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SCHWAB INTERNATIONAL INDEX FUND(TM)
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PROSPECTUS February 28, 1995, as amended June 30, 1995
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD, 24 hours a day.
THE SCHWAB INTERNATIONAL INDEX FUND (the "Fund") attempts to track the price and
dividend performance (total return) of the Schwab International Index(TM) (the
"Index"), an index created by Schwab to represent the performance of common
stocks and other equity securities including preferred stocks, rights and
warrants ("Stocks") issued by large, publicly traded companies from countries
around the world with major developed securities markets, excluding the United
States. The Fund will attempt to achieve this objective by investing
substantially all of its assets in the Stocks that comprise the Index, in
approximately the same proportion as the constituent companies (or "issuers")
are represented in the Index. The Fund is a diversified investment portfolio of
Schwab Capital Trust, (the "Trust"), a no-load, open-end, management investment
company.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. This Prospectus may be available via electronic
mail. For a free paper copy of this Prospectus call 800-2 NO-LOAD. You can find
more detailed information about the Fund in the Trust's "Statement of Additional
Information," dated February 28, 1995, as amended June 30, 1995, (and as further
amended from time to time), and filed with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated by reference
into this Prospectus, and may be obtained without charge by contacting Schwab at
800-2 NO-LOAD, 24 hours a day or 101 Montgomery Street, San Francisco, CA 94104.
TABLE OF CONTENTS
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KEY FEATURES OF THE FUND...................................................... 2
SUMMARY OF EXPENSES........................................................... 3
FINANCIAL HIGHLIGHTS.......................................................... 5
MATCHING THE FUND TO YOUR INVESTMENT NEEDS.................................... 6
INVESTMENT OBJECTIVE, POLICIES AND RISKS...................................... 6
THE SCHWAB INTERNATIONAL INDEX................................................ 11
MANAGEMENT OF THE FUND........................................................ 12
FEES AND EXPENSES............................................................. 12
DISTRIBUTIONS AND TAXES....................................................... 13
SHARE PRICE CALCULATION....................................................... 15
HOW THE FUND SHOWS PERFORMANCE................................................ 15
TAX-ADVANTAGED RETIREMENT PLANS............................................... 16
GENERAL INFORMATION........................................................... 16
SHAREHOLDER GUIDE............................................................. 17
HOW TO PURCHASE SHARES...................................................... 17
HOW TO EXCHANGE SHARES...................................................... 20
HOW TO REDEEM SHARES........................................................ 21
SCHWAB AUTOMATIC INVESTMENT PLAN.............................................. 22
OTHER IMPORTANT INFORMATION................................................... 24
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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.
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KEY FEATURES OF THE FUND
PERFORMANCE. The investment objective of the Schwab International Index Fund is
to attempt to track the price and dividend performance (total return) of the
Schwab International Index(TM) (the "Index"), an index created to represent the
performance of common stocks and other equity securities including preferred
stocks, rights and warrants ("Stocks") issued by large, publicly traded
companies from countries around the world with major developed securities
markets, excluding the United States. (See "The Schwab International Index.")
The Fund will attempt to achieve this objective by investing substantially all
of its assets in the Stocks that comprise the Index, in approximately the same
proportions as the constituent companies (or "issuers") are represented in the
Index. (See "Investment Objective, Policies and Risks.")
DIVERSIFICATION AND RISK. The Fund seeks to invest in substantially all of the
stocks of the 350 companies that make up the Index. This level of
diversification reduces the risk (typically, a decline in the value of
individual securities) associated with investments in individual securities
because the Fund's investments will be spread over a range of industries and
issuers from various countries as opposed to being concentrated in a few
individual securities. Internationally diversified investors have historically
reduced their overall risk and at the same time earned significantly higher
returns. International stocks may have greater price volatility and illiquidity
than U.S. stocks. In addition, certain investment strategies such as foreign
currency exchange transactions and trading in options and futures may involve
increased risks to the Fund. (See "Investment Objective, Policies and Risks.")
LOW MINIMUM INVESTMENT. Investors can begin their investment program with as
little as $1,000. Subsequent investments can be made with only $100.
PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. (the
"Investment Manager"), 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. (See "Management of the Fund.")
LOW COST INVESTING. The Fund brings a low cost approach to investing with:
- no sales charges;
- no 12b-1 fees or contingent deferred sales changes;
- an index fund management strategy designed to minimize overall
operating expenses;
- a portion of the Fund's management fee will be waived through June 30,
1996 for potentially higher returns;
- the Investment Manager's and Schwab's commitment to absorb operating
expenses of the Fund in excess of 0.69% at least through June 30, 1996.
(See "Management of the Fund.")
MINIMIZATION OF CURRENT CAPITAL GAINS TAX LIABILITY. The Fund's investment
policies are designed to minimize current capital gains tax liability. (See
"Distributions and Taxes.")
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SHAREHOLDER SERVICE. Schwab serves as the Fund's distributor, transfer agent,
and shareholder service provider. Schwab's professional representatives are
available to receive your purchase, redemption, and exchange orders. Call your
local Schwab office during business hours or 800-2 NO-LOAD, 24 hours a day. As a
discount broker, Schwab gives you investment choices and lets you make your own
decisions. Schwab has many services that help you make the most informed
investment decisions. (See "How to Purchase Shares," "How to Exchange Shares"
and "How to Redeem Shares.")
FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in the Fund in amounts and at intervals that you
determine. You avoid the inconvenience, delay and expense associated with checks
or bank wires. To obtain more information about the Automatic Investment Plan,
visit or call your local Schwab office or call 800-2 NO-LOAD, 24 hours a day.
CONVENIENT REPORTING. Schwab Customers receive regular statements that combine
all their investment activity, including mutual funds, on one report.
NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders.
SUMMARY OF EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases........................................................... None
Sales Load on Reinvested Dividends................................................ None
Deferred Sales Load............................................................... None
Early Withdrawal Fee Paid to the Fund(1).......................................... 0.75%
Exchange Fee...................................................................... None
ANNUAL FUND OPERATING EXPENSES
(AFTER FEE REDUCTIONS AND EXPENSE REIMBURSEMENT)
(AS A PERCENTAGE OF NET ASSETS):
Management Fee (after fee reductions)(2).......................................... 0.40%
12b-1 Fees........................................................................ None
Other Expenses (after fee reductions and expense reimbursements(3)................ 0.29%
TOTAL FUND OPERATING EXPENSES(3, 4)................................................. 0.69%
</TABLE>
(1) Applies only to the redemption (including by exchange) of shares purchased
and held less than six months. The fee is paid to the Fund (not to the
Investment Manager or Distributor) and is designed to protect long-term
investors from the cost of frequent investments and redemptions by short-term
investors. (See "How to Redeem Shares" and "How to Exchange Shares"). Under
certain special circumstances, Schwab may provide reimbursement of this fee
to qualifying pension plans. Call your Schwab representative for more
information.
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(2) This amount has been restated to reflect a reduction by the Investment
Manager which is guaranteed through at least June 30, 1996. If there were no
such reduction, the maximum management fee for the Fund would be 0.70% of the
Fund's average daily net assets.
(3) This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least June 30, 1996, the total operating
expenses of the Fund will not exceed 0.69% of the Fund's average daily net
assets. Without a similar guarantee which was in effect for the fiscal year
ended October 31, 1994, total fund operating expenses would have been 1.30% of
the Fund's average daily net assets.
(4) Schwab currently imposes no fees for opening and maintaining a Schwab
brokerage account. It is currently anticipated that 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, if
the account balance is below $35, 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 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.
EXAMPLE. You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each period:
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$7 $22 $38 $ 86
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The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. This example reflects the guarantee by the Investment Manager and
Schwab that the total operating expenses of the Fund will not exceed the amount
specified for the time period referred to in note (3) above. ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of
return pursuant to requirements of the Securities and Exchange Commission. THIS
HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR
FUTURE PERFORMANCE.
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FINANCIAL HIGHLIGHTS
The following information with respect to per share data and ratios has been
audited by Price Waterhouse LLP, independent accountants, whose unqualified
reports covering the periods presented are incorporated by reference herein.
This information should be read in conjunction with the financial statements and
accompanying notes which are also incorporated by reference from the Statement
of Additional Information.
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FOR THE PERIOD
SEPT. 9, 1993
FOR THE (COMMENCEMENT
YEAR ENDED OF OPERATIONS)
OCTOBER 31, 1994 TO OCT. 31, 1993
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Net asset value at beginning of period........................ $10.15 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment income....................................... 0.11 0.03
Net realized and unrealized gain on investments and
foreign currency transactions............................ 0.69 0.12
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Total from investment operations............................ 0.80 0.15
LESS DISTRIBUTIONS
Dividends from net investment income........................ (0.04) --
Distributions from realized gain on investments............. (0.02) --
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Total distributions......................................... (0.06) --
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Net asset value at end of period.............................. 10.89 10.15
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Total return.................................................. 7.9% 1.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)....................... $142,355 $106,085
Ratio of expenses to average net assets..................... 0.90% 0.60%*
Ratio of net investment income to average net assets........ 1.14% 2.15%*
Portfolio turnover rate..................................... 6% 2%
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Notes:
During the periods ended October 31, 1994 and 1993, the Investment Manager and
Schwab reduced their fees and absorbed certain expenses of the Fund. Had these
fees and expenses not been reduced and absorbed, the ratio of expenses to
average net assets for the above-referenced periods would have been 1.30% and
2.10%*, respectively, and the ratio of net investment income to average net
assets of the Fund would have been 0.74% and 0.65%*, respectively.
On June 30, 1995, the sub-advisory agreement between Dimensional Fund Advisors
Inc. and the Investment Manager was terminated, and the Investment Manager
assumed sole responsibility for providing the Fund with investment advisory
services.
* Annualized
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MATCHING THE FUND TO YOUR INVESTMENT NEEDS
The Fund may be appropriate for a variety of investment programs. While the Fund
is not a substitute for an investment portfolio tailored to an individual's
investment needs and ability to tolerate risk, it can be used to supplement and
diversify a domestic equity portfolio.
As a complement to a domestic equity portfolio, the Fund offers a convenient way
to invest a portion of your assets internationally, while at the same time
achieving a level of diversification of countries and companies that would be
difficult and costly to achieve with individual securities. Internationally
diversified investors have historically reduced their risk and at the same time
earned significantly higher returns.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
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THE FUND IS DESIGNED TO TRACK THE PERFORMANCE OF THE SCHWAB INTERNATIONAL
INDEX.(TM)
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The Schwab International Index Fund(TM) is a diversified investment portfolio of
Schwab Capital Trust, an open-end, management investment company. The investment
objective of the Fund is to attempt to track the price and dividend performance
(total return) of the Schwab International Index, an index created to represent
the performance of Stocks issued by large, publicly traded companies from
countries around the world with major developed securities markets excluding the
United States. As a matter of fundamental policy, the Fund will invest at least
65% of its total assets in common stocks and other equity securities including
preferred stocks, rights and warrants of companies located in at least three
countries other than the U.S. The Fund's investment objective, along with
certain investment restrictions adopted by the Fund (see "Investment
Restrictions" in the Statement of Additional Information) is fundamental and
cannot be changed without approval by holders of a majority of the Fund's
outstanding voting shares, as defined in the Investment Company Act of 1940 (the
"1940 Act"). While there is no assurance that the Fund will achieve its
investment objective, it will endeavor to do so by following the investment
policies set forth below.
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THE FUND WILL FOLLOW AN "INDEXING" OR "PASSIVE" STRATEGY.
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The Fund will follow an "indexing" or "passive" strategy under which Stocks are
only purchased or sold in order to match the composition of the Index.
Accordingly, the Investment Manager will not select securities for the Fund's
investment portfolio based upon traditional economic, financial and market
analyses and/or forecasting.
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THE FUND WILL BE MANAGED TO MINIMIZE COSTS AND INCREASE SHAREHOLDERS' TOTAL
RETURN.
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The Fund has adopted a number of policies that should cause its portfolio
turnover rate to be below that experienced in many other mutual fund portfolios.
Lower portfolio turnover acts to minimize associated transaction costs as well
as the level of realized capital gains. Shareholders' current tax liability for
capital gains should be reduced and their total return increased by these
policies. The Investment Manager anticipates that the Fund's annual turnover
rate will not exceed 100%.
To reduce transaction costs and minimize shareholders' current capital gains tax
liability, the Fund's investment portfolio will not be automatically traded
("rebalanced") to reflect changes in the Index. The Fund's trading strategy is
designed to further minimize transaction costs (e.g., the Fund will
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generally only buy round-lots of stocks and may trade large blocks of
securities). These policies may cause a particular Stock or a group of Stocks
from a particular country to be over- or under-represented in the Fund relative
to its Index weighting or result in its continued ownership by the Fund after
its deletion from the Index, thereby reducing the correlation between the Fund
and the Index. However, given the diversified nature of the Fund, the Investment
Manager does not expect that any such deviations will significantly impact the
correlation between Fund and Index performance and will engage in these
practices only to the extent that they do not have a material effect on the
Fund's ability to approximate the performance of the Index.
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THE FUND WILL ATTEMPT TO BE SUBSTANTIALLY INVESTED IN INDEX STOCKS.
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The Fund will attempt to invest substantially all its assets in Stocks that
comprise the Index ("Index Stocks") and under normal market conditions, will
invest at least 80% of its total assets in Index Stocks. The Fund is not
required, however, to buy or sell securities solely because the percentage of
its assets invested in Index Stocks changes when their market values increase or
decrease. In addition, the Fund may omit or remove an Index Stock from its
portfolio if the Investment Manager believes the Stock to be insufficiently
liquid or believe the merit of the investment has been substantially impaired by
extraordinary events or financial conditions. Moreover, to avoid any potential
conflict of interest, the Fund will not purchase securities of issuers with
which it is affiliated. To compensate for any Index Stocks omitted or removed
from its investment portfolio, the Fund may purchase Stocks not in the Index
(which would then be considered Index Stocks for purposes of the Fund's policy
regarding the percentage of its assets to be invested in Index Stocks) if the
Investment Manager believes that their market performance is likely to replicate
that of the Index Stocks they replace.
It is anticipated that the Fund will be able to invest in all or at least a
substantial majority of Index Stocks. The Fund will generally select Index
Stocks by reference to their weighting in the Index. Thus, the Fund intends that
the percentage of its assets invested in each Index Stock will approximate the
weighting of that Stock in the Index.
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THE FUND'S PERFORMANCE SHOULD TRACK THAT OF THE INDEX.
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While the Fund will not precisely match the Index's performance, the Fund will
attempt to maximize the correlation between its performance and that of the
Index. Factors such as the size of the Fund's portfolio, transaction costs,
management fees and expenses, brokerage commissions and fees, the extent and
timing of cash flows into and out of the Fund, the Fund's policy of minimizing
transaction costs and current capital gains tax liability, and changes in the
international securities markets and the Index itself are expected by the
Investment Manager to account for any differences between the Fund's performance
and that of the Index.
Over the long term, the Investment Manager seeks a correlation between the
performance of the Fund and that of the Schwab International Index(TM) of 0.9 or
better. A figure of 1.0 would indicate perfect correlation. The Investment
Manager monitors the correlation between the performance of the Fund and the
Index on a regular basis. In the unlikely event that a correlation of 0.9 or
better is not achieved, the Board of Trustees will consider alternative
arrangements.
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INTERNATIONAL STOCKS MAY HAVE LESS LIQUIDITY AND GREATER
PRICE VOLATILITY THAN U.S. STOCKS.
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Because the Fund will be primarily invested in international equities, its price
volatility may be even greater than if it were invested in U.S. equity
securities. When the Fund invests in such securities, they usually will be
denominated in a foreign currency, and the Fund may temporarily hold foreign
currencies. Thus, the value of the Fund's shares will be affected by changes in
currency exchange rates. The value of the Fund's investments denominated in
foreign currencies will depend on the relative strength of those currencies and
the U.S. dollar, and the Fund may be affected favorably or unfavorably by
exchange control regulations or changes in the exchange rate between foreign
currencies and the U.S. dollar. 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 factors. Changes in the foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities, and net investment income and
gains, if any, to be distributed to shareholders by the Fund. Accordingly, the
Fund's ability to achieve its investment objective will depend, to some extent,
on favorable exchange rates.
Other risks and considerations of international investing include: differences
in accounting, auditing and financial reporting standards; 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 Fund's 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.
The Fund may 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 Fund has valued the instrument.
Because of the risks associated with international equity investments, the Fund
is intended to be a long-term investment vehicle and is not designed to provide
investors with a means of speculating on short-term stock market movements.
Investors should not consider the Fund a complete investment program, but should
also hold securities with different risk characteristics including U.S. common
stocks, bonds and money market instruments.
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THE FUND MAY PURCHASE SECURITIES ASIDE FROM STOCKS.
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In order to accommodate cash flows resulting from the purchase and sale of Fund
shares, the Fund may invest in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, certificates of deposit, bankers'
acceptances, and commercial paper (which has been rated in one of the two
highest categories by a non-affiliated, nationally recognized statistical
ratings organization), enter into repurchase agreements collateralized by these
instruments and purchase shares of other investment companies that primarily
invest in any of the just described securities. In the
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aggregate, no more than 10% of the Fund's total assets may be invested in other
investment companies and an investment in any one investment company will be
limited to 5% of total Fund assets. The Investment Manager will charge no
management fees attributable to any Fund assets invested in other investment
companies. (See "Investment Restrictions" in the Statement of Additional
Information.)
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THE FUND MAY UTILIZE FUTURES AND OPTIONS STRATEGIES.
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The Fund may purchase futures contracts on stocks and stock indices and options
contracts (including options on futures contracts). Futures contracts on stocks
and stock indices will be used primarily to accommodate cash flows or in
anticipation of taking a market position when, in the opinion of the Investment
Manager, available cash balances do not permit economically efficient Stock
purchases. Moreover, the Fund may sell futures and options to "close out"
futures and options it may have purchased or to protect against a decrease in
the price of securities it owns but intends to sell. The Fund will not enter
into a futures contract if doing so would cause the sum of its initial margin
deposits on open futures contracts to exceed 5% of the value of its total assets
(see "Investment Securities" in the Statement of Additional Information), and
the value of all futures contracts on stocks and stock indices and options
contracts is not to exceed 10% of the Fund's total assets. The value of all
non-Stock investments may normally represent no more than 20% of the Fund's
total assets.
