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SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
SCHWAB LONG-TERM GOVERNMENT BOND FUND
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PROSPECTUS December 30, 1994, as amended June 30, 1995
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD, 24 hours a day.
THE SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND (the "Short/Intermediate
Fund", formerly known as the Schwab U.S. Government Bond Fund
(Short/Intermediate Term)) and the Schwab Long-Term Government Bond Fund (the
"Long-Term Fund," and, together with the Short/Intermediate Fund, the "Funds"),
attempt to provide a high level of current income consistent with preservation
of capital by investing primarily in securities issued or guaranteed by the
United States Government, its agencies or instrumentalities, and repurchase
agreements covering these securities. Under normal market conditions, each Fund
will invest at least 65% of its assets in bonds, which include bonds, notes,
debentures, mortgage-related securities and zero coupon obligations. Under
normal market conditions, the Short/Intermediate Fund seeks to maintain a dollar
weighted average portfolio maturity not to exceed five years and the Long-Term
Fund seeks to maintain a dollar weighted average maturity greater than ten
years. Each Fund is a diversified investment portfolio of Schwab Investments
(the "Trust"), a no-load, open-end, management investment company.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUNDS. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. This Prospectus may be available via electronic
mail. For a free paper copy of this Prospectus call 800-2 NO-LOAD. You can find
more detailed information about the Funds in the Trust's "Statement of
Additional Information," dated December 30, 1994, as amended June 30, 1995 (and
as further amended from time to time), and filed with the Securities and
Exchange Commission. The Statement of Additional Information is incorporated by
reference into this Prospectus, and may be obtained without charge by contacting
Schwab at 800-2 NO-LOAD, 24 hours a day, or 101 Montgomery Street, San
Francisco, CA 94104.
TABLE OF CONTENTS
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KEY FEATURES OF THE FUNDS.............................................................. 2
SUMMARY OF EXPENSES.................................................................... 3
FINANCIAL HIGHLIGHTS................................................................... 5
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS............................................ 6
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS................................ 6
MANAGEMENT OF THE FUNDS................................................................ 10
DISTRIBUTIONS AND TAXES................................................................ 12
SHARE PRICE CALCULATIONS............................................................... 13
HOW THE FUNDS SHOW PERFORMANCE......................................................... 14
TAX-ADVANTAGED RETIREMENT PLANS........................................................ 14
GENERAL INFORMATION.................................................................... 15
SHAREHOLDER GUIDE...................................................................... 15
HOW TO PURCHASE SHARES............................................................... 15
HOW TO EXCHANGE SHARES............................................................... 18
HOW TO REDEEM SHARES................................................................. 19
SCHWAB AUTOMATIC INVESTMENT PLAN....................................................... 20
OTHER IMPORTANT INFORMATION............................................................ 22
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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KEY FEATURES OF THE FUNDS
PERFORMANCE. The investment objective of both Funds is to attempt to provide a
high level of current income consistent with preservation of capital by
investing primarily in securities issued or guaranteed by the United States
Government, its agencies or instrumentalities and repurchase agreements covering
these securities. Although the Funds will invest primarily in securities
guaranteed by the U.S. Government, its agencies or instrumentalities, neither
Fund is backed by the U.S. Government. (See "Investment Objectives, Policies and
Risk Considerations.")
EFFECT OF PORTFOLIO MATURITIES ON YIELDS. Securities with longer maturities have
a greater risk of fluctuation of principal value than money market instruments.
High quality money market instruments reflect short-term interest rates with
relatively little risk of fluctuation of principal value. The Short/Intermediate
Fund seeks to provide higher yields than money market instruments by investing
in securities with a dollar weighted average portfolio maturity not to exceed
five years. The Long-Term Fund seeks to provide even higher yields by investing
in securities with a dollar weighted average portfolio maturity greater than ten
years.
MINIMIZATION OF SHARE PRICE FLUCTUATION. The Short/Intermediate Fund is managed
in an effort to minimize fluctuations in the value of its shares. The average
dollar-weighted portfolio maturity not to exceed five years is designed to
achieve this goal. The Short/Intermediate Fund's emphasis on capital
preservation may at times act to cause it not to provide the same yield and
total return opportunity as would other funds invested in longer-term or lower
quality bonds.
CREDIT SAFETY THROUGH A GOVERNMENT PORTFOLIO. Both Funds normally will invest
only in Government securities, which are usually considered to be among the
safest of instruments. (See "Investment Objectives, Policies and Risk
Considerations.")
MONTHLY DIVIDENDS. Dividends on each Fund's shares are declared daily and paid
monthly, unlike many individual Government securities which generally pay
interest semi-annually. Additionally, unlike interest paid on Government
Securities, shareholders can reinvest dividends paid on their Fund shares. (See
"Distributions and Taxes.")
LOW MINIMUM INVESTMENT. Investors can begin their investment program with as
little as $1,000. Subsequent investments can be made with only $100. (See "How
to Purchase Shares.")
PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. (the
"Investment Manager"), currently provides investment management services to the
SchwabFunds(R), a family of 18 mutual funds with over $27 billion in assets as
of June 15, 1995. (See "Management of the Funds.")
LOW COST INVESTING. The Fund brings a low cost approach to investing with:
- no sales or transaction fees;
- no 12b-1 fees or contingent deferred sales charges;
- a portion of the Short/Intermediate Fund's management fee waived through
April 30, 1996 for potentially higher returns;
- all of the Long-Term Fund's management fee waived through April 30, 1996
for potentially higher returns;
- A commitment by the Investment Manager and Schwab to absorb operating
expenses of the Short/Intermediate Fund in excess of 0.49% of the Fund's
average daily net assets at least through April 30, 1996 (see "Management
of the Funds"); and
- A commitment by the Investment Manager and Schwab to absorb all of the
operating expenses of the Long-Term Fund at least through April 30, 1996
(see "Management of the Funds").
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SHAREHOLDER SERVICE. Schwab serves as the Funds' principal
underwriter/distributor, transfer agent, and shareholder service provider.
Schwab's professional representatives are available 24 hours a day to receive
your purchase, redemption, and exchange orders. Call your local Schwab office
during business hours or 800-2 NO-LOAD, 24 hours a day. As a discount broker,
Schwab gives you investment choices and lets you make your own decisions. Schwab
has many services that help you make the most informed investment decisions.
(See "How to Purchase Shares," "How to Exchange Shares," and "How to Redeem
Shares.")
FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in the Funds in amounts and at intervals that
you select. You avoid the inconvenience, delay and expense associated with
checks or bank wires. To obtain more information about the Automatic Investment
Plan, refer to the "Schwab Automatic Investment Plan" section in this
Prospectus, visit or call your local Schwab office or call 800-2 NO-LOAD, 24
hours a day. (See "Schwab's Automatic Investment Plan.")
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity on one report. (See "Other Important
Information.")
NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders. (See "Management
of the Funds.")
FIXED INCOME INVESTMENTS. In addition to bond mutual funds, Schwab offers a
complete selection of individual fixed income securities, including
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- Municipal Bonds - Corporate Bonds
- Strips - Ginnie Maes
- Treasuries - CDs
</TABLE>
Contact Schwab's bond specialists at 800-626-4600 for more information.
SUMMARY OF EXPENSES
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<CAPTION>
SCHWAB
SHORT/ SCHWAB
INTERMEDIATE LONG-TERM
GOVERNMENT GOVERNMENT
BOND FUND BOND FUND
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SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases.............................................. None None
Sales Load on Reinvested Dividends................................... None None
Deferred Sales Load.................................................. None None
Exchange Fee......................................................... None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF NET ASSETS):
Management Fees (after fee reductions)............................... 0.31%(1) None(2)
12b-1 Fees........................................................... None None
Other Expenses (after fee reductions and expense reimbursements)..... 0.18%(4) None(5)
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TOTAL FUND OPERATING EXPENSES(3)....................................... 0.49%(4) None(5)
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</TABLE>
(1) This amount has been restated to reflect a reduction by the Investment
Manager which is guaranteed through at least April 30, 1996. If there were no
reduction, the management fee for the Short/Intermediate Fund would be 0.41% of
the Fund's average daily net assets.
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(2) This amount has been restated to reflect a reduction by the Investment
Manager which is guaranteed through at least April 30, 1996. If there were no
reduction, the management fee for the Long-Term Fund would be 0.41% of the
Fund's average daily net assets.
(3) Schwab currently imposes no fees for opening and maintaining a Schwab
brokerage account. It is currently anticipated that effective October 1, 1995, a
quarterly fee of $7.50 will be charged to Schwab brokerage and custodial
accounts with balances below $1,000 and $500, respectively. This fee will be
waived if there has been one commissionable trade within the last six months, if
the account balance is below $35, or if there are combined account balances of
at least $10,000. Schwab imposes no fees for opening and maintaining a Schwab
One(R) account with a minimum balance of $5,000. Schwab One accounts with
balances below $5,000 are subject to a monthly fee of $5 if there have been
fewer than two commissionable trades within the last 12 months. Schwab
Individual Retirement Accounts with balances of $10,000 or more by September 15,
1995 are not charged Schwab's $29 annual IRA account fee for the life of the
account. Schwab Keogh plans are currently charged an annual fee of $45.
(4) This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least April 30, 1996, the total operating
expenses of the Short/Intermediate Fund will not exceed 0.49% of the Fund's
average daily net assets. Without a similar guarantee which was in effect for
the fiscal year ended August 31, 1994, total fund operating expenses would have
been 0.81% of the Fund's average daily net assets.
(5) This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least April 30, 1996, the Investment Manager
and Schwab will absorb all the Long-Term Fund's operating expenses. Without this
guarantee, total fund operating expenses for the fiscal year ended August 31,
1994 would have been 2.19% of the Fund's average daily net assets.
EXAMPLES. You would pay the following expenses on a $1,000 investment in each
Fund, assuming (1) a 5% annual return and (2) redemption at the end of each time
period:
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Short/Intermediate Fund............................... $5 $16 $27 $ 62
Long-Term Fund........................................ $0 $ 0 $ 0 $ 0
</TABLE>
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Funds will bear directly or
indirectly. This example reflects the guarantee by the Investment Manager and
Schwab that the total operating expenses of each Fund will not exceed the
amounts specified for the time periods referred to in notes (4) and (5) above.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The example assumes a
5% annual rate of return pursuant to requirements of the Securities and Exchange
Commission. THIS HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE
REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE.
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FINANCIAL HIGHLIGHTS
Set forth below is the table containing information as to income and capital
changes for a share of the Schwab Short/Intermediate Government Bond Fund,
formerly known as the Schwab U.S. Government Bond Fund (Short/Intermediate
Term), and the Schwab Long-Term Government Bond Fund, formerly known as the
Schwab Long-Term U.S. Government Bond Fund, outstanding for the periods
indicated below. This information has been audited by Price Waterhouse LLP, the
Trust's independent accountants, whose unqualified report appears with the
financial statements in the Statement of Additional Information.
<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE
GOVERNMENT BOND FUND SCHWAB LONG-TERM
---------------------------------------------------------- GOVERNMENT BOND FUND
FOR THE PERIOD ------------------------------
NOVEMBER 5, 1991 FOR THE PERIOD
FOR THE FOR THE (COMMENCEMENT MARCH 5, 1993
FOR THE EIGHT MONTH YEAR ENDED OF OPERATIONS) FOR THE (COMMENCEMENT
YEAR ENDED PERIOD ENDED DECEMBER TO YEAR ENDED OF OPERATIONS) TO
AUGUST 31, AUGUST 31, 31, DECEMBER 31, AUGUST 31, AUGUST 31,
1994 1993 1992 1991 1994 1993
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<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period.............................. $ 10.64 $ 10.26 $ 10.28 $ 10.00 $10.53 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .54 .37 .60 .10 .60 .31
Net realized and unrealized gain
(loss) on investments............ (.71) .38 .01 .28 (1.20) .53
---------- ------------ ----------- -------- ---------- --------
Total from investment operations... (.17) .75 .61 .38 (.60) .84
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (.54) (.37) (.60) (.10) (.60) (.31)
Distributions from realized gain on
investments...................... (.12) -- (.03) -- -- --
---------- ------------ ----------- -------- ---------- --------
Total distributions................ (.66) (.37) (.63) (.10) (.60) (.31)
---------- ------------ ----------- -------- ---------- --------
Net asset value at end of period... $ 9.81 $ 10.64 $ 10.26 $ 10.28 $ 9.33 $ 10.53
========== =========== =========== ================ ========== ==============
Total Return (%)..................... (1.67) 7.39 6.08 3.79 (5.80) 8.63
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s)... $190,479 $273,973 $ 226,223 $ 66,404 $7,108 $ 2,806
Ratio of expenses to average net
assets (%)....................... .60 .60* .43 .35* .10 .26*
Ratio of net investment income to
average net assets (%)........... 5.28 5.28* 5.78 6.14* 6.27 6.36*
Portfolio turnover rate (%)........ 91 107 185 4 123 42
</TABLE>
Note: The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab
Short/Intermediate Government Bond Fund for the periods ended August 31, 1994,
1993, December 31, 1992 and 1991 would have been .81%, .84%*, .89% and 1.47%*,
respectively, and the ratio of net investment income to average net assets would
have been 5.07%, 5.04%*, 5.32% and 5.02%*, respectively. With respect to the
Schwab Long-Term Government Bond Fund the ratio of expenses to average net
assets for the periods ended August 31, 1994 and 1993 would have been 2.19% and
19.19%*, respectively, and the ratio of net investment income to average net
assets would have been 4.18% and (12.57%)*, respectively.
* Annualized
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MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS
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THE FUNDS MAY BE SUITABLE FOR RISK-SENSITIVE
INVESTORS SEEKING INCOME.
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The Funds may be appropriate for a variety of investment programs. While the
Funds are not a substitute for an investment portfolio tailored to an
individual's investment needs and ability to tolerate risk, they can serve as
components of an investor's long-term program to accumulate assets for
retirement, college tuition, or other major goals.
Because the Funds will ordinarily invest primarily in U.S. Government securities
and because the Short/Intermediate Fund will be managed in an effort to minimize
fluctuations in its share price, the Short/Intermediate Fund (and to a lesser
degree, the Long-Term Fund) may be appropriate for investors, including those
who have retired, who desire to receive monthly dividend payments from a fund
whose objective is to seek above average returns while minimizing their exposure
to principal fluctuations. Investors should note, however, that the principal
value of shares of the Long-Term Fund may be subject to greater fluctuation than
the value of shares of the Short/Intermediate Fund resulting from the longer
maturities of the securities held by the Long-Term Fund.
INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
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THE FUNDS ARE DESIGNED TO PROVIDE A HIGH LEVEL OF CURRENT
INCOME CONSISTENT WITH PRESERVATION OF CAPITAL.
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Both Funds are investment portfolios of the Trust, a no-load, open-end,
management investment company. The investment objective of each Fund is to
provide a high level of current income consistent with preservation of capital.
Each Fund's investment objective, along with certain investment restrictions
adopted by each Fund (see "Investment Restrictions" in the Statement of
Additional Information), is fundamental, and cannot be changed without approval
by holders of a majority of the Fund's outstanding voting shares, as defined in
the Investment Company Act of 1940 (the "1940 Act"). While there is no assurance
that either Fund will achieve its investment objective, each will endeavor to do
so by following the investment policies set forth below.
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EACH FUND WILL INVEST PRIMARILY IN U.S. GOVERNMENT SECURITIES.
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Each Fund will invest primarily in securities issued or guaranteed by the United
States Government, its agencies, or instrumentalities, and repurchase agreements
covering these securities. The Funds will attempt to invest 100% of their total
assets in the foregoing instruments and may also invest in related options and
futures contracts. Under normal market conditions, each Fund will invest at
least 65% of its total assets in bonds, which include bonds, notes, debentures,
mortgage-related securities, stripped government securities, and zero coupon
obligations.
U.S. Government Securities include: bills, bonds, stripped government
securities, and other debt securities, differing as to maturity and rates of
interest, that are issued by and are direct obligations of the U.S. Treasury and
other securities that are issued or guaranteed as to principal and interest by
the U.S. Government or by its agencies or instrumentalities that include, but
are not limited to,
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Government National Mortgage Association ("GNMA"), Federal Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"), and
Federal National Mortgage Association ("FNMA"). U.S. Government Securities are
generally viewed by the Investment Manager as being among the safest of debt
securities with respect to the timely payment of principal and interest (but not
with respect to any premium paid on purchase), but generally bear a lower rate
of interest than corporate debt securities. However, they are subject to market
risk like other debt securities, and therefore a Fund's shares can be expected
to fluctuate in value. In addition, each Fund may invest in principal or
interest only portions of U.S. Government Securities that have been separated
(stripped). Stripped securities are usually sold separately in the form of
receipts or certificates representing undivided interests in the stripped
portion. Stripped securities may be more volatile than non-stripped securities.
Depending on market conditions, the Funds may invest a substantial portion of
their assets in mortgage-backed debt securities issued by GNMA, FNMA, and FHLMC.
Securities issued by GNMA represent an interest in a pool of mortgages insured
by the Federal Housing Administration or the Farmers Home Administration, or
guaranteed by the Veterans Administration. Securities issued by FNMA and FHLMC,
U.S. Government-sponsored corporations, also represent an interest in a pool of
mortgages.
The timely payment of principal and interest on GNMA securities is guaranteed by
GNMA and backed by the full faith and credit of the U.S. Treasury. FNMA
guarantees full and timely payment of interest and principal on FNMA securities.
FHLMC guarantees timely payment of interest and ultimate collection of principal
on FHLMC securities. FNMA and FHLMC securities are not backed by the full faith
and credit of the U.S. Treasury. With respect to securities supported only by
the credit of the issuing agency or instrumentality or by an additional line of
credit with the U.S. Treasury, there is no guarantee that the U.S. Government
will provide support to such agencies or instrumentalities. Accordingly, such
securities may involve greater risk of loss of principal and interest.
Mortgage-backed debt securities, such as those issued by GNMA, FNMA, and FHLMC,
are of the "modified pass-through type," which means the interest and principal
payments on mortgages in the pool are passed through to investors. During
periods of declining interest rates, there is increased likelihood that the
underlying mortgages will be prepaid, with a resulting loss of the full-term
benefit of any premium paid by a Fund on purchase of such securities. In
addition, the proceeds of prepayment would likely be invested at lower interest
rates. Also, prepayments of mortgages which underlie securities purchased at a
premium may not have been fully amortized at the time the obligation is repaid.
As a result of these principal payment features, mortgage-backed securities are
generally more volatile investments than other U.S. Government Securities.
The Funds may also invest in other types of U.S. Government Securities,
including collateralized mortgage obligations ("CMOs") issued by U.S. Government
agencies or instrumentalities. A CMO is a security backed by a portfolio of
mortgages or mortgage-backed securities held under an indenture. The issuer's
obligation to make interest and principal payments is secured by the underlying
portfolio of mortgages or mortgage-backed securities. CMOs are issued with a
number of classes or series which have different maturities and which may
represent interests in some or all of the interest or
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principal on the underlying collateral or a combination thereof. CMOs of
different classes are generally retired in sequence as the underlying mortgage
loans in the mortgage pool are repaid. In the event of sufficient early
prepayments on such mortgages, the class or series of CMO first to mature
generally will be retired prior to its maturity. Thus, the early retirement of a
particular class or series of CMO held by a Fund would have the same effect as
the prepayment of mortgages underlying a mortgage-backed pass-through security.
The Funds may also enter into repurchase agreements. A repurchase agreement
involves a sale of securities to a Fund with the concurrent agreement of the
seller (bank or securities dealer) to repurchase the securities within a
specified time at the same price plus an amount equal to an agreed upon interest
rate. In the event of a bankruptcy or other default of a seller of a repurchase
agreement, a Fund could experience both delays in liquidating and losses.
Neither Fund may invest more than 10% of its net assets in repurchase agreements
maturing in more than seven days and other illiquid securities.
The Funds may also purchase shares of other investment companies, subject to the
limitations imposed by the 1940 Act and the rules promulgated thereunder.
Because other investment companies employ an investment adviser and other
service providers, such investment by the Funds may cause shareholders to bear
duplicative fees. The Investment Manager will charge no management fees
attributable to Fund assets that are invested in other investment companies.
(See "Investment Restrictions" in the Statement of Additional Information.")
Under normal market conditions, the Short/Intermediate Fund seeks to maintain a
dollar-weighted average portfolio maturity not exceeding five years, and the
Long-Term Fund seeks to maintain a dollar-weighted average portfolio maturity in
excess of ten years. Both Funds will be managed to attempt to minimize
fluctuations in the value of their shares by concentrating on securities whose
prices are anticipated to be relatively less sensitive to changes in broad based
interest rates.
The frequency of portfolio transactions, a Fund's turnover rate, will vary from
year to year depending upon market conditions and purchase and redemption
patterns of each Fund's shareholders. Typically, funds with higher turnover tend
to generate higher capital gains and transaction costs. The Short/Intermediate
Fund had portfolio turnover rates for the year ended August 31, 1994, for the
period ended August 31, 1993 and for the year ended December 31, 1992 of 91%,
107% and 185%, respectively. The Long-Term Fund had portfolio turnover rates for
the year ended August 31, 1994 and for the period from March 5, 1993
(commencement of operations) to August 31, 1993 of 123% and 42%, respectively.
