497 1 e497.txt CHARLES SCHWAB INVESTMENTS FORM 497 1 SCHWABFUNDS PROSPECTUS August 1, 2000 EQUITY INDEX FUNDS SCHWAB S&P 500 FUND SCHWAB 1000 FUND(R) SCHWAB SMALL-CAP INDEX FUND(R) SCHWAB TOTAL STOCK MARKET INDEX FUND(TM) SCHWAB INTERNATIONAL INDEX FUND(R) QUANTITATIVE/SECTOR FUNDS SCHWAB ANALYTICS FUND(R) SCHWAB FOCUS FUNDS Communications Focus Fund Financial Services Focus Fund Health Care Focus Fund Technology Focus Fund ASSET ALLOCATION FUNDS SCHWAB MARKETTRACK PORTFOLIOS(TM) All Equity Portfolio Growth Portfolio Balanced Portfolio Conservative Portfolio SCHWAB MARKETMANAGER PORTFOLIOS(TM) Growth Portfolio Balanced Portfolio Small Cap Portfolio International Portfolio BOND FUNDS SCHWAB SHORT-TERM BOND MARKET INDEX FUND SCHWAB TOTAL BOND MARKET INDEX FUND SCHWAB YIELDPLUS FUND(TM) SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND SCHWAB LONG-TERM TAX-FREE BOND FUND SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND 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. This prospectus does not offer for sale and is not a solicitation of offers to purchase, shares of certain funds described herein in those states and other jurisdictions where the funds are not registered and/or qualified for sale. In particular the California state-specific funds are offered for sale and are available only to residents of California, Arizona, District of Columbia, Florida, South Carolina, New Jersey and the U.S. Virgin Islands. [CHARLES SCHWAB LOGO] 2 SCHWABFUNDS PROSPECTUS 03 SCHWAB EQUITY INDEX FUNDS (1) 04 Schwab S&P 500 Fund 06 Schwab 1000 Fund(R) 08 Schwab Small-Cap Index Fund(R) 10 Schwab Total Stock Market Index Fund(TM) 12 Schwab International Index Fund(R) 21 SCHWAB ANALYTICS FUND(R) (1) 22 Schwab Analytics Fund 25 SCHWAB FOCUS FUNDS (2) 26 Communications Focus Fund 28 Financial Services Focus Fund 30 Health Care Focus Fund 32 Technology Focus Fund 35 SCHWAB MARKETTRACK PORTFOLIOS(TM) (3) 36 All Equity Portfolio 38 Growth Portfolio 40 Balanced Portfolio 42 Conservative Portfolio 49 SCHWAB MARKETMANAGER PORTFOLIOS(TM) (3) 50 Growth Portfolio 52 Balanced Portfolio 54 Small Cap Portfolio 56 International Portfolio 63 SCHWAB BOND INDEX FUNDS (4) 64 Schwab Short-Term Bond Market Index Fund 66 Schwab Total Bond Market Index Fund 71 SCHWAB YIELDPLUS FUND(TM) (5) 72 Schwab YieldPlus Fund 75 SCHWAB TAX-FREE BOND FUNDS (6) 76 Schwab Short/Intermediate Tax-Free Bond Fund 78 Schwab Long-Term Tax-Free Bond Fund 83 SCHWAB CALIFORNIA TAX-FREE BOND FUNDS (6) 84 Schwab California Short/Intermediate Bond Fund 86 Schwab California Long-Term Tax-Free Bond Fund 90 INVESTMENT MANAGEMENT 92 INVESTING IN THE FUNDS AND PORTFOLIOS Each fund or group of funds in this prospectus has a separate prospectus that contains substantially identical information to that contained in this prospectus. For a current copy of any of these prospectuses, call 800-453-4000. Current prospectus dated: (1) 2/29/2000, (2) 5/15/2000, (3) 2/29/2000 as amended 7/1/2000, (4) 11/15/1999 as amended 6/15/2000, (5) 7/21/1999 as amended 6/15/2000, (6) 11/15/1999 as amended 7/14/2000. 3 SCHWAB EQUITY INDEX FUNDS ABOUT THE FUNDS The Schwab Equity Index Funds share the same basic INVESTMENT STRATEGY: They are designed to track the performance of a stock market index. Each fund tracks a different index. This strategy distinguishes an index fund from an "actively managed" mutual fund. Instead of choosing investments based on judgment, a portfolio manager LOOKS TO AN INDEX to determine which securities the fund should own. Because the composition of an index tends to be comparatively stable, index funds historically have shown LOW PORTFOLIO TURNOVER compared to actively managed funds. The funds are designed for LONG-TERM INVESTORS. Their performance will fluctuate over time and, as with all investments, future performance may differ from past performance. EQUITY INDEX FUNDS(R) 3 4 SCHWAB S&P 500 FUND TICKER SYMBOLS Investor Shares SWPIX Select Shares(R) SWPPX e.Shares(R) SWPEX THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE S&P 500(R) INDEX. INDEX THE S&P 500 INDEX INCLUDES THE COMMON STOCKS OF 500 LEADING U.S. COMPANIES FROM A BROAD RANGE OF INDUSTRIES. Standard & Poor's, the company that maintains the index, uses a variety of measures to determine which stocks are listed in the index. Each stock is represented in proportion to its total market value. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX. It is the fund's policy that under normal circumstances it will invest at least 80% of total assets in these stocks; typically, the actual percentage is considerably higher. The fund generally gives the same weight to a given stock as the index does. Like many index funds, the fund may invest in futures contracts and lend securities to minimize the gap in performance that naturally exists between any index fund and its index. This gap occurs mainly because, unlike the index, the fund incurs expenses and must keep a small portion of its assets in cash for business operations. By using futures, the fund potentially can offset the portion of the gap attributable to its cash holdings. Any income realized through securities lending may help reduce the portion of the gap attributable to expenses. Because some of the effect of expenses remains, however, the fund's performance normally is below that of the index. LARGE-CAP STOCKS Although the 500 companies in the index constitute only about 7% of all the publicly traded companies in the United States, they represent approximately 80% of the total value of the U.S. stock market. (All figures are as of 10/31/99.) Companies of this size are generally considered large-cap stocks. Their performance is widely followed, and the index itself is popularly seen as a measure of overall U.S. stock market performance. Because the index weights a stock according to its market capitalization (total market value of all shares outstanding), larger stocks have more influence on the performance of the index than do the index's smaller stocks. The performance information below shows you how the fund's performance compares to that of its index, which varies over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the index does not include any costs of investments. The fund has three share classes, which have different minimum investments and different costs. For information on choosing a class, see page 93. ANNUAL TOTAL RETURNS (%) as of 12/31 Investor Shares 97 32.47 98 28.0 99 20.60
BEST QUARTER: 21.08% Q4 1998 WORST QUARTER: -9.98% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR INCEPTION ------------------------------------------------------------------------------- Investor Shares 20.60 26.13 1 Select Shares 20.78 25.69 2 e.Shares 20.68 26.26 3 S&P 500 Index 21.04 26.74 4
1 Inception: 5/1/96. 2 Inception: 5/19/97. 3 Inception: 5/1/96. 4 From 5/1/96. 4 EQUITY INDEX FUNDS 5 SCHWAB S&P 500 FUND Long-term investors who want to focus on large-cap U.S. stocks or who are looking for performance that is linked to a popular index may want to consider this fund. MAIN RISKS STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money. YOUR INVESTMENT FOLLOWS THE LARGE-CAP PORTION OF THE U.S. STOCK MARKET, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund cannot take steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stocks of one or more industries (for example, rising oil prices may lead to a decline in airline stocks). Although the S&P 500(R) Index encompasses stocks from many different sectors of the economy, its performance primarily reflects that of large-cap stocks. As a result, whenever these stocks perform less well than mid- or small-cap stocks, the fund may underperform funds that have exposure to those segments of the U.S. stock market. Likewise, whenever large-cap U.S. stocks fall behind other types of investments -- bonds, for instance -- the fund's performance also will lag those investments. OTHER RISK FACTORS Although the fund's main risks are those associated with its stock investments, its other investment strategies also may involve risks. These risks could affect how well the fund tracks the performance of the index. For example, futures contracts, which the fund uses to gain exposure to the index for its cash balances, could cause the fund to track the index less closely if they don't perform as expected. The fund also may lend a portion of its securities to certain financial institutions in order to earn income. These loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. INDEX OWNERSHIP Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500(R) and 500(R) are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the fund. The fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the fund. More complete information may be found in the Statement of Additional Information (see back cover). FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the total return for each share class. FEE TABLE (%)
INVESTOR SELECT SHARES SHARES(R) e.SHARES -------------------------------------------------------------------------------- SHAREHOLDER FEES -------------------------------------------------------------------------------- Redemption fee, charged only on shares you sell within 180 days of buying them, and paid directly to the fund* 0.75 0.75 0.75
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------------------------- Management fees** 0.17 0.17 0.17 Distribution (12b-1) fees None None None Other expenses 0.30 0.15 0.16 --------------------------------- Total annual operating expenses 0.47 0.32 0.33 EXPENSE REDUCTION (0.12) (0.13) (0.05) --------------------------------- NET OPERATING EXPENSES*** 0.35 0.19 0.28 =================================
* This fee applies only to shares purchased on or after 09/15/2000. ** Reflects current fees. *** Guaranteed by Schwab and the investment adviser through 2/28/01. 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. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- Investor Shares $ 36 $139 $251 $580 Select Shares $ 19 $ 90 $167 $393 e.Shares $ 29 $101 $180 $413
EQUITY INDEX FUNDS 5 6 SCHWAB 1000 FUND(R) TICKER SYMBOLS INVESTOR SHARES SNXFX SELECT SHARES(R) SNXSX THE FUND'S GOAL IS TO MATCH THE TOTAL RETURN OF THE SCHWAB 1000 INDEX(R). INDEX THE SCHWAB 1000 INDEX INCLUDES THE COMMON STOCKS OF THE LARGEST 1,000 PUBLICLY TRADED COMPANIES IN THE UNITED STATES, with size being determined by market capitalization (total market value of all shares outstanding). The index is designed to be a measure of the performance of large- and mid-cap U.S. stocks. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX. It is the fund's policy that under normal circumstances it will invest at least 80% of total assets in these stocks; typically, the actual percentage is considerably higher. The fund generally gives the same weight to a given stock as the index does. The fund may make use of certain management techniques in seeking to enhance after-tax performance. For example, it may adjust its weightings of certain stocks, continue to hold a stock that is no longer included in the index or choose to realize certain capital losses and use them to offset capital gains. These strategies may help the fund reduce taxable capital gains distributions. Like many index funds, the fund also may invest in futures contracts and lend securities to minimize the gap in performance that naturally exists between any index fund and its index. This gap occurs mainly because, unlike the index, the fund incurs expenses and must keep a small portion of its assets in cash for business operations. By using futures, the fund potentially can offset the portion of the gap attributable to its cash holdings. Any income realized through securities lending may help reduce the portion of the gap attributable to expenses. Because some of the effect of expenses remains, however, the fund's performance normally is below that of the index. LARGE- AND MID-CAP STOCKS Although there are currently more than 7,100 total stocks in the United States, the companies represented by the Schwab 1000 Index make up some 87% of the total value of all U.S. stocks. (Figures are as of 10/31/99.) These large- and mid-cap stocks cover many industries and represent many sizes: At $472 billion, the market capitalization of the largest one is approximately 1,435 times that of the smallest one. (Figures are as of 10/31/99.) Because large- and mid-cap stocks can perform differently from each other at times, a fund that invests in both categories of stocks may have somewhat different performance than a fund that invests only in large-cap stocks. The performance information below shows you how performance has varied from year-to-year and how it averages out over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on unmanaged market indices. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the indices do not include any costs of investments. The fund has two share classes, which have different minimum investments and different costs. For information on choosing a class, see page 93. ANNUAL TOTAL RETURNS (%) as of 12/31 Investor Shares 92 8.52 93 9.63 94 -0.11 95 36.60 96 21.57 97 31.92 98 27.16 99 21.00
BEST QUARTER: 21.93% Q4 1998 WORST QUARTER: -10.70% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR 5 YEARS INCEPTION -------------------------------------------------------------------------------- Investor Shares 21.00 27.51 18.98 1 Select Shares 21.15 -- 25.94 2 S&P 500(R) Index 21.04 28.56 19.46 3 Schwab 1000 Index 21.22 28.04 19.45 3
1 Inception: 4/2/91. 2 Inception: 5/19/97. 3 From 4/2/91. 6 EQUITY INDEX FUNDS 7 SCHWAB 1000 FUND(R) Because it includes so many U.S. stocks and industries, this fund could make sense for long-term investors seeking broad diversification in a single investment. It's also a logical choice for stock investors who want exposure beyond the large-cap segment of the U.S. stock market. MAIN RISKS STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money. YOUR INVESTMENT FOLLOWS THE LARGE- AND MID-CAP PORTIONS OF THE U.S. STOCK MARKET, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund cannot take steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stocks of one or more industries (for example, rising oil prices may lead to a decline in airline stocks). Because the Schwab 1000 Index(R) encompasses stocks from across the economy, the fund is broadly diversified, which reduces the impact of the performance of any given industry or stock. But whenever large- and mid-cap U.S. stocks fall behind other types of investments -- bonds, for instance -- the fund's performance also will lag these investments. OTHER RISK FACTORS Although the fund's main risks are those associated with its stock investments, its other investment strategies also may involve risks. These risks could affect how well the fund tracks the performance of the index. For example, futures contracts, which the fund uses to gain exposure to the index for its cash balances, could cause the fund to track the index less closely if they don't perform as expected. The fund also may lend a portion of its securities to certain financial institutions in order to earn income. These loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the total return for each share class. FEE TABLE (%)
INVESTOR SELECT SHARES SHARES(R) -------------------------------------------------------------------------------- SHAREHOLDER FEES -------------------------------------------------------------------------------- Redemption fee, charged only on shares you sell within 180 days of buying them, and paid directly to the fund* 0.75 0.75
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------------------------- Management fees 0.23 0.23 Distribution (12b-1) fees None None Other expenses 0.28 0.14 ---------------------- Total annual operating expenses 0.51 0.37 EXPENSE REDUCTION (0.05) (0.02) ---------------------- NET OPERATING EXPENSES** 0.46 0.35 ======================
* For shares purchased prior to 5/1/00 the redemption fee is 0.50%. ** Guaranteed by Schwab and the investment adviser through 2/28/01. 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. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- Investor Shares $47 $159 $280 $636 Select Shares $36 $117 $206 $466
EQUITY INDEX FUNDS 7 8 SCHWAB SMALL-CAP INDEX FUND(R) TICKER SYMBOLS INVESTOR SHARES SWSMX SELECT SHARES(R) SWSSX THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB SMALL-CAP INDEX(R). INDEX THE SCHWAB SMALL-CAP INDEX INCLUDES THE COMMON STOCKS OF THE SECOND-LARGEST 1,000 PUBLICLY TRADED COMPANIES IN THE UNITED STATES, with size being determined by market capitalization (total market value of all shares outstanding). The index is designed to be a measure of the performance of small-cap U.S. stocks. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX. It is the fund's policy that under normal circumstances it will invest at least 80% of total assets in these stocks; typically, the actual percentage is considerably higher. The fund generally gives the same weight to a given stock as the index does. Like many index funds, the fund also may invest in short-term investments and lend securities to minimize the gap in performance that naturally exists between any index fund and its index. This gap occurs mainly because, unlike the index, the fund incurs expenses and must keep a small portion of its assets in cash for business operations. Because any income from securities lending and short-term investments typically is not enough to eliminate the effect of expenses, the fund's performance normally is below that of the index. SMALL-CAP STOCKS In measuring the performance of the second-largest 1,000 companies in the U.S. stock market, the index may be said to focus on the "biggest of the small" among America's publicly traded stocks. These stocks range in size from $8 billion to $15 million in terms of their total market value. (All figures are as of 10/31/99.) Historically, the performance of small-cap stocks has not always paralleled that of large-cap stocks. For this reason, some investors use them to diversify a portfolio that invests in larger stocks. With its small-cap focus, this fund may make sense for long-term investors who are willing to accept greater risk in the pursuit of potentially higher long-term returns. The performance information below shows you how performance has varied from year-to-year and how it averages out over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on unmanaged market indices. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the indices do not include any costs of investments. The fund has two share classes, which have different minimum investments and different costs. For information on choosing a class, see page 93. ANNUAL TOTAL RETURNS (%) as of 12/31 Investor Shares 94 -3.08 95 27.65 96 15.49 97 25.69 98 -3.57 99 24.20
BEST QUARTER: 18.09% Q2 1997 WORST QUARTER: -20.94% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR 5 YEARS INCEPTION -------------------------------------------------------------------------------- Investor Shares 24.20 17.28 13.71 1 Select Shares 24.44 -- 16.38 2 Russell 2000 Index(R) 21.26 16.70 13.54 3 Schwab Small-Cap Index 27.67 19.04 15.41 3
1 Inception: 12/3/93. 2 Inception: 5/19/97. 3 From 12/3/93. 8 EQUITY INDEX FUNDS 9 SCHWAB SMALL-CAP INDEX FUND(R) With its small-cap focus, this fund may make sense for long-term investors who are willing to accept greater risk in the pursuit of potentially higher long-term returns. MAIN RISKS STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money. YOUR INVESTMENT FOLLOWS THE SMALL-CAP PORTION OF THE U.S. STOCK MARKET, as measured by the index. It follows the market during upturns as well as downturns. Because of its indexing strategy, the fund cannot take steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stocks of one or more industries (for example, rising oil prices may lead to a decline in airline stocks). HISTORICALLY, SMALL-CAP STOCKS HAVE BEEN RISKIER THAN LARGE- AND MID-CAP STOCKS. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements, and may move sharply, especially during market upturns and downturns. In addition, during any period when small-cap stocks perform less well than large- or mid-cap stocks, the fund may underperform funds that have exposure to those segments of the U.S. stock market. Likewise, whenever U.S. small-cap stocks fall behind other types of investments -- bonds, for instance -- the fund's performance also will lag these investments. OTHER RISK FACTORS Although the fund's main risks are those associated with its stock investments, its other investment strategies also may involve risks. These risks could affect how well the fund tracks the performance of the index. For example, the fund may lend a portion of its securities to certain financial institutions in order to earn income. These loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the total return for each share class. FEE TABLE (%)
INVESTOR SELECT SHARES SHARES(R) -------------------------------------------------------------------------------- SHAREHOLDER FEES -------------------------------------------------------------------------------- Redemption fee, charged only on shares you sell within 180 days of buying them and paid directly to the fund* 0.75 0.75
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------------------------- Management fees** 0.31 0.31 Distribution (12b-1) fees None None Other expenses 0.32 0.18 ---------------- Total annual operating expenses 0.63 0.49 EXPENSE REDUCTION (0.14) (0.11) ---------------- NET OPERATING EXPENSES*** 0.49 0.38 ================
* For shares purchased prior to 5/1/00 the redemption fee is 0.50%. ** Reflects current fees. *** Guaranteed by Schwab and the investment adviser through 2/28/01. 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.
EXPENSES ON A $10,000 INVESTMENT -------------------------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- Investor Shares $50 $188 $337 $773 Select Shares $39 $146 $263 $605
EQUITY INDEX FUNDS 9 10 SCHWAB TOTAL STOCK MARKET INDEX FUND(TM) TICKER SYMBOLS Investor Shares SWTIX Select Shares(R) SWTSX THE FUND SEEKS TO TRACK THE TOTAL RETURN OF THE ENTIRE U.S. STOCK MARKET, AS MEASURED BY THE WILSHIRE 5000 EQUITY INDEX. INDEX THE FUND'S BENCHMARK INDEX INCLUDES ALL PUBLICLY TRADED COMMON STOCKS OF COMPANIES HEADQUARTERED IN THE UNITED STATES FOR WHICH PRICING INFORMATION IS READILY AVAILABLE -- currently more than 7,100 stocks. The index weights each stock according to its market capitalization (total market value of all shares outstanding). STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX. It is the fund's policy that under normal circumstances it will invest at least 80% of total assets in these stocks; typically, the actual percentage is considerably higher. Because it would be impractical to invest in every company in the U.S. stock market, the fund uses statistical sampling techniques to assemble a portfolio whose performance is expected to resemble that of the index. The fund generally expects that its portfolio will include the largest 2,500 to 3,000 U.S. stocks (measured by market capitalization), and that its industry weightings, dividend yield and price/earnings ratio will be similar to those of the index. The fund may use certain techniques in seeking to enhance after-tax performance, such as adjusting its weightings of certain stocks or choosing to realize certain capital losses and use them to offset capital gains. These strategies may help the fund reduce taxable capital gain distributions. Like many index funds, the fund also may invest in futures contracts and lend securities in seeking to enhance total return and minimize the gap between its performance and that of the index. However, the fund's performance normally is below that of the index. PERFORMANCE Because this is a new fund, no performance figures are given. Information will appear in a future version of the fund's prospectus. The fund has two share classes, which have different minimum investments and different costs. For information on choosing a class, see page 93. THE U.S. STOCK MARKET The U.S. stock market is commonly divided into three segments, based on market capitalization. Mid- and small-cap stocks are the most numerous, but make up only about one-third of the total value of the market. In contrast, large-cap stocks are relatively few in number but make up approximately two-thirds of the market's total value. In fact, the largest 3,000 of the market's listed stocks represent about 98% of its total value. (All figures on this page are as of 10/31/99). In terms of performance, these segments can behave somewhat differently from each other, over the short term as well as the long term. For that reason, the performance of the overall stock market can be seen as a blend of the performance of all three segments. 10 EQUITY INDEX FUNDS 11 SCHWAB TOTAL STOCK MARKET INDEX FUND(TM) With its very broad exposure to the U.S. stock market, this fund is designed for long-term investors who want exposure to all three tiers of the market: large-, mid- and small-cap. MAIN RISKS STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money. YOUR INVESTMENT FOLLOWS THE U.S. STOCK MARKET, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund will not take steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stocks of one or more industries (for example, rising oil prices may lead to a decline in airline stocks). Because the fund encompasses stocks from across the economy, it is broadly diversified, which reduces the impact of the performance of any given industry, individual stock or market segment. But whenever any particular market segment outperforms the U.S. stock market as a whole, the fund may underperform funds that have greater exposure to that segment. Likewise, whenever U.S. stocks fall behind other types of investments -- bonds, for instance -- the fund's performance also will lag these investments. Because the fund gives greater weight to larger stocks, most of its performance will reflect the performance of the large-cap segment. OTHER RISK FACTORS Although the fund's main risks are those associated with its stock investments, its other investment strategies also involve risks. For example, the fund's use of sampling may increase the gap between the performance of the fund and that of the index. Futures contracts, which the fund uses to gain exposure to stocks for its cash balances, also could cause the fund to track the index less closely if they don't perform as expected. The fund also may lend a portion of its securities to certain financial institutions in order to earn income. These loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. INDEX OWNERSHIP Wilshire and Wilshire 5000 are registered service marks of Wilshire Associates, Inc. The fund is not sponsored, endorsed, sold or promoted by Wilshire Associates, and Wilshire Associates is not in any way affiliated with the fund. Wilshire Associates makes no representation regarding the advisability of investing in the fund or in any stock included in the Wilshire 5000. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder Fees" are one-time expenses charged to you directly by the fund. "Annual Operating Expenses" are paid out of fund assets, so their effect is included in the total return for each share class.
