<PAGE> 1
File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on September 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. 24 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28 [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:
Martin E. Lybecker, Esq. Frances Cole, Esq.
Ropes & Gray Charles Schwab Investment Management, Inc.
One Franklin Square 101 Montgomery Street
1301 K Street, N.W., Suite 800 East 120K-14-109
Washington, D.C. 20005 San Francisco, California 94104
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/ / On [date], pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/X/ On December 1, 1998, 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
PART A
SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB 1000 FUND(R)
<TABLE>
<CAPTION>
Part A Item Prospectus Caption
<S> <C>
1 Front and Back Cover Pages No captions
2 Risk/Return Summary: Investments, Risks, and
Performance
(a) Fund investment objectives/goals About the Funds: Schwab 1000 Fund - Goal
(b) Principal investment strategies of the Fund About the Funds: Schwab 1000 Fund - Index, Strategy
(c) Principal risks of investing in the Fund
(c)(1) Narrative risk disclosure About the Funds: Schwab 1000 Fund - Main Risks, Other
risk factors
(c)(2) Risk/Return Bar Chart and Table About the Funds: Schwab 1000 Fund - Performance
3 Risk/Return Summary: Fee Table About the Funds: Schwab 1000 Fund - Fund Fees and
Expenses
4 Investment Objectives, Principal Strategies, and About the Funds: Schwab 1000 Fund - Goal, Index,
Related risks Strategy, Main Risks, Other risk factors
5 Management's Discussion of Fund Performance Not applicable
6 Management, Organization, and Capital Structure About the Funds: Fund Management
7 Shareholder Information
(a) Pricing of Fund Shares Investing in the Funds: Transaction Policies
(b) Purchase of Fund Shares Investing in the Funds: Buying Shares, Methods for
placing orders, When placing orders
(c) Redemption of Fund Shares Investing in the Funds: Selling/Exchanging Shares,
Methods for placing orders, When placing orders;
Transaction Policies; About the Funds: Schwab 1000 Fund
- Fund Fees and Expenses
(d) Dividends and Distributions Investing in the Funds: Distributions and Taxes
(e) Tax Consequences Investing in the Funds: Distributions and Taxes
(f) Separate Disclosure Document Not applicable
8 Distribution Arrangements
(a) Sales Loads Not applicable
(b) Rule 12b-1 Fees Not applicable
(c) Multiple Class and Master-Feeder Funds About the Funds: Schwab 1000 Fund - Performance, Fund
Fees and Expenses, Financial Highlights; Investing in
the Funds
9 Financial Highlights Information About the Funds: Schwab 1000 Fund - Financial
Highlights
</TABLE>
<PAGE> 3
PROSPECTUS
December 1, 1998
SCHWAB
EQUITY INDEX FUNDS
SCHWAB S&P 500 FUND
SCHWAB 1000 FUND(R)
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB INTERNATIONAL INDEX FUND(R)
The Securities and Exchange Commission makes no claim for the investment merit
of any mutual fund or the accuracy or completeness of the information a fund
puts into its prospectus. It is unlawful for anyone to inform you otherwise.
SCHWABFUNDS(R)
<PAGE> 4
ABOUT THE FUNDS
ABOUT THE FUNDS
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
<PAGE> 5
The funds in this prospectus share the same basic INVESTMENT STRATEGY: they are
designed to track the performance of an index. Each fund tracks a different
stock market 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 do not buy and sell securities as often as many actively managed funds.
LOWER PORTFOLIO TURNOVER generally means lower realized capital gains, which can
increase an investor's AFTER-TAX RETURNS. Index funds also tend to have lower
operating and trading expenses. Other things being equal, LOWER COSTS can
translate to HIGHER TOTAL RETURN.
The funds are designed for LONG-TERM INVESTORS. Because they invest in stocks,
their performance will fluctuate over time -- and, as with all investments,
future performance may differ from past performance.
<PAGE> 6
bySCHWAB S&P 500 FUND
TICKER SYMBOLS INVESTOR SHARES: SWPIX SELECT SHARES: SWPPX e.SHARES:SWPEX
GOAL
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE S&P 500(R) INDEX.
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.
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
paying expenses and processing shareholder orders. 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. However, because some of the effect of
expenses remains, the fund's performance normally is below that of the index.
LARGE-CAP STOCKS
While the 500 companies in the index comprise only about 00% of all the publicly
traded companies in the United States, they represent approximately 00% of the
total value of the U.S. stock market. (All figures 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 of an influence
on the performance of the index than do the index's smaller stocks.
SCHWAB S&P 500 FUND
4
<PAGE> 7
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
THE STOCK MARKET RISES AND FALLS DAILY. As with any stock investment, 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 volatility 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).
While 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
While the fund's main risks are those associated with its principal investment
strategies, the fund's other strategies also may 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).
5 SCHWAB S&P 500 FUND
<PAGE> 8
PERFORMANCE
Below are a chart and a table showing the fund's performance. By looking at this
information, you can see how fund performance has varied from year to year and
how it averages out over time. The figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance.
The fund has three share classes, which have different minimum investments and
different costs. Information on choosing a class is on page 24.
ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
Investor Shares
[BAR GRAPH]
BEST QUARTER: 00.00% QX 'XX
WORST QUARTER: 00.00% QX 'XX
YEAR-TO-DATE PERFORMANCE AS OF 9/30/98: 00.00%
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 10/31/98
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
------ ------- ---------
<S> <C> <C> <C>
Investor Shares 000 000 000
Select Shares 000 000 000
e.Shares 000 000 000
S&P 500(R) Index 000 000 000
</TABLE>
FUND FEES AND EXPENSES
The following table describes the fees and expenses you could expect to pay as
an investor in the fund. "Shareholder fees" are one-time expenses that are
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/administration fees 0.00 0.00 0.00
Distribution (12b-1) fees None None None
Other expenses 0.00 0.00 0.00
Total annual operating expenses 0.00 0.00 0.00
EXPENSE REDUCTION 0.00 0.00 0.00
(DUE TO ACTIONS BY SCHWAB AND/OR
THE INVESTMENT MANAGER)
ACTUAL OPERATING EXPENSES 0.00 0.00 0.00
(GUARANTEED THROUGH 2/29/00)
</TABLE>
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, a 5% return each year and no
changes in 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 $00 $000 $000 $000
Select Shares $00 $000 $000 $000
e.Shares $00 $000 $000 $000
</TABLE>
Investors should be aware of a fund's EXPENSES as well as its TOTAL RETURN
(share price changes plus distributions).
