<PAGE> 1
File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on February 25, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 32 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 36 [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
Jeremiah H. Chafkin
101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)
Copies of communications to:
<TABLE>
<CAPTION>
<S> <C> <C>
John H. Grady, Jr. Esq. Martin E. Lybecker, Esq. Frances Cole, Esq.
Morgan Lewis & Bockius LLP Ropes & Gray Charles Schwab Investment Management, Inc.
1701 Market Street One Franklin Square 101 Montgomery Street
Philadelphia, PA 19103 1301 K Street, N.W., Suite 800 East 120K-14-109
Washington, D.C. 20005 San Francisco, CA 94104
</TABLE>
It is proposed that this filing will become effective (check
appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/X/ On February 29, 2000, pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / On (date), pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / On (date), pursuant to paragraph (a)(ii) of Rule 485 if
appropriate, check appropriate box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE> 2
SCHWAB
EQUITY INDEX FUNDS
PROSPECTUS
February 29, 2000
SCHWAB S&P 500 FUND
SCHWAB 1000 FUND(R)
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB TOTAL STOCK MARKET INDEX FUND(TM)
SCHWAB INTERNATIONAL INDEX FUND(R)
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[CHARLES SCHWAB LOGO]
<PAGE> 3
SCHWAB
EQUITY INDEX
FUNDS
ABOUT THE FUNDS
4 Schwab S&P 500 Fund
10 Schwab 1000 Fund(R)
14 Schwab Small-Cap Index Fund(R)
18 Schwab Total Stock Market Index Fund(TM)
22 Schwab International Index Fund(R)
26 Fund Management
INVESTING IN THE FUNDS
28 Buying Shares
29 Selling/Exchanging Shares
30 Transaction Policies
31 Distributions and Taxes
<PAGE> 4
ABOUT THE FUNDS
The funds in this prospectus share the same basic INVESTMENT STRATEGY: They are
designed to track the performance of a stock market index. Each fund tracks a
different index.
This strategy distinguishes an index fund from an "actively managed" mutual
fund. Instead of choosing investments based on judgment, a portfolio manager
LOOKS TO AN INDEX to determine which securities the fund should own.
Because the composition of an index tends to be comparatively stable, index
funds historically have shown LOW PORTFOLIO TURNOVER compared to actively
managed funds.
The funds are designed for LONG-TERM INVESTORS. Their performance will fluctuate
over time and, as with all investments, future performance may differ from past
performance.
<PAGE> 5
SCHWAB
S&P 500 FUND
TICKER SYMBOLS
INVESTOR SHARES SWPIX
SELECT SHARES(R) SWPPX
e.SHARES(R) SWPEX
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.
Like many index funds, the fund may invest in futures contracts and lend
securities to minimize the gap in performance that naturally exists between any
index fund and its index. This gap occurs mainly because, unlike the index, the
fund incurs expenses and must keep a small portion of its assets in cash for
business operations. By using futures, the fund potentially can offset the
portion of the gap attributable to its cash holdings. Any income realized
through securities lending may help reduce the portion of the gap attributable
to expenses. Because some of the effect of expenses remains, however, the fund's
performance normally is below that of the index.
LARGE-CAP STOCKS
Although the 500 companies in the index constitute only about 7% of all the
publicly traded companies in the United States, they represent approximately 80%
of the total value of the U.S. stock market. (All figures are as of 10/31/99.)
Companies of this size are generally considered large-cap stocks. Their
performance is widely followed, and the index itself is popularly seen as a
measure of overall U.S. stock market performance.
Because the index weights a stock according to its market capitalization (total
market value of all shares outstanding), larger stocks have more influence on
the performance of the index than do the index's smaller stocks.
S&P 500 FUND 4
<PAGE> 6
Long-term investors who want to focus on LARGE-CAP U.S. STOCKS or who are
looking for performance that is linked to a POPULAR INDEX may want to consider
this fund.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE LARGE-CAP PORTION OF THE U.S. STOCK MARKET, as
measured by the index. It follows these stocks during upturns as well as
downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
Although the S&P 500(R) Index encompasses stocks from many different sectors of
the economy, its performance primarily reflects that of large-cap stocks. As a
result, whenever these stocks perform less well than mid- or small-cap stocks,
the fund may underperform funds that have exposure to those segments of the U.S.
stock market. Likewise, whenever large-cap U.S. stocks fall behind other types
of investments -- bonds, for instance -- the fund's performance also will lag
those investments.
OTHER RISK FACTORS
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also 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 S&P 500 FUND
<PAGE> 7
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investments.
The fund has three share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.
ANNUAL TOTAL RETURNS (%) as of 12/31
INVESTOR SHARES
[BAR GRAPH]
<TABLE>
<CAPTION>
97 98 99
<S> <C> <C> <C>
32.47 28.0 20.60
</TABLE>
BEST QUARTER: 21.08% Q4 1998
WORST QUARTER: -9.98% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C>
Investor Shares 20.60 26.13 1
Select Shares(R) 20.78 25.69 2
e.Shares(R) 20.68 26.26 3
S&P 500(R) Index 21.04 26.74 4
</TABLE>
1 Inception: 5/1/96.
2 Inception: 5/19/97.
3 Inception: 5/1/96.
4 From 5/1/96.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE (%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES e.SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
None None None
ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees* 0.17 0.17 0.17
Distribution (12b-1) fees None None None
Other expenses 0.30 0.15 0.16
====================================
Total annual operating expenses 0.47 0.32 0.33
EXPENSE REDUCTION (0.12) (0.13) (0.05)
------------------------------------
NET OPERATING EXPENSES** 0.35 0.19 0.28
====================================
</TABLE>
* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/28/01.
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $36 $139 $251 $580
Select Shares $19 $90 $167 $393
e.Shares $29 $101 $180 $413
</TABLE>
The performance information above shows you how the fund's PERFORMANCE compares
to that of ITS INDEX, which varies OVER TIME.
S&P 500 FUND 6
<PAGE> 8
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 5/1/96 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 17.05 14.17 10.88 10.00
---------------------------------------------------------
Income from investment operations:
Net investment income 0.17 0.16 0.14 0.08
Net realized and unrealized gain on investments 4.10 2.85 3.24 0.80
---------------------------------------------------------
Total income from investment operations 4.27 3.01 3.38 0.88
Less distributions:
Dividends from net investment income (0.15) (0.13) (0.09) --
---------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 21.17 17.05 14.17 10.88
=========================================================
Total return (%) 25.20 21.39 31.29 8.80 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.35 0.35 0.38 0.49 2
Expense reductions reflected in above ratio 0.27 0.28 0.32 0.40 2
Ratio of net investment income to average net assets 1.01 1.25 1.49 1.89 2
Portfolio turnover rate 3 1 3 1
Net assets, end of period ($ x 1,000,000) 3,183 1,935 923 244
</TABLE>
1 Not annualized.
2 Annualized.
7 S&P 500 FUND
<PAGE> 9
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 17.09 14.19 12.85
-----------------------------------------------------------------
Income from investment operations:
Net investment income 0.20 0.26 0.05
Net realized and unrealized gain on investments 4.12 2.78 1.29
-----------------------------------------------------------------
Total income from investment operations 4.32 3.04 1.34
Less distributions:
Dividends from net investment income (0.18) (0.14) --
-----------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 21.23 17.09 14.19
=================================================================
Total return (%) 25.42 21.63 10.43 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses
to average net assets 0.19 0.19 0.19 2
Expense reductions reflected in above ratio 0.28 0.28 0.34 2
Ratio of net investment income to average net assets 1.17 1.40 1.46 2
Portfolio turnover rate 3 1 3
Net assets, end of period ($ x 1,000,000) 3,750 1,548 486
</TABLE>
1 Not annualized.
2 Annualized.
S&P 500 FUND 8
<PAGE> 10
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 5/1/96 -
e.SHARES(R) 10/31/99 10/31/98 10/31/97 10/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 17.08 14.19 10.89 10.00
---------------------------------------------------
Income from investment operations:
Net investment income 0.20 0.15 0.21 0.04
Net realized and unrealized gain on investments 4.09 2.88 3.19 0.85
---------------------------------------------------
Total income from investment operations 4.29 3.03 3.40 0.89
Less distributions:
Dividends from net investment income (0.16) (0.14) (0.10) --
---------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 21.21 17.08 14.19 10.89
===================================================
Total return (%) 25.28 21.50 31.48 8.90 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses
to average net assets 0.28 0.28 0.28 0.28 2
Expense reductions reflected in above ratio 0.20 0.24 0.33 0.91 2
Ratio of net investment income to average net assets 1.08 1.32 1.61 1.82 2
Portfolio turnover rate 3 1 3 1
Net assets, end of period ($ x 1,000,000) 435 281 132 36
</TABLE>
1 Not annualized.
2 Annualized.
9 S&P 500 FUND
<PAGE> 11
SCHWAB
1000 FUND(R)
TICKER SYMBOLS
INVESTOR SHARES SNXFX
SELECT SHARES(R) SNXSX
THE FUND'S GOAL IS TO MATCH THE TOTAL RETURN OF THE SCHWAB 1000 INDEX.(R)
INDEX
THE SCHWAB 1000 INDEX(R) 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 taxable capital gains 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
business operations. By using futures, the fund potentially can offset the
portion of the gap attributable to its cash holdings. Any income realized
through securities lending may help reduce the portion of the gap attributable
to expenses. Because some of the effect of expenses remains, however, the fund's
performance normally is below that of the index.
LARGE- AND
MID-CAP STOCKS
Although there are currently more than 7,100 total stocks in the United States,
the companies represented by the Schwab 1000 Index make up some 87% of the total
value of all U.S. stocks. (Figures are as of 10/31/99.)
These large- and mid-cap stocks cover many industries and represent many sizes:
At $472 billion, the market capitalization of the largest one is approximately
1,435 times that of the smallest one. (Figures are as of 10/31/99.)
Because large- and mid-cap stocks can perform differently from each other at
times, a fund that invests in both categories of stocks may have somewhat
different performance than a fund that invests only in large-cap stocks.
SCHWAB 1000 FUND 10
<PAGE> 12
Because it includes so many U.S. stocks and industries, this fund could make
sense for long-term investors seeking BROAD DIVERSIFICATION in a single
investment. It's also a logical choice for stock investors who want exposure
beyond the large-cap segment of the U.S. stock market.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE LARGE- AND MID-CAP PORTIONS OF THE U.S. STOCK
MARKET, as measured by the index. It follows these stocks during upturns as well
as downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
Because the Schwab 1000 Index(R) encompasses stocks from across the economy, the
fund is broadly diversified, which reduces the impact of the performance of any
given industry or stock. But whenever large- and mid-cap U.S. stocks fall behind
other types of investments -- bonds, for instance -- the fund's performance also
will lag these investments.
OTHER RISK FACTORS
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also 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> 13
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the indices do not include any costs of investments.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.
ANNUAL TOTAL RETURNS (%) as of 12/31
INVESTOR SHARES
[BAR GRAPH]
<TABLE>
1992 1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
8.52 9.63 -0.11 36.60 21.57 31.92 27.16 21.00
</TABLE>
<TABLE>
<S> <C> <C> <C>
BEST QUARTER: 21.93% Q4 1998
WORST QUARTER: -10.70% Q3 1998
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 21.00 27.51 18.98 1
Select Shares(R) 21.15 -- 25.94 2
S&P 500(R) Index 21.04 28.56 19.46 3
Schwab 1000 Index(R) 21.22 28.04 19.45 3
</TABLE>
1 Inception: 4/2/91.
2 Inception: 5/19/97.
3 From 4/2/91.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE (%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
Redemption fee, charged only
on shares you sell within 180
days of buying them, and paid
directly to the fund* 0.75 0.75
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.23 0.23
Distribution (12b-1) fees None None
Other expenses 0.28 0.14
=======================
Total annual operating expenses 0.51 0.37
EXPENSE REDUCTION (0.05) (0.02)
-----------------------
NET OPERATING EXPENSES** 0.46 0.35
=======================
</TABLE>
* For shares purchased prior to 5/1/00 the redemption fee is 0.50%.
** Guaranteed by Schwab and the investment adviser through 2/28/01.
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $47 $159 $280 $636
Select Shares $36 $117 $206 $466
</TABLE>
The performance information above shows you how PERFORMANCE has varied from
YEAR-TO-YEAR and how it averages out OVER TIME.
SCHWAB 1000 FUND 12
<PAGE> 14
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 9/1/97 - 9/1/96 - 9/1/95 - 9/1/94 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 8/31/97 8/31/96 8/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 29.90 25.25 24.78 18.14 15.68 13.08
------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.26 0.27 0.04 0.28 0.24 0.26
Net realized and unrealized gain on investments 7.21 4.64 0.43 6.62 2.45 2.48
------------------------------------------------------------------------
Total income from investment operations 7.47 4.91 0.47 6.90 2.69 2.74
Less distributions:
Dividends from net investment income (0.25) (0.26) -- (0.26) (0.23) (0.14)
------------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 37.12 29.90 25.25 24.78 18.14 15.68
========================================================================
Total return (%) 25.12 19.63 1.90 1 38.32 17.27 21.23
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.46 0.46 0.46 2 0.47 0.49 0.54
Expense reductions reflected in above ratio 0.05 0.05 0.04 2 0.06 0.08 0.09
Ratio of net investment income to average net assets 0.78 1.02 1.00 2 1.33 1.66 2.03
Portfolio turnover rate 3 2 -- 2 2 2
Net assets, end of period ($ x 1,000,000) 4,925 3,657 2,611 2,499 1,560 827
</TABLE>
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 9/1/97 - 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97 8/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 29.93 25.26 24.79 22.64
--------------------------------------------------
Income from investment operations:
Net investment income 0.30 0.32 0.04 0.05
Net realized and unrealized gain on investments 7.22 4.63 0.43 2.10
--------------------------------------------------
Total income from investment operations 7.52 4.95 0.47 2.15
Less distributions:
Dividends from net investment income (0.29) (0.28) -- --
--------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 37.16 29.93 25.26 24.79
==================================================
Total return (%) 25.29 19.79 1.90 1 9.50 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.35 0.35 0.35 2 0.35 2
Expense reductions reflected in above ratio 0.02 0.04 0.06 2 0.33 2
Ratio of net investment income to average net assets 0.89 1.11 1.11 2 1.26 2
Portfolio turnover rate 3 2 -- 2
Net assets, end of period ($ x 1,000,000) 2,214 1,041 426 347
</TABLE>
1 Not annualized.
2 Annualized.
13 SCHWAB 1000 FUND
<PAGE> 15
SCHWAB
SMALL-CAP INDEX FUND(R)
TICKER SYMBOLS
INVESTOR SHARES SWSMX
SELECT SHARES(R) SWSSX
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB SMALL-CAP INDEX.(R)
INDEX
THE SCHWAB SMALL-CAP INDEX(R) 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.
Like many index funds, the fund also may invest in short-term investments and
lend securities to minimize the gap in performance that naturally exists between
any index fund and its index. This gap occurs mainly because, unlike the index,
the fund incurs expenses and must keep a small portion of its assets in cash for
business operations. Because any income from securities lending and short-term
investments typically is not enough to eliminate the effect of expenses, the
fund's performance normally is below that of the index.
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 $8 billion to
$15 million in terms of their total market value. (All figures are as of
10/31/99.)
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.
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.
SMALL-CAP INDEX FUND 14
<PAGE> 16
With its SMALL-CAP FOCUS, this fund may make sense for long-term investors who
are willing to accept greater risk in the pursuit of potentially higher
long-term returns.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE SMALL-CAP PORTION OF THE U.S. STOCK MARKET, as
measured by the index. It follows the market during upturns as well as
downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
HISTORICALLY, SMALL-CAP STOCKS HAVE BEEN RISKIER THAN LARGE- AND MID-CAP STOCKS.
Stock prices of smaller companies may be based in substantial part on future
expectations rather than current achievements, and may move sharply, especially
during market upturns and downturns. In addition, during any period when
small-cap stocks perform less well than large- or mid-cap stocks, the fund may
underperform funds that have exposure to those segments of the U.S. stock
market. Likewise, whenever U.S. small-cap stocks fall behind other types of
investments -- bonds, for instance -- the fund's performance also will lag these
investments.
OTHER RISK FACTORS
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also 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 SMALL-CAP INDEX FUND
<PAGE> 17
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the indices do not include any costs of investments.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.
