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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB CAPITAL TRUST
101 Montgomery Street, San Francisco, CA 94104
FEBRUARY 28, 1996
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectuses, dated February 28, 1996 (as
amended from time to time) for Schwab International Index Fund(TM) (the
"International Index Fund") and Schwab Small-Cap Index Fund(R) (the "Small-Cap
Index Fund"), the joint Prospectus dated September 25, 1995, as amended December
8, 1995 (and as further amended from time to time), for Schwab Asset
Director(R)-High Growth Fund, Schwab Asset Director(R)-Balanced Growth Fund and
Schwab Asset Director(R)-Conservative Growth Fund (the "Asset Director Funds")
and the joint prospectus dated February 28, 1996 (as amended from time to time)
for the Investor Shares and the e.Shares(TM) of the Schwab S & P 500 Fund (the
"S & P 500 Fund"), six separately managed investment portfolios (collectively
the "Funds") of Schwab Capital Trust (the "Trust"). To obtain a copy of any of
these Prospectuses, please contact Charles Schwab & Co., Inc. ("Schwab") at
800-2 NO-LOAD, 24 hours a day, or 101 Montgomery Street, San Francisco, CA
94104. TDD users may contact Schwab at 800-345-2550, 24 hours a day. These
Prospectuses are also available electronically by using our Internet address:
http://www.schwab.com.
SCHWABFunds(R)
800-2 NO-LOAD
TABLE OF CONTENTS
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INVESTMENT OBJECTIVES.......................................................................................... 2
INVESTMENT SECURITIES.......................................................................................... 3
INVESTMENT RESTRICTIONS........................................................................................ 24
MANAGEMENT OF THE TRUST........................................................................................ 26
PORTFOLIO TRANSACTIONS AND TURNOVER............................................................................ 34
TAXES.......................................................................................................... 36
SHARE PRICE CALCULATION........................................................................................ 39
HOW THE FUNDS REFLECT PERFORMANCE.............................................................................. 40
THE BENEFITS OF INTERNATIONAL INVESTING........................................................................ 41
INDEXING AND THE SCHWAB INDEX FUNDS............................................................................ 41
GENERAL INFORMATION............................................................................................ 46
PURCHASE AND REDEMPTION OF SHARES.............................................................................. 48
OTHER INFORMATION.............................................................................................. 48
COMPANIES IN THE SCHWAB INTERNATIONAL INDEX.................................................................... 50
COMPANIES IN THE SCHWAB SMALL-CAP INDEX........................................................................ 60
FINANCIAL STATEMENTS........................................................................................... F-1
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INVESTMENT OBJECTIVES
SCHWAB INTERNATIONAL INDEX FUND(TM)
The investment objective of the International Index Fund is to attempt
to track the price and dividend performance (total return) of the Schwab
International Index(R) (the "International Index"), an index created to
represent the performance of common stocks and other equity securities issued by
large publicly traded companies from countries around the world with major
developed securities markets, excluding the United States.
SCHWAB SMALL-CAP INDEX FUND(R)
The investment objective of the Small-Cap Index Fund is to attempt to
track the price and dividend performance (total return) of the Schwab Small-Cap
IndexTM (the "Small-Cap Index"), an index created to represent the performance
of common stocks of the second 1,000 largest United States companies, ranked by
market capitalization (share price times the number of shares outstanding).
SCHWAB ASSET DIRECTOR(R)- HIGH GROWTH FUND
The investment objective of the Schwab Asset Director-High Growth Fund
is to provide high capital growth with less volatility than an all-stock
portfolio. This Fund provides the greatest exposure to various stock categories,
including domestic large and small company stocks, and international stocks.
SCHWAB ASSET DIRECTOR(R)- BALANCED GROWTH FUND
The investment objective of the Schwab Asset Director-Balanced Growth
Fund is to provide maximum total return, including both capital growth and
income. This Fund represents a more balanced approach to stocks and bonds.
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
The investment objective of the Schwab Asset Director-Conservative
Growth Fund is to provide income and more growth potential than an all-bond
portfolio. This Fund's stock component is designed to help offset inflation.
SCHWAB S&P 500 FUND-INVESTOR SHARES
SCHWAB S&P 500 FUND - e.SHARES(TM)
The Fund's investment objective is to track the price and dividend
performance (total return) of common stocks of United States companies, as
represented by the S&P 500.
The investment objectives stated above for each of the Funds, along
with certain investment restrictions adopted by the Funds, are fundamental and
cannot be changed without approval by holders of a majority of the Funds'
outstanding voting shares, as defined in the Investment Company Act of 1940 (the
"1940 Act").
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INVESTMENT SECURITIES
FOREIGN INVESTMENTS
The International Index Fund and the Asset Director Funds expect to
invest in stocks of foreign issuers. The International Index Fund will invest
primarily in such stocks. Investing in foreign issuers involves certain special
considerations, including those set forth below, which are not typically
associated with investing in U.S. issuers. Since investments in the securities
of foreign issuers are usually made and held in foreign currencies, and since
the International Index Fund and the Asset Director Funds may hold cash in
foreign currencies, they may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversions between various currencies. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange market as well as by political and
economic factors.
Since foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. companies, there may be less publicly available
information about a foreign company than about a U.S. company. Securities of
foreign companies have less volume, are less liquid and are more volatile than
securities of U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
International Index Fund and the Asset Director Funds endeavor to achieve the
most favorable net results on their portfolio transactions. There is generally
less government supervision and regulation of foreign securities exchanges,
brokers, dealers and listed companies than in the U.S., thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the International Index
Fund and the Asset Director Funds is uninvested and no return is earned thereon.
The inability to make intended security purchases due to settlement problems
could cause the International Index Fund and the Asset Director Funds to miss
attractive investment opportunities. Losses to the International Index Fund and
the Asset Director Funds arising out of the inability to fulfill a contract to
sell such securities could result in potential liability to the International
Index Fund and the Asset Director Funds.
In addition, with respect to those countries in which the International
Index Fund and the Asset Director Funds may invest or other countries which may
have a significant impact on the
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companies in which the International Index Fund and the Asset Director Funds may
invest, there is the possibility of expropriation or confiscatory taxation,
political or social instability, diplomatic developments, change of government
or war which could affect the International Index Fund's and the Asset Director
Funds' investments. Moreover, individual foreign economies may differ favorably
or unfavorably from the U.S. economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Each of the Asset Director Funds may invest up to 5% of its total
assets in companies located in developing countries. Compared to the United
States and other developed countries, developing countries may have relatively
unstable governments, economies based on only a few industries and securities
markets that trade a small number of securities. Prices on these exchanges tend
to be volatile, and securities in these countries have historically offered
greater potential for gain (as well as loss) than securities of companies
located in developed countries.
Hong Kong. In addition to the risks discussed above, it is impossible
to currently foresee what risk, if any, may exist to the International Index
Fund's and the Asset Director Funds' investments as a result of the planned 1997
incorporation of the British Crown Colony of Hong Kong into the People's
Republic of China. Shareholders should note that the risks discussed above may
increase depending on political and economic developments as the scheduled time
for the change in government in Hong Kong draws nearer.
DEPOSITARY RECEIPTS
Each of the Asset Director Funds may invest up to 5% of its total
assets in American Depositary Receipts and European Depositary Receipts (ADRs
and EDRs) which are receipts representing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. These are
designed for U.S. and European securities markets as alternatives to purchasing
underlying securities in their corresponding national markets and currencies.
ADRs and EDRs can be sponsored or unsponsored. Sponsored ADRs and EDRs are
certificates in which a bank or financial institution participates with a
custodian. Issuers of unsponsored ADRs and EDRs are not contractually obligated
to disclose material information in the United States. Therefore, there may not
be a correlation between such information and the market value of the
unsponsored ADR or EDR.
OPTIONS ON SECURITIES
Writing Covered Options. The Funds may write (sell) covered call and
put options on any securities in which they may invest. The Funds may purchase
and write such options on securities that are listed on domestic or foreign
securities exchanges or traded in the over-the-counter market. All call options
written by the Funds are covered, which means that the Funds will own the
securities subject to the option so long as the option is outstanding. The
purpose of
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writing covered call options is to realize greater income than would be realized
on portfolio securities transactions alone. However, in writing covered call
options for additional income, the Funds may forego the opportunity to profit
from an increase in the market price of the underlying security.
All put options written by the Funds will be covered, which means that
each of the Funds will have deposited with its custodian cash, U.S. government
securities or other high-grade debt securities (i.e., securities rated in one of
the top three categories by Moody's Investor Service ("Moody's") or Standard &
Poor's Corporation ("S&P") or, if unrated, determined by the Funds' Investment
Manager to be of comparable credit quality) with a value at least equal to the
exercise price of the put option. The purpose of writing such options is to
generate additional income for the Funds. However, in return for the option
premium, the Funds accept the risk that they may be required to purchase the
underlying securities at a price in excess of the securities market value at the
time of purchase.
The Funds may terminate their obligations under a written call or put
option by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions."
Purchasing Options. The Funds may purchase put and call options on any
securities in which they may invest or options on any securities index based on
securities in which they may invest. The Funds may also enter into closing sale
transactions in order to realize gains or minimize losses on options they have
purchased.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option, since, with regard to certain options, the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains the
amount of the premium. This amount may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill its obligation to purchase the underlying security at the
exercise price, which will usually exceed the then market value of the
underlying security.
The purchase of a call option would entitle the Funds, in return for
the premium paid, to purchase specified securities at a specified price during
the option period. The Funds would ordinarily realize a gain if, during the
option period, the value of such securities exceeded the sum of the exercise
price, the premium paid and transaction costs; otherwise the Funds would realize
either no gain or a loss on the purchase of the call option.
Risks Associated With Options Transactions. There is no assurance that
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a liquid secondary market on a domestic or foreign options exchange will exist
for any particular exchange-traded option or at any particular time. If the
Funds are unable to effect a closing purchase transaction with respect to
covered options they have written, the Funds will not be able to sell the
underlying securities or dispose of assets held in a segregated account until
the options expire or are exercised. Similarly, if the Funds are unable to
effect a closing sale transaction with respect to options they have purchased,
they would have to exercise the options in order to realize any profit and will
incur transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), although
outstanding options on that exchange that had been issued by the OCC as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
The Funds may purchase and sell both options that are traded on U.S.
and foreign exchanges and options traded over-the-counter with broker-dealers
who make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the SEC changes its position,
the Funds will treat purchased over-the-counter options and all assets used to
cover written over-the-counter options as illiquid securities, except that with
respect to options written with primary dealers in U.S. government securities
pursuant to an agreement requiring a closing purchase transaction at a formula
price, the amount of illiquid securities may be calculated with reference to a
formula approved by the staff of the SEC. Each of the Funds will write or
purchase an option only where the market value of that option, when aggregated
with the market value of all other options transactions made on behalf of the
Fund, does not exceed 5% of the Fund's total assets.
FOREIGN CURRENCY TRANSACTIONS
Forward Foreign Currency Exchange Contracts. The International Index
Fund and the Asset Director Funds may enter into forward foreign currency
exchange contracts in several circumstances. The International Index Fund and
the Asset Director Funds may
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engage in foreign currency exchange transactions to protect against uncertainty
in the level of future exchange rates. The International Index Fund and the
Asset Director Funds expect to engage in foreign currency exchange transactions
in connection with the purchase and sale of portfolio securities (so-called
"transaction hedging") and to protect the value of specific portfolio positions
("position hedging").
For transaction hedging purposes, the International Index Fund and the
Asset Director Funds enter into foreign currency transactions with respect to
specific receivables or payables of the funds arising in connection with the
purchase or sale of portfolio securities. By transaction hedging, the
International Index Fund and the Asset Director Funds will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, and the
transaction's settlement date. When engaging in position hedging, the
International Index Fund and the Asset Director Funds enter into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which portfolio securities are denominated (or against an
increase in the value of currency for securities which the International Index
Fund and the Asset Director Funds expect to purchase).
When engaging in position and/or transaction hedging, the International
Index Fund and the Asset Director Funds may purchase or sell foreign currencies
on a spot (or cash) basis at the prevailing spot rate and may also enter into
contracts to purchase or sell foreign currencies at a future date ("forward
contracts") and purchase and sell foreign currency futures contracts ("futures
contracts"). The International Index Fund and the Asset Director Funds may also
purchase exchange-listed and over-the-counter call and put options on futures
contracts and on foreign currencies. A put option on a futures contract gives
the International Index Fund and the Asset Director Funds the right to assume a
short position in the futures contract until expiration of the option. A put
option on currency gives the International Index Fund and the Asset Director
Funds the right to sell a currency at an exercise price until the expiration of
the option. A call option on a futures contract gives the International Index
Fund and the Asset Director Funds the right to assume a long position in the
futures contract until the expiration of the option. A call option on currency
gives the International Index Fund and the Asset Director Funds the right to
purchase a currency at the exercise price until the expiration of the option.
Hedging transactions involve costs and may result in losses, and the
ability of the International Index Fund and the Asset Director Funds 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 Funds own or expect to purchase or sell. They simply
establish a rate of exchange that one can achieve at some future point in time.
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Additionally, although these techniques tend to minimize the risk of loss due to
decline in the value of the hedged currency, they tend to limit any potential
gain that might result from an increase in the value of such currency.
Although the contracts are not presently regulated by the Commodity
Futures Trading Commission (the "CFTC"), the CFTC may in the future assert
authority to regulate these contracts. In such event, the ability of the
International Index Fund and the Asset Director Funds to utilize forward foreign
currency exchange contracts may be restricted.
Each of the Asset Director Funds will enter into a forward foreign
currency exchange contract only when the market value of such contract, when
aggregated with the market value of all other such contracts held by the Fund
does not exceed 5% of the Fund's total assets.
The International Index Fund and the Asset Director Funds generally
will not enter into a forward contract with a term of greater than one year.
While the International Index Fund and the Asset Director Funds will
enter into forward contracts to reduce currency exchange rate risks,
transactions in such contracts involve certain other risks. Thus, while the
International Index Fund and the Asset Director Funds may benefit from such
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the International Index Fund and the Asset Director
Funds than if it had not engaged in any such transactions. Moreover, there may
be imperfect correlation between the International Index Fund's and the Asset
Director Funds' portfolio holdings of securities denominated in a particular
currency and forward contracts entered into by the International Index Fund and
the Asset Director Funds. Such imperfect correlation may cause the International
Index Fund and the Asset Director Funds to sustain losses, which will prevent
the International Index Fund and the Asset Director Funds from achieving a
complete hedge or expose the International Index Fund and the Asset Director
Funds to risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The International
Index Fund and the Asset Director Funds may write covered put and call options
and purchase put and call options on foreign currencies for the purpose of
protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. A call option
written by the International Index Fund and the Asset Director Funds obligates
the International Index Fund and the Asset Director Funds to sell specified
currency to the holder of the option at a specified price at any time before the
expiration date. A put option written by the International Index Fund and the
Asset Director Funds would obligate the International Index Fund and the Asset
Director Funds to purchase specified currency from the option holder at a
specified time before the expiration date. The writing of currency options
involves a risk that the International Index Fund
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and the Asset Director Funds will, upon exercise of the option, be required to
sell currency subject to a call at a price that is less than the currency's
market value or be required to purchase currency subject to a put at a price
that exceeds the currency's market value.
The International Index Fund and the Asset Director Funds may terminate
their obligations under a call or put option by purchasing an option identical
to the one it has written. Such purchases are referred to as "closing purchase
transactions." The International Index Fund and the Asset Director Funds would
also be able to enter into closing sale transactions in order to realize gains
or minimize losses on options purchased by the International Index Fund and the
Asset Director Funds.
The purchase of a call option would entitle the International Index
Fund and the Asset Director Funds, in return for the premium paid, to purchase
specified currency at a specified price during the option period. The
International Index Fund and the Asset Director Funds would ordinarily realize a
gain or a loss on the purchase of the call option.
The purchase of a put option would entitle the International Index Fund
and the Asset Director Funds, in exchange for the premium paid, to sell specific
currency at a specified price during the option period. The purchase of
protective puts is designed merely to offset or hedge against a decline in the
dollar value of the International Index Fund's and the Asset Director Funds'
portfolio securities due to currency exchange rate fluctuations. The
International Index Fund and the Asset Director Funds would ordinarily realize a
gain, if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs; otherwise the International Index Fund and the Asset
Director Funds would realize either no gain or a loss on the purchase of the put
option. Gains and losses on the purchase of protective put options would tend to
be offset by countervailing changes in the value of the underlying currency.
Special Risks Associated With Options on Foreign Currency. An exchange
traded option position may be closed out only on an options exchange that
provides a secondary market for an option of the same series. Although the
International Index Fund and the Asset Director Funds will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option or at any particular time. For some options, no
secondary market on an exchange may exist. In such event, it might not be
possible to effect closing transactions in particular options, with the result
that the International Index Fund and the Asset Director Funds would have to
exercise their options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities pursuant to the
exercise of put options. If the International Index Fund and the Asset Director
Funds, as covered call option writers, are unable to effect a
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closing purchase transaction in a secondary market, they will not be able to
sell the underlying currency (or security denominated in that currency) until
the option expires or they deliver the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the OCC inadequate. This could result in an exchange instituting special
procedures that may interfere with the timely execution of customers' orders.
The International Index Fund and the Asset Director Funds will purchase
and write over-the-counter options only to the extent consistent with their
limitations on investments in illiquid securities, as described in the
Prospectuses. Trading in over-the-counter options is subject to the risk that
the other party will be unable or unwilling to close-out purchasing and writing
activities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds may purchase and sell various kinds of futures contracts and
options on futures contracts. The futures contracts may be based on various
securities (such as U.S. government securities), securities indices, foreign
currencies and other financial instruments and indices. All futures contracts
entered into by the Funds are traded on U.S. exchanges or boards of trade that
are licensed and regulated by the CFTC or on foreign exchanges. The Funds are
not permitted to engage in speculative futures trading.
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed upon price during a designated month (or to deliver the final cash
settlement price, in the case of a contract relating to an index or otherwise
not calling for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, the
Funds can seek, through the sale of futures contracts, to offset a decline in
the value of their current portfolio securities. When rates are falling or
prices are rising, the Funds, through the purchase of futures contracts, can
attempt to secure better rates or prices than might later be available in the
market when they effect anticipated purchases. Similarly, the International
Index Fund and the Asset Director Funds can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and their portfolio securities that are denominated in such currency. The
International Index Fund and the Asset Director Funds can purchase futures
contracts on a foreign currency to fix the price in U.S. dollars of a security
denominated in such currency that the International Index Fund and the Asset
Director Funds have acquired or expect to acquire.
Although futures contracts by their terms generally call for the actual
delivery or acquisition of underlying
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securities or the cash value of the index, in most cases the contractual
obligation is fulfilled before the date of the contract without having to make
or take such delivery. The contractual obligation is offset by buying (or
selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities or the cash value of the index underlying the
contractual obligations. The Funds may incur brokerage fees when they purchase
or sell futures contracts.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions, which may
result in a profit or a loss. While the Funds' futures contracts on securities
or currency will usually be liquidated in this manner, the Funds may instead
make or take delivery of the underlying securities or currency whenever it
appears economically advantageous for them to do so. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
Options on Futures Contracts. The acquisition of put and call options
on futures contracts will give the Funds the right (but not the obligation), for
a specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Funds obtain the benefit of the futures position if
prices move in a favorable direction but limit their risk of loss in the event
of an unfavorable price movement to the loss of the premium and transaction
costs.
The writing of a call option on a futures contract generates a premium
that may partially offset a decline in the value of the Funds' assets. By
writing a call option, the Funds become obligated, in exchange for the premium,
to sell a futures contract that may have a value lower than the exercise price.
Thus, the loss incurred by the Funds in writing options on futures is
potentially unlimited and may exceed the amount of the premium received. The
Funds will incur transaction costs in connection with the writing of options on
futures.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. The Funds'
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Hedging Strategies With Futures. Hedging by use of futures contracts
seeks to establish more certainty than would otherwise be possible with respect
to the effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Funds own or propose to acquire. Such futures
contracts may include contracts for the future delivery of
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securities held by the Funds or securities with characteristics similar to those
of the Funds' portfolio securities. Similarly, the International Index Fund and
the Asset Director Funds may sell futures contracts on currency in which its
portfolio securities are denominated or in one currency to hedge against
fluctuations in the value of securities denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the Investment Manager, there is a sufficient
degree of correlation between price trends for the Funds' portfolio securities
and futures contracts based on other financial instruments, securities indices
or other indices, the Funds may also enter into such futures contracts as part
of their hedging strategy. Although under some circumstances, prices of
securities in the Funds' portfolio may be more or less volatile than prices of
such futures contracts, the Investment Manager will attempt to estimate the
extent of this difference in volatility based on historical patterns and to
compensate for it by having the Funds enter into a greater or lesser number of
futures contracts or by attempting to achieve only a particular hedge against
price changes affecting the Funds' portfolio securities. When hedging of this
character is successful, any depreciation in the value of the portfolio
securities will be substantially offset by appreciation in the value of the
futures position. On the other hand, any unanticipated appreciation in the value
of the Funds' portfolio securities will be substantially offset by a decline in
the value of the futures position.
On other occasions, the Funds may take "long" positions by purchasing
such futures contracts. This would be done, for example, when the Funds
anticipate the subsequent purchase of particular securities when they have the
necessary cash but expect the prices or currency exchange rates then available
in the applicable market to be less favorable than prices that are currently
available.
When buying or selling futures contracts, a Fund must deposit an amount
of cash, cash equivalents, or liquid, high-quality debt instruments with its
broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract, which will be returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin," will be
made at least daily as the price of the futures contract fluctuates and the
Fund's position in the contract becomes more or less valuable, a process known
as "marking-to-market."
Regulations of the Commodities Futures Trading Commission ("CFTC")
applicable to the Funds generally require that all of their futures transactions
constitute "bona fide" hedging transactions. As a result, a Fund will normally
sell futures contracts to protect against a decrease in the price of securities
it owns but intends to sell or purchase futures contracts to protect against an
increase in the price of securities it intends to purchase. In
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addition, the Funds may purchase and sell futures contracts and options as a
substitute for a comparable market position in the underlying securities.
Futures transactions need not constitute "bona fide" hedging under CFTC
regulations if the aggregate initial margin and premiums required to establish
such positions do not exceed 5% of each Fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and options
transactions involve risks which, in some strategies, can be substantial, due to
the low margin deposits required and the extremely high degree of leverage
involved in futures and options trading. However, to the extent the Funds'
futures and options practices are limited to hedging purposes, the Investment
Manager does not believe that the Funds are subject to the degree of risk
frequently associated with futures and options transactions. To the extent the
Funds engage in the use of futures and options on futures other than for hedging
purposes, the Funds may be subject to additional risk.
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 a Fund
seeks to "close out" its position. If a Fund were unable to "close out" a
futures or option position and prices moved adversely, the Fund would have to
continue to make daily cash payments to maintain its required margin, and if the
Fund had insufficient cash to meet this requirement, it may have to sell
portfolio securities at a disadvantageous time. In addition, the Fund might be
required to deliver the securities underlying futures or options contracts it
holds. Each 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 securities being hedged. This situation could result from price
distortions in the futures or options markets due to, among other things, active
trading by speculators and use of offsetting "closing" transactions by other
investors seeking to avoid meeting additional margin deposit requirements. In
the event of significant market distortions, it is possible that a Fund could
lose money on futures or options contracts and experience appreciation in the
value of its portfolio securities, or vice versa.
Finally, adverse market movements could cause a 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. There is also the risk of loss by a Fund of
margin deposits in the event of bankruptcy of a broker with whom the
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Fund has an open position in a futures contract or option.
The extent to which each Fund may purchase and sell futures, options,
equity index participations and index participation contracts may be limited by
the fact that each Fund intends to meet Internal Revenue Code of 1986, as
amended (the "Code"), requirements for qualification as a regulated investment
company. See "Federal Income Tax."
SWAPS
Each of the Asset Director Funds may enter into swaps on various
securities (such as U.S. government securities), securities indices, interest
rates, prepayment rates, foreign currencies or other financial instruments or
indices in order to protect the value of the Asset Director Funds from interest
rate fluctuations and to hedge against fluctuations in the floating rate market
in which the Asset Director Funds' investments are traded, for both hedging and
non-hedging purposes. While swaps are different from futures contracts (and
options on futures contracts) in that swap contracts are individually negotiated
with specific counterparties, the Asset Director Funds will use swap contracts
for purposes similar to the purposes for which they use options, futures and
options on futures. Those uses of swap contracts (i.e., risk management and
hedging) present the Funds with risks and opportunities similar to those
associated with options contracts, futures contracts and options on futures. See
"Futures Contracts and Options on Futures Contracts" in this Statement.
The Asset Director Funds may enter into these transactions to manage
their exposure to changing interest rates and other market factors. Some
transactions may reduce each Asset Director Fund's exposure to market
fluctuations while others may tend to increase market exposure.
The use of swaps involves investment techniques and risks different
from and potentially greater than those associated with ordinary fund securities
transactions. If the Investment Manager is incorrect in its expectations of
market values, interest rates, or currency exchange rates, the investment
performance of the Asset Director Funds would be less favorable than it would
have been if this investment technique were not used. The Asset Director Funds
will only invest in swaps up to 5% of each Fund's total assets.
PREFERRED STOCK
The Funds may invest in preferred stock. Preferred stock has priority
as to income and generally as to assets of the issuer; however, income is
usually limited to a definitive percentage regardless of the issuer's earnings.
Preferred stock usually has limited voting rights. The Asset Director Funds will
only invest in preferred stock up to 5% of each Fund's net assets.
CONVERTIBLE SECURITIES
Each of the Asset Director Funds may invest up to 5% of its net assets
in securities that are convertible into common stock, including convertible
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bonds that are investment grade, convertible preferred stocks and warrants. The
S&P 500 Fund will not purchase convertible securities directly. It may, however,
hold convertible securities to the extent that such holdings are incident to the
Fund's ownership of common stocks.
Convertible bonds are issued with lower coupons than nonconvertible
bonds of the same quality and maturity, but they give holders the option to
exchange their bonds for a specific number of shares of the company's common
stock at a predetermined price. This structure allows the convertible bond
holder to participate in share price movements in the company's common stock.
The actual return on a convertible bond may exceed its stated yield if the
company's common stock appreciates in value and the option to convert to common
shares becomes more valuable.
Convertible preferred stocks are nonvoting equity securities that pay a
fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
The Funds may invest in warrants. Warrants entitle the holder to buy
the issuer's stock at a specific price for a specific period of time. The price
of a warrant tends to be more volatile than, and does not always track, the
price of its underlying stock. Warrants are issued with expiration dates. Once a
warrant expires, it has no value in the market.
REAL ESTATE-RELATED INVESTMENTS
Each of the Asset Director Funds may invest up to 5% of its total
assets in real estate-related investments. Real estate-related instruments
include real estate investment trusts, commercial and residential
mortgage-backed securities and real estate financings. Real estate-related
instruments are sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
overbuilding and the management skill and creditworthiness of the issuer. Real
estate-related instruments may also be affected by tax and regulatory
requirements, such as those relating to the environment.
PRECIOUS METAL-RELATED INVESTMENTS
Each of the Asset Director Funds may invest up to 5% of its total
assets in precious metal-related investments. The Asset Director Funds and the
S&P 500 Fund may invest in common stocks of domestic companies principally
engaged in precious metal-related activities which include companies principally
engaged in the extraction, processing, distribution or marketing of precious
metals if at the time of investment the Investment Manager considers that at
least 50% of the company's assets, revenues or profits are derived from the
precious metal industry. The Asset Director Funds may
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also invest in securities of foreign companies principally engaged in the
precious metals industry. For further disclosure on foreign securities, see
"Foreign Investments" in this Statement of Additional Information.
The Asset Director Funds and the S&P 500 Fund may also invest in
futures on precious metals, such as gold futures, and options thereon. Such
investments are subject to the investment limitations for investments in futures
and options for the Asset Director Funds and the S&P 500 Fund as set forth in
"Futures Contracts and Options on Futures Contracts" in this Statement of
Additional Information.
Prices of precious metals can be expected to respond to changes in
rates of inflation and to perceptions of economic and political instability.
Historically, the prices of precious metals and of securities of companies
engaged in the precious metal-related activities may be subject to extreme
fluctuations, reflecting wider economic or political instability or for other
reasons.
U.S. GOVERNMENT SECURITIES
The Funds may purchase U.S. government securities. Direct obligations
of the U.S. government are supported by the full faith and credit of the U.S.
Treasury. While obligations of certain U.S. government agencies and
instrumentalities are similarly backed, those of others, such as the Federal
National Mortgage Association and the Student Loan Marketing Association, are
only supported by the right of the issuer to borrow from the U.S. Treasury, the
discretionary authority of the U.S. government to purchase the agency's
obligations or the credit of the issuing agency or instrumentality. There can be
no assurance that the U.S. government would provide financial support to U.S.
government sponsored agencies or instrumentalities if it is not obligated to do
so by law. A Fund will invest in U.S. government securities not backed by the
full faith and credit of the U.S. Treasury only when the Investment Manager is
satisfied that the credit risk with respect to their issuer is minimal.
GOVERNMENT "MORTGAGE BACKED" SECURITIES
Among the U.S. government securities in which the Funds may invest are
government "mortgage-backed" (or government guaranteed mortgage-related)
securities. Mortgages backing the securities purchased by the Funds include,
among others, conventional thirty-year fixed rate mortgages, graduated payment
mortgages, fifteen-year mortgages and adjustable rate mortgages. All of these
mortgages can be used to create pass-through securities. A pass-through security
is formed when mortgages are pooled together and undivided interests in the pool
or pools are sold. The cash flow from the mortgages is passed through to the
holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an individual mortgage prepays the remaining principal before the
mortgage's scheduled maturity date. As a result of
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the pass-through of prepayments of principal on the underlying securities,
mortgage-backed securities are often subject to more rapid prepayment of
principal then their stated maturity indicates. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the realized yield or average life of a particular issue of
pass-through certificates. Prepayment rates are important because of their
effect on the yield and price of the securities. Accelerated prepayments
adversely impact yields for pass-throughs purchased at a premium (i.e., a price
in excess of principal amount) and may involve additional risk of loss of
principal because the premium may not have been fully amortized at the time the
obligation is repaid. The opposite is true for pass-throughs purchased at a
discount. The Funds may purchase mortgage-related securities at a premium or at
a discount. Principal and interest payments on the mortgage-related securities
are government guaranteed to the extent described below. Such guarantees do not
extend to the value or yield of the mortgage-related securities themselves or of
a Fund's shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorized GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. The FHLMC issues two types of mortgage
pass-through securities ("FHLMC Certificates"): mortgage participation
certificates ("PCs") and guaranteed
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mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. The FHLMC guarantees timely monthly payment of interest
on PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately ten years. The FHLMC guarantee is not backed by the
full faith and credit of the U.S. government.
