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File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on December 30, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 14 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 18 [X]
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SCHWAB INVESTMENTS
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
Timothy F. McCarthy, President
Schwab Investments
101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)
Copies of communications to:
Martin E. Lybecker, Esq. Frances Cole, Esq.
Ropes & Gray Charles Schwab Investment
One Franklin Square Management, Inc.
1301 K Street, N.W., 101 Montgomery Street
Suite 800 East San Francisco, California 94104
Washington, D.C. 20005
It is proposed that this filing will become effective (check appropriate box):
/X/ Immediately upon filing pursuant to paragraph (b)
/ / On (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/ / On (date) pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / On (date) pursuant to paragraph (a)(ii) of Rule 485
if appropriate, check appropriate box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended,
Registrant has registered an indefinite number or amount of shares of beneficial
interest under the Securities Act of 1933, as amended. The Rule 24f-2 Notice for
Registrant's fiscal year ended August 31, 1996 was filed on October 24, 1996.
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CROSS REFERENCE SHEET
SCHWAB INVESTMENTS:
SCHWAB 1000 FUND(R)
<TABLE>
<CAPTION>
Part A Item Prospectus Caption
- ----------- ------------------
<S> <C>
Cover Page Cover Page
Synopsis Summary of Expenses; Key Features of the Fund
Condensed Financial Information Financial Highlights; How the Fund Shows
Performance
General Description of Registrant Matching the Fund to Your Investment Needs;
General Information; Investment Objective and
Policies; The Schwab 1000 Index
Management of the Fund Management of the Fund
Capital Stock and Other Securities General Information; Distributions and Taxes;
Shareholder Guide
Purchase of Securities Being Offered Share Price Calculation; Shareholder Guide
Redemption or Repurchase Shareholder Guide; Other Important Information
Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 3
SCHWAB 1000 FUND(R)
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 1000 Fund (the "Fund") attempts to match the price
and dividend performance (total return) of common stocks of United States
companies as represented by the Schwab 1000 Index(R) (the "Index"), an index
composed of the common stocks of the 1,000 largest United States corporations
(excluding investment companies). The 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 FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. You can find more detailed information about the
Fund in the Trust's Statement of Additional Information ("SAI") dated December
31, 1996 (as amended from time to time). The SAI has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference into
this Prospectus. The 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 SAI, 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
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<S> <C>
Key Features of the Fund.............. 2
Summary of Expenses................... 3
Financial Highlights.................. 5
Matching the Fund to Your Investment
Needs............................... 6
Investment Objective and Policies..... 6
The Schwab 1000 Index................. 9
Management of the Fund................ 9
Distributions and Taxes............... 11
Share Price Calculation............... 12
How the Fund Shows Performance........ 13
Tax-Advantaged Retirement Plans....... 13
General Information................... 13
Shareholder Guide..................... 14
How to Buy Shares................... 14
How to Sell or Exchange Shares...... 17
Schwab Automatic Investment Plan...... 18
Other Important Information........... 19
</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> 4
KEY FEATURES OF THE FUND
PERFORMANCE. The investment objective of the Fund is to match the price and
dividend performance (total return) of the Schwab 1000 Index(R), an index
created by Schwab to represent the performance of the public market for common
stocks of United States companies. (See "The Schwab 1000 Index.") The Fund,
which is a diversified investment portfolio of the Trust, an open-end management
investment company, invests primarily in the securities of companies represented
in the Index. (See "Investment Objective and Policies.")
REDUCED RISK THROUGH DIVERSIFICATION. The Fund seeks to invest in the common
stocks of substantially all of the 1,000 companies that make up the Index. This
level of diversification reduces the risk associated with investments in
individual equity securities (typically, a decline in the value of individual
securities) because the Fund's investments will be spread over a wide range of
industries and common stock issues as opposed to being concentrated in a few
individual securities. (See "Investment Objective and Policies.")
LOW-COST INVESTING. The Fund brings a low-cost approach to investing with:
- - no sales charges;
- - an index fund management strategy designed to minimize overall operating
expenses; and
- - the voluntary guarantee of Charles Schwab Investment Management, Inc. (the
"Investment Manager") and Schwab that the Fund's total fund operating expenses
will not exceed 0.49% of the Fund's average daily net assets. These guarantees
may be discontinued at any time. (By way of comparison, according to
Morningstar, Inc., as of October 31, 1996 the total fund operating expenses of
the average U.S. growth and income fund was 1.25% of its average daily net
assets.) (See "Management of the Fund.")
MINIMIZATION OF CURRENT CAPITAL GAINS TAX LIABILITY. Taxes can erode the returns
a shareholder earns from a mutual fund investment. The Fund's investment
policies are designed to minimize current capital gains tax liability. Since the
Fund doesn't actively trade stocks, except to realign portfolio holdings with
the Index and respond to customer purchases and redemptions, capital gains are
minimized. When the Fund's Investment Manager does trade, an attempt is made to
offset capital gains with capital losses to minimize taxable distributions to
shareholders. This strategy seeks to defer capital gains until shares are sold
by an investor. Until such time, any unrealized gains accumulate in the Fund,
helping to build the value of a shareholder's investment. (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. The Investment Manager currently provides investment
management services to the mutual funds in the SchwabFunds Family(R), a family
of 26 mutual funds with approximately $42 billion in assets as of December 12,
1996. (See "Management of the Fund.")
SHAREHOLDER SERVICE. Schwab serves as the Fund's principal
underwriter/distributor, transfer agent, and shareholder service provider.
Schwab's professional representatives are available 24 hours a day to receive
your
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purchase, redemption and exchange orders. Call 800-2 NO-LOAD. 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 electronically by using
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 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.")
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load on Purchases........... None
Sales Load on Reinvested
Dividends...................... None
Deferred Sales Load............... None
Early Withdrawal Fee(1)........... 0.50%
Exchange Fee...................... None
ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Management Fee (after fee
reduction)(2).................. 0.20%
12b-1 Fees........................ None
Other Expenses (after fee
reduction and expense
reimbursement)(3).............. 0.29%
TOTAL FUND OPERATING
EXPENSES(3,4).................. 0.49%
</TABLE>
(1) Applies only to the redemption (including by exchange) of shares purchased
and held less than six months. The fee is paid to the Fund and is designed
to protect long-term investors from the cost of frequent investments and
redemptions by short-term investors. (See "How to Sell or Exchange Shares.")
The Fund reserves the right to waive this fee for certain clients of Schwab
Institutional and The Charles Schwab Trust Company and for certain
tax-advantaged retirement plans. Call your Schwab representative for more
information.
(2) This amount reflects a voluntary reduction by the Investment Manager, which
may be discontinued at any time. If there were no reduction, the maximum
management fee would be 0.28% of the Fund's average daily net assets.
(3) This amount reflects a voluntary guarantee by the Investment Manager and
Schwab that total operating expenses for the Fund will not exceed 0.49% of
the Fund's average daily net assets. Without these guarantees, which were in
effect for the fiscal year ended August 31, 1996, other expenses and total
fund operating expenses would have been 0.32% and 0.57%, respectively, of
the Fund's average daily net assets. These guarantees may be discontinued at
any time.
(4) 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
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currently charged an annual fee of $45. (See "Tax-Advantaged Retirement
Plans.")
EXAMPLE. You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
5.$.. $16 $27 $ 62
</TABLE>
THE PURPOSE OF THE PRECEDING TABLE IS TO ASSIST INVESTORS IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR
INDIRECTLY. This example reflects the guarantee by the Investment Manager and
Schwab that the total fund operating expenses will not exceed the amount
specified in note (3). 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 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 SAI.
<TABLE>
<CAPTION>
PERIOD
APRIL 2, 1991
EIGHT MONTHS (COMMENCEMENT
YEAR ENDED AUGUST 31, ENDED YEAR ENDED OF OPERATIONS) TO
-------------------------------- 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............................ $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income............ .24 .26 .26 .17 .24 .15
Net realized and unrealized gain
(loss) on investments.............. 2.45 2.48 .28 .79 .71 1.26
---------- -------- -------- -------- -------- --------
Total from investment
operations......................... 2.69 2.74 .54 .96 .95 1.41
LESS DISTRIBUTIONS
Dividends from net investment
income............................. (.23) (.14) (.26) (.12) (.25) (.15)
Distributions from realized gain
(loss) on investments.............. -- -- -- -- -- --
---------- -------- -------- -------- -------- --------
Total distributions.............. (.23) (.14) (.26) (.12) (.25) (.15)
---------- -------- -------- -------- -------- --------
Net asset value at end of period... $ 18.14 $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26
========== ======== ======== ======== ======== ========
Total return(%).................... 17.27 21.23 4.28 8.06 8.52 14.25
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(000s)............................. $1,560,059 $826,714 $554,061 $515,272 $370,980 $ 192,206
Ratio of expenses to average net
assets (%)..................... 0.49 0.54 0.51 0.45* 0.35 --*
Ratio of net investment income
to average net assets (%).... 1.66 2.03 2.06 2.21* 2.45 3.21*
Portfolio turnover rate (%)...... 2 2 3 1 1 1
Average commission rate.......... $ .03
</TABLE>
Notes: The Investment Manager and Schwab have reduced a portion of their fees
and absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. The following table illustrates the ratio of
expenses to average net assets and the ratio of net investment income to average
net assets had these fees and expenses not been reduced and absorbed:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST EIGHT MONTHS
31, ENDED YEAR ENDED PERIOD ENDED
------------------ AUGUST 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1991
---- ---- ---- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets prior to reduced
fees and absorbed expenses............................... 0.57% 0.63% 0.56% 0.49%* 0.52% 1.05%*
Ratio of net investment income to average net assets prior
to reduced fees and absorbed expenses................... 1.58% 1.94% 2.01% 2.17%* 2.28% 2.16%*
</TABLE>
On June 1, 1995, the sub-advisory agreement between Dimensional Fund Advisors
Inc. and the Investment Manager was terminated, and the Investment Manager
assumed sole responsibility for providing the Fund with investment advisory
services.
* Annualized.
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MATCHING THE FUND TO YOUR
INVESTMENT NEEDS
THE FUND MAY BE APPROPRIATE FOR A VARIETY OF INVESTMENT PROGRAMS. While the Fund
is not a substitute for an investment portfolio tailored to an individual's
investment needs and ability to tolerate risk, it can be used as a broad-based
"core" equity investment around which to build your overall portfolio.
THE FUND MAY BE ESPECIALLY SUITABLE FOR LONG-TERM INVESTORS. Because the Fund
will ordinarily invest in a large number of common stocks, it may be especially
appropriate for investors, including those saving for retirement or college,
with long-term investment objectives. While common stock prices tend to rise and
decline for short or extended periods, historically they have generally risen
over the long term. As a result, stocks have over time historically provided
many investors with higher returns than most alternative securities investments.
INVESTMENT OBJECTIVE AND POLICIES
THE FUND IS DESIGNED TO MATCH THE PERFORMANCE OF THE SCHWAB 1000 INDEX(R). The
Fund is a diversified investment portfolio of the Trust, an open-end management
investment company. The investment objective of the Fund is to provide a total
return that matches that of the Index, an index created to represent the
performance of publicly traded common stocks of United States companies. The
Fund's investment objective is fundamental and cannot be changed without
shareholder approval. While there is no assurance that the Fund will achieve its
investment objective, it will endeavor to do so by following the investment
policies set forth below.
THE FUND WILL FOLLOW AN "INDEXING" OR "PASSIVE" STRATEGY. The Fund will follow
an "indexing" or "passive" strategy under which stocks are only purchased or
sold in order to match the composition of the Index. Accordingly, the Investment
Manager generally will not select securities for the Fund's investment portfolio
based upon traditional economic, financial and market analyses and/or
forecasting.
THE FUND IS MANAGED TO MINIMIZE COSTS AND REALIZED CAPITAL GAINS TO INCREASE
SHAREHOLDERS' TOTAL RETURN. The Fund is managed to offset capital gains with
capital losses in order to minimize your capital gains tax liability. This
special feature of the Fund can make a real difference in your after-tax return.
The Fund has adopted a number of policies that should cause its portfolio
turnover rate to be below that experienced in many other mutual fund portfolios.
The Fund's portfolio turnover rates for the years ended August 31, 1996, 1995
and 1994 were 2%, 2% and 3%, respectively. Lower portfolio turnover acts to
minimize associated transaction costs as well as the level of current realized
capital gains. Shareholders' current tax liability for capital gains should be
reduced and their total return increased by these policies.
To reduce transaction costs and minimize shareholders' current capital gains tax
liability, the Fund's investment portfolio will not be automatically traded
(i.e., "rebalanced") to reflect changes in the Index. The Fund's trading
strategy is designed to further minimize transaction costs (e.g., the Fund will
generally only buy round-lots of stocks and may trade large blocks of
securities). These policies may cause a particular stock to be over- or under-
represented in the Fund relative to its Index weighting or result in its
continued ownership by the Fund after its deletion from the Index,
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thereby reducing the correlation between Fund and Index composition. However,
given the diversified nature of the Fund, the Investment Manager does not expect
that these potential deviations will significantly impact the correlation
between Fund and Index performance. Moreover, the Investment Manager will only
engage in these practices to the extent that they do not have a material effect
on the Fund's ability to track the performance of the Index.
THE FUND WILL ATTEMPT TO BE SUBSTANTIALLY INVESTED IN INDEX STOCKS. Under normal
market conditions, the Fund will invest at least 80% of its total assets in
stocks that comprise the Index ("Index Stocks"). The Fund, however, is not
required to buy or sell securities solely because the percentage of its assets
invested in Index Stocks changes when the market value of its holdings increases
or decreases. In addition, the Fund may omit or remove an Index Stock from its
portfolio if the Investment Manager believes the stock to be insufficiently
liquid or believes the merit of the investment has been substantially impaired
by extraordinary events or financial conditions. To compensate for any Index
Stocks omitted or removed from its investment portfolio, the Fund may buy stocks
not in the Index (which would then be considered Index Stocks for purposes of
the Fund's policy regarding the percentage of its assets to be invested in Index
Stocks) if the Investment Manager believes that their market performance is
likely to replicate that of the Index Stocks they replace.
It is anticipated that the Fund will be able to invest in a majority of Index
Stocks. The Fund will generally select stocks by reference to their weighting in
the Index. Thus, the Fund intends that the percentage of its assets invested in
each Index Stock will approximate the weighting of that stock in the Index.
FUND PERFORMANCE SHOULD APPROXIMATE THAT OF THE INDEX. While Fund performance
will not precisely match Index performance, the Fund will attempt to maximize
the correlation between its performance and that of the Index. Factors such as
the size of the Fund's portfolio, transaction costs, management fees and
expenses, brokerage commissions and fees, the extent and timing of cash flows
into and out of the Fund, the Fund's policy of minimizing transaction costs and
current capital gains tax liability, and changes in the securities markets and
the Index itself are expected by the Investment Manager to account for any
differences between Fund and Index performance.
THE FUND MAY PURCHASE SECURITIES ASIDE FROM COMMON STOCKS. The value of all
non-Index Stock investments may normally represent no more than 20% of the
Fund's total assets. In order to accommodate cash flows resulting from the
purchase and sale of Fund shares, the Fund may invest in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
certificates of deposit, bankers' acceptances and commercial paper (which has
been rated in one of the two highest categories by a non-affiliated, nationally
recognized statistical rating organization); enter into repurchase agreements
collateralized by these instruments; and purchase shares of other investment
companies that invest primarily in any of the securities described above. In the
aggregate, no more than 10% of the Fund's total assets may be invested in other
investment companies, and an investment in any one investment company will be
limited to 5% of total Fund assets. Because other investment companies employ an
investment adviser and other service providers, such investments by the Fund may
cause shareholders to bear duplicative fees. The Investment
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Manager will charge no management fees attributable to any Fund assets invested
in other investment companies. (See "Investment Restrictions" in the Statement
of Additional Information.)
The Fund may also purchase futures contracts on stocks and stock indices,
options contracts (including options on futures contracts), equity index
participations and index participation 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 Index
Stock purchases. Moreover, the 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. The Fund will not invest
more than 5% of its total assets in equity index participations and 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
contracts 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.
Futures contracts and options pose certain risks. The primary risks associated
with the use of futures contracts and options include: imperfect correlation
between the change in market value of the securities held by the Fund and the
prices of futures contracts and options, and possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position 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 the Fund's underlying securities. The risk that the 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, the Fund may
not use futures contracts or options to leverage its portfolio. When investing
in futures and options contracts, the Fund will segregate cash, cash-equivalents
or liquid, high quality debt instruments in the amount of the underlying
obligation.
THE FUND MAY LEND ITS SECURITIES TO GENERATE ADDITIONAL INCOME. To increase its
income, the Fund may lend securities from its portfolio to brokers, dealers and
other financial institutions that borrow securities. No more than one-third of
the Fund's total assets may be represented by loaned securities. The Fund's
loans of portfolio securities will be collateralized by cash, letters of credit
or U.S. Government securities equal at all times to 100% of the loaned
securities' market value plus accrued interest.
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THE SCHWAB 1000 INDEX(R)
THE INDEX HAS SET INCLUSION CRITERIA. To be included in the Index, a company
must satisfy all of the following criteria:
1. it must be an "operating company" (i.e., not an investment company)
incorporated in the United States, its territories or possessions;
2. a liquid market for its common shares must exist on the New York Stock
Exchange (the "Exchange"), American Stock Exchange or the NASDAQ/NMS; and
3. its market value must place it among the top 1,000 such companies as measured
by market capitalization.
A particular stock's weighting in the Index is based on its relative total
market value (i.e., its market price per share multiplied by the number of
shares outstanding), divided by the total market value of the Index. As of
December 16, 1996, the aggregate market capitalization of Index Stocks was
approximately $6.368 trillion.
SCHWAB DEVELOPED AND MAINTAINS THE INDEX. The Index, which as of December 16,
1996 represented approximately 83.6% of the total market value of all publicly
traded United States companies, as represented by the Wilshire 5000 Index, was
developed and is maintained by Schwab to represent the total return of publicly
traded common stocks of United States companies and serve as a standard of
comparison for Fund performance. Schwab receives no compensation from the Fund
for maintaining the Index.
SCHWAB CALCULATES AND REPORTS INDEX PERFORMANCE DAILY. Index performance (i.e.,
the market value of all Index Stocks) is calculated and made available each
Business Day by Schwab. Index total return is computed monthly (using beginning
of month capitalization weightings and assuming reinvestment of dividends) and
may be reported from time to time to Fund shareholders.
SCHWAB PERIODICALLY UPDATES THE COMPOSITION OF THE INDEX. Schwab reviews and, as
necessary, revises the list of companies whose securities are included in the
Index at least annually. Companies known by Schwab to meet or no longer meet the
inclusion criteria will be added or deleted as appropriate. Schwab will also
modify the Index as necessary to account for corporate actions (e.g., new
issues, repurchases, stock dividends/splits, tenders, mergers, swaps, spin-offs
or Chapter 11 bankruptcy filings made because of a company's inability to
continue operating as a going concern). Schwab may change Index inclusion
criteria if it determines that doing so would cause the Index to be more
representative of the domestic equity market. In the future, the Trust's Board
of Trustees, subject to shareholder approval, may select another index should it
decide that taking such action would be in the best interests of Fund
shareholders.
MANAGEMENT OF THE FUND
Responsibility for overall management of the Fund rests with the trustees and
officers of the Trust. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. In addition to maintaining the
Index and providing day-to-day portfolio management of the Fund, the Investment
Manager provides general investment advice regarding the Fund's investment
strategies, and performs expense management,
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accounting and recordkeeping, and other administrative services necessary to the
operation of the Fund. 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. As of December 12, 1996, the SchwabFunds(R) had aggregate net
assets of approximately $42 billion.
Pursuant to separate agreements, Charles Schwab & Co., Inc. ("Schwab" or the
"Transfer Agent"), 101 Montgomery Street, San Francisco, CA 94104, serves as
shareholder services and transfer agent for the Fund. 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 Fund shares, and
facilitating effective cash management of shareholder 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 the described shareholder and transfer agency
information and services. Schwab is also the 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 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 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 interests in and other relationships with The Charles
Schwab Corporation and its affiliates, Mr. Schwab may be deemed to be a
controlling person of Schwab and the Investment Manager.
Geri Hom is Vice President of the Investment Manager and Senior Portfolio
Manager for the Fund. She joined Schwab in March 1995 as Portfolio
Manager-Equities and currently manages the four Schwab index funds and co-
manages the three Schwab Asset Director(R) Funds with approximately $3.0 billion
in assets. For four years prior to joining Schwab, she was a Principal for Wells
Fargo Nikko Investment Advisors. For the seven prior years, she was Vice
President and Manager of the Domestic Equity Portfolio Management Group for
Wells Fargo Nikko. She holds a B.A. in business education from San Francisco
State University.
Stephen B. Ward, Senior Vice President and Chief Investment Officer, has overall
responsibility for the management of the Fund's portfolio. Steve joined Charles
Schwab Investment Management, Inc. 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 holds an M.B.A. from the Wharton School and a B.A. in
economics from Virginia Tech, and has been a chartered financial analyst since
1985.
Please see the Fund's Annual Report to Shareholders for the fiscal year ended
August 31, 1996 for a discussion by the Investment Manager of the Fund's
performance.
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<PAGE> 13
FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Trust, the Investment Manager receives from the Fund a
graduated annual fee, payable monthly, of 0.30% of the Fund's average daily net
assets not in excess of $500 million and 0.22% of such assets over $500 million.
The Investment Manager has agreed to waive the Fund's management fee in excess
of 0.20% of the Fund's average daily net assets. In addition, the Investment
Manager and Schwab guarantee that total fund operating expenses will not exceed
0.49% of the Fund's average daily net assets. The waiver and expense limits,
which are voluntary and may be discontinued at any time, will serve to maintain
or lower the Fund's expenses and thus maintain or increase the Fund's total
return to shareholders. For the year ended August 31, 1996, the Fund paid
investment management fees of 0.20% and total operating expenses of 0.49% of the
Fund's average daily net assets.
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 the Fund's
average daily net assets. The Investment Manager and Schwab may reduce their
fees from time to time.
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 Fund 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.
PORTFOLIO BROKERAGE. When placing orders for the Fund's securities transactions,
the Investment Manager will use its judgment to obtain best price and execution.
The full range and quality of brokerage services available are considered in
making these determinations. For securities transactions in which Schwab is not
a principal, the Investment Manager may use Schwab to execute the 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 Fund will distribute substantially all of
its net investment income and net capital gains, if any, on an annual basis, as
determined by the Trust's Board of Trustees.
The value of your shares reflects any net investment income or net capital gains
that the Fund has earned but not yet distributed, so their value will be reduced
when distributions are paid. If you elect to receive these distributions in
cash, the value of your Fund holdings as a whole will decrease. If you choose to
reinvest your distributions, the reduced value of your shares will be offset by
the value of new shares purchased with reinvested distributions.
FEDERAL TAX INFORMATION. The Fund is treated as a separate entity for tax
purposes, has elected to be treated as a regulated investment
11
<PAGE> 14
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, the 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 will relieve the Fund of
liability for federal income tax to the extent its earnings are so distributed.
Dividends paid by the Fund 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. For corporate investors in the Fund, dividend distributions
designated by the Fund to be from dividends received from qualifying domestic
corporations will be eligible for the 70% corporate dividends-received deduction
to the extent they would qualify if the Fund were a regular corporation.
Distributions received from the 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 owned
shares in the Fund. However, any loss on the sale or exchange of shares held for
six months or less shall, to the extent of any long-term capital gain
distributions received with respect to such shares, be treated as a long-term
capital loss. If a shareholder is not subject to income tax, 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 Fund will notify
shareholders at least annually as to the nature of all distributions made during
the taxable year, including amounts qualifying as dividends and capital gains
distributions.
The foregoing is only a brief summary of the federal income tax considerations
affecting the Fund and its shareholders. The discussion of taxes set forth above
is included for general information purposes only. Prospective investors in the
Fund should consult their tax advisers with specific reference to their own tax
situations.
SHARE PRICE CALCULATION
THE FUND SELLS ITS SHARES FREE OF SALES CHARGES. The price of a share of the
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.
The Fund values its 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.
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<PAGE> 15
HOW THE FUND SHOWS PERFORMANCE
THE FUND'S PERFORMANCE MAY BE ADVERTISED IN TERMS OF TOTAL RETURN. From time to
time the Fund may advertise its total return. Performance figures are based upon
historical results and are not intended to indicate future performance.
The 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.
The 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 Index), United States Treasury obligations, bank certificates of
deposit, the Consumer Price Index, corporate bonds and other investments for
which reliable performance data is available. The Fund's performance may also be
compared to averages, performance rankings, or other information prepared by
Lipper Analytical Services, Inc. and Morningstar, Inc.
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 24
hours a day.
TAX-ADVANTAGED
RETIREMENT PLANS
RETIREMENT PLANS OFFER EXCELLENT TAX ADVANTAGES, AND THE FUND MAY BE AN
ESPECIALLY SUITABLE INVESTMENT FOR THEM. Schwab offers tax-advantaged retirement
plans for which the Fund 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 IRAs 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 PLANS. A well designed retirement program can help a
company attract and retain valuable employees. Call 800-2 NO-LOAD, 24 hours a
day 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 will have equal, noncumulative voting rights and equal
rights as to dividends, assets and liquidation of such series.
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<PAGE> 16
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
Investment Company Act of 1940, as amended, such as for the election of
trustees.
SHAREHOLDER GUIDE
PLACE ORDERS AND OBTAIN SHAREHOLDER INFORMATION. You may place Fund purchase and
redemption orders as well as request exchanges by calling 800-2 NO-LOAD, where
trained representatives are available to answer questions about the Fund 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 your 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 the Fund follows
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 telephone transactions may be difficult to implement
during periods of drastic economic or market changes. If you experience
difficulties in reaching us by telephone, you can mail your orders as set forth
on the following pages.
To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.
You may purchase shares through an account maintained with Schwab or through any
other entity that has been designated by Schwab. The following information
regarding the purchase, exchange and redemption of Fund shares through a Schwab
account relates solely to transactions through Schwab accounts and should not be
read to apply to transactions through other designated entities. For more
information, see "Purchase and Redemption of Shares" in the SAI.
HOW TO BUY SHARES
YOU MAY BUY SHARES OF THE FUND THROUGH A SCHWAB, IRA, TRUST, OR KEOGH ACCOUNT.
If you purchase shares of the Fund 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 that you hold in a Schwab
account. Of course, this SIPC account protection does not protect shareholders
from share price fluctuations.
14
<PAGE> 17
You may buy Fund shares through 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 it to Charles Schwab & Co., Inc. 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 the 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 to wire funds into your existing
Schwab account, please call 800-2 NO-LOAD, 24 hours a day.
BUYING SHARES THROUGH THE CHARLES SCHWAB TRUST COMPANY. You may also buy shares
of the Fund through an account maintained with The Charles Schwab Trust Company
(the "Trust Company"). Payment for these shares must be made directly to the
Trust Company and you must have funds available in your account to purchase
shares of the Fund. Contact a Trust Company representative for more information.
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 the Fund may be
as low as $1,000 ($500 for IRAs, certain other retirement plans and 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.)
Schwab reserves the right to waive these minimums for clients of Schwab
Institutional and The Charles Schwab Trust Company and for certain
tax-advantaged retirement plans.
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 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
15
<PAGE> 18
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 purchase
shares of the Fund. 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 Charles
Schwab & Co., Inc. 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 and the dollar amount of shares you would like purchased;
and
- - (initial share purchases only) one of the distribution options listed below.
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 buy 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 the Fund. If you
already are a Fund shareholder and wish to change your distribution option,
please call 800-2 NO-LOAD for assistance.
1. AUTOMATIC REINVESTMENT: Both income dividends and any capital gains
distributions will be reinvested in additional shares of the Fund. 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 this Fund.
2. CASH DIVIDENDS/REINVESTED CAPITAL GAINS: Income dividends will be paid in
cash, and any capital gains will be reinvested in additional shares.
3. ALL CASH: Income 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
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<PAGE> 19
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 your Schwab account to your bank, see "Other Important
Information - Wire Transfers to Your Bank."
OTHER PURCHASE INFORMATION. The 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 Fund
are subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing. Schwab will charge a service fee against an investor's
Schwab account should his or her investment check be 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 Schwab's 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 Schwab's Transfer Agent or its
authorized 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.
The 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. The 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 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. The Fund reserves the right on 60 days' written notice
to modify, limit or terminate the exchange privilege.
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<PAGE> 20
EARLY WITHDRAWAL FEE PAID TO THE FUND. The Fund is meant to be a long-term
investment. Frequent trading in Fund shares by short-term investors increases
the Fund's costs. To offset the costs of short-term trading and to ensure that
long-term investors do not bear these costs, the Fund assesses a 0.50% (one-half
of one percent) early withdrawal fee upon redemption or exchange proceeds
attributable to shares purchased and held less than six months. To benefit Fund
shareholders directly, the early withdrawal fee is paid directly to the Fund and
does not apply to the redemption or exchange of shares acquired through
reinvestment of dividends or capital gains. Solely for purposes of calculating
the amount (if any) of the early withdrawal fee, shares will be treated as
redeemed on a "first-in first-out basis," except that shares acquired through
dividend reinvestment will be treated as redeemed first. This method of
calculating the fee should result in the lowest total early withdrawal fee. The
Fund reserves the right to waive this fee for certain clients of Schwab
Institutional and The Charles Schwab Trust Company and for certain
tax-advantaged retirement plans.
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 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 above information 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
SCHWAB AUTOMATIC
INVESTMENT PLAN
THE FREE SCHWAB AUTOMATIC INVESTMENT PLAN IS A FAST, CONVENIENT WAY TO MAKE
REGULAR INVESTMENTS IN THE FUND. Schwab's Automatic Investment Plan ("AIP")
allows you to make periodic investments in non-money market SchwabFunds(R) (and
certain other funds available through Schwab) automatically and conveniently.
You can make automatic investments in any amount, from $100 to $50,000, once you
meet the Fund's investment minimum. Automatic investments are made from your
Schwab account, and you may select from the following methods to make automatic
investments: using the uninvested cash in your Schwab account; using the
proceeds of
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<PAGE> 21
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
the 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, the 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 IRAs, other retirement plans
and 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. Fund shares will be automatically redeemed should the Schwab
account in which the shares are carried be closed.
CONSOLIDATED MAILINGS. In an effort to reduce mailing costs, the Fund
consolidates 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 branch for additional information. A 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 FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
- ------------------------------------------------------
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<PAGE> 22
SCHWAB
1000 FUND(R)
PROSPECTUS December 31, 1996
[SchwabFunds Logo]
736-9 (12/96) Printed on recycled paper.
[SchwabFunds Logo]
101 Montgomery Street
San Francisco, California 94104
<PAGE> 23
CROSS REFERENCE SHEET
SCHWAB INVESTMENTS:
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
SCHWAB LONG-TERM GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
Part A Item Prospectus Caption
- ----------- ------------------
<S> <C>
Cover Page Cover Page
Synopsis Summary of Expenses; Key Features of the Funds
Condensed Financial Information Financial Highlights; How the Funds Show
Performance
General Description of Registrant Matching the Funds to Your Investment
Needs; Investment Objectives, Policies and Risk
Considerations; Management of the Funds.
Management of the Fund Management of the Funds
Capital Stock and Other Securities General Information; Distributions and Taxes;
Share Price Calculations; Shareholder Guide
Purchase of Securities Being Offered Share Price Calculation; Shareholder Guide;
Schwab Automatic Investment Plan
Redemption or Repurchase Shareholder Guide; Other Important Information
Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 24
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> 25
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
2
<PAGE> 26
- - 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.
3
<PAGE> 27
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.
4
<PAGE> 28
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
5
<PAGE> 29
<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.
6
<PAGE> 30
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
7
<PAGE> 31
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
8
<PAGE> 32
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-
9
<PAGE> 33
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-
10
<PAGE> 34
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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<PAGE> 37
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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<PAGE> 38
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.
- ------------------------------------------------------
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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THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 45
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 46
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 47
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
<PAGE> 48
CROSS REFERENCE SHEET
SCHWAB INVESTMENTS:
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB LONG-TERM TAX-FREE BOND FUND
<TABLE>
<CAPTION>
Part A Item Prospectus Caption
- ----------- ------------------
<S> <C>
Cover Page Cover Page
Synopsis Summary of Expenses; Key Features of the Funds
Condensed Financial Information Financial Highlights; How the Funds Show
Performance
General Description of Registrant Matching the Funds to Your Investment
Needs; Investment Objectives and
Policies; Risk Considerations; Management
of the Funds.
Management of the Fund Management of the Funds
Capital Stock and Other Securities General Information; Distributions and Taxes;
Share Price Calculations; Shareholder Guide
Purchase of Securities Being Offered Share Price Calculations; Shareholder Guide,
Schwab Automatic Investment Plan
Redemption or Repurchase Shareholder Guide; Other Important Information
Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 49
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB LONG-TERM TAX-FREE 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 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 ten years or longer, although they 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.
THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION YOU SHOULD KNOW BEFORE
INVESTING IN THE FUND. 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 and Policies.... 6
Municipal Securities and Investment
Techniques.......................... 8
Risk Considerations................... 9
Management of the Funds............... 10
Distributions and Taxes............... 12
Share Price Calculations.............. 13
How the Funds Show Performance........ 14
General Information................... 14
Shareholder Guide..................... 15
How to Buy Shares................... 15
How to Sell or Exchange Shares...... 18
Schwab Automatic Investment Plan...... 19
Other Important Information........... 19
</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> 50
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
personal income 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 ten years or longer. (See "Matching the Funds to Your
Investment Needs.")
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 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. 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 December 31, 1997 for potentially higher
returns; and
- - a guarantee 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 December 31, 1997 (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
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<PAGE> 51
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 mutual fund 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 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 reduction)........ 0.31%1 0.31%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 0.49%4
============== ==============
</TABLE>
1 This amount reflects a reduction by the Investment Manager which is guaranteed
through at least December 31, 1997. 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 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.")
3 This amount reflects the guarantee by the Investment Manager and Schwab that,
through at least December 31, 1997, the total operating expenses of the
Short/Intermediate Fund will not exceed 0.49% of the Fund's average daily net
assets. Without this
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guarantee, which was in effect for the fiscal year ended August 31, 1996,
other expenses (as restated) and total operating expenses would have been
0.49% and 0.90%, respectively, of the Fund's average daily net assets.
4 This amount reflects the guarantee by the Investment Manager and Schwab that,
through at least December 31, 1997, 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, 1996, other expenses and total operating expenses would have been
0.53% and 0.94%, 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........... $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 SEC. THIS HYPOTHETICAL
RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR FUTURE
PERFORMANCE.
4
<PAGE> 53
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 SEPTEMBER 11, 1992
(COMMENCEMENT EIGHT MONTHS (COMMENCEMENT
OF OPERATIONS) TO ENDED OF OPERATIONS) TO
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED AUGUST 31, AUGUST 31, DECEMBER 31,
1996 1995 1994 1993 1996 1995 1994 1993 1992
------- ------- ------- ----------------- ------- ------- ------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
periods............... $ 10.12 $ 9.92 $ 10.15 $ 10.00 $ 10.16 $ 9.95 $ 10.59 $ 9.92 $ 10.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income.............. 0.41 0.40 0.37 0.13 0.52 0.53 0.52 0.36 0.17
Net realized and
unrealized gain
(loss) on
investments......... (0.08) 0.20 (0.23) 0.15 (0.03) 0.21 (0.56) 0.67 (0.08)
------- ------- ------- ------- ------- ------- ------- ------------ -------
Total from investment
operations.......... 0.33 0.60 0.14 0.28 0.49 0.74 (0.04) 1.03 0.09
LESS DISTRIBUTIONS
Dividends from net
investment
income.............. (0.41) (0.40) (0.37) (0.13) (0.52) (0.53) (0.52) (0.36) (0.17)
Distributions from
realized gain on
investments......... -- -- -- -- -- -- (0.08) -- --
------- ------- ------- ------- ------- ------- ------- ------------ -------
Total distributions... (0.41) (0.40) (0.37) (0.13) (0.52) (0.53) (0.60) (0.36) (0.17)
------- ------- ------- ------- ------- ------- ------- ------------ -------
Net asset value at end
of period............. $ 10.04 $ 10.12 $ 9.92 $ 10.15 $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92
======= ======= ======= ======= ======= ======= ======= ======== ========
Total return (%)....... 3.32 6.23 1.42 2.83 4.87 7.76 (0.42) 10.56 0.92
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000s)....... $54,132 $52,504 $63,889 $54,450 $43,672 $41,413 $43,975 $ 50,413 $ 28,034
Ratio of expenses to
average net assets
(%)................. 0.49 0.49 0.48 0.45* 0.49 0.54 0.51 0.45* 0.45*
Ratio of net
investment income to
average net assets
(%)................. 4.06 4.06 3.71 3.63* 5.06 5.40 5.05 5.30* 5.61*
Portfolio turnover
rate (%)............ 44 35 19 11 50 70 62 91 54
Ratio of expenses to
average net assets
prior to reduced
fees and absorbed
expenses (%)++...... 0.90 0.89 0.91 1.26* 0.94 0.93 0.99 1.18* 1.53*
Ratio of net
investment income to
average net assets
prior to reduced
fees and absorbed
expenses (%)++...... 3.65 3.66 3.28 2.82* 4.61 5.01 4.57 4.57* 4.53*
</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
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<PAGE> 54
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS
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
EACH FUND SEEKS A HIGH LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM FEDERAL
INCOME TAX, 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 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, 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.
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 United States, 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. The
Long-Term Fund has no restriction on its portfolio maturity, but its dollar
weighted average portfolio maturity is currently expected to be ten years or
longer. Either Fund may invest in obligations of any maturity.
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 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.)
Each Fund will invest only in Municipal Securities that at the time of purchase:
(a) are rated
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<PAGE> 55
within the four highest rating categories for municipal securities assigned by
Moody's Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P"),
Fitch Investors Services, Inc. ("Fitch"), or any other nationally recognized
statistical rating organization ("NRSRO"); or (b) are rated within the two
highest rating categories for short-term municipal securities assigned by any
NRSRO; or (c) are unrated by any NRSRO, 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 and each 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 Long-Term Fund had
portfolio turnover rates for the years ended August 31, 1996 and 1995, of 50%
and 70%, respectively. The Short/Intermediate Fund had portfolio turnover rates
for the years ended August 31, 1996 and 1995, of 44% and 35%, respectively.
Each Fund is "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 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 an
NRSRO; commercial paper rated in the two highest rating categories established
by any NRSRO; certificates of deposit of domestic banks having capital and
surplus in excess of
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<PAGE> 56
$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 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 any NRSRO, 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
8
<PAGE> 57
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.
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
Funds' fundamental policy regarding investment in Municipal Securities. 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,
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. Corporate shareholders may be subject to the Federal
alternative minimum tax on exempt-interest dividends received from a Fund.
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 securi-
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<PAGE> 58
ties, 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 would 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
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.
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Joanne Larkin is a Vice President of Schwab and the Senior Portfolio Manager for
the Funds, 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 February 1992, Ms. Larkin was portfolio manager for the
Shearson Lehman California Municipal Bond Fund and E.F. Hutton's Municipal Cash
Reserve Management. She graduated from Rosemont College with a Bachelor of Arts
in Sociology.
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 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 interests in and other
relationships with The Charles Schwab Corporation and its affiliates, Mr. Schwab
may be deemed to be a controlling person of Schwab and the Investment Manager.
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. Through at least December 31, 1997, 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 DECEMBER 31, 1997, THE INVESTMENT MANAGER AND SCHWAB GUARANTEE
THAT THE TOTAL
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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. The Investment Manager and Schwab 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, legal 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 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 0.25% and total operating expenses of 0.49% of the
Fund's average daily net assets, and the Long-Term Fund paid investment
management fees of 0.24% and total operating expenses of 0.49% of the Fund's
average daily net assets.