ANNUAL TOTAL RETURNS (%) as of 12/31
INVESTOR SHARES
[BAR GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98 99
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
-3.08 27.65 15.49 25.69 -3.57 24.20
</TABLE>
BEST QUARTER: 18.09% Q2 1997
WORST QUARTER: -20.94% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 24.20 17.28 13.71 1
Select Shares(R) 24.44 -- 16.38 2
Russell 2000 Index(R) 21.26 16.70 13.54 3
Schwab Small-Cap Index(R) 27.67 19.04 15.41 3
</TABLE>
1 Inception: 12/3/93.
2 Inception: 5/19/97.
3 From 12/3/93.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE (%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
Redemption fee, charged only
on shares you sell within 180
days of buying them and paid
directly to the fund* 0.75 0.75
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
- --------------------------------------------------------------------------------
Management fees** 0.31 0.31
Distribution (12b-1) fees None None
Other expenses 0.32 0.18
=========================
Total annual operating expenses 0.63 0.49
EXPENSE REDUCTION (0.14) (0.11)
-------------------------
NET OPERATING EXPENSES*** 0.49 0.38
=========================
</TABLE>
* For shares purchased prior to 5/1/00 the redemption fee is 0.50%.
** Reflects current fees.
*** Guaranteed by Schwab and the investment adviser through 2/28/01.
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $50 $188 $337 $773
Select Shares $39 $146 $263 $605
</TABLE>
The performance information above shows you how PERFORMANCE has varied from
YEAR-TO-YEAR and how it averages out OVER TIME.
SMALL-CAP INDEX FUND 16
<PAGE> 18
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 11/1/95 - 11/1/94 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 15.39 17.73 13.59 11.70 10.05
------------------------------------------------------------------
Income from investment operations:
Net investment income 0.06 0.05 0.06 0.07 0.10
Net realized and unrealized gain (loss)
on investments 2.89 (2.33) 4.14 1.88 1.61
------------------------------------------------------------------
Total income from investment operations 2.95 (2.28) 4.20 1.95 1.71
Less distributions:
Dividends from net investment income (0.06) (0.06) (0.06) (0.06) (0.06)
Distributions from realized gains on investments (0.87) -- -- -- --
------------------------------------------------------------------
Total distributions (0.93) (0.06) (0.06) (0.06) (0.06)
------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.41 15.39 17.73 13.59 11.70
==================================================================
Total return (%) 19.96 (12.88) 31.03 16.73 17.11
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.49 0.49 0.52 0.59 0.68
Expense reductions reflected in above ratio 0.30 0.32 0.37 0.35 0.34
Ratio of net investment income to average net assets 0.33 0.35 0.53 0.56 0.68
Portfolio turnover rate 41 40 23 23 24
Net assets, end of period ($ x 1,000,000) 452 480 410 209 122
</TABLE>
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 15.41 17.75 14.50
------------------------------------------
Income from investment operations:
Net investment income 0.07 0.08 0.02
Net realized and unrealized gain (loss)
on investments 2.90 (2.35) 3.23
------------------------------------------
Total income from investment operations 2.97 (2.27) 3.25
Less distributions:
Dividends from net investment income (0.07) (0.07) --
Distributions from realized gains on investments (0.87) -- --
------------------------------------------
Total distributions (0.94) (0.07) --
------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.44 15.41 17.75
==========================================
Total return (%) 20.14 (12.81) 22.41 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.38 0.38 0.38 2
Expense reductions reflected in above ratio 0.27 0.33 0.52 2
Ratio of net investment income to average net assets 0.44 0.46 0.56 2
Portfolio turnover rate 41 40 23
Net assets, end of period ($ x 1,000,000) 447 150 81
</TABLE>
1 Not annualized.
2 Annualized.
17 SMALL-CAP INDEX FUND
<PAGE> 19
SCHWAB
TOTAL STOCK MARKET
INDEX FUND(TM)
TICKER SYMBOLS
INVESTOR SHARES SWTIX
SELECT SHARES(R) SWTSX
THE FUND SEEKS TO TRACK THE TOTAL RETURN OF THE ENTIRE U.S. STOCK MARKET, AS
MEASURED BY THE WILSHIRE 5000 EQUITY INDEX.
INDEX
THE FUND'S BENCHMARK INDEX INCLUDES ALL PUBLICLY TRADED COMMON STOCKS OF
COMPANIES HEADQUARTERED IN THE UNITED STATES FOR WHICH PRICING INFORMATION IS
READILY AVAILABLE -- currently more than 7,100 stocks. The index weights each
stock according to its market capitalization (total market value of all shares
outstanding).
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.
Because it would be impractical to invest in every company in the U.S. stock
market, the fund uses statistical sampling techniques to assemble a portfolio
whose performance is expected to resemble that of the index. The fund generally
expects that its portfolio will include the largest 2,500 to 3,000 U.S. stocks
(measured by market capitalization), and that its industry weightings, dividend
yield and price/earnings ratio will be similar to those of the index.
The fund may use certain techniques in seeking to enhance after-tax performance,
such as adjusting its weightings of certain stocks or choosing to realize
certain capital losses and use them to offset capital gains. These strategies
may help the fund reduce taxable capital gain distributions.
Like many index funds, the fund also may invest in futures contracts and lend
securities in seeking to enhance total return and minimize the gap between its
performance and that of the index. However, the fund's performance normally is
below that of the index.
THE U.S. STOCK MARKET
The U.S. stock market is commonly divided into three segments, based on market
capitalization.
Mid- and small-cap stocks are the most numerous, but make up only about
one-third of the total value of the market. In contrast, large-cap stocks are
relatively few in number but make up approximately two-thirds of the market's
total value. In fact, the largest 3,000 of the market's listed stocks represent
about 98% of its total value. (All figures on this page are as of 10/31/99).
In terms of performance, these segments can behave somewhat differently from
each other, over the short term as well as the long term. For that reason, the
performance of the overall stock market can be seen as a blend of the
performance of all three segments.
TOTAL STOCK MARKET INDEX FUND 18
<PAGE> 20
With its very BROAD EXPOSURE to the U.S. stock market, this fund is designed for
LONG-TERM INVESTORS who want exposure to all three tiers of the market: large-,
mid- and small-cap.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE 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 will not take steps to reduce market exposure or to
lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
Because the fund encompasses stocks from across the economy, it is broadly
diversified, which reduces the impact of the performance of any given industry,
individual stock or market segment. But whenever any particular market segment
outperforms the U.S. stock market as a whole, the fund may underperform funds
that have greater exposure to that segment. Likewise, whenever U.S. stocks fall
behind other types of investments -- bonds, for instance --the fund's
performance also will lag these investments. Because the fund gives greater
weight to larger stocks, most of its performance will reflect the performance of
the large-cap segment.
OTHER RISK FACTORS
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also involve risks.
For example, the fund's use of sampling may increase the gap between the
performance of the fund and that of the index. Futures contracts, which the fund
uses to gain exposure to stocks for its cash balances, also 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
Wilshire and Wilshire 5000 are registered service marks of Wilshire Associates,
Inc. The fund is not sponsored, endorsed, sold or promoted by Wilshire
Associates, and Wilshire Associates is not in any way affiliated with the fund.
Wilshire Associates makes no representation regarding the advisability of
investing in the fund or in any stock included in the Wilshire 5000.
19 TOTAL STOCK MARKET INDEX FUND
<PAGE> 21
PERFORMANCE
Because this is a new fund, no performance figures are given. Information will
appear in a future version of the fund's prospectus.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.
FEE TABLE (%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES (R)
- --------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
Redemption fee, charged
only on shares you sell within
180 days of buying them and
paid directly to the fund* 0.75 0.75
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.30 0.30
Distribution (12b-1) fees None None
Other expenses** 0.61 0.44
=====================
Total annual operating expenses 0.91 0.74
EXPENSE REDUCTION (0.51) (0.47)
---------------------
NET OPERATING EXPENSES*** 0.40 0.27
=====================
</TABLE>
* For shares purchased prior to 5/1/00, the redemption fee is 0.50%.
** Based on estimated expenses for the current fiscal year.
*** Guaranteed by Schwab and the investment adviser through 2/28/01.
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C>
Investor Shares $ 41 $ 239
Select Shares $ 28 $ 189
</TABLE>
TOTAL STOCK MARKET INDEX FUND 20
<PAGE> 22
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
6/1/99 -
INVESTOR SHARES 10/31/99
- --------------------------------------------------------------------------------
<S> <C>
PER-SHARE DATA ($)
- --------------------------------------------------------------------------------
Net asset value at beginning of period 20.00
-------------------
Income from investment operations:
Net investment income 0.07
Net realized and unrealized gain on investments 0.80
-------------------
Total income from investment operations 0.87
-------------------
NET ASSET VALUE AT END OF PERIOD 20.87
===================
Total return (%) 4.35 1
RATIOS/SUPPLEMENTAL DATA (%)
- --------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.40 2
Expense reductions reflected in above ratio 0.51 2
Ratio of net investment income to average net assets 0.92 2
Portfolio turnover rate 1
Net assets, end of period ($ x 1,000,000) 136
</TABLE>
<TABLE>
<CAPTION>
6/1/99 -
SELECT SHARES(R) 10/31/99
- --------------------------------------------------------------------------------
<S> <C>
PER-SHARE DATA ($)
- --------------------------------------------------------------------------------
Net asset value at beginning of period 20.00
------------------
Income from investment operations:
Net investment income 0.07
Net realized and unrealized gain on investments 0.82
------------------
Total income from investment operations 0.89
------------------
NET ASSET VALUE AT END OF PERIOD 20.89
==================
Total return (%) 4.45 1
RATIOS/SUPPLEMENTAL DATA (%)
- --------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.27 2
Expense reductions reflected in above ratio 0.47 2
Ratio of net investment income to average net assets 1.05 2
Portfolio turnover rate 1
Net assets, end of period ($ x 1,000,000) 149
</TABLE>
1 Not annualized.
2 Annualized.
21 TOTAL STOCK MARKET INDEX FUND
<PAGE> 23
SCHWAB
INTERNATIONAL INDEX FUND(R)
TICKER SYMBOLS
INVESTOR SHARES SWINX
SELECT SHARES(R) SWISX
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB INTERNATIONAL
INDEX.(R)
INDEX
THE SCHWAB INTERNATIONAL INDEX(R) INCLUDES COMMON STOCKS OF THE 350 LARGEST
PUBLICLY TRADED COMPANIES FROM SELECTED COUNTRIES OUTSIDE THE UNITED STATES. The
selected countries all have developed securities markets and include most
Western European countries, as well as Australia, Canada, Hong Kong and Japan --
currently 15 countries in all. Within these countries, Schwab identifies the 350
largest companies according to their market capitalizations (total market value
of all shares outstanding), in U.S. dollars. The index does not maintain any
particular country weightings, although any given country cannot represent more
than 35% of the index.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does, and does not hedge its exposure to foreign currencies beyond
using forward contracts to lock in transaction prices until settlement. In
seeking to enhance after-tax performance, the fund may choose to realize certain
capital losses and use them to offset capital gains. This strategy may help the
fund reduce taxable capital gain distributions.
Like many index funds, the fund also may invest in short-term investments and
lend securities to minimize the gap in performance that naturally exists between
any index fund and its index. This gap occurs mainly because, unlike the index,
the fund incurs expenses and must keep a small portion of its assets in cash for
business operations. Because any income from securities lending and short-term
investments typically is not enough to eliminate the effect of expenses, the
fund's performance normally is below that of the index.
INTERNATIONAL STOCKS
Over the past several decades, foreign stock markets have grown rapidly. The
market value of foreign stocks today represents approximately 43% of the world's
total market capitalization. (All figures are as of 10/31/99.)
For some investors, an international index fund represents an opportunity for
low-cost access to a variety of world markets in one fund. Others turn to
international stocks to diversify a portfolio of U.S. investments, because
international stock markets historically have performed somewhat differently
from the U.S. market.
INTERNATIONAL INDEX FUND 22
<PAGE> 24
For long-term investors who are interested in the potential rewards of
INTERNATIONAL INVESTING and who are prepared for the additional risks, this fund
could be worth considering.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE PERFORMANCE OF A MIX OF INTERNATIONAL LARGE-CAP
STOCKS, as measured by the index. It follows these stocks during upturns as well
as downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of market declines.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative,
short-term or long-term. Other factors may be ignored by the market as a whole
but may cause movements in the price of one company's stock or the stocks of one
or more industries (for example, rising oil prices may lead to a decline in
airline stocks).
INTERNATIONAL STOCKS CARRY ADDITIONAL RISKS. Changes in currency exchange rates
can erode market gains or widen market losses. International markets -- even
those that are well established -- are often more volatile than those of the
United States, for reasons ranging from a lack of reliable company information
to the risk of political upheaval. In addition, during any period when large-cap
international stocks perform less well than other types of stocks or other types
of investments -- bonds, for instance -- the fund's performance also will lag
these investments.
OTHER RISK FACTORS
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also 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.
23 INTERNATIONAL INDEX FUND
<PAGE> 25
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the indices do not include any costs of investments.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 28.
ANNUAL TOTAL RETURNS (%) as of 12/31
INVESTOR SHARES
[BAR GRAPH]
94 95 96 97 98 99
3.84 14.22 9.12 7.31 15.85 33.62
BEST QUARTER: 19.88% Q4 1999
WORST QUARTER: -14.93% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 33.62 15.67 13.06 1
Select Shares(R) 33.79 -- 17.88 2
MSCI-EAFE(R) Index 26.96 12.83 10.99 3
Schwab International
Index(R) 33.81 16.21 13.62 3
</TABLE>
1 Inception: 9/9/93.
2 Inception: 5/19/97.
3 From 9/9/93.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE (%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES(R)
- --------------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
Redemption fee, charged only
on shares you sell within 180
days of buying them and paid
directly to the fund* 1.50 1.50
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees** 0.42 0.42
Distribution (12b-1) fees None None
Other expenses 0.35 0.22
------------------------
Total annual operating expenses 0.77 0.64
EXPENSE REDUCTION (0.19) (0.17)
------------------------
NET OPERATING EXPENSES*** 0.58 0.47
========================
</TABLE>
* For shares purchased prior to 5/1/00, the redemption fee is 0.50%.
** Reflects current fees.
*** Guaranteed by Schwab and the investment adviser through 2/28/01.
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $59 $227 $409 $936
Select Shares $48 $188 $340 $782
</TABLE>
The performance information above shows you how PERFORMANCE has varied from
YEAR-TO-YEAR and how it averages out OVER TIME.
INTERNATIONAL INDEX FUND 24
<PAGE> 26
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 11/1/95 - 11/1/94 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 14.21 13.31 12.23 11.13 10.89
--------------------------------------------------------------------
Income from investment operations:
Net investment income 0.19 0.17 0.17 0.16 0.14
Net realized and unrealized gain
on investments 3.66 0.88 1.08 1.07 0.22
--------------------------------------------------------------------
Total income from investment operations 3.85 1.05 1.25 1.23 0.36
Less distributions:
Dividends from net investment income (0.13) (0.15) (0.17) (0.13) (0.12)
--------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.93 14.21 13.31 12.23 11.13
====================================================================
Total return (%) 27.31 8.02 10.33 11.07 3.35
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses
to average net assets 0.58 0.58 0.61 0.69 0.85
Expense reductions reflected in above ratio 0.41 0.46 0.52 0.48 0.37
Ratio of net investment income to average net assets 1.24 1.35 1.36 1.50 1.45
Portfolio turnover rate 5 6 13 6 --
Net assets, end of period ($ x 1,000,000) 447 428 318 247 180
</TABLE>
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 14.23 13.32 13.59
--------------------------------------------
Income from investment operations:
Net investment income 0.18 0.22 0.04
Net realized and unrealized gain (loss)
on investments 3.70 0.85 (0.31)
--------------------------------------------
Total income from investment operations 3.88 1.07 (0.27)
Less distributions:
Dividends from net investment income (0.15) (0.16) --
--------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.96 14.23 13.32
============================================
Total return (%) 27.49 8.16 (1.99) 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.47 0.47 0.47 2
Expense reductions reflected in above ratio 0.39 0.48 0.80 2
Ratio of net investment income to average net assets 1.57 1.49 0.17 2
Portfolio turnover rate 5 6 13
Net assets, end of period ($ x 1,000,000) 449 94 50
</TABLE>
1 Not annualized.
2 Annualized.
25 INTERNATIONAL INDEX FUND
<PAGE> 27
FUND MANAGEMENT
The fund's investment adviser, Charles Schwab Investment Management, Inc., has
more than $100 billion under management.
The investment adviser for the Schwab Equity Index Funds is Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.
Founded in 1989, the firm today serves as investment adviser for all of the
SchwabFunds.(R) The firm manages assets for more than 4 million shareholder
accounts. (All figures on this page are as of 10/31/99.)
