N-30D 1 f87420nv30d.txt CHARLES SCHWAB FAMILY OF FUNDS FORM N-30D Schwab Institutional Advantage Money Fund(R) Schwab Retirement Money Fund(R) ANNUAL REPORT December 31, 2002 [CHARLES SCHWAB LOGO] In this report: Market overview ............................. 2 Schwab Institutional Advantage Money Fund(R)................................ 4 Schwab Retirement Money Fund(R).............. 16 Financial Notes.............................. 27 Fund trustees................................ 30 Glossary..................................... 33 [PHOTO OF CHARLES R. SCHWAB] Charles R. Schwab Chairman Dear Shareholder, As an investor, how you feel about 2002 probably depends a lot on how much exposure you had to each asset class. If you're reading this report, you probably had some assets in money market investments. Although money fund yields were low when the year began and lower still when it ended, the capital preservation these funds provided meant that they still fared better than many stock investments. At the same time, money market investments lagged bond investments, which as a category actually performed quite well in 2002. Does this mean that long-term investors should now limit their portfolios to bonds and money funds? By no means. While there can be times when such an approach might happen to yield better results (as 2002 showed), history clearly shows that this isn't usual for longer periods. Investors have seen many changes in the past few years. But the basic principles of investing remain very much the same. Concepts such as asset allocation and portfolio rebalancing are as timely and important as ever. So is dollar-cost averaging 1 -- a basic mathematical principle you can bring into play simply by investing a set amount on a regular schedule. For most people, investing is a long-term proposition. Today's bad news often has an impact on financial markets. But over time, it's factors such as economic growth that shape broader trends. And those trends are what long-term investing is about. I want to thank you for choosing SchwabFunds(R) during this difficult time for investors. We strive to help you reach your financial goals, and look forward to serving you in the future. Sincerely, /s/ Charles R. Schwab 1 Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets. MARKET OVERVIEW A YEAR OF FALLING SHORT-TERM RATES AND A MODERATE, PROTRACTED ECONOMIC RECOVERY. Calendar 2002 saw the U.S. economy making evident but very slow progress in recovering from the recession that was brought on by the collapse of the "new economy" and exacerbated by the 9/11 attacks. Through the policies of the Federal Reserve (the Fed) as well as through fiscal policies, the U.S. government continued to take action during 2002 to turn the economy around. Although the full effect of these policy actions may not be felt for some time, the economy did see some benefit during the year from these actions and perhaps even greater benefit from actions taken earlier. The rate cuts that the Fed had made in 2001 served their purpose of creating liquidity in 2002. In addition, a series of tax cuts enacted in 2001--criticized by some at the time as being unnecessary--turned out to benefit the economy at a time when help was much needed. One of the features of the 2001 recession was a steep fall-off in capital investment by businesses. This type of spending continued to languish even after the recession was over, and indeed remained relatively weak throughout 2002. Spending by consumers--most of whom have kept their jobs--was another story. Robust prior to the recession, consumer spending kept right on going through the recession and afterward with barely a pause until late in 2002. Low interest rates have been a boon for consumers as far as financing goes, and this was reflected in strong activity during 2002 in housing purchases and mortgage refinancings as well as auto sales. ASSET CLASS PERFORMANCE COMPARISON % returns during the report period This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below. 1.70% THREE-MONTH U.S. TREASURY BILLS (T-BILLS): measures short-term U.S. Treasury obligations 10.26% LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX: measures the U.S. bond market -22.10% S&P 500(R) INDEX: measures U.S. large-cap stocks -20.48% RUSSELL 2000(R) INDEX: measures U.S. small-cap stocks -15.49% MSCI-EAFE(R) INDEX: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East [LINE GRAPH]
Lehman Aggregate MSCI EAFE Russell 2000 S&P 500 3 Month Bond Index Index Small-Cap Index Index T-Bill 31-Dec-01 0 0 0 0 0 Jan-02 -0.24 1.57 2.21 2.13 0.02 Jan-02 1.27 -1.4 0.32 -0.22 0.08 Jan-02 1.1 -3.23 -2.86 -1.79 0.1 Jan-02 0.57 -4.29 -1.83 -1.28 0.11 Feb-02 1.01 -5.38 -1.66 -2.15 0.14 Feb-02 1.34 -6.71 -4.38 -4.41 0.18 Feb-02 1.57 -4.37 -3.81 -3.72 0.21 Feb-02 1.76 -6.38 -4.65 -4.97 0.24 Mar-02 1.35 -3.34 -1.91 -1.16 0.27 Mar-02 0.21 2.25 2.53 1.68 0.3 Mar-02 0.01 2.11 2.41 1.84 0.32 Mar-02 -0.08 0.86 3.09 0.32 0.35 Mar-02 0.09 0.62 3.98 0.29 0.4 Apr-02 1.08 0.61 2.21 -1.87 0.44 Apr-02 1.33 -1.12 5.87 -2.89 0.48 Apr-02 1.56 2.1 6.28 -1.66 0.51 Apr-02 2.12 1.16 3.03 -5.93 0.54 May-02 2.18 1.87 5.29 -6.1 0.57 May-02 2.14 1.19 1.29 -7.71 0.61 May-02 1.72 3.97 4.65 -3.2 0.65 May-02 2.37 3.32 1.52 -5.19 0.69 May-02 2.89 2.45 0.27 -6.49 0.72 Jun-02 2.84 -0.78 -3.21 -9.96 0.75 Jun-02 3.95 -4.94 -5.52 -11.74 0.79 Jun-02 4.11 -4.99 -5.09 -13.33 0.82 Jun-02 3.79 -1.62 -4.7 -13.16 0.85 Jul-02 3.68 -2.1 -9.16 -13.23 0.86 Jul-02 4.9 -6.49 -14.84 -19.16 0.9 Jul-02 5 -9.14 -20.41 -25.62 0.93 Jul-02 5.23 -14.72 -21.21 -25.18 0.97 Aug-02 5.83 -13.81 -22.38 -24.09 1.03 Aug-02 5.9 -11.19 -19.88 -20.19 1.06 Aug-02 5.63 -10.36 -18.3 -18.42 1.09 Aug-02 6.39 -9.45 -17.43 -17.36 1.12 Aug-02 6.81 -11.59 -19.3 -19.4 1.15 Sep-02 7.11 -14.18 -19.15 -21.35 1.18 Sep-02 7.79 -15.97 -19.44 -21.72 1.21 Sep-02 8.14 -19.38 -24.12 -25.62 1.25 Sep-02 8.26 -19.09 -25.19 -27.21 1.28 Oct-02 8.26 -21.77 -28.04 -29.45 1.31 Oct-02 7.74 -20.84 -28.65 -26.39 1.33 Oct-02 6.64 -17.23 -24.82 -22.07 1.34 Oct-02 7.04 -18.19 -22.89 -20.9 1.37 Nov-02 7.84 -17.15 -20.62 -20.5 1.44 Nov-02 8.68 -16.02 -21.53 -21.04 1.51 Nov-02 8.32 -15.45 -20.06 -19.71 1.54 Nov-02 7.97 -13.54 -17.14 -17.89 1.56 Nov-02 8.02 -13.09 -15.79 -17.25 1.59 Dec-02 8.61 -15.77 -17.77 -12.87 1.61 Dec-02 8.98 -17.26 -19.55 -21.38 1.63 Dec-02 9.59 -17.2 -19.76 -20.83 1.66 Dec-02 10.2 -17.52 -20.27 -22.63 1.69 31-Dec-02 10.26 -15.94 -20.48 -22.1 1.7
These figures assume dividends and distributions were reinvested. Index figures don't include trading and management costs, which would lower performance. Indices are unmanaged and you can't invest in them directly. Remember that past performance isn't an indication of future results. Data source: Charles Schwab & Co., Inc. (Schwab). Schwab Institutional Advantage Money Fund(R) and Schwab Retirement Money Fund(R) 2 WITH LOW YIELDS, MONEY MARKET INVESTMENTS GENERALLY LAGGED BOND INVESTMENTS DURING 2002, BUT STILL FARED BETTER THAN MOST CATEGORIES OF STOCKS. MONEY MARKET YIELDS FELL DURING 2002 ON ECONOMIC SOFTNESS AND A FED RATE CUT. The prices and yields of short-term securities reflected an unusual amount of uncertainty about the direction of the economy during 2002. As the short-term market scrutinized each new economic indicator--both negative and positive--the direction of short-term rates changed frequently. At one point during the report period the yield curve became inverted, with yields on overnight securities actually higher than yields on 12-month securities. At other times in the year, the yield curve was essentially flat (similar rates for all maturities), and at still other times it was a "normal" rising curve (higher rates paid in exchange for longer maturities). Overall, however, short-term rates went down during 2002, retreating even further from the low levels they had reached in the wake of the Fed's dramatic series of interest rate cuts (which ended in December 2001). Short-term markets began the year with some optimism that the recovery was gathering steam, and short-term yields rose modestly through March 2002. When this optimism began to appear premature, however, rates began a steady slide downward that continued through October. In November, short-term markets were surprised by the Fed's 0.50% cut in its target rate (from 1.75% to 1.25%). Short-term investors generally appeared to believe the Fed would cut rates only 0.25%, if at all. As a result, short-term yields fell sharply on the Fed's announcement. THE VIEW FROM HERE: SLOW-PACED ECONOMIC IMPROVEMENT MAY CONTINUE. Although consumer spending appeared to be flagging somewhat as 2002 drew to a close, capital spending by corporations began showing signs of revival and may be able to take up some of the slack. The Fed's interest rate cuts appear to be achieving their goal of injecting liquidity into the economy, with the main effects of the November 2002 cut still to be felt (aside, of course, from its effect in pushing down short-term rates). Although in our opinion the threat of deflation cannot be discounted, it is worth noting that the Fed still has a variety of tools at its disposal, and has indicated that it may use them if it believes the circumstances warrant. One major concern is geopolitical risk. The outcome and ultimate impact of the situations in Iraq, North Korea and the Middle East are unknown. We believe that this uncertainty may be making the Fed's actions less effective than they otherwise would be. Likewise, it may be that businesses are holding back on capital spending more than they otherwise might. Based on past history and on the yield curve as it stood at the end of 2002, one thing that does appear likely is that when the Fed is satisfied that the current low interest rate environment has done its job in helping the economy regain momentum, it will raise interest rates, and short-term yields will likely follow. When that might happen, and whether any further cuts will occur before then, however, is unclear. 