FEE TABLE (%) INVESTOR SELECT SHARES SHARES(R) -------------------------------------------------------------------------------- SHAREHOLDER FEES -------------------------------------------------------------------------------- Redemption fee, charged only on shares you sell within 180 days of buying them and paid directly to the fund* 0.75 0.75
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------------------------- Management fees 0.30 0.30 Distribution (12b-1) fees None None Other expenses** 0.61 0.44 ---------------- Total annual operating expenses 0.91 0.74 EXPENSE REDUCTION (0.51) (0.47) ---------------- NET OPERATING EXPENSES*** 0.40 0.27 ================
* For shares purchased prior to 5/1/00, the redemption fee is 0.50%. ** Based on estimated expenses for the current fiscal year. *** Guaranteed by Schwab and the investment adviser through 2/28/01. 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.
EXPENSES ON A $10,000 INVESTMENT -------------------------------------------------------------------------------- 1 YEAR 3 YEARS -------------------------------------------------------------------------------- Investor Shares $41 $239 Select Shares $28 $189
EQUITY INDEX FUNDS 11 12 SCHWAB INTERNATIONAL INDEX FUND(R) TICKER SYMBOLS INVESTOR SHARES SWINX SELECT SHARES(R) SWISX THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB INTERNATIONAL INDEX(R). INDEX THE SCHWAB INTERNATIONAL INDEX INCLUDES COMMON STOCKS OF THE 350 LARGEST PUBLICLY TRADED COMPANIES FROM SELECTED COUNTRIES OUTSIDE THE UNITED STATES. The selected countries all have developed securities markets and include most Western European countries, as well as Australia, Canada, Hong Kong and Japan -- currently 15 countries in all. Within these countries, Schwab identifies the 350 largest companies according to their market capitalizations (total market value of all shares outstanding), in U.S. dollars. The index does not maintain any particular country weightings, although any given country cannot represent more than 35% of the index. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX. It is the fund's policy that under normal circumstances it will invest at least 80% of total assets in these stocks; typically, the actual percentage is considerably higher. The fund generally gives the same weight to a given stock as the index does, and does not hedge its exposure to foreign currencies beyond using forward contracts to lock in transaction prices until settlement. In seeking to enhance after-tax performance, the fund may choose to realize certain capital losses and use them to offset capital gains. This strategy may help the fund reduce taxable capital gain distributions. Like many index funds, the fund also may invest in short-term investments and lend securities to minimize the gap in performance that naturally exists between any index fund and its index. This gap occurs mainly because, unlike the index, the fund incurs expenses and must keep a small portion of its assets in cash for business operations. Because any income from securities lending and short-term investments typically is not enough to eliminate the effect of expenses, the fund's performance normally is below that of the index. INTERNATIONAL STOCKS Over the past several decades, foreign stock markets have grown rapidly. The market value of foreign stocks today represents approximately 43% of the world's total market capitalization. (All figures are as of 10/31/99.) For some investors, an international index fund represents an opportunity for low-cost access to a variety of world markets in one fund. Others turn to international stocks to diversify a portfolio of U.S. investments, because international stock markets historically have performed somewhat differently from the U.S. market. The performance information below shows you how performance has varied from year-to-year and how it averages out over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on unmanaged market indices. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the indices do not include any costs of investments. The fund has two share classes, which have different minimum investments and different costs. For information on choosing a class, see page 93. ANNUAL TOTAL RETURNS (%) as of 12/31 -------------------------------------------------------------------------------- Investor Shares 94 3.84 95 14.22 96 9.12 97 7.31 98 15.85 99 33.62
BEST QUARTER: 19.88% Q4 1999 WORST QUARTER: -14.93% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99 -------------------------------------------------------------------------------- SINCE 1 YEAR 5 YEARS INCEPTION -------------------------------------------------------------------------------- Investor Shares 33.62 15.67 13.06 1 Select Shares 33.79 -- 17.88 2 MSCI-EAFE(R) Index 26.96 12.83 10.99 3 Schwab International Index 33.81 16.21 13.62 3
1 Inception: 9/9/93. 2 Inception: 5/19/97. 3 From 9/9/93. 12 EQUITY INDEX FUNDS 13 SCHWAB INTERNATIONAL INDEX FUND(R) For long-term investors who are interested in the potential rewards of international investing and who are prepared for the additional risks, this fund could be worth considering. MAIN RISKS STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money. YOUR INVESTMENT FOLLOWS THE PERFORMANCE OF A MIX OF INTERNATIONAL LARGE-CAP STOCKS, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund cannot take steps to reduce market exposure or to lessen the effects of market declines. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short-term or long-term. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stocks of one or more industries (for example, rising oil prices may lead to a decline in airline stocks). INTERNATIONAL STOCKS CARRY ADDITIONAL RISKS. Changes in currency exchange rates can erode market gains or widen market losses. International markets -- even those that are well established -- are often more volatile than those of the United States, for reasons ranging from a lack of reliable company information to the risk of political upheaval. In addition, during any period when large-cap international stocks perform less well than other types of stocks or other types of investments -- bonds, for instance -- the fund's performance also will lag these investments. OTHER RISK FACTORS Although the fund's main risks are those associated with its stock investments, its other investment strategies also may involve risks. These risks could affect how well the fund tracks the performance of the index. For example, the fund may lend a portion of its securities to certain financial institutions in order to earn income. These loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the total return for each share class.
FEE TABLE (%) INVESTOR SELECT SHARES SHARES(R) -------------------------------------------------------------------------------- SHAREHOLDER FEES -------------------------------------------------------------------------------- Redemption fee, charged only on shares you sell within 180 days of buying them and paid directly to the fund* 1.50 1.50
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------------------------- Management fees** 0.42 0.42 Distribution (12b-1) fees None None Other expenses 0.35 0.22 ================ Total annual operating expenses 0.77 0.64 EXPENSE REDUCTION (0.19) (0.17) ---------------- NET OPERATING EXPENSES*** 0.58 0.47 ================
* For shares purchased prior to 5/1/00, the redemption fee is 0.50%. ** Reflects current fees. *** Guaranteed by Schwab and the investment adviser through 2/28/01. 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.
EXPENSES ON A $10,000 INVESTMENT -------------------------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- Investor Shares $59 $227 $409 $936 Select Shares $48 $188 $340 $782
EQUITY INDEX FUNDS 13 14 FINANCIAL HIGHLIGHTS SCHWAB S&P 500 FUND This section provides further details about the fund's financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/98 - 11/1/97 - 11/1/96 - 5/1/96 - INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96 -------------------------------------------------------------------------------------------- PER-SHARE DATA ($) -------------------------------------------------------------------------------------------- Net asset value at beginning of period 17.05 14.17 10.88 10.00 -------------------------------------------- Income from investment operations: Net investment income 0.17 0.16 0.14 0.08 Net realized and unrealized gain on investments 4.10 2.85 3.24 0.80 -------------------------------------------- Total income from investment operations 4.27 3.01 3.38 0.88 Less distributions: Dividends from net investment income (0.15) (0.13) (0.09) -- -------------------------------------------- NET ASSET VALUE AT END OF PERIOD 21.17 17.05 14.17 10.88 ============================================ Total return (%) 25.20 21.39 31.29 8.80 1 RATIOS/SUPPLEMENTAL DATA (%) -------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.35 0.35 0.38 0.49 2 Expense reductions reflected in above ratio 0.27 0.28 0.32 0.40 2 Ratio of net investment income to average net assets 1.01 1.25 1.49 1.89 2 Portfolio turnover rate 3 1 3 1 Net assets, end of period ($ x 1,000,000) 3,183 1,935 923 244
11/1/98 - 11/1/97 - 5/19/97 - SELECT SHARES(R) 10/31/99 10/31/98 10/31/97 -------------------------------------------------------------------------------- PER-SHARE DATA ($) -------------------------------------------------------------------------------- Net asset value at beginning of period 17.09 14.19 12.85 --------------------------------- Income from investment operations: Net investment income 0.20 0.26 0.05 Net realized and unrealized gain on investments 4.12 2.78 1.29 --------------------------------- Total income from investment operations 4.32 3.04 1.34 Less distributions: Dividends from net investment income (0.18) (0.14) -- --------------------------------- NET ASSET VALUE AT END OF PERIOD 21.23 17.09 14.19 ================================= Total return (%) 25.42 21.63 10.43 1 RATIOS/SUPPLEMENTAL DATA (%) --------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.19 0.19 0.19 2 Expense reductions reflected in above ratio 0.28 0.28 0.34 2 Ratio of net investment income to average net assets 1.17 1.40 1.46 2 Portfolio turnover rate 3 1 3 Net assets, end of period ($ x 1,000,000) 3,750 1,548 486
1 Not annualized. 2 Annualized. 14 EQUITY INDEX FUNDS 15 FINANCIAL HIGHLIGHTS FINANCIAL HIGHLIGHTS SCHWAB S&P 500 FUND Continued
11/1/98 - 11/1/97 - 11/1/96 - 5/1/96 - e.SHARES(R) 10/31/99 10/31/98 10/31/97 10/31/96 ---------------------------------------------------------------------------------------- PER-SHARE DATA ($) ---------------------------------------------------------------------------------------- Net asset value at beginning of period 17.08 14.19 10.89 10.00 ---------------------------------------- Income from investment operations: Net investment income 0.20 0.15 0.21 0.04 Net realized and unrealized gain on investments 4.09 2.88 3.19 0.85 ---------------------------------------- Total income from investment operations 4.29 3.03 3.40 0.89 Less distributions: Dividends from net investment income (0.16) (0.14) (0.10) -- ---------------------------------------- NET ASSET VALUE AT END OF PERIOD 21.21 17.08 14.19 10.89 ======================================== Total return (%) 25.28 21.50 31.48 8.90 1 RATIOS/SUPPLEMENTAL DATA (%) -------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.28 0.28 0.28 0.28 2 Expense reductions reflected in above ratio 0.20 0.24 0.33 0.91 2 Ratio of net investment income to average net assets 1.08 1.32 1.61 1.82 2 Portfolio turnover rate 3 1 3 1 Net assets, end of period ($ x 1,000,000) 435 281 132 36
1 Not annualized. 2 Annualized. EQUITY INDEX FUNDS 15 16 FINANCIAL HIGHLIGHTS SCHWAB 1000 FUND(R) This section provides further details about the fund's recent financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/98 - 11/1/97 - 9/1/97 - 9/1/96 - 9/1/95 - 9/1/94 - INVESTOR SHARES 10/31/99 10/31/98 10/31/97 8/31/97 8/31/96 8/31/95 ------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 29.90 25.25 24.78 18.14 15.68 13.08 -------------------------------------------------------------------- Income from investment operations: Net investment income 0.26 0.27 0.04 0.28 0.24 0.26 Net realized and unrealized gain on investments 7.21 4.64 0.43 6.62 2.45 2.48 -------------------------------------------------------------------- Total income from investment operations 7.47 4.91 0.47 6.90 2.69 2.74 Less distributions: Dividends from net investment income (0.25) (0.26) -- (0.26) (0.23) (0.14) -------------------------------------------------------------------- NET ASSET VALUE AT END OF PERIOD 37.12 29.90 25.25 24.78 18.14 15.68 ==================================================================== Total return (%) 25.12 19.63 1.90 1 38.32 17.27 21.23 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.46 0.46 0.462 0.47 0.49 0.54 Expense reductions reflected in above ratio 0.05 0.05 0.042 0.06 0.08 0.09 Ratio of net investment income to average net assets 0.78 1.02 1.002 1.33 1.66 2.03 Portfolio turnover rate 3 2 -- 2 2 2 Net assets, end of period ($ x 1,000,000) 4,925 3,657 2,611 2,499 1,560 827
11/1/98 - 11/1/97 - 9/1/97 - 5/19/97 - SELECT SHARES(R) 10/31/99 10/31/98 10/31/97 8/31/97 ------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ------------------------------------------------------------------------------------------- Net asset value at beginning of period 29.93 25.26 24.79 22.64 -------------------------------------------- Income from investment operations: Net investment income 0.30 0.32 0.04 0.05 Net realized and unrealized gain on investments 7.22 4.63 0.43 2.10 -------------------------------------------- Total income from investment operations 7.52 4.95 0.47 2.15 Less distributions: Dividends from net investment income (0.29) (0.28) -- -- -------------------------------------------- NET ASSET VALUE AT END OF PERIOD 37.16 29.93 25.26 24.79 ============================================ Total return (%) 25.29 19.79 1.90 1 9.50 1 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------ Ratio of actual operating expenses to average net assets 0.35 0.35 0.35 2 0.35 2 Expense reductions reflected in above ratio 0.02 0.04 0.06 2 0.33 2 Ratio of net investment income to average net assets 0.89 1.11 1.11 2 1.26 2 Portfolio turnover rate 3 2 -- 2 Net assets, end of period ($ x 1,000,000) 2,214 1,041 426 347
1 Not annualized. 2 Annualized. 16 EQUITY INDEX FUNDS 17 FINANCIAL HIGHLIGHTS FINANCIAL HIGHLIGHTS SCHWAB SMALL-CAP INDEX FUND(R) This section provides further details about the fund's recent financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/98 - 11/1/97 - 11/1/96 - 11/1/95 - 11/1/94 - INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95 --------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) --------------------------------------------------------------------------------------------------- Net asset value at beginning of period 15.39 17.73 13.59 11.70 10.05 --------------------------------------------------- Income from investment operations: Net investment income 0.06 0.05 0.06 0.07 0.10 Net realized and unrealized gain (loss) on investments 2.89 (2.33) 4.14 1.88 1.61 --------------------------------------------------- Total income from investment operations 2.95 (2.28) 4.20 1.95 1.71 Less distributions: Dividends from net investment income (0.06) (0.06) (0.06) (0.06) (0.06) Distributions from realized gains on investments (0.87) -- -- -- -- --------------------------------------------------- Total distributions (0.93) (0.06) (0.06) (0.06) (0.06) --------------------------------------------------- NET ASSET VALUE AT END OF PERIOD 17.41 15.39 17.73 13.59 11.70 =================================================== Total return (%) 19.96 (12.88) 31.03 16.73 17.11 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.49 0.49 0.52 0.59 0.68 Expense reductions reflected in above ratio 0.30 0.32 0.37 0.35 0.34 Ratio of net investment income to average net assets 0.33 0.35 0.53 0.56 0.68 Portfolio turnover rate 41 40 23 23 24 Net assets, end of period ($ x 1,000,000) 452 480 410 209 122
11/1/98 - 11/1/97 5/19/97 - SELECT SHARES(R) 10/31/99 10/31/98 10/31/97 -------------------------------------------------------------------------------- PER-SHARE DATA ($) -------------------------------------------------------------------------------- Net asset value at beginning of period 15.41 17.75 14.50 ---------------------------- Income from investment operations: Net investment income 0.07 0.08 0.02 Net realized and unrealized gain (loss) on investments 2.90 (2.35) 3.23 ---------------------------- Total income from investment operations 2.97 (2.27) 3.25 Less distributions: Dividends from net investment income (0.07) (0.07) -- Distributions from realized gains on investments (0.87) -- -- ---------------------------- Total distributions (0.94) (0.07) -- ---------------------------- NET ASSET VALUE AT END OF PERIOD 17.44 15.41 17.75 ============================ Total return (%) 20.14 (12.81) 22.41 1 RATIOS/SUPPLEMENTAL DATA (%) --------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.38 0.38 0.38 2 Expense reductions reflected in above ratio 0.27 0.33 0.52 2 Ratio of net investment income to average net assets 0.44 0.46 0.56 2 Portfolio turnover rate 41 40 23 Net assets, end of period ($ x 1,000,000) 447 150 81
1 Not annualized. 2 Annualized. EQUITY INDEX FUNDS 17 18 FINANCIAL HIGHLIGHTS SCHWAB TOTAL STOCK MARKET INDEX FUND(TM) This section provides further details about the fund's financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
6/1/99 - INVESTOR SHARES 10/31/99 -------------------------------------------------------------------------------- PER-SHARE DATA ($) -------------------------------------------------------------------------------- Net asset value at beginning of period 20.00 ------- Income from investment operations: Net investment income 0.07 Net realized and unrealized gain on investments 0.80 ------- Total income from investment operations 0.87 ------- NET ASSET VALUE AT END OF PERIOD 20.87 ======= Total return (%) 4.35 1 RATIOS/SUPPLEMENTAL DATA (%) ----------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.40 2 Expense reductions reflected in above ratio 0.51 2 Ratio of net investment income to average net assets 0.92 2 Portfolio turnover rate 1 Net assets, end of period ($ x 1,000,000) 136
6/1/99 - SELECT SHARES(R) 10/31/99 -------------------------------------------------------------------------------- PER-SHARE DATA ($) -------------------------------------------------------------------------------- Net asset value at beginning of period 20.00 ------- Income from investment operations: Net investment income 0.07 Net realized and unrealized gain on investments 0.82 ------- Total income from investment operations 0.89 ------- NET ASSET VALUE AT END OF PERIOD 20.89 ======= Total return (%) 4.45 1 RATIOS/SUPPLEMENTAL DATA (%) ----------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.27 2 Expense reductions reflected in above ratio 0.47 2 Ratio of net investment income to average net assets 1.05 2 Portfolio turnover rate 1 Net assets, end of period ($ x 1,000,000) 149
1 Not annualized. 2 Annualized. 18 EQUITY INDEX FUNDS 19 FINANCIAL HIGHLIGHTS FINANCIAL HIGHLIGHTS SCHWAB INTERNATIONAL INDEX FUND(R) This section provides further details about the fund's recent financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/98 - 11/1/97 - 11/1/96 - 11/1/95 - 11/1/94 - INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95 ------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------- Net asset value at beginning of period 14.21 13.31 12.23 11.13 10.89 --------------------------------------------------- Income from investment operations: Net investment income 0.19 0.17 0.17 0.16 0.14 Net realized and unrealized gain on investments 3.66 0.88 1.08 1.07 0.22 --------------------------------------------------- Total income from investment operations 3.85 1.05 1.25 1.23 0.36 Less distributions: Dividends from net investment income (0.13) (0.15) (0.17) (0.13) (0.12) --------------------------------------------------- NET ASSET VALUE AT END OF PERIOD 17.93 14.21 13.31 12.23 11.13 =================================================== Total return (%) 27.31 8.02 10.33 11.07 3.35 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.58 0.58 0.61 0.69 0.85 Expense reductions reflected in above ratio 0.41 0.46 0.52 0.48 0.37 Ratio of net investment income to average net assets 1.24 1.35 1.36 1.50 1.45 Portfolio turnover rate 5 6 13 6 -- Net assets, end of period ($ x 1,000,000) 447 428 318 247 180
11/1/98 - 11/1/97 - 5/19/97 - SELECT SHARES(R) 10/31/99 10/31/98 10/31/97 -------------------------------------------------------------------------------- PER-SHARE DATA ($) -------------------------------------------------------------------------------- Net asset value at beginning of period 14.23 13.32 13.59 ---------------------------- Income from investment operations: Net investment income 0.18 0.22 0.04 Net realized and unrealized gain (loss) on investments 3.70 0.85 (0.31) ---------------------------- Total income from investment operations 3.88 1.07 (0.27) ---------------------------- Less distributions: Dividends from net investment income (0.15) (0.16) -- ---------------------------- NET ASSET VALUE AT END OF PERIOD 17.96 14.23 13.32 ============================ Total return (%) 27.49 8.16 (1.99) 1 RATIOS/SUPPLEMENTAL DATA (%) -------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.47 0.47 0.47 2 Expense reductions reflected in above ratio 0.39 0.48 0.80 2 Ratio of net investment income to average net assets 1.57 1.49 0.17 2 Portfolio turnover rate 5 6 13 Net assets, end of period ($ x 1,000,000) 449 94 50
1 Not annualized. 2 Annualized. EQUITY INDEX FUNDS 19 20 [Blank page] 21 SCHWAB ANALYTICS FUND(R) ABOUT THE FUND The Schwab Analytics Fund uses a strategy that is primarily QUANTITATIVE rather than one based on individual company research. This strategy employs a range of proprietary techniques to select stocks, construct a portfolio and manage overall risk. The fund uses software models to SCREEN STOCKS, based on factors that historically have been associated with above-average performance. The fund also looks at indicators of how those who are closest to a given company --ANALYSTS AND COMPANY INSIDERS -- currently view the company's near-term prospects. Before making its actual investment decisions, the fund consults another technical model, this one designed to MANAGE RISK. Taken together, these techniques are designed to complement each other in creating a portfolio with risk similar to that of the S&P 500(R) Index but with returns that are intended to be greater. The fund is designed for LONG-TERM INVESTORS. Its performance will fluctuate over time and, as with all investments, future performance may differ from past performance. QUANTITATIVE/SECTOR FUNDS 21 22 SCHWAB ANALYTICS FUND(R) TICKER SYMBOL SWANX THE FUND SEEKS LONG-TERM CAPITAL GROWTH. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS PRIMARILY IN U.S. STOCKS. Under normal circumstances, the fund expects to hold the common stocks of approximately 100 large- and mid-cap U.S. companies. The fund seeks to assemble a portfolio with long-term performance that will exceed that of the S&P 500(R) Index. The portfolio managers monitor more than 1,300 companies that have market values of $500 million or more. Using a variety of quantitative techniques, the managers screen and rank these companies based on numerous factors. These include fundamental characteristics, such as a company's size and valuation and its history of earnings and dividends, as well as technical characteristics, such as its stock price movements. The rankings also take into account various analysts' earnings estimates and revisions, and also purchases and sales of the stock by corporate insiders. Once the rankings are complete, the managers select the highest-ranked stocks (approximately 100) for inclusion in the fund's portfolio. The managers use a risk management model to construct a diversified portfolio with the goal of keeping the fund's volatility similar to that of the S&P 500. While the fund may include stocks that are outside the S&P 500 or weight its stock holdings differently from the index, it normally seeks to have the same industry weightings as the index. RISK MANAGEMENT The fund approaches risk management from the perspective of its benchmark, the S&P 500 Index. The S&P 500 includes the common stocks of 500 leading U.S. companies from a broad range of industries. The fund's risk management model is designed to estimate how much return a given investment might produce compared to the benchmark and how much risk it might involve compared to the benchmark. The model is designed to help the fund invest for returns that exceed the S&P 500, while maintaining a risk profile that is very similar to that of the index. The performance information below shows you how performance has varied from year to year and how it averages out over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the index does not include any costs of investment. [Performance chart] ANNUAL TOTAL RETURNS (%) as of 12/31 97 31.62 98 28.03 99 27.75
BEST QUARTER: 23.09% Q4 1998 WORST QUARTER: -10.79% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99 -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION -------------------------------------------------------------------------------- Fund 27.75 29.10 1 S&P 500 Index 21.04 27.11 1
1 Inception: 7/1/96. 22 QUANTITATIVE/SECTOR FUNDS 23 SCHWAB ANALYTICS FUND(R) This fund could be appropriate for long-term investors seeking a quantitative approach designed to outperform the S&P 500(R) Index. 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 OF THE RISKS OF THIS FUND ARE ASSOCIATED WITH THE LARGE- AND MID-CAP SEGMENTS OF THE U.S. STOCK MARKET. While the fund is not an index fund, its management techniques are likely to result in performance that correlates with the S&P 500, during upturns as well as downturns. The fund can take only limited steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence market-wide trends; the outcome may be positive or negative, short term or long term. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stocks of one or more industries (for example, rising oil prices may lead to a decline in airline stocks). The fund includes stocks from many different sectors of the economy, which reduces the impact of the performance of any given industry or stock. But whenever large- and mid-cap U.S. stocks fall behind other types of investments -- bonds or small-cap stocks, for instance -- the fund's performance also will lag these investments. In addition, because the values of mid-cap stocks may fluctuate more widely than those of large-cap stocks, the fund could be more volatile if it were to increase its holdings of mid-cap stocks. OTHER RISK FACTORS The fund's management model is based largely on past market behavior. To the extent that market dynamics shift over time, the model may fail to anticipate these shifts, which could affect the fund's ability to outperform its benchmark. Although the fund's main risks are those associated with its stock investments, the fund uses other strategies that also may involve risks. For example, futures contracts, which the fund uses to gain exposure to the stock market for its cash balances, could hurt the fund's performance if they don't perform as expected. Additionally, the fund may actively buy and sell portfolio securities, which will increase its portfolio turnover rate and expenses, and increase the likelihood of capital gain distributions. 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 (%)
SHAREHOLDER FEES -------------------------------------------------------------------------------- None ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------------------------- Management fees 0.54 Distribution (12b-1) fees None Other expenses 0.39 ----- Total annual operating expenses 0.93 EXPENSE REDUCTION (0.18) ----- NET OPERATING EXPENSES* 0.75 =====
* Guaranteed by Schwab and the investment adviser through 2/28/01. 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.
