<PAGE> 1
As filed with the Securities and Exchange Commission on July 12, 1995
File Nos. 33-62470 and 811-07704
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 5 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7 /X/
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SCHWAB CAPITAL TRUST
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(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
-------------------------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
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Elizabeth G. Sawi, President
Schwab Capital Trust
101 Montgomery Street, San Francisco, California 94104
------------------------------------------------------
(Name and Address of Agent for Service)
Copies of communications to:
Martin E. Lybecker, Esq. Frances Cole, Esq.
Ropes & Gray Charles Schwab Investment Management, Inc.
1001 Pennsylvania Avenue, N.W. 101 Montgomery Street
Washington, D.C. 20004 San Francisco, CA 94104
It is proposed that this filing will become effective (check appropriate box)
/ / Immediately upon filing pursuant to paragraph (b)
/ / On (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/X/ 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485
if appropriate, check appropriate box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2: Pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended, Registrant has registered an indefinite number
or amount of its shares of beneficial interest under the Securities Act of 1933,
as amended. The Rule 24f-2 Notice for Registrant's fiscal year ending October
31, 1994 was filed on December 16, 1994.
Total No. of Pages 177 Exhibit Index Appears at 135
------------ ------------
<PAGE> 2
PART A
SCHWAB CAPITAL TRUST
The information required by Items 1 through 9 for Schwab Small-Cap
Index Fund(TM) and Schwab International Index Fund(TM), two separate portfolios
of Registrant, is hereby incorporated by reference to the Prospectuses for these
portfolios filed with the Securities and Exchange Commission under Rule 497(e)
on June 30, 1995.
<PAGE> 3
CROSS REFERENCE SHEET
SCHWAB CAPITAL TRUST:
SCHWAB ASSET DIRECTOR-HIGH GROWTH
SCHWAB ASSET DIRECTOR-BALANCED GROWTH
SCHWAB ASSET DIRECTOR-CONSERVATIVE GROWTH
<TABLE>
<CAPTION>
Part A Item Prospectus Caption
- ----------- ------------------
<S> <C>
Cover Page Cover Page
Synopsis Key Features of the Funds; Matching the Funds to
Your Investment Needs
Condensed Financial Information Financial Highlights
General Description of Registrant Matching the Funds to Your Investment Needs;
Investment Objective and Policies
Management of the Fund Management Functions and Responsibilities
Capital Stock and Other Securities Important Information About Your Investment
Purchase of Securities Being Offered Important Information About Your Investment
Redemption or Repurchase Investing in Our Funds
Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 4
CONTENTS
Page
----
Key Features of the Funds 2
Matching the Funds to Your Investment Needs 3
Expenses 4
Investing in Our Funds 5
How to Buy Shares 5
How to Sell or Exchange Shares 6
Investment Objectives and Policies 7
Investment Techniques Used by Our Funds 8
Important Information About Your Investment 10
Dividends and Other Distributions 10
Income Tax Information 11
How We Determine the Price of Your Shares 11
How the Funds Report Performance 11
Organization and Management of Our Funds 12
Management Functions and Responsibilities 12
Operating Fees and Expenses 12
Other Information on the Operation of Our Funds 13
Glossary of Important Terms 14
READING THIS PROSPECTUS. Explanations of all italicized terms in this Prospectus
are included in the Glossary at the end of this Prospectus. References to "you"
and "your" in this Prospectus refer to prospective investors or shareholders,
while references to "us" or "our" refer to the three Funds.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
SCHWAB ASSET DIRECTOR FUNDS
ASSET DIRECTOR-HIGH GROWTH
ASSET DIRECTOR-BALANCED GROWTH
ASSET DIRECTOR-CONSERVATIVE GROWTH
SCHWAB ASSET DIRECTOR-HIGH GROWTH, SCHWAB ASSET DIRECTOR-BALANCED
GROWTH AND SCHWAB ASSET DIRECTOR-CONSERVATIVE GROWTH (THE "FUNDS") are a family
of three asset allocation funds which provide diversification among major
investment categories. Each seeks to meet its investment objective by investing
in a different mix of stocks, bonds, and cash-equivalents. All three Funds are
designed to provide exposure to the growth potential of the stock market in
varying degrees. Each Fund is a diversified investment portfolio of Schwab
Capital Trust (the "Trust"), a no-load management investment company (mutual
fund).
ABOUT THIS PROSPECTUS: THIS PROSPECTUS PROVIDES YOU WITH CONCISE INFORMATION
THAT YOU SHOULD KNOW BEFORE YOU DECIDE IF THE FUNDS PROVIDE THE INVESTMENT
OPPORTUNITY YOU ARE LOOKING FOR. READ IT CAREFULLY, AND RETAIN IT FOR FUTURE
REFERENCE. You can find more detailed information in the Statement of Additional
Information, dated September , 1995. That Statement has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated in this
Prospectus by reference (which means that it is legally considered part of this
Prospectus even though it's not printed here). The prospectus is available
electronically by using our Internet address: http://www.schwab.com. You can get
a free paper copy of this Prospectus or the Statement of Additional Information
by calling Schwab at 800-2 NO-LOAD, or by writing Schwab at 101 Montgomery
Street, San Francisco, California 94104.
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office, or call 800-2 NO-LOAD.
PROSPECTUS , 1995
1
<PAGE> 5
KEY FEATURES OF THE FUNDS
STRATEGY: Each Fund invests in a diversified mix of stocks, bonds, and
cash-equivalents. Research shows that the greatest impact on investment returns
is due to the asset allocation decision (the mix of stocks, bonds, and
cash-equivalents) rather than market timing or individual stock and bond
selection. A study of the performance of pension funds indicated that over 90%
of the performance was determined by asset mix.*
The primary difference among the Funds is the proportion invested in stocks.
Each Fund targets a different mix of investments as described below. This mix
will vary within defined ranges based on the Investment Manager's and the
Sub-Adviser's long-term outlook for financial markets. For more detailed
information, see "Investment Objectives and Policies."
*Financial Analysts Journal; Brinson, Singer, Beebower; May-June 1991
SCHWAB ASSET DIRECTOR-HIGH GROWTH
INVESTMENT OBJECTIVE: to provide you with high capital growth with less
volatility than an all-stock portfolio. This Fund provides the greatest exposure
to various stock categories, including domestic large and small company stocks
and international stocks.
[PIE CHART 1]
<TABLE>
TARGET Defined
MIX ranges
------ -------
<S> <C> <C>
STOCKS 80% 65%-95%
Large Companies 40%
Small Companies 20%
International 20%
CASH 5%
BONDS 15%
</TABLE>
SCHWAB ASSET DIRECTOR-BALANCED GROWTH
INVESTMENT OBJECTIVE: to provide you with maximum total return, including both
capital growth and income. This Fund represents a more balanced exposure
approach to stocks and bonds.
[PIE CHART 2]
<TABLE>
TARGET Defined
MIX ranges
------ -------
<S> <C> <C>
STOCKS 60% 50%-70%
Large Companies 30%
Small Companies 15%
International 15%
CASH 5%
BONDS 35%
</TABLE>
SCHWAB ASSET DIRECTOR-CONSERVATIVE GROWTH
INVESTMENT OBJECTIVE: to provide you with income and more growth potential than
an all-bond portfolio. This Fund's stock component is designed to help offset
inflation.
[PIE CHART 3]
<TABLE>
TARGET Defined
MIX ranges
------ -------
<S> <C> <C>
STOCKS 40% 30%-50%
Large Companies 20%
Small Companies 10%
International 10%
CASH 5%
BONDS 55%
</TABLE>
For more detailed information on the three Funds, see "Investment Objectives and
Policies."
MANAGEMENT. The Investment Manager, Charles Schwab Investment Management, Inc.,
currently manages the mutual funds in the SchwabFunds Family(TM), a family of 18
mutual funds with over $27 billion in assets as of June 15, 1995. The
Sub-Adviser, Symphony Asset Management Inc. is a wholly-owned subsidiary of
BARRA, Inc. BARRA, established in 1975, provides innovative analytical models,
software, and services designed to enable its more than 800 clients in 30
countries to make superior investment decisions. Symphony presently
acts as Sub-Adviser to one other investment company and manages over $600
million of institutional and private account assets. For more detailed
information, see "Organization and Management of Our Funds."
2
<PAGE> 6
MARKET PERFORMANCE. For the twenty years ended 1994, the asset categories to be
used by the Funds have provided the following average annual returns*:
Large company stocks (S & P 500) 14.6%
Small company stocks (CRSP 6-7-8) 19.6%
International stocks (MSCI EAFE) 16.3%
Bonds (Long-term Governments) 9.4%
Cash equivalents (30 day T-bills) 7.3%
*Source: Ibbotson & Associates. See Glossary for definitions of the various
indices. Indices do not include fees such as those charged by the Funds. Past
performance of indices does not necessarily reflect future performance results
of the Funds.
LOW COST INVESTING. You pay no sales fees or charges when you buy or sell shares
of the Funds. Additionally, the Funds were designed with operating expenses
below the industry average, which helps provide more competitive returns. The
Investment Manager and Schwab guarantee that each Fund's total fund operating
expenses will not exceed 0.89% through December 31, 1996. The industry average
for asset allocation funds is 1.43%*. For more detailed information, see
"Investing in Our Funds" and "Operating Fees and Expenses."
[BAR GRAPH]
<TABLE>
<S> <C>
Schwab Asset Director Funds 0.89%
Average Asset Allocation Fund 1.43%
</TABLE>
* Source: Morningstar Investment Services, Inc., April, 1995
SHAREHOLDER SERVICES. Schwab's professional representatives are available
toll-free 24 hours a day at 800-2 NO-LOAD to service your account, or you can
visit or call your local Schwab office during regular business hours. Schwab
also enables you to execute your trading requests through electronic products
and services such as StreetSmart(TM), The Equalizer(R), and Telebroker(R). See
"Investing in the Funds."
CONVENIENT REPORTING. You receive one consolidated account statement for all of
your account activity, including all of your mutual fund activity.
FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in amounts and at intervals that you select. For
more information, see "Schwab Automatic Investment Plan" in this Prospectus.
RETIREMENT PLANS. Schwab offers tax-advantaged retirement plans for which the
Funds may be a particularly appropriate investment. For more information, see
"Tax-Advantaged Retirement Plans" in this Prospectus.
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS
This family of three asset allocation funds provides diversification among major
investment categories. Each seeks to meet its investment objective by investing
in a different mix of stocks, bonds, and cash-equivalents. All three Funds are
designed to provide exposure to the growth potential of the stock market with
varying degrees of volatility due to the different allocations. For more
detailed information, see "Investment Objectives and Policies."
An investor's strategy might include investing in one or a combination of these
Funds to match their investment time horizon and risk tolerance.
SCHWAB ASSET DIRECTOR-HIGH GROWTH may be appropriate for you if you have a
long-term investment horizon and want the growth potential from stock
investments. You should be comfortable with the risks of the stock market, but
do not want the volatility of an all-stock investment.
SCHWAB ASSET DIRECTOR-BALANCED GROWTH may be appropriate for you if you have an
intermediate-term investment horizon and want a more balanced approach to your
investment. You should want the growth potential from stock investments but are
willing to achieve it more slowly and with less volatility than that provided by
Schwab Asset Director-High Growth.
SCHWAB ASSET DIRECTOR-CONSERVATIVE GROWTH may be appropriate for you if
you have a short-term investment horizon but still want some exposure to the
stock market. You should want returns that keep pace with inflation but want to
limit volatility to the extent possible.
RISKS CONSIDERATIONS: The Funds seek to reduce overall risk by diversifying
investments among major asset categories and sub-categories. However, depending
on the Investment Manager's asset allocation decisions with regard to the mix of
stocks, bonds and cash equivalents, shareholders in the Funds may be exposed to
the risks associated with each. Stock risk is the possibility that stock prices
in general or particular will decline over short or even extended periods.
Small-cap and International
3
<PAGE> 7
stocks will typically be included in the mix and pose special risks. Bond risk
is the potential for decline in the market value of bonds due to interest rate
changes or the ability of an issuer to meet its obligations. Diversification
among asset categories will not necessarily protect the Funds from loss. The
Funds may engage in certain derivative transactions; their characteristics and
limitations on their use are more fully described in "Investment Techniques Used
By Our Funds." There are many types of derivative transactions with varying
degrees of potential return and risk.
Please refer to the "Investment Techniques Used by Our Funds" section in this
Prospectus for a more detailed discussion of the risks associated with
particular types of investments.
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are the fees and charges you pay for buying or
selling shares of a fund. You pay no sales fees or charges when you buy or sell
shares of our Funds.
ANNUAL FUND OPERATING EXPENSES include management fees paid to the Investment
Manager, transfer agency fees, and other expenses. These expenses cover, for
example, services such as investment research and management of the Funds,
maintaining shareholder records, and issuing shareholder statements. Each Fund
pays its own annual operating expenses from its income and assets, and they are
factored into the dividends paid to shareholders and into the price of the
Funds' shares. As a shareholder, you are not charged any of these fees directly.
<TABLE>
<CAPTION>
High
Growth Balanced Conservative
Fund Fund Fund
------ -------- ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES
Sales charge on purchases
and reinvested dividends None None None
Deferred sales charge or
redemption fees None None None
Exchange fees None None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management fee (after
fee reduction)(1) 0.49% 0.49% 0.49%
12b-1 fees None None None
Other expenses (after fee
reduction)(2) 0.40% 0.40% 0.40%
---- ---- ----
TOTAL FUND OPERATING
EXPENSES(3,4) 0.89% 0.89% 0.89%
</TABLE>
(1) This amount reflects a reduction by the Investment Manager, which is
guaranteed through at least December 31, 1996. If there were no such reduction,
the maximum management fee would be 0.74% of the average daily net assets of
each Fund.
(2) "Other Expenses" are based on estimated amounts for the current fiscal year
for each Fund.
(3) This amount reflects the guarantee by Schwab and the Investment Manager
that, through at least December 31, 1996, the total operating expenses of each
Fund will not exceed 0.89% of its average daily net assets. If there were no
such reduction, the estimated maximum total operating expenses would be 1.14% of
the average daily net assets of each Fund.
(4) Schwab currently imposes no fees for opening and maintaining a Schwab
brokerage account. Effective October 1, 1995, a quarterly fee of $7.50 will be
charged to Schwab brokerage and custodial accounts with balances below $1,000
and $500, respectively. This fee will be waived if there has been one
commissionable trade within the last six months, or if there are combined
account balances of at least $10,000. Schwab imposes no fees for opening and
maintaining a Schwab One(R) account with a minimum balance of $5,000. Schwab One
accounts with balances below $5,000 are subject to a monthly fee of $5.00 if
there have been fewer than two commissionable trades within the last 12 months.
Schwab Individual Retirement Accounts with balances of $10,000 or more by
September 15, 1995 are not charged Schwab's $29 annual IRA account fee for the
life of the account. Schwab Keogh plans are currently charged an annual fee of
$45.
EXAMPLES. You would pay the following expenses on a $1,000 investment in the
Funds assuming: (1) 5% annual return; and (2) redemption at the end of each
period.
<TABLE>
<CAPTION>
1 Year 3 Years
------ -------
<S> <C> <C>
Growth Fund $9 $28
Balanced Fund $9 $28
Conservative Fund $9 $28
</TABLE>
THIS IS AN EXAMPLE ONLY AND DOES NOT REPRESENT PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE EXAMPLE. This
example reflects the guarantee by Schwab and the Investment Manager that,
through at least December 31, 1996, total operating expenses for each of the
Funds will not exceed 0.89% of their average daily net assets. Please remember
that, while this
4
<PAGE> 8
example assumes a 5% annual return on investment, each Fund's actual returns may
be more or less than the 5% used in this example.
The purpose of the table above is to help you understand the various costs and
expenses you will bear directly or indirectly when you invest in the Funds. (See
"Organization and Management of Our Funds - Operating Fees and Expenses.")
INVESTING IN OUR FUNDS
HOW TO BUY SHARES
NEW INVESTORS TO SCHWAB need to open a Schwab account by completing and signing
an account application. Mail it, together with your check, to the address
indicated on the application. You may also open your account in person as
described in the table on this page.
EXISTING SCHWAB INVESTORS must have funds in their Schwab account in order to
buy shares in the Fund. Orders to buy shares received by Schwab's Mutual Fund
Transfer Agency Department by 4 p.m. (Eastern time) will be executed on that
day. Orders received after that time will be executed on the next Business Day.
Schwab will charge your Schwab brokerage account a $15 service fee for any
check returned because of insufficient or uncollected funds, or because of a
stop payment order.
Schwab also enables you to execute your trading requests through electronic
products and services such as StreetSmart(TM), The Equalizer(R), and
Telebroker(R).
Within your Schwab account, you have access to other investments available at
Schwab, such as stocks, bonds and other mutual funds. Additionally, the
Securities Investor Protection Corporation (known as "SIPC") will provide
account protection up to $500,000 for your securities, including shares in each
Fund, that you hold in a Schwab account. However, SIPC account protection does
not protect you from any loss of principal due to market or economic conditions.
<TABLE>
<CAPTION>
FUND MINIMUMS
<S> <C>
FUND INITIAL PURCHASE:
Brokerage account $1,000
Retirement account $ 500
FUND ADDITIONAL PURCHASE:
Brokerage account $ 100
Retirement account $ 100
Automatic investment plan $ 100
FUND MINIMUM BALANCE:
Brokerage account $1,000
Retirement account $ 500
</TABLE>
Schwab reserves the right to waive these minimums from time to time and for
clients of Schwab Institutional, a division of Schwab.
SPECIAL SUBSCRIPTION OFFERING
The distributor, Charles Schwab & Co., Inc., is soliciting subscriptions for
shares of the Funds during an initial offering period, which is currently
scheduled to end November 16, 1995, subject to extension by the Funds and the
distributor. Shares are being offered at the initial net asset value of $10 per
share. The Funds and their distributor reserve the right to withdraw, cancel, or
modify the offering without notice and to refuse any order in whole or in part.
The Funds expect to commence continuous offerings of their shares immediately
following the settlement of the subscription offerings.
Each Fund, in its sole discretion and without prior notice to you, reserves the
right to reject orders to buy shares, to change the minimum investment
requirements, and to withdraw or suspend any part of the offering made by this
Prospectus. All orders to buy shares must be accepted by the Fund, and orders
are not binding until the Fund confirms or accepts them in writing.
HOW TO BUY SHARES
Whether by phone, mail, electronically or in person, the following information
is always needed:
1. your Schwab brokerage account number.
2. the name of the Fund you wish to buy.
3. the amount you wish to invest.
BY PHONE
- - Call 800-2 NO-LOAD (800-266-5623)
- - Place a buy order for your account.
BY MAIL
- - Include a letter of instruction with the information requested above,
signed by one of the registered account holders in the exact form specified
on the account.
- - Make your check payable to Charles Schwab & Co., Inc.
- - Mail to 101 Montgomery Street, San Francisco, CA 94104 or your local Schwab
office.
5
<PAGE> 9
- - Once your letter is mailed it is irrevocable and may not be modified or
canceled.
ELECTRONICALLY
- - Refer to product information on StreetSmart(TM), The Equalizer(R), and
Telebroker(R) for details.
IN PERSON
- - Deposit your check at your local Schwab office. For the Schwab office
nearest you, call 800-2 NO-LOAD.
BY WIRE
- - Contact your local Schwab office for instructions.
AUTOMATICALLY
- - Use Schwab Automatic Investment Plan.
- - Sign up for this service when opening your account.
SCHWAB'S AUTOMATIC INVESTMENT PLAN allows you to make periodic investments in
non-money market SchwabFunds(R) (and certain other funds available through
Schwab) automatically and conveniently. You can make automatic investments in
any amount, from $100 to $50,000, once you meet the Fund's investment minimum.
Automatic investments are made from your Schwab account and you may select from
using the uninvested cash in your Schwab account and/or by using the proceeds of
redemption of shares of the Schwab Money Fund linked to your Schwab account, or
by using the Schwab MoneyLink(R) Transfer Service. For more detailed information
about this service, or to establish your automatic investment plan, call your
local Schwab office or 800-2 NO-LOAD, 24 hours a day.
TAX-ADVANTAGED RETIREMENT PLANS. Schwab offers tax-advantaged retirement plans
for which the Funds may be a particularly appropriate investment. Schwab's
retirement plans allow participants to defer taxes while helping them build
their retirement savings. The Schwab IRA is a retirement plan with a wide choice
of investments offering people with earned income the opportunity to compound
earnings on a tax-deferred basis. The Schwab Keogh is a tax-advantaged plan for
self-employed individuals and their employees that permits the employer to make
annual tax-deductible contributions of up to $30,000. Schwab also offers
Corporate Retirement Plans to help a company attract and retain valuable
employees. Call your local Schwab office or 800-2 NO-LOAD, 24 hours a day for
more information.
HOW TO SELL OR EXCHANGE YOUR SHARES
You can sell your shares in the Fund at any time, in person, by telephone, or by
mail. Your shares will be sold at the next share price (net asset value)
calculated after your order is received and accepted by Schwab's Mutual Fund
Transfer Agency Department. Orders received and accepted by Schwab's Mutual Fund
Transfer Agency Department on any Business Day before 4:00 p.m. Eastern Time,
will receive that day's closing price. Orders received and accepted after that
time will receive the closing price on the following Business Day. When you sell
your shares, you may receive more or less than the amount you invested.
The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of any other SchwabFunds class or series available to investors in your
state. Thus, you can conveniently modify your investments if your goals or
market conditions change. An exchange will involve the sale of shares at the net
asset value next determined after receipt by Schwab's Mutual Fund Transfer
Agency Department of an exchange request (on the same day as your request was
received, if it was received by 4:00 p.m. Eastern time and on the next Business
Day if the request was received after that time) and the purchase of shares in
another fund at the net asset value of that fund next determined after sale of
the shares involved in the exchange. An exchange of shares will be treated as a
sale of the shares for federal income tax purposes. Note that you must meet the
minimum investment requirements applicable to the shares you wish to receive in
an exchange. The Funds reserve the right on 60 days' written notice to modify,
limit or terminate the exchange privilege.
HOW TO SELL OR EXCHANGE SHARES
Whether by phone, mail, electronically or in person, the following information
is always needed:
When Selling Shares:
1. your Schwab brokerage account number.
2. the name of the Fund from which you wish to sell shares.
3. the number of shares you wish to sell.
When Exchanging Shares:
1. your Schwab brokerage account number.
2. the number of shares you want to exchange.
3. the name of the Fund from which you wish to exchange shares.
4. the name of the Fund into which shares are to be exchanged.
BY PHONE
- - Call 800-2 NO-LOAD (800-266-5623)
- - Place a sell or exchange request for your account.
6
<PAGE> 10
BY MAIL
- - Include a letter of instruction with the information requested above,
signed by one of the registered account holders in the exact form specified
on the account.
- - Mail to 101 Montgomery Street, San Francisco, CA 94104 or your local Schwab
office.
- - Once your letter is mailed, it is irrevocable and may not be modified or
canceled.
ELECTRONICALLY
- - Refer to product information on StreetSmart(TM), The Equalizer(R), and
Telebroker(R) for details.
IN PERSON
- - Place your sell or exchange request at your local Schwab office.
- - For the Schwab office nearest you, call 800-2 NO-LOAD.
We will follow reasonable procedures to confirm that your telephone instructions
are genuine. If we do not follow reasonable procedures to confirm that your
telephone order is genuine, we may be liable for any losses you may suffer from
unauthorized or fraudulent orders. These procedures may include requiring a form
of personal identification, providing written confirmation of your telephone
instructions, and tape recording all telephone transactions. You should be aware
that telephone transactions may be difficult to implement during periods of
drastic economic or market changes. If you experience difficulties in reaching
us by telephone you can mail your orders or place them in person as set forth
below.
Payment for shares will be credited directly to your Schwab account no later
than 3 Business Days after Schwab's Mutual Fund Transfer Agency Department
receives your sell instructions in proper form. Proceeds will then be held there
or mailed to you depending on the account standing instructions you have
selected. For information on how to wire funds from your Schwab account to your
bank, contact your local Schwab office for additional information.
If you purchased shares by check, your sales proceeds may be held in you Schwab
account until your check clears (which may take up to 15 days). Depending on the
type of Schwab account you have, your money may earn interest during any holding
period.
The Fund may suspend redemption rights or postpone payments when trading on the
New York Stock Exchange is restricted, the Exchange is closed for any reason
other than its customary weekend or holiday closings, emergency circumstances as
determined by the SEC exist, or for such other circumstances as the SEC may
permit. The Fund may also elect to invoke a 7 day period for cash settlement of
individual redemption requests in excess of $250,000 or 1% of the Fund's net
assets, whichever is less. (See "Purchase and Redemption of Shares" in the
Statement of Additional Information.)
INVESTMENT OBJECTIVES AND POLICIES
THE SCHWAB ASSET DIRECTOR FUNDS are a family of three asset allocation funds
which provide diversification among major investment categories. Each seeks to
meet its investment objective by investing in a different mix of stocks, bonds,
and cash-equivalents. All three funds are designed to provide exposure to the
growth potential of the stock market in varying degrees.
Target mixes among asset categories and the defined ranges within which the
allocations will vary have been established for each Fund. There are no defined
ranges for asset sub-categories (i.e., large company stocks) which may make up
all or none of an investment category. The Investment Manager will allocate
assets among categories, emphasizing investment in the most attractive
category. The Sub-Adviser produces an outlook for financial markets and using
a Tactical Asset Allocation Model measuring the relative attractiveness of
each asset category. Some types of investments can fall into more than one
asset category. The Funds may also make other investments that do not fall
within the asset categories. The investment objectives stated below are
fundamental to each Fund. Because any investment involves risk, we cannot
guarantee achieving these objectives.
SCHWAB ASSET DIRECTOR-HIGH GROWTH
The investment objective of Schwab Asset Director-High Growth is to provide
you with high capital growth with less risk than an all stock portfolio. This
Fund provides the greatest exposure to various stock categories, including
domestic large and small company stocks, and international stocks.
Schwab Asset Director-High Growth's target mix, as well as the defined ranges
for the different asset categories are as follows:
<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
--- ------
<S> <C> <C>
STOCKS 80% 65% - 95%
Large company stocks 40%
Small company stocks 20%
</TABLE>
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<PAGE> 11
<TABLE>
<S> <C> <C>
International stocks 20%
BONDS 15% 0% - 30%
CASH EQUIVALENTS 5% 0% - 35%
</TABLE>
SCHWAB ASSET DIRECTOR-BALANCED GROWTH
The investment objective of Schwab Asset Director-Balanced Growth is to provide
you with maximum total return, including both capital growth and income. This
Fund represents a more balanced exposure approach to stocks and bonds.
Schwab Asset Director-Balanced Growth's target mix, as well as the defined
ranges for the different asset categories are as follows:
<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
--- -------
<S> <C> <C>
STOCKS 60% 50% - 70%
Large company stocks 30%
Small company stocks 15%
International stocks 15%
BONDS 35% 25% - 45%
CASH EQUIVALENTS 5% 0% - 25%
</TABLE>
SCHWAB ASSET DIRECTOR-CONSERVATIVE GROWTH
The investment objective of Schwab Asset Director-Conservative Growth is to
provide you with income and more growth potential than an all bond fund. This
Fund's stock component is designed to help offset inflation.
The Schwab Asset Director-Conservative Growth Fund's target mix, as well as the
defined ranges for the different asset categories are as follows:
<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
--- -------
<S> <C> <C>
STOCKS 40% 30% - 50%
Large company stocks 20%
Small company stocks 10%
International stocks 10%
BONDS 55% 45% - 65%
CASH EQUIVALENTS 5% 0% - 25%
</TABLE>
INVESTMENT TECHNIQUES USED BY OUR FUNDS
Our Funds will invest in stocks, bonds, and short-term instruments in varying
proportions, according to the Funds' target mixes and defined ranges.
STOCK ALLOCATION: The common stocks the Funds invest in will be a diversified
portfolio within each asset sub-category (large company, small company, and
international company) as specified in the investment objectives. Common stocks
represent an ownership, or equity, interest in a company. Although common stocks
have a history of long-term growth in value, their prices tend to fluctuate in
the short-term.
LARGE COMPANY STOCKS: The Funds' large company allocation will be invested in a
representative sample of the stocks which comprise the Standard & Poor's 500
Index(R).
SMALL COMPANY STOCKS:. The Funds' small company allocation will be invested in a
representative sample of stocks selected from a universe consisting of the
second 1,000 largest U.S. operating corporations, as measured by market
capitalization. Small company stocks have historically been characterized by
greater total returns, greater volatility of returns, and lower dividend yields
than large company stocks.
INTERNATIONAL STOCKS are those issued by companies domiciled or based outside
the United States. The Funds' international allocation will be invested in a
representative sample of stocks selected from a universe consisting of the 350
largest non-U.S. operating corporations, as measured by market capitalization.
These investments will be denominated in a foreign currency, and the value of
the Funds' investments will be affected by changes in currency exchange rates
versus the U.S. dollar in addition to normal market fluctuations. 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, by changes in
interest rates, as well as by political and economic factors. Other risks and
considerations of international investing include: differences in accounting,
auditing and financial reporting standards; generally higher transaction costs
on foreign portfolio transactions; small trading volumes and generally lower
liquidity of foreign stock markets, which may result in greater price
volatility; foreign withholding taxes payable on the Funds' security holdings,
which may reduce dividend income payable to shareholders; the possibility of
expropriation, nationalization or confiscatory taxation; adverse changes in
investment or exchange control regulations; political instability which could
affect U.S. investment in foreign countries; and potential restrictions on the
flow of international capital.
BOND ALLOCATION: Bond investments for the Funds will primarily consist of United
States Government obligations, highly rated corporate debt obligations, and
highly rated asset-backed securities. The debt securities
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<PAGE> 12
in which the Funds invest are: 1) obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, including bills, notes, bonds,
discount notes, stripped government securities, and other debt securities. Not
all obligations issued or guaranteed by U.S. Government agencies are backed by
the full faith and credit of the United States; 2) domestic and foreign issues
of corporate debt obligations having floating or fixed rates of interest; 3)
asset-backed securities, including mortgage-related securities. Asset-backed
securities are secured by company receivables, home equity loans, truck and auto
loans, leases, and credit card receivables. The collateral backing asset-backed
securities cannot be foreclosed upon. Mortgage-backed securities are securities
collateralized by pools of mortgage loans and are assembled by various
governmental agencies and organizations, such as GNMA, FNMA, and FHLMC. When
interest rates decline, there is increased likelihood that the mortgages
underlying a mortgage-backed security will pre-pay, resulting in the loss of any
unamortized premium paid for the securities and the probability of having to
reinvest the proceeds at lower rates; and 4) repurchase agreements
collateralized by eligible investments. The corporate debt obligations or the
asset-backed obligations the Funds invest in will be rated in one of the three
highest categories (A or better) by a nationally recognized statistical rating
organization ("NRSRO").
The market value of the Funds' debt investments will change in response to
interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding debt securities generally rise and conversely,
during periods of rising interest rates, the values of such securities generally
decline. While securities with longer maturities tend to produce higher yields,
the prices of longer maturity securities are also subject to greater market
fluctuations as a result of changes in interest rates. Changes by NRSRO's in the
rating of any debt security and in the ability of an issuer to make payments of
interest and principal also affect the value of these investments. Except under
condition of default, changes in the value of portfolio securities will not
affect cash income derived from these securities but will affect the Funds' net
asset value.
CASH ALLOCATION: The Funds may invest in the following types of U.S. dollar
denominated short-term money market instruments that the Investment Manager has
determined to present moderate credit risk:
1. Bank certificates of deposit, time deposits or bankers acceptances
of banks having capital, surplus and undivided profits in excess of
$100 million.
2. Commercial paper rated in one of the two highest rating categories by a
nationally recognized statistical rating organization, or commercial paper or
notes of issuers with an unsecured debt issue outstanding currently rated in
one of the two highest rating categories by any nationally recognized
statistical rating organization where the obligation is on the same or a
higher level of priority and collateralized to the same extent as the rated
issue.
3. Obligations of, or guaranteed by, the United States or Canadian governments,
their agencies or instrumentalities.
4. Repurchase agreements involving obligations that are suitable for invest-
ment under the categories set forth above.
OTHER ASSETS. The Funds may also make other investments that do not fall within
the asset classes described above. These may include warrants, convertible
securities, preferred stocks, real-estate related investments, precious metal
related investments, American and European Depository Receipts, and stocks and
bonds issued in developing countries. In addition, the Funds may invest in other
securities, in the future, not presently contemplated or which are not currently
available. These additional investments must be consistent with the Funds'
investment objectives and legally permissible investments for the Funds.
ADJUSTING INVESTMENT EXPOSURE. Each Fund may use various techniques to increase
or decrease its exposure to changing security prices, interest rates, currency
exchange rates, commodity prices, or other factors that affect security values.
These techniques may involve derivative transactions such as buying and selling
options and futures contracts, entering into currency exchange contracts and
forward contracts, or swap agreements. The Funds may also sell securities short
if at the time of the short sale the Fund owns or has the right to own
securities equivalent in kind and amount to the securities sold short at no
additional cost. The Investment Manager can use these practices to adjust the
risk and return characteristics of a Fund's portfolio of investments. If the
Investment Manager judges market conditions incorrectly or employs a strategy
that does not correlate well with the Funds' investments, these techniques could
result in a loss, regardless of whether the intent was to reduce risk or
increase return. These techniques may increase the volatility of the Funds and
may involve a small investment of cash relative to the magnitude of the risk
assumed. In addition, these techniques could result in a loss if the
counterparty to the transaction does not perform as promised.
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<PAGE> 13
ILLIQUID SECURITIES. Each Fund may purchase illiquid securities, provided that
no more than 10% of a Fund's net assets valued at the time of the transaction
are invested in such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase securities
on a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, a Fund will not pay for such securities or start earning
interest on them until the Fund receives them. Securities purchased on a
when-issued or delayed delivery basis are recorded as an asset. The value of
such securities may change as the general level of interest rates change.
REPURCHASE AGREEMENTS. Each of our Funds may engage in repurchase agreements. By
entering into a repurchase agreement, a Fund acquires ownership of a security
from a broker-dealer or bank that agrees to repurchase the security at a
mutually agreed upon time and price. The repurchase price is higher than the
purchase price, thereby determining the yield during the Fund's holding period.
In the event of a bankruptcy or other default of a repurchase agreement
counterparty, a Fund might have expenses in enforcing its rights, and could
experience losses, including a decline in the value of the underlying securities
and loss of income.
BORROWING POLICY. The Funds may not borrow money except for temporary purposes
to meet redemption requests that could not otherwise be met without immediately
selling portfolio securities. A Fund may borrow an amount up to one-third of the
value of a Fund's total assets and may pledge up to 10% of the Fund's net assets
to secure such borrowings. No Fund may borrow for leverage purposes. This
borrowing policy is fundamental to each Fund.
SECURITIES LENDING: Each Fund may lend up to 33 1/3% of its portfolio securities
to broker/dealers as a means of increasing income. These loans must be fully
collateralized at all times. As with any collateralized loan, there are risks of
delay in recovery or even losses of rights in the assets loaned should the
borrower fail financially.
DIVERSIFICATION. The Funds are subject to the following limitation, which
applies to all investments by the Funds other than securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities: none of
the Funds may invest more than 5% of the value of its total assets in the
securities of one issuer, except that each Fund may invest up to 25% of the
value of its assets without regard to this 5% limitation.
INVESTMENT COMPANIES. Our Funds may also purchase shares of other investment
companies, including those managed by the Investment Manager. These purchases
will be subject to the limitations imposed by the 1940 Act, and we will only
make these purchases after obtaining any required regulatory approvals.
Investment in other mutual funds may cause you to bear duplicate fees for
investment management and other services. To avoid your paying duplicate fees,
the Investment Manager of the Funds will not charge any management fees on
assets of the Funds that are invested in other SchwabFunds.
TURNOVER. The Investment Manager anticipates that the Funds' annual turnover
rate will not exceed 100%.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENT
DIVIDENDS AND OTHER DISTRIBUTIONS
DISTRIBUTION OPTIONS
When you first buy shares in our Funds, you may choose one of the three
following distribution options:
1. AUTOMATIC REINVESTMENT: We will reinvest all distributions in additional
shares of the Fund. This option will be selected automatically unless you
specify another option.
2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in
cash and capital gains will be reinvested in additional shares.
3. ALL CASH: Income dividends and any capital gains distributions will both be
paid in cash.
Distributions will be reinvested at the net asset value next determined after
their record date. Cash distributions will be credited to your Schwab account on
the date distributions are payable, and will be held there or mailed to you,
depending on the standing instructions applicable to your account.
To change the distribution option you have selected, call your local Schwab
office or 800-2 NO-LOAD.
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<PAGE> 14
The Funds intend to distribute substantially all of their net investment income
each year, as determined by the Board of Trustees. Net investment income
dividends will be paid on the following schedule: Schwab Asset Director-High
Growth and Schwab Asset Director-Balanced Growth: annually in December; Schwab
Asset Director-Conservative Growth: quarterly in March, June, September, and
December. Net capital gains, if any, will be distributed annually in December
by all three Funds. All distributions will be automatically reinvested in
additional shares of the Funds unless the shareholder elects otherwise.
INCOME TAX INFORMATION
The following is only a very brief summary of some of the federal income tax
consequences that affect the Funds and shareholders. Therefore, it is important
that you consult with advisers about your own tax situation.
Each Fund intends to qualify as a regulated investment company under the Code.
In order to qualify, we will distribute to our shareholders on a current basis
substantially all of our investment company taxable income and our capital gain
net income (if any), and we will meet certain other requirements. As a regulated
investment company, we will pay no federal income taxes to the extent that we
distribute our earnings to our shareholders. Income received by the Funds from
sources within certain foreign countries, however, may be subject to foreign
income taxes withheld at the source.
Dividends paid by the Funds from net investment income and distributions from
the Funds' net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, generally will be taxable to
shareholders as ordinary income. Distributions received from the Funds
designated as long-term capital gains (net of capital losses), whether received
in cash or reinvested, will generally be taxable as long-term capital gains
without regard to the length of time a shareholder owned shares in the Funds.
We will provide you with a record of all dividends, distributions, purchases,
and sales on your regular Schwab brokerage account statement. At least once a
year we will notify you of the federal income tax consequences of all
distributions made that year to your account.
HOW WE DETERMINE THE PRICE OF YOUR SHARES
The price of a share of each Fund is its net asset value, which we determine
each Business Day at the close of trading on the New York Stock Exchange,
generally at 4:00 p.m., Eastern time. We determine the price of a share by
adding the total assets of each Fund, subtracting any liabilities attributable
to that Fund, and then dividing the resulting number by the number of shares
outstanding.
The Funds value their portfolio securities based on their market value, where
quotations are readily available. The value of other assets for which no
quotations are readily available (including any restricted securities) are
valued at fair value as determined in good faith by the Investment Manager
pursuant to Board of Trustees guidelines. Securities may be valued on the basis
of prices provided by pricing services when such prices are believed to reflect
fair market value.
HOW THE FUNDS REPORT PERFORMANCE
From time to time the Funds may advertise their total return. Performance
figures are based upon historical results and are not intended to indicate
future performance.
A Fund's total return measures its overall change in value over a period,
including share price movements, and assumes all dividends and capital gains
have been reinvested. Average annual total return reflects the hypothetical
annually compounded return mandated by the SEC. Other reported total return
figures may differ in that they may report non-standard periods or represent
aggregate or cumulative return over a stated length of time.
ANNUAL REPORT AND SEMI-ANNUAL REPORT MAILINGS. Twice a year, each Fund will
provide a report to all shareholders describing the performance of the Funds and
outlining the investments. In order to reduce mailing costs, we consolidate
these shareholder mailings by household. If a household has multiple accounts
and the same address of record for all the accounts, we will send mailings for
all accounts at that address in a single package. If you do not want this
consolidation of mailings to apply to your account, please write to
SchwabFunds(R) at the address on the front of this prospectus. To request a free
copy of a Fund's Annual Report (or Semi-Annual Report), call your local Schwab
office or call 800-2 NO-LOAD.
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<PAGE> 15
ORGANIZATION AND MANAGEMENT OF OUR FUNDS
MANAGEMENT FUNCTIONS AND RESPONSIBILITIES
GENERAL OVERSIGHT OF OUR FUNDS. The Board of Trustees and officers meet
regularly to review the Funds' investments, performance, expenses and other
business affairs.
THE INVESTMENT MANAGER. The Investment Manager, Charles Schwab Investment
Management, Inc., is responsible for the overall management of the Funds'
business affairs, subject to the authority of the trustees and officers of
Schwab Capital Trust. The Investment Manager makes all portfolio selection
decisions, places all orders for the Funds' securities transactions, and has
primary responsibility for the management of the Funds' investment portfolios.
The Investment Manager, founded in 1989, is a wholly owned subsidiary of The
Charles Schwab Corporation and is the investment adviser and administrator of
the SchwabFunds(R) mutual funds. As of June 15, 1995, the SchwabFunds(R) had
aggregate net assets in excess of $27 billion.
Geri Hom is the portfolio manager for the equity portions of the Asset Director
Funds. She joined Schwab in March 1995 as Portfolio Manager - Equities and
currently manages the three Schwab index funds with $900 million in assets. For
four years prior to joining Schwab, she was a Principal for Wells Fargo Nikko
Investment Advisors. She was Vice President and Manager of the Domestic Equity
Portfolio Management Group for Wells Fargo Nikko for seven years prior to that.
Andrea Regan is the portfolio manager for the bond portions of the Asset
Director Funds. She joined Schwab in January 1991 and is currently Portfolio
Manager-Fixed Income. She currently manages three money market funds and two
bond funds with assets of $3 billion. Prior to joining Schwab, she was Vice
President and Manager of Trading for Merus Capital Management, the investment
management division of the Bank of California.
Stephen B. Ward, Schwab's Senior Vice President and Chief Investment Officer,
also participates in the management of each Funds' portfolios. Prior to April
1991, Mr. Ward was Vice President and Portfolio Manager for Federated Investors.
THE SUB-ADVISER. The Investment Manager has retained Symphony Asset Management
Inc. to serve as Sub-Adviser to the Funds. As Sub-Adviser, Symphony will
recommend to the Investment Manager the asset mix within the defined range for
each Fund. Symphony employs a Tactical Asset Allocation model to measure
relative values among asset categories. Using this model Symphony recommends
asset allocations it believes will provide the highest returns for a given level
of risk. Symphony does not recommend the purchase or sale of individual
securities.