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THE FUNDS MAY UTILIZE FUTURES AND OPTIONS STRATEGIES.
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The Funds may utilize futures and options to hedge their investment portfolios,
although neither Fund intends to pursue an extensive strategy entailing futures
and options. The Funds may purchase futures contracts on U.S. Government
securities and any index comprised of such securities as well as options
contracts (including options on futures contracts). Moreover, the Funds may sell
futures and options to "close out" futures and options it may have purchased or
to protect against a decrease in the price of securities it owns. Under normal
market conditions, each Fund may hedge a maximum of 25% of its
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total assets by selling futures, writing calls or buying puts and will limit its
purchases of calls so that the value of the securities underlying the calls does
not exceed 5% of a Fund's total assets. (See "Investment Securities" in the
Statement of Additional Information.)
Because each Fund's 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 extensive futures and options
transactions.
However, three principal areas of risk are present when futures and options
contracts are used in a hedging context. First, there may not always be a liquid
secondary market for a futures or option contract at the time when a Fund seeks
to "close out" its position. The Funds will seek to reduce the risk that they
will be unable to "close out" contracts by only entering into futures or options
contracts that are traded on national exchanges and for which there appears to
be a liquid secondary market. Second, 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. The Funds
are not permitted to sell uncovered options. 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 adverse market distortions, a similar result
could be expected were the Funds to invest directly in the securities being
hedged. Of course, if the Investment Manager is incorrect in its forecast of
interest rates, market values, and other economic factors, the Funds would have
been better off without the hedge. There is also the risk of loss by the Funds
of margin deposits in the event of bankruptcy of a broker with whom the Funds
have an open position in a futures contract or option.
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THE FUNDS MAY LEND THEIR SECURITIES TO GENERATE ADDITIONAL INCOME.
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To increase their income, the Funds may lend their portfolio securities to
brokers, dealers and other financial institutions that borrow securities. No
more than one-third of each Fund's total assets may be represented by loaned
securities. Each Fund's loans of portfolio securities will be fully
collateralized by cash, letters of credit or U.S. Government securities equal at
all times to at least 100% of the loaned securities' market value plus accrued
interest. As with other extensions of credit, there are risks of delay in
recovery or even losses of rights in the securities loaned should the borrower
of the securities fail financially. However, such loans will be made only to
firms deemed by the Investment Manager to be of good standing and when, in the
judgment of the Investment Manager, the income which can be earned currently
from such loans justifies the attendant risk.
The Funds may borrow money from banks or other financial institutions 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 their total assets (including the amount borrowed), provided that
neither Fund will purchase securities while borrowings represent more than 5% of
its assets.
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THE FUNDS MAY ELECT A STRATEGY WHICH INCLUDES PURCHASING
WHEN-ISSUED SECURITIES AND RESTRICTED SECURITIES.
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Each Fund may purchase and sell securities on a "when-issued" or "firm
commitment" basis. Under these arrangements, the securities' prices and yields
are fixed on the date of the commitment, but payment and delivery are scheduled
for a future time. At the time of settlement, the market value of the security
may be more or less than its purchase or sale price. While the Funds may enter
into these transactions with the intention of actually receiving or delivering
the securities, they may sell these securities before the settlement date or
enter into a new commitment to extend the delivery date further into the future.
Between the time of purchase and settlement, no payment is made by a Fund and no
interest on securities purchased for future delivery is received by that Fund.
The Investment Manager may determine that it is in the best interest of a Fund
to purchase or maintain selected illiquid or restricted securities. A Fund will
not purchase illiquid securities if, as a result, more than 10% of its total
assets would be invested in illiquid securities.
MANAGEMENT OF THE FUNDS
Responsibility for overall management of the Funds rests with the trustees and
officers of the Trust. Professional investment management for the Funds is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. The Investment Manager provides
a continuous investment program, including general investment and economic
advice regarding each Fund's investment strategies, and performs expense
management, accounting and record keeping, and other administrative services
necessary to the operation of the Funds and the Trust. The Investment Manager,
formed in 1989, is a wholly-owned subsidiary of The Charles Schwab Corporation
and is the investment adviser and administrator of the SchwabFunds(R), a family
of 18 mutual funds. As of June 15, 1995, SchwabFunds had aggregate net assets in
excess of $27 billion.
Andrea Regan is the Portfolio Manager for the Funds and, as such, has had
primary responsibility for the day-to-day management of each Fund's portfolio
since the commencement of each Fund's operations. Prior to January 1991, Ms.
Regan was Vice President and Manager of Trading for the Bank of California's
investment management division, Merus Capital Management.
Stephen B. Ward, the Trust's Senior Vice President and Chief Investment Officer,
also participates in the management of each Fund's portfolio. Prior to April
1991, Mr. Ward was Vice President and Portfolio Manager for Federated Investors.
Pursuant to separate agreements, Charles Schwab & Co., Inc. ("Schwab" or the
"Transfer Agent"), 101 Montgomery Street, San Francisco, CA 94104, serves as
shareholder services agent and transfer agent for the Funds. Schwab provides
information and services to shareholders, which include reporting share
ownership, sales and dividend activity (including associated tax consequences),
responding to daily inquiries, effecting the transfer of each Fund's shares, and
facilitating effective cash management of shareholders' Schwab account balances.
It also furnishes such office space and equipment, telephone facilities,
personnel and informational literature distribution as is necessary and
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appropriate in providing shareholder and transfer agency information and
services. Schwab is also each Fund's Distributor, but receives no compensation
for its services as such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 2.5 million active customer accounts and has over 200 offices. Schwab
also offers convenient access to financial information services and provides
products and services that help investors make investment decisions. Schwab is a
wholly-owned subsidiary of The Charles Schwab Corporation. Charles R. Schwab is
the founder, Chairman, Chief Executive Officer and a director of The Charles
Schwab Corporation and, as of November 30, 1994 was the beneficial owner of
approximately 22.25% of the outstanding shares of that corporation. Mr. Schwab
may be deemed to be a "controlling person" of Schwab and the Investment Manager.
Please see the Funds' Annual Report to Shareholders for the fiscal year ended
August 31, 1994 for a discussion by the Investment Manager of each Fund's
performance.
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THROUGH AT LEAST APRIL 30, 1996, THE INVESTMENT MANAGER AND SCHWAB GUARANTEE
THAT THE SHORT/INTERMEDIATE FUND'S OPERATING EXPENSES WILL NOT EXCEED 0.49%
OF THE FUND'S AVERAGE DAILY NET ASSETS AND THE INVESTMENT MANAGER AND SCHWAB
WILL ABSORB ALL OF THE LONG-TERM FUND'S OPERATING EXPENSES.
- --------------------------------------------------------------------------------
FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from each Fund an
annual fee, payable monthly, of 0.41% of each Fund's average daily net assets.
Through at least April 30, 1996, the Investment Manager guarantees that the
Short/Intermediate Fund's management fee will not exceed 0.31% of the Fund's
average daily net assets and that the Investment Manager will waive payment of
all of the Long-Term Fund's management fee. Moreover, at least through April 30,
1996, the Investment Manager and Schwab guarantee that the Short/Intermediate
Fund's total operating expenses will not exceed 0.49% of the Fund's average
daily net assets and that the Investment Manager and Schwab will absorb all of
the Long-Term Fund's operating expenses. The effect of these guarantees is to
maintain or lower each Fund's expenses and thus maintain or increase each Fund's
total return to shareholders.
For the transfer agency and shareholder services provided under its Transfer
Agency and Shareholder Service Agreements with the Trust, Schwab receives an
annual fee, payable monthly, of 0.05% and 0.20%, respectively, of each Fund's
average daily net assets. PNC Bank is the Funds' Custodian. The Investment
Manager, Schwab and the Custodian may each reduce its fees from time to time in
the future.
The Trust pays the expenses of its operations, including the fees and expenses
of independent accountants, counsel and custodian, and the costs of calculating
net asset values, brokerage commissions or transaction costs, taxes,
registration fees, and the fees and expenses of qualifying the Trust and its
shares for distribution. In addition, the Trust will incur and pay fees in
connection with the establishment and maintenance of "sweep" accounts through
which the Funds may make regular investments in other investment companies. The
expenses will generally be allocated among the Trust's investment portfolios on
the basis of relative net assets at the time of allocation. However,
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expenses directly attributable to a particular Fund will be charged to that
Fund. For the year ended August 31, 1994, the Short/Intermediate Fund paid
investment management fees of 0.26% and total operating expenses of 0.60% of the
Fund's average daily net assets, and the Long-Term Fund paid no investment
management fees and paid total operating expenses of 0.10% of the Fund's average
daily net assets.
PORTFOLIO BROKERAGE. U.S. Government Securities are typically purchased and sold
on the over-the-counter market through dealers acting as principals for their
own accounts. Accordingly, commissions are not charged on these transactions.
Instead, the subject securities are sold on a "net" basis with the participating
dealer(s) earning a spread (the difference between ask and bid price) on each
purchase or sale. The Funds may, however, pay commissions in connection with
their options transactions.
When placing orders for each Fund's securities transactions, the Investment
Manager uses its best judgment to obtain best price and execution. The full
range and quality of brokerage services available are considered in making these
determinations. For non-debt security trades in which Schwab is not a principal,
the Investment Manager may use Schwab to execute a Fund's transactions when it
reasonably believes that commissions (or prices) charged and transaction quality
will be at least comparable to those available from other qualified brokers or
dealers.
DISTRIBUTIONS AND TAXES
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THE FUNDS DECLARE DAILY DIVIDENDS WHICH ARE PAID MONTHLY.
- --------------------------------------------------------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS. On each day that the net asset values per
share of the Funds are determined, (a "Business Day"), each Fund declares a
dividend from net investment income as of the close of trading on the New York
Stock Exchange (normally 4:00 p.m. Eastern time) to shareholders of record at
the previous net asset value calculation. Dividends are normally paid (and,
where applicable, reinvested) on the 25th of each month, if a Business Day,
otherwise on the next Business Day. Each Fund intends to distribute
substantially all of its net investment income on an annual basis, and plans to
distribute substantially all of its net capital gains, if any, at least once
annually, as determined by the Board of Trustees. All distributions will be
automatically reinvested in additional shares of that Fund unless the
shareholder elects otherwise.
TAX INFORMATION. Each Fund is treated as a separate entity for tax purposes, has
elected to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), qualified as such
and intends to continue to so qualify. In order to so qualify, each Fund will
distribute substantially all of its net investment income and net capital gains
to shareholders on an annual basis, and will meet certain other requirements. So
long as it meets these and certain minimum distribution requirements, each Fund
will not be liable for federal income taxes on the amount of its earnings that
is distributed.
Dividends paid by the Funds from net investment income and distributions from
the Fund's net short-term capital gains in excess of any net long-term capital
losses, whether received in cash or reinvested, generally will be taxable as
ordinary income. Distributions received from a Fund designated as long-term
capital gains (net of capital losses), whether received in cash or reinvested,
will be
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taxable as long-term capital gains without regard to the length of time a
shareholder has owned shares in a Fund. Any loss on the sale or exchange of a
Fund's shares held for six months or less shall be treated as a long-term
capital loss to the extent of any long-term capital gain distribution received
on the shares. If a shareholder is not subject to tax on his income, generally
the shareholder will not be taxed on amounts distributed by the Fund.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' Schwab account statements. The Funds will notify
shareholders at least annually as to the Federal income tax consequences of all
distributions made each year.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the mutual fund from direct obligations of
the U.S. Government, subject in some cases to minimum investment requirements.
Investments in repurchase agreements collateralized by U.S. Government
securities do not generally qualify for this purpose. At the end of each
calendar year, the Funds will provide shareholders with the percentage of any
dividends paid which may qualify for such tax-free status. Shareholders should
consult their own tax advisors with respect to the application of state and
local income tax laws to these distributions and on the application of other
state and local intangible property or income tax laws to their shares and to
distributions and redemption proceeds received from the Funds.
The foregoing is only a brief summary of the federal income tax considerations
affecting the Funds and their shareholders. Accordingly, a potential investor
should consult his or her tax adviser with specific reference to the
shareholder's own tax situation.
SHARE PRICE CALCULATIONS
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THERE ARE NO SALES CHARGES OR TRANSACTION FEES TO
PURCHASE OR REDEEM SHARES OF A FUND.
- ------------------------------------------------------------------
The price of each Fund's shares on any given day is their "net asset value" or
NAV. This amount is computed by dividing the total market value of each Fund's
investments and other assets on that day, less any liabilities, by the number of
Fund shares outstanding. The net asset value per share of each Fund is
determined on each day the New York Stock Exchange is open for trading at 4:00
p.m., Eastern time. Each Fund's net asset value will fluctuate and neither
Funds' shares are insured against reduction in net asset value. (See "Share
Price Calculation" in the Statement of Additional Information.)
The securities in which the Funds invest will be valued daily based on their
market value. Securities for which market quotations are readily available are
valued at the mean between the most recent bid and asked prices. Price
information on each listed security is taken from the exchange where the
security is primarily traded. The value of other assets for which no reliable
quotations are readily available (including any restricted securities) are
valued at fair value as determined in good faith by the Investment Manager
pursuant to Board of Trustees' guidelines. Securities may be valued on the basis
of prices provided by pricing services when such prices are believed to reflect
fair market value.
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HOW THE FUNDS SHOW PERFORMANCE
From time to time each Fund may advertise its total return or yield. Performance
figures are based upon historical results and are not intended to indicate
future performance.
Each Fund's total return measures its overall change in value over a period,
including share price movements, and assumes all dividends and capital gains
have been reinvested. Average annual total return reflects the hypothetical
annually compounded return mandated by the Securities and Exchange Commission.
Other reported total return figures may differ in that they may report non-
standard periods or represent aggregate or cumulative return over a stated
length of time.
Each Fund's yield refers to the income generated by a hypothetical investment in
that Fund over a specific 30-day period. This income is then annualized, which
means that the income generated during the 30-day period is assumed to be
generated every 30 days over an annual period and is shown as a percentage of
the hypothetical investment. (See "Total Return and Yield" in the Statement of
Additional Information.)
The Funds' performance may be compared to that of other mutual funds tracked by
mutual fund rating services, various indices of investment performance
(including the Schwab 1000 Index(R)), United States Treasury obligations, bank
certificates of deposit, the Consumer Price Index, and other investments for
which reliable performance data is available. Each Fund's performance may also
be compared to various unmanaged bond indices, including but not limited to the
Salomon Brothers High Grade Index, the Shearson Lehman Government/Corporate Bond
Index, the Merrill Lynch Government/Corporate Bond Master Index, and to Lipper
Analytical Services, Inc. averages and Morningstar, Inc. performance rankings.
Additional performance information is available in the Trust's Annual Report,
which is available free of charge by calling 800-2 NO-LOAD, or from your local
Schwab office.
TAX-ADVANTAGED RETIREMENT PLANS
- --------------------------------------------------------------------------------
RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGES AND THE FUNDS
MAY BE ESPECIALLY SUITABLE INVESTMENTS FOR THEM.
- --------------------------------------------------------------------------------
Schwab offers tax-advantaged retirement plans for which the Funds may be a
particularly appropriate investment. Schwab's retirement plans allow
participants to defer taxes while helping them build their retirement savings.
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, 1995 are
not 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 permits the employer to make annual tax-deductible contributions
of up to $30,000. Schwab Keogh Plans are currently charged an annual fee of $45.
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SCHWAB CORPORATE RETIREMENT ACCOUNT. A well designed retirement program can help
a company attract and retain valuable employees. Call your local Schwab office
or 800-2 NO-LOAD, for more information.
GENERAL INFORMATION
ABOUT THE TRUST. The Trust was organized as a business trust under the laws of
Massachusetts on October 26, 1990 and may issue an unlimited number of shares of
beneficial interest in one or more investment portfolios or series ("Series").
Currently, shares of seven Series are offered. The Board of Trustees may
authorize the issuance of shares of additional Series if deemed desirable.
Shares of each Series have equal noncumulative voting rights and equal rights as
to dividends, assets and liquidation of such Series.
The Trust is not required to hold annual shareholders' meetings and does not
intend to do so. It will, however, hold special meetings as required or deemed
desirable by the Board of Trustees for such purposes as electing or removing
trustees, changing fundamental policies, or approving an investment advisory
agreement. Shareholders will vote by Series and not in the aggregate (for
example, when voting to approve the investment advisory agreement), except when
voting in the aggregate is permitted under the 1940 Act, such as for the
election of trustees.
SHAREHOLDER GUIDE
- -----------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE
SHAREHOLDER SERVICE AND INFORMATION.
- -----------------------------------------------------------
SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
request exchanges at any one of over 200 Schwab offices nationwide or by calling
800-2 NO-LOAD, 24 hours a day, where trained representatives are available to
answer questions about the Funds and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. Each Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, each Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmation of such instructions and tape
recording telephone transactions.
HOW TO PURCHASE SHARES
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YOU MAY PURCHASE SHARES OF THE FUNDS THROUGH A
SCHWAB, IRA, TRUST, OR KEOGH ACCOUNT.
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PURCHASING SHARES THROUGH A SCHWAB ACCOUNT. You may purchase shares of the Funds
exclusively through an account maintained with Schwab, and payment for shares
must be made directly to Schwab. The Securities Investor Protection Corporation
("SIPC") will provide account protection, in an amount up to $500,000, for
securities, including Fund shares which you hold in a Schwab account. Of course,
SIPC account protection does not protect shareholders from share price
fluctuations.
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If you already have a Schwab account, you may purchase shares in the Funds as
described below and need not open a new account.
If you do not presently maintain a Schwab account and wish to establish one,
simply complete a Schwab Account Application (available by calling 800-2
NO-LOAD, 24 hours a day, or by contacting your local Schwab office) and mail or
deliver it to your local Schwab office. You may also mail the application to
Schwab at 101 Montgomery Street, San Francisco, CA 94104. Corporations and other
organizations should contact their local Schwab office to determine which
additional forms may be necessary to open a Schwab account.
You may deposit funds into your Schwab account by check, wire or many other
forms of electronic funds transfer (securities may also be deposited). All
deposit checks should be made payable to Charles Schwab & Co., Inc. If you would
like to wire funds into your existing Schwab account, please contact your local
Schwab office for instructions.
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YOUR INITIAL INVESTMENT IN EITHER FUND MAY BE AS LOW AS $1,000.
ADDITIONAL SHARE PURCHASES CAN BE MADE FOR AS LITTLE AS $100.
- --------------------------------------------------------------------------------
MINIMUM FUND INVESTMENT REQUIREMENTS. Your initial investment in a Fund may be
as low as $1,000 ($500 for custodial accounts, Individual Retirement Accounts
and certain other retirement plans). The minimum subsequent investment is $100.
These requirements may be reduced or waived on certain occasions. (See "Purchase
and Redemption of Shares" in the Statement of Additional Information.)
- ---------------------------------------------------------------
SHARES WILL BE PURCHASED AFTER YOU HAVE FUNDS
AVAILABLE IN YOUR ACCOUNT.
- ---------------------------------------------------------------
WHEN AND AT WHAT PRICE SHARES WILL BE PURCHASED. You must have funds available
in your Schwab account in order to purchase Fund shares. If funds (including
those transmitted by wire) are received by Schwab before the time the Fund's
daily net asset value is calculated (normally 4:00 p.m. Eastern time), they will
be available for investment on the day of receipt. If funds arrive after that
time, they will be available for investment the next Business Day. Orders to
purchase shares will be executed at the next determined net asset value after
receipt by Schwab's Mutual Fund Transfer Agency Department. Orders received
after that time will be executed at the next determined net asset value,
generally the next Business Day. (See "Share Price Calculation.")
METHODS OF PURCHASING SHARES. Schwab offers you several convenient ways to
purchase shares of the Funds. You may choose the one that works best for you and
Schwab will confirm execution of your purchase order.
BY PHONE:
You may use existing funds in your Schwab account to make initial and
subsequent share purchases. To place your order, call your local Schwab office
during regular business hours or 800-2 NO-LOAD, 24 hours a day.
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BY MAIL:
You may direct that funds already in your Schwab account be used to make
initial and subsequent share purchases. Alternatively, your purchase
instructions may be accompanied by a check made out to Charles Schwab & Co.,
Inc. which will be deposited into your Schwab account and used, as necessary,
to cover all or part of your purchase order.
Written purchase orders (along with any checks) should be mailed to your local
Schwab office or to Schwab at 101 Montgomery Street, San Francisco, CA 94104,
and should contain the following information:
- your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);
- the name of the fund(s) and the dollar amount of shares you would like
purchased; and
- (initial share purchases only) select one of the distribution options
listed below.
IN PERSON AT A SCHWAB OFFICE:
Visit your local Schwab office where a representative will be happy to assist
you.
AUTOMATIC INVESTMENT:
Once you have satisfied the initial investment requirements, you may authorize
Schwab to automatically purchase shares at intervals and in amounts
pre-selected by you on your behalf. (See "Schwab Automatic Investment Plan.")
YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS. You may select from the three
distribution options listed below when you first become a shareholder in either
of the Funds. If you already are a shareholder and wish to change your
distribution option, please call your local Schwab office for assistance.
