<PAGE> 1
As filed with the Securities and Exchange Commission on DECEMBER 29, 1997
FILE NOS. 33-62470 AND 811-7704
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 22
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
--------------
SCHWAB CAPITAL TRUST
--------------------
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
------------------------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
--------------
Tom D. Seip, President
Schwab Capital Trust
101 Montgomery Street, San Francisco, California 94104
------------------------------------------------------
(Name and Address of Agent for Service)
Copies of communications to:
<TABLE>
<S> <C>
Martin E. Lybecker, Esq. Frances Cole, Esq.
Ropes & Gray Charles Schwab Investment Management, Inc.
1301 K Street, N.W., Suite 800 East 101 Montgomery Street
Washington, D.C. 20005 San Francisco, CA 94104
</TABLE>
It is proposed that this filing will become effective (check appropriate box)
/ / Immediately upon filing pursuant to paragraph (b)
/ X / On December 31, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485
if appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
PART A
SCHWAB CAPITAL TRUST
The information required by Items 1 through 9 for Schwab OneSource(R)
Portfolios-Balanced Allocation, Schwab OneSource Portfolios-Growth Allocation,
Schwab OneSource Portfolios-International, Schwab OneSource Portfolios-Small
Company; Schwab Asset Director(R)-High Growth, Schwab Asset Director-Balanced
Growth, Schwab Asset Director-Conservative Growth and Schwab Analytics Fund(R),
each a separate portfolio of the Registrant, is hereby incorporated by reference
to the Prospectus for these portfolios filed with the Securities and Exchange
Commission under Rule 485(a) on December 17, 1997.
<PAGE> 3
CROSS REFERENCE SHEET
SCHWAB CAPITAL TRUST
SCHWAB S & P 500 FUND, SCHWAB SMALL-CAP INDEX FUND(R) AND SCHWAB INTERNATIONAL
INDEX FUND(R)
Part A Item Prospectus Caption
Cover Page Cover Page
Synopsis Expenses; Key Features
Condensed Financial Information Financial Highlights
General Description of Registrant Organization & Management; Investment
Objectives, Policies & Risks
Management of the Fund Organization & Management
Management's Discussion of Fund Discussion to be Included in Funds'
Performance Annual Reports
Capital Stock and Other Securities Investing in Shares; Organization &
Management
Purchase of Securities Being Offered Investing In Shares
Redemption or Repurchase Investing in Shares
Pending Legal Proceedings Not Applicable
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KEY FEATURES......................... 2
EXPENSES............................. 4
FINANCIAL HIGHLIGHTS................. 6
PERFORMANCE.......................... 12
ORGANIZATION & MANAGEMENT............ 13
INVESTMENT OBJECTIVES, POLICIES &
RISKS.............................. 16
INVESTING IN SHARES.................. 20
</TABLE>
The Prospectus provides concise information that you should know before
investing. Please retain it for future reference.
The Statement of Additional Information (SAI), dated December 31, 1997, contains
additional information and is incorporated by reference into the Prospectus. The
SAI has been filed with the Securities and Exchange Commission (SEC). The SEC
maintains a World Wide Web site (http://www.sec.gov) that contains the SAI,
material incorporated by reference and other information. The SAI is available
without charge by calling 1-800-435-4000 (1-800-345-2550 for TDD users) or
writing to 101 Montgomery Street, San Francisco, California 94104.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SCHWAB EQUITY
INDEX FUNDS
SCHWAB 1000 FUND(R)
SCHWAB S&P 500 FUND
SCHWAB SMALL-CAP
INDEX FUND(R)
SCHWAB INTERNATIONAL INDEX FUND(R)
PROSPECTUS
DECEMBER 31, 1997
SCHWAB 1000 FUND
(Schwab1000 Fund) seeks total return by tracking the performance of the Schwab
1000 Index(R).
SCHWAB S&P 500 FUND
(S&P 500 Fund) seeks total return by tracking the performance of the S&P 500(R)
Index.
SCHWAB SMALL-CAP INDEX FUND
(Small-Cap Fund) seeks total return by tracking the performance of the Schwab
Small-Cap Index(R).
SCHWAB INTERNATIONAL INDEX FUND (International Fund) seeks total return by
tracking the performance of the Schwab International Index(R).
<PAGE> 5
KEY FEATURES
MATCHING A FUND TO YOUR INVESTMENT NEEDS. Unlike actively managed funds, each
Fund seeks to track the performance of an index, which attempts to represent a
particular market, or market sector. Because each Fund will invest in a large
number and broad range of stocks, each Fund could provide a diversified stock
fund investment for your asset allocation plan. Each Fund could be an excellent
choice for a variety of long-term investment programs, such as Schwab's
Automatic Investment Plan or retirement plans.
GOALS. SCHWAB 1000 FUND(R) seeks to track the total return of the Schwab 1000
Index(R), an index composed of common stocks of the 1,000 largest U.S.
companies.
S&P 500 FUND seeks to track the total return of the S&P 500(R) Index, an index
composed of common stocks of 500 U.S. companies, and prepared and published by
Standard & Poors.
SMALL-CAP FUND seeks to track the total return of the Schwab Small-Cap Index(R),
an index composed of common stocks of the second 1,000 largest U.S. companies.
INTERNATIONAL FUND seeks to track the total return of the Schwab International
Index(R), an index composed of equity securities issued by large,
publicly-traded companies from countries other than the United States with
major, developed securities markets.
There is no guarantee a Fund will achieve its goal.
CLASSES DESIGNED TO MEET DIFFERENT NEEDS. Each Fund offers Investor Shares and
Select Shares. Select Shares(TM) have lower total expenses, but require higher
minimum investments. S&P 500 Fund also offers e.Shares(TM), which have lower
total expenses than Investor Shares (although higher than Select Shares), but
are available only to certain investors who trade through SchwabLink(R).
STRATEGIES. Each Fund intends to achieve its goal by following an indexing
investment strategy. Read the "Investment Objectives, Policies & Risks" section
for more information. Each Fund intends to operate as a diversified mutual fund.
RISKS. While indexing strategies may reduce certain risks associated with active
management, they do not ensure against other risks typically associated with
investing in stocks, such as a decline in the value of a particular stock,
industry or market. In addition, small-cap and international investing involve
additional risks and considerations. Read the "Investment Objectives, Policies &
Risks" section for more details.
2
<PAGE> 6
TAX EFFICIENT STRATEGIES. The Funds use investing strategies designed to
minimize your tax liabilities. Read the "Investment Objectives, Policies &
Risks" section for more details.
MANAGEMENT. Charles Schwab Investment Management, Inc. (the Investment Manager)
currently provides investment management services to the SchwabFunds(R), a
family of 31 mutual funds with over $55 billion in assets as of November 28,
1997.
SHAREHOLDER SERVICE. Charles Schwab & Co., Inc. (Schwab) provides professional
representatives 24 hours a day at 1-800-435-4000 to service your accounts. Read
the "Investing in Shares" section of the prospectus for information on "How to
Buy Shares" and "How to Sell or Exchange Shares" of a Fund.
LOW COST INVESTING. The Investment Manager and Schwab have voluntarily
guaranteed that, through at least February 29, 2000, total operating expenses of
each class of each Fund, as a percentage of average daily net assets, will not
exceed certain amounts. Read the "Expenses" section for more details.
3
<PAGE> 7
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are charges you may pay when you buy, sell or
exchange shares of the Funds.
<TABLE>
<CAPTION>
SCHWAB S&P SMALL- INTER-
1000 500 CAP NATIONAL
FUND(R) FUND FUND FUND
<S> <C> <C> <C> <C>
Maximum sales
charge on
purchases and
reinvested
dividends NONE NONE NONE NONE
Maximum deferred
sales charge NONE NONE NONE NONE
Redemption fee 0.50%* NONE* 0.50%* 0.75%*
Exchange fee NONE NONE NONE NONE
</TABLE>
* As a percentage of the amount redeemed of shares held less than 6 months
(read the "Investing in Shares" section for more information). Contact Schwab
for information on wire fees.
The information on shareholder transaction expenses is for transactions through
an account through Schwab. If you are purchasing, selling, exchanging or
maintaining shares through an entity other than Schwab, transaction expenses may
be charged by that entity.
ANNUAL OPERATING EXPENSES are paid by the Fund. These expenses include
management fees paid to the Investment Manager and other fees for services such
as maintaining shareholder records and furnishing shareholder statements and
financial reports. These expenses are factored into the price of a Fund's shares
and into the dividends paid to shareholders. For funds with more than one class
of shares these fees are factored into each class. As a shareholder, you are not
charged any of these fees directly.
The annual operating expenses stated below are based on historical expenses
(adjusted for Investor Shares to reflect current fees) and are stated as a
percentage of average daily net assets of each class of each Fund.
<TABLE>
<CAPTION>
SCHWAB S&P SMALL- INTER-
1000 500 CAP NATIONAL
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
INVESTOR SHARES
Management fee (after
reduction) 0.19% 0.04% 0.11% 0.14%
12b-1 fee None None None None
Other expenses (after
reduction) 0.27% 0.31% 0.38% 0.44%
TOTAL OPERATING
EXPENSES (AFTER
REDUCTION) 0.46% 0.35% 0.49% 0.58%
</TABLE>
<TABLE>
<CAPTION>
SCHWAB S&P SMALL- INTER-
1000 500 CAP NATIONAL
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SELECT SHARES(TM)
Management fee (after
reduction) 0.19% 0.04% 0.11% 0.14%
12b-1 fee None None None None
Other expenses (after
reduction) 0.16% 0.15% 0.27% 0.33%
TOTAL OPERATING
EXPENSES (AFTER
REDUCTION) 0.35% 0.19% 0.38% 0.47%
</TABLE>
<TABLE>
<CAPTION>
S&P
500
FUND
<S> <C>
.E SHARES(TM)
Management fee (after reduction) 0.04%
12b-1 fee None
Other expenses (after reduction) 0.24%
TOTAL OPERATING EXPENSES (AFTER REDUCTION) 0.28%
</TABLE>
EXAMPLE: If each of the Funds were to provide an annual return of 5%, you would
pay the following expenses on a $1,000
4
<PAGE> 8
investment, whether you redeemed your shares at the end of each period or left
your shares invested.
SCHWAB 1000 FUND(R)
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Investor Shares $5 $15 $26 $ 58
Select Shares(TM) 4 11 20 44
</TABLE>
S&P 500 FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Investor Shares $4 $11 $20 $ 44
Select Shares 2 6 11 24
e. Shares(TM) 3 9 16 36
</TABLE>
SMALL-CAP FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Investor Shares $5 $16 $27 $ 62
Select Shares 4 12 21 48
</TABLE>
INTERNATIONAL FUND
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Investor Shares $6 $19 $32 $ 73
Select Shares 5 15 26 59
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
The Investment Manager and Schwab have voluntarily agreed to guarantee, at least
through February 29, 2000, that total operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) of each class of each
Fund will not exceed the amount shown in the annual operating expenses table on
page 4. If these guarantees were not in effect, the management fees, other
expenses and total operating expenses for each class of each Fund, as a
percentage of average daily net assets, would have been as follows: 0.23%, 0.27%
and 0.50% for Schwab 1000 Fund - Investor Shares; 0.23%, 0.18% and 0.41% for
Schwab 1000 Fund - Select Shares; 0.35%, 0.35% and 0.70% for the S&P 500
Fund - Investor Shares; 0.35%, 0.18% and 0.53% for S&P 500 Fund - Select Shares;
0.35%, 0.26%, and 0.61% for S&P 500 Fund - e. Shares; 0.49%, 0.40% and 0.89% for
Small-Cap Fund - Investor Shares; 0.49%, 0.41% and 0.90% for Small-Cap
Fund - Select Shares; 0.69%, 0.44% and 1.13% for International Fund - Investor
Shares; 0.69%, 0.58% and 1.27% for International Fund - Select Shares.
Read the "Organization and Management" section of this prospectus for more
information on expenses.
5
<PAGE> 9
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants for the Funds. Their reports are included in the Annual Reports for
the Funds, which are separate reports that contain additional financial
information.
The auditor's reports, financial highlights and financial statements for the
Funds are incorporated by reference into the SAI. For free copies of an Annual
Report and/or the SAI, call 1-800-435-4000.
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Schwab 1000 Fund(R)
---------------------------------------------------------------------------------------------
Investor Shares
October 31, August 31, August 31, December 31,
1997(1) 1997 1996 1995 1994 1993(2) 1992 1991(3)
----------- ---------- ---------- -------- -------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 24.78 $ 18.14 $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26 $ 10.00
Income from
investment
- --------------------
operations
---------
Net investment
income 0.04 0.28 0.24 0.26 0.26 0.17 0.24 0.15
Net realized and
unrealized gain
on investments 0.43 6.62 2.45 2.48 0.28 0.79 0.71 1.26
---------- ---------- ---------- -------- -------- -------- -------- --------
Total from
investment
operations 0.47 6.90 2.69 2.74 0.54 0.96 0.95 1.41
Less distributions
- --------------
Dividends from net
investment income -- (0.26) (0.23) (0.14) (0.26) (0.12) (0.25) (0.15)
---------- ---------- ---------- -------- -------- -------- -------- --------
Total distributions -- (0.26) (0.23) (0.14) (0.26) (0.12) (0.25) (0.15)
---------- ---------- ---------- -------- -------- -------- -------- --------
Net asset value at
end of period $ 25.25 $ 24.78 $ 18.14 $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26
========== ========== ========== ======== ======== ======== ======== ========
Total return (not
annualized) 1.90% 38.32% 17.27% 21.23% 4.28% 8.06% 8.52% 14.25%
- ---------
Ratios/Supplemental
data
- --------------------
Net assets, end of
period (000s) $2,610,607 $2,498,891 $1,560,059 $826,714 $554,061 $515,272 $370,980 $192,206
Ratio of expenses
to average net
assets+ 0.46% * 0.47% 0.49% 0.54% 0.51% 0.45%* 0.35% 0.00%*
Ratio of net
investment income
to average net
assets+ 1.00% * 1.33% 1.66% 2.03% 2.06% 2.21%* 2.45% 3.21%*
Portfolio turnover
rate 0% 2% 2% 2% 3% 1% 1% 1%
Average commission
rate** $ 0.0279 $ 0.0280 $ 0.0282 -- -- -- -- --
</TABLE>
6
<PAGE> 10
FINANCIAL HIGHLIGHTS (CONTINUED)
- ---------------
<TABLE>
<C> <S>
+ The information contained in the above table is based on actual expenses for the period, after giving effect to
the portion of expenses reduced and absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios would have been:
Ratio of expenses
to average net
assets 0.50%* 0.53% 0.57% 0.63% 0.56% 0.49%* 0.52% 1.05%*
Ratio of net
investment income
to average net
assets 0.96%* 1.27% 1.58% 1.94% 2.01% 2.17%* 2.28% 2.16%*
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
(1) Two month period from September 1, 1997.
(2) Eight month period from January 1, 1993.
(3) Period from April 2, 1991 (commencement of operations).
</TABLE>
7
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Schwab 1000 Fund(R)
---------------------------
Select Shares(TM)
---------------------------
Two months Period
ended ended
October 31, August 31,
1997 1997(1)
----------- -----------
<S> <C> <C>
Net asset value at beginning of period $ 24.79 $ 22.64
Income from investment operations
- --------------------------------
Net investment income 0.04 0.05
Net realized and unrealized gain on investments 0.43 2.10
-------- --------
Total from investment operations 0.47 2.15
Less distributions
- ---------------
Dividends from net investment income -- --
-------- --------
Total distributions -- --
-------- --------
Net asset value at end of period $ 25.26 $ 24.79
======== ========
Total return (not annualized) 1.90% 9.50%
- ----------
Ratios/Supplemental data
- -----------------------
Net assets, end of period (000s) $ 426,392 $ 347,244
Ratio of expenses to average net assets+ 0.35%* 0.35%*
Ratio of net investment income to average net assets+ 1.11%* 1.26%*
Portfolio turnover rate 0% 2%
Average commission rate $ 0.0279 $ 0.0280
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ The information contained in the above table is based on actual expenses for the period, after giving effect to
the portion of expenses reduced and absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios would have been:
Ratio of expenses to average net assets 0.41%* 0.68%*
Ratio of net investment income to average net assets 1.05%* 0.93%*
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
(1) For the period from May 19, 1997 (commencement of operations) to August 31, 1997.
</TABLE>
8
<PAGE> 12
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
S&P 500 Fund
---------------------------------------------------------------------------
Investor Shares e.Shares(TM) Select
Period Period Shares(TM)
Year ended ended Year ended ended Period ended
October 31, October 31, October 31, October 31, October 31,
1997 1996(1) 1997 1996(1) 1997(2)
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.88 $ 10.00 $ 10.89 $ 10.00 $ 12.85
Income from investment operations
- --------------------------------
Net investment income 0.14 0.08 0.21 0.04 0.05
Net realized and unrealized gain on investments 3.24 0.80 3.19 0.85 1.29
-------- -------- -------- ------- --------
Total from investment operations 3.38 0.88 3.40 0.89 1.34
Less distributions
- ---------------
Dividends from net investment income (0.09) -- (0.10) -- --
-------- -------- -------- ------- --------
Total distributions (0.09) -- (0.10) -- --
-------- -------- -------- ------- --------
Net asset value at end of period $ 14.17 $ 10.88 $ 14.19 $ 10.89 $ 14.19
======== ======== ======== ======= ========
Total return (not annualized) 31.29% 8.80% 31.48% 8.90% 10.43%
- ----------
Ratios/Supplemental data
- -----------------------
Net assets, end of period (000s) $ 923,148 $ 243,772 $ 131,691 $36,331 $ 485,604
Ratio of expenses to average net assets+ 0.38% 0.49%* 0.28% 0.28%* 0.19%*
Ratio of net investment income to average net
assets+ 1.49% 1.89%* 1.61% 1.82%* 1.46%*
Portfolio turnover rate 3% 1% 3% 1% 3%
Average commission rate $ 0.0277 $ 0.0224 $ 0.0277 $0.0224 $ 0.0277
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ The information contained in the above table is based on actual expenses for the period, after giving effect to
the portion of expenses reduced and absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios would have been:
Ratio of expenses to average net assets 0.70% 0.89%* 0.61% 1.19%* 0.53%*
Ratio of net investment income to average net
assets 1.17% 1.49%* 1.28% 0.91%* 1.12%*
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
(1) For the period from May 1, 1996 (commencement of operations) to October 31, 1996.
(2) For the period from May 19, 1997 (commencement of operations) to October 31, 1997.
</TABLE>
9
<PAGE> 13
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Small-Cap Fund
-----------------------------------------------------------------
Select
Shares(TM)
Investor Shares Period ---------------
ended Period ended
Year ended October 31, October 31, October 31,
1997 1996 1995 1994++ 1997(1)
-------- -------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 13.59 $ 11.70 $ 10.05 $ 10.00 $ 14.50
Income from investment operations
- --------------------------------
Net investment income 0.06 0.07 0.10 0.06 0.02
Net realized and unrealized gain on investments 4.14 1.88 1.61 -- 3.23
-------- -------- -------- -------
Total from investment operations 4.20 1.95 1.71 0.06 3.25
Less distributions
- ---------------
Dividends from net investment income (0.06) (0.06) (0.06) (0.01) --
-------- -------- -------- -------
Total distributions (0.06) (0.06) (0.06) (0.01) --
-------- -------- -------- -------
Net asset value at end of period $ 17.73 $ 13.59 $ 11.70 $ 10.05 $ 17.75
======== ======== ======== =======
Total return (not annualized) 31.03% 16.73% 17.11% 0.63% 22.41%
- ----------
Ratios/Supplemental data
- -----------------------
Net assets, end of period (000s) $410,470 $209,125 $122,074 $68,128 $81,174
Ratio of expenses to average net assets+ 0.52% 0.59% 0.68% 0.67%* 0.38%*
Ratio of net investment income to average net assets+ 0.53% 0.56% 0.68% 0.68%* 0.56%*
Portfolio turnover rate 23% 23% 24% 16% 23%
Average commission rate** $ 0.0012 $ 0.0318 -- -- $0.0012
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ The information contained in the above table is based on actual expenses for the periods, after giving effect
to the portion of fees and expenses reduced by the Investment Manager and Schwab. Had these fees and expenses
not been reduced, the Fund's expense and net investment income ratios would have been:
Ratio of expenses to average net assets 0.89% 0.94% 1.02% 1.19%* 0.90%*
Ratio of net investment income to average net assets 0.16% 0.21% 0.34% 0.16%* 0.04%*
++ For the period December 3, 1993 (commencement of operations) to October 31, 1994.
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
(1) For the period May 19, 1997 (commencement of operations) to October 31, 1997.
</TABLE>
10
<PAGE> 14
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
International Fund
---------------------------------------------------------------------------
Investor Shares Select
Period Shares(TM)
ended Period ended
Year ended October 31, October 31, October 31,
1997 1996 1995 1994 1993++ 1997(1)
-------- -------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 12.23 $ 11.13 $ 10.89 $ 10.15 $ 10.00 $ 13.59
Income from investment operations
- --------------------------------
Net investment income 0.17 0.16 0.14 0.11 0.03 0.04
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 1.08 1.07 0.22 0.69 0.12 (0.31)
-------- -------- -------- -------- --------
Total from investment operations 1.25 1.23 0.36 0.80 0.15 (0.27)
Less distributions
- ---------------
Dividends from net investment income (0.17) (0.13) (0.12) (0.04) -- --
Distributions from realized gain on
investments -- -- -- (0.02) --
-------- -------- -------- -------- --------
Total distributions (0.17) (0.13) (0.12) (0.06) -- --
-------- -------- -------- -------- --------
Net asset value at end of period $ 13.31 $ 12.23 $ 11.13 $ 10.89 $ 10.15 $ 13.32
======== ======== ======== ======== ========
Total return (not annualized) 10.33% 11.07% 3.35% 7.89% 1.50% (1.99)%
- ----------
Ratios/Supplemental data
- -----------------------
Net assets, end of period (000s) $317,833 $246,778 $179,612 $142,355 $ 106,085 $ 49,529
Ratio of expenses to average net assets+ 0.61% 0.69% 0.85% 0.90% 0.60%* 0.47%*
Ratio of net investment income to
average net assets + 1.36% 1.50% 1.45% 1.14% 2.15%* 1.17%*
Portfolio turnover rate 13% 6% 0% 6% 2% 13%
Average commission rate** $ 0.0175 $ 0.0162 -- -- -- $ 0.0175
</TABLE>
- ---------------
<TABLE>
<C> <S>
+ 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:
Ratio of expenses to average net
assets+ 1.13% 1.17% 1.22% 1.30% 2.10% * 1.27% *
Ratio of net investment income to
average net assets+ 0.84% 1.02% 1.08% 0.74% 0.65% * 0.37% *
* Annualized
** A fund is required to disclose its average commission rate per share for security trades on which a commission
is charged.
++ For the period September 9, 1993 (commencement of operations) to October 31, 1993.
(1) For the period May 19, 1997 (commencement of operations) to October 31, 1997.
</TABLE>
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<PAGE> 15
PERFORMANCE
Typically, mutual funds report performance in terms of total return.
TOTAL RETURN is the actual annual return of an investment assuming both the
reinvestment of any income earned and any change in share price. A cumulative
total return is the actual total return of an investment over a stated period of
time, while an average annual total return is a hypothetical rate of return,
which, if achieved annually would have produced the same cumulative total
return. An average annual total return will smooth out the actual year-to-year
fluctuations of an investment's return.
Each Fund intends to track the performance of its Index. The performance of each
Index, typically reported as total return, assumes reinvestment of dividends
paid by the stocks in the Index, but does not take into account any fees or
expenses associated with investing directly in the stocks in the Index, such as
brokerage commissions.
The International Fund may report total return in foreign currencies, as well as
in U.S. dollars. Total return reported in U.S. dollars represents the actual
annual return of investments denominated in local currency, and any increases or
decreases in value when the local currency is converted to U.S. dollars.
Fluctuations in the exchange rate between the U.S. dollar and a local currency
will affect the U.S. dollar-denominated returns of the International Fund.
Fund strategies, performance and holdings are detailed in financial reports
which are sent to shareholders twice a year. For a free copy of a most recent
financial report, call 1-800-435-4000.
12
<PAGE> 16
ORGANIZATION & MANAGEMENT
EACH FUND IS A DIVERSIFIED MUTUAL FUND. Each Fund is a series of Schwab Capital
Trust (a Trust), except the Schwab 1000 Fund(R), which is a series of Schwab
Investments (a Trust).
EACH FUND IS OVERSEEN BY A BOARD OF TRUSTEES. The Board of Trustees meets
regularly to review each Fund's activities, contractual arrangements and
performance. The Board of Trustees is responsible for protecting the interests
of each Fund's shareholders. There is a remote possibility that a Fund may
become liable for a misstatement about another Fund in the prospectus.