Symphony was established in 1994 as a wholly-owned subsidiary of
BARRA, Inc. BARRA, founded in 1975, provides innovative analytical models,
software, and services that enable its more than 800 clients in 30 countries to
make superior investment decisions. BARRA's software and services analyze
equity, fixed income, currency, and other financial markets. Symphony presently
serves as Sub-Adviser to one other investment company and manages directly and
indirectly over $600 million in institutional and private account assets.
The Sub-Adviser's primary investment officer is Praveen Gottipalli. Since May
1994, he has been Symphony's Director of Investments. For more than five years
prior to that, he was Director of the Active Strategies Group of BARRA, Inc.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab serves as the Shareholder
Services Agent and Transfer Agent for the Funds. Schwab was established in 1971
and is America's largest discount broker. Schwab provides low-cost securities
brokerage and related financial services to approximately 2.5 million active
customer accounts and has over 200 branch offices. Schwab also offers convenient
access to financial information services and provides products and services that
help investors make investment decisions. Schwab is a wholly-owned subsidiary of
The Charles Schwab Corporation. Charles R. Schwab is the founder, Chairman and
Chief Executive Officer, and a director of The Charles Schwab Corporation and,
as of March 1, 1995, the beneficial owner of approximately 23.3% of the
outstanding shares of that corporation. Mr. Schwab may be deemed to be a
controlling person of Schwab and the Investment Manager.
OPERATING FEES AND EXPENSES
For investment management services, under the terms of its Investment Advisory
and Administration Agreement with the Trust, the Investment Manager receives a
graduated annual fee payable monthly from each Fund of 0.74% of each Funds'
average daily net assets not in excess of $1 billion, 0.69% of such net assets
over $1 billion, but not more than $2 billion, and 0.64% of such net assets over
$2 billion.
The Investment Manager pays the Sub-Adviser an annual fee, payable monthly, of
0.__% of each Funds' average daily net assets. The Sub-Adviser does not receive
compensation directly from the Funds.
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<PAGE> 16
The Investment Manager and Schwab guarantee that, through at least December 31,
1996, the management fee for each of the Funds will not exceed 0.49% of its
average daily net assets, and total operating expenses of each of the Funds
will not exceed 0.89% of their average daily net assets. The following expenses
are not included as "operating expenses" for purposes of this guarantee:
interest expenses, taxes, foreign taxes withheld, and capital items such as
costs of purchase or sale of portfolio securities, including brokerage fees or
commissions. The effect of this voluntary expense limitation is to maintain or
increase the Funds' total return to shareholders.
For its services as Transfer Agent, Schwab receives an annual fee of 0.05% of
the average daily net assets of each Fund. In addition, for shareholder services
provided, Schwab receives an annual fee of 0.20% of the average daily net assets
of each Fund.
Schwab serves as the distributor for the Funds but receives no compensation for
this service.
OTHER EXPENSES. The Trust pays the expenses of the Funds' operations, including
the fees and expenses for independent auditors, legal counsel, custodians, and
the cost of maintaining books and records of account, taxes, registration fees,
and the fees and expenses of qualifying the Trust and its shares for
distribution under federal and state securities laws, and industry association
membership dues.
The Trust generally allocates these expenses among the individual investment
portfolios or series ("Series") of the Trust, including the Funds. This
allocation is based on the relative net assets of each Series at the time the
expenses are incurred. However, expenses directly attributable to a particular
series are charged to that series.
PORTFOLIO BROKERAGE. When placing orders for the Funds' securities transactions,
the Investment Manager will use its judgment to obtain the best price and
execution. The full range and quality of brokerage services available are
considered in making these determinations. For securities transactions in which
Schwab is not a principal, the Investment Manager may use Schwab to execute the
Funds' transactions when it reasonably believes that commissions (or prices)
charged and transaction quality will be at least comparable to those available
from other qualified brokers or dealers.
OTHER INFORMATION ON THE OPERATION OF OUR FUNDS
The Trust was organized as a business trust under the laws of Massachusetts on
May 7, 1993 and may issue an unlimited number of shares of beneficial interest
in one or more Series or classes. Currently shares of five Series are offered.
The Board of Trustees may authorize the issuance of shares of additional Series
or classes, if it deems it desirable. Shares within each Series have equal,
noncumulative voting rights, and have equal rights as to dividends, assets, and
liquidation.
ANNUAL SHAREHOLDER MEETINGS. The Trust is not required to hold annual meetings
and does not intend to do so except in connection with certain matters, such as
a change in a Fund's fundamental policies, election of Trustees, or approval
of a new investment advisory agreement. In addition, a Trustee may be elected
or removed by shareholders at a special meeting called upon written request of
shareholders owning in the aggregate at least 10% of theoutstanding shares of
the Trust.
YOUR VOTING RIGHTS. If we were to make changes to a Fund's management or
fundamental policies, you would be asked to vote as a shareholder because
shareholders have voting rights on these matters. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the Fund will send you
proxy materials that explain the issues to be decided and include a voting card
for you to mail back. Shareholders are entitled to one vote for each share
owned. Unless permitted by the 1940 Act, shareholders will vote by Series and
not in the aggregate.
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<PAGE> 17
For example, when voting to approve an investment advisory agreement for a
Series, only shareholders of that Series may vote; when voting to elect
Trustees, shareholders of all the Series vote in the aggregate.
GLOSSARY OF IMPORTANT TERMS
ANNUALIZED: calculated to represent a year; a statement produced by calculating
financial results covering less than a year to show what might happen when the
results are hypothetically extended to cover an entire year.
BOND: a debt obligation that requires the issuer to pay a fixed sum of money
each year (the interest payments) until maturity, the date on which the bond
comes due and the principal (the amount borrowed) must be paid. Floating or
variable rate bonds have an interest rate that rises or falls if general
interest rates or some other security (such as Treasury bills) rises or falls.
BUSINESS DAY: any day both the Federal Reserve Bank of New York and the New York
Stock Exchange are open for business. A Business Day normally begins at 9 a.m.
Eastern time when the Exchange opens, and usually ends at 4 p.m. Eastern time
when the Exchange closes.
CAPITAL GAIN OR LOSS: the increase or decrease in the value of a security over
the original purchase price. A gain is realized when the security that has
increased in value is sold. An unrealized gain or loss occurs when the value of
a security increases or decreases but the security is not sold. If a security is
held for more than 12 months and then sold at a profit, that profit is a
realized long-term capital gain. If it is sold at a profit after being held for
less than 12 months, that profit is a realized short-term capital gain.
CASH EQUIVALENTS: securites convertible into cash in a very short time period
CODE: The Internal Revenue Code of 1986, as amended.
COMMERCIAL PAPER: unsecured debt obligations issued by businesses and sold at a
discount but redeemed at par within 2 to 270 days.
CRSP 6-7-8: an index calculated by the Center for Research on Securities Prices,
University of Chicago, comprised of all publicly traded stocks whose market
capitalization falls within deciles 6, 7, and 8 of the market capitalization of
all stocks listed on the New York Stock Exchange.
DISTRIBUTION: payment the fund makes to shareholders. There are two kinds of
distributions: dividends, or the profits (after expenses) from the fund's
investments, and capital gains distributions.
DIVERSIFIED: under the 1940 Act, a diversified fund generally may not invest
more than 5% of its assets in the securities of any one issuer, and may not hold
more than 10% of the voting shares of any one issuer. Certain minor exceptions
apply to this policy, which are described in the Statement of Additional
Information.
FUNDAMENTAL: a policy which can not be changed without the approval of a
majority of the shareholders of a Fund.
INVESTMENT MANAGER: Charles Schwab Investment Management, Inc.
LARGE COMPANY STOCKS: The stocks of companies with the largest market
capitalization's - market capitalizations of about $1.5 billion and up.
MSCI EAFE: Morgan Stanley Capital International Europe, Australia, Far East
stock index.
MATURITY: the date on which the principal of a debt obligation such as a bond
comes due and must be repaid.
MONEY MARKET INSTRUMENT: Short-term liquid debt such as Treasury bills and
commercial paper, which is sold at a discount but redeemed at par. See
Commercial Paper.
NET ASSET VALUE (NAV): on a per share basis, the value of one share in a fund.
This value is determined by adding the total fund assets, subtracting all
liabilities, and then dividing the resulting number by the number of shares
outstanding.
1940 ACT: the Investment Company Act of 1940, as amended.
NONCUMULATIVE VOTING RIGHTS: the right of a shareholder to vote only the number
of shares owned at the time of voting.
OPEN-END FUND: also called a mutual fund; an investment company in which people
invest by buying its shares, thereby pooling their money and allowing the fund
to invest in a number of securities. The fund distributes the profits from these
investments, after expenses, to the fund's shareholders. Although shares in the
fund are sold publicly, they are not traded on an open exchange because the fund
will buy and sell shares to meet investor demand. Since the company is not
limited as to the number of shares it can issue, the company's capitalization is
not fixed but open.
PAR: for a stock, par is the value assigned to the stock at the time it is
issued. It does not reflect either the intrinsic value of the security nor its
market value. For a bond, par is the price at which the bond will be redeemed at
its date of maturity, and the value on which the calculation of interest
payments is based.
PORTFOLIO: the total stocks, bonds, and other securities held by an individual
investor, a mutual fund, or a financial institution.
RISK: the possibility of losing all or part of your investment, that the value
of your investment will decrease, or that you will receive little or no return
on your investment.
S & P 500: an index of 500 stocks selected, calculated, and published by
Standard & Poors, Inc.
SCHWAB: Charles Schwab & Co., Inc. 101 Montgomery Street, San Francisco, CA
94104.
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SECURITIES AND EXCHANGE COMMISSION (SEC): established by Congress to administer
the Securities Act of 1933, the Invest-ment Company Act of 1940, and other
securities-related laws.
SHORT-TERM: with respect to a fund's portfolio investments, maturing in 397 days
or less.
SMALL COMPANY STOCKS: stocks of companies whose market capitalization is within
a dollar range usually well below that of large companies, or in the lower
portion of a list ranking companies by market capitalization. (i.e., the second
1,000 largest companies according ot their market capitalization)
SUB-ADVISER: Symphony Asset Management, Inc., 555 California Street - Suite
#2975, San Francisco, California 94104
TACTICAL ASSET ALLOCATION MODEL: a value-oriented strategy used to measure the
relative values among asset categories to determine the asset allocation which
seeks the highest reward for a given level of risk.
T-BILLS: debt securities issued by the U.S. Government having a maturity of less
than one year.
TRANSFER AGENT: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.
TRUST: Schwab Capital Trust
VOLATILITY: a measure of the magnitude and frequency of changes in securities
values. Statistically, volatility is the measure of the spread of the prices or
yields around the mean of the prices or yields.
YIELD: the rate at which dividends or interest are paid by a security. The yield
is calculated as a percentage of the security's current market price. A stock
selling for $80 per share and paying dividends of $6.40 is yielding 8 percent
($6.40/$80=.08). Likewise, a bond with a par or face value of $1,000 and a 9
percent interest rate selling for $600 is yielding 15 percent ($90/$600 =.15).
Interest on a bond is always based on the par or face value of the bond, while
the yield or return is based on the market price.
- --------------------------------------------------------------------------------
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING NOT CONTAINED IN THIS PROSPECTUS. IF ANYONE GIVES ANY OTHER
INFORMATION OR MAKES ANY OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION
OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR.
- --------------------------------------------------------------------------------
THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
LAWFULLY BE MADE.
- --------------------------------------------------------------------------------
15
<PAGE> 19
CROSS REFERENCE SHEET
SCHWAB CAPITAL TRUST
<TABLE>
<CAPTION>
Statement of Additional
Part B Item Information Caption
- ----------- -----------------------
<S> <C>
Cover Page Cover Page
Table of Contents Table of Contents
General Information and History General Information
Investment Objectives and Policies Investment Objectives; Investment Securities;
Investment Restrictions
Management of the Fund Management of the Trust
Control Persons and Principal Holders of Management of the Trust
Securities
Investment Advisory and Other Services Management of the Trust
Brokerage Allocation and Other Practices Portfolio Transactions and Turnover
Capital Stock and Other Securities General Information
Purchase, Redemption and Pricing of Securities Share Price Calculation; Purchase and Redemption
Being Offered of Shares
Tax Status Taxes
Underwriters Management of the Trust
Calculation of Performance Data How the Funds Reflect Performance
Financial Statements Financial Statements
</TABLE>
<PAGE> 20
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB CAPITAL TRUST
101 Montgomery Street, San Francisco, CA 94104
SEPTEMBER____, 1995
This Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Prospectuses, dated February 28, 1995,
as amended June 30, 1995, for Schwab International Index Fund(TM) (the
"International Index Fund"), and Schwab Small-Cap Index Fund(TM) (the
"Small-Cap Index Fund"), and the joint Prospectus dated September___, 1995 for
Schwab Asset Director-High Growth Fund, Schwab Asset Director-Balanced Growth
Fund and Schwab Asset Director-Conservative Growth Fund (the "Asset Director
Funds"), five separately managed investment portfolios (collectively the
"Funds") of Schwab Capital Trust (the "Trust"). To obtain a copy of any of
these Prospectuses, please contact Charles Schwab & Co., Inc. ("Schwab") at
800-2 NO-LOAD, 24 hours a day or 101 Montgomery Street, San Francisco, CA
94104.
SCHWABFunds(R)
800-2 NO-LOAD
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES.................................................... 2
INVESTMENT SECURITIES.................................................... 3
INVESTMENT RESTRICTIONS.................................................. 25
MANAGEMENT OF THE TRUST.................................................. 28
PORTFOLIO TRANSACTIONS AND TURNOVER...................................... 36
TAXES.................................................................... 38
SHARE PRICE CALCULATION.................................................. 41
HOW THE FUNDS REFLECT PERFORMANCE........................................ 42
THE BENEFITS OF INTERNATIONAL INVESTING.................................. 43
INDEXING AND THE SCHWAB INDEX FUNDS...................................... 43
GENERAL INFORMATION...................................................... 48
PURCHASE AND REDEMPTION OF SHARES........................................ 50
OTHER INFORMATION........................................................ 50
FINANCIAL STATEMENTS..................................................... 51
APPENDIX A............................................................... 81
APPENDIX B............................................................... 90
</TABLE>
<PAGE> 21
INVESTMENT OBJECTIVES
INTERNATIONAL INDEX FUND
The investment objective of the International Index Fund is to track
the price and dividend performance (total return) of the Schwab International
Index(TM) , (the "International Index"), an index created to represent the
performance of common stocks and other equity securities issued by large
publicly traded companies from countries around the world with major developed
securities markets, excluding the United States.
SMALL-CAP INDEX FUND
The investment objective of the Small-Cap Index Fund is to attempt to
track the price and dividend performance (total return) of the Schwab
Small-Cap Index(TM) (the "Small-Cap Index"), an index created to represent the
performance of the second 1,000 publicly traded common stocks issued by United
States companies, ranked by market capitalization (share price times the number
of shares outstanding).
SCHWAB ASSET DIRECTOR-HIGH GROWTH
The investment objective of the Schwab Asset Director-High Growth
Fund is to provide high capital growth with less risk than an all-stock
portfolio. This Fund provides the greatest exposure to various stock
categories, including domestic large and small company stocks, and
international stocks.
SCHWAB ASSET DIRECTOR-BALANCED GROWTH
The investment objective of the Schwab Asset Director-Balanced Growth
Fund is to provide the shareholder with maximum total return, including both
capital growth and income. This Fund represents a more balanced exposure
approach to stocks and bonds.
SCHWAB ASSET DIRECTOR-CONSERVATIVE GROWTH
The investment objective of the Schwab Asset Director-Conservative
Growth Fund is to provide the shareholder with income and more growth potential
than an all-bond portfolio. This Fund's stock component is designed to help
offset inflation.
The investment objectives stated above for each of the Funds, along
with certain investment restrictions adopted by the Funds, are fundamental and
cannot be changed without approval by holders of a majority of the Funds'
outstanding voting shares, as defined in the Investment Company Act of 1940
(the "1940 Act").
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<PAGE> 22
INVESTMENT SECURITIES
FOREIGN INVESTMENTS
The International Index Fund and the Asset Director Funds expect to
invest in stocks of foreign issuers. The International Index Fund will invest
primarily in such stocks. Investing in foreign issuers involves certain
special considerations, including those set forth below, which are not
typically associated with investing in U.S. issuers. Since investments in the
securities of foreign issuers are usually made and held in foreign currencies,
and since the International Index Fund and the Asset Director Funds may hold
cash in foreign currencies, they may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations and may 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.
Since foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company.
Volume and liquidity in most markets are less than in the U.S. and securities
of many foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although
the International Index Fund and the Asset Director Funds endeavors to achieve
the most favorable net results on their portfolio transactions. There is
generally less government supervision and regulation of foreign securities
exchanges, brokers, dealers and listed companies than in the U.S., thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the International Index
Fund and the Asset Director Funds are uninvested and no return is earned
thereon. The inability to make intended security purchases due to settlement
problems could cause the International Index Fund and the Asset Director Funds
to miss attractive investment opportunities. Losses to the International Index
Fund and the Asset Director Funds arising out of the inability to fulfill a
contract to sell such securities, could result in potential liability to the
International Index Fund and Asset Director Funds.
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<PAGE> 23
In addition, with respect to those countries in which the
International Index Fund and the Asset Director Funds may invest or other
countries which may have a significant impact on the companies in which the
International Index Fund and the Asset Director Funds may invest, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, diplomatic developments, change of government or war which could
affect the International Index Fund's and the Asset Director Funds'
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.
Each of the Asset Director Funds may invest up to 5% of its total
assets in companies located in developing countries. Compared to the United
States and other developed countries, developing countries may have relatively
unstable governments, economies based on only a few industries, and securities
markets which trade a small number of securities. Prices on these exchanges
tend to be volatile and, in the past, securities in these countries have
offered greater potential for gain (as well as loss) than securities of
companies located in developed countries.
Hong Kong. In addition to the risks discussed above, it is impossible
to currently foresee what risk, if any, may exist to the International Index
Fund's and the Asset Director Funds' investments as a result of the planned
1997 incorporation of the British Crown Colony of Hong Kong into the People's
Republic of China. Shareholders should note that the risks discussed above may
increase depending on political and economic developments as the scheduled
time for the change in government in Hong Kong draws nearer.
DEPOSITORY RECEIPTS
Each of the Asset Director Funds may invest up to 5% of its total
assets in American Depository Receipts and European Depositary Receipts (ADRs
and EDRs) which are receipts representing ownership of share of a foreign-based
issuer held in trust by a bank or similar financial institution. These are
designed for U.S. and European securities markets as alternatives to purchasing
underlying securities in their corresponding national markets and currencies.
ADRs and EDRs can be sponsored or unsponsored. Sponsored ADRs and EDRs are
certificates in which a bank or financial institution participates with a
custodian. Issuers of unsponsored ADRs and EDRs 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
the unsponsored ADR or EDR.
OPTIONS ON SECURITIES
Writing Covered Options. The Funds may write (sell) covered call and
put options on any securities in which they may invest. The Funds may purchase
and write such options on securities that are
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<PAGE> 24
listed on domestic or foreign securities exchanges or traded in the
over-the-counter market. All call options written by the Funds are covered,
which means that the Funds will own the securities subject to the option so
long as the option is outstanding. The purpose of writing covered call options
is to realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, the Funds may forego the opportunity to profit from an increase in the
market price of the underlying security.
All put options written by the Funds will be covered, which means that
each of the Funds will have deposited with its custodian cash, U.S. government
securities or other high-grade debt securities (i.e., securities rated in one
of the top three categories by Moody's Investor Service ("Moody's") or Standard
& Poor's Corporation ("S&P"), or, if unrated, determined by the Funds'
Investment Manager to be of comparable credit quality) with a value at least
equal to the exercise price of the put option. The purpose of writing such
options is to generate additional income for the Funds. However, in return for
the option premium, the Funds accept the risk that they may be required to
purchase the underlying securities at a price in excess of the securities
market value at the time of purchase.
The Funds 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."
Purchasing Options. The Funds may purchase put and call options on
any securities in which they may invest or options on any securities index
based on securities in which they may invest. The Funds would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on options they have purchased.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, since, with regard to certain options the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains
the amount of the premium. This amount may, in the case of a covered call
option, be offset by a decline in the market value of the underlying security
during the option period. If a call option is exercised, the writer
experiences a profit or loss from the sale of the underlying security. If a
put option is exercised, the writer must fulfill its obligation to purchase the
underlying security at the exercise price, which will usually exceed the then
market value of the underlying security.
The purchase of a call option would entitle the Funds, in return for
the premium paid, to purchase specified securities at a specified price during
the
5
<PAGE> 25
option period. The Funds would ordinarily realize a gain if, during the option
period, the value of such securities exceeded the sum of the exercise price,
the premium paid and transaction costs, otherwise the Funds would realize
either no gain or a loss on the purchase of the call option.
Risks Associated With Options Transactions. There is no assurance
that a liquid secondary market on a domestic or foreign options exchange will
exist for any particular exchange-traded option or at any particular time. If
the Funds are unable to effect a closing purchase transaction with respect to
covered options they have written, the Funds will not be able to sell the
underlying securities or dispose of assets held in a segregated account until
the options expire or are exercised. Similarly, if the Funds are unable to
effect a closing sale transaction with respect to options they have purchased,
they 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: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an exchange on opening
transaction or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options; (iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) 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 (vi) 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 Funds may purchase and sell both options that are traded on U.S.
and foreign exchanges and options traded over-the-counter with broker-dealers
who make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission (the "SEC") changes its position, the Funds 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 the 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 approved by
the staff of the SEC. Each of the Asset Director Funds will write or purchase
an option only where the market value of that option, when aggregated with the
market value of all other options transactions made on
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<PAGE> 26
behalf of the Fund does not exceed 5% of the Fund's total assets.
FOREIGN CURRENCY TRANSACTIONS
Forward Foreign Currency Exchange Contracts. The International Index
Fund and the Asset Director Funds may enter into forward foreign currency
exchange contracts in several circumstances. The International Index Fund and
the Asset Director Funds may engage in foreign currency exchange transactions
to protect against uncertainty in the level of future exchange rates. The
International Index Fund and the Asset Director Funds expect to engage in
foreign currency exchange transactions in connection with the purchase and sale
of portfolio securities (so-called "transaction hedging") and to protect the
value of specific portfolio positions ("position hedging").
For transaction hedging purposes, the International Index Fund and the Asset
Director Funds enter into foreign currency transactions with respect to
specific receivables or payables of the funds arising in connection with the
purchase or sale of portfolio securities. By transaction hedging, the
International Index Fund and the Asset Director Funds will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, and the date on
which such payments are made or received. When engaging in position hedging,
the International Index Fund and the Asset Director Funds enter into foreign
currency exchange transactions to protect against a decline in the values of
the foreign currencies in which portfolio securities are denominated (or
against an increase in the value of currency for securities which the
International Index Fund and the Asset Director Funds expect to purchase).
When engaging in portfolio and/or transaction hedging, the International Index
Fund and the Asset Director Funds may purchase or sell foreign on a spot (or
cash) basis at the prevailing spot rate, and may also enter into contracts to
purchase or sell foreign currencies at a future date ("forward contracts") and
purchase and sell foreign currency futures contracts ("futures contracts").
The International Index Fund and the Asset Director Funds may also purchase
exchange-listed and over-the-counter call and put options on futures contracts
and on foreign currencies. A put option on a futures contract gives the
International Index Fund and the Asset Director Funds the right to assume a
short position in the futures contract until expiration of the option. A put
option on currency gives the International Index Fund and the Asset Director
Funds the right to sell a currency at an exercise price until the expiration of
the option. A call option on a futures contract gives the International Index
Fund and the Asset Director Funds the right to assume a long position in the
futures contract until the expiration of the option. A call option on currency
gives the International Index Fund and the Asset Director Funds the right to
purchase a currency at the
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<PAGE> 27
exercise price until the expiration of the option.
Hedging transaction involve costs and may result in losses, and the
International Index Fund and the Asset Director Funds' ability to engage in
hedging transactions may be limited by tax considerations. Transaction and
position hedging do not eliminate fluctuations in the underlying prices of the
securities which the fund owns or expects to purchase or expects to purchase or
sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to decline in the value of the hedged currency, they tend
to limit any potential gain which might result from an increase in the value of
such currency.
Although the contracts are not presently regulated by the Commodity
Futures Trading Commission (the "CFTC"), the CFTC may in the future assert
authority to regulate these contracts. In such event, the International Index
Fund's and the Asset Director Funds' ability to utilize forward foreign
currency exchange contracts may be restricted.
Each of the Asset Director Funds will enter into a forward foreign
currency exchange contract only when the market value of such contract, when
aggregated with the market value of all other such contracts held by the Fund
does not exceed 5% of the Fund's total assets.
The International Index Fund and the Asset Director Funds generally
will not enter into a forward contract with a term of greater than one year.
While the International Index Fund and the Asset Director Funds will
enter into forward contracts to reduce currency exchange rate risks,
transactions in such contracts involve certain other risks. Thus, while the
International Index Fund and the Asset Director Funds may benefit from such
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the International Index Fund and the Asset Director
Funds than if it had not engaged in any such transactions. Moreover, there may
be imperfect correlation between the International Index Fund's and the Asset
Director Funds' portfolio holdings of securities denominated in a particular
currency and forward contracts entered into by the International Index Fund and
the Asset Director Funds. Such imperfect correlation may cause the
International Index Fund and the Asset Director Funds to sustain losses which
will prevent the International Index Fund and the Asset Director Funds from
achieving a complete hedge or expose the International Index Fund and the Asset
Director Funds to risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The
International Index Fund and the Asset Director Funds may write covered put and
call options and purchase put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of
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<PAGE> 28
portfolio securities and against increases in the dollar cost of securities to
be acquired. A call option written by the International Index Fund and the
Asset Director Funds obligates the International Index Fund and the Asset
Director Funds to sell specified currency to the holder of the option at a
specified price at any time before the expiration date. A put option written
by the International Index Fund and the Asset Director Funds would obligate the
International Index Fund and the Asset Director Funds to purchase specified
currency from the option holder at a specified time before the expiration date.
The writing of currency options involves a risk that the International Index
Fund and the Asset Director Funds will, upon exercise of the option, be
required to sell currency subject to a call at a price that is less than the
currency's market value or be required to purchase currency subject to a put at
a price that exceeds the currency's market value.
The International Index Fund and the Asset Director Funds may
terminate their obligations under a call or put option by purchasing an option
identical to the one it has written. Such purchases are referred to as
"closing purchase transactions." The International Index Fund and the Asset
Director Funds would also be able to enter into closing sale transactions in
order to realize gains or minimize losses on options purchased by the
International Index Fund and the Asset Director Funds.
The purchase of a call option would entitle the International Index
Fund and the Asset Director Funds, in return for the premium paid, to purchase
specified currency at a specified price during the option period. The
International Index Fund and the Asset Director Funds would ordinarily realize
a gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the International Index
Fund and the Asset Director Funds, in exchange for the premium paid, to sell
specific currency at a specified price during the option period. The purchase
of protective puts is designed merely to offset or hedge against a decline in
the dollar value of the International Index Fund's and the Asset Director
Funds' portfolio securities due to currency exchange rate fluctuations. The
International Index Fund and the Asset Director Funds would ordinarily realize
a gain, if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs; otherwise the International Index Fund and the Asset
Director Funds would realize either no gain or a loss on the purchase of the
put option. Gains and losses on the purchase of protective put options would
tend to be offset by countervailing changes in the value of the underlying
currency.
Special Risks Associated With Options on Foreign Currency. An
exchange traded option position may be closed out only on an options exchange
which provides a secondary market for an option of the same series. Although
the International Index Fund and the Asset Director Funds will generally
purchase or
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<PAGE> 29
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange
will exist for any particular option, or at any particular time. For some
options, no secondary market on an exchange may exist, In such event, it might
not be possible to effect closing transactions in particular options, with the
result that the International Index Fund and the Asset Director Funds would
have to exercise its options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities pursuant to the
exercise of put options. If the International Index Fund and the Asset
Director Funds as a covered call option writer is unable to effect a closing
purchase transaction in a secondary market, it will not be able to sell the
underlying currency (or security denominated in that currency) until the option
expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities
of the OCC inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
The International Index Fund and the Asset Director Funds will
purchase and write over-the-counter options only to the extent consistent with
its limitations on investments in illiquid securities, as described in the
Prospectuses. Trading in over-the-counter options is subject to the risk that
the other party will be unable or unwilling to close-out purchasing and writing
activities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To hedge against changes in interest rates, securities prices or
currency exchange rates, the Funds may purchase and sell various kinds of
futures contracts. The Funds may also enter into closing purchase and sale
transactions with respect to any such contracts and options. The futures
contracts may be based on various securities (such as U.S. government
securities), securities indices, foreign currencies and other financial
instruments and indices. The Funds will engage in futures and related option
transactions only for bona fide hedging or other appropriate risk management
purposes as defined below. All futures contracts entered into by the Funds are
traded on U.S. exchanges or boards of trade that are licensed and regulated by
the CFTC or on foreign exchanges.
Futures Contracts. A futures contract may generally be described as
an agreement between two parties to buy and sell particular financial
instruments for an agreed upon price during a designated month (or to deliver
the final cash settlement price, in the case of a contract relating to an index
or otherwise not calling for physical delivery at the end of trading in the
contract).
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When interest rates are rising or securities prices are falling, the
Funds can seek, through the sale of futures contracts, to offset a decline in
the value of its current portfolio securities. When rates are falling or
prices are rising, the Funds, through the purchase of futures contracts, can
attempt to secure better rates or prices than might later be available in the
market when they affect anticipated purchases. Similarly, the International
Index Fund and the Asset Director Funds can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. The
International Index Fund and the Asset Director Funds can purchase futures
contracts on foreign currency to fix the price in U.S. dollars of a security
denominated in such currency that the International Index Fund and the Asset
Director Funds has acquired or expects to acquire.
Although futures contracts by their terms generally call for the
actual delivery or acquisition of underlying securities or the cash value of
the index, in most cases the contractual obligation is fulfilled before the
date of the contract without having to make or take such delivery. The
contractual obligation is offset by buying (or selling, as the case may be) on
a commodities exchange an identical futures contract calling for delivery in
the same month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the securities or
the cash value of the index underlying the contractual obligations. The Funds
may incur brokerage fees when it purchases or sells futures contracts.
Positions taken in the futures markets are not normally held to
maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While the Funds' futures contracts on securities
or currency will usually be liquidated in this manner, the Funds may instead
make or take delivery of the underlying securities or currency whenever it
appears economically advantageous for them to do so. A clearing corporation
associated with the exchange on which futures on securities or currency are
traded guarantees that, if still open, the sale or purchase will be performed
on the settlement date.
Hedging Strategies With Futures. Hedging by use of futures contracts
seeks to establish more certainty than would otherwise be possible with respect
to the effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Funds own or propose to acquire. Such
futures contracts may include contracts for the future delivery of securities
held by the Funds or securities with characteristics similar to those of the
Funds' portfolio securities. Similarly, the International Index Fund and the
Asset Director Funds may sell futures contracts on currency in which its
portfolio securities are denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between
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the two currencies. If, in the opinion of the Funds' Investment Manager, there
is a sufficient degree of correlation between price trends for the Funds'
portfolio securities and futures contracts based on other financial
instruments, securities indices or other indices, the Funds may also enter into
such futures contracts as part of their hedging strategy. Although under some
circumstances, prices of securities in the Funds' portfolio may be more or less
volatile than prices of such futures contracts, the Funds' Investment Manager
will attempt to estimate the extent of this difference in volatility based on
historical patterns and to compensate for it by having the Funds enter into a
greater or lesser number of futures contracts or by attempting to achieve only
a particular hedge against price changes affecting the Funds' portfolio
securities. When hedging of this character is successful, any depreciation in
the value of the portfolio securities will substantially be offset by
appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of the Funds' portfolio securities
would be substantially offset by a decline in the value of the futures
position.
On other occasions, the Funds may take "long" positions by purchasing
such futures contracts. This would be done, for example, when the Funds
anticipate the subsequent purchase of particular securities when they have the
necessary cash, but expects the prices or currency exchange rates then
available in the applicable market to be less favorable than prices that are
currently available.
Options on Futures Contracts. The acquisition of put and call options
on futures contracts will give the Funds the right (but not the obligation),
for a specified price, to sell or to purchase, respectively, the underlying
futures contract at any time during the option period. As the purchaser of an
option on a futures contract, the Funds obtain the benefit of the futures
position if prices move in a favorable direction but limit their risk of loss
in the event of an unfavorable price movement to the loss of the premium and
transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Funds' assets. By
writing a call option, the Funds become obligated, in exchange for the premium,
to sell a futures contract, which may have a value lower than the exercise
price. Thus, the loss incurred by the Funds in writing options on futures is
potentially unlimited and may exceed the amount of the premium received. The
Funds will incur transaction costs in connection with the writing of options on
futures.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. The
Funds' ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market.
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The Funds may use options on futures contracts solely for bona fide
hedging or other appropriate risk management purposes as defined below.
Other Considerations. The Funds will engage in futures and related
options transactions only for bona fide hedging or other appropriate risk
management purposes in accordance with CFTC regulations which permit principals
of an investment company registered under the 1940 Act to engage in such
transactions without registering as commodity pool operators. "Appropriate
risk management purposes" means activities in addition to bona fide hedging
which the CFTC deems appropriate for operators of entities, including
registered investment companies, that are excluded from the definition of
commodity pool operator. The Funds are not permitted to engage in speculative
futures trading. The Funds will determine that the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Funds or
which they expect to purchase. Except as stated below, the Funds' futures
transactions will be entered into for traditional hedging purposes--i.e.,
futures contracts will be sold to protect against a decline in the price of
securities, or the currency will be purchased to protect the Fund against an
increase in the price of securities, or the currency in which they are
denominated. As evidence of this hedging intent, the Funds expect that on 75%
or more of the occasions on which it takes a long futures (or option) position
(involving the purchase of futures contracts), the Funds will have purchased,
or will be in the process of purchasing, equivalent amounts of related
securities (or assets denominated in the related currency) in the cash market
at the time when the futures (or option) position is closed out. However, in
particular cases, when it is economically advantageous for the Funds to do so,
a long futures position may be terminated (or an option may expire) without the
corresponding purchase of securities or other assets. As an alternative to
literal compliance with the bona fide hedging definition, a CFTC regulation
permits the Funds to elect to comply with a different test, under which (i) the
Funds' futures positions will be used as part of its portfolio management
strategy and will be incidental to its activities in the underlying cash market
and (ii) the underlying commodity value of such positions will not exceed the
sum of (a) cash or cash equivalents segregated for this purpose, (b) cash
proceeds on existing investments due within 30 days, and (c) accrued profits on
such futures or options positions.
Each of the Funds will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code") for
maintaining its qualification as a regulated investment company for federal
income tax purposes.
The Funds may not purchase or sell futures contracts or purchase or
sell related options, except for closing purchase
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or sale transactions, if (i) immediately thereafter the sum of the amount of
margin deposits on the Funds' outstanding futures and related options positions
and the amount of premiums paid for outstanding options on futures would exceed
5% of the market value of that Fund's total assets or (ii) in the case of each
of the Asset Director Funds, immediately thereafter the market value of the
futures contract or related option, when aggregated with the market value of
all other positions, on such securities held by the Fund would exceed 5% of the
Fund's total assets. These transactions involve brokerage costs, require
margin deposits and, in the case of futures contracts and options obligating
the Funds to purchase securities or currencies, require the Funds to segregate
assets to cover such contracts and options.
While transactions in futures contracts and options on futures may
reduce certain risks, such transactions themselves entail certain other risks.
Thus, while the Funds may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in a poorer overall performance for the Funds than if
they had not entered into any futures contracts or options transactions. In
the event of an imperfect correlation between a futures position and portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Funds may be exposed to risk of loss.
Perfect correlation between the Funds' futures positions and portfolio
positions may be difficult to achieve. In addition, it is not possible to
hedge fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not
related to currency fluctuations.
SWAPS
Each of the Asset Director Funds may enter into swaps on various
securities (such as U.S. government securities), securities indexes, interest
rates, prepayment rates, foreign currencies or other financial instruments or
indexes, in order to protect the value of the Asset Director Funds from
interest rate fluctuations and to hedge against fluctuations in the floating
rate market in which the Asset Director Funds' investments are traded, for both
hedging and non-hedging purposes. While swaps are different from futures
contracts (and options on futures contracts) in that swap contracts are
individually negotiated with specific counterparties, the Asset Director Funds
will use swap contracts for purposes similar to the purposes for which they use
options, futures, and options on futures. Those uses of swap contracts (i.e.,
risk management and hedging) present the Funds with risks and opportunities
similar to those associated with options contracts, futures contracts, and
options on futures. See "Futures Contracts and Options on Futures Contracts"
in this Statement.
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The Asset Director Funds may enter into these transactions to manage
their exposure to changing interest rates and other market factors. Some
transactions may reduce each Asset Director Funds' exposure to market
fluctuations while others may tend to increase market exposure.
The use of swaps involves investment techniques and risks different
from and potentially greater than those associated with ordinary fund
securities transactions. If the Investment Manager is incorrect in its
expectations of market values, interest rates, or currency exchange rates, the
investment performance of the Asset Director Funds would be less favorable than
it would have been if this investment technique were not used. The Asset
Director Funds will only invest in swaps up to 5% of each Fund's total assets.
PREFERRED STOCK
The Funds may invest in preferred stock. Preferred stock has priority
as to income and generally as to assets of the issuer, however, income is
usually limited to a definitive percentage regardless of the issuer's earnings.
Preferred stock usually has limited voting rights. The Asset Director Funds
will only invest in preferred stock up to 5% of each Fund's total assets.
CONVERTIBLE SECURITIES
Each of the Asset Director Funds may invest up to 5% of its total
assets in securities that are convertible into common stock, including
convertible bonds, convertible preferred stocks, and warrants.
Convertible bonds are issued with lower coupons than nonconvertible
bonds of the same quality and maturity, but they give holders the option to
exchange their bonds for a specific number of shares of the company's common
stock at a predetermined price. This structure allows the convertible bond
holder to participate in share price movements in the company's common stock.
The actual return on a convertible bond may exceed its stated yield if the
company's common stock appreciates in value, and the option to convert to
common shares becomes more valuable.
Convertible preferred stocks are nonvoting equity securities that pay
a fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of
common stockholders.
The Funds may invest in warrants. Warrants entitle the holder to buy
the issuer's stock at a specific price for a specific period of time. The
price of a warrant tends to be more volatile than, and does not always track,
the prices of its
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underlying stock. Warrants are issued with expiration dates. Once a warrant
expires, it has no value in the market.
REAL ESTATE-RELATED INVESTMENTS
Each of the Asset Director Funds may invest up to 5% of its total
assets in real estate-related investments. Real estate-related instruments
include real estate investment trusts, commercial and residential
mortgage-backed securities, and real estate financings. Real estate-related
instruments are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
overbuilding, and the management skill and creditworthiness of the issuer.
Real estate-related instruments may also be affected by tax and regulatory
requirements, such as those relating to the environment.
PRECIOUS METAL-RELATED INVESTMENTS
Each of the Asset Director Funds may invest up to 5% of its total
assets in precious metal-related investments. The Asset Director Funds may
invest in common stocks of companies principally engaged in precious
metal-related activities which include companies principally engaged in the
extraction, processing, distribution, or marketing of precious metals industry
if at the time of investment the Investment Manager considers that at least 50%
of the company's assets, revenues or profits are derived from the precious
metal industry. The Asset Director Funds may also invest in securities of
companies principally engaged in the precious metals industry in which the
Asset Director may be foreign or domestic. For further disclosure on foreign
securities, see "Foreign Investments" in this Statement of Additional
Information.
The Asset Director Funds may also invest in futures on precious
metals, such as gold futures, and options thereon. Such investments are
subject to the investment limitations for investments in futures and options
for the Asset Director Funds as set forth in "Futures Contracts and Options on
Futures Contracts" in this Statement of Additional Information.
Prices of precious metals can be expected to respond to changes in
rates of inflation and to perceptions of economic and political instability.
Historically, the prices of precious metals and of securities of companies
engaged in the precious metal-related activities may be subject to extreme
fluctuations, reflecting wider economic or political instability or for other
reasons.
U.S. GOVERNMENT SECURITIES
The Funds may purchase U.S. Government securities direct obligations
of the United States Government are supported by the full faith and credit of
the United States Treasury. While obligations of certain United States
Government agencies and instrumentalities are similarly backed, those of
others, such as the Federal National Mortgage Association and the Student Loan
Marketing Association, are only supported by the
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right of the issuer to borrow from the U.S. Treasury, the discretionary
authority of the U.S. Government to purchase the agency's obligations or the
credit of the issuing agency or instrumentality. There can be no assurance
that the U.S. Government would provide financial support to United States
Government sponsored agencies or instrumentalities if it is not obligated to do
so by law. A Fund will invest in U.S. Government securities not backed by the
full faith and credit of the United States Treasury only when Charles Schwab
Investment Management, Inc. (the "Investment Manager") is satisfied that the
credit risk with respect to their issuer is minimal.
GOVERNMENT "MORTGAGE BACKED" SECURITIES
Among the U.S. Government securities in which the Funds may invest are
government "mortgage-backed" (or government guaranteed mortgage-related)
securities. Mortgages backing the securities purchased by the Funds include,
among others, conventional thirty year fixed rate mortgages, graduated payment
mortgages, fifteen year mortgages and adjustable rate mortgages. All of these
mortgages can be used to create pass-through securities. A pass-through
security is formed when mortgages are pooled together and undivided interest in
the pool or pools are sold. The cash flow from the mortgages is passed through
to the holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal then their
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the
realized yield or average life of a particular issue of pass-through
certificates. Prepayment rates are important because of their effect on the
yield and price of the securities. Accelerated prepayments adversely impact
yields for pass-throughs purchased at a premium (i,e., a price in excess of
principal amount) and may involve additional risk of loss of principal because
the premium may not have been fully amortized at the time the obligation is
repaid. The opposite is true for pass-throughs purchased at a discount. The
Funds may purchase mortgage-related securities at a premium or at a discount.