1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gains
distributions will be reinvested in additional shares. This option will be
selected automatically unless you specify another option.
2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in
cash and any capital gain distributions will be reinvested in additional
shares.
3. ALL CASH: Dividends and any capital gain distributions will both be paid in
cash.
Dividends and distributions subject to reinvestment will be invested at the net
asset value next determined after their record date. Cash distributions will be
credited to your Schwab account and will be held there or mailed to you
depending on the standing instructions applicable to your account. For
information on how to wire funds from a Schwab account to a bank, see "Other
Important Information - Wire Transfers to Your Bank."
OTHER PURCHASE INFORMATION. Each Fund reserves the right in its sole discretion
and without prior notice to shareholders, to withdraw or suspend all or any part
of the offering made by this Prospectus,
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to reject purchase orders or to change the minimum investment requirements. All
orders to purchase shares of the Fund are subject to acceptance by the Funds and
are not binding until confirmed or accepted in writing. Any purchase which would
result in a single shareholder owning shares with a value of more than 10% of a
Fund's assets or $3 million, whichever is greater, are subject to prior approval
by the Fund. Schwab will charge a $15 service fee against an investor's Schwab
account if his or her investment check is returned because of insufficient or
uncollected funds or a stop payment order.
HOW TO EXCHANGE SHARES
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SHARES OF THE FUNDS MAY BE EXCHANGED FOR SHARES OF
OTHER FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
- ---------------------------------------------------------------------------
The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of any other SchwabFunds class or series available to investors in your
state. Thus, you can conveniently modify your investments if your goals or
market conditions change. An exchange will involve the redemption of shares at
the net asset value next determined after receipt by the Transfer Agent of an
exchange request (on the same day as the Transfer Agent received your request,
if it was received by 4:00 p.m. (Eastern time) and on the next Business Day if
the request was received after that time) and the purchase of shares at the net
asset value next determined after sale of the shares involved in the exchange
(on the same day as the Transfer Agent received your request, if it was received
by 4:00 p.m. (Eastern time) and on the next Business Day if the request was
received after that time). An exchange of shares will be treated as the sale of
the shares for federal income tax purposes. Note that you must meet the minimum
investment requirements applicable to the shares you wish to receive in an
exchange. Each Fund reserves the right on 60 days' written notice to modify,
limit or terminate the exchange privilege.
METHODS OF EXCHANGING SHARES.
BY PHONE:
To exchange between any of the SchwabFunds(R) by telephone, please call your
local Schwab office during its regular business hours or 800-2 NO-LOAD, 24
hours a day. Investors should be aware that telephone exchanges may be
difficult to implement during periods of drastic economic or market changes.
Shareholders who experience difficulties in exchanging shares by telephone can
mail their exchange requests or make them in person as set forth below.
To properly process your telephone exchange request we will need the following
information:
- your Schwab account number and your name for verification;
- the name of the fund from which you wish to exchange shares;
- the number of shares to be exchanged;
- the name of the fund into which shares are to be exchanged; and
- the distribution option you select.
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BY MAIL:
You may also request an exchange by writing your local Schwab office, or
writing to Schwab at 101 Montgomery Street, San Francisco, CA 94104.
To properly process your mailed exchange request, we will need a letter from
you which:
- references your Schwab account number;
- specifies the name of the fund from which you wish to exchange shares;
- describes the number of shares to be exchanged;
- indicates the name of the fund into which shares are to be exchanged;
- indicates the distribution option you select; and
- is signed by at least one of the registered Schwab account holders in
the exact form specified in the account.
IN PERSON AT A SCHWAB OFFICE:
You can also request an exchange in person at your local Schwab office.
HOW TO REDEEM SHARES
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REDEMPTION PROCEEDS WILL BE CREDITED TO YOUR SCHWAB ACCOUNT.
YOU MAY ELECT TO HAVE THEM MAILED TO YOU.
- --------------------------------------------------------------------------------
THE PRICE AT WHICH SHARES WILL BE REDEEMED. Shares will be redeemed at the net
asset value per share next determined after receipt by the Transfer Agent of
proper redemption instructions, as set forth below.
PAYMENT OF REDEMPTION PROCEEDS. Payment for redeemed shares will be credited
directly to your Schwab account no later than 7 days after the Transfer Agent
receives your redemption instructions in proper form. Redemption proceeds will
then be held there or mailed to you depending on the account standing
instructions you selected. For information on how to wire funds from your Schwab
account to your bank, see "Other Important Information - Wire Transfers to Your
Bank."
If you purchased shares by check, your redemption proceeds may be held in your
Schwab account until your check clears (which may take up to 15 days). Depending
on the type of Schwab account you have, your money may earn interest during any
holding period.
Each Fund may suspend redemption rights or postpone payments when trading on the
New York Stock Exchange (the "Exchange") is restricted, the Exchange is closed
for any reason other than its customary weekend or holiday closings, emergency
circumstances as determined by the Securities and Exchange Commission (the
"SEC") exist, or for such other circumstances as the SEC may permit. Each Fund
may also elect to invoke a 7 day period for cash settlement of individual
redemption requests in excess of $250,000 or 1% of a Fund's net assets,
whichever is less. (See "Purchase and Redemption of Shares" in the Statement of
Additional Information.)
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<PAGE> 20
METHODS OF REDEEMING SHARES.
BY PHONE:
You may redeem your shares by telephone by calling your local Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day. Investors
should be aware that telephone redemption may be difficult to implement during
periods of drastic economic or market changes. Shareholders who experience
difficulties in redeeming by telephone can mail their redemption orders or
place them in person as set forth below.
Telephone redemption orders received prior to 4:00 p.m. (Eastern time) on any
Business Day, once they have been verified as to the caller's identity and
account ownership by the Transfer Agent, will be deemed to have been received
by the Transfer Agent on that day.
BY MAIL:
Redemption orders can also be delivered through the mail. Mailed redemption
orders should be addressed to your local Schwab office or to Schwab at 101
Montgomery Street, San Francisco, CA 94104. Once a redemption request is
mailed it is irrevocable and may not be modified or canceled.
To properly process your redemption order we will need a letter from you which
contains the following information:
- your Schwab account number;
- the name of the Fund from which you wish to redeem shares;
- the number of fund shares to be redeemed; and
- a signature of one or more of the registered Schwab account holders
(in the exact form specified in the account).
IN PERSON AT A SCHWAB OFFICE:
You can also place your redemption order in person at your local Schwab
office.
SCHWAB AUTOMATIC INVESTMENT PLAN
- --------------------------------------------------------------------------------
THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST,
CONVENIENT WAY TO MAKE REGULAR INVESTMENTS IN THE FUNDS.
- --------------------------------------------------------------------------------
Schwab offers an Automatic Investment Plan ("AIP") that allows you to make
periodic investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. AIP can be used as a
dollar cost averaging program that saves you time and expense associated with
writing checks or wiring funds.
INVESTMENT MINIMUMS: You can make automatic investments in any amount, from $100
to $50,000, once you meet a fund's investment minimum.
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INVESTMENT METHODS: Automatic investments are made from your Schwab account and
you may select from several different investment methods (sources of funds) to
make automatic investment(s):
a) USING FUNDS IN A SCHWAB ACCOUNT: You can make automatic investments by using
the uninvested cash in your Schwab account and/or by using the proceeds of
redemption of shares of the Schwab Money Fund linked to your Schwab account.
If you elect to use these funds to make your automatic investments, cash in
your Schwab account will be used to make the investment and, if necessary,
shares of your Schwab Money Fund will be redeemed to cover the balance of the
purchase.
b) USING THE SCHWAB MONEYLINK(R) TRANSFER SERVICE FOR:
- "Authorized Transfers" from a bank checking or savings account;
- "Direct Deposit" of payroll or government checks (all or a portion).
Authorized Transfers (transfers from a bank checking or savings account) and
Direct Deposit (automatic deposit of all or a portion of a payroll or government
check) are two of the investment method options which are made available through
the Schwab Moneylink Transfer Service ("MoneyLink"). MoneyLink transfers money
into your Schwab account and automatic investments can be made using these
funds.
If you elect to use Authorized Transfers and/or Direct Deposit for your
automatic investments, you will select two dates: a transfer date (when the
money is transferred into your Schwab account) and your investment date. The
automatic investment date selected may be the same day of your Direct Deposit or
Authorized Transfers. Schwab recommends that your investment date be on or close
to the transfer/deposit date to minimize uninvested cash in your Schwab account.
If you make changes to your Authorized Transfer or Direct Deposit date, it may
also be necessary to change your automatic investment date to coincide with the
new transfer/deposit date.
INVESTMENT FREQUENCY: You can select the frequency of your automatic investments
(twice monthly, monthly or quarterly) and choose either the 5th or the 20th of
the month for your automatic investment dates. Quarterly investments are made on
the date selected in the first month of each quarter (January, April, July and
October).
CHANGING INSTRUCTIONS TO AN ALREADY ESTABLISHED PLAN: If you want to change the
fund(s) selected for your AIP, you may do so by calling your local branch or
800-2 NO-LOAD, 24 hours a day, or by sending written instructions clearly
outlining the changes to: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104. Written notification must include the following:
1. the funds with AIP that you want to cancel;
2. the newly selected fund(s) in which you want to begin making automatic
investments and the amount to be invested in each fund; and
3. the investment frequency and investment dates for your new automatic
investments.
21
<PAGE> 22
Information on changing Authorized Transfer and Direct Deposit instructions is
included in the Automatic Investment Plan Terms and Conditions brochure which
you will receive after enrolling in AIP.
TERMINATING YOUR AUTOMATIC INVESTMENT PLAN. If you wish to terminate your AIP,
you may call your local branch or 800-2 NO-LOAD, 24 hours a day, or send written
instructions to Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.
Note: Your Authorized Transfers and/or Direct Deposit will not automatically
terminate when you cancel your AIP investments.
TERMINATING AUTHORIZED TRANSFERS AND DIRECT DEPOSIT. If you wish to terminate
your Authorized Transfers, you may do so at any time by notifying Schwab in
writing. You must notify your employer or government agency to cancel Direct
Deposit.
IMPORTANT: If you are canceling your Authorized Transfers and/or Direct Deposit
and you wish to cancel your AIP, you must also provide instructions stating that
Schwab should cancel your AIP. You may notify Schwab by sending written
instructions to the address above or telephoning your local branch or 800-2
NO-LOAD, 24 hours a day. Your automatic investments will continue using Schwab
account assets if Schwab does not receive notification to terminate your
automatic investments as well.
TO AVOID PROCEDURAL DIFFICULTIES, SCHWAB SHOULD RECEIVE INSTRUCTIONS TO CHANGE
OR TERMINATE YOUR AIP OR AUTHORIZED TRANSFERS AT LEAST TEN DAYS PRIOR TO YOUR
SCHEDULED INVESTMENT DATE.
ADDITIONAL INFORMATION. This information is only a summary of the Automatic
Investment Plan Terms and Conditions brochure which you will receive if you
choose to enroll in AIP. Please read it carefully and keep it for future
reference.
OTHER IMPORTANT INFORMATION
MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, each Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of a shareholder's holdings in that Fund drops below the Fund's $500
minimum balance requirement ($250 in the case of custodial accounts, IRAs and
other retirement plans). Shareholders will be notified in writing 30 days before
the Fund takes such action to allow them to increase their holdings to at least
the minimum level. Also note that, because they can only be held in Schwab
accounts, shares of each Fund will be automatically redeemed should the Schwab
account in which they are carried be closed.
CONSOLIDATED MAILINGS. In an effort to reduce mailing costs, the Funds
consolidate shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write SchwabFunds at 101
Montgomery Street, San Francisco, CA 94104 to that effect.
22
<PAGE> 23
WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
can be wired from your Schwab account to your bank account. Call your local
Schwab office for additional information on wire transfers. A $15 service fee
will be charged against your Schwab account for each wire sent.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
BEING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR
THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23
<PAGE> 24
SCHWAB GOVERNMENT
BOND FUNDS
Prospectus December 30, 1994,
as amended June 30, 1995
SchwabFunds(R)
101 Montgomery Street
San Francisco, California 94104
919-5 (7/95) CRS 6677 Printed on recycled paper.
SchwabFunds(R)
<PAGE> 25
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
PROSPECTUS December 30, 1994, as amended June 30, 1995
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD, 24 hours a day.
THE SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND (the
"Short/Intermediate Fund") and the SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND
FUND (the "Long-Term Fund," formerly known as the Schwab California Tax-Free
Bond Fund; and together with the Short/Intermediate Fund, the "Funds") are
designed for investors who seek a high level of current income that is exempt
from federal income and State of California personal income taxes, consistent
with preservation of capital. Both Funds seek to achieve their objective by
investing primarily in debt securities issued by or on behalf of the State of
California, its political subdivisions, agencies or instrumentalities, the
interest on which is not subject to regular federal income and State of
California personal income taxes ("California Municipal Securities"). Under
normal market conditions, each Fund will invest at least 65% of its assets in
California Municipal Securities, including bonds, notes, debentures, and zero
coupon securities. Under normal market conditions, the Short/Intermediate Fund
seeks to maintain a dollar weighted average portfolio maturity of between two
and five years, and the Long-Term Fund seeks to maintain a dollar weighted
average portfolio maturity of ten years or longer, although it may invest in
obligations of any maturity. Each Fund is a non-diversified investment portfolio
of Schwab Investments (the "Trust"), a no-load, open-end, management investment
company. Shares of the Funds are offered to California residents and residents
of selected other states.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUNDS. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. This Prospectus may be available via electronic
mail. For a free paper copy of this Prospectus call 800-2 NO-LOAD. You can find
more detailed information about the Funds in the Trust "Statement of Additional
Information," dated December 30, 1994, as amended June 30, 1995 (and as further
amended from time to time), and filed with the Securities and Exchange
Commission. The Statement of Additional Information is incorporated by reference
into this Prospectus, and may be obtained without charge by contacting Schwab at
800-2 NO-LOAD, 24 hours a day, or 101 Montgomery Street, San Francisco, CA
94104.
TABLE OF CONTENTS
<TABLE>
<S> <C>
KEY FEATURES OF THE FUNDS.............................................................. 2
SUMMARY OF EXPENSES.................................................................... 3
FINANCIAL HIGHLIGHTS................................................................... 5
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS............................................ 6
INVESTMENT OBJECTIVES AND POLICIES..................................................... 6
CALIFORNIA MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES.............................. 8
RISK CONSIDERATIONS.................................................................... 10
MANAGEMENT OF THE FUNDS................................................................ 11
DISTRIBUTIONS AND TAXES................................................................ 13
SHARE PRICE CALCULATION................................................................ 15
HOW THE FUNDS SHOW PERFORMANCE......................................................... 15
GENERAL INFORMATION.................................................................... 16
SHAREHOLDER GUIDE...................................................................... 17
HOW TO PURCHASE SHARES............................................................... 17
HOW TO EXCHANGE SHARES............................................................... 19
HOW TO REDEEM SHARES................................................................. 21
SCHWAB AUTOMATIC INVESTMENT PLAN....................................................... 22
OTHER IMPORTANT INFORMATION............................................................ 24
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 26
KEY FEATURES OF THE FUNDS
DOUBLE TAX-FREE INCOME. Income from each Fund will generally be exempt from
federal income and State of California personal income taxes. The Funds may
offer higher after-tax yields than some comparable taxable investments. Both
Funds offer tax benefits to California residents, who pay some of the highest
state taxes in the nation. With the possibility of additional increases in
individual tax rates in coming years, the Funds' tax-exempt returns may become
even more attractive. (See "Investment Objectives and Policies.")
EFFECT OF PORTFOLIO MATURITY ON YIELDS. Securities with longer maturities have a
greater risk of fluctuating principal values than shorter-term investments. High
quality money market instruments reflect short-term interest rates with
relatively little risk of fluctuation of principal value. The Short/Intermediate
Fund seeks to provide higher yields than money market instruments by investing
in securities with a dollar weighted average portfolio maturity of between two
and five years. The Long-Term Fund seeks to provide even higher yields by
investing in securities with a dollar weighted average portfolio maturity of ten
years or longer.
SAFETY THROUGH AN INVESTMENT GRADE PORTFOLIO. The Funds will invest only in
municipal securities rated in the four highest rating categories and in unrated
securities deemed to be of equivalent credit quality. For more information on
portfolio securities that may, subsequent to inclusion in a Fund's portfolio,
receive a rating below that required for purchase, see the section of this
Prospectus entitled "Risk Considerations."
MONTHLY DIVIDENDS. Dividends on each Fund's shares are declared daily and paid
monthly, unlike individual municipal securities which generally pay interest
semi-annually. Additionally, unlike interest paid on municipal securities,
shareholders can reinvest dividends paid on their Fund shares. (See
"Distributions and Taxes.")
LOW MINIMUM INVESTMENT. Investors can begin their tax-free investment program
with as little as $1,000. Subsequent investments can be made with only $100.
(See "How to Purchase Shares.")
PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. (the
"Investment Manager"), provides investment management services to the
SchwabFunds(R), a family of 18 mutual funds with over $27 billion in assets as
of June 15, 1995. (See "Management of the Funds.")
LOW COST INVESTING. The Funds bring a low cost approach to investing with:
- no sales charges or transaction fees;
- no 12b-1 fees or contingent deferred sales charges;
- a portion of the management fees for the Short/Intermediate Fund and the
Long-Term Fund waived through April 30, 1996 for potentially higher
returns; and
- A commitment by the Investment Manager and Schwab to absorb operating
expenses of the Short/Intermediate Fund and the Long-Term Fund in excess
of 0.49% of each Fund's average daily net assets at least through April
30, 1996 (see "Management of the Funds").
2
<PAGE> 27
SHAREHOLDER SERVICE. Schwab serves as the Funds' principal
underwriter/distributor, transfer agent, and shareholder service provider.
Schwab's professional representatives are available 24 hours a day to receive
your purchase, redemption, and exchange orders. Call your local Schwab office
during business hours or 800-2 NO-LOAD, 24 hours a day. As a discount broker,
Schwab gives you investment choices and lets you make your own decisions. Schwab
has many services that help you make the most informed investment decisions.
(See "How To Purchase Shares," "How to Exchange Shares," and "How to Redeem
Shares.")
FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in the Funds in amounts and at intervals that
you select. You avoid the inconvenience, delay and expense associated with
checks or bank wires. To obtain more information about the Automatic Investment
Plan refer to the "Schwab Automatic Investment Plan" section in this Prospectus,
visit or call your local Schwab office or call 800-2 NO-LOAD, 24 hours a day.
(See "Schwab Automatic Investment Plan.")
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity on one report. (See "Other Important
Information.")
NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders. (See "Management
of the Funds.")
FIXED INCOME INVESTMENTS. In addition to bond mutual funds, Schwab offers a
complete selection of individual fixed income securities, including
- Municipal Bonds
- Strips
- Treasuries
- Corporate Bonds
- Ginnie Maes
- CD's
Contact Schwab's bond specialists at 800-626-4600 for more information.
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SCHWAB SCHWAB
CALIFORNIA CALIFORNIA
SHORT/INTERMEDIATE LONG-TERM
TAX-FREE BOND FUND TAX-FREE BOND FUND
------------------ ------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases.......................................... None None
Sales Load on Reinvested Dividends............................... None None
Deferred Sales Load.............................................. None None
Exchange Fee..................................................... None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF NET ASSETS):
Management Fees (after fee reductions)(1)........................ 0.31% 0.31%
12b-1 Fees....................................................... None None
Other Expenses (after fee reductions and expense
reimbursements)................................................ 0.18%(3) 0.18%(4)
------- -------
TOTAL FUND OPERATING EXPENSES(2)..................................... 0.49%(3) 0.49%(4)
============== ==============
</TABLE>
(1) This amount has been restated to reflect a reduction by the Investment
Manager which is guaranteed through at least April 30, 1996. If there were no
such reduction, the maximum management fee for the Short/Intermediate Fund and
the Long-Term Fund would be 0.41% of each Fund's average daily net assets.
3
<PAGE> 28
(2) Schwab currently imposes no fees for opening and maintaining a Schwab
brokerage account. It is currently anticipated that effective October 1, 1995, a
quarterly fee of $7.50 will be charged to Schwab brokerage and custodial
accounts with balances below $1,000 and $500, respectively. This fee will be
waived if there has been one commissionable trade within the last six months, if
the account balance is below $35, or if there are combined account balances of
at least $10,000. Schwab imposes no fees for opening and maintaining a Schwab
One(R) account with a minimum balance of $5,000. Schwab One accounts with
balances below $5,000 are subject to a monthly fee of $5 if there have been
fewer than two commissionable trades within the last 12 months. Schwab
Individual Retirement Accounts with balances of $10,000 or more by September 15,
1995 are not charged Schwab's $29 annual IRA account fee for the life of the
account. Schwab Keogh plans are currently charged an annual fee of $45.
(3) This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least April 30, 1996, the total operating
expenses of the Short/Intermediate Fund will not exceed 0.49% of the Fund's
average daily net assets. Without a similar guarantee which was in effect, for
the fiscal year ended August 31, 1994, total fund operating expenses would have
been 0.86% of the Fund's average daily net assets.