THE FUNDS MAY HOLD SPECIAL MEETINGS. These meetings may be called for purposes
such as electing Trustees, changing fundamental policies and amending management
contracts. Shareholders are entitled to one vote for each share owned and may
vote by proxy or in person. Proxy materials will be mailed to shareholders prior
to any meetings, and will include a voting card and information explaining the
matters to be voted upon.
THE FUNDS ARE MANAGED BY THE INVESTMENT MANAGER. The Investment Manager is
responsible for managing each Fund's day-to-day business affairs, including
picking each Fund's investments; although the Investment Manager is subject to
the overall authority of the Board of Trustees.
Geri Hom is a Vice President of the Investment Manager and Senior Portfolio
Manager for each Fund. She joined Schwab in March 1995 as Portfolio Manager --
Equities and currently manages each Fund and co-manages three Schwab Asset
Director(R)Funds with approximately $6.1 billion in assets. For the prior seven
years before joining Schwab, Ms. Hom was Vice President and Manager of the
Domestic Equity Portfolio Management Group for Wells Fargo Nikko. She holds a
Bachelor of Arts in Business Education from San Francisco State University.
Stephen B. Ward is the Trust's Senior Vice President and Chief Investment
Officer. He has overall day-to-day responsibility for the management of the
Funds' portfolios. Mr. Ward joined the Investment Manager as Vice President and
Portfolio Manager in April 1991 and was promoted to his current position in
August 1993. Prior to joining the Investment Manager, Mr. Ward was Vice
President and Portfolio Manager at Federated Investors. He graduated with a
Masters of Business Administration from the Wharton School and a Bachelor of
Arts in Economics from Virginia Tech and has been a Chartered Financial Analyst
since 1985.
For the services performed under its contract with each Fund, the Investment
Manager is entitled to receive a graduated annual fee, payable monthly from each
Fund.
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<PAGE> 17
For the fiscal years ended October 31, 1997, each of the S&P 500 Fund, Small-Cap
Fund and International Fund paid the Investment Manager investment management
fees, as a percentage of daily net assets, of 0.04%, 0.15% and 0.21%,
respectively. For the fiscal year ended August 31, 1997 and the fiscal period
ended October 31, 1997, Schwab 1000 Fund(R) paid the Investment Manager
investment management fees, as a percentage of its daily net assets, of 0.19%.
SCHWAB IS THE FUNDS' SHAREHOLDER SERVICES AND TRANSFER AGENT. Schwab provides
Fund information to shareholders, including share price, reporting shareholder
ownership and account activities and distributing the Funds' prospectuses,
financial reports and other informational literature about the Funds. Schwab
maintains the office space, equipment and personnel necessary to provide these
services. Schwab also distributes and markets SchwabFunds and provides other
services.
For the services performed as transfer agent under its contract with each Fund,
Schwab is entitled to receive an annual fee from each Fund. The fees are payable
monthly in the amount of 0.05% of each Fund's average daily net assets. For the
services performed as shareholder services agent under its contract with each
class of the Funds, Schwab is entitled to receive an annual fee from each class
of the Funds. The fees are payable monthly in the amount of 0.20% of Investor
Shares' and 0.05% of Select Shares' and e.Shares' average daily net assets.
THE FUNDS PAY OTHER EXPENSES. These expenses are typically connected with a
Trust's operations, and include legal, audit and custodian fees, as well as the
costs of accounting and registration of the Funds. Expenses not directly
attributable to a particular fund will generally be allocated among the funds in
a Trust on the basis of each fund's relative net assets at the time the expense
is incurred.
During the fiscal year ended October 31, 1997, Schwab and the Investment Manager
voluntarily lowered the guaranteed total operating expenses for the Investor
Shares of the Funds. As a result, the total operating expenses for this class as
noted below were higher than those reported in the annual operating expenses
table in the "Expenses" section of this prospectus.
For the fiscal year ended or period ended as noted below, each class of each
Fund paid total operating expenses as a percentage of its average daily net
assets, as follows: 0.47% for Schwab 1000 Fund - Investor Shares and 0.35% for
Schwab 1000 Fund - Select Shares(TM) (for fiscal year ended August 31, 1997);
0.46% for Schwab 1000 Fund - Investor Shares and 0.35% for Schwab 1000
Fund - Select Shares; (for fiscal period ended October 31, 1997); 0.38% for S&P
500 Fund - Investor Shares, 0.19% for S&P 500 Fund - Select Shares and 0.28% for
S&P 500 Fund - e.Shares(TM); 0.52% for Small-Cap Fund - Investor Shares and
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<PAGE> 18
0.38% for Small-Cap Fund - Select Shares; and 0.61% for International
Fund - Investor Shares and 0.47% for International Fund - Select Shares.
The Investment Manager may use affiliated broker-dealers, including Schwab, to
execute the Funds' transactions.
The Charles Schwab Corporation is the parent company of the Investment Manager
and Schwab. Charles R. Schwab is the founder, Chairman, Co-Chief Executive
Officer and Director of The Charles Schwab Corporation. As a result of his
ownership of and interests in The Charles Schwab Corporation, Mr. Schwab may be
deemed to be a controlling person of the Investment Manager and Schwab.
15
<PAGE> 19
INVESTMENT OBJECTIVES, POLICIES & RISKS
INVESTMENT OBJECTIVES
THE SCHWAB 1000 FUND(R) seeks to match the total return of the Schwab 1000
Index(R).
THE S&P 500 FUND seeks to track the total return of the S&P 500(R) Index.
THE SMALL-CAP FUND seeks to track the total return of Schwab Small-Cap Index(R).
THE INTERNATIONAL FUND seeks to track the total return of Schwab International
Index(R).
Each Fund's investment objective may be changed only by vote of a majority of a
Fund's shareholders. Unless otherwise noted, policies and limitations may be
changed without shareholder approval.
INVESTMENT STRATEGIES
Each Fund intends to achieve its objective by following an indexing investment
strategy.
Each Fund normally will invest at least 80% of its total assets in the
securities making up its Index (Index Stocks).
THE INDEXES
The criteria for inclusion in each Index are described below. The Schwab Indexes
may not include a particular security (otherwise eligible for inclusion) under
certain circumstances, such as in the event of corporate actions like mergers or
new issues (IPOs).
THE SCHWAB 1000 INDEX(R) is designed to represent the total return of large- and
mid-cap domestic stocks. Publicly-traded common stocks of the top 1,000 U.S.
companies (as measured by market capitalization) are eligible for inclusion in
this index.
THE S&P 500(R) Index is a widely recognized, index comprised of 500 large-cap
common stocks selected by Standard & Poor's.
THE SCHWAB SMALL-CAP INDEX(R) is designed to represent the total return of
small-cap domestic stock. Publicly-traded common stocks of the second 1,000 U.S.
companies (as measured by market capitalization) are eligible for inclusion in
this index.
THE SCHWAB INTERNATIONAL INDEX(R) is designed to represent the total return of
large-cap foreign stocks. Equity securities of the top 350 foreign companies (as
measured by market capitalization) that are publicly-traded in developed
securities markets are eligible for inclusion in this index. Some countries
represented in the Index include Australia, Belgium, Canada, Denmark, France,
Germany, Hong Kong, Italy, Japan, the Netherlands, Singapore, Spain, Sweden,
Switzerland and the United Kingdom.
THE INDEXING STRATEGY is a method of investment management that relies on an
index to determine the investments of a fund, rather than the judgment of a
portfolio manager. Of course, the portfolio manager of an index fund still uses
his/her judgment, but not in the traditional sense of investment management. By
following indexing strategies, each Fund seeks to match or track the investment
performance of its Index.
Each Fund will invest in a group of securities selected from its Index, which,
16
<PAGE> 20
when taken together, is expected to perform similarly to its Index. Each Fund
generally tries to match its holdings of Index Stocks to their weightings in the
Index. This technique is expected to enable each Fund to track the dividend
income and price movements (total return) of its Index, while minimizing
brokerage, custodial and accounting costs. In addition, the indexing strategy is
intended to minimize a Fund's realized capital gains, which can make a
difference in an investors' after-tax return, especially for those investors in
higher tax brackets. Each Fund will seek a correlation between its performance
(total return), and that of its Index of 0.9 or better. A perfect correlation of
1.0 is unlikely as the Funds incur operating expenses unlike the Indexes. The
Investment Manager will monitor the performance of each Fund against its Index
and will rebalance a Fund periodically to reduce tracking error. In the event a
correlation of 0.9 or better is not achieved, the Board of Trustees will
consider alternative arrangements.
THE RISKS for each Fund are basically those risks associated with investing in
equity securities. Generally speaking, there are three types of risk inherent to
investing in equity securities.
STOCK RISK is the risk that a stock may decline in price over the short- or
long-term. When a stock's price declines, its market value is lowered even
though the intrinsic value of the company may not have changed. Some stocks,
like small company and international stocks, are more sensitive to stock risk
than others. Diversifying investments across companies can help to lower the
stock risk of a Fund.
INDUSTRY RISK is the risk that the companies in a particular industry will
experience a decline in the price of their stock. Sometimes a negative economic
condition will affect a single industry or group of industries. For example, the
automotive industry may have a greater exposure to a single factor, such as an
increase in the price of oil, which may affect the sale of automobiles and
impact the value of the industries' securities. Diversifying investments across
industries can help to reduce the industry risk of a Fund.
MARKET RISK is typically the result of a negative economic condition that
affects the value of an entire class of securities, such as stocks or bonds.
Unlike stock and industry risk, the Funds do not attempt to reduce market risk,
which can only be removed by diversification among various asset classes (e.g.,
stocks, bonds, cash and real estate).
The amount or type of risk each Fund will be subject to depends on its portfolio
of investments. Because each Fund intends to track its Index, its risk profile
is expected to be similar to that of its Index. The Indexes are designed to
reflect the performance of a particular segment of the stock market and will be
subject to those market risks, as well as stock and industry risks.
17
<PAGE> 21
PRINCIPAL SECURITIES AND INVESTMENT TECHNIQUES
The different types of securities comprising each Index and other securities in
which the Funds may invest are described below.
EQUITY SECURITIES include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, which represent an ownership interest in
a company, are probably the most recognized type of equity security. Equity
securities that have historically outperformed most other securities, although
their prices can be volatile in the short term. Market conditions, political,
economic and even company-specific news can cause significant changes in the
price of a stock. Smaller companies (as measured by market capitalization),
sometimes called small-cap companies or small-cap stocks, may be especially
sensitive to these factors.
INTERNATIONAL INVESTMENTS include foreign securities and foreign currencies.
International investments involve additional risks and considerations. Foreign
entities may not be subject to the same regulatory and reporting requirements as
domestic entities, and foreign markets may provide less stringent investor
protections, including lower disclosure standards. In addition, foreign
economic, political and legal developments, as well as fluctuating foreign
currency values and withholding taxes, could have more dramatic effects on the
value of a foreign security. All of these factors and others can cause foreign
investments to be volatile.
DEBT SECURITIES are obligations issued by various entities, including
governments and corporations, in order to raise money. They are basically
"IOUs", but are commonly referred to as bonds or money market securities. These
securities normally require the issuer to pay a fixed, variable or floating rate
of interest on the amount of money borrowed (the "principal") until it is paid
back upon maturity. U.S. Government securities are issued or guaranteed by the
U.S. Government, its agencies and instrumentalities. A money market security is
a high-quality debt security that has short-term maturity.
ILLIQUID SECURITIES are securities that are not actively traded and, therefore,
may be difficult to sell quickly. The sale of some illiquid securities and
certain other securities may be subject to legal restrictions, which could make
it difficult to sell these securities. A fund could incur losses if it has
difficulty selling a security.
Restriction: Each Fund will not invest more than 10% of its net assets in
illiquid securities. This policy may be changed only by shareholders.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. To the extent a Fund invests in liquid restricted securities, its
general level of illiquidity may increase if these securities become difficult
to sell.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES are securities that are purchased at
a set price and yield but are to be delivered to the buyer at a later than
customary date. Generally, the purchaser does not pay for
18
<PAGE> 22
these securities or earn interest on them until they are delivered, but their
value could change prior to delivery.
REPURCHASE AGREEMENTS involve a Fund buying securities (usually U.S. Government
securities) from a seller and simultaneously agreeing to sell them back at an
agreed-upon price (usually higher) and time. There are risks that losses will
result if the seller does not perform as agreed.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased by a Fund. These
investments will cause a Fund to bear duplicative fees for certain services.
ADJUSTING INVESTMENT EXPOSURE are investment techniques a Fund may use to
increase or decrease its exposure to a number of conditions, including changing
interest or currency exchange rates and other conditions affecting the value of
securities. These investment techniques include buying and selling futures and
options contracts, entering into currency exchange contracts or swap agreements
(an exchange of one security or asset for another), purchasing indexed
securities and selling securities short. Generally, futures and options
transactions are agreements between two parties to buy or sell securities at a
specified price within a designated period. Currency exchange contracts for the
International Fund include transactions and position hedging, which involve
buying and/or selling foreign currencies either on a spot (cash) or future basis
in an attempt to protect specific holdings in foreign securities or the
portfolio as a whole.
The Funds intend to use investment techniques to adjust risk exposure and
increase returns, and to manage their cash positions. The use of any of these
techniques will increase a Fund's risks and volatility. The potential losses to
a Fund could be substantially more than the initial cost of the investment
itself.
The Funds also employ the policies described below.
STOCK SUBSTITUTION STRATEGY is a strategy, whereby each Fund may, in
extraordinary circumstances, substitute a similar stock for an Index Stock.
DIVERSIFICATION involves investing in a wide range of securities and, thereby,
spreading and reducing the risks of investment.
BORROWING money is a form of leveraging if a Fund continues to make investments
while borrowings remain outstanding. Borrowing subjects a Fund to interest costs
which may exceed the interest received on the securities purchased with the
borrowed funds.
Restriction: Each Fund may borrow up to 33 1/3% of its total net assets for
temporary or emergency purposes; provided that each Fund will not purchase
securities while borrowing represents more than 5% of its total assets. This
policy may be changed only by shareholders.
LENDING securities may earn income for a Fund, but could result in losses to the
Fund, and possibly affect share price.
Restriction. Each Fund will limit lending to no more than 33 1/3% of its total
assets.
19
<PAGE> 23
INVESTING IN SHARES
BUSINESS DAYS
The Funds are open each day the New York Stock Exchange (NYSE) is open (business
days).
NET ASSET VALUE
The price of the shares of each class of each Fund is its net asset value per
share (NAV). NAV is determined each business day at the close of the NYSE,
generally 4:00 p.m. Eastern time. NAV is calculated by adding the value of each
Fund's assets attributable to each class, subtracting its share of liabilities
and dividing the result by the number of outstanding shares of the class. NAV
will fluctuate and none of the Funds is insured against loss in its NAV. Each
Fund values its portfolio securities based on market quotes if they are readily
available. If market quotes are not readily available, portfolio securities are
assigned fair market values pursuant to guidelines adopted by the Board of
Trustees.
MINIMUM INVESTMENTS
INVESTOR SHARES AND E.SHARES(TM)
<TABLE>
<S> <C>
INITIAL INVESTMENT............... $ 1,000
for custodial and retirement plan
accounts....................... $ 500
ADDITIONAL SHARES................ $ 100
MINIMUM BALANCE*................. $ 1,000
SELECT SHARES(TM)
INITIAL INVESTMENT............... $50,000
ADDITIONAL SHARES................ $ 1,000
MINIMUM BALANCE*................. $40,000
</TABLE>
* Your shares may be automatically redeemed if, as a result of selling or
exchanging shares, you no longer meet a Fund's minimum balance requirements.
You will be given 30 days' notice prior to redemption to increase your
holdings to the required minimum balance.
These minimums may not be applicable to certain customers of Schwab
Institutional's Services for Investment Managers or Schwab's Retirement Plan
Services. These minimums may be different if you are buying, selling/exchanging
or maintaining shares of a Fund through an entity other than Schwab.
HOW TO BUY SHARES
Shares may be purchased through a Schwab account or through an account with any
other entity designated by Schwab. The following information on how to buy
shares is for shares bought through a Schwab account. Shares are purchased at
the NAV next determined after your purchase order has been received in good
order. Purchase orders received in good order by Schwab prior to 4:00 p.m.
Eastern time will be executed that day. Shares normally begin to earn dividends
on the next business day.
BY TELEPHONE. Call 1-800-435-4000, 24 hours a day (1-800-345-2550 for TDD
users).
BY MAIL. Write to a Fund at 101 Montgomery Street, San Francisco, CA 94104.
ELECTRONICALLY. Visit Schwab's World Wide Web site at http://www.schwab.com. For
more information about e.Shares,
20
<PAGE> 24
StreetSmart(R), The Equalizer(R) and Telebroker(R), call 1-800-435-4000.
SCHWABLINK(R). e.Shares(TM) may be purchased by clients of Schwab Institutional
and The Schwab Trust Company, and certain retirement plans. Transactions in
e.Shares must be made using SchwabLink. Read its manual for transaction
instructions. In the event you experience mechanical difficulty using
SchwabLink, call the Schwab Institutional trading desk at 1-800-367-5198 for
help.
TO PURCHASE SHARES OF THE FUNDS. Please provide the following information.
- - your name and Schwab account number (for e.Shares, your SchwabLink master
account number and subaccount number);
- - the name of your Fund and class and the dollar amount you would like to
purchase; and
- - for initial purchases only, one of the three distribution choices below.
AUTOMATIC REINVESTMENT. Dividends and capital gain distributions will be
reinvested in shares of your Fund. If you do not choose an option, this
option will be assigned to you and all distributions will be reinvested;
CASH OPTION. Dividends will be paid to your Schwab account and, if requested,
mailed to you the next business day.
CASH DISTRIBUTION/REINVESTED CAPITAL GAINS. Dividends will be paid to you in
cash and any capital gain distributions will be reinvested in additional
shares.
HOW TO SELL OR EXCHANGE SHARES
Shares may be sold or exchanged through a Schwab account or through an account
with any other entity designated by Schwab. The following information on how to
sell and exchange shares is for shares sold or exchanged through a Schwab
account. Shares are sold or exchanged at the NAV next determined after your sale
or exchange order has been received in good order. Sale and exchange orders
received in good order by Schwab prior to 4:00 p.m. Eastern time will be
executed that day. Shares sold or exchanged normally earn dividends on that day.
BY TELEPHONE. Call 1-800-435-4000, 24 hours a day (1-800-345-2550 for TDD
users).
BY MAIL. Write to a Fund at 101 Montgomery Street, San Francisco, CA 94104.
ELECTRONICALLY. Visit Schwab's World Wide Website at http://www.schwab.com. For
more information about StreetSmart(R), The Equalizer(R) and Telebroker(R), call
1-800-435-4000.
SCHWABLINK(R). e.Shares may be sold or exchanged by clients of Schwab
Institutional and The Schwab Trust Company, and certain retirement plans.
Transactions in e.Shares must be made using SchwabLink. Read its manual for
transaction instructions. In the event you experience mechanical
21
<PAGE> 25
difficulty using SchwabLink(R), call the Schwab Institutional trading desk at
1-800-367-5198 for help.
TO SELL OR EXCHANGE SHARES OF THE FUNDS. Please provide the following
information:
- - your name and Schwab account number (for e.Shares, your SchwabLink master
account number and subaccount number);
- - the name of your Fund and class you would like to sell or exchange from and
the number of shares;
- - for exchanges only, the name of your Fund and class, if applicable, into
which you would like to exchange and a distribution choice; and
- - if selling or exchanging by mail, a signature of at least one of the persons
named on your Schwab account.
Once mailed, redemption and exchange requests are irrevocable and may not be
modified or canceled.
PLEASE NOTE THE FOLLOWING WHEN SELLING OR EXCHANGING SHARES OF THE FUNDS:
- - payment for redeemed shares will be made to your Schwab account within 7
days;
- - a check may be mailed to you upon request;
- - if you bought your shares by check, a check will be issued as soon as your
check clears, which may take up to 15 days from the date of purchase;
- - depending on the type of Schwab account you have, your money may earn
interest during any holding period;
- - a fee may be charged for redemptions by wire;
- - you may exchange your shares for shares of any other SchwabFund, provided you
meet its minimum investment and any other requirements;
- - the Funds and Schwab reserve the right to modify, limit or terminate the
exchange privilege upon 60 days' written notification;
- - the Funds may suspend the right to sell shares or postpone payment for a sale
of shares when trading on the NYSE is restricted, the NYSE is closed for any
reason other than its customary weekend and holiday closings, emergency
circumstances exist as determined by the SEC or as otherwise permitted by the
SEC; and
- - an exchange of a Fund's shares for shares of other SchwabFunds will be
treated as a taxable event for federal income tax purposes. An exchange
between different classes of shares of a Fund should not be treated as a
taxable event.
- - An early withdrawal fee upon redemption or exchange of shares of the Schwab
1000 Fund(R), Small-Cap Fund or International Fund will be charged against
proceeds attributable to shares purchased or held less than six months. This
fee will be paid directly to the Fund to offset costs of short-term trading
and ensure that long-term investors do not
22
<PAGE> 26
bear additional costs. An early withdrawal fee will not be charged for
exchanges between classes of shares of the same Fund or against shares
redeemed or acquired though reinvestment of dividends or capital gains
distributions. Solely for purposes of calculating the early withdrawal fee,
shares will be treated as redeemed on a "first-in, first-out" basis, except
for shares acquired through dividend reinvestment, which will be redeemed
first (although no early withdrawal fee will be assessed against these). This
method of calculating the fee should result in the lowest total early
withdrawal fee. The Funds reserve the right to waive this fee for certain
tax-advantaged retirement plans.
OPENING A SCHWAB ACCOUNT
Schwab was established in 1971 and is one of America's largest discount brokers.
Schwab serves over 4.7 million customer accounts and helps the investor make
investment decisions by offering them low cost brokerage services and providing
them with financial products and information. Visit one of Schwab's 260 branch
offices or Schwab's Web site (http://www.schwab.com) for information on
investment products and services.
Investors may open a Schwab account by simply completing an application,
although institutional investors should contact Schwab to find out if any
additional forms need to be completed. Read the application and account
agreement for complete information about your account.
Using a Schwab account, investors have access to investments other than just
mutual funds, such as stocks and bonds. The Securities Investor Protection
Corporation (SIPC) provides account protection of up to $500,000 for the
securities held in a Schwab account, including shares of the Funds. It is
important to remember that SIPC account protection does not protect against
losses due to market or economic conditions.
Schwab accounts opened prior to January 15, 1998 require a $1,000 minimum
investment and account balance ($500 for custodial accounts). A fee of $7.50
will be charged to Schwab accounts that fall below this minimum for three
consecutive months in a quarter. The fee, if applicable, will be charged at the
end of each quarter, but will be waived if there has been at least one
commissionable trade within the previous six months, or if the investor's
combined Schwab accounts equal $10,000 or more.
Schwab One(R) accounts opened prior to January 15, 1998 require a $5,000 minimum
investment and account balance. A monthly fee of $5.00 will be charged to Schwab
One accounts that fall below this minimum, unless there have been at least two
commissionable trades within the previous twelve months.
Effective January 15, 1998, Schwab accounts will not be available, and Schwab
One(R) accounts will be available with a new
23
<PAGE> 27
minimum initial investment requirement of $2,500. Additionally, the account fees
for existing Schwab and Schwab One(R) accounts will be replaced with a calendar
quarter account fee of $15, effective April 1, 1998. However, this fee will not
be charged if the combined balances of your household's accounts at Schwab
exceed $25,000 at the end of any month in that quarter, you have one
commissionable trade in that or the preceding quarter or you have two or more
commissionable trades during the last four quarters. If you have more than one
account at Schwab, you will be charged only one quarterly fee.
Deposits may be made to your account by check, wire and other forms of
electronic funds transfer. Securities also may be deposited. All checks should
be made out to Charles Schwab & Co., Inc. Schwab will charge a $15 service fee
for any checks returned as a result of insufficient or uncollected funds or a
stop order. Monies received by Schwab before 4:00 p.m. Eastern time will be
available for investment in the Fund that day. Monies received by Schwab after
4:00 p.m. Eastern time will be available for investment in the Fund the next
business day.
Contact Schwab for instructions and any applicable fees if you would like to
wire money from your Schwab account.
TAX-ADVANTAGED RETIREMENT PLANS. Retirement plans offer excellent tax advantages
and the Funds may be especially suitable investments for them. Schwab's
retirement plans allow participants to defer taxes while helping them build
their retirement savings.
SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab IRA accounts with balances of $10,000 or more by September 15, 1998 will
not be charged Schwab's $29 annual IRA account fee for the life of the account.
