-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P/O7IwfhPUm/prl6hQfJ3SwX4NMShSFvyk3l6pWZ1wYZP1jSKvtouiGCD/dTco/o DlSaGfIKI1tLBqGp4mah2w== 0000950149-02-000381.txt : 20020414 0000950149-02-000381.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950149-02-000381 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20020226 EFFECTIVENESS DATE: 20020228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWAB INVESTMENTS CENTRAL INDEX KEY: 0000869365 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-37459 FILM NUMBER: 02558877 BUSINESS ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST STREET 2: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWAB INVESTMENTS CENTRAL INDEX KEY: 0000869365 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-06200 FILM NUMBER: 02558878 BUSINESS ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST STREET 2: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 485BPOS 1 f78472b1e485bpos.txt SCHWAB INVESTMENTS P.E.AMEND. 41 TO FORM N-1A File Nos. 33-37459 and 811-6200 As filed with the Securities and Exchange Commission on February 26, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No.41 [X] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 45 [X] SCHWAB INVESTMENTS (Exact Name of Registrant as Specified in Charter) 101 Montgomery Street, San Francisco, California 94104 (Address of Principal Executive Offices) (zip code) Registrant's Telephone Number, including Area Code: (415) 627-7000 Jeremiah H. Chafkin 101 Montgomery Street, San Francisco, California 94104 (Name and Address of Agent for Service) Copies of communications to: Richard W. Grant Esq. Martin E. Lybecker, Esq. Koji Felton, Esq. Morgan Lewis & Bockius LLP Wilmer Cutler & Pickering Charles Schwab Investment Management, Inc. 1701 Market Street 2445 M Street, N.W., 101 Montgomery Street Philadelphia, PA 19103 Washington, D.C. 20037 120K-14-109 San Francisco, CA 94104
It is proposed that this filing will become effective (check appropriate box): / / Immediately upon filing pursuant to paragraph (b) /X/ On February 28, 2002, pursuant to paragraph (b) / / 60 days after filing pursuant to paragraph (a)(i) / / On (date), pursuant to paragraph (a)(1) / / 75 days after filing pursuant to paragraph (a)(ii) / / On (date), pursuant to paragraph (a)(ii) of Rule 485 if appropriate, check appropriate box: / / This post-effective amendment designates a new effective date for a previously filed post-effective amendment Part C SCHWAB EQUITY INDEX FUNDS PROSPECTUS February 28, 2002 SCHWAB S&P 500 FUND SCHWAB 1000 FUND(R) SCHWAB SMALL-CAP INDEX FUND(R) SCHWAB TOTAL STOCK MARKET INDEX FUND(R) SCHWAB INTERNATIONAL INDEX FUND(R) As with all mutual funds, the Securities and Exchange Commission (SEC) has not approved these securities or passed on whether the information in this prospectus is adequate and accurate. Anyone who indicates otherwise is committing a federal crime. [SCHWAB FUNDS(R) LOGO] SCHWAB EQUITY INDEX FUNDS ABOUT THE FUNDS 4 Schwab S&P 500 Fund 10 Schwab 1000 Fund(R) 14 Schwab Small-Cap Index Fund(R) 18 Schwab Total Stock Market Index Fund(R) 22 Schwab International Index Fund(R) 26 Fund management INVESTING IN THE FUNDS 28 Buying shares 29 Selling/exchanging shares 30 Transaction policies 31 Distributions and taxes ABOUT THE FUNDS The funds in this prospectus share the same basic investment strategy: They are designed to track the performance of a stock market index. Each fund tracks a different index. This strategy distinguishes an index fund from an "actively managed" mutual fund. Instead of choosing investments based on judgment, a portfolio manager looks to an index to determine which securities the fund should own. Because the composition of an index tends to be comparatively stable, index funds historically have shown low portfolio turnover compared to actively managed funds. The funds are designed for long-term investors. Their performance will fluctuate over time and, as with all investments, future performance may differ from past performance. The fund's goal is to track the total return of the S&P 500(R) Index. SCHWAB S&P 500 FUND TICKER SYMBOLS Investor Shares SWPIX Select Shares(R) SWPPX e.Shares(R) SWPEX LARGE-CAP STOCKS Although the 500 companies in the index constitute only about 8% of all the publicly traded companies in the United States, they represent approximately 81% of the total value of the U.S. stock market. (All figures are as of 12/31/01.) Companies of this size are generally considered large-cap stocks. Their performance is widely followed, and the index itself is popularly seen as a measure of overall U.S. stock market performance. Because the index weights a stock according to its market capitalization (total market value of all shares outstanding), larger stocks have more influence on the performance of the index than do the index's smaller stocks. INDEX THE S&P 500 INDEX INCLUDES THE 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 GENERALLY 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 its 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 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. S&P 500 Fund 4 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 underperform mid- or small-cap stocks, the fund may also 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 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. INDEX OWNERSHIP: "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500" and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the Schwab S&P 500 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) 5 PERFORMANCE The information below shows fund returns before and after taxes, and compares fund performance (which varies over time) to that of the index. The index is unmanaged and does not include expenses or taxes. All figures assume distributions were reinvested. The after-tax figures: - - reflect the highest federal income tax rates that applied during the period, but assume no state or local taxes - - are shown for one share class only, and would be different for other share classes - - may not reflect your actual after-tax performance - - may not be relevant to shares in an IRA, 401(k) or other tax-advantaged retirement account Keep in mind that future performance (both before and after taxes) may differ from past performance. The fund has three share classes, which have different minimum investments and different costs. For information on choosing a class, see page 28. ANNUAL TOTAL RETURNS (%) as of 12/31 INVESTOR SHARES [BAR CHART] 97 32.47 98 28.05 99 20.60 00 (9.33) 01 (12.15)
BEST QUARTER: 21.08% Q4 1998 WORST QUARTER: (14.73%) Q3 2001 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/01
Since 1 Year 5 Years inception - -------------------------------------------------------------------------------- INVESTOR SHARES Before taxes (12.15) 10.26 11.65 1 After taxes on distributions (12.50) 9.86 11.23 1 After taxes on distributions and sale of shares (7.40) 8.30 9.52 1 SELECT SHARES(R) before taxes (12.04) -- 8.44 2 e.SHARES(R) before taxes (12.15) 10.34 11.74 3 S&P 500(R) Index (11.89) 10.70 12.10 4
1 Inception: 5/1/96. 2 Inception: 5/19/97. 3 Inception: 5/1/96. 4 From 5/1/96. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are 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 SHAREHOLDER FEES SHARES SHARES e.SHARES - -------------------------------------------------------------------------------- Redemption fee* 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 0.29 0.14 0.14 ------------------------------------- Total annual operating expenses 0.46 0.31 0.31 Expense reduction (0.11) (0.12) (0.03) ------------------------------------- NET OPERATING EXPENSES** 0.35 0.19 0.28 =====================================
* Charged only on shares you sell 180 days or less after buying them and paid directly to the fund. ** Guaranteed by Schwab and the investment adviser through 2/28/03 (excluding interest, taxes and certain non-routine expenses). Designed to help you compare expenses, the example below 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 $137 $247 $569 SELECT SHARES $19 $ 88 $162 $381 e.SHARES $29 $ 97 $171 $390
S&P 500 Fund 6 FINANCIAL HIGHLIGHTS This section provides further details about the fund's recent financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/00- 11/1/99- 11/1/98- 11/1/97- 11/1/96- INVESTOR SHARES 10/31/01 10/31/00 10/31/99 10/31/98 10/31/97 - -------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) - -------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 22.15 21.17 17.05 14.17 10.88 ------------------------------------------------------------------ Income or loss from investment operations: Net investment income 0.17 0.17 0.17 0.16 0.14 Net realized and unrealized gains or losses (5.70) 1.06 4.10 2.85 3.24 ------------------------------------------------------------------ Total income or loss from investment operations (5.53) 1.23 4.27 3.01 3.38 Less distributions: Dividends from net investment income (0.17) (0.18) (0.15) (0.13) (0.09) Distributions from net realized gains -- (0.07) -- -- -- ------------------------------------------------------------------ Total distributions (0.17) (0.25) (0.15) (0.13) (0.09) ------------------------------------------------------------------ Net asset value at end of period 16.45 22.15 21.17 17.05 14.17 ================================================================== Total return (%) (25.11) 5.81 25.20 21.39 31.29 RATIOS/SUPPLEMENTAL DATA (%) - -------------------------------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.35 0.35 1 0.35 0.35 0.38 Expense reductions reflected in above ratio 0.11 0.16 0.27 0.28 0.32 Ratio of net investment income to average net assets 0.95 0.81 1.01 1.25 1.49 Portfolio turnover rate 4 9 3 1 3 Net assets, end of period ($ x 1,000,000) 3,070 3,617 3,183 1,935 923
1 Would have been 0.36% if certain non-routine expenses (proxy fees) had been included. 7 FINANCIAL HIGHLIGHTS continued
11/1/00- 11/1/99- 11/1/98- 11/1/97- 5/19/97 1- SELECT SHARES(R) 10/31/01 10/31/00 10/31/99 10/31/98 10/31/97 - ----------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) - ----------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 22.21 21.23 17.09 14.19 12.85 ---------------------------------------------------------------------- Income or loss from investment operations: Net investment income 0.20 0.20 0.20 0.26 0.05 Net realized and unrealized gains or losses (5.71) 1.06 4.12 2.78 1.29 ---------------------------------------------------------------------- Total income or loss from investment operations (5.51) 1.26 4.32 3.04 1.34 Less distributions: Dividends from net investment income (0.20) (0.21) (0.18) (0.14) -- Distributions from net realized gains -- (0.07) -- -- -- ---------------------------------------------------------------------- Total distributions (0.20) (0.28) (0.18) (0.14) -- ---------------------------------------------------------------------- Net asset value at end of period 16.50 22.21 21.23 17.09 14.19 ====================================================================== Total return (%) (24.97) 5.94 25.42 21.63 10.43 2 RATIOS/SUPPLEMENTAL DATA (%) - ----------------------------------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.19 0.19 4 0.19 0.19 0.19 3 Expense reductions reflected in above ratio 0.12 0.16 0.28 0.28 0.34 3 Ratio of net investment income to average net assets 1.11 0.98 1.17 1.40 1.46 3 Portfolio turnover rate 4 9 3 1 3 Net assets, end of period ($ x 1,000,000) 3,563 4,357 3,750 1,548 486
1 Commencement of operations. 2 Not annualized. 3 Annualized. 4 Would have been 0.20% if certain non-routine expenses (proxy fees) had been included. S&P 500 Fund 8
11/1/00- 11/1/99- 11/1/98- 11/1/97- 11/1/96- e.SHARES(R) 10/31/01 10/31/00 10/31/99 10/31/98 10/31/97 - ----------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) - ----------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 22.17 21.21 17.08 14.19 10.89 ----------------------------------------------------------- Income or loss from investment operations: Net investment income 0.20 0.20 0.20 0.15 0.21 Net realized and unrealized gains or losses (5.71) 1.04 4.09 2.88 3.19 ----------------------------------------------------------- Total income or loss from investment operations (5.51) 1.24 4.29 3.03 3.40 Less distributions: Dividends from net investment income (0.20) (0.21) (0.16) (0.14) (0.10) Distributions from net realized gains -- (0.07) -- -- -- ----------------------------------------------------------- Total distributions (0.20) (0.28) (0.16) (0.14) (0.10) ----------------------------------------------------------- Net asset value at end of period 16.46 22.17 21.21 17.08 14.19 =========================================================== Total return (%) (25.02) 5.84 25.28 21.50 31.48 RATIOS/SUPPLEMENTAL DATA (%) - ----------------------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.28 0.28 1 0.28 0.28 0.28 Expense reductions reflected in above ratio 0.03 0.07 0.20 0.24 0.33 Ratio of net investment income to average net assets 1.02 0.88 1.08 1.32 1.61 Portfolio turnover rate 4 9 3 1 3 Net assets, end of period ($ x 1,000,000) 304 441 435 281 132
1 Would have been 0.29% if certain non-routine expenses (proxy fees) had been included. 9 The fund's goal is to match the total return of the Schwab 1000 Index(R). SCHWAB 1000 FUND(R) TICKER SYMBOLS Investor Shares SNXFX Select Shares(R) SNXSX LARGE- AND MID-CAP STOCKS Although there are currently more than 6,000 total stocks in the United States, the companies represented by the Schwab 1000 Index make up some 88% of the total value of all U.S. stocks. (Figures are as of 12/31/01.) These large- and mid-cap stocks cover many industries and represent many sizes. Because large- and mid-cap stocks can perform differently from each other at times, a fund that invests in both categories of stocks may have somewhat different performance than a fund that invests only in large-cap stocks. INDEX THE SCHWAB 1000 INDEX INCLUDES THE 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 GENERALLY 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 its 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. Schwab 1000 Fund 10 Because it includes so many U.S. stocks and industries, this fund could make sense for long-term investors seeking broad diversification in a single investment. It's also a logical choice for stock investors who want exposure beyond the large-cap segment of the U.S. stock market. MAIN RISKS STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money. YOUR INVESTMENT FOLLOWS THE LARGE- AND MID-CAP PORTIONS OF THE U.S. STOCK MARKET, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund cannot take steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stocks of one or more industries (for example, rising oil prices may lead to a decline in airline stocks). Because the Schwab 1000 Index(R) encompasses stocks from across the economy, the fund is broadly diversified, which reduces the impact of the performance of any given industry or stock. But whenever large- and mid-cap U.S. stocks fall behind other types of investments -- bonds, for instance -- the fund's performance also will lag these investments. OTHER RISK FACTORS Although the fund's main risks are those associated with its stock investments, its other investment strategies also may involve risks. These risks could affect how well the fund tracks the performance of the index. For example, futures contracts, which the fund uses to gain exposure to the index for its cash balances, could cause the fund to track the index less closely if they don't perform as expected. The fund also may lend a portion of its securities to certain financial institutions in order to earn income. These loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. 11 PERFORMANCE The information below shows fund returns before and after taxes, and compares fund performance (which varies over time) to that of two indices. The indices are unmanaged and do not include expenses or taxes. All figures assume distributions were reinvested. The after-tax figures: - - reflect the highest federal income tax rates that applied during the period, but assume no state or local taxes - - are shown for one share class only, and would be different for other share classes - - may not reflect your actual after-tax performance - - may not be relevant to shares in an IRA, 401(k) or other tax-advantaged retirement account Keep in mind that future performance (both before and after taxes) may differ from past performance. The fund has two share classes, which have different minimum investments and different costs. For information on choosing a class, see page 28. ANNUAL TOTAL RETURNS (%) as of 12/31 INVESTOR SHARES [BAR CHART] 92 8.52 93 9.63 94 (0.11) 95 36.60 96 21.57 97 31.92 98 27.16 99 21.00 00 (8.21) 01 (12.26)
BEST QUARTER: 21.93% Q4 1998 WORST QUARTER: (15.39%) Q3 2001 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/01
Since 1 Year 5 Years 10 Years Inception - -------------------------------------------------------------------------------- INVESTOR SHARES Before taxes (12.26) 10.33 12.43 12.90 1 After taxes on distributions (12.55) 9.98 11.88 12.34 1 After taxes on distributions and sale of shares (7.47) 8.38 10.39 10.86 1 SELECT SHARES(R) before taxes (12.14) -- -- 8.81 2 S&P 500(R) Index (11.89) 10.70 12.94 13.22 3 Schwab 1000 Index(R) (12.07) 10.66 12.88 13.31 3
1 Inception: 4/2/91. 2 Inception: 5/19/97. 3 From 4/2/91. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are 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 SHAREHOLDER FEES SHARES SHARES - -------------------------------------------------------------------------------- Redemption fee* 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 0.13 --------------------- Total annual operating expenses 0.51 0.36 Expense reduction (0.05) (0.01) --------------------- NET OPERATING EXPENSES** 0.46 0.35 =====================
* Charged only on shares you sell 180 days or less after buying them and paid directly to the fund. ** Guaranteed by Schwab and the investment adviser through 2/28/03 (excluding interest, taxes and certain non-routine expenses). Designed to help you compare expenses, the example below 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 $115 $201 $455
Schwab 1000 Fund 12 FINANCIAL HIGHLIGHTS This section provides further details about the fund's recent financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/00- 11/1/99- 11/1/98- 11/1/97- 9/1/97- 9/1/96- INVESTOR SHARES 10/31/01 10/31/00 10/31/99 10/31/98 10/31/97 8/31/97 - ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA ($) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value at beginning of period 39.95 37.12 29.90 25.25 24.78 18.14 -------------------------------------------------------------------------------- Income or loss from investment operations: Net investment income 0.26 0.26 0.26 0.27 0.04 0.28 Net realized and unrealized gains or losses (10.40) 2.83 7.21 4.64 0.43 6.62 -------------------------------------------------------------------------------- Total income or loss from investment operations (10.14) 3.09 7.47 4.91 0.47 6.90 Less distributions: Dividends from net investment income (0.24) (0.26) (0.25) (0.26) -- (0.26) -------------------------------------------------------------------------------- Net asset value at end of period 29.57 39.95 37.12 29.90 25.25 24.78 ================================================================================ Total return (%) (25.50) 8.34 25.12 19.63 1.90 2 38.32 RATIOS/SUPPLEMENTAL DATA (%) - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net operating expenses to average net assets 0.46 0.46 4 0.46 0.46 0.46 3 0.47 Expense reductions reflected in above ratio 0.05 0.04 0.05 0.05 0.04 3 0.06 Ratio of net investment income to average net assets 0.78 0.63 0.78 1.02 1.00 3 1.33 Portfolio turnover rate 8 9 3 2 -- 2 Net assets, end of period ($ x 1,000,000) 3,852 5,083 4,925 3,657 2,611 2,499
11/1/00- 11/1/99- 11/1/98- 11/1/97- 9/1/97- 5/19/97 1- SELECT SHARES(R) 10/31/01 10/31/00 10/31/99 10/31/98 10/31/97 8/31/97 - ------------------------------------------------------------------------------------------------------------------------------------ PER-SHARE DATA ($) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value at beginning of period 39.98 37.16 29.93 25.26 24.79 22.64 ------------------------------------------------------------------------------ Income or loss from investment operations: Net investment income 0.31 0.29 0.30 0.32 0.04 0.05 Net realized and unrealized gains or losses (10.41) 2.84 7.22 4.63 0.43 2.10 ------------------------------------------------------------------------------ Total income or loss from investment operations (10.10) 3.13 7.52 4.95 0.47 2.15 Less distributions: Dividends from net investment income (0.30) (0.31) (0.29) (0.28) -- -- ------------------------------------------------------------------------------ Net asset value at end of period 29.58 39.98 37.16 29.93 25.26 24.79 ============================================================================== Total return (%) (25.40) 8.46 25.29 19.79 1.90 2 9.50 2 RATIOS/SUPPLEMENTAL DATA (%) - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net operating expenses to average net assets 0.35 0.35 4 0.35 0.35 0.35 3 0.35 3 Expense reductions reflected in above ratio 0.01 -- 0.02 0.04 0.06 3 0.33 3 Ratio of net investment income to average net assets 0.89 0.74 0.89 1.11 1.11 3 1.26 3 Portfolio turnover rate 8 9 3 2 -- 2 Net assets, end of period ($ x 1,000,000) 1,911 2,159 2,214 1,041 426 347
1 Commencement of operations. 2 Not annualized. 3 Annualized. 4 Would have been 0.47% if certain non-routine expenses (proxy fees) had been included. 5 Would have been 0.36% if certain non-routine expenses (proxy fees) had been included. 13 The fund's goal is to track the performance of a benchmark index that measures the total return of small capitalization U.S. stocks. SCHWAB SMALL-CAP INDEX FUND(R)
TICKER SYMBOLS Investor Shares SWSMX Select Shares(R) SWSSX
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. Historically, the performance of small-cap stocks has not always paralleled that of large-cap stocks. For this reason, some investors use them to diversify a portfolio that invests in larger stocks. INDEX THE FUND INTENDS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY TRACKING THE TOTAL RETURN OF THE SCHWAB SMALL-CAP INDEX(R). The index includes the 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 GENERALLY 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 its 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 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. Small-Cap Index Fund 14 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 underperform large- or mid-cap stocks, the fund may also 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, futures contracts, which the fund uses to gain exposure to stocks 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. 15 PERFORMANCE The information below shows fund returns before and after taxes, and compares fund performance (which varies over time) to that of two indices. The indices are unmanaged and do not include expenses or taxes. All figures assume distributions were reinvested. The after-tax figures: - - reflect the highest federal income tax rates that applied during the period, but assume no state or local taxes - - are shown for one share class only, and would be different for other share classes - - may not reflect your actual after-tax performance - - may not be relevant to shares in an IRA, 401(k) or other tax-advantaged retirement account Keep in mind that future performance (both before and after taxes) may differ from past performance. The fund has two share classes, which have different minimum investments and different costs. For information on choosing a class, see page 28. ANNUAL TOTAL RETURNS (%) as of 12/31 [BAR CHART]
INVESTOR SHARES 94 (3.08) 95 27.65 96 15.49 97 25.69 98 (3.57) 99 24.20 00 3.73 01 (0.90)
BEST QUARTER: 19.63% Q4 2001 WORST QUARTER: (20.94%) Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/01
Since 1 Year 5 Years inception - ---------------------------------------------------------------- INVESTOR SHARES Before taxes (0.90) 9.12 10.53 1 After taxes on distributions (1.75) 7.84 9.63 1 After taxes on distributions and sale of shares 0.04 7.12 8.60 1 SELECT SHARES(R) before taxes (0.80) -- 9.68 2 Russell 2000 Index(R) 2.49 7.52 7.78 3 Schwab Small-Cap Index(R) (1.06) 10.36 10.70 3
1 Inception: 12/3/93. 2 Inception: 5/19/97. 3 From 12/3/93. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are 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.
