<PAGE> 1
File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on December 29, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 22 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 26 [X]
--------------
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
Tom D. Seip, 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., 101 Montgomery Street
Suite 800 East San Francisco, California 94104
Washington, D.C. 20005
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[X] On December 31, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] On [date], pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] On [date], pursuant to paragraph (a)(ii) of Rule 485
if appropriate, check appropriate box:
<PAGE> 2
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE> 3
SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB TOTAL BOND MARKET INDEX FUND
The information required by Items 1 through 9 for Schwab Short-Term Bond
Market Index Fund and Schwab Total Bond Market Index Fund, each a separate
portfolio of the Registrant, is hereby incorporated by reference to the
Prospectus for each Portfolio filed with the Securities and Exchange Commission
pursuant to Rule 485(b) on October 31, 1997.
The information required by Items 1 through 9 for Schwab California
Long-Term Tax-Free Bond Fund, Schwab Long-Term Tax-Free Bond Fund and Schwab
Short/Intermediate Tax-Free Bond Fund, each a separate portfolio of the
Registrant, is hereby incorporated by reference to the Prospectus for each
Portfolio filed with the Securities and Exchange Commission pursuant to Rule
485(b) on December 15, 1997.
<PAGE> 4
SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB 1000 FUND(R)
- --------------------------------------------------------------------------------
Part A Item Prospectus Caption
- --------------------------------------------------------------------------------
1. Cover Page Cover Page
- --------------------------------------------------------------------------------
2. Synopsis Key Features;
Expenses
- --------------------------------------------------------------------------------
3. Condensed Financial Information Not applicable
- --------------------------------------------------------------------------------
4. General Description of Registrant Organization & Management;
Investment Objective, Policies &
Risks
- --------------------------------------------------------------------------------
5. Management of the Fund Organization & Management
- --------------------------------------------------------------------------------
5.(a) Management's Discussion of Fund Not applicable
Performance
- --------------------------------------------------------------------------------
6. Capital Stock and Other Securities Organization & Management;
Investing in Shares
- --------------------------------------------------------------------------------
7. Purchase of Securities Being Investing in Shares
Offered
- --------------------------------------------------------------------------------
8. Redemption or Repurchase Investing in Shares
- --------------------------------------------------------------------------------
9. Pending Legal Proceedings Not applicable
- --------------------------------------------------------------------------------
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KEY FEATURES......................... 2
EXPENSES............................. 4
FINANCIAL HIGHLIGHTS................. 6
PERFORMANCE.......................... 12
ORGANIZATION & MANAGEMENT............ 13
INVESTMENT OBJECTIVES, POLICIES &
RISKS.............................. 16
INVESTING IN SHARES.................. 20
</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 1-800-435-4000 (1-800-345-2550 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
SCHWAB 1000 FUND
(Schwab1000 Fund) seeks total return by tracking the performance of the Schwab
1000 Index(R).
SCHWAB S&P 500 FUND
(S&P 500 Fund) seeks total return by tracking the performance of the S&P 500(R)
Index.
SCHWAB SMALL-CAP INDEX FUND
(Small-Cap Fund) seeks total return by tracking the performance of the Schwab
Small-Cap Index(R).
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 long-term investment programs, such as Schwab's
Automatic Investment Plan or retirement plans.
GOALS. SCHWAB 1000 FUND(R) seeks to track the total return of the Schwab 1000
Index(R), an index composed of common stocks of the 1,000 largest U.S.
companies.
S&P 500 FUND seeks to track the total return of the S&P 500(R) Index, an index
composed of common stocks of 500 U.S. companies, and prepared and published by
Standard & Poors.
SMALL-CAP FUND seeks to track the total return of the Schwab Small-Cap Index(R),
an index composed of common stocks of the second 1,000 largest U.S. companies.
INTERNATIONAL FUND seeks to track the total return of the Schwab International
Index(R), 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.
CLASSES DESIGNED TO MEET DIFFERENT NEEDS. Each Fund offers Investor Shares and
Select Shares. Select Shares(TM) have lower total expenses, but require higher
minimum investments. S&P 500 Fund also offers e.Shares(TM), which have lower
total expenses than Investor Shares (although higher than Select Shares), but
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 certain 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.
2
<PAGE> 7
TAX EFFICIENT STRATEGIES. The Funds use investing strategies designed to
minimize your tax liabilities. Read the "Investment Objectives, Policies &
Risks" section for more details.
MANAGEMENT. Charles Schwab Investment Management, Inc. (the Investment Manager)
currently provides investment management services to the SchwabFunds(R), a
family of 31 mutual funds with over $55 billion in assets as of November 28,
1997.
SHAREHOLDER SERVICE. Charles Schwab & Co., Inc. (Schwab) provides professional
representatives 24 hours a day at 1-800-435-4000 to service your accounts. Read
the "Investing in Shares" section of the prospectus for information on "How to
Buy Shares" and "How to Sell or Exchange 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.
3
<PAGE> 8
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are charges you may pay when you buy, sell or
exchange shares of the Funds.
<TABLE>
<CAPTION>
SCHWAB S&P SMALL- INTER-
1000 500 CAP NATIONAL
FUND(R) FUND FUND FUND
<S> <C> <C> <C> <C>
Maximum sales
charge on
purchases and
reinvested
dividends NONE NONE NONE NONE
Maximum deferred
sales charge NONE NONE NONE NONE
Redemption fee 0.50%* NONE* 0.50%* 0.75%*
Exchange fee NONE NONE NONE NONE
</TABLE>
* As a percentage of the amount redeemed of shares held less than 6 months
(read the "Investing in Shares" section for more information). Contact Schwab
for information on wire fees.
The information on shareholder transaction expenses is for transactions through
an account through Schwab. If you are purchasing, selling, exchanging or
maintaining shares through an entity other than Schwab, transaction expenses may
be charged by that entity.
ANNUAL OPERATING EXPENSES are paid by the Fund. 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 annual operating expenses stated below are based on historical expenses
(adjusted for Investor Shares to reflect current fees) and are stated as a
percentage of average daily net assets of each class of each Fund.
<TABLE>
<CAPTION>
SCHWAB S&P SMALL- INTER-
1000 500 CAP NATIONAL
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
INVESTOR SHARES
Management fee (after
reduction) 0.19% 0.04% 0.11% 0.14%
12b-1 fee None None None None
Other expenses (after
reduction) 0.27% 0.31% 0.38% 0.44%
TOTAL OPERATING
EXPENSES (AFTER
REDUCTION) 0.46% 0.35% 0.49% 0.58%
</TABLE>
<TABLE>
<CAPTION>
SCHWAB S&P SMALL- INTER-
1000 500 CAP NATIONAL
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SELECT SHARES(TM)
Management fee (after
reduction) 0.19% 0.04% 0.11% 0.14%
12b-1 fee None None None None
Other expenses (after
reduction) 0.16% 0.15% 0.27% 0.33%
TOTAL OPERATING
EXPENSES (AFTER
REDUCTION) 0.35% 0.19% 0.38% 0.47%
</TABLE>
<TABLE>
<CAPTION>
S&P
500
FUND
<S> <C>
.E SHARES(TM)
Management fee (after reduction) 0.04%
12b-1 fee None
Other expenses (after reduction) 0.24%
TOTAL OPERATING EXPENSES (AFTER REDUCTION) 0.28%
</TABLE>
EXAMPLE: If each of the Funds were to provide an annual return of 5%, you would
pay the following expenses on a $1,000
4
<PAGE> 9
investment, whether you redeemed your shares at the end of each period or left
your shares invested.
SCHWAB 1000 FUND(R)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Investor Shares $5 $15 $26 $ 58
Select Shares(TM) 4 11 20 44
</TABLE>
S&P 500 FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Investor Shares $4 $11 $20 $ 44
Select Shares 2 6 11 24
e. Shares(TM) 3 9 16 36
</TABLE>
SMALL-CAP FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Investor Shares $5 $16 $27 $ 62
Select Shares 4 12 21 48
</TABLE>
INTERNATIONAL FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Investor Shares $6 $19 $32 $ 73
Select Shares 5 15 26 59
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. 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 each class of each
Fund will not exceed the amount shown in the annual operating expenses table on
page 4. 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 as follows: 0.23%, 0.27%
and 0.50% for Schwab 1000 Fund - Investor Shares; 0.23%, 0.18% and 0.41% for
Schwab 1000 Fund - Select Shares; 0.35%, 0.35% and 0.70% for the S&P 500
Fund - Investor Shares; 0.35%, 0.18% and 0.53% for S&P 500 Fund - Select Shares;
0.35%, 0.26%, and 0.61% for S&P 500 Fund - e. Shares; 0.49%, 0.40% and 0.89% for
Small-Cap Fund - Investor Shares; 0.49%, 0.41% and 0.90% for Small-Cap
Fund - Select Shares; 0.69%, 0.44% and 1.13% for International Fund - Investor
Shares; 0.69%, 0.58% and 1.27% for International Fund - Select Shares.
Read the "Organization and Management" section of this prospectus for more
information on expenses.
5
<PAGE> 10
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, 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.
The auditor's 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.
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Schwab 1000 Fund(R)
---------------------------------------------------------------------------------------------
Investor Shares
October 31, August 31, August 31, December 31,
1997(1) 1997 1996 1995 1994 1993(2) 1992 1991(3)
----------- ---------- ---------- -------- -------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 24.78 $ 18.14 $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26 $ 10.00
Income from
investment
- --------------------
operations
---------
Net investment
income 0.04 0.28 0.24 0.26 0.26 0.17 0.24 0.15
Net realized and
unrealized gain
on investments 0.43 6.62 2.45 2.48 0.28 0.79 0.71 1.26
---------- ---------- ---------- -------- -------- -------- -------- --------
Total from
investment
operations 0.47 6.90 2.69 2.74 0.54 0.96 0.95 1.41
Less distributions
- --------------
Dividends from net
investment income -- (0.26) (0.23) (0.14) (0.26) (0.12) (0.25) (0.15)
---------- ---------- ---------- -------- -------- -------- -------- --------
Total distributions -- (0.26) (0.23) (0.14) (0.26) (0.12) (0.25) (0.15)
---------- ---------- ---------- -------- -------- -------- -------- --------
Net asset value at
end of period $ 25.25 $ 24.78 $ 18.14 $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26
========== ========== ========== ======== ======== ======== ======== ========
Total return (not
annualized) 1.90% 38.32% 17.27% 21.23% 4.28% 8.06% 8.52% 14.25%
- ---------
Ratios/Supplemental
data
- --------------------
Net assets, end of
period (000s) $2,610,607 $2,498,891 $1,560,059 $826,714 $554,061 $515,272 $370,980 $192,206
Ratio of expenses
to average net
assets+ 0.46% * 0.47% 0.49% 0.54% 0.51% 0.45%* 0.35% 0.00%*
Ratio of net
investment income
to average net
assets+ 1.00% * 1.33% 1.66% 2.03% 2.06% 2.21%* 2.45% 3.21%*
Portfolio turnover
rate 0% 2% 2% 2% 3% 1% 1% 1%
Average commission
rate** $ 0.0279 $ 0.0280 $ 0.0282 -- -- -- -- --
</TABLE>
6
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONTINUED)
- ---------------
<TABLE>
<C> <S>
+ The information contained in the above table is based on actual expenses for the period, after giving effect to
the portion of expenses reduced and absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios would have been:
Ratio of expenses
to average net
assets 0.50%* 0.53% 0.57% 0.63% 0.56% 0.49%* 0.52% 1.05%*
Ratio of net
investment income
to average net
assets 0.96%* 1.27% 1.58% 1.94% 2.01% 2.17%* 2.28% 2.16%*
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
(1) Two month period from September 1, 1997.
(2) Eight month period from January 1, 1993.
(3) Period from April 2, 1991 (commencement of operations).
</TABLE>
7
<PAGE> 12
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Schwab 1000 Fund(R)
---------------------------
Select Shares(TM)
---------------------------
Two months Period
ended ended
October 31, August 31,
1997 1997(1)
----------- -----------
<S> <C> <C>
Net asset value at beginning of period $ 24.79 $ 22.64
Income from investment operations
- --------------------------------
Net investment income 0.04 0.05
Net realized and unrealized gain on investments 0.43 2.10
-------- --------
Total from investment operations 0.47 2.15
Less distributions
- ---------------
Dividends from net investment income -- --
-------- --------
Total distributions -- --
-------- --------
Net asset value at end of period $ 25.26 $ 24.79
======== ========
Total return (not annualized) 1.90% 9.50%
- ----------
Ratios/Supplemental data
- -----------------------
Net assets, end of period (000s) $ 426,392 $ 347,244
Ratio of expenses to average net assets+ 0.35%* 0.35%*
Ratio of net investment income to average net assets+ 1.11%* 1.26%*
Portfolio turnover rate 0% 2%
Average commission rate $ 0.0279 $ 0.0280
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ The information contained in the above table is based on actual expenses for the period, after giving effect to
the portion of expenses reduced and absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios would have been:
Ratio of expenses to average net assets 0.41%* 0.68%*
Ratio of net investment income to average net assets 1.05%* 0.93%*
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
(1) For the period from May 19, 1997 (commencement of operations) to August 31, 1997.
</TABLE>
8
<PAGE> 13
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
S&P 500 Fund
---------------------------------------------------------------------------
Investor Shares e.Shares(TM) Select
Period Period Shares(TM)
Year ended ended Year ended ended Period ended
October 31, October 31, October 31, October 31, October 31,
1997 1996(1) 1997 1996(1) 1997(2)
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.88 $ 10.00 $ 10.89 $ 10.00 $ 12.85
Income from investment operations
- --------------------------------
Net investment income 0.14 0.08 0.21 0.04 0.05
Net realized and unrealized gain on investments 3.24 0.80 3.19 0.85 1.29
-------- -------- -------- ------- --------
Total from investment operations 3.38 0.88 3.40 0.89 1.34
Less distributions
- ---------------
Dividends from net investment income (0.09) -- (0.10) -- --
-------- -------- -------- ------- --------
Total distributions (0.09) -- (0.10) -- --
-------- -------- -------- ------- --------
Net asset value at end of period $ 14.17 $ 10.88 $ 14.19 $ 10.89 $ 14.19
======== ======== ======== ======= ========
Total return (not annualized) 31.29% 8.80% 31.48% 8.90% 10.43%
- ----------
Ratios/Supplemental data
- -----------------------
Net assets, end of period (000s) $ 923,148 $ 243,772 $ 131,691 $36,331 $ 485,604
Ratio of expenses to average net assets+ 0.38% 0.49%* 0.28% 0.28%* 0.19%*
Ratio of net investment income to average net
assets+ 1.49% 1.89%* 1.61% 1.82%* 1.46%*
Portfolio turnover rate 3% 1% 3% 1% 3%
Average commission rate $ 0.0277 $ 0.0224 $ 0.0277 $0.0224 $ 0.0277
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ The information contained in the above table is based on actual expenses for the period, after giving effect to
the portion of expenses reduced and absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios would have been:
Ratio of expenses to average net assets 0.70% 0.89%* 0.61% 1.19%* 0.53%*
Ratio of net investment income to average net
assets 1.17% 1.49%* 1.28% 0.91%* 1.12%*
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
(1) For the period from May 1, 1996 (commencement of operations) to October 31, 1996.
(2) For the period from May 19, 1997 (commencement of operations) to October 31, 1997.
</TABLE>
9
<PAGE> 14
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Small-Cap Fund
-----------------------------------------------------------------
Select
Shares(TM)
Investor Shares Period ---------------
ended Period ended
Year ended October 31, October 31, October 31,
1997 1996 1995 1994++ 1997(1)
-------- -------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 13.59 $ 11.70 $ 10.05 $ 10.00 $ 14.50
Income from investment operations
- --------------------------------
Net investment income 0.06 0.07 0.10 0.06 0.02
Net realized and unrealized gain on investments 4.14 1.88 1.61 -- 3.23
-------- -------- -------- -------
Total from investment operations 4.20 1.95 1.71 0.06 3.25
Less distributions
- ---------------
Dividends from net investment income (0.06) (0.06) (0.06) (0.01) --
-------- -------- -------- -------
Total distributions (0.06) (0.06) (0.06) (0.01) --
-------- -------- -------- -------
Net asset value at end of period $ 17.73 $ 13.59 $ 11.70 $ 10.05 $ 17.75
======== ======== ======== =======
Total return (not annualized) 31.03% 16.73% 17.11% 0.63% 22.41%
- ----------
Ratios/Supplemental data
- -----------------------
Net assets, end of period (000s) $410,470 $209,125 $122,074 $68,128 $81,174
Ratio of expenses to average net assets+ 0.52% 0.59% 0.68% 0.67%* 0.38%*
Ratio of net investment income to average net assets+ 0.53% 0.56% 0.68% 0.68%* 0.56%*
Portfolio turnover rate 23% 23% 24% 16% 23%
Average commission rate** $ 0.0012 $ 0.0318 -- -- $0.0012
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ The information contained in the above table is based on actual expenses for the periods, after giving effect
to the portion of fees and expenses reduced by the Investment Manager and Schwab. Had these fees and expenses
not been reduced, the Fund's expense and net investment income ratios would have been:
Ratio of expenses to average net assets 0.89% 0.94% 1.02% 1.19%* 0.90%*
Ratio of net investment income to average net assets 0.16% 0.21% 0.34% 0.16%* 0.04%*
++ For the period December 3, 1993 (commencement of operations) to October 31, 1994.
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
(1) For the period May 19, 1997 (commencement of operations) to October 31, 1997.
</TABLE>
10
<PAGE> 15
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
International Fund
---------------------------------------------------------------------------
Investor Shares Select
Period Shares(TM)
ended Period ended
Year ended October 31, October 31, October 31,
1997 1996 1995 1994 1993++ 1997(1)
-------- -------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 12.23 $ 11.13 $ 10.89 $ 10.15 $ 10.00 $ 13.59
Income from investment operations
- --------------------------------
Net investment income 0.17 0.16 0.14 0.11 0.03 0.04
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 1.08 1.07 0.22 0.69 0.12 (0.31)
-------- -------- -------- -------- --------
Total from investment operations 1.25 1.23 0.36 0.80 0.15 (0.27)
Less distributions
- ---------------
Dividends from net investment income (0.17) (0.13) (0.12) (0.04) -- --
Distributions from realized gain on
investments -- -- -- (0.02) --
-------- -------- -------- -------- --------
Total distributions (0.17) (0.13) (0.12) (0.06) -- --
-------- -------- -------- -------- --------
Net asset value at end of period $ 13.31 $ 12.23 $ 11.13 $ 10.89 $ 10.15 $ 13.32
======== ======== ======== ======== ========
Total return (not annualized) 10.33% 11.07% 3.35% 7.89% 1.50% (1.99)%
- ----------
Ratios/Supplemental data
- -----------------------
Net assets, end of period (000s) $317,833 $246,778 $179,612 $142,355 $ 106,085 $ 49,529
Ratio of expenses to average net assets+ 0.61% 0.69% 0.85% 0.90% 0.60%* 0.47%*
Ratio of net investment income to
average net assets + 1.36% 1.50% 1.45% 1.14% 2.15%* 1.17%*
Portfolio turnover rate 13% 6% 0% 6% 2% 13%
Average commission rate** $ 0.0175 $ 0.0162 -- -- -- $ 0.0175
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ The information contained in the above table is based on actual expenses for the periods, after giving effect
to the portion of fees reduced and expenses absorbed by the Investment Manager and Schwab. Had these fees and
expenses not been reduced and absorbed, the Fund's expense and net investment income ratios would have been:
Ratio of expenses to average net
assets+ 1.13% 1.17% 1.22% 1.30% 2.10% * 1.27% *
Ratio of net investment income to
average net assets+ 0.84% 1.02% 1.08% 0.74% 0.65% * 0.37% *
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
++ For the period September 9, 1993 (commencement of operations) to October 31, 1993.
(1) For the period May 19, 1997 (commencement of operations) to October 31, 1997.
</TABLE>
11
<PAGE> 16
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.
Each Fund intends to track the performance of its Index. The performance of each
Index, typically reported as total return, assumes reinvestment of dividends
paid by the stocks in the Index, but does not take into account any fees or
expenses associated with investing directly in the stocks in the Index, such as
brokerage commissions.
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.
12
<PAGE> 17
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(R), 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. There is a remote possibility that a Fund may
become liable for a misstatement about another Fund in the prospectus.
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
Bachelor of Arts 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.
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<PAGE> 18
For the fiscal years ended October 31, 1997, each of the S&P 500 Fund, Small-Cap
Fund and International Fund paid the Investment Manager investment management
fees, as a percentage of daily net assets, of 0.04%, 0.15% and 0.21%,
respectively. For the fiscal year ended August 31, 1997 and the fiscal period
ended October 31, 1997, Schwab 1000 Fund(R) paid the Investment Manager
investment management fees, as a percentage of its daily net assets, of 0.19%.
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
maintains the office space, equipment and personnel necessary to provide these
services. Schwab also distributes and markets SchwabFunds and provides other
services.
For the services performed as transfer agent under its contract with each Fund,
Schwab is entitled to receive an annual fee from each Fund. 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 an annual fee 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 generally be allocated among the funds in
a Trust on the basis of each fund's relative net assets at the time the expense
is incurred.
During the fiscal year ended October 31, 1997, Schwab and the Investment Manager
voluntarily lowered the guaranteed total operating expenses for the Investor
Shares of the Funds. As a result, the total operating expenses for this class as
noted below were higher than those reported in the annual operating expenses
table in the "Expenses" section of this prospectus.
For the fiscal year ended or period ended as noted below, each class of each
Fund paid total operating expenses as a percentage of its average daily net
assets, as follows: 0.47% for Schwab 1000 Fund - Investor Shares and 0.35% for
Schwab 1000 Fund - Select Shares(TM) (for fiscal year ended August 31, 1997);
0.46% for Schwab 1000 Fund - Investor Shares and 0.35% for Schwab 1000
Fund - Select Shares; (for fiscal period ended October 31, 1997); 0.38% for S&P
500 Fund - Investor Shares, 0.19% for S&P 500 Fund - Select Shares and 0.28% for
S&P 500 Fund - e.Shares(TM); 0.52% for Small-Cap Fund - Investor Shares and
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<PAGE> 19
0.38% for Small-Cap Fund - Select Shares; and 0.61% for International
Fund - Investor Shares and 0.47% for International Fund - Select Shares.
The Investment Manager may use affiliated broker-dealers, including Schwab, to
execute the Funds' transactions.
The Charles Schwab Corporation is the parent company of the Investment Manager
and Schwab. Charles R. Schwab is the founder, Chairman, Co-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.
15
<PAGE> 20
INVESTMENT OBJECTIVES, POLICIES & RISKS
INVESTMENT OBJECTIVES
THE SCHWAB 1000 FUND(R) seeks to match the total return of the Schwab 1000
Index(R).
THE S&P 500 FUND seeks to track the total return of the S&P 500(R) Index.
THE SMALL-CAP FUND seeks to track the total return of Schwab Small-Cap Index(R).
THE INTERNATIONAL FUND seeks to track the total return of Schwab International
Index(R).
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 (Index Stocks).
THE INDEXES
The criteria for inclusion in each Index are described below. The Schwab Indexes
may not include a particular security (otherwise eligible for inclusion) under
certain circumstances, such as in the event of corporate actions like mergers or
new issues (IPOs).
THE SCHWAB 1000 INDEX(R) is designed to represent the total return of large- and
mid-cap domestic stocks. Publicly-traded common stocks of the top 1,000 U.S.
companies (as measured by market capitalization) are eligible for inclusion in
this index.
THE S&P 500(R) Index is a widely recognized, index comprised of 500 large-cap
common stocks selected by Standard & Poor's.
THE SCHWAB SMALL-CAP INDEX(R) is designed to represent the total return of
small-cap domestic stock. Publicly-traded common stocks of the second 1,000 U.S.
companies (as measured by market capitalization) are eligible for inclusion in
this index.
THE SCHWAB INTERNATIONAL INDEX(R) is designed to represent the total return of
large-cap foreign stocks. Equity securities of the top 350 foreign companies (as
measured by market capitalization) that are publicly-traded in developed
securities markets are eligible for inclusion in this index. 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 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,
16
<PAGE> 21
when taken together, is expected to perform similarly to its Index. Each Fund
generally tries to match its holdings of Index Stocks to their weightings in the
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 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 inherent 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. Some stocks,
like small company and international stocks, are more sensitive to stock risk
than others. Diversifying investments across companies can help to lower the
stock risk of a Fund.
INDUSTRY RISK is the risk that the companies in a particular industry will
experience a decline in the price of their 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 an entire class of securities, such as stocks or bonds.
Unlike stock and industry risk, the Funds do not attempt to reduce market risk,
which can only be removed by diversification among various asset classes (e.g.,
stocks, bonds, cash and real estate).
The amount or type of risk each Fund will be subject to depends on its portfolio
of investments. Because each Fund intends to track its Index, its risk profile
is expected to be similar to that of its Index. The Indexes are designed to
reflect the performance of a particular segment of the stock market and will be
subject to those market risks, as well as stock and industry risks.
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<PAGE> 22
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 that 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 and 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. They 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. U.S. Government securities are issued or guaranteed by the
U.S. Government, its agencies and instrumentalities. A money market security is
a high-quality debt security that has short-term maturity.
ILLIQUID SECURITIES are securities that are not actively traded and, therefore,
may be difficult to sell quickly. The sale of some illiquid securities and
certain other securities may be subject to legal restrictions, which could make
it difficult to sell these securities. A fund could incur losses if it has
difficulty selling a security.
Restriction: Each Fund will not invest more than 10% of its net assets in
illiquid securities. This policy may be changed only by shareholders.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. To the extent a Fund invests in liquid restricted securities, its
general level of illiquidity may increase if these securities become difficult
to sell.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES are securities that are purchased at
a set price and yield but are to be delivered to the buyer at a later than
customary date. Generally, the purchaser does not pay for
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<PAGE> 23
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
(an exchange of one security or asset for another), purchasing indexed
securities and selling securities short. Generally, futures and options
transactions are agreements between two parties to buy or sell securities at a
specified price within a designated period. Currency exchange contracts for the
International Fund include transactions and position hedging, which involve
buying and/or selling foreign currencies either on a spot (cash) or future basis
in an attempt to protect specific holdings in foreign securities or the
portfolio as a whole.
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.
STOCK SUBSTITUTION STRATEGY is a strategy, whereby each Fund may, in
extraordinary circumstances, substitute a similar stock for an Index Stock.
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 a 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 net assets for
temporary or emergency purposes; provided that each Fund will not purchase
securities while borrowing represents more than 5% of its total assets. This
policy may be changed only by shareholders.
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.
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<PAGE> 24
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 class of each Fund is its net asset value per
share (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 attributable to each class, subtracting its share of liabilities
and dividing the result by the number of outstanding shares of the class. 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.
MINIMUM INVESTMENTS
INVESTOR SHARES AND E.SHARES(TM)
<TABLE>
<S> <C>
INITIAL INVESTMENT............... $ 1,000
for custodial and retirement plan
accounts....................... $ 500
ADDITIONAL SHARES................ $ 100
MINIMUM BALANCE*................. $ 1,000
SELECT SHARES(TM)
INITIAL INVESTMENT............... $50,000
ADDITIONAL SHARES................ $ 1,000
MINIMUM BALANCE*................. $40,000
</TABLE>
* Your shares may be automatically redeemed if, as a result of selling or
exchanging shares, you no longer meet a Fund's minimum balance requirements.
You will be given 30 days' notice prior to redemption to increase your
holdings to the required minimum balance.
These minimums may not be applicable to certain customers of Schwab
Institutional's 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 a Fund at 101 Montgomery Street, San Francisco, CA 94104.
ELECTRONICALLY. Visit Schwab's World Wide Web site at http://www.schwab.com. For
more information about e.Shares,
20
<PAGE> 25
StreetSmart(R), The Equalizer(R) and Telebroker(R), call 1-800-435-4000.
SCHWABLINK(R). e.Shares(TM) 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 1-800-367-5198 for
help.
TO PURCHASE SHARES OF THE FUNDS. Please provide the following information.
- - your name and Schwab account number (for e.Shares, your SchwabLink master
account number and subaccount number);
- - the name of your Fund and class and the dollar amount you would like to
purchase; and
- - for initial purchases only, one of the three distribution choices below.
AUTOMATIC REINVESTMENT. Dividends and 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 distributions will be reinvested;
CASH OPTION. Dividends will be paid to your Schwab account and, if requested,
mailed to you the next business day.
CASH DISTRIBUTION/REINVESTED CAPITAL GAINS. Dividends will be paid to you in
cash and any capital gain distributions will be reinvested in additional
shares.
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 and 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 a 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), 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
21
<PAGE> 26
difficulty using SchwabLink(R), 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 (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.
PLEASE NOTE THE FOLLOWING WHEN SELLING OR EXCHANGING SHARES OF THE FUNDS:
- - payment for redeemed shares will be made to your Schwab account within 7
days;
- - a check may 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 from the date of purchase;
- - depending on the type of Schwab account you have, your money may earn
interest during any holding period;
- - a fee may be charged for redemptions by wire;
- - 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(R), 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
22
<PAGE> 27
bear additional costs. An early withdrawal fee will not be charged for
exchanges between classes of shares of the same Fund or against shares
redeemed or acquired though reinvestment of dividends or capital gains
distributions. 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.
OPENING A SCHWAB ACCOUNT
Schwab was established in 1971 and is one of America's largest discount brokers.
Schwab serves over 4.7 million customer accounts and helps the investor make
investment decisions by offering them low cost brokerage services and providing
them with financial products and information. Visit one of Schwab's 260 branch
offices or Schwab's 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. Read the application and account
agreement for complete information about your account.
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 account 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 account protection does not protect against
losses due to market or economic conditions.
Schwab accounts opened prior to January 15, 1998 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 opened prior to January 15, 1998 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.
Effective January 15, 1998, Schwab accounts will not be available, and Schwab
One(R) accounts will be available with a new
23
<PAGE> 28
minimum initial investment requirement of $2,500. Additionally, the account fees
for existing Schwab and Schwab One(R) accounts will be replaced with a calendar
quarter account fee of $15, effective April 1, 1998. However, this fee will not
be charged if the combined balances of your household's accounts at Schwab
exceed $25,000 at the end of any month in that quarter, you have one
commissionable trade in that or the preceding quarter or you have two or more
commissionable trades during the last four quarters. If you have more than one
account at Schwab, you will be charged only one quarterly fee.
