<PAGE> 1
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses.............................. 2
Financial Highlights.................. 4
Key Features of the Funds............. 5
Matching the Funds to Your
Investment Needs.................... 7
Investing in Our Funds................ 8
Shareholder Services................ 8
How to Buy Shares................... 8
How to Sell or Exchange Your
Shares........................... 10
Investment Objectives and Policies.... 12
Investment Techniques Used by
Our Funds........................... 13
Important Information About
Your Investment..................... 17
Dividends and Other Distributions... 17
Income Tax Information.............. 18
How We Determine the Price of
Your Shares...................... 18
How the Funds Report Performance.... 19
Organization and Management of
Our Funds........................... 19
Management Functions and
Responsibilities................. 19
Operating Fees and Expenses......... 21
Other Information on the Operation
of Our Funds..................... 22
Glossary of Important Terms........... 23
</TABLE>
READING THIS PROSPECTUS. Explanations of all italicized terms in this Prospectus
are included in the Glossary at the end of this Prospectus. References to "you"
and "your" in this Prospectus refer to prospective investors and/or current
shareholders, while references to "us," "our," and "our Funds" refer to the
three Funds generally.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SCHWAB ASSET DIRECTOR(R) FUNDS
THE SCHWAB ASSET DIRECTOR - HIGH GROWTH FUND, THE SCHWAB ASSET
DIRECTOR - BALANCED GROWTH FUND, AND THE SCHWAB ASSET DIRECTOR - CONSERVATIVE
GROWTH FUND (THE "FUNDS") are a family of three asset allocation funds which
provide diversification among major investment categories. Each Fund seeks to
meet its investment objective by investing in a different mix of stocks, bonds
and cash-equivalents. All three Funds are designed to provide varying degrees of
exposure to the growth potential of the stock market. Each Fund is a diversified
investment portfolio of Schwab Capital Trust (the "Trust"), a no-load, open-end
management investment company.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS PROVIDES YOU WITH CONCISE INFORMATION
THAT YOU SHOULD KNOW BEFORE YOU DECIDE IF THE FUNDS PROVIDE THE INVESTMENT
OPPORTUNITIES YOU ARE LOOKING FOR. READ IT CAREFULLY, AND RETAIN IT FOR FUTURE
REFERENCE. You can find more detailed information in the Statement of Additional
Information ("SAI") dated May 21, 1996 (as amended from time to time). The SAI
has been filed with the Securities and Exchange Commission ("SEC") and is
incorporated in this Prospectus by reference (which means that it is legally
considered part of this Prospectus even though it is not printed here). The
Prospectus is available electronically by using our Internet address:
http://www.schwab.com. You can get a free paper copy of this Prospectus or the
SAI by calling Charles Schwab & Co., Inc. ("Schwab") at 800-2 NO-LOAD, or by
writing Schwab at 101 Montgomery Street, San Francisco, California 94104.
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Schwab office,
or call 800-2 NO-LOAD (800-266-5623). TDD users may contact Schwab at
800-345-2550, 24 hours a day.
PROSPECTUS MAY 21, 1996
<PAGE> 2
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are the fees and charges you pay for buying or
selling shares of a fund. You pay no sales fees or charges when you buy or sell
shares of our Funds.
ANNUAL FUND OPERATING EXPENSES include management fees paid to the Investment
Manager, transfer agency fees and other expenses. These expenses cover services
such as investment research and management of the Funds, maintaining shareholder
records and issuing shareholder statements. Each Fund pays its own annual
operating expenses from its income, which is factored into the dividends paid to
shareholders and into the Fund's share price. As a shareholder, you are not
charged any of these fees directly.
<TABLE>
<CAPTION>
HIGH BALANCED CONSERVATIVE
GROWTH GROWTH GROWTH
FUND FUND FUND
------ -------- ------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge on Purchases and
Reinvested Dividends......... None None None
Deferred Sales Charge or
Redemption Fees.............. None None None
Exchange Fees.................. None None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY
NET ASSETS)
Management Fee (after fee
reduction)1.................. 0.49% 0.49% 0.49%
12b-1 Fees..................... None None None
Other Expenses (after fee
reduction and expense
reimbursement)2,3............ 0.40% 0.40% 0.40%
------ -------- ------
TOTAL FUND OPERATING EXPENSES
(AFTER FEE REDUCTION AND EXPENSE
REIMBURSEMENT)3,4................ 0.89% 0.89% 0.89%
</TABLE>
1 This amount reflects a reduction guaranteed by the Investment Manager through
at least February 28, 1997. If there were no such reduction, the maximum
management fee would be 0.74% of each Fund's average daily net assets. (See
"Organization and Management of Our Funds - Operating Fees and Expenses.")
2 "Other Expenses" are based on estimated amounts for the current fiscal year
for each Fund.
3 This amount reflects the guarantee by the Investment Manager and Schwab that,
through at least February 28, 1997, total fund operating expenses will not
exceed 0.89% of each Fund's average daily net assets. Without this guarantee,
estimated other expenses and total fund operating expenses for the High Growth
Fund, the Balanced Growth Fund and the Conservative Growth Fund would be 0.98%
and 1.72%; 1.12% and 1.86%; and 1.99% and 2.73%, respectively, of that Fund's
average daily net assets.
4 You may be charged a fee if applicable minimum balances are not maintained in
your Schwab brokerage or Schwab One(R) account. Schwab Individual Retirement
Accounts ("IRAs") with balances of $10,000 or more by September 15, 1996 will
not be charged Schwab's $29 annual IRA account fee for the life of the
account. Schwab Keogh plans are currently charged an annual fee of $45. See
"Investing in Our Funds" for information regarding minimum balance and
investment requirements.
EXAMPLES. You would pay the following expenses on a $1,000 investment in the
Funds, assuming (1) 5% annual return and (2) redemption at the end of each
period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------- --------
<S> <C> <C>
High Growth Fund............. $9 $28
Balanced Growth Fund......... $9 $28
Conservative Growth Fund..... $9 $28
</TABLE>
2
<PAGE> 3
THIS IS AN EXAMPLE ONLY AND DOES NOT REPRESENT PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE EXAMPLE. This
example reflects the guarantee by the Investment Manager and Schwab that,
through at least February 28, 1997, total fund operating expenses will not
exceed 0.89% of each Fund's average daily net assets. Please remember that,
while this example assumes a 5% annual return on investment, each Fund's actual
returns may be more or less than the 5% used in this example.
The purpose of the table above is to help you understand the various costs and
expenses you will bear directly or indirectly when you invest in the Funds. See
"Organization and Management of Our Funds - Operating Fees and Expenses."
3
<PAGE> 4
FINANCIAL HIGHLIGHTS
The following information with respect to each of the Funds covering the period
from November 20, 1995 (commencement of operations) to March 31, 1996 has not
been audited. This information should be read in conjunction with the unaudited
financial statements and accompanying notes which are incorporated by reference
from the SAI. A free copy of the SAI may be obtained by calling the telephone
number or writing to the address on the first page of this Prospectus.
<TABLE>
<CAPTION>
HIGH BALANCED CONSERVATIVE
GROWTH FUND GROWTH FUND GROWTH FUND
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Net asset value at beginning of period.............. $ 10.00 $ 10.00 $ 10.00
Income from investment operations
- ----------------------------------------
Net investment income............................. .06 .09 .12
Net realized and unrealized gain on investments
and foreign currency transactions.............. .56 .37 .17
----------- ----------- -----------
Total from investment operations.................. .62 .46 .29
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.................... $ 10.60 $ 10.43 $ 10.18
=========== =========== ===========
Total return (%).................................... 6.23 4.60 2.87
- -------------------
Ratios/Supplemental data
- -----------------------------
Net assets, end of period......................... $90,009,691 $64,928,375 $22,016,054
Ratio of expenses to average net assets (%)....... .89* .89* .89*
Ratio of net investment income to average net
assets (%)..................................... 1.82* 2.55* 3.25*
Portfolio turnover rate (%)....................... 31 24 27
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 March 31, 1996 would have been 1.72%* and .99%*, 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 March 31, 1996 would have been 1.86%* and 1.58%*, 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 March 31, 1996 would have been 2.73%* and 1.41%*, respectively.