INVESTOR SELECT SHAREHOLDER FEES SHARES SHARES - --------------------------------------------------- Redemption fee* 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 0.31 0.16 --------------- Total annual operating expenses 0.61 0.46 Expense reduction (0.12) (0.08) --------------- NET OPERATING EXPENSES** 0.49 0.38 ===============
* Charged only on shares you sell 180 days or less after buying them and paid directly to the fund. ** Guaranteed by Schwab and the investment adviser through 2/28/03 (excluding interest, taxes and certain non-routine expenses). Designed to help you compare expenses, the example below 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 $183 $328 $751 SELECT SHARES $39 $140 $250 $571
Small-Cap Index Fund 16 FINANCIAL HIGHLIGHTS This section provides further details about the fund's recent financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/00- 11/1/99- 11/1/98- 11/1/97- 11/1/96- INVESTOR SHARES 10/31/01 10/31/00 10/31/99 10/31/98 10/31/97 PER-SHARE DATA ($) - ------------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 21.06 17.41 15.39 17.73 13.59 --------------------------------------------------------------------- Income or loss from investment operations: Net investment income 0.07 0.07 0.06 0.05 0.06 Net realized and unrealized gains or losses (2.76) 3.62 2.89 (2.33) 4.14 --------------------------------------------------------------------- Total income or loss from investment operations (2.69) 3.69 2.95 (2.28) 4.20 Less distributions: Dividends from net investment income (0.08) (0.04) (0.06) (0.06) (0.06) Distributions from net realized gains (2.31) -- (0.87) -- -- --------------------------------------------------------------------- Total distributions (2.39) (0.04) (0.93) (0.06) (0.06) --------------------------------------------------------------------- Net asset value at end of period 15.98 21.06 17.41 15.39 17.73 ===================================================================== Total return (%) (13.66) 21.22 19.96 (12.88) 31.03 RATIOS/SUPPLEMENTAL DATA (%) - ------------------------------------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.49 0.49 4 0.49 0.49 0.52 Expense reductions reflected in above ratio 0.12 0.16 0.30 0.32 0.37 Ratio of net investment income to average net assets 0.49 0.44 0.33 0.35 0.53 Portfolio turnover rate 49 54 41 40 23 Net assets, end of period ($ x 1,000,000) 804 803 452 480 410
11/1/00- 11/1/99- 11/1/98- 11/1/97- 5/19/97 1- SELECT SHARES(R) 10/31/01 10/31/00 10/31/99 10/31/98 10/31/97 PER-SHARE DATA ($) - ------------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 21.09 17.44 15.41 17.75 14.50 --------------------------------------------------------------------- Income or loss from investment operations: Net investment income 0.11 0.11 0.07 0.08 0.02 Net realized and unrealized gains or losses (2.78) 3.61 2.90 (2.35) 3.23 --------------------------------------------------------------------- Total income or loss from investment operations (2.67) 3.72 2.97 (2.27) 3.25 Less distributions: Dividends from net investment income (0.11) (0.07) (0.07) (0.07) -- Distributions from net realized gains (2.31) -- (0.87) -- -- --------------------------------------------------------------------- Total distributions (2.42) (0.07) (0.94) (0.07) -- --------------------------------------------------------------------- Net asset value at end of period 16.00 21.09 17.44 15.41 17.75 ===================================================================== Total return (%) (13.56) 21.37 20.14 (12.81) 22.41 2 RATIOS/SUPPLEMENTAL DATA (%) - ------------------------------------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.38 0.38 5 0.38 0.38 0.38 3 Expense reductions reflected in above ratio 0.08 0.12 0.27 0.33 0.52 3 Ratio of net investment income to average net assets 0.60 0.55 0.44 0.46 0.56 3 Portfolio turnover rate 49 54 41 40 23 Net assets, end of period ($ x 1,000,000) 727 757 447 150 81
1 Commencement of operations. 2 Not annualized. 3 Annualized. 4 Would have been 0.50% if certain non-routine expenses (proxy fees) had been included. 5 Would have been 0.39% if certain non-routine expenses (proxy fees) had been included. 17 The fund's goal is to track the total return of the entire U.S. stock market, as measured by the Wilshire 5000 Total Market Index. SCHWAB TOTAL STOCK MARKET INDEX FUND(R)
TICKER SYMBOLS Investor Shares SWTIX Select Shares(R) SWTSX
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 99% of its total value. (All figures on this page are as of 12/31/01). 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. INDEX THE FUND'S BENCHMARK INDEX INCLUDES ALL PUBLICLY TRADED STOCKS OF COMPANIES HEADQUARTERED IN THE UNITED STATES FOR WHICH PRICING INFORMATION IS READILY AVAILABLE -- currently more than 6,000 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 GENERALLY 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 its 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 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. Total Stock Market Index Fund 18 With its very broad exposure to the U.S. stock market, this fund is designed for long-term investors who want exposure to all three tiers of the market: large-, mid- and small-cap. MAIN RISKS STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is tied to these markets, the value of your investment in the fund will fluctuate, which means that you could lose money. YOUR INVESTMENT FOLLOWS THE U.S. STOCK MARKET, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund will not take steps to reduce market exposure or to lessen the effects of a declining market. MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news can influence marketwide trends; the outcome may be positive or negative, short term or long term. Other factors may be ignored by the market as a whole but may cause movements in the price of one company's stock or the stocks of one or more industries (for example, rising oil prices may lead to a decline in airline stocks). Because the fund encompasses stocks from across the economy, it is broadly diversified, which reduces the impact of the performance of any given industry, individual stock or market segment. But whenever any particular market segment outperforms the U.S. stock market as a whole, the fund may underperform funds that have greater exposure to that segment. Likewise, whenever U.S. stocks fall behind other types of investments -- bonds, for instance -- the fund's performance also will lag these investments. Because the fund gives greater weight to larger stocks, most of its performance will reflect the performance of the large-cap segment. OTHER RISK FACTORS Although the fund's main risks are those associated with its stock investments, its other investment strategies also involve risks. For example, the fund's use of sampling may increase the gap between the performance of the fund and that of the index. Futures contracts, which the fund uses to gain exposure to stocks for its cash balances, also could cause the fund to track the index less closely if they don't perform as expected. The fund also may lend a portion of its securities to certain financial institutions in order to earn income. These loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. INDEX OWNERSHIP: Wilshire and Wilshire 5000 are registered service marks of Wilshire Associates, Inc. The fund is not sponsored, endorsed, sold or promoted by Wilshire Associates, and Wilshire Associates is not in any way affiliated with the fund. Wilshire Associates makes no representation regarding the advisability of investing in the fund or in any stock included in the Wilshire 5000. 19 PERFORMANCE The information below shows fund returns before and after taxes, and compares fund performance (which varies over time) to that of the index. The index is unmanaged and does not include expenses or taxes. All figures assume distributions were reinvested. The after-tax figures: - - reflect the highest federal income tax rates that applied during the period, but assume no state or local taxes - - are shown for one share class only, and would be different for other share classes - - may not reflect your actual after-tax performance - - may not be relevant to shares in an IRA, 401(k) or other tax-advantaged retirement account Keep in mind that future performance (both before and after taxes) may differ from past performance. The fund has two share classes, which have different minimum investments and different costs. For information on choosing a class, see page 28. ANNUAL TOTAL RETURNS (%) as of 12/31 INVESTOR SHARES [BAR CHART] 00 (10.63) 01 (11.19)
BEST QUARTER: 12.24% Q4 2001 WORST QUARTER: (15.87%) Q3 2001 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/01
Since 1 Year inception - -------------------------------------------------------------- INVESTOR SHARES Before taxes (11.19) (3.12) 1 After taxes on distributions (11.51) (3.43) 1 After taxes on distributions and sale of shares (6.82) (2.62) 1 SELECT SHARES(R) before taxes (11.09) (2.99) 1 Wilshire 5000 Total Market Index (10.97) (3.11) 2
1 Inception: 6/1/99. 2 From 6/1/99. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are charged to you directly by the fund. "Annual operating expenses" are paid out of fund assets, so their effect is included in the total return for each share class. FEE TABLE (%)
INVESTOR SELECT SHAREHOLDER FEES SHARES SHARES - --------------------------------------------------- Redemption fee* 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 0.35 0.20 --------------- Total annual operating expenses 0.65 0.50 Expense reduction (0.25) (0.23) --------------- NET OPERATING EXPENSES** 0.40 0.27 ===============
* Charged only on shares you sell 180 days or less after buying them and paid directly to the fund. ** Guaranteed by Schwab and the investment adviser through 2/28/03 (excluding interest, taxes and certain non-routine expenses). Designed to help you compare expenses, the example below 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 $41 $183 $337 $787 SELECT SHARES $28 $137 $257 $606
Total Stock Market Index Fund 20 FINANCIAL HIGHLIGHTS This section provides further details about the fund's recent financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/00- 11/1/99- 6/1/991- INVESTOR SHARES 10/31/01 10/31/00 10/31/99 - ----------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) - ----------------------------------------------------------------------------------------------------- Net asset value at beginning of period 22.49 20.87 20.00 ------------------------------------------ Income or loss from investment operations: Net investment income 0.15 0.16 0.07 Net realized and unrealized gains or losses (5.87) 1.56 0.80 ------------------------------------------ Total income or loss from investment operations (5.72) 1.72 0.87 Less distributions: Dividends from net investment income (0.15) (0.10) -- ------------------------------------------ Net asset value at end of period 16.62 22.49 20.87 ========================================== Total return (%) (25.55) 8.23 4.35 2 RATIOS/SUPPLEMENTAL DATA (%) - ----------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.40 0.40 4 0.40 3 Expense reductions reflected in above ratio 0.25 0.26 0.51 3 Ratio of net investment income to average net assets 0.94 0.76 0.92 3 Portfolio turnover rate 2 2 1 Net assets, end of period ($ x 1,000,000) 224 218 136
11/1/00- 11/1/99- 6/1/99 1- SELECT SHARES(R) 10/31/01 10/31/00 10/31/99 - ----------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) - ----------------------------------------------------------------------------------------------------- Net asset value at beginning of period 22.52 20.89 20.00 ------------------------------------------ Income or loss from investment operations: Net investment income 0.18 0.17 0.07 Net realized and unrealized gains or losses (5.87) 1.56 0.82 ------------------------------------------ Total income or loss from investment operations (5.69) 1.73 0.89 Less distributions: Dividends from net investment income (0.18) (0.10) -- ------------------------------------------ Net asset value at end of period 16.65 22.52 20.89 ========================================== Total return (%) (25.40) 8.30 4.45 2 RATIOS/SUPPLEMENTAL DATA (%) - ----------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.27 0.27 5 0.27 3 Expense reductions reflected in above ratio 0.23 0.24 0.47 3 Ratio of net investment income to average net assets 1.07 0.89 1.05 3 Portfolio turnover rate 2 2 1 Net assets, end of period ($ x 1,000,000) 257 262 149
1 Commencement of operations. 2 Not annualized. 3 Annualized. 4 Would have been 0.41% if certain non-routine expenses (proxy fees) had been included. 5 Would have been 0.28% if certain non-routine expenses (proxy fees) had been included. 21 The fund's goal is to track the performance of a benchmark index that measures the total return of large, publicly traded non-U.S. companies from countries with developed equity markets outside of the United States. SCHWAB INTERNATIONAL INDEX FUND(R)
TICKER SYMBOLS Investor Shares SWINX Select Shares(R) SWISX
INTERNATIONAL STOCKS Over the past several decades, foreign stock markets have grown rapidly. The market value of foreign stocks today represents approximately 59% of the world's total market capitalization. (All figures are as of 12/31/01.) For some investors, an international index fund represents an opportunity for low-cost access to a variety of world markets in one fund. Others turn to international stocks to diversify a portfolio of U.S. investments, because international stock markets historically have performed somewhat differently from the U.S. market. INDEX THE FUND INTENDS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY TRACKING THE TOTAL RETURN OF THE SCHWAB INTERNATIONAL INDEX(R). The index includes 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 free float-adjusted market capitalizations (total market value of all shares available for purchase by international investors) 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 GENERALLY 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 its 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 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 typically is not enough to eliminate the effect of expenses, the fund's performance normally is below that of the index. International Index Fund 22 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 underperform other types of stocks or other types of investments -- bonds, for instance -- the fund's performance also will lag these investments. OTHER RISK FACTORS Although the fund's main risks are those associated with its stock investments, its other investment strategies also may involve risks. These risks could affect how well the fund tracks the performance of the index. For example, the fund may lend a portion of its securities to certain financial institutions in order to earn income. These loans are fully collateralized. However, if the institution defaults, the fund's performance could be reduced. 23 PERFORMANCE The information below shows fund returns before and after taxes, and compares fund performance (which varies over time) to that of two indices. The indices are unmanaged and do not include expenses or taxes. All figures assume distributions were reinvested. The after-tax figures: - - reflect the highest federal income tax rates that applied during the period, but assume no state or local taxes - - are shown for one share class only, and would be different for other share classes - - may not reflect your actual after-tax performance - - may not be relevant to shares in an IRA, 401(k) or other tax-advantaged retirement account Keep in mind that future performance (both before and after taxes) may differ from past performance. The fund has two share classes, which have different minimum investments and different costs. For information on choosing a class, see page 28. ANNUAL TOTAL RETURNS (%) as of 12/31 INVESTOR SHARES [BAR CHART] 94 3.84 95 14.22 96 9.12 97 7.31 98 15.85 99 33.62 00 (17.59) 01 (22.74)
BEST QUARTER: 19.88% Q4 1999 WORST QUARTER: (14.93%) Q3 1998 AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/01
Since 1 Year 5 Years inception - -------------------------------------------------------------------------------- INVESTOR SHARES Before taxes (22.74) 1.12 3.97 1 After taxes on distributions (23.08) 0.69 3.49 1 After taxes on distributions and sale of shares (13.86) 0.71 3.02 1 SELECT SHARES(R) before taxes (22.71) -- (0.42) 2 MSCI-EAFE(R) Index (21.44) 0.89 (0.50) 3 Schwab International Index(R) (22.76) 1.50 (0.24) 3
1 Inception: 9/9/93. 2 Inception: 5/19/97. 3 From 9/9/93. FUND FEES AND EXPENSES The following table describes what you could expect to pay as a fund investor. "Shareholder fees" are 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 SHAREHOLDER FEES SHARES SHARES - --------------------------------------------------- Redemption fee* 1.50 1.50 ANNUAL OPERATING EXPENSES (% of average net assets) - --------------------------------------------------- Management fees 0.40 0.40 Distribution (12b-1) fees None None Other expenses 0.35 0.20 --------------- Total annual operating expenses 0.75 0.60 Expense reduction (0.17) (0.13) --------------- NET OPERATING EXPENSES** 0.58 0.47 ===============
* Charged only on shares you sell 180 days or less after buying them and paid directly to the fund. ** Guaranteed by Schwab and the investment adviser through 2/28/03 (excluding interest, taxes and certain non-routine expenses). Designed to help you compare expenses, the example below 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 $223 $400 $914 SELECT SHARES $48 $179 $322 $738
International Index Fund 24 FINANCIAL HIGHLIGHTS This section provides further details about the fund's recent financial history. "Total return" shows the percentage that an investor in the fund would have earned or lost during a given period, assuming all distributions were reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP, audited these figures. Their full report is included in the fund's annual report (see back cover).
11/1/00- 11/1/99- 11/1/98- 11/1/97- 11/1/96- INVESTOR SHARES 10/31/01 10/31/00 10/31/99 10/31/98 10/31/97 - ----------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) - ----------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 17.13 17.93 14.21 13.31 12.23 ------------------------------------------------------------------- Income or loss from investment operations: Net investment income 0.15 0.20 0.19 0.17 0.17 Net realized and unrealized gains or losses (4.81) (0.85) 3.66 0.88 1.08 ------------------------------------------------------------------- Total income or loss from investment operations (4.66) (0.65) 3.85 1.05 1.25 Less distributions: Dividends from net investment income (0.25) (0.15) (0.13) (0.15) (0.17) ------------------------------------------------------------------- Net asset value at end of period 12.22 17.13 17.93 14.21 13.31 =================================================================== Total return (%) (27.58) (3.69) 27.31 8.02 10.33 RATIOS/SUPPLEMENTAL DATA (%) - ----------------------------------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.58 0.58 4 0.58 0.58 0.61 Expense reductions reflected in above ratio 0.17 0.23 0.41 0.46 0.52 Ratio of net investment income to average net assets 1.14 1.60 1.24 1.35 1.36 Portfolio turnover rate 18 16 5 6 13 Net assets, end of period ($ x 1,000,000) 519 637 447 428 318
11/1/00- 11/1/99- 11/1/98- 11/1/97- 5/19/97 1- SELECT SHARES(R) 10/31/01 10/31/00 10/31/99 10/31/98 10/31/97 - ----------------------------------------------------------------------------------------------------------------------------- PER-SHARE DATA ($) - ----------------------------------------------------------------------------------------------------------------------------- Net asset value at beginning of period 17.14 17.96 14.23 13.32 13.59 ------------------------------------------------------------------- Income or loss from investment operations: Net investment income 0.16 0.27 0.18 0.22 0.04 Net realized and unrealized gains or losses (4.80) (0.91) 3.70 0.85 (0.31) ------------------------------------------------------------------- Total income or loss from investment operations (4.64) (0.64) 3.88 1.07 (0.27) Less distributions: Dividends from net investment income (0.27) (0.18) (0.15) (0.16) -- ------------------------------------------------------------------- Net asset value at end of period 12.23 17.14 17.96 14.23 13.32 =================================================================== Total return (%) (27.45) (3.65) 27.49 8.16 (1.99) 2 RATIOS/SUPPLEMENTAL DATA (%) - ----------------------------------------------------------------------------------------------------------------------------- Ratio of net operating expenses to average net assets 0.47 0.47 5 0.47 0.47 0.47 3 Expense reductions reflected in above ratio 0.13 0.19 0.39 0.48 0.80 3 Ratio of net investment income to average net assets 1.25 1.71 1.57 1.49 0.17 3 Portfolio turnover rate 18 16 5 6 13 Net assets, end of period ($ x 1,000,000) 616 700 449 94 50
1 Commencement of operations. 2 Not annualized. 3 Annualized. 4 Would have been 0.59% if certain non-routine expenses (proxy fees) had been included. 5 Would have been 0.48% if certain non-routine expenses (proxy fees) had been included. 25 FUND MANAGEMENT THE FUNDS' INVESTMENT ADVISER, CHARLES SCHWAB INVESTMENT MANAGEMENT, INC., HAS MORE THAN $146 BILLION UNDER MANAGEMENT. The investment adviser for the Schwab Equity Index Funds is Charles Schwab Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104. Founded in 1989, the firm today serves as investment adviser for all of the SchwabFunds(R). The firm manages assets for more than 6 million shareholder accounts. (All figures on this page are as of 10/31/01.) As the investment adviser, the firm oversees the asset management and administration of the Schwab Equity Index Funds. As compensation for these services, the firm receives a management fee from each fund. For the 12 months ended 10/31/01, these fees were 0.14% for the Schwab S&P 500 Fund, 0.22% for the Schwab 1000 Fund(R), 0.22% for the Schwab Small-Cap Index Fund(R), 0.07% for the Schwab Total Stock Market Index Fund(R), and 0.27% for the Schwab International Index Fund(R). These figures, which are expressed as a percentage of each fund's average daily net assets, represent the actual amounts paid, including the effects of reductions. GERI HOM, a vice president of the investment adviser, is responsible for the day-to-day management of and has overall responsibility for each of the funds. Prior to joining the firm in March 1995, she worked for nearly 15 years in equity index management. LARRY MANO, a portfolio manager, is responsible for the day-to-day management of Schwab Total Stock Market Index Fund and Schwab International Index Fund. Prior to joining the firm in November 1998, he worked for 20 years in equity index management. Fund management 26 INVESTING IN THE FUNDS As a SchwabFunds(R) investor, you have a number of ways to do business with us. On the following pages, you will find information on buying, selling and exchanging shares using the method that is most convenient for you. You also will see how to choose a distribution option for your investment. Helpful information on taxes is included as well. 27 SCHWAB ACCOUNTS Different types of Schwab brokerage accounts are available, with varying account opening and balance requirements. Some Schwab brokerage account features can work in tandem with features offered by the funds. For example, when you sell shares in a fund, the proceeds automatically are paid to your Schwab brokerage account. From your account, you can use features such as Schwab MoneyLink(R), which lets you move money between your brokerage accounts and bank accounts, and Automatic Investment Plan (AIP), which lets you set up periodic investments. For more information on Schwab brokerage accounts, call 1-800-435-4000 or visit the Schwab web site at www.schwab.com. BUYING SHARES Shares of the funds may be purchased through a Schwab brokerage account or through certain third-party investment providers, such as other financial institutions, investment professionals and workplace retirement plans. The information on these pages outlines how Schwab brokerage account investors can place "good orders," which are orders made in accordance with the funds' policies, 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. STEP 1 CHOOSE A FUND AND A SHARE CLASS. Your choice may depend on the amount of your investment. Currently, e.Shares(R) are available only for the S&P 500 Fund and are offered to clients of Schwab Institutional, The Charles Schwab Trust Company and certain retirement plans. The minimums shown below are for each fund and share class.
MINIMUM INITIAL MINIMUM ADDITIONAL MINIMUM SHARE CLASS INVESTMENT INVESTMENT BALANCE - ------------------------------------------------------------------------------- Investor Shares $2,500 ($1,000 for $500 ($100 for custodial -- retirement and accounts and investments custodial accounts) through the Automatic Investment Plan) Select Shares(R) $50,000 $1,000 $40,000 e.Shares $1,000 ($500 for $100 -- retirement and custodial accounts)
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 at right. Remember that e.Shares(R) are available only through SchwabLink(R). Make checks payable to Charles Schwab & Co., Inc. Investing in the funds 28 SELLING/EXCHANGING SHARES USE ANY OF THE METHODS DESCRIBED BELOW TO SELL SHARES OF A FUND. When selling or exchanging shares, please be aware of the following policies: - - A fund may take up to seven days to pay sale proceeds. - - If you are selling shares that were recently purchased by check, the proceeds may be delayed until the check for purchase clears; this may take up to 15 days from the date of purchase. - - As indicated in each fund's fee table, each fund charges a redemption fee, payable to the fund, on the sale or exchange of any shares that occurs 180 days or less after purchasing 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). - - There is no redemption fee when you exchange between share classes of the same fund. - - The funds reserve the right to honor redemptions in portfolio securities instead of cash when your redemptions over a 90-day period exceed $250,000 or 1% of a fund's assets, whichever is less. - - Exchange orders are limited to other SchwabFunds(R) that are not Sweep Investments(R) and must meet the minimum investment and other requirements for the fund and share class into which you are exchanging. - - You must obtain and read the prospectus for the fund into which you are exchanging prior to placing your order. METHODS FOR PLACING DIRECT ORDERS INTERNET www.schwab.com SCHWAB BY PHONE Automated voice service or speak with a representative at 1-800-435-4000 (for TDD service, call 1-800-345-2550). TELEBROKER(R) Automated touch-tone phone service at 1-800-272-4922. SCHWABLINK(R) Investment professionals should follow the transaction instructions in the SchwabLink manual; for technical assistance, call 1-800-367-5198. MAIL Write to SchwabFunds at: P.O. Box 7575 San Francisco, CA 94120-7575 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 SchwabLink transactions, include the master account and subaccount numbers) or, for Internet orders, your password. - - The name and share class (if applicable) 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. - - When selling or exchanging shares by mail, be sure to include the signature of at least one of the persons whose name is on the account. - - For exchanges, the name and share class (if applicable) of the fund into which you want to exchange and the distribution option you prefer. - - When selling shares, how you would like to receive the proceeds. Please note that orders to buy, sell or exchange become irrevocable at the time you mail them. 29 TRANSACTION POLICIES THE FUNDS ARE OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE) IS OPEN. The funds calculate their share prices each business day, for each share class, after the close of the NYSE (generally 4 p.m. Eastern time). A fund's share price is its net asset value per share, or NAV, which is the fund's net assets divided by the number of its shares outstanding. Orders to buy, sell or exchange shares that are received in good order prior to the close of a fund (generally 4 p.m. Eastern time) will be executed at the next share price calculated that day. If you place an order through a third-party investment provider, please consult with that investment provider to determine when your order will be executed. Generally, you will receive the share price next calculated after the fund receives your order from your investment provider. However, some investment providers may arrange with the fund for you to receive the share price next calculated after your investment provider has received your order. Some investment providers may require that they receive orders prior to a specified cut-off time. In valuing their securities, the funds use market quotes if they are readily available. In cases where quotes are not readily available, a fund may value securities based on fair values developed using methods approved by the fund's Board of Trustees. Shareholders of the Schwab International Index Fund(R) should be aware that because foreign markets are often open on weekends and other days when the fund is closed, the value of the fund's portfolio may change on days when it is not possible to buy or sell shares of the fund. THE FUNDS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following: - - To automatically redeem your shares if the account they are held in is closed for any reason or your balance falls below the minimum for your share class as a result of selling or exchanging your shares. - - To modify or terminate the exchange privilege upon 60 days' written notice to shareholders. - - To refuse any purchase or exchange order, including large purchase orders that may negatively impact their operations and orders that appear to be associated with short-term trading activities. - - To change or waive a fund's investment minimums. - - To suspend the right to sell shares back to a fund, and delay sending proceeds, during times when trading on the NYSE is restricted or halted, or otherwise as permitted by the SEC. - - To withdraw or suspend any part of the offering made by this prospectus. - - To revise the redemption fee criteria. Investing in the funds 30 DISTRIBUTIONS AND TAXES ANY INVESTMENT IN THE FUNDS TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The information below is meant as a general summary for U.S. citizens and residents. Because each person's tax situation is different, you should consult your tax advisor about the tax implications of your investment in a fund. You also can visit the Internal Revenue Service (IRS) web site at www.irs.gov. AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS AND GAINS YOUR FUND EARNS. Every year, each fund distributes to its shareholders substantially all of its net investment income and net capital gains, if any. These distributions typically are paid in December to all shareholders of record. UNLESS YOU ARE INVESTING THROUGH AN IRA, 401(k) OR OTHER TAX-ADVANTAGED RETIREMENT ACCOUNT, YOUR FUND DISTRIBUTIONS GENERALLY HAVE TAX CONSEQUENCES. Each fund's net investment income and short-term capital gains are distributed as dividends and are taxable as ordinary income. Other capital gain distributions are taxable as long-term capital gains, regardless of how long you have held your shares in the fund. Distributions generally are taxable in the tax year in which they are declared, whether you reinvest them or take them in cash. GENERALLY, ANY SALE OR EXCHANGE OF YOUR SHARES IS A TAXABLE EVENT. For tax purposes, an exchange of your shares for shares of another SchwabFund is treated the same as a sale. An exchange between classes within a fund is not reported as a taxable sale. 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. SHAREHOLDERS IN THE SCHWAB INTERNATIONAL INDEX FUND(R) MAY HAVE ADDITIONAL TAX CONSIDERATIONS as a result of foreign tax payments made by the fund. Typically, these payments will reduce the fund's dividends but will still be included in your taxable income. You may be able to claim a tax credit or deduction for your portion of foreign taxes paid by the fund, however. AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION DETAILING THE TAX STATUS OF ANY DISTRIBUTIONS a fund paid during the previous calendar year. Schwab brokerage account customers also receive information on distributions and transactions in their monthly account statements. SCHWAB BROKERAGE ACCOUNT CUSTOMERS WHO SELL FUND SHARES typically will receive a report that calculates their gain or loss using the "average cost" single-category method. This information is not reported to the IRS, and you still have the option of calculating gains or losses using any other methods permitted by the IRS. MORE ON DISTRIBUTIONS If you are investing through a taxable account and purchase shares of a fund just before it declares a distribution, you may receive a portion of your investment back as a taxable distribution. This is because when a fund makes a distribution, the share price is reduced by the amount of the distribution. You can avoid "buying a dividend," as it is often called, by finding out if a distribution is imminent and waiting until afterwards to invest. Of course, you may decide that the opportunity to gain a few days of investment performance outweighs the tax consequences of buying a dividend. 31 SCHWAB EQUITY INDEX FUNDS PROSPECTUS February 28, 2002 [SCHWAB FUNDS(R) LOGO] TO LEARN MORE This prospectus contains important information on the funds and should be read and kept for reference. You also can obtain more information from the following sources. SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent performance and fund holdings. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed discussion of investment policies and the risks associated with various investments. The SAI is incorporated by reference into the prospectus, making it legally part of the prospectus. You can obtain free copies of these documents by contacting SchwabFunds(R). You can also review and copy them in person at the SEC's Public Reference Room, access them online at www.sec.gov or obtain paper copies by sending an electronic request to publicinfo@sec.gov. You will need to pay a duplicating fee before receiving paper copies from the SEC. SEC FILE NUMBER Schwab S&P 500 Fund 811-7704 Schwab 1000 Fund(R) 811-6200 Schwab Small-Cap Index Fund(R) 811-7704 Schwab Total Stock Market Index Fund(R) 811-7704 Schwab International Index Fund(R) 811-7704 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-0102 1-202-942-8090 (Public Reference Section) www.sec.gov publicinfo@sec.gov SCHWABFUNDS P.O. Box 7575 San Francisco, CA 94120-7575 1-800-435-4000 www.schwab.com/schwabfunds REG13644FLT-05 STATEMENT OF ADDITIONAL INFORMATION SCHWAB EQUITY INDEX FUNDS SCHWAB S&P 500 FUND SCHWAB 1000 FUND(R) SCHWAB SMALL-CAP INDEX FUND(R) SCHWAB TOTAL STOCK MARKET INDEX FUND(R) SCHWAB INTERNATIONAL INDEX FUND(R) FEBRUARY 28, 2002 The Statement of Additional Information (SAI) is not a prospectus. It should be read in conjunction with the funds' prospectus dated February 28, 2002 (as amended from time to time). To obtain a free copy of the prospectus, please contact SchwabFunds(R) at 800-435-4000, 24 hours a day, or write to the funds at P.O. Box 7575, San Francisco, California 94120-7575. For TDD service call 800-345-2550, 24 hours a day. The prospectus also may be available on the Internet at: http://www.schwab.com/schwabfunds. The funds' most recent annual report is a separate document supplied with the SAI and includes the funds' audited financial statements, which are incorporated by reference into this SAI. Schwab S&P 500 Fund, Schwab Small-Cap Index Fund, Schwab Total Stock Market Index Fund and Schwab International Index Fund are series of Schwab Capital Trust (a trust), and Schwab 1000 Fund is a series of Schwab Investments (a trust). TABLE OF CONTENTS
Page INVESTMENT OBJECTIVES, STRATEGIES, RISKS AND LIMITATIONS.................. 2 MANAGEMENT OF THE FUNDS................................................... 20 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 28 INVESTMENT ADVISORY AND OTHER SERVICES.................................... 29 BROKERAGE ALLOCATION AND OTHER PRACTICES.................................. 32 DESCRIPTION OF THE TRUSTS................................................. 33 PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS AND PRICING OF SHARES..................................................... 34 TAXATION.................................................................. 36 CALCULATION OF PERFORMANCE DATA........................................... 38
