<PAGE> 1
[Cover: The Schwab Building, San Francisco, California]
SCHWABFUNDS(R)
SCHWAB
INTERNATIONAL
INDEX FUND(R)
Annual Report
October 31, 1996
<PAGE> 2
Dear Shareholder,
It's been an exciting year at SchwabFunds(R). With the
support of investors like you, the SchwabFunds Family(R)
continues to rank among the largest and fastest-growing
[PHOTO OF mutual fund complexes in the nation. In total, Charles
CHARLES R. SCHWAB] Schwab Investment Management, Inc. (CSIM), manages over $40
billion in assets for approximately 2.5 million
shareholders. Today CSIM offers investors 30 mutual funds
spanning a spectrum of financial markets and investing
styles. You'll find in-depth information on the performance of your SchwabFunds
investment in the following pages.
SMART NEW WAYS TO DIVERSIFY YOUR PORTFOLIO
Now more than ever, investors tell us they're looking for new ways to diversify
their portfolios in order to manage risk and enhance return potential. But with
literally thousands of mutual funds to choose from, analyzing and selecting
funds can be an overwhelming task. That's why we've introduced the new Schwab
OneSource Portfolios -- three "funds of funds" that span both U.S. and
international markets. Each OneSource Portfolio is actively managed by an
experienced portfolio manager who invests in a variety of mutual funds from
well-known fund families, monitors their performance and adjusts the portfolio
mix in response to changes in the markets. So you can get diversification not
only across asset classes -- stocks, bonds and cash -- but among different funds
and investing styles too.
OPENING NEW CHANNELS OF COMMUNICATION
If you're among the millions of people exploring the Internet, I encourage you
to visit our Web site at www.schwab.com. There you'll find a wealth of online
information about SchwabFunds as well as a wide range of investments and
resources available from Schwab. You can access the latest mutual fund
performance data, request a free fund prospectus, trade funds and more -- all
from the comfort of your home or office, 24 hours a day. It's just one more way
we're harnessing the latest technology to make investing easier and more
convenient.
Thank you for placing your trust in SchwabFunds. In the year ahead, we'll
continue working to provide you with an expanding range of investment
opportunities to meet your needs.
/s/ Charles R. Schwab
Charles R. Schwab
Cover: The Schwab Building, San Francisco, California
<PAGE> 3
KEEP YOUR
MONEY WORKING
HARDER!
-------------
Use this envelope to easily add to
your SchwabFunds(R).
Charles Schwab
<PAGE> 4
WE'VE MADE IT EASIER FOR YOU! TAKE ADVANTAGE OF THIS OPPORTUNITY TO ADD TO YOUR
SCHWABFUNDS(R) INVESTMENT.
Now, you can add to your account by using this convenient Schwab
investment envelope. It's a simple, easy way to increase your
investment. You can also have money transferred to your fund
directly from your bank account or payroll check using Schwab's
free Automatic Investment Plan (AIP)(1). If you'd like more information
on AIP, just check the appropriate box on the coupon. We'll send
you everything you need to get started.
DON'T DELAY. USE THIS CONVENIENT INVESTMENT ENVELOPE AND SEND YOUR CHECK TODAY!
(1)The Automatic Investment Plan does not ensure profit or protect against
loss in declining markets.
- -------------------------------------------------------------------------------
PLEASE DETACH HERE.
SCHWABFUNDS(R)
INVESTMENT COUPON ---------------------------------------
- ------------------------------------ SCHWAB ACCOUNT NUMBER
PLEASE INDICATE TO WHICH SCHWABFUND
Please enclose your check and this YOUR INVESTMENT SHOULD GO:
completed investment coupon in the
attached postage-paid envelope. / / Schwab S&P 500 Fund
/ / Schwab Analytics Fund(TM)
- --------------------------------- / / Schwab Small-Cap Index Fund(R)
NAME / / Schwab International Index Fund(R)
/ / Schwab OneSource Portfolios --
$ International
- --------------------------------- / / Schwab Asset Director(R) -- High
AMOUNT OF INVESTMENT* Growth Fund
/ / Schwab Asset Director(R) --
- --------------------------------- Balanced Growth Fund
SIGNATURE / / Schwab Asset Director(R) --
/ / Check here if you would like Conservative Growth Fund
more investment coupons for IF NO FUND IS INDICATED, YOUR INVESTMENT
future use. WILL GO INTO THE SWEEP ACCOUNT YOU'VE
/ / Check here if you would like DESIGNATED.
more information on Schwab's
Automatic Investment Plan (AIP).
*THIS ENVELOPE MAY NOT BE USED FOR --------------------------------
INITIAL INVESTMENTS. SUBSEQUENT (lift here for more information)
INVESTMENT MINIMUM IS $100. ---------------------------------
(C)1996 Charles Schwab & Co., Inc. All
rights reserved. Member SIPC/NYSE.
Printed on recycled paper. TF4447(12/96)
CRS 12012
<PAGE> 5
- --------------------------------------------------------------------------------
CharlesSchwab
- --------------------------------------------------------------------------------
JUST FOLLOW THESE EASY STEPS TO INVEST IN YOUR SCHWABFUNDS(R) ACCOUNT:
1. Fill out the Schwab investment coupon
completely, including your name, account
number, amount of your check and signature.
Please use one coupon for each account.
2. Make your check payable to CHARLES SCHWAB THIS ENVELOPE IS INTENDED
& CO., INC., and enclose your check with the FOR SHAREHOLDERS WHO HAVE
completed coupon in this postage-paid envelope. ALREADY RECEIVED A CURRENT
SCHWABFUNDS PROSPECTUS.
3. Then just drop your SchwabFunds investment
envelope in the mail today--and start putting
your money to work! If you have any questions,
don't hesitate to call 1-800-2 NO-LOAD.
<PAGE> 6
Attn: Dept. AIP 333-4
<TABLE>
<CAPTION>
<S> <C>
---------------
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| BUSINESS REPLY MAIL | | MAILED IN THE |
| FIRST-CLASS MAIL PERMIT NO. 18125 SAN FRANCISCO, CA | | UNITED STATES |
---------------------------------------------------------- ---------------
POSTAGE WILL BE PAID BY ADDRESSEE
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PO BOX 7778
SAN FRANCISCO CA 94120-9419
</TABLE>
<PAGE> 7
TABLE OF CONTENTS
GROWTH IN NET ASSETS AND NUMBER OF ACCOUNTS ........................... 2
PERFORMANCE ........................................................... 3
TAX-SMART INVESTMENT .................................................. 4
FUND HOLDINGS ......................................................... 5
PORTFOLIO MANAGEMENT TEAM ............................................. 7
MARKET OVERVIEW ....................................................... 8
QUESTIONS AND ANSWERS ................................................. 12
FINANCIAL STATEMENTS AND NOTES ........................................ 18
1
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We are pleased to report on the performance of the Schwab International Index
Fund(R) (the Fund) for its fiscal year ended October 31, 1996. During the year,
the Fund achieved its primary objective of tracking the price and dividend
performance of the Schwab International Index(R) (the Index). It also succeeded
in maintaining the tax efficiencies and low costs designed to help maximize
long-term performance results as explained below.
GROWTH IN NET ASSETS AND NUMBER OF ACCOUNTS
<TABLE>
<CAPTION>
Net Assets Number of
in Millions Accounts
------------------------------------------------
<S> <C> <C>
Sep-93* $ 95,552,841 16,797
Oct-93 $106,085,381 17,611
Nov-93 $101,303,954 18,059
Dec-93 $112,844,304 18,940
Jan-94 $123,270,658 19,955
Feb-94 $125,079,990 19,763
Mar-94 $120,531,855 19,880
Apr-94 $123,635,660 19,854
May-94 $124,443,798 19,988
Jun-94 $125,369,671 20,113
Jul-94 $129,558,872 20,307
Aug-94 $135,579,362 21,304
Sep-94 $132,774,107 20,747
Oct-94 $142,355,062 21,680
Nov-94 $137,713,287 21,972
Dec-94 $138,099,459 21,944
Jan-95 $133,088,705 21,888
Feb-95 $134,445,191 21,805
Mar-95 $143,514,912 21,763
Apr-95 $154,062,498 22,244
May-95 $160,198,618 22,832
Jun-95 $161,420,288 23,174
Jul-95 $174,669,999 23,775
Aug-95 $172,981,666 24,182
Sep-95 $179,408,413 24,422
Oct-95 $179,611,854 24,599
Nov-95 $186,260,214 24,767
Dec-95 $195,889,123 25,138
Jan-96 $208,604,044 26,321
Feb-96 $216,433,443 27,075
Mar-96 $225,800,585 27,784
Apr-96 $236,184,000 28,495
May-96 $237,643,000 28,853
Jun-96 $241,962,000 29,098
Jul-96 $240,603,000 29,188
Aug-96 $240,603,000 29,186
Sep-96 $246,328,000 29,190
Oct-96 $246,778,000 29,190
</TABLE>
* Commencement of Fund Operations
2
<PAGE> 9
PERFORMANCE
The table below compares total return for various periods, ended October 31,
1996, for the Schwab International Index Fund(R), the Schwab International
Index(R) and the Morgan Stanley Capital International - Europe, Australasia, Far
East Index (MSCI EAFE).