Deposits may be made to your account 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 advantages
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.
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 cash, Sweep Shares of a Schwab Money Fund or the Schwab
MoneyLink(R) Transfer Service. As long as you are purchasing a Fund's shares
through
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<PAGE> 29
AIP, distributions paid to you by the Fund must be reinvested in additional
shares of that Fund. For more detailed information about this service, or to
establish your AIP, call 1-800-435-4000, 24 hours a day.
DIVIDENDS & TAXES
The following is only a brief summary of some of the federal 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.
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 International Fund from foreign sources may be subject to
foreign income taxes withheld at the source. For taxable years in which it so
qualifies, 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 by International Fund and may claim a credit or deduction
for those foreign taxes, subject to the general limitations on foreign tax
credits and deductions.
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, a Fund notifies shareholders of the federal income tax treatment of
all distributions made by each Fund that year.
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 or visiting a Schwab branch office.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are
25
<PAGE> 30
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 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.
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 by the S&P 500 Fund, its shareholders or any other
person or entity from the use of the 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&P 500 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
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<PAGE> 31
(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.
- ---------------------------------------------------
27
<PAGE> 32
SCHWAB EQUITY
- -----------------
INDEX FUNDS
- -----------
PROSPECTUS
MAY 19, 1997
// Schwab S&P 500 Fund
// Schwab 1000 Fund(R)
// Schwab Small-Cap
Index Fund(R)
// Schwab International
Index Fund(R)
[Schwab Funds(R) Logo]
SchwabFunds(R)
101 Montgomery Street
San Francisco, California 94104
3048-1 (12/97) CRS 11209 Printed on recycled paper.
<PAGE> 33
PART B
SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB TOTAL BOND MARKET INDEX FUND
The information required by Items 10 through 23 for Schwab Short-Term Bond
Market Index Fund and Schwab Total Bond Market Index Fund, each a separate
portfolio of the Registrant, is hereby incorporated by reference to the
Statement of Additional Information for each of these Portfolios filed with the
Securities and Exchange Commission pursuant to Rule 485(b) on October 31, 1997.
The information required by Items 10 through 23 for Schwab California Long-Term
Tax-Free Bond Fund, Schwab Long-Term Tax-Free Bond Fund and Schwab
Short/Intermediate Bond Fund, a portfolio of the Registrant, is hereby
incorporated by reference to the Statement of Additional Information for this
Portfolio filed with the Securities and Exchange Commission pursuant to Rule
485(b) on December 15, 1997.
<PAGE> 34
SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB 1000 FUND(R)
- --------------------------------------------------------------------------------
Part B Item Statement of Additional Information
Caption
- --------------------------------------------------------------------------------
10. Cover Page Cover Page
- --------------------------------------------------------------------------------
11. Table of Contents Table of Contents
- --------------------------------------------------------------------------------
12. General Information and History General Information
- --------------------------------------------------------------------------------
13. Investment Objectives and Policies Investment Securities; Investment
Restrictions
- --------------------------------------------------------------------------------
14. Management of the Fund Management of the Trust
- --------------------------------------------------------------------------------
15. Control Persons and Principal General Information
Holders of Securities
- --------------------------------------------------------------------------------
16. Investment Advisory and Other Management of the Trust
Services
- --------------------------------------------------------------------------------
17. Brokerage Allocation and Other Portfolio Transactions and Turnover
Practices
- --------------------------------------------------------------------------------
18. Capital Stock and Other Securities General Information
- --------------------------------------------------------------------------------
19. Purchase, Redemption and Pricing Share Price Calculation;
of Securities Being Offered Purchase and Redemption of Shares
- --------------------------------------------------------------------------------
20. Tax Status Taxes
- --------------------------------------------------------------------------------
21. Underwriters Management of the Trust
- --------------------------------------------------------------------------------
22. Calculation of Performance Data Total Return and Yield
- --------------------------------------------------------------------------------
23. Financial Statements Financial Statements
- --------------------------------------------------------------------------------
<PAGE> 35
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 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 Schwab 1000 Fund(R).
To obtain a copy of the Prospectus, please contact Charles Schwab & Co.,
Inc. (Schwab) at 1-800-435-4000, 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/schwabfunds.
SCHWABFUNDS(R)
1-800-435-4000
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES........................................................2
INVESTMENT SECURITIES AND RISKS..............................................2
INVESTMENT RESTRICTIONS ....................................................16
ORGANIZATION AND MANAGEMENT OF THE TRUSTS ..................................18
MANAGEMENT OF THE FUNDS.....................................................24
PORTFOLIO TRANSACTIONS AND TURNOVER.........................................26
TAXES.......................................................................28
SHARE PRICE CALCULATION.....................................................31
HOW THE FUNDS REFLECT PERFORMANCE...........................................32
THE INDEXES AND INDEXING STRATEGIES.........................................34
PURCHASE AND REDEMPTION OF SHARES...........................................37
OTHER INFORMATION...........................................................38
FINANCIAL INFORMATION.......................................................38
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<PAGE> 36
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(R). The investment objective of the Schwab 1000 Fund(R) 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 seek 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 AND RISKS
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.
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. Each of the Schwab 1000
Fund(R), International Fund and Small-Cap Fund will not purchase convertible
securities if as a result more than 5% of its net assets would be invested in
these securities.
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<PAGE> 37
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).
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
3
<PAGE> 38
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 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.
4
<PAGE> 39
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. 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
5
<PAGE> 40
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 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
6
<PAGE> 41
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 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.
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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 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.
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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 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.
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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 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(R) 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.
Restriction. Each Fund will not purchase indexed securities, if as a result,
more that 5% of net assets would be invested in these securities.
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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 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
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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 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,
letters of credit 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, in addition to prepayment risk.
Mortgage-backed securities include collateralized mortgage obligations,
mortgage-backed bonds and stripped mortgage-backed securities.
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.
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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.
Restriction. Each Fund will not purchase preferred stocks, if as a result, it
would have more than 5% of net assets in such securities.
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 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;
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(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.
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.
Restriction. Each Fund will not purchase warrants, if as a result, it would
have invested more than 5% of net assets in such securities.
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
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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 500 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).
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.
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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.
In addition to Investment Restrictions numbered 4, 6, 8, 10, and 11 above, the
Schwab 1000 Fund(R) has the following additional fundamental policies.
THE SCHWAB 1000 FUND(R) 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) Purchase securities (other then securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a result or such
purchase, 25% or more of the value of its total assets would be invested in any
industry (except, to the extent that the Schwab 1000 Index(R) is also so
concentrated). Securities issued by governments or political subdivisions or
authorities of governments are not considered to be securities subject to this
concentration restriction.
3) Invest more than 10% of the total value of its assets in illiquid
securities, including repurchase agreements with maturities in excess of seven
days.
4) 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.
5) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
6) 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.
With respect to the fundamental restriction regarding illiquid securities,
the Fund not calculate its 10% of total assets limit so that it may invest more
than 15% of net assets in illiquid securities.
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.
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THE INTERNATIONAL FUND will invest at least 65% of its total assets in common
stocks and other equity securities including preferred stocks, rights and
warrants of companies located in at least three 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:
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(R) Fund has the following additional non-fundamental investment
limitations.
THE SCHWAB 1000(R) 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.
17
<PAGE> 52
ORGANIZATION AND MANAGEMENT OF THE TRUSTS
Each Fund, except the Schwab 1000 Fund(R), 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(R) 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(R),
Schwab Total Bond Market Index Fund, Schwab Short-Term 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. Currently, Schwab Capital Trust offers
the following series: S&P 500 Fund, International Fund, Small-Cap Fund,
Analytics Fund, Schwab Asset Director(R)- High Growth Fund, Schwab Asset
Director(R)- Balanced Fund, Schwab Asset Director(R)- Conservative Fund, Schwab
OneSource(R) Portfolios- Growth Allocation Fund, Schwab OneSource(R) Portfolios-
Balanced Allocation Fund, Schwab OneSource(R) Portfolios- International Fund,
and Schwab OneSource(R) 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,
18
<PAGE> 53
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 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 December 19, 1997, the officers and Trustees of the Trust, as a group
owned of record or beneficially less than 1% of the outstanding voting
securities of the remaining classes and series of Schwab Capital Trust and
Schwab Investments.
As of December 19, 1997, the Charles Schwab Trust Company, 101 Montgomery
Street, San Francisco, California, 94104 directly or beneficially owned,
respectively, 7.21%, 12.01% and 10.30% of S&P 500 Fund Investor Shares, Select
Shares and e.Shares. As of this same date, the Morgan Stanley Trust Company, 1
Pierrepont Plaza, Brooklyn , New York, 11201, directly or beneficially owned
19.92% of International Fund - Investor Shares and 15.40% of Small-Cap Fund -
Investor Shares.
19
<PAGE> 54
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The Officers and Trustees of the Trust, their principal
occupations over the past five years and their affiliations, if any, with The
Charles Schwab Corporation, Schwab and Charles Schwab Investment Management,
Inc., the Investment Manager, are as follows:
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
CHARLES R. SCHWAB* Chairman and Chairman, Co-Chief Executive
July 29, 1937 Trustee Officer and Director, The
Charles Schwab Corporation;
Chairman, Chief Executive Officer
and Director, Charles Schwab
Holdings, Inc.; Chairman and
Director, Charles Schwab & Co.,
Inc, Charles Schwab Investment
Management, Inc., The Charles
Schwab Trust Company, and Schwab
Retirement Plan Services, Inc.;
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).
TOM D. SEIP Executive Vice President, The
February 15, 1950 Charles Schwab Corporation;
Enterprise President -
International and Mutual Funds,
Charles Schwab & Co., Inc.;
Chief Executive Officer, Charles
Schwab Investment Management, Inc.
DONALD F. DORWARD Trustee Executive Vice President and
September 23, 1931 Managing Director, Grey
Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief
Executive Officer, Dorward &
Associates. Dorward & Associates is
an advertising and marketing/
consulting firm.
- --------------------
20
<PAGE> 55
ROBERT G. HOLMES Trustee Chairman, Chief Executive
May 15, 1931 Officer and Director, Semloh
Financial, Inc. Semloh
Financial is an international
financial services and
investment advisory firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens
June 28, 1938 & Co. (investment banking).
Prior 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
August 18, 1943 Officer and Director, Wilsey
Bennett, Inc. (truck and air
transportation, real estate
investment and management, and
investments).
TAI-CHIN TUNG Treasurer and Vice President - Finance,
March 7, 1951 Principal Charles Schwab & Co., Inc.;
Financial Officer 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 Executive Vice President,
December 9, 1955 President, Chief SchwabFunds(R), Charles Schwab &
Operating Co., Inc.; President and Chief
Officer and Operating Officer, Charles
Trustee 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 Senior Vice President and Chief
President Investment
- ---------------
* This Trustee is an "interested person" of the Trust.
21
<PAGE> 56
April 5, 1955 and Chief Officer, Charles Schwab
Investment Investment Management, Inc.
Officer
FRANCES COLE Secretary Vice President, Chief Counsel,
September 9, 1955 Chief Compliance Officer and
Assistant Corporate Secretary,
Charles Schwab Investment
Management, Inc.
DAVID H. LUI Assistant Vice President and Senior
October 14, 1960 Secretary Counsel, Charles Schwab
Investment Management, Inc.
From 1991 to 1992, he was
Assistant Secretary for the
Franklin Group of Mutual Funds
and Assistant Corporate Counsel
for Franklin Resources, Inc.
KAREN L. SEAMAN Assistant Corporate Counsel, Charles
February 27, 1968 Secretary Schwab Investment Management,
Inc. From October 1994 to July
1996, she was an Attorney for
Franklin Resources, Inc. Prior
to 1994, Ms. Seaman was an
Attorney for The Benham Group.
MATTHEW O'TOOLE Assistant Corporate Counsel, Charles
September 26, 1964 Secretary Schwab Investment Management,
Inc. From November 1995 to
April 1997, Mr. O'Toole was
Assistant General Counsel for
Chancellor LGT Asset Management,
Inc. Prior there to, Mr.
O'Toole was Senior Counsel at
the U.S. Securities and Exchange
Commission in Washington, D.C.
AMY L. MAUK Assistant Corporate Counsel, Charles
January 5, 1969 Secretary Schwab Investment Management,
Inc. From April 1995 to March
1997, she was a Legal Product
Manager for Fidelity Investments.
Each of the above-referenced Officers and/or Trustees also serves in the same
capacity as described for the Trust for The Charles Schwab Family of Funds,
Schwab Capital Trust and Schwab Annuity Portfolios. The address of each
individual listed above is 101 Montgomery Street, San Francisco, California
94104.
22
<PAGE> 57
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Pension or
Retirement Estimated
Aggregate Aggregate Benefits Accrued Annual Benefits Total
Compensation Compensation as Part of Fund upon Retirement Compensation
Name of Person, from Schwab from Schwab Expenses from the from the Fund from the Fund
Position Capital Trust Investments Fund Complex 2 Complex 2 Complex 2
- -------- ------------- ----------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Tom D. Seip, 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, $18,800 $18,800 N/A N/A $92,000
Trustee
Robert G. Holmes, $18,800 $18,800 N/A N/A $92,000
Trustee
Donald R. Stephens, $18,800 $18,800 N/A N/A $92,000
Trustee
Michael W. Wilsey, $18,000 $18,800 N/A N/A $92,000
Trustee
</TABLE>
1 Figures are for each Trust's fiscal year ended October 31, 1997.
2 "Fund Complex" comprises all 33 funds of the Schwab Capital 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.
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
23
<PAGE> 58
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 $55 billion in assets as of November 28, 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.
For the fiscal years ended October 31, 1997, 1996 and 1995, the International
Fund paid investment advisory fees of $643,000, $886,000, and $665,000,
respectively (fees were reduced by $1,503,000, $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.
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<PAGE> 59
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 $540,000, $520,000, and $332,000, respectively
(fees were reduced by $1,000,000, $347,000, and $115,000, respectively).
Schwab 1000 Fund(R). For its advisory and administrative services to the Schwab
1000 Fund(R), 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(R) 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(R) paid investment advisory fees of $4,025,000, $2,485,000 and $1,640,000,
(fees were reduced by $1,179,000, 648,000 and $137,000, respectively) and for
the fiscal period ended October 31, 1997 $967,000 (fees were reduced by
$220,000).
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(R) and the Select Shares(R) 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 $429,000 and $128,000, respectively (fees were
reduced by $2,410,000 and $723,000 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").
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(R) 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
in effect in 1995, the Investment Manager paid Dimensional $143,000, $36,000 and
$436,034 for International Fund, Small-Cap Fund and Schwab 1000 Fund(R),
respectively.
25
<PAGE> 60
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.
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 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
26
<PAGE> 61
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 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 year ended October 31, 1997, S&P 500 Fund paid brokerage
commissions of $583,314 and for the fiscal year period of May 1, 1996
(commencement of operations) through October 31, 1995 the Fund paid brokerage
commissions of $119,350.
For the fiscal years ended October 31, 1996, 1995 and 1994, the International
Fund paid brokerage commissions of $86,632, $101,230, and $54,718, respectively.
For the fiscal years ended August 31, 1997, 1996 and 1995, the Schwab 1000
Fund(R) paid brokerage commissions of $424,652, $408,000 and $118,000 and for
the fiscal period ended October 31, 1997 $92,582.
For the fiscal years ended October 31, 1997, 1996 and 1995, the Small-Cap Fund
paid brokerage commissions of $281,321, $181,679,and $142,785, respectively.
Of brokerage commissions paid by the Schwab 1000 Fund(R) in 1996, $1,000 (0.25%
of the total amount) was paid to Schwab, an affiliated person of the Fund and
0.54% of transactions involving the payment of a brokerage commission in 1996
were effected through Schwab.
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
27
<PAGE> 62
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 13% and 6%, respectively.
The Small-Cap Fund's portfolio turnover rate for the fiscal years ended October
31, 1997 and 1996 was 23% and 23%, respectively.
The S&P 500 Fund's portfolio turnover rate for the fiscal year ended October 31,
1997 was 3% and for the period of May 1, 1996 (commencement of operations) to
October 31, 1996 was 1%.
The Schwab 1000 Fund(R)'s portfolio turnover rate for the fiscal years ended
August 31, 1997 and 1996 was 2% and 2%, respectively. The portfolio turnover
rate for the period of August 31, 1997 to October 31, 1997 was 0%.
From time to time, each Fund may compare its portfolio turnover rate with that
of other mutual funds as reported by independent sources.
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
28
<PAGE> 63
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.
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
29
<PAGE> 64
definition of "resident alien." Different tax consequences may result if the
foreign shareholder is engaged in 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.
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
30
<PAGE> 65
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 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
31
<PAGE> 66
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 Five Years ended From Commencement of
Operations) October 31, 1997 October 31, 1997 Operations to October 31, 1997
- --------------------- ---------------- ---------------- ------------------------------
<S> <C> <C> <C>
International Fund -- 10.33% N/A 8.20%
Investor Shares
(9/09/93)
Small-Cap Fund -- 31.03% N/A 16.23%
Investor Shares
(12/03/93)
S&P 500 Fund -- 31.29% N/A 26.75%
Investor Shares
(5/01/96)
S&P 500 Fund -- 31.48% N/A 26.95%
e.Shares (5/01/96)
Schwab 1000 Fund(R) -- 30.84% 18.97% 16.91%
Investor Shares (5/2/91)
</TABLE>
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.
32
<PAGE> 67
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) 38.69%
International Fund - Select Shares (5/19/97) 1.99%
Small-Cap Fund - Investor Shares (12/03/93) 80.26%
Small-Cap Fund - Select Shares (5/19/97) 22.41%
Schwab 1000 Fund(R) - Investor Shares (5/2/91) 79.92%
Schwab 1000 Fund(R) - Select Shares (5/19/97) 11.57%
S&P 500 Fund - Investor Shares (5/01/96) 42.84%
S&P 500 Fund - e.Shares (5/01/96) 43.18%
S&P 500 Fund - Select Shares (5/19/97) 10.43%
</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
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
33
<PAGE> 68
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.
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 Schwab 1000 Index(R), Schwab Small Cap-Index(R) and
Schwab International Index(R) were developed and are maintained by Schwab. They
serve as a comparison for their Fund's performance. Schwab receives no
compensation from the Funds for maintaining the Indexes. The performance (i.e.,
the market value of all Index Stocks) of the Schwab 1000 Index, the Schwab
Small-Cap Index and the Schwab International Index is calculated and made
available each business day by Schwab. The total return of the Schwab 1000
Index, the Schwab Small-Cap Index and The Schwab International Index is computed
monthly (using beginning of month capitalization weightings and assuming
reinvestment of dividends) and may be reported from time to time to each Fund's
shareholders.
Schwab reviews and, as necessary, revises the lists of companies whose
securities are included in the Schwab 1000 Index, the Schwab Small-Cap Index and
the Schwab International Index at least annually. Companies known by Schwab to
meet or no longer meet the inclusion criteria will be added or deleted as
appropriate. Schwab will also modify each index as necessary to account for
corporate actions (e.g., new issues, repurchases, stock dividends/splits,
tenders, mergers, swaps, spin-offs, or Chapter 11 bankruptcy filings made
because of a company's inability to continue operating as a going concern).
Schwab may change the Schwab 1000 Index and the Schwab Small-Cap Index inclusion
criteria if it determines that doing so would cause the Schwab 1000 Index and
the Schwab Small-Cap Index to be more representative of the domestic equity
market. Schwab may also change Schwab International Index inclusion criteria if
it determines that doing so would cause the Schwab International Index to be
more representative of the large, publicly traded international company equity
market. In the future, each Trust's Board of Trustees, subject
to shareholder approval, may select another index should it decide that taking
such action would be in the best interest of a Fund's shareholders.
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.
34
<PAGE> 69
INTERNATIONAL INDEX
The International Index is a broad-based international stock index, which
contains the common stocks of 350 of the largest non-U.S. operating companies
(i.e., non-investment companies) within the fifteen countries used to represent
developed markets. 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 markets outside the
United States. In addition, the market value of the securities must place them
among the top 350 such companies as measured by market capitalization. The Fund
may purchase securities of companies with which it is affiliated to the extent
these companies are represented in its Index. 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 October 31, 1997, the aggregate market capitalization of Index Stocks
included in the Schwab International index was approximately $5.362 trillion.
This represents approximately 48% 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). The Fund may purchase securities of companies
with which it is affiliated to the extent these companies are represented in its
Index. 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 and Small-Cap Index,
respectively, to the historical performance of various other indices, including
the S&P 500, as reported by independent sources.
As of October 31, 1997, the aggregate market capitalization of Index Stocks
included in the Schwab Small-Cap Index was approximately $680 billion. This
represents approximately 6.9% of the total market value of all publicly traded
United States companies, as represented by the Wilshire 5000 Index.
THE S&P 500 INDEX(R)
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
35
<PAGE> 70
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 14.57% . 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: Micropal, December 31, 1996.
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 October 31, 1997, the aggregate market capitalization of Index Stocks
included in the Schwab 1000 Index was approximately $8.153 trillion. This
represents approximately 83.88% 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. The Fund may purchase securities of companies with which
it is affiliated to the extent these companies are represented in its Index.
Charles R. Schwab, a veteran investor, was instrumental in developing the Schwab
1000 Fund(R). 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.
36
<PAGE> 71
The data reported below is current as of December 1996. The Source for all
information below is Micropal, 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>
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SCHWAB 1000 S&P 500 3-MONTH CD'S CORPORATE TREASURY INFLATION
INDEX INDEX BONDS BILLS (CPI)
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
1979 21.34 18.61 11.22 -2.11 9.81 13.29
- -----------------------------------------------------------------------------------------
1980 61.20 57.16 25.69 -2.39 22.24 27.47
- -----------------------------------------------------------------------------------------
1981 54.95 49.42 45.67 0.49 39.5 38.85
- -----------------------------------------------------------------------------------------
1982 87.60 81.61 63.51 39.88 54.75 44.17
- -----------------------------------------------------------------------------------------
1983 128.48 122.58 78.34 52.85 68.04 49.63
- -----------------------------------------------------------------------------------------
1984 142.83 136.54 96.81 78.25 84.16 55.54
- -----------------------------------------------------------------------------------------
1985 221.19 211.59 112.65 121.18 98.01 61.45
- -----------------------------------------------------------------------------------------
1986 277.88 269.75 126.51 157.76 110 63.22
- -----------------------------------------------------------------------------------------
1987 289.34 289.16 142.04 164.35 122.08 70.46
- -----------------------------------------------------------------------------------------
1988 355.39 353.79 160.74 188.74 137.07 77.99
- -----------------------------------------------------------------------------------------
1989 492.10 497.58 184.42 229.43 156.44 86.26
- -----------------------------------------------------------------------------------------
1990 465.16 479.03 207.59 252.67 175.64 97.64
- -----------------------------------------------------------------------------------------
1991 656.08 655.44 225.54 317.99 190.41 103.69
- -----------------------------------------------------------------------------------------
1992 723.39 712.98 237.52 354.3 200.45 109.6
- -----------------------------------------------------------------------------------------
1993 807.71 794.93 248.27 409.57 209.51 115.36
- -----------------------------------------------------------------------------------------
1994 812.16 806.75 264.5 389.57 222.93 121.12
- -----------------------------------------------------------------------------------------
1995 1153.87 1,147.48 284.46 498.43 240.49 126.74
- -----------------------------------------------------------------------------------------
1996 1430.75 1,433.91 303.19 518.07 257.63 134.27
- -----------------------------------------------------------------------------------------
Source: Micropal. Corporate Bonds are represented by the Lehman Brothers Long-Term Corporate Bond Index.
</TABLE>
PURCHASE AND REDEMPTION OF SHARES
We designed the Funds for long-term investors. You should not use the Funds to
speculate on short-term market movements. Doing so can disrupt our investment
strategy and operations. It also raises costs for other Fund investors. As a
result, we may refuse any purchase or buy exchange order that we deem to be
disruptive to the Funds or their investments.
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,
37
<PAGE> 72
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, Price Waterhouse LLP, 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 periods 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.
38
<PAGE> 73
PART C
OTHER INFORMATION
December 29, 1997
SCHWAB INVESTMENTS
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
1. Financial Statements and financial highlights included in the Annual
Reports for the Schwab 1000 Fund(R), Schwab Short-Term Bond Market
Index Fund (formerly Schwab Short/Intermediate Government Bond Fund),
Schwab Total Bond Market Index Fund (formerly Schwab Long-Term
Government Bond 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 for the fiscal year ended August 31, 1997, were
filed on October 28, 1997 pursuant to Rule 30d-1 under the 1940 Act,
and are incorporated herein by reference.
(b) Exhibits:
(1) -- Agreement and Declaration of Trust dated October 29,
1990 is electronically filed herein as Exhibit 1.
(2) -- Amended and Restated By-Laws are electronically filed
herein as Exhibit 2.
(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 this Post-Effective
Amendment.
(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 this Post-Effective
Amendment.
(5) (a) -- Investment Advisory and Administration Agreement
between Registrant and Charles Schwab Investment
Management, Inc. (the "Investment Manager") is
electronically filed herein as Exhibit 5(a).
(b) -- Amended Schedules to Investment Advisory and
Administration Agreement referred to at Exhibit 5(a)
above are electronically filed herein as Exhibit 5(b)
to Post-Effective Amendment No. 14 to Registrant's
Registration Statement on Form N-1A, filed on December
30, 1994.
(6) -- Distribution Agreement between Registrant and Charles
Schwab & Co., Inc. ("Schwab") is electronically filed
herein as Exhibit 6(a).
(b) -- Amended Schedule A to the Distribution Agreement is
electronically filed herein as Exhibit 6(b).
(7) -- Inapplicable.
(8) (a) -- Custodian Services Agreement between Registrant and
PNC Bank, National Association (formerly Provident
National Bank) is electronically filed herein
C-1
<PAGE> 74
as Exhibit 8(a).
(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 A to the Custodian Services Agreement
referred to at Exhibit 8(a) above is electronically
filed herein as Exhibit 8(d).
(e) -- Transfer Agency Agreement and Schedules B and D
between the Registrant and Schwab are electronically
filed herein as Exhibit 8(e).
(f) -- Amended Schedules A and C to the Transfer Agency
Agreement referred to at Exhibit 8(e) above are
electronically filed herein as Exhibit 8(f).
(g) -- Shareholder Service Agreement between the Registrant
and Schwab is electronically filed herein as Exhibit
8(g).
(h) -- Form of Amended Schedules to the Shareholder Services
Agreement referred to at Exhibit 8(g) above is
incorporated by reference as Exhibit 8(h) to
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A, filed December
15, 1997.
(i) -- Accounting Services Agreement between Registrant and
Provident Financial Processing Corporation is
electronically filed herein as Exhibit 8(i).
(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, 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 A to the Accounting Services
Agreement referred to at Exhibit 8(i) above is
electronically filed herein as Exhibit 8(l).
(9) -- Inapplicable.
(10) -- Opinion of counsel as to legality of the securities
being registered is electronically filed herein.
(11) (a) -- Consent of Ropes & Gray is electronically filed
herein.
(b) -- Consent of Price Waterhouse LLP is electronically
filed herein.
(12) -- Inapplicable.
C-2
<PAGE> 75
(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
electronically filed herein as Exhibit 13.
(14) -- Inapplicable.
(15) -- Inapplicable.
(16) (a) -- Performance Calculations for Schwab California
Long-Term Tax-Free Bond Fund and Schwab Short-Term
Bond Market Index Fund (formerly Schwab
Short/Intermediate Government Bond Fund) is
incorporated by reference to Exhibit 16 to
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on December
15, 1997.
(b) Performance Calculation for Schwab 1000 Fund(R) is
electronically filed herein as Exhibit 16(b).
(17) (a) -- Financial Data Schedule for Schwab 1000 Fund(R) is
electronically filed herein as Exhibit 17.
(b) -- Financial Data Schedule for Schwab Short-Term Bond
Market Index Fund (formerly Schwab Short/Intermediate
Government Bond Fund), was filed and is incorporated
by reference to Exhibit 17 to Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form
N-1A, filed December 15, 1997.
(c) -- Financial Data Schedule for Schwab Total Bond Market
Index Fund (formerly Schwab Long-Term Government Bond
Fund) Fund was filed and is incorporated by reference
to Exhibit 17 to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A,
filed December 15, 1997.
(d) -- Financial Data Schedule for Schwab Short/Intermediate
Tax-Free Bond Fund was filed and is incorporated by
reference to Exhibit 17 to Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form
N-1A, filed December 15, 1997.
(e) -- Financial Data Schedule for Schwab Long-Term Tax-Free
Bond Fund was filed and is incorporated by reference
to Exhibit 17 to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A,
filed December 15, 1997.
(f) -- Financial Data Schedule for Schwab California
Short/Intermediate Tax-Free Bond Fund was filed and is
incorporated by reference to Exhibit 17 to
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A, filed December
15, 1997.
(g) -- Financial Data Schedule for Schwab California
Long-Term Tax-Free Bond Fund was filed and is
incorporated by reference to Exhibit 17 to
Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A, filed December
15, 1997.
C-3
<PAGE> 76
(18) -- Registrant's Multiple Class Plan for Schwab 1000
Fund(R)-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.
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 December 19, 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 191,473 accounts)
Schwab 1000 Fund - Select Shares(TM) 1 (for the benefit of 4,913 accounts)
Schwab Total Bond Market Index Fund 1 (for the benefit of 2,180 accounts)
(formerly known as Schwab Long-Term
Government Bond Fund)
Schwab Short-Term Bond Market Index 1 (for the benefit of 8,560 accounts)
Fund (formerly known as Schwab
Short/Intermediate Government Bond Fund)
Schwab Long-Term Tax-Free Bond Fund 1 (for the benefit of 2,450 accounts)
Schwab Short/Intermediate Tax-Free Bond 1 (for the benefit of 2,474 accounts)
Fund
Schwab California Long-Term Tax-Free 1 (for the benefit of 3,852 accounts)
Bond Fund
Schwab California Short/Intermediate 1 (for the benefit of 2,134 accounts)
Tax-Free Bond Fund
</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.
