<PAGE> 1
As filed with the Securities and Exchange Commission on OCTOBER 20th, 1997
FILE NOS. 33-37459 AND 811-6200
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 19
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
-------------
SCHWAB INVESTMENTS
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
------------------------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
--------------
Timothy F. McCarthy, President
Schwab Investments
101 Montgomery Street, San Francisco, California 94104
------------------------------------------------------
(Name and Address of Agent for Service)
Copies of communications to:
Martin E. Lybecker, Esq. Frances Cole, Esq.
Ropes & Gray Charles Schwab Investment
One Franklin Square Management, Inc.
1301 K Street, N.W., Suite 800 East 101 Montgomery Street
Washington, D.C. 20005 San Francisco, California 9410
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/ / On [date] pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/X/ On December 31, 1997, pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / On [date], pursuant to paragraph (a)(ii) of Rule 485
<PAGE> 2
if appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended,
Registrant has registered an indefinite number or amount of shares of beneficial
interest under the Securities Act of 1933, as amended. The Rule 24f-2 Notice for
Registrant's fiscal year ended August 31, 1997 will be filed on or about October
31, 1997.
<PAGE> 3
SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB LONG-TERM GOVERNMENT BOND FUND
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
The information required by Items 1 through 9 for Schwab Long-Term
Government Bond Fund and Schwab Short/Intermediate Government Bond Fund, each a
separate portfolio of the Registrant, is hereby incorporated by reference to the
Prospectus for each of these Portfolios filed with the Securities and Exchange
Commission pursuant to Rule 497(e) on December 31, 1996.
The information required by Items 1 through 9 for Schwab Long-Term
Tax-Free Bond Fund, Schwab Short/Intermediate Tax-Free Bond Fund, Schwab
California Long-Term Tax-Free Bond Fund, Schwab California Long-Term Tax-Free
Bond Fund, each a separate portfolio of the Registrant, is hereby incorporated
by reference to the Prospectus for this Portfolio filed with the Securities and
Exchange Commission pursuant to Rule 485(a) on September 26, 1997.
<PAGE> 4
SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB 1000 FUND-INVESTORS SHARES
SCHWAB 1000 FUND-SELECT SHARES
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Part A Item Prospectus Caption
- -----------------------------------------------------------------------------------------------------------------------------------
Cover Page Cover Page
- ----------------------------------------------------------------------------------------------------------------------------------
Synopsis Key Features;
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Financial Information Not applicable
- -----------------------------------------------------------------------------------------------------------------------------------
General Description of Registrant Organization & Management;
Investment Objective & Policies
- -----------------------------------------------------------------------------------------------------------------------------------
Management of the Fund Organization & Management
- -----------------------------------------------------------------------------------------------------------------------------------
Management's Discussion of Fund Performance Not applicable
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Stock and Other Securities Organization & Management;
Investing in Shares
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase of Securities Being Offered Investing in Shares
- -----------------------------------------------------------------------------------------------------------------------------------
Redemption or Repurchase Investing in Shares
- -----------------------------------------------------------------------------------------------------------------------------------
Pending Legal Proceedings Not applicable
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KEY FEATURES......................
EXPENSES..........................
FINANCIAL HIGHLIGHTS..............
PERFORMANCE.......................
ORGANIZATION & MANAGEMENT.........
INVESTMENT OBJECTIVES, POLICIES &
RISKS ............................
INVESTING IN SHARES...............
</TABLE>
The Prospectus provides concise information that you should know before
investing. Please retain it for future reference.
The Statement of Additional Information (SAI), dated December 31, 1997, contains
additional information and is incorporated by reference into the Prospectus. The
SAI has been filed with the Securities and Exchange Commission (SEC). The SEC
maintains a World Wide Web site (http://www.sec.gov) that contains the SAI,
material incorporated by reference and other information. The SAI is available
without charge by calling 800-435-4000 (800-345-2550 for TDD users) or writing
to 101 Montgomery Street, San Francisco, California 94104.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SCHWAB EQUITY INDEX FUNDS
SCHWAB 1000 FUND(R)
SCHWAB S&P 500 FUND
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB INTERNATIONAL INDEX FUND(R)
PROSPECTUS
DECEMBER 31, 1997
THE SCHWAB 1000 FUND (Schwab 1000 Fund) seeks total return by tracking the
performance of the Schwab 1000 Index(R).
THE SCHWAB S&P 500 FUND (S&P 500 Fund) seeks total return by tracking the
performance of the S&P 500(R) Index.
THE SCHWAB SMALL-CAP FUND (Small-Cap Fund) seeks total return by tracking the
performance of the Schwab Small-Cap Index(R).
THE SCHWAB INTERNATIONAL INDEX FUND (International Fund) seeks total return by
tracking the performance of the Schwab International Index(R).
<PAGE> 6
KEY FEATURES
MATCHING A FUND TO YOUR INVESTMENT NEEDS: Unlike actively managed funds, each
Fund seeks to track the performance of an index, which attempts to represent a
particular market, or market sector. Because each Fund will invest in a large
number and broad range of stocks, each Fund could provide a diversified stock
fund investment for your asset allocation plan. Each Fund could be an excellent
choice for a variety of investment programs, such as Schwab's Automatic
Investment Plan or retirement plans.
GOALS: THE SCHWAB 1000 FUND seeks to track the total return of the Schwab 1000
Index, an index composed of common stocks of the 1,000 largest U.S. companies.
THE S&P 500 FUND seeks to track total return of the S&P 500 Index, an index
composed of common stocks of 500 U.S. companies, and prepared and published by
Standard & Poors.
THE SMALL-CAP FUND seeks to track the total return of the Schwab Small-Cap
Index, an index composed of common stocks of the second 1,000 largest U.S.
companies.
THE INTERNATIONAL FUND seeks to track the total return of the Schwab
International Index, an index composed of equity securities issued by large,
publicly-traded companies from countries other than the United States with
major, developed securities markets.
There is no guarantee a Fund will achieve its goal.
MANAGEMENT: Charles Schwab Investment Management, Inc. (the Investment Manager)
currently provides investment management services to the SchwabFunds(R), a
family of 30 mutual funds with over $[xx] billion in assets as of [date].
TAX EFFICIENT STRATEGIES: The Funds use investing strategies designed to
minimize your tax liabilities. Read the "Investment Objectives, Policies &
Risks" section for more details.
CLASSES DESIGNED TO MEET DIFFERENT NEEDS. Each Fund offers Investor Shares
and Select Shares. The Select Shares have lower total expenses, but require
higher minimum investments. The Schwab 500 Fund also offers e.Shares, which also
have lower total expenses than Investor Shares (although higher than Select
Shares), but e.Shares are available only to certain investors who trade through
SchwabLink(R).
STRATEGIES: Each Fund intends to achieve its goal by following an indexing
investment strategy. Read the "Investment Objectives, Policies &
Risks" section for more information. Each Fund intends to operate as a
diversified mutual fund.
RISKS: While indexing strategies may reduce the risks associated with active
management, they do not ensure against other risks typically associated with
investing in stocks, such as a decline in the value of a particular stock,
industry or market. In addition, small-cap and international investing involve
additional risks and considerations. Read the "Investment Objectives, Policies
& Risks" section for more details.
SHAREHOLDER SERVICE: Charles Schwab & Co., Inc. (Schwab) provides professional
representatives 24 hours a day at 800-435-4000 to service your accounts. Read
the "Investing in Shares" section of the prospectus for information on "How to
Buy Shares" and "How to Sell Shares" of a Fund.
LOW COST INVESTING: The Investment Manager and Schwab have voluntarily
guaranteed that, through at least February 29, 2000, total operating expenses of
each class of each Fund, as a percentage of average daily net assets, will not
exceed certain amounts. Read the "Expenses" section for more details.
2
<PAGE> 7
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are charges you may pay when you buy, sell or
exchange shares of the Funds.
<TABLE>
<CAPTION>
SCHWAB S&P 500 SMALL-CAP INTERNATIONAL
1000 FUND FUND FUND
<S> <C> <C> <C> <C>
Maximum sales charge on purchases and
reinvested dividends................................... None None None None
Deferred sales charge on early withdrawals............. 0.50%* None 0.50%* 0.75%*
Redemption fee......................................... None** None** None** None**
Exchange fee........................................... None None None None
Account maintenance fees............................... None*** None*** None*** None***
</TABLE>
* Applies only to sales/exchanges of shares held less than 6 months.
** Read the "Investing in Shares" section of the prospectus for information
concerning wire redemption fees.
*** Read the "Investing in Shares" section of the prospectus for information
concerning fees that may be charged if you do not maintain the required minimums
in a Fund or in your Schwab account.
The information on shareholder transaction expenses is for transactions through
a Schwab account. If you are purchasing, selling, exchanging or maintaining
shares through an entity other than Schwab, other transaction expenses may be
charged by that entity.
ANNUAL OPERATING EXPENSES are paid by the Funds. These expenses include
management fees paid to the Investment Manager and other fees for services such
as maintaining shareholder records and furnishing shareholder statements and
financial reports. These expenses are factored into the price of a Fund's shares
and into the dividends paid to shareholders. For funds with more than one class
of shares these fees are factored into each class. As a shareholder, you are not
charged any of these fees directly.
The following figures are based on historical expenses and are stated as a
percentage of average daily net assets of each class of each Fund.
<TABLE>
<CAPTION>
INVESTOR SHARES
Schwab S&P 500 Small-Cap Inter-
1000 Fund* Fund national
Fund Fund
<S> <C> <C> <C> <C>
Management fee (after reduction)......................... Xx% xx% xx% xx%
12b-1 fee................................................ None None None None
Other expenses (after reduction)......................... Xx% xx% xx% xx%
TOTAL OPERATING EXPENSES (AFTER REDUCTION)............... Xx% xx% xx% xx%
<CAPTION>
SELECT SHARES
Schwab S&P 500 Small-Cap Inter-
1000 Fund Fund national
Fund Fund
<S> <C> <C> <C> <C>
Management fee (after reduction)......................... xx% xx% xx% xx%
12b-1 fee................................................ None None None None
Other expenses (after reduction)......................... xx% xx% xx% xx%
TOTAL OPERATING EXPENSES (AFTER REDUCTION)............... xx% xx% xx% xx%
</TABLE>
*Fee information is also for e.Shares.
3
<PAGE> 8
EXAMPLE: If each of the Funds were to provide an annual return of 5%, you would
pay the following expenses on a $1,000 investment, whether you redeem your
shares at the end of each period or left your shares invested.
SCHWAB 1000 1 3 5 10
FUND Year Years Years Years
Select Shares
Investor Shares
S&P 500 1 3 5 10
FUND Year Years Years Years
Select Shares
Investor Shares
e.Shares
SMALL-CAP 1 3 5 10
FUND Year Years Years Years
Select Shares
Investor Shares
INTERNATIONAL 1 3 5 10
FUND Year Years Years Years
Select Shares
Investor Shares
THE EXPENSE TABLES AND EXAMPLES ABOVE ARE SUPPOSED TO HELP YOU UNDERSTAND THE
COSTS OF OWNING SHARES IN THE FUNDS. ACTUAL EXPENSES MAY BE GREATER OR LESSER
THAN THOSE SHOWN.
The Investment Manager and Schwab have voluntarily agreed to guarantee, at
least through February 29, 2000, that total operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses) of the Funds
will not exceed the amounts shown in the fee table. If these guarantees were not
in effect, the management fees, other expenses and total operating expenses for
each class of each Fund, as a percentage of average daily net assets, would have
been:
Read the "Organization & Management" section of this prospectus for more
information on expenses.
4
<PAGE> 9
FINANCIAL HIGHLIGHTS
The following information has been audited by _____________, independent
accountants for the Funds. Their reports are included in the Annual Reports for
the Funds, which are separate reports that contain additional financial
information.
Their reports, financial highlights and financial statements for the Funds are
incorporated by reference into the SAI. For free copies of an Annual Report
and/or the SAI, call 1-800-435-4000.
5
<PAGE> 10
PERFORMANCE
Typically, mutual funds report performance in terms of total return.
TOTAL RETURN is the actual annual return of an investment assuming both the
reinvestment of any income earned and any change in share price. A cumulative
total return is the actual total return of an investment over a stated period of
time, while an average annual total return is a hypothetical rate of return,
which, if achieved annually would have produced the same cumulative total
return. An average annual total return will smooth out the actual year-to-year
fluctuations of an investment's return.
The International Fund may report total return in foreign currencies, as well as
in U.S. dollars. Total return reported in U.S. dollars represents the actual
annual return of investments denominated in local currency, and any increases or
decreases in value when the local currency is converted to U.S. dollars.
Fluctuations in the exchange rate between the U.S. dollar and a local currency
will affect the U.S. dollar-denominated returns of the International Fund.
Fund strategies, performance and holdings are detailed in financial reports
which are sent to shareholders twice a year. For a free copy of a most recent
financial report, call 1-800-435-4000.
6
<PAGE> 11
ORGANIZATION & MANAGEMENT
EACH FUND IS A DIVERSIFIED MUTUAL FUND. Each Fund is a series of Schwab Capital
Trust (a Trust), except the Schwab 1000 Fund, which is a series of Schwab
Investments (a Trust).
EACH FUND IS OVERSEEN BY A BOARD OF TRUSTEES. The Board of Trustees meets
regularly to review each Fund's activities, contractual arrangements and
performance. The Board of Trustees is responsible for protecting the interests
of each Fund's shareholders.
THE FUNDS MAY HOLD SPECIAL MEETINGS. These meetings may be called for purposes
such as electing Trustees, changing fundamental policies and amending management
contracts. Shareholders are entitled to one vote for each share owned and may
vote by proxy or in person. Proxy materials will be mailed to shareholders prior
to any meetings, and will include a voting card and information explaining the
matters to be voted upon.
THE FUNDS ARE MANAGED BY THE INVESTMENT MANAGER. The Investment Manager is
responsible for managing each Fund's day-to-day business affairs, including
picking each Fund's investments; although the Investment Manager is subject to
the overall authority of the Board of Trustees.
Geri Hom is a Vice President of the Investment Manager and Senior Portfolio
Manager for each Fund. She joined Schwab in March 1995 as Portfolio Manager -
Equities and currently manages each Fund and co-manages three Schwab Asset
Director(R) Funds with approximately $6.1 billion in assets. For the prior seven
years before joining Schwab, Ms. Hom was Vice President and Manager of the
Domestic Equity Portfolio Management Group for Wells Fargo Nikko. She holds a
B.A. in business education from San Francisco State University.
Stephen B. Ward is the Trust's Senior Vice President and Chief Investment
Officer. He has overall day-to-day responsibility for the management of the
Funds' portfolios. Mr. Ward joined the Investment Manager as Vice President and
Portfolio Manager in April 1991 and was promoted to his current position in
August 1993. Prior to joining the Investment Manager, Mr. Ward was Vice
President and Portfolio Manager at Federated Investors. He graduated with a
Masters of Business Administration from the Wharton School and a Bachelor of
Arts in Economics from Virginia Tech and has been a Chartered Financial Analyst
since 1985.
For the services performed under its contract with each Fund, the Investment
Manager is entitled to receive a graduated annual fee, payable monthly from each
Fund.
7
<PAGE> 12
For the fiscal years ended October 31, 1997, each Fund paid the Investment
Manager investment management fees as a percentage of its daily net assets as
shown in the fee table on the "Expenses" section.
SCHWAB IS THE FUNDS' SHAREHOLDER SERVICES AND TRANSFER AGENT. Schwab provides
Fund information to shareholders, including share price, reporting shareholder
ownership and account activities and distributing the Funds' prospectuses,
financial reports and other informational literature about the Funds. Schwab
also maintains the office space, equipment and personnel necessary to provide
these services. Schwab also distributes and markets SchwabFunds and services.
For the services performed as transfer agent under its contract with each Fund,
Schwab is entitled to receive annual fees from the Funds. The fees are payable
monthly in the amount of 0.05% of each Fund's average daily net assets. For the
services performed as shareholder services agent under its contract with each
class of the Funds, Schwab is entitled to receive annual fees from each class of
the Funds. The fees are payable monthly in the amount of 0.20% of Investor
Shares' and 0.05% of Select Shares' and e.Shares' average daily net assets.
THE FUNDS PAY OTHER EXPENSES. These expenses are typically connected with a
Trust's operations, and include legal, audit and custodian fees, as well as the
costs of accounting and registration of the funds. Expenses not directly
attributable to a particular fund will be allocated equitably among the funds in
a Trust.
For the fiscal year ended October 31, 1997, each class of each Fund paid total
operating expenses as shown in the fee table in the "Expenses" section.
The Charles Schwab Corporation is the parent company of the Investment Manager
and Schwab. Charles R. Schwab is the founder, Chairman, Chief Executive Officer
and Director of The Charles Schwab Corporation. As a result of his ownership of
and interests in The Charles Schwab Corporation, Mr. Schwab may be deemed to be
a controlling person of the Investment Manager and Schwab.
8
<PAGE> 13
INVESTMENT OBJECTIVES, POLICIES & RISKS
INVESTMENT OBJECTIVES
THE SCHWAB 1000 FUND seeks to track the total return of the Schwab 1000 Index.
THE S&P 500 FUND seeks to track the total return of the S&P 500 Index.
THE SMALL-CAP FUND seeks to track the total return of Schwab Small-Cap Index
Fund.
THE INTERNATIONAL FUND seeks to track the total return of Schwab International
Index.
Each Fund's investment objective may be changed only by vote of a majority of a
Fund's shareholders. Unless otherwise noted, policies and limitations may be
changed without shareholder approval.
INVESTMENT STRATEGIES
Each Fund intends to achieve its objective by following an indexing investment
strategy.
Each Fund normally will invest at least 80% of its total assets in the
securities making up its Index.
THE INDEXES
THE SCHWAB 1000 INDEX is designed to represent the total return of
publicly-traded, common stocks of U.S. companies.
THE SCHWAB SMALL-CAP INDEX is designed to represent the total return of
publicly-traded, common stocks of small-cap U.S. companies.
THE SCHWAB INTERNATIONAL INDEX is designed to represent the total return of
publicly-traded, equity securities of large-cap foreign companies from developed
securities markets. Some countries represented in the Index include Australia,
Belgium, Canada, Denmark, France, Germany, Hong Kong, Italy, Japan, the
Netherlands, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
THE S&P 500 Index is a widely recognized, index comprised of 500 large-cap
common stocks selected by Standard & Poor's.
THE INDEXING STRATEGY is a method of investment management that relies on an
index to determine the investments of a fund, rather than the judgment of a
portfolio manager. Of course, the portfolio manager of an index fund still uses
his/her judgment, but not in the traditional sense of investment management. By
following indexing strategies, each Fund seeks to match or track the investment
performance of its Index.
