<PAGE>
SCHWABFUNDS-Registered Trademark-
SCHWAB
BOND INDEX
FUNDS
SEMIANNUAL REPORT
AND
AN IMPORTANT NOTICE REGARDING
DELIVERY OF SHAREHOLDER
DOCUMENTS
Semiannual Report
February 29, 2000
<PAGE>
IMPORTANT NOTICE REGARDING DELIVERY OF SHAREHOLDER DOCUMENTS
The Securities and Exchange Commission has adopted a rule permitting mutual
funds to deliver only one copy of shareholder documents, including prospectuses
and shareholder reports to fund investors with multiple accounts at the same
residential or post office box address. This practice is commonly called
"householding" and is intended to eliminate duplicate mailings of shareholder
documents.
As permitted by the rule, Schwab may begin indefinitely householding
prospectuses and shareholder reports for SchwabFunds.-Registered Trademark-
ADDITIONAL COPIES OF SHAREHOLDER DOCUMENTS
ALL SCHWABFUNDS PROSPECTUSES AND SHAREHOLDER REPORTS ARE AVAILABLE FREE OF
CHARGE, AND MAY BE REQUESTED AT ANY TIME BY CALLING SCHWAB AS INDICATED BELOW.
SCHWABFUNDS PROSPECTUSES ARE ALSO AVAILABLE ON OUR WEB SITE AT WWW.SCHWAB.COM.
If you would otherwise fall under our householding policy, but for any reason
prefer to receive multiple SchwabFunds prospectuses and shareholder reports,
please contact:
- - SCHWAB SIGNATURE SERVICES-TM- CLIENTS: Schwab Signature Services.
- - INVESTMENT MANAGER CLIENTS: Schwab at 800-515-2157, or your investment
manager.
- - ALL OTHER CLIENTS: Schwab at 800-435-4000.
Your instructions that householding not apply to your accounts holding
SchwabFunds will be effective within 30 days of receipt by Schwab.
<PAGE>
SCHWABFUNDS-Registered Trademark-
SCHWAB
BOND INDEX
FUNDS
Semiannual Report
February 29, 2000
<PAGE>
SCHWAB BOND INDEX FUNDS
We're pleased to bring you this semiannual report for the following funds (the
funds) for the six-month period ended February 29, 2000:
- 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 8
PORTFOLIO SNAPSHOT 10
- ---------------------------------------------
Schwab Total Bond Market Index Fund
FUND PERFORMANCE 12
PORTFOLIO SNAPSHOT 14
- ---------------------------------------------
Dividends Paid 16
- ---------------------------------------------
The Portfolio Management Team 17
- ---------------------------------------------
Fund Discussion 18
- ---------------------------------------------
Glossary 19
- ---------------------------------------------
Financial Statements and Notes 22
- ---------------------------------------------
</TABLE>
<PAGE>
A MESSAGE FROM THE CHAIRMAN
[PHOTO]
Dear Shareholder,
As we begin a new year, I'd like to take this opportunity to reflect on last
year's milestones at Charles Schwab Investment Management, Inc. (CSIM), the
investment adviser for the SchwabFunds-Registered Trademark- Family.
First of all, SchwabFunds-Registered Trademark- assets topped the $100 billion
mark in September. SchwabFunds continues to be among the largest and fastest
growing fund families in the nation, with the support of investors like you.
Secondly, we added two new products to our SchwabFunds offering in 1999:
- - SCHWAB TOTAL STOCK MARKET INDEX FUND-TM- seeks to track the total return of
the entire U.S. stock market, as measured by the Wilshire 5000 Total Market
Index, the broadest measure of U.S. stock market performance. In one single,
low-cost investment, fund investors can benefit from exposure to U.S companies
of all types and sizes.
- - SCHWAB YIELDPLUS FUND-TM- seeks high current income with minimal changes in
share price. It is designed to provide the potential for higher yields than a
money fund and lower risk than a longer-term bond fund through a management
strategy designed to minimize price fluctuation. Intended for your long-term
(over one-year) cash needs, the fund seeks to increase the overall yield
potential of the cash portion of your portfolio.
For more information on either of these funds, please call 800-435-4000 and
request a free prospectus. The prospectus contains more information on fund fees
and expenses. Please read it carefully before investing.
I encourage you to take a moment to read this semiannual report as it is
designed to provide timely information about your SchwabFunds investments. You
will find information on each fund's total returns and performance, as well as
commentary on market conditions provided by the portfolio management team. In
the section "What Every Bond Fund Investor Should Know", we've also provided
guidelines that can help you reach your goals by establishing--or
maintaining--an ongoing investment program.
As a leader in online brokerage, we recognize the value of the web as a means of
communicating timely, relevant information to investors. Regular updates on all
of the SchwabFunds, including performance data, are available on our Web site at
WWW.SCHWAB.COM/SCHWABFUNDS. We encourage you to take advantage of this valuable
resource which can help you keep track of your funds' performance.
I'd like to make all of you aware that March 3, 2000 was designated as the
record date for a proxy and shareholders' meeting for the entire SchwabFunds
complex. Every SchwabFund has at least one proposal up for a vote. No matter how
many shares you own, your vote is important. Your prompt response will help
reduce proxy costs -- which are paid by the funds and their shareholders. Voting
by internet or phone lowers proxy costs even further. If you have questions
about the proxy, would like help in voting, or if you did not receive the proxy
materials, please call the funds' proxy solicitor, D.F. King & Co., at
800-431-9633.
At Schwab our philosophy has always been that a combination of regular investing
and diversification is the best strategy over the long term. By investing in
SchwabFunds, you've already taken an important step in building a portfolio that
can help you meet your future goals. Thank you for your investment in
SchwabFunds.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
February 29, 2000
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 $2,500.
CONVENIENCE: SchwabFunds-Registered Trademark- 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.
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; a substantial portion of the
bonds in the funds are investment-grade corporate bonds rated AAA through BBB,
the four highest credit ratings.
*The Schwab YieldPlus Fund has a redemption fee of 0.25% on shares sold within
90 days of purchase.
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 high current income with minimal changes in
share price and its overall portfolio is managed to maintain an average
effective 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 primarily 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
maturities 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
February 2000 marked the 107th month of the current expansion, making it the
longest in U.S. history. Annualized GDP growth accelerated from 2.8% during the
first half of 1999 to 6.5% in the second half, averaging 4.2% for the year--the
fourth consecutive year at 4% or more. This rate is considered by most
economists and the Federal Reserve (Fed) to be in excess of what the economy can
absorb without experiencing inflationary pressures. High levels of consumer
spending and business capital investment, as well as rising real wages,
productivity, and strong gains in stock prices have been the principal factors
continuing this lengthy expansion.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GROSS DOMESTIC PRODUCT
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED RATE)
<S> <C>
Q1 1990 5.00%
Q2 1990 1.00%
Q3 1990 -0.60%
Q4 1990 -3.00%
Q1 1991 -1.70%
Q2 1991 2.60%
Q3 1991 1.30%
Q4 1991 2.50%
Q1 1992 4.30%
Q2 1992 4.00%
Q3 1992 3.10%
Q4 1992 5.20%
Q1 1993 -0.70%
Q2 1993 2.10%
Q3 1993 1.50%
Q4 1993 6.00%
Q1 1994 3.60%
Q2 1994 5.70%
Q3 1994 2.20%
Q4 1994 5.10%
Q1 1995 1.50%
Q2 1995 0.80%
Q3 1995 3.20%
Q4 1995 3.30%
Q1 1996 2.90%
Q2 1996 6.90%
Q3 1996 2.20%
Q4 1996 4.90%
Q1 1997 4.90%
Q2 1997 5.10%
Q3 1997 4.00%
Q4 1997 3.10%
Q1 1998 6.70%
Q2 1998 2.10%
Q3 1998 3.80%
Q4 1998 5.90%
Q1 1999 3.70%
Q2 1999 1.90%
Q3 1999 5.70%
Q4 1999 7.30%
Source: Bloomberg L.P.
</TABLE>
The Commerce Department, after revising the GDP benchmark data for the past four
decades, has reported stronger growth, higher personal savings and lower
inflation than was previously calculated for the 1990s.
Looking ahead, the availability of increasingly scarce labor resources and the
behavior of domestic consumers in response to continued stock market volatility
may be key determinants of whether the economy continues on its current course
or softens throughout 2000. The consensus of most economists is that the U.S.
economy appears poised for continued strong growth and additional intervention
by the Fed (increases in the federal funds rate) until the growth rate of the
economy slows to a more sustainable level.