FNMA Securities. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages insured by the
FHA. FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
and principal on FNMA Certificates. The FNMA guarantee is not backed by the full
faith and credit of the U.S. government.
OTHER ASSET-BACKED SECURITIES
The Asset Director Funds may invest a portion of their assets in debt
obligations known as "Asset-Backed Securities" that are rated in one of the
three highest rating categories by a nationally recognized statistical rating
organization (e.g., Standard & Poor's Corporation or Moody's Investors Service,
Inc.) or, if not so rated, deemed to be of equivalent quality by the Investment
Manager pursuant to guidelines adopted by the Board of Trustees. The credit
quality of most Asset-Backed Securities depends primarily on the credit quality
of the assets underlying such securities, how well the entity issuing the
security is insulated from the credit risk of the originator (or any other
affiliated entities), and the amount and quality of any credit support provided
to the securities. The rate of principal payments on asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets, which in turn may be affected by a variety of economic and other
factors. As a result, the yield on any asset-backed security is difficult to
predict with precision, and actual yield to maturity may be more or less than
the anticipated yield to maturity. Asset-Backed Securities may be classified as
"Pass-Through Certificates" or "Collateralized Obligations."
"Pass-Through Certificates" are asset-backed securities that represent
undivided fractional ownership interests in the underlying pool of assets.
Pass-Through Certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
Pass-Through Certificates represent ownership interests in the underlying
assets, the holders thereof bear directly the risk of
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any defaults by the obligors on the underlying assets not covered by any credit
support.
Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The assets collateralizing such Asset-Backed Securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
Asset-Backed Securities and any credit support provided. As a result, although
payments on such Asset-Backed Securities are obligations of the issuers, in the
event of default on the underlying assets not covered by any credit support, the
issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related Asset-Backed Securities.
METHODS OF ALLOCATING CASH FLOWS
While many Asset-Backed Securities are issued with only one class of
security, many others are issued in more than one class, each with different
payment terms. Multiple class Asset-Backed Securities are issued for two main
reasons. First, multiple classes may be used as a method of providing credit
support. This is accomplished typically through creation of one or more classes
whose right to payments on the Asset-Backed Security is made subordinate to the
right to such payments of the remaining class or classes. Second, multiple
classes may permit the issuance of securities with payment terms, interest rates
or other characteristics differing both from those of each other and from those
of the underlying assets. Examples include so-called "multi-tranche CMOs"
(collateralized mortgage obligations) with serial maturities such that all
principal payments received on the mortgages underlying the securities are first
paid to the class with the earliest stated maturity, and then sequentially to
the class with the next stated maturity), "Strips" (Asset-Backed Securities
entitling the holder to disproportionate interests with respect to the
allocation of interest and principal of the assets backing the security), and
securities with a class or classes having characteristics that mimic the
characteristics of non-Asset-Backed Securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
TYPES OF CREDIT SUPPORT
Asset-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two classes: liquidity protection and protection against ultimate default
on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made in a timely fashion.
Protection against ultimate
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default ensures payment on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained from third parties, through various means of structuring the
transaction, or through a combination of such approaches. Examples of
Asset-Backed Securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
Asset-Backed Securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
Asset-Backed Securities that have "reserve funds" (where cash or investments,
sometimes funded from a portion of the initial payments on the underlying
assets, are held in reserve against future losses) or that have been
"overcollateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceed that required to make payment on
the Asset-Backed Securities and pay any servicing or other fees). The degree of
credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an Asset-Backed Security.
CREDIT CARD RECEIVABLE SECURITIES
The Asset Director Funds may invest in Asset-Backed Securities backed
by receivables from revolving credit card agreements ("Credit Card Receivable
Securities"). Most of the Credit Card Receivable Securities issued publicly to
date have been Pass-Through Certificates. In order to lengthen the maturity of
Credit Card Receivable Securities, most such securities provide for a fixed
period during which only interest payments on the underlying accounts are passed
through to the security holder and principal payments received on such accounts
are used to fund the transfer of additional credit card charges made on an
account to the pool of assets supporting the related Credit Card Receivable
Securities. The initial fixed period usually may be shortened upon the
occurrence of specified events that signal a potential deterioration in the
quality of the assets backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life of an issue of
Credit Card Receivable Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during the initial
period and the non-occurrence of specified events. Competitive and general
economic factors could adversely affect the rate at which new receivables are
created in an account and conveyed to an issuer, shortening the expected
weighted average life of the related Credit Card Receivable Security, and
reducing its yield. An acceleration in cardholders' payment rates or any other
event that shortens the period during which additional credit card charges on an
account may be transferred to the pool of assets supporting the related Credit
Card Receivable Security could have a similar effect on the weighted average
life and yield.
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Credit card holders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holders the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on accounts. In addition, unlike most other Asset-Backed
Securities, accounts are unsecured obligations of the cardholder.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES
The Funds may invest in certificates of deposit, which are certificates
issued against funds deposited in a banking institution for a specified period
of time at a specified interest rate. Bankers' acceptances are credit
instruments evidencing a bank's obligation to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the full amount of the instrument upon maturity. Each Fund will
only invest in certificates of deposit and bankers' acceptances of banks having
capital, surplus and undivided profits in excess of $100 million.
COMMERCIAL PAPER
The Funds may invest in Commercial Paper, which consists of short-term,
unsecured promissory notes issued to finance short-term credit needs. The Funds
will only invest in commercial paper that at the time of purchase is rated
Prime-1 or Prime-2 by Moody's, A-1 or A-2 by S&P, "Duff 2" or higher by Duff &
Phelps, Inc. ("Duff"), or "F2" or higher by Fitch Investors Services, Inc.
("Fitch") or if unrated by Moody's, S&P, Duff or Fitch, is determined by the
Investment Manager, using guidelines approved by the Board of Trustees, to be at
least equal in quality to one or more of the above ratings.
OTHER INVESTMENT POLICIES
Securities that are acquired by the International Index Fund and the
Asset Director Funds outside the U.S. and that are publicly traded in the U.S.,
on a foreign securities exchange or in a foreign securities market are not
considered by the Funds to be illiquid assets provided that: (i) the Funds
acquire and hold the securities with the intention of reselling the securities
in the foreign trading market, (ii) the Funds reasonably believe they can
readily dispose of the securities in the foreign trading market or for cash in
the U.S., or (iii) foreign market and current market quotations are readily
available. Investments may be in securities of foreign issuers, whether located
in developed or undeveloped countries. Investments in foreign securities where
delivery takes place outside the U.S. will have to be made in compliance with
any applicable U.S. and foreign currency restrictions and tax laws (including
laws imposing withholding taxes on any dividend or interest income) and laws
limiting the amount and types of foreign investments. Changes of government
administrations or of economic or monetary policies, in the U.S. or abroad, or
changed circumstances regarding convertibility or exchange rates could result in
investment losses for the Funds. Investments in foreign securities may also
subject the Funds to losses due
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to nationalization, expropriation or differing accounting practices and
treatments. Moreover, investors should recognize that foreign securities are
often traded with less frequency and volume, and therefore may have greater
price volatility, than is the case with many U.S. securities. Notwithstanding
the fact that the Funds generally intend to acquire the securities of foreign
issuers where there are public trading markets, investments by the Funds in the
securities of foreign issuers may tend to increase the risks with respect to the
liquidity of the Funds' portfolio and the Funds' ability to meet a large number
of shareholder redemption requests should there be economic or political turmoil
in a country in which the Funds have a substantial portion of their assets
invested or should relations between the U.S. and foreign countries deteriorate
markedly. Furthermore, the reporting and disclosure requirements applicable to
foreign issuers may differ from those applicable to domestic issuers, and there
may be difficulties in obtaining or enforcing judgments against foreign issuers.
Loans of Portfolio Securities. The Funds may loan securities to
qualified broker-dealers or other institutional investors provided that such
loans do not exceed one-third of the value of the Funds' total assets at the
time of the most recent loan, and that the borrower deposits and maintains with
the Funds cash collateral or U.S. government securities with a value equal to
102% of the value of the securities loaned. The lending of securities is a
common practice in the securities industry. The Funds will engage in security
lending arrangements with the primary objective of increasing the Funds' income
through investment of the cash collateral in short-term, interest-bearing
obligations but will do so only to the extent that the Funds will not lose the
tax treatment available to regulated investment companies. The Funds will be
entitled to all dividends or interest on any loaned securities.
Repurchase Transactions. Repurchase agreements are instruments under
which a buyer acquires ownership of a security from a seller that agrees to
repurchase the security at a mutually agreed upon time and price (which price is
higher than the purchase price), thereby determining the yield during the
buyer's holding period. Under the 1940 Act, a repurchase agreement is deemed to
be the loan of money by a Fund to the seller, collateralized by the underlying
security. The interest rate is effective for the period of time in which the
Funds are invested in the agreement and is not related to the coupon rate on the
underlying security. Any repurchase agreements entered into by a Fund will
involve the Fund as the buyer and banks or broker-dealers as sellers (repurchase
agreements with broker-dealers will be limited to obligations of the U.S.
government, its agencies or instrumentalities). The period of these repurchase
agreements will usually be short, from overnight to one week, and at no time
will the Funds invest in repurchase agreements for more than one year. However,
securities subject to repurchase agreements may have maturity dates in excess of
one year from the effective date of the repurchase agreements. The transaction
requires the initial collateralization of the seller's
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obligation with securities having a market value, including accrued interest,
equal to at least 102% of the dollar amount invested by the Funds, with the
value marked-to-market daily to maintain 100% coverage. A default by the seller
might cause the Funds to experience a loss or delay in the liquidation of the
collateral securing the repurchase agreement. The Funds might also incur
disposition costs in liquidating the collateral. The Funds will make payment for
such securities only upon physical delivery or evidence of book entry transfer
to the account of its custodian bank. The Funds may not enter into a repurchase
agreement of more than seven days duration if, as a result, the market value of
the Funds' net assets, together with investments in other securities deemed to
be not readily marketable, would be invested in excess of the Funds' policy on
investments in illiquid securities.
In the event of a bankruptcy or other default of a repurchase
agreement's seller, a Fund might incur expenses in enforcing its rights, and
could experience losses, including a decline in the value of the underlying
securities and loss of income. Each Fund will not invest more than 10% of its
net assets at the time of purchase in repurchase agreements maturing in more
than seven days and other illiquid securities.
Illiquid Securities. Each Fund reserves the right to invest up to 10%
of its net assets in illiquid securities. Generally an "illiquid security" is
any security that cannot be disposed of promptly and in the ordinary course of
business at approximately the amount at which the Funds have valued the
instrument. Subject to this limitation, the Funds may invest in restricted
securities where such investment is consistent with the Funds' investment
objectives, and such securities may be considered to be liquid to the extent the
Funds' Investment Manager determines that there is a liquid institutional or
other market for such securities. In determining whether a restricted security
is properly considered a liquid security, the Funds' Investment Manager, under
the direction of the Board of Trustees, will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to purchase or sell the security and the number of
potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). To the extent the Funds invest
in restricted securities that are deemed liquid, the general level of
illiquidity in the Funds' portfolios may be increased if qualified institutional
buyers become uninterested in purchasing these securities contracts. The Funds
will limit their investments in liquid restricted securities to 5% of their net
assets.
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INVESTMENT RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act). Each of the Funds
may not:
1) As to 75% of its assets, purchase securities of any issuer
(other than obligations of, or guaranteed by, the U.S. government, its agencies
or instrumentalities) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of such issuer.
2) Purchase securities (other than securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities) if, as a
result of such purchase, 25% or more of the value of its total assets would be
invested in any industry (except that the International Index Fund, the
Small-Cap Index Fund and the S&P 500 Fund may purchase securities under such
circumstances only to the extent that the Schwab International Index(R), the
Schwab Small-Cap IndexTM or the S&P 500(R), respectively, is also so
concentrated).
3) Invest more than 10% of its net assets in illiquid securities,
including repurchase agreements with maturities in excess of seven days.
4) Purchase or retain securities of an issuer if any of the
officers, trustees or directors of the Trust or the Investment Manager
individually own beneficially more than 1/2 of 1% of the securities of such
issuer and together beneficially own more than 5% of the securities of such
issuer.
5) Purchase or sell commodities or real estate, including
interests in real estate limited partnerships, provided that each Fund may (i)
purchase securities of companies that deal in real estate or interests therein,
(ii) purchase or sell futures contracts, options contracts, equity index
participations and index participation contracts, and (iii) for the Asset
Director Funds and the S&P 500 Fund, purchase securities of companies that deal
in precious metals or interests therein.
6) Invest for the purpose of exercising control or management of
another issuer.
7) Purchase securities of other investment companies, except as
permitted by the 1940 Act, including any exemptive relief granted by the SEC.
8) Lend money to any person, except that each Fund may (i)
purchase a portion of an issue of short-term debt securities or similar
obligations (including repurchase
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agreements) that are publicly distributed or customarily purchased by
institutional investors, and (ii) lend its portfolio securities.
9) Borrow money or issue senior securities except that each Fund
may borrow from banks as a temporary measure to satisfy redemption requests or
for extraordinary or emergency purposes and then only in an amount not to exceed
one-third of the value of its total assets (including the amount borrowed),
provided that each Fund will not purchase securities while borrowings represent
more than 5% of its total assets.
10) Pledge, mortgage or hypothecate any of its assets except that,
to secure allowable borrowings, each Fund may do so with respect to no more than
one-third of the value of its total assets.
11) Underwrite securities issued by others except to the extent it
may be deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment portfolio.
In order to permit the sale of shares of each Fund in certain
jurisdictions, each Fund may make commitments more restrictive than the
fundamental operating restrictions described above. Should it do so and later
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders, it will revoke the commitment(s) by terminating sales
of its shares in the jurisdiction(s) involved.
The following restrictions are non-fundamental and may be changed by
the Trust's Board of Trustees. Each of the Funds may not:
1) Purchase more than 10% of any class of securities of any
issuer if, as a result of such purchase, it would own more than 10% of such
issuer's outstanding voting securities.
2) Invest more than 5% of its total assets in securities of
issuers (other than obligations of, or guaranteed by the United States
Government, its agencies or instrumentalities) that with their predecessors have
a record of less than three years continuous operation.
3) Invest more than 5% of its net assets in warrants, valued at
the lower of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the American
Stock Exchange, provided, however, that for purposes of this restriction,
warrants acquired by a Fund in units or attached to other securities are deemed
to be without value.
4) Purchase puts, calls, straddles, spreads or any combination
thereof if by reason of such purchase the value of its aggregate investment in
such securities would exceed 5% of the Fund's total assets.
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<PAGE> 26
5) Make short sales, except for short sales against the box.
6) Purchase or sell interests in oil, gas or other mineral
development programs or leases, although it may invest in companies that own or
invest in such interests or leases.
7) Purchase securities on margin, except such short-term credits
as may be necessary for the clearance of purchases and sales of securities.
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The officers and trustees of the Trust, their
principal occupations over the past five years and their affiliations, if any,
with The Charles Schwab Corporation, Schwab and the Investment Manager, are as
follows:
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/BIRTHDAY THE TRUST PRINCIPAL OCCUPATION
------------- --------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Founder, Chairman, Chief Executive Officer and
July 29, 1937 Director, The Charles Schwab Corporation; Founder,
Chairman and Director, Charles Schwab & Co., Inc.
and Charles Schwab Investment Management, Inc.;
Chairman and Director, The Charles Schwab Trust
Company; Chairman and Director, and Chairman
(officer position) until December 1995,
Mayer & Schweitzer, Inc. (a securities brokerage
subsidiary of The Charles Schwab Corporation);
Director, The Gap, Inc. (a clothing retailer),
Transamerica Corporation (a financial services
organization), AirTouch Communications (a
telecommunications company) and Siebel Systems
(a software company).
</TABLE>
- --------------------------
*Mr. Schwab is an "interested person" of the Trust.
26
<PAGE> 27
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/BIRTHDAY THE TRUST PRINCIPAL OCCUPATION
------------- --------- --------------------
<S> <C> <C>
TIMOTHY F. McCARTHY** President and Trustee Executive Vice President - Mutual Funds, Charles
September 19, 1951 Schwab & Co., Inc. and The Charles Schwab
Corporation; Chief Executive Officer, Charles
Schwab Investment Management, Inc. From 1994 to
1995, Mr. McCarthy was Chief Executive Officer,
Jardine Fleming Unit Trusts Ltd.; Executive
Director, Jardine Fleming Holdings Ltd.;
Chairman, Jardine Fleming Taiwan Securities Ltd.;
and Director of JF India and Fleming Flagship,
Europe. Prior to 1994, he was President of
Fidelity Investments Advisor Group, a division of
Fidelity Investments in Boston.
DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
September 23, 1931 Associates (advertising and marketing/consulting).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (real estate
June 28, 1938 investment). Prior to 1993, Mr. Stephens was
Chairman and Chief Executive Officer of the Bank of
San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
A. JOHN GAMBS Treasurer and Principal Executive Vice President - Finance and Chief
November 16, 1945 Financial Officer Financial Officer, The Charles Schwab Corporation;
Executive Vice President, Chief Financial Officer
and Director, Charles Schwab & Co., Inc.; Chief
Financial Officer and Director, Charles Schwab
Investment Management, Inc.; and Chief Financial
Officer, The Charles Schwab Trust Company.
</TABLE>
- --------------------------
**Mr. McCarthy is an "interested person" of the Trust.
27
<PAGE> 28
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/BIRTHDAY THE TRUST PRINCIPAL OCCUPATION
------------- --------- --------------------
<S> <C> <C>
WILLIAM J. KLIPP* Senior Vice President, Senior Vice President, Charles Schwab & Co., Inc.;
December 9, 1955 Chief Operating Officer President and Chief Operating Officer, Charles
and Trustee Schwab Investment Management, Inc. Prior to 1993,
Mr. Klipp was Treasurer of Charles Schwab & Co.,
Inc. and Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice President & Senior Vice President and Chief Investment Officer,
April 5, 1955 Chief Investment Charles Schwab Investment Management, Inc.
Officer
FRANCES COLE Secretary Vice President, Chief Counsel, Chief Compliance
September 9, 1955 Officer and Assistant Corporate Secretary, Charles
Schwab Investment Management, Inc.
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel - Charles Schwab
October 14, 1960 Investment Management, Inc. From 1991 to 1992, he
was Assistant Secretary and Assistant Corporate
Counsel for the Franklin Group of Mutual Funds.
CHRISTINA M. PERRINO Assistant Secretary Vice President and Senior Counsel - Charles Schwab
June 16, 1961 Investment Management, Inc. Prior to 1994, she was
Counsel and Assistant Secretary for North American
Security Life Insurance Company and Secretary for
North American Funds.
</TABLE>
Each of the above-referenced Officers and/or Trustees also serves in
the same capacity as described for the Trust for Schwab Investments, The Charles
Schwab Family of Funds and Schwab Annuity Portfolios. The address of each
individual listed above is 101 Montgomery Street, San Francisco, California
94104.
- ----------------------------------
*Mr. Klipp is an "interested person" of the Trust.
28
<PAGE> 29
<TABLE>
<CAPTION>
COMPENSATION TABLE(1)
Pension or
Retirement
Benefits Estimated
Accrued as Part Annual Benefits
of Fund Upon Total
Aggregate Expenses from Retirement from Compensation
Name of Person, Compensation the Fund the Fund from the Fund
Position from the Trust Complex(2) Complex(2) Complex(2)
- --------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Elizabeth G. Sawi(3), 0 N/A N/A 0
President and Trustee
Timothy F. McCarthy(4), 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Sr. Vice President, Chief
Operating Officer and
Trustee
Donald F. Dorward, 16,000 N/A N/A 60,500
Trustee
Robert G. Holmes, 16,000 N/A N/A 60,500
Trustee
Donald R. Stephens, 16,000 N/A N/A 60,500
Trustee
Michael W. Wilsey, 16,000 N/A N/A 60,500
Trustee
</TABLE>
1 Figures are for the Trust's fiscal year ended October 31,
1995.
2 "Fund Complex" comprises all 23 funds of the Trust, The
Charles Schwab Family of Funds, Schwab Investments and Schwab
Annuity Portfolios.
3 Ms. Sawi served as President and Trustee until October 1995.
4 Mr. McCarthy became President and Trustee in October 1995.
----------------------------------------------
29
<PAGE> 30
Pursuant to exemptive relief received by the Trust from the SEC, the
Trust may enter into deferred fee arrangements (the "Fee Deferral Plan" or the
"Plan") with the Trust's trustees who are not "interested persons" of any of the
Funds of the Trust (the "Independent Trustees" or the "Trustees").
As of the date of this Statement of Additional Information, none of the
Independent Trustees has elected to participate in the Fee Deferral Plan. In the
event an Independent Trustee does elect to participate in the Plan, the Plan
would operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account"), as of the
date such fees would have been paid to such Trustee. The value of the Deferred
Fee Account as of any date will be equal to the value the Account would have had
as of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the SchwabFund(R) or SchwabFunds selected by the
participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, The Charles
Schwab Family of Funds, and Schwab Investments.
Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. The exemptive relief granted to the Trust permits the
Funds and the Trustees to purchase the Selected SchwabFund Securities, which
transactions would otherwise be limited or prohibited by the investment policies
and/or restrictions of the Funds. See "Investment Restrictions."
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the mutual funds in the
SchwabFunds Family(R), a family of 22 mutual funds with approximately $33
billion in assets as of January 31, 1996. The Investment Manager is an affiliate
of Schwab, the Trust's distributor and shareholder services and transfer agent.
The Advisory Agreement will continue in effect until May 30, 1997 with respect
to each of the Funds and thereafter will continue for one year terms subject to
annual approval by: (1) the Trust's Board of Trustees or (2) a vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of a
Fund. In either event, the continuance must also be approved by a majority of
the Trust's Board of Trustees who are not parties to the Agreement or interested
persons (as defined in the 1940 Act) of any such party by vote cast in person at
a meeting called for the purpose of voting
30
<PAGE> 31
on such approval. The Advisory Agreement may be terminated at any time upon 60
days notice by either party, or by a majority vote of the outstanding shares of
a Fund, and will terminate automatically upon assignment.
International Index Fund. For its advisory and administrative services
to the International Index Fund, the Investment Manager is entitled to receive a
graduated annual fee, payable monthly, of 0.70% of the Fund's average daily net
assets not in excess of $300 million, and 0.60% of such assets over $300
million.
The Investment Manager and Schwab have guaranteed that, through at
least February 28, 1997, the total fund operating expenses for the International
Index Fund will not exceed 0.69% of that Fund's average daily net assets.
For the fiscal years ended October 31, 1995 and 1994 and for the fiscal
period from September 9, 1993 (commencement of operations) to October 31, 1993,
the International Index Fund paid investment advisory fees of $665,000,
$474,000, and $0, respectively (fees were reduced by $415,000, $388,000, and
$98,000, respectively).
Small-Cap Index Fund. For its advisory and administrative services to
the Small-Cap Index Fund, the Investment Manager is entitled to receive a
graduated annual fee, payable monthly, of 0.50% of the Fund's average daily net
assets not in excess of $300 million, and 0.45% of such assets over $300
million.
The Investment Manager and Schwab have guaranteed that, through
February 28, 1997, the total fund operating expenses for the Small-Cap Index
Fund will not exceed 0.59% of that Fund's average daily net assets.
For the fiscal year ended October 31, 1995 and for the fiscal period
from December 3, 1993 (commencement of operations) to October 31, 1994, the
Small-Cap Index Fund paid investment advisory fees of $332,000 and $152,000,
respectively (fees were reduced by $115,000 and $107,000, respectively).
Asset Director Funds. For its advisory and administrative services to
the Asset Director Funds, the Investment Manager is entitled to receive a
graduated annual fee, payable monthly, of 0.74% of each Fund's average daily net
assets not in excess of $1 billion, and 0.69% of the next $1 billion; and 0.64%
of such net assets over $2 billion.
The Investment Manager and Schwab have guaranteed that, through at
least December 31, 1996, the total fund operating expenses for each Asset
Director Fund will not exceed 0.89% of the Fund's average daily net assets.
S&P 500 Fund. For its advisory and administrative services to the S&P
500 Fund, the Investment Manager is entitled to receive a graduated annual fee,
payable monthly, of 0.36% of the Fund's average daily net assets not in excess
of $1 billion, and 0.33% of the next $1 billion; and 0.31% of such net assets
over $2 billion.
31
<PAGE> 32
The Investment Manager and Schwab have guaranteed that, through at
least February 28, 1997, the total operating expenses allocable to the Investor
Shares and the e.Shares(TM) will not exceed 0.49% and 0.28%, respectively, of
the average daily net assets of that class of shares.
Additional Information. The Advisory Agreement provides that the fees
to be paid to the Investment Manager will be less than the amount that would
cause the aggregate operating expenses of a Fund (excluding interest, taxes, net
brokerage commissions and extraordinary expenses) in any year to exceed the most
stringent limits prescribed by any state in which shares of a Fund are offered
for sale. The most stringent current limit for such expenses is 2.5% of a fund's
first $30 million of average net assets, 2.0% of a fund's next $70 million of
average net assets and 1.5% of a fund's average net assets in excess of $100
million.
From time to time, each Fund may compare its total operating expense
ratio to the total operating expense ratio of other mutual funds or mutual fund
averages with similar investment objectives as reported by Lipper Analytical
Service, Inc., Morningstar, Inc. or other independent sources of such
information ("independent sources").
SUB-ADVISER
The Investment Manager has entered into an investment sub-advisory
agreement (the "Sub-Advisory Agreement") with respect to the Asset Director
Funds with Symphony Asset Management, Inc. (the "Sub-Adviser"), pursuant to
which it will act as the Funds' sub-adviser. The Sub-Adviser is registered as an
investment adviser under the Investment Advisers Act of 1940 and currently
manages directly and indirectly approximately $700 million in institutional and
private account assets.
The Sub-Adviser furnishes investment advice through direct assistance
to the Investment Manager in the development and execution of quantitatively
based investment strategies. The Sub-Adviser uses a sophisticated optimization
technique known as "Tactical Asset Allocation" in evaluating the optimal
allocation of the Asset Director Funds' assets among asset categories: stocks,
bonds, and cash.
Tactical Asset Allocation is a value-oriented strategy which seeks the
highest reward for a given level of risk. Expected returns are measured for each
asset category; for stocks, the internal rate of return is measured on
forecasted dividend stream; for bonds, the yield to maturity is evaluated on
representative long corporate bonds; and for cash-equivalents, yield to maturity
is evaluated on representative money market instruments. Risks and correlations
of the asset categories are measured from long-term return histories.
The Investment Manager pays the Sub-Adviser an annual investment
sub-advisory fee, payable monthly, of 0.08% of the first $100 million of the
aggregate average daily net assets of the Asset Director Funds, 0.06% of the
next $150 million, 0.04% of the next $600 million
32
<PAGE> 33
and 0.02% of the Funds' aggregate average daily net assets over $850 million.
As of May 1, 1995 and June 30, 1995, Dimensional Fund Advisors Inc.
("Dimensional") no longer served as the sub-adviser to the Schwab Small-Cap
Index Fund and the Schwab International Index Fund, respectively. As of the same
dates, the Investment Manager became responsible for providing all investment
advisory services to the Funds.
Expenses. Under the Sub-Advisory Agreement between Dimensional and the
Investment Manager, the Investment Manager paid Dimensional the following
amounts for the fiscal periods indicated below.
International Index Fund: for the fiscal years ended October 31, 1995
and 1994 and for the fiscal period from September 9, 1993 (commencement of
operations) to October 31, 1993, $143,000, $185,000, and $21,000 respectively.
Small-Cap Index Fund: for the fiscal year ended October 31, 1995 and
for the fiscal period from December 3, 1993 (commencement of operations) to
October 31, 1994, $36,000 and $51,000, respectively.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal
underwriter for shares of the Trust and is the Trust's agent for the purpose of
the continuous offering of the Funds' shares. Each Fund pays the cost for the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under the
Distribution Agreement. Terms of continuation, termination and assignment under
the Distribution Agreement are identical to those described above with respect
to the Advisory Agreement.
CUSTODIAN AND FUND ACCOUNTANT
State Street Bank and Trust Company, at 1 Heritage Drive, North Quincy,
Massachusetts 02171-2197 serves as Custodian and as Fund Accountant for the
International Index Fund, the Small-Cap Index Fund and the Asset Director Funds.
PNC Bank, National Association, at the Airport Business Center, 200
Stevens Drive, Suite 440, Lester, Pennsylvania 19113, serves as Custodian for
the S&P 500 Fund. PFPC Inc., at 400 Bellevue Parkway, Wilmington, Delaware
19809, serves as Fund Accountant for the S&P 500 Fund.
ACCOUNTANTS AND REPORTS TO SHAREHOLDERS
The Trust's independent accountants, Price Waterhouse LLP, audit and
report on the annual financial statements of each series of the Trust and review
certain regulatory reports and the Trust's federal income tax return. Price
33
<PAGE> 34
Waterhouse LLP also performs other professional accounting, auditing, tax and
advisory services when engaged to do so by the Trust. Shareholders will be sent
audited annual and unaudited semi-annual financial statements. The address of
Price Waterhouse LLP is 555 California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, 1301 K Street, N.W., Suite 800 East, Washington, D.C.
20054, is counsel to the Trust.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the Funds, the Investment
Manager seeks to obtain best price and execution. Subject to the supervision of
the Board of Trustees, the Investment Manager will generally select brokers and
dealers for the Funds primarily on the basis of the quality and reliability of
brokerage services, including execution capability and financial responsibility.