As the investment adviser, the firm oversees the asset management and
administration of the Schwab Equity Index Funds. As compensation for these
services, the firm receives a management fee from each fund. For the 12 months
ended 10/31/99, these fees were 0.12% for the Schwab S&P 500 Fund, 0.21% for the
Schwab 1000 Fund,(R) 0.20% for the Schwab Small-Cap Index Fund(R) and 0.25% 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. For Schwab Total Stock Market Index
Fund, this fee is calculated as follows:
<TABLE>
<CAPTION>
MANAGEMENT FEE (% of average daily net assets)
- -------------------------------------------------------------------------------
<S> <C>
First $500 million of assets 0.30%
Assets above $500 million 0.22%
</TABLE>
GERI HOM, a vice president of the investment adviser, is responsible for the
day-to-day management of each of the funds. Prior to joining the firm in 1995,
she worked for nearly 15 years in equity index management.
LARRY MANO, a portfolio manager, is responsible for the day-to-day management of
Schwab Total Stock Market Index Fund. Prior to joining the firm in 1998, he
worked for 20 years in equity index management, most recently at Wilshire
Associates, Inc.
FUND MANAGEMENT 26
<PAGE> 28
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.
27 INVESTING IN THE FUNDS
<PAGE> 29
BUYING SHARES
Shares of the funds may be purchased through a Schwab brokerage account or
through certain third-party investment providers, such as other financial
institutions, investment professionals and workplace retirement plans.
The information on these pages outlines how Schwab brokerage account investors
can place "good orders" to buy, sell and exchange shares of the funds. If you
are investing through a third-party investment provider, some of the
instructions, minimums and policies may be different. Some investment providers
may charge transaction or other fees. Contact your investment provider for more
information.
SCHWAB ACCOUNTS
Different types of Schwab brokerage accounts are available, with varying account
opening and balance requirements. Some Schwab brokerage account features can
work in tandem with features offered by the funds.
For example, when you sell shares in a fund, the proceeds automatically are paid
to your Schwab brokerage account. From your account, you can use features such
as MoneyLink,(TM) which lets you move money between your brokerage accounts and
bank accounts, and Automatic Investment Plan (AIP), which lets you set up
periodic investments.
For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
STEP 1
CHOOSE A FUND AND A SHARE CLASS. Your choice may depend on the amount of your
investment. Currently, e.Shares(R) are available only for the S&P 500 Fund and
are offered to clients of Schwab Institutional, The Charles Schwab Trust Company
and certain retirement plans. The minimums shown below are for each fund and
share class.
<TABLE>
<CAPTION>
MINIMUM INITIAL MINIMUM ADDITIONAL
SHARE CLASS INVESTMENT INVESTMENT MINIMUM BALANCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares $2,500 ($1,000 for $500 ($100 for $1,000 ($500 for
retirement and Automatic retirement and
custodial accounts) Investment Plan) custodial accounts)
- --------------------------------------------------------------------------------
Select Shares(R) $50,000 $1,000 $40,000
- --------------------------------------------------------------------------------
e.Shares(R) $1,000 ($500 for $100 $1,000 ($500 for
retirement and retirement and
custodial accounts) custodial accounts)
</TABLE>
STEP 2
CHOOSE AN OPTION FOR FUND DISTRIBUTIONS. The three options are described below.
If you don't indicate a choice, you will receive the first option.
<TABLE>
<CAPTION>
OPTION FEATURES
- --------------------------------------------------------------------------------
<S> <C>
Reinvestment All dividends and capital gain distributions are invested
automatically in shares of your fund and share class.
- --------------------------------------------------------------------------------
Cash/reinvestment You receive payment for dividends, while any capital gain
mix distributions are invested in shares of your fund and share
class.
- --------------------------------------------------------------------------------
Cash You receive payment for all dividends and capital gain
distributions.
</TABLE>
STEP 3
PLACE YOUR ORDER. Use any of the methods described at right. Remember that
e.Shares are available only through SchwabLink. Make checks payable to Charles
Schwab & Co., Inc.
INVESTING IN THE FUNDS 28
<PAGE> 30
SELLING/EXCHANGING SHARES
Use any of the methods described below to sell shares of a fund.
When selling or exchanging shares, please be aware of the following policies:
- - A fund may take up to seven days to pay sale proceeds.
- - If you are selling shares that were recently purchased by check, the proceeds
may be delayed until the check for purchase clears; this may take up to 15
days from the date of purchase.
- - As indicated in each fund's fee table, excluding S&P 500 Fund, each fund
charges a redemption fee, payable to the fund, on the sale or exchange of any
shares that have been held for less than 180 days; in attempting to minimize
this fee, a fund will first sell any shares in your account that aren't
subject to the fee (including shares acquired through reinvestment or
exchange).
- - There is no redemption fee when you exchange between share classes of the
same fund.
- - The funds reserve the right to honor redemptions in portfolio securities
instead of cash when your redemptions over a 90-day period exceed $250,000 or
1% of a fund's assets, whichever is less.
- - Exchange orders must meet the minimum investment and other requirements for
the fund and share class into which you are exchanging.
- - You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.
METHODS FOR PLACING DIRECT ORDERS
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
SCHWABLINK
Investment professionals should follow the transaction instructions in the
SchwabLink manual; for technical assistance, call 800-367-5198.
MAIL
Write to SchwabFunds(R) at:
P.O. Box 7575
San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab branch office.
WHEN PLACING ORDERS
With every order to buy, sell or exchange shares, you will need to include the
following information:
- - Your name
- - Your account number (for SchwabLink transactions, include the master account
and subaccount numbers)
- - The name and share class of the fund whose shares you want to buy or sell
- - The dollar amount or number of shares you would like to buy, sell or exchange
- - For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer
- - When selling shares, how you would like to receive the proceeds
Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.
29 INVESTING IN THE FUNDS
<PAGE> 31
TRANSACTION POLICIES
THE FUNDS ARE OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN.
THE FUNDS CALCULATE THEIR SHARE PRICES EACH BUSINESS DAY, for each share class,
after the close of the NYSE. A fund's share price is its net asset value per
share, or NAV, which is the fund's net assets divided by the number of its
shares outstanding. Orders to buy, sell or exchange shares that are received in
good order prior to the close of the fund (generally 4 p.m. Eastern time) will
be executed at the next share price calculated that day.
In valuing their securities, the funds use market quotes if they are readily
available. In cases where quotes are not readily available, a fund may value
securities based on fair values developed using methods approved by the fund's
Board of Trustees.
Shareholders of the Schwab International Index Fund(R) should be aware that
because foreign markets are often open on weekends and other days when the fund
is closed, the value of the fund's portfolio may change on days when it is not
possible to buy or sell shares of the fund.
THE FUNDS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following:
- - To automatically redeem your shares if the account they are held in is closed
for any reason or your balance falls below the minimum for your share class
as a result of selling or exchanging your shares
- - To modify or terminate the exchange privilege upon 60 days' written notice to
shareholders
- - To refuse any purchase or exchange order, including large purchase orders
that may negatively impact their operations and orders that appear to be
associated with short-term trading activities
- - To change or waive a fund's investment minimums
- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC
- - To withdraw or suspend any part of the offering made by this prospectus
- - To revise the redemption fee criteria
INVESTING IN THE FUNDS 30
<PAGE> 32
DISTRIBUTIONS AND TAXES
ANY INVESTMENT IN THE FUND TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in the fund. You also can
visit the Internal Revenue Service (IRS) web site at www.irs.gov.
AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS AND GAINS YOUR
FUND EARNS. Every year, each fund distributes to its shareholders substantially
all of its net investment income and net capital gains, if any. These
distributions typically are paid in December to all shareholders of record.
UNLESS YOU ARE INVESTING THROUGH A TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT, YOUR
FUND DISTRIBUTIONS GENERALLY HAVE TAX CONSEQUENCES. Each fund's net investment
income and short-term capital gains are distributed as dividends and are taxable
as ordinary income. Other capital gain distributions are taxable as long-term
capital gains, regardless of how long you have held your shares in the fund.
Distributions generally are taxable in the tax year in which they are declared,
whether you reinvest them or take them in cash.
GENERALLY, ANY SALE OF YOUR SHARES IS A TAXABLE EVENT. A sale may result in a
capital gain or loss for you. The gain or loss generally will be treated as
short term if you held the shares for 12 months or less, long term if you held
the shares longer.
FOR TAX PURPOSES, AN EXCHANGE BETWEEN FUNDS IS DIFFERENT FROM AN EXCHANGE
BETWEEN CLASSES. An exchange between funds is considered a sale. An exchange
between classes within a fund is not reported as a taxable sale.
SHAREHOLDERS IN THE SCHWAB INTERNATIONAL INDEX FUND(R) MAY HAVE ADDITIONAL TAX
CONSIDERATIONS as a result of foreign tax payments made by the fund. Typically,
these payments will reduce the fund's dividends but will still be included in
your taxable income. You may be able to claim a tax credit or deduction for your
portion of foreign taxes paid by the fund, however.
AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DISTRIBUTIONS the fund paid during the previous
calendar year. Schwab brokerage account customers also receive information on
distributions and transactions in their monthly account statements.
SCHWAB BROKERAGE ACCOUNT CUSTOMERS WHO SELL FUND SHARES typically will receive a
report that calculates their gain or loss using the "average cost"
single-category method. This information is not reported to the IRS, and you
still have the option of calculating gains or losses using any other methods
permitted by the IRS.
MORE ON DISTRIBUTIONS
If you are investing through a taxable account and purchase shares of a fund
just before it declares a distribution, you may receive a portion of your
investment back as a taxable distribution. This is because when a fund makes a
distribution, the share price is reduced by the amount of the distribution.
You can avoid "buying a dividend," as it is often called, by finding out if a
distribution is imminent and waiting until afterwards to invest. Of course, you
may decide that the opportunity to gain a few days of investment performance
outweighs the tax consequences of buying a dividend.
31 INVESTING IN THE FUNDS
<PAGE> 33
TO LEARN MORE
This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the SEC's Public Reference Room
or by computer using the SEC's EDGAR database at 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 Total Stock Market Index Fund(TM) 811-7704
Schwab International Index Fund(R) 811-7704
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0102
800-SEC-0330 (Public Reference Section)
202-942-8090
www.sec.gov
[email protected]
SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
www.schwab.com/schwabfunds
SCHWAB
EQUITY INDEX FUNDS
PROSPECTUS
February 29, 2000
[CHARLES SCHWAB LOGO]
MKT3644FLT-1
<PAGE> 34
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB EQUITY INDEX FUNDS
SCHWAB S&P 500 FUND
SCHWAB 1000 FUND(R)
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB TOTAL STOCK MARKET INDEX FUND(TM)
SCHWAB INTERNATIONAL INDEX FUND(R)
FEBRUARY 29, 2000
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated February 29, 2000 (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, Schwab Total Stock Market
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
Page
INVESTMENT STRATEGIES, RISKS AND LIMITATIONS.............................. 2
MANAGEMENT OF THE FUNDS................................................... 16
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 20
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 20
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 23
DESCRIPTION OF THE TRUSTS................................................. 25
PURCHASE, REDEMPTION, DELEIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES..................................................... 26
TAXATION.................................................................. 28
CALCULATION OF PERFORMANCE DATA........................................... 30
<PAGE> 35
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. There is no guarantee the funds will achieve their objectives.
THE SCHWAB S&P 500 FUND'S investment objective is to seek to track the price and
dividend performance (total return) of common stocks of U. S. companies, as
represented by Standard & Poor's 500 Composite Stock Price Index (the S&P
500(R)).
The S&P 500 is representative of the performance of the U.S. stock market. The
index consists of 500 stocks chosen for market size, liquidity and industry
group representation. It is a market value weighted index (stock price times
number of shares outstanding), with each stock's weight in the index
proportionate to its market value. The S&P 500 does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
index are among the largest, it also includes some relatively small companies.
Those companies, however, generally are established companies within their
industry group. Standard & Poor's (S&P) identifies important industry groups
within the U.S. economy and then allocates a representative sample of stocks
with each group to the S&P 500. There are four major industry sectors within the
index: industrials, utilities, financial and transportation. The fund may
purchase securities of companies with which it is affiliated to the extent these
companies are represented in its index.
The Schwab S&P 500 Fund is not sponsored, endorsed, sold or promoted by S&P. S&P
makes no representation or warranty, express or implied, to the shareholders of
the Schwab S&P 500 Fund or any member of the public regarding the advisability
of investing in securities generally or in the Schwab S&P 500 Fund particularly
or the ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to the Schwab S&P 500 Fund is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 Index, which is determined,
composed and calculated by S&P without regard to the Schwab S&P 500 Fund. S&P
has no obligation to take the needs of the Schwab S&P 500 Fund or its
shareholders into consideration in determining, composing or calculating the S&P
500 Index. S&P is not responsible for and has not participated in the
determination of the prices and amount of Schwab S&P 500 Fund shares or in the
determination or calculation of the equation by which the Schwab S&P 500 Fund's
shares are to be converted into cash. S&P has no obligation or liability in
connection with the administration, marketing or trading of the Schwab S&P 500
Fund's shares.
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
2
<PAGE> 36
therein. S&P makes no warranty, express or implied, as to results to be obtained
by the Schwab S&P 500 Fund, its shareholders or any other person or entity from
the use of the S&P 500(R) Index or any data therein. S&P makes no express or
implied warranties and expressly disclaims all warranties of 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, 1999, the aggregate market capitalization of the stocks
included in the Schwab 1000 Index was approximately $12.2 trillion. This
represents approximately 87% of the total market value of all publicly traded
U.S. companies, as represented by the Wilshire 5000 Index.
THE SCHWAB SMALL-CAP INDEX FUND'S investment objective is to attempt to track
the price and dividend performance (total return) of the Schwab Small-Cap
Index(R) (Small-Cap Index), an index created to represent the performance of
common stocks of the second 1,000 largest U.S. companies, ranked by market
capitalization (share price times the number of shares outstanding). Pursuant to
a policy that may be changed only by vote of a majority of its shareholders, the
Schwab Small-Cap Index Fund will invest at least 65% of its total assets in
common stocks, or other equity securities including preferred stocks, rights and
warrants.
To be included in the Schwab Small-Cap Index, a company must satisfy all of the
following criteria: (1) it must be an "operating company" (i.e., not an
investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the NYSE,
AMEX or the NASDAQ/NMS and (3) its market value must place it among the
second-largest 1,000 such companies as measured by market capitalization (i.e.,
from the company with a rank of 1,001 through the company with a rank of 2,000).
The fund may purchase securities of companies with which it is affiliated to the
extent these companies are represented in its index.
THE SCHWAB TOTAL STOCK MARKET INDEX FUND'S investment objective is to seek to
track the total return of the entire U.S. stock market. In pursuing its
objective, the fund uses the Wilshire 5000 Equity Index to measure the total
return of the U.S. stock market. The Wilshire 5000 Equity Index is
representative of the performance of the entire U.S. stock market. The index
measures the performance of all U.S. headquartered equity securities with
readily available price data. It is a market-value weighted index consisting of
approximately 7,400 stocks. The fund may purchase securities of companies with
which it is affiliated to the extent these companies are represented in its
index.
3
<PAGE> 37
Because it would be too expensive to buy all of the stocks included in the
index, the investment adviser may use statistical sampling techniques in an
attempt to replicate the total return of the U.S. stock market using a smaller
number of securities. These techniques use a smaller number of index securities
than that included in the index, which, when taken together, are expected to
perform similarly to the index. These techniques are based on a variety of
factors, including capitalization, dividend yield, price/earnings ratio, and
industry factors.
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 Schwab
International Index Fund will invest at least 65% of its total assets in common
stocks and other equity securities including preferred stocks, rights and
warrants of companies located in at least three countries other than the United
States.
To be included in the International Index the securities must be issued by an
operating company (i.e., not an investment company) whose principal trading
market is in a country with a major developed securities market outside the
United States. In addition, the market value of the company's outstanding
securities must place the company among the top 350 such companies as measured
by market capitalization (share price times the number of shares outstanding).
The fund may purchase securities of companies with which it is affiliated to the
extent these companies are represented in its index. By tracking the largest
companies in developed markets, the index represents the performance of what
some analysts deem the "blue chips" of international markets. The index also is
designed to provide a broad representation of the international market, by
limiting investments by country to no more than 35% of the total market
capitalization of the index. The International Index was first made available to
the public on July 29, 1993.
The Schwab 1000 Index(R), Small Cap-Index and International Index were developed
and are maintained by Schwab. Schwab receives no compensation from the funds for
maintaining the indexes. Schwab reviews and, as necessary, revises the lists of
companies whose securities are included in the Schwab 1000 Index, the Small-Cap
Index and the International Index usually 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.
4
<PAGE> 38
A particular stock's weighting in the International Index, Small-Cap Index or
Schwab 1000 Index is based on its relative total market value (i.e., its market
price per share times the number of shares outstanding), divided by the total
market capitalization of its Index.