TOTAL RETURN TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative Since Average Annual
Fund Inception Since Fund Inception
Six-Months One-year (9/9/93) (9/9/93)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Schwab
International 0.33% 11.07% 25.71% 7.54%
Index Fund
- -------------------------------------------------------------------------------------------
Schwab
International 0.30% 12.24% 28.63% 8.33%
Index
- -------------------------------------------------------------------------------------------
MSCI EAFE (2.42)% 10.48% 21.78% --
- -------------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1996 the one-year total return for the Schwab International
Index Fund was 9.77% and the average annual total return since inception was
7.81%.
- -------------------------------------------------------------------------------
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The
Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed that maximum total operating expenses will
not exceed 0.69% through at least 2/28/97. Without fee waivers and guarantees,
for the periods ended 10/31/96, the Fund's total return for the six-month,
one-year, cumulative since inception, and average annual since inception would
have been 0.09%, 10.55%, 24.06%, and 7.09%, respectively. For the periods ended
9/30/96, the Fund's one-year total return and average annual total return since
inception would have been 9.24% and 7.38%, respectively. Indices are unmanged,
and unlike the Fund, do not reflect advisory and other fees associated with an
investment in the Fund. Investors cannot invest in an index directly.
3
<PAGE> 10
TAX-SMART INVESTMENT STRATEGY
The Schwab International Index Fund(R) seeks to maximize its after-tax
performance for investors by keeping capital gain distributions to a minimum.
This strategy is designed to help you keep more of what your money earns. The
following chart illustrates the effects of this strategy.
- --------------------------------------------------------------------------------
One-Year Total Return As of October 31, 1996
<TABLE>
<CAPTION>
Before-Tax After-Tax % Lost to Taxes
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Schwab International 11.07% 10.58% 0.49%
Index Fund
- -------------------------------------------------------------------------------------
Average International 10.20% 9.36% 0.84%
Fund
- -------------------------------------------------------------------------------------
</TABLE>
Source for average international fund is Morningstar, Inc. for 361 international
funds as of 10/31/96. After-tax returns assume the maximum Federal tax rate of
39.6% on dividends and 28% on capital gain distributions. Tax rates vary and may
be higher or lower than those shown. TOTAL RETURN ASSUMES REINVESTMENT OF ALL
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL
FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. The Investment Manager and Schwab waived a portion of
their fees during the reporting period, and have guaranteed that maximum total
operating expenses will not exceed 0.69% through at least 2/28/97. Without this
fee waiver and guarantee, the Fund's total return would have been lower.
4
<PAGE> 11
FUND HOLDINGS
The Fund's portfolio is diversified across 15 countries, approximately 350 of
the world's largest publicly traded companies and a broad range of sectors and
industries. Following is a list of the Fund's ten largest holdings as well as a
chart showing the percentage of the portfolio invested in each country. Both are
as of October 31, 1996 and are not necessarily indicative of the Fund's future
holdings. A complete listing of the Fund's portfolio holdings, also as of
October 31, 1996, can be found in the Statement of Net Assets section of this
report.
FUND'S TOP TEN HOLDINGS AS A
PERCENTAGE OF NET ASSETS
Royal Dutch Petroleum Co. Netherlands 2.00%
Roche Group Holdings AG Switzerland 1.71
Nippon Telegraph & Telephone Corp. Japan 1.69
Bank of Tokyo Mitsubishi, Ltd. Japan 1.51
British Petroleum Co. United Kingdom 1.46
Toyota Motor Corp. Japan 1.37
Glaxo Wellcome United Kingdom 1.32
Shell Transportation & Trading Co. United Kingdom 1.31
Sandoz AG Switzerland 1.21
Nestle, SA Switzerland 1.03
5
<PAGE> 12
[MAP]
SCHWAB INTERNATIONAL INDEX FUND(R) EQUITY HOLDINGS
AS OF OCTOBER 31, 1996
Canada 3.4%
Belgium 0.8%
Netherlands 6.1%
Germany 8.4%
Denmark 0.3%
Sweden 2.0%
Japan 29.0%
United Kingdom 21.8%
Spain 2.0%
France 7.1%
Switzerland 7.0%
Italy 2.0%
Singapore 2.0%
Australia 2.4%
Hong Kong 4.3%
6
<PAGE> 13
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD, Senior Vice President and Chief Investment Officer, has overall
responsibility for the management of the Fund's portfolio. Steve joined CSIM as
Vice President and Portfolio Manager in April 1991, and was promoted to his
current position in August 1993. Prior to joining CSIM, Steve was the Vice
President and Portfolio Manager at Federated Investors. He holds an MBA from the
Wharton School, and a B.A. in economics from Virginia Tech, and has been a
chartered financial analyst since 1985.
GERI HOM, Portfolio Manager, has primary responsibility for the day-to-day
management of the Fund's portfolio. Geri joined CSIM in March 1995 as Portfolio
Manager and currently manages over $3 billion in assets. Prior to joining CSIM,
Geri was a Principal for Wells Fargo Nikko Investment Advisors and Vice
President and Manager of the Domestic Equity Portfolio Management Group for
Wells Fargo Nikko. She holds a B.A. in business education from San Francisco
State University.
The following market overview and answers to questions are provided by the
Portfolio Management Team.
7
<PAGE> 14
MARKET OVERVIEW
REAL GDP GROWTH RATE
(Quarterly % Change, Annual Rate)
<TABLE>
<CAPTION>
Real GDP Growth Rate
--------------------
<S> <C>
Q4-95 0.3%
Q1-96 2.0%
Q2-96 4.7%
Q3-96 2.0%
</TABLE>
As shown on the graph above, the start of the fiscal year November 1, 1995 was
ushered in with a weak fourth quarter 1995 real GDP growth rate of 0.3%, which
caused some concern over the possibility of an economic recession. However, as
time progressed, the economic climate improved significantly. By the third
quarter of 1996, sentiment was focused on the apparent strength of the economy
and its potential impact on future inflation. The financial markets were
particularly concerned that the combined impact of strong economic growth and
the strength of the labor market would force the Federal Reserve (the Fed) to
raise the federal funds rate in an effort to prevent a resurgence of inflation.
At the close of the Fund's fiscal year, job creation appears to be maintaining a
healthy pace and the national unemployment rate of 5.2% is near its low for the
decade. Although the pace of economic growth has slowed somewhat to a rate of
2.0% in the third quarter of 1996, there remain signs of
8
<PAGE> 15
potential inflationary pressures in the economy. Although both price and wage
inflation appear to be well contained, the Fed has indicated it will maintain a
posture of "heightened surveillance" and remain diligent in its effort to
prevent increases in inflation.