INVESTMENT OBJECTIVES, STRATEGIES, RISKS AND LIMITATIONS The following investment strategies, risks and limitations supplement those set forth in the prospectus and may be changed without shareholder approval unless otherwise noted. Also, policies and limitations that state a maximum percentage of assets that may be invested in a security or other asset, or that set forth a quality standard, shall be measured immediately after and as a result of a fund's acquisition of such security or asset unless otherwise noted. Any subsequent change in values, net assets or other circumstances will not be considered when determining whether the investment complies with the funds' investment policies and limitations. Not all investment securities or techniques discussed below are eligible investments for each fund. A fund will invest in securities or engage in techniques that are intended to help achieve its investment objective. INVESTMENT OBJECTIVES AND INDEXES Each fund's investment objective may be changed only by vote of a majority of its outstanding voting shares. A majority of the outstanding voting shares of a fund means the affirmative vote of the lesser of: (a) 67% or more of the voting shares represented at the meeting, if more than 50% of the outstanding voting shares of a fund are represented at the meeting or (b) more than 50% of the outstanding voting shares of a fund. There is no guarantee the funds will achieve their objectives. THE SCHWAB S&P 500 FUND'S investment objective is to seek to track the price and dividend performance (total return) of common stocks of U. S. companies, as represented by Standard & Poor's 500 Composite Stock Price Index (the S&P 500(R)). The S&P 500 is representative of the performance of the U.S. stock market. The index consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index (stock price times number of shares outstanding), with each stock's weight in the index proportionate to its market value. The S&P 500 does not contain the 500 largest stocks, as measured by market capitalization. Although many of the stocks in the index are among the largest, it also includes some relatively small companies. Those companies, however, generally are established companies within their industry group. Standard & Poor's (S&P) identifies important industry groups within the U.S. economy and then allocates a representative sample of stocks with each group to the S&P 500. There are four major industry sectors within the index: industrials, utilities, financial and transportation. The fund may purchase securities of companies with which it is affiliated to the extent these companies are represented in its index. It is the Schwab S&P 500 Fund's policy that under normal circumstances it will invest at least 80% of its assets in securities included in the S&P 500. The fund will notify its shareholders at least 60 days before changing this policy. For purposes of this policy, assets mean net assets plus the amount of any borrowings for investment purposes. The Schwab S&P 500 Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the shareholders of the Schwab S&P 500 Fund or any member of the public regarding the advisability of investing in securities generally or in the Schwab S&P 500 Fund particularly or the ability of the S&P 500 Index to track general stock market performance. S&P's only relationship to the Schwab S&P 500 Fund is the licensing of certain trademarks and trade names of S&P and of the S&P 500 Index, which is determined, composed and calculated by S&P without regard to the Schwab S&P 500 Fund. S&P has no 2 obligation to take the needs of the Schwab S&P 500 Fund or its shareholders into consideration in determining, composing or calculating the S&P 500 Index. S&P is not responsible for and has not participated in the determination of the prices and amount of Schwab S&P 500 Fund shares or in the determination or calculation of the equation by which the Schwab S&P 500 Fund's shares are to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Schwab S&P 500 Fund's shares. S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index or any data included therein, and S&P shall have no liability for any errors, omissions or interruptions therein. S&P makes no warranty, express or implied, as to results to be obtained by the Schwab S&P 500 Fund, its shareholders or any other person or entity from the use of the S&P 500(R) Index or any data therein. S&P makes no express or implied warranties and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the S&P 500 Index or any data included therein. Without limiting any of the foregoing, in no event shall S&P have any liability for any special, punitive, indirect or consequential damages (including lost profits), even if notified of the possibility of such damages. THE SCHWAB 1000 FUND'S investment objective is to match the price and dividend performance (total return) of the Schwab 1000 Index(R), an index created to represent to performance of publicly traded equity securities of the 1,000 largest U.S. companies. To be included in the Schwab 1000 Index, a company must satisfy all of the following criteria: (1) it must be an "operating company" (i.e., not an investment company) or real estate investment trust incorporated in the United States, its territories or possessions; (2) a liquid market for its common shares must exist on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX) or the NASDAQ/NMS and (3) its market value must place it among the top 1,000 such companies as measured by market capitalization (share price times the number of shares outstanding). The fund may purchase securities of companies with which it is affiliated to the extent these companies are represented in its index. As of October 31, 2001, the aggregate market capitalization of the stocks included in the Schwab 1000 Index was approximately $10 trillion. This represents approximately 89% of the total market value of all publicly traded U.S. companies, as represented by the Wilshire 5000 Total Market Index. It is the Schwab 1000 Fund's policy that under normal circumstances it will invest at least 80% of its assets in securities included in the Schwab 1000 Index. The fund will notify its shareholders at least 60 days before changing this policy. For purposes of this policy, assets mean net assets plus the amount of any borrowings for investment purposes. THE SCHWAB SMALL-CAP INDEX FUND'S investment objective is to seek to track the performance of a benchmark index that measures total return of small capitalization U.S. stocks. The Schwab Small-Cap Index Fund intends to achieve its investment objective by tracking the price and dividend performance (total return) of the Schwab Small-Cap Index(R) (Small-Cap Index). The Schwab Small-Cap Index was created to represent the performance of equity securities of the second 1,000 largest U.S. companies, ranked by market capitalization (share price times the number of shares outstanding). To be included in the Schwab Small-Cap Index, a company must satisfy all of the following criteria: (1) it must be an "operating company" (i.e., not an investment company) or a real estate 3 investment trust incorporated in the United States, its territories or possessions; (2) a liquid market for its common shares must exist on the NYSE, AMEX or the NASDAQ/NMS and (3) its market value must place it among the second-largest 1,000 such companies as measured by market capitalization (i.e., from the company with a rank of 1,001 through the company with a rank of 2,000). The fund may purchase securities of companies with which it is affiliated to the extent these companies are represented in its index. It is the Schwab Small-Cap Index Fund's policy that under normal circumstances it will invest at least 80% of its assets in securities included in the benchmark index. The fund will notify its shareholders at least 60 days before changing this policy. For purposes of this policy, assets mean net assets plus the amount of any borrowings for investment purposes. THE SCHWAB TOTAL STOCK MARKET INDEX FUND'S investment objective is to seek to track the total return of the entire U.S. stock market. In pursuing its objective, the fund uses the Wilshire 5000 Total Market Index to measure the total return of the U.S. stock market. The Wilshire 5000 Total Market Index is representative of the performance of the entire U.S. stock market. The index measures the performance of all U.S. headquartered equity securities with readily available pricing data. It is a market-value weighted index consisting of approximately 6,000 stocks as of October 31, 2001. The fund may purchase securities of companies with which it is affiliated to the extent these companies are represented in its index. It is the Schwab Total Stock Market Index Fund's policy that under normal circumstances it will invest at least 80% of its assets in securities included in the benchmark index. The fund will notify its shareholders at least 60 days before changing this policy. For purposes of this policy, assets mean net assets plus the amount of any borrowings for investment purposes. 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. Because it would be too expensive to buy all of the stocks included in the index, the investment adviser may use statistical sampling techniques in an attempt to replicate the total return of the U.S. stock market using a smaller number of securities. These techniques use a smaller number of index securities than that included in the index, which, when taken together, are expected to perform similarly to the index. These techniques are based on a variety of factors, including capitalization, dividend yield, price/earnings ratio, and industry factors. THE SCHWAB INTERNATIONAL INDEX FUND'S investment objective is to seek to track the performance of a benchmark index that measures the total return of large, publicly traded non-U.S. companies from countries with developed equity markets outside of the United States. The Schwab International Index Fund intends to achieve its investment objective by tracking the price and dividend performance (total return) of the Schwab International Index(R) (International Index). The International Index was created to represent the performance of common stocks and other equity securities issued by large publicly traded companies from countries around the world with major developed securities markets, excluding the United States. 4 To be included in the International Index the securities must be issued by an operating company (i.e., not an investment company) whose principal trading market is in a country with a major developed securities market outside the United States. In addition, the market value of the company's outstanding securities must place the company among the top 350 such companies as measured by free-float adjusted market capitalization (share price times the number of shares available for purchase by international investors). The free-float available for purchase by international investors generally excludes shares held by strategic investors (such as governments, corporations, controlling shareholders and management) and shares subject to foreign ownership restrictions. The fund may purchase securities of companies with which it is affiliated to the extent these companies are represented in its index. By tracking the largest companies in developed markets, the index represents the performance of what some analysts deem the "blue chips" of international markets. The index also is designed to provide a broad representation of the international market, by limiting investments by country to no more than 35% of the total market capitalization of the index. The International Index was first made available to the public on July 29, 1993. It is the Schwab International Index Fund's policy that under normal circumstances it will invest at least 80% of its assets in stocks included in the benchmark index. The fund will notify its shareholders at least 60 days before changing this policy. The Schwab 1000 Index(R), Small-Cap Index and International Index were developed and are maintained by Schwab. Schwab receives no compensation from the funds for maintaining the indexes. Schwab reviews and, as necessary, revises the lists of companies whose securities are included in the Schwab 1000 Index, the Small-Cap Index and the International Index usually annually. Companies known by Schwab to meet or no longer meet the inclusion criteria may be added or deleted as appropriate. Schwab also will modify each index as necessary to account for corporate actions (e.g., new issues, repurchases, stock dividends/splits, tenders, mergers, stock swaps, spin-offs or bankruptcy filings made because of a company's inability to continue operating as a going concern). Schwab may change the Schwab 1000 Index and the Small-Cap Index inclusion criteria if it determines that doing so would cause the Schwab 1000 Index and the Small-Cap Index to be more representative of the domestic equity market. Schwab also may change the International Index inclusion criteria if it determines that doing so would cause the International Index to be more representative of the large, publicly traded international company equity market. In the future, the Board of Trustees, may take necessary and timely action to change the benchmark index for the Schwab Small-Cap Index Fund, including selecting a new one, should it decide that such changes would better enable the fund to seek its objective of tracking the small-cap U.S. stock sector and taking such action would be in the best interest of the fund's shareholders. The Board of Trustees also may take necessary and timely action to change the benchmark index for the Schwab International Index Fund, including selecting a new one, should it decide that such changes would better enable the fund to seek its objective of tracking the international stock sector and taking such action would be in the best interest of the fund's shareholders. The Board of Trustees may select another index for the Schwab 1000 Fund, subject to shareholder approval, should it decide that taking such action would be in the best interest of the fund's shareholders. A particular stock's weighting in the Small-Cap Index or the Schwab 1000 Index is based on its relative total market value (i.e., its market price per share times the number of shares outstanding), divided by the total market capitalization of its index. 5 A particular stock's weighting in the International Index is based on its relative free-float adjusted market value, divided by the total free-float adjusted market capitalization of the index. INVESTMENT STRATEGIES AND RISKS BANKERS' ACCEPTANCES or notes are credit instruments evidencing a bank's obligation to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the full amount of the instrument upon maturity. A fund will invest only in bankers' acceptances of banks that have capital, surplus and undivided profits in excess of $100 million. BORROWING may subject a fund to interest costs, which may exceed the interest received on the securities purchased with the borrowed funds. A fund normally may borrow at times to meet redemption requests rather than sell portfolio securities to raise the necessary cash. Borrowing can involve leveraging when securities are purchased with the borrowed money. To avoid this, a fund will earmark or segregate assets to cover such borrowings in accordance with positions of the Securities and Exchange Commission (SEC). Each fund may establish lines-of-credit (lines) with certain banks by which it may borrow funds for temporary or emergency purposes. A borrowing is presumed to be for temporary or emergency purposes if it is repaid by a fund within 60 days and is not extended or renewed. Each fund intends to use the lines to meet large or unexpected redemptions that would otherwise force a fund to liquidate securities under circumstances which are unfavorable to the fund's remaining shareholders. Each fund will pay a fee to the bank for using the lines. CERTIFICATES OF DEPOSIT or time deposits are issued against funds deposited in a banking institution for a specified period of time at a specified interest rate. A fund will invest only in certificates of deposit of banks that have capital, surplus and undivided profits in excess of $100 million. COMMERCIAL PAPER consists of short-term, promissory notes issued by banks, corporations and other institutions to finance short-term credit needs. These securities generally are discounted but sometimes may be interest bearing. Commercial paper, which also may be unsecured, is subject to credit risk. CONCENTRATION means that substantial amounts of assets are invested in a particular industry or group of industries. Concentration increases investment exposure. For example, the automobile industry may have a greater exposure to a single factor, such as an increase in the price of oil, which may adversely affect the sale of automobiles and, as a result, the value of the industry's securities. Each fund will not concentrate its investments, unless its index is so concentrated. DELAYED-DELIVERY TRANSACTIONS include purchasing and selling securities on a delayed-delivery or when-issued basis. These transactions involve a commitment to buy or sell specific securities at a predetermined price or yield, with payment and delivery taking place after the customary settlement period for that type of security. When purchasing securities on a delayed-delivery basis, a fund assumes the rights and risks of ownership, including the risk of price and yield fluctuations. Typically, no interest will accrue to a fund until the security is delivered. A fund will earmark or segregate appropriate liquid assets to cover its delayed-delivery purchase obligations. When the fund sells a security on a delayed-delivery basis, it does not participate in further gains or losses with respect to that security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the fund could suffer losses. 6 DEPOSITARY RECEIPTS include American or European Depositary Receipts (ADRs or EDRs), Global Depositary Receipts or Shares (GDRs or GDSs) or other similar global instruments that are receipts representing ownership of shares of a foreign-based issuer held in trust by a bank or similar financial institution. These securities are designed for U.S. and European securities markets as alternatives to purchasing underlying securities in their corresponding national markets and currencies. Depositary receipts can be sponsored or unsponsored. Sponsored depositary receipts are certificates in which a bank or financial institution participates with a custodian. Issuers of unsponsored depositary receipts are not contractually obligated to disclose material information in the United States. Therefore, there may not be a correlation between such information and the market value of an unsponsored depositary receipt. DIVERSIFICATION involves investing in a wide range of securities and thereby spreading and reducing the risks of investment. Each fund is a series of an open-end investment management company. Each fund is a diversified mutual fund. EMERGING OR DEVELOPING MARKETS exist in countries that are considered to be in the initial stages of industrialization. The risks of investing in these markets are similar to the risks of international investing in general, although the risks are greater in emerging and developing markets. Countries with emerging or developing securities markets tend to have economic structures that are less stable than countries with developed securities markets. This is because their economies may be based on only a few industries and their securities markets may trade a small number of securities. Prices on these exchanges tend to be volatile, and securities in these countries historically have offered greater potential for gain (as well as loss) than securities of companies located in developed countries. EQUITY SECURITIES represent ownership interests in a company, and are commonly called "stocks." Equity securities historically have outperformed most other securities, although their prices can fluctuate based on changes in a company's financial condition, market conditions and political, economic or even company-specific news. When a stock's price declines, its market value is lowered even though the intrinsic value of the company may not have changed. Sometimes factors, such as economic conditions or political events, affect the value of stocks of companies of the same or similar industry or group of industries, and may affect the entire stock market. Types of equity securities include common stocks, preferred stocks, convertible securities, warrants, and interests in real estate investment trusts. Common stocks, which are probably the most recognized type of equity security, usually entitle the owner to voting rights in the election of the corporation's directors and any other matters submitted to the corporation's shareholders for voting. Preferred stocks do not ordinarily carry voting rights though they may carry limited voting rights. Preferred stocks normally have preference over the corporation's assets and earnings, however. For example, preferred stocks have preference over common stock in the payment of dividends. Preferred stocks also may pay specified dividends. Convertible securities are typically preferred stocks or bonds that are exchangeable for a specific number of another form of security (usually the issuer's common stock) at a specified price or ratio. A corporation may issue a convertible security that is subject to redemption after a specified date, and usually under certain circumstances. A holder of a convertible security that is called for redemption would be required to tender it for redemption to the issuer, convert it to the underlying common stock or sell it to a third party. Convertible bonds typically pay a lower interest rate than nonconvertible bonds of the same quality and maturity because of the convertible feature. This structure allows the holder of the convertible bond to participate in 7 share price movements in the company's common stock. The actual return on a convertible bond may exceed its stated yield if the company's common stock appreciates in value and the option to convert to common stock becomes more valuable. Convertible preferred stocks are nonvoting equity securities that pay a fixed dividend. These securities have a convertible feature similar to convertible bonds, but do not have a maturity date. Due to their fixed income features, convertible securities provide higher income potential than the issuer's common stock, but typically are more sensitive to interest rate changes than the underlying common stock. In the event of liquidation, bondholders have claims on company assets senior to those of shareholders; preferred shareholders have claims senior to those of common shareholders. Convertible securities typically trade at prices above their conversion value, which is the current market value of the common stock received upon conversion, because of their higher yield potential than the underlying common stock. The difference between the conversion value and the price of a convertible security will vary depending on the value of the underlying common stock and interest rates. When the underlying value of the common stocks declines, the price of the issuer's convertible securities will tend not to fall as much because the convertible security's income potential will act as a price support. While the value of a convertible security also tends to rise when the underlying common stock value rises, it will not rise as much because their conversion value is more narrow. The value of convertible securities also is affected by changes in interest rates. For example, when interest rates fall, the value of convertible securities may rise because of their fixed income component. Warrants are types of securities usually issued with bonds and preferred stock that entitle the holder to purchase a proportionate amount of common stock at a specified price for a specific period of time. The prices of warrants do not necessarily move parallel to the prices of the underlying common stock. Warrants have no voting rights, receive no dividends and have no rights with respect to the assets of the issuer. If a warrant is not exercised within the specified time period, it will become worthless and a fund will lose the purchase price it paid for the warrant and the right to purchase the underlying security. FOREIGN SECURITIES involve additional risks, including foreign currency exchange rate risks, because they are issued by foreign entities, including foreign governments, banks and corporations, or because they are traded principally overseas. Foreign entities are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to U.S. corporations. In addition, there may be less publicly available information about foreign entities. Foreign economic, political and legal developments, as well as fluctuating foreign currency exchange rates and withholding taxes, could have more dramatic effects on the value of foreign securities. For example, conditions within and around foreign countries, such as the possibility of expropriation or confiscatory taxation, political or social instability, diplomatic developments, change of government or war could affect the value of foreign investments. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Foreign securities typically have less volume and are generally less liquid and more volatile than securities of U.S. companies. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although the funds endeavor to achieve the most favorable overall results on portfolio transactions. There is generally less government supervision and regulation of foreign securities exchanges, brokers, dealers and listed companies 8 than in the United States, thus increasing the risk of delayed settlements of portfolio transactions or loss of certificates for portfolio securities. There may be difficulties in obtaining or enforcing judgments against foreign issuers as well. These factors and others may increase the risks with respect to the liquidity of a fund's portfolio containing foreign investments, and its ability to meet a large number of shareholder redemption requests. Foreign markets also have different clearance and settlement procedures and, in certain markets, there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when a portion of the assets of a fund is uninvested and no return is earned thereon. The inability to make intended security purchases due to settlement problems could cause a fund to miss attractive investment opportunities. Losses to a fund arising out of the inability to fulfill a contract to sell such securities also could result in potential liability for a fund. Investments in the securities of foreign issuers are usually made and held in foreign currencies. In addition, the Schwab International Index Fund may hold cash in foreign currencies. These investments may be affected favorably or unfavorably by changes in currency exchange rates and in exchange control regulations, and may cause a fund to incur costs in connection with conversions between various currencies. The rate of exchange between the U.S. dollar and other currencies is determined by the forces of supply and demand in the foreign exchange market as well as by political and economic factors. Changes in the foreign currency exchange rates also may affect the value of dividends and interest earned, gains and losses realized on the sale of securities, and net investment income and gains, if any, to be distributed to shareholders by the International Index Fund. On January 1, 1999, 11 of the 15 member states of the European union introduced the "euro" as a common currency. During a three-year transitional period, the euro will coexist with each member state's currency. By July 1, 2002, the euro will have replaced the national currencies of the following member countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. During the transition period, each country will treat the euro as a separate currency from that of any member state. Currently, the exchange rate of the currencies of each of these countries is fixed to the euro. The euro trades on currency exchanges and is available for non-cash transactions. The participating countries currently issue sovereign debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins will replace the bills and coins of the participating countries. The new European Central Bank has control over each country's monetary policies. Therefore, the participating countries no longer control their own monetary policies by directing independent interest rates for their currencies. The national governments of the participating countries, however, have retained the authority to set tax and spending policies and public debt levels. The conversion may impact the trading in securities of issuers located in, or denominated in the currencies of, the member states, as well as foreign exchanges, payments, the settlement process, custody of assets and accounting. The introduction of the euro is also expected to affect derivative and other financial contracts in which the funds may invest in so far as price sources such as day-count fractions or settlement dates applicable to underlying instruments may be changed to conform to the conventions applicable to euro currency. The overall impact of the transition of the member states' currencies to the euro cannot be determined with certainty at this time. In addition to the effects described above, it is likely that 9 more general short and long-term consequences can be expected, such as changes in economic environment and changes in behavior of investors, all of which will impact each fund's euro-denominated investments. Securities that are acquired by a fund outside the United States and that are publicly traded in the United States on a foreign securities exchange or in a foreign securities market, are not considered illiquid provided that: (1) the fund acquires and holds the securities with the intention of reselling the securities in the foreign trading market, (2) the fund reasonably believes it can readily dispose of the securities in the foreign trading market or for cash in the United States, or (3) foreign market and current market quotations are readily available. Investments in foreign securities where delivery takes place outside the United States will have to be made in compliance with any applicable U.S. and foreign currency restrictions and tax laws (including laws imposing withholding taxes on any dividend or interest income) and laws limiting the amount and types of foreign investments. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS involve the purchase or sale of foreign currency at an established exchange rate, but with payment and delivery at a specified future time. Many foreign securities markets do not settle trades within a time frame that would be considered customary in the U.S. stock market. Therefore, the Schwab International Index Fund normally engages in forward foreign currency exchange contracts in order to secure exchange rates for portfolio securities purchased or sold, but awaiting settlement. These transactions do not seek to eliminate any fluctuations in the underlying prices of the securities involved. Instead, the transactions simply establish a rate of exchange that can be expected when the fund settles its securities transactions in the future. Forwards involve certain risks. For example, if the counterparties to the contracts are unable to meet the terms of the contracts or if the value of the foreign currency changes unfavorably, the fund could sustain a loss. FUTURES CONTRACTS are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed-upon price on a stipulated future date. In the case of futures contracts relating to an index or otherwise not calling for physical delivery at the close of the transaction, the parties usually agree to deliver the final cash settlement price of the contract. The funds may purchase and sell futures contracts based on securities, securities indices and foreign currencies or any other futures contracts traded on U.S. exchanges or boards of trade that the Commodities Futures Trading Commission (CFTC) licenses and regulates on foreign exchanges. Each fund must maintain a small portion of its assets in cash to process shareholder transactions in and out of the fund and to pay its expenses. In order to reduce the effect this otherwise uninvested cash would have on its ability to track the performance of its index as closely as possible, a fund may purchase futures contracts representative of its index or securities in its index. Such transactions allow the fund's cash balance to produce a return similar to that of the underlying security or index on which the futures contract is based. Also, the Schwab International Index Fund may purchase or sell futures contracts on a specified foreign currency to "fix" the price in U.S. dollars of the foreign security it has acquired or sold or expects to acquire or sell. In regards to the Schwab Total Stock Market Index Fund and Schwab Small-Cap Index Fund, because there is not currently available any futures contract tied directly to either the total return of the U.S. stock market or the funds' indices, there is no guarantee that this strategy will be successful. Each fund may enter into futures contracts for these or other reasons. When buying or selling futures contracts, a fund must place a deposit with its broker equal to a fraction of the contract amount. This amount is known as "initial margin" and must be in the 10 form of liquid debt instruments, including cash, cash-equivalents and U.S. government securities. Subsequent payments to and from the broker, known as "variation margin" are made at least daily as the values of the futures contracts fluctuate. This process is known as "marking-to-market". The margin amount will be returned to the fund upon termination of the futures contracts assuming all contractual obligations are satisfied. Each fund's aggregate initial and variation margin payments required to establish its futures positions may not exceed 5 % of its net assets. Because margin requirements are normally only a fraction of the amount of the futures contracts in a given transaction, futures trading can involve a great deal of leverage. In order to avoid this, a fund will earmark or segregate assets for any outstanding futures contracts as may be required under the federal securities laws. While the funds intend to purchase and sell futures contracts in order to simulate full investment in the securities comprising their respective indices, there are risks associated with these transactions. Adverse market movements could cause a fund to experience substantial losses when buying and selling futures contracts. Of course, barring significant market distortions, similar results would have been expected if the fund had instead transacted in the underlying securities directly. There also is the risk of losing any margin payments held by a broker in the event of its bankruptcy. Additionally, the funds incur transaction costs (i.e., brokerage fees) when engaging in futures trading. Futures contracts normally require actual delivery or acquisition of an underlying security or cash value of an index on the expiration date of the contract. In most cases, however, the contractual obligation is fulfilled before the date of the contract by buying or selling, as the case may be, identical futures contracts. Such offsetting transactions terminate the original contracts and cancel the obligation to take or make delivery of the underlying securities or cash. There may not always be a liquid secondary market at the time a fund seeks to close out a futures position. If a fund is unable to close out its position and prices move adversely, the fund would have to continue to make daily cash payments to maintain its margin requirements. If a fund had insufficient cash to meet these requirements it may have to sell portfolio securities at a disadvantageous time or incur extra costs by borrowing the cash. Also, a fund may be required to make or take delivery and incur extra transaction costs buying or selling the underlying securities. The funds seek to reduce the risks associated with futures transactions by buying and selling futures contracts that are traded on national exchanges or for which there appears to be a liquid secondary market. ILLIQUID SECURITIES generally are any securities that cannot be disposed of promptly and in the ordinary course of business at approximately the amount at which a fund has valued the instruments. The liquidity of a fund's investments is monitored under the supervision and direction of the Board of Trustees. Investments currently not considered liquid include repurchase agreements not maturing within seven days and certain restricted securities. INDEXING STRATEGIES involve tracking the investments and, therefore, performance of an index. Each fund normally will invest at least 80% of its assets in the securities of its index. Moreover, each fund will invest so that its portfolio performs similarly to that of its index. Each fund tries to generally match its holdings in a particular security to its weight in the index. Each fund will seek a correlation between its performance and that of its index of 0.90 or better. A perfect correlation of 1.0 is unlikely as the funds incur operating and trading expenses unlike their indices. A fund may rebalance its holdings in order to track its index more closely. In the event its intended correlation is not achieved, the Board of Trustees will consider alternative arrangements for a fund. 11 INTERFUND BORROWING AND LENDING. A fund may borrow money from and/or lend money to other funds/portfolios in the Schwab complex ("SchwabFunds(R)"). All loans are for temporary or emergency purposes and the interest rates to be charged will be the average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable treatment of all participating funds/portfolios. The interfund lending facility is subject to the oversight and periodic review of the Board of Trustees of the SchwabFunds. MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be issued by entities such as the U.S. government, corporations and financial institutions (like banks). Money market securities include commercial paper, certificates of deposit, banker's acceptances, notes and time deposits. Money market securities pay fixed, variable or floating rates of interest and are generally subject to credit and interest rate risks. The maturity date or price of and financial assets collateralizing a security may be structured in order to make it qualify as or act like a money market security. These securities may be subject to greater credit and interest rate risk than other money market securities because of their structure. Money market securities may be issued with puts or these can be sold separately. Each fund must keep a portion of its assets in cash for business operations. In order to reduce the effect this otherwise uninvested cash would have on its performance, a fund may invest in money market securities. OPTIONS CONTRACTS generally provide the right to buy or sell a security, commodity, futures contract or foreign currency in exchange for an agreed upon price. If the right is not exercised after a specified period, the option expires and the option buyer forfeits the money paid to the option seller. A call option gives the buyer the right to buy a specified number of shares of a security at a fixed price on or before a specified date in the future. For this right, the call option buyer pays the call option seller, commonly called the call option writer, a fee called a premium. Call option buyers are usually anticipating that the price of the underlying security will rise above the price fixed with the call writer, thereby allowing them to profit. If the price of the underlying security does not rise, the call option buyer's losses are limited to the premium paid to the call option writer. For call option writers, a rise in the price of the underlying security will be offset in part by the premium received from the call option buyer. If the call option writer does not own the underlying security, however, the losses that may ensue if the price rises could be potentially unlimited. If the call option writer owns the underlying security or commodity, this is called writing a covered call. All call options written by the funds will be covered, which means that the funds will own the securities subject to the option so long as the option is outstanding. A put option is the opposite of a call option. It gives the buyer the right to sell a specified number of shares of a security at a fixed price on or before a specified date in the future. Put option buyers are usually anticipating a decline in the price of the underlying security, and wish to offset those losses when selling the security at a later date. All put options a fund writes will be covered, which means that a fund will deposit with its custodian cash, U.S. government securities or other liquid debt securities with a value at least equal to the exercise price of the put option. The purpose of writing such options is to generate additional income for a fund. However, in return for the option premium, a fund accepts the risk that it may be required to purchase the underlying securities at a price in excess of the securities' market value at the time of purchase. 