UNEMPLOYMENT
The unemployment rate dropped to 4.0% in January, a 29-year low, before inching
back up to 4.1% in February. Labor markets continue to be extremely tight in
many areas of the country and there has been some regional evidence of labor
shortages driving up wages. Growth in the labor force has slowed, and the Fed
has expressed its concern that a continuation of strong demand and tight labor
markets may put pressure on manufacturers and service providers to raise prices.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
1/90 5.40%
2/90 5.30%
3/90 5.20%
4/90 5.40%
5/90 5.40%
6/90 5.20%
7/90 5.50%
8/90 5.70%
9/90 5.90%
10/90 5.90%
11/90 6.20%
12/90 6.30%
1/91 6.40%
2/91 6.60%
3/91 6.80%
4/91 6.70%
5/91 6.90%
6/91 6.90%
7/91 6.80%
8/91 6.90%
9/91 6.90%
10/91 7.00%
11/91 7.00%
12/91 7.30%
1/92 7.30%
2/92 7.40%
3/92 7.40%
4/92 7.40%
5/92 7.60%
6/92 7.80%
7/92 7.70%
8/92 7.60%
9/92 7.60%
10/92 7.30%
11/92 7.40%
12/92 7.40%
1/93 7.30%
2/93 7.10%
3/93 7.00%
4/93 7.10%
5/93 7.10%
6/93 7.00%
7/93 6.90%
8/93 6.80%
9/93 6.70%
10/93 6.80%
11/93 6.60%
12/93 6.50%
1/94 6.80%
2/94 6.60%
3/94 6.50%
4/94 6.40%
5/94 6.10%
6/94 6.10%
7/94 6.30%
8/94 6.00%
9/94 5.80%
10/94 5.80%
11/94 5.60%
12/94 5.50%
1/95 5.60%
2/95 5.40%
3/95 5.30%
4/95 5.80%
5/95 5.80%
6/95 5.60%
7/95 5.60%
8/95 5.70%
9/95 5.60%
10/95 5.50%
11/95 5.70%
12/95 5.60%
1/96 5.60%
2/96 5.50%
3/96 5.60%
4/96 5.50%
5/96 5.60%
6/96 5.30%
7/96 5.50%
8/96 5.10%
9/96 5.20%
10/96 5.20%
11/96 5.30%
12/96 5.40%
1/97 5.30%
2/97 5.30%
3/97 5.10%
4/97 5.00%
5/97 4.70%
6/97 5.00%
7/97 4.70%
8/97 4.90%
9/97 4.70%
10/97 4.70%
11/97 4.60%
12/97 4.70%
1/98 4.50%
2/98 4.60%
3/98 4.60%
4/98 4.30%
5/98 4.30%
6/98 4.50%
7/98 4.50%
8/98 4.50%
9/98 4.50%
10/98 4.50%
11/98 4.40%
12/98 4.30%
1/99 4.30%
2/99 4.40%
3/99 4.20%
4/99 4.30%
5/99 4.20%
6/99 4.30%
7/99 4.30%
8/99 4.20%
9/99 4.20%
10/99 4.10%
11/99 4.10%
12/99 4.10%
1/00 4.00%
2/00 4.10%
Source: Bloomberg L.P.
</TABLE>
4
<PAGE>
INFLATION
Price inflation continued to remain well contained, but trending upward. The CPI
rose 3.2% for the year ended February 29, 2000. Its core rate (which excludes
the more volatile food and energy components) rose just 2.1%. The Personal
Consumption Expenditures Index, a measure of inflation closely watched by the
Fed, rose 2.0% for the same period. The GDP price deflator, the broadest measure
of inflation, indicated prices rising at an annual rate of 1.4% for 1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
QUARTERLY EMPLOYMENT MONTHLY CONSUMER
COST INDEX PRICE INDEX
<S> <C> <C>
1/90 5.5% 5.2%
2/90 5.5% 5.3%
3/90 5.5% 5.2%
4/90 5.4% 4.7%
5/90 5.4% 4.4%
6/90 5.4% 4.7%
7/90 5.2% 4.8%
8/90 5.2% 5.6%
9/90 5.2% 6.2%
10/90 4.9% 6.3%
11/90 4.9% 6.3%
12/90 4.9% 6.1%
1/91 4.6% 5.7%
2/91 4.6% 5.3%
3/91 4.6% 4.9%
4/91 4.6% 4.9%
5/91 4.6% 5.0%
6/91 4.6% 4.7%
7/91 4.3% 4.4%
8/91 4.3% 3.8%
9/91 4.3% 3.4%
10/91 4.3% 2.9%
11/91 4.3% 3.0%
12/91 4.3% 3.1%
1/92 4.0% 2.6%
2/92 4.0% 2.8%
3/92 4.0% 3.2%
4/92 3.6% 3.2%
5/92 3.6% 3.0%
6/92 3.6% 3.1%
7/92 3.5% 3.2%
8/92 3.5% 3.1%
9/92 3.5% 3.0%
10/92 3.5% 3.2%
11/92 3.5% 3.0%
12/92 3.5% 2.9%
1/93 3.5% 3.3%
2/93 3.5% 3.2%
3/93 3.5% 3.1%
4/93 3.6% 3.2%
5/93 3.6% 3.2%
6/93 3.6% 3.0%
7/93 3.6% 2.8%
8/93 3.6% 2.8%
9/93 3.6% 2.7%
10/93 3.5% 2.8%
11/93 3.5% 2.7%
12/93 3.5% 2.7%
1/94 3.2% 2.5%
2/94 3.2% 2.5%
3/94 3.2% 2.5%
4/94 3.2% 2.4%
5/94 3.2% 2.3%
6/94 3.2% 2.5%
7/94 3.2% 2.8%
8/94 3.2% 2.9%
9/94 3.2% 3.0%
10/94 3.0% 2.6%
11/94 3.0% 2.7%
12/94 3.0% 2.7%
1/95 2.9% 2.8%
2/95 2.9% 2.9%
3/95 2.9% 2.9%
4/95 2.9% 3.1%
5/95 2.9% 3.2%
6/95 2.9% 3.0%
7/95 2.7% 2.8%
8/95 2.7% 2.6%
9/95 2.7% 2.5%
10/95 2.7% 2.8%
11/95 2.7% 2.6%
12/95 2.7% 2.5%
1/96 2.8% 2.7%
2/96 2.8% 2.7%
3/96 2.8% 2.8%
4/96 2.9% 2.9%
5/96 2.9% 2.9%
6/96 2.9% 2.8%
7/96 2.8% 3.0%
8/96 2.8% 2.9%
9/96 2.8% 3.0%
10/96 2.9% 3.0%
11/96 2.9% 3.3%
12/96 2.9% 3.3%
1/97 2.9% 3.0%
2/97 2.9% 3.0%
3/97 2.9% 2.8%
4/97 2.8% 2.5%
5/97 2.8% 2.2%
6/97 2.8% 2.3%
7/97 3.0% 2.2%
8/97 3.0% 2.2%
9/97 3.0% 2.2%
10/97 3.3% 2.1%
11/97 3.3% 1.8%
12/97 3.3% 1.7%
1/98 3.3% 1.6%
2/98 3.3% 1.4%
3/98 3.3% 1.4%
4/98 3.5% 1.4%
5/98 3.5% 1.7%
6/98 3.5% 1.7%
7/98 3.7% 1.7%
8/98 3.7% 1.6%
9/98 3.7% 1.5%
10/98 3.4% 1.5%
11/98 3.4% 1.5%
12/98 3.4% 1.6%
1/99 3.0% 1.7%
2/99 3.0% 1.6%
3/99 3.0% 1.7%
4/99 3.2% 2.3%
5/99 3.2% 2.1%
6/99 3.2% 2.0%
7/99 3.1% 2.1%
8/99 3.1% 2.3%
9/99 3.1% 2.6%
10/99 3.4% 2.6%
11/99 3.4% 2.6%
12/99 3.4% 2.7%
1/00 2.7%
2/00 3.2%
Source: Bloomberg L.P.
</TABLE>
In spite of the record length and strength of the current expansion, and labor
markets tighter than we have experienced in a generation, wage inflation has
remained largely subdued. The Employment Cost Index, which measures inflation in
wages, salaries and benefits, was well contained, increasing just 3.4% during
1999.
Although there is little evidence of accelerating core inflation, the Fed has
expressed concern that if labor markets continue to tighten, increases in wages
could outpace productivity growth. In such an environment, productivity growth
becomes particularly critical, as it enables companies to pay higher wages
without raising prices. Non-farm productivity grew 2.8% in 1998 and 3.0% during
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
GROWTH OF A HYPOTHETICAL $1 INVESTMENT
COMPILED BY CHARLES SCHWAB & CO., INC.