3 The fund seeks the highest current income consistent with stability of capital and liquidity. Schwab Institutional Advantage Money Fund(R) [PHOTO OF LINDA KLINGMAN AND MIKE NEITZKE] LINDA KLINGMAN, a vice president of the investment advisor and senior portfolio manager, has overall responsibility for the management of the fund. She joined the firm in 1990 and has nearly 16 years of experience managing money market funds. MIKE NEITZKE, a portfolio manager, has day-to-day responsibility for management of the fund. Prior to joining the firm in March 2001, he worked for more than 15 years in the financial industry as a portfolio manager. TICKER SYMBOL: SWIXX MANAGERS' PERSPECTIVE SHORT-TERM YIELDS DECLINED DURING THE REPORT PERIOD AS THE ECONOMIC RECOVERY FAILED TO PICK UP SPEED. After peaking in March, yields fell steadily through October, then declined more sharply in November with the Fed's 0.50% rate cut. One development that affected the market was a decline in the supply of commercial paper during 2002. We trace this decline to a combination of factors associated with the soft economy. In particular, issuers reined in their short-term borrowing as they sought to cut costs and defer capital spending. This reduction in supply, in part, put downward pressure on yields. THE FUND GENERALLY MAINTAINED A LONGER AVERAGE MATURITY THAN ITS PEERS 1 DURING 2002. Because the fund held a higher proportion of fixed-rate securities than the average for its peer group, and maintained a somewhat longer weighted average maturity in its portfolio, it was able to mitigate the effects on its yield as short-term rates declined. Money market investors may also take some comfort from the fact that although money market investments generally lagged bond investments during 2002, they still fared better than most categories of stocks. 1 Source: iMoney Net, Inc. First Tier Institutional Category, 12/31/02. Schwab Institutional Advantage Money Fund and Schwab Retirement Money Fund(R) 4 PERFORMANCE AND FUND FACTS SEVEN-DAY YIELDS 1 as of 12/31/02 The seven-day yields are calculated using standard SEC formulas. The effective yield includes the effect of reinvesting daily dividends. Please remember that money market fund yields fluctuate, and that past performance is not an indication of future results. ----------------------------------------- SEVEN-DAY YIELD 1.12% ----------------------------------------- SEVEN-DAY EFFECTIVE YIELD 1.13% -----------------------------------------
WEIGHTED AVERAGE MATURITY during the period Money funds must maintain a dollar-weighted average maturity of no longer than 90 days, and cannot invest in any security whose effective maturity is longer than 397 days (approximately 13 months). [LINE GRAPH]
Monthly Maturity 31-Dec-01 62 Jan-02 60 Feb-02 64 Mar-02 63 Apr-02 67 May-02 64 Jun-02 61 Jul-02 68 Aug-02 62 Sep-02 55 Oct-02 68 Nov-02 62 31-Dec-02 55
PORTFOLIO COMPOSITION 2 as of 12/31/02 All figures are shown as a percentage of the fund's investments. All of the fund's securities were in the top tier of credit quality at the time of purchase. BY SECURITY TYPE [PIE CHART] 47.8% COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 39.0% CERTIFICATES OF DEPOSIT 6.1% VARIABLE RATE OBLIGATION 4.6% REPURCHASE AGREEMENTS 2.0% PROMISSORY NOTES 0.5% BANK NOTES
BY CREDIT QUALITY [PIE CHART] 100.0% TIER 1
1 A portion of the fund's expenses was reduced during the reporting period. Without this reduction, the fund's seven-day yield would have been 1.00% and the seven-day effective yield would have been 1.00%. 2 Composition of the fund's portfolio is as of 12/31/02 and is not indicative of holdings after that date. 5 SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R) - Financials FINANCIAL TABLES These tables provide additional data on the fund's performance, portfolio holdings and business operations. Complementing the tables is the financial notes section at the end of this report, which describes the fund's business structure, accounting practices and other matters. The financial tables and the financial notes have both been audited by PricewaterhouseCoopers LLP. Look online at WWW.SCHWAB.COM/SCHWABFUNDS/HOW2READ for guides that are designed to help you read the financial tables in any SchwabFunds(R) shareholder report. FINANCIAL HIGHLIGHTS
1/1/02- 1/1/01- 1/1/00- 1/1/99- 1/1/98- 12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 ----------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ----------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00 ---------------------------------------------------------- Income from investment operations: Net investment income 0.01 0.04 0.06 0.05 0.05 ---------------------------------------------------------- Less distributions: Dividends from net investment income (0.01) (0.04) (0.06) (0.05) (0.05) ---------------------------------------------------------- Net asset value at end of period 1.00 1.00 1.00 1.00 1.00 ---------------------------------------------------------- Total return (%) 1.48 3.96 6.12 4.90 5.26 RATIOS/SUPPLEMENTAL DATA (%) ----------------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.50 0.50 0.50 1 0.50 0.50 Expense reductions reflected in above ratio 0.13 0.16 0.18 0.21 0.29 Ratio of net investment income to average net assets 1.46 3.83 5.96 4.84 5.12 Net assets, end of period ($ x 1,000,000) 907 797 647 604 369
1 Would have been 0.51% if certain non-routine expenses (proxy fees) had been included. See financial notes. 6 PORTFOLIO HOLDINGS As of December 31, 2002. This section shows all the securities in the fund's portfolio and their market value, as of the report date. We use the symbols below to designate certain characteristics: * Asset-backed security + Credit-enhanced security o Illiquid restricted security For fixed-rate obligations, the rate shown is the effective yield at the time of purchase, except for U.S. government agency coupon notes and U.S. Treasury notes, for which the rate shown is the interest rate (the rate established when the obligation was issued). For variable-rate obligations, the rate shown is the rate as of the report date. For variable-rate obligations with scheduled maturities greater than 397 days, the maturity shown is the later of the next interest rate change date or demand date. For variable-rate obligations with scheduled maturities less than 397 days, the maturity shown is the earlier of the next interest rate change date or demand date. For variable-rate obligations without demand features, the maturity shown is the next interest rate change date. The pie chart below shows the fund's major categories and the market value and cost of the securities in each category. For definitions of abbreviations and acronyms used in security descriptions, see "portfolio terms" in the glossary. ALL DOLLAR VALUES ARE IN THOUSANDS. [PIE CHART] 89.3% FIXED-RATE OBLIGATION Market Value: $819,996 Cost: $819,996 6.1% VARIABLE-RATE OBLIGATIONS Market Value: $55,868 Cost: $55,868 4.6% OTHER INVESTMENTS Market Value: $42,489 Cost: $42,489 ------------------------------------- 100.0% TOTAL INVESTMENTS Market Value: $918,353 Cost: $918,353
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) FIXED-RATE OBLIGATIONS 89.3% of investments COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 47.8% ---------------------------------------------------------------------------- AB SPINTAB 1.34%, 02/20/03 2,000 1,996 ALLIANCE & LEICESTER, PLC 1.32%, 02/10/03 2,000 1,997 AMERICAN EXPRESS CREDIT CORP. 1.70%, 01/24/03 3,000 2,997 1.35%, 01/28/03 2,000 1,998 * AMSTEL FUNDING CORP. 1.76%, 01/09/03 3,000 2,999 1.65%, 02/14/03 1,000 998 * AMSTERDAM FUNDING CORP. 1.35%, 02/26/03 5,000 4,990 1.34%, 03/07/03 2,000 1,995 1.34%, 03/12/03 5,000 4,987 ANZ (DELAWARE), INC. 1.33%, 03/18/03 2,000 1,994 * ASSET SECURITIZATION COOPERATIVE CORP. 1.80%, 01/09/03 3,000 2,999 1.80%, 01/13/03 3,000 2,998 1.79%, 01/14/03 3,000 2,998 1.79%, 01/23/03 4,000 3,996 *+ ATLANTIS ONE FUNDING CORP. 1.86%, 01/10/03 2,000 1,999 1.32%, 02/20/03 8,000 7,985 1.35%, 02/27/03 1,273 1,270 1.34%, 03/13/03 1,000 997 1.35%, 03/21/03 2,012 2,006 1.34%, 03/25/03 2,201 2,194 1.69%, 03/25/03 1,000 996 BANK OF NOVA SCOTIA 1.54%, 02/06/03 3,000 2,995 BARCLAYS U.S. FUNDING CORP. 1.36%, 03/05/03 5,000 4,988 *+ BAVARIA TRR CORP. 1.81%, 01/06/03 1,000 1,000 1.81%, 01/24/03 1,000 999 * BAVARIA UNIVERSAL FUNDING CORP. 1.81%, 01/21/03 1,000 999 1.84%, 01/27/03 1,000 999