TOTAL RETURNS PERFORMANCE
Growth of a Dollar Invested
<TABLE>
<CAPTION>
Schwab Schwab Lehman MF
S&P 500 Small Cap International General US
Index(R) Index(R) Index(R) Govt. Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oct-95 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Nov-95 $ 1.044 $ 1.017 $ 1.028 $ 1.016
Dec-95 $ 1.064 $ 1.073 $ 1.068 $ 1.030
Jan-96 $ 1.100 $ 1.070 $ 1.071 $ 1.036
Feb-96 $ 1.110 $ 1.113 $ 1.073 $ 1.015
Mar-96 $ 1.121 $ 1.133 $ 1.093 $ 1.007
Apr-96 $ 1.137 $ 1.193 $ 1.119 $ 1.000
May-96 $ 1.167 $ 1.234 $ 1.106 $ 0.999
Jun-96 $ 1.171 $ 1.194 $ 1.113 $ 1.011
Jul-96 $ 1.119 $ 1.098 $ 1.084 $ 1.014
Aug-96 $ 1.143 $ 1.167 $ 1.094 $ 1.012
Sep-96 $ 1.207 $ 1.210 $ 1.126 $ 1.029
Oct-96 $ 1.241 $ 1.190 $ 1.122 $ 1.051
</TABLE>
Schwab Small-Cap Index(R) 18.97% S&P 500(R) Index 24.06%
Schwab International Index(R) 12.24% Lehman MF General
US Govt. Index 5.12%
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
are representative returns of specific market sectors from 11/1/95 through
10/31/96 and do not reflect a fund's performance. Indices are unmanaged and,
unlike a fund, do not reflect the payment of advisory fees and other expenses
associated with an investment in a fund. Investors cannot invest in an index
directly.
DOMESTIC EQUITY MARKET HIGHLIGHTS
As shown on the graph above, domestic equities achieved strong returns during
the fiscal year, outpacing both international equities and domestic bonds.(1)
During the fiscal year, the total return for the
1 The domestic equities market is represented by the S&P 500 Index and the
Schwab Small-Cap Index. The Schwab Small-Cap Index is comprised of the common
stocks of the second 1,000 largest publicly traded companies ranked by market
capitalization, excluding investment companies.
9
<PAGE> 16
S&P 500(R) Index was 24.06% and the total return for the Schwab Small-Cap
Index(R) was 18.97%.(2) Both returns were in excess of their longer-term
(20-year) averages of 14.47% for the S&P 500 Index and 16.83% for small cap
stocks.(3) Both of these indices reached new highs in the second quarter,
experienced significant declines in June and July, and went on to recover (the
S&P 500 Index reached a new high) by the close of the fiscal period.
Using most traditional measures, such as price-to-book value and dividend yield,
many major market indices remain valued near their historic highs. The primary
exception is the price-to-earnings ratio which, at 20 times earnings for the S&P
500 Index, is well above its historical average, but below its 1991 and 1987
highs of 26 and 22, respectively.
Although there are many contributing factors, most market observers attribute
the market's strong performance to three key developments: the second straight
year of impressive corporate earnings; a continuation of relatively moderate
short- and long-term interest rates; and continued high levels of cash flowing
into equity mutual funds.
INTERNATIONAL EQUITY MARKET HIGHLIGHTS
International equity returns were more modest and were heavily influenced by the
strengthening dollar. In local currency terms, the total return of the Schwab
International Index(R)(4) for the 12 months ended October 31, 1996 was 17.82%.
Because the U.S. dollar increased in value against most other currencies, the
total return in U.S. dollars was 12.24%.
2 Morningstar, Inc., for the period November 1, 1995 to October 31, 1996.
3 Morningstar, Inc., for the period November 1, 1976 to October 31, 1996.
4 The Schwab International Index is representative of the international equity
market. This Index is comprised of the stocks of the 350 largest non-U.S.
companies located in countries with developed securities markets and excludes
investment companies.
10
<PAGE> 17
BOND MARKET HIGHLIGHTS
30-YEAR AND 5-YEAR TREASURY BOND YIELDS
<TABLE>
<CAPTION>
Thirty Year Five Year
Treasury Bond Treasury Bond
Yield Yield
- -------------------------------------------------------
<S> <C> <C>
11/3/95 6.28% 5.70%
11/10/95 6.34% 5.76%
11/17/95 6.23% 5.65%
11/24/95 6.25% 5.69%
12/1/95 6.09% 5.49%
12/8/95 6.05% 5.55%
12/15/95 6.10% 5.57%
12/22/95 6.06% 5.50%
12/29/95 5.95% 5.38%
1/5/96 6.05% 5.41%
1/12/96 6.15% 5.43%
1/19/96 5.97% 5.27%
1/26/96 6.05% 5.33%
2/2/96 6.16% 5.26%
2/9/96 6.10% 5.23%
2/16/96 6.24% 5.30%
2/23/96 6.41% 5.51%
3/1/96 6.37% 5.58%
3/8/96 6.71% 6.06%
3/15/96 6.74% 6.18%
3/22/96 6.66% 6.06%
3/29/96 6.67% 6.09%
4/5/96 6.82% 6.38%
4/12/96 6.80% 6.29%
4/19/96 6.79% 6.32%
4/26/96 6.79% 6.28%
5/3/96 7.12% 6.60%
5/10/96 6.93% 6.47%
5/17/96 6.83% 6.41%
5/24/96 6.83% 6.41%
5/31/96 6.99% 6.63%
6/7/96 7.03% 6.70%
6/14/96 7.09% 6.70%
6/21/96 7.10% 6.72%
6/28/96 6.87% 6.46%
7/5/96 7.19% 6.82%
7/12/96 7.03% 6.65%
7/19/96 6.97% 6.57%
7/26/96 7.01% 6.63%
8/2/96 6.74% 6.27%
8/9/96 6.69% 6.22%
8/16/96 6.77% 6.30%
8/23/96 6.96% 6.51%
8/30/96 7.12% 6.72%
9/6/96 7.11% 6.70%
9/13/96 6.95% 6.47%
9/20/96 7.04% 6.62%
9/27/96 6.91% 6.44%
10/4/96 6.74% 6.21%
10/11/96 6.85% 6.28%
10/18/96 6.80% 6.25%
10/25/96 6.82% 6.26%
</TABLE>
As shown on the chart above, during the first three months of the fiscal year,
both intermediate and long-term Treasury Bond yields declined, causing a
corresponding increase in the value of bonds. This decline in rates was a result
of concerns over a potential recession, an anticipated decline in demand for
borrowing, and reduced inflationary expectations. The bond market experienced a
dramatic reversal in sentiment during February, which marked the beginning of a
sharp increase in Treasury Bond yields and a corresponding decrease in the value
of bonds. The increase in rates was a result of strong economic data and
concerns that the economy could be growing too fast, which could result in
higher inflation levels. The last half of the fiscal year was characterized by
some degree of volatility and no discernible trend, with trading ranges of 6.7%
to 7.2% for the 30-year Treasury Bond and 6.2% to 6.8% for the 5-year Treasury
Bond.
11
<PAGE> 18
QUESTIONS AND ANSWERS
Q. HOW DID THE PERFORMANCE OF THE SCHWAB INTERNATIONAL INDEX(R) COMPARE TO THE
MSCI EAFE DURING THE FISCAL YEAR?
A. During the fiscal year, the total return for the Schwab International Index
was 12.24%, outperforming the 10.48% return of the MSCI EAFE. The returns of
both indices were somewhat below the long-term average for international stock
returns. For example, the twenty-year average annual total return for the period
ended December 1995 for the MSCI EAFE was 14.40%.
The chart at right illustrates the cumulative total return for the Schwab
International Index(R), Schwab International Index Fund(R) and the MSCI EAFE
since the Fund's inception on September 9, 1993. The average annual total return
since inception for the Schwab International Index has been 8.33%, versus 6.46%
for the MSCI EAFE. It is important to note that investors cannot invest in
either index directly.
Q. WHAT ACCOUNTS FOR THE DIFFERENCE IN THE PERFORMANCE OF THE INDEX AND THE
FUND?
A. The performance of the Index is a theoretical return of common stocks
representing the largest 350 international companies from major developed
securities markets outside of the United States, ranked by market
capitalization. Unlike the Fund, the Index does not incur management and other
costs that reduce returns to the shareholders. In addition, the Fund, unlike the
Index, holds a small portion of its balances in cash to meet shareholder
redemptions and pay expenses. The cash portion earns interest at money market
rates, which may be more or less than the returns of the Index during a given
period. Also, the weighting of any particular security in the Fund can be
greater or less than the theoretical weighting in the Index.