RUSSELL 2000 LEHMAN AGGREGATE
S&P 500 SMALL-CAP INDEX MSCE EAFE (ND) INDEX BOND INDEX
<S> <C> <C> <C> <C>
8/99 $1.000 $1.000 $1.000 $1.000
9/99 $0.973 $1.000 $1.010 $1.012
10/99 $1.034 $1.004 $1.048 $1.015
11/99 $1.055 $1.064 $1.084 $1.015
12/99 $1.117 $1.185 $1.182 $1.010
1/00 $1.061 $1.166 $1.107 $1.007
2/00 $1.041 $1.358 $1.136 $1.019
</TABLE>
Reversing a five-year period of relative under performance, small-cap stocks
significantly outperformed both large-cap stocks and international stocks for
the six-month reporting period ended 2/29/00. Small-cap stocks as represented by
the Russell 2000 Index achieved a total return of 35.8%, leaving large caps, as
represented by the S&P 500 Index, well behind with a six-month return of 4.1%.
Within the S&P 500, the technology stocks' out-performance of the so-
5
<PAGE>
MARKET OVERVIEW (continued)
called "old economy" stocks was truly remarkable. For example, during 1999, the
performance of the technology-laden NASDAQ Composite was 85.6% versus 21.0% for
the S&P 500 (which itself had a 25.4% technology weighting as of 12/31/99).
Although dampened by relatively weak foreign currencies, international stocks,
as represented by the MSCI EAFE Index, achieved a strong return of 13.6% for the
period. Reflecting the rise in intermediate- and long-term interest rates, fixed
income returns were generally weak for the period. Bond returns, as represented
by the Lehman Brothers Aggregate Bond Index, were 1.9% for the year.
U.S. EQUITY VALUATION
The price/earnings ratio for the S&P 500-Registered Trademark- Index remained at
very high levels during the reporting period and ended the period at a lofty
28.6 times earnings, slightly less 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. Reflecting the extraordinary valuations of the technology sector, the
price/earnings ratio (12 months trailing) for the NASDAQ 100 Index was 144.2.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 PRICE/EARNINGS RATIO
<S> <C> <C>
1/90 14.37
2/90 14.21
3/90 14.77
4/90 14.82
5/90 15.84
6/90 16.66
7/90 16.65
8/90 15.57
9/90 14.9
10/90 14.36
11/90 14.59
12/90 15.19
1/91 14.95
2/91 16.82
3/91 17.48
4/91 17.85
5/91 17.92
6/91 17.96
7/91 18.07
8/91 19.72
9/91 19.88
10/91 19.92
11/91 21.02
12/91 21.85
1/92 23.35
2/92 23.83
3/92 25.45
4/92 25.51
5/92 25.71
6/92 25.08
7/92 25.61
8/92 25.5
9/92 24.37
10/92 23.94
11/92 24.08
12/92 24.01
1/93 24.2
2/93 24.25
3/93 24.22
4/93 23.2
5/93 23.21
6/93 22.58
7/93 22.52
8/93 23.02
9/93 23.74
10/93 23.97
11/93 22.55
12/93 23.55
1/94 22.98
2/94 21.17
3/94 20.34
4/94 20.1
5/94 20.16
6/94 19.76
7/94 18.64
8/94 18.9
9/94 18.26
10/94 17.55
11/94 16.58
12/94 16.98
1/95 16.23
2/95 16.2
3/95 16.5
4/95 16.02
5/95 16.43
6/95 16.82
7/95 16.55
8/95 16.18
9/95 16.86
10/95 16.18
11/95 17.14
12/95 17.41
1/96 18.11
2/96 18.56
3/96 18.94
4/96 19.16
5/96 19.48
6/96 19.3
7/96 18.31
8/96 18.62
9/96 19.75
10/96 19.6
11/96 21.05
12/96 20.7
1/97 20.55
2/97 20.98
3/97 19.87
4/97 20.24
5/97 21.43
6/97 22.45
7/97 23.92
8/97 22.64
9/97 24
10/97 22.84
11/97 24.02
12/97 24.51
1/98 24.99
2/98 26.44
3/98 27.76
4/98 26.51
5/98 26.12
6/98 27.09
7/98 26.78
8/98 22.77
9/98 24.23
10/98 27.58
11/98 30.14
12/98 31.97
1/99 33.29
2/99 32.65
3/99 33.78
4/99 33.9
5/99 32.74
6/99 34.7
7/99 31.62
8/99 31.21
9/99 29.9
10/99 29.92
11/99 30.65
12/99 32.53
1/00 29.78
2/00 28.59
30-Year Mean 15.7
Source: Bloomberg L.P.
</TABLE>
TREASURY BOND YIELDS
Continuing a trend which began in October 1998, both long-term and intermediate
term rates continued to climb upward during the reporting period. The primary
driver of this upward trend was the continued strong growth of the domestic
economy, which shows no immediate signs of slowing.
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>
9/99 6.02% 5.77%
9/99 6.04% 5.78%
9/99 6.06% 5.75%
9/99 5.97% 5.66%
10/99 6.13% 5.86%
10/99 6.20% 5.95%
10/99 6.26% 5.97%
10/99 6.35% 6.10%
10/99 6.16% 5.95%
11/99 6.06% 5.86%
11/99 6.04% 5.86%
11/99 6.16% 5.99%
11/99 6.23% 6.05%
12/99 6.25% 6.07%
12/99 6.17% 5.98%
12/99 6.37% 6.19%
12/99 6.49% 6.31%
12/99 6.48% 6.34%
1/00 6.55% 6.41%
1/00 6.70% 6.58%
1/00 6.69% 6.63%
1/00 6.45% 6.66%
2/00 6.27% 6.65%
2/00 6.27% 6.70%
2/00 6.16% 6.68%
2/00 6.13% 6.47%
Source: Bloomberg L.P.
</TABLE>
6
<PAGE>
Typically the yields on 30-year treasury securities exceed those on five-year
securities to compensate investors for the additional interest rate risk
associated with longer duration securities. As shown in the graph above, late in
January, this normal relationship reversed resulting in what is referred to as a
negatively sloped yield curve. This situation is a result of the accumulating
budget surpluses, which are allowing the Federal government to downsize its
debt. The Treasury Department announced that it plans to buy back $30 billion in
debt in 2000 starting with longer-dated maturities since those payments carry
the steepest interest payment. The anticipated reduction in supply resulting
from this buyback program, as well as scaled back issuance, bid up the price of
the longer-term securities and resulted in a reduction in yields.
7
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/29/00
<TABLE>
<CAPTION>
SINCE
SIX INCEPTION 30-DAY
MONTHS(1) ONE YEAR FIVE YEARS (11/5/91) SEC YIELD
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
SCHWAB SHORT-TERM
BOND MARKET INDEX FUND(2),(3) 1.58% 2.74% 5.56% 5.43% 6.66%
- -----------------------------------------------------------------------------------------------------------------
Benchmark Indices(4) 1.72% 3.02% 5.96% 5.68% N/A
- -----------------------------------------------------------------------------------------------------------------
Lehman Brothers Mutual Fund Short (1-5 Year)
Government/Corporate Bond Index (NEW) 1.72% 3.02% 6.25% 6.09% 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 12/31/99. As of 12/31/99, the fund's six-month, one-year,
five-year and since-inception average annual total returns were 1.50%, 1.54%,
6.01% and 5.48%, respectively. The 30-day SEC yield as of 12/31/99 was 6.39%.(5)
(1) Actual, not annualized, since period is less than one year.
(2) 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.
(3) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/29/00, the fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
lower. The 30-day SEC yield as of 2/29/00 would have been 6.36%.
(4) 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.
(5) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/99, the fund's six-month, one-year,
five-year and since inception average annual total returns would have been
lower. The 30-day SEC yield as of 12/31/99 would have been 6.06%.