12 A fund may purchase and write put and call options on any securities in which it may invest or any securities index or basket of securities based on securities in which it may invest. A fund may purchase and write such options on securities that are listed on domestic or foreign securities exchanges or traded in the over-the-counter market. Like futures contracts, option contracts are rarely exercised. Option buyers usually sell the option before it expires. Option writers may terminate their obligations under a written call or put option by purchasing an option identical to the one it has written. Such purchases are referred to as "closing purchase transactions." A fund may enter into closing sale transactions in order to realize gains or minimize losses on options it has purchased or written. An exchange-traded currency option position may be closed out only on an options exchange that provides a secondary market for an option of the same series. Although a fund generally will purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market will exist for any particular option or at any particular time. If a fund is unable to effect a closing purchase transaction with respect to options it has written, it will not be able to sell the underlying securities or dispose of assets earmarked or held in a segregated account until the options expire or are exercised. Similarly, if a fund is unable to effect a closing sale transaction with respect to options it has purchased, it would have to exercise the options in order to realize any profit and will incur transaction costs upon the purchase or sale of underlying securities. Reasons for the absence of a liquid secondary market on an exchange include the following: (1) there may be insufficient trading interest in certain options; (2) an exchange may impose restrictions on opening transactions or closing transactions or both; (3) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (4) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (5) the facilities of an exchange or the Options Clearing Corporation (the "OCC") may not at all times be adequate to handle current trading volume; or (6) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), although outstanding options on that exchange that had been issued by the OCC as a result of trades on that exchange would continue to be exercisable in accordance with their terms. The ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. Until such time as the staff of the SEC changes its position, a fund will treat purchased over-the-counter options and all assets used to cover written over-the-counter options as illiquid securities, except that with respect to options written with primary dealers in U.S. government securities pursuant to an agreement requiring a closing purchase transaction at a formula price, the amount of illiquid securities may be calculated with reference to a formula the staff of the SEC approves. Additional risks are involved with options trading because of the low margin deposits required and the extremely high degree of leverage that may be involved in options trading. There may be imperfect correlation between the change in market value of the securities held by a fund and the prices of the options, possible lack of a liquid secondary market, and the resulting inability to close such positions prior to their maturity dates. A fund may write or purchase an option only when the market value of that option, when aggregated with the market value of all other options transactions made on behalf of a fund, does not exceed 5% of its total assets. 13 PROMISSORY NOTES are written agreements committing the maker or issuer to pay the payee a specified amount either on demand or at a fixed date in the future, with or without interest. These are sometimes called negotiable notes or instruments and are subject to credit risk. Bank notes are notes used to represent obligations issued by banks in large denominations. REAL ESTATE INVESTMENT TRUSTS (REITS) are pooled investment vehicles, which invest primarily in income producing real estate or real estate related loans or interests and, in some cases, manage real estate. REITs are sometimes referred to as equity REITs, mortgage REITs or hybrid REITs. An equity REIT invests primarily in properties and generates income from rental and lease properties and, in some cases, from the management of real estate. Equity REITs also offer the potential for growth as a result of property appreciation and from the sale of appreciated property. Mortgage REITs invest primarily in real estate mortgages, which may secure construction, development or long-term loans, and derive income for the collection of interest payments. Hybrid REITS may combine the features of equity REITs and mortgage REITs. REITs are generally organized as corporations or business trusts, but are not taxed as a corporation if they meet certain requirements of the Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). To qualify, a REIT must, among other things, invest substantially all of its assets in interests in real estate (including other REITs), cash and government securities, distribute at least 95% of its taxable income to its shareholders and receive at least 75% of that income from rents, mortgages and sales of property. Like any investment in real estate, a REIT's performance depends on many factors, such as its ability to find tenants for its properties, to renew leases, and to finance property purchases and renovations. In general, REITs may be affected by changes in underlying real estate values, which may have an exaggerated effect to the extent a REIT concentrates its investment in certain regions or property types. For example, rental income could decline because of extended vacancies, increased competition from nearby properties, tenants' failure to pay rent, or incompetent management. Property values could decrease because of overbuilding, environmental liabilities, uninsured damages caused by natural disasters, a general decline in the neighborhood, losses due to casualty or condemnation, increases in property taxes, or changes in zoning laws. Ultimately, a REIT's performance depends on the types of properties it owns and how well the REIT manages its properties. In general, during periods of rising interest rates, REITs may lose some of their appeal for investors who may be able to obtain higher yields from other income-producing investments, such as long-term bonds. Higher interest rates also mean that financing for property purchases and improvements is more costly and difficult to obtain. During periods of declining interest rates, certain mortgage REITs may hold mortgages that mortgagors elect to prepay, which can reduce the yield on securities issued by mortgage REITs. Mortgage REITs may be affected by the ability of borrowers to repay debts to the REIT when due and equity REITs may be affected by the ability of tenants to pay rent. Like small-cap stocks in general, certain REITs have relatively small market capitalizations and their securities can be more volatile than -- and at times will perform differently from -- large-cap stocks. In addition, because small-cap stocks are typically less liquid than large-cap stocks, REIT stocks may sometimes experience greater share-price fluctuations than the stocks of larger companies. Further, REITs are dependent upon specialized management skills, have limited diversification, and are therefore subject to risks inherent in operating and financing a limited number of projects. By investing in REITs indirectly through a fund, a shareholder will bear indirectly a proportionate share of the REIT's expenses. Finally, REITs could possibly fail to 14 qualify for tax-free pass-through of income under the Code or to maintain their exemptions from registration under the 1940 Act. REPURCHASE AGREEMENTS involve a fund buying securities (usually U.S. government securities) from a seller and simultaneously agreeing to sell them back at an agreed-upon price (usually higher) and time. There are risks that losses will result if the seller does not perform as agreed. Under certain circumstances, repurchase agreements that are fully collateralized by U.S. government securities may be deemed to be investments in U.S. government securities. RESTRICTED SECURITIES are securities that are subject to legal restrictions on their sale. Restricted securities may be considered to be liquid if an institutional or other market exists for these securities. In making this determination, a fund, under the direction and supervision of the Board of Trustees, will take into account the following factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers willing to purchase or sell the security and the number of potential purchasers; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). To the extent a fund invests in restricted securities that are deemed liquid, the general level of illiquidity in a fund's portfolio may be increased if qualified institutional buyers become uninterested in purchasing these securities. SECURITIES LENDING of portfolio securities is a common practice in the securities industry. A fund may engage in security lending arrangements with the primary objective of increasing its income. For example, a fund may receive cash collateral and may invest it in short-term, interest-bearing obligations, but will do so only to the extent that it will not lose the tax treatment available to regulated investment companies. Lending portfolio securities involves risks that the borrower may fail to return the securities or provide additional collateral. Also, voting rights with respect to loaned securities may pass with the lending of the securities. A fund may loan portfolio securities to qualified broker-dealers or other institutional investors provided: (1) the loan is secured continuously by collateral consisting of U.S. government securities, letters of credit, cash or cash equivalents or other appropriate instruments maintained on a daily marked-to-market basis in an amount at least equal to the current market value of the securities loaned; (2) a fund may at any time call the loan and obtain the return of the securities loaned; (3) a fund will receive any interest or dividends paid on the loaned securities; and (4) the aggregate market value of securities loaned will not at any time exceed one-third of the total assets of the fund, including collateral received from the loan (at market value computed at the time of the loan). SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by the funds, including those managed by its investment adviser. Because other investment companies employ investment advisers and other service providers, investments by a fund may cause shareholders to pay duplicative fees. SHORT SALES may be used by a fund as part of its overall portfolio management strategies or to offset a potential decline in the value of a security. For example, short sales may be used as a quantitative technique to assemble a portfolio whose performance is expected to track that of the index. A fund may sell a security short only if the fund owns the security, or the right to obtain the security or equivalent securities, or covers such short sale with liquid assets as required by the current rules and interpretations of the SEC or its staff. When a fund makes a short sale, it may borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. A fund also 15 may have to pay a fee to borrow particular securities and is often obligated to pay over any accrued interest and dividends on such borrowed securities. If the price of the security sold short increases between the time of the short sale and the time a fund replaces the borrowed security, a fund will incur a loss; conversely, if the price declines, a fund will realize a gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. Selling securities short against the box involves selling a security that a fund owns or has the right to acquire, for the delivery at a specified date in the future. If a fund sells securities short against the box, it may protect unrealized gains, but will lose the opportunity to profit on such securities if the price rises. The successful use of short selling as a hedging strategy may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged. SMALL-CAP STOCKS are common stocks issued by U.S. operating companies with market capitalizations that place them below the largest 1,000 such companies. Historically, small-cap stocks have been riskier than stocks issued by large- or mid-cap companies for a variety of reasons. Small-cap companies may have less certain growth prospects and are typically less diversified and less able to withstand changing economic conditions than larger capitalized companies. Small-cap companies also may have more limited product lines, markets or financial resources than companies with larger capitalizations, and may be more dependent on a relatively small management group. In addition, small-cap companies may not be well known to the investing public, may not have institutional ownership and may have only cyclical, static or moderate growth prospects. Most small-cap company stocks pay low or no dividends. These factors and others may cause sharp changes in the value of a small-cap company's stock, and even cause some small-cap companies to fail. Additionally, small-cap stocks may not be as broadly traded as large- or mid-cap stocks, and the Schwab Small-Cap Index Fund's and the Schwab Total Stock Market Index Fund's respective positions in securities of such companies may be substantial in relation to the market for such securities. Accordingly, it may be difficult for the Schwab Small-Cap Index Fund and the Schwab Total Stock Market Index Fund to dispose of securities of these small-cap companies at prevailing market prices in order to meet redemptions. This lower degree of liquidity can adversely affect the value of these securities. For these reasons and others, the value of a fund's investments in small-cap stocks is expected to be more volatile than other types of investments, including other types of stock investments. While small-cap stocks are generally considered to offer greater growth opportunities for investors, they involve greater risks and the share price of a fund that invests in small-cap stocks (like the Schwab Small-Cap Index Fund and the Schwab Total Stock Market Index Fund) may change sharply during the short term and long term. STOCK SUBSTITUTION STRATEGY is a strategy, whereby each fund may, in certain circumstances, substitute a similar stock for a security in its index. U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or guaranteed by the U.S. government or any of its agencies or instrumentalities. Not all U.S. government securities are backed by the full faith and credit of the United States. Some U.S. government securities, such as those issued by Fannie Mae, Freddie Mac, the Student Loan Marketing Association (SLMA or Sallie Mae), and the Federal Home Loan Banks (FHLB), are supported by a line of credit the issuing entity has with the U.S. Treasury. Others are supported solely by the credit of the issuing agency or instrumentality such as obligations issued by the Federal Farm Credit Banks Funding Corporation (FFCB). There can be no assurance that the U.S. government will provide financial support to U.S. government securities of its agencies and instrumentalities if it is not obligated to 16 do so under law. Of course U.S. government securities, including U.S. Treasury securities, are among the safest securities, however, not unlike other debt securities, they are still sensitive to interest rate changes, which will cause their yields and prices to fluctuate. INVESTMENT LIMITATIONS The following investment limitations may be changed only by vote of a majority of each fund's outstanding voting shares. EACH OF THE SCHWAB S&P 500 FUND, SCHWAB 1000 FUND, SCHWAB SMALL-CAP INDEX FUND, AND SCHWAB INTERNATIONAL INDEX FUND MAY NOT: 1) Borrow money, except to the extent permitted under the Investment Company 1940 Act (the "1940 Act"), the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. 2) Make loans to other persons, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. 3) Issue senior securities, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. 4) Purchase securities of an issuer, except as consistent with the maintenance of its status as an open-end diversified company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. 5) Concentrate investments in a particular industry or group of industries, as concentration is defined under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. 6) Purchase or sell commodities or real estate, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. 7) Underwrite securities issued by other persons, except to the extent permitted under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. IN ADDITION, EACH OF THE SCHWAB S&P 500 FUND, SCHWAB SMALL-CAP INDEX FUND AND SCHWAB INTERNATIONAL INDEX FUND MAY NOT: 1) Purchase securities of other investment companies, except as permitted by the 1940 Act, including any exemptive relief granted by the SEC. IN ADDITION, THE SCHWAB 1000 FUND MAY NOT: 1) Purchase securities of other investment companies, except as permitted by the 1940 Act. 17 THE SCHWAB TOTAL STOCK MARKET INDEX FUND MAY NOT: 1) Purchase securities of any issuer, except as consistent with the maintenance of its status as a diversified company under the 1940 Act; 2) Concentrate investments in a particular industry or group of industries, except as permitted under the 1940 Act, or the rules or regulations thereunder; and 3) (i) Purchase or sell commodities, commodities contracts, futures or real estate, (ii) lend or borrow money, (iii) issue senior securities, (iv) underwrite securities or (v) pledge, mortgage or hypothecate any of its assets, except as permitted by the 1940 Act, or the rules or regulations thereunder. THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING THE ABOVE POLICIES AND RESTRICTIONS. Borrowing. The 1940 Act restricts a fund from borrowing (including pledging, mortgaging or hypothecating assets) in excess of 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets). Concentration. The SEC defines concentration as investing 25% or more of a fund's total assets in an industry or group of industries, with certain exceptions. Diversification. Under the 1940 Act and the rules, regulations and interpretations thereunder, a "diversified company," as to 75% of its total assets, may not purchase securities of any issuer (other than obligations of, or guaranteed by, the U.S. government or its agencies, or instrumentalities or securities of other registered investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer's voting securities would be held by the fund. Lending. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. Real Estate. The 1940 Act does not directly restrict a fund's ability to invest in real estate, but does require that every fund have a fundamental investment policy governing such investments. The funds have adopted a fundamental policy that would permit direct investment in real estate. However, each fund has a non-fundamental investment limitation that prohibits it from investing directly in real estate. This non-fundamental policy may be changed only by vote of each fund's Board of Trustees. Senior Securities. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it provides allowances for certain borrowings and certain other investments, such as short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, when such investments are "covered" or with appropriate earmarking or segregation of assets to cover such obligations. Underwriting. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any 18 commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets. THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY BE CHANGED BY THE BOARD OF TRUSTEES. EACH FUND MAY NOT: 1) Sell securities short unless it owns the security or the right to obtain the security or equivalent securities, or unless it covers such short sale as required by current SEC rules and interpretations (transactions in futures contracts, options and other derivative instruments are not considered selling securities short). 2) Purchase securities on margin, except such short-term credits as may be necessary for the clearance of purchases and sales of securities and provided that margin deposits in connection with futures contracts, options on futures or other derivative instruments shall not constitute purchasing securities on margin. 3) Borrow money except that the fund may (i) borrow money from banks or through an interfund lending facility, if any, only for temporary or emergency purposes (and not for leveraging) and (ii) engage in reverse repurchase agreements with any party; provided that (i) and (ii) in combination do not exceed 33 1/3% of its total assets (any borrowings that come to exceed this amount will be reduced to the extent necessary to comply with the limitation within three business days). 4) Lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties (this restriction does not apply to purchases of debt securities or repurchase agreements). 5) Purchase securities (other than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities) if, as a result of such purchase, 25% or more of the value of its total assets would be invested in any industry or group of industries (except that each fund may purchase securities to the extent that its index is also so concentrated). 6) Purchase or sell commodities, commodity contracts or real estate, including interests in real estate limited partnerships, provided that each fund may (i) purchase securities of companies that deal in real estate or interests therein (including REITs), (ii) purchase or sell futures contracts, options contracts, equity index participations and index participation contracts, and (iii) purchase securities of companies that deal in precious metals or interests therein. 7) Invest more than 15% of its net assets in illiquid securities. IN ADDITION, THE SCHWAB SMALL-CAP INDEX FUND 1) Intends to achieve its investment objective by tracking the price and dividend performance (total return) of the Schwab Small-Cap Index. 19 IN ADDITION, THE SCHWAB INTERNATIONAL INDEX FUND 1) Intends to achieve its investment objective by tracking the price and dividend performance (total return) of the Schwab International Index. IN ADDITION, THE SCHWAB TOTAL STOCK MARKET INDEX FUND MAY NOT: 1) Purchase securities of other investment companies, except as permitted by the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. Policies and limitations that state a maximum percentage of assets that may be invested in a security or other asset, or that set forth a quality standard shall be measured immediately after and as a result of the fund's acquisition of such security or asset, unless otherwise noted. Except with respect to the non-fundamental limitations illiquid securities and borrowing, any subsequent change in net assets or other circumstances will not be considered when determining whether the investment complies with a fund's investment policies and limitations. MANAGEMENT OF THE FUNDS Each fund is overseen by a Board of Trustees. The trustees are responsible for protecting shareholder interests. The trustees regularly meet to review the investment activities, contractual arrangements and the investment performance of each fund. The trustees met 5 times during the most recent fiscal year. Certain trustees are "interested persons." A trustee may be considered an interested person of the trust under the 1940 Act if he or she is an officer, director or employee of CSIM or Schwab. A trustee also may be considered an interested person of the trust under the 1940 Act if he or she owns The Charles Schwab Corporation stock. Each officer's and trustee's principal occupations during the past five years, other directorships and affiliations, if any, with The Charles Schwab Corporation, Schwab and CSIM are as follows:
POSITION(S) PRINCIPAL OCCUPATIONS, NAME AND DATE WITH AFFILIATIONS AND OTHER OF BIRTH THE TRUSTS DIRECTORSHIPS INDEPENDENT TRUSTEES DONALD F. DORWARD Trustee of each Chief Executive Officer, Dorward & September 23, 1931 fund in Schwab Associates (corporate management, Capital Trust marketing and communications consulting since 1993 and firm). From 1996 to 1999, Executive Vice Schwab Investments President and Managing Director, Grey since 1991. Advertising.
20 ROBERT G. Trustee of each Chairman, Chief Executive Officer and HOLMES fund in Schwab Director, Semloh Financial, Inc. May 15, 1931 Capital Trust (international financial services and since 1993 and investment advisory firm). Schwab Investments since 1991. DONALD R. Trustee of each Managing Partner, D.R. Stephens & STEPHENS fund in Schwab Company (investments). Prior to 1996, June 28, 1938 Capital Trust Chairman and Chief Executive Officer of since 1993 and North American Trust (real estate Schwab Investments investment trust). since 1991. MICHAEL W. Trustee of each Chairman and Chief Executive Officer, WILSEY fund in Schwab Wilsey Bennett, Inc. (truck and air August 18, 1943 Capital Trust transportation, real estate investment since 1993 and and management, and investments). Schwab Investments since 1991. MARIANN Trustee of each Chairman of JDN Corporate Advisory LLL BYERWALTER fund in Schwab (corporate services). From 1996 to 2001, August 13, 1960 Capital Trust Ms. Byerwalter was the Vice President and Schwab for Business Affairs and Chief Financial Investments Officer of Stanford University. Ms. since 2000. Byerwalter also is a Directors of America First Companies, Omaha, NE (venture capital/fund management), Redwood Trust, Inc. (mortgage finance), Stanford Hospitals and Clinics, SRI International (research), LookSmart, Ltd. (an Internet infrastructure company), PMI Group, Inc. (mortgage insurance) and Lucile Packard Children's Hospital.
21 WILLIAM A. HASLER Trustee of each Co-Chief Executive Officer, Aphton November 22, 1941 fund in Schwab Corporation (bio-pharmaceuticals). Prior Capital Trust to August 1998, Mr. Hasler was Dean of and Schwab the Haas School of Business at the Investments University of California, Berkeley since 2000. (higher education). Mr. Hasler also is on the Board of Directors of Solectron Corporation (manufacturing), Tenera, Inc. (services and software), Airlease Ltd. (aircraft leasing), Mission West Properties (commercial real estate) and Digital Microwave Corporation (a network equipment corporation). GERALD B. SMITH Trustee of each Chairman and Chief Executive Officer and September 28, 1950 fund in Schwab founder of Smith Graham & Co. Capital Trust (investment advisors). Mr. Smith is also and Schwab on the Board of Directors of Investments Pennzoil-Quaker State Company (oil and since 2000. gas) and Rorento N.V. (investments - Netherlands), Cooper Industries (electrical products, tools and hardware), and is a member of the audit committee of Northern Border Partners, L.P. (energy). INTERESTED TRUSTEES AND OFFICERS CHARLES R. SCHWAB Chairman and Chairman, Co-Chief Executive Officer and July 29, 1937 * Trustee of each Director, The Charles Schwab fund in Schwab Corporation; Chief Executive Officer and Capital Trust Director, Schwab Holdings, Inc.; since 1993 and Chairman and Director, Charles Schwab & Schwab Co., Inc., Charles Schwab Investment Investments Management, Inc.; Chairman, Schwab since 1991. Retirement Plan Services, Inc.; Director, U.S. Trust Corporation, United States Trust Company of New York; Director until July 2001, The Charles
* In addition to his position with the investment adviser and the distributor, Mr. Schwab owns stock in The Charles Schwab Corporation, a publicly traded company and the parent company of the investment adviser and the distributor. 22 Schwab Trust Company; Chairman and Director until January 1999, Mayer & Schweitzer, Inc. (a securities brokerage subsidiary of The Charles Schwab Corporation); Director, The Gap, Inc. (a clothing retailer), Audiobase, Inc. (full-service audio solutions for the Internet), Vodaphone AirTouch PLC (a telecommunications company), Siebel Systems (a software company) and Xign, Inc. (a developer of electronic payment systems). JOHN P. COGHLAN President, Vice Chairman and Executive Vice May 6, 1951 ** Chief Executive President, The Charles Schwab Officer and Corporation; Vice Chairman and Trustee of each Enterprise President, Retirement Plan fund in Schwab Services and Services for Investment Capital Trust Managers, Charles Schwab & Co., Inc.; and Schwab Chief Executive Officer and Director, Investments Charles Schwab Investment Management, since 2000. Inc.; President, Chief Executive Officer and Director, The Charles Schwab Trust Company; President and Director, Schwab Retirement Technologies, Inc.; Director, Charles Schwab Asset Management (Ireland) Ltd., Charles Schwab Worldwide Funds PLC, Schwab Retirement Plan Services, Inc. and Performance Technologies, Inc. (technology company). JEREMIAH H. Executive Vice Executive Vice President, Investment CHAFKIN President, Service Marketing, Charles Schwab & Co., May 9, 1959 2 Chief Operating Inc.; Director, Charles Schwab Asset Officer and Management (Ireland) Ltd; President and Trustee of each Chief Operating Officer until December fund in Schwab 2001, Charles Schwab Investment Capital Trust Management, Inc. Prior to September and Schwab 1999, Mr. Chafkin was Senior Managing Investments Director, Bankers Trust Company. since 2000.
** In addition to their positions with the investment adviser and the distributor, Messrs. Coghlan and Chafkin also own stock in The Charles Schwab Corporation. 23 TAI-CHIN TUNG Treasurer and Senior Vice President and Chief March 7, 1951 Principal Financial Officer, Charles Schwab Financial Investment Management, Inc.; Vice Officer President, The Charles Schwab Trust Company. From 1994 to 1996, Ms. Tung was Controller for Robertson Stephens Investment Management, Inc. STEPHEN B. WARD Senior Vice Director, Senior Vice President and April 5, 1955 President and Chief Investment Officer, Charles Schwab Chief Investment Management, Inc.; Chief Investment Investment Officer, The Charles Schwab Officer Trust Company. KOJI E. FELTON Secretary Senior Vice President, Chief Counsel and March 13, 1961 Assistant Corporate Secretary, Charles Schwab Investment Management, Inc. Prior to June 1998, Mr. Felton was a Branch Chief in Enforcement at the U.S. Securities and Exchange Commission in San Francisco.
The continuation of each fund's investment advisory agreement must be specifically approved at least annually (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreement or "interested persons" of any party (the "Independent Trustees"), cast in person at a meeting called for the purpose of voting on such approval. Each year, the Board of Trustees calls and holds a meeting to decide whether to renew the investment advisory agreement. In preparation for the meeting, the Board requests and reviews a wide variety of materials provided by the funds' investment adviser, as well as extensive data provided by third parties, and the Independent Trustees receive advice from counsel to the Independent Trustees. At the April 24, 2001 meeting, the Board of Trustees, including a majority of Independent Trustees, approved the funds' investment advisory and administration agreement with CSIM (the "Agreement") based on its consideration and evaluation of a variety of specific factors such as: (1) the nature and quality of the services provided to the funds under the Agreement; (2) the funds' expenses under the Agreement and how those expenses compared to those of other comparable mutual funds; (3) each fund's investment performance and how it compared to that of other comparable mutual funds; and (4) the profitability of CSIM and its affiliates, including Schwab, with respect to each fund, including both direct and indirect benefits accruing to CSIM and its affiliates. 24 First, with respect to the nature and quality of the services provided by CSIM to the funds, the trustees considered, among other things, CSIM's personnel, experience, track record and compliance program. The trustees also considered how Schwab's extensive branch network, around-the-clock access, internet access, investment and research tools, telephone services, and array of account features benefit the funds. The trustees also considered Schwab's excellent reputation as a full service firm and its overall financial condition. Second, with respect to the funds' expenses under the Agreement, the trustees considered each fund's net operating expense ratio in comparison to those of other comparable mutual funds, such "peer groups" and comparisons having been selected and calculated by an independent third party. The trustees also considered the existence of any economies of scale and whether those were passed along to the funds' shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates each fund's respective peer group averages. They also considered the voluntary waiver of management and other fees to prevent total fund expenses from exceeding a specified cap. Third, with respect to fund performance, the trustees considered each fund's performance relative to its peer group and appropriate indices/benchmarks, in light of total return and market trends. The trustees considered the composition of the peer group, selection criteria, and the reputation of the third party who prepared the analysis. In evaluating performance, the Board of Trustees considered both risk and shareholder risk expectations for a given fund. Fourth, with regard to profitability, the trustees considered all compensation flowing to CSIM and its affiliates, directly or indirectly. The trustees also considered any benefits derived by the investment adviser or sub-adviser from their relationship with the funds, such as investment information or other research resources. In determining profitability of CSIM and its affiliates, the trustees reviewed management's profitability analyses with the assistance of independent accountants. The trustees also considered whether the levels of compensation and profitability under the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to the funds by CSIM and its affiliates. The Board also considered information about average expense ratios of funds in each fund's respective peer group and the effects of CSIM's and Schwab's voluntary waiver of management and other fees to prevent total portfolio expenses from exceeding a specified cap. In its deliberation, the Board did not identify any particular information that was all-important or controlling. Based on the Board's deliberation and its evaluation of the information described above, the Board, including all of the Independent Trustees, unanimously approved the continuation of the Agreement and concluded that the compensation under the Agreement is fair and reasonable in light of such services and expenses and such other matters as the trustees have considered to be relevant in the exercise of their reasonable judgment. BOARD COMMITTEES Each trust has an Audit/Portfolio Compliance Committee that is comprised of all of the Independent Trustees. This Committee reviews financial statements and other audit-related matters for the trusts; it does this at least quarterly and, if necessary, more frequently. The Committee met 4 times during the most recent fiscal year. Each trust has a Nominating Committee, which meets as often as deemed appropriate by the Committee for the primary purpose of nominating persons to serve as members of the Board of Trustees. This Committee did not meet during the most recent fiscal year. The Committee will 25 not consider nominees recommended by shareholders. The following table provides trustee compensation information as of October 31, 2001. Unless otherwise stated, information is for the fund complex.
Pension or Retirement Total Name of Benefits Compensation Trustee Aggregate Compensation Accrued as from Fund from the: Part of Fund Complex Expenses ------------------------------------------------------ Schwab Schwab Schwab Schwab Schwab S&P 1000 Small- Total International 500 Fund Cap Stock Index Fund Index Market Fund Fund Index Fund - ------------------------------------------------------------------------------------------------------------ Charles R. Schwab 0 0 0 0 0 N/A 0 Steven L. Scheid 1 0 0 0 0 0 N/A 0 Jeremiah H. Chafkin 0 0 0 0 0 N/A 0 John P. Coghlan 2 0 0 0 0 0 N/A 0 Mariann Byerwalter 9,494 8,711 2,516 1,317 2,244 N/A 146,100 Donald F. Dorward 9,494 8,711 2,516 1,317 2,244 N/A 146,100 William A. Hasler 9,494 8,711 2,516 1,317 2,244 N/A 146,100 Robert G. Holmes 9,494 8,711 2,516 1,317 2,244 N/A 146,100 Gerald B. Smith 9,494 8,711 2,516 1,317 2,244 N/A 146,100 Donald R. Stephens 9,494 8,711 2,516 1,317 2,244 N/A 146,100 Michael W. Wilsey 9,494 8,711 2,516 1,317 2,244 N/A 146,100
1 Mr. Scheid resigned from the board of trustees effective November 21, 2000. 2 Appointed to the board on November 21, 2000. 26 The following table provides information as of December 31, 2001, with respect to a dollar range of securities beneficially owned by each trustee.