Because the Fund's futures and options practices are limited to hedging
purposes, the Investment Manager does not believe that the Fund is subject to
the degree of risk frequently associated with futures and options transactions.
Three principal areas of risk are present when futures and options contracts are
used even in a hedging context. First, there may not always be a liquid
secondary market for a futures or option contract at the time when the Fund
seeks to "close out" its position. The Fund will seek to reduce the risk that it
will be unable to "close out" contracts by only entering into futures or options
contracts that are traded on national exchanges and for which there appears to
be a liquid secondary market. It is also possible that changes in the prices of
futures or options contracts might correlate imperfectly, or not at all, with
changes in the market values of the stocks being hedged.
Finally, adverse market movements could cause the Fund to lose up to its full
investment in an options contract and/or to experience substantial losses on an
investment in a futures contract. However, barring the just referenced
significant market distortions, a similar result could be expected were the Fund
to invest directly in the securities being hedged. Of course, in a given case,
if the Investment Manager is incorrect in its forecast of interest rates, market
values, and other economic factors, the Fund would have been better off without
the hedge. There is also the risk of loss by the Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option.
CURRENCY HEDGING. The Fund may engage in foreign currency exchange transactions
to protect against uncertainty in the level of future exchange rates. The Fund
expects 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").
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For transaction hedging purposes, the Fund enters into foreign currency
transactions with respect to specific receivables or payables of the Fund
arising in connection with the purchase or sale of its portfolio securities. By
transaction hedging, the Fund will attempt to protect itself 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 it engages in position hedging, the Fund enters into
foreign currency exchange transactions to protect against a decline in the
values of the foreign currencies in which its portfolio securities are
denominated (or against an increase in the value of currency for securities
which the Fund expects to purchase).
When it engages in portfolio and/or transaction hedging, the Fund may purchase
or sell a foreign currency 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 Fund 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 Fund the
right to assume a short position in the futures contract until expiration of the
option. A put option on currency gives the Fund 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 Fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
Fund the right to purchase a currency at the exercise price until the expiration
of the option.
Hedging transactions involve costs and may result in losses, and the Fund's
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 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 a 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.
For further information on currency forward and futures contracts and foreign
currency options, see "Investment Securities" in the Statement of Additional
Information.
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THE FUND MAY BORROW MONEY.
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The Fund may borrow money for temporary purposes, but not for the purpose of
purchasing investments, in an amount up to one-third of the value of its total
assets.
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THE FUND MAY LEND ITS SECURITIES TO GENERATE INCOME.
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To increase its income, the Fund may lend securities from its portfolio to
brokers, dealers and other financial institutions that borrow securities. No
more than one-third of the Fund's total assets may be represented by loaned
securities. The Fund's loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. Government securities equal at all times to at
least 100% of the loaned securities' market value plus accrued interest. (For
more information regarding securities lending, see the Statement of Additional
Information section entitled "Other Investment Policies--Loans of Portfolio
Securities.")
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THE SCHWAB INTERNATIONAL INDEX(TM)
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THE INDEX HAS SET INCLUSION CRITERIA.
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To be included in the Schwab International Index, a company must satisfy all of
the following criteria: (1) it must be an "operating company" (i.e., not an
investment company) whose principal trading market is in a country with major
developed securities markets outside the United States; (2) a liquid market for
its shares must exist; (3) its market capitalization must place it among the top
350 such companies as measured by market capitalization, provided that the total
of all companies from any country may not exceed 35% of the Index on a
rebalancing date. A particular Stock's weighting in the Index is based on its
issuer's relative total market capitalization (i.e., its market price per share
times the number of shares outstanding), divided by the total market value of
the Index. As of January 2, 1995 the aggregate market capitalization of Index
Stocks was approximately $3.1 trillion.
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SCHWAB DEVELOPED AND MAINTAINS THE INDEX.
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The Index, which as of January 2, 1995 represented approximately 35% of the
total market value of all publicly traded non-United States companies, was
developed in 1993 and will be maintained by Schwab 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. Currently the countries included in the
Index are Australia, Belgium, Canada, Denmark, France, Germany, Hong Kong,
Italy, Japan, the Netherlands, Singapore, Spain, Sweden, Switzerland, and the
United Kingdom. The Index will serve as a standard of comparison for the Fund's
performance. Schwab receives no compensation from the Fund for maintaining the
Index.
- ------------------------------------------------------------
SCHWAB CALCULATES AND REPORTS THE INDEX'S PERFORMANCE DAILY.
- ------------------------------------------------------------
The Index's performance (i.e., the market value of all 350 Index Stocks in U.S.
dollars) is calculated and made available each Business Day by Schwab. The total
return of the Index is computed monthly (using beginning of month capitalization
weightings and assuming reinvestment of dividends) and may be reported from time
to time to Fund shareholders.
- ---------------------------------------------------------
SCHWAB PERIODICALLY UPDATES THE COMPOSITION OF THE INDEX.
- ---------------------------------------------------------
The list of companies whose securities are included in the Index will be revised
at least semi-annually. Companies known to meet or no longer meet the inclusion
criteria will be added or deleted as appropriate. The Index will also be
modified as necessary to account for corporate actions (e.g., new issues,
repurchases, stock dividends/splits, tenders, mergers, swaps, spin-offs or
bankruptcy filings made because of a company's inability to continue operating
as a going concern). The Index's inclusion criteria may be changed should it be
determined that doing so would cause the Index to be more representative of the
large, publicly traded international company equity market. In the future, the
Fund's Board of Trustees, subject to shareholder approval, may select another
index should it decide that taking such action would be in the best interests of
Fund shareholders.
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<PAGE> 12
MANAGEMENT OF THE FUND
Responsibility for overall management of the Fund rests with the trustees and
officers of Schwab Capital Trust. Professional investment management for the
Fund is provided by the Investment Manager, Charles Schwab Investment
Management, Inc., 101 Montgomery Street, San Francisco, CA 94104. In addition to
maintaining the Index and providing day-to-day portfolio management of the Fund,
the Investment Manager provides general investment advice regarding the Fund's
investment strategies, and performs expense management, accounting and record
keeping, and other administrative services necessary to the operation of the
Fund. The Investment Manager, formed in 1989, is a wholly-owned subsidiary of
The Charles Schwab Corporation and is the investment adviser and administrator
of the SchwabFunds(R) family of 18 mutual funds. As of June 15, 1995,
SchwabFunds had aggregate net assets of approximately $27 billion.
Pursuant to separate agreements, Charles Schwab & Co., Inc., 101 Montgomery
Street, San Francisco, CA 94104, serves as shareholder services agent and
transfer agent for the Fund ("Schwab" or the "Transfer Agent"). Schwab provides
information and services to shareholders, which include reporting share
ownership, sales and dividend activity (including associated tax consequences),
responding to daily inquiries, effecting the transfer of the Fund's shares, and
facilitating effective cash management of shareholders' account balances. It
furnishes such office space and equipment, telephone facilities, personnel and
informational literature distribution as is necessary and appropriate to provide
the described shareholder and transfer agency information and services. Schwab
is also the Fund's Distributor, but receives no compensation for its services as
such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 2.5 million active customer accounts and has over 200 offices. Schwab
also offers convenient access to financial information services and provides
products and services that help investors make investment decisions. Schwab is
an indirect 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 January 31, 1995 the beneficial owner
of approximately 21.7% of its outstanding shares. Mr. Schwab may be deemed to be
a "controlling person" of Schwab and the Investment Manager.
FEES AND EXPENSES
- ---------------------------------------------------------------------------
THE INVESTMENT MANAGER AND SCHWAB GUARANTEE THAT THE FUND'S TOTAL OPERATING
EXPENSES WILL NOT EXCEED 0.69% THROUGH AT LEAST JUNE 30, 1996.
- ---------------------------------------------------------------------------
Pursuant to its Investment Advisory and Administration Agreement with the Trust,
the Investment Manager receives from the Fund 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. Through at least June 30,
1996, the Investment Manager guarantees that the Fund's management fee will not
exceed 0.40% of the Fund's average daily net assets. In addition, through at
least June 30, 1996, the Investment Manager and Schwab guarantee that the Fund's
total operating expenses will not exceed 0.69% of the Fund's average daily net
assets. The effect of this guarantee is to maintain or lower the Fund's expenses
and thus maintain or increase the Fund's total return to shareholders. For
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<PAGE> 13
the fiscal year ended October 31, 1994, the Fund paid investment management fees
of 0.39% and total operating expenses of 0.90% of average net assets.
For the transfer agency and shareholder services provided under its Transfer
Agency and Shareholder Service Agreements with Schwab Capital Trust, Schwab
receives an annual fee, payable monthly, of 0.05% and 0.20%, respectively, of
the Fund's average daily net assets. State Street Bank and Trust Co. is the
Fund's Custodian.
The Trust pays the expenses of its operations, including the fees and expenses
of independent auditors, counsel and custodian, and the costs of calculating net
asset values, brokerage commissions or transaction costs, taxes, registration
fees, and the fees and expenses of qualifying Schwab Capital Trust and its
shares for distribution. The expenses will generally be allocated among Schwab
Capital Trust investment portfolios or series on the basis of relative net
assets at the time of allocation. However, expenses directly attributable to a
particular Fund will be charged to that Fund.
PORTFOLIO BROKERAGE. When placing orders for the Fund's securities transactions,
the Investment Manager will use its judgment to obtain 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 Fund's
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.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------
THE FUND WILL DECLARE AND PAY DIVIDENDS ANNUALLY.
- -------------------------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund intends to distribute substantially
all of its net investment income and net capital gains, if any, on an annual
basis, as determined by the Board of Trustees. All distributions will be
automatically reinvested in additional shares of the Fund unless the shareholder
elects otherwise.
TAX INFORMATION. The Fund is treated as a separate entity for tax purposes, has
elected to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), qualified as such,
and intends to continue to so qualify. In order to so qualify, the Fund will
distribute substantially all of its net investment income and net capital gains
to shareholders on an annual basis, and will meet certain other requirements. So
long as it meets these and certain minimum distribution requirements, the Fund
will not be liable for federal income tax on the amount of its earnings that is
distributed.
Dividends paid by the Fund from net investment income and distributions from the
Fund's net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, generally will be taxable as
ordinary income. Distributions received from the Fund 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 has owned shares in the Fund. Any loss on the sale or exchange of
the Fund's shares held for six months or less shall be treated as a long-term
capital loss to the extent of any long-term capital gain distribution
13
<PAGE> 14
received on the shares. If a shareholder is not subject to federal income tax,
the shareholder will not generally be taxed on amounts distributed by the Fund,
including any foreign taxes paid by the Fund and passed through, as described
below.
Dividends and distributions paid by the Fund are not eligible for the dividends
received deduction for corporate shareholders if, as expected, none of the
Fund's income consists of dividends paid by United States corporations.
Income received by the Fund from sources within various foreign countries might
be subject to foreign income taxes withheld at the source. If more than 50% of
the value of the Fund's total assets at the close of its taxable year comprise
securities issued by foreign corporations, the Fund may elect to "pass through"
to the Fund's shareholders the amount of foreign income taxes paid by the Fund.
Pursuant to this election, U.S. shareholders must include in gross income, even
though not actually received, their respective pro rata share of foreign taxes
paid by the Fund, and may either deduct their pro rata share of foreign taxes
(but not for alternative minimum tax purposes) or credit the tax against U.S.
income taxes, subject to certain limitations described in Code section 904 (but
not both). No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions.
The foregoing discussion relates to only 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 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 Fund generally
are not subject to U.S. taxation. Different tax consequences may result if the
foreign shareholder is engaged in a U.S. trade or business or is present in the
U.S. for more than 183 days. 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 the Fund may also be subject to state,
local and foreign taxes, and their treatment under applicable tax laws may
differ from the federal income tax treatment.
The Fund might inadvertently invest in non-U.S. corporations which would be
treated as Passive Foreign Investment Companies ("PFICs") or become a PFIC under
the Code. This could result in adverse tax consequences upon the disposition of,
or the receipt of "excess distributions" with respect to, such equity
investments. To the extent the Fund does invest in PFICs, it may adopt certain
tax strategies to reduce or eliminate the adverse effects of certain federal tax
provisions governing PFIC investments. It may also mark-to-market its
investments in PFICs, causing the Fund to have distribute amounts in excess of
its realized income and gains. To the extent that the Fund does invest in a PFIC
and is required to pay a tax on income or gain from such investment, the payment
of this tax would reduce the Fund's economic return and excess distributions
received from such investment will be treated as ordinary income rather than
capital gains.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' regular Schwab account statements. The Fund will
notify shareholders at least annually as to the nature of all distributions made
each year.
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<PAGE> 15
The foregoing is only a brief summary of the federal income tax considerations
affecting the Fund and its shareholders. Accordingly, a potential investor
should consult his or her tax adviser with specific reference to his or her own
tax situation.
SHARE PRICE CALCULATION
- ------------------------------------------------
THE FUND SELLS ITS SHARES FREE OF SALES CHARGES.
- ------------------------------------------------
The price of the Fund's shares on any given day is its "net asset value" or NAV.
This amount is computed by dividing the total market value of the Fund's
investments and other assets on that day, less any liabilities, by the number of
shares outstanding, and 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. The net asset value per share of the Fund is
determined on each day the New York Stock Exchange is open for trading at 4:00
p.m., Eastern time. The Fund's net asset value will fluctuate and Fund shares
are not insured against reduction in net asset value. (See "Share Price
Calculation" in the Statement of Additional Information.)
The securities in which the Fund invests will be valued daily based on their
market value. Each security held by the Fund 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. If extraordinary
events which materially affect of the value of the investments of the Fund occur
subsequent to the close of the securities market on which such securities are
primarily traded, the investments affected thereby will be valued at "fair
value" (as described above).
HOW THE FUND SHOWS PERFORMANCE
- ------------------------------------------------------------------
THE FUND'S PERFORMANCE MAY BE ADVERTISED IN TERMS OF TOTAL RETURN.
- ------------------------------------------------------------------
From time to time the Fund may advertise its total return. Performance figures
are based upon historical results and are not intended to indicate future
performance.
The 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 Securities and Exchange Commission.
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.
The Fund's performance may be compared to that of other mutual funds tracked by
mutual fund rating services, various indexes of investment performance
(including the Schwab 1000 Index(R), the
15
<PAGE> 16
Schwab International Index(TM), the Schwab Small-Cap Index(TM), and the Standard
& Poor's 500 Index), United States Treasury obligations, bank certificates of
deposit, the Consumer Price Index, and other investments for which reliable
performance data is available. The Fund's performance may also be compared to
averages, performance rankings, or other information prepared by Lipper
Analytical Services, Inc. and Morningstar, Inc.
Additional performance information is included in the Fund's Annual Report to
Shareholders, which you may obtain free of charge by calling 800-2 NO-LOAD or
from your local Schwab office.
TAX-ADVANTAGED RETIREMENT PLANS
- ------------------------------------------------------------
RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGES AND THE FUND
MAY BE AN ESPECIALLY SUITABLE INVESTMENT FOR THEM.
- ------------------------------------------------------------
Schwab offers tax-advantaged retirement plans for which the Fund may be a
particularly appropriate investment. Schwab's retirement plans allow
participants to defer taxes while helping them build their retirement savings.
SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab IRAs with account 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. 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 Keogh Plans are currently charged an annual fee of $45.
SCHWAB CORPORATE RETIREMENT PLANS. A well designed retirement program can 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.
GENERAL INFORMATION
ABOUT SCHWAB CAPITAL TRUST. Schwab Capital 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 investment portfolios or
series ("Series"). Currently, only shares of this Series and the Schwab
Small-Cap Index Fund(TM) are offered. The Board of Trustees may authorize the
issuance of shares of additional Series if deemed desirable. Shares of each
Series will have equal noncumulative voting rights and equal rights as to
dividends, assets and liquidation of such Series.
Schwab Capital Trust is not required to hold annual shareholders' meetings and
does not intend to do so. It will, however, hold special meetings as required or
deemed desirable by the Board of Trustees for such purposes as electing or
removing trustees, changing fundamental policies, or approving an investment
advisory agreement. Shareholders will vote by Series and not in the aggregate
(for example, when voting to approve the investment advisory agreement), except
when voting in the aggregate is permitted under the 1940 Act, such as for the
election of trustees.
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<PAGE> 17
SHAREHOLDER GUIDE
- ------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE SHAREHOLDER
SERVICE AND INFORMATION.
- ------------------------------------------------------
SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
exchange requests at any one of over 200 Schwab offices nationwide or by calling
800-2 NO-LOAD, 24 hours a day, where trained representatives are available to
answer questions about the Fund and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmation of such instructions and tape
recording telephone transactions.
HOW TO PURCHASE SHARES
- ---------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND THROUGH A SCHWAB BROKERAGE,
SCHWAB ONE(R), IRA, TRUST OR KEOGH ACCOUNT.
- ---------------------------------------------------------------
PURCHASING SHARES THROUGH A SCHWAB ACCOUNT. You may purchase shares of the Fund
through an account maintained with Schwab, and payment for shares must be made
directly to Schwab. Schwab accounts are currently free of maintenance fees,
although there may be charges for Schwab One accounts, Schwab IRAs and Keogh
plans. (See "Summary of Expenses.") The Securities Investor Protection
Corporation ("SIPC") will provide account protection, in an amount up to
$500,000, for securities, including Fund shares that you hold in a Schwab
account. Of course, SIPC account protection does not protect shareholders from
share price fluctuations.
If you already have a Schwab account, you may purchase shares in the Fund
through one of the methods described below, and you do not need not to complete
a new Schwab account application or open a new account.
If you do not presently maintain a Schwab account and wish to establish one,
simply complete a Schwab account application (available by calling 800-2
NO-LOAD, 24 hours a day or by contacting your local Schwab office) and mail or
deliver it to your local Schwab office. You may also mail the application to
Schwab at 101 Montgomery Street, San Francisco, CA 94104. Corporations and other
organizations should call their local Schwab office to determine which
additional forms may be necessary to open a Schwab account.
