And, if you live in a state with a
high personal state income tax or other personal tax, you may be better served
by choosing a double tax-free fund that provides income free from federal, state
and, in some cases, local income taxes.*
SCHWAB BOND FUNDS
Schwab offers a variety of bond funds, summarized below. When evaluating a bond
fund for potential investment, you should consider your attitude toward risk and
return, as well as your income tax bracket.
TAXABLE BOND FUNDS
SCHWAB YIELDPLUS FUND-TM- seeks to invest in fixed-income securities and its
overall portfolio is managed to maintain an average maturity of one year or
less.
SCHWAB SHORT-TERM BOND MARKET INDEX FUND seeks to track the Lehman Brothers
Short Mutual Fund (1-5 Year) Government/Corporate Bond Index. This index
represents the performance of U.S. government, U.S. corporate bonds and dollar
denominated foreign issues that have average maturities between one and five
years.
SCHWAB TOTAL BOND MARKET INDEX FUND seeks to track the Lehman Brothers Aggregate
Bond Index. This index is a broad-based index covering investment-grade bonds
with maturities greater than one year.
TAX-FREE BOND FUNDS
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in municipal
bonds with dollar-weighted average maturities of two to five years. Its share
price will generally be less volatile than that of longer-term bond funds but
will generally provide lower returns.
SCHWAB LONG-TERM TAX-FREE BOND FUND invests in municipal bonds with
dollar-weighted average maturities of 10 years or more. It is designed to
provide higher tax-free income than is usually available with shorter-term
funds; however, its net asset value may be more volatile than that of
shorter-term bond funds.
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in
California municipal bonds with dollar-weighted average maturities of two to
five years. Its share price will generally be less volatile than that of longer-
term bond funds but will generally provide lower returns.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND invests primarily in California
municipal bonds with dollar-weighted average maturity of 10 years or longer. It
is designed to provide higher tax-free income than is available with
shorter-term funds; however, its net asset value may be more volatile than that
of shorter-term bond funds.
If you would like more information on any of these funds, please visit us at
WWW.SCHWAB.COM/SCHWABFUNDS or call us toll free at 800-435-4000 and request a
free prospectus, which contains more information, including fees and expenses.
Please be sure to read the prospectus before investing.
WE MAKE IT EASY TO INVEST
We try to make it easy and convenient for you to invest in
SchwabFunds-Registered Trademark-. Our automated methods allow you to invest or
transfer money to your Schwab account on a regular basis; you can invest through
our Web site at WWW.SCHWAB.COM/SCHWABFUNDS; through our automated touch-tone
telephone service, TeleBroker,-Registered Trademark- by calling 800-272-4922; or
you can also visit us in person at any of our nationwide branches.
KEEPING YOU INFORMED
One of our top priorities at Charles Schwab is to keep you informed about your
investments and potential opportunities in the marketplace. For a wealth of
information about our investment philosophy and funds, as well as about the
market and economic environment, visit our Web site:
WWW.SCHWAB.COM/SCHWABFUNDS.
*Some investors may be subject to the alternative minimum tax (AMT); consult
your tax advisor.
3
<PAGE>
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic product (GDP), continued its
lengthy expansion with a strong real growth rate of 3.9% for the year ended June
1999--a rate in excess of the Federal Reserve's estimate of the long-term
maximum sustainable non-inflationary growth rate.
The slower second quarter growth rate of 1.6%, reflecting the drag from a
bloated trade deficit, marks the 33rd consecutive quarter of positive
growth--the longest peacetime expansion ever. Strong consumer spending leveraged
by record domestic stock market levels and its associated wealth effect
continued to provide momentum for this historic expansion, in our opinion.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GROSS DOMESTIC PRODUCT REAL GDP
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED RATE)
<S> <C>
Q1 1990 3.9%
Q2 1990 1.2%
Q3 1990 -1.9%
Q4 1990 -4.0%
Q1 1991 -2.1%
Q2 1991 1.8%
Q3 1991 1.0%
Q4 1991 1.0%
Q1 1992 4.7%
Q2 1992 2.5%
Q3 1992 3.0%
Q4 1992 4.3%
Q1 1993 0.1%
Q2 1993 2.0%
Q3 1993 2.1%
Q4 1993 5.3%
Q1 1994 3.0%
Q2 1994 4.7%
Q3 1994 1.8%
Q4 1994 3.6%
Q1 1995 1.7%
Q2 1995 0.4%
Q3 1995 3.3%
Q4 1995 2.8%
Q1 1996 3.3%
Q2 1996 6.1%
Q3 1996 2.1%
Q4 1996 4.2%
Q1 1997 4.2%
Q2 1997 4.0%
Q3 1997 4.2%
Q4 1997 3.0%
Q1 1998 5.5%
Q2 1998 1.8%
Q3 1998 3.7%
Q4 1998 6.0%
Q1 1999 4.3%
Q2 1999 1.6%
Source: BLOOMBERG L.P.
</TABLE>
The consensus of most economists is that the U.S. economy appears poised for
continued growth, but at a more moderate pace than the 4.3% rate experienced
during 1998. High levels of consumer confidence and spending, low interest
rates, rising real wages and strong gains in stock prices have been the
principal factors continuing this lengthy expansion.
Last year's concerns over the impact of international economic problems have
been displaced by concerns over imbalances in the domestic economy, namely the
surging current account (trade) deficit, record high stock valuations, and the
negative savings rate. Looking ahead, the behavior of domestic consumers in
response to continued stock market volatility may also be a key determinant of
whether the economy continues on its current course or softens throughout the
remainder of 1999, in our opinion.
UNEMPLOYMENT
August's unemployment rate of 4.2% was a 28-year low. Labor markets continue to
be extremely tight in many areas of the country. Growth in the labor force has
slowed, and there continues to be concern that wage and benefits increases may
begin to put more pressure on labor costs (refer to Employment Cost Index on the
next page).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
Jan-90 5.4%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.4%
Jun-90 5.2%
Jul-90 5.5%
Aug-90 5.7%
Sep-90 5.9%
Oct-90 5.9%
Nov-90 6.2%
Dec-90 6.3%
Jan-91 6.4%
Feb-91 6.6%
Mar-91 6.8%
Apr-91 6.7%
May-91 6.9%
Jun-91 6.9%
Jul-91 6.8%
Aug-91 6.9%
Sep-91 6.9%
Oct-91 7.0%
Nov-91 7.0%
Dec-91 7.3%
Jan-92 7.3%
Feb-92 7.4%
Mar-92 7.4%
Apr-92 7.4%
May-92 7.6%
Jun-92 7.8%
Jul-92 7.7%
Aug-92 7.6%
Sep-92 7.6%
Oct-92 7.3%
Nov-92 7.4%
Dec-92 7.4%
Jan-93 7.3%
Feb-93 7.1%
Mar-93 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
Jul-93 6.9%
Aug-93 6.8%
Sep-93 6.7%
Oct-93 6.8%
Nov-93 6.6%
Dec-93 6.5%
Jan-94 6.8%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.1%
Jun-94 6.1%
Jul-94 6.3%
Aug-94 6.0%
Sep-94 5.8%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.5%
Jan-95 5.6%
Feb-95 5.4%
Mar-95 5.3%
Apr-95 5.8%
May-95 5.8%
Jun-95 5.6%
Jul-95 5.6%
Aug-95 5.7%
Sep-95 5.6%
Oct-95 5.5%
Nov-95 5.7%
Dec-95 5.6%
Jan-96 5.6%
Feb-96 5.5%
Mar-96 5.6%
Apr-96 5.5%
May-96 5.6%
Jun-96 5.3%
Jul-96 5.5%
Aug-96 5.1%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.4%
Jan-97 5.3%
Feb-97 5.3%
Mar-97 5.1%
Apr-97 5.0%
May-97 4.7%
Jun-97 5.0%
Jul-97 4.7%
Aug-97 4.9%
Sep-97 4.7%
Oct-97 4.7%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.5%
Feb-98 4.6%
Mar-98 4.6%
Apr-98 4.3%
May-98 4.3%
Jun-98 4.5%
Jul-98 4.5%
Aug-98 4.5%
Sep-98 4.5%
Oct-98 4.5%
Nov-98 4.4%
Dec-98 4.3%
Jan-99 4.3%
Feb-99 4.4%
Mar-99 4.2%
Apr-99 4.3%
May-99 4.2%
Jun-99 4.3%
Jul-99 4.3%
Aug-99 4.2%
Source: BLOOMBERG L.P.
</TABLE>
4
<PAGE>
INFLATION
Price inflation continued to remain well contained, in our opinion. The CPI rose
just 2.3% for the year ended August 1999. Its core rate (which excludes the more
volatile food and energy components) rose 1.9%. The GDP price deflator, the
broadest measure of inflation, indicated prices rising at an annual rate of 1.2%
for year ended June 1999. The Employment Cost Index, which measures inflation in
wages, salaries and benefits was also well contained, increasing 3.2% for the
year ended June 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION QUARTERLY EMPLOYMENT COST INDEX MONTHLY CONSUMER PRICE INDEX
<S> <C> <C>
Jan-90 5.5% 5.2%
Feb-90 5.5% 5.3%
Mar-90 5.5% 5.2%
Apr-90 5.4% 4.7%
May-90 5.4% 4.4%
Jun-90 5.4% 4.7%
Jul-90 5.2% 4.8%
Aug-90 5.2% 5.6%
Sep-90 5.2% 6.2%
Oct-90 4.9% 6.3%
Nov-90 4.9% 6.3%
Dec-90 4.9% 6.1%
Jan-91 4.6% 5.7%
Feb-91 4.6% 5.3%
Mar-91 4.6% 4.9%
Apr-91 4.6% 4.9%
May-91 4.6% 5.0%
Jun-91 4.6% 4.7%
Jul-91 4.3% 4.4%
Aug-91 4.3% 3.8%
Sep-91 4.3% 3.4%
Oct-91 4.3% 2.9%
Nov-91 4.3% 3.0%
Dec-91 4.3% 3.1%
Jan-92 4.0% 2.6%
Feb-92 4.0% 2.8%
Mar-92 4.0% 3.2%
Apr-92 3.6% 3.2%
May-92 3.6% 3.0%
Jun-92 3.6% 3.1%
Jul-92 3.5% 3.2%
Aug-92 3.5% 3.1%
Sep-92 3.5% 3.0%
Oct-92 3.5% 3.2%
Nov-92 3.5% 3.0%
Dec-92 3.5% 2.9%
Jan-93 3.5% 3.3%
Feb-93 3.5% 3.2%
Mar-93 3.5% 3.1%
Apr-93 3.6% 3.2%
May-93 3.6% 3.2%
Jun-93 3.6% 3.0%
Jul-93 3.6% 2.8%
Aug-93 3.6% 2.8%
Sep-93 3.6% 2.7%
Oct-93 3.5% 2.8%
Nov-93 3.5% 2.7%
Dec-93 3.5% 2.7%
Jan-94 3.2% 2.5%
Feb-94 3.2% 2.5%
Mar-94 3.2% 2.5%
Apr-94 3.2% 2.4%
May-94 3.2% 2.3%
Jun-94 3.2% 2.5%
Jul-94 3.2% 2.8%
Aug-94 3.2% 2.9%
Sep-94 3.2% 3.0%
Oct-94 3.0% 2.6%
Nov-94 3.0% 2.7%
Dec-94 3.0% 2.7%
Jan-95 2.9% 2.8%
Feb-95 2.9% 2.9%
Mar-95 2.9% 2.9%
Apr-95 2.9% 3.1%
May-95 2.9% 3.2%
Jun-95 2.9% 3.0%
Jul-95 2.7% 2.8%
Aug-95 2.7% 2.6%
Sep-95 2.7% 2.5%
Oct-95 2.7% 2.8%
Nov-95 2.7% 2.6%
Dec-95 2.7% 2.5%
Jan-96 2.8% 2.7%
Feb-96 2.8% 2.7%
Mar-96 2.8% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.9% 2.8%
Jul-96 2.8% 3.0%
Aug-96 2.8% 2.9%
Sep-96 2.8% 3.0%
Oct-96 2.9% 3.0%
Nov-96 2.9% 3.3%
Dec-96 2.9% 3.3%
Jan-97 2.9% 3.0%
Feb-97 2.9% 3.0%
Mar-97 2.9% 2.8%
Apr-97 2.8% 2.5%
May-97 2.8% 2.2%
Jun-97 2.8% 2.3%
Jul-97 3.0% 2.2%
Aug-97 3.0% 2.2%
Sep-97 3.0% 2.2%
Oct-97 3.3% 2.1%
Nov-97 3.3% 1.8%
Dec-97 3.3% 1.7%
Jan-98 3.3% 1.6%
Feb-98 3.3% 1.4%
Mar-98 3.3% 1.4%
Apr-98 3.5% 1.4%
May-98 3.5% 1.7%
Jun-98 3.5% 1.7%
Jul-98 3.7% 1.7%
Aug-98 3.7% 1.6%
Sep-98 3.7% 1.5%
Oct-98 3.4% 1.5%
Nov-98 3.4% 1.5%
Dec-98 3.4% 1.6%
Jan-99 3.0% 1.7%
Feb-99 3.0% 1.6%
Mar-99 3.0% 1.7%
Apr-99 3.2% 2.3%
May-99 3.2% 2.1%
Jun-99 3.2% 2.0%
Jul-99 2.1%
Aug-99 2.3%
Source: BLOOMBERG L.P.