INVESTMENT STRATEGIES AND RISKS
BORROWING may subject a fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money. To avoid this, each fund will
not purchase securities while borrowings represent more than 5% of its total
assets.
CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure. For example, the automobile industry may have a greater exposure to a
single factor, such as an increase in the price of oil, which may adversely
affect the sale of automobiles and, as a result, the value of the industry's
securities. Each fund will not concentrate its investments, unless its index is
so concentrated.
DELAYED-DELIVERY TRANSACTIONS include purchasing and selling securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to buy or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. When purchasing securities on a delayed-delivery basis, a fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Typically, no interest will accrue to the fund until the security
is delivered. The fund will segregate appropriate liquid assets to cover its
delayed-delivery purchase obligations. When a fund sells a security on a
delayed-delivery basis, the fund does not participate in further gains or losses
with respect to that security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, the fund could suffer
losses.
DEPOSITARY RECEIPTS include American or European Depositary Receipts (ADRs or
EDRs), Global Depositary Receipts or Shares (GDRs or GSSs) or other similar
global instruments that are receipts representing ownership of shares of a
foreign-based issuer held in trust by a bank or similar financial institution.
These securities are designed for U.S. and European securities markets as
alternatives to purchasing underlying securities in their corresponding national
markets and currencies. Depositary receipts can be sponsored or unsponsored.
Sponsored depositary receipts are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored depositary
receipts are not contractually obligated to disclose material information in the
United States. Therefore, there may not be a correlation between such
information and the market value of an unsponsored depositary receipt.
DIVERSIFICATION involves investing in a wide range of securities and thereby
spreading and reducing the risks of investment. Each fund is a series of an
open-end investment management company. Each fund is a diversified mutual fund.
EMERGING OR DEVELOPING MARKETS exist in countries that are considered to be in
the initial stages of industrialization. The risks of investing in these markets
are similar to the risks of international investing in general, although the
risks are greater in emerging and developing markets. Countries with emerging or
developing securities markets tend to have economic
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structures that are less stable than countries with developed securities
markets. This is because their economies may be based on only a few industries
and their securities markets may trade a small number of securities. Prices on
these exchanges tend to be volatile, and securities in these countries
historically have offered greater potential for gain (as well as loss) than
securities of companies located in developed countries.
EQUITY SECURITIES represent ownership interests in a corporation, and are
commonly called "stocks." Equity securities historically have outperformed most
other securities, although their prices can fluctuate based on changes in a
company's financial condition, market conditions and political, economic or even
company-specific news. When a stock's price declines, its market value is
lowered even though the intrinsic value of the company may not have changed.
Sometimes factors, such as economic conditions or political events, affect the
value of stocks of companies of the same or similar industry or group of
industries, and may affect the entire stock market.
Types of equity securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, which are probably the most recognized
type of equity security, usually entitle the owner to voting rights in the
election of the corporation's directors and any other matters submitted to the
corporation's shareholders for voting. Preferred stocks do not ordinarily carry
voting rights or may carry limited voting rights, but normally have preference
over the corporation's assets and earnings. For example, preferred stocks have
preference over common stock in the payment of dividends. Preferred stocks also
may pay specified dividends.
Convertible securities are typically preferred stock or bonds that are
exchangeable for a specific number of another form of security (usually the
issuer's common stock) at a specified price or ratio. A corporation may issue a
convertible security that is subject to redemption after a specified date and
usually under certain circumstances. A holder of a convertible security that is
called for redemption would be required to tender it for redemption to the
issuer, convert it to the underlying common stock or sell it to a third party.
Convertible bonds typically pay a lower interest rate than nonconvertible bonds
of the same quality and maturity because of the convertible feature. This
structure allows the holder of the convertible bond to participate in share
price movements in the company's common stock. The actual return on a
convertible bond may exceed its stated yield if the company's common stock
appreciates in value and the option to convert to common shares becomes more
valuable.
Convertible preferred stocks are nonvoting equity securities that pay a fixed
dividend. These securities have a convertible feature similar to convertible
bonds, however, they do not have a maturity date. Due to their fixed income
features, convertible securities provide higher income potential than the
issuer's common stock, but typically are more sensitive to interest rate changes
than the underlying common stock. In the event of liquidation, bondholders have
claims on company assets senior to those of stockholders; preferred stockholders
have claims senior to those of common stockholders.
Convertible securities typically trade at prices above their conversion value,
which is the current market value of the common stock received upon conversion,
because of their higher yield potential than the underlying common stock. The
difference between the conversion value and the price of a convertible security
will vary depending on the value of the underlying common stock and interest
rates. When the underlying value of the common stocks declines, the price of the
issuer's convertible securities will tend not to fall as much because the
convertible security's
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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 a
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 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 Schwab International Index Fund may hold
cash in foreign currencies. These
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investments may be affected favorably or unfavorably by changes in currency
rates and in exchange control regulations, and may cause a fund to incur costs
in connection with conversions between various currencies. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange market as well as by political and
economic factors. Changes in the foreign currency exchange rates also may affect
the value of dividends and interest earned, gains and losses realized on the
sale of securities, and net investment income and gains, if any, to be
distributed to shareholders by the International Index Fund.
In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the 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). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the converted currencies of each country. The European
Central Bank, all national central banks and all stock exchanges and
depositories began pricing, trading and settling 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 a fund's investments and/or increase its
expenses. While the investment adviser has taken steps to minimize the impact of
the conversion on the funds, it is not possible to know precisely what impact
the conversion will have on the funds, if any, nor is it possible to eliminate
the risks completely.
Securities that are acquired by a fund outside the United States and that are
publicly traded in the United States on a foreign securities exchange or in a
foreign securities market, are not considered illiquid provided that: (1) the
fund acquires and holds the securities with the intention of reselling the
securities in the foreign trading market, (2) the fund reasonably believes it
can readily dispose of the securities in the foreign trading market or for cash
in the United States, or (3) 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 Schwab International Index Fund normally engages in forward
foreign currency exchange contracts in order to secure exchange rates for
portfolio securities purchased or sold, but waiting settlement. These
transactions do not seek to eliminate any fluctuations in the underlying prices
of the securities involved. Instead, the transactions simply establish a rate of
exchange that can be expected when the fund settles its securities transactions
in the future.
FUTURES CONTRACTS are securities that represent an agreement between two parties
that obligates one party to buy and the other party to sell specific securities
at an agreed-upon price on a stipulated future date. In the case of futures
contracts relating to an index or otherwise not calling for physical
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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 Schwab International Index Fund may purchase or
sell futures contracts on a specified foreign currency to "fix" the price in
U.S. dollars of the foreign security it has acquired or sold or expects to
acquire or sell. In regards to the Schwab Total Stock Market Index Fund, because
there is not currently available any futures contract tied directly to either
the total return of the U.S. stock market or the fund's index, there is no
guarantee that this strategy will be successful.
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. Because
margin requirements are normally only a fraction of the amount of the futures
contracts in a given transaction, futures trading can involve a great deal of
leverage. In order to avoid this, the fund will segregate assets in an amount
equal to the margin requirement that is deposited with the broker for its
outstanding futures contracts.
While the funds intend to purchase and sell futures contracts in order to
simulate full investment in the securities comprising their respective indices,
there are risks associated with these transactions. Adverse market movements
could cause a fund to experience substantial losses when buying and selling
futures contracts. Of course, barring significant market distortions, similar
results would have been expected if the fund had instead transacted in the
underlying securities directly. There also is the risk of losing any margin
payments held by a broker in the event of its bankruptcy. Additionally, the
funds incur transaction costs (i.e. brokerage fees) when engaging in futures
trading.
Futures contracts normally require actual delivery or acquisition of an
underlying security or cash value of an index on the expiration date of the
contract. In most cases, however, the contractual obligation is fulfilled before
the date of the contract by buying or selling, as the case may be, identical
futures contracts. Such offsetting transactions terminate the original contracts
and cancel the obligation to take or make delivery of the underlying securities
or cash. There may not always be a liquid secondary market at the time a fund
seeks to close out a futures position. If a fund is unable to close out its
position and prices move adversely, the fund would have to continue to make
daily cash payments to maintain its margin requirements. If a fund had
insufficient cash to meet these requirements it may have to sell portfolio
securities at a
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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. For example, a fund may receive cash collateral and it
may invest it in short-term, interest-bearing obligations, but will do so only
to the extent that it will not lose the tax treatment available to mutual funds.
Lending portfolio securities involves risks that the borrower may fail to return
the securities or provide additional collateral. Also, voting rights with
respect to the loaned securities may pass with the lending of the securities.
A fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash equivalents or other appropriate instruments maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (2) the fund may at any time call the loan and obtain
the return of the securities loaned; (3) the fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of
securities loaned will not at any time exceed one-third of the total assets of
the fund including collateral received from the loan (at market value computed
at the time of the loan).
Although voting rights with respect to loaned securities pass to the borrower,
the lender retains the right to recall a security (or terminate a loan) for the
purpose of exercising the security's voting rights. Efforts to recall such
securities promptly may be unsuccessful, especially for foreign securities or
thinly traded securities such as small-cap stocks. In addition, because
recalling a security may involve expenses to the funds, it is expected that the
funds will do so only where the items being voted upon are, in the judgment of
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser),
either material to the economic value of the security or threaten to materially
impact the issuer's corporate governance policies or structure.
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REPURCHASE AGREEMENTS. Repurchase agreements involve a fund buying securities
(usually U.S. government securities) from a seller and simultaneously agreeing
to sell them back at an agreed-upon price (usually higher) and time. There are
risks that losses will result if the seller does not perform as agreed.
Repurchase agreements will be collateralized by First Tier Securities. In
addition, repurchase agreements collateralized entirely by U.S. government
securities may be deemed to be collateralized fully pursuant to Rule 2a-7.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. Restricted securities may be considered to be liquid if an
institutional or other market exists for these securities. In making this
determination, a fund, under the direction and supervision of the board of
trustees, will take into account the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). To the
extent a fund invests in restricted securities that are deemed liquid, the
general level of illiquidity in the fund's portfolios may be increased if
qualified institutional buyers become uninterested in purchasing these
securities.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by the funds,
including those managed by its investment adviser. Because other investment
companies employ investment advisers and other service providers, investments by
a fund may cause shareholders to pay duplicative fees.
SMALL-CAP STOCKS are common stocks issued by U.S. operating companies with
market capitalizations that place them below the largest 1,000 such companies.
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 Schwab Small-Cap Index Fund's and the Schwab Total Stock Market Index Fund's
respective positions in securities of such companies may be substantial in
relation to the market for such securities. Accordingly, it may be difficult for
the Schwab Small-Cap Index Fund and the Schwab Total Stock Market 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 and the Schwab
Total Stock Market Index Fund) may change sharply during the short term and long
term.
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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 OF THE SCHWAB S&P 500 FUND, SCHWAB 1000 FUND, SCHWAB SMALL-CAP FUND, AND
SCHWAB INTERNATIONAL FUND MAY NOT:
1) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the trust or the investment adviser
individually own beneficially more than half of 1% of the securities of
such issuer and together beneficially own more than 5% of the
securities of such issuer.
2) Invest for the purpose of exercising control or management of another
issuer.
3) Lend money to any person, except that each fund may (i) purchase a
portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) that are distributed
publicly or customarily purchased by institutional investors, and (ii)
lend its portfolio securities.
4) Pledge, mortgage or hypothecate any of its assets, except that, to
secure allowable borrowings, each fund may do so with respect to no
more than one-third of the value of its total assets.
5) Underwrite securities issued by others, except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
EACH OF THE SCHWAB S&P 500 FUND, SCHWAB SMALL-CAP INDEX FUND AND SCHWAB
INTERNATIONAL INDEX FUND MAY NOT:
1) As to 75% of its assets, purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. government, its agencies or
instrumentalities or investments in other registered investment
companies) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of such issuer.
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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 Schwab S&P 500 Fund, purchase securities
of companies that deal in precious metals or interests therein.
5) Purchase securities of other investment companies, except as permitted
by the 1940 Act, including any exemptive relief granted by the SEC.
6) Borrow money or issue senior securities, except that each fund may
borrow from banks as a temporary measure to satisfy redemption requests
or for extraordinary or emergency purposes and then only in an amount
not to exceed one-third of the value of its total assets (including the
amount borrowed), provided that each fund will not purchase securities
while borrowings represent more than 5% of its total assets.
THE SCHWAB 1000 FUND MAY NOT:
1) As to 75% of its assets, purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its
total assets would be invested in the securities of such issuer.
2) Purchase securities (other then securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities) if, as a result of
such purchase, 25% or more of the value of its total assets would be
invested in any industry (except to the extent that the Schwab 1000
Index(R) is also so concentrated). Securities issued by governments or
political subdivisions or authorities of governments are not considered
to be securities subject to this concentration restriction.
3) Invest more than 10% of the total value of its assets in illiquid
securities, including repurchase agreements with maturities in excess
of seven days.
4) Purchase or sell commodities or real estate, including interests in
real estate limited partnerships, provided that the fund may (i)
purchase securities of companies that deal in real estate or interests
therein, and (ii) purchase or sell futures contracts, options
contracts, equity index participations and index participation
contracts.
5) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
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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 SCHWAB TOTAL STOCK MARKET INDEX FUND MAY NOT:
1) Purchase securities of any issuer, except as consistent with the
maintenance of its status as a diversified company under the Investment
Company 1940 Act (the "1940 Act") ;
2) Concentrate investments in a particular industry or group of
industries, except as permitted under the 1940 Act, or the rules or
regulations thereunder; and
3) (i) Purchase or sell commodities, commodities contracts, futures or
real estate, (ii) lend or borrow money, (iii) issue senior securities,
(iv) underwrite securities or (v) pledge, mortgage or hypothecate any
of its assets, except as permitted by the 1940 Act, or the rules or
regulations thereunder.
THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING
THE ABOVE POLICIES AND RESTRICTIONS.
Diversification. Under the 1940 Act and the rules, regulations and
interpretations thereunder, a "diversified company," as to 75% of its total
assets, may not purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government or its agencies, or instrumentalities or
securities of other registered investment companies) if, as a result, more than
5% of its total assets would be invested in the securities of such issuer, or
more than 10% of the issuer's voting securities would be held by the fund.
Concentration. The Securities and Exchange Commission defines concentration as
investing 25% or more of an investment company's total assets in an industry or
group of industries, with certain exceptions.
Borrowing. The 1940 Act restricts the fund from borrowing (including pledging,
mortgaging or hypothecating assets) in excess of 33 1/3% of its total assets
(not including temporary borrowings not in excess of 5% of its total assets).
Lending. Under the 1940 Act, the fund may only make loans if expressly permitted
by its investment policies.
The following additional limitations have been adopted by THE SCHWAB S&P 500
FUND, SCHWAB 1000 FUND, SCHWAB SMALL-CAP FUND AND SCHWAB INTERNATIONAL 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 OF THE SCHWAB S&P 500 FUND, SCHWAB 1000 FUND, SCHWAB SMALL-CAP FUND AND
SCHWAB INTERNATIONAL FUND MAY NOT:
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1) 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.
2) 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.
3) 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.
4) Make short sales, except for short sales against the box.
5) 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.
6) 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:
1) 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.
THE SCHWAB TOTAL STOCK MARKET INDEX FUND MAY NOT:
1) Purchase securities of any issuer, if as a result, more than 15% of its
net assets would be invested in illiquid securities, including
repurchase agreements with maturities in excess of 7 days.
2) Invest for the purpose of exercising control or management of another
issuer.
3) Purchase securities of other investment companies, except as permitted
by the 1940 Act, including any exemptive relief granted by the SEC.
4) Sell securities short unless it owns the security or the right to
obtain the security or equivalent securities (transactions in futures
contracts and options are not considered selling securities short).
5) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities and
provided that margin payments in connection with futures contracts and
options on futures shall not constitute purchasing securities on
margin.
15
<PAGE> 49
6) Borrow money except that the fund may (i) borrow money from banks and
(ii) engage in reverse repurchase agreements with any party; provided
that (i) and (ii) in combination do not exceed 33 1/3% of its total
assets (any borrowings that come to exceed this amount will be reduced
to the extent necessary to comply with the limitation within three
business days) and the fund will not purchase securities while
borrowings represent more than 5% of its total assets.
7) Concentrate investments in a particular industry or group of
industries, as concentration is defined under the Investment Company
Act of 1940 or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time except to the
extent the investments of its index are concentrated.
8) Lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of securities or repurchase
agreements).
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 the fund's acquisition of
such security or asset, unless otherwise noted. Except with respect to
non-fundamental limitations (1) illiquid securities and (6) borrowing, any
subsequent change in net assets or other circumstances will not be considered
when determining whether the investment complies with the fund's investment
policies and limitations.