You may deposit funds into your Schwab account by check, wire or many other
forms of electronic funds transfer (securities may also be deposited). All
deposit checks should be made payable to Charles Schwab & Co., Inc. If you would
like to wire funds into your existing Schwab account, please contact your local
Schwab office for instructions.
PURCHASING SHARES THROUGH THE CHARLES SCHWAB TRUST COMPANY. You may also
purchase shares of the Fund through an account maintained with The Charles
Schwab Trust Company (the "Trust Company"). Payment for shares must be made
directly to the Trust Company and you must have funds
17
<PAGE> 18
available in your account to purchase shares of the Fund. Contact a Trust
Company representative for more information.
- -------------------------------------------------------------
YOUR INITIAL INVESTMENT IN THE FUND MAY BE AS LOW AS $1,000.
ADDITIONAL SHARE PURCHASES CAN BE MADE FOR AS LITTLE AS $100.
- -------------------------------------------------------------
MINIMUM FUND INVESTMENT REQUIREMENTS. Your initial investment in the Fund may be
as low as $1,000 ($500 for custodial accounts, Individual Retirement Accounts
and certain other retirement plans). The minimum subsequent investment is $100.
These requirements may be reduced or waived on certain occasions. (See "Purchase
and Redemption of Shares" in the Statement of Additional Information.)
- ---------------------------------------------
SHARES WILL BE PURCHASED AFTER YOU HAVE FUNDS
AVAILABLE IN YOUR ACCOUNT.
- ---------------------------------------------
WHEN AND AT WHAT PRICE SHARES WILL BE PURCHASED. You must have funds available
in your account in order to purchase shares. If funds (including those which are
transmitted by wire) are received before the time the Fund's daily net asset
value is calculated (normally 4:00 p.m. Eastern time), the order will be
executed at the next determined net asset value. Orders received after that time
will be executed at the next determined net asset value, generally the next
business day. (See "Share Price Calculation.")
METHODS OF PURCHASING SHARES. Schwab offers you several convenient ways to
purchase shares of the Fund. You may choose the one that works best for you and
Schwab will confirm execution of your purchase order.
BY PHONE:
You may use existing funds in your Schwab account to make initial and
subsequent share purchases. To place your order, call your local Schwab office
during regular business hours or 800-2 NO-LOAD, 24 hours a day.
BY MAIL:
You may direct that funds already in your Schwab account be used to make
initial and subsequent share purchases. Alternatively, your purchase
instructions may be accompanied by a check made out to Charles Schwab & Co.,
Inc. which will be deposited into your Schwab account and used, as necessary,
to cover all or part of your purchase order.
Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, CA 94104, or to your local Schwab office
and should contain the following information:
- your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);
- the name of the fund and the dollar amount of shares you would like
purchased; and
- (initial share purchases only) a selection of one of the distribution
options listed below.
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<PAGE> 19
IN PERSON AT A SCHWAB OFFICE:
Visit your local Schwab office where a representative will be happy to assist
you.
AUTOMATIC INVESTMENT:
Once you have satisfied the initial investment requirements, you may authorize
Schwab to automatically purchase shares at intervals and in amounts
pre-selected by you on your behalf. (See "Schwab Automatic Investment Plan.")
- -----------------------------------------------
YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS.
- -----------------------------------------------
SELECTING A DISTRIBUTION OPTION. You may select from the three distribution
options listed below when you first become a shareholder in the Fund. If you
already are a shareholder and wish to change your distribution option, please
call your local Schwab office for assistance.
1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gains
distributions will be reinvested in additional shares. 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 any capital gain distributions will be reinvested in additional
shares.
3. ALL CASH: Dividends and any capital gain distributions will both be paid in
cash.
Dividends and distributions subject to reinvestment will be invested at the net
asset value next determined after their record date. Cash distributions will be
credited to your Schwab account and will be held there or mailed to you
depending on the standing instructions applicable to your account. For
information on how to wire funds from your Schwab account to your bank, see
"Other Important Information--Wire Transfers To Your Bank."
OTHER PURCHASE INFORMATION. The Fund reserves the right in its sole discretion,
and without prior notice to shareholders, to withdraw or suspend all or any part
of the offering made by this Prospectus, to reject purchase orders or to change
the minimum investment requirements. All orders to purchase shares of the Fund
are subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing. Any purchase which would result in a single shareholder
owning shares with a value of more than 10% of a Fund's assets or $3 million,
whichever is greater, are subject to prior approval by the Fund. Schwab will
charge a $15 service fee against an investor's Schwab account if his or her
investment check is returned because of insufficient or uncollected funds or a
stop payment order.
19
<PAGE> 20
HOW TO EXCHANGE SHARES
- ------------------------------------------------
FUND SHARES MAY BE EXCHANGED FOR SHARES OF OTHER
FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
- ------------------------------------------------
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 redemption of shares at
the net asset value next determined after receipt by the Transfer Agent of an
exchange request (on the same day as the Transfer Agent received your request,
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 (on the same day as the Transfer Agent received
your request, 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). 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 Fund reserves the right on 60 days'
written notice to modify, limit or terminate the exchange privilege.
METHODS OF EXCHANGING SHARES.
BY PHONE:
To exchange between funds by telephone, please call your local Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day. Investors
should be aware that telephone exchanges may be difficult to implement during
periods of drastic economic or market changes. Shareholders who experience
difficulties in exchanging shares by telephone can mail their exchange
requests or make them in person as set forth below.
To properly process your telephone exchange request we will need the following
information:
- your Schwab account number;
- the name of the fund from which you wish to exchange shares and the
number of shares to be exchanged; and
- the name of the fund into which shares are to be exchanged.
BY MAIL:
You may also request an exchange by writing Schwab at 101 Montgomery Street,
San Francisco, CA 94104, or your local Schwab office.
To properly process your exchange request we will need a letter from you which
contains the following information:
- your Schwab account number;
- the name of the fund from which you wish to exchange shares and the
number of shares to be exchanged;
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<PAGE> 21
- the name of the fund into which shares are to be exchanged and the
distribution option you select; and
- a signature of any one of the registered Schwab account holders (in
the exact form specified in the account).
IN PERSON AT A SCHWAB OFFICE:
You can also request an exchange in person at your local Schwab office.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------
REDEMPTION PROCEEDS WILL BE CREDITED TO YOUR SCHWAB ACCOUNT. YOU MAY ELECT
TO HAVE THEM MAILED TO YOU.
- --------------------------------------------------------------------------
THE PRICE AT WHICH SHARES WILL BE REDEEMED. The Fund will redeem shares at the
net asset value per share next determined after receipt by the Transfer Agent of
proper redemption instructions as set forth on the following page.
EARLY WITHDRAWAL FEE PAID TO THE FUND. Frequent trading in Fund shares by
short-term investors increases the Fund's costs. To ensure that long-term
investors do not bear these costs, the Fund assesses a 0.75% (three-fourths of
one percent) early withdrawal fee upon redemption or exchange proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is paid directly to the Fund and does not apply to the redemption
or exchange of shares acquired through reinvestment of dividends or capital
gains. Solely for purposes of calculating the amount (if any) of the early
withdrawal fee, shares will be treated as redeemed on a "first-in first-out
basis," except that shares acquired through dividend reinvestment will be
treated as redeemed first. This method of calculating the fee should result in
the lowest total early withdrawal fee. Under certain special circumstances,
Schwab may provide reimbursement of this fee to qualifying pension plans. Call
your Schwab representative for more information.
PAYMENT OF REDEMPTION PROCEEDS. Payment for redeemed shares will be credited
directly to your Schwab account no later than seven days after the Transfer
Agent receives your redemption instructions in proper form. Redemption proceeds
will then be held there or mailed to you depending on the account standing
instructions you selected. For information on how to wire funds from your Schwab
account to your bank, see "Other Important Information--Wire Transfers to Your
Bank."
If you purchased shares by check, your redemption proceeds may be held in your
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 or other major international stock exchanges are
restricted, the exchanges are closed for any reason other than their customary
weekend or holiday closings, emergency circumstances as determined by the
Securities and Exchange Commission (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.)
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<PAGE> 22
METHODS OF REDEEMING SHARES.
BY PHONE:
You may redeem your shares by telephone by calling your local Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day. Investors
should be aware that telephone redemption may be difficult to implement during
periods of drastic economic or market changes. Shareholders who experience
difficulties in redeeming by telephone can mail their redemption orders or
place them in person as set forth below.
Telephone redemption orders received prior to 4:00 p.m. (Eastern time) on any
Business Day, once they have been verified as to the caller's identity and
account ownership by the Transfer Agent, will be deemed to have been received
by the Transfer Agent on that day.
BY MAIL:
Redemption orders can also be delivered through the mail. Mailed redemption
orders should be addressed to Schwab at 101 Montgomery Street, San Francisco,
CA 94104, or your local Schwab office. Once a redemption request is mailed it
is irrevocable and may not be modified or canceled.
To properly process your redemption order we will need a letter from you which
contains the following information:
- your Schwab account number;
- the name of the fund from which you wish to redeem shares and the
number of fund shares to be redeemed; and
- a signature of any one of the registered Schwab account holders (in
the exact form specified in the account).
IN PERSON AT A SCHWAB OFFICE:
You can also place your redemption order in person at your local Schwab
office.
SCHWAB AUTOMATIC INVESTMENT PLAN
- ----------------------------------------------------------------------------
THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST, CONVENIENT WAY TO MAKE
REGULAR INVESTMENTS IN THE FUND.
- ----------------------------------------------------------------------------
Schwab offers an Automatic Investment Plan ("AIP") that allows you to make
periodic investments in non-money market SchwabFunds (and certain other funds
available through Schwab) automatically and conveniently. AIP can be used as a
dollar cost averaging program that saves you time and expense associated with
writing checks or wiring funds.
INVESTMENT MINIMUMS: You can make automatic investments in any amount, from $100
to $50,000, once you meet the Fund's investment minimum.
22
<PAGE> 23
INVESTMENT METHODS: Automatic investments are made from your Schwab account and
you may select from several different investment methods (sources of funds) to
make automatic investment(s):
a. USING FUNDS IN A SCHWAB ACCOUNT: You can make automatic investments by
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. If you elect to use these funds to make your automatic
investments, cash in your Schwab account will be used to make the
investment and, if necessary, shares of your Schwab Money Fund will be
redeemed to cover the balance of the purchase.
b. USING THE SCHWAB MONEYLINK(R) TRANSFER SERVICE FOR:
- 'Authorized Transfers" from a bank checking or savings account;
- "Direct Deposit" of payroll or government checks (all or a portion).
Authorized Transfers (transfers from a bank checking or savings account) and
Direct Deposit (automatic deposit of all or a portion of a payroll or government
check) are two of the investment method options which are made available through
the Schwab Moneylink Transfer Service ("MoneyLink"). MoneyLink transfers money
into your Schwab account and automatic investments can be made using these
funds.
If you elect to use Authorized Transfers and/or Direct Deposit for your
automatic investments, you will select two dates: a transfer date (when the
money is transferred into your Schwab account) and your investment date. The
automatic investment date selected may be the same day of your Direct Deposit or
Authorized Transfers. Schwab recommends that your investment date be on or close
to the transfer/deposit date to minimize uninvested cash in your Schwab account.
If you make changes to your Authorized Transfer or Direct Deposit date, it may
also be necessary to change your automatic investment date to coincide with the
new transfer/deposit date.
INVESTMENT FREQUENCY: You can select the frequency of your automatic investments
(twice monthly, monthly or quarterly) and choose either the 5th or the 20th of
the month for your automatic investment dates. Quarterly investments are made on
the date selected in the first month of each quarter (January, April, July and
October).
CHANGING INSTRUCTIONS TO AN ALREADY ESTABLISHED PLAN: If you want to change the
fund(s) selected for your AIP, you may do so by calling your local branch or
800-2 NO-LOAD, 24 hours a day, or by sending written instructions clearly
outlining the changes to: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104. Written notification must include the following:
1. The funds with AIP that you want to cancel;
2. The newly selected fund(s) in which you want to begin making automatic
investments, the amount to be invested in each fund and the distribution
option selected;
3. The investment frequency and investment dates for your new automatic
investments.
Information on changing Authorized Transfer and Direct Deposit instructions is
included in the Automatic Investment Plan Terms and Conditions brochure which
you will receive after enrolling in AIP.
23
<PAGE> 24
TERMINATING YOUR AUTOMATIC INVESTMENT PLAN. If you wish to terminate your AIP,
you may call your local branch or 800-2 NO-LOAD, 24 hours a day, or send written
instructions to: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.
NOTE: Your Authorized Transfers and/or Direct Deposit will not automatically
terminate when you cancel your AIP investments.
TERMINATING AUTHORIZED TRANSFERS AND DIRECT DEPOSIT. If you wish to terminate
your Authorized Transfers, you may do so at any time by notifying Schwab in
writing. You must notify your employer or government agency to cancel Direct
Deposit.
IMPORTANT: If you are canceling your Authorized Transfers and/or Direct Deposit
and you wish to cancel your AIP, you must also provide instructions stating that
Schwab should cancel your AIP. You may notify Schwab by sending written
instructions to the address above or telephoning your local branch or 800-2
NO-LOAD, 24 hours a day. Your automatic investments will continue using Schwab
account assets if Schwab does not receive notification to terminate your
automatic investments as well.
TO AVOID PROCEDURAL DIFFICULTIES, SCHWAB SHOULD RECEIVE INSTRUCTIONS TO CHANGE
OR TERMINATE YOUR AIP OR AUTHORIZED TRANSFERS AT LEAST TEN DAYS PRIOR TO YOUR
SCHEDULED INVESTMENT DATE.
ADDITIONAL INFORMATION. This information is only a summary of the Automatic
Investment Plan Terms and Conditions brochure which you will receive if you
choose to enroll in AIP. Please read it carefully and keep it for future
reference.
OTHER IMPORTANT INFORMATION
MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, the Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of the shareholder's account drops below the Fund's $500 ($250 in the case
of custodial accounts, IRAs and other retirement plans) minimum balance
requirement. Shareholders will be notified in writing 30 days before such action
is taken to allow them to increase their holdings to at least the minimum level.
Also note that, because they can only be held in Schwab accounts, shares of the
Fund will be automatically redeemed should the Schwab account in which they are
carried be closed.
CONSOLIDATED MAILINGS. In an effort to reduce mailing costs, the Fund
consolidates shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write SchwabFunds at 101
Montgomery Street, San Francisco, CA 94104, to that effect.
24
<PAGE> 25
WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
will be wired from your Schwab account to your bank account. Call your local
Schwab office for additional information on wire transfers. A $15 bank-wire
service fee will be charged against your Schwab account for each wire sent.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
BEING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
25
<PAGE> 26
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 27
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 28
SCHWAB INTERNATIONAL
INDEX FUND(TM)
Prospectus February 28, 1995,
as amended June 30, 1995
SchwabFunds(R)
101 Montgomery Street
San Francisco, California 94104
981-4 (7/95) CRS 6677 Printed on recycled paper.
SchwabFunds(R)
<PAGE> 29
SCHWAB SMALL-CAP INDEX FUND(TM)
- --------------------------------------------------------------------------------
PROSPECTUS February 28, 1995, as amended June 30, 1995
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD, 24 hours a day.
THE SCHWAB SMALL-CAP INDEX FUND (the "Fund") attempts to track the price and
dividend performance (total return) of the Schwab Small-Cap Index(TM) (the
"Index"), an index created by Schwab to represent the performance of common
stocks of the second 1,000 largest United States corporations (excluding
investment companies), ranked by market capitalization (share price times the
number of shares outstanding). The issuers of these common stocks are referred
to in this prospectus as "Small-Cap Issuers." The Fund will attempt to achieve
its objective by investing substantially all of its assets in stocks that
comprise the Index, in approximately the same proportion as the Small-Cap
Issuers are represented in the Index. The Fund is a diversified investment
portfolio of Schwab Capital Trust (the "Trust"), a no-load, open-end, management
investment company.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. This Prospectus may be available via electronic
mail. For a free paper copy of this Prospectus call 800-2 NO-LOAD. You can find
more detailed information about the Fund in the Trust's Statement of Additional
Information, dated February 28, 1995, as amended June 30, 1995 (and as further
amended from time to time), and filed with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated by reference
into this Prospectus, and may be obtained without charge by contacting Schwab at
800-2 NO-LOAD, 24 hours a day or 101 Montgomery Street, San Francisco, CA 94104.
TABLE OF CONTENTS
<TABLE>
<S> <C>
KEY FEATURES OF THE FUND...................................................... 2
SUMMARY OF EXPENSES........................................................... 3
FINANCIAL HIGHLIGHTS.......................................................... 5
MATCHING THE FUND TO YOUR INVESTMENT NEEDS.................................... 6
INVESTMENT OBJECTIVE, POLICIES AND RISKS...................................... 6
THE SCHWAB SMALL-CAP INDEX.................................................... 10
MANAGEMENT OF THE FUND........................................................ 11
FEES AND EXPENSES............................................................. 12
DISTRIBUTIONS AND TAXES....................................................... 13
SHARE PRICE CALCULATION....................................................... 13
HOW THE FUND SHOWS PERFORMANCE................................................ 14
TAX-ADVANTAGED RETIREMENT PLANS............................................... 15
GENERAL INFORMATION........................................................... 15
SHAREHOLDER GUIDE............................................................. 16
HOW TO PURCHASE SHARES...................................................... 16
HOW TO EXCHANGE SHARES...................................................... 18
HOW TO REDEEM SHARES........................................................ 20
SCHWAB AUTOMATIC INVESTMENT PLAN.............................................. 21
OTHER IMPORTANT INFORMATION................................................... 23
</TABLE>
- --------------------------------------------------------------------------------
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.
<PAGE> 30
KEY FEATURES OF THE FUND
PERFORMANCE. The investment objective of the Schwab Small-Cap Index Fund is to
attempt to track the price and dividend performance (total return) of the Index,
an index composed of the common stocks of the second 1,000 largest United States
corporations (excluding investment companies), ranked by market capitalization
(share price times the number of shares outstanding). The Fund will attempt to
achieve its objective by investing substantially all of its assets in stocks
that comprise the Index, in approximately the same proportions as the Small-Cap
Issuers are represented in the Index. (See "The Schwab Small-Cap Index(TM).")