8
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB SHORT-TERM LEHMAN BROTHERS MUTUAL BENCHMARK
BOND MARKET INDEX FUND FUND SHORT (1-5) GOVERNMENT / INDEX
CORPORATE BOND INDEX
<S> <C> <C> <C>
11/5/1991 $10,000 $10,000 $10,000
11/30/1991 $10,117 $10,097 $10,097
12/31/1991 $10,381 $10,287 $10,250
1/31/1992 $10,241 $10,243 $10,237
2/29/1992 $10,240 $10,272 $10,268
3/31/1992 $10,190 $10,251 $10,265
4/30/1992 $10,282 $10,349 $10,358
5/31/1992 $10,440 $10,477 $10,455
6/30/1992 $10,595 $10,614 $10,560
7/31/1992 $10,794 $10,778 $10,682
8/31/1992 $10,898 $10,884 $10,768
9/30/1992 $11,053 $11,012 $10,869
10/31/1992 $10,924 $10,903 $10,807
11/30/1992 $10,868 $10,868 $10,791
12/31/1992 $11,012 $10,990 $10,891
1/31/1993 $11,202 $11,164 $11,006
2/28/1993 $11,355 $11,298 $11,094
3/31/1993 $11,395 $11,339 $11,128
4/30/1993 $11,499 $11,428 $11,196
5/31/1993 $11,462 $11,394 $11,169
6/30/1993 $11,622 $11,518 $11,253
7/31/1993 $11,661 $11,541 $11,278
8/31/1993 $11,823 $11,679 $11,371
9/30/1993 $11,851 $11,718 $11,408
10/31/1993 $11,892 $11,748 $11,433
11/30/1993 $11,819 $11,725 $11,435
12/31/1993 $11,873 $11,773 $11,481
1/31/1994 $11,973 $11,873 $11,552
2/28/1994 $11,780 $11,754 $11,482
3/31/1994 $11,628 $11,637 $11,423
4/30/1994 $11,527 $11,569 $11,380
5/31/1994 $11,485 $11,582 $11,396
6/30/1994 $11,500 $11,602 $11,424
7/31/1994 $11,599 $11,732 $11,527
8/31/1994 $11,628 $11,770 $11,565
9/30/1994 $11,585 $11,708 $11,538
10/31/1994 $11,593 $11,722 $11,565
11/30/1994 $11,528 $11,662 $11,516
12/31/1994 $11,540 $11,688 $11,538
1/31/1995 $11,697 $11,867 $11,697
2/28/1995 $11,852 $12,072 $11,859
3/31/1995 $11,919 $12,141 $11,928
4/30/1995 $12,018 $12,268 $12,034
5/31/1995 $12,232 $12,553 $12,243
6/30/1995 $12,281 $12,627 $12,309
7/31/1995 $12,308 $12,657 $12,360
8/31/1995 $12,396 $12,747 $12,435
9/30/1995 $12,470 $12,820 $12,495
10/31/1995 $12,572 $12,943 $12,599
11/30/1995 $12,696 $13,080 $12,706
12/31/1995 $12,799 $13,194 $12,802
1/31/1996 $12,900 $13,315 $12,910
2/29/1996 $12,817 $13,225 $12,860
3/31/1996 $12,778 $13,184 $12,851
4/30/1996 $12,776 $13,173 $12,864
5/31/1996 $12,777 $13,182 $12,892
6/30/1996 $12,878 $13,298 $12,986
7/31/1996 $12,917 $13,346 $13,037
8/31/1996 $12,940 $13,380 $13,085
9/30/1996 $13,072 $13,528 $13,204
10/31/1996 $13,235 $13,717 $13,353
11/30/1996 $13,368 $13,849 $13,452
12/31/1996 $13,311 $13,813 $13,455
1/31/1997 $13,378 $13,877 $13,520
2/28/1997 $13,397 $13,904 $13,552
3/31/1997 $13,355 $13,860 $13,541
4/30/1997 $13,477 $13,994 $13,652
5/31/1997 $13,575 $14,097 $13,748
6/30/1997 $13,680 $14,208 $13,843
7/31/1997 $13,874 $14,418 $13,994
8/31/1997 $13,841 $14,398 $14,008
9/30/1997 $13,964 $14,532 $14,114
10/31/1997 $14,091 $14,663 $14,218
11/30/1997 $14,130 $14,691 $14,254
12/31/1997 $14,228 $14,798 $14,349
1/31/1998 $14,383 $14,969 $14,487
2/28/1998 $14,358 $14,969 $14,500
3/31/1998 $14,415 $15,022 $14,551
4/30/1998 $14,479 $15,095 $14,622
5/31/1998 $14,563 $15,188 $14,711
6/30/1998 $14,643 $15,273 $14,794
7/31/1998 $14,697 $15,337 $14,856
8/31/1998 $14,898 $15,551 $15,064
9/30/1998 $15,152 $15,842 $15,346
10/31/1998 $15,204 $15,887 $15,389
11/30/1998 $15,175 $15,874 $15,376
12/31/1998 $15,214 $15,928 $15,429
1/31/1999 $15,258 $16,008 $15,506
2/28/1999 $15,116 $15,871 $15,374
3/31/1999 $15,232 $15,990 $15,489
4/30/1999 $15,247 $16,043 $15,540
5/31/1999 $15,188 $15,979 $15,478
6/30/1999 $15,219 $16,024 $15,522
7/31/1999 $15,254 $16,040 $15,537
8/31/1999 $15,289 $16,075 $15,571
9/30/1999 $15,402 $16,204 $15,696
10/31/1999 $15,427 $16,247 $15,738
11/30/1999 $15,448 $16,275 $15,765
12/31/1999 $15,448 $16,262 $15,752
1/31/2000 $15,409 $16,230 $15,721
2/29/2000 $15,530 $16,353 $15,840
</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 two indices: Lehman Brothers Mutual Fund Short (1-5 Year)
Government/Corporate Bond Index and the benchmark index that combines the
performance of the Lehman Brothers Short (1-3 Year) U.S. Government Bond Index
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.
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 2/28/99 (000s) $181,451
- ----------------------------------------------------------------------
Total net assets as of 2/29/00 (000s) $217,592
- ----------------------------------------------------------------------
Percentage growth over reporting period 20%
- ----------------------------------------------------------------------
</TABLE>
9
<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
2/29/00 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 2/29/00 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 51 1,864
- ------------------------------------------------------------------------------------------------------------
Yield to Maturity 7.01% 6.90%
- ------------------------------------------------------------------------------------------------------------
Average Weighted Coupon 6.28% 6.38%
- ------------------------------------------------------------------------------------------------------------
Weighted Average Maturity 2.82 years 2.74 years
- ------------------------------------------------------------------------------------------------------------
Average Weighted Quality AA AA
- ------------------------------------------------------------------------------------------------------------
Average Weighted Duration 2.39 years 2.39 years
- ------------------------------------------------------------------------------------------------------------
Expense Ratio 0.35%* --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/00.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/29/00
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF FUND
OF FUND INVESTMENTS
MATURITY RANGE VALUE (000S) INVESTMENTS (CUMULATIVE)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
0 - 6 months $33,979 15.7% 15.7%
- ---------------------------------------------------------------------------------------------------------
7 - 36 months $81,329 37.7% 53.4%
- ---------------------------------------------------------------------------------------------------------
37 - 60 months $90,675 42.0% 95.4%
- ---------------------------------------------------------------------------------------------------------
More than
60 months $ 9,814 4.6% 100.0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT STYLE BOX(1)
AS OF 2/29/00
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 2/29/00, 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.
10
<PAGE>
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2) as of 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. Treasury Obligations 50.8%
Corporate Bonds 41.1%
Agency Obligations 7.6%
Temporary Investments 0.5%
</TABLE>
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 63.0%
AA 3.6%
A 19.0%
BBB 11.6%
BB 2.3%
Unrated Securities 0.5%
</TABLE>
The charts above illustrate the composition of the fund's portfolio as of
2/29/00 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
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------
U.S. Treasury Notes,
5.875%, Maturity 11/15/2004 8.5%
- ---------------------------------------------
U.S. Treasury Notes,
5.250%, Maturity 05/15/2004 5.9%
- ---------------------------------------------
Cox Communications Inc.,
6.696%, Maturity 05/15/2000 4.6%
- ---------------------------------------------
U.S. Treasury Notes,
6.125%, Maturity 12/31/2001 3.6%
- ---------------------------------------------
U.S. Treasury Notes,
5.375%, Maturity 06/30/2003 3.1%
- ---------------------------------------------
- ---------------------------------------------
U.S. Treasury Notes,
5.750%, Maturity 11/30/2002 2.7%
- ---------------------------------------------
U.S. Treasury Notes,
5.500%, Maturity 05/31/2003 2.6%
- ---------------------------------------------
Kimco Realty Corp.,
6.740%, Maturity 05/17/2000 2.3%
- ---------------------------------------------
Royal Bank of Scotland PLC,
8.817%, Maturity 03/31/2005 2.3%
- ---------------------------------------------
Korea Development Bank,
6.940%, Maturity 04/18/2000 2.3%
- ---------------------------------------------
</TABLE>
11
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 2/29/00
<TABLE>
<CAPTION>
SINCE
SIX INCEPTION 30-DAY
MONTHS(1) ONE YEAR FIVE YEARS (3/5/93) SEC YIELD
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
SCHWAB TOTAL BOND MARKET INDEX FUND(2),(3) 2.01% 0.79% 6.93% 5.86% 6.88%
- -----------------------------------------------------------------------------------------------------------------
Benchmark Indices(4) 1.92% 1.11% 6.85% 5.77% N/A
- -----------------------------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (NEW) 1.92% 1.11% 6.99% 5.92% 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 12/31/99. As of 12/31/99, the fund's six-month, one-year,
five-year and since-inception average annual total returns were 0.92%, (1.04)%,
7.87% and 5.89%, respectively. The 30-day SEC yield as of 12/31/99 was 6.53%.(5)
(1) Actual, not annualized, since period is less than one year.