See financial notes. 7 SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R) - Financials PORTFOLIO HOLDINGS As of December 31, 2002. Continued
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) BEAR STEARNS COMPANIES, INC. 1.34%, 02/26/03 1,000 998 1.33%, 03/26/03 6,000 5,981 * BETA FINANCE, INC. 1.71%, 02/18/03 1,000 998 CBA (DELAWARE) FINANCE, INC. 1.34%, 03/05/03 2,000 1,995 * CC (USA), INC. 1.78%, 01/06/03 2,000 2,000 1.35%, 01/28/03 4,000 3,996 * CC (USA), INC., 144A 2.43%, 01/27/03 6,000 5,999 CDC COMMERCIAL PAPER CORP. 1.64%, 03/06/03 6,000 5,983 CIT GROUP, INC. 1.73%, 02/12/03 3,000 2,994 CITICORP 1.73%, 01/16/03 5,000 4,996 * CLIPPER RECEIVABLES CORP. 1.34%, 02/25/03 4,000 3,992 1.34%, 03/11/03 1,000 997 * CONCORD MINUTEMEN CAPITAL CO., L.L.C. Series A 1.73%, 01/09/03 2,000 1,999 1.37%, 02/05/03 3,000 2,996 1.35%, 02/20/03 1,400 1,397 1.46%, 04/04/03 1,000 996 * DAKOTA CP NOTES OF CITIBANK CREDIT CARD ISSUANCE TRUST 1.34%, 03/21/03 5,000 4,985 DEN NORSKE BANK ASA 1.34%, 03/05/03 4,000 3,991 DANSKE CORP. 1.71%, 01/21/03 1,000 999 DEPFA BANK, PLC 1.34%, 03/18/03 1,000 997 DEUTSCHE BANK FINANCIAL, L.L.C. 1.53%, 02/07/03 11,000 10,983 * DORADA FINANCE, INC. 1.86%, 01/15/03 1,000 999 1.65%, 02/04/03 2,000 1,997 2.03%, 03/21/03 2,000 1,991 * DORADA FINANCE, INC., 144A 1.96%, 09/16/03 2,000 2,000 DRESDNER U.S. FINANCE, INC. 1.54%, 05/12/03 4,000 3,978 * EDISON ASSET SECURITIZATION CORP., L.L.C. 1.68%, 02/13/03 3,000 2,994 1.35%, 03/11/03 15,000 14,961 1.65%, 04/04/03 4,000 3,983 *+ ENTERPRISE FUNDING CORP. 1.34%, 03/19/03 5,701 5,685 FORENINGSSPARBANKEN (SWEDBANK) 1.35%, 02/05/03 1,000 999 *+ FORRESTAL FUNDING MASTER TRUST NOTES Series 2000A 1.39%, 03/25/03 5,550 5,532 FORTIS FUNDING, L.L.C. 1.60%, 02/03/03 1,000 999 1.34%, 03/03/03 4,000 3,991 1.77%, 03/14/03 1,000 997 GE CAPITAL INTERNATIONAL FUNDING, INC. 1.78%, 01/16/03 6,000 5,996 1.75%, 01/21/03 1,000 999 1.79%, 01/29/03 1,000 999 1.63%, 02/06/03 1,000 998 1.33%, 02/12/03 1,000 998 1.78%, 02/14/03 2,000 1,996 1.35%, 02/27/03 2,000 1,996 1.73%, 03/25/03 2,000 1,992 GE FINANCIAL ASSURANCE HOLDINGS, INC. 1.34%, 03/21/03 3,000 2,991 GENERAL ELECTRIC CAPITAL CORP. 2.32%, 02/14/03 5,000 4,986 2.31%, 02/19/03 3,000 2,991 2.27%, 02/24/03 4,000 3,987 2.24%, 02/27/03 11,000 10,962 1.33%, 03/12/03 1,000 997 GENERAL ELECTRIC CAPITAL SERVICES 1.72%, 01/10/03 1,000 1,000 1.32%, 01/15/03 5,000 4,997 GENERAL ELECTRIC CO. 1.32%, 01/21/03 5,000 4,996 * GIRO FUNDING U.S. CORP. 1.78%, 01/02/03 10,000 10,000 1.33%, 03/25/03 1,000 997
See financial notes. 8
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) * GIRO MULTI-FUNDING CORP. 1.67%, 01/31/03 5,000 4,993 *o GREENWICH FUNDING CORP. 1.36%, 01/10/03 4,000 3,999 1.34%, 01/24/03 1,000 999 * GREYHAWK FUNDING, L.L.C. 1.35%, 02/21/03 5,000 4,990 * HATTERAS FUNDING CORP. 1.73%, 01/14/03 3,000 2,998 1.36%, 01/17/03 2,000 1,999 *+ INTREPID FUNDING MASTER TRUST 1.34%, 02/24/03 3,000 2,994 J.P. MORGAN CHASE & CO. 1.63%, 02/07/03 5,000 4,992 * K2 (USA), L.L.C. 1.68%, 02/06/03 3,000 2,995 1.38%, 06/02/03 3,000 2,983 KBC FINANCIAL PRODUCTS INTERNATIONAL, LTD. 1.72%, 01/13/03 2,000 1,999 *+ KITTY HAWK FUNDING CORP. 1.35%, 03/03/03 8,000 7,982 1.34%, 03/10/03 2,170 2,165 LANDESBANK SCHLESWIG-HOLSTEIN GIROZENTRALE 2.44%, 01/27/03 5,000 4,991 * LEXINGTON PARKER CAPITAL CO., L.L.C. 1.83%, 01/10/03 1,000 1,000 1.33%, 01/13/03 2,000 1,999 1.74%, 01/17/03 2,000 1,998 * LINKS FINANCE, L.L.C. 1.36%, 03/03/03 1,000 998 1.35%, 03/11/03 1,000 997 MERRILL LYNCH & Co., Inc. 1.65%, 03/21/03 1,000 996 * MONT BLANC CAPITAL CORP. 1.79%, 01/14/03 2,000 1,999 1.36%, 03/06/03 2,000 1,995 MORGAN STANLEY 1.78%, 01/24/03 6,000 5,993 1.34%, 02/26/03 5,000 4,990 1.33%, 03/14/03 4,000 3,989 1.33%, 03/20/03 7,000 6,980 * NEWCASTLE CERTIFICATES PROGRAM Series 2000A 1.73%, 01/08/03 1,000 1,000 * PARK AVENUE RECEIVABLES CORP. 1.35%, 02/11/03 4,000 3,994 SALOMON SMITH BARNEY HOLDINGS, INC. 1.31%, 01/08/03 3,000 2,999 1.75%, 01/17/03 3,000 2,998 1.34%, 02/25/03 2,000 1,996 1.34%, 03/07/03 4,000 3,990 1.33%, 03/12/03 5,000 4,987 1.33%, 03/14/03 1,000 997 SAN PAOLO IMI U.S. FINANCIAL CO. 1.33%, 03/12/03 5,000 4,987 * SIGMA FINANCE, INC. 1.91%, 01/14/03 5,245 5,241 1.62%, 04/08/03 3,000 2,987 1.69%, 04/14/03 1,000 995 SOCIETE GENERALE, N.A., INC. 1.53%, 01/08/03 1,000 1,000 STADSHYPOTEK DELAWARE, INC. 1.37%, 02/13/03 1,000 998 * STELLAR FUNDING GROUP, INC. 1.40%, 01/07/03 2,022 2,022 1.79%, 02/28/03 1,481 1,477 1.71%, 03/26/03 2,510 2,500 1.71%, 03/27/03 1,362 1,357 1.71%, 03/31/03 1,540 1,534 SVENSKA HANDELSBANKEN, INC. 1.33%, 03/27/03 5,000 4,984 *+ TRIPLE-A ONE FUNDING CORP. 1.36%, 01/24/03 3,457 3,454 1.35%, 02/12/03 1,000 998 UBS FINANCE (DELAWARE), INC. 1.33%, 03/17/03 3,000 2,992 1.33%, 03/26/03 7,571 7,548 * VARIABLE FUNDING CAPITAL CORP. 1.78%, 01/07/03 14,000 13,996 1.79%, 01/23/03 1,000 999 WESTPAC CAPITAL CORP. 1.35%, 03/25/03 4,100 4,087 * WINDMILL FUNDING CORP. 1.80%, 01/09/03 2,000 1,999 1.79%, 01/16/03 5,000 4,996 WYETH 1.75%, 02/10/03 4,000 3,992 --------- 438,742
See financial notes. 9 SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R) - Financials PORTFOLIO HOLDINGS As of December 31, 2002. Continued
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) CERTIFICATES OF DEPOSIT 39.0% ---------------------------------------------------------------------------- ABBEY NATIONAL TREASURY SERVICES, PLC 1.72%, 01/13/03 8,000 8,000 1.77%, 01/15/03 1,000 1,000 ABN AMRO BANK, NV 1.78%, 01/15/03 2,225 2,226 AMERICAN EXPRESS CENTURION BANK 1.37%, 01/28/03 2,000 2,000 BANK OF MONTREAL 1.33%, 03/21/03 5,000 5,000 BARCLAYS BANK, PLC 1.34%, 01/13/03 2,000 2,000 1.33%, 03/03/03 4,000 4,000 1.65%, 03/03/03 9,000 9,001 1.30%, 05/02/03 3,000 3,000 1.60%, 11/25/03 4,000 4,000 BAYERISCHE HYPO-UND VEREINSBANK, AG 1.77%, 01/17/03 4,000 4,000 BNP PARIBAS 1.54%, 02/04/03 4,000 4,000 1.55%, 02/05/03 3,000 3,000 2.04%, 03/27/03 1,000 1,000 1.74%, 04/17/03 5,000 5,000 1.80%, 06/17/03 6,000 6,017 CANADIAN IMPERIAL BANK OF COMMERCE 1.33%, 02/14/03 1,000 1,000 2.30%, 02/21/03 2,000 2,000 1.35%, 02/27/03 3,000 3,000 2.00%, 04/10/03 4,000 4,000 CHASE MANHATTAN BANK USA, N.A. 1.77%, 01/23/03 9,000 9,000 1.32%, 02/11/03 4,000 4,000 CITIBANK, N.A. 1.77%, 01/22/03 12,000 12,000 1.78%, 01/22/03 8,000 8,000 1.33%, 03/19/03 3,000 3,000 COMMONWEALTH BANK OF AUSTRALIA 1.33%, 01/31/03 5,000 5,000 1.33%, 03/18/03 2,000 2,000 CREDIT LYONNAIS S.A. 1.37%, 03/06/03 5,000 5,000 CREDIT SUISSE FIRST BOSTON 1.65%, 02/03/03 1,000 1,000 DEUTSCHE BANK, AG 1.32%, 02/11/03 11,000 11,000 1.77%, 03/10/03 3,000 3,003 DEXIA BANK BELGIUM 2.30%, 02/21/03 3,000 3,000 1.33%, 03/24/03 3,000 3,000 2.51%, 04/02/03 2,000 2,000 DRESDNER BANK, AG 1.33%, 02/19/03 2,000 2,000 1.68%, 04/11/03 4,000 4,000 HBOS TREASURY SERVICES, PLC 1.34%, 02/18/03 5,000 5,000 1.36%, 03/10/03 4,000 4,000 HSBC BANK USA 1.55%, 02/28/03 5,000 5,002 ING BANK, NV 1.72%, 01/09/03 5,000 5,000 1.77%, 01/16/03 2,000 2,000 1.84%, 01/21/03 4,000 4,000 1.77%, 01/23/03 2,000 2,000 1.74%, 04/17/03 5,000 5,000 LANDESBANK BADEN WURTTEMBERG 1.33%, 02/12/03 1,000 1,000 1.33%, 03/17/03 8,000 8,000 1.85%, 10/17/03 4,000 4,000 LANDESBANK HESSEN-THURINGEN GIROZENTRALE 1.62%, 01/30/03 5,000 5,001 LLOYDS TSB BANK, PLC 1.60%, 01/27/03 3,000 3,000 1.32%, 03/27/03 2,000 2,000 1.76%, 05/16/03 1,000 1,003 1.75%, 05/19/03 5,000 5,000 NATEXIS BANQUES POPULAIRES 1.34%, 02/19/03 5,000 5,000 NATIONAL AUSTRALIA BANK, LTD. 1.60%, 04/07/03 8,000 8,000 NATIONAL BANK OF CANADA 1.33%, 02/12/03 5,000 5,000 NORDDEUTSCHE LANDESBANK GIROZENTRALE 1.68%, 04/15/03 3,000 3,000 1.55%, 05/05/03 3,000 3,000 1.49%, 12/29/03 2,000 2,000 NORDEA BANK FINLAND, PLC 1.77%, 03/17/03 3,000 3,000 1.34%, 03/31/03 5,000 5,000
See financial notes. 10