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 ("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 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. 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 take all
exempt-interest dividends into account in determining "adjusted current
earnings" for purposes of calculating their alternative minimum tax.
Each Fund may at times purchase Municipal Securities at a discount from the
prices at which they were originally issued, especially during periods of rising
interest rates. For federal income tax purposes, some or all of this market
discount may be included in each Fund's ordinary income and will be taxable to
shareholders as such when it is distributed to them. 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.
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.
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
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
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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
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,
taxable equivalent yield, and taxable 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 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.
Taxable 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. This is normally assumed to be
the applicable maximum tax rate. Taxable 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 hypothetical performance of taxable and tax-free
investments over the long-term to show the effects of compounding tax-free
dividends. The taxable equivalent effective yield is computed in the same manner
as is the taxable 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)), U.S. 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 to
Shareholders, which is available free of charge by calling 800-2 NO-LOAD.
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
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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 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 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 which 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 or contact such designated
entity.
HOW TO BUY SHARES
YOU MAY BUY SHARES OF THE FUNDS 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
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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 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 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). 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.
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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.
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 Fund
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 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 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 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
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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 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 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
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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
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).
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),
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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.
- ------------------------------------------------------
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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THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 70
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 71
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 72
SCHWAB TAX-FREE
BOND FUNDS
PROSPECTUS DECEMBER 31, 1996
[SchwabFunds(R) Logo]
921-6 (12/96) Printed on recycled paper.
[SchwabFunds(R) Logo]
101 Montgomery Street
San Francisco, California 94104
<PAGE> 73
CROSS REFERENCE SHEET
SCHWAB INVESTMENTS:
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
<TABLE>
<CAPTION>
Part A Item Prospectus Caption
- ----------- ------------------
<S> <C>
Cover Page Cover Page
Synopsis Summary of Expenses; Key Features of the Funds
Condensed Financial Information Financial Highlights; How the Funds Shows
Performance
General Description of Registrant Matching the Funds to Your Investment Needs;
Investment Objectives and Policies; Risk
Considerations; Management of the Funds
Management of the Fund Management of the Funds
Capital Stock and Other Securities General Information; Distributions and Taxes;
Share Price Calculations; Shareholder Guide
Purchase of Securities Being Offered Share Price Calculation; Shareholder Guide;
Schwab Automatic Investment Plan
Redemption or Repurchase Shareholder Guide; Other Important Information
Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 74
SCHWAB CALIFORNIA SHORT/
INTERMEDIATE TAX-FREE BOND FUND
SCHWAB CALIFORNIA LONG-TERM
TAX-FREE 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 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, in the opinion of bond counsel, 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 they 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.
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>
<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...................... 16
How to Buy Shares.................... 17
How to Sell or Exchange Shares....... 19
Schwab Automatic Investment Plan....... 20
Other Important Information............ 21
</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> 75
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 personal income taxes in the nation. With the possibility of additional
increases in personal income 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. (See "Matching the Funds to Your Investment Needs.")
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 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 charges or transaction fees;
- - no 12b-1 fees or contingent deferred sales charges;
- - a portion of the management fees for each Fund waived through December 31,
1997 for potentially higher returns; and
- - a guarantee 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 December 31, 1997 (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.
2
<PAGE> 76
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 CALIFORNIA SCHWAB 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 reduction)........ 0.31%1 0.31%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 0.49%4
============== ==============
</TABLE>
1 This amount reflects a reduction by the Investment Manager which is guaranteed
through at least December 31, 1997. 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 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.")
3 This amount reflects the guarantee by the Investment Manager and Schwab that,
through at least December 31, 1997, 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
3
<PAGE> 77
year ended August 31, 1996, other expenses and total fund operating expenses
would have been 0.46% and 0.87%, respectively, of the Fund's average daily net
assets.
4 This amount reflects the guarantee by the Investment Manager and Schwab that,
through at least December 31, 1997, 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, 1996, other expenses and total fund operating expenses would have
been 0.41% and 0.82%, 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..... $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 SEC. THIS HYPOTHETICAL
RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR FUTURE
PERFORMANCE.
4
<PAGE> 78
FINANCIAL HIGHLIGHTS
Set forth below is the table containing information as to income and capital
changes for a share of the Schwab California Short/Intermediate Tax-Free Bond
Fund and the Schwab California Long-Term Tax-Free Bond Fund (formerly, Schwab
California 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
SHORT/INTERMEDIATE TAX-FREE BOND FUND SCHWAB CALIFORNIA
---------------------------------------------- LONG-TERM TAX-FREE BOND FUND
FOR THE PERIOD -----------------------------
APRIL 21, 1993
(COMMENCEMENT
OF OPERATIONS)
TO
YEAR ENDED AUGUST 31, AUGUST 31, YEAR ENDED AUGUST 31,
1996 1995 1994 1993 1996 1995 1994
------- ------- ------- ---------------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period..... $ 10.06 $ 9.89 $ 10.13 $ 10.00 $ 10.53 $ 10.40 $ 11.26
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... 0.43 0.42 0.37 0.13 0.57 0.56 0.56
Net realized and unrealized gain (loss)
on investments......................... (0.02) 0.17 (0.24) 0.13 0.10 0.13 (0.74)
------- ------- ------- -------- -------- ------- --------
Total from investment operations........ 0.41 0.59 0.13 0.26 0.67 0.69 (0.18)
LESS DISTRIBUTIONS
Dividends from net investment income.... (0.43) (0.42) (0.37) (0.13) (0.57) (0.56) (0.56)
Distributions from realized gain on
investments............................ -- -- -- -- -- -- (.12)
------- ------- ------- -------- -------- ------- --------
Total distributions..................... (0.43) (0.42) (0.37) (0.13) (0.57) (0.56) (0.68)
------- ------- ------- -------- -------- ------- --------
Net asset value at end of period........... $ 10.04 $ 10.06 $ 9.89 $ 10.13 $ 10.63 $ 10.53 $ 10.40
======= ======= ======= ======== ======== ======= ========
Total return (%)........................... 4.11 6.17 1.29 2.57 6.43 6.98 (1.70)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s)........ $45,788 $40,639 $48,649 $ 44,545 $101,616 $90,045 $106,432
Ratio of expenses to average net assets
(%).................................... 0.49 0.50 0.48 0.45* 0.49 0.58 0.60
Ratio of net investment income to
average net assets (%)................. 4.23 4.29 3.69 3.49* 5.30 5.54 5.12
Portfolio turnover rate (%)............. 20 62 35 0 36 46 48
Ratio of expenses to average net assets
prior to reduced fees and absorbed
expenses (%)++......................... 0.87 0.84 0.86 1.25* 0.82 0.81 0.80
Ratio of net investment income to
average net assets prior to reduced
fees and absorbed expenses (%)++....... 3.85 3.95 3.31 2.69* 4.97 5.31 4.92
<CAPTION>
FOR THE PERIOD
FEBRUARY 24, 1992
EIGHT MONTHS (COMMENCEMENT
ENDED OF OPERATIONS) TO
AUGUST 31, DECEMBER 31,
1993 1992
------------ -----------------
<S> <C> <C>
Net asset value at beginning of period..... $ 10.58 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... 0.38 0.51
Net realized and unrealized gain (loss)
on investments......................... 0.68 0.58
-------- -------
Total from investment operations........ 1.06 1.09
LESS DISTRIBUTIONS
Dividends from net investment income.... (0.38) (0.51)
Distributions from realized gain on
investments............................ -- --
-------- -------
Total distributions..................... (0.38) (0.51)
-------- -------
Net asset value at end of period........... $ 11.26 $ 10.58
======== =======
Total return (%)........................... 10.13 11.10
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s)........ $138,067 $72,969
Ratio of expenses to average net assets
(%).................................... 0.60* 0.45*
Ratio of net investment income to
average net assets (%)................. 5.18* 5.72*
Portfolio turnover rate (%)............. 47 124
Ratio of expenses to average net assets
prior to reduced fees and absorbed
expenses (%)++......................... 0.87* 1.05*
</TABLE>
<TABLE>
<S> <C> <C>
Ratio of net investment income to
average net assets prior to reduced
fees and absorbed expenses (%)++....... 4.91* 5.12*
</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
5
<PAGE> 79
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS
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, 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.
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 federal alternative minimum tax
for individuals or the California 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
portfolio maturity of ten years or longer, although they may invest in
obligations of any maturity.
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 each Fund will only make
these purchases after obtaining any required regulatory approvals. Investment in
other investment companies may cause you to bear duplicative fees for certain
services. The Investment Manager will charge no management fees attributable to
Fund assets that are invested in other investment companies. (See
6
<PAGE> 80
"Investment Restrictions" in the Statement of Additional Information.)
Each Fund will invest only in California Municipal Securities that at the time
of purchase: (a) are rated within the four highest rating categories for
municipal securities assigned by Moody's Investors Service ("Moody's"), Standard
& Poor's Corporation ("S&P"), Fitch Investors Services, Inc. ("Fitch"), or any
other nationally recognized statistical rating organization ("NRSRO"); or (b)
are rated within the two highest rating categories for short-term municipal
securities assigned by any NRSRO; or (c) are unrated by any NRSRO, 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 and each 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 20% and 62%, respectively. The Long-Term Fund had portfolio turnover rates
for the years ended August 31, 1996 and 1995 of 36% and 46%, respectively.
Each Fund is "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 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 an
NRSRO; commercial paper rated in the two highest rating categories established
by any NRSRO; certificates of deposit of domestic banks having capital and
surplus in excess of $100 million, and any of the foregoing tempo-
7
<PAGE> 81
rary 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, in the opinion of counsel to the
issuer, 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 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 any NRSRO, 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
8
<PAGE> 82
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.
Each Fund will not treat interest income specifically subject to federal
alternative minimum tax for individuals as tax-exempt for purposes of measuring
compliance with the Funds' fundamental policy regarding investment in California
Municipal Securities. To the extent that the Funds invest in securities, the
interest income on which is treated as a preference item for purpose of the
federal 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.
Corporate shareholders may be subject to the federal alternative minimum tax on
exempt-interest dividends received from a Fund.
9
<PAGE> 83
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.
Because 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 other 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 and local 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. 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.)
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
10
<PAGE> 84
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 would 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
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.
Joanne Larkin is a Vice President of Schwab and the Senior Portfolio Manager for
the Funds, 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 February 1992, Ms. Larkin was portfolio manager for the
Shearson Lehman California Municipal Bond
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Fund and E.F. Hutton's Municipal Cash Reserve Management. She graduated from
Rosemont College with a Bachelor of Arts in Sociology.
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 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 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 and Chief Executive Officer and a director of The Charles
Schwab Corporation. As a result of his beneficial ownership interests in and
other relationships with The Charles Schwab Corporation and its affiliates, Mr.
Schwab may be deemed to be a controlling person of Schwab and the Investment
Manager.
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. At least through December 31, 1997, 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 DECEMBER 31, 1997, 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
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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. The Investment Manager and Schwab 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, 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 0.28% and total operating expenses of 0.49% of the
Fund's average daily net assets, and the Long-Term Fund paid investment
management fees of 0.30% and total operating expenses of 0.49% of the Fund's
average daily net assets.
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 ("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 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. To the extent dividends
paid to shareholders are
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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 take all
exempt-interest dividends into account in determining "adjusted current
earnings" for purposes of calculating their alternative minimum tax.
Each Fund may at times purchase California Municipal Securities at a discount
from the prices at which they were originally issued, especially during periods
of rising interest rates. For federal income tax purposes, some or all of this
market discount may be included in each Fund's ordinary income and will be
taxable to shareholders as such when it is distributed to them. 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.
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
sources other than interest on 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 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.
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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
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
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,
taxable equivalent yield, and taxable 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 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.
Taxable 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.) Taxable
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 taxable
equivalent effective yield is computed in the same manner as is the taxable
equivalent yield, except that the effective yield is substi-
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tuted 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)), U.S. 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 to
Shareholders, which is available free of charge by calling 800-2 NO-LOAD.
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 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 complete transactions by telephone during
periods of drastic economic or market changes. If you experience difficulties in
purchasing, redeeming or exchanging
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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 which 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 or contact such designated
entity.
HOW TO BUY SHARES
YOU MAY BUY SHARES OF THE FUNDS THROUGH A SCHWAB ACCOUNT. Shares of the Funds
are offered to California residents and residents of selected other states.
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 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 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
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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 either 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.)
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.
ELECTRONICALLY:
- - Refer to product information on Street Smart(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
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already are a Fund 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 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 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 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
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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
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
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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).
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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THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 96
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 97
SCHWAB CALIFORNIA
TAX-FREE BOND FUNDS
PROSPECTUS December 31, 1996
[SchwabFunds(R) Logo]
920-6 (12/96) Printed on recycled paper.
[SchwabFunds(R) Logo]
101 Montgomery Street
San Francisco, California 94104
<PAGE> 98
CROSS REFERENCE SHEET
SCHWAB INVESTMENTS:
SCHWAB 1000 FUND(R)
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
SCHWAB LONG-TERM GOVERNMENT BOND FUND
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
<TABLE>
<CAPTION>
Part B Item Statement of Additional Information Caption
- ----------- -------------------------------------------
<S> <C>
Cover Page Cover Page
Table of Contents Table of Contents
General Information and History General Information
Investment Objectives and Policies Investment Securities; Investment Restrictions
Management of the Fund Management of the Trust
Control Persons and Principal Holders of Securities Management of the Trust; General Information
Investment Advisory and Other Services Management of the Trust
Brokerage Allocation and Other Practices Portfolio Transactions and Turnover
Capital Stock and Other Securities General Information
Purchase, Redemption and Pricing of Securities Being Share Price Calculation; Purchase and Redemption
Offered of Shares
Tax Status Taxes
Underwriters Management of the Trust
Calculation of Performance Data Total Return and Yield
Financial Statements Financial Statements
</TABLE>
<PAGE> 99
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB INVESTMENTS
101 Montgomery Street, San Francisco, CA 94104
DECEMBER 31, 1996
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectuses, which may be amended from time to
time, dated December 31, 1996, for the Schwab 1000 Fund(R), the Schwab Long-Term
Government Bond Fund, the Schwab Short/Intermediate Government Bond Fund, the
Schwab Long-Term Tax-Free Bond Fund, the Schwab Short/Intermediate Tax-Free Bond
Fund, the Schwab California Long-Term Tax-Free Bond Fund, and the Schwab
California Short/Intermediate Tax-Free Bond Fund (each a "Fund" and,
collectively, the "Funds"), seven separately managed investment portfolios of
Schwab Investments (the "Trust"). To obtain a copy of any of these Prospectuses,
please contact Charles Schwab & Co., Inc. ("Schwab") at 800-2 NO-LOAD, 24 hours
a day or 101 Montgomery Street, San Francisco, California 94104. TDD users may
contact Schwab at 800-345-2550, 24 hours a day. These Prospectuses are also
available electronically by using our World Wide Web address:
http://www.schwab.com.
SCHWABFunds(R)
800-2 NO-LOAD
TABLE OF CONTENTS
Page
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INVESTMENT SECURITIES ................................................... 2
INVESTMENT RESTRICTIONS ................................................. 16
MANAGEMENT OF THE TRUST ................................................. 19
PORTFOLIO TRANSACTIONS AND TURNOVER ..................................... 26
TAXES ................................................................... 29
SHARE PRICE CALCULATION ................................................. 34
TOTAL RETURN AND YIELD .................................................. 34
SCHWABFUNDS INVESTMENT STRATEGIES ....................................... 37
GENERAL INFORMATION ..................................................... 41
PURCHASE AND REDEMPTION OF SHARES ....................................... 44
OTHER INFORMATION ....................................................... 44
APPENDIX - RATINGS OF INVESTMENT SECURITIES ............................. 45
FINANCIAL STATEMENTS .................................................... 49
<PAGE> 100
INVESTMENT SECURITIES
U.S. GOVERNMENT SECURITIES
Direct obligations of the U.S. Government are supported by the full
faith and credit of the U.S. Treasury. While obligations of certain U.S.
Government agencies and instrumentalities are similarly backed, those of others,
such as the Federal National Mortgage Association and the Student Loan Marketing
Association, are only supported by the right of the issuer to borrow from the
U.S. Treasury, the discretionary authority of the U.S. Government to purchase
the agency's obligations or the credit of the issuing agency or instrumentality.
There can be no assurance that the U.S. Government would provide financial
support to U.S. Government sponsored agencies or instrumentalities if it were
not obligated to do so by law. A Fund will invest in U.S. Government securities
not backed by the full faith and credit of the U.S. Treasury only when Charles
Schwab Investment Management, Inc. (the "Investment Manager") is satisfied that
the credit risk with respect to their issuer is minimal.
GOVERNMENT
"MORTGAGE BACKED" SECURITIES
Government "mortgage-backed" (or government guaranteed mortgage-related)
securities are among the U.S. Government securities in which the Funds may
invest. Mortgages backing the securities purchased by the Funds include, among
others, conventional 30-year fixed rate mortgages, graduated payment mortgages,
15-year mortgages and adjustable rate mortgages. All of these mortgages can be
used to create pass-through securities. A pass-through security is formed when
mortgages are pooled together and undivided interests in the pool or pools are
sold. The cash flow from the mortgages is passed through to the holders of the
securities in the form of periodic payments of interest, principal and
prepayments (net of a service fee). Prepayments occur when the holder of an
individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal than their stated maturity
indicates. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of pass-through certificates. Prepayment rates are
important because of their effect on the yield and price of the securities.
Accelerated prepayments adversely impact yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not be fully amortized at the
time the obligation is repaid. The opposite is true for pass-throughs purchased
at a discount. The Funds may purchase mortgage-related securities at a premium
or at a discount. Principal and
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interest payments on the mortgage-related securities are guaranteed by the
government to the extent described below. Such guarantees do not extend to the
value or yield of the mortgage-related securities themselves or of a Fund's
shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorized GNMA to guarantee the timely payment
of principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and credit
of the U.S. Government. The GNMA is also empowered to borrow without limitation
from the U.S. Treasury if necessary to make any payments required under its
guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. The FHLMC issues two types of mortgage
pass-through securities ("FHLMC Certificates"): mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble
GNMA Certificates in that each PC represents a pro rata share of all interest
and principal payments made and owed on the underlying pool. The FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately 10 years. The FHLMC guarantee is not backed by the full faith and
credit of the U.S. Government.
FNMA Securities. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages the FHA. insures
FNMA issues guaranteed
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mortgage pass-through certificates ("FNMA Certificates"). FNMA Certificates
resemble GNMA Certificates in that each FNMA Certificate represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. FNMA guarantees timely payment of interest and principal on FNMA
Certificates. The FNMA guarantee is not backed by the full faith and credit of
the U.S. Government.
OTHER ASSET-BACKED SECURITIES
Each Fund may invest a portion of its assets in debt obligations known
as "Asset-Backed Securities" that are rated in one of the four highest rating
categories by a nationally recognized statistical rating organization (e.g.,
Standard & Poor's Corporation or Moody's Investors Service, Inc.) or, if not so
rated, deemed to be of equivalent quality by the Investment Manager pursuant to
guidelines adopted by the Board of Trustees. The credit quality of most
Asset-Backed Securities depends primarily on the credit quality of the assets
underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator (or any other affiliated
entities) and the amount and quality of any credit support provided to the
securities. The rate of principal payments on Asset-Backed Securities generally
depends on the rate of principal payments received on the underlying assets,
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any Asset-Backed Security is difficult to predict with
precision, and actual yield to maturity may be more or less than the anticipated
yield to maturity. Asset-Backed Securities may be classified as "Pass-Through
Certificates" or "Collateralized Obligations."
"Pass-Through Certificates" are asset-backed securities that represent
undivided fractional ownership interests in the underlying pool of assets.
Pass-Through Certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
Pass-Through Certificates represent ownership interests in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support.
Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The assets collateralizing such Asset-Backed Securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
Asset-Backed Securities and any credit support provided. As a result, although
payments on such Asset-Backed Securities are obligations of the issuers, in the
event of default on the underlying assets not covered by any credit support, the
issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related Asset-Backed Securities.
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METHODS OF ALLOCATING
CASH FLOWS
While many Asset-Backed Securities are issued with only one class of
security, many others are issued in more than one class, each with different
payment terms. Multiple class Asset-Backed Securities are issued for two main
reasons. First, multiple classes may be used as a method of providing credit
support. This is typically accomplished by creating one or more classes with a
right to payments on the Asset-Backed Security that is subordinate to that of
the remaining class or classes. Second, multiple classes may permit the issuance
of securities with payment terms, interest rates or other characteristics that
differ both from those of each other and from those of the underlying assets.
Examples include so-called "multi-tranche CMOs" (collateralized mortgage
obligations) with serial maturities such that all principal payments received on
the mortgages underlying the securities are first paid to the class with the
earliest stated maturity, and then sequentially to the class with the next
stated maturity, "Strips" (Asset-Backed Securities that entitle the holder to
disproportionate interests with respect to the allocation of interest and
principal of the assets backing the security) and securities with a class or
classes having characteristics that mimic the characteristics of
non-Asset-Backed Securities, such as floating interest rates (i.e., interest
rates that adjust as a specified benchmark changes) or scheduled amortization of
principal.
TYPES OF CREDIT SUPPORT
Asset-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two classes: liquidity protection and protection against ultimate default
on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made timely. Protection
against ultimate default ensures payment on at least a portion of the assets in
the pool. Such protection may be provided through guarantees, insurance policies
or letters of credit obtained from third parties, through various means of
structuring the transaction, or through a combination of such approaches.
Examples of Asset-Backed Securities with credit support that arises out of the
structure of the transaction include "senior-subordinated securities" (multiple
class Asset-Backed Securities with certain classes subordinate to other classes
as to the payment of principal thereon, so that defaults on the underlying
assets are borne first by the holders of the subordinated class) and
Asset-Backed Securities that have "reserve funds" (cash or investments,
sometimes funded from a portion of the initial payments on the underlying
assets, are held in reserve against future losses) or that have been
"overcollateralized" (the scheduled payments on, or the principal amount of,
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the underlying assets substantially exceed that required to make payment on the
Asset-Backed Securities and pay any servicing or other fees). The degree of
credit support provided on each issue is generally based on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an Asset-Backed Security.
CREDIT CARD RECEIVABLE SECURITIES
Each Fund may invest in Asset-Backed Securities backed by receivables
from revolving credit card agreements ("Credit Card Receivable Securities").
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying accounts are passed through to
the security holder and principal payments received on such accounts are used to
fund the transfer of additional credit card charges made on an account to the
pool of assets supporting the related Credit Card Receivable Securities. The
initial fixed period may usually be shortened upon the occurrence of specified
events that signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. Competitive and general economic factors
could adversely affect the rate at which new receivables are created in an
account and conveyed to an issuer, shortening the expected weighted average life
of the related Credit Card Receivable Security, and reducing its yield. An
acceleration in cardholders' payment rates or any other event that shortens the
period during which additional credit card charges on an account may be
transferred to the pool of assets supporting the related Credit Card Receivable
Security could have a similar effect on the weighted average life and yield.
Credit card holders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holders the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on accounts. In addition, unlike most other Asset-Backed
Securities, accounts are unsecured obligations of the cardholder.
MUNICIPAL SECURITIES
"Municipal Securities" are debt securities issued by a state, its
political subdivisions, agencies, authorities, and corporations. Municipal
Securities issued by or on behalf of the State of California, its subdivisions,
agencies or authorities are referred to herein as "California Municipal
Securities."
Municipal Securities that the Schwab Long-Term Tax-Free Bond Fund
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and the Schwab Short/Intermediate Tax-Free Bond Fund (the "Municipal Bond
Funds") may purchase, and California Municipal Securities that the Schwab
California Long-Term Tax-Free Bond Fund and the Schwab California
Short/Intermediate Tax-Free Bond Fund (the "California Municipal Bond Funds")
may purchase include, without limitation, debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, public utilities, schools, streets, and water and sewer works.
Other public purposes for which Municipal Securities may be issued include
refunding outstanding obligations, obtaining funds for general operating
expenses and obtaining funds to loan to other public institutions and
facilities.
Municipal Securities include securities issued to finance various
private activities, including certain types of private activity bonds
("industrial development bonds" under prior law). These securities may be issued
by or on behalf of public authorities to obtain funds to provide certain
privately owned or operated facilities. The Municipal Bond Funds and the
California Municipal Bond Funds may not be desirable investments for
"substantial users" of facilities financed by private activity bonds or
industrial development bonds or for "related persons" of substantial users for
whom dividends attributable to interest on such bonds may not be tax-exempt.
Shareholders should consult their own tax advisers regarding the potential
effect on them (if any) of any investment in these Funds.
Municipal Securities are generally classified as "general obligation" or
"revenue." General obligation notes are secured by the issuer's pledge of its
full credit and taxing power for the payment of principal and interest. Revenue
notes are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Private activity bonds and industrial development
bonds that are Municipal Securities are in most cases revenue bonds and
generally do not constitute the pledge of the credit of the issuer of such
bonds.
Examples of Municipal Securities that are issued with original
maturities of one year or less are short-term tax anticipation notes, bond
anticipation notes, revenue anticipation notes, construction loan notes,
pre-refunded municipal bonds and tax-free commercial paper. Tax anticipation
notes are typically sold to finance working capital needs of municipalities in
anticipation of the receipt of property taxes on a future date. Bond
anticipation notes are sold on an interim basis in anticipation of a
municipality's issuance of a longer-term bond in the future. Revenue
anticipation notes are issued in expectation of the receipt of other types of
revenue such as those available under the Federal Revenue Sharing Program.
Construction loan notes are instruments insured by the Federal Housing
Administration with permanent financing by "Fannie Mae" (the Federal National
Mortgage
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Association) or "Ginnie Mae" (the Government National Mortgage Association) at
the end of the project construction period. Pre-refunded municipal bonds are
bonds that are not yet refundable, but for which securities have been placed in
escrow to refund an original municipal bond issue when it becomes refundable.
Tax-free commercial paper is an unsecured promissory obligation issued or
guaranteed by a municipal issuer. The Municipal Bond Funds and the California
Municipal Bond Funds may purchase other Municipal Securities similar to the
foregoing, which are or may become available, including securities issued to
pre-refund other outstanding obligations of municipal issuers.
The federal bankruptcy statutes relating to the adjustments of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or the
consent of creditors, which proceedings could result in material adverse changes
in the rights of holders of obligations issued by such subdivisions or
authorities.
Litigation challenging the validity under the state constitutions of
present systems of financing public education has been initiated or adjudicated
in a number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law, which ultimately could
affect the validity of those Municipal Securities or the tax-free nature of the
interest thereon.
RISK FACTORS:
CALIFORNIA MUNICIPAL SECURITIES
In addition to general economic pressures which affect the State of
California's (the "State") ability to raise revenues to meet its financial
obligations, certain State constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could also
result in the adverse effects described below. The following information is only
a brief summary, is not a complete description and is based on information drawn
from official statements and prospectuses relating to securities offerings of
the State that have come to the attention of the Trust and were available before
the date of this Statement of Additional Information. The Trust has not
independently verified the accuracy and completeness of the information
contained in those statements and prospectuses.
As used in this section, "California Municipal Securities" includes
issues that are secured by a direct payment obligation of the State and
obligations of issuers that rely in whole or in part on State revenues for
payment of their obligations. Property tax revenues and part of the State's
General Fund surplus are distributed to counties, cities and their various
taxing entities; whether and to what extent a portion of the State's General
Fund will be distributed in the future to them is unclear.
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Overview. After suffering through a severe recession, since the start of
1994 California's economy has been on a steady recovery. Employment increased by
over 500,000 in 1994 and 1995, and the pre-recession employment level is
expected to be matched in 1996. The strongest growth has been in export-related
industries, business services, electronics, entertainment, and tourism, which
has offset the recession-related losses which were heaviest in aerospace and
defense-related industries, finance and insurance.
The recession seriously affected State tax revenues and caused an
increase in expenditures for health and welfare programs. As a result, from the
late 1980s through 1992-1993, the State experienced recurring budget deficits.
During this period, expenditures exceeded revenues in four out of six years, and
the State accumulated a budget deficit of about $2.8 billion at its peak at June
30, 1993. One consequence of the large budget imbalances was to significantly
reduce the State's available cash resources and force the State to use a series
of external borrowings to meet its cash needs.
As a result of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since October 1992, all
three major nationally recognized statistical rating organizations lowered the
State's general obligation bond rating from the highest ranking of "AAA." The
State's general obligation bonds are now rated "A+" by Standard and Poor's
Corporation ("S&P"), "A1" by Moody's Investors Service, Inc. ("Moody's") and
"A+" by Fitch Investors Service, Inc. ("Fitch").
State Appropriations Limit. Subject to certain exceptions, the State is
subject to an annual appropriations limit imposed by its Constitution on
"proceeds of taxes." Various expenditures, including but not limited to debt
service on certain bonds and appropriations for qualified capital outlay
projects, are not included in the appropriations limit.
1994-1995 FISCAL YEAR
Revenues. The 1994-1995 Budget Act projected General Fund revenues and
transfers of $41.9 billion, or about $2.1 billion more than 1993-1994, as
revised. This projection included the receipt of approximately $760 million in
new federal aid to reimburse the State for certain costs related to refugees and
undocumented foreign immigrants. Only about $33 million of this amount was
received, with another $98 million scheduled to be received in the 1995-1996
fiscal year. The 1994-1995 Budget Act also projected Special Fund revenues of
$12.1 billion, a decrease of 2.4% from 1993-1994.
Expenditures. The 1994-1995 Budget Act projected General Fund
expenditures of $40.9 billion (a $1.6 billion increase from projected 1993-1994
expenditures), in order to keep a balanced budget which pays off the accumulated
deficit, within available revenues. The 1994-1995 Budget Act also projected
Special Fund expenditures of $12.3 billion, a 4.7% decrease from 1993-1994. The
1994-1995 Budget Act balanced the
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budget with a number of major adjustments, including the receipt of about $1.1
billion from the federal government for health and welfare costs and an increase
of about $526 million in Proposition 98 General Fund support for K-14 schools.
Cash resources at the beginning of the 1994-1995 fiscal year were
insufficient to meet all obligations without external borrowing, such as
occurred in 1992. The 1994-1995 Budget Act assumed that the State would use a
cash flow borrowing program in 1994-1995 which combined one-year notes and
two-year warrants, which have now been issued. Issuance of the warrants allows
the State to defer repayment of about $1 billion of its accumulated budget
deficit into 1995-1996. Additional legislation was passed with the 1994-1995
Budget Act designed to ensure that the warrants will be repaid in the 1995-1996
fiscal year.
As a result of the improving economy, the State Department of Finance's
final estimates for the fiscal year showed revenues and transfers of $42.7
billion and expenditures of $42 billion.
1995-1996 FISCAL YEAR
Notwithstanding the improved economy, because of serious policy
differences, the 1995-1996 Budget Act was not enacted until August 3, 1995, 34
days after the start of the fiscal year.
Revenues. The 1995-1996 Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5% increase from 1994-1995. The 1995-1996 Budget
Act projected that the General Fund will end the 1995-1996 fiscal year with a
slight surplus of $28 million at June 30, 1996, and that all of the accumulated
budget deficits will have been repaid. In May 1996, the State Department of
Finance updated the 1995-1996 projections, and estimated that there would be
revenues and transfers of about $46.1 billion but, due to increased
expenditures, there would instead be a deficit of about $70 million in the
budget reserve at June 30, 1996. Principal features of the 1995-1996 Budget Act
included an increase in Proposition 98 funding for K-14 schools of about $1.2
billion, reductions in health and welfare costs of about $900 million (about
$500 million of which depends upon federal legislative approval), and receipt of
an additional $494 million in federal aid for costs of illegal immigrants (above
commitments already made by the federal government; only $31 million of this was
received in 1995-1996). Special Fund revenues were estimated at $12.7 billion.
Expenditures. The 1995-1996 Budget Act projected General Fund
expenditures of $43.4 billion, a 4% increase from 1994-1995. Special Fund
expenditures of $13 billion have been appropriated. The May 1996 State
Department of Finance revisions projected that expenditures for 1995-1996 would
increase to about $45.4 billion.
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1996-97 FISCAL YEAR
The Governor's proposed budget for 1996-1997 projected General Fund
revenues and transfers of about $45.6 billion and proposed total General Fund
appropriations of about $45.2 billion. The Governor's proposed budget renewed a
proposal, which had been rejected by the Legislature in 1995, for a 15% cut in
personal and corporate tax rates, phased in over a three-year period. In May
1996, the State Department of Finance updated revenue estimates to $47.1 billion
for 1996- 1997, assuming enactment of the Governor's proposed tax cut, and
expenditure estimates to $46.5 billion.
Revenues. The 1996-1997 Budget Act, enacted on July 15, 1996, rejected
the Governor's proposed 15% tax cut (but did include a 5% cut in bank and
corporation taxes). Consequently, revenues for 1996-1997 were increased to an
estimated $47.6 billion. Special fund revenues are estimated to be $13.3
billion. The 1996-1997 Budget Act appropriated a budget reserve of $305 million
at June 30, 1997. This budget reserve assumed savings of about $660 million in
the State's health and welfare costs based on changes to federal law, including
welfare reform. The federal welfare reform legislation passed in August 1996 is
projected to provide only about $360 million of the assumed $660 million in
savings, however, subject to further adjustment based on how the State
implements changes to its welfare system. Other principal features of the
1996-1997 Budget Act include an increase in Proposition 98 funding for K-14
schools of about $1.6 billion, and about $700 million in new federal aid for
costs of illegal immigrants (with about $540 million to be received during
1996-1997).
Expenditures. The 1996-1997 Budget Act includes General Fund
appropriations of about $47.2 billion, a 4% increase over the final estimated
1995-1996 expenditures. Special Fund expenditures are budgeted at $12.6
billion.
The foregoing discussions of the 1994-1995, 1995-1996 and 1996-1997
Budgets are based upon the Budget Acts for these years, and should not be
construed as a statement of fact. The assumptions used to construct a budget,
which include estimates and projections of revenues and expenditures, may be
affected by numerous factors, including future economic conditions in the State
and the Nation. There can be no assurances that any estimates will be achieved.
ISSUES AFFECTING LOCAL
GOVERNMENTS AND SPECIAL DISTRICTS
Proposition 13. Certain California Municipal Securities may be
obligations of issuers that rely in whole or in part on ad valorem real property
taxes as a source of revenue. In 1978, California voters approved Proposition
13, which limits ad valorem taxes on real property and restricts the ability of
taxing entities to increase property tax and other tax revenues.
With certain exceptions, the maximum ad valorem tax on real property is
limited to 1% of the full cash value to be
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collected by the counties and apportioned according to law. One exception is for
debt service on bonded indebtedness if such is approved by two-thirds of the
votes cast by voters voting on the proposition. The full cash value may be
adjusted annually to reflect inflation at a rate not to exceed 2% per year, or
reduction in the consumer price index or comparable local data, or reduced in
the event of declining property value caused by substantial damage, destruction
or other factors, or adjusted when there is a "change in ownership" or "new
construction."
Proposition 62. This initiative, approved by voters in 1986, placed
further restrictions on the ability of local governments to raise taxes and
allocate approved tax revenues. Although some of the California Courts of Appeal
held that parts of Proposition 62 were unconstitutional, the California Supreme
Court recently issued a decision that upheld Proposition 62's requirement that
special taxes be approved by a two-thirds vote of the voters voting in an
election on the issue. This recent decision may invalidate other taxes that have
been imposed by local governments in California and make it more difficult for
local governments to raise taxes.
Propositions 98 and 111. These initiatives changed the State
appropriations limit and State funding of public education below the university
level by guaranteeing K-14 schools a minimum share of General Fund revenues. The
initiatives require that the State establish a prudent state reserve fund for
public education.
Proposition 218. Passed in November 1996, this initiative places
additional limitations on the ability of California local governments to
increase or impose general taxes, special assessments, and many fees by
requiring voter approval of such items. General taxes and many assessments and
fees that were passed without public approval after 1994 and before November 6,
1996 must now be approved by voters by either July 1, 1997 or November 6, 1998
to continue in effect.
Appropriations Limit. Local governmental entities are also subject to
annual appropriations limits. If a local government's revenues in any year
exceed the amount permitted to be spent, the excess must be returned to the
public through a revision of tax rates or fee schedules over the following two
years.
Conclusion. The effect of these constitutional and statutory changes and
of budget developments on the ability of California issuers to pay interest and
principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds are generally less affected). There is no assurance that any
California issuer will make full or timely payments of principal or interest or
remain solvent. For example, in December 1994, Orange County filed for
bankruptcy. The California Municipal Bond Funds' concentration in California
Municipal Securities provides a greater level of risk than a fund that is
diversified across numerous states and municipal entities.
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ADDITIONAL ISSUES
Mortgages and Deeds of Trust. The California Municipal Bond Funds may
invest in issues which are secured in whole or in part by mortgages or deeds of
trust on real property. California law limits the remedies of a creditor secured
by a mortgage or deed of trust, which may result in delays in the flow of
revenues to an issuer.
Lease Financings. Some local governments and districts finance certain
activities through lease arrangements. It is uncertain whether such lease
financings are debt that require voter approval.
Seismic Risk. It is impossible to predict the time, magnitude or
location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck Los Angeles, causing significant damage
to structures and facilities in a four county area. The possibility exists that
another such earthquake could create a major dislocation of the California
economy.
CERTIFICATES OF DEPOSIT
AND BANKERS' ACCEPTANCES
Certificates of deposit are certificates issued against funds deposited
in a banking institution for a specified period of time at a specified interest
rate. Bankers' acceptances are credit instruments evidencing a bank's obligation
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. Each Fund will invest only in certificates of deposit
and bankers' acceptances of banks that have capital, surplus and undivided
profits in excess of $100 million.
COMMERCIAL PAPER
Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs. The Funds will only invest in
commercial paper that at the time of purchase is rated Prime-1 or Prime-2 by
Moody's, A-1 or A-2 by S&P, "Duff 2" or higher by Duff & Phelps Credit Rating
Co. ("Duff"), or "F2" or higher by Fitch or if unrated by Moody's, S&P, Duff or
Fitch, is 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
ratings.
REPURCHASE AGREEMENTS
Repurchase agreements are instruments under which a buyer acquires
ownership of a security from a seller that agrees to repurchase the security at
a mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the buyer's holding period. Under
the Investment Company Act of 1940, as amended (the "1940 Act"), a repurchase
agreement is deemed to be a Fund's loan of money to the seller, collateralized
by the underlying security. The interest rate is effective for the period of
time in which the Funds are invested in the agreement and is not related to the
coupon rate on the underlying security.
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<PAGE> 112
Any repurchase agreements a Fund enters into will involve the Fund as the buyer
and banks or broker-dealers as sellers (repurchase agreements with
broker-dealers will be limited to obligations of the U.S. Government or its
agencies or instrumentalities). The period of these repurchase agreements will
be usually short--from overnight to one week--and at no time will the Funds
invest in repurchase agreements for more than one year. However, securities
subject to repurchase agreements may have maturity dates in excess of one year
from the effective date of the repurchase agreements. The transaction requires
the initial collateralization of the seller's obligation with securities having
a market value, including accrued interest, equal to at least 102% of the dollar
amount the Funds invest with the value marked-to-market daily to maintain 100%
coverage. A default by the seller might cause the Funds to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Funds might also incur disposition costs in liquidating the collateral. The
Funds will make payment for such securities only upon physical delivery or
evidence of book entry transfer to the account of its custodian bank. The Funds
may not enter into a repurchase agreement of more than seven days duration if,
as a result, the market value of the Funds' net assets, together with
investments in other securities deemed to be not readily marketable, would be
invested in excess of the Funds' policy on investments in illiquid securities.
In the event of a bankruptcy or other default of a repurchase
agreement's seller, a Fund might incur expenses in enforcing its rights, and
could experience losses, including a decline in the value of the underlying
securities and loss of income. Each Fund will not invest more than 10% of its
net assets at the time of purchase in repurchase agreements maturing in more
than seven days and other illiquid securities.