*Annualized
4
<PAGE> 5
KEY FEATURES OF THE FUNDS
STRATEGY: Each Fund invests in a diversified mix of stocks, bonds and
cash-equivalents. Research shows that the greatest impact on investment returns
is due to the asset allocation decision (the mix of stocks, bonds and
cash-equivalents) rather than market timing or individual stock and bond
selections. A study of the performance of pension funds indicated that over 90%
of the performance was determined by asset mix.*
The primary difference between the Funds is the proportion invested in stocks.
Each Fund targets a different mix of investments as described below and on the
following page. This mix among major asset classes will vary within defined
ranges based on the Investment Manager's and the Sub-Adviser's determination of
relative attractiveness of securities in the financial markets. For more
detailed information, see "Investment Objectives and Policies."
SCHWAB ASSET DIRECTOR(R) -
HIGH GROWTH FUND
INVESTMENT OBJECTIVE: to provide you with high capital growth with less
volatility than an all-stock portfolio. This Fund provides the greatest exposure
to various stock categories, including domestic large and small company stocks
and international stocks.
[PIE CHART 1]
<TABLE>
<CAPTION>
TARGET Defined
MIX Ranges
------ -------
<S> <C> <C>
STOCKS 80% 65%-95%
Large Companies 40%
Small Companies 20%
International 20%
CASH 5%
BONDS 15%
</TABLE>
*Financial Analysts Journal; Brinson, Singer, Beebower; May - June 1991
SCHWAB ASSET DIRECTOR(R) -
BALANCED GROWTH FUND
INVESTMENT OBJECTIVE: to provide you with maximum total return, including both
capital growth and income. This Fund represents a more balanced approach to
stocks and bonds.
[PIE CHART 2]
<TABLE>
<CAPTION>
TARGET Defined
MIX Ranges
------ -------
<S> <C> <C>
STOCKS 60% 50%-70%
Large Companies 30%
Small Companies 15%
International 15%
CASH 5%
BONDS 35%
</TABLE>
SCHWAB ASSET DIRECTOR(R) -
CONSERVATIVE GROWTH FUND
INVESTMENT OBJECTIVE: to provide you with income and more growth potential than
an all-bond portfolio. This Fund's stock component is designed to help offset
inflation.
[PIE CHART 3]
<TABLE>
<CAPTION>
TARGET Defined
MIX Ranges
------ -------
<S> <C> <C>
STOCKS 40% 30%-50%
Large Companies 20%
Small Companies 10%
International 10%
CASH 5%
BONDS 55%
</TABLE>
MANAGEMENT. The Investment Manager, Charles Schwab Investment Management, Inc.,
currently manages the mutual funds in the SchwabFunds Family([), a family of 23
mutual funds with over $35 billion in assets as of April 30, 1996. The
Sub-Adviser, Symphony
5
<PAGE> 6
Asset Management, Inc. ("Symphony"), is a wholly-owned subsidiary of BARRA, Inc.
BARRA, established in 1975, provides innovative analytical models, software and
services designed to enable its more than 800 clients in 30 countries to make
superior investment decisions. Symphony presently acts as Sub-Adviser to three
other investment companies and manages over $700 million of institutional and
private account assets. For more details, see "Organization and Management of
Our Funds."
MARKET PERFORMANCE. For the 23 years ended 1995, the asset categories to be used
by the Funds have provided the following average annual returns:*
<TABLE>
<S> <C>
Large company stocks
(S&P 500 Index(R))................ 11.9%
Small company stocks (Ibbotson and
BARRA small cap index)............ 14.8%
International stocks (MSCI EAFE).... 11.8%
Bonds (Ibbotson and Lehman
long-term government bond
index)............................ 9.6%
Cash-equivalents (commercial
paper A1P1)....................... 8.4%
</TABLE>
* Source: BARRA, Inc. See Glossary for definitions of the various indices.
Indices do not include fees such as those charged by the Funds. Past
performance of indices does not necessarily reflect future performance results
of the Funds.
LOW-COST INVESTING. You pay no sales fees or charges when you buy or sell shares
of the Funds. Additionally, the Funds were designed with operating expenses
below the industry average, which helps provide more competitive returns.
The Investment Manager and Schwab guarantee that each Fund's total fund
operating expenses will not exceed 0.89% through at least February 28, 1997.
After this date, the guarantee may be terminated, modified or continued. The
industry average for total operating expenses of asset allocation funds is
1.36%.*
[BAR GRAPH]
<TABLE>
<S> <C>
Schwab Asset Director Funds 0.89%
Average Asset Allocation Fund 1.36%
</TABLE>
* Source: Morningstar Investment Services, Inc., March, 1996
You may be charged a fee for your Schwab account; please refer to footnote 4 on
page 2. For more details, see "Investing in Our Funds" and "Operating Fees and
Expenses."
SHAREHOLDER SERVICES. Schwab's professional representatives are available
toll-free 24 hours a day at 800-2 NO-LOAD to service your account, or you can
visit or call your local Schwab office during regular business hours. Schwab
also enables you to execute your trading requests through electronic products
and services such as StreetSmart(TM), e.Schwab(TM), The Equalizer(R) and
TeleBroker(R). See "Investing in Our Funds."
CONVENIENT REPORTING. You receive one consolidated account statement for all of
your account activity, including all of your SchwabFunds(R) activity.
FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in the Funds in amounts and at intervals that
you select. For
6
<PAGE> 7
more information, see "Investing in Our Funds - Schwab's Automatic Investment
Plan."
RETIREMENT PLANS. Schwab offers tax-advan-taged retirement plans for which the
Funds may be a particularly appropriate investment. For more information, see
"Investing in Our Funds - Tax-Advantaged Retirement Plans."
SPECIAL RISK CONSIDERATIONS. The Funds may invest in foreign securities and
small company stocks, which may pose special risks. Foreign securities may
present unique investment opportunities; however, international investing
involves risks not associated with domestic investing. Foreign securities
markets are not always as efficient as those in the United States and are often
less liquid and more volatile. Small company stocks have historically been
characterized by greater total returns, greater volatility of returns and lower
dividend yields than large company stocks. As of April 30, 1996, the market
capitalizations of the small companies in which the Funds may invest ranged from
$107 million to $1.5 billion. This market capitalization range may fluctuate in
the future.
MATCHING THE FUNDS TO YOUR
INVESTMENT NEEDS
This family of three asset allocation funds provides diversification among major
investment categories. Each Fund seeks to meet its investment objective by
investing in a different mix of stocks, bonds and cash-equivalents. All three
Funds are designed to provide exposure to the growth potential of the stock
market with varying degrees of volatility due to the different asset
allocations. For more details, see "Investment Objectives and Policies."
An investor's strategy might include investing in one or a combination of these
Funds to match his or her investment time horizon and risk tolerance.
THE SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND may be appropriate for you if
you have a long-term investment horizon and want the growth potential from stock
investments. You should be comfortable with the risks of the stock market but do
not want the volatility of an all-stock investment.