C-4
<PAGE> 77
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 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, Co-Chief
Executive Officer and
Director
Schwab Holdings, Inc. Chairman, Chief
Executive Officer and
Director
Charles Schwab Investment Chairman and Director
Management, Inc.
The Charles Schwab Trust Company Chairman and Director
Mayer & Schweitzer, Inc. Chairman and Director
Schwab Retirement Plan Services, Chairman and Director
Inc.
Charles Schwab Limited Chairman, Chief
Executive
</TABLE>
C-5
<PAGE> 78
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Officer and Director
Performance Technologies, Inc. Chairman and Director
TrustMark, Inc. Chairman and Director
Schwab (SIS) Holdings, Inc. I Chairman, Chief
Executive Officer and
Director
Schwab International Holdings, Inc. Chairman, Chief
Executive Officer and
Director
The Gap, Inc. Director
Transamerica Corporation Director
AirTouch Communications Director
Siebel Systems Director
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until
February 1995; Vice
Chairman until August
1994
The Charles Schwab Corporation Vice Chairman and
Director; Chief
Operating Officer
until March 1994
Mayer & Schweitzer, Inc. Director until
February 1995
The Charles Schwab Trust Company Director until
December 1996
David S. Pottruck Charles Schwab & Co., Inc. Chief Executive
Officer and Director
The Charles Schwab Corporation President, Co-Chief
Executive Officer,
Chief Operating
Officer and Director
Schwab Holdings, Inc. Director
Schwab Retirement Plan Services, Director
Inc.
Charles Schwab Limited Director
Charles Schwab Investment Director
Management, Inc.
Mayer & Schweitzer, Inc. Director
Performance Technologies, Inc. Director
</TABLE>
C-6
<PAGE> 79
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Schwab (SIS) Holdings, Inc. I President, Chief
Operating Officer and
Director
Schwab International Holdings, Inc. President, Chief
Operating Officer and
Director
Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman and
Director until January
1996; Senior Executive
Vice President and
Chief Operating
Officer until January
1995
The Charles Schwab Corporation Executive Vice
President until
January 1996; Senior
Executive Vice
President until
January 1995
Mayer & Schweitzer, Inc. Director until January
1996
John P. Coghlan Charles Schwab & Co., Inc. Enterprise President
The Charles Schwab Corporation Executive Vice
President
The Charles Schwab Trust Company President, Chief
Executive Officer and
Director
Schwab Retirement Plan Services, Director
Inc.
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
Charles Schwab & Co., Inc. Executive Vice
President and Chief
Strategy Officer
Timothy F. McCarthy Charles Schwab & Co., Inc. President and Chief
Operating Officer
The Charles Schwab Corporation Executive Vice
President
Jardine Fleming Unit Trusts Ltd. Chief Executive
Officer until October
1995
Fidelity Investment Advisor Group President until 1994
Mayer & Schweitzer, Inc. Director
</TABLE>
C-7
<PAGE> 80
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Gideon Sasson Charles Schwab & Co., Inc. Enterprise President
Beth Sawi The Charles Schwab Corporation Executive Vice
President
Charles Schwab & Co., Inc. Executive Vice
President until
December 1997
Steven L. Scheid Charles Schwab & Co., Inc. Executive Vice
President, Chief
Financial Officer and
Director
The Charles Schwab Corporation Executive Vice
President and Chief
Financial Officer
Schwab Holdings, Inc. Executive Vice
President, Chief
Financial Officer and
Director
Charles Schwab Investment Chief Financial
Management, Inc. Officer and Director
The Charles Schwab Trust Company Chief Financial
Officer and Director
Charles Schwab Limited Finance Officer and
Director
Schwab Retirement Plan Services, Director
Inc.
Performance Technologies, Inc. Director
Mayer & Schweitzer, Inc. Director
Schwab (SIS) Holdings, Inc. I Chief Financial
Officer and Director
Schwab International Holdings, Inc. Chief Financial
Officer and Director
Tom D. Seip Charles Schwab & Co., Inc. Enterprise President
The Charles Schwab Corporation Executive Vice
President
Charles Schwab Investment Chief Executive Officer
Management, Inc.
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice
President and Chief
Administrative Officer
The Charles Schwab Corporation Executive Vice
President and Chief
Administrative Officer
Commercial Credit Corporation Managing Director
until
</TABLE>
C-8
<PAGE> 81
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
February 1994
Karen W. Chang Charles Schwab & Co., Inc. Enterprise President
Linnet F. Deily Charles Schwab & Co., Inc. Enterprise President
Lon Gorman Charles Schwab & Co., Inc. Enterprise President
Susanne D. Lyons Charles Schwab & Co., Inc. Enterprise President
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice
President
Wayne W. Fieldsa Charles Schwab & Co., Inc. Executive Vice
President
James M. Hackley Charles Schwab & Co., Inc. Executive Vice
President
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
William J. Klipp, Charles Schwab & Co., Inc. Executive Vice
Trustee, Executive President
Vice President and
Chief Operating
Officer
Charles Schwab Investment President and Chief
Management, Inc. Operating Officer
Peter J. McIntosh Charles Schwab & Co., Inc. Executive Vice
President
Leonard Short Charles Schwab & Co., Inc. Executive Vice
President
Stephen B. Ward, Charles Schwab Investment Senior Vice President
Senior Vice Management, Inc. and Chief Investment
President and Chief Officer
Investment Officer
Frances Cole, Charles Schwab Investment Senior Vice President,
Secretary Management, Inc. Chief Counsel, Chief
Compliance Officer and
Assistant Corporate
Secretary
Tai-Chin Tung, Charles Schwab & Co., Inc. Vice President
Treasurer and
Principal
Financial Officer
Charles Schwab Investment Controller
Management, Inc.
</TABLE>
C-9
<PAGE> 82
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Robertson Stephens Investment Controller until 1996
Management, Inc.
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate
Secretary
Charles Schwab & Co., Inc. Assistant Corporate
Secretary
Charles Schwab Investment Corporate Secretary
Management, Inc.
The Charles Schwab Trust Company Assistant Corporate
Secretary
Mayer & Schweitzer Secretary
Mary B. Templeton Charles Schwab Investment Assistant Corporate
Management, Inc. Secretary until
September 1997
The Charles Schwab Corporation Senior Vice President,
General Counsel and
Corporate Secretary
until September 1997
Charles Schwab & Co., Inc. Senior Vice President,
General Counsel and
Corporate Secretary
until September 1997
Mayer & Schweitzer Assistant Corporate
Secretary until
September 1997
The Charles Schwab Trust Company Assistant Corporate
Secretary until
February 1996 until
September 1997
David H. Lui, Charles Schwab Investment Vice President and
Assistant Secretary Management, Inc. Senior Counsel
Matthew M. O'Toole, Charles Schwab Investment Corporate Counsel
Assistant Secretary Management, Inc.
Karen L. Seaman, Charles Schwab Investment Corporate Counsel
Assistant Secretary Management, Inc.
Amy L. Mauk Charles Schwab Investment Corporate Counsel
Assistant Secretary Management, Inc.
Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President
</TABLE>
Item 29. Principal Underwriters.
C-10
<PAGE> 83
(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.
C-11
<PAGE> 84
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,
Registrant certifies that it meets all of the requirements for effectiveness of
this Post-Effective Amendment No. 22 to Registrant's Registration Statement on
Form N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this
Post-Effective Amendment No. 22 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Washington, District of Columbia on
the 29th day of December, 1997.
SCHWAB INVESTMENTS
Registrant
Charles R. Schwab*
----------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 29th day
of December, 1997.
Signature Title
- --------- -----
Charles R. Schwab* Chairman and Trustee
Charles R. Schwab
Tom D. Seip * President and Trustee
Tom D. Seip
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.
<PAGE> 85
EXHIBIT INDEX
Exhibit
1 Agreement and Declaration of Trust
2 Amended and Restated By-laws
5 (a) Investment Advisory and Administration Agreement
(b) Amended Schedules to the Investment Advisory Agreement
6 (a) Distribution Agreement
(b) Amended Schedule to the Distribution Agreement.
8 (a) Custodian Agreement
(d) Amended Schedule to the Custodian Services Agreement
(e) Transfer Agency Agreement
(f) Amended Schedule to the Transfer Agency Agreement
(g) Shareholder Services Agreement
(i) Accounting Services Agreement
(l) Amended Schedule to Accounting Services Agreement
10 Opinion of Counsel
11(a) Consent of Ropes and Gray
11(b) Consent of Price Waterhouse
13 Purchase Agreement
16 Performance Calculation for Schwab 1000 Fund(R)
17(a) Financial Data Schedule for Schwab 1000 Fund
<PAGE> 1
EXHIBIT 1
SCHWAB INVESTMENTS
---------------
AGREEMENT AND DECLARATION OF TRUST
---------------
AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts on the
25th day of October, 1990, by the Trustees hereunder, and by the holders of
shares of beneficial interest to be issued hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of an
investment company; and
WHEREAS, the Trustees have agreed to manage all property coming into their
hands as trustees of a Massachusetts voluntary association with transferable
shares in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash,
securities and other assets, which they may from time to time acquire in any
manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the
following terms and conditions for the pro rata benefit of the holders from time
to time of Shares in this Trust as hereinafter set forth.
<PAGE> 2
ARTICLE I
Name and Definitions
Name
Section 1. This Trust shall be known as "Schwab Investments", and the
Trustees shall conduct the business of the Trust under that name or any other
name as they may from time to time determine.
Definitions
Section 2. Whenever used herein, unless otherwise required by the context
or specifically provided:
(a) The "Trust" refers to the Massachusetts business trust
established by this Agreement and Declaration of Trust, as amended from
time to time;
(b) "Trustees" refers to the Trustees of the Trust named herein or
elected in accordance with Article IV;
(c) "Shares" means the equal proportionate transferable units of
interest into which the beneficial interest in the Trust shall be divided
from time to time or, if more than one series or classes of Shares is
authorized by the Trustees, the equal proportionate transferable units
into which the beneficial interest of each series or classes of Shares
shall be divided from time to time, and includes fractions of Shares as
well as whole Shares;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of 1940 and
the Rules and Regulations thereunder, all as amended from time to time;
(f) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Principal Underwriter" and "Majority Shareholder
Vote" (the 67% or 50% requirement of the third sentence of Section
2(a)(42) of the 1940 Act, whichever may be applicable) shall have the
meanings given them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and Declaration
of Trust, as amended or restated from time to time; and
(h) "Bylaws" shall mean the Bylaws of the Trust, as amended from
time to time.
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ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in securities and debt instruments and to carry on such other business
as the Trustees may from time to time determine pursuant to their authority
under this Declaration of Trust.
ARTICLE III
Shares
Division of Beneficial Interests
Section 1. The Shares of the Trust shall be issued in one or more series
as the Trustees may, without Shareholder approval, authorize. Each series shall
be preferred over all other series in respect of the assets allocated to that
series. Each series may be divided into two or more classes, as the Trustees
may, without Shareholder approval, authorize. The beneficial interest in each
series shall be divided into Shares, with a par value of $0.00001. Unless the
Trustees have authorized the issuance of Shares of a series in two or more
classes, each Share of a series shall represent an equal proportionate interest
in the series with each other Share of the same series, none having priority or
preference over another. If the Trustees have authorized the issuance of Shares
of a series in two or more classes, then the classes may have such variations as
to dividend, redemption, and voting rights, net asset values, expenses borne by
the classes, and other matters as the Trustees have authorized. The number of
Shares authorized shall be unlimited. The Trustees may from time to time divide
or combine the Shares of any series or of any class of a series into a greater
or lesser number without thereby changing the proportionate beneficial interests
in the series.
Ownership of Shares
Section 2. The ownership of Shares shall be recorded on the books of the
Trust or a transfer or similar agent. No certificates certifying the ownership
of Shares shall be issued except as the Trustees may otherwise determine from
time to time. The Trustees may make such rules as they consider appropriate for
the issuance of Share certificates, the transfer of Shares and similar matters.
The record books of the Trust as kept by the Trust or by any transfer or similar
agent, as the case may be, shall be conclusive as to who are the Shareholders of
each series and as to the number of Shares of each series held from time to time
by each Shareholder.
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Investment in the Trust
Section 3. The Trustees shall accept investments in the Trust from such
persons and on such terms and for such consideration, which may consist of cash
or tangible or intangible property or a combination thereof, as they from time
to time authorize.
All consideration received by the Trust for the issue or sale of Shares of
each series, together with all income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation thereof,
and any funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be, shall irrevocably belong to the series of Shares
with respect to which the same were received by the Trust for all purposes,
subject only to the rights of creditors, and shall be so handled upon the books
of account of the Trust and are herein referred to as "assets of" such series.
No Preemptive Rights
Section 4. Shares shall have no preemptive or other right to subscribe to
any additional Shares or other securities issued by the Trust.
Status of Shares and Limitation of Personal Liability
Section 5. Shares shall be deemed to be personal property giving only the
rights provided in this instrument. Every Shareholder by virtue of having become
a Shareholder shall be held to have expressly assented and agreed to the terms
hereof and to have become a party hereto. The death of a Shareholder during the
continuance of the Trust shall not operate to terminate the same nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but only to the
rights of said decedent under this Trust. Ownership of Shares shall not entitle
the Shareholder to any title in or to the whole or any part of the Trust
property or right to call for a partition or division of the same or for an
accounting, nor shall the ownership of Shares constitute the Shareholders
partners. Neither the Trust nor the Trustees, nor any officer, employee or agent
of the Trust shall have any power to bind personally any Shareholder, nor except
as specifically provided herein to call upon any Shareholder for the payment of
any sum of money or assessment whatsoever other than such as the Shareholder may
at any time personally agree to pay.
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ARTICLE IV
The Trustees
Election
Section 1. The number of Trustees shall be as provided in the Bylaws or as
fixed from time to time by the Trustees. The Shareholders may elect Trustees at
any meeting of Shareholders called by the Trustees for that purpose. Each
Trustee shall serve during the continued lifetime of the Trust until he or she
dies, resigns or is removed, or, if sooner, until the next meeting of
Shareholders called for the purpose of electing Trustees and the election and
qualification of his or her successor. Any Trustee may resign at any time by
written instrument signed by him and delivered to any officer of the Trust, to
each other Trustee or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
Except to the extent expressly provided in a written agreement with the Trust,
no Trustee resigning and no Trustee removed shall have any right to any
compensation for any period following his or her resignation or removal, or any
right to damages on account of such removal.
Effect of Death, Resignation, etc. of a Trustee
Section 2. The death, declination, resignation, retirement, removal or
incapacity of the Trustees, or any one of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the terms of this
Declaration of Trust.
Powers
Section 3. Subject to the provisions of this Declaration of Trust, the
business of the Trust shall be managed by the Trustees, and they shall have all
powers necessary or convenient to carry out that responsibility. Without
limiting the foregoing, the Trustees may adopt Bylaws not inconsistent with this
Declaration of Trust providing for the conduct of the business of the Trust and
may amend and repeal them to the extent that such Bylaws do not reserve that
right to the Shareholders; they may enlarge or reduce their number, may fill
vacancies in their number, including vacancies caused by enlargement of their
number, and may remove Trustees with or without cause; they may elect and
remove, with or without cause, such officers and appoint and terminate such
agents as they consider appropriate; they may appoint from their own number, and
terminate, any one or more committees consisting of two or more Trustees,
including an executive committee which may, when the Trustees are not in
session, exercise some or all of the power and authority of the Trustees as the
Trustees may determine; they may employ one or more custodians of the assets of
the Trust and may authorize such custodians to employ subcustodians and to
deposit all or any part
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of such assets in a system or systems for the central handling of securities,
retain a transfer agent or a Shareholder servicing agent, or both, provide for
the distribution of Shares by the Trust, through one or more principal
underwriters or otherwise, set record dates for the determination of
Shareholders with respect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, write
options on and lease any or all of the assets of the Trust;
(c) To act as a distributor of Shares and as underwriter of, or
broker or dealer in, securities or other property;
(d) To vote or give assent, or exercise any rights of ownership,
with respect to stock or other securities or property; and to execute and
deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power
and discretion with relation to securities or property as the Trustees
shall deem proper;
(e) To exercise powers and rights of subscription or otherwise which
in any manner arise out of ownership of securities;
(f) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in the
name of the Trustees or of the Trust or in the name of a custodian,
subcustodian or other depository or a nominee or nominees or otherwise;
(g) To allocate assets, liabilities and expenses of the Trust to a
particular series of Shares or to apportion the same among two or more
series, provided that any liabilities or expenses incurred by a particular
series of Shares shall be payable solely out of the assets of that series;
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(h) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer, any security of
which is or was held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer, and
to pay calls or subscriptions with respect to any security held in the
Trust;
(i) To join with other security holders in acting through a
committee depositary, voting trustee or otherwise, and in that connection
to deposit any security with, or transfer any security to, any such
committee, depositary or trustee, and to delegate to them such power and
authority with relation to any security (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay, and
to pay, such portion of the expenses and compensation of such committee,
depositary or trustee as the Trustees shall deem proper;
(j) To compromise, arbitrate or otherwise adjust claims in favor of
or against the Trust or any matter in controversy, including but not
limited to claims for taxes;
(k) To enter into joint ventures, general or limited partnerships
and any other combinations or associations;
(l) To borrow funds;
(m) To endorse or guarantee the payment of any notes or other
obligations of any person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge
the Trust property or any part thereof to secure any of or all such
obligations;
(n) To purchase and pay for entirely out of Trust property such
insurance as they may deem necessary or appropriate for the conduct of the
business, including without limitation, insurance policies insuring the
assets of the Trust and payment of distributions and principal on its
portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers or managers,
principal underwriters, or independent contractors of the Trust
individually against all claims and liabilities of every nature arising by
reason of holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such
person as Shareholder, Trustee, officer, employee, agent, investment
adviser or manager, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to
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constitute negligence, whether or not the Trust would have the power to
indemnify such person against such liability;
(o) To pay pensions for faithful service, as deemed appropriate by
the Trustees, and to adopt, establish and carry out pension,
profit-sharing, Share bonus, Share purchase, savings, thrift and other
retirement, incentive and benefit plans, trusts and provisions, including
the purchasing of life insurance and annuity contracts as a means of
providing such retirement and other benefits, for any or all of the
Trustees, officers, employees and agents of the Trust; and
(p) To engage in any other lawful act or activity in which
corporations organized under the Massachusetts Business Corporation Law
may engage. The Trustees shall not in any way be bound or limited by any
present or future law or custom in regard to investments by trustees.
Except as otherwise provided herein or from time to time in the Bylaws,
any action to be taken by the Trustees may be taken by a majority of the
Trustees present at a meeting of Trustees (a quorum being present), within or
without Massachusetts, including any meeting held by means of a conference
telephone or other communications equipment by means of which all persons
participating in the meeting can hear each other at the same time and
participation by such means shall constitute presence in person at a meeting, or
by written consents of a majority of the Trustees then in office.
Payment of Expenses by Trust
Section 4. The Trustees are authorized to pay or to cause to be paid out
of the principal or income of the Trust, or partly out of principal and partly
out of income, as they deem fair, all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with the Trust, in connection with
the management thereof, or in connection with the financing of the sale of
Shares, including, but not limited to, the Trustees' compensation and such
expenses and charges for the services of the Trust's officers, employees, any
investment adviser, sub-adviser, principal underwriter, auditor, counsel,
custodian, sub-custodian, transfer agent, administrator, sub-administrator,
distributor, shareholder servicing agent, and such other agents or independent
contractors and such other expenses and charges as the Trustees may deem
necessary or proper to incur, provided, however, that all expenses, fees,
charges, taxes and liabilities incurred or arising in connection with a
particular series of Shares as determined by the Trustees, shall be payable
solely out of the assets of that series.
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Ownership of Assets of the Trust
Section 5. Title to all of the assets of each series of Shares and of the
Trust shall at all times be considered as vested in the Trustees.
Advisory, Management and Distribution
Section 6. The Trustees may, at any time and from time to time, contract
for exclusive or nonexclusive advisory and/or management services with any
corporation, trust, association or other organization (the "Manager"), every
such contract to comply with such requirements and restrictions as may be set
forth in the Bylaws; and any such contract may provide for one or more
Sub-advisers who shall perform all or part of the obligations of the Manager
under such Contract and may contain such other terms interpretive of or in
addition to said requirements and restrictions as the Trustees may determine,
including, without limitation, authority to determine from time to time what
investments shall be purchased, held, sold or exchanged and what portion, if
any, of the assets of the Trust shall be held uninvested and to make changes in
the Trust's investments. The Trustees may also, at any time and from time to
time, contract with the Manager or any other corporation, trust, association or
other organization, appointing it exclusive or nonexclusive distributor or
principal underwriter for the Shares, every such contract to comply with such
requirements and restrictions as may be set forth in the Bylaws; and any such
contract may contain such other terms interpretive of or in addition to said
requirements and restrictions as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager,
adviser, principal underwriter or distributor or agent of or for any
corporation, trust, association, or other organization, or of or for any
parent or affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's contract,
or transfer, Shareholder servicing or other agency contract may have been
or may hereafter be made, or that any such organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in the Trust, or
that
(ii) any corporation, trust, association or other organization with
which an advisory or management contract or principal underwriter's or
distributor's contract, or transfer, Shareholder servicing or other agency
contract may have been or may hereafter be made also has an advisory or
management contract, or principal underwriter's or
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distributor's contract, or transfer, Shareholder servicing or other agency
contract with one or more other corporations, trusts, associations, or
other organizations, or has other business or interests shall not affect
the validity of any such contract or disqualify any Shareholder, Trustee
or officer of the Trust from voting upon or executing the same or create
any liability or accountability to the Trust or its Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Shareholders shall have such power to vote as is provided for in, and may
hold meetings and take actions pursuant to the provisions of the Bylaws.
ARTICLE VI
Distributions, Redemptions and Repurchases
Distributions
Section 1. The Trustees may each year, or more frequently if they so
determine, distribute to the Shareholders of each series such income and capital
gains, accrued or realized, as the Trustees may determine, after providing for
actual and accrued expenses and liabilities (including such reserves as the
Trustees may establish) determined in accordance with good accounting practices.
The Trustees shall have full discretion to determine which items shall be
treated as income and which items as capital and their determination shall be
binding upon the Shareholders. Distributions of each year's income of each
series shall be distributed pro rata to Shareholders in proportion to the number
of Shares of each series held by each of them. Such distributions shall be made
in cash or Shares or a combination thereof as determined by the Trustees. Any
such distribution paid in Shares will be paid at the net asset value thereof as
determined in accordance with the Bylaws.
Redemptions and Repurchases
Section 2. The Trust shall purchase such Shares as are offered by any
Shareholder for redemption, upon the presentation of any certificate for the
Shares to be purchased, a proper instrument of transfer and a request directed
to the Trust or a person designated by the Trust that the Trust purchase such
Shares, or in accordance with such other procedures for redemption as the
Trustees may from time to time authorize; and the Trust will pay therefor the
net asset value thereof, as next determined in accordance with the Bylaws, less
such redemption charge or fee as the Trustees may determine from time to time.
Payment for said Shares shall be made by the Trust to the Shareholder within
seven days after the date on which the request
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is made. The obligation set forth in this Section 2 is subject to the provision
that in the event that any time the New York Stock Exchange is closed for other
than customary weekends or holidays, or, if permitted by rules of the
Commission, during periods when trading on the Exchange is restricted or during
any emergency which makes it impractical for the Trust to dispose of its
investments or to determine fairly the value of its net assets, or during any
other period permitted by order of the Commission for the protection of
investors, such obligation may be suspended or postponed by the Trustees. The
Trust may also purchase or repurchase Shares at a price not exceeding the net
asset value of such Shares in effect when the purchase or repurchase or any
contract to purchase or repurchase is made. The Trust may refuse to honor a
request by a Shareholder for redemption of his or her Shares for a specified
time after such Shareholder's purchase of such Shares, such specified time, if
any, to be set forth in the Bylaws.
Redemptions at the Option of the Trust
Section 3. The Trust shall have the right at its option and at any time to
redeem Shares of any Shareholder at the net asset value thereof as determined in
accordance with the Bylaws: (i) if at such time such Shareholder owns fewer
Shares than, or Shares having an aggregate net asset value of less than, an
amount determined from time to time by the Trustees; or (ii) to the extent that
such Shareholder owns Shares of a particular series of Shares equal to or in
excess of a percentage of the outstanding Shares of that series determined from
time to time by the Trustees; or (iii) to the extent that such Shareholder owns
Shares of the Trust representing a percentage equal to or in excess of such
percentage of the aggregate number of outstanding Shares of the Trust or the
aggregate net asset value of the Trust determined from time to time by the
Trustees. In addition, if the Net Income of any series of Shares of the Trust
which uses the amortized cost method of valuation pursuant to the 1940 Act is
determined at any time to be a negative amount, then, with respect to a
Shareholder owning Shares of such series, such Shareholder's pro rata share of
such negative amount shall constitute a liability of such Shareholder to the
Trust which shall be paid at such times and in such manner as the Trustees may
from time to time determine out of such Shareholder's accrued dividend account
in such series or otherwise. As used in this Article VI, Section 3, "Net Income"
shall mean all interest income accrued on portfolio investments of the series
plus or minus realized or unrealized gains and losses on portfolio investments
of the series, less all actual and accrued expenses and liabilities determined
in according with generally accepted accounting practices. Determination of Net
Income of a series made by the Trustees, or as they may authorize, in good
faith, shall be binding on all parties concerned.
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Dividends, Distributions, Redemptions and Repurchases
Section 4. No dividend or distribution (including, without limitation, any
distribution paid upon termination of the Trust or of any series) with respect
to, nor any redemption or repurchase of, the Shares of any series shall be
effected by the Trust other than from the assets of such series.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Compensation
Section 1. The Trustees as such shall be entitled to reasonable
compensation from the Trust; they may fix the amount of their compensation.
Nothing herein shall in any way prevent the employment of any Trustee for
advisory, management, legal, accounting, investment banking, underwriting,
brokerage, or investment dealer or other services and payment for the same by
the Trust.
Limitation of Liability
Section 2. The Trustees shall not be responsible or liable in any event
for any neglect or wrongdoing of any officer, agent, employee, manager or
principal underwriter of the Trust, nor shall any Trustee be responsible for the
act or omission of any other Trustee, but nothing herein contained shall protect
any Trustee against any liability to which he or she would otherwise be subject
by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been executed or done only in or with respect to
their or his or her capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
ARTICLE VIII
Indemnification
Trustees, Officers, etc.
Section 1. The Trust shall indemnify each of its Trustees and officers
(including persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest as a
shareholder, creditor or otherwise) (hereinafter referred to as a "Covered
Person") against all liabilities and expenses, including but not limited
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to amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties), shall be paid from time to time by the Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article, provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (provided that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as opposed to a
full trial type inquiry) that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Article.
Compromise Payment
Section 2. As to any matter disposed of (whether by a compromise payment,
pursuant to a consent decree or otherwise) without an adjudication by a court,
or by any other body before which the proceeding was brought, that such Covered
Person either (a) did not act in good faith in the reasonable belief that his or
her action was in the best interests of the Trust or (b) is liable to the Trust
or its Shareholders by reason of wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his or her
office, indemnification shall be provided if (a) approved as in the best
interests of the Trust, after notice that it involves such indemnification, by
at least a majority of the disinterested Trustees acting on the matter (provided
that a majority of the disinterested Trustees then in office act on the matter)
upon a determination, based upon a review of readily available facts (as opposed
to a full trial type inquiry) that such Covered Person
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acted in good faith in the reasonable belief that his or her action was in the
best interests of the Trust and is not liable to the Trust or its Shareholders
by reasons of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office, or (b)
there has been obtained an opinion in writing of independent legal counsel,
based upon a review of readily available facts (as opposed to a full trial type
inquiry) to the effect that such Covered Person appears to have acted in good
faith in the reasonable belief that his or her action was in the best interests
of the Trust and that such indemnification would not protect such Person against
any liability to the Trust to which he or she would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office. Any approval
pursuant to this Section shall not prevent the recovery from any Covered Person
of any amount paid to such Covered Person in accordance with this Section as
indemnification if such Covered Person is subsequently adjudicated by a court of
competent jurisdiction not to have acted in good faith in the reasonable belief
that such Covered Person's action was in the best interests of the Trust or to
have been liable to the Trust or its Shareholders by reason of wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Covered Person's office.
Indemnification Not Exclusive
Section 3. The right of indemnification hereby provided shall not be
exclusive of or affect any other rights to which such Covered Person may be
entitled. As used in this Article VIII, the term "Covered Person" shall include
such person's heirs, executors and administrators and a "disinterested Trustee"
is a Trustee who is not an "interested person" of the Trust as defined in
Section 2(a)(19) of the 1940 Act (or who has been exempted from being an
"interested person" by any rule, regulation or order of the Commission) and
against whom none of such actions, suits or other proceedings or another action,
suit or other proceeding on the same or similar grounds is then or has been
pending. Nothing contained in this Article shall affect any rights to
indemnification to which personnel of the Trust, other than Trustees or
officers, and other persons may be entitled by contract or otherwise under law,
nor the power of the Trust to purchase and maintain liability insurance on
behalf of any such person; provided, however, that the Trust shall not purchase
or maintain any such liability insurance in contravention of applicable law,
including without limitation the 1940 Act.
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Shareholders
Section 4. In case any Shareholder or former Shareholder shall be held to
be personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled to be
held harmless from and indemnified against all loss and expense arising from
such liability, but only out of the assets of the particular series of Shares of
which he or she is or was a Shareholder.
ARTICLE IX
Miscellaneous
Trustees, Shareholders, etc. Not Personally Liable; Notice
Section 1. All persons extending credit to, contracting with or having any
claim against the Trust or a particular series of Shares shall look only to the
assets of the Trust or the assets of that particular series of Shares for
payment under such credit, contract or claim; and neither the Shareholders nor
the Trustees, nor any of the Trust's officers, employees or agents, whether
past, present or future, shall be personally liable therefor. Nothing in this
Declaration of Trust shall protect any Trustee against any liability to which
such Trustee would otherwise be subject by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officer or officers shall give notice that this
Declaration of Trust is on file with the Secretary of The Commonwealth of
Massachusetts and shall recite that the same was executed or made by or on
behalf of the Trust or by them as Trustee or Trustees or as officer or officers
and not individually and that the obligations of such instrument are not binding
upon any of them or the Shareholders individually but are binding only upon the
assets and property of the Trust, and may contain such further recital as he or
she or they may deem appropriate, but the omission thereof shall not operate to
bind any Trustee or Trustees or officer or officers or Shareholder or
Shareholders individually.