(2) 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.
(3) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 2/29/00, the fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
lower. The 30-day SEC yield as of 2/29/00 would have been 6.63%.
(4) 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.
(5) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 12/31/99, the fund's six-month, one-year,
five-year and since-inception average annual total returns would have been
lower. The 30-day SEC yield as of 12/31/99 would have been 6.24%.
12
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB TOTAL BOND LEHMAN BROTHERS
MARKET INDEX FUND AGGREGATE BOND INDEX BENCHMARK INDEX
<S> <C> <C> <C>
3/5/1993 $10,000 $10,000 $10,000
3/31/1993 $9,784 $9,979 $9,979
4/30/1993 $9,890 $10,048 $10,056
5/31/1993 $9,927 $10,061 $10,045
6/30/1993 $10,314 $10,244 $10,268
7/31/1993 $10,441 $10,302 $10,330
8/31/1993 $10,863 $10,482 $10,561
9/30/1993 $10,901 $10,511 $10,601
10/31/1993 $10,952 $10,550 $10,641
11/30/1993 $10,688 $10,460 $10,524
12/31/1993 $10,738 $10,517 $10,565
1/31/1994 $10,938 $10,659 $10,710
2/28/1994 $10,544 $10,474 $10,483
3/31/1994 $10,220 $10,216 $10,247
4/30/1994 $10,112 $10,134 $10,166
5/31/1994 $10,060 $10,133 $10,153
6/30/1994 $10,027 $10,110 $10,129
7/31/1994 $10,239 $10,311 $10,316
8/31/1994 $10,233 $10,324 $10,318
9/30/1994 $10,050 $10,172 $10,172
10/31/1994 $10,036 $10,163 $10,165
11/30/1994 $10,031 $10,140 $10,147
12/31/1994 $10,122 $10,210 $10,209
1/31/1995 $10,347 $10,412 $10,399
2/28/1995 $10,647 $10,660 $10,622
3/31/1995 $10,718 $10,726 $10,689
4/30/1995 $10,887 $10,875 $10,829
5/31/1995 $11,429 $11,296 $11,266
6/30/1995 $11,445 $11,379 $11,353
7/31/1995 $11,348 $11,354 $11,311
8/31/1995 $11,566 $11,491 $11,443
9/30/1995 $11,711 $11,602 $11,553
10/31/1995 $11,931 $11,753 $11,728
11/30/1995 $12,173 $11,929 $11,911
12/31/1995 $12,395 $12,096 $12,080
1/31/1996 $12,438 $12,176 $12,154
2/29/1996 $12,075 $11,964 $11,906
3/31/1996 $11,934 $11,881 $11,807
4/30/1996 $11,766 $11,814 $11,732
5/31/1996 $11,722 $11,790 $11,712
6/30/1996 $11,885 $11,948 $11,863
7/31/1996 $11,890 $11,981 $11,893
8/31/1996 $11,830 $11,960 $11,866
9/30/1996 $12,112 $12,168 $12,063
10/31/1996 $12,451 $12,439 $12,329
11/30/1996 $12,763 $12,651 $12,543
12/31/1996 $12,537 $12,534 $12,415
1/31/1997 $12,533 $12,572 $12,429
2/28/1997 $12,556 $12,604 $12,446
3/31/1997 $12,353 $12,464 $12,314
4/30/1997 $12,606 $12,651 $12,492
5/31/1997 $12,732 $12,771 $12,599
6/30/1997 $12,918 $12,923 $12,740
7/31/1997 $13,363 $13,272 $13,102
8/31/1997 $13,152 $13,159 $12,972
9/30/1997 $13,397 $13,354 $13,167
10/31/1997 $13,687 $13,548 $13,395
11/30/1997 $13,700 $13,610 $13,463
12/31/1997 $13,778 $13,747 $13,604
1/31/1998 $13,977 $13,923 $13,809
2/28/1998 $13,938 $13,912 $13,771
3/31/1998 $13,964 $13,959 $13,818
4/30/1998 $14,035 $14,032 $13,890
5/31/1998 $14,166 $14,165 $14,022
6/30/1998 $14,263 $14,286 $14,141
7/31/1998 $14,306 $14,316 $14,171
8/31/1998 $14,575 $14,549 $14,402
9/30/1998 $14,930 $14,890 $14,739
10/31/1998 $14,844 $14,811 $14,661
11/30/1998 $14,866 $14,895 $14,744
12/31/1998 $14,937 $14,940 $14,788
1/31/1999 $15,061 $15,046 $14,893
2/28/1999 $14,770 $14,783 $14,633
3/31/1999 $14,870 $14,864 $14,713
4/30/1999 $14,874 $14,911 $14,760
5/31/1999 $14,703 $14,780 $14,630
6/30/1999 $14,649 $14,733 $14,584
7/31/1999 $14,614 $14,671 $14,522
8/31/1999 $14,594 $14,664 $14,515
9/30/1999 $14,790 $14,834 $14,684
10/31/1999 $14,832 $14,889 $14,738
11/30/1999 $14,841 $14,887 $14,736
12/31/1999 $14,782 $14,816 $14,666
1/31/2000 $14,719 $14,767 $14,617
2/29/2000 $14,886 $14,945 $14,794
</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 two indices: 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 2/28/99 (000s) $381,786
- ----------------------------------------------------------------------
Total net assets as of 2/29/00 (000s) $560,784
- ----------------------------------------------------------------------
Percentage growth over reporting period 47%
- ----------------------------------------------------------------------
</TABLE>
13
<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 2/29/00 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 2/29/00 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 92 5,566
- ----------------------------------------------------------------------------------------------------------
Yield to Maturity 7.80% 7.32%
- ----------------------------------------------------------------------------------------------------------
Average Weighted Coupon 6.91% 6.79%
- ----------------------------------------------------------------------------------------------------------
Weighted Average Maturity 8.79 years 8.88 years
- ----------------------------------------------------------------------------------------------------------
Average Weighted Quality AA AAA
- ----------------------------------------------------------------------------------------------------------
Average Weighted Duration 4.93 4.94
- ----------------------------------------------------------------------------------------------------------
Expense Ratio 0.35%* --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects a voluntary reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 10/31/00.
MATURITY SCHEDULE: WEIGHTED AVERAGE
MATURITY AS OF 2/29/00
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF FUND
OF FUND INVESTMENTS
MATURITY RANGE VALUE (000S) INVESTMENTS (CUMULATIVE)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
0 - 1 year $189,983 27.6% 27.6%
- ---------------------------------------------------------------------------------------------------------
2 - 10 years $285,073 41.5% 69.1%
- ---------------------------------------------------------------------------------------------------------
11 - 20 years $ 52,918 7.7% 76.8%
- ---------------------------------------------------------------------------------------------------------
21 - 30 years $ 41,262 6.0% 82.8%
- ---------------------------------------------------------------------------------------------------------
More than
30 years $118,319 17.2% 100.0%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT STYLE BOX(1)
AS OF 2/29/00
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 2/29/00, 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.
14
<PAGE>
PORTFOLIO COMPOSITION AS A PERCENTAGE
OF FUND INVESTMENTS(2) as of 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. Treasury Obligations 27.1%
Preferred Stock 1.8%
Corporate Bonds (4) 38.5%
Mortgage-Backed Securities 19.1%
Asset-Backed Securities (4) 7.7%
Agency Obligations 5.6%
Temporary Investments 0.2%
</TABLE>
PORTFOLIO COMPOSITION BY CREDIT QUALITY(3)
as of 2/29/00
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA 55.5%
AA 8.0%
A 18.2%
BBB 16.7%
BB 1.3%
Unrated Securities 0.3%
</TABLE>
The charts above illustrate the composition of the fund's portfolio as of
2/29/00 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 33.1% 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
6.260%, Maturity 03/15/2000 4.8%
- -------------------------------------------------------------------
Federal National Mortgage Association,
6.500%, Maturity 03/01/2030 4.2%
- -------------------------------------------------------------------
Royal Bank of Scotland PLC,
9.118%, Maturity 03/31/2010 3.6%
- -------------------------------------------------------------------
Health & Retirement Properties,
7.280%, Maturity 04/10/2000 3.6%
- -------------------------------------------------------------------
U.S. Treasury Notes,
4.250%, Maturity 11/15/2003 3.4%
- -------------------------------------------------------------------
- -------------------------------------------------------------------
KBC Bank Fund Trust III,
9.860%, Maturity 11/02/2009 2.8%
- -------------------------------------------------------------------
U.S. Treasury Notes,
6.500%, Maturity 02/15/2010 2.7%
- -------------------------------------------------------------------
U.S. Treasury Notes,
5.375%, Maturity 06/30/2003 2.7%
- -------------------------------------------------------------------
U.S. Treasury Notes,
5.500%, Maturity 02/28/2003 2.7%
- -------------------------------------------------------------------
Federal National Mortgage Association
7.000%, Maturity 03/01/2030 2.6%
- -------------------------------------------------------------------
</TABLE>
15
<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
2000++ $0.27 $0.29
</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.