</TABLE>
Although there seems to be little evidence of accelerating core inflation, the
Federal Reserve has expressed concern that should labor markets continue to
tighten, increases in wages may outpace productivity growth. In that
environment, productivity growth can become particularly critical, as it enables
companies to pay higher wages without raising prices. Non-farm productivity grew
2.2% in 1998 and at a 2.1% annualized rate in the first half of 1999, continuing
a healthy trend that began in 1996.*
ASSET CLASS PERFORMANCE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE MSCI-EAFE S&P 500 RUSSELL 2000 LEHMAN BROTHERS
GROWTH OF A HYPOTHETICAL $1 INVESTMENT INDEX INDEX INDEX AGGREGATE
BOND INDEX
<S> <C> <C> <C> <C>
Aug-98 $1.000 $1.000 $1.000 $1.000
Sep-98 $0.969 $1.064 $1.078 $1.023
Oct-98 $1.070 $1.151 $1.122 $1.018
Nov-98 $1.125 $1.220 $1.181 $1.024
Dec-98 $1.170 $1.291 $1.254 $1.027
Jan-99 $1.166 $1.345 $1.271 $1.034
Feb-99 $1.138 $1.303 $1.168 $1.016
Mar-99 $1.186 $1.355 $1.186 $1.022
Apr-99 $1.234 $1.407 $1.292 $1.025
May-99 $1.170 $1.374 $1.311 $1.016
Jun-99 $1.216 $1.450 $1.371 $1.013
Jul-99 $1.252 $1.405 $1.333 $1.008
Aug-99 $1.257 $1.398 $1.284 $1.008
COMPILED BY CHARLES SCHWAB & CO., INC.
</TABLE>
Large-cap domestic stocks, as represented by the S&P 500-Registered Trademark-
Index, continued to be the strongest performing asset class, achieving a total
return of 39.8% for year ended August 1999. Within the S&P 500, growth stocks
continued to be the strongest performing style for the period. Small-cap stocks
as represented by the Russell 2000-Registered Trademark- Index, also produced a
return of 28.4%.
Assisted by the rebound in Asian markets, international stock returns, as
represented by the MSCI-EAFE-Registered Trademark- Index, produced a total
return of 25.7% for the one-year reporting period.
* Source: Bloomberg L.P.
5
<PAGE>
MARKET OVERVIEW (continued)
Reflecting the rise in intermediate- and long-term interest rates, fixed income
returns were generally flat for the period. Bond returns, as represented by the
Lehman Brothers Aggregate Bond Index, were 0.8% for the one-year reporting
period.
U.S. EQUITY VALUATION
The price/earnings ratio for the S&P 500-Registered Trademark- Index reached
record highs during the reporting period and ended the period at a lofty 31.2
times earnings, more than twice its long-term average. The price/earnings ratio,
also known as a multiple, is the price of a stock divided by its earnings per
share, and generally indicates how much investors are willing to pay for a
company's earning potential. Based on other traditional market valuation
measures such as the price-to-book value ratio or dividend yield, the U.S. stock
market continues to remain at record high valuation levels.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 PRICE/EARNINGS RATIO
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24.00
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Mar-98 27.76
Apr-98 26.51
May-98 26.12
Jun-98 27.09
Jul-98 26.78
Aug-98 22.77
Sep-98 24.23
Oct-98 27.58
Nov-98 30.14
Dec-98 31.97
Jan-99 33.29
Feb-99 32.65
Mar-99 33.78
Apr-99 33.90
May-99 32.74
Jun-99 34.70
Jul-99 31.62
Aug-99 31.21
30-Year Average 15.26
Source: BLOOMBERG L.P.
</TABLE>
TREASURY BOND YIELDS
Continuing a trend which began in October 1998, both long-term and
intermediate-term rates climbed during the reporting period. Scaled back
concerns about the impact of international economic problems and the continued
growth of the domestic economy, were the primary drivers of this upward trend in
yields, in our opinion.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR TREASURY BOND YIELDS
30-YEAR TREASURY BOND YIELD FIVE-YEAR TREASURY NOTE YIELD
<S> <C> <C>
8/27/98 5.34% 4.90%
9/4/98 5.29% 4.89%
9/11/98 5.23% 4.65%
9/18/98 5.15% 4.52%
9/25/98 5.11% 4.37%
10/2/98 4.84% 4.08%
10/9/98 5.12% 4.46%
10/16/98 4.98% 4.04%
10/23/98 5.18% 4.30%
10/30/98 5.16% 4.23%
11/6/98 5.39% 4.59%
11/13/98 5.25% 4.50%
11/20/98 5.22% 4.60%
11/27/98 5.16% 4.59%
12/4/98 5.04% 4.39%
12/11/98 5.02% 4.39%
12/18/98 5.00% 4.36%
12/25/98 5.22% 4.71%
1/1/99 5.10% 4.54%
1/8/99 5.27% 4.73%
1/15/99 5.11% 4.55%
1/22/99 5.08% 4.52%
1/29/99 5.09% 4.55%
2/5/99 5.35% 4.86%
2/12/99 5.42% 4.96%
2/19/99 5.39% 4.99%
2/26/99 5.58% 5.22%
3/5/99 5.60% 5.22%
3/12/99 5.53% 5.06%
3/19/99 5.56% 5.08%
3/26/99 5.59% 5.08%
4/2/99 5.46% 4.96%
4/9/99 5.46% 4.96%
4/16/99 5.57% 5.11%
4/23/99 5.60% 5.14%
4/30/99 5.66% 5.21%
5/7/99 5.81% 5.37%
5/14/99 5.92% 5.50%
5/21/99 5.75% 5.43%
5/28/99 5.83% 5.58%
6/4/99 5.96% 5.73%
6/11/99 6.16% 5.91%
6/18/99 5.97% 5.73%
6/25/99 6.15% 5.89%
7/2/99 6.00% 5.69%
7/9/99 6.00% 5.69%
7/16/99 5.88% 5.55%
7/23/99 6.03% 5.69%
7/30/99 6.10% 5.79%
8/6/99 6.18% 5.91%
8/13/99 6.10% 5.86%
8/20/99 5.99% 5.77%
8/27/99 5.98% 5.77%
Source: BLOOMBERG L.P.
</TABLE>
6
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION 30-DAY
ONE YEAR FIVE YEARS (11/5/91) SEC YIELD
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
SCHWAB SHORT-TERM
BOND MARKET INDEX FUND(1),(2) 2.66% 5.63% 5.58% 5.71%
- -----------------------------------------------------------------------------------------------------------
Benchmark Indices(3) 3.36% 6.13% 5.83% N/A
- -----------------------------------------------------------------------------------------------------------
Lehman Brothers Short (1-3 Year)
U.S. Government Bond Index (PRIOR) 4.12% 6.24% 5.84% N/A
- -----------------------------------------------------------------------------------------------------------
Lehman Brothers Mutual Fund Short (1-5 Year)
Government/Corporate Bond Index (NEW) 3.36% 6.43% 6.26% N/A
- -----------------------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 6/30/99. As of 6/30/99, the fund's one-year, five-year and
since inception average annual total returns were 3.97%, 5.77% and 5.64%,
respectively. The 30-day SEC yield as of 6/30/99 was 5.63%.(4)
(1) Prior to 11/1/97, the Schwab Short-Term Bond Market Index Fund was known as
the Schwab Short/Intermediate Government Bond Fund. As reported in the
fund's annual report dated 8/31/97, shareholders approved the proposed
change to the fund's investment objective from an actively managed
government bond strategy to an index strategy at the shareholders' meeting
held on 9/22/97.
(2) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 8/31/99, the fund's one-year, five-year and
since-inception average annual total returns would have been 2.24%, 5.27%
and 5.21%, respectively. The 30-day SEC yield as of 8/31/99 would have been
5.27%.
(3) This index represents the Lehman Brothers Short (1-3 Year) U.S. Government
Bond Index for the period from the fund's inception on 11/5/91 through
2/28/98, and the Lehman Brothers Mutual Fund Short (1-5 Year)
Government/Corporate Bond Index from 3/1/98 through the end of the reporting
period. This benchmark is designed to show investors how a hypothetical
$10,000 investment in the fund has performed since its inception to the end
of the reporting period by comparing it with the fund's prior and
new indices.
(4) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 6/30/99, the fund's one-year, five-year and
since inception average annual total returns would have been 3.55%, 5.42%
and 5.28%, respectively. The 30-day SEC yield as of 6/30/99 would have been
5.22%.
