<PAGE> 1
SCHWAB SHORT/INTERMEDIATE
GOVERNMENT BOND FUND
SCHWAB LONG-TERM GOVERNMENT
BOND FUND
PROSPECTUS DECEMBER 31, 1996
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Call 800-2 NO-LOAD (800-266-5623),
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," formerly known as the Schwab Long-Term U.S. Government Bond
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 U.S.
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.
THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION YOU SHOULD KNOW BEFORE
INVESTING IN THE FUNDS. PLEASE READ IT CAREFULLY AND RETAIN IT FOR FUTURE
REFERENCE. You can find more detailed information about each Fund in the Trust's
"Statement of Additional Information," dated December 31, 1996 (as amended from
time to time). The Statement of Additional Information has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference into
this Prospectus. This Prospectus is also available electronically by using our
World Wide Web address: http://www.schwab.com. To receive a free paper copy of
this Prospectus or the Statement of Additional Information, call Charles Schwab
& Co., Inc. ("Schwab") at 800-2 NO-LOAD, 24 hours a day, or write Schwab at 101
Montgomery Street, San Francisco, CA 94104. TDD users may contact Schwab at
800-345-2550, 24 hours a day.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<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, Policies and
Risk Considerations................ 7
Management of the Funds.............. 11
Distributions and Taxes.............. 13
Share Price Calculations............. 14
How the Funds Show Performance....... 14
Tax-Advantaged Retirement Plans...... 15
General Information.................. 15
Shareholder Guide.................... 15
How to Buy Shares.................. 16
How to Sell or Exchange Shares..... 18
Schwab Automatic Investment Plan..... 20
Other Important Information.......... 20
</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> 2
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 U.S. 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. (See "Matching the Funds to Your Investment Needs.")
MINIMIZATION OF SHARE PRICE FLUCTUATION. The Short/Intermediate Fund is managed
in an effort to minimize fluctuations in the value of its shares. The dollar
weighted average 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 cause the Fund not to provide the same yield and total
return as 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 Buy Shares.")
PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. (the
"Investment Manager"), currently provides investment management services to the
mutual funds in the SchwabFunds Family(R), a family of 26 mutual funds with over
$42 billion in assets as of December 15, 1996. (See "Management of the Funds.")
LOW COST INVESTING. Each Fund brings a low cost approach to investing with:
- - no sales or transaction fees;
- - no 12b-1 fees or contingent deferred sales charges;
- - a guarantee 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, which includes waiving a portion of the Fund's management fee, for
potentially higher returns, although this guarantee may be discontinued at any
time (see "Summary of Expenses" and "Management of the Funds"); and
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- - a guarantee by the Investment Manager and Schwab to absorb operating expenses
of the Long-Term Fund in excess of 0.30% of the Fund's average daily net
assets, which includes waiving a portion of the Fund's management fee, for
potentially higher returns. This guarantee may be discontinued at any time.
(See "Summary of Expenses" and "Management of the Funds")
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 800-2 NO-LOAD, 24 hours a
day. TDD users may contact Schwab at 800-345-2550, 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. Schwab also enables you to execute your trading requests
through electronic products such as StreetSmart(R), The Equalizer(R) and
TeleBroker(R). (See "How to Buy Shares" and "How to Sell or Exchange 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. (See "Schwab Automatic Investment Plan" or call 800-2
NO-LOAD, 24 hours a day.)
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their investment activity, including mutual funds, on one report. (See
"Other Important Information.")
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 SHORT/ SCHWAB
INTERMEDIATE LONG-TERM
GOVERNMENT GOVERNMENT
BOND FUND 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
reduction)................. 0.31%1 0.12%1
12b-1 Fees................... None None
Other Expenses (after fee
reduction and expense
reimbursement)............. 0.18%3 0.18%4
------ -----------
TOTAL FUND OPERATING
EXPENSES2.................... 0.49%3 0.30%4
========== ==========
</TABLE>
1 This amount reflects for the Long-Term Fund, and has been restated to reflect
for the Short/Intermediate Fund, a voluntary reduction by the Investment
Manager. If there were no such reduction, the management fee for the
Short/Intermediate Fund and the Long-Term Fund would be 0.41% of each Fund's
average daily net assets. The Investment Manager may discontinue these
guarantees at any time.