++ For the six-month period ended 2/29/00 for both funds.
16
<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.
17
<PAGE>
FUND DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
Q. HOW DID THE FUNDS PERFORM DURING THE SIX-MONTH 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 six-month reporting period.
The SCHWAB SHORT-TERM BOND MARKET INDEX FUND achieved a total return of 1.58%
for the six-month reporting period ended February 29, 2000. This return came
from a combination of dividend income of 2.82% and a decline in the fund's NAV
of 1.24%. 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, 2.82 years as of February 29, 2000, remained fairly constant
throughout the reporting period.
The SCHWAB TOTAL BOND MARKET INDEX FUND achieved a total return of 2.01% for the
six-month reporting period ended February 29, 2000. This return came from a
combination of dividend income of 3.05% and a decline in the fund's NAV of
1.04%. 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, 8.79 years as of February 29, 2000, increased moderately compared to
the beginning of the period (8.55 years) as a result of changes in the Lehman
Aggregate Index.
Q. HOW DID THE FUNDS' PERFORMANCE COMPARE TO THEIR INDEXES?
A. The funds' performance compared to their indexes is shown in the following
tables.
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
<TABLE>
<CAPTION>
TOTAL RETURN
FOR THE
SIX MONTHS
ENDED 2/29/00
<S> <C>
- ---------------------------------------------------------------------------
Schwab Short-Term
Bond Market Index Fund 1.58%
- ---------------------------------------------------------------------------
Lehman Brothers Short (1-5) Government/Corporate Index 1.72%
- ---------------------------------------------------------------------------
Tracking Differential (0.14)%
- ---------------------------------------------------------------------------
</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 six-month reporting period this gap was 0.14%,
less than the fund's operating expenses for the period.
SCHWAB TOTAL BOND MARKET INDEX FUND
<TABLE>
<CAPTION>
TOTAL RETURN
FOR THE
6 MONTHS
ENDED 2/29/00
<S> <C>
- ---------------------------------------------------------------------------
Schwab Total Bond
Market Index Fund 2.01%
- ---------------------------------------------------------------------------
Lehman Brothers
Aggregate Bond Index 1.92%
- ---------------------------------------------------------------------------
Tracking Differential 0.09%
- ---------------------------------------------------------------------------
</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. However, during the six-month period, the fund return
slightly exceeded the Index return, a positive result for the fund.
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 assets, 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, the reinvestment income and, consequently, the 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)
February 29, 2000 (Unaudited)
Par Value
------- --------
U.S. GOVERNMENT SECURITIES -- 57.9% (a)
U.S. TREASURY OBLIGATIONS -- 50.4%
U.S. Treasury Notes
6.38%, 09/30/01 $ 4,000 $ 3,991
5.88%, 11/30/01 2,500 2,473
6.13%, 12/31/01 8,000 7,941
6.38%, 01/31/02 3,000 2,990
6.25%, 02/28/02 2,500 2,488
6.50%, 02/28/02 2,000 1,999
6.63%, 03/31/02 4,000 4,005
6.63%, 04/30/02 2,750 2,754
6.00%, 07/31/02 1,500 1,482
6.38%, 08/15/02 3,000 2,987
5.88%, 09/30/02 3,000 2,951
5.75%, 11/30/02 5,900 5,778
5.50%, 02/28/03 5,000 4,853
5.50%, 03/31/03 4,000 3,879
5.75%, 04/30/03 5,000 4,878
5.50%, 05/31/03 5,800 5,614
5.38%, 06/30/03 7,000 6,749
5.25%, 08/15/03 3,000 2,876
5.75%, 08/15/03 3,000 2,921
5.25%, 05/15/04 13,500 12,839
5.88%, 11/15/04 (d) 19,000 18,448
5.88%, 11/15/05 5,000 4,813
--------
109,709
--------
AGENCY OBLIGATIONS -- 7.5%
Federal Home Loan Bank
6.00%, 05/17/04 5,000 4,759
Federal National Mortgage Association
6.25%, 11/15/02 5,000 4,912
5.94%, 03/29/04 5,000 4,762
5.88%, 04/23/04 2,000 1,902
--------
16,335
--------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $128,687) 126,044
--------
CORPORATE BONDS -- 40.8% (a)
American General Finance
6.25%, 12/18/02 2,000 1,945
Bank of New York Co., Inc.
6.63%, 06/15/03 2,000 1,955
Par Value
------- --------
Bank One Corp.
7.25%, 08/01/02 $ 2,000 $ 1,998
Columbia Gas Systems
6.39%, 11/28/00 2,000 1,990
Cox Communications Inc. (b)
6.70%, 05/15/00 10,000 10,007
Dupont (E.I.) de Nemours & Co.
6.75%, 10/15/04 4,000 3,910
Ford Motor Credit Co.
6.70%, 07/16/04 5,000 4,850
General Electric Capital Corp.
6.65%, 09/03/02 5,000 4,950
Health & Retirement Properties (b)
7.28%, 04/10/00 5,000 4,994
Hertz Corp.
7.00%, 05/01/02 2,000 1,985
Hughes Electronics Corp. (b)
7.29%, 04/24/00 5,000 4,988
Kimco Realty Corp. (b)
6.74%, 05/17/00 5,000 5,029
Korea Development Bank (b)
6.94%, 04/18/00 5,000 4,997
Lehman Brothers Holdings, Inc.
6.20%, 01/15/02 1,500 1,462
Pepsi Bottling Holdings, Inc.
5.38%, 02/17/04 5,000 4,675
Philip Morris Companies, Inc.
6.15%, 03/15/00 3,000 3,000
Quebec Province
7.50%, 07/15/02 2,000 2,005
Royal Bank of Scotland PLC (d)
8.82%, 03/31/05 5,000 5,000
Starwood Hotels & Resorts Worldwide, Inc.
6.25%, 11/15/00 5,000 4,931
Target Corp.
7.50%, 02/15/05 2,000 2,005
TCI Communications, Inc.
8.65%, 09/15/04 3,500 3,653
US West Capital Funding Inc.
6.13%, 07/15/02 1,500 1,459
USAA Capital Corp.
6.68%, 11/01/01 5,000 4,950
WestPac Banking Corp.
9.13%, 08/15/01 2,000 2,050
--------
TOTAL CORPORATE BONDS
(Cost $89,977) 88,788
--------
22
<PAGE>
Shares Value
------- --------
OTHER INVESTMENT COMPANIES -- 0.5% (c)
Provident Institutional Funds - Fed
Funds Portfolio
5.46% 965 $ 965
--------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $965) 965
--------
TOTAL INVESTMENTS -- 99.2%
(Cost $219,629) 215,797
--------
OTHER ASSETS AND LIABILITIES -- 0.8%
Other assets 13,190
Liabilities (11,395)
--------
1,795
--------
TOTAL NET ASSETS -- 100.0% $217,592
========
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)
February 29, 2000 (Unaudited)
Par Value
------- --------
U.S. GOVERNMENT SECURITIES -- 63.5% (a)
U.S. TREASURY OBLIGATIONS -- 33.3%
U.S. Treasury Bonds
5.25%, 02/15/29 $14,065 $ 12,126
U.S. Treasury Notes
5.75%, 06/30/01 9,000 8,919
5.50%, 07/31/01 6,000 5,922
5.50%, 08/31/01 7,000 6,903
5.63%, 09/30/01 2,000 1,973
5.88%, 10/31/01 3,000 2,969
6.13%, 12/31/01 5,500 5,460
6.38%, 01/31/02 12,500 12,458
6.50%, 02/28/02 (d) 6,500 6,496
6.00%, 07/31/02 3,500 3,459
5.75%, 11/30/02 6,250 6,121
5.50%, 02/28/03 15,500 15,043
5.75%, 04/30/03 8,000 7,806
5.38%, 06/30/03 15,700 15,136
5.25%, 08/15/03 10,850 10,403
4.25%, 11/15/03 20,500 18,956
4.75%, 02/15/04 10,350 9,703
5.88%, 11/15/04 5,500 5,340
5.50%, 02/15/08 6,450 6,008
5.63%, 05/15/08 3,000 2,815
4.75%, 11/15/08 8,250 7,251
6.50%, 02/15/10 (d) 15,300 15,400
--------
186,667
--------
AGENCY OBLIGATIONS -- 6.8%
Federal Home Loan Mortgage Corporation
5.25%, 02/16/01 5,000 4,924
6.88%, 01/15/05 5,000 4,950
6.63%, 09/15/09 10,000 9,575
Federal National Mortgage Association
5.75%, 04/15/03 5,000 4,823
5.63%, 02/20/04 10,000 9,464
5.88%, 04/23/04 5,000 4,755
--------
38,491
--------
MORTGAGE-BACKED OBLIGATIONS -- 23.4% (d)
Federal National Mortgage Association
5.50%, 03/01/15 3,000 2,750
6.00%, 03/01/15 7,000 6,562
6.50%, 03/01/15 9,000 8,646
7.00%, 03/01/15 6,000 5,893
7.50%, 03/01/15 4,000 4,011
6.00%, 03/01/30 10,000 9,066
Par Value
------- --------
6.50%, 03/01/30 $25,000 $ 23,359
7.00%, 03/01/30 15,000 14,381
7.50%, 03/01/30 13,000 12,748
8.00%, 03/01/30 11,000 11,017
Government National Mortgage Association
5.50%, 03/01/30 2,000 1,746
6.00%, 03/01/30 2,000 1,805
6.50%, 03/01/30 5,000 4,659
7.00%, 03/01/30 9,000 8,626
7.50%, 03/01/30 8,000 7,853
8.00%, 03/01/30 8,000 8,028
--------
131,150
--------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $361,996) 356,308
--------
CORPORATE BONDS -- 47.1% (a)
Argentaria Capital Funding (b)
6.47%, 05/08/00 10,000 10,000
Bank of Tokyo-Mitsubishi, Ltd.