Principal and interest payments on the mortgage-related securities are
government guaranteed to the extent described below. Such guarantees do not
extend to the value or yield of the mortgage-related securities themselves or
of a Fund's shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgaged securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive
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timely payment of all interest and principal payments due on the mortgage pool,
net of fees paid to the "issuer" and GNMA, regardless of whether or not the
mortgagor actually makes the payment.
The National Housing Act authorized GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the United States. The GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before
the maturity of the mortgages in the pool. Foreclosures impose no risk to
principal investment because of the GNMA guarantee, except to the extent that a
Fund has purchased the certificates above par in the secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 to promote development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues two types of
mortgage pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately ten years. The FHLMC guarantee is not backed by
the full faith and credit of the United States.
FNMA Securities. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by
the FHA. FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates. The FNMA guarantee is not backed
by the full faith and credit of the United States.
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OTHER ASSET-BACKED SECURITIES
The Asset Director Funds may invest a portion of their assets in debt
obligations known as "Asset-Backed Securities" that are rated in one of the
three highest rating categories by a nationally recognized statistical rating
organization (e.g., Standard & Poor's Corporation or Moody's Investors Service,
Inc.) or, if not so rated, deemed to be of equivalent quality by the Investment
Manager pursuant to guidelines adopted by the Board of Trustees. The credit
quality of most Asset-Backed Securities depends primarily on the credit quality
of the assets underlying such securities, how well the entity issuing the
security is insulated from the credit risk of the originator (or any other
affiliated entities), and the amount and quality of any credit support provided
to the securities. The rate of principal payments on asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets, which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any asset-backed security is difficult to
predict with precision and actual yield to maturity may be more or less than
the anticipated yield to maturity. Asset-Backed Securities may be classified
as "Pass-Through Certificates" or "Collateralized Obligations."
"Pass-Through Certificates" are asset-backed securities that represent
undivided fractional ownership interests in the underlying pool of assets.
Pass-Through Certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because Pass-Through Certificates represent ownership interests in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The assets collateralizing such Asset-Backed Securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
Asset-Backed Securities and any credit support provided. As a result, although
payments on such Asset-Backed Securities are obligations of the issuers, in the
event of default on the underlying assets not covered by any credit support,
the issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related Asset-Backed Securities.
METHODS OF ALLOCATING CASH FLOWS
While many Asset-Backed Securities are issued with only one class of
security, many others are issued in more than one class, each with different
payment terms. Multiple class Asset-Backed Securities are issued for two main
reasons. First, multiple classes may be used as a method of providing credit
support. This is accomplished typically
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through creation of one or more classes whose right to payments on the
Asset-Backed Security is made subordinate to the right to such payments of the
remaining class or classes. Second, multiple classes may permit the issuance
of securities with payment terms, interest rates or other characteristics
differing both from those of each other and from those of the underlying
assets. Examples include so-called "multi-tranche CMOs" (collateralized
mortgage obligations) with serial maturities such that all principal payments
received on the mortgages underlying the securities are first paid to the class
with the earliest stated maturity, and then sequentially to the class with the
next stated maturity), "Strips" (Asset-Backed Securities entitling the holder
to disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security), and securities with a class or
classes having characteristics which mimic the characteristics of
non-Asset-Backed Securities, such as floating interest rates (i.e., interest
rates which adjust as a specified benchmark changes) or scheduled amortization
of principal.
TYPES OF CREDIT SUPPORT
Asset-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection against ultimate
default on the underlying assets. Liquidity protection refers to the provision
of advances, generally by the entity administering the pool of assets, to
ensure that scheduled payments on the underlying pool are made in a timely
fashion. Protection against ultimate default ensures payment on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained from third
parties, through various means of structuring the transaction, or through a
combination of such approaches. Examples of Asset-Backed Securities with
credit support arising out of the structure of the transaction include
"senior-subordinated securities" (multiple class Asset-Backed Securities with
certain classes subordinate to other classes as to the payment of principal
thereon, with the result that defaults on the underlying assets are borne first
by the holders of the subordinated class) and Asset-Backed Securities that have
"reserve funds" (where cash or investments, sometimes funded from a portion of
the initial payments on the underlying assets, are held in reserve against
future losses) or that have been "overcollateralized" (where the scheduled
payments on, or the principal amount of, the underlying assets substantially
exceed that required to make payment on the Asset-Backed Securities and pay any
servicing or other fees). The degree of credit support provided on each issue
is based generally on historical information respecting the level of credit
risk associated with such payments. Delinquency or loss in excess of that
anticipated could adversely affect the
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return on an investment in an Asset-Backed Security.
CREDIT CARD RECEIVABLE SECURITIES
The Asset Director Funds may invest in Asset-Backed Securities backed
by receivables from revolving credit card agreements ("Credit Card Receivable
Securities"). Most of the Credit Card Receivable Securities issued publicly to
date have been Pass-Through Certificates. In order to lengthen the maturity of
Credit Card Receivable Securities, most such securities provide for a fixed
period during which only interest payments on the underlying Accounts are
passed through to the security holder and principal payments received on such
Accounts are used to fund the transfer to the pool of assets supporting the
related Credit Card Receivable Securities of additional credit card charges
made on an Account. The initial fixed period usually may be shortened upon the
occurrence of specified events that signal a potential deterioration in the
quality of the assets backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life of an issue of
Credit Card Receivable Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during the initial
period and the non-occurrence of specified events. Competitive and general
economic factors could adversely affect the rate at which new receivables are
created in an Account and conveyed to an issuer, shortening the expected
weighted average life of the related Credit Card Receivable Security, and
reducing its yield. An acceleration in cardholders' payment rates or any other
event that shortens the period during which additional credit card charges on
an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could have a similar effect on the weighted
average life and yield.
Credit card holders are entitled to the protection of a number of
state and federal consumer credit laws, many of which give such holders the
right to set off certain amounts against balances owed on the credit card,
thereby reducing amounts paid on Accounts. In addition, unlike most other
Asset-Backed Securities, Accounts are unsecured obligations of the cardholder.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES
The Funds may invest in certificates of deposit which are certificates
issued against funds deposited in a banking institution for a specified period
of time at a specified interest rate. Bankers' acceptances 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. Each Fund will
only invest in certificates of deposit and bankers' acceptances of banks
having capital,
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surplus and undivided profits in excess of $100 million.
COMMERCIAL PAPER
The Funds may invest in Commercial paper which consists of
short-term, unsecured promissory notes issued to finance short- term credit
needs. The Funds will only invest in commercial paper that at the time of
purchase is rated Prime-1 or Prime-2 by Moody's, A-1 or A-2 by S&P, "Duff 2" or
higher by Duff & Phelps, Inc. ("Duff"), or "F2" or higher by Fitch Investors
Services, Inc. ("Fitch") or if unrated by Moody's, S&P, Duff, or Fitch, is
determined by the Investment Manager, using guidelines approved by the Board of
Trustees, to be at least equal in quality to one or more of the above ratings.
OTHER INVESTMENT POLICIES
Securities which are acquired by the International Index Fund and the
Asset Director Funds outside the U.S. and which are publicly traded in the U.S.
or on a foreign securities exchange or in a foreign securities market are not
considered by the Funds to be illiquid assets so long as the Funds acquire and
hold the securities with the intention of reselling the securities in the
foreign trading market, the Funds reasonably believe they can readily dispose
of the securities in the foreign trading market, the Funds reasonably believe
they can readily dispose of the securities for cash in the U.S., or foreign
market and current market quotations are readily available. Investments may be
in securities of foreign issuers, whether located in developed or undeveloped
countries. Investments in foreign securities where delivery takes place
outside the U.S. 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. Changes of government administrations
or of economic or monetary policies, in the U.S. or abroad, or changed
circumstances convertibility or exchange rates could result in investment
losses for the Funds. Investments in foreign securities may also subject the
Funds to losses due to nationalization, expropriation or differing accounting
practices and treatments. Moreover, investors should recognize that foreign
securities are often traded with less frequency and volume, and therefore may
have greater price volatility, than is the case with many U.S. securities.
Notwithstanding the fact that the Funds generally intend to acquire the
securities of foreign issuers where there are public trading markets,
investments by the Funds in the securities of foreign issuers may tend to
increase the risks with respect to the liquidity of the Funds' portfolio and
the Funds' ability to meet a large number of shareholder redemption requests
should there be economic or political turmoil in a country in which the Funds
have a substantial portion of their assets invested or should relations between
the U.S. and foreign countries deteriorate markedly. Furthermore, the
reporting and disclosure requirements applicable to foreign issuers
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may differ from those applicable to domestic issuers, and there may be
difficulties in obtaining or enforcing judgments against foreign issuers.
Loans of Portfolio Securities. The Funds may loan securities to
qualified broker-dealers or other institutional investors provided that such
loans do not exceed one-third of the value of the Funds' total assets at the
time of the most recent loan, and that the borrower deposits and maintains with
the Funds cash collateral or U.S. government securities with a value equal to
102% of the value of the securities loaned. The lending of securities is a
common practice in the securities industry. The Funds will engage in security
lending arrangements with the primary objective of increasing the Funds' income
through investment of the cash collateral in short-term, interest-bearing
obligations, but will do so only to the extent that the Funds will not lose the
tax treatment available to regulated investment companies. The Funds will be
entitled to all dividends or interest on any loaned securities.
Repurchase Transactions. Repurchase agreements are instruments under
which a buyer acquires ownership of a security from a seller that agrees to
repurchase the security at a mutually agreed upon time and price (which price
is higher than the purchase price), thereby determining the yield during the
buyer's holding period. Under the 1940 Act, a repurchase agreement is deemed to
be the loan of money by a Fund to the seller, collateralized by the underlying
security. The interest rate is effective for the period of time in which the
Funds are invested in the agreement and is not related to the coupon rate on
the underlying security. Any repurchase agreements entered into by a Fund will
involve the Fund as the buyer and banks or broker-dealers as sellers
(repurchase agreements with broker-dealers will be limited to obligations of
the U.S. Government, its agencies or instrumentalities). The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Funds invest in repurchase agreements for more than one year.
However, the securities which are subject to repurchase agreements may have
maturity dates in excess of one year from the effective date of the repurchase
agreements. The transaction requires the initial collateralization of the
seller's obligation with securities having a market value, including accrued
interest, equal to at least 102% of the dollar amount invested by the Funds,
with the value marked-to-market daily to maintain 100% coverage. A default by
the seller might cause the Funds to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Funds
might also incur disposition costs in liquidating the collateral. The Funds
will make payment for such securities only upon physical delivery or evidence
of book entry transfer to the account of its custodian bank. The Funds may not
enter into a repurchase agreement of more than seven days duration if, as a
result, the market value of the Funds' net assets, together with investments in
other securities deemed to be not readily marketable, would be invested in
excess of
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the Funds' policy on investments in illiquid securities.
In the event of a bankruptcy or other default of a repurchase
agreement's seller, a Fund might incur expenses in enforcing its rights, and
could experience losses, including a decline in the value of the underlying
securities and loss of income. Each Fund will not invest more than 10% of its
total assets at the time of purchase in repurchase agreements maturing in more
than seven days and other illiquid securities.
Illiquid Securities. Each Fund reserves the right to invest up to 10%
of its net assets in illiquid securities. Generally an "illiquid security"
is any security that cannot be disposed of promptly and in the ordinary course
of business at approximately the amount at which the Funds have valued the
instrument. Subject to this limitation, the Funds may invest in restricted
securities where such investment is consistent with the Funds' investment
objectives and such securities may be considered to be liquid to the extent the
Funds' Investment Manager determines that there is a liquid institutional or
other market for such securities. In determining whether a restricted security
is properly considered a liquid security, the Funds' Investment Manager will
take into account the following factors: (i) the frequency of trades and quotes
for the security; (ii) the number of dealers willing to purchase or sell the
security and the number of potential purchasers; (iii) dealer undertakings to
make a market in the security; and (iv) the nature of the security and the
nature of the 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 the Funds invest in restricted securities that are deemed liquid,
the general level of illiquidity in the Funds' portfolio may be increased if
qualified institutional buyers become uninterested in purchasing these
securities contracts.
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INVESTMENT RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act). Each of the Funds
may not:
1) As to 75% of its assets, purchase securities of any issuer
(other than obligations of, or guaranteed by, the United States Government, its
agencies or instrumentalities) if, as a result, more than 5% of the value of
its total assets would be invested in the securities of such issuer.
2) Purchase securities (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if, as a
result of such purchase, 25% or more of the value of its total assets would be
invested in any industry (except that the Funds may purchase securities under
such circumstances only to the extent that the Schwab International Index(TM) or
the Schwab Small-Cap Index(TM) is also so concentrated).
3) Invest more than 10% of the total value of its assets in
illiquid securities, including repurchase agreements with maturities in excess
of seven days.
4) Purchase or retain securities of an issuer if any of the
officers, trustees or directors of the Trust, or the Investment Manager
individually own beneficially more than 1/2 of 1% of the securities of such
issuer and together beneficially own more than 5% of the securities of such
issuer.
5) Purchase or sell commodities or real estate, including
interests in real estate limited partnerships, provided that each Fund may (i)
purchase securities of companies that deal in real estate or interests therein,
(ii) purchase or sell futures contracts, options contracts, equity index
participations and index participation contracts, and (iii) for the Asset
Director Funds, purchase securities of companies that deal in precious metals
or interests therein.
6) Invest for the purpose of exercising control or management of
another issuer.
7) Purchase securities of other investment companies, except as
permitted by the 1940 Act.
8) Lend money to any person, except that each Fund may (i)
purchase a portion of an issue of short-term debt securities or similar
obligations (including repurchase
25
<PAGE> 45
agreements) that are publicly distributed or customarily purchased by
institutional investors, and (ii) lend its portfolio securities.
9) Borrow money except from banks as a temporary measure to
satisfy redemption requests or for extraordinary or emergency purposes and then
only in an amount not to exceed one-third of the value of its total assets
(including the amount borrowed), provided that each Fund will not purchase
securities while borrowings represent more than 5% of its total assets.
10) Pledge, mortgage or hypothecate any of its assets except that,
to secure allowable borrowings, each Fund may do so with respect to no more
than one-third of the value of its total assets.
11) Underwrite securities issued by others except to the extent it
may be deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment portfolio.
In order to permit the sale of shares of each Fund in certain
jurisdictions, each Fund may make commitments more restrictive than the
fundamental operating restrictions described above. Should it do so and later
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders, it will revoke the commitment(s) by terminating
sales of its shares in the jurisdiction(s) involved.
The following restrictions are non-fundamental and may be changed by
the Trust's Board of Trustees. Each of the Funds may not:
1) Purchase more than 10% of any class of securities of any
issuer if, as a result of such purchase, it would own more than 10% of such
issuer's outstanding voting securities.
2) Invest more than 5% of its total assets in securities of
issuers (other than obligations of, or guaranteed by the United States
Government, its agencies or instrumentalities) that with their predecessors
have a record of less than three years continuous operation.
3) Invest more than 5% of its net assets in warrants, valued at
the lower of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the American
Stock Exchange, provided, however, that for purposes of this restriction,
warrants acquired by a Fund in units or attached to other securities are deemed
to be without value.
26
<PAGE> 46
4) Purchase puts, calls, straddles, spreads or any combination
thereof if by reason of such purchase the value of its aggregate investment in
such securities would exceed 5% of the Fund's total assets.
5) Make short sales, except for short sales against the box.
6) Purchase or sell interests in oil, gas or other mineral
development programs or leases, although it may invest in companies that own or
invest in such interests or leases.
7) Purchase securities on margin, except such short-term credits
as may be necessary for the clearance of purchases and sales of securities.
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<PAGE> 47
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The officers and trustees of the Trust, their
principal occupations over the past five years and their affiliations, if any,
with The Charles Schwab Corporation, Schwab, and Charles Schwab Investment
Management, Inc., are as follows:
<TABLE>
<CAPTION>
POSITION WITH
NAME THE TRUST PRINCIPAL OCCUPATION
- ---- --------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Founder, Chairman, Chief Executive Officer and
Age: 57 Director, The Charles Schwab Corporation;
Founder, Chairman and Director, Charles Schwab &
Co., Inc. and Charles Schwab Investment
Management, Inc.; Chairman and Director, The
Charles Schwab Trust Company and Mayer &
Schweitzer, Inc. (a securities brokerage
subsidiary of The Charles Schwab Corporation);
Director, The Gap, Inc. (a clothing retailer),
Transamerica Corporation (a financial services
organization) and AirTouch Communications (a
telecommunications company).
ELIZABETH G. SAWI ** President and Trustee Executive Vice President - Mutual Funds, Charles
Age: 43 Schwab & Co., Inc. and The Charles Schwab
Corporation; President, Charles Schwab
Investment Management, Inc. Prior to April
1994, Ms. Sawi was Executive Vice President -
Marketing and Advertising for Charles Schwab &
Co., Inc. and The Charles Schwab Corporation.
DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
Age: 63 Associates (advertising and marketing/consulting).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
Age: 63 Semloh Financial, Inc. (international financial
services).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (real
Age: 56 estate investment). Prior to 1993, Mr. Stephens
was Chairman and Chief Executive Officer of the
Bank of San Francisco.
</TABLE>
__________________________________
*Mr. Schwab is an "interested person" of the Trust.
**Ms. Sawi is an "interested person" of the Trust.
28
<PAGE> 48
<TABLE>
<S> <C> <C>
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
Age: 51 Wilsey Bennett, Inc. (truck and air
transportation, real estate investment and
management, and investments).
A. JOHN GAMBS Treasurer and Principal Executive Vice President - Finance and Chief
Age: 49 Financial Officer Financial Officer, The Charles Schwab
Corporation; Executive Vice President, Chief
Financial Officer and Director, Charles Schwab &
Co., Inc.; Chief Financial Officer and Director,
Charles Schwab Investment Management, Inc.; and
Chief Financial Officer, The Charles Schwab
Trust Company.
WILLIAM J. KLIPP*** Senior Vice President, Senior Vice President, Charles Schwab & Co.,
Age: 39 Chief Operating Officer Inc. and Chief Operating Officer, Charles Schwab
and Trustee Investment Management, Inc. Prior to 1993, Mr.
Klipp was Treasurer of Charles Schwab & Co.,
Inc. and Mayer & Schweitzer, Inc. Prior to
1990, he was Vice President, Director Funding,
Merrill Lynch & Co., Inc.
STEPHEN B. WARD Senior Vice President & Senior Vice President, Charles Schwab Investment
Age: 39 Chief Investment Management, Inc. Prior to 1991, Mr. Ward was
Officer Vice President and Portfolio Manager for
Federated Investors.
FRANCES COLE Secretary Chief Counsel and Compliance Officer, Assistant
Age: 39 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to 1991, Ms. Cole was
Senior Counsel for Equitec Securities Company.
TIMOTHY B. PAWLOSKI Assistant Treasurer Vice President of Finance - SchwabFunds(R), 1991
Age: 36 to 1993, Mr. Pawloski was Director of Finance
for Charles Schwab & Co., Inc. and from 1987 to
1991, he served as a Senior Manager at Price
Waterhouse.
PAMELA E. HERLICH Assistant Secretary Assistant Corporate Secretary, The Charles
Age: 41 Schwab Corporation and Charles Schwab & Co.,
Inc.; Corporate Secretary, Charles Schwab
Investment Management, Inc., Mayer & Schweitzer
and The Charles Schwab Trust Company. Prior to
1993, Ms. Herlich was Assistant Corporate
Secretary for Mayer & Schweitzer, Inc. and The
Charles Schwab Trust Company.
</TABLE>
__________________________________
***Mr. Klipp is an "interested person" of the Trust.
29
<PAGE> 49
<TABLE>
<S> <C> <C>
DAVID H. LUI Assistant Secretary Senior Counsel - Charles Schwab Investment
Age: 34 Management, Inc. From 1991 to 1992, he was
Assistant Secretary and Assistant Corporate
Counsel for the Franklin Group of Mutual Funds.
Prior to 1991, he was an Associate for Thelen,
Marrin, Johnson & Bridges (a San Francisco law
firm).
CHRISTINA M. PERRINO Assistant Secretary Senior Counsel - Charles Schwab Investment
Age: 34 Management, Inc. Prior to 1994, she was Counsel
and Assistant Secretary for North American
Security Life Insurance Company and Secretary
for North American Funds.
</TABLE>
Each of the above-referenced Officers and/or Trustees also serves in
the same capacity as described for the Trust for Schwab Investments, The
Charles Schwab Family of Funds, Schwab Annuity Portfolios, and Schwab Advantage
Trust (which has not yet commenced operations). The address of each individual
listed above is 101 Montgomery Street, San Francisco, California 94104.
30
<PAGE> 50
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Annual
Benefits Accrued Benefits Upon
Aggregate as Part of Fund Retirement from Total Compensation
Name of Person, Compensation Expenses from the the Fund from the Fund
Position from the Trust Fund Complex(2) Complex(2) Complex(2)
-------------------- -------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Elizabeth G. Sawi, 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Sr. Vice President,
Chief Operating
Officer, and Trustee
Donald F. Dorward, 16,000 N/A N/A 55,000
Trustee
Robert G. Holmes, 16,000 N/A N/A 55,000
Trustee
Donald R. Stephens, 16,000 N/A N/A 55,000
Trustee
Michael W. Wilsey, 16,000 N/A N/A 55,000
Trustee
</TABLE>
1. Figures are for the Trust's fiscal year ended October 31, 1994.
2. "Fund Complex" comprises all 19 funds of the Trust, The Charles
Schwab Family of Funds, Schwab Investments and Schwab Annuity
Portfolios.
Pursuant to exemptive relief received by the Trust from the Securities and
Exchange Commission, the Trust may enter into deferred fee arrangements (the
"Fee Deferral Plan" or the "Plan") with the Trust's trustees who are not
"interested persons" of any of the Funds of the Trust (the "Independent
Trustees" or the "Trustees").
As of the date of this Statement of Additional Information, none of the
Independent Trustees has elected to participate in the Fee Deferral Plan. In
the event an Independent Trustee does
31
<PAGE> 51
elect to participate in the Plan, the Plan would operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book reserve
account established by the Trust (the "Deferred Fee Account"), as of the date
such fees would have been paid to such Trustee. The value of the Deferred Fee
Account as of any date will be equal to the value the Account would have had as
of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the SchwabFund(R) or SchwabFunds selected by
the participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, The Charles
Schwab Family of Funds, and Schwab Investments.
Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. The exemptive relief granted to the Trust permits the
Funds and the Trustees to purchase the Selected SchwabFund Securities, which
transactions would otherwise be limited or prohibited by the investment
policies and/or restrictions of the Funds. See "Investment Restrictions."
INVESTMENT MANAGER
The Investment Manager, a wholly-owned subsidiary of The Charles
Schwab Corporation, serves as the Funds' investment adviser and administrator
pursuant to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as
an investment adviser under the Investment Advisers Act of 1940, as amended,
and currently provides investment management services to the SchwabFunds(R), a
family of 18 mutual funds with approximately $27 billion in assets as of June
15, 1995. The Investment Manager is an affiliate of Schwab, the Trust's
distributor and shareholder services and transfer agent. The Advisory
Agreement will continue in effect until July 21, 1996 with respect to the
Schwab International Index Fund, October 14, 1996 with respect to the Schwab
Small-Cap Index Fund, [ ] with respect to the Asset Director Funds, and
thereafter will continue for one year terms subject to annual approval by: (1)
the Trust's Board of Trustees or (2) a vote of a majority (as defined in the
1940 Act) of the outstanding voting securities of a Fund. In either event, the
continuance must also be approved by a majority of the Trust's Board of
Trustees who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any such party by vote cast in person at a meeting called
for the purpose of voting on such approval. The Advisory Agreement may be
terminated at any time upon 60 days notice by either party, or by a majority
vote of the outstanding shares of a Fund, and will terminate automatically upon
assignment.
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<PAGE> 52
International Index Fund. For its advisory and administrative
services to the International Index Fund, the Investment Manager is entitled to
receive a graduated annual fee, payable 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.
The Investment Manager and Schwab have guaranteed that, through at
least June 30, 1996, the total fund operating expenses for the International
Index Fund will not exceed 0.69% of that Fund's average daily net assets.
For the fiscal period from September 9, 1993 (commencement of
operations) to October 31, 1993, no investment advisory fees were paid by the
International Index Fund (fees were reduced by $97,986). For the fiscal year
ended October 31, 1994, the International Index Fund paid investment advisory
fees of $474,0000 (fees were reduced by $388,000).
Small-Cap Index Fund. For its advisory and administrative services to
the Small-Cap Index Fund, the Investment Manager is entitled to receive a
graduated annual fee, payable 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.
The Investment Manager and Schwab have guaranteed that, through June
30, 1996, the total fund operating expenses for the Small-Cap Index Fund will
not exceed 0.59% of that Fund's average daily net assets.
For the fiscal period from December 3, 1993 (commencement of
operations) to October 31, 1994, the Small-Cap Index Fund paid investment
advisory fees of $151,861 (fees were reduced by $106,533).
Asset Director Funds. For its advisory and administrative services
to the Asset Director Funds, the Investment Manager is entitled to receive a
graduated annual fee, payable monthly, of 0.74% of each Fund's average daily net
assets not in excess of $1 billion, and 0.69% of such net assets over $1
billion; and 0.64% of such net assets over $2 billion.
The Investment Manager and Schwab have guaranteed that, through
at least December 31, 1996, the total fund operating expenses for the
International Index Fund will not exceed 0.89% of each Fund's average daily net
assets.
Additional Information. The Advisory Agreement provides that the fees
to be paid to the Investment Manager will be less than the amount that would
cause the aggregate operating expenses of a Fund (excluding interest, taxes,
net brokerage commissions and extraordinary expenses) in any year to exceed the
most stringent limits prescribed by any state in which shares of a Fund are
offered for sale. The most stringent current limit for such expenses is 2.5%
of a fund's first $30 million of average net assets, 2.0% of a fund's next $70
million of average net
33
<PAGE> 53
assets and 1.5% of a fund's average net assets in excess of $100 million.
From time to time, each Fund may compare its total operating expense
ratio to the total operating expense ratio of other mutual funds or mutual fund
averages with similar investment objectives as reported by Lipper Analytical
Service, Inc., Morningstar, Inc. or other independent sources of such
information ("independent sources").
SUB-ADVISER
The Investment Manager has entered into an investment sub-advisory
agreement (the "Sub-Advisory Agreement") with respect to the Asset Director
Funds with Symphony Asset Management, Inc. (the "Sub-Adviser"), pursuant to
which it will act as the Funds' sub-adviser. The Sub-Adviser is registered as
an investment adviser under the Investment Advisers Act of 1940 and as of
June 30, 1995 managed directly and indirectly approximately $600 million in
institutional and private account assets.
The Sub-Adviser furnishes investment advice through direct assistance
to the Investment Manager in the development and execution of quantitatively
based investment strategies. The Sub-Adviser uses a sophisticated optimization
technique known as "Tactical Asset Allocation" in evaluating the optimal
allocation of the Asset Director Funds' assets among asset categories: stocks,
bonds, and cash.
Tactical Asset Allocation is a value-oriented strategy which seeks the
highest reward for a given level of risk. Expected returns are measured for
each asset category; for stocks, the internal rate of return is measured on
forecasted dividend stream; for bonds, the yield to maturity is evaluated on
representative long corporate bonds; and cash equivalents, yield to maturity
evaluated on representative money market instruments. Risks and correlations
of the asset categories are measured from long-term return histories.
The Investment Manager pays the Sub-Adviser an annual investment
sub-advisory fee, payable monthly, of ___% each of the Asset Director Fund's
average daily net assets not in excess of $____ million, and ____% of such
assets over $____ million.
As of May 1, 1995 and June 30, 1995, Dimensional Fund Advisors Inc.
("Dimensional") no longer served as the sub-adviser to the Schwab Small-Cap
Index Fund and the Schwab International Index Fund, respectively. As of the
same dates, the Investment Manager became responsible for providing all
investment advisory services to the Funds.
Expenses. Under the sub-advisory agreement between Dimensional and
the Investment Manager, the Investment Manager paid Dimensional the following
amounts for the fiscal periods indicated below.
International Index Fund: $20,999 and $185,000 for the fiscal period from
34
<PAGE> 54
September 9, 1993 (commencement of operations) to October 31, 1993 and for the
fiscal year ended October 31, 1994, respectively.
Small-Cap Index Fund: $51,419 for the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1994.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal
underwriter for shares of the Trust and is the Trust's agent for the purpose of
the continuous offering of the Funds' shares. Each Fund pays the cost for the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under
the Distribution Agreement. Terms of continuation, termination and assignment
under the Distribution Agreement are identical to those described above with
respect to the Advisory Agreement.
CUSTODIAN AND FUND ACCOUNTANT
State Street Bank and Trust Company, at 1 Heritage Drive, North
Quincy, Massachusetts 02171-2197 serves as Custodian and as Fund Accountant
for the Trust.
ACCOUNTANTS
AND REPORTS TO SHAREHOLDERS
The Trust's independent accountants, Price Waterhouse LLP, audit and
report on the annual financial statements of each series of the Trust and
review certain regulatory reports and the Trust's federal income tax return.
Price Waterhouse LLP also performs other professional accounting, auditing,
tax and advisory services when engaged to do so by the Trust. Shareholders
will be sent audited annual and unaudited semi-annual financial statements.
The address of Price Waterhouse LLP is 555 California Street, San Francisco,
California 94104.
LEGAL COUNSEL
Ropes & Gray, 1001 Pennsylvania Avenue, N.W., Suite 1200 South,
Washington, D.C. 20004, is counsel to the Trust.
35
<PAGE> 55
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the Funds, the Investment
Manager seeks to obtain best price and execution. Subject to the supervision
of the Board of Trustees, the Investment Manager will generally select brokers
and dealers for the Funds primarily on the basis of the quality and reliability
of brokerage services, including execution capability and financial
responsibility. In assessing these criteria, the Investment Manager will,
among other things, monitor the performance of brokers effecting transactions
for the Funds to determine the effect, if any, 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.
In an attempt to obtain best execution for the Funds, the Investment
Manager may also place orders directly with market makers or with third market
brokers, Instinet or brokers on an agency basis. Placing orders with third
market brokers or through Instinet may enable the Funds to trade directly with
other institutional holders on a net basis. At times, this may allow the Funds
to trade larger blocks than would be possible trading through a single market
maker.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources may also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
In determining when and to what extent to use Schwab as its broker for
executing orders for the Funds on securities exchanges, the Investment Manager
will consider (if relevant) whether the compensation to be paid Schwab will be
(i) fair and reasonable, (ii) at least as favorable to the Funds as commissions
that would be charged by other qualified brokers having comparable execution
capabilities, and (iii) at least as favorable as commissions contemporaneously
charged by Schwab on comparable transactions for its most favored unaffiliated
customers. The Funds do not consider it practicable or in the best interests
of their shareholders to solicit competitive bids for commission rates on each
transaction. However, the Board of Trustees, including a majority of the
trustees who are not "interested persons" of Schwab within the meaning of the
1940 Act, (i) has prescribed procedures designed
36
<PAGE> 56
to provide that the Funds do not pay commissions that do not meet the standards
described above, (ii) reviews those procedures annually to determine whether
they remain adequate, and (iii) considers quarterly whether or not the
commissions charged by Schwab have met the standards.
Schwab's brokerage services to the Funds are also subject to Rule
11a2-2(T) under the Securities Exchange Act of 1934, as amended. Rule
11a2-2(T) permits the Funds to use Schwab as a broker provided certain
conditions are met. Among these requirements are that the floor brokerage
element of portfolio transactions (that is, execution on the exchange floor or
through use of exchange facilities) be performed by members of the exchange not
associated with Schwab, that the orders to such members be transmitted from off
the exchange floor and that neither Schwab nor an associated person of Schwab
participates in the execution of the transaction after the order has been so
transmitted. In connection with transactions in which Schwab acts as broker
for the Funds, Schwab, while not permitted to perform floor brokerage (which is
undertaken by members selected by Schwab who are not associated with that
firm), still continues to bear principal responsibility for determining
important elements of overall execution such as timing and order size, and also
clears and settles such transactions. Schwab pays the fees charged by those
persons performing the described floor brokerage elements. Schwab will not
trade directly with the Funds in any transactions in which Schwab or an
affiliate acts as principal.
Brokerage Commissions. For the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1994, the Small-Cap Index Fund paid
brokerage commissions of $165,997. For the fiscal period from September 9,
1993 (commencement of operations) to October 31, 1993 and for the fiscal year
ended October 31, 1994, the International Index Fund paid brokerage
commissions of $170,195 and $86,127, respectively.
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
owned by the Fund 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 expect that
their portfolio turnover rate will not exceed 100% in any given year, a
turnover rate lower than that of most non-index mutual funds. A high portfolio
turnover rate may increase a Fund's transaction costs. The International Index
Fund's portfolio turnover rate for the fiscal period from
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<PAGE> 57
September 9, 1993 (commencement of operations) to October 31, 1993 and for the
fiscal year ended October 31, 1994 was 2% and 6%, respectively. The Small-Cap
Index Fund's portfolio turnover rate for the fiscal period from December 3,
1993 (commencement of operations) to October 31, 1994 was 16%.
From time to time, each Fund may compare its portfolio turnover rate with
that of other mutual funds as reported by independent sources.
TAXES
It is the policy of each Fund to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Code.
By following this policy, each Fund expects to eliminate or reduce to a nominal
amount the federal income tax to which it is subject.
In order to qualify as a regulated investment company, each of the
Funds must, among other things, (1) derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stocks, securities, foreign currencies or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in stocks, securities or
currencies; (2) derive less than 30% of its gross income from gains from the
sale or other disposition of certain assets (including stocks and securities)
held for less than three months; and (3) diversify its holdings so that at the
end of each quarter of its taxable year (i) at least 50% of the market value of
the Fund's total assets is represented by cash or cash items, United States
Government securities, securities of other regulated investment companies and
other securities limited, in respect of any one issuer, to a value not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of
its assets is invested in the securities of any one issuer (other than United
States Government securities or securities of any other regulated investment
company) or of two or more issuers that the Fund controls, within the meaning
of the Code, and that are engaged in the same, similar or related trades or
businesses. These requirements may restrict the degree to which a Fund may
engage in short-term trading and certain hedging transactions and may limit the
range of a Fund's investments. If a Fund qualifies as a regulated investment
company, it will not be subject to federal income tax on the part of its net
investment income and net realized capital gains, if any, which it distributes
to shareholders, provided that the Fund meets certain minimum distribution
requirements. To comply with these requirements, a Fund must distribute at
least (a) 90% of its "investment company
38
<PAGE> 58
taxable income" (as that term is defined in the Code) and (b) 90% of the excess
of its (i) tax-exempt interest income over (ii) certain deductions attributable
to that income (with certain exceptions), for its taxable year. Each Fund
intends to make sufficient distributions to shareholders to meet these
requirements.
The Code imposes a non-deductible excise tax on regulated investment
companies 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 capital gain net income for the one year period ending on October 31 of
such calendar year. The balance of such income must be distributed during the
next calendar year. 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. If the distributions during a calendar year
were less than the required amount, the Fund is subject to a non-deductible
excise tax equal to 4% of the deficiency.
A Fund's transactions in futures contracts, forward contracts, foreign
currency transactions, options, and certain other investment and hedging
activities is subject to special tax rules. In a given case, these rules may
accelerate income to a Fund, defer its losses, cause adjustments in the
holding periods of the Fund's assets, convert short-term capital losses into
long-term capital losses or otherwise affect the character of the Fund's
income. These rules could therefore affect the amount, timing and character of
distributions to shareholders. The Funds will endeavor to make any available
elections pertaining to these transactions in a manner believed to be in the
best interest of the Funds and their shareholders.
INCOME TAX INFORMATION
Any dividends declared by the Funds in October, November or December
to shareholders of record during those months and paid during the following
January are treated, for tax purposes, as if they were received by each
shareholder on December 31 of the year declared.
Dividends paid by the Funds from net investment income and
distributions from the Funds' net short-term capital gains in excess of any net
long-term capital losses, whether received in cash or reinvested, generally
will be taxable to shareholders as ordinary income. For corporate investors in
the Funds, dividend distributions designated by the Funds 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 received from the Funds
designated as long-term capital gains (net of capital losses), whether received
in cash or reinvested, will be taxable as long-term capital gains without
regard to the length of time a shareholder owned shares in the Funds. However,
if a shareholder receives a long-term capital gain distribution with
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<PAGE> 59
respect to Funds' 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 gain
distribution, be treated as a long-term capital loss. If a shareholder is not
subject to income tax, generally the shareholder will not be taxed on amounts
distributed by the Funds.
A Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends paid to any shareholder (1)
who fails to provide a correct taxpayer identification number certified under
penalty of perjury; (2) who is subject to withholding by the Internal Revenue
Service for failure to properly report all payments of interest or dividends;
or (3) who fails to provide a certified statement that he or she is not subject
to "backup withholding." This "backup withholding" is not an additional tax
and any amounts withheld may be credited against the shareholder's ultimate
U.S. tax liability.
The foregoing discussion relates only to federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts
and estates) generally are subject to U.S. withholding tax at the rate of 30%
(or a lower tax treaty rate) on distributions derived from net investment
income and short-term capital gains. Distributions to foreign shareholders of
long-term capital gains and any gains from the sale or other disposition of
shares of the Funds generally are not subject to U.S. taxation, unless the
recipient is an individual who meets the Code's definition of "resident alien."
Different tax consequences may result if the foreign shareholder is engaged in
a trade or business within the United States. In addition, the tax
consequences to a foreign shareholder entitled to claim the benefits of a tax
treaty may be different than those described above. Distributions by a Fund
may also be subject to state, local and foreign taxes, and its treatment under
applicable tax laws may differ from the federal income tax treatment.
Although the International Index Fund and the Asset Director Funds
will attempt not to invest in any non-U.S. corporation which could be treated
as a passive Foreign investment company ("PFIC"), or become a PFIC, under the
Code, it might inadvertently do so. This could result in adverse tax
consequences upon the disposition of, or the receipt of "excess distributions"
with respect to, such equity investments. To the extent the International
Index Fund and the Asset Director Funds do invest in PFIC, they may adopt
certain tax strategies to reduce or eliminate the adverse effects of certain
federal tax provisions governing PFIC investments. Many non-U.S. banks and
insurance companies may not be treated as PFICs if they satisfy certain
technical requirements under the Code. To the extent that the International
Index Fund and the Asset Director Funds do invest in foreign securities which
are determined to be PFIC securities and are required to pay a tax on such
investments, a credit for this tax would not be allowed to be passed
40
<PAGE> 60
through to the International Index Fund's and the Asset Director Funds'
shareholders. Therefore, the payment of this tax would reduce the
International Index Fund's and the Asset Director Funds' economic return from
their PFIC shares and excess distributions received with respect to such shares
are treated as ordinary income rather than capital gains.
This discussion of federal income taxation presented above only
summarizes some of the important federal tax considerations generally affecting
purchasers of Fund shares. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund and its shareholders,
and the discussion is not intended as a substitute for careful tax planning.
Accordingly, prospective investors (particularly those not residing or
domiciled in the United States) should consult their own tax advisers regarding
the consequences of investing in a Fund.
SHARE PRICE CALCULATION
Each Fund's net asset value per share is determined each day the New
York Stock Exchange is open for trading as of 4:00 p.m., Eastern time. The net
asset value of the International Index Fund is expressed in U.S. dollars by
translating the Fund's assets using the bid price for the U.S. dollar as quoted
by generally recognized, reliable sources. Currently, the New York Stock
Exchange is closed on the following holidays: New Year's Day (observed),
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The Funds value their portfolio securities
based on their market value. Each security held by the Funds which is listed
on a securities exchange and for which market quotations are available is
valued at the last quoted sale price for a given day, or if a sale is not
reported for that day, at the mean between the most recent quoted bid and asked
prices. Price information on each listed security is taken from the exchange
where the security is primarily traded. Unlisted securities for which market
quotations are readily available are valued at the mean between the most recent
bid and asked prices. The value of other assets for which no quotations are
readily available (including any restricted securities) are valued at fair
value as determined in good faith by the Investment Manager pursuant to Board
of Trustees guidelines. Securities may be valued on the basis of prices
provided by pricing services when such prices are believed to reflect fair
market value.
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<PAGE> 61
HOW THE FUNDS REFLECT PERFORMANCE
STANDARDIZED TOTAL RETURN
Average annual total return for a period is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in the
Fund made at the beginning of the period, then calculating the average annual
compounded rate of return that would produce the same investment return on the
$1,000 over the same period. In computing average annual total return, the
Fund assumes the reinvestment of all distributions at net asset value on
applicable reinvestment dates. For the fiscal period from September 9, 1993
(commencement of operations) to October 31, 1993 and for the fiscal year ended
October 31, 1994, the International Index Fund's total return was 1.5% and
7.9%, respectively. For the fiscal period from December 3, 1993 (commencement
of operations) to October 31, 1994, the Small-Cap Index Fund's total return was
0.63%.
NONSTANDARDIZED TOTAL RETURN
Nonstandardized total return for a Fund differs from standardized
total return in that it relates to periods other than the period for
standardized total return and/or that it represents aggregate (rather than
average) total return.
In addition, an after-tax total return for each Fund may be calculated
by taking that Fund's standardized or non-standardized total return and
subtracting applicable federal taxes from the portions of each Fund's total
return attributable to capital gains distributions and ordinary income. This
after-tax total return may be compared to that of other mutual funds with
similar investment objectives as reported by independent sources.
Each Fund may also report the percentage of that Fund's standardized
or non-standardized total return which would be paid to taxes annually (at the
applicable federal personal income and capital gains tax rates) before
redemption of Fund shares. This proportion may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.
COMPARING THE PERFORMANCE OF THE FUNDS WITH OTHER FUNDS.
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 of investment performance, United States government
obligations, bank certificates of deposit, the consumer price index, and other
investments for which reliable data is available.
42
<PAGE> 62
THE BENEFITS OF INTERNATIONAL INVESTING
INCREASED DIVERSIFICATION
CAN LOWER RISK
To some extent, all U.S.-based investments -- stocks, bonds, mutual
funds and CDs -- are affected by the same economic forces. Tax cuts, interest
rate changes and the performance of the U.S. stock market can all influence
U.S. investments. Adding international (or overseas) investments to a
U.S.-based portfolio has historically reduced the portfolio's overall
volatility. Although U.S. and international markets may be interrelated, they
do not move in tandem -- so losses in one market can be offset by gains in
another.