Another factor accounting for the difference in performance is the Fund's goal
of minimizing capital gain distributions. In order to avoid excessive
realization of capital gains, the Fund may continue to hold certain stocks that
are no longer in the Index. Depending on the
12
<PAGE> 19
Comparison of Change in Value of a Hypothetical $10,000 Investment
in the Schwab International Index Fund(R),
the Schwab International Index and the MSCI EAFE
<TABLE>
<CAPTION>
DATE FUND INDEX EAFE
<S> <C> <C> <C>
9/9/93 $10,000 $10,000 $10,000
9/30/93 $9,770 $9,786 $9,749
10/31/93 $10,150 $10,167 $10,049
11/30/93 $9,420 $9,454 $9,171
12/31/93 $10,096 $10,137 $9,833
1/31/94 $10,769 $10,823 $10,664
2/28/94 $10,558 $10,623 $10,634
3/31/94 $10,156 $10,172 $10,176
4/30/94 $10,458 $10,544 $10,607
5/31/94 $10,407 $10,448 $10,547
6/30/94 $10,488 $10,508 $10,695
7/31/94 $10,649 $10,692 $10,798
8/31/94 $10,941 $10,999 $11,054
9/30/94 $10,559 $10,621 $10,706
10/31/94 $10,950 $11,026 $11,062
11/30/94 $10,428 $10,478 $10,530
12/31/94 $10,484 $10,564 $10,597
1/31/95 $10,108 $10,254 $10,190
2/28/95 $10,189 $10,282 $10,160
3/31/95 $10,759 $10,964 $10,794
4/30/95 $11,145 $11,346 $11,200
5/31/95 $11,176 $11,303 $11,067
6/29/91 $11,064 $11,168 $10,873
7/31/95 $11,623 $11,826 $11,551
8/31/95 $11,237 $11,384 $11,111
9/30/95 $11,470 $11,661 $11,327
10/30/91 $11,318 $11,461 $11,023
11/30/95 $11,562 $11,782 $11,329
12/31/95 $11,975 $12,238 $11,786
1/31/96 $12,006 $12,277 $11,834
2/29/96 $12,026 $12,300 $11,874
3/31/96 $12,232 $12,529 $12,126
4/30/96 $12,530 $12,826 $12,479
5/31/96 $12,396 $12,674 $12,250
6/30/96 $12,489 $12,761 $12,318
7/31/96 $12,139 $12,430 $11,958
8/31/96 $12,253 $12,538 $11,985
9/30/96 $12,592 $12,907 $12,303
10/31/96 $12,571 $12,863 $12,178
</TABLE>
Schwab International Index Fund Schwab International Index Fund
Average Annual Total Returns Schwab International Index
through October 31, 1996 MSCI EAFE
One-Year Since Inception
11.07% 7.54%
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The performance graph
compares a hypothetical $10,000 investment in the Schwab International Index
Fund, since inception with a hypothetical investment in the Schwab International
Index and the MSCI EAFE. Total return assumes reinvestment of all dividends and
capital gain distributions, if any. Indices are unmanaged, and unlike the Fund,
do not reflect advisory and other fees associated with an investment in the
Fund. Investors cannot invest in an index directly. The Investment Manager and
Schwab waived a portion of their fees during the fiscal year, and have
guaranteed that maximum total operating expenses will not exceed 0.69% through
at least 2/28/97. Without fee waivers and guarantees, the Fund's total return
for each period would have been lower.
13
<PAGE> 20
performance of these non-Index stocks, this practice can have a positive or
negative impact on the Fund's performance. Lastly, unlike the Index, the Fund
incurs trading costs when it buys or sells stocks. Combined, these factors cause
the difference in the returns of the Fund compared to the Index, a difference
referred to as the Fund's "tracking error."
The tracking error for the Fund during the reporting period was 1.17%. The
average annual tracking error for the Fund since its inception has been 0.79%,
which is within our expectation given the components of tracking error discussed
above.
Q. WHAT IMPACT HAVE FLUCTUATING VALUES OF THE U.S. DOLLAR AND INTERNATIONAL
CURRENCIES HAD ON THE PERFORMANCE OF THE FUND DURING THE FISCAL YEAR?
A. Since your investment in the Fund is denominated in U.S. dollars, the return
you receive as a U.S. investor from international equities is made up of two
primary components: the market movement of securities, and the value of the
dollar in relation to the local currencies associated with those securities. As
a result, fluctuations in the exchange rate between the U.S. dollar and the
local currencies will affect the U.S. dollar-denominated returns the Fund earns
on international equities. A rise in the U.S. dollar against the local currency
will decrease the return on your investment in the Fund. A decline in the U.S.
dollar against the local currency will increase the return on your investment.
During the reporting period, the U.S. dollar increased in value against local
currencies. This caused the total return of the Fund, for a dollar- denominated
investor, to lag behind the return of the Fund measured in local currency.
However, the strong performance of international equities during the reporting
period allowed the Fund to post a positive return. The graph at right
illustrates how currency fluctuations affected the hypothetical performance of
the Index during the fiscal year. The lower line, with an ending value of
$11,224, represents the value of a hypothetical $10,000 investment for a U.S.
dollar-denominated investment. The upper line represents the local currency
value of $11,781 prior to conversion to U.S. dollars.
14
<PAGE> 21
ANNUAL REPORT
SCHWAB INTERNATIONAL INDEX FUND
[GRAPH AREA (PLOT POINTS)]
Hypothetical $10,000 Investment in U.S. Dollars and Local Currency
<TABLE>
<CAPTION>
Date In US Dollars In Local Currency
---- ------------- -----------------
<S> <C> <C>
Oct-95 $10,000 $10,000
Nov-95 $10,280 $10,403
Dec-95 $10,678 $10,790
Jan-96 $10,712 $11,172
Feb-96 $10,732 $11,043
Mar-96 $10,932 $11,305
Apr-96 $11,191 $11,664
May-96 $11,059 $11,575
Jun-96 $11,134 $11,692
Jul-96 $10,846 $11,163
Aug-96 $10,940 $11,320
Sep-96 $11,262 $11,871
Oct-96 $11,224 $11,781
</TABLE>
The graph above compares a hypothetical $10,000 investment in the Schwab
International Index(R), valued in U.S. dollars to the same investment valued in
local currency. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. TOTAL RETURN
ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS, IF ANY.
Indices are unmanaged, and unlike funds, do not reflect advisory and other fees
associated with investments in funds. Investors cannot invest in an index
directly.
Q. What is an index investing and what makes it an attractive investment
strategy?
A. Although index strategies have broad appeal among institutional investors, it
is actually a fairly simple concept. Like the Schwab International Index, all
indices represent a predefined group of securities (frequently, but not always,
common stocks). There are many different types of stock indices including large
company, small company, industry specific, international, regional, and
individual country. The objective of an index strategy is to track the
performance of an index by investing in substantially all or a representative
sample of the securities in the index.
15
<PAGE> 22
An index strategy is frequently referred to as a "passive" investment strategy.
In contrast with "active" strategies, a passive strategy does not attempt to
"make bets" by emphasizing particular industry sectors or individual securities
that the fund manager believes will outperform the market. It is important to
note that investors cannot invest in an index directly.
The primary advantages of investing in an index fund include the opportunity to
achieve a particular market return, the ability to purchase a portfolio of
securities diversified across a particular market segment, and the potential to
reduce costs to shareholders by offering lower management fees and total
operating expenses. Passively managed funds generally have lower portfolio
turnover and transaction costs, and they attempt to remain as fully invested as
possible. Over time, these strategies may help to enhance shareholders'
after-tax returns.
In contrast, actively managed funds may periodically maintain varying levels of
cash positions in an effort to enhance returns by "timing" market movements. For
example, as of September 30, 1996, the Investment Company Institute reported
that the average cash equivalent position for all international funds was 6.5%.
This is significantly greater than the Schwab International Index Fund(R), which
had a cash equivalent position of 0.46% as of September 30, 1996. Over time,
being fully invested with a low cash position will generally provide potential
for higher returns.
Q. WHAT STRATEGIES DOES THE FUND USE TO HELP INVESTORS ACHIEVE HIGHER AFTER-TAX
RETURNS?
A. Taxes can erode the returns you earn from your mutual fund investment. That's
why it is important to understand how fund returns compare after taxes when
evaluating performance.
The Fund is managed to help maximize your after-tax returns by minimizing
taxable capital gain distributions. Since the Fund does not actively trade
stocks, except to realign portfolio holdings with the Index and to respond to
customer purchases and redemptions, capital gains are
16
<PAGE> 23
minimized. And when the Fund's manager does trade, an attempt is made to offset
capital gains with capital losses to minimize taxable distributions to
shareholders.