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Trustee's Good Faith Action, Expert Advice, No Bond or Surety
Section 2. The exercise by the Trustees of their powers and discretion
hereunder shall be binding upon everyone interested. A Trustee shall be liable
for his or her own wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice or for
failing to follow such advice. Except as may be required by applicable law,
including, without limitation, the 1940 Act, the Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
Liability of Third Persons Dealing with Trustees
Section 3. No person dealing with the Trustees shall be bound to make any
inquiry concerning the validity of any transaction made or to be made by the
Trustees or to see to the application of any payments made or property
transferred to the Trust or upon its order.
Duration and Termination of Trust
Section 4. Unless terminated as provided herein, the Trust shall continue
without limitation of time. The Trust may be terminated at any time by the vote
of Shareholders holding at least a majority of the Shares of each series
entitled to vote or by the Trustees by written notice to the Shareholders. Any
series of Shares may be terminated at any time by vote of Shareholders holding
at least a majority of the Shares of such series entitled to vote or by the
Trustees by written notice to the Shareholders of such series.
Upon termination of the Trust or of any one or more series of Shares,
after paying or otherwise providing for all charges, taxes, expenses and
liabilities, whether due or accrued or anticipated, of the Trust or of the
particular series as may be determined by the Trustees, the Trust shall, in
accordance with such procedures as the Trustees consider appropriate, reduce the
remaining assets to distributable form in cash or shares or other securities, or
any combination thereof, and distribute the proceeds to the Shareholders of the
series involved, ratably according to the number of Shares of such series held
by the several Shareholders of such series on the date of termination.
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Filing of Copies, References, Headings
Section 5. The original or a copy of this instrument and of each amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. A copy of this instrument and of each amendment hereto shall be
filed by the Trust with the Secretary of The Commonwealth of Massachusetts and
with the Boston City Clerk, as well as any other governmental office where such
filing may from time to time be required. Anyone dealing with the Trust may rely
on a certificate by an officer of the Trust as to whether or not any such
amendments have been made and as to any matters in connection with the Trust
hereunder, and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or of
any such amendments. In this instrument and in any such amendment, references to
this instrument, and all expressions like "herein", "hereof" and "hereunder"
shall be deemed to refer to this instrument as amended or affected by any such
amendments. Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. This instrument may be executed in
any number of counterparts each of which shall be deemed an original.
Applicable Law
Section 6. This Declaration of Trust is made in The Commonwealth of
Massachusetts, and it is created under and is to be governed by and construed
and administered according to the laws of said Commonwealth. The Trust shall be
of the type commonly called a Massachusetts business trust, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
Amendments
Section 7. This Declaration of Trust may be amended at any time by an
instrument in writing signed by a majority of the then Trustees when authorized
to do so by vote of Shareholders holding a majority of the Shares of each series
entitled to vote, except that an amendment which shall affect the holders of one
or more series of Shares but not the holders of all outstanding series shall be
authorized by vote of the Shareholders holding a majority of the Shares entitled
to vote of each series affected and no vote of Shareholders of a series not
affected shall be required. Amendments having the purpose of changing the name
of the Trust, of establishing, changing, or eliminating the par value of the
Shares or of supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision contained herein shall
not require authorization by Shareholder vote.
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IN WITNESS WHEREOF, the undersigned has executed this Agreement and
Declaration of Trust as Trustee and not individually, as of the 26th day of
October, 1990.
/s/ Marilyn J. Mitchell
- --------------------------------
Marilyn J. Mitchell
Trustee
COUNTY OF SUFFOLK :
: ss
COMMONWEALTH OF MASSACHUSETTS :
On this 26th day of October, 1990, Marilyn J. Mitchell, known to me and
known to be the individual described herein and who executed the foregoing
instrument, before me and acknowledged the foregoing instrument to be her free
act and deed.
/s/ Denise Sharon Towey
--------------------------------------------
Notary Public
[Notary's Seal] My Commission Expires: 5/2/97
----------
Address of the Trustee:
127 Congress Street
Boston, MA 02110
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EXHIBIT 2
BYLAWS
OF
SCHWAB INVESTMENTS
ARTICLE 1
Agreement and Declaration of Trust,
Resident Agent and Principal Office
1.1 Agreement and Declaration of Trust. These Bylaws shall be subject to
the Agreement and Declaration of Trust, dated October 25, 1990, and as from time
to time in effect (the "Declaration of Trust"), of Schwab Investments, the
Massachusetts business trust established by the Declaration of Trust (the
"Trust").
Unless otherwise specified herein, capitalized terms in these Bylaws shall
have the meaning given such terms in the Declaration of Trust.
1.2 Resident Agent of the Trust. The Trust shall have an agent for service
of process residing in The Commonwealth of Massachusetts.
1.3 Principal Office of the Trust. The initial principal office of the
Trust shall be located in San Francisco, California. The Trust may have such
other offices as the Trustees may determine or as they may authorize.
ARTICLE 2
Meetings of Trustees
2.1 Regular Meetings. Regular meetings of the Trustees may be held without
call or notice at such places and at such times as the Trustees may from time to
time determine, provided that notice of the first regular meeting following any
such determination shall be given to absent Trustees. A regular meeting of the
Trustees may be held without call or notice immediately after and at the same
place as the annual meeting of the shareholders.
2.2 Special Meetings. Special meetings of the Trustees may be held at any
time and at any place designated in the call of the meeting when called by the
Chairman of the Board of the Trustees, the President or the Treasurer or by two
or more Trustees, sufficient notice thereof being given to each Trustee by the
Secretary or an Assistant Secretary or by the officer or the Trustees calling
the meeting.
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2.3 Notice. It shall be sufficient notice to the Trustee of a special
meeting to send notice by mail at least forty-eight hours or by telegram, telex
or telecopy or other electronic facsimile transmission method at least
twenty-four hours before the meeting addressed to the Trustee at his or her
usual or last known business or residence address or to give notice to him or
her in person or by telephone at least twenty-four hours before the meeting.
Notice of a meeting need not be given to any Trustee if a written waiver of
notice, executed by him or her before the meeting, is filed with the records of
the meeting, or to any Trustee who attends the meeting without protesting prior
thereto or at its commencement the lack of notice to him or her. Neither notice
of a meeting nor a waiver of a notice need specify the purposes of the meeting.
2.4 Quorum. At any meeting of the Trustees a majority of the Trustees then
in office shall constitute a quorum. Any meeting may be adjourned from time to
time by a majority of the votes cast upon the question, whether or not a quorum
is present, and the meeting may be held as adjourned without further notice.
ARTICLE 3
Officers
3.1 Enumeration: Qualification. The officers of the Trust shall be a
President, a Treasurer, and a Secretary who shall also be the Clerk, and such
other officers including a Chairman of the Board of the Trustees, if any, as the
Trustees from time to time may in their discretion elect. The Trust may also
have such agents as the Trustees from time to time may in their discretion
appoint. The Chairman of the Board of the Trustees, if one is elected, shall be
a Trustee and may but need not be a Shareholder; and any other officer may but
not need be a Trustee or a Shareholder. Any two or more offices may be held by
the same person.
3.2 Election. The President, the Treasurer, and the Secretary shall be
elected by the Trustees upon the occurrence of a vacancy in any such office.
Other officers, if any, may be elected or appointed by the Trustees at any time.
Vacancies in any office may be filled at any time.
3.3 Tenure. The Chairman of the Board of the Trustees, if one is elected,
the President, the Treasurer and the Secretary shall hold office until their
respective successors are chosen and qualified, or in each case until he or she
sooner dies, resigns, is removed or becomes disqualified. Each other officer
shall hold office and each agent shall retain authority at the pleasure of the
Trustees.
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3.4 Powers. Subject to the other provisions of these Bylaws, each officer
shall have, in addition to the duties and powers herein and as set forth in the
Declaration of Trust, such duties and powers as are commonly incident to the
office occupied by him or her as if the Trust were organized as a Massachusetts
business corporation and such other duties and powers as the Trustees may from
time to time designate.
3.5 Chairman; President. Unless the Trustees otherwise provide, the
Chairman of the Board of the Trustees or, if there is none or in the absence of
the Chairman, the President shall preside at all meetings of the Shareholders
and of the Trustees. The Chairman of the Trustees, if there is one, shall be the
chief executive officer and, unless the Trustees otherwise provide, the
President shall be the chief operating officer. If there is no Chairman of the
Board of Trustees, the President shall be the chief executive officer.
3.6 Treasurer. Unless otherwise provided by the Trustees, the Treasurer
shall be the chief financial and accounting officer of the Trust, and shall,
subject to the provisions of the Declaration of Trust and to any arrangement
made by the Trustees with a custodian, investment adviser or manager, or
transfer, Shareholder servicing or similar agent, be in charge of the valuable
papers, books of account and accounting records of the Trust, and shall have
such other duties and powers as may be designated from time to time by the
Trustees or by the President.
3.7 Secretary. The Secretary shall record all proceedings of the
Shareholders and the Trustees in books to be kept therefor, which books or a
copy thereof shall be kept at the principal office of the Trust. In the absence
of the Secretary from any meeting of the Shareholders or Trustees, an assistant
secretary, or if there be none or if he or she is absent, a temporary secretary
chosen at such meeting shall record the proceedings thereof in the aforesaid
books.
3.8 Resignations. Any officer may resign at any time by written instrument
signed by him or her and delivered to the Chairman of the Board of the Trustees
the President or the Secretary or to a meeting of the Trustees. Such resignation
shall be effective upon receipt unless specified to be effective at some other
time. Except to the extent expressly provided in a written agreement with the
Trust, no officer resigning and no officer removed shall have any right to any
compensation for any period following his or her resignation or removal, or any
right to damages on account of such removal.
3.9 General Manager. The person elected to and possessed of the
office of General Manager those duties and powers commonly associated with
the office of executive vice president and chief operating officer of a
Massachusetts business corporation,
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including without limitation the power to execute on behalf of the Fund all
documents and agreements duly-authorized by the Trustees and to otherwise
contractually obligate and bind the Fund within the bounds of the officeholder's
actual authority. It is expressly intended, however, that nothing herein shall
authorize the General Manager to take any action which he or she does not
believe to be in the best interests of the Fund, or in any event to knowingly
commit any criminal or otherwise unlawful act in the name of the Fund.
ARTICLE 4
Committees
4.1 Quorum; Voting. A majority of the members of any Committee of the
Trustees shall constitute a quorum for the transaction of business, and any
action of such a Committee may be taken at a meeting by a vote of a majority of
the members present (a quorum being present) or evidenced by one or more
writings signed by such a majority. Members of a Committee may participate in a
meeting of such Committee by means of a conference telephone or other
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.
ARTICLE 5
Reports
5.1 General. The Trustees and officers shall render reports at the time
and in the manner required by the Declaration of Trust or any applicable law.
Officers and Committees shall render such additional reports as they may deem
desirable or as may from time to time be required by the Trustees.
ARTICLE 6
Fiscal Year
6.1 General. Except as from time to time otherwise provided by the
Trustees, the initial fiscal year of the Trust shall end on such date as is
determined in advance or in arrears by the Treasurer, and subsequent fiscal
years shall end on such date in subsequent years.
ARTICLE 7
Seal
7.1 General. At the discretion of the Trustees, the Trust may have a seal.
The seal of the Trust, if any, shall consist of a flat-faced die with the word
"Massachusetts", together with the name of the Trust and the year of its
organization cut or engraved thereon but, unless otherwise required by the
Trustees,
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the seal shall not be necessary to be placed on, and its absence shall not
impair the validity of, any document, instrument or other paper executed and
delivered by or on behalf of the Trust.
ARTICLE 8
Execution of Papers
8.1 General. Except as the Trustees may generally or in particular cases
authorize the execution thereof in some other manner, all deeds, leases,
contracts, notes and other obligations made by the Trustees shall be signed by
the President, by any Vice-President, or by the Treasurer or the Secretary and
need not bear the seal of the Trust.
ARTICLE 9
Issuance of Share Certificates
9.1 Share Certificates. In lieu of issuing certificates for Shares, the
Trustees or the transfer agent may either issue receipts therefor or may keep
accounts upon the books of the Trust for the record holders of such Shares, who
shall in either case be deemed, for all purposes hereunder, to be the holders of
certificates for such Shares as if they had accepted such certificates and shall
be held to have expressly assented and agreed to the terms hereof.
The Trustees may at any time authorize the issuance of Share certificates.
In that event, each Shareholder shall be entitled to a certificate stating the
number of Shares owned by him or her, in such form as shall be prescribed from
time to time by the Trustees. Such certificates shall be signed by the Chairman
of the Board of the Trustees, the President or any Vice-President and by the
Treasurer or Assistant Treasurer. Such signatures may be facsimile if the
certificate is signed by a transfer agent, or by a registrar, other than a
Trustee, officer or employee of the Trust. In case any officer who has signed or
whose facsimile signature has been placed on such certificate shall cease to be
such officer before such certificate is issued, it may be issued by the Trust
with the same effect as if he were such officer at the time of its issue.
9.2 Loss of Certificates. In case of the alleged loss or destruction or
the mutilation of a Share certificate, a duplicate certificate may be issued in
place thereof, upon such terms as the Trustees shall prescribe.
9.3 Issuance of New Certificates to Pledgee. A pledgee of Shares
transferred as collateral security shall be entitled to a new certificate if the
instrument of transfer substantially describes the debt or duty that is intended
to be secured thereby. Such new certificates shall express on its face that it
is held as collateral security, and the name of the pledgor shall
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<PAGE> 6
be stated thereon, who alone shall be liable as a Shareholder and entitled to
vote thereon.
9.4 Discontinuance of Issuance of Certificates. The Trustees may at any
time discontinue the issuance of Share certificates and may, by written notice
to each Shareholder, require the surrender of Share certificates to the Trust
for cancellation. Such surrender and cancellation shall not effect the ownership
of Shares in the Trust.
ARTICLE 10
Provisions Relating to the Conduct of the Trust's Business
10.1. Certain Definitions. When used herein the following words shall have
the following meanings: "Distributor" shall mean any one or more corporations,
firms or associations which have distributor's or principal underwriter's
contracts in effect with the Trust providing that redeemable Shares issued by
the Trust shall be offered and sold by such Distributor. "Manager" shall mean
any corporation, firm or association which may at the time have an advisory or
management contract with the Trust and any corporation, firm or association
which may at any time have a sub-advisory contract relating to the Trust with
any such Manager.
10.2 Limitation on Holdings by the Trust of Certain Securities and on
Dealings with officers or Trustees. The Trust may not purchase or retain shares
or securities issued by an issuer if one or more of the holders of the shares or
securities issued by an issuer or one or more of the officers or directors of
such issuer is an officer or Trustee of the Trust or officer or director of the
Manager and if one or more of such officers, Trustees or directors owns
beneficially more than 1/2 of 1% of the shares or securities, or both, of such
issuer and such officers, Trustees and directors owning more than 1/2 of 1% of
such shares or securities together own beneficially more 5% of such shares or
securities. Each officer and Trustee of the Trust shall keep the Treasurer of
the Trust informed of the names of all issuers shares or securities of which are
held in the portfolio of the Trust in which such officer or Trustee owns as much
as 1/2 of 1% of the outstanding shares or securities.
The Trust will not lend any of its assets to the Distributor or Manager or
to any officer or director of the Distributor or Manager or any officer or
Trustee of the Trust, and shall not permit any officer or Trustee or any officer
or director of the Distributor or Manager to deal for or on behalf of the Trust
with himself or herself as principal or agent, or with any partnership,
association or corporation in which he or she has a financial interest; provided
that the foregoing provisions shall not prevent (a) officers and Trustees of the
Trust or officers and directors of the Distributor or Manager from buying,
holding
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or selling Shares in the Trust or from being partners, officers or directors of
or otherwise financially interested in the Distributor or the Manager; (b)
purchases or sales of securities or other property if such transaction is
permitted by or is exempt or exempted from the provisions of the Investment
Company Act of 1940 or any Rule or Regulation thereunder (together, the "1940
Act"); (c) employment of legal counsel, registrar, transfer agent, Shareholder
servicing agent, dividend disbursing agent or custodian who is, or has a
partner, Shareholder, officer or director who is, an officer or Trustee of the
Trust or an officer or director of the Distributor or Manager; (d) sharing
statistical, research, legal and management expenses and office hire and
expenses with any other investment company in which an officer or Trustee of the
Trust or an officer or director of the Distributor or Manager is an officer or
director or otherwise financially interested.
10.3 Limitation on Dealing in Securities of the Trust by Certain
officers, Trustees, Distributor or Manager. Neither the Distributor nor
Manager, nor any officer or Trustee of the Trust or officer or director of the
Distributor or Manager shall take long or short positions in securities issued
by the Trust; provided, however, that:
(a) the Distributor may purchase from the Trust and otherwise deal in
Shares issued by the Trust pursuant to the terms of its contract
with the Trust;
(b) any officer or Trustee of the Trust or officer or director of the
Distributor or Manager or any trustee or fiduciary for the benefit
of any of them may at any time, or from time to time, purchase from
the Trust or from the Distributor Shares issued by the Trust at the
price available to the public or to such officer, Trustee, director,
trustee or fiduciary, no such purchase to be in contravention of any
applicable state or federal requirement; and
(c) the Distributor or the Manager may at any time, or from time to
time, purchase for investment Shares issued by the Trust.
10.4 Securities and Cash of the Trust to be held by Custodian_subject to
Conditions.
(a) All securities and cash owned by this Trust shall be held by or
deposited with one or more banks or trust companies having
(according to its last published report) not less than $5,000,000
aggregate capital, surplus and undivided profits (any such bank or
trust company being hereby designated as "Custodian"), provided such
a Custodian can be found ready and
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willing to act; subject to such rules, regulations and orders, if
any, as the Securities and Exchange Commission may adopt, this Trust
may, or may permit any Custodian to, deposit all or any part of the
securities owned by this Trust in a system for the central handling
of securities pursuant to which all securities of any particular
class or series of any issue deposited within the system may be
transferred or pledged by bookkeeping entry, without physical
delivery. The Custodian may appoint, subject to the approval of the
Trustees, one or more subcustodians.
(b) The Trust shall enter into a written contract, with each Custodian
regarding the powers, duties and compensation of such Custodian with
respect to the cash and securities of the Trust held by such
Custodian. Said contract and all amendments thereto shall be
approved by the Trustees.
(c) The Trust shall upon the resignation or inability to serve of any
Custodian or upon change of any Custodian:
(i) in case of such resignation or inability to serve,
use its best efforts to obtain a successor Custodian;
(ii) require that the cash and securities owned by the
Trust be delivered directly to the successor
Custodian; and
(iii) in the event that no successor Custodian can be found,
submit to the Shareholders, before permitting delivery
of the cash and securities owned by the Trust otherwise
than to a successor Custodian, the question whether the
Trust shall be liquidated or shall function without a
Custodian.
10.5 Requirements and Restrictions Regarding the Management Contract.
Every advisory or management contract entered into by the Trust shall provide
that in the event that the total expenses of any series of Shares of the Trust
for any fiscal year should exceed the limits imposed on investment company
expenses imposed by any statute or regulatory authority of any jurisdiction in
which Shares of the Trust are offered for sale, the compensation due the Manager
for such fiscal year shall be reduced by the amount of such excess by a
reduction or refund thereof provided, however, that where the Trust employs more
than one investment adviser, it shall be sufficient that one or more of the
investment advisers assumes the aforementioned liability to the Trust on behalf
of one or more of the other investment advisers.
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10.6 Reports to Shareholders: Distributions from Realized Gains. The
Trust shall send to each Shareholder of record at least semi-annually a
statement of the condition of the Trust and of the results of its operations,
containing all information required by applicable laws or regulations.
10.7 Determination of Net Asset Value Per Share. Net asset value per
Share of each series of Shares of the Trust shall mean: (i) the value of all the
assets of such series; (ii) less total liabilities of such series; (iii) divided
by the number of Shares of such series outstanding, in each case at the time of
each determination. The net asset value per Share of each series shall be
determined as of the normal close of trading on the New York Stock Exchange on
each day on which such Exchange is open. As of any time other than the normal
close of trading on such Exchange, the Trustees may cause the net asset value
per Share last determined to be determined again in a similar manner or adjusted
to reflect changes in market values of securities in the portfolio, such
adjustment to be made on the basis of changes in selected security prices
determined by the Trustees to be relevant to the portfolio of such series or in
averages or in other standard and readily ascertainable market data, and the
Trustees may fix the time when such redetermined or adjusted net asset value per
Share of each series shall become effective.
In valuing the portfolio investments of any series for determination of
net asset value per Share of such series, securities for which market quotations
are readily available shall be valued at prices which, in the opinion of the
Trustees or the person designated by the Trustees to make the determination,
most nearly represent the market value of such securities, and other securities
and assets shall be valued at their fair value as determined by or pursuant to
the direction of the Trustees, which in the case of short-term debt obligations,
commercial paper and repurchase agreements may, but need not, be on the basis of
quoted yields for securities of comparable maturity, quality and type, or on the
basis of amortized cost. Expenses and liabilities of the Trust shall be accrued
each day. Liabilities may include such reserves for taxes, estimated accrued
expenses and contingencies as the Trustees or their designates may in their sole
discretion deem fair and reasonable under the circumstances. No accruals shall
be made in respect of taxes on unrealized appreciation of securities owned
unless the Trustees shall otherwise determine. Dividends payable by the Trust
shall be deducted as at the time of but immediately prior to the determination
of net asset value per Share on the record date therefor.
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ARTICLE 11
Shareholders, Voting Powers and Meetings
11.1 Voting Powers. The Shareholders shall have power to vote only (i)
for the election of Trustees as provided in Article IV, Section 1 of the
Declaration of Trust, provided, however, that no meeting of Shareholders is
required to be called for the purpose of electing Trustees unless and until such
time as less than a majority of the Trustees have been elected by the
Shareholders, (ii) with respect to any Manager or Sub-Adviser as provided in
Article IV, Section 6 of the Declaration of Trust to the extent required by the
1940 Act, (iii) with respect to any termination of this Trust to the extent and
as provided in Article IX, Section 4 of the Declaration of Trust, (iv) with
respect to any amendment of the Declaration of Trust to the extent and as
provided in Article IX, Section 7 of the Declaration of Trust, (v) to the same
extent as the stockholders of a Massachusetts business corporation as to whether
or not 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, and (vi) with respect to such additional matters relating to the
Trust as may be required by law, the Declaration of Trust, these Bylaws or any
registration of the Trust with the Commission (or any successor agency) or any
state, or as the Trustees may consider necessary or desirable. Each whole Share
shall be entitled to one vote as to any matter on which it is entitled to vote
and each fractional Share shall be entitled to a proportionate fractional vote.
The Shareholders of any particular series shall not be entitled to vote on any
matters as to which such series is not affected. Except with respect to matters
as to which the Trustees have determined that only the interests of one or more
particular series are affected or as required by law, all of the Shares of each
series shall, on matters as to which it is entitled to vote, vote with other
series so entitled as a single class. Notwithstanding the foregoing, with
respect to matters which would otherwise be voted on by two or more series as a
single class, the Trustees may, in their sole discretion, submit such matters to
the Shareholders of any or all such series, separately. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person or
by proxy. A proxy with respect to Shares held in the name of two or more persons
shall be valid if executed by any one of them unless at or prior to exercise of
the proxy the Trust receives a specific written notice to the contrary from any
one of them. A proxy purporting to be executed by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its exercise and the
burden of proving invalidity shall rest on the challenger. Until Shares are
issued, the Trustees may exercise all rights of Shareholders and may take any
action required by law, the Declaration of Trust or these Bylaws to be taken by
Shareholders.
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11.2 Voting Power and Meetings. Meetings of the Shareholders may be
called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 of the Declaration of Trust and for such other purposes as
may be prescribed by law, by the Declaration of Trust or by these Bylaws.
Meetings of the Shareholders may also be called by the Trustees from time to
time for the purpose of taking action upon any other matter deemed by the
Trustees to be necessary or desirable. A meeting of Shareholders may be held at
any place designated by the Trustees. Written notice of any meeting of
Shareholders shall be given or caused to be given by the Trustees by mailing
such notice at least seven days before such meeting, postage prepaid, stating
the time and place of the meeting, to each Shareholder at the Shareholder's
address as it appears on the records of the Trust. Whenever notice of a meeting
is required to be given to a Shareholder under the Declaration of Trust or these
Bylaws, a written waiver thereof, executed before or after the meeting by such
Shareholder or his attorney thereunto authorized and filed with the records of
the meeting, shall be deemed equivalent to such notice.
11.3 Quorum and Required Vote. 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 or of the Declaration of Trust or these
Bylaws permits or requires that 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. 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.
Except when a larger vote is required by any provision of law or the Declaration
of Trust or these Bylaws, a majority of the Shares voted shall decide any
questions and a plurality shall elect a Trustee, provided that where any
provision of law or of the Declaration of Trust or these Bylaws permits or
requires that the holders of any series shall vote as a series, then a majority
of the Shares of that series voted on the matter (or a plurality with respect to
the election of a Trustee) shall decide that matter insofar as that series is
concerned.
11.4 Action by Written Consent. Any action taken by Shareholders may be
taken without a meeting if a majority of Shareholders entitled to vote on the
matter (or such larger proportion thereof as shall be required by any express
provision of law or the Declaration of Trust or these Bylaws) consent to the
action in writing and such written consents are filed with the records of the
meetings of Shareholders. Such consent shall be treated for all purposes as a
vote taken at a meeting of Shareholders.
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11.5 Record Dates. For the purpose of determining the Shareholders who
are entitled to vote or act at any meeting or any adjournment thereof, or who
are entitled to receive payment of any dividend or of any other distribution,
the Trustees may from time to time fix a time, which shall be not more than 90
days before the date of any meeting of Shareholders or the date for the payment
of any dividend or of any other distribution, as the record date for determining
the Shareholders having the right to notice of and to vote at such meeting and
any adjournment thereof or the right to receive such dividend or distribution,
and in such case only Shareholders of record on such record date shall have such
right notwithstanding any transfer of Shares on the books of the Trust after the
record date; or without fixing such record date the Trustees may for any of such
purposes close the register or transfer books for all or any part of such
period.
ARTICLE 12
Amendments to the Bylaws
12.1 General. These Bylaws may be amended or repealed, in whole or in
part, by a majority of the Trustees then in office at any meeting of the
Trustees, or by one or more writings signed by such a majority.
May 13, 1991
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<PAGE> 1
EXHIBIT 5(A)
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
AGREEMENT made as of June 15, 1994 between SCHWAB INVESTMENTS, a
Massachusetts business trust (herein called the "Trust"), and CHARLES SCHWAB
INVESTMENT MANAGEMENT, INC., a Delaware corporation (the "Investment Adviser").
WHEREAS, the Trust is registered as an open-end diversified, management
investment company under the Investment Company Act of 1940, as amended ("1940
Act"); and
WHEREAS, the Trust desires to retain the Investment Adviser to furnish
investment advisory, administrative, and certain accounting and record-keeping
services to the investment portfolios of the Trust listed on Schedule A hereto
(each a "Schwab Fund" and collectively, the "Schwab Funds"),
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints the Investment Adviser to act
as investment adviser and administrator to the Schwab Funds for the period and
on the terms set forth in this Agreement. The Investment Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. The Trust has furnished the Investment
Adviser with copies properly certified or authenticated of each of the
following:
(a) the Trust's Agreement and Declaration of Trust, as filed
with the Secretary of State of The Commonwealth of Massachusetts on
October 26, 1990, and all amendments thereto or restatements thereof
(such Agreement and Declaration, as presently in effect and as it shall
from time to time be amended or restated, is herein called the
"Declaration of Trust");
(b) the Trust's By-Laws and amendments thereto;
(c) resolutions of the Trust's Board of Trustees authorizing
the appointment of the Investment Adviser and approving this Agreement;
(d) the Trust's Notification of
<PAGE> 2
Registration on Form N-8A under the 1940 Act, as filed with the
Securities and Exchange Commission ("SEC") on October 26, 1991 and all
amendments thereto;
(e) the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended ("1933 Act"), (File No. 33-37459)
and under the 1940 Act as filed with the SEC and all amendments
thereto; and
(f) the Trust's most recent prospectus and Statement of
Additional Information for the Schwab Funds (such prospectuses and
Statement of Additional Information, as presently in effect, and all
amendments and supplements thereto are herein collectively called the
"Prospectus").
The Trust will furnish the Investment Adviser from time to time with copies of
all amendments of or supplements to the foregoing.
3. Management. Subject to the direction and control of the Board of
Trustees of the Trust, the Investment Adviser will supervise or perform for the
Schwab Funds all aspects of the operations of the Schwab Funds except for those
performed by the custodian for the Schwab Funds under the Custody Agreement,
provide general economic and financial analysis and advice to the Schwab Funds,
and provide a continuous investment program for the Schwab Funds, including
investment research and management as to all securities and investments and cash
equivalents in the Schwab Funds. More particularly, the Investment Adviser will:
determine from time to time what securities and other investments will be
purchased, retained, or sold by the Schwab Funds; maintain office facilities
(which may be in the offices of the Investment Adviser or a corporate affiliate
but shall be in such location as the Trust reasonably determines); furnish
statistical and research data, clerical services and stationery and office
supplies; compile data for, prepare for execution by the Schwab Funds and file
all the Schwab Funds' federal and state tax returns and required tax filings
other than those required to be made by the Schwab Funds' custodian and transfer
agent; prepare compliance filings pursuant to state securities laws with the
advice of the Trust's counsel; prepare the Trust's Annual and Semi-Annual
Reports to Shareholders and amendments to its Registration Statements (on Form
N-1A or any replacement therefor); compile data for, prepare and file timely
Notices to the SEC required pursuant to Rule 24f-2 under the 1940 Act; perform
at the expense of the Schwab Funds the daily pricing of portfolio securities and
computation of the net asset value and the net income of each Schwab Fund in
accordance with the
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<PAGE> 3
Prospectus and resolutions of the Trust's Board of Trustees; keep and maintain
the financial accounts and records of the Schwab Funds and provide the Trust
with certain reports, all as more specifically set forth on Schedule B hereto;
and generally assist in all aspects of the operations of the Schwab Funds.