In assessing these criteria, the Investment Manager will, among other things,
monitor the performance of brokers effecting transactions for the Funds to
determine the effect, if any, the Funds' transactions through those brokers have
on the market prices of the stocks involved. This may be of particular
importance for the Funds' investments in relatively smaller companies whose
stocks are not as actively traded as those of their larger counterparts. The
Funds will seek to buy and sell securities in a manner that causes the least
possible fluctuation in the prices of those stocks in view of the size of the
transactions.
In an attempt to obtain best execution for the Funds, the Investment
Manager may also place orders directly with market makers or with third market
brokers, Instinet or brokers on an agency basis. Placing orders with third
market brokers or through Instinet may enable the Funds to trade directly with
other institutional holders on a net basis. At times, this may allow the Funds
to trade larger blocks than would be possible trading through a single market
maker.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources may also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
In determining when and to what extent to use Schwab or any other
affiliated broker-dealer as its broker for executing orders for the Funds on
securities exchanges, the Investment Manager will consider (if relevant)
34
<PAGE> 35
whether the compensation to be paid Schwab or any other affiliated broker-dealer
will be (i) fair and reasonable, (ii) at least as favorable to the Funds as
commissions that would be charged by other qualified brokers having comparable
execution capabilities, and (iii) at least as favorable as commissions
contemporaneously charged by Schwab or any other affiliated broker-dealer on
comparable transactions for its most favored unaffiliated customers. The Funds
do not consider it practicable or in the best interests of their shareholders to
solicit competitive bids for commission rates on each transaction. However, the
Board of Trustees, including a majority of the trustees who are not "interested
persons" of Schwab or any other affiliated broker-dealer within the meaning of
the 1940 Act, (i) has prescribed procedures designed to provide that the Funds
do not pay commissions that do not meet the standards described above, (ii)
reviews those procedures annually to determine whether they remain adequate, and
(iii) considers quarterly whether or not the commissions charged by Schwab or
any other affiliated broker-dealer have met the standards.
Brokerage services provided by Schwab to the Funds are also subject to
Rule 11a2-2(T) under the Securities Exchange Act of 1934, as amended. Rule
11a2-2(T) permits the Funds to use Schwab as a broker provided certain
conditions are met. Among these requirements are that the floor brokerage
element of portfolio transactions (that is, execution on the exchange floor or
through use of exchange facilities) be performed by members of the exchange not
associated with Schwab, that the orders to such members be transmitted from off
the exchange floor and that neither Schwab nor an associated person of Schwab
participates in the execution of the transaction after the order has been so
transmitted. In connection with transactions in which Schwab acts as broker for
the Funds, Schwab, while not permitted to perform floor brokerage (which is
undertaken by members selected by Schwab who are not associated with that firm),
still continues to bear principal responsibility for determining important
elements of overall execution such as timing and order size, and also clears and
settles such transactions. Schwab pays the fees charged by those persons
performing the described floor brokerage elements. Schwab will not trade
directly with the Funds in any transactions in which Schwab or an affiliate acts
as principal.
Brokerage Commissions. For the fiscal years ended October 31, 1995 and
1994 and for the fiscal period from September 9, 1993 (commencement of
operations) to October 31, 1993, the International Index Fund paid brokerage
commissions of $54,718, $86,127, $170,195, respectively. For the fiscal year
ended October 31, 1995 and for the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1994, the Small-Cap Index Fund paid
brokerage commissions of $142,785 and $165,997, respectively.
PORTFOLIO TURNOVER
For reporting purposes, each Fund's turnover rate is calculated by
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<PAGE> 36
dividing the value of purchases or sales of portfolio securities for the fiscal
year, whichever is less, by the monthly average value of portfolio securities
owned by the Fund during the fiscal year. When making the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded.
A 100% portfolio turnover rate would occur, for example, if all
portfolio securities (aside from short-term securities) were sold and either
repurchased or replaced once during the fiscal year. The Funds expect that their
portfolio turnover rate will not exceed 100% in any given year, a turnover rate
lower than that of most non-index mutual funds. In the case of the Asset
Director Funds, this 100% portfolio turnover rate applies to the Funds' stock
and bond categories separately. A high portfolio turnover rate may increase a
Fund's transaction costs. The International Index Fund's portfolio turnover rate
for the fiscal years ended October 31, 1995 and 1994 was 0% and 6%,
respectively. The Small-Cap Index Fund's portfolio turnover rate for the fiscal
year ended October 31, 1995 and for the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1994 was 24% and 16%, respectively.
From time to time, each Fund may compare its portfolio turnover rate
with that of other mutual funds as reported by independent sources.
TAXES
It is the policy of each Fund to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Code. By
following this policy, each Fund expects to eliminate or reduce to a nominal
amount the federal income tax to which it is subject.
In order to qualify as a regulated investment company, each of the
Funds must, among other things, (1) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stocks, securities, foreign currencies or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
derive less than 30% of its gross income from gains from the sale or other
disposition of certain assets (including stocks and securities) held for less
than three months; and (3) diversify its holdings so that at the end of each
quarter of its taxable year (i) at least 50% of the market value of the Fund's
total assets is represented by cash or cash items, U.S. government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. government securities or
securities of
36
<PAGE> 37
any other regulated investment company) or of two or more issuers that the Fund
controls, within the meaning of the Code, and that are engaged in the same,
similar or related trades or businesses. These requirements may restrict the
degree to which a Fund may engage in short-term trading and certain hedging
transactions and may limit the range of a Fund's investments. If a Fund
qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, which it distributes to shareholders, provided that the Fund
meets certain minimum distribution requirements. To comply with these
requirements, a Fund must distribute at least (a) 90% of its "investment company
taxable income" (as that term is defined in the Code) and (b) 90% of the excess
of its (i) tax-exempt interest income over (ii) certain deductions attributable
to that income (with certain exceptions), for its taxable year. Each Fund
intends to make sufficient distributions to shareholders to meet these
requirements.
The Code imposes a non-deductible excise tax on regulated investment
companies that do not distribute in a calendar year (regardless of whether they
otherwise have a non-calendar taxable year) an amount equal to 98% of their
"ordinary income" (as defined in the Code) for the calendar year plus 98% of
their capital gain net income for the one year period ending on October 31 of
such calendar year. The balance of such income must be distributed during the
next calendar year. For the foregoing purposes, a Fund is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year. If the distributions during a calendar year were
less than the required amount, the Fund is subject to a non-deductible excise
tax equal to 4% of the deficiency.
A Fund's transactions in futures contracts, forward contracts, foreign
currency transactions, options, and certain other investment and hedging
activities are subject to special tax rules. In a given case, these rules may
accelerate income to a Fund, defer its losses, cause adjustments in the holding
periods of the Fund's assets, convert short-term capital losses into long-term
capital losses or otherwise affect the character of the Fund's income. These
rules could therefore affect the amount, timing and character of distributions
to shareholders. The Funds will endeavor to make any available elections
pertaining to these transactions in a manner believed to be in the best interest
of the Funds and their shareholders.
INCOME TAX INFORMATION
Any dividends declared by the Funds in October, November or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder on
December 31 of the year in which they were declared.
Dividends paid by the Funds from net investment income and
distributions from the Funds' net short-term capital gains in excess of any net
long-term
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<PAGE> 38
capital losses, whether received in cash or reinvested, generally will be
taxable to shareholders as ordinary income. For corporate investors in the
Funds, dividend distributions designated by the Funds to be from dividends
received from qualifying domestic corporations will be eligible for the 70%
corporate dividends-received deduction to the extent they would qualify if the
Funds were regular corporations. Distributions received from the Funds
designated as long-term capital gains (net of capital losses), whether received
in cash or reinvested, will be taxable as long-term capital gains without regard
to the length of time a shareholder owned shares in the Funds. However, if a
shareholder receives a long-term capital gain distribution with respect to
Funds' shares held for six months or less, any loss on the sale or exchange of
those shares shall, to the extent of the long-term capital gain distribution, be
treated as a long-term capital loss. If a shareholder is not subject to income
tax, generally the shareholder will not be taxed on amounts distributed by the
Funds.
A Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends paid to any shareholder (1) who
fails to provide a correct taxpayer identification number certified under
penalty of perjury; (2) who is subject to withholding by the Internal Revenue
Service for failure to properly report all payments of interest or dividends; or
(3) who fails to provide a certified statement that he or she is not subject to
"backup withholding." This "backup withholding" is not an additional tax and any
amounts withheld may be credited against the shareholder's ultimate U.S. tax
liability.
The foregoing discussion relates only to federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) generally are subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from net investment income and
short-term capital gains. Distributions to foreign shareholders of long-term
capital gains and any gains from the sale or other disposition of shares of the
Funds generally are not subject to U.S. taxation, unless the recipient is an
individual who meets the Code's definition of "resident alien." Different tax
consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a
foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above. Distributions by a Fund may also be
subject to state, local and foreign taxes, and its treatment under applicable
tax laws may differ from the federal income tax treatment.
Although the International Index Fund and the Asset Director Funds will
attempt not to invest in any non-U.S. corporation which could be treated as a
passive foreign investment company ("PFIC"), or become a PFIC, under the Code,
it might inadvertently do so. This could result in adverse tax consequences upon
the disposition of, or the receipt of "excess distributions" with respect to,
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such equity investments. To the extent the International Index Fund and the
Asset Director Funds do invest in PFICs, they may adopt certain tax strategies
to reduce or eliminate the adverse effects of certain federal tax provisions
governing PFIC investments. Many non-U.S. banks and insurance companies may not
be treated as PFICs if they satisfy certain technical requirements under the
Code. To the extent that the International Index Fund and the Asset Director
Funds do invest in foreign securities which are determined to be PFIC securities
and are required to pay a tax on such investments, a credit for this tax would
not be allowed to be passed through to the International Index Fund's and the
Asset Director Funds' shareholders. Therefore, the payment of this tax would
reduce the International Index Fund's and the Asset Director Funds' economic
return from their PFIC shares and excess distributions received with respect to
such shares are treated as ordinary income rather than capital gains.
This discussion of federal income taxation presented above only summarizes some
of the important federal tax considerations generally affecting purchasers of
Fund shares. No attempt has been made to present a detailed explanation of the
federal income tax treatment of a Fund and its shareholders, and the discussion
is not intended as a substitute for careful tax planning. Accordingly,
prospective investors (particularly those not residing or domiciled in the
United States) should consult their own tax advisers regarding the consequences
of investing in a Fund.
SHARE PRICE CALCULATION
Each Fund's net asset value per share is determined each day the New
York Stock Exchange is open for trading as of 4:00 p.m., Eastern time. The net
asset value of the International Index Fund is expressed in U.S. dollars by
translating the Fund's assets using the bid price for the U.S. dollar as quoted
by generally recognized, reliable sources. Currently, the New York Stock
Exchange is closed on the following holidays: New Year's Day (observed),
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The Funds value their portfolio securities
daily based on their market value. Each security held by the Funds that 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
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<PAGE> 40
such prices are believed to reflect fair market value.
HOW THE FUNDS REFLECT PERFORMANCE
STANDARDIZED TOTAL RETURN
Average annual total return for a period is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in the Fund
made at the beginning of the period, then calculating the average annual
compounded rate of return that would produce the same investment return on the
$1,000 over the same period. In computing average annual total return, the Fund
assumes the reinvestment of all distributions at net asset value on applicable
reinvestment dates. For the fiscal year ended October 31, 1995 and for the
fiscal period from September 9, 1993 (commencement of operations) to October 31,
1995, the International Index Fund's average annual total return was 3.35% and
5.95%, respectively. For the fiscal year ended October 31, 1995 and for the
fiscal period from December 3, 1993 (commencement of operations) to October 31,
1995, the Small-Cap Index Fund's total return was 17.11% and 8.97%,
respectively.
NONSTANDARDIZED TOTAL RETURN
Nonstandardized total return for a Fund differs from standardized total
return in that it relates to periods other than the period for standardized
total return and/or that it represents aggregate (rather than average) total
return.
In addition, an after-tax total return for each Fund may be calculated
by taking that Fund's standardized or non-standardized total return and
subtracting applicable federal taxes from the portions of each Fund's total
return attributable to capital gains distributions and ordinary income. This
after-tax total return may be compared to that of other mutual funds with
similar investment objectives as reported by independent sources.
Each Fund may also report the percentage of that Fund's standardized or
non-standardized total return which would be paid to taxes annually (at the
applicable federal personal income and capital gains tax rates) before
redemption of Fund shares. This proportion may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.
YIELD
Yield refers to the net investment income generated by a hypothetical
investment in the Fund over a specific 7-day period. This net investment income
is then annualized, which means that the net investment income generated during
the 7-day period is assumed to be generated in each 7-day period over an annual
period, and is shown as a percentage of the investment.
COMPARING THE PERFORMANCE OF THE FUNDS WITH OTHER FUNDS AND INDICES
The performance of the Funds may be compared with the performance of
other mutual funds by comparing the
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<PAGE> 41
ratings of mutual fund rating services, various indices of investment
performance, United States government obligations, bank certificates of deposit,
the consumer price index, and other investments for which reliable data is
available.
The Asset Director Funds may also compare their historical performance
figures to the performance of indices similar to their asset categories and
sub-categories, such as those indices names in the Funds' Prospectus under
"Market Performance."
THE BENEFITS OF INTERNATIONAL INVESTING
INCREASED DIVERSIFICATION CAN LOWER RISK
To some extent, all U.S.-based investments -- stocks, bonds, mutual
funds and CDs -- are affected by the same economic forces. Tax cuts, interest
rate changes and the performance of the U.S. stock market can all influence U.S.
investments. Adding international (or overseas) investments to a U.S.-based
portfolio has historically reduced the portfolio's overall volatility. Although
U.S. and international markets may be interrelated, they do not move in tandem
- -- so losses in one market can be offset by gains in another.
POTENTIALLY HIGHER OVERALL PERFORMANCE
During the past 10 years ending December 31, 1994, international equity
markets outperformed the U.S. equity market and most other U.S. securities
investments -- corporate bonds, CDs and U.S. Treasuries. The returns produced by
the international markets have also kept investors well ahead of inflation. This
historical performance means that investors diversified overseas earned a higher
level of return.
BROADER GROWTH OPPORTUNITIES
Investors who limit their portfolios to U.S. securities are missing
these investment opportunities. Ten years ago, the United States made up more
than half of the world's equity investments. As of December 31, 1993, it
represented just over one-third.
INDEXING AND THE SCHWAB INDEX FUNDS
Because the unmanaged performance of a broad-based equity index has
often proven superior to that of many individually selected stock portfolios, a
growing percentage of assets invested in the equity markets are being placed in
"index" portfolios. Institutional investors often devote a substantial
percentage of their assets to indexed strategies.
An index typically tracks the performance of a group of securities
selected to represent a particular market, and is most often used to gauge that
market's performance. The Dow Jones Industrial Average ("DJIA") and Standard
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& Poor's 500 Index(R) ("S&P 500") are two indices designed to measure the
performance of United States stocks. When investment managers invest indexed
separate accounts or index fund assets, they attempt to replicate the
performance of the applicable target index by holding all or a representative
sample of the securities included in the index.
The Funds' performance data assume the reinvestment of dividends, but
do not reflect deductions for administrative and management expenses. The Funds
will be subject to these costs and expenses, while the Index does not have these
expenses. In addition, various factors, such as holding a cash balance, may
cause the Funds' performance to be higher or lower than that of the Index.
THE SCHWAB INTERNATIONAL INDEX(R)
The Schwab International Index(R) is a broad-based stock market index
which contains the common stocks of the 350 largest operating companies (i.e.,
non-investment companies) incorporated outside the United States. To reduce
undue risk, the Index represents equities only from countries that are
considered to have developed markets and economies. By tracking the largest
companies in developed markets, the Index represents the performance of the
"blue chips" of international markets. The Index is also designed to provide a
broad representation of the international market, by limiting each country to no
more than 35% of the total market capitalization of the Index. As the stocks
contained in the Index represent about 35% of the total market capitalization of
international companies, the Index provides a reliable measure of market
performance. The Schwab International Index(R) was first made available to the
public on July 29, 1993.
THE SCHWAB SMALL-CAP INDEX(TM)
To be included in the Schwab Small-Cap Index, a company must satisfy
all of the following criteria: (1) it must be an "operating company" (i.e., not
an investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the New
York Stock Exchange, American Stock Exchange or the NASDAQ/NMS, and (3) its
market value must place it among the second 1000 such companies as measured by
market capitalization (i.e., from the company with a rank of 1001 through the
company with a rank of 2000). Shareholders generally avoid exposure to the
smallest companies, whose shares are often thinly traded and very volatile,
because these stocks are not included in the Index.
A particular stock's weighting in the Schwab Small-Cap Index is based
on its relative total market value (i.e., its market price per share times the
number of shares outstanding), divided by the total market capitalization of the
Schwab Small-Cap Index. The returns produced by the United States stock market
during the 25 years ending December 31, 1995 have been exceeded by very few
types of securities investments. Because the unmanaged performance of the U.S.
stock
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market has often proven superior to that of many individually selected stock
portfolios, a growing percentage of assets invested in the equity markets are
being placed in "index" portfolios. From less than $9 billion in 1980, indexed
institutional holdings have grown to over $280 billion, a figure equal to
approximately one-quarter of all institutional assets. (Source: Callan
Associates Survey, reported in Fall 1990 edition of The Journal of Portfolio
Management).
Historically, returns in a long-term investment in a group of common
stocks representative of the stock market as a whole, as well as a group of
common stocks representative of small-cap stocks, have significantly exceeded
the returns of U.S. Treasury Bills, CDs, corporate bonds and inflation.
THE S&P 500 INDEX
The Standard and Poor's 500 Composite Stock Price Index, known as the
S&P 500 Index, is representative of the performance of the U.S. stock market.
The Index consists of 500 stocks chosen for market size, liquidity, and industry
group representation. It is a market-value weighted index (stock price times
number of shares outstanding), with each stock's weight in the Index
proportionate to its market value. The S&P does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
Index are among the largest, there are also some relatively small companies in
the Index. Those companies, however, are generally established companies within
their industry group. S&P identifies important industry groups within the U.S.
economy and then allocates a representative sample of stocks with each group to
the S&P 500. There are four major industry sectors within the Index:
Industrials, Utilities, Financial and Transportation.
ASSET ALLOCATION STRATEGIES USING SCHWABFUNDS(R)
Shareholders of SchwabFunds may wish to invest in the SchwabFunds as
components of their personal asset allocation plan. They may also choose to
invest in the Schwab Asset Director Funds, which offer the benefits of asset
allocation in a single fund. An asset allocation program is available through
Schwab. This program may help shareholders select investments, including
investments in SchwabFunds, that match their individual investment needs. The
shareholders' personal investment plan is based on a number of factors including
personal financial situation, time horizon, investment objectives and goals, and
risk tolerance.
ACCESS TO SCHWAB'S MUTUAL FUND ONESOURCE SERVICE(TM)
With Schwab's Mutual Fund OneSource ServiceTM ("OneSource"), a
shareholder can invest in over 200 mutual funds from many fund companies,
subject to the following. If a shareholder makes five or more short-term
redemptions of OneSource mutual funds (other than the SchwabFunds) within any
12-month period, a fee will be charged on all future trades. A short-term
redemption in this context refers to the sale of mutual fund
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<PAGE> 44
shares held for six months or less. Some mutual funds available through
OneSource may charge fees permitted under Rule 12b-1 in excess of one quarter of
one percent per year. Schwab reserves the right to modify OneSource's terms and
conditions at any time. For more information, a shareholder should contact their
Schwab office during its regular business hours or 800-2 NO-LOAD, 24 hours a
day.
From time to time, the Funds may include discussions in advertisements
of the income tax savings shareholders may experience as a result of their
policy of limiting portfolio trading in order to reduce capital gains. This
information may be supplemented by presentations of statistical data
illustrating the extent of such income tax savings and the impact of such
savings on the yield and/or total return of the Funds. In addition, such
advertisements may include comparisons of the Funds' performance against that of
investment products that do not employ the Funds' policy of seeking to limit
capital gains.
The Funds are intended to make indexed investing easily available to
Schwab customers with the highest level of convenience and economy thereby
facilitating their ability to participate in the long-term performance of the
U.S. stock market.
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<PAGE> 45
SCHWABFUNDS(R).
SchwabFunds offers a variety of series and classes of shares of beneficial
interest to help you with your investment needs.
EQUITY FUNDS
Schwab 1000 Fund(R)(1)
Schwab International Index Fund(TM)(2)
Schwab Small-Cap Index Fund(R)(2)
Schwab Asset Director(R)-High Growth Fund(2)
Schwab Asset Director(R)-Balanced Growth Fund(2)
SchwabAsset Director(R)-Conservative Growth Fund(2)
Schwab S&P 500 Fund-Investor Shares(2)
Schwab S&P 500 Fund-e.Shares(TM)(2,3)
FIXED INCOME FUNDS(1)
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund(4)
Schwab California Long-Term Tax-Free Bond Fund(4)
MONEY MARKET FUNDS(5)
Schwab Money Market Fund
Schwab Government Money Fund
Schwab U.S. Treasury Money Fund
Schwab Value Advantage Money Fund(TM)
Schwab Tax-Exempt Money Fund-Sweep Shares
Schwab Tax-Exempt Money Fund-Value Advantage Shares(TM)
Schwab California Tax-Exempt Money Fund-Sweep Shares(4)
Schwab California Tax-Exempt Money Fund-Value Advantage Shares(TM)(4)
Schwab Retirement Money Fund(R)(6)
Schwab Institutional Advantage Money Fund(TM)(6)
Schwab New York Tax-Exempt Money Fund-Sweep Shares(7)
Schwab New York Tax-Exempt Money Fund-Value Advantage Shares(TM)(7)
1 The Schwab 1000 Fund and all fixed income funds are separate investment
portfolios of Schwab Investments.
2 The Funds are separate investment portfolios or classes of shares of
Schwab Capital Trust.
3 Available only through SchwabLink(TM).
4 Available only to California residents and residents of selected other
states.
5 All listed money market funds are separate investment portfolios of The
Charles Schwab Family of Funds.
6 Designed for institutional investors only.
7 Available only to New York residents and residents of selected other
states.
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OTHER INFORMATION
From time to time, the International Index Fund and the Small-Cap Index
Fund may compare the historical performance of the Schwab International Index(R)
and the Schwab Small-Cap Index(TM), respectively, to the historical performance
of various other indices, including the S&P 500, as reported by independent
sources.
Each Fund is managed to offset capital gains with capital losses in
order to minimize that Fund's capital gain distributions. This special feature
can make a real difference in an investor's after-tax return, especially if the
investor is in a high tax bracket. In addition, each Fund has adopted a number
of policies that should cause its portfolio turnover rate to be below the
portfolio turnover rate of many other mutual funds. A lower portfolio turnover
rate acts to minimize associated transaction costs as well as the level of
realized capital gains. By avoiding, where possible, the distribution of capital
gains to shareholders, the Funds help to build the value of a shareholders
shares and defer payment of capital gains taxes until shares are redeemed. A
shareholder's current tax liability for capital gains should be reduced and the
shareholder's total return increased by these policies.
Each Fund may, from time to time, refer to recent studies that analyze
certain techniques and strategies which either Fund may use. In addition, each
Fund may, from time to time, promote the advantages of investing in a series
that is part of a large, diverse mutual fund complex.
From time to time, either Fund may include discussions in
advertisements of the income tax savings shareholders may experience as a result
of that Fund's policy of limiting portfolio trading in order to reduce capital
gains. This information may be supplemented by presentations of statistical data
illustrating the extent of such income tax savings and the impact of such
savings on the yield and/or total return of either Fund. In addition, such
advertisements may include comparisons of each Fund's performance against that
of investment products that do not employ each Fund's policy of seeking to limit
capital gains.
GENERAL INFORMATION
The Trust is generally not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
election or removal of trustees if a meeting is requested in writing by a
shareholder or shareholders who beneficially own(s) 10% or more of the Trust's
shares; (2) adoption of any contract for which shareholder approval is required
by the 1940 Act; (3) any termination of the Trust to the extent and as provided
in the Declaration of Trust; (4) any amendment of the Declaration of Trust
(other than amendments changing the name of the Trust or any of its investment
portfolios, supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision thereof); (5)
determining whether a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the shareholders, to the same extent as the stockholders of a Massachusetts
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business corporation; and (6) such additional matters as may be required by law,
the Declaration of Trust, the Bylaws or any registration of the Trust with the
SEC or any state or as the Board of Trustees may consider desirable. The
shareholders also would vote upon changes to a Fund's fundamental investment
objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing trustees and until the election and
qualification of his or her successor or until death, resignation, retirement or
removal by a majority vote of the shares entitled to vote (as described below)
or of a majority of the Trustees. In accordance with the 1940 Act (i) the Trust
will hold a shareholder meeting for the election of trustees when less than a
majority of the trustees have been elected by shareholders, and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled by a
vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such
for at least six months and who hold shares constituting at least 1% of the
Trust's outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more trustees, the Trust has undertaken to
disseminate appropriate materials at the expense of the requesting shareholders.
The Bylaws provide that a majority of shares entitled to vote shall be
a quorum for the transaction of business at a shareholders' meeting, except that
where any provision of law, of the Declaration of Trust or of these Bylaws
permits or requires that (i) holders of any series shall vote as a series, then
a majority of the aggregate number of shares of that series entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that series; or (ii) holders of any class shall vote as a class, then a majority
of the aggregate number of shares of that class entitled to vote shall be
necessary to constitute a quorum for the transaction of business by that class.
Any lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting, without the necessity of further notice. The Declaration of
Trust specifically authorizes the Board of Trustees to terminate the Trust (or
any of its investment portfolios) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the Trust solely by reason of being or having been a shareholder. Moreover,
the Trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is
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considered remote, because it is limited to circumstances in which a disclaimer
is inoperative and the Trust itself is unable to meet its obligations.
For further information, please refer to the registration statement and
exhibits for the Trust on file with the SEC in Washington, D.C. and available
upon payment of a copying fee. The statements in the Prospectus and this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
PRINCIPAL HOLDERS OF SECURITIES
As of February 28, 1996, Charles Schwab and Co., Inc., 101 Montgomery
St., San Francisco, CA 94104 directly owned 100% of the outstanding shares of
the Schwab S&P 500 Fund--Investor Shares and the Schwab S&P 500
Fund--e.Shares(TM).
In addition, as of January 31, 1996, the officers and trustees of the
Trust, as a group, owned of record or beneficially 1.3%, 2.3% and 1.7% of the
outstanding voting securities of the Schwab Small-Cap Index Fund, the Asset
Director--High Growth Fund and the Asset Director--Conservative Growth,
respectively. As of January 31, 1996, the officers and trustees of the Trust, as
a group, owned of record or beneficially less than 1% of the outstanding voting
securities of the remaining series of Schwab Capital Trust.
PURCHASE AND REDEMPTION OF SHARES
Each Fund has set minimum initial investment requirements, as disclosed
in their respective Prospectuses. Subsequent investments of $100 or more may be
made. These minimum investment requirements may be changed at any time and are
not applicable to certain types of investors. The Trust may waive the minimums
for purchases by trustees, directors, officers or employees of the Trust,
Schwab, the Investment Manager, or the Sub-Adviser.
The Trust has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of its net assets at the beginning
of such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of the stated limits may be paid, in whole or in
part, in investment securities or in cash, as the Trust's Board of Trustees may
deem advisable; however, payment will be made wholly in cash unless the Board of
Trustees believes that economic or market conditions exist that would make such
a practice detrimental to the best interests of the Fund. If redemption proceeds
are paid in investment securities, such securities will be valued as set forth
in the Prospectus of the Fund affected under "Share Price Calculation" and a
redeeming shareholder would normally incur brokerage expenses if he or she
converted the securities to cash.