MANAGEMENT OF THE FUNDS
The officers and trustees, their principal occupations during the past five
years and their affiliations, if any, with The Charles Schwab Corporation,
Charles Schwab & Co., Inc. (Schwab) and Charles Schwab Investment Management,
Inc. (CSIM or the investment adviser), are as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUSTS
- --------------------------------------- ------------------------- --------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Co-Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc., Vodaphone
AirTouch PLC (a
</TABLE>
- --------
* This trustee is an "interested person" of the trusts.
16
<PAGE> 50
<TABLE>
<S> <C> <C>
telecommunications company) and
Siebel Systems (a software company).
STEVEN L. SCHEID* President and Trustee Vice Chairman and Executive Vice President, The
June 28, 1953 Charles Schwab Corporation; Vice Chairman and
Enterprise President - Financial Products and
Services, Director, Charles Schwab & Co., Inc.;
Chief Executive Officer and Chief Financial
Officer, Director, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Mr.
Scheid was Executive Vice President of
Finance for First Interstate Bancorp and
Principal Financial Officer from 1995 to 1996.
Prior to 1994, Mr. Scheid was Chief Financial
Officer, First Interstate Bank of Texas.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (Investments) and Chairman and Chief Executive
Officer of North American Trust (real estate
investment trust).
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air
transportation, real estate investment,
management, and investments).
</TABLE>
- --------
* This trustee is an "interested person" of the trusts.
17
<PAGE> 51
<TABLE>
<S> <C> <C>
WILLIAM J. KLIPP* Trustee From 1991 to 1999, Mr. Klipp was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; President and Chief Operating Officer,
Charles Schwab Investment Management, Inc.
JEREMIAH H. CHAFKIN Executive Vice Executive Vice President, SchwabFunds(R), Charles
May 5, 1959 President and Chief Schwab & Co., Inc.; President and Chief
Operating Officer Operating Officer, Charles Schwab Investment
Management, Inc. Prior to November 1999, Mr.
Chafkin was Senior Managing Director, Bankers
Trust Company.
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.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>
Each of the above-referenced officers and/or trustees also serves in the same
capacity as described for the trusts, for The Charles Schwab Family of Funds and
Schwab Annuity Portfolios. The address of each individual listed above is 101
Montgomery Street, San Francisco, California 94104.
Each fund is overseen by a board of trustees. The board of trustees meets
regularly to review each fund's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of a fund's shareholders. The following table provides information as of October
31, 1999, concerning compensation of the trustees. Unless otherwise stated,
information is for the fund complex, which included 40 funds as of December 31,
1999.
18
<PAGE> 52
<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Accrued Compensation
from the as Part of Fund from Fund
Expenses Complex
Schwab Schwab Schwab Schwab Schwab
S&P 500 1000 Small- Total International
Fund Fund(R) Cap Index Stock Index Fund
Fund Market
Index
Fund
- ------------------ --------- ---------- ----------- --------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 0 0 N/A 0
Steven L. Scheid 0 0 0 0 0 N/A 0
William J. Klipp 0 0 0 0 0 N/A 0
Donald F. Dorward $8,570 $12,096 $1,733 $246 $1,777 N/A $118,150
Robert G. Holmes $8,570 $12,096 $1,733 $246 $1,777 N/A $118,150
Donald R. Stephens $8,570 $12,096 $1,733 $246 $1,777 N/A $118,150
Michael W. Wilsey $8,193 $11,579 $1,671 $246 $1,684 N/A $109,450
</TABLE>
DEFERRED COMPENSATION PLAN
Trustees who are not "interested persons" of a trust ("independent trustees")
may enter into a fee deferral plan. Under this plan, deferred fees will be
credited to an account established by the trust as of the date that such fees
would have been paid to the trustee. The value of this account will equal the
value that the account would be if the fees credited to the account had been
invested in the shares of SchwabFunds selected by the trustee. Currently, none
of the independent trustees has elected to participate in this plan.
CODE OF ETHICS
The funds, their investment adviser and Schwab have adopted a Code of Ethics
(Code) as required under the 1940 Act. Subject to certain conditions or
restrictions, the Code permits the trustees, directors, officers or advisory
representatives of the funds or the investment adviser or the directors or
officers of Schwab to buy or sell securities for their own accounts. This
includes securities that may be purchased or held by the funds. Securities
transactions by some of these individuals may be subject to prior approval of
the investment adviser's Chief Compliance Officer or alternate. Most securities
transactions are subject to quarterly reporting and review requirements.
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<PAGE> 53
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of February 1, 2000, the officers and trustees of the trusts, as a group
owned, of record or beneficially, less than 1% of the outstanding voting
securities of the classes and series of each trust.
As of February 1, 2000, the following represents persons or entities that owned,
directly or beneficially, more than 5% of the shares of any class of any of the
funds:
Schwab International Index Fund (R) - Select Shares(R)
Schwab MarketTrack All Equity Portfolio 14.03%
Schwab MarketTrack Balanced Portfolio 11.46%
Schwab MarketTrack Growth Portfolio 17.44%
Schwab S&P 500 Fund - Investor Shares
Charles Schwab Trust Co. 16.15%
S&P 500 Fund - e.Shares(R)
Charles Schwab Trust Co. 10.57%
S&P 500 Fund - Select Shares(R)
Charles Schwab Trust Co. 14.49%
Schwab Small-Cap Index Fund(R) - Select Shares(R)
Schwab MarketTrack Growth II 6.73%
Schwab MarketTrack All Equity Portfolio 11.74%
Schwab MarketTrack Balanced Portfolio 11.44%
Schwab MarketTrack Growth Portfolio 17.39%
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as the funds' investment adviser and
administrator pursuant to Investment Advisory and Administration Agreements
(Advisory Agreements) between it and each trust. Charles Schwab & Co., Inc.
(Schwab) is an affiliate of the investment adviser and is the trusts'
distributor, shareholder services agent and transfer agent. Charles R. Schwab is
the founder, Chairman, Co-Chief Executive Officer and Director of The Charles
Schwab Corporation. As a result of his ownership of and interests in The Charles
Schwab Corporation, Mr. Schwab may be deemed to be a controlling person of the
investment adviser and Schwab.
For its advisory and administrative services to the Schwab S&P 500 Fund, the
investment adviser is entitled to receive an annual fee, accrued daily and paid
monthly, based on the Schwab S&P 500 Fund's average daily net assets as
described below.
First $500 million - 0.20%
More than $500 million - 0.17%
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<PAGE> 54
Prior to February 29, 2000, for its advisory and administrative services to the
Schwab S&P 500 Fund, the investment adviser was 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, 1999, 1998 and 1997, the Schwab S&P 500
Fund paid investment advisory fees of $7,536,000, $2,525,000 and $429,000,
respectively (fees were reduced by $11,794,000, $6,509,000 and $2,410,000,
respectively).
The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, the total operating expenses (excluding interest, taxes
and extraordinary expenses) of the Investor Shares, the e.Shares(R) and the
Select Shares(TM) will not exceed 0.35%, 0.19% and 0.28% respectively, of the
average daily net assets of each class.
For its advisory and administrative services to the Schwab 1000 Fund the
investment adviser is entitled to receive an annual fee, accrued daily and paid
monthly, of 0.30% of the fund's average daily net assets not in excess of $500
million and 0.22% of such assets over $500 million.
For the fiscal years ended October 31, 1999, 1998, and 1997, the Schwab 1000
Fund paid investment advisory fees of $13,006,000, $7,610,000 and $967,000,
respectively (fees were reduced by $1,336,000, $1,552,000, $220,000 and
$1,179,000, respectively).
The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, total operating expenses (excluding interest, taxes and
extraordinary expenses) of the Investor Shares and Select Shares for the Schwab
1000 Fund(R) will not exceed 0.46% and 0.35%, respectively, of the average daily
net assets of each class.
For its advisory and administrative services to the Schwab Total Stock Market
Index Fund, the investment adviser is entitled to receive an annual fee, accrued
daily and paid monthly, of 0.30% of the fund's average daily net assets not in
excess of $500 million, and 0.22% of such net assets over $500 million.
For the fiscal year ended October 31, 1999, the Schwab Total Stock Market Index
Fund paid investment advisory fees of $0 (fees were reduced by $284,000).
The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, the total operating expenses (excluding interest, taxes
and extraordinary expenses) of the Investor Shares and Select Shares for the
fund will not exceed 0.40%, and 0.27%, respectively, of the average daily net
assets of each class.
For its advisory and administrative services to the Schwab Small-Cap Index Fund,
the investment adviser is entitled to receive an annual fee, accrued daily and
paid monthly, based on the Schwab Small-Cap Index Fund's average daily net
assets as described below.
First $500 million - 0.33%
More than $500 million - 0.28%
21
<PAGE> 55
Prior to February 29, 2000 for its advisory and administrative services to the
Schwab Small-Cap Index Fund, the investment adviser was 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, 1999, 1998, 1997, the Schwab Small-Cap
Index Fund paid investment advisory fees of $1,502,000, $921,000 and $540,000,
respectively (fees were reduced by $2,099,000, $1,911,000 and $1,000,000,
respectively).
The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, total operating expenses (excluding interest, taxes and
extraordinary expenses) of the Investor Shares and Select Shares for the Schwab
Small-Cap Index Fund will not exceed 0.49% and 0.38%, respectively, of the
average daily net assets of each class.
Prior to February 29, 2000, for its advisory and administrative services to the
International Index Fund, the investment adviser was 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 its advisory and administrative services to the Schwab International Index
Fund, the investment advisor is entitled to receive an annual fee, accrued daily
and paid monthly, based on the Schwab International Index Fund's average daily
net assets as described below.
First $500 million - 0.43%
More than $500 million - 0.38%
For the fiscal years ended October 31, 1999, 1998 and 1997, the Schwab
International Index Fund paid investment advisory fees of $1,755,000, $940,000
and $643,000, respectively (fees were reduced by $2,625,000, $2,127,000 and
$1,503,000, respectively).
The investment adviser and Schwab have voluntarily guaranteed that, through at
least February 28, 2001, total operating expenses (excluding interest, taxes and
extraordinary expenses) of the Investor Shares and Select Shares for the Schwab
International Index Fund will not exceed 0.58% and 0.47%, respectively, of the
average daily net assets of each class.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of the funds and is the trusts' agent for the purpose of the continuous
offering of the funds' shares. Each fund pays the cost of the prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective investors and for supplementary sales
literature and advertising. Schwab receives no fee under the Distribution
Agreement. Terms of continuation, termination and assignment under the
Distribution Agreement are identical to those described above with respect to
the Advisory Agreement.
22
<PAGE> 56
SHAREHOLDER SERVICES AND TRANSFER AGENT
Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
funds' prospectuses, financial reports and other informational literature about
the funds. Schwab maintains the office space, equipment and personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds and
provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these 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'(R) and e.Shares'(R) average daily net assets.
CUSTODIANS AND FUND ACCOUNTANT
Brown Brothers Harriman & Co., 40 Water Street, Boston MA 02109, serves as
custodian for the Schwab International Index Fund and the Schwab Small-Cap Index
Fund. PFPC Trust Company, 8800 Tinicum Blvd. Third Floor Suite 200,
Philadelphia, PA 19153 serves as custodian to the Schwab S&P 500 Fund, Schwab
1000 Fund, and Schwab Total Stock Market Fund. SEI Investments, Mutual Fund
Services, One Freedom Valley Dr. Oaks, Pennsylvania 19456, serves as fund
accountant for the funds.
The custodians are responsible for the daily safekeeping of securities and cash
held or sold by the funds. The fund accountant maintains all books and records
related to each fund's transactions.
INDEPENDENT ACCOUNTANTS
The funds' independent accountants, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trusts and review
certain regulatory reports and each fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
the trusts engage them to do so. Their address is 333 Market Street, San
Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ended October 31, 1999, 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.
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<PAGE> 57
A 100% portfolio turnover rate would occur, for example, if all portfolio
securities (aside from short-term securities) were sold and either repurchased
or replaced once during the fiscal year. The funds do not expect that their
respective portfolio turnover rates will exceed 100% in any given year, a
turnover rate lower than that of most non-index mutual funds. The funds'
portfolio turnover rates are in the financial highlight tables in the
prospectus.
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the fund, the investment adviser seeks
to obtain best execution. Subject to the supervision of the board of trustees,
the investment adviser will generally select brokers and dealers for the fund on
the basis of a number of factors, including, for example, price paid for
securities, commission paid for transactions, clearance, settlement, reputation,
financial strength and stability, efficiency of execution and error resolution,
block trading and block positioning capabilities, willingness to execute related
or unrelated difficult transactions in the future, and order of call.
In assessing these criteria, the investment adviser will, among other things,
monitor the performance of brokers effecting transactions for the funds to
determine the effect, if any, that the funds' transactions through those brokers
have on the market prices of the stocks involved. This may be of particular
importance for the funds' investments in relatively smaller companies whose
stocks are not as actively traded as those of their larger counterparts. The
funds will seek to buy and sell securities in a manner that causes the least
possible fluctuation in the prices of those stocks in view of the size of the
transactions.
When the execution capability and price offered by two or more broker-dealers
are comparable, the investment adviser may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources also may be used by the investment adviser when
providing advisory services to its clients.
In determining when and to what extent to use Schwab or any other affiliated
broker-dealer as its broker for executing orders for the funds on securities
exchanges, the investment adviser follows procedures, adopted by the board of
trustees, that are designed to ensure that affiliated brokerage commissions (if
relevant) are reasonable and fair in comparison to unaffiliated brokerage
commissions for comparable transactions. The Board reviews the procedures
annually and approves and reviews transactions involving affiliated brokers
quarterly.
In an attempt to obtain best execution for the funds, the investment adviser may
place orders directly with market makers or with third market brokers, Instinet
or brokers on an agency basis. Placing orders with third market brokers or
through Instinet may enable the funds to trade directly with other institutional
holders on a net basis. At times, this may allow the funds to trade larger
blocks than would be possible trading through a single market maker.
BROKERAGE COMMISSIONS
For the fiscal years ended October 31, 1999, 1998 and 1997, the Schwab S&P 500
Fund paid brokerage commissions of $1,266,303, $898,196 and $583,314,
respectively.
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<PAGE> 58
For the fiscal year ended October 31, 1999, 1998, the fiscal period of September
1, 1997 through October 31, 1997, the Schwab 1000 Fund(R) paid brokerage
commissions of $743,826, $641,226 and $92,582, respectively.
For the fiscal years ended October 31, 1999, 1998, 1997, the Schwab Small-Cap
Index Fund paid brokerage commissions of $858,379, $710,856 and $281,321,
respectively.
For the fiscal year ended October 31, 1999, the Schwab Total Stock Market Index
Fund paid brokerage commissions of $152,679.
For the fiscal years ended October 31, 1999, 1998, and 1997, the Schwab
International Index Fund paid brokerage commissions of $205,007, $208,087, and
$83,632, respectively.
Of brokerage commissions paid by the Schwab S&P 500 Fund in 1998 and 1999,
$11,550 (1.34% of the total) and $13,000 (1.03% of the total), respectively, was
paid to Schwab.
Of brokerage commission paid by the Schwab 1000 Fund in 1998 and 1999, $14,360
(2.24% of the total) and $5,040 (0.68% of the total), respectively, was paid to
Schwab. Schwab is an affiliated person of each of the funds.
DESCRIPTION OF THE TRUSTS
Each fund, except the Schwab 1000 Fund, is a series of Schwab Capital Trust, an
open-end investment management company organized as a Massachusetts business
trust on May 7, 1993. The Schwab 1000 Fund is a series of Schwab Investments, an
open-end investment management company organized as a Massachusetts business
trust on October 26, 1990. Each fund is composed of multiple classes of shares:
Select Shares,(TM) Investor Shares and, for the Schwab S&P 500 Fund,
e. Shares.(R)
Each Declaration of Trust provides that shares may be automatically redeemed if
held by a shareholder in an amount less than the minimum required by each fund
or share class. Each fund's initial and subsequent minimum investment and
balance requirements are set forth in the prospectus. These minimums may be
waived for certain investors, including trustees, officers and employees of
Schwab, or changed without prior notice.
The funds may hold special meetings. These meetings may be called for purposes
such as electing trustees, changing fundamental policies and amending management
contracts. Shareholders are entitled to one vote for each share owned and may
vote by proxy or in person. Proxy materials will be mailed to shareholders prior
to any meetings, and will include a voting card and information explaining the
matters to be voted upon.