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2 You may be charged a fee if applicable minimum balances are not maintained in
your Schwab brokerage account or Schwab One(R) account. (See "How to Buy
Shares - Schwab Account Minimums and Associated Fees.") Schwab Individual
Retirement Accounts with balances of $10,000 or more by September 15, 1997
will not be charged Schwab's $29 annual IRA account fee for the life of the
account. Schwab Keogh plans are currently charged an annual fee of $45. (See
"Tax-Advantaged Retirement Plans.")
3 This amount reflects the voluntary guarantee by the Investment Manager and
Schwab that the total operating expenses of the Short/ Intermediate Fund will
not exceed 0.49% of the Fund's average daily net assets. The Investment
Manager and Schwab may discontinue these guarantees at any time. Without a
similar guarantee, which was in effect for the fiscal year ended August 31,
1996, other expenses and total fund operating expenses would have been 0.39%
and 0.80%, respectively, of the Fund's average daily net assets.
4 This amount has been restated to reflect the voluntary guarantee by the
Investment Manager and Schwab that the total operating expenses of the
Long-Term Fund will not exceed 0.30% of the Fund's average daily net assets.
The Investment Manager and Schwab may discontinue these guarantees at any
time. Without a similar guarantee, which was in effect for the fiscal year
ended August 31, 1996, other expenses and total fund operating expenses would
have been 0.76% and 1.17%, respectively, 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........... $3 $10 $17 $ 38
</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 (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 SEC. 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
--------------------------------------------------------------------------
FOR THE PERIOD
NOVEMBER 5, 1991
(COMMENCEMENT
EIGHT MONTHS OF OPERATIONS)
ENDED YEAR ENDED TO
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1991
-------- -------- -------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period.... $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28 $ 10.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income................ 0.59 0.59 0.54 0.37 0.60 0.10
Net realized and
unrealized gain (loss)
on investments........ (0.17) 0.03 (0.71) 0.38 0.01 0.28
-------- -------- -------- -------- -------- --------
Total from investment
operations............ 0.42 0.62 (0.17) 0.75 0.61 0.38
LESS DISTRIBUTIONS
Dividends from net
investment income..... (0.59) (0.59) (0.54) (0.37) (0.60) (0.10)
Distributions from
realized gain on
investments........... -- -- (0.12) -- (0.03) --
-------- -------- -------- -------- -------- --------
Total distributions.... (0.59) (0.59) (0.66) (0.37) (0.63) (0.10)
-------- -------- -------- -------- -------- --------
Net asset value at end
of period............. $ 9.67 $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28
======== ======== ======== ======== ======== ========
TOTAL RETURN (%)........ 4.39 6.61 (1.67) 7.39 6.08 3.79
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000s)......... $134,019 $157,191 $190,479 $273,973 $226,223 $ 66,404
Ratio of expenses to
average net
assets (%)............ 0.49 0.58 0.60 0.60* 0.43 0.35*
Ratio of net investment
income to average net
assets (%)............ 6.03 6.11 5.28 5.28* 5.78 6.14*
Portfolio turnover
rate (%).............. 80 203 91 107 185 4
</TABLE>
<TABLE>
<CAPTION>
SCHWAB LONG-TERM
GOVERNMENT BOND FUND
-------------------------------------------
FOR THE PERIOD
MARCH 5, 1993
(COMMENCEMENT
OF OPERATIONS)
TO
YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1993
------- ------- ------ ---------------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period.... $ 9.80 $ 9.33 $10.53 $10.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income................ 0.65 0.69 0.60 0.31
Net realized and
unrealized gain (loss)
on investments........ (0.42) 0.47 (1.20) 0.53
Total from investment
operations............ 0.23 1.16 (0.60) 0.84
LESS DISTRIBUTIONS
Dividends from net
investment income..... (0.65) (0.69) (0.60) (0.31)
Distributions from
realized gain on
investments........... -- -- -- --
Total distributions.... (0.65) (0.69) (0.60) (0.31)
------- ------- ------ ------
Net asset value at end
of period............. $ 9.38 $ 9.80 $ 9.33 $10.53
======= ======= ====== ======
TOTAL RETURN (%)........ 2.29 13.03 (5.80) 8.63
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000s)......... $22,761 $12,949 $7,108 $2,806
Ratio of expenses to
average net
assets (%)............ 0.00 0.00 0.10 0.26*
Ratio of net investment
income to average net
assets (%)............ 6.67 7.38 6.27 6.36*
Portfolio turnover
rate (%).............. 66 240 123 42
</TABLE>
* Annualized
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<TABLE>
<CAPTION>
SCHWAB SHORT/INTERMEDIATE
GOVERNMENT BOND FUND SCHWAB LONG-TERM
-------------------------------------------------------------------------- GOVERNMENT BOND FUND
