<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION
14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X] Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Schwab Investments
101 Montgomery Street
San Francisco, CA 94104
-----------------------------------------------
(Name of Registrant as Specified in its Charter)
Matthew M. O'Toole, Esq.
Schwab Investments
101 Montgomery Street
San Francisco, CA 94104
-----------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check the appropriate box):
[X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which
transaction applies: N/A
2) Aggregate number of securities to which transaction
applies: N/A
3) Per unit price or other underlying value of
transaction computed pursuant to Exchange Act Rule
0-11:* N/A
4) Proposed maximum aggregate value of transaction: N/A
5) Total fee paid: N/A
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
Notes:
<PAGE> 2
IMPORTANT INFORMATION REGARDING YOUR INVESTMENT IN THE SCHWABFUNDS(R)
Dear Shareholder,
I am writing to inform you of the upcoming special meeting of shareholders of
the Schwab Short/Intermediate Government Bond Fund and the Schwab Long-Term
Government Bond Fund, and to request that you take a few minutes to read the
enclosed material and mail back the proxy voting card.
You are being asked to vote on important proposals affecting your Fund. The
Board of Trustees, including myself, unanimously believes that these changes
are in your Fund's and your best interest. The changes proposed will give your
Fund the additional flexibility needed to take advantage of opportunities in
today's market environment. Also, the Board and I believe your approval of
these proposals is important to enable your Fund to remain competitive.
The Board of Trustees has approved these proposals and unanimously recommends a
vote "For" each proposal. If you have any questions regarding the enclosed
proxy or need any assistance in voting your shares, please contact our proxy
solicitor, D.F. King & Co., Inc. at 1-800-290-6433.
Regardless of the number of shares you own, it is important that you take the
time to read the enclosed proxy, and complete and mail your voting card as soon
as you can. A postage paid envelope is enclosed. If Fund shareholders don't
return their proxies, your Fund may have to incur the expense of follow-up
solicitations. All shareholders benefit from the speedy return of proxies.
I appreciate the time and consideration that you can give to this important
matter. At Schwab, we realize that we earn your trust day-by-day. We value
your confidence in our efforts and will continue to work hard to offer you
investment opportunities to help you achieve your financial goals.
Sincerely,
Charles R. Schwab
Chairman
Schwab Investments
-2-
<PAGE> 3
BOND FUND PROXY
DRAFT Q&A
June 26, 1997
1. WHAT PROPOSALS AM I BEING ASKED TO VOTE ON?
- To elect seven Trustees.
- To consider amending each Fund's fundamental investment objective
resulting in changing the Funds from Government bond funds to bond
index funds that would include Government and other fixed income
securities.
- To consider eliminating, reclassifying or amending each Fund's
fundamental investment restrictions.
- To transact such other business as may properly come before the
Meeting.
2. WHY IS THE BOARD OF TRUSTEES PROPOSING THAT THE FUNDS BE CHANGED TO INDEX
FUNDS?
Schwab has long been an advocate of indexing as an investment strategy. The
Board of Trustees believes the proposed bond index funds will offer
customers many benefits through the use of an indexing strategy. These
benefits include: broad bond portfolio diversification, a consistent
investment style, and potentially lower trading costs as a result of lower
portfolio turnover and fewer transactions, over the long term. And, all
other things being equal, lower costs can translate into higher returns.
The objectives of index funds, unlike actively managed funds, are to closely
track the total return of a particular market, or market sector. Because
both proposed Funds plan to invest in a larger number and broader range of
bonds, the Funds should provide investors a more well rounded bond fund
investment for their asset allocation plan. The proposed bond index funds
could represent excellent choices for the core component of an investor's
bond fund holdings and could fulfill the bond portion of an asset allocation
plan, whether that plan calls for a longer-term or short-term bond fund.
In addition, the Board of Trustees believe that the proposed bond index
funds should have a broader appeal to a larger number of investors. This
would permit the Funds to be marketed more effectively, creating economies
of scale if assets grow. These economies could be achieved by spreading the
Funds' fixed costs over a larger asset base, which would potentially lower
the Funds' operating expenses.
1
<PAGE> 4
3. IF PROPOSAL 2 IS APPROVED, THE FUNDS WILL BECOME INDEX FUNDS. CAN YOU
DESCRIBE THE INDICES THE FUNDS WILL SEEK TO TRACK?