POTENTIALLY HIGHER
OVERALL PERFORMANCE
During the past 10 years ending December 31, 1994, international
equity markets outperformed the U.S. equity market and most other U.S.
securities investments -- corporate bonds, CDs and U.S. Treasuries. The
returns produced by the international markets have also kept investors well
ahead of inflation. This historical performance means that investors
diversified overseas earned a higher level of return.
BROADER GROWTH OPPORTUNITIES
Investors who limit their portfolios to U.S. securities are missing
these investment opportunities. Ten years ago, the United States made up more
than half of the world's equity investments. As of December 31, 1993, it
represented just over one-third.
INDEXING AND THE SCHWAB INDEX FUNDS
Because the unmanaged performance of a broad-based equity index has
often proven superior to that of many individually selected stock portfolios, a
growing percentage of assets invested in the equity markets are being placed in
"index" portfolios. Institutional investors often devote a substantial
percentage of their assets to indexed strategies.
An index typically tracks the performance of a group of securities
selected to represent a particular market, and is most often used to gauge that
market's performance. The Dow Jones Industrial Average ("DJIA") and Standard &
Poor's 500 Index(R) ("S&P 500") are two indices designed to measure the
performance of United States stocks. When investment managers invest indexed
separate accounts or index fund assets, they attempt to replicate the
performance of the applicable target index by holding
43
<PAGE> 63
all or a representative sample of the securities included in the index.
The Funds performance data assume the reinvestment of dividends, but
do not reflect deductions for administrative and management expenses. The
Funds will be subject to these costs and expenses. In addition, various
factors may cause the Funds' performance to be higher or lower than that of the
Index.
THE SCHWAB INTERNATIONAL
INDEX(TM)
The Schwab International Index(TM) is a broad-based stock market index
which contains the common stocks of the 350 largest operating companies (i.e.,
non-investment companies) incorporated outside the United States. To reduce
undue risk, the Index represents equities only from countries that are
considered to have developed markets and economies. By tracking the largest
companies in developed markets, the Index represents the performance of the
"blue chips" of international markets. The Index is also designed to provide a
broad representation of the international market, by limiting each country to
no more than 35% of the total market capitalization of the Index. As the
stocks contained in the Index represent about 35% of the total market
capitalization of international companies, the Index provides a reliable
measure of market performance. The Schwab International Index(TM) was first
made available to the public on July 29, 1993.
THE SCHWAB SMALL-CAP INDEX(TM)
To be included in the Schwab Small-Cap Index, a company must satisfy
all of the following criteria: (1) it must be an "operating company" (i.e., not
an investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the New
York Stock Exchange, American Stock Exchange or the NASDAQ/NMS, and (3) its
market value must place it among the second 1000 such companies as measured by
market capitalization (i.e., from the company with a rank of 1001 through the
company with a rank of 2000). Shareholders generally avoid exposure to the
smallest companies, whose shares are often thinly traded and very volatile,
because these stocks are not included in the Index.
A particular stock's weighting in the Schwab Small-Cap 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
the Schwab Small-Cap Index. The returns produced by the United States stock
market during the 25 years ending December 31, 1990 have been exceeded by those
of very few types of securities investments. Because the unmanaged performance
of the U.S. stock market has often proven superior to that of many individually
selected stock portfolios, a growing percentage of assets invested in the
equity markets are being placed in "index" portfolios. From less than $9
billion in 1980, indexed institutional
44
<PAGE> 64
holdings have grown to over $280 billion, a figure equal to approximately
one-quarter of all institutional assets. (Source: Callan Associates Survey,
reported in Fall 1990 edition of The Journal of Portfolio Management).
Historically a long-term investment in a group of common stocks
representative of the stock market as a whole as well as a group of common
stocks representative of small-cap stocks has significantly exceeded that of
U.S. Treasury Bills, CDs, corporate bonds and inflation.
ASSET ALLOCATION STRATEGIES USING SCHWABFUNDS(R)
Shareholders of SchwabFunds may wish to invest in the SchwabFunds as
part of their personal asset allocation plan. An asset allocation program is
available through Schwab. This program may help shareholders select
investments, including investments in SchwabFunds, that match their individual
investment needs. The shareholders' personal investment plan is based on a
number of factors including personal financial situation, time horizon,
investment objectives and goals, and risk tolerance.
ACCESS TO SCHWAB'S MUTUAL
FUND ONESOURCE SERVICE(TM)
With Schwab's Mutual Fund OneSource Service (TM) ("OneSource"), a
shareholder can invest in over 200 mutual funds from many fund companies,
subject to the following. If a shareholder makes five or more short-term
redemptions of OneSource mutual funds (other than the SchwabFunds) within any
12-month period, a fee will be charged on all future trades. A short-term
redemption in this context refers to the sale of mutual fund shares held for
six months or less. Some mutual funds available through OneSource may charge
fees permitted under Rule 12b-1 in excess of one quarter of one percent per
year. Schwab reserves the right to modify OneSource's terms and conditions at
any time. For more information, a shareholder should contact their Schwab
office during its regular business hours or 800-2 NO-LOAD, 24 hours a day.
From time to time, the Funds may include discussions in advertisements
of the income tax savings shareholders may experience as a result of their
policy of limiting portfolio trading in order to reduce capital gains. This
information may be supplemented by presentations of statistical data
illustrating the extent of such income tax savings and the impact of such
savings on the yield and/or total return of the Funds. In addition, such
advertisements may include comparisons of the Funds' performance against that
of investment products that do not employ the Funds' policy of seeking to limit
capital gains. The Funds are intended to make indexed investing easily
available to Schwab customers with the highest level of convenience and economy
thereby facilitating their ability to participate in the long-term performance
of the United States stock market.
45
<PAGE> 65
SCHWABFUNDS(R).
SchwabFunds offers a variety of series and classes of shares of beneficial
interest to help you with your investment needs.
EQUITY FUNDS
Schwab 1000 Fund(R)(1)
Schwab International Index Fund(TM)(2)
Schwab Small-Cap Index Fund(TM)(2)
Schwab Asset Director-High Growth
Schwab Asset Director-Balanced Growth
Schwab Asset Director-Conservative Growth
FIXED INCOME FUNDS(1)
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund(3)
Schwab California Long-Term Tax-Free Bond Fund(3)
MONEY MARKET FUNDS(4)
Schwab Money Market Fund
Schwab Government Money Fund
Schwab U.S. Treasury Money Fund
Schwab Value Advantage Money Fund(TM)
Schwab Tax-Exempt Money Fund--Sweep Shares
Schwab Tax-Exempt Money Fund--Value Advantage Shares(5)
Schwab California Tax-Exempt Money Fund--Sweep Shares(3)
Schwab California Tax-Exempt Money Fund--Value Advantage Shares(3,5)
Schwab Retirement Money Fund(TM)(6)
Schwab Institutional Advantage Money Fund(TM)(6)
Schwab New York Tax-Exempt Money Fund--Sweep Shares(7)
Schwab New York Tax-Exempt Money Fund--Value Advantage Shares(5,7)
(1) The Schwab 1000 Fund and all fixed income funds are separate
investment portfolios of Schwab Investments.
(2) The Schwab International Index Fund, the Schwab Small-Cap Index Fund
and the Asset Director Funds are separate investment portfolios of the
Trust.
(3) Available only to California residents and residents of selected other
states.
(4) All listed money market funds are separate investment portfolios of
The Charles Schwab Family of Funds.
(5) As of June 30, 1995, the Schwab Tax-Exempt Money Fund--Value Advantage
Shares, Schwab California Tax-Exempt Money Fund--Value Advantage
Shares, and the
46
<PAGE> 66
Schwab New York Tax-Exempt Money Fund--Value Advantage Shares had not
yet commenced operations.
(6) Designed for institutional investors only.
(7) Available only to New York residents and residents of selected other
states.
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<PAGE> 67
OTHER INFORMATION
From time to time, the International Index Fund and the Small-Cap Index
Fund may compare the historical performance of the Schwab International
Index(TM) and the Schwab Small-Cap Index(TM), respectively, to the historical
performance of various other indices, including the S&P 500, as reported by
independent sources.
Each Fund is managed to offset capital gains with capital losses in
order to minimize that Fund's capital gains tax liability. This special
feature can make a real difference in an investor's after-tax return,
especially if the investor is in a high tax bracket. In addition, each Fund
has adopted a number of policies that should cause its portfolio turnover rate
to be below the portfolio turnover rate of many other mutual funds. A lower
portfolio turnover rate acts to minimize associated transaction costs as well
as the level of realized capital gains. By avoiding, where possible, the
distribution of capital gains to shareholders, the Funds help to build the
value of a shareholders shares and defer payment of capital gains taxes until
shares are redeemed. A shareholder's current tax liability for capital gains
should be reduced and the shareholder's total return increased by these
policies.
Each Fund may, from time to time, refer to recent studies that analyze
certain techniques and strategies which either Fund may use. In addition, each
Fund may, from time to time, promote the advantages of investing in a series
that is part of a large, diverse mutual fund complex.
From time to time, either Fund may include discussions in
advertisements of the income tax savings shareholders may experience as a
result of that Fund's 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 either Fund. In
addition, such advertisements may include comparisons of each Fund's
performance against that of investment products that do not employ each Fund's
policy of seeking to limit capital gains.
GENERAL INFORMATION
The Trust is generally not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
election or removal of trustees if a meeting is requested in writing by a
shareholder or shareholders who beneficially own(s) 10% or more of the Trust's
shares; (2) adoption of any contract for which shareholder approval is required
by the 1940 Act; (3) any termination of the Trust to the extent and as provided
in the Declaration of Trust; (4) any amendment of the Declaration of Trust
(other than amendments changing the name of the Trust or any of its investment
portfolios, supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision thereof); (5)
determining whether a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the shareholders, to the same extent as the stockholders of a Massachusetts
business corporation; and (6) such additional
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<PAGE> 68
matters as may be required by law, the Declaration of Trust, the Bylaws or any
registration of the Trust with the SEC or any state or as the Board of Trustees
may consider desirable. The shareholders also would vote upon changes to a
Fund's fundamental investment objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing trustees and until the election and
qualification of his or her successor or until death, resignation, retirement
or removal by a majority vote of the shares entitled to vote (as described
below) or of a majority of the Trustees. In accordance with the 1940 Act (i)
the Trust will hold a shareholder meeting for the election of trustees when
less than a majority of the trustees have been elected by shareholders, and
(ii) if, as a result of a vacancy in the Board of Trustees, less than
two-thirds of the trustees have been elected by the shareholders, that vacancy
will be filled by a vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such
for at least six months and who hold shares constituting at least 1% of the
Trust's outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more trustees, the Trust has undertaken
to disseminate appropriate materials at the expense of the requesting
shareholders.
The Bylaws provide that the presence at a shareholder meeting in
person or by proxy of at least 30% of the shares entitled to vote on a matter
shall constitute a quorum, unless otherwise provided by the 1940 Act or other
applicable law. Thus, even if less than a majority of shareholders were
represented, a meeting of the Trust's shareholders could occur. Attending
shareholders would in such case be permitted to take action not requiring the
vote of more than a majority of a quorum. Some matters requiring a larger vote
under the Declaration of Trust, such as termination or reorganization of the
Trust, and certain amendments of the Declaration of Trust, could not be decided
at such a meeting, nor could matters which under the 1940 Act require the vote
of a "majority of the outstanding voting securities," as defined in the 1940
Act. The Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Trust (or any of its investment portfolios) by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business
trust could, under certain circumstances, be held personally liable for the
Trust's obligations. The Declaration of Trust, however, disclaims shareholder
liability for the Trust's acts or obligations and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Trust or the trustees. In addition, the Declaration of Trust
provides for indemnification out of the property of an investment portfolio in
which a shareholder owns or owned shares for all losses and expenses of such
shareholder or former shareholder if he or she is held personally liable for
the obligations of the Trust solely by reason of being or having been a
shareholder. Moreover, the Trust will be covered by insurance which the
trustees consider adequate to cover foreseeable tort claims. Thus, the risk of
a shareholder incurring financial loss on account of shareholder liability is
considered remote, because it is limited to circumstances in which a disclaimer
is inoperative and the Trust itself is unable to meet its obligations.
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<PAGE> 69
For further information, please refer to the registration statement
and exhibits for the Trust on file with the SEC in Washington, D.C. and
available upon payment of a copying fee. The statements in the Prospectus and
this Statement of Additional Information concerning the contents of contracts
or other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
PURCHASE AND REDEMPTION OF SHARES
Each Fund's minimum initial investment requirement is $1,000 ($500 for
Custodial Accounts, Individual Retirement Accounts and certain other retirement
plans). Subsequent investments of $100 or more may be made. These minimum
investment requirements may be changed at any time and are not applicable to
certain types of investors. The Trust may waive the minimums for purchases by
trustees, directors, officers or employees of the Trust, Schwab, the
Investment Manager, or the Sub-Adviser.
The Trust has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of its net assets at the
beginning of such period. This election is irrevocable without the SEC's prior
approval. Redemption requests in excess of the stated limits may be paid, in
whole or in part, in investment securities or in cash, as the Trust's Board of
Trustees may deem advisable; however, payment will be made wholly in cash
unless the Board of Trustees believes that economic or market conditions exist
that would make such a practice detrimental to the best interests of the Fund.
If redemption proceeds are paid in investment securities, such securities will
be valued as set forth in the Prospectus of the Fund affected under "Share
Price Calculation" and a redeeming shareholder would normally incur brokerage
expenses if he or she converted the securities to cash.
OTHER INFORMATION
The Prospectuses of the Funds and this Statement of Additional
Information do not contain all the information included in the Registration
Statement filed with the SEC under the Securities Act of 1933, as amended, with
respect to the securities offered by the Prospectuses. Certain portions of the
Registration Statement have been omitted from the Prospectuses and this
Statement of Additional Information pursuant to the rules and regulations of
the SEC. The Registration Statement, including the exhibits filed therewith,
may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectuses and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
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SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
COMMON STOCK--97.2%
AUSTRALIA--2.6%
Australia & New Zealand
Banking Group 49,700 $ 144
BTR Nylex 116,332 207
Broken Hill Proprietary Co. 70,134 1,075
CRA 24,700 351
Coles Myer 50,456 157
Commonwealth Bank 37,577 208
National Australia Bank 58,769 464
News Corp. 78,390 483
Western Mining Corp. 47,000 293
Westpac Banking Corp. 79,986 268
-------
3,650
-------
BELGIUM--0.6%
Electrabel 1,800 320
Electrabel, AFV1 300 54
Petrofina SA 1,000 307
Societe Generale de Belgique 2,640 184
-------
865
-------
CANADA--3.1%
Alcan Aluminum 8,845 237
American Barrick
Resources Corp. 14,800 353
BCE Inc. 13,564 474
Bank of Montreal 9,793 182
Bank of Nova Scotia 8,185 166
Canadian Imperial Bank
of Commerce 8,161 193
Canadian Pacific Ltd. 14,600 233
Imperial Oil 8,563 307
Newbridge Networks Corp. 3,300 92
Northern
Telecom 10,700 386
Nova Corp. 19,200 192
PanCanadian Petroleum 5,000 158
Placer Dome Inc. 9,200 199
Royal Bank of Canada 13,200 277
Seagram Co. 16,300 502
Thomson Corp. 23,700 285
Toronto-Dominion Bank 11,600 176
-------
4,412
-------
DENMARK--0.4%
D/S 1912 Series B 10 173
D/S Svendborg Series B 5 125
Tele Danmark AS Series B 5,290 305
-------
603
-------
FRANCE--7.4%
AXA Groupe SA 13,100 608
Alcatel Cable 1,723 201
Assurances Generales
de France 15,800 646
Banque Nationale de Paris 10,018 496
Canal Plus 819 135
Carrefour 1,100 485
Cie Financiere de
Paribas (Bearer) 4,681 312
Cie Generale des Eaux 4,803 440
Compagnie de
Saint-Gobain SA 3,273 415
Compagnie de Suez 6,400 306
Credit Lyonnais 1,800 163
Danone Groupe 3,000 423
GAN Group 1,900 105
L'Air Liquide 2,784 393
L'Air Liquide (Rights -
exp. 11/04/94)* 2,384 33
L'Oreal SA 2,650 576
LVMH Moet-Hennessy
Louis Vuitton 7,100 1,145
Lafarge Coppee SA 3,500 278
Lyonnaise des
Eaux-Dumez 2,430 221
Michelin Class B (Reg.) 4,450 186
Peugeot Citroen 2,200 330
Rhone-Poulenc SA
A Shares 13,500 333
Schneider SA 2,650 199
Societe Generale 3,473 392
Societe Nationale
Elf Aquitaine 11,256 832
TOTAL Compagnie
Francaise des Petroles
Class B 9,300 603
Union des Assurances
de Paris 12,650 334
-------
10,590
-------
GERMANY--7.5%
BASF AG 2,500 529
Bankgesellschaft Berlin 1,029 246
Bayer AG 2,866 671
Bayerische Hypotheken &
Wechsel Bank 913 240
Bayerische Hypotheken &
Wechsel Bank (New)* 91 23
Bayerische Motoren Werke AG 820 423
Bayerische Vereinsbank AG 924 274
Commerzbank AG 1,345 283
Daimler-Benz AG 2,721 1,399
Deutsche Bank AG 2,016 994
Dresdner Bank AG 1,897 508
Hoechst AG 2,550 559
Mannesmann AG 1,561 417
Muenchener
Rueckversicherung 11 18
Muenchener
Rueckversicherung (Reg.) 311 573
Preussag AG 615 180
RWE AG 1,370 420
SAP AG 242 156
Siemens AG 2,356 985
Thyssen AG 1,189 227
VEBA AG 2,018 676
VIAG AG 873 275
Vereinigte Elektrizitat
Westfalen Series B 807 203
Volkswagen AG 1,129 332
-------
10,611
-------
HONG KONG--4.3%
CITIC Pacific 85,000 256
Cathay Pacific
Airways 118,000 175
China Light & Power 77,400 403
Hang Seng Bank 81,100 588
Henderson Land
Development Co. 68,000 444
Hong Kong
Telecom 469,200 1,005
Hongkong Electric Holdings 84,000 264
</TABLE>
See accompanying Notes to Financial Statements.
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<PAGE> 71
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Hongkong Land Holdings 111,000 $284
Hutchison Whampoa 154,000 711
Jardine Matheson
Holdings (Reg.) 29,811 248
New World
Development Co. 69,709 222
Sun Hung Kai Properties 86,500 660
Swire Pacific Class A 68,000 519
Wharf Holdings 89,000 351
-------
6,130
-------
ITALY--2.4%
Alleanza Assicurazioni 22,500 235
Alleanza Assicurazioni
(Non-Convertible) 3,750 35
Assicurazioni Generali 35,200 882
Banco di Roma SpA 141,900 151
Fiat Finance SpA 65,000 266
Fiat Finance SpA
(Non-Convertible) 14,000 32
First Bank San Paolo
di Torino 27,700 165
IMI 24,800 162
INA* 161,000 233
RAS Assicurazioni 6,310 79
RAS Assicurazioni
(Non-Convertible) 2,790 19
STET 137,000 414
STET (Non-Convertible) 66,000 163
Telecom Italia 200,000 549
Telecom Italia
(Non-Convertible) 42,000 93
-------
3,478
-------
JAPAN--32.7%
Ajinomoto Co., Inc. 11,000 151
All Nippon Airways Co. 28,000 332
Asahi Bank 45,000 497
Asahi Breweries 8,000 88
Asahi Chemical
Industry Co. 28,000 227
Asahi Glass Co. 21,000 271
Ashikaga Bank 8,000 59
Bank of Fukuoka 11,000 103
Bank of Tokyo 39,000 600
Bank of Yokohama 20,000 184
Bridgestone Corp. 15,000 248
Canon Inc. 16,000 297
Chiba Bank 13,000 123
Chubu Electric Power Co. 14,300 366
Chugoku Electric
Power Co., Inc. 5,900 147
Cosmo Oil Co. 11,000 88
Dai Nippon Printing Co. 15,000 279
Dai-Ichi Kangyo Bank 54,000 987
Daiei Inc. 14,000 210
Daiichi Pharmaceutical Co. 5,000 76
Daiwa Bank 29,000 305
Daiwa House Industry Co. 9,000 125
Daiwa Securities Co. 26,000 378
East Japan Railway Co. 100 499
Ebara Corp. 5,000 91
Eisai Co. 5,000 86
FamilyMart Co. 1,000 65
Fanuc 5,000 243
Fuji Bank 50,000 1,110
Fuji Photo Film Co. 9,000 215
Fujitsu Ltd. 35,000 401
Furukawa Electric Co. 13,000 90
Gunma Bank 10,000 114
Hachijuni Bank 10,000 126
Hankyu Corp. 17,000 103
Hanwa Co. 5,000 20
Hiroshima Bank 13,000 83
Hitachi Ltd. 57,000 594
Hitachi Zosen 19,000 111
Hokkaido Electric Power Co. 4,000 100
Hokkaido Takushoku Bank 12,000 58
Hokuriku Bank 13,000 98
Hokuriku Electric Power Co. 4,000 99
Honda Motor Co. 18,000 314
Industrial Bank of Japan 46,000 1,425
Ishikawajima-Harima
Heavy Industries 25,000 120
Isuzu Motors 20,000 107
Ito-Yokado Co. 8,000 437
Itochu Corp. 28,000 218
Japan Airlines Co. 35,000 271
Japan Energy Co. 21,000 93
Joyo Bank 14,000 123
Jusco Co. 6,000 135
Kajima Corp. 16,000 152
Kandenko Co. 5,000 91
Kansai Electric Power Co. 18,800 474
Kao Corp. 12,000 142
Kawasaki Heavy Industries 25,000 123
Kawasaki Steel Co. 52,000 244
Keio Teito Railway Co. 8,000 46
Kinden Co. 3,000 49
Kinki Nippon Railway Co. 31,000 268
Kirin Brewery Co. 19,000 228
Kobe Steel 48,000 166
Kokusai Denki 1,100 113
Komatsu Ltd. 18,000 171
Kubota Co. 23,000 177
Kyocera Corp. 4,000 305
Kyowa Hakko Kogyo 6,000 61
Kyushu Electric Power Co. 8,500 214
Kyushu Matsushita
Electric Co. 3,000 76
Long-Term Credit Bank
of Japan 42,000 503
Marubeni Corp. 27,000 156
Marui Co. 7,000 128
Matsushita Communication
Industrial 4,000 111
Matsushita Electric
Industrial Co. 41,000 681
Matsushita Electric Works 12,000 133
Matsushita-Kotokuki
Electronics 3,000 85
Mazda Motor Corp. 21,000 125
Mitsubishi Bank 51,000 1,279
Mitsubishi Chemical Corp. 28,000 165
Mitsubishi Corp. 30,000 409
Mitsubishi Electric Corp. 39,000 292
Mitsubishi Estate Co. 25,000 294
Mitsubishi Heavy Industries 59,000 481
Mitsubishi Materials Co. 21,000 119
Mitsubishi Motors Co. 17,000 159
Mitsubishi Oil Co. 8,000 87
</TABLE>
See accompanying Notes to Financial Statements.
52
<PAGE> 72
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Mitsubishi Trust &
Banking Corp. 25,000 $ 387
Mitsui & Co. 30,000 269
Mitsui Fudosan Co. 16,000 180
Mitsui Marine & Fire
Insurance Co. 14,000 106
Mitsui O.S.K. Lines 14,000 61
Mitsui Trust & Banking Co. 22,000 254
Mitsukoshi 6,000 62
Murata Manufacturing Co. 4,400 180
NEC Corp. 28,000 358
NGK Insulators 5,000 53
NKK Corp. 57,000 176
Nagoya Railroad Co. 10,000 52
New Oji Paper Co. 12,000 134
Nichii Co. 4,000 56
Nikko Securities Co. 29,000 341
Nintendo Co. 3,000 168
Nippon Credit Bank 34,000 226
Nippon Express Co. 21,000 228
Nippon Fire & Marine
Insurance Co. 7,000 52
Nippon Oil Co. 21,000 152
Nippon Paper
Industries Co. 39,000 308
Nippon Steel Corp. 121,000 500
Nippon Telegraph &
Telephone Corp. 303 2,831
Nippon Yusen 21,000 143
Nippondenso Co. 15,000 321
Nissan Motor Co. 49,000 418
Nisshin Steel Co. 20,000 105
Nomura Securities Co. 38,000 796
Obayashi Corp. 10,000 71
Odakyu Electric
Railway Co. 14,000 103
Oki Electric Industry Co. 12,000 96
Ono Pharmaceutical Co. 2,000 94
Osaka Gas Co. 45,000 193
Pioneer Electronic Co. 4,000 104
Ricoh Co. 13,000 130
Sakura Bank 58,000 796
Sankyo Co. 7,000 182
Sanwa Bank 50,000 1,048
Sanyo Electric Co. 33,000 199
Secom Co. 2,000 134
Sega Enterprises 2,000 104
Seibu Railway Co. 11,000 477
Sekisui Chemical Co. 11,000 113
Sekisui House 11,000 125
Seven-Eleven Japan Co. 7,000 574
Sharp Co. 22,000 411
Shikoku Electric Power Co. 4,800 118
Shimizu Corp. 14,000 145
Shin-Etsu Chemical Co. 6,000 128
Shiseido Co. 8,000 97
Shizuoka Bank 16,000 218
Showa Shell Sekiyu 7,000 93
Sony Corp. 7,000 427
Sony Music Entertainment
(Japan) 2,100 119
Sumitomo Bank 56,000 1,052
Sumitomo Chemical Co. 29,000 171
Sumitomo Corp. 21,000 217
Sumitomo Electric Industries 12,000 180
Sumitomo Marine & Fire
Insurance Co. 13,000 118
Sumitomo Metal Industries 51,000 193
Sumitomo Metal Mining Co. 11,000 109
Sumitomo Trust &
Banking Co. 22,000 320
Suzuki Motor Co. 10,000 127
TDK 3,000 147
Taisei Corp. 19,000 127
Taisho Pharmaceutical Co. 6,000 110
Takeda Chemical Industries 17,000 211
Teijin Ltd. 19,000 113
Tobu Railway Co. 16,000 102
Tohoku Electric Power Co. 8,900 228
Tokai Bank 39,000 483
Tokio Marine & Fire
Insurance Co. 30,000 356
Tokyo Electric Power Co. 26,000 762
Tokyo Electron 3,000 100
Tokyo Gas Co. 50,000 236
Tokyo Steel Manufacturing 2,000 50
Tokyu Corp. 18,000 126
Tonen 13,000 207
Toppan Printing Co. 12,000 177
Toray Industries 24,000 190
Toshiba Corp. 56,000 442
Tostem Corp. 4,000 114
Toto 6,000 94
Toyo Seikan 4,000 134
Toyo Trust & Banking Co. 13,000 152
Toyoda Automatic Loom 4,000 84
Toyota Motor Corp. 66,000 1,458
Yamaichi Securities Co. 20,000 159
Yamanouchi
Pharmaceutical Co. 6,000 118
Yamazaki Baking Co. 5,000 104
Yasuda Fire & Marine
Insurance Co. 15,000 110
Yasuda Trust & Banking Co. 18,000 160
-------
46,554
-------
NETHERLANDS--5.1%
ABN-Amro Holding NV 12,240 435
AEGON NV 4,400 272
Akzo Nobel NV 3,000 379
Elsevier NV 29,000 296
Heineken NV 1,600 234
Internationale
Nederlanden Groep 11,582 542
Koninklijke PTT Nederland 19,700 628
Philips Electronics NV 13,300 441
PolyGram NV 7,900 352
Royal Dutch Petroleum Co.
(Bearer) 23,200 2,702
Unilever NV 6,700 798
Wolters Kluwer CVA 2,700 195
-------
7,274
-------
SINGAPORE--1.8%
OCBC Bank 35,833 386
Singapore Airlines 52,000 499
Singapore Telecom 640,000 1,395
United Overseas Bank 30,000 329
-------
2,609
-------
</TABLE>
See accompanying Notes to Financial Statements.
53
<PAGE> 73
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
SPAIN--1.7%
Argentaria 5,700 $220
Banco Central SA (Reg.) 5,500 132
Banco de Bilbao Vizcaya
SA (Reg.) 7,400 194
Banco de Santander 1,200 48
Banco de Santander
SA (Reg.) 5,600 228
Empresa Nacional
de Electricidad 10,000 458
Iberdrola SA 39,600 261
Repsol, SA 12,800 409
Telefonica de Espana, SA 35,800 484
-------
2,434
-------
SWEDEN--1.6%
ASEA AB Series A
Free shares 2,100 153
ASEA AB Series B
Free shares 800 58
Astra AB Series A
Free shares 19,400 524
Astra AB Series B
Free shares 3,400 91
BCP Branded Consumer
Products Series A
Free shares 5,300 57
BCP Branded Consumer
Products Series B
Free shares 2,800 31
L.M. Ericsson Series B
Free shares 9,300 565
Pharmacia AB Series A
Free shares 5,300 100
Pharmacia AB Series B
Free shares 2,800 52
Sandvik AB Series A
Free shares 8,600 146
Volvo AB Series A
Free shares 5,000 98
Volvo AB Series B
Free shares 20,700 408
-------
2,283
-------
SWITZERLAND--5.8%
BBC Brown
Boveri 331 284
BBC Brown Boveri (Reg.) 189 31
CS Holding (Bearer) 1,014 444
CS Holding (Reg.) 1,745 148
Ciba-Geigy AG (Bearer) 170 100
Ciba-Geigy AG (Reg.) 1,080 630
Cie Financiere Richemont
Series A (Bearer) 232 228
Nestle SA (Reg.) 1,669 1,562
Roche Holding AG 295 1,313
Roche Holding AG (Bearer) 70 631
SMH AG (Bearer) 156 87
SMH AG (Reg.) 682 90
Sandoz AG (Bearer) 91 48
Sandoz AG (Reg.) 1,673 835
Schweiz Bankgesellschaft
(Bearer) 886 831
Schweiz Bankgesellschaft
(Reg.) 950 202
Schweiz Bankverein (Bearer) 940 271
Schweiz Bankverein (Reg.) 1,030 142
Zurich Versicherung (Bearer) 150 137
Zurich Versicherung (Reg.) 206 189
-------
8,203
-------
UNITED KINGDOM--20.2%
Abbey National 56,600 385
Allied-Lyons PLC 43,900 429
Argyll Group PLC 44,593 190
BAA PLC 42,200 355
BAT Industries PLC 127,800 916
BOC Group 18,525 204
BTR PLC 148,712 746
Barclays PLC 70,097 667
Bass PLC 37,200 338
Boots Co. PLC 42,448 368
British Airways PLC 40,000 230
British Gas PLC 181,600 870
British Petroleum PLC 236,575 1,683
British Steel 80,800 212
Cable & Wireless PLC 146,900 1,009
Cadbury Schweppes PLC 33,655 239
Commercial Union 23,500 211
General Accident 17,300 166
General Electric Co. PLC 115,800 523
Glaxo Holdings PLC 133,126 1,303
Grand Metropolitan PLC 92,103 625
Great Universal Stores 43,000 394
Guinness PLC 84,200 643
HSBC Holdings PLC 36,191 430
HSBC Holdings PLC
(Hong Kong) 66,146 788
Hanson PLC 206,153 779
Imperial Chemical
Industries PLC 29,100 380
Inchcape 21,300 152
J. Sainsbury PLC 74,732 488
Kingfisher 28,500 221
Lloyds Abbey Life 26,700 153
Lloyds Bank 56,554 530
Marks & Spencer PLC 117,900 801
National Power 52,800 428
National Westminster
Bank PLC 73,299 603
New Rothmans (units) 62,400 428
Pearson PLC 21,837 226
Peninsular & Oriental
Steam Navigation 25,546 266
Powergen PLC 33,400 310
Prudential Corp. 82,019 428
RTZ Corp. PLC (Reg.) 44,900 631
Rank Organisation PLC 35,800 237
Redland 21,300 162
Reed International PLC 23,400 288
Reuters Holdings PLC 86,500 679
Royal Bank of
Scotland Group 30,100 216
Scot & Newcastle 20,100 170
Scottish Power 31,400 185
Shell Transport &
Trading Co. (Reg.) 143,700 1,723
SmithKline Beecham PLC
Series A 56,063 373
SmithKline Beecham units 54,100 329
Standard Chartered PLC 9,900 48
</TABLE>
See accompanying Notes to Financial Statements.
54
<PAGE> 74
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ------
<S> <C> <C>
Sun Alliance Group 31,988 $172
TSB Group PLC 68,100 253
Tesco 83,900 322
Thorn-EMI PLC 17,500 278
Tomkins 46,100 159
Unilever PLC 34,600 644
Vendome (units) 29,850 253
Vodafone Group PLC 124,968 433
Waste Management
International* 16,000 133
Wellcome PLC 34,900 367
Zeneca Group 38,900 547
--------
28,719
--------
TOTAL COMMON STOCK
(Cost $128,564) 138,415
--------
PREFERRED STOCK--0.4%
GERMANY--0.4%
Henkel KGaA 542 213
RWE AG (Non Voting) 700 172
SAP AG (Non Voting) 161 93
Volkswagen AG (Non Voting) 201 47
--------
525
--------
ITALY--0.0%
Fiat Finance SpA 18,300 44
--------
TOTAL PREFERRED STOCK
(Cost $511) 569
--------
WARRANTS--0.0%
SWITZERLAND--0.0%
CS Holding expire 12/16/94* 2,759 11
--------
UNITED KINGDOM--0.0%
BTR Nylex expire 11/26/98* 4,019 3
--------
TOTAL WARRANTS
(Cost $16) 14
--------
Maturity Value
(000)s (000s)
-------- ------
<S> <C> <C>
REPURCHASE AGREEMENT--1.1%
UNITED STATES--1.1%
State Street Bank & Trust 4.25%
Dated 10/31/94
Due 11/01/94
Collateralized By:
U.S. Treasury Bill
$1,550,000 Par;
Due 4/30/95 $1,478 $ 1,478
--------
TOTAL REPURCHASE AGREEMENT
(Cost $1,478) 1,478
--------
TOTAL INVESTMENTS -- 98.7%
(Cost $130,569) 140,476
--------
OTHER ASSETS AND LIABILITIES -- 1.3%
Other Assets 4,564
Liabilities (2,685)
--------
1,879
--------
NET ASSETS -- 100.0%
Applicable to 13,066,324
outstanding $0.00001
par value shares
(unlimited shares authorized) $142,355
========
NET ASSET VALUE PER SHARE $10.89
======
</TABLE>
- ------------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
55
<PAGE> 75
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF OPERATIONS (in thousands)
For the year ended October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax withheld of $350) $2,394
Interest 125
------
Total investment income 2,519
------
Expenses:
Investment advisory and administration fee 862
Transfer agency and shareholder service fees 308
Custodian fees 196
Registration fees 43
Professional fees 45
Shareholder reports 72
Trustees' fees 50
Amortization of deferred organization costs 24
Insurance and other expenses 6
------
1,606
Less expenses reduced (499)
------
Total expenses incurred by Fund 1,107
------
Net investment income 1,412
------
Net realized gain (loss) on investments and foreign currency transactions:
Proceeds from sales of investments 7,690
Cost of investments sold (8,384)
------
Net realized loss on investments from changes in market value (694)
Net realized gain on investments from changes in foreign
exchange rates 99
------
Net realized loss on investments sold (595)
Net realized gain on foreign currency transactions 15
------
Net realized loss on investments sold and foreign
currency transactions (580)
------
Change in net unrealized gain (loss) on investments and foreign
currency translation:
Changes in market value:
Beginning of period unrealized gain 4,200
End of period unrealized gain 413
------
Decrease in net unrealized gain in market value (3,787)
------
Changes in foreign exchange rates:
Beginning of period unrealized loss (3,131)
End of period unrealized gain 9,494
------
Increase in net unrealized gain in foreign exchange rates 12,625
------
Net increase in unrealized gain on investments from
changes in market value and foreign exchange rates 8,838
Net increase in unrealized gain on translating assets and
liabilities into the reporting currency 51
------
Net increase in unrealized gain on investments and
foreign currency translation 8,889
------
Net gain on investments 8,309
------
Net increase in net assets resulting from operations $9,721
======
</TABLE>
See accompanying Notes to Financial Statements.
56
<PAGE> 76
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
September 9, 1993
For the (commencement
year ended of operations) to
October 31, October 31,
1994 1993
------------ -----------------
<S> <C> <C>
Operations:
Net investment income $ 1,412 $ 301
Net realized gain (loss) on investments sold
and foreign currency transactions (580) 188
Net increase in unrealized gain on investments
and foreign currency translation 8,889 1,053
-------- --------
Net increase in net assets resulting from
operations 9,721 1,542
-------- --------
Distributions to Shareholders From:
Net investment income (433) --
Capital gains (188) --
-------- --------
Total distributions to shareholders (621) --
-------- --------
Capital Share Transactions:
Proceeds from shares sold 61,237 106,336
Net asset value of shares issued in
reinvestment of distributions 560 --
Early withdrawal fees 129 --
Less payments for shares redeemed (34,756) (1,793)
-------- --------
Increase in net assets from capital share
transactions 27,170 104,543
-------- --------
Total increase in net assets 36,270 106,085
Net Assets:
Beginning of period 106,085 --
-------- --------
End of period (including undistributed net invest-
ment income of $1,280 and $301, respectively) $142,355 $106,085
======== ========
Number of Fund Shares:
Sold 5,947 10,637
Reinvested 56 --
Redeemed (3,392) (182)
-------- --------
Net increase in shares outstanding 2,611 10,455
Shares Outstanding:
Beginning of period 10,455 --
-------- --------
End of period 13,066 10,455
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
57
<PAGE> 77
SCHWABFUNDS(R) 8
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1994
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUND
The Schwab International Index Fund (the "Fund") is a series of Schwab Capital
Trust (the "Trust"), an open-end, management investment company organized as a
Massachusetts business trust on May 7, 1993 and registered under the Investment
Company Act of 1940, as amended.
In addition to the Fund, the Trust also offers the Schwab Small-Cap Index
Fund(TM). The assets of each series are segregated and accounted for separately.
The investment objective of the Fund is to attempt to track the price and
dividend performance (total return) of the Schwab International Index(TM), an
index created to represent the performance of common stocks and other equity
securities issued by large, publicly traded companies from countries around the
world with major developed securities markets (excluding the United States and
South Africa).
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Investments in securities traded on an exchange are valued
at the last quoted sale price for a given day, or if a sale is not reported for
that day, at the mean between the most recent quoted bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Fund's sub-advisor pursuant to Board of Trustees guidelines.
Short-term securities with 60 days or less to maturity are stated at amortized
cost, which approximates market value.
Security transactions and investment income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Dividend income and distributions to
shareholders are recorded on the ex-dividend date; interest income is recorded
on the accrual basis. Realized gains and losses from security transactions are
determined on an identified cost basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or Government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Foreign currency translation -- The accounting records of the Fund are
maintained in U.S. dollars. Investment securities and all other assets and
liabilities of the Fund denominated in a foreign currency are translated into
U.S. dollars at the exchange rates on October 31. Purchases and sales of
securities, income receipts and expense payments are translated into U.S.
dollars at the exchange rate in effect on the dates of the respective
transactions.
The Fund separates within its statement of operations the portion of realized
and unrealized gains and losses resulting from changes in foreign exchange rates
from that arising from changes in securities' market values.
Forward currency contracts -- A forward currency contract ("Forward") is an
agreement between two parties to buy and sell a currency at a set price on a
future date. The value of the Forward fluctuates with changes in currency
exchange rates. The Forward is marked-to-market daily and the change in value is
recorded by the Fund as an unrealized gain or loss. When the Forward is closed,
the Fund records a realized gain or loss equal to the difference between the
value at the time the
58
<PAGE> 78
SCHWABFUNDS(R) 9
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1994
- --------------------------------------------------------------------------------
contract was opened and the value at the time the contract was closed. The Fund
engages in Forwards in connection with the purchase and sale of portfolio
securities to minimize the uncertainty of changes in future exchange rates (see
Note 9).
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund, its initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from the Fund's commencement of operations.
Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. The Fund is considered a separate entity for tax purposes.
At October 31, 1994, (for financial reporting and federal income tax purposes),
net unrealized gain aggregated $9,907,000, of which $13,741,000 related to
appreciated securities and $3,834,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of .70% of the first $300 million
of average daily net assets and .60% of such assets over $300 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$862,000 during the year ended October 31, 1994, before the Investment Manager
reduced its fee (see Note 5).
Sub-advisory agreement -- The Investment Manager has a sub-advisory agreement
with Dimensional Fund Advisors Inc. ("Dimensional") to perform day-to-day
portfolio management for the Fund. Dimensional does not receive compensation
directly from the Fund. However, the Investment Manager pays Dimensional an
annual fee, payable monthly, of .15% of the first $300 million of average daily
net assets and .05% of such assets over $300 million.
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets for transfer
agency services and .20% of such assets for shareholder services. For the year
ended October 31, 1994, the Fund incurred transfer agency and shareholder
service fees of $308,000, before Schwab reduced its fees (see Note 5).
Officers and trustees -- During the period, certain officers and trustees of the
Trust were also officers or directors of the Investment Manager, Schwab or
Dimensional. During the year ended October 31, 1994, the Trust made no direct
payments to its officers or trustees who were "interested persons" within the
meaning of the Investment Company Act of 1940, as amended. The Fund incurred
fees of $50,000 related to the Trust's unaffiliated trustees.
59
<PAGE> 79
SCHWABFUNDS(R) 10
- --------------------------------------------------------------------------------
4. BORROWING AGREEMENT
The Trust has an arrangement with State Street Bank and Trust Company, the
Fund's custodian, whereby the Fund may borrow up to $10,000,000, on a temporary
basis, to fund redemptions. Amounts borrowed under this arrangement bear
interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the year ended October 31, 1994, no borrowings were
made under this arrangement.
5. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in
order to limit the Fund's ratio of operating expenses to average net
assets. During the year ended October 31, 1994, the total of such fees
reduced by the Investment Manager was $388,000 and the total of such
fees reduced by Schwab was $111,000.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated $36,420,000 and $7,690,000, respectively, during the year ended
October 31, 1994.
