<PAGE> 1
File Nos. 33-62470 and 811-7704
As filed with the Securities and Exchange Commission on May 15, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 38 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 40 [X]
SCHWAB CAPITAL TRUST
(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:
John H. Grady, Jr. Esq. Martin E. Lybecker Frances Cole, Esq.
Morgan Lewis & Bockius LLP Ropes & Gray Charles Schwab Investment
1701 Market Street One Franklin Square Management, Inc.
Philadelphia, PA 19103 1301 K Street NW 101 Montgomery Street
Suite 800 East 120K-14-109
Washington, DC 20005 San Francisco, CA 94104
It is proposed that this filing will become effective (check appropriate box)
/ / Immediately upon filing pursuant to paragraph (b)
/X/ On May 15, 2000 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485
if appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Part C
<PAGE> 2
SCHWAB
FOCUS FUNDS
PROSPECTUS
MAY 15, 2000
COMMUNICATIONS FOCUS FUND
FINANCIAL SERVICES FOCUS FUND
HEALTH CARE FOCUS FUND
TECHNOLOGY FOCUS FUND
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.
CharlesSchwab
<PAGE> 3
SCHWAB
FOCUS FUNDS
ABOUT THE FUNDS
4 Communications Focus Fund
7 Financial Services Focus Fund
10 Health Care Focus Fund
13 Technology Focus Fund
16 Fund Management
INVESTING IN THE FUNDS
18 Buying Shares
19 Selling/Exchanging Shares
20 Transaction Policies
21 Distributions and Taxes
<PAGE> 4
ABOUT THE FUNDS
Each fund described in this prospectus shares the same basic INVESTMENT
APPROACH. Each fund seeks long-term capital growth by investing in companies in
a particular economic sector.
Each fund selects from a base universe of stocks issued by the 2,000 LARGEST
COMPANIES (as measured by market capitalization) incorporated in the United
States, plus any smaller or foreign stocks that are not among these 2,000 but
are included in the S&P 500(R) Index. The Communications Focus Fund also may
include in its base universe foreign stocks not included in the S&P 500.
The investment adviser for the funds has identified a series of SECTOR-SPECIFIC
factors that historically have signaled superior long-term PERFORMANCE, such as
earnings, cash flow, sales and market value. A sophisticated QUANTITATIVE MODEL
sorts the base universe by sector, screens each stock for fundamental and
technical factors and assigns weightings to help the adviser construct the
portfolios. However, in seeking to lock in gains, limit losses or otherwise
maximize a fund's RISK-ADJUSTED RETURN, the adviser may adjust the model's
output. The adviser periodically reviews the factors used by the model, and may
enhance or change them to incorporate the results of NEW RESEARCH. If a stock no
longer meets the model's investment criteria, the fund may sell it.
Each of the funds is designed for LONG-TERM INVESTORS. The funds' performance
will fluctuate over time and, as with all investments, future performance may
differ from past performance.
<PAGE> 5
TICKER SYMBOL
SWCFX
COMMUNICATIONS FOCUS FUND
THE FUND'S GOAL IS TO SEEK LONG-TERM CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE FUND CONCENTRATES ITS INVESTMENTS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES PRIMARILY ISSUED BY U.S. COMPANIES IN THE COMMUNICATIONS
SECTOR. It is the fund's policy that under normal circumstances it will invest
at least 65% of total assets in these securities; typically, the actual
percentage will be considerably higher. The fund also may invest in common
stocks and other equity securities of foreign companies.
The fund expects to invest in all of the types of companies in the
communications sector (see sidebar). The investment adviser chooses the fund's
stocks as described in "About the Funds."
The fund may invest in futures contracts to gain greater market exposure while
still keeping a small portion of assets in cash for business operations. By
using futures, the fund potentially can offset the impact on its performance of
keeping some assets in cash. The fund also may lend portfolio securities to earn
additional income. Any income realized through securities lending may help fund
performance.
Until the fund has reached sufficient asset levels, the fund may use futures,
exchange-traded funds and depositary receipts more extensively than it otherwise
might, if the investment adviser determines that doing so would be advantageous.
THE COMMUNICATIONS SECTOR
The U.S. economy can be divided into sectors, each consisting of a number of
related industries. The communications sector includes these types of companies:
- - companies involved in telecommunications research, distribution, sales or
service
- - media companies, including radio and television
- - telecommunications equipment makers
- - telephone service providers, including providers of local, long-distance,
cellular and paging services
In determining whether a company falls within the sector, the fund considers the
amount of the company's assets devoted to, and sales and operating income
derived from, the sector.
COMMUNICATIONS FOCUS FUND 4
<PAGE> 6
Investors who believe that COMMUNICATIONS firms may be a good long-term
investment and are able to accept the risks 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.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends, over both the short and the long term. Other
factors may affect a single company or an industry, but not the broader market.
BECAUSE THE FUND CONCENTRATES ITS INVESTMENTS IN A SINGLE SECTOR OF THE ECONOMY,
YOUR INVESTMENT IS EXPOSED TO THAT SECTOR'S RISKS. Stocks of communications
companies may underperform the stock market as a whole, and are likely to have
above-average volatility. The companies in which the fund invests are affected
by many of the same factors, such as legislative or regulatory changes, intense
competition for market share and competitive challenges posed by joint ventures
and mergers between U.S. and foreign firms. Because the fund uses an active
model, it could underperform its sector as measured by a sector-specific index.
The fund may take only limited steps to reduce sector exposure or to lessen the
effects of a declining market. Also, foreign stocks carry additional risks such
as: changes in currency exchange rates (which can erode market gains or widen
losses); lack of reliable company information or political upheaval.
RISKS OF INDIVIDUAL COMPANIES MAY PLAY A GREATER ROLE WITH THIS FUND because the
fund is non-diversified, which means it may invest more than 5% of assets in a
single issuer. In addition, to the extent that the fund invests in companies of
a given size, it takes on the risks of that market segment. For example, small-
and mid-cap company stocks may be more volatile than large-cap stocks.
THE FUND'S MANAGEMENT MODEL IS BASED ON MARKET HISTORY. If the model fails to
capture shifts in market dynamics, or if adjustments to the model do not produce
the results expected, fund performance could suffer.
THE FUND MAY BUY AND SELL PORTFOLIO SECURITIES ACTIVELY. If it does, its
portfolio turnover rate and transaction costs will rise, which would lower fund
performance and increase the likelihood of capital gain distributions.
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 pursues its strategy.
For example, futures contracts, which the fund uses to gain additional market
exposure, could adversely affect the fund's performance if they don't perform as
expected.
Any loans of portfolio securities by the fund are fully collateralized. However,
if the borrowing institution defaults, the fund's performance could be reduced.
If the fund invests in any exchange-traded funds, there is the risk that those
funds' managers could make decisions that would hurt the fund's performance.
Depositary receipts (which represent ownership in a group of stocks or a single
stock) may trade at a discount. If the fund invests in any depositary receipts,
this could mean that the fund would not be able to realize the full market value
of its underlying securities.
Depositary receipts can represent ownership of foreign stocks, such as ADRs.
5 COMMUNICATIONS FOCUS FUND
<PAGE> 7
PERFORMANCE
Because this is a new fund, no performance figures or financial highlights 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 total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES (% of transaction amount)
- --------------------------------------------------------------------------------
Redemption fee, charged only on shares you sell
within 180 days of buying them, and paid directly
to the fund 0.75
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.83
-----
Total annual operating expenses 1.37
EXPENSE REDUCTION (0.48)
-----
NET OPERATING EXPENSES* 0.89
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding
interest, taxes and certain non-routine expenses).
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>
$91 $387
</TABLE>
COMMUNICATIONS FOCUS FUND 6
<PAGE> 8
TICKER SYMBOL
SWFFX
FINANCIAL SERVICES FOCUS FUND
THE FUND'S GOAL IS TO SEEK LONG-TERM CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE FUND CONCENTRATES ITS INVESTMENTS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES PRIMARILY ISSUED BY U.S. COMPANIES IN THE FINANCIAL
SERVICES SECTOR. It is the fund's policy that under normal circumstances it will
invest at least 65% of total assets in these securities; typically, the actual
percentage will be considerably higher.
The fund expects to invest in all of the types of companies in the financial
services sector (see sidebar). The investment adviser chooses the fund's stocks
as described in "About the Funds."
The fund may invest in futures contracts to gain greater market exposure while
still keeping a small portion of assets in cash for business operations. By
using futures, the fund potentially can offset the impact on its performance of
keeping some assets in cash. The fund also may lend portfolio securities to earn
additional income. Any income realized through securities lending may help fund
performance.
Until the fund has reached sufficient asset levels, the fund may use futures,
exchange-traded funds and depositary receipts more extensively than it otherwise
might, if the investment adviser determines that doing so would be advantageous.
THE FINANCIAL SERVICES SECTOR
The U.S. economy can be divided into sectors, each consisting of a number of
related industries. The financial services sector includes these types of
companies:
- - asset management firms
- - brokerage companies
- - commercial banks
- - financial services firms
- - insurance companies
- - real estate investment trusts (REITs)
- - savings and loan associations
In determining whether a company falls within the sector, the fund considers the
amount of the company's assets devoted to, and sales and operating income
derived from, the sector.
7 FINANCIAL SERVICES FOCUS FUND
<PAGE> 9
This fund may appeal to long-term investors who are interested in a fund that
seeks to capture the performance potential of the U.S. FINANCIAL SERVICES
sector.
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.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends, over both the short and the long term. Other
factors may affect a single company or an industry, but not the broader market.
BECAUSE THE FUND CONCENTRATES ITS INVESTMENTS IN A SINGLE SECTOR OF THE ECONOMY,
YOUR INVESTMENT IS EXPOSED TO THAT SECTOR'S RISKS. Stocks of financial services
companies may underperform the stock market as a whole, and are likely to have
above-average volatility. The companies in which the fund invests are affected
by many of the same factors, such as legislative or regulatory changes, rising
interest rates, credit losses when borrowers default and pricing pressures from
increasing competition. Because the fund uses an active model, it could
underperform its sector as measured by a sector-specific index. The fund may
take only limited steps to reduce sector exposure or to lessen the effects of a
declining market.
RISKS OF INDIVIDUAL COMPANIES MAY PLAY A GREATER ROLE WITH THIS FUND because the
fund is non-diversified, which means it may invest more than 5% of assets in a
single issuer. In addition, to the extent that the fund invests in companies of
a given size, it takes on the risks of that market segment. For example, small-
and mid-cap company stocks may be more volatile than large-cap stocks.
THE FUND'S MANAGEMENT MODEL IS BASED ON MARKET HISTORY. If the model fails to
capture shifts in market dynamics, or if adjustments to the model do not produce
the results expected, fund performance could suffer.
THE FUND MAY BUY AND SELL PORTFOLIO SECURITIES ACTIVELY. If it does, its
portfolio turnover rate and transaction costs will rise, which would lower fund
performance and increase the likelihood of capital gain distributions.
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 pursues its strategy.
For example, futures contracts, which the fund uses to gain additional market
exposure, could adversely affect the fund's performance if they don't perform as
expected.
Any loans of portfolio securities by the fund are fully collateralized. However,
if the borrowing institution defaults, the fund's performance could be reduced.
If the fund invests in any exchange-traded funds, there is the risk that those
funds' managers could make decisions that would hurt the fund's performance.
Depositary receipts (which represent ownership in a group of stocks) may trade
at a discount. If the fund invests in any depositary receipts, this could mean
that the fund would not be able to realize the full market value of its
underlying securities.
FINANCIAL SERVICES FOCUS FUND 8
<PAGE> 10
PERFORMANCE
Because this is a new fund, no performance figures or financial highlights 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 total return.
<TABLE>
<S> <C>
FEE TABLE (%)
SHAREHOLDER FEES (% of transaction amount)
- --------------------------------------------------------------------------------
Redemption fee, charged only on shares you sell
within 180 days of buying them, and paid directly
to the fund 0.75
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.83
-----
Total annual operating expenses 1.37
EXPENSE REDUCTION (0.48)
-----
NET OPERATING EXPENSES* 0.89
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding
interest, taxes and certain non-routine expenses).
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>
$91 $387
</TABLE>
9 FINANCIAL SERVICES FOCUS FUND
<PAGE> 11
TICKER SYMBOL
SWHFX
HEALTH CARE FOCUS FUND
THE FUND'S GOAL IS TO SEEK LONG-TERM CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE FUND CONCENTRATES ITS INVESTMENTS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES PRIMARILY ISSUED BY U.S. COMPANIES IN THE HEALTH CARE
SECTOR. It is the fund's policy that under normal circumstances it will invest
at least 65% of total assets in these securities; typically, the actual
percentage will be considerably higher.
The fund expects to invest in all of the types of companies in the health care
sector (see sidebar). The investment adviser chooses the fund's stocks as
described in "About the Funds."
The fund may invest in futures contracts to gain greater market exposure while
still keeping a small portion of assets in cash for business operations. By
using futures, the fund potentially can offset the impact on its performance of
keeping some assets in cash. The fund also may lend portfolio securities to earn
additional income. Any income realized through securities lending may help fund
performance.
Until the fund has reached sufficient asset levels, the fund may use futures,
exchange-traded funds and depositary receipts more extensively than it otherwise
might, if the investment adviser determines that doing so would be advantageous.
THE HEALTH CARE SECTOR
The U.S. economy can be divided into sectors, each consisting of a number of
related industries. The health care sector includes these types of companies:
- - drug and biotechnology companies
- - health care facilities operators
- - medical product manufacturers and suppliers
- - medical providers
- - medical services firms
In determining whether a company falls within the sector, the fund considers the
amount of the company's assets devoted to, and sales and operating income
derived from, the sector.
HEALTH CARE FOCUS FUND 10
<PAGE> 12
Investors who believe that U.S. HEALTH CARE COMPANIES may show potential
long-term growth 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.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends, over both the short and the long term. Other
factors may affect a single company or an industry, but not the broader market.
BECAUSE THE FUND CONCENTRATES ITS INVESTMENTS IN A SINGLE SECTOR OF THE ECONOMY,
YOUR INVESTMENT IS EXPOSED TO THAT SECTOR'S RISKS. Stocks of health care
companies may underperform the stock market as a whole, and are likely to have
above-average volatility. The companies in which the fund invests are affected
by many of the same factors, such as legislative or regulatory changes, failure
to win government approval for new products, rapid product obsolescence and the
high costs of liability should a product or service prove harmful. Because the
fund uses an active model, it could underperform its sector as measured by a
sector-specific index. The fund may take only limited steps to reduce sector
exposure or to lessen the effects of a declining market.
RISKS OF INDIVIDUAL COMPANIES MAY PLAY A GREATER ROLE WITH THIS FUND because the
fund is non-diversified, which means it may invest more than 5% of assets in a
single issuer. In addition, to the extent that the fund invests in companies of
a given size, it takes on the risks of that market segment. For example, small-
and mid-cap company stocks may be more volatile than large-cap stocks.
THE FUND'S MANAGEMENT MODEL IS BASED ON MARKET HISTORY. If the model fails to
capture shifts in market dynamics, or if adjustments to the model do not produce
the results expected, fund performance could suffer.
THE FUND MAY BUY AND SELL PORTFOLIO SECURITIES ACTIVELY. If it does, its
portfolio turnover rate and transaction costs will rise, which would lower fund
performance and increase the likelihood of capital gain distributions.
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 pursues its strategy.
For example, futures contracts, which the fund uses to gain additional market
exposure, could adversely affect the fund's performance if they don't perform as
expected.
Any loans of portfolio securities by the fund are fully collateralized. However,
if the borrowing institution defaults, the fund's performance could be reduced.
If the fund invests in any exchange-traded funds, there is the risk that those
funds' managers could make decisions that would hurt the fund's performance.
Depositary receipts (which represent ownership in a group of stocks) may trade
at a discount. If the fund invests in any depositary receipts, this could mean
that the fund would not be able to realize the full market value of its
underlying securities.
11 HEALTH CARE FOCUS FUND
<PAGE> 13
PERFORMANCE
Because this is a new fund, no performance figures or financial highlights 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 total return.
<TABLE>
<S> <C>
FEE TABLE (%)
SHAREHOLDER FEES (% of transaction amount)
- --------------------------------------------------------------------------------
Redemption fee, charged only on shares you sell
within 180 days of buying them, and paid directly
to the fund 0.75
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.83
-----
Total annual operating expenses 1.37
EXPENSE REDUCTION (0.48)
-----
NET OPERATING EXPENSES* 0.89
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding
interest, taxes and certain non-routine expenses).
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>
$91 $387
</TABLE>
HEALTH CARE FOCUS FUND 12
<PAGE> 14
TICKER SYMBOL
TECHNOLOGY SWTFX
FOCUS FUND
THE FUND'S GOAL IS TO SEEK LONG-TERM CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE FUND CONCENTRATES ITS INVESTMENTS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES PRIMARILY ISSUED BY U.S. COMPANIES IN THE TECHNOLOGY
SECTOR. It is the fund's policy that under normal circumstances it will invest
at least 65% of total assets in these securities; typically, the actual
percentage will be considerably higher.
The fund expects to invest in all of the types of companies in the technology
sector (see sidebar). The investment adviser chooses the fund's stocks as
described in "About the Funds."
The fund may invest in futures contracts to gain greater market exposure while
still keeping a small portion of assets in cash for business operations. By
using futures, the fund potentially can offset the impact on its performance of
keeping some assets in cash. The fund also may lend portfolio securities to earn
additional income. Any income realized through securities lending may help fund
performance.
Until the fund has reached sufficient asset levels, the fund may use futures,
exchange-traded funds and depositary receipts more extensively than it otherwise
might, if the investment adviser determines that doing so would be advantageous.
THE TECHNOLOGY SECTOR
The U.S. economy can be divided into sectors, each consisting of a number of
related industries. The technology sector includes these types of companies:
- - companies involved in technology research, distribution, sales or service
- - computer hardware and software makers
- - defense and aerospace contractors
- - electronic equipment makers
- - internet equipment and service providers
- - office equipment makers
- - semiconductor makers
In determining whether a company falls within the sector, the fund considers the
amount of the company's assets devoted to, and sales and operating income
derived from, the sector.
13 TECHNOLOGY FOCUS FUND
<PAGE> 15
This fund is designed for long-term investors seeking a way to gain exposure to
the TECHNOLOGY SEGMENT of the U.S. economy.
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.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends, over both the short and the long term. Other
factors may affect a single company or an industry, but not the broader market.
BECAUSE THE FUND CONCENTRATES ITS INVESTMENTS IN A SINGLE SECTOR OF THE ECONOMY,
YOUR INVESTMENT IS EXPOSED TO THAT SECTOR'S RISKS. Stocks of technology
companies may underperform the stock market as a whole, and are likely to have
above-average volatility. The companies in which the fund invests are affected
by many of the same factors, such as intense price competition, difficulties
bringing products to market, product obsolescence caused by competitor
innovations, stock prices that are unsupported by revenues, high employee
turnover and high labor costs. Because the fund uses an active model, it could
underperform its sector as measured by a sector-specific index. The fund may
take only limited steps to reduce sector exposure or to lessen the effects of a
declining market.
RISKS OF INDIVIDUAL COMPANIES MAY PLAY A GREATER ROLE WITH THIS FUND because the
fund is non-diversified, which means it may invest more than 5% of assets in a
single issuer. In addition, to the extent that the fund invests in companies of
a given size, it takes on the risks of that market segment. For example, small-
and mid-cap company stocks may be more volatile than large-cap stocks.
THE FUND'S MANAGEMENT MODEL IS BASED ON MARKET HISTORY. If the model fails to
capture shifts in market dynamics, or if adjustments to the model do not produce
the results expected, fund performance could suffer.
THE FUND MAY BUY AND SELL PORTFOLIO SECURITIES ACTIVELY. If it does, its
portfolio turnover rate and transaction costs will rise, which would lower fund
performance and increase the likelihood of capital gain distributions.
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 pursues its strategy.
For example, futures contracts, which the fund uses to gain additional market
exposure, could adversely affect the fund's performance if they don't perform as
expected.
Any loans of portfolio securities by the fund are fully collateralized. However,
if the borrowing institution defaults, the fund's performance could be reduced.
If the fund invests in any exchange-traded funds, there is the risk that those
funds' managers could make decisions that would hurt the fund's performance.
Depositary receipts (which represent ownership in a group of stocks) may trade
at a discount. If the fund invests in any depositary receipts, this could mean
that the fund would not be able to realize the full market value of its
underlying securities.
TECHNOLOGY FOCUS FUND 14
<PAGE> 16
PERFORMANCE
Because this is a new fund, no performance figures or financial highlights 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 total return.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES (% of transaction amount)
- --------------------------------------------------------------------------------
<S> <C>
Redemption fee, charged only on shares you sell
within 180 days of buying them, paid directly to
the fund 0.75
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.83
-----
Total annual operating expenses 1.37
EXPENSE REDUCTION (0.48)
------
NET OPERATING EXPENSES* 0.89
======
</TABLE>
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding
interest, taxes and certain non-routine expenses).