Name of Dollar Range of Trustee Ownership of Aggregate Trustee Equity Securities in the: Dollar Range Of Trustee Ownership In the Fund Complex -------------------------------------------------------------- Schwab Schwab Schwab Schwab Schwab S&P 500 1000 Small- Total International Fund Fund Cap Index Stock Index Fund Market Fund Index Fund - ---------------------------------------------------------------------------------------------------- Charles R. Schwab $10,001- Over Over None Over Over $50,000 $100,000 $100,000 $100,000 $100,000 Jeremiah H. Chafkin Over None None None None Over $100,000 $100,000 John P. Coghlan $10,001- $50,001- $50,001- None $10,001- Over $50,000 $100,000 $100,000 $50,000 $100,000 Mariann Byerwalter None $50,001- None None None $50,001- $100,000 $100,000 Donald F. Dorward None $50,001- None None None Over $100,000 $100,000 William A. Hasler None None None None None $50,001- $100,000 Robert G. Holmes None $50,001- None None None Over $100,000 $100,000 Gerald B. Smith None None None None None Over $100,000 Donald R. Stephens None None None None None Over $100,000 Michael W. Wilsey Over None None None None Over $100,000 $100,000
DEFERRED COMPENSATION PLAN Independent Trustees may enter into a fee deferral plan. Under this plan, deferred fees will be credited to an account established by the trust as of the date that such fees would have been paid to the trustee. The value of this account will equal the value that the account would have if the fees credited to the account had been invested in the shares of SchwabFunds selected by the trustee. Currently, none of the Independent Trustees has elected to participate in this plan. 27 CODE OF ETHICS The funds, their investment adviser and Schwab have adopted a Code of Ethics (Code) as required under the 1940 Act. Subject to certain conditions or restrictions, the Code permits the trustees, directors, officers or advisory representatives of the funds or the investment adviser or the directors or officers of Schwab to buy or sell securities for their own accounts. This includes securities that may be purchased or held by the funds. Securities transactions by some of these individuals may be subject to prior approval of the investment adviser's Chief Compliance Officer or alternate. Most securities transactions are subject to quarterly reporting and review requirements. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES As of January 31, 2002, the officers and trustees of the trusts, as a group owned, of record or beneficially, less than 1% of the outstanding voting securities of the classes and series of each trust. As of January 31, 2002, the following represents persons or entities that owned, of record or beneficially, more than 5% of the shares of any class of any of the funds: SCHWAB S&P 500 FUND - INVESTOR SHARES The Charles Schwab Trust Co. 20.56% S&P 500 FUND - e.SHARES(R) The Charles Schwab Trust Co. 8.23% S&P 500 FUND - SELECT SHARES(R) Schwab MarketTrack All Equity Portfolio 5.02% The Charles Schwab Trust Co. 12.84% S&P 1000 FUND(R) - SELECT SHARES(R) The Charles Schwab Trust Co. 5.19% SCHWAB SMALL-CAP FUND(R) - SELECT SHARES(R) Schwab MarketTrack All Equity Portfolio 13.69% Schwab MarketTrack Balanced Portfolio 9.59% Schwab MarketTrack Growth Portfolio 13.57% The Charles Schwab Trust Co. 8.53% SCHWAB TOTAL STOCK MARKET INDEX FUND - INVESTOR SHARES The Charles Schwab Trust Co. 9.11% SCHWAB INTERNATIONAL INDEX FUND (R) - SELECT SHARES(R) Schwab MarketTrack All Equity Portfolio 20.46% Schwab MarketTrack Balanced Portfolio 12.07% Schwab MarketTrack Growth Portfolio 16.90%
28 INVESTMENT ADVISORY AND OTHER SERVICES INVESTMENT ADVISER CSIM, a wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery Street, San Francisco CA 94104, serves as the funds' investment adviser and administrator pursuant to Investment Advisory and Administration Agreements (Advisory Agreements) between it and each trust. Schwab is an affiliate of the investment adviser and is the trusts' distributor, shareholder services agent and transfer agent. Charles R. Schwab is the founder, Chairman, Co-Chief Executive Officer and Director of The Charles Schwab Corporation. As a result of his ownership of and interests in The Charles Schwab Corporation, Mr. Schwab may be deemed to be a controlling person of the investment adviser and Schwab. For its advisory and administrative services to the Schwab S&P 500 Fund, the investment adviser is entitled to receive an annual fee, accrued daily and paid monthly, of 0.20% of the fund's average daily net assets not in excess of $500 million, and 0.17% of such net assets over $500 million. Prior to February 28, 2000, for its advisory and administrative services to the Schwab S&P 500 Fund, the investment adviser was entitled to receive an annual fee, accrued daily and paid monthly, of 0.36% of the fund's average daily net assets not in excess of $1 billion, 0.33% of the next $1 billion and 0.31% of such net assets over $2 billion. For the fiscal years ended October 31, 2001, 2000, and 1999, the Schwab S&P 500 Fund paid investment advisory fees of $10,820,000, $11,534,000 and $7,536,000, respectively (fees were reduced by $2,316,000, $6,009,000 and $11,794,000, respectively). The investment adviser and Schwab have contractually guaranteed that, through at least February 28, 2003, the total fund annual operating expenses (excluding interest, taxes and certain non-routine expenses) of the Investor Shares, the e.Shares(R) and the Select Shares(R) will not exceed 0.35%, 0.28% and 0.19% respectively, of the average daily net assets of each class. For its advisory and administrative services to the Schwab 1000 Fund the investment adviser is entitled to receive an annual fee, accrued daily and paid monthly, of 0.30% of the fund's average daily net assets not in excess of $500 million and 0.22% of such assets over $500 million. For the fiscal years ended October 31, 2001, 2000 and 1999, the Schwab 1000 Fund paid investment advisory fees of $14,298,000, $16,517,000 and $13,006,000, respectively (fees were reduced by $756,000, $451,000 and $1,336,000, respectively). The investment adviser and Schwab have contractually guaranteed that, through at least February 28, 2003, total fund annual operating expenses (excluding interest, taxes and certain non-routine expenses) of the Investor Shares and Select Shares for the Schwab 1000 Fund will not exceed 0.46% and 0.35% respectively, of the average daily net assets of each class. For its advisory and administrative services to the Schwab Small-Cap Index Fund, the investment adviser is entitled to receive an annual fee, accrued daily and paid monthly, of 0.33% of the fund's average daily net assets not in excess of $500 million, and 0.28% of such net assets over $500 million. Prior to February 28, 2000, for its advisory and administrative services to the Schwab Small-Cap Index Fund, the investment adviser was entitled to receive an annual fee, accrued daily and paid 29 monthly, of 0.50% of the fund's average daily net assets not in excess of $300 million and 0.45% of such assets over $300 million. For the fiscal years ended October 31, 2001, 2000 and 1999, the Schwab Small-Cap Index Fund paid investment advisory fees of $3,395,000, $2,836,000 and $1,502,000, respectively (fees were reduced by $1,263,000, $1,623,000 and $2,099,000, respectively). The investment adviser and Schwab have contractually guaranteed that, through at least February 28, 2003, total fund annual operating expenses (excluding interest, taxes and certain non-routine) of the Investor Shares and Select Shares(R) for the Schwab Small-Cap Index Fund will not exceed 0.49% and 0.38%, respectively, of the average daily net assets of each class. For its advisory and administrative services to the Schwab Total Stock Market Index Fund, the investment adviser is entitled to receive an annual fee, accrued daily and paid monthly, of 0.30% of the fund's average daily net assets not in excess of $500 million, and 0.22% of such net assets over $500 million. For the fiscal years ended October 31, 2001, 2000 and 1999, the Schwab Total Stock Market Index Fund paid investment advisory fees of $348,000, $293,000 and $0 (fees were reduced by $1,067,000, $940,000 and $284,000, respectively). The investment adviser and Schwab have contractually guaranteed that, through at least February 28, 2003, the total fund annual operating expenses (excluding interest, taxes and certain non-routine expenses) of the Investor Shares and Select Shares for the fund will not exceed 0.40%, and 0.27%, respectively, of the average daily net assets of each class. For its advisory and administrative services to the Schwab International Index Fund, the investment adviser is entitled to receive an annual fee, accrued daily and paid monthly, of 0.43% of the average daily net assets not in excess of $500 million, and 0.38% of such net assets over $500 million. Prior to February 28, 2001, for its advisory and administrative services to the International Index Fund, the investment adviser was entitled to receive an annual fee, accrued daily and paid monthly, of 0.70% of the fund's average daily net assets not in excess of $300 million and 0.60% of such assets over $300 million. For the fiscal years ended October 31, 2001, 2000 and 1999, the Schwab International Index Fund paid investment advisory fees of $3,395,000, $3,269,000 and $1,755,000, respectively (fees were reduced by $1,669,000, $2,327,000 and $2,625,000, respectively). The investment adviser and Schwab have contractually guaranteed that, through at least February 28, 2003, the total fund annual operating expenses (excluding interest, taxes and certain non-routine expenses) of the Investor Shares and Select Shares for the Schwab International Index Fund will not exceed 0.58% and 0.47%, respectively, of the average daily net assets of each class. The amount of the expense cap of a fund is determined in coordination with the Board of Trustees, and the expense cap is intended to limit the effects on shareholders of expenses incurred in the ordinary operation of a fund. The expense cap is not intended to cover all fund expenses, and a fund's expenses may exceed the expense cap. For example, the expense cap does not cover investment-related expenses, such as brokerage commissions, interest and taxes, nor does it cover extraordinary or non-routine expenses, such as shareholder meeting costs. 30 DISTRIBUTOR Pursuant to a Distribution Agreement, Schwab is the principal underwriter for shares of the funds and is the trusts' agent for the purpose of the continuous offering of the funds' shares. Each fund pays the cost of the prospectuses and shareholder reports to be prepared and delivered to existing shareholders. Schwab pays such costs when the described materials are used in connection with the offering of shares to prospective investors and for supplemental sales literature and advertising. Schwab receives no fee under the Distribution Agreement. SHAREHOLDER SERVICES AND TRANSFER AGENT Schwab provides fund information to shareholders, including share price, shareholder ownership and account activities and distributes the funds' prospectuses, financial reports and other informational literature about the funds. Schwab maintains the office space, equipment and personnel necessary to provide these services. Schwab also distributes and markets SchwabFunds and provides other services. At its own expense, Schwab may engage third party entities, as appropriate, to perform some or all of these services. For the services performed as transfer agent under its contract with each fund, Schwab is entitled to receive an annual fee, payable monthly from each fund, in the amount of 0.05% of each fund's average daily net assets. For the services performed as shareholder services agent under its contract with each share class of each fund, Schwab is entitled to receive an annual fee, payable monthly from each share class of each fund, in the amount of 0.20% of Investor Shares' and 0.05% of Select Shares'(R) and e.Shares'(R) average daily net assets. CUSTODIANS AND FUND ACCOUNTANT Brown Brothers Harriman & Co., 40 Water Street, Boston MA 02109, serves as custodian for the Schwab International Index Fund and the Schwab Small-Cap Index Fund. PFPC Trust Company, 8800 Tinicum Blvd. Third Floor Suite 200, Philadelphia, PA 19153 serves as custodian to the Schwab S&P 500 Fund, Schwab 1000 Fund, and Schwab Total Stock Market Fund. SEI Investments, Mutual Fund Services, One Freedom Valley Dr. Oaks, Pennsylvania 19456, serves as fund accountant for the funds. The custodians are responsible for the daily safekeeping of securities and cash held or sold by the funds. The fund accountant maintains all books and records related to each fund's transactions. INDEPENDENT ACCOUNTANTS The funds' independent accountants, PricewaterhouseCoopers LLP, audits and reports on the annual financial statements of each series of the trusts and reviews certain regulatory reports and each fund's federal income tax return. They also perform other professional accounting, auditing, tax and advisory services when the trusts engage them to do so. Their address is 333 Market Street, San Francisco, CA 94105. Each fund's audited financial statements for the fiscal year ended October 31, 2001, are included in the fund's annual report, which is a separate report supplied with the SAI. 31 BROKERAGE ALLOCATION AND OTHER PRACTICES PORTFOLIO TURNOVER For reporting purposes, each fund's turnover rate is calculated by dividing the value of purchases or sales of portfolio securities for the fiscal year, whichever is less, by the monthly average value of portfolio securities the fund owned during the fiscal year. When making the calculation, all securities whose maturities at the time of acquisition were one year or less ("short-term securities") are excluded. A 100% portfolio turnover rate would occur, for example, if all portfolio securities (aside from short-term securities) were sold and either repurchased or replaced once during the fiscal year. The funds do not expect that their respective portfolio turnover rates will exceed 100% in any given year, a turnover rate lower than that of most non-index mutual funds. The funds' portfolio turnover rates are in the financial highlight tables in the prospectus. PORTFOLIO TRANSACTIONS In effecting securities transactions for a fund, the investment adviser seeks to obtain best execution. Subject to the supervision of the Board of Trustees, the investment adviser will select brokers and dealers for the funds on the basis of a number of factors, including, for example, price paid for securities, commission paid for transactions, clearance, settlement, reputation, financial strength and stability, efficiency of execution and error resolution, block trading and block positioning capabilities, willingness to execute related or unrelated difficult transactions in the future, and order of call. In assessing these criteria, the investment adviser will, among other things, monitor the performance of brokers effecting transactions for the funds to determine the effect, if any, that the funds' transactions through those brokers have on the market prices of the stocks involved. This may be of particular importance for the funds' investments in relatively smaller companies whose stocks are not as actively traded as those of their larger counterparts. The funds will seek to buy and sell securities in a manner that causes the least possible fluctuation in the prices of those stocks in view of the size of the transactions. When the execution capability and price offered by two or more broker-dealers are comparable, the investment adviser may, in its discretion, utilize the services of broker-dealers that provide it with investment information and other research resources. Such resources also may be used by the investment adviser when providing advisory services to its other clients, including mutual funds. In addition to agency transactions, the adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. In an attempt to obtain best execution for a fund, the investment adviser may place orders directly with market makers or with third market brokers such as Instinet, which is a computer subscriber service, or brokers on an agency basis. Placing orders with third market brokers or through Instinet may enable the funds to trade directly with other institutional holders on a net basis. At times, this may allow the funds to trade larger blocks than would be possible trading through a single market maker. In determining when and to what extent to use Schwab or any other affiliated broker-dealer as its broker for executing orders for the funds on securities exchanges, the investment adviser follows procedures, adopted by the Board of Trustees, that are designed to ensure that affiliated brokerage 32 commissions (if relevant) are reasonable and fair in comparison to unaffiliated brokerage commissions for comparable transactions. The Board reviews the procedures annually and approves and reviews transactions involving affiliated brokers quarterly. BROKERAGE COMMISSIONS For the fiscal years ended October 31, 2001, 2000 and 1999, the Schwab S&P 500 Fund paid brokerage commissions of $411,950, $556,689 and $1,266,303, respectively. For the fiscal years ended October 31, 2001, 2000 and 1999, the Schwab 1000 Fund(R) paid brokerage commissions of $391,945, $676,353 and $743,826, respectively. For the fiscal years ended October 31, 2001, 2000 and 1999, the Schwab Small-Cap Index Fund paid brokerage commissions of $3,840,472, $1,443,453 and $858,379, respectively. For the fiscal years ended October 31, 2001, 2000 and 1999, the Schwab Total Stock Market Index Fund paid brokerage commissions of $74,244, $88,990 and $152,679, respectively. For the fiscal years ended October 31, 2001, 2000 and 1999, the Schwab International Index Fund paid brokerage commissions of $396,361, $589,760 and $205,007, respectively. DESCRIPTION OF THE TRUSTS Each fund, except the Schwab 1000 Fund, is a series of Schwab Capital Trust, an open-end investment management company organized as a Massachusetts business trust on May 7, 1993. The Schwab 1000 Fund is a series of Schwab Investments, an open-end investment management company organized as a Massachusetts business trust on October 26, 1990. Each fund is composed of multiple classes of shares: Select Shares(R), Investor Shares and, for the Schwab S&P 500 Fund, e.Shares(R). The Declaration of Trust provides that shares may be automatically redeemed if held by a shareholder in an amount less than the minimum required by each fund or share class. Each fund's minimum initial investment, minimum additional investment and minimum balance requirements are set forth in the prospectus. These minimums may be waived for certain investors, including trustees, officers and employees of Schwab, or changed without prior notice. The minimums may also be waived for investment programs such as those programs designated for retirement savings, college savings or graduation gifts. The funds may hold special shareholder meetings, which may cause the funds to incur non-routine expenses. These meetings may be called for purposes such as electing trustees, changing fundamental policies and amending management contracts. Shareholders are entitled to one vote for each share owned and may vote by proxy or in person. Proxy materials will be mailed to shareholders prior to any meetings, and will include a voting card and information explaining the matters to be voted upon. The bylaws of each trust provide that a majority of shares entitled to vote shall be a quorum for the transaction of business at a shareholders' meeting, except that where any provision of law, or of the Declaration of Trust or of the bylaws permits or requires that (1) holders of any series shall vote as a series, then a majority of the aggregate number of shares of that series entitled to vote shall be necessary to constitute a quorum for the transaction of business by that series, or (2) holders of any class shall vote as a class, then a majority of the aggregate number of shares of that class entitled to 33 vote shall be necessary to constitute a quorum for the transaction of business by that class. Any lesser number shall be sufficient for adjournments. Any adjourned session or sessions may be held, within a reasonable time after the date set for the original meeting, without the necessity of further notice. Each Declaration of Trust specifically authorizes the Board of Trustees to terminate the trust (or any of its investment portfolios) by notice to the shareholders without shareholder approval. Under Massachusetts law, shareholders of a Massachusetts business trust could, under certain circumstances, be held personally liable for the trust's obligations. Each Declaration of Trust, however, disclaims shareholder liability for the trust's acts or obligations and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the trust or the trustees. In addition, each Declaration of Trust provides for indemnification out of the property of an investment portfolio in which a shareholder owns or owned shares for all losses and expenses of such shareholder or former shareholder if he or she is held personally liable for the obligations of the trust solely by reason of being or having been a shareholder. Moreover, each trust will be covered by insurance which the trustees consider adequate to cover foreseeable tort claims. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is considered remote, because it is limited to circumstances in which a disclaimer is inoperative and the trust itself is unable to meet its obligations. There is a remote possibility that a fund could become liable for a misstatement in the prospectus or SAI about another fund. As more fully described in each Declaration of Trust, the trustees may each year, or more frequently, distribute to the shareholders of each series accrued income less accrued expenses and any net realized capital gains less accrued expenses. Distributions of each year's income of each series shall be distributed pro rata to shareholders in proportion to the number of shares of each series held by each of them. Distributions will be paid in cash or shares or a combination thereof as determined by the trustees. Distributions paid in shares will be paid at the net asset value as determined in accordance with the bylaws. PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS AND PRICING SHARES PURCHASING AND REDEEMING SHARES OF THE FUNDS The funds are open each day that the New York Stock Exchange (NYSE) is open (business days). The NYSE's trading session is normally conducted from 9:30 a.m. Eastern time until 4:00 p.m. Eastern time, Monday through Friday, although some days, such as in advance of and following holidays, the NYSE's trading session closes early. The following holiday closings are currently scheduled for 2002: New Year's Day, Martin Luther King Jr.'s Birthday (observed), Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. While orders to buy, sell and exchange shares are typically accepted by Schwab at any time, only orders that are received in good order by the funds' transfer agent prior to the close of the NYSE's trading session will be executed that day at the funds' (or classes') share price calculated that day. On any day that the NYSE closes early, the funds reserve the right to advance the time by which purchase, redemption and exchanges orders must be received by the funds' transfer agent that day in order to be executed that day at that day's share price. As long as the funds or Schwab follows reasonable procedures to confirm that an investor's telephone or Internet order is genuine, they will not be liable for any losses the investor may experience due to unauthorized or fraudulent instructions. These procedures may include requiring a form of personal identification or other confirmation before acting upon any telephone or Internet order, providing written confirmation of telephone or Internet orders and tape 34 recording all telephone orders. Share certificates will not be issued in order to avoid additional administrative costs, however, share ownership records are maintained by Schwab. The funds reserve the right to waive the early redemption fee for certain tax-advantaged retirement plans. The funds have made an election with the SEC to pay in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of its net assets at the beginning of such period. This election is irrevocable without the SEC's prior approval. Redemption requests in excess of these limits may be paid, in whole or in part, in investment securities or in cash, as the Board of Trustees may deem advisable. Payment will be made wholly in cash unless the Board of Trustees believes that economic or market conditions exist that would make such payment a detriment to the best interests of a fund. If redemption proceeds are paid in investment securities, such securities will be valued as set forth in "Pricing of Shares". A redeeming shareholder would normally incur transaction costs if he or she were to convert the securities to cash. Each fund is designed for long-term investing. Because short-term trading activities can disrupt the smooth management of a fund and increase its expenses, each fund reserves the right to refuse any purchase or exchange order, or large purchase or exchange orders, including any purchase or exchange order which appears in its sole discretion to be associated with short-term trading activities or "market timing." Because market timing decisions to buy and sell securities typically are based on an individual investor's market outlook, including such factors as the perceived strength of the economy or the anticipated direction of interest rates, it is difficult for a fund to determine in advance what purchase or exchange orders may be deemed to be associated with market timing or short-term trading activities. Shares of the funds may be held only through a Schwab account or certain third-party investment providers that have an arrangement with Schwab. If you close your Schwab account, your fund shares may be redeemed unless you first transfer them to such a third-party investment provider. EXCHANGING SHARES OF THE FUNDS Shares of any SchwabFund, including any class of shares, may be sold and shares of any other SchwabFund or class purchased, provided the minimum investment and any other requirements of the fund or class purchased are satisfied. Without limiting this privilege, "an exchange order," which is a simultaneous order to sell shares of one fund or class and automatically invest the proceeds in another fund or class, may not be executed between shares of Sweep Investments(R) and shares of non-Sweep Investments. Shares of Sweep Investments may be bought and sold automatically pursuant to the terms and conditions of your Schwab account agreement or by direct order as long as you meet the minimums for direct investments. In addition, different exchange policies may apply to SchwabFunds that are bought and sold through third-party investment providers. DELIVERY OF SHAREHOLDER DOCUMENTS Typically once a year, an updated prospectus will be mailed to shareholders describing each fund's investment strategies, risks and shareholder policies. Twice a year, financial reports will be mailed to shareholders describing each fund's performance and investment holdings. In order to 35 eliminate duplicate mailings of shareholder documents, each household may receive one copy of these documents, under certain conditions. This practice is commonly called "householding." If you want to receive multiple copies, you may write or call your fund at the address or telephone number on the front of this SAI. Your instructions will be effective within 30 days of receipt by Schwab. PRICING OF SHARES Each business day, each share class of a fund calculates its share price, or NAV, "as of the close of the NYSE." This means that NAVs are calculated using the values of a fund's portfolio securities as of the close of the NYSE. Such values are required to be determined in one of two ways: securities for which market quotations are readily available are required to be valued at current market value; and securities for which market quotations are not readily available are required to be valued at fair value using procedures approved by the Board of Trustees. The funds use approved pricing services to provide values for their portfolio securities. Current market values are generally determined by the approved pricing services as follows: securities traded on stock exchanges are valued at the last-quoted sales price on the exchange on which such securities are primarily traded (closing values), or, lacking any sales, at the mean between the bid and ask prices; securities traded in the over-the-counter market are valued at the last sales price that day, or, if no sales that day, at the mean between the bid and ask prices. In addition, securities that are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges with these values then translated into U.S. dollars at the current exchange rate. Securities may be fair valued pursuant to procedures approved by the funds' Board of Trustees when approved pricing services do not provide a value for a security, a furnished price appears manifestly incorrect or events occur prior to the close of the NYSE that materially affect the furnished price. The Board of Trustees regularly reviews fair value determinations made by the funds pursuant to the procedures. TAXATION FEDERAL TAX INFORMATION FOR THE FUNDS It is each fund's policy to qualify for taxation as a "regulated investment company" (RIC) by meeting the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, each fund expects to eliminate or reduce to a nominal amount the federal income tax to which it is subject. If a fund does not qualify as a RIC under the Code, it will be subject to federal income tax on its net investment income and any net realized capital gains. The Code imposes a non-deductible excise tax on RICs that do not distribute in a calendar year (regardless of whether they otherwise have a non-calendar taxable year) an amount equal to 98% of their "ordinary income" (as defined in the Code) for the calendar year plus 98% of their net capital gain for the one-year period ending on October 31 of such calendar year, plus any undistributed amounts from prior years. The non-deductible excise tax is equal to 4% of the deficiency. For the foregoing purposes, a fund is treated as having distributed any amount on which it is subject to income tax for any taxable year ending in such calendar year. A fund's transactions in futures contracts, forward contracts, foreign currency transactions, options and certain other investment and hedging activities may be restricted by the Code and are subject to special tax rules. In a given case, these rules may accelerate income to a fund, defer its 36 losses, cause adjustments in the holding periods of a fund's assets, convert short-term capital losses into long-term capital losses or otherwise affect the character of a fund's income. These rules could therefore affect the amount, timing and character of distributions to shareholders. The funds will endeavor to make any available elections pertaining to these transactions in a manner believed to be in the best interest of the funds and their shareholders. FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS The discussion of federal income taxation presented below supplements the discussion in the funds' prospectus and only summarizes some of the important federal tax considerations generally affecting shareholders of the funds. Accordingly, prospective investors (particularly those not residing or domiciled in the United States) should consult their own tax advisors regarding the consequences of investing in a fund. Any dividends declared by a fund in October, November or December and paid the following January are treated, for tax purposes, as if they were received by shareholders on December 31 of the year in which they were declared. Long-term capital gains distributions are taxable as long-term capital gains, regardless of how long you have held your shares. However, if you receive a long-term capital gains distribution with respect to fund shares held for six months or less, any loss on the sale or exchange of those shares shall, to the extent of the long-term capital gains distribution, be treated as a long-term capital loss. For corporate investors in the funds, dividend distributions the funds designate to be from dividends received from qualifying domestic corporations will be eligible for the 70% corporate dividends-received deduction to the extent they would qualify if the funds were regular corporations. Distributions by a fund also may be subject to state, local and foreign taxes, and their treatment under applicable tax laws may differ from the federal income tax treatment. Each fund will be required in certain cases to withhold at the applicable withholding rate and remit to the U.S. Treasury, the withheld amount of taxable dividends paid to any shareholder who (1) fails to provide a correct taxpayer identification number certified under penalty of perjury; (2) is subject to withholding by the Internal Revenue Service for failure to properly report all payments of interest or dividends; (3) fails to provide a certified statement that he or she is not subject to "backup withholding;" or (4) fails to provide a certified statement that he or she is a U.S. person (including a U.S. resident alien). Backup withholding is not an additional tax and any amounts withheld may be credited against the shareholder's ultimate U.S. tax liability. Foreign shareholders (i.e., nonresident alien individuals and foreign corporations, partnerships, trusts and estates) are generally subject to U.S. withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions derived from net investment income and short-term capital gains. Distributions to foreign shareholders of long-term capital gains and any gains from the sale or other disposition of shares of the funds generally are not subject to U.S. taxation, unless the recipient is an individual who either (1) meets the Code's definition of "resident alien" or (2) is physically present in the U.S. for 183 days or more per year. Different tax consequences may result if the foreign shareholder is engaged in a trade or business within the United States. In addition, the tax consequences to a foreign shareholder entitled to claim the benefits of a tax treaty may be different than those described above. Income that the Schwab International Index Fund receives from sources within various foreign countries may be subject to foreign income taxes withheld at the source. If a fund has at least 50% of its assets invested in foreign securities at the end of its taxable year, it may elect to pass through to its shareholders the ability to take either the foreign tax credit or the deduction for 37 foreign taxes. It is expected that the Schwab International Index Fund will have more than 50% of the value of its total assets at the close of its taxable year invested in foreign securities, and it will make this election. Pursuant to this election, U.S. shareholders must include in gross income, even though not actually received, their respective pro rata share of foreign taxes, and may either credit the tax against U.S. income taxes, subject to certain limitations described in the Code or deduct their pro rata share of foreign taxes, but not for alternative minimum tax purposes (but not both). A shareholder who does not itemize deductions may not claim a deduction for foreign taxes. The Schwab International Index Fund may invest in a non-U.S. corporation, which could be treated as a passive foreign investment company (PFIC) or become a PFIC under the Code. This could result in adverse tax consequences upon the disposition of, or the receipt of "excess distributions" with respect to, such equity investments. To the extent the Schwab International Index Fund does invest in PFICs, it may elect to treat the PFIC as a "qualified fund" or mark-to-market its investments in PFICs annually. In either case, the Schwab International Index Fund may be required to distribute amounts in excess of realized income and gains. To the extent that the Schwab International Index Fund does invest in foreign securities which are determined to be PFIC securities and is required to pay a tax on such investments, a credit for this tax would not be allowed to be passed through to the fund's shareholders. Therefore, the payment of this tax would reduce the Schwab International Index Fund's economic return from its PFIC shares, and excess distributions received with respect to such shares are treated as ordinary income rather than capital gains. Shareholders are urged to consult their tax advisors as to the state and local tax rules affecting investments in the funds. CALCULATION OF PERFORMANCE DATA Average annual total return is a standardized measure of performance calculated using methods prescribed by SEC rules. It is calculated by determining the ending value of a hypothetical initial investment of $1,000 made at the beginning of a specified period. The ending value is then divided by the initial investment, which is annualized and expressed as a percentage. It is reported for periods of one, five and 10 years or since commencement of operations for periods not falling on those intervals. In computing average annual total return, a fund assumes reinvestment of all distributions at net asset value on applicable reinvestment dates. For average "after-tax" total return, the SEC rules mandate several assumptions, including that the highest historical individual federal marginal income tax rates at the time of reinvestment be used, and that the calculations do not reflect the impact of state and local taxes. After-tax returns depend on an investor's tax situation, and may differ from those shown. These returns, for instance, assume that an investor has sufficient capital gains of the same character from other investments to offset any capital losses from the redemption. These returns are not relevant to certain tax-deferred investors. If the sale of shares results in a loss, it is assumed that the shareholder has sufficient capital gains to offset the capital loss. As a result, returns after taxes on distributions and sale of fund shares may exceed returns after taxes on distributions (but before sale of fund shares). 38 AVERAGE ANNUAL TOTAL RETURNS
Fund (Commencement of One Year ended Five Years ended 10 Years or Operations) October 31, 2001 October 31, 2001 From Commencement of Operations to October 31, 2001 - --------------------------------------------------------------------------------------- Schwab S&P 500 Fund - Investor Shares (5/1/96) (25.11%) 9.60% 10.36% After-tax Returns: On Distribution (25.36%) 9.22% 10.02% On Distribution and Sale (15.26%) 7.75% 8.45% e.Shares(R) (5/1/96) (25.02%) 9.70% 10.47% Select Shares(R) (5/19/97) (24.97%) - 6.78% Schwab 1000 Fund - Investor Shares (4/2/91) (25.50%) 9.59% 12.27% After-tax Returns: On Distribution (25.69%) 9.21% 11.71% On Distribution and Sale (15.50%) 7.73% 10.24% Select Shares (5/19/97) (25.40%) - 7.06% Schwab Small-Cap Index Fund - Investor Shares (12/3/93) (13.66%) 7.46% 8.96% After-tax Returns: On Distribution (15.82%) 6.58% 8.32% On Distribution and Sale (6.12%) 6.05% 7.44% Select Shares (5/19/97) (13.56%) - 6.89% Schwab Total Stock Market Index Fund Investor Shares (6/1/99) (25.55%) - (6.89%) After-tax Returns: On Distribution (25.77%) - (7.07%) On Distribution and Sale (15.53%) - (5.52%) Select Shares (6/1/99) (25.40%) - (6.76%) Schwab International Index Fund - Investor Shares (9/9/93) (27.58%) 1.14% 3.57% After-tax Returns: On Distribution (28.01%) 0.68 3.14% On Distribution and Sale (16.72%) 0.73 2.71% Select Shares (5/19/97) (27.45%) - (1.27%)
Each fund also may report the percentage of its total return that would be paid to taxes annually (at the applicable federal personal income and capital gains tax rates) before redemption of fund shares. This percentage may be compared to that of other mutual funds with similar investment objectives as reported by independent sources. A fund also may advertise its cumulative total return. This number is calculated using the same formula that is used for average annual total return except that, rather than calculating the total return based on a one-year period, cumulative total return is calculated from commencement of operations to the fiscal year ended October 31, 2001. 39
Name of Fund (Commencement of Operations) Cumulative Total Return - ----------------------------------------- ----------------------- Schwab S&P 500 Fund - Investor Shares (5/1/96) 72.04% e.Shares(R) (5/1/96) 72.97% Select Shares (5/19/97) 33.91% Schwab 1000 Fund - Investor Shares (4/2/91) 238.21% Select Shares (5/19/97) 35.49% Schwab Small-Cap Fund - Investor Shares (12/3/93) 97.18% Select Shares (5/19/97) 34.53% Schwab Total Stock Market Index Fund - Investor Shares (6/1/99) (15.92%) Select Shares (6/1/99) (15.62%) Schwab International Index Fund - Investor Shares (9/9/93) 33.03% Select Shares (5/19/97) (5.53%)
The performance of the funds may be compared with the performance of other mutual funds by comparing the ratings of mutual fund rating services, various indices, U.S. government obligations, bank certificates of deposit, the consumer price index and other investments for which reliable data is available. An index's performance data assumes the reinvestment of dividends but does not reflect deductions for administrative, management and trading expenses. The funds will be subject to these costs and expenses, while an index does not have these expenses. In addition, various factors, such as holding a cash balance, may cause the funds' performance to be higher or lower than that of an index. TAX EFFICIENCY Taxes can erode the returns a shareholder earns from a mutual fund investment and are an important, and often overlooked, factor when evaluating a mutual fund's performance. For many mutual funds, shareholder tax liability is of minimal concern in the investment management process. In contrast, the investment adviser of the Schwab 1000, International and Total Stock Market Funds employs specific investment strategies designed to minimize capital gain distributions while achieving each fund's investment objective. These strategies include selling the highest tax cost securities first, not re-balancing the portfolio to reflect changes in their indexes, trading only round-lots or large blocks of securities and focusing on individual tax lots in deciding when and how to manage the realization of capital gains. In addition, the investment adviser monitors, analyzes and evaluates each fund's portfolio as well as market conditions to carefully manage necessary trading activity and to determine when there are opportunities to realize capital losses, which offset realized capital gains. These policies will be utilized to the extent they do not have a material effect on each fund's ability to track or match the performance of its index. They may affect the composition of a fund's index holdings as compared to the index. By deferring or avoiding the realization of capital gains, where possible, until an investor sells shares, unrealized gains can accumulate in a fund, helping to build the value of a shareholder's investment. In addition, shareholders are given greater control over the timing of the recognition of such gains and the impact on their tax situations. There can be no assurance that the investment adviser will succeed in avoiding realized net capital gains. 40 The Schwab 1000, International and Total Stock Market Funds may refer to recent studies that analyze certain techniques and strategies these funds may use to promote the advantages of investing in a series that is part of a large, diverse mutual fund complex. From time to time, a fund may include discussions in advertisements of the income tax savings shareholders may experience as a result of their policy of limiting portfolio trading in order to reduce capital gains. This information may be supplemented by presentations of statistical data illustrating the extent of such income tax savings and the impact of such savings on the yield and/or total return of the funds. In addition, such advertisements may include comparisons of the funds' performance against that of investment products that do not employ the funds' policy of seeking to limit capital gains. 41 PART C OTHER INFORMATION SCHWAB INVESTMENTS Item 23. Exhibits. (a) Articles of Incorporation Agreement and Declaration of Trust, dated October 26, 1990, was electronically filed and is incorporated by reference to Exhibit 1, File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1997. (b) By-Laws Amended and Restated By-Laws were electronically filed and are incorporated by reference to Exhibit 2, File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1997. (c) Instruments Defining (i) Article III, Section 5, Article V, Article VI, Article VIII, Section 4 Rights of Security Holders and Article IX, Sections 1, 5 and 7 of the Agreement and Declaration of Trust were filed and are incorporated by reference to Exhibit 1, File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1997. (ii) Article 9, Article 10, Section 6, and Article 11 of the Amended and Restated By-Laws were filed and are incorporated by reference to Exhibit 2, File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A filed on December 30, 1997. (d) Investment Advisory (i) Investment Advisory and Administration Agreement between Registrant and Contracts Charles Schwab Investment Management, Inc. (the "Investment Manager") and Schedules B and C were electronically filed and are incorporated by reference to Exhibit 5(a), File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1997. (ii) Amended Schedules A and D to Investment Advisory and Administration Agreement referred to at Exhibit (d)(i) above was electronically filed and is incorporated by reference to Exhibit (d) (ii), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999.