DIVERSIFICATION AND RISK. The Fund seeks to invest in substantially all of the
common stocks of the 1,000 companies that make up the Index. This level of
diversification reduces the risk (typically, a decline in the value of
individual securities) associated with investments in individual securities
because the Fund's investments will be spread over a range of industries and
issuers as opposed to being concentrated in a few individual securities. Stocks
of Small-Cap Issuers generally have greater illiquidity and price volatility
than stocks of larger capitalization issuers. (See "Investment Objective,
Policies and Risks.")
LOW MINIMUM INVESTMENT. Investors can begin their investment program with as
little as $1,000. Subsequent investments can be made with only $100 ($50 if you
elect to participate in the free Automatic Investment Plan described under
"Schwab Automatic Investment Plan").
PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. (the
"Investment Manager"), 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. (See "Management of the Fund.")
LOW COST INVESTING. The Fund brings a low cost approach to investing with:
- no sales charges;
- no 12b-1 fees or contingent deferred sales charges;
- an index fund management strategy designed to minimize overall
operating expenses;
- a portion of the Fund's management fees waived through June 30, 1996;
- the Investment Manager's and Schwab's commitment to absorb total fund
operating expenses in excess of 0.59% of the Fund's average daily net
assets at least through June 30, 1996. (See "Management of the Fund.")
MINIMIZATION OF CURRENT CAPITAL GAINS TAX LIABILITY. The Fund's investment
policies are designed to minimize current capital gains tax liability. (See
"Distributions and Taxes.")
SHAREHOLDER SERVICE. Schwab serves as the Fund's distributor, transfer agent,
and shareholder service provider. Schwab's professional representatives are
available to receive your purchase, redemption, and exchange orders. Call your
local Schwab office during business hours or 800-2 NO-LOAD, 24 hours a day. As a
discount broker, Schwab gives you investment choices and lets you make your own
decisions. Schwab has many services that help you make the most informed
investment decisions. (See "How to Purchase Shares," "How to Exchange Shares"
and "How to Redeem Shares.")
2
<PAGE> 31
FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in the Fund in amounts and at intervals that you
determine. You avoid the inconvenience, delay and expense associated with checks
or bank wires. To obtain more information about the Automatic Investment Plan,
refer to the "Schwab Automatic Investment Plan" section in this prospectus or
visit or call your local Schwab office or call 800-2 NO-LOAD, 24 hours a day.
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their investment activity, including mutual funds, on one report.
NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders.
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases........................................................... None
Sales Load on Reinvested Dividends................................................ None
Deferred Sales Load............................................................... None
Early Withdrawal Fee Paid to the Fund(1).......................................... 0.50%
Exchange Fee...................................................................... None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF NET ASSETS):
Management Fee (after fee reductions)(2).......................................... 0.30%
12b-1 Fees........................................................................ None
Other Expenses (after fee reductions and expense reimbursements)(3)............... 0.29%
TOTAL FUND OPERATING EXPENSES(3), (4)............................................... 0.59%
</TABLE>
(1) Applies only to the redemption (including by exchange) of shares purchased
and held less than six months. The fee is paid to the Fund (not to the
Investment Manager or Distributor) and is designed to protect long-term
investors from the cost of frequent investments and redemptions by short-term
investors. (See "How to Redeem Shares" and "How to Exchange Shares"). Under
certain special circumstances, Schwab may provide reimbursement of this fee to
qualifying pension plans. Call your Schwab representative for more
information.
(2) This amount has been restated to reflect a reduction by the Investment
Manager which is guaranteed through June 30, 1996. If there were no such
reduction, the maximum management fee for the Fund would be 0.50% of the Fund's
average daily net assets.
(3) This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least June 30, 1996, the total fund
operating expenses will not exceed 0.59% of the Fund's average daily net assets.
Without a similar guarantee which was in effect for the fiscal year ended
October 31, 1994, total fund operating expenses would have been 1.19% of the
Fund's average daily net assets, on an annualized basis.
3
<PAGE> 32
(4) Schwab currently imposes no fees for opening and maintaining a Schwab
brokerage account. It is currently anticipated that 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, if
the account balance is below $35, 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 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.
EXAMPLE. You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$6 $19 $33 $ 74
</TABLE>
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. This example reflects the guarantee by the Investment Manager and
Schwab that the total fund operating expenses will not exceed the amount
specified for the time period referred to in note (3) on the previous page.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The example assumes a
5% annual rate of return pursuant to requirements of the Securities and Exchange
Commission. THIS HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE
REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE.
4
<PAGE> 33
FINANCIAL HIGHLIGHTS
The following information with respect to per share data and ratios has been
audited by Price Waterhouse LLP, independent accountants, whose unqualified
report covering the period from December 3, 1993 (commencement of operations) to
October 31, 1994 is incorporated by reference from the Statement of Additional
Information. This information should be read in conjunction with the financial
statements and accompanying notes which are also incorporated by reference from
the Statement of Additional Information.
<TABLE>
<S> <C>
Net asset value at beginning of period.......................................... $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................................................... 0.06
Net realized and unrealized gain (loss) on investments........................ --
-------
Total from investment operations.............................................. 0.06
LESS DISTRIBUTIONS
Dividends from net investment income.......................................... (0.01)
Dividends from realized gain on investments................................... --
Total distributions........................................................... (0.01)
-------
Net asset value at end of period................................................ 10.05
========
Total return.................................................................... 0.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)......................................... $68,128
Ratio of expenses to average net assets....................................... 0.67%*
Ratio of net investment income to average net assets.......................... 0.68%*
Portfolio turnover rate....................................................... 16%
</TABLE>
Notes:
During the period ended October 31, 1994, the Investment Manager and Schwab
reduced their fees and absorbed certain expenses of the Fund. Had these fees and
expenses not been reduced and absorbed, the ratio of expenses to average net
assets for the above-referenced period would have been 1.19%* of the Fund's
average daily net assets and the ratio of net investment income to average net
assets of the Fund would have been 0.16%* of the Fund's average daily net
assets.
On May 1, 1995, the sub-advisory agreement between Dimensional Fund Advisors
Inc. and the Investment Manager was terminated, and the Investment Manager
assumed sole responsibility for providing the Fund with investment advisory
services.
* Annualized
5
<PAGE> 34
MATCHING THE FUND TO YOUR INVESTMENT NEEDS
The Fund may be appropriate for a variety of investment programs. While the Fund
is not a substitute for an investment portfolio tailored to an individual's
investment needs and ability to tolerate risk, it can be used to supplement and
diversify an investment portfolio which may be primarily comprised of larger
capitalization equity issues.
- ------------------------------------------------------------
THE FUND MAY BE ESPECIALLY SUITABLE FOR LONG-TERM INVESTORS.
- ------------------------------------------------------------
Because the Fund will ordinarily invest in a large number of common stocks, it
may be especially appropriate for investors with long-term investment
objectives, including those saving for retirement or college. While common stock
prices tend to rise and decline for short or extended periods, historically they
have generally risen over the long-term. As a result, stocks have over time
historically provided many investors with higher returns than most alternative
securities investments.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
- -----------------------------------------------------------
THE FUND IS DESIGNED TO TRACK THE PERFORMANCE OF THE INDEX.
- -----------------------------------------------------------
The investment objective of the Fund is to attempt to track the price and
dividend performance (total return) of the Index, a new index created by Schwab
to represent the performance of Small-Cap Issuers. As of December 31, 1994, the
market capitalization of stocks in the Index ranged in size from approximately
$174 million to $661 million. The Fund is a diversified investment portfolio of
the Trust, a no-load, open-end, management investment company. As a matter of
fundamental policy, the Fund will invest at least 65% of its total assets in
common stocks or other equity securities including preferred stocks, rights and
warrants. The Fund's investment objective, along with certain investment
restrictions adopted by the Fund (see "Investment Restrictions" in the Statement
of Additional Information) is fundamental and cannot be changed without approval
by holders of a majority of the Fund's outstanding voting shares, as defined in
the Investment Company Act of 1940 (the "1940 Act"). While there is no assurance
that the Fund will achieve its investment objective, it will endeavor to do so
by following the investment policies set forth below.
- ---------------------------------------------------------
THE FUND WILL FOLLOW AN "INDEXING" OR "PASSIVE" STRATEGY.
- ---------------------------------------------------------
The Fund will follow an "indexing" or "passive" strategy under which stocks are
generally purchased or sold in order to match the composition of the Index.
Accordingly, the Investment Manager will not select securities for the Fund's
investment portfolio based upon traditional economic, financial and market
analyses and/or forecasting.
- ----------------------------------------------------------------
THE FUND WILL BE MANAGED TO MINIMIZE COSTS AND TAX CONSEQUENCES
TO INCREASE SHAREHOLDERS' TOTAL RETURN.
- ----------------------------------------------------------------
The Fund is managed to offset capital gains with capital losses in order to
minimize the Fund's capital gains tax liability. This special feature of the
Fund can make a real difference in your after-tax return, especially if you're
in a high tax bracket. The Fund has adopted a number of policies that should
cause its portfolio turnover rate to be below that experienced in many other
mutual fund portfolios. Lower
6
<PAGE> 35
portfolio turnover acts to minimize associated transaction costs as well as the
level of realized capital gains. Shareholders' current tax liability for capital
gains should be reduced and their total return increased by these policies. The
Investment Manager anticipates that the Fund's annual portfolio turnover rate
will not exceed 100%.
To reduce transaction costs and minimize shareholders' current capital gains tax
liability, the Fund's investment portfolio will not be automatically traded
("re-balanced") to reflect changes in the Index. The Fund's trading strategy is
designed to further minimize transaction costs (e.g., the Fund will generally
only buy round-lots of stocks and may trade large blocks of securities). These
policies may cause a particular stock to be over- or under-represented in the
Fund relative to its Index weighting or result in its continued ownership by the
Fund after its deletion from the Index, thereby reducing the correlation between
the Fund and the Index. However, given the diversified nature of the Fund, the
Investment Manager does not expect that any such deviations will significantly
impact the correlation between Fund and Index performance and will engage in
these practices only to the extent that they do not have a material effect on
the Fund's ability to approximate the performance of the Index.
- -------------------------------------------------------------------
THE FUND WILL ATTEMPT TO BE SUBSTANTIALLY INVESTED IN INDEX STOCKS.
- -------------------------------------------------------------------
The Fund will attempt to invest substantially all of its assets in stocks of the
Small-Cap Issuers that comprise the Index ("Index Stocks") and under normal
market conditions, will invest at least 80% of its total assets in Index Stocks.
The Fund is not required, however, to buy or sell securities solely because the
percentage of its assets invested in Index Stocks changes when their market
values increase or decrease. In addition, the Fund may omit or remove Index
Stocks from its portfolio if the Investment Manager believes the stock to be
insufficiently liquid or believe the merit of the investment has been
substantially impaired by extraordinary events or financial conditions.
Moreover, to avoid any potential conflict of interest, the Fund will not
purchase securities of issuers with which it is affiliated. To compensate for
any Index Stocks omitted or removed from its investment portfolio, the Fund may
purchase stocks not in the Index (which would then be considered Index Stocks
for purposes of the Fund's policy regarding the percentage of its assets to be
invested in Index Stocks) if the Investment Manager believes that the market
performance of such securities is likely to replicate that of the Index Stocks
they replace.
It is anticipated that the Fund will be able to invest in all or at least a
substantial majority of Index Stocks. The Fund will generally select Index
Stocks by reference to their weighting in the Index. Thus, the Fund intends that
the percentage of its assets invested in each Index Stock will approximate the
weighting of that stock in the Index.
- ------------------------------------------------------
THE FUND'S PERFORMANCE SHOULD TRACK THAT OF THE INDEX.
- ------------------------------------------------------
While the Fund will not precisely match the Index's performance, the Fund will
attempt to maximize the correlation between its performance and that of the
Index. Factors such as the size of the Fund's portfolio, transaction costs,
management fees and expenses, brokerage commissions and fees, the extent and
timing of cash flows into and out of the Fund, the Fund's policy of minimizing
transaction costs and current capital gains tax liability, and changes in the
securities markets and the Index itself
7
<PAGE> 36
are expected by the Investment Manager to account for any differences between
the Fund's performance and that of the Index.
Over the long term, the Investment Manager seeks a correlation between the
performance of the Fund and that of the Index of 0.9 or better. A figure of 1.0
would indicate a perfect correlation. The Investment Manager monitors the
correlation between the performance of the Fund and the Index on a regular
basis. In the unlikely event that a correlation of 0.9 or better is not
achieved, the Board of Trustees will consider alternative arrangements.
- -------------------------------------------------------------------
STOCKS OF SMALL-CAP ISSUERS GENERALLY HAVE GREATER PRICE VOLATILITY
AND LESS LIQUIDITY THAN LARGER CAPITALIZATION STOCKS.
- -------------------------------------------------------------------
Because the Fund will be primarily invested in common stocks and other equity
securities, its portfolio will be subject to price volatility over both short-
and long-term periods. Moreover, because the Fund invests in equity securities
of Small-Cap Issuers, its price volatility may be greater than if the Fund
invested in equity securities of issuers which have a larger market
capitalization than that of Small-Cap Issuers.
Generally, equity securities of Small-Cap Issuers have historically been
characterized by greater volatility of returns, greater total returns, and lower
dividend yields than equity securities of large capitalization issuers. For any
particular period of time, these characteristics may not be consistent.
Historically, equity securities of Small-Cap Issuers have shown a pattern of
over-performing or under-performing equity securities of larger capitalization
issuers for extended periods of time (cycles) ranging in duration from four to
fourteen years. The greater price volatility of equity securities of Small-Cap
Issuers may result from the fact that there may be less market liquidity, less
publicly available information or fewer investors who monitor the activities of
these companies. In addition, the market prices of these securities may exhibit
more sensitivity to changes in industry or general economic conditions.
The Fund may 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 Fund has valued the instrument.
Because of the risks associated with investments in equity securities of
Small-Cap Issuers, the Fund is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of speculating on short-term
stock market movements. Investors should not consider the Fund a complete
investment program, but should also hold securities with different risk
characteristics including other mutual funds or portfolios of individual
securities, equity securities of larger capitalization issuers, bonds and money
market instruments.
In order to accommodate cash flows resulting from the purchase and sale of Fund
shares, the Fund may invest in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, certificates of deposit, bankers'
acceptances, and commercial paper (which has been rated in one of the two
highest rating categories by a non-affiliated, nationally recognized statistical
rating organization), enter into repurchase agreements collateralized by these
instruments and purchase
8
<PAGE> 37
shares of other investment companies that primarily invest in any of the
above-referenced securities. In the aggregate, no more than 10% of the Fund's
total assets may be invested in other investment companies and an investment in
any one investment company will be limited to 5% of total Fund assets. The
Investment Manager will charge no management fees attributable to any Fund
assets invested in other investment companies. (See "Investment Restrictions" in
the Statement of Additional Information.)
- ----------------------------------------------------
THE FUND MAY UTILIZE FUTURES AND OPTIONS STRATEGIES.
- ----------------------------------------------------
The Fund may purchase futures contracts on stocks and stock indices and options
contracts (including options on futures contracts). Futures contracts on stocks
and stock indices will be used primarily to accommodate cash flows or in
anticipation of taking a market position when, in the opinion of the Investment
Manager, available cash balances do not permit economically efficient stock
purchases. Moreover, the Fund may sell futures and options to "close out"
futures and options it may have purchased or to protect against a decrease in
the price of securities it owns but intends to sell. The Fund will not enter
into a futures contract if doing so would cause the sum of its initial margin
deposits on open futures contracts to exceed 5% of the value of its total assets
(see "Investment Securities" in the Statement of Additional Information). The
value of all futures contracts on stocks and stock indices and options contracts
is not to exceed 10% of the Fund's total assets. The value of all non-stock
investments may normally represent no more than 20% of the Fund's total assets.
- --------------------------------------------------------------------------------
BECAUSE THE FUND'S FUTURES AND OPTIONS PRACTICES ARE LIMITED TO HEDGING
PURPOSES, THE INVESTMENT MANAGER DOES NOT BELIEVE THAT THE FUND IS SUBJECT TO
THE DEGREE OF RISK FREQUENTLY ASSOCIATED WITH FUTURES AND OPTIONS TRANSACTIONS.
- --------------------------------------------------------------------------------
Three principal areas of risk are present when futures and options contracts are
used even in a hedging context. First, there may not always be a liquid
secondary market for a futures or option contract at the time when the Fund
seeks to "close out" its position. The Fund will seek to reduce the risk that it
will be unable to "close out" contracts by only entering into futures or options
contracts that are traded on national exchanges and for which there appears to
be a liquid secondary market. It is also possible that changes in the prices of
futures or options contracts might correlate imperfectly, or not at all, with
changes in the market values of the stocks being hedged.
Finally, adverse market movements could cause the Fund to lose up to its full
investment in an options contract and/or to experience substantial losses on an
investment in a futures contract. However, barring such significant market
distortions, a similar result could be expected were the Fund to invest directly
in the securities being hedged. Of course, in a given case, if the Investment
Manager is incorrect in its forecast of interest rates, market values, and other
economic factors, the Fund would have been better off without the hedge. There
is also the risk of loss by the Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a futures
contract or option.
For further information on futures and options contracts, see "Investment
Securities" in the Statement of Additional Information.
9
<PAGE> 38
- --------------------------
THE FUND MAY BORROW MONEY.
- --------------------------
The Fund may borrow money for temporary purposes, but not for the purpose of
purchasing investments, in an amount up to one-third of the value of its total
assets.
- ----------------------------------------------------
THE FUND MAY LEND ITS SECURITIES TO GENERATE INCOME.
- ----------------------------------------------------
To increase its income, the Fund may lend securities from its portfolio to
brokers, dealers and other financial institutions that borrow securities. No
more than one-third of the Fund's total assets may be represented by loaned
securities. The Fund's loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. Government securities equal at all times to at
least 100% of the loaned securities' market value plus accrued interest. (For
more information regarding securities lending, see "Other Investment
Policies--Loans of Portfolio Securities" in the Statement of Additional
Information).
THE SCHWAB SMALL-CAP INDEX(TM)
- -------------------------------------
THE INDEX HAS SET INCLUSION CRITERIA.