SCHWAB KEOGH. A tax-advantaged plan for self-employed individuals and their
employees that permit the employer to make annual tax-deductible contributions
of up to $30,000. Schwab Keogh Plans are currently charged an annual fee of $45.
SCHWAB CORPORATE RETIREMENT ACCOUNT. A well-designed retirement program can help
a company attract and retain valuable employees. Call 1-800-435-4000 for more
information.
SCHWAB AUTOMATIC INVESTMENT PLAN. 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 a Fund's investment minimum. Automatic investments are made from your
Schwab account using cash, Sweep Shares of a Schwab Money Fund or the Schwab
MoneyLink(R) Transfer Service. As long as you are purchasing a Fund's shares
through
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<PAGE> 28
AIP, distributions paid to you by the Fund must be reinvested in additional
shares of that Fund. For more detailed information about this service, or to
establish your AIP, call 1-800-435-4000, 24 hours a day.
DIVIDENDS & TAXES
The following is only a brief summary of some of the federal income tax
consequences that may affect each Fund and its shareholders. Unless your
investment in a Fund is through a retirement account, you should consider the
tax implications of investing, and consult with your own tax adviser.
Each Fund will distribute its net investment income and capital gains, if any,
to shareholders each year. All distributions received by shareholders are
subject to federal income tax, and may be subject to state and/or local taxes.
Distributions are taxable when paid, whether they are received in cash or
reinvested, although distributions declared in December, but paid in January,
are taxable as if they were paid on December 31.
Income received by International Fund from foreign sources may be subject to
foreign income taxes withheld at the source. For taxable years in which it so
qualifies, International Fund may elect to "pass-through" to its shareholders
the amount of foreign taxes paid. Under such an election, shareholders who
receive a distribution must include in their gross income their pro rata share
of foreign taxes paid by International Fund and may claim a credit or deduction
for those foreign taxes, subject to the general limitations on foreign tax
credits and deductions.
Shareholders receive a record of all distributions by a Fund, as well as
purchases and sales they have made, via their monthly Schwab account statement.
Each year, a Fund notifies shareholders of the federal income tax treatment of
all distributions made by each Fund that year.
GENERAL INFORMATION
As long as the Funds or Schwab follow reasonable procedures to confirm that your
telephone order is genuine, they will not be liable for any losses an investor
may experience due to unauthorized or fraudulent instructions.
These procedures may include:
- - requiring a form of personal identification before acting upon any telephone
order;
- - providing written confirmation of telephone orders; and
- - tape recording all telephone orders.
It may be difficult to place orders by telephone during periods of drastic
economic or market changes because Schwab's phone lines may become very busy
with calls from other investors. Consider other methods for placing an order,
such as writing to the Funds or visiting a Schwab branch office.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are
25
<PAGE> 29
maintained by Schwab. Twice a year, financial reports will be mailed to
shareholders describing each Fund's performance and investment holdings. In
order to reduce these mailing costs, each household will receive one
consolidated mailing. If you do not want to receive consolidated mailings, you
may write to your Fund and request that your mailings not be consolidated.
The S&P 500 Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's ("S&P"). S&P makes no representation or warranty, express or implied, to
the shareholders of the S&P 500 Fund or any member of the public regarding the
advisability of investing in securities generally or in the S&P 500 Fund
particularly or the ability of the S&P 500 Index to track general stock market
performance. S&P's only relationship to the S&P 500 Fund is the licensing of
certain trademarks and trade names of S&P and of the S&P 500(R) Index, which is
determined, composed and calculated by S&P without regard to the S&P 500 Fund.
S&P has no obligation to take the needs of the S&P 500 Fund or its shareholders
into consideration in determining, composing or calculating the S&P 500 Index.
S&P is not responsible for and has not participated in the determination of the
prices and amount of S&P 500 Fund shares or in the determination or calculation
of the equation by which the S&P 500 Fund's shares are to be converted into
cash. S&P has no obligation or liability in connection with the administration,
marketing or trading of the S&P 500 Fund's shares.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein, and S&P shall have no liability for any errors,
omissions or interruptions therein. S&P makes no warranty, express or implied,
as to results to be obtained by the S&P 500 Fund, its shareholders or any other
person or entity from the use of the S&P 500 Index or any data therein. S&P
makes no express or implied warranties and expressly disclaims all warranties or
merchantability or fitness for a particular purpose or use with respect to the
S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect or consequential damages
26
<PAGE> 30
(including lost profits), even if notified of the possibility of such damages.
Each Fund, in its sole discretion and without prior notice, reserves the right
to refuse orders to purchase shares, change minimum investment requirements or
withdraw or suspend any part of the offering made by this prospectus.
- ---------------------------------------------------
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS AND
IN OFFICIAL SALES MATERIALS. IF ANYONE GIVES ANY OTHER INFORMATION OR MAKES ANY
OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION OR REPRESENTATIONS.
- ---------------------------------------------------
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
BE MADE.
- ---------------------------------------------------
27
<PAGE> 31
SCHWAB EQUITY
- -----------------
INDEX FUNDS
- -----------
PROSPECTUS
MAY 19, 1997
// Schwab S&P 500 Fund
// Schwab 1000 Fund(R)
// Schwab Small-Cap
Index Fund(R)
// Schwab International
Index Fund(R)
[Schwab Funds(R) Logo]
SchwabFunds(R)
101 Montgomery Street
San Francisco, California 94104
3048-1 (12/97) CRS 11209 Printed on recycled paper.
<PAGE> 32
PART B
SCHWAB CAPITAL TRUST
The information required by Items 10 through 23 for the Schwab OneSource(R)
Portfolios-Balanced Allocation, Schwab OneSource Portfolios-Growth Allocation,
Schwab OneSource Portfolios-International, Schwab OneSource Portfolios-Small
Company; Schwab Asset Director(R)-High Growth, Schwab Asset Director-Balanced
Growth, Schwab Asset Director-Conservative Growth and Schwab Analytics Fund(R),
each a separate portfolio of the Registrant, is hereby incorporated by reference
to the Statement of Additional Information for these portfolios filed with the
Securities and Exchange Commission under Rule 485(a) on December 17, 1997.
<PAGE> 33
CROSS REFERENCE SHEET
SCHWAB CAPITAL TRUST
SCHWAB S & P 500 FUND, SCHWAB SMALL-CAP INDEX FUND(R)
AND SCHWAB INTERNATIONAL INDEX FUND(R)
Statement of Additional
Part B Item Information Caption
- ----------- -----------------------
Cover Page Cover Page; Table of Contents
General Information and History General Information; The Benefits
of International Investing; Asset
Allocation--the Schwab Equity
Index Funds
Investment Objectives and Policies Investment Policies and
Restrictions
Management of the Fund Management of the Trust
Control Persons and Principal Holders General Information
of Securities
Investment Advisory and Other Management of the Trust
Services
Brokerage Allocation and Other Portfolio Transactions and
Practices Turnover
Capital Stock and Other Securities General Information
Purchase, Redemption and Pricing of Share Price Calculation; Purchase
Securities Being Offered and Redemption of Shares
Tax Status Distributions and Taxes
Underwriters Management of the Trust
Calculation of Performance Data How the Funds Reflect Performance
Financial Statements Not Applicable
<PAGE> 34
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB CAPITAL TRUST
SCHWAB S&P 500 FUND
SCHWAB INTERNATIONAL INDEX FUND(R)
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB INVESTMENTS
SCHWAB 1000 FUND(R)
DECEMBER 31, 1997
This Statement of Additional Information (SAI) is not a prospectus. It
should be read in conjunction with the Prospectus dated December 31, 1997 (as
amended from time to time) for the Schwab International Index Fund(R)
(International Fund), Schwab Small-Cap Index Fund(R) (Small-Cap Fund), Schwab
S&P 500 Fund (S&P 500 Fund) and Schwab 1000 Fund(R).
To obtain a copy of the Prospectus, please contact Charles Schwab & Co.,
Inc. (Schwab) at 1-800-435-4000, 24 hours a day, or 101 Montgomery Street, San
Francisco, California 94104. TDD users may contact Schwab at 800-345-2550, 24
hours a day. The Prospectus also may be available electronically by using our
World Wide Web address: http://www.schwab.com/schwabfunds.
SCHWABFUNDS(R)
1-800-435-4000
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES........................................................2
INVESTMENT SECURITIES AND RISKS..............................................2
INVESTMENT RESTRICTIONS ....................................................16
ORGANIZATION AND MANAGEMENT OF THE TRUSTS ..................................18
MANAGEMENT OF THE FUNDS.....................................................24
PORTFOLIO TRANSACTIONS AND TURNOVER.........................................26
TAXES.......................................................................28
SHARE PRICE CALCULATION.....................................................31
HOW THE FUNDS REFLECT PERFORMANCE...........................................32
THE INDEXES AND INDEXING STRATEGIES.........................................34
PURCHASE AND REDEMPTION OF SHARES...........................................37
OTHER INFORMATION...........................................................38
FINANCIAL INFORMATION.......................................................38
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<PAGE> 35
INVESTMENT OBJECTIVES
INTERNATIONAL FUND. The investment objective of the International Fund is to
attempt to track the price and dividend performance (total return) of the Schwab
International Index(R) (International Index), an index created to represent the
performance of common stocks and other equity securities issued by large
publicly traded companies from countries around the world with major developed
securities markets, excluding the United States.
SMALL-CAP FUND. The investment objective of the Small-Cap Fund is to attempt to
track the price and dividend performance (total return) of the Schwab Small-Cap
Index(R) (Small-Cap Index), an index created to represent the performance of
common stocks of the second 1,000 largest United States companies, ranked by
market capitalization (share price times the number of shares outstanding).
SCHWAB 1000 FUND(R). The investment objective of the Schwab 1000 Fund(R) is to
match the price and dividend performance (total return) of the Schwab 1000
Index(R), an index created to represent to performance of publicly traded common
stocks of the 1,000 largest United States companies.
S&P 500 FUND. The Fund's investment objective is to seek to track the price and
dividend performance (total return) of common stocks of U. S. companies, as
represented by Standard & Poor's 500 Composite Stock Price Index (the S&P
500(R)).
INVESTMENT SECURITIES AND RISKS
ASSET-BACKED SECURITIES are securities that are backed by the loans or account
receivables of an entity, such as a bank or credit card company. These
securities are obligations that the issuer intends to repay using the assets
backing them (once collected). Therefore, repayment may depend largely on the
cash flows generated by the assets backing the securities. Sometimes the credit
support for these securities is limited to the underlying assets, but, in other
cases, may be provided by a third party via a letter of credit or insurance
guarantee.
CONVERTIBLE SECURITIES. Convertible securities are securities that are
exchangeable for a specific number of another form of security at a specified
price. Bonds and preferred stocks may be convertible. Convertible bonds
typically pay a lower interest rate than nonconvertible bonds of the same
quality and maturity, because the convertible feature allows them to be
exchanged for a specific number of shares of the company's common stock at a
predetermined price. This structure allows the holder of the convertible bond to
participate in share price movements in the company's common stock. The actual
return on a convertible bond may exceed its stated yield if the company's common
stock appreciates in value and the option to convert to common shares becomes
more valuable. Convertible preferred stocks are nonvoting equity securities that
pay a fixed dividend. These securities have a convertible feature similar to
convertible bonds, however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
Restriction. The S&P 500 Fund will not purchase convertible securities directly.
It may, however, hold convertible securities to the extent that such holdings
are incident to the Fund's ownership of common stocks. Each of the Schwab 1000
Fund(R), International Fund and Small-Cap Fund will not purchase convertible
securities if as a result more than 5% of its net assets would be invested in
these securities.
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<PAGE> 36
CREDIT AND LIQUIDITY SUPPORTS may be employed by issuers to reduce the credit
risk of their securities. Credit supports include letters of credit, insurance
and guarantees. Liquidity supports include puts and demand features. These
arrangements move the credit risk of an investment from the issuer of the
security to the support provider.
DEBT SECURITIES are obligations, issued by various entities, including
governments and corporations, in order to raise money. They are basically
"IOUs," but are commonly referred to as bonds. Bonds normally require the issuer
to pay a fixed, variable or floating rate of interest on the amount of money
borrowed (the "principal") until it is paid back (at "maturity"). Upon maturity,
the principal must be repaid.
Debt securities experience price changes when interest rates change. As a rule,
when interest rates rise, bond prices decline or "fall", and when interest rates
fall bond prices rise. Typically, longer-maturity bonds react to interest rate
changes more severely than shorter-term bonds (all else being equal) but
generally offer a greater rate of interest. Debt securities also are subject to
the risk that their issuer will fail to meet its obligation to pay interest
and/or principal, and their prices also may be affected by the credit quality of
their issuer. Investment-grade debt securities are medium- and high-quality
securities, although some still possess varying degrees of speculative
characteristics and risk.
FOREIGN CURRENCY TRANSACTIONS. The following sections pertain to foreign
currency transactions: Forward Foreign Currency Exchange Contracts; Writing
and Purchasing Currency Call and Put Option; and Special Risks Associated
With Options on Foreign Currency.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The International Fund may enter
into forward foreign currency exchange contracts in several circumstances. The
International Fund may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future exchange rates. The
International Fund expects to engage in foreign currency exchange transactions
in connection with the purchase and sale of portfolio securities (so-called
"transaction hedging") and to protect the value of specific portfolio positions
("position hedging").
For transaction hedging purposes, the International Fund enters into foreign
currency transactions with respect to specific receivables or payables of the
fund arising in connection with the purchase or sale of portfolio securities. By
transaction hedging, the International Fund will attempt to protect against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold and the transaction's settlement
date. When engaging in position hedging, the International Fund enters into
foreign currency exchange transactions to protect against a decline in the
values of the foreign currencies in which portfolio securities are denominated
(or against an increase in the value of currency in which the International Fund
expects to purchase securities).
When engaging in position and/or transaction hedging, the International Fund may
purchase or sell foreign currencies on a spot (or cash) basis at the prevailing
spot rate. In addition, the International Fund also may enter into contracts to
purchase or sell foreign currencies at a future date ("forward contracts") and
purchase and sell foreign currency futures contracts ("futures contracts"). The
International Fund also may purchase exchange-listed and over-the-counter call
and put options on futures contracts and on foreign currencies. A put option on
a futures contract gives the International Fund the right to assume a short
position in the futures contract until expiration of the option. A put option on
currency gives the International Fund the right to sell a currency at an
exercise price until the expiration of the option. A call option on a futures
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<PAGE> 37
contract gives the International Fund the right to assume a long position in the
futures contract until the expiration of the option. A call option on currency
gives the International Fund the right to purchase a currency at the exercise
price until the expiration of the option.
Hedging transactions involve costs and may result in losses to the International
Fund. The International Fund's ability to engage in hedging transactions may be
limited by tax considerations. Transaction and position hedging do not eliminate
fluctuations in the underlying prices of the securities that the International
Fund owns or expects to purchase or sell. They simply establish a rate of
exchange that may be achieved at some future point in time. Additionally,
although these techniques tend to minimize the risk of loss due to decline in
the value of the hedged currency, they tend to limit any potential gain that
might result from an increase in the value of such currency.
Although the contracts are not presently regulated by the Commodity Futures
Trading Commission (the "CFTC"), the CFTC may in the future assert authority to
regulate these contracts. In such event, the ability of the International Fund
to utilize forward foreign currency exchange contracts may be restricted.
Restriction. The International Fund generally will not enter into a forward
contract with a term of greater than one year.
While the International Fund will enter into forward contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while the International Fund may benefit from such
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the International Fund than if it had not engaged in any
such transactions. Moreover, there may be imperfect correlation between the
International Fund's portfolio holdings of securities denominated in a
particular currency and forward contracts into which the International Fund may
enter. Such imperfect correlation may cause the International Fund to sustain
losses, which will prevent the International Fund from achieving a complete
hedge or expose the International Fund to risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The International Fund may
write covered put and call options and purchase put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
portfolio securities and against increases in the dollar cost of securities to
be acquired. A call option written by the International Fund obligates the
International Fund to sell specified currency to the holder of the option at a
specified price at any time before the expiration date. A put option written by
the International Fund would obligate the International Fund to purchase
specified currency from the option holder at a specified time before the
expiration date. The writing of currency options involves risks that the
International Fund will, upon exercise of an option, be required to sell
currency at a price that is less than the currency's market value or be required
to purchase currency at a price that exceeds the currency's market value.
The International Fund may terminate their obligations under a call or put
option by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." The International
Fund would also be able to enter into closing sale transactions in order to
realize gains or minimize losses on options purchased by the International Fund.
The purchase of a call option would entitle the International Fund to purchase
specified currency at a specified price during the option period in return for
the premium paid. The International Fund ordinarily would realize a gain or a
loss on the purchase of the call option.
4
<PAGE> 38
The purchase of a put option would entitle the International Fund to sell
specific currency at a specified price during the option period in exchange for
the premium paid. The purchase of protective puts is designed merely to offset
or hedge against a decline in the dollar value of the International Fund's
portfolio securities due to currency exchange rate fluctuations. The
International Fund ordinarily would realize a gain if, during the option period,
the value of the underlying currency decreased below the exercise price in an
amount that that would more than cover the premium and transaction costs.
Otherwise, the International Fund would realize either no gain or a loss on the
purchase of the put option. Gains and losses on the purchase of protective put
options would tend to be offset by countervailing changes in the value of the
underlying currency.
Special Risks Associated With Options on Foreign Currency. An exchange-traded
option position may be closed out only on an options exchange that provides a
secondary market for an option of the same series. Although the International
Fund generally will purchase or write only those options for which there appears
to be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at any particular
time. For some options, no secondary market on an exchange may exist. In such
event, it might not be possible to effect closing transactions in particular
options. The International Fund would then have to exercise its options in order
to realize any profit and would incur transaction costs upon the sale of
underlying securities pursuant to the exercise of put options. If the
International Fund, as a covered call option writer, is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying currency (or security denominated in that currency) until the
option expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
OCC inadequate. This could result in an exchange instituting special procedures
that may interfere with the timely execution of customers' orders.
The International Fund will purchase and write over-the-counter options only to
the extent consistent with its limitations on investments in illiquid
securities. Trading in over-the-counter options is subject to the risk that the
other party will be unable or unwilling to close-out purchasing and writing
activities.
FOREIGN REPURCHASE AGREEMENTS. Foreign repurchase agreements involve a Fund
purchasing foreign securities and simultaneously agreeing to sell them back to
the counter-party in exchange for a fixed U.S. dollar or foreign currency
amount. Foreign repurchase agreements may not be fully collateralized at all
times. In addition, the value of the securities purchased by a Fund may be more
or less than the amount the counter-party has agreed to pay upon re-purchase. A
Fund could experience losses of the counter-party fails to perform. Foreign
repurchase agreements involve significantly higher risks than repurchase
agreements, including the risks of currency fluctuations.
FUTURES AND OPTIONS. The following sections pertain to futures and options
transactions: Writing Covered Options; Purchasing Options; Risks Associated
with Options Transactions; Futures Contracts; Options on Futures Contracts;
Hedging Strategies With Futures; and Risks Involved in Futures and Options
Transactions.
Writing Covered Options. The Funds may write (sell) covered call and put options
on any securities in which they may invest. The Funds may purchase and write
such options on securities that are listed on domestic or foreign securities
exchanges or traded in the over-the-counter market. All call options written by
the Funds are covered, which means that the Funds will own the securities
subject to the option so long as the option is outstanding. The purpose of
writing covered call options is to realize greater income than
5
<PAGE> 39
would be realized on portfolio securities transactions alone. However, in
writing covered call options for additional income, the Funds may forego the
opportunity to profit from an increase in the market price of the underlying
security.
All put options the Funds write will be covered, which means that each of the
Funds will have deposited with its custodian cash, U.S. Government securities or
other high-grade debt securities with a value at least equal to the exercise
price of the put option. High-grade securities are securities rated in one of
the top three categories by Moody's Investor Service (Moody's) or Standard &
Poor's (S&P), or, if unrated, determined by the Investment Manager to be of
comparable credit quality. The purpose of writing such options is to generate
additional income for the Funds. However, in return for the option premium, the
Funds accept the risk that they may be required to purchase the underlying
securities at a price in excess of the securities market value at the time of
purchase.
The Funds may terminate their obligations under a written call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions."
Purchasing Options. The Funds may purchase put and call options on any
securities in which they may invest or options on any securities index based on
securities in which they may invest. The Funds may also enter into closing sale
transactions in order to realize gains or minimize losses on options they have
purchased.
For certain options, the writer may be assigned an exercise notice at any time
prior to the termination of the obligation. Therefore, the writer may have no
control over when the underlying securities must be sold, in the case of call
options, or purchased, in the case of put options. Whether or not an option
expires unexercised, the writer retains the amount of the premium. This amount
may, in the case of a covered call option, be offset by a decline in the market
value of the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. If a put option is exercised, the writer must fulfill its
obligation to purchase the underlying security at the exercise price, which will
usually exceed the then market value of the underlying security.
The purchase of a call option would entitle the Funds, in return for the premium
paid, to purchase specified securities at a specified price during the option
period. The Funds would ordinarily realize a gain if, during the option period,
the value of such securities exceeded the sum of the exercise price, the premium
paid and transaction costs; otherwise the Funds would realize either no gain or
a loss on the purchase of the call option.
Risks Associated With Options Transactions. There is no assurance that a liquid
secondary market on a domestic or foreign options exchange will exist for any
particular exchange-traded option or at any particular time. If the Funds are
unable to effect a closing purchase transaction with respect to covered options
they have written, the Funds will not be able to sell the underlying securities
or dispose of assets held in a segregated account until the options expire or
are exercised. Similarly, if the Funds are unable to effect a closing sale
transaction with respect to options they have purchased, they would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) an exchange may impose restrictions on opening and/or closing transactions;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to
6
<PAGE> 40
particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the Options Clearing Corporation (the "OCC") may not at all
times be adequate to handle current trading volume; and (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), although outstanding options on that exchange that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The Funds may purchase and sell both options that are traded on U.S. and foreign
exchanges and options traded over-the-counter with broker-dealers who make
markets in these options. The ability to terminate over-the-counter options is
more limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations.
The Funds currently treat purchased over-the-counter options and all assets used
to cover written over-the-counter options as illiquid securities, except for
options written with primary dealers in U.S. Government securities pursuant to
an agreement requiring a closing purchase transaction at a formula price.
Restriction. Each of the Funds will write or purchase an option only when the
market value of that option, when aggregated with the market value of all other
options transactions made on behalf of the Fund, does not exceed 5% of the
Fund's net assets.
The Funds may purchase and sell various kinds of futures contracts and options
on futures contracts. The futures contracts may be based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices. All futures contracts entered into by
the Funds are traded on U.S. exchanges or boards of trade that the CFTC licenses
and regulates on foreign exchanges. The Funds are not permitted to engage in
speculative futures trading.
Futures Contracts. A futures contract generally may be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed-upon price during a designated month. In the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading
in the contract, the parties may agree to deliver the final cash settlement
price.
When interest rates are rising or securities prices are falling, the Funds may
seek, through the sale of futures contracts, to offset a decline in the value of
their current portfolio securities. When rates are falling or prices are rising,
the Funds, through the purchase of futures contracts, may attempt to secure
better rates or prices than might later be available in the market when they
effect anticipated purchases. Similarly, the International Fund may sell futures
contracts on a specified currency to protect against a decline in the value of
that currency and their portfolio securities that are denominated in that
currency. The International Fund may purchase futures contracts on a foreign
currency to fix the price in U.S. dollars of a security denominated in that
currency that the International Fund has acquired or expects to acquire.
Although futures contracts, by their terms, generally call for the actual
delivery or acquisition of underlying securities or the cash value of the index,
in most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take such delivery. The contractual
obligation is offset by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities or the cash value of
the index underlying the contractual obligations. The Funds may incur brokerage
fees when they purchase or sell futures contracts.
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<PAGE> 41
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions, which may result in a profit
or a loss. While the Funds' futures contracts on securities or currency will
usually be liquidated in this manner, the Funds may instead make or take
delivery of the underlying securities or currency whenever it appears
economically advantageous for them to do so. A clearing corporation associated
with the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
Options on Futures Contracts. The acquisition of put and call options on futures
contracts will give the Funds the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, the Funds obtain the benefit of the futures position if
prices move in a favorable direction but limit their risk of loss in the event
of an unfavorable price movement to the loss of the premium and transaction
costs.
The writing of a call option on a futures contract generates a premium that may
partially offset a decline in the value of the Funds' assets. By writing a call
option, the Funds become obligated, in exchange for the premium, to sell a
futures contract that may have a value lower than the exercise price. Thus, the
loss incurred by the Funds in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. The Funds will
incur transaction costs in connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that these closing transactions can be effected. The Funds'
ability to establish and close out positions on these options will be subject to
the development and maintenance of a liquid market.