Part C (e) Underwriting Contracts (i) Distribution Agreement between Registrant and Charles Schwab & Co., Inc. ("Schwab") was electronically filed and is incorporated by reference to Exhibit 6, File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1997. (ii) Amended Schedule A to the Distribution Agreement was electronically filed and is incorporated by reference to Exhibit (e) (ii), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, on July 21, 1999. (f) Bonus or Profit Sharing Inapplicable. Contracts (g) Custodian Agreements (i) Custodian Services Agreement between Registrant and PFPC Trust Company (assigned by PNC Bank, National Association ("PNC Bank," formerly Provident National Bank) was electronically filed and is incorporated by reference to Exhibit 8(a), File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1997. (ii) Amendment No. 1 to Custodian Services Agreement referred to at Exhibit g(i) above was filed and is incorporated by reference to Exhibit 8(b), File No. 811-6200, of Post-Effective Amendment No. 13 to Registrant's Registration Statement on Form N-1A, filed on December 29, 1996. (iii) Amendment No. 2 to Custodian Services Agreement referred to at Exhibit (g)(i) above was filed and is incorporated by reference to Exhibit 8(c), File No. 811-6200, of Post-Effective Amendment No.14 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1996. (iv) Amended Schedule A to the Custodian Services Agreement referred to at Exhibit (g)(i) above was electronically filed and is incorporated by reference to Exhibit (g)(iv), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (v) Transfer Agency Agreement between the Registrant and Schwab and Schedule B were electronically filed and are incorporated by reference to Exhibit 8(e), File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1997.
Part C (vi) Amended Schedules A and C to the Transfer Agency Agreement referred to at Exhibit (g)(v) above were electronically filed and are incorporated by reference to Exhibit (g)(vi), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N1-1A, filed on July 21, 1999. (vii) Shareholder Service Agreement between the Registrant and Schwab and Schedule B were electronically filed and are incorporated by reference to Exhibit 8(g), File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1997. (viii) Schedules A and C to the Shareholder Service Agreement between the Registrant and Schwab referenced at Exhibit (g)(vii) above were electronically filed and are incorporated by reference to Exhibit (g)(viii), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (ix) Accounting Services Agreement between Registrant and Provident Financial Processing Corporation was electronically filed and is incorporated by reference to Exhibit 8(i), File No. 811-6200, of Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A filed on December 30, 1997. (x) Amendment No. 1 to Accounting Services Agreement referred to at Exhibit (g)(ix) above was filed and is incorporated by reference to Exhibit 8(j), File No. 811-6200, of Post-Effective Amendment No. 13 to Registrant's Registration Statement on Form N-1A, filed on December 29, 1996. (xi) Amendment No. 2 to Accounting Services Agreement referred to at Exhibit (g)(ix) above was filed and is incorporated by reference to Exhibit 8(k), File No. 811-6200, of Post-Effective Amendment No. 14 to Registrant's Registration Statement on Form N-1A, filed on December 30, 1996. (xii) Amended Custodian Services Fee Agreement dated November 1, 1998, by and between the Registrant and PFPC Trust Company (assigned by PNC Bank), is incorporated herein by reference to Exhibit (g)(xii), File No. 811-6200, of Post-Effective Amendment No. 27 to Registrant's Registration Statement on Form N-1A, electronically filed on December 30, 1998.
Part C (xiii) Schedule A to the Custodian Services Fee Agreement between the registrant and PFPC Trust Company (assigned by PNC Bank), was electronically filed and is incorporated by reference to Exhibit (g)(xiv), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (xiv) Accounting Services Agreement with SEI Fund Resources dated April 1, 1998, was electronically filed and is incorporated herein by reference to Exhibit (g)(xiii), File No. 811-6200, of Post-Effective Amendment No. 27 to Registrant's Registration Statement on Form N-1A, electronically filed on December 30, 1998. (xv) Amended Schedule A of the Accounting Services Agreement between the Registrant and SEI Fund Resources was electronically filed and is incorporated by reference to Exhibit (g)(xvi), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (xvi) Amendment No. 1 to the Accounting Services Agreement dated December 17, 1998, by and between Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Investments and SEI Fund Resources was electronically filed and is incorporated by reference to exhibit (g)(xvii), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (xvii) Amendment to the Custodian Services Agreement pursuant to Rule 17f-5 referenced above as Exhibit (g)(i) between Registrant and PFPC Trust Company (assigned by PNC Bank), dated July 2, 2001, is herewith electronically filed as Exhibit (g)(xvii), File No. 811-6200. (xviii) Amendment to the Custodian Services Agreement pursuant to Rule 17f-7 referenced above as Exhibit (g)(i) between Registrant and PFPC Trust Company (assigned by as PNC Bank), dated July 2, 2001, is herewith electronically filed as Exhibit (g)(xviii), File No. 811-6200. (xix) Amendment to the Custodian Services Agreement referenced above as Exhibit (g)(i) between Registrant and PFPC Trust Company (assigned by PNC Bank), dated August 21, 2001, is herewith electronically filed as Exhibit (g)(xix), File No. 811-6200. (h) Other Material Contracts Inapplicable.
Part C (i) Legal Opinion Opinion of Counsel electronically filed herewith as Exhibit (i), File No. 811-6200. (j) Other Opinions Auditors' Consent electronically filed herewith as Exhibit (j), File No. 811-6200. (k) Omitted Financial Inapplicable. Statements (l) Initial Capital Agreement (i) Purchase Agreement relating to shares of the Schwab 1000 Fund was electronically filed and is incorporated by reference to Exhibit (l)(i), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (ii) Purchase Agreement relating to shares of the Schwab Short-Term Bond Market Index Fund (formerly Schwab Short/Intermediate Government Bond Fund) was electronically filed and incorporated by reference to Exhibit (l)(ii), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (iii) Purchase Agreement relating to shares of the Schwab California Long-Term Tax-Free Bond Fund (formerly Schwab California Tax Free Bond Fund) was electronically filed and is incorporated by reference to Exhibit (l)(iii), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (iv) Purchase Agreement relating to shares of the Schwab Long-Term Tax-Free Bond Fund (formerly Schwab National Tax Free Bond Fund) was electronically filed and is incorporated by reference to Exhibit (l)(iv), File No. 811-6200, of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (v) Purchase Agreement relating to shares of the Schwab Short/Intermediate Tax-Free Bond Fund, Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab Total Bond Market Index Fund (formerly, Schwab Long-Term Government Bond Fund) was electronically filed and is incorporated by reference to Exhibit 13, File No. 811-6200, to Post-Effective Amendment No. 22 to Registrant's Registration Statement on Form N-1A filed on December 30, 1997. (vi) Purchase Agreement relating to shares of the Schwab YieldPlus Fund(R) was electronically filed and is incorporated by reference to Exhibit (l)(vi) of Post-Effective Amendment No. 29, File No. 811-6200, to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999.
Part C (m) Rule 12b-1 Plan Inapplicable. (n) Financial Data Schedule Inapplicable. (o) Rule 18f-3 Plan Registrant's Amended and Restated Multiple Class Plan for Investor and Select Shares of Schwab 1000 Fund(R) and Schwab YieldPlus Fund(R) was electronically filed and is incorporated by reference to Exhibit (o)(i) of Post-Effective Amendment No. 29 to Registrant's Registration Statement on Form N-1A, filed on July 21, 1999. (p) Power of Attorney (i) Power of Attorney executed by Mariann Byerwalter, February 14, 2001, to Post-Effective Amendment No. 36 to Registrant's Statement on Form N-1A, electronically filed on February 26, 2001, is incorporated herein by reference to Exhibit (p)(i), File No. 811-6200. (ii) Power of Attorney executed by William A. Hasler, February 14, 2001, to Post-Effective Amendment No. 36 to Registrant's Statement on Form N-1A, electronically filed on February 26, 2001, is incorporated herein by reference to Exhibit (p)(ii), File No. 811-6200 (iii) Power of Attorney executed by Gerald B. Smith, February 14, 2001, to Post-Effective Amendment No. 36 to Registrant's Statement on Form N-1A, electronically filed on February 26, 2001, is incorporated herein by reference to Exhibit (p)(iii), File No. 811-6200 (iv) Power of Attorney executed by Charles R. Schwab, November 21, 2000, to Post-Effective Amendment No. 35 to the Registrant's Registration Statement on Form N-1A, electronically filed on December 11, 2000, is incorporated herein by reference to Exhibit (p)(iv), File No. 811-6200. (v) Power of Attorney executed by Jeremiah H. Chafkin, November 21, 2000, to Post-Effective Amendment No. 35 to the Registrant's Registration Statement on Form N-1A, electronically filed on December 11, 2000, is incorporated herein by reference to Exhibit (p)(v), File No. 811-6200.
Part C (vi) Power of Attorney executed by John Coghlan, November 21, 2000, to Post-Effective Amendment No. 35 to the Registrant's Registration Statement on Form N-1A, electronically filed on December 11, 2000, is incorporated herein by reference to Exhibit (p)(vi), File No. 811-6200. (vii) Power of Attorney executed by Donald F. Doward, February 14, 2001, to Post-Effective Amendment No. 36 to Registrant's Statement on Form N-1A, electronically filed on February 26, 2001, is incorporated herein by reference to Exhibit (p)(vii), File No. 811-6200. (viii) Power of Attorney executed by Robert G. Holmes, February 14, 2001, to Post-Effective Amendment No. 36 to Registrant's Statement on Form N-1A, electronically filed on February 26, 2001, is incorporated herein by reference to Exhibit (p)(viii), File No. 811-6200. (ix) Power of Attorney executed by Donald R. Stephens, February 14, 2001, to Post-Effective Amendment No. 36 to Registrant's Statement on Form N-1A, electronically filed on February 26, 2001, is incorporated herein by reference to Exhibit (p)(ix), File No. 811-6200. (x) Power of Attorney executed by Michael W. Wilsey, February 14, 2001, to Post-Effective Amendment No. 36 to Registrant's Statement on Form N-1A, electronically filed on February 26, 2001, is incorporated herein by reference to Exhibit (p)(x), File No. 811-6200. (xi) Power of Attorney executed by Tai-Chin Tung, February 14, 2001, to Post-Effective Amendment No. 36 to Registrant's Statement on Form N-1A, electronically filed on February 26, 2001, is incorporated herein by reference to Exhibit (p)(xi), File No. 811-6200. (xii) Certificate of Assistant Secretary executed by Alice L. Schulman, August 20, 2001, to Post-Effective Amendment No. 37 to Registrant's Statement on Form N-1A electronically filed on August 28, 2001, is incorporated herein by reference to Exhibit (p)(xii), File No. 811-6200. (q) Code of Ethics (i) Code of Ethics adopted by Registrant, Charles Schwab Investment Management Inc. and Charles Schwab & Co., Inc. is electronically filed herewith to Exhibit (q)(i), File No. 811-6200.
Part C Item 24. Persons Controlled by or under Common Control with the Registrant. The Charles Schwab Family of Funds (the "Schwab Fund Family"), Schwab Capital Trust and Schwab Annuity Portfolios are each Massachusetts business trusts registered under the Investment Company Act of 1940, as amended (the "1940 Act"). Each is advised by the Investment Manager and employs Schwab as principal underwriter, transfer agent and shareholder services agent. As a result, The Charles Schwab Family of Funds, Schwab Capital Trust and Schwab Annuity Portfolios may each be deemed to be under common control with Registrant. Item 25. Indemnification. Article VIII of Registrant's Agreement and Declaration of Trust (Exhibit (1) hereto, which is incorporated herein by reference) provides in effect that Registrant will indemnify its officers and trustees against all liabilities and expenses, including but not limited to amounts paid in satisfaction of judgments, in compromise, or as fines and penalties, and counsel fees reasonably incurred by any such officer or trustee in connection with the defense or disposition of any action, suit, or other proceeding. However, in accordance with Section 17(h) and 17(i) of the 1940 Act and its own terms, said Agreement and Declaration of Trust does not protect any person against any liability to Registrant or its shareholders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. In any event, Registrant will comply with 1940 Act Releases No. 7221 and 11330 respecting the permissible boundaries of indemnification by an investment company of its officers and trustees. Insofar as indemnification for liability arising under the Securities Act of 1933, as amended (the "1933 Act"), may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a trustee, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. Item 26. Business and Other Connections of Investment Manager Registrant's investment adviser, Charles Schwab Investment Management, Inc., a Delaware corporation, organized in October 1989 to serve as investment manager to Registrant, also serves as the investment manager to The Charles Schwab Family of Funds, Schwab Capital Trust, and Schwab Annuity Portfolios, each an open-end, management investment company. The principal place of business of the investment adviser is 101 Montgomery Street, San Francisco, California 94104. The only business in which the investment adviser engages is that of investment adviser and administrator to Registrant, The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Annuity Portfolios and any other investment companies that Schwab may sponsor in the future, and an investment adviser to certain non-investment company clients. Part C The business, profession, vocation or employment of a substantial nature in which each director and/or senior or executive officer of the investment adviser (CSIM) is or has been engaged during the past two fiscal years is listed below. The name of any company for which any director and/or senior or executive officer of the investment adviser serves as director, officer, employee, partner or trustee is also listed below. In addition, the name and position of each director and/or senior or executive officer of the Registrant's principal underwriter Charles Schwab & Co. Inc. is listed below.
Name and Position with Registrant Name of Company Capacity - ------------------------------------------------------------------------------------------------------------------------ Charles R. Schwab, Charles Schwab & Co., Inc. Chairman, Director Chairman, Chief Executive Officer and Trustee The Charles Schwab Corporation Chairman and Co-Chief Executive Officer, Director Charles Schwab Investment Management, Inc. Chairman, Director Schwab Holdings, Inc. Chief Executive Officer, Director Charles Schwab Limited (U.K.) Chairman and Chief Executive Officer Schwab International Holdings, Inc. Chairman and Chief Executive Officer Schwab (SIS) Holdings, Inc. I Chairman and Chief Executive Officer U.S. Trust Corporation Director United States Trust Company of New York Director The Gap, Inc. Director Audiobase, Inc. Director Vodaphone AirTouch PLC Director Siebel Systems Director Xign, Inc. Director
Part C
Name and Position with Registrant Name of Company Capacity - ------------------------------------------------------------------------------------------------------------------------ The Charles Schwab Trust Company Director until July 2001 Mayer & Schweitzer, Inc. Chairman and Director until January 1999 Schwab Retirement Plan Services, Inc. Chairman, Director until January 1999 Performance Technologies, Inc. Chairman, Director until January 1999 TrustMark, Inc. Chairman and Director until January 1999 David S. Pottruck Charles Schwab & Co., Inc. President and Chief Executive Officer, Director The Charles Schwab Corporation President and Co-Chief Executive Officer, Director U.S. Trust Corporation Director United States Trust Company of New York Director Schwab (SIS) Holdings, Inc. I President and Chief Operating Officer Schwab Holdings, Inc. President and Chief Operating Officer, Director Schwab International Holdings, Inc. President and Chief Operating Officer Charles Schwab Investment Management, Inc. Director until October 2001 Schwab Retirement Plan Services, Inc. Director until January 1999 Charles Schwab Limited (U.K.) Director until January 1999 Mayer & Schweitzer, Inc. Director until January 1999 Performance Technologies, Inc. Director until January 1999 TrustMark, Inc. Director until January 1999
Part C
Name and Position with Registrant Name of Company Capacity - ------------------------------------------------------------------------------------------------------------------------ John P. Coghlan Charles Schwab & Co., Inc. Vice Chairman and Enterprise President and Trustee President - Retirement Plan Services and Services for Investment Managers Charles Schwab Investment Management, Inc. Chief Executive Officer and Director The Charles Schwab Corporation Vice Chairman and Executive Vice President The Charles Schwab Trust Company President, Chief Executive Officer and Director Schwab Retirement Technologies, Inc. President and Director Charles Schwab Asset Management (Ireland) Ltd. Director Charles Schwab Worldwide Funds PLC Director Performance Technologies, Inc. Director Schwab Retirement Plan Services, Inc. Director Willie C. Bogan The Charles Schwab Corporation Assistant Corporate Secretary Charles Schwab & Co., Inc. Vice President and Assistant Corporate Secretary Charles Schwab Investment Management, Inc. Assistant Corporate Secretary The Charles Schwab Trust Company Assistant Corporate Secretary until February 2000 Jeremiah H. Chafkin, Charles Schwab & Co., Inc. Executive Vice President, Asset Executive Vice President, Management Products and Chief Operating Officer Services. Prior to September and Trustee 1999, Mr. Chafkin was Senior Managing Director, Bankers Trust Company. Charles Schwab Asset Management (Ireland) Ltd. Director
Part C
Name and Position with Registrant Name of Company Capacity - ------------------------------------------------------------------------------------------------------------------------ Charles Schwab Investment Management, Inc. President and Chief Operating Officer until December 2001 Karen W. Chang Charles Schwab & Co., Inc. Enterprise President - General Investor Services Koji E. Felton, Charles Schwab Investment Management, Inc. Senior Vice President, Chief Secretary Counsel and Assistant Corporate Secretary Christopher V. Dodds Charles Schwab & Co., Inc. Executive Vice President and Chief Financial Officer Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President - Corporate Oversite and Corporate Secretary Lon Gorman Charles Schwab & Co., Inc. Vice Chairman and Enterprise President - Capital Markets and Trading Daniel O. Leemon Charles Schwab & Co., Inc. Executive Vice President and Chief Strategy Officer Dawn G. Lepore Charles Schwab & Co., Inc. Vice Chairman of Technology and Administration Frederick E. Matteson Charles Schwab & Co., Inc. Executive Vice President - Schwab Technology Services Mary McLeod Charles Schwab & Co., Inc. Executive Vice President - Human Resources John P. McGonigle Charles Schwab & Co., Inc. Executive Vice President - Mutual Funds Geoffrey J. Penney Charles Schwab & Co., Inc. Executive Vice President - Financial Products and International Technology Gideon Sasson Charles Schwab & Co., Inc. Enterprise President - Brokerage Operations
Part C
Name and Position with Registrant Name of Company Capacity - ------------------------------------------------------------------------------------------------------------------------ Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President and Chief Administrative Officer Tai-Chin Tung, Charles Schwab Investment Management, Inc. Senior Vice President and Chief Treasurer and Principal Financial Officer Financial Officer The Charles Schwab Trust Company Vice President Stephen B. Ward, Charles Schwab Investment Management, Inc. Director, Senior Vice President Senior Vice President and and Chief Investment Officer Chief Investment Officer The Charles Schwab Trust Company Chief Investment Officer
Item 27. Principal Underwriters. (a) Schwab acts as principal underwriter and distributor of Registrant's shares. Schwab also acts as principal underwriter for The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Annuity Portfolios and intends to act as such for any other investment company which Schwab may sponsor in the future. (b) See Item 26(b) for information on each director and/or senior or executive officer of Schwab. The principal business address of Schwab is 101 Montgomery Street, San Francisco, California 94104. (c) Not applicable. Item 28. Location of Accounts and Records. All accounts, books and other documents required to be maintained pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of: Registrant; Registrant's investment manager and administrator, Charles Schwab Investment Management, Inc., 101 Montgomery Street, San Francisco, California 94104; Registrant's principal underwriter, Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, California 94104; Registrant's Custodian, PFPC Trust Company, 8800 Tinicum Blvd., Third Floor Suite 200, Philadelphia, Pennsylvania 19153; Registrant's fund accountants, PFPC, Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809 or SEI Fund Resources, Oaks, Pennsylvania; or Ropes & Gray, 1301 K Street, N.W., Suite 800 East, Washington, District of Columbia, 20005. Item 29. Management Services. Not applicable. Item 30. Undertakings. Not applicable. Part C Not applicable. Part C SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended, Registrant certifies that it meets all of the requirements for the effectiveness of this Post Effective Amendment No. 41 to Registrant's Registration Statement on Form N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this Post Effective Amendment No. 41 to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on the 19th day of February, 2002. SCHWAB INVESTMENTS Registrant Charles R. Schwab* ------------------ Charles R. Schwab, Chairman Pursuant to the requirements of the 1933 Act, this Post-Effective Amendment No. 41 to Registrant's Registration Statement on Form N-1A has been signed below by the following persons in the capacities indicated this 19th day of February, 2002.