This strategy seeks to defer capital gains until you sell your shares. Until
such time, any unrealized gains accumulate in the Fund, helping to build the
value of your investment.
Q. HOW DOES THE FUND FIT INTO AN ASSET ALLOCATION PLAN?
A. The Fund can best be used to fulfill all or a portion of the international
equity component of an asset allocation plan. The Fund is a diversified
representation of the large company international equity market. Typically,
investors with higher risk tolerances and longer-term investment horizons may
want to consider a larger allocation to international stocks. Investors with
lower risk tolerances and shorter-term investment horizons may want to consider
a smaller allocation to international stocks. An investment portfolio which ONLY
invests in international stocks will not realize the benefits of asset class
diversification. To take maximum advantage of these investment principles,
international stocks should be combined with other major equity asset classes
(such as large company stocks and small company stocks) to form the equity
component of a well-diversified investment portfolio.
17
<PAGE> 24
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
October 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
COMMON STOCK--98.3%
AUSTRALIA--2.3%
Australia & New Zealand Banking Group 77,262 $ 451
Broken Hill Proprietary Co., Ltd. 116,281 1,544
Coca Cola Amatil 29,457 405
Commonwealth Bank Group 60,023 564
Commonwealth Bank Group (Installment Receipts) 14,142 85
National Australia Bank 85,804 942
News Corp., Ltd. 110,907 631
Western Mining Corp. 65,592 412
Westpac Banking Corp. 99,986 571
-----
5,605
-----
BELGIUM--0.8%
Electrabel 3,100 720
Electrabel, VVPR Strip 500 1
Generale de Banque 840 294
Petrofina SA 1,100 338
Societe Generale de Belgique 3,040 227
Tractebel Investor International 600 286
-----
1,866
-----
CANADA--3.4%
Alcan Aluminum Ltd. 15,376 505
BCE Inc. 20,888 959
Bank of Montreal 16,776 508
Bank of Nova Scotia, Halifax 19,541 616
Barrick Gold Corp. 19,903 521
Canadian Imperial Bank of Commerce 13,397 557
Canadian Pacific Ltd 20,597 521
Imperial Oil Ltd. (New) 11,952 527
Northern Telecom Ltd. 14,053 915
Placer Dome Inc. 21,200 509
Royal Bank of Canada, Montreal Quebec 15,200 502
Seagram Co. Ltd. 20,826 785
Thomson Corp. 33,900 682
Toronto-Dominion Bank 14,000 327
-----
8,434
-----
</TABLE>
18
<PAGE> 25
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
DENMARK--0.3%
Novo Nordisk A/S Series B 2,102 $ 350
Tele Danmark A/S Series B 7,910 399
------
749
------
FRANCE--7.1%
AXA Groupe SA 15,588 968
Alcatel Alsthom CGE SA 8,287 707
BQE National de Paris 10,331 387
Canal Plus 1,354 335
Carrefour 2,855 1,584
Cie Financiere de Paribas (Bearer) 5,425 349
Cie Generale de Eaux 6,852 819
Compagnie de Saint-Gobain SA 5,078 685
Danone Groupe 3,416 468
Elf Aquitaine 14,835 1,186
L'Air Liquide 3,965 612
L'Air Liquide (Prime Fidelite 1997) (Reg.) 3,324 513
L'Oreal SA 3,759 1,273
LVMH Moet Hennessy Louis Vuitton 7,100 1,628
Lafarge Coppee SA 8,847 531
Lyonnaise des Eaux-Dumez 2,840 251
Michelin (CGDE) Class B (Reg.) 5,354 258
PSA Peugeot Citroen 2,200 229
Pinault Printemps Redoute SA 1,255 473
Renault (Reg.) 14,839 316
Rhone-Poulenc SA A Shares 15,750 467
Roussel Uclaf 1,526 404
Sanofi 6,203 562
Schneider SA 9,040 442
Societe Generale 4,907 529
Suez Group 7,753 334
TOTAL Class B 12,682 992
Union des Assurances de Paris 14,792 307
------
17,609
------
GERMANY--8.2%
BASF AG 36,369 1,162
Bayer AG 37,670 1,423
Bayerische Hypotheken & Wechsel Bank AG 15,269 447
Bayerische Motoren Werk AG 1,099 643
Bayerische Vereinsbank AG 15,131 569
Commerzbank AG 21,500 482
</TABLE>
19
<PAGE> 26
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
October 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
Daimler Benz AG 30,638 $ 1,799
Deutsche Bank AG 27,823 1,289
Dresdner Bank AG 23,930 640
Hoechst AG 32,620 1,227
Linde AG 400 248
Lufthansa AG 25,290 331
Mannesmann AG 2,022 785
Metro AG 4,927 404
Muenchener Rueckversicherung 11 21
Muenchener Rueckversicherung (Reg.) 812 1,941
RWE AG 18,210 750
RWE AG (Non Voting) 18,320 622
Sap AG 3,610 489
Siemens AG 31,250 1,615
Thyssen AG 1,963 351
Veba AG 26,470 1,412
Vereinigte Elektrizitatswerke Westfalen Series B 1,249 416
Viag AG 1,235 457
Viag AG (New)* 277 101
Volkswagen AG 1,534 604
------
20,228
------
HONG KONG--4.3%
CITIC Pacific 124,000 603
Cathay Pacific Airways 100,000 156
Cheung Kong Holdings 126,000 1,010
China Light & Power 116,900 543
Hang Seng Bank Ltd. 105,900 1,257
Henderson Land Development Co. 91,000 809
Hong Kong Electric Holdings Ltd. 99,000 317
Hong Kong Telecommunications Ltd. 648,265 1,144
Hutchison Whampoa Ltd. 216,000 1,508
New World Development Co. 92,099 536
Sun Hung Kai Properties 134,500 1,531
Swire Pacific Ltd. Class A 87,500 772
Wharf Holdings 101,000 417
------
10,603
------
ITALY--2.0%
Assicurazioni Generali 48,070 928
Fiat SpA 168,000 449
Fiat SpA, di Risp (Non-Convertible) 42,000 61
INA 201,000 278
</TABLE>
20
<PAGE> 27
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
STET 207,000 $ 715
STET di Risp (Non-Convertible) 66,000 176
Telecom Italia 395,976 882
Telecom Italia Mob 395,976 818
Telecom Italia Mob di Risp 195,000 222
Telecom Italia di Risp (Non-Convertible) 165,000 314
-----
4,843
-----
JAPAN--29.0%
Ajinomoto Co., Inc. 26,000 276
All Nippon Airways Co., Ltd. 51,000 425
Asahi Bank 79,000 812
Asahi Chemical Industry Co. 41,000 256
Asahi Glass Co., Ltd. 42,000 443
Bank of Tokyo-Mitsubishi, Ltd. 183,450 3,738
Bank of Yokohama 44,000 326
Bridgestone Corp. 28,000 472
Canon Inc. 31,000 594
Chiba Bank 31,000 233
Chubu Electric Power Co. 26,100 539
Chugoku Electric Power Co., Inc. 14,300 288
DDI Corp. 100 751
Dai Nippon Printing Co. 27,000 455
Dai-Ichi Kangyo Bank, Ltd. 112,000 1,820
Daiei Inc. 24,000 213
Daiwa Bank 48,000 272
Daiwa House Industries Co. 11,000 153
Daiwa Securities Co. 47,000 508
East Japan Railway Co. 150 689
Eisai Co. 250 4
Fanuc 8,000 256
Fuji Bank, Ltd. 111,000 1,999
Fuji Photo Film Co. 18,000 517
Fujitsu Ltd. 66,000 580
Gunma Bank 10,000 89
Hachijuni Bank 13,000 130
Hitachi Ltd. 121,000 1,073
Honda Motor Co., Ltd. 34,000 812
Industrial Bank of Japan, Ltd. 106,720 2,128
Ishikawajima-Harima Heavy Industries 53,000 244
Isuzu Motors Ltd. 39,000 193
Ito-Yokado Co., Ltd. 15,000 748
Itochu Corp. 43,000 259
</TABLE>
21
<PAGE> 28
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
October 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
Japan Air Lines Co., Ltd. 63,000 $ 360
Japan Telecom Co. 20 481
Japan Tobacco Inc. 100 706
Joyo Bank 18,000 119
Joyo Bank (Rights expire 11/20/96)* 1,800 6
Jusco Co. 12,000 356
Kajima Corp. 34,000 292
Kansai Electric Power Co. 33,700 707