6 SCHWAB S&P 500 FUND
<PAGE> 9
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, audited these figures. Their
full report is included in the fund's annual report (see back cover).
<TABLE>
<CAPTION>
11/1/97- 11/1/96- 5/1/96-
INVESTOR SHARES 10/31/98 10/31/97 10/31/96
PER-SHARE DATA ($)
<S> <C> <C> <C>
Net asset value at beginning of period 00.00 00.00 00.00
----- ----- -----
Income from investment operations:
Net investment income 00.00 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00 00.00
----- ----- -----
Total income from investment operations 00.00 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00) (00.00)
----- ----- -----
NET ASSET VALUE AT END OF PERIOD 00.00 00.00 00.00
===== ===== =====
Total return (%; not annualized) 00.00 00.00 00.00
===== ===== =====
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to average net assets 00.00 00.00 00.00 1
Ratio of net investment income to average net assets 00.00 00.00 00.00 1
Portfolio turnover rate 00.00 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00 00
</TABLE>
1 Annualized.
7 SCHWAB S&P 500 FUND
<PAGE> 10
FINANCIAL HIGHLIGHTS CONTINUED
<TABLE>
<CAPTION>
11/1/97- 5/19/97-
SELECT SHARES 10/31/98 10/31/97
PER-SHARE DATA ($)
<S> <C> <C>
Net asset value at beginning of period 00.00 00.00
----- -----
Income from investment operations:
Net investment income 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00
----- -----
Total income from investment operations 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00)
----- -----
NET ASSET VALUE AT END OF PERIOD 00.00 00.00
===== =====
Total return (%; not annualized) 00.00 00.00
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to average net assets 00.00 00.00 1
Ratio of net investment income to average net assets 00.00 00.00 1
Portfolio turnover rate 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00
</TABLE>
1 Annualized.
8 SCHWAB S&P 500 FUND
<PAGE> 11
FINANCIAL HIGHLIGHTS CONTINUED
<TABLE>
<CAPTION>
11/1/97- 11/1/96- 5/1/96-
e.SHARES 10/31/98 10/31/97 10/31/96
PER-SHARE DATA ($)
<S> <C> <C> <C>
Net asset value at beginning of period 00.00 00.00 00.00
------ ------ ------
Income from investment operations:
Net investment income 00.00 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00 00.00
------ ------ ------
Total income from investment operations 00.00 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00) (00.00)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD 00.00 00.00 00.00
====== ====== ======
Total return (%; not annualized) 00.00 00.00 00.00
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to average net assets 00.00 00.00 1 00.00 1
Ratio of net investment income to average net assets 00.00 00.00 1 00.00 1
Portfolio turnover rate 00.00 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00 00
</TABLE>
1 Annualized.
9 SCHWAB S&P 500 FUND
<PAGE> 12
SCHWAB 1000 FUND(R)
TICKER SYMBOLS INVESTOR SHARES: SNXFX SELECT SHARES: SNXSX
GOAL
THE FUND'S GOAL IS TO MATCH THE TOTAL RETURN OF THE SCHWAB 1000 INDEX(R).
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.
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
paying expenses and processing shareholder orders. 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. However, because some of the effect of
expenses remains, the fund's performance normally is below that of the index.
LARGE- AND MID-CAP STOCKS
Although there are currently more than X,000 total stocks in the United States,
the 1,000 largest make up some 00% of the total value of all U.S. stocks.
These large- and mid-cap stocks cover many industries and represent many sizes:
at $00 billion, the market capitalization of the largest one is approximately 0
times that of the 1,000th largest one. (All figures as of 10/31/98).
Because large-cap 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.
10 SCHWAB 1000 FUND
<PAGE> 13
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 tier of the U.S. stock market.
MAIN RISKS
THE STOCK MARKET RISES AND FALLS DAILY. As with any stock investment, 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 volatility 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
While the fund's main risks are those associated with its principal investment
strategies, the fund's other strategies also may 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.
11 SCHWAB 1000 FUND
<PAGE> 14
PERFORMANCE
Below are a chart and a table showing the fund's performance. By looking at this
information, you can see how fund performance has varied from year to year and
how it averages out over time. The figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance.
The fund has two share classes, which have different minimum investments and
different costs. Information on choosing a class is on page 24.
ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
Investor Shares
[BAR GRAPH]
92 93 94 95 96 97
BEST QUARTER: 00.00% QX 'XX
WORST QUARTER: 00.00% QX 'XX
YEAR-TO-DATE PERFORMANCE AS OF 9/30/98: 00.00%
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
<S> <C> <C> <C>
Investor Shares 000 000 000
Select Shares 000 000 000
Schwab 1000 Index(R) 000 000 000
</TABLE>
FUND FEES AND EXPENSES
The following table describes the fees and expenses you could expect to pay as
an investor in the fund. "Shareholder fees" are one-time expenses that are
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
------ ------
<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/administration fees 0.00 0.00
Distribution (12b-1) fees None None
Other expenses 0.00 0.00
Total annual operating expenses 0.00 0.00
EXPENSE REDUCTION 0.00 0.00
(DUE TO ACTIONS BY SCHWAB AND/OR
THE INVESTMENT MANAGER)
ACTUAL OPERATING EXPENSES 0.00 0.00
(GUARANTEED THROUGH 2/29/00)
</TABLE>
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, a 5% return each year, and
no changes in 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 $00 $000 $000 $000
Select Shares $00 $000 $000 $000
</TABLE>
Investors should be aware of a fund's expenses as well as its total return
(share price changes plus distributions).
12 SCHWAB 1000 FUND
<PAGE> 15
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, audited these figures. Their
full report is included in the fund's annual report (see back cover).