The bylaws of each trust provide that a majority of shares entitled to vote
shall be a quorum for the transaction of business at a shareholders' meeting,
except that where any provision of law, or of the Declaration of Trust or of the
bylaws permits or requires that (1) holders of any series shall vote as a
series, then a majority of the aggregate number of shares of that series
entitled to vote shall be necessary to constitute a quorum for the transaction
of business by that series, or (2) holders of any class shall vote as a class,
then a majority of the aggregate number of shares of that class entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that class. A
25
<PAGE> 59
majority of the outstanding shares of a fund means the affirmative vote, at an
annual or special meeting of shareholders (a) where 67% or more of the voting
securities are present at the meeting or represented by proxy, of shareholders
owning more than 50% of the outstanding securities of a fund or (b) of more than
50% of the outstanding voting securities of a fund, whichever is less. Any
lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting, without the necessity of further notice. Each Declaration of
Trust specifically authorizes the board of trustees to terminate the trust (or
any of its investment portfolios) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the trust's
obligations. Each Declaration of Trust, however, disclaims shareholder liability
for the trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the trust or the trustees. In addition, each Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the trust solely by reason of being or having been a shareholder. Moreover,
each trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and 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 each 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.
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<PAGE> 60
The funds reserve the right to waive the early redemption fee for certain
tax-advantaged retirement plans.
The funds have made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of its net assets at the beginning of
such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of these limits may be paid, in whole or in part,
in investment securities or in cash, as the board of trustees may deem
advisable. Payment will be made wholly in cash unless the board of trustees
believes that economic or market conditions exist that would make such payment a
detriment to the best interests of a fund. If redemption proceeds are paid in
investment securities, such securities will be valued as set forth in "Pricing
of Shares". A redeeming shareholder would normally incur brokerage expenses if
he or she were to convert the securities to cash.
Each fund is designed for long-term investing. Because short-term trading
activities can disrupt the smooth management of a fund and increase its
expenses, each fund reserves the right to refuse any purchase or exchange order
that appears to be associated with short-term trading activities or "market
timing." Because market timing decisions to buy and sell securities typically
are based on an individual investor's market outlook, including such factors as
the perceived strength of the economy or the anticipated direction of interest
rates, it is difficult for a fund to determine in advance what purchase or
exchange orders may be deemed to be associated with market timing or short-term
trading activities.
DELIVERY OF SHAREHOLDER DOCUMENTS
Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order to eliminate duplicate
mailings of shareholder documents, each household may receive one copy of these
documents, under certain conditions. This practice is commonly called
"householding." If you want to receive multiple copies, you may write or call
your fund at the address or telephone number on the front of this SAI. Your
instructions will be effective within 30 days of receipt by Schwab.
PRICING OF SHARES
Securities traded on stock exchanges are valued at the last-quoted sales price
on the exchange on which such securities are primarily traded, or, lacking any
sales, at the mean between the bid and ask prices. Securities traded in the
over-the-counter market are valued at the last sales price that day, or if no
sales that day, at the mean between the bid and ask prices. In addition,
securities that are primarily traded on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective exchanges
with these values then translated into U.S. dollars at the current exchange
rate. Securities for which market quotations or closing values are not readily
available (including restricted securities that are subject to limitations on
their sale and illiquid securities) are valued at fair value as determined in
good faith pursuant to guidelines and procedures adopted by the board of
trustees. These procedures require that securities be valued on the basis of
prices provided by approved pricing services, except when a price appears
manifestly incorrect or events occurring between the time a price is furnished
by a service and the time a fund calculates its share price materially affect
the furnished price. The board of trustees
27
<PAGE> 61
regularly reviews fair values assigned to portfolio securities under these
circumstances and also when no prices from approved pricing services are
available.
TAXATION
FEDERAL TAX INFORMATION FOR THE FUNDS
It is each fund's policy to qualify for taxation as a "regulated investment
company"(RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, each fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If a fund does not qualify as a RIC under the Code, it will
be subject to federal income tax on its net investment income and any net
realized capital gains.
The Code imposes a non-deductible excise tax on RICs that do not distribute in a
calendar year (regardless of whether they otherwise have a non-calendar taxable
year) an amount equal to 98% of their "ordinary income" (as defined in the Code)
for the calendar year plus 98% of their net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. For
the foregoing purposes, a fund is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
The Schwab International Index 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 Schwab International Index Fund does
invest in PFICs, it may elect to treat the PFIC as a "qualified fund" or
mark-to-market its investments in PFICs annually. In either case, the Schwab
International Index Fund may be required to distribute amounts in excess of
realized income and gains. To the extent that the Schwab International Index
Fund does invest in foreign securities which are determined to be PFIC
securities and is 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 Schwab International Index
Fund's economic return from its PFIC shares, and excess distributions received
with respect to such shares are treated as ordinary income rather than capital
gains.
A fund's transactions in futures contracts, forward contracts, foreign currency
transactions, options and certain other investment and hedging activities may be
restricted by the Code and are subject to special tax rules. In a given case,
these rules may accelerate income to a fund, defer its losses, cause adjustments
in the holding periods of the fund's assets, convert short-term capital losses
into long-term capital losses or otherwise affect the character of the fund's
income. These rules could therefore affect the amount, timing and character of
distributions to shareholders. The funds will endeavor to make any available
elections pertaining to these transactions in a manner believed to be in the
best interest of the funds and their shareholders.
FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS
28
<PAGE> 62
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 their
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 either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more. 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 Schwab International Index Fund receives from sources within
various foreign countries may be subject to foreign income taxes withheld at the
source. If a fund has at least 50% of its assets invested in foreign securities
at the end of its taxable year, it may elect to pass through to its shareholders
the ability to take either the foreign tax credit or the deduction for foreign
taxes. It is expected that the Schwab International Index Fund will have more
than 50% of the value of its total assets at the close of its taxable year
invested in foreign securities, and it will make this election. Pursuant to this
election, U.S. shareholders must include in gross income, even though not
actually received, their respective pro rata share of foreign taxes, and may
either credit the tax against U.S. income taxes, subject to certain limitations
described in the Code or deduct their pro rata share of foreign taxes, but not
for alternative minimum tax purposes
29
<PAGE> 63
(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, 1999 31, 1999 Operations to October 31,
1999
- ---------------------------------- ------------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Schwab S&P 500 Fund -
Investor Shares (5/1/96) 25.20% - 24.76%
e.Shares (5/1/96) 25.28% - 24.90%
Select Shares (5/19/97) 25.42% - 23.70%
Schwab 1000 Fund -
Investor Shares (5/2/91) 25.12% 24.66% 18.17%
Select Shares (5/19/97) 25.29% - 23.40%
Schwab Small-Cap Index Fund -
Investor Shares (12/3/93) 19.96% 13.36% 11.31%
Select Shares (5/19/97) 20.14% - 10.67%
Schwab Total Stock Market Index
Fund
Investor Shares (5/28/99) - - 4.35%
Select Shares (5/28/99) - - 4.45%
Schwab International Index Fund -
Investor Shares (9/9/93) 27.31% 11.74% 11.08%
Select Shares (5/19/97) 27.49% - 13.07%
</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> 64
A fund also may advertise its cumulative total return. This number is calculated
using the same formula that is used for average annual total return except that,
rather than calculating the total return based on a one-year period, cumulative
total return is calculated from commencement of operations to the fiscal year
ended October 31, 1999.
<TABLE>
<CAPTION>
Name of Fund (Commencement of Operations) Cumulative Total Return
- ----------------------------------------- -----------------------
<S> <C>
Schwab S&P 500 Fund -
Investor Shares (5/1/96) 117.09%
e.Shares (5/1/96) 117.95%
Select Shares (5/19/97) 68.46%
Schwab 1000 Fund -
Investor Shares (5/2/91) 319.01%
Select Shares (5/19/97) 67.45%
Schwab Small-Cap Fund -
Investor Shares (12/3/93) 88.39%
Select Shares (5/19/97) 28.23%
Schwab Total Stock Market Index Fund
Investor Shares (5/28/99) 4.35%
Select Shares (5/28/99) 4.45%
Schwab International Index Fund -
Investor Shares (9/9/93) 90.73%
Select Shares (5/19/97) 35.15%
</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 adviser of the Schwab 1000, International and Total Stock Market
Funds employs specific investment strategies designed to minimize capital gain
distributions while achieving each fund's investment objective. These strategies
include selling the highest tax cost securities first, not re-balancing the
portfolio to reflect changes in their indexes, trading only round-lots or large
blocks of securities and focusing on individual tax lots in deciding when and
how to manage the realization of capital gains. In addition, the investment
adviser monitors, analyzes and evaluates each fund's portfolio as well as market
conditions to carefully manage necessary trading activity and to determine when
there are opportunities to realize capital losses, which offset realized capital
gains. These policies will be utilized to the extent they do not have a material
effect on each fund's ability to track or match the performance of its index.
They may affect the composition of a fund's index holdings as compared to the
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<PAGE> 65
index. By deferring or avoiding the realization of capital gains, where
possible, until an investor sells shares, unrealized gains can accumulate in a
fund, helping to build the value of a shareholder's investment. In addition,
shareholders are given greater control over the timing of the recognition of
such gains and the impact on their tax situations. There can be no assurance
that the investment adviser will succeed in avoiding realized net capital gains.
The Schwab 1000, International and Total Stock Market Funds may refer to recent
studies that analyze certain techniques and strategies these 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, a fund 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.
32
<PAGE> 66
PART C
OTHER INFORMATION
SCHWAB INVESTMENTS
Item 23. Exhibits.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(a) Articles of Agreement and Declaration of Trust,
Incorporation dated October 26, 1990, was
electronically filed and is
incorporated by reference to Exhibit 1
of Post-Effective Amendment No. 22 to
Registrant's Registration Statement
on Form N-1A, filed on December 30,
1997.
(b) By-Laws Amended and Restated By-Laws were
electronically filed and are incorporated
by reference to Exhibit 2 of Post-
Effective Amendment No. 22 to
Registrant's Registration Statement on
Form N-1A, filed on December 30, 1997.
(c) Instruments Defining (i) Article III, Section 5, Article V,
Rights of Security Article VI, Article VIII, Section 4
Holders 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 Administration
Contracts Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the
"Investment Manager") and Schedules B
and C were electronically filed and
are 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 A and D to Investment
Advisory and Administration Agreement
referred to at Exhibit (d)(i) above was
electronically filed and is incorporated
by reference to Exhibit (d) (ii) of
Post-Effective Amendment No. 29 to
Registrant's Registration Statement
on Form N-1A, filed on July 21, 1999.
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(e) Underwriting Contracts (i) 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.
(ii) Amended Schedule A to the Distribution Agreement
was electronically filed and is incorporated by
reference to Exhibit (e) (ii) of Post-Effective
Amendment No. 29 to Registrant's Registration
Statement on Form N-1A, on July 21, 1999.
(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 g(i) 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 g(i) 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 A to the Custodian Services
Agreement referred to at Exhibit g(i) above was
electronically filed and is incorporated by
reference to Exhibit (g)(iv) of Post-Effective
Amendment No. 29 to Registrant's Registration
Statement on Form N-1A , filed on July 21, 1999.
(v) Transfer Agency Agreement between the Registrant
and Schwab and Schedule B were electronically
filed and are 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.
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
<S> <C> <C>
(vi) Amended Schedules A and C to the Transfer Agency
Agreement referred to at Exhibit g(v) above were
electronically filed and are incorporated by
reference to Exhibit (g)(vi) of Post-Effective
Amendment No. 29 to Registrant's Registration
Statement on Form 1-1A, filed on July 21, 1999.
(vii) Shareholder Service Agreement between the
Registrant and Schwab and Schedule B were
electronically filed and are 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) Schedules A and C to the Shareholder Service
Agreement between the Registrant and Schwab
referenced at Exhibit (g)(vii) above were
electronically filed and are incorporated by
reference to Exhibit (g)(viii) of
Post-Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed on July
21, 1999.
(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 g(ix) 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 g(ix) 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 Custodian Services Fee Agreement dated
November 1, 1998, by and between the Registrant and
PNC Bank, National Association, is
incorporated herein by reference to Exhibit
(g)(xii) of Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A,
electronically filed on December 30, 1998.
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(xiii) Schedule A to the Custodian Services Fee
Agreement between the registrant and PNC Bank,
National Association and PFPC, Inc. was
electronically filed and is incorporated by
reference to Exhibit (g)(xiv) of Post-Effective
Amendment No. 29 to Registrant's Registration
Statement on Form N-1A, filed on July 21, 1999.
(xiv) Accounting Services Agreement with SEI Fund
Resources dated April 1, 1998, was electronically
filed and is incorporated herein by reference to
Exhibit g(xiii) of Post-Effective Amendment
No. 27 to Registrant's Registration Statement on
Form N-1A, electronically filed on December 30,
1998.
(xv) Amended Schedule A of the Accounting Services
Agreement between the Registrant and SEI Fund
Resources was electronically filed and
is incorporated by reference to Exhibit
(g)(xvi) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A,
filed on July 21, 1999.
(xvi) Amendment No. 1 to the Accounting Services
Agreement dated December 17, 1998, by and between
Schwab Capital Trust, Schwab Annuity Portfolios,
Schwab Investments and SEI Fund Resources was
electronically filed and is incorporated by
reference to exhibit (g)(xvii) of
Post-Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed on July
21, 1999.
(h) Other Material Contracts Inapplicable.
(i) Legal Opinion Opinion of Counsel is electronically is filed
herewith as Exhibit (i).
(j) Other Opinions Auditors Consent is electronically filed herewith
as Exhibit (j).
(k) Omitted Financial Inapplicable.
Statements
(l) Initial Capital Agreement (i) Purchase Agreement relating to shares of the
Schwab 1000 Fund was electronically filed and
is incorporated by reference to Exhibit
(l)(i) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A,
filed on July 21, 1999.
(ii) Purchase Agreement relating to shares of the
Schwab Short-Term Bond Market Index Fund
(formerly Schwab Short/Intermediate
Government Bond Fund) was electronically filed and
incorporated by reference to Exhibit (l)(ii) of
Post-Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed on July
21, 1999.
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(iii) Purchase Agreement relating to shares of the
Schwab California Long-Term Tax-Free Bond
Fund (formerly Schwab California Tax Free Bond
Fund) was electronically filed and is incorporated
by reference to Exhibit (l)(iii) of Post-Effective
Amendment No. 29 to Registrant's Registration
Statement on Form N-1A, filed on July 21, 1999.
(iv) Purchase Agreement relating to shares of the
Schwab Long-Term Tax-Free Bond Fund (formerly Schwab
National Tax Free Bond Fund) was electronically
filed and is incorporated by reference to Exhibit
(l)(iv) of Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A,
filed on July 21, 1999.
(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.
(vi) Purchase Agreement relating to shares of the
Schwab Yield Plus Fund was electronically filed and
is incorporated by reference to Exhibit (l)(vi) of Post-
Effective Amendment No. 29 to Registrant's Registration
Statement on Form N-1A, filed on July 29, 1999.
(m) Rule 12b-1 Plan Inapplicable.
(n) Financial Data Schedule (i) Inapplicable.
(o) Rule 18f-3 Plan Registrant's Amended and Restated Multiple Class Plan
for Investor and Select Shares of Schwab 1000 Fund(R)
and Schwab YieldPlus Fund(TM)was electronically filed
and is incorporated by reference to Exhibit (o)(i)
of Post-Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A, filed on July 29, 1999.
(p) Power of Attorney Power of Attorney executed by Jeremiah H. Chafkin, December 6,
1999, is electronically filed herewith as Exhibit (p).
(q) Code of Ethics Code of Ethics adopted by Registrant, Charles Schwab
Investment Management Inc. and Charles Schwab & Co.,
Inc. is electronically filed herewith as Exhibit (q).
</TABLE>
<PAGE> 71
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 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 adviser, Charles Schwab Investment Management, Inc., a
Delaware corporation, organized in October 1989 to serve as investment manager
to Registrant, also serves as the investment adviser 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 adviser engages is that of investment
adviser 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 as well as provider of advisory
services to the Schwab Fund for Charitable Giving and to
<PAGE> 72
Charles Schwab Asset Management (Ireland) limited.
The business, profession, vocation or employment of a substantial nature in
which each director and/or senior or executive officer of the investment adviser
(CSIM) is or has been engaged during the past two fiscal years is listed below.
The name of any company for which any director and/or senior or executive
officer of the investment adviser serves as director, officer, employee, partner
or trustee is also listed below. In addition, the name and position of each
director and/or senior or executive officer of the Registrant's principal
underwriter Schwab & Co. Inc. is listed below.