Each Fund will invest in a group of securities selected from its Index, which,
when taken together, is expected to perform similarly to its Index. This
technique is expected to enable each Fund to track the dividend income and price
movements (total return) of its Index, while minimizing brokerage, custodial and
accounting costs. In addition, the indexing strategy is intended to minimize a
Fund's realized capital gains, which can make a difference in an investors'
after-tax return, especially for those investors in higher tax brackets. Each
Fund will
9
<PAGE> 14
seek a correlation between its performance (total return), and that of its Index
of 0.9 or better. A perfect correlation of 1.0 is unlikely as the Funds incur
operating expenses unlike the Indexes. The Investment Manager will monitor the
performance of each Fund against its index and will rebalance a Fund
periodically to reduce tracking error. In the event a correlation of 0.9 or
better is not achieved, the Board of Trustees will consider alternative
arrangements.
THE RISKS for each Fund are basically those risks associated with investing in
equity securities. Generally speaking, there are three types of risk attendant
to investing in equity securities.
STOCK RISK is the risk that a stock may decline in price over the short- or
long-term. When a stock's price declines, its market value is lowered even
though the intrinsic value of the company may not have changed. Diversifying
investments across companies can help to lower the stock risk of a Fund.
INDUSTRY RISK is the risk that the companies of a particular industry will
experience a decline in the price of this stock. Sometimes a negative economic
condition will affect a single industry or group of industries. For example,
the automotive industry may have a greater exposure to a single factor, such as
an increase in the price of oil, which may affect the sale of automobiles and
impact the value of the industries' securities. Diversifying investments across
industries can help to reduce the industry risk of a Fund.
MARKET RISK is, typically, the result of a negative economic condition that
affects the value of the securities of companies operating in a particular
market.
The amount or each type of risk each Fund will be subject to will depend on its
portfolio of investments. Because the Funds intend to track their Indexes, their
risk profiles are expected to be similar to that of their Indexes. The Indexes
are designed to reflect the performance of a particular segment of the stock's
market and will be subject to those market risks.
PRINCIPAL SECURITIES AND INVESTMENT TECHNIQUES
The different types of securities comprising each index and other securities in
which the Funds may invest are described below.
EQUITY SECURITIES include common stocks, preferred stocks, convertible
securities and warrants. Common stocks which represent an ownership interest in
a company are probably the most recognized type of equity security. Equity
securities have historically outperformed most other securities, although their
prices can be volatile in the short term. Market conditions, political, economic
and even company-specific news can cause significant changes in the price of a
stock. Smaller companies (as measured by market capitalization), sometimes
called small-cap companies or small-cap stocks, may be especially sensitive to
these factors.
INTERNATIONAL INVESTMENTS include foreign securities, foreign currencies.
International investments involve additional risks and considerations. Foreign
entities may not be subject to the same regulatory and reporting requirements as
domestic entities, and foreign markets may provide less stringent investor
protections, including lower disclosure standards. In addition, foreign
economic, political and legal developments, as well as fluctuating foreign
currency values and withholding taxes, could have more dramatic effects on the
value of a foreign security. All of these factors and others can cause foreign
investments to be volatile.
DEBT SECURITIES are obligations issued by various entities, including
governments and corporations in order to raise money. The are basically "IOUs",
but are commonly referred to as bonds or money market securities. These
securities normally require the issuer to pay a fixed, variable or floating rate
of interest on the amount of money borrowed (the "principal") until it is paid
back upon maturity. A money market security is a high-quality debt security
that has short-term maturity.
10
<PAGE> 15
ILLIQUID SECURITIES are securities which are not actively traded or are subject
to legal restrictions and, therefore, may be difficult to sell quickly or
without losses.
Restriction: Each Fund will not purchase illiquid securities if, as a result,
more than 10% of its net assets would be invested in illiquid securities.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY SECURITIES are securities that are
purchased but are to be delivered to the buyer at a later than customary date,
price and yield. Generally, the purchaser does not pay for these securities or
earn interest on them until they are delivered, but their value could change
prior to delivery.
REPURCHASE AGREEMENTS involve a Fund buying securities (usually U.S. Government
securities) from a seller and simultaneously agreeing to sell them back at an
agreed-upon price (usually higher) and time. There are risks that losses will
result if the seller does not perform as agreed.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased by a Fund. These
investments will cause a Fund to bear duplicative fees for certain services.
ADJUSTING INVESTMENT EXPOSURE are investment techniques a Fund may use to
increase or decrease its exposure to a number of conditions, including changing
interest or currency exchange rates and other conditions affecting the value of
securities. These investment techniques include buying and selling futures and
options contracts, entering into currency exchange contracts or swap agreements,
purchasing index securities and selling securities short.
The Funds intend to use investment techniques to adjust risk exposure and
increase returns, and to manage their cash positions. The use of any of these
techniques will increase a Fund's risks and volatility. The potential losses to
a Fund could be substantially more than the initial cost of the investment
itself.
The Funds also employ the policies described below.
DIVERSIFICATION involves investing in a wide range of securities and, thereby,
spreading and reducing the risks of investment.
BORROWING money is a form of leveraging if the Fund continues to make
investments while borrowings remain outstanding. Borrowing subjects a Fund to
interest costs, which may exceed the interest received on the securities
purchased with the borrowed funds.
Restriction: Each Fund may borrow up to 33 1/3% of its total assets for
temporary or emergency purposes; provided that each Fund will not purchase
securities while borrowing represents more than 5% of its total assets.
LENDING securities may earn income for a Fund, but could result in losses to the
Fund, and possibly affect share price.
Restriction. Each Fund will limit lending to no more than 33 1/3% of its total
assets.
11
<PAGE> 16
INVESTING IN SHARES
BUSINESS DAYS
The Funds are open each day the New York Stock Exchange (NYSE) is open (business
days).
NET ASSET VALUE
The price of the shares of each Fund is its NAV. NAV is determined each business
day at the close of the NYSE, generally 4:00 p.m. Eastern time. NAV is
calculated by adding the value of each Fund's assets, subtracting its
liabilities and dividing the result by the number of outstanding shares. Each
Fund's NAV will fluctuate and none of the Funds is insured against loss in its
NAV. Each Fund values its portfolio securities based on market quotes if they
are readily available. If market quotes are not readily available, portfolio
securities are assigned fair market values pursuant to guidelines adopted by the
Board of Trustees.
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
INVESTOR SHARES AND E.SHARES(TM)
<S> <C>
INITIAL INVESTMENT $1,000
for custodial and retirement accounts $500
ADDITIONAL SHARES $100
MINIMUM BALANCE* $1,000
</TABLE>
<TABLE>
<CAPTION>
SELECT SHARES
<S> <C>
INITIAL INVESTMENT $50,000
ADDITIONAL SHARES $1,000
MINIMUM BALANCE* $40,000
</TABLE>
* Shares may be automatically redeemed if you do not meet a Fund's minimum
balance requirements.
These minimums may not be applicable to certain customers of Schwab
Institutional Services for Investment Managers or Schwab's Retirement Plan
Services. These minimums may be different if you are buying, selling/exchanging
or maintaining shares of a Fund through an entity other than Schwab.
HOW TO BUY SHARES
Shares may be purchased through a Schwab account or through an account with any
other entity designated by Schwab. The following information on how to buy
shares is for shares bought through a Schwab account. Shares are purchased at
the NAV next determined after your purchase order has been received in good
order . Purchase orders received in good order by Schwab prior to 4:00 p.m.
Eastern time will be executed that day. Shares normally begin to earn dividends
on the next business day.
BY TELEPHONE. Call 1-800-435-4000, 24 hours a day (1-800-345-2550 for TDD
users).
BY MAIL. Write to the Funds at 101 Montgomery Street, San Francisco, CA 94104.
ELECTRONICALLY. Visit Schwab's World Wide Website at http://www.schwab.com for
more information about e.Shares, StreetSmart(R), The Equalizer(R) and
Telebroker(R), or call 1-800-435-4000.
SCHWABLINK(R). e.Shares may be purchased by clients of Schwab Institutional and
The Schwab Trust Company, and certain retirement plans. Transactions in e.Shares
must be made using SchwabLink. Read its manual for transaction instructions. In
the event you experience mechanical difficulty using SchwabLink, call the Schwab
Institutional trading desk at 800-367-5198 for help.
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TO PURCHASE SHARES OF THE FUNDS. Please provide the following information:
- - your name and Schwab account number (and for e.Shares, your SchwabLink
master account number and subaccount number);
- - the name of your Fund and class, if applicable, and the dollar amount you
would like to purchase; and
- - for initial purchases only, one of the two distribution choices below:
AUTOMATIC REINVESTMENT. Dividends and/or capital gain distributions will be
reinvested in shares of your Fund. If you do not choose an option, this
option will be assigned to you and all your distributions will be
reinvested; or
CASH OPTION. Dividends will be paid to your Schwab account and, if
requested, mailed to you the next business day.
HOW TO SELL OR EXCHANGE SHARES
Shares may be sold or exchanged through a Schwab account or through an account
with any other entity designated by Schwab. The following information on how to
sell or exchange shares is for shares sold or exchanged through a Schwab
account. Shares are sold or exchanged at the NAV next determined after your sale
or exchange order has been received in good order . Sale and exchange orders
received in good order by Schwab prior to 4:00 p.m. Eastern time will be
executed that day. Shares sold or exchanged normally earn dividends on that day.
BY TELEPHONE. Call 1-800-435-4000, 24 hours a day (1-800-345-2550 for TDD
users).
BY MAIL. Write to either Fund at 101 Montgomery Street, San Francisco, CA 94104.
ELECTRONICALLY. Visit Schwab's World Wide Website at http://www.schwab.com for
more information about StreetSmart(R), The Equalizer(R) and Telebroker(R), or
call 1-800-435-4000.
SCHWABLINK(R). e.Shares may be sold or exchanged by clients of Schwab
Institutional and The Schwab Trust Company, and certain retirement plans.
Transactions in e.Shares must be made using SchwabLink. Read its manual for
transaction instructions. In the event you experience mechanical difficulty
using SchwabLink, call the Schwab Institutional trading desk at 1-800-367-5198
for help.
TO SELL OR EXCHANGE SHARES OF THE FUNDS. Please provide the following
information:
- - your name and Schwab account number (and for e.Shares, your SchwabLink
master account number and subaccount number);
- - the name of your Fund and class you would like to sell or exchange from and
the number of shares;
- - for exchanges only, the name of your Fund and class, if applicable, into
which you would like to exchange and a distribution choice; and
- - if selling or exchanging by mail, a signature of at least one of the
persons named on your Schwab account.
Once mailed, redemption and exchange requests are irrevocable and may not be
modified or canceled.
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<PAGE> 18
PLEASE NOTE THE FOLLOWING WHEN SELLING OR EXCHANGING SHARES OF THE FUNDS:
- - a check for your shares will be issued on the business day following
receipt and acceptance of your sale order, and will be mailed to you upon
request;
- - if you bought your shares by check, a check will be issued as soon as your
check clears, which may take up to 15 days;
- - depending on the type of Schwab account you have, your money may earn
interest during any holding period;
- - you may exchange your shares for shares of any other SchwabFund, provided
you meet its minimum investment and any other requirements;
- - the Funds and Schwab reserve the right to modify, limit or terminate the
exchange privilege upon 60 days' written notification;
- - the Funds may suspend the right to sell shares or postpone payment for a
sale of shares when trading on the NYSE is restricted, the NYSE is closed
for any reason other than its customary weekend and holiday closings,
emergency circumstances exist as determined by the SEC or as otherwise
permitted by the SEC;and
- - an exchange of a Fund's shares for shares of other SchwabFunds will be
treated as a taxable event for federal income tax purposes. An exchange
between different classes of shares of a Fund should not be treated as a
taxable event.
- - An early withdrawal fee upon redemption or exchange of shares of the Schwab
1000 Fund, Small-Cap Fund or International Fund will be charged against
proceeds attributable to shares purchased or held less than six months.
This fee will be paid directly to the Fund to offset costs of short-term
trading and ensure that long-term investors do not bear additional costs.
An early withdrawal fee for exchanges between classes of shares of the same
Fund or to shares redeemed or acquired though reinvestment of dividends or
capital gains distributions will be charged. Solely for purposes of
calculating the early withdrawal fee, shares will be treated as redeemed on
a "first-in, first-out" basis, except for shares acquired through dividend
reinvestment which will be redeemed first (although no early withdrawal fee
will be assessed against these). This method of calculating the fee should
result in the lowest total early withdrawal fee. The Funds reserve the
right to waive this fee for certain tax-advantaged retirement plans.
DIVIDENDS & TAXES
The following is only a brief summary of some of the federal and state income
tax consequences that may affect each Fund and its shareholders. Unless your
investment in a Fund is through a retirement account, you should consider the
tax implications of investing, and consult with your own tax adviser.
Each Fund will distribute its net investment income and capital gains, if any,
to shareholders each year. All distributions received by shareholders are
subject to federal income tax, and may be subject to state and/or local taxes.
Note that most states grant tax-exempt status to distributions paid to
shareholders from interest income derived from U.S. Government securities.
Distributions are taxable when paid, whether they are received in cash or
reinvested, although distributions declared in December, but paid in January,
are taxable as if they were paid on December 31.
Income received by the International Fund from foreign sources may be subject
to foreign income taxes withheld at the source. For taxable years in which it
so qualifies, the International Fund may elect to "pass-through" to its
shareholders the amount of foreign taxes paid. Under such an election,
shareholders who receive a distribution must include in their gross income
their pro rata share of foreign taxes paid and may claim a credit or deduction
for those foreign taxes, subject to the general limitations on foreign tax
credits and deductions.
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<PAGE> 19
Shareholders receive a record of all distributions by a Fund, as well as
purchases and sales they have made, via their monthly Schwab account statement.
Each year, each Fund notifies shareholders of all distributions made by the Fund
that year, including the percentage of dividends paid that may qualify for
tax-exempt status.
OPENING A SCHWAB ACCOUNT
Schwab was established in 1971 and is one of America's largest discount brokers.
Schwab helps over [XX] million customers make investment decisions by offering
them low cost brokerage services and providing them with financial products and
information. Visit one of Schwab's [number] branch offices or Schwab's World
Wide Web site (http://www.schwab.com) for information on investment products and
services.
Investors may open a Schwab account by simply completing an application,
although institutional investors should contact Schwab to find out if any
additional forms need to be completed.
Using a Schwab account, investors have access to investments other than just
mutual funds, such as stocks and bonds. The Securities Investor Protection
Corporation (SIPC) provides insurance protection of up to $500,000 for the
securities held in a Schwab account, including shares of the Funds. It is
important to remember that SIPC insurance does not protect against losses due to
market or economic conditions.
Schwab accounts require a $1,000 minimum investment and account balance ($500
for custodial accounts). A fee of $7.50 will be charged to Schwab accounts that
fall below this minimum for three consecutive months in a quarter. The fee, if
applicable, will be charged at the end of each quarter, but will be waived if
there has been at least one commissionable trade within the previous six months,
or if the investor's combined Schwab accounts equal $10,000 or more.
Schwab One(R) accounts require a $5,000 minimum investment and account balance.
A monthly fee of $5.00 will be charged to Schwab One accounts that fall below
this minimum, unless there have been at least two commissionable trades within
the previous twelve months.
Deposits may be made to Schwab accounts by check, wire and other forms of
electronic funds transfer. Securities also may be deposited. All checks should
be made out to Charles Schwab & Co., Inc. Schwab will charge a $15 service fee
for any checks returned as a result of insufficient or uncollected funds or a
stop order. Monies received by Schwab before 4:00 p.m. Eastern time will be
available for investment in the Fund that day. Monies received by Schwab after
4:00 p.m. Eastern time will be available for investment in the Fund the next
business day.
Contact Schwab for instructions and any applicable fees if you would like to
wire money from your Schwab account.
TAX-ADVANTAGED RETIREMENT PLANS.
Retirement plans offer excellent tax advantage and the Funds may be especially
suitable investments for them. Schwab's retirement plans allow participants to
defer taxes while helping them build their retirement savings.
SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab IRA accounts with balances of $10,000 or more by September 15, 1998 will
not be charged Schwab's $29 annual IRA account fee for the life of the account.
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<PAGE> 20
SCHWAB KEOGH. A tax-advantaged plan for self-employed individuals and their
employees that permit the employer to make annual tax-deductible contributions
of up to $30,000. Schwab Keogh Plans are currently charged an annual fee of $45.
SCHWAB CORPORATE RETIREMENT ACCOUNT. A well-designed retirement program can help
a company attract and retain valuable employees. Call 1-800-435-4000 for more
information.
SCHWAB AUTOMATIC INVESTMENT PLAN. Schwab's Automatic Investment Plan (AIP)
allows you to make periodic investments in non-money market SchwabFunds(R) (and
certain other funds available through Schwab) automatically and conveniently.
You can make automatic investments in any amount, from $100 to $50,000, once you
meet a Fund's investment minimum.
Automatic investments are made from your Schwab account using uninvested cash or
shares of the Schwab money fund linked to your Schwab account or by using the
Schwab MoneyLink(R) Transfer Service. As long as you are purchasing a Fund's
shares through AIP, you must chose the automatic reinvestment option for
distributions. For more detailed information about this service, or to establish
your AIP, call 1-800-435-4000, 24 hours a day.
GENERAL INFORMATION
As long as the Funds or Schwab follow reasonable procedures to confirm that your
telephone order is genuine, they will not be liable for any losses an investor
may experience due to unauthorized or fraudulent instructions.
These procedures may include:
- - requiring a form of personal identification before acting upon any
telephone order;
- - providing written confirmation of telephone orders; and
- - tape recording all telephone orders.
It may be difficult to place orders by telephone during periods of drastic
economic or market changes because Schwab's phone lines may become very busy
with calls from other investors. Consider other methods for placing an order,
such as writing to the Funds.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
Twice a year, financial reports will be mailed to shareholders describing each
Fund's performance and investment holdings. In order to reduce these mailing
costs, each household will receive one consolidated mailing. If you do not want
to receive consolidated mailings, you may write to your Fund and request that
your mailings not be consolidated.
THE S&P 500 Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's ("S&P"). S&P makes no representation or warranty, express or implied, to
the shareholders of the S&P 500 Fund or any member of the public regarding the
advisability of investing in securities generally or in the S&P 500 Fund
particularly or the ability of the S&P 500 Index to track general stock market
performance. S&P's only relationship to the S&P 500 Fund is the licensing of
certain trademarks and trade names of S&P and of the S&P 500(R) Index, which is
determined, composed and calculated by S&P without regard to the S&P 500 Fund.
S&P has no obligation to take the needs of the S&P 500 Fund or its shareholders
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of S&P
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<PAGE> 21
500 Fund shares or in the determination or calculation of the equation by which
the S&P 500 Fund's shares are to be converted into cash. S&P has no obligation
or liability in connection with the administration, marketing or trading of the
S&P 500 Fund's shares.
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<PAGE> 22
S&P does not guarantee the accuracy and /or the completeness of the S&P 500
Index or any data included therein, and S&P shall have no liability for any
errors, omissions or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained be the S&P 500 Fund, its shareholders or
any other person or entity from the use S&P 500 Index or any data therein. S&P
makes no express or implied warranties and expressly disclaims all warranties or
merchantability or fitness for a particular purpose or use with respect to the
S&P500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect or consequential damages (including lost profits), even if notified of
the possibility of such damages.