<TABLE>
<CAPTION>
11/1/97 - 9/1/97 - 9/1/96 - 9/1/95 - 9/1/94 - 9/1/93 -
INVESTOR SHARES 10/31/98 10/31/97 8/31/97 8/31/96 8/31/95 8/31/94
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 00.00 00.00 00.00 00.00 00.00 00.00
----- ----- ----- ----- ----- -----
Income from investment operations:
Net investment income 00.00 00.00 00.00 00.00 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00 00.00 00.00 00.00 00.00
----- ----- ----- ----- ----- -----
Total income from investment operations 00.00 00.00 00.00 00.00 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00) (00.00) (00.00) (00.00) --
----- ----- ----- ----- ----- -----
NET ASSET VALUE AT END OF PERIOD 00.00 00.00 00.00 00.00 00.00 00.00
===== ===== ===== ===== ===== =====
Total return (%; not annualized) 00.00 00.00 00.00 00.00 00.00 00.00
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to net average assets 00.00 00.00 1 00.00 00.00 00.00 00.00
Ratio of net investment income to average net assets 00.00 00.00 1 00.00 00.00 00.00 00.00
PORTFOLIO TURNOVER RATE 00.00 00.00 00.00 00.00 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00 00 00 00 00
</TABLE>
<TABLE>
<CAPTION>
11/1/97 - 9/1/97 - 5/19/97 -
SELECT SHARES 10/31/98 10/31/97 8/31/97
----- ----- -----
<S> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 00.00 00.00 00.00
----- ----- -----
Income from investment operations:
Net investment income 00.00 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00 00.00
----- ----- -----
Total income from investment operations 00.00 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00) (00.00)
----- ----- -----
NET ASSET VALUE AT END OF PERIOD 00.00 (00.00) (00.00)
===== ====== ======
Total return (%; not annualized) 00.00 00.00 00.00
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to net average assets 00.00 00.00 1 00.00 1
Ratio of net investment income to average net assets 00.00 00.00 1 00.00 1
Portfolio turnover rate 00.00 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00 00
</TABLE>
1 Annualized.
13 SCHWAB 1000 FUND
<PAGE> 16
SCHWAB SMALL-CAP
INDEX FUND(R)
TICKER SYMBOLS INVESTOR SHARES: SWSMX SELECT SHARES: SWSSX
GOAL
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB SMALL-CAP INDEX(R).
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.
Like many index funds, the fund also may invest in short-term investments and
lend securities, in order 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 paying expenses and processing shareholder orders. 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.
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 $00 million to
$00 million in terms of their total market value. (All figures as of 10/31/98).
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.
14 SCHWAB SMALL-CAP INDEX FUND
<PAGE> 17
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
THE STOCK MARKET RISES AND FALLS DAILY. As with any stock investment, 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 volatility 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
While the fund's main risks are those associated with its principal investment
strategies, the fund's other strategies also may 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.
15 SCHWAB SMALL-CAP INDEX FUND
<PAGE> 18
PERFORMANCE
Below are a chart and a table showing the fund's performance. By looking at this
information, you can see how fund performance has varied from year to year and
how it averages out over time. The figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance.
The fund has two share classes, which have different minimum investments and
different costs. Information on choosing a class is on page 24.
ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
Investor Shares
[BAR GRAPH]
95 96 97
BEST QUARTER: 00.00% QX 'XX
WORST QUARTER: 00.00% QX 'XX
YEAR-TO-DATE PERFORMANCE AS OF 9/30/98: 00.00%
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
<S> <C> <C> <C>
Investor Shares 000 000 000
Select Shares 000 000 000
Schwab Small-Cap Index(TM) 000 000 000
</TABLE>
FUND FEES AND EXPENSES
The following table describes the fees and expenses you could expect to pay as
an investor in the fund. "Shareholder fees" are one-time expenses that are
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
------ ------
<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/administration fees 0.00 0.00
Distribution (12b-1) fees None None
Other expenses 0.00 0.00
Total annual operating expenses 0.00 0.00
EXPENSE REDUCTION 0.00 0.00
(DUE TO ACTIONS BY SCHWAB AND/OR
THE INVESTMENT MANAGER)
ACTUAL OPERATING EXPENSES 0.00 0.00
(GUARANTEED THROUGH 2/29/00)
</TABLE>
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, a 5% return each year, and
no changes in 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 $00 $000 $000 $000
Select Shares $00 $000 $000 $000
</TABLE>
Investors should be aware of a fund's EXPENSES as well as its TOTAL RETURN
(share price changes plus distributions).
16 SCHWAB SMALL-CAP INDEX FUND
<PAGE> 19
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, audited these figures. Their
full report is included in the fund's annual report (see back cover).
<TABLE>
<CAPTION>
11/1/97- 11/1/96- 11/1/95- 11/1/94- 12/3/93-
INVESTOR SHARES 10/31/98 10/31/97 10/31/96 10/31/95 10/31/94
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 00.00 00.00 00.00 00.00 00.00
----- ----- ----- ----- -----
Income from investment operations:
Net investment income 00.00 00.00 00.00 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00 00.00 00.00 00.00
----- ----- ----- ----- -----
Total income from investment operations 00.00 00.00 00.00 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00) (00.00) (00.00) (00.00)
----- ----- ----- ----- -----
NET ASSET VALUE AT END OF PERIOD 00.00 00.00 00.00 00.00 00.00
===== ===== ===== ===== =====
Total return (%; not annualized) 00.00 00.00 00.00 00.00 00.00
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to net average assets 00.00 00.00 00.00 00.00 00.00 1
Ratio of net investment income to average net assets 00.00 00.00 00.00 00.00 00.00 1
Portfolio turnover rate 00.00 00.00 00.00 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00 00 00 00
</TABLE>
<TABLE>
<CAPTION>
11/1/97- 5/19/97-
SELECT SHARES 10/31/98 10/31/97
-------- --------
<S> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 00.00 00.00
----- -----
Income from investment operations:
Net investment income 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00
----- -----
Total income from investment operations 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00)
----- -----
NET ASSET VALUE AT END OF PERIOD 00.00 00.00
===== =====
Total return (%; not annualized) 00.00 00.00
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to net average assets 00.00 00.00 1
Ratio of net investment income to average net assets 00.00 00.00 1
Portfolio turnover rate 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00
</TABLE>
1 Annualized.
17 SCHWAB SMALL-CAP INDEX FUND
<PAGE> 20
SCHWAB INTERNATIONAL
INDEX FUND(R)
TICKER SYMBOLS INVESTOR SHARES: SWINX SELECT SHARES: SWISX
GOAL
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB INTERNATIONAL
INDEX(R).