Hedging Strategies With Futures. Hedging by use of futures contracts seeks to
establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that the Funds own or propose to acquire. Such futures
contracts may include contracts for the future delivery of securities held by
the Funds or securities with characteristics similar to those of the Funds'
portfolio securities. Similarly, the International Fund sells futures contracts
on currency in which its portfolio securities are denominated or in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency if there is an established historical pattern of correlation
between the two currencies. If, in the opinion of the Investment Manager, there
is a sufficient degree of correlation between price trends for the Funds'
portfolio securities and futures contracts based on other financial instruments,
securities indices or other indices, the Funds may enter into such futures
contracts as part of their hedging strategy. Although, under some circumstances,
prices of securities in the Funds' portfolio may be more or less volatile than
prices of such futures contracts, the Investment Manager will attempt to
estimate the extent of this difference in volatility based on historical
patterns. The Investment Manager will attempt to compensate for it by having the
Funds enter into a greater or lesser number of futures contracts or by
attempting to achieve only a particular hedge against price changes affecting
the Funds' portfolio securities. When hedging of this character is successful,
any depreciation in the value of the portfolio securities will be substantially
offset by appreciation in the value of the futures position. On the other hand,
any unanticipated appreciation in the value of the Funds' portfolio securities
will be substantially offset by a decline in the value of the futures position.
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On other occasions, the Funds may take "long" positions by purchasing such
futures contracts. This may be done when the Funds anticipate the subsequent
purchase of particular securities when they have the necessary cash but expect
the prices or currency exchange rates available on the intended date of purchase
in the applicable market to be less favorable than prices that are currently
available.
When buying or selling futures contracts, a Fund must deposit an amount of cash,
cash equivalents or liquid, high-quality debt instruments with its broker equal
to a fraction of the contract amount. This amount is known as "initial margin"
and is in the nature of a performance bond or good faith deposit on the
contract, which will be returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. Subsequent
payments to and from the broker, known as "variation margin," will be made at
least daily as the price of the futures contract fluctuates and the Fund's
position in the contract becomes more or less valuable. This process is known as
"marking-to-market."
Regulations of the Commodities Futures Trading Commission ("CFTC") applicable to
the Funds generally require that all of their futures transactions constitute
"bona fide" hedging transactions. As a result, a Fund will normally sell futures
contracts to protect against a decrease in the price of securities it owns but
intends to sell or purchase futures contracts to protect against an increase in
the price of securities it intends to purchase. In addition, the Funds may
purchase and sell futures contracts and options as a substitute for a comparable
market position in the underlying securities. Futures transactions need not
constitute "bona fide" hedging under CFTC regulations if the aggregate initial
margin and premiums required to establish such positions do not exceed 5% of
each Fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and options
transactions involve risks, which in some strategies can be substantial due to
the low margin deposits required and the extremely high degree of leverage
involved in futures and options trading. However, to the extent the Funds'
futures and options practices are limited to hedging purposes, the Investment
Manager does not believe that the Funds are subject to the degree of risk
frequently associated with futures and options transactions. To the extent the
Funds engage in the use of futures and options on futures other than for hedging
purposes, the Funds may be subject to additional risk.
The primary risks associated with the use of futures and options include:
imperfect correlation between the change in market value of the securities held
by a Fund and the prices of the futures or options, possible lack of a liquid
secondary market for futures or options, and the resulting inability to close
such positions prior to their maturity dates. To minimize these risks, the Funds
will invest only in those contracts whose behavior is expected to resemble that
of a Fund's underlying securities. The Funds will attempt to minimize the risks
being unable to close out futures positions by entering into these transactions
on a national exchange with an active and liquid secondary market.
Three principal areas of risk are present when futures and options contracts are
used even in a hedging context. First, there may not always be a liquid
secondary market for a futures or option contract at the time a Fund seeks to
"close out" its position. If a Fund is unable to "close out" a futures or option
position and prices move adversely, the Fund would have to continue to make
daily cash payments to maintain its required margin. If the Fund had
insufficient cash to meet this requirement, it would have to sell portfolio
securities at a disadvantageous time. In addition, the Fund might be required to
deliver the securities underlying futures or options contracts it holds. Each
Fund will seek to reduce the risk that it will be unable to "close out"
contracts by entering into only futures or options contracts that are traded on
national exchanges and for which there appears to be a liquid secondary market.
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It is also possible that changes in the prices of futures or options contracts
might correlate imperfectly, or not at all, with changes in the market values of
the securities being hedged. This situation could result from price distortions
in the futures or options markets due to, among other things, active trading by
speculators and use of offsetting "closing" transactions by other investors
seeking to avoid meeting additional margin deposit requirements. In the event of
significant market distortions, it is possible that a Fund could lose money on
futures or options contracts and experience appreciation in the value of its
portfolio securities, or vice versa.
Finally, adverse market movements could cause a Fund to lose up to its full
investment in an options contract and/or to experience substantial losses on an
investment in a futures contract. However, barring such significant market
distortions, a similar result could be expected were the Fund to invest directly
in the securities being hedged. There is also the risk of loss by a Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in a futures contract or option.
Restrictions. The value of all futures contracts on stocks and stock indices and
options contracts is not to exceed 10% of the Small-Cap Fund's and the
International Fund's total assets. Each Fund may enter into futures contracts
and options on futures contracts provided that aggregate deposits required do
not exceed 5% of its 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.
Index participations and index participation contracts provide the equivalent of
a position in the securities comprising an index, with each security's
representation equaling its index weighting. Moreover, their holders are
entitled to payments equal to the dividends paid by the underlying index
securities . Generally, the value of an index participation or index
participation contract will rise and fall along with the value of the related
index. A Fund will invest in equity index participations and index participation
contracts only if a liquid market for them appears to exist.
Restriction. The Schwab 1000 Fund(R) may not invest more than 5% of its total
assets in equity index participations.
The extent to which each Fund may purchase and sell futures, options, equity
index participations and index participation contracts may be limited by each
Fund's intention to meet Code requirements for qualification as a regulated
investment company. Read the "Taxes" section in this Statement of Additional
Information (SAI) for more information." An underlying fund's investment in such
instruments may similarly be restricted by Code requirements.
ILLIQUID SECURITIES. Investments that cannot be sold or disposed of in the
normal course of business at their approximate value will be considered
illiquid. The Investment Manager determines the liquidity of a Fund's
investments under the supervision and direction of the Board of Trustees.
Investments currently considered illiquid are repurchase agreements not maturing
within seven days and some restricted securities.
INDEXED SECURITIES. The International Fund may purchase securities whose prices
are indexed to the prices of other securities, securities, indexes, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities are typically debt securities or deposits whose value at maturity or
interest rate paid is determined by reference to a specified instrument.
Restriction. Each Fund will not purchase indexed securities, if as a result,
more that 5% of net assets would be invested in these securities.
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INTERNATIONAL INVESTMENTS. The International Fund will invest primarily in
foreign securities. International investing involves certain special
considerations, which are typically not associated with investing in U.S.
issuers. Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries. Foreign companies are not subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies. In addition,
there may be less publicly available information about foreign companies.
Foreign securities typically have less volume, and are generally less liquid and
more volatile than securities of U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the International Fund endeavors to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of foreign securities exchanges, brokers,
dealers and listed companies than in the United States, thus increasing the risk
of delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. There may be difficulties in obtaining or enforcing
judgments against foreign issuers as well. These factors and others may increase
the risks with respect to the liquidity of the International Fund's portfolio,
and the Fund's ability to meet a large number of shareholder redemption
requests.
Foreign markets also have different clearance and settlement procedures, and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of the International Fund is uninvested and no
return is earned thereon. The inability to make intended security purchases due
to settlement problems could cause the International Fund to miss attractive
investment opportunities. Losses to the International Fund arising out of the
inability to fulfill a contract to sell such securities could result in
potential liability to the Fund.
Investments in the securities of foreign issuers are usually made and held in
foreign currencies. In addition, the International Fund may hold cash in foreign
currencies. These investments may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, and may cause a
Fund to incur costs in connection with conversions between various currencies.
The rate of exchange between the U.S. dollar and other currencies is determined
by the forces of supply and demand in the foreign exchange market as well as by
political and economic factors. Changes in the foreign currency exchange rates
also may affect the value of dividends and interest earned, gains and losses
realized on the sale of securities, and net investment income and gains, if any,
to be distributed to shareholders by the International Fund.
In addition, conditions within and around foreign countries, such as the
possibility of expropriation or confiscatory taxation, political or social
instability, diplomatic developments, change of government or war, could affect
the value of foreign investments. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the recent incorporation of the British
Crown Colony of Hong Kong into the People's Republic of China. Shareholders
should note that the risks discussed above may increase depending on political
and economic developments.
Securities that are acquired by the International Fund outside the United States
and that are publicly-traded in the United States on a foreign securities
exchange or in a foreign securities market, are not considered by the Fund to be
illiquid assets provided that: (i) the Fund acquires and holds the securities
with the intention
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of reselling the securities in the foreign trading market, (ii) the Fund
reasonably believes it can dispose of the securities readily in the foreign
trading market or for cash in the United States, or (iii) foreign market and
current market quotations are readily available. Investments in foreign
securities where delivery takes place outside the United States will have to be
made in compliance with any applicable U.S. and foreign currency restrictions
and tax laws (including laws imposing withholding taxes on any dividend or
interest income) and laws limiting the amount and types of foreign investments.
LENDING AND DIRECT DEBT. Direct debt instruments represent ownership interests
in the debt of a company, government or other entity. Lending of securities is a
common practice in the securities industry. The Funds will engage in security
lending arrangements with the primary objective of increasing the Funds' income
through investment of the cash collateral in short-term, interest-bearing
obligations but will do so only to the extent that the Funds will not lose the
tax treatment available to regulated investment companies. The Funds will be
entitled to all dividends or interest on any loaned securities. Loans of
securities involve a risk that the borrower may fail to return the securities or
provide additional collateral. The Funds may loan securities to qualified
broker-dealers or other institutional investors provided: (i) the loan is
secured continuously by collateral consisting of U.S. Government securities,
letters of credit cash or cash equivalents maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (ii) the Fund may at any time call the loan and obtain
the return of the securities loaned; (iii) the Fund will receive any interest or
dividends paid on the loaned securities; and (iv) the aggregate market value of
securities loaned will not at any time exceed one-third of the total assets of
the Fund.
MORTGAGE-BACKED SECURITIES represent an interest in an underlying pool of
mortgages. Issuers of these securities include agencies and instrumentalities of
the U.S. Government, such as the Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association, and private entities, such as banks. The
income paid on mortgage-backed securities depends upon the income received from
the underlying pool of mortgages. These securities are subject to interest rate
risk, like other debt securities, in addition to prepayment risk.
Mortgage-backed securities include collateralized mortgage obligations,
mortgage-backed bonds and stripped mortgage-backed securities.
MONEY MARKET SECURITIES are high-quality, short-term securities that may be
issued by entities such as the U.S. Government, corporations and financial
institutions (like banks).
PRECIOUS METAL-RELATED INVESTMENTS. Prices of precious metals can be expected to
respond to changes in rates of inflation and to perceptions of economic and
political instability. Historically, the prices of precious metals and of
securities of companies engaged in the precious metal-related activities have
been subject to extreme fluctuations, as a result of, among other reasons, wider
economic or political instability. The S&P 500 Fund may invest in common stocks
of domestic companies principally engaged in precious metal-related activities,
which include companies principally engaged in the extraction, processing,
distribution or marketing of precious metals, if, at the time of investment, the
Investment Manager considers that at least 50% of the company's assets, revenues
or profits are derived from the precious metal industry.
The S&P 500 Fund also may invest in futures on precious metals, such as gold
futures, and options thereon. Such investments are subject to the investment
limitations on investments in futures and options for the S&P 500 Fund as set
forth in the "Futures Contracts and Options on Futures Contracts" section of the
SAI.
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PREFERRED STOCK. The Funds may invest in preferred stock. Preferred stock has
priority over common stock as to income and generally as to assets of an issuer;
however, income is usually limited to a definitive percentage regardless of the
issuer's earnings. Preferred stock usually has limited voting rights.
Restriction. Each Fund will not purchase preferred stocks, if as a result, it
would have more than 5% of net assets in such securities.
REAL ESTATE-RELATED INVESTMENTS. Real estate-related instruments include real
estate investment trusts, commercial and residential mortgage-backed securities
and real estate financings. Real estate-related instruments are sensitive to
factors such as changes in real estate values and property taxes, interest
rates, cash flow of underlying real estate assets, overbuilding, and the
management skill and creditworthiness of the issuer. Real estate-related
instruments also may be affected by certain tax and regulatory requirements,
such as those relating to the environment.
REPURCHASE AGREEMENTS. Repurchase agreements are instruments under which a buyer
acquires ownership of a security from a seller who agrees to repurchase the
security at a mutually agreed upon time and price (which price is higher than
the purchase price), thereby determining the yield during the buyer's holding
period. Under the 1940 Act, a repurchase agreement is deemed to be a Fund's loan
of money to the seller, collateralized by the underlying security. The interest
rate is effective for the period of time in which the Funds are invested in the
agreement and is not related to the coupon rate on the underlying security. Any
repurchase agreements a Fund enters into will involve the Fund as the buyer and
banks or broker-dealers as sellers (repurchase agreements with broker-dealers
will be limited to obligations of the U.S. Government or its agencies or
instrumentalities). The period of these repurchase agreements will be usually
short--from overnight to one week--and at no time will the Funds invest in
repurchase agreements for more than one year. However, securities subject to
repurchase agreements may have maturity dates in excess of one year from the
effective date of the repurchase agreements. The transaction requires the
initial collateralization of the seller's obligation with securities having a
market value, including accrued interest, equal to at least 102% of the dollar
amount the Funds invest with the value marked-to-market daily to maintain 100%
coverage. A default by the seller might cause the Funds to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Funds might also incur disposition costs in liquidating the collateral. The
Funds will make payment for such securities only upon physical delivery or
evidence of book entry transfer to the account of its custodian bank.
Restriction. The Funds may not enter into a repurchase agreement of more than
seven days duration if, as a result, the market value of the Funds' net assets,
together with investments in other securities deemed to be not readily
marketable, would be invested in excess of the Funds' policy on investments in
illiquid securities.
In the event of a bankruptcy or other default of a repurchase agreement's
seller, a Fund might incur expenses in enforcing its rights, and could
experience losses, including a decline in the value of the underlying securities
and loss of income.
Restriction. Each Fund will not invest more than 10% of its net assets at the
time of purchase in repurchase agreements maturing in more than seven days and
other illiquid securities.
RESTRICTED SECURITIES. Restricted securities are securities that are subject to
legal restrictions on their sale. Restricted securities may be considered to be
liquid if a liquid institutional or other market exists for these securities. In
making this determination, the Investment Manager, under the direction of the
Board of Trustees, will take into account the following factors: (i) the
frequency of trades and quotes for the security;
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(ii) the number of dealers willing to purchase or sell the security and the
number of potential purchasers; (iii) dealer undertakings to make a market in
the security; and (iv) the nature of the security and marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). To the extent the Funds invest in restricted
securities that are deemed liquid, the general level of illiquidity in the
Funds' portfolios may be increased if qualified institutional buyers become
uninterested in purchasing these securities contracts.
SECURITIES OF OTHER INVESTMENT COMPANIES. Each Fund may buy shares of other
investment companies, including those managed by its Investment Manager. Because
other investment companies employ investment adviser and other service
providers, investments by a Fund may cause shareholders to pay duplicative fees.
Restriction. No more than 10% of a Fund's total assets may be invested in other
investment companies, and an investment in any one investment company will be
limited to 5% of a Fund's total assets.
STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately from each other. While the risks associated with
stripped securities are similar to other securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
SWAP AGREEMENTS are an exchange of one security or asset for another. A swap may
be entered into in order to change the maturity of a Fund's portfolio or to
protect a Fund's value from changes in interest rates. By entering into a swap
agreement, a Fund is exposed to the risk that the counter party will not fulfill
its obligations.
U.S. GOVERNMENT SECURITIES are debt securities issued by the U.S. Treasury or
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities. U.S. Treasury securities are backed by the full faith and
credit of the United States. Not all U.S. Government securities are backed by
the full faith and credit of the United States. Some U.S. Government
securities are supported by a line of credit the issuing entity has with the
U.S. Treasury. Others are supported solely by the credit of the issuing
agency or instrumentality. Of course U.S. Government securities are among
the safest securities, but they are still subject to interest rate changes
which may affect their yields.
WARRANTS. The Funds may invest in warrants, which are options to purchase equity
securities at specific prices valid for a specific period of time. The prices do
not necessarily move parallel to the prices of the underlying securities.
Warrants have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer. If a warrant is not exercised within the
specified time period, it will become worthless and a Fund will lose the
purchase price and the right to purchase the underlying security.
Restriction. Each Fund will not purchase warrants, if as a result, it would
have invested more than 5% of net assets in such securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Funds may hold securities on a
"when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, a Fund will not pay for securities until the Fund receives
them. Securities purchased on a when-issued or delayed delivery basis are
recorded as assets. During the period between the agreement date and the
settlement date, the value of such securities may change as the
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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.
INVESTMENT RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and cannot be
changed without approval of the holders of a majority of the outstanding voting
securities (as defined in the 1940 Act).
THE INTERNATIONAL FUND, THE SMALL-CAP FUND AND THE S&P 500 FUND MAY NOT:
1) As to 75% of its assets, purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities or investments in other registered investment companies) if,
as a result, more than 5% of the value of its total assets would be invested in
the securities of such issuer.
2) Purchase securities (other than securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a result of such
purchase, 25% or more of the value of its total assets would be invested in any
industry (except that each Fund may purchase securities under such circumstances
only to the extent that its Index is also so concentrated).
3) Invest more than 10% of its net assets in illiquid securities,
including repurchase agreements with maturities in excess of seven day.
4) Purchase or retain securities of an issuer if any of the officers,
Trustees or Directors of the Trust or the Investment Manager individually own
beneficially more than 1/2 of 1% of the securities of such issuer and together
beneficially own more than 5% of the securities of such issuer.
5) Purchase or sell commodities, commodity contracts or real estate,
including interests in real estate limited partnerships, provided that each Fund
may (i) purchase securities of companies that deal in real estate or interests
therein, (ii) purchase or sell futures contracts, options contracts, equity
index participations and index participation contracts, and (iii) for the S&P
500 Fund, purchase securities of companies that deal in precious metals or
interests therein.
6) Invest for the purpose of exercising control or management of another
issuer.
7) Purchase securities of other investment companies, except as permitted
by the 1940 Act, including any exemptive relief granted by the SEC.
8) Lend money to any person, except that each Fund may (i) purchase a
portion of an issue of short-term debt securities or similar obligations
(including repurchase agreements) that are distributed publicly or customarily
purchased by institutional investors, and (ii) lend its portfolio securities.
9) Borrow money or issue senior securities, except that each Fund may
borrow from banks as a temporary measure to satisfy redemption requests or for
extraordinary or emergency purposes and then only in an amount not to exceed
one-third of the value of its total assets (including the amount borrowed),
provided that each Fund will not purchase securities while borrowings represent
more than 5% of its total assets.
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10) Pledge, mortgage or hypothecate any of its assets, except that, to
secure allowable borrowings, each Fund may do so with respect to no more than
one-third of the value of its total assets.
11) Underwrite securities issued by others, except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of securities from its investment portfolio.
In addition to Investment Restrictions numbered 4, 6, 8, 10, and 11 above, the
Schwab 1000 Fund(R) has the following additional fundamental policies.
THE SCHWAB 1000 FUND(R) MAY NOT:
1) As to 75% of its assets, purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of such issuer.
2) Purchase securities (other then securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a result or such
purchase, 25% or more of the value of its total assets would be invested in any
industry (except, to the extent that the Schwab 1000 Index(R) is also so
concentrated). Securities issued by governments or political subdivisions or
authorities of governments are not considered to be securities subject to this
concentration restriction.
3) Invest more than 10% of the total value of its assets in illiquid
securities, including repurchase agreements with maturities in excess of seven
days.
4) Purchase or sell commodities or real estate, including interests in
real estate limited partnerships, provided that the Fund may (i) purchase
securities of companies that deal in real estate or interests therein, and (ii)
purchase or sell futures contracts, options contracts, equity index
participations and index participation contracts.
5) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
6) Borrow money except from banks as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes and then only in
an amount not to exceed one-third of the value of its total assets (including
the amount borrowed), provided that the Fund will not purchase securities while
borrowings represent more than 5% of its total assets.
With respect to the fundamental restriction regarding illiquid securities,
the Fund not calculate its 10% of total assets limit so that it may invest more
than 15% of net assets in illiquid securities.
The Small-Cap Fund has the following additional fundamental limitation.
THE SMALL-CAP FUND will invest at least 65% of its total assets in common
stocks, or other equity securities including preferred stocks, rights and
warrants.
The International Fund has the following additional fundamental limitation.
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THE INTERNATIONAL FUND will invest at least 65% of its total assets in common
stocks and other equity securities including preferred stocks, rights and
warrants of companies located in at least three countries other than the United
States.
In order to permit the sale of shares of each Fund in certain jurisdictions,
each Fund may make commitments more restrictive than the fundamental operating
restrictions described above. Should it do so and later determine that any such
commitment is no longer in the best interests of the Fund and its shareholders,
it will revoke the commitment(s) by terminating sales of its shares in the
jurisdiction(s) involved.
The following restrictions are non-fundamental and may be changed by the Trust's
Board of Trustees.
EACH FUND MAY NOT:
a) Purchase more than 10% of any class of securities of any issuer if, as
a result of such purchase, it would own more than 10% of such issuer's
outstanding voting securities.
b) Invest more than 5% of its net assets in warrants, valued at the lower
of cost or market, and no more than 40% of this 5% may be invested in warrants
that are not listed on the New York Stock Exchange or the American Stock
Exchange, provided, however, that for purposes of this restriction, warrants
acquired by a Fund in units or attached to other securities are deemed to be
without value.
c) Purchase puts, calls, straddles, spreads or any combination thereof if
by reason of such purchase the value of its aggregate investment in such
securities would exceed 5% of the Fund's net assets.
d) Make short sales, except for short sales against the box.
e) Purchase or sell interests in oil, gas or other mineral development
programs or leases, although it may invest in companies that own or invest in
such interests or leases.
f) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities.
The Schwab 1000(R) Fund has the following additional non-fundamental investment
limitations.
THE SCHWAB 1000(R) FUND MAY NOT:
i) Invest more than 5% of its total assets in securities of issuers (other
that obligations of, guaranteed by the U.S. Government, its agencies or
instrumentalities) that, with their predecessors, have a record of less than
three years continuous operation.
ii) Purchase securities that would cause more that 5% of its net assets to
be invested in restricted securities, excluding restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 that have been
determined to be liquid under procedures adopted by the Trust's Board of
Trustees based upon the trading markets for the securities.
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ORGANIZATION AND MANAGEMENT OF THE TRUSTS
Each Fund, except the Schwab 1000 Fund(R), is a series of Schwab Capital Trust
(a Trust), an open-end investment management company organized as a
Massachusetts business trust on May 7, 1993. The Schwab 1000 Fund(R) is a series
of Schwab Investments (a Trust), an open-end investment management company
organized as a Massachusetts business trust on October 26, 1990. Each Trust is
authorized to issue and unlimited number of shares of beneficial interests in
one or more series or classes of series (funds and/or classes of funds).
Currently, Schwab Investments offers the following series: Schwab 1000 Fund(R),
Schwab Total Bond Market Index Fund, Schwab Short-Term Bond Market Index Fund,
Schwab Short/Intermediate Tax-Free Bond Fund, Schwab Long-Term Tax-Free Bond
Fund, Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund. Currently, Schwab Capital Trust offers
the following series: S&P 500 Fund, International Fund, Small-Cap Fund,
Analytics Fund, Schwab Asset Director(R)- High Growth Fund, Schwab Asset
Director(R)- Balanced Fund, Schwab Asset Director(R)- Conservative Fund, Schwab
OneSource(R) Portfolios- Growth Allocation Fund, Schwab OneSource(R) Portfolios-
Balanced Allocation Fund, Schwab OneSource(R) Portfolios- International Fund,
and Schwab OneSource(R) Portfolios- Small Company Fund.