- -------------------------------------
The Index is comprised of the second 1,000 largest United States corporations as
defined below. To be included in the 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 (the "Exchange"), American Stock Exchange or the NASDAQ/NMS; and
3. its market value must place it among the second 1,000 such companies as
measured by market capitalization (i.e., from the company with a rank of
1,001 through the company with a rank of 2,000). A particular stock's
weighting in the Index is based on that stock's relative total market value
(i.e., its market price per share times the number of shares outstanding, for
all classes of shares), divided by the total market value of the Index. As of
February 15, 1995, the aggregate market capitalization of the Index was
approximately $359 billion.
- -----------------------------------------
SCHWAB DEVELOPED AND MAINTAINS THE INDEX.
- -----------------------------------------
The Index was developed in 1993 and will be maintained by Schwab to represent
the price and dividend performance (total return) of Small-Cap Issuers and serve
as a standard of comparison for the Fund's performance. Schwab receives no
compensation from the Fund for maintaining the Index.
- ------------------------------------------------------------
SCHWAB CALCULATES AND REPORTS THE INDEX'S PERFORMANCE DAILY.
- ------------------------------------------------------------
The Index's performance (i.e., the market value of all Index Stocks) is
calculated and made available each Business Day by Schwab. The total return of
the Index is computed monthly (using beginning of month capitalization
weightings and assuming reinvestment of dividends) and may be reported from
10
<PAGE> 39
time to time to Fund shareholders. Schwab will use its best efforts to select
companies for inclusion in the Small-Cap Index which meet the above criteria.
- ---------------------------------------------------------
SCHWAB PERIODICALLY UPDATES THE COMPOSITION OF THE INDEX.
- ---------------------------------------------------------
Schwab will review and, as necessary, revise the list of Small-Cap Issuers whose
securities are included in the Index at least semi-annually. Companies known by
Schwab to meet or no longer meet the inclusion criteria will be added or deleted
as appropriate. Schwab will also modify the Index as necessary to account for
corporate actions (e.g., new issues, repurchases, stock dividends/splits, tender
offers, mergers, swaps, spin-offs or Chapter 11 bankruptcy filings made because
of a company's inability to continue operating as a going concern). Schwab may
change the Index's inclusion criteria should it determine that doing so would
cause the Index to be more representative of the domestic equity market. In the
future, the Trust's Board of Trustees, subject to shareholder approval, may
select another index should it decide that taking such action would be in the
best interests of Fund shareholders.
MANAGEMENT OF THE FUND
Responsibility for overall management of the Fund rests with the trustees and
officers of the Trust. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. In addition to maintaining the
Index and providing day-to-day management of the Fund, the Investment Manager
provides general investment advice regarding the Fund's investment strategies,
and performs expense management, accounting and record keeping, and other
administrative services necessary to the operation of the Fund. The Investment
Manager, formed in 1989, is a wholly-owned subsidiary of The Charles Schwab
Corporation and is the investment adviser and administrator of the
SchwabFunds(R) family of 18 mutual funds. As of June 15, 1995, SchwabFunds had
aggregate net assets of approximately $27 billion.
Pursuant to separate agreements, Charles Schwab & Co., Inc., 101 Montgomery
Street, San Francisco, CA 94104, serves as shareholder services agent and
transfer agent for the Fund ("Schwab" or the "Transfer Agent"). Schwab provides
information and services to shareholders, which include reporting share
ownership, sales and dividend activity (including associated tax consequences),
responding to daily inquiries, effecting the transfer of the Fund's shares, and
facilitating effective cash management of shareholders' account balances. It
furnishes such office space and equipment, telephone facilities, personnel and
informational literature distribution as is necessary and appropriate to provide
the described shareholder and transfer agency information and services. Schwab
is also the Fund's distributor, but receives no compensation for its services as
such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 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 January 31, 1995 was the
11
<PAGE> 40
beneficial owner of approximately 21.7% of its outstanding shares. Mr. Schwab
may be deemed to be a "controlling person" of Schwab and the Investment Manager.
FEES AND EXPENSES
- --------------------------------------------------------------------------------
THE INVESTMENT MANAGER AND SCHWAB GUARANTEE THAT TOTAL FUND OPERATING EXPENSES
WILL NOT EXCEED 0.59% OF THE FUND'S AVERAGE DAILY NET ASSETS
THROUGH AT LEAST JUNE 30, 1996.
- --------------------------------------------------------------------------------
Pursuant to its Investment Advisory and Administration Agreement with the Trust,
the Investment Manager receives from the Fund 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 has
agreed to waive the Fund's management fee in excess of 0.30% of the Fund's
average daily net assets through at least June 30, 1996. In addition, the
Investment Manager and Schwab guarantee that total fund operating expenses will
not exceed 0.59% of the Fund's average daily net assets through at least June
30, 1996. The effect of these guarantees is to maintain or lower the Fund's
expenses and thus maintain or increase the Fund's total return to shareholders.
For the fiscal period from December 3, 1993 (commencement of operations) to
October 31, 1994, the Fund paid annualized investment management fees of 0.29%
and annualized total operating expenses of 0.67% of average net assets.
For the transfer agency and shareholder services provided under its Transfer
Agency and Shareholder Service Agreements with the Trust, Schwab receives an
annual fee, payable monthly, of 0.05% and 0.20%, respectively, of the Fund's
average daily net assets. State Street Bank and Trust Company is the Fund's
Custodian.
The Trust pays the expenses of its operations, including the fees and expenses
of independent auditors, counsel and custodian, and the costs of calculating net
asset values, brokerage commissions or transaction costs, taxes, registration
fees, and the fees and expenses of qualifying the Trust and its shares for
distribution. The expenses will generally be allocated among the Trust's
investment portfolios or series on the basis of relative net assets at the time
of allocation. However, expenses directly attributable to a particular Fund will
be charged to that Fund.
PORTFOLIO BROKERAGE. When placing orders for the Fund's securities transactions,
the Investment Manager will use its judgment to obtain 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 Fund's
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.
12
<PAGE> 41
DISTRIBUTIONS AND TAXES
- -------------------------------------------------
THE FUND WILL DECLARE AND PAY DIVIDENDS ANNUALLY.
- -------------------------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund intends to distribute substantially
all of its net investment income and net capital gains, if any, on an annual
basis, as determined by the Board of Trustees. All distributions will be
automatically reinvested in additional shares of the Fund unless the shareholder
elects otherwise.
TAX INFORMATION. The Fund is treated as a separate entity for tax purposes, has
elected to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), qualified as such,
and intends to continue to so qualify. In order to so qualify, the Fund will
distribute substantially all of its net investment income and net capital gains
to shareholders on an annual basis, and will meet certain other requirements. So
long as it meets these and certain minimum distribution requirements, the Fund
will not be liable for federal income tax on the amount of its earnings that are
distributed.
Dividends paid by the Fund from net investment income and distributions from the
Fund's net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, generally will be taxable as
ordinary income. For corporate investors in the Fund, dividend distributions
designated by the Fund 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 Fund were a regular corporation.
Distributions received from the Fund 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 has
owned shares in the Fund.
Any loss on the sale or exchange of the Fund's shares held for six months or
less shall be treated as a long-term capital loss to the extent of any long-term
capital gain distribution received on the shares. If a shareholder is not
subject to federal income tax, the shareholder will not generally be taxed on
amounts distributed by the Fund.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' Schwab account statements. The Fund will notify
shareholders at least annually as to the nature of all distributions made during
the taxable year.
The foregoing is only a brief summary of the federal income tax considerations
affecting the Fund and its shareholders. Accordingly, a potential investor
should consult his or her tax adviser with specific reference to the
shareholder's own tax situation.
SHARE PRICE CALCULATION
- ------------------------------------------------
THE FUND SELLS ITS SHARES FREE OF SALES CHARGES.
- ------------------------------------------------
The price of the Fund's shares on any given day is its "net asset value" or NAV.
This amount is computed by dividing the total market value of the Fund's
investments and other assets on that day, less any liabilities, by the number of
shares outstanding. The net asset value per share of the Fund is
13
<PAGE> 42
determined, on each day the Exchange is open for trading (a "Business Day"), at
4:00 p.m., Eastern time. The Fund's net asset value will fluctuate and Fund
shares are not insured against reduction in net asset value. (See "Share Price
Calculations" in the Statement of Additional Information.)
The securities in which the Fund invests will be valued daily based on such
securities' market value. Each security held by the Fund 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 recently 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.
HOW THE FUND SHOWS PERFORMANCE
- -------------------------------------------------
THE FUND'S PERFORMANCE MAY BE ADVERTISED IN TERMS
OF TOTAL RETURN.
- -------------------------------------------------
From time to time the Fund may advertise its total return. Performance figures
are based upon historical results and are not intended to indicate future
performance.
The 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 Securities and Exchange Commission.
Other reported total return figures may differ. For example, such figures may
report non-standard periods or represent aggregate or cumulative return over a
stated length of time.
The Fund's performance may be compared to that of other mutual funds tracked by
mutual fund rating services, various indices of investment performance
(including the Schwab 1000 Index(R), the Schwab Small-Cap Index(TM), the Schwab
International Index(TM), the Standard & Poor's 500 Index(R), and the Standard &
Poor's Small-Cap 600 Index), United States Treasury obligations, bank
certificates of deposit, the Consumer Price Index, and other investments for
which reliable performance data is available. The Fund's performance may also be
compared to averages, performance rankings, or other information prepared by
Lipper Analytical Services, Inc. and Morningstar, Inc.
Additional performance information is included in the Fund's Annual Report to
Shareholders, which you may obtain free of charge by calling 800-2 NO-LOAD or
from your local Schwab office.
14
<PAGE> 43
TAX-ADVANTAGED RETIREMENT PLANS
- ----------------------------------------------------------------
RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGES AND THE FUND MAY
BE AN ESPECIALLY SUITABLE INVESTMENT FOR THEM.
- ----------------------------------------------------------------
Schwab offers tax-advantaged retirement plans for which the Fund may be a
particularly appropriate investment. Schwab's retirement plans allow
participants to defer taxes while helping them build their retirement savings.
SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab IRAs 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. 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 Keogh Plans are currently charged an annual fee of $45.
SCHWAB CORPORATE RETIREMENT PLANS. A well-designed retirement program can 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.
GENERAL INFORMATION
ABOUT THE TRUST. 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 investment portfolios or series ("Series").
Currently only shares of this Series and the Schwab International Index Fund(TM)
are offered. The Board of Trustees may authorize the issuance of shares of
additional Series if deemed desirable. Shares of each Series will have equal
noncumulative voting rights and equal rights as to dividends, assets and
liquidation of such Series.
The Trust is not required to hold annual shareholders' meetings and does not
intend to do so. It will, however, hold special meetings as required or deemed
desirable by the Board of Trustees for such purposes as electing or removing
trustees, changing fundamental policies, or approving an investment advisory
agreement. Shareholders will vote by Series and not in the aggregate (for
example, when voting to approve the investment advisory agreement), except when
voting in the aggregate is permitted under the 1940 Act, such as for the
election of trustees.
15
<PAGE> 44
SHAREHOLDER GUIDE
- -------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE SHAREHOLDER
SERVICE AND INFORMATION.
- -------------------------------------------------------
SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
exchange requests at any one of over 200 Schwab offices nationwide or by calling
800-2 NO-LOAD, 24 hours a day, where trained representatives are available to
answer questions about the Fund and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmations of such instructions and tape
recording telephone transactions.
HOW TO PURCHASE SHARES
- ---------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND THROUGH A SCHWAB BROKERAGE,
SCHWAB ONE(R), IRA, TRUST OR KEOGH ACCOUNT.
- ---------------------------------------------------------------
PURCHASING SHARES THROUGH A SCHWAB ACCOUNT. You may purchase shares of the Fund
through an account maintained with Schwab, and payment for shares must be made
directly to Schwab. You must have funds available in your Schwab account in
order to purchase shares. Schwab accounts are currently free of maintenance
fees, although there may be charges for Schwab One accounts, Schwab IRAs and
Keogh plans. (See "Summary of Expenses.") The Securities Investor Protection
Corporation ("SIPC") will provide account protection, in an amount up to
$500,000, for securities, including Fund shares that you hold in a Schwab
account. Of course, SIPC account protection does not protect shareholders from
share price fluctuations.
If you already have a Schwab account, you may purchase shares in the Fund
through one of the methods described below, and you do not need to complete a
new Schwab account application or open a new account.
If you do not presently maintain a Schwab account and wish to establish one,
simply complete a Schwab account application (available by calling 800-2
NO-LOAD, 24 hours a day or by contacting your local Schwab office) and mail or
deliver it to your local Schwab office. You may also mail the application to
Schwab at 101 Montgomery Street, San Francisco, CA 94104. Corporations and other
organizations should call their local Schwab office to determine which
additional forms may be necessary to open a Schwab account.
You may deposit funds into your Schwab account by check, wire or many other
forms of electronic funds transfer (securities may also be deposited). All
deposit checks should be made payable to Charles Schwab & Co., Inc. If you would
like to wire funds into your existing Schwab account, please contact your local
Schwab office for instructions.
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<PAGE> 45
PURCHASING SHARES THROUGH THE CHARLES SCHWAB TRUST COMPANY. You may also
purchase shares of the Fund though an account maintained with The Charles Schwab
Trust Company (the "Trust Company"). Payment for any such shares must be made
directly to the Trust Company and you must have funds available in your account
to purchase shares of the Fund. Contact a Trust Company representative for more
information.
- -------------------------------------
MINIMUM FUND INVESTMENT REQUIREMENTS.
- -------------------------------------
YOUR INITIAL INVESTMENT IN THE FUND MAY BE AS LOW AS $1,000. ADDITIONAL SHARE
PURCHASES CAN BE MADE FOR AS LITTLE AS $100. Your initial investment in the Fund
may be as low as $1,000 ($500 for custodial accounts, Individual Retirement
Accounts and certain other retirement plans). The minimum subsequent investment
is $100. These requirements may be reduced or waived on certain occasions. (See
"Purchase and Redemption of Shares" in the Statement of Additional Information.)
SHARES WILL BE PURCHASED AFTER YOU HAVE FUNDS AVAILABLE IN YOUR ACCOUNT. You
must have funds available in your account in order to purchase shares. If funds
(including those which are transmitted by wire) are received before the time the
Fund's daily net asset value is calculated (normally 4:00 p.m. Eastern time),
the order will be executed at the next determined net asset value. Orders
received after that time will be executed at the next determined net asset
value, generally the next Business Day. (See "Share Price Calculation.")
METHODS OF PURCHASING SHARES. Schwab offers you several convenient ways to
purchase shares of the Fund. You may choose the one that works best for you and
Schwab will confirm execution of your purchase order.
BY PHONE:
You may use existing funds in your Schwab account to make initial and
subsequent share purchases. To place your order, call your local Schwab office
during regular business hours or 800-2 NO-LOAD, 24 hours a day.
BY MAIL:
You may direct that funds already in your Schwab account be used to make
initial and subsequent share purchases. Alternatively, your purchase
instructions may be accompanied by a check made out to Charles Schwab & Co.,
Inc. which will be deposited into your Schwab account and used, as necessary,
to cover all or part of your purchase order.
Written purchase orders (along with any checks) should be mailed to your local
Schwab office, or to Schwab at 101 Montgomery Street, San Francisco, CA 94104
and should contain the following information:
- your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);
- the name of the fund and the dollar amount of shares you would like
purchased; and
- (initial share purchases only) a selection of one of the distribution
options listed on the following page.
17
<PAGE> 46
IN PERSON AT A SCHWAB OFFICE:
Visit your local Schwab office where a representative will be happy to assist
you.
AUTOMATIC INVESTMENT:
Once you have satisfied the initial investment requirements, you may authorize
Schwab to automatically purchase shares at intervals and in amounts
pre-selected by you on your behalf. (See "Schwab Automatic Investment Plan.")
YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS. You may select from the three
distribution options listed below when you first become a shareholder in the
Fund. If you already are a shareholder and wish to change your distribution
option, please call your local Schwab office for assistance.
AUTOMATIC REINVESTMENT: Both income dividends and any capital gains
distributions will be reinvested in additional shares. This option will be
selected automatically unless you specify another option;
CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in cash
and any capital gain distributions will be reinvested in additional shares; or
ALL CASH: Dividends and any capital gain distributions will both be paid in
cash.
Dividends and distributions subject to reinvestment will be invested at the net
asset value next determined after their record date. Cash distributions will be
credited to your Schwab account and will be held there or mailed to you
depending on the standing instructions applicable to your account. For
information on how to wire funds from a Schwab account to a bank, see "Other
Important Information--Wire Transfers to Your Bank."
OTHER PURCHASE INFORMATION. The Fund reserves the right in its sole discretion,
and without prior notice to shareholders, to withdraw or suspend all or any part
of the offering made by this Prospectus, to reject purchase orders or to change
the minimum investment requirements. All orders to purchase shares of the Fund
are subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing. Any purchase which would result in a single shareholder
owning shares with a value of more than 10% of a Fund's assets or $3 million,
whichever is greater, are subject to prior approval by the Fund. Schwab will
charge a $15 service fee against an investor's Schwab account if his or her
investment check is returned because of insufficient or uncollected funds or a
stop payment order.
HOW TO EXCHANGE SHARES
- ------------------------------------------------
FUND SHARES MAY BE EXCHANGED FOR SHARES OF OTHER
FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
- ------------------------------------------------
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 redemption
18
<PAGE> 47
of shares at the net asset value next determined after receipt by the Transfer
Agent of an exchange request (on the same day as the Transfer Agent received
your request, 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 (on the same day as the Transfer
Agent received your request, 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). 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 Fund reserves
the right on 60 days' written notice to modify, limit or terminate the exchange
privilege.
METHODS OF EXCHANGING SHARES.
BY PHONE:
To exchange between funds by telephone, please call your local Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day. Investors
should be aware that telephone exchanges may be difficult to implement during
periods of drastic economic or market changes. Shareholders who experience
difficulties in exchanging shares by telephone can mail their exchange
requests or make them in person as set forth below.
To properly process your telephone exchange request we will need the following
information:
- your Schwab account number and your name for verification;
- the number of shares of the fund to be exchanged; and
- the name of the fund into which shares are to be exchanged.