OTHER INFORMATION
The Prospectuses of the Funds and this Statement of Additional
Information do not contain all the information included in the Registration
Statement filed with the SEC under the Securities Act of 1933, as amended, with
respect to
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the securities offered by the Prospectuses. Certain portions of the Registration
Statement have been omitted from the Prospectuses and this Statement of
Additional Information pursuant to the rules and regulations of the SEC. The
Registration Statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectuses and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
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COMPANIES IN THE SCHWAB INTERNATIONAL INDEX
The following is a list of Companies whose securities were included in
the Schwab International Index(R) calculation as of September 29, 1995:
<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
ABBEY NATIONAL UNITED KINGDOM
ABN AMRO HOLDING NETHERLANDS
AEGON NETHERLANDS
AIR LIQUIDE FRANCE
AJINOMOTO CO JAPAN
AKZO NOBEL NETHERLANDS
ALCAN ALUMINIUM CANADA
ALCATEL ALSTHOM FRANCE
ALL NIPPON AIRWAYS CO JAPAN
ALLEANZA ASSICUR. ORD ITALY
ALLEANZA ASSICUR. RNC ITALY
ALLIED DOMECQ UNITED KINGDOM
AMCOR AUSTRALIA
ANZ BANKING GROUP AUSTRALIA
ARGENTARIA CORP BANCARIA SPAIN
ARGYLL GROUP UNITED KINGDOM
ASAHI BANK JAPAN
ASAHI BREWERIES JAPAN
ASAHI CHEMICAL IND CO JAPAN
ASAHI GLASS CO JAPAN
ASDA GROUP UNITED KINGDOM
ASEA A SWEDEN
ASEA B SWEDEN
ASS'D BR FOODS EX WESTON UNITED KINGDOM
ASSICURAZIONI GENERALI ITALY
ASTRA A SWEDEN
ASTRA B SWEDEN
AXA FRANCE
BAA UNITED KINGDOM
BANCO BILBAO VIZCAYA SPAIN
BANCO SANTANDER SPAIN
BANK FUKUOKA JAPAN
BANK MONTREAL CANADA
BANK NOVA SCOTIA CANADA
</TABLE>
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<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
BANK TOKYO JAPAN
BANK YOKOHAMA JAPAN
BANKGESELLSCHAFT BERLIN GERMANY
BARCLAYS UNITED KINGDOM
BARRICK GOLD CORP CANADA
BASF GERMANY
BASS UNITED KINGDOM
BAT INDUSTRIES UNITED KINGDOM
BAYER GERMANY
BAYER HYPOTHEKEN BANK GERMANY
BAYER VEREINSBANK STAMM GERMANY
BBC BROWN BOVERI INH SWITZERLAND
BBC BROWN BOVERI NAMEN SWITZERLAND
BCE INC CANADA
BMW STAMM GERMANY
BNP ORD FRANCE
BOC GROUP UNITED KINGDOM
BOOTS CO UNITED KINGDOM
BRIDGESTONE CORP JAPAN
BRITISH AIRWAYS UNITED KINGDOM
BRITISH GAS UNITED KINGDOM
BRITISH PETROLEUM UNITED KINGDOM
BRITISH SKY BROADCASTING UNITED KINGDOM
BRITISH STEEL UNITED KINGDOM
BRITISH TELECOM UNITED KINGDOM
BROKEN HILL PROP CO AUSTRALIA
BTR UNITED KINGDOM
BTR NYLEX AUSTRALIA
CABLE & WIRELESS UNITED KINGDOM
CADBURY SCHWEPPES UNITED KINGDOM
CANADIAN IMPERIAL BANK CANADA
CANADIAN PACIFIC LTD CANADA
CANON INC JAPAN
CARREFOUR FRANCE
CHEUNG KONG HONG KONG
CHIBA BANK JAPAN
CHINA LIGHT & POWER HONG KONG
CHUBU ELECTRIC POWER CO JAPAN
CHUGOKU ELECTRIC POWER JAPAN
</TABLE>
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<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
CIBA-GEIGY INHABER SWITZERLAND
CIBA-GEIGY NAMEN SWITZERLAND
CITIC PACIFIC HONG KONG
CITY DEVELOPMENTS SINGAPORE
COMMERCIAL UNION UNITED KINGDOM
COMMERZBANK AKTIE GERMANY
COMMONWEALTH BANK AUSTRALIA
CRA AUSTRALIA
CS HOLDING SWITZERLAND
DAI NIPPON PRINTING CO JAPAN
DAI-ICHI KANGYO BANK JAPAN
DAIEI JAPAN
DAIMLER-BENZ GERMANY
DAIWA BANK JAPAN
DAIWA HOUSE IND CO JAPAN
DAIWA SECURITIES CO JAPAN
DANONE (GROUPE) FRANCE
DDI CORP JAPAN
DEUTSCHE BANK GERMANY
DEVELOPMENT BK SINGAPORE SINGAPORE
DRESDNER BANK GERMANY
EAST JAPAN RAILWAY CO JAPAN
ELECTRABEL BELGIUM
ELECTRABEL VVPR BELGIUM
ELF AQUITAINE FRANCE
ELSEVIER NETHERLANDS
ENDESA SPAIN
ERICSSON (LM) B SWEDEN
FANUC JAPAN
FIAT ORD ITALY
FIAT PRIV ITALY
FIAT RNC ITALY
FUJI BANK JAPAN
FUJI PHOTO FILM CO JAPAN
FUJITSU JAPAN
GENERAL ELECTRIC PLC UNITED KINGDOM
GENERALE BELGIQUE BELGIUM
GENERALE EAUX (CIE) FRANCE
GLAXO WELLCOME UNITED KINGDOM
</TABLE>
52
<PAGE> 53
<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
GRANADA GROUP UNITED KINGDOM
GRAND METROPOLITAN UNITED KINGDOM
GREAT UNIVERSAL STORES UNITED KINGDOM
GUINNESS UNITED KINGDOM
GUNMA BANK JAPAN
HACHIJUNI BANK JAPAN
HANG SENG BANK HONG KONG
HANKYU CORP JAPAN
HANSON UNITED KINGDOM
HEINEKEN NV NETHERLANDS
HENDERSON LAND DEV. HONG KONG
HENKEL VORZUG GERMANY
HITACHI JAPAN
HITACHI ZOSEN CORP JAPAN
HOECHST GERMANY
HOKKAIDO ELECTRIC POWER JAPAN
HOKURIKU ELECTRIC POWER JAPAN
HOLDERBANK INHABER SWITZERLAND
HOLDERBANK NAMEN SWITZERLAND
HONDA MOTOR CO JAPAN
HONGKONG ELECTRIC HLDGS HONG KONG
HONGKONG LAND HK (USD) SINGAPORE
HONGKONG TELECOM HONG KONG
HSBC HOLDINGS (GBP 0.75) UNITED KINGDOM
HSBC HOLDINGS (HKD 10) UNITED KINGDOM
HUTCHISON WHAMPOA HONG KONG
IBERDROLA SPAIN
IMPERIAL CHEMICAL ICI UNITED KINGDOM
IMPERIAL OIL CANADA
INA ITALY
INDUSTRIAL BANK OF JAPAN JAPAN
INT'LE NEDERLANDEN GROEP NETHERLANDS
ISHIKAWAJIMA-HARIMA JAPAN
ITO-YOKADO CO JAPAN
ITOCHU CORP JAPAN
JAPAN AIRLINES CO JAPAN
JAPAN TELECOM CO JAPAN
JAPAN TOBACCO JAPAN
JARDINE MATHESON HK(USD) SINGAPORE
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
JOYO BANK JAPAN
JUSCO CO JAPAN
KAJIMA CORP JAPAN
KANSAI ELECTRIC POWER CO JAPAN
KAO CORP JAPAN
KAWASAKI HEAVY IND JAPAN
KAWASAKI STEEL CORP JAPAN
KDD JAPAN
KINGFISHER UNITED KINGDOM
KINKI NIPPON RAILWAY CO JAPAN
KIRIN BREWERY CO JAPAN
KOBE STEEL JAPAN
KOMATSU JAPAN
KON. PTT NEDERLAND NETHERLANDS
KUBOTA CORP JAPAN
KYOCERA CORP JAPAN
KYUSHU ELECTRIC POWER CO JAPAN
LAFARGE (LAFARGE COPPEE) FRANCE
LINDE GERMANY
LLOYDS BANK UNITED KINGDOM
LONG-TERM CREDIT BANK JAPAN
LOREAL FRANCE
LUFTHANSA STAMM GERMANY
LUFTHANSA VORZUG GERMANY
LVMH FRANCE
LYONNAISE DES EAUX FRANCE
MANNESMANN GERMANY
MARKS & SPENCER UNITED KINGDOM
MARUBENI CORP JAPAN
MARUI CO JAPAN
MATSUSHITA COMMUNICATION JAPAN
MATSUSHITA ELECT IND'L JAPAN
MATSUSHITA ELECT WORKS JAPAN
MICHELIN B FRANCE
MITSUBISHI BANK JAPAN
MITSUBISHI CHEMICAL CORP JAPAN
MITSUBISHI CORP JAPAN
MITSUBISHI ELECTRIC CORP JAPAN
MITSUBISHI ESTATE CO JAPAN
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
MITSUBISHI HEAVY IND JAPAN
MITSUBISHI MATERIALS JAPAN
MITSUBISHI MOTORS CORP JAPAN
MITSUBISHI TRUST JAPAN
MITSUI & CO JAPAN
MITSUI FUDOSAN CO JAPAN
MITSUI MARINE & FIRE JAPAN
MITSUI TRUST & BANK CO JAPAN
MUNCHENER RUCK INH GERMANY
MUNCHENER RUCK NAM GERMANY
MURATA MANUFACTURING CO JAPAN
NAME CC
NATIONAL AUSTRALIA BANK AUSTRALIA
NATIONAL POWER UNITED KINGDOM
NATIONAL WESTMINSTER BK UNITED KINGDOM
NEC CORP JAPAN
NESTLE NOM SWITZERLAND
NEW OJI PAPER CO JAPAN
NEW WORLD DEVELOPMENT HONG KONG
NEWS CORP AUSTRALIA
NEWS CORP PLVO AUSTRALIA
NIKKO SECURITIES CO JAPAN
NIKON CORP JAPAN
NINTENDO CO JAPAN
NIPPON CREDIT BANK JAPAN
NIPPON EXPRESS CO JAPAN
NIPPON OIL CO JAPAN
NIPPON PAPER IND CO JAPAN
NIPPON STEEL CORP JAPAN
NIPPON YUSEN K.K JAPAN
NIPPONDENSO CO JAPAN
NISSAN MOTOR CO JAPAN
NKK CORP JAPAN
NOMURA SECURITIES CO JAPAN
NORANDA INC CANADA
NORTHERN TELECOM CANADA
NTT CORP JAPAN
OBAYASHI CORP JAPAN
OCBC BANK SINGAPORE
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
ODAKYU ELECTRIC RAILWAY JAPAN
OKI ELECTRIC INDUSTRY CO JAPAN
OMRON CORP JAPAN
ONO PHARMACEUTICAL CO JAPAN
OSAKA GAS CO JAPAN
PARIBAS(CIE FINANCIERE)A FRANCE
PEARSON UNITED KINGDOM
PEN & ORIENTAL STEAM UNITED KINGDOM
PETROFINA BELGIUM
PEUGEOT SA FRANCE
PHARMACIA A SWEDEN
PHARMACIA B SWEDEN
PHILIPS ELECTRONICS NETHERLANDS
PLACER DOME CANADA
POLYGRAM NETHERLANDS
POWERGEN UNITED KINGDOM
PRUDENTIAL CORP UNITED KINGDOM
RANK ORGANISATION UNITED KINGDOM
REED INTERNATIONAL UNITED KINGDOM
RENAULT FRANCE
REPSOL SPAIN
REUTERS HOLDINGS UNITED KINGDOM
RHONE-POULENC ORD A FRANCE
RICHEMONT (FIN) A UNIT SWITZERLAND
RICOH CO JAPAN
ROCHE HOLDING GENUSS SWITZERLAND
ROCHE HOLDING INHABER SWITZERLAND
ROHM CO JAPAN
ROYAL BANK OF CANADA CANADA
ROYAL BANK OF SCOTLAND UNITED KINGDOM
ROYAL DUTCH PETROLEUM CO NETHERLANDS
RTZ CORP REG UNITED KINGDOM
RWE STAMM GERMANY
RWE VORZUG GERMANY
SAINSBURY (J) UNITED KINGDOM
SAINT-GOBAIN FRANCE
SAKURA BANK JAPAN
SANDOZ INHABER SWITZERLAND
SANDOZ NAMEN SWITZERLAND
</TABLE>
56
<PAGE> 57
<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
SANDVIK A SWEDEN
SANDVIK B SWEDEN
SANKYO CO JAPAN
SANOFI FRANCE
SANWA BANK JAPAN
SANYO ELECTRIC CO JAPAN
SAP STAMM GERMANY
SAP VORZUG GERMANY
SCHERING GERMANY
SCHNEIDER(EX-SPIE BATIGN FRANCE
SCHWEIZ BANKGESELL INH SWITZERLAND
SCHWEIZ BANKGESELL NAMEN SWITZERLAND
SCHWEIZ BANKVEREIN INH SWITZERLAND
SCHWEIZ BANKVEREIN NAMEN SWITZERLAND
SCOTTISH & NEWCASTLE UNITED KINGDOM
SEAGRAM CO CANADA
SECOM CO JAPAN
SEIBU RAILWAY CO JAPAN
SEKISUI CHEMICAL CO JAPAN
SEKISUI HOUSE JAPAN
SEVEN-ELEVEN JAPAN CO JAPAN
SHARP CORP JAPAN
SHELL T & T UNITED KINGDOM
SHIKOKU ELECTRIC POWER JAPAN
SHIMIZU CORP JAPAN
SHIN-ETSU CHEMICAL CO JAPAN
SHIZUOKA BANK JAPAN
SIEMENS STAMM GERMANY
SINGAPORE AIRLINES SINGAPORE
SINGAPORE TELECOM SINGAPORE
SMITHKLINE BEECHAM A UNITED KINGDOM
SMITHKLINE BEECHAM UNIT UNITED KINGDOM
SOCIETE GENERALE FRANCE
SONY CORP JAPAN
SONY MUSIC ENTERTAINMENT JAPAN
STANDARD CHARTERED UNITED KINGDOM
STET ORD ITALY
STET RNC ITALY
SUEZ (COMPAGNIE DE) FRANCE
</TABLE>
57
<PAGE> 58
<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
SUMITOMO BANK JAPAN
SUMITOMO CHEMICAL CO JAPAN
SUMITOMO CORP JAPAN
SUMITOMO ELECTRIC IND JAPAN
SUMITOMO MARINE & FIRE JAPAN
SUMITOMO METAL IND JAPAN
SUMITOMO TRUST & BANK JAPAN
SUN HUNG KAI PROPERTIES HONG KONG
SUZUKI MOTOR CORP JAPAN
SWIRE PACIFIC A HONG KONG
TAISEI CORP JAPAN
TAISHO PHARMACEUTICAL CO JAPAN
TAKEDA CHEMICAL IND JAPAN
TDK CORP JAPAN
TEIJIN JAPAN
TELE DANMARK B GERMANYNMARK
TELECOM ITALIA MOB. ORD ITALY
TELECOM ITALIA MOB. RNC ITALY
TELECOM ITALIA ORD ITALY
TELECOM ITALIA RNC ITALY
TELEFONICA DE ESPANA SPAIN
TESCO UNITED KINGDOM
THOMSON CORP CANADA
THORN-EMI UNITED KINGDOM
THYSSEN GERMANY
TOBU RAILWAY CO JAPAN
TOHOKU ELECTRIC POWER CO JAPAN
TOKAI BANK JAPAN
TOKIO MARINE & FIRE JAPAN
TOKYO ELECTRIC POWER CO JAPAN
TOKYO ELECTRON JAPAN
TOKYO GAS CO JAPAN
TOKYU CORP JAPAN
TONEN CORP JAPAN
TOPPAN PRINTING CO JAPAN
TORAY INDUSTRIES JAPAN
TORONTO-DOMINION BANK CANADA
TOSHIBA CORP JAPAN
TOSTEM CORP JAPAN
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
COMPANY NAME COUNTRY
<S> <C>
TOTAL SA FRANCE
TOTO JAPAN
TOYO SEIKAN KAISHA JAPAN
TOYO TRUST & BANKING CO JAPAN
TOYODA AUTOMATIC LOOM JAPAN
TOYOTA MOTOR CORP JAPAN
TRACTEBEL BELGIUM
TRACTEBELGIUML VVPR BELGIUM
TSB GROUP UNITED KINGDOM
UAP (COMPAGNIE) FRANCE
UNILEVER NV CERT NETHERLANDS
UNILEVER PLC UNITED KINGDOM
UNITED OVERSEAS BANK SINGAPORE
VEBA GERMANY
VENDOME LUXURY GRP UNIT UNITED KINGDOM
VEW INH (VEREIN EL WEST GERMANY
VIAG GERMANY
VODAFONE GROUP UNITED KINGDOM
VOLKSWAGEN STAMM GERMANY
VOLKSWAGEN VORZUG GERMANY
VOLVO A SWEDEN
VOLVO B SWEDEN
WESTERN MINING CORP HLDG AUSTRALIA
WESTPAC BANKING AUSTRALIA
WHARF HOLDINGS HONG KONG
WINTERTHUR VERS. INHABER SWITZERLAND
WINTERTHUR VERS. NAMEN SWITZERLAND
WOLTERS KLUWER NETHERLANDS
YAMAICHI SECURITIES CO JAPAN
YAMANOUCHI PHARM. JAPAN
YASUDA FIRE & MARINE JAPAN
YASUDA TRUST & BANK CO JAPAN
ZENECA GROUP UNITED KINGDOM
ZUERICH VERSICHERUNG SWITZERLAND
</TABLE>
59
<PAGE> 60
COMPANIES IN THE SCHWAB SMALL-CAP INDEX
The following is a list of Companies whose securities were included in
the Schwab Small-Cap Index(TM) calculation as of December 31, 1995:
1ST SOURCE CORP
3DO CO
AAMES FINL CORP
AAR CORP
ABM INDS INC
ABR INFORMATION SVCS
ACCESS HEALTH MARKET
ACCLAIM ENTMT INC NE
ACCUSTAFF INC
ACORDIA INC
ACUSON CORP
ACX TECHNOLOGIES INC
ACXIOM CORP
ADVANCED TECHNOLOGY
ADVANCED TISSUE SCIENCES INC
ADVO SYSTEM INC
AFFILIATED COMPUTER SVCS INC
AG CHEM EQUIP INC
AGOURON PHARMACEUTICAL
AIR EXPRESS INTL CORP
AIRBORNE FGHT CORP
ALANTEC CI2ORP
ALBANK FINL CORP
ALBANY INTL CORP
ALEX BROWN INC
ALEXANDER & ALEXANDER
ALFA CORP
ALLEN GROUP INC
ALLIANCE ENTMT CORP
ALLIANCE PHARMACEUTICAL
ALLIANCE SEMICONDUCTOR
ALLIANT TECHSYSTEMS
ALLIED GROUP INC
ALPHARMA INC
ALTERNATIVE RESOURCES
ALTRON INC
AMC ENTMT INC
AMCOL INTL CORP
AMCORE FINL INC
AMERCO
AMERICA WEST AIRLS INC
AMERICAN ANNUITY GROUP
AMERICAN BANKRS INS GROUP
AMERICAN BUSINESS INFO INC
AMERICAN BUSINESS PRODUCTS
AMERICAN FINL ENTPRISES
AMERICAN FREIGHTWAYS
AMERICAN HERIT LF INVESTMENT
AMERICAN MED RESPONSE
AMERICAN MGMT SYS INC
AMERICAN MOBILE SATELLITE
AMERICAN PRESIDENT COS
AMERICAN TRAVELLERS
AMERICREDIT CORP
AMETEK INC
AMRESCO INC
AMSCO INTL INC
ANCHOR GAMING
ANTEC CORP
ANTHONY INDS INC
APOLLO GROUP INC
APPLEBEES INTL INC
APPLIED MAGNETICS CO
APPLIED PWR INC
APPLIX INC
APS HLDG CORP
APTARGROUP INC
AQUILA GAS PIPELINE
ARBOR DRUGS INC
ARCH COMMUNICATIONS
60
<PAGE> 61
ARCTCO INC
ARGONAUT GROUP INC
ARMCO INC
ARMOR ALL PRODS CORP
ARNOLD INDS INC
ARVIN INDS INC
ASHLAND COAL INC
ASPECT TELECOMMUNICATIONS
ASPEN TECHNOLOGY INC
ASSOCIATED BANC CORP
ASSOCIATED GROUP INC
AST RESEARCH INC
ASTORIA FINL CORP
ATLANTIC SOUTHEST AIRLINES
ATLAS AIR INC
ATMOS ENERGY CORP
ATRIA SOFTWARE INC
AUGAT INC
AURA SYS INC
AUSPEX SYS INC
AUTHENTIC FITNESS CO
AVATAR HLDS INC
AVID TECHNOLOGY INC
AZTAR CORP
BALDOR ELEC CO
BALL CORP
BALLARD MED PRODS
BALLY ENTMT CORP
BANCORPSOUTH INC
BANCTEC INC
BANKNORTH GRP INC DE
BARRETT RES CORP
BASSETT FURNITURE INDUSTRIES
BATTLE MTN GOLD CO
BAY ST GAS CO
BBN CORP
BEARINGS INC
BELDEN INC
BELL & HOWELL HLDGS
BELL BANCORP INC
BENSON EYECARE CORP
BENTON OIL & GAS CO
BEST BUY INC
BET HLDGS INC
BIO RAD LABS INC
BIRMINGHAM STL CORP
BISYS GROUP INC
BJ SVCS CO
BLACK BOX CORP DEL
BLACK HILLS PWR & LT
BLAIR CORP
BLANCH E W HLDGS INC
BLOCK DRUG INC
BLOUNT INTL INC
BMC INDS INC MINN
BOB EVANS FARMS INC
BOK FINL CORP
BOOLE & BABBAGE INC
BORG WARNER SEC CORP
BORG-WARNER AUTOMOTIVE
BORLAND INTL INC
BOSTON TECHNOLOGY INC
BOWNE & CO INC
BOYD GAMING CORP
BREED TECHNOLOGIES INC
BROOKLYN BANCORP INC
BROWN GROUP INC
BRUSH WELLMAN INC
BT OFFICE PRODS INTL
BUFFETS INC
BURLINGTON COAT FACT
BURR BROWN CORP
BUSH BOAKE ALLEN INC
BUSINESS RECORDS COR
BWIP HLDG INC
C D I CORP
CABLE DESING TECHNOL
CABLEVISION SYS CORP
CABOT OIL & GAS CORP
CAL FED BANCORP INC
61
<PAGE> 62
CALGON CARBON CORP
CALIFORNIA BANCSHARE
CALIFORNIA MICROWAVE
CALMAT CO
CAMBREX CORP
CAMBRIDGE TECH PARTNERS
CAMCO INTL INC
CANANDAIGUA WINE INC
CAPITAL BANCORP FLA
CAPITAL RE CORP
CAPITOL AMERN FINL CORP
CAPSURE HLDGS CORP
CARAUSTAR INDS INC
CARLISLE CORP
CARMIKE CINEMAS INC
CARPENTER TECHNOLOGY
CARRINGTON LABS INC
CARSON PIRIE SCOTT & CO ILL
CARTER WALLACE INC
CASEYS GEN STORES
CASTLE A M & CO
CATALINA MARKETING CORP
CATELLUS DEV CORP
CCB FINL CORP
CDW COMPUTER CTRS INC
CELLSTAR CORP
CENTENNIAL CELLULAR
CENTEX CONSTRUCTION
CENTRAL HUDSON GAS&ELEC
CENTRAL LA ELEC INC
CENTRAL MAINE PWR CO
CENTRAL NEWSPAPERS INC
CENTURA BKS INC
CENTURY COMMUNICATIONS
CERNER CORP
CHAMPION ENTERPRISES
CHANTAL PHARMACEUTICALS
CHAPARRAL STL CO
CHARMING SHOPPES INC
CHECKFREE CORP
CHECKPOINT SYS INC
CHEMED CORP
CHEMICAL FINL CORP
CHESAPEAKE CORP VA
CHESAPEAKE ENERGY CO
CHICAGO MINIATURE LA
CHIQUITA BRANDS INTL
CHITTENDEN CORP
CHURCH & DWIGHT INC
CHYRON CORP
CIDCO INC
CILCORP INC
CIRCLE K CORP DEL
CIRCON CORP
CITICASTERS INC
CITIZENS BANCORP MD
CITIZENS BKG CORP MI
CITIZENS CORP
CITY NATL CORP
CKE RESTAURANTS INC
CLAIRES STORES INC
CLARCOR INC
CLEVELAND CLIFFS INC
CMAC INVT CORP
CMG INFORMATION SVCS
CML GROUP INC
CNB BANCSHARES INC
CNS INC
COAST SVGS FINL INC
COASTAL PHYSICIAN GRP
COBRA GOLF INC
COCA COLA BOTTLNG CO
COEUR D ALENE MINES
COHERENT COMMUNICATION
COHERENT INC
COLE KENNETH PRODTNS
COLE TAYLOR FINL GROUP
COLLECTIVE FED SVGS&LOAN
COLLINS & AIKMAN CORP
COLONIAL BANCGROUP INC
62
<PAGE> 63
COLONIAL DATA TECHNOLOGIES
COLTEC INDS INC
COMAIR CORP
COMMERCE GROUP INC MA
COMMERCIAL FEDERAL CORP
COMMERCIAL INTERTECH
COMMERCIAL METALS CO
COMMNET CELLULAR INC
COMMONWEALTH ENERGY
COMMUNITY FIRST BANK
COMMUNITY HEALTH SYSTEMS
COMMUNITY PSYCHIATRIC CNTRS
COMPDENT CORP
COMPUSA INC
COMPUTER HORIZONS CO
COMPUTER PRODS INC
COMPUWARE CORP
COMSHARE INC
COMVERSE TECHNOLOGY
CONE MLS CORP N C
CONMED CORP
CONTINUUM INC
CONTROL DATA SYSTEMS
COORS ADOLPH CO
COPART INC
COPLEY PHARMACEUTICAL
COPYTELE INC
COVENTRY CORP
CRAIG JENNY INC
CRAWFORD & CO
CRAWFORD & CO
CRAY RESH INC
CREDENCE SYS CORP
CROMPTON & KNOWLES
CROSS A T CO
CROSS TIMBERS OIL CO
CULLEN FROST BANKERS
CURTISS WRIGHT CORP
CYGNUS INC
CYRIX CORP
DAIG CORP
DALLAS SEMICONDUCTOR
DAMES & MOORE INC
DATA BROADCASTING CO
DATA GEN CORP
DATASCOPE CORP
DAVIDSON & ASSOC INC
DELPHI FINL GROUP INC
DELTA & PINE LD CO
DEPARTMENT 56 INC
DESTEC ENERGY INC
DETROIT DIESEL CORP
DEVON ENERGY CORP
DEVRY INC DEL
DEXTER CORP
DIAGNOSTIC PRODS CP
DIAL PAGE INC
DIALOGIC CORP
DIAMOND SHAMROCK R&M
DIGI INTL INC
DIMON INC
DIONEX CORP
DISCOUNT AUTO PTS INC
DOLLAR TREE STORES INC
DONALDSON INC
DONNKENNY INC DEL
DOUBLETREE CORP
DOVATRON INTL INC
DOWNEY FINL CORP
DREYERS GRAND ICE CR
DSP COMMUNICATIONS INC
DURIRON INC
DUTY FREE INTL INC
DYNATECH CORP
EASTERN ENTERPRISES
EASTERN UTILS ASSOC
EATON VANCE CORP
ECHOSTAR COMMUNICATION
ELECTRO RENT CORP
ELECTRO SCIENTIFIC
63
<PAGE> 64
ELECTROGLAS INC
EMMIS BROADCASTING CO
EMPIRE DIST ELEC CO
ENERGEN CORP
ENERGY VENTURES INC
ENHANCE FINL SVCS GRP
ENZO BIOCHEM INC
EPIC DESIGN TECHNOLO
ETHAN ALLEN INTERIOR
EVERGREEN MEDIA CORP
EXABYTE CORP
EXCALIBUR TECHNOLOGIES
EXECUTIVE RISK INC
EXPEDITORS INTL WASH
EXPRESS SCRIPTS INC
F & M NATL CORP
FABRI CTRS AMER INC
FAIR ISAAC & CO INC
FALCON DRILLING INC
FAMILY DLR STORES INC
FARMER BROS CO
FEDERAL MOGUL CORP
FERRO CORP
FILENET CORP
FINANCIAL SEC ASSURN
FINGERHUT COS INC
FIRST AMERN FINL COR
FIRST CITIZENS BANCSHARES
FIRST COML CORP
FIRST COMMERCE BANCSHARES
FIRST COMWLTH FINL PA
FIRST FINL BANCORP
FIRST FINL CORP WIS
FIRST MICH BK CORP
FIRST MIDWEST BANCORP
FIRST MISS CORP
FIRST NATL BANCORP
FIRSTBANK ILL CO
FIRSTIER INC
FIRSTMISS GOLD INC
FISHER SCIENTIFIC INTL
FLEMING COS INC
FLORIDA EAST COAST R
FLORIDA ROCK INDS INDUSTRIES
FLOWERS INDS INC
FLUKE JOHN MFG INC
FMC GOLD CO
FOREMOST CORP OF AMERICA
FOREST CITY ENTERPRISES
FOXMEYER HEALTH CORP
FRANKLIN QUEST CO
FREMONT GEN CORP
FRESENIUS USA INC
FRONTIER INS GROUP INC
FSI INTL INC
FT WAYNE NATL CORP INC
FTP SOFTWARE INC
FULLER H B CO
FULTON FINL CORP PA
FUND AMERICAN COS IN
G & K SVCS INC
GAINSCO INC
GALLAGHER ARTHUR J & CO
GAYLORD CONTAINER CO
GC COS INC
GENCORP INC
GENERAL BINDING CORP
GENERAL DATACOMM IND
GENERAL MAGIC INC
GENESIS HEALTH VENTURES
GENTEX CORP
GEON CO
GEOTEK INDS INC
GEOWORKS
GERBER SCIENTIFIC INC
GIBSON GREETINGS INC
GIDDINGS&LEWIS INC WI
GILEAD SCIENCES INC
GLATFELTER P H CO
GLENDALE FED SVGS & LOAN
64
<PAGE> 65
GLOBAL INDL TECHNOLOGIES
GLOBAL NAT RES INC
GLOBAL VILLAGE COMMUNICATN
GOULDS PUMPS INC
GRACO INC
GRANCARE INC
GRANITE CONSTR INC
GRC INTERNATIONAL INC
GREAT FINL CORP
GREENFIELD INDS INC
GREIF BROS CORP
GREYHOUND LINES INC
GRIFFON CORP
GUILFORD MLS INC
GULF SOUTH MEDICAL SUPPLY
GYMBOREE CORP
HADCO CORP
HAEMONETICS CORP
HANCOCK HLDG CO
HARLAND JOHN H CO
HARLEYSVILLE GROUP INC
HARMAN INTL INDS INC
HARPER GROUP
HARTE-HANKS COMMUNICATIONS
HAYES WHEELS INTL INC
HCC INS HLDGS INC
HCIA INC
HEALTH MGMT SYS INC
HEALTHPLAN SVCS CORP
HEARTLAND EXPRESS IN
HEARTLAND WIRELESS COMM
HECLA MNG CO
HELENE CURTIS INDS
HELIX TECHNOLOGY CORP
HELMERICH & PAYNE INC
HENRY JACK & ASSOC INC
HERBALIFE INTL INC
HERITAGE MEDIA CORP
HNC SOFTWARE INC
HOLLYWOOD ENTMT CORP
HOME BEN CORP
HOME FINL CORP DEL H
HOME SHOPPING NETWORK
HON INDS INC
HORACE MANN EDUCATOR
HOUGHTON MIFFLIN CO
HUBCO INC
HUDSON FOODS INC
HUMAN GENOME SCIENCE
HUNT JB TRANS SVC INC
HUNT MFG CO
HYPERION SOFTWARE CO
I-STAT CORP
ICN PHARMACEUTICALS
IDEON GROUP INC
IDEX CORP
IES INDS INC
IHOP CORP
IMCO RECYCLING INC
IMMULOGIC PHARMACEUTICALS
IMMUNEX CORP NEW
IMPERIAL BANCORP
IN FOCUS SYS INC
INDENTIX INC
INDIANA ENERGY INC
INFORMATION RES INC
INPHYNET MEDICAL MGMT
INSIGNIA FINL GROUP
INSILCO CORP
INSITUFORM TECHNOLOGIES
INSO CORP
INTEGON CORP
INTEGRATED HEALTH SVCS
INTEGRATED PROCESS E
INTEGRATED SILICON S
INTEGRATED SYS INC
INTER REGL FINL GROUP
INTERCO INC NEW
INTERDIGITAL COMMUNICATIONS
INTERFACE FLOORING
65
<PAGE> 66
INTERGRAPH CORP
INTERIM SVCS INC
INTERMAGNETICS GEN
INTERMET CORP
INTERNATIONAL DAIRY
INTERNATIONAL FAMILY
INTERNATIONAL MULTIF
INTERNEURON PHARMACEUTICALS
INTERPOOL INC
INTERSOLV
INTERSTATE BAKERIES
INTERSTATE PWR CO
INTERVOICE INC
INTL CABLETEL INC
INVACARE CORP
IONICS INC
ISIS PHARMACEUTICALS
ISOLYSER INC
ITI TECHNOLOGIES INC
ITRON INC
ITT EDUCATIONAL SERV
J&L SPECIALTY STL INC
JACOBS ENGR GROUP INC
JACOR COMMUNICATIONS
JEFFERSON BANKSHARES
JLG INDS INC
JOHN ALDEN FINL CORP
JP FOODSERVICE INC
JSB FINANCIAL INC
JUNO LTG INC
JUST FOR FEET INC
JUSTIN INDS INC
K N ENERGY INC
KANSAS CITY LIFE INS
KATZ MEDIA GROUP INC
KAUFMAN&BROAD HOME CORP
KAYDON CORP
KEANE ASSOC INC
KELLWOOD CO
KENNAMETAL INC
KENT ELECTRS CORP
KEYSTONE FINANCIAL INC
KEYSTONE INTL INC
KIMBALL INTL INC
KINDER-CARE LEARN CT
KINETIC CONCEPTS INC
KIRBY EXPL CO.