Schwab Short/Intermediate Government Bond Fund
If Proposal 2 is approved, the Short-Term Bond Market Index Fund (currently
the Schwab Short/Intermediate Government Bond Fund) would seek to track the
Lehman Brothers Short (1-5) Government/Corporate Index. This index is
market-weighted and designed to track the performance of broad segments of
the bond market.
As the chart below illustrates, the Lehman Brothers Short (1-5)
Government/Corporate Index encompasses U.S. Treasury and agency securities,
and investment grade corporate and international (dollar-denominated) bonds,
with maturities between 1 and 5 years, which currently represents
approximately ____ securities.
The following two charts show how the composition of these indices compare
with the composition of the Funds as of December 31, 1996. (Data will be
updated as of 6/30/97.)
<TABLE>
<CAPTION>
Current Lehman Brothers Short
Schwab (1-5)
Short/Intermediate Government/Corporate
Government Bond Fund Index
-------------------- ---------------------
<S> <C> <C>
U.S. Treasury and agency securities 87.3% 86.0%
Corporate bonds 0.0% 12.0%
International (dollar-denominated) bonds 0.0% 2.0%
Mortgage-backed securities 12.7% 0.0%
Asset-backed securities 0.0% 0.0%
Dollar-weighted average maturity 2.9 years 2.7 years
</TABLE>
Schwab Long-Term Government Bond Fund
If Proposal 2 is approved, the Total Bond Market Index Fund (currently the
Schwab Long-Term Government Bond Fund) would seek to track the Lehman
Brothers Aggregate Bond Index. This index is also market-weighted and
designed to track the performance of broad segments of the bond market.
As the chart below illustrates, the Lehman Brothers Aggregate Bond Index
encompasses all U.S. Treasury and agency securities, investment grade
corporate and international (dollar-denominated) bonds, as well as
mortgage-backed securities with maturities greater than one year, which
currently represents approximately ____ securities.
2
<PAGE> 5
<TABLE>
<CAPTION>
Current
Schwab Long-Term Lehman Brothers
Government Bond Fund Aggregate Bond Index
-------------------- --------------------
<S> <C> <C>
U.S. Treasury and agency securities 100.0% 51.6%
Corporate bonds 0.0% 14.1%
International (dollar-denominated) bonds 0.0% 3.7%
Mortgage-backed securities 0.0% 29.6%
Asset-backed securities 0.0% 1.0%
Dollar-weighted average maturity 11.1 years 8.8 years
</TABLE>
4. IF PROPOSAL 2 IS APPROVED, THE FUNDS WILL NO LONGER INVEST PRIMARILY IN
GOVERNMENT AND AGENCY SECURITIES. WILL THIS MAKE INVESTING IN THE FUNDS
MORE RISKY?
As shown in the charts [above], as of [June 30, 1997] both of the proposed
index funds would maintain significant positions in U.S. Treasury and agency
securities -- 86.0% for the Short-Term Bond Bond Index Fund and 51.6% for
the Total Bond Market Index Fund.
The non-U.S. Treasury/agency securities represented in both indices are all
investment grade and quite diversified. As a result, both index Funds are
expected to maintain relatively low levels of credit risk. However, given
that U.S. Treasury and agency securities have the lowest credit risk,
compared to other types of securities, the portfolio management team
anticipates that the proposed Funds would have a slightly higher level of
credit risk.
The table below summarizes the various types of risk to which bond funds are
exposed. As the table shows, the risk profiles of the proposed Funds are
very similar to the risk profiles of the existing Funds. Since the average
maturity of the Total Bond Market Index Fund is expected to be
approximately 2.3 years shorter than the Schwab Long-Term Government Bond
Fund, the Total Bond Market Index Fund would be subject to SLIGHTLY LESS
interest rate risk (NAV or price volatility) and SLIGHTLY MORE income risk
(income variability over time).