PORTFOLIO MATURITY
From time to time, the California Municipal Bond Funds, the Municipal
Bond Funds and the Government Bond Funds may compare their average portfolio
maturities with the average portfolio maturities of other mutual funds having
similar investment objectives.
PORTFOLIO SECURITIES LENDING
Loans of portfolio securities made by any Fund will be fully
collateralized and will be marked to market daily.
FUTURES AND OPTIONS CONTRACTS,
EQUITY INDEX PARTICIPATIONS AND
INDEX PARTICIPATION CONTRACTS
The Schwab Short/Intermediate Government Bond Fund and the Schwab
Long-Term Government Fund (the "Government Bond Funds") and the Schwab 1000
Fund(R) (for purposes of this sub-section only, each a "Fund" and, together, the
"Funds") may buy and sell futures contracts on securities and any index
comprised of securities in which the Funds may invest, option contracts on
securities, indexes and futures contracts, equity index participations, and
index participation contracts.
14
<PAGE> 113
In a securities futures contract, one party agrees to make, and the
other agrees to take, delivery of a specific amount of a specific security at a
specified time and price. Under a securities index futures contract, the parties
agree to make or take delivery of an amount of cash equal to a specific dollar
amount times the difference between the value of an agreed-upon securities index
at the end of the contract period and its value at the time the agreement was
originally made. Futures contracts are commonly "closed out" prior to the end of
the contract period by entering into an offsetting transaction in a
corresponding futures contract.
Options on indexes are similar to options on securities except that,
rather than representing the right to take or make delivery of a security at a
specified exercise price, an option on a securities index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of the securities index upon which the option is based is "in the money."
This amount of cash is equal to the difference between the closing level of the
index and the exercise price of the option, expressed in dollars times a
specified multiple. Unlike securities options, all settlements are in cash, and
gain or loss depends on price movements in the group of securities comprising
the index rather than price movements of individual securities.
Index participations and index participation contracts provide the
equivalent of a position in the securities comprising an index, with each
security's representation equaling its index weighting. Moreover, their holders
are entitled to payments equal to the dividends paid by the underlying index
securities. Generally, the value of an index participation or index
participation contract will rise and fall along with the value of the related
index. A Fund will invest in equity index participations and index participation
contracts only if a liquid market for them appears to exist.
When buying or selling futures contracts, a Fund must deposit an amount
of cash, cash equivalents or liquid, high quality debt instruments with its
broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract, which will be returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin," will be
made at least daily as the price of the futures contract fluctuates, and the
Fund's position in the contract becomes more or less valuable. This process is
known as "marking-to-market."
Regulations of the Commodities Futures Trading Commission ("CFTC")
applicable to the Funds generally require that all of their futures transactions
constitute "bona fide" hedging transactions. As a result, a Fund will normally
sell futures contracts to protect against a decrease in the price of securities
it owns but intends to sell or purchase futures contracts to protect against an
increase in the price of securities it intends to purchase. In
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<PAGE> 114
addition, the Funds may purchase and sell futures contracts and options as a
substitute for a comparable market position in the underlying securities.
Futures transactions need not constitute "bona fide" hedging under CFTC
regulations if the aggregate initial margin and premiums required to establish
such positions do not exceed 5% of each Fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and options
transactions involve risks, which in some strategies can be substantial due to
the low margin deposits required and the extremely high degree of leverage
involved in futures and options trading. However, to the extent the Funds'
futures and options practices are limited to hedging purposes, the Investment
Manager does not believe that the Funds are subject to the degree of risk
frequently associated with futures and options transactions. To the extent the
Funds engage in the use of futures and options on futures other than for hedging
purposes, the Funds may be subject to additional risk.
Three principal areas of risk are present when futures and options
contracts are used even in a hedging context. First, there may not always be a
liquid secondary market for a futures or option contract at the time when a Fund
seeks to "close out" its position. If a Fund is unable to "close out" a futures
or option position, and prices move adversely, the Fund would have to continue
to make daily cash payments to maintain its required margin, and if the Fund has
insufficient cash to meet this requirement, it may have to sell portfolio
securities at a disadvantageous time. In addition, the Fund might be required to
deliver the securities underlying futures or options contracts it holds. Each
Fund will seek to reduce the risk that it will be unable to "close out"
contracts by entering into only futures or options contracts that are traded on
national exchanges and for which there appears to be a liquid secondary market.
It is also possible that changes in the prices of futures or options
contracts might correlate imperfectly, or not at all, with changes in the market
values of the securities being hedged. This situation could result from price
distortions in the futures or options markets due to, among other things, active
trading by speculators and use of offsetting "closing" transactions by other
investors seeking to avoid meeting additional margin deposit requirements. In
the event of significant market distortions, it is possible that a Fund could
lose money on futures or options contracts and experience appreciation in the
value of its portfolio securities, or vice versa.
Finally, adverse market movements could cause a Fund to lose up to its
full investment in an options contract and/or to experience substantial losses
on an investment in a futures contract. However, barring such significant market
distortions, a similar result could be expected were the Fund to invest directly
in the securities being hedged. There is also the risk of loss by a Fund of
margin deposits in the event of bankruptcy of a broker with whom the
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<PAGE> 115
Fund has an open position in a futures contract or option.
The extent to which each Fund may purchase and sell futures, options,
equity index participations and index participation contracts may be limited by
each Fund's intention to meet the Internal Revenue Code of 1986, as amended (the
"Code"), requirements for qualification as a regulated investment company. See
"Taxes - Federal Income Tax."
INVESTMENT RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund to which
they apply. A Fund may not:
1) As to 75% of its assets, purchase securities of any issuer (other than
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its
total assets would be invested in the securities of such issuer, except
that, with respect to the Schwab California Long-Term Tax-Free Bond
Fund, provided that no more than 25% of the Fund's total assets would be
invested in the securities of a single issuer, up to 50% of the Fund's
total assets may be invested without regard to this 5% limitation; and,
provided further, that, with respect to the Municipal Bond Funds and the
Schwab California Short/Intermediate Tax-Free Bond Fund and as a matter
of non-fundamental policy that may be changed by the Board of Trustees,
so long as no more than 25% of the Fund's total assets would be invested
in the securities of a single issuer, up to 50% of the Fund's total
assets may be invested without regard to the 5% limitation set forth
above.
2) Purchase securities (other than securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) if, as a result of
such purchase, 25% or more of the value of its total assets would be
invested in any industry (except, with respect to the Schwab 1000
Fund(R), to the extent that the Schwab 1000 Index(R) is also so
concentrated). Securities issued by governments or political
subdivisions or authorities of governments are not considered to be
securities subject to this industry concentration restriction.
3) Invest more than 10% of the total value of its assets in illiquid
securities, including repurchase agreements with maturities in excess of
seven days.
4) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the Trust or the Investment Manager
individually own beneficially more than 1/2
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<PAGE> 116
of 1% of the securities of such issuer and together beneficially own
more than 5% of the securities of such issuer.
5) Purchase or sell commodities or real estate, including interests in real
estate limited partnerships, provided that each Fund may (i) purchase
securities of companies that deal in real estate or interests therein,
and (ii) purchase or sell futures contracts, options contracts, equity
index participations and index participation contracts.
6) Invest for the purpose of exercising control or management of another
issuer.
7) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
8) Lend money to any person, except that each Fund may (i) purchase a
portion of an issue of short-term debt securities or similar obligations
(including repurchase agreements) that are publicly distributed or
customarily purchased by institutional investors, and (ii) lend its
portfolio securities.
9) Borrow money except from banks as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes and then
only in an amount not to exceed one-third of the value of its total
assets (including the amount borrowed), provided that the Fund will not
purchase securities while borrowings represent more than 5% of its total
assets.
10) Pledge, mortgage or hypothecate any of its assets except that to secure
allowable borrowings, each Fund may do so with respect to no more than
one-third of the value of its total assets (10% of net assets with
respect to the Schwab California Long-Term Tax-Free Bond Funds).
11) Underwrite securities issued by others except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
In order to permit the sale of shares of each Fund in certain
jurisdictions, each Fund may make commitments more restrictive than the
fundamental operating restrictions described above. Should it do so and later
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders, it will revoke the commitment(s) by terminating sales
of its shares in the jurisdiction(s) involved.
The following restrictions are non-fundamental and may be changed by the
Trust's Board of Trustees. Each of the Funds may not:
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<PAGE> 117
1) Purchase more than 10% of any class of securities of any issuer if, as a
result of such purchase, it would own more than 10% of such issuer's
outstanding voting securities.
2) Invest more than 5% of its total assets in securities of issuers (other
than obligations of, or guaranteed by the U.S. Government, its agencies
or instrumentalities) that with their predecessors have a record of less
than three years continuous operation.
3) Purchase securities that would cause more than 5% of its net assets to
be invested in restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of
1933 that have been determined to be liquid under procedures adopted by
the Trust's Board of Trustees based upon the trading markets for the
securities.
4) Invest more than 5% of its net assets in warrants, valued at the lower
of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the
American Stock Exchange, provided, however, that for purposes of this
restriction, warrants acquired by a Fund in units or attached to other
securities are deemed to be without value.
5) Purchase puts, calls, straddles, spreads or any combination thereof if
by reason of such purchase the value of its aggregate investment in such
securities would exceed 5% of the Fund's total assets.
6) Make short sales, except for short sales against the box.
7) Purchase or sell interests in oil, gas or other mineral development
programs or leases, although it may invest in companies that own or
invest in such interests or leases.
8) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities.
9) Purchase securities the income of which is subject to the Federal
Alternative Minimum Tax (AMT) if, by reason of such purchase, the total
income earned by such securities would exceed 20% of all income earned
by the Fund.
The Schwab Long-Term Tax-Free Bond Fund and the Schwab California
Long-Term Tax-Free Bond Fund each may be invested in long-term bonds, and in
obligations of any maturity, although their dollar weighted maturities under
normal market conditions will be 10 years or longer.
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<PAGE> 118
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The Officers and Trustees of the Trust, their
principal occupations over the past five years and their affiliations, if any,
with The Charles Schwab Corporation, Schwab and the Investment Manager, are as
follows:
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
CHARLES R. SCHWAB* Chairman and Chairman, Chief Executive
July 29, 1937 Trustee Officer and Director, The
Charles Schwab Corporation;
Chairman and Director, Charles
Schwab & Co., Inc. and Charles
Schwab Investment Management,
Inc.; Chairman and Director, The
Charles Schwab Trust Company;
Chairman and Director (current
board positions), and Chairman
(officer position) until
December 1995, Mayer &
Schweitzer, Inc. (a securities
brokerage subsidiary of The
Charles Schwab Corporation);
Director, The Gap, Inc. (a
clothing retailer), Transamerica
Corporation (a financial
services organization), AirTouch
Communications (a
telecommunications company) and
Siebel Systems (a software
company).
TIMOTHY F. McCARTHY** President and Executive Vice President -
September 19, 1951 Trustee Mutual Funds, Charles Schwab &
Co., Inc.; Executive Vice
President - President, Financial
Products and International
Group, the Charles Schwab
Corporation; Chief Executive
Officer, Charles Schwab
Investment Management, Inc.;
President, Chief Financial
Officer and Director, Charles
Schwab Limited; Director, Mayer
& Schweitzer. From 1994 to 1995,
Mr. McCarthy was Chief Executive
Officer, Jardine Fleming Unit
Trusts Ltd.;
- -----------------------------------
*Mr. Schwab is an "interested person" of the Trust
20
<PAGE> 119
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
Executive Director, Jardine
Fleming Holdings Ltd.; Chairman,
Jardine Fleming Taiwan
Securities Ltd.; and Director of
JF India and Fleming Flagship,
Europe. Prior to 1994, he was
President of Fidelity
Investments Advisor Group, a
division of Fidelity Investments
in Boston.
DONALD F. DORWARD Trustee President and Chief Executive
September 23, 1931 Officer, Dorward & Associates
(advertising and
marketing/consulting).
ROBERT G. HOLMES Trustee Chairman, Chief Executive
May 15, 1931 Officer and Director, Semloh
Financial, Inc. Semloh Financial
is an international financial
services and investment advisory
firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens
June 28, 1938 & Co. (investment banking).
From 1985 to 1995, Mr. Stephens
was Chairman and Chief Executive
Officer of North American Trust
(a real estate investment
trust). Prior to 1992, Mr.
Stephens was Chairman and Chief
Executive Officer of the Bank of
San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive
August 18, 1943 Officer and Director, Wilsey
& Co. Director, Wilsey Bennett,
Inc. (truck and air
transportation, real estate
investment and management, and
investments).
- --------------------------------------------------------------------------------
** Mr. McCarthy is an "interested person" of the Trust.
21
<PAGE> 120
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
TAI-CHIN TUNG Treasurer and Vice President - Finance,
March 7, 1951 Principal Charles Schwab & Co., Inc.;
Financial Officer Controller, Charles Schwab
Investment Management, Inc. From
1994 to 1996, Ms. Tung was
Controller for Robertson
Stephens Investment Management,
Inc. From 1993 to 1994, she was
Vice President of Fund
Accounting, Capital Research and
Management Co. Prior to 1993,
Ms. Tung was Senior Vice
President of the Sierra Funds
and Chief Operating Officer of
Great Western Financial
Securities.
WILLIAM J. KLIPP* Executive Vice Executive Vice President -
December 9, 1955 President, Chief SchwabFunds(R), Charles Schwab &
Operating Officer Co., Inc.; President and Chief
and Trustee Operating Officer, Charles
Schwab Investment Management,
Inc. Prior to 1993, Mr. Klipp
was Treasurer of Charles Schwab
& Co., Inc. and Mayer &
Schweitzer, Inc.
STEPHEN B. WARD Senior Vice Senior Vice President and Chief
April 5, 1955 President and Chief Investment Officer, Charles
Investment Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Vice President, Chief Counsel,
September 9, 1955 Chief Compliance Officer and
Assistant Corporate Secretary,
Charles Schwab Investment
Management, Inc.
- -----------------------------------
*Mr. Klipp is an "interested person" of the Trust.
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<PAGE> 121
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
DAVID H. LUI Assistant Secretary Vice President and Senior
October 14, 1960 Counsel - Charles Schwab
Investment Management, Inc. From
1991 to 1992, he was Assistant
Secretary and Assistant
Corporate Counsel for the
Franklin Group of Mutual Funds.
CHRISTINA M. PERRINO Assistant Secretary Vice President and Senior
June 16, 1961 Counsel - Charles Schwab
Investment Management, Inc.
Prior to 1994, she was Counsel
and Assistant Secretary for
North American Security Life
Insurance Company and Secretary
for North American Funds.
KAREN L. SEAMAN Assistant Secretary Corporate Counsel - Charles
February 27, 1968 Schwab Investment Management,
Inc. From October 1994 to July
1996, she was an Attorney for
Franklin Resources, Inc. Prior
to 1994, Ms. Seaman was an
attorney for The Benham Group.
Each of the above-referenced Officers and/or Trustees also serves in the
same capacity as described for the Trust for The Charles Schwab Family of Funds,
Schwab Capital Trust, Schwab Annuity Portfolios, and Schwab Advantage Trust
(which has not yet commenced operations). The address of each individual listed
above is 101 Montgomery Street, San Francisco, California 94104.
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<PAGE> 122
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Estimated
as Part of Fund Annual Benefits Total
Aggregate Expenses from upon Retirement Compensation
Name of Person, Compensation the Fund from the Fund from the Fund
Position from the Trust Complex(2) Complex(2) Complex(2)
- -------------------- -------------- ----------------- ---------------- ----------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and
Trustee
Timothy F. 0 N/A N/A 0
McCarthy ,
President and
Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice
President, Chief
Operating Officer
and Trustee
Donald F. Dorward, 16,150 N/A N/A 81,100
Trustee
Robert G. Holmes, 16,150 N/A N/A 81,100
Trustee
Donald R. Stephens, 16,150 N/A N/A 81,100
Trustee
Michael W. Wilsey, 16,150 N/A N/A 81,100
Trustee
</TABLE>
1. Figures are for the Trust's fiscal year ended August 31, 1996.
2. "Fund Complex" comprises all 24 funds of the Trust, The Charles
Schwab Family of Funds, Schwab Capital Trust and Schwab Annuity
Portfolios.
-------------------------------------------
TRUSTEE DEFERRED COMPENSATION PLAN
Pursuant to exemptive relief received by the Trust from the Securities
and Exchange Commission (the "SEC"), the Trust may enter into deferred fee
arrangements (the "Fee Deferral Plan" or the "Plan") with the Trust's Trustees
who are not "interested persons" of any of the Funds of the Trust (the
"Independent Trustees" or the "Trustees").
As of the date of this Statement of Additional Information, none of the
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<PAGE> 123
Independent Trustees has elected to participate in the Fee Deferral Plan. In the
event an Independent Trustee does elect to participate in the Plan, the Plan
would operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account") as of the
date such fees would have been paid to such Trustee. The value of the Deferred
Fee Account as of any date will be equal to the value the Account would have had
as of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the SchwabFund or SchwabFunds(R) selected by the
participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, The Charles
Schwab Family of Funds, Schwab Capital Trust, and Schwab Annuity Portfolios.
Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. The exemptive relief granted to the Trust permits the
Funds and the Trustees to purchase the Selected SchwabFund Securities, which
transactions would otherwise be limited or prohibited by the investment policies
and/or restrictions of the Funds. See "Investment Restrictions."
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the SchwabFunds Family(R),
a family of 26 mutual funds with over $42 billion in assets as of December 15,
1996. The Investment Manager is an affiliate of: Schwab; the Trust's
distributor; the shareholder services agent; and the transfer agent. The
Advisory Agreement will continue in effect until February 23, 1997 with respect
to each of the Funds, and thereafter will continue for one year terms subject to
annual approval by: (1) the Trust's Board of Trustees or (2) a vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of a
Fund. In either event, the continuance must also be approved by a majority of
the Trust's Board of Trustees who are not parties to the Agreement or interested
persons (as defined in the 1940 Act) of any such party by vote cast in person at
a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated at any time upon 60 days' notice by either party, or
by a majority vote of the outstanding shares of a Fund, and will terminate
automatically upon assignment.
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<PAGE> 124
For its advisory and administrative services to the Schwab 1000 Fund(R),
the Investment Manager is entitled to receive a graduated annual fee, payable
monthly, of 0.30% of the Fund's average daily net assets not in excess of $500
million, and 0.22% of such assets over $500 million. For its advisory and
administrative services to the Government Bond Funds, the Municipal Bond Funds
and the California Municipal Bond Funds, the Investment Manager is entitled to
receive a graduated annual fee, payable monthly, of 0.41% of each Fund's average
daily net assets.
The Investment Manager and Schwab have guaranteed that, through at least
December 31, 1997, the total fund operating expenses for the Schwab Long-Term
Tax-Free Bond Fund, the Schwab Short/Intermediate Tax-Free Bond Fund, the Schwab
California Long-Term Tax-Free Bond Fund, and the Schwab California
Short/Intermediate Tax-Free Bond Fund will not exceed 0.49% of each Fund's
average daily net assets. The Investment Manager and Schwab also have guaranteed
(these guarantees may be discontinued at any time) that the total fund operating
expenses will not exceed 0.30%, 0.49% and 0.49% of the average daily net assets
for the Schwab Long-Term Government Bond Fund, the Schwab 1000 Fund and the
Schwab Short/Intermediate Government Bond Fund, respectively.
Schwab 1000 Fund. For the fiscal years ended August 31, 1994, 1995 and
1996, the investment advisory fees incurred by the Schwab 1000 Fund were
$1,554,672 (no fees were reduced), $1,640,000 (fees were reduced by $137,000)
and $2,485,000 (fees were reduced by $648,000), respectively.
The Government Bond Funds. For the fiscal years ended August 31, 1994,
1995 and 1996, the investment advisory fees incurred by the Schwab Long-Term
Government Bond Fund were $0 (fees were reduced by $18,943), $0 (fees were
reduced by $40,554) and $0 (fees were reduced by $68,000), respectively.
For the fiscal years ended August 31, 1994, 1995 and 1996, the
investment advisory fees incurred by the Schwab Short/Intermediate Government
Bond Fund were $629,913 (fees were reduced by $363,412), $439,000 (fees were
reduced by $232,000) and $453,000 (fees were reduced by $149,000), respectively.
The Municipal Bond Funds. For the fiscal years ended August 31, 1994,
1995 and 1996, the investment advisory fees incurred by the Schwab Long-Term
Tax-Free Bond Fund were $78,581 (fees were reduced by $116,810), $89,000 (fees
were reduced by $80,000) and $102,000 (fees were reduced by $75,000),
respectively.
For the fiscal years ended August 31, 1994, 1995 and 1996, the
investment advisory fees incurred by the Schwab Short/Intermediate Tax-Free Bond
Fund were $91,945 (fees were reduced by $182,991), $97,000 (fees were reduced by
$130,000) and $131,000 (fees were reduced by $85,000), respectively.
The California Municipal Bond Funds. For the fiscal years ended August
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31, 1994, 1995 and 1996, the investment advisory fees incurred by the Schwab
California Long-Term Tax-Free Bond Fund were $315,733 (fees were reduced by
$182,153), $245,000 (fees were reduced by $130,000) and $297,000 (fees were
reduced by $104,000), respectively.
For the fiscal years ended August 31, 1994, 1995 and 1996, the
investment advisory fees incurred by the Schwab California Short/Intermediate
Tax-Free Bond Fund were $75,136 (fees were reduced by $139,229), $77,000 (fees
were reduced by $94,000) and $118,000 (fees were reduced by $57,000),
respectively.
Additional Information. The Advisory Agreement provides that the fees to
be paid to the Investment Manager will be less than the amount that would cause
the aggregate operating expenses of a Fund (excluding interest, taxes, net
brokerage commissions and extraordinary expenses) in any year to exceed the most
stringent limits prescribed by any state in which shares of a Fund are offered
for sale. The most stringent current limit for such expenses is 2.5% of a fund's
first $30 million of average net assets, 2.0% of a fund's next $70 million of
average net assets and 1.5% of a fund's average net assets in excess of $100
million.
From time to time, each Fund may compare its total operating expense
ratio to the total operating expense ratio of other mutual funds or mutual fund
averages with similar investment objectives as reported by Lipper Analytical
Service, Inc., Morningstar, Inc. or other independent sources of such
information ("independent sources").
SUB-ADVISER
Prior to June 1, 1995, Dimensional Fund Advisors Inc. ("Dimensional")
served as the sub-adviser to the Schwab 1000 Fund(R). As of June 1, 1995, the
Investment Manager became responsible for providing all investment advisory
services to the Schwab 1000 Fund.
Under the sub-advisory agreement then in effect between Dimensional and
the Investment Manager and pursuant to Dimensional's expense reduction
agreement, the Investment Manger paid Dimensional: $504,966 for the fiscal year
ended August 31, 1994 and $436,034 for the fiscal year ended August 31, 1995.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal
underwriter for shares of the Trust and is the Trust's agent for the purpose of
the continuous offering of the Funds' shares. Each Fund pays the cost of the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under the
Distribution Agreement. Terms of continuation, termination and assignment under
the Distribution Agreement are identical to those described above with respect
to the Advisory Agreement.
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CUSTODIAN AND FUND ACCOUNTANT
PNC Bank, National Association, at the Airport Business Center, 200
Stevens Drive, Suite 440, Lester, Pennsylvania 19113, serves as Custodian for
the Trust.
PFPC, Inc., at 103 Bellevue Parkway Wilmington, Delaware 19809, serves
as Fund Accountant for the Trust.
ACCOUNTANTS AND REPORTS
TO SHAREHOLDERS
The Trust's independent accountants, Price Waterhouse LLP, audit and
report on the annual financial statements of each series of the Trust and review
certain regulatory reports and each Fund's federal income tax return. Price
Waterhouse LLP also performs other professional accounting, auditing, tax and
advisory services when the Trust engages it to do so. Shareholders will be sent
audited annual and unaudited semi-annual financial statements. The address of
Price Waterhouse LLP is 555 California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, D.C. 20005, is counsel to the Trust.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the Schwab 1000 Fund(R), the
Investment Manager seeks to obtain best price and execution. Subject to the
supervision of the Board of Trustees, the Investment Manager will generally
select brokers and dealers for all of the Funds primarily on the basis of the
quality and reliability of brokerage services, including execution capability
and financial responsibility. In assessing these criteria, the Investment
Manager will, among other things, monitor the performance of brokers effecting
transactions for the Funds to determine the effect, if any, the Funds'
transactions through those brokers have on the market prices of the stocks
involved. This may be of particular importance for the Schwab 1000 Fund's
investments in relatively smaller companies whose stocks are not as actively
traded as those of their larger counterparts. The Schwab 1000 Fund will seek to
buy and sell securities in a manner that causes the least possible fluctuation
in the prices of those stocks in view of the size of the transactions.
In an attempt to obtain best execution for the Schwab 1000 Fund, the
Investment Manager may also place orders for NASDAQ/NMS stocks directly
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with market makers or with third market brokers, Instinet or brokers on an
agency basis. Placing orders with third market brokers or through Instinet may
enable the Schwab 1000 Fund to trade directly with other institutional holders
on a net basis. At times, this may allow the Fund to trade larger blocks than
would be possible trading through a single market maker.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources may also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
In determining when and to what extent to use Schwab or any other
affiliated broker-dealer as its broker for executing orders for the Schwab 1000
Fund on securities exchanges, the Investment Manager will consider (if relevant)
whether the compensation to be paid Schwab or any other affiliated broker-dealer
will be (i) fair and reasonable, (ii) at least as favorable to the Fund as
commissions that would be charged by other qualified brokers having comparable
execution capabilities and (iii) at least as favorable as commissions
contemporaneously charged by Schwab or any other affiliated broker-dealer on
comparable transactions for its most favored unaffiliated customers. The Fund
does not consider it practicable or in the best interests of its shareholders to
solicit competitive bids for commission rates on each transaction. However, the
Board of Trustees, including a majority of the Trustees who are not "interested
persons" of Schwab or any other affiliated broker-dealer within the meaning of
the 1940 Act, (i) has prescribed procedures designed to provide that the Fund
does not pay commissions that do not meet the standards described above, (ii)
reviews those procedures annually to determine whether they remain adequate and
(iii) considers quarterly whether or not the commissions charged by Schwab or
any other affiliated broker-dealer have met the standards.
Brokerage services Schwab provides to the Schwab 1000 Fund(R) are also
subject to Rule 11a2-2(T) under the Securities Exchange Act of 1934, as amended.
Rule 11a2-2(T) permits the Fund to use Schwab as a broker provided certain
conditions are met. Among these requirements are that members of the exchange
not associated with Schwab perform the floor brokerage element of portfolio
transactions (that is, execution on the exchange floor or through use of
exchange facilities), that the orders to such members be transmitted from off
the exchange floor and that neither Schwab nor an associated person of Schwab
participates in the execution of the transaction after the order has been so
transmitted. In connection with transactions in which Schwab acts as broker for
the Schwab 1000 Fund, Schwab, while not permitted to perform floor brokerage
(which is undertaken by members Schwab selects who are not
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associated with that firm), still continues to bear principal responsibility for
determining important elements of overall execution such as timing and order
size, and also clears and settles such transactions. Schwab pays the fees
charged by those persons performing the described floor brokerage elements.
Schwab will not trade directly with the Funds in any transactions in which
Schwab or an affiliate acts as principal.
Brokerage Commissions. For the fiscal years ended August 31, 1994, 1995
and 1996, the Schwab 1000 Fund paid brokerage commissions of $50,000, $118,000
and $408,000, respectively. Of the brokerage commission paid in 1996, $1,000
(0.25% of the total amount) was paid to Schwab, an affiliated person of the
Fund. [ ]% of the transactions involving the payment of a brokerage commission
in 1996 were effected through Schwab The Government Bond Funds, Municipal Bond
Funds and California Municipal Bond Funds paid no brokerage commissions for
each such Fund's last three fiscal years, respectively.
PORTFOLIO TURNOVER
For reporting purposes, each Fund's turnover rate is calculated by
dividing the value of purchases or sales of portfolio securities for the fiscal
year, whichever is less, by the monthly average value of portfolio securities
the Fund owned during the fiscal year. When the Fund makes the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded. A 100% portfolio turnover rate would
occur, for example, if all portfolio securities (aside from short-term
securities) were sold and either repurchased or replaced once during the fiscal
year.
From time to time, each Fund may compare its portfolio turnover rate
with that of other mutual funds as reported by independent sources.
Schwab 1000 Fund. The Schwab 1000 Fund's portfolio turnover rates for
the fiscal years ended August 31, 1995 and 1996 were 2% and 2%, respectively.
The Government Bond Funds. The portfolio turnover rates for the Schwab
Long-Term Government Bond Fund for the fiscal years ended August 31, 1995 and
1996 were 240% and 66%, respectively. The portfolio turnover rates for the
Schwab Short/Intermediate Government Bond Fund for the fiscal years ended August
31, 1995 and 1996 were 203% and 80%, respectively.
The Municipal Bond Funds. The portfolio turnover rates for the Schwab
Long-Term Tax-Free Bond for the fiscal years ended August 31, 1995 and 1996 were
70% and 50%, respectively. The portfolio turnover rates for the Schwab
Short/Intermediate Tax-Free Bond Fund for the fiscal years ended August 31, 1995
and 1996 were 35% and 44%, respectively.
The California Municipal Bond Funds. The portfolio turnover rates for
the Schwab California Long-Term Tax-Free Bond Fund for the fiscal years ended
August 31, 1995 and 1996 were 46% and 36%, respectively. The portfolio turnover
rates for the Schwab California Short/Intermediate Tax-Free Bond Fund for the
fiscal years ended August 31, 1995 and 1996 were 62% and 20%, respectively.
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TAXES
FEDERAL INCOME TAX
It is each Fund's policy to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Code. By
following this policy, each Fund expects to eliminate or reduce to a nominal
amount the federal income tax to which it is subject.
In order to qualify as a regulated investment company, each of the Funds
must, among other things, (1) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stocks, securities, foreign currencies or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
derive less than 30% of its gross income from gains from the sale or other
disposition of certain assets (including stocks and securities) held for less
than three months; and (3) diversify its holdings so that at the end of each
quarter of its taxable year (i) at least 50% of the market value of the Fund's
total assets is represented by cash or cash items, U.S. Government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of any other regulated investment company) or of two or more issuers
that the Fund controls, within the meaning of the Code, and that are engaged in
the same, similar or related trades or businesses. These requirements may
restrict the degree to which a Fund may engage in short-term trading and certain
hedging transactions and may limit the range of a Fund's investments. If a Fund
qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, which it distributes to shareholders, provided that the Fund
meets certain minimum distribution requirements. To comply with these
requirements, a Fund must distribute at least (a) 90% of its "investment company
taxable income" (as that term is defined in the Code) and (b) 90% of the excess
of its (i) tax-exempt interest income over (ii) certain deductions attributable
to that income (with certain exceptions), for its taxable year. Each Fund
intends to make sufficient distributions to shareholders to meet these
requirements.
The Code imposes a non-deductible excise tax on regulated investment
companies that do not distribute in a calendar year (regardless of whether they
otherwise have a non-calendar taxable year) an amount equal to 98% of their
"ordinary income" (as defined in the Code)
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for the calendar year plus 98% of their capital gain net income for the one-year
period ending on October 31 of such calendar year. For the foregoing purposes, a
Fund is treated as having distributed any amount on which it is subject to
income tax for any taxable year ending in such calendar year. If the
distributions during a calendar year are less than the required amount, the Fund
is subject to a non-deductible excise tax equal to 4% of the deficiency.
A Fund's transactions in futures contracts and options and certain other
investment and hedging activities are subject to special tax rules. In a given
case, these rules may accelerate income to a Fund, defer its losses, cause
adjustments in the holding periods of the Fund's assets, convert short-term
capital losses into long-term capital losses or otherwise affect the character
of the Fund's income. These rules could therefore affect the amount, timing and
character of distributions to shareholders. Income earned as a result of these
transactions would, in general, not be eligible for the corporate dividends
received deduction when distributed to corporate shareholders. The Funds will
endeavor to make any available elections pertaining to these transactions in a
manner believed to be in the best interest of the Funds and their shareholders.
Any dividends declared by the Funds in October, November or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder on
December 31 of the year declared. A Fund may adjust its schedule for the
reinvestment of distributions for the month of December to assist in complying
with the reporting and minimum distribution requirements of the Code.
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." This "backup withholding" is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
The foregoing discussion relates only to federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from net investment income and
short-term capital gains. Distributions to foreign shareholders of long-term
capital gains and any gains from the sale or other disposition of shares of the
Funds are generally not subject to U.S. taxation, unless the recipient is an
individual who meets the Code's definition of "resident alien." Different tax
consequences may
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result if the foreign shareholder is engaged in a trade or business within the
United States. In addition, the tax consequences to a foreign shareholder
entitled to claim the benefits of a tax treaty may be different than those
described above. Distributions by a Fund may also be subject to state, local and
foreign taxes, and their treatment under applicable tax laws may differ from the
federal income tax treatment.
SCHWAB LONG-TERM TAX-FREE BOND
FUND, SCHWAB SHORT/INTERMEDIATE
TAX-FREE BOND FUND, SCHWAB
CALIFORNIA LONG-TERM TAX-FREE BOND
FUND, AND SCHWAB CALIFORNIA
SHORT/INTERMEDIATE TAX-FREE BOND
FUND
The Code permits a regulated investment company that invests at least
50% of its assets at the close of each quarter in Municipal Securities to pass
through to its investors, on a tax-exempt basis, net Municipal Securities
interest income. An exempt-interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by the Schwab Long-Term Tax-Free Bond
Fund, Schwab Short/Intermediate Tax-Free Bond Fund, Schwab California Long-Term
Tax-Free Bond Fund, and Schwab California Short/Intermediate Tax-Free Bond Fund
and designated as an exempt-interest dividend in a written notice mailed to
shareholders after the close of such Fund's taxable year, but not to exceed in
the aggregate the net Municipal Securities interest income received by each such
Fund during the taxable year. The percentage of the total dividends paid during
any taxable year that is designated as exempt-interest dividends will be uniform
throughout such year for all shareholders receiving dividends from each Fund
during such year, and may differ from the percentage of exempt income actually
received by a Fund during the period for which the Shares were held. If for any
taxable year the Schwab Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate
Tax-Free Bond Fund, Schwab California Long-Term Tax-Free Bond Fund, or Schwab
California Short/Intermediate Tax-Free Bond Fund does not qualify for the
special federal tax treatment afforded regulated investment companies, all of
its taxable income will be subject to federal tax at regular corporate rates
(without any deduction for distributions to its shareholders) when distributed,
and Municipal Securities interest income, although not taxed to the Funds, would
be taxable to shareholders. 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.
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
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
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regulations have been issued as of the date of this Statement of Additional
Information.
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.
The discussion of federal income taxation presented above summarizes
only some of the important federal tax considerations generally affecting
purchasers of Fund shares. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund and its shareholders,
and the discussion is not intended as a substitute for careful tax planning.
Accordingly, prospective investors (particularly those not residing or domiciled
in the United States) should consult their own tax advisers regarding the
consequences of investing in a Fund.
STATE OF CALIFORNIA TAXES
With respect to each California Municipal Bond Fund, if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Fund consists of obligations the interest on which is exempt from
California personal income taxation under the Constitution or laws of California
or of the United States ("California Exempt Obligations"), then the Fund will be
qualified to pay dividends exempt from State of California personal income tax
to its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). The California Municipal Bond Funds intend to
qualify under the above requirement so that they can pay California
exempt-interest dividends. If a California Municipal Bond Fund fails to so
qualify, none of its dividends will be exempt from State of California personal
income tax.
Not later than 60 days after the close of its taxable year, each
California Municipal Bond Fund will notify each shareholder of the portion of
the dividends paid by it to the shareholder with respect to such taxable year
which is exempt from State of California personal income tax. The total amount
of California exempt-interest dividends paid by a California Municipal Bond Fund
to all of its shareholders with respect to any taxable year cannot exceed the
amount of interest received by the Fund during such year on California Exempt
Obligations, less any expenses or expenditures (including any expenditures
attributable to the acquisition of additional securities for the
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California Municipal Bond Funds) that are deemed to have been paid from such
interest. Dividends paid by the California Municipal Bond Funds in excess of
this limitation will be subject to State of California personal income tax. For
purposes of this limitation, expenses or other expenditures paid during any year
generally will be deemed to have been paid with funds attributable to interest
received by the Fund from California Exempt Obligations for such year in the
same ratio as such interest from California Exempt Obligations for such year
bears to the total gross income earned by the Fund for the year. The effect of
this accounting convention is that amounts of interest from California Exempt
Obligations received by the California Municipal Bond Funds that would otherwise
be available for distribution as California exempt-interest dividends will be
reduced by the expenses and expenditures deemed to have been paid from such
amounts.
To the extent, if any, dividends paid to shareholders are derived from
long-term and short-term capital gains, such dividends will not constitute
California exempt-interest dividends. Rules similar to those regarding the
treatment of such dividends for federal income tax purposes are also applicable
for State of California personal income tax purposes. Moreover, interest on
indebtedness incurred by a shareholder to purchase or carry shares of a
California Municipal Bond Fund is not deductible for State of California
personal income tax purposes if the Fund distributes California exempt-interest
dividends to the shareholder during his or her taxable year.
The foregoing is a summary of only some of the important State of
California personal income tax considerations generally affecting the California
Municipal Bond Funds and their shareholders. No attempt is made to present a
detailed explanation of the State of California personal income tax treatment of
the California Municipal Bond Funds or their shareholders, and this discussion
is not intended as a substitute for careful planning. Further, it should be
noted that the portions of the California Municipal Bond Funds' dividends
constituting California exempt-interest dividends are excludable from income for
State of California personal income tax purposes only. Any dividends paid to
shareholders of the California Municipal Bond Funds subject to State of
California franchise or corporate income tax will be taxed as ordinary dividends
to such shareholders, notwithstanding that all or a portion of such dividends
are exempt from State of California personal income tax. Accordingly, potential
investors in the California Municipal Bond Funds, including, in particular,
corporate investors that may be subject to California franchise or corporate
income tax, should consult their tax advisers with respect to the application of
such tax to the receipt of the California Municipal Bond Funds' dividends and as
to their own State of California tax situation, in general.
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SHARE PRICE CALCULATION
Each Fund's net asset value per share is determined each day the New
York Stock Exchange is open for trading as of 4:00 p.m., Eastern time.
Currently, the New York Stock Exchange is closed on the following holidays: New
Year's Day (observed), Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The Funds value their
portfolio securities daily based on their fair value. Securities traded on stock
exchanges are valued at the last quoted sales price on the exchange on which
such securities are primarily traded, or, lacking any sales, at the mean between
the bid and ask prices. Investments in mutual funds are valued at their
respective net asset values, as determined by those funds. Investments in money
market funds are valued at their respective net asset values, as determined by
those Funds. Securities traded in the over-the-counter market are valued at the
last sales price that day, or if no sales that day, at the mean between the bid
and ask prices. In addition, securities that are primarily traded on foreign
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges with these values then translated into
U.S. dollars at the current exchange rate. Foreign securities for which the
closing values are not readily available are valued at fair value as determined
in good faith pursuant to the Board of Trustees guidelines. Securities for which
market quotations are not readily available (including restricted securities
that are subject to limitations on their sale) are valued at fair value as
determined in good faith pursuant to the Trust's 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.
From time to time, each Fund may report its net asset value per share
over a specified period. Each Fund's net asset value, for the periods set forth,
may be compared to net asset values for other mutual funds with similar
investment objectives as reported by independent sources.
TOTAL RETURN AND YIELD
STANDARDIZED TOTAL RETURN
Average annual total return for a period is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in a Fund
made at the beginning of the period, then calculating the average annual
compounded rate of return that would produce the same investment return on the
$1,000 over the same period. In computing average annual total return, a Fund
assumes the reinvestment of all distributions at net asset value on applicable
reinvestment dates.