Subject to the provisions of the Agreement and Declaration of Trust and
the 1940 Act, the Investment Adviser, at its expense, may select and contract
with investment advisers (the "Sub-Advisers") for one or more of the Schwab
Funds. So long as any Sub-Adviser serves as Sub-Adviser to a Schwab Fund, it
must be a party to a Sub-Investment Advisory Agreement in substantially the form
attached hereto as Schedule C (the "Sub-Adviser Agreement") and will be
obligated to (i) furnish continuously an investment program as to those assets
of the Trust and the Schwab Funds involved allocated by the Investment Adviser,
(ii) in connection therewith, adhere to such guidelines as may be established by
the Investment Adviser from time to time to insure compliance with applicable
investment objectives, policies and restrictions of the Trust and the Schwab
Funds and (iii) place all orders for the purchase and sale of Investments. The
Investment Adviser may also delegate or subcontract some or all of the
Investment Adviser's other duties enumerated in this Agreement. The Investment
Adviser will be responsible for payment of all compensation to all Sub-Advisers
and other persons and entities to which Investment Adviser delegates any duties
hereunder.
The Investment Adviser further agrees that it:
(a) will use the same skill and care in providing such
services as it would use in providing services to fiduciary accounts if
it had investment responsibilities for such accounts;
(b) will conform with all applicable Rules and Regulations of
the SEC and will in addition conduct its activities under this
Agreement in accordance with any applicable regulations of any
governmental authority pertaining to the investment advisory activities
of the Investment Adviser;
(c) will not make loans to any person to purchase or carry
units of beneficial interest in the Trust or make loans to the Trust;
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<PAGE> 4
(d) will place orders pursuant to its investment
determinations for the Schwab Funds either directly with the issuer or
with an underwriter, market maker, or broker or dealer. In placing
orders with brokers and dealers the Investment Adviser will attempt to
obtain prompt execution of orders in an effective manner at the most
favorable price. Consistent with this obligation, when the execution
and price offered by two or more brokers or dealers are comparable, the
Investment Adviser may, in its discretion, purchase or sell portfolio
securities to and from brokers and dealers who provide the Investment
Adviser or any Sub-Adviser with research advice and other services. In
no instance will portfolio securities be purchased from or sold to the
Investment Adviser or any Sub-Adviser, or any affiliated person of
either the Trust, the Investment Adviser, or any Sub-Adviser, except as
may be permitted under the 1940 Act;
(e) will treat confidentially and as proprietary information
of the Trust all records and other information relative to the Trust,
and will not use such records and information for any purpose other
than performance of its responsibilities and duties hereunder, except
after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld
where the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested
by the Trust; and
(f) will direct its personnel when making investment
recommendations for the Trust, not to inquire or take into
consideration whether the issuers of securities proposed for purchase
or sale for the Trust's accounts are customers of the Investment
Adviser or of its parent or its subsidiaries or affiliates. In dealing
with such customers, the Investment Adviser and its parent,
subsidiaries, and affiliates will not inquire or take into
consideration whether securities of those customers are held by the
Trust.
4. Services to Others. The Trust understands that the Investment
Adviser may in the future act as an investment adviser to fiduciary and other
managed accounts, and as investment adviser, sub-investment adviser, and/or
administrator to other investment companies. The Trust has no objection to the
Investment Adviser's acts in such
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<PAGE> 5
capacities, provided that whenever one of the Schwab Funds and one or more other
investment companies advised by the Investment Adviser have available funds for
investment, investments suitable and appropriate for each will be allocated in
accordance with a formula believed by the Investment Adviser to be equitable to
each company. The Trust recognizes that in some cases this procedure may
adversely affect the size of the position that a Schwab Fund may obtain in a
particular security. In addition, the Trust understands that the persons
employed by the Investment Adviser to assist in the Investment Adviser's duties
under this Agreement will not devote their full time to such service and nothing
contained in this Agreement will be deemed to limit or restrict the right of the
Investment Adviser or any of its affiliates to engage in and devote time and
attention to other businesses or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Investment Adviser hereby agrees that all records it
maintains for the Trust are the property of the Trust and further agrees to
surrender promptly to the Trust any of such records upon the Trust's request and
will require the same type of agreement from each Sub-Adviser. The Investment
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, the Investment Adviser
will pay all expenses incurred by it in providing general economic and financial
analysis and advice to the Schwab Funds and providing a continuous investment
program for the Schwab Funds pursuant to Section 3 above and in providing its
activities under this Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Trust. The Investment Adviser
will also pay all compensation of any person or person employed by or associated
with the Investment Adviser to assist in the performance of the Investment
Adviser's obligations under this Agreement, whether or not such person is also a
officer or employee of the Trust, and the Investment Adviser will not cause any
obligation to be incurred on behalf of the Trust in respect of any such
compensation. Other expenses to be incurred in the operation of the Schwab Funds
- -- including without limitation taxes, interest, brokerage fees and commissions,
if any, fees of Trustees who are not officers, directors, shareholders, or
employees of the Investment Adviser or any Sub-Adviser, SEC fees and state "blue
sky" qualification fees, advisory and administration fees, costs of performing
the pricing of portfolio securities, transfer and dividend disbursing agents'
fees, certain insurance premiums,
-5-
<PAGE> 6
outside auditing and legal expenses, costs of maintaining the Trust's existence
as a Massachusetts business trust, typesetting and printing prospectuses for
regulatory purposes and for distribution to current shareholders of the Schwab
Funds, costs of shareholders' and Trustees' reports and meetings and any
extraordinary expenses -- will be borne by the Schwab Funds; provided however,
that the Schwab Funds will not bear, directly or indirectly, the cost of any
activity that is primarily intended to result in the distribution of shares of
the Schwab Funds.
7. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Trust will pay the Investment Adviser and the
Investment Adviser will accept as full compensation therefor, an advisory fee,
accrued daily and payable monthly, in accordance with Schedule D hereto.
If in any fiscal year the aggregate expenses (as defined under
the securities regulations of any state having jurisdiction over the Trust) of a
Schwab Fund exceed the expense limitations of any such state, the Investment
Adviser will reimburse such Schwab Fund for a portion of such excess expenses
equal to such excess times the ratio of the fees otherwise payable by such
Schwab Fund to the Investment Adviser hereunder to the aggregate fees otherwise
payable by such Schwab Fund to the Investment Adviser hereunder, and to Charles
Schwab & Co., Inc. under the Transfer Agency and Shareholder Servicing Agreement
between it and the Trust. The obligation of the Investment Adviser to reimburse
a Schwab Fund hereunder is limited in any fiscal year to the amount of its fee
hereunder from such Schwab Fund for such fiscal year, provided, however, that
notwithstanding the foregoing, the Investment Adviser will reimburse each Schwab
Fund for such proportion of such excess expenses regardless of the amount of
fees paid to it during such fiscal year to the extent that the securities
regulations of any state having jurisdiction over the Trust so require. Such
expense reimbursement, if any, will be estimated daily and reconciled and paid
on a monthly basis.
8. Limitation of Liability. The Investment Adviser will not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the performance of this Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Investment Adviser in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
9. Duration and Termination. This Agreement will become effective as to
each Schwab Fund as of the date set
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<PAGE> 7
forth opposite each Fund's name on Schedule A, provided that it has been
approved by a vote of a majority of the outstanding voting securities of such
Schwab Fund, in accordance with the requirements under the 1940 Act.
Thereafter, if not terminated as to a Schwab Fund, this
Agreement will continue in effect as to such Schwab Fund for successive periods
each ending on May 30 of each year, provided such continuance is specifically
approved at least annually (a) by the vote of a majority of those members of the
Trust's Board of Trustees who are not parties to this Agreement or interested
persons of the Trust, the Investment Adviser, or any Sub-Adviser, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
Trust's Board of Trustees or by vote of a majority of the outstanding voting
securities of such Schwab Fund. Notwithstanding the foregoing, this Agreement
may be terminated at any time on sixty days' written notice, without the payment
of any penalty, by the Trust (by vote of the Trust's Board of Trustees or by
vote of a majority of the outstanding voting securities of such Schwab Fund) or
by the Investment Adviser. This Agreement will immediately terminate in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment" shall have
the same meaning of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by the laws of the State of California.
The names "Schwab Investments" and "Trustees of Schwab
Investments" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under the
Declaration of Trust, to which reference is hereby made and a copy of which is
on file at the office of the Secretary of The Commonwealth of Massachusetts and
elsewhere as required by law, and to any and all amendments thereto so filed or
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<PAGE> 8
hereafter filed. The obligations of "Schwab Investments" entered into in the
name or on behalf thereof by any of the Trustees, representatives or agents are
made not individually, but in such capacities, and are not binding upon any of
the Trustees, interest holders or representatives of the Trust personally, but
bind only the assets of the Trust, and all persons dealing with any series of
units of interest of the Trust must look solely to the assets of the Trust
belonging to such series for the enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
SCHWAB INVESTMENTS
By: /s/ Elizabeth G. Sawi
------------------------------------
Name: Elizabeth G. Sawi
Title: President
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
By: /s/ William J. Klipp
------------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
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<PAGE> 1
EXHIBIT 5(B)
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
AMENDED SCHEDULE A
FUND FUND EFFECTIVE DATE
Schwab 1000 Fund April 2, 1991
Schwab Short/Intermediate November 4, 1991
Government Bond Fund
Schwab California Long-Term February 20, 1992
Tax-Free Bond Fund
Schwab Long-Term Tax-Free July 30, 1992
Bond Fund
Schwab Long-Term Government March 1, 1993
Bond Fund
Schwab Short/Intermediate Tax-Free March 1, 1993
Bond Fund
Schwab California Short/Intermediate March 1, 1993
Tax-Free Bond Fund
SCHWAB INVESTMENTS
By: /s/ Elizabeth G. Sawi
-------------------------------
Name: Elizabeth G. Sawi
Title: President
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ William J. Klipp
-------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
<PAGE> 2
SCHEDULE B
The Investment Adviser will keep and maintain the following books and
records of each Schwab Fund pursuant to Rule 31a-1 under the Investment Company
Act of 1940 (the "Rule"):
a. Journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements of cash, and
all other debits and credits, as required by subsection (b)(1) of the Rule;
b. General and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, including interest accrued and
interest received, as required by subsection (b)(2)(i) of the Rule;
c. Separate ledger accounts required by subsection (b)(2)(ii) and (iii)
of the Rule; and
d. A monthly trial balance of all ledger accounts (except shareholder
accounts) as required by subsection (b)(8) of the Rule.
In addition to the maintenance of the books and records specified
above, the Investment Adviser will perform the following accounting services
daily for each Schwab Fund:
a. Calculate the yield;
b. Provide the following reports:
(i) a current security position report;
(ii) a summary report of transactions and pending
maturities (including the principal, cost, and
accrued interest on each portfolio security in
maturity date order); and
(iii) a current cash position report (including cash
available from portfolio sales and maturities and
sales of a Portfolio's Shares less cash needed for
redemptions and settlement of portfolio purchases);
c. Such other similar services with respect to a Schwab Fund as
may be reasonably requested by Trust.
<PAGE> 3
SCHEDULE C
Form of Sub-Investment Advisory
Agreement
<PAGE> 4
AMENDED SCHEDULE D
ADVISORY FEE SCHEDULE
FUND FUND EFFECTIVE DATE
SCHWAB 1000 FUND APRIL 2, 1991
The annual graduated fee, payable monthly, is
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.
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND NOVEMBER 4, 1991
The annual graduated fee, payable monthly, is
0.41% of the Fund's average daily net assets.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND FEBRUARY 20, 1992
The annual fee, payable monthly, is 0.41% of the
Fund's average daily net assets.
SCHWAB LONG-TERM TAX-FREE BOND FUND JULY 30, 1992
The annual fee, payable monthly, is 0.41% of the
Fund's average daily net assets.
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND MARCH 1, 1993
The annual fee, payable monthly, is 0.41% of the
Fund's average daily net assets.
SCHWAB LONG-TERM GOVERNMENT BOND FUND MARCH 1, 1993
The annual fee, payable monthly, is 0.41% of the
Fund's average daily net assets.
<PAGE> 5
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND MARCH 1, 1993
The annual fee, payable monthly, is 0.41% of the
Fund's average daily net assets.
SCHWAB INVESTMENTS
By: /s/ Elizabeth G. Sawi
------------------------------
Name: Elizabeth G. Sawi
Title: President
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ William J. Klipp
------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
<PAGE> 1
EXHIBIT 6(A)
DISTRIBUTION AGREEMENT
June 15, 1994
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, California 94104
Ladies and Gentlemen:
This is to confirm that, in consideration of the agreements hereinafter
contained, the undersigned, SCHWAB INVESTMENTS (the "Trust"), a Massachusetts
business trust, has agreed that CHARLES SCHWAB & CO., INC. (the "Distributor")
shall be, for the period of this Agreement, the distributor of the units of
beneficial interest of the investment portfolios of the Trust identified on
Schedule A hereto (each a "Fund", and collectively, the "Funds"). Such units of
beneficial interest are hereinafter called "Shares."
1. Services as Distributor.
1.1. Distributor will act as agent for the distribution of the Shares
covered by the registration statement and prospectus of the Trust in effect
under the Securities Act of 1933, as amended.
1.2. Distributor agrees to use appropriate efforts to solicit orders
for the sale of the Shares and will undertake such advertising and promotion as
it believes reasonable in connection with such solicitation. The Trust
understands that Distributor may, in the future, be the distributor of the
shares of several investment companies or series (together, "Companies"),
including Companies having investment objectives similar to those of the Trust.
The Trust further understands that investors and potential investors in the
Trust may invest in shares of such other Companies. The Trust agrees that
Distributor's duties to such Companies shall not be deemed to be in conflict
with its duties to the Trust under this paragraph 1.2.
Distributor shall, at its own expense, finance appropriate activities
which it deems reasonable which are primarily intended to result in the sale of
the Shares, including, but not limited to, advertising, compensation of
underwriters, dealers and sales personnel, the printing and mailing of
prospectuses to other than current Shareholders, and the printing and mailing of
sales literature.
1.3. All activities by Distributor and its partners, agents, and
employees as distributor of the Shares shall comply with all applicable laws,
rules and regulations, including, without limitation, all rules and regulations
made or adopted pursuant to the Investment Company Act of 1940 by the Securities
<PAGE> 2
and Exchange Commission or any securities association registered under the
Securities Exchange Act of 1934.
1.4. Distributor will provide one or more persons, during normal
business hours, to respond to telephone questions with respect to the Trust.
1.5. Distributor will transmit any orders received by it for purchase
or redemption of the Shares to the transfer agent and custodian for the Funds.
1.6. Whenever in their judgment such action is warranted by unusual
market, economic or political conditions, or by abnormal circumstances of any
kind, the Trust's officers may decline to accept any orders for, or make any
sales of the Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.7. Distributor will act only on its own behalf as principal if it
chooses to enter into selling agreements with selected dealers or others.
1.8. The Trust agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
the Shares for sale in such states as Distributor may designate.
1.9. The Trust shall furnish from time to time, for use in connection
with the sale of the Shares, such information with respect to the Funds and the
Shares as Distributor may reasonably request; and the Trust warrants that the
statements contained in any such information shall fairly show or represent what
they purport to show or represent. The Trust shall also furnish Distributor upon
request with: (a) unaudited semi-annual statements of the Funds' books and
accounts prepared by the Trust, (b) quarterly earnings statements prepared by
the Trust, (c) a monthly itemized list of the securities in the Funds, (d)
monthly balance sheets as soon as practicable after the end of each month, and
(e) from time to time such additional information regarding the financial
condition of the Funds as Distributor may reasonably request.
1.10. The Trust represents to Distributor that all registration
statements and prospectuses filed by the Trust with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Shares have been carefully prepared in conformity with the requirements of said
Act and rules and regulations of the Securities and Exchange Commission
thereunder. As used in this agreement the terms "registration statement" and
"prospectus" shall mean any
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<PAGE> 3
registration statement and any prospectus and Statement of Additional
Information relating to the Funds filed with the Securities and Exchange
Commission and any amendments and supplements thereto which at any time shall
have been filed with the same Commission. The Trust represents and warrants to
Distributor that any registration statement and prospectus, when such
registration statement becomes effective, will contain all statements required
to be stated therein in conformity with said Act and the rules and regulations
of said Commission; that all statements of fact contained in any such
registration statement and prospectus will be true and correct when such
registration statement becomes effective; and that neither any registration
statement nor any prospectus when such registration statement becomes effective
will include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading to a purchaser of the Shares. The Distributor may but shall not
be obligated to propose from time to time such amendment or amendments to any
registration statement and such supplement or supplements to any prospectus as,
in the light of future developments, may, in the opinion of the Distributor's
counsel, be necessary or advisable. If the Trust shall not propose such
amendment or amendments and/or supplement or supplements within fifteen days
after receipt by the Trust of a written request from Distributor to do so,
Distributor may, at its option, terminate this agreement. The Trust shall not
file any amendment to any registration statement or supplement to any prospectus
without giving Distributor reasonable notice thereof in advance; provided,
however, that nothing contained in this agreement shall in any way limit the
Trust's right to file at any time such amendments to any registration statement
and/or supplements to any prospectus, of whatever character, as the Trust may
deem advisable, such right being in all respects absolute and unconditional.
1.11. The Trust authorizes Distributor and dealers to use any
prospectus in the form furnished from time to time in connection with the sale
of the Shares. The Trust agrees to indemnify, defend and hold Distributor, its
directors, officers and employees, and any person who controls Distributor
within the meaning of Section 15 of the Securities Act of 1933, as amended, free
and harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith) which
Distributor, its partners and employees, or any such controlling person, may
incur under the Securities Act of 1933, as amended, or under common law or
otherwise, arising out of or based upon any untrue statement, or alleged untrue
statement, of a material fact contained in any registration statement or any
prospectus or arising out of or based upon any omission, or alleged omission, to
state a material fact required to be stated in either any registration statement
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<PAGE> 4
or any prospectus or necessary to make the statements in either thereof not
misleading; provided, however, that the Trust's agreement to indemnify
Distributor, its directors, officers or employees, and any such controlling
person shall not be deemed to cover any claims, demands, liabilities or expenses
arising out of any statements or representations as are contained in any
prospectus and in such financial and other statements as are furnished in
writing to the Trust by Distributor and used in the answers to the registration
statement or in the corresponding statements made in the prospectus, or arising
out of or based upon any omission or alleged omission to state a material fact
in connection with the giving of such information required to be stated in such
answers or necessary to make the answers not misleading; and further provided
that the Trust's agreement to indemnify Distributor and the Trust's
representations and warranties hereinbefore set forth in paragraph 1.10 shall
not be deemed to cover any liability to the Trust or its Shareholders to which
Distributor would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties, or by reason of
Distributor's reckless disregard of its obligations and duties under this
agreement. The Trust's agreement to indemnify Distributor, its partners and
employees, and any such controlling person, as aforesaid, is expressly
conditioned upon the Trust's being notified of any action brought against
Distributor, its directors, officers or employees, or any such controlling
person, such notification to be given by letter or by telegram addressed to the
Trust at its principal office in San Francisco, California and sent to the Trust
by the person against whom such action is brought, within 10 days after the
summons or other first legal process shall have been served. The failure to so
notify the Trust of any such action shall not relieve the Trust from any
liability which the Trust may have to the person against whom such action is
brought by reason of any such untrue, or allegedly untrue, statement or
omission, or alleged omission, otherwise than on account of the Trust's
indemnity agreement contained in this paragraph 1.11. The Trust will be entitled
to assume the defense of any suit brought to enforce any such claim, demand or
liability, but, in such case, such defense shall be conducted by counsel of good
standing chosen by the Trust and approved by Distributor, which approval shall
not be unreasonably withheld. In the event the Trust elects to assume the
defense of any such suit and retain counsel of good standing approved by
Distributor, the defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but in case the
Trust does not elect to assume the defense of any such suit, or in case
Distributor reasonably does not approve of counsel chosen by the Trust, the
Trust will reimburse Distributor, its directors, officers and employees, or the
controlling person or persons named as defendant or defendants in such suit, for
the fees and expenses of any counsel retained by Distributor or them. The
Trust's indemnification agreement contained in this paragraph
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<PAGE> 5
1.11 and the Trust's representations and warranties in this agreement shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of Distributor, its partners and employees, or any
controlling person, and shall survive the delivery of any Shares. This agreement
of indemnity will inure exclusively to Distributor's benefit, to the benefit of
its several partners and employees, and their respective estates, and to the
benefit of the controlling persons and their successors. The Trust agrees
promptly to notify Distributor of the commencement of any litigation or
proceedings against the Trust or any of its officers or Trustees in connection
with the issue and sale of any Shares.
1.12. Distributor agrees to indemnify, defend and hold the Trust, its
several officers and Trustees and any person who controls the Trust within the
meaning of Section 15 of the Securities Act of 1933, as amended, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Trust, its officers or Trustees or any such controlling person, may incur under
the Securities Act of 1933, as amended, or under common law or otherwise, but
only to the extent that such liability or expense incurred by the Trust, its
officers or Trustees or such controlling person resulting from such claims or
demands, shall arise out of or be based upon any untrue, or alleged untrue,
statement of a material fact contained in information furnished in writing by
Distributor to the Trust and used in the answers to any of the items of the
registration statement or in the corresponding statements made in the
prospectus, or shall arise out of or be based upon any omission, or alleged
omission, to state a material fact in connection with such information furnished
in writing by Distributor to the Trust required to be stated in such answers or
necessary to make such information not misleading. Distributor's agreement to
indemnify the Trust, its officers and Trustees, and any such controlling person,
as aforesaid, is expressly conditioned upon Distributor's being notified of any
action brought against the Trust, its officers or Trustees, or any such
controlling person, such notification to be given by letter or telegram
addressed to Distributor at its principal office in San Francisco, California
and sent to Distributor by the person against whom such action is brought,
within 10 days after the summons or other first legal process shall have been
served. Distributor shall have the right of first control of the defense of such
action, with counsel of its own choosing, satisfactory to the Trust, if such
action is based solely upon such alleged misstatement or omission on
Distributor's part, and in any other event the Trust, its officers or Trustees
or such controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action. The failure to so
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<PAGE> 6
notify Distributor of any such action shall not relieve Distributor from any
liability which Distributor may have to the Trust, its officers or Trustees, or
to such controlling person by reason of any such untrue or alleged untrue
statement, or omission or alleged omission, otherwise than on account of
Distributor's indemnity agreement contained in this paragraph 1.12.
1.13. No Shares shall be offered by either Distributor or the Trust
under any of the provisions of this agreement and no orders for the purchase or
sale of Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the
Securities Act of 1933, as amended, or if and so long as a current prospectus as
required by Section 10(b)(2) of said Act, as amended, is not on file with the
Securities and Exchange Commission; provided, however, that nothing contained in
this paragraph 1.13 shall in any way restrict or have an application to or
bearing upon the Trust's obligation to repurchase Shares from any Shareholder in
accordance with the provisions of the Trust's prospectus, Declaration of Trust,
or By-laws.
1.14. The Trust agrees to advise Distributor as soon as reasonably
practical by a notice in writing delivered to Distributor or its counsel:
(a) of any request by the Securities and Exchange Commission for
amendments to the registration statement or prospectus then in effect or for
additional information;
(b) in the event of the issuance by the Securities and Exchange
Commission of any stop order suspending the effectiveness of the registration
statement or prospectus then in effect or the initiation by service of process
on the Trust of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any statement of a
material fact made in the registration statement or prospectus then in effect or
which requires the making of a change in such registration statement or
prospectus in order to make the statements therein not misleading; and
(d) of all action of the Securities and Exchange Commission with
respect to any amendment to any registration statement or prospectus which may
from time to time be filed with the Securities and Exchange Commission.
For purposes of this section, informal requests by or acts of the Staff
of the Securities and Exchange Commission shall not be deemed actions of or
requests by the Securities and Exchange Commission.
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<PAGE> 7
1.15. Distributor agrees on behalf of itself and its directors,
officers and employees to treat confidentially and as proprietary information of
the Trust all records and other information relative to the Trust and its prior,
present or potential Shareholders, and not to use such records and information
for any purpose other than performance of its responsibilities and duties
hereunder, except after prior notification to and approval in writing by the
Trust, which approval shall not be unreasonably withheld and may not be withheld
where Distributor may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Trust.
1.16. This agreement shall be governed by the laws of the Commonwealth
of Massachusetts.
2. Issuance of Shares.
The Trust reserves the right to issue, transfer or sell Shares of the
Funds at net asset value (a) in connection with the merger or consolidation of
the Trust or the Funds with any other investment company or the acquisition by
the Trust or the Funds of all or substantially all of the assets or of the
outstanding Shares of any other investment company; (b) in connection with a pro
rata distribution directly to the holders of Shares of a Fund in the nature of a
stock dividend or split; (c) upon the exercise of subscription rights granted to
the holders of Shares of a Fund on a pro rata basis; (d) in connection with the
issuance of Shares of a Fund pursuant to any exchange and reinvestment
privileges described in any then-current prospectus of a Fund; and (e) otherwise
in accordance with any then-current prospectus of the Funds.
3. Term and Matters Relating to the Trust as a Massachusetts Business
Trust.
This agreement shall become effective as to the Trust on January 23,
1991, and, unless sooner terminated as provided herein, shall continue until two
years, and thereafter shall continue automatically for successive one-year
periods ending on January 23 of each successive year; provided, however, that
such continuance is specifically approved at least annually by (i) the Trust's
Board of Trustees or (ii) by "vote of a majority of the outstanding Shares" (as
defined below) of the Trust, and provided further, that in either event the
continuance is also approved at least annually by the majority of the Trust's
Trustees who are not parties to the agreement or interested persons (as defined
in the 1940 Act) of any party to this agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. This agreement is
terminable on not less than sixty days' notice by the Trust's Board of Trustees,
by "vote of a
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<PAGE> 8
majority of the outstanding Shares" (as defined below) of the Trust or by
Distributor. This agreement will also terminate automatically in the event of
its assignment (as defined in the 1940 Act). For purposes of this Agreement, the
term "vote of a majority of the outstanding Shares" shall mean the approval, at
a meeting of Shareholders duly called, of the lesser of (i) the holders of 67%
or more of the votes present at any such meeting, if the holders of more than
50% of the outstanding votes are present or represented by proxy thereat; or
(ii) the holders of more than 50% of the outstanding votes.
The names "Schwab Investments" and "Trustees of Schwab Investments"
refer respectively to the Trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated as of October 25, 1989 to which reference is hereby made and a copy
of which is on file at the office of the Secretary of State of The Commonwealth
of Massachusetts and elsewhere as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of "Schwab Investments"
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities, and
are not binding upon any of the Trustees, Shareholders or representatives of the
Trust personally, but bind only the assets of the Trust, and all persons dealing
with any series of Shares of the Trust must look solely to the assets of the
Trust belonging to such series for the enforcement of any claims against the
Trust.
4. Severability.
If any provision of this Agreement is found by a court or agency of
competent jurisdiction to be in violation of any state or federal law, rule or
regulation, then the invalidity of such provision shall not affect the
enforceability or validity of the remaining provisions.
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<PAGE> 9
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the place below indicated,
whereupon it shall become a binding agreement between us.
Yours very truly,
SCHWAB INVESTMENTS
By: /s/ Elizabeth G. Sawi
---------------------------
Name: Elizabeth G. Sawi
Title: President
Accepted:
CHARLES SCHWAB & CO., INC.
By: /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: Senior Vice President -
SchwabFunds
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<PAGE> 1
EXHIBIT 6(B)
AMENDED SCHEDULE A
TO THE DISTRIBUTION AGREEMENT
BETWEEN SCHWAB INVESTMENTS AND
CHARLES SCHWAB & CO., INC.
FUND FUND EFFECTIVE DATE
Schwab 1000 Fund April 2, 1991
Schwab Short/Intermediate Government November 4, 1991
Bond Fund
Schwab California Long-Term Tax-Free February 20, 1992
Bond Fund
Schwab Long-Term Tax-Free Bond Fund July 30, 1992
Schwab Short/Intermediate Tax-Free March 1, 1993
Bond Fund
Schwab Long-Term Government March 1, 1993
Bond Fund
Schwab California Short/Intermediate March 1, 1993
Tax-Free Bond Fund
SCHWAB INVESTMENTS
By: /s/ Elizabeth G. Sawi
------------------------------
Name: Elizabeth G. Sawi
Title: President
CHARLES SCHWAB & CO., INC.
By: /s/ William J. Klipp
---------------------------
Name: William J. Klipp
Title: Senior Vice President -
SchwabFunds
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<PAGE> 1
EXHIBIT 8(a)
CUSTODIAN SERVICES AGREEMENT TERMS AND CONDITIONS
This Agreement is made as of November 4, 1991, by and between SCHWAB
INVESTMENTS, (the "Fund"), a Massachusetts business trust, and PROVIDENT
NATIONAL BANK ("Provident"), a national banking association.
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940 (the "1940" Act), as amended.
The Fund wishes to retain Provident to provide custody services, and
Provident wishes to furnish such services to each of the Fund's investment
portfolios listed on Schedule A, hereto ("Portfolio(s)"), either directly or
through an affiliate or affiliates, as more fully described herein. For the
Schwab 1000 Fund, a portfolio of the Fund, this agreement amends and restates,
in its entirety, the Custodian Services Agreement dated March 31, 1991 by and
between the Schwab 1000 Fund and Provident National Bank.
In consideration of the promises and mutual covenants herein contained,
the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall mean any
officer of the Fund and any other person, who is duly authorized by the Fund's
Governing Board, to give Oral and Written Instructions on behalf of the Fund.
Such persons are listed in the Certificate attached hereto as the Authorized
Persons Appendix.
(b) "Book-Entry System". The term "Book-Entry System"
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<PAGE> 2
means Federal Reserve Treasury book-entry system for United States and federal
agency securities, its successor or successors, and its nominee or nominees and
any book-entry system maintained by an exchange registered with the SEC under
the 1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Governing Board". The term "Governing Board" shall mean the
Fund's Board of Directors if the Fund is a corporation or the Fund's Board of
Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall mean
oral instructions received by Provident from an Authorized Person or from a
person reasonably believed by Provident to be an Authorized Person.
(f) "Provident". The term "Provident" shall mean Provident National
Bank or a subsidiary or affiliate of Provident National Bank.