7. EARLY WITHDRAWAL FEES PAID TO THE FUND
The Fund assesses a .75% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the year ended October 31, 1994, total early withdrawal fees
retained by the Fund amounted to $129,000.
8. COMPOSITION OF NET ASSETS
At October 31, 1994, net assets consisted of:
<TABLE>
<S> <C>
Capital paid in $131,687,000
Accumulated undistributed net investment income 1,306,000
Accumulated net realized loss on investments sold
and foreign currency transactions (580,000)
Net unrealized gain on investments 9,907,000
Net unrealized gain on translating assets and liabilities
into the reporting currency 35,000
------------
Total $142,355,000
============
</TABLE>
The Fund adopted Statement of Position 93-2 Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies, which will generally present
undistributed income and realized gains on a tax basis. As a result of adoption,
certain reclassifications to increase undistributed net investment income and
decrease capital paid in by $26,000 have occurred. These reclassifications have
no impact on the net asset value of the Fund.
At October 31, 1994, the Fund's Statement of Net Assets included liabilities of
$896,000 for securities purchased, $280,000 for Fund shares redeemed, $52,000
for investment advisory and administration fee payable and $25,000 for transfer
agency and shareholder service fees payable.
60
<PAGE> 80
SCHWABFUNDS(R) 11
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1994
- --------------------------------------------------------------------------------
9. COMMITMENTS
At October 31, 1994, the Fund had an open Forward contract which obligated the
Fund to deliver foreign currency in exchange for U.S. dollars at a specified
future date as follows:
<TABLE>
<CAPTION>
Contract In Exchange Settlement Unrealized
Currency Amount For Date Value Loss
-------- -------- ----------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C>
British pound 770,000 $1,257,872 11/4/94 $1,259,405 $1,533
</TABLE>
10. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout
the period:
<TABLE>
<CAPTION>
For the period
September 9, 1993
For the (commencement of
year ended operations) to
October 31, 1994 October 31, 1993
---------------- -----------------
<S> <C> <C>
Net asset value at beginning of period $ 10.15 $ 10.00
Income from Investment Operations
Net investment income .11 .03
Net realized and unrealized gain on investments
and foreign currency transactions .69 .12
-------- --------
Total from investment operations .80 .15
Less Distributions
Dividends from net investment income (.04) --
Distributions from net realized gain
on investments (.02) --
-------- --------
Total distributions (.06) --
-------- --------
Net asset value at end of period $ 10.89 $ 10.15
======== ========
Total return (%) 7.9 1.5
Ratios/Supplemental Data
Net assets, end of period (000s) $142,355 $106,085
Ratio of expenses to average net
assets (%) .90 .60*
Ratio of net investment income to
average net assets (%) 1.14 2.15*
Portfolio turnover rate (%) 6 2
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the periods ended
October 31, 1994 and 1993, would have been 1.30% and 2.10%*, respectively, and
the ratio of net investment income to average net assets would have been .74%
and .65%*, respectively.
61
<PAGE> 81
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
To the Board of Trustees
and Shareholders of the Schwab International Index Fund(TM)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the Schwab International Index
Fund (one of the series constituting Schwab Capital Trust, hereafter referred
to as the "Trust") at October 31, 1994, the results of its operations and the
changes in its net assets for each of the periods presented, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at October 31, 1994 by
correspondence with the custodian and broker, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
November 30, 1994
62
<PAGE> 82
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
COMMON STOCK--96.0%
A.L. Laboratories, Inc.
Class A 2,300 $41,113
AAR Corp. 2,600 32,175
ABM Industries, Inc. 1,800 37,800
ABT Building Products Corp.* 1,900 29,450
ACX Technologies, Inc.* 2,300 80,788
ADAC Laboratories 3,000 25,500
AGCO Corp. 2,500 137,500
AMC Entertainment Inc.* 500 5,750
AMCORE Financial, Inc. 1,500 28,688
AMETEK, Inc. 6,500 117,813
APS Holding Corp. Class A* 2,100 61,163
AST Research, Inc.* 10,400 131,950
Acclaim Entertainment, Inc. 6,800 118,575
Acordia, Inc. 2,500 70,625
Acuson Corp.* 4,900 90,038
Acxiom Corp.* 1,600 47,400
Addington Resources, Inc.* 3,100 32,550
Adelphia Communications
Corp. Class A* 2,000 24,500
Adesa Corp.* 1,800 24,300
Adia Personnel Services, Inc. 1,000 36,000
Adobe Systems Inc. 1,600 57,900
Advanced Technology
Laboratories, Inc.* 2,200 35,750
Advanced Tissue
Sciences, Inc.* 5,000 37,500
ADVO, Inc. 3,300 58,575
Air & Water Technologies
Corp. Class A* 9,500 66,500
Air Express
International Corp. 2,200 61,600
Airborne Freight Corp. 1,700 32,513
Airgas, Inc. 2,700 78,300
Alaska Air Group, Inc.* 2,100 36,750
ALBANK Financial Corp. 2,200 48,813
Albany International Corp.
Class A 3,800 75,050
Alberto-Culver Co. Class A 1,800 42,525
Alberto-Culver Co. Class B
(Convertible) 2,100 53,288
Aldila, Inc. 3,900 50,213
Alex. Brown Inc. 2,400 66,300
Alfa Farmers
Federation Corp. 6,900 75,900
Allen Group Inc. 3,700 89,725
Alliance Pharmaceutical Corp.* 3,600 27,675
Alliant Techsystems Inc.* 1,700 58,438
Allied Group, Inc. 1,500 43,313
Allwaste, Inc.* 5,600 35,700
Alpha-Beta Technology, Inc.* 400 3,750
Altera Corp.* 3,400 134,088
Amax Gold Inc. 14,500 97,875
Amcast Industrial Corp. 1,500 30,188
America Online, Inc. 1,300 92,300
American Annuity Group, Inc. 7,500 71,250
American Bankers
Insurance Group, Inc. 3,400 67,575
American Business
Information, Inc.* 5,100 89,250
American Business
Products, Inc. 1,300 28,925
American Classic Voyages 1,900 32,775
American Colloid Co. 3,400 53,550
American Freightways Corp. 1,600 33,800
American Heritage Life
Investment Corp. 5,200 91,650
American Income
Holding Inc. 2,500 87,344
American Maize-Products Co. 1,000 22,625
American Management
Systems, Inc. 4,500 71,156
American Medical
Response, Inc.* 2,600 70,525
American President
Companies, Ltd. 4,600 111,550
American Savings Bank of
Florida (New)* 4,800 96,300
Americredit Corp.* 5,300 35,113
Ameridata Technologies Inc.* 2,600 34,775
Amphenol Corp. Class A* 3,100 67,813
Amsco International, Inc.* 10,700 102,988
Amtech Corp. 2,300 23,000
Analogic Corp.* 2,100 36,750
Anchor Bancorp, Inc.* 3,800 56,525
Andrew Corp. 950 49,519
Angelica Corp. 1,100 29,150
AnnTaylor Stores Corp.* 700 29,050
Antec Corp.* 3,800 107,350
Anthem Electronics, Inc.* 2,300 75,613
Anthony Industries, Inc. 2,400 41,100
Apogee Enterprises, Inc. 2,300 41,113
Apple South, Inc. 4,650 74,981
Applebee's International, Inc. 3,300 60,638
Applied Magnetics Corp.* 2,600 9,425
Applied Power Inc. Class A 1,500 36,938
Aptargroup, Inc. 2,700 73,575
Aquarion Co. 900 21,150
Aquila Gas Pipeline Corp. 4,800 36,600
Arbor Drugs, Inc. 2,800 59,150
Arctco, Inc. 4,650 95,325
Argosy Gaming Corp.* 3,900 67,275
Arkansas Best Corp. 4,100 53,044
Armco Inc.* 17,000 121,125
Armor All Products Corp. 3,600 80,100
Arnold Industries Inc. 4,300 99,438
Arrow International, Inc. 4,100 114,288
Arthur J. Gallagher & Co. 2,300 75,325
Artisoft, Inc.* 2,000 19,500
Arvin Industries, Inc. 3,700 90,188
Ashland Coal, Inc. 2,500 76,250
Aspect
Telecommunications Corp.* 1,800 62,100
Associated Banc-Corp 2,200 74,250
Associated Natural
Gas Corp. 2,000 76,250
Atari Corp.* 18,600 125,550
Atmos Energy Corp. 2,400 39,300
Au Bon Pain Co., Inc.
Class A* 1,700 33,575
Augat Inc. 3,500 69,563
Aura Systems, Inc.* 5,700 26,363
Authentic Fitness Corp. 5,500 83,188
AutoFinance Group, Inc.* 3,100 31,388
Automotive Industries
Holding, Inc.* 2,800 68,600
Autotote Corp. Class A 5,000 87,500
</TABLE>
See accompanying Notes to Financial Statements.
63
<PAGE> 83
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Avatar Holdings, Inc.* 1,500 $52,688
Aviall, Inc. 7,275 72,750
Avid Technology, Inc.* 1,700 64,175
Aztar Corp.* 7,400 44,400
BWIP Holding, Inc. Class A 4,100 72,775
BET Holdings, Inc. Class A* 1,500 24,750
BISYS Group, Inc.* 2,600 57,200
BJ Services Co.* 2,700 55,013
BMC West Corp. 1,400 23,800
Baldor Electric Co. 2,860 74,360
Baldwin & Lyons, Inc.
Class A 100 1,550
Baldwin & Lyons, Inc.
Class B 1,800 27,000
Ballard Medical Products 9,900 96,525
Bally Entertainment Corp.* 7,600 53,200
Baltimore Bancorp 2,800 57,050
BancTec, Inc.* 1,800 36,000
Bancorpsouth, Inc. 1,300 41,600
Bank of Montreal 1,180 21,919
Bankers Corp. 240 3,465
Banyan Systems, Inc.* 2,800 49,000
Barefoot Inc. 2,800 39,550
Barnes Group Inc. 700 26,250
Barr Laboratories, Inc.* 1,000 25,250
Barrett Resources Corp.* 1,900 37,288
Bassett Furniture
Industries, Inc. 2,500 67,500
Bay State Gas Co. 2,100 50,925
Bay View Capital Corp. 1,200 27,000
Bearings, Inc. 900 29,363
Belden Inc. 2,800 56,000
Bell Bancorp, Inc. 1,800 47,250
Bell Sports Corp.* 1,300 27,300
Benton Oil & Gas Co.* 4,500 35,156
Bergen Brunswig Corp.
Class A 6,175 101,888
Berkley (W.R.) Corp. 600 21,525
Berry Petroleum Co. Class A 2,900 27,550
Best Power Technology, Inc.* 1,100 15,538
Big B, Inc. 2,900 35,525
Bio-Technology
General Corp.* 3,800 7,363
Biocraft Laboratories, Inc. 1,700 30,388
Birmingham Steel Corp. 1,500 38,813
Black Box Corp. 3,000 42,000
Black Hills Corp. 2,300 47,150
Blair Corp. 1,400 58,800
Blanch (E.W.) Holdings, Inc. 2,200 44,825
Block Drug Co., Inc. Class A 1,900 67,450
Blount, Inc. Class A 1,300 55,413
Blount, Inc. Class B 500 21,750
Bolt Beranek and
Newman Inc.* 2,200 39,050
Bombay Company, Inc. 5,950 71,400
Books-A-Million, Inc. 3,000 42,563
Borg-Warner
Security Corp.* 3,400 35,275
Borland International, Inc.* 9,300 99,975
Boston Bancorp 1,000 30,750
Boston Technology, Inc.* 8,400 138,600
Bowne & Co., Inc. 2,800 44,800
Box Energy Corp. Class A* 500 6,000
Box Energy Corp. Class B
(Non Voting)* 3,000 27,000
Breed Technologies, Inc. 1,100 38,913
BroadBand
Technologies, Inc.* 1,900 49,400
Broadway Stores Inc.* 8,500 95,625
Broderbund Software, Inc. 1,400 89,950
Brown (Tom), Inc.* 3,000 38,250
Brown Group, Inc. 500 16,938
Bruno's, Inc. 14,200 135,788
Brush Wellman Inc. 2,700 45,225
Buffets, Inc. 5,000 51,563
Bush Industries, Inc. 800 20,900
C-TEC Corp.* 1,300 35,750
CCB Financial Corp. 1,500 60,750
CCP Insurance, Inc. 5,400 83,700
CDI Corp.* 3,400 57,800
CILCORP Inc. 2,400 73,200
CKE Restaurants Inc. 2,600 21,450
CLARCOR Inc. 2,400 48,300
CMAC Investment Corp. 2,100 57,750
CML Group, Inc. 8,250 81,469
CNB Bancshares, Inc. 2,200 75,625
COR Therapeutics, Inc.* 4,400 57,200
CPI Corp. 1,700 36,975
Cross (A.T.) Co. Class A 2,800 42,350
CSF Holdings, Inc.* 1,600 41,600
CSS Industries, Inc. 1,700 28,263
Cabot Oil & Gas Corp.
Class A 3,300 61,050
Cadence Design
Systems, Inc.* 1,800 36,000
CalMat Co. 4,300 89,225
Caldor Corp.* 3,000 85,875
Calgene, Inc.* 4,600 39,963
Calgon Carbon Corp. 6,600 74,250
California Energy Co., Inc.* 6,800 115,600
California Federal Bank 3,000 34,500
California Microwave, Inc.* 1,900 59,138
California Water Service Co. 800 25,100
Camco International, Inc. 4,600 94,875
Canandaigua Wine Co.,
Inc. Class A* 2,100 68,775
Canandaigua Wine Co.,
Inc. Class B* 400 13,500
Capital Re Corp. 5,400 118,800
Capitol American
Financial Corp. 6,500 144,625
Capsure Holdings Corp.* 2,800 37,100
Caraustar Industries, Inc. 4,200 82,950
Carlisle Companies Inc. 2,800 91,350
Carpenter Technology Corp. 1,200 67,800
Carr-Gottstein Food Co.* 2,000 13,750
Casey's General Stores, Inc. 4,700 62,275
Cash America
Investments, Inc. 3,400 28,050
Casino America, Inc. 850 9,350
Castle & Cooke Homes, Inc.* 9,300 145,313
Catalina Marketing Corp.* 1,500 76,313
Catellus Development Corp.* 13,300 88,113
Cato Corp. (New) Class A 4,500 42,750
Cell Genesys, Inc.* 2,300 17,250
CellPro, Inc.* 2,300 38,525
Cellular Communications
Class A (Redeemable)* 4,500 239,063
Centennial Cellular Corp. 4,100 70,725
</TABLE>
See accompanying Notes to Financial Statements.
64
<PAGE> 84
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Centerbank Waterbury
Connecticut* 2,200 $27,775
Centocor, Inc.* 9,300 165,075
Central Hudson Gas &
Electric Corp. 3,100 75,950
Central Jersey Bancorp 1,500 48,750
Central Louisiana Electric
Co., Inc. (New) 4,100 88,663
Central Maine Power Co. 5,200 59,800
Central Vermont Public
Service Corp. 2,100 27,825
Centura Banks, Inc. 2,700 59,400
Century Communications
Corp. Class A 3,900 33,150
Cerner Corp.* 2,400 98,700
Chambers Development
Co., Inc.* 1,900 3,800
Chambers Development
Co., Inc. Class A* 9,400 18,800
Champion Enterprises, Inc.* 1,400 49,700
Chaparral Steel Co. 6,000 48,000
Charter Medical Corp.* 4,900 121,275
Charter One Financial, Inc. 4,000 81,000
Checkers Drive-In
Restaurants, Inc. 8,800 29,975
Checkpoint Systems, Inc.* 2,100 39,375
Cheesecake Factory, Inc. 1,600 30,600
Chemed Corp. 1,500 51,188
Chemical Financial Corp. 1,330 52,535
Chesapeake Corp. 4,300 133,300
Cheyenne Software, Inc. 6,250 69,531
Chipcom Corp. 1,800 108,450
Chiquita Brands
International, Inc. 8,200 101,475
Church & Dwight Co., Inc. 3,600 81,000
Circa Pharmaceuticals, Inc.* 3,500 52,063
Citizens Bancorp 2,100 59,325
Citizens Banking Corp. 2,400 63,600
Citizens First Bancorp, Inc. 7,500 72,656
City National Corp. 8,200 90,200
Claire's Stores, Inc. 3,300 38,363
Clear Channel
Communications, Inc. 575 28,966
Cleveland-Cliffs Inc. 1,800 68,625
Coast Savings
Financial, Inc.* 2,300 32,775
Coastal Healthcare
Group, Inc.* 3,400 106,250
Cobra Golf, Inc. 3,400 126,225
Coca-Cola Bottling Co.
Consolidated 1,300 34,288
Coeur d'Alene Mines Corp. 2,600 48,425
Cognex Corp. 2,700 66,825
Collagen Corp. 1,800 39,600
Collective Bancorp, Inc. 3,600 64,125
Colonial BancGroup, Inc. 1,600 36,800
Colonial Gas Co. 900 17,438
Colonial Group, Inc. Class A 1,300 44,688
Comair Holdings, Inc. 3,800 81,700
Commerce Clearing
House, Inc. Class A 2,800 49,350
Commerce Clearing
House, Inc. Class B
(Non Voting) 2,900 49,663
Commercial Federal Corp.* 2,200 46,338
Commercial Intertech Corp. 2,850 54,863
Commercial Metals Co. 2,733 74,474
Commonwealth Energy
System 1,900 71,725
Community Health
Systems, Inc. 1,800 47,250
Community Psychiatric
Centers 7,300 72,088
Comnet Cellular Inc.* 1,900 53,913
CompUSA, Inc.* 2,700 31,388
Comverse Technology Inc.* 3,000 37,125
Concord EFS Inc. 2,700 66,825
Cone Mills Corp.* 3,600 42,750
Connecticut Energy Corp. 900 19,125
Connecticut Natural
Gas Corp. 1,400 33,075
Conner Peripherals, Inc.* 4,500 51,750
Consolidated
Freightways, Inc.* 2,000 44,750
Consolidated Stores Corp.* 8,700 157,688
Consorcio G Grupo Dina* 4,202 42,545
Continental Airlines, Inc.
Class A* 800 13,300
Continental Airlines, Inc.
Class B* 3,600 59,400
Continental Medical
Systems, Inc.* 15,000 106,875
Continuum Company, Inc.* 3,500 94,063
Copley Pharmaceutical, Inc. 3,064 54,003
CopyTele, Inc.* 3,900 19,378
Coram Healthcare Corp.* 4,662 76,923
Cordis Corp.* 1,200 69,375
Coventry Corp. 4,600 114,425
Crawford & Co. Class A 2,300 35,650
Crawford & Co. Class B 2,100 32,813
Cray Research, Inc.* 4,300 82,238
Credence Systems Corp.* 4,500 113,625
Credit Acceptance Corp. 3,500 131,688
Cross Timbers Oil Co. 4,900 78,400
CrossComm Corp.* 1,000 10,250
Crown Central
Petroleum Corp.* 600 10,200
Cullen/Frost Bankers, Inc. 1,900 63,175
Cypress Semiconductor Corp.* 6,200 129,425
Cyrix Corp.* 3,100 127,681
Cyrk, Inc.* 1,500 58,875
Cytec Industries, Inc.* 2,100 86,100
CytRx Corp.* 3,200 7,700
Dallas Semiconductor Corp.* 9,500 133,000
Dames & Moore, Inc. 4,700 69,325
Daniel Industries, Inc. 1,400 18,900
Data General Corp.* 5,900 57,525
Datascope Corp.* 2,700 46,238
DeVRY Inc.* 3,500 101,938
Dell Computer Corp.* 3,150 140,569
Delphi Financial Group, Inc.
Class A* 700 13,738
Delta Woodside
Industries, Inc. 8,100 84,038
Department 56, Inc.* 400 14,650
Deposit Guaranty Corp. 3,000 86,250
Destec Energy, Inc.* 11,500 126,500
Detroit Diesel Corp.* 4,700 116,325
Devon Energy Corp. 3,400 74,375
Dexter Corp. 4,500 92,813
</TABLE>
See accompanying Notes to Financial Statements.
65
<PAGE> 85
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Diagnostek, Inc.* 4,000 $63,000
Diagnostic Products Corp. 1,600 38,400
Dial Page, Inc.* 1,600 34,800
Dibrell Brothers, Inc. 2,000 44,000
Digi International, Inc.* 2,300 38,813
Digital Microwave Corp.* 800 11,900
Dime Bancorp Inc.* 10,400 91,000
Dionex Corp.* 1,500 56,063
Discount Auto Parts, Inc.* 2,600 39,650
Discovery Zone, Inc. 6,800 130,900
Donaldson Co., Inc. 4,800 110,400
Downey Savings and
Loan Association 1,900 35,863
Dress Barn, Inc.* 3,800 37,050
Dreyer's Grand Ice
Cream, Inc. 2,600 66,625
Dual Drilling Co.* 1,900 24,819
Duff & Phelps Corp. 4,200 74,025
Duriron Co., Inc. 3,000 53,625
Duty Free International, Inc. 5,300 70,888
Dynatech Corp.* 1,700 49,300
E'town Corp. 700 18,200
E-Z Serve Corp.* 4,300 7,659
ENVOY Corp.* 2,000 40,750
Eagle Hardware &
Garden, Inc.* 3,400 33,150
Eastern Enterprises 3,900 101,400
Eastern Utilities Associates 3,600 78,750
Eaton Vance Corp.
(Non Voting) 1,400 44,275
Edison Brothers Stores, Inc. 3,500 83,125
Education Alternatives, Inc.* 2,000 42,750
Elcor Corp.* 1,000 16,875
Electroglas Inc.* 1,400 55,825
Electronics for Imaging, Inc.* 2,300 60,375
Empire District Electric Co. 2,200 35,475
Energen Corp. 1,300 29,575
Energy Service Co., Inc. 2,275 32,988
Energy Ventures, Inc.* 1,400 20,300
Enhance Financial
Services Group, Inc. 3,100 56,188
Ennis Business Forms, Inc. 2,700 36,450
Enquirer/Star Group, Inc.
Class A 3,300 55,275
Enterra Corp.* 2,700 61,763
Envirotest Systems Corp.
Class A* 2,500 31,563
Ethan Allen Interiors, Inc.* 2,200 53,900
Evergreen Media Corp.
Class A* 700 12,600
Exabyte Corp.* 3,900 86,044
Exar Corp. 1,200 24,750
Excel Industries, Inc. 1,900 28,500
Expeditors International of
Washington, Inc. 2,300 47,438
Express Scripts, Inc. Class A 1,200 40,800
F & M National Corp. 2,255 36,644
FHP International Corp.* 1,056 30,624
FHP International Corp. 3,520 96,360
FMC Gold Co. 17,500 72,188
FTP Software Inc.* 3,600 90,000
Fab Industries, Inc. 900 27,788
Fair, Issac & Co. Inc. 1,000 40,250
Farmer Bros. Co. 300 38,400
Fastenal Co. 800 35,900
Fidelity National
Financial, Inc. 2,900 32,988
Fieldcrest Cannon, Inc.* 1,300 33,150
Figgie International Inc.
Class A 4,600 35,938
Figgie International Inc.
Class B 600 5,025
FileNet Corp.* 1,500 37,875
Filene's Basement Corp.* 3,900 29,738
Financial Trust Corp. 1,200 34,200
First Alert Inc. 3,800 80,275
First American
Financial Corp. 3,600 67,050
First Bancorporation of Ohio 900 21,713
First Citizens BancShares,
Inc. Class A 1,300 58,825
First Colonial Bankshares Corp.
Class A 1,500 34,031
First Commerce Corp. 1,162 30,793
First Commercial Corp. 2,800 58,450
First Commonwealth
Financial Corp. 3,000 42,750
First Financial Bancorp 1,600 61,400
First Financial Corp. 4,000 56,000
First Michigan Bank Corp. 2,959 69,537
First Midwest Bancorp, Inc. 2,100 57,488
First Mississippi Corp. 3,200 67,200
First National Bancorp 2,700 52,650
First Pacific Networks, Inc.* 1,100 7,425
FirstFed Financial Corp.* 200 2,850
FirstFed Michigan Corp. 3,300 68,888
Firstbank of Illinois Co. 1,000 38,250
Fisher Scientific
International, Inc. 2,600 72,475
Flagstar Companies, Inc.* 7,200 59,400
Florida East Coast
Industries, Inc. 1,400 106,575
Florida Rock Industries, Inc. 1,400 37,275
Fluke Corp. 1,100 32,588
Foamex International Inc.* 4,300 38,431
Foodmaker, Inc. (New)* 11,100 59,663
Foote, Cone & Belding
Communications, Inc. 1,900 85,025
Foothill Group, Inc. Class A 2,400 36,000
Foremost Corp. of America 1,800 58,500
Forest City Enterprises, Inc.
Class A 900 27,338
Forest City Enterprises, Inc.
Class B (Convertible) 500 17,781
Fort Wayne National Corp. 1,800 49,725
Fossil, Inc.* 2,200 61,325
FoxMeyer Health Corp.* 5,473 90,989
Franklin Electric Co., Inc. 1,100 34,650
Franklin Quest Co.* 1,700 60,138
Fremont General Corp. 2,800 68,950
Fritz Companies, Inc.* 1,800 69,750
Frontier Insurance
Group, Inc. 2,350 64,331
Frozen Food Express
Industries, Inc. 2,100 34,650
Fuller (H.B.) Co. 2,400 79,200
Fulton Financial Corp. 3,300 62,700
G&K Services, Inc. Class A 2,950 47,938
GAINSCO, Inc. 2,315 20,256
GC Companies, Inc.* 1,280 36,160
</TABLE>
See accompanying Notes to Financial Statements.
66
<PAGE> 86
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Galey & Lord, Inc.* 1,800 $28,350
Gartner Group Inc. Class A 4,000 128,500
Gaylord Container Corp.
Class A* 8,700 73,950
GenCare Health Systems, Inc.* 1,700 78,838
GenCorp Inc. 5,800 69,600
General Binding Corp. 2,900 62,350
General DataComm
Industries, Inc.* 3,100 103,463
Genesco Inc.* 2,800 6,300
Genesis Health
Ventures, Inc.* 2,100 61,950
Genetic Therapy, Inc.* 2,400 16,200
Geneva Steel Class A* 2,200 38,775
Gensia Pharmaceuticals, Inc.* 5,400 25,650
Gentex Corp. 2,900 70,325
Geon Co. 700 21,000
Geotek Communications Inc.* 10,300 88,838
Gerber Scientific, Inc. 3,900 52,163
Germantown Savings Bank 500 30,500
Gerrity Oil & Gas Corp.* 1,600 9,400
Getty Petroleum Corp.* 1,800 20,475
Gibson Greetings, Inc. 2,600 39,000
Giddings & Lewis, Inc. 6,200 95,325
Gilead Sciences, Inc.* 1,200 10,500
Glendale Federal Bank (New) 5,400 58,725
Global Natural
Resources Inc.* 4,400 33,000
Good Guys, Inc., The* 2,300 26,306
Goody's Family
Clothing, Inc.* 2,700 28,688
Goulds Pumps, Inc. 3,600 78,075
Graco Inc. 1,350 24,975
GranCare, Inc.* 5,000 77,500
Grand Casinos, Inc.* 3,800 51,300
Granite Construction Inc. 1,900 41,563
Greenfield Industries, Inc. 2,700 64,125
Grenada Sunburst
System Corp. 1,300 40,300
Grey Advertising Inc. 100 15,450
Grow Group, Inc. 2,000 28,750
Guaranty National
Corp. (New) 1,500 25,125
Guilford Mills, Inc. 1,600 33,000
Gupta Corp.* 600 6,675
Gymboree Corp. 4,000 131,000
HBO & Co. 2,600 84,825
HS Resources, Inc.* 2,100 43,050
Hach Co. 2,075 28,531
Haemonetics Corp.* 5,300 106,000
Haggar Corp. 1,200 28,500
Hancock Fabrics, Inc. 4,000 30,500
Hancock Holding Co. 1,300 37,700
Handleman Co. 6,300 70,875
Handy & Harman 1,700 28,263
Hanover Direct, Inc.* 13,300 54,031
Harleysville Group Inc. 4,600 111,550
Harman International
Industries, Inc. 2,200 78,650
Harnischfeger
Industries Corp. 5,100 127,500
Harper Group, Inc. 2,800 37,800
Harry's Farmers Market, Inc.
Class A* 400 3,550
Hartmarx Corp.* 5,300 30,475
Haverty Furniture
Companies, Inc. 3,000 36,750
Hawkeye Bancorporation 2,000 40,750
Hayes Wheels International, Inc. 3,200 75,200
Health Care and
Retirement Corp.* 2,500 67,188
Health Systems
International Inc.* 4,700 126,313
HealthCare Compare Corp.* 5,600 155,400
Healthsouth
Rehabilitation Corp.* 2,500 95,000
Heart Technology, Inc.* 2,900 68,875
Heartland Express, Inc. 2,000 58,500
Hechinger Co. Class A 4,900 55,125
Hechinger Co. Class B
(Convertible) 2,300 26,163
Hecla Mining Co.* 7,800 87,750
Helene Curtis Industries, Inc. 1,800 63,675
Herbalife International, Inc. 1,000 16,625
Heritage Media Corp.
Class A* 1,900 46,075
Hibernia Corp. Class A 2,900 23,200
Hilb, Rogal and Hamilton Co. 2,700 32,063
Hillhaven Corp. 12,500 278,125
Holly Corp. 1,000 24,625
Home Beneficial Corp.
Class B 1,700 35,063
Homedco Group, Inc.* 2,300 82,800
Hometown Buffet, Inc. 2,800 31,850
Horizon Healthcare Corp.* 4,100 113,263
Hornbeck Offshore
Services, Inc.* 2,200 33,000
Houghton Mifflin Co. 900 41,400
Hovnanian Enterprises,
Inc. Class A* 1,400 8,400
Hudson Foods, Inc. 1,300 28,600
Huffy Corp. 2,200 33,000
Hunt Manufacturing Co. 3,000 48,375
Huntco, Inc. Class A 700 15,400
ICN Pharmceuticals, Inc.* 3,900 45,338
IDEX Corp.* 2,300 100,050
IDEXX Laboratories, Inc. 2,600 72,800
IHOP Corp.* 1,500 41,250
INDRESCO, Inc.* 3,800 47,500
INTERCO Inc. (New)* 2,100 30,450
IVAX Corp. 2,092 40,010
Immunex Corp. (New)* 7,100 96,738
Immunomedics, Inc.* 3,600 15,525
Imperial Bancorp 2,000 32,000
Independent Insurance
Group, Inc. (Non Voting) 800 9,400
Indiana Energy, Inc. 4,100 79,950
Information Resources, Inc.* 4,200 61,950
Ingles Markets Inc. 1,100 12,100
Input/Output, Inc. 2,800 60,550
Insignia Financial Group
Class A (New)* 1,700 34,213
Insilco Corp.* 1,500 39,750
Insituform Technologies, Inc.
Class A* 2,600 33,800
Instrument Systems Corp.* 5,300 39,750
Insurance Auto Auctions, Inc.* 1,600 51,800
Integon Corp. 2,800 42,000
</TABLE>
See accompanying Notes to Financial Statements.
67
<PAGE> 87
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Integrated Device
Technology, Inc.* 1,000 $28,500
Integrated Health
Services, Inc.* 3,200 130,400
Intelligent Electronics, Inc. 6,400 99,200
Inter-Regional Financial
Group, Inc. 1,400 32,900
Interface Systems, Inc.
Class A 2,400 27,750
Intergraph Corp.* 11,900 102,638
Intergroup Healthcare Corp.* 1,600 101,200
Intermet Corp. 9,200 63,250
International Dairy Queen,
Inc. Class A* 2,600 43,225
International Dairy Queen,
Inc. Class B* 1,800 30,825
International Family
Entertainment, Inc.
Class B* 5,700 74,813
International Multifoods Corp. 2,900 52,200
International Rectifier Corp.* 3,500 81,375
Interneuron
Pharmaceuticals, Inc.* 500 2,813
Interpool, Inc.* 2,100 28,875
Interstate Bakeries Corp. 4,000 51,500
Interstate Power Co. 1,500 33,375
Intuit, Inc.* 600 42,225
Invacare Corp. 1,600 48,600
Ionics, Inc.* 1,000 53,750
Iowa-Illinois Gas &
Electric Co. 4,800 98,400
J. Baker, Inc. 2,200 37,400
JSB Financial, Inc. 1,800 44,775
Jacobs Engineering
Group Inc.* 4,500 96,188
Jacor Communications,
Inc. Class A* 3,700 51,800
Jan Bell Marketing, Inc.* 10,100 55,550
Jason Inc. 3,125 28,516
Jefferies Group, Inc. 1,000 34,250
Jefferson Bankshares, Inc. 2,500 47,969
John Wiley & Sons, Inc.
Class A 1,600 70,000
Johnson Worldwide
Associates, Inc. Class A* 1,200 27,450
Johnstown America
Industries, Inc.* 1,500 29,813
Jones Intercable, Inc.* 1,300 18,200
Jones Intercable, Inc.
Class A* 2,300 31,769
Joslyn Corp. 1,200 32,400
Joy Technologies Inc.* 7,200 99,900
Juno Lighting, Inc. 2,900 54,738
Justin Industries, Inc. 4,300 56,975
K N Energy, Inc. 4,268 105,100
KCS Energy, Inc. 1,900 31,825
KLA Instruments Corp.* 700 36,750
Kaiser Aluminum Corp.* 10,600 119,250
Kaman Corp. Class A 3,200 31,000
Kasler Corp. 1,300 6,663
Kaufman & Broad
Home Corp. 5,700 74,100
Kaydon Corp. 2,700 63,113
Keane, Inc. 4,500 92,250
Kelley Oil Corp.* 700 4,375
Kellwood Co. 3,300 66,413
Kemet Corp.* 2,700 58,050
Kendall Square
Research Corp.* 1,700 186
Kennametal Inc. 800 22,500
Keystone Financial, Inc. 3,500 96,688
Kimball International, Inc.
Class B 2,200 52,800
Kinder-Care Learning
Centers, Inc. (New)* 3,400 45,050
Kirby Corp.* 3,900 65,325
Komag, Inc.* 3,700 92,038
L.A. Gear, Inc.* 2,700 18,900
LCI International, Inc. 2,400 58,200
La Quinta Inns, Inc. 2,700 67,838
La-Z-Boy Chair Co. 3,000 90,750
LabOne, Inc. 2,100 36,225
Laclede Gas Co. 2,500 52,188
Lance Inc. 5,100 90,525
Landmark Graphics Corp.* 2,100 43,050
Landstar Systems, Inc.* 2,200 72,600
Lattice Semiconductor Corp. 2,900 49,119
Lawson Products, Inc. 2,300 59,513
Lawter International, Inc. 7,600 95,950
Leader Financial Corp.* 2,000 47,750
Lechters, Inc.* 2,900 51,113
Legg Mason, Inc. 1,900 39,900
Lennar Corp. 4,800 72,600
Level One
Communications, Inc. 2,150 38,700
Levitz Furniture Inc.* 11,000 96,250
Libbey, Inc. 2,400 38,100
Liberty Bancorp, Inc. 1,200 38,100
Liberty Corp. 3,600 94,950
Life Partners Group, Inc. 3,800 82,650
Life Re Corp. 2,000 36,500
Life Technologies, Inc. 2,500 46,875
Life USA Holding, Inc.* 2,900 23,744
Lilly Industries, Inc. Class A 3,750 50,625
Lincare Holdings, Inc. 4,800 129,600
Lincoln
Telecommunications Co. 5,500 90,750
Liposome Technology, Inc.* 2,200 14,300
Liqui-Box Corp. 1,000 34,500
Littelfuse, Inc.* 3,400 88,400
Living Centers of
America, Inc.* 1,900 57,238
Logicon, Inc. 1,100 33,825
Lone Star Industries Inc.* 2,300 44,563
Lone Star Steakhouse &
Saloon, Inc.* 6,100 156,313
Lottery Enterprises, Inc. 45 293
Louis Dreyfus Natural
Gas Corp.* 7,400 108,225
Loyola Capital Corp. 2,800 56,000
Luby's Cafeterias, Inc. 4,700 108,688
Lukens Inc. 2,450 77,481
M.S. Carriers, Inc.* 2,100 49,088
M/A-COM., Inc.* 3,000 21,000
MAXXAM Inc.* 1,500 50,438
MDU Resources Group, Inc. 3,200 86,800
MICROS Systems, Inc. 1,100 40,975
Mac Frugal's
Bargains-Close-outs, Inc.* 4,800 99,000
</TABLE>
See accompanying Notes to Financial Statements.
68
<PAGE> 88
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----
<S> <C> <C>
Madison Gas and Electric Co. 1,500 $49,875
Magma Copper Co. (New)* 1,900 33,963
Magna Group, Inc. 4,600 95,163
MagneTek, Inc.* 4,100 60,988
Manitowoc Co., Inc. 1,600 41,200
Marcus Corp. 1,200 31,500
Marine Drilling
Companies, Inc.* 12,400 50,375
Mariner Health Group, Inc.* 3,100 69,944
Mark Twain Bancshares, Inc. 2,500 67,813
Markel Corp.* 900 37,013
Marquette Electronics, Inc.
Class A* 1,900 36,575
Marsam
Pharmaceuticals Inc.* 2,300 30,619
Marshall Industries 2,700 70,538
Masland Corp. 2,100 33,731
Material Sciences Corp. 1,800 28,575
Maxim Integrated
Products, Inc.* 1,200 80,700
Maybelline, Inc. 2,500 45,313
McClatchy Newspapers,
Inc. Class A 600 13,950
Measurex Corp. 2,900 62,713
Medaphis Corp.* 2,500 95,625
Medicine Shoppe
International, Inc. 900 21,150
Medusa Corp. 2,800 63,700
Men's Wearhouse, Inc. 2,300 57,213
Mentor Graphics Corp. 8,000 107,500
Meredith Corp. 1,200 58,800
Merisel, Inc.* 5,500 50,188
Merrill Corp. 900 16,650
Mesa Airlines, Inc.* 6,000 49,500
MESA Inc.* 10,300 52,788
Methode Electronics, Inc.
Class A 4,000 75,000
Methode Electronics, Inc.
Class B (Convertible) 200 4,175
Metricom, Inc.* 2,100 27,300
Metropolitan Financial Corp. 5,600 134,400
Michael Foods, Inc. 2,300 23,000
Michaels Stores, Inc.* 3,900 158,438
Micom Communications* 1,599 22,986
Micro Warehouse, Inc. 6,300 219,713
MicroAge Computer
Centers, Inc. 1,950 24,131
Microchip Technology, Inc. 1,700 79,900
Mid Atlantic Medical
Services Inc. 2,000 46,250
Mid-Am, Inc. 2,200 32,450
Midwest Grain Products, Inc. 1,600 42,200
Mine Safety Appliances Co. 1,200 54,150
Minerals Technologies, Inc. 800 23,800
Mohawk Industries, Inc. 5,300 85,463
Molten Metal Technology, Inc.* 3,800 84,550
Money-Store Inc., The 2,300 47,150
Monk-Austin, Inc. 2,900 42,413
Moorco International, Inc. 1,800 26,325
Morgan Keegan, Inc. 2,100 26,775
Mosinee Paper Corp. 900 24,413
Mueller Industries, Inc.* 1,500 47,438
Multicare Companies, Inc.* 3,200 65,800
Musicland Group, Inc.* 6,200 84,475
Mutual Assurance, Inc. 1,550 45,144
Mycogen Corp.* 3,200 32,800
Myers Industries, Inc. 2,500 42,500
N.S. Bancorp, Inc. 1,300 35,994
NAC Re Corp. 3,200 83,200
NACCO Industries, Inc.
Class A 1,300 76,700
NBB Bancorp, Inc. 1,300 62,075
NCH Corp. 1,400 93,275
NL Industries, Inc.* 8,700 110,925
NUI Corp. 1,500 23,063
NYMAGIC, Inc. 1,400 23,450
Nabors Industries, Inc.* 11,900 87,763
Nash Finch Co. 2,000 32,000
Nashua Corp. 700 15,925
National Auto Credit Inc.* 4,100 49,969
National Bancorp of
Alaska, Inc. 1,400 72,100
National Commerce Bancorp 4,100 95,325
National Computer
Systems, Inc. 1,800 25,650
National Data Corp. 2,400 49,800
National Gypsum Co. (New)* 3,500 118,125
National Penn
Bancshares, Inc. 1,155 31,329
National Presto
Industries, Inc. 1,100 43,313
National RE Holdings Corp. 3,100 75,950
National Steel Corp. Class B* 2,300 40,825
Nautica Enterprises, Inc. 2,300 66,700
Navigators Group, Inc. 600 9,750
Neiman Marcus Group, Inc. 6,400 92,000
Nellcor Inc.* 3,000 93,000
Netmanage, Inc. 5,400 152,550
Network General Corp.* 3,000 64,313
Network Systems Corp.* 4,800 33,300
New England Business
Service, Inc. 2,400 45,300
New Jersey
Resources Corp. 3,200 69,600
Noble Drilling Corp.* 18,975 138,755
Noise Cancellation
Technologies, Inc.* 15,400 20,213
Norand Corp.* 1,200 47,100
North American
Mortgage Co. 2,800 50,400
North Carolina Natural
Gas Corp. 700 15,750
North Fork Bancorp, Inc. 3,000 45,750
Northwest Natural Gas Co. 2,000 60,750
Northwestern Public
Service Co. 900 23,400
Northwestern Steel & Wire* 3,900 23,888
NovaCare, Inc.* 4,280 42,800
Novellus Systems, Inc.* 2,800 152,950
Noven Pharmaceuticals, Inc.* 2,600 39,325
Nuevo Energy Co.* 1,300 29,088
O'Reilly Automotive, Inc.* 1,400 35,350
O'Sullivan Corp. 2,000 19,000
OEA, Inc. 3,500 86,188
OM Group, Inc. 2,000 39,875
OMI Corp. 3,600 23,400
ONBANCorp, Inc. 2,100 55,125
Oak Industries Inc.* 2,900 74,675
</TABLE>
See accompanying Notes to Financial Statements.