Each Fund, in its sole discretion and without prior notice, reserves the right
to refuse orders to purchase shares, change minimum investment requirements or
withdraw or suspend any part of the offering made by this prospectus.
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS AND
IN OFFICIAL SALES MATERIALS. IF ANYONE GIVES ANY OTHER INFORMATION OR MAKES ANY
OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION OR REPRESENTATIONS.
THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
BE MADE.
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SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB 1000 FUND-INVESTORS SHARES
SCHWAB 1000 FUND-SELECT SHARES
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Part B Item Statement of Additional Information Caption
- -----------------------------------------------------------------------------------------------------------------------------------
Cover Page Cover Page
- -----------------------------------------------------------------------------------------------------------------------------------
Table of Contents Table of Contents
- -----------------------------------------------------------------------------------------------------------------------------------
General Information and History Organization and Management of the Trusts;
The Indexes and Indexing Strategies
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Objectives and Policies Investment Objectives;
Investment Securities and Risks;
Investment Policies and Restrictions
- -----------------------------------------------------------------------------------------------------------------------------------
Management of the Fund Management of the Funds
- -----------------------------------------------------------------------------------------------------------------------------------
Control Persons and Principal Holders of Securities Organization and Management of the Trusts
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Advisory and Other Services Organization and Management of the Trusts
- -----------------------------------------------------------------------------------------------------------------------------------
Brokerage Allocation and Other Practices Portfolio Transactions and Turnover
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Stock and Other Securities Organization and Management of the Trusts
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase, Redemption and Pricing of Securities Being Offered Share Price Calculation;
Purchase and Redemption of Shares
- -----------------------------------------------------------------------------------------------------------------------------------
Tax Status Taxes
- -----------------------------------------------------------------------------------------------------------------------------------
Underwriters Organization and Management of the Trusts
- -----------------------------------------------------------------------------------------------------------------------------------
Calculation of Performance Data How the Funds Reflect Performance
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Statements Financial Statements
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 24
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB CAPITAL TRUST
SCHWAB S&P 500 FUND
SCHWAB INTERNATIONAL INDEX FUND(R)
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB INVESTMENTS
SCHWAB 1000 INDEX FUND(R)
DECEMBER 31, 1997
This Statement of Additional Information (SAI) is not a prospectus. It
should be read in conjunction with the Prospectus dated December 31, 1997 (as
amended from time to time) for the Schwab International Index Fund(R)
(International Fund), Schwab Small-Cap Index Fund(R) (Small-Cap Fund), Schwab
S&P 500 Fund (S&P 500 Fund) and the Schwab 1000 Fund.
To obtain a copy of the Prospectus, please contact Charles Schwab &
Co., Inc. (Schwab) at 800-435-4000, 24 hours a day, or 101 Montgomery Street,
San Francisco, California 94104. TDD users may contact Schwab at 800-345-2550,
24 hours a day. The Prospectus also may be available electronically by using our
World Wide Web address: http://www.schwab.com/funds.
SCHWABFUNDS(R)
800-435-4000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT OBJECTIVES..............................................................................................
INVESTMENT SECURITIES AND RISKS....................................................................................
INVESTMENT POLICIES AND RESTRICTIONS ..............................................................................
ORGANIZATION AND MANAGEMENT OF THE TRUSTS .........................................................................
MANAGEMENT OF THE FUNDS............................................................................................
PORTFOLIO TRANSACTIONS AND TURNOVER................................................................................
TAXES..............................................................................................................
SHARE PRICE CALCULATION............................................................................................
HOW THE FUNDS REFLECT PERFORMANCE..................................................................................
THE INDEXES AND INDEXING STRATEGIES................................................................................
PURCHASE AND REDEMPTION OF SHARES..................................................................................
OTHER INFORMATION..................................................................................................
FINANCIAL STATEMENTS...............................................................................................
</TABLE>
<PAGE> 25
INVESTMENT OBJECTIVES
INTERNATIONAL FUND. The investment objective of the International Fund is to
attempt to track the price and dividend performance (total return) of the Schwab
International Index(R) (International Index), an index created to represent the
performance of common stocks and other equity securities issued by large
publicly traded companies from countries around the world with major developed
securities markets, excluding the United States.
SMALL-CAP FUND. The investment objective of the Small-Cap Fund is to attempt to
track the price and dividend performance (total return) of the Schwab Small-Cap
Index(R) (Small-Cap Index), an index created to represent the performance of
common stocks of the second 1,000 largest United States companies, ranked by
market capitalization (share price times the number of shares outstanding).
SCHWAB 1000 FUND. The investment objective of the Schwab 1000 Fund is to match
the price and dividend performance (total return) of the Schwab 1000 Index(R),
an index created to represent to performance of publicly traded common stocks of
the 1,000 largest United States companies.
S&P 500 FUND. The Fund's investment objective is to track the price and dividend
performance (total return) of common stocks of U. S. companies, as represented
by Standard & Poor's 500 Composite Stock Price Index (the S&P 500(R)).
INVESTMENT SECURITIES
ASSET-BACKED SECURITIES are securities that are backed by the loans or account
receivables 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 may depend largely on the
cash flows generated by the assets backing the securities. Sometimes the credit
support for these securities is limited to the underlying assets, but, in other
cases, may be provided by a third party via a letter of credit or insurance
guarantee.
CONVERTIBLE SECURITIES. Convertible securities are securities that are
exchangeable for a specific number of another form of security at a specified
price. Bonds and preferred stocks may be convertible. Convertible bonds
typically pay a lower interest rate than nonconvertible bonds of the same
quality and maturity, because the convertible feature allows them to be
exchanged for a specific number of shares of the company's common stock at a
predetermined price. This structure allows the holder of the convertible bond to
participate in share price movements in the company's common stock. The actual
return on a convertible bond may exceed its stated yield if the company's common
stock appreciates in value and the option to convert to common shares becomes
more valuable. Convertible preferred stocks are nonvoting equity securities that
pay a fixed dividend. These securities have a convertible feature similar to
convertible bonds, however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
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<PAGE> 26
Restriction. The S&P 500 Fund will not purchase convertible securities directly.
It may, however, hold convertible securities to the extent that such holdings
are incident to the Fund's ownership of common stocks.
CREDIT AND LIQUIDITY SUPPORTS may be employed by issuers to reduce the credit
risk of their securities. Credit supports include letters of credit, insurance
and guarantees. Liquidity supports include puts and demand features. These
arrangements move the credit risk of an investment from the issuer of the
security to the support provider.
DEBT SECURITIES are obligations, issued by various entities, including
governments and corporations, in order to raise money. They are basically
"IOUs," but are commonly referred to as bonds. Bonds normally require the issuer
to pay a fixed, variable or floating rate of interest on the amount of money
borrowed (the "principal") until it is paid back (at "maturity"). Upon maturity,
the principal must be repaid.
Debt securities experience price changes when interest rates change. As a rule,
when interest rates rise, bond prices decline or "fall", and when interest rates
fall bond prices rise. Typically, longer-maturity bonds react to interest rate
changes more severely than shorter-term bonds (all else being equal) but
generally offer a greater rate of interest. Debt securities also are subject to
the risk that their issuer will fail to meet its obligation to pay interest
and/or principal, and their prices also may be affected by the credit quality of
their issuer. Investment-grade debt securities are medium- and high-quality
securities, although some still possess varying degrees of speculative
characteristics and risk.
FOREIGN CURRENCY TRANSACTIONS. The following sections pertain to foreign
currency transactions: Forward Foreign Currency Exchange Contracts; Writing and
Purchasing Currency Call and Put Option; and Special Risks Associated With
Options on Foreign Currency.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The International Fund may enter
into forward foreign currency exchange contracts in several circumstances. The
International Fund may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future exchange rates. The
International Fund expects to engage in foreign currency exchange transactions
in connection with the purchase and sale of portfolio securities (so-called
"transaction hedging") and to protect the value of specific portfolio positions
("position hedging").
For transaction hedging purposes, the International Fund enters into foreign
currency transactions with respect to specific receivables or payables of the
fund arising in connection with the purchase or sale of portfolio securities. By
transaction hedging, the International Fund will attempt to protect against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold and the transaction's settlement
date. When engaging in position hedging, the International Fund enters into
foreign currency exchange transactions to protect against a decline in the
values of the foreign currencies in which portfolio securities are denominated
(or against an increase in the value of currency in which the International Fund
expects to purchase securities).
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<PAGE> 27
When engaging in position and/or transaction hedging, the International Fund may
purchase or sell foreign currencies on a spot (or cash) basis at the prevailing
spot rate. In addition, the International Fund also may enter into contracts to
purchase or sell foreign currencies at a future date ("forward contracts") and
purchase and sell foreign currency futures contracts ("futures contracts"). The
International Fund also may purchase exchange-listed and over-the-counter call
and put options on futures contracts and on foreign currencies. A put option on
a futures contract gives the International Fund the right to assume a short
position in the futures contract until expiration of the option. A put option on
currency gives the International Fund the right to sell a currency at an
exercise price until the expiration of the option. A call option on a futures
contract gives the International Fund the right to assume a long position in the
futures contract until the expiration of the option. A call option on currency
gives the International Fund the right to purchase a currency at the exercise
price until the expiration of the option.
Hedging transactions involve costs and may result in losses to the International
Fund. The International Fund's ability to engage in hedging transactions may be
limited by tax considerations. Transaction and position hedging do not eliminate
fluctuations in the underlying prices of the securities that the International
Fund owns or expects to purchase or sell. They simply establish a rate of
exchange that may be achieved at some future point in time. Additionally,
although these techniques tend to minimize the risk of loss due to decline in
the value of the hedged currency, they tend to limit any potential gain that
might result from an increase in the value of such currency.
Although the contracts are not presently regulated by the Commodity Futures
Trading Commission (the "CFTC"), the CFTC may in the future assert authority to
regulate these contracts. In such event, the ability of the International Fund
to utilize forward foreign currency exchange contracts may be restricted.
Restriction. The International Fund generally will not enter into a forward
contract with a term of greater than one year.
While the International Fund will enter into forward contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while the International Fund may benefit from such
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the International Fund than if it had not engaged in any
such transactions. Moreover, there may be imperfect correlation between the
International Fund's portfolio holdings of securities denominated in a
particular currency and forward contracts into which the International Fund may
enter. Such imperfect correlation may cause the International Fund to sustain
losses, which will prevent the International Fund from achieving a complete
hedge or expose the International Fund to risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The International Fund may
write covered put and call options and purchase put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
portfolio securities and against increases in the dollar cost of securities to
be acquired. A call option written by the International Fund obligates the
International Fund to sell specified currency to the holder of the option at a
specified price at any time before the expiration date. A put option written by
the International Fund would obligate the International Fund to purchase
specified currency from the option holder at a specified time before the
expiration date. The writing of currency options involves risks that the
International Fund will, upon exercise of an option, be required to sell
currency at a price that
4
<PAGE> 28
is less than the currency's market value or be required to purchase currency at
a price that exceeds the currency's market value.
The International Fund may terminate their obligations under a call or put
option by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." The International
Fund would also be able to enter into closing sale transactions in order to
realize gains or minimize losses on options purchased by the International Fund.
The purchase of a call option would entitle the International Fund to purchase
specified currency at a specified price during the option period in return for
the premium paid. The International Fund ordinarily would realize a gain or a
loss on the purchase of the call option.
The purchase of a put option would entitle the International Fund to sell
specific currency at a specified price during the option period in exchange for
the premium paid. The purchase of protective puts is designed merely to offset
or hedge against a decline in the dollar value of the International Fund's
portfolio securities due to currency exchange rate fluctuations. The
International Fund ordinarily would realize a gain if, during the option period,
the value of the underlying currency decreased below the exercise price in an
amount that that would more than cover the premium and transaction costs.
Otherwise, the International Fund would realize either no gain or a loss on the
purchase of the put option. Gains and losses on the purchase of protective put
options would tend to be offset by countervailing changes in the value of the
underlying currency.
Special Risks Associated With Options on Foreign Currency. An exchange-traded
option position may be closed out only on an options exchange that provides a
secondary market for an option of the same series. Although the International
Fund generally will purchase or write only those options for which there appears
to be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at any particular
time. For some options, no secondary market on an exchange may exist. In such
event, it might not be possible to effect closing transactions in particular
options. The International Fund would then have to exercise its options in order
to realize any profit and would incur transaction costs upon the sale of
underlying securities pursuant to the exercise of put options. If the
International Fund, as a covered call option writer, is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying currency (or security denominated in that currency) until the
option expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
OCC inadequate. This could result in an exchange instituting special procedures
that may interfere with the timely execution of customers' orders.
The International Fund will purchase and write over-the-counter options only to
the extent consistent with its limitations on investments in illiquid
securities. Trading in over-the-counter options is subject to the risk that the
other party will be unable or unwilling to close-out purchasing and writing
activities.
FOREIGN REPURCHASE AGREEMENTS. Foreign repurchase agreements involve a Fund
purchasing foreign securities and simultaneously agreeing to sell them back to
the counter-party in exchange for a fixed U.S.
5
<PAGE> 29
dollar or foreign currency amount. Foreign repurchase agreements may not be
fully collateralized at all times. In addition, the value of the securities
purchased by a Fund may be more or less than the amount the counter-party has
agreed to pay upon re-purchase. A Fund could experience losses of the
counter-party fails to perform. Foreign repurchase agreements involve
significantly higher risks than repurchase agreements, including the risks of
currency fluctuations.
FUTURES AND OPTIONS. The following sections pertain to futures and options
transactions: Writing Covered Options; Purchasing Options; Risks Associated with
Options Transactions; Futures Contracts; Options on Futures Contracts; Hedging
Strategies With Futures; and Risks Involved in Futures and Options Transactions.
Writing Covered Options. The Funds may write (sell) covered call and put options
on any securities in which they may invest. The Funds may purchase and write
such options on securities that are listed on domestic or foreign securities
exchanges or traded in the over-the-counter market. All call options written by
the Funds are covered, which means that the Funds will own the securities
subject to the option so long as the option is outstanding. The purpose of
writing covered call options is to realize greater income than would be realized
on portfolio securities transactions alone. However, in writing covered call
options for additional income, the Funds may forego the opportunity to profit
from an increase in the market price of the underlying security.
All put options the Funds write will be covered, which means that each of the
Funds will have deposited with its custodian cash, U.S. Government securities or
other high-grade debt securities with a value at least equal to the exercise
price of the put option. High-grade securities are securities rated in one of
the top three categories by Moody's Investor Service (Moody's) or Standard &
Poor's (S&P), or, if unrated, determined by the Investment Manager to be of
comparable credit quality. The purpose of writing such options is to generate
additional income for the Funds. However, in return for the option premium, the
Funds accept the risk that they may be required to purchase the underlying
securities at a price in excess of the securities market value at the time of
purchase.
The Funds may terminate their obligations under a written call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Funds may purchase put and call options on any
securities in which they may invest or options on any securities index based on
securities in which they may invest. The Funds may also enter into closing sale
transactions in order to realize gains or minimize losses on options they have
purchased.
For certain options, the writer may be assigned an exercise notice at any time
prior to the termination of the obligation. Therefore, the writer may have no
control over when the underlying securities must be sold, in the case of call
options, or purchased, in the case of put options. Whether or not an option
expires unexercised, the writer retains the amount of the premium. This amount
may, in the case of a covered call option, be offset by a decline in the market
value of the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. If a
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put option is exercised, the writer must fulfill its obligation to purchase the
underlying security at the exercise price, which will usually exceed the then
market value of the underlying security.
The purchase of a call option would entitle the Funds, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Funds would ordinarily realize a gain if, during the option period,
the value of such securities exceeded the sum of the exercise price, the premium
paid and transaction costs; otherwise the Funds would realize either no gain or
a loss on the purchase of the call option.
Risks Associated With Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Funds are
unable to effect a closing purchase transaction with respect to covered options
they have written, the Funds will not be able to sell the underlying securities
or dispose of assets held in a segregated account until the options expire or
are exercised. Similarly, if the Funds are unable to effect a closing sale
transaction with respect to options they have purchased, they would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) an exchange may impose restrictions on opening and/or closing transactions;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the Options Clearing Corporation (the "OCC") may not at all
times be adequate to handle current trading volume; and (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), although outstanding options on that exchange that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The Funds may purchase and sell both options that are traded on U.S. and foreign
exchanges and options traded over-the-counter with broker-dealers who make
markets in these options. The ability to terminate over-the-counter options is
more limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations.
The Funds currently treat purchased over-the-counter options and all assets used
to cover written over-the-counter options as illiquid securities, except for
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price.
Restriction. Each of the Funds will write or purchase an option only when the
market value of that option, when aggregated with the market value of all other
options transactions made on behalf of the Fund, does not exceed 5% of the
Fund's net assets.
The Funds may purchase and sell various kinds of futures contracts and options
on futures contracts. The futures contracts may be based on various securities
(such as U.S. Government securities), securities
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indices, foreign currencies and other financial instruments and indices. All
futures contracts entered into by the Funds are traded on U.S. exchanges or
boards of trade that the CFTC licenses and regulates on foreign exchanges. The
Funds are not permitted to engage in speculative futures trading.
Futures Contracts. A futures contract generally may be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed-upon price during a designated month. In the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading
in the contract, the parties may agree to deliver the final cash settlement
price.
When interest rates are rising or securities prices are falling, the Funds may
seek, through the sale of futures contracts, to offset a decline in the value of
their current portfolio securities. When rates are falling or prices are rising,
the Funds, through the purchase of futures contracts, may attempt to secure
better rates or prices than might later be available in the market when they
effect anticipated purchases. Similarly, the International Fund may sell futures
contracts on a specified currency to protect against a decline in the value of
that currency and their portfolio securities that are denominated in that
currency. The International Fund may purchase futures contracts on a foreign
currency to fix the price in U.S. dollars of a security denominated in that
currency that the International Fund has acquired or expects to acquire.
Although futures contracts, by their terms, generally call for the actual
delivery or acquisition of underlying securities or the cash value of the index,
in most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take such delivery. The contractual
obligation is offset by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities or the cash value of
the index underlying the contractual obligations. The Funds may incur brokerage
fees when they purchase or sell futures contracts.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions, which may result in a profit
or a loss. While the Funds' futures contracts on securities or currency will
usually be liquidated in this manner, the Funds may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for them to do so. A clearing corporation associated
with the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Options on Futures Contracts. The acquisition of put and call options on futures
contracts will give the Funds the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Funds obtain the benefit of the futures position if
prices move in a favorable direction but limit their risk of loss in the event
of an unfavorable price movement to the loss of the premium and transaction
costs.
The writing of a call option on a futures contract generates a premium that may
partially offset a decline in the value of the Funds' assets. By writing a call
option, the Funds become obligated, in exchange for the premium, to sell a
futures contract that may have a value lower than the exercise price. Thus, the
loss incurred by the Funds in writing options on futures is potentially
unlimited and may exceed the amount of
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the premium received. The Funds will incur transaction costs in connection with
the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that these closing transactions can be effected. The Funds'
ability to establish and close out positions on these options will be subject to
the development and maintenance of a liquid market.