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) RABOBANK NEDERLAND, NV 1.96%, 01/14/03 3,000 3,000 2.47%, 02/28/03 1,000 1,000 2.49%, 02/28/03 2,000 2,000 2.98%, 04/04/03 3,000 3,000 ROYAL BANK OF CANADA 2.38%, 03/07/03 4,000 4,000 SAN PAOLO IMI SPA 1.35%, 01/29/03 3,000 3,000 SOCIETE GENERALE 1.34%, 03/20/03 10,000 10,000 2.05%, 03/31/03 5,000 5,000 2.01%, 04/09/03 3,000 3,000 SOUTHTRUST BANK 1.35%, 06/06/03 1,000 1,000 STATE STREET BANK & TRUST CO., N.A. 1.72%, 01/24/03 5,000 5,000 SVENSKA HANDELSBANKEN, AB 1.66%, 03/19/03 1,000 1,000 TORONTO DOMINION BANK 1.32%, 05/13/03 2,000 2,000 1.35%, 06/24/03 7,000 7,000 UBS, AG 2.44%, 01/06/03 5,000 5,000 2.24%, 02/04/03 3,000 3,001 2.27%, 02/28/03 6,000 6,000 1.59%, 12/16/03 5,000 5,000 UNICREDITO ITALIANO SPA 1.75%, 01/07/03 1,000 1,000 1.72%, 01/15/03 1,000 1,000 1.70%, 01/21/03 3,000 3,000 1.35%, 03/11/03 5,000 5,000 1.35%, 03/12/03 2,000 2,000 WELLS FARGO BANK, N.A. 1.64%, 01/10/03 9,000 9,000 1.62%, 01/29/03 11,000 11,000 WESTLB AG 1.60%, 04/03/03 2,000 2,000 1.93%, 09/18/03 5,000 5,000 WILMINGTON TRUST CO. 1.75%, 02/06/03 5,000 5,000 --------- 358,254 PROMISSORY NOTES 2.0% o THE GOLDMAN SACHS GROUP, INC. 1.75%, 02/04/03 1,000 1,000 1.87%, 02/05/03 2,000 2,000 1.84%, 03/18/03 1,000 1,000 1.75%, 04/10/03 6,000 6,000 1.50%, 06/02/03 4,000 4,000 1.45%, 06/10/03 3,000 3,000 1.45%, 06/17/03 1,000 1,000 --------- 18,000 BANK NOTES 0.5% ---------------------------------------------------------------------------- BANK OF AMERICA, N.A. 2.50%, 05/02/03 5,000 5,000 VARIABLE-RATE OBLIGATIONS 6.1% of investments + ASSET PARTNERS, INC. RB Series 1997 1.60%, 01/07/03 3,295 3,295 * ASSET SECURITIZATION COOPERATIVE CORP., 144A 1.38%, 01/22/03 4,000 4,000 + BMC SPECIAL CARE FACILITIES FINANCING AUTHORITY OF THE CITY OF MONTGOMERY, ALABAMA Taxable RB (Montgomery Baptist Outreach Services Corp. Project) Series 1997A 1.52%, 01/07/03 8,600 8,600 Taxable RB (Montgomery Baptist Outreach Services Corp. Project) Series 1997B 1.52%, 01/07/03 2,200 2,200 * BETA FINANCE, INC., 144A 1.39%, 01/15/03 10,000 9,999 + CITY OF NEW BRITAIN, CONNECTICUT GO, 144A 1.52%, 01/07/03 5,600 5,600 + LOANSTAR ASSETS PARTNERS II, L.P., 144A 1.50%, 01/07/03 5,000 5,000 + NEW YORK CITY IDA Taxable Industrial Revenue Refunding Bond (Allway Tools, Inc. Project) Series 1997 1.60%, 01/07/03 175 175
See financial notes. 11 SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R) - Financials PORTFOLIO HOLDINGS As of December 31, 2002. Continued
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) + PALM SPRINGS, CALIFORNIA COP (Downtown Parking Project) Series 2002A 1.67%, 01/07/03 7,000 7,000 * SIGMA FINANCE, INC., 144A 1.43%, 01/06/03 1,000 1,000 1.39%, 01/15/03 9,000 8,999 ------ 55,868
MATURITY VALUE MKT. VALUE SECURITY ($ x 1,000) ($ x 1,000) OTHER INVESTMENTS 4.6% of investments REPURCHASE AGREEMENTS 4.6% ---------------------------------------------------------------------------- CREDIT SUISSE FIRST BOSTON CORP. Tri-Party Repurchase Agreement Collateralized by U.S. Government Securities 1.28%, issued 12/31/02, due 01/02/03 42,492 42,489
END OF PORTFOLIO HOLDINGS. For totals, please see the first page of holdings for this fund. See financial notes. 12 Statement of ASSETS AND LIABILITIES As of December 31, 2002. All numbers x 1,000 except NAV. ASSETS ------------------------------------------------------------------ Investments, at market value $ 918,353 a Receivables: Fund shares sold 2,514 Interest 2,221 Prepaid expenses + 52 ------------- TOTAL ASSETS 923,140 LIABILITIES ------------------------------------------------------------------ Payables: Fund shares redeemed 11,188 Dividends to shareholders 10 Investments bought 5,004 Investment adviser and administrator fees 19 Transfer agent and shareholder service fees 17 Accrued expenses + 41 ------------- TOTAL LIABILITIES 16,279 NET ASSETS ------------------------------------------------------------------ TOTAL ASSETS 923,140 TOTAL LIABILITIES - 16,279 ------------- NET ASSETS $ 906,861 NET ASSETS BY SOURCE Capital received from investors 906,862 Net realized capital losses (1)
NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $906,861 906,919 $1.00 a Includes illiquid restricted securities worth $22,998, or 2.50% of the fund's investments. The amortized cost for the fund's securities was $918,353. FEDERAL TAX DATA COST BASIS OF PORTFOLIO $918,353 UNUSED CAPITAL LOSSES: Expires 12/31 of: Loss amount: 2004 $1
See financial notes. 13 SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R) - Financials Statement of OPERATIONS For January 1, 2002 through December 31, 2002. All numbers x 1,000. INVESTMENT INCOME ------------------------------------------------------- Interest $16,230 EXPENSES ------------------------------------------------------- Investment adviser and administrator fees 3,141 a Transfer agent and shareholder service fees 1,818 b Trustees' fees 25 c Custodian and portfolio accounting fees 181 Professional fees 25 Registration fees 11 Shareholder reports 22 Other expenses + 11 ---------- Total expenses 5,234 Expense reduction - 1,101 d ---------- NET EXPENSES 4,133 INCREASE IN NET ASSETS FROM OPERATIONS ------------------------------------------------------- TOTAL INVESTMENT INCOME 16,230 NET EXPENSES - 4,133 ---------- NET INVESTMENT INCOME 12,097 ---------- INCREASE IN NET ASSETS FROM OPERATIONS $12,097
a Calculated on a graduated basis as a percentage of average daily net assets: 0.38% of the first $1 billion, 0.35% over $1 billion, 0.32% over $10 billion, 0.30% over $20 billion and 0.27% over $40 billion. b Calculated as a percentage of average daily net assets: for transfer agent services, 0.05% of the fund's assets; for shareholder services, 0.17% of the fund's assets. c For the fund's independent trustees only. d This reduction was made by the investment adviser (CSIM). It reflects a guarantee by CSIM and the transfer agent and the shareholder service agent (Schwab) to limit the operating expenses of this fund through at least April 30, 2003, to 0.50% of average daily net assets. This limit doesn't include interest, taxes and certain non-routine expenses. See financial notes. 14 Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers x 1,000.
OPERATIONS --------------------------------------------------------------------------------- 1/1/02-12/31/02 1/1/01-12/31/01 Net investment income $ 12,097 $ 28,914 Net realized gains + -- 2 ------------------------------------ INCREASE IN NET ASSETS FROM OPERATIONS 12,097 28,916 DISTRIBUTIONS PAID --------------------------------------------------------------------------------- Dividends from net investment income 12,097 28,914 a TRANSACTIONS IN FUND SHARES b --------------------------------------------------------------------------------- Shares sold 810,966 815,023 Shares reinvested 12,003 28,718 Shares redeemed + (712,969) (694,267) ------------------------------------ NET INCREASE 110,000 149,474 NET ASSETS --------------------------------------------------------------------------------- Beginning of period 796,861 647,385 Total increase + 110,000 149,476 c ------------------------------------ END OF PERIOD $ 906,861 $ 796,861
a The tax-basis components of distributions paid for the current period are: Ordinary income $12,097 Long-term capital gains $ -- b Because all transactions in this section took place at $1.00 per share, figures for share quantities are the same as for dollars. c Represents the changes in net assets from operations plus the changes in value of transactions in fund shares, minus distributions paid. See financial notes. 15 The fund seeks the highest current income consistent with stability of capital and liquidity. Schwab Retirement Money Fund(R) [PHOTO OF LINDA KLINGMAN AND MIKE NEITZKE] LINDA KLINGMAN, a vice president of the investment advisor and senior portfolio manager, has overall responsibility for the management of the fund. She joined the firm in 1990 and has nearly 16 years of experience managing money market funds. MIKE NEITZKE, a portfolio manager, has day-to-day responsibility for management of the fund. Prior to joining the firm in March 2001, he worked for more than 15 years in the financial industry as a portfolio manager. TICKER SYMBOL: SWRXX MANAGERS' PERSPECTIVE SHORT-TERM YIELDS DECLINED DURING THE REPORT PERIOD AS THE ECONOMIC RECOVERY FAILED TO PICK UP SPEED. After peaking in March, yields fell steadily through October, then declined more sharply in November with the Fed's 0.50% rate cut. One development that affected the market was a decline in the supply of commercial paper during 2002. We trace this decline to a combination of factors associated with the soft economy. In particular, issuers reined in their short-term borrowing as they sought to cut costs and defer capital spending. This reduction in supply, in part, put downward pressure on yields. THE FUND GENERALLY MAINTAINED A LONGER AVERAGE MATURITY THAN ITS PEERS 1 DURING 2002, WHICH CONTRIBUTED POSITIVELY TO ITS PERFORMANCE. Because the fund held a higher proportion of fixed-rate securities than the average for its peer group, and maintained a somewhat longer weighted average maturity in its portfolio, it was able to mitigate the effects on its yield as short-term rates declined. Money market investors may also take some comfort from the fact that although money market investments generally lagged bond investments during 2002, they still fared better than most categories of stocks. 1 Source: iMoney Net, Inc. First Tier Retail Category, 12/31/02. Schwab Institutional Advantage Money Fund(R) and Schwab Retirement Money Fund 16 PERFORMANCE AND FUND FACTS SEVEN-DAY YIELD as of 12/31/02 The seven-day yields are calculated using standard SEC formulas. The effective yield includes the effect of reinvesting daily dividends. Please remember that money market fund yields fluctuate, and that past performance is not an indication of future results.
----------------------------------------- SEVEN-DAY YIELD 0.96% ----------------------------------------- SEVEN-DAY EFFECTIVE YIELD 0.96% -----------------------------------------