EXPENSES ON A $10,000 INVESTMENT ------------------------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------------------------------------------------------- $77 $278 $497 $1,127
QUANTITATIVE/SECTOR FUNDS 23 24 FINANCIAL HIGHLIGHTS SCHWAB ANALYTICS FUND(R) This section provides further details about the fund's recent financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/98 - 11/1/97 - 11/1/96 - 7/1/96 - 10/31/99 10/31/98 10/31/97 10/31/96 ---------------------------------------------------------------------------------------- PER-SHARE DATA ($) ---------------------------------------------------------------------------------------- Net asset value at beginning of period 14.57 13.72 11.01 10.00 ---------------------------------------- Income from investment operations: Net investment income 0.06 0.10 0.13 0.05 Net realized and unrealized gain on investments 4.94 2.20 2.79 0.96 ---------------------------------------- Total income from investment operations 5.00 2.30 2.92 1.01 Less distributions: Dividends from net investment income (0.09) (0.12) (0.08) -- Distributions from realized gain on investments (0.57) (1.33) (0.13) -- ---------------------------------------- Total distributions (0.66) (1.45) (0.21) -- ---------------------------------------- NET ASSET VALUE AT END OF PERIOD 18.91 14.57 13.72 11.01 ======================================== Total return (%) 35.20 18.37 26.83 10.10 1 RATIOS/SUPPLEMENTAL DATA (%) ----------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.75 0.75 0.74 0.75 2 Expense reductions reflected in above ratio 0.18 0.37 0.41 0.76 2 Ratio of net investment income to average net assets 0.34 0.70 1.04 1.41 2 Portfolio turnover rate 99 115 120 33 Net assets, end of period ($ x 1,000,000) 289 192 150 98
1 Not annualized. 2 Annualized. 24 QUANTITATIVE/SECTOR FUNDS 25 SCHWAB FOCUS FUNDS ABOUT THE FUNDS The Schwab Focus Funds share 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. QUANTITATIVE/SECTOR FUNDS 25 26 COMMUNICATIONS FOCUS FUND TICKER SYMBOL SWCFX 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. 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. 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. 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. 26 QUANTITATIVE/SECTOR FUNDS 27 COMMUNICATIONS FOCUS 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. 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 (%)
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 ====
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding interest, taxes and certain non-routine expenses). 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. EXPENSES ON A $10,000 INVESTMENT 1 YEAR 3 YEARS -------------------------------------------------------------------------------- $91 $387
QUANTITATIVE/SECTOR FUNDS 27 28 FINANCIAL SERVICES FOCUS FUND TICKER SYMBOL SWFFX 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. 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. 28 QUANTITATIVE/SECTOR FUNDS 29 FINANCIAL SERVICES FOCUS FUND 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. 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 (%)
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 ====
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding interest, taxes and certain non-routine expenses). 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. EXPENSES ON A $10,000 INVESTMENT 1 YEAR 3 YEARS -------------------------------------------------------------------------------- $91 $387
QUANTITATIVE/SECTOR FUNDS 29 30 HEALTH CARE FOCUS FUND TICKER SYMBOL SWHFX 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. Investors who believe that U.S. health care companies may show potential long-term growth may want to consider this fund. 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. 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. 30 QUANTITATIVE/SECTOR FUNDS 31 HEALTH CARE FOCUS 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. 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 (%)
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 ====
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding interest, taxes and certain non-routine expenses). 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. EXPENSES ON A $10,000 INVESTMENT 1 YEAR 3 YEARS -------------------------------------------------------------------------------- $91 $387
QUANTITATIVE/SECTOR FUNDS 31 32 TECHNOLOGY FOCUS FUND TICKER SYMBOL SWTFX 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. This fund is designed for long-term investors seeking a way to gain exposure to the technology segment of the U.S. economy 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. 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. 32 QUANTITATIVE/SECTOR FUNDS 33 TECHNOLOGY FOCUS 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 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 FUNDS 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. 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 (%)
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 ====
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding interest, taxes and certain non-routine expenses). 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. EXPENSES ON A $10,000 INVESTMENT 1 YEAR 3 YEARS -------------------------------------------------------------------------------- $91 $387
QUANTITATIVE/SECTOR FUNDS 33 34 [BLANK PAGE] 35 SCHWAB MARKETTRACK PORTFOLIOS(TM) ABOUT THE PORTFOLIOS The Schwab MarketTrack Portfolios in this prospectus share the same investment approach. Each portfolio seeks to maintain a DEFINED MIX of asset classes over time, and each invests mainly in a COMBINATION of other SchwabFunds(R), which are managed using INDEXING STRATEGIES. Each portfolio pursues a different investment goal. This approach is intended to offer the investor key features of two types of investment strategies: asset allocation and indexing. Each portfolio's performance is a blend of the performance of different asset classes or different segments within an asset class. Indexing, a strategy of TRACKING THE PERFORMANCE of a given market over time, involves looking to an index to determine what securities to own. By investing in a combination of index mutual funds, the portfolios can offer DIVERSIFICATION in a single investment. The portfolios are designed for LONG-TERM INVESTORS. Their performance will fluctuate over time and, as with all investments, future performance may differ from past performance. ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 35 36 SCHWAB MARKETTRACK ALL EQUITY PORTFOLIO TICKER SYMBOL SWEGX THE PORTFOLIO SEEKS HIGH CAPITAL GROWTH THROUGH AN ALL-STOCK PORTFOLIO. STRATEGY To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio's target allocation is 100% in stock investments, with certain percentages for different segments of the stock market. The portfolio invests in other SchwabFunds(R), particularly three of the Equity Index Funds. These underlying funds seek to track the total returns of various stock market indices. They typically invest in the stocks included in the index they are tracking, and generally give each stock the same weight as the index does. Each underlying fund focuses on a different segment of the stock market. Below are the underlying funds for this portfolio and the indices they seek to track, listed according to their corresponding category in the fund's asset allocation:
ALLOCATION FUND AND INDEX -------------------------------------------------------------------------------------------- LARGE-CAP Schwab S&P 500 Fund. Seeks to track the S&P 500(R) Index, a widely STOCK recognized index maintained by Standard & Poor's that includes 500 U.S. large-cap stocks. -------------------------------------------------------------------------------------------- SMALL-CAP Schwab Small-Cap Index Fund(R). Seeks to track the Schwab Small-Cap STOCK Index(R), which includes the second-largest 1,000 U.S. stocks as measured by market capitalization. -------------------------------------------------------------------------------------------- INTERNATIONAL Schwab International Index Fund(R). Seeks to track the Schwab International STOCK Index(R), which includes the largest 350 stocks (as measured by market capitalization) that are publicly traded in developed securities markets outside the United States.
The portfolio managers monitor the portfolio's holdings and cash flow and manage them as needed in order to maintain the portfolio's target allocation. In seeking to enhance after-tax performance, the managers may permit modest deviations from the target allocation for certain periods of time. ASSET ALLOCATION AMONG FUNDS Asset allocation is a strategy of investing specific percentages of a portfolio in various asset classes. The portfolio's allocation focuses on stock investments for long-term growth. The portfolio typically does not change its stock segment allocations for purposes of investment strategy and seeks to remain close to the target allocations of 45% in large-cap, 30% in international and 25% in small-cap. Because the portfolio must keep a small portion of its assets in cash for business operations, the portfolio's actual investments will be slightly less than 100% in stock funds. The performance information below shows you how the fund's performance compares to that of an index, which varies over time. PERFORMANCE Below are a chart and a table showing the portfolio's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that indices do not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31
99 -- 25.06
BEST QUARTER: 17.07% Q4 1999 WORST QUARTER: -1.71% Q3 1999 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR INCEPTION -------------------------------------------------------------- Portfolio 25.06 16.94 1 S&P 500 Index 21.04 19.90 2
1 Inception: 5/19/98. 2 From 5/19/98. 36 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 37 SCHWAB MARKETTRACK ALL EQUITY PORTFOLIO This portfolio's exposure to a broad spectrum of U.S. and international stocks makes it a good choice for long-term investors seeking a composite of U.S. and international stock market performance in a single 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 portfolio will fluctuate, which means that you could lose money. THE PORTFOLIO'S STOCK ALLOCATIONS CAN HAVE AN EFFECT ON RETURNS. The risks and returns of different segments of the stock market can vary over the long term and the short term. Because of this, the portfolio's performance could suffer during times when segments emphasized by its target allocation are out of favor, or when stocks in general are out of favor. MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH STOCK INDEX FUNDS. The portfolio's underlying stock index funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Neither the portfolio, because of its asset allocation strategy, nor the underlying funds, because of their indexing strategy, can take steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence market-wide trends; the outcome may be positive or negative, short term or long term. Any type of stock can temporarily fall out of favor with the market. THE VALUES OF CERTAIN TYPES OF STOCKS, SUCH AS SMALL-CAP STOCKS AND INTERNATIONAL STOCKS, MAY FLUCTUATE MORE WIDELY THAN OTHERS. With small-cap stocks, one reason is that their prices may be based in part on future expectations rather than current achievements. International stock investments can be affected by changes in currency exchange rates, which can erode market gains or widen market losses. Other reasons for the volatility of international markets range from a lack of reliable company information to the risk of political upheaval. OTHER RISK FACTORS While the portfolio's underlying funds seek to track the returns of various indices, in each case their performance normally is below that of the index. This gap occurs mainly because, unlike an index, the underlying funds incur expenses and must keep a small portion of their assets in cash. To the extent that an underlying fund lends securities or makes short-term or other investments to reduce its performance gap, it may increase the risk that its performance will be reduced. The portfolio itself keeps a small portion of its assets in cash, which may contribute modestly to lower performance. PORTFOLIO FEES AND EXPENSES The following table describes what you could expect to pay as a portfolio investor. "Shareholder fees" are one-time expenses charged to you directly by the portfolio. "Annual operating expenses" are paid out of portfolio assets, so their effect is included in total return. Fees of the underlying funds are reflected in those funds' performance, and thus indirectly in portfolio performance. These fees are approximately 0.40% of the portfolio's average net assets based on current investments, and may fluctuate. FEE TABLE (%)
SHAREHOLDER FEES -------------------------------------------------------------- None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------- Management fees* 0.44 Distribution (12b-1) fees None Other expenses 0.49 ---- Total annual operating expenses 0.93 EXPENSE REDUCTION (0.43) ---- NET OPERATING EXPENSES** 0.50 ====
* Reflects current fees. ** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding interest, taxes and certain non-routine expenses). 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 portfolio or sold your shares at the end of each period. Your actual costs may be higher or lower. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------- $51 $253 $473 $1,104
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 37 38 SCHWAB MARKETTRACK GROWTH PORTFOLIO TICKER SYMBOL SWHGX THE PORTFOLIO SEEKS HIGH CAPITAL GROWTH WITH LESS VOLATILITY THAN AN ALL-STOCK PORTFOLIO. STRATEGY TO PURSUE ITS GOAL, THE PORTFOLIO MAINTAINS A DEFINED ASSET ALLOCATION. The portfolio's target allocation includes stock, bond and cash investments. The portfolio invests mainly in other SchwabFunds(R), particularly index funds, which seek to track the total returns of various market indices. These underlying funds typically invest in the securities included in the index they are tracking, and give each security the same weight as the index does. Each underlying fund focuses on a different market segment. Below are the underlying funds for this portfolio and the indices they seek to track, listed according to their corresponding category in the fund's asset allocation:
ALLOCATION FUND AND INDEX -------------------------------------------------------------------------------------------- LARGE-CAP Schwab S&P 500 Fund. Seeks to track the S&P 500(R) Index, a widely STOCK recognized index maintained by Standard & Poor's that includes 500 U.S. large-cap stocks. -------------------------------------------------------------------------------------------- SMALL-CAP Schwab Small-Cap Index Fund(R). Seeks to track the Schwab Small-Cap STOCK Index(R), which includes the second-largest 1,000 U.S. stocks as measured by market capitalization. -------------------------------------------------------------------------------------------- INTERNATIONAL Schwab International Index Fund(R). Seeks to track the Schwab International STOCK Index(R), which includes the largest 350 stocks (as measured by market capitalization) that are publicly traded in developed securities markets outside the United States. -------------------------------------------------------------------------------------------- BOND Schwab Total Bond Market Index Fund(TM). Seeks to track the Lehman Brothers Aggregate Bond Index, which includes a broad-based mix of U.S. investment-grade bonds with maturities greater than one year.
The portfolio also may use individual securities in its allocations and may continue to hold any individual securities it currently owns. The portfolio managers monitor the portfolio's holdings and cash flow and manage them as needed in order to maintain the portfolio's target allocation. In seeking to enhance after-tax performance, the managers may permit modest deviations from the target allocation for certain periods of time. ASSET ALLOCATION Asset allocation is a strategy of investing specific percentages of a portfolio in various asset classes. The Growth Portfolio's allocation focuses on stock investments, while including some bonds and cash investments to reduce volatility. The portfolio typically does not change its asset allocations for purposes of investment strategy and seeks to remain close to the target allocations of 80% stocks, 15% bonds and 5% cash. The stock allocation is further divided into three segments: 40% of assets for large-cap, 20% for small-cap and 20% for international. The performance information below shows you how performance has varied from year to year and how it averages out over time. PERFORMANCE Below are a chart and a table showing the portfolio's performance, as well as data on two unmanaged market indices. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that indices do not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31
-------------------------- 96 14.48 97 21.00 98 15.17 99 19.36
BEST QUARTER: 15.70% Q4 1998 WORST QUARTER: -10.55% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR INCEPTION ---------------------------------------------------------------- Portfolio 19.36 17.77 1 S&P 500 Index 21.04 26.47 2 Lehman Brothers Aggregate Bond Index -0.82 5.60 2
1 Inception: 11/20/95. 2 From 11/20/95. ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 38 39 SCHWAB MARKETTRACK GROWTH PORTFOLIO By emphasizing stocks while including other investments to temper market risk, this portfolio could be appropriate for investors seeking attractive long-term growth with potentially lower volatility. MAIN RISKS STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the portfolio will fluctuate, which means that you could lose money. THE PORTFOLIO'S ASSET AND STOCK ALLOCATIONS CAN HAVE AN EFFECT ON RETURNS. The risks and returns of different classes of assets and different segments of the stock market can vary over the long term and the short term. Because of this, the portfolio's performance could suffer during times when the types of stocks favored by its target allocation are out of favor, or when stocks in general are out of favor. MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH STOCK INDEX FUNDS. The portfolio's underlying stock index funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Neither the portfolio, because of its asset allocation strategy, nor the underlying funds, because of their indexing strategy, can take steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence market-wide trends; the outcome may be positive or negative, short term or long term. Any type of stock can temporarily fall out of favor with the market. THE VALUES OF CERTAIN TYPES OF STOCKS, SUCH AS SMALL-CAP STOCKS AND INTERNATIONAL STOCKS, MAY FLUCTUATE MORE WIDELY THAN OTHERS. With small-cap stocks, one reason is that their prices may be based in part on future expectations rather than current achievements. International stock investments can be affected by changes in currency exchange rates, which can erode market gains or widen market losses. Other reasons for the volatility of international markets range from a lack of reliable company information to the risk of political upheaval. OTHER RISK FACTORS For the portion of the portfolio's assets that are invested in the bond market, a major risk is that bond prices generally fall when interest rates rise. Portfolio performance also could be affected if bonds held by the underlying funds go into default. Another risk is that certain bonds may be paid off, or "called," substantially earlier or later than expected. While the portfolio's underlying funds seek to track the returns of various indices, in each case their performance normally is below that of the index. This gap occurs mainly because, unlike an index, the underlying funds incur expenses and must keep a small portion of their assets in cash. To the extent that an underlying fund lends securities or makes short-term or other investments to reduce its performance gap, it may increase the risk that its performance will be reduced. The portfolio itself keeps a small portion of its assets in cash, which may contribute modestly to lower performance. PORTFOLIO FEES AND EXPENSES The following table describes what you could expect to pay as a portfolio investor. "Shareholder fees" are one-time expenses charged to you directly by the portfolio. "Annual operating expenses" are paid out of portfolio assets, so their effect is included in total return. Fees of the underlying funds are reflected in those funds' performance, and thus indirectly in portfolio performance. These fees are approximately 0.26% of the portfolio's average net assets based on current investments, and may fluctuate. FEE TABLE (%)
SHAREHOLDER FEES -------------------------------------------------------------- None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------- Management fees* 0.44 Distribution (12b-1) fees None Other expenses 0.39 ---- Total annual operating expenses 0.83 EXPENSE REDUCTION (0.33) ---- NET OPERATING EXPENSES** 0.50 ====
* Reflects current fees. ** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding interest, taxes and certain non-routine expenses). 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 portfolio or sold your shares at the end of each period. Your actual costs may be higher or lower. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------- $51 $232 $428 $995
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 39 40 SCHWAB MARKETTRACK BALANCED PORTFOLIO TICKER SYMBOL SWBGX THE PORTFOLIO SEEKS BOTH CAPITAL GROWTH AND INCOME. STRATEGY To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio's target allocation includes bond, stock and cash investments. The portfolio invests mainly in other SchwabFunds(R), particularly index funds, which seek to track the total returns of various market indices. These underlying funds typically invest in the securities included in the index they are tracking, and give each security the same weight as the index does. Each underlying fund focuses on a different market segment. Below are the underlying funds for this portfolio and the indices they seek to track, listed according to their corresponding category in the fund's asset allocation:
ALLOCATION FUND AND INDEX -------------------------------------------------------------------------------------------- LARGE-CAP Schwab S&P 500 Fund. Seeks to track the S&P 500(R) Index, a widely STOCK recognized index maintained by Standard & Poor's that includes 500 U.S. large-cap stocks. -------------------------------------------------------------------------------------------- SMALL-CAP Schwab Small-Cap Index Fund(R). Seeks to track the Schwab Small-Cap STOCK Index(R), which includes the second-largest 1,000 U.S. stocks as measured by market capitalization. -------------------------------------------------------------------------------------------- INTERNATIONAL Schwab International Index Fund(R). Seeks to track the Schwab International STOCK Index(R), which includes the largest 350 stocks (as measured by market capitalization) that are publicly traded in developed securities markets outside the United States. -------------------------------------------------------------------------------------------- BOND Schwab Total Bond Market Index Fund(TM). Seeks to track the Lehman Brothers Aggregate Bond Index, which includes a broad-based mix of U.S. investment-grade bonds with maturities greater than one year.