FOR THE PERIOD -------------------------------------------
NOVEMBER 5, 1991 FOR THE PERIOD
(COMMENCEMENT MARCH 5, 1993
EIGHT MONTHS OF OPERATIONS) (COMMENCEMENT
ENDED YEAR ENDED TO OF OPERATIONS) TO
YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31, YEAR ENDED AUGUST 31, AUGUST 31,
1996 1995 1994 1993 1992 1991 1996 1995 1994 1993
-------- -------- -------- ------------ ------------ ---------------- ------- ------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of
expenses
to
average
net
assets
prior
to
reduced
fees
and
absorbed
expenses
(%)++... 0.80 0.81 0.81 0.84* 0.89 1.47* 1.17 1.18 2.19 19.19*
Ratio of
net
investment
income
to
average
net
assets
prior
to
reduced
fees
and
absorbed
expenses
(%)++... 5.72 5.88 5.07 5.04* 5.32 5.02* 5.50 6.20 4.18 (12.57)*
</TABLE>
++ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to (a) limit each Fund's ratio of operating
expenses to average net assets; and (b) increase each Fund's ratio of net
investment income to average net assets.
* Annualized
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS
THE FUNDS MAY BE SUITABLE FOR RISK-SENSITIVE INVESTORS SEEKING 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 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.
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INVESTMENT OBJECTIVES, POLICIES AND RISK CONSIDERATIONS
EACH FUND IS DESIGNED TO PROVIDE A HIGH LEVEL OF CURRENT INCOME CONSISTENT WITH
PRESERVATION OF CAPITAL. 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, as amended (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 U.S. GOVERNMENT SECURITIES. Each Fund will
invest primarily in securities issued or guaranteed by the U.S. 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, 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
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<PAGE> 8
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 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 a higher price or 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.
Each Fund may also purchase shares of other no-load investment companies,
including those managed by the Investment Manager. These purchases will be
subject to the limitations imposed by the 1940 Act, and we will only make these
purchases after obtaining any required regulatory approvals. Investment in
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<PAGE> 9
other investment companies may cause you to bear duplicative fees for certain
services. 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, although either Fund may invest in obligations of any
maturity. 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 years ended August 31, 1996 and 1995
of 80% and 203%, respectively. The Long-Term Fund had portfolio turnover rates
for the years ended August 31, 1996 and 1995 of 66% and 240%, respectively. The
Investment Manager's efforts to reposition each Fund's portfolio in an
environment of steadily falling interest rates was the primary factor for each
Fund's higher portfolio turnover in 1995.
THE FUNDS MAY UTILIZE FUTURES AND OPTIONS STRATEGIES. Each Fund may also
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), to accommodate cash flows or in anticipation of taking a market
position when, in the opinion of the Investment Manager, available cash balances
do not permit economically efficient purchases. Moreover, each Fund 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 but intends to
sell. Each Fund may enter into futures contracts and options thereon provided
that the aggregate deposits required on these contracts do not exceed 5% of the
Fund's total assets. Futures contacts and options may be used to maintain cash
reserves while simulating full investment; to facilitate trading; or to seek
higher investment returns or simulate full investment when a futures contract is
priced more attractively or is otherwise considered more advantageous than the
underlying security or index. Each Fund may enter into futures contracts and
options thereon provided that the aggregate deposits required on these contracts
do not exceed 5% of each Fund's total assets. Under normal market conditions,
each Fund may commit a maximum of 25% of its 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.)
Futures contracts and options pose certain risks. The primary risks associated
with the use of futures contracts and options include: imperfect correlation
between the change in market value of the securities held by each Fund and the
prices of futures contracts and options, and possible lack of a liquid secon-
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<PAGE> 10
dary market for a futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of imperfect correlation
will be minimized by investing only in those contracts whose behavior is
expected to resemble that of each Fund's underlying securities. The risk that
each Fund will be unable to close out a futures position will be minimized by
entering into such transactions on a national exchange with an active and liquid
secondary market.