WEIGHTED AVERAGE MATURITY during the period Money funds must maintain a dollar-weighted average maturity of no longer than 90 days, and cannot invest in any security whose effective maturity is longer than 397 days (approximately 13 months). [LINE GRAPH]
Monthly Maturity 31-Dec-01 62 Jan-02 60 Feb-02 64 Mar-02 63 Apr-02 67 May-02 64 Jun-02 61 Jul-02 68 Aug-02 62 Sep-02 55 Oct-02 68 Nov-02 62 31-Dec-02 55
PORTFOLIO COMPOSITION 1 as of 12/31/02 All figures are shown as a percentage of the fund's investments. All of the fund's securities were in the top tier of credit quality at the time of purchase. BY SECURITY TYPE [PIE CHART] 50.5% COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 38.9% CERTIFICATES OF DEPOSIT 5.1% REPURCHASE AGREEMENTS 3.6% VARIABLE RATE OBLIGATION 1.9% PROMISSORY NOTES
BY CREDIT QUALITY [PIE CHART] 100.0% TIER 1
1 Composition of the fund's portfolio is as of 12/31/02 and is not indicative of holdings after that date. 17 SCHWAB RETIREMENT MONEY FUND(R) - Financials FINANCIAL TABLES These tables provide additional data on the fund's performance, portfolio holdings and business operations. Complementing the tables is the financial notes section at the end of this report, which describes the fund's business structure, accounting practices and other matters. The financial tables and the financial notes have both been audited by PricewaterhouseCoopers LLP. Look online at WWW.SCHWAB.COM/SCHWABFUNDS/HOW2READ for guides that are designed to help you read the financial tables in any SchwabFunds(R) shareholder report. FINANCIAL HIGHLIGHTS
1/1/02- 1/1/01- 1/1/00- 1/1/99- 1/1/98- 12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 ----------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ----------------------------------------------------------------------------------------------------- Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00 ----------------------------------------------------- Income from investment operations: Net investment income 0.01 0.04 0.06 0.05 0.05 ----------------------------------------------------- Less distributions: Dividends from net investment income (0.01) (0.04) (0.06) (0.05) (0.05) ----------------------------------------------------- Net asset value at end of period 1.00 1.00 1.00 1.00 1.00 ----------------------------------------------------- Total return (%) 1.30 3.75 5.90 4.68 5.03 RATIOS/SUPPLEMENTAL DATA (%) ----------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.68 0.70 0.71 1 0.72 0.73 Expense reductions reflected in above ratio -- -- -- 0.02 0.07 Ratio of net investment income to average net assets 1.28 3.61 5.77 4.62 4.88 Net assets, end of period ($ x 1,000,000) 566 515 399 322 225
1 Would have been 0.72% if certain non-routine expenses (proxy fees) had been included. See financial notes. 18 PORTFOLIO HOLDINGS As of December 31, 2002. This section shows all the securities in the fund's portfolio and their market value, as of the report date. We use the symbols below to designate certain characteristics: * Asset-backed security + Credit-enhanced security o Illiquid restricted security For fixed-rate obligations, the rate shown is the effective yield at the time of purchase, except for U.S. government agency coupon notes and U.S. Treasury notes, for which the rate shown is the interest rate (the rate established when the obligation was issued). For variable-rate obligations, the rate shown is the rate as of the report date. For variable-rate obligations with scheduled maturities greater than 397 days, the maturity shown is the later of the next interest rate change date or demand date. For variable-rate obligations with scheduled maturities less than 397 days, the maturity shown is the earlier of the next interest rate change date or demand date. For variable-rate obligations without demand features, the maturity shown is the next interest rate change date. The pie chart below shows the fund's major categories and the market value and cost of the securities in each category. For definitions of abbreviations and acronyms used in security descriptions, see "portfolio terms" in the glossary. ALL DOLLAR VALUES ARE IN THOUSANDS. [PIE CHART] 91.3% FIXED-RATE OBLIGATIONS Market Value: $526,155 Cost: $526,155 3.6% VARIABLE-RATE OBLIGATIONS Market Value: $20,995 Cost: $20,995 5.1% OTHER INVESTMENTS Market Value: $29,407 Cost: $29,407 ------------------------------------ 100.0% TOTAL INVESTMENTS Market Value: $576,557 Cost: $576,557
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) FIXED-RATE OBLIGATIONS 91.3% of investments COMMERCIAL PAPER & OTHER CORPORATE OBLIGATIONS 50.5% ---------------------------------------------------------------------------- AB SPINTAB 1.34%, 02/20/03 2,000 1,996 ALLIANCE & LEICESTER, PLC 1.32%, 02/10/03 1,000 999 AMERICAN EXPRESS CREDIT CORP. 1.70%, 01/24/03 2,000 1,998 1.35%, 01/28/03 3,000 2,997 * AMSTEL FUNDING CORP. 1.36%, 02/18/03 1,000 998 1.35%, 03/19/03 1,000 997 * AMSTERDAM FUNDING CORP. 1.75%, 01/17/03 3,000 2,998 1.35%, 02/26/03 1,000 998 1.34%, 03/21/03 3,000 2,991 * APRECO, INC. 1.80%, 01/15/03 2,000 1,999 * ASSET SECURITIZATION COOPERATIVE CORP. 1.35%, 02/26/03 2,000 1,996 *+ ATLANTIS ONE FUNDING CORP. 1.86%, 01/10/03 1,000 1,000 1.74%, 01/30/03 3,289 3,284 1.34%, 03/12/03 4,000 3,990 1.34%, 03/13/03 2,000 1,995 1.34%, 03/21/03 2,000 1,994 1.34%, 03/25/03 1,000 997 1.69%, 03/25/03 1,044 1,040 BANK OF IRELAND 1.34%, 03/05/03 2,000 1,995 * BARTON CAPITAL CORP. 1.36%, 01/15/03 1,000 999 *+ BAVARIA TRR CORP. 1.76%, 01/06/03 1,000 1,000 * BAVARIA UNIVERSAL FUNDING CORP. 1.81%, 01/21/03 2,024 2,022 BEAR STEARNS COMPANIES, INC. 1.33%, 03/26/03 5,000 4,984 * BETA FINANCE, INC. 1.71%, 02/18/03 2,000 1,995
See financial notes. 19 SCHWAB RETIREMENT MONEY FUND(R) - Financials PORTFOLIO HOLDINGS As of December 31, 2002. Continued
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) * BETA FINANCE, INC., 144A 2.13%, 02/14/03 1,000 1,000 * CC (USA), INC. 1.36%, 02/26/03 1,000 998 1.36%, 02/27/03 1,000 998 1.78%, 04/22/03 2,800 2,785 CIT GROUP, INC. 1.81%, 01/09/03 1,000 1,000 1.51%, 02/19/03 1,000 998 CITICORP 1.73%, 01/16/03 8,000 7,994 * CLIPPER RECEIVABLES CORP. 1.34%, 02/25/03 5,000 4,990 * CONCORD MINUTEMEN CAPITAL CO., L.L.C. Series A 1.73%, 01/09/03 2,000 1,999 1.38%, 02/14/03 2,000 1,997 * DAKOTA CP NOTES OF CITIBANK CREDIT CARD ISSUANCE TRUST 1.54%, 01/14/03 5,000 4,997 DEN NORSKE BANK ASA 1.34%, 03/05/03 2,000 1,995 DANSKE CORP. 1.71%, 01/21/03 2,000 1,998 1.35%, 02/26/03 1,900 1,896 DEPFA BANK, PLC 1.34%, 03/18/03 1,000 997 DEUTSCHE BANK FINANCIAL, L.L.C. 1.53%, 02/07/03 9,000 8,986 * DORADA FINANCE, INC. 1.80%, 01/21/03 1,000 999 1.65%, 02/04/03 1,000 998 1.37%, 02/27/03 1,000 998 DRESDNER U.S. FINANCE, INC. 1.54%, 05/12/03 1,000 994 * EDISON ASSET SECURITIZATION CORP., L.L.C. 1.68%, 02/13/03 4,000 3,992 1.35%, 03/11/03 4,000 3,990 1.65%, 04/04/03 1,000 996 *+ ENTERPRISE FUNDING CORP. 1.34%, 03/19/03 4,000 3,988 * FALCON ASSET SECURITIZATION CORP. 1.33%, 01/08/03 4,000 3,999 FORTIS FUNDING, L.L.C. 1.67%, 01/31/03 1,000 999 1.34%, 03/03/03 1,000 998 1.60%, 04/07/03 2,000 1,992 * GALAXY FUNDING, INC. 1.34%, 02/12/03 2,000 1,997 1.37%, 02/13/03 3,000 2,995 GE CAPITAL INTERNATIONAL FUNDING, INC. 1.78%, 01/16/03 2,000 1,998 1.73%, 03/25/03 7,000 6,972 1.32%, 04/08/03 1,000 996 GE FINANCIAL ASSURANCE HOLDINGS, INC. 1.34%, 03/21/03 2,000 1,994 GENERAL ELECTRIC CAPITAL CORP. 2.31%, 02/19/03 2,000 1,994 2.27%, 02/24/03 7,000 6,977 2.24%, 02/27/03 6,000 5,979 1.33%, 03/12/03 1,000 997 GENERAL ELECTRIC CAPITAL SERVICES 1.72%, 01/10/03 2,000 1,999 1.34%, 01/23/03 5,000 4,996 * GIRO FUNDING U.S. CORP. 1.73%, 01/14/03 1,000 999 1.75%, 02/05/03 4,000 3,993 * GIRO MULTI-FUNDING CORP. 1.67%, 01/15/03 3,000 2,998 *o GREENWICH FUNDING CORP. 1.79%, 01/21/03 5,000 4,995 * GREYHAWK FUNDING, L.L.C. 1.35%, 02/21/03 5,000 4,990 * HATTERAS FUNDING CORP. 1.36%, 01/17/03 2,000 1,999 1.79%, 01/21/03 1,000 999 *+ INDEPENDENCE FUNDING, L.L.C. 1.35%, 01/14/03 2,181 2,180 1.34%, 02/27/03 1,000 998 *+ INTREPID FUNDING MASTER TRUST 1.34%, 02/24/03 2,000 1,996 J.P. MORGAN CHASE & CO. 1.63%, 02/07/03 2,000 1,997 * JUPITER SECURITIZATION CORP. 1.39%, 01/28/03 1,000 999 1.80%, 01/28/03 4,000 3,995
See financial notes. 20