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<TABLE>
<CAPTION>
Average annual total return
Total return for the fiscal year from commencement of
ended August 31, 1996 operations to August 31, 1996
--------------------- -----------------------------
<S> <C> <C>
Schwab 1000 Fund(R) 17.27% 3.49%
Schwab Long-Term Government 2.29% 4.92%
Bond Fund
Schwab Short/Intermediate 4.39% 5.48%
Government Bond Fund
Schwab Long-Term Tax-Free Bond 4.87% 5.89%
Fund
Schwab Short/Intermediate Tax- 3.32% 4.09%
Free Bond Fund
Schwab California Long-Term Tax- 6.43% 7.20%
Free Bond Fund
Schwab California 4.11% 4.19%
Short/Intermediate Tax-Free Bond
Fund
</TABLE>
NONSTANDARDIZED TOTAL RETURN
Nonstandardized total return for a Fund differs from standardized total
return in that it relates to periods other than the period for standardized
total return and/or that it represents aggregate (rather than average) total
return.
In addition, an after-tax total return for the Schwab 1000 Fund(R) may
be calculated by taking the Fund's standardized or non-standardized total return
and subtracting applicable federal taxes from the portion of the Fund's total
return attributable to capital gains distributions and ordinary income. This
after-tax total return may be compared to that of other mutual funds with
similar investment objectives as reported by independent sources.
In addition, the Schwab 1000 Fund may report the percentage of the
Fund's standardized or non-standardized total return which would be paid to
taxes annually (at the applicable federal personal income and capital gains tax
rates) before redemption of Fund shares. This proportion may be compared to that
of other mutual funds with similar investment objectives as reported by
independent sources.
YIELD
A Fund's yield refers to the net investment income generated by a
hypothetical investment in the Fund over a specific 30 day period. This net
investment income is then annualized, which means that the net investment income
generated during the 30-day period is assumed to be generated in each 30-day
period over an annual period, and is shown as a percentage of the investment.
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<TABLE>
<CAPTION>
Fund 30-day period ended August 31, 1996
- ---- ----------------------------------
<S> <C>
Schwab Long-Term Government Bond Fund 7.23%
Schwab Short/Intermediate Government Bond Fund 5.77%
Schwab Long-Term Tax-Free Bond Fund 5.30%
Schwab Short/Intermediate Tax-Free Bond Fund 4.03%
Schwab California Long-Term Tax-Free Bond Fund 5.34%
Schwab California Short/Intermediate Tax-Free Bond 4.20%
Fund
</TABLE>
EFFECTIVE YIELD
A Fund's effective yield is calculated similarly, but the net investment
income earned by the investment is assumed to be compounded monthly when
annualized. The effective yield will be slightly higher than the yield due to
this compounding effect.
TAX EQUIVALENT YIELD AND
TAX EQUIVALENT EFFECTIVE YIELD
The tax equivalent yield of the Municipal Bond Funds and the California
Municipal Bond Funds are calculated by dividing that portion of the applicable
fund's yield (computed as described above) that is tax-exempt by an amount equal
to one minus the applicable effective tax rate, and adding the result to that
portion, if any, of the yield of the Fund that is not tax-exempt. For the
Municipal Bond Funds, the maximum federal marginal rate of 39.6% is normally
used; for the California Municipal Bond Funds, a combined rate of the maximum
federal marginal rate of 39.6% and the California marginal rate of 9.3% is
normally used.
<TABLE>
<CAPTION>
Taxable equivalent
yield for 30-day period
Fund ended August 31, 1996
- ---- ---------------------
<S> <C>
Schwab Long-Term Tax-Free Bond Fund 8.77%
Schwab Short/Intermediate Tax-Free Bond Fund 6.67%
Schwab California Long-Term Tax-Free Bond Fund 8.84%
Schwab California Short/Intermediate Tax-Free 6.95%
Bond Fund
</TABLE>
Tax equivalent effective yields are computed in the same manner as tax
equivalent yields, except that effective yield is substituted for yield in the
calculation. In calculating tax equivalent yields and effective yields the
California
38
<PAGE> 137
Municipal Bond Funds generally assume an effective tax rate (combining the
federal 39.6% rate and the California 9.3% rate, and assuming the taxpayer
deducts California state taxes paid) of 45.22%. The effective tax rates used in
determining such yields do not reflect the tax costs resulting from the full or
partial loss of the benefits of personal exemptions, itemized deductions and
California exemption credits that may result from the receipt of additional
taxable income by taxpayers with adjusted gross incomes exceeding $117,950 (for
joint returns) or $58,975 (for separate returns) for 1996. Actual tax equivalent
yields and tax equivalent effective yields may be higher for taxpayers subject
to the loss of these benefits than the rates reported by the Funds.
TAX-EXEMPT VERSUS TAXABLE YIELD
Investors may want to determine which investment, tax-exempt or taxable,
will provide a higher after-tax return. To determine the tax equivalent yield,
or tax equivalent effective yield, simply divide the yield or effective yield of
the Municipal Bond Funds or the California Municipal Bond Funds by 1 minus your
marginal federal tax rate (or combined state and federal tax rate in the case of
the California Municipal Bond Funds). Note, however, that as discussed above,
full or partial loss by certain investors of the described federal tax benefits
could cause the resulting figure to understate the after-tax return produced by
the Fund in question.
From time to time, each Fund may report on the dividends paid to
shareholders over a specified period of time.
SCHWABFUNDS(R) INVESTMENT STRATEGIES
INDEXING AND THE SCHWAB 1000
INDEX(R) AND FUND
The returns produced by the U.S. stock market during the 25 years ending
December 31, 1994 have been exceeded by those of very few types of securities
investments. Because the unmanaged performance of the U.S. stock market has
often proven superior to that of many individually selected stock portfolios, a
growing percentage of assets invested in the equity markets are being placed in
"index" portfolios. Institutional investors often devote a substantial
percentage of their assets to indexed strategies.
The historical superiority of a long-term investment in a group of
common stocks representative of the stock market as a whole is illustrated in
the graph and table below. It may be seen that the cumulative 25 year total
return of the Schwab 1000 Index significantly exceeds that of U.S. Treasury
Bills (obligations which, when issued, have maturities of one year or less), and
long-term Government Bonds (bonds issued by the U.S. Treasury which at issue
have maturities of at least 10 but no more than 30 years) and is well above the
rate of inflation as represented by the Consumer Price Index ("CPI"). While
common stock prices fluctuated during the years 1978 through 1994, they were
substantially higher at the end than the beginning of the period. The historical
data presented is not indicative of future results.
39
<PAGE> 138
Schwab 1000 Index data assumes the reinvestment of dividends, but does
not reflect deductions for administrative and management costs and expenses. The
Fund will be subject to these costs and expenses. In addition, various factors
may cause the Fund's performance to be higher or lower than that of the Index.
(See "Investment Objective and Policies.") The Schwab 1000 Index was first made
available to the public on February 1, 1991.
The cumulative total return figures reported for the Schwab 1000 Index
for the period prior to February 1, 1991 reflect the historical performance of
the Index as if the Index had been in existence for the entire period.
Investors should vbe aware that they cannot invest directly in an index.
An index typically tracks the performance of a group of securities
selected to represent a particular market, and is most often used to gauge that
market's performance. The Dow Jones Industrial Average and Standard & Poor's 500
Index(R) ("S&P 500") are two indices designed to measure the performance of U.S.
stocks. As of December 16, 1996, the market capitalization of the stocks
included in these indices represent approximately 16.8% and 71.8%, respectively,
of the U.S. stock market's total value. When investment managers invest indexed
separate accounts or index fund assets, they attempt to replicate the
performance of the applicable target index by holding all or a representative
sample of the securities included in the index.
The Schwab 1000 Index is a broad-based stock market index which contains
the common stocks of the 1,000 largest operating companies (i.e., non-investment
companies) incorporated in the United States. As the stocks contained in the
index represent about 84% of the total market capitalization of all U.S.
companies, as represented by the Wilshire 500 Index, the Schwab 1000 Index
provides a reliable measure of broad market performance and can serve as a
benchmark against which individual investors can compare the performance of
their equity investments. Relative to some indices that primarily track one
group of stocks, and as a result do not capture movements in other areas of the
market, the Schwab 1000 Index(R), because it contains the stocks of the more
established blue-chip companies as well as those of relatively smaller
companies, reflects an expanded breadth of market coverage. This distinction is
important because historically the stocks of smaller companies have
out-performed those of their blue-chip counterparts in some years, while the
reverse has been true in other years. Of course, past performance may not
necessarily be indicative of future results.
From time to time, the Schwab 1000 Fund may compare the historical
performance of the Schwab 1000 Index to the historical performance of various
other indices, including the S&P 500, as reported by independent sources.
Charles R. Schwab, a veteran investor, was instrumental in developing
the Schwab 1000 Fund(R). The investment objective of the Fund, which is designed
to make indexed investing available with a high level of convenience and
economy, is to match the total return of the Schwab 1000 Index.
The Schwab 1000 Fund is managed to offset capital gains with capital
losses in order to minimize the distribution of capital gains to shareholders.
This special feature of the Schwab 1000 Fund can make a real difference in an
investor's after-tax return, especially if the investor is in a high tax
bracket. The Schwab 1000 Fund has adopted a number of policies that should cause
its portfolio turnover rate to be below the portfolio turnover rate of
40
<PAGE> 139
many other mutual funds. A lower portfolio turnover rate acts to minimize
associated transaction costs as well as the level of realized capital gains. By
avoiding, where possible, the distribution of capital gains to shareholders, the
Schwab 1000 Fund helps to build the value of an investor's shares and defer
payment of capital gains taxes until redemption of the those shares. Current tax
liability for capital gains should be reduced and total return increased by
these policies.
The Schwab 1000 Fund may, from time to time, refer to recent studies
that analyze certain techniques and strategies which the Schwab 1000 Fund uses.
In addition, the Schwab 1000 Fund may, from time to time, promote the advantages
of investing in a series that is part of a large, diverse mutual fund complex.
41
<PAGE> 140
The data reported below is current as of December __, 1996. Source:
Schwab 1000 Index(R) -- Charles Schwab & Co., Inc.; S&P 500 Index(R) --
Standard & Poors; 3-Month CD's -- _______; Corporate Bonds -- ________;
Treasury Bills -- _______; and Inflation (CPI) -- _______.
[The following is a line chart comparing the Schwab 1000 Index, S&P 500 Index,
3-Month CDs, Corporate Bonds, Treasury Bills and Inflation (CPI).]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SCHWAB 1000 S&P 500 3-MONTH CORPORATE TREASURY INFLATION
INDEX(R) INDEX(R) CD'S BONDS BILLS (CPI)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1979 21.34% 18.30% 11.22% -2.12% 10.04% 13.29%
1980 61.20% 56.43% 25.69% -2.42% 22.79% 27.46%
1981 54.95% 48.49% 45.68% 0.49% 39.98% 38.82%
1982 87.60% 80.36% 63.50% 39.90% 54.96% 44.14%
1983 128.48% 120.86% 78.33% 52.89% 68.32% 49.61%
1984 142.83% 134.70% 96.80% 78.30% 84.43% 55.53%
1985 221.19% 209.19% 112.65% 121.21% 98.23% 61.46%
1986 277.88% 266.94% 126.49% 157.73% 110.04% 63.24%
1987 289.34% 286.25% 142.02% 164.30% 122.26% 70.38%
1988 355.39% 350.40% 160.70% 188.66% 137.07% 77.99%
1989 492.10% 493.11% 184.36% 229.04% 156.34% 86.26%
1990 465.16% 474.63% 207.57% 252.58% 175.61% 97.62%
1991 656.08% 649.79% 225.50% 317.84% 190.55% 103.71%
1992 723.39% 706.94% 237.51% 354.18% 200.56% 109.59%
1993 807.71% 788.19% 248.26% 409.44% 209.57% 115.36%
1994 812.12% 799.80% 264.41% 389.44% 222.80% 121.11%
1995 1153.81% 1137.43% 286.08% 498.27% 240.60% 126.72%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 141
ASSET ALLOCATION STRATEGIES USING
SCHWABFUNDS(R)
Shareholders of SchwabFunds may wish to invest in the SchwabFunds as
components of their personal asset allocation plan. An asset allocation program
is available through Schwab. This program may help shareholders select
investments, including investments in SchwabFunds, that match their individual
investment needs. The shareholders' personal investment plan is based on a
number of factors, including personal financial situation, time horizon,
investment objectives and goals and risk tolerance.
ACCESS TO SCHWAB'S MUTUAL
FUND ONESOURCE(R) SERVICE
With Schwab's Mutual Fund OneSource Service ("OneSource"), a shareholder
can invest in over 575 mutual funds from many fund companies, subject to the
following. Schwab's standard transaction fee will be charged on each redemption
of fund shares held for 90 days or less to discourage short-term trading. Mutual
fund shares held for more than 90 days are exempt from the short-term redemption
policy and may be sold without penalty. Up to 15 short-term redemption of fund
shares per calendar year are permitted. If you exceed this number, you will no
longer be able to buy or sell fund shares without paying a transaction fee. As a
courtesy, we will notify you in advance if your short-term redemptions are
nearing the point where all of your future trades will be subject to transaction
fees. Schwab reserves the right to modify OneSource's terms and conditions at
any time. For more information, a shareholder should contact his or her Schwab
office during its regular business hours or call 800-2 NO-LOAD, 24 hours a day.
From time to time, the Schwab 1000 Fund(R) may include discussions in
advertisements of the income tax savings shareholders may experience as a result
of the Schwab 1000 Fund's policy of limiting portfolio trading in order to
reduce capital gains. This information may be supplemented by presentations of
statistical data illustrating the extent of such income tax savings and the
impact of such savings on the yield and/or total return of the Schwab 1000 Fund.
In addition, such advertisements may include comparisons of the Schwab 1000
Fund's performance against that of investment products that do not employ the
Schwab 1000 Fund's policy of seeking to limit capital gains.
The Schwab 1000 Fund is intended to make indexed investing easily
available to Schwab customers with the highest level of convenience and economy
thereby facilitating their ability to participate in the long-term performance
of the U.S. stock market.
43
<PAGE> 142
GENERAL INFORMATION
The Trust generally is not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
removal of Trustees if a meeting is requested in writing by a shareholder or
shareholders who beneficially own(s) 10% or more of the Trust's shares; (2)
adoption of any contract for which shareholder approval is required by the 1940
Act; (3) any termination of the Trust to the extent and as provided in the
Declaration of Trust; (4) any amendment of the Declaration of Trust (other than
amendments changing the name of the Trust or any of its investment portfolios,
supplying any omission, curing any ambiguity or curing, correcting or
supplementing any defective or inconsistent provision thereof); (5) determining
whether a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust or the
shareholders, to the same extent as the stockholders of a Massachusetts business
corporation; and (6) such additional matters as may be required by law, the
Declaration of Trust, the Bylaws or any registration of the Trust with the SEC
or any state or as the Board of Trustees may consider desirable. The
shareholders also would vote upon changes to a Fund's fundamental investment
objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing Trustees and until the election and
qualification of his or her successor or until death, resignation, retirement or
removal by a majority vote of the shares entitled to vote (as described below)
or of a majority of the Trustees. In accordance with the 1940 Act, (i) the Trust
will hold a shareholder meeting for the election of Trustees when less than a
majority of the Trustees have been elected by shareholders and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
Trustee have been elected by the shareholders, that vacancy will be filled by a
vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such
for at least six months and who hold shares constituting at least 1% of the
Trust's outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more Trustees, the Trust has undertaken to
disseminate appropriate materials at the expense of the requesting shareholders.
The Bylaws provide that the presence at a shareholder meeting in person
or by proxy of at least 30% of the shares entitled to vote on a matter shall
constitute a quorum, unless otherwise provided by the 1940 Act or other
applicable law. Thus, even if less than a majority of shareholders were
represented, a meeting of the Trust's shareholders could occur. Attending
shareholders would in such case be permitted to take action not requiring the
vote of more than a majority of a quorum. Some matters requiring a larger vote
under the Declaration of Trust, such as
44
<PAGE> 143
termination or reorganization of the Trust, and certain amendments of the
Declaration of Trust, could not be decided at such a meeting; nor could matters
which under the 1940 Act require the vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act. The Declaration of Trust
specifically authorizes the Board of Trustees to terminate the Trust (or any of
its investment portfolios) by notice to the shareholders without shareholder
approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the Trust solely by reason of being or having been a shareholder. Moreover,
the Trust will be covered by insurance which the Trustees consider adequate to
cover foreseeable tort claims.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote, because it is limited to
circumstances in which a disclaimer is inoperative and the Trust itself is
unable to meet its obligations.
For further information, please refer to the registration statement and
exhibits for the Trust on file with the SEC in Washington, D.C. and available
upon payment of a copying fee. The statements in the Prospectus and this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
45
<PAGE> 144
SCHWABFUNDS(R)
SchwabFunds offers a variety of series and classes of shares of beneficial
interest to help you with your investment needs.
EQUITY FUNDS
Schwab 1000 Fund(R)(1)
Schwab International Index Fund(R)(2)
Schwab Small-Cap Index Fund(R)(2)
Schwab Asset Director(R)-High Growth Fund(2)
Schwab Asset Director(R)-Balanced Growth Fund(2)
Schwab Asset Director(R)-Conservative Growth Fund(2)
Schwab S&P 500 Fund-Investor Shares(2)
Schwab S&P 500
Fund-e.Shares(TM)(2), (3)
Schwab Analytics Fund(TM)(2)
Schwab OneSource Portfolios-International
Schwab OneSource Portfolios-Growth Allocation
Schwab OneSource Portfolios-Balanced Allocation
FIXED INCOME FUNDS(1)
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund(4)
Schwab California Long-Term Tax-Free Bond Fund(4)
MONEY MARKET FUNDS(5)
Schwab Money Market Fund
Schwab Government Money Fund
Schwab U.S. Treasury Money Fund
Schwab Value Advantage Money Fund(R)
Schwab Municipal Money Fund-Sweep Shares
Schwab Municipal Money Fund-Value Advantage Shares(TM)
Schwab California Municipal Money Fund-Sweep Shares
Schwab California Municipal Money Fund-Value Advantage Shares(TM)
Schwab Retirement Money Fund(R)(6)
Schwab Institutional Advantage Money Fund(R)(6)
Schwab New York Municipal Money Fund-Sweep Shares
Schwab New York Municipal Money Fund-Value Advantage Shares(TM)
(1) The Schwab 1000 Fund and all fixed income funds are separate investment
portfolios of the Trust.
(2) The Funds are separate investment portfolios or classes of shares of
Schwab Capital Trust.
(3) Available only through SchwabLink(TM).
(4) Available only to California residents and residents of selected other
states.
(5) All listed money market funds are separate investment portfolios of The
Charles Schwab Family of Funds.
(6) Designed for institutional investors only.
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<PAGE> 145
PURCHASE AND REDEMPTION OF SHARES
Each Fund's minimum initial investment requirement is $1,000 ($500 for
Custodial Accounts, Individual Retirement Accounts and certain other retirement
plans). Subsequent investments of $100 or more may be made. These minimum
investment requirements may be changed at any time and are not applicable to
certain types of investors. The Trust may waive the minimums for purchases by
Trustees, Directors, officers or employees of the Trust, Schwab, or the
Investment Manager.
The Trust has made an election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90- day period to the lesser of $250,000 or 1% of its net assets at the
beginning of such period. This election is irrevocable without the SEC's prior
approval. Redemption requests in excess of the stated limits may be paid, in
whole or in part, in investment securities or in cash, as the Trust's Board of
Trustees may deem advisable; however, payment will be made wholly in cash unless
the Board of Trustees believes that economic or market conditions exist that
would make such a practice detrimental to the best interests of the Fund. If
redemption proceeds are paid in investment securities, such securities will be
valued as set forth in the Prospectus of the Fund affected under "Share Price
Calculation" and a redeeming shareholder would normally incur brokerage expenses
if he or she were to convert the securities to cash.
OTHER INFORMATION
The Prospectuses of the Funds and this Statement of Additional
Information do not contain all the information included in the Registration
Statement filed with the SEC under the Securities Act of 1933, as amended, with
respect to the securities offered by the Prospectuses. Certain portions of the
Registration Statement have been omitted from the Prospectuses and this
Statement of Additional Information pursuant to the rules and regulations of the
SEC. The Registration Statement, including the exhibits filed therewith, may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectuses and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
This Statement of Additional Information does not constitute an offering
by the Trust, any series thereof, or by the Distributor in any jurisdiction in
which such offering may not be lawfully made.
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<PAGE> 146
APPENDIX - RATINGS OF INVESTMENT SECURITIES
From time to time, each Fund may report the percentage of its assets
which fall into the rating categories set forth below.
BONDS
MOODY'S INVESTORS SERVICE
Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of these issues. Bonds carrying an Aa
designation are deemed to be of high quality by all standards. Together with Aaa
rated bonds, they comprise what are generally known as high grade bonds. Aa
bonds are rated lower than the best bonds because they may enjoy relatively
lower margins of protection, fluctuations of protective elements may be of
greater amplitude or there may be other factors present which make them appear
to be subject to somewhat greater long-term risks. A rated bonds are considered
as upper-medium grade obligations as they possess many favorable investment
attributes. Bonds designated Baa are considered medium grade in that they are
not highly protected nor poorly secured. Interest payments and principal
security appear to be adequate at the present, but they may lack certain
protective elements or be characteristically unreliable over any great length of
time. Baa bonds do not have any outstanding investment characteristics and do
have speculative characteristics.
STANDARD & POOR'S CORPORATION
AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree. A
ratings are given to debt which has a strong capacity to pay interest and repay
principal but is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than higher rated debt. BBB debt indicates
the issuer is regarded by S & P as having an adequate capacity to pay interest
and repay principal. These securities appear to have adequate protection,
however adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal in this category
than in higher categories.
DUFF & PHELPS CREDIT RATING CO.
Duff confers an AAA designation to bonds of issuers with the highest
credit quality. The risk factors associated with these bonds are negligible,
being only slightly more than for risk-free U.S. Treasury debt. AA rated bonds
are of high credit quality and have strong protection factors. The risks
associated with them are modest but may vary slightly from time to time because
of
48
<PAGE> 147
economic conditions. An A rating indicates that the protection factors are
average but adequate. The risk factors, however, are more variable and greater
in periods of economic stress. BBB rated debt has protection factors that are
below average but still sufficient for prudent investment. There is considerable
variability in the risk of BBB rated debt during economic cycles.
FITCH INVESTOR SERVICES, INC.
AAA is the highest rating Fitch assigns to bonds, and indicates the
obligor's exceptionally strong ability to pay interest and repay principal.
Bonds which Fitch considers of very high credit quality, and the obligor's
ability to pay interest and repay principal is very strong, although not as
strong as AAA, is rated AA. An A rating is given to show high credit quality and
the issuer's ability to pay interest and repay principal is strong, but there is
more vulnerability to economic conditions and circumstances than higher rated
debt. BBB bonds are considered investment grade, where the issuer has adequate
ability to pay interest and repay principal. Bonds rated BBB are more
susceptible to adverse changes in economic conditions and circumstances, thus
these bonds are more likely to fall below investment grade or have the
timeliness of their payments impaired.
SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS
MOODY'S INVESTORS SERVICE
Short-term notes/variable rate demand obligations bearing the
designations MIG-1/VMIG-1 are considered to be of the best quality, enjoying
strong protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-3 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.
STANDARD & POOR'S CORPORATION
An S&P SP-1 rating indicates that the subject securities' issuer has a
strong capacity to pay principal and interest. Issues determined to possess very
strong safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a satisfactory capacity to pay principal and
interest is denoted by an SP-2 rating.
IBCA
Obligations supported by the highest capacity for timely repayment are
rated A1+. An A1 rating indicates that the obligation is supported by a very
strong capacity for timely repayment. Obligations rated A2 are supported by a
good capacity for timely repayment, although adverse changes in business,
economic, or financial conditions may affect this capacity.
49
<PAGE> 148
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service ("Moody's"). Issuers (or related supporting institutions) of
commercial paper with this rating are considered to have a superior ability to
repay short-term promissory obligations. Issuers (or related supporting
institutions) of securities rated Prime-2 are viewed as having a strong capacity
to repay short-term promissory obligations. This capacity will normally be
evidenced by many of the characteristics of issuers whose commercial paper is
rated Prime-1 but to a lesser degree.
STANDARD & POOR'S CORPORATION
A Standard & Poor's Corporation ("S&P") A-1 commercial paper rating
indicates a strong degree of safety regarding timely payment of principal and
interest. Issues determined to possess overwhelming safety characteristics are
denoted A-1+. Capacity for timely payment on commercial paper rated A-2 is
satisfactory, but the relative degree of safety is not as high as for issues
designated A-1.
DUFF & PHELPS CREDIT RATING CO.
Duff-1 is the highest commercial paper rating assigned by Duff & Phelps,
Credit Rating Co. ("Duff"). Three gradations exist within this rating category:
A Duff-1+ rating indicates the highest certainty of timely payment (issuer
short-term liquidity is found to be outstanding and safety is deemed to be just
below that of risk-free short-term U.S. Treasury obligations), a Duff-1 rating
signifies a very high certainty of timely payment (issuer liquidity is
determined to be excellent and risk factors are considered minor) and a Duff-1-
rating denotes high certainty of timely payment (issuer liquidity factors are
strong and risk is very small). A Duff-2 rating indicates a good certainty of
timely payment. Liquidity factors and company fundamentals are sound and risk
factors are small.
FITCH INVESTORS SERVICE, INC.
F-1+ is the highest category, and indicates the strongest degree of
assurance for timely payment. Issues rated F-1 reflect an assurance of timely
payment only slightly less than issues rated F-1+. Issues assigned an F-2 rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues in the first two rating categories.
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<PAGE> 149
COMMERCIAL PAPER, SHORT-TERM OBLIGATIONS
AND DEPOSIT OBLIGATIONS ISSUED BY BANKS
THOMSON BANKWATCH (TBW)
TBW-1 is the highest category and indicates the degree of safety
regarding timely repayment of principal and interest is very high. TBW-2 is the
second highest category and while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
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<PAGE> 150
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
COMMON STOCK--99.6%
AEROSPACE/DEFENSE--2.0%
B.F. Goodrich Co. 12,400 $ 465
Boeing Co. 90,200 8,163
Coltec Industries, Inc.* 18,200 273
General Dynamics Corp. 14,900 955
Litton Industries, Inc.* 10,500 490
Lockheed Martin Corp. 53,292 4,483
McDonnell Douglas Corp. 60,000 3,008
Northrop Grumman Corp. 15,900 1,141
Raytheon Co. 60,400 3,111
Rockwell International Corp. 55,500 2,886
Sundstrand Corp. 14,600 546
Textron, Inc. 22,700 1,938
United Technologies Corp. 33,200 3,743
------
31,202
------
AIR TRANSPORTATION--0.5%
AMR Corp.* 25,100 2,058
America West Airlines, Inc. Class B* 11,000 147
Comair Holdings, Inc. 12,000 290
Continental Airlines, Inc. Class B* 14,400 326
Delta Airlines, Inc. 24,700 1,751
Northwest Airlines Corp. Class A* 24,500 923
Southwest Airlines Co. 36,400 833
UAL Corp.* 21,600 1,037
USAir Group, Inc.* 16,500 295
------
7,660
------
ALCOHOLIC BEVERAGES--0.4%
Anheuser-Busch Companies, Inc. 69,200 5,242
Brown Forman Corp. Class B 15,500 562
------
5,804
------
APPAREL--0.6%
Jones Apparel Group, Inc.* 6,800 377
Liz Claiborne, Inc. 17,500 608
NIKE, Inc. Class B 39,800 4,298
Nautica Enterprises, Inc.* 10,000 266
Nine West Group, Inc.* 7,700 397
Reebok International Ltd. 16,700 601
Russell Corp. 5,900 189
Springs Industries, Inc. 5,000 226
Talbots, Inc. 7,500 257
Unifi, Inc. 16,925 463
V.F. Corp. 18,800 1,105
Warnaco Group, Inc. Class A 13,600 337
------
9,124
------
</TABLE>
F-1
<PAGE> 151
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
AUTOMOTIVE PRODUCTS--0.2%
Bandag, Inc. 4,000 $ 189
Cooper Tire & Rubber 19,500 380
Danaher Corp. 12,800 531
Goodyear Tire & Rubber 38,900 1,775
Lear Corp.* 14,000 537
------
3,412
------
BANKS--7.8%
AmSouth Bancorp. 11,700 461
Banc One Corp. 116,021 4,452
Bancorp Hawaii, Inc. 10,175 385
Bank of Boston Corp. 42,120 2,222
Bank of New York Co., Inc. 101,000 2,815
BankAmerica Corp. 94,995 7,362
Bankers Trust New York Corp. 21,300 1,656
Barnett Banks, Inc. 23,088 1,515
Boatmens Bancshares, Inc. 38,700 2,063
Central Fidelity Banks, Inc. 12,825 304
Chase Manhattan Corp. (New) 114,330 8,503
Citicorp 131,100 10,914
Comerica, Inc. 29,264 1,427
Commerce Bancshares, Inc. 7,056 257
Compass Bancshares, Inc. 8,850 298
Corestates Financial Corp. 56,592 2,341
Crestar Financial Corp. 12,400 721
Dime Bancorp, Inc. (New)* 24,926 327
Fifth Third Bancorp 26,975 1,436
First American Corp. 5,900 274
First Bank System, Inc. 37,109 2,384
First Chicago NBD Corp. 81,521 3,475
First Commerce Corp. 10,562 380
First Empire State Corp. 2,500 636
First Security Corp. 19,612 533
First Tennessee National Corp. 16,300 559
First Union Corp. 77,793 4,969
First Virginia Banks, Inc. 9,750 405
First of America Bank Corp. 21,900 1,035
Firstar Corp. 19,500 921
Firstmerit Corp. 5,400 163
Fleet Financial Group, Inc. (New) 73,580 3,072
Hibernia Corp. Class A 35,000 385
Huntington Bancshares, Inc. 48,512 1,107
J.P. Morgan & Co., Inc. 51,400 4,504
Keycorp (New) 58,923 2,364
MBNA Corp. 59,700 1,813
Marshall & Ilsley Corp. 19,828 548
Mellon Bank Corp. 40,472 2,241
</TABLE>
F-2
<PAGE> 152
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Mercantile Bancorp, Inc. 14,450 $ 706
Mercantile Bankshares Corp. 10,450 280
National City Corp. 74,240 2,793
NationsBank Corp. 78,464 6,679
Northern Trust Corp. 16,950 1,116
Norwest Corp. 94,288 3,548
Old Kent Financial Corp. 17,120 688
PNC Bank Corp. 90,430 2,826
Provident Bancorp, Inc.* 6,800 272
Regions Financial Corp. 13,850 635
Republic New York Corp. 16,400 1,084
Signet Banking Corp. 15,300 369
SouthTrust Corp. 25,125 744
Southern National Corp. 28,750 898
Star Banc Corp. 7,100 559
State Street Boston Corp. 20,100 1,088
Summit Bancorp 32,900 1,275
Suntrust Banks, Inc. 57,200 2,195
Synovus Financial Corp. 25,650 612
U.S. Bancorp 47,891 1,838
Union Bank of California 7,400 357
Union Planters Corp. 12,100 398
Valley National Bancorp 11,365 293
Wachovia Corp. (New) 42,520 1,945
Wells Fargo & Co. 26,000 6,468
Wilmington Trust Co. 4,900 160
Zions Bancorp 2,900 251
-------
121,304
-------
BUSINESS MACHINES & SOFTWARE--7.5%
3COM Corp.* 43,400 2,029
Adobe Systems, Inc. 23,800 832
Amdahl Corporation* 32,100 319
America Online, Inc.* 21,100 640
Apple Computer, Inc. 38,700 941
Autodesk, Inc. 12,200 282
BMC Software, Inc.* 12,100 904
Bay Networks, Inc.* 53,923 1,483
Cabletron Systems, Inc.* 24,250 1,479
Ceridian Corp.* 17,480 745
Cirrus Logic, Inc.* 12,200 188
Cisco Systems, Inc.* 172,300 9,078
Compaq Computer Corp.* 70,600 3,998
Computer Assoc. International, Inc. 96,075 5,044
Computer Sciences Corp.* 20,498 1,435
Compuware Corp.* 11,000 476
Dell Computer Corp.* 27,300 1,831
Diebold, Inc. 17,212 884
</TABLE>
F-3
<PAGE> 153
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Digital Equipment Corp.* 38,400 $ 1,483
EMC Corp.* 55,900 1,076
Electronic Arts, Inc.* 11,400 353
Electronics for Imaging, Inc.* 7,500 471
Gateway 2000, Inc.* 24,000 1,074
Hewlett Packard Co. 267,400 11,699
Honeywell, Inc. 33,800 1,965
Informix Corp.* 40,700 918
International Business Machines 147,700 16,893
Intuit, Inc.* 11,800 435
Iomega Corp.* 39,000 602
Komag, Inc.* 27,200 573
McAfee Associates, Inc.* 8,000 479
