<PAGE> 1
File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on December 30, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 27 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 31 [X]
SCHWAB INVESTMENTS
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
(Address of Principal Executive Offices) (zip code)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
William J. Klipp
101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)
Copies of communications to:
<TABLE>
<S> <C> <C>
John H. Grady, Jr. Esq. Martin E. Lybecker, Esq. Frances Cole, Esq.
Morgan Lewis & Bockius LLP Ropes & Gray Charles Schwab Investment Management, Inc.
1701 Market Street One Franklin Square 101 Montgomery Street
Philadelphia, PA 19103 1301 K Street, N.W., Suite 800 120K-14-109
East San Francisco, CA 94104
Washington, D.C. 20005
</TABLE>
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[X] On 12/31/98, 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:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE> 2
PROSPECTUS
January 11, 1999
SCHWAB
Equity Index Funds
SCHWAB S&P 500 FUND
SCHWAB 1000 FUND(R)
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB INTERNATIONAL INDEX FUND(R)
As with all mutual funds, the Securities and Exchange Commission has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
SCHWABFUNDS
<PAGE> 3
About the funds
Schwab Equity Index Funds
ABOUT THE FUNDS
4 Schwab S&P 500 Fund
10 Schwab 1000 Fund(R)
14 Schwab Small-Cap Index Fund(R)
18 Schwab International Index Fund(R)
22 Fund Management
INVESTING IN THE FUNDS
24 Buying Shares
25 Selling/Exchanging Shares
26 Transaction Policies
27 Distributions and Taxes
<PAGE> 4
The funds in this prospectus share the same basic INVESTMENT STRATEGY: They are
designed to track the performance of a stock market index. Each fund tracks a
different index.
This strategy distinguishes an index fund from an "actively managed" mutual
fund. Instead of choosing investments based on judgment, the portfolio manager
looks to an index to determine which securities the fund should own.
Because the composition of an index tends to be comparatively stable, index
funds historically have shown low portfolio turnover compared to actively
managed funds.
The funds are designed for long-term investors. Their performance will fluctuate
over time and, as with all investments, future performance may differ from past
performance.
<PAGE> 5
Schwab S&P 500 Fund
TICKER SYMBOLS INVESTOR SHARES: SWPIX SELECT SHARES(TM): SWPPX
e.SHARES(R): SWPEX
GOAL
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE S&P 500(R) INDEX.
LARGE-CAP STOCKS
Although the 500 companies in the index constitute only about 7% of all the
publicly traded companies in the United States, they represent approximately 80%
of the total value of the U.S. stock market. (All figures are as of 10/31/98.)
Companies of this size are generally considered large-cap stocks. Their
performance is widely followed, and the index itself is popularly seen as a
measure of overall U.S. stock market performance.
Because the index weights a stock according to its market capitalization (total
market value of all shares outstanding), larger stocks have more influence on
the performance of the index than do the index's smaller stocks.
INDEX
THE S&P 500 INDEX INCLUDES THE COMMON STOCKS OF 500 LEADING U.S. COMPANIES FROM
A BROAD RANGE OF INDUSTRIES. Standard & Poor's, the company that maintains the
index, uses a variety of measures to determine which stocks are listed in the
index. Each stock is represented in proportion to its total market value.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does. In seeking to enhance after-tax performance, the fund may
choose to realize certain capital losses and use them to offset capital gains.
This strategy may help the fund reduce its taxable distributions. All other
factors being equal, this can lower realized capital gains and lower operating
expenses.
Like many index funds, the fund may invest in futures contracts and lend
securities to minimize the gap in performance that naturally exists between any
index fund and its index. This gap occurs mainly because, unlike the index, the
fund incurs expenses and must keep a small portion of its assets in cash for
business operations. By using futures, the fund potentially can offset the
portion of the gap attributable to its cash holdings. Any income realized
through securities lending may help reduce the portion of the gap attributable
to expenses. Because some of the effect of expenses remains, however, the fund's
performance normally is below that of the index.
4 S&P 500 FUND
<PAGE> 6
Long-term investors who want to focus on large-cap U.S. stocks or who are
looking for performance that is linked to a popular index may want to consider
this fund.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE LARGE-CAP PORTION OF THE U.S. STOCK MARKET, as
measured by the index. It follows these stocks during upturns as well as
downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
Although the S&P 500(R) Index encompasses stocks from many different sectors of
the economy, its performance primarily reflects that of large-cap stocks. As a
result, whenever these stocks perform less well than mid- or small-cap stocks,
the fund may underperform funds that have exposure to those segments of the U.S.
stock market. Likewise, whenever large-cap U.S. stocks fall behind other types
of investments -- bonds, for instance -- the fund's performance also will lag
those investments.
OTHER RISK FACTORS
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also involve risks. These risks could affect how
well the fund tracks the performance of the index.
For example, futures contracts, which the fund uses to gain exposure to the
index for its cash balances, could cause the fund to track the index less
closely if they don't perform as expected.
The fund also may lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
INDEX OWNERSHIP
Standard & Poor's,(R) S&P,(R) S&P 500,(R) Standard & Poor's 500(R) and 500(R)
are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use
by the fund. The fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's, and Standard & Poor's makes no representation regarding the advisability
of investing in the fund. More complete information may be found in the
Statement of Additional Information (see back cover).
S&P 500 FUND 5
<PAGE> 7
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investments.
The fund has three share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 24.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
Investor Shares
[CHART--1997--32.47%]
BEST QUARTER: 17.17% Q2 1997
WORST QUARTER: -9.98% Q3 1998
YEAR-TO-DATE PERFORMANCE AS OF 9/30/98: 5.76%
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
- ----------------------------------------------------------
<S> <C> <C>
Investor Shares 32.47 28.39 1
Select Shares(TM) -- 29.74 2
e.Shares(R) 32.72 28.61 3
S&P 500(R) Index 33.34 29.14 4
</TABLE>
1 Inception: 5/1/96.
2 Inception: 5/19/97.
3 Inception: 5/1/96.
4 From: 5/1/96.
The performance information above shows you how the fund's performance compares
to that of its index, which varies over time.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE (%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES e.SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
NONE NONE NONE
ANNUAL OPERATING EXPENSES
(% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.34 0.34 0.34
Distribution (12b-1) fees None None None
Other expenses 0.29 0.13 0.18
------------------------------------
Total annual operating expenses 0.63 0.47 0.52
EXPENSE REDUCTION 0.28 0.28 0.24
------------------------------------
NET OPERATING EXPENSES* 0.35 0.19 0.28
------------------------------------
</TABLE>
* Guaranteed by Schwab and the investment adviser through 2/29/00
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $36 $166 $316 $753
Select Shares $19 $115 $228 $557
e.Shares $29 $136 $261 $625
</TABLE>
6 S&P 500 FUND
<PAGE> 8
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
11/1/97 - 11/1/96 - 5/1/96 -
INVESTOR SHARES 10/31/98 10/31/97 10/31/96
<S> <C> <C> <C>
PER-SHARE DATA ($)
- --------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 14.17 10.88 10.00
----------------------------------------
Income from investment operations:
Net investment income 0.16 0.14 0.08
Net realized and unrealized gain on investments 2.85 3.24 0.80
----------------------------------------
Total income from investment operations 3.01 3.38 0.88
Less distributions:
Dividends from net investment income (0.13) (0.09) --
----------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.05 14.17 10.88
========================================
Total return (%) 21.39 31.29 8.80 1
RATIOS/SUPPLEMENTAL DATA (%)
- --------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to average net assets 0.35 0.38 0.49 2
Expense reductions reflected in above ratio 0.28 0.32 0.40 2
Ratio of net investment income to average net assets 1.25 1.49 1.89 2
Portfolio turnover rate 1 3 1
Net assets, end of period ($ x 1,000,000) 1,935 923 244
</TABLE>
1 Not annualized.
2 Annualized.
S&P 500 FUND 7
<PAGE> 9
FINANCIAL HIGHLIGHTS CONTINUED
<TABLE>
<CAPTION>
11/1/97 - 5/19/97 -
SELECT SHARES(TM) 10/31/98 10/31/97
<S> <C> <C>
PER-SHARE DATA ($)
- --------------------------------------------------------------------------------------------
Net asset value at beginning of period 14.19 12.85
---------------------------
Income from investment operations:
Net investment income 0.26 0.05
Net realized and unrealized gain on investments 2.78 1.29
---------------------------
Total income from investment operations 3.04 1.34
Less distributions:
Dividends from net investment income (0.14) (0.00)
---------------------------
NET ASSET VALUE AT END OF PERIOD 17.09 14.19
===========================
Total return (%) 21.63 10.43 1
RATIOS/SUPPLEMENTAL DATA (%)
- --------------------------------------------------------------------------------------------
Ratio of actual operating expenses to average net assets 0.19 0.19 2
Expense reductions reflected in above ratio 0.28 0.34 2
Ratio of net investment income to average net assets 1.40 1.46 2
Portfolio turnover rate 1 3
Net assets, end of period ($ x 1,000,000) 1,548 486
</TABLE>
1 Not annualized.
2 Annualized.
8 S&P 500 FUND
<PAGE> 10
FINANCIAL HIGHLIGHTS CONTINUED
<TABLE>
<CAPTION>
11/1/97 - 11/1/96 - 5/1/96 -
e.SHARES(R) 10/31/98 10/31/97 10/31/96
<S> <C> <C> <C>
PER-SHARE DATA ($)
- --------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 14.19 10.89 10.00
--------------------------------------------
Income from investment operations:
Net investment income 0.15 0.21 0.04
Net realized and unrealized gain on investments 2.88 3.19 0.85
--------------------------------------------
Total income from investment operations 3.03 3.40 0.89
Less distributions:
Dividends from net investment income (0.14) (0.10) --
--------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.08 14.19 10.89
============================================
Total return (%) 21.50 31.48 8.90 1
RATIOS/SUPPLEMENTAL DATA (%)
- --------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to average net assets 0.28 0.28 0.28 2
Expense reductions reflected in above ratio 0.24 0.33 0.91 2
Ratio of net investment income to average net assets 1.32 1.61 1.82 2
Portfolio turnover rate 1 3 1
Net assets, end of period ($ x 1,000,000) 281 132 36
</TABLE>
1 Not annualized.
2 Annualized.
S&P 500 FUND 9
<PAGE> 11
Schwab 1000 Fund(R)
TICKER SYMBOLS INVESTOR SHARES: SNXFX SELECT SHARES(TM): SNXSX
GOAL
THE FUND'S GOAL IS TO MATCH THE TOTAL RETURN OF THE SCHWAB 1000 INDEX.(R)
LARGE- AND MID-CAP STOCKS
Although there are currently more than 7,200 total stocks in the United States,
the companies represented by the Schwab 1000 Index make up some 87% of the total
value of all U.S. stocks. (Figures are as of 10/31/98.)
These large- and mid-cap stocks cover many industries and represent many sizes:
At $240 billion, the market capitalization of the largest one is approximately
200 times that of the 1,000th largest one. (Figures are as of 12/31/97.)
Because large- and mid-cap stocks can perform differently from each other at
times, a fund that invests in both categories of stocks may have somewhat
different performance than a fund that invests only in large-cap stocks.
INDEX
THE SCHWAB 1000 INDEX INCLUDES THE COMMON STOCKS OF THE LARGEST 1,000 PUBLICLY
TRADED COMPANIES IN THE UNITED STATES, with size being determined by market
capitalization (total market value of all shares outstanding). The index is
designed to be a measure of the performance of large- and mid-cap U.S. stocks.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does.
The fund may make use of certain management techniques in seeking to enhance
after-tax performance. For example, it may adjust its weightings of certain
stocks, continue to hold a stock that is no longer included in the index or
choose to realize certain capital losses and use them to offset capital gains.
These strategies may help the fund reduce its taxable distributions. All other
factors being equal, this can lower realized capital gains and lower operating
expenses.
Like many index funds, the fund also may invest in futures contracts and lend
securities to minimize the gap in performance that naturally exists between any
index fund and its index. This gap occurs mainly because, unlike the index, the
fund incurs expenses and must keep a small portion of its assets in cash for
business operations. By using futures, the fund potentially can offset the
portion of the gap attributable to its cash holdings. Any income realized
through securities lending may help reduce the portion of the gap attributable
to expenses. Because some of the effect of expenses remains, however, the fund's
performance normally is below that of the index.
10 SCHWAB 1000 FUND
<PAGE> 12
Because it includes so many U.S. stocks and industries, this fund could make
sense for long-term investors seeking broad diversification in a single
investment. It's also a logical choice for stock investors who want exposure
beyond the large-cap segment of the U.S. stock market.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE LARGE- AND MID-CAP PORTIONS OF THE U.S. STOCK
MARKET, as measured by the index. It follows these stocks during upturns as well
as downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
Because the Schwab 1000 Index(R) encompasses stocks from across the economy, the
fund is broadly diversified, which reduces the impact of the performance of any
given industry or stock. But whenever large- and mid-cap U.S. stocks fall behind
other types of investments -- bonds, for instance -- the fund's performance also
will lag these investments.
OTHER RISK FACTORS
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also involve risks. These risks could affect how
well the fund tracks the performance of the index.
For example, futures contracts, which the fund uses to gain exposure to the
index for its cash balances, could cause the fund to track the index less
closely if they don't perform as expected.
The fund also may lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
SCHWAB 1000 FUND 11
<PAGE> 13
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the indices do not include any costs of investments.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 24.
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS (%) AS OF 12/31
- --------------------------------------------------------------------------------
Investor Shares
<S> <C>
92 8.52
93 9.63
94 -0.11
95 36.60
96 21.57
97 31.92
</TABLE>
BEST QUARTER: 16.72% Q2 1997
WORST QUARTER: -10.70% Q3 1998
YEAR-TO-DATE PERFORMANCE AS OF 9/30/98: 4.29%
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
- --------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 31.92 19.13 17.53 1
Select Shares(TM) -- -- 31.80 2
S&P 500(R) Index 33.34 20.24 17.93 3
Schwab 1000 Index(R) 32.37 19.73 17.99 3
</TABLE>
1 Inception: 4/2/91.
2 Inception: 5/19/97.
3 From: 4/2/91.
The performance information above shows you how performance has varied from
year-to-year and how it averages out over time.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
<TABLE>
<CAPTION>
FEE TABLE (%)
- --------------------------------------------------------------------------------
INVESTOR SELECT
SHARES SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES (% of transaction amount)
REDEMPTION FEE, CHARGED ONLY ON SHARES
YOU SELL WITHIN 180 DAYS OF BUYING THEM 0.50 0.50
<CAPTION>
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fees 0.23 0.23
Distribution (12b-1) fees None None
Other expenses 0.28 0.16
====================
Total annual operating expenses 0.51 0.39
EXPENSE REDUCTION 0.05 0.04
--------------------
NET OPERATING EXPENSES* 0.46 0.35
--------------------
</TABLE>
* Guaranteed by Schwab and the investment adviser through 2/29/00
EXPENSES ON A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $ 47 $157 $279 $634
Select Shares $ 36 $120 $214 $488
</TABLE>
12 SCHWAB 1000 FUND
<PAGE> 14
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
11/1/97 - 9/1/97 - 9/1/96 - 9/1/95 - 9/1/94 - 9/1/93 -
INVESTOR SHARES 10/31/98 10/31/97 8/31/97 8/31/96 8/31/95 8/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period 25.25 24.78 18.14 15.68 13.08 12.80
--------------------------------------------------------------------
Income from investment operations:
Net investment income 0.27 0.04 0.28 0.24 0.26 0.26
Net realized and unrealized gain on investments 4.64 0.43 6.62 2.45 2.48 0.28
--------------------------------------------------------------------
Total income from investment operations 4.91 0.47 6.90 2.69 2.74 0.54
Less distributions:
Dividends from net investment income (0.26) 0.00 (0.26) (0.23) (0.14) (0.26)
--------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 29.90 25.25 24.78 18.14 15.68 13.08
====================================================================
Total return (%) 19.63 1.90 1 38.32 17.27 21.23 4.28
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to average net assets 0.46 0.46 2 0.47 0.49 0.54 0.51
Expense reductions reflected in above ratio 0.05 0.04 2 0.06 0.08 0.09 0.05
Ratio of net investment income to average net assets 1.02 1.00 2 1.33 1.66 2.03 2.06
Portfolio turnover rate 2 -- 2 2 2 3
Net assets, end of period ($ x 1,000,000) 3,657 2,611 2,499 1,560 827 554
<CAPTION>
11/1/97 - 9/1/97 - 5/19/97 -
SELECT SHARES(TM) 10/31/98 10/31/97 8/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period 25.26 24.79 22.64
--------------------------------------------------------------------
Income from investment operations:
Net investment income 0.32 0.04 0.05
Net realized and unrealized gain on investments 4.63 0.43 2.10
--------------------------------------------------------------------
Total income from investment operations 4.95 0.47 2.15
Less distributions:
Dividends from net investment income (0.28) (0.00) (0.00)
--------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 29.93 25.26 24.79
====================================================================
Total return (%) 19.79 1.90 1 9.50 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to average net assets 0.35 0.35 2 0.35 2
Expense reductions reflected in above ratio 0.04 0.06 2 0.33 2
Ratio of net investment income to average net assets 1.11 1.11 2 1.26 2
Portfolio Turnover Rate 2 -- 2
Net assets, end of period ($ x 1,000,000) 1,041 426 347
</TABLE>
1 Not annualized.
2 Annualized.
SCHWAB 1000 FUND 13
<PAGE> 15
Schwab Small-Cap
Index Fund(R)
TICKER SYMBOLS INVESTOR SHARES: SWSMX SELECT SHARES(TM): SWSSX
GOAL
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB SMALL-CAP INDEX.(R)
SMALL-CAP STOCKS
In measuring the performance of the second-largest 1,000 companies in the U.S.
stock market, the index may be said to focus on the "biggest of the small" among
America's publicly traded stocks. These stocks range in size from $1.18 billion
to $380 million in terms of their total market value. (All figures are as of
12/31/97.)