8.40%, 04/15/10 5,000 5,056
Bear Stearns Companies Inc.
7.63%, 12/07/09 6,000 5,835
Case Credit Corp. (b)
6.24%, 05/01/00 10,000 10,000
Centex Corp. (b)
6.68%, 03/30/00 10,000 10,000
Conagra, Inc. (b)
6.32%, 03/12/00 10,000 9,998
CSC Holdings, Inc.
8.13%, 07/15/09 4,000 3,950
Dell Computer Corp.
6.55%, 04/15/08 5,000 4,675
Dow Chemical Co.
7.38%, 11/01/29 3,000 2,888
Dresdner Funding Trust I
8.15%, 06/30/31 5,000 4,819
DuPont (E.I.) de Nemours
6.88%, 10/15/09 4,000 3,840
ERP Operating L.P. (b)
6.86%, 05/22/00 5,000 5,012
Fidelity Investments
7.57%, 06/15/29 10,000 9,575
Ford Motor Credit
6.70%, 07/16/04 7,000 6,790
GTE Corp.
6.94%, 04/15/28 5,000 4,556
24
<PAGE>
Par Value
------- --------
Health & Retirement Properties (b)
7.28%, 04/10/00 $20,000 $ 19,976
Hughes Electronics Corp. (b)
7.29%, 04/24/00 10,000 9,975
HVB Funding Trust III
9.00%, 10/22/31 5,000 5,156
KBC Bank Fund Trust III
9.86%, 11/02/09 15,000 15,919
Lehman Brothers Holdings PLC (b)
6.42%, 03/03/00 5,000 4,980
Lehman Brothers Holdings, Inc. (b)
6.84%, 04/17/00 3,200 3,219
Lehman Brothers Holdings, Inc.
6.20%, 01/15/02 1,500 1,463
Lilly del Mar, Inc. (b)
7.30%, 05/05/00 10,000 10,121
MBNA Corp. (b)
6.44%, 03/13/00 3,200 3,194
6.49%, 03/17/00 3,975 3,965
Merrill Lynch & Co., Inc. (b)
6.33%, 03/24/00 5,000 4,983
Merrill Lynch & Co., Inc.
6.00%, 02/17/09 5,000 4,406
Nordbanken
8.95%, 11/12/09 5,000 5,056
Pepsi Bottling Holdings, Inc.
5.63%, 02/17/09 7,000 6,178
Public Service Enterprises (b)
6.71%, 11/22/99 5,000 5,007
Qwest Communications International
Series B
7.50%, 11/01/08 5,000 4,850
Rayonier Inc. (b)
6.41%, 05/23/00 5,000 4,999
Royal Bank of Scotland PLC (d)
9.12%, 03/31/10 20,000 20,000
Saks, Inc.
7.25%, 12/01/04 2,000 1,860
Suntrust Capital III (b)
6.77%, 03/15/00 5,000 4,865
Target Corp.
7.50%, 02/15/05 3,000 3,008
TRW Inc. (b)
6.60%, 03/28/00 10,000 9,999
TXU Eastern Funding Co.
6.75%, 05/15/09 4,000 3,655
Par Value
------- --------
United Mexican States
9.88%, 02/01/10 $10,000 $ 10,538
--------
TOTAL CORPORATE BONDS
(Cost $266,791) 264,366
--------
ASSET-BACKED OBLIGATIONS -- 9.5%(a)(b)
Advanta Mortgage Loan Trust,
Series 1998-1 A-7 / (MBIA Insurance)
6.09%, 03/27/00 3,035 3,037
Airplanes Pass Through Trust
Series 1R, Class A8
6.26%, 03/15/00 27,000 27,084
Discover Card Master Trust I,
Series 94-2, Class A
6.24%, 03/15/00 10,000 10,075
First USA Credit Card Master Trust
6.18%, 03/15/00 7,000 7,024
Provident Bank Home Equity Loan
Trust Series 1997-2 Class A5
6.11%, 03/27/00 4,289 4,294
Southern Pacific Secured Asset Corp.
Series 1998 A-1 / (MBIA Insurance)
6.08%, 03/27/00 1,647 1,648
--------
TOTAL ASSET-BACKED OBLIGATIONS
(Cost $53,062) 53,162
--------
Shares
-------
PREFERRED STOCK -- 2.2%
Centaur Funding Corp. 12 12,117
--------
TOTAL PREFERRED STOCK
(Cost $12,512) 12,117
--------
OTHER INVESTMENT COMPANIES -- 0.3% (c)
Provident Institutional Funds - Fed
Funds Portfolio
5.44% 1,602 1,602
--------
TOTAL OTHER INVESTMENT COMPANIES
(Cost $1,602) 1,602
--------
TOTAL INVESTMENTS -- 122.6%
(Cost $695,963) 687,555
--------
OTHER ASSETS AND LIABILITIES -- (22.6%)
Other assets 86,734
Liabilities (213,505)
--------
(126,771)
--------
TOTAL NET ASSETS -- 100.0% $560,784
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
25
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
February 29, 2000 (Unaudited)
(All dollar amounts are in thousands unless otherwise noted)
(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.