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) * K2 (USA), L.L.C. 1.34%, 02/10/03 2,000 1,997 1.77%, 02/25/03 1,000 997 1.37%, 02/28/03 1,000 998 *+ KITTY HAWK FUNDING CORP. 1.35%, 03/03/03 6,000 5,986 LANDESBANK SCHLESWIG-HOLSTEIN GIROZENTRALE 1.84%, 01/16/03 1,000 999 2.44%, 01/27/03 2,000 1,997 * LEXINGTON PARKER CAPITAL CO., L.L.C. 1.81%, 01/17/03 3,000 2,998 1.85%, 01/17/03 2,000 1,998 * LINKS FINANCE, L.L.C. 1.79%, 01/17/03 1,000 999 LLOYDS TSB BANK, PLC 1.35%, 03/05/03 1,700 1,696 * MONT BLANC CAPITAL CORP. 1.79%, 01/14/03 2,000 1,999 MORGAN STANLEY 1.78%, 01/24/03 10,000 9,989 1.33%, 03/14/03 3,000 2,992 * NEWCASTLE CERTIFICATES PROGRAM Series 2000A 1.73%, 01/08/03 4,000 3,999 * PREFERRED RECEIVABLES FUNDING CORP. 1.33%, 01/07/03 2,000 2,000 * QUINCY CAPITAL CORP. 1.36%, 02/05/03 2,703 2,699 * RECEIVABLES CAPITAL CORP. 1.35%, 03/12/03 5,138 5,124 SALOMON SMITH BARNEY HOLDINGS, INC. 1.32%, 02/05/03 1,000 999 1.34%, 02/25/03 4,000 3,992 1.34%, 03/07/03 1,000 998 SAN PAOLO IMI U.S. FINANCIAL CO. 1.35%, 01/28/03 4,000 3,996 * SIGMA FINANCE, INC. 1.91%, 01/14/03 3,000 2,998 1.62%, 04/08/03 5,000 4,978 1.66%, 04/14/03 1,000 995 SOCIETE GENERALE, N.A., INC. 1.53%, 01/08/03 2,000 1,999 1.34%, 02/20/03 2,000 1,996 * STELLAR FUNDING GROUP, INC. 1.71%, 01/02/03 1,000 1,000 2.03%, 03/25/03 2,000 1,991 1.66%, 03/31/03 1,000 996 1.72%, 04/07/03 1,402 1,396 UBS FINANCE (DELAWARE), INC. 1.35%, 03/04/03 1,500 1,496 1.33%, 03/13/03 1,000 997 1.33%, 03/17/03 7,000 6,981 * VARIABLE FUNDING CAPITAL CORP. 1.78%, 01/07/03 3,000 2,999 * WINDMILL FUNDING CORP. 1.79%, 01/16/03 4,000 3,997 WYETH 1.75%, 02/03/03 2,000 1,997 1.75%, 02/11/03 3,000 2,994 -------- 291,127 CERTIFICATES OF DEPOSIT 38.9% ---------------------------------------------------------------------------- ABBEY NATIONAL TREASURY SERVICES, PLC 1.72%, 01/13/03 4,000 4,000 1.77%, 01/23/03 4,000 4,000 1.33%, 02/20/03 1,000 1,000 ABN AMRO BANK, NV 2.51%, 04/02/03 2,000 2,000 ALLIANCE & LEICESTER 1.75%, 01/30/03 1,000 1,000 BANK OF MONTREAL 1.33%, 03/21/03 5,000 5,000 BANK OF NOVA SCOTIA 1.34%, 02/26/03 5,000 5,000 BARCLAYS BANK, PLC 1.70%, 01/07/03 6,000 6,000 1.33%, 03/03/03 4,000 4,000 1.30%, 05/02/03 1,000 1,000 1.60%, 11/25/03 2,000 2,000 BAYERISCHE HYPO-UND VEREINSBANK, AG 1.77%, 01/17/03 1,000 1,000 1.84%, 01/17/03 4,000 4,000 BAYERISCHE LANDESBANK GIROZENTRALE 1.62%, 01/21/03 3,000 3,000
See financial notes. 21 SCHWAB RETIREMENT MONEY FUND(R) - Financial PORTFOLIO HOLDINGS As of December 31, 2002. Continued
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) BNP PARIBAS 2.04%, 03/27/03 2,000 2,000 1.74%, 04/17/03 6,000 6,000 1.80%, 06/17/03 4,000 4,011 CANADIAN IMPERIAL BANK OF COMMERCE 2.30%, 02/21/03 2,000 2,000 2.00%, 04/10/03 5,000 5,000 CHASE MANHATTAN BANK USA, N.A. 1.78%, 01/22/03 1,000 1,000 1.32%, 02/10/03 4,000 4,000 1.32%, 02/11/03 2,000 2,000 1.60%, 04/03/03 1,000 1,000 CITIBANK, N.A. 1.78%, 01/22/03 4,000 4,000 1.33%, 03/12/03 3,000 3,000 1.33%, 03/19/03 3,000 3,000 COMMONWEALTH BANK OF AUSTRALIA 1.33%, 03/18/03 4,000 4,000 CREDIT LYONNAIS S.A 1.37%, 03/06/03 5,000 5,000 DEN NORSKE BANK ASA 1.57%, 02/05/03 2,000 2,000 DEUTSCHE BANK, AG 1.77%, 03/10/03 3,000 3,003 DEXIA BANK BELGIUM 2.30%, 02/21/03 5,000 5,000 DRESDNER BANK, AG 1.73%, 01/30/03 2,000 2,000 1.33%, 02/19/03 2,000 2,000 1.61%, 04/17/03 1,000 1,004 HBOS TREASURY SERVICES, PLC 1.34%, 02/18/03 1,000 1,000 1.36%, 03/10/03 3,000 3,000 ING BANK, NV 1.72%, 01/09/03 2,000 2,000 1.77%, 01/16/03 2,000 2,000 1.77%, 01/23/03 3,000 3,000 1.37%, 03/10/03 3,000 3,000 1.74%, 04/17/03 2,000 2,000 J.P. MORGAN CHASE BANK 1.60%, 04/01/03 4,000 4,000 LANDESBANK BADEN WURTTEMBERG 1.35%, 02/25/03 3,000 3,000 1.85%, 10/17/03 2,000 2,000 LANDESBANK HESSEN-THURINGEN GIROZENTRALE 1.62%, 01/30/03 5,000 5,000 LLOYDS TSB BANK, PLC 1.60%, 01/27/03 7,000 7,001 1.32%, 03/27/03 2,000 2,000 1.76%, 05/16/03 3,000 3,009 NATEXIS BANQUES POPULAIRES 1.34%, 02/19/03 5,000 5,000 NATIONAL AUSTRALIA BANK, LTD. 1.60%, 04/07/03 5,000 5,000 NATIONAL BANK OF CANADA 1.33%, 02/12/03 5,000 5,000 NORDDEUTSCHE LANDESBANK GIROZENTRALE 1.68%, 04/15/03 3,000 3,000 1.49%, 12/29/03 2,000 2,000 NORDEA BANK FINLAND, PLC 1.77%, 03/17/03 2,000 2,000 1.34%, 03/31/03 3,000 3,000 RABOBANK NEDERLAND, NV 1.96%, 01/14/03 2,000 2,000 ROYAL BANK OF CANADA 2.38%, 03/07/03 2,000 2,000 2.38%, 03/26/03 3,000 3,000 1.61%, 11/25/03 3,000 3,000 SAN PAOLO IMI SPA 1.34%, 03/06/03 2,000 2,000 SOCIETE GENERALE 1.84%, 01/13/03 2,000 2,000 1.34%, 03/20/03 2,000 2,000 2.01%, 04/09/03 4,000 4,000 SOUTHTRUST BANK 1.35%, 06/06/03 1,000 1,000 STATE STREET BANK & TRUST CO., N.A. 1.72%, 01/24/03 3,000 3,000 SVENSKA HANDELSBANKEN, AB 1.66%, 03/19/03 4,000 4,000 TORONTO DOMINION BANK 2.47%, 01/06/03 5,000 5,000
See financial notes. 22
ISSUER FACE VALUE MKT. VALUE RATE, MATURITY DATE ($ x 1,000) ($ x 1,000) UBS, AG 2.44%, 01/06/03 1,000 1,000 1.59%, 12/16/03 2,000 2,000 UNICREDITO ITALIANO SPA 1.72%, 01/15/03 5,000 5,000 1.35%, 03/11/03 2,000 2,000 1.68%, 04/15/03 1,000 1,000 WESTLB AG 1.60%, 04/03/03 2,000 2,000 1.93%, 09/18/03 3,000 3,000 WILMINGTON TRUST CO. 1.75%, 02/06/03 4,000 4,000 -------- 224,028 PROMISSORY NOTES 1.9% ---------------------------------------------------------------------------- o THE GOLDMAN SACHS GROUP, INC. 1.75%, 02/04/03 2,000 2,000 1.84%, 03/18/03 4,000 4,000 1.50%, 06/02/03 1,000 1,000 1.45%, 06/17/03 4,000 4,000 -------- 11,000 VARIABLE-RATE OBLIGATIONS 3.6% of investments * ASSET SECURITIZATION COOPERATIVE CORP.,144A 1.38%, 01/22/03 1,000 1,000 * BETA FINANCE, INC., 144A 1.39%, 01/15/03 5,000 5,000 + CALIFORNIA POLLUTION CONTROL FINANCING AUTHORITY Solid Waste Disposable RB (Burr Properties Project) Series 1998 2.20%, 01/07/03 1,930 1,930 + COLUMBUS, GEORGIA DEVELOPMENT AUTHORITY Taxable RB (Jay Leasing, Inc. Project) Series 1997 1.52%, 01/07/03 1,985 1,985 + EAGLE COUNTY, COLORADO TAXABLE HOUSING FACILITIES RB (BC Housing, L.L.C. Project) Series 1997B 1.42%, 01/07/03 1,500 1,500 SALOMON SMITH BARNEY HOLDINGS, INC. 1.36%, 02/10/03 5,000 5,000
FACE VALUE MKT. VALUE SECURITY ($ x 1,000) ($ x 1,000) * SIGMA FINANCE, INC., 144A 1.43%, 01/06/03 2,000 2,000 + TRAP ROCK INDUSTRIES, INC. VRD RB Series 1997, 144A 1.47%, 01/07/03 1,540 1,540 + VILLAGE OF STURTEVANT, WISCONSIN IDRB (Andis Co. Project) Series 1996B 1.60%, 01/07/03 1,040 1,040 -------- 20,995
MATURITY VALUE MKT. VALUE SECURITY ($ x 1,000) ($ x 1,000) OTHER INVESTMENTS 5.1% of investments REPURCHASE AGREEMENTS 5.1% ---------------------------------------------------------------------------- CREDIT SUISSE FIRST BOSTON CORP. Tri-Party Repurchase Agreement Collateralized by U.S. Government Securities 1.28%, issued 12/31/02, due 01/02/03 29,409 29,407
END OF PORTFOLIO HOLDINGS. For totals, please see the first page of holdings for this fund. See financial notes. 23 SCHWAB RETIREMENT MONEY FUND(R) - Financial Statement of ASSETS AND LIABILITIES As of December 31, 2002. All numbers x 1,000 except NAV. ASSETS ----------------------------------------------------------------------- Investments, at market value $576,557 a Receivables: Fund shares sold 1,845 Interest 1,413 Prepaid expenses + 26 TOTAL ASSETS 579,841 ------------ LIABILITIES ----------------------------------------------------------------------- Payables: Fund shares redeemed 12,830 Dividends to shareholders 6 Investments bought 1,000 Investment adviser and administrator fees 18 Transfer agent and shareholder service fees 12 Accrued expenses + 43 ----------- TOTAL LIABILITIES 13,909 NET ASSETS ----------------------------------------------------------------------- TOTAL ASSETS 579,841 TOTAL LIABILITIES - 13,909 ----------- NET ASSETS $565,932 NET ASSETS BY SOURCE Capital received from investors 565,933 Net realized capital losses (1)
NET ASSET VALUE (NAV) SHARES NET ASSETS / OUTSTANDING = NAV $565,932 565,990 $1.00 a Includes illiquid restricted securities worth $15,995, or 2.77% of the fund's investments. The amortized cost for the fund's securities was $576,557. FEDERAL TAX DATA COST BASIS OF PORTFOLIO $576,557 UNUSED CAPITAL LOSSES: Expires 12/31 of: Loss amount: 2004 $1
See financial notes. 24 Statement of OPERATIONS For January 1, 2002 through December 31, 2002. All numbers x 1,000. INVESTMENT INCOME ----------------------------------------------------------------------- Interest $10,468 EXPENSES ----------------------------------------------------------------------- Investment adviser and administrator fees 2,026 a Transfer agent and shareholder service fees 1,333 b Trustees' fees 26 c Custodian and portfolio accounting fees 157 Professional fees 25 Shareholder reports 42 Other expenses + 10 ----------- TOTAL EXPENSES 3,619 d INCREASE IN NET ASSETS FROM OPERATIONS ----------------------------------------------------------------------- TOTAL INVESTMENT INCOME 10,468 NET EXPENSES - 3,619 ----------- NET INVESTMENT INCOME 6,849 ----------- INCREASE IN NET ASSETS FROM OPERATIONS $ 6,849
a Calculated on a graduated basis as a percentage of average daily net assets: 0.38% of the first $1 billion, 0.35% over $1 billion, 0.32% over $10 billion, 0.30% over $20 billion and 0.27% over $40 billion. b Calculated as a percentage of average daily net assets: for transfer agent services, 0.05% of the fund's assets; for shareholder services, 0.20% of the fund's assets. c For the fund's independent trustees only. d The investment adviser (CSIM) and the transfer agent and shareholder service agent (Schwab) guarantee to limit the operating expenses of this fund through at least April 30, 2003, to 0.73% of average daily net assets. This limit doesn't include interest, taxes and certain non-routine expenses. See financial notes. 25 SCHWAB RETIREMENT MONEY FUND(R) - Financial Statements of CHANGES IN NET ASSETS For the current and prior report periods. All numbers x 1,000.