Signature Title - --------- ----- Charles R. Schwab* Chairman, Chief Executive Officer and Trustee - ------------------ Charles R. Schwab John Coghlan* President and Trustee - ------------- John Coghlan Jeremiah H. Chafkin* Executive Vice President, Chief Operating Officer and Trustee - -------------------- Jeremiah H. Chafkin Mariann Byerwalter* Trustee - ------------------- Mariann Byerwalter Donald F. Dorward* Trustee - ------------------ Donald F. Dorward William A. Hasler* Trustee - ------------------ William A. Hasler Robert G. Holmes* Trustee - ----------------- Robert G. Holmes Gerald B. Smith* Trustee - ---------------- Gerald B. Smith Donald R. Stephens* Trustee - ------------------- Donald R. Stephens Michael W. Wilsey* Trustee - ------------------ Michael W. Wilsey Tai-Chin Tung* Treasurer and Principal Financial Officer - -------------- Tai-Chin Tung
*By: /s/Richard W. Grant ------------------- Richard W. Grant, Attorney-in-Fact pursuant to Powers of Attorney EXHIBIT INDEX
EXH. NO. DOCUMENT - -------- -------- (g)(xvii) Amendment to the Custodian Services Agreement (g)(xviii) Amendment to the Custodian Services Agreement (g)(xix) Amendment to the Custodian Services Agreement (i) Legal Opinion (j) Other Opinions (q)(i) Code of Ethics
Part C EX-99.(G)(XVII) 4 f78472b1ex99-gxvii.txt AMENDMENT TO THE CUSTODIAN SERVICES AGREEMENT Exhibit (g)(xvii) AMENDMENT This Amendment amends the Custodian Services Agreement between Schwab Investments (the "Fund") and PFPC Trust Company ("PFPC") made as of November 4, 1991 (as subsequently amended and assigned). The date of this Amendment is as of July 2, 2001 (the "Amendment"). The parties agree as follows: With respect to "Foreign Assets" (as defined below) in such jurisdictions as PFPC may agree from time to time, PFPC will perform the duties of a "Foreign Custody Manager" as set forth in Securities and Exchange Commission Rule 17f-5 ("Rule 17f-5") under the Investment Company Act of 1940, as amended ("1940 Act"), subject to and in accordance with the provisions set out below. In consideration of PFPC's agreement to so perform, the Fund agrees to the provisions set out below. 1. PFPC shall select, place and maintain "Foreign Assets" (as that term is defined in Rule 17f-5(a)(2)) with an "Eligible Foreign Custodian" (as that term is defined in Rule 17f-5(a)(1)), provided that PFPC shall have determined that the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such Foreign Assets, including, without limitation, those factors set forth in Rule 17f-5(c)(1)(i)-(iv). 2. PFPC will assure that each foreign custody arrangement with an Eligible Foreign Custodian be governed by a written contract that PFPC has determined provides for the reasonable care of Foreign Assets based on the standards specified in Rule 17f-5(c)(1). Each such contract shall include, without limitation, all of the provisions specified in Rule 17f-5(c)(2)(i)(A)-(F). Alternatively, each such contract may contain, in lieu of any or all of the provisions specified in Rule 17f-5(c)(2)(i)(A)-(F), such other provisions that PFPC reasonably determines will provide, in their entirety, the same or a greater level of care and protection for the Fund's investments as the specified provisions, in their entirety. 3. PFPC will establish and maintain a system for the regular monitoring of the appropriateness of both maintaining the Foreign Assets with each Eligible Foreign Custodian and the custody contractual arrangements with such Eligible Foreign Custodians, it being understood, however, that in the event that PFPC shall have determined that the existing Eligible Foreign Custodian in a given country no longer affords reasonable care to Foreign Assets and that no other Eligible Foreign Custodian in that country would afford reasonable care, PFPC shall promptly so advise the Fund and shall then act in accordance with authorized instructions with respect to the disposition of the affected Foreign Assets. 4. PFPC shall provide to the Fund's Board of Trustees written reports notifying the Board of the placement of Foreign Assets with a particular Eligible Foreign Custodian and of any material change in the Fund's foreign custody arrangements, with the reports to be provided to the Board at such times as the Board may deem reasonable and appropriate based on the circumstances of the Fund's arrangements. Any report provided by PFPC pursuant to this Paragraph may be in electronic form. 5. For purposes of clarity, it is understood and agreed that PFPC shall not be responsible for any Foreign Custody Manager duties, including but not limited to those described in Sections 1-4 above, with respect to any securities depository. Furthermore, the parties hereto acknowledge that custody arrangements with an Eligible Securities Depository (as that term is defined in Rule 17f-7 under the 1940 Act) shall be governed by a separate agreement. 6. In performing its duties hereunder, PFPC shall not supervise, recommend or advise the Fund relative to the investment, purchase, sale, retention or disposition of any Foreign Asset in any country, including with respect to prevailing country risks. PFPC agrees to provide such information in its possession as is specified in Appendix 1 hereto, as may be amended from time to time by the parties. In gathering such information, PFPC shall be subject to the standard of care set forth in Paragraph 7 hereof, but shall not be deemed to warrant the specific accuracy of such information. PFPC agrees to promptly notify the Fund at any time that PFPC becomes aware of a material change to the information provided hereunder, or if PFPC learns that any information previously provided is incomplete or inaccurate. The Fund hereby acknowledges that such information is solely designed to inform the Fund of market conditions and procedures and is not intended as a recommendation to invest or not invest in particular markets. 7. In providing services pursuant to this Amendment, PFPC shall exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of Foreign Assets would exercise. PFPC will indemnify the Fund with respect to the services set forth in this Amendment for the losses, liabilities and expenses suffered by the Fund as a result of PFPC's (a) failure to exercise such reasonable care, prudence and diligence (such as a person having responsibility for the safekeeping of Foreign Assets would exercise), and (b) willful misfeasance, bad faith, negligence or reckless disregard in carrying out its duties and obligations under this Amendment, provided that in no event will PFPC be liable for any indirect, special or consequential losses or damages (regardless of whether PFPC was aware of the possibility thereof). The Fund will indemnify PFPC for losses, liabilities and expenses suffered by PFPC with respect to the matters set forth in this Amendment, except for such losses, liabilities and expenses arising out of PFPC's own (a) failure to exercise reasonable care, prudence and diligence (such as a person having responsibility for the safekeeping of Foreign Assets would exercise), or (b) willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Amendment, provided that in no event will the Fund be liable for any indirect, special or consequential losses or damages (regardless of whether the Fund was aware of the possibility thereof). 8. The Fund represents that the Foreign Assets which are the subject matter of this document are subject to the 1940 Act. PFPC represents that it is a U.S. Bank as defined in Rule 17f-5. 9. Notwithstanding the provisions of any arrangements between the Fund and PFPC or otherwise, but subject to Sections 1-3 above, the Fund hereby agrees that Foreign Assets may be maintained with any Eligible Foreign Custodian. 10. The Fund acknowledges that PFPC (at its own expense) may utilize a third party to carry out PFPC's activities set forth herein, provided however, that the appointment or use of a third party will not relieve PFPC of its obligations and responsibilities under this Amendment and PFPC will be responsible and liable to the Fund for the acts or omissions of such third party to the same extent that PFPC would be responsible and liable to the Fund if such acts or omissions were PFPC's own in providing the services set forth in this Amendment, provided that in no event will PFPC be liable for any indirect, special or consequential losses or damages (regardless of whether PFPC or such third party was aware of the possibility thereof). 11. The name Schwab Investments refers to Schwab Investments and its Trustees, as Trustees but not individually or personally, acting under a Declaration of Trust dated October 26, 1990. The obligations of Schwab Investments entered into in the name of or on behalf of a Portfolio of Schwab Investments by any of its Trustees, representatives or agents are made not individually, but in such Schwab Investments capacities. Such obligations are not binding upon any of the Trustees, shareholders or representatives of Schwab Investments personally, but bind only the assets of Schwab Investments belonging to such Portfolio for the enforcement of any claims against Schwab Investments. Transactions entered into by one or more Portfolios of Schwab Investments are considered independent transactions and shall in no way affect transactions entered into by any other Portfolio(s). Any amount owed by Schwab Investments with respect to any obligation arising out of the Agreement, as amended, shall be paid only out of the assets and property of the particular Portfolio(s) that entered into such transaction. This Amendment and the provisions hereof shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws principles. This Amendment may be executed in counterparts, all of which when taken together shall constitute one contract. Delivery of an executed counterpart of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart of this Amendment. Each party hereto represents that it has taken all requisite action (corporate or otherwise) to authorize the execution and delivery of this Amendment. Agreed: PFPC TRUST COMPANY By: /s/ Joseph Gramlich ---------------------------------- Name: Joseph Gramlich ---------------------------------- Title: Chairman ---------------------------------- SCHWAB INVESTMENTS By: /s/ Tai-Chin Tung ---------------------------------- Name: Tai-Chin Tung ---------------------------------- Title: Chief Financial Officer ---------------------------------- Appendix 1 Information Regarding Country Risk 1. To aid the Fund in its evaluations regarding Country Risk, PFPC shall furnish annually and upon the initial placing of Foreign Assets into a country the following information: A. Opinions of local counsel concerning: i. Whether applicable foreign law would restrict the access afforded the Fund's independent public accountants to books and records kept by an Eligible Foreign Custodian located in that country. ii. Whether applicable foreign law would restrict the Fund's ability to recover its assets in the event of the bankruptcy of an Eligible Foreign Custodian located in that country. iii. Whether applicable foreign law would restrict the Fund's ability to recover assets that are lost while under the control of an Eligible Foreign Custodian located in the country. B. Written information concerning: i. The likelihood of expropriation, nationalization, freezes, or confiscation of the Fund's assets. ii. Whether difficulties in converting the Fund's cash and cash equivalents to U.S. dollars are reasonably foreseeable. C. A market report with respect to the following topics: (i) securities regulatory environment, (ii) foreign ownership restrictions, (iii) foreign exchange, (iv) securities settlement and registration, (v) taxation and (vi) securities depositories. 2. PFPC shall furnish the following additional information on an as needed basis: Market flashes, including with respect to changes in the information in market reports. EX-99.(G)(XVIII) 5 f78472b1ex99-gxviii.txt AMENDMENT TO THE CUSTODIAN SERVICES AGREEMENT Exhibit (g)(xviii) AMENDMENT This Amendment amends the Custodian Services Agreement between Schwab Investments (the "Fund") and PFPC Trust Company ("PFPC") made as of November 4, 1991 (as subsequently amended and assigned). The date of this Amendment is as of July 2, 2001. The parties agree as follows: PFPC will provide to the Fund the risk analysis and monitoring required under sub-sections (a)(1)(i)(A) and (B) of Rule 17f-7 ("Rule 17f-7") under the Investment Company Act of 1940 (the "1940 Act") subject to and in accordance with the provisions set out below, and in consideration of the provision of such risk analysis and monitoring the Fund agrees to the provisions set out below. 1. (a) For such consideration (if any) as agreed and as contemplated by Rule 17f-7, PFPC will provide a written analysis (which may be in electronic form) to the Fund and its investment adviser of the custody risks associated with maintaining the Fund's "Foreign Assets" (as that term is defined in Rule 17f-5(a)(2) under the 1940 Act) with each "Eligible Securities Depository" (as that term is defined in Rule 17f-7(b)(1)) listed on Exhibit B hereto (as the same may be changed by PFPC from time to time) and at which any Foreign Assets of the Fund are held or are expected to be held. PFPC shall monitor the custody risks associated with maintaining the Fund's Foreign Assets at each such Eligible Securities Depository on a continuing basis and shall promptly notify the Fund or its investment adviser in writing (which may be in electronic form) of any material change in such risks. (b) Based on the information available to it in the exercise of diligence, PFPC shall determine the eligibility under Rule 17f-7(b)(1) of each depository listed on Exhibit B hereto (as the same may be changed by PFPC from time to time) and shall promptly advise the Fund or its investment adviser in writing (which may be in electronic form) if any such depository ceases to meet the definition of an Eligible Securities Depository (as that term is defined in Rule 17f-7(b)(1)). 2. The Fund acknowledges that it may maintain Foreign Assets only at the depositories listed on Exhibit B hereto (as the same may be changed by PFPC from time to time). Unless the Fund provides written notice to PFPC specifically stating that a particular depository is not acceptable to it, the Fund agrees and acknowledges that its Foreign Assets may be held at any of the depositories listed on Exhibit B hereto. 3. In providing services pursuant to this Amendment, PFPC shall exercise reasonable care, prudence and diligence. PFPC will indemnify the Fund with respect to the services set forth in this Amendment for the losses, liabilities and expenses suffered by the Fund as a result of PFPC's (a) failure to exercise such reasonable care, prudence and diligence, and (b) willful misfeasance, bad faith, negligence or reckless disregard in carrying out its duties and obligations under this Amendment, provided that in no event will PFPC be liable for any indirect, special or consequential losses or damages (regardless of whether PFPC was aware of the possibility thereof). The Fund will indemnify PFPC for losses, liabilities and expenses suffered by PFPC with respect to the matters set forth in this Amendment, except for such losses, liabilities and expenses arising out of PFPC's own (a) failure to exercise reasonable care, prudence and diligence, or (b) willful misfeasance, bad faith, negligence or reckless disregard of its duties and obligations under this Amendment, provided that in no event will the Fund be liable for any indirect, special or consequential losses or damages (regardless of whether the Fund was aware of the possibility thereof). 4. The Fund represents that the Foreign Assets which are the subject matter of this document are subject to the 1940 Act. 5. Notwithstanding the provisions of any arrangements between the Fund and PFPC or otherwise, the Fund hereby agrees that Foreign Assets may be maintained with any Eligible Securities Depository listed on Exhibit B hereto (unless the Fund provides written notice to PFPC specifically stating that a particular depository is not acceptable to it). PFPC will not be deemed to have chosen any such Eligible Securities Depositories. 6. The Fund acknowledges that PFPC (at its own expense) may utilize a third party to carry out PFPC's activities set forth herein, provided however, that the appointment or use of a third party will not relieve PFPC of its obligations and responsibilities under this Amendment and PFPC will be responsible and liable to the Fund for the acts or omissions of such third party to the same extent that PFPC would be responsible and liable to the Fund if such acts or omissions were PFPC's own in providing the services set forth in this Amendment (provided that in no event will PFPC be liable for any indirect, special or consequential losses or damages (regardless of whether PFPC or such third party was aware of the possibility thereof)). This Amendment shall supercede and replace the Amendment between PFPC and the Fund dated as of the same date hereof and relating to the risk analysis and monitoring required by Rule 17f-7. This Amendment and the provisions hereof shall be construed in accordance with the laws of the State of New York, without regard to its conflict of laws principles. This Amendment may be executed in counterparts, all of which when taken together shall constitute one contract. Delivery of an executed counterpart of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart of this Amendment. Each party hereto represents that it has taken all requisite action (corporate or otherwise) to authorize the execution and delivery of this Amendment. Agreed: PFPC TRUST COMPANY By: /s/ Joseph Gramlich ------------------------------------------ Name: Joseph Gramlich ------------------------------------------ Title: Chairman ------------------------------------------ SCHWAB INVESTMENTS By: /s/ Tai-Chin Tung ------------------------------------------ Name: Tai-Chin Tung ------------------------------------------ Title: Chief Financial Officer ------------------------------------------ Exhibit A Intentionally left blank Exhibit B
COUNTRY DEPOSITORY INSTRUMENTS - ------------------------------------------------------------------------------------------------------------- ARGENTINA CVSA Equity, Corporate Debt, Government Debt (Caja de Valores S.A.) - ------------------------------------------------------------------------------------------------------------- ARGENTINA CRYL Government Debt (Central de Registration y Liquidacion de Instrumentos de Endeudamiento Publico) - ------------------------------------------------------------------------------------------------------------- AUSTRALIA AUSTRACLEAR LIMITED Corporate Debt, Money Market, Semi-Government Debt - ------------------------------------------------------------------------------------------------------------- AUSTRALIA CHESS Equity (Clearing House Electronic Sub-register System) - ------------------------------------------------------------------------------------------------------------- AUSTRALIA RITS Government Debt (Reserve Bank of Australia/Reserve Bank Information and Transfer System) - ------------------------------------------------------------------------------------------------------------- AUSTRIA OEKB Equity, Corporate Debt, Government Debt (OESTERREICHISCHE KONTROLLBANK AG) - ------------------------------------------------------------------------------------------------------------- BELGIUM CIK Equity, Corporate Debt (Caisse Interprofessionnelle de Depots et de Virements de Titres S.A.) - ------------------------------------------------------------------------------------------------------------- BELGIUM NBB Corporate Debt, Government Debt (National Bank of Belgium) - ------------------------------------------------------------------------------------------------------------- BRAZIL CBLC Equity (Companhia Brasileira de Liquidacao e Custodia) - ------------------------------------------------------------------------------------------------------------- BRAZIL CETIP Corporate Debt (Central de Custodia e Liquidacao Financiera de Titulos Privados) - ------------------------------------------------------------------------------------------------------------- BRAZIL SELIC Government Debt (Sistema Especial de Liquidacao e Custodia) - ------------------------------------------------------------------------------------------------------------- BULGARIA BNB Government Debt (Bulgaria National Bank) - ------------------------------------------------------------------------------------------------------------- BULGARIA CDAD Equity, Corporate Debt (Central Depository A.D.) - ------------------------------------------------------------------------------------------------------------- CANADA CDS Equity, Corporate, Government Debt (The Canadian Depository for Securities Limited) - ------------------------------------------------------------------------------------------------------------- CHILE DCV Equity, Corporate Debt, Government Debt (Deposito Central de Valores S.A.) - ------------------------------------------------------------------------------------------------------------- CHINA, SHANGHAI SSCCRC Equity (Shanghai Securities Central Clearing and Registration Corporation) - ------------------------------------------------------------------------------------------------------------- CHINA, SHENZHEN SSCC Equity (Shenzhen Securities Clearing Company, Limited) - ------------------------------------------------------------------------------------------------------------- COLOMBIA DCV Government Debt (Deposito Central de Valores) - -------------------------------------------------------------------------------------------------------------
4
COUNTRY DEPOSITORY INSTRUMENTS - ------------------------------------------------------------------------------------------------------------- COLOMBIA DECEVAL Equity, Corporate Debt, Government Debt (Deposito Centralizado de Valores de Colombia S.A.) - ------------------------------------------------------------------------------------------------------------- CROATIA SDA Equity, Government Debt (Central Depository Agency Inc. - Stredisnja depozitarna agencija d.d.) - ------------------------------------------------------------------------------------------------------------- CROATIA MINISTRY OF FINANCE OF THE REPUBLIC OF CROATIA Short-term debt issued by the Ministry of Finance. - ------------------------------------------------------------------------------------------------------------- CROATIA CNB Short-term debt issued by the National (Croatian National Bank) Bank of Croatia. - ------------------------------------------------------------------------------------------------------------- CZECH REPUBLIC SCP Equity, Corporate Debt, Government Debt (Stredisko cennych papiru) - ------------------------------------------------------------------------------------------------------------- CZECH REPUBLIC CNB Government Debt (Czech National Bank) - ------------------------------------------------------------------------------------------------------------- DENMARK VP Equity, Corporate Debt, Government Debt (Vaerdipapircentralen A/S) - ------------------------------------------------------------------------------------------------------------- EGYPT MCSD Equity, Corporate Debt (Misr for Clearing, Settlement and Depository, S.A.E.) - ------------------------------------------------------------------------------------------------------------- ESTONIA ECDS Equity, Corporate Debt, Government Debt (Estonian Central Depository for Securities Limited - Eesti Vaatpaberite Keskdepositoorium) - ------------------------------------------------------------------------------------------------------------- EUROMARKET DCC Euro-CDs (The Depository and Clearing Centre) - ------------------------------------------------------------------------------------------------------------- EUROMARKET CLEARSTREAM Euro-Debt (Clearstream Banking, S.A.) - ------------------------------------------------------------------------------------------------------------- EUROMARKET EUROCLEAR Euro-Debt - ------------------------------------------------------------------------------------------------------------- FINLAND APK Equity, Corporate Debt, Government Debt (Finnish Central Securities Depository Limited) - ------------------------------------------------------------------------------------------------------------- FRANCE EUROCLEAR FRANCE Equity, Corporate Debt, Government Debt - ------------------------------------------------------------------------------------------------------------- GERMANY CLEARSTREAM Equity, Corporate Debt, Government Debt (CLEARSTREAM BANKING AG) - ------------------------------------------------------------------------------------------------------------- GREECE CSD Equity, Corporate Debt (Central Securities Depository S.A.) - ------------------------------------------------------------------------------------------------------------- GREECE BOG Government Debt (BANK OF GREECE) - ------------------------------------------------------------------------------------------------------------- HONG KONG HKSCC Equity (Hong Kong Securities Clearing Company Limited) - ------------------------------------------------------------------------------------------------------------- HONG KONG CMU Corporate Debt, Government Debt (Central Moneymarkets Unit) - ------------------------------------------------------------------------------------------------------------- HUNGARY KELER Equity, Corporate Debt, Government Debt (Central Depository and Clearing House - Kosponti Elszamolohaz es Ertektar (Budapest) Rt.) - -------------------------------------------------------------------------------------------------------------
5
COUNTRY DEPOSITORY INSTRUMENTS - ------------------------------------------------------------------------------------------------------------- INDIA NSDL Equity, Corporate Debt, Government Debt (National Securities Depository Limited) - ------------------------------------------------------------------------------------------------------------- INDIA CDSL Equity (Central Depository Services (India) Limited) - ------------------------------------------------------------------------------------------------------------- INDIA RBI Government Debt (Reserve Bank of India) - ------------------------------------------------------------------------------------------------------------- INDONESIA KSEI Equity, Corporate Debt (PT Kustodian Sentral Efek Indonesia) - ------------------------------------------------------------------------------------------------------------- IRELAND CREST Equity, Corporate Debt (CRESTCo Limited) - ------------------------------------------------------------------------------------------------------------- ISRAEL TASE CLEARING HOUSE Equity, Corporate Debt, Government Debt (Tel Aviv Stock Exchange Clearing House) - ------------------------------------------------------------------------------------------------------------- ITALY MONTE TITOLI S.P.A. Equity, Corporate Debt, Government Debt - ------------------------------------------------------------------------------------------------------------- ITALY BANCA D'ITALIA Government Debt - ------------------------------------------------------------------------------------------------------------- IVORY COAST DC/BR Equity (Le Depositaire Central / Banque de Reglement) - ------------------------------------------------------------------------------------------------------------- JAPAN JASDEC Equity, Convertible Debt (Japan Securities Depository Center) - ------------------------------------------------------------------------------------------------------------- JAPAN BOJ Registered Government Debt (Bank of Japan) - ------------------------------------------------------------------------------------------------------------- KAZAHKSTAN CSD Equity (CENTRAL SECURITIES DEPOSITORY CJSC) - ------------------------------------------------------------------------------------------------------------- KENYA CBCD Government Debt (Central Bank Central Depository) - ------------------------------------------------------------------------------------------------------------- LATVIA LCD Equity, Corporate Debt, Government Debt (Latvian Central Depository) - ------------------------------------------------------------------------------------------------------------- LEBANON MIDCLEAR S.A.L. Equity (Custodian and Clearing Center of Financial Instruments for Lebanon and the Middle East S.A.L.) - ------------------------------------------------------------------------------------------------------------- LITHUANIA CSDL Equity, Corporate Debt, Government Debt (Central Securities Depository of Lithuania) - ------------------------------------------------------------------------------------------------------------- LUXEMBOURG CLEARSTREAM Equity (Clearstream Banking S.A.) - ------------------------------------------------------------------------------------------------------------- MALAYSIA MCD Equity, Corporate Debt, Government Debt (Malaysian Central Depository Sdn. Bhd.) - ------------------------------------------------------------------------------------------------------------- MAURITIUS CDS Equity, Corporate Debt (Central Depository and Settlement Company Limited) - ------------------------------------------------------------------------------------------------------------- MEXICO INDEVAL Equity, Corporate Debt, Government Debt (S.D. INDEVAL S.A. de C.V.) - ------------------------------------------------------------------------------------------------------------- MOROCCO MAROCLEAR Equity, Corporate Debt, Government Debt - ------------------------------------------------------------------------------------------------------------- NETHERLANDS NECIGEF Equity, Corporate Debt, Government Debt - -------------------------------------------------------------------------------------------------------------
6
COUNTRY DEPOSITORY INSTRUMENTS - ------------------------------------------------------------------------------------------------------------- (Nederlands Centraal Insituut voor Giraal Effectenverkeer B.V.) - ------------------------------------------------------------------------------------------------------------- NEW ZEALAND NZCSD Equity, Corporate Debt, Government Debt (New Zealand Central Securities Depository) - ------------------------------------------------------------------------------------------------------------- NIGERIA CSCS Equity, Corporate Debt, Government Debt (Central Securities Clearing System Limited) - ------------------------------------------------------------------------------------------------------------- NORWAY VPS Equity, Corporate Debt, Government Debt (Verdipapirsentralen) - ------------------------------------------------------------------------------------------------------------- OMAN MDSRC Equity, Corporate Debt (The Muscat Depository and Securities Registration Company, S.A.O.C.) - ------------------------------------------------------------------------------------------------------------- PAKISTAN CDC Equity, Corporate Debt (Central Depository Company of Pakistan Limited) - ------------------------------------------------------------------------------------------------------------- PAKISTAN SBP Government Debt (State Bank of Pakistan) - ------------------------------------------------------------------------------------------------------------- PERU CAVALI Equity, Corporate Debt, Government Debt (CAVALI ICLV S.A.) - ------------------------------------------------------------------------------------------------------------- PHILIPPINES PCD Equity (Philippine Central Depository Inc.) - ------------------------------------------------------------------------------------------------------------- PHILIPPINES ROSS Government Debt (Bangko Sentral ng Pilipinas / Register of Scripless Securities) - ------------------------------------------------------------------------------------------------------------- POLAND NDS Equity, Long-Term Government Debt (National Depository for Securities S.A.) - ------------------------------------------------------------------------------------------------------------- POLAND CRT Short-Term Government Debt (Central Registry of Treasury-Bills) - ------------------------------------------------------------------------------------------------------------- PORTUGAL CVM Equity, Corporate Debt, Government Debt (Central de Valores Mobiliarios e Sistema de Liquidacao e Compensacao) - ------------------------------------------------------------------------------------------------------------- ROMANIA SNCDD Equity (National Company for Clearing, Settlement and Depository for Securities) - ------------------------------------------------------------------------------------------------------------- ROMANIA BSE Equity (Bucharest Stock Exchange Registry) - ------------------------------------------------------------------------------------------------------------- RUSSIA VTB Equity, Corporate Debt, Government Debt (Vneshtorgbank) (Ministry of Finance Bonds) - ------------------------------------------------------------------------------------------------------------- RUSSIA NDC Equity, Corporate Debt, Government Debt (National Depository Centre) - ------------------------------------------------------------------------------------------------------------- RUSSIA DCC Equity (Depository Clearing Company) - ------------------------------------------------------------------------------------------------------------- SINGAPORE CDP Equity, Corporate Debt (The Central Depository (Pte) Limited) - -------------------------------------------------------------------------------------------------------------
7
COUNTRY DEPOSITORY INSTRUMENTS - ------------------------------------------------------------------------------------------------------------- SINGAPORE SGS Government Debt (Monetary Authority of Singapore / Singapore Government Securities Book-Entry System) - ------------------------------------------------------------------------------------------------------------- SLOVAK REPUBLIC SCP Equity, Corporate Debt, Government Debt (Stredisko cennych papierov SR Bratislava, a.s.) - ------------------------------------------------------------------------------------------------------------- SLOVAK REPUBLIC NBS Government Debt (National Bank of Slovakia) - ------------------------------------------------------------------------------------------------------------- SLOVENIA KDD Equity, Corporate Debt, Government Debt (Centralna klirinsko depotna druzba d.d.) - ------------------------------------------------------------------------------------------------------------- SOUTH AFRICA CDL Corporate Debt, Government Debt (CENTRAL DEPOSITORY (PTY) LIMITED) - ------------------------------------------------------------------------------------------------------------- SOUTH AFRICA STRATE Equity (Share Transactions Totally Electronic) - ------------------------------------------------------------------------------------------------------------- SOUTH KOREA KSD Equity, Corporate Debt, Government Debt (Korea Securities Depository) - ------------------------------------------------------------------------------------------------------------- SPAIN SCLV Equity, Corporate Debt (Servicio de Compensacion y Liquidacion de Valores, S.A.) - ------------------------------------------------------------------------------------------------------------- SPAIN CBEO Government Debt (Banco de Espana / Central Book Entry Office) - ------------------------------------------------------------------------------------------------------------- SRI LANKA CDS Equity, Corporate Debt (Central Depository System (Private) Limited) - ------------------------------------------------------------------------------------------------------------- SWEDEN VPC Equity, Corporate Debt, Government Debt (Vardepapperscentralen AB) - ------------------------------------------------------------------------------------------------------------- SWITZERLAND SIS Equity, Corporate Debt, Government Debt (SIS SegaInterSettle AG) - ------------------------------------------------------------------------------------------------------------- TAIWAN TSCD Equity, Government Debt (Taiwan Securities Central Depository Co., Ltd.) - ------------------------------------------------------------------------------------------------------------- THAILAND TSD Equity, Corporate Debt, Government Debt (Thailand Securities Depository Company Limited) - ------------------------------------------------------------------------------------------------------------- TUNISIA STICODEVAM Equity, Corporate Debt, Government Debt (Societe Tunisienne Interprofessionnelle pour la Compensation et le Depot des Valeurs Mobilieres) - ------------------------------------------------------------------------------------------------------------- TURKEY TAKASBANK Equity, Corporate Debt, Government Debt (IMKB Takas ve Saklama Bankasi A.S.) - ------------------------------------------------------------------------------------------------------------- UNITED KINGDOM CREST Equity, Corporate Debt, Government Debt (CRESTCo Limited) - ------------------------------------------------------------------------------------------------------------- UNITED KINGDOM CMO Sterling & Euro CDs, Commercial Paper (Central Moneymarkets Office) - ------------------------------------------------------------------------------------------------------------- UNITED STATES DTC Equity, Corporate Debt (Depository Trust Company) - ------------------------------------------------------------------------------------------------------------- UNITED STATES PTC Mortgage Back Debt - -------------------------------------------------------------------------------------------------------------
8