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman, Director
Chairman, Chief Executive
Officer and Trustee
The Charles Schwab Corporation Chairman and Co-Chief Executive
Officer, Director
Charles Schwab Investment Management, Inc. Chairman, Director
The Charles Schwab Trust Company Director
Mayer & Schweitzer, Inc. Chairman and Director until
January 1999
Schwab Retirement Plan Services, Inc. Chairman, Director until January
1999
Charles Schwab Limited (U.K.) Chairman and Chief Executive
Officer
Schwab Holdings, Inc. Chief Executive Officer
Schwab International Holdings, Inc. Chairman and Chief Executive
Officer
Schwab (SIS) Holdings, Inc. I Chairman and Chief Executive
Officer
Performance Technologies, Inc. Chairman, Director until January
1999
TrustMark, Inc. Chairman and Director until
January 1999
The Gap, Inc. Director
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Audiobase, Inc. Director
Vodaphone AirTouch PLC Director
Siebel Systems Director
David S. Pottruck Charles Schwab & Co., Inc. Chief Executive Officer, Director
The Charles Schwab Corporation President and Co-Chief Executive
Officer, Director
Schwab Retirement Plan Services, Inc. Director until January 1999
Charles Schwab Limited (U.K.) Director until January 1999
Charles Schwab Investment Management, Inc. Director
Mayer & Schweitzer, Inc. Director until January 1999
Performance Technologies, Inc. Director until January 1999
TrustMark, Inc. Director until January 1999
Steven L. Scheid Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President and Trustee President - Financial Products
and Services, Director
The Charles Schwab Corporation Vice Chairman and Executive Vice
President
Charles Schwab Investment Management, Inc. Chief Executive Officer and
Chief Financial Officer, Director
The Charles Schwab Trust Company Director until July 1998
Charles Schwab Limited (U.K.) Finance Officer
Schwab Retirement Plan Services, Inc. Director until January 1999
Performance Technologies, Inc. Director until January 1999
Mayer & Schweitzer, Inc. Director until January 1999
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Willie C. Bogan The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Vice President and Assistant
Corporate Secretary
Charles Schwab Investment Management, Inc. Assistant Corporate Secretary
The Charles Schwab Trust Company Assistant Corporate Secretary
Jeremiah H. Chafkin, Charles Schwab & Co., Inc. Executive Vice President -
Executive Vice President SchwabFunds. Prior to November
and Chief Operating Officer 1999, Mr. Chafkin was Senior
Managing Director, Bankers Trust
Company.
Charles Schwab Investment Management, Inc. President and Chief Operating
Officer
Karen W. Chang Charles Schwab & Co., Inc. Enterprise President - General
Investor Services
John P. Coghlan Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President - Retirement Plan
Services and Services for
Investment Managers
Frances Cole, Charles Schwab Investment Management, Inc. Senior Vice President, Chief
Secretary Counsel and Assistant Corporate
Secretary
Linnet F. Deily Charles Schwab & Co., Inc. Vice Chairman and President -
Schwab Retail Group
Christopher V. Dodds Charles Schwab & Co., Inc. Executive Vice President and Chief
Financial Officer
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President -
Corporate Oversight and Corporate
Secretary
Wayne W. Fieldsa Charles Schwab & Co., Inc. Enterprise President - Brokerage
Operations
</TABLE>
<PAGE> 75
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lon Gorman Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President - Capital Markets and
Trading
James M. Hackley Charles Schwab & Co., Inc. Executive Vice President - Retail
Client Services
Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President - Mutual
Funds Operations
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President and Chief
Strategy Officer
Dawn G. Lepore Charles Schwab & Co., Inc. Vice Chairman, Executive Vice
President and Chief Information
Officer
Susanne D. Lyons Charles Schwab & Co., Inc. Enterprise President - Retail
Client Services
Frederick E. Matteson Charles Schwab & Co., Inc. Executive Vice President - Schwab
Technology Services
John P. McGonigle Charles Schwab & Co., Inc. Executive Vice President - Mutual
Funds
Geoffrey Penney Charles Schwab & Co., Inc. Executive Vice President -
Financial Products and
International Technology
George A. Rich Charles Schwab & Co., Inc. Executive Vice President - Human
Resources
Gideon Sasson Charles Schwab & Co., Inc. Enterprise President - Electronic
Brokerage
Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President and Chief
Administrative Officer
Leonard Short Charles Schwab & Co., Inc. Executive Vice President - CRS
Advertising and Branch Management
Stephen B. Ward, Charles Schwab Investment Management, Inc. Senior Vice President and Chief
Senior Vice President and Investment Officer
Chief Investment Officer
</TABLE>
<PAGE> 76
Item 27. Principal Underwriters.
(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab also acts as principal underwriter for the The
Charles Schwab Family of Funds, 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 each director and/or senior or
executive officer of Schwab. The principal business address of Schwab is 101
Montgomery Street, San Francisco, California 94104.
(c) Not applicable.
Item 27. Principal Underwriters.
(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab currently also acts as principal underwriter for the
Schwab Fund Family, Schwab Capital Trust, Schwab Annuity Portfolios and intends
to act as such for any other investment company which Schwab may sponsor in the
future.
(b) See Item 26(b) for information on the officers and directors of
Schwab. The principal business address of Schwab is 101 Montgomery Street, San
Francisco, California 94104.
(c) Not applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of: Registrant; Registrant's investment manager and
administrator, Charles Schwab Investment Management, Inc., 101 Montgomery
Street, San Francisco, California 94104; Registrant's principal underwriter,
Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's Custodian, PNC Bank, National Association, Broad and Market
Streets, Philadelphia, Pennsylvania 19809; Registrant's fund accountants, PFPC,
Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809 or SEI Fund Resources,
Oaks, Pennsylvania; or Ropes & Gray, 1301 K Street, N.W., Suite 800 East,
Washington, District of Columbia, 20005.
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended,
Registrant certifies that it meets all of the requirements for the effectiveness
of this Registration Statement pursuant to Rule 485(b) under the 1933 Act and
has duly caused this Post Effective Amendment No. 32 to be signed on its behalf
by the undersigned, thereto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on the 25th day of February, 2000.
SCHWAB INVESTMENTS
Registrant
Charles R. Schwab*
---------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this
Post-Effective Amendment No. 31 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 February, 2000.
Signature Title
Charles R. Schwab* Chairman, Chief Executive Officer and Trustee
- --------------------
Charles R. Schwab
Steve Scheid* President and Trustee
- --------------------
Steve Scheid
Jeremiah H. Chafkin* Executive Vice President, Chief Operating Officer
- --------------------
Jeremiah H. Chafkin
William J. Klipp* Trustee
- --------------------
William J. Klipp
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/ John H. Grady, Jr.
------------------------------------
John H. Grady, Jr., Attorney-in-Fact
pursuant to Powers of Attorney
<PAGE> 78
EXHIBIT INDEX
EXH. NO. DOCUMENT
(i) Opinion of Counsel
(j) Auditors' Consent
(p) Power of Attorney
(q) Code of Ethics
<PAGE> 1
Exhibit 99(i)
[letterhead of Morgan, Lewis & Bockius LLP]
February 15, 2000
Schwab Investments
101 Montgomery Street
San Francisco, CA 94104
Re: Opinion of Counsel regarding Post-Effective Amendment No. 32 to the
Registration Statement filed on Form N-1A under the Securities Act of 1933
(File No. 33-37459).
Ladies and Gentlemen:
We have acted as counsel to Schwab Investments, a Massachusetts
business trust (the "Trust"), in connection with the above-referenced
Registration Statement on Form N-1A (as amended, the "Registration Statement")
which relates to the Trust's shares of beneficial interest, par value $.00001
per share (collectively, the "Shares") of the Schwab 1000 Fund. This opinion is
being delivered to you in connection with the Trust's filing of Post-Effective
Amendment No. 32 to the Registration Statement (the "Amendment") to be filed
with the Securities and Exchange Commission pursuant to Rule 485(b) of the
Securities Act of 1933 (the "1933 Act"). With your permission, all assumptions
and statements of reliance herein have been made without any independent
investigation or verification on our part except to the extent otherwise
expressly stated, and we express no opinion with respect to the subject matter
or accuracy of such assumptions or items relied upon.
In connection with this opinion, we have reviewed, among other things,
executed copies of the following documents:
(a) a certificate of the Commonwealth of Massachusetts as to the
existence and good standing of the Trust;
(b) copies of the Fund's Agreement and Declaration of Trust and of
all amendments and all supplements thereto (the "Declaration
of Trust");
(c) a certificate executed by Frances Cole, the Secretary of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration of Trust and Amended and
<PAGE> 2
Schwab Investments
February 15, 2000
Page 2
Restated By-Laws (the "By-Laws"), and certain resolutions
adopted by the Board of Trustees of the Trust authorizing the
issuance of the Shares; and
(d) a printer's proof of the Amendment.
In our capacity as counsel to the Trust, we have examined the
originals, or certified, conformed or reproduced copies, of all records,
agreements, instruments and documents as we have deemed relevant or necessary as
the basis for the opinion hereinafter expressed. In all such examinations, we
have assumed the legal capacity of all natural persons executing documents, the
genuineness of all signatures, the authenticity of all original or certified
copies, and the conformity to original or certified copies of all copies
submitted to us as conformed or reproduced copies. As to various questions of
fact relevant to such opinion, we have relied upon, and assume the accuracy of,
certificates and oral or written statements of public officials and officers or
representatives of the Fund. We have assumed that the Registration Statement, as
filed with the Securities and Exchange Commission, will be in substantially the
form of the printer's proof referred to in paragraph (d) above.
Based upon, and subject to, the limitations set forth herein, we are of
the opinion that the Shares, when issued and sold in accordance with the Trust's
Declaration of Trust and By-Laws, and for the consideration described in the
Registration Statement, will be legally issued, fully paid and nonassessable
under the laws of the Commonwealth of Massachusetts.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not concede that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE> 1
Exhibit 99(j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated December 9, 1999, relating to the
financial statements and financial highlights which appears in the October 31,
1999, Annual Report to Shareholders of Schwab 1000 Fund (one of the portfolios
constituting Schwab Investments) which is also incorporated by reference into
the Registration Statement. We also consent to the references to us under the
headings "Financial Highlights" and "Independent Accountants" in such
Registration Statement.
/s/ PricewaterhouseCoopers
- ---------------------------
PricewaterhouseCoopers LLP
San Francisco, California
February 16, 2000
<PAGE> 1
Exhibit 99(p)
THE CHARLES SCHWAB FAMILY OF FUNDS
SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
POWER OF ATTORNEY
I, the undersigned trustee and/or officer of The Charles Schwab
Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity
Portfolios (each a "Trust" and collectively the "Trusts"), and each a
Massachusetts business trust, do hereby constitute and appoint Frances Cole,
Matthew O'Toole, Richard W. Grant and John H. Grady, Jr., and each of them
singly, my true and lawful attorneys, with full power to them and each of them,
to sign for me and in my name and the capacity listed below, any and all
amendments to the Registration Statement on Form N1-A of each Trust, and to file
the same with all exhibits thereto, and other documents in connection
thereunder, with the Securities and Exchange Commission, granting unto my said
attorneys, and each of them, acting alone, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in the
premises, as fully as to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue thereof.
WITNESS my hand on the date set forth below.
/s/ Jeremiah H. Chafkin Date: 12/6/1999
- ----------------------------- ---------
Jeremiah H. Chafkin
Executive Vice President and Chief Operating Officer
<PAGE> 1
Exhibit 99(q)
THE CHARLES SCHWAB FAMILY OF FUNDS
SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
CHARLES SCHWAB & CO., INC.
CODE OF ETHICS ADOPTED PURSUANT TO SECTION 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
Rule 17j-1 of the Investment Company Act of 1940 (the "1940 Act") requires that
every registered investment company, and each investment adviser to and
principal underwriter for such investment company, adopt a written code of
ethics containing provisions reasonably necessary to prevent its "Access
Persons" from engaging in any act, practice or course of business prohibited by
section 17(j) of the 1940 Act and Rule 17j-1 adopted thereunder. That Rule
further requires that each investment company and its adviser(s) and
underwriter(s) use reasonable diligence, and institute procedures reasonably
necessary, to prevent violations of such code. The Insider Trading and
Securities Fraud Enforcement Act of 1988 ("ITSFEA"), requires every investment
adviser and registered broker-dealer to develop, implement and enforce policies
and procedures to prevent the misuse of material nonpublic information.
The following policies constitute the Code of Ethics for The Charles Schwab
Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity
Portfolios (each a "Trust", and collectively known as the "Trusts"), Charles
Schwab Investment Management, Inc. ("CSIM"), a registered investment adviser and
the investment adviser to the Trusts, and Charles Schwab & Co., Inc. ("Schwab"),
a registered broker-dealer and the principal underwriter of the Trusts. The
policies and procedures established by this Code of Ethics are applicable to all
directors, trustees, officers and employees of the Trusts and CSIM, and to any
director or officer of Schwab who, makes, participates in or obtains information
regarding the purchase or sale of "Covered Securities" by the Trusts. Other
entities that serve as sub-advisers to separate series of the Trusts shall
comply with their own codes of ethics approved by the Board of Trustees, and
report to the Boards of Trustees in accordance with Section VI hereunder.
I. POLICY STATEMENT
Rule 17j-1 under the 1940 Act makes it unlawful for any Affiliated Person of, or
principal underwriter for, the Trusts or Affiliated Person of the Trusts'
investment adviser(s) and principal underwriter, in connection with the direct
or indirect purchase or sale by such person of any Covered Security that is
"held or to be acquired" by any investment portfolio of a Trust (each a "Fund"):
- - To employ any device, scheme or artifice to defraud the Trust or any Fund;
<PAGE> 2
- - To make to the Trust or any Fund any untrue statement of a material fact or
omit to state to the Trust or any Fund a material fact necessary in order
to make the statements made, in light of the circumstances under which they
are made, not misleading;
- - To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon the Trust or any Fund; and
- - To engage in any manipulative practice with respect to the Trust or any
Fund.
It is the policy of the Trusts, CSIM and Schwab that no Access Person of a
Trust, CSIM or Schwab will make, participate in, or engage in any act, practice
or course of conduct that would violate the provisions set forth above or which
would, in any way, conflict with the interests of the Trusts or their
shareholders. This obligation encompasses:
- - the duty at all times to place the interests of shareholders first;
- - the duty to ensure that all personal securities transactions be conducted
consistent with the Code of Ethics and in such a manner as to avoid any
actual or potential conflict of interest or any abuse of an individual's
position of trust and responsibility; and
- - the fundamental standard that Access Persons not take inappropriate
advantage of their positions.
II. DEFINITIONS
The definitions used in this Code of Ethics include the following.
ACCESS PERSON. An "Access Person" of the Trusts or CSIM is any director, Trustee
or officer of the Trusts or CSIM, and any employee of CSIM who, in the ordinary
course of business, makes, participates in or obtains information regarding the
purchase or sale of securities for the Trusts or a Fund. An "Access Person" of
Schwab is any director or officer of Schwab who, in the ordinary course of
business, makes, participates in or obtains information regarding the purchase
or sale of securities for a Trust or a Fund or whose functions or duties as part
of his or her business relate to the making of any recommendation to a Trust or
a Fund regarding the purchase or sale of securities. An "Access Person" is also
any natural person who "controls" a Trust or a Fund or CSIM, but only if such
person obtains information concerning recommendations made to the Trust or a
Fund with regard to the purchase or sale of Covered Securities by the Trust or a
Fund.
AFFILIATED PERSON. An "Affiliated Person" of the Trusts, CSIM or Schwab is
defined in Section 2(a)(3) of the 1940 Act.
BENEFICIAL OWNERSHIP. A person should consider himself or herself "beneficial
owner" of any security in which he or she has a direct or indirect pecuniary
interest. In addition, he or she has "beneficial ownership" of securities held
by his or her spouse, minor children, a relative who shares his or her home, or
other persons if by reason of any contract,
page 2
<PAGE> 3
understanding, relationship, agreement or other arrangement, he or she obtains
from such securities benefits substantially equivalent to those of ownership. He
or she should also consider himself or herself the beneficial owner of
securities if he or she can vest or revest title in himself or herself now or in
the future.
CONTROL. "Control" has the same meaning as in Section (2)(a)(9) of the 1940 Act.
COVERED SECURITY. A "Covered Security" is any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or participation in
any profit-sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for security, fractional
undivided interest in oil, gas, or other mineral rights, any put, call,
straddle, option or privilege on any security. A Covered Security is also any
group or index of securities, or any put, call, straddle, option, or privilege
entered into on a national securities exchange relating to foreign currency, or,
in general, any interest or instrument commonly known as a security, or any
certificate of interest or participation in, temporary or interim certificate
for, receipt for, guarantee of, or warrant or right to subscribe to or purchase,
any of the foregoing.
Notwithstanding the above definition, Covered Securities include only those
securities which a Trust would be permitted to acquire under its investment
objectives and policies set forth in its then current prospectuses filed under
the Securities Act of 1933 (the "1933 Act"), and does not include securities
issued or guaranteed by the United States Government, its agencies or
instrumentalities, bankers' acceptances, bank certificates of deposit,
commercial paper, repurchase agreements, other money market instruments and
shares of registered open-end investment companies.