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>
$91 $387
</TABLE>
15 TECHNOLOGY FOCUS FUND
<PAGE> 17
FUND MANAGEMENT
The funds' investment adviser, Charles Schwab Investment Management, Inc., has
more than $115 billion under management.
The investment adviser for the Schwab Focus Funds is Charles Schwab Investment
Management, Inc. (CSIM), 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 5 million shareholder
accounts. (All figures on this page are as of 3/31/00.)
As the investment adviser, the firm oversees the asset management and
administration of the Schwab Focus Funds. As compensation for these services,
the firm receives a management fee from each fund of 0.54% of average daily net
assets.
GERI HOM, a vice president of the investment adviser, is responsible for the
day-to-day management and has overall responsibility for management 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
the funds. Prior to joining the firm in 1998, he worked for 20 years in equity
index management, most recently as vice president and principal, Institutional
Services Group at Wilshire Associates, Inc.
FUND MANAGEMENT 16
<PAGE> 18
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 distribution option for your investment. Helpful
information on TAXES is included as well.
17 INVESTING IN THE FUNDS
<PAGE> 19
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 and require signature guarantees. Contact
your investment provider for more information.
Schwab is seeking investors for the funds during an initial offering period. As
of the date of this prospectus, Schwab anticipates that this period will begin
on 5/16/00 and end on 6/30/00, although the period may be extended or other-wise
changed. Fund shares will not be purchased until the completion of the initial
offering period.
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(R), 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, then decide how much you want to invest.
<TABLE>
<CAPTION>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENT
- --------------------------------------------------------------------------------
<S> <C>
$5,000 $500
($100 for Automatic
Investment Plan)
</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.
- --------------------------------------------------------------------------------
Cash/reinvestment You receive payment for dividends, while any capital gain
mix distributions are invested in shares of your fund.
- --------------------------------------------------------------------------------
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. Make checks payable
to Charles Schwab & Co., Inc.
INVESTING IN THE FUNDS 18
<PAGE> 20
SELLING/EXCHANGING SHARES
USE ANY OF THE METHODS DESCRIBED BELOW TO SELL SHARES OF A FUND.
When selling or exchanging shares, please be aware of the following policies:
- - A fund may take up to seven days to pay sale proceeds.
- - If you are selling shares that were recently purchased by check, the
proceeds may be delayed until the check for purchase clears; this may take up
to 15 days from the date of purchase.
- - As indicated in the funds' fee tables, each fund 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).
- - Each fund reserves 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
SCHWABINSTITUTIONAL.COM
Investment professionals should follow the transaction instructions in the
SchwabInstitutional.com 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 SchwabInstitutional.com transactions, include the
master account and subaccount numbers)
- - The name 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.
19 INVESTING IN THE FUNDS
<PAGE> 21
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, 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 funds (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.
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 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 affect a fund's operations or 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 a 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 criteria for redemption fees
INVESTING IN THE FUNDS 20
<PAGE> 22
DISTRIBUTIONS AND TAXES
ANY INVESTMENT IN THE FUNDS TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in a fund. You also can
visit the Internal Revenue Service (IRS) web site at www.irs.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 considered a
sale.
AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DISTRIBUTIONS their 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.
21 INVESTING IN THE FUNDS
<PAGE> 23
NOTES
<PAGE> 24
NOTES
<PAGE> 25
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 and copy these materials in person at the SEC's Public
Reference Room or by computer using the SEC's EDGAR database at www.sec.gov or
by electronic request (after paying a duplicating fee) at [email protected].
SEC FILE NUMBER
Schwab Focus Funds 811-7704
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0102
800-SEC-0330 (Public Reference Room)
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
FOCUS FUNDS
PROSPECTUS
May 15, 2000
CharlesSchwab
MKT4593FLT
<PAGE> 26
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB FOCUS FUNDS
COMMUNICATIONS FOCUS FUND
FINANCIAL SERVICES FOCUS FUND
HEALTH CARE FOCUS FUND
TECHNOLOGY FOCUS FUND
MAY 15, 2000
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated May 15, 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 P.O. Box 7575, San
Francisco, California 94120-7575. 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 are series of Schwab Capital Trust (the trust).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT STRATEGIES, SECURITIES, RISKS AND LIMITATIONS.................. 2
MANAGEMENT OF THE FUNDS................................................... 15
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 19
INVESTMENT ADVISORY AND OTHER SERVICES.................................... 19
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 20
DESCRIPTION OF THE TRUSTS................................................. 21
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER
REPORTS AND PRICING OF SHARES............................................. 23
TAXATION.................................................................. 24
CALCULATION OF PERFORMANCE DATA........................................... 25
</TABLE>
<PAGE> 27
INVESTMENT STRATEGIES, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVE
Each fund's investment objective is to seek long-term capital growth. There is
no guarantee a fund will achieve its investment objective. Each fund's
investment objective may be changed by vote of a majority of its shareholders.
The following descriptions of investment securities, 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. (For example, limitations on illiquid securities and borrowing
apply at all times.) Any subsequent change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with a fund's investment policies and limitations. Not all investment
securities or techniques discussed below are eligible investments for each fund.
Each fund will invest in securities or engage in techniques that are intended to
help achieve its investment objective.
INVESTMENT STRATEGIES
Each fund will normally invest at least 65% of its total assets in common stocks
and other equity securities from a base universe of the 2000 largest (measured
by market capitalization) U.S. incorporated companies plus any companies
(including foreign and smaller companies) included in the S&P 500(R) Composite
Stock Index. The Communication Focus Fund also may include in its base universe
foreign stocks not included in the S&P 500. In the future, the investment
adviser may expand the model's base universe to include stocks and other equity
securities of foreign companies not included in the S&P 500 Index.
THE COMMUNICATIONS FOCUS FUND invests in common stocks and other equity
securities issued by companies in the communications sector, including telephone
service providers, such as local and long-distance telephone companies, cellular
and paging services companies, telecommunications equipment makers, companies
involved in telecommunications research, distribution, sales or service, and
media companies (including radio and television). Certain types of companies in
which the fund may invest are engaged in fierce competition for a share of the
market for goods or services such as private and local area networks, or are
engaged in the sale of telephone set equipment.
THE FINANCIAL SERVICES FOCUS FUND invests in common stocks and other equity
securities issued by companies in the financial services sector, including
commercial banks, savings and loan associations, insurance companies, brokerage
companies, asset management firms, real estate investment trusts and financial
services firms.
The financial services sector is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. For
instance, recent business combinations have included insurance, finance, and
securities brokerage under single ownership. Some primarily retail corporations
have expanded into securities and insurance industries. Moreover, the federal
laws generally separating commercial and investment banking were recently
revised to permit a greater level of affiliation between financial services
companies.
2
<PAGE> 28
Rule 12d3-1 under the Investment Company Act of 1940 (the 1940 Act) limits the
extent to which a fund may invest in the securities of any one company that
derives more than 15% of its revenues from brokerage, underwriting or investment
management activities. A fund may purchase securities of an issuer that derived
more than 15% of its gross revenues in its most recent fiscal year from
securities-related activities, subject to the following conditions: 1) the
purchase cannot cause more than 5% of the fund's total assets to be invested in
securities of that issuer; 2) for any equity security, the purchase cannot
result in the fund owning more than 5% of the issuer's outstanding securities in
that class; and 3) for a debt security, the purchase cannot result in the fund
owning more than 10% of the outstanding principal amount of the issuer's debt
securities.
THE HEALTH CARE FOCUS FUND invests in common stocks and other equity securities
issued by companies in the health care sector, including companies engaged in
the design, manufacture, or sale of products or services used for or in
connection with health care or medicine. Companies in the health care sector may
include biotechnology and drug companies, heath care facilities operators,
medical product manufacturers and suppliers, medical services firms and medical
providers.
THE TECHNOLOGY FOCUS FUND invests in common stocks and other equity securities
issued by companies in the technology sector. These may include, companies that
develop, produce, or distribute products or services in the electronic
equipment, semiconductor, computer hardware and software, office equipment,
internet and defense and aerospace industries.
The investment adviser may change the inclusion criteria of each sector if it
determines that doing so would cause a fund to be more representative of its
sector.
INVESTMENT SECURITIES AND RISKS
BORROWING may subject a fund to interest costs, which may exceed the interest
received on any securities purchased with the borrowed funds. A fund normally
may borrow 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. Each fund may borrow money from banks and
make other investments or engage in other transactions permissible under the
1940 Act which may be considered a borrowing. However, each fund may not
purchase securities when bank borrowings exceed 5% of a fund's total assets.
Each fund will monitor its level of borrowing on an on-going basis.
Each fund may establish lines-of-credit (lines) with certain banks by which it
may borrow funds for temporary or emergency purposes. A borrowing is presumed to
be for temporary or emergency purposes if it is repaid by a fund within 60 days
and is not extended or renewed. Each fund intends to use the lines to meet large
or unexpected redemptions that would otherwise force a fund to liquidate
securities under circumstances which are unfavorable to the fund's remaining
shareholders. Each fund will pay a fee to the bank for using the lines.
CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure. For example, the technology sector may have greater exposure to a
single fact such as a shortage of skilled workers, which may increase costs and
adversely affect the value of the sector's securities. Each fund will, under
3
<PAGE> 29
normal conditions, invest 25% or more of its total assets in the industry or
group of industries representing its sector.
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.
Depositary Receipts also include securities issued by a trust representing an
undivided beneficial ownership interest in the assets of the trust, usually
common stocks of a group of companies. The trust generally holds the deposited
common stocks for the benefit of the holders of the depositary receipts. Issuers
generally are not registered as investment companies under the 1940 Act. The
trustee of a trust is typically limited to performing only administrative and
ministerial duties, for which it is paid out of trust assets. The risks of
investing in depositary receipts generally reflect the risks of the securities
held in the trust. The acquisition and disposal of some depositary receipts is
limited to round-lots or round-lot multiples. Depositary receipts may trade in
the secondary market at prices lower than the aggregate value of the
corresponding underlying securities. In such cases, some depositary receipts
enable the holders to realize the underlying value of the securities by
canceling the receipt and receiving a corresponding amount of underlying
securities, which requires the payment of fees and expenses.
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 non-diversified mutual
fund. Each fund intends to diversify its investments to the extent required to
qualify as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986 as amended (the Code).
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.
4
<PAGE> 30
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, but 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 a
company's liquidation, bondholders have claims on company assets senior to those
of stockholders; preferred stockholders have claims senior to those of common
stockholders. Convertible securities typically trade at prices above their
conversion value, which is the current market value of the common stock received
upon conversion, because of their higher yield potential than the underlying
common stock. The difference between the conversion value and the price of a
convertible security will vary depending on the value of the underlying common
stock and interest rates. When the underlying value of the common stocks
decline, the price of the issuer's convertible securities will tend not to fall
as much because the convertible security's income potential will act as a price
support. While the value of a convertible security also tends to rise when the
underlying common stock value rises, it will not rise as much because their
conversion value is more narrow. The value of convertible securities also is
affected by changes in interest rates. For example, when interest rates fall,
the value of convertible securities may rise because of their fixed income
component.
Warrants are a type of security usually issued with bonds and preferred stock
that entitles the holder to a proportionate amount of common stock at 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
5
<PAGE> 31
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, and 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 fund endeavor to achieve the most favorable overall
results on the fund's 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 the fund's transactions or loss of certificates for the fund's
securities. There may be difficulties in obtaining or enforcing judgments
against foreign issuers as well. These factors and others may increase the risks
with respect to the liquidity of the fund's securities 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 the fund is uninvested and no return is earned
thereon. The inability to make intended security purchases due to settlement
problems could cause the fund to miss attractive investment opportunities.
Losses to the fund arising out of the inability to fulfill a contract to sell
such securities also could result in potential liability for the 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 currency of each converting country and 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 from
or to European countries, thereby making the European market less liquid and
more expensive. All of these factors could affect the value of
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the fund's investments and/or increase its expenses. While the investment
adviser has taken steps to minimize the impact of the conversion on the fund, it
is not possible to know precisely what impact the conversion will have on the
fund, if any, nor is it possible to eliminate the risks completely.
FUTURES CONTRACTS are securities that represent an agreement between two parties
that obligates one party to buy, and the other party to sell, specific
securities at an agreed-upon price on a stipulated future date. In the case of
futures contracts relating to an index or otherwise not calling for physical
delivery at the close of the transaction, the parties usually agree to deliver
the final cash settlement price of the contract. The funds may purchase and sell
futures contracts based on securities, securities indices and foreign currencies
or any other futures contracts traded on U.S. exchanges or boards of trade that
the Commodities Futures Trading Commission (CFTC) licenses and regulates on
foreign exchanges.
A 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
performance, a fund may purchase futures contracts. Such transactions allow a
fund's cash balance to produce a return similar to that of the underlying
security or index on which the futures contract is based. A fund may enter into
a futures contract for other reasons.
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. A 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 a fund may purchase and sell futures contracts in order to increase its
market exposure, 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 a 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, a fund incurs 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, a fund would have to continue
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<PAGE> 33
to make daily cash payments to maintain its margin requirements. If a fund had
insufficient cash to meet these requirements it may have to sell portfolio
securities at a disadvantageous time or incur extra costs by borrowing the cash.
Also, a 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.
LENDING of portfolio securities is a common practice in the securities industry.
A fund will engage in security lending arrangements with the primary objective
of increasing its income. For example, a fund may receive cash collateral and it
may invest it in short-term, interest-bearing obligations, but will do so only
to the extent that it will not lose the tax treatment available to mutual funds.
Lending portfolio securities involve risks that the borrower may fail to return
the securities or provide additional collateral.
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
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.
OPTIONS CONTRACTS generally provide the right to buy or sell a security,
commodity, futures contract or foreign currency in exchange for an agreed upon
price. If the right is not exercised after a specified period, the option
expires and the option buyer forfeits the money paid to the option seller.
A call option gives the buyer the right to buy a specified number of shares of a
security at a fixed price on or before a specified date in the future. For this
right, the call option buyer pays the call option seller, commonly called the
call option writer, a fee called a premium. Call option buyers are usually
anticipating that the price of the underlying security will rise above the price
fixed with the call writer, thereby allowing them to profit. If the price of the
underlying security does not rise, the call option buyer's losses are limited to
the premium paid to the call option writer. For call option
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<PAGE> 34
writers, a rise in the price of the underlying security will be offset by the
premium received from the call option buyer. If the call option writer does not
own the underlying security, however, the losses that may ensue if the price
rises could be potentially unlimited. If the call option writer owns the
underlying security or commodity, this is called writing a covered call. All
call options written by the portfolios will be covered, which means that the
portfolios will own the securities subject to the option so long as the option
is outstanding.
A put option is the opposite of a call option. It gives the buyer the right to
sell a specified number of shares of a security at a fixed price on or before a
specified date in the future. Put option buyers are usually anticipating a
decline in the price of the underlying security, and wish to offset those losses
when selling the security at a later date. All put options the portfolios write
will be covered, which means that the portfolio will deposit with its custodian
cash, U.S. government securities or other high-grade debt securities (i.e.,
securities rated in one of the top three categories by Moody's Investor Service
("Moody's") or Standard & Poor's ("S&P") or, if unrated, determined by the
investment adviser to be of comparable credit quality) with a value at least
equal to the exercise price of the put option. The purpose of writing such
options is to generate additional income for the fund. However, in return for
the option premium, the fund accepts the risk that it may be required to
purchase the underlying securities at a price in excess of the securities market
value at the time of purchase.
A fund may purchase and write put and call options on any securities in which it
may invest or any securities index based on securities in which it may invest. A
fund may purchase and write such options on securities that are listed on
domestic or foreign securities exchanges or traded in the over-the-counter
market. Like futures contracts, option contracts are rarely exercised. Option
buyers usually sell the option before it expires. Option writers may terminate
their obligations under a written call or put option by purchasing an option
identical to the one it has written. Such purchases are referred to as "closing
purchase transactions." The fund may enter into closing sale transactions in
order to realize gains or minimize losses on options it has purchased or
written.
Although a fund generally will purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option or at any
particular time. If a fund is unable to effect a closing purchase transaction
with respect to options it has written, it will not be able to sell the
underlying securities or dispose of assets held in a segregated account until
the options expire or are exercised. Similarly, if a fund is unable to effect a
closing sale transaction with respect to options it has purchased, it would have
to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (1) there may be insufficient trading interest in certain options;
(2) an exchange may impose restrictions on opening transactions or closing
transactions or both; (3) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (4) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of an exchange or the Options Clearing Corporation (the OCC) may
not at all times be adequate to handle current trading volume; or (6) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), although outstanding options on that exchange that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
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<PAGE> 35
The ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the Securities and Exchange Commission (SEC) changes
its position, a fund will treat purchased over-the-counter options and all
assets used to cover written over-the-counter options as illiquid securities,
except that with respect to options written with primary dealers in U.S.
government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to a formula the staff of the SEC approves.
Additional risks are involved with options trading because of the low margin
deposits required and the extremely high degree of leverage that may be involved
in options trading. There may be imperfect correlation between the change in
market value of the securities held by a fund and the prices of the options,
possible lack of a liquid secondary markets, and the resulting inability to
close such positions prior to their maturity dates.
A fund may write or purchase an option only when the market value of that
option, when aggregated with the market value of all other options transactions
made on behalf of the fund, does not exceed 5% of its net assets.
REAL ESTATE INVESTMENT TRUSTS (REITS). A REIT is a pooled investment vehicle,
which invests primarily in income producing real estate or real estate related
loans or interests. REITs are sometimes referred to as equity REITs or mortgage
REITs. An equity REIT invests primarily in properties and generates income from
rental and lease properties. Equity REITs also offer the potential for growth as
a result of property appreciation and, in addition, from the sale of appreciated
property. Mortgage REITs invest primarily in real estate mortgages, which may
secure construction, development or long-term loans, and derive income for the
collection of interest payments. REITs are generally organized as corporations
and business trusts but are not taxed as a corporation if they meet certain
requirements of the Code. To qualify, a REIT must, among other things, invest
substantially all of its assets in interests in real estate (including other
REITs), cash and government securities, distribute at least 95% of its taxable
income to its shareholders and receive at least 75% of that income from rents,
mortgages and sales of property.
Like any investment in real estate, a REIT's performance depends on many
factors, such as its ability to find tenants for its properties, to renew
leases, and to finance property purchases and renovations. In general, REITs may
be affected by changes in underlying real estate values, which may have an
exaggerated effect to the extent a REIT concentrates its investment in certain
regions or property types. For example, rental income could decline because of
extended vacancies, increased competition from nearby properties, tenants'
failure to pay rent, or incompetent management. Property values could decrease
because of overbuilding, environmental liabilities, uninsured damages caused by
natural disasters, a general decline in the neighborhood, losses due to casualty
or condemnation, increases in property taxes, or changes in zoning laws.
Ultimately, a REIT's performance depends on the types of properties it owns and
how well the REIT manages its properties
In general, during periods of rising interest rates, REITs may lose some of
their appeal for investors who may be able to obtain higher yields from other
income-producing investments, such as long-term bonds. Higher interest rates
also mean that financing for property purchases and improvements is more costly
and difficult to obtain. During periods of declining interest
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rates, certain mortgage REITs may hold mortgages that mortgagors elect to
prepay, which can reduce the yield on securities issued by mortgage REITs.
Mortgage REITs may be affected by the ability of borrowers to repay debts to the
REIT when due and equity REITs may be affected by the ability of tenants to pay
rent.
Like small-cap stocks in general, certain REITs have relatively small market
capitalization and their securities can be more volatile than -- and at times
will perform differently from -- large-cap stocks. In addition, because
small-cap stocks are typically less liquid than large-cap stocks, REIT stocks
may sometimes experience greater share-price fluctuations than the stocks of
larger companies. Further, REITs are dependent upon specialized management
skills, have limited diversification, and are therefore subject to risks
inherent in operating and financing a limited number of projects. By investing
in REITs indirectly through a fund, a shareholder will bear indirectly a
proportionate share of the REIT's expenses. Finally, REITs could possibly fail
to qualify for tax-free pass-through of income under the Code or to maintain
their exemptions from registration under the 1940 Act.
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. Investment companies generally offer
investors the advantages of diversification and professional investment
management, by combining shareholders' money and investing it in securities such
as stocks, bonds and money market instruments. Investment companies include: (1)
open-end funds (commonly called mutual funds) that issue and redeem their shares
on a continuous basis, (2) closed-end funds that offer a fixed number of shares,
and are usually listed on an exchange, and (3) unit investment trusts that
generally offer a fixed number of redeemable shares. Certain open-end funds and
unit investment trusts are traded on exchanges.