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 capitalization (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.
Like many index funds, the fund also may invest in short-term investments and
lend securities, in order 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 paying expenses and processing shareholder orders. 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.
INTERNATIONAL STOCKS
Over the past several decades, foreign stock markets have grown rapidly. While
U.S. stocks made up 00% of the market value of the world's stock markets as
recently as [year], foreign stocks today represent approximately two-thirds of
the world's total market capitalization. (All figures 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, since
international stock markets historically have performed somewhat differently
from the U.S. market.
18 SCHWAB INTERNATIONAL INDEX FUND
<PAGE> 21
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 stock investment, 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 volatility 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
While the fund's main risks are those associated with its principal investment
strategies, the fund's other strategies also may 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.
19 SCHWAB INTERNATIONAL INDEX FUND
<PAGE> 22
PERFORMANCE
Below are a chart and a table showing the fund's performance. By looking at this
information, you can see how fund performance has varied from year to year and
how it averages out over time. The figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance.
The fund has two share classes, which have different minimum investments and
different costs. Information on choosing a class is on page 24.
ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
- --------------------------------------------------------------------------------
Investor Shares
[BAR GRAPH]
- --------------------------------------------------------------------------------
94 95 96 97
BEST QUARTER: 00.00% QX 'XX
WORST QUARTER: 00.00% QX 'XX
YEAR-TO-DATE PERFORMANCE AS OF 9/30/98: 00.00%
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/97
- --------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
Investor Shares 000 000 000
Select Shares 000 000 000
Schwab International Index(R) 000 000 000
FUND FEES AND EXPENSES
The following table describes the fees and expenses you could expect to pay as
an investor in the fund. "Shareholder fees" are one-time expenses that are
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
- --------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES (% of transaction amount)
- --------------------------------------------------------------------------------
Redemption fee, charged only on shares
you sell within 180 days of buying them 0.75 0.75
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management/administration fees 0.00 0.00
Distribution (12b-1) fees None None
Other expenses 0.00 0.00
Total annual operating expenses 0.00 0.00
EXPENSE REDUCTION 0.00 0.00
(DUE TO ACTIONS BY SCHWAB AND/OR
THE INVESTMENT MANAGER)
ACTUAL OPERATING EXPENSES 0.00 0.00
(GUARANTEED THROUGH 2/29/00)
</TABLE>
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, a 5% return each year,
and no changes in 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.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Investor Shares $00 $000 $000 $000
Select Shares $00 $000 $000 $000
Investors should be aware of a fund's EXPENSES as well as its TOTAL RETURN
(share price changes plus distributions).
20 SCHWAB INTERNATIONAL INDEX FUND
<PAGE> 23
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, audited these figures. Their
full report is included in the fund's annual report (see back cover).
<TABLE>
<CAPTION>
11/1/97- 11/1/96- 11/1/95- 11/1/94- 11/1/93-
INVESTOR SHARES 10/31/98 10/31/97 10/31/96 10/31/95 10/31/94
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 00.00 00.00 00.00 00.00 00.00
------ ------ ------ ------ ------
Income from investment operations:
Net investment income 00.00 00.00 00.00 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00 00.00 00.00 00.00
------ ------ ------ ------ ------
Total income from investment operations 00.00 00.00 00.00 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00) (00.00) (00.00) (00.00)
------ ------ ------ ------ ------
NET ASSET VALUE AT END OF PERIOD 00.00 00.00 00.00 00.00 00.00
====== ====== ====== ====== ======
Total return (%; not annualized) 00.00 00.00 00.00 00.00 00.00
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to net average assets 00.00 00.00 00.00 00.00 00.00
Ratio of net investment income to average net assets 00.00 00.00 00.00 00.00 00.00
Portfolio turnover rate 00.00 00.00 00.00 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00 00 00 00
</TABLE>
<TABLE>
<CAPTION>
11/1/97- 5/19/97-
SELECT SHARES 10/31/98 10/31/97
- ------------------------------------------------------------------------------------------
<S> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------
Net asset value at beginning of period 00.00 00.00
------ ------
Income from investment operations:
Net investment income 00.00 00.00
Net realized and unrealized gain on investments 00.00 00.00
------ ------
Total income from investment operations 00.00 00.00
Less distributions:
Dividends from net investment income (00.00) (00.00)
------ ------
NET ASSET VALUE AT END OF PERIOD 00.00 00.00
====== ======
Total return (%; not annualized) 00.00 00.00
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of actual operating expenses to net average assets 00.00 00.00 1
Ratio of net investment income to average net assets 00.00 00.00 1
Portfolio turnover rate 00.00 00.00
Net assets, end of period ($ x 1,000,000) 00 00
</TABLE>
1 Annualized.
21 SCHWAB INTERNATIONAL INDEX FUND
<PAGE> 24
FUND MANAGEMENT
The fund's INVESTMENT MANAGER, Charles Schwab Investment Management, Inc., has
more than $0.0 billion under management.
THE INVESTMENT MANAGER 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 manager for all of the
SchwabFunds.(R) The firm manages assets for more than XX million accounts. (All
figures on this page as of 10/31/98).
As the investment manager, 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 0.00% for the Schwab S&P 500 Fund, 0.00% for the
Schwab 1000 Fund(R), 0.00% for the Schwab Small-Cap Index Fund(R) and 0.00% 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 manager, is responsible for the
day-to-day management of each of the Schwab Equity Index 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 manager is taking steps to enable its systems to handle these
changes. With regard to the year 2000 problem, the investment manager 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> 25
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.
23 INVESTING IN THE FUNDS
<PAGE> 26
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 below is for Schwab brokerage account investors. 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.