Historically, the performance of small-cap stocks has not always paralleled that
of large-cap stocks. For this reason, some investors use them to diversify a
portfolio that invests in larger stocks.
INDEX
THE SCHWAB SMALL-CAP INDEX INCLUDES THE COMMON STOCKS OF THE SECOND-LARGEST
1,000 PUBLICLY TRADED COMPANIES IN THE UNITED STATES, with size being determined
by market capitalization (total market value of all shares outstanding). The
index is designed to be a measure of the performance of small-cap U.S. stocks.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does. In seeking to enhance after-tax performance the fund may
choose to realize certain capital losses and use them to offset capital gains.
This strategy may help the fund reduce its taxable distributions. All other
factors being equal, this can lower realized capital gains and lower operating
expenses.
Like many index funds, the fund also may invest in short-term investments and
lend securities to minimize the gap in performance that naturally exists between
any index fund and its index. This gap occurs mainly because, unlike the index,
the fund incurs expenses and must keep a small portion of its assets in cash for
business operations. Because any income from securities lending and short-term
investments typically is not enough to eliminate the effect of expenses, the
fund's performance normally is below that of the index.
14 SMALL-CAP INDEX FUND
<PAGE> 16
With its small-cap focus, this fund may make sense for long-term investors who
are willing to accept greater risk in the pursuit of potentially higher
long-term returns.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE SMALL-CAP PORTION OF THE U.S. STOCK MARKET, as
measured by the index. It follows the market during upturns as well as
downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
HISTORICALLY, SMALL-CAP STOCKS HAVE BEEN RISKIER THAN LARGE- AND MID-CAP STOCKS.
Stock prices of smaller companies may be based in substantial part on future
expectations rather than current achievements, and may move sharply, especially
during market upturns and downturns. In addition, during any period when
small-cap stocks perform less well than large- or mid-cap stocks, the fund may
underperform funds that have exposure to those segments of the U.S. stock
market. Likewise, whenever U.S. small-cap stocks fall behind other types of
investments -- bonds, for instance -- the fund's performance also will lag these
investments.
OTHER RISK FACTORS
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also involve risks. These risks could affect how
well the fund tracks the performance of the index.
For example, the fund may lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
SMALL-CAP INDEX FUND 15
<PAGE> 17
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the indices do not include any costs of investments.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 24.
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS (%) AS OF 12/31
- --------------------------------------------------------------------------------
Investor Shares
<S> <C>
94 -3.08
95 27.65
96 15.49
97 25.69
</TABLE>
BEST QUARTER: 18.09% Q2 1997
WORST QUARTER: -20.94% Q3 1998
YEAR-TO-DATE PERFORMANCE AS OF 9/30/98: -17.80%
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
- --------------------------------------------------------------------------------
SINCE
1 YEAR INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Investor Shares 25.69 15.87 1
Select Shares(TM) -- 41.25 2
Russell 2000 Index(R) 22.38 15.97 3
Schwab Small-Cap Index(R) 26.84 17.06 3
</TABLE>
1 Inception: 12/3/93.
2 Inception: 5/19/97.
(3) From: 12/3/93.
The performance information above shows you how performance has varied from
year-to-year and how it averages out over time.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
<TABLE>
<CAPTION>
FEE TABLE (%)
- --------------------------------------------------------------------------------
INVESTOR SELECT
SHARES SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES (% of transaction amount)
- --------------------------------------------------------------------------------
Redemption fee, charged only on shares
you sell within 180 days of buying them 0.50 0.50
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.48 0.48
Distribution (12b-1) fees None None
Other expenses 0.33 0.24
======================
Total annual operating expenses 0.81 0.72
EXPENSE REDUCTION 0.32 0.34
----------------------
NET OPERATING EXPENSES* 0.49 0.38
----------------------
</TABLE>
* Guaranteed by Schwab and the investment adviser through 2/29/00
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $ 50 $218 $409 $964
Select Shares $ 39 $187 $358 $854
</TABLE>
16
<PAGE> 18
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
11/1/97 - 11/1/96 - 11/1/95 - 11/1/94 - 12/3/93 -
INVESTOR SHARES 10/31/98 10/31/97 10/31/96 10/31/95 10/31/94
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
Net asset value at beginning of period 17.73 13.59 11.70 10.05 10.00
----------------------------------------------------------
Income from investment operations:
Net investment income 0.05 0.06 0.07 0.10 0.06
Net realized and unrealized gain (loss) on investments (2.33) 4.14 1.88 1.61 --
----------------------------------------------------------
Total income from investment operations (2.28) 4.20 1.95 1.71 0.06
Less distributions:
Dividends from net investment income (0.06) (0.06) (0.06) (0.06) (0.01)
----------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 15.39 17.73 13.59 11.70 10.05
==========================================================
Total return (%) (12.88) 31.03 16.73 17.11 0.63 1
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to average net assets 0.49 0.52 0.59 0.68 0.67 2
Expense reductions reflected in above ratio 0.32 0.37 0.35 0.34 0.52 2
Ratio of net investment income to average net assets 0.35 0.53 0.56 0.68 0.68 2
Portfolio turnover rate 40 23 23 24 16
Net assets, end of period ($ x 1,000,000) 480 410 209 122 68
<CAPTION>
11/1/97 - 5/19/97 -
SELECT SHARES(TM) 10/31/98 10/31/97
- ---------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value at beginning of period 17.75 14.50
----------------------------------------------------------
Income from investment operations:
Net investment income 0.08 0.02
Net realized and unrealized gain (loss) on investments (2.35) 3.23
----------------------------------------------------------
Total income from investment operations (2.27) 3.25
Less distributions:
Dividends from net investment income (0.07) --
----------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 15.41 17.75
==========================================================
Total return (%) (12.81) 22.41 1
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to average net assets 0.38 0.38 2
Expense reductions reflected in above ratio 0.33 0.52 2
Ratio of net investment income to average net assets 0.46 0.56 2
Portfolio turnover rate 40 23
Net assets, end of period ($ x 1,000,000) 150 81
</TABLE>
1 Not annualized.
2 Annualized.
SMALL-CAP INDEX FUND 17
<PAGE> 19
Schwab International
Index Fund(R)
TICKER SYMBOLS INVESTOR SHARES: SWINX SELECT SHARES(TM): SWISX
GOAL
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB INTERNATIONAL
INDEX.(R)
INTERNATIONAL STOCKS
Over the past several decades, foreign stock markets have grown rapidly. The
market value of foreign stocks today represent approximately 53% of the world's
total market capitalization. (All figures are as of 10/31/98.)
For some investors, an international index fund represents an opportunity for
low-cost access to a variety of world markets in one fund. Others turn to
international stocks to diversify a portfolio of U.S. investments, because
international stock markets historically have performed somewhat differently
from the U.S. market.
INDEX
THE SCHWAB INTERNATIONAL INDEX INCLUDES COMMON STOCKS OF THE 350 LARGEST
PUBLICLY TRADED COMPANIES FROM SELECTED COUNTRIES OUTSIDE THE UNITED STATES. The
selected countries all have developed securities markets and include most
Western European countries, as well as Australia, Canada, Hong Kong and Japan --
currently 15 countries in all. Within these countries, Schwab identifies the 350
largest companies according to their market capitalizations (total market value
of all shares outstanding), in U.S. dollars. The index does not maintain any
particular country weightings, although any given country cannot represent more
than 35% of the index.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does, and does not hedge its exposure to foreign currencies beyond
using forward contracts to lock in transaction prices until settlement. In
seeking to enhance after-tax performance the fund may choose to realize certain
capital losses and use them to offset capital gains. This strategy may help the
fund reduce its taxable distributions. All other factors being equal, this can
lower realized capital gains and lower operating expenses.
Like many index funds, the fund also may invest in short-term investments and
lend securities to minimize the gap in performance that naturally exists between
any index fund and its index. This gap occurs mainly because, unlike the index,
the fund incurs expenses and must keep a small portion of its assets in cash for
business operations. Because any income from securities lending and short-term
investments typically is not enough to eliminate the effect of expenses, the
fund's performance normally is below that of the index.
18 INTERNATIONAL INDEX FUND
<PAGE> 20
For long-term investors who are interested in the potential rewards of
international investing and who are prepared for the additional risks, this fund
could be worth considering.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE PERFORMANCE OF A MIX OF INTERNATIONAL LARGE-CAP
STOCKS, as measured by the index. It follows these stocks during upturns as well
as downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of market declines.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative,
short-term or long-term. Other factors may be ignored by the market as a whole
but may cause movements in the price of one company's stock or the stocks of one
or more industries (for example, rising oil prices may lead to a decline in
airline stocks).
INTERNATIONAL STOCKS CARRY ADDITIONAL RISKS. Changes in currency exchange rates
can erode market gains or widen market losses. International markets -- even
those that are well established -- are often more volatile than those of the
United States, for reasons ranging from a lack of reliable company information
to the risk of political upheaval. In addition, during any period when large-cap
international stocks perform less well than other types of stocks or other types
of investments -- bonds, for instance -- the fund's performance also will lag
these investments.
OTHER RISK FACTORS
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also involve risks. These risks could affect how
well the fund tracks the performance of the index.
For example, the fund may lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
INTERNATIONAL INDEX FUND 19
<PAGE> 21
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the indices do not include any costs of investments.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 24.
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS (%) AS OF 12/31
- --------------------------------------------------------------------------------
Investor Shares
[BAR GRAPH]
<S> <C>
94 3.84
95 14.22
96 9.12
97 7.31
</TABLE>
BEST QUARTER: 14.18% Q2 1997
WORST QUARTER: -14.93% Q3 1998
YEAR-TO-DATE PERFORMANCE AS OF 9/30/98: -2.78%
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
- --------------------------------------------------------------------------------
SINCE
1 YEAR INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Investor Shares 7.31 8.15 1
Select Shares(TM) -- -1.36 2
MSCI-EAFE Index(R) 1.77 5.73 3
Schwab International Index(R) 6.84 8.55 3
</TABLE>
1 Inception: 9/9/93.
2 Inception: 5/19/97.
3 From: 9/9/93.
The performance information above shows you how performance has varied from
year-to-year and how it averages out over time.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
<TABLE>
<CAPTION>
FEE TABLE (%)
- --------------------------------------------------------------------------------
INVESTOR SELECT
SHARES SHARES
- --------------------------------------------------------------------------------
SHAREHOLDER FEES (% of transaction amount)
- --------------------------------------------------------------------------------
<S> <C> <C>
Redemption fee, charged only on shares
you sell within 180 days of buying them 0.75 0.75
<CAPTION>
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
<S> <C> <C>
Management fees 0.67 0.67
Distribution (12b-1) fees None None
Other expenses 0.37 0.28
====================
Total annual operating expenses 1.04 0.95
EXPENSE REDUCTION 0.46 0.48
--------------------
NET OPERATING EXPENSES* 0.58 0.47
--------------------
</TABLE>
* Guaranteed by Schwab and the investment adviser through 2/29/00
EXPENSES ON A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $ 59 $ 273 $ 517 $1,218
Select Shares $ 48 $ 242 $ 466 $1,111
</TABLE>
20 INTERNATIONAL INDEX FUND
<PAGE> 22
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
11/1/97 - 11/1/96 - 11/1/95 - 11/1/94 - 11/1/93 -
INVESTOR SHARES 10/31/98 10/31/97 10/31/96 10/31/95 10/31/94
- ---------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 13.31 12.23 11.13 10.89 10.15
--------------------------------------------------------
Income from Investment Operations:
Net investment income 0.17 0.17 0.16 0.14 0.11
Net realized and unrealized gain on investments 0.88 1.08 1.07 0.22 0.69
----------------------------------------------------------
Total income from investment operations 1.05 1.25 1.23 0.36 0.80
Less distributions:
Dividends from net investment income (0.15) (0.17) (0.13) (0.12) (0.04)
Distributions from realized gains on investments -- -- -- -- (0.02)
----------------------------------------------------------
Total distributions (0.15) (0.17) (0.13) (0.12) (0.06)
----------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 14.21 13.31 12.23 11.13 10.89
==========================================================
Total return (%) 8.02 10.33 11.07 3.35 7.89
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to average net assets 0.58 0.61 0.69 0.85 0.90
Expense reductions reflected in above ratio 0.46 0.52 0.48 0.37 0.40
Ratio of net investment income to average net assets 1.35 1.36 1.50 1.45 1.14
Portfolio turnover rate 6 13 6 -- 6
Net assets, end of period ($ x 1,000,000) 428 318 247 180 142
<CAPTION>
11/1/97 - 5/19/97 -
SELECT SHARES(TM) 10/31/98 10/31/97
- ---------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value at beginning of period 13.32 13.59
----------------------------------------------------------
Income from investment operations:
Net investment income 0.22 0.04
Net realized and unrealized gain (loss) on investments 0.85 (0.31)
----------------------------------------------------------
Total income from investment operations 1.07 (0.27)
Less distributions:
Dividends from net investment income (0.16) --
----------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 14.23 13.32
==========================================================
Total return (%) 8.16 (1.99) 1
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to average net assets 0.47 0.47 2
Expense reductions reflected in above ratio 0.48 0.80 2
Ratio of net investment income to average net assets 1.49 0.17 2
Portfolio turnover rate 6 13
Net assets, end of period ($ x 1,000,000) 94 50
</TABLE>
1 Not annualized.
2 Annualized.
INTERNATIONAL INDEX FUND 21
<PAGE> 23
Fund management
The fund's investment adviser, Charles Schwab Investment Management, Inc., has
more than $77 billion under management.
THE INVESTMENT ADVISER for the Schwab Equity Index Funds is Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.
Founded in 1989, the firm today serves as investment adviser for all of the
SchwabFunds.(R) The firm manages assets for more than 3 million accounts. (All
figures on this page are as of 10/31/98.)
As the investment adviser, the firm oversees the asset management and
administration of the Schwab Equity Index Funds. As compensation for these
services, the firm receives a management fee from each fund. For the 12 months
ended 10/31/98, these fees were 0.09% for the Schwab S&P 500 Fund, 0.19% for the
Schwab 1000 Fund,(R) 0.16% for the Schwab Small-Cap Index Fund(R) and 0.21% for
the Schwab International Index Fund.(R) These figures, which are expressed as a
percentage of each fund's average daily net assets, represent the actual amounts
paid, including the effects of reductions.
GERI HOM, a vice president of the investment adviser, is responsible for the
day-to-day management of each of the funds. She joined the firm in 1995 and has
nearly 20 years of experience in equity index management.
YEAR 2000 AND EURO CONVERSION ISSUES
Two issues with the potential to disrupt fund operations and affect performance
are the inability of some computers to recognize the year 2000 and the
conversion of certain European currencies to the euro beginning 1/1/99.
The investment adviser will continue to take steps to enable its systems to
handle these changes. With regard to the year 2000 problem, the investment
adviser also is seeking assurances that its service providers and business
partners are taking similar steps as well. However, it is impossible to know in
advance exactly how either of these issues will affect fund administration, fund
performance (particularly for funds with European exposure) or securities
markets in general.
22 FUND MANAGEMENT
<PAGE> 24
Investing in the Funds
As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us.
On the following pages, you will find information on buying, selling and
exchanging shares using the method that is most convenient for you. You also
will see how to choose a share class and a distribution option for your
investment. Helpful information on taxes is included as well.