69
<PAGE> 89
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -------
<S> <C> <C>
Oakwood Homes Corp. 3,700 $87,875
Oceaneering International, Inc.* 3,600 46,350
Octel Communications Corp.* 4,400 95,150
Offshore Logistics, Inc.* 2,800 36,225
Offshore Pipelines, Inc.* 2,100 42,788
Ogden Projects, Inc.* 600 10,500
Omega Environmental, Inc.* 5,000 30,000
Omnicare, Inc. 1,100 40,150
One Valley Bancorp of West Virginia, Inc. 2,800 83,650
Oneok Inc. 4,300 75,788
OrNda Heathcorp* 6,660 106,560
Orange & Rockland Utilities, Inc. 2,500 75,938
Orbital Sciences Corp.* 2,500 53,438
Oregon Steel Mills, Inc. 6,300 107,888
Orion Capital Corp. 2,300 70,438
Oshkosh B'Gosh, Inc. Class A 2,400 35,700
Oshkosh B'Gosh, Inc. Class B 200 2,975
Otter Tail Power Co. 1,600 52,200
Outboard Marine Corp. 3,400 70,125
Owens & Minor, Inc. 5,100 75,863
Oxford Health Plans, Inc. 1,300 107,250
Oxford Industries, Inc. 1,600 40,800
PAXAR Corp. 2,750 29,219
PLATINUM technology, inc.* 3,200 71,200
PXRE Corp. 1,100 27,225
Pacific Crest Capital, Inc.* 126 725
Papa John's International* 1,900 60,563
Paragon Trade Brands* 1,800 43,200
Park Communications, Inc.* 3,100 87,188
Park National Corp. 800 31,600
Parker Drilling Co.* 11,100 67,988
Patterson Dental Co. 3,850 72,669
Penn Traffic Co.* 1,900 78,375
PennCorp Financial Group, Inc. 2,900 45,675
Pentair, Inc. 700 29,488
People's Bank Bridgeport Connecticut 5,200 67,925
PeopleSoft, Inc.* 1,900 117,800
Peoples Choice TV Corp.* 1,100 21,725
Peoples Heritage Financial Group, Inc. 2,800 39,550
PerSeptive Biosystems, Inc.* 2,000 22,125
Petroleum Heat and Power Co., Inc. Class A 3,200 28,400
Petrolite Corp. 1,900 56,525
Pharmaceutical Resources, Inc.* 1,800 17,100
Philadelpia Suburban Corp. 1,300 23,075
PhyCor, Inc.* 1,600 54,800
Physicians Health Services, Inc.* 600 15,225
PictureTel Corp.* 2,300 44,850
Piedmont Natural Gas Co., Inc. 4,800 96,600
Pier 1 Imports, Inc. 5,600 43,400
Pikeville National Corp. 1,200 27,600
Pilgrim's Pride Corp. 4,500 45,000
Pillowtex Corp.* 2,100 25,725
Pioneer Group, Inc. 2,000 94,000
Pioneer-Standard Electronics, Inc. 2,550 46,219
Piper Jaffray Inc. 4,600 53,475
Pittston Minerals Group 900 21,600
Pittway Corp. 300 11,213
Pittway Corp. Class A 1,400 51,100
Plains Petroleum Co. 1,200 32,400
Platinum Software Corp. 1,500 17,906
Playboy Enterprises, Inc. Class B* 2,100 17,325
Players International, Inc.* 2,800 62,825
Ply-Gem Industries, Inc. 2,200 47,300
Poe & Brown, Inc. 1,500 32,063
Pogo Producing Co. 700 15,663
Policy Management Systems Corp.* 2,000 94,000
Pope & Talbot, Inc. 1,800 31,950
Powersoft Corp.* 1,500 95,250
Precision Castparts Corp. 3,300 75,488
Premier Bancorp, Inc. 4,600 75,325
President Riverboat Casinos, Inc. 4,700 38,188
Presidential Life Corp. 6,800 40,375
Presstek, Inc. 1,125 37,898
Primark Corp.* 3,500 45,500
Prime Hospitality Corp.* 5,500 42,625
Production Operators Corp. 1,600 41,000
Proffitt's, Inc.* 1,600 28,800
Progress Software Corp.* 900 28,238
Protective Life Corp. 2,200 99,000
Protein Design Labs, Inc.* 2,500 43,438
Provident Bancorp, Inc. 2,800 94,850
Public Service Co. of New Mexico* 6,300 77,963
Public Service Co. of North Carolina, Inc. 3,300 48,263
Pulitzer Publishing Co. 2,100 75,075
Puritan-Bennett Corp. 4,200 108,938
Purolator Products Co. 1,600 39,800
Quaker State Corp. 4,100 55,863
Quality Food Centers, Inc. 3,100 66,650
Quanex Corp. 2,100 52,238
Quantum Corp.* 8,100 123,525
Quantum Health Resources, Inc.* 2,600 94,900
Queens County Bancorp 1,200 31,200
Quick & Reilly Group, Inc. 1,680 43,260
REN Corporation-USA* 2,200 27,500
Raymond James Financial, Inc. 2,800 42,000
Read-Rite Corp.* 5,900 102,144
Reading & Bates Corp. (New)* 10,600 71,550
Recognition International, Inc.* 1,800 13,275
Recoton Corp. 1,900 35,625
Regal-Beloit Corp. 2,800 39,200
Regency Health Services* 3,300 37,538
Reinsurance Group of America, Inc. 3,000 66,750
Reliance Group Holdings, Inc. 18,600 113,925
Republic Bancorp Inc. 2,750 33,000
Rexall Sundown, Inc. 2,700 28,181
Richfood Holdings, Inc. 3,500 56,000
</TABLE>
See accompanying Notes to Financial Statements.
70
<PAGE> 90
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -------
<S> <C> <C>
Riggs National Corp.* 11,100 $101,288
Rio Hotel and Casino, Inc.* 3,900 50,700
Rival Co. 1,500 38,250
River Forest Bancorp, Inc. 1,200 40,350
RoTech Medical Corp.* 1,800 46,125
Robert Half International Inc. 4,600 98,900
Roberts Pharmaceutical Corp.* 3,100 82,538
Rochester Community Savings Bank 2,300 42,263
Rohr Inc.* 6,600 60,225
Rollins Environmental Services, Inc. 11,500 67,563
Rollins Leasing Corp. 8,400 98,700
Roosevelt Financial Group, Inc. 3,300 49,913
Roper Industries, Inc. 2,600 63,050
Ross Stores, Inc. 4,000 56,000
Ruddick Corp. 4,200 81,900
Russ & Berrie Co., Inc. 3,500 47,688
Ryan's Family Steak Houses, Inc.* 21,100 134,513
Ryland Group, Inc. 2,900 46,763
S & T Bancorp, Inc. 2,000 40,250
S.E. Rykoff & Co.* 1,400 28,175
S3, Inc. 2,500 35,625
SCI Systems, Inc.* 4,800 87,000
SCIMED Life Systems, Inc.* 2,800 134,050
SCOR Reinsurance U.S. Corp. 2,200 24,475
SEI Corp. 2,900 60,175
SFFed Corp. 1,400 24,150
SLM Interational, Inc. 3,350 20,519
SPI Pharmaceuticals, Inc. 3,107 71,461
SPX Corp. 2,300 39,963
SafeCard Services, Inc. 3,700 59,200
Safeskin Corp.* 2,200 35,750
Sanifill, Inc.* 2,500 56,875
Santa Cruz Operation, Inc.* 5,500 59,813
Savannah Foods & Industries, Inc. 4,900 61,250
Savoy Pictures Entertainment, Inc.* 4,200 37,275
Sbarro, Inc. 3,000 74,625
Scholastic Corp.* 2,800 128,100
Schuler Homes, Inc.* 3,300 51,563
Scios Nova, Inc.* 5,200 34,450
Scotts Co. Class A* 7,400 114,700
Seabord Corp. 200 36,250
Seafield Capital Corp. 1,100 39,188
Sealed Air Corp.* 3,700 126,263
Sealright Co., Inc. 1,300 22,100
Security Capital Bancorp 2,100 32,550
Seitel, Inc.* 1,000 28,000
Selective Insurance Group, Inc. 4,400 110,550
Sequa Corp. Class A 1,100 26,950
Sequa Corp. Class B 700 19,600
Sequent Computer Systems, Inc.* 5,400 103,275
Shared Medical Systems Corp. 3,900 115,294
Shoe Carnival, Inc. 500 3,250
ShopKo Stores, Inc. 8,800 86,900
Shorewood Packaging Corp.* 2,800 56,350
Showboat, Inc. 2,400 28,800
Sierra Health Services, Inc.* 2,000 65,000
Sierra Pacific Resources 5,400 103,950
Silicon Valley Group, Inc.* 1,000 19,500
Simpson Industries, Inc. 3,000 39,000
Sizzler International, Inc. 11,500 69,000
SkyWest Airlines, Inc. 1,900 38,950
Skyline Corp. 1,300 25,675
Smart & Final Inc. 3,800 56,525
Smith (A.O.) Corp. Class A 1,000 24,500
Smith (A.O.) Corp. Class B 2,600 63,375
Smith International, Inc.* 7,100 118,925
Smith's Food & Drug Centers, Inc. Class B 3,200 82,800
Smithfield Foods, Inc.* 2,600 75,400
Smucker (J.M.) Co. Class B 500 10,688
Snyder Oil Corp. 4,300 74,175
Sodak Gaming Inc.* 1,700 24,013
Sofamor Danek Group, Inc.* 4,600 77,050
Sonat Inc. 5,200 103,350
Sotheby's Holdings, Inc. Class A 700 8,488
South Jersey Industries, Inc. 1,200 20,850
Southdown, Inc.* 6,400 111,200
Southeastern Michigan Gas Enterprises, Inc. 1,890 35,201
Southern California Water Co. 900 14,063
Southern Indiana Gas & Electric Co. 2,866 76,666
Southern Union Co. (New) 2,000 33,750
Southwest Gas Corp. 3,400 58,225
Southwestern Energy Co. 4,200 72,450
Southwestern Life Insurance Co.* 7,200 31,500
Sovereign Bancorp, Inc. 6,280 57,305
SpaceLabs Medical Inc.* 1,700 35,913
Spectravision, Inc.* 1,300 1,381
Spectrum Information Technologies, Inc.* 8,100 13,542
Spelling Entertainment Group, Inc. 12,300 147,600
Sports & Recreation, Inc. 3,000 84,750
Springs Industries, Inc. 3,200 129,200
St. John's Knits, Inc. 1,300 39,650
St. Paul Bancorp, Inc. 3,500 71,969
Standard Microsystems Corp.* 1,900 46,669
Standard Motor Products, Inc. 2,500 45,625
Standard Pacific Corp. 5,800 39,875
Standard Products Co. 2,700 65,138
Standard Register Co. 4,800 85,200
Standex International Corp. 1,800 58,275
Stanhome Inc. 400 13,450
Stant Corp. 2,600 29,250
Starbucks Corp. 1,100 29,838
Starter Corp.* 4,900 36,138
State Auto Financial Corp. 2,100 29,925
Station Casinos Inc.* 4,800 63,600
Steel Technologies Inc. 2,100 25,988
Stein Mart, Inc. 3,600 63,900
Sterling Chemicals, Inc. 10,100 122,463
Sterling Software, Inc.* 3,700 115,625
Stewart Enterprises, Inc. Class A 3,700 89,725
</TABLE>
See accompanying Notes to Financial Statements.
71
<PAGE> 91
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- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -------
<S> <C> <C>
Stone & Webster, Inc. 2,700 $87,413
Stone Container Corp.* 6,112 102,376
Stratacom Inc.* 3,100 175,150
Stratus Computer, Inc.* 2,000 74,500
Strawbridge & Clothier Class A 1,700 36,975
Structural Dynamics Research Corp.* 4,300 20,694
Student Loan Corp. 2,800 53,550
Sturm, Ruger & Co., Inc. 2,000 53,000
Summa Four, Inc.* 500 10,375
Summit Bancorp 4,600 96,888
Summit Technology, Inc.* 2,800 79,800
Sun Healthcare Group, Inc.* 3,608 82,984
Sunglass Hut International, Inc.* 1,600 66,600
Sunrise Medical Inc.* 3,300 85,800
Sunshine Mining Co. 23,000 48,875
Supercuts, Inc.* 1,200 13,200
Surgical Care Affiliates, Inc. 7,150 140,319
Susquehanna Bancshares, Inc. 1,700 39,525
Swift Transportation Co. 2,100 90,825
SyStemix, Inc.* 1,200 18,750
Sybron Corp.* 1,900 65,788
Symantec Corp.* 6,000 107,250
Symbol Technologies, Inc.* 4,300 145,125
Symmetricom, Inc.* 1,600 19,300
Syncor International Corp.* 700 5,950
Synergen, Inc.* 6,800 36,975
Synetic, Inc.* 3,300 54,038
Synopsys, Inc.* 300 13,838
Syratech Corp.* 1,600 29,400
System Software Associates, Inc. 4,600 57,213
Systems & Computer Technology Corp.* 1,700 33,788
TBC Corp.* 4,300 41,656
TCA Cable TV, Inc. 4,000 94,000
TCF Financial Corp. 2,000 78,000
TJ International 3,100 55,800
TNP Enterprises, Inc. 1,300 18,038
TNT Freightways Corp. 3,500 89,688
Taco Cabana Class A 2,500 19,844
Tandycrafts, Inc.* 1,900 22,800
Tech Data Corp. 9,000 176,625
Tecnol Inc.* 3,200 50,800
Tejas Gas Corp.* 1,800 81,450
Tejon Ranch Co. 1,900 25,888
Teleflex Inc. 2,450 94,938
Telxon Corp. 2,500 33,125
Tencor Instruments* 1,900 83,600
Tennant Co. 900 41,063
Terra Industries, Inc. 25,800 274,125
Tesoro Petroleum Corp.* 4,600 43,125
Tetra Tech, Inc. (New) 3,125 60,156
Texas Industries, Inc. 1,800 57,600
Thermedics Inc. 4,800 72,600
Thermo Cardiosystems Inc. 3,300 58,163
Thermo Fibertek, Inc.* 10,700 164,513
Thermotrex Corp. 2,700 41,175
Thiokol Corp. 3,000 73,875
Thomas Nelson, Inc. 2,100 40,163
Thor Industries, Inc. 1,200 24,600
Tiffany & Co. (New) 2,700 105,300
Timberland Co. Class A* 1,400 47,425
Titan Wheel International, Inc. 200 5,750
Toll Brothers, Inc.* 5,700 62,700
Topps Co., Inc. 7,500 43,594
Toro Co. 2,100 58,275
Transco Energy Co. 1,100 15,813
Trenwick Group Inc. 1,100 40,563
TriMas Corp. 2,500 57,813
Triarc Cos., Inc. Class A* 3,900 45,338
Trident NGL Holding, Inc. 6,000 63,750
Trimble Navigation Ltd.* 3,100 44,369
Trust Co. of New Jersey (New) 3,900 57,525
TrustCo Bank Corp NY 2,420 47,190
Trustmark Corp. 5,300 94,075
Tuscon Electric Power Co.* 26,000 91,000
Tyco Toys, Inc. 5,900 38,350
U.S. Bioscience, Inc.* 7,600 55,100
U.S. Can Corp.* 1,800 29,025
U.S. Home Corp. (New)* 1,200 19,050
U.S. Robotics, Inc.* 2,100 83,738
U.S. Trust Corp. 1,500 90,750
UMB Financial Corp. 3,240 104,895
UNR Industries, Inc. 9,700 58,806
USAir Group, Inc.* 9,800 42,875
USLICO Corp. 2,800 56,000
UST Corp.* 3,200 36,400
UniFirst Corp. 3,000 35,625
Unilab Corp. (New)* 6,600 32,588
Union Planters Corp. 2,700 62,100
Union Switch & Signal* 2,600 41,275
United Bankshares, Inc. 1,900 46,550
United Carolina Bancshares Corp. 2,400 62,100
United Companies Financial Corp. 2,200 72,325
United Fire & Casualty Co. 700 29,400
United Illuminating Co. 2,300 70,150
United Insurance Companies, Inc.* 1,500 46,125
United International Holdings Inc. 1,600 24,200
United Meridian Corp.* 3,900 57,038
United States Shoe Corp. 4,000 71,500
United Stationers Inc. 6,000 59,250
United Television, Inc.* 1,500 79,313
United Waste Systems, Inc.* 3,400 81,175
United Water Resources Inc. 6,000 82,500
United Wisconsin Services, Inc. 2,200 80,850
Unitog Co. 1,650 30,319
Unitrode Corp.* 1,600 30,800
Univar Corp. 2,300 31,913
Universal Health Services, Inc. Class B* 1,800 47,925
VISX, Inc.* 1,800 21,825
VLSI Technology, Inc.* 5,900 76,331
Valassis Communications, Inc. 2,900 44,225
Valence Technology, Inc.* 2,700 8,775
Valhi, Inc. 21,000 141,750
Valmont Industries, Inc. 1,600 27,400
</TABLE>
See accompanying Notes to Financial Statements.
72
<PAGE> 92
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -------
<S> <C> <C>
Value City Department Stores, Inc.* 5,900 $67,113
Value Health, Inc.* 1,232 47,740
Value Line, Inc. 1,700 53,550
Varco International, Inc.* 9,900 69,300
Vencor, Inc. 4,650 138,919
Ventritex, Inc.* 3,700 96,200
Venture Stores, Inc. 2,900 44,950
VeriFone, Inc.* 4,300 95,675
Vertex Pharmaceuticals, Inc.* 2,500 33,438
Vesta Insurance Group 1,500 39,563
Vicor Corp.* 3,600 100,800
Victoria Bankshares, Inc. 1,000 25,750
ViewLogic Systems, Inc.* 2,300 50,600
Vigoro Corp. 3,300 101,475
Vintage Petroleum, Inc. 3,700 71,688
Viratek, Inc. 2,295 26,679
Vivra Inc. 2,800 79,100
W.H. Brady Co. Class A 900 2,975
WD-40 Co. 1,200 51,450
WHX Corp.* 11,000 165,000
WICOR, Inc. 2,300 65,838
WLR Foods, Inc. 1,800 47,250
WMS Industries Inc.* 4,000 70,500
Waban, Inc.* 6,000 106,500
Wabash National Corp. 3,000 104,250
Walbro Corp. 1,400 25,025
Wall Data, Inc.* 1,500 54,938
Wallace Computer Services, Inc. 1,400 38,850
Washington Energy Co. 3,800 51,775
Washington National Corp. 4,900 105,963
Waterhouse Securities, Inc. 1,600 25,800
Watson Pharmaceuticals, Inc.* 2,600 68,250
Watts Industries, Inc. Class A 3,100 74,400
Weatherford International Inc.* 3,500 39,813
Webb (Del) Corp. 2,100 33,863
Weirton Steel Corp.* 4,300 37,088
Welbilt Corp.* 1,500 37,313
Wellman, Inc. 500 16,438
Werner Enterprises, Inc. 500 12,688
WesBanco, Inc. 1,400 38,325
West Company, Inc. 3,000 84,375
Westamerica Bank 1,000 32,000
Westcorp Financial Services 4,130 39,235
Westcott Communications, Inc. 2,900 39,875
Western Co. of North America* 2,900 51,475
Western Digital Corp.* 8,200 139,400
Western Waste Industries* 2,400 42,000
WestPoint Stevens, Inc.* 5,600 82,600
Westwood One, Inc.* 5,000 47,813
White River Corp.* 1,000 32,875
Whitney Holding Corp. 2,400 54,300
Whole Foods Market, Inc. 1,900 29,213
Williams-Sonoma, Inc. 4,200 145,950
Winnebago Industries, Inc. 4,100 36,388
Wisconsin Central Transportation Corp. 2,800 129,150
Wolverine Tube, Inc.* 2,000 50,250
Wolverine World Wide, Inc. 1,700 41,650
Worthen Bank & Trust Co. 2,500 71,563
Wyle Laboratories 2,300 42,550
X-Rite, Inc. 1,600 58,600
XCL Limited* 20,500 28,188
Xircom, Inc.* 2,500 43,438
Yankee Energy System, Inc. 1,900 42,513
Yellow Corp. 5,100 99,131
Younkers, Inc.* 1,000 19,625
Zebra Technologies Corp. Class A* 900 36,563
Zenith Electronics Corp.* 7,700 107,800
Zenith Laboratories, Inc. (New) 2,400 57,000
Zenith National Insurance Corp. 3,100 73,238
Zero Corp. 1,900 24,463
Zilog, Inc.* 400 11,600
Zions Bancorp 2,300 86,408
Zurn Industries, Inc. 2,000 36,500
1st Source Corp. 1,145 28,482
3DO Co.* 3,200 53,200
-----------
TOTAL COMMON STOCK(Cost $64,786,151) 65,383,543
Maturity -----------
--------
REPURCHASE AGREEMENT--4.0%
State Street Bank & Trust 4.25%
Dated 10/31/94
Due 11/01/94
Collateralized By:
U.S. Treasury Bill
$2,860,000 Par;
Due 4/30/95 $2,730,000 2,730,000
-----------
TOTAL REPURCHASE AGREEMENT
(Cost $2,730,000) 2,730,000
-----------
TOTAL INVESTMENTS -- 100.0%
(Cost $67,516,151) 68,113,543
-----------
OTHER ASSETS AND LIABILITIES -- 0.0%
Other Assets 230,704
Liabilities (216,246)
-----------
14,458
-----------
NET ASSETS -- 100.0%
Applicable to 6,779,517
outstanding $0.00001
par value shares
(unlimited shares authorized) $68,128,001
===========
NET ASSET VALUE PER SHARE $ 10.05
===========
</TABLE>
- ---------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
73
<PAGE> 93
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF OPERATIONS
For the period December 3, 1993 (commencement of operations) to October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends $ 588,017
Interest 112,525
-----------
Total investment income 700,542
-----------
Expenses:
Investment advisory and administration fee 258,394
Transfer agency and shareholder service fees 129,197
Custodian fees 82,467
Registration fees 32,217
Professional fees 28,173
Shareholder reports 48,377
Trustees' fees 18,495
Amortization of deferred organization costs 13,320
Insurance and other expenses 4,609
-----------
615,249
Less expenses reduced and absorbed (267,476)
-----------
Total expenses incurred by Fund 347,773
-----------
Net investment income 352,769
-----------
Net realized gain (loss) on investments:
Proceeds from sales of investments 8,478,561
Cost of investments sold (9,006,296)
-----------
Net realized loss on investments sold (527,735)
-----------
Net unrealized appreciation on investments:
Beginning of period --
End of period 597,392
-----------
Net unrealized appreciation on investments 597,392
-----------
Net gain on investments 69,657
-----------
Net increase in net assets resulting from operations $ 422,426
===========
</TABLE>
See accompanying Notes to Financial Statements.
74
<PAGE> 94
SchwabFunds(R) 13
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
STATEMENT OF CHANGES IN NET ASSETS
For the period December 3, 1993 (commencement of operations) to October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Operations:
Net investment income $ 352,769
Net realized loss on investments sold (527,735)
Net unrealized appreciation on investments 597,392
------------
Net increase in net assets resulting from operations 422,426
------------
Dividends to shareholders from net investment income (56,830)
Capital Share Transactions:
Proceeds from shares sold 78,645,543
Net asset value of shares issued in reinvestment of dividends 52,690
Early withdrawal fees 27,385
Less payments for shares redeemed (10,963,213)
------------
Increase in net assets from capital share transactions 67,762,405
------------
Total increase in net assets $ 68,128,001
Net Assets:
Beginning of period --
------------
End of period (including undistributed net
Investment income of $295,939) $ 68,128,001
============
Number of Fund Shares:
Sold 7,883,827
Reinvested 5,322
Redeemed (1,109,632)
------------
Net increase in shares outstanding 6,779,517
Shares Outstanding:
Beginning of period --
------------
End of period 6,779,517
============
</TABLE>
See accompanying Notes to Financial Statements.
75
<PAGE> 95
SchwabFunds(R) 14
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the period December 3, 1993 (commencement of operations) to October 31, 1994
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUND
The Schwab Small-Cap Index Fund (the "Fund") is a series of Schwab Capital Trust
(the "Trust"), an open-end, management investment company organized as a
Massachusetts business trust on May 7, 1993 and registered under the Investment
Company Act of 1940, as amended. The Fund commenced operations on December 3,
1993.
In addition to the Fund, the Trust also offers the Schwab International Index
Fund(TM). The assets of each series are segregated and accounted for separately.
The investment objective of the Fund is to attempt to track the price and
dividend performance (total return) of the Schwab Small-Cap Index(TM), an index
created to represent the performance of the second 1,000 largest publicly traded
common stocks issued by United States companies.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Investments in securities traded on an exchange are valued
at the last quoted sale price for a given day, or if a sale is not reported for
that day, at the mean between the most recent quoted bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Fund's sub-advisor pursuant to Board of Trustees guidelines.
Short-term securities with 60 days or less to maturity are stated at amortized
cost, which approximates market value.
Security transactions and investment income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Dividend income and distributions to
shareholders are recorded on the ex-dividend date; interest income is recorded
on the accrual basis. Realized gains and losses from security transactions are
determined on an identified cost basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or Government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund, its initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from the Fund's commencement of operations.
Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. The Fund is considered a separate entity for tax purposes.
76
<PAGE> 96
SchwabFunds(R) 15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1994, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $597,392 of which $7,021,886 related to
appreciated securities and $6,424,494 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of .50% of the first $300 million
of average daily net assets and .45% of such assets over $300 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$258,394 during the period from December 3, 1993 (commencement of operations) to
October 31, 1994, before the Investment Manager reduced its fee (see Note 5).
Sub-advisory agreement -- The Investment Manager has a sub-advisory agreement
with Dimensional Fund Advisors Inc. ("Dimensional") to perform day-to-day
portfolio management for the Fund. Dimensional does not receive compensation
directly from the Fund. However, the Investment Manager pays Dimensional an
annual fee, payable monthly, of .10% of the first $300 million of average daily
net assets and .05% of such assets over $300 million.
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets for transfer
agency services and .20% of such assets for shareholder services. For the period
from December 3, 1993 (commencement of operations) to October 31, 1994, the Fund
incurred transfer agency and shareholder service fees of $129,197, before Schwab
reduced its fees (see Note 5).
Officers and trustees -- During the period, certain officers and trustees of the
Trust were also officers or directors of the Investment Manager, Schwab or
Dimensional. During the period ended October 31, 1994, the Trust made no direct
payments to its officers or trustees who were "interested persons" within the
meaning of the Investment Company Act of 1940, as amended. The Fund incurred
fees of $18,495 related to the Trust's unaffiliated trustees.
4. BORROWING AGREEMENT
The Trust has an arrangement with State Street Bank and Trust Company, the
Fund's custodian, whereby the Fund may borrow up to $10,000,000, on a temporary
basis, to fund redemptions. Amounts borrowed under this arrangement bear
interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the period December 3, 1993 (commencement of
operations) to October 31, 1994, no borrowings were made under this arrangement.
77
<PAGE> 97
SchwabFunds(R) 16
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the period December 3, 1993 (commencement of operations) to October 31, 1994
- --------------------------------------------------------------------------------
5. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit the Fund's ratio of operating expenses to
average net assets. For the period from December 3, 1993 (commencement of
operations) to October 31, 1994, the total of such fees and expenses reduced and
absorbed by the Investment Manager was $153,640 and the total of such fees
reduced by Schwab was $113,836.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated $73,792,447 and $8,478,561, respectively, for the period from
December 3, 1993 (commencement of operations) to October 31, 1994.
7. EARLY WITHDRAWAL FEES PAID TO THE FUND
The Fund assesses a .50% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the period from December 3, 1993 (commencement of operations) to
October 31, 1994, total early withdrawal fees retained by the Fund amounted to
$27,385.
8. COMPOSITION OF NET ASSETS
At October 31, 1994, net assets consisted of:
<TABLE>
<S> <C>
Capital paid in $67,762,405
Accumulated undistributed net investment income 295,939
Accumulated net realized loss on investments sold (527,735)
Net unrealized appreciation on investments 597,392
-----------
Total $68,128,001
===========
</TABLE>
At October 31, 1994, the Fund's Statement of Net Assets included liabilities of
$106,248 for Fund shares redeemed and $24,610 for investment advisory and
administration fee payable.
78
<PAGE> 98
SchwabFunds(R) 17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period, from December 3, 1993 (commencement of operations) to October 31, 1994:
<TABLE>
<S> <C>
Net asset value at beginning of period $ 10.00
Income from Investment Operations
Net investment income .06
Net realized and unrealized gain (loss) on investments --
-----------
Total from investment operations .06
Less Distributions
Dividends from net investment income (.01)
Distributions from realized gain on investments --
-----------
Total distributions (.01)
Net asset value at end of period $ 10.05
===========
Total return (%) .63
Ratios/Supplemental Data
Net assets, end of period $68,128,001
Ratio of expenses to average net assets (%)* .67
Ratio of net investment income to average net assets (%)* .68
Portfolio turnover rate (%) 16
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the period ended
October 31, 1994, would have been 1.19%*, and the ratio of net investment income
to average net assets would have been .16%*.
* Annualized
79
<PAGE> 99
SchwabFunds(R) 18
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Board of Trustees
and Shareholders of the Schwab Small-Cap Index Fund(TM)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the Schwab Small-Cap Index Fund(TM)
(one of the series constituting Schwab Capital Trust, hereafter referred to as
the "Trust") at October 31, 1994, the results of its operations and the changes
in its net assets for the period presented, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at October 31, 1994 by
correspondence with the custodian, provides a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
November 30, 1994
1994 SPECIAL TAX INFORMATION (UNAUDITED)
Notice to Corporate Shareholders
- -------------------------------------------------------------------------------
100% of the Fund's distributions for the fiscal year ended October 31, 1994
qualify for the corporate dividends received deduction.