Investment companies may make investments and use techniques designed to enhance
their performance. These may include delayed-delivery and when-issued securities
transactions; swap agreements; buying and selling futures contracts, illiquid,
and/or restricted securities and repurchase agreements; and borrowing or lending
money and/or portfolio securities. The risks of investing in a particular
investment company will generally reflect the risks of the securities in which
it invests and the investment techniques it employs. Also, investment companies
charge fees and incur expenses.
Each fund may buy securities of other investment companies, including those of
foreign issuers, in compliance with the requirements of federal law or any SEC
exemptive order. Each fund intends to vote any investment company proxies in
accordance with instructions received, or in the same proportion as the vote of
all other shareholders. A fund may invest in investment companies that are not
registered with the SEC or privately placed securities of investment
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companies (which may or may not be registered), such as hedge funds and offshore
funds. Unregistered funds are largely exempt from the regulatory requirements
that apply to registered investment companies. As a result, unregistered funds
may have a greater ability to make investments, or use investment techniques,
that offer a higher potential investment return (for example, leveraging), but
which may carry high risk. Unregistered funds, while not regulated by the SEC
like registered funds, may be indirectly supervised by the financial
institutions (e.g., commercial and investment banks) that may provide them with
loans or other sources of capital. Investments in unregistered funds may be
difficult to sell, which could cause a fund selling an interest in an
unregistered fund to lose money. For example, many hedge funds require their
investors to hold their investments for at least one year.
Federal law restricts the ability of one registered investment company to invest
in another. As a result, the extent to which a fund may invest in another
investment company may be limited. With respect to investments in other mutual
funds, the SEC has granted the funds an exemption from the limitations of the
1940 Act that restrict the amount of securities of underlying mutual funds a
fund may hold, provided that certain conditions are met. The conditions
requested by the SEC were designed to address certain abuses perceived to be
associated with funds of funds, including unnecessary costs (such as sales
loads, advisory fees and administrative costs), and undue influence by a fund of
funds over the underlying fund. The conditions apply only when a fund and its
affiliates in the aggregate own more than 3% of the outstanding shares of any
one underlying fund.
Under the terms of the exemptive order, each fund and its affiliates may not
control a non-affiliated underlying fund. Under the 1940 Act, any person who
owns beneficially, either directly or through one or more controlled companies,
more than 25% of the voting securities of a company is assumed to control that
company. This limitation is measured at the time the investment is made.
SMALL-CAP STOCKS in which a fund may invest include 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 a
fund's positions in securities of such companies may be substantial in relation
to the market for such securities. Accordingly, it may be difficult for a 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
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small-cap stocks may change sharply during the short term and long term.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or 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. Securities issued by
government agencies or instrumentalities include obligations of the following:
The Farm Credit System, Small Business Administration, and the Government
National Mortgage Association (GNMA or Ginnie Mae), including GNMA certificates
and mortgage-backed securities, whose securities are supported by the full faith
and credit of the United States; the Federal Home Loan Banks and the Tennessee
Valley Authority, whose securities are supported by the right to borrow from the
U.S. Treasury; Freddie Mac (formerly known as the Federal Home Loan Mortgage
Association or FHLMC) and Fannie Mae (formerly known as the Federal National
Mortgage Association or FNMA), or the Student Loan Marketing Association (Sallie
Mae or SLMA), whose securities are supported by the discretionary authority of
the U.S. government to purchase certain obligations of the agency or
instrumentality.
There can be no assurance that the U.S. government will provide full financial
support to U.S. government-sponsored agencies or instrumentalities if the U.S.
government is not obligated to do so under law. While U.S. government
securities, including U.S. Treasury securities, are among the safest securities,
like other fixed-income securities, they are sensitive to interest rate changes,
which will cause their yield and value of such securities to fluctuate.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of each fund's shareholders.
1) Each fund will concentrate its investments in a particular industry or
group of industries, as concentration is defined under the 1940 Act,
the rules or regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time
to time. The Communications Focus Fund will concentrate its investments
in securities of companies in the communications sector. The Financial
Services Focus Fund will concentrate its investments in securities of
companies in the financial services sector. The Health Care Focus Fund
will concentrate its investments in securities of companies in the
health care sector. The Technology Focus Fund will concentrate its
investments in securities of companies in the technology sector.
2) Each fund may not purchase or sell commodities or real estate, except
to the extent permitted under the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.
3) Each fund may not make loans to other persons, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.
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4) Each fund may not borrow money, except to the extent permitted under
the 1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.
5) Each fund may not issue senior securities, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended or interpreted from time to time.
6) Each fund may not underwrite securities issued by other persons, except
to the extent permitted under the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.
THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING
THE ABOVE OR BELOW POLICIES AND RESTRICTIONS.
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.
Concentration. The SEC has defined concentration as investing 25% or more of an
investment company's total assets in an industry or group of industries, with
certain exceptions.
Underwriting. Under the 1940 Act, underwriting securities involves a fund
purchasing securities directly from an issuer for the purpose of selling
(distributing) them or participating in any such activity either directly or
indirectly. Under the 1940 Act, a diversified fund may not make any commitment
as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of
issuers (other than investment companies) of which it owns more than 10% of the
outstanding voting securities, exceeds 25% of the value of its total assets.
Each fund is a non-diversified mutual fund.
Senior Securities. Senior securities may include any obligation or instrument
issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds
from issuing senior securities, although it provides allowances for certain
borrowings and certain other investments, such as short sales, reverse
repurchase agreements, firm commitment agreements and standby commitments, with
appropriate segregation of assets.
NON-FUNDAMENTAL INVESTMENT POLICIES.
The following investment policies and restrictions are non-fundamental and may
be changed by the trust's Board of Trustees.
Each fund may not:
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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) Purchase the securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities)
if, as a result, the fund would fail to qualify for taxation as a
"regulated investment company" under the requirements of Subchapter M
of the Code.
3) Purchase securities of other investment companies, except as permitted
by the 1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time, 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.
6) Purchase or sell commodities, commodity contracts or real estate,
including interests in real estate limited partnerships, provided that
the fund may (1) purchase securities of companies that deal in real
estate or interests therein (including REITs), (2) purchase or sell
futures contracts, options contracts, equity index participations and
index participation contracts, and (3) purchase securities of companies
that deal in precious metals or interests therein.
7) Borrow money except that a 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 a fund will not purchase securities while borrowings
represent more than 5% of its total assets.
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 debt securities or
repurchase agreements).
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 CSIM are as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS &
NAME/DATE OF BIRTH THE TRUSTS AFFILIATIONS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
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<TABLE>
<S> <C> <C>
CHARLES R. SCHWAB * Chairman and Trustee Chairman and Co-Chief Executive Officer,
July 29, 1937 Director, The Charles Schwab Corporation; Chief
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), Transamerica Corporation (a
financial services organization), AirTouch
Communications (a 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).
</TABLE>
- ---------------------------
* This trustee is an "interested person" of the trusts.
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<TABLE>
<S> <C> <C>
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air
transportation, real estate investment,
management, and investments).
JEREMIAH H. CHAFKIN Executive Vice Executive Vice President, SchwabFunds(R),
May 5, 1959 President and Chief Charles Schwab & Co., Inc.; President and Chief
Operating Officer Operating Officer, Charles Schwab Investment
Management, Inc.
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.
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 trust, for The Charles Schwab Family of Funds,
Schwab Investments 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.
<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Accrued Compensation from
from the as Part of Fund Fund Complex 2
Expenses
-------------------------------------------------------
Communica Financial Health Technology
-tions Focus Services Care Focus Fund 1
Fund 1 Focus Focus
Fund 1 Fund 1
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
17
<PAGE> 43
<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Accrued Compensation from
from the as Part of Fund Fund Complex 2
Expenses
-------------------------------------------------------
Communica Financial Health Technology
-tions Focus Services Care Focus Fund 1
Fund 1 Focus Focus
Fund 1 Fund 1
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 0 N/A 0
Steven L. Scheid 0 0 0 0 N/A 0
Donald F. Dorward $34 $34 $34 $34 N/A $118,150
Robert G. Holmes $34 $34 $34 $34 N/A $118,150
Donald R. Stevens $34 $34 $34 $34 N/A $118,150
Michael W. Wilsey $34 $34 $34 $34 N/A $109,450
</TABLE>
1. Estimated compensation for the fiscal period ending October 31, 2000.
2. Unless otherwise stated, information is for the fund complex, which included
40 funds as of October 31, 1999.
DEFERRED COMPENSATION PLAN
Trustees who are not "interested persons" of a trust ("independent trustees")
may enter into a fee deferral plan. Under this plan, deferred fees will be
credited to an account established by the trust as of the date that such fees
would have been paid to the trustee. The value of this account will equal the
value that the account would be if the fees credited to the account had been
invested in the shares of SchwabFunds selected by the trustee. Currently, none
of the independent trustees have elected to participate in this plan.
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.
18
<PAGE> 44
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of May 15, 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.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc., 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 funds, the investment
adviser is entitled to receive an annual fee, accrued daily and paid monthly, of
0.54% of each fund's average daily net assets.
The investment adviser and Schwab have contractually guaranteed through May 15,
2001 that each fund's total operating expenses will not exceed 0.89% of the
fund's average daily net assets. The amount of the expense cap is determined in
coordination with the Board of Trustees, and the expense cap is intended to
limit the effects on shareholders of expenses incurred in the ordinary operation
of the funds. The expense cap in not intended to cover all fund expenses, and
the funds' expenses may exceed the expense cap. For example, the expense cap
does not cover investment-related expenses, such as brokerage commissions,
interest, and taxes nor does it cover extraordinary or non-routine expenses,
such as shareholder meeting costs.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of the funds and is the trust's agent for the purpose of the continuous
offering of the funds' shares. Each fund pays the cost of the prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective investors and for supplementary sales
literature and advertising. Schwab receives no fee under the Distribution
Agreement. Terms of continuation, termination and assignment under the
Distribution Agreement are identical to those described above with respect to
the Advisory Agreement.
SHAREHOLDER SERVICES AND TRANSFER AGENT
Schwab provides fund information to shareholders, including share price,
shareholder ownership and account activities and distributes 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
19
<PAGE> 45
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 fund,
Schwab is entitled to receive an annual fee, payable monthly from each fund, in
the amount of 0.20% of each fund's average daily net assets.
CUSTODIAN AND FUND ACCOUNTANT
Brown Brothers Harriman & Co., 40 Water Street, Boston MA 02109 serves as
custodian for the funds. SEI Investments, Mutual Fund Services, One Freedom
Valley Drive, Oaks PA 19456 serves as fund accountant for the funds.
The custodian is 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
reports on the annual financial statements of each series of the trust and
reviews certain regulatory reports and each fund's federal income tax return.
They also perform other professional accounting, auditing, tax and advisory
services when the trust engages 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, 2000, will be included in the fund's annual
report, which is a separate report supplied with the SAI.
OTHER SERVICES
BARRA, Inc. (BARRA) provides the investment adviser with statistical and factual
information and advice about economic factors and trends relating to each fund's
sector and the issuers therein. Pursuant to an agreement between the investment
adviser and BARRA, BARRA provides these services to the investment adviser, and
in return is compensated by the investment adviser based on a percentage of each
fund's assets, subject to any maximum and/or minimum fee per fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
PORTFOLIO TURNOVER
For reporting purposes, each fund's turnover rate is calculated by dividing the
value of purchases or sales of portfolio securities for the fiscal year,
whichever is less, by the monthly average value of portfolio securities the fund
owned during the fiscal year. When making the calculation, all securities whose
maturities at the time of acquisition were one year or less ("short-term
securities") are excluded.
A 100% portfolio turnover rate would occur, for example, if all portfolio
securities (aside from short-term securities) were sold and either repurchased
or replaced once during the fiscal year.
20
<PAGE> 46
Typically, funds with high turnover (such as 100% or more) tend to generate
higher capital gains and transaction costs, such as brokerage commissions.
The turnover rate for each fund is largely driven by the output of the portfolio
model the investment adviser uses to construct each fund's investment portfolio.
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the funds, the investment adviser seeks
to obtain best execution. Subject to the supervision of the board of trustees,
the investment adviser will select brokers and dealers for the funds 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.
DESCRIPTION OF THE TRUST
Each fund is a series of Schwab Capital Trust, an open-end management investment
company organized as a Massachusetts business trust on May 7, 1993.
21
<PAGE> 47
The 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, if any, 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 which may cause the funds to incur
non-routine expenses. 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 the 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 majority of the outstanding shares of a fund means the affirmative vote of the
lesser of : (a) 67% or more of the voting shares represented at the meeting, if
more than 50% of the outstanding voting shares of a fund are represented at the
meeting or (b) more than 50% of the outstanding voting shares of a fund. Any
lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting, without the necessity of further notice. The Declaration of
Trust specifically authorizes the board of trustees to terminate the trust (or
any of its investment portfolios) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the trust solely by reason of being or having been a shareholder. Moreover,
the trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
trust itself is unable to meet its obligations. There is a remote possibility
that a fund could become liable for a misstatement in the prospectus or SAI
about another fund.
As more fully described in the Declaration of Trust, the trustees may each year,
or more frequently, distribute to the shareholders of each series accrued income
less accrued expenses and any net realized capital gains less accrued expenses.
Distributions of each year's income of each series shall be distributed pro rata
to shareholders in proportion to the number of shares of each series held by
each of them. Distributions will be paid in cash or shares or a combination
thereof as determined by the trustees. Distributions paid in shares will be paid
at the net asset value as determined in accordance with the bylaws.
22
<PAGE> 48
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 an
investor's telephone order is genuine, they will not be liable for any losses
the 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.
Each fund reserves the right to waive its early redemption fee for certain
tax-advantaged retirement plans.
Each fund has 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,
or large purchase or exchange orders, including any purchase or exchange order
which 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.
23
<PAGE> 49
PRICING OF SHARES
Securities traded on stock exchanges are valued at the last-quoted sales price
on the exchange on which such securities are primarily traded, or, lacking any
sales, at the mean between the bid and ask prices. Securities traded in the
over-the-counter market are valued at the last sales price that day, or if no
sales that day, at the mean between the bid and ask prices. In addition,
securities that are primarily traded on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective exchanges
with these values then translated into U.S. dollars at the current exchange
rate. Securities for which market quotations or closing values are not readily
available (including restricted securities that are subject to limitations on
their sale and illiquid securities) are valued at fair value as determined in
good faith pursuant to guidelines and procedures adopted by the board of
trustees. These procedures require that securities be valued on the basis of
prices provided by approved pricing services, except when a price appears
manifestly incorrect or events occurring between the time a price is furnished
by a service and the time a fund calculates its share price materially affect
the furnished price. The board of trustees regularly reviews fair values
assigned to portfolio securities under these circumstances and also when no
prices from approved pricing services are available.
TAXATION
FEDERAL TAX INFORMATION FOR THE FUNDS
It is each fund's policy to qualify for taxation as a "regulated investment
company"(RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, each fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If a fund does not qualify as a RIC under the Code, it will
be subject to federal income tax on its net investment income and any net
realized capital gains.
The Code imposes a non-deductible excise tax on RICs that do not distribute in a
calendar year (regardless of whether they otherwise have a non-calendar taxable
year) an amount equal to 98% of their "ordinary income" (as defined in the Code)
for the calendar year plus 98% of their net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. For
the foregoing purposes, a fund is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
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.
24
<PAGE> 50
FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS
The discussion of federal income taxation presented below supplements the
discussion in the funds' prospectus and only summarizes some of the important
federal tax considerations generally affecting shareholders of the funds.
Accordingly, prospective investors (particularly those not residing or domiciled
in the United States) should consult their own tax advisers regarding the
consequences of investing in a fund.
Any dividends declared by a fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. Long-term
capital gains distributions are taxable as long-term capital gains, regardless
of how long you have held your shares. However, if you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss. For corporate investors in the funds, dividend distributions the funds
designate to be from dividends received from qualifying domestic corporations
will be eligible for the 70% corporate dividends-received deduction to the
extent they would qualify if the funds were regular corporations. Distributions
by a fund also may be subject to state, local and foreign taxes, and its
treatment under applicable tax laws may differ from the federal income tax
treatment.
A fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
Foreign shareholders (i.e., nonresident alien individuals and foreign
corporations, partnerships, trusts and estates) are generally subject to U.S.
withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions
derived from net investment income and short-term capital gains. Distributions
to foreign shareholders of long-term capital gains and any gains from the sale
or other disposition of shares of the funds generally are not subject to U.S.
taxation, unless the recipient is an individual who 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.
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.
25
<PAGE> 51
An after-tax total return for each fund may be calculated by taking that fund's
total return and subtracting applicable federal taxes from the portions of each
fund's total return attributable to capital gain and ordinary income
distributions. This after-tax total return may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.
Each fund also may report the percentage of its total return that would be paid
to taxes annually (at the applicable federal personal income and capital gains
tax rates) before redemption of fund shares. This proportion may be compared to
that of other mutual funds with similar investment objectives as reported by
independent sources.
A fund also may advertise its cumulative total return. This number is calculated
using the same formula that is used for average annual total return except that,
rather than calculating the total return based on a one-year period, cumulative
total return is calculated from commencement of operations to the fiscal year
end.
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. The
performance of the funds may be compared with the performance of their
respective sectors for which reliable data are available, such as industry or
sector data. The funds, their distributor or investment adviser may discuss or
quote market, regulatory and economic data and/or factors affecting their
respective sectors or industries or sub-industries within those sectors. 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.
26
<PAGE> 52
PART C
OTHER INFORMATION
SCHWAB CAPITAL TRUST
Item 23. Exhibits.
(a) Articles of Agreement and Declaration of Trust,
Incorporation dated May 6, 1993 is incorporated by
reference to Exhibit 1, File No. 811-
7704, of Post-Effective Amendment No.
21 to Registrant's Registration on
Form N-1A, electronically filed on
December 17, 1997.
(b) By-Laws Amended and Restated Bylaws are
incorporated by reference to
Exhibit 2, File No. 811-7704, of
Post-Effective Amendment No. 7 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
February 27, 1996.
(c) Instruments (i) Article III, Section 5, Article V,
Defining rights of Article VI, Article VIII, Section 4
Security Holders and Article IX, Sections 1, 5 and 7
of the Agreement and Declaration of
Trust, dated May 6, 1993, referenced
in Exhibit (a) above, are incorporated
herein by reference to Exhibit 1, File
No. 811-7704, to Post-Effective
Amendment No. 21 of Registrant's
registration Statement on Form N-1A
electronically filed on December 17,
1997.
(ii) Articles 9 and 11 of the Amended and
Restated Bylaws are incorporated
herein by reference to Exhibit 2, File
No. 811-7704, of Post-Effective
Amendment No. 7 to Registrant's
Registration Statement on Form N-1A,
electronically filed on February 27,
1996.
(d) Investment Advisory (i) Investment Advisory and Administration
Contracts Agreement between Registrant and
Charles Schwab Investment Management,
Inc. (the "Investment Adviser"), dated
June 15, 1994, is incorporated herein
by reference to Exhibit 5(a), File
No. 811-7704, of Post-Effective
Amendment No. 21 to Registrant's
Registration Statement on Form N-1A,
electronically filed on December 17,
1997.
(ii) Amended Schedules A and B to
Investment Advisory and Administration
Agreement referenced in Exhibit (d)(i)
above is incorporated herein by
reference to Exhibit (d)(ii), File No.
811-7704, of Post-Effective Amendment
No. 32 to Registrant's Registration
Statement on Form N-1A, electronically
filed on February 26, 1999.
(iii) Amended Schedules A and B to
the Investment Advisory and
Administration Agreement between
Registrant and the Investment Adviser,
referenced in Exhibit (d)(i) above are
filed herewith as Exhibit (d)(iii),
File No. 811-7704.
Part C
<PAGE> 53
(vi) Investment Sub-Advisory Agreement
between Investment Adviser, on behalf
of the Schwab Analytics Fund(R), and
Symphony Asset Management is
incorporated herein by reference to
Exhibit 5(d), File No. 811-7704, of
Post-Effective Amendment No. 10 to
Registrant's Registration Statement on
Form N-1A, electronically filed on May
17, 1996.
(e) Underwriting (i) Distribution Agreement between
Contracts Registrant and Charles Schwab & Co.,
Inc. ("Schwab"), dated July 21, 1993,
is incorporated herein by reference to
Exhibit 6(a), File No. 811-7704, of
Post-Effective Amendment No. 21 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
December 17, 1997.
(ii) Amended Schedule A to the Distribution
Agreement, referenced at Exhibit
(e)(i) above, is incorporated herein
by reference to Exhibit (e)(ii), File
No. 811-7704, of Post-Effective
Amendment No. 32 to Registrant's
Registration Statement on Form N-1A,
electronically filed on February 26,
1999.