INVESTING IN THE FUNDS 23
<PAGE> 25
BUYING SHARES
Shares of the funds may be purchased through a Schwab brokerage account or
through certain third-party investment providers, such as other financial
institutions, investment professionals and workplace retirement plans.
The information on these pages outlines how Schwab brokerage account investors
can place "good orders" to buy, sell and exchange shares of the funds. If you
are investing through a third-party investment provider, some of the
instructions, minimums and policies may be different. Some investment providers
may charge transaction or other fees. Contact your investment provider for more
information.
SCHWAB ACCOUNTS
Different types of Schwab brokerage accounts are available, with varying account
opening and balance requirements. Some Schwab brokerage account features can
work in tandem with features offered by the funds.
For example, when you sell shares in a fund, the proceeds automatically are paid
to your Schwab brokerage account. From your account, you can use features such
as MoneyLink,(TM) which lets you move money between your brokerage accounts and
bank accounts, and Automatic Investment Plan (AIP), which lets you set up
periodic investments.
For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
STEP 1
- --------------------------------------------------------------------------------
CHOOSE A FUND AND A SHARE CLASS. Your choice may depend on the amount of your
investment. Currently, e.Shares(R) are available only for the S&P 500 Fund and
are offered to clients of Schwab Institutional, The Charles Schwab Trust
Company and certain retirement plans. The minimums shown below are for each
fund and share class.
<TABLE>
<CAPTION>
MINIMUM INITIAL MINIMUM ADDITIONAL
SHARE CLASS INVESTMENT INVESTMENTS MINIMUM BALANCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares $1,000 ($500 for $100 $1,000 ($500 for
retirement and retirement and
custodial accounts) custodial accounts)
- --------------------------------------------------------------------------------
Select Shares(TM) $50,000 $1,000 $40,000
- --------------------------------------------------------------------------------
e.Shares $1,000 ($500 for $100 $1,000 ($500 for
retirement and retirement and
custodial accounts) custodial accounts)
</TABLE>
STEP 2
- --------------------------------------------------------------------------------
CHOOSE AN OPTION FOR FUND DISTRIBUTIONS. The three options are described below.
If you don't indicate a choice, you will receive the first option.
OPTION FEATURES
- --------------------------------------------------------------------------------
Reinvestment All dividends and capital gain distributions are invested
automatically in shares of your fund and share class.
- --------------------------------------------------------------------------------
Cash/reinvestment You receive payment for dividends, while any capital gain
mix distributions are invested in shares of your fund and share
class.
- --------------------------------------------------------------------------------
Cash You receive payment for all dividends and capital gain
distributions.
STEP 3
- --------------------------------------------------------------------------------
PLACE YOUR ORDER using any of the methods described at right. Remember that
e.Shares are available only through SchwabLink. Make checks payable to Charles
Schwab and Co., Inc.
24 INVESTING IN THE FUNDS
<PAGE> 26
SELLING/EXCHANGING SHARES
Use any of the methods described below to sell shares of a fund.
When selling or exchanging shares, please be aware of the following policies:
- - A fund may take up to seven days to pay sale proceeds.
- - If you are selling shares that were recently purchased by check, the
proceeds may be delayed until the check for purchase clears; this may take
up to 15 days from the date of purchase.
- - As indicated in the funds' fee tables, each fund (except the S&P 500 Fund)
charges a redemption fee, payable to the fund, on the sale or exchange of
any shares that have been held for less than 180 days; in attempting to
minimize this fee, a fund will first sell any shares in your account that
aren't subject to the fee (including shares acquired through reinvestment
or exchange).
- - There is no redemption fee when you exchange between share classes of the
same fund.
- - Exchange orders must meet the minimum investment and other requirements
for the fund and share class into which you are exchanging.
- - You will need to obtain and read the prospectus for the fund into which
you are exchanging prior to placing your order.
METHODS FOR PLACING ORDERS
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
SCHWABLINK
Investment professionals should follow the transaction instructions in the
SchwabLink manual; for technical assistance, call 800-367-5198.
MAIL
Write to SchwabFunds(R) at:
101 Montgomery Street, San Francisco, CA 94104
When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab branch office.
WHEN PLACING ORDERS
With every order to buy, sell or exchange shares, you will need to include the
following information:
- - Your name
- - Your account number (for SchwabLink transactions, include the master
account and subaccount numbers)
- - The name and share class of the fund whose shares you want to buy or sell
- - The dollar amount or number of shares you would like to buy, sell or
exchange
- - For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer
- - When selling shares, how you would like to receive the proceeds
Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.
INVESTING IN THE FUNDS 25
<PAGE> 27
TRANSACTION POLICIES
THE FUND IS OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN.
THE FUNDS CALCULATE THEIR SHARE PRICES EACH BUSINESS DAY, for each share class,
after the close of the NYSE. A fund's share price is its net asset value per
share, or NAV, which is the fund's net assets divided by the number of its
shares outstanding. Orders to buy, sell or exchange shares that are received in
good order prior to the close of the fund (generally 4 p.m. Eastern time) will
be executed at the next share price calculated that day.
In valuing their securities, the funds use market quotes if they are readily
available. In cases where quotes are not readily available, a fund may value
securities based on fair values developed using methods approved by the fund's
Board of Trustees.
Shareholders of the Schwab International Index Fund(R) should be aware that
because foreign markets are often open on weekends and other days when the fund
is closed, the value of the fund's portfolio may change on days when it is not
possible to buy or sell shares of the fund.
THE FUNDS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following:
- - To automatically redeem your shares if the account they are held in is
closed for any reason or your balance falls below the minimum for your
share class as a result of selling or exchanging your shares
- - To modify or terminate the exchange privilege upon 60 days' written notice
to shareholders
- - To refuse any purchase or exchange order, including those that appear to
be associated with short-term trading activities
- - To change or waive a fund's investment minimums
- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted,
or otherwise as permitted by the SEC
- - To withdraw or suspend any part of the offering made by this prospectus
26 INVESTING IN THE FUNDS
<PAGE> 28
DISTRIBUTIONS AND TAXES
ANY INVESTMENT IN THE FUNDS TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in a fund. You also can
visit the Internal Revenue Service (IRS) web site at www.irs.ustreas.gov.
AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS AND GAINS YOUR
FUND EARNS. Every year, each fund distributes to its shareholders substantially
all of its net investment income and net capital gains, if any. These
distributions typically are paid in December to all shareholders of record.
UNLESS YOU ARE INVESTING THROUGH A TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT, YOUR
FUND DISTRIBUTIONS GENERALLY HAVE TAX CONSEQUENCES. Each fund's net investment
income and short-term capital gains are distributed as dividends and are taxable
as ordinary income. Other capital gain distributions are taxable as long-term
capital gains, regardless of how long you have held your shares in the fund.
Distributions generally are taxable in the tax year in which they are declared,
whether you reinvest them or take them in cash.
GENERALLY, ANY SALE OF YOUR SHARES IS A TAXABLE EVENT. A sale may result in a
capital gain or loss for you. The gain or loss generally will be treated as
short term if you held the shares for 12 months or less, long term if you held
the shares longer.
FOR TAX PURPOSES, AN EXCHANGE BETWEEN FUNDS IS DIFFERENT FROM AN EXCHANGE
BETWEEN CLASSES. An exchange between funds is considered a sale. An exchange
between classes within a fund is not reported as a taxable sale.
SHAREHOLDERS IN THE SCHWAB INTERNATIONAL INDEX FUND(R) MAY HAVE ADDITIONAL TAX
CONSIDERATIONS as a result of foreign tax payments made by the fund. Typically,
these payments will reduce the fund's dividends but will still be included in
your taxable income. You may be able to claim a tax credit or deduction for your
portion of foreign taxes paid by the fund, however.
AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DISTRIBUTIONS the fund paid during the previous
calendar year. Schwab brokerage account customers also receive information on
distributions and transactions in their monthly account statements.
SCHWAB BROKERAGE ACCOUNT CUSTOMERS WHO SELL FUND SHARES typically will receive a
report that calculates their gain or loss using the "average cost"
single-category method. This information is not reported to the IRS, and you
still have the option of calculating gains or losses using any other methods
permitted by the IRS.
MORE ON DISTRIBUTIONS
If you are investing through a taxable account and purchase shares of a fund
just before it declares a distribution, you may receive a portion of your
investment back as a taxable distribution. This is because when a fund makes a
distribution, the share price is reduced by the amount of the distribution.
You can avoid "buying a dividend," as it is often called, by finding out if a
distribution is imminent and waiting until afterwards to invest. Of course, you
may decide that the opportunity to gain a few days of investment performance
outweighs the tax consequences of buying a dividend.
INVESTING IN THE FUNDS 27
<PAGE> 29
SCHWAB
Equity Index Funds
PROSPECTUS
January 11, 1999
SCHWABFUNDS(R)
TO LEARN MORE
This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the Securities and Exchange
Commission's Public Reference Room.
SCHWABFUNDS
101 Montgomery Street
San Francisco, CA 94104
800-435-4000
WWW.SCHWAB.COM/SCHWABFUNDS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-6009
800-SEC-0330 (Public Reference Section)
www.sec.gov
SEC FILE NUMBERS
Schwab S&P 500 Fund 811-7704
Schwab 1000 Fund(R) 811-6200
Schwab Small-Cap Index Fund(R) 811-7704
Schwab International Index Fund(R) 811-7704
MKT3644FLD
<PAGE> 30
SCHWAB
Equity Index Funds
PROSPECTUS
January 11, 1999
SCHWABFUNDS(R)
TO LEARN MORE
This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the Securities and Exchange
Commission's Public Reference Room.
SCHWABFUNDS
101 Montgomery Street
San Francisco, CA 94104
800-435-4000
WWW.SCHWAB.COM/SCHWABFUNDS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-6009
800-SEC-0330 (Public Reference Section)
www.sec.gov
SEC FILE NUMBERS
Schwab S&P 500 Fund 811-7704
Schwab 1000 Fund(R) 811-6200
Schwab Small-Cap Index Fund(R) 811-7704
Schwab International Index Fund(R) 811-7704
MKT3644FLT
<PAGE> 31
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB EQUITY INDEX FUNDS
SCHWAB S&P 500 FUND
SCHWAB 1000 FUND(R)
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB INTERNATIONAL INDEX FUND(R)
JANUARY 11, 1999
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated January 11, 1999 (as
amended from time to time).
To obtain a copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, or write to the funds at 101 Montgomery Street,
San Francisco, California 94104. For TDD service call 800-345-2550, 24 hours a
day. The prospectus also may be available on the Internet at:
http://www.schwab.com/schwabfunds.
The funds' most recent annual report is a separate document supplied with the
SAI and includes the funds' audited financial statements, which are incorporated
by reference into this SAI.
Schwab S&P 500 Fund, Schwab Small-Cap Index Fund and Schwab International Index
Fund are series of Schwab Capital Trust (a trust), and Schwab 1000 Fund is a
series of Schwab Investments (a trust).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT STRATEGIES, RISKS AND LIMITATIONS............................................... 2
MANAGEMENT OF THE FUNDS.................................................................... 14
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES........................................ 17
INVESTMENT ADVISORY AND OTHER SERVICES..................................................... 17
BROKERAGE ALLOCATION AND OTHER PRACTICES................................................... 20
DESCRIPTION OF THE TRUSTS.................................................................. 21
PURCHASE, REDEMPTION AND PRICING OF SHARES................................................. 23
TAXATION................................................................................... 24
CALCULATION OF PERFORMANCE DATA............................................................ 26
</TABLE>
2
<PAGE> 32
INVESTMENT STRATEGIES, RISKS AND LIMITATIONS
The following investment strategies, risks and limitations supplement those set
forth in the prospectus and may be changed without shareholder approval unless
otherwise noted. Also, policies and limitations that state a maximum percentage
of assets that may be invested in a security or other asset, or that set forth a
quality standard, shall be measured immediately after and as a result of a
fund's acquisition of such security or asset unless otherwise noted. Any
subsequent change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with the fund's
investment policies and limitations. Not all investment securities or techniques
discussed below are eligible investments for each fund. A fund will invest in
securities or engage in techniques that are intended to help achieve its
investment objective.
INVESTMENT OBJECTIVES
Each fund's investment objective may be changed only by vote of a majority of
its shareholders.
THE SCHWAB S&P 500 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)).
The S&P 500 is representative of the performance of the U.S. stock market. The
index consists of 500 stocks chosen for market size, liquidity and industry
group representation. It is a market value weighted index (stock price times
number of shares outstanding), with each stock's weight in the index
proportionate to its market value. The S&P 500 does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
index are among the largest, it also includes some relatively small companies.
Those companies, however, generally are established companies within their
industry group. Standard & Poor's (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. The fund may
purchase securities of companies with which it is affiliated to the extent these
companies are represented in its index.
The Schwab S&P 500 Fund is not sponsored, endorsed, sold or promoted by S&P. S&P
makes no representation or warranty, express or implied, to the shareholders of
the Schwab S&P 500 Fund or any member of the public regarding the advisability
of investing in securities generally or in the Schwab 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 Schwab S&P 500 Fund is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index, which is
determined, composed and calculated by S&P without regard to the Schwab S&P 500
Fund. S&P has no obligation to take the needs of the Schwab 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 Schwab S&P 500 Fund shares or in the
determination or calculation of the equation by which the Schwab 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 Schwab S&P 500
Fund's shares.
3
<PAGE> 33
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 Schwab S&P 500 Fund, its
shareholders or any other person or entity from the use of the S&P 500(R)
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
(including lost profits), even if notified of the possibility of such damages.
THE SCHWAB 1000 FUND'S investment objective 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
U.S. companies.
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 (NYSE), American Stock Exchange (AMEX) or the NASDAQ/NMS and
(3) its market value must place it among the top 1,000 such companies as
measured by market capitalization (share price times the number of shares
outstanding). The fund may purchase securities of companies with which it is
affiliated to the extent these companies are represented in its index.
As of October 31, 1998, the aggregate market capitalization of the stocks
included in the Schwab 1000 Index was approximately $10 trillion. This
represents approximately 87% of the total market value of all publicly traded
U.S. companies, as represented by the Wilshire 5000 Index.
THE SCHWAB SMALL-CAP INDEX FUND'S investment objective 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 U.S. companies, ranked by market
capitalization (share price times the number of shares outstanding). Pursuant to
a policy that may be changed only by vote of a majority of its shareholders, the
Schwab Small-Cap Index Fund will invest at least 65% of its total assets in
common stocks, or other equity securities including preferred stocks, rights and
warrants.
To be included in the Schwab 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 NYSE,
AMEX or the NASDAQ/NMS and (3) its market value must place it among the
second-largest 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.
THE SCHWAB INTERNATIONAL INDEX FUND'S investment objective 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). Pursuant to a policy that may
be changed only by vote of a
4
<PAGE> 34
majority of its shareholders, the International Index 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.
To be included in the International Index the securities must be issued by an
operating company (i.e., not an investment company) whose principal trading
market is in a country with a major developed securities market outside the
United States. In addition, the market value of the company's outstanding
securities must place the company among the top 350 such companies as measured
by market capitalization (share price times the number of shares outstanding).
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 what
some analysts deem the "blue chips" of international markets. The index also is
designed to provide a broad representation of the international market, by
limiting investments by country to no more than 35% of the total market
capitalization of the index. The International Index was first made available to
the public on July 29, 1993.
The Schwab 1000 Index(R), Small Cap-Index and International Index were
developed and are maintained by Schwab. Schwab receives no compensation from the
funds for maintaining the indexes. Schwab reviews and, as necessary, revises the
lists of companies whose securities are included in the Schwab 1000 Index, the
Small-Cap Index and the International Index at least annually. Companies known
by Schwab to meet or no longer meet the inclusion criteria may be added or
deleted as appropriate. Schwab also will modify each index as necessary to
account for corporate actions (e.g., new issues, repurchases, stock
dividends/splits, tenders, mergers, stock swaps, spin-offs or 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 Small-Cap Index inclusion
criteria if it determines that doing so would cause the Schwab 1000 Index and
the Small-Cap Index to be more representative of the domestic equity market.
Schwab also may change the International Index inclusion criteria if it
determines that doing so would cause the International Index to be more
representative of the large, publicly traded international company equity
market. In the future, the 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.
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.
INVESTMENT STRATEGIES AND RISKS
BORROWING may subject a fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money. To avoid this, each fund will
not purchase securities while borrowings represent more than 5% of its total
assets.
5
<PAGE> 35
CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure. For example, the automobile industry may have a greater exposure to a
single factor, such as an increase in the price of oil, which may adversely
affect the sale of automobiles and, as a result, the value of the industry's
securities. Each fund will not concentrate its investments, unless its
index is so concentrated.