Kao Corp. 24,000 282
Kawasaki Heavy Industries 55,000 252
Kawasaki Steel Co. 112,000 345
Kinki Nippon Railway Co. 56,650 376
Kirin Brewery Co., Ltd. 40,000 411
Kobe Steel 104,000 247
Kokusai Denki 1,500 130
Komatsu Ltd. 38,000 311
Kubota Corp. 42,000 238
Kyocera Corp. 7,000 462
Kyushu Electric Power Co. 18,700 383
Long-Term Credit Bank of Japan 85,000 564
Marubeni Corp. 34,000 157
Marui Co. 14,000 259
Matsushita Electric Industrial Co., Ltd. 76,000 1,215
Matsushita Electric Works 30,000 290
Mazda Motor Corp. 48,000 213
Mitsubishi Chemical Corp. 62,000 253
Mitsubishi Corp. 56,000 625
Mitsubishi Electric Corp. 77,000 446
Mitsubishi Estate Co. 46,000 574
Mitsubishi Heavy Industries 122,000 938
Mitsubishi Materials Co. 46,000 204
Mitsubishi Motors 37,000 306
Mitsubishi Trust & Banking Corp. 45,000 664
Mitsui & Co. 56,000 453
Mitsui Fudosan Co. 26,000 322
Mitsui Trust & Banking Co. 44,000 425
Murata Manufacturing Co. 9,000 289
NEC Corp. 55,000 599
NKK Corp. 97,000 244
NTT Data Corp. 10 296
Nikko Securities Co. 52,000 498
Nintendo Co., Ltd. 4,200 269
</TABLE>
22
<PAGE> 29
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
Nippon Credit Bank 69,000 $ 208
Nippon Express Co. 31,000 252
Nippon Oil Co. 48,000 274
Nippon Paper Industries Co. 39,000 220
Nippon Steel Corp. 238,000 694
Nippon Telegraph & Telephone Corp. 596 4,162
Nippon Yusen Kabushiki Kaisha 27,000 135
Nippondenso Co. 31,000 643
Nissan Motor Co., Ltd. 89,000 673
Nomura Securities Co., Ltd. 70,000 1,156
Obayashi Corp. 17,000 131
Odakyu Electric Railway Co. 420 3
Oji Paper Co. (New)* 16,000 117
Osaka Gas Co. 93,000 288
Ricoh Co., Ltd. 27,000 268
Rohm Co. 4,000 237
Sakura Bank 124,000 1,176
Sankyo Co. 13,000 322
Sanwa Bank 104,000 1,772
Sanyo Electric Co., Ltd. 60,000 291
Secom Co. 3,000 179
Seibu Railway Co. 16,000 766
Sekisui Chemical Co. 21,000 234
Sekisui House 26,000 274
Seven-Eleven Japan Co. 15,200 884
Sharp Corp. 40,000 608
Shikoku Electric Power Co. 6,200 125
Shimizu Corp. 31,000 280
Shin-Etsu Chemical Co. 13,650 234
Shizuoka Bank 26,000 297
Sony Corp. 12,500 750
Sumitomo Bank 113,000 1,985
Sumitomo Chemical Co. 63,000 269
Sumitomo Corp. 40,000 323
Sumitomo Electric Industries 27,000 356
Sumitomo Marine & Fire Insurance Co. 28,000 201
Sumitomo Metal Industries 90,000 247
Sumitomo Trust & Banking Co. 44,000 487
Suzuki Motor Corp. 10,000 102
TDK 3,000 176
Taisei Corp. 40,000 246
Taisho Pharmaceutical Co. 8,000 159
</TABLE>
23
<PAGE> 30
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
October 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
Takeda Chemical Industries 31,000 $ 531
Tobu Railway Co. 16,000 90
Tohoku Electric Power Co. 15,100 306
Tokai Bank 67,000 777
Tokio Marine & Fire Insurance Co. 55,000 604
Tokyo Electric Power Co., Inc. 48,000 1,100
Tokyo Gas & Electric Industrial 82,000 256
Tokyu Corp. 43,000 289
Tonen Corp. 23,000 295
Toppan Printing Co. 27,000 330
Toray Industries Inc. 54,000 326
Toshiba Corp. 119,000 744
Tostem Corp. 5,000 144
Toyo Seikan 8,000 253
Toyo Trust & Banking Co. 30,000 256
Toyoda Automatic Loom 6,000 111
Toyota Motor Corp. 143,000 3,379
Yamaichi Securities Co. 45,000 251
Yamanouchi Pharmaceutical Co. 13,000 264
Yasuda Fire & Marine Insurance Co. 20,000 127
Yasuda Trust & Banking Co. 23,000 112
------
71,611
------
NETHERLANDS--6.1%
ABN-Amro Holdings NV 17,870 1,010
Aegon NV 15,411 784
Akzo Nobel NV 4,185 527
Dordtsche Petrol 2,002 348
Elsevier NV 38,508 640
Heineken NV 3,050 576
ING Groep NV 43,506 1,356
Koninklijke Ahold NV 7,171 418
Koninklijke PTT Nederland 26,041 942
Philips Electronics NV 19,400 684
PolyGram NV 10,409 489
Royal Dutch Petroleum Co. (Bearer) 29,926 4,942
SGS-Thomson Microelectronics NV* 7,522 399
Unilever NV, CVA 8,700 1,323
Wolters Kluwer NV, CVA 4,072 523
------
14,961
------
</TABLE>
24
<PAGE> 31
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
SINGAPORE--2.0%
City Developments 47,000 $ 370
Hong Kong Land Holdings 246,356 549
Jardine Matheson Holdings Ltd. 191 1
Overseas Chinese Bank (alien market) 57,212 654
Singapore Airlines Ltd. (alien market) 77,000 678
Singapore Telecommunications 910,000 2,119
United Overseas Bank (alien market) 52,600 512
-----
4,883
-----
SPAIN--2.0%
Argentaria Corp. 8,052 316
Banco Bilbao-Vizcaya SA (Reg.) 13,766 669
Banco de Santander SA (Reg.) 8,600 441
Empresa Nacional de Electricidad 15,326 938
Gas Natural SDG SA 2,091 366
Iberdrola SA 49,800 529
Repsol, SA 16,600 542
Telefonica Internacional de Espana, SA 55,184 1,107
-----
4,908
-----
SWEDEN--2.0%
ASEA AB 3,300 374
ASEA AB Series B 800 89
Astra AB Series A 29,914 1,374
Astra AB Series B 6,700 306
L.M. Ericsson Telephone Series B 69,080 1,870
Sandvik AB Series A 8,600 203
Sandvik AB Series B 3,000 71
Swedish Match Company* 25,700 77
Volvo AB Series A 5,000 103
Volvo AB Series B 20,700 430
-----
4,897
-----
SWITZERLAND--7.0%
BBC Brown Boveri (Bearer) 420 519
BBC Brown Boveri (Reg.) 189 46
CS Holding (Reg.) 13,670 1,365
Ciba-Geigy Ltd. (Bearer) 170 208
Ciba-Geigy Ltd. (Reg.) 1,404 1,729
Cie Financiere Richemont Series A (Bearer) 309 471
Nestle Ltd. (Reg.) 2,334 2,535
Roche Group Holding AG 420 3,177
</TABLE>
25
<PAGE> 32
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
October 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
Roche Group Holding AG (Bearer) 85 $ 1,042
Sandoz Ltd. (Bearer) 491 569
Sandoz Ltd. (Reg.) 2,090 2,416
Schweizerische Bankgesellschaft (Bearer) 1,144 1,090
Schweizerische Bankgesellschaft (Reg.) 1,150 222
Schweizerische Bankverein (Reg.) 4,295 827
Winterthur (Reg.) 600 357
Zurich Versicherung (Reg.) 2,531 693
------
17,266
------
UNITED KINGDOM--21.8%
Abbey National 72,619 754
Allied Domecq PLC 64,028 494
Argyll Group 56,798 337
Associated British Foods 55,569 382
BAA 61,792 498
BAT Industries 177,692 1,232
BOC Group 29,615 410
BTR 223,104 935
Barclays 90,265 1,417
Bass 50,821 652
Boots Co. 56,881 577
British Aerospace 23,848 453
British Airways 59,836 539
British Gas 241,400 750
British Petroleum Co. 336,363 3,615
British Sky Broadcast 101,400 952
British Steel 125,330 348
British Telecom 354,739 2,180
Cable & Wireless 150,259 1,193
Cadbury Schweppes 59,887 499
Commercial Union Assurance Co. 33,117 350
GKN 19,003 357
General Electric Co. 151,200 935
Glaxo Wellcome 206,766 3,248
Granada Group 35,882 517
Grand Metropolitan, Inc. 121,599 917
Great University Stores 56,903 569
Guinness 108,800 779
</TABLE>
26
<PAGE> 33
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
HSBC Holdings 48,766 $ 1,025
HSBC Holdings (Hong Kong) 104,953 2,151
Hanson Industries 289,071 379
Imperial Chemical Industries 40,411 519
Imperial Tobacco* 28,907 169
J. Sainsbury PLC 106,430 631
Kingfisher 41,660 444
Legal & General Group 68,785 363
Lloyds Abbey Life 38,848 397