KRONOS INC
KULICKE & SOFFA INDS
LA Z BOY CHAIR CO
LACLEDE GAS CO
LANCE INC
LANDMARK GRAPHICS CO
LANDRYS SEAFOOD RESTAURANTS
LANDS END INC
LANDSTAR SYS INC
LATTICE SEMICONDUCTOR
LAWSON PRODS INC
LAWTER CHEMS INC
LEADER FINL CORP
LEGATO SYS INC
LEGG MASON INC
LIBBEY INC
LIBERTY BANCORP INC
LIBERTY CORP S C
LIFE PARTNERS GROUP
LIFE RE CORP
LIFE TECHNOLOGIES INC
LIGAND PHARMACEUTICALS
LILLY INDL COATINGS
LINCARE HLDGS INC
LINCOLN ELEC CO
LINCOLN ELEC CO
LINCOLN TELECOMMUNICATIONS
LIPOSOME CO INC
LITTELFUSE INC
LIVING CTRS AMER INC
LOGICON INC
LONE STAR INDS INC
LONG IS BANCORP INC
66
<PAGE> 67
LONGVIEW FIBRE CO
LOUIS DREYFUS NAT GA
LTX CORP
LUBYS CAFETERIAS INC
LUKENS STL CO
LYDALL INC
M S CARRIERS INC
MACFRUGALS BARGAINS
MADISON GAS & ELEC
MAFCO CONS GROUP INC
MAGELLAN HEALTH SVCS
MAGNA GROUP INC
MAIC HLDGS INC
MARCUS CORP
MARINER HEALTH GROUP
MARK TWAIN BANCSHARES
MARKEL CORP
MARSHALL INDS
MASCOTECH INC
MAXICARE HEALTH PLAN
MAXIS INC
MAXXAM INC
MAYBELLINE INC
MCAFEE ASSOCS INC
MCCLATCHY NEWSPAPERS
MDU RESOURCES GROUP
MEASUREX CORP
MEDIA GEN INC
MEDIC COMPUTER SYS INC
MEDIMMUNE INC
MEDISENSE INC
MEDPARTNERS/MULLIKIN
MEDUSA CORP
MENS WEARHOUSE INC
MENTOR CORP MINN
MERCURY INTERACTIVE
MESA AIRLS INC
METHODE ELECTRS INC
METROMEDIA INTL GROUP
MEYER FRED INC DEL
MICHAEL'S STORES INC
MICROCOM INC
MICROS SYS INC
MID-AMERICAN NTL BK
MIDCOM COMMUNICATION
MIKASA INC
MILLER HERMAN INC
MINE SAFETY APPLIANC
MINERALS TECHNOLOGIES
MISSISSIPPI CHEM CORP
MOBILEMEDIA CORP
MODINE MFG CO
MOHAWK INDS INC
MOLTEN METAL TECHNOLOGY
MONEY STORE INC
MORGAN KEEGAN INC
MORRISON RESTAURANTS
MOVIE GALLERY INC
MUELLER INDS INC
MULTICARE COS INC
MYCOGEN CORP
MYERS INDS INC
NAC RE CORP
NACCO INDS INC
NATIONAL AUTO CR INC
NATIONAL BANCORP ALA
NATIONAL COMM BANCORP
NATIONAL COMPUTER SYSTEMS
NATIONAL DATA CORP
NATIONAL ED CORP
NATIONAL INSTRS CORP
NATIONAL MEDIA CORP
NATIONAL PRESTO INDS
NATIONAL STL CORP
NATL RE HOLDING CORP
NATURES SUNSHINE PRO
NAVISTAR INTL CORP N
NCH CORP
NEOPROBE CORP
NETCOM ON-LINE COMM
67
<PAGE> 68
NETWORK EQUIP TECHNOLOGIES
NETWORK GEN CORP
NEUROGEN CORP
NEW ENG BUSINESS SVC
NEW JERSEY RESOURCES CORP
NEW WORLD COMMUNICATIONS
NEW YORK BANCORP INC
NEWFIELD EXPL CO
NEXGEN INC
NEXSTAR PHARMACEUTICALS
NL INDS INC
NN BALL & ROLLER INC
NORRELL CORP GA
NORTH AMERN MTG CO
NORTH AMERN VACCINE
NORTH FORK BANCORP
NORTHWEST NAT GAS CO
NORTHWESTERN PUB SVC
NOVACARE CORP
NU-KOTE HLDG INC
NUEVO ENERGY CO
O REILLY AUTOMOTIVE
OAK INDS INC
OAK TECHNOLOGY INC
OCCUSYSTEMS INC
OCTEL COMMUNICATIONS
OEA INC
OFFSHORE LOGISTICS
OIS OPTICAL IMAGING
OLD NATL BANCP IND
OLYMPIC FINL LTD
OM GROUP INC
ONBANCORP INC
ONE VY BANCORP WV INC
ONEOK INC
OPTICAL DATA SYS INC
ORANGE & ROCKLAND UT
ORBITAL SCIENCES CORP
OREGON STL MLS INC
ORGANOGENESIS INC
ORION CAP CORP
ORTHODONTIC CTRS AME
OSMONICS INC
OTTER TAIL PWR CO
OUTBOARD MARINE CORP
OUTLET COMMUNICATION
OVERSEAS SHIPHOLDNG
OWEN HEALTHCARE INC
OWENS & MINOR INC NE
P-COM INC
PACIFIC SCIENTIFIC
PAIRGAIN TECHNOLOGIES
PAPA JOHNS INTL INC
PARAGON TRADE BRANDS
PARK ELECTROCHEMICAL
PARK NATL CORP
PARKER & PARSLEY PET
PARKER DRILLING CO
PATTERSON DENTAL CO
PAXAR CORP
PAXSON COMMUNICATION
PDT INC
PEAK TECHNOLOGIES GRP
PENNCORP FINL GROUP
PEOPLES BK BRIDGEPORT
PEOPLES HERITGE SV B
PETCO ANIMAL SUPPLIES
PETROLITE CORP
PHH GROUP INC
PHILADELPHIA SUBN CO
PHILLIPS VAN HEUSEN
PHOENIX RESOURCE COS
PHOTRONIC LABS INC
PHP HEALTHCARE CORP
PHYSICIAN COMPUTER N
PHYSICIAN CORP AMERICA
PHYSICIAN RELIANCE NETWORK
PHYSICIANS HEALTH SVCS
PIEDMONT NAT GAS INC
PIER I IMPORTS INC
68
<PAGE> 69
PIONEER GROUP INC
PIONEER STD ELECTRS
PLANTRONICS INC NEW
PLAYERS INTL INC
PLAYTEX PRODS INC
PLC SYS INC
PMT SERVICES INC
POLARIS INDS INC
PRECISION CASTPARTS
PRESIDENTIAL LIFE CO
PRI AUTOMATION INC
PRICE ENTERPRISES INC
PRIDE PETE SVCS INC
PRIMADONNA RESORTS INC
PRIMARK CORP
PRIME HOSPITALITY CO
PRODUCTION OPERATORS
PROFFITTS INC
PROGRESS SOFTWARE CO
PROTEIN DESIGN LABS
PROVIDENT BANCORP INC
PSINET INC
PUBLIC SVC CO N C INC
PUBLIC SVC CO N MEX
PULITZER PUBG CO
PYXIS CORP
QUAKER ST CORP
QUALITY FOOD CTRS INC
QUANEX CORP
QUARTERDECK OFFICE SVCS
QUEENS CNTY BANCORP
QUICK & REILLY GROUP
RALCORP HLDGS INC
RATIONAL SOFTWARE CO
RAYMOND JAMES FINL INC
RCSB FINL INC
REGAL BELOIT CORP
REGAL CINEMAS INC
REGENERON PHARMACEUTICALS
REGIS CORP MINN
REINSURANCE GROUP AMERICA
RENAISSANCE COMM
RENAL TREATMENT CTRS
RESEARCH INDS CORP
RESPIRONICS INC
REXALL SUNDOWN INC
REXEL INC
RICHFOOD HLDGS INC
RIGS NATL CORP WASH
RIO HOTEL & CASINO INC
RIVER FOREST BANCORP
ROBERTS PHARMACEUTICAL
ROBOTIC VISION SYS
ROCK-TENN CO
ROHR INDS INC
ROLLINS INC
ROLLINS TRUCK LEASING
ROOSEVELT FINL GROUP
ROPER INDS INC NEW
ROSS STORES INC
ROTECH MED CORP
ROUGE STL CO
ROWAN COS INC
RUDDICK CORP
RUSS BERRIE & CO
RYANS FAMILY STK HSE
RYKOFF S E & CO
S & T BANCORP INC
S3 INC
SAFEGUARD SCIENTIFIC
SALICK HEALTH CARE INC
SANIFILL INC
SANMINA CORP
SAVANNAH FOODS & IND
SBARRO INC
SCHULMAN A INC
SCIENTIFIC GAMES HLD
SCOTTS CO
SEABOARD CORP
SEAGULL ENERGY CORP
69
<PAGE> 70
SECURITY CAP CORP WI
SECURITY DYNAMICS TECH
SEI CORP
SEITEL INC
SELECTIVE INS GROUP
SEPRACOR INC
SEQUA CORP
SEQUENT COMPUTER SYS
SEQUUS PHARMECEUTICALS
SERVICE MERCHANDISE
SFFED CORP
SHONEYS INC
SHOPKO STORES INC
SHOREWOOD PACKAGING
SHOWBOAT INC
SHURGARD STORAGE CTR
SIERRA HEALTH SVCS INC
SIERRA ON-LINE INC
SIERRA PAC RES
SIGCORP INC
SILICON VY GROUP INC
SILICONIX INC
SILVER KING COMMUNICATION
SITHE ENERGIES INC
SMART & FINAL INC
SMITH A O CORP 'B'
SMITHFIELD FOODS INC
SMITHS FOOD&DRUG CTR
SMUCKER J M CO
SMUCKER J M CO
SNYDER OIL CORP
SOFAMOR/DANEK GROUP
SOFTKEY INTL INC
SOLA INTL INC
SOLV EX CORP
SOMATOGEN INC
SONIC CORP
SOTHEBYS HLDGS INC
SOUTH JERSEY INDS INC
SOUTHDOWN INC
SOUTHERN UN CO NEW
SOUTHWEST GAS CORP
SOUTHWESTERN ENERGY
SOVEREIGN BANCORP INC
SPACELABS MED INC
SPEEDWAY MOTORSPORTS
SPIEGEL INC
SPORTS AUTH INC
SPRINGS INDS INC
SPS TECHNOLOGIES INC
SPS TRANSACTION SVCS
ST JOHN KNITS INC
ST PAUL BANCORP INC
STAC ELECTRS
STANDARD FINL INC
STANDARD PRODS CO
STANDARD REGISTER CO
STANDEX INTL CORP
STANHOME INC
STATE AUTO FINL CORP
STATION CASINOS INC
STEIN MART INC
STERIS CORP
STERLING CHEMS INC
STEWART&STEVENSON SVCS INC
STILLWATER MNG CO
STONE & WEBSTER INC
STRATOSPHERE CORP
STRATUS COMPUTER INC
STRAWBRIDGE & CLOTHIER
STRIDE RITE CORP
STUDENT LN CORP
STURM RUGER & CO INC
SUMITOMO BANK CALIF
SUN HEALTHCARE GROUP
SUNRISE MED INC
SUNSHINE MNG CO
SUPERIOR INDS INTL
SUSQUEHANNA BKSHS PA
SWIFT TRANSN CO
70
<PAGE> 71
SYNETIC INC
SYSTEMS & COMPTR TECH
T R FINL CORP
TARGET THERAPEUTICS
TCA CABLE TV INC
TECH DATA CORP
TECNOL MED PRODS INC
TEJAS GAS CORP DEL
TELEFLEX INC
TELXON CORP
TENCOR INSTRS
TEXAS INDS INC
THERMO ECOTEK CORP
THIOKOL CORPDEL
TIFFANY & CO NEW
TITAN WHEEL INTL INC
TJ INTL INC
TNT FREIGHTWAYS CORP
TOLL BROTHERS INC
TOM BROWN INC NEW
TOPPS INC
TORO CO
TOY BIZ INC
TRANS WORLD AIRLS INC
TRANSACTION SYS ARCH
TREDEGAR INDS INC
TRENWICK GROUP INC
TRIANGLE PAC CORP DE
TRIARC COS INC
TRIDENT MICROSYSTEMS
TRIMAS CORP
TRIMBLE NAVIGATION L
TRINOVA CORP
TRUE NORTH COMMUNICATIONS
TRUST CO NJ JERSEY C
TRUSTCO BK CORP N Y
TRUSTMARK CORP
TUCSON ELEC & POWER
U S AIR GROUP INC
U S DELIVERY SYS INC
U S HOME CORP NEW
U S TR CORP NEW
UGI CORP NEW
ULTRATECH STEPPER INC
UMB FINL CORP
UNIFIRST CORP
UNITED BANKSHS INC W VA
UNITED CAROLINA BANCSHARES
UNITED COS FINL CORP
UNITED DENTAL CARE I
UNITED ILLUM CO
UNITED INS COS INC
UNITED INTL HLDGS INC
UNITED MERIDIAN CORP
UNITED STATES FILTER
UNITED STATIONERS INC
UNITED WASTE SYS INC
UNITED WIS SVCS INC
UNITED WTR RES INC
UNITRODE CORP
UNIVERSAL HEALTH SVC
UNR INDS INC
US ORDER INC
UST CORP
VALASSIS COMMUNICATIONS
VALHI INC NEW
VALMONT INDS INC
VALUE LINE INC
VANGUARD CELLULAR SYS INC
VARCO INTL INC
VENTRITEX INC
VERIFONE INC
VERITAS SOFTWARE CO
VERTEX PHARMACEUTICALS
VESTA INS GROUP INC
VICOR CORP
VICTORIA BANKSHARES
VIDEOSERVER INC
VINTAGE PETE INC
VISX INC DEL
71
<PAGE> 72
VITAL SIGNS INC
VITALINK PHARMACY SVCS
VIVUS INC
VLSI TECHNOLOGY
VOLT INFORMATION SCI
WABAN INC
WABASH NATL CORP
WANG LABS INC NEW
WASHINGTON ENERGY CO
WASHINGTON NATL CORP
WATKINS JOHNSON CO
WATTS INDS INC
WAUSAU PAPER MLS CO
WD 40 CO
WEBB DEL E CORP
WELLMAN INC
WERNER ENTERPRISES INC
WEST INC
WESTAMERICA BANCORP
WESTCORP
WESTCOTT COMMUNICATN
WESTERN GAS RES INC
WESTERN WASTE INDS
WESTINGHOUSE AIR BRAKE
WESTPOINT STEVENS INC
WESTWOOD ONE INC
WFS FINL INC
WHITNEY HLDG CORP
WHX CORP
WICOR INC
WILEY JOHN & SONS INC
WILLIAMS SONOMA INC
WIND RIVER SYSTEMS
WLR FOODS INC
WMS INDUSTRIES INC
WOLVERINE TUBE INC
WOLVERINE WORLD WIDE
WPS RESOURCES CORP
WYLE LABS
WYMAN GORDON CO
X-RITE INC
XTRA INC
YANKEE ENERGY SYS INC
YELLOW CORP
ZALE CORP NEW
ZEBRA TECHNOLOGIES CORP
ZEIGLER COAL HLDG CO
ZENITH ELECTRS CORP
ZENITH NATL INS CORP
ZERO CORP
ZILOG INC
ZURN INDS INC
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY THE
TRUST, ANY SERIES THEREOF, OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE.
72
<PAGE> 73
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
COMMON STOCK--97.3%
AUSTRALIA--2.4%
Australia & New Zealand
Banking Group 53,322 $ 223
BTR Nylex, Ltd. 116,332 316
Broken Hill Proprietary Co.,
Ltd. 83,813 1,135
CRA 27,600 426
Coles Myer, Ltd. 51,855 179
Commonwealth Bank Group 41,124 313
National Australia Bank 63,258 542
News Corp., Ltd. 91,896 463
Western Mining Corp. 53,600 344
Westpac Banking Corp. 79,986 328
--------
4,269
--------
BELGIUM--0.6%
Electrabel 2,000 449
Electrabel, AFV1 500 114
Petrofina SA 1,100 341
Societe Generale de Belgique 3,040 230
--------
1,134
--------
CANADA--3.0%
Alcan Aluminum 10,050 322
BCE Inc. 14,279 481
Bank of Montreal 11,886 268
Bank of Nova Scotia 8,524 184
Barrick Gold Corp. 16,500 385
Canadian Imperial Bank of
Commerce 9,595 260
Canadian Pacific Ltd. 16,700 266
Imperial Oil Ltd. 8,919 327
Newbridge Networks Corp.* 3,300 101
Northern Telecom Ltd. 12,000 433
Nova Corp. 19,200 149
PanCanadian Petroleum Ltd. 5,000 168
Placer Dome Inc. 21,200 467
Royal Bank of Canada 15,200 342
Seagram Co. Ltd. 17,400 633
Thomson Corp. 27,100 367
Toronto-Dominion Bank 14,000 248
--------
5,401
--------
DENMARK--0.4%
D/S 1912 Series B 10 196
D/S Svendborg Series B 5 140
Tele Danmark AS Series B 5,910 308
--------
644
--------
FRANCE--7.2%
AXA Groupe SA 13,366 742
Alcatel Alsthom Cie Generale
d'Electricite SA 6,954 594
Alcatel Cable 1,723 100
Assurances Generales de
France 15,800 456
Banque Nationale de Paris 10,161 418
Canal Plus 819 142
Carrefour 1,200 705
Cie Financiere de Paribas
(Bearer) 5,425 298
Cie Generale des Eaux 5,221 485
Compagnie de Saint-Gobain SA 3,931 469
Danone Groupe 3,350 535
Elf Aquitaine 12,835 874
L'Air Liquide 3,073 515
L'Oreal SA 2,900 709
LVMH Moet Hennessy Louis
Vuitton 7,100 1,413
Lafarge Coppee SA 8,596 570
Lyonnaise des Eaux-Dumez 2,780 271
Michelin Class B (Reg.) 5,300 214
PSA Peugeot Citroen 2,200 287
Renault (Regie Nationale) 10,500 329
Rhone-Poulenc SA A Shares 15,400 336
Sanofi 4,510 288
Schneider SA 8,900 343
Societe Generale 3,978 456
Suez Group 7,455 281
TOTAL Class B 10,604 655
Union des Assurances de Paris 14,389 374
--------
12,859
--------
GERMANY--8.1%
BASF Group 2,653 582
Bankgesellschaft Berlin 1,206 356
Bayer AG 3,167 842
Bayerische Hypotheken &
Wechsel Bank AG 11,380 275
Bayerische Motoren Werke AG 910 488
Bayerische Vereinsbank AG 11,590 328
Commerzbank AG 1,535 355
Daimler-Benz AG 2,721 1,312
Deutsche Bank AG 21,400 968
Dresdner Bank AG 20,130 538
Hoechst AG 2,762 725
Linde AG 400 246
Lufthansa AG (Bearer) 1,600 223
Mannesmann AG 1,734 571
Muenchener Rueckversicherung 11 19
Muenchener Rueckversicherung
(Reg.) 744 1,544
Preussag AG 721 205
RWE AG 1,581 563
SAP AG 2,840 450
Schering AG 3,500 244
Siemens AG 2,610 1,368
Thyssen AG 1,411 254
VIAG AG 970 394
Veba AG 22,470 923
Vereinigte Elektrizitatswerke
Westfalen Series B 903 300
Volkswagen AG 1,246 393
--------
14,466
--------
HONG KONG--3.7%
CITIC Pacific 98,000 306
Cathay Pacific Airways 141,000 208
Cheung Kong Holdings 50,000 282
China Light & Power 94,900 506
Hang Seng Bank Ltd. 88,900 745
Henderson Land
Development Co. 76,000 455
Hongkong Electric Holdings
Ltd. 99,000 337
Hongkong Telecom
International 520,000 908
Hutchison Whampoa Ltd. 165,000 909
New World Development Co. 69,709 271
Sun Hung Kai Properties 107,500 859
Swire Pacific Ltd. Class A 75,500 566
Wharf Holdings 101,000 341
--------
6,693
--------
</TABLE>
See accompanying Notes to Financial Statements.
F-1
<PAGE> 74
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
ITALY--2.3%
Alleanza Assicurazioni 22,500 $ 192
Alleanza Assicurazioni
(Non-Convertible) 3,750 26
Assicurazioni Generali 37,200 867
Banco di Roma SpA 141,900 127
Fiat Finance SpA 113,000 368
Fiat Finance SpA
(Non-Convertible) 42,000 79
First Bank San Paolo di
Torino 27,700 153
IMI 24,800 136
INA 201,000 264
Montedison SpA 213,000 147
RAS Assicurazioni 6,310 63
RAS Assicurazioni
(Non-Convertible) 2,790 15
STET 177,000 501
STET (Non-Convertible) 66,000 144
Telecom Italia 260,000 395
Telecom Italia
(Non-Convertible) 65,000 77
Telecom Italia Mob* 260,000 436
Telecom Italia Mob di Risp* 65,000 72
--------
4,062
--------
JAPAN--30.4%
Ajinomoto Co., Inc. 14,000 138
All Nippon Airways Co., Ltd. 31,000 300
Asahi Bank 48,000 479
Asahi Breweries 8,000 87
Asahi Chemical Industry Co. 28,000 197
Asahi Glass Co., Ltd. 24,000 235
Ashikaga Bank 15,000 89
Bank of Fukuoka 11,000 81
Bank of Tokyo 58,000 845
Bank of Yokohama 24,000 170
Bridgestone Corp. 15,000 208
Canon Inc. 18,000 308
Chiba Bank 16,000 133
Chubu Electric Power Co. 16,100 375
Chugoku Electric Power
Co., Inc. 7,854 183
Cosmo Oil Co. 11,000 54
DDI Corp. 100 810
Dai Nippon Printing Co. 15,000 239
Dai-Ichi Kangyo Bank, Ltd. 97,000 1,640
Daiei Inc. 14,000 146
Daiichi Pharmaceutical Co. 5,000 70
Daiwa Bank 33,000 197
Daiwa House Industry Co. 11,000 165
Daiwa Securities Co. 29,000 340
East Japan Railway Co. 100 472
Ebara Corp. 5,000 69
Eisai Co. 5,000 85
Fanuc 5,000 217
Fuji Bank, Ltd. 93,000 1,727
Fuji Photo Film Co. 11,000 272
Fujitsu Ltd. 38,000 453
Furukawa Electric Co., Ltd. 13,000 58
Gunma Bank 10,000 102
Hachijuni Bank 13,000 145
Hankyu Corp. 17,000 88
Hanwa Co. 5,000 15
Hiroshima Bank 13,000 64
Hitachi Ltd. 96,000 985
Hitachi Zosen 19,000 93
Hokkaido Electric Power Co. 4,080 95
Hokkaido Takushoku Bank 12,000 30
Hokuriku Bank 13,000 76
Hokuriku Electric Power Co. 4,080 94
Honda Motor Co., Ltd. 20,000 348
Industrial Bank of Japan,
Ltd. 76,000 2,073
Ishikawajima-Harima Heavy
Industries 25,000 101
Isuzu Motors Ltd. 20,000 81
Ito-Yokado Co., Ltd. 9,000 492
Itochu Corp. 28,000 166
Japan Airlines Co., Ltd. 35,000 210
Japan Energy Co. 21,000 60
Japan Telecom Co. 10 222
Japan Tobacco Inc. 100 854
Joyo Bank 18,000 129
Jusco Co. 6,000 141
Kajima Corp. 20,000 185
Kandenko Co., Ltd. 5,000 62
Kansai Electric Power Co. 20,200 474
Kao Corp. 12,000 145
Kawasaki Heavy Industries 25,000 105
Kawasaki Steel Co. 72,000 239
Keio Teito Railway Co. 8,000 45
Kinden Co. 3,000 52
Kinki Nippon Railway Co. 35,000 270
Kirin Brewery Co., Ltd. 22,000 222
Kobe Steel 59,000 155
Kokusai Denki 1,500 121
Komatsu Ltd. 22,000 172
Kubota Corp. 27,000 167
Kyocera Corp. 4,000 328
Kyowa Hakko Kogyo 6,000 56
Kyushu Electric Power Co. 9,797 232
Kyushu Matsushita Electric
Co. 3,000 48
Long-Term Credit Bank of
Japan 52,000 406
Marubeni Corp. 34,000 166
Marui Co. 7,000 121
Matsushita Communication
Industrial 4,000 90
Matsushita Electric
Industrial Co., Ltd. 61,000 865
Matsushita Electric Works 15,000 148
Matsushita-Kotokuki
Electronics 3,000 61
Mazda Motor Corp. 21,000 66
Mitsubishi Bank 82,000 1,603
Mitsubishi Chemical Corp. 34,000 154
Mitsubishi Corp. 33,000 365
Mitsubishi Electric Corp. 43,000 321
Mitsubishi Estate Co. 28,000 298
Mitsubishi Heavy Industries 71,000 548
Mitsubishi Materials Co. 21,000 95
Mitsubishi Motors 17,000 142
Mitsubishi Oil Co. 8,000 64
Mitsubishi Trust & Banking
Corp. 27,000 377
Mitsui & Co. 34,000 271
Mitsui Fudosan Co. 16,000 183
Mitsui Marine & Fire
Insurance 14,000 84
Mitsui O.S.K. Lines 14,000 37
Mitsui Trust & Banking Co. 25,000 200
Mitsukoshi Ltd. 9,000 71
Murata Manufacturing Co. 5,000 175
NEC Corp. 34,000 449
NGK Insulators 5,000 46
</TABLE>
See accompanying Notes to Financial Statements.
F-2
<PAGE> 75
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
NKK Corp. 67,000 $ 162
Nagoya Railroad Co. 10,000 47
New Oji Paper Co. 16,000 147
Nichii Co. 4,000 47
Nikko Securities Co. 29,000 270
Nikon Corp. 11,000 157
Nintendo Co., Ltd. 3,000 221
Nippon Credit Bank 34,000 133
Nippon Express Co. 21,000 170
Nippon Fire & Marine
Insurance Co. 7,000 38
Nippon Oil Co. 26,000 138
Nippon Paper Industries Co. 39,000 268
Nippon Steel Corp. 145,000 481
Nippon Telegraph &
Telephone Corp. 596 4,888
Nippon Yusen Kabushiki Kaisha 27,000 144
Nippondenso 17,000 311
Nissan Motor Co., Ltd. 54,000 364
Nisshin Steel Co. 20,000 74
Nomura Securities Co., Ltd. 51,000 932
Obayashi Corp. 17,000 126
Odakyu Electric Railway Co. 14,000 94
Oki Electric Industry Co.,
Ltd. 12,000 111
Omron Corp. 8,000 187
Ono Pharmaceutical Co. 3,000 119
Osaka Gas Co. 53,000 178
Pioneer Electronic Corp. 4,000 61
Ricoh Co., Ltd. 13,000 140
Rohm Co. 4,000 243
SEGA Enterprises, Ltd. 2,000 106
Sakura Bank 86,000 832
Sankyo Co. 7,000 154
Sanwa Bank 92,000 1,565
Sanyo Electric Co., Ltd. 40,000 207
Secom Co. 3,000 195
Seibu Railway Co. 11,000 484
Sekisui Chemical Co. 11,000 143
Sekisui House 14,000 161
Seven-Eleven Japan Co. 7,000 467
Sharp Corp. 22,000 305
Shikoku Electric Power Co. 6,222 145
Shimizu Corp. 17,000 158
Shin-Etsu Chemical Co. 6,000 123
Shiseido Co., Ltd. 8,000 81
Shizuoka Bank 16,000 189
Showa Shell Sekiyu 8,000 64
Sony Corp. 8,000 360
Sony Music Entertainment
(Japan) 2,100 90
Sumitomo Bank 90,000 1,592
Sumitomo Chemical Co. 35,000 163
Sumitomo Corp. 21,000 191
Sumitomo Electric Industries 15,000 173
Sumitomo Marine & Fire
Insurance Co. 13,000 93
Sumitomo Metal Industries 60,000 162
Sumitomo Metal Mining Co. 11,000 87
Sumitomo Trust & Banking Co. 25,000 288
Suzuki Motor Corp. 10,000 101
TDK 3,000 155
Taisei Corp. 19,000 113
Taisho Pharmaceutical Co. 8,000 145
Takeda Chemical Industries 17,000 239
Teijin Ltd. 19,000 87
Tobu Railway Co. 16,000 91
Tohoku Electric Power Co. 10,100 237
Tokai Bank 42,000 439
Tokio Marine & Fire
Insurance Co. 33,000 339
Tokyo Electric Power Co.,
Inc. 39,087 1,024
Tokyo Electron 3,000 130
Tokyo Gas & Electric
Industrial 57,000 201
Tokyu Corp. 23,000 146
Tonen 13,000 184
Toppan Printing Co. 15,000 198
Toray Industries 29,000 181
Toshiba Corp. 68,000 493
Tostem Corp. 5,000 153
Toto 8,000 108
Toyo Seikan 4,000 115
Toyo Trust & Banking Co. 17,000 115
Toyoda Automatic Loom 6,000 94
Toyota Motor Corp. 118,000 2,192
Yamaichi Securities Co. 25,000 131
Yamanouchi Pharmaceutical Co. 6,000 134
Yamazaki Baking Co. 5,000 88
Yasuda Fire & Marine
Insurance Co. 20,000 121
Yasuda Trust & Banking Co. 23,000 103
--------
54,676
--------
NETHERLANDS--5.1%
ABN-AMRO Holding NV 12,240 514
Aegon NV 11,115 422
Akzo Nobel NV 3,300 376
Elsevier NV 31,600 409
Heineken NV 2,250 399
Internationale Nederlanden
Groep 13,042 778
Koninklijke PTT Nederland 22,140 779
Philips Electronics NV 15,400 595
PolyGram NV 8,700 543
Royal Dutch/Shell Group
(Bearer) 25,200 3,129
Unilever NV 7,500 983
Wolters Kluwer CVA 3,139 286
--------
9,213
--------
SINGAPORE--2.2%
Development Bank Singapore 45,000 516
Hong Kong Land Holdings 233,331 420
Jardine Matheson Holdings
Ltd. 35,811 218
OCBC Bank 41,833 491
Singapore Airlines Ltd. 62,000 575
Singapore Telecom 709,000 1,445
United Overseas Bank 39,600 348
--------
4,013
--------
SPAIN--1.6%
Argentaria 5,700 201
Banco Central SA (Reg.) 5,500 114
Banco Espanol de Credito 26,000 176
Banco de Bilbao Vizcaya SA
(Reg.) 11,200 342
Banco de Santander SA (Reg.) 6,800 296
Empresa Nacional de
Electricidad 11,700 582
Iberdrola SA 39,600 298
Repsol, SA 12,800 382
Telefonica Internacional de
Espana, SA 42,300 534
--------
2,925
--------
</TABLE>
See accompanying Notes to Financial Statements.