The Trusts generally are not required to hold shareholder meetings. However,
shareholder meetings will be held in connection with the following matters: (1)
election or removal of Trustees if a meeting is requested in writing by a
shareholder or shareholders who beneficially own(s) 10% or more of the Trust's
shares; (2) adoption of any contract for which shareholder approval is required
by the 1940 Act; (3) any termination of the Trust to the extent and as provided
in the Declaration of Trust; (4) any amendment of the Declaration of Trust
(other than amendments changing the name of the Trust or any of its investment
portfolios, supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision thereof); (5)
determining whether a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the shareholders, to the same extent as the stockholders of a Massachusetts
business corporation; and (6) such additional matters as may be required by law,
the Declaration of Trust, the Bylaws or any registration of the Trust with the
SEC or any state or as the Board of Trustees may consider desirable. The
shareholders also would vote upon changes to a Fund's fundamental investment
objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing Trustees and until the election and qualification of his
or her successor or until death, resignation, retirement or removal by a
majority vote of the shares entitled to vote (as described below) or of a
majority of the Trustees. In accordance with the 1940 Act, (i) the Trust will
hold a shareholder meeting for the election of Trustees when less than a
majority of the Trustees have been elected by shareholders and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
Trustees have been elected by the shareholders, that vacancy will be filled by a
vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such for at
least six months and who hold shares constituting at least 1% of a Trust's
outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more Trustees, each Trust has undertaken
to disseminate appropriate materials at the expense of the requesting
shareholders.
The Bylaws of each Trust provide that a majority of shares entitled to vote
shall be a quorum for the transaction of business at a shareholders' meeting,
except that where any provision of law, of the Declaration of Trust or of the
Bylaws permits or requires that (i) holders of any series shall vote as a
series,
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<PAGE> 52
then a majority of the aggregate number of shares of that series entitled to
vote shall be necessary to constitute a quorum for the transaction of business
by that series, or (ii) holders of any class shall vote as a class, then a
majority of the aggregate number of shares of that class entitled to vote shall
be necessary to constitute a quorum for the transaction of business by that
class. Any lesser number shall be sufficient for adjournments. Any adjourned
session or sessions may be held, within a reasonable time after the date set for
the original meeting, without the necessity of further notice. The Declaration
of Trust of each Trust specifically authorizes the Board of Trustees to
terminate the Trust (or any of its investment portfolios) by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the Trust solely by reason of being or having been a shareholder. Moreover,
the Trust will be covered by insurance which the Trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
Trust itself is unable to meet its obligations. There is a remote possibility
that a Fund could become liable for a misstatement in the prospectus or SAI
about another Fund.
For further information, please refer to the registration statement and exhibits
for the Trust on file with the SEC in Washington, D.C. and available upon
payment of a copying fee. The statements in the Prospectus and this Statement of
Additional Information concerning the contents of contracts or other documents,
copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
PRINCIPAL HOLDERS OF SECURITIES
As of December 19, 1997, the officers and Trustees of the Trust, as a group
owned of record or beneficially less than 1% of the outstanding voting
securities of the remaining classes and series of Schwab Capital Trust and
Schwab Investments.
As of December 19, 1997, the Charles Schwab Trust Company, 101 Montgomery
Street, San Francisco, California, 94104 directly or beneficially owned,
respectively, 7.21%, 12.01% and 10.30% of S&P 500 Fund Investor Shares, Select
Shares and e.Shares. As of this same date, the Morgan Stanley Trust Company, 1
Pierrepont Plaza, Brooklyn , New York, 11201, directly or beneficially owned
19.92% of International Fund - Investor Shares and 15.40% of Small-Cap Fund -
Investor Shares.
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<PAGE> 53
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The Officers and Trustees of the Trust, their principal
occupations over the past five years and their affiliations, if any, with The
Charles Schwab Corporation, Schwab and Charles Schwab Investment Management,
Inc., the Investment Manager, are as follows:
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
CHARLES R. SCHWAB* Chairman and Chairman, Co-Chief Executive
July 29, 1937 Trustee Officer and Director, The
Charles Schwab Corporation;
Chairman, Chief Executive Officer
and Director, Charles Schwab
Holdings, Inc.; Chairman and
Director, Charles Schwab & Co.,
Inc, Charles Schwab Investment
Management, Inc., The Charles
Schwab Trust Company, and Schwab
Retirement Plan Services, Inc.;
Chairman and Director (current
board positions), and Chairman
(officer position) until December
1995, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of
The Charles Schwab
Corporation);Director, The Gap,
Inc. (a clothing retailer),
Transamerica Corporation (a
financial services organization),
AirTouch Communications (a
telecommunications company) and
Siebel Systems (a software
company).
TOM D. SEIP Executive Vice President, The
February 15, 1950 Charles Schwab Corporation;
Enterprise President -
International and Mutual Funds,
Charles Schwab & Co., Inc.;
Chief Executive Officer, Charles
Schwab Investment Management, Inc.
DONALD F. DORWARD Trustee Executive Vice President and
September 23, 1931 Managing Director, Grey
Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief
Executive Officer, Dorward &
Associates. Dorward & Associates is
an advertising and marketing/
consulting firm.
- --------------------
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<PAGE> 54
ROBERT G. HOLMES Trustee Chairman, Chief Executive
May 15, 1931 Officer and Director, Semloh
Financial, Inc. Semloh
Financial is an international
financial services and
investment advisory firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens
June 28, 1938 & Co. (investment banking).
Prior to 1995, Mr. Stephens was
Chairman and Chief Executive
Officer of North American Trust (a
real estate investment trust).
Prior to 1992, Mr. Stephens was
Chairman and Chief Executive
Officer of the Bank of San
Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive
August 18, 1943 Officer and Director, Wilsey
Bennett, Inc. (truck and air
transportation, real estate
investment and management, and
investments).
TAI-CHIN TUNG Treasurer and Vice President - Finance,
March 7, 1951 Principal Charles Schwab & Co., Inc.;
Financial Officer Controller, Charles Schwab
Investment Management, Inc.
From 1994 to 1996, Ms. Tung was
Controller for Robertson
Stephens Investment Management,
Inc. From 1993 to 1994, she was
Vice President of Fund
Accounting, Capital Research and
Management Co. Prior to 1993,
Ms. Tung was Senior Vice
President of the Sierra Funds
and Chief Operating Officer of
Great Western Financial
Securities.
WILLIAM J. KLIPP* Executive Vice Executive Vice President,
December 9, 1955 President, Chief SchwabFunds(R), Charles Schwab &
Operating Co., Inc.; President and Chief
Officer and Operating Officer, Charles
Trustee Schwab Investment Management,
Inc. Prior to 1993, Mr. Klipp
was Treasurer of Charles Schwab
& Co., Inc. and Mayer &
Schweitzer, Inc.
STEPHEN B. WARD Senior Vice Senior Vice President and Chief
President Investment
- ---------------
* This Trustee is an "interested person" of the Trust.
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<PAGE> 55
April 5, 1955 and Chief Officer, Charles Schwab
Investment Investment Management, Inc.
Officer
FRANCES COLE Secretary Vice President, Chief Counsel,
September 9, 1955 Chief Compliance Officer and
Assistant Corporate Secretary,
Charles Schwab Investment
Management, Inc.
DAVID H. LUI Assistant Vice President and Senior
October 14, 1960 Secretary Counsel, Charles Schwab
Investment Management, Inc.
From 1991 to 1992, he was
Assistant Secretary for the
Franklin Group of Mutual Funds
and Assistant Corporate Counsel
for Franklin Resources, Inc.
KAREN L. SEAMAN Assistant Corporate Counsel, Charles
February 27, 1968 Secretary Schwab Investment Management,
Inc. From October 1994 to July
1996, she was an Attorney for
Franklin Resources, Inc. Prior
to 1994, Ms. Seaman was an
Attorney for The Benham Group.
MATTHEW O'TOOLE Assistant Corporate Counsel, Charles
September 26, 1964 Secretary Schwab Investment Management,
Inc. From November 1995 to
April 1997, Mr. O'Toole was
Assistant General Counsel for
Chancellor LGT Asset Management,
Inc. Prior there to, Mr.
O'Toole was Senior Counsel at
the U.S. Securities and Exchange
Commission in Washington, D.C.
AMY L. MAUK Assistant Corporate Counsel, Charles
January 5, 1969 Secretary Schwab Investment Management,
Inc. From April 1995 to March
1997, she was a Legal Product
Manager for Fidelity Investments.
Each of the above-referenced Officers and/or Trustees also serves in the same
capacity as described for the Trust for The Charles Schwab Family of Funds,
Schwab Capital Trust and Schwab Annuity Portfolios. The address of each
individual listed above is 101 Montgomery Street, San Francisco, California
94104.
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<PAGE> 56
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Pension or
Retirement Estimated
Aggregate Aggregate Benefits Accrued Annual Benefits Total
Compensation Compensation as Part of Fund upon Retirement Compensation
Name of Person, from Schwab from Schwab Expenses from the from the Fund from the Fund
Position Capital Trust Investments Fund Complex 2 Complex 2 Complex 2
- -------- ------------- ----------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Tom D. Seip, 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice
President, Chief
Operating Officer and
Trustee
Donald F. Dorward, $18,800 $18,800 N/A N/A $92,000
Trustee
Robert G. Holmes, $18,800 $18,800 N/A N/A $92,000
Trustee
Donald R. Stephens, $18,800 $18,800 N/A N/A $92,000
Trustee
Michael W. Wilsey, $18,000 $18,800 N/A N/A $92,000
Trustee
</TABLE>
1 Figures are for each Trust's fiscal year ended October 31, 1997.
2 "Fund Complex" comprises all 33 funds of the Schwab Capital Trust, The
Charles Schwab Family of Funds, Schwab Investments and Schwab Annuity
Portfolios.
DEFERRED COMPENSATION PLAN
Pursuant to exemptive relief from the SEC, the Trusts may enter into deferred
fee arrangements (the "Fee Deferral Plan" or the "Plan") with Trustees who are
not "interested persons" of any of the Funds (the "Independent Trustees" or the
"Trustees").
As of the date of this SAI, none of the Independent Trustees has elected to
participate in the Fee Deferral Plan. In the event an Independent Trustee does
elect to participate in the Plan, the Plan would operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book reserve
account established by the Trust (the "Deferred Fee Account") as of the date
such fees would have been paid to such Trustee. The value of the Deferred Fee
Account as of any date will be equal to the value the Account would have had as
of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the Schwab
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<PAGE> 57
fund or SchwabFunds(R) selected by the participating Trustee (the "Selected
Schwab fund Securities"). SchwabFunds include the series or classes of
beneficial interest of the Trust, The Charles Schwab Family of Funds and Schwab
Investments.
Pursuant to the exemptive relief from the SEC, each Fund will purchase and
maintain the Selected Schwab fund Securities in an amount equal to the deemed
investments in that Fund of the Deferred Fee Accounts of the Independent
Trustees. The exemptive relief granted to the Trust permits the Funds and the
Trustees to purchase the Selected Schwab fund Securities, which transactions
would otherwise be limited or prohibited by the investment policies and/or
restrictions of the Funds. See "Investment Restrictions in this SAI for more
information."
MANAGEMENT OF THE FUNDS
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to Investment Advisory and Administration Agreements (the "Advisory Agreements")
between it and each Trust. The Investment Manager is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended, and currently
provides investment management services to the SchwabFunds Family(R), a family
of 30 mutual funds with over $55 billion in assets as of November 28, 1997. The
Investment Manager is an affiliate of: Schwab, the Trusts' distributor, the
shareholder services, and the transfer agent. Each Advisory Agreement will
continue in effect until May 30, 1998 with respect to each of the Funds and
thereafter will continue for one year terms subject to annual approval by: (1)
the Board of Trustees or (2) a vote of a majority (as defined in the 1940 Act)
of the outstanding voting securities of a Fund. In either event, the continuance
also must be approved by a majority of the Board of Trustees who are not parties
to the Agreement or interested persons (as defined in the 1940 Act) of any such
party by vote cast in person at a meeting called for the purpose of voting on
such approval. Each Advisory Agreement may be terminated at any time upon 60
days' notice by either party, or by a majority vote of the outstanding shares of
a Fund, and will terminate automatically upon assignment.
International Fund. For its advisory and administrative services to the
International Fund, the Investment Manager is entitled to receive a graduated
annual fee, payable monthly, of 0.70% of the Fund's average daily net assets not
in excess of $300 million and 0.60% of such assets over $300 million.
The Investment Manager and Schwab have guaranteed that, through at least
February 29, 2000, the total fund operating expenses allocable to the Investor
Shares and Select Shares for the International Fund will not exceed 0.58% and
0.47%, respectively, of the average daily net assets of each class of shares.
For the fiscal years ended October 31, 1997, 1996 and 1995, the International
Fund paid investment advisory fees of $643,000, $886,000, and $665,000,
respectively (fees were reduced by $1,503,000, $675,000, and $415,000,
respectively).
Small-Cap Fund. For its advisory and administrative services to the Small-Cap
Fund, the Investment Manager is entitled to receive a graduated annual fee,
payable monthly, of 0.50% of the Fund's average daily net assets not in excess
of $300 million and 0.45% of such assets over $300 million.
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<PAGE> 58
The Investment Manager and Schwab have guaranteed that, through at least
February 29, 2000, the total fund operating expenses allocable to the Investor
Shares and Select Shares for the Small-Cap Fund will not exceed 0.49% and 0.38%,
respectively, the average daily net assets of each class of shares.
For the fiscal years ended October 31, 1997, 1996, and 1995, the Small-Cap Fund
paid investment advisory fees of $540,000, $520,000, and $332,000, respectively
(fees were reduced by $1,000,000, $347,000, and $115,000, respectively).
Schwab 1000 Fund(R). For its advisory and administrative services to the Schwab
1000 Fund(R), the Investment Manager is entitled to receive a graduated annual
fee, payable monthly, of 0.30% of the Fund's average daily net assets not in
excess of $500 million and 0.22% of such assets over $500 million.
The Investment Manager and Schwab have guaranteed that, through at least
February 29, 2000, the total fund operating expenses allocable to the Investor
Shares and Select Shares for the Schwab 1000 Fund(R) will not exceed 0.46% and
0.35%, respectively, of the Fund's average daily net assets.
For the fiscal year ended August 31, 1997, 1996 and 1995, the Schwab 1000
Fund(R) paid investment advisory fees of $4,025,000, $2,485,000 and $1,640,000,
(fees were reduced by $1,179,000, 648,000 and $137,000, respectively) and for
the fiscal period ended October 31, 1997 $967,000 (fees were reduced by
$220,000).
S&P 500 Fund. For its advisory and administrative services to the S&P 500 Fund,
the Investment Manager is entitled to receive a graduated annual fee, payable
monthly, of 0.36% of the Fund's average daily net assets not in excess of $1
billion, 0.33% of the next $1 billion and 0.31% of such net assets over $2
billion.
The Investment Manager and Schwab have guaranteed that, through at least
February 29, 2000, the total operating expenses allocable to the Investor
Shares, the e.Shares(R) and the Select Shares(R) will not exceed 0.35%, 0.28%
and 0.19% respectively, of the average daily net assets of each class of shares.
For the fiscal year ended October 31, 1997 and for the fiscal period of May 1,
1996 (commencement of operations) to October 31, 1996, the S&P 500 Fund paid
investment advisory fees of $429,000 and $128,000, respectively (fees were
reduced by $2,410,000 and $723,000 respectively).
From time to time, each Fund may compare its total operating expense ratio to
the total operating expense ratio of other mutual funds or mutual fund averages
with similar investment objectives as reported by Lipper Analytical Service,
Inc., Morningstar, Inc. or other independent sources of such information
("independent sources").
SUB-ADVISER
As of May 1, 1995, June 1, 1995 and June 30, 1995, Dimensional Fund Advisors
Inc. ("Dimensional") no longer served as the sub-adviser to the Small-Cap Fund,
Schwab 1000 Fund(R) and International Fund, respectively. As of the same dates,
the Investment Manager became responsible for providing all investment advisory
services to the Funds.
Under the Sub-Advisory Agreement between Dimensional and the Investment Manager
in effect in 1995, the Investment Manager paid Dimensional $143,000, $36,000 and
$436,034 for International Fund, Small-Cap Fund and Schwab 1000 Fund(R),
respectively.
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<PAGE> 59
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of the Funds and is the Trusts' agent for the purpose of the continuous
offering of the Funds' shares. Each Fund pays the cost of the prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective investors and for supplementary sales
literature and advertising. Schwab receives no fee under the Distribution
Agreement. Terms of continuation, termination and assignment under the
Distribution Agreement are identical to those described above with respect to
the Advisory Agreement.
CUSTODIAN AND FUND ACCOUNTANT
Morgan Stanley Trust Company, 1 Pierrepont Plaza, Brooklyn, New York 11201, and
Federated Services Company, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222,
serve as Custodian and Fund Accountant for the Funds, except the S&P 500 Fund.
For this Fund, PNC Bank, 400 Bellvue Parkway, Wilmington, Delaware 19809 serves
as custodian; and PFPC, Inc., 103 Bellvue Parkway, Wilmington Delaware 19809
serves as Fund Accountant.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the Funds, the Investment Manager seeks
to obtain best price and execution. Subject to the supervision of the Board of
Trustees, the Investment Manager will generally select brokers and dealers for
the Funds primarily on the basis of the quality and reliability of brokerage
services, including execution capability and financial responsibility. In
assessing these criteria, the Investment Manager will, among other things,
monitor the performance of brokers effecting transactions for the Funds to
determine the effect, if any, the Funds' transactions through those brokers have
on the market prices of the stocks involved. This may be of particular
importance for the Funds' investments in relatively smaller companies whose
stocks are not as actively traded as those of their larger counterparts. The
Funds will seek to buy and sell securities in a manner that causes the least
possible fluctuation in the prices of those stocks in view of the size of the
transactions.
In an attempt to obtain best execution for the Funds, the Investment Manager
also may place orders directly with market makers or with third market brokers,
Instinet or brokers on an agency basis. Placing orders with third market brokers
or through Instinet may enable the Funds to trade directly with other
institutional holders on a net basis. At times, this may allow the Funds to
trade larger blocks than would be possible trading through a single market
maker.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources also may be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
In determining when and to what extent to use Schwab or any other affiliated
broker-dealer as its broker for executing orders for the Funds on securities
exchanges, the Investment Manager will consider (if relevant) whether the
compensation to be paid Schwab or any other affiliated broker-dealer will be (i)
fair and
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<PAGE> 60
reasonable, (ii) at least as favorable to the Funds as commissions that would be
charged by other qualified brokers having comparable execution capabilities and
(iii) at least as favorable as commissions contemporaneously charged by Schwab
or any other affiliated broker-dealer on comparable transactions for its most
favored unaffiliated customers. The Funds do not consider it practicable or in
the best interests of their shareholders to solicit competitive bids for
commission rates on each transaction. However, the Board of Trustees, including
a majority of the Trustees who are not "interested persons" of Schwab or any
other affiliated broker-dealer within the meaning of the 1940 Act, (i) has
prescribed procedures designed to provide that the Funds do not pay commissions
that do not meet the standards described above, (ii) reviews those procedures
annually to determine whether they remain adequate and (iii) considers quarterly
whether or not the commissions charged by Schwab or any other affiliated
broker-dealer have met the standards.
Brokerage services Schwab provides to the Funds are also subject to Rule
11a2-2(T) under the Securities Exchange Act of 1934, as amended. Rule 11a2-2(T)
permits the Funds to use Schwab as a broker provided certain conditions are met.
Among these requirements are that members of the exchange not associated with
Schwab perform the floor brokerage element of portfolio transactions (that is,
execution on the exchange floor or through use of exchange facilities) that the
orders to such members be transmitted from off the exchange floor and that
neither Schwab nor an associated person of Schwab participates in the execution
of the transaction after the order has been so transmitted. In connection with
transactions in which Schwab acts as broker for the Funds, Schwab, while not
permitted to perform floor brokerage (which is undertaken by members Schwab
selects who are not associated with that firm), still continues to bear
principal responsibility for determining important elements of overall execution
such as timing and order size, and also clears and settles such transactions.
Schwab pays the fees charged by those persons performing the described floor
brokerage elements. Schwab will not trade directly with the Funds in any
transactions in which Schwab or an affiliate acts as principal.
For the fiscal year ended October 31, 1997, S&P 500 Fund paid brokerage
commissions of $583,314 and for the fiscal year period of May 1, 1996
(commencement of operations) through October 31, 1995 the Fund paid brokerage
commissions of $119,350.
For the fiscal years ended October 31, 1996, 1995 and 1994, the International
Fund paid brokerage commissions of $86,632, $101,230, and $54,718, respectively.
For the fiscal years ended August 31, 1997, 1996 and 1995, the Schwab 1000
Fund(R) paid brokerage commissions of $424,652, $408,000 and $118,000 and for
the fiscal period ended October 31, 1997 $92,582.
For the fiscal years ended October 31, 1997, 1996 and 1995, the Small-Cap Fund
paid brokerage commissions of $281,321, $181,679,and $142,785, respectively.
Of brokerage commissions paid by the Schwab 1000 Fund(R) in 1996, $1,000 (0.25%
of the total amount) was paid to Schwab, an affiliated person of the Fund and
0.54% of transactions involving the payment of a brokerage commission in 1996
were effected through Schwab.
PORTFOLIO TURNOVER
For reporting purposes, each Fund's turnover rate is calculated by dividing the
value of purchases or sales of portfolio securities for the fiscal year,
whichever is less, by the monthly average value of portfolio securities
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<PAGE> 61
the Fund owned during the fiscal year. When making the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded.
A 100% portfolio turnover rate would occur, for example, if all portfolio
securities (aside from short-term securities) were sold and either repurchased
or replaced once during the fiscal year. The Funds expect that their portfolio
turnover rate will not exceed 100% in any given year, a turnover rate lower than
that of most non-index mutual funds.
The International Fund's portfolio turnover rate for the fiscal years ended
October 31, 1997 and 1996 was 13% and 6%, respectively.
The Small-Cap Fund's portfolio turnover rate for the fiscal years ended October
31, 1997 and 1996 was 23% and 23%, respectively.
The S&P 500 Fund's portfolio turnover rate for the fiscal year ended October 31,
1997 was 3% and for the period of May 1, 1996 (commencement of operations) to
October 31, 1996 was 1%.
The Schwab 1000 Fund(R)'s portfolio turnover rate for the fiscal years ended
August 31, 1997 and 1996 was 2% and 2%, respectively. The portfolio turnover
rate for the period of August 31, 1997 to October 31, 1997 was 0%.
From time to time, each Fund may compare its portfolio turnover rate with that
of other mutual funds as reported by independent sources.
TAXES
It is each Fund's policy to qualify for taxation as a "regulated investment
company" by meeting the requirements of Subchapter M of the Code. By following
this policy, each Fund expects to eliminate or reduce to a nominal amount the
federal income tax to which it is subject.
In order to qualify as a regulated investment company, each of the Funds must,
among other things, (1) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks, securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
for taxable years beginning on or before August 5, 1997, derive less than 30% of
its gross income from gains from the sale or other disposition of certain assets
(including stocks and securities) held less than three months; and (3) diversify
its holdings so that at the end of each quarter of its taxable year (i) at least
50% of the market value of the Fund's total assets is represented by cash or
cash items, U.S. Government securities, securities of other regulated investment
companies and other securities limited, in respect of any one issuer, to a value
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. Government securities or securities of any other regulated investment
company) or of two or more issuers that the Fund controls, within the meaning of
the Code, and that are engaged in the same, similar or related trades or
businesses.
These requirements may restrict the degree to which a Fund may engage in certain
hedging transactions and may limit the range of a Fund's investments. If a Fund
qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if
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<PAGE> 62
any, which it distributes to shareholders, provided that the Fund meets certain
minimum distribution requirements. To comply with these requirements, a Fund
must distribute at least (a) 90% of its "investment company taxable income" (as
that term is defined in the Code) and (b) 90% of the excess of its (i)
tax-exempt interest income over (ii) certain deductions attributable to that
income (with certain exceptions), for its taxable year. Each Fund intends to
make sufficient distributions to shareholders to meet these requirements.
The Code imposes a non-deductible excise tax on regulated investment companies
that do not distribute in a calendar year (regardless of whether they otherwise
have a non-calendar taxable year) an amount equal to 98% of their "ordinary
income" (as defined in the Code) for the calendar year plus 98% of their capital
gain net income for the one year period ending on October 31 of such calendar
year. The balance of such income must be distributed during the next calendar
year. For the foregoing purposes, a Fund is treated as having distributed any
amount on which it is subject to income tax for any taxable year ending in such
calendar year. If the distributions during a calendar year were less than the
required amount, the Fund is subject to a non-deductible excise tax equal to 4%
of the deficiency.
INCOME TAX INFORMATION
Any dividends declared by the Funds in October, November or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder on
December 31 of the year in which they were declared.