Lloyds TSB Group 298,261 1,891
Marks & Spencer PLC 152,500 1,281
National Power Development 59,600 393
National Westminster Bancorp 104,773 1,196
Pearson, Inc. 34,454 425
Powergen 38,518 320
Prudential Corp. 110,479 836
RTZ Corp. PLC 60,025 960
Rank Group 86,054 572
Reed International 31,845 593
Rentokil Group 54,815 368
Reuters Holdings PLC 95,074 1,184
Royal Bank of Scotland 49,988 409
Royal Sun Alliance 969 7
Scot & Newcastle 37,789 393
Shell Transport & Trading Co. 197,687 3,240
Siebe 24,267 381
SmithKline Beecham PLC (New) 149,987 1,853
Standard Chartered PLC 56,941 614
Tesco 121,999 661
Thorn EMI* 23,982 135
Thorn EMI 24,463 481
Tomkins 12 0
Unilever 44,900 943
Vendome Lux Group SA (units) 42,290 399
Vodafone Group 177,810 687
Whitbread 26,922 315
Zeneca Group 51,108 1,385
------
53,889
------
</TABLE>
27
<PAGE> 34
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
October 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
UNITED STATES--0.0%
Millennium Chemicals Inc.* 4,129 $ 84
--------
TOTAL COMMON STOCK
(Cost $209,972) 242,436
-------
PREFERRED STOCK--0.3%
AUSTRALIA--0.1%
News Corp. (Limited Voting Shares) 61,436 270
-------
GERMANY--0.2%
Sap AG (Non-Voting) 2,010 270
Volkswagen AG (Non-Voting) 350 106
-------
376
-------
ITALY--0.0%
Fiat SpA 38,800 55
-------
TOTAL PREFERRED STOCK
(Cost $580) 701
-------
WARRANTS--0.0%
SWITZERLAND--0.0%
Schweizerische Bankverein (expire 6/30/00)* 425 1
-------
UNITED KINGDOM--0.0%
BTR (expire 11/26/98)* 4,019 0
-------
TOTAL WARRANTS
(Cost $3) 1
-------
</TABLE>
28
<PAGE> 35
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
---------- --------
<S> <C> <C>
CASH EQUIVALENTS--0.8%
Seven Seas Money Market Fund+
5.04%, 11/07/96 2,041,447 $ 2,041
-------
TOTAL CASH EQUIVALENTS
(Cost $2,041) 2,041
-------
TOTAL INVESTMENTS--99.4%
(Cost $212,596) 245,179
-------
OTHER ASSETS AND LIABILITIES--0.6%
Other Assets 2,084
Liabilities (485)
-------
1,599
------
NET ASSETS--100.0% (Note 8)
Applicable to 20,180,511 outstanding shares, $0.00001
par value (unlimited shares authorized) $246,778
=======
NET ASSET VALUE PER SHARE $12.23
=====
</TABLE>
- ---------------
* Non-Income Producing Security
+ Interest rate represents the yield on October 31, 1996.
See accompanying Notes to Financial Statements.
29
<PAGE> 36
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (in thousands)
Year ended October 31, 1996
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax withheld of $738) $ 4,699
Interest 190
------
Total investment income 4,889
------
Expenses:
Investment advisory and administration fee 1,561
Transfer agency and shareholder service fees 559
Custodian fees 233
Registration fees 55
Professional fees 81
Shareholder reports 75
Trustees' fees 22
Amortization of deferred organization costs 25
Insurance and other expenses 7
------
2,618
Less expenses reduced (Note 4) (1,078)
------
Total expenses incurred by Fund 1,540
------
Net investment income 3,349
------
Net realized gain (loss) on investments and foreign
currency transactions:
Net realized loss from changes in market value (1,972)
Net realized gain from changes in foreign exchange rates 287
------
Net realized loss on investments sold (1,685)
Net realized loss on foreign currency transactions (96)
------
Net realized loss on investments sold and foreign
currency transactions (1,781)
------
Change in net unrealized gain (loss) on investments and
foreign currency translation:
Increase in net unrealized gain from changes in market
value 29,821
Decrease in net unrealized gain from changes in foreign
exchange rates (9,716)
------
Increase in net unrealized gain on investments 20,105
Decrease in net unrealized gain on translating assets
and liabilities into the reporting currency (7)
------
Increase in net unrealized gain on investments and
foreign currency translation 20,098
------
Net gain on investments 18,317
------
Increase in net assets resulting from operations $21,666
======
</TABLE>
See accompanying Notes to Financial Statements.
30
<PAGE> 37
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Year ended
October 31,
1996 1995
-------- --------
<S> <C> <C>
Operations:
Net investment income $ 3,349 $ 2,238
Net realized gain (loss) on investments sold
and foreign currency transactions (1,781) 193
Increase in net unrealized gain on
investments and foreign currency
translation 20,098 2,557
---------- --------
Increase in net assets resulting from
operations 21,666 4,988
---------- --------
Dividends to shareholders from net
investment income (2,089) (1,532)
---------- --------
Capital share transactions:
Proceeds from shares sold 100,434 73,349
Net asset value of shares issued in
reinvestment of dividends 1,809 1,372
Early withdrawal fees 54 49
Less payments for shares redeemed (54,708) (40,969)
---------- --------
Increase in net assets from capital
share transactions 47,589 33,801
---------- --------
Total increase in net assets 67,166 37,257
Net assets:
Beginning of period 179,612 142,355
---------- --------
End of period (including undistributed
net investment income of $3,292 and
$2,051, respectively) $246,778 $179,612
========== ========
Number of Fund shares:
Sold 8,493 6,778
Reinvested 155 134
Redeemed (4,605) (3,840)
---------- --------
Net increase in shares outstanding 4,043 3,072
Shares outstanding:
Beginning of period 16,138 13,066
---------- --------
End of period 20,181 16,138
========== ========
</TABLE>
See accompanying Notes to Financial Statements.
31
<PAGE> 38
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended October 31, 1996
1. DESCRIPTION OF THE FUND
The Schwab International Index Fund (the "Fund") is a series of Schwab Capital
Trust (the "Trust"), a no-load, open-end, management investment company
organized as a Massachusetts business trust on May 7, 1993 and registered under
the Investment Company Act of 1940, as amended.
In addition to the Fund, the Trust also offers the Schwab Small-Cap Index
Fund(R), Schwab Asset Director(R) - High Growth Fund, Schwab Asset
Director - Balanced Growth Fund, Schwab Asset Director - Conservative Growth
Fund, Schwab S&P 500 Fund, Schwab Analytics Fund(TM), Schwab OneSource
Portfolios - International, Schwab OneSource Portfolios - Growth Allocation and
Schwab OneSource Portfolios - Balanced Allocation. The assets of each series are
segregated and accounted for separately.
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 and
investments in money market funds are valued at the last 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 Fund's investment manager pursuant
to guidelines adopted in good faith by the Board of Trustees. Short-term
securities with 60 days or less to maturity are stated at amortized cost, which
approximates market value.