<TABLE>
<CAPTION>
Schwab Lehman Brothers Short Schwab Long-Term Lehman Brothers
Short/Intermediate (1-5) Government Bond Aggregate Bond
Government Government/Corporate Fund Index
Bond Fund Index
------------------ --------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Interest Rate Risk Low Low High Medium
Income Risk High High Low Medium
Credit Risk Low Low Low Low
Prepayment/Call Risk Low Low Medium Medium
</TABLE>
3
<PAGE> 6
5. IF THE PROXY PROPOSALS ARE APPROVED, WHAT IS THE EXPECTED IMPACT ON FUND
YIELDS?
Schwab Short/Intermediate Government Bond Fund
The portfolio composition and average maturity of the Short-Term Bond
Market Index Fund is expected to be similar to the Schwab
Short/Intermediate Government Bond Fund. As a result, the Portfolio
Management Team anticipates relatively little difference in yield.
Schwab Long-Term Government Bond Fund
The Total Bond Market Index Fund will have additional exposure to corporate
and mortgage-backed securities, which could tend to increase yields.
However, the shorter average portfolio maturity could tend to lower yields.
While the difference resulting from these two factors may offset each other,
the actual difference in yield at any point in time will be a function of
various market conditions.
6. HAS EACH FUND'S BOARD OF TRUSTEES APPROVED THE PROPOSALS?
Yes. The Board of Trustees unanimously has approved the proposals and
recommends that the shareholders vote "For" all of the proposals.
7. HOW DO I VOTE MY SHARES?
You can vote your shares by completing, signing, dating and mailing the
enclosed proxy card in the postage paid envelope. If you have any questions
regarding the enclosed proxy or need any assistance in voting your shares,
please call our proxy solicitor, D.F. King & Co. at 1-800-290-6433.
4
<PAGE> 7
SCHWAB INVESTMENTS
101 MONTGOMERY STREET
SAN FRANCISCO, CALIFORNIA 94104
-----------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF SCHWAB INVESTMENTS
TO BE HELD ON SEPTEMBER 22, 1997
-----------------------------------------------
To Shareholders of Schwab Investments:
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of the Schwab Short/Intermediate Government Bond Fund and the
Schwab Long-Term Government Bond Fund (each a "Fund" and collectively, the
"Funds"), each a series of Schwab Investments, will be held at 101 Market
Street, San Francisco, California 94105 on September 22, 1997 at 10:00 a.m.,
Pacific time, for the following purposes:
1. To elect seven Trustees to hold office until their successors
are duly elected and qualified;
2. To consider amending each Fund's fundamental investment
objective;
3. To consider eliminating, reclassifying or amending each Fund's
fundamental investment restrictions; and
4. To transact such other business as may properly come before
the Meeting or any adjournment(s) thereof.
These Proposals are discussed in greater detail in the accompanying
Proxy Statement.
The close of business on June 25, 1997 was fixed as the record date
for the determination of Shareholders entitled to notice of, and to vote at,
the Meeting and any adjournment(s) thereof.
By Order of the Trustees,
Frances Cole
Secretary
July 28, 1997
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING! WHETHER OR NOT
YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE, SIGN, AND DATE THE
ENCLOSED PROXY CARD AND PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. YOU CAN HELP THE FUNDS AVOID
THE NECESSITY AND ADDITIONAL EXPENSE OF FURTHER SOLICITATIONS TO ENSURE A
QUORUM BY PROMPTLY RETURNING THE ENCLOSED PROXY CARD. IF YOU DESIRE TO VOTE IN
PERSON, YOU MAY REVOKE YOUR PROXY PRIOR TO THE MEETING.
-2-
<PAGE> 8
SCHWAB INVESTMENTS
101 MONTGOMERY STREET
SAN FRANCISCO, CALIFORNIA 94104
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS OF
SCHWAB INVESTMENTS
TO BE HELD ON SEPTEMBER 22, 1997
This Proxy Statement is being furnished to the shareholders of the
Schwab Short/Intermediate Government Bond Fund and the Schwab Long-Term
Government Bond Fund (each a "Fund"), each a series of Schwab Investments, a
Massachusetts business trust (the "Trust"), in connection with the solicitation
of proxies by and on behalf of the Board of Trustees for use at a Special
Meeting of Shareholders of the Funds (the "Meeting") to be held at 101 Market
Street, San Francisco, California 94105, on September 22, 1997, at 10:00 a.m.,
Pacific time, and at any adjournment(s) of the Meeting. This Proxy Statement
is first being mailed to shareholders on or about July 28, 1997.
