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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB CAPITAL TRUST
101 Montgomery Street, San Francisco, CA 94104
SEPTEMBER 2, 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 May 21, 1996 (as amended from time to time) for
Schwab Asset Director(R)-High Growth Fund (the "High Growth Fund"), Schwab Asset
Director(R)-Balanced Growth Fund (the "Balanced Growth Fund") and Schwab Asset
Director(R)-Conservative Growth Fund (the "Conservative Growth Fund" and
jointly, the "Asset Director Funds"); 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"); the Prospectus dated May 21,
1996 (as amended from time to time) for the Schwab Analytics Fund(TM) (the
"Analytics Fund"); and the Prospectus dated September 2, 1996 for Schwab
OneSource(R) Portfolios-International, eight 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, California 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................................................. 29
MANAGEMENT OF THE TRUST................................................. 32
PORTFOLIO TRANSACTIONS AND TURNOVER..................................... 41
TAXES................................................................... 43
SHARE PRICE CALCULATION................................................. 47
HOW THE FUNDS REFLECT PERFORMANCE....................................... 48
THE BENEFITS OF INTERNATIONAL INVESTING................................. 49
INDEXING AND THE SCHWAB INDEX FUNDS..................................... 50
GENERAL INFORMATION..................................................... 54
PURCHASE AND REDEMPTION OF SHARES....................................... 56
OTHER INFORMATION....................................................... 57
FINANCIAL STATEMENTS.................................................... F-1
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INVESTMENT OBJECTIVES
INTERNATIONAL INDEX FUND
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.
SMALL-CAP INDEX FUND
The investment objective of the Small-Cap Index Fund is to attempt to
track the price and dividend performance (total return) of the Schwab Small-Cap
Index(TM) (the "Small-Cap Index"), an index created to represent the performance
of common stocks of the second 1,000 largest United States companies, ranked by
market capitalization (share price times the number of shares outstanding).
HIGH GROWTH FUND
The investment objective of the 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.
BALANCED GROWTH FUND
The investment objective of the 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.
CONSERVATIVE GROWTH FUND
The investment objective of the 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.
S&P 500 FUND-INVESTOR SHARES
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 U. S. companies, as represented
by Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
ANALYTICS FUND
The investment objective of the Analytics Fund is to achieve long-term
capital growth.
SCHWAB ONESOURCE(R) PORTFOLIOS-INTERNATIONAL
Schwab OneSource Portfolios-International is a mutual fund that seeks
long-term capital appreciation. To achieve this goal, the Investment
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Manager, Charles Schwab Investment Management, Inc. ("CSIM"), will attempt to
identify and select a diversified portfolio of international equity funds which
presents the greatest capital growth potential ("underlying fund(s)") based on
an analysis of many factors, including the underlying funds' investment
objective, the history of portfolio manager(s), and total return, volatility and
expenses.
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, as
amended (the "1940 Act").
INVESTMENT SECURITIES
FOREIGN INVESTMENTS
The International Index Fund and Asset Director Funds expect to invest
in stocks of foreign issuers. The International Index Fund will invest primarily
in such stocks. The Schwab OneSource(R) Portfolios-International expects to
invest primarily in other investment companies which invest in stocks of foreign
issuers, and may invest directly in domestic and foreign securities. We expect
that many of the underlying funds may invest up to 100% of their assets in
foreign securities. Investing in foreign issuers involves certain special
considerations, including those set forth below, which typically are not
associated with investing in U.S. issuers. Since investments in the securities
of foreign issuers usually are made and held in foreign currencies, and since
the International Index Fund, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying 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 more volatile than
securities of U.S. companies. Fixed commissions on foreign securities exchanges
generally are higher than negotiated commissions on U.S. exchanges, although the
International Index Fund, Asset Director Funds and Schwab OneSource
Portfolios-International endeavor to achieve the most favorable net results on
their portfolio transactions. There generally is
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less government supervision and regulation of foreign securities exchanges,
brokers, dealers and listed companies than in the United States, 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, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying 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, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying funds to miss attractive investment
opportunities. Losses to the International Index Fund, Asset Director Funds,
Schwab OneSource(R) Portfolios-International and underlying funds arising out of
the inability to fulfill a contract to sell such securities could result in
potential liability to the International Index Fund, Asset Director Funds,
Schwab OneSource Portfolios-International and underlying funds.
In addition, with respect to those countries in which the International
Index Fund, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds may invest or other countries which may have a significant
impact on the companies in which the International Index Fund, Asset Director
Funds, Schwab OneSource Portfolios-International and underlying 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, Asset Director Funds',
Schwab OneSource Portfolios-International's and underlying 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. Schwab OneSource
Portfolios-International may invest directly, or indirectly through underlying
funds which invest primarily 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
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currently foresee what risk, if any, may exist to the International Index
Fund's, Asset Director Funds', Schwab OneSource(R) Portfolios-International's
and underlying 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, European Depositary Receipts, Global
Depositary Receipts, Global Depositary Shares ("ADRs," "EDRs," "GDRs," and
"GDSs," respectively) or other similar global instruments, which are receipts
representing ownership of shares of a foreign-based issuer held in trust by a
bank or similar financial institution. The underlying funds may invest in ADRs,
EDRs, GDRs, GDSs, or other similar global instruments. These are designed for
U.S. and European securities markets as alternatives to purchasing underlying
securities in their corresponding national markets and currencies. ADRs, EDRs,
GDRs, and GDSs can be sponsored or unsponsored. Sponsored ADRs, EDRs, GDRs, and
GDSs are certificates in which a bank or financial institution participates with
a custodian. Issuers of unsponsored ADRs, EDRs, GDRs, and GDSs 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 ADRs, EDRs, GDRs, or GDSs.
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 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 the Funds write 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 ("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
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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 also may 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
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) an exchange may impose restrictions on opening transactions or
closing
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transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation (the "OCC")
may not at all times be adequate to handle current trading volume; or (vi) one
or more exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Funds may purchase and sell both options that are traded on U.S.
and foreign exchanges and options traded over-the-counter with broker-dealers
who make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission (the "SEC") changes its position, the Funds will treat purchased
over-the-counter options and all assets used to cover written over-the-counter
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. Government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to a formula the staff of the SEC
approves. 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.
The underlying funds also may write (sell) covered call and put options
and purchase put and call options. The nature of the conditions and risks
associated with such transactions by the underlying funds are similar to those
described for the Funds.
FOREIGN CURRENCY TRANSACTIONS
Forward Foreign Currency Exchange Contracts. The International Index
Fund, Asset Director Funds and Schwab OneSource(R) Portfolios-International may
enter into forward foreign currency exchange contracts in several circumstances.
The International Index Fund, Asset Director Funds and Schwab OneSource
Portfolios-International may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future exchange rates. The
International Index Fund, Asset Director Funds and Schwab OneSource
Portfolios-International 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"). The underlying funds also may engage in
transaction and position hedging.
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For transaction hedging purposes, the International Index Fund, Asset
Director Funds, Schwab OneSource(R) Portfolios-International and underlying
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 Asset Director Funds will attempt to protect against a possible loss
resulting from an adverse change in the relationship between (i) the U.S. dollar
and the applicable foreign currency during the period between the date on which
the security is purchased or sold and (ii) the transaction's settlement date.
When engaging in position hedging, the International Index Fund, Asset Director
Funds, Schwab OneSource Portfolios-International and underlying 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, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying funds expect to purchase).
When engaging in position and/or transaction hedging, the International
Index Fund, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds may purchase or sell foreign currencies on a spot (or cash)
basis at the prevailing spot rate and also may 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"). International
Index Fund, Asset Director Funds, Schwab OneSource Portfolios-International
and underlying funds also may 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, Asset Director Funds,
Schwab OneSource Portfolios-International and underlying 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, Asset Director
Funds, Schwab OneSource Portfolios-International and underlying 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, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying 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,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
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, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying funds to engage in hedging transactions
may be limited by tax considerations. Transaction and position hedging do not
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eliminate fluctuations in the underlying prices of the securities which the
Funds or the underlying funds own or expect to purchase or sell. They simply
establish a rate of exchange that may be achieved at some future point in time.
Additionally, although these techniques tend to minimize the risk of loss due to
decline in the value of the hedged currency, they tend to limit any potential
gain that might result from an increase in the value of such currency.
Although the contracts presently are not 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, Asset Director Funds, Schwab OneSource(R)
Portfolios-International and underlying 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, Asset Director Funds and Schwab OneSource
Portfolios-International generally will not enter into a forward contract with a
term of greater than one year.
While the International Index Fund, Asset Director Funds and Schwab
OneSource Portfolios-International will, and underlying funds may, enter into
forward contracts to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while the International Index Fund,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
funds may benefit from such transactions, unanticipated changes in currency
prices may result in a poorer overall performance for the International Index
Fund, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds than if they had not engaged in any such transactions.
Moreover, there may be imperfect correlation between the International Index
Fund's, Asset Director Funds', Schwab OneSource Portfolios-International's and
underlying funds' portfolio holdings of securities denominated in a particular
currency and forward contracts into which the International Index Fund, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
enter. Such imperfect correlation may cause the International Index Fund, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
to sustain losses, which will prevent the International Index Fund, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
from achieving a complete hedge or expose the International Index Fund, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
to risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The International
Index Fund, Asset Director Funds,
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Schwab OneSource(R) Portfolios-International and underlying 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, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
obligates the International Index Fund, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying 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, Asset Director
Funds, Schwab OneSource Portfolios-International and underlying funds would
obligate the International Index Fund, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying 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,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
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, Asset Director Funds and Schwab OneSource
Portfolios-International 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, Asset Director Funds and Schwab OneSource Portfolios-International
also would be able to enter into closing sale transactions in order to realize
gains or minimize losses on options purchased by the International Index Fund,
Asset Director Funds and Schwab OneSource Portfolios-International.
The purchase of a call option would entitle the International Index
Fund, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds to purchase specified currency at a specified price during the
option period in return for the premium paid. The International Index Fund,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
funds ordinarily would 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, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds to sell specific currency at a specified price during the
option period in exchange for the premium paid. 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, Asset Director Funds', Schwab OneSource
Portfolios-International's and underlying funds' portfolio securities due to
currency exchange rate fluctuations. The International Index Fund, Asset
Director
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Funds, Schwab OneSource(R) Portfolios-International and underlying funds
ordinarily would 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,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
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, Asset Director Funds and Schwab OneSource
Portfolios-International generally will purchase or write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market 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, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying 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, Asset Director Funds,
Schwab OneSource Portfolios-International and underlying funds, as covered call
option writers, are unable to effect a 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, Asset Director Funds and Schwab
OneSource Portfolios-International 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
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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
the CFTC licenses and regulates on foreign exchanges. The Funds and the
underlying funds are not permitted to engage in speculative futures trading.
Futures Contracts. A futures contract generally may 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 and the underlying funds may 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 and the underlying funds,
through the purchase of futures contracts, may 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, Asset Director Funds, Schwab
OneSource Portfolios-International and the underlying funds may 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, Asset Director Funds, Schwab
OneSource Portfolios-International and the underlying funds may 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, Asset
Director Funds, Schwab OneSource(R) Portfolios-International and the underlying
funds have acquired or expect to acquire.
Although futures contracts by their terms generally call for the actual
delivery or acquisition of underlying securities or the cash value of the index,
in most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take such delivery. The contractual
obligation is offset by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities or the cash value of
the index underlying the contractual obligations. The Funds and the underlying
funds may incur brokerage fees when they purchase or sell futures contracts.
Positions taken in the futures markets normally are not held to
maturity but are instead liquidated through offsetting transactions, which may
result in a profit or a loss. While the Funds' and the underlying funds' futures
contracts on securities or currency usually will be liquidated in this manner,
the Funds and the underlying funds may instead make or take delivery of the
underlying securities or currency
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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 and the underlying 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 and the
underlying 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' and the
underlying funds' assets. By writing a call option, the Funds and the underlying
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 and the underlying funds in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. The Funds and the
underlying 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'
and the underlying 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 securities held by
the Funds or securities with characteristics similar to those of the Funds'
portfolio securities. Similarly, the International Index Fund, Asset Director
Funds and Schwab OneSource(R) Portfolios-International may sell futures
contracts on currency in which their 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
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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.
The underlying funds may engage in similar hedging transactions using
futures contracts which would operate in a similar manner and entail similar
risks to the underlying funds.
When buying or selling futures contracts, a Fund and an underlying 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 and
underlying 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 and underlying funds' position in
the contract becomes more or less valuable. This process is known as
"marking-to-market."
Regulations of the Commodities Futures Trading Commission ("CFTC")
applicable to the Funds and the underlying funds generally require that all of
their futures transactions constitute "bona fide" hedging transactions. As a
result, a Fund and an underlying fund normally will 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 addition, the Funds and the underlying
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 and each underlying fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and
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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 and the underlying funds engage in the use of futures and options on
futures other than for hedging purposes, the Funds and the underlying 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
or an underlying fund seeks to "close out" its position. If a Fund or an
underlying fund is unable to "close out" a futures or option position and prices
move adversely, the Fund or an underlying fund would have to continue to make
daily cash payments to maintain its required margin, and if the Fund or an
underlying fund has insufficient cash to meet this requirement, it may have to
sell portfolio securities at a disadvantageous time. In addition, the Fund or an
underlying fund might be required to deliver the securities underlying futures
or options contracts it holds. Each Fund will seek to, and the underlying funds
may seek to, reduce the risk that it will be unable to "close out" contracts by
entering into only futures or options contracts that are traded on national
exchanges and for which there appears to be a liquid secondary market.
It also is 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 or an
underlying 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 or an underlying
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 or an underlying fund to invest directly in the securities being
hedged. There is also the risk of loss by a Fund or an underlying fund of margin
deposits in the event of bankruptcy of a broker with whom the Fund or an
underlying 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
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Internal Revenue Code of 1986, as amended (the "Code"), requirements for
qualification as a regulated investment company. See "Taxes." An underlying
fund's investment in such instruments may similarly be restricted by Code
requirements.
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 of
Additional Information.
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
invest only 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
bonds that are investment grade, convertible preferred stocks and warrants. The
S&P 500 Fund will not purchase convertible securities directly. It may,
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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.
Warrants. The Funds or underlying funds may invest in warrants, which are
options to purchase equity securities at specific prices valid for a specific
period of time. The prices do not necessarily move parallel to the prices of the
underlying securities. Warrants have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer. If a warrant is not
exercised within the specified time period, it will become worthless and a Fund
or an underlying fund will lose the purchase price and the right to purchase the
underlying security.
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 also may 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, S&P 500
Fund and Analytics 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
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company's assets, revenues or profits are derived from the precious metal
industry. The Asset Director Funds also may 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, S&P 500 Fund and Analytics Fund also may
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, S&P 500 Fund and Analytics
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 have been 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 were 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
Government "mortgage-backed" (or government guaranteed
mortgage-related) securities are among the U.S. Government securities in which
the Funds may invest. Mortgages backing the securities purchased by the Funds
include, among others, conventional 30-year fixed rate mortgages, graduated
payment mortgages, 15-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
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remaining principal before the mortgage's scheduled maturity date. As a result
of the pass-through of prepayments of principal on the underlying securities,
mortgage-backed securities often are subject to more rapid prepayment of
principal than 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 also is 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 usually will
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
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Certificates"): mortgage participation certificates ("PCs") and guaranteed
mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. The FHLMC guarantees timely monthly payment of interest
on PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately 10 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 the FHA insures.
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., S&P or Moody's) 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 depends generally on the rate of
principal payments received on the underlying assets, which in turn may be
affected by a variety of economic and other factors. As a result, the yield on
any asset-backed security is difficult to predict with precision, and actual
yield to maturity may be more or less than the anticipated yield to maturity.
Asset-Backed Securities may be classified as "Pass-Through Certificates" or
"Collateralized Obligations."
"Pass-Through Certificates" are asset-backed securities that represent
undivided fractional ownership interests in the underlying pool of assets.
Pass-Through Certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
Pass-Through Certificates represent ownership interests in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the
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underlying assets not covered by any credit support.
Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, generally are 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 often are 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 timely. Protection
against ultimate default ensures payment on at least a portion of
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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
invest only 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
only will 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, Asset
Director Funds and Schwab OneSource(R) Portfolios-International outside the
United States and that are publicly traded in the United States on a foreign
securities exchange or in a foreign securities market are not considered 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 United States, 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 United States will have to be made in
compliance with any applicable U.S. and foreign currency restrictions and tax
laws (including laws imposing withholding taxes on any dividend or interest
income) and laws limiting the amount and types of foreign investments. Changes
of government administrations or economic or monetary policies in the United
States or abroad, or changed circumstances regarding convertibility or exchange
rates, could result in investment losses for
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the Funds. Investments in foreign securities also may subject the Funds to
losses due to nationalization, expropriation or differing accounting practices
and treatments. Moreover, investors should recognize that foreign securities
often are traded with less frequency and volume, and therefore may have greater
price volatility, than is the case with many U.S. securities. Notwithstanding
that the Funds generally intend to acquire the securities of foreign issuers
where there are public trading markets, the Funds' investments 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 United States 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 or underlying funds may loan
securities to qualified broker-dealers or other institutional investors
provided: (i) the loan is secured continuously by collateral consisting of U.S.
Government securities or cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at lease equal to the current market value
of the securities loaned; (ii) the Fund or underlying fund may at any time call
the loan and obtain the return of the securities loaned; (iii) the Fund or
underlying fund will receive any interest or dividends paid on the loaned
securities; and (iv) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund or underlying fund.
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. Loans of securities involve a risk that the borrower may
fail to return the securities or provide additional collateral.
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 a Fund's loan of money 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 a Fund
24
<PAGE> 25
enters into 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 usually will 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 obligation with securities having a market value, including accrued
interest, equal to at least 102% of the dollar amount the Funds invest 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 also might 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, except the Schwab OneSource
Portfolios-International, reserves the right to invest up to 10% of its net
assets in illiquid securities. The Schwab OneSource(R) Portfolios-International
reserves the right to invest up to 15% 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 marketplace
trades (e.g., the time needed to dispose of the
25
<PAGE> 26
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.
When-Issued and Delayed Delivery Securities. The Funds may hold
securities on a "when-issued" or "delayed delivery" basis. When-issued or
delayed delivery securities are securities purchased for future delivery at a
stated price an yield. Generally, a Fund will not pay for securities until the
Fund receives them. Securities purchased on a when-issued or delayed delivery
basis are recorded as assets. During the period between the agreement date and
the settlement date, the value of such securities may change as the prices of
securities in the stock market increase or decrease, or as interest rates
change. Default by the other party to the agreement may result in a loss to a
Fund.
UNDERLYING FUND INVESTMENT TECHNIQUES
The underlying funds for Schwab OneSource(R) Portfolios-International
also may engage in foreign currency transactions with respect to foreign
securities investments; invest in restricted securities; sell securities short;
borrow money for investment purposes (i.e., leverage their portfolio); write
(sell) or purchase call or put options on securities or on stock indices;
concentrate their assets in one industry; invest in master demand notes; invest
in domestic equity securities; and enter into futures contracts and option on
futures contracts.
The risks associated with these investments are discussed below.
To the extent that the underlying funds also invest or engage in swaps,
preferred stock, convertible securities, real estate-related investments,
precious metal-related investments, U.S. Government securities, government
"mortgage-backed" securities, asset-backed securities, certificates of deposit
and bankers' acceptances, commercial paper, repurchase transactions, and
when-issued and delayed delivery securities, the underlying funds would be
subject to risks associated with such investments similar to those risks
discussed above regarding such investments by the Funds.
Short Sales. An underlying fund may sell securities short. In a short
sale, the underlying fund sells stock which it does not own, making delivery
with securities "borrowed" from a broker. The underlying fund is then obligated
to replace the security borrowed by purchasing it at the market price at the
time of replacement. This price may or may not be less than the price at which
the security was sold by the underlying fund. Until the security is replaced,
the underlying fund is required to pay the lender any dividends or interest
which accrue during the period of the loan. In order to borrow the security, the
underlying fund also may have to pay a premium which would increase the cost of
26
<PAGE> 27
the security sold. The broker will retain the proceeds of the short sale to the
extent necessary to meet margin requirements until the short position is closed
out.
The underlying fund also must deposit in a segregated account an amount
of cash or U.S. Government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) the value of the collateral deposited with the broker in connection with the
short sale (not including the proceeds from the short sale). While the short
position is open, the underlying fund must maintain daily the segregated account
at such a level that (i) the amount deposited in it plus the amount deposited
with the broker as collateral equals the current market value of the securities
sold short and (ii) the amount deposited in it plus the amount deposited with
the broker as collateral is not less than the market value of the securities at
the time they were sold short. Depending upon market conditions, up to 80% of
the value of an underlying fund's net assets may be deposited as collateral for
the obligation to replace securities borrowed to effect short sales and
allocated to a segregated account in connection with short sales. The underlying
fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
underlying fund replaces the borrowed security. The underlying fund will realize
a gain if the security declines in price between those dates. The amount of any
gain will be decreased and the amount of any loss increased by the amount of any
premium dividends or interest the underlying fund may be required to pay in
connection with a short sale.
A short sale is "against the box" if at all times when the short
position is open the underlying fund owns an equal or greater amount of the
securities or securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities sold short.
Such a transaction serves to defer a gain or loss for Federal income tax
purposes. The procedures described above regarding deposits in a segregated
account are not required to be followed for short sales "against the box."
Leverage through Borrowing. An underlying fund may borrow up to 25% of
the value of its net assets on an unsecured basis from banks to increase its
holdings of portfolio securities. Under the 1940 Act, the underlying fund is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if it is disadvantageous to do so from an
investment standpoint. Leveraging will exaggerate the effect of any increase or
decrease in the value of portfolio securities on the underlying fund's net asset
value, and money borrowed will be subject to interest costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the interest and option premiums received
27
<PAGE> 28
from the securities purchased with borrowed underlying funds.
Derivatives. An underlying fund may invest in the following instruments
that are commonly known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on or "received" from a traditional
security, asset or market index.
Hedging. An underlying fund may employ many of the investment
techniques described herein not only for investment purposes which may be
considered speculative, but also for hedging purposes. For example, an
underlying fund may purchase or sell put and call options on common stocks to
hedge against movement in individual common stock prices, or purchase and sell
stock index futures and related options to hedge against marketwide movements in
common stock prices. Although such hedging techniques generally tend to minimize
the risk of loss that is hedged against, they also may limit commensurably the
potential gain that might have resulted had the hedging transaction not
occurred. Also, the desired protection generally resulting from hedging
transactions may not always be achieved.
Master Demand Notes. Although the Fund will not do so, underlying funds
(particularly money market mutual funds) may invest up to 100% of their assets
in master demand notes. Master demand notes are unsecured obligations of U.S.
corporations redeemable upon notice that permit investment by an underlying fund
of fluctuating amounts at varying rates of interest pursuant to direct
arrangements between the fund and the issuing corporation. Because they are
direct arrangements between the underlying fund and the issuing corporation,
there is no secondary market for the notes. However, they are redeemable at face
value, plus accrued interest, at any time.
Domestic Equity Securities. The underlying funds, particularly global
underlying funds, also may be able to purchase equity securities of U.S.
companies. Equity securities are ownership interests in the net worth of a
corporation and include common stocks, convertible securities and warrants.
Common stock prices can be volatile in the short term. Market conditions or
other company, political and economic news often can cause large changes in a
stock's price. Such investments entail market risk, i.e., the risk of being
invested in stocks when the market goes down, resulting in stock prices
declining over short or even long periods.
28
<PAGE> 29
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). With respect to the
Analytics Fund and the Schwab OneSource(R) Portfolios-International, investment
restriction numbers 3, 4, 6 and 7 are non-fundamental and may be changed by the
Trust's Board of Trustees. 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 or investments in other registered investment companies) 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 and Small-Cap Index Fund may
purchase securities under such circumstances only to the extent that the
International Index or Small-Cap Index, respectively, also is so concentrated
and that the S&P 500 Fund and Analytics Fund may purchase securities under such
circumstances only to the extent that the S&P 500 is also so concentrated, and
except that the Schwab OneSource Portfolios-International will invest 25% or
more of its total assets in other investment companies).
3) Invest more than 10% of its net assets in illiquid securities,
including repurchase agreements with maturities in excess of seven days (except
that the Schwab OneSource(R) Portfolios-International may not invest more than
15% of its net assets in illiquid securities).
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, commodity contracts or real estate,
including interests in real estate limited partnerships, provided that each Fund
may (i) purchase securities of companies that deal in real estate or interests
therein, (ii) purchase or sell futures contracts, options contracts, equity
index participations and index participation contracts, and (iii) for the Asset
Director Funds, S&P 500 Fund and Analytics 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.
29
<PAGE> 30
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 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 U.S. 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,
30
<PAGE> 31
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 net assets.
5) Make short sales, except for short sales against the box.
6) Purchase or sell interests in oil, gas or other mineral development
programs or leases, although it may invest in companies that own or invest in
such interests or leases.
7) Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities.
Investments in Other Mutual Funds. The Schwab OneSource(R)
Portfolios-International intends to purchase shares of underlying funds in
compliance with the requirements of Section 12(d)(1)(F) of the 1940 Act. Under
that provision, the Fund is prohibited from purchasing the securities of an
underlying fund if, as a result, the Fund together with its affiliates, would
own more than 3% of the total outstanding securities of that underlying fund. In
addition, the Fund is required to seek voting instructions from its shareholders
regarding underlying fund proxies, and to vote such proxies in accordance with
the instructions received or to vote such proxies in the same proportion as the
vote of all other holders of the underlying fund securities.
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<PAGE> 32
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/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
------------------ ------------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Chief Executive Officer and Director,
July 29, 1937 The Charles Schwab Corporation;
Chairman and Director, Charles Schwab & Co., Inc.
and Charles Schwab Investment Management, Inc.;
Chairman and Director, The Charles Schwab Trust
Company; Chairman and Director (current board
positions), 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).
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).
</TABLE>
- -------------------------
* Mr. Schwab is an "interested person" of the Trust.
**Mr. McCarthy is an "interested person" of the Trust.
32
<PAGE> 33
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
------------------ ------------- --------------------
<S> <C> <C>
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services); and International Investment
Consultant, Cannon Street, Inc. (private
investigative firm).
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).
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 and 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.
TAI-CHIN TUNG Treasurer and Principal Vice President - Finance, Charles Schwab & Co.,
March 7, 1951 Financial Officer Inc.; Controller, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Ms. Tung was
Controller for Robertson Stephens Investment
Management, Inc. From 1993 to 1994, she was Vice
President of Fund Accounting, Capital Research
and Management Co. Prior to 1993, Ms. Tung was
Senior Vice President of the Sierra Funds and
Chief Operating Officer of Great Western
Financial Securities.
</TABLE>
- --------------------
* Mr. Klipp is an "interested person" of the Trust.
33
<PAGE> 34
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
------------------ ------------- --------------------
<S> <C> <C>
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, 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.
34
<PAGE> 35
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Pension or Retirement
Benefits Accrued as
Aggregate Part of Fund Expenses Total
Name of Person, Compensation from from the Fund Compensation from
Position the Trust Complex 2 the Fund Complex 2
- --------------- ------------------ --------------------- -------------------
<S> <C> <C> <C>
Charles R. Schwab, 0 N/A 0
Chairman and Trustee
Elizabeth G. Sawi 3, 0 N/A 0
President and Trustee
Timothy F. McCarthy 4, 0 N/A 0
President and Trustee
William J. Klipp, 0 N/A 0
Sr. Vice President, Chief
Operating Officer and
Trustee
Donald F. Dorward, 16,600 N/A 73,000
Trustee
Robert G. Holmes, 16,600 N/A 73,000
Trustee
Donald R. Stephens, 16,600 N/A 73,000
Trustee
Michael W. Wilsey, 16,600 N/A 73,000
Trustee
</TABLE>
1 Figures are for the Trust's fiscal year ended October 31, 1995.
2 "Fund Complex" comprises all 24 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.
------------------------------
35
<PAGE> 36
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" in this
Statement of Additional Information.
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the SchwabFunds Family(R),
a family of 24 mutual funds with over $39 billion in assets as of August 20,
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 also must 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
36
<PAGE> 37
for the purpose of voting on such approval. The Advisory Agreement may be
terminated at any time upon 60 days' notice by either party, or by a majority
vote of the outstanding shares of a Fund, and will terminate automatically upon
assignment.
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 its 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 its 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 $106,000, 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, 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 February 28, 1997, 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, 0.33% of the next $1 billion and 0.31% of such net assets over $2
billion.
37
<PAGE> 38
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.
Analytics Fund. For its advisory and administrative services to the
Analytics Fund, the Investment Manager is entitled to receive a graduated annual
fee, payable monthly, of 0.74% of the Fund's average daily net assets not in
excess of $1 billion, 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 July 1, 1997, the total fund operating expenses for the Schwab Analytics
Fund will not exceed 0.75% of its average daily net assets.