The portfolio also may use individual securities in its allocations and may continue to hold any individual securities it currently owns. The portfolio managers monitor the portfolio's holdings and cash flow and manage them as needed in order to maintain the portfolio's target allocation. In seeking to enhance after-tax performance, the managers may permit modest deviations from the target allocation for certain periods of time. ASSET ALLOCATION Asset allocation is a strategy of investing specific percentages of a portfolio in various asset classes. The Balanced Portfolio's allocation is weighted toward stock investments, while including substantial bond investments to add income and reduce volatility. The portfolio typically does not change its asset allocations for purposes of investment strategy and seeks to remain close to the target allocations of 60% stocks, 35% bonds and 5% cash. The stock allocation is further divided into three segments: 30% of assets for large-cap, 15% for small-cap and 15% for international. The performance information below shows you how performance has varied from year to year and how it averages out over time. PERFORMANCE Below are a chart and a table showing the portfolio's performance, as well as data on two unmanaged market indices. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that indices do not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31
96 97 98 99 -------------------------- 11.15 17.76 13.67 14.00
BEST QUARTER: 11.81% Q4 1998 WORST QUARTER: -6.85% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR INCEPTION -------------------------------------------------------------- Portfolio 14.00 14.44 1 S&P 500 Index 21.04 26.47 2 Lehman Brothers Aggregate Bond Index -0.82 5.60 2
1 Inception: 11/20/95. 2 From 11/20/95. 40 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 41 SCHWAB MARKETTRACK BALANCED PORTFOLIO With a blend of asset types that modestly favors stocks, this portfolio may be suitable for intermediate-term investors or for long-term investors with moderate sensitivity to risk. MAIN RISKS STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the portfolio will fluctuate, which means that you could lose money. THE PORTFOLIO'S ASSET AND STOCK ALLOCATIONS CAN HAVE A SUBSTANTIAL EFFECT ON PERFORMANCE. The risks and returns of different classes of assets and different segments of the stock market can vary over the long term and the short term. Because it intends to maintain substantial exposure to stocks as well as bonds, the portfolio will be hurt by poor performance in either market. Also, because it does not intend to make strategic changes in its allocation, it could underperform any asset allocation funds that underweight asset classes or types of stocks that perform poorly during a given period. MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH INDEX FUNDS. The portfolio's underlying index funds seek to track the performance of various segments of the stock or bond market, as measured by their respective indices. Neither the portfolio, because of its asset allocation strategy, nor the underlying funds, because of their indexing strategy, can take steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence market-wide trends; the outcome may be positive or negative, short term or long term. Any type of stock can temporarily fall out of favor with the market. The values of certain types of stocks, such as small-cap stocks and international stocks, may fluctuate more widely than others. BOND PRICES GENERALLY FALL WHEN INTEREST RATES RISE, WHICH CAN AFFECT THE BOND PORTION OF THE PORTFOLIO. This risk is generally greater for bond investments with longer maturities. Portfolio performance also could be affected if bonds held by the underlying funds go into default. Another risk is that certain bonds may be paid off, or "called," substantially earlier or later than expected. OTHER RISK FACTORS While the portfolio's underlying funds seek to track the returns of various indices, in each case their performance normally is below that of the index. This gap occurs mainly because, unlike an index, the underlying funds incur expenses and must keep a small portion of their assets in cash. To the extent that an underlying fund lends securities or makes short-term or other investments to reduce its performance gap, it may increase the risk that its performance will be reduced. The portfolio itself keeps a small portion of its assets in cash, which may contribute modestly to lower performance. PORTFOLIO FEES AND EXPENSES The following table describes what you could expect to pay as a portfolio investor. "Shareholder fees" are one-time expenses charged to you directly by the portfolio. "Annual operating expenses" are paid out of portfolio assets, so their effect is included in total return. Fees of the underlying funds are reflected in those funds' performance, and thus indirectly in portfolio performance. These fees are approximately 0.29% of the portfolio's average net assets based on current investments, and may fluctuate. FEE TABLE (%)
SHAREHOLDER FEES ------------------------------------------------------------- None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) ------------------------------------------------------------- Management fees* 0.44 Distribution (12b-1) fees None Other expenses 0.39 ---- Total annual operating expenses 0.83 EXPENSE REDUCTION (0.33) ---- NET OPERATING EXPENSES** 0.50 ====
* Reflects current fees. ** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding interest, taxes and certain non-routine expenses). 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 portfolio or sold your shares at the end of each period. Your actual costs may be higher or lower. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------- $51 $232 $428 $995
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 41 42 SCHWAB MARKETTRACK CONSERVATIVE PORTFOLIO TICKER SYMBOL SWCGX THE PORTFOLIO SEEKS INCOME AND MORE GROWTH POTENTIAL THAN AN ALL-BOND PORTFOLIO. STRATEGY TO PURSUE ITS GOAL, THE PORTFOLIO MAINTAINS A DEFINED ASSET ALLOCATION. The portfolio's target allocation includes bond, stock and cash investments. The portfolio invests mainly in other SchwabFunds(R), particularly index funds, which seek to track the total returns of various market indices. These underlying funds typically invest in the securities included in the index they are tracking, and give each security the same weight as the index does. Each underlying fund focuses on a different market segment. Below are the underlying funds for this portfolio and the indices they seek to track, listed according to their corresponding category in the fund's asset allocation:
ALLOCATION FUND AND INDEX --------------------------------------------------------------------------------------------- LARGE-CAP Schwab S&P 500 Fund. Seeks to track the S&P 500(R) Index, a widely STOCK recognized index maintained by Standard & Poor's that includes 500 U.S. large-cap stocks. --------------------------------------------------------------------------------------------- SMALL-CAP Schwab Small-Cap Index Fund(R). Seeks to track the Schwab Small-Cap STOCK Index(R), which includes the second-largest 1,000 U.S. stocks as measured by market capitalization. --------------------------------------------------------------------------------------------- INTERNATIONAL Schwab International Index Fund(R). Seeks to track the Schwab International STOCK Index(R), which includes the largest 350 stocks (as measured by market capitalization) that are publicly traded in developed securities markets outside the United States. --------------------------------------------------------------------------------------------- BOND Schwab Total Bond Market Index Fund(TM). Seeks to track the Lehman Brothers Aggregate Bond Index, which includes a broad-based mix of U.S. investment-grade bonds with maturities greater than one year.
The portfolio also may use individual securities in its allocations and may continue to hold any individual securities it currently owns. The portfolio managers monitor the portfolio's holdings and cash flow and manage them as needed in order to maintain the portfolio's target allocation. In seeking to enhance after-tax performance, the managers may permit modest deviations from the target allocation for certain periods of time ASSET ALLOCATION Asset allocation is a strategy of investing specific percentages of a portfolio in various asset classes. The Conservative Portfolio's allocation is weighted toward bond investments, while including substantial stock investments for long-term growth. The portfolio typically does not change its asset allocations for purposes of investment strategy and seeks to remain close to the target allocations of 55% bonds, 40% stocks and 5% cash. The stock allocation is further divided into three segments: 20% of assets for large-cap, 10% for small-cap and 10% for international. The performance information below shows you how performance has varied from year to year and how it averages out over time. PERFORMANCE Below are a chart and a table showing the portfolio's performance, as well as data on two unmanaged market indices. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that indices do not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31
96 97 98 99 ------------------------ 8.14 14.71 11.58 8.70
BEST QUARTER: 8.49% Q2 1997 WORST QUARTER: -3.35% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR INCEPTION -------------------------------------------------------------- Portfolio 8.70 11.06 1 Lehman Brothers Aggregate Bond Index -0.82 5.60 2 S&P 500 Index 21.04 26.47 2
1 Inception: 11/20/95. 2 From 11/20/95. 42 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 43 SCHWAB MARKETTRACK CONSERVATIVE PORTFOLIO Conservative investors and investors with shorter time horizons are among those for whom this portfolio was created. MAIN RISKS STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the portfolio will fluctuate, which means that you could lose money. THE PORTFOLIO'S ASSET AND STOCK ALLOCATIONS CAN HAVE A SUBSTANTIAL EFFECT ON PERFORMANCE. The risks and returns of different classes of assets and different segments of the stock market can vary over the long term and the short term. Because it intends to maintain substantial exposure to stocks as well as bonds, the portfolio will be hurt by poor performance in either market. Also, because it does not intend to make strategic changes in its allocation, it could underperform any asset allocation funds that underweight asset classes or types of stocks that perform poorly during a given period. MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH INDEX FUNDS. The portfolio's underlying index funds seek to track the performance of various segments of the stock or bond market, as measured by their respective indices. Neither the portfolio, because of its asset allocation strategy, nor the underlying funds, because of their indexing strategy, can take steps to reduce market exposure or to lessen the effects of a declining market. BOND PRICES GENERALLY FALL WHEN INTEREST RATES RISE, WHICH CAN AFFECT THE BOND PORTION OF THE PORTFOLIO. This risk is generally greater for bond investments with longer maturities. Portfolio performance also could be affected if bonds held by the underlying funds go into default. Another risk is that certain bonds may be paid off, or "called," substantially earlier or later than expected. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence market-wide trends; the outcome may be positive or negative, short term or long term. Any type of stock can temporarily fall out of favor with the market. Also, the values of certain types of stocks, such as small-cap stocks and international stocks, may fluctuate more widely than others. OTHER RISK FACTORS While the portfolio's underlying funds seek to track the returns of various indices, in each case their performance normally is below that of the index. This gap occurs mainly because, unlike an index, the underlying funds incur expenses and must keep a small portion of their assets in cash. To the extent that an underlying fund lends securities or makes short-term or other investments to reduce its performance gap, it may increase the risk that its performance will be reduced. The portfolio itself keeps a small portion of its assets in cash, which may contribute modestly to lower performance. PORTFOLIO FEES AND EXPENSES The following table describes what you could expect to pay as a portfolio investor. "Shareholder fees" are one-time expenses charged to you directly by the portfolio. "Annual operating expenses" are paid out of portfolio assets, so their effect is included in total return. Fees of the underlying funds are reflected in those funds' performance, and thus indirectly in portfolio performance. These fees are approximately 0.30% of the portfolio's average net assets based on current investments, and may fluctuate. FEE TABLE (%)
SHAREHOLDER FEES -------------------------------------------------------------- None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------- Management fees* 0.44 Distribution (12b-1) fees None Other expenses 0.41 ---- Total annual operating expenses 0.85 EXPENSE REDUCTION (0.35) ---- NET OPERATING EXPENSES** 0.50 ====
* Reflects current fees. ** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding interest, taxes and certain non-routine expenses). 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 portfolio or sold your shares at the end of each period. Your actual costs may be higher or lower. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------- $51 $236 $437 $1,017
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 43 44 FINANCIAL HIGHLIGHTS SCHWAB MARKETTRACK ALL EQUITY PORTFOLIO This section provides further details about the portfolio's financial history. "Total return" shows the percentage that an investor in the portfolio would have earned or lost during a given period, assuming all distributions were reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the portfolio's annual report (see back cover).
11/1/98 - 5/19/98 - 10/31/99 10/31/98 ---------------------------------------------------------------------------------- PER-SHARE DATA ($) ---------------------------------------------------------------------------------- Net asset value at beginning of period 9.28 10.00 --------------------- Income from investment operations: Net investment income (loss) 0.03 (0.01) Net realized and unrealized gain (loss) on investments 2.22 (0.71) --------------------- Total income (loss) from investment operations 2.25 (0.72) Less distributions: Dividends from net investment income (0.01) -- Dividends in excess of net investment income (0.04) -- --------------------- Total distributions (0.05) -- --------------------- NET ASSET VALUE AT END OF PERIOD 11.48 9.28 ===================== Total return (%) 24.34 (7.20) 1
RATIOS/SUPPLEMENTAL DATA (%) ---------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.54 0.39 2 Expense reductions reflected in above ratio 0.43 0.74 2 Ratio of net investment income to average net assets 0.13 (0.36) 2 Portfolio turnover rate 6 2 Net assets, end of period ($ x 1,000,000) 203 117
1 Not annualized. 2 Annualized. 44 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 45 FINANCIAL HIGHLIGHTS SCHWAB MARKETTRACK GROWTH PORTFOLIO This section provides further details about the portfolio's financial history. "Total return" shows the percentage that an investor in the portfolio would have earned or lost during a given period, assuming all distributions were reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the portfolio's annual report (see back cover).
11/1/98- 11/1/97- 11/1/96- 11/20/95- 10/31/99 10/31/98 10/31/97 10/31/96 ------------------------------------------------------------------------------------------- PER-SHARE DATA ($) Net asset value at beginning of period 13.96 13.59 11.30 10.00 --------------------------------------- Income from investment operations: Net investment income 0.18 0.16 0.17 0.19 Net realized and unrealized gain on investments 2.48 0.99 2.32 1.13 --------------------------------------- Total income from investment operations 2.66 1.15 2.49 1.32 Less distributions: Dividends from net investment income (0.22) (0.16) (0.20) (0.02) Distributions from capital gains (0.03) (0.62) -- -- --------------------------------------- Total distributions (0.25) (0.78) (0.20) (0.02) --------------------------------------- NET ASSET VALUE AT END OF PERIOD 16.37 13.96 13.59 11.30 ======================================= Total return (%) 19.24 8.85 22.33 13.24 1
------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA (%) Ratio of net operating expenses to average net assets 0.58 0.60 0.75 0.89 2 Expense reductions reflected in above ratio 0.33 0.50 0.49 0.61 2 Ratio of net investment income to average net assets 1.21 1.34 1.58 2.03 2 Portfolio turnover rate 7 14 113 46 Net assets, end of period ($ x 1,000,000) 428 276 168 106
1 Not annualized. 2 Annualized. ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 45 46 FINANCIAL HIGHLIGHTS SCHWAB MARKETTRACK BALANCED PORTFOLIO This section provides further details about the portfolio's financial history. "Total return" shows the percentage that an investor in the portfolio would have earned or lost during a given period, assuming all distributions were reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the portfolio's annual report (see back cover).
11/1/98- 11/1/97- 11/1/96- 11/20/95- 10/31/99 10/31/98 10/31/97 10/31/96 ----------------------------------------------------------------------------------------- PER-SHARE DATA ($) Net asset value at beginning of period 13.39 12.82 11.05 10.00 --------------------------------------- Income from investment operations: Net investment income 0.29 0.25 0.22 0.25 Net realized and unrealized gain on investments 1.57 0.86 1.78 0.83 --------------------------------------- Total income from investment operations 1.86 1.11 2.00 1.08 Less distributions: Dividends from net investment income (0.33) (0.23) (0.23) (0.03) Distributions from capital gains (0.07) (0.31) -- -- --------------------------------------- Total distributions (0.40) (0.54) (0.23) (0.03) --------------------------------------- NET ASSET VALUE AT END OF PERIOD 14.85 13.39 12.82 11.05 ======================================= Total return (%) 14.18 9.02 18.43 10.82 1
RATIOS/SUPPLEMENTAL DATA (%) ----------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.58 0.59 0.78 0.89 2 Expense reductions reflected in above ratio 0.33 0.51 0.52 0.67 2 Ratio of net investment income to average net assets 2.25 2.33 2.48 2.79 2 Portfolio turnover rate 7 32 104 44 Net assets, end of period ($ x 1,000,000) 403 264 151 81
1 Not annualized. 2 Annualized. 46 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 47 FINANCIAL HIGHLIGHTS FINANCIAL HIGHLIGHTS SCHWAB MARKETTRACK CONSERVATIVE PORTFOLIO This section provides further details about the portfolio's financial history. "Total return" shows the percentage that an investor in the portfolio would have earned or lost during a given period, assuming all distributions were reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the portfolio's annual report (see back cover).
11/1/98- 11/1/97- 11/1/96- 11/20/95- 10/31/99 10/31/98 10/31/97 10/31/96 ----------------------------------------------------------------------------------------- PER-SHARE DATA ($) Net asset value at beginning of period 12.11 11.71 10.51 10.00 --------------------------------------- Income from investment operations: Net investment income 0.41 0.35 0.35 0.33 Net realized and unrealized gain on investments 0.68 0.64 1.21 0.48 --------------------------------------- Total income from investment operations 1.09 0.99 1.56 0.81 Less distributions: Dividends from net investment income (0.40) (0.35) (0.36) (0.30) Distributions from capital gains (0.07) (0.24) -- -- --------------------------------------- Total distributions (0.47) (0.59) (0.36) (0.30) --------------------------------------- NET ASSET VALUE AT END OF PERIOD 12.73 12.11 11.71 10.51 ======================================= Total return (%) 9.13 8.64 15.12 8.18 1
RATIOS/SUPPLEMENTAL DATA (%) ----------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.57 0.58 0.81 0.89 2 Expense reductions reflected in above ratio 0.35 0.64 0.84 1.16 2 Ratio of net investment income to average net assets 3.28 3.26 3.40 3.49 2 Portfolio turnover rate 8 58 104 64 Net assets, end of period ($ x 1,000,000) 167 115 41 22
1 Not annualized. 2 Annualized. ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 47 48 [Blank page] 49 SCHWAB MARKETMANAGER PORTFOLIOS(TM) ABOUT THE PORTFOLIOS The Schwab MarketManager Portfolios share a "MULTI-FUND" investment strategy. Each portfolio invests primarily in a COMBINATION of other actively managed funds. Each portfolio's mix of underlying funds is strategically chosen with a SPECIFIC GOAL in mind. By using a multi-fund strategy, the portfolios can provide exposure to a VARIETY OF MUTUAL FUNDS in a single investment. This strategy may help to produce a high level of DIVERSIFICATION among securities and industries. As a result, the portfolios may reduce the risks associated with INVESTING in a single fund, fund company or investment style. The portfolio managers ANALYZE ECONOMIC CONDITIONS to identify promising areas for investment. They review funds according to their investment objectives and policies, and use quantitative techniques to measure their past performance, volatility and expenses. The managers then choose each underlying fund by ANALYZING its investment style and gaining FIRSTHAND KNOWLEDGE of its manager. The portfolios are designed for LONG-TERM INVESTORS. Their performance will fluctuate over time and, as with all investments, future performance may differ from past performance. ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 49 50 SCHWAB MARKETMANAGER GROWTH PORTFOLIO TICKER SYMBOL SWOGX THE PORTFOLIO SEEKS CAPITAL GROWTH. STRATEGY TO PURSUE ITS GOAL, THE PORTFOLIO INVESTS AT LEAST 65% OF ITS TOTAL ASSETS IN OTHER MUTUAL FUNDS, including those available through Schwab's Mutual Fund OneSource(R) service. Typically, the actual percentage is considerably higher. The portfolio invests in stock, bond and money market funds, which the managers choose within the framework of an asset allocation strategy. Based on analysis of economic outlooks and market conditions, the managers determine whether and how much to adjust the portfolio's allocation. Within the stock fund allocation, the portfolio managers may allocate their investment among large-cap, small-cap and international stock funds. Within the bond fund allocation, the managers allocate investments among bond funds primarily based on the maturities and credit quality of their holdings. In choosing the underlying funds, the portfolio managers seek clearly defined investment strategies, strong performance histories and stable management, among other criteria. As of 10/31/99, the portfolio included 40 underlying funds. The performance information below shows you how performance has varied from year to year and how it averages out over time. ASSET ALLOCATION AMONG FUNDS Asset allocation is a strategy of investing specific percentages of a portfolio in various asset classes. The Growth Portfolio's allocation is designed to provide the growth opportunities of stock investing while tempering volatility with bond and money market funds. Over the long term, the portfolio will generally reflect its target allocation, as shown below. The table also shows the highest and lowest allocations the portfolio could assign for each type of fund. The portfolio has the flexibility to adjust its allocations of large-cap, small-cap and international stock funds as well.
TARGET ALLOCATION ALLOCATION FLEXIBILITY ----------------------------------------- STOCK FUNDS 80% 65 - 95% large-cap 35% small-cap 20% international 25% BOND FUNDS 15% 0 - 30% MONEY MARKET FUNDS 5% 0 - 35%
PERFORMANCE Below are a chart and a table showing the portfolio's performance, as well as data on two unmanaged market indices. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that indices do not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31
97 98 99 ------------------- 18.38 15.15 35.65
BEST QUARTER: 25.72% Q4 1999 WORST QUARTER: -11.73% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR INCEPTION ---------------------------------------------------------------- Portfolio 35.65 22.07 1 S&P 500(R) Index 21.04 26.65 2 Lehman Brothers Aggregate Bond Index -0.82 5.43 2
1 Inception: 11/18/96. 2 From 11/18/96. 50 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 51 SCHWAB MARKETMANAGER GROWTH PORTFOLIO When you are investing for the long term, a portfolio that emphasizes stock investments in its asset allocation may make sense for you. MAIN RISKS THE STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the portfolio will fluctuate, which means that you could lose money. THE PORTFOLIO'S PARTICULAR ASSET ALLOCATION CAN HAVE AN EFFECT ON PERFORMANCE. The portfolio's neutral allocation is designed with long-term performance in mind, and does not ensure any particular type of performance over the short term. Because the risks and returns of different asset classes can vary widely over both the long term and the short term, the portfolio's performance could suffer if a particular asset class does not perform as expected. MANY OF THE RISKS OF THIS PORTFOLIO ARE THOSE ASSOCIATED WITH STOCK FUNDS. The same factors that affect stock market performance generally affect stock funds. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. Any type of stock can temporarily fall out of favor with the market. The values of certain types of stocks, such as small-cap stocks and international stocks, may fluctuate more widely than others. TO THE EXTENT THAT THE PORTFOLIO INVESTS IN BOND FUNDS, A MAJOR RISK IS THAT BOND PRICES GENERALLY FALL WHEN INTEREST RATES RISE. Underlying funds that focus on bonds with longer maturities tend to be more sensitive to this risk. Portfolio performance also could be affected if bonds held by the underlying funds go into default. To minimize this risk, the portfolio intends to invest in bond funds that invest primarily in investment-grade quality debt securities. Another risk is that certain bonds may be paid off, or "called," substantially earlier or later than expected. OTHER RISK FACTORS Because the portfolio managers have no control over the management of the underlying funds, decisions made by the underlying funds' managers could change the portfolio's effective asset allocation or hurt its performance. For example, if managers of underlying funds tended to favor cash, the portfolio's exposure to the stock market would be lowered. Similarly, if underlying funds make investments that don't perform as expected, the portfolio's performance could be affected. Additionally, the portfolio may actively buy and sell underlying fund shares, which will increase its portfolio turnover rate, and increase the likelihood of capital gain distributions. PORTFOLIO FEES AND EXPENSES The following table describes what you could expect to pay as a portfolio investor. "Shareholder fees" are one-time expenses charged to you directly by the portfolio. "Annual operating expenses" are paid out of portfolio assets, so their effect is included in total return. Fees of the underlying funds are reflected in those funds' performance, and thus indirectly in portfolio performance. FEE TABLE (%)
SHAREHOLDER FEES -------------------------------------------------------------- None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------- Management fees 0.54 Distribution (12b-1) fees None Other expenses 0.39 ---- Total annual operating expenses 0.93 EXPENSE REDUCTION (0.43) ---- NET OPERATING EXPENSES* 0.50 ====
* Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding interest, taxes, and certain non-routine expenses). 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 portfolio or sold your shares at the end of each period. Your actual costs may be higher or lower. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------- $51 $253 $473 $1,104
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 51 52 SCHWAB MARKETMANAGER BALANCED PORTFOLIO TICKER SYMBOL SWOBX THE PORTFOLIO SEEKS CAPITAL GROWTH AND INCOME. STRATEGY TO PURSUE ITS GOAL, THE PORTFOLIO INVESTS AT LEAST 65% OF ITS TOTAL ASSETS IN OTHER MUTUAL FUNDS, including those available through Schwab's Mutual Fund OneSource(R) service. Typically, the actual percentage is considerably higher. The portfolio invests in stock, bond and money market funds, which the managers choose within the framework of an asset allocation strategy. Based on analysis of economic outlooks and market conditions, the managers determine whether and how much to adjust the portfolio's allocation. Within the stock fund allocation, the portfolio managers may allocate their investment among large-cap, small-cap and international stock funds. Within the bond fund allocation, the managers allocate investments among bond funds primarily based on the maturities and credit quality of their holdings. In choosing the underlying funds, the portfolio managers seek clearly defined investment strategies, strong performance histories and stable management, among other criteria. As of 10/31/99, the portfolio included 37 underlying funds. The performance information below shows you how performance has varied from year to year and how it averages out over time. ASSET ALLOCATION AMONG FUNDS Asset allocation is a strategy of investing specific percentages of a portfolio in various asset classes. The Balanced Portfolio's allocation is designed to provide a mix of the growth opportunities of stock investing with the income opportunities of bond and money market funds. Over the long term, the portfolio will generally reflect its target allocation, as shown below. The table also shows the highest and lowest allocations the portfolio could assign for each type of fund. The portfolio has the flexibility to adjust its allocations of large-cap, small-cap and international stock funds as well.