DELAYED-DELIVERY TRANSACTIONS include purchasing and selling securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to buy or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. When purchasing securities on a delayed-delivery basis, a fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Typically, no interest will accrue to the fund until the security
is delivered. The fund will segregate appropriate liquid assets to cover its
delayed-delivery purchase obligations. When a fund sells a security on a
delayed-delivery basis, the fund does not participate in further gains or losses
with respect to that security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, the fund could suffer
losses.
DEPOSITARY RECEIPTS include American or European Depositary Receipts (ADRs or
EDRs), Global Depositary Receipts or Shares (GDRs or GSSs) or other similar
global instruments that are receipts representing ownership of shares of a
foreign-based issuer held in trust by a bank or similar financial institution.
These securities are designed for U.S. and European securities markets as
alternatives to purchasing underlying securities in their corresponding national
markets and currencies. Depositary receipts can be sponsored or unsponsored.
Sponsored depositary receipts are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored depositary
receipts are not contractually obligated to disclose material information in the
United States. Therefore, there may not be a correlation between such
information and the market value of an unsponsored depositary receipt.
DIVERSIFICATION involves investing in a wide range of securities and thereby
spreading and reducing the risks of investment. Each fund is a series of an
open-end investment management company. Each fund is a diversified mutual fund.
EMERGING OR DEVELOPING MARKETS exist in countries that are considered to be in
the initial stages of industrialization. The risks of investing in these markets
are similar to the risks of international investing in general, although the
risks are greater in emerging and developing markets. Countries with emerging or
developing securities markets tend to have economic structures that are less
stable than countries with developed securities markets. This is because their
economies may be based on only a few industries and their securities markets may
trade a small number of securities. Prices on these exchanges tend to be
volatile, and securities in these countries historically have offered greater
potential for gain (as well as loss) than securities of companies located in
developed countries.
EQUITY SECURITIES represent ownership interests in a corporation, and are
commonly called "stocks." Equity securities historically have outperformed most
other securities, although their prices can fluctuate based on changes in a
company's financial condition, market conditions and political, economic or even
company-specific news. When a stock's price declines, its market value is
lowered even though the intrinsic value of the company may not have changed.
6
<PAGE> 36
Sometimes factors, such as economic conditions or political events, affect the
value of stocks of companies of the same or similar industry or group of
industries, and may affect the entire stock market.
Types of equity securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, which are probably the most recognized
type of equity security, usually entitle the owner to voting rights in the
election of the corporation's directors and any other matters submitted to the
corporation's shareholders for voting. Preferred stocks do not ordinarily carry
voting rights or may carry limited voting rights, but normally have preference
over the corporation's assets and earnings. For example, preferred stocks have
preference over common stock in the payment of dividends. Preferred stocks also
may pay specified dividends.
Convertible securities are typically preferred stock or bonds that are
exchangeable for a specific number of another form of security (usually the
issuer's common stock) at a specified price or ratio. A corporation may issue a
convertible security that is subject to redemption after a specified date and
usually under certain circumstances. A holder of a convertible security that is
called for redemption would be required to tender it for redemption to the
issuer, convert it to the underlying common stock or sell it to a third party.
Convertible bonds typically pay a lower interest rate than nonconvertible bonds
of the same quality and maturity, because of the convertible feature. 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 securities provide higher income potential than the
issuer's common stock, but typically are more sensitive to interest rate changes
than the underlying common stock. In the event of liquidation, bondholders have
claims on company assets senior to those of stockholders; preferred stockholders
have claims senior to those of common stockholders.
Convertible securities typically trade at prices above their conversion value,
which is the current market value of the common stock received upon conversion,
because of their higher yield potential than the underlying common stock. The
difference between the conversion value and the price of a convertible security
will vary depending on the value of the underlying common stock and interest
rates. When the underlying value of the common stocks decline, the price of the
issuer's convertible securities will tend not to fall as much because the
convertible security's income potential will act as a price support. While the
value of a convertible security also tends to rise when the underlying common
stock value rises, it will not rise as much because their conversion value is
more narrow. The value of convertible securities also is affected by changes in
interest rates. For example, when interest rates fall, the value of convertible
securities may rise because of their fixed-income component.
Warrants are a type of security usually issued with bonds and preferred stock
that entitles the holder to a proportionate amount of common stock at specified
price for a specific period of time. The prices of warrants do not necessarily
move parallel to the prices of the underlying common stock. 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
7
<PAGE> 37
become worthless and a fund will lose the purchase price it paid for the warrant
and the right to purchase the underlying security.
FOREIGN SECURITIES involve additional risks, including foreign currency exchange
rate risks, because they are issued by foreign entities, including foreign
governments, banks, corporations or because they are traded principally
overseas. Foreign entities are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. corporations. In addition, there may be less publicly
available information about foreign entities. Foreign economic, political and
legal developments, as well as fluctuating foreign currency exchange rates and
withholding taxes, could have more dramatic effects on the value of foreign
securities. For example, 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.
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 funds endeavor to achieve the most favorable overall
results on 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 a fund's portfolio containing foreign
investments, and its 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 a fund is uninvested and no return is earned
thereon. The inability to make intended security purchases due to settlement
problems could cause a fund to miss attractive investment opportunities. Losses
to a fund arising out of the inability to fulfill a contract to sell such
securities also could result in potential liability for the fund.
Investments in the securities of foreign issuers are usually made and held in
foreign currencies. In addition, the International Index 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 Index Fund.
In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the upcoming conversion of the 11 of the
15 Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary
8
<PAGE> 38
Union (EMU). Exchange rates between the U.S. dollar and the local currencies
involved in the conversion may become more volatile as the conversion date of
January 1, 1999 approaches and thereafter. There also may be increased
volatility in the exchange rates for currencies of other European countries.
After January 3, 1999, the euro will be the official currency of the EMU, the
rate of exchange will have been set between the euro and the currency of each
converting country and the European Central Bank, all national central banks and
all stock exchanges and depositories will price, trade and settle in euro even
if the securities traded are not denominated in euro. Each securities
transaction that requires converting to euro may involve rounding that could
affect the value of the security converted. In addition, issuers of securities
that require converting may experience increased costs as a result of the
conversion, which may affect the value of their securities. It is possible that
uncertainties related to the conversion will affect investor expectations and
cause investments to shift away from European countries, thereby making the
European market less liquid. All of these factors could affect the value of the
International Index Fund's investments and/or increase its expenses. While the
investment adviser is taking steps to minimize the impact of the conversion on
the fund, it is not possible to know precisely what impact the conversion will
have on the fund, if any, nor is it possible to eliminate the risks completely.
Securities that are acquired by a 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 illiquid provided that: (i) the
fund acquires and holds the securities with the intention of reselling the
securities in the foreign trading market, (ii) the fund reasonably believes it
can readily 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.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS involve the purchase or sale of
foreign currency at an established exchange rate, but with payment and delivery
at a specified future time. Many foreign securities markets do not settle trades
within a time frame that would be considered customary in the U.S. stock market.
Therefore, the International Index Fund normally engages in forward foreign
currency exchange contracts in order to secure exchange rates for portfolio
securities purchased or sold, but waiting settlement. These transactions do not
seek to eliminate any fluctuations in the underlying prices of the securities
involved. Instead, the transactions simply establish a rate of exchange that can
be expected when the fund settles its securities transactions in the future.
FUTURES CONTRACTS are securities that represent an agreement between two parties
that obligates one party to buy and the other party to sell specific securities
at an agreed-upon price on a stipulated future date. In the case of futures
contracts relating to an index or otherwise not calling for physical delivery at
the close of the transaction, the parties usually agree to deliver the final
cash settlement price of the contract. The funds may purchase and sell futures
contracts based on securities, securities indices and foreign currencies or any
other futures contracts traded on U.S. exchanges or boards of trade that the
Commodities Futures Trading Commission (CFTC) licenses and regulates on foreign
exchanges.
9
<PAGE> 39
Each fund must maintain a small portion of its assets in cash to process
shareholder transactions in and out of the fund and to pay its expenses. In
order to reduce the effect this otherwise uninvested cash would have on its
ability to track the performance of its index as closely as possible, a fund may
purchase futures contracts representative of its index or the securities in its
index. Such transactions allow the fund's cash balance to produce a return
similar to that of the underlying security or index on which the futures
contract is based. Also, the International Index Fund may purchase or sell
futures contracts on a specified foreign currency to "fix" the price in U.S.
dollars of the foreign security it has acquired or sold or expects to acquire or
sell. When buying or selling futures contracts, a fund must place a deposit with
its broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and must be in the form of liquid debt instruments, including
cash, cash-equivalents and U.S. government securities. Subsequent payments to
and from the broker, known as "variation margin" are made at least daily as the
value of the futures contracts fluctuate. This process is known as
"marking-to-market". The margin amount will be returned to the fund upon
termination of the futures contracts assuming all contractual obligations are
satisfied. Each fund's aggregate initial and variation margin payments required
to establish its futures positions may not exceed 5 % of its net assets.
While the funds intend to purchase and sell futures contracts in order to
simulate full investment in the securities comprising their respective indices,
there are risks associated with these transactions. Adverse market movements
could cause a fund to experience substantial losses when buying and selling
futures contracts. Of course, barring significant market distortions, similar
results would have been expected if the fund had instead transacted in the
underlying securities directly. There also is the risk of losing any margin
payments held by a broker in the event of its bankruptcy. Additionally, the
funds incur transaction costs (i.e. brokerage fees) when engaging in futures
trading.
Futures contracts normally require actual delivery or acquisition of an
underlying security or cash value of an index on the expiration date of the
contract. In most cases, however, the contractual obligation is fulfilled before
the date of the contract by buying or selling, as the case may be, identical
futures contracts. Such offsetting transactions terminate the original contracts
and cancel the obligation to take or make delivery of the underlying securities
or cash. There may not always be a liquid secondary market at the time a fund
seeks to close out a futures position. If a fund is unable to close out its
position and prices move adversely, the fund would have to continue to make
daily cash payments to maintain its margin requirements. If a fund had
insufficient cash to meet these requirements it may have to sell portfolio
securities at a disadvantageous time or incur extra costs by borrowing the cash.
Also, the fund may be required to make or take delivery and incur extra
transaction costs buying or selling the underlying securities. The funds seek to
reduce the risks associated with futures transactions by buying and selling
futures contracts that are traded on national exchanges or for which there
appears to be a liquid secondary market.
ILLIQUID SECURITIES generally are any securities that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which the fund has valued the instruments. The liquidity of a fund's investments
is monitored under the supervision and direction of the board of trustees.
Investments currently not considered liquid include repurchase agreements not
maturing within seven days and certain restricted securities.
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<PAGE> 40
INDEXING STRATEGIES involve tracking the investments and, therefore, performance
of an index. Each fund normally will invest at least 80% of its total assets in
the securities of its index. Moreover, each fund will invest so that its
portfolio performs similarly to that of its index. Each fund tries to generally
match its holdings in a particular security to its weight in the index. Each
fund will seek a correlation between its performance and that of its index of
0.90 or better. A perfect correlation of 1.0 is unlikely as the funds incur
operating and trading expenses unlike their indices. A fund may rebalance its
holdings in order to track its index more closely. In the event its intended
correlation is not achieved, the board of trustees will consider alternative
arrangements for a fund.
LENDING of portfolio securities is a common practice in the securities industry.
A fund will engage in security lending arrangements with the primary objective
of increasing its income. For example, a fund may receive cash collateral and
it may invest it in short-term, interest-bearing obligations, but will do so
only to the extent that it will not lose the tax treatment available to mutual
funds. Lending portfolio securities involve risks that the borrower may fail to
return the securities or provide additional collateral. Also, voting rights
with respect to the loaned securities may pass with the lending of the
securities and efforts to call such securities promptly may be unsuccessful,
especially for foreign securities. A fund may loan portfolio securities to
qualified broker-dealers or other institutional investors provided: (1) 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; (2) the fund may at any time call the loan and
obtain the return of the securities loaned; (3) the fund will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed one-third of the
total assets of the fund.
REPURCHASE AGREEMENTS. 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.
Repurchase agreements will be collateralized by First Tier Securities. In
addition, repurchase agreements collateralized entirely by U.S. government
securities may be deemed to be collateralized fully pursuant to Rule 2a-7.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. Restricted securities may be considered to be liquid if an
institutional or other market exists for these
11
<PAGE> 41
securities. In making this determination, a fund, under the direction and
supervision of the board of trustees, will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to purchase or sell the security and the number of
potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer). To the extent a fund invests in restricted securities
that are deemed liquid, the general level of illiquidity in the fund's
portfolios may be increased if qualified institutional buyers become
uninterested in purchasing these securities.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by the funds,
including those managed by its investment adviser. Because other investment
companies employ investment advisers and other service providers, investments by
a fund may cause shareholders to pay duplicative fees.
SMALL-CAP STOCKS are common stocks issued by U.S. operating companies with
market capitalizations that place them within the second-largest 1,000 such
companies, as measured by the Small-Cap Index. Historically, small-cap stocks
have been riskier than stocks issued by large- or mid-cap companies for a
variety of reasons. Small-cap companies may have less certain growth prospects
and are typically less diversified and less able to withstand changing economic
conditions than larger capitalized companies. Small-cap companies also may have
more limited product lines, markets or financial resources than companies with
larger capitalizations, and may be more dependent on a relatively small
management group. In addition, small-cap companies may not be well known to the
investing public, may not have institutional ownership and may have only
cyclical, static or moderate growth prospects. Most small-cap company stocks pay
low or no dividends.
These factors and others may cause sharp changes in the value of a small-cap
company's stock, and even cause some small-cap companies to fail. Additionally,
small-cap stocks may not be as broadly traded as large- or mid cap stocks, and
the Small-Cap Index Fund's position in securities of such companies may be
substantial in relation to the market for such securities. Accordingly, it may
be difficult for the Small-Cap Index Fund to dispose of securities of these
small-cap companies at prevailing market prices in order to meet redemptions.
This lower degree of liquidity can adversely affect the value of these
securities. For these reasons and others, the value of a fund's investments in
small-cap stocks is expected to be more volatile than other types of
investments, including other types of stock investments. While small-cap stocks
are generally considered to offer greater growth opportunities for investors,
they involve greater risks and the share price of a fund that invests in
small-cap stocks (like the Schwab Small-Cap Index Fund) may change sharply
during the short term and long term.
STOCK SUBSTITUTION STRATEGY is a strategy, whereby each fund may, in
extraordinary circumstances, substitute a similar stock for a security in its
index.
U.S. GOVERNMENT SECURITIES are 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, include bills, notes and bonds, and 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. There can be no assurance that the U.S. government
will provide financial support to U.S.
12
<PAGE> 42
government securities of its agencies and instrumentalities if it is not
obligated to do so under law. Of course U.S. government securities, including
U.S. Treasury securities, are among the safest securities, however, not unlike
other fixed-income securities, they are still sensitive to interest rate
changes, which will cause their yields to fluctuate.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of each fund's shareholders.
EACH FUND MAY NOT:
1) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the trust or the investment adviser
individually own beneficially more than half of 1% of the securities of
such issuer and together beneficially own more than 5% of the
securities of such issuer.
2) Invest for the purpose of exercising control or management of another
issuer.
3) 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.
4) 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.
5) 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.
THE S&P 500 FUND, SMALL-CAP INDEX FUND AND INTERNATIONAL INDEX 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
days.
4) 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,
13
<PAGE> 43
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.
5) Purchase securities of other investment companies, except as permitted
by the 1940 Act, including any exemptive relief granted by the SEC.
6) 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.
THE SCHWAB 1000 FUND MAY NOT:
1) As to 75% of its assets, purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its
total assets would be invested in the securities of such issuer.
2) Purchase securities (other then 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 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 limitation (3), the Schwab 1000 Fund(R) may not invest so that
more than 15% of its net assets in illiquid securities.
The following additional limitations have been adopted by each fund. These
limitations may be more restrictive than the limitations listed above, and may
be changed by the board of trustees without shareholder approval or notice.
EACH FUND MAY NOT:
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<PAGE> 44
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 NYSE or the AMEX, 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.
IN ADDITION, THE SCHWAB 1000 FUND MAY NOT:
a) 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 board of trustees based upon the trading markets for the
securities.
MANAGEMENT OF THE FUNDS
The officers and trustees, their principal occupations during the past five
years and their affiliations, if any, with The Charles Schwab Corporation,
Charles Schwab & Co., Inc. (Schwab) and Charles Schwab Investment Management,
Inc. (CSIM or the investment adviser), are as follows:
15
<PAGE> 45
<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS &
OF BIRTH THE TRUSTS AFFILIATIONS
- -------------------------------------- ------------------------ --------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Co-Chief Executive Officer and
July 29, 1937 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).