F-3
<PAGE> 76
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
SWEDEN--2.2%
ASEA AB Series A Free shares 3,300 $ 330
ASEA AB Series B Free shares 800 79
Astra AB Series A Free shares 22,400 823
Astra AB Series B Free shares 3,400 123
Branded Consumer Products
(Compulsory Acquisition)
Series A* 5,300 75
Branded Consumer Products
(Compulsory Acquisition)
Series B* 2,800 39
Ericsson(LM) Telephone* 6,280 133
Ericsson(LM) Telephone
Series B 62,800 1,333
Pharmacia AB Series A
Free shares 5,300 184
Pharmacia AB Series B
Free shares 2,800 98
Sandvik AB Series A
Free shares 8,600 161
Volvo AB Series A Free shares 5,000 114
Volvo AB Series B Free shares 20,700 466
--------
3,958
--------
SWITZERLAND--8.0%
BBC Brown Boveri 370 429
BBC Brown Boveri (Reg.) 189 43
CS Holding (Reg.) 13,670 1,397
Ciba-Geigy Ltd. (Bearer) 170 147
Ciba-Geigy Ltd. (Reg.) 1,175 1,017
Cie Financiere Richemont
Series A (Bearer) 259 360
Holderbank Fn Glarus (Bearer) 1,000 803
Nestle Ltd. (Reg.) 1,823 1,911
Roche Group 323 2,347
Roche Group (Bearer) 75 960
SMH AG (Bearer) 156 97
SMH AG (Reg.) 682 92
Sandoz Ltd. (Bearer) 491 409
Sandoz Ltd. (Reg.) 1,673 1,381
Schweizerische
Bankgesellschaft (Bearer) 979 1,061
Schweizerische
Bankgesellschaft (Reg.) 950 218
Schweizerische Bankverein
(Bearer) 1,129 463
Schweizerische Bankverein
(Reg.) 1,251 256
Winterthur (Reg.) 500 329
Zurich Versicherun (Reg.) 2,095 600
--------
14,320
--------
UNITED KINGDOM--20.1%
Abbey National 61,900 524
Allied-Lyons 48,700 393
Argyll Group 54,708 278
BAA PLC 48,456 377
BAT Industries PLC 144,756 1,188
BOC Group 21,850 300
BTR PLC 165,615 880
Barclays PLC 75,223 883
Bass PLC 42,400 444
Boots Co. PLC 46,648 413
British Airways PLC 46,400 334
British Gas PLC 201,400 767
British Petroleum Co. PLC 259,375 1,907
British Sky Broadcast 76,400 457
British Steel 94,600 244
British Telecommunications
PLC 294,200 1,749
Cable & Wireless PLC 146,900 959
Cadbury Schweppes PLC 40,210 332
Commercial Union
Assurance Co. 31,400 304
General Accident 17,300 177
General Electric Co. PLC 125,200 622
Glaxo PLC 149,529 2,017
Grand Metropolitan PLC 98,003 679
Great Universal Stores 47,800 431
Guinness PLC 93,500 749
HSBC Holdings PLC 40,757 606
HSBC Holdings PLC
(Hong Kong) 82,896 1,217
Hanson PLC 240,444 737
Imperial Chemical
Industries PLC 32,100 393
Inchcape 22,221 110
J. Sainsbury PLC 85,028 569
Kingfisher 29,415 221
Lloyds Abbey Life 26,700 193
Lloyds Bank 59,098 727
Marks & Spencer PLC 127,500 855
National Power Development 59,600 465
National Westminster Bank PLC 75,443 753
Pearson PLC 25,137 250
Peninsular & Oriental Steam
Navigation Co. 26,291 200
Powergen PLC 37,400 336
Prudential Corp. 85,865 537
RTZ Corp. PLC (Reg.) 48,503 672
Rank Organisation PLC 40,800 272
Redland 22,248 123
Reed International PLC 26,000 395
Reuters Holdings PLC 86,500 804
Royal Bank of Scotland 36,413 295
Scot & Newcastle 20,100 186
Scottish Power 31,400 173
Shell Transport & Trading
Co. (Reg.) 157,000 1,837
SmithKline Beecham PLC
Series A 65,635 685
SmithKline Beecham PLC
(units) 62,700 642
Standard Chartered PLC 10,264 84
Sun Alliance Group 31,988 191
TSB Group PLC 76,700 452
Tesco 95,403 453
Thorn EMI PLC 19,666 458
Tomkins 47,801 189
Unilever PLC 36,900 717
Vendome (units) 34,050 301
Vodafone Group PLC 146,192 604
Waste Management
International* 16,000 75
Zeneca Group 45,200 842
--------
36,027
--------
TOTAL COMMON STOCK
(Cost $162,414) 174,660
--------
</TABLE>
See accompanying Notes to Financial Statements.
F-4
<PAGE> 77
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
PREFERRED STOCK--0.7%
AUSTRALIA--0.1%
News Corp. Ltd. (Limited
Voting Shares) 39,718 $ 182
--------
GERMANY--0.6%
Henkel KGaA 629 235
RWE AG (Non Voting) 1,832 519
SAP AG Non Voting Preference 2,010 308
Volkswagen AG (Non Voting) 350 80
--------
1,142
--------
ITALY--0.0%
Fiat Finance SpA 38,800 77
--------
TOTAL PREFERRED STOCK
(Cost $1,168) 1,401
--------
WARRANTS--0.0%
UNITED KINGDOM--0.0%
BTR Nylex Ltd.
(expire 11/26/98)* 4,019 2
--------
TOTAL WARRANTS
(Cost $3) 2
--------
</TABLE>
<TABLE>
<CAPTION>
Maturity Value
(000s) (000s)
-------- ------
<S> <C> <C>
REPURCHASE AGREEMENT--1.2%
UNITED STATES--1.2%
State Street Bank & Trust
4.75%
Dated 10/31/95
Due 11/01/95
Collateralized By:
U.S. Treasury Bond
$1,440,000 Par; 12%
Due 8/15/13 $ 2,144 2,144
--------
TOTAL REPURCHASE AGREEMENT
(Cost $2,144) 2,144
--------
TOTAL INVESTMENTS--99.2%
(Cost $165,729) 178,207
--------
OTHER ASSETS AND LIABILITIES--0.8%
Other Assets 1,793
Liabilities (388)
--------
1,405
--------
NET ASSETS--100.0%
Applicable to 16,137,640
outstanding $0.00001
par value shares
(unlimited shares
authorized) $179,612
========
NET ASSET VALUE PER SHARE $11.13
=====
</TABLE>
- ------------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
F-5
<PAGE> 78
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF OPERATIONS (in thousands)
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax withheld of $515) $ 3,386
Interest 161
-------
Total investment income 3,547
-------
Expenses:
Investment advisory and administration fee 1,080
Transfer agency and shareholder service fees 386
Custodian fees 206
Registration fees 45
Professional fees 50
Shareholder reports 46
Trustees' fees 43
Amortization of deferred organization costs 24
Insurance and other expenses 6
-------
1,886
Less expenses reduced (577)
-------
Total expenses incurred by Fund 1,309
-------
Net investment income 2,238
-------
Net realized gain (loss) on investments and foreign currency
transactions:
Proceeds from sales of investments 9,597
Cost of investments sold (9,437)
-------
Net realized gain on investments from changes in market
value 160
Net realized loss on investments from changes in foreign
exchange rates (137)
-------
Net realized gain on investments sold 23
Net realized gain on foreign currency transactions 170
-------
Net realized gain on investments sold and foreign
currency transactions 193
-------
Change in net unrealized gain (loss) on investments and foreign
currency translation:
Changes in market value:
Beginning of period unrealized gain 413
End of period unrealized gain 4,832
-------
Increase in net unrealized gain in market value 4,419
-------
Changes in foreign exchange rates:
Beginning of period unrealized gain 9,494
End of period unrealized gain 7,646
-------
Decrease in net unrealized gain in foreign exchange rates (1,848)
-------
Increase in net unrealized gain on investments from
changes in market value and foreign exchange rates 2,571
Decrease in net unrealized gain on translating assets
and liabilities into the reporting currency (14)
-------
Increase in net unrealized gain on investments and
foreign currency translation 2,557
-------
Net gain on investments 2,750
-------
Increase in net assets resulting from operations $ 4,988
=======
</TABLE>
See accompanying Notes to Financial Statements.
F-6
<PAGE> 79
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended
October 31,
1995 1994
-------- --------
<S> <C> <C>
Operations:
Net investment income $ 2,238 $ 1,412
Net realized gain (loss) on investments sold
and foreign currency transactions 193 (580)
Increase in net unrealized gain on investments
and foreign currency translation 2,557 8,889
-------- --------
Increase in net assets resulting from
operations 4,988 9,721
-------- --------
Distributions to Shareholders From:
Net investment income (1,532) (433)
Capital gains -- (188)
-------- --------
Total distributions to shareholders (1,532) (621)
-------- --------
Capital Share Transactions:
Proceeds from shares sold 73,349 61,237
Net asset value of shares issued in
reinvestment of distributions 1,372 560
Early withdrawal fees 49 129
Less payments for shares redeemed (40,969) (34,756)
-------- --------
Increase in net assets from capital share
transactions 33,801 27,170
-------- --------
Total increase in net assets 37,257 36,270
Net Assets:
Beginning of period 142,355 106,085
-------- --------
End of period (including undistributed
net investment income of $2,051 and
$1,306, respectively) $179,612 $142,355
======== ========
Number of Fund Shares:
Sold 6,778 5,947
Reinvested 134 56
Redeemed (3,840) (3,392)
-------- --------
Net increase in shares outstanding 3,072 2,611
Shares Outstanding:
Beginning of period 13,066 10,455
-------- --------
End of period 16,138 13,066
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-7
<PAGE> 80
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUND
The Schwab International Index Fund (the "Fund") is a series of Schwab Capital
Trust (the "Trust"), an open-end, management investment company organized as a
Massachusetts business trust on May 7, 1993 and registered under the Investment
Company Act of 1940, as amended.
In addition to the Fund, the Trust also offers the Schwab Small-Cap Index
Fund(R), the Schwab Asset Director(R)-High Growth Fund, the Schwab Asset
Director(R)-Conservative Growth Fund and the Schwab Asset Director(R)-Balanced
Growth Fund. The assets of each series are segregated and accounted for
separately.
The investment objective of the Fund is to attempt to track the price and
dividend performance (total return) of the Schwab International Index(R), an
index created to represent the performance of common stocks and other equity
securities issued by large, publicly traded companies from countries around the
world with major developed securities markets, excluding the United States.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Investments in securities traded on an exchange are valued
at the last quoted sale price for a given day, or if a sale is not reported for
that day, at the mean between the most recent quoted bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Fund's investment manager pursuant to Board of Trustees'
guidelines. Short-term securities with 60 days or less to maturity are stated at
amortized cost, which approximates market value.
Security transactions and investment income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Dividend income and distributions to
shareholders are recorded on the ex-dividend date; interest income is recorded
on the accrual basis. Realized gains and losses from security transactions are
determined on an identified cost basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or Government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Foreign currency translation -- The accounting records of the Fund are
maintained in U.S. dollars. Investment securities and all other assets and
liabilities of the Fund denominated in a foreign currency are translated into
U.S. dollars at the exchange rates on October 31. Purchases and sales of
securities, income receipts and expense payments are translated into U.S.
dollars at the exchange rate in effect on the dates of the respective
transactions.
The Fund separates within its statement of operations the portion of realized
and unrealized gains and losses resulting from changes in foreign exchange rates
from that arising from changes in securities' market values.
F-8
<PAGE> 81
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
Forward currency contracts -- A forward currency contract ("Forward") is an
agreement between two parties to buy and sell a currency at a set price on a
future date. The value of the Forward fluctuates with changes in currency
exchange rates. The Forward is marked-to-market daily and the change in value is
recorded by the Fund as an unrealized gain or loss. When the Forward is closed,
the Fund records a realized gain or loss equal to the difference between the
value at the time the contract was opened and the value at the time the contract
was closed. The Fund engages in Forwards in connection with the purchase and
sale of portfolio securities to minimize the uncertainty of changes in future
exchange rates.
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund, its initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from the Fund's commencement of operations.
Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. The Fund is considered a separate entity for tax purposes.
At October 31, 1995, (for financial reporting and federal income tax purposes),
net unrealized gain aggregated $12,478,000, of which $22,819,000 related to
appreciated securities and $10,341,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of .70% of the first $300 million
of average daily net assets and .60% of such assets over $300 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$1,080,000 during the year ended October 31, 1995, before the Investment Manager
reduced its fee (see Note 5).
Sub-advisory agreement -- Prior to June 30, 1995, the Investment Manager had a
sub-advisory agreement with Dimensional Fund Advisors Inc. ("Dimensional") under
which Dimensional performed day-to-day portfolio management for the Fund.
Dimensional did not receive compensation directly from the Fund. However, the
Investment Manager did pay Dimensional an annual fee, payable monthly, of .15%
of the first $300 million of average daily net assets and .05% of such assets
over $300 million. Effective June 30, 1995, the sub-advisory agreement for the
Fund was terminated and the Investment Manager assumed day-to-day portfolio
management responsibility for the Fund.
F-9
<PAGE> 82
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets for transfer
agency services and .20% of such assets for shareholder services. For the year
ended October 31, 1995, the Fund incurred transfer agency and shareholder
service fees of $386,000, before Schwab reduced its fees (see Note 5).
Officers and trustees -- During the period, certain officers and trustees of the
Trust were also officers or directors of the Investment Manager and/or Schwab.
During the year ended October 31, 1995, the Trust made no direct payments to its
officers or trustees who were "interested persons" within the meaning of the
Investment Company Act of 1940, as amended. The Fund incurred fees of $43,000
related to the Trust's unaffiliated trustees.
4. BORROWING AGREEMENT
The Trust has an arrangement with State Street Bank and Trust Company, the
Fund's custodian, whereby the Fund may borrow up to $10,000,000, on a temporary
basis, to fund redemptions. Amounts borrowed under this arrangement bear
interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the year ended October 31, 1995, no borrowings were
made under this arrangement.
5. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the Fund's ratio of operating expenses to average net assets. For the year
ended October 31, 1995, the total of such fees reduced by the Investment Manager
was $415,000 and the total of such fees reduced by Schwab was $162,000.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated $43,932,000 and $9,597,000, respectively, for the year ended October
31, 1995.
7. EARLY WITHDRAWAL FEES PAID TO THE FUND
The Fund assesses a .75% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the year ended October 31, 1995, total early withdrawal fees
retained by the Fund amounted to $49,000.
F-10
<PAGE> 83
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
8. COMPOSITION OF NET ASSETS
At October 31, 1995, net assets consisted of:
<TABLE>
<S> <C>
Capital paid in $165,464,000
Accumulated undistributed net investment income 2,051,000
Accumulated net realized loss on investments sold and
foreign currency transactions (402,000)
Net unrealized gain on investments 12,478,000
Net unrealized gain on translating assets and liabilities
into the reporting currency 21,000
------------
Total $179,612,000
============
</TABLE>
The Fund follows Statement of Position 93-2 Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies, which will generally present
undistributed income and realized gains on a tax basis. As a result, certain
reclassifications to increase undistributed net investment income and net
realized loss on investments sold and foreign currency transactions by $39,000
and $15,000 respectively, and to decrease capital paid in by $24,000 have
occurred. These reclassifications have no impact on the net asset value of the
Fund.
At October 31, 1995, the Fund's Statement of Net Assets included liabilities of
$149,000 for Fund shares redeemed and $61,000 for investment advisory and
administration fee payable.
F-11
<PAGE> 84
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
For the period
September 9,
1993
(commencement of
For the year ended operations) to
October 31, October 31,
1995 1994 1993
-------- -------- ----------------
<S> <C> <C> <C>
Net asset value at beginning of period $ 10.89 $ 10.15 $ 10.00
Income from Investment Operations
- -------------------------------
Net investment income .14 .11 .03
Net realized and unrealized gain on
investments and foreign currency
transactions .22 .69 .12
-------- -------- --------
Total from investment operations .36 .80 .15
Less Distributions
- ---------------
Dividends from net investment income (.12) (.04) --
Distributions from realized gain
on investments -- (.02) --
-------- -------- --------
Total distributions (.12) (.06) --
-------- -------- --------
Net asset value at end of period $ 11.13 $ 10.89 $ 10.15
======== ======== ========
Total return (%) 3.35 7.89 1.50
- --------------
Ratios/Supplemental Data
- -----------------------
Net assets, end of period (000s) $179,612 $142,355 $106,085
Ratio of expenses to
average net assets (%) .85 .90 .60*
Ratio of net investment income to
average net assets (%) 1.45 1.14 2.15*
Portfolio turnover rate (%) 0 6 2
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the periods ended
October 31, 1995, 1994 and 1993, would have been 1.22%, 1.30% and 2.10%*,
respectively, and the ratio of net investment income to average net assets would
have been 1.08%, .74% and .65%*, respectively.
* Annualized
F-12
<PAGE> 85
SchwabFunds(R) 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Board of Trustees
and Shareholders of the Schwab International Index Fund(TM)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the Schwab International Index Fund
(one of the series constituting Schwab Capital Trust, hereafter referred to as
the "Trust") at October 31, 1995, and the results of its operations and the
changes in its net assets for each of the periods presented, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
November 22, 1995
F-13
<PAGE> 86
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
COMMON STOCK--99.0%
1st Source Corp. 2,433 $ 57
20th Century Industries 12,100 201
3COM Corp. 4,134 194
3DO Co.* 5,900 64
AAR Corp. 4,000 71
ACX Technologies, Inc. 6,200 98
ADVO, Inc. 4,500 115
AG Chemical Equipment Inc. 2,700 77
AGCO Corp. 6,150 275
ALANTEC Corp.* 2,200 78
ALBANK Financial Corp. 2,600 75
AMC Entertainment Inc.* 3,700 67
AMCORE Financial, Inc. 4,100 93
AMETEK, Inc. 7,700 136
AMP Inc. 1,792 70
APS Holding Corp. Class A* 3,200 66
AST Research, Inc.* 9,754 87
Acclaim Entertainment, Inc.* 10,000 237
Acme Metals Co.* 1,000 15
Acordia, Inc. 2,900 80
Actava Group Inc.* 4,100 71
Actel Corp.* 3,700 44
Acuson Corp.* 5,600 65
Acxiom Corp. 5,700 170
Addington Resources, Inc.* 3,100 39
Adobe Systems Inc. 1,600 91
Advanced Tissue Sciences,
Inc.* 7,800 70
Affiliated Computer Services
Inc.* 1,800 59
Air Express International
Corp. 4,000 82
Airborne Freight Corp. 4,700 123
Alaska Air Group, Inc.* 3,300 49
Albany International Corp.
Class A 7,100 147
Alberto-Culver Co. Class A 300 8
Alex. Brown Inc. 3,800 186
Alfa Farmers Federation Corp. 9,600 103
Allen Group Inc. 5,100 125
Alliance Entertainment Corp.* 8,200 55
Alliance Semiconductor Corp. 8,250 253
Alliant Techsystems Inc.* 2,900 135
Allied Group, Inc. 1,900 61
Alpharma, Inc. 4,600 110
Altera Corp. 3,000 182
Alternative Resources Corp. 4,100 126
Altron Inc. 2,500 73
Amcol International Corp. 3,900 67
Amerco* 10,500 190
America Online, Inc. 1,000 80
America West Airlines, Inc.* 10,200 139
American Annuity Group, Inc. 8,250 89
American Bankers Insurance
Group, Inc. 5,100 182
American Business
Information, Inc. 7,650 136
American Business Products,
Inc. 3,300 72
American Financial
Enterprises Inc. 1,500 35
American Freightways Corp.* 7,400 93
American Heritage Life
Investment Corp. 5,200 100
American Homepatient Inc.* 1,900 46
American Maize-Products Co. 2,700 107
American Management Systems,
Inc. 6,600 192
American Medical Response,
Inc.* 6,000 173
American Mobile Satellite
Corp.* 6,300 132
American Oncology Resources
Inc.* 6,400 224
American President Companies,
Ltd. 7,100 172
Americredit Corp.* 7,100 87
Amphenol Corp. Class A* 3,100 67
Amresco Inc. 5,700 61
Amsco International, Inc.* 10,700 171
Anchor Gaming* 2,500 55
Andrew Corp. 1,275 54
Angelica Corp. 2,000 45
AnnTaylor Stores Corp.* 5,500 61
Antec Corp.* 5,600 70
Anthony Industries, Inc. 6,415 119
Apogee Enterprises, Inc. 2,300 34
Apollo Group Inc. 4,650 121
Apple South, Inc. 6,650 138
Applebee's International,
Inc. 7,600 212
Applied Innovation Inc. 3,400 32
Applied Power Inc. Class A 2,800 85
Apria Healthcare Group Inc.* 11,600 252
Aptar Group, Inc. 4,500 154
Aquila Gas Pipeline Corp. 6,800 75
Arbor Drugs, Inc. 5,900 107
Arch Communications Group
Inc.* 2,600 71
Arctco, Inc. 6,150 70
Argosy Gaming Co.* 4,700 44
Armco Inc.* 28,000 172
Armor All Products Corp. 4,600 77
Arnold Industries Inc. 6,300 104
Arrow International, Inc. 1,000 42
Arthur J. Gallagher & Co. 3,300 117
Arvin Industries, Inc. 6,300 112
Ashland Coal, Inc. 2,900 69
Aspect Telecommunications
Corp. 5,600 194
Associated Banc-Corp 3,900 148
Associated Group Inc. Class
A* 4,100 73
Astoria Financial Corp. 4,000 172
Atlantic Southeast Airlines,
Inc. 6,300 157
Atmos Energy Corp. 4,000 73
Atria Software Inc. 3,200 115
Augat Inc. 4,100 65
Auspex Systems, Inc.* 7,600 108
Authentic Fitness Corp. 5,500 113
Avatar Holdings, Inc.* 2,400 89
Avid Technology, Inc.* 4,500 196
Aztar Corp.* 7,400 60
B W/I P Inc. Class A 5,100 84
BISYS Group, Inc.* 5,600 156
BJ Services Co.* 6,900 162
BMC Industries, Inc. 3,100 120
Baldor Electric Co. 6,540 157
Baldwin & Lyons, Inc. Class B 3,300 49
Ballard Medical Products 9,900 171
Bally Entertainment Corp. 10,100 111
</TABLE>
See accompanying Notes to Financial Statements.
F-14
<PAGE> 87
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Bancorp South, Inc. 2,300 $ 108
Banta Corp. 5,050 220
Banyan Systems, Inc.* 2,800 22
Barnes Group Inc. 1,600 60
Barrett Resources Corp.* 6,900 160
Bassett Furniture Industries,
Inc. 3,600 73
Bay State Gas Co. 2,800 70
Bearings, Inc. 1,600 58
Belden Inc. 12,300 297
Bell Bancorp, Inc. 1,800 53
Ben Franklin Retail Stores,
Inc.* 912 3
Benton Oil & Gas Co.* 5,000 61
Berkley (W.R.) Corp. 4,000 173
Best Products Inc. (New)* 7,300 36
Big B, Inc. 4,700 69
Bio Rad Laboratories Inc.* 1,700 65
Biocraft Laboratories, Inc. 2,800 43
Birmingham Steel Corp. 7,100 108
Black Box Corp. 4,000 66
Black Hills Corp. 3,200 80
Blair Corp. 1,900 56
Blanch (E.W.) Holdings, Inc. 3,500 67
Block Drug Co., Inc. Class A 4,957 191
Blount, Inc. Class A 2,900 126
Blount, Inc. Class B 1,000 48
Blyth Industries Inc.* 3,600 182
Boise Cascade Office Products
Co.* 7,600 275
Bok Financial Corp. 5,000 108
Bolt Beranek and Newman Inc.* 4,300 133
Bombay Company, Inc.* 7,850 46
Books-A-Million, Inc. 3,500 45
Boole & Babbage, Inc. 500 18
Borg Warner Automotive Inc. 5,400 159
Borland International, Inc.* 9,300 126
Boston Scientific Corp.* 3,073 129
Boston Technology, Inc.* 8,400 117
Bowne & Co., Inc. 3,800 71
Brady (W.H.) Co. Class A 1,700 124
Breed Technologies, Inc. 8,300 155
BroadBand Technologies, Inc.* 2,600 46
Broderbund Software, Inc. 100 7
Brooklyn Bancorp Inc.* 3,200 126
Brooktree Corp.* 3,500 42
Brown (Tom), Inc.* 4,600 52
Brown Group, Inc. 3,700 51
Bruno's Inc.* 402 4
Brush Wellman Inc. 4,000 67
Buffets, Inc.* 6,900 87
Burlington Coat Factory
Warehouse Corp.* 8,800 98
Burlington Industries, Inc.* 16,400 182
Burr-Brown Corp. 3,200 102
Bush Boake Allen Inc.* 4,600 126
Business Records Corp.
Holding Co.* 1,200 45
C-COR Electronics, Inc. 2,400 56
C-Cube Microsystems, Inc.* 4,100 283
C-TEC Corp. 6,800 145
CCB Financial Corp. 3,550 175
CCH Inc. Class A 4,800 113
CCH Inc. Class B 8,700 202
CDI Corp.* 4,000 59
CDW Computer Centers, Inc. 3,500 172
CFW Communications Co. 2,400 44
CIDCO, Inc.* 3,300 97
CILCORP Inc. 3,300 129
CLARCOR Inc. 3,000 68
CMAC Investment Corp. 2,900 138
CML Group, Inc. 11,350 65
CNB Bancshares, Inc. 3,801 103
CPI Corp. 2,800 51
CSF Holdings, Inc. 2,375 93
Cabot Oil & Gas Corp. Class A 4,600 62
Cadence Design Systems, Inc. 2,700 87
CalMat Co. 9,100 154
Caldor Corp.* 3,400 17
Calgon Carbon Corp. 9,500 108
California Federal Bank 12,600 186
California Federal Bank
Goodwill Certificates* 960 4
California Microwave, Inc.* 3,500 76
Cambridge Technology
Partners, Inc.* 3,200 183
Camco International Inc. 6,000 137
Canandaigua Wine Co., Inc.
Class B* 1,000 48
Capital Re Corp. 5,400 153
Capitol American Financial
Corp. 6,500 128
Caraustar Industries, Inc. 6,600 122
Carlisle Companies Inc. 3,400 140
Carmike Cinemas, Inc.* 2,500 52
Carpenter Technology Corp. 3,600 136
Carson Pirie Scott & Co.
Illinois* 4,100 69
Carter-Wallace, Inc. 9,800 103
Casey's General Stores, Inc. 6,000 139
Casino America, Inc.* 3,350 23
Castech Aluminum Group Inc.* 2,400 34
Catalina Marketing Corp.* 2,200 111
Catellus Development Corp.* 28,300 156
Cato Corp. (New) Class A 6,200 37
Cellstar Corp.* 4,700 129
Cellular Communications, Inc.
Class A (Redeemable)* 4,500 242
Cellular Technical Services
Inc.* 2,100 35
Centex Construction Products
Inc.* 6,000 76
Central Hudson
Gas & Electric Corp. 3,700 113
Central Louisiana Electric
Co., Inc. 4,800 129
Central Maine Power Co. 7,900 110
Central Newspapers, Inc.
Class A 6,400 189
Centura Banks, Inc. 5,000 169
Century Communications Corp.
Class A* 19,100 166
Cephalon Inc.* 5,600 168
Cerner Corp. 5,400 139
Champion Enterprises, Inc. 4,200 109
Chaparral Steel Co. 6,000 59
Charming Shoppes, Inc. 26,100 74
Charter Medical Corp.* 6,100 110
Charter One Financial, Inc. 5,700 161
Chase Manhattan Corp. 1,360 78
Checkpoint Systems, Inc.* 5,700 165
Cheesecake Factory, Inc.* 2,400 51
Chemed Corp. 2,000 70
</TABLE>
See accompanying Notes to Financial Statements.