(iii) Amended Schedule A to the
Distribution Agreement between
Registrant and Schwab, referenced at
Exhibit (e)(i) above, is filed
herewith as Exhibit (e)(iii), File No.
811-7704.
(f) Bonus or Profit Inapplicable
Sharing Contracts
(g) Custodian Agreements (i) Custodian Agreement between Registrant
and Morgan Stanley Trust Company,
dated April 4, 1997, is incorporated
herein by reference to Exhibit 8(a),
File No. 811-7704, of Post-Effective
Amendment No. 18 to Registrant's
Registration Statement on Form N-1A,
electronically filed on April 14,
1997.
(ii) Amended Appendix 2 to Custodian
Agreement between the Registrant and
Morgan Stanley Trust Company referred
to at Exhibit (g)(i) above, is
incorporated herein by reference to
Exhibit (g)(ii), File No. 811-7704, of
Post-Effective Amendment No. 30 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
December 29, 1998.
(iii) Amended Custodian Agreement referenced
at Exhibit (g)(i) above, between
Registrant and Morgan Stanley Trust
Company, is incorporated herein by
reference to Exhibit 8(c), File No.
811-7704, of Post-Effective Amendment
No. 21 to Registrant's Registration
Statement on Form N-1A, electronically
filed on December 17, 1997.
Part C
<PAGE> 54
(iv) Accounting Services Agreement between
Registrant and SEI Investments, dated
April 1, 1998, is incorporated herein
by reference to Exhibit 8(d), File No.
811-7704, of Post-Effective Amendment
No. 26 to Registrant's Registration
Statement on Form N-1A, electronically
filed on August 14, 1998.
(v) Amended Schedule A to the Accounting
Services Agreement referenced at
Exhibit (g)(iv) above, is incorporated
herein by reference to Exhibit (g)(v),
File No. 811-7704, of Post-Effective
Amendment No. 32 to Registrant's
Registration Statement on Form N1-A,
electronically filed on February 26,
1999.
(vi) Form of Amended Schedule A to the
Accounting Services Agreement
referenced at Exhibit (g)(iv) above,
is filed herewith as Exhibit (g)(vi),
File No. 811-7704.
(vii) Custodian Services Agreement between
Registrant, on behalf of the Schwab
S&P 500 Fund, and PNC Bank, National
Association ("PNC Bank"), dated
February 21, 1996, is incorporated
herein by reference to Exhibit 8(c),
File No. 811-7704, of Post-Effective
Amendment No. 7 to Registrant's
Registration Statement on Form N-1A,
electronically filed on February 27,
1996.
(viii) Schedule A to the Custodian Services
Agreement referenced at Exhibit
(g)(vii) above between Registrant, on
behalf of the Institutional Select
Index Funds is incorporated herein by
reference to Exhibit (g)(viii), File
No. 811-7704, of Post-Effective
Amendment No. 32 to Registrant's
Registration Statement on Form N1-A,
electronically filed on February 26,
1999.
(ix) Schedule I to the Custodian Services
Agreement referenced at Exhibit
(g)(vii) above, is incorporated herein
by reference to Exhibit (a)(ix), File
No. 811-7704, of Post-Effective
Amendment No. 36 to the Registrant's
Registration Statement on Form N-1A,
electronically filed on or about
February 25, 2000.
(x) Accounting Services Agreement between
Registrant, on behalf of the Schwab
S&P 500 Fund, and PFPC Inc., dated
February 21, 1996, is incorporated
herein by reference to Exhibit 8(d),
File No. 811-7704, of Post-Effective
Amendment No. 7 to Registrant's
Registration Statement on Form N-1A,
electronically filed on February 27,
1996.
Part C
<PAGE> 55
(xi) Amended Schedule to the Accounting
Services Agreement referenced at
Exhibit (g)(viii) above between
Registrant, on behalf of the Schwab
S&P 500 Fund and the Schwab Analytics
Fund, and PFPC Inc. is incorporated
herein by reference to Exhibit 8(f),
File No. 811-7704, of Post-Effective
Amendment No. 10 to Registrant's
Registration Statement on Form N-1A,
electronically filed on May 17, 1996.
(xii) Transfer Agency Agreement between
Registrant and Schwab, dated July 21,
1993, is incorporated herein by
reference to Exhibit 8(j), File No.
811-7704, of Post-Effective Amendment
No. 21 to Registrant's Registration
Statement on Form N-1A, electronically
filed on December 17, 1997.
(xiii) Amended Schedules A and C to
the Transfer Agency Agreement
referenced at Exhibit (g)(xii) above
is filed herewith as Exhibit (g)(xiv),
File No. 811-7704.
(xiv) Amended Schedules A and C to the
Transfer Agency Agreement between
Registrant and Schwab referenced at
Exhibit (g)(xii) above, are
incorporated herein by reference to
Exhibit (g)(xiv), File No. 811-7704,
of Post Effective Amendment No. 33 to
Registrant's Registration Statement on
Form N-1A electronically filed on
April 15, 1999.
(xv) Shareholder Service Agreement between
Registrant and Schwab, dated July 21,
1993 is incorporated herein by
reference to Exhibit 8(l), File No.
811-7704, of Post-Effective Amendment
No. 21 to Registrant's Registration
Statement on Form N-1A, electronically
filed on December 17, 1997.
(xvi) Amended Schedules A and C to the
Shareholder Service Agreement between
Registrant and Schwab referenced at
Exhibit (g)(xv) above, is incorporated
herein by reference to Exhibit
(g)(xvi), File No. 811-7704, of
Post-Effective Amendment No. 32 to
Registrant's Registration Statement on
Form N1-A, electronically filed on
February 26, 1999.
(xvii) Form of Amended Schedules A and C to
the Shareholder Service Agreement
between Registrant and Schwab
referenced at Exhibit (g)(xv) above,
are filed herewith as Exhibit
(g)(xvii), File No. 811-7704.
(xviii) Amended Custodian Services Agreement
by and between Registrant and PNC
Bank, National Association, dated
November 1, 1998, referenced as
Exhibit (g)(vii) above, is
incorporated herein by reference to
Exhibit (g)(xv), File No. 811-7704, of
Post-Effective Amendment No. 30 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
December 29, 1998.
Part C (xix) Custodian Agreement by and between
Registrant and Brown Brothers
Harriman & Co. dated October 28, 1999,
is filed herewith as Exhibit
(a)(xix), File No. 811-7704.
<PAGE> 56
(h) Other Material License Agreement between Schwab
Contracts Capital Trust and Standard & Poor's is
incorporated herein by reference to
Exhibit (h), File No. 811-7704, of
Post-Effective Amendment No. 32 to
Registrant's Registration Statement on
Form N1-A, electronically filed on
February 26, 1999.
(i) Legal Opinion Opinion of Morgan, Lewis & Bockius LLP
as to the legality of the securities
being registered is filed herewith as
Exhibit (i), File No. 811-7704.
(j) Other Opinions Inapplicable.
(k) Omitted Financial Inapplicable.
Statements
(l) Initial Capital (i) Purchase Agreement for the Schwab
Agreement International Index Fund(R), dated
June 17, 1993, is incorporated herein
by reference to Exhibit 13(a) of Post-
Effective Amendment No. 21 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
December 17, 1997.
(ii) Purchase Agreement for the Schwab
Small-Cap Index Fund(R), dated October
13, 1993, is incorporated herein by
reference to Exhibit 13(b), File No.
811-7704, of Post-Effective Amendment
No. 21 to Registrant's Registration
Statement on Form N-1A, electronically
filed on December 17, 1997.
(iii) Purchase Agreement for the Schwab
MarketTrack Portfolios - Growth
Portfolio, Balanced Portfolio and
Conservative Portfolio (formerly
Schwab Asset Director(R)- High Growth,
Schwab Asset Director - Balanced
Growth, and Schwab Asset Director -
Conservative Growth Funds) is
incorporated herein by reference to
Exhibit 13(c), File No. 811-7704, of
Post-Effective Amendment No. 6 to
registrant's Registration Statement on
Form N-1A, electronically filed on
December 15, 1996.
(iv) Purchase Agreement for the Schwab S&P
500 Fund-Investor Shares and
e.Shares(R) is incorporated herein by
reference to Exhibit 13(d), File No.
811-7704, of Post-Effective Amendment
No. 7 to Registrant's Registration
Statement on Form N-1A, electronically
filed on February 27, 1996.
(v) Purchase Agreement for the Schwab
Analytics Fund(R) is incorporated
herein by reference to Exhibit 13(e),
File No. 811-7704, to Post-Effective
Amendment No. 13 of Registrant's
Registration Statement on Form N-1A,
electronically filed on October 10,
1996.
Part C
<PAGE> 57
(vi) Purchase Agreement for Schwab
MarketManager International Portfolio
(formerly Schwab OneSource(R)
Portfolios-International) is
incorporated herein by reference to
Exhibit 13(f), File No. 811-7704, of
Post-Effective Amendment No. 13 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
October 10, 1996.
(vii) Purchase Agreement for Schwab
MarketManager Growth Portfolio and
Balanced Portfolio (formerly Schwab
OneSource Portfolios-Growth Allocation
and Schwab OneSource
Portfolios-Balanced Allocation) is
incorporated herein by reference of
Exhibit 13(g), File No. 811-7704, to
Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A,
electronically filed on December 18,
1996.
(viii) Purchase Agreement for Schwab
MarketManagertm Small Cap Portfolio
(formerly Schwab OneSource(R)
Portfolios-Small Company) is
incorporated herein by reference to
Exhibit 13(h), File No. 811-7704, of
Post-Effective Amendment No. 21 to
Registrant's Registration Statement on
Form N-1A, electronically filed on
December 17, 1997.
(ix) Purchase Agreement for MarketTracktm
All Equity Portfolio is incorporated
herein by reference to Exhibit 13(i),
File No. 811-7704, of Post-Effective
Amendment No. 26 to Registrant's
Registration Statement on Form N-1A,
electronically filed on August 14,
1998.
(x) Purchase Agreement for Institutional
Select S&P 500 Fund, Institutional
Select Large-Cap Value Index Fund and
Institutional Select Small-Cap Value
Index Fund is incorporated herein by
reference to Exhibit (l)(x), File No.
811-7704, of Post-Effective Amendment
No. 32 to Registrant's Registration
Statement on Form N1-A, electronically
filed on February 26, 1999.
(xi) Purchase Agreement for Schwab Total
Stock Market Index Fund is
incorporated herein by reference to
Exhibit (l)(xi), File No. 811-7704, of
Post Effective Amendment No. 33 to
Registrant's Registration Statement on
Form N-1A electronically filed on
April 15, 1999.
(m) Rule 12b-1 Plan Inapplicable.
(n) Financial Data (i) Inapplicable.
Schedule
(o) Rule 18f-3 Plan (i) Amended and Restated Multiple Class
Plan, dated April 10, 1997, for Schwab
International Index Fund, Schwab
Small-Cap Index Fund and Schwab S&P
500 Fund is incorporated herein by
reference to Post Effective Amendment
18, File No. 811-7704, to Registrant's
Registration Statement on Form N1-A,
electronically filed on April 14,
1997.
Part C
<PAGE> 58
(ii) Amended Schedule A to the Amended and
Restated Multiple Class Plan and the
Amended and Restated Multiple Class
Plan, referenced at Exhibit (o)(i)
above, for Schwab Total Stock Market
Index are incorporated herein by
reference to Exhibit (o)(ii), File No.
811-7704, of Post Effective Amendment
No. 33 to Registrant's Registration
Statement on Form N-1A electronically
filed on April 15, 1999.
(p) Power of Attorney Power of Attorney executed by Jeremiah
H. Chafkin, December 6, 1999, is
incorporated herein by reference to
Exhibit (p), File No. 811-7704,of
Post-Effective Amendment No. 36 to
Registrant's Registration Statement on
Form N-1A electronically filed on
February 25, 2000.
(q) Code of Ethics Code of Ethics adopted by Registrant,
Charles Schwab Investment Management
Inc. and Charles Schwab & Co., Inc. is
incorporated herein by reference to
Exhibit (q), File No. 811-7704, of
Post-Effective Amendment No. 36 to
Registrant's Registration Statement on
Form N-1A electronically filed on
February 25, 2000.
Item 24. Persons Controlled by or under Common Control with the Fund.
The Charles Schwab Family of Funds, Schwab Investments and Schwab Annuity
Portfolios each are Massachusetts business trusts registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), are advised by the
Investment Adviser, and employ Schwab as their principal underwriter, transfer
agent and shareholder services agent. As a result, The Charles Schwab Family of
Funds, Schwab Investments and Schwab Annuity Portfolios may 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 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
Part C
<PAGE> 59
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 Manager
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 manager to The Charles Schwab
Family of Funds, Schwab Investments, and Schwab Annuity Portfolios, each an
open-end, management investment company. The principal place of business of the
investment adviser 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 Investments, and 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 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
</TABLE>
Part C
<PAGE> 60
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
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
</TABLE>
Part C
<PAGE> 61
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
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
</TABLE>
Part C
<PAGE> 62
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
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
</TABLE>
Part C
<PAGE> 63
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
Item 27. Principal Underwriter.
(a) Schwab acts as principal underwriter and distributor of Registrant's
shares. Schwab currently also acts as principal underwriter for The Charles
Schwab Family of Funds, Schwab Investments and 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 adviser
and administrator, Charles Schwab Investment Management, Inc., 101
Montgomery Street, San Francisco, California 94104; Registrant's former
sub-investment adviser, Dimensional Fund Advisors Inc., 1299 Ocean
Avenue, Suite 1100, Santa Monica, California 90401; Registrant's
sub-investment adviser for the Schwab Analytics Fund(R) is Symphony Asset
Management, Inc., 555 California Street, Suite 2975, San Francisco,
California 94104;
Part C
<PAGE> 64
Registrant's principal underwriter, Charles Schwab & Co., Inc., 101
Montgomery Street, San Francisco, California 94104; Registrant's
custodian and fund accountants, PNC Bank, National Association/PFPC Inc.,
400 Bellevue Parkway, Wilmington, Delaware 19809, Chase Manhattan Bank, 1
Pierrepont Plaza, Brooklyn, New York 11201, and SEI Fund Resources, Oaks
Pennsylvania 19456; Registrant's former custodians and fund accountants,
Federated Services Company, 1001 Liberty Avenue, Pittsburgh, Pennsylvania
15222, State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02180; 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.
Part C
<PAGE> 65
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 Post Effective Amendment No. 38 to Registrant's Registration Statement
on Form N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this
Post Effective Amendment No. 38 to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Philadelphia, on the 4th day of May,
2000.
SCHWAB CAPITAL TRUST
Registrant
Charles R. Schwab*
-------------------------
Charles R. Schwab, Chairman , Chief Executive Officer and Trustee
Pursuant to the requirements of the 1933 Act, this
Post-Effective Amendment No. 38 to Registrant's Registration Statement on Form
N-1A has been signed below by the following persons in the capacities indicated
this 4th day of May, 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
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
---------------------------------------
John H. Grady, Jr., Attorney-in-Fact
pursuant to Powers of Attorney
<PAGE> 66
EXHIBIT INDEX
EXH. NO. DOCUMENT
- -------- --------
(d)(iii) Form of Amended Schedules A and B Investment Advisory and
Administrative Agreement
(e)(iii) Form of Amended Schedule A - Distribution Agreement
(g)(vi) Form of Amended Schedule A to the Accounting Services
Agreement
(g)(xiv) Form of Amended Schedules A and C - Transfer Agency Agreement
(g)(xvii) Form of Amended Schedules A and C - Shareholder Services
Agreement
(g)(xix) Custodian Agreement
(i) Opinion of Counsel
Part C
<PAGE> 1
EXHIBIT (d)(iii)
AMENDED SCHEDULE A
TO THE INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund - Investor Shares July 21, 1993
Schwab International Index Fund - Select Shares April 30, 1997
Schwab Small-Cap Index Fund - Investor Shares October 14, 1993
Schwab Small-Cap Index Fund - Select Shares April 30, 1997
Schwab MarketTrack Growth Portfolio (formerly known as Schwab Asset September 25, 1995
Director-High Growth Fund)
Schwab MarketTrack Balanced Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Balanced Growth Fund)
Schwab MarketTrack Conservative Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Conservative Growth Fund)
Schwab S&P 500 Fund - e.Shares February 28, 1996
Schwab S&P 500 Fund - Investor Shares February 28, 1996
Schwab S&P 500 Fund - Select Shares April 30, 1997
Schwab Analytics Fund May 21, 1996
Schwab MarketManager International Portfolio (formerly known as Schwab September 2, 1996
OneSource Portfolios-International)
Schwab MarketManager Growth Portfolio (formerly known as Schwab OneSource October 13, 1996
Portfolios-Growth Allocation)
Schwab MarketManager Balanced Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Balanced Allocation)
Schwab MarketManager Small Cap Portfolio (formerly known as Schwab August 3, 1997
OneSource Portfolios-Small Company)
Schwab Market Track All Equity Portfolio (formerly known as Schwab Asset April 16, 1998
Director-Aggressive Growth Fund)
Institutional Select S&P 500 Fund October 28, 1998
Institutional Select Large Cap-Value Index Fund October 28, 1998
Institutional Select Small-Cap Value Index Fund October 28, 1998
Schwab Total Stock Market Index Fund - Investor Shares April 15, 1999
Schwab Total Stock Market Index Fund - Select Shares April 15, 1999
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Communications Focus Fund May 15, 2000
Financial Services Focus Fund May 15, 2000
Health Care Focus Fund May 15, 2000
Technology Focus Fund May 15, 2000
</TABLE>
SCHWAB CAPITAL TRUST
By: /s/ JEREMIAH H. CHAFKIN
----------------------------
Name: Jeremiah H. Chafkin
Title: Executive Vice President and
Chief Operating Officer
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ STEPHEN B. WARD
----------------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer
<PAGE> 3
SCHEDULE B
TO THE INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
ADVISORY FEE SCHEDULE
THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS AGREEMENT AND
ARE TO BE ACCRUED DAILY AND PAID MONTHLY IN ARREARS:
Fund Fee
- ---- ---
Schwab International Index Fund Seventy one-hundredths of one percent
(0.70%) of the Fund's average daily net
assets not in excess of $300,000,000 and
sixty one-hundredths of one percent (0.60%)
of such assets over $300,000,000
Schwab Small-Cap Index Fund Fifty one-hundredths of one percent (0.50%)
of the Fund's average daily net assets not
in excess of $300,000,000 and forty-five
one-hundredths of one percent (0.45%) of
such assets over $300,000,000
Schwab MarketTrack Growth Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab Asset Director-High assets not in excess of $500 million, and
Growth Fund) forty nine-one hundredths of one percent
(0.49%) of such net assets over $500 million
Schwab MarketTrack Balanced Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab Asset Director-Balanced assets not in excess of $500 million, and
Growth Fund) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million
Schwab MarketTrack Conservative Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab Asset Director-Conservative assets not in excess of $500 million, and
Growth Fund) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million
Schwab S&P 500 Fund Thirty-six one-hundredths of one percent
(0.36%) of the Fund's average daily net
assets not in excess of $1 billion;
thirty-three one hundredths of one percent
(0.33%) of such net assets over $1 billion,
but not more than $2 billion; and thirty-one
one hundredths of one percent (0.31%) of
such net assets over $2 billion.
<PAGE> 4
Fund Fee
- ---- ---
Schwab Analytics Fund Fifty four-one-hundredths of one percent
(0.54%) of the Fund's average daily net
assets not in excess of $500 million, and
forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million
Schwab MarketManager Fifty four-one-hundredths of one percent
International Portfolio (0.54%) of the Fund's average daily net
(formerly known as Schwab assets not in excess of $500 million, and
OneSource Portfolios- forty nine-one-hundredths of one percent
International) (0.49%) of such net assets over $500 million
Schwab MarketManager Growth Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab OneSource Portfolios- assets not in excess of $500 million, and
Growth Allocation) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million
Schwab MarketManager Balanced Fifty four one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab OneSource Portfolios- assets not in excess of $500 million, and
Balanced Allocation) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million
Schwab MarketManager Small Fifty four one-hundredths of one percent
Cap Portfolio (formerly known (0.54%) of the Fund's average daily net
as Schwab OneSource Portfolios assets not in excess of $500 million, and
- -Small Company) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million
Schwab Market Track All Equity Fifty four-one-hundredths of one percent
Portfolio (formerly known as (0.54%) of the Fund's average daily net
Schwab Asset Director-Aggressive assets not in excess of $500 million, and
Growth Fund) forty nine-one-hundredths of one percent
(0.49%) of such net assets over $500 million
Institutional Select S&P 500 Fund Twenty one hundredths of one percent (0.20%)
of the Fund's average daily net assets not
in excess of $1 billion; and eighteen one
hundredths of one percent (0.18%) of such
net assets over $1 billion.