Schwab OneSource(R) Portfolios-International. For its advisory and
administrative services to the Schwab OneSource(R) Portfolios-International, the
Investment Manager is entitled to receive a graduated annual fee, payable
monthly, of 0.74% of the Fund's average daily net assets not in excess of $1
billion, 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 February 28, 1999, the total fund operating expenses for the Schwab
OneSource Portfolios-International will not exceed 0.50% of its average daily
net assets.
Additional Information. The Advisory Agreement provides that the fees
to be paid to the Investment Manager will be less than the amount that would
cause the aggregate operating expenses of a Fund (excluding interest, taxes, net
brokerage commissions and extraordinary expenses) in any year to exceed the most
stringent limits prescribed by any state in which shares of a Fund are offered
for sale. The most stringent current limit for such expenses is 2.5% of a fund's
first $30 million of average net assets, 2.0% of a fund's next $70 million of
average net assets and 1.5% of a fund's average net assets in excess of $100
million.
Schwab currently receives remuneration from fund companies
participating in its Mutual Fund OneSource(R) service equal to 0.25% to 0.35%
per annum of assets invested in OneSource Funds. The Investment Manager and
Schwab provide investment management and otyer services to all of Schwab's
proprietary funds and receive compensation from them. In light of this
remuneration and compensation, Schwab guarantees, through at least December 31,
2001, to waive its Transfer Agent and Shareholder Service fees which normally
total 0.25%. After December 31, 2001, the guarantees may be terminated,
modified or continued.
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 and Analytics Fund 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
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directly and indirectly approximately $700 million in institutional and private
account assets.
For the Asset Director Funds, 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.
For the Analytics Fund, the Sub-Adviser will make investment decisions
for the Fund's non-cash investments. The Sub-Adviser will use quantitative
techniques and proprietary real-time databases and software models to
continually identify and rank stocks that exhibit a favorable combination of
attributes that historically have been associated with aggregate total returns
greater than that of the S&P 500. Once rankings are determined, statistical
methodologies will be used to construct a portfolio of the most attractive
stocks in terms of potential long-term capital growth.
For the Sub-Adviser's services relating to the Asset Director Funds,
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 Funds' aggregate
average daily net assets, 0.06% of the next $150 million, 0.04% of the next $600
million and 0.02% of the Funds' aggregate average daily net assets over $850
million. For the Analytics Fund, the Investment Manager pays the Sub-Adviser an
annual investment sub-advisory fee, payable monthly, 0.20% of the Fund's average
daily net assets not in excess of $300 million, 0.15% of the next $500 million
and 0.10% of such assets over $800 million.
As of May 1, 1995 and June 30, 1995, Dimensional Fund Advisors Inc.
("Dimensional") no longer served as the sub-adviser to the Small-Cap Index Fund
and 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.
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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 of the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
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 Fund Accountant for the
International Index Fund, Small-Cap Index Fund, Asset Director Funds and Schwab
OneSource(R) Portfolios-International.
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 and Analytics Fund. PFPC Inc., at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as Fund Accountant for the S&P 500 Fund and
Analytics 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 each Fund's federal income tax return. Price
Waterhouse LLP also performs other professional accounting, auditing, tax and
advisory services when engaged to do so by the Trust. Shareholders will be sent
audited annual and unaudited semi-annual financial statements. The address of
Price Waterhouse LLP is 555 California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, D.C. 20005, is counsel to the Trust.
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PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the Funds, the Investment
Manager and the Sub-Adviser seek to obtain best price and execution. Subject to
the supervision of the Board of Trustees, the Investment Manager and the
Sub-Adviser generally will 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 and the Sub-Adviser 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 and the Sub-Adviser also may 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 and the Sub-Adviser may, in their discretion,
in agency transactions (and not principal transactions) utilize the services of
broker-dealers that provide them with investment information and other research
resources. Such resources also may be used by the Investment Manager and the
Sub-Adviser 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 and the Sub-Adviser will consider
(if relevant) 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.
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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 Schwab provides to the Funds also are 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 members of the exchange
not associated with Schwab perform the floor brokerage element of portfolio
transactions (that is, execution on the exchange floor or through use of
exchange facilities) 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 Schwab selects 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 and $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
dividing the value of purchases or sales of portfolio securities for the fiscal
year, whichever is less, by the monthly average value of portfolio securities
the Fund owned during the fiscal year. When making the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded.
A 100% portfolio turnover rate would occur, for example, if all
portfolio securities (aside from short-term securities) were sold and either
repurchased or replaced once during the fiscal year. The Funds expect that their
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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. 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 each Fund's policy 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 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
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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 the Funds pay from net investment income and distributions
from the Funds' net short-term capital gains in excess of any net long-term
capital losses, whether received in cash or reinvested, generally will be
taxable to shareholders as ordinary income. For corporate investors in the
Funds, dividend distributions the Funds designate to be from dividends received
from qualifying domestic corporations will be eligible for the 70% corporate
dividends-received deduction to the extent they would qualify if the Funds were
regular corporations. Distributions 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
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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
U.S. Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) 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 also may be
subject to state, local and foreign taxes, and its treatment under applicable
tax laws may differ from the federal income tax treatment.
Income the International Index Fund, Asset Director Funds and Schwab
OneSource(R) Portfolios-International receive from sources within various
foreign countries may be subject to foreign income taxes withheld at the source.
If a Fund has at least 50% of its assets invested in foreign securities at the
end of its taxable year, it may elect to pass through the foreign tax credit to
its shareholders. It is expected that the International Index Fund will have
more than 50% of the value of its total assets at the close of its taxable year
invested in foreign securities, and it will make this election. Pursuant to this
election, U.S. shareholders must include in gross income, even though not
actually received, their respective pro rata share of foreign taxes, and may
either deduct their pro rata share of foreign taxes (but not for alternative
minimum tax purposes) or credit the tax against U.S. income taxes, subject to
certain limitations described in Code section 904 (but not both). A shareholder
who does not itemize deductions may not claim a deduction for
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foreign taxes. It is expected that the Asset Director Funds and Schwab
OneSource(R) Portfolios-International will not have 50% of their assets invested
in foreign securities at the close of their taxable years, and therefore will
not be permitted to make this election and "pass through" to their shareholders.
Each shareholder's respective pro rata share of foreign taxes these Funds pay
will, therefore, be netted against their share of these Fund's gross income.
Although the International Index Fund, Asset Director Funds and Schwab
OneSource Portfolios-International 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 may inadvertently do so. This could
result in adverse tax consequences upon the disposition of, or the receipt of
"excess distributions" with respect to, such equity investments. To the extent
the International Index Fund, Asset Director Funds and Schwab OneSource
Portfolios-International 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,
Asset Director Funds and Schwab OneSource Portfolios-International 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, Asset Director
Funds' and Schwab OneSource Portfolios-International's shareholders.
Therefore, the payment of this tax would reduce the International Index Fund's,
Asset Director Funds' and Schwab OneSource(R) Portfolios-International's
economic return from their PFIC shares, and excess distributions received with
respect to such shares are treated as ordinary income rather than capital gains.
An underlying fund may inadvertently invest in non-U.S. corporations
which would be treated as Passive Foreign Investment Companies ("PFICs") or
become a PFIC under the Code. This could result in adverse tax consequences upon
the disposition of, or the receipt of "excess distributions" with respect to,
such equity investments. To the extent an underlying fund does invest in PFICs,
it may elect to treat the PFIC as a "qualified electing fund" or mark-to-market
its investments in PFICs annually. In either case, the underlying fund may be
required to distribute amounts in excess of its realized income and gains. To
the extent that the underlying fund itself is required to pay a tax on income or
gain from investment in PFICs, the payment of this tax would reduce the Fund's
economic return.
The 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
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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 Business Day
at the close of trading on the New York Stock Exchange, generally 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 fair value. Each security the Funds hold 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 readily
are available (including any restricted securities) are valued at fair value as
determined in good faith by the Investment Manager pursuant to Board of Trustees
guidelines. Securities may be valued on the basis of prices provided by pricing
services when such prices are believed to reflect fair value.
In accordance with the 1940 Act, the underlying funds are valued at
their respective net asset values as determined by those funds. The underlying
funds that are money market funds value their portfolio securities based on the
amortized cost method. The other underlying funds value their portfolio
securities based on market quotes if they are readily available. The Investment
Manager assigns fair values to the Funds' other investments in good faith under
Board of Trustees guidelines. The Board of Trustees regularly reviews these
values.
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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, the fiscal
period from September 9, 1993 (commencement of operations) to October 31, 1995,
and the period ended July 31, 1996, the International Index Funds's average
annual total return was 3.35%, 5.95%, and 4.44%, respectively. For the fiscal
year ended October 31, 1995, for the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1995, and the period ended July 31,
1996, the Small-Cap Index Fund's total return was 17.11%, 8.97% and 6.55%,
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 nonstandardized 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 also may 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
A Fund's yield refers to the net investment income generated by a
hypothetical investment in the Fund over a specific 30 day period. This net
investment income is then annualized, which means that the net investment income
generated during the 30-day period is assumed to be generated in each 30-day
period over an annual period, and is shown as a percentage of the investment.
EFFECTIVE YIELD
A Fund's effective yield is calculated similarly, but the net
investment income earned by the investment is assumed to be compounded monthly
when annualized. The effective yield will be slightly higher than the yield due
to this compounding effect.
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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 ratings of mutual fund rating services,
various indices of investment performance, U.S. Government obligations, bank
certificates of deposit, the consumer price index and other investments for
which reliable data is available.
The Asset Director Funds also may compare their historical performance
figures to the performance of indices similar to their asset categories and sub-
categories, and to the performance of "blended indices" similar to the Funds'
portfolio strategies, such as those indices names in the Funds' Prospectus under
"Market Performance."
The Schwab OneSource(R) Portfolios-International may compare its
historical performance to the performance of indices such as Morgan Stanley
Capital International's EAFE index, its World ex-U.S. index, other indices or
combination of indices.
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 historically has 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
international markets produced also have 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.
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INDEXING AND THE SCHWAB INDEX FUNDS
Because the unmanaged performance of a broad-based equity index often
has 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 most often is used to gauge that
market's performance. The Dow Jones Industrial Average ("DJIA") and S&P 500 are
two indices designed to measure the performance of U.S. 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 assumes the reinvestment of dividends but
does 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.
INTERNATIONAL INDEX
The International Index 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 also is 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 International Index was first made available to the public on
July 29, 1993.
SMALL-CAP INDEX
To be included in the 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 1,000 such companies as measured by
market capitalization (i.e., from the company with a rank of 1,001
50
<PAGE> 51
through the company with a rank of 2,000). 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 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 Small-
Cap Index. The returns produced by the U.S. 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 market often
has 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, significantly have exceeded
the returns of U.S. Treasury Bills, CDs, corporate bonds and inflation.
THE S&P 500 INDEX(R)
The S&P 500 is representative of the performance of the U.S. stock
market. The Index consists of 500 stocks chosen for market size, liquidity and
industry group representation. It is a market- value weighted index (stock price
times number of shares outstanding), with each stock's weight in the Index
proportionate to its market value. The S&P 500 does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
Index are among the largest, there also are some relatively small companies in
the Index. Those companies, however, generally are 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 also may 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
51
<PAGE> 52
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(R) service ("OneSource"), a
shareholder can invest in over 575 mutual funds from many fund companies,
subject to the following. Schwab's standard transaction fee will be charged on
each redemption of fund shares held for 90 days or less to discourage short-term
trading. Mutual fund shares held for more than 90 days are exempt from the
short-term redemption policy and may be sold without penalty. Up to 15
short-term redemption of fund shares per calendar year are permitted. if you
exceed this number, you'll no longer be able to buy or sell fund shares without
paying a transaction fee. As a courtesy, we'll notify you in advance if your
short-term redemptions are nearing the point where all of your future trades
will be subject to transaction fees. Schwab reserves the right to modify
OneSource's terms and conditions at any time. For more information, a
shareholder should contact his or her Schwab office during its regular business
hours or call 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.
52
<PAGE> 53
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
Schwab Asset Director(R)-Conservative Growth Fund 2
Schwab S&P 500 Fund-Investor Shares 2
Schwab S&P 500 Fund-e.Shares(TM) 2, 3
Schwab Analytics Fund(TM) 2
Schwab OneSource(R) Portfolios-International
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(R)
Schwab Tax-Exempt Money Fund-Sweep Shares
Schwab Tax-Exempt Money Fund-Value Advantage Shares(TM)
Schwab California Tax-Exempt Money Fund-Sweep Shares
Schwab California Tax-Exempt Money Fund-Value Advantage Shares(TM)
Schwab Retirement Money Fund(R) 6
Schwab Institutional Advantage Money Fund(R) 6
Schwab New York Tax-Exempt Money Fund-Sweep Shares
Schwab New York Tax-Exempt Money Fund-Value Advantage Shares(TM)
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.
53
<PAGE> 54
OTHER INFORMATION
From time to time, the International Index Fund and Small-Cap Index
Fund may compare the historical performance of the International Index and
Small-Cap Index, respectively, to the historical performance of various other
indices, including the S&P 500, as reported by independent sources.
Each Fund, except for the Analytics Fund and Schwab OneSource(R)
Portfolios- International, is managed to offset capital gains with capital
losses in order to minimize the 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, distributing 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, each 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 each 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 generally is 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
54
<PAGE> 55
be brought or maintained derivatively or as a class action on behalf of the
Trust or the shareholders, to the same extent as the stockholders of a
Massachusetts business corporation; and (6) such additional 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 the 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
55
<PAGE> 56
Trustees consider adequate to cover foreseeable tort claims. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered remote, because it is limited to circumstances in which a disclaimer
is inoperative and the Trust itself is unable to meet its obligations.
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 August 13, 1996, the officers and Trustees of the Trust, as a
group, owned of record or beneficially 10%, 5%, 12%, and 18% of the outstanding
voting securities of the International Index Fund, Small-Cap Index Fund, High
Growth Fund and Conservative Growth Fund, respectively. As of August 3, 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 its respective Prospectus. 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 Sub-Adviser.
The Funds, other than the Schwab OneSource(R) Portfolios-International,
have made an election with the SEC to pay in cash all redemptions requested by
any shareholder of record limited in amount during any 90-day period to the
lesser of $250,000 or 1% of its net assets at the beginning of such period. The
Schwab OneSource(R) Portfolios-International has not elected and may not elect
to pay such redemptions in cash. This election is irrevocable without the SEC's
prior approval. Redemption requests in excess of the stated limits and
redemption requests of Schwab OneSource Portfolios International 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" for the International Index and Small-Cap Funds and under
"Important Information About Your Investment--How We Determine the Price of
Your Shares for the Asset Director Funds, Analytics Fund, S&P Fund and the
Schwab OneSource Portfolios--International" and a redeeming shareholder would
normally incur brokerage expenses if he or she were to convert the securities
to cash.
56
<PAGE> 57
OTHER INFORMATION
The Prospectuses of the Funds and this Statement of Additional
Information do not contain all the information included in the Registration
Statement filed with the SEC under the Securities Act of 1933, as amended, with
respect to the securities offered by the Prospectuses. Certain portions of the
Registration Statement have been omitted from the Prospectuses and this
Statement of Additional Information pursuant to the rules and regulations of the
SEC. The Registration Statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectuses and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
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.
57
<PAGE> 58
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Genesis Health
Ventures, Inc. 150 $ 4,444
Gilead Sciences Inc.* 100 3,075
Gulf South Medical
Supply Inc. 100 4,088
Haemonetics Corp.* 100 1,925
HealthSouth
Rehabilitation Corp. 117 4,344
Herbalife International
Inc. 100 1,375
Human Genome Sciences
Inc.* 100 3,988
Humana Inc.* 200 4,925
ICN Pharmaceuticals,
Inc. 101 2,273
Immulogic
Pharmaceutical Corp.* 100 1,094
Immunex Corp. (New)* 100 1,569
Interneuron
Pharmaceuticals* 100 3,913
Invacare Corp. 100 2,575
Isis Pharmaceuticals* 100 1,263
Isolyser Inc. 100 1,750
Johnson & Johnson 400 37,000
Kinetic Concepts Inc. 100 1,488
Ligand Pharmaceuticals
Inc. Class B 100 1,481
Lincare Holdings Inc.* 100 3,875
Liposome Inc.* 100 2,456
Living Centers of
America* 100 3,700
Mallinckrodt
Group Inc. 100 3,938
Medimmune Inc.* 100 1,675
Medisense Inc.* 100 4,488
Medtronic Inc. 200 10,625
Mentor Corp. 100 2,338
Merck & Co. Inc. 800 48,400
Multicare Cos. Inc. 100 2,838
Nellcor Puritan
Bennett Inc.* 100 4,900
Nexstar Pharmaceuticals
Inc.* 100 2,450
Novacare Inc.* 200 1,450
Omnicare Inc. 100 6,000
Owens & Minor Inc.
(New) 100 1,350
PDT Inc. 100 4,763
Patterson Dental Co.* 100 3,000
Pfizer Inc. 400 27,550
Pharmacia &
Upjohn Inc. 200 7,650
Physician Sales &
Service Inc. 100 2,738
Pyxis Corp.* 200 5,075
Quintiles Transnational
Corp. 200 14,625
Renal Treatment Centers
Inc. 400 11,600
Respironics Inc. 100 2,163
RoTech Medical Corp. 100 4,150
Roberts Pharmaceutical
Corp.* 100 1,875
Salick Health Care,
Inc.* 200 7,625
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Schering Plough Corp. 200 $ 11,475
Sepracor Inc.* 100 1,400
Sofamor/Danek
Group Inc.* 100 3,275
Sola International
Inc.* 100 3,275
Somatogen Inc.* 100 1,656
St. Jude Medical, Inc. 100 3,644
Sunrise Medical Inc.* 100 1,825
Target Therapeutics
Inc. 200 10,825
Tecnol Medical Products
Inc.* 100 1,963
Tenet Healthcare Corp.* 100 2,050
Thermedics Inc.* 100 3,025
U.S. Healthcare, Inc. 100 5,219
United Healthcare Corp. 300 17,550
Ventritex Inc. 100 1,556
Vertex Pharmaceuticals
Inc.* 100 2,950
VISX Inc.* 100 3,400
Vivra Inc. 150 4,744
Warner Lambert Co. 100 11,175
West Co Inc. 100 2,275
-------
561,804
-------
HOUSEHOLD PRODUCTS--0.4%
Avon Products, Inc. 100 8,888
Bush Boake Allen Inc.* 100 2,700
Church & Dwight Inc. 100 2,200
Clorox Co. 100 8,263
Colgate-Palmolive Co. 100 7,663
Dial Corp. 100 2,813
Gillette Co. 200 10,800
International Flavors &
Fragrances Inc. 100 4,913
Playtex Products Inc.* 200 1,750
Procter & Gamble Co. 500 42,250
-------
92,240
-------
IMAGING & PHOTO--0.2%
Avid Technology, Inc.* 100 1,944
BMC Industries, Inc. 100 2,675
C-Cube Microsystems,
Inc. 200 9,850
Eastman Kodak Co. 100 7,650
Electronics for
Imaging Inc. 200 12,275
Ultratech Stepper Inc. 100 2,600
-------
36,994
-------
INSURANCE--1.4%
Aetna Life &
Casualty Co. 100 7,125
Alexander & Alexander
Services 1,200 22,650
Alfa Corp. 100 1,300
Allstate Corp. 400 15,550
American Annuity
Group, Inc. 100 1,250
American Bankers
Insurance
Group, Inc. 100 3,938
American General Corp. 200 7,025
</TABLE>
F-83
<PAGE> 59
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
American International
Group, Inc. 300 $27,413
Aon Corp. 100 5,363
Argonaut Group, Inc. 100 3,125
Arthur J. Gallagher
& Co. 100 3,250
CMAC Investment Corp. 100 5,600
Capital Re Corp. 100 3,750
Capitol American
Financial Corp. 100 2,413
Chubb Corp. 100 9,463
Cigna Corp. 100 11,338
Citizens Corp. 100 1,950
Commerce Group Inc. 100 2,000
Crawford & Co.
Class A 100 1,625
Crawford & Co.
Class B 100 1,625
Enhance Financial
Services Group Inc. 100 2,713
Financial Security
Assured Holdings Ltd. 100 2,700
Foremost Corp. of
America 100 5,350
Fremont General Corp. 150 3,750
General Re Corp. 100 14,288
HCC Insurance
Holdings, Inc. 200 11,700
Harleysville Group Inc. 100 2,750
Highlands Insurance
Group Inc.* 10 190
Home Beneficial Corp.
Class B 100 2,588
Horace Mann Educators
Corp. (New) 100 3,288
ITT Hartford
Group Inc. 100 4,888
Jefferson-Pilot Corp. 300 15,825
John Alden Financial
Corp. 100 1,950
Kansas City Life
Insurance Co. 100 5,513
Liberty Corp. 100 3,175
Life Partners
Group Inc. 100 2,088
Lincoln National
Corp. Inc. 100 4,825
Marsh & McLennan
Companies 100 9,400
NAC Re Corp. 100 3,275
National Re Corp. 100 3,550
Orion Capital Corp. 100 4,438
Penncorp Financial
Group Inc. 100 3,063
Presidential Life Corp. 100 981
Providian Corp. 100 4,613
Reinsurance Group of
America Inc. 100 4,150
Safeco Corp. 200 6,588
Selective Insurance
Group, Inc. 100 3,150
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Sierra Health
Services Inc.* 100 $ 3,300
St. Paul Companies,
Inc. 100 5,313
Torchmark Corp. 100 4,300
Transamerica Corp. 100 7,600
UNUM Corp. 100 5,950
USF&G Corp. 100 1,588
United Companies
Financial Corp. 100 3,213
United Insurance
Companies, Inc. 100 2,125
Vesta Insurance
Group Inc. 150 4,819
Zenith National
Insurance Corp. 100 2,513
-------
309,263
-------
MEDIA--0.8%
AMC Entertainment Inc.* 100 2,588
Cablevision Systems
Corp. Class A* 100 4,988
Central Newspapers Inc.
Class A 100 3,638
Century Communications
Corp. Class A* 300 2,906
Citicasters Inc. 100 3,000
Comcast Corp. Class A 200 3,488
Dow Jones & Co. Inc. 100 3,738
Evergreen Media* 100 3,963
Gannett Inc. 100 6,838
Harte Hanks
Communications (New) 150 3,544
Houghton Mifflin Co. 100 4,638
Interdigital Commerce
Corp.* 100 831
International Cabletel
Inc. 100 2,944
International Family
Entertainment Inc.
Class B 125 1,906
Jacor Communications
Inc.* 100 2,150
John Wiley & Son, Inc.
Class A 100 3,450
Knight-Ridder, Inc. 100 7,238
McClatchy Newspapers
Inc. Class A 100 2,425
McGraw-Hill, Inc. 200 8,825
Media General, Inc.
Class A 100 3,850
Meredith Corp. 100 4,538
Metromedia
International
Group., Inc. 100 1,350
New World
Communications
Class A* 100 1,869
New York Times Co.
Class A 100 3,250
Oak Industries Inc.* 100 2,700
Paxson Communications
Corp. 100 1,488
Pulitzer Publishing Co. 100 5,700
Regal Cinemas, Inc. 150 6,141
</TABLE>
F-84
<PAGE> 60
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Renaissance
Communications Corp. 100 $ 2,763
SBC Communications Inc. 400 20,000
TCA Cable TV Inc. 100 2,938
Tele Communications
Inc. (New)--TCI
Group Series A 500 9,594
Time Warner Inc. 300 12,263
Times Mirror Co. (New)
Series A 100 4,263
Tribune Co. (New) 100 6,975
United International
Holdings Inc.
Class A* 100 1,450
Viacom Inc. Class B* 300 12,300
Westcott
Communications Inc.* 100 2,131
Westwood One Inc.* 100 1,769
-------
180,430
-------
MISCELLANEOUS FINANCE--0.9%
AMCORE Financial, Inc. 100 2,025
Alex Brown Inc. 100 5,413
American Express Co. 200 9,700
Americredit Corp.* 100 1,438
Astoria Financial Corp. 100 5,338
Beneficial Corp. 100 5,525
Bok Financial Corp.
(New) 100 2,075
Cal-Federal Bancorp
Inc.* 200 3,575
Charter One
Financial Inc. 200 7,013
Coast Savings
Financial Inc.* 100 3,113
Collective Bancorp Inc. 100 2,419
Commercial Federal
Corp. 100 3,838
Dean Witter
Discover & Co. 100 5,450
Eaton Vance Corp. (Non
Voting) 100 3,088
Federal Home Loan
Mortgage Corp. 200 16,675
Federal National
Mortgage Assoc. 800 24,500
First Financial Corp. 100 2,363
Fund American
Enterprises
Holdings, Inc. 100 7,650
Glendale Federal Bank
(FSB) (New)* 100 1,750
Great Western Financial
Corp. 100 2,300
Green Tree Financial
Corp. 100 3,375
H.F. Ahmanson & Co. 100 2,375
Home Financial Corp. 100 1,400
Household International
Inc. 100 6,913
Interpool Inc. 100 1,800
Merrill Lynch & Co.
Inc. 200 12,075
Money Store Inc. 250 6,344
Morgan Stanley
Group Inc. 200 10,050
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Olympic Financial Ltd.* 100 $ 2,225
Peoples Heritage
Financial Group, Inc. 100 2,100
Pioneer Group Inc. 100 2,650
Quick & Reilly
Group, Inc. 100 3,050
Raymond James
Financial Inc. 100 2,263
Roosevelt
Financial Group Inc. 200 3,850
Salomon Inc. 100 4,063
Sovereign Bancorp Inc. 105 1,168
St. Paul Bancorp Inc. 100 2,431
Standard Financial Inc. 100 1,494
Student Loan Corp. 100 3,575
Travelers Group Inc. 200 12,300
Westcorp Inc. 100 1,963
-------
202,712
-------
MOTOR VEHICLE--0.7%
Arctco, Inc. 100 969
Arvin Industries, Inc. 500 11,250
Borg Warner
Automotive Inc. 100 3,813
Breed Technologies Inc. 100 2,150
Chrysler Corp. 300 18,825
Dana Corp. 100 3,325
Detroit Diesel Corp.* 100 1,913
Eaton Corp. 100 6,050
Echlin Inc. 100 3,438
Federal Mogul Corp. 100 1,900
Ford Motor Co. 700 25,113
General Motors Corp. 600 32,550
Gentex Corp.* 100 3,938
Genuine Parts Co. 100 4,425
Hayes Wheels
International Inc. 100 3,038
Mascotech Inc. 200 2,625
Modine
Manufacturing Co. 100 2,750
Standard Products Co. 100 2,538
Superior Industries
International, Inc. 100 2,738
TRW Inc. 100 9,388
Titan Wheel
International Inc. 100 1,613
-------
144,349
-------
NON-FERROUS--0.4%
Alcan Aluminum Ltd. 300 9,563
Aluminum Company of
America 200 12,475
Cyprus Amax
Minerals Co. 100 2,713
Echo Bay Mines Ltd 200 2,625
Engelhard Corp. 100 2,513
Freeport McMoran Copper
& Gold Class B 100 3,288
Hecla Mining Co.* 100 775
Inco Ltd. 100 3,363
</TABLE>
F-85
<PAGE> 61
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Minerals
Technologies Inc. 600 $ 23,100
Mueller Industries Inc. 100 4,025
Phelps Dodge Corp. 100 7,350
Reynolds Metals Co. 100 5,375
Stillwater Mining Co.* 100 2,375
Sunshine Mining &
Refining Co.* 600 975
Wolverine Tube Inc.* 200 7,350
-------
87,865
-------
OIL-DOMESTIC--0.4%
Amerada Hess Corp. 100 5,663
Atlantic Richfield Co. 300 35,325
Barrett Resources
Corp.* 100 2,775
Cross Timbers Oil Co. 100 2,000
Diamond Shamrock Inc. 100 3,388
Kerr-McGee Corp. 100 6,388
Phillips Petroleum Co. 200 8,300
Pogo Producing Co. 100 3,613
Quaker State Corp. 100 1,575
Smith International
Inc.* 100 2,975
Snyder Oil Corp. 100 900
Sun Inc. 100 3,100
USX Corp. (Marathon
Group) (New) 200 4,400
Unocal Corp. 200 6,425
-------
86,827
-------
OIL-INTERNATIONAL--1.0%
Amoco Corp. 300 21,900
Chevron Corp. 500 29,000
Exxon Corp. 800 68,000
Mobil Corp. 200 23,000
Royal Dutch
Petroleum Co. 300 42,975
Texaco Inc. 200 17,100
Western Atlas, Inc.* 100 6,000
-------
207,975
-------
PAPER--0.5%
Alco Standard Corp. 100 5,788
Caraustar Industries
Inc. 100 2,513
Champion International
Corp. 100 4,825
Chesapeake Corp. 100 2,888
Georgia Pacific Corp. 100 7,775
International Paper Co. 200 7,975
James River Corp. 100 2,675
Kimberly Clark Corp. 178 12,927
Longview Fibre Co. 200 3,525
Louisiana Pacific Corp. 100 2,513
Mead Corp. 100 5,563
P.H. Glatfelter Co. 200 3,325
Rock Tennessee Co.