The Board of Trustees has fixed the close of business on June 25,
1997, as the record date (the "Record Date") for determining Fund shareholders
entitled to notice of, and to vote at, the Meeting and any adjournment(s)
thereof. Only holders of record of shares of a Fund at the close of business
on the Record Date are entitled to notice of, and to vote at, the Meeting and
at any adjournment(s) thereof.
The holder of each full share of a Fund outstanding as of the close of
business on the Record Date is entitled to one vote for each share held of
record upon each matter properly submitted to the Meeting or any adjournment(s)
thereof, with a proportionate vote for each fractional share. Shareholders are
requested to complete, date, sign, and promptly return the accompanying proxy
card in the enclosed envelope. If the enclosed proxy is properly executed and
returned in time to be voted at the Meeting, the shares represented thereby
will be voted in accordance with the instructions marked on the proxy, unless
such proxy previously has been revoked. Unless instructions to the contrary
are marked on the proxy, the proxy will be voted FOR the Proposals described in
this Proxy Statement and in the discretion of the persons named as proxies in
connection with any other matter that may properly come before the Meeting or
any adjournment(s) thereof. The Board of Trustees does not know of any matter
to be considered at the Meeting other than the matters referred to in the
Notice of Special Meeting accompanying this Proxy Statement.
-3-
<PAGE> 9
Any shareholder who has given a proxy has the right to revoke it at
any time prior to its exercise by attending the Meeting and voting his or her
shares in person or by submitting, prior to the date of the Meeting, a written
notice of revocation or a subsequently dated proxy to the following: Schwab
Investments, 101 Montgomery Street, San Francisco, California 94104,
Attention: Secretary.
In the event a quorum is not present at the Meeting or sufficient
votes to approve the Proposals are not received, the persons named as proxies
may propose one or more adjournment(s) of such Meeting to permit further
solicitation of proxies. A shareholder vote may be taken on any other matter
to properly come before the Meeting prior to such adjournment(s) if sufficient
votes to approve such matters have been received and such vote is otherwise
appropriate. Any adjournment(s) of the Meeting will require the affirmative
vote of a majority of those shares present at the Meeting or represented by
proxy and voting. Abstentions and broker "non-votes" (i.e., proxies from
brokers or nominees indicating that such persons have not received instructions
from the beneficial owner or other person entitled to vote shares on a
particular matter with respect to which the brokers or nominees do not have
discretionary power) will be counted as shares that are present to determine
the presence of a quorum and will have the effect of a vote against the
Proposals set forth in this Proxy Statement. As of June 25, 1997, the number
of outstanding shares of the Schwab Short/Intermediate Government Bond Fund and
the Schwab Long-Term Government Bond Fund was [___] and [__], respectively.
In addition to the solicitation of proxies by mail, officers of the
Trust, officers and regular employees of Charles Schwab Investment Management,
Inc. (the "Investment Manager"), the Funds' investment adviser and
administrator, and Charles Schwab & Co., Inc. ("Schwab"), the Funds'
distributor, transfer agent and shareholder servicing agent, may also solicit
proxies electronically, by telephone, by telegraph or in person. The address
of the Investment Manager and Schwab is 101 Montgomery Street, San Francisco,
California 94104. The Trust has retained a proxy solicitation firm in
connection with proxy solicitation for the Meeting. The cost of retaining such
a firm will depend upon the amount and types of services rendered. The costs
of solicitation and expenses incurred in connection with preparing this Proxy
Statement and its enclosures, including any cost of retaining a proxy
solicitation firm, will be borne pro rata by the Funds. The Funds will
reimburse firms and others for their expenses in forwarding solicitation
materials to the beneficial owners of shares of the Funds.
As explained more fully below, currently the Investment Manager and
Schwab have voluntarily guaranteed that the total operating expenses of the
Schwab Short/Intermediate Government Bond Fund and the Schwab Long-Term
Government Bond Fund will not exceed 0.49% and 0.30%, respectively, of that
Fund's average daily net assets. The current voluntary guarantees may be
discontinued at any time. If shareholders of each Fund were to approve Proposal
2, the Investment Manager and Schwab have voluntarily guaranteed that, through
at least September 30, 1998, the total operating expenses of the Schwab
Short/Intermediate Government Bond Fund and the Schwab Long-Term Government Bond
Fund will not exceed 0.38% and 0.30%, respectively, of that Fund's average daily
net assets. The expenses related to this proxy solicitation will be excluded
from the calculations of each Fund's total operating expenses for purposes of
the Investment Manager's and Schwab's guarantee.