(g) "SEC". The term "SEC" shall mean the Securities and Exchange
Commission.
(h) "Securities and Commodities Laws". The terms the "1933 Act"
shall mean the Securities Act of 1933, the "1934 Act" shall mean the Securities
Exchange Act of 1934, the "1940 Act" shall mean the Investment Company Act of
1940, as amended, and the "CEA" shall mean the Commodities Exchange Act, as
amended.
(i) "Shares". The term "Shares" shall mean the shares of stock of
any series or class of the Fund, or, where appropriate,
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<PAGE> 3
units of beneficial interest in a trust where the Fund is organized as a Trust.
3
<PAGE> 4
(J) "Property". The term "Property" shall mean:
(i) any and all securities and other investment items which
the Fund may from time to time deposit, or cause to be
deposited, with Provident or which Provident may from
time to time hold for the Fund;
(ii) All income in respect of any of such securities or other
investment items;
(iii) all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of securities issued by the
Fund, which are received by Provident from time to
time, from or on behalf of the Fund.
(k) "Written Instructions". The term "Written Instructions" shall
mean written instructions signed by two Authorized Persons and received by
Provident. The instructions may be delivered by hand,, mail, tested telegram,
cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints Provident to provide
custodian services to each of the Portfolios listed in Schedule A, hereto, and
Provident accepts such appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide Provident with the following:
(a) certified or authenticated copies of the
4
<PAGE> 5
resolutions of the Fund's Governing Board, approving the appointment
of Provident or its affiliates to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) a copy of the Fund's administration agreements if Provident is
not providing the Fund with such services;
(f) copies of any shareholder servicing agreements made in respect
of the Fund; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. Compliance with Government Rules and Regulations.
Provident undertakes to comply with all applicable requirements of the
1933 Act, the 1934 Act, the 1940 Act, and the CEA, and any laws, rules and
regulations of governmental authorities having jurisdiction with respect to all
duties to be performed by Provident hereunder. Except as specifically set forth
herein, Provident assumes no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, Provident
shall act only upon Oral and Written
5
<PAGE> 6
Instructions. Provident shall be entitled to rely upon any Oral and Written
Instructions it receives from an Authorized Persons (or from a person reasonably
believed by Provident to be an Authorized Person) pursuant to this Agreement.
Provident may assume that any Oral or Written Instructions received hereunder
are not in any way inconsistent with the provisions of organizational documents
or this Agreement or of any vote, resolution or proceeding of the Fund's
Governing Board or of the Fund's shareholders.
The Fund agrees to forward to Provident Written Instructions confirming
Oral Instructions so that Provident receives the Written Instructions by the
close of business on the same day that such Oral Instructions are received. The
fact that such confirming Written Instructions are not received by Provident
shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions.
The Fund further agrees that Provident shall incur no liability to the
Fund in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If Provident is in doubt as to any action it
should or should not take, Provident may request directions or advice, including
Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If Provident shall be in doubt as to any
questions of law pertaining to any action it should or
6
<PAGE> 7
should not take, Provident may request advice at its own cost from such counsel
of its own choosing (who may be counsel for the Fund, the Fund's advisor or
Provident, at the option of Provident).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions Provident receives from the
Fund, and the advice it receives from counsel, Provident shall be entitled to
rely upon and follow the advice of counsel.
(d) Protection of Provident. Provident shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral or
Written Instructions it receives from the Fund or from counsel to the Fund and
which Provident believes, in good faith, to be consistent with those directions,
advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an obligation
upon Provident (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions advice or Oral
or Written Instructions unloose under the terms of other provisions of this
Agreement, the same in a condition of Provident's properly taking or not taking
such action.
7. Records. The books and records pertaining to the Fund, which are in the
possession of Provident, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
Authorized Persons,
7
<PAGE> 8
shall have access to such books and records at all time during Provident's
normal business hours. Upon the reasonable request or the Fund, copies of any
such books and records shall be provided by Provident to the Fund or to an
Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. Provident agrees to keep confidential all records or
the Fund and information relative to the Fund and its Shareholders (past,
present and potential), unless the release of such records or information is
otherwise consented to, in writing, by the Fund. The Fund agrees that such
consent shall not be unreasonably withheld. The Fund further agrees that, should
Provident be required to provide such information or records to duly constituted
authorities (who may institute civil or criminal contempt proceedings for
failure to comply), Provident shall not be required to seek the Fund's consent
prior to disclosing such information.
9. Cooperation with Accountants. Provident shall cooperate with the Fund's
independent public accountants and shall take all reasonable action in the
performance of its obligations under this Agreement to ensure that the necessary
information is made available to such accountants for the expression of their
opinion, as required by the Fund.
10. Disaster Recovery. Provident shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is
8
<PAGE> 9
available. In the event of equipment failures, Provident shall, at no additional
expense to the Fund, take reasonable steps to minimize service interruptions but
shall have no liability with respect thereto.
11. Compensation. As compensation for services rendered by Provident
during the term of this Agreement, the Fund will pay to Provident a fee or fees
as may be agreed to in writing by the Fund and Provident from time to time.
12. Indemnification. The Fund agrees to indemnify and hold harmless
Provident and its nominees from all taxes, charges, expenses, assessment, claims
and liabilities (including, without limitation, liabilities arising under the
1933 Act, the 1934 Act, the 1940 Act, the CEA, and any state and foreign
securities and blue sky laws, and amendments thereto, and expenses, including
(without limitation) attorneys' fees and disbursements, arising directly or
indirectly from any action which Provident takes or does not take (i) at the
request or on the direction of or in reliance on the advice of the Fund or (ii)
upon Oral or Written Instructions. Neither Provident, nor any of its nominees,
shall be indemnified against any liability to the Fund or to its shareholders
(or any expenses incident to such liability) arising out of Provident's own
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties and obligations under this Agreement.
13. Responsibility of Provident. Provident shall be under no
9
<PAGE> 10
duty to take any action on behalf of the Fund except as specifically set forth
herein or as may be specifically agreed to by Provident, in writing. Provident
shall be obligated to exercise reasonable and diligence in the performance of
its duties hereunder, to act in good faith and to use its best effort, within
reasonable limits, in performing Services provided for under this Agreement.
Provident shall be responsible for damages arising out of its failure to perform
its duties under this Agreement arising out of Provident's negligence.
Without limiting the generality of the foregoing or of any other provision
of this Agreement, Provident, in connection with its duties under this
Agreement, shall not be under any duty or obligation to inquire into and shall
not be liable for (a) the validity or invalidity or authority or lack thereof of
any Oral or Written Instruction, notice or other instrument which conforms to
the applicable requirements of this Agreement, and which Provident reasonably
believes to be genuine; or (b) delays or errors or loss of data occurring by
reason of circumstances beyond Provident's control, including acts of civil or
military authority, national emergencies, labor difficulties, fire, flood or
catastrophe, acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
14. Description of Services.
(a) Delivery of the Property.. The Fund will deliver or arrange for
delivery to Provident, all the property it owns,
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<PAGE> 11
including cash received as a result of the distribution of its shares, during
the period that is set forth in this Agreement. Provident will not be
responsible for such property until actual receipt.
(b) Receipt and Disbursement of Money. Provident, acting upon
Written Instructions, shall open and maintain separate account(s) in the name of
each Portfolio using all cash received from or for the account of such
Portfolio, subject to the terms of this Agreement. In addition, upon Written
Instructions, Provident shall open separate custodial accounts for each separate
series, portfolio or class of the Fund and shall hold in such account(s) all
cash received from or for the accounts of the Fund specifically designated to
each series, portfolio or class.
Provident shall make cash payment from or for the account of the Fund only
for:
(i) purchases of securities in the name of each Portfolio or
Provident or Provident's nominee as provided in
sub-paragraph j and for which Provident has received a
copy of the broker's or dealer's confirmation or payee's
invoice, as appropriate;
(ii) purchase or redemption of shares of each Portfolio
delivered to Provident;
(iii) payment of, subject to Written Instructions, interest,
taxes, administration, accounting, distribution,
advisory, management fees or
11
<PAGE> 12
similar expenses which are to be borne by each
Portfolio;
(iv) payment to, subject to receipt of Written Instructions,
the Fund's transfer agent, as agent for the
shareholders, an amount equal to the amount of dividends
and distributions stated in the Written Instructions to
be distributed in cash by the transfer agent to
shareholders, or, in lieu of paying the Fund's transfer
agent, Provident may arrange for the direct payment of
cash dividends and distributions to shareholders in
accordance with procedures mutually agreed upon from
time to time by and among the Fund, Provident and the
Fund's transfer agent.
(v) payments, upon receipt Written Instructions, in
connection with the conversion, exchange or surrender of
securities owned or subscribed to by each Portfolio and
held by or delivered to Provident;
(vi) payments of the amounts of dividends received with
respect to securities sold short;
(vii) payments made to a sub-custodian pursuant to provisions
in sub-paragraph c of this Agreement; and
(viii) payments upon Written Instructions made for
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<PAGE> 13
other proper Fund Purposes.
Provident is hereby authorized to endorse and collect
all check, drafts or other orders for the payment of
money received as custodian for the account of the Fund.
(c) Receipt of Securities.
(i) Provident shall hold all securities received by it for
or for the account of each Portfolio in a separate
account that physically segregates such securities from
those of any other persons, firms or corporations. All
such securities shall be held or disposed of only upon
Written Instructions of the Fund pursuant to the terms
of this Agreement. Provident shall have no power or
authority to assign, hypothecate, pledge or otherwise
dispose of any such securities or investment, except
upon the express terms of this Agreement and upon
Written Instructions, accompanied by a certified
resolution of the Fund's Governing Board, authorizing
the transaction. In no case may any member of the Fund's
Board of Trustees, or any officer, employee or agent of
the Fund withdraw any securities.
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<PAGE> 14
At Provident's own expense and for its own convenience,
Provident may enter into sub-custodian agreements with
other United States banks or trust companies to perform
duties described in this sub-paragraph c. Such bank or
trust company shall have an aggregate capital, surplus
and undivided profits, according to its last published
report, of at least one million dollars $1,000,000), if
it is a subsidiary or affiliate of Provident, or at
least twenty million dollars ($20,000,000) if such bank
or trust company is not a subsidiary or affiliate of
Provident. In addition, such bank or trust company must
agree to comply with the relevant provisions of the 1940
Act and other applicable rules and regulations.
Provident shall remain responsible for the performance
of all of its duties as described in this Agreement and
shall hold the Fund harmless from its own acts or
omissions, under the standards of care provided for
herein, or of any sub-custodian chosen by Provident
under the terms of this sub-paragraph c.
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<PAGE> 15
(d) Transactions Requiring Instructions. Upon receipt of oral or
Written Instructions and not otherwise, Provident, directly or through the use
of the Book-Entry System shall;
(i) deliver any securities held for each Portfolio against
the receipt of payment for the sale of such securities;
(ii) execute and deliver to such persons as may be designated
in such Oral or Written Instructions, proxies, consents,
authorizations, and any other instruments whereby the
authority of the Fund as owner of any securities may be
exercised;
(iii) deliver any securities to the issuer thereof, or its
agent, when such securities are called, redeemed,
retired or otherwise become payable; provided that, in
any such case, the cash or other consideration is to be
delivered to Provident;
(iv) deliver any securities held for each Portfolio against
receipt of other securities or cash issued or paid in
connection with the liquidation, reorganization,
refinancing, tender offer, merger, consolidation or
recapitalization of any corporation, or the exercise of
any conversion privilege;
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<PAGE> 16
(v) deliver any securities held for each Portfolio to any
protective committee, reorganization committee or other
person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or
sale of assets of any corporation, and receive and hold
under the terms of this Agreement such certificates of
deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such
delivery;
(vi) make such transfer or exchanges of the assets of the
Fund and take such other steps as shall be stated in
said Oral or Written Instructions to be for the purpose
of effectuating a duly authorized plan of liquidation,
reorganization, merger, consolidation or
recapitalization of such Portfolio;
(vii) release securities belonging to a Portfolio to any bank
or trust company for the purpose of a pledge or
hypothecation to secure any loan incurred by that
Portfolio; provided, however, that securities shall be
released only upon payment to Provident of the monies
borrowed, except that in cases where additional
collateral is required to secure a borrowing already
made subject to proper prior
16
<PAGE> 17
authorization, further securities may be released for
that purpose; and repay such loan upon redelivery to it
of the securities pledged or hypothecated therefor and
upon surrender of the note or notes evidencing the loan;
(viii) release and deliver securities owned by a Portfolio in
connection with any repurchase agreement entered into on
behalf of a Portfolio, but only on receipt of payment
therefor; and pay out moneys of a Portfolio in
connection with such repurchase agreements, but only
upon the delivery of the securities;
(ix) release and deliver or exchange securities owned by a
Portfolio in connection with any conversion of such
securities, pursuant to their terms, into other
securities;
(x) release and deliver securities owned by a Portfolio for
the purpose of redeeming in kind shares of a Portfolio
upon delivery thereof to Provident; and
(xi) release and deliver or exchange securities owned by a
Portfolio for other corporate purposes.
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Provident must also receive a certified resolution
describing the nature of the corporate purpose and the
name and address of the person(s) to whom delivery shall
be made when such action is pursuant to sub-paragraph
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d.(xi) above.
(e) Use of Book-Entry System. The Fund shall deliver to Provident
certified resolutions of the Fund's Governing Board approving, authorizing and
instructing Provident on a continuous and on-going basis,, to deposit in the
Book-Entry System all securities belonging to each Portfolio eligible for
deposit therein and to utilize the Book-Entry System to the extent possible in
connection with settlements of purchases and sales of securities by the Fund,
and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings. Provident shall
continue to perform such duties until it receives Written or Oral Instructions
authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of a Portfolio which are
maintained in the Book-Entry system, established
pursuant to this sub-paragraph e hereof, the records of
Provident shall identify by Book-Entry or otherwise
those securities belonging to a Portfolio.
Provident shall furnish the Fund a detailed statement of
the Property held for the Fund under this Agreement at
least monthly and from time to time and upon written
request.
19
<PAGE> 20
(ii) Securities and any cash of a Portfolio deposited in the
Book-Entry System will at all times be segregated from
any assets and cash controlled by Provident in other
than a fiduciary or custodian capacity but may be
commingled with other assets held in such capacities.
Provident and its sub-custodian, if any, will pay out
money only upon receipt of securities and will deliver
securities only upon the receipt of money.
(iii) All books and records maintained by Provident which
relate to the Fund's participation in the Book-Entry
System will at all times during Provident's regular
business hours be open to the inspection of the Fund's
duly authorized employees or agents, and the Fund will
be furnished with all information in respect of the
services rendered to it as it may require.
(iv) Provident will provide the Fund with copies of any
report obtained by Provident on the system of internal
accounting control of the Book-Entry System promptly
after receipt of such a report by Provident. Provident
will also provide the Fund with such reports on its own
system of internal control as the Fund may reasonably
request from time
20
<PAGE> 21
to time.
(f) Registration of Securities. All Securities hold for the Fund
which are issued or issuable only in bearer form, except such securities held in
the Book-Entry System, shall be hold by Provident in bearer form; all other
securities held for the Fund may be registered in the name of the Fund;
Provident; the Book-Entry System; a sub-custodian; or any duly appointed
nominee(s) of the Fund, Provident, Book-Entry system or sub-custodian. The Fund
reserves the right to instruct Provident as to the method of registration and
safekeeping of the securities of each Portfolio. The Fund agrees to furnish to
Provident appropriate instruments to enable Provident to hold or deliver in
proper form for transfer, or to register its registered nominee or in the name
of the Book-Entry Systems any securities which it may hold for the account of
each Portfolio and which may from time to time be registered in the name of the
Portfolio. Provident shall hold all such securities which are not held in the
Book-Entry System in a separate account for each Portfolio in the name of each
Portfolio physically segregated at all times from those of any other person or
persons.
(g) Voting and Other Action. Neither Provident nor its nominee shall
vote any of the securities hold pursuant to this Agreement by or for the account
of the Fund, except in accordance with Written Instructions. Provident, directly
or through the use of the Book-Entry System, shall execute in blank and promptly
deliver all notice, proxies, and proxy soliciting materials to the
21
<PAGE> 22
registered holder of such securities. If the registered holder is not the Fund
then Written or oral Instructions must designate the person(s) who owns such
securities.
(h) Transactions Not Requiring Instructions. In the absence of
contrary Written Instructions, Provident is authorized to take the following
actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of each
Portfolio, all income, dividends, distributions,
coupons, option premiums, other payments and
similar items, included or to be included in the
Property, and, in addition, promptly advise the
Fund of such receipt and credit such income, as
collected, to the Fund's custodian account;
(B) endorse and deposit for collection, in the name of
the applicable Portfolio, checks, drafts, or other
orders for the payment of money;
(C) receive and hold for the account of each Portfolio
all securities received as a distribution on the
portfolio securities as a result of a stock
dividend, share split-up or reorganization,
recapitalization, readjustment or other
22
<PAGE> 23
rearrangement or distribution of rights or similar
securities issued with respect to any portfolio
securities belonging to a Portfolio held by
Provident hereunder;
(D) present for payment and collect the amount payable
upon all securities which may mature or be called,
redeemed, or retired, or otherwise become payable
on the date such securities become payable; and
(E) take any action which may be necessary and proper
in connection with the collection and receipt of
such income and other payments and the endorsement
for collection of checks, drafts, and other
negotiable instruments.
(ii) Miscellaneous Transactions.
(A) Provident is authorized to deliver or cause to be
delivered Property against payment or other
consideration or written receipt therefor in the
following cases:
(1) for examination by a broker or dealer
selling for the account of a Portfolio in
accordance with street delivery custom;
(2) for the exchange of interim receipts
23
<PAGE> 24
or temporary securities for definitive
securities; and
(3) for transfer of securities into the name of
a Portfolio or Provident or nominee of
either, or exchange of securities for a
different number of bonds, certificates, or
other evidence, representing the same
aggregate face amount or number of units
bearing the same interest rate, maturity
date and call provisions, if any; provided
that, in any such case, the new securities
are to be delivered to Provident.
(B) Unless and until Provident receives Oral or
Written Instructions to the contrary, Provident
shall:
(1) pay all income items held by it which call
for payment upon presentation and hold the
cash received by it upon such payment for
the account of a Portfolio;
(2) collect interest and cash dividends
received, with notice to the Fund, to the
account of a Portfolio;
(3) hold for the account of a portfolio
24
<PAGE> 25
all stock dividends, rights and similar
securities issued with respect to any
securities held by us; and
(4) execute as agent on behalf of the Fund all
necessary ownership certificates required by
the Internal Revenue Code or the Income Tax
Regulations of the United States Treasury
Department or under the laws of any State
now or hereafter in effect, inserting the
Fund's name on such certificate as the owner
of the securities covered thereby, to the
extent it may lawfully do so.
(i) Segregated Accounts.
(i) Provident shall upon receipt of Written or Oral
Instructions establish and maintain a segregated
accounts(s) on its records for and on behalf of each
Portfolio. Such account(s) may be used to transfer cash
and securities, including securities in the Book-Entry
System:
(A) for the purposes of compliance by the Fund with
the procedures required by a securities or option
exchange, providing such procedures comply with
the 1940 Act
25
<PAGE> 26
and any releases of the SEC relating to the
maintenance of segregated accounts by
registered investment companies; and
(B) Upon receipt of Written Instructions, for other
proper corporate purposes.
(ii) Provident may enter into separate custodial agreements
with various futures commission merchants ("FCMs") that
the Fund uses ("FCM Agreement"). Pursuant to an FCM
Agreement, the Fund's margin deposits in any
transactions involving futures contracts and options on
futures contracts will be held by Provident in accounts
("FCM Account") subject to the disposition by the FCM
involved in such contracts and in accordance with the
customer contract between FCM and the Fund ("FCM
Contract"), SEC rules and the rules of the applicable
commodities exchange. Such FCM Agreements shall only be
entered into upon receipt of Written Instructions from
the Fund which state that:
(A) a customer agreement between the FCM and the Fund
has been entered into; and
(B) the Fund is in compliance with all the rules and
regulations of the CFTC. Transfers of initial
margin shall be made into a FCM Account only upon
Written Instructions; transfers of premium and
variation margin may be made
26
<PAGE> 27
into a FCM Account pursuant to Oral Instructions.
Transfers of funds from a FCM Account to the FCM
for which Provident holds such an account may only
occur upon certification by the FCM to Provident
that pursuant to the FCM Agreement and the FCM
Contract, all conditions precedent to its right to
give Provident such instructions have been
satisfied.
(iii) Provident shall arrange for the establishment of IRA
custodian accounts for such shareholders holding shares
through IRA accounts, in accordance with the Prospectus,
the Internal Revenue Code (including regulations), and
with such other procedures an are mutually agreed upon
from time to time by and among the Fund, Provident and
the Fund's transfer agent.
(j) Purchases of Securities. Provident shall settle purchased
securities upon receipt of Oral or Written Instructions from the Fund or its
investment advisor(s) that specify:
(i) the name of the issuer and the title of the securities,
including CUSIP number if
27
<PAGE> 28
applicable;
(ii) the number of shares or the principal amount purchased
and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase;
(vi) the name of the person from whom or-the broker through
when the purchase was made. Provident shall upon receipt
of securities purchased by or for a Portfolio pay out of
the moneys held for the account of a Portfolio the total
amount payable to the person from whom or the broker
through whom the purchase was made, provided that the
same conforms to the total amount payable as set forth
in such oral or Written Instructions.
(k) Sales of Securities. Provident shall sell securities upon
receipt of Oral Instructions from the Fund that specify:
(i) the name of the issuer and the title of the security,
including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and
accrued interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
28
<PAGE> 29
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to
whom the sale was made;
(vii) the location to which the security must be delivered and
delivery deadline, if any. Provident shall deliver the
securities upon receipt of the total amount payable to
the Fund upon such sale, provided that the total amount
payable is the same as was set forth in the Oral or
Written Instructions. Subject to the foregoing,
Provident may accept payment in such form as shall be
satisfactory to it, and may deliver securities and
arrange for payment in accordance with the customs
prevailing among dealers in securities.
(1) Reports.
(i) Provident shall furnish the Fund the following reports:
(A) such periodic and special reports as the Fund may
reasonably request;
(B) a monthly statement summarizing all transactions
and entries for the account of each Portfolio,
listing the portfolio securities belonging to each
Portfolio with the adjusted average cost of each
29
<PAGE> 30
issue and the market value at the end of such
month, and stating the cash account of the
Portfolio including disbursement;
(C) the reports to be furnished to the Fund pursuant
to Rule 17f-4; and
(D) such other information as may be agreed upon from
time to time between the Fund and Provident.
(ii) Provident shall transmit promptly to the Fund any proxy
statement, proxy material, notice of a call or
conversion or similar communication received by it as
custodian of the Property. Provident shall be under no
other obligation to inform the Fund as to such actions
or events.
(m) Collections. All collections of monies or other property, in
respect, or which are to become part of the Property (but not the safekeeping
thereof upon receipt by Provident) shall be at the sole risk of the Fund. If
payment is not received by Provident within a reasonable time after proper
demands have been made, Provident shall notify the Fund in writing, including
copies of all demand letters, any written responses, memoranda of all oral
responses and to telephonic demands thereto, and await instructions from the
Fund. Provident shall not be obliged to take legal action for collection unless
and until reasonably indemnified to its satisfaction.
30
<PAGE> 31
Provident shall also notify the Fund as soon as reasonably practicable
whenever income due on securities is not collected in due course.
15. Duration and Termination. This Agreement shall continue unless sooner
terminated by the Fund or by Provident for "cause" (as defined below) on sixty
(60) days prior written notice to the other party, for a period of five years.
For purposes of this Agreement, "cause" shall mean any circumstances which
materially impair the ability of either party to this Agreement to perform all
of its duties and obligations hereunder. In the event this Agreement is
terminated (pending appointment of a successor to Provident or vote of the
shareholders any Portfolio of the Fund to dissolve or to function without a
custodian of its cash, securities or other property), Provident shall not
deliver cash, securities or other property of applicable Portfolio to the
Portfolio or the Fund. It may deliver them to a bank or trust company of
Provident's, having an aggregate capital, surplus and undivided profits, as
shown by its last published report, of not less than twenty million dollars
($20,000,000), as a custodian for such Portfolio to be held under terms similar
to those of this Agreement. Provident shall not be required to make any such
delivery or payment until full payment shall have been made to Provident of all
of its fees, compensation, costs and expenses. Provident shall have a security
interest in and shall have a right of setoff against Property in such
Portfolio's possession as security for the payment of such fees, compensation,
costs and
31
<PAGE> 32
expenses.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to Provident at
Provident's address, Airport Business Center, International Court 2, 200 Stevens
Drive, Philadelphia, Pennsylvania 19113, marked for the attention of the
Custodian Services Department (or its successor) (b) if to the Fund, at the
address of the Fund; or (c) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such Notice or other
communication. If notice is sent by confirming telegram, cable, telex or
facsimile sending device, it shall be deemed to have been given immediately. If
notice is sent by first-class mail, it shall be deemed to have been given five
days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
waived only by a written amendment, signed by the party against whom enforcement
of such change or waiver in sought.
18. Delegation. Provident may, with the prior written consent of the Fund,
which consent may not be unreasonably withheld, assign its rights and delegate
its duties hereunder to any wholly-owned direct or indirect subsidiary of
Provident National Bank or PNC Financial Corp, provided that (i) Provident gives
the Fund a minimum of thirty (30) days in which to decide and
32
<PAGE> 33
to consent by written notice; (ii) the delegate agrees with Provident to
comply with all relevant provisions of the 1940 Act; and (iii) Provident and
such delegate promptly provide such information as the Fund may request, and
respond to such questions as the Fund may ask, relative to the delegation,
including (without limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one more separate documents their agreement, if any, with respect
to delegated and/or Oral Instructions.
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect.
This Agreement shall be deemed to be a contract made in California and
governed by California law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
and shall
33
<PAGE> 34
inure to the benefit of the parties hereto and their respective successors.
34
<PAGE> 35
IN WITNESS WHEREOF,, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
PROVIDENT NATIONAL BANK
By: /s/ Joseph Gramlech
---------------------------------
SCHWAB INVESTMENTS
By: /s/ Tom D. Seip
---------------------------------
35
<PAGE> 1
Exhibit 8(d)
CUSTODIAN SERVICES AGREEMENT
SCHEDULE A
<TABLE>
<CAPTION>
PORTFOLIO INCEPTION DATE
- ------------------------------------------------------------ -----------------------
<S> <C>
Schwab 1000 Fund April 4, 1991
Schwab Short Intermediate Government Bond Fund November 4, 1991
Schwab California Long-Term Tax-Free Bond Fund February 20, 1992
Schwab Long-Term Tax-Free Bond Fund September 11, 1992
Schwab Long-Term Government Bond Fund March 5, 1993
Schwab Short/Intermediate Tax-Free Bond Fund April 21, 1993
Schwab California Short/Intermediate Tax-Free Bond Fund April 21, 1993
</TABLE>
SCHWAB INVESTMENTS
BY: /s/ Tom D. Seip
--------------------------------------
NAME: Tom D. Seip
------------------------------------
TITLE: President and Chief Operating officer
-------------------------------------------------
PNC BANK, NATIONAL ASSOCIATION
(Successor by merger to Provident National Bank)
BY: /s/ Robert J. Perlsweig
-------------------------------------
NAME: Robert J. Perlsweig
-----------------------------------
TITLE: Senior Vice President
------------------------------------------------
<PAGE> 1
Exhibit 8(e)
TRANSFER AGENCY AGREEMENT
AGREEMENT made this 1st day of May, 1993, between Schwab Investments
(the "Trust"), a Massachusetts business trust having its principal place of
business at 101 Montgomery Street, San Francisco, California 94104, and CHARLES
SCHWAB & CO., INC. ("Schwab"), a corporation organized under the laws of the
State of California which is a Securities and Exchange Commission licensed
transfer agent and which has its principal place of business at 101 Montgomery
Street, San Francisco, California 94104.
WHEREAS, the Trust desires that Schwab perform certain services for the
Trust, and for its series denominated as "Funds" and whose shares of beneficial
interest currently comprise the shares of the Trust identified on Schedule A
hereto (individually referred to herein as a "Fund" and collectively as the
"Funds"); and
WHEREAS, Schwab is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES; USE OF SUBTRANSFER AGENTS. Schwab will perform for the
Trust the services set forth in Schedule B hereto, including services as
Transfer Agent.
Schwab also agrees to perform for the Trust such special services
incidental to the performance of the services enumerated herein as agreed to by
the parties from time to time. Schwab will perform such additional services as
are provided on an amendment to Schedule B hereof, in consideration of such fees
as the parties hereto may agree.
Schwab may, in its discretion, appoint in writing other parties
qualified to perform transfer agency and shareholder services (individually, a
"Subtransfer Agent") to carry out some or all of its responsibilities under this
Agreement with respect to a Fund; provided, however, that the Subtransfer Agent
will be the agent of Schwab and not the agent of the Trust or such Fund, and
that Schwab will be fully responsible for the acts of such Subtransfer Agent and
shall not be relieved of any of its responsibilities hereunder by the
appointment of such Subtransfer Agent.
2. FEES. The Trust will pay Schwab for the services to be provided by
Schwab under this Agreement in accordance with, and in the manner set forth in,
Schedule C hereto. Schwab will not change the fees it charges pursuant to the
fee schedule until the
<PAGE> 2
expiration of one year from the Effective Date of this Agreement (as defined
below), unless the Trust otherwise agrees to such change in writing; thereafter,
Schwab may change its fees only upon the written consent of the Trust. Fees for
any additional services to be provided by Schwab pursuant to an amendment to
Schedule B hereto shall be subject to mutual agreement at the time such
amendment to Schedule B is proposed.