Class A 100 1,756
Schweitzer Mauduit
International Inc. 10 271
Shorewood Packaging
Corp.* 100 1,725
Temple-Inland Inc. 100 4,850
Union Camp Corp. 100 5,438
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Wausau Paper
Mills Co. 125 $ 2,875
Westvaco Corp. 100 3,100
Weyerhaeuser Co. 200 9,900
Willamette
Industries, Inc. 100 6,175
------
98,382
------
PRODUCER GOODS-MANUFACTURING--2.0%
Albany International
Corp. Class A (New) 100 2,150
Allied Signal Inc. 300 17,438
AptarGroup, Inc. 100 3,763
Avery Dennison Corp. 100 5,700
BT Office Products
International Inc.* 100 1,738
BW/IP Holding, Inc.
Class A 100 2,075
Baldor Electric Co. 100 2,163
Blyth Industries Inc. 200 7,950
Case Corp. 100 5,050
Caterpillar Inc. 200 12,800
Coherent Inc.* 100 5,369
Collins & Aikman Corp.* 200 1,400
Cooper Industries Inc. 100 4,250
Credence Systems Corp. 100 2,163
Deere & Co. 300 11,663
Donaldson Inc. 100 2,625
Dover Corp. 100 5,150
Duriron Inc. 100 2,625
Emerson Electric Co. 200 16,725
FMC Corp. (New)* 100 6,938
Fisher Scientific
International, Inc. 100 3,738
General Electric Co. 1,200 93,000
Giddings & Lewis Inc. 200 3,700
Goulds Pumps Inc. 100 2,344
Greenfield Industries
Inc. 100 3,794
Griffon Corp.* 100 900
Helix Technology Corp. 100 3,769
Herman Miller Inc. 100 3,075
IDEX Corp. 100 3,925
ITT Industries Inc. 100 2,750
Illinois Tool
Works Inc. 100 6,725
Ingersoll Rand Co. 100 3,875
Insilco Corp.* 100 3,469
Interface Inc. Class A 100 1,306
Ionics Inc. 100 4,800
JLG Industries Inc. 100 5,475
Johnson Controls, Inc. 100 7,150
Juno Lighting Inc. 100 1,488
Kaydon Corp. 100 3,975
Kennametal Inc. 100 3,788
Keystone
International Inc. 100 2,188
Lincoln Electric Co.
Class A (Non Voting) 100 2,825
Lydall Inc. 100 2,350
Myers Industry Inc. 100 1,813
Navistar International
Corp.* 1,200 14,400
</TABLE>
F-86
<PAGE> 62
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Nu-Kote Holding Inc.
Class A 100 $ 1,775
Pall Corp. 100 2,800
Parker Hannifin Corp. 100 4,225
Precision Castparts
Corp. 100 4,338
Presstek Inc. 100 13,888
Raychem Corp. 100 7,788
Roper Industries 100 4,713
Standex International
Corp. 100 2,700
Stewart & Stevenson
Services, Inc. 100 2,950
TRINOVA Corp. 600 21,150
Teleflex Inc. 100 4,638
Tencor Instruments 100 2,469
Tenneco Inc. 200 10,975
Texas Industries Inc. 100 6,400
TriMas Corp. 200 4,725
Triarc Cos., Inc.
Class A* 100 1,263
Tyco Interest Ltd 100 3,863
U.S. Filter Corp. (New) 100 3,075
UNR Industries, Inc. 200 1,850
Valhi, Inc. (New) 500 3,250
W.W. Grainger, Inc. 100 6,900
WMS Industries Inc.* 100 1,813
Watts Industries Inc.
Class A 100 2,050
Westinghouse Air Brake
Co. (New) 100 1,413
Westinghouse Electric
Corp. 300 5,663
Westpoint Stevens Inc.
Class A 100 2,106
Wyman Gordon Co.* 100 1,825
X-Rite, Inc. 100 1,750
-------
438,712
-------
RAILROAD--0.3%
Burlington Northern
Santa Fe 100 8,750
CSX Corp. 200 10,250
Conrail Inc. 100 6,975
Florida East Coast
Industry Inc. 100 8,900
Norfolk Southern Corp. 100 8,400
Union Pacific Corp. 200 13,625
-------
56,900
-------
REAL PROPERTY--0.1%
Catellus Development
Corp.* 200 1,825
Insignia Financial
Group Class A (New) 400 8,800
Price Enterprises Inc. 100 1,600
-------
12,225
-------
RETAIL--1.3%
Albertson's Inc. 200 7,700
American Stores Co.
(New) 100 3,338
Arbor Drugs, Inc. 100 2,038
Best Buy Co., Inc.* 200 3,850
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Burlington Coat Factory
Warehouse* 100 $ 1,088
CDW Computer
Centers Inc.* 100 7,725
CUC International Inc. 100 3,288
Carson Pirie Scott & Co.*
100 2,425
Casey's General
Stores Inc. 100 2,156
Charming Shoppes Inc. 300 1,931
Circle K Corp.* 100 3,125
Circuit City Stores
Inc. 100 3,175
Claire's Stores Inc. 150 3,263
CompUSA Inc. 200 6,925
Dayton Hudson Corp. 100 9,550
Dillard Department
Stores Inc. Class A 100 4,013
Dollar Tree Stores Inc. 150 5,025
Duty Free
International Inc. 100 1,338
Family Dollar
Stores, Inc. 300 4,575
Federated Department
Stores Inc.* 100 3,338
Fingerhut
Companies, Inc. 100 1,275
Fred Meyer Inc.* 100 2,875
Fruit of the Loom Inc.
Class A* 100 2,638
Gap Inc. 200 6,025
Gymboree Corp.* 100 2,600
Harcourt General Inc. 100 4,400
Hollywood Entertainment
Corp. 100 1,631
Home Depot Inc. 200 9,475
Home Shopping
Network, Inc.* 400 4,700
J.C. Penney Inc. 200 9,900
Just for Feet Inc. 100 4,781
K Mart Corp. 300 3,038
Kroger Co.* 100 4,113
Lands' End, Inc.* 100 1,975
Limited Inc. 109 2,262
Lowe's Cos Inc. 100 3,238
MacFrugals Bargains-
Close-Out* 100 1,338
May Department
Stores Co. 200 10,200
Melville Corp. 100 3,888
Michaels Stores Inc.* 100 1,844
Nordstrom Inc. 100 5,075
Pier 1 Imports Inc. 100 1,338
Price Costco Inc.* 100 1,894
Proffitt's, Inc.* 100 3,288
Rite Aid Corp. 100 2,963
Ross Stores Inc. 100 3,463
Ruddick Corp. 100 1,325
Sears Roebuck & Co. 200 9,975
Service Merchandise
Co. Inc.* 300 1,425
Shopko Stores Inc. 100 1,550
Smart & Final Inc. 100 2,275
</TABLE>
F-87
<PAGE> 63
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Smith's Food & Drug
Centers, Inc. Class B 100 $ 2,500
Sotheby's Holdings,
Inc. Class A 100 1,413
Spiegel, Inc. Class A
(Non Voting) 400 4,000
Sports Authority Inc.* 100 2,975
Stanhome Inc. 100 2,950
Stein Mart Inc.* 100 1,588
Tandy Corp. 100 5,188
Tiffany & Co. (New) 100 6,525
Toys 'R' Us, Inc.* 200 5,575
Waban Inc.* 100 2,450
Wal-Mart Stores, Inc. 1,600 38,200
Walgreen Co. 200 6,400
Williams-Sonoma Inc.* 100 2,506
Winn Dixie Stores Inc. 200 6,600
Woolworth Corp. 100 1,913
Zale Corp. (New)* 100 1,881
-------
289,297
-------
STEEL--0.2%
Armco Inc.* 300 1,688
Bethlehem Steel Corp.* 100 1,363
Birmingham Steel Corp. 100 1,600
Carpenter Technology
Corp. 100 3,763
Chaparral Steel Co. 100 1,513
Cleveland Cliffs Inc. 100 4,175
Intermet Corp.* 100 1,463
J & L Specialty
Steel Inc. 100 1,813
Lukens Inc. 100 2,638
National Steel Corp.
Class B* 100 1,363
Nucor Corp. 100 5,625
Oregon Steel Mills Inc. 100 1,588
USX Corp. (U.S. Steel
Group) 100 3,300
WHX Corp.* 100 1,150
Worthington
Industries Inc. 100 2,044
-------
35,086
-------
TELEPHONE--1.6%
360 Communications Co.* 100 2,350
AT&T Corp. 1,100 67,375
Airtouch
Communications Inc.* 500 15,625
Alltel Corp. 100 3,288
American Mobile
Satellite Corp.* 100 1,925
Ameritech Corp. (New) 600 35,025
Antec Corp.* 100 1,519
Arch Communications
Group, Inc.* 100 2,375
Aspect
Telecommunications
Corp. 100 5,750
Associated Group Inc.
Class A* 100 2,781
Bell Atlantic Corp. 200 13,000
BellSouth Corp. 600 24,000
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Boston Technology Inc.
(New)* 100 $ 1,750
C-TEC Corp. 100 2,988
Cellstar Corp.* 100 938
Comnet Cellular Inc.* 100 3,313
DSC Communications
Corp.* 100 3,138
GTE Corp. 600 26,025
General Datacom
Industries Inc.* 100 1,375
Geotek
Communications Inc.* 200 2,088
InterVoice, Inc.* 100 2,806
Lincoln
Telecommunications 100 1,681
Loral Space &
Communications* 100 1,438
MCI Communications
Corp. 500 14,688
Microcom Inc.* 100 2,450
Mobilemedia Corp.
Class A* 100 1,988
Nextel
Communications Inc.* 107 1,926
Northern Telecom Ltd 200 10,300
Nynex Corp. 200 9,825
Octel Communications
Corp. 100 4,500
Pacific Telesis Group 500 17,125
Pairgain Technologies
Inc.* 100 9,575
Sprint Corp. 300 12,638
Tellabs Inc. 100 5,538
U S WEST, Inc.
(Communications
Group) 400 13,100
U S West Inc. (Media
Group)* 300 5,850
Vanguard Cellular
Systems, Inc.
Class A* 200 4,300
Worldcom Inc.* 200 9,388
-------
345,744
-------
TOBACCO--0.3%
American Brands, Inc. 100 4,163
Loews Corp. 200 15,250
Philip Morris
Companies Inc. 600 54,075
UST Inc. 100 3,200
-------
76,688
-------
TRANSPORTATION-MISCELLANEOUS--0.3%
Air Express
International Corp. 100 2,788
Airbourne Freight Corp. 100 2,638
Amerco Inc.* 100 2,219
American Freightways
Corp.* 100 1,525
American President
Companies, Ltd. 100 2,388
Arnold Industries Inc. 100 1,600
Federal Express Corp.* 100 8,075
</TABLE>
F-88
<PAGE> 64
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Harper Group, Inc. 200 $ 3,850
Heartland Express, Inc. 100 2,950
J.B. Hunt Transport
Services Inc. 100 2,056
Kirby Corp.* 100 1,763
NACCO Industries, Inc.
Class A 200 12,625
Overseas Shipholding
Group 100 2,013
Rollins Truck Leasing
Corp. 100 1,088
Ryder System, Inc. 100 2,913
Shurgard Storage
Centers Inc. Class A 100 2,563
Swift Transportation
Inc. 100 1,900
TNT Freightways Corp. 100 2,256
Wabash National Corp. 100 1,975
Werner Enterprises Inc. 100 2,463
XTRA Corp. 100 4,550
Yellow Corp. 100 1,225
-------
67,423
-------
TRAVEL & RECREATION--0.5%
Anthony Industries,
Inc. 100 2,850
Aztar Corp.* 100 975
Bally Entertainment
Corp. 500 10,438
Bally Total Fitness
Holding Corp.* 25 138
Boyd Gaming Corp.* 200 2,800
Brunswick Corp. 100 2,200
Doubletree Corp.* 100 3,194
Harrahs
Entertainment Inc.* 100 3,450
Hilton Hotels Corp. 100 10,550
ITT Corp. (New)* 100 6,088
Marcus Corp. 100 2,788
Marriot International
Inc. 100 4,875
Players International
Inc. 100 1,138
Polaris Industries Inc. 100 3,488
Primadonna Resorts
Inc.* 100 1,913
Prime Hospitality
Corp.* 100 1,513
Rio Hotel &
Casino Inc.* 100 1,800
Speedway
Motorsports, Inc. 200 5,350
Station Casinos Inc.* 100 1,313
Stratosphere Corp.* 100 1,094
Topps Inc. 100 584
Walt Disney Co. 609 37,758
-------
106,297
-------
UTILITIES--1.3%
American Electric Power
Co., Inc. 100 4,063
Aquila Gas Pipeline
Corp. 100 1,388
Baltimore Gas &
Electric Co. 100 2,638
Carolina Power &
Light Co. 100 3,600
Central & South West
Corp. 200 5,450
Central Hudson Gas &
Electric Corp. 100 2,900
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Central Louisiana
Electric Co. (New) 100 $ 2,563
Central Maine
Power Co. 100 1,425
Cilcorp Inc. 100 4,313
Cinergy Corp. 100 2,900
Coastal Corp. 100 3,963
Commonwealth Energy
System (Shares of
Beneficial Interest) 100 4,588
Consolidated Edison Co. 200 5,875
Consolidated Natural
Gas Co. 100 4,675
DTE Energy Co. 100 3,100
Destec Energy, Inc.* 300 3,525
Dominion Resources Inc. 100 3,850
Duke Power Co. 200 9,400
Eastern Enterprises 300 10,763
Eastern Utilities
Association 100 2,038
Edison International 300 4,800
Enron Corp. 200 8,050
Entergy Corp. 200 5,300
FPL Group, Inc. 200 8,625
General Public
Utilities Corp. 100 3,175
Houston Industries Inc. 200 4,275
IES Industries Inc. 100 2,650
Indiana Energy Inc. 100 2,388
K N Energy Inc. 100 3,200
Laclede Gas Co. 100 2,350
MDU Resources
Group, Inc. 100 2,188
New Jersey Resources
Corp. 100 2,838
Niagara Mohawk Power
Corp. 100 750
NorAm Energy Co. 200 2,200
Northern States
Power Co. 100 4,675
Northwest Natural
Gas Co. 100 3,269
Ohio Edison Co. 100 2,088
Oneok Inc. 200 5,150
Orange & Rockland
Utilities, Inc. 100 3,413
Otter Tail Power Co. 200 7,325
P P & L Resources Inc. 100 2,263
Pacific Enterprises 100 2,575
Pacific Gas &
Electric Co. 300 6,825
Pacificorp 200 4,000
Panenergy Corp. 100 3,350
Peco Energy Co. 200 4,975
Piedmont Natural
Gas Inc. 100 2,163
Primark Corp.* 100 3,550
Public Service Co. of
New Mexico 100 1,750
Public Service Co. of
North Carolina Inc. 100 1,613
</TABLE>
F-89
<PAGE> 65
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Public Service
Enterprise Group 200 $ 5,225
Seagull Energy Corp.* 100 2,438
Sierra Pacific
Resources 100 2,425
Sig Corp. 100 3,338
Sonat Inc. 100 4,363
South Jersey
Industries Inc. 100 2,338
Southern Co. 500 11,000
Southwest Gas Corp. 100 1,663
Southwestern Energy Co. 100 1,388
Tejas Gas Corp. 100 5,000
Texas Utilities Co. 200 8,050
Tucson Electric
Power Co.* 500 1,438
UGI Corp. (New) 100 2,238
Unicom Corp. 300 8,250
Union Electric Co. 100 3,863
United Illuminating Co. 100 3,638
United Water
Resources Inc. 100 1,250
WPS Resources Corp. 100 3,163
Washington Energy Co. 100 1,938
Western Gas
Resources Inc. 100 1,475
Wicor Inc. 100 3,438
Williams Cos. Inc. 100 5,113
---------
277,822
---------
6,430,111
---------
INTERNATIONAL--10.6%
AUSTRALIA--0.2%
Australia & New Zealand
Banking Group 594 2,837
Broken Hill Proprietary
Co., Ltd. 1,134 17,451
Commonwealth Bank Group 523 4,293
National Australia Bank 820 7,356
News Corp., Ltd. 797 4,671
Western Mining Corp. 650 4,738
Westpac Banking Corp. 1,069 5,190
---------
46,536
---------
BELGIUM--0.1%
Electrabel 32 7,177
Electrabel, VVPR Strip 6 16
Petrofina SA 11 3,253
Societe Generale de
Belgique 24 1,868
Tractebel Investor
International 4 1,626
Tractebel Investor
International, VVPR
Strip 4 1,620
---------
15,560
---------
CANADA--0.3%
Alcan Aluminum Ltd. 132 4,198
BCE Inc. 183 7,198
Bank of Montreal 156 3,747
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Bank of Nova Scotia,
Halifax 135 $ 3,059
Barrick Gold Corp. 286 8,770
Canadian Imperial Bank
of Commerce 127 3,946
Canadian Pacific Ltd. 200 4,069
Imperial Oil Ltd. (New) 113 4,594
Northern Telecom Ltd. 149 7,672
Placer Dome Inc. 140 3,897
Royal Bank of Canada,
Montreal Quebec 184 4,358
Seagram Co. Ltd. 176 5,927
Thomson Corp. 345 5,739
Toronto-Dominion Bank 176 3,051
-------
70,225
-------
DENMARK--0.0%
Tele Danmark A/S
Series B 52 2,617
-------
2,617
-------
FRANCE--0.7%
AXA Groupe SA 106 6,316
Alcatel Alsthom CGE SA 88 8,276
BQE National de Paris 113 4,719
Carrefour 15 11,721
Cie Financiere de
Paribas (Bearer) 70 4,503
Cie Generale de Eaux 69 7,504
Compagnie de
Saint-Gobain SA 49 5,870
Danone Groupe 42 6,348
Elf Aquitaine 159 11,825
L'Air Liquide 39 7,087
L'Oreal SA 36 11,126
LVMH Moet Hennessy
Louis Vuitton 51 13,047
Lafarge Coppee SA 54 3,459
Lyonnaise des Eaux-
Dumez 30 3,013
Michelin (CGDE)
Class B (Reg.) 43 2,131
PSA Peugeot Citroen 29 4,052
Renault (Regie
Nationale) 140 4,245
Rhone-Poulenc SA A
Shares 188 4,511
Sanofi 60 4,842
Schneider SA 75 3,495
Societe Generale 51 5,922
Suez Group 93 3,853
TOTAL Class B 137 9,298
Union des Assurances de
Paris 176 3,811
-------
150,974
-------
GERMANY--0.8%
BASF AG 36 9,830
Bankgesell Berlin 13 2,671
Bayer AG 41 13,203
Bayerische Hypotheken &
Wechsel Bank AG 151 3,756
Bayerische Motoren
Werk AG 12 6,479
</TABLE>
F-90
<PAGE> 66
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Bayerische Vereinsbank AG 154 $ 4,527
Commerzbank AG 20 4,331
Daimler-Benz AG 30 16,432
Deutsche Bank AG 278 13,323
Dresdner Bank AG 260 6,542
Hoechst AG 34 11,451
Linde AG 5 3,057
Lufthansa AG 21 3,331
Mannesmann AG 21 7,174
Muenchener
Rueckversicherung (Reg.) 5 9,080
RWE AG* 120 4,672
RWE AG (Non Voting)* 70 2,037
Sap AG 30 3,890
Siemens AG 33 18,070
Thyssen AG 18 3,263
Veba AG 285 14,167
Vereinigte
Elektrizitatswerke
Westfalen Series B 12 3,449
Viag AG 12 4,707
Viag AG (New)* 3 1,177
Volkswagen AG 14 4,833
-------
175,452
-------
HONG KONG--0.6%
CITIC Pacific 2,000 7,860
Cheung Kong Holdings 2,000 14,285
Hang Seng Bank Ltd. 2,000 20,296
Henderson China 4 11
Henderson Land
Development Co. 1,000 7,175
Hongkong Electric
Holdings Ltd. 2,000 6,360
Hongkong
Telecommunications
Ltd. 8,400 16,017
Hutchison Whampoa Ltd. 2,000 12,410
New World
Development Co. 2,046 9,178
Sun Hung Kai Properties 1,000 9,534
Swire Pacific Ltd.
Class A 1,000 8,532
Wharf Holdings 2,000 7,407
-------
119,065
-------
ITALY--0.2%
Alleanza Assicurazioni 191 1,804
Assicurazioni Generali 469 11,695
Fiat SpA 1,924 6,559
Fiat SpA, di Risp
(Non-Convertible) 830 1,512
INA 1,382 2,123
STET 2,246 7,592
STET di Risp
(Non-Convertible) 627 1,644
Telecom Italia 3,888 7,928
Telecom Italia di Risp
(Non-Convertible) 1,145 1,899
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Telecom Italia Mob 3,367 $ 7,437
Telecom Italia Mob
di Risp 1,431 2,006
------
52,199
------
JAPAN--3.9%
Asahi Bank 1,000 12,906
Bank of Tokyo
Mitsubishi
(Bank of Tokyo shares) 800 18,431
Bank of Tokyo
Mitsubishi
(Mitsubishi Bank shares) 1,050 24,291
DDI Corp. 1 8,594
Dai-Ichi Kangyo
Bank, Ltd. 1,000 20,362
East Japan Railway Co. 1 5,344
Fuji Bank, Ltd. 1,000 21,892
Fujitsu Ltd. 1,000 10,325
Hitachi Ltd. 1,000 10,803
Industrial Bank of
Japan, Ltd. 1,000 26,767
Ishikawajima-Harima
Heavy Industries 1,000 4,971
Ito-Yokado Co., Ltd. 1,000 58,984
Joyo Bank 1,000 8,183
Kansai Electric
Power Co. 1,000 24,282
Kawasaki Heavy
Industries 1,000 5,172
Kawasaki Steel Co. 1,000 3,661
Kobe Steel 1,000 3,107
Kokusai Denki 1,000 98,466
Long-Term Credit
Bank of Japan 1,000 8,671
Matsushita Electric
Industrial Co., Ltd. 1,000 17,686
Mitsubishi Chemical
Corp. 1,000 5,487
Mitsubishi Electric
Corp. 1,000 7,877
Mitsubishi Heavy
Industries 1,000 8,929
NKK Corp. 1,000 3,136
Nippon Paper
Industries Co. 1,000 7,323
Nippon Steel Corp. 2,000 7,227
Nippon Telegraph &
Telephone Corp. 4 31,012
Nissan Motor Co., Ltd. 1,000 8,451
Nomura Securities
Co., Ltd. 1,000 21,796
Obayashi Corp. 1,000 9,302
Oki Electric Industry
Co., Ltd. 1,000 7,935
Omron Corp. 1,000 22,561
Osaka Gas Co. 1,000 4,006
Sakura Bank 1,000 11,759
Sanwa Bank 1,000 20,267
Seven-Eleven Japan Co. 1,100 77,922
Sumitomo Bank 1,000 21,414
Sumitomo Metal
Industries 1,000 3,212
Taisei Corp. 1,000 7,743
Tokai Bank 1,000 12,810
</TABLE>
F-91
<PAGE> 67
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Tokyo Electric Power
Co., Inc. 1,000 $ 27,245
Tokyo Electron 1,000 37,188
Tokyo Gas & Electric
Industrial 1,000 3,929
Toshiba Corp. 1,000 7,782
Toyo Seikan 1,000 35,467
Toyo Trust &
Banking Co. 1,000 10,898
Toyota Motor Corp. 1,000 22,848
Yasuda Fire & Marine
Insurance Co. 1,000 7,887
-------
846,311
-------
NETHERLANDS--0.6%
ABN Amro
Holdings NV 181 9,370
Aegon NV 152 7,239
Akzo Nobel NV 42 4,878
Elsevier NV 386 5,812
Heineken NV 29 6,069
ING NV 168 12,971
Koninklijke PTT
Nederland 271 10,169
Philips Electronics NV 201 7,097
PolyGram NV 105 6,250
Royal Dutch Petroleum
Co. (Bearer) 314 44,731
Unilever NV, CVA 94 12,826
Wolters Kluwer NV, CVA 29 3,170
-------
130,582
-------
SINGAPORE--0.1%
Hong Kong Land Holdings 1,000 2,140
Singapore Airlines Ltd.
(alien market) 1,000 10,101
Singapore
Telecommunications 6,000 14,767
-------
27,008
-------
SPAIN--0.2%
Argentaria Corp. 50 2,024
Banco Bilbao-Vizcaya SA
(Reg.) 133 5,055
Banco de Santander SA
(Reg.) 68 3,159
Empresa Nacional de
Electricidad 152 9,548
Iberdrola SA 542 5,305
Repsol, SA 176 6,455
Telefonica
Internacional de
Espana, SA 550 9,794
-------
41,340
-------
SWEDEN--0.2%
ASEA AB 39 3,991
ASEA AB Series B 13 1,319
Astra AB Series A 294 13,071
Astra AB Series B 40 1,767
L.M. Ericsson Telephone
Series B 560 11,354
Sandvik AB Series A 72 1,587
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Sandvik AB Series B 82 $ 1,808
Volvo AB Series A 65 1,490
Volvo AB Series B 167 3,829
-------
40,216
-------
SWITZERLAND--0.7%
CS Holding (Reg.) 108 9,808
Ciba-Geigy Ltd.
(Bearer) 1 1,154
Ciba-Geigy Ltd. (Reg.) 14 16,248
Nestle Ltd. (Reg.) 25 27,807
Roche Group
Holding AG 4 31,459
Roche Group Holding AG
(Bearer) 1 13,531
Sandoz Ltd. (Bearer) 2 2,178
Sandoz Ltd. (Reg.) 21 22,935
Schweizerische
Bankgesellschaft
(Bearer) 12 11,927
Schweizerische
Bankgesellschaft
(Reg.) 13 2,827
schweizerische
Bankverein (Bearer) 14 5,243
Schweizerische
Bankverein (Reg.) 16 2,990
Winterthur (Reg.) 4 2,510
Zurich Versicherung
(Reg.) 27 7,546
-------
158,163
-------
UNITED KINGDOM--2.0%
Abbey National 769 6,575
Allied Domecq PLC 610 4,715
Argyll Group 669 3,343
Associated British
Foods 443 2,654
BAA 605 4,973
BAT Industries 1,806 13,648
BOC Group 193 2,682
BTR 2,162 10,415
Barclays 944 10,473
Bass 517 6,098
Boots Co. 556 5,302
British Airways 567 4,430
British Gas 2,541 9,027
British Petroleum Co. 3,245 29,285
British Sky Broadcast 1,030 7,411
British Steel 806 2,408
British Telecom 3,652 20,038
Cable & Wireless 1,294 10,158
Cadbury Schweppes 577 4,473
Commercial Union
Assurance Co. 389 3,376
General Electric Co. 1,608 8,678
Glaxo Wellcome 2,029 24,603
Granada Group 343 4,252
Grand Metropolitan,
Inc. 1,251 8,230
Great University Stores 589 6,424
Guinness 1,184 8,520
HSBC Holdings 500 7,403
HSBC Holdings (Hong
Kong) 1,036 15,338
Hanson Industries 2,132 6,323
Imperial Chemical
Industries 424 5,744
</TABLE>
F-92
<PAGE> 68
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
J. Sainsbury PLC 1,060 $ 5,840
Kingfisher 391 3,499
Lloyds TSB Group 2,345 11,243
Marks & Spencer PLC 1,640 10,949
National Power
Development 695 5,864
National Westminster
Bancorp 1,007 9,285
Pearson, Inc. 309 3,265
Powergen 425 3,570
Prudential Corp. 1,114 7,672
RTZ Corporation PLC 571 8,991
Rank Organisation PLC 486 3,899
Reed International 329 5,661
Reuters Holdings PLC 977 11,060
Royal Bank of Scotland 473 3,692
RTZ Corp. (Bearer) 57 884
Scot & Newcastle 358 3,705
Shell Transport &
Trading Co. (Reg.) 1,941 25,610
SmithKline Beecham PLC
Series A 810 8,590
SmithKline Beecham PLC
(New) 782 8,299
Standard Chartered PLC 566 5,300
Tesco 1,209 5,105
Thorn Emi 251 6,962
Unilever 475 8,695
Vodafone Group 1,228 4,908
Zeneca Group 554 11,320
---------
440,867
---------
2,317,115
---------
TOTAL COMMON STOCK
(Cost $7,997,220) 8,747,226
---------
PREFERRED STOCK--0.1%
AUSTRALIA--0.0%
News Corp. (Limited
Voting Shares) 388 1,996
---------
GERMANY--0.1%
Henkel KGaA 9 3,451
Sap AG (Non-Voting) 24 3,187
Volkswagen AG
(Non-Voting) 6 1,525
---------
8,163
---------
ITALY--0.0%
Fiat SpA 701 1,340
---------
GERMANY--0.0%
Lufthansa AG
(Non-Voting) 12 1,879
---------
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
UNITED STATES--0.0%
Teledyne, Inc. Series E 1 $ 15
----------
TOTAL PREFERRED STOCK
(Cost $13,259) 13,393
----------
</TABLE>
<TABLE>
<CAPTION>
Par
----------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS--54.1%(a)
U.S. Treasury Bonds
10.00%, 05/15/10 $ 300,000 363,567
7.25%, 05/15/16 470,000 478,968
8.13%, 08/15/19 325,000 362,622
U.S. Treasury Bonds
7.13%, 02/15/23 2,850,000 2,864,849
6.25%, 08/15/23 775,000 699,368
U.S. Treasury Notes
5.88%, 05/31/96 200,000 200,142
6.25%, 01/31/97 800,000 804,440
5.63%, 10/31/97 1,100,000 1,095,402
5.13%, 02/28/98 150,000 147,674
5.88%, 08/15/98 800,000 795,952
5.00%, 02/15/99 600,000 582,204
7.00%, 04/15/99 300,000 306,216
7.50%, 10/31/99 500,000 518,265
7.13%, 02/29/00 200,000 205,100
5.75%, 10/31/00 1,050,000 1,023,666
6.38%, 08/15/02 525,000 520,790
6.50%, 05/15/05 150,000 147,984
6.50%, 08/15/05 650,000 641,030
----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $12,122,972) 11,758,239
----------
AGENCY OBLIGATIONS-
COUPON NOTES--1.8%(a)
Federal National
Mortgage Assoc.