The risk of loss in trading futures and options contracts in some strategies can
be substantial, due both to the low margin deposits required and the extremely
high degree of leverage that can be involved in futures and options pricing. As
a result, a relatively small price movement in a futures or options contract may
result in immediate and substantial loss (or gain) to the investor. While
futures contracts and options can be used as leveraged instruments, each Fund
may not use futures contracts or options to leverage its portfolios. When
investing in futures and options contracts, each Fund will segregate cash,
cash-equivalents or liquid, high-quality debt instruments in the amount of the
underlying obligation.
THE FUNDS MAY LEND THEIR SECURITIES TO GENERATE ADDITIONAL INCOME. 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.
THE FUNDS MAY ELECT A STRATEGY WHICH INCLUDES PURCHASING WHEN-ISSUED SECURITIES
AND RESTRICTED SECURITIES. 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 securi-
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ties. 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
general investment advice regarding each Fund's investment strategies, and
performs expense management, accounting, record-keeping and other administrative
services necessary to the operation of the Funds. 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 mutual funds in the SchwabFunds
Family(R), a family of 26 mutual funds with aggregate net assets in excess of
$42 billion as of December 15, 1996.
Andrea Regan is a Vice President of Schwab and the Senior Portfolio Manager for
the Funds and, as such, she 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. She graduated from San Jose State University with a Bachelor
of Science in Accounting.
Stephen B. Ward is the Trust's Senior Vice President and Chief Investment
Officer. He has overall responsibility for the management of the Funds'
portfolios. Steve joined the Investment Manager as Vice President and Portfolio
Manager in April 1991 and was promoted to his current position in August 1993.
Prior to joining the Investment Manager, Steve was Vice President and Portfolio
Manager at Federated Investors. He graduated with a Master of Business
Administration from the Wharton School and a Bachelor of Arts in Economics from
Virginia Tech and has been a Chartered Financial Analyst since 1985.
Please see the Funds' Annual Report to Shareholders for the fiscal year ended
August 31, 1996 for a discussion by the Investment Manager of each Fund's
performance.
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 information),
responding to daily inquiries, effecting the transfer of each Fund's shares, and
facilitating effective cash management of shareholders' Schwab account balances.
Schwab also furnishes such office space and equipment, telephone facilities,
personnel and informational literature distribution as is necessary and
appropriate in providing the shareholder and transfer agency information and
services described above. 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 3.3 million
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active customer accounts and has over 230 branch offices. Schwab also offers
convenient access to financial information services and provides products and
services that help investors make investment decisions. Schwab and the
Investment Manager, which was formed in 1989, are wholly owned subsidiaries of
The Charles Schwab Corporation. Charles R. Schwab is the founder, Chairman,
Chief Executive Officer and a director of The Charles Schwab Corporation. As a
result of his beneficial ownership interest in and other relationships with The
Charles Schwab Corporation and its affiliates, Mr. Schwab may be deemed to be a
controlling person of Schwab and the Investment Manager.
FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from each Fund a
graduated annual fee, payable monthly, of 0.41% of each Fund's average daily net
assets. 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 Long-Term Fund's management fee will not exceed 0.12% of the Fund's
average daily net assets. Moreover, 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 Long-Term Fund's
operating expenses will not exceed 0.30% of the Fund's average daily net assets.
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. The
Investment Manager and Schwab may discontinue these guarantees at any time.
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. The Investment Manager and Schwab 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, legal counsel and custodian; 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 the expense is incurred. However,
expenses directly attributable to a particular Fund will be charged to that
Fund. For the year ended August 31, 1996, the Short/Intermediate Fund paid
investment management fees of 0.31% and total operating expenses of 0.49% of the
Fund's average daily net assets, and the Long-Term Fund paid no investment
management fees or other operating expenses.
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.
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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
DIVIDENDS AND OTHER DISTRIBUTIONS. The Funds declare daily dividends which are
paid monthly. On each day that the net asset value per share of each Fund is
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 ("the
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, with the exception of the dividend paid in December,
which is paid on the last Business Day of December. 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.
Such qualification relieves a Fund of liability for federal income taxes to the
extent its earnings are 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 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
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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
THERE ARE NO SALES CHARGES OR TRANSACTION FEES TO PURCHASE OR REDEEM SHARES OF A
FUND. The price of a share of each Fund is its net asset value, which is
determined each Business Day at the close of trading on the Exchange, generally
at 4:00 p.m. (Eastern time). The price is determined by adding the total assets
of the Fund, subtracting any liabilities, and then dividing the resulting amount
by the number of shares outstanding. Each Fund's net asset value will fluctuate
and neither Fund's shares are insured against reduction in net asset value. (See
"Share Price Calculation" in the Statement of Additional Information.)