Dividends the Funds pay from net investment income and distributions from the
Funds' net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, will generally 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 be taxable as long-term capital gains without regard
to the length of time a shareholder owned shares in the Funds. However, if a
shareholder receives a long-term capital gain distribution with respect to
Funds' shares held for six months or less, any loss on the sale or exchange of
those shares shall, to the extent of the long-term capital gain distribution, be
treated as a long-term capital loss. For corporate investors in the Funds,
dividend distributions the Funds designate to be from dividends received from
qualifying domestic corporations will be eligible for the 70% corporate
dividends-received deduction to the extent they would qualify if the Funds were
regular corporations. If a shareholder is not subject to income tax, generally
the shareholder will not be taxed on amounts distributed by the Funds.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." This "backup withholding" is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S.
tax liability.
The foregoing discussion relates only to federal income tax law as applicable to
U.S. citizens or residents. Foreign shareholders (i.e., nonresident alien
individuals and foreign corporations, partnerships, trusts and estates) are
generally subject to U.S. withholding tax at the rate of 30% (or a lower tax
treaty rate) on distributions derived from net investment income and short-term
capital gains. Distributions to foreign shareholders of long-term capital gains
and any gains from the sale or other disposition of shares of the Funds are
generally not subject to U.S. taxation, unless the recipient is an individual
who meets the Code's
29
<PAGE> 63
definition of "resident alien." Different tax consequences may result if the
foreign shareholder is engaged in a trade or business within the United States.
In addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described above.
Distributions by a Fund also may be subject to state, local and foreign taxes,
and its treatment under applicable tax laws may differ from the federal income
tax treatment.
Income that the International Fund receives from sources within various foreign
countries may be subject to foreign income taxes withheld at the source. If a
Fund has at least 50% of its assets invested in foreign securities at the end of
its taxable year, it may elect to pass through to its shareholders the ability
to take either the foreign tax credit or the deduction for foreign titles. It is
expected that the International Fund will have more than 50% of the value of its
total assets at the close of its taxable year invested in foreign securities,
and it will make this election. Pursuant to this election, U.S. shareholders
must include in gross income, even though not actually received, their
respective pro rata share of foreign taxes, and may either deduct their pro rata
share of foreign taxes (but not for alternative minimum tax purposes) or credit
the tax against U.S. income taxes, subject to certain limitations described in
the Code (but not both). A shareholder who does not itemize deductions may not
claim a deduction for foreign taxes.
The International Fund may invest in a non-U.S. corporation which could be
treated as a passive foreign investment company ("PFIC") or become a PFIC under
the Code. This could result in adverse tax consequences upon the disposition of,
or the receipt of "excess distributions" with respect to, such equity
investments. To the extent the International Fund does invest in PFICs, they may
elect to treat the PFIC as a "qualified fund" or mark-to-marked its investments
in PFICs annually. In either case, the International Fund may be required to
distribute amounts in excess of realized income and gains. To the extent that
the International Fund does invest in foreign securities which are determined to
be PFIC securities and are required to pay a tax on such investments, a credit
for this tax would not be allowed to be passed through to the Fund's
shareholders. Therefore, the payment of this tax would reduce the International
Fund's economic return from their PFIC shares, and excess distributions received
with respect to such shares are treated as ordinary income rather than capital
gains.
A Fund's transactions in futures contracts, forward contracts, foreign currency
transactions, options and certain other investment and hedging activities are
subject to special tax rules. In a given case, these rules may accelerate income
to a Fund, defer its losses, cause adjustments in the holding periods of the
Fund's assets, convert short-term capital losses into long-term capital losses
or otherwise affect the character of the Fund's income. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. The Funds will endeavor to make any available elections pertaining
to these transactions in a manner believed to be in the best interest of the
Funds and their shareholders.
The discussion of federal income taxation presented above only summarizes some
of the important federal tax considerations generally affecting purchasers of
Fund shares. No attempt has been made to present a detailed explanation of the
federal income tax treatment of a Fund and its shareholders, and the discussion
is not intended as a substitute for careful tax planning. Accordingly,
prospective investors (particularly those not residing or domiciled in the
United States) should consult their own tax advisers regarding the consequences
of investing in a Fund.
TAX EFFICIENCY
Taxes can erode the returns a shareholder earns from a mutual fund investment
and are an important, and often overlooked, factor when evaluating a mutual
fund's performance. For many mutual funds, shareholder tax liability is of
minimal concern in the investment management process. In contrast, the
30
<PAGE> 64
Investment Manager of the Funds actively employs specific investment policies
designed to minimize realized capital gain distributions. These policies include
selling the highest tax cost securities first, not rebalancing the portfolio to
reflect changes in their indexes and trading only round-lots or large blocks of
securities. In order to minimize capital gain distributions, while achieving
each Fund's investment objective, the Investment Manager focuses on individual
tax lots in deciding when and how to manage the realization of net capital
gains. These policies will be utilized only to the extent they do not have a
material effect on each Fund's ability to track or match the performance of its
index. By deferring the realization of capital gains, where possible, until an
investor sells shares, those unrealized gains can accumulate in a Fund, helping
to build the value of a shareholder's investment. In addition, shareholders are
given greater control over the timing of the recognition of such gains and the
impact on their tax situations. The Investment Manager constantly monitors,
analyzes and evaluates the portfolio as well as market conditions to carefully
manage necessary trading activity and to determine when there are opportunities
to harvest capital losses, which can then be used to offset realized capital
gains. Through the use of these and other strategies, the Investment Manager
seeks to minimize current capital gains distributions to an extent not found in
most mutual funds. There can be no assurance that the Investment Manager will
succeed in avoiding realized net capital gains.
In addition, each Fund has adopted a number of policies that should cause its
portfolio turnover rate to be below the portfolio turnover rate of many other
mutual funds. A lower portfolio turnover rate acts to minimize associated
transaction costs as well as the level of realized capital gains. By avoiding,
where possible, distributing capital gains to shareholders, the Funds help to
build the value of a shareholders' shares and defer payment of capital gains
taxes until shares are redeemed. A shareholder's current tax liability for
capital gains should be reduced and the shareholder's total return increased by
these policies.
Each Fund may, from time to time, refer to recent studies that analyze certain
techniques and strategies the Funds may use. In addition, each Fund may, from
time to time, promote the advantages of investing in a series that is part of a
large, diverse mutual fund complex.
SHARE PRICE CALCULATION
Each Fund's net asset value per share (NAV) is determined each Business Day at
the close of trading on the New York Stock Exchange (NYSE), generally as of 4:00
p.m. Eastern time. The NAV of the International Fund is expressed in U.S.
dollars by translating the Fund's assets using the mean price for the U.S.
dollar as quoted by generally recognized, reliable sources. The NYSE may change
its holiday closing schedule at anytime, but, currently, the NYSE is scheduled
to close on the following holidays: New Year's Day, Dr. Martin Luther King Jr.'s
Day (observed), Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Shares purchased begin to earn
dividends on the next business day with the following exceptions: Columbus Day
and Veterans Day.
The Funds value their portfolio securities daily based on their fair value.
Securities traded on stock exchanges are valued at the last quoted sales price
on the exchange on which such securities are primarily traded, or, lacking any
sales, at the mean between the bid and ask prices. Securities traded in the
over-the-counter market are valued at the last sales price that day, or if no
sales that day, at the mean between the bid and ask prices. In addition,
securities that are primarily traded on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective exchanges
with these values then translated into U.S. dollars at the current exchange
rate. Foreign securities for which the closing values are not readily available
are valued at fair value as determined in good faith pursuant to the Board of
Trustees' guidelines. Securities for which market quotations are not readily
available (including
31
<PAGE> 65
restricted securities that are subject to limitations on their sale and illiquid
securities) are valued at fair value as determined in good faith pursuant to
guidelines adopted by the Board of Trustees. Securities may be valued on the
basis of prices provided by pricing services when such prices are believed to
reflect fair market value. The Investment Manager assigns fair values to the
Funds' other investments in good faith under Board of Trustees guidelines. The
Board of Trustees regularly reviews these values.
HOW THE FUNDS REFLECT PERFORMANCE
STANDARDIZED TOTAL RETURN
Average annual total return is determined by calculating the return on a $1,000
investment in a Fund made at the beginning of the period, then calculating the
average annual compounded rate of return that would produce the same investment
return on the $1,000 over the same period. It is reported for periods of 1, 5,
10 years or since commencement of operations for periods not falling on those
intervals. In computing average annual total return, a Fund assumes the
reinvestment of all distributions at net asset value on applicable reinvestment
dates.
<TABLE>
<CAPTION>
Fund (Commencement of One Year ended Five Years ended From Commencement of
Operations) October 31, 1997 October 31, 1997 Operations to October 31, 1997
- --------------------- ---------------- ---------------- ------------------------------
<S> <C> <C> <C>
International Fund -- 10.33% N/A 8.20%
Investor Shares
(9/09/93)
Small-Cap Fund -- 31.03% N/A 16.23%
Investor Shares
(12/03/93)
S&P 500 Fund -- 31.29% N/A 26.75%
Investor Shares
(5/01/96)
S&P 500 Fund -- 31.48% N/A 26.95%
e.Shares (5/01/96)
Schwab 1000 Fund(R) -- 30.84% 18.97% 16.91%
Investor Shares (5/2/91)
</TABLE>
See "Nonstandardized Total Return" below for the aggregate (cumulative) total
return of the Select Shares of the Funds, which have not operated for a full
fiscal year as of October 31, 1997.
NONSTANDARDIZED TOTAL RETURN
Nonstandardized total return for a Fund differs from standardized total return
in that it relates to periods other than the period for standardized total
return and/or that it represents aggregate (rather than average) total return.
In addition, an after-tax total return for each Fund may be calculated by taking
that Fund's standardized or non-standardized total return and subtracting
applicable federal taxes from the portions of each Fund's total return
attributable to capital gain distributions and ordinary income. This after-tax
total return may be compared to that of other mutual funds with similar
investment objectives as reported by independent sources.
32
<PAGE> 66
Each Fund also may report the percentage of that Fund's standardized or
non-standardized total return which would be paid to taxes annually (at the
applicable federal personal income and capital gains tax rates) before
redemption of Fund shares. This proportion may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.
A Fund may also advertise its cumulative total return since inception. This
number is calculated using the same formula that is used for average annual
total return except that, rather than calculating the total return based on a
one-year period, cumulative total return is calculated from commencement of
operations to the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
Name of Fund (Commencement of Operations) Cumulative Total Return
<S> <C>
International Fund - Investor Shares (9/09/93) 38.69%
International Fund - Select Shares (5/19/97) 1.99%
Small-Cap Fund - Investor Shares (12/03/93) 80.26%
Small-Cap Fund - Select Shares (5/19/97) 22.41%
Schwab 1000 Fund(R) - Investor Shares (5/2/91) 79.92%
Schwab 1000 Fund(R) - Select Shares (5/19/97) 11.57%
S&P 500 Fund - Investor Shares (5/01/96) 42.84%
S&P 500 Fund - e.Shares (5/01/96) 43.18%
S&P 500 Fund - Select Shares (5/19/97) 10.43%
</TABLE>
YIELD
A Fund's yield refers to the net investment income generated by a hypothetical
investment in the Fund over a specific 30-day period. This net investment income
is then annualized, which means that the net investment income generated during
the 30-day period is assumed to be generated in each 30-day period over an
annual period, and is shown as a percentage of the investment.
EFFECTIVE YIELD
A Fund's effective yield is calculated similarly, but the net investment income
earned by the investment is assumed to be compounded monthly when annualized.
The effective yield will be slightly higher than the yield due to this
compounding effect.
COMPARING THE PERFORMANCE OF THE FUNDS WITH OTHER FUNDS AND INDICES
The performance of the Funds may be compared with the performance of other
mutual funds by comparing the ratings of mutual fund rating services, various
indices of investment performance, U.S. Government obligations, bank
certificates of deposit, the consumer price index and other investments for
which reliable data is available. For example, the International Fund and the
Small Cap Index Fund may be compared to the Schwab 1000 Index(R), the Schwab
International Index(R), the Schwab Small-Cap Index(R), and the Standard & Poor's
500 Index(R), and the Small Cap Index Fund(R) may also be compared to Standard &
Poor's Small-Cap 600 Index.
From time to time, the Funds may include discussions in advertisements of the
income tax savings shareholders may experience as a result of their policy of
limiting portfolio trading in order to reduce capital gains. This information
may be supplemented by presentations of statistical data illustrating the extent
of such income tax savings and the impact of such savings on the yield and/or
total return of the
33
<PAGE> 67
Funds. In addition, such advertisements may include comparisons of the Funds'
performance against that of investment products that do not employ the Funds'
policy of seeking to limit capital gains.
THE INDEXES AND INDEXING STRATEGIES
Because the unmanaged performance of a broad-based equity index often has proven
superior to that of many individually selected stock portfolios, a growing
percentage of assets invested in the equity markets are being placed in "index"
portfolios. Institutional investors often devote a substantial percentage of
their assets to indexed strategies.
An index typically tracks the performance of a group of securities selected to
represent a particular market, and most often is used to gauge that market's
performance. The Dow Jones Industrial Average ("DJIA") and S&P 500 are two
indices designed to measure the performance of U.S. stocks. When investment
managers invest indexed separate accounts or index fund assets, they attempt to
replicate the performance of the applicable target index by holding all or a
representative sample of the securities included in the index.
An index's performance data assumes the reinvestment of dividends but does not
reflect deductions for administrative and management expenses. The Funds will be
subject to these costs and expenses, while an index does not have these
expenses. In addition, various factors, such as holding a cash balance, may
cause the Funds' performance to be higher or lower than that of an index.
The Funds are intended to make indexed investing easily available to Schwab
customers with the highest level of convenience and economy, thereby
facilitating their ability to participate in the long-term performance of the
U.S. stock market. The Schwab 1000 Index(R), Schwab Small Cap-Index(R) and
Schwab International Index(R) were developed and are maintained by Schwab. They
serve as a comparison for their Fund's performance. Schwab receives no
compensation from the Funds for maintaining the Indexes. The performance (i.e.,
the market value of all Index Stocks) of the Schwab 1000 Index, the Schwab
Small-Cap Index and the Schwab International Index is calculated and made
available each business day by Schwab. The total return of the Schwab 1000
Index, the Schwab Small-Cap Index and The Schwab International Index is computed
monthly (using beginning of month capitalization weightings and assuming
reinvestment of dividends) and may be reported from time to time to each Fund's
shareholders.
Schwab reviews and, as necessary, revises the lists of companies whose
securities are included in the Schwab 1000 Index, the Schwab Small-Cap Index and
the Schwab International Index at least annually. Companies known by Schwab to
meet or no longer meet the inclusion criteria will be added or deleted as
appropriate. Schwab will also modify each index as necessary to account for
corporate actions (e.g., new issues, repurchases, stock dividends/splits,
tenders, mergers, swaps, spin-offs, or Chapter 11 bankruptcy filings made
because of a company's inability to continue operating as a going concern).
Schwab may change the Schwab 1000 Index and the Schwab Small-Cap Index inclusion
criteria if it determines that doing so would cause the Schwab 1000 Index and
the Schwab Small-Cap Index to be more representative of the domestic equity
market. Schwab may also change Schwab International Index inclusion criteria if
it determines that doing so would cause the Schwab International Index to be
more representative of the large, publicly traded international company equity
market. In the future, each Trust's Board of Trustees, subject
to shareholder approval, may select another index should it decide that taking
such action would be in the best interest of a Fund's shareholders.
The difference between a fund's total return and the total return of its
benchmark index is referred to as a fund's tracking error. The Funds may
report or advertise tracking error.
34
<PAGE> 68
INTERNATIONAL INDEX
The International Index is a broad-based international stock index, which
contains the common stocks of 350 of the largest non-U.S. operating companies
(i.e., non-investment companies) within the fifteen countries used to represent
developed markets. For securities to be included in the International Index, a
liquid market must exist for the securities, and the securities must be issued
by an operating company (not an investment company) whose principal trading
market is in a country with a major developed securities markets outside the
United States. In addition, the market value of the securities must place them
among the top 350 such companies as measured by market capitalization. The Fund
may purchase securities of companies with which it is affiliated to the extent
these companies are represented in its Index. By tracking the largest companies
in developed markets, the Index represents the performance of the "blue chips"
of international markets. The Index also is designed to provide a broad
representation of the international market, by limiting each country to no more
than 35% of the total market capitalization of the Index. As the stocks
contained in the Index represent about 35% of the total market capitalization of
international companies, the Index provides a reliable measure of market
performance. The International Index was first made available to the public on
July 29, 1993.
As of October 31, 1997, the aggregate market capitalization of Index Stocks
included in the Schwab International index was approximately $5.362 trillion.
This represents approximately 48% of the total market value of all publicly
traded non-U.S. companies.
SMALL-CAP INDEX
To be included in the Small-Cap Index, a company must satisfy all of the
following criteria: (1) it must be an "operating company" (i.e., not an
investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the New
York Stock Exchange, American Stock Exchange or the NASDAQ/NMS and (3) its
market value must place it among the second 1,000 such companies as measured by
market capitalization (i.e., from the company with a rank of 1,001 through the
company with a rank of 2,000). The Fund may purchase securities of companies
with which it is affiliated to the extent these companies are represented in its
Index. Shareholders generally avoid exposure to the smallest companies, whose
shares are often thinly traded and very volatile, because these stocks are not
included in the Index.
From time to time, the International Index Fund and Small-Cap Fund may compare
the historical performance of the International Index and Small-Cap Index,
respectively, to the historical performance of various other indices, including
the S&P 500, as reported by independent sources.
As of October 31, 1997, the aggregate market capitalization of Index Stocks
included in the Schwab Small-Cap Index was approximately $680 billion. This
represents approximately 6.9% of the total market value of all publicly traded
United States companies, as represented by the Wilshire 5000 Index.
THE S&P 500 INDEX(R)
The S&P 500 is representative of the performance of the U.S. stock market. The
Index consists of 500 stocks chosen for market size, liquidity and industry
group representation. It is a market value weighted index (stock price times
number of shares outstanding), with each stock's weight in the Index
proportionate to its market value. The S&P 500 does not contain the 500 largest
stocks, as measured by market
35
<PAGE> 69
capitalization. Although many of the stocks in the Index are among the largest,
there also are some relatively small companies in the Index. Those companies,
however, generally are established companies within their industry group. S&P
identifies important industry groups within the U.S. economy and then allocates
a representative sample of stocks with each group to the S&P 500. There are four
major industry sectors within the Index: Industrials, Utilities, Financial and
Transportation.
For the 20 years ended 1996, the S&P 500 Index provided on average annual total
return of 14.57% . This total return assumes reinvestment of all dividends paid
by stocks included in the S&P 500 Index, but does not include taxes, brokerage
fees or fees charged by the S&P 500 Fund. (Source: Micropal, December 31, 1996.
Past performance of the S&P 500 Index is not indicative of future results of the
S&P 500 or the S&P 500 Fund.
THE SCHWAB 1000 INDEX(R)
The Schwab 1000 Index is a broad-based stock market index, which contains the
common stocks of the 1,000 largest operating companies (i.e., non-investment
companies) incorporated in the United States. As the stocks contained in the
index represent about 84% of the total market capitalization of all U.S.
companies, as represented by the Wilshire 500 Index, the Schwab 1000 Index
provides a reliable measure of broad market performance and can serve as a
benchmark against which individual investors can compare the performance of
their equity investments. Relative to some indices that primarily track one
group of stocks, and as a result do not capture movements in other areas of the
market, the Schwab 1000 Index(R), because it contains the stocks of the more
established blue-chip companies as well as those of relatively smaller
companies, reflects an expanded breadth of market coverage. This distinction is
important because historically the stocks of smaller companies have
out-performed those of their blue-chip counterparts in some years, while the
reverse has been true in other years. Of course, past performance may not
necessarily be indicative of future results.
As of October 31, 1997, the aggregate market capitalization of Index Stocks
included in the Schwab 1000 Index was approximately $8.153 trillion. This
represents approximately 83.88% of the total market value of all publicly traded
United States companies, as represented by the Wilshire 5000 Index.
To be included in the Schwab 1000 Index, a company must satisfy all of the
following criteria: (1) it must be an "operating company" (i.e., not an
investment company) incorporated in the United States, its territories or
possessions; (2) a liquid market for its common shares must exist on the New
York Stock Exchange, American Stock Exchange or the NASDAQ/NMS and (3) its
market value must place it among the top 1,000 such companies as measured by
market capitalization. The Fund may purchase securities of companies with which
it is affiliated to the extent these companies are represented in its Index.
Charles R. Schwab, a veteran investor, was instrumental in developing the Schwab
1000 Fund(R). The investment objective of the Fund, which is designed to make
indexed investing available with a high level of convenience and economy, is to
match the total return of the Schwab 1000 Index.
From time to time, the Schwab 1000 Fund(R) may compare the historical
performance of the Schwab 1000 Index to the historical performance of various
other indices, including the S&P 500, as reported by independent sources.
A particular stock's weighting in the International Index, Small-Cap Index or
Schwab 1000 Index is based on its relative total market value (i.e., its market
price per share times the number of shares outstanding), divided by the total
market capitalization of its Index.
36
<PAGE> 70
The data reported below is current as of December 1996. The Source for all
information below is Micropal, with the exception of the data for the Schwab
1000 Index (R), which is from Schwab's Mutual Fund Research Group.
The following is a line chart comparing the Schwab 1000 Index, S&P 500 Index,
3-Month CDs, Corporate Bonds, Treasury Bills and Inflation (CPI).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SCHWAB 1000 S&P 500 3-MONTH CD'S CORPORATE TREASURY INFLATION
INDEX INDEX BONDS BILLS (CPI)
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
1979 21.34 18.61 11.22 -2.11 9.81 13.29
- -----------------------------------------------------------------------------------------
1980 61.20 57.16 25.69 -2.39 22.24 27.47
- -----------------------------------------------------------------------------------------
1981 54.95 49.42 45.67 0.49 39.5 38.85
- -----------------------------------------------------------------------------------------
1982 87.60 81.61 63.51 39.88 54.75 44.17
- -----------------------------------------------------------------------------------------
1983 128.48 122.58 78.34 52.85 68.04 49.63
- -----------------------------------------------------------------------------------------
1984 142.83 136.54 96.81 78.25 84.16 55.54
- -----------------------------------------------------------------------------------------
1985 221.19 211.59 112.65 121.18 98.01 61.45
- -----------------------------------------------------------------------------------------
1986 277.88 269.75 126.51 157.76 110 63.22
- -----------------------------------------------------------------------------------------
1987 289.34 289.16 142.04 164.35 122.08 70.46
- -----------------------------------------------------------------------------------------
1988 355.39 353.79 160.74 188.74 137.07 77.99
- -----------------------------------------------------------------------------------------
1989 492.10 497.58 184.42 229.43 156.44 86.26
- -----------------------------------------------------------------------------------------
1990 465.16 479.03 207.59 252.67 175.64 97.64
- -----------------------------------------------------------------------------------------
1991 656.08 655.44 225.54 317.99 190.41 103.69
- -----------------------------------------------------------------------------------------
1992 723.39 712.98 237.52 354.3 200.45 109.6
- -----------------------------------------------------------------------------------------
1993 807.71 794.93 248.27 409.57 209.51 115.36
- -----------------------------------------------------------------------------------------
1994 812.16 806.75 264.5 389.57 222.93 121.12
- -----------------------------------------------------------------------------------------
1995 1153.87 1,147.48 284.46 498.43 240.49 126.74
- -----------------------------------------------------------------------------------------
1996 1430.75 1,433.91 303.19 518.07 257.63 134.27
- -----------------------------------------------------------------------------------------
Source: Micropal. Corporate Bonds are represented by the Lehman Brothers Long-Term Corporate Bond Index.
</TABLE>
PURCHASE AND REDEMPTION OF SHARES
We designed the Funds for long-term investors. You should not use the Funds to
speculate on short-term market movements. Doing so can disrupt our investment
strategy and operations. It also raises costs for other Fund investors. As a
result, we may refuse any purchase or buy exchange order that we deem to be
disruptive to the Funds or their investments.
The Funds and classes have set minimum initial and subsequent investment
requirements, as disclosed in the Prospectus. These minimum investment
requirements may be changed at any time and are not applicable to certain types
of investors. The Trust may waive the minimums for purchases by Trustees,
Directors, officers or employees of the Sub-Adviser.
The Funds have made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of its net assets at the beginning of
such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of applicable limits (as summarized below) may be
paid, in whole or in part, in investment securities or in cash, as the Board of
Trustees may deem advisable. However,
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<PAGE> 71
payment will be made wholly in cash unless the Board of Trustees believes that
economic or market conditions exist that would make such a practice detrimental
to the best interests of the Fund. If redemption proceeds are paid in investment
securities, such securities will be valued as set forth in the "Share Price
Calculation" section of the SAI. A redeeming shareholder would normally incur
brokerage expenses if he or she were to convert the securities to cash.