7.250%, 06/01/05 400,000 396,824
----------
TOTAL AGENCY OBLIGATIONS-
COUPON NOTES
(Cost $403,958) 396,824
----------
CASH EQUIVALENTS--3.4%(b)
AGENCY OBLIGATIONS-
DISCOUNT NOTES--2.3%
Federal Home Loan Bank
5.21%, 05/28/96 500,000 498,054
----------
</TABLE>
F-93
<PAGE> 69
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Maturity Value
-------- -----------
<S> <C> <C>
REPURCHASE AGREEMENT--1.1%
State Street Bank 4.75%
Dated 04/30/96
Due 05/01/96
Collateralized By:
U.S. Treasury Note
$245,000 Par; 8.00%
Due 10/15/96 $242,032 $ 242,000
----------
TOTAL CASH EQUIVALENTS
(Cost $740,054) 740,054
----------
TOTAL INVESTMENTS--99.6%
(Cost $21,277,463) 21,655,736
----------
OTHER ASSETS AND
LIABILITIES--0.4%
Other Assets 296,971
Liabilities (218,792)
----------
78,179
----------
NET ASSETS--100.0%
Applicable to 2,123,836
outstanding $0.00001
par value shares
(unlimited shares authorized) $21,733,915
===========
NET ASSET VALUE PER SHARE $10.23
======
</TABLE>
NOTES TO STATEMENTS OF NET ASSETS
(a) Interest rates represent stated coupon rate of security.
(b) Interest rates represent effective yield at the time of purchase.
- ---------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
F-94
<PAGE> 70
SchwabFunds(R)
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
------Schwab Asset Director(R)----------
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Investment income:
Dividends (net of foreign tax
withheld of $18,774, $7,667 and
$2,379, respectively) $ 519,839 $ 274,650 $ 64,508
Interest 450,271 607,495 301,956
-------- -------- --------
Total investment income 970,110 882,145 366,464
-------- -------- --------
Expenses:
Investment advisory and
administration fee 264,862 189,136 65,101
Transfer agency and
shareholder service fees 89,480 63,897 21,993
Custodian fees 141,565 122,061 85,816
Registration fees 41,952 34,105 17,293
Professional fees 18,854 17,495 15,300
Shareholder reports 24,964 17,779 6,341
Trustees' fees 4,671 3,526 1,540
Amortization of deferred
organization costs 1,630 1,630 1,630
Insurance and other expenses 2,583 2,314 2,044
-------- -------- --------
590,561 451,943 217,058
Less expenses reduced and absorbed (272,011) (224,468) (138,760)
-------- -------- --------
Total expenses incurred by Fund 318,550 227,475 78,298
-------- -------- --------
Net investment income 651,560 654,670 288,166
-------- -------- --------
Net realized gain (loss) on
investments and foreign currency
transactions:
Proceeds from sales of investments 37,502,807 22,479,790 8,331,437
Cost of investments sold (37,849,936) (22,724,569) (8,402,243)
-------- -------- ---------
Net realized loss from changes
in market value (347,129) (244,779) (70,965)
Net realized loss from changes
in foreign exchange rates (72) (69) (8)
-------- -------- --------
Net realized loss on
investments sold (347,201) (244,848) (70,973)
Net realized gain (loss) on
foreign currency transactions 3,590 1,675 (103)
-------- -------- --------
Net realized loss on
investments sold and
foreign currency
transactions (343,611) (243,173) (71,076)
</TABLE>
Statement continued on next page.
F-95
<PAGE> 71
SchwabFunds(R)
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (continued)
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
------Schwab Asset Director(R)----------
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Net unrealized gain (loss) on
investments and foreign currency
translation:
Net unrealized gain from changes
in market value $ 6,422,873 $ 3,049,139 $ 453,450
Net unrealized loss from changes
in foreign exchange rates (549,278) (301,388) (75,177)
-------- -------- --------
Net unrealized gain on
investments from changes in
market value and foreign
exchange rates 5,873,595 2,747,751 378,273
Net unrealized loss on translating
assets and liabilities into the
reporting currency (271) (12) (242)
-------- -------- --------
Net unrealized gain on
investments and foreign
currency translation 5,873,324 2,747,739 378,031
-------- -------- --------
Net gain on investments 5,529,713 2,504,566 306,955
-------- -------- --------
Increase in net assets resulting
from operations $ 6,181,273 $ 3,159,236 $ 595,121
======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-96
<PAGE> 72
SchwabFunds(R)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
------Schwab Asset Director(R)----------
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Operations:
Net investment income $ 651,560 $ 654,670 $ 288,166
Net realized loss on investments
sold and foreign currency
transactions (343,611) (243,173) (71,076)
Net unrealized gain on investments
and foreign currency
translation 5,873,324 2,747,739 378,031
----------- ----------- -----------
Increase in net assets resulting
from operations 6,181,273 3,159,236 595,121
----------- ----------- -----------
Dividends to shareholders from net
investment income (158,402) (150,875) (214,428)
----------- ----------- -----------
Capital share transactions:
Proceeds from shares sold 97,345,157 71,109,119 24,570,535
Net asset value of shares issued
in reinvestment of dividends 152,276 138,204 193,730
Less payments for shares redeemed (8,664,601) (5,246,654) (3,412,043)
----------- ----------- -----------
Increase in net assets from
capital
share transactions 88,832,832 66,000,669 21,352,222
----------- ----------- -----------
Total increase in net assets 94,855,703 69,009,030 21,732,915
Net assets:
Beginning of period 1,000 1,000 1,000
----------- ----------- -----------
End of period (including
undistributed net investment
income of $493,158, $503,795
and $73,738, respectively) $94,856,703 $69,010,030 $21,733,915
=========== =========== ===========
Number of Fund shares:
Sold 9,610,666 7,030,800 2,440,024
Reinvested 14,842 13,523 19,030
Redeemed (828,084) (506,227) (335,318)
----------- ----------- -----------
Net increase in shares outstanding 8,797,424 6,538,096 2,123,736
Shares outstanding:
Beginning of period 100 100 100
----------- ----------- -----------
End of period 8,797,524 6,538,196 2,123,836
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
F-97
<PAGE> 73
SchwabFunds(R)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
1. DESCRIPTION OF THE FUNDS
The Schwab Asset Director(R) - High Growth Fund, Schwab Asset
Director - Balanced Growth Fund and Schwab Asset Director - Conservative Growth
Fund (the "Funds") are series of Schwab Capital Trust (the "Trust"), a no-load,
open-end investment management 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 three Funds described above, the Trust also offers the Schwab
International Index Fund(TM), Schwab Small-Cap Index Fund(R) and Schwab S&P 500
Fund. The assets of each series are segregated and accounted for separately.
The investment objective of the Schwab Asset Director - High Growth Fund (the
"High Growth Fund") is to provide high capital growth with less volatility than
an all-stock portfolio. The investment objective of the Schwab Asset
Director - Balanced Growth Fund (the "Balanced Growth Fund") is to provide a
maximum total return including both capital growth and income. The investment
objective of the Schwab Asset Director - Conservative Growth Fund (the
"Conservative Growth Fund") is to provide income and more growth potential than
an all-bond portfolio. Each Fund invests in a diversified mix of stocks, bonds
and cash equivalents.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
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 by
the Funds' investment manager pursuant to guidelines adopted in good faith by
the Board of Trustees. Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the representative quoted bid and asked prices, or if such prices
are not available, at prices for securities of comparable maturity, quality and
type. 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 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 and includes
amortization of premium and accretion of discount on investments. Realized gains
and losses from security transactions are determined on an identified cost
basis. For callable bonds purchased at a premium, the excess of the purchase
price over the call value is amortized against interest income through the call
date. If the call provision is not exercised, any remaining premium is amortized
through the final maturity date.
F-98
<PAGE> 74
SchwabFunds(R)
- --------------------------------------------------------------------------------
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or government agency securities. All collateral is held by the Funds'
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 Funds are
maintained in U.S. dollars. Investment securities and all other assets and
liabilities of the Funds denominated in a foreign currency are translated into
U.S. dollars at the exchange rates on April 30. Purchases and sales of foreign
securities, foreign income receipts and foreign expense payments are translated
into U.S. dollars at the exchange rate in effect on the dates of the respective
transactions.
The Funds separate within their statement of operations the portion of realized
and unrealized gains and losses resulting from changes in foreign exchange rates
from that arising from changes in securities' market values.
Forward currency contracts -- A forward currency contract ("Forward") is an
agreement between two parties to buy and sell a currency at a set price on a
future date. The value of the Forward fluctuates with changes in currency
exchange rates. The Forward is marked-to-market daily and the change in value is
recorded by the Funds as an unrealized gain or loss. When the Forward is closed,
the Funds record 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 Funds engage in Forwards in connection with the purchase and
sale of portfolio securities to minimize the uncertainty of changes in future
exchange rates. The Funds could be exposed to risk if counterparties to the
contracts are unable to meet the terms of the contracts or if the value of the
foreign currency changes unfavorably.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds are amortized on a straight-line basis over a
five-year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that 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 each 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. Each Fund is considered a separate entity for tax purposes.
At April 30, 1996, (for financial reporting and federal income tax purposes),
net unrealized gain for the High Growth Fund, Balanced Growth Fund and
Conservative Growth Fund aggregated $5,873,595, $2,747,751 and $378,273,
respectively, of which $7,575,579, $4,123,657 and $931,787, respectively,
related to appreciated securities and $1,701,984, $1,375,906 and $553,514,
respectively, related to depreciated securities.
F-99
<PAGE> 75
SchwabFunds(R)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
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,
each Fund pays an annual fee, payable monthly, of .74% of each Fund's average
daily net assets not in excess of $1 billion, .69% of such assets over $1
billion and .64% of such assets over $2 billion. Under this agreement, the High
Growth Fund, Balanced Growth Fund and Conservative Growth Fund incurred
investment advisory and administration fees of $264,862, $189,136 and $65,101,
respectively, for the period ended April 30, 1996, before the Investment Manager
reduced its fee (see Note 4).
Sub-advisory agreement -- The Investment Manager has a sub-advisory agreement
with Symphony Asset Management, Inc. ("Symphony") to serve as sub-adviser to the
Funds. Symphony does not receive compensation directly from the Funds. However,
the Investment Manager pays Symphony an annual fee, payable monthly, of .08% of
the Funds' aggregate average net assets on the first $100 million, .06% of the
next $150 million, .04% of the next $600 million and .02% of such net assets
over $850 million.
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of each Fund's average daily net assets for
transfer agency services and .20% of such assets for shareholder services. For
the period ended April 30, 1996, the High Growth Fund, Balanced Growth Fund and
Conservative Growth Fund incurred transfer agency and shareholder service fees
of $89,480, $63,897 and $21,993, respectively, before Schwab reduced its fees
(see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
period ended April 30, 1996, 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 Funds incurred fees aggregating $9,737
related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit each Fund's ratio of operating expenses to
average net assets. For the period ended April 30, 1996, the total of such fees
and expenses reduced and absorbed by the Investment Manager was $183,280,
$160,571 and $116,767 for the High Growth Fund, Balanced Growth Fund and
Conservative Growth Fund, respectively, and the total of such fees reduced by
Schwab was $88,731, $63,897 and $21,993 for the High Growth Fund, Balanced
Growth Fund and Conservative Growth Fund, respectively.
F-100
<PAGE> 76
SchwabFunds(R)
- --------------------------------------------------------------------------------
5. BORROWING AGREEMENT
The Trust has an agreement with State Street Bank and Trust Company, the Funds'
custodian, whereby each Fund may borrow up to $10,000,000, on a temporary basis,
to fund redemptions. Amounts borrowed under this arrangement bear interest at
periodically negotiated rates and may be collateralized by the assets of the
Fund. During the period ended April 30, 1996, no borrowings were made under this
arrangement.
6. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, for the period ended April 30, 1996, were as follows:
<TABLE>
<CAPTION>
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
------------ ----------- -----------
<S> <C> <C> <C>
Purchases $126,123,992 $88,257,569 $29,443,551
Proceeds of sales and
maturities $37,849,936 $22,724,569 $8,402,243
</TABLE>
7. COMPOSITION OF NET ASSETS
At April 30, 1996, net assets for each Fund consisted of:
<TABLE>
<CAPTION>
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Capital paid in $88,833,832 $66,001,669 $21,353,222
Accumulated undistributed
net investment income 493,158 503,795 73,738
Accumulated net realized
loss on investments sold
and foreign currency
transactions (343,611) (243,173) (71,076)
Net unrealized gain on
investments 5,873,595 2,747,751 378,273
Net unrealized loss on
translating assets and
liabilities into the
reporting currency (271) (12) (242)
----------- ----------- -----------
Total $94,856,703 $69,010,030 $21,733,915
=========== =========== ===========
</TABLE>
At April 30, 1996, the High Growth Fund's Statement of Net Assets included:
$398,586 payable for investments purchased, $78,838 payable for Fund shares
redeemed, $13,851 payable for investment advisory and administration fee and
$161,244 receivable for Fund shares sold. The Balanced Growth Fund's Statement
of Net Assets included: $316,281 payable for investment purchased, $140,768
payable for Fund shares redeemed, $9,088 payable for investment advisory and
administration fee and $116,223 receivable for Fund shares sold. The
Conservative Growth Fund's Statement of Net Assets included: $84,926 payable for
Fund shares redeemed, $2,867 payable for investment advisory and administration
fee and $15,048 receivable for Fund shares sold.
F-101
<PAGE> 77
SchwabFunds(R)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
8. COMMITMENTS
At April 30, 1996, the Funds had various open Forward contracts as follows:
The High Growth Fund and Balanced Growth Fund had open Forward contracts which
obligated the Funds to deliver U.S. dollars in exchange for foreign currencies
at specified future dates as follows:
High Growth Fund
<TABLE>
<CAPTION>
Contract In Exchange Settlement Unrealized
Currency Amount For Date Value Gain (Loss)
- ----------------------- ------------ ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Swedish krona 64,555 $ 9,543 05/02/96 $ 9,519 ($ 24)
Netherlands guilder 78,400 45,875 05/03/96 45,754 (121)
Swiss franc 21,000 16,935 05/06/96 16,914 (21)
Italian lira 174,152,000 111,422 05/07/96 111,493 71
Pound sterling 35,000 52,745 05/07/96 52,687 (58)
Spanish peseta 3,264,670 25,754 05/08/96 25,663 (91)
Belgian franc 315,000 10,032 05/14/96 10,006 (26)
French franc 125,000 24,272 05/31/96 24,190 (82)
---------- -------- -------
$ 296,578 $296,226 ($352)
========== ======== =======
</TABLE>
Balanced Growth Fund
<TABLE>
<CAPTION>
Contract In Exchange Settlement Unrealized
Currency Amount For Date Value Gain (Loss)
- ------------------------ ----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Canadian dollar 17,500 $ 12,853 05/02/96 $ 12,853 $ --
Danish krona 72,375 12,288 05/02/96 12,263 (25)
Deutsche mark 13,400 8,772 05/02/96 8,753 (19)
Netherlands guilder 66,400 38,853 05/03/96 38,751 (102)
Italian lira 9,262,900 5,926 05/07/96 5,930 4
Pound sterling 82,000 123,574 05/07/96 123,438 (136)
Spanish peseta 3,758,000 29,649 05/08/96 29,544 (105)
Belgian franc 421,000 13,408 05/14/96 13,374 (34)
French franc 244,000 47,379 05/31/96 47,218 (161)
---------- -------- -------
$ 292,702 $292,124 ($578)
========== ======== =======
</TABLE>
The Conservative Growth Fund had open Forward contracts which obligated the Fund
to deliver foreign currencies in exchange for U.S. dollars at specified future
dates as follows:
<TABLE>
<CAPTION>
Contract In Exchange Settlement Unrealized
Currency Amount For Date Value Gain (Loss)
- ------------------------ ----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Canadian dollar 4,200 $ 3,084 05/02/96 $ 3,085 ($ 1)
Deutsche mark 4,500 2,945 05/02/96 2,939 6
Australian dollar 9,700 7,639 05/06/96 7,620 19
Swiss franc 1,800 1,453 05/06/96 1,450 3
Pound sterling 3,100 4,672 05/07/96 4,667 5
---------- -------- -------
$ 19,793 $ 19,761 $ 32
========== ======== =======
</TABLE>
F-102
<PAGE> 78
SchwabFunds(R)
- --------------------------------------------------------------------------------
9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period from November 20, 1995 (commencement of operations) to April 30, 1996:
<TABLE>
<CAPTION>
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Net asset value at beginning of period....... $ 10.00 $ 10.00 $ 10.00
Income from investment operations
- ---------------------------------
Net investment income...................... .08 .11 .15
Net realized and unrealized gain on
investments and foreign currency
transactions............................. .72 .47 .19
----------- ----------- -----------
Total from investment operations........... .80 .58 .34
Less distributions
- ------------------
Dividends from net investment income....... (.02) (.03) (.11)
Distributions from realized gain on
investments.............................. -- -- --
----------- ----------- -----------
Total distributions........................ (.02) (.03) (.11)
----------- ----------- -----------
Net asset value at end of period............. $ 10.78 $ 10.55 $ 10.23
=========== =========== ===========
Total return (%)............................. 8.03 5.81 3.37
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period.................. $94,856,703 $69,010,030 $21,733,915
Ratio of expenses to average
net assets (%)........................... .89* .89* .89*
Ratio of net investment income to
average net assets (%)................... 1.82* 2.56* 3.28*
Portfolio turnover rate (%)................ 52 42 46
Average commission rate.................... $ .02 $ .02 $ .02
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each 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 and the ratio of net
investment income to average net assets for the High Growth Fund for the period
ended April 30, 1996, would have been 1.65%* and 1.06%*, respectively. With
respect to the Balanced Growth Fund, the ratio of expenses to average net assets
and the ratio of net investment income to average net assets for the period
ended April 30, 1996 would have been 1.77%* and 1.68%*, respectively. With
respect to the Conservative Growth Fund the ratio of expenses to average net
assets and the ratio of net investment income to average net assets for the
period ended April 30, 1996 would have been 2.47%* and 1.70%*, respectively.
* Annualized
F-103
<PAGE> 79
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB CAPITAL TRUST
101 Montgomery Street, San Francisco, CA 94104
SEPTEMBER 2, 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 May 21, 1996 (as amended from time to time) for
Schwab Asset Director(R)-High Growth Fund (the "High Growth Fund"), Schwab Asset
Director(R)-Balanced Growth Fund (the "Balanced Growth Fund") and Schwab Asset
Director(R)-Conservative Growth Fund (the "Conservative Growth Fund" and
jointly, the "Asset Director Funds"); 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"); the Prospectus dated May 21,
1996 (as amended from time to time) for the Schwab Analytics Fund(TM) (the
"Analytics Fund"); and the Prospectus dated September 2, 1996 for Schwab
OneSource(R) Portfolios-International, eight 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, California 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES................................................... 2
INVESTMENT SECURITIES................................................... 3
INVESTMENT RESTRICTIONS................................................. 29
MANAGEMENT OF THE TRUST................................................. 32
PORTFOLIO TRANSACTIONS AND TURNOVER..................................... 41
TAXES................................................................... 43
SHARE PRICE CALCULATION................................................. 47
HOW THE FUNDS REFLECT PERFORMANCE....................................... 48
THE BENEFITS OF INTERNATIONAL INVESTING................................. 49
INDEXING AND THE SCHWAB INDEX FUNDS..................................... 50
GENERAL INFORMATION..................................................... 54
PURCHASE AND REDEMPTION OF SHARES....................................... 56
OTHER INFORMATION....................................................... 57
FINANCIAL STATEMENTS.................................................... F-1
</TABLE>
<PAGE> 80
INVESTMENT OBJECTIVES
INTERNATIONAL INDEX FUND
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.
SMALL-CAP INDEX FUND
The investment objective of the Small-Cap Index Fund is to attempt to
track the price and dividend performance (total return) of the Schwab Small-Cap
Index(TM) (the "Small-Cap Index"), an index created to represent the performance
of common stocks of the second 1,000 largest United States companies, ranked by
market capitalization (share price times the number of shares outstanding).
HIGH GROWTH FUND
The investment objective of the 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.
BALANCED GROWTH FUND
The investment objective of the 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.
CONSERVATIVE GROWTH FUND
The investment objective of the 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.
S&P 500 FUND-INVESTOR SHARES
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 U. S. companies, as represented
by Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
ANALYTICS FUND
The investment objective of the Analytics Fund is to achieve long-term
capital growth.
SCHWAB ONESOURCE(R) PORTFOLIOS-INTERNATIONAL
Schwab OneSource Portfolios-International is a mutual fund that seeks
long-term capital appreciation. To achieve this goal, the Investment
2
<PAGE> 81
Manager, Charles Schwab Investment Management, Inc. ("CSIM"), will attempt to
identify and select a diversified portfolio of international equity funds which
presents the greatest capital growth potential ("underlying fund(s)") based on
an analysis of many factors, including the underlying funds' investment
objective, the history of portfolio manager(s), and total return, volatility and
expenses.
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, as
amended (the "1940 Act").
INVESTMENT SECURITIES
FOREIGN INVESTMENTS
The International Index Fund and Asset Director Funds expect to invest
in stocks of foreign issuers. The International Index Fund will invest primarily
in such stocks. The Schwab OneSource(R) Portfolios-International expects to
invest primarily in other investment companies which invest in stocks of foreign
issuers, and may invest directly in domestic and foreign securities. We expect
that many of the underlying funds may invest up to 100% of their assets in
foreign securities. Investing in foreign issuers involves certain special
considerations, including those set forth below, which typically are not
associated with investing in U.S. issuers. Since investments in the securities
of foreign issuers usually are made and held in foreign currencies, and since
the International Index Fund, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying 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 more volatile than
securities of U.S. companies. Fixed commissions on foreign securities exchanges
generally are higher than negotiated commissions on U.S. exchanges, although the
International Index Fund, Asset Director Funds and Schwab OneSource
Portfolios-International endeavor to achieve the most favorable net results on
their portfolio transactions. There generally is
3
<PAGE> 82
less government supervision and regulation of foreign securities exchanges,
brokers, dealers and listed companies than in the United States, 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, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying 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, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying funds to miss attractive investment
opportunities. Losses to the International Index Fund, Asset Director Funds,
Schwab OneSource(R) Portfolios-International and underlying funds arising out of
the inability to fulfill a contract to sell such securities could result in
potential liability to the International Index Fund, Asset Director Funds,
Schwab OneSource Portfolios-International and underlying funds.
In addition, with respect to those countries in which the International
Index Fund, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds may invest or other countries which may have a significant
impact on the companies in which the International Index Fund, Asset Director
Funds, Schwab OneSource Portfolios-International and underlying 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, Asset Director Funds',
Schwab OneSource Portfolios-International's and underlying 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. Schwab OneSource
Portfolios-International may invest directly, or indirectly through underlying
funds which invest primarily 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
4
<PAGE> 83
currently foresee what risk, if any, may exist to the International Index
Fund's, Asset Director Funds', Schwab OneSource(R) Portfolios-International's
and underlying 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, European Depositary Receipts, Global
Depositary Receipts, Global Depositary Shares ("ADRs," "EDRs," "GDRs," and
"GDSs," respectively) or other similar global instruments, which are receipts
representing ownership of shares of a foreign-based issuer held in trust by a
bank or similar financial institution. The underlying funds may invest in ADRs,
EDRs, GDRs, GDSs, or other similar global instruments. These are designed for
U.S. and European securities markets as alternatives to purchasing underlying
securities in their corresponding national markets and currencies. ADRs, EDRs,
GDRs, and GDSs can be sponsored or unsponsored. Sponsored ADRs, EDRs, GDRs, and
GDSs are certificates in which a bank or financial institution participates with
a custodian. Issuers of unsponsored ADRs, EDRs, GDRs, and GDSs 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 ADRs, EDRs, GDRs, or GDSs.
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 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 the Funds write 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 ("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
5
<PAGE> 84
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 also may 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
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) an exchange may impose restrictions on opening transactions or
closing
6
<PAGE> 85
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation (the "OCC")
may not at all times be adequate to handle current trading volume; or (vi) one
or more exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to
be exercisable in accordance with their terms.
The Funds may purchase and sell both options that are traded on U.S.
and foreign exchanges and options traded over-the-counter with broker-dealers
who make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission (the "SEC") changes its position, the Funds will treat purchased
over-the-counter options and all assets used to cover written over-the-counter
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. Government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to a formula the staff of the SEC
approves. 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.
The underlying funds also may write (sell) covered call and put options
and purchase put and call options. The nature of the conditions and risks
associated with such transactions by the underlying funds are similar to those
described for the Funds.
FOREIGN CURRENCY TRANSACTIONS
Forward Foreign Currency Exchange Contracts. The International Index
Fund, Asset Director Funds and Schwab OneSource(R) Portfolios-International may
enter into forward foreign currency exchange contracts in several circumstances.
The International Index Fund, Asset Director Funds and Schwab OneSource
Portfolios-International may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future exchange rates. The
International Index Fund, Asset Director Funds and Schwab OneSource
Portfolios-International 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"). The underlying funds also may engage in
transaction and position hedging.
7
<PAGE> 86
For transaction hedging purposes, the International Index Fund, Asset
Director Funds, Schwab OneSource(R) Portfolios-International and underlying
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 Asset Director Funds will attempt to protect against a possible loss
resulting from an adverse change in the relationship between (i) the U.S. dollar
and the applicable foreign currency during the period between the date on which
the security is purchased or sold and (ii) the transaction's settlement date.
When engaging in position hedging, the International Index Fund, Asset Director
Funds, Schwab OneSource Portfolios-International and underlying 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, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying funds expect to purchase).
When engaging in position and/or transaction hedging, the International
Index Fund, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds may purchase or sell foreign currencies on a spot (or cash)
basis at the prevailing spot rate and also may 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"). International
Index Fund, Asset Director Funds, Schwab OneSource Portfolios-International
and underlying funds also may 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, Asset Director Funds,
Schwab OneSource Portfolios-International and underlying 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, Asset Director
Funds, Schwab OneSource Portfolios-International and underlying 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, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying 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,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
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, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying funds to engage in hedging transactions
may be limited by tax considerations. Transaction and position hedging do not
8
<PAGE> 87
eliminate fluctuations in the underlying prices of the securities which the
Funds or the underlying funds own or expect to purchase or sell. They simply
establish a rate of exchange that may be achieved at some future point in time.
Additionally, although these techniques tend to minimize the risk of loss due to
decline in the value of the hedged currency, they tend to limit any potential
gain that might result from an increase in the value of such currency.
Although the contracts presently are not 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, Asset Director Funds, Schwab OneSource(R)
Portfolios-International and underlying 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, Asset Director Funds and Schwab OneSource
Portfolios-International generally will not enter into a forward contract with a
term of greater than one year.
While the International Index Fund, Asset Director Funds and Schwab
OneSource Portfolios-International will, and underlying funds may, enter into
forward contracts to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while the International Index Fund,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
funds may benefit from such transactions, unanticipated changes in currency
prices may result in a poorer overall performance for the International Index
Fund, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds than if they had not engaged in any such transactions.