7
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB SHORT- LEHMAN BROTHERS LEHMAN BROTHERS BENCHMARK
TERM BOND SHORT (1-3) MUTUAL FUND INDEX
MARKET INDEX US GOVERNMENT BOND INDEX SHORT (1-5)
FUND GOVERNMENT/CORPORATE BOND INDEX
<S> <C> <C> <C> <C>
11/5/1991 $10,000 $10,000 $10,000 $10,000
11/30/1991 $10,117 $10,059 $10,097 $10,097
12/31/1991 $10,381 $10,212 $10,287 $10,250
1/31/1992 $10,241 $10,199 $10,243 $10,237
2/29/1992 $10,240 $10,229 $10,272 $10,268
3/31/1992 $10,190 $10,226 $10,251 $10,265
4/30/1992 $10,282 $10,319 $10,349 $10,358
5/31/1992 $10,440 $10,415 $10,477 $10,455
6/30/1992 $10,595 $10,521 $10,614 $10,560
7/31/1992 $10,794 $10,642 $10,778 $10,682
8/31/1992 $10,898 $10,728 $10,884 $10,768
9/30/1992 $11,053 $10,829 $11,012 $10,869
10/31/1992 $10,924 $10,767 $10,903 $10,807
11/30/1992 $10,868 $10,751 $10,868 $10,791
12/31/1992 $11,012 $10,851 $10,990 $10,891
1/31/1993 $11,202 $10,965 $11,164 $11,006
2/28/1993 $11,355 $11,052 $11,298 $11,094
3/31/1993 $11,395 $11,087 $11,339 $11,128
4/30/1993 $11,499 $11,154 $11,428 $11,196
5/31/1993 $11,462 $11,128 $11,394 $11,169
6/30/1993 $11,622 $11,211 $11,518 $11,253
7/31/1993 $11,661 $11,236 $11,541 $11,278
8/31/1993 $11,823 $11,329 $11,679 $11,371
9/30/1993 $11,851 $11,365 $11,718 $11,408
10/31/1993 $11,892 $11,390 $11,748 $11,433
11/30/1993 $11,819 $11,392 $11,725 $11,435
12/31/1993 $11,873 $11,438 $11,773 $11,481
1/31/1994 $11,973 $11,509 $11,873 $11,552
2/28/1994 $11,780 $11,439 $11,754 $11,482
3/31/1994 $11,628 $11,380 $11,637 $11,423
4/30/1994 $11,527 $11,337 $11,569 $11,380
5/31/1994 $11,485 $11,353 $11,582 $11,396
6/30/1994 $11,500 $11,381 $11,602 $11,424
7/31/1994 $11,599 $11,484 $11,732 $11,527
8/31/1994 $11,628 $11,522 $11,770 $11,565
9/30/1994 $11,585 $11,495 $11,708 $11,538
10/31/1994 $11,593 $11,522 $11,722 $11,565
11/30/1994 $11,528 $11,473 $11,662 $11,516
12/31/1994 $11,540 $11,495 $11,688 $11,538
1/31/1995 $11,697 $11,654 $11,867 $11,697
2/28/1995 $11,852 $11,815 $12,072 $11,859
3/31/1995 $11,919 $11,883 $12,141 $11,928
4/30/1995 $12,018 $11,989 $12,268 $12,034
5/31/1995 $12,232 $12,197 $12,553 $12,243
6/30/1995 $12,281 $12,263 $12,627 $12,309
7/31/1995 $12,308 $12,314 $12,657 $12,360
8/31/1995 $12,396 $12,388 $12,747 $12,435
9/30/1995 $12,470 $12,449 $12,820 $12,495
10/31/1995 $12,572 $12,552 $12,943 $12,599
11/30/1995 $12,696 $12,659 $13,080 $12,706
12/31/1995 $12,799 $12,754 $13,194 $12,802
1/31/1996 $12,900 $12,862 $13,315 $12,910
2/29/1996 $12,817 $12,812 $13,225 $12,860
3/31/1996 $12,778 $12,803 $13,184 $12,851
4/30/1996 $12,776 $12,816 $13,173 $12,864
5/31/1996 $12,777 $12,844 $13,182 $12,892
6/30/1996 $12,878 $12,938 $13,298 $12,986
7/31/1996 $12,917 $12,988 $13,346 $13,037
8/31/1996 $12,940 $13,036 $13,380 $13,085
9/30/1996 $13,072 $13,155 $13,528 $13,204
10/31/1996 $13,235 $13,304 $13,717 $13,353
11/30/1996 $13,368 $13,402 $13,849 $13,452
12/31/1996 $13,311 $13,405 $13,813 $13,455
1/31/1997 $13,378 $13,469 $13,877 $13,520
2/28/1997 $13,397 $13,501 $13,904 $13,552
3/31/1997 $13,355 $13,491 $13,860 $13,541
4/30/1997 $13,477 $13,601 $13,994 $13,652
5/31/1997 $13,575 $13,696 $14,097 $13,748
6/30/1997 $13,680 $13,791 $14,208 $13,843
7/31/1997 $13,874 $13,941 $14,418 $13,994
8/31/1997 $13,841 $13,955 $14,398 $14,008
9/30/1997 $13,964 $14,061 $14,532 $14,114
10/31/1997 $14,091 $14,165 $14,663 $14,218
11/30/1997 $14,130 $14,201 $14,691 $14,254
12/31/1997 $14,228 $14,296 $14,798 $14,349
1/31/1998 $14,383 $14,433 $14,969 $14,487
2/28/1998 $14,358 $14,446 $14,969 $14,500
3/31/1998 $14,415 $14,502 $15,022 $14,551
4/30/1998 $14,479 $14,572 $15,095 $14,622
5/31/1998 $14,563 $14,649 $15,188 $14,711
6/30/1998 $14,643 $14,725 $15,273 $14,794
7/31/1998 $14,697 $14,795 $15,337 $14,856
08/31/98 $14,898 $14,975 $15,551 $15,064
09/30/98 $15,152 $15,177 $15,842 $15,346
10/31/98 $15,204 $15,252 $15,887 $15,389
11/30/98 $15,175 $15,236 $15,874 $15,376
12/31/98 $15,214 $15,294 $15,928 $15,429
01/31/99 $15,258 $15,352 $16,008 $15,506
02/28/99 $15,116 $15,314 $15,871 $15,374
03/31/99 $15,232 $15,418 $15,990 $15,489
04/30/99 $15,247 $15,466 $16,043 $15,540
05/31/99 $15,188 $15,455 $15,979 $15,478
06/30/99 $15,219 $15,500 $16,024 $15,522
7/31/1999 $15,254 $15,548 $16,040 $15,537
8/31/1999 $15,289 $15,592 $16,075 $15,571
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Short-Term Bond Market Index Fund, made at its inception, with a similar
investment in three indices: the Lehman Brothers Short (1-3 Year) U.S.
Government Bond Index, which was the fund's index until 2/28/98; the Lehman
Brothers Mutual Fund Short (1-5 Year) Government/Corporate Bond Index, the
fund's index beginning on 3/1/98; and a benchmark index that combines the
performance of these two indices for their respective periods. The change in the
index is a result of the fund's conversion from a government bond fund to a bond
index fund, as discussed in previous shareholder reports, which was completed as
of 3/1/98.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the fund. Investors cannot invest in an index
directly.
ASSETS
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Total net assets as of 8/31/98 (000s) $157,421
- ----------------------------------------------------------------------
Total net assets as of 8/31/99 (000s) $218,050
- ----------------------------------------------------------------------
Percentage growth over reporting period 39%
- ----------------------------------------------------------------------
</TABLE>
8
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
PORTFOLIO SNAPSHOT
The Schwab Short-Term Bond Market Index Fund invests primarily in U.S. Treasury
obligations, corporate obligations and other U.S. government securities. The
information below provides a snapshot of the fund's characteristics as of
8/31/99 and is not indicative of its composition after that date. The terms used
below are defined beginning on page 19. A complete list of the securities in the
fund's portfolio as of 8/31/99 is provided in the Schedule of Investments later
in this report.
FUND FACTS
<TABLE>
<CAPTION>
LEHMAN BROTHERS
SCHWAB SHORT-TERM BOND MARKET SHORT (1-5 YEAR) GOVERNMENT/
INDEX FUND CORPORATE INDEX
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Number of Issues 53 1,804
- ------------------------------------------------------------------------------------------------------------
Yield to Maturity 6.13% 6.19%
- ------------------------------------------------------------------------------------------------------------
Average Coupon 5.88% 6.19%
- ------------------------------------------------------------------------------------------------------------
Average Weighted Maturity 2.77 years 2.78 years
- ------------------------------------------------------------------------------------------------------------
Average Quality AAA AAA
- ------------------------------------------------------------------------------------------------------------
Average Duration 2.42 years 2.43 years
- ------------------------------------------------------------------------------------------------------------
Expense Ratio 0.35%* --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/99.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 8/31/99
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF FUND
OF FUND INVESTMENTS
MATURITY RANGE VALUE (000S) INVESTMENTS (CUMULATIVE)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
0 - 6 months $ 11,777 5.5% 5.5%
- ---------------------------------------------------------------------------------------------------------
7 - 36 months $113,935 52.5% 58.0%
- ---------------------------------------------------------------------------------------------------------
37 - 60 months $ 87,480 40.3% 98.3%
- ---------------------------------------------------------------------------------------------------------
More than
60 months $ 3,745 1.7% 100.0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT STYLE BOX(1)
AS OF 8/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTED AVERAGE MATURITY
<S> <C> <C> <C>
Short Int Long AVERAGE CREDIT QUALITY
X High
Medium
Low
</TABLE>
(1) Source: Morningstar. The style box represents two of the main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the fund's portfolio as of 8/31/99, and is
not indicative of its holdings after that date, nor does it represent a risk
rating or any type of forecast of future performance. Placement is based on
the fund's weighted average maturity and the average credit quality of its
portfolio. The fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than 10 years.
Credit quality is defined on page 19. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
9
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2) AS OF 8/31/99
<S> <C>
U.S. Treasury Obligations 66.3%
Corporate Bonds 25.3%
Agency Obligations 7.6%
Temporary Investments 0.8%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION BY
CREDIT QUALITY(3)
AS OF 8/31/99
<S> <C>
AAA 76.0%
AA 1.8%
A 12.9%
BBB 6.0%
BB 2.3%
Unrated Securities 1.0%
</TABLE>
The charts above illustrate the composition of the fund's portfolio as of
8/31/99 and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities of
the fund.
(3) Credit quality is based on published ratings from Standard & Poor's Ratings
Group and/or Moody's Investor Service, which are recognized rating services.
Categories reflect the higher published ratings for securities rated
differently by the two agencies, and percentages are dollar-weighted.