Medic Computer Systems, Inc.* 6,500 227
Micron Electronics* 20,000 319
Microsoft Corp.* 158,300 19,402
Network General Corp.* 11,000 188
Novell, Inc.* 104,000 1,086
Oracle Systems Corp.* 170,275 5,992
Parametric Technology Corp.* 36,200 1,643
PeopleSoft, Inc.* 11,400 876
Pitney Bowes, Inc. 39,300 1,896
Policy Management Systems Corp.* 3,000 106
Safeguard Scientifics, Inc.* 7,000 226
Seagate Technology, Inc.* 26,830 1,288
Security Dynamics Technology* 4,000 264
Shiva Corp.* 8,400 424
Silicon Graphics, Inc.* 47,900 1,114
Sterling Software, Inc.* 7,200 489
Storage Technology Corp.* 14,800 561
Sun Microsystems, Inc.* 49,500 2,688
Sybase, Inc.* 15,120 243
Synopsys, Inc.* 9,800 373
Tandem Computers, Inc.* 47,800 502
Unisys Corp.* 69,900 411
Western Digital Corp.* 8,800 309
Xerox Corp. 89,500 4,911
-------
116,147
-------
BUSINESS SERVICES--3.1%
American Management Systems, Inc.* 11,000 279
Apria Healthcare Group, Inc.* 14,000 354
Automatic Data Processing, Inc. 78,200 3,255
Browning Ferris Industries Inc. 55,200 1,408
Cadence Design Systems, Inc.* 19,875 589
Cambridge Technology Partners* 12,000 342
Cintas Corp. 16,100 879
Comdisco, Inc. 22,022 573
</TABLE>
F-4
<PAGE> 154
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Concord EFS, Inc.* 14,850 $ 379
Corrections Corp. of America* 18,000 581
Credit Acceptance Corp.* 7,000 154
Deluxe Corp. 20,400 780
Dun & Bradstreet Corp. 47,600 2,743
Ecolab, Inc. 14,400 437
Equifax, Inc. 39,000 995
FHP International Corp.* 10,500 380
First Data Corp. 61,551 4,801
Fiserv, Inc.* 8,975 302
FlightSafety International, Inc. 9,800 434
Foundation Health Corp.* 12,200 366
GTECH Holdings Corp.* 15,700 436
Gartner Group Inc. Class A (New)* 24,300 759
H & R Block, Inc. 22,700 568
HBO & Co. 24,600 1,341
Health Care & Retirement Corp.* 10,050 249
Health Management Associates, Inc. Class A* 21,168 482
HealthCare Compare Corp.* 6,000 257
Healthsource, Inc.* 17,000 255
Interpublic Group of Companies, Inc. 19,900 900
Kelly Services, Inc. Class A 5,525 155
Laboratory Corp. of America Holdings, Inc.* 18,648 75
Manpower, Inc. 19,500 695
Medaphis Corp.* 25,200 321
Medpartners/Mullikin, Inc.* 13,000 270
National Service Industries, Inc. 12,200 464
Olsten Corp. 22,275 621
Omnicom Group, Inc. 19,100 867
OrNda Healthcorp* 16,300 420
PHH Corp. 9,000 260
PacifiCare Health Systems, Inc. Class B* 9,300 746
Paychex, Inc. 22,725 1,221
PhyCor Inc.* 12,300 401
Quorum Health Group, Inc.* 13,100 332
R.R. Donnelley & Sons Co. 37,500 1,223
Republic Industries, Inc.* 50,000 1,300
Reynolds & Reynolds Co. Class A 10,200 511
Robert Half International, Inc.* 23,100 762
SUPERVALU, Inc. 15,800 444
Safety-Kleen Corp. 8,600 148
Sanifill Inc. 6,500 301
Service Corp. International 33,700 1,900
Shared Medical Systems Corp. 7,600 414
Steris Corp.* 9,000 276
Stewart Enterprises, Inc. Class A 13,050 445
SunGard Data Systems, Inc.* 8,800 375
Total System Services, Inc. 31,800 719
</TABLE>
F-5
<PAGE> 155
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
U.S.A. Waste Services, Inc.* 30,500 $ 839
United Waste Systems, Inc.* 9,000 263
Value Health, Inc.* 9,082 144
Vencor Inc.* 15,775 495
Viad Corp. 20,100 286
WMX Technologies, Inc. 132,000 4,175
Wallace Computer Services, Inc. 6,800 184
Wellpoint Health Networks, Inc. Class A* 17,275 536
Wheelabrator Technologies, Inc. 37,300 555
------
48,421
------
CHEMICAL--3.4%
A. Schulman, Inc. 10,000 221
ARCO Chemical Co. 25,600 1,229
Air Products & Chemicals, Inc. 29,100 1,593
Albemarle Corp. 25,400 410
Betz Laboratories, Inc. 4,100 201
Cabot Corp. 17,800 490
Cytec Industries, Inc.* 13,755 478
Dow Chemical Co. 67,300 5,367
E.I. Du Pont de Nemours & Co. 147,500 12,113
Eastman Chemical Co. 23,725 1,326
Ethyl Corp. 31,300 282
Georgia Gulf Corp. 12,600 397
Great Lakes Chemical Corp. 14,500 834
Hercules, Inc. 29,300 1,458
International Speciality Products, Inc.* 15,400 169
Loctite Corp. 9,300 408
Lubrizol Corp. 15,600 443
Lyondell Petrochemical Co. 16,300 371
M.A. Hanna Co. 10,725 233
Minnesota Mining & Manufacturing Co. 113,700 7,817
Monsanto Co. 155,500 4,995
Morton International, Inc. 36,900 1,370
Nalco Chemical Co. 14,800 475
Olin Corp. 5,000 396
PPG Industries, Inc. 47,600 2,350
Praxair Inc. 47,100 1,937
RPM, Inc. 10,875 173
Rohm & Haas Co. 16,300 1,019
Sigma-Aldrich Corp. 17,500 925
Union Carbide Corp. 37,000 1,600
Valspar Corp. 2,800 132
W.R. Grace & Co. 24,900 1,634
Witco Corp. 12,900 390
------
53,236
------
</TABLE>
F-6
<PAGE> 156
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
CONSTRUCTION--0.4%
Armstrong World Industries, Inc. 8,100 $ 501
Clayton Homes, Inc. 21,077 424
Crane Co. 4,600 184
Fluor Corp. 20,300 1,299
Lafarge Corp. 16,100 306
Martin Marietta Materials, Inc. 21,400 471
Oakwood Homes Corp. 14,000 329
Owens Corning* 11,600 422
Schuller Corp. 49,300 487
Sherwin Williams Co. 27,500 1,203
Stanley Works 19,800 545
USG Corp.* 11,700 333
Vulcan Materials Co. 7,800 451
-----
6,955
-----
CONSUMER-DURABLE--0.4%
Black & Decker Corp. 19,500 770
Leggett & Platt, Inc. 18,300 522
Masco Corp. 40,400 1,177
Maytag Corp. 22,800 459
Newell Co. 37,674 1,173
Shaw Industries, Inc. 30,100 452
Snap-on Tools Corp. 10,100 461
Sunbeam Corporation 21,100 459
Whirlpool Corp. 21,100 1,034
-----
6,507
-----
CONSUMER-NONDURABLE--1.4%
American Greetings Corp. Class A 29,200 756
Apple South, Inc. 12,350 258
Applebee's International, Inc.* 5,000 145
Boston Chicken, Inc.* 15,600 541
Brinker International, Inc.* 20,225 303
Corning, Inc. 63,800 2,377
Cracker Barrel Old Country Store, Inc. 20,900 489
Darden Restaurants, Inc. 38,600 309
Duracell International, Inc. 29,500 1,331
First Brands Corp. 6,400 146
Hasbro, Inc. 23,150 851
Lancaster Colony Corp. 5,300 193
Lone Star Steakhouse & Saloon, Inc.* 7,400 246
Mattel, Inc. 72,220 1,905
McDonald's Corp. 184,600 8,561
Outback Steakhouse, Inc.* 11,250 316
Papa John's International, Inc.* 5,000 227
Premark International, Inc. 17,300 316
Rubbermaid, Inc. 36,000 954
</TABLE>
F-7
<PAGE> 157
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Starbucks Corp.* 20,500 $ 669
U S Industries Inc. New* 15,000 386
Wendy's International, Inc. 33,500 678
------
21,957
------
CONTAINERS--0.3%
Bemis Co., Inc. 13,400 400
Crown Cork & Seal, Inc. 32,700 1,529
Jefferson Smurfit Corp.* 25,900 311
Owens-Illinois, Inc.* 30,900 475
Sealed Air Corp.* 9,600 364
Sonoco Products Co. 21,310 631
Stone Container Corp. 22,112 307
------
4,017
------
ELECTRONICS--4.1%
ADC Telecommunications, Inc.* 17,700 1,007
AMP, Inc. 61,300 2,345
Adaptec, Inc.* 15,200 759
Advanced Micro Devices, Inc.* 44,900 572
Altera Corp.* 9,200 405
American Power Conversion Corp.* 14,000 193
Amphenol Corp. Class A* 6,500 128
Analog Devices, Inc.* 37,050 894
Applied Materials, Inc.* 49,700 1,205
Arrow Electronics, Inc.* 11,400 520
Ascend Communications, Inc.* 27,300 1,432
Atmel Corp.* 30,200 780
Avnet, Inc. 9,100 425
Cascade Communications Corp.* 25,300 1,722
Checkpoint Systems, Inc.* 8,000 231
Cypress Semiconductor Corp.* 15,600 181
EG&G, Inc. 7,200 135
Electronic Data Systems Corp. 130,000 7,085
FORE Systems, Inc.* 23,400 829
General Instrument Corp.* 37,000 1,013
General Signal Corp. 11,600 465
Glenayre Technologies, Inc.* 14,600 534
Harris Corp. 8,300 510
Imation Corp.* 10,760 254
Input/Output, Inc.* 11,400 403
Intel Corp. 217,300 17,343
KLA Instruments Corp.* 10,400 207
LSI Logic Corp.* 32,100 702
Linear Technology Corp. 18,700 626
Maxim Integrated Products, Inc.* 14,600 450
Mentor Graphics Corp.* 8,000 110
Micron Technology Inc. 49,200 1,119
Molex, Inc. 23,445 774
</TABLE>
F-8
<PAGE> 158
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Molex, Inc. Class A 12,366 $ 369
Motorola, Inc. 160,800 8,583
National Semiconductor Corp.* 33,300 612
Perkin-Elmer Corp. 10,300 534
Pittway Corp. Class A 6,750 317
QUALCOMM, Inc.* 14,700 637
SCI Systems, Inc.* 9,000 403
Scientific-Atlanta, Inc. 11,700 158
Sensormatic Electronics Corp. 27,150 499
Solectron Corp.* 14,100 527
Symbol Technologies, Inc.* 4,300 191
Tektronix, Inc. 7,600 295
Teradyne, Inc.* 17,900 277
Texas Instruments, Inc. 48,300 2,258
Thermo Instrument Systems, Inc.* 26,737 1,036
Thomas & Betts Corp. 10,400 382
Varian Associates, Inc. 9,300 424
VeriFone, Inc.* 6,500 310
Vicor Corp.* 12,500 309
Vishay Intertechnology, Inc.* 12,810 258
Xilinx, Inc.* 17,400 611
------
64,348
------
ENERGY-DEVELOPMENT--1.3%
Anadarko Petroleum Corp. 19,700 1,039
Apache Corp. 30,100 884
BJ Services Co.* 10,000 376
Baker Hughes, Inc. 41,200 1,246
Burlington Resources, Inc. 33,000 1,407
Chesapeake Energy Corp.* 7,500 403
Cooper Cameron Corp.* 7,500 396
Dresser Industries, Inc. 46,060 1,336
ENSCO International, Inc.* 16,400 480
Enron Oil & Gas Co. 41,100 1,063
Freeport-McMoRan, Inc. 4,250 146
Global Marine, Inc.* 51,500 740
Halliburton Co. 30,100 1,584
Louisiana Land & Exploration Co. 8,700 495
MAPCO Petroleum, Inc. 7,400 399
Mitchell Energy & Development Corp. Class A 8,000 150
NGC Corp. 31,000 469
Nabors Industries, Inc.* 21,100 314
Noble Affiliates, Inc. 12,400 498
Noble Drilling Corp.* 30,000 428
Occidental Petroleum Corp. 84,900 1,974
Parker & Parsley Petroleum Co.* 9,400 233
Reading & Bates Corp. (New)* 18,500 453
Rowan Cos., Inc. 22,000 338
</TABLE>
F-9
<PAGE> 159
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Sonat Offshore Drilling, Inc. 8,300 $ 453
Tidewater, Inc. 15,000 576
Union Texas Petroleum Holdings, Inc. 21,100 438
United Meridian Corp.* 7,500 298
Valero Energy Corp. 6,600 139
Vastar Resources 29,800 1,039
Weatherford Enterra, Inc.* 9,400 270
------
20,064
------
FOOD-AGRICULTURE--5.6%
Archer-Daniels-Midland Co. 142,443 2,528
CPC International, Inc. 38,000 2,617
Campbell Soup Co. 65,600 4,272
Coca-Cola Co. 658,600 32,930
Coca-Cola Enterprises, Inc. 34,200 1,381
ConAgra, Inc. 61,824 2,604
Dean Foods Co. 6,150 159
Dole Food Company, Inc. 13,100 542
Earthgrains Co. 2,388 81
Flowers Industries, Inc. 15,000 270
General Mills, Inc. 43,600 2,398
H.J. Heinz Co. 105,100 3,311
Hershey Foods Corp. 20,400 1,777
Hormel Foods Corp. 19,100 406
IBP, Inc. 20,400 477
IMC Global, Inc. 24,760 1,065
Interstate Bakeries Corp. (New)* 18,600 563
Kellogg Co. 58,400 3,942
McCormick & Co., Inc. 15,400 318
Nabisco Holdings Corp. Class A 14,000 471
Pepsico, Inc. 414,600 11,920
Pioneer HI Bred International, Inc. 19,400 1,069
Quaker Oats Co. 34,600 1,137
Ralston Purina Co. 26,300 1,644
Richfood Holdings, Inc. 8,500 321
Sara Lee Corp. 130,900 4,123
Sysco Corp. 46,700 1,500
Terra Industries, Inc. 11,100 147
Tyson Foods, Inc. Class A 46,200 1,123
Universal Corp. 9,500 240
Universal Foods Corp. 4,100 117
Whitman Corp. 23,900 535
Wm Wrigley Junior Co. 35,000 1,894
------
87,882
------
</TABLE>
F-10
<PAGE> 160
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
GOLD--0.2%
Homestake Mining Co. 37,800 $ 624
Newmont Gold Co. 28,600 1,541
Newmont Mining Corp. 26,132 1,382
Santa Fe Pacific Gold Corp. 25,720 334
------
3,881
------
HEALTHCARE--9.6%
ALZA Corp.* 27,600 756
Abbott Laboratories 210,200 9,485
Allergan, Inc. 15,700 610
American Home Products Corp. 170,100 10,078
Amgen, Inc.* 67,700 3,948
Bausch & Lomb Inc. 13,100 434
Baxter International, Inc. 74,600 3,329
Beckman Instruments, Inc. 4,300 159
Becton Dickinson & Co. 35,800 1,463
Bergen Brunswig Corp. Class A 6,483 181
Beverly Enterprises, Inc.* 18,400 189
Biogen, Inc.* 7,400 514
Biomet, Inc.* 25,900 403
Boston Scientific Corp.* 49,271 2,260
Bristol Myers Squibb Co. 131,900 11,574
C.R. Bard, Inc. 13,600 422
Cardinal Health, Inc. 19,662 1,443
Caremark International, Inc. 17,475 435
Centocor, Inc.* 20,600 695
Chiron Corp.* 49,612 967
Columbia/HCA Healthcare Corp. 122,172 6,887
Dentsply International, Inc. 4,100 168
Dura Pharmaceuticals, Inc.* 9,000 313
Eli Lilly & Co. 150,284 8,604
Forest Laboratories, Inc.* 9,300 382
Genentech Inc.* 34,300 1,801
Genesis Health Ventures, Inc.* 8,000 204
Genetics Institute* 6,300 393
Genzyme Corp. General Division* 12,000 289
Guidant Corp. 17,168 871
HealthSouth Rehabilitation Corp.* 41,600 1,347
Hillenbrand Industries, Inc. 15,000 486
Humana Inc.* 46,500 872
IDEXX Laboratories, Inc.* 9,800 383
IVAX Corp. 29,700 479
Interneuron Pharmaceuticals* 10,500 326
Johnson & Johnson 354,200 17,444
Lincare Holdings, Inc.* 7,500 279
Mallinckrodt Group, Inc. 25,600 1,037
Manor Care, Inc. 14,550 500
</TABLE>
F-11
<PAGE> 161
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
McKesson Corp. (New) 9,700 $ 413
Medtronic, Inc. 62,500 3,250
Merck & Co., Inc. 328,654 21,568
Mylan Laboratories, Inc. 25,550 418
Nellcor Puritan Bennett, Inc.* 15,000 388
Omnicare, Inc. 26,600 652
Pfizer, Inc. 168,000 11,928
Quintiles Transnational Corp.* 6,000 452
R.P. Scherer Corp.* 3,600 173
Rhone-Poulenc Rorer, Inc. 34,000 2,393
Schering Plough Corp. 98,600 5,509
St. Jude Medical, Inc.* 26,450 951
Stryker Corp. 21,600 531
Sybron International Corp.* 9,800 270
Tenet Healthcare Corp.* 55,368 1,163
Thermo Cardiosystems, Inc.* 7,500 256
Thermotrex Corp.* 5,000 188
United Healthcare Corp. 44,900 1,734
United States Surgical Corp. 15,300 558
Vivra, Inc.* 11,000 331
Warner Lambert Co. 71,400 4,248
Watson Pharmaceuticals, Inc.* 9,500 273
-------
150,057
-------
HOUSEHOLD PRODUCTS--2.1%
Alberto Culver Co. Class B Convertible 4,500 186
Avon Products, Inc. 35,200 1,685
Clorox Co. 13,300 1,245
Colgate-Palmolive Co. 41,500 3,372
Dial Corp. (New)* 20,100 231
Gillette Co. 116,500 7,427
International Flavors & Fragrances, Inc. 32,500 1,398
Procter & Gamble Co. 183,900 16,344
Tambrands, Inc. 8,900 378
Thermolase Corp.* 5,700 131
Tupperware Corp.* 17,300 757
-------
33,154
-------
IMAGING & PHOTO--0.5%
C-Cube Microsystems, Inc.* 8,000 306
Eastman Kodak Co. 93,900 6,808
Polaroid Corp. 10,700 453
-------
7,567
-------
INSURANCE--4.1%
AFLAC, Inc. 39,825 1,369
AMBAC, Inc. 9,300 506
Aetna, Inc. 47,565 3,145
Alleghany Corp.* 2,896 585
</TABLE>
F-12
<PAGE> 162
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Allmerica Property & Casualty Companies, Inc. 10,700 $ 302
Allstate Corp. 119,124 5,316
American General Corp. 54,500 1,989
American International Group, Inc. 127,225 12,086
American National Insurance Co. 5,700 392
American Re Corp. 11,300 713
Aon Corp. 27,350 1,381
Bankers Life Holdings Corp. 6,900 169
CNA Financial Corp.* 18,400 1,849
Chubb Corp. 55,100 2,445
Cigna Corp. 20,700 2,404
Cincinnati Financial Corp. 14,238 778
Conseco, Inc. 8,000 336
Equitable Companies, Inc. 45,100 1,111
Equitable of Iowa Companies 4,700 173
First Colony Corp. 14,450 508
General Re Corp. 20,700 2,999
Hartford Steam Boiler Inspection & Ins., Co. 2,700 120
Health Systems International, Inc.* 10,400 254
ITT Hartford Group, Inc. 28,900 1,524
Jefferson-Pilot Corp. 19,850 1,020
Liberty Financial Cos. 7,000 214
Lincoln National Corp., Inc. 25,100 1,111
MBIA Corp. 13,500 1,100
MGIC Investment Corp. 17,700 1,122
Marsh & McLennan Companies 21,400 1,990
Mercury General Corp. 4,200 190
Ohio Casualty Corp. 5,300 170
Old Republic International Corp. 17,850 397
Oxford Health Plans, Inc.* 21,900 999
Paul Revere Corp. 6,900 196
Progressive Corp. 16,400 892
Protective Life Corp. 13,800 486
Provident Companies, Inc. 12,000 444
Providian Corp. 25,400 1,051
Reliastar Financial Corp. 12,500 552
Safeco Corp. 39,600 1,317
St. Paul Companies, Inc. 22,300 1,154
Sunamerica, Inc. 17,050 1,162
TIG Holdings, Inc. 16,300 469
The PMI Group, Inc.* 10,000 489
Torchmark Corp. 15,650 665
Transamerica Corp. 20,500 1,397
Transatlantic Holdings, Inc. 5,800 402
UNUM Corp. 19,808 1,258
USF&G Corp. 32,700 527
USLIFE Corp. 5,400 158
United Companies Financial Corp. 7,000 266
</TABLE>
F-13
<PAGE> 163
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
United Insurance Companies, Inc.* 12,000 $ 280
Unitrin, Inc. 7,200 363
Western National Corp. 9,500 179
------
64,474
------
MEDIA--2.5%
A.H. Belo Corp. Class A 18,000 722
BHC Communications, Inc. Class A* 5,700 530
Chris-Craft Industries, Inc.* 4,555 184
Clear Channel Communications* 9,600 791
Comcast Corp. Class A 69,400 1,123
Cox Communications, Inc. Class A* 67,306 1,329
Dow Jones & Co., Inc. 22,000 861
E.W. Scripps Co. Class A 19,675 876
Gannett, Inc. 39,800 2,667
Harte Hanks Communications (New) 9,100 232
Infinity Broadcasting Corp. Class A* 20,587 564
King World Productions, Inc.* 9,000 317
Knight-Ridder, Inc. 28,800 972
Lee Enterprises, Inc. 7,000 144
Lin Television Corp.* 10,550 378
Marvel Entertainment Group, Inc.* 14,500 125
McGraw-Hill, Inc. 24,100 988
Media General, Inc. Class A 7,000 218
Meredith Corp. 8,000 344
New York Times Co. Class A 21,313 666
Pulitzer Publishing Co.* 2,300 125
Reader's Digest Assoc., Inc. Class A 28,800 1,163
Regal Cinemas, Inc.* 5,000 184
Renaissance Communications Corp.* 7,000 247
SBC Communications, Inc. 160,128 7,466
Scholastic Corp.* 2,800 190
Tele Communications, Inc. (New)--TCI Group Series A* 187,346 2,775
Tele-Communications, Inc. (Liberty Media Group)
Class A* 38,086 1,009
Time Warner Inc. 108,480 3,621
Times Mirror Co. (New) Series A 26,400 1,145
Tribune Co. (New) 15,600 1,121
Turner Broadcasting System, Inc. Class A 17,200 428
Turner Broadcasting System, Inc. Class B 54,100 1,339
United Television, Inc. 3,000 284
Viacom Inc. Class A* 18,212 569
Viacom Inc. Class B* 95,074 2,995
Washington Post Co. Class B 2,500 808
------
39,500
------
MISCELLANEOUS FINANCE--4.1%
A.G. Edwards & Sons, Inc. 15,562 436
ADVANTA Corp. Class A 14,600 714
AT&T Capital Corp. 10,900 486
</TABLE>
F-14
<PAGE> 164
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
American Express Co. 132,900 $ 5,814
Bear Stearns Companies, Inc. 37,275 871
Beneficial Corp. 13,000 733
Berkshire Hathaway, Inc.* 325 10,173
Capital One Financial Corp. 17,000 512
Charter One Financial, Inc. 12,500 476
Countrywide Credit Industries, Inc. 25,985 627
Dean Witter Discover & Co. 43,995 2,200
Federal Home Loan Mortgage Corp. 49,600 4,383
Federal National Mortgage Assoc. 296,800 9,201
Finova Group, Inc. 10,800 594
First USA, Inc. 18,200 965
Franklin Resources, Inc. 22,200 1,321
GATX Corp. 5,000 231
Golden West Financial Corp. 19,200 1,066
Great Western Financial Corp. 30,800 762
Green Tree Financial Corp. 33,000 1,147
Greenpoint Financial Corp. 13,000 463
H.F. Ahmanson & Co. 24,800 626
Household International, Inc. 25,300 2,005
Lehman Brothers Holdings, Inc. 22,880 483
Leucadia National Corp. 13,000 296
Mercury Finance Co. 35,563 413
Merrill Lynch & Co., Inc. 45,300 2,775
Money Store Inc. 15,000 364
Morgan Stanley Group, Inc. 45,100 2,154
Paine Webber Group, Inc. 25,125 518
Salomon Inc. 27,100 1,220
Standard Federal Bank 10,700 448
Student Loan Marketing Assoc. 15,100 1,112
T. Rowe Price Associates, Inc. 13,200 384
TCF Financial Corp. 12,800 478
Travelers Group, Inc. 123,325 5,349
United Asset Management Corp. 18,400 426
Washington Mutual, Inc. 24,125 875
Wesco Financial Corp. 2,100 365
------
63,466
------
MOTOR VEHICLE--2.3%
Chrysler Corp. 204,600 5,959
Cummins Engine, Inc. 10,400 391
Dana Corp. 22,300 669
Eaton Corp. 17,900 991
Echlin Inc. 13,800 421
Fleetwood Enterprises, Inc. 19,200 533
Ford Motor Co. 317,700 10,643
General Motors Corp. 203,000 10,099
General Motors Corp. Class H 28,000 1,565
</TABLE>
F-15
<PAGE> 165
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Genuine Parts Co. 29,450 $ 1,263
Harley-Davidson, Inc. 20,700 849
PACCAR, Inc. 7,660 349
TRW, Inc. 17,600 1,628
------
35,360
------
NON-FERROUS--0.6%
Alumax, Inc.* 12,500 413
Aluminum Company of America 51,000 3,168
Asarco, Inc. 10,800 279
Cyprus Amax Minerals Co. 18,300 389
Engelhard Corp. 32,687 666
Freeport-McMoRan Copper & Gold, Inc. Class A 29,531 831
Freeport-McMoRan Copper & Gold, Inc. Class B 49,894 1,466
Phelps Dodge Corp. 15,400 932
Reynolds Metals Co. 14,800 792
------
8,936
------
OIL-DOMESTIC--1.2%
Amerada Hess Corp. 24,500 1,246
Ashland, Inc. 18,600 691
Atlantic Richfield Co. 46,100 5,382
FINA, Inc. Class A 8,000 403
Kerr-McGee Corp. 17,000 975
Murphy Oil Corp. 11,370 497
Oryx Energy Co.* 28,200 494
Pennzoil Co. 11,000 587
Phillips Petroleum Co. 72,700 2,944
Pogo Producing Co. 10,000 341
Santa Fe Energy Resources, Inc.* 13,600 160
Smith International, Inc. 10,000 348
Sun, Inc. 15,900 376
Tosco Corp. 9,300 446
USX Corp. (Marathon Group) (New) 81,000 1,691
Ultramar Corp. 11,800 325
Unocal Corp. 71,534 2,450
------
19,356
------
OIL-INTERNATIONAL--4.2%
Amoco Corp. 131,700 9,087
Chevron Corp. 176,800 10,409
Exxon Corp. 329,500 26,813
Mobil Corp. 106,500 12,008
Texaco, Inc. 71,300 6,328
Western Atlas, Inc.* 12,600 765
------
65,410
------
PAPER--1.6%
Alco Standard Corp. 32,300 1,409
Boise Cascade Corp. 10,000 338
</TABLE>
F-16
<PAGE> 166
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Bowater, Inc. 7,600 $ 274
Champion International Corp. 27,500 1,183
Consolidated Papers, Inc. 9,100 469
Fort Howard Corp.* 20,000 474
Georgia Pacific Corp. 24,300 1,807
International Paper Co. 85,100 3,404
James River Corp. 20,600 536
Kimberly Clark Corp. 75,330 5,904
Louisiana Pacific Corp. 24,000 522
Mead Corp. 11,500 658
Potlatch Corp. 4,300 162
Rayonier, Inc. 13,875 550
St. Joe Corp. 6,800 418
Temple-Inland, Inc. 19,400 958
Thermo Fibertek, Inc.* 9,150 118
Union Camp Corp. 16,300 791
Westvaco Corp. 28,300 810
Weyerhaeuser Co. 52,400 2,338
Willamette Industries, Inc. 17,000 1,056
------
24,179
------
PRODUCER GOODS-MANUFACTURING--5.4%
AGCO Corp. 19,600 463
Airgas, Inc.* 20,600 464
Allied Signal, Inc. 76,900 4,749
American Financial Group, Inc. 24,100 750
American Standard Co.* 20,000 683
Avery Dennison Corp. 11,400 583
Blyth Industries, Inc.* 10,000 460
Boise Cascade Office Products Corp.* 16,400 344
Briggs & Stratton Corp. 4,300 187
Case Corp. 23,900 1,087
Caterpillar, Inc. 54,400 3,747
Cincinnati Milacron, Inc. 5,100 101
Cooper Industries, Inc. 30,300 1,227
Corporate Express, Inc.* 22,900 862
Deere & Co. 71,500 2,842
Dover Corp. 34,600 1,518
Emerson Electric Co. 59,100 4,950
FMC Corp. (New)* 13,600 870
Federal Signal Corp. 10,066 228
Foster Wheeler Corp. 9,800 423
General Electric Co. 440,100 36,583
Harnischfeger Industries Corp. 10,100 381
Harsco Corp. 6,700 408
Hubbell, Inc. Class B 15,938 576
ITT Industries, Inc. 31,600 723
Illinois Tool Works, Inc. 29,600 2,046
</TABLE>
F-17
<PAGE> 167
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Ingersoll Rand Co. 33,700 $ 1,441
JLG Industries, Inc. 11,000 212
Johnson Controls, Inc. 8,800 620
Mark IV Industries, Inc. 14,672 315
Millipore Corp. 12,400 474
Nordson Corp. 2,700 139
Pall Corp. 24,533 577
Parker Hannifin Corp. 24,250 946
Pentair, Inc. 6,200 169
Presstek, Inc.* 4,000 252
Raychem Corp. 9,700 666
TRINOVA Corp. 7,000 220
Tecumseh Products Co. Class A 3,500 184
Tenneco, Inc. 43,000 2,139
Thermo Electron Corp. 39,137 1,551
Timken Co. 7,800 296
Trinity Industries, Inc. 11,950 387
Tyco Interest Ltd 37,614 1,589
U.S. Filter Corp. (New)* 10,000 261
Varity Corp.* 15,100 759
W.W. Grainger, Inc. 14,000 945
Westinghouse Electric Corp. 109,600 1,795
York International Corp. 8,400 379
------
83,571
------
RAILROAD--1.1%
Alexander & Baldwin, Inc. 6,700 173
Burlington Northern Santa Fe 39,951 3,196
CSX Corp. 54,700 2,769
Conrail Inc. 21,600 1,472
Illinois Central Corp. Class A 15,525 470
Kansas City Southern Industries, Inc. 14,700 595
Norfolk Southern Corp. 34,200 2,851
Southern Pacific Rail Corp.* 39,363 1,122
Union Pacific Corp. 52,900 3,855
Wisconsin Central Transportation Corp.* 12,900 453
------
16,956
------
REAL PROPERTY--0.2%
HFS, Inc.* 34,600 2,072
Host Marriott Corp.* 67,500 928
Rouse Co. 11,500 298
------
3,298
------
RETAIL--5.6%
Albertson's, Inc. 72,100 3,055
American Stores Co. (New) 36,700 1,509
AutoZone, Inc.* 38,500 1,049
Barnes & Noble, Inc.* 5,100 168
</TABLE>
F-18
<PAGE> 168
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Bed Bath & Beyond, Inc.* 24,800 $ 563
Best Buy Co., Inc.* 11,000 242
CDW Computer Centers, Inc.* 5,000 327
CUC International, Inc.* 63,625 2,187
Circuit City Stores, Inc. 25,700 810
CompUSA, Inc.* 13,000 522
Consolidated Stores Corp.* 19,400 737
Dayton Hudson Corp. 58,500 2,018
Dillard Department Stores, Inc. Class A 32,200 1,095
Dollar General Corp. 22,360 721
Family Dollar Stores, Inc. 14,000 238
Fastenal Co. 9,700 455
Federated Department Stores, Inc.* 51,200 1,773
Food Lion, Inc. Class A 150,450 1,302
Food Lion, Inc. Class B 64,800 527
Fruit of the Loom, Inc. Class A* 18,800 522
Gap Inc. 79,000 2,765
General Nutrition Companies, Inc.* 23,600 350
Giant Food Inc. Class A 13,700 461
Global Directmail Corp.* 10,000 453
Great Atlantic & Pacific Tea Co., Inc. 5,700 152
Hannaford Bros. Co., Inc. 13,300 446
Harcourt General, Inc. 20,200 967
Heilig-Meyers Co. 7,350 130
Home Depot, Inc. 124,866 6,634
Home Shopping Network, Inc.* 23,000 247
J.C. Penney, Inc. 62,300 3,294
Jack Eckerd Corp.* 17,400 426
Just for Feet, Inc.* 5,000 223
K Mart Corp. 135,700 1,357
Kohl's Corp.* 18,200 692
Kroger Co.* 31,200 1,322
Limited, Inc. 66,119 1,223
Lowes Cos, Inc. 42,100 1,521
May Department Stores Co. 75,900 3,453
Melville Corp. 31,300 1,322
Mercantile Stores Co., Inc. 8,300 438
Neiman Marcus Group Inc.* 11,800 350
Nordstrom, Inc. 22,900 893
Office Depot, Inc.* 37,300 592
OfficeMax, Inc.* 26,100 365
Payless Shoesource, Inc.* 9,600 337
Pep Boys--Manny, Moe & Jack 13,700 459
Petsmart Inc.* 27,400 750
Price Costco, Inc.* 47,704 951
Revco D.S., Inc.* 16,000 412
Rite Aid Corp. 17,900 571
Safeway, Inc.* 55,800 2,023
</TABLE>
F-19
<PAGE> 169
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Sears Roebuck & Co. 111,400 $ 4,902
Southland Corp.* 70,000 221
Spiegel, Inc. Class A (Non Voting) 28,000 233
Staples, Inc.* 38,605 765
Sunglass Hut International Inc.* 14,000 221
TJX Companies, Inc. 26,100 835
Tandy Corp. 18,058 797
Thrifty Payless* 15,000 242
Tiffany & Co. (New) 10,000 349
Toys 'R' Us, Inc.* 70,280 2,073
Viking Office Products, Inc.* 30,200 781
Vons Companies, Inc.* 11,700 518
Wal-Mart Stores, Inc. 605,900 16,056
Walgreen Co. 68,700 2,267
Weis Markets, Inc. 7,900 270
Winn Dixie Stores Inc. 38,300 1,317
Woolworth Corp.* 29,800 633
------
87,879
------
STEEL--0.3%
AK Steel Holding Corp. 7,500 279
Allegheny Teldyne Inc. 58,280 1,180
Bethlehem Steel Corp.* 28,600 293
Inland Steel Industries, Inc. 8,600 148
LTV Corp. 19,200 226
Nucor Corp. 26,100 1,220
USX Corp. (U.S. Steel Group) 19,160 527
Worthington Industries Inc. 16,700 339
------
4,212
------
TELEPHONE--6.7%
360 Communications Co.* 26,944 643
AT&T Corp. 429,817 22,565
Adtran, Inc.* 9,600 608
Airtouch Communications Inc.* 131,000 3,603
Alltel Corp. 46,400 1,311
Ameritech Corp. (New) 144,700 7,470
Andrew Corp.* 17,075 764
Aspect Telecommunications Corp.* 5,000 259
Bell Atlantic Corp. 115,726 6,510
BellSouth Corp. 267,400 9,693
Century Telephone Enterprises, Inc. 13,750 466
Cincinnati Bell Inc. 15,400 735
Comsat Corp. Series 1 17,000 385
DSC Communications Corp.* 35,900 1,066
Frontier Corp. 42,200 1,245
GTE Corp. 259,700 10,226
LCI International Inc.* 17,000 601
MCI Communications Corp. 178,100 4,486
</TABLE>
F-20
<PAGE> 170
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
MFS Communications Co., Inc.* 60,355 $ 2,554
Nextel Communications, Inc.* 66,000 1,085
Nynex Corp. 118,200 5,097
Octel Communications Corp.* 8,200 239
Pacific Telesis Group 112,700 3,649
Paging Network, Inc.* 30,300 540
Pairgain Technologies, Inc.* 12,000 800
PictureTel Corp. (New)* 4,800 157
Southern New England Telecommunications 13,800 526
Sprint Corp. 118,134 4,799
Telephone & Data Systems, Inc. 12,600 537
Tellabs, Inc.* 21,800 1,382
U S WEST, Inc. (Communications Group) 129,510 3,821
U S WEST, Inc. (Media Group)* 124,700 2,260
U.S. Robotics, Inc. 21,800 1,150
United States Cellular Corp.* 19,500 590
Worldcom, Inc.* 97,234 2,036
-------
103,858
-------
TOBACCO--1.8%
American Brands, Inc. 51,300 2,084
Loew's Corp. 33,500 2,504
Philip Morris Companies, Inc. 222,300 19,951
RJR Nabisco Holdings Corp. 67,536 1,781
UST, Inc. 54,200 1,626
-------
27,946
-------
TRANSPORTATION-MISCELLANEOUS--0.2%
Amerco, Inc.* 8,900 273
Caliber Systems, Inc. 10,000 174
Consolidated Freightways Inc. 7,900 182
Federal Express Corp.* 17,800 1,333
Fritz Companies, Inc.* 10,000 149
Pittston Services Group 9,900 280
Ryder System, Inc. 19,800 562
-------
2,953
-------
TRAVEL & RECREATION--1.4%
Bally Entertainment Corp.* 13,000 354
Brunswick Corp. 28,900 611
Callaway Golf Co. 19,000 627
Circus Circus Enterprises, Inc.* 25,400 864
Coleman Co., Inc. (New)* 7,200 122
Gaylord Entertainment Co. Class A 20,359 499
Grand Casinos, Inc.* 11,100 201
Harrahs Entertainment, Inc.* 25,100 477
Hilton Hotels Corp. 11,500 1,229
ITT Corp. (New)* 28,900 1,539
International Game Technology 33,600 685
</TABLE>
F-21
<PAGE> 171
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
La Quinta Inns, Inc. 19,200 $ 367
MGM Grand, Inc.* 13,500 510
Marriot International, Inc. 38,100 2,091
Mirage Resorts, Inc.* 49,100 1,142
Polaris Industries, Inc.* 7,000 201
Promus Hotel Corp.* 15,200 458
Walt Disney Co. 179,507 10,232
------
22,209
------
UTILITIES--4.9%
AES Corp.* 16,559 586
AGL Resources, Inc. 14,600 296
Allegheny Power System, Inc. 28,100 832
American Electric Power Co., Inc. 48,900 2,029
American Water Works Co., Inc. 19,600 419
Atlantic Energy, Inc. 7,800 138
Baltimore Gas & Electric Co. 47,150 1,226
Boston Edison Co. 12,900 298
Brooklyn Union Gas Co. 7,350 199
CIPSCO, Inc. 5,000 178
CMS Energy Corp. 27,900 834
Calenergy Co.,Inc.* 14,600 442
Carolina Power & Light Co. 38,500 1,343
Centerior Energy Corp. 23,600 180
Central & South West Corp. 55,800 1,472
Cinergy Corp. 49,565 1,487
Citizens Utilities Co. Class A* 53,909 633
Citizens Utilities Co. Class B* 8,241 97
Coastal Corp. 26,300 1,042
Columbia Gas System, Inc. 19,100 1,074
Consolidated Edison Co. 69,700 1,821
Consolidated Natural Gas Co. 22,600 1,229
DPL Inc. 21,850 516
DQE, Inc. 17,050 473
DTE Energy Co. 37,100 1,057
Delmarva Power & Light Co. 15,700 322
Dominion Resources, Inc. 45,150 1,687
Duke Power Co. 59,800 2,796
ENSERCH Corp. 24,500 493
Edison International 125,600 2,182
El Paso Natural Gas Co. 14,941 622
Enova Corp. 24,300 556
Enron Corp. 79,600 3,194
Entergy Corp. 59,421 1,508
Equitable Resources, Inc. 5,100 146
FPL Group, Inc. 48,200 2,133
Florida Progress Corp. 30,400 1,053
GPU, Inc. 28,100 885
</TABLE>
F-22
<PAGE> 172
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
Hawaiian Electric Industries, Inc. 7,900 $ 276
Houston Industries, Inc. 69,900 1,520
IPALCO Enterprises, Inc. 15,000 405
Idaho Power Co. 5,400 178
Illinova Corp. 16,300 426
K N Energy, Inc. 7,000 241
KU Energy Corp. 5,500 163
Kansas City Power & Light Co. 15,900 437
LG&E Energy Corp. 25,900 589
Long Island Lighting Co. 24,300 419
MCN Corp. 17,600 471
Midamerican Energy Co. 34,461 547
Montana Power Co. 7,900 171
NICOR, Inc. 10,300 323
NIPSCO Industries, Inc. 13,900 514
National Fuel Gas Co. 5,800 215
Nevada Power Co. 13,000 268
New England Electric Co. 13,800 450
New York State Electric & Gas Corp. 16,400 353
Niagara Mohawk Power Corp. 25,200 208
NorAm Energy Co. 25,215 369
Northeast Utilities 25,900 330
Northern States Power Co. 15,200 694
Ohio Edison Co. 34,000 714
Oklahoma Gas & Electric Co. 10,200 413
P P & L Resources, Inc. 39,720 894
Pacific Enterprises 18,300 547
Pacific Gas & Electric Co. 105,300 2,382
Pacificorp 73,500 1,479
Panenergy Corp. 36,800 1,219
Peco Energy Co. 60,500 1,422
Peoples Energy Corp. 9,500 323
Pinnacle West Capital Corp. 19,300 555
Portland General Corp. 13,200 479
Potomac Electric Power Co. 39,500 973
Public Service Co. of Colorado 14,300 509
Public Service Enterprise Group 73,000 1,980
Puget Sound Power & Light Co. 16,200 371
Questar Corp. 17,900 649
SCANA Corp. 25,800 703
Sonat, Inc. 22,500 993
Southern Co. 179,700 4,066
Southwestern Public Service Co. 12,000 393
Teco Energy Inc. 27,200 649
Texas Utilities Co. 63,200 2,591
Unicom Corp. 52,900 1,217
Union Electric Co. 28,400 1,061
UtiliCorp United, Inc. 13,900 401
</TABLE>
F-23
<PAGE> 173
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
August 31, 1996
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
WPL Holdings, Inc. 4,400 $ 134
Washington Gas Light Co. 6,200 136
Washington Water Power Co. 7,700 142
Western Resources, Inc. 14,231 418
Williams Cos., Inc. 30,060 1,499
Wisconsin Energy Corp. 26,000 694
---------
77,051
---------
TOTAL COMMON STOCK
(Cost $1,209,274) 1,553,313
---------
PREFERRED STOCK--0.0%
Aetna, Inc. 6.25% Class C (Voting) 2,922 203
Airtouch Communications, Inc. 6.00% Class B
(Convertible) 4,243 122
Airtouch Communications, Inc. 4.25% Class C
(Convertible) 2,725 130
---------
TOTAL PREFERRED STOCK
(Cost $448) 455
---------
WARRANTS--0.0%
UTILITIES--0.0%
AES Corp. (Exp 7/31/00)* 25 0
---------
TOTAL WARRANTS
(Cost $0) 0
---------
</TABLE>
F-24
<PAGE> 174
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Maturity Value
(000s) (000s)
--------- ----------
<S> <C> <C>
REPURCHASE AGREEMENT--0.3%
PNC Bank, N.A. 4.50%, Dated 08/30/96;
Due 09/03/96; Collateralized By:
Federal Home Loan Mortgage Corporation:
$8,230,000 Par; 6.50%, Due 10/15/08 $5,435 $ 5,432
---------
TOTAL REPURCHASE AGREEMENT
(Cost $5,432) 5,432
---------
TOTAL INVESTMENTS--99.9%
(Cost $1,215,154) 1,559,200
---------
OTHER ASSETS AND LIABILITIES--0.1%
Other Assets 5,536
Liabilities (4,677)
---------
859
---------
NET ASSETS--100.0%
Applicable to 86,013,083 outstanding shares,
$0.00001 par value (unlimited shares authorized) $1,560,059
==========
NET ASSET VALUE PER SHARE $18.14
=====
</TABLE>
- ---------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
F-25
<PAGE> 175
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<S> <C>
Investment income:
Dividends $ 26,356
Interest 365
------
Total investment income 26,721
------
Expenses:
Investment advisory and administration fee 3,133
Transfer agency and shareholder service fees 3,106
Custodian fees 234
Registration fees 255
Professional fees 94
Shareholder reports 191
Trustees' fees 40
Amortization of deferred organization costs 28
Insurance and other expenses 42
------
7,123
Less expenses reduced (1,036)
------
Total expenses incurred by Fund 6,087
------
Net investment income 20,634
------
Net realized gain (loss) on investments sold:
Proceeds from sales of investments 25,680
Cost of investments sold (24,251)
------
Net realized gain on investments sold 1,429
------
Change in net unrealized gain (loss) on investments:
Beginning of period 199,094
End of period 344,046
-------
Increase in net unrealized gain on investments 144,952
-------
Net gain on investments 146,381
-------
Increase in net assets resulting from operations $167,015
=======
</TABLE>
See accompanying Notes to Financial Statements.
F-26
<PAGE> 176
- ------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Year ended
August 31,
1996 1995
---------- --------
<S> <C> <C>
Operations:
Net investment income $ 20,634 $ 12,704
Net realized gain on investments sold 1,429 430
Increase in net unrealized gain
on investments 144,952 115,945
---------- --------
Increase in net assets resulting
from operations 167,015 129,079
---------- --------
Dividends to shareholders from net investment
income (14,179) (6,199)
---------- --------
Capital share transactions:
Proceeds from shares sold 788,862 264,444
Net asset value of shares issued in
reinvestment of dividends 12,770 5,550
Early withdrawal fees 385 93
Less payments for shares redeemed (221,508) (120,314)
---------- --------
Increase in net assets from
capital share transactions 580,509 149,773
---------- --------
Total increase in net assets 733,345 272,653
Net assets:
Beginning of period 826,714 554,061
---------- --------
End of period (including undistributed
net investment income of $15,134 and
$8,679, respectively) $1,560,059 $826,714
========== ========
Number of Fund shares:
Sold 45,105 18,751
Reinvested 758 439
Redeemed (12,583) (8,825)
---------- --------
Net increase in shares outstanding 33,280 10,365
Shares outstanding:
Beginning of period 52,733 42,368
---------- --------
End of period 86,013 52,733
========== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-27
<PAGE> 177
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
1. DESCRIPTION OF THE FUND
The Schwab 1000 Fund (the "Fund") is a series of Schwab Investments (the
"Trust"), a no-load, open-end management investment company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940, as amended.