Moreover, there may be imperfect correlation between the International Index
Fund's, Asset Director Funds', Schwab OneSource Portfolios-International's and
underlying funds' portfolio holdings of securities denominated in a particular
currency and forward contracts into which the International Index Fund, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
enter. Such imperfect correlation may cause the International Index Fund, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
to sustain losses, which will prevent the International Index Fund, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
from achieving a complete hedge or expose the International Index Fund, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
to risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The International
Index Fund, Asset Director Funds,
9
<PAGE> 88
Schwab OneSource(R) Portfolios-International and underlying 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, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying funds
obligates the International Index Fund, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying 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, Asset Director
Funds, Schwab OneSource Portfolios-International and underlying funds would
obligate the International Index Fund, Asset Director Funds, Schwab OneSource
Portfolios-International and underlying 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,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
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, Asset Director Funds and Schwab OneSource
Portfolios-International 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, Asset Director Funds and Schwab OneSource Portfolios-International
also would be able to enter into closing sale transactions in order to realize
gains or minimize losses on options purchased by the International Index Fund,
Asset Director Funds and Schwab OneSource Portfolios-International.
The purchase of a call option would entitle the International Index
Fund, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds to purchase specified currency at a specified price during the
option period in return for the premium paid. The International Index Fund,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
funds ordinarily would 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, Asset Director Funds, Schwab OneSource Portfolios-International and
underlying funds to sell specific currency at a specified price during the
option period in exchange for the premium paid. 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, Asset Director Funds', Schwab OneSource
Portfolios-International's and underlying funds' portfolio securities due to
currency exchange rate fluctuations. The International Index Fund, Asset
Director
10
<PAGE> 89
Funds, Schwab OneSource(R) Portfolios-International and underlying funds
ordinarily would 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,
Asset Director Funds, Schwab OneSource Portfolios-International and underlying
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, Asset Director Funds and Schwab OneSource
Portfolios-International generally will purchase or write only those options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market 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, Asset
Director Funds, Schwab OneSource Portfolios-International and underlying 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, Asset Director Funds,
Schwab OneSource Portfolios-International and underlying funds, as covered call
option writers, are unable to effect a 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, Asset Director Funds and Schwab
OneSource Portfolios-International 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
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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
the CFTC licenses and regulates on foreign exchanges. The Funds and the
underlying funds are not permitted to engage in speculative futures trading.
Futures Contracts. A futures contract generally may 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 and the underlying funds may 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 and the underlying funds,
through the purchase of futures contracts, may 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, Asset Director Funds, Schwab
OneSource(R) Portfolios-International and the underlying funds may 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, Asset Director Funds, Schwab
OneSource Portfolios-International and the underlying funds may 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, Asset
Director Funds, Schwab OneSource Portfolios-International and the underlying
funds have acquired or expect to acquire.
Although futures contracts by their terms generally call for the actual
delivery or acquisition of underlying securities or the cash value of the index,
in most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take such delivery. The contractual
obligation is offset by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities or the cash value of
the index underlying the contractual obligations. The Funds and the underlying
funds may incur brokerage fees when they purchase or sell futures contracts.
Positions taken in the futures markets normally are not held to
maturity but are instead liquidated through offsetting transactions, which may
result in a profit or a loss. While the Funds' and the underlying funds' futures
contracts on securities or currency usually will be liquidated in this manner,
the Funds and the underlying funds may instead make or take delivery of the
underlying securities or currency
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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 and the underlying 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 and the
underlying 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' and the
underlying funds' assets. By writing a call option, the Funds and the underlying
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 and the underlying funds in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. The Funds and the
underlying 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'
and the underlying 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 securities held by
the Funds or securities with characteristics similar to those of the Funds'
portfolio securities. Similarly, the International Index Fund, Asset Director
Funds and Schwab OneSource(R) Portfolios-International may sell futures
contracts on currency in which their 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
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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.
The underlying funds may engage in similar hedging transactions using
futures contracts which would operate in a similar manner and entail similar
risks to the underlying funds.
When a Fund and an underlying fund buys or sells a futures contract,
it 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 and
underlying 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 and underlying funds' position in
the contract becomes more or less valuable. This process is known as
"marking-to-market."
Regulations of the CFTC applicable to the Funds and underlying funds
generally require that all of their futures transactions constitute "bona fide"
hedging transactions. As a result, a Fund and an underlying fund normally will
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 addition,
the Funds and underlying 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 and each underlying
fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and
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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 and the underlying funds engage in the use of futures and options on
futures other than for hedging purposes, the Funds and the underlying 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
or an underlying fund seeks to "close out" its position. If a Fund or an
underlying fund is unable to "close out" a futures or option position and prices
move adversely, the Fund or an underlying fund would have to continue to make
daily cash payments to maintain its required margin, and if the Fund or an
underlying fund has insufficient cash to meet this requirement, it may have to
sell portfolio securities at a disadvantageous time. In addition, the Fund or an
underlying fund might be required to deliver the securities underlying futures
or options contracts it holds. Each Fund will seek to, and the underlying funds
may seek to, reduce the risk that it will be unable to "close out" contracts by
entering into only futures or options contracts that are traded on national
exchanges and for which there appears to be a liquid secondary market.
It also is 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 or an
underlying 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 or an underlying
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 or an underlying fund to invest directly in the securities being
hedged. There is also the risk of loss by a Fund or an underlying fund of margin
deposits in the event of bankruptcy of a broker with whom the Fund or an
underlying 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
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Internal Revenue Code of 1986, as amended (the "Code"), requirements for
qualification as a regulated investment company. See "Taxes." An underlying
fund's investment in such instruments may similarly be restricted by Code
requirements.
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 of
Additional Information.
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
invest only 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
bonds that are investment grade, convertible preferred stocks and warrants. The
S&P 500 Fund will not purchase convertible securities directly. It may,
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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.
Warrants. The Funds or underlying funds may invest in warrants, which are
options to purchase equity securities at specific prices valid for a specific
period of time. The prices do not necessarily move parallel to the prices of the
underlying securities. Warrants have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer. If a warrant is not
exercised within the specified time period, it will become worthless and a Fund
or an underlying fund will lose the purchase price and the right to purchase the
underlying security.
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 also may 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, S&P 500
Fund and Analytics 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
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company's assets, revenues or profits are derived from the precious metal
industry. The Asset Director Funds also may 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, S&P 500 Fund and Analytics Fund also may
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, S&P 500 Fund and Analytics
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 have been 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 were 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
Government "mortgage-backed" (or government guaranteed
mortgage-related) securities are among the U.S. Government securities in which
the Funds may invest. Mortgages backing the securities purchased by the Funds
include, among others, conventional 30-year fixed rate mortgages, graduated
payment mortgages, 15-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
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remaining principal before the mortgage's scheduled maturity date. As a result
of the pass-through of prepayments of principal on the underlying securities,
mortgage-backed securities often are subject to more rapid prepayment of
principal than 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 also is 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 usually will
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
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Certificates"): mortgage participation certificates ("PCs") and guaranteed
mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. The FHLMC guarantees timely monthly payment of interest
on PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately 10 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 the FHA insures.
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., S&P or Moody's) 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 depends generally on the rate of
principal payments received on the underlying assets, which in turn may be
affected by a variety of economic and other factors. As a result, the yield on
any asset-backed security is difficult to predict with precision, and actual
yield to maturity may be more or less than the anticipated yield to maturity.
Asset-Backed Securities may be classified as "Pass-Through Certificates" or
"Collateralized Obligations."
"Pass-Through Certificates" are asset-backed securities that represent
undivided fractional ownership interests in the underlying pool of assets.
Pass-Through Certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
Pass-Through Certificates represent ownership interests in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the
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underlying assets not covered by any credit support.
Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, generally are 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 often are 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 timely. Protection
against ultimate default ensures payment on at least a portion of
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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
invest in certificates of deposit and bankers' acceptances only 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
only will 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, Asset
Director Funds and Schwab OneSource(R) Portfolios-International outside the
United States and that are publicly traded in the United States on a foreign
securities exchange or in a foreign securities market are not considered 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 United States, 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 United States will have to be made in
compliance with any applicable U.S. and foreign currency restrictions and tax
laws (including laws imposing withholding taxes on any dividend or interest
income) and laws limiting the amount and types of foreign investments. Changes
of government administrations or economic or monetary policies in the United
States or abroad, or changed circumstances regarding convertibility or exchange
rates, could result in investment losses for
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<PAGE> 102
the Funds. Investments in foreign securities also may subject the Funds to
losses due to nationalization, expropriation or differing accounting practices
and treatments. Moreover, investors should recognize that foreign securities
often are traded with less frequency and volume, and therefore may have greater
price volatility, than is the case with many U.S. securities. Notwithstanding
that the Funds generally intend to acquire the securities of foreign issuers
where there are public trading markets, the Funds' investments 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 United States 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 or underlying funds may loan
securities to qualified broker-dealers or other institutional investors
provided: (i) the loan is secured continuously by collateral consisting of U.S.
Government securities or cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at lease equal to the current market value
of the securities loaned; (ii) the Fund or underlying fund may at any time call
the loan and obtain the return of the securities loaned; (iii) the Fund or
underlying fund will receive any interest or dividends paid on the loaned
securities; and (iv) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund or underlying fund.
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. Loans of securities involve a risk that the borrower may
fail to return the securities or provide additional collateral.
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 a Fund's loan of money 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 a Fund
24
<PAGE> 103
enters into 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 usually will 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 obligation with securities having a market value, including accrued
interest, equal to at least 102% of the dollar amount the Funds invest 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 also might 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, except the Schwab OneSource
Portfolios-International, reserves the right to invest up to 10% of its net
assets in illiquid securities. The Schwab OneSource(R) Portfolios-International
reserves the right to invest up to 15% 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 marketplace
trades (e.g., the time needed to dispose of the
25
<PAGE> 104
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.
When-Issued and Delayed Delivery Securities. The Funds may hold
securities on a "when-issued" or "delayed delivery" basis. When-issued or
delayed delivery securities are securities purchased for future delivery at a
stated price an yield. Generally, a Fund will not pay for securities until the
Fund receives them. Securities purchased on a when-issued or delayed delivery
basis are recorded as assets. During the period between the agreement date and
the settlement date, the value of such securities may change as the prices of
securities in the stock market increase or decrease, or as interest rates
change. Default by the other party to the agreement may result in a loss to a
Fund.
UNDERLYING FUND INVESTMENT TECHNIQUES
The underlying funds for Schwab OneSource(R) Portfolios-International
also may engage in foreign currency transactions with respect to foreign
securities investments; invest in restricted securities; sell securities short;
borrow money for investment purposes (i.e., leverage their portfolio); write
(sell) or purchase call or put options on securities or on stock indices;
concentrate their assets in one industry; invest in master demand notes; invest
in domestic equity securities; and enter into futures contracts and option on
futures contracts.
The risks associated with these investments are discussed below.
To the extent that the underlying funds also invest or engage in swaps,
preferred stock, convertible securities, real estate-related investments,
precious metal-related investments, U.S. Government securities, government
"mortgage-backed" securities, asset-backed securities, certificates of deposit
and bankers' acceptances, commercial paper, repurchase transactions, and
when-issued and delayed delivery securities, the underlying funds would be
subject to risks associated with such investments similar to those risks
discussed above regarding such investments by the Funds.
Short Sales. An underlying fund may sell securities short. In a short
sale, the underlying fund sells stock which it does not own, making delivery
with securities "borrowed" from a broker. The underlying fund is then obligated
to replace the security borrowed by purchasing it at the market price at the
time of replacement. This price may or may not be less than the price at which
the security was sold by the underlying fund. Until the security is replaced,
the underlying fund is required to pay the lender any dividends or interest
which accrue during the period of the loan. In order to borrow the security, the
underlying fund also may have to pay a premium which would increase the cost of
26
<PAGE> 105
the security sold. The broker will retain the proceeds of the short sale to the
extent necessary to meet margin requirements until the short position is closed
out.
The underlying fund also must deposit in a segregated account an amount
of cash or U.S. Government securities equal to the difference between (a) the
market value of the securities sold short at the time they were sold short and
(b) the value of the collateral deposited with the broker in connection with the
short sale (not including the proceeds from the short sale). While the short
position is open, the underlying fund must maintain daily the segregated account
at such a level that (i) the amount deposited in it plus the amount deposited
with the broker as collateral equals the current market value of the securities
sold short and (ii) the amount deposited in it plus the amount deposited with
the broker as collateral is not less than the market value of the securities at
the time they were sold short. Depending upon market conditions, up to 80% of
the value of an underlying fund's net assets may be deposited as collateral for
the obligation to replace securities borrowed to effect short sales and
allocated to a segregated account in connection with short sales. The underlying
fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
underlying fund replaces the borrowed security. The underlying fund will realize
a gain if the security declines in price between those dates. The amount of any
gain will be decreased and the amount of any loss increased by the amount of any
premium dividends or interest the underlying fund may be required to pay in
connection with a short sale.
A short sale is "against the box" if at all times when the short
position is open the underlying fund owns an equal or greater amount of the
securities or securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities sold short.
Such a transaction serves to defer a gain or loss for Federal income tax
purposes. The procedures described above regarding deposits in a segregated
account are not required to be followed for short sales "against the box."
Leverage through Borrowing. An underlying fund may borrow up to 25% of
the value of its net assets on an unsecured basis from banks to increase its
holdings of portfolio securities. Under the 1940 Act, the underlying fund is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if it is disadvantageous to do so from an
investment standpoint. Leveraging will exaggerate the effect of any increase or
decrease in the value of portfolio securities on the underlying fund's net asset
value, and money borrowed will be subject to interest costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the interest and option premiums received
27
<PAGE> 106
from the securities purchased with borrowed underlying funds.
Derivatives. An underlying fund may invest in the following instruments
that are commonly known as derivatives. Generally, a derivative is a financial
arrangement, the value of which is based on or "received" from a traditional
security, asset or market index.
Hedging. An underlying fund may employ many of the investment
techniques described herein not only for investment purposes which may be
considered speculative, but also for hedging purposes. For example, an
underlying fund may purchase or sell put and call options on common stocks to
hedge against movement in individual common stock prices, or purchase and sell
stock index futures and related options to hedge against marketwide movements in
common stock prices. Although such hedging techniques generally tend to minimize
the risk of loss that is hedged against, they also may limit commensurably the
potential gain that might have resulted had the hedging transaction not
occurred. Also, the desired protection generally resulting from hedging
transactions may not always be achieved.
Master Demand Notes. Although the Fund will not do so, underlying funds
(particularly money market mutual funds) may invest up to 100% of their assets
in master demand notes. Master demand notes are unsecured obligations of U.S.
corporations redeemable upon notice that permit investment by an underlying fund
of fluctuating amounts at varying rates of interest pursuant to direct
arrangements between the fund and the issuing corporation. Because they are
direct arrangements between the underlying fund and the issuing corporation,
there is no secondary market for the notes. However, they are redeemable at face
value, plus accrued interest, at any time.
Domestic Equity Securities. The underlying funds, particularly global
underlying funds, also may be able to purchase equity securities of U.S.
companies. Equity securities are ownership interests in the net worth of a
corporation and include common stocks, convertible securities and warrants.
Common stock prices can be volatile in the short term. Market conditions or
other company, political and economic news often can cause large changes in a
stock's price. Such investments entail market risk, i.e., the risk of being
invested in stocks when the market goes down, resulting in stock prices
declining over short or even long periods.
28
<PAGE> 107
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). With respect to the
Analytics Fund and the Schwab OneSource(R) Portfolios-International, investment
restriction numbers 3, 4, 6 and 7 are non-fundamental and may be changed by the
Trust's Board of Trustees. 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 or investments in other registered investment companies) 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 and Small-Cap Index Fund may
purchase securities under such circumstances only to the extent that the
International Index or Small-Cap Index, respectively, also is so concentrated
and that the S&P 500 Fund and Analytics Fund may purchase securities under such
circumstances only to the extent that the S&P 500 is also so concentrated, and
except that the Schwab OneSource Portfolios-International will invest 25% or
more of its total assets in other investment companies).
3) Invest more than 10% of its net assets in illiquid securities,
including repurchase agreements with maturities in excess of seven days (except
that the Schwab OneSource(R) Portfolios-International may not invest more than
15% of its net assets in illiquid securities).
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, commodity contracts or real estate,
including interests in real estate limited partnerships, provided that each Fund
may (i) purchase securities of companies that deal in real estate or interests
therein, (ii) purchase or sell futures contracts, options contracts, equity
index participations and index participation contracts, and (iii) for the Asset
Director Funds, S&P 500 Fund and Analytics 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.
29
<PAGE> 108
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 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 U.S. 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,
30
<PAGE> 109
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 net assets.
5) Make short sales, except for short sales against the box.
6) Purchase or sell interests in oil, gas or other mineral development
programs or leases, although it may invest in companies that own or invest in
such interests or leases.
7) Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities.
Investments in Other Mutual Funds. The Schwab OneSource(R)
Portfolios-International intends to purchase shares of underlying funds in
compliance with the requirements of Section 12(d)(1)(F) of the 1940 Act. Under
that provision, the Fund is prohibited from purchasing the securities of an
underlying fund if, as a result, the Fund together with its affiliates, would
own more than 3% of the total outstanding securities of that underlying fund. In
addition, the Fund is required to seek voting instructions from its shareholders
regarding underlying fund proxies, and to vote such proxies in accordance with
the instructions received or to vote such proxies in the same proportion as the
vote of all other holders of the underlying fund securities.
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<PAGE> 110
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/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
------------------ ------------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Chief Executive Officer and Director,
July 29, 1937 The Charles Schwab Corporation;
Chairman and Director, Charles Schwab & Co., Inc.
and Charles Schwab Investment Management, Inc.;
Chairman and Director, The Charles Schwab Trust
Company; Chairman and Director (current board
positions), 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).
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).
</TABLE>
- -------------------------
* Mr. Schwab is an "interested person" of the Trust.
**Mr. McCarthy is an "interested person" of the Trust.
32
<PAGE> 111
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
------------------ ------------- --------------------
<S> <C> <C>
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services); and International Investment
Consultant, Cannon Street, Inc. (private
investigative firm).
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).
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 and 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.
TAI-CHIN TUNG Treasurer and Principal Vice President - Finance, Charles Schwab & Co.,
March 7, 1951 Financial Officer Inc.; Controller, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Ms. Tung was
Controller for Roberson Stephens Investment
Management, Inc. From 1993 to 1994, she was Vice
President of Fund Accounting, Capital Research
and Management Co. Prior to 1993, Ms. Tung was
Senior Vice President of the Sierra Funds and
Chief Operating Officer of Great Western
Financial Securities.
</TABLE>
- --------------------
* Mr. Klipp is an "interested person" of the Trust.
33
<PAGE> 112
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
------------------ ------------- --------------------
<S> <C> <C>
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, 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.
34
<PAGE> 113
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Pension or Retirement
Benefits Accrued as
Aggregate Part of Fund Expenses Total
Name of Person, Compensation from from the Fund Compensation from
Position the Trust Complex 2 the Fund Complex 2
- --------------- ------------------ --------------------- -------------------
<S> <C> <C> <C>
Charles R. Schwab, 0 N/A 0
Chairman and Trustee
Elizabeth G. Sawi 3, 0 N/A 0
President and Trustee
Timothy F. McCarthy 4, 0 N/A 0
President and Trustee
William J. Klipp, 0 N/A 0
Sr. Vice President, Chief
Operating Officer and
Trustee
Donald F. Dorward, 16,600 N/A 73,000
Trustee
Robert G. Holmes, 16,600 N/A 73,000
Trustee
Donald R. Stephens, 16,600 N/A 73,000
Trustee
Michael W. Wilsey, 16,600 N/A 73,000
Trustee
</TABLE>
1 Figures are for the Trust's fiscal year ended October 31, 1995.
2 "Fund Complex" comprises all 24 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.
------------------------------
<PAGE> 114
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" in this
Statement of Additional Information.
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the SchwabFunds Family(R),
a family of 24 mutual funds with over $39 billion in assets as of August 20,
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 also must 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
36
<PAGE> 115
for the purpose of voting on such approval. The Advisory Agreement may be
terminated at any time upon 60 days' notice by either party, or by a majority
vote of the outstanding shares of a Fund, and will terminate automatically upon
assignment.
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 its 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 its 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 $106,000, 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, 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 February 28, 1997, 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, 0.33% of the next $1 billion and 0.31% of such net assets over $2
billion.
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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.
Analytics Fund. For its advisory and administrative services to the
Analytics Fund, the Investment Manager is entitled to receive a graduated annual
fee, payable monthly, of 0.74% of the Fund's average daily net assets not in
excess of $1 billion, 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 July 1, 1997, the total fund operating expenses for the Schwab Analytics
Fund will not exceed 0.75% of its average daily net assets.
Schwab OneSource(R) Portfolios-International. For its advisory and
administrative services to the Schwab OneSource(R) Portfolios-International, the
Investment Manager is entitled to receive a graduated annual fee, payable
monthly, of 0.74% of the Fund's average daily net assets not in excess of $1
billion, 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 February 28, 1999, the total fund operating expenses for the Schwab
OneSource Portfolios-International will not exceed 0.50% of its average daily
net assets.
Additional Information. The Advisory Agreement provides that the fees
to be paid to the Investment Manager will be less than the amount that would
cause the aggregate operating expenses of a Fund (excluding interest, taxes, net
brokerage commissions and extraordinary expenses) in any year to exceed the most
stringent limits prescribed by any state in which shares of a Fund are offered
for sale. The most stringent current limit for such expenses is 2.5% of a fund's
first $30 million of average net assets, 2.0% of a fund's next $70 million of
average net assets and 1.5% of a fund's average net assets in excess of $100
million.
Schwab currently receives remuneration from fund companies
participating in its Mutual Fund OneSource(R) service equal to 0.25% to 0.35%
per annum of assets invested in OneSource Funds. The Investment Manager and
Schwab provide investment management and otyer services to all of Schwab's
proprietary funds and receive compensation from them. In light of this
remuneration and compensation, Schwab guarantees, through at least December 31,
2001, to waive its Transfer Agent and Shareholder Service fees which normally
total 0.25%. After December 31, 2001, the guarantees may be terminated,
modified or continued.
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 and Analytics Fund 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
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directly and indirectly approximately $700 million in institutional and private
account assets.
For the Asset Director Funds, 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.
For the Analytics Fund, the Sub-Adviser will make investment decisions
for the Fund's non-cash investments. The Sub-Adviser will use quantitative
techniques and proprietary real-time databases and software models to
continually identify and rank stocks that exhibit a favorable combination of
attributes that historically have been associated with aggregate total returns
greater than that of the S&P 500. Once rankings are determined, statistical
methodologies will be used to construct a portfolio of the most attractive
stocks in terms of potential long-term capital growth.
For the Sub-Adviser's services relating to the Asset Director Funds,
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 Funds' aggregate
average daily net assets, 0.06% of the next $150 million, 0.04% of the next $600
million and 0.02% of the Funds' aggregate average daily net assets over $850
million. For the Analytics Fund, the Investment Manager pays the Sub-Adviser an
annual investment sub-advisory fee, payable monthly, 0.20% of the Fund's average
daily net assets not in excess of $300 million, 0.15% of the next $500 million
and 0.10% of such assets over $800 million.
As of May 1, 1995 and June 30, 1995, Dimensional Fund Advisors Inc.
("Dimensional") no longer served as the sub-adviser to the Small-Cap Index Fund
and 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.
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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 of the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
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 Fund Accountant for the
International Index Fund, Small-Cap Index Fund, Asset Director Funds and Schwab
OneSource(R) Portfolios-International.
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 and Analytics Fund. PFPC Inc., at 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as Fund Accountant for the S&P 500 Fund and
Analytics 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 each Fund's federal income tax return. Price
Waterhouse LLP also performs other professional accounting, auditing, tax and
advisory services when engaged to do so by the Trust. Shareholders will be sent
audited annual and unaudited semi-annual financial statements. The address of
Price Waterhouse LLP is 555 California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, D.C. 20005, is counsel to the Trust.
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PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the Funds, the Investment
Manager and the Sub-Adviser seek to obtain best price and execution. Subject to
the supervision of the Board of Trustees, the Investment Manager and the
Sub-Adviser generally will 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 and the Sub-Adviser 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 and the Sub-Adviser also may 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 and the Sub-Adviser may, in their discretion,
in agency transactions (and not principal transactions) utilize the services of
broker-dealers that provide them with investment information and other research
resources. Such resources also may be used by the Investment Manager and the
Sub-Adviser 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 and the Sub-Adviser will consider
(if relevant) 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.
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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 Schwab provides to the Funds also are 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 members of the exchange
not associated with Schwab perform the floor brokerage element of portfolio
transactions (that is, execution on the exchange floor or through use of
exchange facilities) 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 Schwab selects 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 and $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
dividing the value of purchases or sales of portfolio securities for the fiscal
year, whichever is less, by the monthly average value of portfolio securities
the Fund owned during the fiscal year. When making the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded.
A 100% portfolio turnover rate would occur, for example, if all
portfolio securities (aside from short-term securities) were sold and either
repurchased or replaced once during the fiscal year. The Funds expect that their
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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. 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 each Fund's policy 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 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
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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 the Funds pay from net investment income and distributions
from the Funds' net short-term capital gains in excess of any net long-term
capital losses, whether received in cash or reinvested, generally will be
taxable to shareholders as ordinary income. For corporate investors in the
Funds, dividend distributions the Funds designate to be from dividends received
from qualifying domestic corporations will be eligible for the 70% corporate
dividends-received deduction to the extent they would qualify if the Funds were
regular corporations. Distributions 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
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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
U.S. Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) 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 also may be
subject to state, local and foreign taxes, and its treatment under applicable
tax laws may differ from the federal income tax treatment.
Income the International Index Fund, Asset Director Funds and Schwab
OneSource(R) Portfolios-International receive from sources within various
foreign countries may be subject to foreign income taxes withheld at the source.
If a Fund has at least 50% of its assets invested in foreign securities at the
end of its taxable year, it may elect to pass through the foreign tax credit to
its shareholders. It is expected that the International Index Fund will have
more than 50% of the value of its total assets at the close of its taxable year
invested in foreign securities, and it will make this election. Pursuant to this
election, U.S. shareholders must include in gross income, even though not
actually received, their respective pro rata share of foreign taxes, and may
either deduct their pro rata share of foreign taxes (but not for alternative
minimum tax purposes) or credit the tax against U.S. income taxes, subject to
certain limitations described in Code section 904 (but not both). A shareholder
who does not itemize deductions may not claim a deduction for
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foreign taxes. It is expected that the Asset Director Funds and Schwab
OneSource(R) Portfolios-International will not have 50% of their assets invested
in foreign securities at the close of their taxable years, and therefore will
not be permitted to make this election and "pass through" to their shareholders.
Each shareholder's respective pro rata share of foreign taxes these Funds pay
will, therefore, be netted against their share of these Fund's gross income.
Although the International Index Fund, Asset Director Funds and Schwab
OneSource Portfolios-International 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 may inadvertently do so. This could
result in adverse tax consequences upon the disposition of, or the receipt of
"excess distributions" with respect to, such equity investments. To the extent
the International Index Fund, Asset Director Funds and Schwab OneSource
Portfolios-International 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,
Asset Director Funds and Schwab OneSource Portfolios-International 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, Asset Director
Funds' and Schwab OneSource Portfolios-International's shareholders.
Therefore, the payment of this tax would reduce the International Index Fund's,
Asset Director Funds' and Schwab OneSource Portfolios-International's
economic return from their PFIC shares, and excess distributions received with
respect to such shares are treated as ordinary income rather than capital gains.
An underlying fund may inadvertently invest in non-U.S. corporations
which would be treated as Passive Foreign Investment Companies ("PFICs") or
become a PFIC under the Code. This could result in adverse tax consequences upon
the disposition of, or the receipt of "excess distributions" with respect to,
such equity investments. To the extent an underlying fund does invest in PFICs,
it may elect to treat the PFIC as a "qualified electing fund" or mark-to-market
its investments in PFICs annually. In either case, the underlying fund may be
required to distribute amounts in excess of its realized income and gains. To
the extent that the underlying fund itself is required to pay a tax on income or
gain from investment in PFICs, the payment of this tax would reduce the Fund's
economic return.
The 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
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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 Business Day
at the close of trading on the New York Stock Exchange, generally 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 fair value. Each security the Funds hold 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 readily
are available (including any restricted securities) are valued at fair value as
determined in good faith by the Investment Manager pursuant to Board of Trustees
guidelines. Securities may be valued on the basis of prices provided by pricing
services when such prices are believed to reflect fair value.
In accordance with the 1940 Act, the underlying funds are valued at
their respective net asset values as determined by those funds. The underlying
funds that are money market funds value their portfolio securities based on the
amortized cost method. The other underlying funds value their portfolio
securities based on market quotes if they are readily available. The Investment
Manager assigns fair values to the Funds' other investments in good faith under
Board of Trustees guidelines. The Board of Trustees regularly reviews these
values.