F-15
<PAGE> 88
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Chemical Financial Corp. 1,995 $ 79
Chesapeake Corp. 6,700 205
Chesapeake Energy Corp. 2,600 76
Cheyenne Software, Inc.* 9,450 197
Chips & Technologies Inc.* 3,900 34
Chiquita Brands
International, Inc. 13,000 211
Church & Dwight Co., Inc. 4,100 84
Citicasters Inc. 3,000 94
Citizens Bancorp 3,700 122
Citizens Banking Corp. 3,600 110
Citizens Corp. 8,800 160
City National Corp. 11,200 148
Claire's Stores, Inc. 4,500 88
Clear Channel Communications,
Inc. 475 39
Cleveland-Cliffs Inc. 2,700 101
Coast Savings Financial,
Inc.* 4,600 121
Coastal Physician Group Inc.* 6,200 81
Cobra Golf, Inc. 4,300 113
Coca-Cola Bottling Co.
Consolidated 2,000 67
Coeur d'Alene Mines Corp. 3,000 51
Cognex Corp.* 3,900 234
Coherent, Inc.* 2,800 80
Cole Taylor Financial Group
Inc. 3,600 95
Collective Bancorp, Inc. 4,400 103
Collins & Aikman Corp.* 15,700 126
Colonial BancGroup, Inc. 3,400 98
Colonial Data Technologies
Corp.* 3,600 50
Comair Holdings, Inc. 7,400 209
Comdata Holdings Corp.* 4,000 98
Commerce Group Inc.
Massachusetts 8,500 173
Commercial Federal Corp. 3,800 125
Commercial Intertech Corp. 3,450 58
Commercial Metals Co. 3,233 83
Commonwealth Energy System 2,600 110
Community Health Systems,
Inc.* 4,500 143
Community Psychiatric Centers 10,100 110
Comnet Cellular, Inc.* 3,700 93
CompUSA Inc.* 5,100 195
Computer Network Technology* 5,000 33
ComputerVision Corp.* 12,400 146
Comverse Technology Inc.* 5,000 113
Concord Efs Inc.* 10,300 355
Cone Mills Corp.* 10,300 112
Conner Peripherals, Inc.* 14,100 254
Consolidated Stores Corp.* 6,100 141
Continental Airlines, Inc.
Class B* 6,400 228
Continuum Company, Inc.* 5,000 197
Coors (Adolph) Co. Class B 9,000 163
Copley Pharmaceutical, Inc.* 4,764 78
Coram Healthcare Corp.* 9,262 37
Corrections Corp. of America 3,800 207
Coventry Corp. 8,000 158
Crawford & Co. Class A 4,300 67
Crawford & Co. Class B 8,500 132
Cray Research, Inc.* 6,400 133
Creative Computers Inc.* 2,100 60
Credence Systems Corp. 6,750 253
Crompton & Knowles Corp. 13,600 172
Cross (A.T.) Co. Class A 5,800 83
Cross Timbers Oil Co. 4,900 71
Cullen/Frost Bankers, Inc. 2,700 137
Culligan Water Technologies
Inc.* 3,500 60
Curtiss-Wright Corp. 1,400 62
Cypress Semiconductor Corp. 900 32
Cyrix Corp.* 4,500 144
Cytec Industries Inc.* 3,000 164
DSP Group, Inc.* 1,500 24
Daig Corp. 5,000 113
Dallas Semiconductor Corp. 9,500 202
Dames & Moore, Inc. 4,700 64
Data General Corp.* 7,900 91
Datascope Corp.* 4,200 101
Dauphin Deposit Corp. 8,400 245
Dave & Busters Inc.* 840 13
Davidson & Associates, Inc. 8,700 312
DeVRY Inc. 7,000 158
Dekalb Genetics Corp. 1,200 51
Dell Computer Corp. 6,300 293
Delta & Pine Land Co. 2,100 81
Department 56 Inc.* 300 14
Deposit Guaranty Corp. 4,400 194
Detroit Diesel Corp.* 8,900 158
Devon Energy Corp. 4,700 102
Devon Group, Inc. (New)* 1,600 62
Dexter Corp. 5,800 138
Diagnostic Products Corp. 4,300 159
Dial Page, Inc.* 5,000 74
Dialogic Corp.* 3,400 98
Diamond Multimedia Systems
Inc.* 7,200 214
Diamond Shamrock, Inc. 7,800 201
Digi International Inc.* 3,000 81
Digital Link Corp.* 1,900 30
Dimon Inc. 8,400 123
Dionex Corp.* 1,500 80
Discount Auto Parts, Inc.* 2,900 78
Discovery Zone, Inc.* 11,900 42
Dollar Tree Stores Inc.* 4,100 109
Donaldson Co., Inc. 5,800 141
Doubletree Corp.* 4,300 94
Downey Financial Corp. 3,200 65
Dreyer's Grand Ice Cream,
Inc. 3,300 115
Duriron Co., Inc. 4,400 118
Duty Free International, Inc. 6,800 97
Dynatech Corp. 3,400 52
Eastern Enterprises 4,800 143
Eastern Utilities Assoc. 4,800 113
Eaton Vance Corp. (Non
Voting) 2,100 76
Edison Brothers Stores, Inc. 4,200 15
Egghead, Inc.* 3,000 21
Electro Scientific Industries
Inc.* 2,200 69
Electroglas Inc. 2,300 163
Electronics for Imaging, Inc. 2,800 232
Empire District Electric Co. 3,200 59
Energen Corp. 2,800 63
Enhance Financial Services
Group, Inc. 7,100 145
Envoy Corp. (New)* 2,000 26
Enzo Biochem, Inc. 5,775 92
</TABLE>
See accompanying Notes to Financial Statements.
F-16
<PAGE> 89
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Ethan Allen Interiors, Inc.* 3,700 $ 73
Exabyte Corp.* 4,900 63
Exar Corp. 2,000 48
Expeditors International of
Washington, Inc. 3,900 104
Express Scripts, Inc. Class A 3,400 131
F & M National Corp. 3,955 71
FHP International Corp.* 1,056 26
FMC Gold Co. 17,500 68
FSF Financial Corp. 5,100 68
FTP Software Inc.* 6,600 179
Fab Industries, Inc. 400 12
Fair, Issac & Co., Inc. 3,000 83
Farmer Bros. Co. 400 52
Fastenal Co. 1,400 49
Fedders Corp. 825 4
Federal-Mogul Corp. 8,800 157
Federated Department Stores,
Inc.* 2,700 69
Ferro Corp. 7,700 178
FileNet Corp.* 2,800 127
Financial Security Assured
Holdings Ltd. 6,400 166
Fingerhut Companies, Inc. 10,600 144
FirsTier Financial, Inc. 6,200 265
First Alert, Inc. 5,600 86
First American Financial
Corp. 3,600 84
First Bank System, Inc. 3,809 189
First Citizens BancShares,
Inc. Class A 2,600 138
First Commerce Bancshares
Inc. 3,000 54
First Commercial Corp. 5,640 169
First Commonwealth Financial
Corp. 5,300 87
First Data Corp. 501 33
First Financial Bancorp 2,800 95
First Financial Corp. 6,900 147
First Michigan Bank Corp. 4,906 132
First Midwest Bancorp, Inc. 2,900 82
First Mississippi Corp. 4,900 100
First National Bancorp 5,200 146
First Union Corp. 2,220 110
FirstFed Michigan Corp. 5,100 173
Firstbank of Illinois Co. 2,600 78
Firstmiss Gold Inc.* 7,571 138
Fisher Scientific
International, Inc. 3,600 113
Flagstar Companies, Inc.* 8,300 35
Florida East Coast
Industries, Inc. 2,400 161
Florida Rock Industries, Inc. 2,000 54
Fluke Corp. 1,600 59
Foremost Corp. of America 2,400 110
Forest City Enterprises, Inc.
Class A 2,100 78
Fort Wayne National Corp. 2,700 85
Fossil, Inc.* 2,200 23
FoxMeyer Health Corp. 5,473 125
Frame Technology Corp.* 3,800 107
Franklin Quest Co.* 5,700 136
Fremont General Corp. 4,280 124
Fresenius U.S.A. Inc.* 4,500 74
Fritz Cos., Inc. 5,200 181
Frontier Insurance Group,
Inc. 3,050 87
Fuller (H.B.) Co. 3,300 104
Fulton Financial Corp. 6,560 141
Fund American Enterprises
Holdings, Inc.* 1,909 132
Fusion Systems Corp.* 1,800 50
G&K Services, Inc. Class A 5,250 119
GC Companies Inc.* 1,680 54
Gartner Group Inc. Class A 5,800 253
Gasonics International Corp. 2,000 66
Gaylord Container Corp. Class
A* 11,400 87
GenCorp Inc. 8,100 85
General Binding Corp. 3,400 67
General DataComm Industries,
Inc.* 5,000 76
General Magic Inc.* 6,300 80
Genesis Health Ventures,
Inc.* 3,300 95
Geneva Steel Class A* 6,200 45
Gentex Corp.* 5,000 113
Geon Co. 6,300 157
Geotek Communications Inc.* 14,400 120
Gerber Scientific, Inc. 5,100 86
Giddings & Lewis, Inc. 8,800 143
Gilead Sciences, Inc.* 4,900 94
Glendale Federal
Bank, F.S.B. (New)* 9,100 146
Global Natural Resources
Inc.* 6,600 66
Global Village
Communications* 3,600 62
Goulds Pumps, Inc. 5,300 127
Graco Inc. 2,650 89
Grand Casinos, Inc. 4,600 183
Granite Construction Inc. 3,100 88
Great Financial Corp. 3,500 72
Greenfield Industries Inc. 3,500 104
Greif Brothers Corp. 5,600 141
Grey Advertising Inc. 100 19
Griffon Corp.* 7,600 64
Guaranty National Corp. (New) 3,500 50
Guilford Mills, Inc. 2,900 64
Gulf South Medical Supply
Inc. 3,000 63
Gymboree Corp. 6,000 136
HBO & Co. 2,600 184
HCC Insurance Holdings, Inc.* 2,900 101
HCIA Inc.* 1,600 43
Hadco Corp.* 2,400 67
Haemonetics Corp.* 7,700 145
Hancock Holding Co. 2,300 84
Handleman Co. 6,300 49
Hanover Direct Inc.* 26,800 45
Harland (John H.) Co. 7,600 158
Harleysville Group Inc. 4,600 129
Harman International
Industries, Inc. 3,675 170
Harnischfeger Industries
Corp. 4,369 138
Harper Group, Inc. 3,800 67
Harte Hanks Communications 5,000 151
Hawkeye Bancorporation 2,900 71
Hayes Wheels International,
Inc. 4,400 116
Health Management Systems,
Inc. 2,400 77
Heart Technology, Inc.* 4,100 116
Heartland Express, Inc.* 2,900 79
Heartland Wireless
Communications, Inc.* 3,500 91
</TABLE>
See accompanying Notes to Financial Statements.
F-17
<PAGE> 90
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Hechinger Co. Class A 9,100 $ 39
Hecla Mining Co.* 10,400 77
Helene Curtis Industries,
Inc. 2,400 72
Helix Technology Corp. 2,100 78
Helmerich & Payne, Inc. 5,600 145
Herbalife International, Inc. 6,400 48
Heritage Media Corp. Class A* 4,500 125
Hollywood Entertainment Corp. 7,900 210
Hollywood Park Inc. (New)* 4,100 39
Home Beneficial Corp. Class B 4,400 108
Home Financial Corp. 5,400 83
Horace Mann Educators Corp. 5,200 138
Horizon Healthcare Corp.* 11,695 237
Hudson Foods, Inc. 6,250 88
Human Genome Sciences Inc.* 3,300 64
Hunt (J.B.) Transport
Services, Inc. 9,150 141
Hunt Manufacturing Co. 3,000 53
Huntco Inc. Class A 1,200 16
Hutchinson Technology Inc.* 1,500 95
Hyperion Software Corp.* 1,800 88
I-Stat Corp.* 2,300 71
ICN Pharmaceuticals, Inc. 7,802 160
IDEX Corp. 4,350 164
IDEXX Laboratories, Inc. 6,800 275
IES Industries Inc. 8,300 221
IHOP Corp.* 2,200 48
INDRESCO Inc.* 5,000 86
INSO Corp. 3,400 121
INTERCO Inc. 10,300 76
INTERSOLV Inc.* 4,200 67
Ideon Group Inc. 5,600 50
Immunex Corp. (New)* 9,300 117
Imperial Bancorp 3,300 74
In Focus Systems, Inc.* 2,200 72
Indiana Energy, Inc. 5,500 116
Information Resources, Inc.* 6,600 72
Inphynet Medical Management
Inc.* 3,400 62
Input/Output, Inc. 4,500 168
Insignia Financial Group
Class A (New)* 2,100 57
Insilco Corp.* 2,100 71
Insurance Auto Auctions,
Inc.* 2,200 16
Integon Corp. 3,900 64
Integrated Device Technology,
Inc. 800 15
Integrated Health Services,
Inc. 5,300 121
Integrated Systems Inc.* 2,200 78
Intelligent Electronics, Inc. 8,200 64
Inter-Regional Financial
Group, Inc. 1,700 60
InterVoice, Inc.* 3,200 58
Interdigital Communications
Corp.* 9,300 68
Interface Systems, Inc. Class
A 4,400 67
Intergraph Corp.* 11,900 146
Interim Services Inc.* 2,800 83
Intermet Corp.* 9,200 110
International CableTel, Inc. 7,033 188
International Dairy Queen,
Inc. Class A* 5,400 115
International Family
Entertainment, Inc. Class B* 9,300 172
International Multifoods
Corp. 3,900 80
International Rectifier
Corp.* 5,200 235
Interneuron Pharmaceuticals,
Inc.* 7,500 113
Interpool, Inc.* 4,100 66
Interstate Bakeries Corp. 8,600 184
Interstate Power Co. 2,000 58
Intuit Inc. 1,200 87
Invacare Corp. 8,400 210
Iomega Corp. 4,300 102
Ionics, Inc. 4,200 171
Isis Pharmaceuticals, Inc.* 4,000 40
Isolyser Inc. 5,400 96
Itron, Inc.* 2,600 76
J & L Specialty Steel, Inc. 10,200 167
JSB Financial, Inc. 2,800 86
Jacobs Engineering Group
Inc.* 9,500 208
Jacor Communications, Inc.
Class A* 4,600 72
Jefferson Bankshares, Inc. 3,200 72
John Alden Financial Corp. 5,700 118
John Wiley & Sons, Inc. Class
A 5,800 173
Jones Intercable, Inc. Class
A* 7,500 94
Juno Lighting, Inc. 4,600 67
Just for Feet Inc. 3,350 80
Justin Industries, Inc. 5,800 59
K N Energy, Inc. 6,568 168
KCS Energy, Inc. 1,900 22
KLA Instruments Corp. 1,200 52
Kaiser Aluminum Corp.* 12,800 144
Kaman Corp. Class A 4,700 51
Kaufman & Broad Home Corp. 7,700 90
Kaydon Corp. 3,500 101
Keane, Inc. 4,500 122
Kelley Oil & Gas Corp.* 10,100 24
Kellwood Co. 5,000 94
Kemet Corp. 7,800 267
Kenetech Corp.* 8,900 28
Kennametal Inc. 5,400 168
Kent Electronics Corp. 3,050 149
KeyCorp, Inc. 2,200 74
Keystone Financial, Inc. 6,100 199
Keystone International, Inc. 8,700 194
Kimball International, Inc.
Class B 5,000 129
Kinder-Care Learning
Centers, Inc. (New)* 5,000 68
Kinetic Concepts, Inc. 10,300 116
Kirby Corp.* 6,000 99
Komag, Inc.* 5,100 291
Kulicke & Soffa Industries
Inc. 6,000 212
LCI International Inc. 16,200 292
LTX Corp.* 6,400 78
La Quinta Inns, Inc. 2,250 58
La-Z-Boy Chair Co. 4,000 119
Laclede Gas Co. 3,800 77
Lance, Inc. 7,200 123
Landmark Graphics Corp.* 4,000 87
Landry's Seafood Restaurants,
Inc. 4,000 56
Lands' End, Inc. 8,000 120
Landstar Systems, Inc.* 2,700 72
Lattice Semiconductor Corp.* 4,400 172
Lawson Products, Inc. 2,800 68
</TABLE>
See accompanying Notes to Financial Statements.
F-18
<PAGE> 91
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Lawter International, Inc. 9,500 $ 101
Leader Financial Corp. 3,500 125
Learning Co.* 1,600 95
Lechters, Inc.* 3,300 31
Legg Mason, Inc. 3,500 101
Lennar Corp. 8,800 201
Level One Communications
Inc.* 2,650 61
Libbey Inc. 3,200 66
Liberty Bancorp, Inc. 2,000 72
Liberty Corp. 4,800 161
Life Partners Group, Inc. 5,900 107
Life Re Corp. 3,300 68
Life Technologies, Inc. 3,800 95
Lillian Vernon Corp. 3,800 51
Lilly Industries, Inc. Class
A 5,350 68
Lincare Holdings, Inc.* 7,200 180
Lincoln Electric Co. 2,600 64
Lincoln Telecommunications
Co. 9,900 172
Liposome Co., Inc.* 7,200 110
Liqui-Box Corp. 300 8
Littlefuse, Inc.* 3,400 111
Living Centers of America,
Inc.* 4,700 122
Logicon, Inc. 3,400 78
Lojack Corp.* 7,200 111
Lone Star Industries, Inc. 6,300 144
Long Islands Bancorp Inc. 6,200 142
Louis Dreyfus Natural Gas
Corp.* 11,400 160
Loyola Capital Corp. 2,800 100
Luby's Cafeterias, Inc. 6,500 135
Lukens Inc. 4,150 128
Lydall, Inc. 5,800 132
M.S. Carriers, Inc.* 3,000 47
MAIC Holdings Inc.* 1,627 49
MAXXAM Inc.* 2,300 85
MDU Resources Group, Inc. 7,200 152
MESA Inc.* 12,400 53
MICROS Systems, Inc. 1,500 56
Mac Frugal's Bargains-
Close-outs, Inc.* 6,000 71
Macromedia Inc. 8,000 294
Madison Gas and Electric Co. 2,300 76
Mafco Consolidated Group
Inc.* 6,300 143
Magma Copper Co. (New) 12,000 201
Magna Group, Inc. 6,500 159
MagneTek, Inc.* 5,300 52
Manitowoc Co., Inc. 1,600 45
Marcus Corp. 3,700 128
Mariner Health Group, Inc.* 4,300 42
Mark Twain Bancshares, Inc. 4,100 143
Markel Corp.* 1,300 95
Marquette Electronics, Inc.
Class A* 9,400 172
Marshall Industries* 4,300 152
Mascotech, Inc. 16,500 169
Material Sciences Corp. 3,300 55
Maxicare Health Plans Inc.* 4,200 74
Maxim Integrated Products,
Inc. 2,100 157
Maxtor Corp.* 10,700 54
Maybelline, Inc. 2,900 69
McAfee Associates, Inc. 3,500 205
McClatchy Newspapers, Inc.
Class A 6,900 136
Measurex Corp. 3,600 111
Medic Computer Systems, Inc.* 2,900 155
Medicine Shoppe
International, Inc. 1,800 78
Medisense Inc.* 3,800 81
Medpartners Inc.* 4,700 131
Medusa Corp. 3,400 85
Men's Wearhouse, Inc. 3,200 126
Mentor Corp. 5,800 129
Mercury Interactive Corp.* 3,700 77
Meredith Corp. 6,800 243
Merisel, Inc.* 6,500 39
Mesa Airlines, Inc.* 7,900 75
Methode Electronics, Inc.
Class A 5,300 123
Meyer (Fred), Inc.* 7,200 134
Michaels Stores, Inc.* 5,600 77
Microchip Technology, Inc. 2,100 83
Microdyne Corp.* 2,700 75
Mid-Am, Inc. 3,320 55
Midamerican Energy Co. 9,261 148
Mikasa Inc.* 4,900 64
Miller (Herman), Inc. 6,300 188
Mine Safety Appliances Co. 1,200 61
Minerals Technologies, Inc. 4,900 195
Mississippi Chemical Corp. 5,800 139
Mohawk Industries, Inc.* 8,200 122
Molten Metal Technology,
Inc.* 5,100 198
Money Store Inc. 4,950 197
Morrison Knudsen Corp. 8,000 52
Movie Gallery Inc.* 3,000 115
Mueller Industries, Inc. 4,600 108
Multicare Cos., Inc.* 3,800 71
Musicland Stores Corp.* 6,800 44
Myers Industries, Inc. 5,450 78
NAC Re Corp. 4,900 172
NACCO Industries, Inc. Class
A 2,300 132
NCH Corp. 1,800 98
NL Industries, Inc.* 12,500 163
NYMAGIC, Inc. 2,000 32
Nabors Industries, Inc.* 21,100 182
National Auto Credit Inc.* 5,500 89
National Bancorp of Alaska,
Inc. 1,800 113
National Commerce Bancorp 6,200 160
National Computer Systems,
Inc. 3,400 64
National Data Corp. 5,800 154
National Instruments Corp.* 5,100 97
National Presto Industries,
Inc. 1,600 65
National RE Holdings Corp. 4,300 145
National Steel Corp. Class B* 9,600 127
Nautica Enterprises, Inc. 4,650 160
Neiman Marcus Group, Inc. 9,800 168
Nellcor Inc.* 7,296 421
Neostar Retail Group Inc.* 3,500 53
Netcom Online Communications* 2,500 145
Netmanage Inc. 10,800 221
Network Equipment
Technologies, Inc.* 4,400 144
Network General Corp.* 5,100 211
Network Peripherals Inc.* 2,400 25
New England Business Service,
Inc. 3,200 62
New Jersey Resources Corp. 3,700 93
</TABLE>
See accompanying Notes to Financial Statements.
F-19
<PAGE> 92
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Newfield Exploration Co.* 5,900 $ 174
Nexgen Inc.* 7,500 139
Nextel Communications, Inc.* 3,877 54
Noble Drilling Corp.* 22,975 162
Norand Corp.* 1,600 27
North American Mortgage Co. 3,800 78
North Fork Bancorp, Inc. 5,700 125
Northwest Natural Gas Co. 3,400 110
Norwest Corp. 3,680 109
NovaCare, Inc.* 14,080 88
Novellus Systems, Inc.* 600 41
Nu-Kote Holding, Inc. 4,900 101
Nuevo Energy Co.* 4,300 95
O'Reilly Automotive, Inc.* 2,100 69
OEA, Inc. 5,100 139
OM Group Inc. 2,700 79
ONBANCorp, Inc. 3,600 106
Oak Industries Inc.* 4,500 94
Oak Technology* 4,400 242
Oakwood Homes Corp. 6,200 233
Octel Communications Corp.* 5,600 191
Offshore Logistics, Inc.* 4,200 53
Olympic Financial Ltd.* 5,100 92
Omnicare, Inc. 6,600 239
One Valley Bancorp of
West Virginia, Inc. 4,700 157
Oneok Inc. 6,900 168
Opti Inc.* 2,400 24
Optical Data Systems, Inc. 3,900 117
OrNda Healthcorp* 9,760 173
Orange & Rockland Utilities,
Inc. 3,400 119
Orbital Sciences Corp.* 5,300 77
Oregon Steel Mills, Inc. 6,300 90
Orion Capital Corp. 3,200 131
Ostex International Inc.* 2,700 53
Otter Tail Power Co. 2,500 86
Outboard Marine Corp. 4,400 91
Outlet Communications Inc.* 1,800 83
Overseas Shipholding Group,
Inc. 9,200 156
Owens & Minor, Inc. 6,600 78
Oxford Health Plans, Inc. 2,200 173
PAXAR Corp. 4,687 59
PDT Inc. 2,400 91
PHH Corp. 3,900 171
PLATINUM technology, inc.* 12,300 225
Pairgain Technologies Inc.* 3,400 145
Papa John's International,
Inc.* 2,400 93
Park Electrochemical Corp. 2,600 81
Park National Corp. 1,500 68
Parker & Parsley Petroleum
Co. 8,300 154
Parker Drilling Co.* 21,100 111
Patlex Corp. (New)* 550 3
Patterson Dental Co. 3,850 95
Paxson Communications Corp. 6,500 80
Payless Cashways Inc.* 9,300 53
Penn Traffic Co.* 2,600 28
PennCorp Financial Group,
Inc. 6,900 165
People's Bank 8,600 171
People's Choice TV Corp.* 2,600 54
PeopleSoft, Inc. 600 52
Peoples Heritage Financial
Group, Inc. 3,800 73
Performance Systems
International Inc.* 7,100 126
Petrie Stores Corp. 12,300 35
Petrolite Corp. 2,400 58
Phillips-Van Heusen Corp. 5,700 58
Phoenix Resource Cos Inc. 3,200 57
Photronic, Inc. 2,950 88
Phycor, Inc. 6,900 253
Physician Reliance Network
Inc.* 5,300 176
Physician Sales & Service
Inc. 4,500 73
Physicians Corp. of America* 9,900 150
Physicians Health Services,
Inc.* 2,000 67
Picturetel Corp. 3,300 217
Piedmont Natural Gas Co.,
Inc. 9,400 207
Pier 1 Imports, Inc. 9,745 94
Pioneer Group, Inc. 6,100 160
Pioneer-Standard Electronics,
Inc. 5,025 69
Piper Jaffray Inc. 4,600 55
Pittway Corp. 800 48
Pittway Corp. Class A 3,200 192
Planar Systems, Inc.* 2,700 47
Players International Inc. 6,900 73
Playtex Products, Inc.* 12,300 86
Ply-Gem Industries, Inc. 2,800 48
Pogo Producing Co. 9,000 181
Polaris Industries Inc. 6,900 193
Policy Management Systems
Corp.* 2,000 94
Pratt & Lambert United, Inc. 2,100 44
Precision Castparts Corp. 4,800 172
Premier Bancorp, Inc. 7,900 163
Presidential Life Corp. 6,800 65
Presstek Inc. 3,350 160
Price Enterprises Inc. 5,300 78
Primadonna Resorts Inc.* 7,400 116
Primark Corp.* 4,600 105
Prime Hospitality Corp.* 6,900 68
Production Operators Corp. 2,200 65
Proffitt's, Inc.* 2,100 49
Progress Software Corp. 1,600 104
Protective Life Corp. 600 17
Protein Design Labs, Inc.* 3,300 55
Provident Bancorp, Inc. 3,700 155
Public Service Co. of
New Mexico* 10,200 171
Public Service Co. of
North Carolina, Inc. 6,000 95
Pulitzer Publishing Co. 4,025 182
Pulte Corp. 7,300 231
Quaker State Corp. 7,400 97
Quality Food Centers, Inc. 3,600 73
Quanex Corp. 2,800 55
Quantum Health Resources,
Inc.* 3,000 32
Quarterdeck Corp.* 5,200 111
Quick & Reilly Group, Inc. 5,580 133
Quintiles Transnational Corp. 2,500 159
RCSB Financial Inc. 3,600 80
Raymond James Financial, Inc. 4,400 95
Reading & Bates Corp.* 20,600 237
Regal Cinemas, Inc. 3,200 125
Regal-Beloit Corp. 4,500 81
Reinsurance Group of America,
Inc. 4,400 151
</TABLE>
See accompanying Notes to Financial Statements.
F-20
<PAGE> 93
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Reliance Group Holdings, Inc. 26,400 $ 195
Renaissance Commerce Corp. 6,600 148
Renal Treatment Centers Inc.* 2,200 79
Republic Waste Industries
Inc. 14,600 316
Respironics, Inc. 3,900 86
Rexel Inc.* 5,200 60
Rexene Corp.* 3,200 29
Richfood Holdings, Inc. 8,500 214
Riggs National Corp.* 11,100 145
Rio Hotel and Casino, Inc.* 4,900 62
River Forest Bancorp, Inc. 3,200 75
RoTech Medical Corp.* 3,100 72
Robert Half International
Inc. 6,900 252
Roberts Pharmaceutical Corp.* 4,600 89
Rock Tennessee Co. 6,700 111
Rogers Corp. 1,400 32
Rohr Inc.* 6,600 98
Rollins Environmental
Services, Inc.* 15,100 51
Rollins Truck Leasing Corp. 9,800 94
Roosevelt Financial Group,
Inc. 10,200 163
Roper Industries, Inc. 3,800 135
Ross Stores, Inc. 5,700 89
Rouge Steel Co. 3,500 76
Rowan Companies, Inc.* 21,100 140
Ruddick Corp. 11,200 143
Russ & Berrie Co., Inc. 8,500 118
Ryan's Family Steak Houses,
Inc.* 21,100 165
Rykoff-Sexton, Inc. 6,250 141
Ryland Group, Inc. 2,900 42
S & T Bancorp, Inc. 2,100 54
S3 Inc. 9,000 153
SCI Systems, Inc.* 7,300 257
SEI Corp. 4,200 90
STERIS Corp. 4,100 138
Safeguard Scientifics Inc. 3,300 149
Salick Health Care, Inc.* 2,600 95
Samsonite Corp. (New) 3,500 35
Sanifill, Inc.* 3,800 120
Sanmina Corp.* 1,900 103
Santa Cruz Operations, Inc.* 6,200 37
Savannah Foods & Industries,
Inc. 5,400 68
Savoy Pictures Entertainment,
Inc.* 7,200 42
Sbarro, Inc. 8,000 167
Schuler Homes, Inc.* 8,300 100
Scientific Games Holdings
Corp. 3,400 113
Scotts Co. Class A* 7,400 146
Seaboard Corp. 300 79
Seafield Capital Corp. 1,400 50
Seagull Energy Corp.* 8,600 147
Security Capital Corp. 2,300 126
Security Dynamics Tech 3,400 110
Seitel, Inc.* 2,100 54
Selective Insurance Group,
Inc. 4,400 163
Semitool Inc. 2,700 43
Sepracor Inc.* 5,200 88
Sequa Corp. Class A* 2,600 67
Sequent Computer Systems,
Inc.* 8,000 140
Service Merchandise Co.,
Inc.* 23,562 127
Shiva Corp.* 3,100 186
Shoney's, Inc.* 10,200 113
ShopKo Stores, Inc. 12,800 138
Shorewood Packaging Corp.* 4,900 81
Showboat, Inc. 3,300 79
Shurgard Storage Centers Inc. 5,800 148
Sierra Health Services, Inc.* 3,100 89
Sierra On-Line, Inc. 4,300 161
Sierra Pacific Resources 7,000 164
Silicon Valley Group, Inc.* 5,700 184
Sithe Energies Inc.* 13,700 98
SkyWest Airlines, Inc. 2,300 39
Smart & Final Inc. 5,000 94
Smith International, Inc.* 8,600 138
Smith's Food & Drug Centers,
Inc. Class B 4,200 96
Smithfield Foods, Inc.* 3,400 86
Smucker (J.M.) Co. Class A 6,900 135
Smucker (J.M.) Co. Class B 3,500 63
Snyder Oil Corp. 6,500 67
Sofamor/Danek Group, Inc.* 5,800 142
Somatogen Inc.* 4,400 70
Sonat Offshore Drilling, Inc. 6,700 213
South Jersey Industries, Inc. 2,800 57
Southdown, Inc.* 6,400 104
Southern Indiana
Gas & Electric Co. 3,966 134
Southwest Gas Corp. 4,900 74
Southwestern Energy Co. 4,900 61
Sovereign Bancorp, Inc. 10,179 102
SpaceLabs Medical Inc.* 2,800 71
Spectrian Corp.* 1,700 37
Spectrum HoloByte, Inc.* 5,100 53
Sports & Recreation, Inc. 3,600 27
Sports Authority Inc.* 4,600 100
Springs Industries, Inc. 4,900 210
St. John's Knits, Inc. 2,100 101
St. Paul Bancorp, Inc. 4,500 108
Standard Financial Inc.* 4,300 60
Standard Motor Products, Inc. 2,500 41
Standard Products Co. 3,900 60
Standard Register Co. 7,700 175
Standex International Corp. 3,000 98
Stanhome Inc. 4,700 143
State Auto Financial Corp. 3,100 69
Station Casinos Inc* 8,100 104
Stein Mart, Inc.* 4,300 48
Sterling Chemicals, Inc.* 15,200 122
Stewart Enterprises, Inc.