Hedging Strategies With Futures. Hedging by use of futures contracts seeks to
establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Funds own or propose to acquire. Such futures
contracts may include contracts for the future delivery of securities held by
the Funds or securities with characteristics similar to those of the Funds'
portfolio securities. Similarly, the International Fund sells futures contracts
on currency in which its portfolio securities are denominated or in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency if there is an established historical pattern of correlation
between the two currencies. If, in the opinion of the Investment Manager, there
is a sufficient degree of correlation between price trends for the Funds'
portfolio securities and futures contracts based on other financial instruments,
securities indices or other indices, the Funds may enter into such futures
contracts as part of their hedging strategy. Although, under some circumstances,
prices of securities in the Funds' portfolio may be more or less volatile than
prices of such futures contracts, the Investment Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns. The Investment Manager will attempt to compensate for it by having the
Funds enter into a greater or lesser number of futures contracts or by
attempting to achieve only a particular hedge against price changes affecting
the Funds' portfolio securities. When hedging of this character is successful,
any depreciation in the value of the portfolio securities will be substantially
offset by appreciation in the value of the futures position. On the other hand,
any unanticipated appreciation in the value of the Funds' portfolio securities
will be substantially offset by a decline in the value of the futures position.
On other occasions, the Funds may take "long" positions by purchasing such
futures contracts. This may be done when the Funds anticipate the subsequent
purchase of particular securities when they have the necessary cash but expect
the prices or currency exchange rates available on the intended date of purchase
in the applicable market to be less favorable than prices that are currently
available.
When buying or selling futures contracts, a Fund must deposit an amount of cash,
cash equivalents or liquid, high-quality debt instruments with its broker equal
to a fraction of the contract amount. This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the
contract, which will be returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. Subsequent
payments to and from the broker, known as "variation margin," will be made at
least daily as the price of the futures contract fluctuates and the Fund's
position in the contract becomes more or less valuable. This process is known as
"marking-to-market."
Regulations of the Commodities Futures Trading Commission ("CFTC") applicable to
the Funds generally require that all of their futures transactions constitute
"bona fide" hedging transactions. As a result, a Fund
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will normally sell futures contracts to protect against a decrease in the price
of securities it owns but intends to sell or purchase futures contracts to
protect against an increase in the price of securities it intends to purchase.
In addition, the Funds may purchase and sell futures contracts and options as a
substitute for a comparable market position in the underlying securities.
Futures transactions need not constitute "bona fide" hedging under CFTC
regulations if the aggregate initial margin and premiums required to establish
such positions do not exceed 5% of each Fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and options
transactions involve risks, which in some strategies can be substantial due to
the low margin deposits required and the extremely high degree of leverage
involved in futures and options trading. However, to the extent the Funds'
futures and options practices are limited to hedging purposes, the Investment
Manager does not believe that the Funds are subject to the degree of risk
frequently associated with futures and options transactions. To the extent the
Funds engage in the use of futures and options on futures other than for hedging
purposes, the Funds may be subject to additional risk.
The primary risks associated with the use of futures and options include:
imperfect correlation between the change in market value of the securities held
by a Fund and the prices of the futures or options, possible lack of a liquid
secondary market for futures or options, and the resulting inability to close
such positions prior to their maturity dates. To minimize these risks, the Funds
will invest only in those contracts whose behavior is expected to resemble that
of a Fund's underlying securities. The Funds will attempt to minimize the risks
being unable to close out futures positions by entering into these transactions
on a national exchange with an active and liquid secondary market.
Three principal areas of risk are present when futures and options contracts are
used even in a hedging context. First, there may not always be a liquid
secondary market for a futures or option contract at the time a Fund seeks to
"close out" its position. If a Fund is unable to "close out" a futures or option
position and prices move adversely, the Fund would have to continue to make
daily cash payments to maintain its required margin. If the Fund had
insufficient cash to meet this requirement, it would have to sell portfolio
securities at a disadvantageous time. In addition, the Fund might be required to
deliver the securities underlying futures or options contracts it holds. Each
Fund will seek to reduce the risk that it will be unable to "close out"
contracts by entering into only futures or options contracts that are traded on
national exchanges and for which there appears to be a liquid secondary market.
It is also possible that changes in the prices of futures or options contracts
might correlate imperfectly, or not at all, with changes in the market values of
the securities being hedged. This situation could result from price distortions
in the futures or options markets due to, among other things, active trading by
speculators and use of offsetting "closing" transactions by other investors
seeking to avoid meeting additional margin deposit requirements. In the event of
significant market distortions, it is possible that a Fund could lose money on
futures or options contracts and experience appreciation in the value of its
portfolio securities, or vice versa.
Finally, adverse market movements could cause a Fund to lose up to its full
investment in an options contract and/or to experience substantial losses on an
investment in a futures contract. However, barring such significant market
distortions, a similar result could be expected were the Fund to invest directly
in the
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securities being hedged. There is also the risk of loss by a Fund of margin
deposits in the event of bankruptcy of a broker with whom the Fund has an open
position in a futures contract or option.
Restrictions. The value of all futures contracts on stocks and stock indices and
options contracts is not to exceed 10% of the Small-Cap Fund's and the
International Fund's total assets. Each Fund may enter into futures contracts
and options on futures contracts provided that aggregate deposits required do
not exceed 5% of its total assets. In addition, certain provisions of the
Internal Revenue Code of 1986, as amended, (the "Code"), may limit each Fund's
use of futures contracts and options.
Index participations and index participation contracts provide the equivalent of
a position in the securities comprising an index, with each security's
representation equaling its index weighting. Moreover, their holders are
entitled to payments equal to the dividends paid by the underlying index
securities . Generally, the value of an index participation or index
participation contract will rise and fall along with the value of the related
index. A Fund will invest in equity index participations and index participation
contracts only if a liquid market for them appears to exist.
Restriction. The Schwab 1000 Fund may not invest more than 5% of its total
assets in equity index participations.
The extent to which each Fund may purchase and sell futures, options, equity
index participations and index participation contracts may be limited by each
Fund's intention to meet Code requirements for qualification as a regulated
investment company. Read the "Taxes" section in this Statement of Additional
Information (SAI) for more information." An underlying fund's investment in such
instruments may similarly be restricted by Code requirements.
ILLIQUID SECURITIES. Investments that cannot be sold or disposed of in the
normal course of business at their approximate value will be considered
illiquid. The Investment Manager determines the liquidity of a Fund's
investments under the supervision and direction of the Board of Trustees.
Investments currently considered illiquid are repurchase agreements not maturing
within seven days and some restricted securities.
INDEXED SECURITIES. The International Fund may purchase securities whose prices
are indexed to the prices of other securities, securities, indexes, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities are typically debt securities or deposits whose value at maturity or
interest rate paid is determined by reference to a specified instrument.
INTERNATIONAL INVESTMENTS. The International Fund will invest primarily in
foreign securities. International investing involves certain special
considerations, which are typically not associated with investing in U.S.
issuers. Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries. Foreign companies are not subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies. In addition,
there may be less publicly available information about foreign companies.
Foreign securities typically have less volume, and are generally less liquid and
more volatile than securities of U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher
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than negotiated commissions on U.S. exchanges, although the International Fund
endeavors to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
foreign securities exchanges, brokers, dealers and listed companies than in the
United States, thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. There may be
difficulties in obtaining or enforcing judgments against foreign issuers as
well. These factors and others may increase the risks with respect to the
liquidity of the International Fund's portfolio, and the Fund's ability to meet
a large number of shareholder redemption requests.
Foreign markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of the International Fund is uninvested and no
return is earned thereon. The inability to make intended security purchases due
to settlement problems could cause the International Fund to miss attractive
investment opportunities. Losses to the International Fund arising out of the
inability to fulfill a contract to sell such securities could result in
potential liability to the Fund.
Investments in the securities of foreign issuers are usually made and held in
foreign currencies. In addition, the International Fund may hold cash in foreign
currencies. These investments may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and may cause a
Fund to incur costs in connection with conversions between various currencies.
The rate of exchange between the U.S. dollar and other currencies is determined
by the forces of supply and demand in the foreign exchange market as well as by
political and economic factors. Changes in the foreign currency exchange rates
also may affect the value of dividends and interest earned, gains and losses
realized on the sale of securities, and net investment income and gains, if any,
to be distributed to shareholders by the International Fund.
In addition, conditions within and around foreign countries, such as the
possibility of expropriation or confiscatory taxation, political or social
instability, diplomatic developments, change of government or war, could affect
the value of foreign investments. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the recent incorporation of the British
Crown Colony of Hong Kong into the People's Republic of China. Shareholders
should note that the risks discussed above may increase depending on political
and economic developments.
Securities that are acquired by the International Fund outside the United States
and that are publicly-traded in the United States on a foreign securities
exchange or in a foreign securities market, are not considered by the Fund to be
illiquid assets provided that: (i) the Fund acquires and holds the securities
with the intention of reselling the securities in the foreign trading market,
(ii) the Fund reasonably believes it can dispose of the securities readily in
the foreign trading market or for cash in the United States, or (iii) foreign
market and current market quotations are readily available. Investments in
foreign securities where delivery takes place outside the United States will
have to be made in compliance with any applicable U.S. and foreign
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currency restrictions and tax laws (including laws imposing withholding taxes on
any dividend or interest income) and laws limiting the amount and types of
foreign investments.
LENDING AND DIRECT DEBT. Direct debt instruments represent ownership interests
in the debt of a company, government or other entity. Lending of securities is a
common practice in the securities industry. The Funds will engage in security
lending arrangements with the primary objective of increasing the Funds' income
through investment of the cash collateral in short-term, interest-bearing
obligations but will do so only to the extent that the Funds will not lose the
tax treatment available to regulated investment companies. The Funds will be
entitled to all dividends or interest on any loaned securities. Loans of
securities involve a risk that the borrower may fail to return the securities or
provide additional collateral. The Funds may loan securities to qualified
broker-dealers or other institutional investors provided: (i) the loan is
secured continuously by collateral consisting of U.S. Government securities,
cash or cash equivalents maintained on a daily marked-to-market basis in an
amount at least equal to the current market value of the securities loaned; (ii)
the Fund may at any time call the loan and obtain the return of the securities
loaned; (iii) the Fund will receive any interest or dividends paid on the loaned
securities; and (iv) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund.
MORTGAGE-BACKED SECURITIES represent an interest in an underlying pool of
mortgages. Issuers of these securities include agencies and instrumentalities of
the U.S. Government, such as the Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association, and private entities, such as banks. The
income paid on mortgage-backed securities depends upon the income received from
the underlying pool of mortgages. These securities are subject to interest rate
risk, like other debt securities,
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in addition to prepayment risk. Mortgage-backed securities include
collateralized mortgage obligations, mortgage-backed bonds and stripped
mortgage-backed securities.
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MONEY MARKET SECURITIES are high-quality, short-term securities that may be
issued by entities such as the U.S. Government, corporations and financial
institutions (like banks).
PRECIOUS METAL-RELATED INVESTMENTS. Prices of precious metals can be expected to
respond to changes in rates of inflation and to perceptions of economic and
political instability. Historically, the prices of precious metals and of
securities of companies engaged in the precious metal-related activities have
been subject to extreme fluctuations, as a result of, among other reasons, wider
economic or political instability. The S&P 500 Fund may invest in common stocks
of domestic companies principally engaged in precious metal-related activities,
which include companies principally engaged in the extraction, processing,
distribution or marketing of precious metals, if, at the time of investment, the
Investment Manager considers that at least 50% of the company's assets, revenues
or profits are derived from the precious metal industry.
The S&P 500 Fund also may invest in futures on precious metals, such as gold
futures, and options thereon. Such investments are subject to the investment
limitations on investments in futures and options for the S&P 500 Fund as set
forth in the "Futures Contracts and Options on Futures Contracts" section of the
SAI.
PREFERRED STOCK. The Funds may invest in preferred stock. Preferred stock has
priority over common stock as to income and generally as to assets of an issuer;
however, income is usually limited to a definitive percentage regardless of the
issuer's earnings. Preferred stock usually has limited voting rights.
REAL ESTATE-RELATED INVESTMENTS. Real estate-related instruments include real
estate investment trusts, commercial and residential mortgage-backed securities
and real estate financings. Real estate-related instruments are sensitive to
factors such as changes in real estate values and property taxes, interest
rates, cash flow of underlying real estate assets, overbuilding, and the
management skill and creditworthiness of the issuer. Real estate-related
instruments also may be affected by certain tax and regulatory requirements,
such as those relating to the environment.
REPURCHASE AGREEMENTS. Repurchase agreements are instruments under which a buyer
acquires ownership of a security from a seller who agrees to repurchase the
security at a mutually agreed upon time and price (which price is higher than
the purchase price), thereby determining the yield during the buyer's holding
period. Under the 1940 Act, a repurchase agreement is deemed to be a Fund's loan
of money to the seller, collateralized by the underlying security. The interest
rate is effective for the period of time in which the Funds are invested in the
agreement and is not related to the coupon rate on the underlying security. Any
repurchase agreements a Fund enters into will involve the Fund as the buyer and
banks or broker-dealers as sellers (repurchase agreements with broker-dealers
will be limited to obligations of the U.S. Government or its agencies or
instrumentalities). The period of these repurchase agreements will be usually
short--from overnight to one week--and at no time will the Funds invest in
repurchase agreements for more than one year. However, securities subject to
repurchase agreements may have maturity dates in excess of one year from the
effective date of the repurchase agreements. The transaction requires the
initial collateralization of the seller's obligation with securities having a
market value, including accrued interest, equal to at least 102% of the dollar
amount the Funds invest with the value marked-to-market daily to maintain 100%
coverage. A default by the seller might cause the Funds to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Funds might also incur disposition costs in liquidating
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the collateral. The Funds will make payment for such securities only upon
physical delivery or evidence of book entry transfer to the account of its
custodian bank.
Restriction. The Funds may not enter into a repurchase agreement of more than
seven days duration if, as a result, the market value of the Funds' net assets,
together with investments in other securities deemed to be not readily
marketable, would be invested in excess of the Funds' policy on investments in
illiquid securities.
In the event of a bankruptcy or other default of a repurchase agreement's
seller, a Fund might incur expenses in enforcing its rights, and could
experience losses, including a decline in the value of the underlying securities
and loss of income.
Restriction. Each Fund will not invest more than 10% of its net assets at the
time of purchase in repurchase agreements maturing in more than seven days and
other illiquid securities.
RESTRICTED SECURITIES. Restricted securities are securities that are subject to
legal restrictions on their sale. Restricted securities may be considered to be
liquid if a liquid institutional or other market exists for these securities. In
making this determination, the Investment Manager, under the direction of the
Board of Trustees, will take into account the following factors: (i) the
frequency of trades and quotes for the security; (ii) the number of dealers
willing to purchase or sell the security and the number of potential purchasers;
(iii) dealer undertakings to make a market in the security; and (iv) the nature
of the security and marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). To the
extent the Funds invest in restricted securities that are deemed liquid, the
general level of illiquidity in the Funds' portfolios may be increased if
qualified institutional buyers become uninterested in purchasing these
securities contracts.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may buy shares of other
investment companies, including those managed by its Investment Manager. Because
other investment companies employ investment adviser and other service
providers, investments by a Fund may cause shareholders to pay duplicative fees.
Restriction. No more than 10% of a Fund's total assets may be invested in other
investment companies, and an investment in any one investment company will be
limited to 5% of a Fund's total assets.
STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately from each other. While the risks associated with
stripped securities are similar to other securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
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SWAP AGREEMENTS are an exchange of one security or asset for another. A swap may
be entered into in order to change the maturity of a Fund's portfolio or to
protect a Fund's value from changes in interest rates. By entering into a swap
agreement, a Fund is exposed to the risk that the counter party will not fulfill
its obligations.
U.S. GOVERNMENT SECURITIES are debt securities issued by the U.S. Treasury or
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities. U.S. Treasury securities are backed by the full faith and
credit of the United States. Not all U.S. Government securities are backed by
the full faith and credit of the United States. Some U.S. Government securities
are supported by a line of credit the issuing entity has with the U.S. Treasury.
Others are supported solely by the credit of the issuing agency or
instrumentality. Of course U.S. Government securities are among the safest
securities, but they are still subject to interest rate changes which may affect
their yields.
WARRANTS. The Funds may invest in warrants, which are options to purchase equity
securities at specific prices valid for a specific period of time. The prices do
not necessarily move parallel to the prices of the underlying securities.
Warrants have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer. If a warrant is not exercised within the
specified time period, it will become worthless and a Fund will lose the
purchase price and the right to purchase the underlying security.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Funds may hold securities on a
"when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, a Fund will not pay for securities until the Fund receives
them. Securities purchased on a when-issued or delayed delivery basis are
recorded as assets. During the period between the agreement date and the
settlement date, the value of such securities may change as the prices of
securities in the stock market increase or decrease, or as interest rates
change. Default by the other party to the agreement may result in a loss to a
Fund.
INVESTMENT RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and cannot be
changed without approval of the holders of a majority of the outstanding voting
securities (as defined in the 1940 Act).
THE INTERNATIONAL FUND, THE SMALL-CAP FUND AND THE S&P FUND MAY NOT:
1) As to 75% of its assets, purchase securities of any issuer
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities or investments in other registered investment companies)
if, as a result, more than 5% of the value of its total assets would be invested
in the securities of such issuer.
2) Purchase securities (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if, as a
result of such purchase, 25% or more of the value of its total assets would be
invested in any industry (except that each Fund may purchase securities under
such circumstances only to the extent that its Index is also so concentrated).
17
<PAGE> 41
3) Invest more than 10% of its net assets in illiquid securities,
including repurchase agreements with maturities in excess of seven day.
4) Purchase or retain securities of an issuer if any of the
officers, Trustees or Directors of the Trust or the Investment Manager
individually own beneficially more than 1/2 of 1% of the securities of such
issuer and together beneficially own more than 5% of the securities of such
issuer.
5) Purchase or sell commodities, commodity contracts or real
estate, including interests in real estate limited partnerships, provided that
each Fund may (i) purchase securities of companies that deal in real estate or
interests therein, (ii) purchase or sell futures contracts, options contracts,
equity index participations and index participation contracts, and (iii) for the
S&P 500 Fund, purchase securities of companies that deal in precious metals or
interests therein.
6) Invest for the purpose of exercising control or management of
another issuer.
7) Purchase securities of other investment companies, except as
permitted by the 1940 Act, including any exemptive relief granted by the SEC.
8) Lend money to any person, except that each Fund may (i)
purchase a portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) that are distributed publicly or
customarily purchased by institutional investors, and (ii) lend its portfolio
securities.
9) Borrow money or issue senior securities, except that each Fund
may borrow from banks as a temporary measure to satisfy redemption requests or
for extraordinary or emergency purposes and then only in an amount not to exceed
one-third of the value of its total assets (including the amount borrowed),
provided that each Fund will not purchase securities while borrowings represent
more than 5% of its total assets.