THE SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND may be appropriate for you
if you have an intermediate-term investment horizon and want a more balanced
approach to your investment. You should want the growth potential from stock
investments but are willing to achieve it more slowly and with less volatility
than that provided by the Schwab Asset Director - High Growth Fund.
THE SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND may be appropriate for
you if you have a short-term investment horizon but still want some exposure to
the stock market. You should want returns that keep pace with inflation but want
to limit volatility to the extent possible.
RISK CONSIDERATIONS: The Funds seek to reduce overall risk by diversifying
investments among major asset categories and sub-categories. However, depending
on the Investment Manager's asset allocation decisions with regard to the mix of
stocks, bonds and cash-equivalents, shareholders in the Funds may be exposed to
the risks associated with each particular asset type. Stock risk is the
possibility that stock prices will decline over short or even extended periods.
Small-company and international stocks will typically be included in the mix and
pose special risks. Bond risk is the potential for decline in the market value
of
7
<PAGE> 8
bonds due to interest rate changes or the ability of an issuer to meet its
obligations. Diversification among asset categories will not necessarily protect
the Funds from loss.
You should pay special attention to the description of derivatives and foreign
securities on pages 13 through 16, for these investments carry more risk
potential than the Funds' other investments. The Funds may engage in futures
contracts, options, spot foreign currency exchange contracts, forward foreign
currency exchange contracts and swap agreements. Foreign securities may present
unique investment opportunities; however, international investing involves risks
not associated with domestic investing. Foreign securities markets are not
always as efficient as those in the United States and are often less liquid and
more volatile.
Please refer to the "Investment Techniques Used by Our Funds" section in this
Prospectus and "Investment Securities" in the SAI for a more detailed discussion
of the risks associated with particular types of investments.
INVESTING IN OUR FUNDS
SHAREHOLDER SERVICES
You may place Fund purchase and redemption orders as well as request exchanges
at any one of over 230 Schwab offices nationwide or by calling 800-2 NO-LOAD,
where trained representatives are available to answer questions about the Funds
and your account. The right to initiate transactions by telephone, as discussed
below, is automatically available through your Schwab account. TDD users may
contact Schwab at 800-345-2550, 24 hours a day.
We will follow reasonable procedures to confirm that your telephone instructions
are genuine. If each Fund follows telephone orders that it reasonably believes
to be genuine, it will not be liable for any losses you may experience. If each
Fund does not follow reasonable procedures to confirm that a telephone order is
genuine, each Fund may be liable for any losses you may suffer from unauthorized
or fraudulent orders. These procedures may include requiring a form of personal
identification, providing written confirmation of your telephone instructions
and recording all telephone transactions. You should be aware that telephone
transactions may be difficult to implement during periods of drastic economic or
market changes. If you experience difficulties in reaching us by telephone, you
can mail your orders or place them in person as set forth on the following
pages.
You may purchase shares through an account maintained with Schwab or through any
other entity that has been designated by Schwab. The following information
regarding the purchase, exchange and redemption of Fund shares through a Schwab
account relates solely to transactions through Schwab accounts and should not be
read to apply to transactions through other designated entities. For more
information, see "Purchase and Redemption of Shares" in the SAI.
HOW TO BUY SHARES
NEW INVESTORS TO SCHWAB need to open a Schwab account by completing and signing
an account application. Mail it, together with your check, to the address
indicated on the application. You may also open your account in person as
described in the table on the following page.
8
<PAGE> 9
EXISTING SCHWAB INVESTORS must have funds in their Schwab account in order to
buy shares in a Fund. Schwab will charge your Schwab brokerage account a $15
service fee for any check returned because of insufficient or uncollected funds
or because of a stop payment order.
Schwab also enables you to execute your trading requests through electronic
products and services such as StreetSmart(TM), e.Schwab(TM), The Equalizer(R)
and TeleBroker(R).
Within your Schwab account, you have access to other investments available at
Schwab, such as stocks, bonds and other mutual funds. The Securities Investor
Protection Corporation (known as "SIPC") will provide account protection, in an
amount up to $500,000, for securities, including Fund shares, that you hold in a
Schwab account. Of course, SIPC account protection does not protect you from
share price fluctuations.
SCHWAB ACCOUNT AND FUND MINIMUMS AND FEES
- ------------------------------------------------------
<TABLE>
<S> <C>
SCHWAB ACCOUNT MINIMUM BALANCE
Brokerage account.............. $1,000
Custodial account.............. $500
FUND INITIAL PURCHASE
Brokerage account.............. $1,000
IRA, other retirement plan and
custodial account............ $500
FUND ADDITIONAL PURCHASE
Any type of account............ $100
</TABLE>
- ------------------------------------------------------
Schwab reserves the right to waive these minimums for clients of Schwab
Institutional and The Charles Schwab Trust Company and for certain
tax-advantaged retirement plans.
A quarterly fee of $7.50 will be charged on Schwab brokerage accounts that fall
below the minimum. This fee, if applicable, will be charged at the end of each
quarter and will be waived if there has been at least one commissionable trade
within the last six months or if the shareholder's combined account balances at
Schwab total $10,000 or more. Schwab currently imposes no fee for opening a
Schwab One(R) account with a minimum balance of $5,000. Schwab One accounts with
balances below $5,000 are subject to a fee of $5 per month imposed by Schwab if
there have been fewer than two commissionable trades within the last twelve
months.
Each Fund, in its sole discretion and without prior notice to you, reserves the
right to reject orders to buy shares, to change the minimum investment
requirements and to withdraw or suspend any part of the offering made by this
Prospectus. All orders to buy shares must be accepted by the Fund, and orders
are not binding until the Fund confirms or accepts them in writing.
HOW TO BUY SHARES
- ------------------------------------------------------
Whether by phone, mail, electronically or in person, the following information
is always needed:
- - your Schwab account number.
- - the name of the Fund you wish to buy.
- - the amount you wish to invest.
BY PHONE
- - Call 800-2 NO-LOAD.
- - Place a buy order for your account.
- - TDD users may contact Schwab at 800-345-2550 24 hours a day.
BY MAIL
- - Include a letter of instruction with the information requested above, signed
by one
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<PAGE> 10
of the registered account holders in the exact form specified on the account.
- - Make your check payable to Charles Schwab & Co., Inc.
- - Mail to 101 Montgomery Street, San Francisco, CA 94104 or your local Schwab
office.
- - Once your letter is mailed, you may not modify or cancel your instructions.
ELECTRONICALLY
- - Refer to product information on StreetSmart(TM), e.Schwab(TM), The
Equalizer(R) and TeleBroker(R) for details.
IN PERSON
- - Deposit your check at your local Schwab office.
- - For the Schwab office nearest you, call 800-2 NO-LOAD.
BY WIRE
- - Contact your local Schwab office for instructions.
AUTOMATICALLY
- - Use Schwab's Automatic Investment Plan.
- - Sign up for this service when opening your account.
- ------------------------------------------------------
SCHWAB'S AUTOMATIC INVESTMENT PLAN ("AIP") allows you to make periodic
investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. You can make automatic
investments in any amount, from $100 to $50,000, once you meet the Fund's
investment minimum. Automatic investments are made from your Schwab account, and
you may select from the following methods to make automatic investments: using
the uninvested cash in your Schwab account; using the proceeds of redemption of
shares of the Schwab Money Fund linked to your Schwab account; or using the
Schwab MoneyLink(R) Transfer Service. As long as you are purchasing a Fund's
shares through AIP, all dividends and distributions paid by the Fund must be
reinvested in additional shares of that Fund. For more details about this
service, or to establish your AIP, call your local Schwab office or 800-2
NO-LOAD, 24 hours a day.