STEVEN L. SCHEID*+ President and Trustee Executive Vice President and Chief Financial
June 28, 1953 Officer, The Charles Schwab Corporation;
Enterprise President - Financial Products and
Services and Chief Financial Officer, Charles Schwab
& Co., Inc.; Chief Executive Officer, Chief Financial
Officer and Director, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Mr. Scheid was
Executive Vice President of Finance for First
Interstate Bancorp and Principal Financial Officer
from 1995 to 1996. Prior to 1994, Mr. Scheid was
Chief Financial Officer, First Interstate Bank of
Texas.
DONALD F. DORWARD Trustee Executive Vice President and Managing Director,
September 23, 1931 Grey Advertising. From 1990 to 1996, Mr.
Dorward was President and Chief Executive Officer,
Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments) and Chairman and Chief Executive
Officer of North American Trust (real estate
investment trust).
</TABLE>
- -------------
* This trustee is an "interested person" of the trusts.
+ Effective August 18, 1998, Mr. Scheid was elected as President and
trustee.
16
<PAGE> 46
<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS &
OF BIRTH THE TRUSTS AFFILIATIONS
- -------------------------------------- ------------------------ --------------------------------------------------
<S> <C> <C>
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air
transportation, real estate investment and
management and investments).
TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller,
March 7, 1951 Financial Officer 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.
WILLIAM J. KLIPP* Executive Vice Executive Vice President, SchwabFunds(R), Charles
December 9, 1955 President, Chief Schwab & Co., Inc.; President and Chief
Operating Officer and Operating Officer, Charles Schwab Investment
Trustee Management, Inc.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>
Each of the above-referenced officers and/or trustees also serves in the same
capacity as described for the trusts, for The Charles Schwab Family of Funds and
Schwab Annuity Portfolios. The address of each individual listed above is 101
Montgomery Street, San Francisco, California 94104.
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 the fund's shareholders. The following table provides information as of
October 31, 1998 concerning compensation of the trustees.
- ------------
* This trustee is an "interested person" of the trusts.
17
<PAGE> 47
<TABLE>
<CAPTION>
Name of Trustee ($)
Aggregate Compensation
from the Pension or
---------------------------------------------------- Retirement ($)
Schwab Small- Benefits Accrued Total
S&P 500 1000 Cap Index International as Part of Fund Compensation from
Fund Fund(R) Fund Index Fund Expenses Fund Complex 1
- ------------------- -------- --------- ----------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 0 N/A 0
Timothy F. 0 0 0 0 N/A 0
McCarthy 2
Tom D. Seip 3 0 0 0 0 N/A 0
Steven L. Scheid 4 0 0 0 0 N/A 0
William J. Klipp 0 0 0 0 N/A 0
Donald F. Dorward 6,142 10,612 2,203 1,904 N/A 99,050
Robert G. Holmes 6,142 10,612 2,203 1,904 N/A 99,050
Donald R. Stephens 6,142 10,612 2,203 1,904 N/A 99,050
Michael W. Wilsey 6,142 10,612 2,203 1,904 N/A 99,050
</TABLE>
1 Unless otherwise stated, information is for the fund complex, which included
38 funds as of October 31, 1998.
2 Mr. McCarthy served as President and trustee until November 24, 1997.
3 Mr. Seip served as President and trustee until May 15, 1998.
4 Mr. Scheid became President and trustee on August 18, 1998.
DEFERRED COMPENSATION PLAN
Trustees who are not "interested persons" of a trust ("independent trustees")
may enter into a fee deferral plan. Under this plan, deferred fees will be
credited to an account established by the trust as of the date that such fees
would have been paid to the trustee. The value of this account will equal the
value that the account would be if the fees credited to the account had been
invested in the shares of SchwabFunds selected by the trustee. Currently, none
of the independent trustees have elected to participate in this plan.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
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<PAGE> 48
As of December 8, 1998, the officers and trustees of the trusts, as a group
owned of record or beneficially less than 1% of the outstanding voting
securities of the classes and series of each trust.
As of December 8, 1998, the following represents persons or entities that
owned, directly or beneficially owned, more than 5% of the shares of any class
of any of the Equity Index Funds:
The Schwab MarketTrack All Equity Portfolio, Schwab MarketTrack Balanced
Portfolio and Schwab MarketTrack Growth Portfolio, 120 Kearny Street, San
Francisco, California 94104 owned 5.95%, 8.08%, and 11.20%, respectively, of the
Small-Cap Equity Fund-Investor Shares.
The Schwab MarketTrack All Equity Portfolio, Schwab MarketTrack Balanced
Portfolio, and Schwab MarketTrack Growth Portfolio, 120 Kearny Street, San
Francisco, California 94104 owned 8.42%, 9.42%, and 13.13%, respectively, of the
International Index Fund-Investor Shares.
The Charles Schwab Trust Co., 1 Montgomery Street, San Francisco, California
94104 owned 10.30% of the International Index Fund-Select Shares(TM), 7.39% of
the Schwab 1000 Fund-Select Shares, 12.45% of the Small-Cap Index Fund-Select
Shares, 12.14% of the S&P 500 Fund-Investor Shares, 10.61% of the S&P 500
Fund-Select Shares and 12.05% of the S&P 500 Fund e.shares.(R)
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as the funds' investment adviser and
administrator pursuant to Investment Advisory and Administration Agreements
(Advisory Agreements) between it and each trust. Charles Schwab & Co., Inc.
(Schwab) is an affiliate of the investment adviser and is the trusts'
distributor, shareholder services agent and transfer agent. 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 adviser and Schwab.
Year 2000 presents uncertainties and possible risks to the smooth operations of
the funds and the provision of services to shareholders. Many computer programs
use only two digits to identify a specific year and therefore may not accurately
recognize the upcoming change in the next century. If not corrected, many
computer applications could fail or create erroneous results by or at year 2000.
Due to the funds' and their service providers' dependence on computer technology
to operate, the nature and impact of year 2000 processing failures on the funds
could be material. The funds'
19
<PAGE> 49
investment adviser is taking steps to minimize the risks of year 2000 for the
funds, including seeking assurances from the funds' service providers that they
are analyzing their systems, testing them for potential problems and remediating
them to the extent possible. There can be no assurance that these steps will be
sufficient to avoid any adverse impact on the funds, however, minimizing year
2000 risk for the funds is a priority of the investment adviser.
For its advisory and administrative services to the S&P 500 Fund, the investment
adviser is entitled to receive an annual fee, accrued daily and paid 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.
For the fiscal years ended October 31, 1998 and 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 $2,525,000, $429,000 and $128,000,
respectively (fees were reduced by $6,509,000, $2,410,000 and $723,000,
respectively).
The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 29, 2000, the total operating expenses (excluding interest, taxes
and extraordinary expenses) of the Investor Shares, the e.Shares(R) and the
Select Shares(TM) will not exceed 0.35%, 0.28% and 0.19% respectively, of the
average daily net assets of each class.
For its advisory and administrative services to the Schwab 1000 Fund the
investment adviser is entitled to receive an annual fee, accrued daily and
paid 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.
For the fiscal year ended October 31, 1998, the fiscal period ended October 31,
1997, fiscal years ended August 31, 1997 and 1996, the Schwab 1000 Fund paid
investment advisory fees of $7,610,000, $967,000, $4,025,000 and $2,485,000,
(fees were reduced by $1,552,000, $220,000, $1,179,000, and $648,000,
respectively).
The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 29, 2000, total operating expenses (excluding interest, taxes and
extraordinary expenses) of the Investor Shares and Select Shares for the Schwab
1000 Fund(R) will not exceed 0.46% and 0.35%, respectively, of the average daily
net assets of each class.
For its advisory and administrative services to the Small-Cap Index Fund, the
investment adviser is entitled to receive an annual fee, accrued daily and
paid 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.
For the fiscal years ended October 31, 1998, 1997 and 1996, the Small-Cap
Index Fund paid investment advisory fees of $921,000, $540,000 and $520,000,
respectively (fees were reduced by $1,911,000, $1,000,000 and $347,000,
respectively).
The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 29, 2000, total operating expenses (excluding interest, taxes and
extraordinary expenses)
20
<PAGE> 50
of the Investor Shares and Select Shares for the Small-Cap Index Fund will not
exceed 0.49% and 0.38%, respectively, of the average daily net assets of each
class.
For its advisory and administrative services to the International Index Fund,
the investment adviser is entitled to receive an annual fee, accrued daily and
paid 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.
For the fiscal years ended October 31, 1998, 1997 and 1996, the International
Index Fund paid investment advisory fees of $940,000, $643,000 and $886,000,
respectively (fees were reduced by $2,127,000, $1,503,000 and $675,000,
respectively).
The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 29, 2000, total operating expenses (excluding interest, taxes and
extraordinary expenses) of the Investor Shares and Select Shares for the
International Index Fund will not exceed 0.58% and 0.47%, respectively, of the
average daily net assets of each class.
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.
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, payable monthly from each fund, 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 share class
of each fund, Schwab is entitled to receive an annual fee, payable monthly from
each share class of each fund, in the amount of 0.20% of Investor Shares' and
0.05% of Select Shares'(TM) and e.Shares' average daily net assets.
CUSTODIAN AND FUND ACCOUNTANT
Chase Manhattan Bank New York (formerly called Morgan Stanley Trust
Company), 1 Pierrepont Plaza, Brooklyn, New York 11201, serves as custodian
for the International
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<PAGE> 51
Index Fund and the Small-Cap Index Fund. PNC Bank, 400 Bellevue Parkway,
Wilmington, Delaware 19809 serves as custodian to the Schwab 1000 Fund and S&P
500 Fund. SEI Fund Resources, One Freedom Valley Dr. Oaks, Pennsylvania 19456,
serves as fund accountant for the funds.
The custodians are responsible for the daily safekeeping of securities and cash
held or sold by the funds. The accountants maintain all books and records
related to each fund's transactions.
INDEPENDENT ACCOUNTANT
The funds' independent accountant, PricewaterhouseCoopers LLP, audits and
reports 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 333 Market Street, San
Francisco, California 94105. Each fund's audited financial statements for the
fiscal year ended October 31, 1998, are included in the fund's annual report,
which is a separate report supplied with the SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
PORTFOLIO TURNOVER
For reporting purposes, each fund's turnover rate is calculated by dividing the
value of purchases or sales of portfolio securities for the fiscal year,
whichever is less, by the monthly average value of portfolio securities the fund
owned during the fiscal year. When making the calculation, all securities whose
maturities at the time of acquisition were one year or less ("short-term
securities") are excluded.
A 100% portfolio turnover rate would occur, for example, if all portfolio
securities (aside from short-term securities) were sold and either repurchased
or replaced once during the fiscal year. The funds do not expect that their
respective portfolio turnover rates will exceed 100% in any given year, a
turnover rate lower than that of most non-index mutual funds.
The funds' portfolio turnover rates are in the financial highlight tables
in the prospectus. The increase in the Small-Cap Index Fund's portfolio turnover
rate for the fiscal year ended October 31, 1998 was the result of a significant
rebalancing of the Schwab Small-Cap Index.(R) The funds do not anticipate
significant variations in their portfolio turnover rates during fiscal year
ended October 31, 1999.
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the funds, the investment adviser
seeks to obtain best price and execution. Subject to the supervision of the
board of trustees, the investment adviser 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.
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<PAGE> 52
In assessing these criteria, the investment adviser will, among other things,
monitor the performance of brokers effecting transactions for the fund to
determine the effect, if any, that 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.
When the execution capability and price offered by two or more broker-dealers
are comparable, the investment adviser 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 adviser when
providing advisory services to its clients.
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 adviser follows procedures, adopted by
the board of trustees, that are designed to ensure that affiliated brokerage
commissions (if relevant) are reasonable and fair in comparison to unaffiliated
brokerage commissions for comparable transactions. The Board reviews the
procedures annually and approves and reviews transactions involving affiliated
brokers quarterly.
In an attempt to obtain best execution for the funds, the investment adviser
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.
BROKERAGE COMMISSIONS
For the fiscal years ended October 31, 1998 and 1997, and for the fiscal year
period of May 1, 1996 (commencement of operations), through October 31, 1995,
the S&P 500 Fund paid brokerage commissions of $898,196, $583,314 and $119,350
respectively.
For the fiscal year ended October 31, 1998, the fiscal period of September 1,
1997 through October 31, 1997 and the fiscal years ended August 31 1997 and
1996, the Schwab 1000 Fund(R) paid brokerage commissions of $641,226, $92,582,
$424,652 and $408,000, respectively.
For the fiscal years ended October 31, 1998, 1997 and 1996, the Small-Cap Index
Fund paid brokerage commissions of $710,856, $281,321 and $181,679,
respectively.
For the fiscal years ended October 31, 1998, 1997 and 1996, the International
Index Fund paid brokerage commissions of $208,087, $94,860 and $86,632,
respectively.
Of brokerage commissions paid by the S&P 500 and Schwab 1000 Funds in 1998,
$11,550 (1.34% of the total) and $14,360 (2.24% of the total) respectively was
paid to Schwab, an affiliated person of the Fund
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<PAGE> 53
and 2.14% and 3.17%, respectively of transactions involving the payment of a
brokerage commission in 1996 were effected through Schwab.
DESCRIPTION OF THE TRUSTS
Each fund, except the Schwab 1000 Fund, is a series of Schwab Capital
Trust, an open-end investment management company organized as a Massachusetts
business trust on May 7, 1993. The Schwab 1000 Fund is a series of Schwab
Investments, an open-end investment management company organized as a
Massachusetts business trust on October 26, 1990. Each fund is composed of
multiple classes of shares: Select Shares, (TM) Investor Shares and, for the S&P
500 Fund, e. Shares.(R)
Each Declaration of Trust provides that shares may be automatically redeemed if
held by a shareholder in an amount less than the minimum required by each fund
or share class. Each fund's initial and subsequent minimum investment and
balance requirements are set forth in the prospectus. These minimums may be
waived for certain investors, including trustees, officers and employees of
Schwab, or changed without prior notice.
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 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, or of the Declaration of Trust or of the
bylaws permits or requires that (1) holders of any series shall vote as a
series, then a majority of the aggregate number of shares of that series
entitled to vote shall be necessary to constitute a quorum for the transaction
of business by that series, or (2) 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. Each
Declaration of 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. Each 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, each 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,
each 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
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<PAGE> 54
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.
As more fully described in the Declaration of Trust, the trustees may each year,
or more frequently, distribute to the shareholders of each series accrued income
less accrued expenses and any net realized capital gains less accrued expenses.
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. Distributions will be paid in cash or shares or a combination
thereof as determined by the trustees. Distributions paid in shares will be paid
at the net asset value as determined in accordance with the bylaws.
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASING AND REDEEMING SHARES OF THE FUNDS
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.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
Twice a year, financial reports will be mailed to shareholders describing each
Fund's performance and investment holdings. In order to reduce these mailing
costs, each household will receive one consolidated mailing. If you do not want
to receive consolidated mailings, you may write to your Fund and request that
your mailings not be consolidated.
The funds reserve the right to waive the early redemption fee for certain
tax-advantaged retirement plans.
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 these limits may be paid, in whole or in part,
in investment securities or in cash, as the board of trustees may deem
advisable. Payment will be made wholly in cash unless the board of trustees
believes that economic or market conditions exist that would make such payment a
detriment to the best interests of a fund. If redemption proceeds are paid in
investment securities, such securities will be valued as set forth in "Pricing
of Shares". A redeeming shareholder would normally incur brokerage expenses if
he or she were to convert the securities to cash.
Each fund is designed for long-term investing. Because short-term trading
activities can disrupt the smooth management of a fund and increase its
expenses, each fund reserves the right to refuse any purchase or exchange order
that appears to be associated with short-term trading activities or "market
timing." Because market timing decisions to buy and sell securities typically
are based on an individual investor's market outlook, including such factors as
the perceived strength of the economy or the anticipated direction of interest
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<PAGE> 55
rates, it is difficult for a fund to determine in advance what purchase or
exchange orders may be deemed to be associated with market timing or short-term
trading activities.
PRICING OF SHARES
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. Securities for which market quotations or closing values are not
readily available (including restricted securities that are subject to
limitations on their sale and illiquid securities) are valued at fair value as
determined in good faith pursuant to guidelines and procedures adopted by the
board of trustees. These procedures require that securities be valued on the
basis of prices provided by approved pricing services, except when a price
appears manifestly incorrect or events occurring between the time a price is
furnished by a service and the time a fund calculates its share price materially
affect the furnished price. The board of trustees regularly reviews fair values
assigned to portfolio securities under these circumstances and also when no
prices from approved pricing services are available.