10) Pledge, mortgage or hypothecate any of its assets, except
that, to secure allowable borrowings, each Fund may do so with respect to no
more than one-third of the value of its total assets.
11) Underwrite securities issued by others, except to the extent
it may be deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment portfolio.
18
<PAGE> 42
In addition to Investment Restrictions numbered 2, 4, 6, 7, 8, 10, and 11 above,
the Schwab 1000 Fund has the following additional fundamental policies.
The Schwab 1000 Fund may not:
1) As to 75% of its assets, purchase securities of any issuer
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or instrumentalities) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of such issuer.
2) Invest more than 10% of the total value of its assets in
illiquid securities, including repurchase agreements with maturities in excess
of seven days.
3) Purchase or sell commodities or real estate, including
interests in real estate limited partnerships, provided that the fund may (i)
purchase securities of companies that deal in real estate or interests therein,
and (ii) purchase or sell futures contracts, options contracts, equity index
participations and index participation contracts.
4) Borrow money except from banks as a temporary measure to
satisfy redemption requests or for extraordinary or emergency purposes and then
only in an amount not to exceed one-third of the value of its total assets
(including the amount borrowed), provided that the fund will not purchase
securities while borrowings represent more than 5% of its total assets.
The Small-Cap Fund has the following additional fundamental limitation.
THE SMALL-CAP FUND will invest at least 65% of its total assets in common
stocks, or other equity securities including preferred stocks, rights and
warrants.
The International Fund has the following additional fundamental limitation.
THE INTERNATIONAL FUND will invest at least 65% of its total assets in common
stocks, or other equity securities including preferred stocks, rights and
warrants of companies located in at least three different countries other than
the United States.
In order to permit the sale of shares of each Fund in certain jurisdictions,
each Fund may make commitments more restrictive than the fundamental operating
restrictions described above. Should it do so and later determine that any such
commitment is no longer in the best interests of the Fund and its shareholders,
it will revoke the commitment(s) by terminating sales of its shares in the
jurisdiction(s) involved.
The following restrictions are non-fundamental and may be changed by the Trust's
Board of Trustees.
EACH FUND MAY NOT:
19
<PAGE> 43
a) Purchase more than 10% of any class of securities of any
issuer if, as a result of such purchase, it would own more than 10% of such
issuer's outstanding voting securities.
b) Invest more than 5% of its net assets in warrants, valued at
the lower of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the American
Stock Exchange, provided, however, that for purposes of this restriction,
warrants acquired by a Fund in units or attached to other securities are deemed
to be without value.
c) Purchase puts, calls, straddles, spreads or any combination
thereof if by reason of such purchase the value of its aggregate investment in
such securities would exceed 5% of the Fund's net assets.
d) Make short sales, except for short sales against the box.
e) Purchase or sell interests in oil, gas or other mineral
development programs or leases, although it may invest in companies that own or
invest in such interests or leases.
f) Purchase securities on margin, except such short-term credits
as may be necessary for the clearance of purchases and sales of securities.
The Schwab 1000 Fund has the following additional non-fundamental investment
limitations.
THE SCHWAB 1000 FUND MAY NOT:
i) Invest more than 5% of its total assets in securities of
issuers (other that obligations of, guaranteed by the U.S. Government, its
agencies or instrumentalities) that, with their predecessors, have a record of
less than three years continuous operation.
ii) Purchase securities that would cause more that 5% of its net
assets to be invested in restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that
have been determined to be liquid under procedures adopted by the Trust's Board
of Trustees based upon the trading markets for the securities.
ORGANIZATION AND MANAGEMENT OF THE TRUSTS
Each Fund, except the Schwab 1000 Fund, is a series of Schwab Capital Trust (a
Trust), an open-end investment management company organized as a Massachusetts
business trust on May 7, 1993. The Schwab 1000 Fund is a series of Schwab
Investments (a Trust), an open-end investment management company organized as a
Massachusetts business trust on October 26, 1990. Each trust is authorized to
issue and unlimited number of shares of beneficial interests in one or more
series or classes of series (funds and/or classes of funds). Currently, Schwab
Investments offers the following series: Schwab 1000 Fund, Schwab Total Bond
Market Index Fund, Schwab Short Bond Market Index Fund, Schwab
Short/Intermediate Tax-Free Bond Fund, Schwab Long-Term Tax-Free Bond Fund,
Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab California
Long-Term Tax-Free Bond Fund.
20
<PAGE> 44
Currently, Schwab Capital Trust offers the following series: S&P 500 Fund,
International Fund, Small-Cap Fund, Analytics Fund, Schwab Asset Director- High
Growth Fund, Schwab Asset Director- Balanced Fund, Schwab Asset Director-
Conservative Fund, Schwab OneSource Portfolios- Growth Allocation Fund, Schwab
OneSource Portfolios- Balanced Allocation Fund, Schwab OneSource Portfolios-
International Fund, and Schwab OneSource Portfolios- Small Company Fund.
The Trusts generally are not required to hold shareholder meetings. However,
shareholder meetings will be held in connection with the following matters: (1)
election or removal of Trustees if a meeting is requested in writing by a
shareholder or shareholders who beneficially own(s) 10% or more of the Trust's
shares; (2) adoption of any contract for which shareholder approval is required
by the 1940 Act; (3) any termination of the Trust to the extent and as provided
in the Declaration of Trust; (4) any amendment of the Declaration of Trust
(other than amendments changing the name of the Trust or any of its investment
portfolios, supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision thereof); (5)
determining whether a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the shareholders, to the same extent as the stockholders of a Massachusetts
business corporation; and (6) such additional matters as may be required by law,
the Declaration of Trust, the Bylaws or any registration of the Trust with the
SEC or any state or as the Board of Trustees may consider desirable. The
shareholders also would vote upon changes to a Fund's fundamental investment
objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing Trustees and until the election and qualification of his
or her successor or until death, resignation, retirement or removal by a
majority vote of the shares entitled to vote (as described below) or of a
majority of the Trustees. In accordance with the 1940 Act, (i) the Trust will
hold a shareholder meeting for the election of Trustees when less than a
majority of the Trustees have been elected by shareholders and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
Trustees have been elected by the shareholders, that vacancy will be filled by a
vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such for at
least six months and who hold shares constituting at least 1% of a Trust's
outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more Trustees, each Trust has undertaken
to disseminate appropriate materials at the expense of the requesting
shareholders.
The Bylaws of each Trust provide that a majority of shares entitled to vote
shall be a quorum for the transaction of business at a shareholders' meeting,
except that where any provision of law, of the Declaration of Trust or of the
Bylaws permits or requires that (i) holders of any series shall vote as a
series, then a majority of the aggregate number of shares of that series
entitled to vote shall be necessary to constitute a quorum for the transaction
of business by that series, or (ii) holders of any class shall vote as a class,
then a majority of the aggregate number of shares of that class entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that class. Any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting, without the necessity of further notice. The
Declaration of Trust of each Trust
21
<PAGE> 45
specifically authorizes the Board of Trustees to terminate the Trust (or any of
its investment portfolios) by notice to the shareholders without shareholder
approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the Trust solely by reason of being or having been a shareholder. Moreover,
the Trust will be covered by insurance which the Trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
Trust itself is unable to meet its obligations. There is a remote possibility
that a Fund could become liable for a misstatement in the prospectus or SAI
about another Fund.
For further information, please refer to the registration statement and exhibits
for the Trust on file with the SEC in Washington, D.C. and available upon
payment of a copying fee. The statements in the Prospectus and this Statement of
Additional Information concerning the contents of contracts or other documents,
copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
PRINCIPAL HOLDERS OF SECURITIES
As of ______________, 1997, two trustees owned approximately [xx]% of the total
outstanding shares of the Conservative Growth Fund. As of this same date, the
officers and Trustees of the Trusts, as a group, owned of record or beneficially
less than 1% of the outstanding voting securities of the other Funds.
As of ______________, 1997, the Charles Schwab Trust Company, 101 Montgomery
Street, San Francisco, California, 94104, directly or beneficially owned [xx]%
of the International Fund - Select Shares, [xx]% of the Small-Cap Fund -
Select Shares, [xx]% of the S&P 500 Fund - Investor Shares, [xx]% of the S&P 500
Fund - Select Shares, and [xx]% of the S&P 500 Fund - e.Shares. As of this same
date, the Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New York,
11201, directly or beneficially owned [xx]% of International Fund - Investor
Shares and [xx]% of the Small-Cap Fund - Investor Shares.
OFFICERS AND TRUSTEES
The officers and Trustees of the Trusts, their principal occupations over the
past five years and their affiliations, if any, with The Charles Schwab
Corporation, Schwab and the Investment Manager, are as follows:
22
<PAGE> 46
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Chief Executive Officer and
July 29, 1937 Director, The Charles Schwab Corporation;
Chairman and Director, Charles Schwab & Co.,
Inc. and Charles Schwab Investment
Management, Inc.; Chairman and Director, The
Charles Schwab Trust Company; Chairman and
Director (current board positions), and
Chairman (officer position) until December
1995, Mayer & Schweitzer, Inc. (a securities
brokerage subsidiary of The Charles Schwab
Corporation); Director, The Gap, Inc. (a
clothing retailer), Transamerica Corporation
(a financial services organization),
AirTouch Communications (a
telecommunications company) and Siebel
Systems (a software company).
TIMOTHY F. McCARTHY** President and Trustee Executive Vice President and President -
September 19, 1951 Financial Products and International Group,
Charles Schwab & Co., Inc.; Executive Vice
President-President, Financial Products and
International Group, The Charles Schwab
Corporation; Chief Executive Officer,
Charles Schwab Investment Management, Inc.;
Vice Chairman and Chief Operating Officer,
Charles Schwab Limited; Director, Mayer &
Schweitzer. From 1994 to 1995, Mr. McCarthy
was Chief Executive Officer, Jardine Fleming
Unit Trusts Ltd.; Executive Director,
Jardine Fleming Holdings Ltd.; Chairman,
Jardine Fleming Taiwan Securities Ltd.; and
Director of JF India and Fleming Flagship,
Europe. Prior to 1994, he was President of
Fidelity Investments Advisor Group, a
division of Fidelity Investments in Boston.
</TABLE>
*Mr. Schwab is an "interested person" of the Trust.
23
<PAGE> 47
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
DONALD F. DORWARD Trustee Executive Vice President and Managing Director,
September 23, 1931 Grey Advertising. From 1990 to 1996, Mr. Dorward
was President and Chief Executive Officer, Dorward
& Associates. Dorward and Associates is an
advertising and marketing/consulting firm.
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. Semloh Financial is an
international financial services and investment
advisory firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co.
June 28, 1938 (investment banking). From 1985 to 1995, Mr.
Stephens was Chairman and Chief Executive
Officer of North American Trust (a real
estate investment trust). Prior to 1992, Mr.
Stephens was Chairman and Chief Executive
Officer of the Bank of San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
</TABLE>
**Mr. McCarthy is an "interested person" of the Trust.
24
<PAGE> 48
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
TAI-CHIN TUNG Treasurer and Principal Vice President - Finance, Charles Schwab & Co.,
March 7, 1951 Financial Officer Inc.; Controller, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Ms. Tung was
Controller for Robertson Stephens Investment
Management, Inc. From 1993 to 1994, she was Vice
President of Fund Accounting, Capital Research and
Management Co. Prior to 1993, Ms. Tung was Senior
Vice President of the Sierra Funds and Chief
Operating Officer of Great Western Financial
Securities.
WILLIAM J. KLIPP* Executive Vice President, Executive Vice President-SchwabFunds(R), Charles
December 9, 1955 Chief Operating Officer Schwab & Co., Inc.; President and Chief Operating
and Trustee Officer, Charles Schwab Investment Management, Inc.
Prior to 1993, Mr. Klipp was Treasurer of Charles
Schwab & Co., Inc. and Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice President and Senior Vice President and Chief Investment Officer,
April 5, 1955 Chief Investment Charles Schwab Investment Management, Inc.
Officer
FRANCES COLE Secretary Senior Vice President, Chief Counsel, Chief
September 9, 1955 Compliance Officer and Assistant Corporate
Secretary, Charles Schwab Investment Management,
Inc.
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel - Charles Schwab
October 14, 1960 Investment Management, Inc. From 1991 to 1992, he
was Assistant Secretary and Assistant Corporate
Counsel for the Franklin Group of Mutual Funds.
</TABLE>
*Mr. Klipp is an "interested person" of the Trust.
25
<PAGE> 49
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
MATTHEW M. O'TOOLE Assistant Secretary Corporate Counsel - Charles Schwab Investment
September 26, 1964 Management, Inc. From November, 1995 to April,
1997, Mr. O'Toole was Assistant General Counsel for
Chancellor LGT Asset Management. Inc. Prior thereto
Mr. O'Toole was Senior Counsel at the Securities
and Exchange Commission in Washington, D.C.
KAREN L. SEAMAN Assistant Secretary Corporate Counsel - Charles Schwab Investment
February 27, 1968 Management, Inc. From October, 1994 to July 1996,
Ms. Seaman was Attorney for Franklin Resources,
Inc. Prior to 1994, Ms. Seaman was an attorney for
The Benham Group.
</TABLE>
Each of the above-referenced Officers and/or Trustees also serves in
the same capacity for The Charles Schwab Family of Funds and Schwab Annuity
Portfolios. The address of each individual listed above is 101 Montgomery
Street, San Francisco, California 94104.
26
<PAGE> 50
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or Retirement
Benefits Accrued as Estimated Annual
Aggregate Aggregate Part of Fund Expenses Benefits upon Total Compensation
Name of Person, Compensation from Compensation from from the Fund Complex(2) Retirement from the from the Fund
Position Schwab Capital Trust Schwab Investments Fund Complex(2)
Complex(2)
<S> <C> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Timothy F. McCarthy, 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice
President, Chief
Operating Officer and
Trustee
Donald F. Dorward, [xxx] N/A N/A [xxx]
Trustee
Robert G. Holmes, [xxx] N/A N/A [xxx]
Trustee
Donald R. Stephens, [xxx] N/A N/A [xxx]
Trustee
Michael W. Wilsey, [xxx] N/A N/A [xxx]
Trustee
</TABLE>
(1) Figures are for the Trust's fiscal year ended October 31,
1997.
(2) "Fund Complex" comprises all 30 funds of the Trust, The
Charles Schwab Family of Funds, Schwab Investments and Schwab
Annuity Portfolios.
DEFERRED COMPENSATION PLAN
Pursuant to exemptive relief from the SEC, the Trusts may enter into deferred
fee arrangements (the "Fee Deferral Plan" or the "Plan") with Trustees who are
not "interested persons" of any of the Funds (the "Independent Trustees" or the
"Trustees").
As of the date of this SAI, none of the Independent Trustees has elected to
participate in the Fee Deferral Plan. In the event an Independent Trustee does
elect to participate in the Plan, the Plan would operate as described below.
27
<PAGE> 51
Under the Plan, deferred Trustee's fees will be credited to a book reserve
account established by the Trust (the "Deferred Fee Account") as of the date
such fees would have been paid to such Trustee. The value of the Deferred Fee
Account as of any date will be equal to the value the Account would have had as
of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the Schwab fund or SchwabFunds(R) selected by
the participating Trustee (the "Selected Schwab fund Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, The Charles
Schwab Family of Funds and Schwab Investments.
Pursuant to the exemptive relief from the SEC, each Fund will purchase and
maintain the Selected Schwab fund Securities in an amount equal to the deemed
investments in that Fund of the Deferred Fee Accounts of the Independent
Trustees. The exemptive relief granted to the Trust permits the Funds and the
Trustees to purchase the Selected Schwab fund Securities, which transactions
would otherwise be limited or prohibited by the investment policies and/or
restrictions of the Funds. See "Investment Restrictions in this SAI for more
information."
MANAGEMENT OF THE FUNDS
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to Investment Advisory and Administration Agreements (the "Advisory Agreements")
between it and each Trust. The Investment Manager is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended, and currently
provides investment management services to the SchwabFunds Family(R), a family
of 30 mutual funds with over $[xx] billion in assets as of [_______], 1997. The
Investment Manager is an affiliate of: Schwab, the Trusts' distributor, the
shareholder services, and the transfer agent. Each Advisory Agreement will
continue in effect until May 30, 1998 with respect to each of the Funds and
thereafter will continue for one year terms subject to annual approval by: (1)
the Board of Trustees or (2) a vote of a majority (as defined in the 1940 Act)
of the outstanding voting securities of a Fund. In either event, the continuance
also must be approved by a majority of the Board of Trustees who are not parties
to the Agreement or interested persons (as defined in the 1940 Act) of any such
party by vote cast in person at a meeting called for the purpose of voting on
such approval. Each Advisory Agreement may be terminated at any time upon 60
days' notice by either party, or by a majority vote of the outstanding shares of
a Fund, and will terminate automatically upon assignment.
International Fund. For its advisory and administrative services to the
International Fund, the Investment Manager is entitled to receive a graduated
annual fee, payable monthly, of 0.70% of the Fund's average daily net assets not
in excess of $300 million and 0.60% of such assets over $300 million.
The Investment Manager and Schwab have guaranteed that, through at least
February 29, 2000, the total fund operating expenses allocable to the Investor
Shares and Select Shares for the International Fund will not exceed 0.58% and
0.47%, respectively, of the average daily net assets of each class of shares.
28
<PAGE> 52
For the fiscal years ended October 31, 1997, 1996 and 1995, the International
Fund paid investment advisory fees of $_______, $886,000, and $665,000,
respectively (fees were reduced by $______, $675,000, and $415,000,
respectively).
Small-Cap Fund. For its advisory and administrative services to the Small-Cap
Fund, the Investment Manager is entitled to receive a graduated annual fee,
payable monthly, of 0.50% of the Fund's average daily net assets not in excess
of $300 million and 0.45% of such assets over $300 million.
The Investment Manager and Schwab have guaranteed that, through at least
February 29, 2000, the total fund operating expenses allocable to the Investor
Shares and Select Shares for the Small-Cap Fund will not exceed 0.49% and 0.38%,
respectively, the average daily net assets of each class of shares.
For the fiscal years ended October 31, 1997, 1996, and 1995, the Small-Cap Fund
paid investment advisory fees of $______, $520,000, and $332,000, respectively
(fees were reduced by $______, $347,000, and $115,000, respectively).
Schwab 1000 Fund. For its advisory and administrative services to the Schwab
1000 Fund, the Investment Manager is entitled to receive a graduated annual fee,
payable monthly, of 0.30% of the Fund's average daily net assets not in excess
of $500 million and 0.22% of such assets over $500 million.
The Investment Manager and Schwab have guaranteed that, through at least
February 29, 2000, the total fund operating expenses allocable to the Investor
Shares and Select Shares for the Schwab 1000 Fund will not exceed 0.46% and
0.35%, respectively, of the Fund's average daily net assets.