Institutional Select Large-Cap Twenty one hundredths of one percent (0.20%)
Value Index Fund of the Fund's average daily net assets not
in excess of $1 billion; and eighteen one
hundredths of one percent (0.18%) of such
net assets over $1 billion.
Institutional Select Small-Cap Twenty-five one hundredths of one percent
Value Index Fund (0.25%) of the Fund's average daily net
assets not in excess of $1 billion; and
twenty-three one hundredths of one percent
(0.23%) of such net assets over $1 billion.
<PAGE> 5
Fund Fee
- ---- ---
Schwab Total Stock Market Index Thirty one hundredths of one percent (0.30%)
Fund of the Fund's average daily net assets not
in excess of $500 million; and twenty-two
one hundredths of one percent (0.22%) of
such net assets over $500 million.
Communications Focus Fund Fifty four-one-hundredths of one percent
(0.54%) of the Fund's average daily net
assets
Financial Services Focus Fund Fifty four-one-hundredths of one percent
(0.54%) of the Fund's average daily net
assets
Health Care Focus Fund Fifty four-one-hundredths of one percent
(0.54%) of the Fund's average daily net
assets Technology Focus Fund Fifty
four-one-hundredths of one percent (0.54%)
of the Fund's average daily net assets
SCHWAB CAPITAL TRUST
By: /s/ JEREMIAH H. CHAFKIN
-------------------------------------
Name: Jeremiah H. Chafkin
Title: Executive Vice President and
Chief Operating Officer
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ STEPHEN B. WARD
-------------------------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer
<PAGE> 1
EXHIBIT (e)(iii)
SCHEDULE A
TO THE DISTRIBUTION AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND CHARLES SCHWAB & CO., INC.
<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund - Investor Shares July 21, 1993
Schwab International Index Fund - Select Shares April 30, 1997
Schwab Small-Cap Index Fund - Investor Shares October 14, 1993
Schwab Small-Cap Index Fund - Select Shares April 30, 1997
Schwab MarketTrack Growth Portfolio (formerly known as Schwab Asset September 25, 1995
Director-High Growth Fund)
Schwab MarketTrack Balanced Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Balanced Growth Fund)
Schwab MarketTrack Conservative Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Conservative Growth Fund)
Schwab S&P 500 Fund - e.Shares February 28, 1996
Schwab S&P 500 Fund - Investor Shares February 28, 1996
Schwab S&P 500 Fund - Select Shares April 30, 1997
Schwab Analytics Fund May 21, 1996
Schwab MarketManager International Portfolio (formerly known as Schwab September 2, 1996
OneSource Portfolios-International)
Schwab MarketManager Growth Portfolio (formerly known as Schwab OneSource October 13, 1996
Portfolios-Growth Allocation)
Schwab MarketManager Balanced Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Balanced Allocation)
Schwab MarketManager Small Cap Portfolio (formerly known as Schwab August 3, 1997
OneSource Portfolios-Small Company)
Institutional Select S&P 500 Fund October 28, 1998
Institutional Select Large Cap-Value Index Fund October 28, 1998
Institutional Select Small-Cap Value Index Fund October 28, 1998
Schwab Total Stock Market Index Fund - Investor Shares April 15, 1999
Schwab Total Stock Market Index Fund - Select Shares April 15, 1999
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Communications Focus Fund May 15, 2000
Financial Services Focus Fund May 15, 2000
Health Care Focus Fund May 15, 2000
Technology Focus Fund May 15, 2000
</TABLE>
SCHWAB CAPITAL TRUST
By: /s/ JEREMIAH H. CHAFKIN
-----------------------------
Name: Jeremiah H. Chafkin
Title: Executive Vice President
and Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By: /s/ RON CARTER
----------------------------
Name: Ron Carter
Title: Senior Vice President
<PAGE> 1
Exhibit (g)(vi)
FORM OF SCHEDULE A
ACCOUNTING SERVICES AGREEMENT
BETWEEN
SCHWAB INVESTMENTS,
SCHWAB CAPITAL TRUST,
SCHWAB ANNUITY PORTFOLIOS AND
SEI FUND RESOURCES
LIST OF FUNDS
(As revised May 15, 2000)
<TABLE>
<CAPTION>
Name of Fund Date
- ---------------------------------------------------------------------------------------
<S> <C>
Schwab MarketTrack Growth Portfolio 4/30/98
Schwab MarketTrack Balanced Portfolio 4/30/98
Schwab MarketTrack Conservative Portfolio 4/30/98
Schwab MarketTrack All Equity Portfolio 4/15/98
Schwab International Index Fund: Investor Shares, Select Shares 4/30/98
Schwab Small-Cap Index Fund: Investor Shares, Select Shares 4/30/98
Schwab MarketManager International Portfolio 4/30/98
Schwab MarketManager-Balanced Portfolio 4/30/98
Schwab MarketManager Growth Portfolio 4/30/98
Schwab MarketManager Small-Company Portfolio 4/30/98
Schwab MarketTrack Growth Portfolio II 4/30/98
Schwab S&P 500 Fund: Select Shares, Investor Shares, e.Shares 11/1/98
Schwab S&P 500 Portfolio 11/1/98
Schwab 1000 Fund: Select Shares, Investor Shares 11/1/98
Schwab Analytics Fund 11/1/98
Institutional Select S&P 500 Fund 2/1/99
Institutional Select Large-Cap Value Index Fund 2/1/99
Institutional Select Small-Cap Value Index Fund 2/1/99
Schwab Total Stock Market: Select Shares, Investor Shares 6/1/99
Financial Services Focus Fund 7/3/00
Health Care Focus Fund 7/3/00
Technology Focus Fund 7/3/00
Communications Focus Fund 7/3/00
</TABLE>
SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
By
-------------------------------------
Name: Tai-Chin Tung
Title: Principal Financial Officer
SEI FUND RESOURCES
By
-------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT (g)(xiv)
SCHEDULE A
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND CHARLES SCHWAB AND CO, INC.
<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund - Investor Shares July 21, 1993
Schwab International Index Fund - Select Shares April 30, 1997
Schwab Small-Cap Index Fund - Investor Shares October 14, 1993
Schwab Small-Cap Index Fund - Select Shares April 30, 1997
Schwab MarketTrack Growth Portfolio (formerly known as Schwab Asset September 25, 1995
Director-High Growth Fund)
Schwab MarketTrack Balanced Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Balanced Growth Fund)
Schwab MarketTrack Conservative Portfolio (formerly known as Schwab September 25, 1995
Asset Director-Conservative Growth Fund)
Schwab S&P 500 Fund - e.Shares February 28, 1996
Schwab S&P 500 Fund - Investor Shares February 28, 1996
Schwab S&P 500 Fund - Select Shares April 30, 1997
Schwab Analytics Fund May 21, 1996
Schwab MarketManager International Portfolio (formerly known as Schwab September 2, 1996
OneSource Portfolios-International)
Schwab MarketManager Growth Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Growth Allocation)
Schwab MarketManager Balanced Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Balanced Allocation)
Schwab MarketManager Small Cap Portfolio (formerly known as Schwab August 3, 1997
OneSource Portfolios-Small Company)
Schwab Market Track All Equity Portfolio (formerly known as Schwab April 16, 1998
Asset Director-Aggressive Growth Fund)
Institutional Select S&P 500 Fund October 28, 1998
Institutional Select Large-Cap Value Index Fund October 28, 1998
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Institutional Select Small-Cap Value Index Fund October 28, 1998
Schwab Total Stock Market Index Fund - Investor Shares April 15, 1999
Schwab Total Stock Market Index Fund - Select Shares April 15, 1999
Communications Focus Fund May 15, 2000
Financial Services Focus Fund May 15, 2000
Health Care Focus Fund May 15, 2000
Technology Focus Fund May 15, 2000
</TABLE>
SCHWAB CAPITAL TRUST
By: /s/ JEREMIAH H. CHAFKIN
-------------------------------
Name: Jeremiah H. Chafkin
Title: Executive Vice President
and Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By: /s/ RON CARTER
-------------------------------
Name: Ron Carter
Title: Senior Vice President
<PAGE> 3
SCHEDULE C
TO THE TRANSFER AGENCY AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND CHARLES SCHWAB AND CO, INC.
FEES
THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS AGREEMENT AND ARE
TO BE ACCRUED DAILY AND PAID MONTHLY IN ARREARS:
<TABLE>
<CAPTION>
FUND FEE
- ---- ---
<S> <C>
Schwab International Index Fund - Investor Shares Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab International Index Fund - Select Shares Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab Small-Cap Index Fund - Investor Shares Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab Small-Cap Index Fund-Select Shares Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab MarketTrack Growth Portfolio (formerly known as Five one-hundredths of one percent (.05%) of the Fund's
Schwab Asset Director-High Growth Fund) average daily net assets
Schwab MarketTrack Balanced Portfolio (formerly known as Five one-hundredths of one percent (.05%) of the
Schwab Asset Director-Balanced Growth Fund) Fund's average daily net assets
Schwab MarketTrack Conservative Portfolio (formerly Five one-hundredths of one percent (.05%) of the
known as Schwab Asset Director-Conservative Growth Fund) Fund's average daily net assets
Schwab S&P 500 Fund-Investor Shares Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab S&P 500 Fund-e.Shares Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab S&P 500 Fund-Select Shares Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab Analytics Fund Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab MarketManager International Portfolio (formerly known as Five one-hundredths of one percent (.05%) of the
Schwab OneSource Portfolios-International) Fund's average daily net assets
Schwab MarketManager Growth Portfolio (formerly known as Five one-hundredths of one percent (.05%) of the
Schwab OneSource Portfolios-Growth Allocation) Fund's average daily net assets.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
FUND FEE
- ---- ---
<S> <C>
Schwab MarketManager Balanced Portfolio (formerly known as Five one-hundredths of one percent (.05%) of the
Schwab OneSource Portfolios-Balanced Allocation) Fund's average daily net assets.
Schwab MarketManager Small Cap Portfolio (formerly known as Five one-hundredths of one percent (.05%) of the
Schwab OneSource Portfolios-Small Company) Fund's average daily net assets.
Schwab Market Track All Equity Portfolio (formerly known as Five one-hundredths of one percent (.05%) of the
Schwab Asset Director-Aggressive Growth Fund) Fund's average daily net assets
Institutional Select S&P 500 Fund Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Institutional Select Large-Cap Value Index Fund Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Institutional Select Small-Cap Value Index Fund Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab Total Stock Market Index Fund - Investor Shares Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Schwab Total Stock Market Index Fund - Select Shares Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Communications Focus Fund Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Financial Services Focus Fund Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Health Care Focus Fund Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
Technology Focus Fund Five one-hundredths of one percent (.05%) of the
Fund's average daily net assets
</TABLE>
<PAGE> 5
SCHWAB CAPITAL TRUST
By: /s/ JEREMIAH H. CHAFKIN
---------------------------
Name: Jeremiah H. Chafkin
Title: Executive Vice President
and Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By: /s/ RON CARTER
---------------------------
Name: Ron Carter
Title: Senior Vice President
<PAGE> 1
EXHIBIT (g)(xvii)
SCHEDULE A
TO THE SHAREHOLDER SERVICE AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND CHARLES SCHWAB AND CO, INC.
<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund - Investor Shares July 21, 1993
Schwab International Index Fund - Select Shares April 30, 1997
Schwab Small-Cap Index Fund - Investor Shares October 14, 1993
Schwab Small-Cap Index Fund - Select Shares April 30, 1997
Schwab MarketTrack Growth Portfolio (formerly known as Schwab Asset September 25, 1995
Director-High Growth Fund)
Schwab MarketTrack Balanced Portfolio (formerly known as Schwab Asset September 25, 1995
Director-Balanced Growth Fund)
Schwab MarketTrack Conservative Portfolio (formerly known as Schwab September 25, 1995
Asset Director-Conservative Growth Fund)
Schwab S&P 500 Fund - Investor Shares February 28, 1996
Schwab S&P 500 Fund -e.Shares February 28, 1996
Schwab S&P 500 Fund - Select Shares April 30, 1997
Schwab Analytics Fund May 21, 1996
Schwab MarketManager International Portfolio (formerly known as Schwab September 2, 1996
OneSource Portfolios-International)
Schwab MarketManager Growth Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Growth Allocation)
Schwab MarketManager Balanced Portfolio (formerly known as Schwab October 13, 1996
OneSource Portfolios-Balanced Allocation)
Schwab MarketManager Small Cap Portfolio (formerly known as Schwab August 3, 1997
OneSource Portfolios-Small Company)
Schwab MarketTrack All Equity Portfolio (formerly known as Schwab Asset April 16, 1998
Director-Aggressive Growth Fund)
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Institutional Select S&P 500 Fund October 28, 1998
Institutional Select Large-Cap Value Index Fund October 28, 1998
Institutional Select Small-Cap Value Index Fund October 28, 1998
Schwab Total Stock Market Index Fund - Investor Shares April 15, 1999
Schwab Total Stock Market Index Fund - Select Shares April 15, 1999
Communications Focus Fund May 15, 2000
Financial Services Focus Fund May 15, 2000
Health Care Focus Fund May 15, 2000
Technology Focus Fund May 15, 2000
</TABLE>
SCHWAB CAPITAL TRUST
By: /s/ JEREMIAH H. CHAFKIN
------------------------------
Name: Jeremiah H. Chafkin
Title: Executive Vice President
and Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By: /s/ RON CARTER
------------------------------
Name: Ron Carter
Title: Senior Vice President
<PAGE> 3
SCHEDULE C
TO THE SHAREHOLDER SERVICE AGREEMENT
BETWEEN
SCHWAB CAPITAL TRUST AND CHARLES SCHWAB AND CO, INC.
THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS AGREEMENT AND
ARE TO BE ACCRUED DAILY AND PAID MONTHLY IN ARREARS:
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab International Index Fund - Investor Shares Twenty one-hundredths of one percent (.20%) of the Fund's average
daily net assets
Schwab International Index Fund - Select Shares Five one-hundredths of one percent (0.05%) of the class' average
daily net assets
Schwab Small-Cap Index Fund-Investor Shares Twenty one-hundredths of one percent (.20%) of the Fund's average
daily net assets
Schwab Small-Cap Index Fund-Select Shares Five one-hundredths of one percent (0.05%) of the class' average
daily net assets
Schwab MarketTrack Growth Portfolio (formerly known Twenty one-hundredths of one percent (.20%) of the Fund's average
as Schwab Asset Director-High Growth Fund) daily net assets
Schwab MarketTrack Balanced Portfolio (formerly Twenty one-hundredths of one percent (.20%) of the Fund's average
known as Schwab Asset Director-Balanced daily net assets
Growth Fund)
Schwab MarketTrack Conservative Portfolio (formerly Twenty one-hundredths of one percent (.20%) of the Fund's average
known as Schwab Asset Director-Conservative
Growth daily net assets Fund)
Schwab S&P 500 Fund -Investor Shares Twenty one-hundredths of one percent (.20%) of the class' average
daily net assets
Schwab S&P 500 Fund - e.Shares Five one-hundredths of one percent (0.05%) of the class' average
daily net assets
Schwab S&P 500 Fund - Select Shares Five one-hundredths of one percent (0.05%) of the class' average
daily net assets
Schwab Analytics Fund Twenty one-hundredths of one percent (.20%) of the Fund's average
daily net assets.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab MarketManager International Portfolio Twenty one-hundredths of one percent (.20%) of the Fund's average
(formerly known as Schwab OneSource daily net assets.
Portfolios-International)
Schwab MarketManager Growth Portfolio (formerly Twenty one-hundredths of one percent (.20%) of the Fund's average
known as Schwab OneSource Portfolios-Growth daily net assets.
Allocation)
Schwab MarketManager Balanced Portfolio (formerly Twenty one-hundredths of one percent (.20%) of the Fund's average
known as Schwab OneSource Allocation) Portfolios-Balanced daily net assets.
Schwab MarketManager Small Cap Portfolio (formerly Twenty one-hundredths of one percent (.20%) of the Fund's average
known as Schwab OneSource Portfolios-Small Company) daily net assets.
Schwab Market Track All Equity Portfolio (formerly Twenty one-hundredths of one percent (.20%) of the Fund's average
known as Schwab Asset Director-Aggressive Growth daily net assets
Fund)
Institutional Select S&P 500 Fund Five one-hundredths of one percent (0.05%) of the Fund's average
daily net assets
Institutional Select Large-Cap Value Index Fund Five one-hundredths of one percent (0.05%) of the Fund's average
daily net assets
Institutional Select Small-Cap Index Fund Five one-hundredths of one percent (0.05%) of the Fund's average
daily net assets
Schwab Total Stock Market Index Fund - Investor Twenty one-hundredths of one percent (0.20%) of the Fund's
Shares average daily net assets
Schwab Total Stock Market Index Fund - Select Shares Five one-hundredths of one percent (0.05%) of the Fund's average
daily net assets
Communications Focus Fund Twenty one-hundredths of one percent (0.20%) of the Fund's
average daily net assets
Financial Services Focus Fund Twenty one-hundredths of one percent (0.20%) of the Fund's
average daily net assets
Health Care Focus Fund Twenty one-hundredths of one percent (0.20%) of the Fund's
average daily net assets
Technology Focus Fund Twenty one-hundredths of one percent (0.20%) of the Fund's
average daily net assets
</TABLE>
<PAGE> 5
SCHWAB CAPITAL TRUST
By: /s/ JEREMIAH H. CHAFKIN
----------------------------
Name: Jeremiah H. Chafkin
Title: Executive Vice President
and Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By: /s/ RON CARTER
----------------------------
Name: Ron Carter
Title: Senior Vice President
<PAGE> 1
Exhibit (g)(xix)
CUSTODIAN AGREEMENT
THIS AGREEMENT, dated as of October 28, 1999 between SCHWAB CAPITAL
TRUST, an open-end management investment company organized under the laws of the
Commonwealth of Massachusetts and registered with the Commission under the 1940
Act on behalf of the Series listed on Schedule A (each a FUND) and BROWN
BROTHERS HARRIMAN & CO., a limited partnership formed under the laws of the
State of New York (BBH&CO. or the CUSTODIAN).
W I T N E S S E T H:
WHEREAS, the Fund wishes to employ BBH&Co. to act as custodian for the
Fund and to provide related services, all as provided herein, and BBH&Co. is
willing to accept such employment, subject to the terms and conditions herein
set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Fund and BBH&Co. hereby agree, as follows:
1. APPOINTMENT OF CUSTODIAN. The Fund hereby appoints BBH&Co. as the Fund's
custodian, and BBH&Co. hereby accepts such appointment. All Investments of the
Fund delivered to the Custodian or its agents or Subcustodians (as defined in
Section 13.20) shall be dealt with as provided in this Agreement. The duties of
the Custodian with respect to the Fund's Investments shall be only as set forth
expressly in this Agreement which duties are generally comprised of safekeeping
and various administrative duties that will be performed in accordance with
Instructions and as reasonably required to effect Instructions.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE FUND. The Fund hereby
represents, warrants
1
<PAGE> 2
and covenants each of the following:
2.1 This Agreement has been, and at the time of delivery of
each Instruction such Instruction will have been, duly authorized,
executed and delivered by the Fund. This Agreement does not violate any
Applicable Law or conflict with or constitute a default under the
Fund's prospectus or other organic document, agreement, judgment, order
or decree to which the Fund is a party or by which it or its
Investments is bound.
2.2 By providing an Instruction with respect to the first
acquisition of an Investment in a jurisdiction other than the United
States of America, the Fund shall be deemed to have confirmed to the
Custodian that the Fund, or its delegate or agent, has assessed and
accepted all material Country or Sovereign Risks and accepted
responsibility for their occurrence and will, where appropriate, ensure
that such risks are disclosed to the Fund's shareholders.
2.3 The Fund shall safeguard and shall solely be responsible
for the safekeeping of any testkeys, identification codes, passwords,
other security devices or statements of account with which the
Custodian provides it, except that the Fund shall not be responsible
where the Custodian has been negligent in the safekeeping of such
devices or statements of account. In furtherance and not limitation of
the foregoing, in the event the Fund utilizes any on-line service
offered by the Custodian, the Fund and the Custodian shall be fully
responsible for the security of each party's connecting terminal,
access thereto and the proper and authorized use thereof, and the
initiation and application of continuing effective safeguards in
respect thereof.
3. REPRESENTATION AND WARRANTY OF BBH&CO. BBH&Co. hereby represents and
warrants that this Agreement has been duly authorized, executed and delivered by
BBH&Co. and does not and will not violate any Applicable Law or conflict with,
or constitute a default under, BBH&Co.'s limited partnership agreement or any
agreement, instrument, judgment, order or decree to which BBH&Co. is a party or
by which it is bound. BBH&Co. hereby represents and warrants that it is a bank
having the qualification prescribed in paragraph (a) of Section 26(a) of the
1940 Act and that it will continue to have such qualification during the term of
this Agreement.