TARGET ALLOCATION ALLOCATION FLEXIBILITY ------------------------------------------- STOCK FUNDS 60% 50 - 70% large-cap 30% small-cap 15% international 15% BOND FUNDS 35% 25 - 45% MONEY MARKET FUNDS 5% 0 - 25%
PERFORMANCE Below are a chart and a table showing the portfolio's performance, as well as data on two unmanaged market indices. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that indices do not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31
97 98 99 ------------------- 18.51 13.59 25.77
BEST QUARTER: 18.58% Q4 1999 WORST QUARTER: -8.16% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR INCEPTION -------------------------------------------------------------- Portfolio 25.77 17.96 1 S&P 500(R)Index 21.04 26.65 2 Lehman Brothers Aggregate Bond Index -0.82 5.43 2
1 Inception: 11/18/96. 2 From 11/18/96. 52 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 53 SCHWAB MARKETMANAGER BALANCED PORTFOLIO Long-term investors seeking a blend of growth and income investments may want to consider this portfolio. MAIN RISKS STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the portfolio will fluctuate, which means that you could lose money. THE PORTFOLIO'S PARTICULAR ASSET ALLOCATION CAN HAVE A SIGNIFICANT EFFECT ON PERFORMANCE. The portfolio's neutral allocation is designed with long-term performance in mind, and does not ensure any particular type of performance over the short term. Because the risks and returns of different asset classes can vary widely over both the long term and the short term, the portfolio's performance could suffer if a particular asset class does not perform as expected. TO THE EXTENT THAT THE PORTFOLIO HAS EXPOSURE TO A GIVEN TYPE OF MUTUAL FUND, IT TAKES ON THE ASSOCIATED RISKS. The same factors that affect stock market performance generally affect stock funds. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. The values of certain types of stocks, such as small-cap stocks or international stocks, may fluctuate more widely in price than others. WITH BOND FUNDS, ONE MAJOR RISK IS THAT BOND PRICES GENERALLY FALL WHEN INTEREST RATES RISE. Underlying funds that focus on bonds with longer maturities tend to be more sensitive to this risk. Portfolio performance also could be affected if bonds held by its underlying funds go into default. Economic conditions can cause bond markets to fall in anticipation of greater risk of default, in which case funds that emphasize lower-quality bonds could suffer disproportionate losses. To minimize this risk, the portfolio intends to invest primarily in bond funds that invest primarily in investment-grade quality debt securities. Another risk is that certain bonds may be paid off, or "called," substantially earlier or later than expected. OTHER RISK FACTORS Because the portfolio managers have no control over the management of the underlying funds, decisions made by the underlying funds' managers could change the portfolio's effective asset allocation or hurt its performance. For example, if managers of underlying funds tended to favor cash, the portfolio's exposure to the stock market would be lowered. Similarly, if underlying funds make investments that don't perform as expected, the portfolio's performance could be affected. Additionally, the portfolio may actively buy and sell underlying fund shares, which will increase its portfolio turnover rate, and increase the likelihood of capital gain distributions. PORTFOLIO FEES AND EXPENSES The following table describes what you could expect to pay as a portfolio investor. "Shareholder fees" are one-time expenses charged to you directly by the portfolio. "Annual operating expenses" are paid out of portfolio assets, so their effect is included in total return. Fees of the underlying funds are reflected in those funds' performance, and thus indirectly in portfolio performance. FEE TABLE (%)
SHAREHOLDER FEES -------------------------------------------------------------- None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------- Management fees 0.54 Distribution (12b-1) fees None Other expenses 0.41 ---- Total annual operating expenses 0.95 EXPENSE REDUCTION (0.45) ---- NET OPERATING EXPENSES* 0.50 ====
* Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding interest, taxes, and certain non-routine expenses). 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 portfolio or sold your shares at the end of each period. Your actual costs may be higher or lower. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------- $51 $258 $482 $1,125
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 53 54 SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO TICKER SYMBOL SWOSX THE PORTFOLIO SEEKS LONG-TERM CAPITAL APPRECIATION. STRATEGY TO PURSUE ITS GOAL, THE PORTFOLIO INVESTS AT LEAST 65% OF ITS TOTAL ASSETS IN OTHER MUTUAL FUNDS, including those available through Schwab's Mutual Fund OneSource(R) service. The fund also has a policy of investing at least 65% of total assets in small-cap stock funds. Typically, the actual percentages for both policies are considerably higher. The portfolio managers regularly review the small-cap segment of the market to identify sectors or industries that offer the greatest potential for growth. The managers then screen the universe of small-cap funds based on a combination of quantitative measures-past performance, volatility, expenses-and qualitative evaluations of their investment objectives, management teams and current holdings. The portfolio managers meet frequently with the management teams of those small-cap funds that satisfy the screening criteria in order to gain a more complete understanding of their investment styles and strategies. In choosing the underlying funds, the portfolio managers seek clearly defined investment strategies, strong performance histories and stable management, among other criteria. As of 10/31/99, the portfolio included 24 underlying funds. Because the small-cap market can be volatile, the portfolio managers monitor and adjust the portfolio as necessary. In so doing, they seek to anticipate upcoming markets as well as respond to current conditions. SMALL-CAP STOCKS AND CAPITAL GROWTH Small-cap companies are those whose market capitalization places them at the smaller end of the spectrum of publicly traded companies. There are thousands of small-cap companies, which historically have made up approximately 20% of the total U.S. market capitalization. These companies are found in every industry, although they tend to be concentrated in high-growth sectors such as technology. Over the past 70 years, stocks of these companies have offered high long-term growth rates. At the same time, they have often been more volatile than large-cap stocks, sometimes suffering deep slumps and at other times enjoying high market enthusiasm. The performance information below shows you how the fund's performance compares to that of an index, which varies over time. PERFORMANCE Below are a chart and a table showing the portfolio's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and the index does not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31
98 99 ----------- 0.61 37.88
BEST QUARTER: 24.78% Q4 1999 WORST QUARTER: -18.97% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR INCEPTION -------------------------------------------------------------- Portfolio 37.88 14.77 1 Russell 2000(R)Index 21.26 6.88 2
1 Inception: 9/16/97. 2 From 9/16/97. 54 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 55 SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO For the long-term investor, a small-cap stock investment can be important because of the exposure it provides to a different segment of the stock market. MAIN RISKS STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the portfolio will fluctuate, which means that you could lose money. THE MAIN RISKS OF THIS PORTFOLIO ARE THOSE ASSOCIATED WITH SMALL-CAP STOCK FUNDS. The same factors that affect stock market performance generally affect all stock funds. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. Other factors may be ignored by the market as a whole but may affect stock prices in one or more industries (for example, rising oil prices may lead to a decline in airline stocks). HISTORICALLY, SMALL-CAP STOCK FUNDS HAVE BEEN RISKIER THAN FUNDS THAT FOCUS ON LARGE- AND MID-CAP STOCKS. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. In addition, during any period when small-cap stock funds perform less well than funds that focus on other types of stock or other types of investments -- bonds, for instance -- the portfolio's performance also will lag these investments. OTHER RISK FACTORS Because the portfolio managers have no control over the management of the underlying funds, decisions made by the underlying funds' managers could change the portfolio's investment profile or hurt its performance. For example, if managers of underlying funds tended to favor cash, the portfolio's exposure to the stock market would be lowered. Similarly, if underlying funds make investments that don't perform as expected, the portfolio's performance could be affected. Additionally, the portfolio may actively buy and sell underlying fund shares, which will increase its portfolio turnover rate, and increase the likelihood of capital gain distributions. PORTFOLIO FEES AND EXPENSES The following table describes what you could expect to pay as a portfolio investor. "Shareholder fees" are one-time expenses charged to you directly by the portfolio. "Annual operating expenses" are paid out of portfolio assets, so their effect is included in total return. Fees of the underlying funds are reflected in those funds' performance, and thus indirectly in portfolio performance. FEE TABLE (%)
SHAREHOLDER FEES -------------------------------------------------------------------------------- None ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) Management fees 0.54 Distribution (12b-1) fees None Other expenses 0.47 ------ Total annual operating expenses 1.01 EXPENSE REDUCTION (0.51) ------ NET OPERATING EXPENSES* 0.50 ======
* Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding interest, taxes, and certain non-routine expenses). 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 portfolio or sold your shares at the end of each period. Your actual costs may be higher or lower. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------------------------------------------------------- $51 $271 $508 $1,190
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 55 56 SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO TICKER SYMBOL SWOIX THE PORTFOLIO SEEKS LONG-TERM CAPITAL APPRECIATION. STRATEGY TO PURSUE ITS GOAL, THE PORTFOLIO INVESTS AT LEAST 65% OF ITS TOTAL ASSETS IN OTHER MUTUAL FUNDS, including those available through Schwab's Mutual Fund OneSource(R) service. The fund also has a policy of investing at least 65% of total assets in international stock funds. Typically, the actual percentages for both policies are considerably higher. The portfolio managers analyze global economic trends to target regions and countries that offer the greatest potential for growth. Based on their findings, they develop a country-by-country allocation that focuses typically on developed markets but also may include emerging markets. The managers then screen the universe of international stock funds based on a combination of quantitative measures-past performance, volatility, expenses-and qualitative evaluations of their investment objectives, country weightings, sector diversification, management teams and current holdings. The portfolio managers meet frequently with the management teams of those international stock funds that satisfy the screening criteria in order to gain a more complete understanding of their investment styles and strategies. In choosing the underlying funds, the portfolio managers seek clearly defined investment strategies, strong performance histories and stable management, among other criteria. As of 10/31/99, the portfolio included 23 underlying funds. Because international markets can be volatile, the portfolio managers monitor and adjust the portfolio as necessary. In so doing, they seek to anticipate upcoming markets as well as respond to current conditions. INTERNATIONAL STOCK FUNDS Approximately two-thirds of the world's market opportunities lie outside the United States. These include developed countries whose securities markets are established and whose economies are industrialized, as well as emerging markets, where industrialization and securities markets are in the process of developing. With so many opportunities available, it is difficult for any one mutual fund to maintain expertise in all industries and regions. The multi-fund approach offers a potential solution by allowing portfolio managers to assemble a combination of underlying funds whose strengths lie in different areas. The performance information below shows you how performance has varied from year to year and how it averages out over time. PERFORMANCE Below are a chart and a table showing the portfolio's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and the index does not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31 97 6.81 98 13.29 99 74.82
BEST QUARTER: 41.67% Q4 1999 WORST QUARTER:-16.35% Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
SINCE 1 YEAR INCEPTION ------------------------------------------------------------------------------- Portfolio 74.82 27.50 1 MSCI EAFE(R) Index 26.96 14.86 2
1 Inception: 10/16/96. 2 From 10/16/96. 56 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 57 SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO International stock funds offer access to many foreign markets that can be difficult for individual investors to reach. 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 portfolio will fluctuate, which means that you could lose money. THE MAIN RISKS OF THIS PORTFOLIO ARE THOSE ASSOCIATED WITH INTERNATIONAL STOCK FUNDS. The same factors that affect stock market performance generally affect all stock funds. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. Other factors may be ignored by the market as a whole but may affect stock prices in one or more industries (for example, rising oil prices may lead to a decline in airline stocks). INTERNATIONAL STOCK FUNDS CARRY ADDITIONAL RISKS. Changes in currency exchange rates can erode market gains or widen market losses for the underlying funds. International markets-even those that are well established-are often more volatile than those of the United States, for reasons ranging from a lack of reliable company information to the risk of political upheaval. These risks are more significant in emerging markets, where governments may be less stable, markets less liquid and economies less highly industrialized. In addition, during any period when international stock funds perform less well than funds that focus on other types of stocks or other types of investments -- bonds, for instance --the portfolio's performance also will lag these investments. OTHER RISK FACTORS Because the portfolio managers have no control over the management of the underlying funds, decisions made by the underlying funds' managers could change the portfolio's investment profile or hurt its performance. For example, if managers of underlying funds tended to favor cash, the portfolio's exposure to the stock market would be lowered. Similarly, if underlying funds make investments that don't perform as expected, such as certain foreign currency transactions, the portfolio's performance could be affected. Additionally, the portfolio may actively buy and sell underlying fund shares, which will increase its portfolio turnover rate, and increase the likelihood of capital gain distributions. PORTFOLIO FEES AND EXPENSES The following table describes what you could expect to pay as a portfolio investor. "Shareholder fees" are one-time expenses charged to you directly by the portfolio. "Annual operating expenses" are paid out of portfolio assets, so their effect is included in total return. Fees of the underlying funds are reflected in those funds' performance, and thus indirectly in portfolio performance. FEE TABLE (%)
SHAREHOLDER FEES -------------------------------------------------------------------------------- Redemption fee, charged only on shares you sell within 180 days of buying them and paid directly to the fund.* 1.50 ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------------------------- Management fees 0.54 Distribution (12b-1) fees None Other expenses 0.43 ------ Total annual operating expenses 0.97 EXPENSE REDUCTION (0.47) ------ NET OPERATING EXPENSES** 0.50 ======
* This fee does not apply to shares purchased before 5/1/00. ** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding interest, taxes and certain non-routine expenses). 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 portfolio or sold your shares at the end of each period. Your actual costs may be higher or lower. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------------------------------------------------------- $51 $262 $490 $1,147
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 57 58 FINANCIAL HIGHLIGHTS SCHWAB MARKETMANAGER GROWTH PORTFOLIO This section provides further details about the portfolio's financial history. "Total return" shows the percentage that an investor in the portfolio would have earned or lost during a given period, assuming all distributions were reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the portfolio's annual report (see back cover).
11/1/98 - 11/1/97 - 11/18/96 - 10/31/99 10/31/98 10/31/97 PER-SHARE DATA ($) -------------------------------------------------------------------------------- Net asset value at beginning of period 11.43 11.60 10.00 ---------------------------------- Income from investment operations: Net investment income 0.16 0.32 0.08 Net realized and unrealized gain on investments 2.91 0.11 1.66 ---------------------------------- Total income from investment operations 3.07 0.43 1.74 Less distributions: Dividends from net investment income (0.16) (0.29) (0.14) Dividends in excess of net investment income (0.05) -- -- Distributions from capital gains (0.23) (0.31) -- ---------------------------------- Total distributions (0.44) (0.60) (0.14) ---------------------------------- NET ASSET VALUE AT END OF PERIOD 14.06 11.43 11.60 ================================== Total return (%) 27.38 3.87 17.60 1 RATIOS/SUPPLEMENTAL DATA (%) -------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.50 0.50 0.50 2 Expense reductions reflected in above ratio 0.43 0.67 0.77 2 Ratio of net investment income to average net assets 1.23 2.66 2.07 2 Portfolio turnover rate 284 384 192 Net assets, end of period ($ x 1,000,000) 181 152 124
1 Not annualized. 2 Annualized. 58 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 59 FINANCIAL HIGHLIGHTS SCHWAB MARKETMANAGER BALANCED PORTFOLIO FINANCIAL HIGHLIGHTS This section provides further details about the portfolio's financial history. "Total return" shows the percentage that an investor in the portfolio would have earned or lost during a given period, assuming all distributions were reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the portfolio's annual report (see back cover).
11/1/98 - 11/1/97 - 11/18/96 - 10/31/99 10/31/98 10/31/97 PER-SHARE DATA ($) -------------------------------------------------------------------------------- Net asset value at beginning of period 11.36 11.38 10.00 --------------------------------- Income from investment operations: Net investment income 0.27 0.36 0.17 Net realized and unrealized gain on investments 2.11 0.18 1.34 --------------------------------- Total income from investment operations 2.38 0.54 1.51 Less distributions: Dividends from net investment income (0.28) (0.34) (0.13) Dividends in excess of net investment income (0.02) -- -- Distributions from capital gains -- (0.22) -- --------------------------------- Total distributions (0.30) (0.56) (0.13) --------------------------------- NET ASSET VALUE AT END OF PERIOD 13.44 11.36 11.38 ================================= Total return (%) 21.28 4.89 15.27 1 RATIOS/SUPPLEMENTAL DATA (%) -------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.50 0.50 0.50 2 Expense reductions reflected in above ratio 0.45 0.69 0.95 2 Ratio of net investment income to average net assets 2.20 3.21 3.03 2 Portfolio turnover rate 244 353 171 Net assets, end of period ($ x 1,000,000) 122 93 61
1 Not annualized. 2 Annualized. ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 59 60 FINANCIAL HIGHLIGHTS SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO This section provides further details about the portfolio's financial history. "Total return" shows the percentage that an investor in the portfolio would have earned or lost during a given period, assuming all distributions were reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the portfolio's annual report (see back cover).
11/1/98 - 11/1/97 - 9/16/97 - 10/31/99 10/31/98 10/31/97 PER-SHARE DATA ($) -------------------------------------------------------------------------------- Net asset value at beginning of period 8.51 9.93 10.00 ---------------------------------- Income from investment operations: Net investment income 0.24 0.21 0.02 Net realized and unrealized gain (loss) on investments 2.34 (1.36) (0.09) ---------------------------------- Total income (loss) from investment operations 2.58 (1.15) (0.07) Less distributions: Dividends from net investment income (0.05) (0.21) -- Dividends in excess of net investment income -- (0.03) -- Distributions from capital gains -- (0.03) -- ---------------------------------- Total distributions (0.05) (0.27) -- ---------------------------------- NET ASSET VALUE AT END OF PERIOD 11.04 8.51 9.93 ================================== Total return (%) 30.38 (11.84) (0.70) 1 RATIOS/SUPPLEMENTAL DATA (%) -------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.50 0.50 0.50 2 Expense reductions reflected in above ratio 0.51 0.69 0.75 2 Ratio of net investment income to average net assets 2.23 2.65 1.29 2 Portfolio turnover rate 145 166 10 Net assets, end of period ($ x 1,000,000) 123 129 207
1 Not annualized. 2 Annualized. 60 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 61 FINANCIAL HIGHLIGHTS SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO FINANCIAL HIGHLIGHTS This section provides further details about the portfolio's financial history. "Total return" shows the percentage that an investor in the portfolio would have earned or lost during a given period, assuming all distributions were reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the portfolio's annual report (see back cover).
