<PAGE> 1
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>
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PAGE
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<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> 2
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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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:
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<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.
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FINANCIAL HIGHLIGHTS
Set forth below is the table containing information as to income and capital
changes for a share of the Schwab 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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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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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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$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
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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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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> 22
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 23
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 24
SCHWAB 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