32
<PAGE> 39
- ------------------------------------------------------------------------------
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. Realized
gains and losses from security transactions are determined on an identified cost
basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Foreign currency translation -- The accounting records of the Fund are
maintained in U.S. dollars. Investment securities and all other assets and
liabilities of the Fund denominated in a foreign currency are translated into
U.S. dollars at the exchange rates on October 31. Purchases and sales of
securities, income receipts and expense payments are translated into U.S.
dollars at the exchange rate in effect on the dates of the respective
transactions.
The Fund separates within its statement of operations the portion of realized
and unrealized gains and losses resulting from changes in foreign exchange rates
from that arising from changes in securities' market values.
Forward currency contracts -- A forward currency contract ("Forward") is an
agreement between two parties to buy and sell a currency at a set price on a
future date. The value of the Forward fluctuates with changes in currency
exchange rates. The Forward is marked-to-market daily and the change in value is
recorded by the Fund as an unrealized gain or loss. When the Forward is closed,
the Fund records a realized gain or loss equal to the difference between the
value at the time the contract was opened and the value at the time the contract
was closed. The Fund engages in Forwards in connection with the purchase and
sale of portfolio securities to minimize the uncertainty of changes in future
exchange rates. The Fund 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.
33
<PAGE> 40
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended October 31, 1996
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund and its initial registration with the Securities and
Exchange Commission are amortized on a straight-line basis over a five-year
period from the Fund's commencement of operations.
Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all net investment income and realized net capital gains, if any, to
shareholders. Therefore, no federal income tax provision is required. The Fund
is considered a separate entity for tax purposes.
At October 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized gain aggregated $32,583,000, of which $45,871,000 related to
appreciated securities and $13,288,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of 0.70% of the first $300 million
of average daily net assets and 0.60% of such assets over $300 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$1,561,000 during the year ended October 31, 1996, before the Investment Manager
reduced its fee (see Note 4).
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 0.05% of average daily
34
<PAGE> 41
- ------------------------------------------------------------------------------
net assets for transfer agency services and 0.20% of such assets for shareholder
services. For the year ended October 31, 1996, the Fund incurred transfer agency
and shareholder service fees of $559,000, 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
year ended October 31, 1996, the Trust made no direct payments to its officers
or trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Fund incurred fees of $22,000 related to
the Trust's unaffiliated trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the Fund's ratio of operating expenses to average net assets. For the year
ended October 31, 1996, the total of such fees reduced by the Investment Manager
and Schwab was $675,000 and $403,000, respectively (see Note 9).
5. BORROWING AGREEMENT
The Trust has an arrangement with State Street Bank and Trust Company, the
Fund's custodian, whereby the Fund may borrow up to $10,000,000, on a temporary
basis, to fund redemptions. Amounts borrowed under this arrangement bear
interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the year ended October 31, 1996, no borrowings were
made under this arrangement.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated (in thousands) $75,454 and $27,236, respectively, for the year ended
October 31, 1996.
35
<PAGE> 42
SCHWAB INTERNATIONAL INDEX FUND(R)
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended October 31, 1996
7. EARLY WITHDRAWAL FEES PAID TO THE FUND
The Fund assesses a 0.75% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the year ended October 31, 1996, total early withdrawal fees
retained by the Fund amounted to $54,000.
8. COMPOSITION OF NET ASSETS
At October 31, 1996, net assets consisted of (in thousands):
<TABLE>
<S> <C>
Paid in capital $213,106
Accumulated undistributed net investment income 3,292
Accumulated net realized loss on investments sold (2,217)
and foreign currency transactions
Net unrealized gain on investments 32,583
Net unrealized gain on translating assets and 14
liabilities into the reporting currency
----------
Total $246,778
==========
</TABLE>
The Fund follows Statement of Position 93-2 Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies, which will generally present
undistributed income and realized gains on a tax basis. As a result, certain
reclassifications have occurred that decreased undistributed net investment
income by $19,000 and increased net realized loss on investments sold and
foreign currency transactions and capital paid in by $34,000 and $53,000,
respectively. These reclassifications have no impact on the net asset value of
the Fund.
At October 31, 1996, the Fund's Statement of Net Assets included: $71,000
payable for investments purchased, $142,000 payable for Fund shares redeemed,
$32,000 payable for investment advisory and administration fee and $244,000
receivable for Fund shares sold.
36
<PAGE> 43
- ------------------------------------------------------------------------------
9. FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
PERIOD ENDED
YEAR ENDED OCTOBER 31, OCTOBER 31,
1996 1995 1994 1993 ++
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $ 11.13 $ 10.89 $ 10.15 $ 10.00
Income from investment operations
Net investment income 0.16 0.14 0.11 0.03
Net realized and unrealized gain on
investments and foreign currency
transactions 1.07 0.22 0.69 0.12
-------- -------- -------- ------------
Total from investment operations 1.23 0.36 0.80 0.15
Less distributions
Dividends from net investment income (0.13) (0.12) (0.04) --
Distributions from realized gain on
investments -- -- (0.02) --
-------- -------- -------- ------------
Total distributions (0.13) (0.12) (0.06) --
-------- -------- -------- ------------
Net asset value at end of period $ 12.23 $ 11.13 $ 10.89 $ 10.15
======== ======== ======== ===========
Total return (not annualized) 11.07% 3.35% 7.89% 1.50%
Ratios/Supplemental data
Net assets, end of period (000s) $246,778 $179,612 $142,355 $106,085
Ratio of expenses to average net
assets + 0.69% 0.85% 0.90% 0.60%*
Ratio of net investment income to
average net assets + 1.50% 1.45% 1.14% 2.15%*
Portfolio turnover rate 6% 0% 6% 2%
Average commission rate $0.01
</TABLE>
- ---------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of fees reduced and expenses
absorbed by the Investment Manager and Schwab. Had these fees and expenses not
been reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C>
Ratio of expenses to average net
assets 1.17% 1.22% 1.30% 2.10%*
Ratio of net investment income to
average net assets 1.02% 1.08% 0.74% 0.65%*
</TABLE>
++ For the period September 9, 1993 (commencement of operations) to October 31,
1993.
* Annualized
37
<PAGE> 44
- ------------------------------------------------------------------------------
To the Trustees and Shareholders
of the Schwab International Index Fund(R)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Schwab International Index Fund (one of the series constituting Schwab
Capital Trust, hereafter referred to as the "Trust") at October 31, 1996, the
results of its operations, the changes in its net assets and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1996 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
November 27, 1996
38
<PAGE> 45
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 46
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 47
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money funds.
SCHWAB ASSET ALLOCATION FUNDS
Schwab Asset Director(R) -- High Growth Fund
Schwab Asset Director -- Balanced Growth Fund
Schwab Asset Director -- Conservative Growth Fund
Schwab OneSource Portfolios -- Growth Allocation
Schwab OneSource Portfolios -- Balanced Allocation
SCHWAB STOCK FUNDS
Schwab 1000 Fund(R)
Schwab S&P 500 Fund
Schwab Analytics Fund(TM)
Schwab Small-Cap Index Fund(R)
Schwab International Index Fund(R)
Schwab OneSource Portfolios -- International
SCHWAB BOND FUNDS
Schwab Government Bond Funds -- Long-Term
and Short/Intermediate
Schwab Tax-Free Bond Funds -- Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds -- Long-Term
and Short/Intermediate
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds* that seek high current income with
safety and liquidity. Choose from taxable or tax-advantaged alternatives. Many
can be linked to your Schwab account to "sweep" cash balances automatically when
you're between investments. Or, for your larger cash reserves, choose one of our
Value Advantage Investments(TM).
Please call 1-800-2 NO-LOAD for a free prospectus and brochure for any of the
SchwabFunds(R).
Each prospectus provides more complete information, including charges and
expenses. Please read it carefully before investing.
This report must be preceded or accompanied by a current prospectus.
* Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the funds will be able to
maintain a stable share price of $1.
<PAGE> 48
----------------
BULK RATE
U.S. POSTAGE
SchwabFunds PAID
- ----------- CHARLES SCHWAB
FAMILY(R) ----------------
- -----------
101 Montgomery Street
San Francisco, California 94104
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current prospectus.
(C)1996 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
TF4443R(12/96) CRS 12012 Printed on recycled paper.