STEP 1
CHOOSE A FUND AND SHARE CLASS. Your choice may depend on the amount of your
investment. Currently, e.Shares(TM) 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 retirement $100 $1,000
and custodial accounts)
- -------------------------------------------------------------------------------------------------------
Select Shares(TM) $50,000 $1,000 $40,000
- -------------------------------------------------------------------------------------------------------
e.Shares(TM) $1,000 ($500 for retirement $100 $1,000
and 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 dividend 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 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.
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, 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.
24 INVESTING IN THE FUNDS
<PAGE> 27
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:
- - proceeds from a sale may take up to seven days to be paid to your account
- - if you are selling shares that were recently purchased by check, the proceeds
may be delayed until the check for purchase clears; this can take up to 15
days
- - orders to buy, sell or exchange become irrevocable at the time you mail them
- - as indicated in the funds' fee tables, each fund (except the Schwab S&P 500
Fund) charges a redemption fee 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 any fund into which you
are exchanging prior to placing your order
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
METHODS FOR PLACING ORDERS
PHONE
Call 800-435-4000, 24 hours a day, seven days a week (for TDD service, call
800-345-2550)
INTERNET
www.schwab.com/schwabfunds
SCHWABLINK
Follow the transaction instructions in the SchwabLink manual; for technical
assistance, call 800-367-5198
MAIL
Write to SchwabFunds 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 your Schwab account
IN PERSON
Visit the nearest Charles Schwab branch office
25 INVESTING IN THE FUNDS
<PAGE> 28
TRANSACTION POLICIES
THE FUNDS ARE OPEN FOR BUSINESS EACH DAY THE NEW YORK STOCK EXCHANGE (NYSE) IS
OPEN. Orders to buy, sell or exchange shares that are received in good order by
Schwab prior to the close of the NYSE (generally 4 p.m. Eastern time) on a
business day will be executed that day.
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. Each order to buy, sell or exchange shares is executed at
the next share price calculated after the order is accepted.
In valuing portfolio 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 rights to:
- - automatically redeem your shares if your account is closed for any reason or
your balance falls below the minimum for your share class
- - modify or terminate the exchange privilege upon 60 days' written notice to
shareholders
- - refuse any purchase or exchange order, including those that appear to be
associated with "market timing" strategies
- - change or waive a fund's investment minimums
- - 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
- - withdraw or suspend any part of the offering made by this prospectus
26 INVESTING IN THE FUNDS
<PAGE> 29
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 with 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. However, you may be able to claim a tax credit or deduction
for your portion of foreign taxes paid by the fund.
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 will end up receiving a portion of
your investment back as a taxable distribution. This is because when a fund
makes a distribution, the amount of the distribution is subtracted from the
share price.
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.
27 INVESTING IN THE FUNDS
<PAGE> 30
EQUITY INDEX FUNDS
TO LEARN MORE
This prospectus contains important information on the funds, and should be read
and kept for reference. However, you can obtain more information:
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes fuller 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
Securities and Exchange Commission. All materials from SchwabFunds are free; the
SEC charges a duplicating fee.
SCHWABFUNDS
101 Montgomery Street
San Francisco, CA 94104
800-435-4000
www.schwab.com/schwabfunds
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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
PROSPECTUS
December 1, 1998
MKT3644FLT SCHWABFUNDS(R)
<PAGE> 31
PART B
SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB 1000 FUND(R)
<TABLE>
<CAPTION>
Part B Item Statement of Additional Information Caption
<S> <C>
10 Cover Page and Table of Contents Cover Page
11 Fund History Description of the Trusts
12 Description of the Fund and Its Investments and Risks Investment Strategies, Risks and Limitations -
(a) Classification Investment Strategies and Risks
(b) Investment Strategies and Risks Investment Objectives, Investment Strategies and Risks;
Calculation of Performance Data - Tax Efficiency
(c) Fund Policies Investment Objectives, Investment Limitations
(d) Temporary Defensive Position Not applicable
(e) Portfolio Turnover Brokerage Allocation and Other Practices
13 Management of the Fund Management of the Funds
14 Control Persons and Principal Holders of Securities Control Persons and Principal Holders of Securities
15 Investment Advisory and Other Services Investment Advisory and Other Services
16 Brokerage Allocation and Other Practices Brokerage Allocation and Other Practices
17 Capital Stock and Other Securities Description of the Trusts
18 Purchase, Redemption and Pricing of Shares Purchase, Redemption and Pricing of Shares
19 Taxation of the Fund Taxation
20 Underwriters Investment Advisory and Other Services
21 Calculation of Performance Data Calculation of Performance Data
22 Financial Statements Investment Advisory and Other Services
</TABLE>
<PAGE> 32
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)
DECEMBER 1, 1998
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated December 1, 1998 (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............................................16
INVESTMENT ADVISORY AND OTHER SERVICES.........................................................17
BROKERAGE ALLOCATION AND OTHER PRACTICES.......................................................19
DESCRIPTION OF THE TRUSTS......................................................................21
PURCHASE, REDEMPTION AND PRICING OF SHARES.....................................................22
TAXATION.......................................................................................23
CALCULATION OF PERFORMANCE DATA................................................................25
</TABLE>
1
<PAGE> 33
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 Schwab 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(R) 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.
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 Index
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<PAGE> 34
or any data included 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 $xxxx trillion. This
represents approximately xxxx% 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 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 majority of its shareholders, the International
Fund will invest at least 65% of its total assets in common stocks and other
equity securities including preferred stocks, rights and warrants of companies
located in at least three countries other than the United States.
3
<PAGE> 35
To be included in the International Index, a liquid market must exist for the
securities, and the securities must be issued by an operating company (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 the "blue chips" of
international markets. The index also is designed to provide a broad
representation of the international market, by limiting each country to no more
than 35% of the total market capitalization of the index. The International
Index was first made available to the public on July 29, 1993.
The Schwab 1000 Index(R), Schwab Small Cap-Index(R) 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 may borrow
at times to meet redemption requests rather than sell portfolio securities to
raise the necessary cash.
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. While each fund does not intend to concentrate its investments, it
may concentrate in a particular industry or group of industries if 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
4
<PAGE> 36
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.
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.
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
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<PAGE> 37
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 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
6
<PAGE> 38
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 Fund may hold cash in foreign
currencies. These investments may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and may cause a
fund to incur costs in connection with conversions between various currencies.