11/1/98 - 11/1/97 - 11/1/96 - 10/16/96 - 10/31/99 10/31/98 10/31/97 10/31/96 PER-SHARE DATA ($) ---------------------------------------------------------------------------------------------------- Net asset value at beginning of period 10.58 10.86 9.91 10.00 ----------------------------------------------------- Income from investment operations: Net investment income 0.11 0.34 0.17 -- Net realized and unrealized gain (loss) on investments 4.28 0.02 0.95 (0.09) ----------------------------------------------------- Total income (loss) from investment operations 4.39 0.36 1.12 (0.09) Less distributions: Dividends from net investment income (0.11) (0.33) (0.17) -- Dividends in excess of net investment income (0.02) (0.01) -- -- Distributions from capital gains -- (0.30) -- -- ----------------------------------------------------- Total distributions (0.13) (0.64) (0.17) -- ----------------------------------------------------- NET ASSET VALUE AT END OF PERIOD 14.84 10.58 10.86 9.91 ===================================================== Total return (%) 41.92 3.55 11.47 (0.90) 1 RATIOS/SUPPLEMENTAL DATA (%) ---------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.50 0.50 0.50 0.50 2 Expense reductions reflected in above ratio 0.47 0.70 0.80 2.91 2 Ratio of net investment income to average net assets 0.94 2.96 1.40 0.52 2 Portfolio turnover rate 249 236 179 -- Net assets, end of period ($ x 1,000,000) 104 74 81 59
1 Not annualized. 2 Annualized. ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 61 62 [Blank page] 63 SCHWAB BOND INDEX FUNDS ABOUT THE FUNDS The Schwab Bond Index Funds share the same basic INVESTMENT STRATEGY: They are designed to track the price and yield performance of a bond index. Each fund tracks a different index. This strategy distinguishes an index fund from an "actively managed" fund. Instead of choosing investments based on judgments about future market or interest rate movements, a portfolio manager LOOKS TO AN INDEX to determine which securities the fund should own. By investing in bonds, the funds seek to provide CURRENT INCOME to shareholders. Each fund also seeks to lower risk by DIVERSIFYING BROADLY across the various sectors of the bond market represented in its index. The funds are designed FOR LONG-TERM INVESTING. Their performance will fluctuate over time and, as with all investments, future performance may differ from past performance. BOND FUNDS 63 64 SCHWAB SHORT-TERM BOND MARKET INDEX FUND TICKER SYMBOL SWBDX THE FUND SEEKS CURRENT INCOME BY TRACKING THE PERFORMANCE OF THE LEHMAN BROTHERS MUTUAL FUND SHORT (1 - 5 YEAR) GOVERNMENT/CORPORATE BOND INDEX. INDEX THE LEHMAN BROTHERS MUTUAL FUND SHORT (1 - 5 YEAR) GOVERNMENT/CORPORATE BOND INDEX INCLUDES INVESTMENT-GRADE GOVERNMENT AND CORPORATE BONDS that are denominated in U.S. dollars and have maturities of one to five years. Investment-grade securities are rated in the four highest credit rating categories (AAA-BBB-). Bonds are represented in the index in proportion to their market value. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN BONDS THAT ARE INCLUDED IN THE INDEX. The fund normally invests at least 65% of total assets in these securities, and typically far more. If a portfolio security falls below investment-grade, the fund may continue to hold it if the investment adviser believes it would benefit the fund. Because it would be impractical to invest in every bond in the index, the fund uses quantitative techniques to assemble a portfolio whose performance is expected to track that of the index. The fund seeks to remain close to the index in its dollar-weighted average maturity. Like many index funds, the fund may enter into swap agreements, in which one security is exchanged for another, and may invest in futures contracts and lend securities. The fund would use these securities and techniques in seeking to enhance total return and minimize the gap between its performance and that of the index. However, because of fund expenses, the fund's performance normally is somewhat below that of the index. SHORT-TERM BONDS As a bond approaches maturity, its market value typically approaches its par value (the amount a bondholder receives when the bond matures). Because of this, short-term bond prices typically do not react as strongly to interest rate changes. In exchange for this lower volatility, short-term bonds typically (though not always) offer lower yields than longer term bonds. The index focuses on three bond market sectors, in this proportion:
BOND TYPE ------------------------------------------------------------------------------- U.S. government 75.7% U.S. corporate 19.1% Dollar-denominated foreign issues 5.2%
The index has approximately 1,804 bonds and a dollar-weighted average maturity of 2.78 years. (All figures as of 8/31/1999). The performance information below shows you how the fund's performance compares to its index, which varies over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the index does not include any costs of investment. The fund adopted its current goal and strategies on 11/1/1997; performance before that time may have been different had its current goal and strategy been in place. ANNUAL TOTAL RETURNS (%) as of 12/31 92 6.08 93 7.84 94 -2.82 95 10.90 96 4.00 97 6.88 98 6.96
BEST QUARTER: 4.32% Q3 1992 WORST QUARTER: -2.09% Q1 1994 YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: 1.24% AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1998
SINCE 1 YEAR 5 YEARS INCEPTION ------------------------------------------------------------------------------- Fund 6.96 5.08 6.04 1 Lehman Brothers Short Government/Corporate Bond Index 7.63 6.23 6.72 2
1 Inception: 11/5/1991. 2 From: 11/5/1991. 64 BOND FUNDS 65 SCHWAB SHORT-TERM BOND MARKET INDEX FUND Investors who are seeking a diversified source of current income and want potentially lower volatility and lower returns, compared to a long-term fund, may want to consider this fund. MAIN RISKS BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money. YOUR INVESTMENT FOLLOWS THE SHORT-TERM BOND MARKET, AS MEASURED BY THE INDEX. The fund is designed to follow the index during upturns as well as downturns. Because of its indexing strategy, the fund will not take steps to reduce market exposure or to lessen the effects of a declining market. WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's share price. The fund's short average maturity is designed to reduce this risk, but will not eliminate it. A fall in interest rates could hurt the fund as well, by lowering its yield. This is because issuers tend to pay off their bonds when interest rates fall, often forcing the fund to reinvest in lower-yielding securities. DIFFERENT TYPES OF BONDS CARRY DIFFERENT TYPES OF RISKS. To the extent that the fund is exposed to a given sector of the bond market, it takes on the risks of that sector. Prices of foreign bonds may be more volatile than those of comparable bonds from U.S. issuers, for reasons ranging from lack of reliable issuer information to the risk of political upheaval. Although the risk of default is generally considered unlikely, any default on the part of a portfolio investment could cause the fund's share price or yield to fall. OTHER RISK FACTORS Although the fund's main risks are those associated with its bond investments, its other investment strategies also involve risks. For example, the fund's use of quantitative techniques may increase the gap between the performance of the fund and that of the index. Futures contracts, which the fund uses to gain exposure to bonds for its cash balances, also could cause the fund to track the index less closely if they don't perform as expected. The fund also may lend a portion of its securities to certain financial institutions in order to earn income. The fund's loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. The fund also could lose money if a swap agreement doesn't perform as expected or if the counterparty to a swap agreement fails to honor the agreement. Additionally, the fund may have a relatively high portfolio turnover rate, which could increase transaction costs and the likelihood of capital gain distributions. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the fund's total return. FEE TABLE (%)
SHAREHOLDER FEES ------------------------------------------------------------------------------- None ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) Management fees 0.30 Distribution (12b-1) fees None Other expenses 0.36 ------ Total annual operating expenses 0.66 EXPENSE REDUCTION (0.31) ------ NET OPERATING EXPENSES* 0.35 ======
* Guaranteed by Schwab and the investment adviser through 10/31/2000. Designed to help you compare expenses, this example uses the same assumptions as other mutual fund prospectuses: a $10,000 investment and 5% return each year. 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. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- $67 $211 $368 $822
BOND FUNDS 65 66 SCHWAB SCHWAB TOTAL BOND MARKET INDEX FUND TICKER SYMBOL SWLBX THE FUND SEEKS CURRENT INCOME BY TRACKING THE PERFORMANCE OF THE LEHMAN BROTHERS AGGREGATE BOND INDEX. INDEX THE LEHMAN BROTHERS AGGREGATE BOND INDEX INCLUDES INVESTMENT-GRADE GOVERNMENT, CORPORATE, MORTGAGE-, COMMERCIAL MORTGAGE- AND ASSET-BACKED BONDS that are denominated in U.S. dollars and have maturities longer than one year. Investment-grade securities are rated in the four highest rating categories (AAA-BBB-). Bonds are represented in the index in proportion to their market value. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN BONDS THAT ARE INCLUDED IN THE INDEX. The fund normally invests at least 65% of total assets in these securities. If a portfolio security falls below investment-grade, the fund may continue to hold it if the investment adviser believes it would benefit the fund. Because it would be impractical to invest in every bond in the index, the fund uses quantitative techniques to assemble a portfolio whose performance is expected to track that of the index. The fund seeks to remain close to the index in its dollar-weighted average maturity. Like many index funds, the fund may enter into swap agreements, in which the payments or investment performance of one security or asset is exchanged for another. The fund also may invest in mortgage dollar rolls, which involve the fund selling mortgage-backed securities and simultaneously agreeing to later repurchase nearly identical securities at a stated price. In addition, the fund may invest in futures contracts and lend securities in seeking to enhance total return and minimize the gap between its performance and that of the index. However, because of fund expenses, the fund's performance normally is somewhat below that of the index. THE BOND MARKET The fund's index focuses on five main sectors of the bond market, in this proportion:
BOND TYPE ------------------------------------------------------------------------------- U.S. government 43.0% Mortgage-backed 33.7% U.S. corporate 16.4% Dollar-denominated foreign issues 4.5% Asset-backed 1.2% Commercial MBS 1.2%
The index has approximately 5,392 bonds and a dollar-weighted average maturity of 9.03 years. (All figures as of 8/31/1999). By investing in longer term bonds, the fund seeks to earn higher yields over time than the Schwab Short-Term Bond Market Index Fund, although with more share price volatility than that fund. The performance information below shows you how the fund's performance compares to its index, which varies over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the index does not include any costs of investment. The fund adopted its current goal and strategies on 11/1/1997; performance before that time may have been different had its current goal and strategy been in place. ANNUAL TOTAL RETURNS (%) as of 12/31 94 -5.74 95 22.47 96 1.06 97 9.98 98 8.41
BEST QUARTER: 6.79% Q2 1995 WORST QUARTER: -4.83% Q1 1994 YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: -0.99% AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1998
SINCE 1 YEAR 5 YEARS INCEPTION ------------------------------------------------------------------------------- Fund 8.41 6.82 7.13 1 Lehman Brothers Aggregate Bond Index 8.69 7.27 7.13 2
1 Inception: 3/5/1993. 2 From: 3/5/1993. 66 BOND FUNDS 67 SCHWAB TOTAL BOND MARKET INDEX FUND This fund is designed for investors seeking to fill the fixed income component to their asset allocation plan, and who can accept higher risk in exchange for potentially higher long-term returns compared to a short-term fund. MAIN RISKS BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money. YOUR INVESTMENT FOLLOWS THE BOND MARKET, AS MEASURED BY THE INDEX. The fund is designed to follow the index during upturns as well as downturns. Because of its indexing strategy, the fund will not take steps to reduce market exposure or to lessen the effects of a declining market. WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's share price. The longer the fund's dollar-weighted average maturity, the more sensitive to interest rate movements its share price is likely to be. When interest rates fall, issuers tend to pay off their bonds, which may force the fund to reinvest in lower-yielding securities. DIFFERENT TYPES OF BONDS CARRY DIFFERENT TYPES OF RISKS. To the extent that the fund is exposed to a given sector of the bond market, it takes on the risks of that sector. With certain mortgage- and asset-backed bonds, a primary risk is the possibility that the bonds may be paid off earlier or later than expected. Either situation could hurt the fund's yield or share price. Prices of foreign bonds may be more volatile than those of comparable bonds from U.S. issuers, for reasons ranging from lack of reliable issuer information to the risk of political upheaval. Although the risk of default is generally considered unlikely, any default on the part of a portfolio investment could cause the fund's share price or yield to fall. OTHER RISK FACTORS Although the fund's main risks are those associated with its bond investments, its other investment strategies also involve risks. For example, the fund's use of quantitative techniques may increase the gap between the performance of the fund and that of the index. Futures contracts, which the fund uses to gain exposure to bonds for its cash balances, also could cause the fund to track the index less closely if they don't perform as expected. The fund also may lend a portion of its securities to certain financial institutions in order to earn income. The fund's loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. The fund also could lose money if a swap agreement doesn't perform as expected or if the counterparty to a swap agreement fails to honor the agreement. The fund's mortgage dollar rolls could lose money if the price of the mortgage-backed securities falls below the agreed repurchase price, or if the counterparty is unable to honor the agreement. Additionally, the fund may have a relatively high portfolio turnover rate, which could increase transaction costs and the likelihood of capital gain distributions. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the fund's total return. FEE TABLE (%)
SHAREHOLDER FEES ------------------------------------------------------------------------------- None ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) Management fees 0.30 Distribution (12b-1) fees None Other expenses 0.33 ------ Total annual operating expenses 0.63 EXPENSE REDUCTION (0.28) ------ NET OPERATING EXPENSES* 0.35 ======
* Guaranteed by Schwab and the investment adviser through 10/31/2000. Designed to help you compare expenses, this example uses the same assumptions as other mutual fund prospectuses: a $10,000 investment and 5% return each year. 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. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------------------------------------------------------- $64 $202 $351 $786
BOND FUNDS 67 68 FINANCIAL HIGHLIGHTS SCHWAB SHORT-TERM BOND MARKET INDEX FUND This section provides further details about the fund's financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
Fiscal periods ended 8/31 1999 1998 1997 1996 1995 PER-SHARE DATA ($) ---------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 9.90 9.74 9.67 9.84 9.81 ------------------------------------------------------- Income from investment operations: Net investment income 0.50 0.56 0.59 0.59 0.59 Net realized and unrealized gain (loss) on investments (0.24) 0.17 0.07 (0.17) 0.03 ------------------------------------------------------- Total income from investment operations 0.26 0.73 0.66 0.42 0.62 Less distributions: Dividends from net investment income (0.50) (0.57) (0.59) (0.59) (0.59) ------------------------------------------------------- NET ASSET VALUE AT END OF PERIOD 9.66 9.90 9.74 9.67 9.84 ======================================================= Total return (%) 2.66 7.64 6.96 4.39 6.61 RATIOS/SUPPLEMENTAL DATA (%) ---------------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.35 0.46 0.49 0.49 0.58 Expense reductions reflected in above ratio 0.42 0.39 0.33 0.31 0.23 Ratio of net investment income to average net assets 5.11 5.58 6.02 6.03 6.11 Portfolio turnover rate 195 128 71 80 203 Net assets, end of period ($ x 1,000,000) 218 157 127 134 157
68 BOND FUNDS 69 FINANCIAL HIGHLIGHTS SCHWAB TOTAL BOND MARKET INDEX FUND FINANCIAL HIGHLIGHTS This section provides further details about the fund's financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
Fiscal periods ended 8/31 1999 1998 1997 1996 1995 PER-SHARE DATA ($) ----------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 10.18 9.75 9.38 9.80 9.33 --------------------------------------------------------- Income from investment operations: Net investment income 0.55 0.60 0.65 0.65 0.69 Net realized and unrealized gain (loss) on investments (0.53) 0.43 0.37 (0.42) 0.47 --------------------------------------------------------- Total income from investment operations 0.02 1.03 1.02 0.23 1.16 Less distributions: Dividends from net investment income (0.55) (0.60) (0.65) (0.65) (0.69) Distributions from net realized gain on investments (0.07) -- -- -- -- --------------------------------------------------------- Total distributions (0.62) (0.60) (0.65) (0.65) (0.69) NET ASSET VALUE AT END OF PERIOD 9.58 10.18 9.75 9.38 9.80 ========================================================= Total return (%) 0.14 10.83 11.18 2.29 13.03 RATIOS/SUPPLEMENTAL DATA (%) ----------------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.35 0.31 0.20 -- -- Expense reductions reflected in above ratio 0.39 0.51 0.98 1.17 1.18 Ratio of net investment income to average net assets 5.55 5.86 6.74 6.67 7.38 Portfolio turnover rate 174 285 51 66 240 Net assets, end of period ($ x 1,000,000) 480 294 25 23 13
BOND FUNDS 69 70 [Blank Page] 71 SCHWAB YIELDPLUS FUND(TM) BOND FUNDS 71 72 SCHWAB YIELDPLUS FUND(TM) TICKER SYMBOLS INVESTOR SHARES SWYPX SELECT SHARES(R) SWYSX THE FUND SEEKS HIGH CURRENT INCOME WITH MINIMAL CHANGES IN SHARE PRICE. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE (HIGH AND CERTAIN MEDIUM QUALITY) BONDS. These may include fixed-, variable- or floating-rate corporate, mortgage-backed and asset-backed debt securities from U.S. and foreign issuers. In choosing securities, the fund's manager seeks to maximize current income within the limits of the fund's credit and maturity policies. To help maintain a very high degree of share price stability and preserve investors' capital, the fund seeks to keep the average effective maturity of its overall portfolio at one year or less. However, in seeking to enhance its potential yields, the fund may invest in bonds with effective or final maturities of any length and may invest up to 25% of assets in lower quality bonds (sometimes called junk bonds) that are rated as low as BB or Ba by at least one nationally recognized rating service or are the unrated equivalent. The investment adviser's credit research department analyzes and monitors the securities that the fund owns or is considering buying. The manager may adjust the fund's holdings or its average effective maturity based on actual or anticipated changes in interest rates or credit quality. In the event a portfolio security was downgraded below B, the manager would promptly sell the security. The manager also may use risk management techniques, including futures contracts, swap agreements and other derivatives, in seeking to reduce share price volatility increase income and otherwise manage the fund's exposure to investment risks. The fund's investment strategy is designed to offer the potential for somewhat higher yields than a money market fund, although unlike a money market fund, its share price will fluctuate. In exchange for seeking minimal fluctuation in share price, the fund may offer lower long-term performance than stock investments or certain other bond investments. RISK MANAGEMENT The fund may use a variety of techniques to manage risk and increase income. Certain types of derivatives (investments whose value is based on one or more securities, rates or indices) can be cost-effective risk management tools. For example, the fund may buy and sell futures contracts to manage interest rate changes. By doing this, the fund has the potential to reduce the share price volatility that tends to be a characteristic of bond funds. These investments such as swap agreements may produce additional income for the fund. 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. The fund has two share classes, which have different minimum investments and different costs. For information on choosing a class, see page 93. 72 BOND FUNDS 73 SCHWAB YIELDPLUS FUND(TM) Investors with investment horizons of one year or more who are seeking an alternative to a money fund or other fixed-income fund may want to consider this fund. MAIN RISKS INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield reflects current interest rates, the fund's yield will change over time. During periods when interest rates are low, the fund's yield (and total return) also may be low. Changes in interest rates also may affect the fund's share price: a sharp rise in interest rates could cause the fund's share price to fall. This risk is greater when the fund holds bonds with longer maturities. THE FUND IS NOT A MONEY MARKET FUND OR A BANK DEPOSIT. Its shares are not insured or guaranteed. Because the fund's share price may move up and down, the value of your investment in the fund will fluctuate, which means you could lose money. THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the risk of default is generally considered unlikely, any default on the part of a portfolio investment could cause the fund's share price or yield to fall. This risk is greater with lower-quality bonds. SOME INVESTMENTS CARRY ADDITIONAL RISKS. To the extent that the manager decides to invest in foreign or lower quality bonds, the fund takes on a greater exposure to certain risks. Prices of foreign bonds may be more volatile than those of comparable bonds from U.S. issuers, for reasons ranging from lack of reliable issuer information to the risk of political upheaval. Prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about an issuer, an industry or the overall economy. With certain mortgage- and asset-backed bonds, a primary risk is the possibility that the bonds may be paid off earlier or later than expected. Either situation could cause the fund to hold securities paying lower than market rates of interest, which could hurt the fund's yield or share price. THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the extent that the manager anticipates interest rate trends imprecisely, the fund could miss yield opportunities or its share price could fall. OTHER MAIN RISK FACTORS While the fund intends to use techniques to manage risk and increase income, they could hurt the fund's performance if they don't perform as expected. For example, if the fund uses a technique involving a derivative, such as a futures contract, for the purpose of offsetting price changes in the fund's portfolio, but the technique does not precisely offset the price changes, the fund's share price could fall. The fund's performance also could be hurt if the counterparty to a derivative did not honor its contractual obligations to the fund. The cost of derivatives may have the effect of increasing fund expenses. While the decision to use or not use a given risk management technique depends on market conditions, these costs could at times outweigh the benefits the fund realizes from these techniques. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder Fees" are one-time expenses charged to you directly by the fund. "Annual Operating Expenses" are paid out of fund assets, so their effect is included in the total return for each share class. FEE TABLE (%)
INVESTOR SELECT SHARES SHARES(R) ------------------------------------------------------------------------------- SHAREHOLDER FEES (% OF TRANSACTION AMOUNT) ------------------------------------------------------------------------------- Redemption fee, charged only on shares you sell within 90 days of buying them 0.25 0.25 ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) ------------------------------------------------------------------------------- Management fees 0.35 0.35 Distribution (12b-1) fees None None Other expenses* 0.39 0.24 ------------------------ Total annual operating expenses 0.74 0.59 EXPENSE REDUCTION 0.19 0.19 ------------------------ NET OPERATING EXPENSES** 0.55 0.40 ========================
* Based on estimated expenses for the current fiscal year. ** Guaranteed by Schwab and the investment adviser through 10/31/2000. 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. ESTIMATED EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS ------------------------------------------------------------------------------- Investor Shares $59 $221 Select Shares $44 $173
BOND FUNDS 73 74 [Blank Page] 75 SCHWAB TAX-FREE BOND FUNDS ABOUT THE FUNDS The Schwab Tax-Free Bond Funds seek to provide HIGH CURRENT INCOME free from federal income tax. Each fund has the same investment goal, but uses a DIFFERENT STRATEGY. Because these funds invest in municipal bonds, their dividends generally are free from federal income tax. Each fund also seeks to lower risk by investing across different sectors of the INVESTMENT-GRADE municipal bond market. The funds are designed for LONG-TERM INVESTING. Their performance will fluctuate over time and, as with all investments, future performance may differ from past performance. BOND FUNDS 75 76 SCHWAB SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND TICKER SYMBOL SWITX THE FUND SEEKS HIGH CURRENT INCOME THAT IS EXEMPT FROM FEDERAL INCOME TAX, CONSISTENT WITH CAPITAL PRESERVATION. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES -- THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA-BBB-). The fund normally invests at least 80% of total assets in these securities, and typically far more. Interest from these securities is free from federal income tax and federal alternative minimum tax. To help preserve investors' capital, the fund seeks to keep the average maturity of its overall portfolio between two and five years. The fund may invest in fixed-, variable- or floating-rate securities from state issuers around the country and from municipal agencies, U.S. territories and possessions. These may include general obligation issues, which typically are backed by the issuer's ability to levy taxes, and revenue issues, which typically are backed by a stream of revenue from a given source, such as an electric utility or a public water system. The fund may invest more than 25% of total assets in municipal securities financing similar projects, and may also invest in municipal notes. Many of the fund's securities carry credit enhancements (such as bond insurance) or liquidity enhancements (such as a letter of credit), which are designed to provide incremental levels of creditworthiness or liquidity. In choosing securities, the fund's manager seeks to maximize current income within the limits of the fund's credit and average maturity standards. The investment adviser's credit research department analyzes and monitors the securities that the fund owns or is considering buying. If a portfolio security falls below investment-grade, the fund may continue to hold it if the investment adviser believes it would benefit the fund. The manager may adjust the fund's holdings or its average maturity based on actual or anticipated changes in interest rates or credit quality. During unusual market conditions, the fund may invest in taxable securities as a temporary defensive measure. In this case, the fund would not be pursuing its goal. SHORTER MATURITIES As a bond approaches maturity, its market value typically moves closer to its par value (the amount of the bond's principal value, which a bondholder receives when the bond matures). Investing in short- and intermediate-term bonds is a common strategy for reducing price volatility and other risks. In exchange for these lower risks, short- and intermediate-term bonds typically (though not always) offer lower yields than longer term bonds. The performance information below shows you how the fund's performance compares to its index, which varies over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the index does not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31 94 -1.12 95 9.28 96 3.54 97 5.17 98 4.78
BEST QUARTER: 3.00% Q1 1995 WORST QUARTER: -2.33% Q1 1994 YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: 0.53%
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1998 ------------------------------------------------------------------------------- SINCE 1 YEAR 5 YEARS INCEPTION ------------------------------------------------------------------------------- Fund 4.78 4.28 4.57 1 Lehman Brothers Three-Year Municipal Bond Index 5.20 4.91 4.92 2
1 Inception: 4/21/1993. 2 From: 4/21/1993. 76 BOND FUNDS 77 SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND MAIN RISKS BOND 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. WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's share price. The fund's short-to-intermediate maturity is designed to reduce this risk, but will not eliminate it. A fall in interest rates could hurt the fund as well, by lowering its yield. This is because issuers tend to pay off their bonds when interest rates fall, often forcing the fund to reinvest in lower-yielding securities. STATE AND REGIONAL FACTORS COULD AFFECT THE FUND'S PERFORMANCE. To the extent that the fund invests in securities from a given state or geographic region, its share price and performance could be affected by local, state and regional factors, including erosion of the tax base and changes in the economic climate. National governmental actions also could affect performance. Because the fund is non-diversified, it may divide its assets among fewer issuers than a diversified fund. This means that the fund could increase its exposure to the risks of a given issuer. THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the risk of default generally is considered unlikely with investment-grade municipal securities, any default on the part of a portfolio investment could cause the fund's share price or yield to fall. The fund's emphasis on quality and preservation of capital also could cause it to underperform certain other types of bond investments, particularly those that take greater maturity and credit risks. At the same time, some of the fund's investments may have greater risks than securities in taxable bond funds. THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the extent that the manager anticipates interest rate trends imprecisely, the fund could miss yield opportunities or its share price could fall. IF CERTAIN TYPES OF INVESTMENTS THE FUND BUYS AS TAX EXEMPT ARE LATER RULED TO BE TAXABLE, A PORTION OF THE FUND'S INCOME COULD BE TAXABLE. Any defensive investments in taxable securities could generate taxable income. Also, some types of municipal securities produce income that is subject to the federal alternative minimum tax (AMT). THE FUND IS NOT DESIGNED TO OFFER SUBSTANTIAL CAPITAL APPRECIATION. In exchange for its goal of capital preservation, the fund may offer lower long-term performance than stock investments or certain other types of bond investments. Individuals in higher tax brackets who are seeking tax-free income along with the potential for lower volatility may want to consider this fund. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the fund's total return.