TAXATION
FEDERAL TAX INFORMATION FOR THE FUNDS
It is each fund's policy to qualify for taxation as a "regulated investment
company"(RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, each fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If a fund does not qualify as a RIC under the Code, it will
be subject to federal income tax on its net investment income and any net
realized capital gains.
The Code imposes a non-deductible excise tax on RICs 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 net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. 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.
The International Index Fund may invest in a non-U.S. corporation, which could
be treated as a
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<PAGE> 56
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 Index Fund does invest in PFICs, it may elect to
treat the PFIC as a "qualified fund" or mark-to-market its investments in PFICs
annually. In either case, the International Index Fund may be required to
distribute amounts in excess of realized income and gains. To the extent that
the International Index 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 Index 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 may be
restricted by the Code and 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.
FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS
The discussion of federal income taxation presented below supplements the
discussion in the funds' prospectus and only summarizes some of the important
federal tax considerations generally affecting shareholders of the funds.
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.
Any dividends declared by a fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. Long-term
capital gains distributions are taxable as long-term capital gains, regardless
of how long you have held your shares. However, if you receive a long-term
capital gains distribution with respect to fund 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 gains 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. 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.
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." Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
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<PAGE> 57
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 generally are not subject to U.S.
taxation, unless the recipient is an individual who meets the Code's definition
of "resident alien." Different tax consequences may result if the foreign
shareholder is engaged in 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.
Income that the International Index 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
taxes. It is expected that the International Index 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 credit the tax against U.S. income taxes, subject to certain limitations
described in the Code or deduct their pro rata share of foreign taxes, but not
for alternative minimum tax purposes (but not both). A shareholder who does not
itemize deductions may not claim a deduction for foreign taxes.
CALCULATION OF PERFORMANCE DATA
Average annual total return is a standardized measure of performance calculated
using methods prescribed by SEC rules. It is calculated by determining the
ending value of a hypothetical initial investment of $1,000 made at the
beginning a specified period. The ending value is then divided by the initial
investment, which is annualized and expressed as a percentage. It is reported
for periods of one, five and 10 years or since commencement of operations for
periods not falling on those intervals. In computing average annual total
return, a fund assumes reinvestment of all distributions at net asset value on
applicable reinvestment dates.
<TABLE>
<CAPTION>
One Year ended Five Years ended From Commencement of
Fund (Commencement of Operations) October 31, 1998 October 31, 1998 Operations to October 31, 1998
- --------------------------------- ---------------- ---------------- ------------------------------
<S> <C> <C> <C>
S&P 500 Fund -
Investor Shares (5/1/96) 21.39% N/A 24.58%
e.Shares (5/1/96) 21.50% N/A 24.75%
Select Shares (5/19/97) 21.63% N/A 22.53%
Schwab 1000 Fund -
Investor Shares (5/2/91) 19.63% 19.85% 17.28%
Select Shares (5/19/97) 19.79% N/A 22.11%
Small-Cap Index Fund -
Investor Shares (12/3/93) -12.88% N/A 9.62%
Select Shares (5/19/97) -12.81% N/A 4.59%
International Index Fund -
Investor Shares (9/9/93) 8.02% 8.10% 8.17%
Select Shares (5/19/97) 8.16% N/A 4.10%
</TABLE>
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An after-tax total return for each fund may be calculated by taking that fund's
total return and subtracting applicable federal taxes from the portions of each
fund's total return attributable to capital gain and ordinary income
distributions. This after-tax total return may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.
Each fund also may report the percentage of its total return that 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 also may advertise its cumulative total return. 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, 1998.
<TABLE>
<CAPTION>
Name of Fund (Commencement of Operations) Cumulative Total Return
- ----------------------------------------- -----------------------
<S> <C>
S&P 500 Fund -
Investor Shares (5/1/96) 73.40%
e.Shares (5/1/96) 73.97%
Select Shares (5/19/97) 34.31%
Schwab 1000 Fund -
Investor Shares (5/2/91) 234.87%
Select Shares (5/19/97) 33.65%
Small-Cap Fund -
Investor Shares (12/3/93) 57.05%
Select Shares (5/19/97) 6.73%
International Index Fund -
Investor Shares (9/9/93) 49.81%
Select Shares (5/19/97) 6.01%
</TABLE>
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, U.S. government obligations, bank certificates of deposit, the consumer
price index and other investments for which reliable data is available. An
index's performance data assumes the reinvestment of dividends but does not
reflect deductions for administrative, management and trading 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.
TAX EFFICIENCY
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<PAGE> 59
Taxes can erode the returns a shareholder earns from a mutual fund investment
and are an important, and often overlooked, factor when evaluating a mutual
fund's performance. For many mutual funds, shareholder tax liability is of
minimal concern in the investment management process. In contrast, the
investment adviser of the funds employs specific investment policies designed
to minimize capital gain distributions while achieving each fund's investment
objective. These policies include selling the highest tax cost securities first,
not re-balancing the portfolio to reflect changes in their indexes, trading only
round-lots or large blocks of securities and focusing on individual tax lots in
deciding when and how to manage the realization of capital gains. In addition,
the investment adviser monitors, analyzes and evaluates each fund's portfolio
as well as market conditions to carefully manage necessary trading activity and
to determine when there are opportunities to realize capital losses, which
offset realized capital gains. These policies will be utilized to the extent
they do not have a material effect on a fund's ability to track or match the
performance of its index. They may affect the composition of a fund's index
holdings as compared to the index. By deferring or avoiding 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. There
can be no assurance that the investment adviser will succeed in avoiding
realized net capital gains.
Each fund may refer to recent studies that analyze certain techniques and
strategies the funds may use or promote the advantages of investing in a series
that is part of a large, diverse mutual fund complex. From time to time, the
funds may include discussions in advertisements of the income tax savings
shareholders may experience as a result of their policy of limiting portfolio
trading in order to reduce capital gains. This information may be supplemented
by presentations of statistical data illustrating the extent of such income tax
savings and the impact of such savings on the yield and/or total return of the
funds. In addition, such advertisements may include comparisons of the funds'
performance against that of investment products that do not employ the funds'
policy of seeking to limit capital gains.
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<PAGE> 60
PART C
OTHER INFORMATION
SCHWAB INVESTMENTS
Item 23. Exhibits.
(a) Articles of Agreement and Declaration of Trust, dated
Incorporation October 29, 1990, was electronically filed
and is incorporated by reference to Exhibit
1 of Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form
N-1A, filed on December 30, 1997.
(b) By-Laws Amended and Restated By-Laws were
electronically filed and are incorporated by
reference to Exhibit 2 of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form N-1A, filed
on December 30, 1997.
(c) Instruments Defining (i) Article III, Section 5, Article V, Article
Rights of Security VI, Article VIII, Section 4 and Article IX,
Holders Sections 1, 5 and 7 of the Agreement and
Declaration of Trust were filed and are
incorporated by reference to Exhibit 1 of
Post-Effective Amendment No. 22 to
Registrant's Registration Statement on
Form N-1A, filed on December 30, 1997.
(ii) Article 9, Article 10, Section 6, and
Article 11 of the Amended and Restated
By-Laws were filed and are incorporated by
reference to Exhibit 2 of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form N-1A filed on
December 30, 1997.
(d) Investment Advisory (i) Investment Advisory and Administration
Contracts Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the
"Investment Manager") was electronically
filed and is incorporated by reference to
Exhibit 5(a) of Post-Effective Amendment No.
22 to Registrant's Registration Statement on
Form N-1A, filed on December 30, 1997.
(ii) Amended Schedules to Investment Advisory and
Administration Agreement referred to at
Exhibit 5(a) above were electronically filed
and are incorporated by reference to Exhibit
5(b) of Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form
N-1A, filed on December 30, 1997.
C-1
<PAGE> 61
(e) Underwriting Distribution Agreement between Registrant
Contracts and Charles Schwab & Co., Inc. ("Schwab")
was electronically filed and is incorporated
by reference to Exhibit 6 of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form N-1A, filed
on December 30, 1997.
(f) Bonus or Profit Inapplicable.
Sharing Contracts
(g) Custodian Agreements (i) Custodian Services Agreement between
Registrant and PNC Bank, National
Association (formerly Provident National
Bank) was electronically filed and is
incorporated by reference to Exhibit 8(a) of
Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form
N-1A, filed on December 30, 1997.
(ii) Amendment No. 1 to Custodian Services
Agreement referred to at Exhibit 8(a) above
was filed and is incorporated by reference
to Exhibit 8(b) of Post-Effective Amendment
No. 13 to Registrant's Registration
Statement on Form N-1A, filed on December
29, 1996.
(iii) Amendment No. 2 to Custodian Services
Agreement referred to at Exhibit 8(a) above
was filed and is incorporated by reference
to Exhibit 8(c) of Post-Effective Amendment
No. 14 to Registrant's Registration
Statement on Form N-1A, filed on
December 30, 1996.
(iv) Amended Schedule to the Custodian Services
Agreement referred to at Exhibit 8(a) above
was filed and is incorporated by reference
to Exhibit 8(d) of Post-Effective Amendment
No. 22 to Registrant's Registration
Statement on Form N-1A, filed on December
30, 1997.
(v) Transfer Agency Agreement between the
Registrant and Schwab was electronically
filed and is incorporated by reference to
Exhibit 8(e) of Post-Effective Amendment No.
22 to Registrant's Registration Statement on
Form N-1A, filed on December 30, 1997.
(vi) Amended Schedules to the Transfer Agency
Agreement referred to at Exhibit 8(e) above
were electronically filed and are
incorporated by reference to Exhibit 8(f) of
Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form
N-1A, filed on December 30, 1997.
C-2
<PAGE> 62
(vii) Shareholder Service Agreement between the
Registrant and Schwab was electronically
filed and is incorporated by reference to
Exhibit 8(g) of Post-Effective Amendment No.
22 to Registrant's Registration Statement on
Form N-1A, filed on December 30, 1997.
(viii) Accounting Services Agreement between
Registrant and Provident Financial
Processing Corporation was electronically
filed and is incorporated by reference to
Exhibit 8(i) of Post-Effective Amendment No.
22 to Registrant's Registration Statement on
Form N-1A filed on December 30, 1997.
(ix) Amendment No. 1 to Accounting Services
Agreement referred to at Exhibit 8(i) above
was filed and is incorporated by reference
to Exhibit 8(j) of Post-Effective Amendment
No. 13 to Registrant's Registration
Statement on Form N-1A, filed on December
29, 1996.
(x) Amendment No. 2 to Accounting Services
Agreement referred to at Exhibit 8(i) above
was filed and is incorporated by reference
to Exhibit 8(k) of Post-Effective Amendment
No. 14 to Registrant's Registration
Statement on Form N-1A, filed on December
30, 1996.
(xi) Amended Schedule to the Accounting Services
Agreement referred to at Exhibit 8(i) above
was electronically filed and is incorporated
by reference to Exhibit 8(l) of
Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form
N-1A filed on December 30, 1997.
(xii) Amended Custodian Services Fee Agreement
dated November 1, 1998 by and between the
Registrant and PNC Bank, National
Association is filed herewith.
(xiii) Accounting Services Agreement with SEI Fund
Resources with Amended Schedule A dated
November 1, 1998 including the Registrant is
filed herewith.
(h) Other Material Inapplicable.
Contracts
(i) Legal Opinion Opinion of Morgan, Lewis & Bockius LLP is
filed herewith.
(j) Other Opinions (i) Consent of PricewaterhouseCoopers LLP as it
relates to the Schwab 1000 Fund(R) is filed
herewith
(k) Omitted Financial Inapplicable.
Statements
(l) Initial Capital (i) Purchase Agreement relating to shares of the
Agreement Schwab 1000 Fund to be filed by subsequent
amendment.
(ii) Purchase Agreement relating to shares of the
Schwab Short-Term Bond Market Index Fund
(formerly Schwab Short/Intermediate
Government Bond Fund) to be filed by
subsequent amendment.
C-3
<PAGE> 63
(iii) Purchase Agreement relating to shares of the
Schwab California Long-Term Tax-Free Bond
Fund (formerly Schwab California Tax Free
Bond Fund) to be filed by subsequent
amendment.
(iv) Purchase Agreement relating to shares of the
Schwab Long-Term Tax-Free Bond Fund
(formerly Schwab National Tax Free Bond
Fund) to be filed by subsequent amendment.
(v) Purchase Agreement relating to shares of the
Schwab Short/Intermediate Tax-Free Bond
Fund, Schwab California Short/Intermediate
Tax-Free Bond Fund and Schwab Total Bond
Market Index Fund (formerly, Schwab
Long-Term Government Bond Fund) was filed
and is incorporated by reference to Exhibit
13 to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form
N-1A filed on December 30, 1997.
(m) Rule 12b-1 Plan Inapplicable.
(n) Financial Data (i) Financial Data Schedules are filed herewith
Schedule Schwab 1000 Fund
(a) Investor Shares
(b) Select Shares
(o) Rule 18f-3 Plan Registrant's Multiple Class Plan for Schwab
1000 Fund(R)-Investor Shares and Schwab 1000
Fund-Select Shares was electronically filed
and is incorporated by reference to Exhibit
18 of Post-Effective Amendment No. 17 to the
Registrant's Registration Statement on Form
N-1A filed on August 15, 1997.
Item 24. 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 25. 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,
C-4
<PAGE> 64
or reckless disregard of the duties involved in the conduct of his or her
office. In any event, Registrant will comply with 1940 Act Releases No. 7221 and
11330 respecting the permissible boundaries of indemnification by an investment
company of its officers and trustees.
Insofar as indemnification for liability arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to trustees, officers and
controlling persons of the Registrant pursuant 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 26. Business and Other Connections of Investment Adviser
Registrant's Investment Manager, Charles Schwab Investment Management, Inc., a
Delaware corporation, organized in October 1989 to serve as Investment Manager
to Registrant, also serves as the Investment Manager to The Charles Schwab
Family of Funds, 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, The Charles Schwab Family of Funds,
Schwab Capital Trust, Schwab Annuity Portfolios and any other investment
companies that Schwab may sponsor in the future.
The business, profession, vocation or employment of a substantial nature in
which each director and/or senior or executive officer of the Investment Manager
(CSIM) and/or Schwab & Co. Inc. (principal underwriter) is or has been engaged
during the past two fiscal years 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 Management, Inc. Chairman and Director
The Charles Schwab Trust Company Chairman and Director
Mayer & Schweitzer, Inc. Chairman and Director
</TABLE>
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<PAGE> 65
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Schwab Retirement Plan Services, Inc. Chairman and Director
Charles Schwab Limited Chairman, Chief Executive
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
David S. Pottruck Charles Schwab & Co., Inc. Chief Executive Officer and
Director
The Charles Schwab Corporation President, Co-Chief Executive
Officer and Director
Schwab Holdings, Inc. Director
Schwab Retirement Plan Services, Inc. Director
Charles Schwab Limited Director
Charles Schwab Investment Management, Inc. Director
Mayer & Schweitzer, Inc. Director
Performance Technologies, Inc. Director
Schwab (SIS) Holdings, Inc. I President, Chief Operating
Officer and Director
</TABLE>
C-6
<PAGE> 66
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Schwab International Holdings, Inc. President, Chief Operating
Officer and Director
TrustMark, Inc. Director
Steven L. Scheid Charles Schwab & Co., Inc. Enterprise President -
Financial Products and Services
and Chief Financial Officer
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 Management, Inc. Chief Executive Officer, Chief
Financial Officer and Director
The Charles Schwab Trust Company Director
Charles Schwab Limited Finance Officer and Director
Schwab Retirement Plan Services, Inc. Director
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
Karen W. Chang Charles Schwab & Co., Inc. Enterprise President - General
Investor Services
The Charles Schwab Corporation Executive Vice President
</TABLE>
C-7
<PAGE> 67
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
John P. Coghlan Charles Schwab & Co., Inc. Enterprise President - Retirement
Plan Services and Services to
Investment Managers
The Charles Schwab Corporation Executive Vice President
The Charles Schwab Trust Company President, Chief Executive
Officer and Director
Schwab Retirement Plan Services, Inc. Director
Frances Cole, Charles Schwab Investment Management, Inc. Senior Vice President, Chief
Secretary Counsel and Assistant Corporate
Secretary
Linnet F. Deily Charles Schwab & Co., Inc. President - Schwab Retail Group
The Charles Schwab Corporation Executive Vice President
Christopher V. Dodds Charles Schwab & Co., Inc. Senior Vice President and
Controller
The Charles Schwab Corporation Senior Vice President and
Controller
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President -
Corporate Secretary Corporate Oversight, General
Counsel and Corporate Secretary
Wayne W. Fieldsa Charles Schwab & Co., Inc. Enterprise President - Brokerage
Operations
Lon Gorman Charles Schwab & Co., Inc. Enterprise President - Capital
Markets and Trading
The Charles Schwab Corporation Executive Vice President
James M. Hackley Charles Schwab & Co., Inc. Executive Vice President and Head
of Branches
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Assistant Corporate Secretary
</TABLE>
C-8
<PAGE> 68
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab Investment Management, Inc. Corporate Secretary
The Charles Schwab Trust Company Assistant Corporate Secretary
Mayer & Schweitzer Secretary
Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President - Mutual
Fund Operations
William J. Klipp, Charles Schwab & Co., Inc. Executive Vice President -
Trustee, Executive Vice SchwabFunds
President and Chief
Operating Officer
Charles Schwab Investment Management, Inc. President and Chief Operating
Officer
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President and
Chief Strategy Officer
Charles Schwab & Co., Inc. Executive Vice President and
Chief Strategy Officer
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
Susanne D. Lyons Charles Schwab & Co., Inc. Enterprise President - Retail
Investor Specialized Services
The Charles Schwab Corporation Executive Vice President
Gideon Sasson Charles Schwab & Co., Inc. Enterprise President - Brokerage
Operations
The Charles Schwab Corporation Executive Vice President
Leonard Short Charles Schwab & Co., Inc. Executive Vice President - CRS
Advertising and Branch Management
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February 1995;
Vice Chairman until August 1994
</TABLE>
C-9
<PAGE> 69
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Charles Schwab Corporation Vice Chairman and Director until
May 1998; Chief Operating Officer
until March 1994
Mayer & Schweitzer, Inc. Director until February 1995
The Charles Schwab Trust Company Director until December 1996
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President -
International and Chief
Administrative Officer
The Charles Schwab Corporation Executive Vice President and
Chief Administrative Officer
Commercial Credit Corporation Managing Director until February
1994
Stephen B. Ward, Charles Schwab Investment Management, Inc. Senior Vice President and Chief
Senior Vice President and Investment Officer
Chief Investment Officer
</TABLE>
Item 27. Principal Underwriters.