TAX-ADVANTAGED RETIREMENT PLANS. Schwab offers tax-advantaged retirement plans
for which the Funds may be a particularly appropriate investment. Schwab's
retirement plans allow participants to defer taxes while helping them build
their retirement savings. The Schwab IRA is a retirement plan with a wide choice
of investments offering individuals with earned income the opportunity to
compound earnings on a tax-deferred basis. The Schwab Keogh is a tax-advantaged
plan for self-employed individuals and their employees that permits the employer
to make annual tax-deductible contributions of up to $30,000. Schwab also offers
Corporate Retirement Plans to help a company attract and retain valuable
employees. Call your local Schwab office or 800-2 NO-LOAD, 24 hours a day, for
more information.
HOW TO SELL OR EXCHANGE YOUR SHARES
You can sell your shares in a Fund at any time, in person, by telephone, or by
mail. When you sell your shares, you may receive more or less than the amount
you invested.
The exchange privilege allows you to exchange your SchwabFunds shares for shares
of any other SchwabFunds class or series available to investors in your state if
your purchase meets that Fund's eligibility requirements. Thus, you can
conveniently modify your investments if your goals or market
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<PAGE> 11
conditions change. An exchange of shares will be treated as a sale of the shares
for federal income tax purposes. Note that you must meet the minimum initial or
subsequent investment requirements applicable to the shares you wish to receive
in an exchange. The Funds reserve the right on 60 days' written notice to
modify, limit or terminate the exchange privilege.
HOW TO SELL OR EXCHANGE SHARES
- ------------------------------------------------------
Whether by phone, mail, electronically, or in person, the following information
is always needed:
When Selling Shares:
- - your Schwab account number.
- - the name of the Fund from which you wish to sell shares.
- - the number of shares you wish to sell.
When Exchanging Shares:
- - your Schwab account number.
- - the number of shares you want to exchange.
- - the name of the Fund from which you wish to exchange shares.
- - the name of the fund and class into which shares are to be exchanged.
- - the distribution option you select.
BY PHONE
- - Call 800-2 NO-LOAD.
- - Place a sell or exchange request for your account.
- - TDD users may contact Schwab at 800-345-2550, 24 hours a day.
BY MAIL
- - Include a letter of instruction with the information requested above, signed
by one of the registered account holders in the exact form specified on the
account.
- - Mail to 101 Montgomery Street, San Francisco, CA 94104 or your local Schwab
office.
- - Once your letter is mailed, you may not modify or cancel your instructions.
ELECTRONICALLY
- - Refer to product information on StreetSmart(TM), e.Schwab(TM), The
Equalizer(R) and TeleBroker(R) for details.
IN PERSON
- - Place your sell or exchange request at your local Schwab office.
- - For the Schwab office nearest you, call 800-2 NO-LOAD.
- ------------------------------------------------------
Payment for redeemed shares will be credited directly to your Schwab account no
later than 7 days after the Transfer Agent or its authorized agent receives your
sell instructions in proper form. Proceeds will then be held in your Schwab
account or mailed to you depending on the account standing instructions you have
selected. For information on how to wire funds from your Schwab account to your
bank, contact your local Schwab office.
If you purchased shares by check, your sales proceeds may be held in your Schwab
account until your check clears (which may take up to 15 days). Depending on the
type of Schwab account you have, your money may earn interest during any holding
period.
The Funds may suspend redemption rights or postpone payments when trading on the
New York Stock Exchange (the "Exchange") is restricted or is closed for any
reason other than its customary weekend or holiday closings, emergency
circumstances as determined by the SEC exist or for such other circumstances as
the SEC may permit. Each Fund may also elect to invoke a 7-day period for cash
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settlement of individual redemption requests in excess of $250,000 or 1% of the
Fund's net assets, whichever is less. See "Purchase and Redemption of Shares" in
the SAI.
INVESTMENT OBJECTIVES AND POLICIES
THE SCHWAB ASSET DIRECTOR(R) FUNDS are a family of three asset allocation funds
which provide diversification among major investment categories. Each seeks to
meet its investment objective by investing in a different mix of stocks, bonds
and cash-equivalents. Subject to regulatory approval, each Fund may also utilize
investments in affiliated investment companies to meet its investment objective.
All three Funds are designed to provide exposure to the growth potential of the
stock market in varying degrees.
A target mix and a defined range have been established for each asset category
in each of the Funds. Although there is a target mix for each of the stock
sub-categories, there are no defined ranges. The amount invested in each Fund's
stock sub-categories could vary widely from their targets, but not beyond the
defined range of the stock category as a whole. The Investment Manager will
allocate assets among stocks, bonds and cash-equivalents, emphasizing investment
in the most attractive asset category. The Sub-Adviser uses a Tactical Asset
Allocation model to measure the relative value of each asset category and make
recommendations for allocations within the defined ranges. The Funds may also
make other investments that do not fall within the asset categories. The
investment objectives stated below are fundamental to each Fund and may be
changed only with shareholder approval. Because any investment involves risk, we
cannot guarantee achieving these objectives.
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH FUND
The investment objective of the Schwab Asset Director - High Growth Fund is to
provide you with high capital growth with less volatility than an all stock
portfolio. This Fund provides the greatest exposure to various stock categories,
including domestic large and small company stocks and international stocks.
The Schwab Asset Director - High Growth Fund's target mix as well as the defined
ranges for the different asset categories are as follows:
<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
------ ---------
<S> <C> <C>
STOCKS 80% 65%--95%
Large company stocks 40%
Small company stocks 20%
International stocks 20%
BONDS 15% 0%--30%
CASH-EQUIVALENTS 5% 0%--35%
</TABLE>
SCHWAB ASSET DIRECTOR(R) - BALANCED GROWTH FUND
The investment objective of the Schwab Asset Director - Balanced Growth Fund is
to provide you with maximum total return, including both capital growth and
income. This Fund represents a more balanced approach to stocks and bonds.
The Schwab Asset Director - Balanced Growth Fund's target mix as well as the
defined ranges for the different asset categories are as follows:
<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
------ ---------
<S> <C> <C>
STOCKS 60% 50%--70%
Large company stocks 30%
Small company stocks 15%
International stocks 15%
BONDS 35% 25%--45%
CASH-EQUIVALENTS 5% 0%--25%
</TABLE>
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<PAGE> 13
SCHWAB ASSET DIRECTOR(R) - CONSERVATIVE GROWTH FUND
The investment objective of the Schwab Asset Director - Conservative Growth Fund
is to provide you with income and more growth potential than an all bond fund.
This Fund's stock component is designed to help offset inflation.
The Schwab Asset Director - Conservative Growth Fund's target mix as well as the
defined ranges for the different asset categories are as follows:
<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
------ ---------
<S> <C> <C>
STOCKS 40% 30%--50%
Large company stocks 20%
Small company stocks 10%
International stocks 10%
BONDS 55% 45%--65%
CASH-EQUIVALENTS 5% 0%--25%
</TABLE>
INVESTMENT TECHNIQUES USED
BY OUR FUNDS
STOCKS, BONDS AND CASH-EQUIVALENTS
Our Funds will invest in stocks, bonds, and cash-equivalents in varying
proportions, according to the Funds' target mixes and defined ranges.
STOCK ALLOCATION: The common stocks the Funds invest in will be a diversified
portfolio within each stock sub-category (large company, small company and
international stocks). Common stocks represent an ownership, or equity interest,
in a company. Although common stocks have a history of long-term growth in
value, their prices tend to fluctuate in the short-term.
LARGE COMPANY STOCKS: The Funds' large company stock allocation will be invested
in all or a representative sample of the stocks which comprise the Standard &
Poor's 500 Index(R).