BY MAIL:
You may also request an exchange by writing your local Schwab office, or
writing to Schwab at 101 Montgomery Street, San Francisco, CA 94104.
To properly process your exchange request we will need a letter from you
which:
- references your Schwab account number;
- specifies that you would like to exchange shares from the Fund;
- describes the number of fund shares to be exchanged;
- indicates the name of the fund into which shares are to be exchanged
and the distribution option you select; and
- is signed by at least one of the registered Schwab account holders (in
the exact form specified in the account).
IN PERSON AT A SCHWAB OFFICE:
You can also request an exchange in person at your local Schwab office.
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<PAGE> 48
HOW TO REDEEM SHARES
- ------------------------------------------------------------
REDEMPTION PROCEEDS WILL BE CREDITED TO YOUR SCHWAB ACCOUNT.
YOU MAY ELECT TO HAVE THEM MAILED TO YOU.
- ------------------------------------------------------------
THE PRICE AT WHICH SHARES WILL BE REDEEMED. The Fund will redeem shares at the
net asset value per share next determined after receipt by the Transfer Agent of
proper redemption instructions as set forth below and on the following page.
EARLY WITHDRAWAL FEE PAID TO THE FUND. The Fund is meant to be a long-term
investment. Frequent trading in Fund shares by short-term investors increases
the Fund's costs. To offset the costs of short-term trading and to ensure that
long-term investors do not bear these costs, the Fund assesses a 0.50% (one half
of one percent) early withdrawal fee upon redemption or exchange proceeds
attributable to shares purchased and held less than six months. To benefit Fund
shareholders directly, the early withdrawal fee is paid directly to the Fund and
does not apply to the redemption or exchange of shares acquired through
reinvestment of dividends or capital gains. Solely for purposes of calculating
the amount (if any) of the early withdrawal fee, shares will be treated as
redeemed on a "first-in, first-out basis," except that shares acquired through
dividend reinvestment will be treated as redeemed first. This method of
calculating the fee should result in the lowest total early withdrawal fee.
Under certain special circumstances, Schwab may provide reimbursement of this
fee to qualifying pension plans. Call your Schwab representative for more
information.
PAYMENT OF REDEMPTION PROCEEDS. Payment for redeemed shares will be credited
directly to your Schwab account no later than seven days after the Transfer
Agent receives your redemption instructions in proper form. Redemption proceeds
will then be held there or mailed to you depending on the account standing
instructions you selected. For information on how to wire funds from your Schwab
account to your bank, see "Other Important Information--Wire Transfers to Your
Bank."
If you purchased shares by check, your redemption proceeds may be held in your
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
Exchange is restricted, the Exchange is closed for any reason other than its
customary weekend or holiday closings, emergency circumstances as determined by
the Securities and Exchange Commission (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.)
METHODS OF REDEEMING SHARES.
BY PHONE:
You may redeem your shares by telephone by calling your local Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day. Investors
should be aware that telephone
20
<PAGE> 49
redemption may be difficult to implement during periods of drastic economic or
market changes. Shareholders who experience difficulties in redeeming by
telephone can mail their redemption orders or place them in person as set
forth below.
Telephone redemption orders received prior to 4:00 p.m. (Eastern time) on any
Business Day, once they have been verified as to the caller's identity and
account ownership by the Transfer Agent, will be deemed to have been received
by the Transfer Agent on that day.
BY MAIL:
Redemption orders can also be delivered through the mail. Mailed redemption
orders should be addressed to your local Schwab office or to Schwab at 101
Montgomery Street, San Francisco, CA 94104. Once a redemption request is
mailed it is irrevocable and may not be modified or canceled.
To properly process your redemption order we will need a letter from you which
contains the following information:
- your Schwab account number;
- the name of the fund and the number of fund shares to be redeemed; and
- a signature of one or more of the registered Schwab account holders
(in the exact form specified in the account).
IN PERSON AT A SCHWAB OFFICE:
You can also place your redemption order in person at your local Schwab
office.
SCHWAB AUTOMATIC INVESTMENT PLAN
- -------------------------------------------------------------------
THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST, CONVENIENT WAY
TO MAKE REGULAR INVESTMENTS IN THE FUND.
- -------------------------------------------------------------------
Schwab offers an Automatic Investment Plan ("AIP") that allows you to make
periodic investments in non-money market SchwabFunds (and certain other funds
available through Schwab) automatically and conveniently. AIP can be used as a
dollar cost averaging program that saves you time and expense associated with
writing checks or wiring funds.
INVESTMENT MINIMUMS: You can make automatic investments in any amount, from $100
to $50,000, once you meet the Fund's investment minimum.
INVESTMENT METHODS: Automatic investments are made from your Schwab account and
you may select from several different investment methods (sources of funds) to
make automatic investment(s):
a. USING FUNDS IN A SCHWAB ACCOUNT: You can make automatic investments by
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. If you elect to use these funds to make your automatic
investments, cash in your Schwab account will be used to make the
investment and, if necessary, shares of your Schwab Money Fund will be
redeemed to cover the balance of the purchase.
21
<PAGE> 50
b. USING THE SCHWAB MONEYLINK(R) TRANSFER SERVICE FOR:
- "Authorized Transfers" from a bank checking or savings account;
- "Direct Deposit" of payroll or government checks (all or a portion).
Authorized Transfers (transfers from a bank checking or savings account) and
Direct Deposit (automatic deposit of all or a portion of a payroll or government
check) are two of the investment method options which are made available through
the Schwab MoneyLink Transfer(R) Service ("MoneyLink"). MoneyLink transfers
money into your Schwab account and automatic investments can be made using these
funds.
If you elect to use Authorized Transfers and/or Direct Deposit for your
automatic investments, you will select two dates: a transfer date (when the
money is transferred into your Schwab account) and your investment date. The
automatic investment date selected may be the same day of your Direct Deposit or
Authorized Transfers. Schwab recommends that your investment date be on or close
to the transfer/deposit date to minimize uninvested cash in your Schwab account.
If you make changes to your Authorized Transfer or Direct Deposit date, it may
also be necessary to change your automatic investment date to coincide with the
new transfer/deposit date.
INVESTMENT FREQUENCY: You can select the frequency of your automatic investments
(twice monthly, monthly or quarterly) and choose either the 5th or the 20th of
the month for your automatic investment dates. Quarterly investments are made on
the date selected in the first month of each quarter (January, April, July and
October).
CHANGING INSTRUCTIONS TO AN ALREADY ESTABLISHED PLAN: If you want to change the
fund(s) selected for your AIP, you may do so by calling your local branch or
800-2 NO-LOAD, 24 hours a day, or by sending written instructions clearly
outlining the changes to: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104. Written notification must include the following:
1. The funds with AIP that you want to cancel;
2. The newly selected fund(s) in which you want to begin making automatic
investments, the amount to be invested in each fund and the distribution
option selected;
3. The investment frequency and investment dates for your new automatic
investments.
Information on changing Authorized Transfer and Direct Deposit instructions is
included in the Automatic Investment Plan Terms and Conditions brochure which
you will receive after enrolling in AIP.
TERMINATING YOUR AUTOMATIC INVESTMENT PLAN. If you wish to terminate your AIP,
you may call your local branch or 800-2 NO-LOAD, 24 hours a day, or send written
instructions to Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.
NOTE: Your Authorized Transfers and/or Direct Deposit will not automatically
terminate when you cancel your AIP investments.
22
<PAGE> 51
TERMINATING AUTHORIZED TRANSFERS AND DIRECT DEPOSIT. If you wish to terminate
your Authorized Transfers, you may do so at any time by notifying Schwab in
writing. You must notify your employer or government agency to cancel Direct
Deposit.
IMPORTANT: If you are canceling your Authorized Transfers and/or Direct Deposit
and you wish to cancel your AIP, you must also provide instructions stating that
Schwab should cancel your AIP. You may notify Schwab by sending written
instructions to the address above or telephoning your local branch or 800-2
NO-LOAD, 24 hours a day. Your automatic investments will continue using Schwab
account assets if Schwab does not receive notification to terminate your
automatic investments as well.
TO AVOID PROCEDURAL DIFFICULTIES, SCHWAB SHOULD RECEIVE INSTRUCTIONS TO CHANGE
OR TERMINATE YOUR AIP OR AUTHORIZED TRANSFERS AT LEAST TEN DAYS PRIOR TO YOUR
SCHEDULED INVESTMENT DATE.
ADDITIONAL INFORMATION. This information is only a summary of the Automatic
Investment Plan Terms and Conditions brochure which you will receive if you
choose to enroll in AIP. Please read it carefully and keep it for future
reference.
OTHER IMPORTANT INFORMATION
MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, the Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of the shareholder's account drops below the Fund's $500 ($250 in the case
of custodial accounts, IRAs and other retirement plans) minimum balance
requirement. Shareholders will be notified in writing 30 days before such action
is taken to allow them to increase their holdings to at least the minimum level.
Also note that, because they can only be held in Schwab accounts, shares of the
Fund will be automatically redeemed if the Schwab account in which the shares
are carried is closed.
CONSOLIDATED MAILINGS. In an effort to reduce mailing costs, the Fund
consolidates shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write SchwabFunds at 101
Montgomery Street, San Francisco, CA 94104, to that effect.
WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
will be wired from your Schwab account to your bank account. Call your local
Schwab office for additional information on wire transfers. A $15 bank-wire
service fee will be charged against your Schwab account for each wire sent.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
BEING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23
<PAGE> 52
SCHWAB SMALL-CAP
INDEX FUND(TM)
Prospectus February 28, 1995,
as amended June 30, 1995
SchwabFunds(R)
101 Montgomery Street
San Francisco, California 94104
2015-4 (7/95) CRS 6677 Printed on recycled paper.
SchwabFunds(R)
<PAGE> 53
SCHWAB 1000 FUND(R)
- --------------------------------------------------------------------------------
PROSPECTUS December 30, 1994, as amended June 30, 1995
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Call your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD 24 hours a day. The Schwab
1000 Fund(R) (the "Fund") attempts to match the price and dividend performance
(total return) of common stocks of United States companies as represented by the
Schwab 1000 Index(R) (the "Index"), an index composed of the common stocks of
the 1,000 largest United States corporations (excluding investment companies).
The Fund is a diversified investment portfolio of Schwab Investments (the
"Trust"), a no-load, open-end, management investment company.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. This Prospectus may be available via electronic
mail. For a free paper copy of this Prospectus call 800-2 NO-LOAD. You can find
more detailed information about the Fund in the Trust's Statement of Additional
Information dated December 30, 1994, as amended June 30, 1995 (and as further
amended from time to time), and filed with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated by reference
into this Prospectus, and may be obtained without charge by contacting Schwab at
800-2 NO-LOAD, 24 hours a day, or 101 Montgomery Street, San Francisco, CA
94104.
TABLE OF CONTENTS
<TABLE>
<S> <C>
KEY FEATURES OF THE FUND...................................................... 2
SUMMARY OF EXPENSES........................................................... 3
FINANCIAL HIGHLIGHTS.......................................................... 5
MATCHING THE FUND TO YOUR INVESTMENT NEEDS.................................... 6
INVESTMENT OBJECTIVE AND POLICIES............................................. 6
THE SCHWAB 1000 INDEX......................................................... 9
MANAGEMENT OF THE FUND........................................................ 10
DISTRIBUTIONS AND TAXES....................................................... 11
SHARE PRICE CALCULATION....................................................... 12
HOW THE FUND SHOWS PERFORMANCE................................................ 13
TAX-ADVANTAGED RETIREMENT PLANS............................................... 13
GENERAL INFORMATION........................................................... 14
SHAREHOLDER GUIDE............................................................. 15
HOW TO PURCHASE SHARES...................................................... 15
HOW TO EXCHANGE SHARES...................................................... 17
HOW TO REDEEM SHARES........................................................ 18
SCHWAB AUTOMATIC INVESTMENT PLAN.............................................. 20
OTHER IMPORTANT INFORMATION................................................... 22
</TABLE>
- --------------------------------------------------------------------------------
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.
<PAGE> 54
KEY FEATURES OF THE FUND
PERFORMANCE. The investment objective of the Fund is to match the price and
dividend performance (total return) of the Schwab 1000 Index(R), an index
created by Schwab to represent the performance of the public market for common
stocks of United States companies. (See "The Schwab 1000 Index.") The Fund,
which is a diversified investment portfolio of the Trust, an open-end management
investment company, invests primarily in the securities of companies represented
in the Index. (See "Investment Objective and Policies.")
REDUCED RISK THROUGH DIVERSIFICATION. The Fund seeks to invest in substantially
all of the common stocks of the 1,000 companies that make up the Index. This
level of diversification reduces the risk associated with investments in
individual equity securities (typically, a decline in the value of individual
securities) because the Fund's investments will be spread over a wide range of
industries and common stock issues as opposed to being concentrated in a few
individual securities. (See "Investment Objective and Policies.")
LOW COST INVESTING. The Fund brings a low cost approach to investing with:
- no sales charges;
- an index fund management strategy designed to minimize overall
operating expenses; and
- Charles Schwab Investment Management, Inc. (the "Investment Manager")
and Schwab guarantee that the Fund's total fund operating expenses
will, at least through April 30, 1996, not exceed 0.49% of the Fund's
average daily net assets. (By way of comparison, according to
Morningstar, Inc., as of October 31, 1994 the total fund operating
expenses of the average U.S. equity fund exceeded 1.42% of its
average daily net assets.)
MINIMIZATION OF CURRENT CAPITAL GAINS TAX LIABILITY. The Fund's investment
policies are designed to minimize current capital gains tax liability. (See
"Distributions and Taxes.")
PROFESSIONAL MANAGEMENT. The Investment Manager currently provides investment
management services to SchwabFunds(R), a family of 18 mutual funds with
approximately $27 billion in assets as of June 15, 1995. (See "Management of the
Fund.")
SHAREHOLDER SERVICE. Schwab serves as the Fund's principal
underwriter/distributor, transfer agent, and shareholder service provider.
Schwab's professional representatives are available 24 hours a day to receive
your purchase, redemption, and exchange orders. Call your local Schwab office
during business hours or 800-2 NO-LOAD. As a discount broker, Schwab gives you
investment choices and lets you make your own decisions. Schwab has many
services that help you make the most informed investment decisions. (See "How to
Purchase Shares," "How to Exchange Shares," and "How to Redeem Shares.")
FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in amounts and at intervals that you select. You
avoid the inconvenience, delay and
2
<PAGE> 55
expense associated with checks or bank wires. To obtain more information about
the Automatic Investment Plan, refer to the "Schwab Automatic Investment Plan"
section in this Prospectus, visit or call your local Schwab office or call 800-2
NO-LOAD, 24 hours a day.
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their investment activity, including mutual funds, on one report.
NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can make purchase and redemption orders.
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases........................................................... None
Sales Load on Reinvested Dividends................................................ None
Deferred Sales Load............................................................... None
Early Withdrawal Fee(1)........................................................... 0.50%
Exchange Fee...................................................................... None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fee (after fee reductions)(2).......................................... 0.20%
12b-1 Fees........................................................................ None
Other Expenses (after fee reductions and expense reimbursements)(3)............... 0.29%
TOTAL FUND OPERATING EXPENSES(3), (4)............................................... 0.49%
</TABLE>
(1) Applies only to the redemption (including by exchange) of shares purchased
and held less than six months. The fee is paid to the Fund and is designed to
protect long-term investors from the cost of frequent investments and
redemptions by short-term investors. (See "How to Redeem Shares" and "How to
Exchange Shares.") Under certain special circumstances, Schwab may provide
reimbursement of this fee to qualifying pension plans. Call your Schwab
representative for more information.
(2) This amount has been restated to reflect a reduction by the Investment
Manager which is guaranteed through at least April 30, 1996. If there were no
reduction, the maximum management fee for the Fund would be 0.30% of the Fund's
average daily net assets.
(3) This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least April 30, 1996, the total fund
operating expenses for the Fund will not exceed 0.49% of the Fund's average
daily net assets. Without a similar guarantee which was in effect for the fiscal
year ended October 31, 1994, total fund operating expenses would have been 0.56%
of the Fund's average daily net assets.
(4) Schwab currently imposes no fees for opening and maintaining a Schwab
brokerage account. It is currently anticipated that 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
3
<PAGE> 56
fee will be waived if there has been one commissionable trade within the last
six months, if the account balance is below $35, 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 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.
EXAMPLE. You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$5 $16 $27 $ 62
</TABLE>
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. This example reflects the guarantee by the Investment Manager and
Schwab that the total fund operating expenses will not exceed the amount
specified for the time period referred to in note (3). ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of return
pursuant to requirements of the Securities and Exchange Commission. THIS
HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR
FUTURE PERFORMANCE.
4
<PAGE> 57
FINANCIAL HIGHLIGHTS
Set forth below is the table containing information as to income and capital
changes for a share outstanding for the periods indicated below. This
information has been audited by Price Waterhouse LLP, the Trust's independent
accountants, whose unqualified report appears with the financial statements in
the Statement of Additional Information.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE APRIL 2, 1991
FOR THE EIGHT MONTH FOR THE (COMMENCEMENT
YEAR ENDED PERIOD ENDED YEAR ENDED OF OPERATIONS) TO
AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991
---------- ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period... $ 12.80 $ 11.96 $ 11.26 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment income.................. .26 .17 .24 .15
Net realized and unrealized gain on
investments......................... .28 .79 .71 1.26
--------- ------- -------- ---------
Total from investment operations....... .54 .96 .95 1.41
LESS DISTRIBUTIONS
Dividends from net investment income... (.26) (.12) (.25) (.15)
Distributions from realized gain on
investments......................... -- -- -- --
---------- --------- -------- ---------
Total distributions.................... (.26) (.12) (.25) (.15)
---------- -------- -------- ---------
Net asset value at end of period......... $ 13.08 $ 12.80 $ 11.96 $ 11.26
========= ======== ======== =========
Total return (%)......................... 4.28 8.06 8.52 14.25
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s)....... $ 554,061 $515,272 $370,980 $ 192,206
Ratio of expenses to average net assets
(%)................................. .51 .45* .35 --*
Ratio of net investment income to
average net assets (%).............. 2.06 2.21* 2.45 3.21*
Portfolio turnover rate (%)............ 3 1 1 1
</TABLE>
Notes:
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
August 31, 1994, 1993, December 31, 1992 and 1991 would have been .56%, .49%*,
.52% and 1.05%*, respectively, and the ratio of net investment income to average
net assets would have been 2.01%, 2.17%*, 2.28% and 2.16%*, respectively.