The rate of exchange between the U.S. dollar and other currencies is determined
by the forces of supply and demand in the foreign exchange market as well as by
political and economic factors. Changes in the foreign currency exchange rates
also may affect the value of dividends and interest earned, gains and losses
realized on the sale of securities, and net investment income and gains, if any,
to be distributed to shareholders by the International Fund.
In addition 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 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. 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 Fund's investments and/or increase its
expenses. While the investment manager 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
7
<PAGE> 39
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 Fund 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.
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 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. The
funds do not intend to engage in speculative futures transactions.
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
8
<PAGE> 40
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
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.
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 through investment of the cash collateral in
short-term, interest-bearing obligations, but will do so only to the extent that
it will not lose the tax treatment available to regulated investment companies.
Lending portfolio securities involve risks that the borrower may fail to return
the securities or provide additional collateral. A fund may loan portfolio
securities to qualified broker-dealers or other institutional investors
provided: (i) the loan is secured continuously by collateral consisting of U.S.
government securities, letters of credit, cash or cash equivalents maintained on
a daily marked-to-market basis in an amount at least equal to the current market
value of the securities loaned; (ii) the fund may at any time call the loan and
obtain the return of the securities loaned; (iii) the fund will receive any
interest or dividends paid on the loaned securities; and (iv) the
9
<PAGE> 41
aggregate market value of securities loaned will not at any time exceed
one-third of the total assets of the fund.
REPURCHASE AGREEMENTS are instruments under which a buyer acquires ownership of
certain securities (usually U.S. government securities) from a seller who agrees
to repurchase the securities at a mutually agreed-upon time and price, thereby
determining the yield during the buyer's holding period. Any repurchase
agreements a fund enters into will involve the fund as the buyer and banks or
broker-dealers as sellers. The period of repurchase agreements is usually
short--from overnight to one week, although the securities collateralizing a
repurchase agreement may have longer maturity dates. Default by the seller might
cause a fund to experience a loss or delay in the liquidation of the collateral
securing the repurchase agreement. A fund also may incur disposition costs in
liquidating the collateral. In the event of a bankruptcy or other default of a
repurchase agreement's seller, a fund might incur expenses in enforcing its
rights, and could experience losses, including a decline in the value of the
underlying securities and loss of income. A fund will make payment under a
repurchase agreement only upon physical delivery or evidence of book entry
transfer of the collateral to the account of its custodian bank.
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 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 manager. 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(R). 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
10
<PAGE> 42
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. 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 manager
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.
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<PAGE> 43
EACH OF S&P 500 FUND, SMALL-CAP FUND AND INTERNATIONAL 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,
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(R) MAY NOT:
1) As to 75% of its assets, purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its
total assets would be invested in the securities of such issuer.
2) Purchase securities (other then securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities) if, as a result 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
12
<PAGE> 44
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:
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) Invest more than 5% of its total assets in securities of issuers (other
that obligations of, or guaranteed by, the U.S. government, its
agencies or instrumentalities) that, with their predecessors, have a
record of less than three years continuous operation.
b) 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.
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<PAGE> 45
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 manager), are as follows:
<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 Principal Financial Officer,
First Investor Bancorp. Prior to 1994, Mr.
Scheid was Chief Financial Officer, First
Interstate Bank of Texas.
DONALD F. DORWARD Trustee Executive Vice President and Managing
September 23, 1931 Director, Grey Advertising. From 1990 to
1996, Mr. Dorward was President and Chief
Executive Officer, Dorward & Associates
(advertising and marketing/consulting firm).
</TABLE>
- --------
* This trustee is an "interested person" of the trusts.
+ Effective August 18, 1998, Mr. Scheid was elected as President and trustee.
14
<PAGE> 46
<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS &
OF BIRTH THE TRUSTS AFFILIATIONS
- --------------------------------------- ------------------------- --------------------------------------------------
<S> <C> <C>
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).
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),
December 9, 1955 President, Chief Charles 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.
- -----------------------
* This trustee is an "interested person" of the trusts.
15
<PAGE> 47
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
December 31, 1997 concerning compensation of the trustees. Unless otherwise
stated, information is for the fund complex, which included 31 funds as of
December 31, 1997.
<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name Aggregate Compensation Benefits Accrued Compensation from
of from the as Part of Fund Fund Complex
Trustee Expenses
---------------------------------------------------
S&P 500 Schwab Small Cap International
Fund 1000 Fund Fund Fund
- -------- ---------- ---------- --------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles 0 0 0 0 N/A 0
R. Schwab
Timothy 0 0 0 0 N/A 0
F. McCarthy 1
Tom D.Seip 1 0 0 0 0 N/A 0
William 0 0 0 0 N/A 0
J. Klipp,
Donald N/A
F. Dorward
Robert N/A
G. Holmes
Donald N/A
R. Stephens
Michael N/A
W. Wilsey
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
[As of November 30, 1998, [name of person or entity and the jurisdiction under
the laws of which it is organized and all parent companies] control the [Fund
name, class] through ownership of [x.x%] securities or other basis of control.]
As of November 30, 1998, the officers and trustees of the trusts, as a group
owned of record or beneficially [x.x% or less than 1%] of the outstanding voting
securities of the remaining classes and series of each trust.
As of November 30, 1998, the [name of entity or person] directly or beneficially
owned, [x.xx%] of shares of the [Fund name, class].
- ---------------------
1 Effective November 24, 1997, Mr. Seip replaced Mr. McCarthy as President and
trustee.
16
<PAGE> 48
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT MANAGER
Charles Schwab Investment Management, Inc. (CSIM or the investment manager), 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 manager 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 manager 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' 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 manager.
S&P 500 Fund. For its advisory and administrative services to the S&P 500 Fund,
the investment manager 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 $_________, $429,000 and $128,000,
respectively (fees were reduced by $_________, $2,410,000 and $723,000,
respectively).
The investment manager 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(TM) and the
Select Shares(TM) will not exceed 0.35%, 0.28% and 0.19% respectively, of the
average daily net assets of each class.