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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, the fiscal
period from September 9, 1993 (commencement of operations) to October 31, 1995,
and the period ended July 31, 1996, the International Index Funds's average
annual total return was 3.35%, 5.95%, and 4.44%, respectively. For the fiscal
year ended October 31, 1995, for the fiscal period from December 3, 1993
(commencement of operations) to October 31, 1995, and the period ended July 31,
1996, the Small-Cap Index Fund's total return was 17.11%, 8.97% and 6.55%,
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 nonstandardized 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 also may 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
A Fund's yield refers to the net investment income generated by a
hypothetical investment in the Fund over a specific 30 day period. This net
investment income is then annualized, which means that the net investment income
generated during the 30-day period is assumed to be generated in each 30-day
period over an annual period, and is shown as a percentage of the investment.
EFFECTIVE YIELD
A Fund's effective yield is calculated similarly, but the net
investment income earned by the investment is assumed to be compounded monthly
when annualized. The effective yield will be slightly higher than the yield due
to this compounding effect.
48
<PAGE> 127
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 ratings of mutual fund rating services,
various indices of investment performance, U.S. Government obligations, bank
certificates of deposit, the consumer price index and other investments for
which reliable data is available.
The Asset Director Funds also may compare their historical performance
figures to the performance of indices similar to their asset categories and sub-
categories, and to the performance of "blended indices" similar to the Funds'
portfolio strategies, such as those indices names in the Funds' Prospectus under
"Market Performance."
The Schwab OneSource(R) Portfolios-International may compare its
historical performance to the performance of indices such as Morgan Stanley
Capital International's EAFE index, its World ex-U.S. index, other indices or
combination of indices.
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 historically has 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
international markets produced also have 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.
49
<PAGE> 128
INDEXING AND THE SCHWAB INDEX FUNDS
Because the unmanaged performance of a broad-based equity index often
has 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 most often is used to gauge that
market's performance. The Dow Jones Industrial Average ("DJIA") and S&P 500 are
two indices designed to measure the performance of U.S. 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 assumes the reinvestment of dividends but
does 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.
INTERNATIONAL INDEX
The International Index 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 also is 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 International Index was first made available to the public on
July 29, 1993.
SMALL-CAP INDEX
To be included in the 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 1,000 such companies as measured by
market capitalization (i.e., from the company with a rank of 1,001
50
<PAGE> 129
through the company with a rank of 2,000). 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 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 Small-
Cap Index. The returns produced by the U.S. 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 market often
has 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, significantly have exceeded
the returns of U.S. Treasury Bills, CDs, corporate bonds and inflation.
THE S&P 500 INDEX(R)
The S&P 500 is representative of the performance of the U.S. stock
market. The Index consists of 500 stocks chosen for market size, liquidity and
industry group representation. It is a market- value weighted index (stock price
times number of shares outstanding), with each stock's weight in the Index
proportionate to its market value. The S&P 500 does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
Index are among the largest, there also are some relatively small companies in
the Index. Those companies, however, generally are 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 also may 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
51
<PAGE> 130
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(R) service ("OneSource"), a
shareholder can invest in over 575 mutual funds from many fund companies,
subject to the following. Schwab's standard transaction fee will be charged on
each redemption of fund shares held for 90 days or less to discourage short-term
trading. Mutual fund shares held for more than 90 days are exempt from the
short-term redemption policy and may be sold without penalty. Up to 15
short-term redemption of fund shares per calendar year are permitted. if you
exceed this number, you'll no longer be able to buy or sell fund shares without
paying a transaction fee. As a courtesy, we'll notify you in advance if your
short-term redemptions are nearing the point where all of your future trades
will be subject to transaction fees. Schwab reserves the right to modify
OneSource's terms and conditions at any time. For more information, a
shareholder should contact his or her Schwab office during its regular business
hours or call 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.
52
<PAGE> 131
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
Schwab Asset Director(R)-Conservative Growth Fund 2
Schwab S&P 500 Fund-Investor Shares 2
Schwab S&P 500 Fund-e.Shares(TM) 2, 3
Schwab Analytics Fund(TM) 2
Schwab OneSource(R) Portfolios-International
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(R)
Schwab Tax-Exempt Money Fund-Sweep Shares
Schwab Tax-Exempt Money Fund-Value Advantage Shares(TM)
Schwab California Tax-Exempt Money Fund-Sweep Shares
Schwab California Tax-Exempt Money Fund-Value Advantage Shares(TM)
Schwab Retirement Money Fund(R) 6
Schwab Institutional Advantage Money Fund(R) 6
Schwab New York Tax-Exempt Money Fund-Sweep Shares
Schwab New York Tax-Exempt Money Fund-Value Advantage Shares(TM)
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.
53
<PAGE> 132
OTHER INFORMATION
From time to time, the International Index Fund and Small-Cap Index
Fund may compare the historical performance of the International Index and
Small-Cap Index, respectively, to the historical performance of various other
indices, including the S&P 500, as reported by independent sources.
Each Fund, except for the Analytics Fund and Schwab OneSource(R)
Portfolios- International, is managed to offset capital gains with capital
losses in order to minimize the 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, distributing 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, each 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 each 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 generally is 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
54
<PAGE> 133
be brought or maintained derivatively or as a class action on behalf of the
Trust or the shareholders, to the same extent as the stockholders of a
Massachusetts business corporation; and (6) such additional 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 the 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
55
<PAGE> 134
Trustees consider adequate to cover foreseeable tort claims. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered remote, because it is limited to circumstances in which a disclaimer
is inoperative and the Trust itself is unable to meet its obligations.
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 August 13, 1996, the officers and Trustees of the Trust, as a
group, owned of record or beneficially 1.16% and 1.83% of the outstanding
voting securities of the High Growth Fund and Conservative Growth Fund,
respectively. As of August 13, 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 its respective Prospectus. 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 Sub-Adviser.
The Funds, other than the Schwab OneSource(R) Portfolios-International,
have made an election with the SEC to pay in cash all redemptions requested by
any shareholder of record limited in amount during any 90-day period to the
lesser of $250,000 or 1% of its net assets at the beginning of such period. The
Schwab OneSource(R) Portfolios-International has not elected and may not elect
to pay such redemptions in cash. This election is irrevocable without the SEC's
prior approval. Redemption requests in excess of the stated limits and
redemption requests of Schwab OneSource Portfolios International 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" for the International Index and Small-Cap Funds and under
"Important Information About Your Investment--How We Determine the Price of
Your Shares" for the Asset Director Funds, Analytics Fund, S&P Fund and the
Schwab OneSource Portfolios--International and a redeeming shareholder would
normally incur brokerage expenses if he or she were to convert the securities
to cash.
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<PAGE> 135
OTHER INFORMATION
The Prospectuses of the Funds and this Statement of Additional
Information do not contain all the information included in the Registration
Statement filed with the SEC under the Securities Act of 1933, as amended, with
respect to the securities offered by the Prospectuses. Certain portions of the
Registration Statement have been omitted from the Prospectuses and this
Statement of Additional Information pursuant to the rules and regulations of the
SEC. The Registration Statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectuses and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
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.
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<PAGE> 136
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Seagate Technology,
Inc.* 88 $ 5,104
Security Dynamics
Technology 100 8,400
Sequent Computer
Systems, Inc.* 100 1,469
Shiva Corp. 200 12,000
Sierra On-Line Inc. 100 3,938
Silicon Graphics Inc.* 100 2,963
Softkey International
Inc.* 100 2,794
Stratus Computer Inc.* 100 2,813
Structural Dynamics
Research Corp.* 100 3,188
Sun Microsystems Inc. 200 10,838
Tandem Computers Inc.* 100 1,275
Tech Data Corp.* 100 1,938
Transaction Systems
Architects Inc.
Class A* 100 5,375
Trident Microsystems
Inc.* 100 1,775
Unisys Corp.* 200 1,200
Wang Laboratories
Inc. (New)* 100 2,363
Xerox Corp. 100 14,650
-------
470,550
-------
BUSINESS SERVICES--1.6%
ADVO Inc. 100 1,013
Access Health Inc. 150 8,325
Accustaff Inc. 300 8,944
Acxiom Corp. 100 2,731
Affiliated Computer
Services Inc.
Class A* 100 4,763
Alliance Entertainment
Corp.* 100 613
Alternative Resources
Corp. 100 3,588
American Business
Information, Inc. 100 1,975
American Business
Products, Inc. 100 2,175
American Management
Systems, Inc. 150 3,975
American Medical
Response, Inc.* 100 3,700
American Oncology
Resources Inc.* 100 4,813
Amresco Inc. 100 1,725
Apollo Group, Inc.
Class A 150 6,619
Automatic Data
Processing, Inc. 200 7,775
BISYS Group, Inc.* 100 3,800
Bowne & Co. Inc. 100 1,800
Browning Ferris
Industries Inc. 100 3,225
CDI Corp.* 100 2,950
Cambridge Technology
Partners* 100 6,738
Camco International
Inc. 100 3,563
Catalina Marketing
Corp.* 100 7,788
Cerner Corp. 100 2,044
Checkfree Corp.* 200 3,825
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Coastal Physician Group
Inc.* 100 $ 838
Corrections Corp.
of America 100 6,375
Coventry Corp.* 100 1,950
Dames & Moore Inc. 100 1,088
DeVRY Inc. 100 3,725
Deluxe Corp. 100 3,500
Dun & Bradstreet Corp. 200 12,175
Express Scripts Inc.
Class A* 100 4,888
Fair Issac & Co. Inc. 100 4,275
First Data Corp. 200 15,200
Fleming Companies, Inc. 400 5,500
Franklin Quest Co.* 100 2,700
G&K Services, Inc.
Class A 100 2,650
H & R Block Inc. 100 3,513
Health Management
Systems, Inc. 150 3,919
Heritage Media Corp.
Class A (New)* 100 3,838
Hon Industries Inc. 100 2,563
Ideon Group Inc. 100 1,313
Information Resources,
Inc.* 100 1,444
Integrated Health
Services Inc. 100 2,750
Interim Services Inc.* 200 8,638
Interpublic Group of
Companies, Inc. 100 4,675
Jacobs Engineering
Group Inc.* 100 2,775
John H. Harland Co. 300 7,875
Kinder Care Learning
Centers Inc.* 100 1,438
Laidlaw Inc. Class B
(Non Voting) 200 2,100
Magellan Health
Services Inc.* 100 2,150
Mariner Health
Group Inc.* 100 1,694
Maxicare Health Plans
Inc. (New)* 100 2,038
Medpartners/ Mullikin
Inc.* 200 5,775
Molten Metal
Technology, Inc.* 100 3,200
Moore Corp. Ltd. 100 1,825
National Auto Credit
Inc. 110 1,568
National Data Corp. 100 3,525
Netcom Online
Communications* 100 3,569
Orthodontic Centers of
America Inc. 100 3,925
PAXAR Corp. 100 1,738
PHH Corp. 100 5,688
PSINet Inc.* 100 1,406
Physician Corp. of
America* 100 1,488
Physician Reliance
Network* 100 4,363
</TABLE>
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SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Physicians Computer
Network* 200 $ 2,225
R.R. Donnelley & Sons
Co. 100 3,600
Republic Industries
Inc.* 200 6,538
Robert Half
International Inc.* 100 5,750
Rollins, Inc. 200 4,500
SEI Corp. 100 2,363
SPS Transaction
Services, Inc. 100 2,675
Sanifill Inc. 100 4,338
Scientific Games
Holdings Corp. 100 3,200
Service Corp.
International 100 5,313
Standard Register Co. 100 2,525
Steris Corp. 100 3,238
Sun Healthcare
Group Inc.* 100 1,513
Synetic Inc.* 100 3,488
True North
Communications 100 2,638
U S Order Inc.* 100 2,013
U.S.A. Waste
Services Inc.* 200 5,200
Unifirst Corp. 100 2,400
United Waste
Systems, Inc.* 100 5,538
Universal Health
Services Inc. Class B 100 5,550
Valassis Communications
Inc.* 100 1,575
WMX Technologies Inc. 500 17,375
Western Waste
Industries* 100 3,888
Zebra Technologies
Corp. Class A 200 4,975
-------
356,542
-------
CHEMICAL--0.9%
A. Schulman Inc. 100 2,188
Air Products &
Chemicals Inc. 100 5,713
Calgon Carbon Corp. 100 1,250
Crompton & Knowles
Corp. 100 1,538
Cytec Industries Inc.* 100 8,288
Dexter Corp. 100 2,688
Dow Chemical Co. 200 17,775
E.I. Du Pont de
Nemours & Co. 300 24,113
Eastman Chemical Co. 100 6,725
Ferro Corp. 100 2,775
First Mississippi Corp. 100 2,325
Geon Co. 100 2,650
Great Lakes
Chemical Corp. 100 6,825
H.B. Fuller Co. 200 6,550
Hercules Inc. 100 6,050
Lawter International
Inc. 100 1,088
Lilly Industrial Inc.
Class A 100 1,450
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Minnesota Mining &
Manufacturing Co. 200 $ 13,150
Monsanto Co. 100 15,150
Morton International
Inc. 100 3,538
NCH Corp. 100 5,800
NL Industries Inc.
(New) 200 2,875
OM Group Inc. 200 7,588
PPG Industries Inc. 200 10,125
Praxair Inc. 100 3,863
Rohm & Haas Co. 100 6,638
Scotts Co. Class A* 100 1,725
Sterling Chemicals
Inc.* 200 2,275
Union Carbide Corp. 100 4,550
W.R. Grace & Co. 100 7,750
Wellman Inc. 100 2,400
-------
187,418
-------
CONSTRUCTION--0.2%
Apogee Enterprises,
Inc. 100 2,638
Blount International
Inc. Class A 150 4,650
Calmat Co. 100 1,738
Centex Construction
Products Inc. 100 1,438
Fluor Corp. 100 6,613
Del Webb Corp. 100 1,788
Kaufman & Broad
Home Corp. 100 1,413
Oakwood Homes Corp. 100 4,463
Pulte Corp. 100 2,650
Sherwin Williams Co. 100 4,675
Southdown Inc. 100 2,350
Stone & Webster, Inc. 100 3,400
TJ International Inc. 100 1,725
Toll Brothers, Inc.* 100 1,625
-------
41,166
-------
CONSUMER-DURABLE--0.2%
Bassett Furniture
Industries Inc. 100 2,550
Black & Decker Corp. 100 4,025
Furniture Brands
International Inc.* 200 1,975
Harman International
Industries Inc. (New) 100 4,725
Kimball International
Inc. Class B 100 2,875
La-Z-Boy Chair Co. 100 2,963
Masco Corp. 100 2,725
Maytag Corp. 100 2,150
Newell Co. 100 2,850
Outboard Marine Corp. 100 1,975
Regal Beloit Corp. 100 1,938
Toro Co. 200 6,375
Whirlpool Corp. 100 6,013
-------
43,139
-------
CONSUMER-NONDURABLE--0.4%
3DO Co.* 100 900
A.T. Cross Co. Class A 100 1,500
Acclaim
Entertainment Inc.* 200 2,063
</TABLE>
F-80
<PAGE> 138
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
American Greetings
Corp. Class A 100 $ 2,769
Applebee's
International, Inc. 100 2,625
Buffets Inc.* 100 1,394
CML Group, Inc. 200 900
Corning Inc. 200 6,950
Darden Restaurants Inc. 100 1,375
Department 56 Inc.* 100 2,488
Foxmeyer Health Corp. 100 1,950
Hasbro Inc. 100 3,675
IHOP Corp. (New)* 100 2,844
International Dairy
Queen Inc. Class A* 100 2,131
Landry's Seafood
Restaurants, Inc. 100 2,388
Luby's Cafeterias, Inc. 100 2,400
Mafco Consolidated
Group Inc.* 100 1,800
Mattel Inc. 250 6,500
McDonald's Corp. 400 19,150
Mikasa Inc. Class B* 100 1,188
Mohawk Industries Inc.* 100 1,450
Papa John's
International, Inc. 150 7,388
Premark International,
Inc. 100 5,138
Rubbermaid Inc. 100 2,825
Russ Berrie & Co. Inc. 100 1,600
Ryan's Family Steak
Houses Inc.* 200 1,950
Sbarro, Inc. 100 2,625
Shoney's Inc.* 100 1,113
Toy Biz Inc. Class A* 100 2,038
Wendy's International,
Inc. 100 1,913
Zenith Electronics
Corp.* 100 938
------
95,968
------
CONTAINERS--0.1%
ACX Technologies Inc. 100 1,938
Ball Corp. 600 18,675
Crown Cork & Seal Inc. 100 4,713
Gaylord Container Corp.
Class A* 200 2,050
Greif Brothers Corp.
Class A 100 2,625
Stone Container Corp. 100 1,700
------
31,701
------
ELECTRONICS--1.1%
AMETEK, Inc. 100 1,925
AMP Inc. 300 13,425
Advanced Micro Devices
Inc. 180 3,375
Allen Group Inc. 100 2,475
Alliance Semiconductor
Corp. 100 1,063
Applied Materials, Inc. 300 11,963
Augat Inc. 100 1,925
Belden Inc. 100 2,975
Burr Brown 100 1,900
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Cable Design
Technologies Corp. 100 $ 3,275
Checkpoint Systems Inc. 400 11,950
Cyrix Corp.* 100 3,069
Dallas Semiconductor
Corp. 100 1,950
Electroglas Inc. 200 3,925
FORE Systems, Inc. 200 15,763
General Instrument Corp.* 100 3,275
Gerber Scientific Inc. 100 1,688
Harris Corp. 100 6,175
Input/Output Inc. 200 6,950
Integrated Systems
Consulting Group
(Rights exp.
5/22/96)* 17 304
Intel Corp. 500 33,906
Itron, Inc.* 100 5,850
Kent Electronics Corp. 200 8,425
Kulicke & Soffa
Industries Inc. 100 1,875
LSI Logic Corp. 100 3,600
LTX Corp.* 100 969
Lattice Semiconductor
Corp.* 100 3,269
Marshall Industries* 100 3,188
Methode Electronics
Inc. Class A 100 1,650
Micron Technology Inc. 200 7,275
Motorola Inc. 400 24,500
National Semiconductor
Corp.* 100 1,575
Pioneer Standard
Electronics Inc. 100 1,625
Pittway Corp. Class A 150 7,163
Rexel Inc.* 100 1,338
S3 Inc. 200 2,850
Silicon Valley
Group Inc.* 100 2,663
Teledyne Inc. 100 3,713
Texas Instruments Inc. 200 11,300
VLSI Technology, Inc.* 200 3,488
VeriFone, Inc.* 100 4,200
Vicor Corp. 200 3,038
Wyle Electronics 100 4,188
Zilog Inc.* 100 3,763
-------
244,761
-------
ENERGY-DEVELOPMENT--0.6%
Amcol International
Corp. 100 1,150
BJ Services Co.* 100 3,838
Baker Hughes Inc. 100 3,175
Benton Oil & Gas Co.* 100 1,756
Burlington Resources
Inc. 100 3,725
Cabot Oil & Gas Corp.
Class A 100 1,650
Chesapeake Energy Corp. 150 10,613
Devon Energy Corp. 100 2,550
Dresser Industries Inc. 100 3,188
Falcon Drilling Inc.* 100 2,706
Global Industrial
Technologies Inc.* 100 1,838
Global Natural
Resources Inc.* 100 1,450
</TABLE>
F-81
<PAGE> 139
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Halliburton Co. 100 $ 5,738
Helmerich & Payne Inc. 400 14,750
Landmark Graphics
Corp.* 100 1,950
Louis Dreyfus Natural
Gas Corp.* 100 1,275
Nabors Industries Inc.* 300 4,613
Newfield Exploration
Co.* 100 3,425
Noble Drilling Corp.* 300 4,500
Occidental Petroleum
Corp. 200 5,150
Parker & Parsley
Petroleum Co. 100 2,463
Parker Drilling Co.* 200 1,525
Reading & Bates Corp.
(New)* 200 4,900
Rowan Cos. Inc.* 500 7,375
Schlumberger Ltd. 100 8,825
United Meridian Corp.* 100 3,100
Varco International
Inc.* 100 1,663
Vintage Petroleum Inc. 100 2,438
Weatherford Enterra Inc.* 200 7,050
Zeigler Coal Holding
Co. 100 1,475
-------
119,854
-------
FOOD-AGRICULTURE--1.5%
Archer-Daniels-
Midland Co. 400 7,550
Bob Evans Farms, Inc. 200 3,163
CPC International Inc. 100 6,913
Campbell Soup Co. 200 12,500
Chiquita Brands
International Inc. 200 2,925
Coca-Cola Co. 800 65,200
ConAgra, Inc. 200 7,725
Delta & Pine Land Co. 300 13,388
Dimon Inc. 100 1,700
Earthgrains Co.* 16 518
Flowers Industries,
Inc. 200 2,675
General Mills Inc. 100 5,550
H.J. Heinz Co. 300 10,163
Hershey Foods Corp. 100 7,588
Hudson Foods Inc.
Class A 100 1,325
International
Multifoods Corp. 100 1,888
Interstate Bakeries
Corp. (New) 100 2,375
J.M. Smucker Co.
Class A 100 2,113
JP Foodservice, Inc.* 100 2,200
Kellogg Co. 200 14,275
Lance Inc. 100 1,575
Mississippi Chemical
Corp. (New) 100 2,025
Pepsico Inc. 500 31,750
Pioneer HI Bred
International Inc. 100 5,575
Quaker Oats Co. 100 3,438
Ralcorp Holdings, Inc.* 100 2,200
Ralston Purina Co. 100 5,838
Richfood Holdings Inc. 100 3,269
Sara Lee Corp. 500 15,500
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Savannah Foods &
Industries Inc. 100 $ 1,088
Seaboard Corp. 200 43,100
Smithfield Foods Inc.* 100 2,975
Sysco Corp. 100 3,213
Unilever 200 27,300
WLR Foods, Inc. 100 1,213
Whitman Corp. 100 2,525
Wm Wrigley Junior Co. 100 5,263
-------
329,581
-------
GOLD--0.2%
Barrick Gold Corp. 400 12,250
Battle Mountain
Gold Co. 300 2,663
FMC Gold Co. 200 1,275
FirstMiss Gold Inc.* 100 3,088
Homestake Mining Co. 100 2,013
Newmont Mining Corp. 100 5,788
Placer Dome Inc. 200 5,550
Santa Fe Pacific Gold
Corp. 100 1,488
-------
34,115
-------
HEALTHCARE--2.6%
ALZA Corp.* 100 2,850
Abbott Laboratories 400 16,250
Acuson* 100 1,900
Advanced Tissue
Sciences Inc.* 100 1,700
Agouron Pharmaceuticals
Inc.* 100 4,075
Alpharma, Inc. 100 2,450
American Home Products
Corp. 300 31,650
Amgen Inc. 200 11,488
Amsco International,
Inc.* 100 1,450
Ballard Medical
Products 100 1,988
Baxter International
Inc. 200 8,850
Becton Dickinson & Co. 100 8,063
Biomet Inc.* 100 1,469
Block Drug Inc.
Class A 103 3,837
Boston Scientific
Corp.* 167 7,202
Bristol Myers
Squibb Co. 400 32,900
Carter Wallace Inc. 100 1,575
Columbia/HCA Healthcare
Corp. 200 10,625
Community Health
Systems Inc.* 100 4,338
Community Psychiatric
Centers 100 925
Copley Pharmaceutical
Inc.* 100 1,525
Cygnus Therapeutic
Systems, Inc.* 100 2,144
Datascope Corp.* 100 1,775
Diagnostic Products
Corp. 100 4,188
Eli Lilly & Co. 400 23,600
Enzo Biochem Inc. 100 1,838
Fresenius U.S.A. Inc.* 100 2,000
</TABLE>
F-82
<PAGE> 140
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Genesis Health
Ventures, Inc. 150 $ 4,444
Gilead Sciences Inc.* 100 3,075
Gulf South Medical
Supply Inc. 100 4,088
Haemonetics Corp.* 100 1,925
HealthSouth
Rehabilitation Corp. 117 4,344
Herbalife International
Inc. 100 1,375
Human Genome Sciences
Inc.* 100 3,988
Humana Inc.* 200 4,925
ICN Pharmaceuticals,
Inc. 101 2,273
Immulogic
Pharmaceutical Corp.* 100 1,094
Immunex Corp. (New)* 100 1,569
Interneuron
Pharmaceuticals* 100 3,913
Invacare Corp. 100 2,575
Isis Pharmaceuticals* 100 1,263
Isolyser Inc. 100 1,750
Johnson & Johnson 400 37,000
Kinetic Concepts Inc. 100 1,488
Ligand Pharmaceuticals
Inc. Class B 100 1,481
Lincare Holdings Inc.* 100 3,875
Liposome Inc.* 100 2,456
Living Centers of
America* 100 3,700
Mallinckrodt
Group Inc. 100 3,938
Medimmune Inc.* 100 1,675
Medisense Inc.* 100 4,488
Medtronic Inc. 200 10,625
Mentor Corp. 100 2,338
Merck & Co. Inc. 800 48,400
Multicare Cos. Inc. 100 2,838
Nellcor Puritan
Bennett Inc.* 100 4,900
Nexstar Pharmaceuticals
Inc.* 100 2,450
Novacare Inc.* 200 1,450
Omnicare Inc. 100 6,000
Owens & Minor Inc.
(New) 100 1,350
PDT Inc. 100 4,763
Patterson Dental Co.* 100 3,000
Pfizer Inc. 400 27,550
Pharmacia &
Upjohn Inc. 200 7,650
Physician Sales &
Service Inc. 100 2,738
Pyxis Corp.* 200 5,075
Quintiles Transnational
Corp. 200 14,625
Renal Treatment Centers
Inc. 400 11,600
Respironics Inc. 100 2,163
RoTech Medical Corp. 100 4,150
Roberts Pharmaceutical
Corp.* 100 1,875
Salick Health Care,
Inc.* 200 7,625
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Schering Plough Corp. 200 $ 11,475
Sepracor Inc.* 100 1,400
Sofamor/Danek
Group Inc.* 100 3,275
Sola International
Inc.* 100 3,275
Somatogen Inc.* 100 1,656
St. Jude Medical, Inc. 100 3,644
Sunrise Medical Inc.* 100 1,825
Target Therapeutics
Inc. 200 10,825
Tecnol Medical Products
Inc.* 100 1,963
Tenet Healthcare Corp.* 100 2,050
Thermedics Inc.* 100 3,025
U.S. Healthcare, Inc. 100 5,219
United Healthcare Corp. 300 17,550
Ventritex Inc. 100 1,556
Vertex Pharmaceuticals
Inc.* 100 2,950
VISX Inc.* 100 3,400
Vivra Inc. 150 4,744
Warner Lambert Co. 100 11,175
West Co Inc. 100 2,275
-------
561,804
-------
HOUSEHOLD PRODUCTS--0.4%
Avon Products, Inc. 100 8,888
Bush Boake Allen Inc.* 100 2,700
Church & Dwight Inc. 100 2,200
Clorox Co. 100 8,263
Colgate-Palmolive Co. 100 7,663
Dial Corp. 100 2,813
Gillette Co. 200 10,800
International Flavors &
Fragrances Inc. 100 4,913
Playtex Products Inc.* 200 1,750
Procter & Gamble Co. 500 42,250
-------
92,240
-------
IMAGING & PHOTO--0.2%
Avid Technology, Inc.* 100 1,944
BMC Industries, Inc. 100 2,675
C-Cube Microsystems,
Inc. 200 9,850
Eastman Kodak Co. 100 7,650
Electronics for
Imaging Inc. 200 12,275
Ultratech Stepper Inc. 100 2,600
-------
36,994
-------
INSURANCE--1.4%
Aetna Life &
Casualty Co. 100 7,125
Alexander & Alexander
Services 1,200 22,650
Alfa Corp. 100 1,300
Allstate Corp. 400 15,550
American Annuity
Group, Inc. 100 1,250
American Bankers
Insurance
Group, Inc. 100 3,938
American General Corp. 200 7,025
</TABLE>
F-83
<PAGE> 141
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
American International
Group, Inc. 300 $27,413
Aon Corp. 100 5,363
Argonaut Group, Inc. 100 3,125
Arthur J. Gallagher
& Co. 100 3,250
CMAC Investment Corp. 100 5,600
Capital Re Corp. 100 3,750
Capitol American
Financial Corp. 100 2,413
Chubb Corp. 100 9,463
Cigna Corp. 100 11,338
Citizens Corp. 100 1,950
Commerce Group Inc. 100 2,000
Crawford & Co.
Class A 100 1,625
Crawford & Co.
Class B 100 1,625
Enhance Financial
Services Group Inc. 100 2,713
Financial Security
Assured Holdings Ltd. 100 2,700
Foremost Corp. of
America 100 5,350
Fremont General Corp. 150 3,750
General Re Corp. 100 14,288
HCC Insurance
Holdings, Inc. 200 11,700
Harleysville Group Inc. 100 2,750
Highlands Insurance
Group Inc.* 10 190
Home Beneficial Corp.