SMALL COMPANY STOCKS: The Funds' small company stock allocation will be invested
in all or a representative sample of stocks selected from a universe consisting
of the second 1,000 largest U.S. operating corporations, as measured by market
capitalization. Small company stocks have historically been characterized by
greater total returns, greater volatility of returns and lower dividend yields
than large company stocks.
INTERNATIONAL STOCKS: The Funds' international stock allocation will be invested
in all or a representative sample of stocks selected from a universe consisting
of 350 of the largest non-U.S. operating corporations, as measured by market
capitalization. These international stocks are issued by large, publicly traded
companies from countries around the world with major developed securities
markets, excluding the United States. Each Fund may also invest up to 5% of its
net assets in the stocks and bonds of issuers in developing countries; see
"Other Assets" for details. These investments will be denominated in a foreign
currency, and the value of the Funds' investments will be affected by changes in
currency exchange rates versus the U.S. dollar in addition to normal market
fluctuations. The rate of exchange between the U.S. dollar and other currencies
is determined by the forces of supply and demand in the foreign exchange market,
by changes in interest rates, as well as by political and economic factors.
Other risks and considerations of international investing include: differences
in accounting, auditing and financial reporting standards; generally higher
transaction costs on foreign portfolio
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<PAGE> 14
transactions; small trading volumes and generally lower liquidity of foreign
stock markets, which may result in greater price volatility; foreign withholding
taxes payable on the Funds' security holdings, which may reduce dividend income
payable to shareholders; the possibility of expropriation, nationalization or
confiscatory taxation; adverse changes in investment or exchange control
regulations; political instability which could affect U.S. investment in foreign
countries; and potential restrictions on the flow of international capital.
BOND ALLOCATION: Bond investments for the Funds will consist primarily of U.S.
government obligations, highly rated corporate debt obligations and highly rated
asset-backed securities. The debt securities in which the Funds invest are
obligations issued or guaranteed by the U.S. government and its agencies and
instrumentalities, including bills, notes, bonds, discount notes, stripped
government securities and other debt securities. Not all obligations issued or
guaranteed by U.S. government agencies are backed by the full faith and credit
of the United States. The Funds may also buy domestic and foreign issues of
corporate debt obligations having floating or fixed rates of interest.
Asset-backed securities, including mortgage-related securities, may also be
included in the Funds' portfolios. Asset-backed securities are secured by
company receivables, home equity loans, truck and auto loans, leases and credit
card receivables. The collateral backing asset-backed securities cannot be
foreclosed upon. Mortgage-backed securities are securities collateralized by
pools of mortgage loans and are assembled by various governmental agencies and
organizations, such as GNMA, FNMA and FHLMC. When interest rates decline, there
is increased likelihood that the mortgages underlying a mortgage-backed security
will be pre-paid, resulting in the loss of any unamortized premium paid for the
securities and the probability of having to reinvest the proceeds at lower
rates. The bond category also includes repurchase agreements collateralized by
eligible investments.
The corporate debt obligations or the asset-backed obligations the Funds invest
in will be rated in one of the three highest categories ("A" or better) by a
nationally recognized statistical rating organization ("NRSRO").
The market value of the Funds' debt investments will change in response to
interest rate fluctuations and other factors. During periods of falling interest
rates, the values of outstanding debt securities generally rise; conversely,
during periods of rising interest rates, the values of such securities generally
decline. While securities with longer maturities tend to produce higher yields,
the prices of longer maturity securities are also subject to greater market
fluctuations as a result of changes in interest rates. Changes by NRSROs in the
rating of any debt security and in the ability of an issuer to make payments of
interest and principal also affect the value of these investments. Except under
condition of default, changes in the value of portfolio securities will not
affect cash income derived from these securities but will affect the Funds' net
asset values.
CASH ALLOCATION: The Funds may invest in the following types of U.S. dollar
denominated short-term money market instruments that the Investment Manager has
determined to present moderate credit risk:
1. Bank certificates of deposit, time deposits, or bankers' acceptances of
domestic banks (including their foreign branches), U.S. branches of foreign
banks and foreign
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<PAGE> 15
branches of foreign banks, having capital, surplus and undivided profits in
excess of $100 million.
2. Commercial paper rated in one of the two highest rating categories by an
NRSRO, or commercial paper or notes of issuers with an unsecured debt issue
outstanding currently rated in one of the two highest rating categories by any
NRSRO where the obligation is on the same or a higher level of priority and
collateralized to the same extent as the rated issue.
3. Obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
4. Repurchase agreements involving obligations that are suitable for investment
under the categories set forth above.
OTHER ASSETS
The Funds may also make other investments that do not fall within the asset
classes described above. These may include warrants, convertible securities,
preferred stocks, real-estate related investments, precious metal related
investments, American and European Depository Receipts, and stocks and bonds of
issuers in developing countries. Each of these investments is limited to 5% of
each Fund's net assets. In addition, the Funds may invest in other securities,
in the future, not presently contemplated or which are not currently available.
These additional investments must be consistent with the Funds' investment
objective and must be legally permissible investments for the Funds.
THE FUNDS MAY USE FUTURES CONTRACTS AND OPTIONS in order to remain effectively
fully invested in proportions consistent with the Investment Manager's current
asset allocation strategy in an efficient and cost effective manner.
Specifically, each Fund may enter into futures contracts and options thereon
provided that the aggregate deposits required on these contracts do not exceed
5% of the Fund's total assets. In addition, certain provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), may limit each Fund's use of
futures contracts and options.
Futures contracts and options may be used for several reasons: to reallocate the
Funds' assets among stocks, bonds and money market instruments while minimizing
transaction costs; to maintain cash reserves while simulating full investment;
to facilitate trading; to seek higher investment returns; or to simulate full
investment when a futures contract is priced more attractively or is otherwise
considered more advantageous than the underlying security or index.
Because the transaction costs of futures contracts and options may be lower than
the costs of investing in stocks or bonds directly, it is expected that the use
of futures contracts may reduce the Funds' total transaction costs. Also,
because futures contracts require only a small initial margin deposit, the Funds
would then be able to simultaneously maintain a cash reserve for potential
redemptions and simulate full investment. In the event of net redemptions from
the Funds, sufficient futures contracts would be sold to avoid any leveraging of
the Funds' assets.
Futures contracts and options pose certain risks. The primary risks associated
with the use of futures contracts and options include: imperfect correlation
between the change in market value of the securities held by the Funds and the
prices of futures contracts and options, and possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position
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<PAGE> 16
prior to its maturity date. The risk of imperfect correlation will be minimized
by investing only in those contracts the behavior of which is expected to
resemble that of the Funds' underlying securities. The risk that the Funds will
be unable to close out a futures position will be minimized by entering into
such transactions on a national exchange with an active and liquid secondary
market. While futures contracts and options can be used as leveraged
instruments, the Funds may not use futures contracts or options to leverage
their portfolios.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (or gain) to the investor. When investing in futures contracts, the Funds
will segregate cash, cash-equivalents or liquid, high-quality debt instruments
in the amount of the underlying obligation.