- -------------------------------------------------------------------------------
80
<PAGE> 100
APPENDIX A
The following is a list of Companies whose securities were included in
the Schwab International Index(TM) calculation as of the date of this Statement
of Additional Information:
<TABLE>
<S> <C>
ABBEY NATIONAL United Kingdom
ABN-AMRO HOLDING Netherlands
AEGON Netherlands
AGF France
AIR LIQUIDE France
AJINOMOTO CO Japan
AKZO NOBEL Netherlands
ALCAN ALUMINIUM Canada
ALCATEL CABLE France
ALCATEL ALSTHOM France
ALL NIPPON AIRWAYS CO Japan
ALLEANZA ASSICUR. Italy
ALLIED DOMECQ(ALD-LYONS) United Kingdom
AMERICAN BARRICK RES. Canada
ARGENTARIA Spain
ARGYLL GROUP United Kingdom
ASAHI BREWERIES Japan
ASAHI BANK Japan
ASAHI GLASS CO Japan
ASAHI CHEMICAL IND CO Japan
ASEA Sweden
ASHIKAGA BANK Japan
ASSICURAZIONI GENERALI Italy
ASTRA Sweden
AXA France
BAA United Kingdom
BANCO SANTANDER Spain
BANCO BILBAO VIZCAYA Spain
BANCO ESPANOL DE CREDITO Spain
BANK TOKYO Japan
BANK YOKOHAMA Japan
BANK MONTREAL Canada
BANK FUKUOKA Japan
BANKGESELLSCHAFT BERLIN Germany
BARCLAYS United Kingdom
</TABLE>
81
<PAGE> 101
<TABLE>
<S> <C>
BASF Germany
BASS United Kingdom
BAT INDUSTRIES United Kingdom
BAYER Germany
BAYER VEREINSBANK STAMM Germany
BAYER HYPOTHEKEN BANK Germany
BBC BROWN BOVERI Switzerland
BCE INC Canada
BMW Germany
BNP France
BOC GROUP United Kingdom
BOOTS CO United Kingdom
BRIDGESTONE CORP Japan
BRITISH AIRWAYS United Kingdom
BRITISH GAS United Kingdom
BRITISH PETROLEUM United Kingdom
BRITISH TELECOM United Kingdom
BRITISH STEEL United Kingdom
BROKEN HILL PROP CO Australia
BTR United Kingdom
BTR NYLEX Australia
CABLE & WIRELESS United Kingdom
CADBURY SCHWEPPES United Kingdom
CANADIAN IMPERIAL BANK Canada
CANADIAN PACIFIC LTD Canada
CANON INC Japan
CARREFOUR France
CATHAY PACIFIC AIRWAYS Hong Kong
CHIBA BANK Japan
CHINA LIGHT & POWER Hong Kong
CHUBU ELECTRIC POWER CO Japan
CHUGOKU ELECTRIC POWER Japan
CIBA-GEIGY Switzerland
CITIC PACIFIC Hong Kong
COMMERCIAL UNION United Kingdom
COMMERZBANK AKTIE Germany
COMMONWEALTH BANK Australia
COSMO OIL CO Japan
CRA Australia
CS HOLDING Switzerland
DAI-ICHI KANGYO BANK Japan
</TABLE>
82
<PAGE> 102
<TABLE>
<S> <C>
DAI NIPPON PRINTING CO Japan
DAIEI Japan
DAIMLER-BENZ Germany
DAIWA HOUSE IND CO Japan
DAIWA BANK Japan
DAIWA SECURITIES CO Japan
DANONE (BSN) France
DEUTSCHE BANK Germany
DEVELOPMENT BK SINGAPORE Singapore
DRESDNER BANK Germany
EAST JAPAN RAILWAY CO Japan
EBARA CORP Japan
EISAI CO Japan
ELECTRABEL Belgium
ELF AQUITAINE France
ELSEVIER Netherlands
ENDESA Spain
ERICSSON (LM) Sweden
FANUC Japan
FIAT Italy
FUJI BANK Japan
FUJI PHOTO FILM CO Japan
FUJITSU LTD Japan
FURUKAWA ELECTRIC CO Japan
GENERAL ELECTRIC PLC United Kingdom
GENERALE BELGIQUE Belgium
GENERALE EAUX France
GLAXO HOLDINGS United Kingdom
GRAND METROPOLITAN United Kingdom
GREAT UNIVERSAL ST. ORD United Kingdom
GUINNESS United Kingdom
GUNMA BANK Japan
HACHIJUNI BANK Japan
HANG SENG BANK Hong Kong
HANKYU CORP Japan
HANSON United Kingdom
HEINEKEN NV Netherlands
HENDERSON LAND DEV. Hong Kong
HENKEL VORZUG Germany
HITACHI ZOSEN CORP Japan
HITACHI Japan
</TABLE>
83
<PAGE> 103
<TABLE>
<S> <C>
HOECHST Germany
HOKKAIDO ELECTRIC POWER Japan
HOKURIKU ELECTRIC POWER Japan
HOKURIKU BANK Japan
HONDA MOTOR CO Japan
HONGKONG LAND HOLDINGS Hong Kong
HONGKONG ELECTRIC HLDGS Hong Kong
HONGKONG TELECOM Hong Kong
HSBC HOLDINGS United Kingdom
HUTCHISON WHAMPOA Hong Kong
IBERDROLA Spain
IMPERIAL OIL Canada
IMPERIAL CHEMICAL ICI United Kingdom
INA Italy
INDUSTRIAL BANK OF JAPAN Japan
INT'LE NEDERLANDEN GROEP Netherlands
ISHIKAWAJIMA-HARIMA Japan
ISUZU MOTORS Japan
ITO-YOKADO CO Japan
ITOCHU CORP Japan
JAPAN AIRLINES CO Japan
JAPAN ENERGY(NIKKO KYODO Japan
JARDINE MATHESON HLDGS Hong Kong
JOYO BANK Japan
JUSCO CO Japan
KAJIMA CORP Japan
KANSAI ELECTRIC POWER CO Japan
KAO CORP Japan
KAWASAKI STEEL CORP Japan
KAWASAKI HEAVY IND Japan
KDD Japan
KINGFISHER United Kingdom
KINKI NIPPON RAILWAY CO Japan
KIRIN BREWERY CO Japan
KOBE STEEL Japan
KOMATSU Japan
KON. PTT NEDERLAND Netherlands
KUBOTA CORP Japan
KYOCERA CORP Japan
KYUSHU ELECTRIC POWER CO Japan
KYUSHU MATSUSHITA ELECT Japan
</TABLE>
84
<PAGE> 104
<TABLE>
<S> <C>
LAFARGE COPPEE France
LLOYDS BANK United Kingdom
LONG-TERM CREDIT BANK Japan
LOREAL France
LVMH France
LYONNAISE DES EAUX France
MANNESMANN Germany
MARKS & SPENCER United Kingdom
MARUBENI CORP Japan
MARUI CO Japan
MATSUSHITA COMMUNICATION Japan
MATSUSHITA-KOTOBUKI ELEC Japan
MATSUSHITA ELECT WORKS Japan
MATSUSHITA ELECT IND'L Japan
MAZDA MOTOR CORP Japan
MICHELIN France
MITSUBISHI KASEI CORP Japan
MITSUBISHI MOTORS CORP Japan
MITSUBISHI OIL CO Japan
MITSUBISHI TRUST Japan
MITSUBISHI MATERIALS Japan
MITSUBISHI BANK Japan
MITSUBISHI CORP Japan
MITSUBISHI ESTATE CO Japan
MITSUBISHI HEAVY IND Japan
MITSUBISHI ELECTRIC Japan
MITSUI MARINE & FIRE Japan
MITSUI & CO Japan
MITSUI FUDOSAN CO Japan
MITSUI TRUST & BANK CO Japan
MITSUKOSHI Japan
MONTEDISON Italy
MUNCHENER RUCK Germany
MURATA MANUFACTURING CO Japan
NATIONAL WESTMINSTER BK United Kingdom
NATIONAL POWER United Kingdom
NATIONAL AUSTRALIA BANK Australia
NEC CORP Japan
NESTLE Switzerland
NEW WORLD DEVELOPMENT Hong Kong
NEW OJI PAPER CO Japan
</TABLE>
85
<PAGE> 105
<TABLE>
<S> <C>
NEWS CORP Australia
NIKKO SECURITIES CO Japan
NINTENDO CO Japan
NIPPON OIL CO Japan
NIPPON CREDIT BANK Japan
NIPPON EXPRESS CO Japan
NIPPON YUSEN K.K Japan
NIPPON STEEL CORP Japan
NIPPON PAPER IND CO Japan
NIPPONDENSO CO Japan
NISSAN MOTOR CO Japan
NISSHIN STEEL CO Japan
NKK CORP Japan
NOMURA SECURITIES CO Japan
NORTHERN TELECOM Canada
NOVA CORP Canada
NTT CORP Japan
OBAYASHI CORP Japan
OCBC BANK Singapore
ODAKYU ELECTRIC RAILWAY Japan
OKI ELECTRIC INDUSTRY CO Japan
ONO PHARMACEUTICAL CO Japan
OSAKA GAS CO Japan
PARIBAS(CIE FINANCIERE)A France
PEARSON United Kingdom
PEN & ORIENTAL STEAM United Kingdom
PETROFINA Belgium
PEUGEOT SA France
PHILIPS ELECTRONICS Netherlands
PIONEER ELECTRONIC CORP Japan
PLACER DOME Canada
POLYGRAM Netherlands
POWERGEN United Kingdom
PREUSSAG Germany
PRUDENTIAL CORP United Kingdom
RANK ORGANISATION United Kingdom
REED INTERNATIONAL United Kingdom
REPSOL Spain
REUTERS HOLDINGS United Kingdom
RHONE-POULENC France
RICHEMONT (FIN) A UNIT Switzerland
</TABLE>
86
<PAGE> 106
<TABLE>
<S> <C>
RICOH CO Japan
ROCHE HOLDING Switzerland
ROYAL BANK OF SCOTLAND United Kingdom
ROYAL DUTCH PETROLEUM CO Netherlands
ROYAL BANK OF CANADA Canada
RTZ CORP United Kingdom
RWE Germany
SAINSBURY (J) United Kingdom
SAINT-GOBAIN France
SAKURA BANK Japan
SANDOZ Switzerland
SANKYO CO Japan
SANWA BANK Japan
SANYO ELECTRIC CO Japan
SAP Germany
SCHNEIDER (EX-SPEP) France
SCHWEIZ BANKGESELL Switzerland
SCHWEIZ BANKVEREIN Switzerland
SCOTTISH POWER United Kingdom
SEAGRAM CO Canada
SECOM CO Japan
SEGA ENTREPRISES Japan
SEIBU RAILWAY CO Japan
SEKISUI CHEMICAL CO Japan
SEKISUI HOUSE Japan
SEVEN-ELEVEN JAPAN CO Japan
SHARP CORP Japan
SHELL T & T United Kingdom
SHIKOKU ELECTRIC POWER Japan
SHIMIZU CORP Japan
SHIN-ETSU CHEMICAL CO Japan
SHISEIDO CO Japan
SHIZUOKA BANK Japan
SHOWA SHELL SEKIYU K.K Japan
SIEMENS Germany
SINGAPORE AIRLINES Singapore
SINGAPORE TELECOM Singapore
SMITHKLINE BEECHAM PLC United Kingdom
SOCIETE GENERALE France
SONY CORP Japan
SONY MUSIC ENTERTAINMENT Japan
</TABLE>
87
<PAGE> 107
<TABLE>
<S> <C>
STET Italy
SUEZ (COMPAGNIE DE) France
SUMITOMO BANK Japan
SUMITOMO TRUST & BANK Japan
SUMITOMO METAL MINING CO Japan
SUMITOMO METAL IND Japan
SUMITOMO MARINE & FIRE Japan
SUMITOMO CHEMICAL CO Japan
SUMITOMO ELECTRIC IND Japan
SUMITOMO CORP Japan
SUN HUNG KAI PROPERTIES Hong Kong
SUZUKI MOTOR CORP Japan
SWIRE PACIFIC A Hong Kong
TAISEI CORP Japan
TAISHO PHARMACEUTICAL CO Japan
TAKEDA CHEMICAL IND Japan
TDK CORP Japan
TEIJIN Japan
TELE DANMARK Denmark
TELECOM ITALIA (SIP) Italy
TELEFONICA DE ESPANA Spain
TESCO United Kingdom
THOMSON CORP Canada
THORN-EMI United Kingdom
THYSSEN Germany
TOBU RAILWAY CO Japan
TOHOKU ELECTRIC POWER CO Japan
TOKAI BANK Japan
TOKIO MARINE & FIRE Japan
TOKYO ELECTRIC POWER CO Japan
TOKYO GAS CO Japan
TOKYO ELECTRON Japan
TOKYU CORP Japan
TONEN CORP Japan
TOPPAN PRINTING CO Japan
TORAY INDUSTRIES Japan
TORONTO-DOMINION BANK Canada
TOSHIBA CORP Japan
TOSTEM CORP Japan
TOTAL SA France
TOTO Japan
</TABLE>
88
<PAGE> 108
<TABLE>
<S> <C>
TOYO SEIKAN KAISHA Japan
TOYO TRUST & BANKING CO Japan
TOYODA AUTOMATIC LOOM Japan
TOYOTA MOTOR CORP Japan
TSB GROUP United Kingdom
UAP (COMPAGNIE) France
UNILEVER PLC United Kingdom
UNILEVER NV Netherlands
UNITED OVERSEAS BANK Singapore
VEBA Germany
VENDOME LUXURY GRP UNITS United Kingdom
VEREIN EL WESTFALEN Germany
VIAG Germany
VODAFONE GROUP United Kingdom
VOLKSWAGEN Germany
VOLVO Sweden
WELLCOME United Kingdom
WESTERN MINING CORP HLDG Australia
WESTPAC BANKING Australia
WHARF (HOLDINGS) Hong Kong
WOLTERS KLUWER Netherlands
YAMAICHI SECURITIES CO Japan
YAMANOUCHI PHARM. Japan
YAMAZAKI BAKING CO Japan
YASUDA FIRE & MARINE Japan
YASUDA TRUST & BANK CO Japan
ZENECA GROUP United Kingdom
ZURICH VERS. Switzerland
</TABLE>
89
<PAGE> 109
APPENDIX B
The following is a list of Companies whose securities were included in
the Schwab Small-Cap Index(TM) calculation as of the date of this Statement of
Additional Information:
A L PHARMA INC
AAR CORP
ABBEY HEALTHCARE GROUP
ABM INDS INC
ACCLAIM ENTMT INC
ACME METALS INC
ACORDIA INC
ACUSON CORP
ACX TECHNOLOGIES INC
ACXIOM CORP
ADELPHIA COMMUNICATIONS
ADIA SVCS INC
ADVANCED TECH LABS
ADVANCED TISSUE SCIENCES
ADVANTAGE HEALTH CORP
ADVO INC
AGCO CORP
AIR & WTR TECHNOLOGIES
AIR EXPRESS INTL
AIRBORNE FREIGHT
ALANTEC CORP
ALASKA AIR GROUP INC
ALBANK FINL CORP
ALBANY INTL CORP
ALDILA INC
ALEX BROWN INC
ALEXANDERS INC
ALFA CORP
ALLEN GROUP INC
ALLIANCE SEMICONDUCT
ALLIANT TECHSYSTEMS
ALLIED GROUP INC
ALLWASTE INC
AMAX GOLD INC
AMC ENTMT INC
AMCAST INDUSTRIAL CORP
AMCORE FINANCIAL INC
AMERICA WEST AIRLINES
AMERICAN ANNUITY GROUP
AMERICAN BANKERS INSURANCE
AMERICAN BUSINESS INFORMATION
AMERICAN BUSINESS PRODUCTS
AMERICAN CLASSC VOYAGES
AMERICAN COLLOID CO
AMERICAN FREIGHTWAYS
AMERICAN HERITAGE LIFE INVESTMENT
AMERICAN MAIZE PRODUCTS
AMERICAN MEDIA INC
AMERICAN MEDICAL RESPONSE
AMERICAN MGMT SYSTEMS
AMERICAN MOBILE SATELLITE
AMERICAN SAVINGS BK OF FLORIDA
AMERICAN SUPERCONDUCTOR
AMETEK
AMSCO INTL
ANALOGIC CORP
ANCHOR BANCORP
ANGELICA
ANTEC
ANTHONY INDUSTRIES
APOGEE ENTERPRISES
APPLE SOUTH
APPLEBEE'S INTERNATIONAL
APPLIED POWER
APS HLDG CORP
APTARGROUP
AQUILA GAS PIPELINE
ARBOR DRUGS
ARCTCO
ARGOSY GAMING CORP
ARKANSAS BEST
90
<PAGE> 110
ARMOR ALL PRODUCTS
ARNOLD INDUSTRIES
ARVIN INDUSTRIES
ASHLAND COAL
ASPECT TELECOMMUNICATIONS
ASSOCIATED BANC-CORP
AST RESEARCH
ATARI CORP
ATLANTIC SOUTHEAST AIRLINES
ATMOS ENERGY CORP
AU BON PAIN
AUGAT
AUTHENTIC FITNESS CORP
AUTOMOTIVE INDUSTRIES HOLDING
AUTOTOTE CORP
AVATAR HOLDINGS
AVID TECHNOLOGY
AZTAR CORP
BAKER J INC
BALDOR ELEC CO
BALDWIN & LYONS
BALLARD MEDICAL PRODUCTS
BALLY ENTMT CORP
BANCORPSOUTH INC
BANCTEC INC
BANTA CORP
BANYAN SYSTEMS
BAREFOOT
BARNES GROUP
BARR LABS
BARRETT RESOURCES
BASSETT FURNITURE
BAY ST GAS CO
BEARINGS
BELDEN INC
BELL BANCORP
BENTON OIL & GAS CO
BERKLEY W R CORP
BERRY PETE
BET HLDGS
BIG B
BIO RAD LABS
BIOCRAFT LABS
BIRMINGHAM STEEL
BISYS GROUP
BJ SERVICES
BLACK BOX CORP
BLACK HILLS CORP
BLAIR CORP
BLANCH E W HOLDINGS
BLOCK DRUG CO
BLOUNT INC
BMC INDS INC
BOLT BERANEK & NEWMAN
BOMBAY CO
BOOKS-A-MILLION
BOOLE & BABBAGE
BORG WARNER SECURITY
BORLAND INTL
BOSTON TECHNOLOGY
BOWNE & CO
BOX ENERGY CORP
BOYD GAMING CORP
BRADY WH CO
BROADBAND TECHNOLOGIES
BROADWAY & SEYMOUR
BROADWAY STORES
BROWN GROUP INC
BROWN TOM INC
BRUNOS INC
BRUSH WELLMAN INC
BUFFETS INC
BURLINGTON COAT FACTORY
BUSINESS RECORDS CP HLDGS
BW/IP INC
C COR ELECTRONICS
C D I CORP
C TEC CORP
CABOT OIL & GAS CORP
CAERE CORP
CALDOR CORP
CALGENE INC
91
<PAGE> 111
CALGON CARBON CORP
CALIFORNIA ENERGY
CALIFORNIA FED BK
CALIFORNIA MICROWAVE
CALIFORNIA WTR SVC CO
CALMAT
CAMCO INTERNATIONAL
CANANDAIGUA WINE
CAPITAL RE CORP
CAPITOL AMERN FINL CORP
CAPSURE HLDGS CORP
CARAUSTAR INDS INC
CARLISLE COS INC
CARMIKE CINEMAS INC
CARPENTER TECHNOLOGY
CARTER WALLACE
CASEYS GEN STORES
CASH AMER INTL INC
CATALINA MARKETING
CATELLUS DEV CORP
CATO CORP
CCB FINL CORP
CCP INS INC
CELLULAR COMMUNICATIONS
CENTENNIAL CELLULAR
CENTEX CORP
CENTRAL HUDSON GAS&ELEC
CENTRAL JERSEY BANCORP
CENTRAL LA ELEC INC
CENTRAL MAINE PWR CO
CENTURA BKS
CENTURY COMMUNICATIONS
CERNER
CHAMBERS DEV INC
CHAMPION ENTERPRISES
CHAPARRAL STEEL
CHARTER MEDICAL
CHARTER ONE FINANCIAL
CHECKPOINT SYSTEMS
CHEMED
CHEMICAL FINANCIAL
CHERRY CORP
CHEYENNE SOFTWARE
CHRONIMED
CHURCH & DWIGHT
CIDCO
CILCORP
CIRCA PHARMACEUTICALS
CITIZENS BANCORP
CITIZENS BANKING CORP
CITIZENS CORP
CITY NATIONAL CORP
CLAIRE'S STORES
CLARCOR
CLEVELAND CLIFFS
CMAC INVT CORP
CML GROUP
CNB BANCSHARES
COAST SAVINGS FINANCIAL
COASTAL HEALTHCARE
COBRA GOLF INC
COCA-COLA BOTTLING
COEUR D'ALENE MINES
COGNEX
COHERENT
COLLAGEN
COLLECTIVE BANCORP
COLONIAL BANCGROUP
COLONIAL DATA TECH
COLONIAL GROUP
COMAIR HOLDINGS
COMMERCE CLEARING HOUSE
COMMERCIAL FEDERAL
COMMERCIAL INTERTECH
COMMERCIAL METALS CO
COMMNET CELLULAR
COMMONWEALTH ENERGY
COMMUNITY HEALTH SYSTEMS
COMMUNITY PSYCHIATRIC CENTERS
COMPUSA
COMPUTERVISION
COMVERSE TECHNOLOGY
92
<PAGE> 112
CONCORD COMPUTING
CONE MILLS
CONNECTICUT NATURAL GAS
CONNER PERIPHERALS
CONTINENTAL AIRLINES
CONTINENTAL MED SYS
CONTINUUM INC
CONVERSE INC
CONVEX COMPUTER CORP
COPLEY PHARMACEUTICAL
COR THERAPEUTICS
CORRECTIONS CORP OF AMERICA
CPI
CRAIG JENNY
CRAWFORD & CO
CRAY RESEARCH
CREDENCE SYSTEMS
CROSS A T CO
CROSS TIMBERS OIL CO
CSF HOLDINGS
CSS INDUSTRIES
CULLEN FROST BANKERS
CURTISS WRIGHT CORP
CYRIX CORP
CYRK INC
CYTEC INDUSTRIES
DALLAS SEMICONDUCTOR
DAMES & MOORE INC
DATA GENERAL CORP
DATASCOPE
DAVIDSON & ASSOC INC
DELPHI FINL GROUP
DELTA WOODSIDE INDUSTRIES
DEPOSIT GUARANTY CORP
DESTEC ENERGY
DETROIT DIESEL
DEVON ENERGY CORP
DEVON GROUP INC
DEVRY INC
DEXTER CORP
DIAGNOSTEK INC
DIAGNOSTIC PRODS
DIAL PAGE
DIBRELL BROS INC
DIGI INTERNATIONAL
DIGIDESIGN INC
DIGITAL LINK
DIGITAL MICROWAVE
DIME BANCORP
DIONEX CORP
DISCOUNT AUTO PARTS
DISCOVERY ZONE
DONALDSON
DOWNEY SVGS & LN ASSN
DRAVO CORP
DRESS BARN
DREYERS GRAND ICE CREAM
DSP GROUP
DURACRAFT
DURIRON
DUTY FREE INTERNATIONAL
DYNATECH CORP
EAGLE HARDWARE&GARDEN
EASTERN ENTERPRISES
EASTERN UTILS ASSOCIATES
EATON VANCE
EDISON BROS STORES
EGGHEAD
ELECTROGLAS
ELECTRONICS FOR IMAGING
EMPIRE DIST ELEC
ENERGEN CORP
ENHANCE FINANCIAL SERVICES GRP
ENNIS BUSINESS FORMS
ENTERRA CORP
ENVOY CORP
ENZO BIOCHEM
EPITOPE
EQUICREDIT
ETHAN ALLEN INTERIORS
EXABYTE CORP
EXAR CORP
93
<PAGE> 113
EXPEDITORS INTL OF WASHINGTON
EXPRESS SCRIPTS
F & M NATL CORP
FAB INDS INC
FAIR ISAAC & CO
FARMER BROS CO
FEDDERS CORP
FIELDCREST CANNON
FILENET CORP
FINANCIAL TRUST CORP
FIRST ALERT
FIRST AMERICAN FINANCIAL CP
FIRST CITIZENS BANCSHARES
FIRST COLONIAL BANCSHARES
FIRST COMMERCE CORP
FIRST COMMERCIAL CORP
FIRST COMWLTH FINL
FIRST FINANCIAL BANCORP
FIRST FINANCIALL CORP
FIRST MICHIGAN BANK CORP
FIRST MIDWEST BANCORP
FIRST MISSISSIPPI CORP
FIRST NATIONAL BANCORP
1ST SOURCE CORP
FIRSTBANK OF ILLINOIS
FIRSTFED MICHIGAN CORP
FIRSTIER FINANCIAL
FISHER SCIENTIFIC
FLAGSTAR COS INC
FLORIDA EAST COAST
FLORIDA ROCK INDUSTRIES
FLUKE CORP
FMC GOLD
FOAMEX INTL
FOOTHILL GROUP INC
FOREMOST CORP
FOREST CITY ENTERPRI
FOXMEYER HEALTH CORP
FRAME TECHNOLOGY
FRANKLIN ELECTRIC
FRANKLIN QUEST
FREMONT GENERAL
FRESENIUS USA
FRITZ COS INC
FRONTIER INS GROUP
FROZEN FOOD EXPRESS
FT WAYNE NATIONAL CORP
FULLER H B CO
FULTON FINL CORP
FUND AMERN ENTRPR HLDG
FURON
FUTURE HEALTHCARE
G & K SVCS INC
GALLAGHER (ARTHUR J &) CO
GAYLORD CONTAINER
GC COMPANIES
GENCARE HEALTH SYSTEM
GENCORP
GENERAL BINDING CORP
GENERAL DATACOMM INDUSTRIES
GENESIS HEALTH VENTURES
GENEVA STEEL
GENTEX CORP
GEOTEK COMMUNICATIONS
GERBER SCIENTIFIC
GIBSON GREETINGS
GIDDINGS&LEWIS
GILEAD SCIENCES
GLENDALE FED BK
GLOBAL MARINE
GLOBAL NAT RES
GOULDS PUMPS
GRACO
GRANCARE
GRAND CASINOS
GRANITE CONSTRUCTION
GREENFIELD INDUSTRIES
GRENADA SUNBURST SYSTEM
GROW GROUP
GUARANTY NATIONAL
GUILFORD MILLS
HAEMONETICS
94
<PAGE> 114
HAGGAR
HANCOCK FABRICS
HANCOCK HOLDING
HANDLEMAN CO
HANDY & HARMAN
HANOVER DIRECT
HARLAND JOHN H
HARLEYSVILLE GROUP
HARMAN INTL INDS
HARPER GROUP
HARTMARX CORP
HAWKEYE BANCORPORATION
HAYES WHEELS INTL
HCC INS HLDGS INC
HEALTH MGMT SYS INC
HEART TECHNOLOGY INC
HEARTLAND EXPRESS
HECHINGER CO
HECLA MINING
HELENE CURTIS INDUSTRIES
HELMERICH & PAYNE
HERBALIFE INTERNATIONAL
HERITAGE MEDIA
HILB ROGAL & HAMILTON
HILLHAVEN CORP
HILLS STORES
HOLLY CORP
HOLLYWOOD ENTERTAINMENT
HOME BENEFICIAL CORP
HOME HOLDINGS
HOMEDCO GROUP INC
HORACE MANN EDUCATORS
HORSEHEAD RESOURCE DEVELOPMENT
HOUGHTON MIFFLIN CO
HS RESOURCES INC
HUDSON FOODS
HUFFY
HUNT JB TRANS SVC
HUNT MFG
HUNTCO INC
I-STAT CORP
ICN PHARMACEUTICAL
IDEX CORP
IDEXX LABS CORP
IHOP CORP
IMMUNEX CORP
IMO INDS INC
IMRS INC
IN FOCUS SYSTEMS
INDIANA ENERGY
INDRESCO
INFORMATION RESOURCES
INFOSOFT INTERNATIONAL
INGLES MARKETS
INPUT/OUTPUT INC
INSIGNIA FINANCIAL
INSILCO
INSTRUMENT SYSTEMS
INSURANCE AUTO AUCTIONS
INTEGON
INTELLIGENT ELECTRONICS
INTER REGL FINL GROUP
INTERCO
INTERDIGITAL COMMUNICATIONS
INTERGRAPH
INTERIM SVCS
INTERNATIONAL DAIRY QUEEN
INTERNATIONAL MULTIFOODS
INTERNATIONAL RECTIFIER
INTERPOOL
INTERSOLV INC
INTERSTATE BAKERIES
INTERSTATE PWR CO
INTERVOICE INC
INTL CABLETEL INC
INTL FAMILY ENTMT
INTL IMAGING MATERIALS
INVACARE CORP
IONICS INC
IOWA ILL GAS & ELEC
JACOBS ENGR GROUP
95
<PAGE> 115
JACOR COMMUNICATIONS
JASON
JEFFERIES GROUP
JEFFERSON BANKSHARES
JONES INTERCABLE INC
JOSLYN CORP
JSB FINANCIAL INC
JUNO LTG INC
JUSTIN INDUSTRIES
KAISER ALUMINUM CORP
KAMAN CORP
KAUFMAN&BROAD HOME
KAYDON CORP
KCS ENERGY INC
KEANE INC
KELLWOOD CO
KEMET CORP
KENNAMETAL INC
KENT ELECTRS CORP
KEYSTONE INTL INC
KIMBALL INTL INC
KINDER-CARE LR
KINETIC CONCEPTS INC
KIRBY CORP
KN ENERGY INC
KOMAG INC
LA Z BOY CHAIR CO
LABONE INC
LACLEDE GAS CO
LANCE INC
LANDMARK GRAPHICS CO
LANDS END INC
LANDSTAR SYS INC
LATTICE SEMICONDUCTOR
LAWSON PRODS INC
LAWTER INTL INC
LCI INTL INC
LEADER FINL CORP
LEARNING CO
LECHTERS CORP
LEGG MASON INC
LENNAR CORP
LEVEL ONE COMMUNICATIONS
LEVITZ FURNITURE
LIBBEY INC
LIBERTY BANCORP
LIBERTY CORP
LIFE PARTNERS GRP
LIFE RE CORP
LIFE TECHNOLOGIES
LILLY INDS INC
LIN TELEVISION CORP
LINCOLN TELECOMMICATIONS
LIPOSOME CO
LIQUI-BOX CORP
LITTELFUSE INC
LIVING CTRS AMER INC
LOGICON INC
LONE STAR INDS
LONGS DRUG STORES
LOUIS DREYFUS NATURAL GAS
LUBYS CAFETERIAS
LUKENS INC
LYDALL INC
M A COM INC
M S CARRIERS INC
MACFRUGALS BARGAINS
MACROMEDIA INC
MADISON GAS & ELECTRIC
MAGNA GROUP
MAGNETEK INC
MARCUS CORP
MARINER HEALTH GROUP
MARK TWAIN BANCSHARE
MARKEL CORP
MARSHALL INDUSTRIES
MASLAND CORP
MATERIAL SCIENCES
MAXUS ENERGY CORP
MAXXAM INC
MAYBELLINE INC
MCAFEE ASSOCS INC
96
<PAGE> 116
MCCLATCHY NEWSPAPERS
MDU RES GROUP INC
MEASUREX CORP
MEDIC COMPUTER SYSTEMS
MEDICINE SHOPPE INTL
MEDUSA CORP
MENS WEARHOUSE
MENTOR CORP
MEREDITH CORP
MERISEL INC
MESA AIRLINES
MESA INC
METHODE ELECTRONICS
METRICOM INC
MICHAEL FOODS INC
MICROS SYSTEMS
MICROTEST
MICROTOUCH SYSTEMS
MID AM INC
MIDWEST GRAIN PRODUCTS
MILLER HERMAN INC
MINE SAFETY APPLIANCES
MINERALS TECHNOLOGIES
MK RAIL CORP
MOHAWK INDUSTRIES
MOLTEN METAL TECHNOLOGY
MONEY STORE
MONK AUSTIN INC
MOORCO INTL INC
MORRISON KNUDSEN
MOSINEE PAPER CORP
MUELLER INDS INC
MULTICARE COS INC
MUSICLAND STORES
MUTUAL ASSURN INC
MYERS INDS INC
N S BANCORP INC
NABORS INDS INC
NAC RE CORP
NACCO INDS INC
NASH FINCH CO
NATIONAL AUTO CREDIT
NATIONAL BANCORP
NATIONAL COMMERCE BANCORP
NATIONAL COMPUTER SYSTEMS
NATIONAL DATA CORP
NATIONAL PRESTO INDS
NATIONAL STL CORP
NATL PENN BANCSHARES
NATL RE CORP
NAUTICA ENTERPRISES
NBB BANCORP
NCH CORP
NEIMAN MARCUS
NELLCOR INC
NELSON THOMAS INC
NETWORK EQUIPMENT TECHNOLOGIES
NETWORK GENERAL CORP
NETWORK SYSTEMS CORP
NEW ENG BUSINESS SERVICE
NEW JERSEY RESOURCES
NEWFIELD EXPLORATION
NEWPARK RESOURCES
NL INDUSTRIES
NOBLE DRILLING CORP
NORAM ENERGY CORP
NORAND CORP
NORTH AMERICAN MORTGAGE
NORTH FORK BANCORP
NORTHWEST NAT GAS CO
NORTHWESTERN PUB SVC
NOVACARE CORP
NOVEN PHARMACEUTICAL
NU-KOTE HLDG INC
NUEVO ENERGY CO
NYMAGIC INC
O REILLY AUTOMOTIVE
OAK INDS INC
OAKWOOD HOMES CORP
OCEANEERING INTL INC
OCTEL COMMUNICATIONS
97
<PAGE> 117
OEA INC
OFFSHORE LOGISTICS
OFFSHORE PIPELINES
OM GROUP INC
OMI CORP
OMNICARE INC
ONBANCORP INC
ONE VALLEY BANCORP OF WV
ONECOMM CORP
ONEOK INC
OPTICAL DATA SYS
ORANGE & ROCKLAND
ORBITAL SCIENCES
OREGON STEEL MILLS
ORGANOGENESIS
ORION CAP CORP
ORNDA HEALTHCORP
OSHKOSH B GOSH
OSMONICS
OTTER TAIL POWER
OUTBOARD MARINE CORP
OWENS & MINOR INC
OXFORD INDS INC
PACIFIC PHYSICIAN SERVICES
PACIFIC SCIENTIFIC
PAIRGAIN TECHNOLOGIES
PAPA JOHNS INTL INC
PARK COMMUNICATIONS
PARK NATL CORP
PARKER DRILLING
PATTERSON DENTAL
PAXAR CORP
PENN TRAFFIC
PENNCORP FINL GROUP
PEOPLES BK OF BRIDGEPORT
PEOPLES HERITAGE FINL GRP
PETROLEUM HEAT&PWR
PETROLITE CORP
PHH CORP
PHILADELPHIA SUBURBAN
PHILLIPS VAN HEUSEN
PHOENIX RESOURCE
PHOTRONICS
PHYCOR
PHYSICIANS HEALTH SERVICES
PICTURETEL
PIEDMONT NAT GAS
PIER 1 IMPORTS
PIKEVILLE NATL CORP
PILGRIMS PRIDE CORP
PIONEER GROUP INC
PIONEER STANDARD ELECTRONICS
PIPER JAFFRAY
PITTSTON MINERALS GROUP
PITTWAY CORP
PLAINS PETE CO
PLANAR SYS INC
PLATINUM TECHNOLOGY
PLAYERS INTL INC
PLY GEM INDS INC
POE & BROWN INC
POGO PRODUCING CO
POPE & TALBOT INC
PRATT & LAMBERT UNIT
PRECISION CASTPARTS
PREMIER BANCORP INC
PRESIDENT RIVERBOAT CASINOS
PRESIDENTIAL LIFE
PRESSTEK INC
PRIMARK CORP
PRIME HOSPITALITY CO
PRODUCTION OPERATORS
PROFFITTS INC
PROGRESS SOFTWARE
PROTEIN DESIGN LABS
PROVIDENT BANCORP
PROXIMA CORP
PUBLIC SVC CO OF N C
PUBLIC SVC CO OF N MEX
PULITZER PUBG CO
PULTE CORP
PURITAN BENNETT CORP
98
<PAGE> 118
PXRE CORP
PYRAMID TECHNOLOGY
QUAKER STATE
QUALITY FOOD CTRS
QUANEX CORP
QUANTUM HEALTH RES
QUEENS CNTY BANCORP
QUICK&REILLY GROUP
RAYMOND JAMES FINL
READING & BATES CORP
RECOTON CORP
REGAL BELOIT CORP
REGAL CINEMAS INC
REGENCY HEALTH SVCS
REINSURANCE GROUP OF AMERICA
RELIANCE GROUP HLDGS
REN CORP-USA
RESPIRONICS
REXALL SUNDOWN
REXENE CORP
RICHFOOD HLDGS INC
RIGGS NATL
RIO HOTEL & CASINO
RIVER FOREST BANCORP
ROBERT HALF INTL
ROBERTS PHARMACEUTIC
ROCHESTER CMNTY SVGS BK
ROGERS CORP
ROHR INC
ROLLINS ENVIRMTL SVC
ROLLINS TRUCK LEASIN
ROOSEVELT FINL GROUP
ROPER INDS
ROSS STORES INC
ROTECH MED CORP
ROWAN COS INC
RUDDICK CORP
RUSS BERRIE & CO
RYANS FAMILY STEAK HOUSE
RYKOFF-SEXTON INC
RYLAND GROUP INC
S & T BANCORP INC
S3 INC
SAFECARD SVCS INC
SAFESKIN CORP
SAFETY 1ST INC
SALICK HEALTH CARE
SANDERSON FARMS INC
SANIFILL INC
SANTA CRUZ OPERATION
SAVANNAH FOODS & IND
SBARRO INC
SCHULER HOMES
SCI SYS INC
SCIOS NOVA INC
SCOTTS CO
SEABOARD CORP
SEAFIELD CAP CORP
SEALRIGHT CO
SECURITY CAP BANCORP
SECURITY-CONN CORP
SEI CORP
SELECTIVE INS GROUP
SEQUA CORPORATION
SEQUENT COMPUTER SYSTEMS
SERVICE MERCHANDISE
SHONEYS INC
SHOPKO STORES INC
SHOREWOOD PACKAGING
SHOWBOAT INC
SIERRA HEALTH SERVICES
SIERRA ON-LINE INC
SIERRA PACIFIC RESOURCES
SILICON VALLEY GROUP
SITHE ENERGIES INC
SKYLINE CORP
SMART & FINAL
SMITH A O
SMITH INTL INC
SMITHFIELD FOODS
SNYDER OIL CORP
SODAK GAMING INC
99
<PAGE> 119
SOFAMOR/DANEK GROUP
SONAT OFFSHORE DRILL
SOTHEBYS HLDGS
SOUTH JERSEY INDUSTRIES
SOUTHDOWN INC
SOUTHERN IND GAS & ELECTRIC
SOUTHERN UNION CO
SOUTHESTN MICH GAS ENTERPRISES
SOUTHWEST GAS CORP
SOUTHWESTERN ENERGY
SOVEREIGN BANCORP
SPACELABS MEDICAL
SPECTRUM HOLOBYTE
SPORTS & RECREATION
SPRINGS INDUSTRIES
SPX CORP
ST JOHN KNITS
ST PAUL BANCORP INC
STANDARD MICROSYSTEMS
STANDARD MOTOR PRODUCTS
STANDARD PACIFIC
STANDARD PRODS CO
STANDARD REGISTER CO
STANDEX INTL CORP
STANHOME INC
STANT CORP
STARTER CORP
STATION CASINOS
STEIN MART INC
STERIS CORP
STEWART ENTERPRISES
STONE & WEBSTER INC
STRAWBRIDGE & CLOTHIER
STRIDE RITE CORP
STUDENT LOAN
STURM RUGER & CO
SUMMIT BANCORP
SUMMIT TECHNOLOGY
SUNGLASS HUT INTL
SUNRISE MED INC
SUNSHINE MINING
SUSQUEHANNA BKSHS
SWIFT TRANSN CO
SYMANTEC CORP
SYMMETRICOM INC
SYNETIC INC
SYQUEST TECHNOLOGY
SYRATECH CORP
SYSTEM SOFTWARE ASSOCIATES
SYSTEMS & COMPUTER TECHNOLOGY
TARGET THERAPEUTICS
TBC CORP
TCA CABLE TV
TCF FINL CORP
TECH DATA CORP
TECNOL MED PRODS
TEJAS GAS CORP
TELEFLEX INC
TELXON CORP
TENCOR INSTRS
TENNANT CO
TESORO PETE CORP
TEXAS INDS
THERMEDICS
THERMO CARDIOSYSTEMS
THERMO FIBERTEK
THERMOTREX CORP
THIOKOL CORP
3DO CO
THREE FIVE SYSTEMS
TIFFANY & CO
TIMBERLAND CO
TITAN WHEEL INTL INC
TJ INTL INC
TNT FREIGHTWAYS CORP
TOLL BROTHERS INC
TOOTSIE ROLL INDS
TOP SOURCE TECH INC
TOPPS INC
TORO CO
TRACTOR SUPPLY CO
TRENWICK GROUP INC
100
<PAGE> 120
TRIARC COS INC
TRIDENT NGL HOLDING
TRIMBLE NAVIGATION LTD
TRUE NORTH COMMUNICATIONS
TRUST CO OF NJ
TRUSTCO BANK CORP
TRUSTMARK CORP
TUCSON ELEC PWR CO
20TH CENTURY INDUSTRIES
TYCO TOYS
U S CAN CORP
U S ROBOTICS
U S TRUST CORP
UGI CORP
ULTRATECH STEPPER INC
UMB FINL CORP
UNIFIRST CORP
UNION PLANTERS CORP
UNITED BANKSHARES
UNITED CAROLINA BANCSHARES
UNITED COS FINL CORP
UNITED FIRE & CASUALTY CO
UNITED ILLUMINATING
UNITED INS COS INC
UNITED INTL HLDGS IN
UNITED MERIDIAN CORP
UNITED STATES FILTER
UNITED STATIONERS
UNITED TELEVISION
UNITED WASTE SYSTEMS
UNITED WISCONSIN SERVICES
UNITED WTR RES INC
UNITRODE CORP
UNIVAR CORP
UNIVERSAL HLTH SVCS
UNR INDS INC
USA WASTE SVCS INC
USAIR GROUP INC
USLICO CORP
UST CORP
VALASSIS COMMUNICATIONS
VALMONT INDUSTRIES
VALUE CITY DEPT STORES
VALUE LINE INC
VARCO INTERNATIONAL
VENTRITEX
VENTURE STORES
VERIFONE
VERTEX PHARMACEUTICALS
VESTA INS GROUP
VICOR CORP
VICTORIA BANKSHARES
VIEWLOGIC SYSTEMS
VIGORO CORP
VINTAGE PETE
VITALINK PHARMACY SERVICES
VIVRA INC
VLSI TECHNOLOGY
WABAN INC
WALL DATA INC
WALLACE COMPUTER SERVICES
WASHINGTON ENERGY
WASHINGTON NATL CORP
WATKINS JOHNSON
WATSON PHARMACEUTICALS
WATTS INDUSTRIES
WD-40
WEATHERFORD INTL INC
WEBB (DEL) CORP
WEIRTON STEEL
WELBILT CORP
WERNER ENTERPRISES
WESBANCO INC
WEST
WESTAMERICA BANCORP
WESTCORP
WESTCOTT COMMUNICATIONS
WESTERN CO OF NORTH AMERICA
WESTERN GAS RESOURCES
WESTERN PUBLISHING
WESTERN WASTE INDS
WESTPOINT STEVENS
101
<PAGE> 121
WESTWOOD ONE
WHITE RIVER CORP
WHITNEY HLDG CORP
WHX CORP
WICOR INC
WILEY JOHN & SONS
WINNEBAGO INDUSTRIES
WLR FOODS INC
WMS INDS INC
WOLVERINE TUBE INC
WOLVERINE WORLD WIDE
WONDERWARE CORP
WORTHEN BKG CORP
WPS RESOURCES CORP
WYLE LABS
WYMAN GORDON CO
X-RITE INC
XCL LTD
XIRCOM INC
YANKEE ENERGY SYSTEM
ZALE CORP
ZEBRA TECHNOLOGIES
ZENITH ELECTRS CORP
ZENITH LABS
ZENITH NATL INS CORP
ZERO CORP
ZILOG INC
ZIONS BANCORPORATION
ZURN INDUSTRIES
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY THE
TRUST, ANY SERIES THEREOF, OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE.
102
<PAGE> 122
PART C
OTHER INFORMATION
JULY 12, 1995
SCHWAB CAPITAL TRUST
Item 24. Financial Statements and Exhibits.
(a) Financial Statements for Schwab International Index Fund(TM)
and Schwab Small-Cap Index Fund(TM) (as of the filing date of
this Post-Effective Amendment, Schwab Asset Director-High
Growth, Schwab Asset Director-Balanced Growth, and Schwab
Asset Director-Conservative Growth (the "Asset Director
Funds") had not yet commenced operations):
-- Incorporated by reference to Prospectuses for Schwab
International Index Fund and Schwab Small-Cap Index
Fund filed with the Securities and Exchange
Commission under Rule 497(e) on June 30, 1995
-- Condensed Financial Information
-- Included in Part B, Statement of Additional
Information:
-- Statement of Net Assets for Schwab International
Index Fund as of October 31, 1994 (Audited)
-- Statement of Operations for Schwab International
Index Fund for the year ended October 31, 1994
(Audited)
-- Statement of Changes in Net Assets for Schwab
International Index Fund for the year ended
October 31, 1994 (Audited)
-- Notes to Financial Statements for Schwab
International Index Fund for the year ended
October 31, 1994 (Audited)
-- Report of the Independent Accountants for Schwab
International Index Fund, dated November 30, 1994
-- Statement of Net Assets for Schwab Small-Cap
Index Fund for the year ended October 31, 1994
-- Statement of Operations for Schwab Small-Cap
Index Fund for the period December 3, 1993
(commencement of operations) to October 31, 1994
(Audited)
-- Statement of Changes in Net Assets for Schwab
Small-Cap Index Fund for the period December 3,
1993 (commencement of operations) to October 31,
1994 (Audited)
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<PAGE> 123
-- Notes to Financial Statements for Schwab
Small-Cap Index Fund(TM) for the period December
3, 1993 (commencement of operations) to October
31, 1994 (Audited)
-- Report of the Independent Accountants for Schwab
Small-Cap Index Fund, dated November 30, 1994
(b) Exhibits:
(1) -- Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1) to
Registrant's Registration Statement on Form
N-1A, filed on May 10, 1993
(2) -- Amended and Restated By-Laws are incorporated
by reference to Exhibit (2) to Post-Effective
Amendment No. 4 to Registrant's Registration
Statement on Form N-1A, filed on February 24,
1995
(3) -- Inapplicable
(4) (a) -- Article III, Section 5, Article V, Article
VI, Article VIII, Section 4 and Article IX,
Sections 1, 5 and 7 of the Agreement and
Declaration of Trust is incorporated by
reference to Exhibit (1) to Registrant's
Registration Statement on Form N-1A, filed on
May 10, 1993
(b) -- Article 9, Article 10, Section 6 and Article
11 of the By-Laws is incorporated by
reference to Exhibit (2) to Post-Effective
Amendment No. 4 to Registrant's Registration
Statement on Form N-1A, filed on February 24,
1995
(5) (a) -- Investment Advisory and Administration
Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the
"Investment Manager") is incorporated by
reference to Exhibit (5)(a) to Post-Effective
Amendment No. 4 to Registrant's Registration
Statement on Form N-1A, filed on February 24,
1995
(b) -- Form of Revised Schedules to Investment
Advisory and Administration Agreement
referred to at Exhibit 5(a) above is filed
herewith
<R/>
(c) -- Form of Investment Sub-Advisory Agreement
between Investment Manager and Symphony Asset
Management, Inc. ("Symphony") is filed
herewith
(6) (a) -- Distribution Agreement between Registrant and
Charles Schwab & Co., Inc. ("Schwab") is
incorporated by reference to Exhibit (6)(a)
to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A, filed on August 16, 1993
(b) -- Revised Schedule to the Distribution
Agreement referred to at Exhibit (6)(a) above
is incorporated by reference to Exhibit
(6)(b) to Post-
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<PAGE> 124
Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A, filed on
February 25, 1994
(c) -- Form of Revised Schedule to the Distribution
Agreement referred to at Exhibit (6)(a) above
is filed herewith
(7) -- Inapplicable
(8) (a) -- Custodian Agreement between Registrant and
State Street Bank and Trust Company is
incorporated by reference to Exhibit (8)(a)
to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form
N-1A, filed on February 25, 1994
(b) -- Schedule to the Custodian Agreement referred
to at Exhibit (8)(a) above is incorporated by
reference to Exhibit (8)(b) to Post-Effective
Amendment No. 3 to Registrant's Registration
Statement on Form N-1A, filed on June 1, 1994
(c) -- Form of Revised Schedules to the Custodian
Agreement referred to at Exhibit (8)(a) above
is filed herewith
(d) -- Transfer Agency Agreement between Registrant
and Schwab is incorporated by reference to
Exhibit (8)(b) to Post-Effective Amendment
No. 1 to Registrant's Registration Statement
on Form N-1A, filed on August 16, 1993
(e) -- Revised Schedules to the Transfer Agency
Agreement referred to at Exhibit (8)(d) above
are incorporated by reference to Exhibit
(8)(c) to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form
N-1A, filed on February 25, 1994
(f) -- Form of Revised Schedules to the Transfer
Agency Agreement referred to at Exhibit
(8)(d) above are filed herewith
(g) -- Shareholder Service Agreement between
Registrant and Schwab is incorporated by
reference to Exhibit (8)(c) to Post-Effective
Amendment No. 1 to Registrant's Registration
Statement on Form N-1A, filed on August 16,
1993
(h) -- Revised Schedules to the Shareholder Service
Agreement referred to at Exhibit (8)(g) above
are incorporated by reference to Exhibit
(8)(e) to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form
N-1A, filed on February 25, 1994
(i) -- Form of Revised Schedules to the Shareholder
Service Agreement referred to at Exhibit
(8)(g) above are filed herewith
(9) -- Inapplicable
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(10) -- Opinion and Consent of Ropes & Gray as to
legality of the securities being registered
is incorporated by reference to Registrant's
Rule 24f-2 Notice, filed on December 16, 1994
(11) (a) -- Consent of Ropes & Gray is filed herewith
(b) -- Consent of Price Waterhouse LLP, Independent
Accountants, is filed herewith
(12) -- Inapplicable
(13) (a) -- Purchase Agreement for the Schwab
International Index Fund(TM) is incorporated
by reference to Exhibit (13) to
Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form
N-1A, filed on August 16, 1993
(b) -- Purchase Agreement for the Schwab Small-Cap
Index Fund(TM) is incorporated by reference
to Exhibit (13)(b) to Post-Effective
Amendment No. 2 to Registrant's Registration
Statement on Form N-1A, filed on February 25,
1994
(c) -- Form of Purchase Agreement for the Asset
Director Funds is filed herewith
(14) -- Inapplicable
(15) -- Inapplicable
(16) (a) -- Performance calculation for Schwab
International Index Fund is incorporated by
reference to Exhibit (16) to Post-Effective
Amendment No. 2 to Registrant's Registration
Statement on Form N-1A, filed on February
25, 1994
(b) -- Performance calculation for Schwab Small-Cap
Index Fund is incorporated by reference to
Exhibit (16)(b) to Post-Effective Amendment
No. 4 to Registrant's Registration Statement
on Form N-1A, filed on February 24, 1995
(27) (a) -- Financial Data Schedule for Schwab
International Index Fund filed herewith
(27) (b) -- Financial Data Schedule for Schwab Small-Cap
Index Fund filed herewith
Item 25. Persons Controlled by or under Common Control with Registrant.
The Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity
Portfolios, and Schwab Advantage Trust each are Massachusetts business trusts
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), are advised by the Investment Manager, and employ Schwab as their
principal underwriter, transfer agent and shareholder services agent. As a
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<PAGE> 126
result, The Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity
Portfolios, and Schwab Advantage Trust may be deemed to be under common control
with Registrant.
Item 26. Number of Holders of Registrant's Securities.
As of June 30, 1995, the number of record holders of shares of beneficial
interest for the series of Registrant was:
<TABLE>
<CAPTION>
Name of Fund Number of Record Holders
------------ ------------------------
<S> <C>
Schwab International Index Fund(TM) 1 (for the benefit of 17,450
accounts)
Schwab Small-Cap Index Fund(TM) 1 (for the benefit of 24,574
accounts)
Schwab Asset Director-High Growth 0
Schwab Asset Director-Balanced Growth 0
Schwab Asset Director-Conservative 0
Growth
</TABLE>
Item 27. 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
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<PAGE> 127
is against public policy as expressed in the 1933 Act and will be governed by
the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Manager.
(a) Information pertaining to business and other connections of
Registrant's Investment Manager is hereby incorporated by reference to the
Prospectus section captioned "Management of the Fund" and to the section of the
Statement of Additional Information captioned "Management of the Trust" for the
Schwab International Index Fund(TM) and Schwab Small-Cap Index Fund(TM).
Information pertaining to business and other connections of
Registrant's Investment Manager and sub-adviser is incorporated by reference to
the Prospectus section captioned "Management Functions and Responsibilities"
and to the section of the Statement of Additional Information captioned
"Management of the Trust" for the Asset Director Funds.
Registrant's Investment Manager, Charles Schwab Investment
Management, Inc., a Delaware corporation, organized in October 1989 to serve as
Investment Manager to The Charles Schwab Family of Funds, also serves as the
Investment Manager to Schwab Investments, Schwab Annuity Portfolios, and Schwab
Advantage Trust, each an open-end management investment company. The principal
place of business of the Investment Manager is 101 Montgomery Street, San
Francisco, California 94104. The only business in which the Investment Manager
engages is that of investment manager and administrator to Registrant, The
Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity Portfolios,
Schwab Advantage Trust, and any other investment companies that Schwab may
sponsor in the future.
Registrant's sub-investment adviser for the Asset
Director Funds is Symphony. Symphony was formed on
March 30, 1994 and, as of June 30, 1995, manages approximately $600 million.
BARRA, Inc. owns 100% of the outstanding stock of
Symphony.
(b) The business, profession, vocation or employment of a substantial
nature in which each director and/or executive officer of Schwab and/or the
Investment Manager is or has been engaged during the past two fiscal years for
his or her own account in the capacity of director, officer, employee, partner
or trustee is as follows:
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Founder, Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Chief Executive Officer
and Director
</TABLE>
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<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Charles Schwab Investment Management, Chairman and Director
Inc.