Class B 100 2,588
Horace Mann Educators
Corp. (New) 100 3,288
ITT Hartford
Group Inc. 100 4,888
Jefferson-Pilot Corp. 300 15,825
John Alden Financial
Corp. 100 1,950
Kansas City Life
Insurance Co. 100 5,513
Liberty Corp. 100 3,175
Life Partners
Group Inc. 100 2,088
Lincoln National
Corp. Inc. 100 4,825
Marsh & McLennan
Companies 100 9,400
NAC Re Corp. 100 3,275
National Re Corp. 100 3,550
Orion Capital Corp. 100 4,438
Penncorp Financial
Group Inc. 100 3,063
Presidential Life Corp. 100 981
Providian Corp. 100 4,613
Reinsurance Group of
America Inc. 100 4,150
Safeco Corp. 200 6,588
Selective Insurance
Group, Inc. 100 3,150
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Sierra Health
Services Inc.* 100 $ 3,300
St. Paul Companies,
Inc. 100 5,313
Torchmark Corp. 100 4,300
Transamerica Corp. 100 7,600
UNUM Corp. 100 5,950
USF&G Corp. 100 1,588
United Companies
Financial Corp. 100 3,213
United Insurance
Companies, Inc. 100 2,125
Vesta Insurance
Group Inc. 150 4,819
Zenith National
Insurance Corp. 100 2,513
-------
309,263
-------
MEDIA--0.8%
AMC Entertainment Inc.* 100 2,588
Cablevision Systems
Corp. Class A* 100 4,988
Central Newspapers Inc.
Class A 100 3,638
Century Communications
Corp. Class A* 300 2,906
Citicasters Inc. 100 3,000
Comcast Corp. Class A 200 3,488
Dow Jones & Co. Inc. 100 3,738
Evergreen Media* 100 3,963
Gannett Inc. 100 6,838
Harte Hanks
Communications (New) 150 3,544
Houghton Mifflin Co. 100 4,638
Interdigital Commerce
Corp.* 100 831
International Cabletel
Inc. 100 2,944
International Family
Entertainment Inc.
Class B 125 1,906
Jacor Communications
Inc.* 100 2,150
John Wiley & Son, Inc.
Class A 100 3,450
Knight-Ridder, Inc. 100 7,238
McClatchy Newspapers
Inc. Class A 100 2,425
McGraw-Hill, Inc. 200 8,825
Media General, Inc.
Class A 100 3,850
Meredith Corp. 100 4,538
Metromedia
International
Group., Inc. 100 1,350
New World
Communications
Class A* 100 1,869
New York Times Co.
Class A 100 3,250
Oak Industries Inc.* 100 2,700
Paxson Communications
Corp. 100 1,488
Pulitzer Publishing Co. 100 5,700
Regal Cinemas, Inc. 150 6,141
</TABLE>
F-84
<PAGE> 142
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Renaissance
Communications Corp. 100 $ 2,763
SBC Communications Inc. 400 20,000
TCA Cable TV Inc. 100 2,938
Tele Communications
Inc. (New)--TCI
Group Series A 500 9,594
Time Warner Inc. 300 12,263
Times Mirror Co. (New)
Series A 100 4,263
Tribune Co. (New) 100 6,975
United International
Holdings Inc.
Class A* 100 1,450
Viacom Inc. Class B* 300 12,300
Westcott
Communications Inc.* 100 2,131
Westwood One Inc.* 100 1,769
-------
180,430
-------
MISCELLANEOUS FINANCE--0.9%
AMCORE Financial, Inc. 100 2,025
Alex Brown Inc. 100 5,413
American Express Co. 200 9,700
Americredit Corp.* 100 1,438
Astoria Financial Corp. 100 5,338
Beneficial Corp. 100 5,525
Bok Financial Corp.
(New) 100 2,075
Cal-Federal Bancorp
Inc.* 200 3,575
Charter One
Financial Inc. 200 7,013
Coast Savings
Financial Inc.* 100 3,113
Collective Bancorp Inc. 100 2,419
Commercial Federal
Corp. 100 3,838
Dean Witter
Discover & Co. 100 5,450
Eaton Vance Corp. (Non
Voting) 100 3,088
Federal Home Loan
Mortgage Corp. 200 16,675
Federal National
Mortgage Assoc. 800 24,500
First Financial Corp. 100 2,363
Fund American
Enterprises
Holdings, Inc. 100 7,650
Glendale Federal Bank
(FSB) (New)* 100 1,750
Great Western Financial
Corp. 100 2,300
Green Tree Financial
Corp. 100 3,375
H.F. Ahmanson & Co. 100 2,375
Home Financial Corp. 100 1,400
Household International
Inc. 100 6,913
Interpool Inc. 100 1,800
Merrill Lynch & Co.
Inc. 200 12,075
Money Store Inc. 250 6,344
Morgan Stanley
Group Inc. 200 10,050
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Olympic Financial Ltd.* 100 $ 2,225
Peoples Heritage
Financial Group, Inc. 100 2,100
Pioneer Group Inc. 100 2,650
Quick & Reilly
Group, Inc. 100 3,050
Raymond James
Financial Inc. 100 2,263
Roosevelt
Financial Group Inc. 200 3,850
Salomon Inc. 100 4,063
Sovereign Bancorp Inc. 105 1,168
St. Paul Bancorp Inc. 100 2,431
Standard Financial Inc. 100 1,494
Student Loan Corp. 100 3,575
Travelers Group Inc. 200 12,300
Westcorp Inc. 100 1,963
-------
202,712
-------
MOTOR VEHICLE--0.7%
Arctco, Inc. 100 969
Arvin Industries, Inc. 500 11,250
Borg Warner
Automotive Inc. 100 3,813
Breed Technologies Inc. 100 2,150
Chrysler Corp. 300 18,825
Dana Corp. 100 3,325
Detroit Diesel Corp.* 100 1,913
Eaton Corp. 100 6,050
Echlin Inc. 100 3,438
Federal Mogul Corp. 100 1,900
Ford Motor Co. 700 25,113
General Motors Corp. 600 32,550
Gentex Corp.* 100 3,938
Genuine Parts Co. 100 4,425
Hayes Wheels
International Inc. 100 3,038
Mascotech Inc. 200 2,625
Modine
Manufacturing Co. 100 2,750
Standard Products Co. 100 2,538
Superior Industries
International, Inc. 100 2,738
TRW Inc. 100 9,388
Titan Wheel
International Inc. 100 1,613
-------
144,349
-------
NON-FERROUS--0.4%
Alcan Aluminum Ltd. 300 9,563
Aluminum Company of
America 200 12,475
Cyprus Amax
Minerals Co. 100 2,713
Echo Bay Mines Ltd 200 2,625
Engelhard Corp. 100 2,513
Freeport McMoran Copper
& Gold Class B 100 3,288
Hecla Mining Co.* 100 775
Inco Ltd. 100 3,363
</TABLE>
F-85
<PAGE> 143
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Minerals
Technologies Inc. 600 $ 23,100
Mueller Industries Inc. 100 4,025
Phelps Dodge Corp. 100 7,350
Reynolds Metals Co. 100 5,375
Stillwater Mining Co.* 100 2,375
Sunshine Mining &
Refining Co.* 600 975
Wolverine Tube Inc.* 200 7,350
-------
87,865
-------
OIL-DOMESTIC--0.4%
Amerada Hess Corp. 100 5,663
Atlantic Richfield Co. 300 35,325
Barrett Resources
Corp.* 100 2,775
Cross Timbers Oil Co. 100 2,000
Diamond Shamrock Inc. 100 3,388
Kerr-McGee Corp. 100 6,388
Phillips Petroleum Co. 200 8,300
Pogo Producing Co. 100 3,613
Quaker State Corp. 100 1,575
Smith International
Inc.* 100 2,975
Snyder Oil Corp. 100 900
Sun Inc. 100 3,100
USX Corp. (Marathon
Group) (New) 200 4,400
Unocal Corp. 200 6,425
-------
86,827
-------
OIL-INTERNATIONAL--1.0%
Amoco Corp. 300 21,900
Chevron Corp. 500 29,000
Exxon Corp. 800 68,000
Mobil Corp. 200 23,000
Royal Dutch
Petroleum Co. 300 42,975
Texaco Inc. 200 17,100
Western Atlas, Inc.* 100 6,000
-------
207,975
-------
PAPER--0.5%
Alco Standard Corp. 100 5,788
Caraustar Industries
Inc. 100 2,513
Champion International
Corp. 100 4,825
Chesapeake Corp. 100 2,888
Georgia Pacific Corp. 100 7,775
International Paper Co. 200 7,975
James River Corp. 100 2,675
Kimberly Clark Corp. 178 12,927
Longview Fibre Co. 200 3,525
Louisiana Pacific Corp. 100 2,513
Mead Corp. 100 5,563
P.H. Glatfelter Co. 200 3,325
Rock Tennessee Co.
Class A 100 1,756
Schweitzer Mauduit
International Inc. 10 271
Shorewood Packaging
Corp.* 100 1,725
Temple-Inland Inc. 100 4,850
Union Camp Corp. 100 5,438
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Wausau Paper
Mills Co. 125 $ 2,875
Westvaco Corp. 100 3,100
Weyerhaeuser Co. 200 9,900
Willamette
Industries, Inc. 100 6,175
------
98,382
------
PRODUCER GOODS-MANUFACTURING--2.0%
Albany International
Corp. Class A (New) 100 2,150
Allied Signal Inc. 300 17,438
AptarGroup, Inc. 100 3,763
Avery Dennison Corp. 100 5,700
BT Office Products
International Inc.* 100 1,738
BW/IP Holding, Inc.
Class A 100 2,075
Baldor Electric Co. 100 2,163
Blyth Industries Inc. 200 7,950
Case Corp. 100 5,050
Caterpillar Inc. 200 12,800
Coherent Inc.* 100 5,369
Collins & Aikman Corp.* 200 1,400
Cooper Industries Inc. 100 4,250
Credence Systems Corp. 100 2,163
Deere & Co. 300 11,663
Donaldson Inc. 100 2,625
Dover Corp. 100 5,150
Duriron Inc. 100 2,625
Emerson Electric Co. 200 16,725
FMC Corp. (New)* 100 6,938
Fisher Scientific
International, Inc. 100 3,738
General Electric Co. 1,200 93,000
Giddings & Lewis Inc. 200 3,700
Goulds Pumps Inc. 100 2,344
Greenfield Industries
Inc. 100 3,794
Griffon Corp.* 100 900
Helix Technology Corp. 100 3,769
Herman Miller Inc. 100 3,075
IDEX Corp. 100 3,925
ITT Industries Inc. 100 2,750
Illinois Tool
Works Inc. 100 6,725
Ingersoll Rand Co. 100 3,875
Insilco Corp.* 100 3,469
Interface Inc. Class A 100 1,306
Ionics Inc. 100 4,800
JLG Industries Inc. 100 5,475
Johnson Controls, Inc. 100 7,150
Juno Lighting Inc. 100 1,488
Kaydon Corp. 100 3,975
Kennametal Inc. 100 3,788
Keystone
International Inc. 100 2,188
Lincoln Electric Co.
Class A (Non Voting) 100 2,825
Lydall Inc. 100 2,350
Myers Industry Inc. 100 1,813
Navistar International
Corp.* 1,200 14,400
</TABLE>
F-86
<PAGE> 144
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Nu-Kote Holding Inc.
Class A 100 $ 1,775
Pall Corp. 100 2,800
Parker Hannifin Corp. 100 4,225
Precision Castparts
Corp. 100 4,338
Presstek Inc. 100 13,888
Raychem Corp. 100 7,788
Roper Industries 100 4,713
Standex International
Corp. 100 2,700
Stewart & Stevenson
Services, Inc. 100 2,950
TRINOVA Corp. 600 21,150
Teleflex Inc. 100 4,638
Tencor Instruments 100 2,469
Tenneco Inc. 200 10,975
Texas Industries Inc. 100 6,400
TriMas Corp. 200 4,725
Triarc Cos., Inc.
Class A* 100 1,263
Tyco Interest Ltd 100 3,863
U.S. Filter Corp. (New) 100 3,075
UNR Industries, Inc. 200 1,850
Valhi, Inc. (New) 500 3,250
W.W. Grainger, Inc. 100 6,900
WMS Industries Inc.* 100 1,813
Watts Industries Inc.
Class A 100 2,050
Westinghouse Air Brake
Co. (New) 100 1,413
Westinghouse Electric
Corp. 300 5,663
Westpoint Stevens Inc.
Class A 100 2,106
Wyman Gordon Co.* 100 1,825
X-Rite, Inc. 100 1,750
-------
438,712
-------
RAILROAD--0.3%
Burlington Northern
Santa Fe 100 8,750
CSX Corp. 200 10,250
Conrail Inc. 100 6,975
Florida East Coast
Industry Inc. 100 8,900
Norfolk Southern Corp. 100 8,400
Union Pacific Corp. 200 13,625
-------
56,900
-------
REAL PROPERTY--0.1%
Catellus Development
Corp.* 200 1,825
Insignia Financial
Group Class A (New) 400 8,800
Price Enterprises Inc. 100 1,600
-------
12,225
-------
RETAIL--1.3%
Albertson's Inc. 200 7,700
American Stores Co.
(New) 100 3,338
Arbor Drugs, Inc. 100 2,038
Best Buy Co., Inc.* 200 3,850
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Burlington Coat Factory
Warehouse* 100 $ 1,088
CDW Computer
Centers Inc.* 100 7,725
CUC International Inc. 100 3,288
Carson Pirie Scott & Co.*
100 2,425
Casey's General
Stores Inc. 100 2,156
Charming Shoppes Inc. 300 1,931
Circle K Corp.* 100 3,125
Circuit City Stores
Inc. 100 3,175
Claire's Stores Inc. 150 3,263
CompUSA Inc. 200 6,925
Dayton Hudson Corp. 100 9,550
Dillard Department
Stores Inc. Class A 100 4,013
Dollar Tree Stores Inc. 150 5,025
Duty Free
International Inc. 100 1,338
Family Dollar
Stores, Inc. 300 4,575
Federated Department
Stores Inc.* 100 3,338
Fingerhut
Companies, Inc. 100 1,275
Fred Meyer Inc.* 100 2,875
Fruit of the Loom Inc.
Class A* 100 2,638
Gap Inc. 200 6,025
Gymboree Corp.* 100 2,600
Harcourt General Inc. 100 4,400
Hollywood Entertainment
Corp. 100 1,631
Home Depot Inc. 200 9,475
Home Shopping
Network, Inc.* 400 4,700
J.C. Penney Inc. 200 9,900
Just for Feet Inc. 100 4,781
K Mart Corp. 300 3,038
Kroger Co.* 100 4,113
Lands' End, Inc.* 100 1,975
Limited Inc. 109 2,262
Lowe's Cos Inc. 100 3,238
MacFrugals Bargains-
Close-Out* 100 1,338
May Department
Stores Co. 200 10,200
Melville Corp. 100 3,888
Michaels Stores Inc.* 100 1,844
Nordstrom Inc. 100 5,075
Pier 1 Imports Inc. 100 1,338
Price Costco Inc.* 100 1,894
Proffitt's, Inc.* 100 3,288
Rite Aid Corp. 100 2,963
Ross Stores Inc. 100 3,463
Ruddick Corp. 100 1,325
Sears Roebuck & Co. 200 9,975
Service Merchandise
Co. Inc.* 300 1,425
Shopko Stores Inc. 100 1,550
Smart & Final Inc. 100 2,275
</TABLE>
F-87
<PAGE> 145
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Smith's Food & Drug
Centers, Inc. Class B 100 $ 2,500
Sotheby's Holdings,
Inc. Class A 100 1,413
Spiegel, Inc. Class A
(Non Voting) 400 4,000
Sports Authority Inc.* 100 2,975
Stanhome Inc. 100 2,950
Stein Mart Inc.* 100 1,588
Tandy Corp. 100 5,188
Tiffany & Co. (New) 100 6,525
Toys 'R' Us, Inc.* 200 5,575
Waban Inc.* 100 2,450
Wal-Mart Stores, Inc. 1,600 38,200
Walgreen Co. 200 6,400
Williams-Sonoma Inc.* 100 2,506
Winn Dixie Stores Inc. 200 6,600
Woolworth Corp. 100 1,913
Zale Corp. (New)* 100 1,881
-------
289,297
-------
STEEL--0.2%
Armco Inc.* 300 1,688
Bethlehem Steel Corp.* 100 1,363
Birmingham Steel Corp. 100 1,600
Carpenter Technology
Corp. 100 3,763
Chaparral Steel Co. 100 1,513
Cleveland Cliffs Inc. 100 4,175
Intermet Corp.* 100 1,463
J & L Specialty
Steel Inc. 100 1,813
Lukens Inc. 100 2,638
National Steel Corp.
Class B* 100 1,363
Nucor Corp. 100 5,625
Oregon Steel Mills Inc. 100 1,588
USX Corp. (U.S. Steel
Group) 100 3,300
WHX Corp.* 100 1,150
Worthington
Industries Inc. 100 2,044
-------
35,086
-------
TELEPHONE--1.6%
360 Communications Co.* 100 2,350
AT&T Corp. 1,100 67,375
Airtouch
Communications Inc.* 500 15,625
Alltel Corp. 100 3,288
American Mobile
Satellite Corp.* 100 1,925
Ameritech Corp. (New) 600 35,025
Antec Corp.* 100 1,519
Arch Communications
Group, Inc.* 100 2,375
Aspect
Telecommunications
Corp. 100 5,750
Associated Group Inc.
Class A* 100 2,781
Bell Atlantic Corp. 200 13,000
BellSouth Corp. 600 24,000
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Boston Technology Inc.
(New)* 100 $ 1,750
C-TEC Corp. 100 2,988
Cellstar Corp.* 100 938
Comnet Cellular Inc.* 100 3,313
DSC Communications
Corp.* 100 3,138
GTE Corp. 600 26,025
General Datacom
Industries Inc.* 100 1,375
Geotek
Communications Inc.* 200 2,088
InterVoice, Inc.* 100 2,806
Lincoln
Telecommunications 100 1,681
Loral Space &
Communications* 100 1,438
MCI Communications
Corp. 500 14,688
Microcom Inc.* 100 2,450
Mobilemedia Corp.
Class A* 100 1,988
Nextel
Communications Inc.* 107 1,926
Northern Telecom Ltd 200 10,300
Nynex Corp. 200 9,825
Octel Communications
Corp. 100 4,500
Pacific Telesis Group 500 17,125
Pairgain Technologies
Inc.* 100 9,575
Sprint Corp. 300 12,638
Tellabs Inc. 100 5,538
U S WEST, Inc.
(Communications
Group) 400 13,100
U S West Inc. (Media
Group)* 300 5,850
Vanguard Cellular
Systems, Inc.
Class A* 200 4,300
Worldcom Inc.* 200 9,388
-------
345,744
-------
TOBACCO--0.3%
American Brands, Inc. 100 4,163
Loews Corp. 200 15,250
Philip Morris
Companies Inc. 600 54,075
UST Inc. 100 3,200
-------
76,688
-------
TRANSPORTATION-MISCELLANEOUS--0.3%
Air Express
International Corp. 100 2,788
Airbourne Freight Corp. 100 2,638
Amerco Inc.* 100 2,219
American Freightways
Corp.* 100 1,525
American President
Companies, Ltd. 100 2,388
Arnold Industries Inc. 100 1,600
Federal Express Corp.* 100 8,075
</TABLE>
F-88
<PAGE> 146
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Harper Group, Inc. 200 $ 3,850
Heartland Express, Inc. 100 2,950
J.B. Hunt Transport
Services Inc. 100 2,056
Kirby Corp.* 100 1,763
NACCO Industries, Inc.
Class A 200 12,625
Overseas Shipholding
Group 100 2,013
Rollins Truck Leasing
Corp. 100 1,088
Ryder System, Inc. 100 2,913
Shurgard Storage
Centers Inc. Class A 100 2,563
Swift Transportation
Inc. 100 1,900
TNT Freightways Corp. 100 2,256
Wabash National Corp. 100 1,975
Werner Enterprises Inc. 100 2,463
XTRA Corp. 100 4,550
Yellow Corp. 100 1,225
-------
67,423
-------
TRAVEL & RECREATION--0.5%
Anthony Industries,
Inc. 100 2,850
Aztar Corp.* 100 975
Bally Entertainment
Corp. 500 10,438
Bally Total Fitness
Holding Corp.* 25 138
Boyd Gaming Corp.* 200 2,800
Brunswick Corp. 100 2,200
Doubletree Corp.* 100 3,194
Harrahs
Entertainment Inc.* 100 3,450
Hilton Hotels Corp. 100 10,550
ITT Corp. (New)* 100 6,088
Marcus Corp. 100 2,788
Marriot International
Inc. 100 4,875
Players International
Inc. 100 1,138
Polaris Industries Inc. 100 3,488
Primadonna Resorts
Inc.* 100 1,913
Prime Hospitality
Corp.* 100 1,513
Rio Hotel &
Casino Inc.* 100 1,800
Speedway
Motorsports, Inc. 200 5,350
Station Casinos Inc.* 100 1,313
Stratosphere Corp.* 100 1,094
Topps Inc. 100 584
Walt Disney Co. 609 37,758
-------
106,297
-------
UTILITIES--1.3%
American Electric Power
Co., Inc. 100 4,063
Aquila Gas Pipeline
Corp. 100 1,388
Baltimore Gas &
Electric Co. 100 2,638
Carolina Power &
Light Co. 100 3,600
Central & South West
Corp. 200 5,450
Central Hudson Gas &
Electric Corp. 100 2,900
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Central Louisiana
Electric Co. (New) 100 $ 2,563
Central Maine
Power Co. 100 1,425
Cilcorp Inc. 100 4,313
Cinergy Corp. 100 2,900
Coastal Corp. 100 3,963
Commonwealth Energy
System (Shares of
Beneficial Interest) 100 4,588
Consolidated Edison Co. 200 5,875
Consolidated Natural
Gas Co. 100 4,675
DTE Energy Co. 100 3,100
Destec Energy, Inc.* 300 3,525
Dominion Resources Inc. 100 3,850
Duke Power Co. 200 9,400
Eastern Enterprises 300 10,763
Eastern Utilities
Association 100 2,038
Edison International 300 4,800
Enron Corp. 200 8,050
Entergy Corp. 200 5,300
FPL Group, Inc. 200 8,625
General Public
Utilities Corp. 100 3,175
Houston Industries Inc. 200 4,275
IES Industries Inc. 100 2,650
Indiana Energy Inc. 100 2,388
K N Energy Inc. 100 3,200
Laclede Gas Co. 100 2,350
MDU Resources
Group, Inc. 100 2,188
New Jersey Resources
Corp. 100 2,838
Niagara Mohawk Power
Corp. 100 750
NorAm Energy Co. 200 2,200
Northern States
Power Co. 100 4,675
Northwest Natural
Gas Co. 100 3,269
Ohio Edison Co. 100 2,088
Oneok Inc. 200 5,150
Orange & Rockland
Utilities, Inc. 100 3,413
Otter Tail Power Co. 200 7,325
P P & L Resources Inc. 100 2,263
Pacific Enterprises 100 2,575
Pacific Gas &
Electric Co. 300 6,825
Pacificorp 200 4,000
Panenergy Corp. 100 3,350
Peco Energy Co. 200 4,975
Piedmont Natural
Gas Inc. 100 2,163
Primark Corp.* 100 3,550
Public Service Co. of
New Mexico 100 1,750
Public Service Co. of
North Carolina Inc. 100 1,613
</TABLE>
F-89
<PAGE> 147
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Public Service
Enterprise Group 200 $ 5,225
Seagull Energy Corp.* 100 2,438
Sierra Pacific
Resources 100 2,425
Sig Corp. 100 3,338
Sonat Inc. 100 4,363
South Jersey
Industries Inc. 100 2,338
Southern Co. 500 11,000
Southwest Gas Corp. 100 1,663
Southwestern Energy Co. 100 1,388
Tejas Gas Corp. 100 5,000
Texas Utilities Co. 200 8,050
Tucson Electric
Power Co.* 500 1,438
UGI Corp. (New) 100 2,238
Unicom Corp. 300 8,250
Union Electric Co. 100 3,863
United Illuminating Co. 100 3,638
United Water
Resources Inc. 100 1,250
WPS Resources Corp. 100 3,163
Washington Energy Co. 100 1,938
Western Gas
Resources Inc. 100 1,475
Wicor Inc. 100 3,438
Williams Cos. Inc. 100 5,113
---------
277,822
---------
6,430,111
---------
INTERNATIONAL--10.6%
AUSTRALIA--0.2%
Australia & New Zealand
Banking Group 594 2,837
Broken Hill Proprietary
Co., Ltd. 1,134 17,451
Commonwealth Bank Group 523 4,293
National Australia Bank 820 7,356
News Corp., Ltd. 797 4,671
Western Mining Corp. 650 4,738
Westpac Banking Corp. 1,069 5,190
---------
46,536
---------
BELGIUM--0.1%
Electrabel 32 7,177
Electrabel, VVPR Strip 6 16
Petrofina SA 11 3,253
Societe Generale de
Belgique 24 1,868
Tractebel Investor
International 4 1,626
Tractebel Investor
International, VVPR
Strip 4 1,620
---------
15,560
---------
CANADA--0.3%
Alcan Aluminum Ltd. 132 4,198
BCE Inc. 183 7,198
Bank of Montreal 156 3,747
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Bank of Nova Scotia,
Halifax 135 $ 3,059
Barrick Gold Corp. 286 8,770
Canadian Imperial Bank
of Commerce 127 3,946
Canadian Pacific Ltd. 200 4,069
Imperial Oil Ltd. (New) 113 4,594
Northern Telecom Ltd. 149 7,672
Placer Dome Inc. 140 3,897
Royal Bank of Canada,
Montreal Quebec 184 4,358
Seagram Co. Ltd. 176 5,927
Thomson Corp. 345 5,739
Toronto-Dominion Bank 176 3,051
-------
70,225
-------
DENMARK--0.0%
Tele Danmark A/S
Series B 52 2,617
-------
2,617
-------
FRANCE--0.7%
AXA Groupe SA 106 6,316
Alcatel Alsthom CGE SA 88 8,276
BQE National de Paris 113 4,719
Carrefour 15 11,721
Cie Financiere de
Paribas (Bearer) 70 4,503
Cie Generale de Eaux 69 7,504
Compagnie de
Saint-Gobain SA 49 5,870
Danone Groupe 42 6,348
Elf Aquitaine 159 11,825
L'Air Liquide 39 7,087
L'Oreal SA 36 11,126
LVMH Moet Hennessy
Louis Vuitton 51 13,047
Lafarge Coppee SA 54 3,459
Lyonnaise des Eaux-
Dumez 30 3,013
Michelin (CGDE)
Class B (Reg.) 43 2,131
PSA Peugeot Citroen 29 4,052
Renault (Regie
Nationale) 140 4,245
Rhone-Poulenc SA A
Shares 188 4,511
Sanofi 60 4,842
Schneider SA 75 3,495
Societe Generale 51 5,922
Suez Group 93 3,853
TOTAL Class B 137 9,298
Union des Assurances de
Paris 176 3,811
-------
150,974
-------
GERMANY--0.8%
BASF AG 36 9,830
Bankgesell Berlin 13 2,671
Bayer AG 41 13,203
Bayerische Hypotheken &
Wechsel Bank AG 151 3,756
Bayerische Motoren
Werk AG 12 6,479
</TABLE>
F-90
<PAGE> 148
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Bayerische Vereinsbank AG 154 $ 4,527
Commerzbank AG 20 4,331
Daimler-Benz AG 30 16,432
Deutsche Bank AG 278 13,323
Dresdner Bank AG 260 6,542
Hoechst AG 34 11,451
Linde AG 5 3,057
Lufthansa AG 21 3,331
Mannesmann AG 21 7,174
Muenchener
Rueckversicherung (Reg.) 5 9,080
RWE AG* 120 4,672
RWE AG (Non Voting)* 70 2,037
Sap AG 30 3,890
Siemens AG 33 18,070
Thyssen AG 18 3,263
Veba AG 285 14,167
Vereinigte
Elektrizitatswerke
Westfalen Series B 12 3,449
Viag AG 12 4,707
Viag AG (New)* 3 1,177
Volkswagen AG 14 4,833
-------
175,452
-------
HONG KONG--0.6%
CITIC Pacific 2,000 7,860
Cheung Kong Holdings 2,000 14,285
Hang Seng Bank Ltd. 2,000 20,296
Henderson China 4 11
Henderson Land
Development Co. 1,000 7,175
Hongkong Electric
Holdings Ltd. 2,000 6,360
Hongkong
Telecommunications
Ltd. 8,400 16,017
Hutchison Whampoa Ltd. 2,000 12,410
New World
Development Co. 2,046 9,178
Sun Hung Kai Properties 1,000 9,534
Swire Pacific Ltd.