OPERATIONS --------------------------------------------------------------------------- 1/1/02-12/31/02 1/1/01-12/31/01 Net investment income $ 6,849 $ 17,473 --------------------------------- INCREASE IN NET ASSETS FROM OPERATIONS 6,849 17,473 DISTRIBUTIONS PAID --------------------------------------------------------------------------- Dividends from net investment income 6,849 17,473 a TRANSACTIONS IN FUND SHARES b --------------------------------------------------------------------------- Shares sold 449,315 494,480 Shares reinvested 6,808 17,392 Shares redeemed + (405,628) (395,387) --------------------------------- NET INCREASE 50,495 116,485 NET ASSETS --------------------------------------------------------------------------- Beginning of period 515,437 398,952 Total increase + 50,495 116,485 c --------------------------------- END OF PERIOD $565,932 $515,437
a The tax-basis components of distributions paid for the current period are: Ordinary income $6,849 Long-term capital gains $ -- b Because all transactions in this section took place at $1.00 per share, figures for share quantities are the same as for dollars. c Represents the changes in net assets from operations plus the changes in value of transactions in fund shares, minus distributions paid. See financial notes. 26 FINANCIAL NOTES BUSINESS STRUCTURE OF THE FUNDS EACH OF THE FUNDS DISCUSSED IN THIS REPORT IS A SERIES OF THE CHARLES SCHWAB FAMILY OF FUNDS(TM), A NO-LOAD, OPEN-END MANAGEMENT INVESTMENT COMPANY. The company is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended. The sidebar shows the funds in this report and their trust. THE FUNDS OFFER ONE SHARE CLASS. For these funds, shares are bought and sold at $1.00 per share. Each share has a par value of 1/1,000 of a cent, and the trust may issue as many shares as necessary. FUND OPERATIONS Most of the funds' investments are described in the fund-by-fund sections earlier in this report. However, there are certain other investments and policies that may affect a fund's financials. The most significant of these are described below. Other policies concerning the funds' business operations also are described here. THE FUNDS DECLARE DIVIDENDS EVERY DAY THEY ARE OPEN FOR BUSINESS. These dividends, which are equal to a fund's net investment income for that day, are paid out to shareholders once a month. The funds may make distributions from any net realized capital gains once a year. THE FUNDS MAY BUY SECURITIES ON A DELAYED-DELIVERY BASIS. In these transactions, a fund agrees to buy a security for a stated price, with settlement generally occurring within two weeks. If the security's value falls before settlement occurs, a fund could end up paying more for the security than its market value at the time of settlement. The funds have set aside sufficient securities as collateral for those securities bought on a delayed-delivery basis. THE FUNDS MAY ENTER INTO REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security from another party (usually a financial institution) with the agreement that it be sold back in the future. The date, price and other conditions are all specified when the agreement is created. Any repurchase agreements with due dates later than seven days from issue dates may be subject to seven day put features for liquidity purposes. The funds' repurchase agreements will be fully collateralized by U.S. government securities. All collateral is held by the funds' custodian (or, with tri-party agreements, the agent's bank) and is monitored daily to ensure that its market value is at least equal to the repurchase price under the agreement. THE FUNDS PAY FEES FOR VARIOUS SERVICES. Through their trust, the funds have agreements with Charles Schwab Investment Management, Inc. (CSIM) to provide investment advisory and administrative services and with Charles Schwab & Co., Inc. (Schwab) to provide transfer agent and shareholder services. THE TRUST AND ITS FUNDS This list shows all of the funds included in The Charles Schwab Family of Funds. The funds discussed in this report are highlighted. THE CHARLES SCHWAB FAMILY OF FUNDS organized October 20, 1989 Schwab Money Market Fund Schwab Schwab Government Money Fund Schwab U.S. Treasury Money Fund Schwab Value Advantage Money Fund(R) Schwab Municipal Money Fund Schwab California Municipal Money Fund Schwab New York Municipal Money Fund Schwab New Jersey Municipal Money Fund Schwab Pennsylvania Municipal Money Fund Schwab Florida Municipal Money Fund Schwab Institutional Advantage Money Fund(R) Schwab Retirement Money Fund(R) Schwab Government Cash Reserves 27 Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds that may limit the total expenses charged. The rates and limitations for these fees vary from fund to fund, and are described in each fund's Statement of Operations. TRUSTEES MAY INCLUDE PEOPLE WHO ARE OFFICERS AND/OR DIRECTORS OF THE INVESTMENT ADVISER OR SCHWAB. Federal securities law limits the percentage of such "interested persons" who may serve on a trust's board, and the trust was in compliance with these limitations throughout the report period. The trust did not pay any of these persons for their service as trustees, but it did pay non-interested persons (independent trustees), as noted in each fund's Statement of Operations. THE FUNDS MAY ENGAGE IN CERTAIN TRANSACTIONS INVOLVING AFFILIATES. The funds may make direct transactions with certain other SchwabFunds(R) when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. THE FUNDS INTEND TO MEET FEDERAL INCOME AND EXCISE TAX REQUIREMENTS FOR REGULATED INVESTMENT COMPANIES. Accordingly, the funds distribute substantially all of their net investment income and realized net capital gains (if any) to their respective shareholders each year. As long as a fund meets the tax requirements, it is not required to pay federal income tax. ACCOUNTING POLICIES The following are the main policies the funds use in preparing their financial statements. THE FUNDS VALUE THEIR SECURITIES AT AMORTIZED COSt, which approximates market value. SECURITY TRANSACTIONS are recorded as of the date the order to buy or sell the security is executed. INTEREST INCOME is recorded as it accrues. If a fund bought a debt instrument at a discount (that is, for less than its face value) or a premium (more than face value), it amortizes the discount or premium from the current date up to maturity. The fund then increases (in the case of discounts) or reduces (in the case of premiums) the income it records from the security. If the security is callable (meaning that the issuer has the option to pay it off before its maturity date), then the fund amortizes the premium to the security's call date and price, rather than the maturity date and price. REALIZED GAINS AND LOSSES from security transactions are based on the identified costs of the securities involved. EXPENSES that are specific to a fund are charged directly to that fund. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their net assets. EACH FUND MAINTAINS ITS OWN ACCOUNT FOR PURPOSES OF HOLDING ASSETS AND ACCOUNTING, and is considered a separate entity for tax purposes. Within its account, each fund also keeps certain assets in segregated accounts, as may be required by securities law. THE ACCOUNTING POLICIES DESCRIBED ABOVE CONFORM WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. Notwithstanding this, shareholders should understand that in order to follow these principles, fund management has to make estimates and assumptions that affect the information reported in the financial statements. It's possible that once the results are known, they may turn out to be different from these estimates. Schwab Institutional Advantage Money Fund(R) and Schwab Retirement Money Fund(R) 28 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF: Schwab Institutional Advantage Money Fund(R) and Schwab Retirement Money Fund(R) In our opinion, the accompanying statements of assets and liabilities, including the portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Schwab Institutional Advantage Money Fund and Schwab Retirement Money Fund (two of the portfolios constituting The Charles Schwab Family of Funds, hereafter referred to as the "Funds") at December 31, 2002, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and the financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP San Francisco, CA February 7, 2003 29 FUND TRUSTEES unaudited A fund's Board of Trustees is responsible for protecting the interests of that fund's shareholders. The tables below give information about the people who serve as trustees and officers for the SchwabFunds(R), including the funds covered in this report. Trustees remain in office until they resign, retire or are removed by shareholder vote. 1 Under the Investment Company Act of 1940, any officer, director, or employee of Schwab or CSIM is considered an "interested person," meaning that he or she is considered to have a business interest in Schwab or CSIM. These individuals are listed as "interested trustees." The "independent trustees" are individuals who, under the 1940 Act, are not considered to have a business interest in Schwab or CSIM. Each of the SchwabFunds (of which there were 45 as of 12/31/02) belongs to one of these trusts: The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust or Schwab Annuity Portfolios. Currently all these trusts have the same trustees and officers. The address for all trustees and officers is 101 Montgomery Street, San Francisco, CA 94104. You can find more information about the trustees and officers in the Statement of Additional Information, which is available free by calling 1-800-435-4000. INDIVIDUALS WHO ARE INTERESTED TRUSTEES AND OFFICERS OF THE TRUST
TRUST POSITION(S); NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS -------------------------------------------------------------------------------------------------------------------------- CHARLES R. SCHWAB 2 Chair, Trustee: Chair, Co-CEO, Director, The Charles Schwab Corp.; CEO, Director, 7/29/37 Family of Funds, 1989; Schwab Holdings, Inc.; Chair, Director, Charles Schwab & Co., Inc., Investments, 1991; Charles Schwab Investment Management, Inc.; Chair, Charles Schwab Capital Trust, 1993; Holdings (UK); Chair, CEO, Schwab (SIS) Holdings, Inc. I, Schwab Annuity Portfolios, 1994. International Holdings, Inc.; Director, U.S. Trust Corp., United States Trust Co. of New York, The Gap, Inc. (clothing retailer), Audiobase, Inc. (Internet audio solutions), Vodaphone AirTouch PLC (telecom), Siebel Systems (software), Xign, Inc. (electronic payment systems). Until 7/01: Director, The Charles Schwab Trust Co. Until 1/99: Director, Schwab Retirement Plan Services, Inc., Mayer & Schweitzer, Inc. (securities brokerage subsidiary of The Charles Schwab Corp.), Performance Technologies, Inc. (technology), TrustMark, Inc.
1 The SchwabFunds retirement policy requires that independent trustees elected after January 1, 2000 retire at age 72 or after twenty years of service as a trustee, whichever comes first. Independent trustees elected prior to January 1, 2000 will retire on the following schedule: Messrs. Holmes and Dorward will retire on December 31, 2007, and Messrs. Stephens and Wilsey will retire on December 31, 2010. 2 In addition to their positions with the investment adviser and the distributor, Messrs. Schwab, Coghlan and Lyons, and some of Mr. Lyons's immediate family members, also own stock of the Charles Schwab Corporation. Schwab Institutional Advantage Money Fund(R) and Schwab Retirement Money Fund(R) 30 INDIVIDUALS WHO ARE INTERESTED TRUSTEES BUT NOT OFFICERS OF THE TRUST
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS -------------------------------------------------------------------------------------------------------------------------- JOHN PHILIP COGHLAN 1 Trustee: 2000 Vice Chair, EVP, The Charles Schwab Corp.; Vice Chair, President- 5/6/51 (all trusts). Retail, Charles Schwab & Co., Inc.; President, CEO, Director, The Charles Schwab Trust Co.; Chair, Director, Schwab Retirement Plan Services, Inc., Schwab Retirement Technologies, Inc. (formerly TrustMark, Inc.); Director, Charles Schwab Investment Management, Inc., Performance Technologies, Inc. (technology). Until 7/02: Vice Chair, Enterprise President, Retirement Plan Services, Services for Investment Managers, Charles Schwab & Co., Inc. Until 3/02: Director, Charles Schwab Asset Management (Ireland) Ltd., Charles Schwab Worldwide Funds PLC. -------------------------------------------------------------------------------------------------------------------------- JEFFREY M.LYONS 1 Trustee: 2002 EVP, Asset Management Products and Services, Charles Schwab & Co., 2/22/55 (all trusts). Inc. Until 9/01: EVP, Mutual Funds, Charles Schwab & Co., Inc.
INDIVIDUALS WHO ARE OFFICERS OF THE TRUST BUT NOT TRUSTEES
NAME AND BIRTHDATE TRUST OFFICE(S) HELD MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS -------------------------------------------------------------------------------------------------------------------------- RANDALL W. MERK President, CEO President, CEO, Charles Schwab Investment Management, Inc; 7/25/54 (all trusts). EVP, Charles Schwab & Co., Inc. Until 9/02: President and CIO, American Century Investment Management; Director, American Century Cos., Inc. Until 6/01: CIO, Fixed Income, American Century Cos., Inc. Until 1997: SVP, Director, Fixed Income and Quantitative Equity Portfolio Management, Twentieth Century Investors, Inc. -------------------------------------------------------------------------------------------------------------------------- TAI-CHIN TUNG Treasurer, Principal SVP, CFO, Charles Schwab Investment Management, Inc.; VP, 3/7/51 Financial Officer The Charles Schwab Trust Co.; Director, Charles Schwab Asset (all trusts). Management (Ireland) Ltd., Charles Schwab Worldwide Funds PLC. -------------------------------------------------------------------------------------------------------------------------- STEPHEN B. WARD SVP, Chief Investment SVP, Chief Investment Officer, Director, Charles Schwab Investment 4/5/55 Officer Management, Inc.; Chief Investment Officer, The Charles Schwab (all trusts). Trust Co. -------------------------------------------------------------------------------------------------------------------------- KOJI E. FELTON Secretary SVP, Chief Counsel, Assistant Corporate Secretary, Charles Schwab 3/13/61 (all trusts). Investment Management, Inc. Until 6/98: Branch Chief in Enforcement, U.S. Securities and Exchange Commission, San Francisco.