For the fiscal year ended August 31, 1997, 1996 and 1995, the Schwab 1000 Fund
paid investment advisory fees of $_______, $2,485,000 and $1,640,000, (reduced
by $______, 648,000 and $137,000, respectively) and for the fiscal period ended
October 31, 1997 $_______ (reduced by $_____).
S&P 500 Fund. For its advisory and administrative services to the S&P 500 Fund,
the Investment Manager is entitled to receive a graduated annual fee, payable
monthly, of 0.36% of the Fund's average daily net assets not in excess of $1
billion, 0.33% of the next $1 billion and 0.31% of such net assets over $2
billion.
The Investment Manager and Schwab have guaranteed that, through at least
February 29, 2000, the total operating expenses allocable to the Investor
Shares, the e.Shares(TM) and the Select Shares(TM) will not exceed 0.35%, 0.28%
and 0.19% respectively, of the average daily net assets of each class of shares.
For the fiscal year ended October 31, 1997 and for the fiscal period of May 1,
1996 (commencement of operations) to October 31, 1996, the S&P 500 Fund paid
investment advisory fees of $______ and $128,000, respectively (fees were
reduced by $______ and $223,000 respectively).
From time to time, each Fund may compare its total operating expense ratio to
the total operating expense ratio of other mutual funds or mutual fund averages
with similar investment objectives as reported by Lipper Analytical Service,
Inc., Morningstar, Inc. or other independent sources of such information
("independent sources").
29
<PAGE> 53
SUB-ADVISER
As of May 1, 1995, June 1, 1995 and June 30, 1995, Dimensional Fund Advisors
Inc. ("Dimensional") no longer served as the sub-adviser to the Small-Cap Fund,
Schwab 1000 Fund and International Fund, respectively. As of the same dates, the
Investment Manager became responsible for providing all investment advisory
services to the Funds.
Under the Sub-Advisory Agreement between Dimensional and the Investment Manager,
the Investment Manager paid Dimensional the following amounts for the fiscal
periods indicated below.
For the fiscal years ended October 31, 1997, 1996 and 1995, Dimensional was paid
$0, $0, and $143,000, respectively, by the Investment Manager for the
International Fund.
For the fiscal year ended October 31, 1997, 1996 and 1995, Dimensional was paid
$0, $0,and $36,000, respectively, by the Investment Manager for the Small-Cap
Fund.
For the fiscal years ended August 31, 1997, 1996 and 1995, Dimensional was paid
$0, $0 and $436,034, respectively, by the Investment Manager for the S&P 500
Fund.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of the Funds and is the Trusts' agent for the purpose of the continuous
offering of the Funds' shares. Each Fund pays the cost of the prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective investors and for supplementary sales
literature and advertising. Schwab receives no fee under the Distribution
Agreement. Terms of continuation, termination and assignment under the
Distribution Agreement are identical to those described above with respect to
the Advisory Agreement.
CUSTODIAN AND FUND ACCOUNTANT
Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New York 11201, and
Federated Services Company, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222,
serve as Custodian and Fund Accountant for the Funds except the S&P 500 Fund.
For this Fund PNC Bank, 400 Bellvue Parkway, Wilmington, Delaware 19809 serves
as custodian and PFPC, Inc., 103 Bellvue Parkway, Wilmington, Delaware 19809
serves as Fund Accountant to the S&P 500 Fund.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the Funds, the Investment Manager seeks
to obtain best price and execution. Subject to the supervision of the Board of
Trustees, the Investment Manager will generally select brokers and dealers for
the Funds primarily on the basis of the quality and reliability of brokerage
services, including execution capability and financial responsibility. In
assessing these criteria, the Investment
30
<PAGE> 54
Manager will, among other things, monitor the performance of brokers effecting
transactions for the Funds to determine the effect, if any, the Funds'
transactions through those brokers have on the market prices of the stocks
involved. This may be of particular importance for the Funds' investments in
relatively smaller companies whose stocks are not as actively traded as those of
their larger counterparts. The Funds will seek to buy and sell securities in a
manner that causes the least possible fluctuation in the prices of those stocks
in view of the size of the transactions.
In an attempt to obtain best execution for the Funds, the Investment Manager
also may place orders directly with market makers or with third market brokers,
Instinet or brokers on an agency basis. Placing orders with third market brokers
or through Instinet may enable the Funds to trade directly with other
institutional holders on a net basis. At times, this may allow the Funds to
trade larger blocks than would be possible trading through a single market
maker.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources also may be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
In determining when and to what extent to use Schwab or any other affiliated
broker-dealer as its broker for executing orders for the Funds on securities
exchanges, the Investment Manager will consider (if relevant) whether the
compensation to be paid Schwab or any other affiliated broker-dealer will be (i)
fair and reasonable, (ii) at least as favorable to the Funds as commissions that
would be charged by other qualified brokers having comparable execution
capabilities and (iii) at least as favorable as commissions contemporaneously
charged by Schwab or any other affiliated broker-dealer on comparable
transactions for its most favored unaffiliated customers. The Funds do not
consider it practicable or in the best interests of their shareholders to
solicit competitive bids for commission rates on each transaction. However, the
Board of Trustees, including a majority of the Trustees who are not "interested
persons" of Schwab or any other affiliated broker-dealer within the meaning of
the 1940 Act, (i) has prescribed procedures designed to provide that the Funds
do not pay commissions that do not meet the standards described above, (ii)
reviews those procedures annually to determine whether they remain adequate and
(iii) considers quarterly whether or not the commissions charged by Schwab or
any other affiliated broker-dealer have met the standards.
Brokerage services Schwab provides to the Funds are also subject to Rule
11a2-2(T) under the Securities Exchange Act of 1934, as amended. Rule 11a2-2(T)
permits the Funds to use Schwab as a broker provided certain conditions are met.
Among these requirements are that members of the exchange not associated with
Schwab perform the floor brokerage element of portfolio transactions (that is,
execution on the exchange floor or through use of exchange facilities) that the
orders to such members be transmitted from off the exchange floor and that
neither Schwab nor an associated person of Schwab participates in the execution
of the transaction after the order has been so transmitted. In connection with
transactions in which Schwab acts as broker for the Funds, Schwab, while not
permitted to perform floor brokerage (which is undertaken by members Schwab
selects who are not associated with that firm), still continues to bear
principal responsibility for determining important elements of overall execution
such as timing and order size, and also clears and settles such transactions.
Schwab pays the fees charged by those persons
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<PAGE> 55
performing the described floor brokerage elements. Schwab will not trade
directly with the Funds in any transactions in which Schwab or an affiliate acts
as principal.
For the fiscal years ended October 31, 1996, 1995 and 1994, the International
Fund paid brokerage commissions of $______, $101,230, and $54,718, respectively.
For the fiscal years ended August 31, 1997, 1996 and 1995, the Schwab 1000 Fund
paid brokerage commissions of $____, $408,000 and $118,000 and for the fiscal
period ended October 31, 1997 $______.
For the fiscal years ended October 31, 1997, 1996 and 1995, the Small-Cap Fund
paid brokerage commissions of $______, $181,679,and $142,785, respectively.
Of brokerage commissions paid by the Schwab 1000 in 1996, $1,000 (0.25% of the
total amount was paid to Schwab, an affiliate person of the Fund; 0.54% of
transactions involving the payment of a brokerage commission in 1996 were
effected through Schwab. [No brokerage fees were paid by the other Funds for the
past three years.]
PORTFOLIO TURNOVER
For reporting purposes, each Fund's turnover rate is calculated by dividing the
value of purchases or sales of portfolio securities for the fiscal year,
whichever is less, by the monthly average value of portfolio securities the Fund
owned during the fiscal year. When making the calculation, all securities whose
maturities at the time of acquisition were one year or less ("short-term
securities") are excluded.
A 100% portfolio turnover rate would occur, for example, if all portfolio
securities (aside from short-term securities) were sold and either repurchased
or replaced once during the fiscal year. The Funds expect that their portfolio
turnover rate will not exceed 100% in any given year, a turnover rate lower than
that of most non-index mutual funds.
The International Fund's portfolio turnover rate for the fiscal years ended
October 31, 1997 and 1996 was __% and 6%, respectively.
The Small-Cap Fund's portfolio turnover rate for the fiscal years ended October
31, 1997 and 1996 was __% and 23%, respectively.
The S&P 500 Fund's portfolio turnover rate for the fiscal year ended October 31,
1997 was __% and for the period of May 1, 1996 (commencement of operations) to
October 31, 1996 was 1%.
The Schwab 1000 Fund's portfolio turnover rate for the fiscal years ended August
31, 1997 and 1996 was __% and 66%, respectively. The portfolio turnover rate for
the period of August 31, 1997 to October 31, 1997 was __%.
From time to time, each Fund may compare its portfolio turnover rate with that
of other mutual funds as reported by independent sources.
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<PAGE> 56
TAXES
It is each Fund's policy to qualify for taxation as a "regulated investment
company" by meeting the requirements of Subchapter M of the Code. By following
this policy, each Fund expects to eliminate or reduce to a nominal amount the
federal income tax to which it is subject.
In order to qualify as a regulated investment company, each of the Funds must,
among other things, (1) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks, securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
for taxable years beginning on or before August 5, 1997, derive less than 30% of
its gross income from gains from the sale or other disposition of certain assets
(including stocks and securities) held less than three months; and (3) diversify
its holdings so that at the end of each quarter of its taxable year (i) at least
50% of the market value of the Fund's total assets is represented by cash or
cash items, U.S. Government securities, securities of other regulated investment
companies and other securities limited, in respect of any one issuer, to a value
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government securities or securities of any other regulated investment
company) or of two or more issuers that the Fund controls, within the meaning of
the Code, and that are engaged in the same, similar or related trades or
businesses.
These requirements may restrict the degree to which a Fund may engage in certain
hedging transactions and may limit the range of a Fund's investments. If a Fund
qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, which it distributes to shareholders, provided that the Fund
meets certain minimum distribution requirements. To comply with these
requirements, a Fund must distribute at least (a) 90% of its "investment company
taxable income" (as that term is defined in the Code) and (b) 90% of the excess
of its (i) tax-exempt interest income over (ii) certain deductions attributable
to that income (with certain exceptions), for its taxable year. Each Fund
intends to make sufficient distributions to shareholders to meet these
requirements.
The Code imposes a non-deductible excise tax on regulated investment companies
that do not distribute in a calendar year (regardless of whether they otherwise
have a non-calendar taxable year) an amount equal to 98% of their "ordinary
income" (as defined in the Code) for the calendar year plus 98% of their capital
gain net income for the one year period ending on October 31 of such calendar
year. The balance of such income must be distributed during the next calendar
year. For the foregoing purposes, a Fund is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year. If the distributions during a calendar year were less than the
required amount, the Fund is subject to a non-deductible excise tax equal to 4%
of the deficiency.
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<PAGE> 57
INCOME TAX INFORMATION
Any dividends declared by the Funds in October, November or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder on
December 31 of the year in which they were declared.
Dividends the Funds pay from net investment income and distributions from the
Funds' net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, will generally be taxable to
shareholders as ordinary income. Distributions received from the Funds
designated as long-term capital gains (net of capital losses), whether received
in cash or reinvested, will be taxable as long-term capital gains without regard
to the length of time a shareholder owned shares in the Funds. However, if a
shareholder receives a long-term capital gain distribution with respect to
Funds' shares held for six months or less, any loss on the sale or exchange of
those shares shall, to the extent of the long-term capital gain distribution, be
treated as a long-term capital loss. For corporate investors in the Funds,
dividend distributions the Funds designate to be from dividends received from
qualifying domestic corporations will be eligible for the 70% corporate
dividends-received deduction to the extent they would qualify if the Funds were
regular corporations. If a shareholder is not subject to income tax, generally
the shareholder will not be taxed on amounts distributed by the Funds.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." This "backup withholding" is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
The foregoing discussion relates only to federal income tax law as applicable to
U.S. citizens or residents. Foreign shareholders (i.e., nonresident alien
individuals and foreign corporations, partnerships, trusts and estates) are
generally subject to U.S. withholding tax at the rate of 30% (or a lower tax
treaty rate) on distributions derived from net investment income and short-term
capital gains. Distributions to foreign shareholders of long-term capital gains
and any gains from the sale or other disposition of shares of the Funds are
generally not subject to U.S. taxation, unless the recipient is an individual
who meets the Code's definition of "resident alien." Different tax consequences
may result if the foreign shareholder is engaged in
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<PAGE> 58
a trade or business within the United States. In addition, the tax consequences
to a foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above. Distributions by a Fund also may be
subject to state, local and foreign taxes, and its treatment under applicable
tax laws may differ from the federal income tax treatment.
Income that the International Fund receives from sources within various foreign
countries may be subject to foreign income taxes withheld at the source. If a
Fund has at least 50% of its assets invested in foreign securities at the end of
its taxable year, it may elect to pass through to its shareholders the ability
to take either the foreign tax credit or the deduction for foreign titles. It is
expected that the International Fund will have more than 50% of the value of its
total assets at the close of its taxable year invested in foreign securities,
and it will make this election. Pursuant to this election, U.S. shareholders
must include in gross income, even though not actually received, their
respective pro rata share of foreign taxes, and may either deduct their pro rata
share of foreign taxes (but not for alternative minimum tax purposes) or credit
the tax against U.S. income taxes, subject to certain limitations described in
the Code (but not both). A shareholder who does not itemize deductions may not
claim a deduction for foreign taxes.
The International Fund may invest in a non-U.S. corporation which could be
treated as a passive foreign investment company ("PFIC") or become a PFIC under
the Code. This could result in adverse tax consequences upon the disposition of,
or the receipt of "excess distributions" with respect to, such equity
investments. To the extent the International Fund does invest in PFICs, they may
elect to treat the PFIC as a "qualified fund" or mark-to-marked its investments
in PFICs annually. In either case, the International Fund may be required to
distribute amounts in excess of realized income and gains. To the extent that
the International Fund does invest in foreign securities which are determined to
be PFIC securities and are required to pay a tax on such investments, a credit
for this tax would not be allowed to be passed through to the Fund's
shareholders. Therefore, the payment of this tax would reduce the International
Fund's economic return from their PFIC shares, and excess distributions received
with respect to such shares are treated as ordinary income rather than capital
gains.
A Fund's transactions in futures contracts, forward contracts, foreign currency
transactions, options and certain other investment and hedging activities are
subject to special tax rules. In a given case, these rules may accelerate income
to a Fund, defer its losses, cause adjustments in the holding periods of the
Fund's assets, convert short-term capital losses into long-term capital losses
or otherwise affect the character of the Fund's income. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. The Funds will endeavor to make any available elections pertaining
to these transactions in a manner believed to be in the best interest of the
Funds and their shareholders.
The discussion of federal income taxation presented above only summarizes some
of the important federal tax considerations generally affecting purchasers of
Fund shares. No attempt has been made to present a detailed explanation of the
federal income tax treatment of a Fund and its shareholders, and the discussion
is not intended as a substitute for careful tax planning. Accordingly,
prospective investors (particularly those not residing or domiciled in the
United States) should consult their own tax advisers regarding the consequences
of investing in a Fund.
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<PAGE> 59
TAX EFFICIENCY
Taxes can erode the returns a shareholder earns from a mutual fund investment
and are an important, and often overlooked, factor when evaluating a mutual
fund's performance. For many mutual funds, shareholder tax liability is of
minimal concern in the investment management process. In contrast, the
Investment Manager of the Funds actively employs specific investment policies
designed to minimize realized capital gain distributions. These policies include
selling the highest tax cost securities first, not rebalancing the portfolio to
reflect changes in their indexes and trading only round-lots or large blocks of
securities. In order to minimize capital gain distributions, while achieving
each Fund's investment objective, the Investment Manager focuses on individual
tax lots in deciding when and how to manage the realization of net capital
gains. These policies will be utilized only to the extent they do not have a
material effect on each Fund's ability to track or match the performance of its
index. By deferring the realization of capital gains, where possible, until an
investor sells shares, those unrealized gains can accumulate in a Fund, helping
to build the value of a shareholder's investment. In addition, shareholders are
given greater control over the timing of the recognition of such gains and the
impact on their tax situations. The Investment Manager constantly monitors,
analyzes and evaluates the portfolio as well as market conditions to carefully
manage necessary trading activity and to determine when there are opportunities
to harvest capital losses, which can then be used to offset realized capital
gains. Through the use of these and other strategies, the Investment Manager
seeks to minimize current capital gains distributions to an extent not found in
most mutual funds. There can be no assurance that the Investment Manager will
succeed in avoiding realized net capital gains.
In addition, each Fund has adopted a number of policies that should cause its
portfolio turnover rate to be below the portfolio turnover rate of many other
mutual funds. A lower portfolio turnover rate acts to minimize associated
transaction costs as well as the level of realized capital gains. By avoiding,
where possible, distributing capital gains to shareholders, the Funds help to
build the value of a shareholders' shares and defer payment of capital gains
taxes until shares are redeemed. A shareholder's current tax liability for
capital gains should be reduced and the shareholder's total return increased by
these policies.
Each Fund may, from time to time, refer to recent studies that analyze certain
techniques and strategies the Funds may use. In addition, each Fund may, from
time to time, promote the advantages of investing in a series that is part of a
large, diverse mutual fund complex.
SHARE PRICE CALCULATION
Each Fund's net asset value per share (NAV) is determined each Business Day at
the close of trading on the New York Stock Exchange (NYSE), generally as of 4:00
p.m. Eastern time. The NAV of the International Fund is expressed in U.S.
dollars by translating the Fund's assets using the mean price for the U.S.
dollar as quoted by generally recognized, reliable sources. The NYSE may change
its holiday closing schedule at anytime, but currently, the NYSE is scheduled
to close on the following holidays: New Year's Day, Dr. Martin Luther King Jr.'s
Day (observed), Presidents' Day, Good
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<PAGE> 60
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Shares purchased begin to earn dividends on the next business day
with the following exceptions: Columbus Day and Veterans Day.
The Funds value their portfolio securities daily based on their fair value.
Securities traded on stock exchanges are valued at the last quoted sales price
on the exchange on which such securities are primarily traded, or, lacking any
sales, at the mean between the bid and ask prices. Securities traded in the
over-the-counter market are valued at the last sales price that day, or if no
sales that day, at the mean between the bid and ask prices. In addition,
securities that are primarily traded on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective exchanges
with these values then translated into U.S. dollars at the current exchange
rate. Foreign securities for which the closing values are not readily available
are valued at fair value as determined in good faith pursuant to the Board of
Trustees' guidelines. Securities for which market quotations are not readily
available (including restricted securities that are subject to limitations on
their sale and illiquid securities) are valued at fair value as determined in
good faith pursuant to guidelines adopted by the Board of Trustees. Securities
may be valued on the basis of prices provided by pricing services when such
prices are believed to reflect fair market value. The Investment Manager assigns
fair values to the Funds' other investments in good faith under Board of
Trustees guidelines. The Board of Trustees regularly reviews these values.