Class A 5,300 179
Stillwater Mining Co.* 4,800 80
Stone & Webster, Inc. 3,100 104
Stone Container Corp. 6,112 101
Stratacom Inc. 1,400 86
Stratosphere Corp.* 7,200 72
Stratus Computer, Inc.* 6,600 205
Stride Rite Corp. 12,200 137
Structural Dynamics Research
Corp.* 7,300 134
Student Loan Corp. 5,000 158
Sturm, Ruger & Co., Inc. 2,700 73
Sumitomo Bank California 4,000 94
Summit Bancorp 7,860 222
Summit Technology Inc.* 5,100 226
Sun Healthcare Group, Inc.* 12,708 151
</TABLE>
See accompanying Notes to Financial Statements.
F-21
<PAGE> 94
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Sunglass Hut International,
Inc. 9,600 $ 260
Sunrise Medical Inc.* 4,300 78
Sunshine Mining Co.* 43,700 71
Surgical Care Affiliates,
Inc. 10,650 316
Susquehanna Bancshares, Inc. 2,500 73
Swift Transportation Co. 5,100 85
Symantec Corp.* 7,700 187
Symmetricom, Inc.* 2,900 54
Synetic, Inc.* 4,100 96
Synopsys, Inc. 400 15
System Software Associates,
Inc. 6,600 204
Systems & Computer Technology
Corp.* 2,600 47
TBC Corp.* 4,900 35
TCA Cable TV, Inc. 5,800 173
TJ International 4,900 85
TNT Freightways Corp. 5,500 100
TSX Corp. 2,100 41
Target Therapeutics Inc.* 1,700 131
Tech Data Corp.* 9,000 110
Tecnol Inc.* 4,400 82
Tejas Gas Corp. 2,530 119
Tekelec Inc. 2,800 41
Teleflex Inc. 3,950 167
Telular Corp.* 4,800 66
Telxon Corp. 4,000 92
Tencor Instruments 5,000 214
Tennant Co. 2,100 53
Terra Industries, Inc. 14,700 186
Tesoro Petroleum Corp.* 7,800 61
Tetra Tech, Inc. (New) 3,906 85
Texas Industries, Inc. 2,600 137
Theratx Inc.* 4,500 51
Thermedics Inc.* 8,200 151
Thermo Cardiosystems Inc.* 4,700 228
Thermo Fibertek Inc. 16,050 253
Thermotrex Corp. 4,500 161
Thiokol Corp. 5,100 177
Thomas Nelson, Inc. 4,125 69
Three-Five Systems, Inc. 1,700 31
Tiffany & Co. (New) 3,900 170
Timberland Co. Class A* 2,500 48
Titan Wheel International,
Inc. 5,225 76
Toll Brothers, Inc.* 7,300 130
Topps Co., Inc. 9,500 59
Toro Co. 2,600 75
Toy Biz Inc.* 3,800 85
Toys 'R' Us, Inc.* 730 16
Transpro Inc.* 1,275 14
Trenwick Group Inc. 1,400 70
Triangle Pacific Corp.* 3,200 50
Triarc Cos., Inc. Class A* 6,400 61
Trident Microsystems Inc.* 2,300 69
Trimble Navigation Ltd.* 5,000 99
True North Communications 5,500 111
Trust Co. of New Jersey (New) 3,900 51
TrustCo Bank Corp New York 3,904 84
Trustmark Corp. 8,200 157
Tuscon Electric Power Co.* 34,100 102
Tyco Toys, Inc.* 6,800 37
U S Delivery Systems Inc.* 4,500 93
U S Trust Corp. (New) 2,000 96
U.S. Home Corp. (New)* 2,200 59
U.S. Robotics, Inc. 6,800 632
UGI Corp. 7,800 164
UMB Financial Corp. 4,816 208
UNR Industries, Inc. 12,200 101
US Filter Corp. (New) 5,700 133
USA Waste Services, Inc.* 13,907 292
USAir Group, Inc.* 17,200 234
UST Corp.* 4,400 61
Ultratech Stepper Inc. 4,700 188
UniFirst Corp. 3,900 55
Unicom Corp. 2,400 79
Union Planters Corp. 7,788 239
Uniroyal Chemical Corp.* 5,400 42
United Bankshares, Inc. 2,500 76
United Carolina Bancshares
Corp. 3,300 118
United Companies Financial
Corp. 6,440 181
United Illuminating Co. 3,400 129
United Insurance Companies,
Inc. 9,300 156
United International Holdings
Inc.* 4,900 74
United Meridian Corp.* 6,600 111
United Stationers Inc. 3,990 155
United Television, Inc. 2,400 205
United Waste Systems, Inc.* 3,500 138
United Water Resources Inc. 9,300 117
United Wisconsin Services,
Inc. 2,500 62
Unitrode Corp.* 2,300 62
Univar Corp. 4,300 58
Universal Health Services,
Inc. Class B* 3,300 124
VLSI Technology, Inc.* 7,500 176
Valassis Communications,
Inc.* 10,600 147
Valley National Bancorp 7,824 191
Valmont Industries, Inc. 3,300 80
Value City Department Stores,
Inc.* 5,900 35
Value Health, Inc.* 2,338 53
Value Line, Inc. 2,100 70
Varco International, Inc.* 9,900 90
Vencor, Inc. 11,687 324
Ventritex, Inc.* 5,000 98
VeriFone, Inc.* 5,500 149
Vertex Pharmaceuticals, Inc.* 4,300 71
Vesta Insurance Group Inc. 4,500 182
Vicor Corp. 8,600 173
Vigoro Corp. 4,100 178
Vintage Petroleum, Inc. 5,200 105
Vital Signs Inc. 2,900 53
Vitalink Pharmacy Services,
Inc.* 2,600 48
Vivra, Inc. 5,400 178
WD-40 Co. 1,700 67
WHX Corp.* 11,700 121
WICOR, Inc. 3,600 107
WLR Foods, Inc. 3,450 48
WMS Industries Inc.* 5,800 114
WPS Resources Corp. 6,000 187
Waban, Inc.* 8,100 127
Wabash National Corp. 4,900 124
Wallace Computer Services,
Inc. 4,600 259
Wang Laboratories, Inc.* 8,300 140
</TABLE>
See accompanying Notes to Financial Statements.
F-22
<PAGE> 95
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
Washington Energy Co. 5,300 $ 97
Washington National Corp. 4,900 111
Watkins-Johnson Co. 2,500 120
Watson Pharmaceuticals Inc.* 8,556 385
Watts Industries, Inc. Class
A 6,600 136
Wausau Paper Mills Co. 7,056 171
Weatherford Enterra Inc.* 12,654 305
Webb (Del) Corp. 4,200 87
Weirton Steel Corp.* 8,300 37
Wellman, Inc. 300 7
Werner Enterprises, Inc. 6,300 119
West Company, Inc. 3,400 84
WestPoint Stevens, Inc. 8,100 173
Westamerica Bancorp 2,400 95
Westcorp, Inc. 5,596 94
Westcott Communications,
Inc.* 4,000 56
Western Gas Resources, Inc. 5,400 84
Western Publishing Group
Inc.* 4,800 39
Western Waste Industries* 6,200 122
Westinghouse Air Brake
Co. (New)* 6,600 58
Westwood One, Inc.* 7,900 125
Whitney Holding Corp. 3,200 98
Williams Companies, Inc. 206 8
Williams-Sonoma, Inc. 6,200 109
Winnebago Industries, Inc. 4,100 33
Wisconsin Central
Transportation Corp. 500 30
Wolverine Tube Inc.* 3,800 135
Wolverine World Wide, Inc. 3,600 108
Wonderware Corp.* 2,600 83
Work Recovery Inc.* 13,000 17
World Acceptance Corp. 5,300 69
Wyle Laboratories 3,000 128
Wyman-Gordon Co.* 8,700 110
X-Rite, Inc. 4,500 69
Yankee Energy System, Inc. 1,900 41
Yellow Corp. 7,100 94
Zale Corp. (New)* 8,000 119
Zebra Technologies Corp.
Class A* 3,200 190
Zeigler Coal Holding Co. 6,700 79
Zenith Electronics Corp.* 11,100 93
Zenith National Insurance
Corp. 4,300 100
Zero Corp. 3,600 55
Zilog, Inc.* 4,100 146
Zions Bancorp 3,500 243
Zurn Industries, Inc. 5,000 108
--------
TOTAL COMMON STOCK
(Cost $107,206) 120,832
--------
<CAPTION>
Maturity Value
(000s) (000s)
--------- --------
<S> <C> <C>
REPURCHASE AGREEMENT--1.1%
State Street Bank & Trust 4.75%
Dated 10/31/95
Due 11/01/95 Collateralized
By:
U.S. Treasury Bond
$940,000 Par; 12%
Due 8/15/13 $1,400 $ 1,400
--------
TOTAL REPURCHASE AGREEMENT
(Cost $1,400) 1,400
--------
TOTAL INVESTMENTS -- 100.1%
(Cost $108,606) 122,232
--------
OTHER ASSETS AND
LIABILITIES -- (0.1%)
Other Assets 325
Liabilities (483)
--------
(158)
--------
NET ASSETS -- 100.0%
Applicable to 10,431,988
outstanding $0.00001
par value shares
(unlimited shares authorized) $122,074
========
NET ASSET VALUE PER SHARE $11.70
======
</TABLE>
- ------------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
F-23
<PAGE> 96
SchwabFunds(R) 11
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF OPERATIONS (in thousands)
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends $ 1,072
Interest 133
--------
Total investment income 1,205
--------
Expenses:
Investment advisory and administration fee 447
Transfer agency and shareholder service fees 223
Custodian fees 95
Registration fees 46
Professional fees 25
Shareholder reports 35
Trustees' fees 21
Amortization of deferred organization costs 15
Insurance and other expenses 5
--------
912
Less expenses reduced (303)
--------
Total expenses incurred by Fund 609
--------
Net investment income 596
--------
Net realized gain (loss) on investments:
Proceeds from sales of investments 27,327
Cost of investments sold (27,036)
--------
Net realized gain on investments sold 291
--------
Change in net unrealized appreciation on investments:
Beginning of period 597
End of period 13,626
--------
Increase in net unrealized appreciation on investments 13,029
--------
Net gain on investments 13,320
--------
Increase in net assets resulting from operations $ 13,916
========
</TABLE>
See accompanying Notes to Financial Statements.
F-24
<PAGE> 97
SchwabFunds(R) 12
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the period
For the December 3, 1993
year ended (commencement of
October 31, operations) to
1995 October 31, 1994
----------- ----------------
<S> <C> <C>
Operations:
Net investment income $ 596 $ 353
Net realized gain (loss) on
investments sold 291 (528)
Increase in net unrealized appreciation
on investments 13,029 597
-------- --------
Increase in net assets resulting from
operations 13,916 422
-------- --------
Dividends to shareholders from
net investment income (408) (57)
-------- --------
Capital Share Transactions:
Proceeds from shares sold 64,687 78,646
Net asset value of shares issued in
reinvestment of dividends 364 53
Early withdrawal fees 41 27
Less payments for shares redeemed (24,654) (10,963)
-------- --------
Increase in net assets from capital
share transactions 40,438 67,763
-------- --------
Total increase in net assets 53,946 68,128
Net Assets:
Beginning of period 68,128 --
-------- --------
End of period (including undistributed
net investment income of $484 and
$296, respectively) $ 122,074 $ 68,128
======== ========
Number of Fund Shares:
Sold 5,910 7,884
Reinvested 38 5
Redeemed (2,296) (1,109)
-------- --------
Net increase in shares outstanding 3,652 6,780
Shares Outstanding:
Beginning of period 6,780 --
-------- --------
End of period 10,432 6,780
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-25
<PAGE> 98
SchwabFunds(R) 13
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUND
The Schwab Small-Cap Index Fund (the "Fund") is a series of Schwab Capital Trust
(the "Trust"), an open-end, management investment company organized as a
Massachusetts business trust on May 7, 1993 and registered under the Investment
Company Act of 1940, as amended.
In addition to the Fund, the Trust also offers -- the Schwab International Index
Fund(TM), the Schwab Asset Director(R)-High Growth Fund, the Schwab Asset
Director(R)-Conservative Growth Fund and the Schwab Asset Director(R)-Balanced
Growth Fund. The assets of each series are segregated and accounted for
separately.
The investment objective of the Fund is to attempt to track the price and
dividend performance (total return) of the Schwab Small-Cap Index(TM), an index
created to represent the performance of the second 1,000 largest publicly traded
common stocks issued by United States companies.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Investments in securities traded on an exchange are valued
at the last quoted sale price for a given day, or if a sale is not reported for
that day, at the mean between the most recent quoted bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Fund's investment manager pursuant to Board of Trustees'
guidelines. Short-term securities with 60 days or less to maturity are stated at
amortized cost, which approximates market value.
Security transactions and investment income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Dividend income and distributions to
shareholders are recorded on the ex-dividend date; interest income is recorded
on the accrual basis. Realized gains and losses from security transactions are
determined on an identified cost basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or Government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund, its initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from the Fund's commencement of operations.
Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
F-26
<PAGE> 99
SchwabFunds(R) 14
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. The Fund is considered a separate entity for tax purposes.
At October 31, 1995, (for financial reporting and federal income tax purposes),
net unrealized appreciation aggregated $13,626,000, of which $22,090,000 related
to appreciated securities and $8,464,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of .50% of the first $300 million
of average daily net assets and .45% of such assets over $300 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$447,000 during the year ended October 31, 1995, before the Investment Manager
reduced its fee (see Note 5).
Sub-advisory agreement -- Prior to May 1, 1995, the Investment Manager had a
sub-advisory agreement with Dimensional Fund Advisors Inc. ("Dimensional"),
under which Dimensional performed day-to-day portfolio management for the Fund.
Dimensional did not receive compensation directly from the Fund. However, the
Investment Manager did pay Dimensional an annual fee, payable monthly, of .10%
of the first $300 million of average daily net assets and .05% of such assets
over $300 million.
Effective May 1, 1995, the sub-advisory agreement for the Fund was terminated
and the Investment Manager assumed day-to-day portfolio management
responsibility for the Fund.
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of the average daily net assets for
transfer agency services and .20% of such assets for shareholder services. For
the year ended October 31, 1995, the Fund incurred transfer agency and
shareholder service fees of $223,000, before Schwab reduced its fees (see Note
5).
Officers and trustees -- During the period, certain officers and trustees of the
Trust were also officers or directors of the Investment Manager and/or Schwab.
During the year ended October 31, 1995, the Trust made no direct payments to its
officers or trustees who were "interested persons" within the meaning of the
Investment Company Act of 1940, as amended. The Fund incurred fees of $21,000
related to the Trust's unaffiliated trustees.
F-27
<PAGE> 100
SchwabFunds(R) 15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. BORROWING AGREEMENT
The Trust has an arrangement with State Street Bank and Trust Company, the
Fund's custodian, whereby the Fund may borrow up to $10,000,000, on a temporary
basis, to fund redemptions. Amounts borrowed under this arrangement bear
interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the year ended October 31, 1995, no borrowings were
made under this arrangement.
5. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the Fund's ratio of operating expenses to average net assets. For the year
ended October 31, 1995, the total of such fees reduced by the Investment Manager
was $115,000 and the total of such fees reduced by Schwab was $188,000.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated $69,455,000 and $27,327,000, respectively, for the year ended October
31, 1995.
7. EARLY WITHDRAWAL FEES PAID TO THE FUND
The Fund assesses a .50% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the year ended October 31, 1995, total early withdrawal fees
retained by the Fund amounted to $41,000.
8. COMPOSITION OF NET ASSETS
At October 31, 1995, net assets consisted of:
<TABLE>
<S> <C>
Capital paid in $108,201,000
Accumulated undistributed net investment income 484,000
Accumulated net realized loss on investments sold (237,000)
Net unrealized appreciation on investments 13,626,000
------------
Total $122,074,000
============
</TABLE>
At October 31, 1995, the Fund's Statement of Net Assets included receivable for
Fund shares sold of $194,000 in addition to liabilities of $346,000 for
securities purchased, $48,000 for Fund shares redeemed and $29,000 for
investment advisory and administration fee payable.
F-28
<PAGE> 101
SchwabFunds(R) 16
- --------------------------------------------------------------------------------
SCHWAB SMALL-CAP INDEX FUND(R)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
For the period
December 3, 1993
For the (commencement of
year ended operations) to
October 31, 1995 October 31, 1994
---------------- ------------------
<S> <C> <C>
Net asset value at beginning of period $ 10.05 $ 10.00
Income from Investment Operations
- -----------------------------------
Net investment income .10 .06
Net realized and unrealized gain
on investments 1.61 --
-------- -------
Total from investment operations 1.71 .06
Less Distributions
- -----------------
Dividends from net investment income (.06) (.01)
Distributions from realized gain on
investments -- --
-------- -------
Total distributions (.06) (.01)
-------- -------
Net asset value at end of period $ 11.70 $ 10.05
======== =======
Total return (%) 17.11 .63
- ----------------
Ratios/Supplemental Data
- --------------------------
Net assets, end of period (000s) $122,074 $ 68,128
Ratio of expenses to average net assets
(%) .68 .67*
Ratio of net investment income to
average net assets (%) .68 .68*
Portfolio turnover rate (%) 24 16
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the periods ended
October 31, 1995 and 1994, would have been 1.02% and 1.19%*, respectively, and
the ratio of net investment income to average net assets would have been .34%
and .16%*, respectively.
* Annualized
F-29
<PAGE> 102
SchwabFunds(R) 17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Board of Trustees
and Shareholders of the Schwab Small-Cap Index Fund(R)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the Schwab Small-Cap Index Fund
(one of the series constituting Schwab Capital Trust, hereafter referred to as
the "Trust") at October 31, 1995, and the results of its operations and the
changes in its net assets for each of the periods presented, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
November 22, 1995
1995 SPECIAL TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
NOTICE TO CORPORATE SHAREHOLDERS
100% of the Fund's distributions for the fiscal year ended October 31,
1995 qualify for the corporate dividends received deduction.
- --------------------------------------------------------------------------------
F-30
<PAGE> 103
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholder
of the Schwab Asset Director(R) - High Growth Fund
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of the Schwab Asset
Director - High Growth Fund (the "Fund"), a series of Schwab Capital Trust, at
October 31, 1995, in conformity with generally accepted accounting principles.
This financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statement is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse
San Francisco, California
November 22, 1995
F-31
<PAGE> 104
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
<TABLE>
<S> <C>
Cash $ 1,000
Deferred organization costs 17,810
Payable to Charles Schwab Investment Management, Inc. (17,810)
--------
Net Assets $ 1,000
========
Number of shares of beneficial interest issued and
outstanding, $0.00001 par value (unlimited shares authorized) 100
========
Net Asset Value and Offering Price Per Share at October 31, 1995 $ 10.00
========
</TABLE>
The Notes to the Statement of Assets and Liabilities are an integral part of
this financial statement.
F-32
<PAGE> 105
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
1. ORGANIZATION
The Schwab Asset Director - High Growth Fund (the "Fund") is a series of Schwab
Capital Trust (the "Trust"), which is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end, no-load, management
investment company. The Trust was established on May 7, 1993 under the laws of
the Commonwealth of Massachusetts as a Massachusetts business trust. As of
October 31, 1995, the Fund has had no operations other than activities relating
to its organization and the registration of its shares of beneficial interest
under the Securities Act of 1933 and the sale and issuance of 100 shares to
Charles Schwab & Co., Inc. at $10.00 per share.
In addition to the Fund, the Trust also offers the Schwab International Index
Fund(TM), the Schwab Small-Cap Index Fund(R), the Schwab Asset Director-Balanced
Growth Fund and the Schwab Asset Director -Conservative Growth Fund.
2. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
The Trust has an investment advisory and administration agreement with Charles
Schwab Investment Management, Inc. (the "Investment Manager") under which the
Fund will pay a fee for investment advisory and administrative services upon
commencement of the Fund. For advisory services and facilities furnished, the
Fund will pay an annual fee, payable, monthly, of .74% of the first $1 billion
of average daily net assets, .69% of such net assets over $1 billion, and .64%
of such net assets in excess of $2 billion.
The Investment Manager has executed a sub-advisory agreement with Symphony Asset
Management, Inc. ("Symphony"), a wholly-owned subsidiary of BARRA, Inc. Under
this agreement, Symphony will be responsible for recommending the target asset
allocation mix for the tactical asset allocation component of the Fund. Symphony
does not receive compensation directly from the Fund. However, the Investment
Manager will pay Symphony an annual fee, payable monthly, of .08% of the first
$100 million of aggregate average daily net assets of the three Asset Director
Funds, .06% of such net assets of the next $150 million, .04% of such net assets
of the next $600 million and .02% of such net assets over $850 million.
The Trust has transfer agency and shareholder service agreements with Charles
Schwab & Co., Inc. ("Schwab"), under which the Fund will pay fees for transfer
agency and shareholder services. Upon commencement of operations, Schwab will
receive an annual fee, payable monthly, of .05% of average daily net assets for
transfer agency services and .20% of such net assets for shareholder services.
F-33
<PAGE> 106
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
The Investment Manager and Schwab are, respectively, direct and indirect
wholly-owned subsidiaries of The Charles Schwab Corporation.
3. DEFERRED ORGANIZATION COSTS
Costs incurred in connection with the Fund's organization have been incurred by
the Investment Manager and are an obligation to be paid by the Fund. These costs
will be amortized over the period of benefit, but not to exceed 60 months from
the commencement of operations of the Fund.
F-34
<PAGE> 107
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholder
of the Schwab Asset Director(R) - Balanced Growth Fund
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of the Schwab Asset
Director - Balanced Growth Fund (the "Fund"), a series of Schwab Capital Trust,
at October 31, 1995, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Fund's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this financial statement
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse
San Francisco, California
November 22, 1995
F-35
<PAGE> 108
SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
<TABLE>
<S> <C>
Cash $ 1,000
Deferred organization costs 17,810
Payable to Charles Schwab Investment Management, Inc. (17,810)
--------
Net Assets $ 1,000
========
Number of shares of beneficial interest issued and
outstanding, $0.00001 par value (unlimited shares authorized) 100
========
Net Asset Value and Offering Price Per Share at October 31, 1995 $ 10.00
========
</TABLE>
The Notes to the Statement of Assets and Liabilities are an integral part of
this financial statement.
F-36
<PAGE> 109
SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
1. ORGANIZATION
The Schwab Asset Director - Balanced Growth Fund (the "Fund") is a series of
Schwab Capital Trust (the "Trust"), which is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end, no-load, management
investment company. The Trust was established on May 7, 1993 under the laws of
the Commonwealth of Massachusetts as a Massachusetts business trust. As of
October 31, 1995, the Fund has had no operations other than activities relating
to its organization and the registration of its shares of beneficial interest
under the Securities Act of 1933 and the sale and issuance of 100 shares to
Charles Schwab & Co., Inc. at $10.00 per share.
In addition to the Fund, the Trust also offers the Schwab International Index
Fund(TM), the Schwab Small-Cap Index Fund(R), the Schwab Asset Director - High
Growth Fund and the Schwab Asset Director - Conservative Growth Fund.
2. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
The Trust has an investment advisory and administration agreement with Charles
Schwab Investment Management, Inc. (the "Investment Manager") under which the
Fund will pay a fee for investment advisory and administrative services upon
commencement of the Fund. For advisory services and facilities furnished, the
Fund will pay an annual fee, payable, monthly, of .74% of the first $1 billion
of average daily net assets, .69% of such net assets over $1 billion, and .64%
of such net assets in excess of $2 billion.
The Investment Manager has executed a sub-advisory agreement with Symphony Asset
Management, Inc. ("Symphony"), a wholly-owned subsidiary of BARRA, Inc. Under
this agreement, Symphony will be responsible for recommending the target asset
allocation mix for the tactical asset allocation component of the Fund. Symphony
does not receive compensation directly from the Fund. However, the Investment
Manager will pay Symphony an annual fee, payable monthly, of .08% of the first
$100 million of aggregate average daily net assets of the three Asset Director
Funds, .06% of such net assets of the next $150 million, .04% of such net assets
of the next $600 million and .02% of such net assets over $850 million.
The Trust has transfer agency and shareholder service agreements with Charles
Schwab & Co., Inc. ("Schwab"), under which the Fund will pay fees for transfer
agency and shareholder services. Upon commencement of operations, Schwab will
receive an annual fee, payable monthly, of .05% of average daily net assets for
transfer agency services and .20% of such net assets for shareholder services.
F-37
<PAGE> 110
SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
The Investment Manager and Schwab are, respectively, direct and indirect
wholly-owned subsidiaries of The Charles Schwab Corporation.
3. DEFERRED ORGANIZATION COSTS
Costs incurred in connection with the Fund's organization have been incurred by
the Investment Manager and are an obligation to be paid by the Fund. These costs
will be amortized over the period of benefit, but not to exceed 60 months from
the commencement of operations of the Fund.
F-38
<PAGE> 111
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholder
of the Schwab Asset Director(R) - Conservative Growth Fund
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of the Schwab Asset
Director - Conservative Growth Fund (the "Fund"), a series of Schwab Capital
Trust, at October 31, 1995, in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Fund's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this financial statement
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse
San Francisco, California
November 22, 1995
F-39
<PAGE> 112
SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
<TABLE>
<S> <C>
Cash $ 1,000
Deferred organization costs 17,810
Payable to Charles Schwab Investment Management, Inc. (17,810)
--------
Net Assets $ 1,000
========
Number of shares of beneficial interest issued and
outstanding, $0.00001 par value (unlimited shares authorized) 100
========
Net Asset Value and Offering Price Per Share at October 31, 1995 $ 10.00
========
</TABLE>
The Notes to the Statement of Assets and Liabilities are an integral part of
this financial statement.
F-40
<PAGE> 113
SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
1. ORGANIZATION
The Schwab Asset Director - Conservative Growth Fund (the "Fund") is a series of
Schwab Capital Trust (the "Trust"), which is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end, no-load, management
investment company. The Trust was established on May 7, 1993 under the laws of
the Commonwealth of Massachusetts as a Massachusetts business trust. As of
October 31, 1995, the Fund has had no operations other than activities relating
to its organization and the registration of its shares of beneficial interest
under the Securities Act of 1933 and the sale and issuance of 100 shares to
Charles Schwab & Co., Inc. at $10.00 per share.
In addition to the Fund, the Trust also offers the Schwab International Index
Fund(TM), the Schwab Small-Cap Index Fund(R), the Schwab Asset Director - High
Growth Fund and the Schwab Asset Director - Balanced Growth Fund.
2. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
The Trust has an investment advisory and administration agreement with Charles
Schwab Investment Management, Inc. (the "Investment Manager") under which the
Fund will pay a fee for investment advisory and administrative services upon
commencement of the Fund. For advisory services and facilities furnished, the
Fund will pay an annual fee, payable, monthly, of .74% of the first $1 billion
of average daily net assets, .69% of such net assets over $1 billion, and .64%
of such net assets in excess of $2 billion.
The Investment Manager has executed a sub-advisory agreement with Symphony Asset
Management, Inc. ("Symphony"), a wholly-owned subsidiary of BARRA, Inc. Under
this agreement, Symphony will be responsible for recommending the target asset
allocation mix for the tactical asset allocation component of the Fund. Symphony
does not receive compensation directly from the Fund. However, the Investment
Manager will pay Symphony an annual fee, payable monthly, of .08% of the first
$100 million of aggregate average daily net assets of the three Asset Director
Funds, .06% of such net assets of the next $150 million, .04% of such net assets
of the next $600 million and .02% of such net assets over $850 million.
The Trust has transfer agency and shareholder service agreements with Charles
Schwab & Co., Inc. ("Schwab"), under which the Fund will pay fees for transfer
agency and shareholder services. Upon commencement of operations, Schwab will
receive an annual fee, payable monthly, of .05% of average daily net assets for
transfer agency services and .20% of such net assets for shareholder services.
F-41
<PAGE> 114
SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND
(A SERIES OF SCHWAB CAPITAL TRUST)
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
The Investment Manager and Schwab are, respectively, direct and indirect
wholly-owned subsidiaries of The Charles Schwab Corporation.
3. DEFERRED ORGANIZATION COSTS
Costs incurred in connection with the Fund's organization have been incurred by
the Investment Manager and are an obligation to be paid by the Fund. These costs
will be amortized over the period of benefit, but not to exceed 60 months from
the commencement of operations of the Fund.
F-42