(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 26(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 28. 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; 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; Registrant's fund accountants, PFPC,
Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809 or SEI Fund Resources,
Oaks,Pennsylvania; or Ropes & Gray, 1301 K Street, N.W., Suite 800 East,
Washington, District of Columbia, 20005.
C-10
<PAGE> 70
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
C-11
<PAGE> 71
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. 27 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. 27 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Washington, District of Columbia on
the 28th day of December, 1998.
SCHWAB INVESTMENTS
Registrant
Charles R. Schwab*
--------------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 27 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 28th day
of December, 1998.
Signature Title
- --------- -----
Charles R. Schwab* Chairman and Trustee
Charles R. Schwab
Steven L. Scheid* President and Trustee
Steven L. Scheid
William J. Klipp* Executive Vice President,
William J. Klipp Trustee and 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/ Martin E. Lybecker
----------------------------
Martin E. Lybecker, Attorney-in-Fact pursuant to Powers of Attorney
previously filed.
<PAGE> 72
EXHIBIT INDEX
99.B(g)(xii) Amended Custodian Services Fee Agreement dated November 1,
1998 with PNC Bank, National Association
99.B(g)(xiii) Accounting Services Agreement with SEI Fund Resources with
Amended Schedule A dated November 1, 1998
99.B(i) Opinion of Morgan, Lewis & Bockius LLP
99.B(j) Consent of PricewaterhouseCoopers LLP
27(1)(a) Schwab 1000 Fund Investor Shares Financial Data Schedule
27(1)(b) Schwab 1000 Fund Select Shares Financial Data Schedule
C-12
<PAGE> 1
Exhibit 99.B(g)(xii)
November 1, 1998
SCHWAB INVESTMENTS
RE: Custodian Services Fees
Ladies and Gentlemen:
This letter constitutes our agreement with respect to compensation to be paid to
PNC Bank, National Association ("PNC") under the terms of a Custodian Services
Agreement (the "Agreement") dated November 4, 1991 between Schwab Investments
("you" or the "Trust"), on behalf of the Fund listed on the attached Schedule I,
as amended from time to time (the "Funds"), and PNC. Pursuant to the terms of
the Agreement, the Trust, on behalf of the Fund, will pay PNC, for the services
that PNC will provide to the Fund as follows:
1. The Fund shall pay an asset based fee of .009% on the first $200
million of average daily gross assets; .008% on the next $200 million
of average daily gross assets; .007% on the next $200 million of
average daily gross assets; .003% on the next $200 million of average
daily gross assets; .0025% on the next $200 million of average daily
gross assets and .002% on average daily gross assets in excess of $1
billion; exclusive of out-of-pocket expenses and transaction charges.
The fee shall be calculated daily and paid monthly. The fee for the
period from the date hereof until the end of that year shall be
pro-rated according to the proportion which such period bears to the
full annual period.
2. The Fund shall pay transaction charges of $16.50 for each physical
delivery; $8.25 for each fed book entry transaction; $6.50 for each
depository eligible transaction; $10.00 for each GNMA depository
transaction, $7.50 for each repo with PNC (per round-trip piece of
collateral); $30.00 for each options contract and $50.00 for each futures
contract.
A transaction includes Buys, Sells, Maturities, Free Deliveries, Free Receipts,
Exercised or Expired Options.
Out-of-pocket expenses include but are not limited to, postage, overnight
express charges, report transmission charges, microfiche/microfilm, Federal
Reserve wire fees, wire fees for receipt and disbursement, record
retention/storage, custody transfer/registration fees ($10.00 per item); and
cost of independent pricing services.
PNC accepts the payment to it hereunder as full payment with respect to
services provided to the Funds under the terms of the Agreement. This Agreement
supersedes all previous Agreements concerning compensation for services to be
provided to the Trust on behalf of the Fund with respect to the Agreement.
<PAGE> 2
Very truly yours,
PNC BANK, NATIONAL ASSOCIATION
By: _____________________________
Name: _____________________________
Title: _____________________________
Accepted:
SCHWAB INVESTMENTS
on behalf of the Fund, listed on
the attached Schedule I, as amended from time
to time.
By: /s/ Tung Tai-Chin
___________________________________
Name: ___________________________________
Title: ___________________________________
<PAGE> 3
SCHEDULE A
Custodian and Accounting Services Fees
Portfolio
Schwab Short-Term Bond Market Index Fund
Schwab Total Bond Market Index Fund
Schwab California Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
SCHWAB INVESTMENTS
On behalf of each of the Funds listed above.
By: /s/ Tung Tai-Chin
___________________________________
Name: ______________________________
Title: _______________________________
PNC BANK, NATIONAL ASSOCIATION
By: ________________________________
Name: ______________________________
Title: _______________________________
PFPC INC.
By: ________________________________
Name: ______________________________
Title: _______________________________
November 1, 1998
<PAGE> 4
SCHEDULE I
Custodian Services Fees
Fund
Schwab 1000 Fund
PNC BANK, NATIONAL ASSOCIATION
By: ________________________________
Name: ______________________________
Title: _____________________________
SCHWAB INVESTMENTS
By: /s/ Tung Tai-Chin
______________________________
Name: ______________________________
Title:______________________________
November 1, 1998
<PAGE> 5
SCHEDULE A
Accounting Services Agreement
<TABLE>
<CAPTION>
Date
----
<S> <C>
Schwab Short-Term Bond Market Index Fund November 4, 1991
Schwab Total Bond Market Index Fund March 5, 1993
Schwab California Short/Intermediate Tax-Free Bond Fund April 21, 1993
Schwab California Long-Term Tax-Free Bond Fund February 20, 1992
Schwab Short/Intermediate Tax-Free Bond Fund April 21, 1993
Schwab Long-Term Tax-Free Bond Fund September 11, 1992
</TABLE>
SCHWAB INVESTMENTS
By: ________________________________
Name: ______________________________
Title: _____________________________
PFPC, INC.
By: ________________________________
Name: ______________________________
Title: _____________________________
November 1, 1998
<PAGE> 1
Schwab Investments
Exhibit 99.B(g)(xiii)
ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made as of this 1st day of April, 1998, by and among
Schwab Capital Trust and Schwab Annuity Portfolios (each a "Trust", or
collectively, the "Trusts"), each of which is a Massachusetts business trust, on
behalf of those Funds (each a "Fund", or collectively, the "Funds"), listed on
Schedule A, as it may be amended from time to time, and SEI Fund Resources
("SEI"), a Delaware business trust.
WHEREAS, each of the Trusts desires SEI to provide, and SEI is willing to
provide, fund accounting services to the Funds and to each class (each a Class,
or collectively, the "Classes") listed on Schedule A upon the terms and
conditions hereinafter set forth:
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, each Trust and SEI hereby agree as follows:
ARTICLE 1. Retention of SEI. Each Trust hereby retains SEI to act as fund
accounting agent for the Funds and to furnish the Funds with the services
described herein. SEI hereby accepts such employment and agrees to perform the
duties set forth herein. SEI shall, for all purposes herein, be deemed to be an
independent contractor and, unless otherwise expressly provided or authorized,
shall have no authority to act for or represent the Trusts in any way and shall
not be deemed an agent of the Trust.
ARTICLE 2. Delivery of Documents; Authority. Each Trust shall furnish SEI
with copies, properly certified or authenticated, of the governing documents for
each of the Funds and such other documents as may be reasonably necessary to the
performance by SEI of the services set forth in this Agreement. Each Trust
agrees to furnish SEI with any amendments or supplements to such documents.
Each Trust represents and warrants that all appropriate action has been
taken by it and all other necessary persons or entities to authorize the
appointment of SEI to perform the services contemplated by this Agreement with
respect to each of the Funds.
SEI represents and warrants that all appropriate action has been taken by
it and all other necessary persons or entities to authorize the appointment of
SEI to perform the services contemplated by this Agreement with respect to each
of the Funds.
SEI undertakes to comply with all applicable requirements of the
securities and commodities laws, and any laws, rules or regulations of
governmental authorities having jurisdiction with respect to all duties to be
performed by SEI under this Agreement.
ARTICLE 3. Fund Accounting Services. SEI shall perform the services and
compile the records set forth on Schedule B. In providing services under this
Agreement, SEI shall provide the Funds with all necessary office space,
equipment (including back-up facilities in the event of equipment or systems
failure), personnel compensation and facilities for handling the fund accounting
responsibilities for the Funds. SEI shall enter into and maintain in effect with
appropriate parties agreements making adequate provision for emergency use of
electronic data processing equipment. SEI shall take all reasonable steps
necessary to minimize service disruptions. SEI shall have no responsibility for
supervising the performance by any investment adviser or sub-adviser of its
responsibilities.
1
<PAGE> 2
ARTICLE 4. Computation of Net Asset Value, Public Offering Price;
Valuation of Securities.
(a) When computing the net asset value per share of a Fund, SEI will
follow the specific provisions of the Fund's Registration Statement. In general,
such computation will be made by dividing the value of each Fund's securities,
cash and any other assets, less its liabilities, by the number of shares of the
Fund outstanding. Such computation will be made on each day required by each
Fund's Registration Statement.
(b) Securities will be valued in accordance with the specific provisions
of each Fund's Registration Statement, as amended from time to time. SEI may use
one or more external pricing services. SEI shall not be liable for any loss,
cost, damage, claim or other matter incurred by or assessed against the Fund,
regardless of how characterized, based on or resulting from the inaccuracy or
other deficiency in any information or data provided to SEI by any such pricing
service and used by SEI in the performance of these services hereunder, provided
that SEI has used reasonable care in the selection of the pricing agent. SEI
will provide daily to Charles Schwab Investment Management, Inc. ("CSIM") by
7:00 p.m. Eastern time via fax or other electronic delivery medium, the
securities prices used in calculating the net asset value of each Fund for its
use in preparing exception reports generated for those prices on which CSIM has
a comment. Further, upon receipt of the exception reports generated by CSIM, SEI
will diligently pursue communication regarding exception reports with the
designated pricing agent. SEI shall provide CSIM with notice as soon as possible
upon the occurrence of an event that would cause a reasonable person to conclude
that the pricing agent is acting negligently or with willful misfeasance.
ARTICLE 5. Duration and Termination of this Agreement. This Agreement
shall become effective on the dates set forth in Schedule A and shall remain in
effect for the initial term of the Agreement (the "Initial Term") and each
renewal term thereof (each, a "Renewal Term"), each as set forth under Schedule
C, unless terminated in accordance with the provisions of this Article 5. This
Agreement may be terminated only: (a) by the mutual written agreement of the
parties; (b) by either party hereto on 60 days' written notice, as of the end of
the Initial Term or at any time during any Renewal Term; (c) except for any
situation under section (g) hereof any party hereto on such date as is specified
in written notice given by the terminating party, in the event of a material
breach of this Agreement by the other party, provided the terminating party has
notified the other party of such breach at least 30 days prior to the specified
date of termination and the breaching party has not remedied such breach by the
specified date; (d) effective upon the filing of a petition for bankruptcy or
seeking protection from creditors of any party; (e) as to any Fund, effective
upon the liquidation of such Fund; (f) effective upon the liquidation of SEI;
and (g) in the event, however, of willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties by SEI at any time during the
term of this Agreement, the Trusts have a right to terminate this Agreement
immediately upon notice to SEI; however, to the extent that the Trusts' rights
under this provision arise solely due to gross negligence then the Trusts may
terminate this Agreement only if SEI fails to eliminate such gross negligence
immediately upon demand from the Trusts. If the Trusts authorize a cure period,
SEI shall take steps promptly following such demand (but in any event within 30
days thereafter) to preclude the recurrence of such gross negligence. If such
gross negligence is not cured within the cure period, this Agreement shall
terminate effective as of the first date following the cure period'. For
purposes of this Article 5, the term "liquidation" shall mean a transaction in
which the assets of a Fund are sold or otherwise disposed of and proceeds
therefrom are distributed in cash to the shareholders in complete liquidation of
the interests of such shareholders in the entity.
2
<PAGE> 3
ARTICLE 6. Compensation of SEI. For the services to be rendered by SEI
pursuant to this Agreement, the Trusts shall pay to SEI compensation at the rate
specified in Schedule C. The Trust's shall also reimburse SEI for its reasonable
out of pocket expenses as are agreed upon in advance by the parties from time to
time. SEI shall maintain detailed information about the compensation and
expenses allocated to the Trusts by Fund and by Class and shall provide this
detail to the Trusts in its monthly billings. Any revised Schedule C agreed to
by the parties shall be dated and signed by a duly authorized officer of the
Trusts and by a duly authorized officer of SEI. SEI shall in no way be
responsible for paying any expenses of the Funds not otherwise allocated herein,
including without limitation, the cost of pricing services. If this Agreement
becomes effective subsequent to the first day of a month or terminates before
the last day of a month, SEI's compensation for that part of the month in which
this Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fees as set forth above. All rights of compensation under
this Agreement for services performed as of the termination date shall survive
the termination of this Agreement.
ARTICLE 7. Limitation of Liability
(a) The duties of SEI shall be confined to those expressly set forth
herein, and no implied duties are assumed by or may be asserted against SEI
hereunder. SEI shall not be liable for any error of judgment or mistake of law
or for any loss (collectively, "Losses") arising out of any act or omission in
carrying out its duties hereunder, except for those Losses resulting from
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of reckless disregard of its obligations and duties or
Losses arising out of or related to a breach by SEI of its warranty and
obligations set forth in Article 10. hereto. (As used in this Article,
references to SEI shall include officers, employees and other agents of SEI and
its affiliates.) SEI may apply to the Funds at any time for instructions and may
consult counsel for +.he Funds or its own counsel and with accountants and other
experts with respect to any matter arising in connection with its duties, and
SEI shall not be liable to the Funds for any action taken or omitted by it in
good faith in accordance with the opinion of counsel for the Funds, Schwab or
their accountants or other experts.
(b) So long as SEI acts without willful misfeasance, bad faith, gross
negligence, or reckless disregard for its duties, the Trusts shall indemnify SEI
and hold it harmless from and against any and all actions, suits and claims,
whether groundless or otherwise, and from and against any and all losses,
liabilities, damages, costs and charges (including reasonable counsel fees and
disbursements), arising directly or indirectly out of services rendered
hereunder. The indemnity provisions set forth herein shall indefinitely survive
the termination of this Agreement.