3. REIMBURSEMENT OF EXPENSES. In addition to paying Schwab the fees
described in Section 2 hereof, the Trust agrees to reimburse Schwab for Schwab's
out-of-pocket expenses in providing services hereunder, including without
limitation the following:
A. All freight and other delivery and bonding charges
incurred by Schwab in delivering materials to and
from the Trust and in delivery of all materials to
shareholders;
B. All direct telephone, telephone transmission and
telecopy or other electronic transmission expenses
incurred by Schwab in communication with the Trust,
the Trust's investment adviser, sub-investment
advisers or custodian, dealers, shareholders or
others as required for Schwab to perform the services
to be provided hereunder;
C. Costs of postage, couriers, stock computer paper,
statements, labels, envelopes, checks, reports,
letters, tax forms, proxies, notices or other forms
of printed material which shall be required by Schwab
for the performance of the services to be provided
hereunder;
D. The cost of microfilm or microfiche of records or
other materials; and
E. Any expenses Schwab may incur at the written
direction of an officer of the Trust thereunto duly
authorized.
4. EFFECTIVE DATE. This Agreement will become effective with respect to
each Fund as of the date set forth across from its name on Schedule A, such date
for each Fund to be referred to herein as the "Effective Date."
5. TERM AND TERMINATION. This Agreement will continue in effect with
respect to the Trust and to each Fund, unless earlier terminated as to a Fund by
either party hereto as provided hereunder, for an initial term of one year from
the Effective Date. Thereafter, this Agreement will continue in effect unless
either party hereto terminates this Agreement with respect to a
-2-
<PAGE> 3
Fund by giving 90 days' written notice to the other party, whereupon this
Agreement with respect to that Fund will terminate automatically upon the
expiration of said 90 days; provided, however, that after such termination, for
so long as Schwab, with the written consent of the Trust, in fact continues to
perform any one or more of the services contemplated by this Agreement or any
Schedule or exhibit hereto, the provisions of this Agreement, including without
limitation the provisions dealing with indemnification, shall continue in full
force and effect. Fees and out-of-pocket expenses incurred by Schwab but unpaid
by the Trust upon such termination shall be immediately due and payable upon and
notwithstanding such termination. Schwab will be entitled to collect from the
Trust, in addition to the fees and disbursements provided by Paragraphs 2 and 3
hereof, the amount of all of Schwab's cash disbursements and a reasonable fee
(which fee shall be not less than the actual costs incurred by Schwab in
performing such service) for services in connection with Schwab's activities in
effecting such termination, including without limitation, the delivery to the
Trust and/or its distributors or investment advisers and/or other parties, of
the Trust's property, records, instruments and documents, or any copies thereof.
6. SCHWAB'S RELIANCE ON RECORDS AND INSTRUCTIONS. Schwab may rely on
any written records or instructions provided to it by the Trust or any
investment adviser and on any written records provided by any prior transfer
agent or custodian thereof, and each Fund agrees to indemnify Schwab and hold
it, its employees, officers, directors and agents harmless from and against any
and all claims, demands, actions, suits, judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature arising
out of or in any way relating to any actions taken by Schwab with respect to
such Fund in reasonable reliance upon such records or instructions.
7. UNCONTROLLABLE EVENTS. Schwab assumes no responsibility hereunder,
and will not be liable, for any damage, loss of data, delay or any other loss
whatsoever caused by events beyond its reasonable control.
8. STANDARD OF CARE. Schwab will use its best efforts to insure the
accuracy of all services performed under this Agreement, but will not be liable
to the Trust for any action taken or omitted by Schwab in the absence of bad
faith, willful misconduct or gross negligence.
9. LEGAL ADVICE. Schwab will notify the Trust at any time Schwab
believes that it is in need of the advice of counsel (other than counsel in the
regular employ of Schwab or any affiliated companies) with regard to Schwab's
responsibilities and duties pursuant to this Agreement; and after so notifying
the Trust, Schwab, at its discretion, will be entitled to seek,
-3-
<PAGE> 4
receive and act upon advice of legal counsel of its choosing, such advice to be
at the expense of the Trust or the Fund involved unless such advice relates to a
matter involving Schwab's bad faith, willful misconduct or gross negligence with
respect to Schwab's responsibilities and duties hereunder, and Schwab in no
event be liable to the Trust or the Fund involved or any shareholder or
beneficial owner of the Trust or such Fund for any action reasonably taken
pursuant to such advice.
10. INSTRUCTIONS. Whenever Schwab is requested or authorized to take
action hereunder pursuant to instructions from a shareholder concerning an
account in the Trust, Schwab will be entitled to rely upon any certificate,
letter or other instrument or communication, whether in writing or by electronic
or telephone transmission, believed by Schwab to be genuine and to have been
properly made, signed or authorized by an officer or other authorized agent of
the Trust or by the shareholder, as the case may be, and shall be entitled to
receive as conclusive proof of any fact or matter required to be ascertained by
it hereunder a certificate signed by an officer of the Trust or any other person
authorized by the Trust's Board of Trustees or by the shareholder, as the case
may be.
As to the services to be provided hereunder, Schwab may rely
conclusively upon the terms of the Prospectus of a Fund and the Statement of
Additional Information of the Trust to the extent that such services are
described therein unless Schwab receives written instructions to the contrary in
a timely manner from the Trust.
11. INDEMNIFICATION. Each Fund agrees to indemnify and hold harmless
Schwab and Schwab's employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Schwab's actions taken or
non-actions with respect to the performance of services under this Agreement
with respect to such Fund or based, if applicable, upon information,
instructions or requests with respect to such Fund given or made to Schwab by an
officer of the Trust thereunto duly authorized; provided that this
indemnification shall not apply to actions or omissions of Schwab in cases of
its own bad faith, willful misconduct or gross negligence, and further provided
that prior to confessing any claim against it which may be the subject of this
indemnification, Schwab shall give the Trust written notice of and reasonable
opportunity to defend against said claim in its own name or in the name of
Schwab.
12. RECORD RETENTION AND CONFIDENTIALITY. Schwab will keep and maintain
on behalf of the Trust all records which the Trust
-4-
<PAGE> 5
or Schwab is, or may be, required to keep and maintain pursuant to any
applicable statutes, rules and regulations, including without limitation Rules
31a-1 and 31a-2 under the Investment Company Act of 1940, relating to the
maintenance of records in connection with the services to be provided hereunder.
Schwab agrees to make such records available for inspection by the Trust or by
the Securities and Exchange Commission at reasonable times and otherwise to keep
confidential all records and other information relative to the Trust and its
shareholders, except when requested to divulge such information by
duly-constituted authorities or court process, or requested by a shareholder
with respect to information concerning an account as to which such shareholder
has either a legal or beneficial interest or when requested by the Trust, the
shareholder, or the dealer of record as to such account.
13. REPORTS. Schwab will furnish to the Trust and to the Trust's
properly-authorized auditors, investment advisers, examiners, distributors,
dealers, underwriters, salesmen, insurance companies and others designated by
the Trust in writing, such reports at such times as are prescribed in Schedule D
attached hereto, or as subsequently agreed upon by the parties pursuant to an
amendment to Schedule D. The Trust agrees to examine each such report or copy
promptly and will report or cause to be reported any errors or discrepancies
therein no later than three business days from the receipt thereof. In the event
that errors or discrepancies, except such errors and discrepancies as may not
reasonably be expected to be discovered by the recipient within three days after
conducting a diligent examination, are not so reported within the aforesaid
period of time, a report will for all purposes be accepted by and binding upon
the Trust and any other recipient, and Schwab shall have no liability for errors
or discrepancies therein and shall have no further responsibility with respect
to such report except to perform reasonable corrections of such errors and
discrepancies within a reasonable time after requested to do so by the Trust.
14. RIGHTS OF OWNERSHIP. All computer programs and procedures developed
to perform services required to be provided by Schwab under this Agreement are
the property of Schwab. All records and other data except such computer programs
and procedures are the exclusive property of the Trust and all such other
records and data will be furnished to the Trust in appropriate form as soon as
practicable after termination of this Agreement for any reason.
15. RETURN OF RECORDS. Schwab may at its option at any time, and shall
promptly upon the Trust's demand, turn over to the Trust and cease to retain
Schwab's files, records and documents created and maintained by Schwab pursuant
to this Agreement which are no longer needed by Schwab in the performance of its
services or for its legal protection. If not so turned
-5-
<PAGE> 6
over to the Trust, such documents and records will be retained by Schwab for six
years from the year of creation. At the end of such six-year period, such
records and documents will be turned over to the Trust unless the Trust
authorizes in writing the destruction of such records and documents.
16. BANK ACCOUNTS. The Trust and a Fund shall establish and maintain
such bank accounts with such bank or banks as are selected by the Trust, as are
necessary in order that Schwab may perform the services required to be performed
hereunder. To the extent that the performance of such services shall require
Schwab directly to disburse amounts for payment of dividends, redemption
proceeds or other purposes, the Trust and a Fund will provide such bank or banks
with all instructions and authorizations necessary for the Fund to effect such
disbursements.
17. PURCHASE AND REDEMPTION OF SHARES. Schwab will process instructions
from the Shareholders of the Trust to purchase and redeem shares of the Trust as
the agent for the Trust.
With respect to those Funds identified on Schedule A hereto as "Sweep
Funds" (if any), Schwab will perform such daily, and/or weekly monitoring and
other related tasks as is necessary to carry out the automatic investment and
redemption features associated with each individual shareholder's account with
Schwab.
18. REPRESENTATIONS OF THE TRUST. The Trust certifies to Schwab that:
(1) as of the close of business on the Effective Date, each Fund has authorized
unlimited shares and (2) by virtue of its Declaration of Trust, shares of each
Fund which are redeemed by the Trust may be sold by the Trust from its treasury
and (3) this Agreement has been duly authorized by the Trust and, when executed
and delivered by the Trust, will constitute a legal, valid and binding
obligation of the Trust, enforceable against the Trust in accordance with its
terms, subject to bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting the rights and remedies of creditors and
secured parties.
19. REPRESENTATIONS OF SCHWAB. Schwab represents and warrants that the
various procedures and systems which Schwab has implemented with regard to
safeguarding from loss or damage attributable to fire, theft, or any other cause
of the blank checks, records, and other data of the Trust and Schwab's records,
data, equipment facilities and other property used in the performance of its
obligations hereunder are adequate and that it will make such changes therein
from time to time as are required for the secure performance of its obligations
hereunder.
20. INSURANCE. Schwab will use reasonable efforts to obtain insurance
covering the services to be performed by it
-6-
<PAGE> 7
under this Agreement and shall notify the Trust in the event it is unable to do
so within 90 days after the Effective Date of this Agreement. Thereafter, Schwab
will notify the Trust should any of its insurance coverage be changed for any
reason. Such notification shall include the date of change and the reasons
therefor. Schwab will notify the Trust of any material claims against it with
respect to services performed under this Agreement, whether or not they may be
covered by insurance, and shall notify the Trust from time to time as may be
appropriate of the total outstanding claims made by Schwab under its insurance
coverage.
21. INFORMATION TO BE FURNISHED BY THE TRUST. The Trust has furnished
to Schwab the following:
A. Copies of the Declaration of Trust of the Trust and
of any amendments thereto, certified by the proper
official of the state in which such Declaration has
been filed.
B. Copies of the following documents:
1. The Trust's Bylaws and any amendments
thereto.
2. Certified copies of resolutions of the Board
of Trustees covering the following matters:
a. Approval of this Agreement,
authorization of an officer of the
Trust to execute and deliver this
Agreement and authorization for
officers of the Trust to instruct
Schwab hereunder; and
b. Authorization of Schwab to act as
Registrar, Transfer Agent and
Dividend Disbursing Agent for the
Trust.
C. A list of all the officers of the Trust, together
with specimen signatures of those officers who are
authorized to instruct Schwab in all matters.
D. Two copies of the following (if such documents are
employed by the Trust):
1. Prospectuses for each Fund and the Statement
of Additional Information of the Trust;
2. Distribution Agreement;
3. Investment Advisory and Administration
Agreement(s); and
-7-
<PAGE> 8
4. All other forms commonly used by the Trust
or its Distributor with regard to their
relationships and transactions with
shareholders of the Trust.
E. A certified statement as to shares of beneficial
interest of the Trust authorized, issued, and
outstanding as of the Effective Date of Schwab's
appointment as Transfer Agent (or as of the date on
which Schwab's services are commenced, whichever is
the later date) and as to receipt of full
consideration by the Trust for all shares
outstanding, such statement to be certified by the
Treasurer of the Trust;
22. INFORMATION FURNISHED BY SCHWAB. Schwab has furnished to the
Trust the following:
A. Schwab's Articles of Incorporation.
B. Schwab's By-Laws and any amendments thereto.
C. Certified copies of actions of Schwab covering the
following matters:
1. Approval of this Agreement, and
authorization of an officer of Schwab to
execute and deliver this Agreement; and
2. Authorization of Schwab to act as Transfer
Agent for the Trust.
23. AMENDMENTS TO DOCUMENTS. The Trust shall furnish Schwab written
copies of any amendments to, and changes in, any of the items referred to in
Section 21 hereof forthwith upon such amendments and changes becoming effective.
In addition, the Trust agrees that no amendments will be made to the Prospectus
of a Fund or the Statement of Additional Information of the Trust which might
have the effect of changing the procedures employed by Schwab in providing the
services agreed to hereunder or which amendment might affect the duties of
Schwab hereunder unless the Trust first obtains Schwab's approval of such
amendments or changes.
24. RELIANCE ON AMENDMENTS. Schwab may rely on any amendments to or
changes in any of the documents and other items to be provided by the Trust
pursuant to Sections 21 and 23 of this Agreement and a Fund will indemnify and
hold harmless Schwab from and against any and all claims, demands, actions,
suits, judgments, liabilities, losses, damages, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel
-8-
<PAGE> 9
fees and other expenses of every nature and character which may result from
actions or omissions on the part of Schwab with respect to such Fund in reliance
upon such amendments and/or changes. Although Schwab is authorized to rely on
the abovementioned amendments to and changes in the documents and other items
to be provided pursuant to Sections 21 and 23 hereof, Schwab will be under no
duty to comply with or take any action as a result of any of such amendments or
changes unless the Trust first obtains Schwab's written consent to and approval
of such amendments or changes.
25. COMPLIANCE WITH LAW. Except for the obligations of Schwab set forth
in Section 12 hereof, the Trust assumes full responsibility for the preparation,
contents and distribution of each Prospectus of the Trust, as to compliance with
all applicable requirements of the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and any other laws, rules and
regulations of governmental authorities having jurisdiction. Schwab will have no
obligation to take cognizance of any laws relating to the sale of the Trust's
shares.
26. NOTICES. Any notice provided hereunder shall be sufficient given
when sent by registered or certified mail to the party required to be served
with such notice, at the following address: 101 Montgomery Street, San
Francisco, California 94104 or at such other address as such party may from time
to time specify in writing to the other party pursuant to this Section.
27. HEADINGS. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this Agreement.
28. ASSIGNMENT. This Agreement and the rights and duties hereunder
shall not be assignable with respect to a Fund by either of the parties hereto
except by the specific written consent of the other party. This Section 28 shall
not limit or in any way affect Schwab's right to appoint a Subtransfer Agent
pursuant to Section 1 hereof.
29. GOVERNING LAW. This Agreement shall be governed by and provisions
shall be construed in accordance with the laws of the State of California.
30. LIMITATION OF LIABILITY. A copy of the Declaration of Trust of the
Trust is on file with the Secretary of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees or shareholders
individually but are binding only upon the assets and property of the Trust.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
SCHWAB INVESTMENTS
By: /s/ Tom D. Seip
--------------------------------------
Name: Tom D. Seip
-------------------------------------
Title: President
-------------------------------------
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
--------------------------------------
Name: Peter J. McIntosh
--------------------------------------
Title: Senior Vice President
--------------------------------------
-10-
<PAGE> 11
SCHEDULE B
TRANSFER AGENCY SERVICES
I. Record Maintenance.
Schwab will provide full maintenance of all shareholder records for
each account in the Trust. Such records will include:
A. Share balance;
B. Account transaction history, including dividends paid and the
date and price for all transactions;
C. Name and address of the record shareholder (including zip
codes and tax identification numbers but will not include
responsibility for obtaining certified tax identification
numbers or impending back-up withholding);
D. Records of distributions and dividend payments;
E. Transfer records; and
F. Overall control records.
II. Regular Daily Operations.
Schwab will perform the following functions:
A. Process new accounts on the shareholder file by processing
directly from the Trust's distributor or dealer;
B. Process additional purchases to the records of accounts
already on the shareholder file. In such instances, on the
distributor's or dealer's instructions, allocate investor
payments among the Funds;
C. Process purchases and redemptions to accounts already on the
shareholder file in accordance with the terms of all automatic
purchase and redemption provisions set forth in shareholders'
account relationship with the Trust's distributor;
D. Transfer shares upon the receipt of proper instructions from
distributor or dealer; and
E. Process changes of dealer/representative on accounts.
A-2
<PAGE> 12
III. Periodic Operations.
A. Upon receipt of instructions as to payment of dividends and
distributions, which may be standing instructions, compute
distributions and inform the Trust of the amount to be
reinvested in additional shares.
B. Process redemptions as instructed by distributor or dealer.
C. Mail semi-annual and annual Trust and/or Fund reports and
prospectuses.
D. Produce transcripts of account history as requested by the
Trust or by the distributor or dealer.
E. Prepare and file Form 1099's with Internal Revenue Service.
F. Monitor sales of the Funds' shares in the various States and
other jurisdictions where the Funds' shares are registered for
sale, and report on such monitoring efforts to the Funds'
Investment Manager.
IV. Controls.
A. Maintain all balance controls daily and produce monthly
summaries expressed in:
1. shares; and
2. dollar amounts.
V. Special Services Included.
A. Prepare envelopes/labels (from address data supplied by
distributor or dealer as to transmission accounts) and mail
proxy statements; tabulate and certify votes from returned
ballots.
SCHWAB INVESTMENTS
By: /s/ Tom D. Seip
-----------------------------------------
Name: Tom D. Seip
---------------------------------------
Title: President
--------------------------------------
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
-----------------------------------------
Name: Peter J. McIntosh
---------------------------------------
Title: Senior Vice President
--------------------------------------
B-2
<PAGE> 13
SCHEDULE D
REPORTS
I. Daily Activity Report (liquidations processed that day)
II. Daily Share Summary Report (by Fund)
A. Beginning balance
B. Liquidations
C. Payments
D. Exchanges
E. Adjustments
F. Ending Balance
G. Sales by each State and jurisdiction
III. Daily Proof Sheet Summary and Transaction Register
IV. Daily Share Reconciliation Report (reconciling Share Summary Report to
Daily Proof Summary Sheet)
V. Weekly Position Reports (showing all account balances)
VI. Monthly Dividend Reports
VII. Report by independent public accountants concerning Schwab's accounting
system and internal accounting controls, at such times, as the Trust
may reasonably require. These reports shall be of sufficient detail and
scope to provide reasonable accuracy that any material inadequacies
would be disclosed by such examination, and, if there are no such
inadequacies, shall state.
SCHWAB INVESTMENTS
By: /s/ Tom D. Seip
----------------------------------------
Name: Tom D. Seip
----------------------------------------
Title: President
----------------------------------------
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
----------------------------------------
Name: Peter J. McIntosh
----------------------------------------
Title: Senior Vice President
----------------------------------------
D-1
<PAGE> 1
Exhibit 8(f)
SCHEDULE A
<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab 1000 Fund January 1, 1994
Schwab Long-Term Government May 1, 1993
Bond Fund
Schwab Short/Intermediate May 1, 1993
Government Bond Fund
Schwab Long-Term California May 1, 1993
Tax-Free Bond Fund
Schwab Short/Intermediate May 1, 1993
California Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund May 1, 1993
Schwab Short/Intermediate May 1, 1993
Tax-Free Bond Fund
</TABLE>
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
--------------------------------------
William J. Klipp
Senior Vice President
CHARLES SCHWAB & CO., INC.
By: /s/Peter J. McIntosh
--------------------------------------
Peter McIntosh
Senior Vice President
Dated: 12/17/93
------------------------------
A-1
<PAGE> 2
SCHEDULE C
FEES
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab 1000 Fund Five one-hundredths of one percent (.05%) of
the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Long-Term Government Five one-hundredths OF one percent (.05%) of
Bond Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Short/Intermediate Five one-hundredths of one percent (.05%) of
Government Bond Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Long-Term California Tax-Free Bond
Fund Five one-hundredths of one percent
(.05%) of the Fund's average annual net
assets, calculated and payable on a monthly
basis
Schwab Short/Intermediate Bond Fund Five one-hundredths of one percent
California Tax-Free (.05%) of the Fund's average annual net
assets, calculated and payable on a monthly
basis
Schwab Long-Term Tax-Free Bond Five one-hundredths of one percent (.05%) of
Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Short/Intermediate Tax- Five one-hundredths of one percent (.05%) of
Free Bond Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
</TABLE>
C-1
<PAGE> 3
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
-------------------------------------
William J. Klipp
Senior Vice President
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
-------------------------------------
Peter J. McIntosh
Senior Vice President
Dated: 12/17/93
-------------------------------
C-2
<PAGE> 1
Exhibit 8(g)
SHAREHOLDER SERVICE AGREEMENT
AGREEMENT made this 1st day of May, 1993, between Schwab Investments (the
"Trust"), a Massachusetts business trust having its principal place of business
at 101 Montgomery Street, San Francisco, California 94104, and CHARLES SCHWAB &
CO., INC. ("Schwab"), a corporation organized under the laws of the State of
California and a broker-dealer registered with the Securities and Exchange
Commission and member of the National Association of Securities Dealers, Inc.,
which has its principal place of business at 101 Montgomery Street, San
Francisco, California 94104.
WHEREAS, the Trust desires that Schwab perform certain shareholder-related
services for the Trust and for its series denominated as "Funds" whose shares of
beneficial interest currently comprise the shares of the Trust identified on
Schedule A hereto (individually referred to herein as a "Fund" and collectively
as the "Funds"); and
WHEREAS, Schwab is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein set forth, the parties agree as follows:
1. SERVICES. Schwab will perform for the Trust the services set forth in
Schedule B hereto.
2. FEES. The Trust will pay Schwab for the services to be provided by
Schwab under this Agreement in accordance with, and in the manner set forth in,
Schedule C hereto. Schwab will not change the fees it charges pursuant to the
fee schedule until the expiration of one year from the Effective Date of this
Agreement (as defined below), unless the Trust otherwise agrees to such change
in writing; thereafter, Schwab may change its fees only upon the written consent
of the Trust. Fees for any additional services to be provided by Schwab pursuant
to an amendment to Schedule B hereto shall be subject to mutual agreement at the
time such amendment to Schedule B is proposed.
3. REIMBURSEMENT OF EXPENSES. In addition to paying Schwab the fees
described in Section 2 hereof, the Trust agrees to reimburse Schwab for Schwab's
out-of-pocket expenses in providing additional services incurred at the written
direction of an officer of the Trust thereunto duly authorized.
4. EFFECTIVE DATE. This Agreement will become effective with respect to
each Fund as of the date set forth across from its name on Schedule A, such date
for each Fund to be referred to herein as the "Effective Date."
<PAGE> 2
5. TERM AND TERMINATION. This Agreement will continue in effect with
respect to each Fund, unless earlier terminated by either party hereto as to a
Fund as provided hereunder, for an initial term of one year from its Effective
Date. Thereafter, this Agreement will continue in effect unless either party
hereto terminates this Agreement with respect to a Fund by giving 90 days'
written notice to the other party, whereupon this Agreement with respect to that
Fund will terminate automatically upon the expiration of said 90 days; provided,
however, that after such termination, for so long as Schwab, with the written
consent of the Trust, in fact continues to perform any one or more of the
services contemplated by this Agreement or any Schedule or exhibit hereto, the
provisions of this Agreement, including without limitation the provisions
dealing with indemnification, shall continue in full force and effect. Fees and
out-of-pocket expenses incurred by Schwab but unpaid by the Trust upon such
termination shall be immediately due and payable upon and notwithstanding such
termination. Schwab will be entitled to collect from the Trust, in addition to
the fees and disbursements provided by Paragraphs 2 and 3 hereof, the amount of
all of Schwab's cash disbursements and a reasonable fee (which fee shall be not
less than the actual costs incurred by Schwab in performing such service) for
services in connection with Schwab's activities in effecting such termination.
6. SCHWAB'S RELIANCE ON RECORDS AND INSTRUCTIONS. Schwab may rely on any
written records or instructions provided to it by the Trust or any investment
adviser or sub-adviser thereto, and on any written records provided by any
transfer agent or custodian thereof, and each Fund agrees to indemnify Schwab
and hold it, its employees, officers, directors and agents harmless from and
against any and all claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, counsel fees and other expenses of every nature
arising out of or in any way relating to any actions taken by Schwab with
respect to such Fund in reasonable reliance upon such records or instructions.
7. UNCONTROLLABLE EVENTS. Schwab assumes no responsibility hereunder, and
will not be liable, for any damage, loss of data, delay or any other loss
whatsoever caused by events beyond its reasonable control.
8. STANDARD OF CARE. Schwab will use its best efforts to insure the
accuracy of all services performed under this Agreement, but will not be liable
to the Trust for any action taken or omitted by Schwab in the absence of bad
faith, willful misconduct or gross negligence.
9. LEGAL ADVICE. Schwab will notify the Trust at any time Schwab believes
that it is in need of the advice of counsel (other than counsel in the regular
employ of Schwab or any
-2-
<PAGE> 3
affiliated companies) with regard to Schwab's responsibilities and duties
pursuant to this Agreement; and after so notifying the Trust, Schwab, at its
discretion, will be entitled to seek, receive and act upon advice of legal
counsel of its choosing, such advice to be at the expense of the Trust or the
Fund involved unless such advice relates to a matter involving Schwab's bad
faith, willful misconduct or gross negligence with respect to Schwab's
responsibilities and duties hereunder, and Schwab in no event be liable to the
Trust or the Fund involved or any shareholder or beneficial owner of the Trust
or such Fund for any action reasonably taken pursuant to such advice.
10. INSTRUCTIONS. Whenever Schwab is requested or authorized to take
action hereunder pursuant to instructions from a shareholder concerning an
account in the Trust, Schwab will be entitled to rely upon any certificate,
letter or other instrument or communication, whether in writing or by electronic
or telephone transmission, believed by Schwab to be genuine and to have been
properly made, signed or authorized by an officer or other authorized agent of
the Trust or by the shareholder, as the case may be, and shall be entitled to
receive as conclusive proof of any fact or matter required to be ascertained by
it hereunder a certificate signed by an officer of the Trust or any other person
authorized by the Trust's Board of Trustees or by the shareholder, as the case
may be.
As to the services to be provided hereunder, Schwab may rely conclusively
upon the terms of the Prospectus of a Fund and the Statement of Additional
Information of the Trust to the extent that such services are described therein
unless Schwab receives written instructions to the contrary in a timely manner
from the Trust.
11. INDEMNIFICATION. Each Fund agrees to indemnify and hold harmless
Schwab and Schwab's employees, agents, directors, officers and nominees from and
against any and all claims, demands, actions and suits, whether groundless or
otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Schwab's actions taken or
non-actions with respect to the performance of services under this Agreement
with respect to such Fund or based, if applicable, upon information,
instructions or requests with respect to such Fund given or made to Schwab by an
officer of the Trust thereunto duly authorized; provided that this
indemnification shall not apply to actions or omissions of Schwab in cases of
its own bad faith, willful misconduct or gross negligence, and further provided
that, prior to confessing any claim against it which may be the subject of this
indemnification, Schwab shall give the Trust written notice of and reasonable
opportunity to defend against said claim in its own name or in the name of
Schwab.
-3-
<PAGE> 4
12. RECORD RETENTION AND CONFIDENTIALITY. Schwab will keep and maintain
all records which Schwab is, or may be, required to keep and maintain pursuant
to any applicable statutes, rules and regulations in connection with the
services to be provided hereunder. Schwab agrees to make such records available
for inspection by the Trust or by the Securities and Exchange Commission at
reasonable times and otherwise to keep confidential all records and other
information relative to the Trust and its shareholders, except when requested to
divulge such information by duly-constituted authorities or court process, or
requested by a shareholder with respect to information concerning an account as
to which such shareholder has either a legal or beneficial interest or when
requested by the Trust.
13. RIGHTS OF OWNERSHIP. All computer programs and procedures developed to
perform services required to be provided by Schwab under this Agreement are the
property of Schwab. All records and other data except such computer programs and
procedures are the exclusive property of the Trust and all such other records
and data will be furnished to the Trust in appropriate form as soon as
practicable after termination of this Agreement for any reason.
14. RETURN OF RECORDS. Schwab may at its option at any time, and shall
promptly upon the Trust's demand, turn over to the Trust and cease to retain all
files, records and documents created and maintained by Schwab pursuant to this
Agreement which are no longer needed by Schwab in the performance of its
services or for its legal protection. If not so turned over to the Trust, such
documents and records will be retained by Schwab for six years from the year of
creation. At the end of such six-year period, such records and documents will be
turned over to the Trust unless the Trust authorizes in writing the destruction
of such records and documents.
15. REPRESENTATIONS OF THE TRUST. The Trust certifies to Schwab that this
Agreement has been duly authorized by the Trust and, when executed and delivered
by the Trust, will constitute a legal, valid and binding obligation of the
Trust, enforceable against the Trust in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting the rights and remedies of creditors and secured parties.
16. REPRESENTATIONS OF SCHWAB. Schwab represents and warrants that the
various procedures and systems which Schwab has implemented with regard to
safeguarding from loss or damage attributable to fire, theft, or any other cause
of the records, data, equipment facilities and other property used in the
performance of its obligations hereunder are adequate and that it will make such
changes therein from time to time as are required
-4-
<PAGE> 5
for the secure performance of its obligations hereunder.
17. INFORMATION TO BE FURNISHED BY THE TRUST. The Trust has
furnished to Schwab the following:
A. Copies of the Declaration of Trust of the Trust and of any
amendments thereto, certified by the proper official of the
state in which such Declaration has been filed.
B. Copies of the following documents:
1. The Trust's Bylaws and any amendments thereto.
2. Certified copies of resolutions of the Board of
Trustees covering the following matters:
a. Approval of this Agreement, authorization of an
officer of the Trust to execute and deliver
this Agreement and authorization for officers
of the Trust to instruct Schwab hereunder; and
b. Authorization of Schwab to act as Shareholder
Service Agent for the Trust.
C. A list of all the officers of the Trust, together with
specimen signatures of those officers who are authorized to
instruct Schwab in all matters.