In addition to the Fund, the Trust also offers -- the Schwab Short/Intermediate
Government Bond Fund, Schwab Long-Term Government Bond Fund, Schwab California
Short/Intermediate Tax-Free Bond Fund, Schwab California Long-Term Tax-Free Bond
Fund, Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term
Tax-Free Bond Fund. The assets of each series are segregated and accounted for
separately.
The investment objective of the Fund is to provide a total return which matches
that of the Schwab 1000 Index(R), an index created to represent the performance
of the 1000 largest publicly traded common stocks of United States companies.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security valuation -- Investments in securities traded on an exchange are valued
at the last sale price for a given day, or if a sale is not reported for that
day, at the mean between the most recent quoted bid and asked prices. Unlisted
securities for which market quotations are readily available are valued at the
mean between the most recent bid and asked prices. Securities for which no
quotations are readily available are valued at fair value as determined by the
Fund's investment manager pursuant to guidelines adopted in good faith by the
Board of Trustees. Short-term securities with 60 days or less to maturity are
stated at amortized cost, which approximates market value.
F-28
<PAGE> 178
- ------------------------------------------------------------------------------
Security transactions and investment income -- Security transactions are
accounted for on a trade date basis (date the order to buy or sell is executed).
Dividend income and distributions to shareholders are recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Realized
gains and losses from security transactions are determined on an identified cost
basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund, its initial registration with the Securities and
Exchange Commission and with various states have been amortized on a
straight-line basis over the five-year period from the Fund's commencement of
operations.
Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all net investment income and realized net capital gains, if any, to
shareholders. Therefore, no federal income tax provision is required. The Fund
is considered a separate entity for tax purposes.
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized gain aggregated (in thousands) $344,046 of which $363,099 related
to appreciated securities and $19,053 related to depreciated securities.
F-29
<PAGE> 179
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of 0.30% of the first $500 million
of average daily net assets and 0.22% of such assets over $500 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$3,133,000 for the year ended August 31, 1996, before the Investment Manager
reduced its fee (see Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of average daily net assets for transfer
agency services and 0.20% of such assets for shareholder services. For the year
ended August 31, 1996, the Fund incurred transfer agency and shareholder service
fees of $3,106,000, before Schwab reduced its fees (see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1996, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Fund incurred fees of $40,000 related to
the Trust's unaffiliated trustees.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the Fund's ratio of operating expenses to average net assets. For the year
ended August 31, 1996, the total of such fees reduced by the Investment Manager
and Schwab was $648,000 and $388,000, respectively (see Note 9).
5. BORROWING AGREEMENT
The Trust has an arrangement with PNC Bank, N.A., the Fund's custodian, whereby
the Fund may borrow up to $50,000,000, on a
F-30
<PAGE> 180
- ------------------------------------------------------------------------------
temporary basis, to fund redemptions. Amounts borrowed under this arrangement
bear interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the year ended August 31, 1996, no borrowings were
made under this arrangement.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated (in thousands) $621,392 and $25,680, respectively, during the year
ended August 31, 1996.
7. EARLY WITHDRAWAL FEES PAID TO THE FUND
The Fund assesses a 0.50% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the year ended August 31, 1996, total early withdrawal fees
retained by the Fund amounted to $385,000.
8. COMPOSITION OF NET ASSETS
At August 31, 1996, net assets consisted of (in thousands):
<TABLE>
<S> <C>
Paid in capital $1,202,438
Accumulated undistributed net investment income 15,134
Accumulated net realized loss on investments sold (1,559)
Net unrealized gain on investments 344,046
----------
Total $1,560,059
==========
</TABLE>
At August 31, 1996, the Fund's Statement of Net Assets included: $714,000
payable for Fund shares redeemed, $98,000 payable for investment advisory and
administration fee, $103,000 payable for transfer agency and shareholder service
fees and $1,967,000 receivable for Fund shares sold.
F-31
<PAGE> 181
SCHWAB 1000 FUND(R)
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
EIGHT MONTHS PERIOD
ENDED YEAR ENDED ENDED
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 $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26 $ 10.00
Income from investment
- ----------------------
operations
----------
Net investment income 0.24 0.26 0.26 0.17 0.24 0.15
Net realized and unrealized
gain (loss) on
investments 2.45 2.48 0.28 0.79 0.71 1.26
--------- -------- -------- -------- -------- --------
Total from investment
operations 2.69 2.74 0.54 0.96 0.95 1.41
Less distributions
- ------------------
Dividends from net
investment income (0.23) (0.14) (0.26) (0.12) (0.25) (0.15)
Distributions from realized
gain on investments -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Total distributions (0.23) (0.14) (0.26) (0.12) (0.25) (0.15)
--------- -------- -------- -------- -------- --------
Net asset value at
end of period $ 18.14 $ 15.68 $ 13.08 $ 12.80 $ 11.96 $ 11.26
========= ======== ======== ======== ======== ========
Total return (%) 17.27 21.23 4.28 8.06 8.52 14.25
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of
period (000s) $1,560,059 $826,714 $554,061 $515,272 $370,980 $192,206
Ratio of expenses to
average net assets (%) 0.49 0.54 0.51 0.45* 0.35 0.00*
Ratio of net investment
income to average net
assets (%) 1.66 2.03 2.06 2.21* 2.45 3.21*
Portfolio turnover rate (%) 2 2 3 1 1 1
Average commission rate $ 0.03
- ---------------
Ratio of expenses to
average net assets prior
to reduced fees and
absorbed expenses (%)+ 0.57 0.63 0.56 0.49* 0.52 1.05*
Ratio of net investment
income to average net
assets prior to reduced
fees and absorbed
expenses (%)+ 1.58 1.94 2.01 2.17* 2.28 2.16*
</TABLE>
++ For the period April 2, 1991 (commencement of operations) to December 31,
1991.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
F-32
<PAGE> 182
- ------------------------------------------------------------------------------
To the Trustees
and Shareholders of the Schwab 1000 Fund(R)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Schwab 1000 Fund (one of the series constituting Schwab Investments,
hereafter referred to as the "Trust") at August 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and the financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1996 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- -------------------------
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
1996 SPECIAL TAX INFORMATION (UNAUDITED)
- ------------------------------------------------------------------------------
NOTICE TO CORPORATE SHAREHOLDERS
100% of the Fund's distributions for the fiscal year ended August 31, 1996
qualify for the corporate dividends received deduction.
- ------------------------------------------------------------------------------
F-33
<PAGE> 183
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS--46.8%(a)
U.S. Treasury Notes
5.63%, 08/31/97 $ 4,000 $ 3,986
7.38%, 11/15/97 7,000 7,100
7.88%, 01/15/98 2,700 2,760
7.25%, 02/15/98 5,000 5,071
5.88%, 08/15/98 12,000 11,899
6.38%, 05/15/99 5,000 4,985
6.88%, 07/31/99 3,000 3,027
7.13%, 09/30/99 5,000 5,080
7.75%, 12/31/99 5,000 5,173
5.88%, 06/30/00 3,000 2,922
6.13%, 09/30/00 2,000 1,961
6.63%, 06/30/01 8,000 7,968
-------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $62,254) 61,932
-------
AGENCY OBLIGATIONS--43.9%(a)
Federal Home Loan Bank
7.59%, 02/03/97 9,425 9,496
7.76%, 05/30/97 5,000 5,068
7.28%, 02/24/98 6,340 6,420
6.26%, 08/09/99 5,000 4,950
6.70%, 04/23/01 5,000 4,916
Federal Home Loan Mortgage Corp.
8.40%, 11/30/01 2,500 2,566
Federal National Mortgage Assoc.
6.57%, 08/10/00 5,000 4,915
6.75%, 08/24/00 5,000 4,945
6.45%, 03/26/01 5,000 4,877
Student Loan Marketing Assoc.
7.56%, 12/09/96 10,000 10,049
-------
TOTAL AGENCY OBLIGATIONS
(Cost $58,313) 58,202
-------
</TABLE>
F-34
<PAGE> 184
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS
(PLANNED AMORTIZATION CLASS)--8.5%(a)(c)
Federal Home Loan Mortgage Corp. Series 1295 G
7.50%, 05/15/99 $ 2,500 $ 2,522
Federal Home Loan Mortgage Corp. Series 1449 E
6.00%, 09/15/99 6,000 5,830
Federal National Mortgage Assoc. Series 1992-94 G
7.00%, 04/25/00 3,000 2,980
--------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(PLANNED AMORTIZATION CLASS)
(Cost $11,386) 11,332
--------
CASH EQUIVALENTS--0.8%
Federal Home Loan Mortgage Corp.--Discount Note(b)
5.32%, 11/29/96 625 617
Shares
------
Provident Institutional Funds--Fed Funds Portfolio(d)
4.92%, 09/07/96 507 507
--------
TOTAL CASH EQUIVALENTS
(Cost $1,124) 1,124
--------
TOTAL INVESTMENTS--100.0%
(Cost $133,077) $132,590
========
</TABLE>
See accompanying Notes to Schedules of Investments.
F-35
<PAGE> 185
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
AGENCY OBLIGATIONS--49.3%(a)
Federal Farm Credit Bank
8.06%, 01/04/05 $ 815 $ 855
6.27%, 01/26/16 1,000 875
Federal Home Loan Bank
6.45%, 06/08/05 1,000 952
6.43%, 09/19/05 1,000 950
Federal Home Loan Mortgage Corp.
6.92%, 09/15/05 1,000 954
7.53%, 08/07/06 2,000 1,971
8.57%, 10/26/09 500 515
Federal National Mortgage Assoc.
8.50%, 02/01/05 500 518
7.88%, 02/24/05 1,135 1,180
6.35%, 06/10/05 1,000 946
6.65%, 03/08/06 800 749
Tennessee Valley Authority
6.38%, 06/15/05 500 472
-------
TOTAL AGENCY OBLIGATIONS
(Cost $11,226) 10,937
-------
U.S. TREASURY OBLIGATIONS--46.2%(a)
U.S. Treasury Bonds
7.25%, 05/15/16 1,300 1,298
7.50%, 11/15/16 1,550 1,588
7.13%, 02/15/23 500 492
U.S. Treasury Notes
5.75%, 08/15/03 310 291
5.88%, 02/15/04 1,000 942
7.25%, 08/15/04 500 511
6.50%, 08/15/05 2,000 1,942
5.88%, 11/15/05 750 697
7.00%, 07/15/06 2,500 2,510
-------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $10,436) 10,271
-------
</TABLE>
F-36
<PAGE> 186
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ --------
<S> <C> <C>
CASH EQUIVALENTS--4.5%
Federal Home Loan Mortgage Corp.--Discount Note(b)
5.32%, 11/29/96 $915 $ 903
Shares
------
Provident Institutional Funds--FedFund Portfolio(d)
4.92%, 09/07/96 105 105
-------
TOTAL CASH EQUIVALENTS
(Cost $1,008) 1,008
-------
TOTAL INVESTMENTS--100.0%
(Cost $22,670) $22,216
=======
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS
(a) Interest rates represent coupon rate of security.
(b) Interest rates represent the effective yield at time of purchase.
(c) Maturity dates represent average weighted maturities of the underlying
mortgage obligations.
(d) Interest rates represent the yield on August 31, 1996.
See accompanying Notes to Financial Statements.
F-37
<PAGE> 187
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $133,077 and $22,670,
respectively) $132,590 $22,216
Interest receivable 1,604 281
Receivable from advisor -- 28
Receivable for Fund shares sold 22 353
Deferred organization costs 2 23
Prepaid expenses 22 13
Dividends receivable 8 1
-------- -------
Total assets 134,248 22,915
-------- -------
LIABILITIES
Payable for:
Dividends 109 21
Fund shares redeemed 53 76
Investment advisory and administration
fee 11 --
Other 56 57
-------- -------
Total liabilities 229 154
-------- -------
Net assets applicable to outstanding
shares $134,019 $22,761
======== =======
NET ASSETS CONSIST OF:
Capital paid in $145,190 $23,507
Accumulated undistributed net
investment income 54 6
Accumulated net realized loss on
investments sold (10,738) (298)
Net unrealized loss on investments (487) (454)
-------- -------
$134,019 $22,761
======== =======
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 13,865 2,426
Net asset value, offering and redemption
price per share $9.67 $9.38
</TABLE>
See accompanying Notes to Financial Statements.
F-38
<PAGE> 188
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Interest income $ 9,637 $ 1,100
--------- --------
Expenses:
Investment advisory and
administration fee 602 68
Transfer agency and shareholder
service fees 369 41
Custodian fees 82 13
Registration fees 28 15
Professional fees 30 26
Shareholder reports 38 11
Trustees' fees 8 3
Amortization of deferred organization
costs 16 12
Insurance and other expenses 9 4
--------- --------
1,182 193
Less expenses reduced and absorbed (462) (193)
--------- --------
Total expenses incurred by Fund 720 0
--------- --------
Net investment income 8,917 1,100
--------- --------
Net realized gain (loss) on investments
sold:
Proceeds from sales of investments 160,806 22,460
Cost of investments sold (160,799) (22,490)
--------- --------
Net realized gain (loss) on
investments sold 7 (30)
--------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 2,002 433
End of period (487) (454)
--------- --------
Decrease in net unrealized gain
on investments (2,489) (887)
--------- --------
Net loss on investments (2,482) (917)
--------- --------
Increase in net assets resulting
from operations $ 6,435 $ 183
========= ========
</TABLE>
See accompanying Notes to Financial Statements.
F-39
<PAGE> 189
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------- ------------------
Year ended August 31,
1996 1995 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 8,917 $ 10,033 $ 1,100 $ 730
Net realized gain (loss) on
investments sold 7 (3,232) (30) 22
Increase (decrease) in net unrealized
gain on investments (2,489) 3,191 (887) 626
-------- -------- -------- -------
Increase in net assets resulting from
operations 6,435 9,992 183 1,378
-------- -------- -------- -------
Dividends to shareholders from net
investment income (8,934) (10,006) (1,098) (727)
-------- -------- -------- -------
Capital share transactions:
Proceeds from shares sold 25,765 32,379 21,398 14,400
Net asset value of shares issued in
reinvestment of dividends 6,945 7,729 741 486
Less payments for shares redeemed (53,383) (73,382) (11,412) (9,696)
-------- -------- -------- -------
Increase (decrease) in net assets from
capital share transactions (20,673) (33,274) 10,727 5,190
-------- -------- -------- -------
Total increase (decrease) in net assets (23,172) (33,288) 9,812 5,841
Net assets:
Beginning of period 157,191 190,479 12,949 7,108
-------- -------- -------- -------
End of period (including undistributed
net investment income of $54, $71,
$6 and $4, respectively) $134,019 $157,191 $ 22,761 $12,949
======== ======== ======== =======
Number of Fund shares:
Sold 2,618 3,324 2,191 1,535
Reinvested 707 794 77 51
Redeemed (5,428) (7,560) (1,163) (1,027)
-------- -------- -------- -------
Net increase (decrease) in shares
outstanding (2,103) (3,442) 1,105 559
Shares outstanding:
Beginning of period 15,968 19,410 1,321 762
-------- -------- -------- -------
End of period 13,865 15,968 2,426 1,321
======== ======== ======== =======
</TABLE>
See accompanying Notes to Financial Statements.
F-40
<PAGE> 190
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Government Bond Fund and Schwab Long-Term
Government Bond Fund (the "Funds") are series of Schwab Investments (the
"Trust"), a no load, open-end, management investment company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940, as amended.
In addition to the Funds, the Trust also offers -- the Schwab 1000 Fund(R),
Schwab California Short/Intermediate Tax-Free Bond Fund, Schwab California
Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund. The assets of each series are segregated
and accounted for separately.
The investment objective of the Funds is to seek to provide a high level of
current income consistent with preservation of capital. The Funds each invest
primarily in securities issued or guaranteed by the United States Government,
its agencies or instrumentalities, and repurchase agreements collateralized by
these securities.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities within 60 days or less of maturity are stated at amortized
cost which approximates market value.
F-41
<PAGE> 191
- ------------------------------------------------------------------------------
Security transactions and interest income -- Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Interest
income is recorded on the accrual basis and includes amortization of premium and
accretion of discount on investments. Realized gains and losses from security
transactions are determined on an identified cost basis. For callable bonds
purchased at a premium, the excess of the purchase price over the call value is
amortized against interest income through the call date. If the call provision
is not exercised, any remaining premium is amortized through the final maturity
date.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or government agency securities. All collateral is held by each Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds, their initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five-year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
F-42
<PAGE> 192
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized loss for the Schwab Short/Intermediate Government Bond Fund
aggregated $487,000 of which $462,000 related to appreciated securities and
$949,000 related to depreciated securities, and net unrealized loss for the
Schwab Long-Term Government Bond Fund aggregated $454,000, of which $169,000
related to appreciated securities and $623,000 related to depreciated
securities.
At August 31, 1996, the Schwab Short/Intermediate Government Bond Fund had
unused capital loss carryforwards, for federal income tax purposes, of
$8,355,000 and $2,216,000 expiring August 31, 2003 and August 31, 2004,
respectively. The Schwab Long-Term Government Bond Fund had unused capital loss
carryforwards of $230,000 expiring August 31, 2003.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. Under this agreement, the Schwab Short/Intermediate
Government Bond Fund and Schwab Long-Term Government Bond Fund incurred
investment advisory and administration fees of $602,000 and $68,000,
respectively, for the year ended August 31, 1996, before the Investment Manager
reduced its fee (see Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
For the year ended August 31, 1996, the Schwab Short/Intermediate Government
Bond Fund and Schwab Long-Term Government Bond Fund incurred transfer agency and
shareholder service fees of $369,000 and $41,000, respectively, before Schwab
reduced its fees (see Note 4).
F-43
<PAGE> 193
- ------------------------------------------------------------------------------
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1996, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Funds incurred fees aggregating $11,000
related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit the ratio of operating expenses to average
net assets for each Fund. During the year ended August 31, 1996, the total of
such fees and expenses reduced and absorbed by the Investment Manager were
$149,000 and $152,000 for the Schwab Short/Intermediate Government Bond Fund and
Schwab Long-Term Government Bond Fund, respectively, and the total of such fees
reduced by Schwab were $313,000 and $41,000 for the Schwab Short/
Intermediate Government Bond Fund and Schwab Long-Term Government Bond Fund,
respectively (see Note 6).
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1996, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Purchases $115,073 $19,950
Proceeds of sales and maturities $133,389 $10,683
</TABLE>
F-44
<PAGE> 194
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate Government Bond Fund
-------------------------------------------------------------------------------
Eight months Period
ended Year ended ended
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
- ---------------
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*
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*
</TABLE>
++ For the period November 5, 1991 (commencement of operations) to December 31,
1991.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
F-45
<PAGE> 195
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab Long-Term
Government Bond Fund
------------------------------------------------------
Period ended
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
- ---------------
Ratio of expenses to average
net assets prior to reduced
fees and absorbed
expenses (%)+ 1.17 1.18 2.19 19.19*
Ratio of net investment income
to average net assets prior
to reduced fees and absorbed
expenses (%)+ 5.50 6.20 4.18 (12.57)*
</TABLE>
++ For the period March 5, 1993 (commencement of operations) to August 31, 1993.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
F-46
<PAGE> 196
- ------------------------------------------------------------------------------
To the Trustees and Shareholders of
the Schwab Short/Intermediate Government Bond Fund and
Schwab Long-Term Government Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Schwab Short/Intermediate
Government Bond Fund and the Schwab Long-Term Government Bond Fund (two series
constituting part of Schwab Investments, hereafter referred to as the "Trust")
at August 31, 1996, the results of each of their operations, the changes in each
of their net assets and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1996 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
/s/ Price Waterhouse LLP
- -------------------------
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
F-47
<PAGE> 197
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--97.6%(a)
ALABAMA--2.0%
Alabama Special Care Facilities Finance Authority
of Birmingham Hospital Revenue Bonds (Daughters
of Charity National Health System--St.
Vincent's Hospital & Providence) Series 1995
(Aa AA)
7.00%, 11/01/01 $1,000 $1,087
-----
ALASKA--2.2%
Anchorage, Alaska Refunding School Bonds Series
1993A/(MBIA Insurance)(Aaa AAA)
5.10%, 08/01/99 1,145 1,161
-----
ARIZONA--3.8%
Phoenix, Arizona Civic Improvement Corp.
Wastewater Systems Lease Revenue Bonds Series
1993 (A1 A)
5.10%, 07/01/99 1,005 1,021
Phoenix, Arizona Senior Lien Street & Highway
Revenue Refunding Bonds Series 1992 (A1 AA)
5.95%, 07/01/00 1,000 1,039
-----
2,060
-----
CALIFORNIA--2.8%
Sacramento County, California Transportation
Authority Tax & Revenue Anticipation Notes
(MIG1 SP1+)
4.50%, 09/30/97 1,500 1,507
-----
CONNECTICUT--6.7%
Connecticut State Special Tax Obligation
Refunding Bonds (Transportation Infrastructure
Purposes) Series 1995C/(FGIC Insurance)
(Aaa AAA)
5.50%, 10/01/00 2,000 2,065
Connecticut State Unlimited General Obligation
Series 1996B (Aa AA-)
5.00%, 08/15/01 1,500 1,522
-----
3,587
-----
ILLINOIS--2.2%
Illinois Health Facility Authority Revenue Bonds
(OSF Healthcare System) Series 1993 (A1 A+)
5.13%, 11/15/00 1,145 1,152
-----
INDIANA--1.5%
Indiana University Student Fee Revenue Bonds
Series J (A1 AA-)
4.00%, 08/01/97 800 798
-----
</TABLE>
F-48
<PAGE> 198
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
IOWA--4.2%
Black Hawk County, Iowa Hospital Facilities
Revenue Bonds (Allen Memorial Hospital) Series
1990 (Pre-Refunded)/(AMBAC Insurance & Escrowed to
Maturity with Government Securities)(Aaa AAA)
7.38%, 02/01/01 $2,000 $2,245
-----
KENTUCKY--5.0%
Kentucky Housing Corp. Housing Revenue Bonds
Series 1993B/(Multiple Credit Enhancements)
(Aaa AAA)
4.45%, 07/01/00 1,000 987
Kentucky State Property & Buildings Commission
Revenue Refunding Bonds (Project 55)(A A+)
4.15%, 09/01/99 1,735 1,712
-----
2,699
-----
MARYLAND--5.9%
Washington, Maryland Suburban Sanitation District
Sewage Disposal Refunding Bonds (Montgomery &
Prince George Counties, Maryland)(Aa1 AA)
6.00%, 11/01/99 3,000 3,135
-----
MASSACHUSETTS--5.7%
Massachusetts Municipal Wholesale Electric Co.
Power Supply Systems Revenue Bonds Series
1992E/ (AMBAC Insurance)(Aaa AAA)
5.50%, 07/01/00 2,000 2,055
Massachusetts State Health & Educational
Facilities Authority Revenue Bonds (Brigham &
Womens Hospital) Series E (A1 A+)
4.40%, 07/01/00 1,000 990
-----
3,045
-----
MICHIGAN--2.1%
Michigan State Hospital Finance Authority Revenue
Bonds (McLaren Obligated Group)/(Escrowed to
Maturity with Government Securities)(Aaa -)
7.00%, 09/15/00 1,000 1,104
-----
</TABLE>
F-49
<PAGE> 199
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MINNESOTA--8.6%
Minneapolis, Minnesota Community Development
Agency Tax Increment Revenue Bonds/(MBIA
Insurance)(Aaa AAA)
7.00%, 09/01/00 $1,000 $1,087
Minnesota State Housing Finance Agency Rental
Housing Revenue Bonds Series D/(MBIA
Insurance)(Aaa AAA)
4.80%, 08/01/01 2,390 2,378
St. Paul, Minnesota Sewer Revenue Bonds Series A
(A BBB+)
8.00%, 12/01/98 1,050 1,133
-----
4,598
-----
MISSISSIPPI--3.8%
Mississippi Hospital Equipment & Facilities
Authority Revenue Refunding Bonds (Mississippi
Baptist Medical Center)/(MBIA Insurance)
(Aaa AAA)
5.25%, 05/01/01 2,000 2,025
-----
MISSOURI--1.0%
Missouri State Environmental Improvement & Energy
Resources Authority Water Pollution Control
Revenue Bonds (State Revolving Fund Program)
Series 1992A (Aa -)
5.80%, 07/01/99 500 518
-----
NEW YORK--7.6%
New York State Dormitory Authority Lease Revenue
Refunding Bonds (State University Dormitory
Facilities) Series 1995A/(AMBAC Insurance)
(Aaa AAA)
5.10%, 07/01/01 4,000 4,070
-----
OHIO--3.7%
Ohio State Public Facilities Higher Education
Capital Facilities Revenue Bonds Series
IIA/(MBIA Insurance)(Aaa AAA)
4.38%, 11/01/00 2,000 1,982
-----
RHODE ISLAND--2.8%
Rhode Island Student Loan Authority Student Loan
Revenue Put Bonds Series 96-1/(National
Westminster Bank LOC)(- AA)
4.00%, 06/01/97 1,500 1,498
-----
</TABLE>
F-50
<PAGE> 200
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
SOUTH CAROLINA--6.3%
Charleston, South Carolina Public Facilities
Certificates of Participation (Public
Improvement Project) Series 1993/(AMBAC
Insurance)(Aaa AAA)
4.30%, 09/01/00 $1,085 $ 1,061
Greenville Hospital System Board of Trustees,
South Carolina Hospital Facilities Revenue
Refunding Bonds Series 1993C (- AA-)
5.00%, 05/01/00 1,090 1,089
South Carolina State Public Service Authority
Power/Electric Revenue Refunding Bonds Series
1991A (Santee Cooper)(A1 A+)
5.60%, 07/01/00 1,200 1,229
------
3,379
------
TENNESSEE--5.1%
Knox County, Tennessee Health & Education
Hospital Facilities Revenue Bonds (Fort Sanders
Alliance) Series 1990C (Pre-Refunded)/(MBIA
Insurance)
(Aaa AAA)
7.00%, 01/01/00 2,500 2,725
------
TEXAS--3.8%
Houston, Texas General Obligation Revenue Bonds
Series 1995A (Aa AA-)
5.30%, 03/01/01 1,000 1,017
Houston, Texas Water Conveyance System Contract
Certificates of Participation Series 1993E/
(AMBAC Insurance)(Aaa AAA)
5.50%, 12/15/97 1,000 1,018
------
2,035
------
WASHINGTON--8.9%
Port of Seattle, Washington Revenue Bonds
Series B/(FGIC Insurance)(Aaa AAA)
5.50%, 09/01/02 2,775 2,834
Washington State Public Power Supply System
Revenue Refunding Bonds (Nuclear Project #2)
Series A (Aa AA)
4.63%, 07/01/98 2,000 1,997
------
4,831
------
WISCONSIN--1.9%
Wisconsin State Health & Education Facilities
Authority Revenue Bonds (Aurora Medical Group
Project) Series 1996/(FSA Insurance)(Aaa AAA)
4.90%, 11/15/02 1,000 994
------
TOTAL MUNICIPAL BONDS
(Cost $52,294) 52,235
------
</TABLE>
F-51
<PAGE> 201
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--2.2%(b)
CALIFORNIA--1.4%
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985A-1/(Sumitomo Bank
LOC)(- A-1)
3.75%, 09/01/96 $800 $ 800
-------
GEORGIA--0.6%
Hapeville, Georgia Industrial Development
Authority Revenue Bonds (Hapeville Hotel Ltd. Project)/
(Deutsche Bank LOC)(P-1 -)
3.80%, 09/01/96 300 300
------
NEW YORK--0.2%
New York City General Obligation Bonds Series
1993B-2 Subseries B-5/(Morgan Guaranty Trust
LOC)(VMIG1 A-1)
4.00%, 09/01/96 100 100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $1,200) 1,200
-------
Shares
------
CASH EQUIVALENTS--0.2%(c)
Provident Institutional Funds--MuniFund Portfolio
3.01%, 09/07/96 95 95
-------
TOTAL CASH EQUIVALENTS
(Cost $95) 95
-------
TOTAL INVESTMENTS--100.0%
(Cost $53,589) $53,530
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
F-52
<PAGE> 202
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--99.3%(a)
ALASKA--9.8%
Kodiak Island Borough, Alaska General Obligation
Bonds Series 1994A/(AMBAC Insurance)(Aaa AAA)
5.40%, 02/15/10 $2,500 $2,393
Valdez, Alaska Marine Terminal Revenue Refunding
Bonds (BP Pipeline Project) Series 1993B
(Aa3 AA-)
5.50%, 10/01/28 2,000 1,840
-----
4,233
-----
ARIZONA--5.2%
Maricopa County, Arizona Alhambra Elementary School
District 68 School Improvement & Refunding Bonds
Series 1994A/(AMBAC Insurance)(Aaa AAA)
6.80%, 07/01/12 2,000 2,225
-----
CALIFORNIA--4.0%
San Francisco, California Downtown Parking Corp.
Parking Revenue Bonds Series 1993 (A -)
6.65%, 04/01/18 500 510
Santa Clara County, California Financing Authority
Lease Revenue Bonds (VMC Facility Replacement
Project) Series 1994A/(AMBAC Insurance)(Aaa AAA)
7.75%, 11/15/10 1,000 1,216
-----
1,726
-----
CONNECTICUT--0.5%
Connecticut State Housing Finance Authority Bonds
(Housing Mortgage Finance Program) Series 1990B
Subseries B-1 (Aa AA)
7.55%, 11/15/08 225 230
-----
FLORIDA--2.9%
Hillsborough County, Florida Aviation Revenue Bonds
(Tampa International Airport) Series B/
(FGIC Insurance)(Aaa AAA)
5.88%, 10/01/23 1,250 1,247
-----
ILLINOIS--2.6%
Illinois State Toll Highway Authority Priority
Revenue Bonds Series 1992A (A1 A+)
6.38%, 01/01/15 1,100 1,140
-----
</TABLE>
F-53
<PAGE> 203
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
INDIANA--2.5%
Indiana State Office Building Correctional
Facilities Revenue Bonds Series A/(AMBAC Insurance)
(Aaa AAA)
5.50%, 07/01/20 $1,170 $1,097
-----
IOWA--2.6%
Ames, Iowa Hospital Revenue Bonds (Mary Greeley
Medical Center Project) Series 1993/
(AMBAC Insurance)(Aaa AAA)
5.70%, 08/15/12 500 497
Cedar Rapids, Iowa Hospital Facilities Revenue
Bonds (St. Luke's Methodist Project) Series 1993/
(FGIC Insurance)(Aaa AAA)
6.13%, 08/15/13 600 608
-----
1,105
-----
MARYLAND--2.2%
Maryland State Health & Educational Facilities
Authority Revenue Bonds (Mercy Medical Center)/
(FSA Insurance)(Aaa AAA)
5.63%, 07/01/17 1,000 967
-----
MASSACHUSETTS--2.0%
Massachusetts State Housing Finance Agency Multi
Family Residential Housing Revenue Bonds
Series 1989A (A A+)
7.80%, 08/01/22 800 846
-----
MICHIGAN--4.1%
Michigan State Hospital Finance Authority
Revenue Bonds (St. John's Hospital & Medical
Center)/(AMBAC Insurance)(Aaa AAA)
5.25%, 05/15/26 2,000 1,782
-----
MISSISSIPPI--5.1%
Mississippi Hospital Equipment & Facilities
Authority Revenue Refunding Bonds (Mississippi Baptist
Medical Center) Series 1995/(MBIA Insurance)
(Aaa AAA)
6.00%, 05/01/13 2,150 2,185
-----
MISSOURI--2.3%
Kansas City, Missouri School District Building
Revenue Bonds (Capital Improvement Project)
Series 1993/(FGIC Insurance)(Aaa AAA)
5.15%, 02/01/08 1,000 974
-----
</TABLE>
F-54
<PAGE> 204
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
NEVADA--4.4%
Nevada State Municipal Bonds General Obligation
Series A/(FGIC Insurance)(Aaa AAA)
5.50%, 11/01/25 $2,000 $1,890
-----
NEW HAMPSHIRE--1.7%
New Hampshire Higher Education & Health Facilities
Authority Hospital Revenue Bonds (Mary Hitchcock
Memorial Hospital) Series 1993A/(FGIC Insurance)
(Aaa AAA)
5.25%, 08/15/08 750 728
-----
NEW MEXICO--1.1%
Santa Fe, New Mexico Utility Sewer Revenue Bonds
Series 1995A/(AMBAC Insurance)(Aaa AAA)
5.25%, 06/01/17 500 461
-----
NEW YORK--4.3%
New York State General Obligation Bonds
Series 1996A (A A-)
5.30%, 07/15/15 2,000 1,867
-----
PENNSYLVANIA--9.6%
Pennsylvania Higher Education Facilities Authority
Revenue Bonds (University of Pennsylvania Health
Services) Series 1996A (Aa AA)
5.75%, 01/01/17 2,000 1,945
Philadelphia, Pennsylvania Hospitals & Higher
Education Facilities Authority Revenue Refunding
Bonds (Children's Hospital) Series 1993A (Aa AA)
5.25%, 02/15/08 1,000 970
Pittsburgh, Pennsylvania Water & Sewer Authority
Revenue Bonds Series B/(FSA Insurance)(Aaa AAA)
5.75%, 09/01/25 1,250 1,208
-----
4,123
-----
RHODE ISLAND--2.4%
Rhode Island Housing & Mortgage Finance Corp.
Homeownership Opportunity Bonds Series 10A
(Aa AA+)
6.50%, 10/01/22 1,000 1,026
-----
SOUTH CAROLINA--3.5%
Piedmont, South Carolina Municipal Power Agency
Electric Revenue Refunding Bonds Series 1992/
(MBIA Insurance)(Aaa AAA)
6.20%, 01/01/08 1,400 1,498
-----
</TABLE>
F-55
<PAGE> 205
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
TEXAS--9.6%
Copperas Cove, Texas Health Facilities Development
Corp. Hospital Revenue Bonds (Adventist Health
Systems/Sunbelt Obligated Group) Series 1995/
(MBIA Insurance)(Aaa AAA)
5.88%, 11/15/25 $1,500 $ 1,458
Harris County, Texas Revenue Refunding Bonds
(Toll Road Senior Lien) Series 1994/(FGIC
Insurance) (Aaa AAA)
5.38%, 08/15/20 1,000 929
Texas State Public Finance Authority General
Obligation Bonds Series 1994B (Aa AA)
5.75%, 10/01/14 1,025 1,029
University of Texas Revenue Refunding Bonds
Series B (Aa1 AAA)
6.75%, 08/15/13 680 738
------
4,154
------
UTAH--4.0%
Intermountain Power Agency, Utah Power Supply
Revenue Bonds Series 1996D (Aa AA-)
5.00%, 07/01/21 2,000 1,737
------
VIRGINIA--6.5%
Capital Region, Virginia Airport Commission Revenue
Bonds (Richmond International Airport) Series
1995A/(AMBAC Insurance)(Aaa AAA)
5.63%, 07/01/15 1,000 975
Chesapeake Bay Bridge & Tunnel Commission,
Virginia Revenue Refunding Bonds/
(MBIA Insurance)(Aaa AAA)
5.25%, 07/01/19 2,000 1,825
------
2,800
------
WASHINGTON--6.4%
King County, Washington School District General
Obligation Bonds No. 415 Series A (A1 AA-)
5.55%, 12/01/11 500 498
Seattle, Washington Municipal Light & Power Revenue
Refunding Bonds Series 1993 (Aa AA)
5.40%, 05/01/08 2,300 2,266
------
2,764
------
TOTAL MUNICIPAL BONDS
(Cost $42,511) 42,805
------
</TABLE>
F-56
<PAGE> 206
SCHWAB LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
VARIABLE RATE OBLIGATIONS--0.5%(b)
CALIFORNIA--0.2%
California Pollution Control Financing Authority
Pollution Control Revenue Bonds (Burney Forest
Project) Series 1988A/(Fleet Bank LOC)(- P-1)
3.70%, 09/01/96 $100 $ 100
------
FLORIDA--0.3%
Hillsborough County, Florida Industrial Development
Agency Pollution Control Revenue Refunding Bonds
(Tampa Electric/Gannon Coal Conversion Project)
Series 1992 (VMIG1 A-1+)
3.75%, 09/01/96 100 100
------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $200) 200
------
Shares
------
CASH EQUIVALENTS--0.2%(c)
Provident Institutional Funds--MuniFund Portfolio
3.01%, 09/07/96 94 94
--------
TOTAL CASH EQUIVALENTS
(Cost $94) 94
--------
TOTAL INVESTMENTS--100.0%
(Cost $42,805) $43,099
========
</TABLE>
F-57
<PAGE> 207
- ------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
August 31, 1996
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investor Services, Inc. and
Standard & Poor's Corporation which were in effect at August 31, 1996. These
ratings are unaudited.
(a) Interest rates represent coupon rate of security.
(b) Interest rates vary periodically based on current market rates. Rates
shown are the effective rates on August 31, 1996. Dates shown represent
the latter of the demand date or next interest rate change date, which
is considered the maturity date for financial reporting purposes. For
variable rate securities without demand features the next interest
reset date is shown.
(c) Interest rates represent the yield on August 31, 1996.
<TABLE>
<CAPTION>
Abbreviations
-------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
VMIG Variable Moody's Investment Grade
</TABLE>
See accompanying Notes to Financial Statements.
F-58
<PAGE> 208
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $53,589 and $42,805,
respectively) $ 53,530 $43,099
Interest receivable 705 600
Receivable from advisor -- 11
Receivable for Fund shares sold 2 --
Deferred organization costs 31 16
Prepaid expenses 19 27
------- -------
Total assets 54,287 43,753
------- -------
LIABILITIES
Payable for:
Dividends 29 31
Fund shares redeemed 69 3
Deferred organization costs -- 4
Other 57 43
------- -------
Total liabilities 155 81
------- -------
Net assets applicable to outstanding
shares $ 54,132 $43,672
======= =======
NET ASSETS CONSIST OF:
Capital paid in $ 54,716 $43,753
Accumulated undistributed net
investment income 12 15
Accumulated net realized loss on
investments sold (537) (390)
Net unrealized gain (loss) on
investments (59) 294
------- -------
$ 54,132 $43,672
======= =======
PRICING OF SHARES
Outstanding shares, $0.00001 par
value (unlimited shares authorized) 5,393 4,312
Net asset value, offering and
redemption price per share $ 10.04 $ 10.13
</TABLE>
See accompanying Notes to Financial Statements.