4. INSTRUCTIONS. Unless otherwise explicitly indicated herein, the
Custodian shall perform its duties pursuant to Instructions. As used herein, the
term INSTRUCTION shall mean a directive initiated by the Fund,
2
<PAGE> 3
acting directly or through its board of directors, officers or other Authorized
Persons, which directive shall conform to the requirements of this Section 4.
4.1 AUTHORIZED PERSONS. For purposes hereof, an AUTHORIZED PERSON shall
be a person or entity authorized to give Instructions for or on behalf of the
Fund by written notices to the Custodian or otherwise in accordance with
procedures delivered to and acknowledged by the Custodian, including without
limitation the Fund's Investment Adviser or Foreign Custody Manager. The
Custodian may treat any Authorized Person as having full authority of the Fund
to issue Instructions hereunder unless the notice of authorization contains
explicit limitations as to said authority (including any limitations arising
from the Custodian's appointment of depositories pursuant to Section 5.6 of this
Agreement. The Custodian shall be entitled to rely upon the authority of
Authorized Persons until it receives appropriate written notice from the Fund to
the contrary.
4.2 FORM OF INSTRUCTION. Each Instruction shall be transmitted by such
secured or authenticated electro-mechanical means as the Custodian shall make
available to the Fund from time to time unless the Fund shall elect to transmit
such Instruction in accordance with Subsections 4.2.1 through 4.2.3 of this
Section.
4.2.1 FUND DESIGNATED SECURED-TRANSMISSION METHOD. Instructions
may be transmitted through a secured or tested electro-mechanical means
identified by the Fund or by an Authorized Person entitled to give
Instruction and acknowledged and accepted by the Custodian; it being
understood that such acknowledgment shall authorize the Custodian to
receive and process such means of delivery but shall not represent a
judgment by the Custodian as to the reasonableness or security of the
method determined by the Authorized Person.
4.2.2 WRITTEN INSTRUCTIONS. Instructions may be transmitted in
a writing that bears the manual signature of Authorized Persons.
4.2.3 OTHER FORMS OF INSTRUCTION. Instructions may also be
transmitted by another means determined by the Fund or Authorized
Persons and acknowledged and accepted by the Custodian (subject to the
same limits as to acknowledgements as is contained in Subsection 4.2.1,
above) including Instructions given orally or by SWIFT, telex or
telefax (whether tested or
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untested).
When an Instruction is given by means established under Subsections 4.2.1
through 4.2.3, it shall be the responsibility of the Custodian to use reasonable
care to adhere to any security or other procedures established in writing
between the Custodian and the Authorized Person with respect to such means of
Instruction, but such Authorized Person shall be solely responsible for
determining that the particular means chosen is reasonable under the
circumstances. With respect to telefax Instructions, the parties agree and
acknowledge that receipt of legible Instructions cannot be assured, that the
Custodian cannot verify that authorized signatures on telefax Instructions are
original or properly affixed, and that the Custodian shall not be liable for
losses or expenses incurred through actions taken in reliance on inaccurately
stated, illegible or unauthorized telefax Instructions. It shall be the
responsibility of the Custodian to promptly notify the Fund if Instructions are
illegible. The provisions of Section 4A of the Uniform Commercial Code shall
apply to Funds Transfers performed in accordance with Instructions. In the event
that a Funds Transfer Services Agreement is executed between the Fund and
Authorized Person and the Custodian, such an agreement shall comprise a
designation of form of a means of delivering Instructions for purposes of this
Section 4.2.
4.3 COMPLETENESS AND CONTENTS OF INSTRUCTIONS. The Authorized Person
shall be responsible for assuring the adequacy and accuracy of Instructions.
Particularly, upon any acquisition, disposition or other dealing in the Fund's
Investments, and upon any delivery and transfer of any Investment or moneys, the
person initiating such Instruction shall give the Custodian an Instruction with
the following information:
4.3.1 The transaction date and the date and location of
settlement;
4.3.2 The specification of the type of transaction;
4.3.4 A description of the Investments or moneys in question,
including, as appropriate,
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quantity, price per unit, amount of money to be received or delivered,
currency information and where applicable, interest rates, maturity
dates and such other information as may be established in operating
procedures between the Fund and the Custodian. Where an Instruction is
communicated by electronic means, or otherwise where an Instruction
contains an identifying number such as a CUSIP, SEDOL or ISIN number,
the Custodian shall be entitled to rely on such number as controlling
notwithstanding any inconsistency contained in such Instruction,
particularly with respect to Investment description;
4.3.5 The name of the broker or similar entity concerned with
execution of the transaction.
If the Custodian shall determine that an Instruction is either unclear or
incomplete (including those transmitted by telefax), the Custodian shall give
prompt notice of such determination to the Fund, and the Fund shall thereupon
amend or otherwise reform such Instruction. In such event, the Custodian shall
have no obligation to take any action in response to the Instruction initially
delivered until the redelivery of an amended or reformed Instruction.
4.4 TIMELINESS OF INSTRUCTIONS. In giving an Instruction, the Fund
shall take into consideration delays which may occur due to the involvement of a
Subcustodian or agent, differences in time zones, and other factors particular
to a given market, exchange or issuer. the Custodian shall attempt in good faith
to execute any Instruction (including any modification or revocation of a
previous Instruction) received by the Custodian after either (i) specific timing
requirements or deadlines established by the Custodian with respect to
particular classes of Instruction, or (ii) such a time that the Custodian could
not reasonably be expected to have acted on such Instruction due to time zone
differences or other factors beyond its reasonable control, but shall not be
held responsible for losses resulting from its inability to do so.
5. SAFEKEEPING OF FUND ASSETS. The Custodian shall hold Investments
delivered to it or Subcustodians for the Fund in accordance with the provisions
of this Section. The Custodian shall not be
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responsible for (a) the safekeeping of Investments not delivered or that are not
caused to be issued to it or its Subcustodians; (b) pre-existing faults or
defects in Investments that are delivered to the Custodian, or its
Subcustodians; or (c) for assets to hold pursuant to Section 5.6 hereof. The
Custodian is hereby authorized to hold with itself or a Subcustodian, and to
record in one or more accounts, all Investments delivered to and accepted by the
Custodian, any Subcustodian or their respective agents pursuant to an
Instruction or in consequence of any corporate action. The Custodian shall hold
Investments for the account of the Fund and shall segregate Investments from
assets belonging to the Custodian and shall cause its Subcustodians to segregate
Investments from assets belonging to the Subcustodian in an account held for the
Fund or in an account maintained by the Subcustodian generally for
non-proprietary assets of the Custodian.
5.1 USE OF SECURITIES DEPOSITORIES. Except for Investments held
pursuant to Section 5.6 hereunder, the Custodian may deposit and maintain
Investments in any Securities Depository, either directly or through one or more
Subcustodians appointed by the Custodian. Investments held in a Securities
Depository shall be held (a) subject to the agreement, rules, statement of terms
and conditions or other document or conditions effective between the Securities
Depository and the Custodian or the Subcustodian, as the case may be, and (b) in
an account for the Fund or in bulk segregation in an account maintained for the
non-proprietary assets of the entity holding such Investments in the Depository.
If market practice or the rules and regulations of the Securities Depository
prevent the Custodian, the Subcustodian (or any agent of either) from holding
its client assets in such a separate account, the Custodian, the Subcustodian or
other agent shall, as appropriate, segregate such Investments for benefit of the
Fund or for benefit of clients of the Custodian generally on its own books.
For purposes of this Section, a "Securities Depository" is (i) a system
for the handling of securities
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where all securities of any particular class or series of any issuer deposited
within the system are treated as fungible and may be transferred or pledged by
book keeping entry without physical delivery of the securities, or (ii) any
system that qualifies under Rule 17f-4(a) or Rule 17f-5(a)(I)(ii) or (iii) under
the 1940 Act.
The Custodian may deposit Investments in a clearing agency registered
with the Securities and Exchange Commission under section 17A of the Securities
Exchange Act of 1934, as amended ("Clearing Agency"), which acts as a securities
depository or the book-entry system, or both, as provided in Subpart O of
Treasury Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the
book-entry regulations of federal agencies substantially in the form of Subpart
O, provided that:
(i) the Custodian ensures that, upon ceasing to act for the Fund, and
subject to its own rules and contributions to a participant's fund, the
clearing agency shall deliver all Investments held for the Fund to a
successor clearing agency or custodian to be named by the Fund. Where
the Fund has not named a successor, the Custodian shall ensure that the
clearing agency shall deliver the Fund's Investments to a bank having
the qualifications prescribed in Section 26(a)(1) of the 1940 Act for
trustees of unit investment trusts, to be held by the bank as custodian
for the Fund under terms customary to a custodian agreement between
banks and investment companies;
(ii) the Custodian or its agent will deposit the Fund's Investments in an
account that includes only assets held by it for customers;
(iii) the Custodian will send the Fund a confirmation of any transfers to or
from the Fund's account. Where Investments are transferred to the
Fund's account, the Custodian shall, by book-entry or otherwise,
identify Investments as belonging to the Fund by registering the
Investments in the
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name of the Custodian (or its nominee) or by reflecting the Investments
on the Custodian's account on the books of the clearing agency, the
book-entry system or the Custodian's agent. For this purpose, the term
"confirmation" means advice of notice of a transaction; and
(iv) the Custodian or its agent will promptly send to the Fund reports it
receives from the appropriate Federal Reserve Bank or clearing agency
or its respective system of internal accounting controls. The Custodian
and its agents shall send the Fund such reports on their own systems of
internal accounting controls as the Fund may reasonably request from
time to time.
5.2 CERTIFICATED ASSETS. Investments which are certificated may be held
in registered or bearer form: (a) in the Custodian's vault; (b) in the vault of
a Subcustodian or agent of the Custodian or a Subcustodian; or (c) in an account
maintained by the Custodian, Subcustodian or agent at a Securities Depository;
all in accordance with customary market practice in the jurisdiction in which
any Investments are held.
5.3 REGISTERED ASSETS. Investments which are registered may be
registered in the name of the Custodian, a Subcustodian, or in the name of the
Fund or a nominee for any of the foregoing, and may be held in any manner set
forth in paragraph 5.2 above with or without any identification of fiduciary
capacity in such registration.
5.4 BOOK ENTRY ASSETS. Investments which are represented by book-entry
may be so held in an account maintained by the Book-Entry Agent on behalf of the
Custodian, a Subcustodian or another agent of the Custodian, or a Securities
Depository; including depositories so appointed pursuant to Section 5.6 hereof.
5.5 REPLACEMENT OF LOST INVESTMENTS. In the event of a loss of
Investments for which the
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Custodian is responsible under the terms of this Agreement, the Custodian shall
replace such Investment, or in the event that such replacement cannot be
effected, the Custodian shall pay to the Fund the fair market value of such
Investment based on the last available price as of the close of business in the
relevant market on the date that the claim is paid to the Fund with respect to
such loss, or, if less, such other amount as shall be agreed by the parties as
the date for settlement.
5.6 This Section 5.6 sets forth provisions addressing those Funds
(listed on Schedule C hereof) that invest primarily in other mutual funds (each
hereinafter referred to as a "Fund of Funds"). The Fund and the Custodian hereby
agree to authorize the Custodian to take certain additional actions on behalf of
the Fund with respect to each Fund of Funds, as set forth in this Section 5.6.
A. Definitions. Terms defined in this Section 5.6 are as follows:
Schwab is Charles Schwab & Co., Inc.
Schwab Mutual Fund Shares are shares of mutual funds issued by fund
companies that have executed an Operating and/or Service Agreement(s)
with Schwab to participate in Schwab's Mutual Fund One Source or
Marketplace programs.
Mutual Fund Shares are shares of mutual funds issued by fund companies
that have not executed an Operating and/or Service Agreement(s) with
Schwab to participate in Schwab's Mutual Fund One Source or Marketplace
programs.
Fund Agent refers to the transfer agent for any investment company that
issues Mutual Fund Shares.
B. Safekeeping of Mutual Fund Shares. For purposes of this Section 5.6,
Mutual Fund Shares shall be deposited and/or maintained with a Fund
Agent acting as transfer agent for such fund. Each such Fund Agent
shall be deemed to be a "depository" for purposes of Rule 17f-4 under
the 1940 Act. The Fund hereby directs the Custodian to deposit and/or
maintain such securities with a Fund Agent, subject to the following
provisions:
(i) The Custodian shall keep Mutual Fund Shares with a Fund Agent,
provided that such securities are represented in an account
with the Fund Agent, in the name of the Custodian as custodian
of the Fund, in which the Custodian shall not deposit any
assets of the Custodian other than assets held on behalf of
the Fund;
(ii) The records of the Custodian with respect to Mutual Fund
Shares that are maintained with a Fund Agent shall identify by
book-entry those securities which the Fund or its investment
advisor identifies to the Custodian as belonging to the Fund;
(iii) The Custodian shall pay for Mutual Fund Shares purchased for
the account of the Fund upon (x) receipt of Authorized
Instructions that such securities have been purchased and
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<PAGE> 10
will be transferred to the Custodian's account with the Fund
Agent, and (y) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the account
of the Fund. The Custodian shall transfer Mutual Fund Shares
sold for the account of the Fund upon (a) receipt of
Authorized Instructions that such securities have been sold
and that payment for such securities will be transferred to
the Custodian, and (b) the making of an entry on the records
of the Custodian to reflect such transfer and payment for the
account of the Fund. The Custodian will receive confirmation
of the sale of such securities and payment therefore only
after such securities are transferred. Upon request, the
Custodian shall furnish the Fund copies of daily transaction
sheets reflecting each day's transactions with each Fund Agent
for the account of the Fund; and
(iv) The Custodian shall not be liable to the Fund for any loss or
damage to the Fund resulting from the maintenance of Mutual
Fund Shares with a Fund Agent except for losses resulting
directly from the negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees.
C. Safekeeping of Schwab Mutual Fund Shares. Schwab Mutual Fund Shares
shall be deposited and/or maintained in an account maintained with
Schwab as sub-agent for the funds. Schwab shall be deemed to be a
'depository' for purposes of Rule 17f-4 under the 1940 Act. The Fund
hereby directs the Custodian to deposit and/or maintain such securities
with Schwab, subject to the following provisions:
(i) The Custodian shall keep Schwab Mutual Fund Shares with
Schwab, provided that such securities are represented in an
account with Schwab, in the name of the Custodian as custodian
for the Fund, in which the Custodian will not deposit any
assets of the Custodian other than assets held on behalf of
the Fund and which Schwab represents to the Custodian will not
include any assets of Schwab other than assets held as a
fiduciary, custodian or otherwise for customers;
(ii) The records of the Custodian with respect to Schwab Mutual
Fund Shares that are maintained with Schwab shall indentify by
book-entry those securities which the Fund or its investment
advisor has identified to the Custodian as belonging to the
Fund;
(iii) The Custodian shall pay for Schwab Mutual Fund Shares
purchased for the account of the Fund upon (i) receipt of
Authorized Instructions that such securities have been
purchased and will be transferred to the Custodian's account
with Schwab, and (ii) the making of an entry on the records of
the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer Schwab
Mutual Fund Shares sold for the account of the Fund upon (i)
receipt of Authorized Instructions that such securities have
been sold and that payment for such securities will be
transferred to the Custodian, and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and
payment for the account of the Fund. The Custodian will
receive confirmation of the sale of such securities and
payment therefor only after such securities are transferred.
Upon request, the Custodian shall furnish the Fund copies of
daily transaction sheets reflecting each day's transactions
with Schwab for the account of the Fund; and
(iv) The Custodian shall not be liable to the Fund for any loss or
damage to the Fund resulting from maintenance of Schwab Mutual
Fund Shares with Schwab except for losses resulting directly
from the negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees. The Fund acknowledges that the maintenance of
Schwab Mutual Fund Shares with Schwab as contemplated by this
Section 5.6 may be deemed to be "self custody" for purposes of
the Investment Company Act of 1940 and the regulations
thereunder.
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6. ADMINISTRATIVE DUTIES OF THE CUSTODIAN. The Custodian shall perform the
following administrative duties with respect to Investments of the Fund.
6.1 PURCHASE OF INVESTMENTS. Pursuant to Instruction, Investments
purchased for the account of the Fund shall be paid for (a) against delivery
thereof to the Custodian or a Subcustodian, as the case may be, either directly
or through a Clearing Corporation or a Securities Depository (in accordance with
the rules of such Securities Depository or such Clearing Corporation), or (b)
otherwise in accordance with an Instruction, Applicable Law, generally accepted
trade practices, or the terms of the instrument representing such Investment.
6.2 SALE OF INVESTMENTS. Pursuant to Instruction, Investments sold for
the account of the Fund shall be delivered (a) against payment therefor in cash,
by check or by bank wire transfer, (b) by credit to the account of the Custodian
or the applicable Subcustodian, as the case may be, with a Clearing Corporation
or a Securities Depository (in accordance with the rules of such Securities
Depository or such Clearing Corporation), or (c) otherwise in accordance with an
Instruction, Applicable Law, generally accepted trade practices, or the terms of
the instrument representing such Investment.
6.3 DELIVERY IN CONNECTION WITH BORROWINGS OF THE FUND OR OTHER
COLLATERAL AND MARGIN REQUIREMENTS. Pursuant to Instruction, the Custodian may
deliver Investments or cash of the Fund in connection with borrowings and other
collateral and margin requirements.
6.4 FUTURES AND OPTIONS. If, pursuant to an Instruction, the Custodian
shall become a party to an agreement with the Fund and a futures commission
merchant regarding margin (TRI-PARTY AGREEMENT), the Custodian shall (a) receive
and retain, to the extent the same are provided to the Custodian, confirmations
or other documents evidencing the purchase or sale by the Fund of
exchange-traded futures contracts and commodity options, (b) when required by
such Tri-Party Agreement, deposit and maintain in an account opened pursuant to
such Agreement (MARGIN ACCOUNT), segregated either physically or by book-entry
in a Securities Depository for the benefit of any futures commission merchant,
such Investments as the Fund shall have designated as initial, maintenance or
variation "margin" deposits or other collateral intended to secure the Fund's
performance of its obligations under the terms of any exchange-traded futures
contracts and commodity options; and (c) thereafter pay, release or transfer
Investments into or out of the
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margin account in accordance with the provisions of the such Agreement.
Alternatively, the Custodian may deliver Investments, in accordance with an
Instruction, to a futures commission merchant for purposes of margin
requirements in accordance with Rule 17f-6. The Custodian shall in no event be
responsible for the acts and omissions of any futures commission merchant to
whom Investments are delivered pursuant to this Section; for the sufficiency of
Investments held in any Margin Account; or, for the performance of any terms of
any exchange-traded futures contracts and commodity options.
6.5 CONTRACTUAL OBLIGATIONS AND SIMILAR INVESTMENTS. From time to time,
the Fund's Investments may include Investments that are not ownership interests
as may be represented by certificate (whether registered or bearer), by entry in
a Securities Depository or by book entry agent, registrar or similar agent for
recording ownership interests in the relevant Investment. If the Fund shall at
any time acquire such Investments, including without limitation deposit
obligations, loan participations, repurchase agreements and derivative
arrangements, the Custodian shall (a) receive and retain, to the extent the same
are provided to the Custodian, confirmations or other documents evidencing the
arrangement; and (b) perform on the Fund's account in accordance with the terms
of the applicable arrangement, but only to the extent directed to do so by
Instruction. The Custodian shall have no responsibility for agreements running
to the Fund as to which it is not a party other than to retain, to the extent
the same are provided to the Custodian, documents or copies of documents
evidencing the arrangement and, in accordance with Instruction, to include such
arrangements in reports made to the Fund.
6.6 EXCHANGE OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian shall: (a) exchange securities held for the account of the Fund
for other securities in connection with any reorganization, recapitalization,
conversion, split-up, change of par value of shares or similar event, and (b)
deposit any such securities in accordance with the terms of any reorganization
or protective plan.
6.7 SURRENDER OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian may surrender securities: (a) in temporary form for definitive
securities; (b) for transfer into the name of an entity allowable under Section
5.3; and (c) for a different number of certificates or instruments representing
the same number of shares or the same principal amount of indebtedness.
6.8 RIGHTS, WARRANTS, ETC. Pursuant to Instruction, the Custodian shall
(a) deliver warrants, puts, calls, rights or similar securities to the issuer or
trustee thereof, or to any agent of such issuer or trustee, for
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purposes of exercising such rights or selling such securities, and (b) deposit
securities in response to any invitation for the tender thereof.
6.9 MANDATORY CORPORATE ACTIONS. Unless otherwise directed by
Instruction, the Custodian shall: (a) comply with the terms of all mandatory or
compulsory exchanges, calls, tenders, redemptions or similar rights of
securities ownership affecting securities held on the Fund's account and
promptly notify the Fund of such action, and (b) collect all stock dividends,
rights and other items of like nature with respect to such securities.