HOW THE FUNDS REFLECT PERFORMANCE
STANDARDIZED TOTAL RETURN
Average annual total return is determined by calculating the return on a $1,000
investment in a Fund made at the beginning of the period, then calculating the
average annual compounded rate of return that would produce the same investment
return on the $1,000 over the same period. It is reported for periods of 1, 5 10
years or since commencement of operations for periods not falling on those
intervals. In computing average annual total return, a Fund assumes the
reinvestment of all distributions at net asset value on applicable reinvestment
dates.
<TABLE>
<CAPTION>
Fund (Commencement of One Year ended October 31, Five Years ended From Commencement of Operations
- ---------------------- --------------------------- ----------------- -------------------------------
Operations) 1997 October 31, 1997 to October 31, 1997
- ----------- ---- ---------------- -------------------
<S> <C> <C> <C>
International Fund - Investor [xx]% [xx]% [xx]%
Shares (9/09/93)
Small-Cap Fund - Investor [xx]% [xx]% [xx]%
Shares (12/03/93)
S&P 500 Fund - Investor Shares [xx]% [xx]% [xx]%
(5/01/96)
S&P 500 Fund - e.Shares [xx]% [xx]% [xx]%
(5/01/96)
Schwab 1000 Fund - Investor [xx]% [xx]% [xx]%
Shares (5/2/91)
</TABLE>
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<PAGE> 61
See "Nonstandardized Total Return" below for the aggregate (cumulative) total
return of the Select Shares of the Funds, which have not operated for a full
fiscal year as of October 31, 1997.
NONSTANDARDIZED TOTAL RETURN
Nonstandardized total return for a Fund differs from standardized total return
in that it relates to periods other than the period for standardized total
return and/or that it represents aggregate (rather than average) total return.
In addition, an after-tax total return for each Fund may be calculated by taking
that Fund's standardized or non-standardized total return and subtracting
applicable federal taxes from the portions of each Fund's total return
attributable to capital gain distributions and ordinary income. This after-tax
total return may be compared to that of other mutual funds with similar
investment objectives as reported by independent sources.
Each Fund also may report the percentage of that Fund's standardized or
non-standardized total return which would be paid to taxes annually (at the
applicable federal personal income and capital gains tax rates) before
redemption of Fund shares. This proportion may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.
A Fund may also advertise its cumulative total return since inception. This
number is calculated using the same formula that is used for average annual
total return except that, rather than calculating the total return based on a
one-year period, cumulative total return is calculated from commencement of
operations to the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
Name of Fund (Commencement of Operations) Cumulative Total Return
- ----------------------------------------- -----------------------
<S> <C>
International Fund - Investor Shares (9/09/93) %
International Fund - Select Shares (5/19/97) %
Small-Cap Fund - Investor Shares (12/03/93) %
Small-Cap Fund - Select Shares (5/19/97) %
Schwab 1000 Fund - Investor Shares ( 5/2/91) %
Schwab 1000 Fund - Select Shares (5/19/97) %
S&P 500 Fund - Investor Shares (5/01/96) %
S&P 500 Fund - e.Shares (5/01/96) %
S&P 500 Fund - Select Shares (5/19/97) %
</TABLE>
YIELD
A Fund's yield refers to the net investment income generated by a hypothetical
investment in the Fund over a specific 30-day period. This net investment income
is then annualized, which means that the net investment income generated during
the 30-day period is assumed to be generated in each 30-day period over an
annual period, and is shown as a percentage of the investment.
EFFECTIVE YIELD
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<PAGE> 62
A Fund's effective yield is calculated similarly, but the net investment income
earned by the investment is assumed to be compounded monthly when annualized.
The effective yield will be slightly higher than the yield due to this
compounding effect.
COMPARING THE PERFORMANCE OF THE FUNDS WITH OTHER FUNDS AND INDICES
The performance of the Funds may be compared with the performance of other
mutual funds by comparing the ratings of mutual fund rating services, various
indices of investment performance, U.S. Government obligations, bank
certificates of deposit, the consumer price index and other investments for
which reliable data is available. For example, the International Fund and the
Small Cap Index Fund may be compared to the Schwab 1000 Index(R), the Schwab
International Index(R), the Schwab Small-Cap Index(R), and the Standard & Poor's
500 Index(R), and the Small Cap Index Fund(R) may also be compared to Standard &
Poor's Small-Cap 600 Index.
From time to time, the Funds may include discussions in advertisements of the
income tax savings shareholders may experience as a result of their policy of
limiting portfolio trading in order to reduce capital gains. This information
may be supplemented by presentations of statistical data illustrating the extent
of such income tax savings and the impact of such savings on the yield and/or
total return of the Funds. In addition, such advertisements may include
comparisons of the Funds' performance against that of investment products that
do not employ the Funds' policy of seeking to limit capital gains.
THE INDEXES AND INDEXING STRATEGIES
Because the unmanaged performance of a broad-based equity index often has proven
superior to that of many individually selected stock portfolios, a growing
percentage of assets invested in the equity markets are being placed in "index"
portfolios. Institutional investors often devote a substantial percentage of
their assets to indexed strategies.
An index typically tracks the performance of a group of securities selected to
represent a particular market, and most often is used to gauge that market's
performance. The Dow Jones Industrial Average ("DJIA") and S&P 500 are two
indices designed to measure the performance of U.S. stocks. When investment
managers invest indexed separate accounts or index fund assets, they attempt to
replicate the performance of the applicable target index by holding all or a
representative sample of the securities included in the index.
An index's performance data assumes the reinvestment of dividends but does not
reflect deductions for administrative and management expenses. The Funds will be
subject to these costs and expenses, while an index does not have these
expenses. In addition, various factors, such as holding a cash balance, may
cause the Funds' performance to be higher or lower than that of an index.
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<PAGE> 63
The Funds are intended to make indexed investing easily available to Schwab
customers with the highest level of convenience and economy, thereby
facilitating their ability to participate in the long-term performance of the
U.S. stock market.
The difference between a fund's total return and the total return of its
benchmark index is referred to as a fund's tracking error. The Funds may report
or advertise tracking error.
INTERNATIONAL INDEX
The International Index is a broad-based international stock market index, which
contains the common stocks of the 350 largest operating companies (i.e.,
non-investment companies) incorporated outside the United States. For securities
to be included in the International Index, a liquid market must exist for the
securities, and the securities must be issued by an operating company (not an
investment company) whose principal trading market is in a country with a major
developed securities market. In addition, the market value of the securities
must place them among the top 350 such companies as measured by market
capitalization. By tracking the largest companies in developed markets, the
Index represents the performance of the "blue chips" of international markets.
The Index also is designed to provide a broad representation of the
international market, by limiting each country to no more than 35% of the total
market capitalization of the Index. As the stocks contained in the Index
represent about 35% of the total market capitalization of international
companies, the Index provides a reliable measure of market performance. The
International Index was first made available to the public on July 29, 1993.
As of September 30, 1997, the aggregate market capitalization of Index Stocks
included in the Schwab International index was approximately $__._trillion. This
represents approximately _% of the total market value of all publicly traded
non-U.S. companies.
SMALL-CAP INDEX
To be included in the Small-Cap Index, a company must satisfy all of the
following criteria: (1) it must be an "operating company" (i.e., not an
investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the New
York Stock Exchange, American Stock Exchange or the NASDAQ/NMS and (3) its
market value must place it among the second 1,000 such companies as measured by
market capitalization (i.e., from the company with a rank of 1,001 through the
company with a rank of 2,000). Shareholders generally avoid exposure to the
smallest companies, whose shares are often thinly traded and very volatile,
because these stocks are not included in the Index.
From time to time, the International Index Fund and Small-Cap Fund may compare
the historical performance of the International Index(R) and Small-Cap Index(R),
respectively, to the historical performance of various other indices, including
the S&P 500, as reported by independent sources.
As of September 30, 1997, the aggregate market capitalization of Index Stocks
included in the Schwab Small-Cap Index was approximately $__._billion. This
represents approximately _% of the total market value of all publicly traded
United States companies, as represented by the Wilshire 5000 Index.
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<PAGE> 64
THE S&P 500 INDEX
The S&P 500 is representative of the performance of the U.S. stock market. The
Index consists of 500 stocks chosen for market size, liquidity and industry
group representation. It is a market value weighted index (stock price times
number of shares outstanding), with each stock's weight in the Index
proportionate to its market value. The S&P 500 does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
Index are among the largest, there also are some relatively small companies in
the Index. Those companies, however, generally are established companies within
their industry group. S&P identifies important industry groups within the U.S.
economy and then allocates a representative sample of stocks with each group to
the S&P 500. There are four major industry sectors within the Index:
Industrials, Utilities, Financial and Transportation.
For the 20 years ended 1996, the S&P 500 Index provided on average annual total
return of ___%. This total return assumes reinvestment of all dividends paid by
stocks included in the S&P 500 Index, but does not include taxes, brokerage fees
or fees charged by the S&P 500 Fund. (Source: Morningstar, [month, date, year].
Past performance of the S&P 500 Index is not indicative of future results of the
S&P 500 or the S&P 500 Fund.
THE SCHWAB 1000 INDEX(R)
The Schwab 1000 Index is a broad-based stock market index, which contains the
common stocks of the 1,000 largest operating companies (i.e., non-investment
companies) incorporated in the United States. As the stocks contained in the
index represent about 84% of the total market capitalization of all U.S.
companies, as represented by the Wilshire 500 Index, the Schwab 1000 Index
provides a reliable measure of broad market performance and can serve as a
benchmark against which individual investors can compare the performance of
their equity investments. Relative to some indices that primarily track one
group of stocks, and as a result do not capture movements in other areas of the
market, the Schwab 1000 Index(R), because it contains the stocks of the more
established blue-chip companies as well as those of relatively smaller
companies, reflects an expanded breadth of market coverage. This distinction is
important because historically the stocks of smaller companies have
out-performed those of their blue-chip counterparts in some years, while the
reverse has been true in other years. Of course, past performance may not
necessarily be indicative of future results.
As of September 30, 1997, the aggregate market capitalization of Index Stocks
included in the Schwab 1000 Index was approximately $____ trillion. This
represents approximately ___% of the total market value of all publicly traded
United States companies, as represented by the Wilshire 5000 Index.
To be included in the Schwab 1000 Index, a company must satisfy all of the
following criteria: (1) it must be an "operating company" (i.e., not an
investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the New
York Stock Exchange, American Stock Exchange or the NASDAQ/NMS and (3) its
market value must place it among the top 1,000 such companies as measured by
market capitalization.
41
<PAGE> 65
Charles R. Schwab, a veteran investor, was instrumental in developing the Schwab
1000 Fund. The investment objective of the Fund, which is designed to make
indexed investing available with a high level of convenience and economy, is to
match the total return of the Schwab 1000 Index.
From time to time, the Schwab 1000 Fund(R) may compare the historical
performance of the Schwab 1000 Index to the historical performance of various
other indices, including the S&P 500, as reported by independent sources.
A particular stock's weighting in the International Index, Small-Cap Index or
Schwab 1000 Index is based on its relative total market value (i.e., its market
price per share times the number of shares outstanding), divided by the total
market capitalization of its Index.
The data reported below is current as of December 1996. The Source for all
information below is Morningstar, Inc., with the exception of the data for the
Schwab 1000 Index(R), which is from Schwab's Mutual Fund Research Group.
The following is a line chart comparing the Schwab 1000 Index, S&P 500 Index,
3-Month CDs, Corporate Bonds, Treasury Bills and Inflation (CPI).
<TABLE>
<CAPTION>
SCHWAB 1000 INDEX S&P 500 INDEX(R) 3-MONTH CD'S CORPORATE BONDS TREASURY BILLS INFLATION (CPI)
<S> <C> <C> <C> <C> <C> <C>
1979 21.34% 18.30% 11.22% -2.12% 10.04% 13.29%
1980 61.20% 56.43% 25.69% -2.42% 22.79% 27.46%
1981 54.95% 48.49% 45.68% 0.49% 39.98% 38.82%
1982 87.60% 80.36% 63.50% 39.90% 54.96% 44.14%
1983 128.48% 120.86% 78.33% 52.89% 68.32% 49.61%
1984 142.83% 134.70% 96.80% 78.30% 84.43% 55.53%
1985 221.19% 209.19% 112.65% 121.21% 98.23% 61.46%
1986 277.88% 266.94% 126.49% 157.73% 110.04% 63.24%
1987 289.34% 286.25% 142.02% 164.30% 122.26% 70.38%
1988 355.39% 350.40% 160.70% 188.66% 137.07% 77.99%
1989 492.10% 493.11% 184.36% 229.04% 156.34% 86.26%
1990 465.16% 474.63% 207.57% 252.58% 175.61% 97.62%
1991 656.08% 649.79% 225.50% 317.84% 190.55% 103.71%
1992 723.39% 706.94% 237.51% 354.18% 200.56% 109.59%
1993 807.71% 788.19% 248.26% 409.44% 209.57% 115.36%
1994 812.12% 799.80% 264.41% 389.44% 222.80% 121.11%
1995 1153.81% 1137.43% 286.08% 498.27% 240.60% 126.72%
</TABLE>
42
<PAGE> 66
PURCHASE AND REDEMPTION OF SHARES
The Funds and classes have set minimum initial and subsequent investment
requirements, as disclosed in the Prospectus. These minimum investment
requirements may be changed at any time and are not applicable to certain types
of investors. The Trust may waive the minimums for purchases by Trustees,
Directors, officers or employees of the Sub-Adviser.
The Funds have made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of its net assets at the beginning of
such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of applicable limits (as summarized below) may be
paid, in whole or in part, in investment securities or in cash, as the Board of
Trustees may deem advisable. However, payment will be made wholly in cash unless
the Board of Trustees believes that economic or market conditions exist that
would make such a practice detrimental to the best interests of the Fund. If
redemption proceeds are paid in investment securities, such securities will be
valued as set forth in the "Share Price Calculation" section of the SAI. A
redeeming shareholder would normally incur brokerage expenses if he or she were
to convert the securities to cash.
OTHER INFORMATION
The Prospectus and SAI do not contain all the information included in the
Registration Statement filed with the SEC under the Securities Act of 1933, as
amended, with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
SAI pursuant to the rules and regulations of the SEC. The Registration
Statement, including the exhibits filed therewith, may be examined at the office
of the SEC in Washington, D.C.
Statements contained in the Prospectuses or SAI as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of the contract or other document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference.
FINANCIAL INFORMATION
The Funds' independent accountants, _______________, audit and report on the
annual financial statements of each series of the Trusts and review certain
regulatory reports and each Fund's federal income tax return. It also performs
other professional accounting, auditing, tax and advisory services when the
Trusts engage it to do so. Their address is 555 California Street, San
Francisco, California 94104. Each Fund's financial statements and financial
highlights for the fiscal year ended October 31, 1997, are included in each
Fund's Annual Report, which are separate reports supplied with this SAI.
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY THE
TRUST, ANY SERIES THEREOF, OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE.
43
<PAGE> 67
PART C
OTHER INFORMATION
OCTOBER 20TH, 1997
SCHWAB INVESTMENTS
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
1. Financial Statements for Schwab Short/Intermediate Government
Bond Fund and the Schwab Long Term Government Bond Fund were
electronically filed and are incorporated by reference to the
statement of additional information for Schwab Investments in
Post-Effective Amendment No. 16 filed on or about March 26,
1996.
2. Financial Statements for 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
Short/Intermediate Government Bond Fund and Schwab Long-Term
Government Bond Fund were electronically filed and are
incorporated by reference to the statement of additional
information for Schwab Investments in Post-Effective Amendment
No. 16 filed on or about March 26, 1996.
3. Financial Statements for Schwab 1000 Fund to be filed by
subsequent amendment.
(b) Exhibits:
<TABLE>
<S> <C> <C> <C>
(1) -- Agreement and Declaration of Trust is incorporated by reference to Exhibit (1)
to the Registration Statement on Form N-1A of Schwab Investments
("Registrant"), filed on October 29, 1990 (the "Agreement and Declaration of
Trust").
(2) -- Amended and Restated By-Laws are incorporated by reference to Exhibit (2) to
Post-Effective Amendment No. 12, to Registrant's Registration Statement on Form
N-1A, filed on December 30, 1994.
(3) -- Inapplicable.
(4) (a) -- Article III, Section 5, Article V, Article VI, Article VIII, Section 4 and
Article IX, Sections 1, 5 and 7 of the Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1) to Registrant's Registration Statement
on Form N-1A, filed on October 29, 1990.
(b) -- Article 9, Article 10, Section 6, and Article 11 of the Amended and Restated
By-Laws are incorporated by reference to Exhibit (2) to Post-Effective
Amendment No. 12, to Registrant's Registration Statement on Form N-1A, filed on
December 30, 1994.
(5) (a) -- Investment Advisory and Administration Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the "Investment Manager") is incorporated
by reference to Exhibit (5) (a) to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, filed on December 30, 1994.
(b) -- Amended Schedule to Investment Advisory and Administration Agreement referred
to at Exhibit (5)(a) above is incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 14 to Registrant's Registration Statement on Form
N-1A, filed on December 30, 1994.
</TABLE>
C-1
<PAGE> 68
<TABLE>
<S> <C> <C> <C>
(6) -- Distribution Agreement between Registrant and Charles Schwab & Co., Inc.
("Schwab") is incorporated by reference to Exhibit (6)(a) to Post-Effective
Amendment No. 12 to Registrant's Registration Statement on Form N-1A, filed on
December 30, 1994.
(7) -- Inapplicable.
(8) (a) -- Custodian Services Agreement between Registrant and PNC Bank, National
Association (formerly Provident National Bank) is incorporated by reference to
Exhibit (8)(a) to Post-Effective Amendment No.2 to Registrant's Registration
Statement on Form N-1A, filed on December 23, 1991.
(b) -- Amendment No. 1 to Custodian Services Agreement referred to at Exhibit (8)(a)
above is incorporated by reference to Exhibit (8)(b) to Post-Effective
Amendment No. 13 to Registrant's Registration Statement on Form N-1A, filed on
December 29, 1996.
(c) -- Amendment No. 2 to Custodian Services Agreement referred to at Exhibit (8)(a)
above is incorporated by reference to Exhibit 8(c) to Post-Effective Amendment
No.14 to Registrant's Registration Statement on Form N-1A, filed on December
30, 1996.
(d) -- Amended Schedule to the Custodian Services Agreement referred to at Exhibit
(8)(a) above is incorporated by reference to Exhibit (8)(b) to Post-Effective
Amendment No. 12 to Registrant's Registration Statement on Form N-1A, filed on
December 30, 1994.
(e) -- Transfer Agency Agreement between the Registrant and Schwab is incorporated by
reference to Exhibit (8)(b) to Post-Effective Amendment No. 9 to Registrant's
Registration Statement on Form N-1A, filed on August 27, 1993.
(f) -- Amended Schedule to the Transfer Agency Agreement referred to at Exhibit (8)(e)
above is incorporated by reference to Exhibit 8(d) to Post-Effective Amendment
No. 11 to Registrant's Registration Statement on Form N-1A, filed on December
28, 1993.
(g) -- Shareholder Service Agreement between the Registrant and Schwab is incorporated
by reference to Exhibit (8)(c) to Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A, filed on August 27, 1993.