ADJUSTING INVESTMENT EXPOSURE. In addition to futures and options, each Fund may
use a variety of techniques to increase or decrease its exposure to changing
security prices, interest rates, currency exchange rates, commodity prices or
other factors that affect security values. These techniques may involve entering
into spot foreign currency exchange contracts, forward foreign currency exchange
contracts and swap agreements. These techniques may be referred to as derivative
transactions. The Funds may also sell securities short if at the time of the
short sale the Fund owns or has the right to own securities equivalent in kind
and amount to the securities sold short at no additional cost. The Investment
Manager can use these practices to adjust the risk and return characteristics of
a Fund's portfolio. If the Investment Manager judges market conditions
incorrectly or employs a strategy that does not correlate well with the Funds'
investments, these techniques could result in a loss, regardless of whether the
intent was to reduce risk or increase return. These techniques may increase the
volatility of the Funds and may involve a small investment of cash relative to
the magnitude of the risk assumed. In addition, these techniques could result in
a loss if the counterparty to the transaction does not perform as agreed. Each
of these techniques will be limited to 5% of each Fund's net assets. Please
refer to the sections in the SAI entitled "Investment Securities" and
"Investment Restrictions" for a more detailed discussion of these techniques and
the risks associated with them.
ILLIQUID SECURITIES. Pursuant to a fundamental policy, as set forth in the SAI,
each Fund may invest up to 10% of its net assets in illiquid securities.
Generally, an "illiquid security" is any security that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which a Fund has valued the instrument. The absence of a trading market can make
it difficult to ascertain the market value of illiquid securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase securities
on a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, a Fund will not pay for such securities or start earning
interest on them until the Fund receives them. Securities purchased on a
when-issued or delayed delivery basis are recorded as assets. During the period
between the agreement
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<PAGE> 17
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.
REPURCHASE AGREEMENTS. Each of our Funds may engage in repurchase agreements. In
a repurchase agreement, the Fund buys a security at one price and simultaneously
agrees to sell it back at a higher price. In the event of a bankruptcy or other
default of a repurchase agreement counterparty, a Fund may incur expenses in
enforcing its rights and could experience losses, including a decline in the
value of the underlying securities and loss of income.
BORROWING POLICY. The Funds may not borrow money except for temporary purposes
to meet redemption requests that could not otherwise be met without immediately
selling portfolio securities. A Fund may borrow an amount up to one-third of the
value of a Fund's total assets and may pledge up to one-third of the Fund's net
assets to secure such borrowings. No Fund may borrow for leverage purposes. Each
Fund's borrowing policy, as set forth in the SAI, is fundamental to each Fund.
Borrowing money may cause greater fluctuations in a Fund's share price.
SECURITIES LENDING: Each Fund may lend up to 33 1/3% of its portfolio securities
to broker-dealers as a means of increasing income. These loans must be fully
collateralized at all times. As with any collateralized loan, there are risks of
delay in recovery or even losses of rights in the assets loaned should the
borrower fail financially.
INVESTMENT COMPANIES. Our Funds may also purchase shares of other no-load
investment companies, including those managed by the Investment Manager. These
purchases will be subject to the limitations imposed by the 1940 Act, and we
will only make these purchases after obtaining any required regulatory
approvals. Investment in other investment companies may cause you to bear
duplicative fees for certain services.
TURNOVER. The Investment Manager anticipates that each Fund's annual turnover
rates for the stock and bond categories of their portfolios will not exceed
100%.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENT
DIVIDENDS AND OTHER DISTRIBUTIONS
DISTRIBUTION OPTIONS
When you first buy shares in our Funds, you may choose one of the three
following distribution options:
1. AUTOMATIC REINVESTMENT: We will reinvest all distributions in additional
shares of the Fund. The Funds choose this option automatically unless you
specify otherwise. If you are purchasing a Fund's shares through Schwab's AIP,
you must choose this distribution option for that Fund.
2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: We will pay you income dividends in
cash and invest capital gains for you in additional shares of the Funds.
3. ALL CASH: We will pay you both income dividends and any capital gains in
cash.
The Funds reinvest distributions at the net asset value determined on the
declaration date. We credit your cash distributions to your Schwab account on
the date distributions are payable.
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<PAGE> 18
We leave them there or mail them to you, depending on your standing account
instructions.
To change the distribution option you have selected, call your local Schwab
office or 800-2 NO-LOAD.
The Funds intend to distribute substantially all of their net investment income
each year, as determined by the Board of Trustees. The Funds will pay dividends
from net investment income as follows: the Schwab Asset Director(R) - High
Growth Fund and the Schwab Asset Director - Balanced Growth Fund, annually in
December; the Schwab Asset Director - Conservative Growth Fund, quarterly in
March, June, September and December. You should be aware that your per share
equity in undistributed net investment income may be diluted by the continuing
purchases and redemptions of each Fund's shares.
Net capital gains, if any, will be distributed annually in December by all three
Funds. We will automatically reinvest all your distributions in additional Fund
shares unless you elect otherwise.
INCOME TAX INFORMATION
The following is only a very brief summary of some of the federal income tax
consequences that affect the Funds and their shareholders. Therefore, it is
important that you consult with a tax adviser about your own tax situation.
Each Fund intends to qualify as a regulated investment company under the Code.
To qualify, we will distribute to our shareholders on a current basis
substantially all of our investment company taxable income and our capital gain
net income (if any), and we will meet certain other requirements. As a regulated
investment company, we will pay no federal income taxes to the extent that we
distribute our earnings to our shareholders.
Dividends that the Funds pay to you from net investment income and distributions
from the Funds' net short-term capital gains in excess of any net long-term
capital losses, whether received in cash or reinvested, generally will be
taxable to shareholders as ordinary income. Distributions received from the
Funds designated as long-term capital gains (net of capital losses), whether
received in cash or reinvested, will generally be taxable as long-term capital
gains without regard to the length of time a shareholder owned shares in the
Funds.
Income received by the Funds from securities of foreign issuers may be subject
to foreign income taxes withheld at the source. Regulated investment companies
that have more than 50% of their total assets invested in foreign stock or
securities at the end of their fiscal year are allowed to elect, for U.S. income
tax purposes, to treat foreign income taxes paid by it as paid by its
shareholders. It is not expected that any of the Funds will meet this investment
requirement and thus will not be able "pass through" foreign taxes.
We will provide you with a record of all dividends, distributions, purchases,
and sales on your regular Schwab brokerage account statement. At least once a
year we will notify you of the federal income tax consequences of all
distributions made that year to your account.
HOW WE DETERMINE THE PRICE OF YOUR SHARES
The price of a share of each Fund is its net asset value, which we determine
each Business Day at the close of trading on the Exchange, generally at 4:00
p.m. Eastern time. We deter-
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<PAGE> 19
mine the price of a share by adding the total assets of each Fund, subtracting
any liabilities attributable to that Fund, and then dividing the resulting
amount by the number of shares outstanding.
The Funds value their portfolio securities based on their market value, where
quotations are readily available. The value of other assets for which no
quotations are readily available (including any restricted securities) are
valued at fair value as determined in good faith by the Investment Manager
pursuant to Board of Trustees guidelines. Securities may be valued on the basis
of prices provided by pricing services when such prices are believed to reflect
fair market value.
Purchase or redemption orders and exchange requests will be executed at the net
asset value next determined after receipt by the Transfer Agent or its
authorized agent.
HOW THE FUNDS REPORT PERFORMANCE
From time to time the Funds may advertise their total return or yield.
Performance figures are based upon historical results and are not intended to
indicate future performance. The Funds may also compare their historical
performance figures to the performance of indices similar to their asset
categories and sub-categories, such as those indices named in the chart under
"Market Performance" on page 6.
A Fund's total return measures its overall change in value over a period,
including share price movements, and assumes all dividends and capital gains
have been reinvested. Average annual total return reflects the hypothetical
annually compounded return calculated as mandated by the SEC. Other reported
total return figures may differ in that they may report non-standard periods or
represent aggregate or cumulative return over a stated length of time.
A Fund's yield refers to the income generated by an investment in the Fund over
a given period of time, expressed as an annualized percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield may
not equal the income actually paid to shareholders.