Schwab 1000 Fund(R). For its advisory and administrative services to the Schwab
1000 Fund(R), the investment manager 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(R) paid
investment advisory fees of
17
<PAGE> 49
$_______, $_________, $_________ and $_______, (fees
were reduced by $_________, $_________, $______, and $ _______, respectively).
The investment manager 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.
Small-Cap Fund. For its advisory and administrative services to the Small-Cap
Fund, the investment manager 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 Fund
paid investment advisory fees of $________, $540,000 and $520,000, respectively
(fees were reduced by $________, $1,000,000 and $347,000, respectively).
The investment manager 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
Small-Cap Fund will not exceed 0.49% and 0.38%, respectively, of the average
daily net assets of each class.
International Fund. For its advisory and administrative services to the
International Fund, the investment manager 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
Fund paid investment advisory fees of $________, $643,000 and $886,000,
respectively (fees were reduced by $_________, $1,503,000 and $675,000,
respectively).
The investment manager 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 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.
18
<PAGE> 50
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(R)
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' and e.Shares' average daily net assets.
CUSTODIAN AND FUND ACCOUNTANT
Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New York 11201,
serves as custodian and SEI Fund Resources [address], serves as fund accountant
for the funds, except the S&P 500 Fund. PNC Bank, 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as custodian; and PFPC, Inc., 103 Bellevue
Parkway, Wilmington Delaware 19809, serves as fund accountant for the S&P 500
Fund.
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, , 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 . 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
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<PAGE> 51
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.
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the funds, the investment manager seeks
to obtain best price and execution. Subject to the supervision of the Board of
Trustees, the investment manager will generally select brokers and dealers for
the funds primarily on the basis of the quality and reliability of brokerage
services, including execution capability and financial responsibility.
In assessing these criteria, the investment manager will, among other things,
monitor the performance of brokers effecting transactions for the 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 manager may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources also may be used by the investment manager when
providing advisory services to other investment advisory clients, including
mutual funds.
In determining when and to what extent to use Schwab or any other affiliated
broker-dealer as its broker for executing orders for the funds on securities
exchanges, the investment manager 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 manager 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 $________, $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 $________, $92,582,
$424,652 and $408,000, respectively.
For the fiscal years ended October 31, 1998, 1997 and 1996, the Small-Cap Fund
paid brokerage commissions of $________, $281,321 and $181,679, respectively.
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<PAGE> 52
For the fiscal years ended October 31, 1998, 1997 and 1996, the International
Fund paid brokerage commissions of $________, $________ and $86,632,
respectively.
Of brokerage commissions paid by the Schwab 1000 Fund in 1996, $1,000 (0.25% of
the total amount) was paid to Schwab, an affiliated person of the Fund and 0.54%
of transactions involving the payment of a brokerage commission in 1996 were
effected through Schwab.
DESCRIPTION OF THE TRUSTS
Each fund, except the Schwab 1000 Fund(R), 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, Investor Shares and, for the S&P 500 Fund, e.Shares.
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.
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<PAGE> 53
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote, because it is limited to
circumstances in which a disclaimer is inoperative and the trust itself is
unable to meet its obligations. There is a remote possibility that a fund could
become liable for a misstatement in the prospectus or SAI about another fund.
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.
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
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<PAGE> 54
ask prices. Securities traded in the over-the-counter market are valued at the
last sales price that day, or if no sales that day, at the mean between the bid
and ask prices. In addition, securities that are primarily traded on foreign
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges with these values then translated into
U.S. dollars at the current exchange rate. Foreign securities for which the
closing values are not readily available are valued at fair value as determined
in good faith pursuant to the Board of Trustees' guidelines. Securities for
which market quotations are not readily available (including restricted
securities that are subject to limitations on their sale and illiquid
securities) are valued at fair value as determined in good faith pursuant to
guidelines adopted by the Board of Trustees. Securities may be valued on the
basis of prices provided by pricing services when such prices are believed to
reflect fair market value. The Board of Trustees regularly reviews any fair
values assigned to portfolio securities.
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 Fund may invest in a non-U.S. corporation, which could be
treated as a passive foreign investment company (PFIC) or become a PFIC under
the Code. This could result in adverse tax consequences upon the disposition of,
or the receipt of "excess distributions" with respect to, such equity
investments. To the extent the International Fund does invest in PFICs, 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 Fund may be required to
distribute amounts in excess of realized income and gains. To the extent that
the International Fund does invest in foreign securities which are determined to
be PFIC securities and are required to pay a tax on such investments, a credit
for this tax would not be allowed to be passed through to the Fund's
shareholders. Therefore, the payment of this tax would reduce the International
Fund's economic return from their PFIC shares, and excess distributions received
with respect to such shares are treated as ordinary income rather than capital
gains.
A fund's transactions in futures contracts, forward contracts, foreign currency
transactions, options and certain other investment and hedging activities 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
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<PAGE> 55
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.
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 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
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<PAGE> 56
is expected that the International Fund will have more than 50% of the value of
its total assets at the close of its taxable year invested in foreign
securities, and it will make this election. Pursuant to this election, U.S.
shareholders must include in gross income, even though not actually received,
their respective pro rata share of foreign taxes, and may either 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>
Fund (Commencement of Operations) One Year ended Five Years ended October From Commencement of
October 31, 1998 31, 1998 Operations to October 31, 1998
- ---------------------------------- ----------------------- ------------------------ ------------------------------
<S> <C> <C> <C>
S&P 500 Fund -
Investor Shares (5/1/96) % N/A %
e.Shares (5/1/96) % N/A %
Select Shares (5/19/97) % N/A %
Schwab 1000 Fund(R) -
Investor Shares (5/2/91) % % %
Select Shares (5/19/97) % N/A %
Small-Cap Fund -
Investor Shares (12/3/93) % N/A %
Select Shares (5/19/97) % N/A %
International Fund -
Investor Shares (9/9/93) % % %
Select Shares (5/19/97) % N/A %
</TABLE>
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.