6.10 INCOME COLLECTION. Unless otherwise directed by Instruction, the
Custodian shall collect any amount due and payable to the Fund with respect to
Investments and promptly credit the amount collected to a Principal or Agency
Account; provided, however, that the Custodian shall not be responsible for: (a)
the collection of amounts due and payable with respect to Investments that are
in default, or (b) the collection of cash or share entitlements with respect to
Investments that are not registered in the name of the Custodian or its
Subcustodians. The Custodian is hereby authorized to endorse and deliver any
instrument required to be so endorsed and delivered to effect collection of any
amount due and payable to the Fund with respect to Investments.
6.11 OWNERSHIP CERTIFICATES AND DISCLOSURE OF THE FUND'S INTEREST. The
Custodian is hereby authorized to execute on behalf of the Fund ownership
certificates, affidavits or other disclosure required under Applicable Law or
established market practice in connection with the receipt of income, capital
gains or other payments by the Fund with respect to Investments, or in
connection with the sale, purchase or ownership of Investments.
6.12 PROXY MATERIALS. The Custodian shall deliver, or cause to be
delivered, to the Fund proxy forms, notices of meeting, and any other notices or
announcements materially affecting or relating to Investments received by the
Custodian or any nominee.
6.13. TAXES. The Custodian shall, where applicable, assist the Fund in
the reclamation of taxes withheld on dividends and interest payments received by
the Fund. In the performance of its duties with respect to tax withholding and
reclamation, the Custodian shall be entitled to rely on the reasonable advice of
counsel and upon information and advice regarding the Fund's tax status that is
received from or on behalf of the Fund without duty of separate inquiry.
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6.14 OTHER DEALINGS. The Custodian shall otherwise act as directed by
Instruction, including without limitation effecting the free payments of moneys
or the free delivery of securities, provided that such Instruction shall
indicate the purpose of such payment or delivery and that the Custodian shall
record the party to whom such payment or delivery is made.
The Custodian shall attend to all nondiscretionary details in
connection with the sale or purchase or other administration of Investments,
except as otherwise directed by an Instruction, and may make payments to itself
or others for minor expenses of administering Investments under this Agreement;
provided that the Fund shall have the right to request an accounting with
respect to such expenses.
In fulfilling the duties set forth in Sections 6.6 through 6.10 above,
the Custodian shall provide to the Fund all material information pertaining to a
corporate action which the Custodian actually receives; provided that the
Custodian shall not be responsible for the completeness or accuracy of such
information. Any advance credit of cash or shares expected to be received as a
result of any corporate action shall be subject to actual collection and may,
when the Custodian deems collection unlikely, be reversed by the Custodian.
The Custodian may at any time or times in its discretion appoint (and
may at any time remove) agents (other than Subcustodians) to carry out some or
all of the administrative provisions of this Agreement (AGENTS), provided,
however, that the appointment of such agent (other than agents appointed under
Section 5.6 of this Agreement) shall not relieve the Custodian of its
administrative obligations under this Agreement.
7. CASH ACCOUNTS, DEPOSITS AND MONEY MOVEMENTS. Subject to the
terms and conditions set forth
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in this Section 7, the Fund hereby authorizes the Custodian to open and
maintain, with itself or with Subcustodians, cash accounts in United States
Dollars, in such other currencies as are the currencies of the countries in
which the Fund maintains Investments or in such other currencies as the Fund
shall from time to time request by Instruction.
7.1 TYPES OF CASH ACCOUNTS. Cash accounts opened on the books of the
Custodian (PRINCIPAL ACCOUNTS) shall be opened in the name of the Fund. Such
accounts collectively shall be a deposit obligation of the Custodian and shall
be subject to the terms of this Section 7 and the general liability provisions
contained in Section 9. Cash accounts opened on the books of a Subcustodian may
be opened in the name of the Fund or the Custodian or in the name of the
Custodian for its customers generally (AGENCY ACCOUNTS). Such deposits shall be
obligations of the Subcustodian and shall be treated as an Investment of the
Fund. The appointment or use of such accounts shall not relieve the Custodian of
its obligations under this Agreement, and specifically the Custodian shall be
responsible for using reasonable care in the administration of such accounts,
including without limitation in the selection and monitoring of such
Subcustodians. Provided that the Custodian has complied with these obligations,
the Custodian shall not be liable for the repayment of balances in Agency
Accounts in the event such Subcustodian fails to make repayment by reason of
bankruptcy, insolvency or similar cause.
7.2 PAYMENTS AND CREDITS WITH RESPECT TO THE CASH ACCOUNTS. The
Custodian shall make payments from or deposits to any of said accounts in the
course of carrying out its administrative duties, including but not limited to
income collection with respect to the Fund's Investments, and otherwise in
accordance with Instructions. The Custodian and its Subcustodians shall be
required to credit amounts to the cash accounts only when moneys are actually
received in cleared funds in accordance with banking
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practice in the country and currency of deposit. Any credit made to any
Principal or Agency Account before actual receipt of cleared funds shall be
provisional and may be reversed by the Custodian in the event such payment is
not actually collected. Unless otherwise specifically agreed in writing by the
Custodian or any Subcustodian, all deposits shall be payable only at the branch
of the Custodian or Subcustodian where the deposit is made or carried.
7.3 CURRENCY AND RELATED RISKS. The Fund bears risks of holding or
transacting in any currency. The Custodian shall not be liable for any loss or
damage arising from the applicability of any law or regulation now or hereafter
in effect, or from the occurrence of any event, which may delay or affect the
transferability, convertibility or availability of any currency in the country
(a) in which such Principal or Agency Accounts are maintained or (b) in which
such currency is issued, and in no event shall the Custodian be obligated to
make payment of a deposit denominated in a currency during the period during
which its transferability, convertibility or availability has been affected by
any such law, regulation or event. Without limiting the generality of the
foregoing, neither the Custodian nor any Subcustodian shall be required to repay
any deposit made at a foreign branch of either the Custodian or Subcustodian if
such branch cannot repay the deposit due to a cause for which the Custodian
would not be responsible in accordance with the terms of Section 9 of this
Agreement unless the Custodian or such Subcustodian expressly agrees in writing
to repay the deposit under such circumstances. All currency transactions in any
account opened pursuant to this Agreement are subject to exchange control
regulations of the United States and of the country where such currency is the
lawful currency or where the account is maintained. Any taxes, costs, charges or
fees imposed on the convertibility of a currency held by the Fund shall be for
the account of the Fund.
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7.4 FOREIGN EXCHANGE TRANSACTIONS. The Custodian shall, subject to the
terms of this Section, settle foreign exchange transactions (including
contracts, futures, options and options on futures) on behalf and for the
account of the Fund with such currency brokers or banking institutions,
including Subcustodians, as the Fund may direct pursuant to Instructions. The
Custodian may act as principal in any foreign exchange transaction with the Fund
in accordance with Section 7.4.2 of this Agreement. The obligations of the
Custodian in respect of all foreign exchange transactions (whether or not the
Custodian shall act as principal in such transaction) shall be contingent on the
free, unencumbered transferability of the currency transacted on the actual
settlement date of the transaction.
7.4.1 THIRD PARTY FOREIGN EXCHANGE TRANSACTIONS. The
Custodian shall process foreign exchange transactions
(including without limitation contracts, futures, options, and
options on futures), where any third party acts as principal
counterparty to the Fund on the same basis it performs duties
as agent for the Fund with respect to any other of the Fund's
Investments. Accordingly the Custodian shall only be
responsible for delivering or receiving currency on behalf of
the Fund in respect of such contracts pursuant to
Instructions. The Custodian shall not be responsible for the
failure of any counterparty (including any Subcustodian) in
such agency transaction to perform its obligations thereunder.
The Custodian (a) shall transmit cash and Instructions to and
from the currency broker or banking institution with which a
foreign exchange contract or option has been executed pursuant
hereto, (b) may make free outgoing payments of cash in the
form of Dollars or foreign currency without receiving
confirmation of a foreign exchange contract or option or
confirmation that the countervalue currency completing the
foreign exchange contract has been delivered or received or
that the option has been delivered or received, and (c) shall
hold all confirmations, certificates and other documents and
agreements received by the Custodian and evidencing or
relating to such foreign exchange transactions in safekeeping.
The Fund accepts full responsibility for its use of
third-party foreign exchange dealers and for execution of said
foreign exchange contracts and options and understands that
the Fund shall be responsible for any and all costs and
interest charges which may be incurred by the Fund or the
Custodian as a result of the failure or delay of third parties
to deliver foreign exchange.
7.4.2 FOREIGN EXCHANGE WITH THE CUSTODIAN AS
PRINCIPAL. The Custodian may undertake foreign exchange
transactions with the Fund as principal as the Custodian and
the Fund may agree from time to time. In such event, the
foreign exchange transaction will be performed in accordance
with the particular agreement of the parties, or in the event
a principal foreign exchange transaction is initiated by
Instruction in the absence of specific agreement, such
transaction will be performed in accordance with the usual
commercial terms of the Custodian.
7.5 DELAYS. If no event of Force Majeure shall have occurred and be
continuing and in the event
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that a delay shall have been caused by the negligence or willful misconduct of
the Custodian in carrying out an Instruction to credit or transfer cash, the
Custodian shall be liable to the Fund: (a) with respect to Principal Accounts,
for interest to be calculated at the rate customarily paid on such deposit and
currency by the Custodian on overnight deposits at the time the delay occurs for
the period from the day when the transfer should have been effected until the
day it is in fact effected; and, (b) with respect to Agency Accounts, for
interest to be calculated at the rate customarily paid on such deposit and
currency by the Subcustodian on overnight deposits at the time the delay occurs
for the period from the day when the transfer should have been effected until
the day it is in fact effected. The Custodian shall not be liable for delays in
carrying out such Instructions to transfer cash which are not due to the
Custodian's own negligence or willful misconduct.
7.6 ADVANCES. If, for any reason in the conduct of its safekeeping
duties pursuant to Section 5 hereof or its administration of the Fund's assets
pursuant to Section 6 hereof, the Custodian or any Subcustodian advances monies
to facilitate settlement or otherwise for benefit of the Fund (whether or not
any Principal or Agency Account shall be overdrawn either during, or at the end
of, any Business Day), the Fund hereby does:
7.6.1 acknowledge that the Fund shall have no right or title to any
Investments purchased with such Advance save a right to receive such
Investments upon: (a) the debit of the Principal or Agency Account; or,
(b) if such debit would produce an overdraft in such account, other
reimbursement of the associated Advance;
7.6.2 grant to the Custodian a security interest in all Investments;
and,
7.6.3 agree that the Custodian may secure the resulting Advance by
perfecting a security interest in all Investments under Applicable Law.
Neither the Custodian nor any Subcustodian shall be obligated to advance monies
to the Fund, and in the
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<PAGE> 19
event that such Advance occurs, any transaction giving rise to an
Advance shall be for the account and risk of the Fund and shall not be
deemed to be a transaction undertaken by the Custodian for its own
account and risk. If such Advance shall have been made by a
Subcustodian or any other person, the Custodian may assign the security
interest and any other rights granted to the Custodian hereunder to
such Subcustodian or other person. If the Fund shall fail to repay when
due the principal balance of an Advance and accrued and unpaid interest
thereon, the Custodian or its assignee, as the case may be, shall be
entitled to utilize the available cash balance in any Agency or
Principal Account and to dispose of any Investments to the extent
necessary to recover payment of all principal of, and interest on, such
Advance in full. The Custodian may assign any rights it has hereunder
to a Subcustodian or third party. Any security interest in Investments
taken hereunder shall be treated as financial assets credited to
securities accounts under Articles 8 and 9 of the Uniform Commercial
Code (1997). Accordingly, the Custodian shall have the rights and
benefits of a secured creditor that is a securities intermediary under
such Articles 8 and 9.
7.7 INTEGRATED ACCOUNT. For purposes hereof, deposits
maintained in all Principal Accounts (whether or not denominated in
Dollars) shall collectively constitute a single and indivisible current
account with respect to the Fund's obligations to the Custodian, or its
assignee, and balances in such Principal Accounts shall be available
for satisfaction of the Fund's obligations under this Section 7. The
Custodian shall further have a right of offset against the balances in
any Agency Account maintained hereunder to the extent that the
aggregate of all Principal Accounts is overdrawn.
8. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Subject to the
provisions hereinafter set forth in this Section 8, the Fund hereby
authorizes the Custodian to utilize Securities Depositories to act on
behalf
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<PAGE> 20
of the Fund and to appoint from time to time and to utilize Subcustodians. With
respect to securities and funds held by a Subcustodian, either directly or
indirectly (including by a Securities Depository or Clearing Corporation),
notwithstanding any provisions of this Agreement to the contrary, payment for
securities purchased and delivery of securities sold may be made prior to
receipt of securities or payment, respectively, and securities or payment may be
received in a form, in accordance with (a) governmental regulations, (b) rules
of Securities Depositories and clearing agencies, (c) generally accepted trade
practice in the applicable local market, (d) the terms and characteristics of
the particular Investment, or (e) the terms of Instructions.
8.1 DOMESTIC SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may deposit and/or maintain, either directly or through one or more agents
appointed by the Custodian, Investments of the Fund in any Securities Depository
in the United States, including The Depository Trust Company, provided such
Depository meets applicable requirements of the Federal Reserve Bank or of the
Securities and Exchange Commission. The Custodian may, at any time and from time
to time, appoint any bank as defined in Section 2(a)(5) of the 1940 Act meeting
the requirements of a custodian under Section 17(f) of the 1940 Act and the
rules and regulations thereunder, to act on behalf of the Fund as a Subcustodian
for purposes of holding Investments of the Fund in the United States.
Notwithstanding the foregoing, nothing in this Section shall relieve the
Custodian of its administrative obligations under this Agreement in connection
with the appointment of Subcustodians and Securities Depositories. In addition,
the Custodian may appoint as a depository an entity described in Section 5.6 of
this Agreement.
8.2 FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may deposit and/or maintain non-U.S. Investments of the Fund in any Securities
Depository located outside the United States
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<PAGE> 21
provided such Securities Depository meets the requirements of an "eligible
foreign custodian" under Rule 17f-5 promulgated under the 1940 Act, or any
successor rule or regulation ("Rule 17f-5") or which by order of the Securities
and Exchange Commission is exempted therefrom. Additionally, the Custodian may,
at any time and from time to time, appoint (a) any bank, trust company or other
entity meeting the requirements of an ELIGIBLE FOREIGN CUSTODIAN under Rule
17f-5 or which by order of the Securities and Exchange Commission is exempted
therefrom, or (b) any bank as defined in Section 2(a)(5) of the 1940 Act meeting
the requirements of a custodian under Section 17(f) of the 1940 Act and the
rules and regulations thereunder, to act on behalf of the Fund as a Subcustodian
for purposes of holding Investments of the Fund outside the United States. Such
appointment of foreign Subcustodians shall be subject to approval of the Fund in
accordance with Subsections 8.2.1 and 8.2.2.
8.2.1 BOARD APPROVAL OF FOREIGN SUBCUSTODIANS. Unless and
except to the extent that review of certain matters concerning the
appointment of Subcustodians shall have been delegated to the Custodian
pursuant to Subsection 8.2.2, the Custodian shall, prior to the
appointment of any Subcustodian for purposes of holding Investments of
the Fund outside the United States, obtain written confirmation of the
approval of the Board of Trustees or Directors of the Fund with respect
to (a) the identity of a Subcustodian, (b) the country or countries in
which, and the Securities Depositories, if any, through which, any
proposed Subcustodian is authorized to hold Investments of the Fund,
and (c) the Subcustodian agreement which shall govern such appointment.
Each such duly approved country, Subcustodian and Securities Depository
shall be listed on Appendix A attached hereto as the same may from time
to time be amended.
8.2.2 DELEGATION OF BOARD REVIEW OF SUBCUSTODIANS. From time
to time, the Custodian may offer to perform, and the Fund may accept to
perform, that the Custodian perform certain reviews of Subcustodians
and of Subcustodian Contracts as delegate of the Fund's Board. In such
event, the Custodian's duties and obligations with respect to this
delegated review will be performed in accordance with the terms of the
separate delegation agreement between the Fund and the Custodian.
8.3 RESPONSIBILITY FOR FOREIGN SUBCUSTODIANS. With respect to
securities and funds held by a Foreign Subcustodian, either directly or
indirectly (including by a Securities System or foreign clearing agency),
including demand deposit and interest bearing deposits, currencies or other
deposits and foreign
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<PAGE> 22
exchange contracts as referred to herein, the Custodian shall be liable to the
Fund for any loss or damage to the Fund caused by or resulting from the acts or
omissions of any Foreign Subcustodian to the extent that (i) under the terms set
forth in the Subcustodian Agreement between the Custodian and the Foreign
Subcustodian, the Foreign Subcustodian failed to perform in accordance with the
terms of such contract or the standard of conduct imposed under such
Subcustodian Agreement or (ii) such acts or omissions would be deemed to be
negligence, gross negligence or willful misconduct under the laws, circumstances
and practices prevailing in the jurisdiction where the act or omission occurred.
8.4 NEW COUNTRIES. The Fund shall be responsible for informing the
Custodian sufficiently in advance of a proposed investment which is to be held
in a country in which no Foreign Subcustodian is authorized to act in order that
the Custodian shall, if it deems appropriate to do so, have sufficient time to
establish a subcustodial arrangement in accordance herewith. In the event,
however, the Custodian is unable to establish such arrangements prior to the
time such investment is to be acquired, the Custodian is authorized to designate
at its discretion a local safekeeping agent, and the use of such local
safekeeping agent shall be at the sole risk of the Fund, and accordingly the
Custodian shall be responsible to the Fund for the actions of such agent if and
only to the extent the Custodian shall have recovered from such agent for any
damages caused the Fund by such agent. The foregoing sentence does not apply
where the Custodian is acting as the Fund's Foreign Custody Manager pursuant to
a separate Foreign Custody Manager Delegation Agreement between the Custodian
and the Fund.
9. RESPONSIBILITY OF THE CUSTODIAN. In performing its duties and
obligations hereunder, the Custodian shall use reasonable care under the facts
and circumstances prevailing in the market where
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<PAGE> 23
performance is effected. Subject to the specific provisions of this Section, the
Custodian shall be liable for any damage incurred by the Fund in consequence of
the Custodian's negligence, bad faith or willful misconduct, including that
caused by a Subcustodian as set forth is Section 8 hereof. In no event shall the
Custodian be liable hereunder for any special, indirect, punitive or
consequential damages arising out of, pursuant to or in connection with this
Agreement even if the Custodian has been advised of the possibility of such
damages. It is agreed that the Custodian shall have no duty to assess the risks
inherent in the Fund's Investments or to provide investment advice with respect
to such Investments and that the Fund as principal shall bear any risks
attendant to particular Investments such as failure of counterparty or issuer.
9.1 LIMITATIONS OF PERFORMANCE. The Custodian shall not be responsible
under this Agreement for any failure to perform its duties, and shall not liable
hereunder for any loss or damage in association with such failure to perform,
for or in consequence of the following causes:
9.1.1 FORCE MAJEURE. FORCE MAJEURE shall mean any circumstance
or event which is beyond the reasonable control of the Custodian, a
Subcustodian or any agent of the Custodian or a Subcustodian and which
adversely affects the performance by the Custodian of its obligations
hereunder, by the Subcustodian of its obligations under its Subcustody
Agreement or by any other agent of the Custodian or the Subcustodian,
including any event caused by, arising out of or involving (a) an act
of God, (b) accident, fire, water damage or explosion, (c) any
computer, system or other equipment failure or malfunction caused by
any computer virus or the malfunction or failure of any communications
medium (provided that the Custodian has performed in accordance with
Section 12.10), (d) any interruption of the power supply or other
utility service, (e) any strike or other work stoppage, whether partial
or total other than a strike or work stoppage involving the Custodian,
any Subcustodian or any affiliate of the Custodian, (f) any delay or
disruption resulting from or reflecting the occurrence of any Sovereign
Risk, (g) any disruption of, or suspension of trading in, the
securities, commodities or foreign exchange markets, whether or not
resulting from or reflecting the occurrence of any Sovereign Risk, (h)
any encumbrance on the transferability of a currency or a currency
position on the actual settlement date of a foreign exchange
transaction, whether or not resulting from or reflecting the occurrence
of any Sovereign Risk, or (i) any other cause similarly beyond the
reasonable control of the Custodian. The Custodian shall use reasonable
care within its control to minimize the loss or damage to the Fund
resulting from a Force Majeure event including without limitation, the
maintenance of a suitable disaster recovery plan to ensure that the
effects of any Force Majeure event or circumstance are mitigated
insofar as possible and to ensure continuity of service to the Fund.