(4) This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least April 30, 1996, the total operating
expenses of the Long-Term Fund will not exceed 0.49% of the Fund's average daily
net assets. Without a similar guarantee which was in effect for the fiscal year
ended August 31, 1994, total Fund operating expenses would have been 0.80% of
the Fund's average daily net assets.
EXAMPLES. You would pay the following expenses on a $1,000 investment in each
Fund, assuming (1) a 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short/Intermediate Fund..................................... $5 $16 $27 $ 62
Long-Term Fund.............................................. $5 $16 $27 $ 62
</TABLE>
The purpose of the preceding table is to assist purchasers in understanding the
various costs and expenses that an investor in the Funds will bear directly or
indirectly. This example reflects the guarantee by the Investment Manager and
Schwab that the total operating expenses of each Fund will not exceed the
amounts specified for the time periods referred to in notes (3) and (4) above.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The example assumes a
5% annual rate of return pursuant to requirements of the Securities and Exchange
Commission. THIS HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE
REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE.
4
<PAGE> 29
FINANCIAL HIGHLIGHTS
Set forth below is the table containing information as to income and capital
changes for a share of the Schwab California Long-Term Tax-Free Bond Fund
(formerly, Schwab California Tax-Free Bond Fund) and the Schwab
Short/Intermediate Tax-Free Bond Fund outstanding for the periods indicated
below. This information has been audited by Price Waterhouse LLP, the Trust's
independent accountants, whose unqualified report appears with the financial
statements in the Statement of Additional Information.
<TABLE>
<CAPTION>
SCHWAB CALIFORNIA SCHWAB CALIFORNIA
SHORT/INTERMEDIATE LONG-TERM TAX-FREE BOND FUND
TAX-FREE BOND FUND -------------------------------------------
--------------------------- FOR THE PERIOD
FOR THE PERIOD FEBRUARY 24,
APRIL 21, 1993 1992
(COMMENCEMENT FOR THE (COMMENCEMENT
FOR THE OF OPERATIONS) FOR THE EIGHT MONTH OF OPERATIONS)
YEAR ENDED TO YEAR ENDED PERIOD ENDED TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, DECEMBER 31,
1994 1993 1994 1993 1992
---------- -------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period............................. $ 10.13 $ 10.00 $ 11.26 $ 10.58 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income............ .37 .13 .56 .38 .51
Net realized and unrealized gain
(loss) on investments.......... (.24) .13 (.74) .68 .58
---------- -------------- ---------- ------------ ---------------
Total from investment
operations..................... .13 .26 (.18) 1.06 1.09
LESS DISTRIBUTIONS
Dividends from net investment
income......................... (.37) (.13) (.56) (.38) (.51)
Distributions from realized gain
on investments................. -- -- (.12) -- --
---------- -------------- ---------- ------------ ---------------
Total distributions.............. (.37) (.13) (.68) (.38) (.51)
---------- -------------- ---------- ------------ ---------------
Net asset value at end of period..... $ 9.89 $ 10.13 $ 10.40 $ 11.26 $ 10.58
========= ============= ========= ========== ==============
Total return (%)..................... 1.29 2.57 (1.70) 10.13 11.10
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000s)......................... $ 48,649 $ 44,545 $106,432 $138,067 $72,969
Ratio of expenses to average net
assets (%)..................... .48 .45* .60 .60* .45*
Ratio of net investment income to
average net assets (%)......... 3.69 3.49* 5.12 5.18* 5.72*
Portfolio turnover rate (%)...... 35 0 48 47 124
</TABLE>
Note: The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab California
Short/Intermediate Tax-Free Bond Fund for the periods ended August 31, 1994 and
1993 would have been .86% and 1.25%*, respectively, and the ratio of net
investment income to average net assets would have been 3.31% and 2.69%*,
respectively. With respect to the Schwab California Long-Term Tax-Free Bond Fund
the ratio of expenses to average net assets for the periods ended August 31,
1994, 1993 and December 31, 1992 would have been .80%, .87%* and 1.05%*,
respectively, and the ratio of net investment income to average net assets would
have been 4.92%, 4.91%* and 5.12%*, respectively.
* Annualized
5
<PAGE> 30
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS
- -----------------------------------------------------------------------
THE FUND MAY BE ESPECIALLY SUITABLE FOR INVESTORS
SEEKING HIGH FEDERAL AND CALIFORNIA TAX-FREE INCOME.
- -----------------------------------------------------------------------
The Funds may be appropriate for a variety of investment programs. While the
Funds are not a substitute for an investment portfolio tailored to an
individual's investment needs and ability to tolerate risk, they can serve as
components of an investor's long-term program to accumulate assets for
retirement, college tuition or other major goals.
Because the Funds invest primarily in California Municipal Securities, they may
be especially suitable for investors seeking income that is exempt from federal
income and State of California personal income taxes. The Funds are not suitable
for investors who cannot benefit from the tax-exempt character of each Fund's
dividends, such as IRAs, qualified retirement plans or tax-exempt entities.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
EACH FUND SEEKS A HIGH LEVEL OF CURRENT INCOME THAT IS EXEMPT
FROM FEDERAL INCOME AND STATE OF CALIFORNIA PERSONAL INCOME TAXES,
CONSISTENT WITH PRESERVATION OF CAPITAL.
- --------------------------------------------------------------------------------
Both Funds are separate investment portfolios of the Trust, a no-load, open-end,
management investment company. The investment objective of each Fund is to seek
a high level of current income that is exempt from federal income and State of
California personal income taxes, consistent with preservation of capital. The
investment objectives, along with certain investment restrictions adopted by
each Fund (see "Investment Restrictions" in the Statement of Additional
Information), are fundamental, and cannot be changed without approval by holders
of a majority of each Fund's outstanding voting shares, as defined in the
Investment Company Act of 1940 (the "1940 Act"). While there is no assurance
that either Fund will achieve its investment objective, each will endeavor to do
so by following the investment policies set forth below.
- --------------------------------------------------------------------------------
EACH FUND WILL INVEST PRIMARILY IN CALIFORNIA MUNICIPAL SECURITIES.
- --------------------------------------------------------------------------------
Under normal market conditions, each Fund will invest at least 80% of its total
assets in debt obligations issued by or on behalf of the State of California,
its political subdivisions, agencies, and instrumentalities, the interest on
which, in the opinion of bond counsel or other counsel of the issuer, is not
subject to regular federal income and State of California personal income taxes
("California Municipal Securities"), nor to the alternative minimum tax. Absent
unusual market conditions, each Fund will invest at least 65% of its total
assets in California Municipal Securities, including bonds, notes, debentures,
and zero coupon securities. Under normal market conditions, the
Short/Intermediate Fund seeks to maintain a dollar weighted average portfolio
maturity of between two and five years; and the Long-Term Fund seeks to maintain
a dollar weighted average maturity generally of ten years or longer, although it
may invest in obligations of any maturity.
The Funds may also purchase shares of other investment companies, subject to the
limitations imposed by the 1940 Act and the rules promulgated thereunder.
Because other investment compa-
6
<PAGE> 31
nies employ an investment adviser and other service providers, such investment
by the Funds may cause shareholders to bear duplicative fees. The Investment
Manager will charge no management fees attributable to Fund assets that are
invested in other investment companies. (See "Investment Restrictions" in the
Statement of Additional Information.)
- ------------------------------------------------------------------------------
THE FUNDS WILL ONLY INVEST IN INVESTMENT GRADE SECURITIES.
- ------------------------------------------------------------------------------
Each Fund will invest only in California Municipal Securities that at the time
of purchase: (a) are rated within the four highest ratings of municipal
securities (Aaa to Baa) assigned by Moody's Investors Service ("Moody's") or
(AAA to BBB) assigned by Standard & Poor's Corporation ("S&P") or (AAA to BBB)
assigned by Fitch Investors Services, Inc. ("Fitch"); or (b) have Moody's
short-term municipal securities rating of MIG-2 or higher or VMIG-2 or higher,
or a municipal commercial paper rating of P-2 or higher, or S&P's short-term
municipal rating of SP-2 or higher, or a municipal commercial paper rating of
A-2 or higher; or (c) are unrated by Moody's, S&P or Fitch, if they are
determined by the Investment Manager, using guidelines approved by the Board of
Trustees, to be at least equal in quality to one or more of the above referenced
securities (such unrated securities may not exceed 20% of each Fund's net
assets). Bonds rated in the lowest category of investment grade debt may have
speculative characteristics; changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than is the case with higher grade bonds. For a description of
the ratings, see "Appendix - Ratings of Investment Securities" in the Statement
of Additional Information.
See the section of this Prospectus entitled "Risk Considerations" for more
information on portfolio securities which may, subsequent to inclusion in a
Fund's portfolio, receive a rating below that required for purchase.
The frequency of portfolio transactions, the Fund's turnover rate, will vary
from year to year depending upon market conditions and purchase and redemption
patterns of each Fund's shareholders. Typically, funds with higher turnover tend
to generate higher capital gains and transaction costs. The Short/Intermediate
Fund had portfolio turnover rates for the year ended August 31, 1994 and for the
period from April 21, 1993 (commencement of operations) to August 31, 1993 of
35% and 0% respectively. The Long-Term Fund had portfolio turnover rates for the
year ended August 31, 1994, for the period ended August 31, 1993, and for the
period from February 24, 1992 (commencement of operations) to December 31, 1992
of 48%, 47% and 124%, respectively.
- --------------------------------------------------
THE FUNDS WILL BE "NON-DIVERSIFIED."
- --------------------------------------------------
Each Fund will be "non-diversified" under the 1940 Act. This means that, with
respect to 50% of each Fund's total assets, the Fund may not invest more than 5%
of its total assets in the securities of any one issuer (other than the U.S.
Government). The balance of each Fund's assets may be invested in as few as two
issuers. Thus, up to 25% of each Fund's total assets may be invested in the
securities of any one issuer. For purposes of this limitation, a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security, or, with respect to an industrial revenue bond
that is backed only by the assets and revenues of a non-governmental user, by
such
7
<PAGE> 32
non-governmental user. In certain circumstances, the guarantor of a security may
also be considered to be an issuer.
By investing in a portfolio of municipal securities, shareholders in the Funds
enjoy greater diversification than investors holding individual municipal
securities.
From time to time, as a defensive measure or under abnormal market conditions,
each Fund may invest in taxable "temporary investments" which include:
obligations of the U.S. Government, its agencies or instrumentalities, corporate
debt securities rated within the two highest rating categories established by
Moody's, S&P or Fitch, commercial paper rated in the two highest rating
categories established by any of such rating services, certificates of deposit
of domestic banks having capital and surplus in excess of $100 million, and any
of the foregoing temporary investments subject to repurchase agreements. While
purchases by a Fund of certain temporary investments could cause it to generate
dividends taxable to shareholders as ordinary income (see "Distributions And
Taxes"), it is each Fund's primary intention to produce dividends that are not
subject to federal income or State of California personal income taxes.
CALIFORNIA MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES
California Municipal Securities are debt obligations issued by or on behalf of
the State of California, its political subdivisions, agencies and
instrumentalities, the interest from which is exempt from regular federal income
and State of California personal income taxes. These securities are issued to
obtain funds for various public purposes, such as the construction of public
facilities, the payment of general operating expenses or the refunding of
outstanding debts. They may also be issued to finance various private
activities, including lending of funds to public or private institutions for the
construction of housing, educational or medical facilities. California Municipal
Securities may also include certain types of industrial development bonds or
notes issued by public authorities to finance privately owned or operated
facilities or to fund short-term cash requirements. Short-term California
Municipal Securities are generally issued as interim financing in anticipation
of tax collections, revenue receipts or bond sales to finance various public
purposes.
The two principal classifications of California Municipal Securities are general
obligation and limited obligation or revenue securities. General obligation
securities involve the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues. Their payment may
depend on an appropriation by the issuer's legislative body. The characteristics
and methods of enforcement of general obligation securities vary according to
the law applicable to the particular issuer. Limited obligation or revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities, or a specific revenue source, and generally are not
payable from the unrestricted revenues of the issuer. Private activity bonds are
in most cases limited obligation securities, the credit quality of which is
directly related to the corporate user of the facilities. From time to time,
each Fund may invest more than 25% of its total assets in industrial development
and private activity bonds.
Each Fund's portfolio may also include "moral obligation" securities, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt
8
<PAGE> 33
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
California Municipal Securities purchased by the Funds may include variable rate
demand instruments issued by industrial development authorities and other
government entities. In the event variable rate demand instruments that the
Funds can purchase are not rated by credit rating agencies, such instruments
must be determined by the Investment Manager, using guidelines approved by the
Board of Trustees, to be of comparable quality at the time of purchase to rated
instruments which the Funds can purchase. In some cases, the Funds may require
that the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
Although there may be no active secondary market with respect to a particular
variable rate demand instrument purchased by either Fund, each Fund may (at any
time or during specified periods not exceeding one year, depending upon the
instrument involved) demand payment in full of the principal of the instrument
and may resell the instrument to a third party. The absence of such an active
secondary market, however, could make it difficult for a Fund to dispose of a
variable rate demand instrument in the event the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights. Each Fund could, for this or other reasons, suffer a loss with
respect to such instruments. To the extent that the absence of an active
secondary market for such securities cause them to be "illiquid," such
securities will be subject to each Fund's restrictions on acquiring and holding
illiquid securities.
Participation interests in California Municipal Securities with fixed, floating
or variable rates of interest may be purchased by the Funds from financial
institutions. The buyer of a participation interest receives an undivided
interest in the securities underlying the instrument. A Fund will only purchase
a participation interest if: (a) the instrument meets the Fund's previously
described quality standards for California Municipal Securities, and (b) the
instrument is issued with an opinion of counsel or is the subject of a ruling of
the Internal Revenue Service stating that the interest earned on the
participation interest is exempt from federal income tax.
As a matter of fundamental policy, each Fund may borrow money for temporary
purposes, but not for the purpose of purchasing investments, in an amount up to
one-third of the value of its total assets and may pledge up to 10% of its net
assets to secure borrowings. Neither Fund will purchase illiquid securities,
including repurchase agreements maturing in more than seven days, if, as a
result thereof, more than 10% of its net assets valued at the time of the
transaction would be invested in such securities.
Opinions relating to the validity of California Municipal Securities and to the
exemption of interest thereon from federal income and State of California
personal income taxes are rendered by bond counsel to the respective issuers at
the time of issuance and are not binding upon the tax authorities or the courts.
Neither the Funds nor the Investment Manager will review or re-evaluate the
proceedings relating to the issuance of California Municipal Securities or the
bases for such opinions.
As part of the Funds' fundamental 80% policy described above, each Fund will not
treat interest income specifically subject to federal alternative minimum tax as
tax-exempt for purposes of measuring compliance with the policy. To the extent
that the Funds invest in securities, the interest
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<PAGE> 34
income on which is treated as a preference item for purpose of the alternative
minimum tax, individual shareholders, depending on their own tax status, may be
subject to federal (but not California) alternative minimum tax on part of that
Fund's distributions derived from these securities.
RISK CONSIDERATIONS
Investors should note the following considerations before making an investment
in either of the Funds. For more information regarding the risks involved in
investing in municipal securities and California issuers, see the Statement of
Additional Information.
Since each Fund invests primarily in California Municipal Securities, the
performance of each Fund may be especially affected by factors pertaining to the
California economy and other factors specifically affecting the ability of
issuers of California Municipal Securities to meet their obligations. As a
result, the value of each Fund's shares may fluctuate more widely than the value
of shares of a portfolio investing in securities relating to a number of
different states. The ability of state, county, or local governments to meet
their obligations will depend primarily on the availability of tax and other
revenues to those governments and on their fiscal conditions generally. The
amounts of tax and other revenues available to governmental issuers of
California Municipal Securities may be affected from time to time by economic,
political, geographic, and demographic conditions. In addition, constitutional
amendments, legislative measures, executive orders, administrative regulations,
and voter initiatives may limit a government's power to raise revenues or
increase taxes and thus could adversely affect the ability to meet financial
obligations. The current State of California general obligation bond ratings are
S&P: A; Moody's: A1; and Fitch: A. Such ratings and any further reductions may
adversely affect the value of such obligations. The availability of federal,
state, and local aid to issuers of California Municipal Securities may also
affect their ability to meet their obligations. Payments of principal and
interest on limited obligation securities will depend on the economic condition
of the facility or specific revenue source from whose revenues the payments will
be made, which in turn could be affected by economic, political, and demographic
conditions in the State of California. Any reduction in the actual or perceived
ability of an issuer of California Municipal Securities to meet its obligations
(including a reduction in the rating of its outstanding securities) would likely
affect adversely the market value and marketability of its obligations and could
affect adversely the values of California obligations as well. "Proposition 13"
and similar California constitutional and statutory amendments and initiatives
have restricted the ability of California taxing entities to increase real
property and other tax revenues. Other initiative measures approved by
California voters, through limiting various other taxes, have resulted in a
substantial reduction in state revenues. Decreased state revenues may result in
reductions in allocations of state revenues to local governments. It is not
possible to determine the impact of these initiatives on the ability of
California issuers to pay interest or repay principal on their obligations.
There is no certainty that any California issuer will make full payments of
principal and interest or remain solvent. For example, in December 1994, Orange
County filed for bankruptcy. In addition, from time to time, federal legislative
proposals have threatened the tax-exempt status or use of municipal securities.
(An expanded discussion of the risks associated with municipal securities and
California issuers is contained in the Statement of Additional Information.)
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The investment return on a non-diversified portfolio typically is dependent upon
the performance of a smaller number of issuers relative to the number of issuers
held in a diversified portfolio. In the event of changes in the financial
condition or in the market's assessment of certain issuers, each Fund's policy
of acquiring large positions in the obligations of a relatively small number of
issuers may affect the value of that Fund's portfolio to a greater extent than
that of a fully diversified portfolio.
Although the Funds do not presently intend to do so on a regular basis, each
Fund may invest more than 25% of its assets in California Municipal Securities,
the interest on which is paid solely from revenues on similar projects. To the
extent that a Fund's assets are concentrated in California Municipal Securities
payable from revenues on similar projects, the Funds will be subject to the
particular risks presented by such projects to a greater extent than it would be
if its assets were not so concentrated.
Each Fund may purchase securities on a "when-issued" or "delayed delivery"
basis. When-issued or delayed delivery securities are securities purchased for
future delivery at a stated price and yield. The Funds will generally not pay
for such securities or start earning interest on them until they are received.
Securities purchased on a when-issued or delayed delivery basis are recorded as
an asset and are subject to changes in value based upon changes in the general
level of interest rates. Neither Fund will invest more than 25% of its assets in
when-issued or delayed delivery securities or purchase such securities for
speculative purposes, and will make commitments to purchase securities on a
when-issued or delayed delivery basis with the intention of actually acquiring
the securities. However, each Fund reserves the right to sell acquired
when-issued or delayed delivery securities before their settlement dates if
deemed advisable.
After its purchase by a Fund, an issue of California Municipal Securities may
cease to be rated or its rating may be reduced below that required for purchase
by the Funds. Neither event would require the elimination of such an obligation
from the affected Fund's investment portfolio. However, the obligation generally
would be retained only if such retention was determined by the Board of Trustees
of the Trust to be in the best interests of the affected Fund.
MANAGEMENT OF THE FUNDS
Responsibility for overall management of the Funds rests with the trustees and
officers of the Trust. Professional investment management for the Funds is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. The Investment Manager provides
a continuous investment program, including general investment and economic
advice regarding each Fund's investment strategies, and performs expense
management, accounting and record keeping, and other administrative services
necessary to the operation of the Funds and the Trust. The Investment Manager,
formed in 1989, is a wholly-owned subsidiary of The Charles Schwab Corporation
and is the investment adviser and administrator of the SchwabFunds, a family of
18 mutual funds. As of June 15, 1995, SchwabFunds had aggregate net assets in
excess of $27 billion.
Joanne Keighley is the Portfolio Manager for the Funds and, as such, has had
primary responsibility for the day-to-day management of each Fund's portfolio
since the commencement of each Fund's
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operations. Prior to February 1992, Ms. Keighley was portfolio manager for the
Shearson Lehman California Municipal Bond Fund and E.F. Hutton's Municipal Cash
Reserve Management.
Stephen B. Ward, the Trust's Senior Vice President and Chief Investment Officer,
participates in the management of each Fund's portfolio. Prior to April 1991,
Mr. Ward was Vice President and Portfolio Manager for Federated Investors.
Pursuant to separate agreements, Charles Schwab & Co., Inc. ("Schwab" or the
"Transfer Agent"), 101 Montgomery Street, San Francisco, CA 94104, serves as
shareholder services agent and transfer agent for the Funds. Schwab provides
information and services to shareholders, which include reporting share
ownership, sales and dividend activity (including associated tax consequences),
responding to daily inquiries, effecting the transfer of each Fund's shares, and
facilitating effective cash management of shareholders' Schwab account balances.
It furnishes such office space and equipment, telephone facilities, personnel
and informational literature distribution as is necessary and appropriate in
providing shareholder and transfer agency information and services. Schwab is
also each Fund's Distributor, but receives no compensation for its services as
such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 2.5 million active customer accounts and has over 200 offices. Schwab
also offers convenient access to financial information services and provides
products and services that help investors make investment decisions. Schwab is a
wholly-owned subsidiary of The Charles Schwab Corporation. Charles R. Schwab is
the founder, Chairman and Chief Executive Officer and a director of The Charles
Schwab Corporation and, as of November 30, 1994, the beneficial owner of
approximately 22.25% of the outstanding shares of that corporation. Mr. Schwab
may be deemed to be a controlling person of Schwab and the Investment Manager.