TOP 10 HOLDINGS
% OF TOTAL NET ASSETS
- ---------------------------------------------
U.S. Treasury Note,
5.25%, Maturity 05/15/04 6.47%
- ---------------------------------------------
U.S. Treasury Note,
5.50%, Maturity 12/31/00 4.94%
- ---------------------------------------------
Cox Communications (Float),
6.04%, Maturity 11/15/99 4.59%
- ---------------------------------------------
U.S. Treasury Note,
5.88%, Maturity 11/30/01 4.13%
- ---------------------------------------------
U.S. Treasury Note,
6.38%, Maturity 09/30/01 3.25%
- ---------------------------------------------
- ---------------------------------------------
U.S. Treasury Note,
5.75%, Maturity 11/30/02 3.20%
- ---------------------------------------------
U.S. Treasury Note,
6.00%, Maturity 08/15/04 2.77%
- ---------------------------------------------
U.S. Treasury Note,
5.75%, Maturity 06/30/01 2.75%
- ---------------------------------------------
U.S. Treasury Note,
5.50%, Maturity 05/31/03 2.62%
- ---------------------------------------------
U.S. Treasury Note,
4.50%, Maturity 01/31/01 2.37%
- ---------------------------------------------
10
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/99
<TABLE>
<CAPTION>
SINCE
INCEPTION 30-DAY
ONE YEAR FIVE YEARS (3/5/93) SEC YIELD
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
SCHWAB TOTAL BOND MARKET INDEX FUND(1),(2) 0.14% 7.36% 5.99% 6.25%
- -----------------------------------------------------------------------------------------------------------
Benchmark Indices(3) 0.80% 7.06% 5.90% N/A
- -----------------------------------------------------------------------------------------------------------
Lehman Brothers General U.S. Government Bond Index (PRIOR) 0.13% 7.17% 5.89% N/A
- -----------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (NEW) 0.80% 7.27% 6.07% N/A
- -----------------------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 6/30/99. As of 6/30/99, the fund's one-year, five-year and
since-inception average annual total returns were 2.71%, 7.87% and 6.22%,
respectively. The 30-day SEC yield as of 6/30/99 was 6.02%.(4)
(1) Prior to 11/1/97, the Schwab Total Bond Market Index Fund was known as the
Schwab Long-Term Government Bond Fund. As reported in the fund's annual
report dated 8/31/97, shareholders approved the proposed change to the
fund's investment objective from an actively managed government bond
strategy to an index strategy at the shareholders' meeting held on 9/22/97.
(2) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 8/31/99, the fund's one-year, five-year and
since-inception average annual total returns would have been (0.27)%, 6.44%
and 4.18%, respectively. The 30-day SEC yield as of 8/31/99 would have been
5.83%.
(3) This index represents the Lehman Brothers General U.S. Government Bond Index
for the period from the fund's inception on 3/5/93 through 2/28/98, and the
Lehman Brothers Aggregate Bond Index from 3/1/98 through the end of the
reporting period. This benchmark is designed to show investors how a
hypothetical $10,000 investment in the fund has performed since its
inception to the end of the reporting period by comparing it with the fund's
prior and new indices.
(4) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 6/30/99, the fund's one-year, five-year and
since-inception average annual total returns would have been 2.30%, 6.93%,
and 4.37% and respectively. The 30-day SEC yield as of 6/30/99 would have
been 5.66%.
11
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB TOTAL BOND LEHMAN BROTHERS GENERAL LEHMAN BROTHERS BENCHMARK
MARKET INDEX FUND U.S. GOVERNMENT BOND AGGREGATE INDEX
INDEX BOND INDEX
<S> <C> <C> <C> <C>
03/05/93 $10,000 $10,000 $10,000 $10,000
03/31/93 $9,784 $9,926 $9,979 $9,979
04/30/93 $9,890 $10,002 $10,048 $10,056
05/31/93 $9,927 $9,991 $10,061 $10,045
06/30/93 $10,314 $10,213 $10,244 $10,268
07/31/93 $10,441 $10,276 $10,302 $10,330
08/31/93 $10,863 $10,505 $10,482 $10,561
09/30/93 $10,901 $10,545 $10,511 $10,601
10/31/93 $10,952 $10,585 $10,550 $10,641
11/30/93 $10,688 $10,468 $10,460 $10,524
12/31/93 $10,738 $10,509 $10,517 $10,565
01/31/94 $10,938 $10,653 $10,659 $10,710
02/28/94 $10,544 $10,427 $10,474 $10,483
03/31/94 $10,220 $10,193 $10,216 $10,247
04/30/94 $10,112 $10,112 $10,134 $10,166
05/31/94 $10,060 $10,099 $10,133 $10,153
06/30/94 $10,027 $10,076 $10,110 $10,129
07/31/94 $10,239 $10,261 $10,311 $10,316
08/31/94 $10,233 $10,263 $10,324 $10,318
09/30/94 $10,050 $10,118 $10,172 $10,172
10/31/94 $10,036 $10,111 $10,163 $10,165
11/30/94 $10,031 $10,093 $10,140 $10,147
12/31/94 $10,122 $10,155 $10,210 $10,209
01/31/95 $10,347 $10,344 $10,412 $10,399
02/28/95 $10,647 $10,566 $10,660 $10,622
03/31/95 $10,718 $10,633 $10,726 $10,689
04/30/95 $10,887 $10,772 $10,875 $10,829
05/31/95 $11,429 $11,206 $11,296 $11,266
06/30/95 $11,445 $11,292 $11,379 $11,353
07/31/95 $11,348 $11,250 $11,354 $11,311
08/31/95 $11,566 $11,382 $11,491 $11,443
09/30/95 $11,711 $11,491 $11,602 $11,553
10/31/95 $11,931 $11,666 $11,753 $11,728
11/30/95 $12,173 $11,848 $11,929 $11,911
12/31/95 $12,395 $12,016 $12,096 $12,080
01/31/96 $12,438 $12,090 $12,176 $12,154
02/29/96 $12,075 $11,843 $11,964 $11,906
03/31/96 $11,934 $11,745 $11,881 $11,807
04/30/96 $11,766 $11,669 $11,814 $11,732
05/31/96 $11,722 $11,650 $11,790 $11,712
06/30/96 $11,885 $11,800 $11,948 $11,863
07/31/96 $11,890 $11,829 $11,981 $11,893
08/31/96 $11,830 $11,803 $11,960 $11,866
09/30/96 $12,112 $11,999 $12,168 $12,063
10/31/96 $12,451 $12,263 $12,439 $12,329
11/30/96 $12,763 $12,477 $12,651 $12,543
12/31/96 $12,537 $12,349 $12,534 $12,415
01/31/97 $12,533 $12,363 $12,572 $12,429
02/28/97 $12,556 $12,380 $12,604 $12,446
03/31/97 $12,353 $12,249 $12,464 $12,314
04/30/97 $12,606 $12,425 $12,651 $12,492
05/31/97 $12,732 $12,532 $12,771 $12,599
06/30/97 $12,918 $12,673 $12,923 $12,740
07/31/97 $13,363 $13,033 $13,272 $13,102
08/31/97 $13,152 $12,904 $13,159 $12,972
09/30/97 $13,397 $13,097 $13,354 $13,167
10/31/97 $13,687 $13,324 $13,548 $13,395
11/30/97 $13,700 $13,392 $13,610 $13,463
12/31/97 $13,778 $13,532 $13,747 $13,604
01/31/98 $13,977 $13,735 $13,923 $13,809
02/28/98 $13,938 $13,698 $13,912 $13,771
03/31/98 $13,964 $13,736 $13,959 $13,818
04/30/98 $14,035 $13,798 $14,032 $13,890
05/31/98 $14,166 $13,940 $14,165 $14,022
06/30/98 $14,263 $14,099 $14,286 $14,141
07/31/98 $14,306 $14,121 $14,316 $14,171
08/31/98 $14,575 $14,488 $14,549 $14,402
09/30/98 $14,930 $14,879 $14,890 $14,739
10/31/98 $14,844 $14,828 $14,811 $14,661
11/30/98 $14,866 $14,833 $14,895 $14,744
12/31/98 $14,937 $14,865 $14,940 $14,788
01/31/99 $15,061 $14,952 $15,046 $14,893
02/28/99 $14,770 $14,596 $14,783 $14,633
03/31/99 $14,870 $14,653 $14,864 $14,713
04/30/99 $14,874 $14,686 $14,911 $14,760
05/31/99 $14,703 $14,557 $14,780 $14,630
06/30/99 $14,649 $14,528 $14,733 $14,584
07/31/99 $14,614 $14,506 $14,671 $14,522
08/31/99 $14,594 $14,506 $14,664 $14,515
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Total Bond Market Index Fund, made at its inception, with a similar
investment in three indices: the Lehman Brothers General U.S. Government Bond
Index, which was the Fund's index up until 2/28/98; the Lehman Brothers
Aggregate Bond Index, the Fund's index beginning on 3/1/98; and a benchmark
index that combines the performance of these two indices for their respective
periods. The change in the index is a result of a strategy change of the Schwab
Total Bond Market Index Fund, as discussed in previous shareholder reports,
which was completed as of 3/1/98.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly.
ASSETS
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Total net assets as of 8/31/98 (000s) $294,020
- ----------------------------------------------------------------------
Total net assets as of 8/31/99 (000s) $479,939
- ----------------------------------------------------------------------
Percentage growth over reporting period 63%
- ----------------------------------------------------------------------
</TABLE>
12
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
PORTFOLIO SNAPSHOT
The Schwab Total Bond Market Index Fund invests primarily in U.S. Treasury
obligations, corporate obligations, mortgage-backed obligations, asset-backed
obligations dollar-denominated foreign issues and U.S. government agency
securities. The information below provides a snapshot of the fund's
characteristics as of 8/31/99 and is not indicative of its composition after
that date. The terms used below are defined beginning on page 19. A complete
list of the securities in the fund's portfolio as of 8/31/99 is provided in the
Schedule of Investments later in this report.
FUND FACTS
<TABLE>
<CAPTION>
SCHWAB TOTAL BOND MARKET LEHMAN BROTHERS AGGREGATE
INDEX FUND BOND INDEX
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Number of Issues 77 5,392
- ----------------------------------------------------------------------------------------------------------
Yield to Maturity 7.30% 6.90%
- ----------------------------------------------------------------------------------------------------------
Average Coupon 7.87% 6.74%
- ----------------------------------------------------------------------------------------------------------
Weighted Average Maturity 8.55 years 9.03 years
- ----------------------------------------------------------------------------------------------------------
Average Quality AA AAA
- ----------------------------------------------------------------------------------------------------------
Average Duration 5.04 5.04
- ----------------------------------------------------------------------------------------------------------
Expense Ratio 0.35%* --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/99.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 8/31/99
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF FUND
OF FUND INVESTMENTS
MATURITY RANGE VALUE (000S) INVESTMENTS (CUMULATIVE)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
0 - 1 year $144,861 26.5% 26.5%
- ---------------------------------------------------------------------------------------------------------
2 - 10 years $274,423 50.1% 76.6%
- ---------------------------------------------------------------------------------------------------------
11 - 20 years $ 24,499 4.5% 81.1%
- ---------------------------------------------------------------------------------------------------------
21 - 30 years $ 46,754 8.5% 89.6%
- ---------------------------------------------------------------------------------------------------------
More than
30 years $ 56,674 10.4% 100.0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT STYLE BOX(1)
AS OF 8/31/99
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
WEIGHTED AVERAGE MATURITY
<S> <C> <C> <C>
Short Int Long AVERAGE CREDIT QUALITY
X High
Medium
Low
</TABLE>
(1) Source: Morningstar. The style box represents two of the main components of
bond performance: interest rate sensitivity and credit quality. It
illustrates the composition of the fund's portfolio as of 8/31/99, and is
not indicative of its holdings after that date, nor does it represent a risk
rating or any type of forecast of future performance. Placement is based on
the fund's weighted average maturity and the average credit quality of its
portfolio. The fund's weighted average maturity is considered short if it is
less than four years, medium if it is greater than or equal to four years
but less than 10 years, and long if it is equal to or greater than 10 years.