9.1.2 COUNTRY RISK. COUNTRY RISK shall mean, with respect to
the acquisition, ownership, settlement or custody of Investments in a
jurisdiction, all risks relating to, or arising in consequence of,
systemic and markets factors affecting the acquisition, payment for or
ownership
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<PAGE> 24
of Investments including (a) the prevalence of crime and corruption,
(b) the inaccuracy or unreliability of business and financial
information, (c) the instability or volatility of banking and financial
systems, or the absence or inadequacy of an infrastructure to support
such systems, (d) custody and settlement infrastructure of the market
in which such Investments are transacted and held, (e) the acts,
omissions and operation of any Securities Depository, (f) the risk of
the bankruptcy or insolvency of banking agents, counterparties to cash
and securities transactions, registrars or transfer agents, and (g) the
existence of market conditions which prevent the orderly execution or
settlement of transactions or which affect the value of assets.
9.1.3 SOVEREIGN RISK. SOVEREIGN RISK shall mean, in respect of
any jurisdiction, including the United States of America, where
Investments is acquired or held hereunder or under a Subcustody
Agreement, (a) any act of war, terrorism, riot, insurrection or civil
commotion, (b) the imposition of any investment, repatriation or
exchange control restrictions by any Governmental Authority, (c) the
confiscation, expropriation or nationalization of any Investments by
any Governmental Authority, whether de facto or de jure, (iv) any
devaluation or revaluation of the currency, (d) the imposition of
taxes, levies or other charges affecting Investments, (vi) any change
in the Applicable Law, or (e) any other economic or political risk
incurred or experienced.
9.2. LIMITATIONS ON LIABILITY. Except as otherwise specifically
provided in this Agreement or in any separate Delegation Agreement between the
parties, the Custodian shall not be liable for any loss, claim, damage or other
liability arising from the following causes:
9.2.1 FAILURE OF THIRD PARTIES. The failure of any third party
(excluding Subcustodians) including: (a) any issuer of Investments or
book-entry or other agent of and issuer; (b) any counterparty with
respect to any Investment, including any issuer of exchange-traded or
other futures, option, derivative or commodities contract; (c) failure
of an Investment Advisor, Foreign Custody Manager or other agent of the
Fund; or (d) failure of other third parties similarly beyond the
control or choice of the Custodian.
9.2.2 INFORMATION SOURCES. The Custodian may rely upon
information received from issuers of Investments or agents of such
issuers, information received from Subcustodians and from other
commercially reasonable sources such as commercial data bases and the
like, but shall not be responsible for specific inaccuracies in such
information, provided that the Custodian has relied upon such
information in good faith, or for the failure of any commercially
reasonable information provider.
9.2.3 RELIANCE ON INSTRUCTION. Action by the Custodian or the
Subcustodian in accordance with an Instruction, even when such action
conflicts with, or is contrary to any provision of, the Fund's
declaration of trust, certificate of incorporation or by-laws,
Applicable Law, or actions by the trustees, directors or shareholders
of the Fund.
9.2.4 RESTRICTED SECURITIES. The limitations inherent in the
rights, transferability or similar investment characteristics of a
given Investment of the Fund.
10. INDEMNIFICATION. The Fund hereby agrees to indemnify the Custodian and its
respective agents,
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nominees, partners, employees, officers and directors, and agrees to hold each
of them harmless from and against all claims and liabilities, including
reasonable counsel fees and taxes, incurred or assessed against any of them in
connection with the performance of this Agreement and any Instruction, except to
the extent that any such claims, liabilities and losses, including counsel fees
and taxes incurred or assessed, result from the negligence, bad faith or willful
misconduct of the Custodian or of a Subcustodian as set forth in Section 8
hereof. If any person indemnified under the preceding sentence gives written
notice of claim to the Custodian, the Custodian shall promptly give written
notice to the Fund. Not more than thirty days following the date of such notice,
unless the Custodian shall be liable under Section 8 hereof in respect of such
claim, the Fund will pay the amount of such claim or reimburse the Custodian for
any payment made by the Custodian in respect thereof.
The Custodian agrees to indemnify the Fund and its agents, nominees,
partners, employees, officers and trustees, and agrees to hold each of them
harmless from and against all claims and liabilities, including counsel fees and
taxes incurred or assessed against any of them in connection with the
performance of this Agreement or any Instruction to the extent that any such
claims, liabilities and losses, including counsel fees and taxes incurred or
assessed, result from the negligence, bad faith or willful misconduct of the
Custodian or a Subcustodian as set forth in Section 8 hereof. If any person
indemnified under the preceding sentence gives written notice of claim to the
Fund, the Fund shall promptly give written notice to the Custodian. Not more
than thirty days following the date of such notice, unless the Custodian shall
not be liable in respect of such claim, the Custodian will pay the amount of
such claim or reimburse the Fund for any payment made by the Fund in respect
thereof.
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11. REPORTS AND RECORDS. The Custodian shall:
11.1 create and maintain records relating to the performance
of its obligations under this Agreement;
11.2 make available to the Fund, its auditors, agents and
employees, during regular business hours of the Custodian, upon
reasonable request and during normal business hours of the Custodian,
all records maintained by the Custodian pursuant to paragraph (a)
above, subject, however, to all reasonable security requirements of the
Custodian then applicable to the records of its custody customers
generally; and
11.3 make available to the Fund all Electronic Reports; it
being understood that the Custodian shall not be liable hereunder for
the inaccuracy or incompleteness thereof or for errors in any
information included therein.
The Fund shall examine all records, howsoever produced or transmitted,
promptly upon receipt thereof and notify the Custodian promptly of any
discrepancy or error therein. Unless the Fund delivers written notice of any
such discrepancy or error within a reasonable time after its receipt thereof,
such records shall be deemed to be true and accurate. It is understood that the
Custodian now obtains and will in the future obtain information on the value of
assets from outside sources which may be utilized in certain reports made
available to the Fund. The Custodian deems such sources to be reliable but it is
acknowledged and agreed that the Custodian does not verify nor represent nor
warrant as to the accuracy or completeness of such information and accordingly
shall be without liability in selecting and using such sources and furnishing
such information.
12. MISCELLANEOUS.
12.1 PROXIES, ETC. The Fund will promptly execute and deliver, upon
request, such proxies, powers of attorney or other instruments as may be
necessary or desirable for the Custodian to provide, or to cause any
Subcustodian to provide, custody services.
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12.2 ENTIRE AGREEMENT. Except as specifically provided herein, this
Agreement constitutes the entire agreement between the Fund and the Custodian
with respect to the subject matter hereof. Accordingly, this Agreement
supersedes any custody agreement or other oral or written agreements heretofore
in effect between the Fund and the Custodian with respect to the custody of the
Fund's Investments.
12.3 WAIVER AND AMENDMENT. No provision of this Agreement may be
waived, amended or modified, and no addendum to this Agreement shall be or
become effective, or be waived, amended or modified, except by an instrument in
writing executed by the party against which enforcement of such waiver,
amendment or modification is sought; provided, however, that an Instruction
shall, whether or not such Instruction shall constitute a waiver, amendment or
modification for purposes hereof, shall be deemed to have been accepted by the
Custodian when it commences actions pursuant thereto or in accordance therewith.
12.4 GOVERNING LAW AND JURISDICTION. (a) THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH, AND BE GOVERNED BY THE LAWS OF, THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO THE CONFLICTS OF LAW OF SUCH STATE. THE PARTIES HERETO
IRREVOCABLY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF
NEW YORK, THE FEDERAL COURTS LOCATED IN NEW YORK CITY IN THE BOROUGH OF
MANHATTAN, OR OF THE COURTS OF THE STATE OF CALIFORNIA AND THE FEDERAL COURTS
LOCATED IN THE CITY OR COUNTY OF SAN FRANCISCO.
(b) The names "Schwab Capital Trust" and "Trustees of Schwab Capital Trust"
refer respectively to
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the Trust created by the Trustees, as trustees but not individually or
personally, acting from time to time under the Declaration of Trust, to which
reference is hereby made and a copy of which is on file at the Office of the
Secretary of the Commonwealth of Massachusetts and elsewhere as required by law,
and to any and all amendments thereto so filed or hereafter filed. The
obligations of "Schwab Capital Trust" entered into in the name or on behalf
thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, interest holders or representatives personally, but bind only the
assets of the Trust, and all persons dealing with any series of units of
interest of the Trust must look solely to the assets of the trust belonging to
such series for the enforcement of any claims against the Trust.
12.5 NOTICES. Notices and other writings contemplated by this
Agreement, other than Instructions, shall be delivered (a) by hand, (b) by first
class registered or certified mail, postage prepaid, return receipt requested,
(c) by a nationally recognized overnight courier or (d) by facsimile
transmission, provided that any notice or other writing sent by facsimile
transmission shall also be mailed, postage prepaid, to the party to whom such
notice is addressed. All such notices shall be addressed, as follows:
IF TO THE FUND:
Charles Schwab Investment Management, Inc.
101 Montgomery Street
San Francisco, CA 94104
Attn: Treasurer
Telephone: 415-667-3901
Facsimile: 415-667-3800
(to receive notice pursuant to Section 5.6
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
Attn: Mutual Fund Operations
Telephone: 415-636-4170
Facsimile: 415-395-6150
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IF TO THE CUSTODIAN:
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Attn: Manager, Securities Department
Telephone: (617) 772-1818
Facsimile: (617) 772-2263
or such other address as the Fund or the Custodian may have designated
in writing to the other.
12.6 HEADINGS. Paragraph headings included herein are for convenience
of reference only and shall not modify, define, expand or limit any of the terms
or provisions hereof.
12.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
the Fund and the Custodian.
12.8 CONFIDENTIALITY. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all information
provided by each party to the other regarding its business and operations. All
confidential information provided by a party hereto shall be used by any other
party hereto solely for the purpose of rendering or obtaining services pursuant
to this Agreement and, except as may be required in carrying out this Agreement,
shall not be disclosed to any third party without the prior consent of such
providing party. The foregoing shall not be applicable to any information that
is publicly available when provided or thereafter becomes publicly available
other than through a breach of this Agreement, or that is required to be
disclosed by or to any bank examiner of the Custodian or any Subcustodian, any
Regulatory Authority, any auditor of the parties hereto, or by judicial or
administrative process or otherwise by Applicable Law.
12.9 COUNSEL. In fulfilling its duties hereunder, the Custodian shall
be entitled to
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<PAGE> 30
receive and act upon the reasonable advice of (i) counsel for the
Fund or (ii) such counsel as the Fund and the Custodian may agree upon, with
respect to all matters, and the Custodian shall be without liability for any
action reasonably taken or omitted pursuant to such reasonable advice.
12.10 YEAR 2000. Without limiting any other express or implied
warranties made in this Agreement, the Custodian hereby represents and warrants
that its internal core processing systems for the provision of services under
this agreement operate with the ability to store and process date and
date-related data without error or malfunction due to any inability to process
dates in the twentieth or twenty-first century. The Custodian further represents
that it is proceeding with further testing in accordance with industry
conventions and standards with respect to Year 2000 processing. The Custodian
will report and certify to the Fund the results of the same in accordance with
the prevailing schedule established by the relevant financial service industry
sectors and any regulatory schedule or guidelines. The Custodian shall correct
any deficiencies revealed by further testing at no cost to the Fund. In addition
to the foregoing, the Custodian hereby represents and warrants that: (a) it will
use reasonable care and diligence in accordance with the terms of this Agreement
to assure that these services are not compromised by loss of systems or software
functionality related to the succession of the year 2000; (b) it will use
reasonable care and diligence to cause that its agents and Subcustodians perform
likewise; and, (c) it will use reasonable care and diligence to provide for
alternate means of providing services in the event that a computer system or
software might be negatively affected by the succession of the year 2000.
13. DEFINITIONS. The following defined terms will have the respective meanings
set forth below.
13.1 ADVANCE shall mean any extension of credit by or through the
Custodian or by or through any Subcustodian and shall include amounts paid to
third parties for account of the Fund or in discharge of
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<PAGE> 31
any expense, tax or other item payable by the Fund.
13.2 AGENCY ACCOUNT shall mean any deposit account opened on the books
of a Subcustodian or other banking institution in accordance with Section 7.1.
13.3 AGENT shall have the meaning set forth in the last sentence of
Section 6.
13.4 APPLICABLE LAW shall mean with respect to each jurisdiction, all
(a) laws, statutes, treaties, regulations, guidelines (or their equivalents);
(b) orders, interpretations licenses and permits; and (c) judgments, decrees,
injunctions writs, orders and similar actions by a court of competent
jurisdiction; compliance with which is required or customarily observed in such
jurisdiction.
13.5 AUTHORIZED PERSON shall mean any person or entity authorized to
give Instructions on behalf of the Fund in accordance with Section 4.1.
13.6 BOOK-ENTRY AGENT shall mean an entity acting as agent for the
issuer of Investments for purposes of recording ownership or similar entitlement
to Investments, including without limitation a transfer agent or registrar.
13.7 CLEARING CORPORATION shall mean any entity or system established
for purposes of providing securities settlement and movement and associated
functions for a given market.
13.8 COMPULSORY SECURITIES DEPOSITORY shall mean a Securities
Depository the use of which is mandatory (i) under applicable law or regulation;
(ii) because securities cannot be withdrawn from the depository; or (iii)
because maintaining securities outside the Securities Depository is not
consistent with prevailing custodial practices.
13.9 DELEGATION AGREEMENT shall mean any separate agreement entered
into between the Custodian and the Fund or its authorized representative with
respect to certain responsibilities concerning the appointment and
administration of Subcustodians delegated to the Custodian pursuant to Rule
17f-5.
13.10 FOREIGN CUSTODY MANAGER shall mean the Fund's foreign custody
manager appointed pursuant to Rule 17f-5 under the 1940 Act.
13.11 FOREIGN SUBCUSTODIAN shall mean each foreign bank appointed
pursuant to Rule 17f-5 under the 1940 Act, but shall not include Compulsory
Securities Depositories.
13.12 FUNDS TRANSFER SERVICES AGREEMENT shall mean any separate
agreement entered into between the Custodian and the Fund or its authorized
representative with respect to certain matters concerning the processing of
payment orders from Principal Accounts of the Fund.
13.13 INSTRUCTION(S) shall have the meaning assigned in Section 4.
13.14 INVESTMENT ADVISOR shall mean any person or entity who is an
Authorized Person to give Instructions with respect to the investment and
reinvestment of the Fund's Investments.
13.15 INVESTMENTS shall mean any investment asset of the Fund,
including without limitation securities, bonds, notes, and debentures as well as
receivables, derivatives, contractual rights or entitlements and other
intangible assets.
13.16 MARGIN ACCOUNT shall have the meaning set forth in Section 6.4
hereof.
13.17 PRINCIPAL ACCOUNT shall mean deposit accounts of the Fund carried
on the books of
31
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BBH&Co. as principal in accordance with Section 7.
13.18 SAFEKEEPING ACCOUNT shall mean an account established on the
books of the Custodian or any Subcustodian for purposes of segregating the
interests of the Fund (or clients of the Custodian or Subcustodian) from the
assets of the Custodian or any Subcustodian.
13.19 SECURITIES DEPOSITORY shall mean a central or book entry system
or agency established under Applicable Law for purposes of recording the
ownership and/or entitlement to investment securities for a given market.
13.20 SUBCUSTODIAN shall mean each bank appointed by the Custodian
pursuant to Section 8, but shall not include Compulsory Securities Depositories.
13.21 TRI-PARTY AGREEMENT shall have the meaning set forth in Section
6.4 hereof.
13.22 1940 ACT shall mean the Investment Company Act of 1940, as
amended.
14. COMPENSATION. The Fund agrees to pay to the Custodian (a) a fee in an amount
set forth in the fee letter between the Fund and the Custodian in effect on the
date hereof or as amended from time to time, and (b) all reasonable
out-of-pocket expenses incurred by the Custodian, including the reasonable fees
and expenses of all Subcustodians (not including Subcustodian fees that are
covered in Section 14(a)), all as to which the Custodian and Fund may from time
to time agree, and payable from time to time. Amounts payable by the Fund under
and pursuant to this Section 14 shall be payable by wire transfer to the
Custodian at BBH&Co. in New York, New York.
15. TERMINATION. This Agreement may be terminated by either party in accordance
with the provisions of this Section. The provisions of this Agreement and any
other rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
15.1 NOTICE AND EFFECT. This Agreement may be terminated by
either party by written notice effective no sooner than seventy-five
days following the date that notice to such effect shall be delivered
to other party at its address set forth in paragraph 12.5 hereof.
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15.2 SUCCESSOR CUSTODIAN. In the event of the appointment of a
successor custodian, it is agreed that the Investments of the Fund held
by the Custodian or any Subcustodian shall be delivered to the
successor custodian in accordance with reasonable Instructions. The
Custodian agrees to cooperate with the Fund in the execution of
documents and performance of other actions necessary or desirable in
order to facilitate the succession of the new custodian. If no
successor custodian shall be appointed, the Custodian shall in like
manner transfer the Fund's Investments in accordance with Instructions.
15.3 DELAYED SUCCESSION. If no Instruction has been given as
of the effective date of termination, Custodian may at any time on or
after such termination date and upon ten days written notice to the
Fund either (a) deliver the Investments of the Fund held hereunder to
the Fund at the address designated for receipt of notices hereunder; or
(b) deliver any investments held hereunder to a bank or trust company
having a capitalization of $2M USD equivalent and operating under the
Applicable law of the jurisdiction where such Investments are located,
such delivery to be at the risk of the Fund. In the event that
Investments or moneys of the Fund remain in the custody of the
Custodian or its Subcustodians after the date of termination owing to
the failure of the Fund to issue Instructions with respect to their
disposition or owing to the fact that such disposition could not be
accomplished in accordance with such Instructions despite diligent
efforts of the Custodian, the Custodian shall be entitled to
compensation for its services with respect to such Investments and
moneys during such period as the Custodian or its Subcustodians retain
possession of such items and the provisions of this Agreement shall
remain in full force and effect until disposition in accordance with
this Section is accomplished.
15.4 ASSIGNMENT. This Agreement may not be assigned by either
party without the prior written consent of the other party. For this
purpose, assignment includes the change of control of a party or
assignment to any entity controlling, controlled by or under common
control with, the party, including successors.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed as of the date first above written.
SCHWAB CAPITAL TRUST
By: /s/ Tai-Chin Tung
---------------------------------
By: BROWN BROTHERS HARRIMAN & CO.
By: /s/ Kristen F. Giarusso
---------------------------------
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<PAGE> 1
Exhibit (i)
May 4, 2000
Schwab Capital Trust
101 Montgomery Street
San Francisco, CA 94104
Re: Opinion of Counsel regarding Post-Effective Amendment No. 38 to the
Registration Statement filed on Form N-1A under the Securities Act of
1933 (File No. 33-62470).
Ladies and Gentlemen:
We have acted as counsel to Schwab Capital Trust, 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"). This opinion is being delivered to you
in connection with the Trust's filing of Post-Effective Amendment No. 38 to the
Registration Statement (the "Amendment") to be filed with the Securities and
Exchange Commission pursuant to Rule 485(b) of the Securities Act of 1933 (the
"1933 Act"). With your permission, all assumptions and statements of reliance
herein have been made without any independent investigation or verification on
our part except to the extent otherwise expressly stated, and we express no
opinion with respect to the subject matter or accuracy of such assumptions or
items relied upon.
In connection with this opinion, we have reviewed, among other things,
executed copies of the following documents:
(a) a certificate of the Commonwealth of Massachusetts as to the
existence and good standing of the Trust;
(b) copies of the Fund's Agreement and Declaration of Trust and of
all amendments and all supplements thereto (the "Declaration
of Trust");
<PAGE> 2
(c) a certificate executed by Frances Cole, the Secretary of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration of Trust and Amended and Restated By-Laws (the
"By-Laws"), and certain resolutions adopted by the Board of
Trustees of the Trust authorizing the issuance of the Shares;
and
(d) a printer's proof of the Amendment.
In our capacity as counsel to the Trust, we have examined the
originals, or certified, conformed or reproduced copies, of all records,
agreements, instruments and documents as we have deemed relevant or necessary as
the basis for the opinion hereinafter expressed. In all such examinations, we
have assumed the legal capacity of all natural persons executing documents, the
genuineness of all signatures, the authenticity of all original or certified
copies, and the conformity to original or certified copies of all copies
submitted to us as conformed or reproduced copies. As to various questions of
fact relevant to such opinion, we have relied upon, and assume the accuracy of,
certificates and oral or written statements of public officials and officers or
representatives of the Fund. We have assumed that the Registration Statement, as
filed with the Securities and Exchange Commission, will be in substantially the
form of the printer's proof referred to in paragraph (d) above.
Based upon, and subject to, the limitations set forth herein, we are of
the opinion that the Shares, when issued and sold in accordance with the Trust's
Declaration of Trust and By-Laws, and for the consideration described in the
Registration Statement, will be legally issued, fully paid and nonassessable
under the laws of the Commonwealth of Massachusetts.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not concede that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
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