ARTICLE 8. Recordkeeping. SEI shall maintain all records specified in this
Agreement pursuant to Rules 31 a-1 and 31 a-2 under the 1940 Act. All such
records shall be prepared and maintained at the expense of SEI, but shall be the
property of the relevant Fund and will be made available to or surrendered
promptly to such Fund or its designee on the request of either the Fund or CSIM.
SEI shall assist CSIM, the Funds' independent auditors, or upon approval of the
relevant Fund, or upon demand, any regulatory body, in any requested review of
such Fund's accounts and records but shall be reimbursed for all expenses and
employee time invested in any such review of accounts and records outside of the
expenses and employee time routinely and normally expended by SEI as part of a
regulatory review and audit. Upon receipt of the necessary information, SEI
shall supply the necessary data for a Fund's completion of any necessary tax
returns, questionnaires, periodic reports to shareholders and such other reports
and information requests as such Fund and SEI shall agree upon from time to
time.
3
<PAGE> 4
ARTICLE 9. Confidentiality. SEI agrees to keep confidential all records of
the Trusts and information relative to each Fund and its shareholders, unless
the release of such information is otherwise consented to in writing by the
Trust. SEI agrees that should the Trusts be required to provide any information
or records to regulatory bodies (who may institute civil or criminal contempt
proceedings for a failure to comply), SEI must notify the Trusts' and obtain
their consent prior to disclosing any information, unless such disclosure is
required by law.
ARTICLE 10. Year 2000 Compliance. SEI warrants that all software code owned
by or under SEI's control, used in the performance of SEI's obligations under
this contract, will be Year 2000 compliant. For purposes of this paragraph,
"Year 2000 Compliant" means that the software will continue to operate beyond
December 31, 1999 and without creating any logical, mathematical or programming
inconsistencies concerning any date after December 31, 1999 and without
decreasing the functionality of the system applicable to dates prior to January
1, 2000 including, but not limited to, making changes to [a] date and data
century recognition; [b] calculations which accommodate same- and multi- century
formulas and date values; and [c] input/output of date values which reflect
century dates.
ARTICLE 11. Activities of SEI. The services of SEI rendered to the Funds
are not exclusive. SEI is free to render such services to others and to have
other businesses and interests so long as its services hereunder are not
hindered thereby.
ARTICLE 12. Amendment; Assignment. This Agreement may only be amended or
modified by all parties hereto. Neither this Agreement nor any of the rights and
obligations under this Agreement may be assigned by any party without the
written consent of all parties hereto. If a successor fund accountant shall be
appointed by the Trusts, upon termination of this Agreement, SEI shall deliver
all records and property of the Trusts held by SEI to the successor fund
accountant.
ARTICLE 13. Trustees' Liability. A copy of the Declaration of Trust for the
Trusts is on file with the Secretary of State of the Commonwealth of
Massachusetts, and notice is hereby given that this instrument is executed on
behalf of the Trustees of the Trusts as Trustees and not individually and that
the obligations of this instrument are not binding upon any of the Trustees,
officers or shareholders of the Trusts individually, but are binding only upon
the assets and property of the Fund in question. The Names "Schwab Annuity
Portfolios, " "Schwab Capital Trust," "Trustees of Schwab Annuity Portfolios"
and "Trustees of Schwab Capital Trust" refer, respectively, to the Trusts
created and the Trustees, as trustees but not individually or personally, acting
from time to time under the applicable Declarations of Trust which are hereby
referred to and copies of which are on file at the office of the Secretary of
the Commonwealth of Massachusetts and at the principal office of the Trusts. The
obligations of "Schwab Annuity Portfolios" and "Schwab Capital Trust," 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, representatives of the Trusts
personally, but bind only the property of the Funds in question, and all persons
dealing with any class of shares of the Funds must look solely to the Funds
property belonging to such class for the enforcement of any claims against the
Funds.
ARTICLE 14. Notice. Any notice required or permitted to be given by either
party to the other shall be deemed sufficient if sent by registered or certified
mail, postage prepaid, addressed by the party giving notice to the other party
at the last address furnished by the other party to the party giving notice: if
to the Trusts, at 101 Montgomery Street, San Francisco, CA 94104, Attention:
Secretary and if to SEI, at One Freedom Valley Drive, Oaks, PA 19456.
4
<PAGE> 5
ARTICLE 15. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of California and the applicable provisions of the
1940 Act. To the extent that the applicable laws of the State of California, or
any of the provisions herein, conflict with the applicable provisions of the
1940 Act, the latter shall control.
ARTICLE 16. Multiple Originals. This Agreement may be executed in two or
more counterparts, each of which when so executed shall be deemed to be an
original, but such counterparts shall together constitute but one and the same
instrument.
ARTICLE 17. Binding Agreement. This Agreement, and the rights and
obligations of the parties and the Funds hereunder, shall be binding on, and
inure to the benefit of the parties and the Funds and the respective successors
and assigns of each of them.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
By /s/ William J. Klipp
------------------------------
Name: William J. Klipp
Title: President and Chief Operating Officer
SEI FUND RESOURCES
By /s/ Todd Cipperman
------------------------------
Name: Todd Cipperman
Title: Vice President and Assistant Secretary
5
<PAGE> 6
SCHEDULE A
LIST OF FUNDS
<TABLE>
<CAPTION>
NAME OF FUND DATE
------------ ----
<S> <C>
Schwab MarketTrack Growth Portfolio 4/30/98
Schwab MarketTrack Balanced Portfolio 4/30/98
Schwab MarketTrack Conservative Portfolio 4/30/98
Schwab MarketTrack All Equity Portfolio 4/15/98
Schwab International Index Fund: Investor Shares, Select Shares 4/30/98
Schwab Small-Cap Index Fund: Investor Shares, Select Shares 4/30/98
Schwab MarketManager International Portfolio 4/30/98
Schwab MarketManager Balanced Portfolio 4/30/98
Schwab MarketManager Growth Portfolio 4/30/98
Schwab MarketManager Small Cap Portfolio 4/30/98
Schwab MarketManager Growth Portfolio II 4/30/98
Schwab S&P 500 Fund: Select Shares, Investor Shares, e.Shares 11/1/98
Schwab S&O 500 Portfolio 11/1/98
Schwab 1000 Fund: Select Shares, Investor Shares 11/1/98
Schwab Analytics Fund 11/1/98
</TABLE>
SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
By /s/ Tai-Chin Tung
------------------------------------
Name: Tai-Chin Tung
Title: Treasurer, Principal Financial Officer
SEI FUND RESOURCES
By
------------------------------------
Name:
Title:
6
<PAGE> 7
SCHEDULE B
Fund Accounting:
1. Maintain general ledger accounts
2. Calculate NAV (with a primary backup at all times) by the NASDAQ deadline
(by 6:30 PST in the case of the OneSource portfolios)
3. Perform securities valuation; notify pricing committee on Fair Valued
Securities
4. Verify daily the underlying funds' NAVS with the underlying funds' transfer
agent or fund accountant
5. Maintain tax lots for portfolio holdings
6. Bifurcate currency vs. security gains/losses
7. Record investment purchases and sells
8. Record and verify daily income accruals
9. Record, verify expense accruals and monitor CSIM reimbursements and CSIM
waivers both by fund and class
10. Monitor daily collateral asset segregation for Repos, securities lending,
futures and etc.
11. Reconcile cash and positions daily with custodians
12. Compute investable cash; monitor O/D and line of credit outstanding
13. Oversee custodian's activities (settlements, tax reclaims, corporate
actions, etc.)
14. Complete the daily information sheet and investment management report
15. Record fund purchases, redemptions and reconcile outstanding shares daily
with transfer agent
16. Provide month end proof
17. Perform tax compliance quarterly, including the short-short calculation
(until states conform to Federal Code) seven business days before fiscal
quarter end
18. Complete weekly 3% portfolio compliance check for OneSource Portfolios
(until the Exempt Order is granted)
19. Calculate total returns and yields including external distribution of
information
20. Prepare statistics for Board meeting and external agents (reporting
services)
21. Prepare and coordinate the calendar quarter financial summaries for the
Board
22. Maintain book/tax differences and conform to SOPs
23. Calculate fund distribution for both excise and income taxes
24. Coordinate annual audit
25. Prepare and file N-SAR, 24F-2 and N30D through EDGAR
26. Monitor financial D&O and E&O coverage quarterly
27. Consult on general legal and tax issues
28. Prepare monthly service report card
29. Attend quarterly in-person service review meetings
30. Prepare and update accounting policies and operational procedures manual
31. Assist in the SEC examination
32. Comply with Article 10. Year 2000 compliance provisions
7
<PAGE> 8
SCHEDULE C
TO THE ACCOUNTING SERVICES AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND SCHWAB ANNUITY PORTFOLIOS
AND
SEI FUND RESOURCES
APRIL 1, 1998
FEES:
The Trusts shall pay SEI annual compensation for the services performed
and the facilities and personnel provided by SEI pursuant to this Agreement, the
following fee:
(a) with respect to the combined value of the average daily net assets (the
"Combined Assets") of the Funds:
(i) 0.04% (4 basis points) of the Combined Assets with respect to those
assets that are less than or equal to $1 Billion (One Billion U.S.
Dollars); plus
(ii) 0.03% (3 basis points) of the Combined Assets with respect to those
assets that are greater than $1 Billion (One Billion Dollars) but less
than or equal to $2 Billion Dollars); plus
(iii) 0.02% (2 basis points) of the Combined Assets with respect to those
assets that are greater than $2 Billion (Two Billion Dollars) but less
than or equal to $3 Billion (Three Billion Dollars); plus
(iv) 0.015% (1.5 basis points) of the Combined Assets with respect to
those assets that are greater than $3
8
<PAGE> 1
EXHIBIT 99.B(i)
[Morgan, Lewis & Bockius LLP Letterhead]
December 18, 1998
Schwab Investments
101 Montgomery Street
San Francisco, CA 94104
Re: Opinion of Counsel regarding Post-Effective Amendment No. 27
to the Registration Statement filed on Form N-1A under the
Securities Act of 1933 (File No. 33-37459).
Ladies and Gentlemen:
We have acted as counsel to Schwab Investments, a Massachusetts Trust
(the "Trust"), in connection with the above-referenced Registration Statement on
Form N-1A (as amended, the "Registration Statement") which relates to the
Trust's shares of beneficial interest, par value $.00001 per share
(collectively, the "Shares"). This opinion is being delivered to you in
connection with the Trust's filing of Post-Effective Amendment No. 27 to the
Registration Statement (the "Amendment") to be filed with the Securities and
Exchange Commission pursuant to Rule 485(b) of the Securities Act of 1933 (the
"1933 Act"). With your permission, all assumptions and statements of reliance
herein have been made without any independent investigation or verification on
our part except to the extent otherwise expressly stated, and we express no
opinion with respect to the subject matter or accuracy of such assumptions or
items relied upon.
In connection with this opinion, we have reviewed, among other things,
executed copies of the following documents:
(a) a certificate of the Commonwealth of Massachusetts as to the
existence and good standing of the Trust;
(b) copies of the Fund's Agreement and Declaration of Trust and of
all amendments and all supplements thereto (the "Declaration
of Trust");
<PAGE> 2
Schwab Investments
December 18, 1998
Page 2
(c) a certificate executed by Frances Cole, the Secretary of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration of Trust and Amended and Restated By-Laws (the
"By-Laws"), and certain resolutions adopted by the Board of
Trustees of the Trust authorizing the issuance of the Shares;
and
(d) a printer's proof of the Amendment.
In our capacity as counsel to the Trust, we have examined the
originals, or certified, conformed or reproduced copies, of all records,
agreements, instruments and documents as we have deemed relevant or necessary as
the basis for the opinion hereinafter expressed. In all such examinations, we
have assumed the legal capacity of all natural persons executing documents, the
genuineness of all signatures, the authenticity of all original or certified
copies, and the conformity to original or certified copies of all copies
submitted to us as conformed or reproduced copies. As to various questions of
fact relevant to such opinion, we have relied upon, and assume the accuracy of,
certificates and oral or written statements of public officials and officers or
representatives of the Fund. We have assumed that the Registration Statement, as
filed with the Securities and Exchange Commission, will be in substantially the
form of the printer's proof referred to in paragraph (d) above.
Based upon, and subject to, the limitations set forth herein, we are of
the opinion that the Shares, when issued and sold in accordance with the Trust's
Declaration of Trust and By-Laws, and for the consideration described in the
Registration Statement, will be legally issued, fully paid and nonassessable
under the laws of the Commonwealth of Massachusetts.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not concede that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Very truly yours,
/s/ Morgan, Lewis and Bockius LLP
<PAGE> 1
EXHIBIT 99.B(j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 27 to the registration statement on Form N-1A of Schwab
Investments (the "Registration Statement") of our report dated December 8, 1998,
relating to the financial statements and financial highlights appearing in the
October 31, 1998 Annual Report to Shareholders of Schwab International Index
Fund, Schwab Small-Cap Index Fund, Schwab S&P 500 Fund, and Schwab 1000 Fund
which is also incorporated by reference into the Registration Statement. We also
consent to the references to us under the heading "Financial Highlights" in the
Prospectus and under the heading "Independent Accountant" in the Statement of
Additional Information.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
December 30, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK>0000869365
<NAME> SCHWAB INVESTMENTS
<SERIES>
<NUMBER>
<NAME> SCHWAB 1000 FUND -- INVESTOR SHARES
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1,000
<INVESTMENTS-AT-COST> 3,073,992
<INVESTMENTS-AT-VALUE> 4,697,996
<RECEIVABLES> 15,061
<ASSETS-OTHER> 568,265
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,281,322
<PAYABLE-FOR-SECURITIES> 14,167
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 569,482
<TOTAL-LIABILITIES> 583,649
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,045,789
<SHARES-COMMON-STOCK> 122,308
<SHARES-COMMON-PRIOR> 103,406
<ACCUMULATED-NII-CURRENT> 34,084
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,623)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,624,423
<NET-ASSETS> 4,697,673
<DIVIDEND-INCOME> 56,961
<INTEREST-INCOME> 1,013
<OTHER-INCOME> 712
<EXPENSES-NET> 17,543
<NET-INVESTMENT-INCOME> 41,143
<REALIZED-GAINS-CURRENT> (1,169)
<APPREC-INCREASE-CURRENT> 586,248
<NET-CHANGE-FROM-OPS> 626,222
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (27,684)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 46,456
<NUMBER-OF-SHARES-REDEEMED> (28,539)
<SHARES-REINVESTED> 985
<NET-CHANGE-IN-ASSETS> 1,660,674
<ACCUMULATED-NII-PRIOR> 25,431
<ACCUMULATED-GAINS-PRIOR> (5,454)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,162
<INTEREST-EXPENSE> 5
<GROSS-EXPENSE> 19,431
<AVERAGE-NET-ASSETS> 3,982,953
<PER-SHARE-NAV-BEGIN> 25.25
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 4.64
<PER-SHARE-DIVIDEND> (0.26)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 29.90
<EXPENSE-RATIO> 0.46
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK>0000869365
<NAME> SCHWAB INVESTMENTS
<SERIES>
<NUMBER>
<NAME> SCHWAB 1000 FUND -- SELECT SHARES
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1,000
<INVESTMENTS-AT-COST> 3,073,992
<INVESTMENTS-AT-VALUE> 4,697,996
<RECEIVABLES> 15,061
<ASSETS-OTHER> 568,265
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,281,322
<PAYABLE-FOR-SECURITIES> 14,167
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 569,482
<TOTAL-LIABILITIES> 583,649
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,045,789
<SHARES-COMMON-STOCK> 34,762
<SHARES-COMMON-PRIOR> 16,880
<ACCUMULATED-NII-CURRENT> 34,084
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,623)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,624,423
<NET-ASSETS> 4,697,673
<DIVIDEND-INCOME> 56,961
<INTEREST-INCOME> 1,013
<OTHER-INCOME> 712
<EXPENSES-NET> 17,543
<NET-INVESTMENT-INCOME> 41,143
<REALIZED-GAINS-CURRENT> (1,169)
<APPREC-INCREASE-CURRENT> 586,248
<NET-CHANGE-FROM-OPS> 626,222
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,010)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22,937
<NUMBER-OF-SHARES-REDEEMED> (5,225)
<SHARES-REINVESTED> 170
<NET-CHANGE-IN-ASSETS> 1,660,674
<ACCUMULATED-NII-PRIOR> 25,431
<ACCUMULATED-GAINS-PRIOR> (5,454)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,162
<INTEREST-EXPENSE> 5
<GROSS-EXPENSE> 19,431
<AVERAGE-NET-ASSETS> 3,982,953
<PER-SHARE-NAV-BEGIN> 25.26
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> 4.63
<PER-SHARE-DIVIDEND> (0.28)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 29.93
<EXPENSE-RATIO> 0.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