D. Two copies of the following (if such documents are employed
by the Trust):
1. Prospectuses for each Fund and the Statement(s) of
Additional Information of the Trust;
2. Distribution Agreement;
3. Investment Advisory and Administration Agreement(s);
and
4. All other forms commonly used by the Trust or its
Distributor with regard to their relationships and
transactions with shareholders of the Trust.
18. INFORMATION FURNISHED BY SCHWAB. Schwab has furnished to the
Trust the following:
A. Schwab's Articles of Incorporation.
-5-
<PAGE> 6
B. Schwab's By-Laws and any amendments thereto.
C. Certified copies of actions of Schwab covering the
following matters:
1. Approval of this Agreement, and authorization of an
officer of Schwab to execute and deliver this
Agreement; and
2. Authorization of Schwab to act as Shareholder Service
Agent for the Trust.
19. AMENDMENTS TO DOCUMENTS. The Trust shall furnish Schwab written copies
of any amendments to, and changes in, any of the items referred to in Section 17
hereof forthwith upon such amendments and changes becoming effective. In
addition, the Trust agrees that no amendments will be made to the Prospectus of
a Fund or a Statement of Additional Information of the Trust which might have
the effect of changing the procedures employed by Schwab in providing the
services agreed to hereunder or which amendment might affect the duties of
Schwab hereunder unless the Trust first obtains Schwab's approval of such
amendments or changes.
20. RELIANCE ON AMENDMENTS. Schwab may rely on any amendments to or
changes in any of the documents and other items to be provided by the Trust
pursuant to Sections 17 and 19 of this Agreement and a Fund will indemnify and
hold harmless Schwab from and against any and all claims, demands, actions,
suits, judgments, liabilities, losses, damages, actions, suits, judgments,
liabilities, losses, damages, costs, charges, counsel fees and other expenses of
every nature and character which may result from actions or omissions on the
part of Schwab with respect to such Fund in reliance upon such amendments and/or
changes. Although Schwab is authorized to rely on the above-mentioned amendments
to and changes in the documents and other items to be provided pursuant to
Sections 17 and 19 hereof, Schwab will be under no duty to comply with or take
any action as a result of any of such amendments or changes unless the Trust
first obtains Schwab's written consent to and approval of such amendments or
changes.
21. NOTICES. Any notice provided hereunder shall be sufficient given when
sent by registered or certified mail to the party required to be served with
such notice, at the following address: 101 Montgomery Street, San Francisco,
California 94104 or at such other address as such party may from time to time
specify in writing to the other party pursuant to this Section.
-6-
<PAGE> 7
22. HEADINGS. Paragraph headings in this Agreement are included for
convenience only and are not to be used to construe or interpret this
Agreement.
23. ASSIGNMENT. This Agreement and the rights and duties hereunder
shall not be assignable with respect to a Fund by either of the parties
hereto except by the specific written consent of the other party.
24. GOVERNING LAW. This Agreement shall be governed by and
provisions shall be construed in accordance with the laws of the State of
California.
25. LIMITATION OF LIABILITY. A copy of the Declaration of Trust of the
Trust is on file with the Secretary of The Commonwealth of Massachusetts, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees or shareholders
individually but are binding only upon the assets and property of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.
SCHWAB INVESTMENTS
By: /s/ Tom D. Seip
__________________________________
Name: Tom D. Seip_______________________
Title: President_________________________
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
__________________________________
Name: Peter J. McIntosh_________________
Title: Senior Vice President_____________
-7-
<PAGE> 8
SCHEDULE B
SHAREHOLDER SERVICES
Schwab will maintain accounts for, and serve as a customer liaison to, the
shareholders of each Fund, and through its employees will perform various
services in relation thereto, which services shall include responding to
requests for information and other types of shareholder account inquiries, both
by telephone and in writing. The parties hereto expressly agree that the
services provided under this Agreement shall not include, and the amounts
payable hereunder shall not constitute compensation for, services relating to
transfer agency or sub-accounting services for the Trust or any Fund thereof.
SCHWAB INVESTMENTS
By: /s/ Tom D. Seip
----------------------
Name: Tom D. Seip
----------------------
Title: President
----------------------
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
----------------------
Name: Peter J. McIntosh
----------------------
Title: Senior Vice President
----------------------
B-1
<PAGE> 9
SCHEDULE C
Name of Fund Fee
- ------------ ---
Schwab 1000 Fund No Fee
Schwab Long-Term Government Twenty one-hundredths of one percent
Bond Fund (.20%) of the Fund's average annual
net assets, calculated and payable on
a monthly basis
Schwab Short/Intermediate Twenty one-hundredths of one percent
Government Bond Fund (.20%) of the Fund's average annual
net assets, calculated and payable on
a monthly basis
Schwab Long-Term California Twenty one-hundredths of one percent
Tax-Free Bond Fund (.20%) of the Fund's average annual
net assets, calculated and payable on
a monthly basis
Schwab Short/Intermediate Twenty one-hundredths of one percent
California Tax-Free Bond (.20%) of the Fund's average annual
Fund net assets, calculated and payable on
a monthly basis
Schwab Long-Term Tax-Free Bond Fund Twenty
one-hundredths of one percent (.20%)
of the Fund's average annual net
assets, calculated and payable on a
monthly basis
Schwab Short/Intermediate Twenty one-hundredths of one percent
Tax-Free Bond Fund (.20%) of the Fund's average annual
net assets, calculated and payable on
a monthly basis
C-1
<PAGE> 10
SCHWAB INVESTMENTS
By: /s/ Tom D. Seip
------------------------------------
Name: Tom D. Seip
------------------------------------
Title: President
------------------------------------
CHARLES SCHWAB & CO., INC.
By: /s/ Peter J. McIntosh
------------------------------------
Name: Peter J. McIntosh
------------------------------------
Title: Senior Vice President
------------------------------------
Dated: -----------------------
C-2
<PAGE> 1
Exhibit 8(i)
ACCOUNTING SERVICES AGREEMENT
TERMS AND CONDITIONS
This Agreement is made as of November 4, 1991 by and between SCHWAB
INVESTMENTS, (the "Fund"), a Massachusetts business trust, and PROVIDENT
FINANCIAL PROCESSING CORPORATION ("PFPC"), a Delaware corporation which is an
indirect wholly-owned subsidiary of PNC Financial Corp.
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940 (the "1940" Act), as amended.
The Fund wishes to retain PFPC to provide accounting services to each of
the Fund's investment portfolios listed on Schedule A, hereto ("Portfolio(s)"),
and PFPC wishes to furnish such services. For the Schwab 1000 Fund, a portfolio
of the Fund, this agreement amends and restates, in its entirety, the Accounting
Services Agreement dated March 31, 1991 by and between the Schwab 1000 Fund and
PFPC.
In consideration of the promises and mutual covenants herein contained,
the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall
mean any officer of the Fund and any other person, who is duly authorized by
the Fund's Governing Board, to give Oral and Written Instructions on behalf
of the Fund. Such persons are listed in the Certificate attached hereto as
the Authorized Persons Appendix to each Services Attachment to this
Agreement. If
<PAGE> 2
Provident provides more than one service hereunder, the Fund's designation of
Authorized Persons may vary by service.
(b) "Book-Entry System". The term "Book-Entry System" means Federal
Reserve Treasury book-entry system for United States and federal agency
securities, its successor or successors, and its nominee or nominees and any
book-entry system maintained by an exchange registered with the SEC under the
1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Governing Board". The Term "Governing Board" shall mean the
Fund's Board of Directors if the Fund is a corporation or the Fund's Board of
Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall
mean oral instructions received by PFPC from an Authorized Person or from a
person reasonably believed by PFPC to be an Authorized Person.
(f) "Provident". The term "Provident" shall mean Provident National
Bank or a subsidiary or affiliate of Provident National Bank.
(g) "SEC". The term "SEC" shall mean the Securities and
Exchange Commission.
(h) "Securities and Commodities Laws". The terms the "1933 Act"
shall mean the Securities Act of 1933, as amended, the "1934 Act" shall mean the
Securities Exchange Act of 1934, as
2
<PAGE> 3
amended, the "1940 Act" shall mean the Investment Company Act 1940, as amended,
and the "CEA" shall mean the Commodities Exchange Act, as amended.
(i) "Services". The term "Services" shall mean the service
provided to the Portfolios by PFPC.
(j) "Shares". The terms "Shares" shall mean the shares of stock of
any series or class of the Fund, or, where appropriate, units of beneficial
interest in a trust where the Fund is organized as a Trust.
(k) "Property". The term "Property" shall mean:
(i) any and all securities and other investment items which
the Fund may from time to time deposit, or cause to be
deposited, with Provident or which Provident may from
time to time hold for the Fund;
(ii) all income in respect of any of such securities or
other investment items;
(iii) all proceeds of the sale of any of such
securities or investment items; and
(iv) all proceeds of the sale of securities issued by the
Fund, which are received by Provident from time to time,
from or on behalf of the Fund.
(l) "Written Instructions". The term "Written Instructions" shall
mean written instructions signed by two Authorized Persons and received by PFPC.
The instructions may be
3
<PAGE> 4
delivered by hand, mail, tested telegram, cable, telex
or facsimile sending device.
2. Appointment. The Fund hereby appoints PFPC to provide accounting
services to each of the Portfolios listed on Schedule A, hereto, in
accordance with the terms set forth in this Agreement. PFPC accepts such
appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PFPC with the following:
(a) certified or authenticated copies of the resolutions of the
Fund's Governing Board, approving the appointment of Provident or its
affiliates to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) copies of any shareholder servicing agreements made in
respect of the Fund; and
(f) certified or authenticated copies of any and all
amendments or supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PFPC undertakes to
comply with all applicable requirements of the 1933 Act, the 1934 Act, the 1940
Act, and the CEA, and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed by
PFPC
4
<PAGE> 5
hereunder. Except as specifically set forth herein, PFPC assumes no
responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PFPC
shall act only upon Oral and Written Instructions.
PFPC shall be entitled to rely upon any Oral and Written Instructions it
receives from an Authorized Person (or from a person reasonably believed by PFPC
to be an Authorized Person) pursuant to this Agreement. In the exercise of
reasonable judgement, PFPC may assume that any Oral or Written Instruction
received hereunder is not in any way inconsistent with the provisions of
organizational documents or this Agreement or of any vote, resolution or
proceeding of the Fund's Governing Board or of the Fund's shareholders.
The Fund agrees to forward to PFPC Written Instructions confirming Oral
Instructions so that PFPC receives the Written Instructions by the close of
business on the same day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by PFPC shall in no way
invalidate the transactions or enforceability of the transactions authorized by
the Oral Instructions. The Fund further agrees that PFPC shall incur no
liability to the Fund solely by reason of acting upon Oral or Written
Instructions provided such instructions reasonably appear to have been received
from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PFPC is in doubt as to any action it
should or should not take, PFPC may request directions or
5
<PAGE> 6
advice, including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any questions of
law pertaining to any action it should or should not take, PFPC may request
advice at its own cost from such counsel of its own choosing (who may be counsel
for the Fund, the Fund's advisor or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between directions,
advice or Oral or Written Instructions Provident receives from the Fund, and the
advice it receives from counsel, PFPC shall be entitled in good faith to rely
upon and follow the advice of counsel.
(d) Protection of PFPC. PFPC shall be protected in any action it takes or
does not take in reliance upon directions, advice or Oral or Written
Instructions it receives from the Fund or from counsel and which PFPC believes,
in good faith, to be consistent with those directions, advice and Oral or
Written Instructions.
Nothing in this paragraph shall be construed so as to impose an obligation
upon PFPC (i) to seek such directions, advice or Oral or Written Instructions,
or (ii) to act in accordance with such directions, advice or Oral or Written
Instructions unless, under the terms of other provisions of this Agreement, the
same is a condition of PFPC's properly taking or not taking such action.
7. Records. The books and records pertaining to the Fund, which are in the
possession of PFPC, shall be the property of the Fund. Such books and records
shall be prepared and maintained as
6
<PAGE> 7
required by the 1940 Act and other applicable securities laws, rules and
regulations. The Fund, or the Fund's Authorized Persons, shall have access to
such books and records at all times during PFPC's normal business hours. Upon
the reasonable request of the Fund, copies of any such books and records shall
be provided by PFPC to the Fund or to an Authorized Person of the Fund, at the
Fund's expense.
PFPC shall keep the following records:
(a) all books and records with respect to the Fund's books of
account;
(b) records of the Fund's securities transaction;
(c) all other books and records as PFPC is required to maintain
pursuant to Rule 31a-1 of the 1940 Act and as specifically set forth in
Appendix A hereto.
8. Confidentiality. PFPC agrees to keep confidential all records of the
Fund and information relative to the Fund and its shareholders (past, present
and potential), unless the release of such records or information is otherwise
consented to, in writing, by the Fund. The Fund agrees that such consent shall
not be unreasonably withheld. The Fund further agrees that, should PFPC be
required to provide such information or records to duly constituted authorities
(who may institute civil or criminal contempt proceedings for failure to
comply), PFPC shall not be required to seek the Fund's prior written consent
before disclosing such information, but shall instead notify an officer of the
Fund and obtain the officer's oral consent, which consent shall be
7
<PAGE> 8
timely and shall not be unreasonably withheld.
9. Liaison with Accountants. PFPC shall act as liaison with the Fund's
independent public accountants and shall provide account analyses, fiscal year
summaries, and other audit-related schedules. PFPC shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Fund from time to
time.
10. Disaster Recovery. PFPC shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable provision of
emergency use of electronic data processing equipment to the extent appropriate
equipment is available. In the event of equipment failures, PFPC shall, at no
additional expense to the Fund, take reasonable steps to minimize service
interruptions but shall have no liability with respect thereto.
11. Compensation. The fees for services rendered by PFPC during the
term of this Agreement shall be paid by the Fund to PFPC as may be agreed to
in writing by the Fund and PFPC from time to time.
12. Indemnification. The Fund agrees to indemnify and hold harmless PFPC
and its nominees from all taxes, charges, expenses, assessments, claims and
liabilities (including, without limitation, liabilities arising under the 1933
Act, the 1934 Act, the 1940 Act, the CEA, and any state and foreign securities
and blue sky laws,
8
<PAGE> 9
and amendments thereto, and expenses, including (without limitation) reasonable
attorneys' fees and disbursements, arising directly or indirectly from any
action which PFPC takes or does not take (i) at the request or on the direction
of or in reliance on the advice of the Fund or (ii) upon Oral or Written
Instructions. Neither PFPC, nor any of its nominees, shall be indemnified
against any liability to the Fund or to its shareholders (or any expenses
incident to such liability) arising out of PFPC's own willful misfeasance, gross
negligence or reckless disregard of its duties and obligations under this
Agreement.
13. Responsibility of PFPC. PFPC shall be under no duty to take any action
on behalf of the Fund except as specifically set forth herein or as may be
specifically agreed to by PFPC, in writing. PFPC shall be obligated to exercise
care and diligence in the performance of its duties hereunder, to act in good
faith and to use its best efforts, within reasonable limits, in performing
services provided for under this Agreement. PFPC shall be responsible for
damages arising out of its failure to perform its duties under this Agreement
arising out of PFPC's gross negligence. Notwithstanding the foregoing, PFPC
shall not be responsible for losses beyond its reasonable control, provided that
PFPC has acted in accordance with the standard of care set forth above; and
provided further that PFPC shall only be responsible for that portion of losses
or damages suffered by the fund that are attributable to the gross negligence of
PFPC.
Without limiting the generality of the foregoing or of any
9
<PAGE> 10
other provision of this Agreement, PFPC, in connection with its duties under
this Agreement, shall not be liable for (a) the validity or invalidity or
authority or lack thereof of any Oral or Written Instruction, notice or other
instrument which conforms to the applicable requirements of this Agreement, and
which PFPC reasonably believes to be genuine; or (b) delays or errors or loss of
data occurring by reason of circumstances beyond PFPC's reasonable control,
including acts of civil or military authority, national emergencies, labor
difficulties, fire, flood or catastrophe, acts of God, insurrection, war, riots
or failure of the mails, transportation, communication or power supply.
14. Description of Accounting Services.
(a) Services on a Continuing Basis. PFPC will perform the
following accounting functions if required:
(i) Journalize each Portfolio's investment,
capital share and income and expense activities;
(ii) Verify investment buy/sell trade tickets when received
from the Fund's investment advisor and transmit trades
to the Fund's custodian for proper settlement;
(iii) Maintain individual ledgers for investment
securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of the
10
<PAGE> 11
Fund with the custodian, and provide the Fund's
investment advisor with the beginning cash balance
available for investment purposes;
(vi) Update the cash availability throughout the day as
required by the Fund's advisor;
(vii) Post to and prepare the Fund's Statement of Assets and
Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g., advisory
and custody fees);
(ix) Monitor the expense accruals and notify Fund management
of any proposed adjustments;
(x) Control all disbursements from the Fund and authorize
such disbursements upon Written Instructions;
(xi) Calculate capital gains and losses;
(xii) Determine each Portfolio's net income;
(xiii) Obtain security market quotes from independent pricing
services approved by the Advisor, or if such quotes are
unavailable, then obtain such prices from the Advisor,
and in either case calculate the market value of each
Portfolio's investments;
(xiv) Transmit or mail a copy of the daily portfolio valuation
to the Advisor;
11
<PAGE> 12
(xv) Compute the net asset value of the Portfolio;
(xvi) As appropriate, compute the Portfolio's yields, total
return, expense ratios, Portfolio turnover rate, and, if
required, Portfolio average dollar-weighted maturity;
and
(xvii) Prepare a monthly financial statement, which will
include the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses.
12
<PAGE> 13
(b) PFPC will provide the Funds' Administrator with the
following services:
(i) Assist with preparation of:
Federal and State Tax Returns
Excise Tax Returns
Annual and Semi-Annual Shareholder Reports
Rules 24(e)-2 and 24(f)-2 Notices;
(ii) Assist in the Blue Sky and Federal registration and
compliance process;
(iii) Assist in the review of registration statements; and
(iv) Assist in monitoring compliance with Sub-Chapter M of
the Internal Revenue Code.
15. Duration and Termination. This Agreement shall continue, unless sooner
terminated by the Portfolio or by PFPC for "cause" (as defined below) on sixty
(60) days prior written notice to the other party, for a period of 5 years. For
purposes of this Agreement "cause" shall mean any circumstances which materially
impair the ability of either party to this Agreement to perform all of its
duties and obligations hereunder.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. If notice is sent by confirming telegram, cable, telex
or facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have
13
<PAGE> 14
been given three days after it has been mailed. If notice is sent by messenger,
it shall be deemed to have been given on the day it is delivered. Notices shall
be addressed (a) if to PFPC at PFPC's address, 103 Bellevue Parkway, Wilmington,
Delaware 19809; (b) if to the Fund, at the address of the Fund; or (c) if to
neither of the foregoing, at such other address as shall have been notified to
the sender of any such Notice or other communication.
17. Amendments. This Agreement, or any term thereof, may be changed or
waived only by written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
18. Delegation. PFPC may, with the prior written consent of the Fund,
which such consent may not be unreasonably withheld, assign its rights and
delegate its duties hereunder to any wholly-owned direct or indirect subsidiary
of Provident National Bank or PNC Financial Corp, provided that (i) PFPC gives
the Fund a minimum of thirty (30) days in which to decide and consent by written
notice; (ii) the delegate agrees with PFPC to comply with all relevant
provisions of this Agreement and the 1940 Act; and (iii) PFPC and such delegate
promptly provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the delegation, including (without
limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such
14
<PAGE> 15
further acts and execute such further documents as are necessary to effectuate
the purposes hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to delegated and/or Oral Instructions.
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect.
This Agreement shall be deemed to be a contract made in California and
governed by California law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
and shall inure to the benefit of the parties hereto and their respective
successors.
15
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
PROVIDENT FINANCIAL
PROCESSING CORPORATION
By:/s/ Joseph Gramlech
------------------------
SCHWAB INVESTMENTS
By: /s/ Tom D. Seip
------------------------
16
<PAGE> 17
Appendix A
[List of Books and Records to be
Maintained by PFPC]
Subject to Section 7, PFPC will keep and maintain the following books and
records of each Portfolio pursuant to Rule 31a-1 under the Investment Company
Act of 1940 (the "Rule"):
a. Journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements of cash,
and all other debits and credits, as required by subsection (b) (1) of the
Rule;
b. General and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, including interest accrued and
interest received, as required by subsection (b) (2) (i) of the Rule;
c. Separate ledger accounts required by subsection (b) (2) (ii) and
(iii) of the Rule; and
d. A monthly trial balance of all ledger accounts (except
shareholder accounts) as required by subsection (b) (8) of the Rule.
17
<PAGE> 1
EXHIBIT 8(L)
ACCOUNTING SERVICES AGREEMENT
SCHEDULE A
<TABLE>
<CAPTION>
PORTFOLIO INCEPTION DATE
- ----------------------------------------------------- -----------------------
<S> <C>
Schwab 1000 Fund April 4, 1991
Schwab Short/Intermediate Government Bond Fund November 4, 1991
Schwab California Long-Term Tax-Free Bond Fund February 20, 1992
Schwab Long-Term Tax-Free Bond Fund September 11, 1992
Schwab Long-Term Government Bond Fund March 5, 1993
Schwab Short/Intermediate Tax-Free Bond Fund April 21, 1993
Schwab California Short/Intermediate Tax-Free Bond Fund April 21, 1993
</TABLE>
SCHWAB INVESTMENTS
BY: /s/ Tom D. Seip
-------------------------------------------
NAME: Tom D. Seip
-----------------------------------------
TITLE: President and Chief Operating Officer
----------------------------------------
PFPC INC.
BY: /s/ Robert J. Perlsweig
-------------------------------------------
NAME: Robert J. Perlsweig
-----------------------------------------
TITLE: Senior Vice President
----------------------------------------
<PAGE> 1
EXHIBIT 10
[Ropes & Gray letterhead]
WRITER'S DIRECT DIAL NUMBER: (202) 626-3925
December 29, 1997
Schwab Investments
c/o Charles Schwab Investment
Management, Inc.
101 Montgomery Street
San Francisco, California 94104
Gentlemen:
You have registered under the Securities Act of 1933, as amended (the
"1933 Act") an indefinite number of shares of beneficial interest ("Shares") of
Schwab Investments ("Trust"), as permitted by Rule 24f-2 under the Investment
Company Act of 1940, as amended (the "1940 Act"). You propose to file a
post-effective amendment on Form N-1A (the "Post-Effective Amendment") to your
Registration Statement as required by Section 10(a)(3) of the 1933 Act and the
Rules thereunder and Section 8(b) of the 1940 Act and the rules thereunder.
We have examined your Agreement and Declaration of Trust on file in the
office of the Secretary of The Commonwealth of Massachusetts and the Clerk of
the City of Boston. We have also examined a copy of your Bylaws and such other
documents, receipts and records as we have deemed necessary for the purpose of
this opinion.
Based upon the foregoing, we are of the opinion that the issue and sale
of the authorized but unissued Shares of the Trust have been duly authorized
under Massachusetts law. Upon the original issue and sale of your authorized but
unissued Shares of the Trust and upon receipt of the authorized consideration
therefor in an amount not less than the net asset value of the Shares of the
Trust established and in force at the time of their sale (plus any applicable
sales charge), the Shares of the Trust issued will be validly issued, fully paid
and non-assessable.
<PAGE> 2
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust provides for indemnification out
of the property of a particular series of shares for all loss and expenses of
any shareholder of that series held personally liable solely by reason of his
being or having been a shareholder. Thus, the risk of shareholder liability is
limited to circumstances in which that series of shares itself would be unable
to meet its obligations.
We understand that this opinion is to be used in connection with the
filing of the Post-Effective Amendment. We consent to the filing of this opinion
with and as part of your Post-Effective Amendment.
Sincerely,
/s/ Ropes & Gray
-----------------------
Ropes & Gray
<PAGE> 1
EXHIBIT 11(A)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the caption "Legal Counsel" included in or made a part of
Post-Effective Amendment No. 22 to the Registration Statement of Schwab
Investments on Form N-1A (Nos. 33-37459 and 811-6200) under the Securities Act
of 1933, as amended.
/s/ Ropes & Gray
------------------------
ROPES & GRAY
Washington, D.C.
December 23, 1997
<PAGE> 1
EXHIBIT 11(B)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 22 to the registration statement on Form N-1A (the "Registration
Statement") of Schwab Capital Trust of our report dated December 5, 1997,
relating to the financial statements and financial highlights appearing in the
October 31, 1997 Annual Reports to Shareholders of Schwab International Index
Fund, Schwab Small-Cap Index Fund, and Schwab S&P 500 Fund which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectuses and under the heading "Financial Information" in the Statement of
Additional Information.
/s/ Price Waterhouse LLP
San Francisco, California
December 29, 1997
<PAGE> 1
EXHIBIT 13
PURCHASE AGREEMENT
Schwab Investments (the "Fund"), a Massachusetts business
trust, and Charles Schwab & Co., Inc. ("Schwab"), a California corporation,
hereby agree as follows:
1. The Fund hereby offers and Schwab hereby purchases 100
units of beneficial interest in each of Series E, F and G of the Fund,
representing interests in the Schwab Long-Term U.S. Government Bond Fund, the
Schwab Short/Intermediate Tax-Free Bond Fund and the Schwab California
Short/Intermediate Tax-Free Bond Fund, respectively, (such 100 units of
beneficial interest being hereafter collectively known as "Shares") at a price
of $10.00 per Share. Schwab hereby acknowledges purchase of the Shares and the
Fund hereby acknowledges receipt from Schwab of funds in the amount of $3,000 in
full payment for the Shares. It is further agreed that no certificate for the
Shares will be issued by the Fund.
2. Schwab represents and warrants to the Fund that the Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.
3. The names "Schwab Investments" and "Trustees of Schwab
Investments" refer, respectively to the Trust created and the Trustees as
Trustees but not individually or personally, acting from time to time under an
Agreement and Declaration of Trust dated as of October 26, 1990, to which
reference is hereby made and a copy of which is on file at the Office of the
Secretary of State of the Commonwealth of Massachusetts and elsewhere as
required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of "Schwab Investments" entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are not made
individually, but only in such capacities, and are not binding upon any of the
Trustees, Shareholders or representatives of the Trust personally, but bind only
the assets of the Trust, and all persons dealing with any series of Shares of
the Trust must look solely to the assets of the Trust belonging to such series
for the enforcement of any claims against the Trust.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed the
Agreement as of the 1st day of March 1993.
Attest: SCHWAB INVESTMENTS
/s/ David H. Lui By: /s/ Frances Cole
- ----------------------------- -----------------------------
Name: Frances Cole
Title: Assistant Secretary
Attest: CHARLES SCHWAB & CO., INC.
/s/ By: /s/ William J. Klipp
- ----------------------------- ---------------------------
Name: William J. Klipp
Title: Senior Vice President
<PAGE> 1
EXHIBIT 16
DATE RUN: 11/03/97 FUND: 2201 THE SCHWAB 1000 FUND CLASS 1111 REPORT 51
RUN TIME: 18:30 S.E.C. TOTAL RETURN CALCULATION PAGE NO: 5
FOR 12 MONTHS ENDED 10/31/97
<TABLE>
<CAPTION>
PERIOD FACTOR NAV DIV IN $ DIV SHARES SHARES EOM NAV EOM MKT. VAL.
- ------ ----------- --------------- ---------- ---------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BEGINNING NAV AND SHARES: 19.54 51.177
11/096 51.177 20.95 1,072.16
12/096 00.258850000 20.64 12/26/96 DIV 13.25 0.642 51.819 20.34 1,054.00
01/097 51.819 21.51 1,114.63
02/097 51.819 21.59 1,118.77
03/097 51.819 21.63 1,069.03
04/097 51.819 21.74 1,126.55
05/097 51.819 23.12 1,198.06
06/097 51.819 24.08 1,247.80
07/097 51.819 26.03 1,348.85
08/097 51.819 24.78 1,284.07
09/097 51.819 26.11 1,352.99
10/097 51.819 25.25 1,308.43
10/097 25.25 10/31/97 EOM 51.819
TOTAL DIV FACTOR: 0.258850000
ENDING NAV: 25.25
AGGREGATE RETURN: 30.8400%
ENDING REDEEMABLE VALUE: 1,308.43
</TABLE>
<PAGE> 2
FORMULA =
T = TOTAL RETURN P = HYPOTHETICAL INITIAL INVESTMENT
ERV = ENDING REDEEMABLE VALUE
(ENDING NAV X ENDING SHARES)
1/N N = NUMBER OF YEARS IN THE PERIOD
T = ((ERV/P) -1)
T = 30.84% P = 1,000.00
ERV = 1,308.43
N = 1.00000
<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS (SCHWAB 1000 FUND ONLY)
[SERIES]
[NUMBER] 011
[NAME] SCHWAB 1000 FUND - INVESTORS SHARES
<TABLE>
<S> <C>
[PERIOD-TYPE] 2-MOS
[FISCAL-YEAR-END] OCT-31-1997
[PERIOD-END] OCT-31-1997
[INVESTMENTS-AT-COST] 2012325
[INVESTMENTS-AT-VALUE] 3050500
[RECEIVABLES] 7988
[ASSETS-OTHER] 108
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 3058596
[PAYABLE-FOR-SECURITIES] 18203
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 3394
[TOTAL-LIABILITIES] 21597
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1978847
[SHARES-COMMON-STOCK] 103406
[SHARES-COMMON-PRIOR] 100826
[ACCUMULATED-NII-CURRENT] 25431
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (5454)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 1038175
[NET-ASSETS] 2610607
[DIVIDEND-INCOME] 7263
[INTEREST-INCOME] 164
[OTHER-INCOME] 0
[EXPENSES-NET] 2268
[NET-INVESTMENT-INCOME] 5159
[REALIZED-GAINS-CURRENT] 1097
[APPREC-INCREASE-CURRENT] 43118
[NET-CHANGE-FROM-OPS] 49374
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 7163
[NUMBER-OF-SHARES-REDEEMED] 4583
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 190864
[ACCUMULATED-NII-PRIOR] 20272
[ACCUMULATED-GAINS-PRIOR] (6551)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1187
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2497
[AVERAGE-NET-ASSETS] 2586944
[PER-SHARE-NAV-BEGIN] 24.78
[PER-SHARE-NII] .04
[PER-SHARE-GAIN-APPREC] .43
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 25.25
[EXPENSE-RATIO] .46
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