F-59
<PAGE> 209
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
------------------ ---------
<S> <C> <C>
Interest income $ 2,404 $ 2,405
-------- --------
Expenses:
Investment advisory and
administration fee 216 177
Transfer agency and shareholder
service fees 132 108
Custodian fees 37 31
Registration fees 18 13
Professional fees 22 29
Shareholder reports 21 17
Trustees' fees 4 4
Amortization of deferred organization
costs 15 17
Insurance and other expenses 9 10
-------- --------
474 406
Less expenses reduced and absorbed (216) (194)
-------- --------
Total expenses incurred by Fund 258 212
-------- --------
Net investment income 2,146 2,193
-------- --------
Net realized gain (loss) on investments
sold:
Proceeds from sales of investments 67,974 61,630
Cost of investments sold (67,824) (61,207)
-------- --------
Net realized gain on investments
sold 150 423
-------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 531 929
End of period (59) 294
-------- --------
Decrease in net unrealized gain on
investments (590) (635)
-------- --------
Net loss on investments (440) (212)
-------- --------
Increase in net assets resulting from
operations $ 1,706 $ 1,981
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-60
<PAGE> 210
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
Year ended August 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 2,146 $ 2,261 $ 2,193 $ 2,238
Net realized gain (loss) on
investments sold 150 (448) 423 (806)
Increase (decrease) in net unrealized
gain on investments (590) 1,372 (635) 1,600
-------- -------- -------- --------
Increase in net assets resulting from
operations 1,706 3,185 1,981 3,032
-------- -------- -------- --------
Dividends to shareholders from
net investment income (2,147) (2,255) (2,193) (2,232)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 19,101 17,344 18,452 21,437
Net asset value of shares issued in
reinvestment of dividends 1,701 1,746 1,569 1,626
Less payments for shares redeemed (18,733) (31,405) (17,550) (26,425)
-------- -------- -------- --------
Increase (decrease) in net assets
from capital share transactions 2,069 (12,315) 2,471 (3,362)
-------- -------- -------- --------
Total increase (decrease) in net assets 1,628 (11,385) 2,259 (2,562)
-------- -------- -------- --------
Net assets:
Beginning of period 52,504 63,889 41,413 43,975
-------- -------- -------- --------
End of period (including
undistributed net investment income
of $12, $13, $15 and $15,
respectively) $ 54,132 $ 52,504 $ 43,672 $ 41,413
======== ======== ======== ========
Number of Fund shares:
Sold 1,891 1,754 1,797 2,196
Reinvested 168 176 153 166
Redeemed (1,854) (3,185) (1,714) (2,707)
-------- -------- -------- --------
Net increase (decrease) in shares
outstanding 205 (1,255) 236 (345)
Shares outstanding:
Beginning of period 5,188 6,443 4,076 4,421
-------- -------- -------- --------
End of period 5,393 5,188 4,312 4,076
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-61
<PAGE> 211
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free
Bond Fund (the "Funds") are series of Schwab Investments (the "Trust"), a no
load, open-end, management investment company organized as a Massachusetts
business trust on October 26, 1990 and registered under the Investment Company
Act of 1940, as amended.
In addition to the Funds, the Trust also offers -- the Schwab 1000 Fund(R),
Schwab Short/Intermediate Government Bond Fund, Schwab Long-Term Government Bond
Fund, Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund. The assets of each series are
segregated and accounted for separately.
The investment objective of the Funds is to seek to provide a high level of
current income that is exempt from federal income tax, consistent with
preservation of capital. The Funds, which are not "diversified" investment
companies within the meaning of the Investment Company Act of 1940, as amended,
each invest primarily in debt obligations issued by or on behalf of states,
territories and possessions of the United States Government, its agencies or
instrumentalities, the interest of which is not subject to federal income tax.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities within 60 days or less of maturity are stated at amortized
cost which approximates market value.
F-62
<PAGE> 212
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
Security transactions and interest income -- Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Interest
income is recorded on the accrual basis and includes amortization of premium on
investments. Realized gains and losses from security transactions are determined
on an identified cost basis. For callable bonds purchased at a premium, the
excess of the purchase price over the call value is amortized against interest
income through the call date. If the call provision is not exercised, any
remaining premium is amortized through the final maturity date.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds, their initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five-year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
All distributions paid by the Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund during the year ended August 31, 1996
qualify as exempt interest dividends for federal tax purposes.
F-63
<PAGE> 213
- ------------------------------------------------------------------------------
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized loss for the Schwab Short/Intermediate Tax-Free Bond Fund
aggregated $59,000, of which $218,000 related to appreciated securities and
$277,000 related to depreciated securities, and net unrealized gain for the
Schwab Long-Term Tax-Free Bond Fund aggregated $294,000, of which $866,000
related to appreciated securities and $572,000 related to depreciated
securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. Under this agreement, the Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund incurred investment
advisory and administration fees of $216,000 and $177,000, respectively, for the
year ended August 31, 1996, before the Investment Manager reduced its fee (see
Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
For the year ended August 31, 1996, the Schwab Short/Intermediate Tax-Free Bond
Fund and Schwab Long-Term Tax-Free Bond Fund incurred transfer agency and
shareholder service fees of $132,000 and $108,000, respectively, before Schwab
reduced its fees (see Note 4).
F-64
<PAGE> 214
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1996, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Funds incurred fees aggregating $8,000
related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit the ratio of operating expenses to average
net assets for each Fund. During the year ended August 31, 1996, the total of
such fees and expenses reduced and absorbed by the Investment Manager were
$84,000 and $86,000 for the Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund, respectively, and the total of such fees
reduced by Schwab were $132,000 and $108,000 for the Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund, respectively, (see
Note 6).
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1996, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------ ------------------
<S> <C> <C>
Purchases $28,329 $24,831
Proceeds of sales and
maturities $22,168 $19,569
</TABLE>
F-65
<PAGE> 215
- ------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate
Tax-Free Bond Fund
----------------------------------------------
Period ended
Year ended August 31, August 31,
1996 1995 1994 1993++
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Net asset value at beginning of
period $ 10.12 $ 9.92 $ 10.15 $ 10.00
Income from investment operations
- ---------------------------------
Net investment income 0.41 0.40 0.37 0.13
Net realized and unrealized gain
(loss) on investments (0.08) 0.20 (0.23) 0.15
------- ------- ------- -------
Total from investment operations 0.33 0.60 0.14 0.28
Less distributions
- ------------------
Dividends from net investment
income (0.41) (0.40) (0.37) (0.13)
Distributions from realized gain
on investments -- -- -- --
------- ------- ------- -------
Total distributions (0.41) (0.40) (0.37) (0.13)
------- ------- ------- -------
Net asset value at end of period $ 10.04 $ 10.12 $ 9.92 $ 10.15
======= ======= ======= =======
Total return (%) 3.32 6.23 1.42 2.83
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $54,132 $52,504 $63,889 $ 54,450
Ratio of expenses to average net
assets (%) 0.49 0.49 0.48 0.45*
Ratio of net investment income to
average net assets (%) 4.06 4.06 3.71 3.63*
Portfolio turnover rate (%) 44 35 19 11
- ---------------
Ratio of expenses to average net
assets prior to reduced fees
and absorbed expenses (%)+ 0.90 0.89 0.91 1.26*
Ratio of net investment income to
average net assets prior to
reduced fees and absorbed
expenses (%)+ 3.65 3.66 3.28 2.82*
</TABLE>
++ For the period April 21, 1993 (commencement of operations) to August 31,
1993.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
F-66
<PAGE> 216
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
6. FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
Schwab Long-Term Tax-Free Bond Fund
-----------------------------------------------------------------
Eight months Period
ended ended
Year ended August 31, August 31, December 31,
1996 1995 1994 1993 1992++
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.16 $ 9.95 $ 10.59 $ 9.92 $ 10.00
Income from investment
- ----------------------
operations
- -----------
Net investment income 0.52 0.53 0.52 0.36 0.17
Net realized and unrealized
gain (loss) on investments (0.03) 0.21 (0.56) 0.67 (0.08)
------- ------- ------- ------- -------
Total from investment
operations 0.49 0.74 (0.04) 1.03 0.09
Less distributions
- ------------------
Dividends from net investment
income (0.52) (0.53) (0.52) (0.36) (0.17)
Distributions from realized
gain on investments -- -- (0.08) -- --
------- ------- ------- ------- -------
Total distributions (0.52) (0.53) (0.60) (0.36) (0.17)
------- ------- ------- ------- -------
Net asset value at end of
period $ 10.13 $ 10.16 $ 9.95 $ 10.59 $ 9.92
======= ======= ======= ======= =======
Total return (%) 4.87 7.76 (0.42) 10.56 0.92
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period
(000s) $43,672 $41,413 $43,975 $ 50,413 $ 28,034
Ratio of expenses to average
net assets (%) 0.49 0.54 0.51 0.45* 0.45*
Ratio of net investment
income to average net
assets (%) 5.06 5.40 5.05 5.30* 5.61*
Portfolio turnover rate (%) 50 70 62 91 54
- ---------------
Ratio of expenses to average
net assets prior to reduced
fees and absorbed expenses
(%)+ 0.94 0.93 0.99 1.18* 1.53*
Ratio of net investment
income to average net
assets prior to reduced
fees and absorbed expenses
(%)+ 4.61 5.01 4.57 4.57* 4.53*
</TABLE>
++ For the period September 11, 1992 (commencement of operations) to December
31, 1992.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
F-67
<PAGE> 217
- ------------------------------------------------------------------------------
To the Trustees and Shareholders of
the Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Schwab Short/Intermediate
Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond Fund (two series
constituting part of Schwab Investments, hereafter referred to as the "Trust")
at August 31, 1996, the results of each of their operations, the changes in each
of their net assets and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1996 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
/s/ Price Waterhouse LLP
- -------------------------
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
F-68
<PAGE> 218
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
MUNICIPAL BONDS--98.1%(a)
California Housing Finance Agency Home Mortgage
Revenue Bonds Series G (Aa AA-)
5.65%, 02/01/98 $ 500 $ 506
5.65%, 08/01/98 585 594
5.85%, 08/01/99 320 328
6.00%, 08/01/00 410 422
California State Public Works Board Lease Revenue
Refunding Bonds (California Community College
Projects) Series 1993A (A A-)
4.70%, 12/01/99 1,000 1,002
California State Public Works Board Lease Revenue
Refunding Bonds (California State University)
Series 1993A (A A-)
4.30%, 12/01/99 2,000 1,982
California State Public Works Board Lease Revenue
Refunding Bonds (Department of Corrections State
Prisons) Series A/(AMBAC Insurance) (Aaa AAA)
4.70%, 12/01/00 1,865 1,874
California State Public Works Board Lease Revenue
Refunding Bonds (Department of Corrections-State
Prison-Susanville) Series D (A A-)
4.40%, 06/01/00 1,000 986
California State Public Works Board Lease Revenue
Refunding Bonds (Various University of
California Projects) Series A (A A-)
4.70%, 06/01/00 1,020 1,011
California State Public Works Board Lease Revenue
Refunding Bonds (Various University of
California Projects) Series A/
(AMBAC Insurance) (Aaa AAA)
5.60%, 12/01/01 2,000 2,085
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates of
Participation (St. Joseph Health Systems)
(Aa AA)
5.30%, 07/01/00 2,035 2,078
California Statewide Community Development
Authority Hospital Revenue Refunding Bonds
Certificates of Participation (Cedars-Sinai
Medical Center) (A1 -)
4.40%, 11/01/00 1,235 1,204
Contra Costa County, California Transportation
Authority Sales Tax Revenue Bonds Series A/
(FGIC Insurance) (Aaa AAA)
4.80%, 03/01/01 1,000 1,005
Foothill, California Transit Zone Certificates of
Participation Refunding Bonds Referendum
Series A (Baa1 -)
4.50%, 05/01/97 1,000 1,000
4.50%, 11/01/97 1,000 1,000
</TABLE>
F-69
<PAGE> 219
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Garden Grove, California Tax Allocation Refunding
Bonds (Community Development Projects) (- A)
4.70%, 10/01/98 $1,060 $1,059
Los Angeles County, California Flood Control
District Revenue Bonds (Aa1 AA-)
4.30%, 03/01/00 1,090 1,082
Los Angeles, California Convention & Exhibition
Center Authority Certificates of Participation
Series A/(Escrowed to Maturity with Government
Securities) (Aaa AAA)
7.38%, 08/15/99 1,000 1,095
Los Angeles, California State Building Authority
Revenue Refunding Bonds (California Department
of General Services) Series A (A A-)
4.50%, 05/01/98 400 399
4.70%, 05/01/99 450 449
Los Angeles, California Unified School District
Certificates of Participation (Multiple
Properties) Series 1994B/(AMBAC Insurance)
(Aaa AAA)
5.70%, 12/01/99 3,215 3,339
Los Angeles, California Wastewater System Revenue
Bonds Series A (A1 A)
6.60%, 02/01/99 1,775 1,857
Morgan Hill, California Unified School District
Certificates of Participation (A1 -)
4.80%, 08/01/99 510 509
Northern California Power Agency Revenue Bonds
(Geothermal Project No. 3) Series B/(AMBAC
Insurance) (Aaa AAA)
5.00%, 07/01/99 1,360 1,382
Orange County, California Municipal Water
Facilities Certificates of Participation
(Allen-McColloch Pipeline)/(MBIA Insurance)
(Aaa AAA)
4.60%, 07/01/01 3,000 2,977
Port of Long Beach, California Harbor Revenue
Bonds (Aa AA-)
7.10%, 05/15/99 2,000 2,127
Rancho, California Water District Financing
Authority Revenue Bonds/(Toronto-Dominion Bank
LOC) (Aa2 AA)
4.70%, 09/15/01 2,000 1,967
Riverside County, California Public Financing
Authority Special Tax Revenue Bonds Series
A/(MBIA Insurance) (Aaa AAA)
4.40%, 09/01/01 1,750 1,724
San Diego County, California Tax & Revenue
Anticipation Notes (MIG1 SP1+)
4.38%, 09/30/97 1,500 1,505
San Francisco, California Port Commission Revenue
Refunding Bonds (A BBB+)
5.00%, 07/01/00 1,500 1,500
</TABLE>
F-70
<PAGE> 220
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
San Joaquin, California Area Flood Control Agency
Special Assessment Bonds/(FSA Insurance) (Aaa -)
5.10%, 09/02/03 $1,700 $1,702
San Ramon Valley, California Unified School
District Certificates of Participation (Measure
A Capital Project) Series A/(Escrowed to
Maturity with Government Securities) (A -)
4.90%, 10/01/99 1,100 1,104
Santa Monica, California Wastewater Enterprise
Revenue Bonds (Hyperion Project) Series A
(Pre-Refunded) (A1 A+)
6.25%, 01/01/02 1,250 1,352
Stockton, California Health Facilities Revenue
Bonds (St. Joseph Medical Center) Series A/(MBIA
Insurance) (Aaa AAA)
4.60%, 06/01/00 200 199
TOTAL MUNICIPAL BONDS -------
(Cost $44,181) 44,405
-------
VARIABLE RATE OBLIGATIONS--1.7%(b)
California Pollution Control Financing Authority
Revenue Bonds (Burney Forest Project) Series
1988A/(National Westminster Bank LOC) (Aa3 -)
3.70%, 09/01/96 100 100
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986A (VMIG1 A-1+)
3.75%, 09/01/96 100 100
Irvine Ranch Water District Consolidated Revenue
Refunding Bonds Series 1985A-1/(Landesbank
Hessen-Thuringen Girozentrale LOC) (- A-1)
3.75%, 09/01/96 50 50
Irvine, California Improvement Bond Act 1915
Revenue Bonds (Assessment District No. 89-10)
(VMIG1 A-1+)
3.75%, 09/01/96 100 100
Irvine, California Improvement Bond Act 1915
Revenue Bonds (Assessment District No. 95-12)
Series 1996A/ (Kredietbank LOC) (Aa2 AA-)
3.75%, 09/01/96 300 300
</TABLE>
F-71
<PAGE> 221
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
Orange County, California Sanitation District No.
123 Certificates of Participation (Capital
Improvement Program 1990-92) Series C/(FGIC
Insurance) (VMIG1 A-1+)
3.65%, 09/01/96 $100 $100
-------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $750) 750
-------
Shares
------
CASH EQUIVALENTS--0.2%(c)
Provident Institutional Funds--
California Money Fund Portfolio
2.97%, 09/07/96 86 86
-------
TOTAL SHORT-TERM INVESTMENTS
(Cost $86) 86
-------
TOTAL INVESTMENTS--100.0%
(Cost $45,017) $45,241
=======
</TABLE>
See accompanying Notes to Schedules of Investments.
F-72
<PAGE> 222
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
MUNICIPAL BONDS--95.6%(a)
Alameda County, California Public Facilities
Corp. Certificates of Participation (Capital
Projects) (A A+)
6.25%, 06/01/06 $1,000 $1,041
Alta Loma, California Elementary School District
General Obligation Bonds Series 2/(AMBAC
Insurance) (Aaa AAA)
5.88%, 06/01/08 840 868
5.88%, 06/01/09 860 884
Antioch Area, California Public Facilities
Financing Agency Special Tax Community
Facilities Revenue Bonds Series 89-1/(FGIC
Insurance) (Aaa AAA)
5.25%, 08/01/07 1,985 1,973
Bakersfield, California Hospital Revenue Bonds
(Bakersfield Memorial Hospital) Series 1992A
(A A-)
6.50%, 01/01/22 1,000 1,005
California Educational Facilities Authority
Revenue Bonds (Loyola Marymount University)
Series 1992B (A1 -)
6.60%, 10/01/22 1,450 1,537
California Educational Facilities Authority
Revenue Bonds (Mills College) Series 1992
(A -)
6.88%, 09/01/22 500 527
California Educational Facilities Authority
Revenue Bonds (St. Mary's College) Series 1993
(A -)
5.00%, 10/01/12 3,000 2,707
California Health Facilities Financing Authority
Revenue Bonds (Assoc. of Retarded Citizens)
Series 1991/(California Mortgage Insurance)
(- A)
7.00%, 05/01/21 455 477
California Health Facilities Financing Authority
Revenue Bonds (Children's Hospital)/(MBIA
Insurance) (Aaa AAA)
5.38%, 07/01/16 5,180 4,882
California Health Facilities Financing Authority
Revenue Bonds (Marshall Hospital)
Series 1992A/(California Mortgage Insurance)
(- A)
6.63%, 11/01/22 4,000 4,125
California Housing Finance Agency Home Mortgage
Revenue Bonds Series 1994G (Aa AA-)
7.20%, 08/01/14 3,000 3,150
California Housing Finance Agency Home Mortgage
Revenue Bonds Series 1995L/(MBIA Insurance)
(Aaa AAA)
5.90%, 08/01/17 1,000 986
</TABLE>
F-73
<PAGE> 223
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
California Housing Finance Agency Multi Unit
Rental Housing Revenue Bonds II Series 1992B
(A1 A+)
6.70%, 08/01/15 $1,000 $1,039
California State Department of Water Resources
Revenue Bonds (Central Valley Project)
Series O (Aa AA)
5.00%, 12/01/22 2,200 1,928
California State Public Works Board Lease
Revenue Refunding Bonds (Various California
State University Projects) Series 1992A (A A-)
5.50%, 06/01/10 3,000 2,947
6.70%, 10/01/17 1,250 1,305
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates
of Participation (Cedars-Sinai Medical Center)
Series 1992 (A1 -)
6.50%, 08/01/15 1,250 1,277
California Statewide Community Development
Authority Hospital Revenue Bonds Certificates
of Participation (St. Joseph Health Systems)
(Aa AA)
6.50%, 07/01/15 2,000 2,082
Central Coast Water Authority Revenue Bonds
(State Water Project Regional Facilities)
Series 1992/ (AMBAC Insurance) (Aaa AAA)
6.60%, 10/01/22 1,500 1,620
Chico, California Unified School District
General Obligation Bonds Series C/(MBIA
Insurance) (Aaa AAA)
6.75%, 06/01/17 500 539
Fresno, California Health Facility Revenue Bonds
(Holy Cross Health System--St. Agnes Medical
Center) Series 1991 (A1 AA-)
6.50%, 06/01/11 550 566
Los Angeles County, California Public Works
Financing Authority Lease Revenue Refunding
Bonds Series 1996A/(MBIA Insurance) (Aaa AAA)
5.25%, 09/01/13 2,000 1,897
Los Angeles County, California Transportation
Commission Sales Tax Revenue Refunding Bonds
Series 1991B (A1 A+)
6.50%, 07/01/13 555 572
Los Angeles, California Convention & Exhibition
Center Authority Lease Revenue Refunding Bonds
Series 1993A/(MBIA Insurance) (Aaa AAA)
5.13%, 08/15/21 1,000 890
</TABLE>
F-74
<PAGE> 224
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
Los Angeles, California Department of Airports
Revenue Refunding Bonds Series 1995A/(FGIC
Insurance) (Aaa AAA)
5.50%, 05/15/10 $560 $556
Los Angeles, California Department of Water &
Power Electric Plant Revenue Bonds (Aa AA-)
6.00%, 01/15/11 865 881
Los Angeles, California Harbor Department
Revenue Bonds Series 1995A (Aa AA)
6.50%, 08/01/25 3,000 3,124
Monterey Bay, California Unified Air Pollution
Control Certificates of Participation
(Administration Building Project)/
(AMBAC Insurance) (- AAA)
5.70%, 12/01/15 875 856
Northern California Power Agency Multiple
Capital Facilities Revenue Bonds Series
1992A/(MBIA Insurance) (Aaa AAA)
6.50%, 08/01/12 3,300 3,523
Oceanside, California Building Authority
Certificates of Participation Refunding Bonds
Series 1993A (A BBB+)
6.38%, 04/01/12 1,250 1,259
Ontario, California Redevelopment Authority
Revenue Bonds (Project #1)/(MBIA Insurance &
Escrowed to Maturity with Government
Securities) (Aaa AA)
5.50%, 08/01/18 2,000 1,915
Orange County, California Water District
Certificates of Participation (1989 Project)
(Aa AA)
6.50%, 08/15/11 1,150 1,182
Oxnard, California Housing Finance Authority
Lease Revenue Bonds Series 1993/
(FSA Insurance) (Aaa AAA)
5.38%, 06/01/16 2,000 1,872
Petaluma, California Consolidated Public
Facilities Lease Certificates of Participation
Series 1993A/ (AMBAC Insurance) (Aaa AAA)
5.50%, 08/01/08 750 754
Sacramento, California Regional Transit District
Certificates of Participation
Series 1992A (A1 -)
6.38%, 03/01/05 250 262
Sacramento, California Regional Transit District
Refunding Certificates of Participation (Light
Rail Transportation Project) (A1 A+)
6.75%, 07/01/07 2,000 2,157
</TABLE>
F-75
<PAGE> 225
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
Saddleback Community College District,
California Certificates of Participation
(Capital Improvement Project) Series
1996/(MBIA Insurance) (Aaa AAA)
5.50%, 06/01/21 $1,500 $1,417
San Bernardino County, California Certificates
of Participation (West Valley Detention
Center)/ (MBIA Insurance) (Aaa AAA)
6.50%, 11/01/12 420 448
San Diego County, California Regional
Communication System Certificates of Participation
Series 1996/(AMBAC Insurance) (Aaa AAA)
5.50%, 08/15/18 2,700 2,592
San Diego, California Public Facilities Finance
Authority Sewer Revenue Bonds/(FGIC Insurance)
(Aaa AAA)
5.00%, 05/15/25 4,045 3,555
San Francisco, California Bay Area Rapid Transit
District Sales Tax Revenue Bonds Series 1995/
(FGIC Insurance) (Aaa AAA)
5.50%, 07/01/15 1,500 1,451
5.50%, 07/01/20 2,000 1,915
San Francisco, California City & County Airports
Revenue Bonds 2nd Series, Issue 11/(FGIC
Insurance) (Aaa AAA)
6.20%, 05/01/19 2,000 2,032
San Francisco, California Port Commission
Revenue Refunding Bonds Series 1994 (A BBB+)
5.90%, 07/01/09 2,500 2,475
San Jose--Santa Clara, California Water
Financing Authority Sewer Revenue Bonds
Series A/(FGIC Insurance) (Aaa AAA)
5.38%, 11/15/20 1,500 1,402
Santa Clara County, California Financing
Authority Lease Revenue Bonds (VMC Facility
Replacement Project) Series 1994A/
(AMBAC Insurance) (Aaa AAA)
7.75%, 11/15/10 1,460 1,776
6.88%, 11/15/14 2,000 2,192
Santa Clara, California Redevelopment Agency Tax
Allocation Revenue Refunding Bonds (Bayshore
North Project)/(AMBAC Insurance) (Aaa AAA)
7.00%, 07/01/10 1,500 1,712
Southern California Public Power Authority
Revenue Bonds (San Juan Power Project Unit 3)
Series 1993A/(MBIA Insurance) (Aaa AAA)
5.38%, 01/01/08 2,500 2,487
5.00%, 01/01/20 2,000 1,767
</TABLE>
F-76
<PAGE> 226
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
Temecula, California Community Services District
Certificates of Participation (Community
Recreation Center Project) Series 1992 (- A)
7.13%, 10/01/12 $1,000 $1,080
University of California Regents Housing System
Revenue Bonds Series 1993A/(MBIA Insurance)
(Aaa AAA)
5.50%, 11/01/18 2,000 1,907
University of California Revenue Refunding Bonds
(Multi Purpose Projects) Series C/(AMBAC
Insurance) (Aaa AAA)
5.13%, 09/01/18 3,500 3,154
Westminster, California Public Financing
Authority Certificates of Participation (1994
Civic Center & Street Improvement Project)
(- A-)
7.00%, 06/01/19 3,325 3,487
TOTAL MUNICIPAL BONDS ------
(Cost $94,081) 96,014
------
VARIABLE RATE OBLIGATIONS--4.3%(b)
California Pollution Control Financing Authority
Revenue Bonds (Aa3 AA)
3.75%, 09/01/96 100 100
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986C (P-1 A-1+)
3.75%, 09/01/96 400 400
California Pollution Control Financing Authority
Revenue Bonds (Southern California Edison)
Series 1986D (P-1 A-1+)
3.75%, 09/01/96 100 100
Irvine, California Improvement Bond Act 1915
Revenue Bonds (Assessment District No. 95-12)
Series 1996A/(Kredietbank LOC) (VMIG1 A-1+)
3.75%, 09/01/96 100 100
Orange County, California Sanitation District
No. 123 Certificates of Participation (Capital
Improvement Program 1990-92) Series C/(FGIC
Insurance) (VMIG1 A-1+)
3.65%, 09/01/96 3,600 3,600
------
TOTAL VARIABLE RATE OBLIGATIONS
(Cost $4,300) 4,300
------
</TABLE>
F-77
<PAGE> 227
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value
------- --------
<S> <C> <C>
CASH EQUIVALENTS -- 0.1%(c)
Provident Institutional Funds--California Money
Fund Portfolio
2.97%, 09/07/96 90 $90
--------
TOTAL CASH EQUIVALENTS
(Cost $90) 90
--------
TOTAL INVESTMENTS--100.0%
(Cost $98,471) $100,404
========
</TABLE>
See accompanying Notes to Schedules of Investments.
F-78
<PAGE> 228
- ------------------------------------------------------------------------------
NOTES TO SCHEDULES OF INVESTMENTS
August 31, 1996
Parenthetical disclosures which follow each security represent independent bond
ratings, where available, as provided by Moody Investor Services, Inc. and
Standard & Poor's Corporation which were in effect at August 31, 1996. These
ratings are unaudited.
(a) Interest rates represent coupon rate of security.
(b) Interest rates vary periodically based on current market rates. Rates shown
are the effective rates on August 31, 1996. Dates shown represent the
latter of the demand date or next interest rate change date, which is
considered the maturity date for financial reporting purposes. For variable
rate securities without demand features, the next interest reset date is
shown.
(c) Interest rates represent the yield on August 31, 1996.
<TABLE>
<CAPTION>
Abbreviations
- -------------
<S> <C>
AMBAC AMBAC Indemnity Corporation
FGIC Financial Guaranty Insurance Company
FSA Financial Security Assurance
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance
VMIG Variable Moody's Investment Grade
</TABLE>
See accompanying Notes to Financial Statements.
F-79
<PAGE> 229
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
---------------- ---------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $45,017 and $98,471,
respectively) $45,241 $100,404
Interest receivable 532 1,298
Receivable for Fund shares sold 96 75
Deferred organization costs 2 3
Prepaid expenses 9 1
------- --------
Total assets 45,880 101,781
------- --------
LIABILITIES
Payable for:
Dividends 26 72
Fund shares redeemed 16 35
Investment advisory and administration
fee -- 4
Other 50 54
------- --------
Total liabilities 92 165
------- --------
Net assets applicable to outstanding
shares $45,788 $101,616
======= ========
NET ASSETS CONSIST OF:
Capital paid in $46,401 $101,932
Accumulated undistributed
net investment income 11 36
Accumulated net realized loss on
investments sold (848) (2,285)
Net unrealized gain on investments 224 1,933
------- --------
$45,788 $101,616
======= ========
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 4,562 9,558
Net asset value, offering and redemption
price per share $10.04 $10.63
</TABLE>
See accompanying Notes to Financial Statements.
F-80
<PAGE> 230
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Year ended August 31, 1996
<TABLE>
<CAPTION>
Schwab Schwab
California California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
---------------- ---------
<S> <C> <C>
Interest income $ 2,030 $ 5,685
-------- --------
Expenses:
Investment advisory and administration
fee 175 401
Transfer agency and shareholder service
fees 107 246
Custodian fees 31 67
Professional fees 32 37
Shareholder reports 13 28
Trustees' fees 4 6
Registration fees 2 4
Amortization of deferred organization
costs 1 1
Insurance and other expenses 9 13
-------- --------
374 803
Less expenses reduced (164) (323)
-------- --------
Total expenses incurred by Fund 210 480
-------- --------
Net investment income 1,820 5,205
-------- --------
Net realized gain (loss) on investments
sold:
Proceeds from sales of investments 45,305 111,367
Cost of investments sold (45,317) (110,925)
-------- --------
Net realized gain (loss) on
investments sold (12) 442
-------- --------
Change in net unrealized gain (loss)
on investments:
Beginning of period 326 1,574
End of period 224 1,933
-------- --------
Increase (decrease) in net
unrealized gain on investments (102) 359
-------- --------
Net gain (loss) on investments (114) 801
-------- --------
Increase in net assets resulting
from operations $ 1,706 $ 6,006
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-81
<PAGE> 231
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Tax-Free
Bond Fund Bond Fund
-------------------- --------------------
Year ended August 31,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 1,820 $ 1,791 $ 5,205 $ 5,074
Net realized gain (loss) on
investments sold (12) (767) 442 (1,880)
Increase (decrease) in net
unrealized gain on investments (102) 1,219 359 2,086
-------- -------- -------- --------
Increase in net assets
resulting from operations 1,706 2,243 6,006 5,280
-------- -------- -------- --------
Dividends to shareholders from
net investment income (1,820) (1,786) (5,205) (5,061)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 19,657 12,494 31,008 22,400
Net asset value of shares issued in
reinvestment of dividends 1,443 1,403 3,436 3,479
Less payments for shares redeemed (15,837) (22,364) (23,674) (42,485)
-------- -------- -------- --------
Increase (decrease) in net assets
from capital share transactions 5,263 (8,467) 10,770 (16,606)
-------- -------- -------- --------
Total increase (decrease) in net
assets 5,149 (8,010) 11,571 (16,387)
Net assets:
Beginning of period 40,639 48,649 90,045 106,432
-------- -------- -------- --------
End of period (including
undistributed net investment
income of $11, $11, $36 and $36,
respectively) $ 45,788 $ 40,639 $101,616 $ 90,045
======== ======== ======== ========
Number of Fund shares:
Sold 1,951 1,271 2,893 2,201
Reinvested 143 143 321 342
Redeemed (1,572) (2,293) (2,210) (4,220)
-------- -------- -------- --------
Net increase (decrease) in
shares outstanding 522 (879) 1,004 (1,677)
Shares outstanding:
Beginning of period 4,040 4,919 8,554 10,231
-------- -------- -------- --------
End of period 4,562 4,040 9,558 8,554
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-82
<PAGE> 232
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
1. DESCRIPTION OF THE FUNDS
The Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab
California Long-Term Tax-Free Bond Fund (the "Funds") are series of Schwab
Investments (the "Trust"), a no-load, open-end management investment company
organized as a Massachusetts business trust on October 26, 1990 and registered
under the Investment Company Act of 1940, as amended.
In addition to the Funds, the Trust also offers -- the Schwab 1000 Fund(R),
Schwab Short/Intermediate Government Bond Fund, Schwab Long-Term Government Bond
Fund, Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free
Bond Fund. The assets of each series are segregated and accounted for
separately.
The investment objective of the Funds is to seek to provide 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 Funds, which
are not "diversified" investment companies within the meaning of the Investment
Company Act of 1940, as amended, each invest primarily in debt obligations
issued by or on behalf of the State of California, its political subdivisions,
agencies or instrumentalities, the interest of which is not subject to federal
income and State of California personal income taxes.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities within 60 days or less of maturity are stated at amortized
cost which approximates market value.
F-83
<PAGE> 233
- ------------------------------------------------------------------------------
Security transactions and interest income -- Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Interest
income is recorded on the accrual basis and includes amortization of premium on
investments. Realized gains and losses from security transactions are determined
on an identified cost basis. For callable bonds purchased at a premium, the
excess of the purchase price over the call value is amortized against interest
income through the call date. If the call provision is not exercised, any
remaining premium is amortized through the final maturity date.
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, if any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds, their initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five-year period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
All distributions paid by the Schwab California Short/Intermediate Tax-Free Bond
Fund and Schwab California Long-Term Tax-Free Bond Fund during the year ended
August 31, 1996, qualify as exempt interest dividends for federal tax purposes.
At August 31, 1996, (for financial reporting and federal income tax purposes),
net unrealized gain for the Schwab California Short/Intermediate Tax-Free Bond
Fund aggregated $224,000, of which $363,000 related to appreciated securities
and $139,000 related to depreciated
F-84
<PAGE> 234
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
securities, and net unrealized gain for the Schwab California Long-Term Tax-Free
Bond Fund aggregated $1,933,000, of which $2,662,000 related to appreciated
securities and $729,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. Under this agreement, the Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund incurred investment advisory and administration fees of $175,000 and
$401,000, respectively, for the year ended August 31, 1996, before the
Investment Manager reduced its fee (see Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
For the year ended August 31, 1996, the Schwab California Short/Intermediate
Tax-Free Bond Fund and Schwab California Long-Term Tax-Free Bond Fund incurred
transfer agency and shareholder service fees of $107,000, and $246,000,
respectively, before Schwab reduced its fees (see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1996, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Funds incurred fees aggregating $10,000
related to the Trust's unaffiliated trustees.
F-85
<PAGE> 235
- ------------------------------------------------------------------------------
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the ratio of operating expenses to average net assets for each Fund.
During the year ended August 31, 1996, the total of such fees reduced by the
Investment Manager was $57,000 and $104,000 for the Schwab California
Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free
Bond Fund, respectively, and the total of such fees reduced by Schwab was
$107,000 and $219,000 for the Schwab California Short/Intermediate Tax-Free Bond
Fund and the Schwab California Long-Term Tax-Free Bond Fund, respectively (see
Note 6).
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the year ended August 31, 1996, were as follows
(in thousands):
<TABLE>
<CAPTION>
Schwab California Schwab California
Short/Intermediate Long-Term
Tax-Free Bond Fund Tax-Free Bond Fund
------------------- -------------------
<S> <C> <C>
Purchases $13,425 $40,919
Proceeds of sales and
maturities $ 8,224 $33,408
</TABLE>
F-86
<PAGE> 236
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Year ended August 31, 1996
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
Schwab California Short/Intermediate
Tax-Free Bond Fund
---------------------------------------------
Period ended
Year ended August 31, August 31,
1996 1995 1994 1993++
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Net asset value at beginning of
period $ 10.06 $ 9.89 $ 10.13 $ 10.00
Income from investment operations
- ---------------------------------
Net investment income 0.43 0.42 0.37 0.13
Net realized and unrealized gain
(loss) on investments (0.02) 0.17 (0.24) 0.13
------- ------- ------- --------
Total from investment operations 0.41 0.59 0.13 0.26
Less distributions
- ------------------
Dividends from
net investment income (0.43) (0.42) (0.37) (0.13)
Distributions from realized
gain on investments -- -- -- --
------- ------- ------- --------
Total distributions (0.43) (0.42) (0.37) (0.13)
------- ------- ------- --------
Net asset value at end of period $ 10.04 $ 10.06 $ 9.89 $ 10.13
======= ======= ======= ========
Total return (%) 4.11 6.17 1.29 2.57
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $45,788 $40,639 $48,649 $ 44,545
Ratio of expenses to
average net assets (%) 0.49 0.50 0.48 0.45*
Ratio of net investment income to
average net assets (%) 4.23 4.29 3.69 3.49*
Portfolio turnover rate (%) 20 62 35 0
- ---------------
Ratio of expenses to average net
assets prior to reduced fees and
absorbed expenses (%)+ 0.87 0.84 0.86 1.25*
Ratio of net investment income to
average net assets prior to
reduced fees and absorbed
expenses (%)+ 3.85 3.95 3.31 2.69*
</TABLE>
++ For the period April 21, 1993 (commencement of operations) to August 31,
1993.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
F-87
<PAGE> 237
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Schwab California Long-Term Tax-Free Bond Fund
-------------------------------------------------------------
Eight months
ended Period ended
Year ended August 31, August 31, December 31,
1996 1995 1994 1993 1992++
-------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 10.53 $ 10.40 $ 11.26 $ 10.58 $ 10.00
Income from investment
- ----------------------
operations
Net investment income 0.57 0.56 0.56 0.38 0.51
Net realized and unrealized
gain (loss) on investments 0.10 0.13 (0.74) 0.68 0.58
-------- ------- -------- --------- -------
Total from investment
operations 0.67 0.69 (0.18) 1.06 1.09
Less distributions
- ------------------
Dividends from
net investment income (0.57) (0.56) (0.56) (0.38) (0.51)
Distributions from realized
gain on investments -- -- (.12) -- --
-------- ------- -------- --------- -------
Total distributions (0.57) (0.56) (0.68) (0.38) (0.51)
-------- ------- -------- --------- -------
Net asset value at end of period $ 10.63 $ 10.53 $ 10.40 $ 11.26 $ 10.58
======== ======= ======== ========= =======
Total return (%) 6.43 6.98 (1.70) 10.13 11.10
- ----------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period
(000s) $101,616 $90,045 $106,432 $ 138,067 $72,969
Ratio of expenses to
average net assets (%) 0.49 0.58 0.60 0.60* 0.45*
Ratio of net investment income
to average net assets (%) 5.30 5.54 5.12 5.18* 5.72*
Portfolio turnover rate (%) 36 46 48 47 124
- ---------------
Ratio of expenses to average
net assets prior to reduced
fees
and absorbed expenses (%)+ 0.82 0.81 0.80 0.87* 1.05*
Ratio of net investment income
to average net assets prior
to reduced fees and absorbed
expenses (%)+ 4.97 5.31 4.92 4.91* 5.12*
</TABLE>
++ For the period February 24, 1992 (commencement of operations) to December 31,
1992.
+ The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets.
* Annualized
F-88
<PAGE> 238
- ------------------------------------------------------------------------------
To the Trustees and Shareholders of
the Schwab California Short/Intermediate Tax-Free Bond Fund and
Schwab California Long-Term Tax-Free Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Schwab California
Short/Intermediate Tax-Free Bond Fund and the Schwab California Long-Term
Tax-Free Bond Fund (two series constituting part of Schwab Investments,
hereafter referred to as the "Trust") at August 31, 1996, the results of each of
their operations, the changes in each of their net assets and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles. These financial statements and the financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at August 31, 1996 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- -------------------------
PRICE WATERHOUSE LLP
San Francisco, California
September 24, 1996
F-89
<PAGE> 239
PART C
OTHER INFORMATION
December 30, 1996
SCHWAB INVESTMENTS
Item 24. Financial Statements and Exhibits.