(h) -- Form of Amended Schedule to the Shareholder Services Agreement referred to at
Exhibit (8)(g) above is incorporated by reference to Exhibit 8(g) to Post-
Effective Amendment No. 16 to Registrant's Registration Statement on Form N-1A,
filed on March 26, 1997.
(i) -- Accounting Services Agreement between Registrant and Provident Financial
Processing Corporation is incorporated by reference to Exhibit (8)(c) to Post-
Effective Amendment No. 2 to Registrant's Registration Statement on Form N-1A,
filed on December 23, 1991.
(j) -- Amendment No. 1 to Accounting Services Agreement referred to at Exhibit (8)(i)
above is incorporated by reference to Exhibit (8)(i) to Post-Effective
Amendment No. 13 to Registrant's Registration Statement on Form N-1A,
</TABLE>
C-2
<PAGE> 69
<TABLE>
<S> <C> <C> <C>
filed on December 29, 1996.
(k) -- Amendment No. 2 to Accounting Services Agreement referred to at Exhibit (8)(i)
above is incorporated by reference to Exhibit (8)(k) to Post-Effective
Amendment No. 14 to Registrant's Registration Statement on Form N-1A, filed on
December 30, 1996.
(l) -- Amended Schedule to the Accounting Services Agreement referred to at Exhibit
(8)(i) above is incorporated by reference to Exhibit (8)(h) to Post-Effective
Amendment No. 12 to Registrant's Registration Statement on Form N-1A, filed on
December 30, 1994.
(9) -- Inapplicable.
(10) -- Opinion and Consent of Ropes & Gray as to legality of the securities being
registered to be filed by subsequent amendment.
(11) (a) -- Inapplicable.
(b) -- Inapplicable.
(12) -- Inapplicable.
(13) -- Purchase Agreement relating to shares of the Schwab Short/Intermediate Tax-Free
Bond Fund, Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
Long-Term Government Bond Fund (formerly, Schwab Long-Term U.S. Government
Bond Fund) is incorporated by reference to Exhibit (13) to Post Effective
Amendment No. 9 to Registrant's Registration Statement on Form N-1A, filed on
August 27, 1993.
(14) -- Inapplicable.
(15) -- Inapplicable.
(16) -- Performance Calculations to be filed by subsequent amendment.
(17) (a) -- Financial Data Schedule for Schwab 1000 Fund(R) to be filed by subsequent
amendment.
(b) -- Financial Data Schedule for Schwab Short/Intermediate Government Bond Fund to
be filed by subsequent amendment.
(c) -- Financial Data Schedule for Schwab Long-Term Government Bond Fund to be filed
by subsequent amendment.
(d) -- Financial Data Schedule for Schwab Short/Intermediate Tax-Free Bond Fund to be
filed by subsequent amendment.
(e) -- Financial Data Schedule for Schwab Long-Term Tax-Free Bond Fund to be filed by
subsequent amendment.
(f) -- Financial Data Schedule for Schwab California Short/Intermediate Tax-Free Bond
Fund to be filed by subsequent amendment.
</TABLE>
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<PAGE> 70
<TABLE>
<S> <C> <C> <C>
(g) -- Financial Data Schedule for Schwab California Long-Term Tax-Free Bond Fund to
be filed by subsequent amendment.
(18) -- Registrant's Multiple Class Plan for Schwab 1000 Fund Investor Shares and
Schwab 1000 Fund Select Shares is incorporated by reference to Post-Effective
Amendment No. 17 to the Registrant's Registration Statement on Form N-1A filed
on August 15, 1997.
</TABLE>
Item 25. Persons Controlled by or under Common Control with the Registrant.
The Charles Schwab Family of Funds (the "Schwab Fund Family"), Schwab
Capital Trust and Schwab Annuity Portfolios are each Massachusetts business
trusts registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). Each is advised by the Investment Manager and employs Schwab as
principal underwriter, transfer agent and shareholder services agent. As a
result, the Schwab Fund Family, Schwab Capital Trust and Schwab Annuity
Portfolios may each be deemed to be under common control with Registrant.
Item 26. Number of Holders Securities.
As of ___________, 1997 the number of record holders of shares of
beneficial interest for the Series of Registrant:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
- -------------- ------------------------
<S> <C>
Schwab 1000 Fund(R) - Investor Shares 1 (for the benefit of [ ] accounts)
Schwab 1000 Fund - Select Shares(TM) 1 (for the benefit of [ ] accounts)
Schwab Long-Term Government Bond Fund 1 (for the benefit of [ ] accounts)
Schwab Short/Intermediate Government Bond Fund 1 (for the benefit of [ ] accounts)
Schwab Long-Term Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
Schwab Short/Intermediate Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
Schwab California Long-Term Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
Schwab California Short/Intermediate Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
</TABLE>
Item 27. Indemnification.
Article VIII of Registrant's Agreement and Declaration of Trust
(Exhibit (1) hereto, which is incorporated herein by reference) provides in
effect that Registrant will indemnify its officers and trustees against all
liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise, or as fines and penalties, and counsel
fees reasonably incurred by any such officer or trustee in connection with the
defense or disposition of any action, suit, or other proceeding. However, in
accordance with Section 17(h) and 17(i) of the 1940 Act and its own terms, said
Agreement and Declaration of Trust does not protect any person against any
liability to Registrant or its shareholders to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
In any event, Registrant will comply with 1940 Act Releases No. 7221 and 11330
respecting the permissible boundaries of indemnification by an investment
company of its officers and trustees.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to trustees, officers
and controlling persons of the Registrant pursuant
C-4
<PAGE> 71
to the foregoing provisions, or otherwise, Registrant has been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Manager.
(a) Information pertaining to business and other connections of
Registrant's Investment Manager is hereby incorporated by reference to the
section of the Prospectuses captioned "Management of the Fund(s)" and to the
section of the Statement of Additional Information captioned "Management of the
Trust."
Registrant's Investment Manager, Charles Schwab Investment Management,
Inc., a Delaware corporation, organized in October 1989 to serve as Investment
Manager to the Schwab Fund Family, also serves as the Investment Manager to
Schwab Capital Trust and Schwab Annuity Portfolios, each an open-end management
investment company. The principal place of business of the Investment Manager is
101 Montgomery Street, San Francisco, California 94104. The only business in
which the Investment Manager engages is that of investment manager and
administrator to Registrant, Schwab Fund Family, Schwab Capital Trust, Schwab
Annuity Portfolios and any other investment companies that Schwab may sponsor in
the future.
(b) The business, profession, vocation or employment of a substantial
nature in which each director and/or executive officer of Schwab and/or the
Investment Manager is or has been engaged during the past two fiscal years for
his or her own account in the capacity of director, officer, employee, partner
or trustee is as follows:
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Chief Executive
Officer and Director
Charles Schwab Investment Management, Chairman and Director
Inc.
Charles Schwab Limited Chairman, Chief Executive
Officer
The Charles Schwab Trust Company Chairman and Director
Mayer & Schweitzer, Inc. Director and Chairman of
Board of Directors
The Gap, Inc. Director
</TABLE>
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<PAGE> 72
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Transamerica Corporation Director
AirTouch Communications Director
Siebel Systems, Inc. Director
Performance Technologies, Inc. Chairman and Director
TrustMark, Inc. Chairman and Director
Schwab Retirement Plan Services, Inc. Chairman and Director
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February 1995
The Charles Schwab Corporation Vice Chairman and Director
The Charles Schwab Trust Company Director until December 1996
David S. Pottruck Charles Schwab & Co., Inc. President, Chief Executive
Officer and Director
The Charles Schwab Corporation President, Chief Operating
Officer and Director
Charles Schwab Investment Management, Director
Inc.
Mayer & Schweitzer, Inc. Director
Performance Technologies, Inc. Director
TrustMark, Inc. Director
Schwab Retirement Plan Services, Inc. Director
Charles Schwab Limited Director
Decibel Director
McKesson Director
Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman - Ex Officio;
Vice Chairman and Director
until January 1996
The Charles Schwab Corporation Executive Vice President
until January 1996
Mayer & Schweitzer, Inc. Director until January 1996
</TABLE>
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<PAGE> 73
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Parkash P. Ahuja Charles Schwab & Co., Inc. Senior Vice President
Robert J. Almeida Charles Schwab & Co., Inc. Senior Vice President
Rhet Andrews Charles Schwab & Co., Inc. Senior Vice President
William S. Baughman Charles Schwab & Co., Inc. Senior Vice President until
March 1997
Karen Chang Charles Schwab & Co., Inc. Executive Vice President
Rochelle A. Bays Charles Schwab & Co., Inc. Senior Vice President
Michelle B. Blieberg Charles Schwab & Co., Inc. Senior Vice President
John P. Coghlan Charles Schwab & Co., Inc. Executive Vice President
The Charles Schwab Corporation Executive Vice President
The Charles Schwab Trust Company Director and Executive Vice
President
TrustMark, Inc. Director
Performance Technologies, Inc. Director
Schwab Retirement Plan Services, Inc. Director
Reid P. Conklin Charles Schwab & Co., Inc. Senior Vice President
John Danton Charles Schwab & Co., Inc. Senior Vice President
Martha J. Deevy Charles Schwab & Co., Inc. Senior Vice President
Linnet Deily Charles Schwab & Co., Inc. Executive Vice President
Evelyn S. Dilsaver Charles Schwab & Co., Inc. Senior Vice President
Sidney J. Dorr Charles Schwab & Co., Inc. Senior Vice President
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President
Wayne W. Fieldsa Charles Schwab & Co., Inc. Senior Vice President
Edward V. Garlich, Jr. Charles Schwab & Co., Inc. Senior Vice President
Lon Gorman Charles Schwab & Co., Inc. Executive Vice President and
President
Mayer & Schweitzer, Inc. Chairman, Chief Executive
Officer and Director
</TABLE>
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<PAGE> 74
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Edward A. Greene Charles Schwab & Co., Inc. Senior Vice President
Therese Haberle Charles Schwab & Co., Inc. Senior Vice President
James M. Hackley Charles Schwab & Co., Inc. Executive Vice President
Gerry L. Hansen Charles Schwab & Co., Inc. Senior Vice President and
Controller
The Charles Schwab Corporation Senior Vice President and
Controller
Barbara Heinrich Charles Schwab & Co., Inc. Senior Vice President
Jan K. Hier-King Charles Schwab & Co., Inc. Senior Vice President
Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President
Daniel J. Keller Charles Schwab & Co., Inc. Senior Vice President
Michael S. Knight Charles Schwab & Co., Inc. Senior Vice President
Gloria J. Lau Charles Schwab & Co., Inc. Senior Vice President
Thomas N. Lawrie Charles Schwab & Co., Inc. Senior Vice President
Dawn G. Lepore Charles Schwab & Co., Inc. Executive Vice President and
Chief Information Officer
The Charles Schwab Corporation Executive Vice President and
Chief Information Officer
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President and
Chief Strategy Officer
Charles Schwab & Co., Inc. Executive Vice President
James G. Losi Charles Schwab & Co., Inc. Senior Vice President
Jeffrey M. Lyons Charles Schwab & Co., Inc. Senior Vice President
Susanne D. Lyons Charles Schwab & Co., Inc. Executive Vice President
Elinor MacKinnon Charles Schwab & Co., Inc. Senior Vice President
Frederick E. Matteson Charles Schwab & Co., Inc. Senior Vice President
Timothy F. McCarthy, Charles Schwab Investment Management, Chief Executive Officer
Trustee and President Inc.
</TABLE>
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<PAGE> 75
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Charles Schwab & Co., Inc. President and Chief Operating
Officer
Charles Schwab. Limited Vice Chairman; Chief Operating
Officer; Director
The Charles Schwab Corporation Executive Vice President
Mayer & Schweitzer Director
John McGonigle Charles Schwab & Co., Inc. Senior Vice President
Peter J. McIntosh Charles Schwab & Co., Inc. Executive Vice President
Roger G. Neaves Charles Schwab & Co., Inc. Senior Vice President
Geoffrey Penney Charles Schwab & Co., Inc. Senior Vice President
Kenneth W. Perlman Charles Schwab & Co., Inc. Senior Vice President
Mayer & Schweitzer, Inc. Senior Vice President and
General Counsel
Earlene Perry Charles Schwab & Co., Inc. Senior Vice President
Hugo W. Quackenbush Charles Schwab & Co., Inc. Senior Vice President
The Charles Schwab Corporation Senior Vice President
Edward M. Rodden Charles Schwab & Co., Inc. Senior Vice President
Kate Rohrbach Charles Schwab & Co., Inc. Senior Vice President and Chief
Communications Officer
Myra Rothfeld Charles Schwab & Co., Inc. Senior Vice President
Louise J. Rothman Charles Schwab & Co., Inc. Senior Vice President
Gideon Sasson Charles Schwab & Co., Inc. Senior Vice President
Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President
The Charles Schwab Corporation Executive Vice President
Steven L. Scheid Charles Schwab & Co., Inc. Executive Vice President,
Director and Chief Financial
Officer
The Charles Schwab Corporation Executive Vice President and
Chief Financial Officer
</TABLE>
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<PAGE> 76
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Charles Schwab Investment Management, Director and Chief Financial
Inc. Officer
The Charles Schwab Trust Company Chief Financial Officer
Schwab Retirement Plan Director
Services, Inc.
TrustMark, Inc. Director
Charles Schwab Limited Director and Finance Officer
Performance Technologies, Inc. Director
Mayer & Schweitzer Director
Tom D. Seip Charles Schwab & Co., Inc. Executive Vice President
The Charles Schwab Corporation Executive Vice President
Arthur V. Shaw Charles Schwab & Co., Inc. Senior Vice President
Leonard Short Charles Schwab & Co., Inc. Senior Vice President
Betsy Snow Charles Schwab & Co., Inc. Senior Vice President
Ray Straka Charles Schwab & Co., Inc. Senior Vice President
Michelle Swenson Charles Schwab & Co., Inc. Senior Vice President
John N. Tognino Charles Schwab & Co., Inc. Executive Vice President
The Charles Schwab Corporation Executive Vice President
Mayer & Schweitzer, Inc. Director and Vice Chairman
until February 1996
Richard Tinervin Charles Schwab & Co., Inc. Executive Vice President
Mark Thompson Charles Schwab & Co., Inc. Senior Vice President
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President and
Chief Administrative Officer;
Executive Vice President until
October 1996
The Charles Schwab Corporation Executive Vice President and
Chief Administrative Officer
Daniel J. Voet Charles Schwab & Co., Inc. Senior Vice President
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Christopher V. Dodds Charles Schwab & Co., Inc. Treasurer and Senior Vice
President
The Charles Schwab Corporation Treasurer and Senior Vice
President
Mayer & Schweitzer, Inc. Treasurer
Schwab Retirement Plan Services, Inc. Treasurer
TrustMark, Inc. Treasurer
Performance Technologies, Inc. Treasurer
William J. Klipp, Charles Schwab & Co., Inc. Executive Vice President
Trustee, Executive Vice President
and Chief Operating Officer
Charles Schwab Investment Management, President and Chief Operating
Inc. Officer
Stephen B. Ward, Charles Schwab Investment Management, Senior Vice President and Chief
Senior Vice President and Inc. Investment Officer
Chief Investment Officer
The Charles Schwab Trust Company Chief Investment Officer
Charles Schwab & Co., Inc. Senior Vice President and Chief
Investment Officer - Portfolio
Management
Frances Cole, Charles Schwab Investment Management, Senior Vice President, Chief
Secretary Inc. Counsel, Chief Compliance Officer
and Assistant Corporate Secretary
Tai-Chin Tung, Charles Schwab & Co., Inc. Vice President-Finance
Treasurer and
Principal Financial Officer
Charles Schwab Investment Management, Vice President and Controller
Inc.
Robertson Stephens Investment Controller until 1996
Management, Inc.
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Vice President and Assistant
Corporate Secretary
</TABLE>
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<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Charles Schwab Investment Management, Corporate Secretary
Inc.
The Charles Schwab Trust Assistant Corporate Secretary
Company
Mayer & Schweitzer, Inc. Corporate Secretary
Performance Technologies, Inc. Assistant Corporate Secretary
Schwab Retirement Plan Services, Inc. Assistant Corporate Secretary
TrustMark, Inc. Assistant Corporate Secretary
David H. Lui Charles Schwab Investment Management, Vice President and Senior Counsel
Assistant Secretary Inc.
Matthew M. O'Toole Charles Schwab Investment Management, Corporate Counsel
Assistant Secretary Inc.
Karen L. Seaman Charles Schwab Investment Management, Corporate Counsel
Assistant Secretary Inc.
</TABLE>
Item 29. Principal Underwriters.
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<PAGE> 79
(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab currently also acts as principal underwriter for the
Schwab Fund Family, Schwab Capital Trust, Schwab Annuity Portfolios and intends
to act as such for any other investment company which Schwab may sponsor in the
future.
(b) See Item 28(b) for information on the officers and directors of
Schwab. The principal business address of Schwab is 101 Montgomery Street, San
Francisco, California 94104.
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of: Registrant (transfer agency and shareholder
records); Registrant's investment manager and administrator, Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's principal underwriter, Charles Schwab & Co., Inc., 101
Montgomery Street, San Francisco, California 94104; Registrant's Custodian, PNC
Bank, National Association, Broad and Market Streets, Philadelphia, Pennsylvania
19809 (ledgers, receipts, and brokerage orders); Registrant's fund accountants,
PFPC, Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809; or Ropes & Gray,
counsel to Registrant, 1301 K Street, N.W., Suite 800 East, Washington, District
of Columbia, 20005 (minute books, bylaws, and declaration of trust).
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Registrant undertakes to call a meeting of Shareholders, at the
request of at least 10% of Registrant's outstanding shares, for the purpose of
voting upon the question of removal of a trustee or trustees and to assist in
communications with other Shareholders as required by Section (16) of the 1940
Act.
(b) Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of Registrant's latest Annual Report to
Shareholders upon request and without charge.
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<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended, has duly
caused this Post-Effective Amendment No. 19 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, District of
Columbia on the 20th day of October, 1997.
SCHWAB INVESTMENTS
Registrant
Charles R. Schwab*
---------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 19 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 20th day
of October, 1997.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman and Trustee
- --------------------
Charles R. Schwab
Timothy F. McCarthy* President and Trustee
- --------------------
Timothy F. McCarthy
William J. Klipp* Executive Vice President, Trustee and
- --------------------
William J. Klipp Chief Operating Officer
Donald F. Dorward* Trustee
- --------------------
Donald F. Dorward
Robert G. Holmes* Trustee
- --------------------
Robert G. Holmes
Donald R. Stephens* Trustee
- --------------------
Donald R. Stephens
Michael W. Wilsey* Trustee
- --------------------
Michael W. Wilsey
Tai-Chin Tung** Treasurer and Principal Financial Officer
- --------------------
Tai-Chin Tung
*By: /s/ Alan G. Priest
--------------------------------
Alan G. Priest, Attorney-in-Fact
pursuant to Powers of Attorney
previously filed.
</TABLE>
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