Please see the Funds' Annual Report to Shareholders for the fiscal year ended
August 31, 1994 for a discussion by the Investment Manager of each Fund's
performance.
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THROUGH AT LEAST APRIL 30, 1996, THE INVESTMENT MANAGER AND SCHWAB GUARANTEE
THAT THE TOTAL OPERATING EXPENSES FOR THE SHORT/INTERMEDIATE FUND AND THE
LONG-TERM FUND WILL NOT EXCEED 0.49% OF EACH FUND'S AVERAGE DAILY NET ASSETS.
- --------------------------------------------------------------------------------
FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from each Fund an
annual fee, payable monthly, of 0.41% of each Fund's average daily net assets.
At least through April 30, 1996, the Investment Manager guarantees that the
management fee for the Short/Intermediate Fund and the Long-Term Fund will not
exceed 0.31% of each Fund's average daily net assets. Moreover, at least through
April 30, 1996, the Investment Manager and Schwab guarantee that the total
operating expenses of the Short/Intermediate Fund and the Long-Term Fund will
not exceed 0.49% of each Fund's average daily net assets. The effect of these
reductions and guarantees is to maintain or lower each Fund's expenses and thus
maintain or increase each Fund's total return to shareholders.
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For the transfer agency and shareholder services provided under its Transfer
Agency and Shareholder Service Agreements with the Trust, Schwab receives an
annual fee, payable monthly, of 0.05% and 0.20%, respectively, of each Fund's
average daily net assets. PNC Bank is the Funds' Custodian. The Investment
Manager, Schwab and the Custodian may each reduce its fees from time to time.
The Trust pays the expenses of its operations, including the fees and expenses
of independent accountants, counsel and custodian, and the costs of calculating
net asset values, brokerage commissions or transaction costs, taxes,
registration fees, and the fees and expenses of qualifying the Trust and its
shares for distribution. In addition, the Trust will incur and pay fees in
connection with the establishment and maintenance of "sweep" accounts through
which the Fund's may make regular investments in other investment companies. The
expenses will generally be allocated among the Trust's investment portfolios on
the basis of relative net assets at the time of allocation. However, expenses
directly attributable to a particular Fund will be charged to that Fund. For the
year ended August 31, 1994, the Short/Intermediate Fund paid investment
management fees of 0.14% and total operating expenses of 0.48% of the Fund's
average daily net assets, and the Long-Term Fund paid investment management fees
of 0.26% and total operating expenses of 0.60% of the Fund's average daily net
assets.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
THE FUNDS DECLARE DAILY DIVIDENDS WHICH ARE PAID MONTHLY.
- --------------------------------------------------------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS: On each day that the net asset value per
share of the Funds is determined ("Business Day"), each Fund declares a dividend
from net investment income as of the close of trading on the New York Stock
Exchange (normally 4:00 p.m. Eastern time) to shareholders of record at the
previous net asset value calculation. Dividends are normally paid (and, where
applicable, reinvested) on the 25th of each month, if a Business Day, otherwise
on the next Business Day. Each Fund intends to distribute substantially all of
its net investment income on an annual basis, and plans to distribute
substantially all of its net capital gains, if any, at least once annually, as
determined by the Board of Trustees. All distributions will be automatically
reinvested in additional shares of a Fund unless the shareholder elects
otherwise.
TAX INFORMATION: Each Fund is treated as a separate entity for tax purposes, has
elected to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), has qualified as
such, and intends to continue to so qualify. In order to so qualify, each Fund
will distribute substantially all of its net exempt-interest income and its
investment company taxable income, and will meet certain other requirements.
Such qualification relieves a Fund of liability for federal and California
income taxes to the extent its earnings are distributed.
FEDERAL INCOME TAXES: Dividends derived from exempt-interest income (known as
"exempt-interest dividends") may be treated by a Fund's shareholders as items of
interest excludable from their federal gross income. A shareholder should
consult his or her own tax adviser with respect to whether exempt-interest
dividends would be excludable from gross income if the shareholder were treated
as a "substantial user" of facilities financed by an obligation held by either
Fund or a "related person" to such user under the Code. Any loss on the sale or
exchange of any share held for six months or less,
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will be disallowed to the extent of the amount of the exempt-interest dividend
received with respect to such share. The U.S. Treasury Department is authorized
to issue regulations reducing the period to not less than 31 days for certain
regulated investment companies. No such regulations have been issued as of the
date of this Prospectus. To the extent dividends paid to shareholders are
derived from taxable interest or short-term or long-term capital gains, such
dividends will be subject to federal income tax whether such dividends are paid
in the form of cash or additional shares.
If a Fund holds certain "private activity bonds" ("industrial development bonds"
under prior law), dividends derived from interest on such obligations will be
classified as an item of tax preference which could subject certain shareholders
to alternative minimum tax liability. Corporate shareholders must also take all
exempt-interest dividends into account in determining "adjusted current
earnings" for purposes of calculating their alternative minimum tax.
All or part of interest on indebtedness incurred or continued by a shareholder
to purchase or carry shares of a Fund will not be deductible by the shareholder.
The portion of interest that is not deductible is equal to the total interest
paid or accrued on the indebtedness multiplied by the percentage of that Fund's
total distributions (excluding distributions of the excess of net long-term
capital gains over net short-term capital losses) paid to the shareholder that
are exempt-interest dividends. Under rules used by the Internal Revenue Service,
the purchase of shares of a Fund may be considered to have been made with
borrowed funds even though such funds are not directly traceable to the purchase
of the shares.
Taxable distributions which are reinvested will be taxable as if they had been
paid in cash. Shareholders receiving Social Security benefits or Railroad
Retirement Act benefits should note that exempt-interest dividends will be taken
into account in determining the taxability of such benefits. It is not expected
that any portion of the dividends paid by either Fund will be eligible for the
corporate dividends received deduction. (See "Taxes" in the Statement of
Additional Information.)
CALIFORNIA INCOME TAXES: Dividends paid by the Funds to non-corporate
shareholders that are derived from interest on California Municipal Securities
or federal obligations are also exempt from State of California personal income
tax. For this purpose, federal obligations are obligations the interest on which
would be excludable from gross income for California personal income tax
purposes if the obligations were owned by an individual. However, dividends paid
to shareholders that are corporations subject to California franchise or income
tax will be taxed as ordinary income to such shareholders, notwithstanding that
all or a portion of such dividends are exempt from State of California personal
income tax. Moreover, to the extent that a Fund's dividends are derived from
interest on debt obligations other than California Municipal Securities or
federal obligations, such dividends will be subject to State of California
personal income tax, even though such dividends may be exempt for federal income
tax purposes.
Except as noted with respect to State of California personal income tax,
distributions of net investment income may be taxable to investors under state
or local law as dividend income even though all or a portion of such
distributions may be derived from interest on obligations which, if realized
directly, would be exempt from such income taxes. In addition, to the extent, if
any, that dividends paid to shareholders are derived from taxable interest or
from long-term or short-term capital gains, such
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dividends will not be exempt from State of California personal income tax
whether received in cash or reinvested in shares.
Interest on "private activity bonds" is not subject to the California
alternative minimum tax. In addition, California does not impose its personal
income tax on Social Security or Railroad Retirement benefits. None of the
interest on indebtedness incurred to purchase or carry shares will be deductible
for California personal income tax purposes.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' regular Schwab account statements. The Funds will
notify shareholders at least annually as to the federal income and State of
California personal income tax consequences of distributions made each year.
The foregoing is only a brief summary of some of the federal and State of
California income tax considerations affecting the Funds and their shareholders.
Accordingly, a potential investor should consult his or her tax adviser with
specific reference to his or her own tax situation.
SHARE PRICE CALCULATION
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THERE ARE NO SALES CHARGES OR TRANSACTION FEES TO
PURCHASE OR REDEEM SHARES OF A FUND.
- ------------------------------------------------------------------
The price of each Fund's shares on any given day is their "net asset value" or
NAV. This amount is computed by dividing the total market value of each Fund's
investments and other assets on that day, less any liabilities, by the number of
shares outstanding. The net asset value per share of each Fund is determined on
each day the New York Stock Exchange is open for trading at 4:00 p.m., Eastern
time. Each Fund's net asset value will fluctuate and neither Funds' shares are
insured against reduction in net asset value. (See "Share Price Calculation" in
the Statement of Additional Information.)
The securities in which the Funds invest will be valued daily based on their
market value. Securities for which market quotations are readily available are
valued at the mean between the most recent bid and asked prices. The value of
other assets for which no reliable quotations are readily available (including
any restricted securities) are valued at fair value as determined in good faith
by the Investment Manager pursuant to the Board of Trustees' guidelines.
Securities may be valued on the basis of prices provided by pricing services
when such prices are believed to reflect fair market value.
HOW THE FUNDS SHOW PERFORMANCE
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EACH FUND'S PERFORMANCE MAY BE ADVERTISED ON A BEFORE OR AFTER-TAX BASIS.
- --------------------------------------------------------------------------------
From time to time each Fund may advertise its total return, yield, effective
yield, tax-equivalent yield, and tax-equivalent effective yield. Performance
figures are based upon historical results and are not intended to indicate
future performance.
Each Fund's total return measures its overall change in value over a period,
including share price movements, and assumes all dividends and capital gains
have been reinvested. Average annual total return reflects the hypothetical
annually compounded return mandated by the Securities and
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<PAGE> 40
Exchange Commission. Other reported total return figures may differ in that they
may report non-standard periods or represent aggregate or cumulative return over
a stated length of time.
Each Fund's yield refers to the income generated by a hypothetical investment in
that Fund over a specific 30-day period. This income is then annualized, which
means that the income generated during the 30-day period is assumed to be
generated every 30 days over an annual period and is shown as a percentage of
the hypothetical investment.
Tax-equivalent yield is the yield that a taxable investment must generate in
order to equal (after applicable taxes are deducted) a Fund's yield for an
investor in stated federal income and State of California personal income tax
brackets. (Normally assumed to be the applicable maximum tax rate.)
Tax-equivalent yield is based upon, and will be higher than, the portion of the
Fund's yield that is tax exempt. Each Fund may also illustrate the hypothetical
performance of taxable and double tax-free investments over the long-term to
show the effects of compounding double tax-free dividends. The tax-equivalent
yield is computed in the same manner as is the tax-equivalent yield, except that
the effective yield is substituted for yield in the calculation. (See "Total
Return and Yield" in the Statement of Additional Information.)
A Fund's performance may be compared to that of other mutual funds tracked by
mutual fund rating services, various indices of investment performance
(including the Schwab 1000 Index(R)), United States Treasury obligations, bank
certificates of deposit, the Consumer Price Index, and other investments for
which reliable performance data is available. Each Fund's performance may also
be compared to various unmanaged bond indices, Lipper Analytical Services Inc.
averages and Morningstar performance rankings.
Additional performance information is available in the Trust's Annual Report,
which is available free of charge by calling 800-2 NO-LOAD, or from your local
Schwab office.
GENERAL INFORMATION
ABOUT THE TRUST. The Trust was organized as a business trust under the laws of
Massachusetts on October 26, 1990 and may issue an unlimited number of shares of
beneficial interest in one or more investment portfolios or series ("Series").
Currently, shares of seven Series are offered. The Board of Trustees may
authorize the issuance of shares of additional Series if deemed desirable.
Shares of each Series have equal noncumulative voting rights and equal rights as
to dividends, assets and liquidation of such Series.
The Trust is not required to hold annual shareholders' meetings and does not
intend to do so. It will, however, hold special meetings as required or deemed
desirable by the Board of Trustees for such purposes as electing or removing
trustees, changing fundamental policies, or approving an investment advisory
agreement. Shareholders will vote by Series and not in the aggregate (for
example, when voting to approve the investment advisory agreement), except when
voting in the aggregate is permitted under the 1940 Act, such as for the
election of trustees.
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SHAREHOLDER GUIDE
- -----------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE
SHAREHOLDER SERVICE AND INFORMATION.
- -----------------------------------------------------------
SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
request exchanges at any one of our over 200 Schwab offices nationwide or by
calling 800-2 NO-LOAD, 24 hours a day, where trained representatives are
available to answer questions about the Funds and your account. The privilege to
initiate transactions by telephone, as discussed below, is automatically
available through your Schwab account. Each Fund will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
If these procedures are not followed, the Fund may be liable for any losses due
to unauthorized or fraudulent instructions. These procedures may include
requiring a form of personal identification prior to acting upon instructions
received by telephone, providing written confirmation of such instructions and
tape recording telephone transactions.
HOW TO PURCHASE SHARES
- -----------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUNDS
ONLY THROUGH A SCHWAB ACCOUNT.
- -----------------------------------------------------
Shares of the Funds are offered to California residents and residents of
selected other states.
You may purchase shares of the Funds exclusively through an account maintained
with Charles Schwab & Co., Inc., and payment for shares must be made directly to
Schwab. The Securities Investor Protection Corporation ("SIPC") will provide
account protection in an amount up to $500,000 for securities, including Fund
shares which you hold in a Schwab account. Of course, SIPC account protection
does not protect shareholders from share price fluctuations.
If you already have a Schwab account, you may purchase shares in the Funds as
described below and need not open a new account.
If you do not presently maintain a Schwab account and wish to establish one,
simply complete a Schwab Account Application (available by calling 800-2
NO-LOAD, 24 hours a day, or by contacting your local Schwab office) and mail or
deliver it to your local Schwab office. You may also mail the application to
Schwab at 101 Montgomery Street, San Francisco, CA 94104. Corporations and other
organizations should contact their local Schwab office to determine which
additional forms may be necessary to open a Schwab account.
You may deposit funds into your Schwab account by check, wire or other forms of
electronic funds transfer (securities may also be deposited). All deposit checks
should be made payable to Charles Schwab & Co., Inc. If you would like to wire
funds into your existing Schwab account, please contact your local Schwab office
for instructions.
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YOUR INITIAL INVESTMENT IN EITHER FUND MAY BE AS LOW AS $1,000.
ADDITIONAL SHARE PURCHASES CAN BE MADE FOR AS LITTLE AS $100.
- --------------------------------------------------------------------------------
MINIMUM FUND INVESTMENT REQUIREMENTS. Your initial investment in a Fund may be
as low as $1,000 ($500 for custodial accounts). The minimum subsequent
investment is $100. These requirements may be reduced or waived on certain
occasions. (See "Purchase and Redemption of Shares" in the Statement of
Additional Information.)
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SHARES WILL BE PURCHASED AFTER YOU HAVE FUNDS AVAILABLE IN YOUR ACCOUNT.
- --------------------------------------------------------------------------------
WHEN AND AT WHAT PRICE SHARES WILL BE PURCHASED. You must have funds available
in your Schwab account in order to purchase Fund shares. If funds (including
those transmitted by wire) are received by Schwab before the time the Fund's
daily net asset value is calculated (normally 4:00 p.m. Eastern time), they will
be available for investment on the day of receipt. If funds arrive after that
time, they will be available for investment the next Business Day. Orders to
purchase shares will be executed at the next determined net asset value after
receipt by Schwab's Mutual Fund Transfer Agency Department. Orders received
after that time will be executed at the next determined net asset value,
generally the next Business Day. (See "Share Price Calculation.")
METHODS OF PURCHASING SHARES. Schwab offers you several convenient ways to
purchase shares of the Funds. You may choose the one that works best for you and
Schwab will confirm execution of your purchase order.
BY PHONE:
You may use existing funds in your Schwab account to make initial and
subsequent share purchases. To place your order, call your local Schwab office
during regular business hours or 800-2 NO-LOAD, 24 hours a day.
BY MAIL:
You may direct that funds already in your Schwab account be used to make
initial and subsequent share purchases. Alternatively, your purchase
instructions may be accompanied by a check made out to Charles Schwab & Co.,
Inc. which will be deposited into your Schwab account and used, as necessary,
to cover all or part of your purchase order.
Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, CA 94104 or to your local Schwab office
and should contain the following information:
- your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);
- the name of the Fund(s) and the dollar amount of shares you would like
purchased;
- and (initial share purchases only) select one of the distribution
options listed below.
IN PERSON AT A SCHWAB OFFICE:
Visit your local Schwab office where a representative will be happy to assist
you.
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AUTOMATIC INVESTMENT:
Once you have satisfied the initial investment requirements, you may authorize
Schwab to automatically purchase shares at intervals and in amounts
pre-selected by you on your behalf. (See "Schwab Automatic Investment Plan.")
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YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS.
- -------------------------------------------------------------------
SELECTING A DISTRIBUTION OPTION. You may select from the three distribution
options listed below when you first become a shareholder in either of the Funds.
If you already are a shareholder and wish to change your distribution option,
please call your local Schwab office for assistance.
1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gains
distributions will be reinvested in additional shares. This option will be
selected automatically unless you specify another option.
2.CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in cash
and any capital gain distributions will be reinvested in additional shares.
3.ALL CASH: Income dividends and any capital gain distributions will both be
paid in cash.
Dividends and distributions subject to reinvestment will be invested at the net
asset value next determined after their record date. Cash distributions will be
credited to your Schwab account and will be held there or mailed to you
depending on the standing instructions applicable to your account. For
information on how to wire funds from your Schwab account to your bank, see
"Other Important Information - Wire Transfers to Your Bank."
OTHER PURCHASE INFORMATION. Each Fund reserves the right, in its sole discretion
and without prior notice to shareholders, to withdraw or suspend all or any part
of the offering made by this Prospectus, to reject purchase orders or to change
the minimum investment requirements. All orders to purchase shares of the Funds
are subject to acceptance by the Funds and are not binding until confirmed or
accepted in writing. Any purchase which would result in a single shareholder
owning shares with a value of more than 10% of a Fund's assets or $3 million,
whichever is greater, is subject to prior approval by the Fund. Schwab will
charge a $15 service fee against an investor's Schwab account if his or her
investment check is returned because of insufficient or uncollected funds or a
stop payment order.
HOW TO EXCHANGE SHARES
- -----------------------------------------------------------------------
SHARES OF THE FUNDS MAY BE EXCHANGED FOR SHARES OF
OTHER FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
- -----------------------------------------------------------------------
The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of any other SchwabFunds class or series available to investors in your
state. Thus, you can conveniently modify your investments if your goals or
market conditions change. An exchange will involve the redemption of shares at
the net asset value next determined after receipt by the Transfer Agent of an
exchange request (on the same day as the Transfer Agent received your request,
if it was received by 4:00 p.m.
19
<PAGE> 44
(Eastern time) and on the next Business Day if the request was received after
that time) and the purchase of shares at the net asset value next determined
after sale of the shares involved in the exchange (on the same day as the
Transfer Agent received your request, if it was received by 4:00 p.m. (Eastern
time) and on the next Business Day if the request was received after that time).
An exchange will be treated as the sale of the shares for federal and state
income tax purposes. Note that you must meet the minimum investment requirements
applicable to the shares you wish to receive in an exchange. Each Fund reserves
the right on 60 days' written notice to modify, limit or terminate the exchange
privilege.
METHODS OF EXCHANGING SHARES.
BY PHONE:
To exchange between any of the SchwabFunds(R) by telephone, please call your
local Schwab office during its regular business hours or 800-2 NO-LOAD, 24
hours a day. Investors should be aware that telephone exchanges may be
difficult to implement during periods of drastic economic or market changes.
To properly process your telephone exchange request, we will need the
following information:
- your Schwab account number and your name for verification;
- the name of the fund from which you wish to exchange shares;
- number of shares to be exchanged;
- the name of the fund into which shares are to be exchanged; and
- the distribution option you select.
BY MAIL:
You may also request an exchange by writing Schwab at 101 Montgomery Street,
San Francisco, CA 94104 or your local Schwab office.
To properly process your mailed exchange request, we will need a letter from
you which:
- references your Schwab account number;
- specifies the name of the fund from which you wish to exchange shares
and the number of shares to be exchanged;
- indicates the name of the fund into which shares are to be exchanged;
- indicates the distribution option you select; and
- is signed by one of the registered Schwab brokerage account holders
(in the exact form specified in the account).
IN PERSON AT A SCHWAB OFFICE:
You can also request an exchange in person at your local Schwab office.
20
<PAGE> 45
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
REDEMPTION PROCEEDS WILL BE CREDITED TO YOUR SCHWAB ACCOUNT.
YOU MAY ELECT TO HAVE THEM MAILED TO YOU.
- --------------------------------------------------------------------------------
THE PRICE AT WHICH SHARES WILL BE REDEEMED. Shares will be redeemed at the net
asset value per share next determined after receipt by the Transfer Agent of
proper redemption instructions, as set forth on the following page.
PAYMENT OF REDEMPTION PROCEEDS. Payment for redeemed shares will be credited
directly to your Schwab account no later than five Business Days after the
Transfer Agent receives your redemption instructions in proper form. Redemption
proceeds will then be held there or mailed to you depending on the account
standing instructions you have selected. For information on how to wire funds
from your Schwab account to your bank, see "Other Important Information - Wire
Transfers to Your Bank."