FEE TABLE (%) ------------------------------------------------------------------------------- SHAREHOLDER FEES ------------------------------------------------------------------------------- None ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) ------------------------------------------------------------------------------- Management fees 0.30 Distribution (12b-1) fees None Other expenses 0.40 -------- Total annual operating expenses 0.70 EXPENSE REDUCTION (0.21) -------- NET OPERATING EXPENSES* 0.49 ========
* Guaranteed by Schwab and the investment adviser through 10/31/2000 (excluding interest, taxes and certain non-routine expenses). Designed to help you compare expenses, this example uses the same assumptions as other mutual fund prospectuses: a $10,000 investment and 5% return each year. 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.
------------------------------------------------------------------------------- EXPENSES ON A $10,000 INVESTMENT ------------------------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------------------------------------------------------- $72 $224 $390 $871
BOND FUNDS 77 78 SCHWAB SCHWAB LONG-TERM TAX-FREE BOND FUND TICKER SYMBOL SWNTX THE FUND SEEKS HIGH CURRENT INCOME THAT IS EXEMPT FROM FEDERAL INCOME TAX, CONSISTENT WITH CAPITAL PRESERVATION. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES -- THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA-BBB-). The fund normally invests at least 80% of total assets in these securities, and typically far more. Interest from these securities is free from federal income tax and federal alternative minimum tax. The fund seeks to maintain an average maturity in its overall portfolio of at least ten years. The fund may invest in fixed-, variable- or floating-rate securities from state issuers around the country and from municipal agencies, U.S. territories and possessions. These may include general obligation issues, which typically are backed by the issuer's ability to levy taxes, and revenue issues, which typically are backed by a stream of revenue from a given source, such as an electric utility or a public water system. The fund may invest more than 25% of total assets in municipal securities financing similar projects, and may also invest in municipal notes. Many of the fund's securities carry credit enhancements (such as bond insurance) or liquidity enhancements (such as a letter of credit), which are designed to provide incremental levels of creditworthiness or liquidity. In choosing securities, the fund's manager seeks to maximize current income within the limits of the fund's credit and average maturity standards. The investment adviser's credit research department analyzes and monitors the securities that the fund owns or is considering buying. If a portfolio security falls below investment-grade, the fund may continue to hold it if the investment adviser believes it would benefit the fund. The manager may adjust the fund's holdings or its average maturity based on actual or anticipated changes in interest rates or credit quality. During unusual market conditions, the fund may invest in taxable securities as a temporary defensive measure. In this case, the fund would not be pursuing its goal. MATURITY AND YIELD Bond yields typically are higher the longer the bond's maturity. By investing in longer term bonds, the fund seeks to earn higher yields over time than the Schwab Short/Intermediate Tax-Free Bond Fund. Maintaining a longer average maturity does carry certain risks, and investors should expect this fund's share price to fluctuate more than that of the Schwab Short/Intermediate Tax-Free Bond Fund. The performance information below shows you how the fund's performance compares to its index, which varies over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the index does not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31 93 13.61 94 -7.04 95 18.14 96 4.18 97 9.83 98 6.14
BEST QUARTER: 8.03% Q1 1995 WORST QUARTER: -5.88% Q1 1994 YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: -5.21% AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1998 ------------------------------------------------------------------------------- SINCE 1 YEAR 5 YEARS INCEPTION ------------------------------------------------------------------------------- Fund 6.14 5.93 6.97 1 Lehman Brothers General Municipal Bond Index 6.48 6.24 7.04 2
1 Inception: 9/11/1992. 2 From: 9/11/1992. 78 BOND FUNDS 79 SCHWAB LONG-TERM TAX-FREE BOND FUND MAIN RISKS BOND 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. WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's share price. The fund's comparatively long maturity will tend to make it more sensitive to this risk than funds with shorter average maturities. STATE AND REGIONAL FACTORS COULD AFFECT THE FUND'S PERFORMANCE. To the extent that the fund invests in securities from a given state or geographic region, its share price and performance could be affected by local, state and regional factors, including erosion of the tax base and changes in the economic climate. National governmental actions also could affect performance. Because the fund is non-diversified, it may divide its assets among fewer issuers than a diversified fund. This means that the fund could increase its exposure to the risks of a given issuer. THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the risk of default generally is considered unlikely with investment-grade municipal securities, any default on the part of a portfolio investment could cause the fund's share price or yield to fall. The fund's emphasis on quality and preservation of capital also could cause it to underperform certain other types of bond investments, particularly those that take greater maturity and credit risks. At the same time, some of the fund's investments may have greater risks than securities in taxable bond funds. THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the extent that the manager anticipates interest rate trends imprecisely, the fund could miss yield opportunities or its share price could fall. IF CERTAIN TYPES OF INVESTMENTS THE FUND BUYS AS TAX EXEMPT ARE LATER RULED TO BE TAXABLE, A PORTION OF THE FUND'S INCOME COULD BE TAXABLE. Any defensive investments in taxable securities could generate taxable income. Also, some types of municipal securities produce income that is subject to the federal alternative minimum tax (AMT). THE FUND IS NOT DESIGNED TO OFFER SUBSTANTIAL CAPITAL APPRECIATION. In exchange for its goal of capital preservation, the fund may offer lower long-term performance than stock investments or certain other types of bond investments. This fund is designed for individuals in higher tax brackets who are interested in high current tax-free income and can accept a higher degree of risk to their investment. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the fund's total return.
FEE TABLE (%) ------------------------------------------------------------------------------- SHAREHOLDER FEES ------------------------------------------------------------------------------- None ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) ------------------------------------------------------------------------------- Management fees 0.30 Distribution (12b-1) fees None Other expenses 0.39 -------- Total annual operating expenses 0.69 EXPENSE REDUCTION (0.20) -------- NET OPERATING EXPENSES* 0.49 ========
* Guaranteed by Schwab and the investment adviser through 10/31/2000 (excluding interest, taxes and certain non-routine expenses). 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. 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.
EXPENSES ON A $10,000 INVESTMENT ------------------------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------------------------------------------------------- $70 $221 $384 $859
BOND FUNDS 79 80 FINANCIAL HIGHLIGHTS SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND This section provides further details about the fund's financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
Fiscal periods ended 8/31 1999 1998 1997 1996 1995 --------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) --------------------------------------------------------------------------------------------------- Net asset value at beginning of period 10.26 10.16 10.04 10.12 9.92 ------------------------------------------------- Income from investment operations: Net investment income 0.40 0.42 0.41 0.41 0.40 Net realized and unrealized gain (loss) on investments (0.21) 0.10 0.12 (0.08) 0.20 ------------------------------------------------- Total income from investment operations 0.19 0.52 0.53 0.33 0.60 Less distributions: Dividends from net investment income (0.40) (0.42) (0.41) (0.41) (0.40) ------------------------------------------------- NET ASSET VALUE AT END OF PERIOD 10.05 10.26 10.16 10.04 10.12 ================================================= Total return (%) 1.86 5.17 5.40 3.32 6.23 RATIOS/SUPPLEMENTAL DATA (%) --------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.49 0.49 0.49 0.49 0.49 Expense reductions reflected in above ratio 0.32 0.36 0.47 0.41 0.40 Ratio of net investment income to average net assets 3.87 3.99 4.08 4.06 4.06 Portfolio turnover rate 8 22 20 44 35 Net assets, end of period ($ x 1,000,000) 87 68 54 54 53
80 BOND FUNDS 81 FINANCIAL HIGHLIGHTS FINANCIAL HIGHLIGHTS SCHWAB LONG-TERM TAX-FREE BOND FUND This section provides further details about the fund's financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
Fiscal periods ended 8/31 1999 1998 1997 1996 1995 -------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) -------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 11.01 10.53 10.13 10.16 9.95 ------------------------------------------------------------- Income from investment operations: Net investment income 0.50 0.53 0.53 0.52 0.53 Net realized and unrealized gain (loss) on investments (0.85) 0.48 0.40 (0.03) 0.21 ------------------------------------------------------------- Total income from investment operations (0.35) 1.01 0.93 0.49 0.74 Less distributions: Dividends from net investment income (0.50) (0.53) (0.53) (0.52) (0.53) Distributions from realized gain on investments (0.05) -- -- -- -- ------------------------------------------------------------- Total Distributions (0.55) (0.53) (0.53) (0.52) (0.53) NET ASSET VALUE AT END OF PERIOD 10.11 11.01 10.53 10.13 10.16 ============================================================= Total return (%) (3.34) 9.81 9.36 4.87 7.76 RATIOS/SUPPLEMENTAL DATA (%) -------------------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.49 0.49 0.49 0.49 0.54 Expense reductions reflected in above ratio 0.32 0.37 0.53 0.45 0.39 Ratio of net investment income to average net assets 4.59 4.76 5.09 5.06 5.40 Portfolio turnover rate 35 39 61 50 70 Net assets, end of period ($ x 1,000,000) 90 70 47 44 41
BOND FUNDS 81 82 [Blank page] 83 SCHWAB CALIFORNIA TAX-FREE BOND FUNDS ABOUT THE FUNDS The Schwab California Tax-Free Bond Funds seek to provide HIGH CURRENT INCOME free from federal and California state personal income taxes. Each fund has the same investment goal, but uses a DIFFERENT STRATEGY. Because these funds invest mainly in California municipal bonds, their dividends generally are free from federal and California state personal income tax. Each fund also seeks to lower risk by investing across different sectors of the INVESTMENT-GRADE municipal bond market. The funds are designed for LONG-TERM INVESTING. Their performance will fluctuate over time and, as with all investments, future performance may differ from past performance. BOND FUNDS 83 84 SCHWAB SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND TICKER SYMBOL SWCSX THE FUND SEEKS HIGH CURRENT INCOME EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL INCOME TAX THAT IS CONSISTENT WITH CAPITAL PRESERVATION. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES -- THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA-BBB-) -- FROM CALIFORNIA ISSUERS. The fund normally invests at least 80% of total assets in these securities, and typically far more. Interest income from these securities is free from federal and California personal income tax and federal alternative minimum tax. To help preserve investors' capital, the fund seeks to keep the average maturity of its overall portfolio between two and five years. The fund may invest in securities from municipal issuers in California and in U.S. territories and possessions. These may include general obligation issues, which typically are backed by the issuer's ability to levy taxes, and revenue issues, which typically are backed by a stream of revenue from a given source, such as an electric utility or a public water system. The fund may invest more than 25% of total assets in municipal securities financing similar projects, and may also invest in municipal notes. Many of the fund's securities carry credit enhancements (such as bond insurance) or liquidity enhancements (such as a letter of credit), which are designed to provide incremental levels of creditworthiness or liquidity. In choosing securities, the fund's manager seeks to maximize current income within the limits of the fund's credit and maturity standards. The investment adviser's credit research department analyzes and monitors the securities that the fund owns or is considering buying. If a portfolio security falls below investment-grade, the fund may continue to hold it if the investment adviser believes it would benefit the fund. The manager may adjust the fund's holdings or its average maturity based on actual or anticipated changes in interest rates or credit quality. During unusual market conditions, the fund may invest in taxable securities as a temporary defensive measure. In this case, the fund would not be pursuing its goal. SHORTER MATURITIES As a bond approaches maturity, its market value typically moves closer to its par value (the amount of the bond's principal, which a bondholder receives when the bond matures). Investing in short- and intermediate-term bonds is a common strategy for reducing price volatility and other risks. In exchange for these lower risks, short- and intermediate-term bonds typically (though not always) offer lower yields than longer term bonds. The performance information below shows you how the fund's performance compares to its index, which varies over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the index does not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31 94 -2.08 95 10.46 96 3.90 97 5.19 98 4.83
BEST QUARTER: 3.62% Q1 1995 WORST QUARTER: -2.45% Q1 1994 YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: 1.14% AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1998
SINCE 1 YEAR 5 YEARS INCEPTION -------------------------------------------------------------------------------- Fund 4.83 4.38 4.63 1 Lehman Brothers Three-Year Municipal Bond Index 5.20 4.91 4.92 2
1 Inception: 4/21/1993. 2 From: 4/21/1993. 84 BOND FUNDS 85 SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND MAIN RISKS BOND 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. WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's share price. The fund's short-to-intermediate maturity is designed to reduce this risk, but will not eliminate it. A fall in interest rates could hurt the fund as well, by lowering its yield. This is because issuers tend to pay off their bonds when interest rates fall, often forcing the fund to reinvest in lower-yielding securities. THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA AND ITS MUNICIPALITIES. The fund's share price and performance could be affected by local, state and regional factors, including erosion of the tax base and changes in the economic climate. National governmental actions also could affect performance. Because the fund is non-diversified, it may divide its assets among fewer issuers than a diversified fund. This means that the fund could increase its exposure to the risks of a given issuer. THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the risk of default generally is considered unlikely with investment-grade municipal securities, any default on the part of a portfolio investment could cause the fund's share price or yield to fall. THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the extent that the manager anticipates interest rate trends imprecisely, the fund could miss yield opportunities or its share price could fall. IF CERTAIN TYPES OF INVESTMENTS THE FUND BUYS AS TAX EXEMPT ARE LATER RULED TO BE TAXABLE, A PORTION OF THE FUND'S INCOME COULD BE TAXABLE. Any defensive investments in taxable securities could generate taxable income. Also, some types of municipal securities produce income that is subject to the federal alternative minimum tax (AMT). THE FUND IS NOT DESIGNED TO OFFER SUBSTANTIAL CAPITAL APPRECIATION. In exchange for its goal of capital preservation, the fund may offer lower long-term performance than stock investments or certain other types of bond investments. California taxpayers who are seeking double tax-free income along with the potential for lower volatility may want to consider this fund. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the fund's total return. FEE TABLE (%)
SHAREHOLDER FEES -------------------------------------------------------------------------------- None ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------------------------- Management fees 0.30 Distribution (12b-1) fees None Other expenses 0.36 ------ Total annual operating expenses 0.66 EXPENSE REDUCTION (0.17) ------ NET OPERATING EXPENSES* 0.49 ======
* Guaranteed by Schwab and the investment adviser through 10/31/2000 (excluding interest, taxes and certain non-routine expenses). Designed to help you compare expenses, this example uses the same assumptions as other mutual fund prospectuses: a $10,000 investment and 5% return each year. 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. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- $67 $211 $368 $822
BOND FUNDS 85 86 SCHWAB SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND TICKER SYMBOL SWCAX THE FUND SEEKS HIGH CURRENT INCOME EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL INCOME TAX THAT IS CONSISTENT WITH CAPITAL PRESERVATION. STRATEGY TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES -- THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA-BBB-) -- FROM CALIFORNIA ISSUERS. The fund normally invests at least 80% of total assets in these securities, and typically far more. Interest from these securities is free from federal and California personal income tax and federal alternative minimum tax. The fund seeks to maintain an average maturity in its overall portfolio of at least ten years. The fund may invest in securities from municipal issuers in California and in U.S. territories and possessions. These may include general obligation issues, which typically are backed by the issuer's ability to levy taxes, and revenue issues, which typically are backed by a stream of revenue from a given source, such as an electric utility or a public water system. The fund may invest more than 25% of total assets in municipal securities financing similar projects, and may also invest in municipal notes. Many of the fund's securities carry credit enhancements (such as bond insurance) or liquidity enhancements (such as a letter of credit), which are designed to provide incremental levels of creditworthiness or liquidity. In choosing securities, the fund's manager seeks to maximize current income within the limits of the fund's credit standards. The investment adviser's credit research department analyzes and monitors the securities that the fund owns or is considering buying. If a portfolio security falls below investment-grade, the fund may continue to hold it if the investment adviser believes it would benefit the fund. The manager may adjust the fund's holdings or its average maturity based on actual or anticipated changes in interest rates or credit quality. During unusual market conditions, the fund may invest in taxable securities as a temporary defensive measure. In this case, the fund would not be pursuing its goal. MATURITY AND YIELD Bond yields typically are higher the longer the bond's maturity. By investing in longer term bonds, the fund seeks to earn higher yields over time than the Schwab California Short/Intermediate Tax-Free Bond Fund. Maintaining a longer average maturity does carry certain risks, however: investors should expect this fund's share price to be more volatile than that of the Schwab California Short/Intermediate Tax-Free Bond Fund. The performance information below shows you how the fund's performance compares to its index, which varies over time. PERFORMANCE Below are a chart and a table showing the fund's performance, as well as data on an unmanaged market index. These figures assume that all distributions were reinvested. Keep in mind that future performance may differ from past performance, and that the index does not include any costs of investment. ANNUAL TOTAL RETURNS (%) as of 12/31 93 12.88 94 -8.75 95 19.63 96 4.33 97 10.04 98 6.43
BEST QUARTER: 8.47% Q1 1995 WORST QUARTER: -6.74% Q1 1994 YEAR-TO-DATE PERFORMANCE AS OF 9/30/1999: -3.53% AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1998
SINCE 1 YEAR 5 YEARS INCEPTION -------------------------------------------------------------------------------- Fund 6.43 5.93 7.79 1 Lehman Brothers General Municipal Bond Index 6.48 6.24 7.57 2
1 Inception: 2/24/1992. 2 From: 2/24/1992. 86 BOND FUNDS 87 SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND MAIN RISKS BOND 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. WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's share price. The fund's comparatively long average maturity will tend to make it more sensitive to this risk than funds with shorter average maturities. THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA AND ITS MUNICIPALITIES. The fund's share price and performance could be affected by local, state and regional factors, including erosion of the tax base and changes in the economic climate. National governmental actions also could affect performance. Because the fund is non-diversified, it may divide its assets among fewer issuers than a diversified fund. This means that the fund could increase its exposure to the risks of a given issuer. THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the risk of default generally is considered unlikely with investment-grade municipal securities, any default on the part of a portfolio investment could cause the fund's share price or yield to fall. THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the extent that the manager anticipates interest rate trends imprecisely, the fund could miss yield opportunities or its share price could fall. IF CERTAIN TYPES OF INVESTMENTS THE FUND BUYS AS TAX EXEMPT ARE LATER RULED TO BE TAXABLE, A PORTION OF THE FUND'S INCOME COULD BE TAXABLE. Any defensive investments in taxable securities could generate taxable income. Also, some types of municipal securities produce income that is subject to the federal alternative minimum tax (AMT). THE FUND IS NOT DESIGNED TO OFFER SUBSTANTIAL CAPITAL APPRECIATION. In exchange for its goal of capital preservation, the fund may offer lower long-term performance than stock investments or certain other types of bond investments. This fund is designed for California taxpayers who want double tax-free income and can accept higher risk in exchange for potentially higher long-term returns. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are one-time expenses charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the fund's total return. FEE TABLE (%)
SHAREHOLDER FEES -------------------------------------------------------------------------------- None ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS) -------------------------------------------------------------------------------- Management fees 0.30 Distribution (12b-1) fees None Other expenses 0.34 ------ Total annual operating expenses 0.64 EXPENSE REDUCTION (0.15) ------ NET OPERATING EXPENSES* 0.49 ======
* Guaranteed by Schwab and the investment adviser through 10/31/2000 (excluding interest, taxes and certain non-routine expenses). Designed to help you compare expenses, this example uses the same assumptions as other mutual fund prospectuses: a $10,000 investment and 5% return each year. 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. EXPENSES ON A $10,000 INVESTMENT
1 YEAR 3 YEARS 5 YEARS 10 YEARS -------------------------------------------------------------------------------- $65 $205 $357 $798
BOND FUNDS 87 88 FINANCIAL HIGHLIGHTS SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND This section provides further details about the fund's financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
Fiscal periods ended 8/31 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------- Net asset value at beginning of period 10.26 10.16 10.04 10.06 9.89 ------------------------------------------------ Income from investment operations: Net investment income 0.39 0.41 0.43 0.43 0.42 Net realized and unrealized gain (loss) on investments (0.17) 0.11 0.12 (0.02) 0.17 ------------------------------------------------ Total income from investment operations 0.22 0.52 0.55 0.41 0.59 Less distributions: Dividends from net investment income (0.39) (0.42) (0.43) (0.43) (0.42) ------------------------------------------------ NET ASSET VALUE AT END OF PERIOD 10.09 10.26 10.16 10.04 10.06 ================================================ Total return (%) 2.16 5.19 5.54 4.11 6.17 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.49 0.49 0.49 0.49 0.50 Expense reductions reflected in above ratio 0.28 0.30 0.40 0.38 0.34 Ratio of net investment income to average net assets 3.81 4.02 4.21 4.23 4.29 Portfolio turnover rate 7 8 23 20 62 Net assets, end of period ($ x 1,000,000) 126 96 59 46 41
1 Annualized. 88 BOND FUNDS 89 FINANCIAL HIGHLIGHTS FINANCIAL HIGHLIGHTS SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND This section provides further details about the fund's financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
Fiscal periods ended 8/31 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) ------------------------------------------------------------------------------------------------- Net asset value at beginning of period 11.52 11.10 10.63 10.53 10.40 ------------------------------------------------ Income from investment operations: Net investment income 0.54 0.54 0.56 0.57 0.56 Net realized and unrealized gain (loss) on investments (0.70) 0.43 0.47 0.10 0.13 ------------------------------------------------ Total income from investment operations (0.16) 0.97 1.03 0.67 0.69 Less distributions: Dividends from net investment income (0.54) (0.55) (0.56) (0.57) (0.56) ------------------------------------------------ NET ASSET VALUE AT END OF PERIOD 10.82 11.52 11.10 10.63 10.53 ================================================ Total return (%) (1.57) 8.96 9.95 6.43 6.98 RATIOS/SUPPLEMENTAL DATA (%) ------------------------------------------------------------------------------------------------- Ratio of actual operating expenses to average net assets 0.49 0.49 0.49 0.49 0.58 Expense reductions reflected in above ratio 0.26 0.27 0.33 0.33 0.23 Ratio of net investment income to average net assets 4.69 4.79 5.17 5.30 5.54 Portfolio turnover rate 55 28 35 36 46 Net assets, end of period ($ x 1,000,000) 202 190 125 102 90
BOND FUNDS 89 90 INVESTMENT MANAGEMENT THE INVESTMENT ADVISER for all of the SchwabFunds(R) is Charles Schwab Investment Management, Inc. (CSIM), 101 Montgomery Street, San Francisco, CA 94104. Founded in 1989, the firm manages assets for more than 5 million shareholder accounts and has more than $115 billion under management. (all figures on this page are as of June 1, 2000 unless otherwise noted). As the investment adviser, the firm oversees the asset management and administration of the SchwabFunds described in this prospectus. As compensation for these services, the firm receives a management fee from each fund. The table below describes the actual management fee paid by each fund (including the effects of any reductions) for the 12 months prior to the fiscal year end indicated.