Credit quality is defined on page 19. Average credit quality is considered
high if it is AA or better, medium if it is BBB or A, and low if it is below
BBB.
13
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION AS A
PERCENTAGE OF FUND INVESTMENTS(2)
AS OF 8/31/99
<S> <C>
U.S. Treasury Obligations 39.7%
Preferred Stock 2.2%
Corporate Bonds (4) 28.2%
Mortgage Backed Securities 11.8%
Asset Backed Securities (4) 10.3%
Agency Obligations 7.1%
Temporary Investments 0.7%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORTFOLIO COMPSITION BY
CREDIT QUALITY(3)
AS OF 8/31/99
<S> <C>
AAA 64.1%
AA 9.3%
A 8.4%
BBB 12.4%
BB 1.6%
Unrated 4.2%
</TABLE>
The charts above illustrate the composition of the fund's portfolio as of
8/31/99 and are not indicative of its holdings after that date.
(2) These percentages do not take into account other assets and liabilities of
the fund.
(3) Credit quality is based on published ratings from Standard & Poor's Ratings
Group and/or Moody's Investor Service, which are recognized rating services.
Categories reflect the higher published ratings for securities rated
differently by the two agencies, and percentages are dollar-weighted.
(4) A combination of various corporate bonds and asset-backed securities
(approximately 25.8% of the fund's portfolio) is used to gain exposure to
agency mortgage-backed securities.
TOP 10 HOLDINGS
% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------
Airplanes Pass Through Trust, Series 1R, Class A8 5.64%,
Maturity 09/15/99 5.64%
- -------------------------------------------------------------------
Health and Retirement Properties, 6.56%, Maturity 10/11/99 4.17%
- -------------------------------------------------------------------
U.S. Treasury Note, 4.25%, Maturity 11/15/03 4.01%
- -------------------------------------------------------------------
U.S. Treasury Note, 5.38%, Maturity 06/30/03 3.21%
- -------------------------------------------------------------------
U.S. Treasury Note, 5.50%, Maturity 02/28/03 3.19%
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Public Service Enterprises, 6.26%, Maturity 11/22/99 3.13%
- -------------------------------------------------------------------
Federal National Mortgage Association, 6.50%,
Maturity 03/1/29 2.76%
- -------------------------------------------------------------------
U.S. Treasury Note, 5.25%, Maturity 08/15/03 2.72%
- -------------------------------------------------------------------
U.S. Treasury Bond, 5.25%, Maturity 02/15/29 2.55%
- -------------------------------------------------------------------
Centaur Funding Corporation (Preferred Stock) 2.55%
- -------------------------------------------------------------------
</TABLE>
14
<PAGE>
DIVIDENDS PAID
During the reporting period, the funds continued to attempt to provide a high
level of current income consistent with the preservation of capital. The chart
below illustrates the income dividends on a per-share basis paid by each fund
during each fiscal year or reporting period since inception.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DIVIDENDS PAID BY THE SCHWAB BOND INDEX FUNDS
INCOME DIVIDENDS PER SHARE
FISCAL YEAR
Schwab Short-Term Bond Market Schwab Total Bond Market
Index Fund (inception 11/5/91) Index Fund (inception 3/5/93)
<S> <C> <C>
1991* $0.10
1992 $0.60
1993** $0.37 $0.31
1994+ $0.54 $0.60
1995+ $0.59 $0.69
1996+ $0.59 $0.65
1997+ $0.59 $0.65
1998+ $0.57 $0.60
1999+++ $0.50 $0.55
</TABLE>
* Period from the fund's inception on 11/5/91 through 12/31/91.
** Period from the fund's inception on 3/5/93 through 8/31/93 for Schwab Total
Bond Market Index Fund and for the eight-month period ended 8/31/93 for
Schwab Short-Term Bond Market Index Fund.
+ For the one-year period ended 8/31 for both funds.
++ The Schwab Total Bond Market Index Fund paid short- and long-term capital
gains of $0.05 and $0.02, respectively, on 12/31/98.
15
<PAGE>
PORTFOLIO MANAGEMENT
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD--senior vice president and chief investment officer, has overall
responsibility for the management of each fund's portfolio. Steve joined CSIM as
vice president and portfolio manager in April 1991, and was promoted to his
current position in August 1993. Prior to joining CSIM, Steve was vice president
and portfolio manager at Federated Investors.
KIM DAIFOTIS--vice president and senior portfolio manager, has had primary
responsibility for the day-to-day management of each fund's portfolio since he
joined CSIM in November 1997. Prior to joining CSIM, Kim spent five years at
Lehman Brothers where he served as vice president and fixed income institutional
salesman, as well as senior portfolio strategist. Prior to Lehman Brothers, Kim
spent three years as senior portfolio manager for Barclays Global Investors.
16
<PAGE>
FUND DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
Q. HOW DID THE FUNDS PERFORM DURING THE
ONE-YEAR REPORTING PERIOD?
A. Although both funds achieved positive total returns, the rising interest rate
environment and the resulting drop in bond values had a negative impact on the
funds' returns for the one-year reporting period. As would be expected because
of its longer duration, the impact of declining bond values was more pronounced
for the Schwab Total Bond Market Index Fund than the Schwab Short-Term Bond
Market Index Fund.
The SCHWAB SHORT-TERM BOND MARKET INDEX FUND achieved a total return of 2.66%
for the one-year reporting period ended August 31, 1999. This return came from a
combination of dividend income of 5.08% and a decline in the fund's NAV of
2.42%. The NAV decline was a result of higher bond yields at the end of the
period compared to the beginning of the period. The fund's weighted average
maturity, 2.77 years as of August 31, 1999, remained fairly constant throughout
the reporting period.
The SCHWAB TOTAL BOND MARKET INDEX FUND achieved a total return of 0.14% for the
one-year reporting period ended August 31, 1999. This return came from a
combination of dividend income of 6.03% and a decline in the fund's NAV of
5.89%. The NAV decline was a result of higher bond yields at the end of the
period compared to the beginning of the period. The fund's weighted average
maturity, 8.55 years as of August 31, 1999, increased moderately compared to the
beginning of the period (7.84 years) primarily as a result of changes in the
Lehman Brothers Aggregate Bond Index.
Q. HOW DID THE FUNDS' PERFORMANCE COMPARE TO THEIR BENCHMARKS?
A. The funds' performance compared to their benchmark indices is shown in the
tables below.
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
<TABLE>
<CAPTION>
TOTAL RETURN
FOR THE
YEAR ENDED
8/31/99
<S> <C>
- ---------------------------------------------------------------------------
Schwab Short-Term Bond
Market Index Fund 2.66%
- ---------------------------------------------------------------------------
Lehman Brothers Mutual Fund Short (1-5 Year)
Government/Corporate
Bond Index 3.36%
- ---------------------------------------------------------------------------
Tracking Differential (0.70)%
- ---------------------------------------------------------------------------
</TABLE>
Typically, there will be a small gap between the performance of each fund's
index and the actual fund performance. This gap occurs mainly because, unlike
the index, the fund incurs operating expenses and trading costs, and must keep a
small portion of its assets in cash for paying expenses and processing
shareholder orders. During the one-year reporting period this gap, after
accounting for the fund's operating expenses, was (0.35)%.
17
<PAGE>
FUND DISCUSSION (continued)
SCHWAB TOTAL BOND MARKET INDEX FUND
<TABLE>
<CAPTION>
TOTAL RETURN
FOR THE
YEAR ENDED
8/31/99
<S> <C>
- ---------------------------------------------------------------------------
Schwab Total Bond
Market Index Fund 0.14%
- ---------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond Index 0.80%
- ---------------------------------------------------------------------------
Tracking Differential (0.66)%
- ---------------------------------------------------------------------------
</TABLE>
As with the Schwab Short-Term Bond Market Index Fund, we typically anticipate a
small gap between the performance of the Schwab Total Bond Market Index Fund and
its benchmark index. During the one-year reporting period, this gap, after
accounting for the fund's operating expenses, was (0.31)%.
Many events combined to create a very challenging environment for bond fund
managers attempting to track indices and minimize tracking differential. These
included both positive and negative developments, including extreme volatility
in prices, spreads between government and corporate bond yields and liquidity in
the bond market. Moreover, the overall bond markets were also affected by the
Russian government's bond default and concerns over several hedge funds.
18
<PAGE>
GLOSSARY
ALTERNATIVE MINIMUM TAX (AMT)--A federal tax designed to help ensure that at
least a minimum amount of income tax is paid by high-income corporate and
non-corporate taxpayers (including estates and trusts) who reap large tax
savings by making generous use of certain tax deductionsand exemptions. The AMT
functions as a recapture mechanism, reclaiming some of the tax breaks primarily
available to high-income taxpayers, who without the AMT might be able to escape
taxation entirely.
BOND--A bond can be thought of as a loan agreement in which the bondholder lends
a set amount of money to a corporation, government agency or municipality and
expects to be repaid with interest. Although bonds are loans and contain no
rights of ownership, they do embody a legally enforceable promise to repay.
CALL--The right of a bond's issuer to redeem a bond before its stated maturity
date. Bonds can be called for many reasons, but a call typically occurs when
interest rates drop and issuers are able to obtain lower interest rates to
finance their debts.
CALL PROTECTION--When managers seek call protection, they're looking for bonds
whose issuers cannot redeem them before their stated maturities, or who cannot
redeem them until a far-off date. Such bonds help protect yield but are subject
to interest rate sensitivity.
COUPON--The coupon rate is the annual rate of interest on the bond's face value
that the issuer agrees to pay the holder until maturity. The coupon is
established at the time of issue and is determined by the then prevailing level
of interest rates in the marketplace. AVERAGE COUPON is the average interest
rate paid on the securities held by a fund. It is expressed as a percentage of
face value.
CREDIT RATINGS--Bonds are generally rated by one or both of the two major credit
rating agencies accepted in the industry: Moody's Investor Service and the
Standard & Poor's Corporation. They assign ratings based on the issuer's ability
to make the scheduled interest and principal payments. These ratings are
reviewed periodically and may be revised at any time.