PORTFOLIO ABBREVIATIONS
MBIA Municipal Bond Investors Assurance Corporation
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 29, 2000 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------- -----------
<S> <C> <C>
ASSETS
Investments, at value (Cost: $219,629, $695,963, respectively) $215,797 $687,555
Receivables:
Interest 2,994 5,648
Investments sold 10,034 80,574
Fund shares sold 145 464
Prepaid expenses 17 48
-------- --------
Total assets 228,987 774,289
-------- --------
LIABILITIES
Payables:
Dividends 149 411
Investments purchased 9,943 210,623
Fund shares redeemed 1,271 471
Due to counterparties (see Note 2) -- 1,887
Investment advisory and administration fees -- 3
Transfer agency and shareholder service fees 8 19
Other liabilities 24 91
-------- --------
Total liabilities 11,395 213,505
-------- --------
Net assets applicable to outstanding shares $217,592 $560,784
======== ========
NET ASSETS CONSIST OF:
Paid-in capital $233,209 $587,634
Distributions in excess of net investment income (38) (35)
Accumulated net realized loss on investments sold (11,747) (16,483)
Net unrealized depreciation on investments and swap agreements (3,832) (10,332)
-------- --------
$217,592 $560,784
======== ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares authorized) 22,819 59,169
Net asset value, offering and redemption price per share $9.54 $9.48
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the six months ended February 29, 2000 (Unaudited)
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------- -----------
Interest income $ 6,672 $17,070
------- -------
Expenses:
Investment advisory and administration fees 381 886
Transfer agency and shareholder service fees 276 654
Custodian and portfolio accounting fees 52 94
Registration fees 33 105
Professional fees 9 6
Shareholder reports 22 12
Trustees' fees 4 5
Other expenses 7 5
------- -------
784 1,767
Less: expenses reduced (see Note 4) (398) (851)
------- -------
Total expenses incurred by fund 386 916
------- -------
Net investment income 6,286 16,154
------- -------
Net realized loss on investments sold (1,394) (6,197)
Net unrealized appreciation (depreciation) on investments (1,478) 567
Net unrealized depreciation on swap agreements -- (576)
------- -------
Net loss on investments (2,872) (6,206)
------- -------
Increase in net assets resulting from operations $ 3,414 $ 9,948
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------------------------- ----------------------------
Six months Year Six months Year
ended ended ended ended
February 29, 2000 August 31, February 29, 2000 August 31,
(Unaudited) 1999 (Unaudited) 1999
----------------- ---------- ---------------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 6,286 $ 9,474 $ 16,154 $ 21,311
Net realized loss on investments sold (1,394) (680) (6,197) (9,470)
Net unrealized appreciation (depreciation) on investments (1,478) (4,340) 567 (12,670)
Net unrealized depreciation on swap agreements -- -- (576) (1,459)
-------- -------- -------- ---------
Increase (decrease) in net assets resulting
from operations 3,414 4,454 9,948 (2,288)
-------- -------- -------- ---------
Distributions:
Dividends to shareholders from net investment income
(See Note 2) (6,256) (9,475) (16,106) (21,326)
Distributions to shareholders from net realized gains -- -- -- (2,225)
-------- -------- -------- ---------
Total distributions to shareholders (6,256) (9,475) (16,106) (23,551)
-------- -------- -------- ---------
Capital share transactions:
Proceeds from shares sold 50,422 133,291 144,575 302,668
Net asset value of shares issued in
reinvestment of dividends 4,849 7,152 14,840 21,544
Payments for shares redeemed (52,887) (74,793) (72,412) (112,454)
-------- -------- -------- ---------
Increase in net assets from capital share transactions 2,384 65,650 87,003 211,758
-------- -------- -------- ---------
Total increase (decrease) in net assets (458) 60,629 80,845 185,919
Net assets:
Beginning of period 218,050 157,421 479,939 294,020
-------- -------- -------- ---------
End of period (including distributions in excess of net
investment income of ($38), ($68), ($35) and ($83),
respectively) $217,592 $218,050 $560,784 $ 479,939
======== ======== ======== =========
Number of fund shares:
Sold 5,247 13,551 15,123 30,255
Reinvested 505 728 1,554 2,160
Redeemed (5,513) (7,598) (7,599) (11,218)
-------- -------- -------- ---------
Net increase in shares outstanding 239 6,681 9,078 21,197
Shares outstanding:
Beginning of period 22,580 15,899 50,091 28,894
-------- -------- -------- ---------
End of period 22,819 22,580 59,169 50,091
======== ======== ======== =========
</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 2000(1) 1999 1998 1997 1996 1995
PER SHARE DATA ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period 9.66 9.90 9.74 9.67 9.84 9.81
----------------------------------------------------------------
From investment operations:
Net investment income 0.27 0.50 0.56 0.59 0.59 0.59
Net realized andunrealized gain (loss) on
investments (0.12) (0.24) 0.17 0.07 (0.17) 0.03
----------------------------------------------------------------
Total from investment operations 0.15 0.26 0.73 0.66 0.42 0.62
Less distributions:
Dividends from net investment income (0.27) (0.50) (0.57) (0.59) (0.59) (0.59)
----------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 9.54 9.66 9.90 9.74 9.67 9.84
----------------------------------------------------------------
Total return (%) 1.58** 2.66 7.64 6.96 4.39 6.61
RATIOS/SUPPLEMENTAL DATA (%)
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.35* 0.35 0.46 0.49 0.49 0.58
Reductions reflected in above expense ratio 0.36* 0.42 0.39 0.33 0.31 0.23
Ratio of net investment income to average net assets 5.70* 5.11 5.58 6.02 6.03 6.11
Portfolio turnover rate 61 195 128 71 80 203
Net assets, end of period ($ x 1,000) 217,592 218,050 157,421 127,460 134,019 157,191
<FN>
1 For the six months ended February 29, 2000 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab Total Bond Market Index Fund
FISCAL PERIOD ENDED 8/31 2000(1) 1999 1998 1997 1996 1995
PER SHARE DATA ($)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period 9.58 10.18 9.75 9.38 9.80 9.33
----------------------------------------------------------------
From investment operations:
Net investment income 0.29 0.55 0.60 0.65 0.65 0.69
Net realized andunrealized gain (loss) on
investments (0.10) (0.53) 0.43 0.37 (0.42) 0.47
----------------------------------------------------------------
Total from investment operations 0.19 0.02 1.03 1.02 0.23 1.16
Less distributions:
Dividends from net investment income (0.29) (0.55) (0.60) (0.65) (0.65) (0.69)
Distributions from net realized gain on investments -- (0.07) -- -- -- --
----------------------------------------------------------------
Total distributions (0.29) (0.62) (0.60) (0.65) (0.65) (0.69)
----------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 9.48 9.58 10.18 9.75 9.38 9.80
----------------------------------------------------------------
Total return (%) 2.01** 0.14 10.83 11.18 2.29 13.03
RATIOS/SUPPLEMENTAL DATA (%)
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.35* 0.35 0.31 0.20 -- --
Reductions reflected in above expense ratio 0.33* 0.39 0.51 0.98 1.17 1.18
Ratio of net investment income to average net assets 6.17* 5.55 5.86 6.74 6.67 7.38
Portfolio turnover rate 65 174 285 51 66 240
Net assets, end of period ($ x 1,000) 560,784 479,939 294,020 24,778 22,761 12,949
<FN>
1 For the six months ended February 29, 2000 (Unaudited).
* Annualized.
** Not annualized.
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the six months ended February 29, 2000 (Unaudited)
(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-Registered Trademark-, 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-TM-. 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 February 29, 2000, 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 $962
Lehman Brothers $25,000 9/1/00 Based on Mortgage Component of the
Special Finance 1 Month LIBOR Lehman Brothers Aggregate Bond Index $962
</TABLE>
As of February 29, 2000, the total amounts due to counter parties was $1,887.
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. Net realized capital gains, if any, are normally distributed 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 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) at February 29, 2000 (was
substantially the same for financial reporting and federal income tax purposes)
was as follows:
<TABLE>
<CAPTION>
Net Unrealized Appreciated Depreciated
Depreciation Securities Securities
-------------- ----------- -----------
<S> <C> <C> <C>
Schwab Short-Term Bond Market Index Fund $(3,832) $ 53 $ (3,885)
Schwab Total Bond Market Index Fund $(8,408) $2,970 $(11,378)
</TABLE>
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 had deferred losses occurring between November 1,
1998 and August 31, 1999 of $759 and $7,106, respectively.
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 a graduated annual fee, payable monthly, of 0.30% of each
fund's average daily net assets of the first $500 million, and 0.22% of such
assets over $500 million. The investment adviser has reduced a portion of its
fee for the period ended February 29, 2000 (see Note 4).
Prior to November 15, 1999, for its advisory and administration services, the
investment adviser was entitled to receive an annual fee, payable monthly from
each fund of 0.41% of each fund's average daily net assets.
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
period ended February 29, 2000, 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 $9 related to the Trust's
unaffiliated trustees.
OTHER AFFILIATED PARTIES AND TRANSACTIONS -- As of February 29, 2000, 13.4%,
27.4%, 17.5% 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.
34
<PAGE>
4. EXPENSES REDUCED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser and Schwab guarantee that, through at least October 31,
2000, 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. For the purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses,
including proxy-related expenses, and taxes.
For the period ended February 29, 2000, the total of such fees reduced by the
investment adviser and Schwab was as follows:
<TABLE>
<CAPTION>
Fees reduced by the Fees reduced by
investment adviser Schwab
------------------- ---------------
<S> <C> <C>
Schwab Short-Term Bond Market Index Fund $380 $18
Schwab Total Bond Market Index Fund $845 $ 6
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than U.S.
government securities and short-term obligations during the period ended
February 29, 2000, were as follows:
<TABLE>
<CAPTION>
Schwab Short-Term Schwab Total Bond
Bond Market Index Fund Market Index Fund
---------------------- -----------------
<S> <C> <C>
Purchases $30,469 $148,126
Proceeds of sales and maturities $15,962 $225,644
</TABLE>
Purchases, sales and maturities of long-term U.S. government securities during
the period ended February 29, 2000, were as follows:
<TABLE>
<CAPTION>
Schwab Short-Term Schwab Total Bond
Bond Market Index Fund Market Index Fund
---------------------- -----------------
<S> <C> <C>
Purchases $ 88,463 $268,860
Proceeds of sales and maturities $120,290 $ 83,575
</TABLE>
35
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<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.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
P.O. Box 7575, San Francisco, CA 94120-7575
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
-C- 2000 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. MKT3480-2 (4/00)