On June 1, 1995, the sub-advisory agreement between Dimensional Fund Advisors
Inc. and the Investment Manager was terminated, and the Investment Manager
assumed sole responsibility for providing the Fund with investment advisory
services.
* Annualized.
5
<PAGE> 58
MATCHING THE FUND TO YOUR INVESTMENT NEEDS
The Fund may be appropriate for a variety of investment programs. While the Fund
is not a substitute for an investment portfolio tailored to an individual's
investment needs and ability to tolerate risk, it can be used as a broad-based
"core" equity investment around which to build your overall portfolio.
- ------------------------------------------------------------
THE FUND MAY BE ESPECIALLY SUITABLE FOR LONG-TERM INVESTORS.
- ------------------------------------------------------------
Because the Fund will ordinarily invest in a large number of common stocks, it
may be especially appropriate for investors, including those saving for
retirement or college, with long-term investment objectives. While common stock
prices tend to rise and decline for short or extended periods, historically they
have generally risen over the long-term. As a result, stocks have over time
historically provided many investors with higher returns than most alternative
securities investments.
INVESTMENT OBJECTIVE AND POLICIES
- ---------------------------------------------
THE FUND IS DESIGNED TO MATCH THE PERFORMANCE
OF THE SCHWAB 1000 INDEX.(R)
- ---------------------------------------------
The Fund is a diversified investment portfolio of the Trust, an open-end,
management investment company. The investment objective of the Fund is to
provide a total return that matches that of the Index, an index created to
represent the performance of publicly traded common stocks of United States
companies. The Fund's investment objective is fundamental and cannot be changed
without shareholder approval. While there is no assurance that the Fund will
achieve its investment objective, it will endeavor to do so by following the
investment policies set forth below.
- ---------------------------------------------------------
THE FUND WILL FOLLOW AN "INDEXING" OR "PASSIVE" STRATEGY.
- ---------------------------------------------------------
The Fund will follow an "indexing" or "passive" strategy under which stocks are
only purchased or sold in order to match the composition of the Index.
Accordingly, the Investment Manager will not select securities for the Fund's
investment portfolio based upon traditional economic, financial and market
analyses and/or forecasting.
- ---------------------------------------------------------------
THE FUND WILL BE MANAGED TO MINIMIZE COSTS AND TAX CONSEQUENCES
TO INCREASE SHAREHOLDERS' TOTAL RETURN.
- ---------------------------------------------------------------
The Fund is managed to offset capital gains with capital losses in order to
minimize the Fund's capital gains tax liability. This special feature of the
Fund can make a real difference in your after-tax return, especially if you're
in a high tax bracket.
The Fund has adopted a number of policies that should cause its portfolio
turnover rate to be below that experienced in many other mutual fund portfolios.
The Fund's portfolio turnover rate for the year ended August 31, 1994 was 3% and
for the eight-month period ended August 31, 1993, the year ended December 31,
1992, and for the period from April 2, 1991 (commencement of operations) to
December 31, 1991, was 1%. Lower portfolio turnover acts to minimize associated
transaction costs as well as the level of current realized capital gains.
Shareholders' current tax liability for capital gains should be reduced and
their total return increased by these policies.
6
<PAGE> 59
To reduce transaction costs and minimize shareholders' current capital gains tax
liability, the Fund's investment portfolio will not be automatically traded
(i.e., "rebalanced") to reflect changes in the Index. The Fund's trading
strategy is designed to further minimize transaction costs (e.g., the Fund will
generally only buy round-lots of stocks and may trade large blocks of
securities). These policies may cause a particular stock to be over- or
under-represented in the Fund relative to its Index weighting or result in its
continued ownership by the Fund after its deletion from the Index, thereby
reducing the correlation between the Fund and the Index. However, given the
diversified nature of the Fund, the Investment Manager does not expect that
these potential deviations will significantly impact the correlation between
Fund and Index performance. Moreover, the Investment Manager will only engage in
these practices to the extent that they do not have a material effect on the
Fund's ability to approximate the performance of the Index.
- -------------------------------------------------------------------
THE FUND WILL ATTEMPT TO BE SUBSTANTIALLY INVESTED IN INDEX STOCKS.
- -------------------------------------------------------------------
The Fund will attempt to invest substantially all its assets in stocks that
comprise the Index ("Index Stocks") and under normal market conditions, will
invest at least 80% of its total assets in Index Stocks. The Fund, however, is
not required to buy or sell securities solely because the percentage of its
assets invested in Index Stocks changes when the market value of its holdings
increases or decreases. In addition, the Fund may omit or remove an Index Stock
from its portfolio if the Investment Manager believes the stock to be
insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions.
Moreover, to avoid any potential conflict of interest, the Fund will not
purchase securities of issuers with which it is affiliated (including The
Charles Schwab Corporation). To compensate for any Index Stocks omitted or
removed from its investment portfolio, the Fund may purchase stocks not in the
Index (which would then be considered Index Stocks for purposes of the Fund's
policy regarding the percentage of its assets to be invested in Index Stocks) if
the Investment Manager believes that their market performance is likely to
replicate that of the Index Stocks they replace.
It is anticipated that the Fund will be able to invest in a majority of Index
Stocks. The Fund will generally select stocks by reference to their weighting in
the Index. Thus, the Fund intends that the percentage of its assets invested in
each Index Stock will approximate the weighting of that stock in the Index.
- ------------------------------------------------------------
THE FUND'S PERFORMANCE SHOULD APPROXIMATE THAT OF THE INDEX.
- ------------------------------------------------------------
While the Fund will not precisely match the Index's performance, the Fund will
attempt to maximize the correlation between its performance and that of the
Index. Factors such as the size of the Fund's portfolio, transaction costs,
management fees and expenses, brokerage commissions and fees, the extent and
timing of cash flows into and out of the Fund, the Fund's policy of minimizing
transaction costs and current capital gains tax liability, and changes in the
securities markets and the Index itself are expected by the Investment Manager
to account for any differences between the Fund's performance and that of the
Index.
7
<PAGE> 60
- ----------------------------------------------------------
THE FUND MAY PURCHASE SECURITIES ASIDE FROM COMMON STOCKS.
- ----------------------------------------------------------
In order to accommodate cash flows resulting from the purchase and sale of Fund
shares, the Fund may invest in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and certificates of deposit,
bankers' acceptances, commercial paper (which has been rated in one of the two
highest categories by a non-affiliated, nationally recognized statistical
ratings organization), enter into repurchase agreements collateralized by these
instruments, and purchase shares of other investment companies that primarily
invest in any of the just described securities. In the aggregate, no more than
10% of the Fund's total assets may be invested in other investment companies and
an investment in any one investment company will be limited to 5% of total Fund
assets. Because other investment companies employ an investment adviser, and
other service providers, such investments by the Fund may cause shareholders to
bear duplicative fees. The Investment Manager will charge no management fees
attributable to any Fund assets invested in other investment companies. (See
"Investment Restrictions" in the Statement of Additional Information.) The Fund
may also purchase futures contracts on stocks and stock indices, options
contracts (including options on futures contracts), equity index participations
and index participation contracts to accommodate cash flows or in anticipation
of taking a market position when, in the opinion of the Investment Manager,
available cash balances do not permit economically efficient Index Stock
purchases. Moreover, the Fund may sell futures and options to "close out"
futures and options it may have purchased or to protect against a decrease in
the price of securities it owns but intends to sell. The Fund will not invest
more than 5% of its total assets in equity index participations, and will not
enter into a futures contract if doing so would cause the sum of its initial
margin deposits on open futures contracts to exceed 5% of the value of its total
assets (see "Investment Securities" in the Statement of Additional Information),
and the value of all non-Index Stock investments may normally represent no more
than 20% of the Fund's total assets.
Because the Fund's futures and options practices are limited to hedging
purposes, the Investment Manager does not believe that the Fund is subject to
the degree of risk frequently associated with futures and options transactions.
However, three principal areas of risk are present when futures and options
contracts are used even in a hedging context. First, there may not always be a
liquid secondary market for a futures or option contract at the time when the
Fund seeks to "close out" its position. The Fund will seek to reduce the risk
that it will be unable to "close out" contracts by only entering into futures or
options contracts that are traded on national exchanges and for which there
appears to be a liquid secondary market. Second, it is also possible that
changes in the prices of futures or options contracts might correlate
imperfectly, or not at all, with changes in the market values of the stocks
being hedged. Finally, adverse market movements could cause the Fund to lose up
to its full investment in an options contract and/or to experience substantial
losses on an investment in a futures contract. However, barring such referenced
significant adverse market distortions, a similar result could be expected were
the Fund to invest directly in the securities being hedged. Of course, in a
given case, if the Investment Manager is incorrect in its forecast of interest
rates, market values, and other economic factors, the Fund would have been
better off without the hedge. There is also the risk of loss by the Fund of
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margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or option.
- ---------------------------------------------------------------
THE FUND MAY LEND ITS SECURITIES TO GENERATE ADDITIONAL INCOME.
- ---------------------------------------------------------------
To increase its income, the Fund may lend securities from its portfolio to
brokers, dealers and other financial institutions that borrow securities. No
more than one-third of the Fund's total assets may be represented by loaned
securities. The Fund's loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. Government securities equal at all times to 100%
of the loaned securities' market value plus accrued interest.
THE SCHWAB 1000 INDEX(R)
- -------------------------------------
THE INDEX HAS SET INCLUSION CRITERIA.
- -------------------------------------
To be included in the 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 (the "Exchange"), American Stock Exchange or the NASDAQ/NMS; and
3. its market value must place it among the top 1,000 such companies as measured
by market capitalization. A particular stock's weighting in the Index is
based on its relative total market value (i.e., its market price per share
multiplied by the number of shares outstanding), divided by the total market
value of the Index. As of December 15, 1994, the aggregate market
capitalization of the stocks of those companies which comprise the Index was
approximately $4.0 trillion.
- -----------------------------------------
SCHWAB DEVELOPED AND MAINTAINS THE INDEX.
- -----------------------------------------
The Index, which as of December 15, 1994 represented approximately 91% of the
total market value of all publicly traded United States companies, was developed
and will be maintained by Schwab to represent the total return of publicly
traded common stocks of United States companies and serve as a standard of
comparison for the Fund's performance. Schwab receives no compensation from the
Fund for maintaining the Index.
- ------------------------------------------------------------
SCHWAB CALCULATES AND REPORTS THE INDEX'S PERFORMANCE DAILY.
- ------------------------------------------------------------
The Index's performance (i.e., the market value of all Index Stocks) is
calculated and made available each Business Day by Schwab. The total return of
the Index is computed monthly (using beginning of month capitalization
weightings and assuming reinvestment of dividends) and may be reported from time
to time to Fund shareholders.
- ---------------------------------------------------------
SCHWAB PERIODICALLY UPDATES THE COMPOSITION OF THE INDEX.
- ---------------------------------------------------------
Schwab will review and, as necessary, revise the list of companies whose
securities are included in the Index at least semi-annually. Companies known by
Schwab to meet or no longer meet the inclusion
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criteria will be added or deleted as appropriate. Schwab will also modify the
Index as necessary to account for corporate actions (e.g., new issues,
repurchases, stock dividends/splits, tenders, mergers, swaps, spin-offs or
Chapter 11 bankruptcy filings made because of a company's inability to continue
operating as a going concern). Schwab may change the Index's inclusion criteria
should it determine that doing so would cause the Index to be more
representative of the domestic equity market. In the future, the Trust's Board
of Trustees, subject to shareholder approval, may select another index should it
decide that taking such action would be in the best interests of Fund
shareholders.
MANAGEMENT OF THE FUND
Responsibility for overall management of the Fund rests with the trustees and
officers of the Trust. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. In addition to maintaining the
Index and providing day-to-day portfolio management of the Fund, the Investment
Manager provides general investment advice regarding the Fund's investment
strategies, and performs expense management, accounting and recordkeeping, and
other administrative services necessary to the operation of the Fund. The
Investment Manager, formed in 1989, is a wholly-owned subsidiary of The Charles
Schwab Corporation and is the investment adviser and administrator of the
SchwabFunds(R), a family of 18 mutual funds. As of June 15, 1995, the
SchwabFunds had aggregate net assets of approximately $27 billion.
Pursuant to separate agreements, Charles Schwab & Co., Inc. ("Schwab" or the
"Transfer Agent"), 101 Montgomery Street, San Francisco, CA 94104, serves as
shareholder services and transfer agent for the Fund. Schwab provides
information and services to shareholders, which include reporting share
ownership, sales and dividend activity (and associated tax information),
responding to daily inquiries, and effecting the transfer of Fund shares, and
facilitating effective cash management of shareholder Schwab account balances.
It also furnishes such office space and equipment, telephone facilities,
personnel and informational literature distribution as is necessary and
appropriate in providing the described shareholder and transfer agency
information and services. Schwab is also the Fund's distributor, but receives no
compensation for its services as such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 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 and the Investment Manager, which was formed in 1989, are wholly-owned
subsidiaries of The Charles Schwab Corporation. Charles R. Schwab is the
founder, Chairman, 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.
Please see the Fund's Annual Report to Shareholders for the fiscal year ended
August 31, 1994 for a discussion by the Investment Manager of the Fund's
performance.
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FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from the Fund a
graduated annual fee, payable monthly, of 0.30% of the Fund's average daily net
assets not in excess of $500 million and 0.22% of such assets over $500 million.
The Investment Manager has agreed to waive the Fund's management fee in excess
of 0.20% of the Fund's average daily net assets through at least April 30, 1996.
In addition, the Investment Manager and Schwab guarantee that total fund
operating expenses will not exceed 0.49% of the Fund's average daily net assets
through at least April 30, 1996. This expense limit will serve to maintain or
lower the Fund's expenses and thus maintain or increase the Fund's total return
to shareholders. For the year ended August 31, 1994, the Fund paid investment
management fees of 0.30% and total operating expenses of 0.51% of the Fund's
average daily net assets.
For the transfer agency and shareholder services provided under its Transfer
Agency and Shareholder Service Agreements with the Trust, Schwab receives an
annual fee, payable monthly, of 0.05% and 0.20%, respectively, of the Fund's
average daily net assets. PNC Bank is the Fund's custodian (the "Custodian").
The Investment Manager, Schwab and the Custodian may each reduce its fees from
time to time.
The Trust pays the expenses of its operations, including the fees and expenses
of independent accountants, counsel and custodian, the costs of calculating net
asset values, brokerage commissions or transaction costs, taxes, registration
fees, and the fees and expenses of qualifying the Trust and its shares for
distribution. In addition, the Trust will incur and pay fees in connection with
the establishment and maintenance of "sweep" accounts through which the Funds
may make regular investments in other investment companies. The expenses will
generally be allocated among the Trust's investment portfolios on the basis of
relative net assets at the time of allocation. However, expenses directly
attributable to a particular Fund will be charged to that Fund.
PORTFOLIO BROKERAGE. When placing orders for the Fund's securities transactions,
the Investment Manager will use its judgment to obtain 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 Fund's
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.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------
THE FUND WILL DECLARE AND PAY DIVIDENDS ANNUALLY.
- -------------------------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund will distribute substantially all of
its net investment income and net capital gains, if any, on an annual basis, as
determined by the Trust's Board of Trustees.
The value of your shares reflects any net investment income or net capital gains
that the Fund has earned but not yet distributed, so their value will be reduced
when distributions are paid. If you elect to receive these distributions in
cash, the value of your Fund holdings as a whole will decrease. If you
11
<PAGE> 64
choose to reinvest your distributions, the reduced value of your shares will be
offset by the value of new shares purchased with reinvested distributions.
FEDERAL TAX INFORMATION. The Fund is treated as a separate entity for tax
purposes, has elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
qualified as such, and intends to continue to so qualify. In order to so
qualify, the Fund will distribute substantially all of its net investment income
and net capital gains to shareholders on an annual basis, and will meet certain
other requirements. So long as it meets these and certain minimum distribution
requirements, the Fund will not be liable for federal income tax on the amount
of its earnings that are distributed.
Dividends paid by the Fund from net investment income and distributions from the
Fund's net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, generally will be taxable as
ordinary income. For corporate investors in the Fund, dividend distributions
designated by the Fund 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 Fund were a regular corporation.
Distributions received from the Fund 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 Fund. However, if a shareholder receives a long-term capital gain
distribution with respect to Fund shares held for six months or less, any loss
on the sale or exchange of those shares shall, to the extent of the long-term
capital 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 Fund.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' Schwab account statements. The Fund will notify
shareholders at least annually as to the nature of all distributions made during
the taxable year, including amounts qualifying as dividends and capital gains
distributions.
The foregoing is only a brief summary of the federal income tax considerations
affecting the Fund and its shareholders. The discussion of taxes set forth above
is included for general information purposes only. Prospective investors in the
Fund should consult their tax advisers with specific reference to their own tax
situations.
SHARE PRICE CALCULATION
- ------------------------------------------------
THE FUND SELLS ITS SHARES FREE OF SALES CHARGES.
- ------------------------------------------------
The price of the Fund's shares on any given day is its "net asset value" or NAV.
For any given day, this figure is computed by dividing the total market value of
the Fund's investments and other assets on that day, less any liabilities, by
the number of Fund shares outstanding. The net asset value per share of the Fund
is determined on each day the Exchange is open for trading at 4:00 p.m., Eastern
time. The Fund's net asset value will fluctuate and Fund shares are not insured
against reduction in net asset value. (See "Share Price Calculation" in the
Statement of Additional Information.)
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<PAGE> 65
The Fund values its portfolio securities based on their market value. Each
security held by the Fund 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.
HOW THE FUND SHOWS PERFORMANCE
- ------------------------------------------------------------------
THE FUND'S PERFORMANCE MAY BE ADVERTISED IN TERMS OF TOTAL RETURN.
- ------------------------------------------------------------------
From time to time the Fund may advertise its total return. Performance figures
are based upon historical results and are not intended to indicate future
performance.