HELD OR TO BE ACQUIRED. A security is "held or to be acquired" if within the
most recent 15 days it is or has been held by a Trust, or is being or has been
considered by a Trust or CSIM for purchase by a Trust. A purchase or sale
includes the writing of an option to purchase or sell.
INITIAL PUBLIC OFFERING. "Initial Public Offering" is an offering of securities
registered under the 1933 Act the issuer of which, immediately before the
registration, was not subject to the reporting requirements of Sections 13 or
15(d) of the Securities Exchange Act of 1934.
INVESTMENT PERSONNEL. "Investment Personnel" are Access Persons who, in
connection with their regular functions or duties, make or participate in making
recommendations regarding the purchase or sale of securities by a Trust or a
Fund. The term also includes all persons who control a Trust or CSIM or Schwab
and obtain information concerning recommendations made to a Trust regarding the
purchase or sale of securities by a Trust or a Fund.
NON-INTERESTED TRUSTEE. A "Non-Interested Trustee" is any Trustee of the Trusts
who is not an interested person as defined in section 2(a)(19) of the 1940 Act.
page 3
<PAGE> 4
PRIVATE PLACEMENT. A "Private Placement" is an offering that is exempt form
registration under the 1933 Act pursuant to Section 4(2) or Section 4(6) or
pursuant to Rule 504, Rule 505 or Rule 506 adopted thereunder.
III. COMMUNICATIONS
Access Persons may not tip or otherwise disclose to others (except to others who
have a need to know such information in the ordinary course of their business)
any information regarding the investment activities of the Trusts, including any
transaction or recommendation made by or to CSIM or a Trust or a Fund. All such
communications must be reported immediately to the CSIM Compliance Department.
IV. LIMITS ON ACCEPTING OR RECEIVING GIFTS
Access Persons may not accept or receive any gift of more than de minimis value
(as defined in the Schwab Compliance Manual) from any person or entity in
connection with the Trusts or a Fund's entry into a contract, development of an
economic relationship, or other course of dealing by or on behalf of the Trusts
or a Fund.
V. TRADING RESTRICTIONS
The policies and procedures regarding trading restrictions are as follows:
OFFICERS, DIRECTORS, TRUSTEES AND EMPLOYEES TRADING RESTRICTIONS. Any officer,
director, Trustee or employee of the Trusts, CSIM or Schwab with material
nonpublic information about a Covered Security is prohibited from all personal
trading in any security about which he or she has such information.
PRIOR APPROVAL OF TRADES. At all times, each personal transaction in a Covered
Security by Investment Personnel involving more than 5,000 shares of any
issuer's equity securities, rights, warrants or units or $100,000.00 face value
of bonds or debentures of any one issuer must receive prior approval by CSIM's
Chief Compliance Officer or his or her designee. Prior approval of a personal
transaction may only be relied upon for 5 business days from the date approval
is received. Because of the specific policies in place to monitor and control
employee trading of stock of The Charles Schwab Corporation ("SCH"), prior
approval of personal transactions do not apply to SCH stock and SCH options. All
other trading restrictions applicable to Covered Securities still apply to SCH
stock and SCH options.
All Access Persons other than Investment Personnel may trade in Covered
Securities without prior approval, provided that such persons have no actual
knowledge of the Trusts' activities with respect to the subject security, and
have no material, nonpublic information about the issuer of the subject
security.
These trading restrictions apply to all transactions in Covered Securities in
accounts over which Access Persons of CSIM, exercise control, accounts for their
family members or accounts in which they have a beneficial interest, but do not
apply to dividend reinvestment
page 4
<PAGE> 5
programs, odd-lot transactions or investment decisions made by an unrelated
third party who does not have access to the information in possession of such
Access Person. All trading activity by Access Persons is subject to reporting
and surveillance as set forth in the surveillance and reporting sections of
these procedures.
PRIOR APPROVAL OF INITIAL PUBLIC OFFERINGS ("IPOS") AND PRIVATE PLACEMENTS. Each
transaction involving an IPO or a private placement by Investment Personnel must
receive prior approval by CSIM's Chief Compliance Officer or his or her
designee.
NON-INTERESTED TRUSTEES. A Non-Interested Trustee of the Trusts may trade in
securities in which a Trust has invested or is considering for investment,
provided that the Trustee has no actual knowledge of the Trust's contemporaneous
activities with respect to the subject security, and has no material, nonpublic
information about the issuer of the subject security.
VI. REPORTING
The policies and procedures regarding reporting requirements that are applicable
to the Access Persons of the Trusts, CSIM and Schwab include the following.
REPORTS TO THE BOARD OF TRUSTEES. The President of CSIM and Executive Vice
President of Schwab (or their designees) must (i) furnish annually to the Board
of Trustees a written report of any issues arising under the Code of Ethics,
including any material violations and any sanctions imposed in response to these
violations and (ii) certify annually to the Board of Trustees that each has
adopted procedures reasonably necessary to prevent its Access Persons from
violating the provisions of its Code of Ethics. The President of the Trusts (or
his or her designee) will report to the Board of Trustees on an annual basis in
accordance with subparts (i) and (ii), above.
The President of any adviser or sub-adviser other than CSIM shall submit a copy
of its code of ethics for the Board's approval, together with the reports
required by subparts (i) and (ii), above. Such adviser or sub-adviser shall
submit any amendments to its code within 30 days of adoption.
ACCESS PERSON REPORTING. Each Trust, CSIM and Schwab are responsible for
promptly identifying and reporting to the CSIM Compliance Department all persons
considered to be Access Persons. Each Trust, CSIM and Schwab will compile a
written list of such persons, and promptly notify the CSIM Compliance Department
of all changes in the persons designated as Access Persons. The CSIM Compliance
Department will notify Access Persons of their obligation to report trading
activity, and provide them with a copy of this Code. The CSIM Compliance
Department will also prepare the quarterly transaction report for each Access
Person and present such reports to Access Persons for review and execution.
Access Persons shall return the executed quarterly transaction report to the
appropriate review officer(s) ("Review Officer") appointed by the Presidents of
the Trusts and CSIM and Executive Vice President of Schwab, or their respective
designees. Access Persons of any adviser or sub-adviser other than CSIM shall
only file reports under their own code.
page 5
<PAGE> 6
Each Access Person (with the exception of Non-Interested Trustees) must make an
initial holdings report, no later than ten days after he or she becomes an
Access Person and annual holdings reports which shall disclose (a) the title,
number of shares and principal amount of each Covered Security, with the
exception of SCH stock and SCH options, in which such Access Person had any
direct or indirect beneficial ownership; and (b) the name of any broker, dealer
or bank with whom the Access Person maintained an account in which securities
were held for the direct or indirect beneficial interest of the Access Person.
The annual disclosure of holdings shall be made and calculated as of each
calendar year end.
Access Persons (other than Non-Interested Trustees) shall report on a quarterly
calendar basis all transactions in which they acquire any direct or indirect
beneficial ownership in Covered Securities, except for indirect or direct
beneficial ownership in SCH stock or SCH options. These transaction reports must
be made no later than ten days after the end of each calendar quarter and
include trading activity at Schwab and any other broker-dealer.
NON-INTERESTED TRUSTEE REPORTING. The CSIM Compliance Department shall notify
each Non-Interested Trustee that such person is subject to this Code of Ethics'
reporting requirements and shall deliver a copy of this Code of Ethics to each
such person.
Each Non-Interested Trustee shall submit quarterly transaction reports to the
appropriate Review Officer showing all transactions in Covered Securities in
which the person has, or by reason of such transaction acquires, any direct or
indirect beneficial ownership, but only where the Non-Interested Trustee knew at
the time of the transaction or, in the ordinary course of fulfilling his or her
official duties as a Trustee, should have known that during the 15-day period
immediately preceding or after the date of the transaction, such security is or
was purchased or sold, or considered for purchase or sale, by a Trust.
VII. SURVEILLANCE
The policies and procedures regarding surveillance that are applicable to
officers, directors, Trustees and employees of the Trusts, CSIM and Schwab
include the following.
EMPLOYEE SURVEILLANCE AND REVIEW. The Presidents of the Trusts and CSIM and
Executive Vice President of Schwab, or their respective designees, will appoint
Review Officer(s) to conduct employee surveillance and review. The Review
Officer will, on a quarterly basis, compare all reported personal transactions
in Covered Securities with the Trusts or a Fund's completed portfolio
transactions and a list of Covered Securities being considered for purchase or
sale by CSIM to determine whether a violation may have occurred. The Review
Officer will employ procedures similar to those attached as Exhibit A hereto.
Before determining that a person has violated the Code of Ethics, the Review
Officer must give the person an opportunity to supply explanatory material.
If the Review Officer determines that a violation has or may have occurred, the
Review Officer must submit the determination, together with the confidential
quarterly report and any explanatory material provided by the person to the
President of CSIM (or his or her designee), who will determine whether the
person violated the Code of Ethics.
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No person is required to participate in a determination of whether he or she has
committed a violation or discuss the imposition of any sanction against himself
or herself.
If the President of CSIM (or his or her designee) finds that the person violated
the Code of Ethics, he or she will impose upon the person sanctions that he or
she deems appropriate and will report the violation and the sanction imposed to
the Trusts' Board of Trustees at the next regularly scheduled board meeting,
unless, in the sole discretion of the President or his or her designee,
circumstances warrant an earlier report.
The Review Officer will report his or her own transactions to an Alternate
Review Officer on a quarterly basis. The Alternative Review Officer on a
quarterly basis shall fulfill the duties of the Review Officer with respect to
the latter's transactions in Covered Securities.
Employees of CSIM and Schwab are also subject to the requirements of Schwab's
Employee Compliance Guide and Code of Conduct.
VIII. RECORDS
All records associated with this Code of Ethics, including but not limited to;
(i) lists of persons who are, or within past five years have been designated as
Access Persons; (ii) quarterly transaction and annual holdings reports by such
persons; (iii) surveillance documentation, including any Code violation and any
sanctions resulting from the violation; and (iv) communications and all versions
of the Code of Ethics, shall be maintained by the CSIM Compliance Department in
an easily accessible place for at least five years. In addition, any record of
any decision, and the reasons supporting the decision, to approve the
acquisition by Investment Personnel of securities acquired in an IPO or a
private placement, shall be maintained by the CSIM Compliance Department for at
least five years after the end of the fiscal year in which the approval is
granted.
The Code of Ethics, a copy of each quarterly transaction and annual holding
report by each Access Person of the Trusts, any written report made to the Board
of Trustees concerning the Code of Ethics and lists of all persons required to
make reports shall be preserved with the Trusts' records for the period required
by Rule 17j-1.
IX. DISCLOSURE
The Trusts will disclose in their Statement of Additional Information that (i)
the Trusts, CSIM and Schwab have adopted a Code of Ethics; (ii) the personnel of
the Trusts, CSIM and Schwab are permitted to invest in securities for their own
account, subject to the limitations of Rule 17j-1 and this Code; and (iii) the
Code of Ethics can be obtained from the Securities and Exchange Commission. The
Code of Ethics will be filed as an exhibit to the Trusts' registration
statements.
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EXHIBIT A
REVIEW AND SURVEILLANCE PROCEDURES
FOR COMPLIANCE WITH RULE 17j-1
UNDER THE 1940 ACT
I. NOTIFICATION OF QUARTERLY REPORTING REQUIREMENTS
A. At the end of each calendar quarter, the Review Officer will send a
Quarterly Personal Securities Transaction Report (the form of which is
attached as Exhibit B), to each person who is an Access Person of (i)
the Trusts, (ii) CSIM and (iii) Schwab.
B. The Review Officer will promptly record the return of each Quarterly
Personal Securities Transaction Report.
C. Seven days after the end of the calendar quarter, the Review Officer
will send a reminder notice to any Access Person who has not returned
his or her Quarterly Personal Securities Transaction Report.
D. Eleven days after the end of the calendar quarter, the Review Officer
will send a "Notice of Failure" to any Access Person who has not
returned his or her Quarterly Personal Securities Transaction Report.
The Notice of Failure will notify the Access Person that he or she is
in violation of Rule 17j-1 under the 1940 Act and the Code of Ethics
and may be subject to sanctions under the Code of Ethics.
E. The Review Officer shall report the name of any Access Person who has
failed to provide a Quarterly Personal Securities Transaction Report
to the President of CSIM for further evaluation and imposition of
sanctions, if applicable.
II. REVIEW OF QUARTERLY REPORTS
A. Investment Personnel
1. The Review Officer shall verify, against the list of pre-approved
transactions, that Investment Personnel have reported all transactions
that were pre-approved, and that all reported transactions were
pre-cleared.
2. For any transaction in a Covered Security involving more
than 1,000 shares of any issuer's equity securities, rights,
warrants or units or $100,000.00 face value of bonds or
debentures of any one issuer that was reported on the
Quarterly Personal Securities
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Transaction Report, but for which the person had not
obtained prior approval, the Review Officer shall prepare a
report on the transaction and transmit the report to the
President of CSIM for further action.
B. Access Persons.
1. The Review Officer shall review each Quarterly Personal
Securities Transaction Report received against the master
list of Covered Securities purchased or sold, or considered
for purchase or sale, by the Funds for the same period as
the transactions reported by the Access Person.
2. For any transaction by an Access Person in the same security as that
purchased or sold by a Fund, the Review Officer will first determine
whether the transaction was within 15 days (before or after) the
transaction conducted by the Fund. If it falls within the 15 day period,
the Review Officer will review the transaction in light of the following
considerations:
- the size of the transaction;
- whether the transaction was in the same "direction" as
the Fund's;
- the timing of the transaction; and
- the purchase or sale price of the Covered Security.
3. For any trade that is identified by the Review Officer as
having occurred on the same day as a Fund at a more
favorable price to the Access Person, the Review Officer
shall send an inquiry letter to the Access Person and will
conduct further investigation of the transaction.
4. If the Review Officer after further review determines that a
transaction appears to involve a conflict of interest and/or
a violation of the Code, he or she will report this to the
President of the Access Person's employer for further
action.
III. PERIODIC REVIEW
A. On an annual basis, the Review Officer shall review all annual
holdings and quarterly reports submitted by Investment
Personnel for patterns of trading activity that evidence a
possible violation of the Code of Ethics. The following
patterns, if ascertained, will require further inquiry:
- Trading only or primarily in securities that one or more
Funds actively trade in;
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- Transactions that match up closely in time with Fund
transactions and diverge from the person's
otherwise-normal trading profile in terms of the size of
transaction or type of security; and
- Transactions involving the purchase or sale of Covered
Securities that yielded significant profits (or losses
avoided), which match up closely in time with the Funds'
transactions.
B. The Review Officer shall conduct periodic reviews of
reports submitted by Access Persons that disclose more
than 5 trades in Covered Securities per calendar quarter.
The Review Officer may review specific transactions or a
group of transactions for any pattern of activity
referenced in A., above.
IV. VERIFICATION OF BROKERAGE STATEMENTS
A. The Review Officer may request that an Access Person provide a
duplicate statement of any account with a broker, dealer or
bank where an Access Person holds securities, in order to
verify the accuracy of reports made by the Access Person.
B. Any request for statement of securities accounts shall be
complied with no later than 10 days after the request has been
made. If the request has not been complied with, it will be
considered a violation of the Code of Ethics.
V. ANNUAL CERTIFICATION
On an annual basis, each Access Person must certify that he or she (i)
is aware that he or she is subject to the requirements of Rule 17j-1
and the Code of Ethics and understands his or her obligations under the
Rule and Code of Ethics; and (ii) he or she has fully complied with the
requirements of the Code of Ethics.
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EXHIBIT B
QUARTERLY PERSONAL SECURITIES TRANSACTIONS REPORT
Name of Reporting Person:
Calendar Quarter Ended:
<TABLE>
<CAPTION>
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
Name of Date of Title of No. of Shares/ Type of Name of Broker, Dealer or
Issuer* Transaction Security Principal Amount Transaction Price Bank Effecting Transaction
<S> <C> <C> <C> <C> <C> <C>
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
- ----------- -------------- ----------- ----------------- ------------- ------- ----------------------------
</TABLE>
*You are not required to report your personal transactions in stock of The
Charles Schwab Corporation ("SCH") or SCH options.
If you had no reportable transactions during the quarter, please check here.
If you established an account within the last quarter, please provide the
following information:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Date Report
Name of Broker, Date Account was Interest Rate Maturity Date Submitted by Access
Dealer or Bank Established (if applicable) (if applicable) Person
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
If you did not establish a securities account within the last quarter, please
check here.
If you to disclaim beneficial ownership of one or more Securities reported
above, please describe below and indicate which Securities are at issue.
Signature Date
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