If you purchased shares by check, your redemption proceeds may be held in your
Schwab account until your check clears (which may take up to 15 days). Depending
on the type of Schwab account you have, your money may earn interest during any
holding period.
Each Fund may suspend redemption rights or postpone payments when trading on the
New York Stock Exchange (the "Exchange") is restricted, the Exchange is closed
for any reason other than its customary weekend or holiday closings, emergency
circumstances as determined by the Securities and Exchange Commission (the
"SEC") exist, or for such other circumstances as the SEC may permit. Each Fund
may also elect to invoke a 7 day period for cash settlement of individual
redemption requests in excess of $250,000 or 1% of a Fund's net assets,
whichever is less. (See "Purchase and Redemption of Shares" in the Statement of
Additional Information.)
METHODS OF REDEEMING SHARES.
BY PHONE:
You may redeem your shares by telephone by calling your local Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day. Investors
should be aware that telephone redemption may be difficult to implement during
periods of drastic economic or market changes. Shareholders who experience
difficulties in redeeming by telephone can mail their redemption orders or
place them in person as set forth below.
Telephone redemption orders received prior to 4:00 p.m. (Eastern time) on any
Business Day, once they have been verified as to the caller's identity and
account ownership by the Transfer Agent, will be deemed to have been received
by the Transfer Agent that day.
BY MAIL:
Redemption orders can also be delivered through the mail. Mailed redemption
orders should be addressed to Schwab at 101 Montgomery Street, San Francisco,
CA 94104 or your local Schwab office. Once a redemption request is mailed it
is irrevocable and may not be modified or canceled.
21
<PAGE> 46
To properly process your redemption order we will need a letter from you which
contains the following information:
- your Schwab account number;
- the name of the Fund(s) from which you wish to redeem shares;
- the number of Fund shares to be redeemed; and
- a signature of any one of the registered Schwab account holders (in
the exact form specified in the account).
IN PERSON AT A SCHWAB OFFICE:
You can also place your redemption order in person at your local Schwab
office.
SCHWAB AUTOMATIC INVESTMENT PLAN
- --------------------------------------------------------------------------------
THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST,
CONVENIENT WAY TO MAKE REGULAR INVESTMENTS IN THE FUNDS.
- --------------------------------------------------------------------------------
Schwab offers an Automatic Investment Plan ("AIP") that allows you to make
periodic investments in non-money market SchwabFunds (and certain other funds
available through Schwab) automatically and conveniently. AIP can be used as a
dollar cost averaging program that saves you time and expense associated with
writing checks or wiring funds.
INVESTMENT MINIMUMS: You can make automatic investments in any amount, from $100
to $50,000, once you meet a fund's investment minimum.
INVESTMENT METHODS: Automatic investments are made from your Schwab account and
you may select from several different investment methods (sources of funds) to
make automatic investment(s):
a) USING FUNDS IN A SCHWAB ACCOUNT: You can make automatic investments by
using the uninvested cash in your Schwab account and/or by using the
proceeds of redemption of shares of the Schwab Money Fund linked to your
Schwab account. If you elect to use these funds to make your automatic
investments, cash in your Schwab account will be used to make the
investment and, if necessary, shares of your Schwab Money Fund will be
redeemed to cover the balance of the purchase.
b) USING THE SCHWAB MONEYLINK(R) TRANSFER SERVICE FOR:
- "Authorized Transfers" from a bank checking or savings account;
- "Direct Deposit" of payroll or government checks (all or a portion).
Authorized Transfers (transfers from a bank checking or savings account) and
Direct Deposit (automatic deposit of all or a portion of a payroll or government
check) are two of the investment method options which are made available through
the Schwab MoneyLink Transfer Service ("MoneyLink"). MoneyLink transfers money
into your Schwab account and automatic investments can be made using these
funds.
22
<PAGE> 47
If you elect to use Authorized Transfers and/or Direct Deposit for your
automatic investments, you will select two dates: a transfer date (when the
money is transferred into your Schwab account) and your investment date. The
automatic investment date selected may be the same day of your Direct Deposit or
Authorized Transfers. Schwab recommends that your investment date be on or close
to the transfer/deposit date to minimize uninvested cash in your Schwab account.
If you make changes to your Authorized Transfer or Direct Deposit date, it may
also be necessary to change your automatic investment date to coincide with the
new transfer/deposit date.
INVESTMENT FREQUENCY: You can select the frequency of your automatic investments
(twice monthly, monthly or quarterly) and choose either the 5th or the 20th of
the month for your automatic investment dates. Quarterly investments are made on
the date selected in the first month of each quarter (January, April, July and
October).
CHANGING INSTRUCTIONS TO AN ALREADY ESTABLISHED PLAN: If you want to change the
fund(s) selected for your AIP, you may do so by calling your local branch or
800-2 NO-LOAD, 24 hours a day, or by sending written instructions clearly
outlining the changes to: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104. Written notification must include the following:
1. the funds with AIP that you want to cancel;
2. the newly selected fund(s) in which you want to begin making automatic
investments and the amount to be invested in each fund; and
3. the investment frequency and investment dates for your new automatic
investments.
Information on changing Authorized Transfer and Direct Deposit instructions is
included in the Automatic Investment Plan Terms and Conditions brochure which
you will receive after enrolling in AIP.
TERMINATING YOUR AUTOMATIC INVESTMENT PLAN. If you wish to terminate your AIP,
you may call your local branch or 800-2 NO-LOAD, 24 hours a day, or send written
instructions to Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.
Note: Your Authorized Transfers and/or Direct Deposit will not automatically
terminate when you cancel your AIP investments.
TERMINATING AUTHORIZED TRANSFERS AND DIRECT DEPOSIT. If you wish to terminate
your Authorized Transfers, you may do so at any time by notifying Schwab in
writing. You must notify your employer or government agency to cancel Direct
Deposit.
IMPORTANT: If you are canceling your Authorized Transfers and/or Direct Deposit
and you wish to cancel your AIP, you must also provide instructions stating that
Schwab should cancel your AIP. You may notify Schwab by sending written
instructions to the address above or telephoning your local branch or 800-2
NO-LOAD, 24 hours a day. Your automatic investments will continue using Schwab
account assets if Schwab does not receive notification to terminate your
automatic investments as well.
23
<PAGE> 48
TO AVOID PROCEDURAL DIFFICULTIES, SCHWAB SHOULD RECEIVE INSTRUCTIONS TO CHANGE
OR TERMINATE YOUR AIP OR AUTHORIZED TRANSFERS AT LEAST TEN DAYS PRIOR TO YOUR
SCHEDULED INVESTMENT DATE.
ADDITIONAL INFORMATION. This information is only a summary of the Automatic
Investment Plan Terms and Conditions brochure which you will receive if you
choose to enroll in AIP. Please read it carefully and keep it for future
reference.
OTHER IMPORTANT INFORMATION
MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, each Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of a shareholder's holdings in that Fund drops below the Fund's $500
minimum balance requirement ($250 in the case of custodial accounts).
Shareholders will be notified in writing 30 days before the Fund takes such
action to allow them to increase their holdings to at least the minimum level.
Also note that, because they can only be held in Schwab accounts, shares of each
Fund will be automatically redeemed should the Schwab account in which they are
carried be closed.
CONSOLIDATED MAILINGS. In an effort to reduce mailing costs, the Funds
consolidate shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write SchwabFunds at 101
Montgomery Street, San Francisco CA 94104 to that effect.
WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
can be wired from your Schwab account to your bank account. Call your local
Schwab office for additional information on wire transfers. A $15 service fee
will be charged against your Schwab account for each wire sent.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
BEING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR
THEIR DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
24
<PAGE> 49
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 50
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 51
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 52
SCHWAB CALIFORNIA
TAX-FREE BOND FUNDS
PROSPECTUS DECEMBER 30, 1994,
AS AMENDED JUNE 30, 1995
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, California 94104
920-4 (7/95) CRS 6677 Printed on recycled paper.
SchwabFunds(R)
<PAGE> 53
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB LONG-TERM TAX-FREE BOND FUND
- --------------------------------------------------------------------------------
PROSPECTUS December 30, 1994, as amended June 30, 1995
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD, 24 hours a day.
THE SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND (the "Short/Intermediate Fund")
and the SCHWAB LONG-TERM TAX-FREE BOND FUND (the "Long-Term Fund," formerly
known as the Schwab National Tax-Free Bond Fund, and, together, with the
Short/Intermediate Fund, the "Funds"), are designed for investors who seek a
high level of current income that is exempt from federal income tax, consistent
with preservation of capital. Both Funds seek to achieve their objective by
investing primarily in debt securities issued by or on behalf of states,
territories, and possessions of the U.S. and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest on which is
not subject to regular federal income tax ("Municipal Securities"). Under normal
market conditions, each Fund will invest at least 65% of its assets in Municipal
Securities, including bonds, notes, debentures, and zero coupon securities.
Under normal market conditions, the Short/Intermediate Fund seeks to maintain a
dollar weighted average portfolio maturity of between two and five years and the
Long-Term Fund seeks to maintain a dollar weighted average portfolio maturity of
10 years or longer, although it may invest in obligations of any maturity. Each
Fund is a non-diversified investment portfolio of Schwab Investments (the
"Trust"), a no-load, open-end, management investment company.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. This Prospectus may be available via electronic
mail. For a free paper copy of this Prospectus call 800-2 NO-LOAD. You can find
more detailed information about the Funds in the Trust's "Statement of
Additional Information," dated December 30, 1994, as amended June 30, 1995 (and
as further amended from time to time), and filed with the Securities and
Exchange Commission. The Statement of Additional Information is incorporated by
reference into this Prospectus, and may be obtained without charge by contacting
Schwab at 800-2 NO-LOAD, 24 hours a day, or 101 Montgomery Street, San
Francisco, CA 94104.
TABLE OF CONTENTS
<TABLE>
<S> <C>
KEY FEATURES OF THE FUNDS.............................................................. 2
SUMMARY OF EXPENSES.................................................................... 3
FINANCIAL HIGHLIGHTS................................................................... 5
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS............................................ 6
INVESTMENT OBJECTIVES AND POLICIES..................................................... 6
MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES......................................... 8
RISK CONSIDERATIONS.................................................................... 10
MANAGEMENT OF THE FUNDS................................................................ 10
DISTRIBUTIONS AND TAXES................................................................ 12
SHARE PRICE CALCULATIONS............................................................... 14
HOW THE FUNDS SHOW PERFORMANCE......................................................... 14
GENERAL INFORMATION.................................................................... 15
SHAREHOLDER GUIDE...................................................................... 15
HOW TO PURCHASE SHARES............................................................... 16
HOW TO EXCHANGE SHARES............................................................... 18
HOW TO REDEEM SHARES................................................................. 19
SCHWAB AUTOMATIC INVESTMENT PLAN....................................................... 21
OTHER IMPORTANT INFORMATION............................................................ 23
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE> 54
KEY FEATURES OF THE FUNDS
TAX-FREE INCOME. Income from each Fund will generally be exempt from federal
income tax. The Funds may offer higher after-tax yields than some comparable
taxable investments. With the possibility of additional increases in individual
tax rates in coming years, the Funds' tax-exempt returns may become even more
attractive. (See "Investment Objectives and Policies.")
EFFECT OF PORTFOLIO MATURITY ON YIELDS. Securities with longer maturities have a
greater risk of fluctuating principal values than shorter-term instruments. High
quality money market instruments reflect short-term interest rates with
relatively little risk of fluctuation of principal value. The Short/
Intermediate Fund seeks to provide higher yields than money market instruments
by investing in securities to maintain a dollar weighted average portfolio
maturity of between two and five years. The Long-Term Fund seeks to provide even
higher yields by investing in securities to maintain a dollar weighted average
portfolio maturity of 10 years or longer.
CREDIT SAFETY THROUGH AN INVESTMENT GRADE PORTFOLIO. The Funds will invest only
in municipal securities rated in the four highest rating categories and in
unrated securities deemed to be of equivalent credit quality. For more
information on portfolio securities that may, subsequent to inclusion in a
Fund's portfolio, receive a rating below that required for purchase, see the
section of this Prospectus entitled "Risk Considerations."
MONTHLY DIVIDENDS. Dividends on each Fund's shares are declared daily and paid
monthly, unlike individual municipal securities which generally pay interest
semi-annually. Additionally, unlike interest paid on municipal securities,
shareholders can reinvest dividends paid on their Fund's shares. (See
"Distributions and Taxes.")
LOW MINIMUM INVESTMENT. Investors can begin their tax-free investment program
with as little as $1,000. Subsequent investments can be made with only $100.
(See "How to Purchase Shares.")
PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. (the
"Investment Manager"), currently provides investment management services to the
SchwabFunds(R), a family of 18 mutual funds with over $27 billion in assets as
of June 15, 1995. (See "Management of the Funds.")
LOW COST INVESTING. The Funds bring a low cost approach to investing with:
- no sales charges or transaction fees;
- no 12b-1 fees or contingent deferred sales charges;
- a portion of the management fees for the Short/Intermediate Fund and the
Long-Term Fund waived through April 30, 1996 for potentially higher
returns; and
- A commitment by the Investment Manager and Schwab to absorb operating
expenses of the Short/Intermediate Fund and the Long-Term Fund in excess
of 0.49% of each Fund's average daily net assets at least through April
30, 1996 (see "Management of the Funds").
2
<PAGE> 55
SHAREHOLDER SERVICE. Schwab serves as the Funds' principal
underwriter/distributor, transfer agent, and shareholder service provider.
Schwab's professional representatives are available 24 hours a day to receive
your purchase, redemption, and exchange orders. Call your local Schwab office
during business hours or 800-2 NO-LOAD, 24 hours a day. As a discount broker,
Schwab gives you investment choices and lets you make your own decisions. Schwab
has many services that help you make the most informed investment decisions.
(See "How To Purchase Shares," "How to Exchange Shares," and "How to Redeem
Shares.")
FREE AUTOMATIC INVESTMENT PLAN. Schwab's free Automatic Investment Plan allows
you to make regular investments in the Funds in amounts and at intervals that
you select. You avoid the inconvenience, delay and expense associated with
checks or bank wires. To obtain more information about the Automatic Investment
Plans, refer to the "Schwab Automatic Investment Plan" section in this
Prospectus, visit or call your local Schwab office or call 800-2 NO-LOAD, 24
hours a day. (See "Schwab Automatic Investment Plan.")
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity on one report. (See "Other Important
Information.")
NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders. (See "Management
of the Funds.")
FIXED INCOME INVESTMENTS. In addition to bond mutual funds, Schwab offers a
complete selection of individual fixed income securities, including:
<TABLE>
<S> <C>
- Municipal Bonds - Corporate Bonds
- Strips - Ginnie Maes
- Treasuries - CDs
</TABLE>
Contact Schwab's bond specialists at 800-626-4600 for more information.
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SCHWAB SCHWAB
SHORT/INTERMEDIATE LONG-TERM
TAX-FREE BOND FUND TAX-FREE BOND FUND
------------------ ------------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases................................. None None
Sales Load on Reinvested Dividends...................... None None
Deferred Sales Load..................................... None None
Exchange Fee............................................ None None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee reductions)(1)............... 0.31% 0.31%
12b-1 Fees.............................................. None None
Other Expenses (after fee reductions and expense
reimbursement)....................................... 0.18%(3) 0.18%(4)
-------- --------
TOTAL FUND OPERATING EXPENSES(2).......................... 0.49%(3) 0.49%(4)
=============== ===============
</TABLE>
3
<PAGE> 56
(1) This amount has been restated to reflect a reduction by the Investment
Manager which is guaranteed through at least April 30, 1996. If there were no
such reduction, the maximum management fee for the Short/Intermediate Fund and
the Long-Term Fund would be 0.41% of each Fund's average daily net assets.
(2) Schwab currently imposes no fees for opening and maintaining a Schwab
brokerage account. It is currently anticipated that effective October 1, 1995, a
quarterly fee of $7.50 will be charged to Schwab brokerage and custodial
accounts with balances below $1,000 and $500, respectively. This fee will be
waived if there has been one commissionable trade within the last six months, if
the account balance is below $35, or if there are combined account balances of
at least $10,000. Schwab imposes no fees for opening and maintaining a Schwab
One(R) account with a minimum balance of $5,000. Schwab One accounts with
balances below $5,000 are subject to a monthly fee of $5 if there have been
fewer than two commissionable trades within the last 12 months. Schwab
Individual Retirement Accounts with balances of $10,000 or more by September 15,
1995 are not charged Schwab's $29 annual IRA account fee for the life of the
account. Schwab Keogh plans are currently charged an annual fee of $45.
(3) This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least April 30, 1996, the total operating
expenses of the Short/Intermediate Fund will not exceed 0.49% of the Fund's
average daily net assets. Without a similar guarantee which was in effect for
the fiscal year ended August 31, 1994, total operating expenses would have been
0.91% of the Fund's average daily net assets.
(4) This amount has been restated to reflect the guarantee by the Investment
Manager and Schwab that, through at least April 30, 1996, the total operating
expenses of the Long-Term Fund will not exceed 0.49% of the Fund's average daily
net assets. Without a similar guarantee which was in effect for the fiscal year
ended August 31, 1994, total operating expenses would have been 0.99% of the
Fund's average daily net assets.
EXAMPLES. You would pay the following expenses on a $1,000 investment in each
Fund, assuming (1) a 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short/Intermediate Fund................... $5 $16 $27 $ 62
Long-Term Fund............................ $5 $16 $27 $ 62
</TABLE>
The purpose of the preceding table is to assist purchasers in understanding the
various costs and expenses that an investor in the Funds will bear directly or
indirectly. This example reflects the guarantee by the Investment Manager and
Schwab that the total operating expenses of each Fund will not exceed the
amounts specified for the time periods referred to in notes (3) and (4) above.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The examples assumes a
5% annual rate of return pursuant to requirements of the Securities and Exchange
Commission. THIS HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE
REPRESENTATIVE OF PAST OR FUTURE PERFORMANCE.
4
<PAGE> 57
FINANCIAL HIGHLIGHTS
Set forth below is the table containing information as to income and capital
changes for a share of the Schwab Long-Term Tax-Free Bond Fund (formerly, Schwab
National Tax-Free Bond Fund) and the Schwab Short/Intermediate Tax-Free Bond
Fund, outstanding for the periods indicated below. This information has been
audited by Price Waterhouse LLP, the Trust's independent accountants, whose
unqualified report appears with the financial statements in the Statement of
Additional Information.
<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE SCHWAB LONG-TERM
TAX-FREE BOND FUND TAX-FREE BOND FUND
----------------------------- ------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
APRIL 21, 1993 FOR THE SEPTEMBER 11, 1992
FOR THE (COMMENCEMENT FOR THE EIGHT MONTH (COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO YEAR ENDED PERIOD ENDED OF OPERATIONS) TO
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, DECEMBER 31,
1994 1993 1994 1993 1992
---------- ----------------- ---------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period........................... $ 10.15 $ 10.00 $ 10.59 $ 9.92 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.......... .37 .13 .52 .36 .17
Net realized and unrealized
gain (loss) on investments... (.23) .15 (.56) .67 (.08)
---------- ----------------- ---------- -------------- ----------
Total from investment
operations................... .14 .28 (.04) 1.03 .09
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.37) (.13) (.52) (.36) (.17)
Distributions from realized
gain on investments.......... -- -- (.08) -- --
---------- ----------------- ---------- -------------- ----------
Total distributions............ (.37) (.13) (.60) (.36) (.17)
---------- ----------------- ---------- -------------- ----------
Net asset value at end of period... $ 9.92 $ 10.15 $ 9.95 $ 10.59 $ 9.92
========= ============= ========= ============ ================
Total return (%)................... 1.42 2.83 (.42) 10.56 .92
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000s)....................... $ 63,889 $54,450 $ 43,975 $ 50,413 $ 28,034
Ratio of expenses to average
net assets (%)............... .48 .45* .51 .45* .45*
Ratio of net investment income
to average net assets (%).... 3.71 3.63* 5.05 5.30* 5.61*
Portfolio turnover rate (%).... 19 11 62 91 54
</TABLE>
Note: The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit each Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the Schwab
Short/Intermediate Tax-Free Bond Fund for the periods ended August 31, 1994 and
1993 would have been .91% and 1.26%*, respectively, and the ratio of net
investment income to average net assets would have been 3.28% and 2.82%*,
respectively. With respect to the Schwab Long-Term Tax-Free Bond Fund the ratio
of expenses to average net assets for the periods ended August 31, 1994, 1993
and December 31, 1992 would have been .99%, 1.18%* and 1.53%*, respectively, and
the ratio of net investment income to average net assets would have been 4.57%,
4.57%* and 4.53%*, respectively.
*Annualized
5
<PAGE> 58
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS
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THE FUNDS MAY BE ESPECIALLY SUITABLE FOR INVESTORS
SEEKING HIGH FEDERAL TAX-FREE INCOME.
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The Funds may be appropriate for a variety of investment programs. While the
Funds are not a substitute for an investment portfolio tailored to an
individual's investment needs and ability to tolerate risk, they can serve as
components of an investor's long-term program to accumulate assets for
retirement, college tuition or other major goals.