The Charles Schwab Trust Company Chairman and Director
Mayer & Schweitzer, Inc. Chairman and Director
The Gap, Inc. Director
Transamerica Corporation Director
AirTouch Communications Director
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February 1995; Vice
Chairman until August 1994
The Charles Schwab Corporation Vice Chairman and Director; Chief
Operating Officer until March 1994
The Charles Schwab Trust Company Director
David S. Pottruck Charles Schwab & Co., Inc. President, Chief Executive
Officer, and Director
The Charles Schwab Corporation President, Chief Operating
Officer, and Director
Charles Schwab Investment Management, Chief Executive Officer and
Inc. Director
Mayer & Schweitzer, Inc. Director
Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman and Director; Senior
Executive Vice President and Chief
Operating Officer until January
1995
The Charles Schwab Corporation Executive Vice President; Senior
Executive Vice President until
January 1995
Mayer & Schweitzer, Inc. Director
</TABLE>
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<PAGE> 129
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
John P. Coghlan Charles Schwab & Co., Inc. Executive Vice President - Schwab
Institutional
The Charles Schwab Corporation Executive Vice President - Schwab
Institutional
The Charles Schwab Trust Company Director
A. John Gambs, Charles Schwab & Co., Inc. Executive Vice President, Chief
Treasurer and Principal Financial Financial Officer, and Director
Officer
The Charles Schwab Corporation Executive Vice President and Chief
Financial Officer
Charles Schwab Investment Management, Chief Financial Officer and
Inc. Director
The Charles Schwab Trust Company Chief Financial Officer
Mayer & Schweitzer, Inc. Director
Dawn G. Lepore Charles Schwab & Co., Inc. Executive Vice President and Chief
Information Officer
The Charles Schwab Corporation Executive Vice President and Chief
Information Officer
Elizabeth G. Sawi, Charles Schwab & Co., Inc. Executive Vice President - Mutual
Trustee and President Funds
The Charles Schwab Corporation Executive Vice President - Mutual
Funds
Charles Schwab Investment Management,
Inc. President
Tom D. Seip Charles Schwab & Co., Inc. Executive Vice President - Retail
Brokerage
The Charles Schwab Corporation Executive Vice President - Retail
Brokerage
Charles Schwab Investment Management, President and Chief Operating
Inc. Officer until 1994
John N. Tognino Charles Schwab & Co., Inc. Executive Vice President - Capital
Markets and Trading
</TABLE>
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<PAGE> 130
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
The Charles Schwab Corporation Executive Vice President - Capital
Markets and Trading
Mayer & Schweitzer, Inc. Director
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President - Human
Resources
The Charles Schwab Corporation Executive Vice President - Human
Resources
Commercial Credit Corporation Managing Director until February
1994
Christopher V. Dodds Charles Schwab & Co., Inc. Treasurer and Senior Vice
President
The Charles Schwab Corporation Treasurer and Senior Vice
President
Mayer & Schweitzer, Inc. Treasurer
William J. Klipp, Charles Schwab & Co., Inc. Senior Vice President;
Trustee, Senior Vice President, and Treasurer until 1993
Chief Operating Officer
Charles Schwab Investment Management, Senior Vice President and Chief
Inc. Operating Officer
Mayer & Schweitzer, Inc. Treasurer until 1993
Stephen B. Ward, Charles Schwab Investment Management, Senior Vice President
Senior Vice President and Chief Inc.
Investment Officer
Frances Cole, Charles Schwab Investment Management, Chief Counsel and Compliance
Secretary Inc. Officer and Assistant Corporate
Secretary
Pamela E. Herlich, The Charles Schwab Corporation Assistant Corporate Secretary
Assistant Secretary
Charles Schwab & Co., Inc. Assistant Corporate Secretary
Charles Schwab Investment Management, Corporate Secretary
Inc.
Mayer & Schweitzer, Inc. Corporate Secretary
</TABLE>
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<PAGE> 131
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C>
The Charles Schwab Trust Company Corporate Secretary
</TABLE>
(b) The following information, which is believed to be accurate, is based
upon information provided by Symphony. The business, profession, vocation or
employment of a substantial nature in which each director and/or officer of
Symphony is or has been engaged during the past two fiscal years for his or her
own account in the capacity of director, officer, employee, partner or trustee
is as follows:
<TABLE>
<CAPTION>
Name Name of Company Capacity
- ---- --------------- --------
<S> <C>
Andrew T. Rudd Symphony Asset Management, Inc. Director and Chairman
BARRA, Inc. Director, Chief Executive Officer and
Chairman
Jeffrey L. Skelton Symphony Asset Management, Inc. Director, Chief Executive Officer, and
President
BARRA, Inc. President, BARRA Ventures Div.
Wells Fargo Nikko Investment Advisors President -- WFNIA Europe until 1993
James D. Kirsner Symphony Asset Management, Inc. Director
BARRA, Inc. Chief Financial Officer
Arthur Andersen & Co. Partner until 1993
Maria L. Hekker Symphony Asset Management, Inc. General Counsel and Secretary
BARRA, Inc. Chief Legal Officer
Neil L. Rudolph Symphony Asset Management, Inc. Chief Operating Officer/Chief Compliance
Officer
Wells Fargo Nikko Investment Advisors Managing Director, Chief Operating
Officer -- Mutual Fund Group until 1994
Praveen K. Gottipalli Symphony Asset Management, Inc. Director of Investments
BARRA, Inc. Financial Analyst until 1994
Michael J. Henman Symphony Asset Management, Inc. Director of Business Development
Wells Fargo Nikko Investment Advisors Managing Director until 1994
</TABLE>
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Item 29. Principal Underwriter.
(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab currently also acts as principal underwriter for
The Charles Schwab Family of Funds, Schwab Investments, Schwab Annuity
Portfolios, Schwab Advantage Trust, and intends to act as such for any other
investment company which Schwab may sponsor in the future.
(b) See Item 28(b) for information on the officers and directors of
Schwab. The principal business address of Schwab is 101 Montgomery Street, San
Francisco, California 94104.
(c) Not applicable.
Item 30. 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 (transfer agency and shareholder
records); Registrant's investment manager and administrator, Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's former sub-investment adviser, Dimensional Fund Advisors
Inc., 1299 Ocean Avenue, Suite 1100, Santa Monica, California 90401;
Registrant's sub-investment adviser for the Asset Director Funds is Symphony
Asset Management, Inc., 555 California Street, Suite 2975, San Francisco,
California 94104; Registrant's principal underwriter, Charles Schwab & Co.,
Inc., 101 Montgomery Street, San Francisco, California 94104; Registrant's
Custodian and fund accountants, State Street Bank and Trust Company, 225
Franklin Street, Boston, MA 02180 (ledgers, receipts, and brokerage orders); or
Ropes & Gray, counsel to Registrant, 1001 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004 (minute books, bylaws, and declaration of trust).
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Registrant undertakes to call a meeting of Shareholders, at the
request of at least 10% of registrant's outstanding shares, for the purpose of
voting upon the question of removal of a trustee or trustees and to assist in
communications with other Shareholders as required by Section (16) of the 1940
Act.
(b) Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of Registrant's latest Annual Report to
Shareholders upon request and without charge.
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<PAGE> 133
(c) Registrant undertakes to file a post-effective amendment using
financial statements, which need not be audited, for the Asset Director
Funds, within four to six months from the commencement of operations for each
the Schwab Asset Director-High Growth Fund, Schwab Asset Director-Balanced
Growth Fund, and Schwab Asset Director-Conservative Growth Fund.
C-12
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended,
Registrant has duly caused this Post-Effective Amendment No. 5 to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of San
Francisco, State of California, on the 12th day of July 1995.
SCHWAB CAPITAL TRUST
Registrant
Charles R. Schwab*
----------------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 5 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 12th day
of July 1995.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman and Trustee
- -------------------------
Charles R. Schwab
/s/ Elizabeth G. Sawi President and Trustee
- -------------------------------------
Elizabeth G. Sawi
William J. Klipp* Senior Vice President, Chief
- ----------------------------------
William J. Klipp Operating Officer, and Trustee
Donald F. Dorward* Trustee
- -------------------------
Donald F. Dorward
Robert G. Holmes* Trustee
- -------------------------
Robert G. Holmes
Donald R. Stephens* Trustee
- -------------------------
Donald R. Stephens
Michael W. Wilsey* Trustee
- -------------------------
Michael W. Wilsey
A. John Gambs* Principal Financial Officer
- -------------------------
A. John Gambs
</TABLE>
*By: /s/ Elizabeth G. Sawi
------------------------------------------------------------------
Elizabeth G. Sawi, Attorney-in-Fact pursuant
to Powers of Attorney previously filed
<PAGE> 135
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page Number
----------- -----------
<S> <C>
(5)(b) Form of Revised Schedules to the Investment Advisory and
Administration Agreement
(5)(c) Form of Investment Sub-Advisory Agreement
(6)(c) Form of Revised Schedule to the Distribution Agreement
(8)(c) Form of Revised Schedules to the Custodian Agreement
(8)(f) Form of Revised Schedules to the Transfer Agency Agreement
(8)(i) Form of Revised Schedules to the Shareholder Services
Agreement
(11)(a) Consent of Ropes & Gray
(11)(b) Consent of Price Waterhouse LLP
(13)(c) Form of Purchase Agreement
(27)(a) Financial Data Schedule for Schwab International
Index Fund
(27)(b) Financial Data Schedule for Small-Cap Index Fund
</TABLE>
<PAGE> 1
EXHIBIT NO. (5)(b)
FORM OF REVISED SCHEDULES TO THE INVESTMENT ADVISORY AND ADMINISTRATION
AGREEMENT
<PAGE> 2
SCHEDULE A
<TABLE>
<CAPTION>
Fund Effective Date
---- --------------
<S> <C>
Schwab International Index Fund July 21, 1993
Schwab Small-Cap Index Fund October 14, 1993
Schwab Asset Director-High Growth September __, 1995
Schwab Asset Director-Balanced Growth September __, 1995
Schwab Asset Director-Conservative Growth September __, 1995
</TABLE>
SCHWAB CAPITAL TRUST
By:
-------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By:
-------------------------
Name: Elizabeth G. Sawi
Title: President
Dated: September __, 1995
A-1
<PAGE> 3
SCHEDULE B
ADVISORY FEE SCHEDULE
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab International Index Fund Seventy one-hundredths of one percent (0.70%) of the
Fund's average daily net assets not in excess of
$300,000,000 and sixty one-hundredths of one percent
(0.60%) of such assets over $300,000,000
Schwab Small-Cap Index Fund Fifty one-hundredths of one percent (0.50%) of the
Fund's average daily net assets not in excess of
$300,000,000 and forty-five one-hundredths of one
percent (0.45%) of such assets over $300,000,000
Schwab Asset Director-High Growth Seventy-four one-hundredths of one percent (0.74%) of
the Fund's average daily net assets not in excess of
$1 billion, sixty-nine one-hundredths of one percent
(0.69%)of such net assets over $1 billion, but not
more than $2 billion, and sixty-four one-hundredths
of such net assets over $2 billion
Schwab Asset Director-Balanced Growth Seventy-four one-hundredths of one percent (0.74%) of
the Fund's average daily net assets not in excess of
$1 billion, sixty-nine one-hundredths of one percent
(0.69%)of such net assets over $1 billion, but not
more than $2 billion, and sixty-four one-hundredths
of such net assets over $2 billion
</TABLE>
B-1
<PAGE> 4
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab Asset Director-Conservative Growth Seventy-four one-hundredths of one percent (0.74%) of
the Fund's average daily net assets not in excess of
$1 billion, sixty-nine one-hundredths of one percent
(0.69%)of such net assets over $1 billion, but not
more than $2 billion, and sixty-four one-hundredths
of such net assets over $2 billion
</TABLE>
SCHWAB CAPITAL TRUST
By:
-------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By:
-------------------------
Name: Elizabeth G. Sawi
Title: President
Dated: September __, 1995
B-2
<PAGE> 1
EXHIBIT NO. (5)(c)
FORM OF INVESTMENT SUB-ADVISORY AGREEMENT
<PAGE> 2
INVESTMENT SUB-ADVISORY AGREEMENT
AGREEMENT executed as of ___________,1995 by and between CHARLES
SCHWAB INVESTMENT MANAGEMENT, INC., a Delaware corporation and registered
investment adviser ("Schwab"), and SYMPHONY ASSET MANAGEMENT, INC., a
California corporation and registered investment adviser ("Sub-Adviser").
WHEREAS, Schwab is the investment manager for Schwab Capital Trust
(the "Trust"), an open-end management investment company registered under the
Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, Schwab desires to retain Sub-Adviser as Schwab's agent to
furnish investment advisory services to the investment portfolios of the Trust
listed on Schedule A hereto (each a "Fund" and collectively the "Funds").
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Appointment. Schwab hereby appoints Sub-Adviser to provide
sub-investment advisory services to the Funds for the period and on the terms
set forth in this Agreement. Sub-Adviser accepts such appointment and agrees
to furnish the services herein set forth for the compensation herein provided.
2. Delivery of Documents. Schwab has furnished Sub-Adviser with
copies properly certified or authenticated of each of the following:
(a) the Trust's Agreement and Declaration of Trust, as
filed with the Secretary of State of The Commonwealth of Massachusetts
on May 7, 1993, and all amendments thereto or restatements thereof
(such Declaration, as presently in effect and as it shall from time to
time be amended or restated, is herein called the "Declaration of
Trust");
(b) the Trust's By-Laws and amendments thereto;
(c) resolutions of the Trust's Board of Trustees
authorizing the appointment of Sub-Adviser and approving this
Agreement;
-1-
<PAGE> 3
(d) the Trust's Notification of Registration on Form N-8A
under the 1940 Act as filed with the Securities and Exchange
Commission (the "SEC") on May 10, 1993 and all amendments thereto;
(e) the Trust's Registration Statement on Form N-1A under
the Securities Act of 1933, as amended ("1933 Act") (File No.
33-62470) and under the 1940 Act (File No. 811-07704) as filed with
the SEC and all amendments thereto insofar as such Registration
Statement and such amendments relate to the Funds; and
(f) the Trust's most recent prospectus and Statement of
Additional Information for the Funds (such prospectus and Statement of
Additional Information, as presently in effect, and all amendments and
supplements thereto, are herein collectively called the "Prospectus").
Schwab will furnish the Sub-Adviser from time to time with
copies of all amendments of or supplements to the foregoing.
3. Management. Subject always to the supervision of Trust's
Board of Trustees and Schwab, the Sub-Adviser will furnish for each Fund advice
on a daily basis as to the percentage of each Funds' assets that should be
invested among major asset categories, e.g., stocks, bonds and cash, as well as
sub-categories, e.g., small company stock, and large company stock. In the
performance of its duties, the Sub-Adviser will create and manage, on a daily
basis, a computer-based model that will provide the basis for the Sub-Adviser's
advice to Schwab regarding asset allocation. The Sub-Adviser will satisfy its
fiduciary duties to the Funds (as set forth in Section 8, below. The
Sub-Adviser and Schwab will each make its officers and employees available to
the other from time to time at reasonable times to review investment policies
of the Funds and to consult with each other regarding the investment affairs of
the Funds. The Sub-Adviser will report to the Board of Trustees and to Schwab
with respect to the implementation of such program.
The Sub-Adviser further agrees that it:
(a) will use the same skill and care in providing such
services as it uses in providing
-2-
<PAGE> 4
services to fiduciary accounts for which it has investment
responsibilities;
(b) will conform with all applicable rules and
regulations of the SEC pertaining to its investment advisory
activities;
(c) will report regularly to Schwab and to the Board of
Trustees and will make appropriate persons available for the purpose
of reviewing with representatives of Schwab and the Board of Trustees
on a regular basis at reasonable times the management of the Funds,
including, without limitation, review of the general investment
strategy of the Funds, the performance of the Funds in relation to
standard industry indices, interest rate considerations and general
conditions affecting the marketplace and will provide various other
reports from time to time as reasonably requested by Schwab;
(d) will maintain books and records with respect to
Trust's securities transactions and will furnish Schwab and Trust's
Board of Trustees such periodic and/or special reports as the Board or
Schwab may request;
(e) will act upon instructions from Schwab not
inconsistent with its fiduciary duties hereunder;
(f) will treat confidentially and as proprietary
information of Trust all such records and other information relative
to Trust maintained by the Sub-Adviser, and will not use such records
and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification
to and approval in writing by Trust, which approval shall not be
unreasonably withheld and may not be withheld where the Sub-Adviser
may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by Trust;
(g) will receive the research and recom-mendations of
Schwab with respect to the invest-ment and reinvestment of the assets
of the Funds; and
-3-
<PAGE> 5
(h) will vote proxies received by the Sub-Adviser in
connection with securities held by the Funds consistent with its
fiduciary duties hereunder.
4. Books and Records. In compliance with the requirements of
Rule 31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records
which it maintains for the Trust are the property of the Trust and further
agrees to surrender promptly to the Trust any of such records upon the Trust's
request. Sub-Adviser further agrees to maintain the records required to be
maintained by subsections (b)(1), (b)(5), (b)(9), (b)(10), (b)(11), (e) and (f)
of Rule 31a-1 under the 1940 Act and preserve them for the periods prescribed
by Rule 31a-2 under the 1940 Act.
5. Expenses. During the term of this Agreement, Sub-Adviser will
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities (including brokerage commissions
and stamp duties, if any) purchased for the Funds.
6. Compensation. For the services provided and the expenses
assumed pursuant to this Agreement, Schwab will pay the Sub-Adviser, and the
Sub-Adviser agrees to accept as full compensation therefor, a sub-advisory fee,
accrued daily and payable monthly, in accordance with Schedule B hereto. From
time to time, the Sub-Adviser may agree to waive or reduce some or all of the
compensation to which it is entitled under this Agreement.
7. Services to Others. Schwab understands, and has advised
Trust's Board of Trustees, that the Sub-Adviser now acts, and may in the future
act, as an investment adviser to fiduciary and other managed accounts, and as
investment adviser, sub- investment adviser, and/or administrator to other
investment companies. Schwab has no objection to the Sub-Adviser's acts in
such capacities, provided that whenever one or more of the Funds and one or
more other investment companies or accounts advised by Sub-Adviser have
available funds for investment, investments suitable and appropriate for each
will be allocated in accordance with a manner believed by the Sub-Adviser to be
equitable to each company. Schwab recognizes, and has advised Trust's Board of
Trustees, that in some cases this procedure may adversely affect the size of
the position that the participating Fund(s) may obtain in a particular
security. In addition, Schwab understands, and has advised Trust's Board of
Trustees, that the persons employed by the Sub-Adviser to assist in the
Sub-Adviser's duties under this Agreement will not devote their full time to
such service and nothing contained in this Agreement will be deemed to limit or
restrict the right of the Sub-Adviser or any of its affiliates to engage in and
devote time and
-4-
<PAGE> 6
attention to other businesses or to render services of whatever kind or nature.
8. Limitation of Liability. Schwab will not take any action
against the Sub-Adviser to hold the Sub-Adviser liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of the Sub-Adviser's duties under this Agreement, except a
loss resulting from the Sub-Adviser's willful misfeasance, bad faith, or gross
negligence in the performance of its duties under this Agreement.
9. Indemnification. Schwab and the Sub-Adviser each agree to
indemnify the other against any claim against, loss or liability to such other
party (including reasonable attorneys' fees) arising out of any action on the
part of the indemnifying party which constitutes willful misfeasance, bad faith
or gross negligence.
10. Duration and Termination. This Agreement will become
effective as to each Fund as of the date set forth opposite each Fund's name on
Schedule A, provided that it has been approved by a vote of a majority of the
outstanding voting securities of such Fund in accordance with the requirements
under the 1940 Act and, unless sooner terminated as provided herein, will
continue in effect for two years from such date.
Thereafter, if not terminated as to a Fund, this Agreement
will continue in effect as to a Fund for successive periods of 12 months,
provided that such continuation is specifically approved at least annually (a)
by the vote of a majority of those members of the Trust's Board of Trustees who
are not interested persons of the Trust, the Sub-Adviser, or Schwab, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trust's Board of Trustees or by vote of a majority of the outstanding
voting securities of such Fund. Notwithstanding the foregoing, this Agreement
may be terminated as to the Fund at any time, without the payment of any
penalty, on sixty days' written notice by the Trust or by Schwab or on ninety
days' written notice by the Sub-Adviser. This Agreement will immediately
terminate in the event of its assignment. (As used in this Agreement, the
terms "majority of the outstanding voting securities", "interested persons" and
"assignment" have the same meaning of such terms in the 1940 Act.)
11. Amendment of this Agreement. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing
-5-
<PAGE> 7
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
12. Miscellaneous. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be
affected thereby. This Agreement will be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and will be
governed by the laws of the State of California.
The name "Schwab Capital Trust" and "Trustees of Schwab
Capital Trust" refer respectively to the Trust created by, and the Trustees, as
trustees but not individually or personally, acting from time to time under the
Declaration of Trust, to which reference is hereby made and a copy of which is
on file at the office of the Secretary of State of The Commonwealth of
Massachusetts and elsewhere as required by law, and to any and all amendments
thereto so filed or hereafter filed. The obligations of the "Schwab Capital
Trust" entered in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually but only in such capacities
and are not binding upon any of the Trustees, Shareholders or representatives
of Trust personally, but bind only the assets of Trust, and persons dealing
with the Fund must look solely to the assets of Trust belonging to such Fund
for the enforcement of any claims against Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By:
--------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
SYMPHONY ASSET MANAGEMENT, INC.
By:
--------------------------
Name:
--------------------------
Title:
--------------------------
-6-
<PAGE> 8
SCHEDULE A
<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab Asset Director Funds:
Schwab Asset Director-High Growth
Schwab Asset Director-Balanced Growth
Schwab Asset Director-Conservative Growth
</TABLE>
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By:
--------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
SYMPHONY ASSET MANAGEMENT, INC.
By:
--------------------------
Name:
--------------------------
Title:
--------------------------
-7-
<PAGE> 9
SCHEDULE B
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab Asset Director Funds:
Schwab Asset Director-High Growth
Schwab Asset Director-Balanced Growth
Schwab Asset Director-Conservative Growth
</TABLE>
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By:
--------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
SYMPHONY ASSET MANAGEMENT, INC.
By:
--------------------------
Name:
--------------------------
Title:
--------------------------
-8-
<PAGE> 1
EXHIBIT NO. (6)(c)
FORM OF REVISED SCHEDULE TO THE DISTRIBUTION AGREEMENT
<PAGE> 2
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BETWEEN SCHWAB CAPITAL TRUST AND
CHARLES SCHWAB & CO., INC.
DATED SEPTEMBER__, 1995
<TABLE>
<CAPTION>
Fund Effective Date
---- --------------
<S> <C>
Schwab International Index Fund July 21, 1993
Schwab Small-Cap Index Fund October 14, 1993
Schwab Asset Director-High Growth September __, 1995
Schwab Asset Director-Balanced Growth September __, 1995
Schwab Asset Director-Conservative Growth September __, 1995
</TABLE>
SCHWAB CAPITAL TRUST
By:
-------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By:
-------------------------
Name: Elizabeth G. Sawi
Title: Executive Vice President
<PAGE> 1
EXHIBIT NO. (8)(c)
FORM OF REVISED SCHEDULES TO THE CUSTODIAN AGREEMENT
<PAGE> 2
[Letterhead of SchwabFunds]
State Street Bank and Trust Company
125 Franklin Street
Boston, Massachusetts 02110
Attention: Matthew Karstetter, Vice President
Re: Additional Portfolios of Schwab Capital Trust
Gentlemen:
Reference is hereby made to the Custodian Contract, dated as of
September 9, 1993, between Schwab Capital Trust (the "Trust") and State Street
Bank and Trust Company ("State Street"), as Custodian (the "Custodian
Contract"). Since the execution of the Custodian Contract, the Trust has
created four new portfolios and desires to have State Street act as custodian
under the terms of the Custodian Contract with respect to each such portfolio.
Consequently, the Trust hereby requests that State Street agree to amend
Schedule C to the Custodian Contract to add the new portfolios as "Funds" under
the Custodian Contract. The amended Schedule C shall be in the form attached
hereto. If State Street is willing to amend the Custodian Contract and to serve
as Custodian under the terms of the Custodian Contract for the additional
portfolios, please acknowledge such agreement by signing and dating this letter
in the space provided below and returning it to us. Thank you.
Very truly yours,
Schwab Capital Trust
By:
----------------------------
Title:
-------------------------
Accepted and Agreed:
State Street Bank and Trust Company
By:
----------------------------------
Matthew Karstetter, Vice President
<PAGE> 3
SCHEDULE C
PORTFOLIO INCEPTION DATE
--------- --------------
Schwab International Index Fund September 9, 1993
Schwab Small-Cap Index Fund
Schwab Asset Director Fund-High Growth
Schwab Asset Director Fund-Balanced
Schwab Asset Director Fund-Conservative
SCHWAB CAPITAL TRUST
BY:
---------------------------
NAME:
-------------------------
TITLE:
------------------------
STATE STREET BANK AND TRUST COMPANY
BY:
---------------------------
NAME:
-------------------------
TITLE:
------------------------
<PAGE> 4
EXHIBIT 2
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
SCHWAB CAPITAL TRUST - SCHWAB ASSET DIRECTOR FUND - HIGH GROWTH
SCHWAB ASSET DIRECTOR FUND - BALANCED
SCHWAB ASSET DIRECTOR FUND - CONSERVATIVE
- -------------------------------------------------------------------------------
I. Administration
Custody Portfolio and Fund Accounting Service - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report cash
transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Maintain general ledger and capital
stock accounts. Prepare daily trials balance. Calculate net asset value daily.
Provide selected general ledger reports. Market value quotations will be
provided via State Street's Automated Pricing Service.
The administration fee shown below is an annual charge, billed and payable
monthly, based on average monthly net assets.
ANNUAL FEES PER PORTFOLIO
Fund Net Assets Annual fees
--------------- -----------
(in basis points)
First $50 Million 3 Basis Points
Next $50 Million 2 Basis Points
Excess over $100 Million 1 Basis Point
Minimum Monthly Charge $1,000
Phase in of minimum
Month 1 $250
Month 2 $500
Month 3 $750
II. Global Custody - Comprised of asset charges and transaction charges
Asset charges all foreign locations
(in Basis Points)
First $50 Million 7 Basis Points
Over $50 Million 5 Basis Points
Transaction Charges
(all foreign equity and bond trades) $28.00
<PAGE> 5
<TABLE>
<S> <C> <C>
III. Portfolio Trades - For each line item processed
State Street Bank Repos $ 7.00
DTC or Fed Book Entry $ 10.00
New York Physical Settlements $ 20.00
Maturity Collections $ 8.00
PTC Purchase, Sale, Deposit or Withdrawal $ 20.00
All other trades $ 16.00
IV. Options
Option charge for each option written or
closing contract, per issue per broker $ 25.00
Option expiration charge, per issue, per broker $ 15.00
Option exercised charge, per issue, per broker $ 15.00
V. Interest Rate Futures
Transactions - no security movement $ 8.00
VI. Holding Charge
For each issue maintain - monthly charge $ 5.00
VII. Principal Reduction Payments
Per Paydown $ 10.00
VIII. Dividend Charges
(For items held at the request of traders
over record date in street form) $ 50.00
IX. Special Services
Fees for activities of a non-recurring nature such as fund
consolidations or reorganzations, extraordinary security
shipments and the preparation of special reports will be
subject to negotiation. Fees for automated pricing, yield
calculation and other special items will be negotiated
separately.
X. Automated Pricing: This service provides daily securities
pricing.
Monthly base fee per portfolio $375.00
</TABLE>
<PAGE> 6
Monthly Quote Charge (based on the average number of
positions in the portfolio)
<TABLE>
<S> <C> <C>
* Municipal Bond via Muller Data $16.00
* Municipal Bond via Kenny Information System $16.00
* Government, Corporate and Convertible
Bonds via Merrill Lynch $11.00
* Corporate and Government Bonds via Muller Data $11.00
* Options, Futures and Private Placements $ 6.00
* Foreign Equities and Bonds via Extel Ltd $ 6.00
* Listed Equities, DTC Equities and Bonds $ 6.00
* Corporate, Municipal, Convertible and
Government Bonds, Adjustable Rate Preferred
Stocks via IDSI $ 6.00
</TABLE>
XI. Balance Credits
A balance credit will be applied against the custody fee above based on
the 90 day T-Bill rate adjusted by the current Federal Reserve
requirements. The rate will be utilized against the average collected
balances in the Custody Demand Deposit Account maintained at State
Street. Excess balance credits will be carried forward from month to
month until December 31st.
XII. Out-of-Pocket Expenses
A billing for the recovery of applicable out-of-pocket expenses will be
make as of the end of each month. Out-of-pocket expenses include, but
are not limited to the following:
Telephone
Wire Charges ($5.25 per wire in and $5.00 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfers - $8.00 each
Transfer Fees
Sub-custodian Charges (Out of Pockets issued by Sub-Custodians)
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15.00 each
PTC Deposit/Withdrawal for same day turnaround - $50.00
<PAGE> 1
EXHIBIT NO. (8)(f)
FORM OF REVISED SCHEDULES TO THE TRANSFER AGENCY AGREEMENT
<PAGE> 2
SCHEDULE A
<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund July 21, 1993
Schwab Small-Cap Index Fund October 14, 1993
Schwab Asset Director-High Growth September __, 1995
Schwab Asset Director-Balanced Growth September __, 1995
Schwab Asset Director-Conservative Growth September __, 1995
</TABLE>
SCHWAB CAPITAL TRUST
By:
---------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By:
---------------------------
Name: Elizabeth G. Sawi
Title: Executive Vice President
Dated: September __, 1995
A-1
<PAGE> 3
SCHEDULE B
TRANSFER AGENCY SERVICES
I. Record Maintenance.
Schwab will provide full maintenance of all shareholder records for
each account in the Trust. Such records will include:
A. Share balance;
B. Account transaction history, including dividends paid and the
date and price for all transactions;
C. Name and address of the record shareholder (including zip
codes and tax identification numbers but will not include
responsibility for obtaining certified tax identification
numbers or impending back-up withholding);
D. Records of distributions and dividend payments;
E. Transfer records; and
F. Overall control records.
II. Regular Daily Operations.
Schwab will perform the following functions:
A. Process new accounts on the shareholder file by processing
directly from the Trust's distributor or dealer;
B. Process additional purchases to the records of accounts
already on the shareholder file. In such instances, on the
distributor's or dealer's instructions, allocate investor
payments among the Funds;
C. Process purchases and redemptions to accounts already on the
shareholder file in accordance with the terms of all automatic
purchase and redemption provisions set forth in shareholders'
account relationship with the Trust's distributor;
D. Transfer shares upon the receipt of proper instructions from
distributor or dealer; and
E. Process changes of dealer/representative on accounts.
B-1
<PAGE> 4
III. Periodic Operations.
A. Upon receipt of instructions as to payment of dividends and
distributions, which may be standing instructions, compute
distributions and inform the Trust of the amount to be
reinvested in additional shares.
B. Process redemptions as instructed by distributor or dealer.
C. Mail semi-annual and annual Trust and/or Fund reports and
prospectuses.
D. Produce transcripts of account history as requested by the
Trust or by the distributor or dealer.
E. Prepare and file Form 1099's with Internal Revenue Service.
F. Monitor sales of the Funds' shares in the various States and
other jurisdictions where the Funds' shares are registered for
sale, and report on such monitoring efforts to the Funds'
Investment Manager.
IV. Controls.
A. Maintain all balance controls daily and produce monthly
summaries expressed in:
1. shares; and
2. dollar amounts.
V. Special Services Included.
A. Prepare envelopes/labels (from address data supplied by
distributor or dealer as to transmission accounts) and mail
proxy statements; tabulate and certify votes from returned
ballots.
SCHWAB CAPITAL TRUST
By:
---------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By:
---------------------------
Name: Elizabeth G. Sawi
Title: Executive Vice President
B-2
<PAGE> 5
SCHEDULE C
FEES
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab International Index Fund Five one-hundredths of one
percent (.05%) of the Fund's
average daily net assets
Schwab Small-Cap Index Fund Five one-hundredths of one
percent (.05%) of the Fund's
average daily net assets
Schwab Asset Director-High Growth Five one-hundredths of one
percent (.05%) of the Fund's
average daily net assets
Schwab Asset Director-Balanced Growth Five one-hundredths of one
percent (.05%) of the Fund's
average daily net assets
Schwab Asset Director-Conservative Growth Five one-hundredths of one
percent (.05%) of the Fund's
average daily net assets
</TABLE>
SCHWAB CAPITAL TRUST
By:
---------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By:
---------------------------
Name: Elizabeth G. Sawi
Title: Executive Vice President
Dated: September __, 1995
C-1
<PAGE> 6
SCHEDULE D
REPORTS
VI. Daily Activity Report (liquidations processed that day)
VII. Daily Share Summary Report (by Fund)
A. Beginning balance
B. Liquidations
C. Payments
D. Exchanges
E. Adjustments
F. Ending Balance
G. Sales by each State and jurisdiction
VIII. Daily Proof Sheet Summary and Transaction Register
IX. Daily Share Reconciliation Report (reconciling Share Summary Report to
Daily Proof Summary Sheet)
X. Weekly Position Reports (showing all account balances)
XI. Monthly Dividend Reports
XII. Report by independent public accountants concerning Schwab's
accounting system and internal accounting controls, at such times, as
the Trust may reasonably require. These reports shall be of
sufficient detail and scope to provide reasonable accuracy that any
material inadequacies would be disclosed by such examination, and, if
there are no such inadequacies, shall state.
SCHWAB CAPITAL TRUST
By:
---------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By:
---------------------------
Name: Elizabeth G. Sawi
Title: Executive Vice President
D-1
<PAGE> 1
EXHIBIT NO. (8)(i)
FORM OF REVISED SCHEDULES TO THE SHAREHOLDER SERVICES AGREEMENT
<PAGE> 2
SCHEDULE A
<TABLE>
<CAPTION>
Fund Effective Date
- ---- --------------
<S> <C>
Schwab International Index Fund July 21, 1993
Schwab Small-Cap Index Fund October 14, 1993
Schwab Asset Director-High Growth September __, 1995
Schwab Asset Director-Balanced Growth September __, 1995
Schwab Asset Director-Conservative Growth September __, 1995
</TABLE>
SCHWAB CAPITAL TRUST
By:
---------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By:
---------------------------
Name: Elizabeth G. Sawi
Title: Executive Vice President
Dated: September __, 1995
A-1
<PAGE> 3
SCHEDULE B
SHAREHOLDER SERVICES
Schwab will maintain accounts for, and serve as a customer liaison to,
the shareholders of each Fund, and through its employees will perform various
services in relation thereto, which services shall include responding to
requests for information and other types of shareholder account inquiries, both
by telephone and in writing. The parties hereto expressly agree that the
services provided under this Agreement shall not include, and the amounts
payable hereunder shall not constitute compensation for, services relating to
transfer agency or sub-accounting services for the Trust or any Fund thereof.
SCHWAB CAPITAL TRUST
By:
---------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By:
---------------------------
Name: Elizabeth G. Sawi
Title: Executive Vice President
B-1
<PAGE> 4
SCHEDULE C
<TABLE>
<CAPTION>
Fund Fee
- ---- ---
<S> <C>
Schwab International Index Fund Twenty-one hundredths of
one percent (.20%) of the
Fund's average daily net
assets
Schwab Small-Cap Index Fund Twenty-one hundredths of
one percent (.20%) of the
Fund's average daily net
assets
Schwab Asset Director-High Growth Twenty-one hundredths of
one percent (.20%) of the
Fund's average daily net
assets
Schwab Asset Director-Balanced Growth Twenty-one hundredths of
one percent (.20%) of the
Fund's average daily net
assets
Schwab Asset Director-Conservative Growth Twenty-one hundredths of
one percent (.20%) of the
Fund's average daily net
assets
</TABLE>
SCHWAB CAPITAL TRUST
By:
---------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By:
---------------------------
Name: Elizabeth G. Sawi
Title: Executive Vice President
Dated: September __, 1995
C-1
<PAGE> 1
EXHIBIT NO. (11)(a)
CONSENT OF ROPES & GRAY
<PAGE> 2
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the caption "Legal Counsel" included in or made a part of
Post-Effective Amendment No. 5 to the Registration Statement of Schwab Capital
Trust on Form N-1A (Nos. 33-62420 and 811-07704) under the Securities Act of
1933, as amended.
/s/ Ropes & Gray
ROPES & GRAY
Washington, D.C.
July 12, 1995
<PAGE> 1
EXHIBIT NO. (11)(b)
CONSENT OF PRICE WATERHOUSE LLP
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 5 to the registration
statement of the Schwab Capital Trust on Form N-1A (the "Registration
Statement") of our reports dated November 30, 1994, relating to the financial
statements of the Schwab International Index Fund and the Schwab Small-Cap Index
Fund, which appear in such Statement of Additional Information, and to the
incorporation by reference of our reports into the Prospectuses which
constitute part of this Registration Statement. We also consent to the
references to us under the heading "Accountants and Reports to Shareholders" in
such Statement of Additional Information and to the references to us under the
heading "Financial Highlights" in such Prospectuses.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
San Francisco, California
July 12, 1995
<PAGE> 1
EXHIBIT NO. (13)(c)
FORM OF PURCHASE AGREEMENT
<PAGE> 2
PURCHASE AGREEMENT
Schwab Capital Trust (the "Trust"), a Massachusetts business trust, and
Charles Schwab & Co., Inc. ("Schwab"), a California corporation, hereby agree
on the day of September 1995 as follows:
1. The Trust hereby offers and Schwab hereby purchases 100 units of
beneficial interest of each of Series C, D, and E representing interests in the
series of shares known as Schwab Asset Director-High Growth, Schwab Asset
Director-Balanced Growth, and Schwab Asset Director-Conservative Growth,
respectively, (such 100 units of beneficial interest being hereafter
collectively known as "Shares") at a price of $10.00 per Share. Schwab hereby
acknowledges purchase of the Shares and the Trust hereby acknowledges receipt
from Schwab of funds in the amount of $1,000 in full payment for the Shares. It
is further agreed that no certificate for the Shares will be issued by the
Trust.
2. Schwab represents and warrants to the Trust that the Shares are
being acquired for investment purposes and not with a view to the distribution
thereof.
3. The names "Schwab Capital Trust" and "Trustees of Schwab Capital
Trust" refer, respectively to the Trust created and the Trustees as Trustees
but not individually or personally, acting from time to time under an Agreement
and Declaration of Trust dated as of May 6, 1993, to which reference is hereby
made and a copy of which is on file at the Office of the Secretary of State of
the Commonwealth of Massachusetts and elsewhere as required by law, and to any
and all amendments thereto so filed or hereafter filed. The obligations of
"Schwab Capital Trust" entered into in the name or on behalf thereof by any of
the Trustees, representatives or agents are not made individually, but only in
such capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the assets of the Trust,
and all persons dealing with any series of Shares of the Trust must look solely
to the assets for the Trust belonging to such series for the enforcement of any
claims against the Trust.
-1 of 2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed day and year first written above.
<TABLE>
<S> <C>
Attest: SCHWAB CAPITAL TRUST
- ----------------------------------- By:
----------------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
Attest: CHARLES SCHWAB & CO., INC.
- ----------------------------------- By:
----------------------------------
Name: Elizabeth G. Sawi
Title: Executive Vice President
</TABLE>
-2 of 2-
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> SCHWAB INTERNATIONAL INDEX FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 143366
<INVESTMENTS-AT-VALUE> 155233
<RECEIVABLES> 3163
<ASSETS-OTHER> 417
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 158813
<PAYABLE-FOR-SECURITIES> 2330
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2421
<TOTAL-LIABILITIES> 4751
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 142200
<SHARES-COMMON-STOCK> 14053
<SHARES-COMMON-PRIOR> 13066
<ACCUMULATED-NII-CURRENT> 355
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (383)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11890
<NET-ASSETS> 154062
<DIVIDEND-INCOME> 1205
<INTEREST-INCOME> 54
<OTHER-INCOME> 0
<EXPENSES-NET> 653
<NET-INVESTMENT-INCOME> 606
<REALIZED-GAINS-CURRENT> 198
<APPREC-INCREASE-CURRENT> 1948
<NET-CHANGE-FROM-OPS> 2752
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1532
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2882
<NUMBER-OF-SHARES-REDEEMED> 2029
<SHARES-REINVESTED> 134
<NET-CHANGE-IN-ASSETS> 11707
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1306
<OVERDISTRIB-NII-PRIOR> (580)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 481
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 862
<AVERAGE-NET-ASSETS> 138677
<PER-SHARE-NAV-BEGIN> 10.89
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> 0.12
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.96
<EXPENSE-RATIO> 0.010
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> SCHWAB SMALL-CAP INDEX FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> APR-30-1995
<INVESTMENTS-AT-COST> 82436
<INVESTMENTS-AT-VALUE> 84414
<RECEIVABLES> 309
<ASSETS-OTHER> 71
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 84794
<PAYABLE-FOR-SECURITIES> 669
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 174
<TOTAL-LIABILITIES> 843
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79873
<SHARES-COMMON-STOCK> 8000
<SHARES-COMMON-PRIOR> 6780
<ACCUMULATED-NII-CURRENT> 183
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1917
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1978
<NET-ASSETS> 83951
<DIVIDEND-INCOME> 491
<INTEREST-INCOME> 76
<OTHER-INCOME> 0
<EXPENSES-NET> 272
<NET-INVESTMENT-INCOME> 295
<REALIZED-GAINS-CURRENT> 2445
<APPREC-INCREASE-CURRENT> 1381
<NET-CHANGE-FROM-OPS> 4121
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 408
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2239
<NUMBER-OF-SHARES-REDEEMED> 1057
<SHARES-REINVESTED> 38
<NET-CHANGE-IN-ASSETS> 15823
<ACCUMULATED-NII-PRIOR> 296
<ACCUMULATED-GAINS-PRIOR> (528)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 181
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 390
<AVERAGE-NET-ASSETS> 73030
<PER-SHARE-NAV-BEGIN> 10.05
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 0.42
<PER-SHARE-DIVIDEND> 0.06
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.49
<EXPENSE-RATIO> 0.008
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