Class A 1,000 8,532
Wharf Holdings 2,000 7,407
-------
119,065
-------
ITALY--0.2%
Alleanza Assicurazioni 191 1,804
Assicurazioni Generali 469 11,695
Fiat SpA 1,924 6,559
Fiat SpA, di Risp
(Non-Convertible) 830 1,512
INA 1,382 2,123
STET 2,246 7,592
STET di Risp
(Non-Convertible) 627 1,644
Telecom Italia 3,888 7,928
Telecom Italia di Risp
(Non-Convertible) 1,145 1,899
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Telecom Italia Mob 3,367 $ 7,437
Telecom Italia Mob
di Risp 1,431 2,006
------
52,199
------
JAPAN--3.9%
Asahi Bank 1,000 12,906
Bank of Tokyo
Mitsubishi
(Bank of Tokyo shares) 800 18,431
Bank of Tokyo
Mitsubishi
(Mitsubishi Bank shares) 1,050 24,291
DDI Corp. 1 8,594
Dai-Ichi Kangyo
Bank, Ltd. 1,000 20,362
East Japan Railway Co. 1 5,344
Fuji Bank, Ltd. 1,000 21,892
Fujitsu Ltd. 1,000 10,325
Hitachi Ltd. 1,000 10,803
Industrial Bank of
Japan, Ltd. 1,000 26,767
Ishikawajima-Harima
Heavy Industries 1,000 4,971
Ito-Yokado Co., Ltd. 1,000 58,984
Joyo Bank 1,000 8,183
Kansai Electric
Power Co. 1,000 24,282
Kawasaki Heavy
Industries 1,000 5,172
Kawasaki Steel Co. 1,000 3,661
Kobe Steel 1,000 3,107
Kokusai Denki 1,000 98,466
Long-Term Credit
Bank of Japan 1,000 8,671
Matsushita Electric
Industrial Co., Ltd. 1,000 17,686
Mitsubishi Chemical
Corp. 1,000 5,487
Mitsubishi Electric
Corp. 1,000 7,877
Mitsubishi Heavy
Industries 1,000 8,929
NKK Corp. 1,000 3,136
Nippon Paper
Industries Co. 1,000 7,323
Nippon Steel Corp. 2,000 7,227
Nippon Telegraph &
Telephone Corp. 4 31,012
Nissan Motor Co., Ltd. 1,000 8,451
Nomura Securities
Co., Ltd. 1,000 21,796
Obayashi Corp. 1,000 9,302
Oki Electric Industry
Co., Ltd. 1,000 7,935
Omron Corp. 1,000 22,561
Osaka Gas Co. 1,000 4,006
Sakura Bank 1,000 11,759
Sanwa Bank 1,000 20,267
Seven-Eleven Japan Co. 1,100 77,922
Sumitomo Bank 1,000 21,414
Sumitomo Metal
Industries 1,000 3,212
Taisei Corp. 1,000 7,743
Tokai Bank 1,000 12,810
</TABLE>
F-91
<PAGE> 149
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Tokyo Electric Power
Co., Inc. 1,000 $ 27,245
Tokyo Electron 1,000 37,188
Tokyo Gas & Electric
Industrial 1,000 3,929
Toshiba Corp. 1,000 7,782
Toyo Seikan 1,000 35,467
Toyo Trust &
Banking Co. 1,000 10,898
Toyota Motor Corp. 1,000 22,848
Yasuda Fire & Marine
Insurance Co. 1,000 7,887
-------
846,311
-------
NETHERLANDS--0.6%
ABN Amro
Holdings NV 181 9,370
Aegon NV 152 7,239
Akzo Nobel NV 42 4,878
Elsevier NV 386 5,812
Heineken NV 29 6,069
ING NV 168 12,971
Koninklijke PTT
Nederland 271 10,169
Philips Electronics NV 201 7,097
PolyGram NV 105 6,250
Royal Dutch Petroleum
Co. (Bearer) 314 44,731
Unilever NV, CVA 94 12,826
Wolters Kluwer NV, CVA 29 3,170
-------
130,582
-------
SINGAPORE--0.1%
Hong Kong Land Holdings 1,000 2,140
Singapore Airlines Ltd.
(alien market) 1,000 10,101
Singapore
Telecommunications 6,000 14,767
-------
27,008
-------
SPAIN--0.2%
Argentaria Corp. 50 2,024
Banco Bilbao-Vizcaya SA
(Reg.) 133 5,055
Banco de Santander SA
(Reg.) 68 3,159
Empresa Nacional de
Electricidad 152 9,548
Iberdrola SA 542 5,305
Repsol, SA 176 6,455
Telefonica
Internacional de
Espana, SA 550 9,794
-------
41,340
-------
SWEDEN--0.2%
ASEA AB 39 3,991
ASEA AB Series B 13 1,319
Astra AB Series A 294 13,071
Astra AB Series B 40 1,767
L.M. Ericsson Telephone
Series B 560 11,354
Sandvik AB Series A 72 1,587
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
Sandvik AB Series B 82 $ 1,808
Volvo AB Series A 65 1,490
Volvo AB Series B 167 3,829
-------
40,216
-------
SWITZERLAND--0.7%
CS Holding (Reg.) 108 9,808
Ciba-Geigy Ltd.
(Bearer) 1 1,154
Ciba-Geigy Ltd. (Reg.) 14 16,248
Nestle Ltd. (Reg.) 25 27,807
Roche Group
Holding AG 4 31,459
Roche Group Holding AG
(Bearer) 1 13,531
Sandoz Ltd. (Bearer) 2 2,178
Sandoz Ltd. (Reg.) 21 22,935
Schweizerische
Bankgesellschaft
(Bearer) 12 11,927
Schweizerische
Bankgesellschaft
(Reg.) 13 2,827
schweizerische
Bankverein (Bearer) 14 5,243
Schweizerische
Bankverein (Reg.) 16 2,990
Winterthur (Reg.) 4 2,510
Zurich Versicherung
(Reg.) 27 7,546
-------
158,163
-------
UNITED KINGDOM--2.0%
Abbey National 769 6,575
Allied Domecq PLC 610 4,715
Argyll Group 669 3,343
Associated British
Foods 443 2,654
BAA 605 4,973
BAT Industries 1,806 13,648
BOC Group 193 2,682
BTR 2,162 10,415
Barclays 944 10,473
Bass 517 6,098
Boots Co. 556 5,302
British Airways 567 4,430
British Gas 2,541 9,027
British Petroleum Co. 3,245 29,285
British Sky Broadcast 1,030 7,411
British Steel 806 2,408
British Telecom 3,652 20,038
Cable & Wireless 1,294 10,158
Cadbury Schweppes 577 4,473
Commercial Union
Assurance Co. 389 3,376
General Electric Co. 1,608 8,678
Glaxo Wellcome 2,029 24,603
Granada Group 343 4,252
Grand Metropolitan,
Inc. 1,251 8,230
Great University Stores 589 6,424
Guinness 1,184 8,520
HSBC Holdings 500 7,403
HSBC Holdings (Hong
Kong) 1,036 15,338
Hanson Industries 2,132 6,323
Imperial Chemical
Industries 424 5,744
</TABLE>
F-92
<PAGE> 150
SchwabFunds(R)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
J. Sainsbury PLC 1,060 $ 5,840
Kingfisher 391 3,499
Lloyds TSB Group 2,345 11,243
Marks & Spencer PLC 1,640 10,949
National Power
Development 695 5,864
National Westminster
Bancorp 1,007 9,285
Pearson, Inc. 309 3,265
Powergen 425 3,570
Prudential Corp. 1,114 7,672
RTZ Corporation PLC 571 8,991
Rank Organisation PLC 486 3,899
Reed International 329 5,661
Reuters Holdings PLC 977 11,060
Royal Bank of Scotland 473 3,692
RTZ Corp. (Bearer) 57 884
Scot & Newcastle 358 3,705
Shell Transport &
Trading Co. (Reg.) 1,941 25,610
SmithKline Beecham PLC
Series A 810 8,590
SmithKline Beecham PLC
(New) 782 8,299
Standard Chartered PLC 566 5,300
Tesco 1,209 5,105
Thorn Emi 251 6,962
Unilever 475 8,695
Vodafone Group 1,228 4,908
Zeneca Group 554 11,320
---------
440,867
---------
2,317,115
---------
TOTAL COMMON STOCK
(Cost $7,997,220) 8,747,226
---------
PREFERRED STOCK--0.1%
AUSTRALIA--0.0%
News Corp. (Limited
Voting Shares) 388 1,996
---------
GERMANY--0.1%
Henkel KGaA 9 3,451
Sap AG (Non-Voting) 24 3,187
Volkswagen AG
(Non-Voting) 6 1,525
---------
8,163
---------
ITALY--0.0%
Fiat SpA 701 1,340
---------
GERMANY--0.0%
Lufthansa AG
(Non-Voting) 12 1,879
---------
<CAPTION>
Number
of Shares Value
--------- -----------
<S> <C> <C>
UNITED STATES--0.0%
Teledyne, Inc. Series E 1 $ 15
----------
TOTAL PREFERRED STOCK
(Cost $13,259) 13,393
----------
</TABLE>
<TABLE>
<CAPTION>
Par
----------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS--54.1%(a)
U.S. Treasury Bonds
10.00%, 05/15/10 $ 300,000 363,567
7.25%, 05/15/16 470,000 478,968
8.13%, 08/15/19 325,000 362,622
U.S. Treasury Bonds
7.13%, 02/15/23 2,850,000 2,864,849
6.25%, 08/15/23 775,000 699,368
U.S. Treasury Notes
5.88%, 05/31/96 200,000 200,142
6.25%, 01/31/97 800,000 804,440
5.63%, 10/31/97 1,100,000 1,095,402
5.13%, 02/28/98 150,000 147,674
5.88%, 08/15/98 800,000 795,952
5.00%, 02/15/99 600,000 582,204
7.00%, 04/15/99 300,000 306,216
7.50%, 10/31/99 500,000 518,265
7.13%, 02/29/00 200,000 205,100
5.75%, 10/31/00 1,050,000 1,023,666
6.38%, 08/15/02 525,000 520,790
6.50%, 05/15/05 150,000 147,984
6.50%, 08/15/05 650,000 641,030
----------
TOTAL U.S. TREASURY
OBLIGATIONS
(Cost $12,122,972) 11,758,239
----------
AGENCY OBLIGATIONS-
COUPON NOTES--1.8%(a)
Federal National
Mortgage Assoc.
7.250%, 06/01/05 400,000 396,824
----------
TOTAL AGENCY OBLIGATIONS-
COUPON NOTES
(Cost $403,958) 396,824
----------
CASH EQUIVALENTS--3.4%(b)
AGENCY OBLIGATIONS-
DISCOUNT NOTES--2.3%
Federal Home Loan Bank
5.21%, 05/28/96 500,000 498,054
----------
</TABLE>
F-93
<PAGE> 151
SchwabFunds(R)
- --------------------------------------------------------------------------------
SCHWAB ASSET DIRECTOR(R)-CONSERVATIVE GROWTH FUND
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Maturity Value
-------- -----------
<S> <C> <C>
REPURCHASE AGREEMENT--1.1%
State Street Bank 4.75%
Dated 04/30/96
Due 05/01/96
Collateralized By:
U.S. Treasury Note
$245,000 Par; 8.00%
Due 10/15/96 $242,032 $ 242,000
----------
TOTAL CASH EQUIVALENTS
(Cost $740,054) 740,054
----------
TOTAL INVESTMENTS--99.6%
(Cost $21,277,463) 21,655,736
----------
OTHER ASSETS AND
LIABILITIES--0.4%
Other Assets 296,971
Liabilities (218,792)
----------
78,179
----------
NET ASSETS--100.0%
Applicable to 2,123,836
outstanding $0.00001
par value shares
(unlimited shares authorized) $21,733,915
===========
NET ASSET VALUE PER SHARE $10.23
======
</TABLE>
NOTES TO STATEMENTS OF NET ASSETS
(a) Interest rates represent stated coupon rate of security.
(b) Interest rates represent effective yield at the time of purchase.
- ---------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
F-94
<PAGE> 152
SchwabFunds(R)
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
------Schwab Asset Director(R)----------
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Investment income:
Dividends (net of foreign tax
withheld of $18,774, $7,667 and
$2,379, respectively) $ 519,839 $ 274,650 $ 64,508
Interest 450,271 607,495 301,956
-------- -------- --------
Total investment income 970,110 882,145 366,464
-------- -------- --------
Expenses:
Investment advisory and
administration fee 264,862 189,136 65,101
Transfer agency and
shareholder service fees 89,480 63,897 21,993
Custodian fees 141,565 122,061 85,816
Registration fees 41,952 34,105 17,293
Professional fees 18,854 17,495 15,300
Shareholder reports 24,964 17,779 6,341
Trustees' fees 4,671 3,526 1,540
Amortization of deferred
organization costs 1,630 1,630 1,630
Insurance and other expenses 2,583 2,314 2,044
-------- -------- --------
590,561 451,943 217,058
Less expenses reduced and absorbed (272,011) (224,468) (138,760)
-------- -------- --------
Total expenses incurred by Fund 318,550 227,475 78,298
-------- -------- --------
Net investment income 651,560 654,670 288,166
-------- -------- --------
Net realized gain (loss) on
investments and foreign currency
transactions:
Proceeds from sales of investments 37,502,807 22,479,790 8,331,437
Cost of investments sold (37,849,936) (22,724,569) (8,402,243)
-------- -------- ---------
Net realized loss from changes
in market value (347,129) (244,779) (70,965)
Net realized loss from changes
in foreign exchange rates (72) (69) (8)
-------- -------- --------
Net realized loss on
investments sold (347,201) (244,848) (70,973)
Net realized gain (loss) on
foreign currency transactions 3,590 1,675 (103)
-------- -------- --------
Net realized loss on
investments sold and
foreign currency
transactions (343,611) (243,173) (71,076)
</TABLE>
Statement continued on next page.
F-95
<PAGE> 153
SchwabFunds(R)
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (continued)
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
------Schwab Asset Director(R)----------
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Net unrealized gain (loss) on
investments and foreign currency
translation:
Net unrealized gain from changes
in market value $ 6,422,873 $ 3,049,139 $ 453,450
Net unrealized loss from changes
in foreign exchange rates (549,278) (301,388) (75,177)
-------- -------- --------
Net unrealized gain on
investments from changes in
market value and foreign
exchange rates 5,873,595 2,747,751 378,273
Net unrealized loss on translating
assets and liabilities into the
reporting currency (271) (12) (242)
-------- -------- --------
Net unrealized gain on
investments and foreign
currency translation 5,873,324 2,747,739 378,031
-------- -------- --------
Net gain on investments 5,529,713 2,504,566 306,955
-------- -------- --------
Increase in net assets resulting
from operations $ 6,181,273 $ 3,159,236 $ 595,121
======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-96
<PAGE> 154
SchwabFunds(R)
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
------Schwab Asset Director(R)----------
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Operations:
Net investment income $ 651,560 $ 654,670 $ 288,166
Net realized loss on investments
sold and foreign currency
transactions (343,611) (243,173) (71,076)
Net unrealized gain on investments
and foreign currency
translation 5,873,324 2,747,739 378,031
----------- ----------- -----------
Increase in net assets resulting
from operations 6,181,273 3,159,236 595,121
----------- ----------- -----------
Dividends to shareholders from net
investment income (158,402) (150,875) (214,428)
----------- ----------- -----------
Capital share transactions:
Proceeds from shares sold 97,345,157 71,109,119 24,570,535
Net asset value of shares issued
in reinvestment of dividends 152,276 138,204 193,730
Less payments for shares redeemed (8,664,601) (5,246,654) (3,412,043)
----------- ----------- -----------
Increase in net assets from
capital
share transactions 88,832,832 66,000,669 21,352,222
----------- ----------- -----------
Total increase in net assets 94,855,703 69,009,030 21,732,915
Net assets:
Beginning of period 1,000 1,000 1,000
----------- ----------- -----------
End of period (including
undistributed net investment
income of $493,158, $503,795
and $73,738, respectively) $94,856,703 $69,010,030 $21,733,915
=========== =========== ===========
Number of Fund shares:
Sold 9,610,666 7,030,800 2,440,024
Reinvested 14,842 13,523 19,030
Redeemed (828,084) (506,227) (335,318)
----------- ----------- -----------
Net increase in shares outstanding 8,797,424 6,538,096 2,123,736
Shares outstanding:
Beginning of period 100 100 100
----------- ----------- -----------
End of period 8,797,524 6,538,196 2,123,836
=========== =========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
F-97
<PAGE> 155
SchwabFunds(R)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
1. DESCRIPTION OF THE FUNDS
The Schwab Asset Director(R) - High Growth Fund, Schwab Asset
Director - Balanced Growth Fund and Schwab Asset Director - Conservative Growth
Fund (the "Funds") are series of Schwab Capital Trust (the "Trust"), a no-load,
open-end investment management 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 three Funds described above, the Trust also offers the Schwab
International Index Fund(TM), Schwab Small-Cap Index Fund(R) and Schwab S&P 500
Fund. The assets of each series are segregated and accounted for separately.
The investment objective of the Schwab Asset Director - High Growth Fund (the
"High Growth Fund") is to provide high capital growth with less volatility than
an all-stock portfolio. The investment objective of the Schwab Asset
Director - Balanced Growth Fund (the "Balanced Growth Fund") is to provide a
maximum total return including both capital growth and income. The investment
objective of the Schwab Asset Director - Conservative Growth Fund (the
"Conservative Growth Fund") is to provide income and more growth potential than
an all-bond portfolio. Each Fund invests in a diversified mix of stocks, bonds
and cash equivalents.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
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 by
the Funds' investment manager pursuant to guidelines adopted in good faith by
the Board of Trustees. Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the representative quoted bid and asked prices, or if such prices
are not available, at prices for securities of comparable maturity, quality and
type. 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 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 and includes
amortization of premium and accretion of discount on investments. Realized gains
and losses from security transactions are determined on an identified cost
basis. For callable bonds purchased at a premium, the excess of the purchase
price over the call value is amortized against interest income through the call
date. If the call provision is not exercised, any remaining premium is amortized
through the final maturity date.
F-98
<PAGE> 156
SchwabFunds(R)
- --------------------------------------------------------------------------------
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or government agency securities. All collateral is held by the Funds'
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 Funds are
maintained in U.S. dollars. Investment securities and all other assets and
liabilities of the Funds denominated in a foreign currency are translated into
U.S. dollars at the exchange rates on April 30. Purchases and sales of foreign
securities, foreign income receipts and foreign expense payments are translated
into U.S. dollars at the exchange rate in effect on the dates of the respective
transactions.
The Funds separate within their statement of operations the portion of realized
and unrealized gains and losses resulting from changes in foreign exchange rates
from that arising from changes in securities' market values.
Forward currency contracts -- A forward currency contract ("Forward") is an
agreement between two parties to buy and sell a currency at a set price on a
future date. The value of the Forward fluctuates with changes in currency
exchange rates. The Forward is marked-to-market daily and the change in value is
recorded by the Funds as an unrealized gain or loss. When the Forward is closed,
the Funds record 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 Funds engage in Forwards in connection with the purchase and
sale of portfolio securities to minimize the uncertainty of changes in future
exchange rates. The Funds could be exposed to risk if counterparties to the
contracts are unable to meet the terms of the contracts or if the value of the
foreign currency changes unfavorably.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds are amortized on a straight-line basis over a
five-year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that 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 each 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. Each Fund is considered a separate entity for tax purposes.
At April 30, 1996, (for financial reporting and federal income tax purposes),
net unrealized gain for the High Growth Fund, Balanced Growth Fund and
Conservative Growth Fund aggregated $5,873,595, $2,747,751 and $378,273,
respectively, of which $7,575,579, $4,123,657 and $931,787, respectively,
related to appreciated securities and $1,701,984, $1,375,906 and $553,514,
respectively, related to depreciated securities.
F-99
<PAGE> 157
SchwabFunds(R)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
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,
each Fund pays an annual fee, payable monthly, of .74% of each Fund's average
daily net assets not in excess of $1 billion, .69% of such assets over $1
billion and .64% of such assets over $2 billion. Under this agreement, the High
Growth Fund, Balanced Growth Fund and Conservative Growth Fund incurred
investment advisory and administration fees of $264,862, $189,136 and $65,101,
respectively, for the period ended April 30, 1996, before the Investment Manager
reduced its fee (see Note 4).
Sub-advisory agreement -- The Investment Manager has a sub-advisory agreement
with Symphony Asset Management, Inc. ("Symphony") to serve as sub-adviser to the
Funds. Symphony does not receive compensation directly from the Funds. However,
the Investment Manager pays Symphony an annual fee, payable monthly, of .08% of
the Funds' aggregate average net assets on the first $100 million, .06% of the
next $150 million, .04% of the next $600 million and .02% of such net assets
over $850 million.
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of each Fund's average daily net assets for
transfer agency services and .20% of such assets for shareholder services. For
the period ended April 30, 1996, the High Growth Fund, Balanced Growth Fund and
Conservative Growth Fund incurred transfer agency and shareholder service fees
of $89,480, $63,897 and $21,993, respectively, before Schwab reduced its fees
(see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
period ended April 30, 1996, 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 Funds incurred fees aggregating $9,737
related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit each Fund's ratio of operating expenses to
average net assets. For the period ended April 30, 1996, the total of such fees
and expenses reduced and absorbed by the Investment Manager was $183,280,
$160,571 and $116,767 for the High Growth Fund, Balanced Growth Fund and
Conservative Growth Fund, respectively, and the total of such fees reduced by
Schwab was $88,731, $63,897 and $21,993 for the High Growth Fund, Balanced
Growth Fund and Conservative Growth Fund, respectively.
F-100
<PAGE> 158
SchwabFunds(R)
- --------------------------------------------------------------------------------
5. BORROWING AGREEMENT
The Trust has an agreement with State Street Bank and Trust Company, the Funds'
custodian, whereby each Fund may borrow up to $10,000,000, on a temporary basis,
to fund redemptions. Amounts borrowed under this arrangement bear interest at
periodically negotiated rates and may be collateralized by the assets of the
Fund. During the period ended April 30, 1996, no borrowings were made under this
arrangement.
6. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, for the period ended April 30, 1996, were as follows:
<TABLE>
<CAPTION>
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
------------ ----------- -----------
<S> <C> <C> <C>
Purchases $126,123,992 $88,257,569 $29,443,551
Proceeds of sales and
maturities $37,849,936 $22,724,569 $8,402,243
</TABLE>
7. COMPOSITION OF NET ASSETS
At April 30, 1996, net assets for each Fund consisted of:
<TABLE>
<CAPTION>
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Capital paid in $88,833,832 $66,001,669 $21,353,222
Accumulated undistributed
net investment income 493,158 503,795 73,738
Accumulated net realized
loss on investments sold
and foreign currency
transactions (343,611) (243,173) (71,076)
Net unrealized gain on
investments 5,873,595 2,747,751 378,273
Net unrealized loss on
translating assets and
liabilities into the
reporting currency (271) (12) (242)
----------- ----------- -----------
Total $94,856,703 $69,010,030 $21,733,915
=========== =========== ===========
</TABLE>
At April 30, 1996, the High Growth Fund's Statement of Net Assets included:
$398,586 payable for investments purchased, $78,838 payable for Fund shares
redeemed, $13,851 payable for investment advisory and administration fee and
$161,244 receivable for Fund shares sold. The Balanced Growth Fund's Statement
of Net Assets included: $316,281 payable for investment purchased, $140,768
payable for Fund shares redeemed, $9,088 payable for investment advisory and
administration fee and $116,223 receivable for Fund shares sold. The
Conservative Growth Fund's Statement of Net Assets included: $84,926 payable for
Fund shares redeemed, $2,867 payable for investment advisory and administration
fee and $15,048 receivable for Fund shares sold.
F-101
<PAGE> 159
SchwabFunds(R)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the period November 20, 1995
(commencement of operations) to April 30, 1996 (Unaudited)
8. COMMITMENTS
At April 30, 1996, the Funds had various open Forward contracts as follows:
The High Growth Fund and Balanced Growth Fund had open Forward contracts which
obligated the Funds to deliver U.S. dollars in exchange for foreign currencies
at specified future dates as follows:
High Growth Fund
<TABLE>
<CAPTION>
Contract In Exchange Settlement Unrealized
Currency Amount For Date Value Gain (Loss)
- ----------------------- ------------ ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Swedish krona 64,555 $ 9,543 05/02/96 $ 9,519 ($ 24)
Netherlands guilder 78,400 45,875 05/03/96 45,754 (121)
Swiss franc 21,000 16,935 05/06/96 16,914 (21)
Italian lira 174,152,000 111,422 05/07/96 111,493 71
Pound sterling 35,000 52,745 05/07/96 52,687 (58)
Spanish peseta 3,264,670 25,754 05/08/96 25,663 (91)
Belgian franc 315,000 10,032 05/14/96 10,006 (26)
French franc 125,000 24,272 05/31/96 24,190 (82)
---------- -------- -------
$ 296,578 $296,226 ($352)
========== ======== =======
</TABLE>
Balanced Growth Fund
<TABLE>
<CAPTION>
Contract In Exchange Settlement Unrealized
Currency Amount For Date Value Gain (Loss)
- ------------------------ ----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Canadian dollar 17,500 $ 12,853 05/02/96 $ 12,853 $ --
Danish krona 72,375 12,288 05/02/96 12,263 (25)
Deutsche mark 13,400 8,772 05/02/96 8,753 (19)
Netherlands guilder 66,400 38,853 05/03/96 38,751 (102)
Italian lira 9,262,900 5,926 05/07/96 5,930 4
Pound sterling 82,000 123,574 05/07/96 123,438 (136)
Spanish peseta 3,758,000 29,649 05/08/96 29,544 (105)
Belgian franc 421,000 13,408 05/14/96 13,374 (34)
French franc 244,000 47,379 05/31/96 47,218 (161)
---------- -------- -------
$ 292,702 $292,124 ($578)
========== ======== =======
</TABLE>
The Conservative Growth Fund had open Forward contracts which obligated the Fund
to deliver foreign currencies in exchange for U.S. dollars at specified future
dates as follows:
<TABLE>
<CAPTION>
Contract In Exchange Settlement Unrealized
Currency Amount For Date Value Gain (Loss)
- ------------------------ ----------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Canadian dollar 4,200 $ 3,084 05/02/96 $ 3,085 ($ 1)
Deutsche mark 4,500 2,945 05/02/96 2,939 6
Australian dollar 9,700 7,639 05/06/96 7,620 19
Swiss franc 1,800 1,453 05/06/96 1,450 3
Pound sterling 3,100 4,672 05/07/96 4,667 5
---------- -------- -------
$ 19,793 $ 19,761 $ 32
========== ======== =======
</TABLE>
F-102
<PAGE> 160
SchwabFunds(R)
- --------------------------------------------------------------------------------
9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period from November 20, 1995 (commencement of operations) to April 30, 1996:
<TABLE>
<CAPTION>
High Balanced Conservative
Growth Fund Growth Fund Growth Fund
----------- ----------- -----------
<S> <C> <C> <C>
Net asset value at beginning of period....... $ 10.00 $ 10.00 $ 10.00
Income from investment operations
- ---------------------------------
Net investment income...................... .08 .11 .15
Net realized and unrealized gain on
investments and foreign currency
transactions............................. .72 .47 .19
----------- ----------- -----------
Total from investment operations........... .80 .58 .34
Less distributions
- ------------------
Dividends from net investment income....... (.02) (.03) (.11)
Distributions from realized gain on
investments.............................. -- -- --
----------- ----------- -----------
Total distributions........................ (.02) (.03) (.11)
----------- ----------- -----------
Net asset value at end of period............. $ 10.78 $ 10.55 $ 10.23
=========== =========== ===========
Total return (%)............................. 8.03 5.81 3.37
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period.................. $94,856,703 $69,010,030 $21,733,915
Ratio of expenses to average
net assets (%)........................... .89* .89* .89*
Ratio of net investment income to
average net assets (%)................... 1.82* 2.56* 3.28*
Portfolio turnover rate (%)................ 52 42 46
Average commission rate.................... $ .02 $ .02 $ .02
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each 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 and the ratio of net
investment income to average net assets for the High Growth Fund for the period
ended April 30, 1996, would have been 1.65%* and 1.06%*, respectively. With
respect to the Balanced Growth Fund, the ratio of expenses to average net assets
and the ratio of net investment income to average net assets for the period
ended April 30, 1996 would have been 1.77%* and 1.68%*, respectively. With
respect to the Conservative Growth Fund the ratio of expenses to average net
assets and the ratio of net investment income to average net assets for the
period ended April 30, 1996 would have been 2.47%* and 1.70%*, respectively.
* Annualized
F-103