Because the Funds invest primarily in Municipal Securities, they may be
especially suitable for investors seeking income that is exempt from federal
income tax. The Funds are not suitable for investors who cannot benefit from the
tax-exempt character of each Fund's dividends, such as IRAs, qualified
retirement plans or tax-exempt entities.
INVESTMENT OBJECTIVES AND POLICIES
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EACH FUND SEEKS A HIGH LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM
FEDERAL INCOME TAX, CONSISTENT WITH PRESERVATION OF CAPITAL.
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Both Funds are investment portfolios of the Trust, a no-load, open-end,
management investment company. The investment objective of each Fund is to seek
a high level of current income that is exempt from federal income tax,
consistent with preservation of capital. Each Fund's investment objective, along
with certain investment restrictions adopted by each Fund (see "Investment
Restrictions" in the Statement of Additional Information), are fundamental, and
cannot be changed without approval by holders of a majority of each Fund's
outstanding voting shares, as defined in the Investment Company Act of 1940 (the
"1940 Act"). While there is no assurance that either Fund will achieve its
investment objective, each will endeavor to do so by following the investment
policies set forth below.
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EACH FUND WILL INVEST PRIMARILY IN MUNICIPAL SECURITIES.
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Under normal market conditions, each Fund will invest at least 80% of its total
assets in debt obligations issued by or on behalf of states, territories and
possessions of the U.S., and the District of Columbia and their political
subdivisions, agencies, and instrumentalities, the interest on which, in the
opinion of bond counsel or other counsel to the issuer, is not subject to
regular federal income tax ("Municipal Securities"). Absent unusual market
conditions, each Fund will invest 65% of its total assets in Municipal
Securities, including bonds, notes, debentures, and zero coupon securities.
Under normal market conditions, the Short/Intermediate Fund seeks to maintain a
dollar weighted average portfolio maturity of between two and five years and the
Long-Term Fund has no restriction its on portfolio maturity, but its dollar
weighted average portfolio maturity is currently expected to be 10 years or
longer.
The Funds may purchase shares of other investment companies, subject to the
limitations imposed by the 1940 Act and the rules promulgated thereunder.
Because other investment companies employ an investment adviser and other
service providers, such investment by the Funds may cause sharehold-
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<PAGE> 59
ers to bear duplicative fees. The Investment Manager will charge no management
fees attributable to Fund assets that are invested in other investment
companies. (See "Investment Restrictions" in the Statement of Additional
Information.)
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THE FUNDS WILL ONLY INVEST IN INVESTMENT GRADE SECURITIES.
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Each Fund will invest only in Municipal Securities that at the time of purchase:
(a) are rated within the four highest ratings of municipal securities (Aaa to
Baa) assigned by Moody's Investors Service ("Moody's") or (AAA to BBB) assigned
by Standard & Poor's Corporation ("S&P") or (AAA to BBB) assigned by Fitch
Investors Services, Inc. ("Fitch"); or (b) have Moody's short-term municipal
securities rating of MIG-2 or higher or VMIG-2 or higher, or a municipal
commercial paper rating of P-2 or higher, or S&P's short-term municipal rating
of SP-2 or higher, or a municipal commercial paper rating of A-2 or higher; or
(c) are unrated by Moody's, S&P or Fitch, if they are determined by the
Investment Manager, using guidelines approved by the Board of Trustees, to be at
least equal in quality to one or more of the above referenced securities (such
unrated securities may not exceed 20% of the Fund's net assets). Bonds rated in
the lowest category of investment grade debt may have speculative
characteristics; changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
is the case with higher grade bonds. For a description of the ratings, see
"Appendix - Ratings of Investment Securities" in the Statement of Additional
Information.
See the section of this Prospectus entitled "Risk Considerations" for more
information on portfolio securities which may, subsequent to inclusion in a
Fund's portfolio, receive a rating below that required for purchase.
The frequency of portfolio transactions, the Fund's turnover rate, will vary
from year to year depending upon market conditions and purchase and redemption
patterns of each Fund's shareholders. Typically, funds with higher turnover tend
to generate higher capital gains and transaction costs. The Investment Manager
anticipates that the Short/Intermediate Fund's turnover rate will not exceed
100%. The Long-Term Fund had portfolio turnover rates for the year ended August
31, 1994, for the period ended August 31, 1993, and for the period from
September 11, 1992 (commencement of operations) to December 31, 1992 of 62%,
91%, 54%, respectively. The Short/Intermediate Fund had portfolio turnover rates
for the year ended August 31, 1994, and the period from April 21, 1993
(commencement of operations) to August 31, 1993 of 19% and 11%, respectively.
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THE FUNDS WILL BE "NON-DIVERSIFIED."
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Each Fund will be "non-diversified" under the 1940 Act. This means that, with
respect to 50% of each Fund's total assets, the Fund may not invest more than 5%
of its total assets in the securities of any one issuer (other than the U.S.
Government). The balance of each Fund's assets may be invested in as few as two
issuers. Thus, up to 25% of each Fund's total assets may be invested in the
securities of any one issuer. For purposes of this limitation, a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security, or, with respect to an industrial revenue bond
that is backed only by the assets and revenues of a non-governmental user, by
such
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<PAGE> 60
non-governmental user. In certain circumstances, the guarantor of a security may
also be considered to be an issuer.
By investing in a portfolio of municipal securities, shareholders in the Funds
enjoy greater diversification than investors holding individual municipal
securities. Additionally, national tax-free funds typically offer greater
diversification and consequently lower credit risk than many single-state
tax-free funds. This diversification also means more investment opportunities
than single-state tax-free funds.
From time to time, as a defensive measure or under abnormal market conditions,
each Fund may invest in taxable "temporary investments" which include:
obligations of the U.S. Government, its agencies or instrumentalities; corporate
debt securities rated within the two highest rating categories established by
Moody's, S&P or Fitch, commercial paper rated in the two highest rating
categories established by any of such rating services; certificates of deposit
of domestic banks having capital and surplus in excess of $100 million; and any
of the foregoing temporary investments subject to repurchase agreements. While
purchases by a Fund of certain temporary investments could cause it to generate
dividends taxable to shareholders as ordinary income (see "Distributions And
Taxes"), it is each Fund's primary intention to produce dividends that are not
subject to federal income tax.
MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES
Municipal Securities are debt obligations issued by or on behalf of the states,
territories and possessions of the U.S. and the District of Columbia, and their
political subdivisions, agencies and instrumentalities, the interest from which
is exempt from regular federal income tax. These securities are issued to obtain
funds for various public purposes, such as the construction of public
facilities, the payment of general operating expenses or the refunding of
outstanding debts. They may also be issued to finance various private
activities, including lending of funds to public or private institutions for the
construction of housing, educational or medical facilities. Municipal Securities
may also include certain types of industrial development bonds or notes issued
by public authorities to finance privately owned or operated facilities or to
fund short-term cash requirements. Short-term Municipal Securities are generally
issued as interim financing in anticipation of tax collections, revenue receipts
or bond sales to finance various public purposes.
The two principal classifications of Municipal Securities are general obligation
and limited obligation or revenue securities. General obligation securities
involve the credit of an issuer possessing taxing power and are payable from the
issuer's general unrestricted revenues. Their payment may depend on an
appropriation by the issuer's legislative body. The characteristics and methods
of enforcement of general obligation securities vary according to the law
applicable to the particular issuer. Limited obligation or revenue securities
are payable only from the revenues derived from a particular facility or class
of facilities, or a specific revenue source, and generally are not payable from
the unrestricted revenues of the issuer. Private activity bonds are in most
cases limited obligation securities, the credit quality of which is directly
related to the corporate user of the facilities. From time to time, the Fund may
invest more than 25% of its total assets in industrial development and private
activity bonds.
Each Fund's portfolio may also include "moral obligation" securities, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt
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<PAGE> 61
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of the
state or municipality which created the issuer.
Municipal Securities purchased by the Funds may include variable rate demand
instruments issued by industrial development authorities and other government
entities. In the event variable rate demand instruments that the Funds can
purchase are not rated by credit rating agencies, such instruments must be
determined by the Investment Manager, using guidelines approved by the Board of
Trustees, to be of comparable quality at the time of purchase to rated
instruments which the Funds can purchase. In some cases, the Funds may require
that the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
Although there may be no active secondary market with respect to a particular
variable rate demand instrument purchased by either Fund, each Fund may (at any
time or during specified periods not exceeding one year, depending upon the
instrument involved) demand payment in full of the principal of the instrument
and may resell the instrument to a third party. The absence of such an active
secondary market, however, could make it difficult for a Fund to dispose of a
variable rate demand instrument in the event the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights. Each Fund could, for this or other reasons, suffer a loss with
respect to such instruments. To the extent that the absence of an active
secondary market for such securities cause them to be "illiquid," such
securities will be subject to each Fund's restrictions on acquiring and holding
illiquid securities.
Participation interests in Municipal Securities with fixed, floating or variable
rates of interest may be purchased by the Funds from financial institutions. The
buyer of a participation interest receives an undivided interest in the
securities underlying the instrument. A Fund will only purchase a participation
interest if: (a) the instrument meets the Fund's previously described quality
standards for Municipal Securities, and (b) the instrument is issued with an
opinion of counsel or is the subject of a ruling of the Internal Revenue Service
stating that the interest earned on the participation interest is exempt from
federal income tax.
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from federal income tax are rendered by bond counsel to the
respective issuers at the time of issuance. Neither the Funds nor the Investment
Manager will review or re-evaluate the proceedings relating to the issuance of
Municipal Securities or the bases for such opinions.
As a matter of fundamental policy, each Fund may borrow money for temporary
purposes, but not for the purpose of purchasing investments, in an amount up to
one-third of the value of its total assets and may pledge up to 10% of its net
assets to secure borrowings. Neither Fund will purchase illiquid securities,
including repurchase agreements maturing in more than seven days, if, as a
result thereof, more than 10% of its net assets valued at the time of the
transaction would be invested in such securities.
As part of the Funds' fundamental 80% policy described above, each Fund will not
treat interest income subject to federal alternative minimum tax for individuals
as tax-exempt for purposes of measuring compliance with the policy. To the
extent that the Funds invest in securities, the interest income on which is
treated as a preference item for purpose of the alternative minimum tax,
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<PAGE> 62
individual shareholders, depending on their own tax status, may be subject to
federal alternative minimum tax on part of that Fund's distributions derived
from these securities.
RISK CONSIDERATIONS
Investors should note the following considerations before making an investment
in either of the Funds. For more information regarding the risks involved in
investing in municipal securities, see the Funds' Statement of Additional
Information.
The investment return on a non-diversified portfolio typically is dependent upon
the performance of a smaller number of issuers relative to the number of issuers
held in a diversified portfolio. In the event of changes in the financial
condition or in the market's assessment of certain issuers, each Fund's policy
of acquiring large positions in the obligations of a relatively small number of
issuers may affect the value of that Fund's portfolio to a greater extent than
that of a fully diversified portfolio.
Although the Funds do not presently intend to do so on a regular basis, each
Fund may invest more than 25% of its assets in Municipal Securities, the
interest on which is paid solely from revenues on similar projects. To the
extent that a Fund's assets are concentrated in Municipal Securities payable
from revenues on similar projects, the Funds will be subject to the particular
risks presented by such projects to a greater extent than it would be if its
assets were not so concentrated.
Each Fund may purchase securities on a "when-issued" or "delayed delivery"
basis. When-issued or delayed delivery securities are securities purchased for
future delivery at a stated price and yield. The Funds will generally not pay
for such securities or start earning interest on them until they are received.
Securities purchased on a when-issued or delayed delivery basis are recorded as
an asset and are subject to changes in value based upon changes in the general
level of interest rates. Neither Fund will invest more than 25% of its assets in
when-issued or delayed delivery securities or purchase such securities for
speculative purposes, and will make commitments to purchase securities on a
when-issued or delayed delivery basis with the intention of actually acquiring
the securities. However, each Fund reserves the right to sell acquired
when-issued or delayed delivery securities before their settlement dates if
deemed advisable.
After its purchase by a Fund, an issue of Municipal Securities may cease to be
rated or its rating may be reduced below that required for purchase by the
Funds. Neither event would require the elimination of such an obligation from
the affected Fund's investment portfolio. However, the obligation generally
would be retained only if such retention was determined by the Board of Trustees
of the Trust to be in the best interests of the affected Fund.
MANAGEMENT OF THE FUNDS
Responsibility for overall management of the Funds rests with the trustees and
officers of the Trust. Professional investment management for the Funds is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. The Investment Manager provides
a continuous investment program, including general investment and economic
advice regarding each Fund's investment strategies, and performs expense
management, accounting and record keeping, and other administrative services
necessary to the operation of the
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Funds and the Trust. The Investment Manager, formed in 1989, is a wholly-owned
subsidiary of The Charles Schwab Corporation and is the investment adviser and
administrator of the SchwabFunds, a family of 18 mutual funds. As of June 15,
1995, SchwabFunds had aggregate net assets in excess of $27 billion.
Joanne Keighley is the Portfolio Manager for the Funds and, as such, has had
primary responsibility for the day-to-day management of each Fund's portfolio
since the commencement of each Fund's operations. Prior to February 1992, Ms.
Keighley was portfolio manager for the Shearson Lehman California Municipal Bond
Fund and E.F. Hutton's Municipal Cash Reserve Management.
Stephen B. Ward, the Trust's Senior Vice President and Chief Investment Officer,
participates in the management of each Fund's portfolio. Prior to April 1991,
Mr. Ward was Vice President and Portfolio Manager for Federated Investors.
Pursuant to separate agreements, Charles Schwab & Co., Inc. ("Schwab" or the
"Transfer Agent"), 101 Montgomery Street, San Francisco, CA 94104, serves as
shareholder services agent and transfer agent for the Funds. Schwab provides
information and services to shareholders, which include reporting share
ownership, sales and dividend activity (and associated tax consequences),
responding to daily inquiries, effecting the transfer of each Fund's shares, and
facilitating effective cash management of shareholders' Schwab account balances.
It also furnishes such office space and equipment, telephone facilities,
personnel and informational literature distribution as is necessary and
appropriate in providing shareholder and transfer agency information and
services. Schwab is also each Fund's Distributor, but receives no compensation
for its services as such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 2.5 million active customer accounts and has over 200 offices. Schwab
also offers convenient access to financial information services and provides
products and services that help investors make investment decisions. Schwab is a
wholly-owned subsidiary of The Charles Schwab Corporation. Charles R. Schwab is
the founder, Chairman, Chief Executive Officer, and a Director of The Charles
Schwab Corporation and, as of November 30, 1994, the beneficial owner of
approximately 22.25% of the outstanding shares of that corporation. Mr. Schwab
may be deemed to be a controlling person of Schwab and the Investment Manager.
Please see the Funds' Annual Report to Shareholders for the fiscal year ended
August 31, 1994 for a discussion by the Investment Manager of each Fund's
performance.
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THROUGH AT LEAST APRIL 30, 1996, THE INVESTMENT MANAGER AND SCHWAB GUARANTEE
THAT THE TOTAL OPERATING EXPENSES FOR THE SHORT/INTERMEDIATE FUND AND THE
LONG-TERM FUND WILL NOT EXCEED 0.49% OF EACH FUND'S AVERAGE DAILY NET ASSETS.
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FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from each Fund an
annual fee, payable monthly, of 0.41% of each Fund's average daily net assets.
Through at least April 30, 1996, the Investment Manager guarantees that the
management fee for the Short/Intermediate Fund and the Long-Term Fund will not
exceed
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0.31% of each Fund's average daily net assets. Moreover, at least through April
30, 1996, the Investment Manager and Schwab guarantee that the total operating
expenses of the Short/Intermediate Fund and the Long-Term Fund will not exceed
0.49% of each Fund's average daily net assets. The effect of these reductions
and guarantees is to maintain or lower each Fund's expenses and thus maintain or
increase each Fund's total return to shareholders.
For the transfer agency and shareholder services provided under its Transfer
Agency and Shareholder Service Agreements with the Trust, Schwab receives an
annual fee, payable monthly, of 0.05% and 0.20%, respectively, of each Fund's
average daily net assets. PNC Bank is the Funds' Custodian. The Investment
Manager, Schwab and the Custodian may each reduce its fees from time to time.
The Trust pays the expenses of its operations, including the fees and expenses
of independent accountants, counsel and custodian, and the costs of calculating
net asset values, brokerage commissions or transaction costs, taxes,
registration fees, and the fees and expenses of qualifying the Trust and its
shares for distribution. In addition, the Trust will incur and pay fees in
connection with the establishment and maintenance of "sweep" accounts through
which the Funds may make regular investments in other investment companies. The
expenses will generally be allocated among the Trust's investment portfolios on
the basis of relative net assets at the time of allocation. However, expenses
directly attributable to a particular Fund will be charged to that Fund. For the
year ended August 31, 1994, the Short/Intermediate Fund paid investment
management fees of 0.14% and total operating expenses of 0.48% of the Fund's
average daily net assets, and the Long-Term Fund paid investment management fees
of 0.17% and total operating expenses of 0.51% of the Fund's average daily net
assets.
DISTRIBUTIONS AND TAXES
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THE FUNDS DECLARE DAILY DIVIDENDS WHICH ARE PAID MONTHLY.
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DIVIDENDS AND OTHER DISTRIBUTIONS. On each day that the net asset value per
share of the Funds are determined ("Business Day"), each Fund declares a
dividend from net investment income as of the close of trading on the New York
Stock Exchange (normally 4:00 p.m. Eastern time) to shareholders of record at
the previous net asset value calculation. Dividends are normally paid (and,
where applicable, reinvested) on the 25th of each month, if a Business Day,
otherwise on the next Business Day. Each Fund intends to distribute
substantially all of its net investment income on an annual basis, and plans to
distribute substantially all of its net capital gains, if any, at least once
annually, as determined by the Board of Trustees. All distributions will be
automatically reinvested in additional shares of a Fund unless the shareholder
elects otherwise.
TAX INFORMATION. Each Fund is treated as a separate entity for tax purposes, has
elected to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), has qualified as
such, and intends to continue to so qualify. In order to so qualify, each Fund
will distribute substantially all of its net exempt-interest income and its
investment company taxable income, and will meet certain other requirements.
Such qualification relieves a Fund of liability for federal income tax to the
extent its earnings are distributed.
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FEDERAL INCOME TAXES: Dividends derived from exempt-interest income (known as
"exempt-interest dividends") may be treated by a Fund's shareholders as items of
interest excludable from their federal gross income. A shareholder should
consult his or her own tax adviser with respect to whether exempt-interest
dividends would be excludable from gross income if the shareholder were treated
as a "substantial user" of facilities financed by an obligation held by either
Fund or a "related person" to such user under the Code. If a shareholder
receives an exempt-interest dividend with respect to any share held for six
months or less, any loss on the sale or exchange of such share will be
disallowed to the extent of the amount of the exempt-interest dividend. The U.S.
Treasury Department is authorized to issue regulations reducing the period to
not less than 31 days for certain regulated investment companies. No such
regulations have been issued as of the date of this Prospectus. To the extent
dividends paid to shareholders are derived from taxable interest or short-term
or long-term capital gains, such dividends will be subject to federal income tax
whether such dividends are paid in the form of cash or additional shares.
If a Fund holds certain "private activity bonds" ("industrial development bonds"
under prior law), dividends derived from interest on such obligations will be
classified as an item of tax preference which could subject certain shareholders
to alternative minimum tax liability. Corporate shareholders must also take all
exempt interest dividends into account in determining "adjusted current
earnings" for purposes of calculating their alternative minimum tax.
All or part of interest on indebtedness incurred or continued by a shareholder
to purchase or carry shares of a Fund will not be deductible by the shareholder.
The portion of interest that is not deductible is equal to the total interest
paid or accrued on the indebtedness multiplied by the percentage of that Fund's
total distributions (excluding distributions of the excess of net long-term
capital gains over net short-term capital losses) paid to the shareholder that
are exempt-interest dividends. Under rules used by the Internal Revenue Service,
the purchase of shares of a Fund may be considered to have been made with
borrowed funds even though such funds are not directly traceable to the purchase
of the shares.
Taxable distributions which are reinvested will be taxable as if they had been
paid in cash. Shareholders receiving Social Security benefits or Railroad
Retirement Act benefits should note that exempt-interest dividends will be taken
into account in determining the taxability of such benefits. It is not expected
that any portion of the dividends paid by either Fund will be eligible for the
corporate dividends received deduction. (See "Taxes" in the Statement of
Additional Information.)
STATE INCOME TAXES: Distributions of net investment income may be taxable to
investors under state or local law as dividend income even though all or a
portion of such distributions may be derived from interest on obligations which,
if realized directly, would be exempt from such income taxes. In addition, to
the extent, if any, that dividends paid to shareholders are derived from taxable
interest or from long-term or short-term capital gains, such dividends will not
be exempt from state income tax whether received in cash or reinvested in
shares.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' regular Schwab account statements. The Funds will
notify shareholders at least annually as to the federal income tax consequences
of distributions made each year.
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The foregoing is only a brief summary of some of the federal income tax
considerations affecting the Funds and their shareholders. Accordingly, a
potential investor should consult his or her tax adviser with specific reference
to his or her own tax situation.
SHARE PRICE CALCULATIONS
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THERE ARE NO SALES CHARGES OR TRANSACTION FEES TO
PURCHASE OR REDEEM SHARES OF A FUND.