OTHER INFORMATION
The Prospectus and SAI do not contain all the information included in the
Registration Statement filed with the SEC under the Securities Act of 1933, as
amended, with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
SAI pursuant to the rules and regulations of the SEC. The Registration
Statement, including the exhibits filed therewith, may be examined at the office
of the SEC in Washington, D.C.
Statements contained in the Prospectuses or SAI as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of the contract or other document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference.
FINANCIAL INFORMATION
The Funds' independent accountants, Price Waterhouse LLP, audit and report on
the annual financial statements of each series of the Trusts and review certain
regulatory reports and each Fund's federal income tax return. It also performs
other professional accounting, auditing, tax and advisory services when the
Trusts engage it to do so. Their address is 555 California Street, San
Francisco, California 94104. Each Fund's financial statements and financial
highlights for the fiscal periods ended October 31, 1997, are included in each
Fund's Annual Report, which are separate reports supplied with this SAI.
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN OFFERING BY THE
TRUST, ANY SERIES THEREOF, OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE.
38
<PAGE> 72
PART C
OTHER INFORMATION
DECEMBER 29, 1997
SCHWAB CAPITAL TRUST
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
Financial statements and financial highlights included in the Annual Report for
Schwab S&P 500 Fund for the fiscal year ended October 31, 1997, incorporated by
reference into the SAI, were filed on December 23, 1997, pursuant to Rule 30d-1
under the 1940 Act, and are incorporated herein by reference.
Financial statements and financial highlights included in the Annual Report for
Schwab Small-Cap Index Fund(R) for the fiscal year ended October 31, 1997,
incorporated by reference into the SAI, were filed on December 23, 1997,
pursuant to Rule 30d-1 under the 1940 Act, and are incorporated herein by
reference.
Financial statements and financial highlights included in the Annual Report for
Schwab International Index Fund(R) for the fiscal year ended October 31, 1997,
incorporated by reference into the SAI, were filed on December 23, 1997,
pursuant to Rule 30d-1 under the Investment Company Act of 1940 ("1940 Act"),
and are incorporated herein by reference.
Financial statements and financial highlights included in the Annual Report for
Schwab Asset Director Funds(R) for the fiscal year ended October 31, 1997,
incorporated by reference into the SAI, were filed on December 23, 1997,
pursuant to Rule 30d-1 under the 1940 Act, and are incorporated herein by
reference.
Financial statements and financial highlights included in the Annual Report for
Schwab Analytics Fund(R) for the fiscal year ended October 31, 1997,
incorporated by reference into the SAI, were filed on December 23, 1997,
pursuant to Rule 30d-1 under the 1940 Act, and are incorporated herein by
reference.
Financial statements and financial highlights included in the Annual Report for
Schwab OneSource(R) Portfolios for the fiscal year ended October 31, 1997,
incorporated by reference into the SAI, were filed on December 23, 1997,
pursuant to Rule 30d-1 under the 1940 Act, and are incorporated herein by
reference.
(b) Exhibits:
(1) -- Agreement and Declaration of Trust, dated
May 6, 1993 is incorporated by reference to
Exhibit 1 to Post-Effective
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<PAGE> 73
Amendment No.21 to Registrant's Registration
on Form N-1A, electronically filed on
December 17, 1997.
(2) -- Amended and Restated Bylaws are incorporated
by reference to Exhibit (2) to Post-
Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A,
electronically filed on February 27, 1996.
(3) -- Inapplicable.
(4) (a) -- Article III, Section 5, Article V, Article
VI, Article VIII, Section 4 and Article IX,
Sections 1, 5 and 7 of the Agreement and
Declaration of Trust, dated May 6, 1993,
referenced in Exhibit 1 above, are
incorporated herein by reference to Exhibit
1 electronically filed in Registrant's
Registration Statement on Form N-1A
electronically filed on December 17, 1997.
(b) -- Articles 9 and 11 of the Amended and
Restated Bylaws are incorporated by
reference to Exhibit 2 to Post-Effective
Amendment No. 7 to Registrant's Registration
Statement on Form N-1A, filed on February
27, 1996.
(5) (a) -- Investment Advisory and Administration
Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the
"Investment Manager"), dated June 15, 1994,
is incorporated by reference to Exhibit 5(a)
to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form
N-1A, filed on December 17, 1997.
(b) -- Amended Schedules A and B to Investment
Advisory and Administration Agreement
referred to at Exhibit 5(a) above are
incorporated by reference to Exhibit 5(b) to
Post-Effective Amendment No.21 to
Registrant's Registration Statement on Form
N-1A, electronically filed on December 17,
1997.
(c) -- Investment Sub-Advisory Agreement between
Investment Manager, on behalf of the Schwab
Analytics Fund(TM), and Symphony Asset
Management is incorporated by reference to
Exhibit (5)(d) to Post-Effective Amendment
No. 10 to Registrant's Registration
Statement on Form N-1A, filed on May 17,
1996.
(6) (a) -- Distribution Agreement between Registrant
and Charles Schwab & Co., Inc. ("Schwab"),
dated July 21, 1993, is incorporated by
reference to Exhibit 6(a) to Post-Effective
Amendment No. 21 to Registrant's
Registration Statement on Form N-1A,
electronically filed on December 17, 1997.
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<PAGE> 74
(b) -- Amended Schedule A to the Distribution
Agreement referred to at Exhibit 6(a)
above is incorporated by reference to
Exhibit 6(b) to Post-Effective Amendment
No. 21 to Registrant's Registration
Statement on Form N-1A, electronically
filed on December 17, 1997.
(7) -- Inapplicable.
(8) (a) -- Custodian Agreement between Registrant, on
behalf of the Schwab International Index
Fund(R), Schwab Small-Cap Index Fund(R),
Schwab Asset Director(R)-High Growth Fund,
Schwab Asset Director(R)-Balanced Growth
Fund, Schwab Asset Director(R)-Conservative
Growth Fund, Schwab OneSource
Portfolios-International, Schwab OneSource
Portfolios Growth Allocation and Schwab
OneSource Portfolios Balanced Allocation,
and Morgan Stanley Trust Company, dated
April 4, 1997, is incorporated by reference
to Exhibit 8(a) to Post-Effective Amendment
No. 18 to Registrant's Registration
Statement on Form N-1A, filed on April 14,
1997.
(b) -- Amended Appendix 2 to Custodian Agreement
referred to at Exhibit 8(a) above is
incorporated by reference to Exhibit 8(b) to
Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form
N-1A, electronically filed on December 17,
1997.
(c) -- Amendment to Custodian Agreement referred to
at Exhibit 8(a) above is incorporated by
reference to Exhibit 8(c) to Post-Effective
Amendment No. 21 to Registrant's
Registration on Form N-1A, electronically
filed on December 17, 1997.
(d) -- Accounting Services Agreement between
Registrant, on behalf of the Schwab
International Index Fund(R), Schwab
Small-Cap Index Fund(R), Schwab Asset
Director(R)-High Growth Fund, Schwab Asset
Director(R)-Balanced Growth Fund, Schwab
Asset Director(R)-Conservative Growth Fund,
Schwab OneSource Portfolios-International,
Schwab OneSource Portfolios Growth
Allocation and Schwab OneSource Portfolios
Balanced Allocation and Federated Services
Company is incorporated by reference to
Exhibit 8(b) to Post Effective Amendment No.
18 to Registrant's Registration Statement on
Form N1-A, filed on April 14, 1997.
(e) -- Amended Exhibit 1 to Accounting Services
Agreement referred to at Exhibit 8(d) above
is incorporated by reference to Exhibit 8(e)
to Post-Effective Amendment No. 21 to
Registrant's Registration
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<PAGE> 75
Statement on Form N-1A, electronically filed
on December 17, 1997.
(f) -- Custodian Services Agreement between
Registrant, on behalf of the Schwab S&P 500
Fund, and PNC Bank, National Association
("PNC Bank") is incorporated by reference to
Exhibit 8(c) to Post-Effective Amendment No.
7 to Registrant's Registration Statement on
Form N-1A, filed on February 27, 1996.
(g) -- Amended Schedule to the Custodian Services
Agreement referred to at Exhibit 8(f) above
between Registrant, on behalf of the Schwab
S&P 500 Fund and the Schwab Analytics
Fund(TM), and PNC Bank are incorporated by
reference to Exhibit 8(d) to Post-Effective
Amendment No. 10 to Registrant's
Registration Statement on Form N-1A, filed
on May 17, 1996.
(h) -- Accounting Services Agreement between
Registrant, on behalf of the Schwab S&P 500
Fund, and PFPC Inc. is incorporated by
reference to Exhibit 8(d) to Post-Effective
Amendment No. 7 to Registrant's Registration
Statement on Form N-1A, filed on February
27, 1996.
(i) -- Amended Schedule to the Accounting Services
Agreement referred to at Exhibit 8(h) above
between Registrant, on behalf of the Schwab
S&P 500 Fund and the Schwab Analytics Fund,
and PFPC Inc. is incorporated by reference
to Exhibit 8(f) to Post-Effective Amendment
No. 10 to Registrant's Registration
Statement on Form N-1A, filed on May 17,
1996.
(j) -- Transfer Agency Agreement between Registrant
and Schwab is incorporated by reference to
Exhibit 8(j) to Post-Effective Amendment No.
21 to Registrant's Registration Statement on
Form N-1A, electronically filed on December
17, 1997.
(k) -- Amended Schedules A and C to the Transfer
Agency Agreement referred to at Exhibit 8(i)
above are incorporated by reference to
Exhibit 8(k) to Post-Effective Amendment No.
21 to Registrant's Registration on Form
N-1A, electronically filed on December 17,
1997.
(l) -- Shareholder Service Agreement between
Registrant and Schwab, dated July 21, 1993
is incorporated by reference to Exhibit 8(l)
to Post-Effective Amendment No.21 to
Registrant's Registration on Form N-1A,
electronically filed on December 17, 1997.
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<PAGE> 76
(m) -- Amended Schedules A and C to the Shareholder
Service Agreement between Registrant and
Schwab referred to at Exhibit 8(l) above are
incorporated by reference to Exhibit 8(m) to
Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form
N-1A electronically filed on December 17,
1997.
(9) -- License Agreement between Schwab Capital
Trust, on behalf of Schwab S&P 500 Fund, and
Standard & Poor's is incorporated by
reference to Exhibit 9 to Post-Effective
Amendment No. 10 to Registrant's
Registration Statement on Form N-1A, filed
on May 17, 1996.
(10) -- Opinion of counsel as to the legality
of the securities being registered is
electronically filed herein as Exhibit 10.
(11) (a) -- Consent of Ropes and Gray is electronically
filed herein as Exhibit 11(a).
(b) Consent of Price Waterhouse is
electronically filed herein as Exhibit
11(b).
(12) -- Inapplicable.
(13) (a) -- Purchase Agreement for the Schwab
International Index Fund(R), dated June 17,
1993, is incorporated by reference to
Exhibit 13(a) to Post-Effective Amendment
No.21 to Registrant's Registration on Form
N-1A, electronically filed on December 17,
1997.
(b) -- Purchase Agreement for the Schwab Small-Cap
Index Fund(R), dated October 13, 1993, is
incorporated by reference to Exhibit 13(b)
to Post-Effective Amendment No.21 to
Registrant's Registration on Form N-1A,
electronically filed on December 17, 1997.
(c) -- Purchase Agreement for the Schwab Asset
Director(R) Funds is incorporated by
reference to Exhibit (13)(c) to
Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form
N-1A, filed on December 15, 1995.
(d) -- Purchase Agreement for the Schwab S&P 500
Fund-Investor Shares and e.Shares(TM) is
incorporated by reference to Exhibit (13)(d)
to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form
N-1A, filed on February 27, 1996.
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<PAGE> 77
(e) -- Purchase Agreement for the Schwab Analytics
Fund(TM) is incorporated by reference to
Exhibit (13)(e) to Post-Effective Amendment
No. 13 to Registrant's Registration
Statement on Form N-1A, filed on October 10,
1996.
(f) -- Purchase Agreement for Schwab OneSource(R)
Portfolios-International is incorporated by
reference to Exhibit (13)(f) to
Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form
N-1A, filed on October 10, 1996.
(g) -- Purchase Agreement for Schwab OneSource
Portfolios-Growth Allocation and Schwab
OneSource Portfolios-Balanced Allocation is
incorporated by reference to Exhibit 13(g)
to Post-Effective Amendment No. 14 to
Registration Statement on Form N-1A, filed
on December 18, 1996.
(h) -- Purchase Agreement for Schwab OneSource(R)
Portfolios-Small Company is incorporated by
reference to Exhibit 13(h) to Post-Effective
Amendment No.21 to Registrant's Registration
on Form N-1A, electronically filed on
December 17, 1997.
(14) -- Inapplicable.
(15) -- Inapplicable.
(16) (a) -- Performance calculation for the Schwab
International Index Fund(R), to be filed by
subsequent amendment.
(b) -- Performance calculation for the Schwab
Small-Cap Index Fund(R), dated October 31,
1994, is incorporated by reference to
Exhibit (16)(i) to Post-Effective Amendment
No. 18 to Registration Statement on Form
N-1A, filed on April 14, 1997.
(c) -- Performance calculation for the Schwab Asset
Director(R)-High Growth Fund is incorporated
by reference to Exhibit (16)(c) to
Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A, filed on May 17, 1996.
(d) -- Performance calculation for the Schwab Asset
Director(R)-Balanced Growth Fund is
incorporated by reference to Exhibit (16)(d)
to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
N-1A, filed on May 17, 1996.
(e) -- Performance calculation for the Schwab Asset
Director(R)-Conservative Growth Fund is
incorporated by reference to Exhibit
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<PAGE> 78
(16)(e) to Post-Effective Amendment No. 10
to Registrant's Registration Statement on
Form N-1A, filed on May 17, 1996.
(f) -- Performance calculation for the Schwab S&P
500 Fund is incorporated by reference to
Exhibit (16)(f) to Post-Effective Amendment
No. 13 to Registrant's Registration
Statement on Form N-1A, filed on October 10,
1996.
(g) -- Performance calculation for the Schwab
Analytics Fund(TM)is incorporated by
reference to Exhibit (16)(g) to
Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form
N-1A, filed on December 18, 1996.
(h) -- Performance calculation for the Schwab
OneSource Portfolios - International is
incorporated by reference to Exhibit (16)(h)
to Post-Effective Amendment No.18 to
Registration Statement on Form N1-A, filed
on April 14, 1997.
(i) -- Performance calculation for the Schwab
OneSource(R)Portfolios - Growth Allocation
is incorporated by reference to Exhibit
(16)(i) to Post-Effective Amendment No. 18
to Registration Statement on Form N-1A,
filed on April 14, 1997.
(j) -- Performance calculation for the Schwab
OneSource Portfolios - Balanced Allocation
is incorporated by reference to Exhibit
(16)(j) to Post-Effective Amendment No. 18
to Registration Statement on Form N1-A,
filed on April 14, 1997.
(17) (a) Financial Data Schedules for Schwab S & P
500 Fund is electronically filed herein as
Exhibit 17(a).
(b) Financial Data Schedules for Schwab
International Index Fund is electronically
filed herein as Exhibit 17(b).
(c) Financial Data Schedules for Schwab Small
Cap Index Fund is electronically filed
herein as Exhibit 17(c).
(d) Financial Data Schedule for Schwab Asset
Director-High Growth Fund to be filed by
subsequent amendment.
(e) Financial Data Schedule for Schwab Asset
Director-Balanced Growth Fund to be filed by
subsequent amendment.
(f) Financial Data Schedule for Schwab Asset
Director-Conservative Growth Fund is to be
filed by subsequent amendment.
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<PAGE> 79
(g) Financial Data Schedule for Schwab OneSource
Portfolios-International to be filed by
subsequent amendment.
(h) Financial Data Schedule for Schwab OneSource
Portfolios-Growth Allocation to be filed by
subsequent amendment.
(i) Financial Data Schedule for Schwab OneSource
Portfolios-Balanced Allocation to be filed
by subsequent amendment.
(j) Financial Data Schedule for Schwab OneSource
Portfolios-Small Company to be filed by
subsequent amendment.
(18) (a) -- Amended and Restated Multiple Class Plan,
dated April 10, 1997, for Schwab
International Index Fund, Schwab Small-Cap
Index Fund and Schwab S&P 500 Fund is
incorporated by reference to Post Effective
Amendment 18 to Registrant's Registration
Statement on Form N1-A, filed on April 14,
1997.
Item 25. Persons Controlled by or under Common Control with Registrant.
The Charles Schwab Family of Funds, Schwab Investments and Schwab Annuity
Portfolios each are Massachusetts business trusts registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), are advised by the
Investment Manager, and employ Schwab as their principal underwriter, transfer
agent and shareholder services agent. As a result, The Charles Schwab Family of
Funds, Schwab Investments and Schwab Annuity Portfolios may be deemed to be
under common control with Registrant.
Item 26. Number of Holders of Registrant's Securities.
As of December 19, 1997 the number of record holders of shares of
beneficial interest for the series of Registrant was:
<TABLE>
<CAPTION>
Name of Fund/Class Number of Record Holders
- ----------------------- ------------------------
<S> <C>
Schwab International Index Fund(R)- Investor Shares 1 (for the benefit of 30,548 accounts)
Schwab International Index Fund(R)- Select Shares 1 (for the benefit of 1,061 accounts)
Schwab Small-Cap Index Fund(R)- Investor Shares 1 (for the benefit of 38,086 accounts)
Schwab Small-Cap Index Fund(R)- Select Shares 1 (for the benefit of 1,724 accounts)
Schwab Asset Director(R)-High Growth Fund 1 (for the benefit of 18,507 accounts)
Schwab Asset Director(R)-Balanced Growth Fund 1 (for the benefit of 11,108 accounts)
Schwab Asset Director(R)-Conservative Growth Fund 1 (for the benefit of 3,455 accounts)
</TABLE>
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<PAGE> 80
<TABLE>
<CAPTION>
Name of Fund/Class Number of Record Holders
- ----------------------- ------------------------
<S> <C>
Schwab S&P 500 Fund-Investor Shares 1 (for the benefit of 97,444 accounts)
Schwab S&P 500 Fund-Select Shares 1 (for the benefit of 6,524 accounts)
Schwab S&P 500 Fund-e.Shares(TM) 1 (for the benefit of 6,792 accounts)
Schwab Analytics Fund(TM) 1 (for the benefit of 17,757 accounts)
Schwab OneSource Portfolios-International 1 (for the benefit of 11,458 accounts)
Schwab OneSource Portfolios-Growth Allocation 1 (for the benefit of 15,530 accounts)
Schwab OneSource Portfolios-Balanced Allocation 1 (for the benefit of 7,077 accounts)
Schwab OneSource Portfolios-Small Company 1 (for the benefit of 37,980 accounts)
</TABLE>
Item 27. Indemnification.
Article VIII of Registrant's Agreement and Declaration of Trust (Exhibit
(1) hereto, which is incorporated by reference) provides in effect that
Registrant will indemnify its officers and trustees against all liabilities and
expenses, including but not limited to amounts paid in satisfaction of
judgments, in compromise, or as fines and penalties, and counsel fees reasonably
incurred by any such officer or trustee in connection with the defense or
disposition of any action, suit, or other proceeding. However, in accordance
with Section 17(h) and 17(i) of the 1940 Act and its own terms, said Agreement
and Declaration of Trust does not protect any person against any liability to
Registrant or its shareholders to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office. In any event,
Registrant will comply with 1940 Act Releases No. 7221 and 11330 respecting the
permissible boundaries of indemnification by an investment company of its
officers and trustees.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
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<PAGE> 81
Item 28. Business and Other Connections of Investment Manager.
(a) Information pertaining to business and other connections of
Registrant's Investment Manager is hereby incorporated by reference to the
section of the Prospectuses captioned "Management of the Fund(s)" and to the
section of the Statement of Additional Information captioned "Management of the
Trust."
Registrant's Investment Manager, Charles Schwab Investment
Management, Inc., a Delaware corporation, organized in October 1989 to serve as
Investment Manager to the Schwab Fund Family, also serves as the Investment
Manager to Schwab Capital Trust and Schwab Annuity Portfolios, each an open-end
management investment company. The principal place of business of the Investment
Manager is 101 Montgomery Street, San Francisco, California 94104. The only
business in which the Investment Manager engages is that of investment manager
and administrator to Registrant, Schwab Fund Family, Schwab Capital Trust,
Schwab Annuity Portfolios and any other investment companies that Schwab may
sponsor in the future.
(b) The business, profession, vocation or employment of a
substantial nature in which each director and/or executive officer of Schwab
and/or the Investment Manager is or has been engaged during the past two fiscal
years for his or her own account in the capacity of director, officer, employee,
partner or trustee is as follows:
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------- ------------------------------------- ----------------------------------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Co-Chief
Executive Officer and
Director
Schwab Holdings, Inc. Chairman, Chief Executive
Officer and Director
Charles Schwab Investment Management, Chairman and Director
Inc.
The Charles Schwab Trust Company Chairman and Director
Mayer & Schweitzer, Inc. Chairman and Director
Schwab Retirement Plan Services, Inc. Chairman and Director
Charles Schwab Limited Chairman, Chief Executive
Officer and Director
Performance Technologies, Inc. Chairman and Director
</TABLE>
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<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------- ------------------------------------- ----------------------------------
<S> <C> <C>
TrustMark, Inc. Chairman and Director
Schwab (SIS) Holdings, Inc. I Chairman, Chief Executive
Officer and Director
Schwab International Holdings, Inc. Chairman, Chief Executive
Officer and Director
The Gap, Inc. Director
Transamerica Corporation Director
AirTouch Communications Director
Siebel Systems Director
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February
1995; Vice Chairman until
August 1994
The Charles Schwab Corporation Vice Chairman and
Director; Chief Operating
Officer until March 1994
Mayer & Schweitzer, Inc. Director until February
1995
The Charles Schwab Trust Company Director until December
1996
David S. Pottruck Charles Schwab & Co., Inc. Chief Executive Officer and
Director
The Charles Schwab Corporation President, Co-Chief
Executive Officer, Chief
Operating Officer and
Director
Schwab Holdings, Inc. Director
Schwab Retirement Plan Services, Inc. Director
Charles Schwab Limited Director
</TABLE>
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<PAGE> 83
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------- ------------------------------------- ----------------------------------
<S> <C> <C>
Charles Schwab Investment Management, Director
Inc.