<TABLE>
<CAPTION>
MOODY'S S&P DESCRIPTION
<S> <C> <C>
- ---------------------------------------------------------
INVESTMENT GRADE
Aaa AAA Strongest capacity to pay
interest and repay principal
Aa AA Very strong capacity to pay
interest and repay principal
A A Strong capacity to pay
interest and repay principal
Baa BBB Adequate capacity to pay
interest and repay principal
BELOW INVESTMENT GRADE
Ba BB Lowest degree of speculation
with respect to capacity to
pay interest and repay
principal
B B Greater vulnerability to
default but currently has
the capacity to meet
interest and principal
payment
Caa CCC Currently vulnerable to
default--dependent on
favorable conditions
Ca CC Highly speculative
C C Highest degree of
speculation--no interest is
paid
- - D In payment default
</TABLE>
19
<PAGE>
GLOSSARY (continued)
CREDIT RISK--The risk that an issuer of a debt security or a borrower may
default on its obligation.
DIVIDEND--The portion of a company's earnings paid to investors on a per-share
basis.
DURATION--The common objective behind the different definitions of DURATION is
to measure the price sensitivity--and therefore market risk--of a fixed income
security to changes in its yield.
EXPENSE RATIO--Amount, expressed as a percentage of total net asset, that
shareholders pay annually for mutual fund operating expenses and
management fees.
GENERAL OBLIGATION BONDS (GOS)--General obligation bonds are backed by a pledge
of the issuer's full faith and credit with the timely payment of principal and
interest secured by the taxing power of the issuer.
INTEREST--Compensation, usually paid semiannually, to bondholders by the issuer.
Usually expressed as an annual percentage rate.
INTEREST RATE RISK--Risk associated with fluctuations of bond prices in response
to the general movement of interest rates and to changes in investor perceptions
of government monetary policy and economic data.
MARKET RISK--The possibility that the actual return of an investment will be
less than what's expected.
MATURITY--The maturity of a security is the date the issuer makes the final
payment to the security holder. WEIGHTED AVERAGE MATURITY is the average length
of time until the bonds held by a fund reach maturity (or are called) and are
repaid. In general, the longer the average maturity, the more a fund's share
price will fluctuate in response to changes in market interest rates.
MORTGAGE-BACKED SECURITIES--Represent an ownership interest in mortgage loans
made by financial institutions to finance the borrower's purchase of a home or
other real estate. The most basic mortgage securities, known as PASS-THROUGHS,
or participation certificates, represent a direct ownership interest in a trust
composed of a pool of mortgage loans. The majority of mortgage securities are
issued and/or guaranteed by the Government National Mortgage Association (Ginnie
Mae), the Federal National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac).
MUNICIPAL BONDS--Debt obligations of states, cities, towns, municipalities,
municipal authorities and governmental entities. They are issued to build
schools, tunnels and bridges or to finance infrastructure repairs or
improvements. The interest earned typically is free of federal income taxes and,
in some cases, also may be free of state and/or local income taxes if purchased
by residents of the issuing state. However, interest paid by certain municipal
bonds is subject to the AMT.
PREPAYMENT RISK--When interest rates are falling, many homeowners will refinance
their mortgages to take advantage of the new lower rates. As a result, when
interest rates decline, prepayments of mortgage-backed securities accelerate
beyond the initial pricing assumptions, which causes the average life and
maturity of the security to shorten.
REINVESTMENT RISK--The risk that a bondholder may be able to reinvest only at a
lower rate than originally
20
<PAGE>
planned. If yields fall, his reinvestment income and, consequently, his total
return from holding the bond may fall relative to the original yield.
Conversely, if yields rise, total return may also rise.
REVENUE BONDS--Bonds with interest that is payable from a specific source of
revenue. They are generally issued to finance public projects such as bridges,
tunnels and water treatment facilities. The interest payments on a revenue bond
are typically derived from the revenues produced by the facility.
TAXABLE-EQUIVALENT YIELD--The yield needed on a taxable investment in order to
match the return offered on a tax-exempt investment. This calculation is an
important resource for determining which investments--taxable or
tax-exempt--would yield more. The taxable-equivalent yield calculation can
determine which investment offers the better return when all taxes--federal,
state and local--are taken into consideration.
TOTAL RETURN--The sum of interest income, plus capital gains (or losses).
YIELD--The income generated by an investment, expressed as a percentage of its
price. Yield is only a measure of income and does not take into account the
appreciation (or depreciation) of a bond's value.
YIELD TO MATURITY--The overall rate of return an investor would receive if the
securities in a fund's portfolio were held to their maturity dates.
21
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1999
Par Value
------- --------
U.S. GOVERNMENT SECURITIES -- 73.5% (a)
U.S. TREASURY OBLIGATIONS -- 65.9%
U.S. Treasury Notes
4.63%, 11/30/00 $ 5,000 $ 4,939
5.50%, 12/31/00 10,800 10,779
4.50%, 01/31/01 5,250 5,168
5.38%, 02/15/01 5,000 4,979
5.00%, 02/28/01 3,000 2,971
4.88%, 03/31/01 3,500 3,456
5.63%, 05/15/01 5,000 4,991
5.75%, 06/30/01 6,000 5,998
5.50%, 07/31/01 5,000 4,976
6.63%, 07/31/01 2,000 2,031
6.50%, 08/31/01 2,000 2,028
6.38%, 09/30/01 7,000 7,081
5.88%, 11/30/01 9,000 9,015
6.25%, 02/28/02 2,500 2,525
6.63%, 03/31/02 4,000 4,075
6.63%, 04/30/02 2,750 2,802
7.50%, 05/15/02 4,000 4,163
6.00%, 07/31/02 1,500 1,507
6.38%, 08/15/02 3,000 3,039
5.88%, 09/30/02 3,000 3,000
5.75%, 11/30/02 7,000 6,971
5.50%, 02/28/03 5,000 4,936
5.50%, 03/31/03 4,000 3,948
5.75%, 04/30/03 5,000 4,970
5.50%, 05/31/03 5,800 5,719
5.25%, 08/15/03 3,000 2,929
5.75%, 08/15/03 3,000 2,979
4.25%, 11/15/03 1,000 939
4.75%, 02/15/04 750 715
5.25%, 05/15/04 14,500 14,111
6.00%, 08/15/04 (d) 6,000 6,030
---------
143,770
---------
AGENCY OBLIGATIONS -- 7.6%
Federal Home Loan Bank
6.00%, 05/17/04 5,000 4,846
Federal Home Loan Mortgage Corporation
5.50%, 05/15/02 5,000 4,898
Par Value
------- --------
Federal National Mortgage Association
5.94%, 03/29/04 $ 5,000 $ 4,829
5.88%, 04/23/04 2,000 1,927
---------
16,500
---------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $161,944) 160,270
---------
CORPORATE BONDS -- 25.2% (a)
American General Finance
6.25%, 12/18/02 2,000 1,960
Bank of New York Co., Inc.
6.63%, 06/15/03 2,000 1,990
Bank One Corp.
7.25%, 08/01/02 2,000 2,025
Columbia Gas Systems
6.39%, 11/28/00 2,000 2,000
Comdisco, Inc.
6.38%, 11/30/01 1,500 1,474
Cox Communications, Inc. (b)
6.04%, 11/15/99 10,000 10,000
Ford Motor Credit
6.70%, 07/16/04 5,000 4,931
General Electric Capital Corp.
6.65%, 09/03/02 5,000 5,019
Hertz Corp.
7.00%, 05/01/02 2,000 2,015
Lehman Brothers Holdings, Inc.
6.20%, 01/15/02 1,500 1,474
Pepsi Bottling Holdings, Inc.
5.38%, 02/17/04 5,000 4,731
Philip Morris Companies, Inc.
6.15%, 03/15/00 3,000 3,000
Quebec Province
7.50%, 07/15/02 2,000 2,042
Starwood Hotels & Resorts Worldwide, Inc.
6.25%, 11/15/00 5,000 4,938
TCI Communications, Inc.
8.65%, 09/15/04 3,500 3,745
US West Capital Funding, Inc.
6.13%, 07/15/02 1,500 1,459
WestPac Banking Corp.
9.13%, 08/15/01 2,000 2,087
---------
TOTAL CORPORATE BONDS
(Cost $55,570) 54,890
---------
22
<PAGE>
Shares Value
------- -------
OTHER INVESTMENT COMPANIES -- 0.8%(c)
Provident Institutional Funds -
Fed Funds Portfolio
4.80% 1,777 $ 1,777
--------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $1,777) 1,777
--------
TOTAL INVESTMENTS -- 99.5%
(Cost $219,291) 216,937
--------
OTHER ASSETS AND LIABILITIES -- 0.5%
Other assets 27,408
Liabilities (26,295)
--------
1,113
--------
TOTAL NET ASSETS -- 100.0% $218,050
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
23
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1999
Par Value
------- --------
U.S. GOVERNMENT SECURITIES -- 66.9%(a)
U.S. TREASURY OBLIGATIONS -- 45.3%
U.S. Treasury Bonds
5.25%, 11/15/28 $ 6,000 $ 5,191
5.25%, 02/15/29 14,000 12,244
U.S. Treasury Notes
4.63%, 11/30/00 3,000 2,964
4.50%, 01/31/01 5,000 4,922
5.00%, 02/28/01 3,200 3,169
4.88%, 03/31/01 2,000 1,975
5.00%, 04/30/01 8,000 7,912
5.75%, 06/30/01 9,000 8,998
5.50%, 07/31/01 6,000 5,972
6.00%, 07/31/02 3,500 3,516
5.75%, 11/30/02 6,250 6,224
5.50%, 02/28/03 15,500 15,302
5.50%, 03/31/03 2,500 2,467
5.75%, 04/30/03 8,000 7,952
5.50%, 05/31/03 9,500 9,367
5.38%, 06/30/03 15,700 15,409
5.25%, 08/15/03 13,350 13,034
5.75%, 08/15/03 4,000 3,972
4.25%, 11/15/03 20,500 19,241
4.75%, 02/15/04 10,350 9,871
5.25%, 05/15/04 8,000 7,785
7.25%, 05/15/04 3,000 3,150
6.00%, 08/15/04 (d) 12,000 12,061
6.50%, 05/15/05 2,500 2,547
6.13%, 08/15/07 7,900 7,873
5.50%, 02/15/08 6,450 6,189
5.63%, 05/15/08 3,000 2,897
4.75%, 11/15/08 8,250 7,468
5.50%, 05/15/09 8,000 7,685
---------
217,357
---------
Agency Obligations -- 8.1%
Federal Home Loan Mortgage Corp.
5.25%, 02/16/01 5,000 4,949
Federal National Mortgage Association
5.75%, 04/15/03 5,000 4,883
5.63%, 02/20/04 10,000 9,527
5.88%, 04/23/04 5,000 4,818
5.63%, 05/14/04 5,000 4,805
6.63%, 09/15/09 (d) 10,000 9,813
---------
38,795
---------
Par Value
------- --------
Mortgage-Backed Obligations -- 13.5% (d)
Federal National Mortgage Association
6.50%, 09/01/14 $ 9,000 $ 8,747
7.00%, 09/01/14 4,000 3,961
6.00%, 09/01/29 5,000 4,598
6.50%, 09/01/29 14,000 13,256
7.00%, 09/01/29 12,000 11,655
7.50%, 09/01/29 7,000 6,952
8.00%, 09/01/29 3,000 3,041
Government National Mortgage Association
6.50%, 09/01/29 4,000 3,774
7.00%, 09/01/29 5,000 4,845
7.50%, 09/01/29 4,000 3,966
---------
64,795
---------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $326,331) 320,947
---------
CORPORATE BONDS -- 32.1%(a)
Argentaria Capital Funding (b)
5.75%, 11/08/99 10,000 9,987
Conagra, Inc. (b)
5.30%, 09/12/99 10,000 10,012
CSC Holdings, Inc.