- ------------------------------------------------------------------
The price of each Fund's shares on any given day is their "net asset value" or
NAV. This amount is computed by dividing the total market value of each Fund's
investments and other assets on that day, less any liabilities, by the number of
shares outstanding. The net asset value per share of each Fund is determined on
each day the New York Stock Exchange is open for trading at 4:00 p.m., Eastern
time. Each Fund's net asset value will fluctuate and neither Funds' shares are
insured against reduction in net asset value. (See "Share Price Calculation" in
the Statement of Additional Information.)
The securities in which the Funds invest will be valued daily based on their
market value. Securities for which market quotations are readily available are
valued at the mean between the most recent bid and asked prices. The value of
other assets for which no reliable quotations are readily available (including
any restricted securities) are valued at fair value as determined in good faith
by the Investment Manager pursuant to the Board of Trustees' guidelines.
Securities may be valued on the basis of prices provided by pricing services
when such prices are believed to reflect fair market value.
HOW THE FUNDS SHOW PERFORMANCE
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EACH FUND'S PERFORMANCE MAY BE ADVERTISED ON
A BEFORE OR AFTER-TAX BASIS.
- -----------------------------------------------------------------
From time to time each Fund may advertise its total return, yield, effective
yield, tax-equivalent yield, and tax-equivalent effective yield. Performance
figures are based upon historical results and are not intended to indicate
future performance.
Each Fund's total return measures its overall change in value over a period,
including share price movements, and assumes all dividends and capital gains
have been reinvested. Average annual total return reflects the hypothetical
annually compounded return mandated by the Securities and Exchange Commission.
Other reported total return figures may differ in that they may report non-
standard periods or represent aggregate or cumulative return over a stated
length of time.
Each Fund's yield refers to the income generated by a hypothetical investment in
that Fund over a specific 30-day period. This income is then annualized,which
means that the income generated during the 30-day period is assumed to be
generated every 30 days over an annual period and is shown as a percentage of
the hypothetical investment.
Tax-equivalent yield is the yield that a taxable investment must generate in
order to equal (after applicable taxes are deducted) a Fund's yield for an
investor in stated federal income tax brackets. (Normally assumed to be
applicable maximum tax rate.) Tax-equivalent yield is based upon, and will be
higher than, the portion of each Fund's yield that is tax exempt. Each Fund may
also illustrate the
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hypothetical performance of taxable and tax-free investments over the long-term
to show the effects of compounding tax-free dividends. The tax-equivalent
effective yield is computed in the same manner as is the tax-equivalent yield,
except that the effective yield is substituted for yield in the calculation.
(See "Total Return and Yield" in the Statement of Additional Information.)
The Funds' performances may be compared to that of other mutual funds tracked by
mutual fund rating services, various indices of investment performance
(including the Schwab 1000 Index(R)), United States Treasury obligations, bank
certificates of deposit, the Consumer Price Index, and other investments for
which reliable performance data is available. Each Fund's performance may also
be compared to various unmanaged bond indices, Lipper Analytical Services Inc.
averages and Morningstar performance rankings.
Additional performance Information is available in the Trust's Annual Report,
which is available free of charge by calling 800-2 NO-LOAD, or from your local
Schwab office.
GENERAL INFORMATION
ABOUT THE TRUST. The Trust was organized as a business trust under the laws of
Massachusetts on October 26, 1990 and may issue an unlimited number of shares of
beneficial interest in one or more investment portfolios or series ("Series").
Currently, shares of seven Series are offered. The Board of Trustees may
authorize the issuance of shares of additional Series if deemed desirable.
Shares of each Series have equal noncumulative voting rights and equal rights as
to dividends, assets and liquidation of such Series.
The Trust is not required to hold annual shareholders' meetings and does not
intend to do so. It will, however, hold special meetings as required or deemed
desirable by the Board of Trustees for such purposes as electing or removing
trustees, changing fundamental policies, or approving an investment advisory
agreement. Shareholders will vote by Series and not in the aggregate (for
example, when voting to approve the investment advisory agreement), except when
voting in the aggregate is permitted under the 1940 Act, such as for the
election of trustees.
SHAREHOLDER GUIDE
- -----------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE
SHAREHOLDER SERVICE AND INFORMATION.
- -----------------------------------------------------------
SHAREHOLDER SERVICE. You may place purchase and redemption orders as well as
request exchanges at any one of our over 200 Schwab offices nationwide or by
calling 800-2 NO-LOAD, 24 hours a day, where trained representatives are
available to answer questions about the Funds and your account. The privilege to
initiate transactions by telephone, as discussed below, is automatically
available through your Schwab account. Each Fund will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
If these procedures are not followed, the Fund may be liable for any losses due
to unauthorized or fraudulent instructions. These procedures may include
requiring a form of personal identification prior to acting upon instructions
received by telephone, providing written confirmation of such instructions and
tape recording telephone transactions.
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HOW TO PURCHASE SHARES
- --------------------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUNDS ONLY THROUGH A
SCHWAB ACCOUNT.
- --------------------------------------------------------------------------
You may purchase shares of the Funds exclusively through an account maintained
with Charles Schwab & Co., Inc., and payment for shares must be made directly to
Schwab. (See "Summary of Expenses.") The Securities Investor Protection
Corporation ("SIPC") will provide account protection in an amount up to $500,000
for securities, including Fund shares which you hold in a Schwab account. Of
course, SIPC account protection does not protect shareholders from share price
fluctuations.
If you already have a Schwab account, you may purchase shares in the Funds as
described below and need not open a new account.
If you do not presently maintain a Schwab account and wish to establish one,
simply complete a Schwab Account Application (available by calling 800-2
NO-LOAD, 24 hours a day, or by contacting your local Schwab office) and mail or
deliver it to your local Schwab office. You may also mail the application to
Schwab at 101 Montgomery Street, San Francisco, CA 94104. Corporations and
other organizations should contact their local Schwab office to determine which
additional forms may be necessary to open a Schwab account.
You may deposit funds into your Schwab account by check, wire or other forms of
electronic funds transfer (securities may also be deposited). All deposit checks
should be made payable to Charles Schwab & Co., Inc. If you would like to wire
funds into your existing Schwab account, please contact your local Schwab office
for instructions.
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YOUR INITIAL INVESTMENT IN EITHER FUND MAY BE AS LOW AS $1,000.
ADDITIONAL SHARE PURCHASES CAN BE MADE FOR AS LITTLE AS $100.
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MINIMUM FUND INVESTMENT REQUIREMENTS. Your initial investment in a Fund may be
as low as $1,000 ($500 for custodial accounts). The minimum subsequent
investment is $100. These requirements may be reduced or waived on certain
occasions. (See "Purchase and Redemption of Shares" in the Statement of
Additional Information.)
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SHARES WILL BE PURCHASED AFTER YOU HAVE FUNDS AVAILABLE IN YOUR ACCOUNT.
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WHEN AND AT WHAT PRICE SHARES WILL BE PURCHASED. You must have funds available
in your Schwab account in order to purchase Fund shares. If funds (including
those transmitted by wire) are received by Schwab before the time the Fund's
daily net asset value is calculated (normally 4:00 p.m. Eastern time), they will
be available for investment on the day of receipt. If funds arrive after that
time, they will be available for investment the next Business Day. Orders to
purchase shares will be executed at the next determined net asset value after
receipt by Schwab's Mutual Fund Transfer Agency Department. Orders received
after that time will be executed at the next determined net asset value,
generally the next Business Day. (See "Share Price Calculation.")
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METHODS OF PURCHASING SHARES. Schwab offers you several convenient ways to
purchase shares of the Funds. You may choose the one that works best for you and
Schwab will confirm execution of your purchase order.
BY PHONE:
You may use existing funds in your Schwab account to make initial and
subsequent share purchases. To place your order, call your local Schwab office
during regular business hours or 800-2 NO-LOAD, 24 hours a day.
BY MAIL:
You may direct that funds already in your Schwab account be used to make
initial and subsequent share purchases. Alternatively, your purchase
instructions may be accompanied by a check made out to Charles Schwab & Co.,
Inc. which will be deposited into your Schwab account and used, as necessary,
to cover all or part of your purchase order.
Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, CA 94104 or to your local Schwab office
and should contain the following information:
- your Schwab account number (inapplicable if a Schwab Account
Application is also enclosed);
- the name of the fund(s) and the dollar amount of shares you would like
purchased; and
- (initial share purchases only) select one of the distribution options
listed below.
IN PERSON AT A SCHWAB OFFICE:
Visit your local Schwab office where a representative will be happy to assist
you.
AUTOMATIC INVESTMENT:
Once you have satisfied the initial investment requirements, you may authorize
Schwab to automatically purchase shares at intervals and in amounts
pre-selected by you on your behalf. (See "Schwab Automatic Investment Plan.")
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YOU MAY CHOOSE FROM THREE DISTRIBUTION OPTIONS.
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SELECTING A DISTRIBUTION OPTION. You may select from the three distribution
options listed below when you first become a shareholder in either of the Funds.
If you already are a shareholder and wish to change your distribution option,
please call your local Schwab office for assistance.
1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gains
distributions will be reinvested in additional shares. This option will
be selected automatically unless you specify another option.
2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid
in cash and any capital gain distributions will be reinvested in
additional shares.
3. ALL CASH: Dividends and any capital gains distributions will both be
paid in cash.
Dividends and distributions subject to reinvestment will be invested at the net
asset value next determined after their record date. Cash distributions will be
credited to your Schwab account and
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will be held there or mailed to you depending on the standing instructions
applicable to your account. For information on how to wire funds from your
Schwab account to your bank, see "Other Important Information -- Wire Transfers
to Your Bank."
OTHER PURCHASE INFORMATION. Each Fund reserves the right, in its sole discretion
and without prior notice to shareholders, to withdraw or suspend all or any part
of the offering made by this Prospectus, to reject purchase orders or to change
the minimum investment requirements. All orders to purchase shares of the Funds
are subject to acceptance by the Funds and are not binding until confirmed or
accepted in writing. Any purchase which would result in a single shareholder
owning shares with a value of more than 10% of a Fund's assets or $3 million,
whichever is greater, is subject to prior approval by the Fund. Schwab will
charge a $15 service fee against an investor's Schwab account if his or her
investment check is returned because of insufficient or uncollected funds or a
stop payment order.
HOW TO EXCHANGE SHARES
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SHARES OF THE FUNDS MAY BE EXCHANGED FOR SHARES OF
OTHER FUNDS OR CLASSES OF SHARES SPONSORED BY SCHWAB.
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The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of any other SchwabFunds class or series available to investors in your
state. Thus, you can conveniently modify your investments if your goals or
market conditions change. An exchange will involve the redemption of shares at
the net asset value determined after receipt by the Transfer Agent of an
exchange request (on the same day as the Transfer Agent received your request,
if it was received by 4:00 p.m. (Eastern time) and on the next Business Day if
the request was received after that time), and the purchase of shares at the net
asset value next determined after sale of the shares involved in the exchange
(on the same day as the Transfer Agent received your request, if it was received
by 4:00 p.m. (Eastern time) and on the next Business Day if the request was
received after that time). An exchange of shares will be treated as a sale of
the shares for federal income tax purposes. Note that you must meet the minimum
investment requirements applicable to the shares you wish to receive in
exchange. Each Fund reserves the right on 60 days' written notice to modify,
limit or terminate the exchange privilege.
METHODS OF EXCHANGING SHARES.
BY PHONE:
To exchange between any of the SchwabFunds(R) by telephone, please call your
local Schwab office during its regular business hours or 800-2 NO-LOAD, 24
hours a day. Investors should be aware that telephone exchanges may be
difficult to implement during periods of drastic economic or market changes.
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To properly process your telephone exchange request, we will need the
following information:
- your Schwab account number and your name for verification;
- the name of the fund from which you wish to exchange shares;
- the number of shares to be exchanged;
- the name of the fund into which shares are to be exchanged; and
- the distribution option you select.
BY MAIL:
You may also request an exchange by writing Schwab at 101 Montgomery Street,
San Francisco, CA 94104 or your local Schwab office.
To properly process your mailed exchange request, we will need a letter from
you which:
- references your Schwab account number;
- specifies the name of the fund from which you wish to exchange shares;
- describes the number of shares to be exchanged;
- indicates the name of the fund into which shares are to be exchanged;
- indicates the distribution option you select; and
- is signed by at least one of the registered Schwab account holders in
the exact form specified in the account.
IN PERSON AT A SCHWAB OFFICE:
You can also request an exchange in person at your local Schwab office.
HOW TO REDEEM SHARES
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REDEMPTION PROCEEDS WILL BE CREDITED TO YOUR SCHWAB ACCOUNT.
YOU MAY ELECT TO HAVE THEM MAILED TO YOU.
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THE PRICE AT WHICH SHARES WILL BE REDEEMED. Shares will be redeemed at the net
asset value per share next determined after receipt by the Transfer Agent of
proper redemption instructions, as set forth on the following page.
PAYMENT OF REDEMPTION PROCEEDS. Payment for redeemed shares will be credited
directly to your Schwab account no later than seven days after the Transfer
Agent receives your redemption instructions in proper form. Redemption proceeds
will then be held there or mailed to you depending on the account standing
instructions you have selected. For information on how to wire funds from your
Schwab account to your bank, see "Other Important Information -- Wire Transfers
to Your Bank."
If you purchased shares by check, your redemption proceeds may be held in your
Schwab account until your check clears (which may take up to 15 days). Depending
on the type of Schwab account you have, your money may earn interest during any
holding period.
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Each Fund may suspend redemption rights or postpone payments when trading on the
New York Stock Exchange (the "Exchange") is restricted, the Exchange is closed
for any reason other than its customary weekend or holiday closings, emergency
circumstances as determined by the Securities and Exchange Commission (the
"SEC") exist, or for such other circumstances as the SEC may permit. Each Fund
may also elect to invoke a 7 day period for cash settlement of individual
redemption requests in excess of $250,000 or 1% of a Fund's net assets,
whichever is less. (See "Purchase and Redemption of Shares" in the Statement of
Additional Information.)
METHODS OF REDEEMING SHARES.
BY PHONE:
You may redeem your shares by telephone by calling your local Schwab office
during its regular business hours or 800-2 NO-LOAD, 24 hours a day. Investors
should be aware that telephone redemption may be difficult to implement during
periods of drastic economic or market changes. Shareholders who experience
difficulties in redeeming by telephone can mail their redemption orders or
place them in person as set forth below.
Telephone redemption orders received prior to 4:00 p.m. (Eastern time) on any
Business Day, once they have been verified as to the caller's identity and
account ownership by the Transfer Agent, will be deemed to have been received
by the Transfer Agent that day.
BY MAIL:
Redemption orders can also be delivered through the mail. Mailed redemption
orders should be addressed to Schwab at 101 Montgomery Street, San Francisco,
CA 94104 or your local Schwab office. Once a redemption request is mailed it
is irrevocable and may not be modified or canceled.
To properly process your redemption order we will need a letter from you which
contains the following information:
- your Schwab account number;
- the name of the fund from which you wish to redeem shares;
- the number of fund shares to be redeemed; and
- a signature of any one of the registered Schwab account holders (in
the exact form specified in the account).
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IN PERSON AT A SCHWAB OFFICE:
You can also place your redemption order in person at your local Schwab
office.
SCHWAB AUTOMATIC INVESTMENT PLAN
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THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST,
CONVENIENT WAY TO MAKE REGULAR INVESTMENTS IN THE FUNDS.
- --------------------------------------------------------------------------------
Schwab offers an Automatic Investment Plan ("AIP") that allows you to make
periodic investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. AIP can be used as a
dollar cost averaging program that saves you time and expense associated with
writing checks or wiring funds.
INVESTMENT MINIMUMS: You can make automatic investments in any amount, from $100
to $50,000, once you meet a fund's investment minimum.
INVESTMENT METHODS: Automatic investments are made from your Schwab account and
you may select from several different investment methods (sources of funds) to
make automatic investment(s):
a) USING FUNDS IN A SCHWAB ACCOUNT: You can make automatic investments by
using the uninvested cash in your Schwab account and/or by using the
proceeds of redemption of shares of the Schwab Money Fund linked to your
Schwab account. If you elect to use these funds to make your automatic
investments, cash in your Schwab account will be used to make the
investment and, if necessary, shares of your Schwab Money Fund will be
redeemed to cover the balance of the purchase.
b) USING THE SCHWAB MONEYLINK(R) TRANSFER SERVICE FOR:
- "Authorized Transfers" from a bank checking or savings account;
- "Direct Deposit" of payroll or government checks (all or a portion).
Authorized Transfers (transfers from a bank checking or savings account) and
Direct Deposit (automatic deposit of all or a portion of a payroll or government
check) are two of the investment method options which are made available through
the Schwab MoneyLink Transfer Service ("MoneyLink"). MoneyLink transfers money
into your Schwab account and automatic investments can be made using these
funds.
If you elect to use Authorized Transfers and/or Direct Deposit for your
automatic investments, you will select two dates: a transfer date (when the
money is transferred into your Schwab account) and your investment date. The
automatic investment date selected may be the same day of your Direct Deposit or
Authorized Transfers. Schwab recommends that your investment date be on or close
to the transfer/deposit date to minimize uninvested cash in your Schwab account.
If you make changes to your Authorized Transfer or Direct Deposit date, it may
also be necessary to change your automatic investment date to coincide with the
new transfer/deposit date.
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<PAGE> 74
INVESTMENT FREQUENCY: You can select the frequency of your automatic investments
(twice monthly, monthly or quarterly) and choose either the 5th or the 20th of
the month for your automatic investment dates. Quarterly investments are made on
the date selected in the first month of each quarter (January, April, July and
October).
CHANGING INSTRUCTIONS TO AN ALREADY ESTABLISHED PLAN: If you want to change the
fund(s) selected for your AIP, you may do so by calling your local branch or
800-2 NO-LOAD, 24 hours a day, or by sending written instructions clearly
outlining the changes to: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104. Written notification must include the following:
1) the funds with AIP that you want to cancel;
2) the newly selected fund(s) in which you want to begin making automatic
investments and the amount to be invested in each fund; and
3) the investment frequency and investment dates for your new automatic
investments.
Information on changing Authorized Transfer and Direct Deposit instructions is
included in the Automatic Investment Plan Terms and Conditions brochure which
you will receive after enrolling in AIP.
TERMINATING YOUR AUTOMATIC INVESTMENT PLAN. If you wish to terminate your AIP,
you may call your local branch or 800-2 NO-LOAD, 24 hours a day, or send written
instructions to Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.
Note: Your Authorized Transfers and/or Direct Deposit will not automatically
terminate when you cancel your AIP investments.
TERMINATING AUTHORIZED TRANSFERS AND DIRECT DEPOSIT. If you wish to terminate
your Authorized Transfers, you may do so at any time by notifying Schwab in
writing. You must notify your employer or government agency to cancel Direct
Deposit.
IMPORTANT: If you are canceling your Authorized Transfers and/or Direct Deposit
and you wish to cancel your AIP, you must also provide instructions stating that
Schwab should cancel your AIP. You may notify Schwab by sending written
instructions to the address above or telephoning your local branch or 800-2
NO-LOAD, 24 hours a day. Your automatic investments will continue using Schwab
account assets if Schwab does not receive notification to terminate your
automatic investments as well.
TO AVOID PROCEDURAL DIFFICULTIES, SCHWAB SHOULD RECEIVE INSTRUCTIONS TO CHANGE
OR TERMINATE YOUR AIP OR AUTHORIZED TRANSFERS AT LEAST TEN DAYS PRIOR TO YOUR
SCHEDULED INVESTMENT DATE.
ADDITIONAL INFORMATION. This information is only a summary of the Automatic
Investment Plan Terms and Conditions brochure which you will receive if you
choose to enroll in AIP. Please read it carefully and keep it for future
reference.
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OTHER IMPORTANT INFORMATION
MINIMUM BALANCE AND ACCOUNT REQUIREMENTS. Due to the relatively high cost of
maintaining accounts with smaller holdings, each Fund reserves the right to
redeem a shareholder's shares if, as a result of redemptions, the aggregate
value of a shareholder's holdings in that Fund drops below the Fund's $500
minimum balance requirement ($250 in the case of custodial accounts).
Shareholders will be notified in writing 30 days before the Fund takes such
action to allow them to increase their holdings to at least the minimum level.
Also note that, because they can only be held in Schwab accounts, shares of each
Fund will be automatically redeemed should the Schwab account in which they are
carried be closed.
CONSOLIDATED MAILINGS. In an effort to reduce mailing costs, the Funds
consolidate shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write SchwabFunds at 101
Montgomery Street, San Francisco, CA 94104 to that effect.
WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
can be wired from your Schwab account to your bank account. Call your local
Schwab office for additional information on wire transfers. A $15.00 service fee
will be charged against your Schwab account for each wire sent.
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- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
BEING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR
THEIR DISTRIBUTOR. THE PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
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THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 77
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 78
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 79
SCHWAB TAX-FREE
BOND FUNDS
PROSPECTUS DECEMBER 30, 1994,
AS AMENDED JUNE 30, 1995
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, California 94104
921-4 (7/95) CRS 6677 Printed on recycled paper.
SchwabFunds(R)