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<PAGE> 57
A fund also may advertise its cumulative total return since inception. This
number is calculated using the same formula that is used for average annual
total return except that, rather than calculating the total return based on a
one-year period, cumulative total return is calculated from commencement of
operations to the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
Name of Fund (Commencement of Operations) Cumulative Total Return
- ----------------------------------------- -----------------------
<S> <C>
S&P 500 Fund -
Investor Shares (5/1/96) %
e.Shares (5/1/96) %
Select Shares (5/19/97) %
Schwab 1000 Fund(R) -
Investor Shares (5/2/91) %
Select Shares (5/19/97) %
Small-Cap Fund -
Investor Shares (12/3/93) %
Select Shares (5/19/97) %
International Fund -
Investor Shares (9/9/93) %
Select Shares (5/19/97) %
</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
Taxes can erode the returns a shareholder earns from a mutual fund investment
and are an important, and often overlooked, factor when evaluating a mutual
fund's performance. For many mutual funds, shareholder tax liability is of
minimal concern in the investment management process. In contrast, the
investment manager of the funds 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 manager 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. 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 manager will succeed in avoiding realized net
capital gains.
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<PAGE> 58
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> 59
PART C
OTHER INFORMATION
SCHWAB INVESTMENTS
Item 23. Exhibits.
(a) Articles of Incorporation Agreement and Declaration of Trust,
dated 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
Rights of Security Holders (i) Article III, Section 5, Article V,
Article VI, Article VIII, Section 4
and Article IX, Sections 1, 5 and 7
of the Agreement and Declaration of
Trust 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
Contracts Administration 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> 60
(e) Underwriting Contracts Distribution Agreement between
Registrant 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 Sharing Inapplicable.
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> 61
(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) Form of Amended Schedules to the
Shareholder Services Agreement
referred to at Exhibit 8(g) above
were filed and are incorporated by
reference to Exhibit 8(h) of
Post-Effective Amendment No. 21 to
Registrant's Registration Statement
on Form N-1A, filed December 15,
1997.
(ix) 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.
(x) 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.
(xi) 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.
(xii) 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.
(h) Other Material Contracts Inapplicable.
(i) Legal Opinion Opinion and consent of counsel to
be filed by subsequent amendment.
(j) Other Opinions (i) Opinion of independent accountant
to be filed by subsequent
amendment.
(k) Omitted Financial Inapplicable.
Statements
C-3
<PAGE> 62
(l) Initial Capital Agreement (i) Purchase Agreement relating to
shares of the 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.
(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 Schedule (i) Financial Data Schedule for
Schwab 1000 Fund(R) to be filed by
subsequent amendment.
(ii) Financial Data Schedule for Schwab
Short-Term Bond Market Index Fund
(formerly Schwab Short/Intermediate
Government Bond Fund), was
electronically filed and is
incorporated by reference to
Exhibit 17 of Post-Effective
Amendment No. 21 to Registrant's
Registration Statement on Form
N-1A, filed December 15, 1997.
(iii) Financial Data Schedule for Schwab
Total Bond Market Index Fund
(formerly Schwab Long-Term
Government Bond Fund) Fund was
electronically filed and is
incorporated by reference to
Exhibit 17 of Post-Effective
Amendment No. 21 to Registrant's
Registration Statement on Form
N-1A, filed December 15, 1997.
(iv) Financial Data Schedule for Schwab
Short/Intermediate Tax-Free Bond
Fund was electronically filed and
is incorporated by reference to
Exhibit 17 of Post-Effective
Amendment No. 21 to Registrant's
Registration Statement on Form
N-1A, filed December 15, 1997.
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(v) Financial Data Schedule for Schwab
Long-Term Tax-Free Bond Fund was
electronically filed and is
incorporated by reference to
Exhibit 17 of Post-Effective
Amendment No. 21 to Registrant's
Registration Statement on Form
N-1A, filed December 15, 1997.
(vi) Financial Data Schedule for Schwab
California Short/Intermediate
Tax-Free Bond Fund was
electronically filed and is
incorporated by reference to
Exhibit 17 of Post-Effective
Amendment No. 21 to Registrant's
Registration Statement on Form
N-1A, filed December 15, 1997.
(vii) Financial Data Schedule for Schwab
California Long-Term Tax-Free Bond
Fund was electronically filed and
is incorporated by reference to
Exhibit 17 of Post-Effective
Amendment No. 21 to Registrant's
Registration Statement on Form
N-1A, filed December 15, 1997.
(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, 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
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<PAGE> 64
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
Schwab Retirement Plan Services, Inc. Chairman and Director
Charles Schwab Limited Chairman, Chief Executive
Officer and Director
Performance Technologies, 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>
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
Schwab International Holdings, Inc. President, Chief Operating
Officer and Director
TrustMark, Inc. Director
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------- --------------- --------
<S> <C> <C>
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
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
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------- --------------- --------
<S> <C> <C>
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
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
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------- --------------- --------
<S> <C> <C>
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
Matthew M. O'Toole, Charles Schwab Investment Management, Inc. Vice President and Corporate
Assistant Secretary Counsel
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
The Charles Schwab Corporation Vice Chairman and Director until
May 1998; Chief Operating Officer
until March 1994
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------- --------------- --------
<S> <C> <C>
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 Ropes & Gray, counsel
to Registrant, 1301 K Street, N.W., Suite 800 East, Washington, District of
Columbia, 20005.
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
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<PAGE> 70
Not applicable.
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<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
has duly caused this Post-Effective Amendment No. 24 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Washington,
District of Columbia on the 25th day of September, 1998.
SCHWAB INVESTMENTS
Registrant
Charles R. Schwab*
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 24 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 25th day
of September, 1998.
Signature Title
Charles R. Schwab* Chairman, Chief Executive Officer and Trustee
Charles R. Schwab
Steve Scheid* President and Trustee
Steve Scheid
William J. Klipp* Executive Vice President, Trustee and
William J. Klipp Chief Operating Officer
Donald F. Dorward* Trustee
Donald F. Dorward
Robert G. Holmes* Trustee
Robert G. Holmes
Donald R. Stephens* Trustee
Donald R. Stephens
Michael W. Wilsey* Trustee
Michael W. Wilsey
Tai-Chin Tung* Treasurer and Principal Financial Officer
Tai-Chin Tung
*By: /s/ Alan G. Priest
Alan G. Priest, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