8.13%, 07/15/09 4,000 3,905
Dell Computer
7.10%, 04/15/28 3,000 2,753
Dresdner Funding Trust I
8.15%, 06/30/31 5,000 4,587
Fidelity Investments
7.57%, 06/15/29 10,000 9,675
Ford Motor Credit
6.70%, 07/16/04 7,000 6,904
GTE Corp.
6.94%, 04/15/28 5,000 4,656
Health & Retirement Properties (b)
6.56%, 10/11/99 20,000 20,013
Lehman Brothers Holdings, Inc.
6.20%, 01/15/02 1,500 1,474
Lilly del Mar, Inc. (b)
6.57%, 11/05/99 10,000 9,998
Lucent Technologies, Inc.
5.50%, 11/15/08 2,000 1,805
Merrill Lynch & Co., Inc.
5.34%, 09/24/99 (b) 5,000 4,985
6.00%, 02/17/09 5,000 4,525
24
<PAGE>
Par Value
------- --------
Nabisco, Inc.
6.00%, 02/15/11 $ 2,000 $ 1,978
Pepsi Bottling Holdings, Inc.
5.63%, 02/17/09 7,000 6,307
Public Service Enterprises (b)
6.26%, 11/22/99 15,000 15,001
Qwest Communications International
Series B
7.50%, 11/01/08 5,000 4,856
Saks, Inc.
7.25%, 12/01/04 2,000 1,930
Sanwa Finance Aruba
8.35%, 07/15/09 10,000 10,013
Suntrust Capital III (b)
5.79%, 09/15/99 5,000 4,965
TRW Inc. (b)
5.59%, 09/28/99 10,000 10,014
TXU Eastern Funding Co.
6.75%, 05/15/09 4,000 3,800
---------
TOTAL CORPORATE BONDS
(Cost $157,543 154,143
---------
ASSET-BACKED OBLIGATIONS -- 11.7%(a) (b)
Advanta Mortgage Loan Trust, Series
1998-1 A-7/(MBIA Insurance)
5.55%, 09/27/99 4,181 4,184
Airplanes Pass Through Trust Series
1R, Class A8
5.64%, 09/15/99 27,000 27,083
Discover Card Master Trust I, Series
94-2, Class A
5.62%, 09/15/99 10,000 10,075
First USA Credit Card Master Trust
5.55%, 09/15/99 7,000 7,024
Provident Bank Home Equity Loan
Trust Series 1997-2 Class A5
5.57%, 09/27/99 5,559 5,566
Southern Pacific Secured Asset Corp.
Series 1998 A-1/(MBIA Insurance)
5.54%, 09/27/99 2,307 2,310
---------
TOTAL ASSET-BACKED OBLIGATIONS
(Cost $56,151) 56,242
---------
Shares Value
------- --------
PREFERRED STOCK -- 2.5% (e)
Centaur Funding Corp. 12 $ 12,235
---------
TOTAL PREFERRED STOCK
(Cost $12,516) 12,235
---------
OTHER INVESTMENT COMPANIES -- 0.8% (c)
Provident Institutional Funds -
Fed Funds Portfolio
4.80% 3,644 3,644
---------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $3,644) 3,644
---------
TOTAL INVESTMENTS -- 114.0%
(Cost $556,185) 547,211
---------
OTHER ASSETS AND LIABILITIES -- (14.0%)
Other assets 25,015
Liabilities (92,287)
---------
(67,272)
---------
TOTAL NET ASSETS -- 100.0% $ 479,939
=========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
25
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
August 31, 1999
(a) Interest rates represent coupon rate of security.
(b) Variable rate obligations -- Interest rates vary periodically based on
current market rates. Rates shown are the effective rates as of the report
date. Dates shown represent the later of the demand date or next interest
rate change date. For variable rate obligations without demand features, the
next interest reset date is shown. All dates shown are considered the
maturity date for financial reporting purposes.
(c) Interest rates represent the yield on report date.
(d) Security traded on a delayed-delivery basis. Payment and delivery is
scheduled for a future time, generally within two weeks of entering into the
transaction. The transaction is subject to market fluctuation and to the
risk that the value may be more or less than the purchase price when the
transaction was initiated. The Fund has set aside sufficient investment
securities as collateral for securities purchased on a delayed-delivery
basis.
(e) Security cannot be resold to the general public without prior registration
under the Securities Act of 1933. If the security is subsequently registered
and resold, the issuers would typically bear the expense of all
registrations at no cost to the fund. The security is valued at fair value
pursuant to guidelines and procedures adopted by the board of trustees. At
August 31, 1999, the value of the restricted security held by Schwab Total
Bond Market Index Fund was $12,235, which represented 2.5%, of the net
assets of the fund.
PORTFOLIO ABBREVIATIONS
MBIA Municipal Bond Investors Assurance Corporation
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1999
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
---------- -----------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $219,291, $556,185, respectively) $216,937 $547,211
Receivables:
Interest 2,714 4,311
Investments sold 24,515 20,126
Fund shares sold 155 557
Prepaid expenses 24 21
-------- --------
Total assets 244,345 572,226
-------- --------
LIABILITIES
Payables:
Dividends 184 451
Investments purchased 25,928 88,494
Fund shares redeemed 120 834
Due to counterparties (see Note 2) -- 2,391
Transfer agency and shareholder service fees 9 22
Other liabilities 54 95
-------- --------
Total liabilities 26,295 92,287
-------- --------
Net assets applicable to outstanding shares $218,050 $479,939
======== ========
NET ASSETS CONSIST OF:
Paid-in capital $230,825 $500,631
Distributions in excess of net investment income (68) (83)
Accumulated net realized loss on investments sold (10,353) (10,286)
Net unrealized depreciation on investments and swap agreements (2,354) (10,323)
-------- --------
$218,050 $479,939
======== ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 22,580 50,091
Net asset value, offering and redemption price per share $9.66 $9.58
</TABLE>
27
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the year ended August 31, 1999
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------- -----------
<S> <C> <C>
Interest income $10,131 $ 22,639
------- ---------
Expenses:
Investment advisory and administration fees 760 1,574
Transfer agency and shareholder service fees 463 960
Custodian and portfolio accounting fees 95 157
Registration fees 27 64
Professional fees 16 17
Shareholder reports 39 27
Trustees' fees 8 9
Proxy fees -- 9
Other expenses 10 9
------- ---------
1,418 2,826
Less: expenses reduced (see Note 4) (761) (1,498)
------- ---------
Total expenses incurred by fund 657 1,328
------- ---------
Net investment income 9,474 21,311
------- ---------
Net realized loss on investments sold (680) (9,470)
Net unrealized depreciation on investments (4,340) (12,670)
Net unrealized depreciation on swap agreements -- (1,459)
------- ---------
Net loss on investments (5,020) (23,599)
------- ---------
Increase (decrease) in net assets resulting from operations $ 4,454 $ (2,288)
======= =========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
For the year ended August 31,
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
---------------------- -----------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 9,474 $ 7,988 $ 21,311 $ 8,308
Net realized gain (loss) on investments sold (680) 1,170 (9,470) 1,762
Net unrealized appreciation (depreciation) on
investments (4,340) 1,341 (12,670) 3,281
Net unrealized appreciation (depreciation) on
swap agreements -- -- (1,459) 110
-------- -------- --------- --------
Increase (decrease) in net assets resulting
from operations 4,454 10,499 (2,288) 13,461
-------- -------- --------- --------
Distributions:
Dividends to shareholders from net investment
income (See Note 2) (9,475) (8,180) (21,326) (8,398)
Distributions to shareholders from net
realized gains -- -- (2,225) --
-------- -------- --------- --------
Total distributions to shareholders (9,475) (8,180) (23,551) (8,398)
-------- -------- --------- --------
Capital share transactions:
Proceeds from shares sold 133,291 70,549 302,668 283,044
Net asset value of shares issued in reinvestment
of dividends 7,152 6,283 21,544 7,336
Less payments for shares redeemed (74,793) (49,190) (112,454) (26,201)
-------- -------- --------- --------
Increase in net assets from capital share
transactions 65,650 27,642 211,758 264,179
-------- -------- --------- --------
Total increase in net assets 60,629 29,961 185,919 269,242
Net assets:
Beginning of period 157,421 127,460 294,020 24,778
-------- -------- --------- --------
End of period (including distributions in excess
of net investment income of ($68), ($67), ($83)
and ($74), respectively) $218,050 $157,421 $ 479,939 $294,020
======== ======== ========= ========
Number of fund shares:
Sold 13,551 7,182 30,255 28,231
Reinvested 728 640 2,160 731
Redeemed (7,598) (5,009) (11,218) (2,610)
-------- -------- --------- --------
Net increase in shares outstanding 6,681 2,813 21,197 26,352
Shares outstanding:
Beginning of period 15,899 13,086 28,894 2,542
-------- -------- --------- --------
End of period 22,580 15,899 50,091 28,894
======== ======== ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Short-Term Bond Market Index Fund
- ----------------------------------------------------------------------------------------------------------
FISCAL PERIOD ENDED 8/31 1999 1998 1997 1996 1995
PER SHARE DATA ($)
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 9.90 9.74 9.67 9.84 9.81
-------------------------------------------------
From investment operations:
Net investment income 0.50 0.56 0.59 0.59 0.59
Net realized andunrealized gain (loss) on
investments (0.24) 0.17 0.07 (0.17) 0.03
-------------------------------------------------
Total from investment operations 0.26 0.73 0.66 0.42 0.62
Less distributions:
Dividends from net investment income (0.50) (0.57) (0.59) (0.59) (0.59)
-------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 9.66 9.90 9.74 9.67 9.84
-------------------------------------------------
Total return (%) 2.66 7.64 6.96 4.39 6.61
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.35 0.46 0.49 0.49 0.58
Reductions reflected in above expense ratio 0.42 0.39 0.33 0.31 0.23
Ratio of net investment income to average net assets 5.11 5.58 6.02 6.03 6.11
Portfolio turnover rate 195 128 71 80 203
Net assets, end of period ($ X 1,000) 218,050 157,421 127,460 134,019 157,191
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Total Bond Market Index Fund
- ----------------------------------------------------------------------------------------------------------
FISCAL PERIOD ENDED 8/31 1999 1998 1997 1996 1995
PER SHARE DATA ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 10.18 9.75 9.38 9.80 9.33
-------------------------------------------------
From investment operations:
Net investment income 0.55 0.60 0.65 0.65 0.69
Net realized andunrealized gain (loss) on
investments (0.53) 0.43 0.37 (0.42) 0.47
-------------------------------------------------
Total from investment operations 0.02 1.03 1.02 0.23 1.16
Less distributions:
Dividends from net investment income (0.55) (0.60) (0.65) (0.65) (0.69)
Distributions from net realized gain on investments (0.07) -- -- -- --
-------------------------------------------------
Total distributions (0.62) (0.60) (0.65) (0.65) (0.69)
-------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 9.58 10.18 9.75 9.38 9.80
-------------------------------------------------
Total return (%) 0.14 10.83 11.18 2.29 13.03
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.35 0.31 0.20 -- --
Reductions reflected in above expense ratio 0.39 0.51 0.98 1.17 1.18
Ratio of net investment income to average net assets 5.55 5.86 6.74 6.67 7.38
Portfolio turnover rate 174 285 51 66 240
Net assets, end of period ($ X 1,000) 479,939 294,020 24,778 22,761 12,949
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1999
(All dollar amounts are in thousands unless otherwise noted)
1. DESCRIPTION OF THE FUNDS
The Schwab Short-Term Bond Market Index Fund and Schwab Total Bond Market Index
Fund (the "funds") are series of Schwab Investments (the "Trust"), a no-load,
open-end, investment management company organized as a Massachusetts business
trust on October 26, 1990 and registered under the Investment Company Act of
1940 (the "Act"), as amended.