The 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 Securities and Exchange Commission.
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.
The Fund's performance may be compared to that of other mutual funds tracked by
mutual fund rating services, various indices of investment performance
(including the Index), United States Treasury obligations, bank certificates of
deposit, the Consumer Price Index, corporate bonds, and other investments for
which reliable performance data is available. The Fund's performance may also be
compared to averages, performance rankings, or other information prepared by
Lipper Analytical Services, Inc. and Morningstar, Inc.
Additional performance information is available in the Trust's Annual Report,
which is available free of charge by calling 800-2 NO-LOAD, or from your local
Schwab office.
TAX-ADVANTAGED RETIREMENT PLANS
- ------------------------------------------------------------
RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGES AND THE FUND
MAY BE AN ESPECIALLY SUITABLE INVESTMENT FOR THEM.
- ------------------------------------------------------------
Schwab offers tax-advantaged retirement plans for which the Fund may be a
particularly appropriate investment. Schwab's retirement plans allow
participants to defer taxes while helping them build their retirement savings.
SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab IRAs 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.
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<PAGE> 66
SCHWAB KEOGH. 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 Keogh plans are currently charged an annual fee of $45.
SCHWAB CORPORATE RETIREMENT PLANS. A well designed retirement program can 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.
GENERAL INFORMATION
ABOUT THE TRUST. The Trust was organized as a business trust under the laws of
Massachusetts on October 26, 1990 and may issue an unlimited number of shares of
beneficial interest in one or more investment portfolios or series ("Series").
Currently, shares of seven Series are offered. The Board of Trustees may
authorize the issuance of shares of additional Series if deemed desirable.
Shares of each Series will have equal noncumulative voting rights and equal
rights as to dividends, assets and liquidation of such Series.
The Trust is not required to hold annual shareholders' meetings and does not
intend to do so. It will, however, hold special meetings as required or deemed
desirable by the Board of Trustees for such purposes as electing or removing
trustees, changing fundamental policies, or approving an investment advisory
agreement. Shareholders will vote by Series and not in the aggregate (for
example, when voting to approve the investment advisory agreement), except when
voting in the aggregate is permitted under the Investment Company Act of 1940,
as amended, such as for the election of trustees.
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SHAREHOLDER GUIDE
- ------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE SHAREHOLDER
SERVICE AND INFORMATION.
- ------------------------------------------------------
SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
request exchanges at any one of over 200 Schwab offices nationwide or by calling
800-2 NO-LOAD, 24 hours a day, where trained representatives are available to
answer questions about the Funds and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmation of such instructions and tape
recording telephone transactions.
HOW TO PURCHASE SHARES
- ---------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND THROUGH A
SCHWAB, IRA, TRUST, OR KEOGH ACCOUNT.
- ---------------------------------------------
You may purchase shares of the Fund exclusively through an account maintained
with Schwab, and payment for shares must be made directly to Schwab. The
Securities Investor Protection Corporation ("SIPC") will provide account
protection, in an amount up to $500,000 for securities, including Fund shares
that you hold in a Schwab account. Of course, this SIPC account protection does
not protect shareholders from share price fluctuations.
If you already have a Schwab account, you may purchase shares in the Fund as
described below and need not open a new account.
If you do not presently maintain a Schwab account and wish to establish one,
simply complete a Schwab Account Application (available by calling 800-2
NO-LOAD, or contacting your local Schwab office) and mail or deliver it to your
local Schwab office. You may also mail the Application to Charles Schwab & Co.,
Inc. (at 101 Montgomery Street, San Francisco, CA 94104). Corporations and other
organizations should contact their local Schwab office to determine which
additional forms may be necessary to open a Schwab account.
You may deposit funds into your Schwab account by check, wire or many other
forms of electronic funds transfer (securities may also be deposited). All
deposit checks should be made payable to Charles Schwab & Co., Inc. If you would
like to wire funds into your existing Schwab account, please contact your local
Schwab office for instructions.
PURCHASING SHARES THROUGH THE CHARLES SCHWAB TRUST COMPANY. You may also
purchase shares of the Fund through an account maintained with The Charles
Schwab Trust Company (the "Trust Company"). Payment for any such shares must be
made directly to the Trust Company and you must have funds available in your
account to purchase shares of the Fund. Contact a Trust Company representative
for more information.
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- -------------------------------------------------------------
YOUR INITIAL FUND INVESTMENT MAY BE AS LOW AS $1,000.
ADDITIONAL SHARE PURCHASES CAN BE MADE FOR AS LITTLE AS $100.
- -------------------------------------------------------------
Your initial investment in the Fund may be as low as $1,000 ($500 for Individual
Retirement Accounts, certain other retirement plans and custodial accounts). The
minimum subsequent investment is $100. These requirements may be reduced or
waived on certain occasions. (See "Purchase and Redemption of Shares" in the
Statement of Additional Information.)
- -------------------------------------------------------
SHARES WILL BE PURCHASED AFTER YOU HAVE FUNDS AVAILABLE
IN YOUR SCHWAB ACCOUNT.
- -------------------------------------------------------
WHEN AND AT WHAT PRICE SHARES WILL BE PURCHASED. You must have funds available
in your Schwab account in order to purchase Fund shares. If funds (including
those transmitted by wire) are received by Schwab before the time the daily net
asset value is calculated (normally 4:00 p.m., Eastern time), they will be
available for investment on the day of receipt. If funds arrive after that time,
they will be available for investment the next Business Day. Orders to purchase
shares will be executed at the next determined net asset value after receipt by
Schwab's Mutual Fund Transfer Agency Department. Orders received after that time
will be executed at the next determined net asset value, generally the next
Business Day. (See "Share Price Calculation.")
METHODS OF PURCHASING SHARES. Schwab offers you several convenient ways to
purchase shares of the Fund. You may choose the one that works best for you and
Schwab will confirm execution of your purchase order.
BY PHONE:
You may use existing funds in your Schwab account to make initial and
subsequent share purchases. To place your order, call your local Schwab office
during its regular business hours or call 800-2 NO-LOAD, 24 hours a day.
BY MAIL:
You may direct that funds already in your Schwab account be used to make
initial and subsequent share purchases. Alternatively, your purchase
instructions may be accompanied by a check made out to Charles Schwab & Co.,
Inc. which will be deposited into your Schwab account and used, as necessary,
to cover all or part of your purchase order.
Written purchase orders (along with any checks) should be mailed to Charles
Schwab & Co., Inc. (at 101 Montgomery Street, San Francisco, CA 94104) or to
your local Schwab office and should:
- reference your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);
- specify the name of the fund and the dollar amount of shares you would
like purchased; and
- (initial share purchases only) select one of the distribution options
listed on the following page.
IN PERSON AT A SCHWAB OFFICE:
Visit your local Schwab office where a representative will be happy to assist
you.
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<PAGE> 69
AUTOMATIC INVESTMENT:
Once you have satisfied the initial investment requirement, you may authorize
Schwab to automatically purchase Fund shares (at intervals and in amounts
pre-selected by you) on your behalf. (See "Schwab Automatic Investment Plan.")
- -----------------------------------------------
YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS.
- -----------------------------------------------
SELECTING A DISTRIBUTION OPTION. You may select from the three distribution
options listed below when you first become a shareholder in the Fund. If you
already are a Fund shareholder and wish to change your distribution option,
please call your local Schwab office for assistance.
1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gains
distributions will be reinvested 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 subject to reinvestment will be invested at the net asset value
next determined after their record date. Cash distributions will be credited to
your Schwab account and will be held there or mailed to you, depending on the
account standing instructions applicable to your account. For information on how
to wire funds from your Schwab account to your bank, see "Other Important
Information--Wire Transfers to Your Bank."
OTHER PURCHASE INFORMATION. The Fund reserves the right in its sole discretion
and without prior notice to shareholders, to withdraw or suspend all or any part
of the offering made by this Prospectus, to reject purchase orders or to change
the minimum investment requirements. All orders to purchase shares of the Fund
are subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing. Schwab will charge a $15 service fee against an investor's
Schwab account should his or her investment check be returned because of
insufficient or uncollected funds or a stop payment order.
HOW TO EXCHANGE SHARES
- ------------------------------------------------
FUND SHARES MAY BE EXCHANGED FOR SHARES OF OTHER
FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
- ------------------------------------------------
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 redemption of shares at
the net asset value next determined after receipt by the Transfer Agent of an
exchange request (on the same day as the Transfer Agent received your request,
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
17
<PAGE> 70
shares involved in the exchange (on the same day as the Transfer Agent received
your request, 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). 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 Fund reserves the right on 60 days'
written notice to modify, limit or terminate the exchange privilege.
METHODS OF EXCHANGING SHARES.
BY PHONE:
To exchange between funds by telephone, please call your local Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day. Investors
should be aware that telephone exchanges may be difficult to implement during
periods of drastic economic or market changes.
To properly process your telephone exchange request we will need the following
information:
- your Schwab account number and your name for verification;
- the name of the fund from which you wish to exchange shares;
- the number of shares of the fund to be exchanged;
- the name of the fund into which shares are to be exchanged; and
- the distribution option you select.
BY MAIL:
You may also request an exchange by writing Charles Schwab & Co., Inc. (at 101
Montgomery Street, San Francisco, CA 94104) or your local Schwab office.
To properly process your mailed exchange request we will need a letter from
you which:
- references your Schwab account number;
- specifies the name of the fund from which you wish to exchange shares;
- describes the number of shares to be exchanged;
- indicates the name of the fund into which shares are to be exchanged;
- indicates the distribution option you select; and
- is signed by at least one of the registered Schwab account holders in
the exact form specified in the account.
IN PERSON AT A SCHWAB OFFICE:
You can also place an exchange request in person at your local Schwab office.
HOW TO REDEEM SHARES
THE PRICE AT WHICH SHARES WILL BE REDEEMED. The Fund will redeem shares at the
net asset value per share next determined after receipt by the Transfer Agent of
proper redemption instructions as set forth on the following pages.
EARLY WITHDRAWAL FEE PAID TO THE FUND. The Fund is meant to be a long-term
investment. Frequent trading in Fund shares by short-term investors increases
the Fund's costs. To offset the costs of short-term trading and to ensure that
long-term investors do not bear these costs, the Fund assesses a 0.50%
18
<PAGE> 71
(one-half of one percent) early withdrawal fee upon redemption or exchange
proceeds attributable to shares purchased and held less than six months. To
benefit fund shareholders directly, the early withdrawal fee is paid directly to
the Fund and does not apply to the redemption or exchange of shares acquired
through reinvestment of dividends or capital gains. Solely for purposes of
calculating the amount (if any) of the early withdrawal fee, shares will be
treated as redeemed on a "first-in first-out basis," except that shares acquired
through dividend reinvestment will be treated as redeemed first. This method of
calculating the fee should result in the lowest total early withdrawal fee.
- ------------------------------------------------------------
REDEMPTION PROCEEDS WILL BE CREDITED TO YOUR SCHWAB ACCOUNT.
YOU MAY ELECT THAT THEY THEN BE MAILED TO YOU.
- ------------------------------------------------------------
PAYMENT OF REDEMPTION PROCEEDS. Payment for redeemed shares will be credited
directly to your Schwab account no later than 7 days after the Transfer Agent
receives your redemption instructions in proper form. Redemption 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, see "Other Important Information--Wire Transfers to
Your Bank."
If you purchased shares by check, your redemption proceeds may be held in your
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 Securities and Exchange Commission (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.)
METHODS OF REDEEMING SHARES.
BY PHONE:
You may redeem your shares by telephone by calling your local Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day. Investors
should be aware that telephone redemption may be difficult to implement during
periods of drastic economic or market changes. Shareholders who experience
difficulties in redeeming by telephone can mail their redemption orders or
place them in person as set forth below.
Telephone redemption orders received prior to 4:00 p.m. (Eastern time) on any
Business Day, once they have been verified as to the caller's identity and
account ownership by the Transfer Agent, will be deemed to have been received
by the Transfer Agent on that day.
BY MAIL:
Redemption orders can also be delivered through the mail. Mailed redemption
orders should be addressed to Charles Schwab & Co. (at 101 Montgomery Street,
San Francisco, CA 94104) or your
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local Schwab office. Once a redemption request is mailed it is irrevocable and
may not be modified or cancelled.
To properly process your redemption order we will need a letter from you
which:
- references your Schwab account number;
- specifies that you would like to redeem shares from the fund;
- describes the number of fund shares to be redeemed; and
- is signed by any one of the registered Schwab account holders (in the
exact form specified in the account).
IN PERSON AT A SCHWAB OFFICE:
You can also place your redemption order in person at your local Schwab
office.
SCHWAB AUTOMATIC INVESTMENT PLAN
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THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST, CONVENIENT
WAY TO MAKE REGULAR INVESTMENTS IN THE FUND.
- ---------------------------------------------------------------
Schwab offers an Automatic Investment Plan ("AIP") that allows you to make
periodic investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. AIP can be used as a
dollar cost averaging program that saves you time and expense associated with
writing checks or wiring funds.
INVESTMENT MINIMUMS: You can make automatic investments in any amount, from $100
to $50,000, once you meet the Fund's investment minimum.
INVESTMENT METHODS: Automatic investments are made from your Schwab account and
you may select from several different investment methods (sources of funds) to
make automatic investment(s):
a. USING FUNDS IN A SCHWAB ACCOUNT: You can make automatic investments by
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. If you elect to use these funds to make your automatic
investments, cash in your Schwab account will be used to make the
investment and, if necessary, shares of your Schwab Money Fund will be
redeemed to cover the balance of the purchase.
b. USING THE SCHWAB MONEYLINK(R) TRANSFER SERVICE FOR:
- "Authorized Transfers" from a bank checking or savings account;
- "Direct Deposit" of payroll or government checks (all or a portion).
Authorized Transfers (transfers from a bank checking or savings account) and
Direct Deposit (automatic deposit of all or a portion of a payroll or government
check) are two of the investment method options which are made available through
the Schwab MoneyLink(R) Transfer Service ("MoneyLink"). MoneyLink transfers
money into your Schwab account and automatic investments can be made using these
funds.
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If you elect to use Authorized Transfers and/or Direct Deposit for your
automatic investments, you will select two dates: a transfer date (when the
money is transferred into your Schwab account) and your investment date. The
automatic investment date selected may be the same day of your Direct Deposit or
Authorized Transfers. Schwab recommends that your investment date be on or close
to the transfer/deposit date to minimize uninvested cash in your Schwab account.
If you make changes to your Authorized Transfer or Direct Deposit date, it may
also be necessary to change your automatic investment date to coincide with the
new transfer/deposit date.
INVESTMENT FREQUENCY: You can select the frequency of your automatic investments
(twice monthly, monthly or quarterly) and choose either the 5th or the 20th of
the month for your automatic investment dates. Quarterly investments are made on
the date selected in the first month of each quarter (January, April, July and
October).
CHANGING INSTRUCTIONS TO AN ALREADY ESTABLISHED PLAN: If you want to change the
mutual fund(s) selected for your AIP, you may do so by calling your local
branch, or 800-2 NO LOAD, 24 hours a day, or by sending written instructions
clearly outlining the changes to: Charles Schwab & Co., Inc., 101 Montgomery
St., San Francisco, CA, 94104. Written notification must include the following:
1. The mutual funds with AIP that you want to cancel;
2. The newly selected mutual funds in which you want to begin automatic
investments and the amount to be invested in each fund;
3. The investment frequency and investment dates for your new automatic
investments.
Information on changing Authorized Transfer and Direct Deposit instructions is
included in the Automatic Investment Plan Terms and Conditions brochure which
you will receive after enrolling in AIP.
TERMINATING YOUR AUTOMATIC INVESTMENT PLAN: If you wish to terminate your AIP,
you may contact your local branch or 800-2 NO LOAD, 24 hours a day, or send
written instructions to Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.
Note: Your Authorized Transfers and/or Direct Deposit will not automatically
terminate when you cancel your AIP investments.
TERMINATING AUTHORIZED TRANSFERS AND DIRECT DEPOSIT: If you wish to terminate
your Authorized Transfers, you may do so at any time by notifying Schwab in
writing. You must notify your employer or government agency to cancel Direct
Deposit.
IMPORTANT: If you are canceling your Authorized Transfers and/or Direct Deposit
and you wish to cancel your AIP, you must also provide instructions stating that
Schwab should cancel your AIP. You may notify Schwab by sending written
instructions to the address above or telephoning your local branch or 800-2 NO
LOAD, 24 hours a day. Your automatic investments will continue using Schwab
account assets if Schwab does not receive notification to terminate your
automatic investments as well.
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TO AVOID PROCEDURAL DIFFICULTIES, SCHWAB SHOULD RECEIVE INSTRUCTIONS TO CHANGE
OR TERMINATE YOUR AIP OR AUTHORIZED TRANSFERS AT LEAST 10 DAYS PRIOR TO YOUR
SCHEDULED INVESTMENT DATE.
ADDITIONAL INFORMATION. This information is only a summary of the Automatic
Investment Plan Terms and Conditions brochure which you will receive if you
choose to enroll in AIP. Please read it carefully and keep it for future
reference.
OTHER IMPORTANT INFORMATION
MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, the Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of a shareholder's holdings in that Fund drops below the Fund's $500
minimum balance requirement ($250 in the case of IRAs, other retirement plans
and custodial accounts). Shareholders will be notified in writing 30 days before
the Fund takes such action to allow them to increase their holdings to at least
the minimum level. Also note that because they can only be held in Schwab
accounts, Fund shares will be automatically redeemed should the Schwab account
in which the shares are carried is closed.
CONSOLIDATED MAILINGS. In an effort to reduce mailing costs, the Fund
consolidates shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write SchwabFunds at 101
Montgomery Street, San Francisco, CA 94104 to that effect.
WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
can be wired from your Schwab account to your bank account. Call your local
Schwab branch for additional information. A $15 bank-wire service fee will be
charged against your Schwab account for each wire sent.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
BEING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
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THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 76
SCHWAB
1000 FUND(R)
Prospectus December 30, 1994,
as amended June 30, 1995
SchwabFunds(R)
101 Montgomery Street
San Francisco, California 94104
736-7 (7/95) CRS 6677 Printed on recycled paper.
SchwabFunds(R)