Mayer & Schweitzer, Inc. Director
Performance Technologies, Inc. Director
Schwab (SIS) Holdings, Inc. I President, Chief Operating
Officer and Director
Schwab International Holdings, Inc. President, Chief Operating
Officer and Director
Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman and Director until
January 1996; Senior Executive
Vice President and Chief
Operating Officer until January
1995
The Charles Schwab Corporation Executive Vice President until
January 1996; Senior Executive
Vice President until January 1995
Mayer & Schweitzer, Inc. Director until January 1996
John P. Coghlan Charles Schwab & Co., Inc. Enterprise President
The Charles Schwab Corporation Executive Vice President
The Charles Schwab Trust Company President, Chief Executive
Officer and Director
Schwab Retirement Plan Services, Inc. Director
Dawn G. Lepore Charles Schwab & Co., Inc. Executive Vice President and
Chief Information Officer
The Charles Schwab Corporation Executive Vice President and
Chief Information Officer
</TABLE>
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<PAGE> 84
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------- ------------------------------------- ----------------------------------
<S> <C> <C>
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President
Charles Schwab & Co., Inc. Executive Vice President and
Chief Strategy Officer
Timothy F. McCarthy Charles Schwab & Co., Inc. President and Chief Operating
Officer
The Charles Schwab Corporation Executive Vice President
Jardine Fleming Unit Trusts Ltd. Chief Executive Officer until
October 1995
Fidelity Investment Advisor Group President until 1994
Mayer & Schweitzer, Inc. Director
Gideon Sasson Charles Schwab & Co., Inc. Enterprise President
Beth Sawi The Charles Schwab Corporation Executive Vice President
Charles Schwab & Co., Inc. Executive Vice President until
December 1997
Steven L. Scheid Charles Schwab & Co., Inc. Executive Vice President, Chief
Financial Officer and Director
The Charles Schwab Corporation Executive Vice President and
Chief Financial Officer
Schwab Holdings, Inc. Executive Vice President, Chief
Financial Officer and Director
Charles Schwab Investment Management, Inc. Chief Financial Officer and
Director
The Charles Schwab Trust Company Chief Financial Officer and
Director
Charles Schwab Limited Finance Officer and Director
</TABLE>
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<PAGE> 85
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------- ------------------------------------- ----------------------------------
<S> <C> <C>
Schwab Retirement Plan Services, Inc. Director
Performance Technologies, Inc. Director
Mayer & Schweitzer, Inc. Director
Schwab (SIS) Holdings, Inc. I Chief Financial Officer and
Director
Schwab International Holdings, Inc. Chief Financial Officer and
Director
Tom D. Seip Charles Schwab & Co., Inc. Enterprise President
The Charles Schwab Corporation Executive Vice President
Charles Schwab Investment Management, Inc. Chief Executive Officer
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President and
Chief Administrative Officer
The Charles Schwab Corporation Executive Vice President and
Chief Administrative Officer
Commercial Credit Corporation Managing Director until February
1994
Karen W. Chang Charles Schwab & Co., Inc. Enterprise President
Linnet F. Deily Charles Schwab & Co., Inc. Enterprise President
Lon Gorman Charles Schwab & Co., Inc. Enterprise President
Susanne D. Lyons Charles Schwab & Co., Inc. Enterprise President
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President
Wayne W. Fieldsa Charles Schwab & Co., Inc. Executive Vice President
James M. Hackley Charles Schwab & Co., Inc. Executive Vice President
</TABLE>
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<PAGE> 86
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------- ------------------------------------- ----------------------------------
<S> <C> <C>
Christopher V. Dodds Charles Schwab & Co., Inc. Treasurer and Senior Vice
President
The Charles Schwab Corporation Treasurer and Senior Vice
President
Mayer & Schweitzer, Inc. Treasurer
William J. Klipp, Charles Schwab & Co., Inc. Executive Vice President
Trustee, Executive Vice
President and Chief Operating
Officer
Charles Schwab Investment Management, Inc. President and Chief Operating
Officer
Peter J. McIntosh Charles Schwab & Co., Inc. Executive Vice President
Leonard Short Charles Schwab & Co., Inc. Executive Vice President
Stephen B. Ward, Charles Schwab Investment Management, Inc. Senior Vice President and Chief
Senior Vice President and Investment Officer
Chief Investment Officer
Frances Cole, Charles Schwab Investment Management, Inc. Senior Vice President, Chief
Secretary Counsel, Chief Compliance Officer
and Assistant Corporate Secretary
Tai-Chin Tung, Charles Schwab & Co., Inc. Vice President
Treasurer and Principal
Financial Officer
Charles Schwab Investment Management, Inc. Controller
Robertson Stephens Investment Management, Inc. Controller until 1996
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary
</TABLE>
C-15
<PAGE> 87
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------- ------------------------------------- ----------------------------------
<S> <C> <C>
Charles Schwab & Co., Inc. Assistant Corporate Secretary
Charles Schwab Investment Management, Inc. Corporate Secretary
The Charles Schwab Trust Company Assistant Corporate Secretary
Mayer & Schweitzer Secretary
Mary B. Templeton Charles Schwab Investment Management, Inc. Assistant Corporate Secretary
until September 1997
The Charles Schwab Corporation Senior Vice President, General
Counsel and Corporate Secretary
until September 1997
Charles Schwab & Co., Inc. Senior Vice President, General
Counsel and Corporate Secretary
until September 1997
Mayer & Schweitzer Assistant Corporate Secretary
until September 1997
The Charles Schwab Trust Company Assistant Corporate Secretary
until February 1996 until
September 1997
David H. Lui, Charles Schwab Investment Management, Inc. Vice President and Senior Counsel
Assistant Secretary
Matthew M. O'Toole, Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
Karen L. Seaman, Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
</TABLE>
C-16
<PAGE> 88
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- --------------------- ------------------------------------- ----------------------------------
<S> <C> <C>
Amy L. Mauk Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President
</TABLE>
(c) The following information, which is believed to be accurate, is based upon
information provided by Symphony. The business, profession, vocation or
employment of a substantial nature in which each director and/or officer of
Symphony is or has been engaged during the past two fiscal years for his or her
own account in the capacity of director, officer, employee, partner or trustee
is as follows:
<TABLE>
<CAPTION>
Name Name of Company Capacity
- ----------------------- --------------------------------------- ------------------------------------------
<S> <C> <C>
Andrew T. Rudd Symphony Asset Management, Inc Director and Chairman
Symphony Asset Management, LLC
BARRA, Inc. Director, Chief Executive Officer and
Chairman
Jeffrey L. Skelton Symphony Asset Management, Inc. Director, Chief Executive Officer and
Symphony Asset Management, LLC President
BARRA, Inc. President, BARRA Ventures Div. until 1994
Neil L. Rudolph Symphony Asset Management, Inc. Chief Operating Officer/Chief Compliance
Symphony Asset Management, LLC Officer
Wells Fargo Nikko Investment Advisors Managing Director, Chief Operating
Officer -- Mutual Fund Group until 1994
Praveen K. Gottipalli Symphony Asset Management, Inc. Director of Investments
Symphony Asset Management, LLC
BARRA, Inc. Director of Active Strategies until 1994
Michael J. Henman Symphony Asset Management, Inc. Director of Business Development
Symphony Asset Management, LLC
Wells Fargo Nikko Investment Advisors Managing Director
until 1994
</TABLE>
C-17
<PAGE> 89
Item 29. Principal Underwriter.
(a) Schwab acts as principal underwriter and distributor of Registrant's
shares. Schwab currently also acts as principal underwriter for The Charles
Schwab Family of Funds, Schwab Investments and Schwab Annuity Portfolios, and
intends to act as such for any other investment company which Schwab may sponsor
in the future.
(b) See Item 28(b) for information on the officers and directors of
Schwab. The principal business address of Schwab is 101 Montgomery Street, San
Francisco, California 94104.
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of Registrant (transfer agency and shareholder
records); Registrant's investment manager and administrator, Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's former sub-investment adviser, Dimensional Fund Advisors
Inc., 1299 Ocean Avenue, Suite 1100, Santa Monica, California 90401;
Registrant's sub-investment adviser for the Schwab Analytics Fund(TM) is
Symphony Asset Management, Inc., 555 California Street, Suite 2975, San
Francisco, California 94104; Registrant's principal underwriter, Charles Schwab
& Co., Inc., 101 Montgomery Street, San Francisco, California 94104;
Registrant's custodian and fund accountants, Morgan Stanley Trust Company, 1
Pierrepont Plaza, Brooklyn, New York 11201, and Federated Services Company, 1001
Liberty Avenue, Pittsburgh, Pennsylvania 15222; Registrant's former custodians
and fund accountants, State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02180 and PNC Bank, National Association/PFPC Inc., 400
Bellevue Parkway, Wilmington, Delaware 19809 (ledgers, receipts, and brokerage
orders); or Ropes & Gray, counsel to Registrant, 1301 K Street, N.W., Suite 800
East, Washington, District of Columbia 20005 (minute books, bylaws, and
declaration of trust).
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Registrant undertakes to call a meeting of Shareholders, at the
request of at least 10% of Registrant's outstanding shares, for the purpose of
voting upon the question of removal of a trustee or trustees and to assist in
communications with other Shareholders as required by Section (16) of the 1940
Act.
C-18
<PAGE> 90
(b) Registrant undertakes to furnish to each person to whom a prospectus
is delivered a copy of Registrant's latest Annual Report to Shareholders upon
request and without charge.
C-19
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended, Registrant
certifies that it meets all the requirements for effectiveness of the
Post-Effective Amendment No.22 to Registrant's Registration Statement on Form
N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this
Post-Effective Amendment No. 22 to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Washington, District of Columbia, on
this 29th day of December, 1997.
SCHWAB CAPITAL TRUST
Registrant
Charles R. Schwab*
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 29th day
of December, 1997.
Signature Title
Charles R. Schwab* Chairman and Trustee
- ----------------------------
Charles R. Schwab
Tom D. Seip* President and Trustee
- ----------------------------
Tom D. Seip
William J. Klipp* Executive Vice President,
- ----------------------------
William J. Klipp Chief Operating Officer and Trustee
Donald F. Dorward* Trustee
- ----------------------------
Donald F. Dorward
Robert G. Holmes* Trustee
- ----------------------------
Robert G. Holmes
Donald R. Stephens* Trustee
- ----------------------------
Donald R. Stephens
Michael W. Wilsey* Trustee
- ----------------------------
Michael W. Wilsey
Tai-Chin Tung* Treasurer and Principal Financial Officer
- ----------------------------
Tai-Chin Tung
<PAGE> 92
*By: /s/ Alan G. Priest
- --------------------------------------------------
Alan G. Priest, Attorney-in-Fact pursuant
to Powers of Attorney filed previously
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXH. NO. DOCUMENT
- -------- ---------------------------------------------------------------------------------
<S> <C>
10 Opinion of Counsel
11(a) Consent of Ropes & Gray
11(b) Consent of Price Waterhouse
17(a) Financial Data Schedule for Schwab S & P 500 Fund - Investor Shares
Financial Data Schedule for Schwab S & P 500 Fund - Select Shares
Financial Data Schedule for Schwab S & P 500 Fund - e.Shares
17(b) Financial Data Schedule for Schwab International Index Fund - Investor Shares
Financial Data Schedule for Schwab International Index Fund - Select Shares
17(c) Financial Data Schedule for Schwab Small Cap Index Fund - Investor Shares
Financial Data Schedule for Schwab Small Cap Index Fund - Select Shares
</TABLE>
<PAGE> 1
EXHIBIT 10
[ROPES & GRAY LETTERHEAD]
WRITER'S DIRECT DIAL NUMBER: (202) 626-3925
December 29, 1997
Schwab Capital Trust
c/o Charles Schwab Investment
Management, Inc.
101 Montgomery Street
San Francisco, California 94104
Gentlemen:
You have registered under the Securities Act of 1933, as amended (the
"1933 Act") an indefinite number of shares of beneficial interest ("Shares") of
Schwab Capital Trust ("Trust"), as permitted by Rule 24f-2 under the Investment
Company Act of 1940, as amended (the "1940 Act"). You propose to file a
post-effective amendment on Form N-1A (the "Post-Effective Amendment") to your
Registration Statement as required by Section 10(a)(3) of the 1933 Act and the
Rules thereunder and Section 8(b) of the 1940 Act and the rules thereunder.
We have examined your Agreement and Declaration of Trust on file in the
office of the Secretary of The Commonwealth of Massachusetts and the Clerk of
the City of Boston. We have also examined a copy of your Bylaws and such other
documents, receipts and records as we have deemed necessary for the purpose of
this opinion.
Based upon the foregoing, we are of the opinion that the issue and sale
of the authorized but unissued Shares of the Trust have been duly authorized
under Massachusetts law. Upon the original issue and sale of your authorized but
unissued Shares of the Trust and upon receipt of the authorized consideration
therefor in an amount not less than the net asset value of the Shares of the
Trust established and in force at the time of their sale (plus any applicable
sales charge), the Shares of the Trust issued will be validly issued, fully paid
and non-assessable.
<PAGE> 2
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Agreement and Declaration of Trust provides for indemnification out
of the property of a particular series of shares for all loss and expenses of
any shareholder of that series held personally liable solely by reason of his
being or having been a shareholder. Thus, the risk of shareholder liability is
limited to circumstances in which that series of shares itself would be unable
to meet its obligations.
We understand that this opinion is to be used in connection with the
filing of the Post-Effective Amendment. We consent to the filing of this opinion
with and as part of your Post-Effective Amendment.
Sincerely,
/s/ Ropes & Gray
Ropes & Gray
<PAGE> 1
EXHIBIT 11(a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the caption "Legal Counsel" included in or made a part of
Post-Effective Amendment No. 22 to the Registration Statement of Schwab Capital
Trust on Form N-1A (Nos. 33-62470 and 811-07704) under the Securities Act of
1933, as amended.
/s/ ROPES & GRAY
ROPES & GRAY
Washington, D.C.
December 23, 1997
<PAGE> 1
EXHIBIT 11(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 22 to the registration statement on Form N-1A (the "Registration
Statement") of Schwab Capital Trust of our report dated December 5, 1997,
relating to the financial statements and financial highlights appearing in the
October 31, 1997 Annual Reports to Shareholders of Schwab International Index
Fund, Schwab Small-Cap Index Fund, and Schwab S&P 500 Fund which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectuses and under the heading "Financial Information" in the Statement of
Additional Information.
/s/ Price Waterhouse LLP
San Francisco, California
December 29, 1997
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 061
[NAME] SCHWAB CAPITAL TRUST SCHWAB S&P 500 FUND INVESTOR SHARES
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1997
[PERIOD-END] OCT-31-1997
[INVESTMENTS-AT-COST] 1,403,452
[INVESTMENTS-AT-VALUE] 1,570,454
[RECEIVABLES] 9,578
[ASSETS-OTHER] 122
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,580,154
[PAYABLE-FOR-SECURITIES] 36,209
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 3,502
[TOTAL-LIABILITIES] 39,711
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,365,100
[SHARES-COMMON-STOCK] 65,149
[SHARES-COMMON-PRIOR] 22,404
[ACCUMULATED-NII-CURRENT] 11,074
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (2,733)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 167,022
[NET-ASSETS] 923,148
[DIVIDEND-INCOME] 14,709
[INTEREST-INCOME] 34
[OTHER-INCOME] 0
[EXPENSES-NET] 2,670
[NET-INVESTMENT-INCOME] 12,073
[REALIZED-GAINS-CURRENT] (2,679)
[APPREC-INCREASE-CURRENT] 149,985
[NET-CHANGE-FROM-OPS] 159,380
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 2,361
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 68,380
[NUMBER-OF-SHARES-REDEEMED] 25,827
[SHARES-REINVESTED] 193
[NET-CHANGE-IN-ASSETS] 1,260,340
[ACCUMULATED-NII-PRIOR] 1,860
[ACCUMULATED-GAINS-PRIOR] (54)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,839
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 5,276
[AVERAGE-NET-ASSETS] 565,962
[PER-SHARE-NAV-BEGIN] 10.880
[PER-SHARE-NII] 0.140
[PER-SHARE-GAIN-APPREC] 3.240
[PER-SHARE-DIVIDEND] 0.090
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 14.170
[EXPENSE-RATIO] 0.38
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
<PAGE> 2
[ARTICLE] 6
[SERIES]
[NUMBER] 063
[NAME] SCHWAB CAPITAL TRUST SCHWAB S&P 500 FUND S SHARES
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1997
[PERIOD-END] OCT-31-1997
[INVESTMENTS-AT-COST] 1,403,452
[INVESTMENTS-AT-VALUE] 1,570,454
[RECEIVABLES] 9,578
[ASSETS-OTHER] 122
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,580,154
[PAYABLE-FOR-SECURITIES] 36,209
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 3,502
[TOTAL-LIABILITIES] 39,711
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,365,100
[SHARES-COMMON-STOCK] 34,212
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 11,074
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (2,733)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 167,002
[NET-ASSETS] 485,604
[DIVIDEND-INCOME] 14,709
[INTEREST-INCOME] 34
[OTHER-INCOME] 0
[EXPENSES-NET] 2,670
[NET-INVESTMENT-INCOME] 12,073
[REALIZED-GAINS-CURRENT] (2,679)
[APPREC-INCREASE-CURRENT] 149,985
[NET-CHANGE-FROM-OPS] 159,380
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 39,327
[NUMBER-OF-SHARES-REDEEMED] 5,116
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 1,260,340
[ACCUMULATED-NII-PRIOR] 1,860
[ACCUMULATED-GAINS-PRIOR] (54)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,839
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 5,276
[AVERAGE-NET-ASSETS] 133,367
[PER-SHARE-NAV-BEGIN] 12.850
[PER-SHARE-NII] 0.050
[PER-SHARE-GAIN-APPREC] 1.290
[PER-SHARE-DIVIDEND] 0.000
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 14.190
[EXPENSE-RATIO] 0.19
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
<PAGE> 3
[ARTICLE] 6
[SERIES]
[NUMBER] 062
[NAME] SCHWAB CAPITAL TRUST SCHWAB S&P 500 FUND E SHARES
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1997
[PERIOD-END] OCT-31-1997
[INVESTMENTS-AT-COST] 1,403,452
[INVESTMENTS-AT-VALUE] 1,570,454
[RECEIVABLES] 9,578
[ASSETS-OTHER] 122
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,580,154
[PAYABLE-FOR-SECURITIES] 36,209
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 3,502
[TOTAL-LIABILITIES] 39,711
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,365,100
[SHARES-COMMON-STOCK] 9,283
[SHARES-COMMON-PRIOR] 3,336
[ACCUMULATED-NII-CURRENT] 11,074
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (2,733)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 167,002
[NET-ASSETS] 131,691
[DIVIDEND-INCOME] 14,709
[INTEREST-INCOME] 34
[OTHER-INCOME] 0
[EXPENSES-NET] 2,670
[NET-INVESTMENT-INCOME] 12,073
[REALIZED-GAINS-CURRENT] (2,679)
[APPREC-INCREASE-CURRENT] 149,985
[NET-CHANGE-FROM-OPS] 159,380
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 498
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 14,545
[NUMBER-OF-SHARES-REDEEMED] 8,636
[SHARES-REINVESTED] 38
[NET-CHANGE-IN-ASSETS] 1,260,340
[ACCUMULATED-NII-PRIOR] 1,860
[ACCUMULATED-GAINS-PRIOR] (54)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,839
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 5,276
[AVERAGE-NET-ASSETS] 103,860
[PER-SHARE-NAV-BEGIN] 10.890
[PER-SHARE-NII] 0.210
[PER-SHARE-GAIN-APPREC] 3.190
[PER-SHARE-DIVIDEND] 0.100
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 14.190
[EXPENSE-RATIO] 0.28
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 011
[NAME] SCHWAB CAPITAL TRUST SCHWAB INTERNATIONAL INDEX FUND INVESTOR SHARES
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1997
[PERIOD-END] OCT-31-1997
[INVESTMENTS-AT-COST] 301,968,000
[INVESTMENTS-AT-VALUE] 358,583,000
[RECEIVABLES] 5,850,000
[ASSETS-OTHER] 4,670,000
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 369,103,000
[PAYABLE-FOR-SECURITIES] 1,137,000
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 604,000
[TOTAL-LIABILITIES] 1,741,000
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 310,814,000
[SHARES-COMMON-STOCK] 23,884,000
[SHARES-COMMON-PRIOR] 20,181,000
[ACCUMULATED-NII-CURRENT] 4,052,000
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (4,180,000)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 56,676,000
[NET-ASSETS] 317,833,000
[DIVIDEND-INCOME] 5,882,000
[INTEREST-INCOME] 224,000
[OTHER-INCOME] 0
[EXPENSES-NET] 1,882,000
[NET-INVESTMENT-INCOME] 4,224,000
[REALIZED-GAINS-CURRENT] (1,963,000)
[APPREC-INCREASE-CURRENT] 24,079,000
[NET-CHANGE-FROM-OPS] 26,340,000
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 3,464,000
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 11,009,000
[NUMBER-OF-SHARES-REDEEMED] 7,556,000
[SHARES-REINVESTED] 250,000
[NET-CHANGE-IN-ASSETS] 120,584,000
[ACCUMULATED-NII-PRIOR] 3,292,000
[ACCUMULATED-GAINS-PRIOR] (2,217,000)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,146,000
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3,556,000
[AVERAGE-NET-ASSETS] 297,554,000
[PER-SHARE-NAV-BEGIN] 12.230
[PER-SHARE-NII] 0.170
[PER-SHARE-GAIN-APPREC] 1.080
[PER-SHARE-DIVIDEND] 0.170
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 13.310
[EXPENSE-RATIO] 0.61
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
<PAGE> 2
[ARTICLE] 6
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] OCT-31-1997
[PERIOD-START] MAY-31-1997
[PERIOD-END] OCT-31-1997
[INVESTMENTS-AT-COST] 301,968,000
[INVESTMENTS-AT-VALUE] 358,583,000
[RECEIVABLES] 5,850,000
[ASSETS-OTHER] 4,670,000
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 369,103,000
[PAYABLE-FOR-SECURITIES] 1,137,000
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 604,000
[TOTAL-LIABILITIES] 1,741,000
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 310,814,000
[SHARES-COMMON-STOCK] 3,719,000
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 4,052,000
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (4,180,000)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 56,676,000
[NET-ASSETS] 49,529,000
[DIVIDEND-INCOME] 5,882,000
[INTEREST-INCOME] 224,000
[OTHER-INCOME] 0
[EXPENSES-NET] 1,882,000
[NET-INVESTMENT-INCOME] 4,224,000
[REALIZED-GAINS-CURRENT] (1,963,000)
[APPREC-INCREASE-CURRENT] 24,079,000
[NET-CHANGE-FROM-OPS] 26,340,000
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4,006,000
[NUMBER-OF-SHARES-REDEEMED] 287,000
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 120,584,000
[ACCUMULATED-NII-PRIOR] 3,292,000
[ACCUMULATED-GAINS-PRIOR] (2,217,000)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,146,000
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3,556,000
[AVERAGE-NET-ASSETS] 31,460,000
[PER-SHARE-NAV-BEGIN] 13.590
[PER-SHARE-NII] 0.040
[PER-SHARE-GAIN-APPREC] (0.310)
[PER-SHARE-DIVIDEND] 0.000
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 13.320
[EXPENSE-RATIO] 0.47
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 021
[NAME] SCHWAB CAPITAL TRUST SCHWAB SMALL-CAP INDEX FUND INVESTOR SHARES
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] OCT-31-1997
[PERIOD-END] OCT-31-1997
[INVESTMENTS-AT-COST] 374,793,000
[INVESTMENTS-AT-VALUE] 494,190,000
[RECEIVABLES] 3,482,000
[ASSETS-OTHER] 11,000
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 497,683,000
[PAYABLE-FOR-SECURITIES] 5,207,000
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 832,000
[TOTAL-LIABILITIES] 6,039,000
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 372,157,000
[SHARES-COMMON-STOCK] 23,148,000
[SHARES-COMMON-PRIOR] 15,392,000
[ACCUMULATED-NII-CURRENT] 1,452,000
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1,362,000)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 119,397,000
[NET-ASSETS] 410,470,000
[DIVIDEND-INCOME] 3,078,000
[INTEREST-INCOME] 183,000
[OTHER-INCOME] 0
[EXPENSES-NET] 1,590,000
[NET-INVESTMENT-INCOME] 1,671,000
[REALIZED-GAINS-CURRENT] (478,000)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 84,407,000
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 998,000
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 14,644,000
[NUMBER-OF-SHARES-REDEEMED] 6,952,000
[SHARES-REINVESTED] 64,000
[NET-CHANGE-IN-ASSETS] 282,519,000
[ACCUMULATED-NII-PRIOR] 779,000
[ACCUMULATED-GAINS-PRIOR] (884,000)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,540,000
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2,780,000
[AVERAGE-NET-ASSETS] 292,620,000
[PER-SHARE-NAV-BEGIN] 13.590
[PER-SHARE-NII] 0.060
[PER-SHARE-GAIN-APPREC] 4.140
[PER-SHARE-DIVIDEND] 0.060
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 17.730
[EXPENSE-RATIO] 0.52
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
<PAGE> 2
[ARTICLE] 6
[SERIES]
[NUMBER] 022
[NAME] SCHWAB CAPITAL TRUST
SCHWAB SMALL-CAP INDEX FUND
SELECT SHARES
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] OCT-31-1997
[PERIOD-END] OCT-31-1997
[INVESTMENTS-AT-COST] 374,793,000
[INVESTMENTS-AT-VALUE] 494,190,000
[RECEIVABLES] 3,482,000
[ASSETS-OTHER] 11,000
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 497,683,000
[PAYABLE-FOR-SECURITIES] 5,207,000
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 832,000
[TOTAL-LIABILITIES] 6,039,000
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 372,157,000
[SHARES-COMMON-STOCK] 4,574,000
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 1,452,000
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1,362,000)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 119,397,000
[NET-ASSETS] 81,174,000
[DIVIDEND-INCOME] 3,078,000
[INTEREST-INCOME] 183,000
[OTHER-INCOME] 0
[EXPENSES-NET] 1,590,000
[NET-INVESTMENT-INCOME] 1,671,000
[REALIZED-GAINS-CURRENT] (478,000)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 84,407,000
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 5,002,000
[NUMBER-OF-SHARES-REDEEMED] 428,000
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 282,519,000
[ACCUMULATED-NII-PRIOR] 779,000
[ACCUMULATED-GAINS-PRIOR] (884,000)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,540,000
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2,780,000
[AVERAGE-NET-ASSETS] 44,548,000
[PER-SHARE-NAV-BEGIN] 14.500
[PER-SHARE-NII] 0.020
[PER-SHARE-GAIN-APPREC] 3.230
[PER-SHARE-DIVIDEND] 0.000
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 17.750
[EXPENSE-RATIO] 0.38
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