Financial Statements:
Included in Part A, Prospectus:
-- Condensed Financial Information
Included in Part B, Statement of Additional Information:
-- Statement of Net Assets for the Schwab 1000 Fund(R)
as of August 31, 1996 (Audited)
-- Statement of Operations for the Schwab 1000 Fund for
the year ended August 31, 1996 (Audited)
-- Statement of Changes in Net Assets for the Schwab
1000 Fund for the year ended August 31, 1996
(Audited)
-- Notes to Financial Statements for the Schwab 1000
Fund for the year ended August 31, 1996 (Audited)
-- Report of the Independent Accountants for the Schwab
1000 Fund, dated September 24, 1996
-- Schedule of Investments for the Schwab
Short/Intermediate Government Bond Fund as of August
31, 1996 (Audited)
-- Schedule of Investments for the Schwab Long-Term
Government Bond Fund as of August 31, 1996 (Audited)
-- Statement of Assets and Liabilities for the Schwab
Long-Term Government Bond Fund and the Schwab
Short/Intermediate Government Bond Fund for the year
ended August 31, 1996 (Audited)
-- Statement of Operations for the Schwab Long-Term
Government Bond Fund and the Schwab
Short/Intermediate Government Bond Fund for the year
ended August 31, 1996 (Audited)
-- Statement of Changes in Net Assets for the Schwab
Long-Term Government Bond Fund and the Schwab
Short/Intermediate Government Bond Fund for the year
ended August 31, 1996 (Audited)
C-1
<PAGE> 240
-- Notes to Financial Statements for the Schwab
Long-Term Government Bond Fund and the Schwab
Short/Intermediate Government Bond Fund for the year
ended August 31, 1996 (Audited)
-- Report of the Independent Accountants for the Schwab
Long-Term Government Bond Fund and the Schwab
Short/Intermediate Government Bond Fund, dated
September 24, 1996
-- Schedule of Investments for the Schwab Short/
Intermediate Tax-Free Bond Fund as of August 31,
1996 (Audited)
-- Schedule of Investments for the Schwab Long-Term
Tax-Free Bond Fund as of August 31, 1996 (Audited)
-- Statement of Assets and Liabilities for the Schwab
Long-Term Tax-Free Bond Fund and the Schwab
Short/Intermediate Tax-Free Bond Fund for the year
ended August 31, 1996 (Audited)
-- Statement of Operations for the Schwab Long-Term
Tax-Free Bond Fund and the Schwab Short/Intermediate
Tax-Free Bond Fund for the year ended August 31, 1996
(Audited)
-- Statement of Changes in Net Assets for the Schwab
Long-Term Tax-Free Bond Fund and the Schwab
Short/Intermediate Tax-Free Bond Fund for the year
ended August 31, 1996 (Audited)
-- Notes to Financial Statements for the Schwab
Long-Term Tax-Free Bond Fund and the Schwab
Short/Intermediate Tax-Free Bond Fund for the year
ended August 31, 1996 (Audited)
-- Report of the Independent Accountants for the Schwab
Long-Term Tax-Free Bond Fund and the Schwab
Short/Intermediate Tax-Free Bond Fund, dated
September 24, 1996
-- Schedule of Investments for the Schwab California
Short/Intermediate Tax-Free Bond Fund as of August
31, 1996 (Audited)
-- Schedule of Investments for the Schwab California
Long-Term Tax-Free Bond Fund as of August 31, 1996
(Audited)
-- Statement of Assets and Liabilities for the Schwab
California Long-Term Tax-Free Bond Fund and the
Schwab California Short/Intermediate Tax-Free Bond
Fund for the year ended August 31, 1996 (Audited)
-- Statement of Operations for the Schwab California
Long-Term Tax-Free Bond Fund and the Schwab
California Short/Intermediate Tax-Free Bond Fund for
the year ended August 31, 1996 (Audited)
-- Statement of Changes in Net Assets for the Schwab
California Long-Term Tax-Free Bond Fund and the
Schwab California Short/Intermediate Tax-Free Bond
Fund for the year ended August 31, 1996 (Audited)
C-2
<PAGE> 241
-- Notes to Financial Statements for the Schwab
California Long-Term Tax-Free Bond Fund and the
Schwab California Short/Intermediate Tax-Free Bond
Fund for the year ended August 31, 1996 (Audited)
-- Report of the Independent Accountants for the Schwab
California Long-Term Tax-Free Bond Fund and the
Schwab California Short/Intermediate Tax-Free Bond
Fund, dated September 24, 1996
(b) Exhibits:
(1) -- Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1)
to the Registration Statement on Form N-1A
of Schwab Investments ("Registrant"),
filed on October 29, 1990 (the "Agreement
and Declaration of Trust")
(2) -- Amended and Restated By-Laws are incorpo-
rated by reference to Exhibit (2) to Post-
Effective Amendment No. 12, to Registrant's
Registration Statement on Form N-1A, filed
on December 30, 1994
(3) -- Inapplicable
(4) (a) -- Article III, Section 5, Article V, Article
VI, Article VIII, Section 4 and Article IX,
Sections 1, 5 and 7 of the Agreement and
Declaration of Trust is incorporated by
reference to Exhibit (1) to Registrant's
Registration Statement on Form N-1A, filed
on October 29, 1990
(b) -- Article 9, Article 10, Section 6, and
Article 11 of the Amended and Restated By-
Laws are incorporated by reference to
Exhibit (2) to Post-Effective Amendment No.
12, to Registrant's Registration Statement
on Form N-1A, filed on December 30, 1994
(5) -- Investment Advisory and Administration
Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the
"Investment Manager") is incorporated by
reference to Exhibit (5) (a) to Post-
Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A, filed
on December 30, 1994
(6) -- Distribution Agreement between Registrant
and Charles Schwab & Co., Inc. ("Schwab")
is incorporated by reference to Exhibit
(6)(a) to Post-Effective Amendment No. 12
to Registrant's Registration Statement on
Form N-1A, filed on December 30, 1994
(7) -- Inapplicable
(8) (a) -- Custodian Services Agreement between
Registrant and PNC Bank, National Associ-
ation (formerly Provident National Bank)
is incorporated by reference to Exhibit
(8)(a) to Post-Effective Amendment No. 2 to
Registrant's
C-3
<PAGE> 242
Registration Statement on Form N-1A, filed
on December 23, 1991
(b) -- Amendment No. 1 to Custodian Services
Agreement referred to at Exhibit (8)(a)
above is incorporated by reference to
Exhibit (8)(b) to Post-Effective Amendment
No. 13 to Registrant's Registration State-
ment on Form N-1A, filed on December 29,
1996
(c) -- Amendment No. 2 to Custodian Services
Agreement referred to at Exhibit (8)(a)
above is filed herewith
(d) -- Amended Schedule to the Custodian Services
Agreement referred to at Exhibit (8)(a)
above is incorporated by reference to
Exhibit (8)(b) to Post-Effective Amendment
No. 12 to Registrant's Registration State-
ment on Form N-1A, filed on December 30,
1994
(e) -- Transfer Agency Agreement between the
Registrant and Schwab is incorporated by
reference to Exhibit (8)(b) to
Post-Effective Amendment No. 9 to
Registrant's Registration Statement on
Form N-1A, filed on August 27, 1993
(f) -- Amended Schedule to the Transfer Agency
Agreement referred to at Exhibit (8)(e)
above is incorporated by reference to
Exhibit 8(d) to Post-Effective Amendment
No. 11 to Registrant's Registration
Statement on Form N-1A, filed on December
28, 1993
(g) -- Shareholder Service Agreement between the
Registrant and Schwab is incorporated by
reference to Exhibit (8)(c) to Post-
Effective Amendment No. 9 to Registrant's
Registration Statement on Form N-1A, filed
on August 27, 1993
(h) -- Amended Schedule to the Shareholder
Services Agreement referred to at Exhibit
(8)(g) above is incorporated by reference
to Exhibit 8(f) to Post-Effective
Amendment No. 11 to Registrant's Registra-
tion Statement on Form N-1A, filed on
December 28, 1993
(i) -- Accounting Services Agreement between
Registrant and Provident Financial
Processing Corporation is incorporated by
reference to Exhibit (8)(c) to Post-
Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A, filed
on December 23, 1991
(j) -- Amendment No. 1 to Accounting Services
Agreement referred to at Exhibit (8)(i)
above is incorporated by reference to
Exhibit (8)(i) to Post-Effective Amendment
No. 13 to Registrant's Registration State-
ment on Form N-1A, filed on December 29,
1996
(k) -- Amendment No. 2 to Accounting Services
Agreement referred to at Exhibit (8)(i)
above is filed herewith
(l) -- Amended Schedule to the Accounting
Services Agreement referred to at Exhibit
(8)(i) above is incorporated by reference
to Exhibit (8)(h) to Post-
C-4
<PAGE> 243
Effective Amendment No. 12 to Registrant's
Registration Statement on Form N-1A, filed
on December 30, 1994
(9) -- Inapplicable
(10) -- Opinion and Consent of Ropes & Gray as to
legality of the securities being regis-
tered is incorporated by reference to the
Registrant's Rule 24f-2 Notice, filed on
October 24, 1996
(11) (a) -- Consent of Ropes & Gray is filed herewith
(b) -- Consent of Price Waterhouse LLP, Indepen-
dent Accountants, is filed herewith
(12) -- Inapplicable
(13) -- Purchase Agreement relating to shares of
the Schwab Short/Intermediate Tax-Free
Bond Fund, Schwab California Short/Inter-
mediate Tax-Free Bond Fund and Schwab
Long-Term Government Bond Fund (formerly,
Schwab Long-Term U.S. Government Bond
Fund) is incorporated by reference to
Exhibit (13) to Post-Effective Amendment
No. 9 to Registrant's Registration State-
ment on Form N-1A, filed on August 27,
1993
(14) -- Inapplicable
(15) -- Inapplicable
(16) -- Performance Calculations are incorporated
by reference to Exhibit (16) to the
Registrant's Registration Statement on
Form N-1A filed on March 3, 1992 and
August 30, 1992
(17) (a) -- Financial Data Schedule for Schwab 1000
Fund(R) is filed herewith
(b) -- Financial Data Schedule for Schwab Short/
Intermediate Government Bond Fund is filed
herewith
(c) -- Financial Data Schedule for Schwab Long-
Term Government Bond Fund is filed
herewith
(d) -- Financial Data Schedule for Schwab Short-
Intermediate Tax-Free Bond Fund is filed
herewith
(e) -- Financial Data Schedule for Schwab Long-
Term Tax-Free Bond Fund is filed herewith
(f) -- Financial Data Schedule for Schwab
California Short/Intermediate Tax-Free
Bond Fund is filed herewith
(g) -- Financial Data Schedule for Schwab
California Long-Term Tax-Free Bond Fund
is filed herewith
C-5
<PAGE> 244
Item 25. Persons Controlled by or under Common Control with the Registrant.
The Charles Schwab Family of Funds (the "Schwab Fund Family"),
Schwab Capital Trust and Schwab Annuity Portfolios are each Massachusetts
business trusts registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). Each is advised by the Investment Manager and employs Schwab
as principal underwriter, transfer agent and shareholder services agent. As a
result, the Schwab Fund Family, Schwab Capital Trust and Schwab Annuity
Portfolios may each be deemed to be under common control with Registrant.
Item 26. Number of Holders Securities.
As of December 15, 1996, the number of record holders of shares
of beneficial interest for the Series of Registrant:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
- -------------- ------------------------
<S> <C>
Schwab 1000 Fund(R) 1 (for the benefit of 92,294,426 accounts)
Schwab Long-Term Government Bond Fund 1 (for the benefit of 2,196,798 accounts)
Schwab Short/Intermediate Government Bond Fund 1 (for the benefit of 13,603,035 accounts)
Schwab Long-Term Tax-Free Bond Fund 1 (for the benefit of 4,193,837 accounts)
Schwab Short/Intermediate Tax-Free Bond Fund 1 (for the benefit of 5,140,717 accounts)
Schwab California Long-Term Tax-Free Bond Fund 1 (for the benefit of 9,899,597 accounts)
Schwab California Short/Intermediate Tax-Free 1 (for the benefit of 4,788,756 accounts)
Bond Fund
</TABLE>
Item 27. Indemnification.
Article VIII of Registrant's Agreement and Declaration of Trust
(Exhibit (1) hereto, which is incorporated herein by reference) provides in
effect that Registrant will indemnify its officers and trustees against all
liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise, or as fines and penalties, and counsel
fees reasonably incurred by any such officer or trustee in connection with the
defense or disposition of any action, suit, or other proceeding. However, in
accordance with Section 17(h) and 17(i) of the 1940 Act and its own terms, said
Agreement and Declaration of Trust does not protect any person against any
liability to Registrant or its shareholders to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
In any event, Registrant will comply with 1940 Act Releases No. 7221 and 11330
respecting the permissible boundaries of indemnification by an investment
company of its officers and trustees.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
trustees, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, Registrant has been advised that, in the
opinion of the Securities
C-6
<PAGE> 245
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Manager.
(a) Information pertaining to business and other connections of
Registrant's Investment Manager is hereby incorporated by reference to the
section of the Prospectuses captioned "Management of the Fund(s)" and to the
section of the Statement of Additional Information captioned "Management of
the Trust."
Registrant's Investment Manager, Charles Schwab Investment
Management, Inc., a Delaware corporation, organized in October 1989 to serve as
Investment Manager to the Schwab Fund Family, also serves as the Investment
Manager to Schwab Capital Trust and Schwab Annuity Portfolios, each an open-end
management investment company. The principal place of business of the Investment
Manager is 101 Montgomery Street, San Francisco, California 94104. The only
business in which the Investment Manager engages is that of investment manager
and administrator to Registrant, Schwab Fund Family, Schwab Capital Trust,
Schwab Annuity Portfolios and any other investment companies that Schwab may
sponsor in the future.
(b) The business, profession, vocation or employment of a
substantial nature in which each director and/or executive officer of Schwab
and/or the Investment Manager is or has been engaged during the past two fiscal
years for his or her own account in the capacity of director, officer, employee,
partner or trustee is as follows:
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Chief Executive Officer
and Director
Charles Schwab Investment Management, Inc. Chairman and Director
The Charles Schwab Trust Company Chairman and Director
Mayer & Schweitzer, Inc. Director and Chairman of Board of
Directors; Director until
December 1995
The Gap, Inc. Director
</TABLE>
C-7
<PAGE> 246
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Transamerica Corporation Director
AirTouch Communications Director
Siebel Systems Director
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February 1995;
Vice Chairman until August 1994
The Charles Schwab Corporation Vice Chairman and Director; Chief
Operating Officer until March 1994
Mayer & Schweitzer, Inc. Director until February 1995
The Charles Schwab Trust Company Director
David S. Pottruck Charles Schwab & Co., Inc. President, Chief Executive
Officer and Director
The Charles Schwab Corporation President, Chief Operating
Officer and Director
Charles Schwab Investment Management, Inc. Director
Mayer & Schweitzer, Inc. Chairman, Chief Executive Officer
and Director
Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman and Director until
January 1996; Senior Executive
Vice President and Chief
Operating Officer until January
1995
The Charles Schwab Corporation Executive Vice President until
January 1996; Senior Executive
Vice President until January 1995
Mayer & Schweitzer, Inc. Director until January 1996
</TABLE>
C-8
<PAGE> 247
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
John P. Coghlan Charles Schwab & Co., Inc. Executive Vice President - Schwab
Institutional
The Charles Schwab Corporation Executive Vice President - Schwab
Institutional
The Charles Schwab Trust Company Director and Executive Vice
President
Dawn G. Lepore Charles Schwab & Co., Inc. Executive Vice President and
Chief Information Officer
The Charles Schwab Corporation Executive Vice President and
Chief Information Officer
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President -
Business Strategy
Charles Schwab & Co., Inc. Executive Vice President -
Business Strategy
Timothy F. McCarthy, Charles Schwab Investment Management, Inc. Chief Executive Officer
Trustee and President
Charles Schwab & Co., Inc. Executive Vice President - Mutual
Funds
The Charles Schwab Corporation Executive Vice President,
President - Financial Products
and International Group
Jardine Fleming Unit Trusts Ltd. Chief Executive Officer until
October 1995
Fidelity Investment Advisor Group President until 1994
Mayer & Schweitzer, Inc. Director
Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President -
Electronic Brokerage
The Charles Schwab Corporation Executive Vice President -
Electronic Brokerage
</TABLE>
C-9
<PAGE> 248
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Steven L. Scheid Charles Schwab & Co., Inc. Director and Chief Financial
Officer
The Charles Schwab Corporation Executive Vice President - Chief
Financial Officer
Charles Schwab Investment Management, Inc. Executive Vice President,
Director and Chief Financial
Officer
The Charles Schwab Trust Company Chief Financial Officer
Schwab Retirement Plan Services, Inc. Director
Performance Technologies, Inc. Director
Mayer & Schweitzer, Inc. Director
Tom D. Seip Charles Schwab & Co., Inc. Executive Vice President - Retail
Brokerage
The Charles Schwab Corporation Executive Vice President - Retail
Brokerage
Charles Schwab Investment Management, Inc. President and Chief Operating
Officer until 1994
John N. Tognino Charles Schwab & Co., Inc. Executive Vice President -
Capital Markets and Trading until
February 1996
The Charles Schwab Corporation Executive Vice President -
Capital Markets and Trading until
February 1996
Mayer & Schweitzer, Inc. Director and Vice Chairman until
February 1996
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President - Human
Resources and Corporate Support
The Charles Schwab Corporation Executive Vice President and
Chief Administrative Officer
</TABLE>
C-10
<PAGE> 249
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Commercial Credit Corporation Managing Director until February
1994
Christopher V. Dodds Charles Schwab & Co., Inc. Treasurer and Senior Vice
President
The Charles Schwab Corporation Treasurer and Senior Vice
President
Mayer & Schweitzer, Inc. Treasurer
William J. Klipp, Charles Schwab & Co., Inc. Executive Vice President -
Trustee, Executive Vice President SchwabFunds
and Chief Operating Officer
Charles Schwab Investment Management, Inc. President and Chief Operating
Officer
Stephen B. Ward, Charles Schwab Investment Management, Inc. Senior Vice President and Chief
Senior Vice President and Chief Investment Officer
Investment Officer
Frances Cole, Charles Schwab Investment Management, Inc. Vice President, Chief Counsel,
Secretary Chief Compliance Officer and
Assistant Corporate Secretary
Tai-Chin Tung, Charles Schwab & Co., Inc. Vice President - Finance
Treasurer and Principal
Financial Officer
Charles Schwab Investment Management, Inc. Controller
Robertson Stephens Investment Management, Controller until 1996
Inc.
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Assistant Corporate Secretary
Charles Schwab Investment Management, Inc. Corporate Secretary
The Charles Schwab Trust Company Assistant Corporate Secretary
</TABLE>
C-11
<PAGE> 250
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Mayer & Schweitzer Secretary
Mary B. Templeton Charles Schwab Investment Management, Inc. Assistant Corporate Secretary
The Charles Schwab Corporation Senior Vice President, General
Counsel and Corporate Secretary
Charles Schwab & Co., Inc. Senior Vice President, General
Counsel and Corporate Secretary
Mayer & Schweitzer Assistant Corporate Secretary
The Charles Schwab Trust Company Assistant Corporate Secretary
until February 1996
David H. Lui Charles Schwab Investment Vice President and Senior Counsel
Assistant Secretary Management, Inc.
Christina M. Perrino Charles Schwab Investment Vice President and Senior Counsel
Assistant Secretary Management, Inc.
Karen L. Seaman Charles Schwab Investment Corporate Counsel
Assistant Secretary Management, Inc.
</TABLE>
Item 29. Principal Underwriters.
(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab currently also acts as principal underwriter for the
Schwab Fund Family, Schwab Capital Trust, Schwab Annuity Portfolios and intends
to act as such for any other investment company which Schwab may sponsor in the
future.
(b) See Item 28(b) for information on the officers and
directors of Schwab. The principal business address of Schwab is 101 Montgomery
Street, San Francisco, California 94104.
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be
maintained pursuant to Section 31(a) of the 1940 Act and the Rules thereunder
are maintained at the offices of: Registrant (transfer agency and shareholder
records); Registrant's investment manager and administrator, Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's principal underwriter, Charles Schwab & Co., Inc., 101
Montgomery Street, San Francisco, California 94104;
C-12
<PAGE> 251
Registrant's Custodian, PNC Bank, National Association, Broad and Market
Streets, Philadelphia, Pennsylvania 19809 (ledgers, receipts, and brokerage
orders); Registrant's fund accountants, PFPC, Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809; or Ropes & Gray, counsel to Registrant, 1301 K
Street, N.W., Suite 800 East, Washington, District of Columbia, 20005 (minute
books, bylaws, and declaration of trust).
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Registrant undertakes to call a meeting of Shareholders, at
the request of at least 10% of Registrant's outstanding shares, for the purpose
of voting upon the question of removal of a trustee or trustees and to assist in
communications with other Shareholders as required by Section (16) of the 1940
Act.
(b) Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of Registrant's latest Annual Report to
Shareholders upon request and without charge.
C-13
<PAGE> 252
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended,
Registrant certifies that it meets all of the requirements for effectiveness of
this Post-Effective Amendment No. 14 to Registrant's Registration Statement on
Form N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this
Post- Effective Amendment No. 14 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Washington, District of Colombia on
the 30th day of December, 1996.
SCHWAB INVESTMENTS
Registrant
Charles R. Schwab*
---------------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this
Post-Effective Amendment No. 14 to Registrant's Registration Statement on Form
N-1A has been signed below by the following persons in the capacities indicated
this 30th day of December, 1996.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman and Trustee
- -----------------------------
Charles R. Schwab
Timothy F. McCarthy* President and Trustee
- -----------------------------
Timothy F. McCarthy
William J. Klipp* Executive Vice President, Trustee and
- ----------------------------- Chief Operating Officer
William J. Klipp
Donald F. Dorward* Trustee
- -----------------------------
Donald F. Dorward
Robert G. Holmes* Trustee
- -----------------------------
Robert G. Holmes
Donald R. Stephens* Trustee
- -----------------------------
Donald R. Stephens
Michael W. Wilsey* Trustee
- -----------------------------
Michael W. Wilsey
Tai-Chin Tung** Treasurer and Principal Financial Officer
- -----------------------------
Tai-Chin Tung
</TABLE>
*By: /s/ Alan G. Priest
---------------------------------
Alan G. Priest, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
** Pursuant to Power of Attorney filed herewith.
<PAGE> 253
POWER OF ATTORNEY
I, the undersigned trustee and officer of The Charles Schwab Family of
Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and
Schwab Advantage Trust (each a "Trust" and collectively the "Trusts"),
Massachusetts business trusts, do hereby constitute and appoint William J.
Klipp, Frances Cole, Martin E. Lybecker and Alan G. Priest, and each of them
singly, my true and lawful attorneys, with full power to them and each of them,
to sign for me and in my name and in the capacity listed below, any and all
amendments to the Registration Statement on Form N-1A of each Trust, and to file
the same with all exhibits thereto, and other documents in connection
thereunder, with the Securities and Exchange Commission, granting unto my said
attorneys, and each of them acting alone, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in the
premises, as fully as to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue thereof.
WITNESS my hand on the date set forth below.
August 13, 1996 /s/ Tai-Chin Tung
--------------------------------
Tai-Chin Tung
Principal Financial Officer
<PAGE> 254
<TABLE>
<CAPTION>
EXHIBITS INDEX
Exhibit No. Description
- ----------- -----------
<S> <C>
(8)(c) Amendment No. 2 to Custodian Services Agreement
(8)(k) Amendment No. 2 to Accounting Services Agreement
(11)(a) Consent of Ropes & Gray
(11)(b) Consent of Price Waterhouse
(17)(a) Financial Data Schedule for Schwab 1000 Fund(R)
(17)(b) Financial Data Schedule for Schwab Short/Intermediate Government Bond Fund
(17)(c) Financial Data Schedule for Schwab Long-Term Government Bond Fund
(17)(d) Financial Data Schedule for Schwab Short/Intermediate Tax-Free Bond Fund
(17)(e) Financial Data Schedule for Schwab Long-Term Tax-Free Bond Fund
(17)(f) Financial Data Schedule for Schwab California Short/Intermediate Tax-Free Bond
Fund
(17)(g) Financial Data Schedule for Schwab California Long-Term Tax-Free Bond Fund
</TABLE>
<PAGE> 1
Exhibit (8)(C)
AMENDMENT NO. 2 TO CUSTODIAN SERVICES AGREEMENT
This Amendment, dated February 5, 1996, is entered into between SCHWAB
INVESTMENTS, a Massachusetts business trust (the "Fund"), and PNC BANK, NATIONAL
ASSOCIATION (formerly Provident National Bank), a national banking association
("PNC Bank").
WHEREAS, the Fund and PNC Bank have entered into a Custodian Services
Agreement dated as of November 4, 1991 (the "Agreement"), and amended as of
August 8, 1995, pursuant to which the Fund appointed PNC Bank to provide
custodian services to its investment portfolios listed on Schedule A to the
Agreement; and
WHEREAS, the Fund and PNC Bank desire to amend the Agreement;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Paragraph 15 is hereby deleted and replaced with the following:
Duration and Termination. This Agreement shall continue in full force and effect
unless terminated as hereinafter provided or amended at any time by mutual,
written agreement of the parties hereto. This Agreement may be terminated by
either party by an instrument in writing delivered, faxed or mailed, postage
prepaid, to the other party, such termination to take effect on the date stated
therein, which date shall not be sooner than sixty (60) days after the date of
such delivery or mailing. In the event this Agreement is terminated (pending
appointment of a successor to PNC Bank or vote of the shareholders of any
Portfolio of the Fund to dissolve or to function without a custodian of its
cash, securities or
<PAGE> 2
other property), PNC Bank shall not deliver cash, securities or other property
of the applicable Portfolio to the Portfolio or the Fund. It may deliver them to
a bank or trust company of PNC Bank's, having an aggregate capital, surplus and
undivided profits, as shown by its last published report, of not less than
twenty million dollars ($20,000,000), as a custodian for such Portfolio to be
held under terms similar to those of this Agreement. PNC Bank shall not be
required to make any such delivery or payment until full payment shall have been
made to PNC Bank of all of its fees, compensation, costs and expenses. PNC Bank
shall have a security interest in and shall have a right of setoff against
Property in such Portfolio's possession as security for the payment of such
fees, compensation, costs and expenses.
2. Any defined terms not defined herein shall have the same meaning as
given in the Agreement.
3. Miscellaneous. Except to the extent amended and supplemented hereby,
the Agreement shall remain unchanged and in full force and effect and is hereby
ratified and confirmed in all respects as amended and supplemented hereby.
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date and year first above written.
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
------------------------------------
Title: Senior Vice President and
------------------------------------
Chief Operating Officer
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Robert J. Perlsweig
-----------------------------------
Robert J. Perlsweig
Title: Senior Vice President
<PAGE> 1
Exhibit (8)(k)
AMENDMENT NO. 2 TO ACCOUNTING SERVICES AGREEMENT
This Amendment, dated February 5, 1996, is entered into between SCHWAB
INVESTMENTS, a Massachusetts business trust (the "Fund"), and PFPC INC.
(formerly Provident Financial Processing Corporation), a Delaware corporation
which is an indirect wholly-owned subsidiary of PNC Bank Corp. (formerly, PNC
Financial Corp.) ("PFPC").
WHEREAS, the Fund and PFPC have entered into an Accounting Services
Agreement dated as of November 4, 1991 (the "Agreement"), and amended as of
August 8, 1995, pursuant to which the Fund appointed PFPC to provide accounting
services to its investment portfolios listed on Schedule A to the Agreement; and
WHEREAS, the Fund and PFPC desire to amend the Agreement;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Paragraph 15 is hereby deleted and replaced with the following:
Duration and Termination. This Agreement shall continue in full force and effect
with respect to each Portfolio, unless terminated as hereinafter provided or
amended by mutual, written agreement of the parties hereto. This Agreement may
be terminated by either party by an instrument in writing delivered, faxed or
mailed, postage prepaid, to the other party, such termination to take effect on
the date started therein, which date shall not be sooner than sixty (60) days
after the date of such delivery or mailing.
<PAGE> 2
2. Any defined terms not defined herein shall have the same meaning as
given in the Agreement.
3. Miscellaneous. Except to the extent amended and supplemented hereby,
the Agreement shall remain unchanged and in full force and effect and is hereby
ratified and confirmed in all respects as amended and supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date and year first above written.
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
---------------------------------
Title: Senior Vice President and
---------------------------------
Chief Operating Officer
PFPC INC.
By: /s/ Robert J. Perlsweig
---------------------------------
Robert J. Perlsweig
Title: Executive Vice President
<PAGE> 1
EXHIBIT 11(a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the caption "Legal Counsel" included in or made a part of
Post-Effective Amendment No. 14 to the Registration Statement of Schwab
Investments on Form N-1A (Nos. 33-37459 and 811-6200) under the Securities Act
of 1933, as amended.
/s/ Ropes & Gray
Ropes & Gray
Washington, D.C.
December 30, 1996
<PAGE> 1
EXHIBIT 11(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 14 to the registration
statement on Form N-1A (the "Registration Statement") of Schwab Investments
of our reports dated September 24, 1996, relating to the financial statements
and financial highlights of Schwab 1000 Fund(R), Schwab Long-Term Government
Bond Fund, Schwab Short/Intermediate Government Bond Fund, Schwab Long-Term
Tax-Free Bond Fund, Schwab Short/Intermediate Tax-Free Bond Fund, Schwab
California Long-Term Tax-Free Bond Fund, and Schwab California
Short/Intermediate Tax-Free Bond Fund, which appear in such Statement of
Additional Information, and to the incorporation by reference of our reports
into the Prospectuses of the aforementioned funds which constitutes part of
this Registration Statement. We also consent to the reference to us under the
heading "Accountants and Reports to Shareholders" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectuses.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
San Francisco, California
December 27, 1996
<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 1
[NAME] SCHWAB 1000 FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] AUG-31-1996
[PERIOD-START] SEP-01-1995
[PERIOD-END] AUG-31-1996
[INVESTMENTS-AT-COST] 1,215,154
[INVESTMENTS-AT-VALUE] 1,559,200
[RECEIVABLES] 5,499
[ASSETS-OTHER] 37
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,564,736
[PAYABLE-FOR-SECURITIES] 3,335
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,342
[TOTAL-LIABILITIES] 4,677
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,202,438
[SHARES-COMMON-STOCK] 86,013
[SHARES-COMMON-PRIOR] 52,733
[ACCUMULATED-NII-CURRENT] 15,134
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1,559)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 344,046
[NET-ASSETS] 1,560,059
[DIVIDEND-INCOME] 26,356
[INTEREST-INCOME] 365
[OTHER-INCOME] 0
[EXPENSES-NET] 6,087
[NET-INVESTMENT-INCOME] 20,634
[REALIZED-GAINS-CURRENT] 1,429
[APPREC-INCREASE-CURRENT] 144,952
[NET-CHANGE-FROM-OPS] 167,015
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 14,179
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 45,105
[NUMBER-OF-SHARES-REDEEMED] 12,583
[SHARES-REINVESTED] 758
[NET-CHANGE-IN-ASSETS] 733,345
[ACCUMULATED-NII-PRIOR] 8,679
[ACCUMULATED-GAINS-PRIOR] (2,988)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,133
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 7,123
[AVERAGE-NET-ASSETS] 1,242,452
[PER-SHARE-NAV-BEGIN] 15.68
[PER-SHARE-NII] 0.24
[PER-SHARE-GAIN-APPREC] 2.45
[PER-SHARE-DIVIDEND] 0.23
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 18.14
[EXPENSE-RATIO] 0.49
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 2
[NAME] SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] AUG-31-1996
[PERIOD-START] SEP-01-1995
[PERIOD-END] AUG-31-1996
[INVESTMENTS-AT-COST] 133,077
[INVESTMENTS-AT-VALUE] 132,590
[RECEIVABLES] 1,634
[ASSETS-OTHER] 24
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 134,248
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 229
[TOTAL-LIABILITIES] 229
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 145,190
[SHARES-COMMON-STOCK] 13,865
[SHARES-COMMON-PRIOR] 15,968
[ACCUMULATED-NII-CURRENT] 54
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (10,738)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (487)
[NET-ASSETS] 134,019
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 9,637
[OTHER-INCOME] 0
[EXPENSES-NET] 720
[NET-INVESTMENT-INCOME] 8,917
[REALIZED-GAINS-CURRENT] 7
[APPREC-INCREASE-CURRENT] (2,489)
[NET-CHANGE-FROM-OPS] 6,435
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 8,934
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2,618
[NUMBER-OF-SHARES-REDEEMED] 5,428
[SHARES-REINVESTED] 707
[NET-CHANGE-IN-ASSETS] (23,172)
[ACCUMULATED-NII-PRIOR] 71
[ACCUMULATED-GAINS-PRIOR] (10,745)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 602
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,182
[AVERAGE-NET-ASSETS] 147,743
[PER-SHARE-NAV-BEGIN] 9.84
[PER-SHARE-NII] 0.59
[PER-SHARE-GAIN-APPREC] (0.17)
[PER-SHARE-DIVIDEND] 0.59
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 9.67
[EXPENSE-RATIO] 0.49
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 7
[NAME] SCHWAB LONG-TERM GOVERNMENT BOND FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] AUG-31-1996
[PERIOD-START] SEP-01-1995
[PERIOD-END] AUG-31-1996
[INVESTMENTS-AT-COST] 22,670
[INVESTMENTS-AT-VALUE] 22,216
[RECEIVABLES] 663
[ASSETS-OTHER] 36
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 22,915
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 154
[TOTAL-LIABILITIES] 154
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 23,507
[SHARES-COMMON-STOCK] 2,426
[SHARES-COMMON-PRIOR] 1,321
[ACCUMULATED-NII-CURRENT] 6
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (298)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (454)
[NET-ASSETS] 22,761
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 1,100
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 1,100
[REALIZED-GAINS-CURRENT] (30)
[APPREC-INCREASE-CURRENT] (887)
[NET-CHANGE-FROM-OPS] 183
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 1,098
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2,191
[NUMBER-OF-SHARES-REDEEMED] 1,163
[SHARES-REINVESTED] 77
[NET-CHANGE-IN-ASSETS] 9,812
[ACCUMULATED-NII-PRIOR] 4
[ACCUMULATED-GAINS-PRIOR] (268)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 68
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 193
[AVERAGE-NET-ASSETS] 16,485
[PER-SHARE-NAV-BEGIN] 9.80
[PER-SHARE-NII] 0.65
[PER-SHARE-GAIN-APPREC] (0.42)
[PER-SHARE-DIVIDEND] 0.65
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 9.38
[EXPENSE-RATIO] 0.49
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 5
[NAME] SCWHAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] AUG-31-1996
[PERIOD-START] SEP-01-1995
[PERIOD-END] AUG-31-1996
[INVESTMENTS-AT-COST] 53,589
[INVESTMENTS-AT-VALUE] 53,530
[RECEIVABLES] 707
[ASSETS-OTHER] 50
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 54,287
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 155
[TOTAL-LIABILITIES] 155
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 54,716
[SHARES-COMMON-STOCK] 5,393
[SHARES-COMMON-PRIOR] 5,188
[ACCUMULATED-NII-CURRENT] 12
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (537)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (59)
[NET-ASSETS] 54,132
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 2,404
[OTHER-INCOME] 0
[EXPENSES-NET] 258
[NET-INVESTMENT-INCOME] 2,146
[REALIZED-GAINS-CURRENT] 150
[APPREC-INCREASE-CURRENT] (590)
[NET-CHANGE-FROM-OPS] 1,706
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 2,147
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,891
[NUMBER-OF-SHARES-REDEEMED] 1,854
[SHARES-REINVESTED] 168
[NET-CHANGE-IN-ASSETS] 1,628
[ACCUMULATED-NII-PRIOR] 13
[ACCUMULATED-GAINS-PRIOR] (687)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 216
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 474
[AVERAGE-NET-ASSETS] 52,814
[PER-SHARE-NAV-BEGIN] 10.12
[PER-SHARE-NII] 0.41
[PER-SHARE-GAIN-APPREC] (0.08)
[PER-SHARE-DIVIDEND] 0.41
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.04
[EXPENSE-RATIO] 0.49
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 4
[NAME] SCHWAB LONG-TERM TAX-FREE BOND FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] AUG-31-1996
[PERIOD-START] SEP-01-1995
[PERIOD-END] AUG-31-1996
[INVESTMENTS-AT-COST] 42,805
[INVESTMENTS-AT-VALUE] 43,099
[RECEIVABLES] 611
[ASSETS-OTHER] 43
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 43,753
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 81
[TOTAL-LIABILITIES] 81
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 43,753
[SHARES-COMMON-STOCK] 4,312
[SHARES-COMMON-PRIOR] 4,076
[ACCUMULATED-NII-CURRENT] 15
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (390)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 294
[NET-ASSETS] 43,672
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 2,405
[OTHER-INCOME] 0
[EXPENSES-NET] 212
[NET-INVESTMENT-INCOME] 2,193
[REALIZED-GAINS-CURRENT] 423
[APPREC-INCREASE-CURRENT] (635)
[NET-CHANGE-FROM-OPS] 1,981
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 2,193
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,797
[NUMBER-OF-SHARES-REDEEMED] 1,714
[SHARES-REINVESTED] 153
[NET-CHANGE-IN-ASSETS] 2,259
[ACCUMULATED-NII-PRIOR] 15
[ACCUMULATED-GAINS-PRIOR] (813)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 177
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 406
[AVERAGE-NET-ASSETS] 43,355
[PER-SHARE-NAV-BEGIN] 10.16
[PER-SHARE-NII] 0.52
[PER-SHARE-GAIN-APPREC] (0.03)
[PER-SHARE-DIVIDEND] (0.52)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.13
[EXPENSE-RATIO] 0.49
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 6
[NAME] SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] AUG-31-1996
[PERIOD-START] SEP-01-1995
[PERIOD-END] AUG-31-1996
[INVESTMENTS-AT-COST] 45,017
[INVESTMENTS-AT-VALUE] 45,241
[RECEIVABLES] 628
[ASSETS-OTHER] 11
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 45,880
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 92
[TOTAL-LIABILITIES] 92
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 46,401
[SHARES-COMMON-STOCK] 4,562
[SHARES-COMMON-PRIOR] 4,040
[ACCUMULATED-NII-CURRENT] 11
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (848)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 224
[NET-ASSETS] 45,788
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 2,030
[OTHER-INCOME] 0
[EXPENSES-NET] 210
[NET-INVESTMENT-INCOME] 1,820
[REALIZED-GAINS-CURRENT] (12)
[APPREC-INCREASE-CURRENT] (102)
[NET-CHANGE-FROM-OPS] 1,706
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 1,820
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,951
[NUMBER-OF-SHARES-REDEEMED] 1,572
[SHARES-REINVESTED] 143
[NET-CHANGE-IN-ASSETS] 5,149
[ACCUMULATED-NII-PRIOR] 11
[ACCUMULATED-GAINS-PRIOR] (836)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 175
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 374
[AVERAGE-NET-ASSETS] 42,974
[PER-SHARE-NAV-BEGIN] 10.06
[PER-SHARE-NII] 0.43
[PER-SHARE-GAIN-APPREC] (0.02)
[PER-SHARE-DIVIDEND] 0.43
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.04
[EXPENSE-RATIO] 0.49
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[CIK] 0000869365
[NAME] SCHWAB INVESTMENTS
[SERIES]
[NUMBER] 3
[NAME] SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] AUG-31-1996
[PERIOD-START] SEP-01-1995
[PERIOD-END] AUG-31-1996
[INVESTMENTS-AT-COST] 98,471
[INVESTMENTS-AT-VALUE] 100,404
[RECEIVABLES] 1,373
[ASSETS-OTHER] 4
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 101,781
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 165
[TOTAL-LIABILITIES] 165
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 101,932
[SHARES-COMMON-STOCK] 9,558
[SHARES-COMMON-PRIOR] 8,554
[ACCUMULATED-NII-CURRENT] 36
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (2,285)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 1,933
[NET-ASSETS] 101,616
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 5,685
[OTHER-INCOME] 0
[EXPENSES-NET] 480
[NET-INVESTMENT-INCOME] 5,205
[REALIZED-GAINS-CURRENT] 442
[APPREC-INCREASE-CURRENT] 359
[NET-CHANGE-FROM-OPS] 6,006
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 5,205
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2,893
[NUMBER-OF-SHARES-REDEEMED] 2,210
[SHARES-REINVESTED] 321
[NET-CHANGE-IN-ASSETS] 11,571
[ACCUMULATED-NII-PRIOR] 36
[ACCUMULATED-GAINS-PRIOR] (2,727)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 401
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 803
[AVERAGE-NET-ASSETS] 98,178
[PER-SHARE-NAV-BEGIN] 10.53
[PER-SHARE-NII] 0.57
[PER-SHARE-GAIN-APPREC] 0.10
[PER-SHARE-DIVIDEND] 0.57
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.63
[EXPENSE-RATIO] 0.49
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