1 In addition to their positions with the investment adviser and the distributor, Messrs. Schwab, Coghlan and Lyons, and some of Mr. Lyons's immediate family members, also own stock of the Charles Schwab Corporation. 31 INDIVIDUALS WHO ARE INDEPENDENT TRUSTEES
NAME AND BIRTHDATE TRUSTEE SINCE MAIN OCCUPATIONS AND OTHER DIRECTORSHIPS AND AFFILIATIONS -------------------------------------------------------------------------------------------------------------------------- MARIANN BYERWALTER 2000 (all trusts). Chair, JDN Corp. Advisory LLC; Director, Stanford University, 8/13/60 America First Cos., (venture capital/fund management), Redwood Trust, Inc. (mortgage finance), Stanford Hospitals and Clinics, SRI International (research), LookSmart, Ltd. (Internet infrastructure), PMI Group, Inc. (mortgage insurance), Lucile Packard Children's Hospital. 2001: Special Advisor to the President, Stanford University. Until 2001: VP, Business Affairs, CFO, Stanford University. -------------------------------------------------------------------------------------------------------------------------- DONALD F. DORWARD Family of Funds, 1989; CEO, Dorward & Associates (management, marketing and communications 9/23/31 Investments, 1991; consulting). Until 1999: EVP, Managing Director, Grey Advertising. Capital Trust, 1993; Annuity Portfolios, 1994. -------------------------------------------------------------------------------------------------------------------------- WILLIAM A. HASLER 2000 (all trusts). Co-CEO, Aphton Corp. (bio-pharmaceuticals). Director, Solectron 11/22/41 Corp. (manufacturing), Tenera, Inc. (services and software), Airlease Ltd. (aircraft leasing), Mission West Properties (commercial real estate), Digital Microwave Corp. (network equipment). Until 1998: Dean, Haas School of Business, University of California, Berkeley. -------------------------------------------------------------------------------------------------------------------------- ROBERT G. HOLMES Family of Funds, 1989; Chair, CEO, Director, Semloh Financial, Inc. (international 5/15/31 Investments, 1991; financial services and investment advice). Capital Trust, 1993; Annuity Portfolios, 1994. -------------------------------------------------------------------------------------------------------------------------- GERALD B. SMITH 2000 (all trusts). Chair, CEO, Founder, Smith Graham & Co. (investment advisors); 9/28/50 Director, Pennzoil-Quaker State Co. (oil and gas), Rorento N.V. (investments-Netherlands), Cooper Industries (electrical products); Member, audit committee, Northern Border Partners, L.P. (energy). -------------------------------------------------------------------------------------------------------------------------- DONALD R. STEPHENS Family of Funds, 1989; Managing Partner, D.R. Stephens & Co. (investments). Until 1996: 6/28/38 Investments, 1991; Chair, CEO, North American Trust (real estate investments). Capital Trust, 1993; Annuity Portfolios, 1994. -------------------------------------------------------------------------------------------------------------------------- MICHAEL W. WILSEY Family of Funds, 1989; Chair, CEO, Wilsey Bennett, Inc. (transportation, real estate and 8/18/43 Investments, 1991; investments). Capital Trust, 1993; Annuity Portfolios, 1994.
Schwab Institutional Advantage Money Fund(R) and Schwab Retirement Money Fund(R) 32 GLOSSARY Words and phrases that appear in financial reports often have specific meanings that are different from their everyday meanings. The glossary below tells you what is meant by the following terms when they are used in this report. ALTERNATIVE MINIMUM TAX (AMT) A federal income tax designed to limit the extent to which high-income taxpayers (including individuals, estates, trusts and corporations) can benefit from certain deductions and exemptions. For example, some types of income that are exempt from regular federal income tax are not exempt from the AMT. ASSET ALLOCATION The practice of dividing a portfolio among different asset classes, with each asset class assigned a particular percentage. ASSET-BACKED SECURITIES Securities that are backed by the loans or accounts receivable of an entity, such as a bank or credit card company. These securities are obligations that the issuer intends to repay using the assets backing them (once collected). Therefore, repayment depends largely on the cash flows generated by the assets backing the securities. ASSET CLASS A group of securities with similar structure and basic characteristics. Stocks, bonds and cash are the three main examples of asset classes. BOND A security representing a loan from the investor to the issuer. A bond typically pays interest at a fixed rate (the "coupon rate") until a specified date (the "maturity date"), at which time the issuer returns the money borrowed ("principal" or "face value") to the bondholder. Because of their structure, bonds are sometimes called "fixed income securities" or "debt securities." BOND ANTICIPATION NOTES Obligations sold by a municipality on an interim basis in anticipation of the municipality's issuance of a longer-term bond in the future. CAPITAL GAIN, CAPITAL LOSS The difference between the amount paid for an investment and its value at a later time. If the investment has been sold, the capital gain or loss is considered a realized gain or loss. If the investment is still held, the gain or loss is still "on paper" and is considered unrealized. COMMERCIAL PAPER Promissory notes issued by banks, corporations and other institutions to finance short-term credit needs. These securities generally are structured as discount notes but sometimes may be interest-bearing notes. Commercial paper, which may be unsecured, is subject to credit risk. CREDIT QUALITY The capacity of an issuer to make its interest and principal payments. Federal regulations strictly limit the credit quality of the securities a money market fund can buy. CREDIT RATINGS Debt issuers, including corporations, states and municipalities, may arrange with a recognized independent rating organization, such as Moody's Investor Service, Standard & Poor's and Fitch, Inc., to rate their creditworthiness and/or the creditworthiness of their debt issues. For example, an issuer may obtain a long-term rating within the investment grade rating category, which is from high to low, AAA, AA, A and BBB for Standard & Poor's and Fitch, and Aaa, Aa, A and Baa for Moody's. CREDIT RISK The risk that a debt issuer may be unable to pay interest or principal to its debtholders. PORTFOLIO TERMS To help reduce the space occupied by the portfolio holdings, we use the following terms. Most of them appear within descriptions of individual securities in municipal funds, and describe features of the issuer or the security. Some of these are more fully defined elsewhere in the Glossary. ACES Adjustable convertible extendable security BAN Bond anticipation note COP Certificate of participation GAN Grant anticipation note GO General obligation HDA Housing Development Authority HFA Housing Finance Agency IDA Industrial Development Authority IDB Industrial Development Board IDRB Industrial Development Revenue Bond M/F Multi-family RAN Revenue anticipation note RB Revenue bond S/F Single-family TAN Tax anticipation note TECP Tax-exempt commercial paper TOB Tender option bond TOBP Tender option bond partnership TRAN Tax and revenue anticipation note VRD Variable-rate demand 33 DOLLAR-WEIGHTED AVERAGE MATURITY (DWAM) See weighted average maturity. EFFECTIVE YIELD A measurement of a fund's yield that assumes that all dividends were reinvested in additional shares of the fund. EXPENSE RATIO The amount that is taken from a mutual fund's assets each year to cover the fund's operating expenses. An expense ratio of 0.50% means that a fund's expenses amount to half of one percent of its average net assets a year. FACE VALUE The value of a bond, note, mortgage or other security as given on the certificate or instrument. Face value is also referred to as par value or nominal value. INTEREST Payments to holders of debt securities as compensation for loaning a security's principal to the issuer. MATURITY Generally, the date a debt security is scheduled to be "retired" and its principal amount returned to the bondholder. MONEY MARKET SECURITIES High-quality, short-term debt securities that may be issued by entities such as the U.S. government, corporations and financial institutions (such as banks). Money market securities include commercial paper, promissory notes, certificates of deposit, banker's acceptances, notes and time deposits. MUNICIPAL SECURITIES Debt securities issued by a state, its counties, municipalities, authorities and other subdivisions, or the territories and possessions of the United States and the District of Columbia, including their subdivisions, agencies and instrumentalities and corporations. These securities may be issued to obtain money for various public purposes, including the construction of a wide range of public facilities such as airports, bridges, highways, housing, hospitals, mass transportation, public utilities, schools, streets, and water and sewer works. NET ASSET VALUE PER SHARE (NAV) The value of one share of a mutual fund. NAV is calculated by taking the fund's total assets, subtracting liabilities, and dividing by the number of shares outstanding. Money funds seek to maintain a steady NAV of $1.00 OUTSTANDING SHARES, SHARES OUTSTANDING When speaking of a company or mutual fund, indicates all shares currently held by investors. REVENUE ANTICIPATION NOTES Obligations that are issued in expectation of the receipt of other types of revenue, such as that available under the Federal Revenue Sharing Program. TAXABLE-EQUIVALENT YIELD The yield an investor would need to get from a taxable investment in order to match the yield paid by a given tax-exempt investment, once the effect of all applicable taxes is taken into account. For example, if your tax rate were 25%, a tax-exempt investment paying 4.5% would have a taxable-equivalent yield for you of 6.0% (4.5% / [1 - 0.25%] = 6.0%). TOTAL RETURN The percentage that an investor would have earned or lost on an investment in the fund assuming dividends and distributions were reinvested. TAX ANTICIPATION NOTES Notes that typically are sold to finance the working capital needs of municipalities in anticipation of the receipt of property taxes on a future date. TIER ONE, TIER TWO Tier one is the highest category of credit quality, tier two the second highest. A security's tier can be established either by an independent rating organization or by a determination of the investment adviser. Money market fund shares and U.S. government securities are automatically considered tier one securities. WEIGHTED AVERAGE For mutual funds, an average that gives the same weight to each security as the security represents in the fund's portfolio. WEIGHTED AVERAGE MATURITY For mutual funds, the maturity of all the debt securities in its portfolio, calculated as a weighted average. As a rule, the longer a fund's weighted average maturity, the greater its interest rate risk. Money funds are required to maintain a weighted average maturity of no more than 90 days. YIELD The income paid out by an investment, expressed as an annual rate and calculated as a percentage of the investment's market value. Schwab Institutional Advantage Money Fund(R) and Schwab Retirement Money Fund(R) 34 NOTES NOTES CONTACT SCHWAB SchwabFunds(R) offers you a complete family of mutual funds, each one based on a time-tested investment approach and using disciplined, clearly defined management strategies. Actively managed funds include multi-manager stock funds, a long-short stock fund with hedging capabilities, and a range of taxable and tax-free bond funds. Index funds include large-cap, small-cap and international stock funds. The list at right shows all currently available SchwabFunds. Whether you're an experienced investor or just starting out, SchwabFunds can help you achieve your financial goals. Please call 1-800-435-4000 for a free prospectus and brochure for any SchwabFund. Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus. METHODS FOR PLACING ORDERS The following information outlines how Schwab investors can place orders. If you are investing through a third- party investment provider, methods for placing orders may be different. INTERNET 1 www.schwab.com SCHWAB BY PHONE(TM) 2 Use our automated voice service or speak to a representative. Call 1-800-435-4000, day or night (for TDD service, call 1-800-345-2550). TELEBROKER(R) Automated touch-tone phone service at 1-800-272-4922. MAIL Write to SchwabFunds at: P.O. Box 3812 Englewood, CO 80155-3812 When selling or exchanging shares, be sure to include the signatures of at least one of the persons whose name is on the account. 1 Shares of Sweep Investments(TM) may not be purchased over the Internet. 2 Orders placed in person or through a telephone representative are subject to a service fee payable to Schwab. THE SCHWABFUNDS FAMILY STOCK FUNDS Schwab S&P 500 Fund Schwab 1000 Fund(R) Schwab Small-Cap Index Fund(R) Schwab Total Stock Market Index Fund(R) Schwab International Index Fund(R) Schwab Core Equity Fund(TM) Schwab Hedged Equity Fund(TM) Schwab Focus Funds Communications Focus Fund Financial Services Focus Fund Health Care Focus Fund Technology Focus Fund Schwab MarketMasters Funds(TM) formerly MarketManager Portfolios U.S. MarketMasters Fund(TM) Small-Cap MarketMasters Fund(TM) International MarketMasters Fund(TM) Balanced MarketMasters Fund(TM) ASSET ALLOCATION FUNDS Schwab MarketTrack Portfolios(R) All Equity Portfolio Growth Portfolio Balanced Portfolio Conservative Portfolio BOND FUNDS Schwab Short-Term Bond Market Fund Schwab Total Bond Market Fund Schwab YieldPlus Fund(R) Schwab Short/Intermediate Tax-Free Bond Fund Schwab Long-Term Tax-Free Bond Fund Schwab California Short/Intermediate Tax-Free Bond Fund Schwab California Long-Term Tax-Free Bond Fund SCHWAB MONEY FUNDS Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity. 3 Choose from taxable or tax-advantaged alternatives. Many can be linked to your Schwab account to "sweep" cash balances automatically when you're between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments(R). 3 Investments in money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency and, although they seek to preserve the value of your investment at $1 per share, it is possible to lose money. [CHARLES SCHWAB LOGO] INVESTMENT ADVISER Charles Schwab Investment Management, Inc. 101 Montgomery Street, San Francisco, CA 94104 DISTRIBUTOR SchwabFunds(R) P.O. Box 3812, Englewood, CO 80155-3812 This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. (C)2002 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE. Printed on recycled paper. REG13860-05