FEE PAID (% OF AVERAGE NAME OF FUND NET ASSETS) FISCAL YEAR END ---------------------------------------------------------------------------------- SCHWAB ANALYTICS FUND(R) 0.42% 10/31/99 SCHWAB BOND INDEX FUNDS Schwab Short-Term Bond Market Index Fund 0.02% 8/31/99 Schwab Total Bond Market Index Fund 0.02% 8/31/99 SCHWAB CALIFORNIA TAX-FREE BOND FUNDS Schwab California Short/Intermediate Tax-Free Bond Fund 0.13% 8/31/99 Schwab California Long-Term Tax-Free Bond Fund 0.15% 8/31/99 SCHWAB EQUITY INDEX FUNDS Schwab S&P 500 Fund 0.12% 10/31/99 Schwab 1000 Fund(R) 0.21% 10/31/99 Schwab Small-Cap Index Fund(R) 0.20% 10/31/99 Schwab Total Stock Market Index Fund(TM) 0.00% 10/31/99 Schwab International Index Fund(R) 0.25% 10/31/99 SCHWAB MARKETMANAGER PORTFOLIOS(TM) Growth Portfolio 0.43% 10/31/99 Balanced Portfolio 0.41% 10/31/99 Small Cap Portfolio 0.35% 10/31/99 International Portfolio 0.38% 10/31/99 SCHWAB MARKETTRACK PORTFOLIOS(TM) All Equity Portfolio 0.17% 10/31/99 Growth Portfolio 0.27% 10/31/99 Balanced Portfolio 0.26% 10/31/99 Conservative Portfolio 0.25% 10/31/99 SCHWAB TAX-FREE BOND FUNDS Schwab Short/Intermediate Tax-Free Bond Fund 0.09% 8/31/99 Schwab Long-Term Tax-Free Bond Fund 0.09% 8/31/99
For the following funds that have not had a fiscal year end, the management fee as a percentage of average daily net assets is calculated as follows: SCHWAB YIELDPLUS FUND(TM) First $500 million of assets 0.35% Assets above $500 million 0.30% SCHWAB FOCUS FUNDS 0.54%
For the Schwab Analytics Fund, a portion of the management fee is used to pay the subadviser. 90 INVESTMENT MANAGEMENT 91 INVESTMENT MANAGERS The following are responsible for the management of the funds or portfolios indicated. Schwab Bond Index Funds, Schwab MarketTrack Portfolios(TM), Schwab YieldPlus Fund(TM) KIMON DAIFOTIS, CFA, a vice president of the investment adviser, has overall responsibility for management of the Schwab Bond Index Funds and Schwab YieldPlus Fund(TM). He is responsible for the day-to-day management of the bond and cash portions of Schwab MarketTrack Portfolios(TM). Prior to joining the firm in October 1997, he worked for more than 17 years in research and asset management. Schwab Analytics Fund(R) PRAVEEN GOTTIPALLI, a portfolio manager for the day-to-day management of Schwab Analytics Fund(R), has been Director of Investment for Symphony Asset Management since 1994. Prior to this position, he was at BARRA, Inc. for nine years. SYMPHONY ASSET MANAGEMENT, INC. is the subadvisor for Schwab Analytics Fund(R). Symphony is located at 555 California Street, San Francisco, CA 94104. Founded in 1994, Symphony is owned by BARRA, Inc., which was founded in 1975 and is a leading provider of analytical models. Symphony and its affiliate, Symphony Asset Management, LLC, currently have more than $2.7 billion under management. Schwab Equity Index Funds, Schwab Analytics Fund(R), Schwab MarketTrack Portfolios, Schwab Focus Funds GERI HOM, a vice president of the investment adviser, is responsible for the day-to-day management of Schwab Equity Index Funds (not including Schwab Total Stock Market Index Fund), the equity portions of the Schwab MarketTrack Portfolios and Schwab Focus Funds, and she has overall responsibility for the Schwab Analytics Fund(R). She joined the firm in 1995 and has nearly 20 years of experience in equity index management. Schwab California Tax-Free Bond Funds, Schwab Tax-Free Bond Funds JOANNE LARKIN, a vice president of the investment adviser, has had overall responsibility for management of Schwab California Tax-Free Bond Funds and Schwab Tax-Free Bond Funds since each fund's inception. Prior to joining the firm in February 1992, she worked for more than eight years in research and asset management at another firm. Schwab Total Stock Market Index Fund(TM), Schwab Focus Funds LARRY MANO, a portfolio manager, is responsible for the day-to-day management of Schwab Total Stock Market Index Fund(TM) and Schwab Focus Funds. Prior to joining the firm in 1998, he worked for 20 years in equity index management, most recently as a vice president and principal of the Institutional Services Group at Wilshire Associates, Inc. Schwab MarketManager Portfolios(TM) JEFFREY MORTIMER, CFA, a vice president of the investment adviser, is responsible for overall management of the Schwab MarketManager Portfolios. Prior to joining the firm in October 1997, he worked for more than eight years in asset allocation and manager selection. The Schwab MarketManager Portfolios may invest in the Excelsior Funds without limitation, just as the Schwab MarketManager Portfolios can invest without limitation in affiliated SchwabFunds. The advisers to the Excelsior Funds are United States Trust Company of New York, U.S. Trust Company (Connecticut) and/or other subsidiaries of U.S. Trust Corporation (U.S. Trust). U.S. Trust and Charles Schwab Investment Management, Inc. are under the common control of The Charles Schwab Corporation. The fund's INVESTMENT ADVISER, Charles Schwab Investment Management, Inc., has more than $115 billion under management. INDEX OWNERSHIP Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500(R) and 500(R) are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the fund. The Schwab S&P 500 Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the fund. More complete information may be found in the Statement of Additional Information (see back cover). Wilshire and Wilshire 5000 are registered service marks of Wilshire Associates, Inc. The Schwab Total Stock Market Index Fund is not sponsored, endorsed, sold or promoted by Wilshire Associates, and Wilshire Associates is not in any way affiliated with the fund. Wilshire Associates makes no representation regarding the advisability of investing in the fund or in any stock included in the Wilshire 5000. INVESTMENT MANAGEMENT 91 92 INVESTING IN THE FUNDS/PORTFOLIOS As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us. On the following pages, you will find information on BUYING, SELLING AND EXCHANGING shares using the method that is most CONVENIENT FOR YOU. You also will see how to choose a share class and a distribution option for your investment. Helpful information on TAXES is included as well. The information on these pages outlines how Schwab brokerage account investors can place "good orders" to buy, sell and exchange shares of the funds. If you are investing through a third-party investment provider, some of the instructions, minimums and policies may be different. Some investment providers may charge transaction or other fees. Contact your investment provider for more information. SCHWAB ACCOUNTS Different types of Schwab brokerage accounts are available, with varying account opening and balance requirements. Some Schwab brokerage account features can work in tandem with features offered by the funds. For example, when you sell shares in a fund or portfolio, the proceeds automatically are paid to your Schwab brokerage account. From your account, you can use features such as MoneyLink, which lets you move money between your brokerage accounts and bank accounts and Automatic Investment Plan (AIP), which lets you set up periodic investments. For more information on Schwab brokerage accounts, call 800-435-4000 or visit the Schwab Web site at www.schwab.com. METHODS FOR PLACING DIRECT ORDERS PHONE Call 800-435-4000, day or night (for TDD service, call 800-345-2550). INTERNET www.schwab.com/schwabfunds SCHWABLINK Investment professionals should follow the transaction instructions in the SchwabInstitutional.com manual; for technical assistance, call 800-367-5198. MAIL Write to SchwabFunds 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. 92 INVESTING IN THE FUNDS/PORTFOLIOS 93 BUYING SHARES Shares of the funds or portfolios 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. STEP 1 CHOOSE A FUND, AND, IF APPLICABLE, A SHARE CLASS. YOUR CHOICE OF SHARE CLASS MAY DEPEND ON THE AMOUNT OF YOUR INVESTMENT. SCHWAB ANALYTICS FUND(TM), SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO AND SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO:
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE -------------------------------------------------------------------------------------------------------------------------------- $2,500 ($1,000 for retirement and $500 ($100 for Automatic Investment Plan) $500 ($250 for retirement and custodial accounts) custodial accounts)
SCHWAB FOCUS FUNDS:
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE -------------------------------------------------------------------------------------------------------------------------------- $5,000 $500 ($100 for Automatic Investment Plan)
SCHWAB MARKETMANAGER GROWTH PORTFOLIO, SCHWAB MARKETMANAGER BALANCED PORTFOLIO, SCHWAB MARKETTRACK PORTFOLIOS(TM):
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE -------------------------------------------------------------------------------------------------------------------------------- $1,000 ($500 for retirement and $500 ($100 for Automatic Investment Plan) $500 ($250 for retirement and custodial accounts) custodial accounts)
SCHWAB EQUITY INDEX FUNDS:
SHARE CLASS MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE --------------------------------------------------------------------------------------------------------------------------------- Investor Shares $2,500 ($1,000 for retirement and $500 ($100 for Automatic Investment Plan) $1,000 ($500 for custodial accounts) retirement and custodial accounts) --------------------------------------------------------------------------------------------------------------------------------- Select Shares(R) $50,000 $1,000 $40,000 --------------------------------------------------------------------------------------------------------------------------------- e.Shares(R) $2,500 ($500 for retirement $100 $1,000 ($500 for and custodial accounts) retirement and custodial accounts)
Currently, e.Shares are available only for the S&P 500 Fund and are offered to clients of Schwab Institutional, The Charles Schwab Trust Company and certain retirement plans. SCHWAB BOND INDEX FUNDS, SCHWAB CALIFORNIA TAX-FREE BOND FUNDS AND SCHWAB TAX-FREE BOND FUNDS:
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE ------------------------------------------------------------------------------------------------------------------------------ $2,500 ($1,000 for retirement* and $500 ($100 for Automatic Investment Plan) $1,000 ($500 for custodial accounts) retirement* and custodial accounts)
* Tax-Free funds are not appropriate investments for IRAs and other tax deferred accounts. Please consult with your tax advisor about your situation. SCHWAB YIELDPLUS FUND(TM):
SHARE CLASS MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE ------------------------------------------------------------------------------------------------------------------------------- Investor Shares $2,500 ($1,000 for retirement and $500 ($100 for Automatic Investment Plan) $1,000 ($500 for custodial accounts) retirement and custodial accounts) ------------------------------------------------------------------------------------------------------------------------------- Select Shares $50,000 $1,000 $40,000
STEP 2 CHOOSE AN OPTION FOR FUND DISTRIBUTIONS. The three options are described below. If you don't indicate a choice, you will receive the first option. OPTION FEATURES -------------------------------------------------------------------------------- Reinvestment All dividends and capital gain distributions are invested automatically in shares of your fund and share class. -------------------------------------------------------------------------------- Cash/reinvestment mix You receive payment for dividends, while any capital gain distributions are invested in shares of your fund and share class. -------------------------------------------------------------------------------- Cash You receive payment for all dividends and capital gain distributions. STEP 3 PLACE YOUR ORDER. Use any of the methods described on the previous page. Make checks payable to Charles Schwab & Co., Inc. INVESTING IN THE FUNDS/PORTFOLIOS 93 94 SELLING/EXCHANGING SHARES POLICIES TO KEEP IN MIND - 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. - Exchange orders are limited to other Schwab non-Sweep Investments as well as variable NAV funds and must meet the minimum investment and other requirements for the fund and, if applicable, the 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. - The 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. - As indicated in their fee tables, the Schwab Equity Index Funds, Schwab Focus Funds, Schwab MarketManager International Portfolio and Schwab YieldPlus Fund(TM) charge a redemption fee, payable to each fund, on shares you sell or exchange within 180 days (90 days for the Schwab Yield Plus Fund) of buying them; 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). - In a multi-class fund, there is no redemption fee when you exchange between share classes of that fund. METHODS FOR PLACING DIRECT ORDERS PHONE Call 800-435-4000, day or night (for TDD service, call 800-345-2550). INTERNET www.schwab.com/schwabfunds SCHWABLINK Investment professionals should follow the transaction instructions in the 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 or, for internet orders, your account number/"Login ID" - Your account number (for SchwabInstitutional.com transactions, include the master account and subaccount numbers) or, for internet orders, your password - The name and, if applicable, the share class of the fund whose shares you want to buy or sell - The dollar amount or number of shares you would like to buy, sell or exchange - For exchanges, the name and share class of the fund into which you want to exchange and the distribution option you prefer - When selling shares, how you would like to receive the proceeds Please note that orders to buy, sell or exchange become irrevocable at the time you mail them. 94 INVESTING IN THE FUNDS/PORTFOLIOS 95 TRANSACTION POLICIES THE FUNDS OR PORTFOLIOS ARE OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE) IS OPEN. The funds or portfolios calculate their share prices (for each share class, if necessary) each business day, after the close of the NYSE. A fund's or portfolio's share price is its net asset value per share, or NAV, which is the fund's or portfolio's net assets divided by the number of its shares outstanding. POLICIES FOR WHEN YOUR ORDER WILL BE EXECUTED depend on the fund or portfolio concerned: SCHWAB ANALYTICS FUND(R), SCHWAB EQUITY INDEX FUNDS, SCHWAB FOCUS FUNDS, SCHWAB MARKETMANAGER PORTFOLIOS(TM), SCHWAB MARKETTRACK PORTFOLIOS(TM): Orders to buy, sell or exchange shares that are received in good order prior to the close of a fund or portfolio (generally 4pm. Eastern Time) will be executed at the next share price calculated that day. SCHWAB BOND INDEX FUNDS, SCHWAB CALIFORNIA TAX-FREE BOND FUNDS, SCHWAB TAX-FREE BOND FUNDS, SCHWAB YIELDPLUS FUND(TM): Orders that are received in good order are executed at the next NAV to be calculated (generally 4pm. Eastern Time). Orders to buy shares that are accepted prior to the close of the fund generally will receive the next day's dividend. Orders to sell or exchange shares that are accepted and executed prior to the close of the fund on a given day generally will receive that day's dividend. IN VALUING PORTFOLIO SECURITIES, all funds except the Schwab MarketTrack and Schwab MarketManager Portfolios 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 Schwab MarketTrack and Schwab MarketManager Portfolios use the NAVs reported by their underlying funds to value underlying fund investments. SHAREHOLDERS OF FUNDS OR PORTFOLIOS WITH EXPOSURE TO FOREIGN MARKETS should be aware that because these markets are often open on weekends and other days when the funds and portfolios are closed, the value of some or all securities owned by a fund or portfolio may change on days when it is not possible to buy or sell shares of the fund or portfolio. EACH DAY, REPORTING SERVICES, SUCH AS NEWSPAPERS, MAY PUBLISH THE SHARE PRICES OF MUTUAL FUNDS from the close of business on the previous day. For the Schwab MarketTrack and Schwab MarketManager Portfolios, these prices are generally reported one day behind other mutual funds. This is because these portfolios use the share prices of their underlying funds to calculate NAV, and this information is typically received and calculated after the publishing deadlines of reporting services. Each portfolio still calculates its share price daily, and this is the price at which you may buy and sell shares each day. THE FUNDS, PORTFOLIOS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following: - To automatically redeem your shares if the account they are held in is closed for any reason or your balance falls below the minimum for your share class as a result of selling or exchanging your shares - To modify or terminate the exchange privilege upon 60 days' written notice to shareholders - To refuse any purchase or exchange order, including large purchase orders that may negatively affect a fund's operations or orders that appear to be associated with short-term trading activities - To change or waive a fund's or portfolio's investment minimums - To suspend the right to sell shares back to the fund or portfolio, 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 INVESTING IN THE FUNDS/PORTFOLIOS 95 96 DISTRIBUTIONS AND TAXES ANY INVESTMENT IN A FUND OR PORTFOLIO 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 or portfolio. 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 OR PORTFOLIO EARNS. Each fund and portfolio distributes to all shareholders of record substantially all of its net investment income and net capital gains, if any, according to the following schedules: SCHWAB ANALYTICS FUND(R), SCHWAB EQUITY INDEX FUNDS, SCHWAB FOCUS FUNDS, SCHWAB MARKETMANAGER PORTFOLIOS(TM), SCHWAB MARKETTRACK PORTFOLIOS(TM): These funds and portfolios typically pay income and capital gains distributions in December, except for the Schwab MarketTrack Conservative Portfolio, which typically makes income distributions at the end of every calendar quarter. SCHWAB BOND INDEX FUNDS, SCHWAB CALIFORNIA TAX-FREE BOND FUNDS, SCHWAB TAX-FREE BOND FUNDS, SCHWAB YIELDPLUS FUND(TM): Each of these funds declares a dividend every business day, based on its determination of its net investment income. Each fund pays its dividends on the 25th of every month (or next business day, if the 25th is not a business day), except that in December dividends are paid on the last business day of the month. The funds expect to pay any capital gain distributions every year, typically in December. FOR ALL TAXABLE FUNDS AND PORTFOLIOS, UNLESS YOU ARE INVESTING THROUGH A TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT, YOUR DISTRIBUTIONS GENERALLY HAVE TAX CONSEQUENCES. The net investment income and short-term capital gains of each fund and portfolio 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 or portfolio. 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 OR PORTFOLIOS IS DIFFERENT FROM AN EXCHANGE BETWEEN CLASSES. An exchange between funds or portfolios is considered a sale. An exchange between classes within a fund is not reported as a taxable sale. SHAREHOLDERS IN THE SCHWAB INTERNATIONAL INDEX FUND(R) MAY HAVE ADDITIONAL TAX CONSIDERATIONS as a result of foreign tax payments made by the fund. Typically, these payments will reduce the fund's dividends but will still be included in your taxable income. You may be able to claim a tax credit or deduction for your portion of foreign taxes paid by the fund, however. 96 INVESTING IN THE FUNDS/PORTFOLIOS 97 IF YOU OWN SHARES IN A TAX-FREE BOND FUND, you should be aware that your fund's distributions may have tax consequences. Each fund's dividends typically are free from federal income tax. Dividends from the California Tax-Free Bond Funds typically are free from federal and California state income tax. Dividends from the Tax-Free Bond Funds typically are subject to any state and local personal income taxes, although a portion of each fund's dividends may be free from state or local income taxes, depending on the extent to which a fund invests in bonds that are tax-exempt in your state. Each fund's capital gain distributions generally are taxable in the tax year in which they are declared, whether you reinvest them or take them in cash. While interest from municipal securities generally is free from federal income tax, some types of securities produce income that is subject to the federal alternative minimum tax (AMT). To the extent that a fund invests in these securities, shareholders who are subject to the AMT may have to pay this tax on some or all dividends received from that fund. Any dividends derived from U.S. government securities are generally free from state and local income taxes. However, some states may limit this benefit, and some agency-backed securities may not qualify for tax-exempt status. AT THE BEGINNING OF EVERY YEAR, THE FUNDS AND PORTFOLIOS PROVIDE SHAREHOLDERS WITH INFORMATION detailing the tax status of any distributions the fund or portfolio paid during the previous calendar year. For Schwab Bond Index Funds, this information includes the percentage of dividends paid that may qualify for tax-exempt status. For Schwab Tax-Free Bond Funds, this information includes a breakdown of the fund's income from each state. Schwab brokerage account customers also receive information on distributions and transactions in their monthly account statements. SCHWAB BROKERAGE ACCOUNT CUSTOMERS WHO SELL FUND OR PORTFOLIO 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 or portfolio 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 or portfolio makes a distribution, the share price is reduced by the amount of the distribution. You can avoid "buying a dividend," as it is often called, by finding out if a distribution is imminent and waiting until afterwards to invest. Of course, you may decide that the opportunity to gain a few days of investment performance outweighs the tax consequences of buying a dividend. INVESTING IN THE FUNDS/PORTFOLIOS 97 98 98 NOTES 99 NOTES 99 100 TO LEARN MORE This prospectus contains important information on the funds and portfolios 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 and portfolio investors, discuss recent performance and holdings. Each fund's STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed discussion of investment policies and the risks associated with various investments. Each 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 publicinfo@sec.gov. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-6009 800-SEC-0330 (Public Reference Section) 202-942-8090 www.sec.gov publicinfo@sec.gov SCHWABFUNDS P.O. Box 7575 San Francisco, CA 94104 800-435-4000 www.schwab.com/schwabfunds SEC FILE NUMBERS SCHWAB EQUITY INDEX FUNDS 811-7704 SCHWAB 1000 FUND 811-6200 SCHWAB ANALYTICS FUND(R) 811-7704 SCHWAB FOCUS FUNDS 811-7704 SCHWAB MARKETTRACK PORTFOLIOS(TM) 811-7704 SCHWAB MARKETMANAGER PORTFOLIOS(TM) 811-7704 SCHWAB BOND INDEX FUNDS 811-6200 SCHWAB YIELDPLUS FUND(TM) 811-6200 SCHWAB TAX FREE FUNDS 811-6200 SCHWAB CALIFORNIA TAX FREE FUNDS 811-6200 MKT 4696 [CHARLES SCHWAB LOGO]