In addition to the funds, the Trust also offers the Schwab 1000
Fund(REGISTRATION MARK), Schwab California Short/Intermediate Tax-Free Bond
Fund, Schwab California Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate
Tax-Free Bond Fund, Schwab Long-Term Tax-Free Bond Fund, and Schwab YieldPlus
Fund(TRADE MARK) (effective on 7/21/99 and commencement of operations on
10/1/99). The assets of each series are segregated and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
SECURITY VALUATION -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Restricted securities are valued at fair value as determined in good faith
pursuant to guidelines and procedures adopted by the board of trustees. The
value of each swap agreement is determined in accordance with a specified
formula reflective of the agreement's individual terms. Short-term securities
with 60 days or less to maturity are stated at amortized cost, which
approximates market value.
SECURITY TRANSACTIONS, INTEREST INCOME AND REALIZED GAINS (LOSSES) -- Security
transactions are accounted for on a trade date basis (date the order to buy or
sell is executed). Interest income is accrued on a daily basis and includes
accretion of original issue discount and market discount and amortization of
market premium. For callable bonds purchased at a premium, the excess of the
purchase price over the call value is amortized against interest income through
the call date. If the call provision is not exercised, any remaining premium is
amortized through the final maturity date. Realized gains and losses from
security transactions are determined on an identified cost basis.
SWAP AGREEMENTS -- Each fund may enter into swap agreements, which may be an
exchange of payments based on two different variable rates, such as a LIBOR
based payment for one based on an index. A swap may be entered into in order to,
among other things, change the maturity of a fund's portfolio, to protect a
fund's value from changes in interest rates, to expose a fund to a different
security or market, or to help a fund achieve a strategy relative to an index or
other benchmark. By entering into a swap agreement, a fund is
32
<PAGE>
exposed to the risks of unanticipated movements in interest rates or in the
value of an underlying security or index, or that the counterparty will not
fulfill its obligation under the agreement.
As of August 31, 1999, the Schwab Total Bond Market Index Fund had the following
outstanding swap agreements with the following terms:
<TABLE>
<CAPTION>
Notional Termination Payments Made Payments Received Unrealized
Counterparty Amount Date by the Fund by the Fund depreciation
- ------------------ -------- ----------- -------------- ------------------------------------ ------------
<S> <C> <C> <C> <C> <C>
Lehman Brothers $25,000 6/1/00 Based on Mortgage Component of the
Special Finance 1 month LIBOR Lehman Brothers Aggregate Bond Index $674
Lehman Brothers $25,000 9/1/00 Based on Mortgage Component of the
Special Finance 1 Month LIBOR Lehman Brothers Aggregate Bond Index $675
</TABLE>
As of August 31, 1999, the total amounts due to counter parties are $2,391,
which includes a terminated but unsettled swap agreement of $1,093. Net income
or loss from the swap agreements is included in net investment income.
DOLLAR ROLLS -- The Schwab Total Bond Market Index Fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase similar (same type, coupon and maturity) securities on a specific
future date.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Each fund declares a dividend
daily, substantially equal to its net investment income for that day, payable
monthly. Distributions from net realized capital gains, if any, are recorded on
ex-dividend date, payable annually.
EXPENSES -- Expenses arising in connection with a fund are charged directly to
that fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
FEDERAL INCOME TAXES -- It is each fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its net investment income and realized net
capital gains, if any, to shareholders. Therefore, no federal income tax
provision is required. Each fund is considered a separate entity for federal
income tax purposes.
Net unrealized appreciation (depreciation) for federal income tax purposes at
August 31, 1999 was as follows:
<TABLE>
<CAPTION>
Net Unrealized Appreciated Depreciated
Depreciation Securities Securities
-------------- ----------- -----------
<S> <C> <C> <C>
Schwab Short-Term Bond Market Index Fund $ (2,481) $130 $ (2,611)
Schwab Total Bond Market Index Fund $(13,411) $544 $(13,955)
</TABLE>
The cost at August 31, 1999 for federal income tax purposes for the Schwab
Short-Term Bond Market Index Fund and the Schwab Total Bond Market Index Fund
was $219,418 and $560,622, respectively.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1999, the unused capital loss
carryforwards for federal income tax purposes, were as follows:
Schwab Short-Term
Bond Market Index Fund
----------------------
Expiring in:
08/31/03 $7,078
08/31/04 2,216
08/31/05 172
------
Total capital loss carryforwards $9,466
======
Under current law, net capital losses realized after October 31 may be deferred
and treated as occurring on the first day of the following fiscal year. At
August 31, 1999, the Schwab Short-Term Bond Market Index Fund and the Schwab
Total Bond Market Index Fund have deferred losses occurring between November 1,
1998 and August 31, 1999 of $759 and $7,106, respectively.
RECLASSIFICATIONS -- Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial and tax reporting. Accordingly, permanent book/tax
differences of $6 for the Schwab Total Bond Market Index Fund were reclassified
from paid-in capital to net investment income. These reclassifications have no
effect on net assets or net asset values per share.
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "investment adviser"). For advisory services and facilities furnished,
the funds each pay an annual fee, payable monthly, of 0.41% of each fund's
average daily net assets. The investment adviser has reduced a portion of its
fee for the year ended August 31, 1999 (see Note 4).
TRANSFER AGENCY AND SHAREHOLDER SERVICE AGREEMENTS -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
OFFICERS AND TRUSTEES -- Certain officers and trustees of the Trust are also
officers and/or directors of the investment adviser and/or Schwab. During the
year ended August 31, 1999, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Act, as amended.
The funds incurred fees aggregating $17 related to the Trust's unaffiliated
trustees.
34
<PAGE>
OTHER AFFILIATED PARTIES AND TRANSACTIONS -- As of August 31, 1999, 12.3%,
27.0%, 18.3% and 0.5% of the Schwab Total Bond Market Index Fund's outstanding
shares were owned by Schwab MarketTrack Growth Portfolio, Schwab MarketTrack
Balanced Portfolio, Schwab MarketTrack Conservative Portfolio and Schwab
MarketTrack Growth Portfolio II, respectively.
4. EXPENSES REDUCED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser and Schwab guarantee that, effective November 1, 1998
through at least October 31, 1999, the Schwab Short-Term Bond Market Index Fund
and Schwab Total Bond Market Index Fund's total operating expenses will not
exceed 0.35% of each fund's average daily net assets, after reductions and
reimbursements. Prior to November 1, 1998, the investment adviser and Schwab
guaranteed that the Schwab Short-Term Bond Market Index Fund and Schwab Total
Bond Market Index Fund's operating expenses would not exceed 0.38% and 0.30%,
respectively. For the purpose of this guarantee, operating expenses do not
include interest expenses, extraordinary expenses and taxes.
For the year ended August 31, 1999, the total of such fees reduced by the
investment adviser and Schwab was $761 for the Schwab Short-Term Bond Market
Index Fund and $1,498 for the Schwab Total Bond Market Index Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than U.S.
government securities and short-term obligations during the year ended August
31, 1999, were as follows:
<TABLE>
<CAPTION>
Schwab Short-Term Schwab Total Bond
Bond Market Index Fund Market Index Fund
---------------------- -----------------
<S> <C> <C>
Purchases $60,597 $155,614
Proceeds of sales and maturities $47,610 $110,108
</TABLE>
Purchases, sales and maturities of long-term U.S. government securities during
the year ended August 31, 1999, were as follows:
<TABLE>
<CAPTION>
Schwab Short-Term Schwab Total Bond
Bond Market Index Fund Market Index Fund
---------------------- -----------------
<S> <C> <C>
Purchases $351,560 $612,128
Proceeds of sales and maturities $308,691 $438,034
</TABLE>
35
<PAGE>
To the Board of Trustees and Shareholders of
Schwab Short-Term Bond Market Index Fund and
Schwab Total Bond Market Index Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab Short-Term Bond Market Index
Fund and Schwab Total Bond Market Index Fund (two portfolios of Schwab
Investments, hereafter referred to as the "Funds") at August 31, 1999, and the
results of each of their operations for the year then ended, the changes in each
of their net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
San Francisco, CA
October 5, 1999
36
<PAGE>
THE SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money market
funds.
Please visit us at WWW.SCHWAB.COM/SCHWABFUNDS or call 800-435-4000 for a free
prospectus and brochure for any of these SchwabFunds.
This report must be preceded or accompanied by a current prospectus.
METHODS FOR PLACING ORDERS
The information below outlines how Schwab brokerage account investors can place
orders. If you are investing through a third-party investment provider, methods
for placing orders may be different.
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
MAIL
Write to SchwabFunds-Registered Trademark- at:
P.O. Box 7575, San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signatures of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab office.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab MarketManager Growth Portfolio
Schwab MarketManager Balanced Portfolio
SCHWAB STOCK FUNDS
Schwab S&P 500 Fund
Schwab 1000 Fund-Registered Trademark-
Shwab Total Stock Market Index Fund
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager Small Cap Portfolio
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio
SCHWAB BOND FUNDS
Schwab YieldPlus Fund-TM-
Schwab Total Bond Market Index Fund
Schwab Short-Term Bond Market Index Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate
Tax-Free Bond Fund
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds(1) that seek high current income
consistent with safety and liquidity. Choose from taxable or tax-advantaged
alternatives. Many can be linked to your Schwab account to "sweep" cash balances
automatically when you're between investments. Or, for your larger cash
reserves, choose one of our Value Advantage Investments-Registered Trademark-.
(1) 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.
<PAGE>
[LOGO]
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc.
P.O. Box 7575, San Francisco, CA 94120-7575
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
-C- 1999 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. MKT3655-1 (10/99)