ANNUAL REPORT AND SEMI-ANNUAL REPORT MAILINGS. Twice a year, each Fund will
provide a report to all shareholders describing the performance of the Funds and
outlining the investments. In order to reduce mailing costs, we consolidate
these shareholder mailings by household. If a household has multiple accounts
and the same address of record for all the accounts, we will send mailings for
all accounts at that address in a single package. If you do not want this
consolidation of mailings to apply to your account, please write to
SchwabFunds(R) at the address on the front of this Prospectus. To request a free
copy of a Fund's Annual Report (or Semi-Annual Report), call your local Schwab
office or call 800-2 NO-LOAD.
ORGANIZATION AND
MANAGEMENT OF OUR FUNDS
MANAGEMENT FUNCTIONS AND RESPONSIBILITIES
GENERAL OVERSIGHT OF OUR FUNDS. The Board of Trustees and officers meet
regularly to review the Funds' investments, performance, expenses and other
business affairs.
THE INVESTMENT MANAGER. The Investment Manager, Charles Schwab Investment
Management, Inc., is responsible for the overall man-
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agement of the Funds' business affairs, subject to the authority of the Trustees
and officers of the Trust. The Investment Manager makes all portfolio selection
decisions, places all orders for the Funds' securities transactions and has
primary responsibility for the management of the Funds' investment portfolios.
The Investment Manager, founded in 1989, is a wholly owned subsidiary of The
Charles Schwab Corporation and is the investment adviser and administrator of
the SchwabFunds(R) mutual funds. As of April 30, 1996, the SchwabFunds had
aggregate net assets in excess of $35 billion.
Geri Hom is the portfolio manager for the equity portions of the Asset
Director(R) Funds. She joined Schwab in March 1995 as Portfolio
Manager - Equities and currently manages the four Schwab index funds with
approximately $2 billion in assets. For four years prior to joining Schwab, she
was a Principal for Wells Fargo Nikko Investment Advisors. For the seven prior
years, she was Vice President and Manager of the Domestic Equity Portfolio
Management Group for Wells Fargo Nikko.
Andrea Regan is the portfolio manager for the bond portions of the Asset
Director Funds. She joined Schwab in January 1991 and is currently Portfolio
Manager - Fixed Income. She currently manages three money market funds and two
bond funds with combined assets of approximately $3 billion. Prior to joining
Schwab, she was Vice President and Manager of Trading for Merus Capital
Management, the investment management division of the Bank of California.
Stephen B. Ward, Senior Vice President and Chief Investment Officer, has overall
responsibility for the day-to-day operations of the Funds. He is the supervising
portfolio manager for the Investment Manager.
THE SUB-ADVISER. The Investment Manager has retained Symphony Asset Management,
Inc. to serve as Sub-Adviser to the Funds. As Sub-Adviser, Symphony will
recommend to the Investment Manager the asset mix within the defined ranges for
each Fund. Symphony employs a Tactical Asset Allocation model to measure
relative values among asset categories. Using this model, Symphony recommends
asset allocations it believes will provide the highest returns for a given level
of risk. Symphony does not recommend the purchase or sale of individual
securities.
Symphony was established in 1994 as a wholly-owned subsidiary of BARRA, Inc.
BARRA, founded in 1975, provides innovative analytical models, software and
services that enable its more than 800 clients in 30 countries to make superior
investment decisions. BARRA's software and services analyze equity, fixed
income, currency and other financial markets. Symphony presently serves as Sub-
Adviser to three other investment companies and manages directly and indirectly
over $700 million in institutional and private account assets.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab serves as the Shareholder
Services Agent and Transfer Agent for the Funds. Schwab was established in 1971
and is America's largest discount broker. Schwab provides low-cost securities
brokerage and related financial services to approximately 3.3 million active
customer accounts and has over 230 branch offices. Schwab also offers convenient
access to financial information services and provides products and services that
help investors make investment decisions. Schwab is a wholly-owned subsidiary of
The Charles Schwab Corporation. Charles R. Schwab is the founder, Chairman and
Chief Executive Of-
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<PAGE> 21
ficer, and a Director of The Charles Schwab Corporation. As a result of his
beneficial ownership interests in and other relationships with The Charles
Schwab Corporation and its affiliates, Mr. Schwab may be deemed to be a
controlling person of Schwab and the Investment Manager.
OPERATING FEES AND EXPENSES
For investment management services, under the terms of its Investment Advisory
and Administration Agreement with the Trust, the Investment Manager is entitled
to receive a graduated annual fee, payable monthly, from each Fund of 0.74% of
each Funds' average daily net assets not in excess of $1 billion; 0.69% of such
net assets over $1 billion, but not more than $2 billion; and 0.64% of such net
assets over $2 billion.
The Investment Manager guarantees that, through at least February 28, 1997, the
management fee for each Fund will not exceed 0.49% of its average daily net
assets.
The Investment Manager pays the Sub-Adviser an annual fee, payable monthly,
ranging from 0.08% to 0.02% of the Funds' combined average daily net assets,
declining as assets increase. The Sub-Adviser does not receive compensation
directly from the Funds.
For its services as Transfer Agent, Schwab receives an annual fee of 0.05% of
the average daily net assets of each Fund. In addition, for shareholder services
provided, Schwab receives an annual fee of 0.20% of the average daily net assets
of each Fund.
Schwab serves as the distributor for the Funds but receives no compensation for
this service.
The Investment Manager and Schwab also guarantee that, through at least February
28, 1997, total fund operating expenses will not exceed 0.89% of each Fund's
average daily net assets (after waivers and reimbursements). For purposes of
this guarantee, "operating expenses" do not include interest expenses, taxes,
foreign taxes paid or withheld and capital items such as costs of purchase or
sale of portfolio securities, including brokerage fees or commissions. The
effect of this voluntary expense limitation is to maintain or increase the
Funds' total return to shareholders.
OTHER EXPENSES. The Trust pays the expenses of the Funds' operations, including
the fees and expenses for independent accountants, legal counsel and the
custodian of their assets; the cost of maintaining books and records of account;
taxes; registration fees; the fees and expenses of qualifying the Trust and its
shares for distribution under federal and state securities laws; and industry
association membership dues.
The Trust generally allocates these expenses among the individual investment
portfolios or series ("Series") of the Trust, including the Funds. This
allocation is based on the relative net assets of each Series at the time the
expenses are incurred. However, expenses directly attributable to a particular
series are charged to that series.
PORTFOLIO BROKERAGE. When placing orders for the Funds' securities transactions,
the Investment Manager uses its judgment to obtain the best price and execution.
It considers the full range and quality of brokerage services available in
making these determinations. For securities transactions in which Schwab is not
a principal, the Investment Manager may use Schwab or other qualified affiliated
brokers or dealers to execute the Funds' transactions when it reasonably
believes that commissions (or prices) charged and transaction quality will
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<PAGE> 22
be at least comparable to those available from other qualified non-affiliated
brokers or dealers.
OTHER INFORMATION ON THE OPERATION OF OUR FUNDS
The Trust is a business trust formed under the laws of Massachusetts on May 7,
1993. It may issue an unlimited number of shares of beneficial interest in one
or more Series or classes. Currently it offers shares of seven Series.
The Board of Trustees may authorize the issuance of shares of additional Series
or classes, if it deems it desirable. Shares within each Series have equal,
noncumulative voting rights, and have equal rights as to dividends, assets and
liquidation.
Due to the relatively high cost of maintaining accounts with smaller holdings,
each Fund reserves the right to redeem your shares if, as a result of
redemptions, the aggregate value of your account drops below each Fund's $500
minimum balance requirement ($250 in the case of IRAs, other retirement plans
and custodial accounts). You will be given 30 days' advance written notice and a
chance to increase your Fund balance to the minimum requirement before the Fund
redeems your shares. Fund shares will be automatically redeemed should the
Schwab account in which they are carried be closed.