COUNTRY DEPOSITORY INSTRUMENTS - ------------------------------------------------------------------------------------------------------------- (Participants Trust Company) - ------------------------------------------------------------------------------------------------------------- UNITED STATES FED Government Debt (THE FEDERAL RESERVE BOOK-ENTRY SYSTEM) - ------------------------------------------------------------------------------------------------------------- URUGUAY BCU Corporate Debt, Government Debt (Banco Central del Uruguay) - ------------------------------------------------------------------------------------------------------------- VENEZUELA BCV Government Debt (Banco Central de Venezuela) - ------------------------------------------------------------------------------------------------------------- ZAMBIA CSD Equity, Government Debt (LuSE Central Shares Depository Limited) - ------------------------------------------------------------------------------------------------------------- ZAMBIA BOZ Government Debt (Bank of Zambia) - -------------------------------------------------------------------------------------------------------------
9 EX-99.(G)(XIX) 6 f78472b1ex99-gxix.txt AMENDMENT TO THE CUSTODIAN SERVICES AGREEMENT Exhibit (g)(xix) AMENDMENT TO CUSTODIAN SERVICES AGREEMENT THIS AMENDMENT, dated as of August 21, 2001, by and between SCHWAB INVESTMENTS (the "Fund") and PFPC Trust Company ("PFPC"), amends the Custodian Services Agreement by and between the parties dated November 4, 1991 (the "Agreement"). WHEREAS, the Fund has appointed PFPC to act as the custodian of the Fund and to provide the custodian services set forth in the Agreement; and WHEREAS, the Fund and PFPC wish to amend the Agreement to clarify the use of sub-custodians with respect to domestic and foreign assets; NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained and contained in the Agreement, the Fund and PFPC agree, as follows: 1. Section 14(c) of the Agreement shall be deleted and restated in its entirety as follows: (c) Receipt of Securities. (i) Segregation: PFPC shall hold all securities received by it for or for the account of each Portfolio in a separate account that segregates such securities from those of any other persons, firms or corporations. All such securities shall be held or disposed of only upon Written Instructions of the Fund or otherwise pursuant to the terms of this Agreement. PFPC shall have no power or authority to assign, hypothecate, pledge or otherwise dispose of any such securities or investment, except upon the express terms of this Agreement or upon Written Instructions, authorizing the transaction. In no case may any member of the Fund's Board of Trustees, or any officer, employee or agent of the Fund withdraw any securities. (ii) Domestic Sub-Custodians: At PFPC's own expense, PFPC may retain any bank (as defined in Section 2(a)(5) of the 1940 Act and which meets the requirements of a custodian under Section 17(f) of the 1940 Act and the rules and regulations thereunder) to act as sub-custodian with respect to domestic assets of the Fund. Any such sub-custodian shall have an aggregate capital, surplus and undivided profits, according to its last published report, of at least one million dollars ($1,000,000) if it is a subsidiary or affiliate of PFPC, or at least twenty million dollars ($20,000,000) if such sub-custodian is not a subsidiary or affiliate of PFPC. In addition, any such sub-custodian must agree to comply with the relevant provisions of the 1940 Act and other applicable laws, rules and regulations. (iii) Foreign Sub-Custodians: PFPC may at any time and from time to time enter into arrangements with sub-custodians with respect to services regarding foreign assets. Any such arrangement will be entered into only with prior notice to the Fund or as otherwise provided in the 1940 Act (e.g., pursuant to Rule 17f-5). In addition, any sub-custodian may engage an Eligible Foreign Custodian to act as sub-sub-custodian for purposes of holding the Fund's assets. (iv) Responsibility for Domestic and Foreign Sub-Custodians: PFPC's selection and use of a domestic or foreign sub-custodian or any sub-sub-custodian shall not relieve PFPC of any of its duties under this Agreement, and PFPC shall be fully responsible for the actions or inactions of any such domestic or foreign sub-custodian or sub-sub-custodian to the same extent that PFPC would be liable to the Fund if such actions or inactions were its own hereunder. 2. All defined terms used herein shall have the meaning given in the Agreement as amended by this Amendment. 3. The name Schwab Investments refers to Schwab Investments and its Trustees, as Trustees but not individually or personally, acting under a Declaration of Trust dated October 26, 1990. The obligations of Schwab Investments entered into in the name of or on behalf of a Portfolio of Schwab Investments by any of the Trustees, representatives or agents are made not individually, but in such Schwab Investments capacities. Such obligations are not binding upon any of the Trustees, shareholders or representatives of Schwab Investments personally, but bind only the assets of Schwab Investments belonging to such Portfolio for the enforcement of any claims against Schwab Investments. Transactions entered into by one or more Portfolios in Schwab Investments are considered independent transactions and shall in no way affect transactions entered into by any other Portfolio(s). Any amount owed by Schwab Investments with respect to any obligation arising out of the Agreement, as amended, shall be paid only out of the assets and property of the particular Portfolio(s) that entered into such transaction. 4. To the extent of any conflict between the terms of this Amendment and the terms of the Agreement, the terms of this Amendment shall be controlling. Except to the extent amended and supplemented hereby, the Agreement shall remain unchanged and in full force and effect and is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be duly executed as of the date first above written. PFPC TRUST COMPANY SCHWAB INVESTMENTS By: /s/ David E. Fritz By: /s/ Tai-Chin Tung ------------------------------ ------------------------------ Name: David E. Fritz Name: Tai-Chin Tung ------------------------------ ------------------------------ Title: Vice President Title: CFO ------------------------------ ------------------------------ EX-99.(I) 7 f78472b1ex99-i.txt LEGAL OPINION Exhibit (i) 1701 Market Street MORGAN, LEWIS Philadelphia, PA 19103 & BOCKIUS LLP (215)963-5000 COUNSELORS AT LAW Fax: (215) 963-5299 February 15, 2002 Schwab Investments 101 Montgomery Street San Francisco, CA 94104 Re: Opinion of Counsel regarding Post-Effective Amendment No. 41 to the Registration Statement filed on Form N-1A under the Securities Act of 1933 (File No. 33-37459). Ladies and Gentlemen: We have acted as counsel to Schwab Investments, a Massachusetts business trust (the "Trust"), in connection with the above-referenced Registration Statement on Form N-1A (as amended, the "Registration Statement") which relates to the Trust's shares of beneficial interest, par value $.00001 per share (collectively, the "Shares"). This opinion is being delivered to you in connection with the Trust's filing of Post-Effective Amendment No. 41 to the Registration Statement (the "Amendment") to be filed with the Securities and Exchange Commission pursuant to Rule 485(b) of the Securities Act of 1933 (the "1933 Act"). With your permission, all assumptions and statements of reliance herein have been made without any independent investigation or verification on our part except to the extent otherwise expressly stated, and we express no opinion with respect to the subject matter or accuracy of such assumptions or items relied upon. In connection with this opinion, we have reviewed, among other things, executed copies of the following documents: (a) a certificate of the Commonwealth of Massachusetts as to the existence and good standing of the Trust; (b) copies of the Trust's Agreement and Declaration of Trust and of all amendments and all supplements thereto (the "Declaration of Trust"); (c) a certificate executed by Koji Felton, the Secretary of the Trust, certifying as to, and attaching copies of, the Trust's Declaration of Trust and Amended and Restated By-Laws (the "By-Laws"), and certain resolutions adopted by the Board of Trustees of the Trust authorizing the issuance of the Shares; and (d) a printer's proof of the Amendment. In our capacity as counsel to the Trust, we have examined the originals, or certified, conformed or reproduced copies, of all records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinion hereinafter expressed. In all such examinations, we have assumed the legal capacity of all natural persons executing documents, the genuineness of all signatures, the authenticity of all original or certified copies, and the conformity to original or certified copies of all copies submitted to us as conformed or reproduced copies. As to various questions of fact relevant to such opinion, we have relied upon, and assume the accuracy of, certificates and oral or written statements of public officials and officers or representatives of the Trust. We have assumed that the Registration Statement, as filed with the Securities and Exchange Commission, will be in substantially the form of the printer's proof referred to in paragraph (d) above. Based upon, and subject to, the limitations set forth herein, we are of the opinion that the Shares, when issued and sold in accordance with the Trust's Declaration of Trust and By-Laws, and for the consideration described in the Registration Statement, will be legally issued, fully paid and nonassessable under the laws of the Commonwealth of Massachusetts. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not concede that we are in the category of persons whose consent is required under Section 7 of the 1933 Act. Very truly yours, /s/Morgan, Lewis & Bockius LLP EX-99.(J) 8 f78472b1ex99-j.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit (j) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated December 10, 2001, relating to the financial statements and financial highlights which appears in the October 31, 2001 Annual Report to Shareholders of the Schwab 1000 Fund, which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights" and "Independent Accountants" in such Registration Statement. PricewaterhouseCoopers LLP San Francisco, California February 25, 2002 EX-99.(Q)(I) 9 f78472b1ex99-qi.txt CODE OF ETHICS Exhibit (q)(i) THE CHARLES SCHWAB FAMILY OF FUNDS SCHWAB INVESTMENTS SCHWAB CAPITAL TRUST SCHWAB ANNUITY PORTFOLIOS CHARLES SCHWAB INVESTMENT MANAGEMENT, INC. CHARLES SCHWAB & CO., INC. CODE OF ETHICS ADOPTED PURSUANT TO SECTION 17j-1 UNDER THE INVESTMENT COMPANY ACT OF 1940 Rule 17j-1 of the Investment Company Act of 1940 (the "1940 Act") requires that every registered investment company, and each investment adviser to and principal underwriter for such investment company, adopt a written code of ethics containing provisions reasonably necessary to prevent its "Access Persons" from engaging in any act, practice or course of business prohibited by section 17(j) of the 1940 Act and Rule 17j-1 adopted thereunder. That Rule further requires that each investment company and its adviser(s) and underwriter(s) use reasonable diligence, and institute procedures reasonably necessary, to prevent violations of such code. The Insider Trading and Securities Fraud Enforcement Act of 1988 ("ITSFEA"), requires every investment adviser and registered broker-dealer to develop, implement and enforce policies and procedures to prevent the misuse of material nonpublic information. The following policies constitute the Code of Ethics for The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios (each a "Trust", and collectively known as the "Trusts"), Charles Schwab Investment Management, Inc. ("CSIM"), a registered investment adviser and the investment adviser to the Trusts, and Charles Schwab & Co., Inc. ("Schwab"), a registered broker-dealer and the principal underwriter of the Trusts. The policies and procedures established by this Code of Ethics are applicable to all directors, trustees, officers and employees of the Trusts and CSIM, and to any director or officer of Schwab who, makes, participates in or obtains information regarding the purchase or sale of "Covered Securities" by the Trusts. Other entities that serve as sub-advisers to separate series of the Trusts shall comply with their own codes of ethics approved by the Board of Trustees, and report to the Boards of Trustees in accordance with Section VI hereunder. I. POLICY STATEMENT Rule 17j-1 under the 1940 Act makes it unlawful for any Affiliated Person of, or principal underwriter for, the Trusts or Affiliated Person of the Trusts' investment adviser(s) and principal underwriter, in connection with the direct or indirect purchase or sale by such person of any Covered Security that is "held or to be acquired" by any investment portfolio of a Trust (each a "Fund"): - - To employ any device, scheme or artifice to defraud the Trust or any Fund; - - To make to the Trust or any Fund any untrue statement of a material fact or omit to state to the Trust or any Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; - - To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the Trust or any Fund; and - - To engage in any manipulative practice with respect to the Trust or any Fund. It is the policy of the Trusts, CSIM and Schwab that no Access Person of a Trust, CSIM or Schwab will make, participate in, or engage in any act, practice or course of conduct that would violate the provisions set forth above or which would, in any way, conflict with the interests of the Trusts or their shareholders. This obligation encompasses: - - The duty at all times to place the interests of shareholders first; - - The duty to ensure that all personal securities transactions be conducted consistent with the Code of Ethics and in such a manner as to avoid any actual or potential conflict of interest or any abuse of an individual's position of trust and responsibility; and - - The fundamental standard that Access Persons not take inappropriate advantage of their positions. II. DEFINITIONS The definitions used in this Code of Ethics include the following: ACCESS PERSON An "Access Person" of the Trusts or CSIM is any director, Trustee or officer of the Trusts or CSIM, and any employee of CSIM who, in the ordinary course of business, makes, participates in or obtains information regarding the purchase or sale of Covered Securities for the Trusts or a Fund or whose functions or duties relate to the making of any recommendation to a Trust or a Fund regarding the purchase or sale of securities. An "Access Person" of Schwab is any director or officer of Schwab who, in the ordinary course of business, makes, participates in or obtains information regarding the purchase or sale of Covered Securities for a Trust or a Fund or whose functions or duties in the ordinary course of business relate to the making of any recommendation to a Trust or a Fund regarding the purchase or sale of Covered Securities. An "Access Person" is also any natural person in a control relationship to a Trust or a Fund or CSIM who obtains information concerning recommendations made to the Trust or a Fund with regard to the purchase or sale of Covered Securities by the Trust or a Fund. AFFILIATED PERSON An "Affiliated Person" of the Trusts, CSIM or Schwab is defined in Section 2(a)(3) of the 1940 Act. BENEFICIAL OWNERSHIP A person should consider himself or herself a "beneficial owner" of any security in which he or she has a direct or indirect pecuniary interest. Pecuniary interest in any class of securities includes the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in securities. For example, he or she has page 2 "beneficial ownership" of securities held by his or her spouse, minor children, a relative who shares his or her home, or other persons if by reason of any contract, understanding, relationship, agreement or other arrangement, he or she obtains from such securities benefits substantially equivalent to those of ownership. He or she should also consider himself or herself the beneficial owner of securities if he or she can vest or revest title in himself or herself now or in the future. CONTROL "Control" has the same meaning as in Section (2)(a)(9) of the 1940 Act. COVERED SECURITY A "Covered Security" is any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option or privilege on any security. A Covered Security is also any group or index of securities, or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. Notwithstanding the above definition, Covered Securities include only those securities which a Trust would be permitted to acquire under its investment objectives and policies set forth in its then current prospectuses filed under the Securities Act of 1933 (the "1933 Act"), and does not include direct obligations of the United States Government, bankers' acceptances, bank certificates of deposit, commercial paper, repurchase agreements, other money market instruments and shares of registered open-end investment companies. HELD OR TO BE ACQUIRED A Covered Security is "held or to be acquired" if within the most recent 15 days it is or has been held by a Trust, or is being or has been considered by a Trust or CSIM for purchase by a Trust. A purchase or sale includes the writing of an option to purchase or sell a Covered Security described above INITIAL PUBLIC OFFERING "Initial Public Offering" is an offering of securities registered under the Securities Act of 1933 (the "Securities Act"), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934. INVESTMENT PERSONNEL "Investment Personnel" are Access Persons who, in connection with their regular functions or duties, make or participate in making recommendations regarding the purchase or sale of securities by a Trust or a Fund. The term also includes all persons who control a Trust or CSIM or Schwab and obtain information concerning recommendations made to a Trust regarding the purchase or sale of securities by a Trust or a Fund. NON-INTERESTED TRUSTEE A "Non-Interested Trustee" is any Trustee of the Trusts who is not an interested person of such Trust as defined in section 2(a)(19) of the 1940 Act. page 3 PRIVATE PLACEMENT A "Private Placement" is an offering that is exempt from registration under the 1933 Act pursuant to Section 4(2) or Section 4(6) or pursuant to Rule 504, Rule 505 or Rule 506 adopted thereunder. III. COMMUNICATIONS Access Persons may not tip or otherwise disclose to others (except to others who have a need to know such information in the ordinary course of their business) any information regarding the investment activities of the Trusts, including any transaction or recommendation made by or to CSIM or a Trust or a Fund. All communications that violate the terms of this Section III must be reported immediately to the CSIM Compliance Department. IV. LIMITS ON ACCEPTING OR RECEIVING GIFTS Access Persons may not accept or receive any gift of more than de minimis value (as defined in the Schwab Compliance Manual) from any person or entity in connection with the Trusts or a Fund's entry into a contract, development of an economic relationship, or other course of dealing by or on behalf of the Trusts or a Fund. V. TRADING RESTRICTIONS The policies and procedures regarding trading restrictions are as follows: OFFICERS, DIRECTORS, TRUSTEES AND EMPLOYEES TRADING RESTRICTIONS Any officer, director, Trustee or employee of the Trusts, CSIM or Schwab with material nonpublic information about a Covered Security is prohibited from all personal trading in any security about which he or she has such information. PRIOR APPROVAL OF TRADES At all times, each personal transaction in a Covered Security by Investment Personnel involving more than 5,000 shares of any issuer's equity securities, rights, warrants or units or $100,000.00 face value of bonds or debentures of any one issuer must receive prior approval by CSIM's Chief Compliance Officer or his or her designee. Prior approval of a personal transaction may only be relied upon for 5 business days from the date approval is received. Because of the specific policies in place to monitor and control employee trading of stock of The Charles Schwab Corporation ("SCH"), prior approval of personal transactions do not apply to SCH stock and SCH options. All other trading restrictions applicable to Covered Securities still apply to SCH stock and SCH options. All Access Persons other than Investment Personnel may trade in Covered Securities without prior approval, provided that such persons have no actual knowledge of the Trusts' activities with respect to the subject security, and have no material, nonpublic information about the issuer of the subject security. Access Persons of any adviser or sub-adviser other than CSIM are subject only to the trading restrictions under their own code. page 4 These trading restrictions apply to all transactions in Covered Securities in accounts over which Access Persons of CSIM exercise control, including accounts for their family members or accounts in which they have a beneficial interest, but do not apply to dividend reinvestment programs, direct stock purchase plans, odd-lot transactions or investment decisions made by an unrelated third party who does not have access to the information in possession of such Access Person. All trading activity by Access Persons is subject to reporting and surveillance as set forth in the surveillance and reporting sections of these procedures. PRIOR APPROVAL OF INITIAL PUBLIC OFFERINGS ("IPOS") AND PRIVATE PLACEMENTS Each transaction where Investment Personnel directly or indirectly acquire beneficial ownership in an IPO or a private placement requires prior approval by CSIM's Chief Compliance Officer or his or her designee. NON-INTERESTED TRUSTEES A Non-Interested Trustee of the Trusts may trade in securities in which a Trust has invested or is considering for investment, provided that the Trustee has no actual knowledge of the Trust's contemporaneous activities with respect to the subject security, and has no material, nonpublic information about the issuer of the subject security. VI. REPORTING The policies and procedures regarding reporting requirements that are applicable to the Access Persons of the Trusts, CSIM and Schwab include the following: REPORTS TO THE BOARD OF TRUSTEES The President of CSIM and Executive Vice President of Schwab (or their designees) must (i) furnish annually to the Board of Trustees a written report of any issues arising under the Code of Ethics, including any material violations and any sanctions imposed in response to these violations and (ii) certify annually to the Board of Trustees that each has adopted procedures reasonably necessary to prevent its Access Persons from violating the provisions of its Code of Ethics. The President of the Trusts (or his or her designee) will report to the Board of Trustees on an annual basis in accordance with subparts (i) and (ii), above. The President of any adviser or sub-adviser other than CSIM shall submit a copy of its code of ethics for the Board's approval, together with the reports required by subparts (i) and (ii), above. Such adviser or sub-adviser shall submit any amendments to its code within 30 days of adoption. ACCESS PERSON REPORTING Each Trust, CSIM and Schwab are responsible for promptly identifying and reporting to the CSIM Compliance Department all persons considered to be Access Persons. Each Trust, CSIM and Schwab will compile a written list of such persons, and promptly notify the CSIM Compliance Department of all changes in the persons designated as Access Persons. The CSIM Compliance Department will notify Access Persons of their obligation to report trading activity, and provide them with a copy of this page 5 Code. The CSIM Compliance Department will also prepare the quarterly transaction report for each Access Person and present such reports to Access Persons for review and execution. Access Persons shall return the executed quarterly transaction report to the appropriate review officer(s) ("Review Officer") appointed by the Presidents of the Trusts and CSIM and Executive Vice President of Schwab, or their respective designees. Access Persons of any adviser or sub-adviser other than CSIM shall only file reports under their own code. Access Persons (other than Non-Interested Trustees) shall report on a quarterly calendar basis all transactions in which they acquire any direct or indirect beneficial ownership in Covered Securities. These transaction reports must be made no later than ten days after the end of each calendar quarter and include trading activity at Schwab and any other broker-dealer. The quarterly transaction reports shall disclose the following: With respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect beneficial ownership: - The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and principal amount of each Covered Security; - The nature of the transaction (i.e.: purchase, sale, or any other type of acquisition or disposition); - The price of the Covered Security at which the transaction was effected; - The name of the broker, dealer or bank with or through which the transaction was effected; and - The date that the report is submitted by the Access Person. With respect to any account established during the quarter by an Access Person in which any securities were held for the direct or indirect benefit of the Access Person: - The name of the broker, dealer or bank with whom the Access Person established the account; - The date the account was established; and - The date that the report is submitted by the Access Person. Each Access Person (with the exception of Non-Interested Trustees) must make an initial holdings report, no later than ten days after he or she becomes an Access Person, and an annual holdings report, within thirty days after the end of the calendar year, which shall disclose: - - The title, number of shares and principal amount of each Covered Security in which such Access Person had any direct or indirect beneficial ownership; - - The name of any broker, dealer or bank with whom the Access Person maintained an account in which securities were held for the direct or indirect beneficial interest of the Access Person; and - - The date that the report is submitted by the Access Person. The annual disclosure of holdings shall be made and calculated as of each calendar year end. page 6 NON-INTERESTED TRUSTEE REPORTING The CSIM Compliance Department shall notify each Non-Interested Trustee that such person is subject to this Code of Ethics' reporting requirements and shall deliver a copy of this Code of Ethics to each such person. Each Non-Interested Trustee shall only submit quarterly transaction reports to the appropriate Review Officer showing all transactions in Covered Securities in which the person has, or by reason of such transaction acquires, any direct or indirect beneficial ownership, where the Non-Interested Trustee knew at the time of the transaction or, in the ordinary course of fulfilling his or her official duties as a Trustee, should have known that during the 15-day period immediately preceding or after the date of the Trustee's transaction, such security is or was purchased or sold, or considered for purchase or sale, by a Trust. EXCEPTIONS TO REPORTING REQUIREMENTS Every Access Person must file the preceding reports EXCEPT: - - An Access Person need not make a report with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or control. - - The Review Officer may elect to accept broker account statements in lieu of a quarterly transactions report if the transactions report would duplicate information contained in those broker trade confirmations or account statements received by the Trust, CSIM or Schwab with respect to the Access Person in the time period required, and all of the information required is contained in the broker trade confirmations or account statements, or in the records of the Trust, CSIM or Schwab. VII. SURVEILLANCE The policies and procedures regarding surveillance that are applicable to officers, directors, Trustees and employees of the Trusts, CSIM and Schwab include the following: EMPLOYEE SURVEILLANCE AND REVIEW The Presidents of the Trusts and CSIM and Executive Vice President of Schwab, or their respective designees, will appoint Review Officer(s) to conduct employee surveillance and review. The Review Officer will, on a quarterly basis, compare all reported personal transactions in Covered Securities with the Trusts' or a Fund's completed portfolio transactions and a list of Covered Securities being considered for purchase or sale by CSIM to determine whether a violation may have occurred. The Review Officer will employ procedures similar to those attached as Exhibit A hereto. Before determining that a person has violated the Code of Ethics, the Review Officer must give the person an opportunity to supply explanatory material. If the Review Officer determines that a violation has or may have occurred, the Review Officer must submit the determination, together with the confidential quarterly report and page 7 any explanatory material provided by the person to the President of CSIM (or his or her designee), who will determine whether the person violated the Code of Ethics. No person is required to participate in a determination of whether he or she has committed a violation or discuss the imposition of any sanction against himself or herself. If the President of CSIM (or his or her designee) finds that the person violated the Code of Ethics, he or she will impose upon the person sanctions that he or she deems appropriate including, among other things, a letter of censure or suspension or termination of the employment of the violator. The President of CSIM (or his or her designee) will report the violation and the sanction imposed to the Trusts' Board of Trustees at the next regularly scheduled board meeting, unless, in the sole discretion of the President or his or her designee, circumstances warrant an earlier report. The Review Officer will report his or her own transactions to an Alternate Review Officer on a quarterly basis. The Alternative Review Officer on a quarterly basis shall fulfill the duties of the Review Officer with respect to the latter's transactions in Covered Securities. Employees of CSIM and Schwab are also subject to the requirements of Schwab's Employee Compliance Guide and Code of Conduct. VIII. RECORDS All records associated with this Code of Ethics, including but not limited to; (i) lists of persons who are, or within the past five years have been designated as Access Persons; (ii) quarterly transaction and annual holdings reports by such persons; (iii) surveillance documentation, including any Code violation and any sanctions resulting from the violation; and (iv) communications and all versions of the Code of Ethics, shall be maintained by the CSIM Compliance Department in an easily accessible place for at least five years. In addition, any record of any decision, and the reasons supporting the decision, to approve the acquisition by Investment Personnel of securities acquired in an IPO or a private placement, shall be maintained by the CSIM Compliance Department for at least five years after the end of the fiscal year in which the approval is granted. The Code of Ethics, a copy of each quarterly transaction and annual holding report by each Access Person of the Trusts, any written report made to the Board of Trustees concerning the Code of Ethics and lists of all persons required to make reports shall be preserved with the Trusts' records for the period required by Rule 17j-1. IX. DISCLOSURE The Trusts will disclose in their Statement of Additional Information that (i) the Trusts, CSIM and Schwab have adopted a Code of Ethics; (ii) the personnel of the Trusts, CSIM and Schwab are permitted to invest in securities for their own account, subject to the limitations of Rule 17j-1 and this Code; and (iii) the Code of Ethics can be obtained from the Securities and Exchange Commission. The Code of Ethics will be filed as an exhibit to the Trusts' registration statements. page 8 EXHIBIT A REVIEW AND SURVEILLANCE PROCEDURES FOR COMPLIANCE WITH RULE 17j-1 UNDER THE 1940 ACT I. NOTIFICATION OF QUARTERLY REPORTING REQUIREMENTS A. At the end of each calendar quarter, the Review Officer will send a Quarterly Personal Securities Transaction Report (the form of which is attached as Exhibit B), to each person who is an Access Person of (i) the Trusts, (ii) CSIM and (iii) Schwab. B. The Review Officer will promptly record the return of each Quarterly Personal Securities Transaction Report. C. Seven days after the end of the calendar quarter, the Review Officer will send a reminder notice to any Access Person who has not returned his or her Quarterly Personal Securities Transaction Report. D. Eleven days after the end of the calendar quarter, the Review Officer will send a "Notice of Failure" to any Access Person who has not returned his or her Quarterly Personal Securities Transaction Report. The Notice of Failure will notify the Access Person that he or she is in violation of Rule 17j-1 under the 1940 Act and the Code of Ethics and may be subject to sanctions under the Code of Ethics. E. The Review Officer shall report the name of any Access Person who has failed to provide a Quarterly Personal Securities Transaction Report to the President of CSIM for further evaluation and imposition of sanctions, if applicable. II. REVIEW OF QUARTERLY REPORTS A. Investment Personnel 1. The Review Officer shall verify, against the list of pre-approved transactions, that Investment Personnel have reported all transactions that were pre-approved, and that all reported transactions were pre-cleared. 2. For any transaction in a Covered Security involving more than 5,000 shares of any issuer's equity securities, rights, warrants or units or $100,000.00 face value of bonds or debentures of any one issuer that was reported on the Quarterly Personal Securities page 9 Transaction Report, but for which the person had not obtained prior approval, the Review Officer shall prepare a report on the transaction and transmit the report to the President of CSIM for further action. B. Access Persons. 1. The Review Officer shall review each Quarterly Personal Securities Transaction Report received against the master list of Covered Securities purchased or sold, or considered for purchase or sale, by the Funds for the same period as the transactions reported by the Access Person. 2. For any transaction by an Access Person in the same security as that purchased or sold by a Fund, the Review Officer will first determine whether the transaction was within 15 days (before or after) the transaction conducted by the Fund. If it falls within the 15 day period, the Review Officer will review the transaction in light of the following considerations: -- the size of the transaction; -- whether the transaction was in the same "direction" as the Fund's; -- the timing of the transaction; and -- the purchase or sale price of the Covered Security. 3. For any trade that is identified by the Review Officer as having occurred on the same day as a Fund at a more favorable price to the Access Person, the Review Officer shall send an inquiry letter to the Access Person and will conduct further investigation of the transaction. 4. If the Review Officer after further review determines that a transaction appears to involve a conflict of interest and/or a violation of the Code, he or she will report this to the President of the Access Person's employer for further action. III. PERIODIC REVIEW A. On an annual basis, the Review Officer shall review all annual holdings and quarterly reports submitted by Investment Personnel for patterns of trading activity that evidence a possible violation of the Code of Ethics. The following patterns, if ascertained, will require further inquiry: -- Trading only or primarily in securities that one or more Funds actively trade in; page 10 -- Transactions that match up closely in time with Fund transactions and diverge from the person's otherwise-normal trading profile in terms of the size of transaction or type of security; and -- Transactions involving the purchase or sale of Covered Securities that yielded significant profits (or losses avoided), which match up closely in time with the Funds' transactions. B. The Review Officer shall conduct periodic reviews of reports submitted by Access Persons that disclose more than 5 trades in Covered Securities per calendar quarter. The Review Officer may review specific transactions or a group of transactions for any pattern of activity referenced in A., above. IV. VERIFICATION OF BROKERAGE STATEMENTS A. The Review Officer may request that an Access Person provide a duplicate statement of any account with a broker, dealer or bank where an Access Person holds securities, in order to verify the accuracy of reports made by the Access Person. B. Any request for statement of securities accounts shall be complied with no later than 10 days after the request has been made. If the request has not been complied with, it will be considered a violation of the Code of Ethics. V. ANNUAL CERTIFICATION On an annual basis, each Access Person must certify that he or she (i) is aware that he or she is subject to the requirements of Rule 17j-1 and the Code of Ethics and understands his or her obligations under the Rule and Code of Ethics; and (ii) he or she has fully complied with the requirements of the Code of Ethics. page 11 EXHIBIT B QUARTERLY PERSONAL SECURITIES TRANSACTIONS REPORT Name of Reporting Person: Calendar Quarter Ended:
Name of Date of Title of No. of Shares/ Type of Name of Broker, Dealer or Issuer* Transaction Security Principal Amount Transaction Price Bank Effecting Transaction - ------------------------------------------------------------------------------------------------------------------
If you had no reportable transactions during the quarter, please check here. If you established an account within the last quarter, please provide the following information:
Name of Broker, Date Account was Interest Rate Maturity Date Date Report Submitted Dealer or Bank Established (if applicable) (if applicable) by Access Person - -----------------------------------------------------------------------------------------------------------------
If you did not establish a securities account within the last quarter, please check here. If you to disclaim beneficial ownership of one or more Securities reported above, please describe below and indicate which Securities are at issue. Signature Date page 12 -----END PRIVACY-ENHANCED MESSAGE-----