The Funds value their portfolio securities based on market quotes if they are
readily available. If they are not readily available, the Investment Manager
assigns fair values pursuant to guidelines adopted in good faith by the Board of
Trustees. The Board of Trustees reviews these values regularly.
Purchase or redemption orders and exchange requests will be executed at the net
asset value next determined after receipt by the Transfer Agent or its
authorized agent.
HOW THE FUNDS 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 SEC. Other reported total return
figures may differ in that they may report non-standard periods or represent
aggregate or cumulative return over a stated length of time.
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)), U.S. Treasury obligations, bank
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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 to
Shareholders, which is available free of charge by calling 800-2 NO-LOAD.
TAX-ADVANTAGED RETIREMENT PLANS
RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGE AND THE FUNDS MAY BE ESPECIALLY
SUITABLE INVESTMENTS FOR THEM. Schwab's retirement plans allow participants to
defer taxes while helping them build their retirement savings.
SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Schwab IRA accounts with balances of $10,000 or more by September 15, 1997 will
not be charged Schwab's $29 annual IRA account fee for the life of the account.
SCHWAB KEOGH. A tax-advantaged plan for self-employed individuals and their
employees that 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.
SCHWAB CORPORATE RETIREMENT ACCOUNT. A well designed retirement program can help
a company attract and retain valuable employees. Call 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 it deems it desirable.
Shares within 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. In addition, a Trustee may be removed by shareholders at a special
meeting called upon written request by shareholders owning at least 10% of the
outstanding shares of the Trust. 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
PLACE ORDERS AND OBTAIN SHAREHOLDER SERVICE AND INFORMATION. You may place
purchase and redemption orders as well as request exchanges by calling 800-2
NO-LOAD, where trained representatives are available to answer
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questions about the Funds and your account. The right to initiate transactions
by telephone, as discussed below, is available automatically through your Schwab
account. TDD users may contact Schwab at 800-345-2550, 24 hours a day.
Reasonable procedures will be followed to confirm that telephone instructions
are genuine. These procedures may include requiring a form of personal
identification, providing written confirmation of your telephone instructions
and recording all telephone transactions. If each Fund executes telephone orders
that it reasonably believes to be genuine, it will not be liable for any losses
you may experience. If the Fund does not follow reasonable procedures to confirm
that a telephone order is genuine, however, the Fund may be liable for any
losses you may suffer from unauthorized or fraudulent orders. You should be
aware that it may be difficult to implement transactions by telephone during
periods of drastic economic or market changes. If you experience difficulties in
purchasing, redeeming or exchanging shares by telephone, you can utilize the
alternative methods discussed on the following pages to place an order.
To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.
You may buy shares through an account maintained with Schwab or through any
other entity that has been designated by Schwab. The information on the
following pages regarding the purchase, exchange, and redemption of Fund shares
through a Schwab account relates solely to such transactions through Schwab
accounts and should not be read to apply to such transactions through other
designated entities. For more information, see "Purchase and Redemption of
Shares" in the Statement of Additional Information.
HOW TO BUY SHARES
BUYING SHARES THROUGH A SCHWAB ACCOUNT. If you buy shares of the Funds through
an account maintained with Schwab, 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.
You may buy Fund shares using your Schwab account as described below. If you
already have a Schwab account, you 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) 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). You may
also buy shares of each Fund using electronic products such as StreetSmart(R),
The Equalizer(R), and TeleBroker(R). All deposit checks should be made payable
to Charles Schwab & Co., Inc. If you would like
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to wire funds into your existing Schwab account, please call 800-2 NO-LOAD.
SCHWAB ACCOUNT MINIMUMS AND ASSOCIATED FEES. Schwab requires a $1,000 deposit
and account balance minimum to maintain a Schwab brokerage account ($500 for
custodial accounts). A quarterly fee of $7.50 will be charged on Schwab
brokerage accounts that fall below the minimum. This fee, if applicable, will be
charged at the end of each quarter and will be waived if there has been at least
one commissionable trade within the last six months, or if the shareholder's
combined account balances at Schwab total $10,000 or more.
Schwab currently imposes no fee for opening a Schwab One(R) account with a
minimum of $5,000 account equity. Schwab One accounts containing less than
$5,000 account equity are subject to a fee of $5 per month imposed by Schwab if
there have been fewer than two commissionable trades within the last twelve
months.
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.)