SHARE CERTIFICATES. To assist in minimizing administrative costs, share
certificates will not be issued. Records regarding share ownership are
maintained by the Transfer Agent.
SHAREHOLDER MEETINGS. The Trust is not required to hold annual shareholders'
meetings and does not intend to do so. It will, however, hold special meetings
as required or deemed desirable by the Board of Trustees for purposes such as a
change in a Fund's fundamental policies, election of Trustees, or approval of an
investment advisory agreement. In addition, shareholders may remove a Trustee at
a special meeting called upon written request of shareholders owning in the
aggregate at least 10% of the outstanding shares of the Trust.
YOUR VOTING RIGHTS. If we were to make changes to a Fund's management or
fundamental policies, we would ask you to vote as a shareholder. If we hold a
meeting and you cannot attend, you can vote by proxy. Before the meeting, the
Fund will send you proxy materials that explain the issues to be decided and
include a voting card for you to return. Shareholders have one vote for each
share owned.
Unless permitted by the 1940 Act, shareholders will vote by Series and not in
the aggregate. For example, when voting to approve an investment advisory
agreement for a Series, only shareholders of that Series may vote; when voting
to elect Trustees, shareholders of all the Series vote in the aggregate.
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GLOSSARY OF IMPORTANT TERMS
ANNUALIZED: calculated to represent a year; a statement produced by calculating
financial results covering less than a year to show what might happen when the
results are hypothetically extended to cover an entire year.
BOND: a debt obligation that requires the issuer to pay a fixed sum of money
each year (the interest payments) until maturity. Upon maturity, the bond comes
due and the principal (the amount borrowed) must be paid. Floating or variable
rate bonds have an interest rate that rises or falls if general interest rates
or some other security (such as Treasury bills) rises or falls.
BUSINESS DAY: any day the New York Stock Exchange is open for business. A
Business Day normally begins at 9:30 a.m. Eastern time when the Exchange opens,
and usually ends at 4 p.m. Eastern time when the Exchange closes.
CAPITAL GAIN OR LOSS: the increase or decrease in the value of a security over
the original purchase price. A gain is realized when the security that has
increased in value is sold. An unrealized gain or loss occurs when the value of
a security increases or decreases but the security is not sold. If a security is
held for more than 12 months and then sold at a profit, that profit is a
realized long-term capital gain. If it is sold at a profit after being held for
less than 12 months, that profit is a realized short-term capital gain.
CASH-EQUIVALENTS: securities convertible into cash in a very short time period.
See Money Market Instruments.
CODE: The Internal Revenue Code of 1986, as amended.
COMMERCIAL PAPER: unsecured debt obligations issued by businesses and sold at a
discount but redeemed at par within 2 to 270 days.
DISTRIBUTION: payment the fund makes to shareholders. There are two kinds of
distributions: dividends, or the profits (after expenses) from the fund's
investments, and capital gain distributions.
DIVERSIFIED: under the 1940 Act, a diversified fund generally may not invest
more than 5% of its assets in the securities of any one issuer and may not hold
more than 10% of the voting shares of any one issuer with respect to 75% of the
value of its total assets. Certain minor exceptions apply to this policy, which
are described in the SAI. This test is applied to each of the Funds as a whole
and to each of the Fund's stock sub-categories.
FHLMC: Federal Home Loan Mortgage Corporation.
FNMA: Federal National Mortgage Association.
FUNDAMENTAL: a policy which cannot be changed without the approval of a majority
of the shareholders of a Fund.
GNMA: Government National Mortgage Association.
INVESTMENT MANAGER: Charles Schwab Investment Management, Inc., 101 Montgomery
Street, San Francisco, CA 94104.
INTERNATIONAL STOCKS: stocks of 350 of the largest non-U.S. operating
corporations according to their market capitalization. Currently, the countries
in which these stocks may be issued include Australia, Austria, Belgium, Canada,
Denmark, France, Germany, Hong Kong, Italy, Japan, the Netherlands, New Zealand,
Norway, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
LARGE COMPANY STOCKS: the stocks of companies with the largest market
capitalizations, i.e., market capitalizations of about $1.5 billion and up.
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MSCI EAFE: Morgan Stanley Capital International Europe, Australia, Far East
stock index.
MATURITY: the date on which the principal of a debt obligation such as a bond
comes due and must be repaid.
MONEY MARKET INSTRUMENT: Short-term liquid debt such as Treasury bills and
commercial paper. See Commercial Paper.
NET ASSET VALUE (NAV): on a per share basis, the value of one share in a fund.
This value is determined by adding the total fund assets, subtracting all
liabilities, and then dividing the resulting amount by the number of shares
outstanding.
1940 ACT: the Investment Company Act of 1940, as amended.
NONCUMULATIVE VOTING RIGHTS: the right of a shareholder to vote only the number
of shares owned at the time of voting.
PAR: for a stock, par is the value assigned to the stock at the time it is
issued. It does not reflect either the intrinsic value of the security nor its
market value. For a bond, par is the price at which the bond will be redeemed at
its date of maturity, and the value on which the calculation of interest
payments is based.
PORTFOLIO: the total stocks, bonds and other securities held by an individual
investor, a mutual fund or a financial institution.
RISK: the possibility of losing all or part of your investment, that the value
of your investment will decrease, or that you will receive little or no return
on your investment.
S&P 500 INDEX(R): an index of 500 stocks selected, calculated and published by
Standard & Poor's, Inc.
SAI: the Trust's Statement of Additional Information, as amended from time to
time.
SCHWAB: Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, CA
94104.
SECURITIES AND EXCHANGE COMMISSION (SEC): established by Congress to administer
the Securities Act of 1933, the 1940 Act and other securities-related laws.
SHORT-TERM: with respect to a fund's portfolio investments, maturing in 397 days
or less.
SMALL COMPANY STOCKS: stocks of companies whose market capitalization is within
a dollar range usually well below that of large companies, or in the lower
portion of a list ranking companies by market capitalization (i.e., the second
1,000 largest companies according to their market capitalization).
SUB-ADVISER: Symphony Asset Management, Inc., 555 California Street, Suite
#2975, San Francisco, CA 94104.
TACTICAL ASSET ALLOCATION MODEL: a value-oriented strategy created by Symphony
used to measure the relative values among asset categories to determine the
asset allocation which seeks the highest reward for a given level of risk. Risks
and correlations of the asset categories are measured from long-term return
histories.
T-BILLS: debt securities issued by the U.S. Government having a maturity of less
than one year.
TRANSFER AGENT: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.
TRUST: Schwab Capital Trust.
VOLATILITY: a measure of the magnitude and frequency of changes in securities
values. Statistically, volatility is the measure of the spread of the prices or
yields around the mean of the prices or yields.
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- ------------------------------------------------------
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING NOT CONTAINED IN THIS PROSPECTUS. IF ANYONE GIVES ANY OTHER
INFORMATION OR MAKES ANY OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION
OR REPRESENTATIONS AS HAVING BEEN AUTHORIZED BY THE TRUST OR ITS DISTRIBUTOR.
- ------------------------------------------------------
THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
LAWFULLY BE MADE.
- ------------------------------------------------------
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THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 27
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 28
SCHWAB
ASSET DIRECTOR(R) FUNDS
PROSPECTUS May 21, 1996
[SchwabFunds Logo]
2462-2 (5/96) Printed on recycled paper
[SchwabFunds Logo]
101 Montgomery Street
San Francisco, California 94104