WHEN AND AT WHAT PRICE SHARES WILL BE BOUGHT. You must have funds available in
your Schwab account in order to buy Fund shares through your Schwab account. 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.
METHODS OF BUYING SHARES
Schwab offers you several convenient ways to buy 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 800-2 NO-LOAD, 24 hours a day. TDD
users may contact Schwab at 800-345-2550, 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 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) one of the distribution options listed below.
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ELECTRONICALLY:
- - Refer to product information on StreetSmart(R), e.Schwab(TM), The
Equalizer(R), and TeleBroker(R) for details.
- - World Wide Web address: http://www.schwab.com
AUTOMATIC INVESTMENT:
Once you have satisfied the initial investment requirements, you may authorize
Schwab to automatically purchase Fund shares at intervals and in amounts
pre-selected by you on your behalf. (See "Schwab Automatic Investment Plan.")
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. If you are
purchasing Fund shares through Schwab's Automatic Investment Plan, you must
choose this distribution option for that Fund.
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 account 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, 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, are subject to prior approval by that 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 SELL OR
EXCHANGE SHARES
SALE OF SHARES. Shares will be redeemed at the net asset value per share next
determined after receipt and verification by the Transfer Agent or its
authorized agent of proper redemption instructions, as set forth on the
following pages. Payment for redeemed shares will be credited directly to your
Schwab account no later than 7-days after the Transfer Agent or its authorized
agent receives your redemption instructions in proper form. Redemption proceeds
will then be held there or mailed to you
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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 Exchange is restricted; the Exchange is closed for any reason other than its
customary weekend or holiday closings; emergency circumstances as determined by
the SEC exist; or for such other circumstances as the SEC may permit. Each Fund
may also elect to invoke a 7-day period for cash settlement of individual
redemption requests. (See "Purchase and Redemption of Shares" in the Statement
of Additional Information.
EXCHANGE OF SHARES. 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 involves the
redemption of Fund shares and the purchase of shares of any SchwabFunds of your
choice. An exchange of shares will be treated as a sale and purchase of the
shares for federal income tax purposes. Note that you must meet the initial or
subsequent 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 SELLING OR EXCHANGING SHARES
BY PHONE:
To sell shares or to exchange shares between any of the SchwabFunds by
telephone, please call 800-2 NO-LOAD, 24 hours a day. TDD users may contact
Schwab at 800-345-2550, 24 hours a day. To properly process your telephone
redemption or exchange request, we will need the following information:
- - your Schwab account number and your name for verification;
- - the number of shares to be sold or exchanged;
- - the name of the Fund from which you wish to sell or exchange shares;
- - the name of the fund, and class into which shares are to be exchanged, if
applicable; and
- - if you are exchanging shares, the distribution option you select.
BY MAIL:
You may also request a redemption or an exchange by writing Schwab at 101
Montgomery Street, San Francisco, CA 94104. To properly process your mailed
redemption or exchange request, we will need the information above and a letter
signed by at least one of the registered Schwab account holders in the exact
form specified in the account. Once mailed, a redemption request is irrevocable
and may not be modified or canceled.
ELECTRONICALLY:
- - Refer to product information on StreetSmart(R), e.Schwab(TM), The
Equalizer(R), and TeleBroker(R) for details.
- - World Wide Web address: http://www.schwab.com
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SCHWAB AUTOMATIC
INVESTMENT PLAN
Schwab's Automatic Investment Plan ("AIP") allows you to make periodic
investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. You can make automatic
investments in any amount, from $100 to $50,000, once you meet a Fund's
investment minimum. Automatic investments are made from your Schwab account, and
you may select from the following methods to make automatic investments: using
the uninvested cash in your Schwab account; using the proceeds of redemption of
shares of the Schwab money fund linked to your Schwab account; or using the
Schwab MoneyLink(R) Transfer Service. As long as you are purchasing a Fund's
shares through AIP, all dividends and distributions paid to you by the Fund must
be reinvested in additional shares of that Fund. For more detailed information
about this service, or to establish your AIP, call 800-2 NO-LOAD, 24 hours a
day.
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. 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 Schwab 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 $25 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. 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.
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20
<PAGE> 21
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 22
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 23
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 24
SCHWAB GOVERNMENT
BOND FUNDS
PROSPECTUS December 31, 1996
[SchwabFunds(R) Logo]
919-7 (12/96) Printed on recycled paper.
[SchwabFunds(R) Logo]
101 Montgomery Street
San Francisco, California 94104