-4-
<PAGE> 10
PROPOSAL 1
ELECTION OF TRUSTEES
It is proposed that seven Trustees be elected, each Trustee to hold
office until a successor is elected and qualified. It is the intention of the
persons named in the accompanying form of proxy to vote such proxy for the
election of the persons listed below unless shareholders specifically indicate
in their proxies their desire to withhold authority to vote for elections to
office. The Board of Trustees does not contemplate that any nominee will be
unable to serve as a Trustee for any reason, but if that should occur prior to
the Meeting, the proxy holders reserve the right to substitute another person
or persons of their choice as nominee or nominees.
Each person listed below has consented to being named in this Proxy
Statement and has agreed to serve as a Trustee if elected.
<TABLE>
<CAPTION>
NAME/BIRTHDAY TRUSTEE SINCE PRINCIPAL OCCUPATION
-------------- ------------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* 1991 Chairman, Chief Executive Officer and Director, The
July 29, 1937 Charles Schwab Corporation; Chairman and Director
of Schwab and the Investment Manager; Chairman and
Director, The Charles Schwab Trust Company;
Chairman and Director, 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).
DONALD F. DORWARD 1991 Executive Vice President, Managing Director, Grey
September 23, 1931 Advertising, Inc. Prior to November, 1996, Mr.
Dorward was President and Chief Executive Officer,
Dorward & Associates (advertising and
marketing/consulting).
</TABLE>
- -----------------------------------
** An interested person of the Trust as defined in the 1940 Act.
-5-
<PAGE> 11
<TABLE>
<S> <C> <C>
ROBERT G. HOLMES 1991 Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. Semloh Financial, Inc. is
an international financial services and investment
advisory firm.
WILLIAM J. KLIPP* 1995 Executive Vice President of Schwab; President and
December 9, 1955 Chief Operating Officer of the Investment Manager
and Senior Vice President and Chief Operating
Officer of the Trust. Prior to 1993, Mr. Klipp was
Treasurer of Schwab and Mayer & Schweitzer, Inc.
TIMOTHY F. McCARTHY* 1995 Executive Vice President - Mutual Funds of Schwab
September 19, 1951 and The Charles Schwab Corporation; Chief Executive
Officer of the Investment Manager and President of
the Trust. From 1994 to 1995, Mr. McCarthy was
Chief Executive Officer, Jardine Fleming Unit
Trusts Ltd.; 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 R. STEPHENS 1991 Managing Partner, D.R. Stephens & Co. (investment
June 28, 1938 banking). Prior to 1995, Mr. Stephens was
Chairman and Chief Executive Officer of North
American Trust (a real estate investment trust).
Prior to 1992, Mr. Stephens was Chairman and Chief
Executive Officer of the Bank of San Francisco.
MICHAEL W. WILSEY 1991 Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
</TABLE>
Each of the above-referenced individuals is also a Trustee for The
Charles Schwab Family of Funds, Schwab Capital Trust and Schwab Annuity
Portfolios, each of which is an investment company affiliated with the Trust
and managed by the Investment Manager (collectively, the "Affiliated Trusts").
The address of each individual listed above is 101 Montgomery Street, San
Francisco, California 94104.
-6-
<PAGE> 12
In addition to Messrs. McCarthy and Klipp, the executive officers of
the Funds are:
Stephen B. Ward, born April 5, 1955, is Senior Vice President & Chief
Investment Officer of the Funds. Mr. Ward is Senior Vice President and Chief
Investment Officer of the Investment Manager and is Senior Vice President of
The Charles Schwab Corporation and has been an employee of the Investment
Manager and The Charles Schwab Corporation since October and April 1993,
respectively. Prior to April 1993, Mr. Ward was a Vice President and
Portfolio Manager for Schwab.
Tai-Chin Tung, born March 7, 1951, is Treasurer and Principal Financial
Officer of the Funds. She is Controller of the Investment Manager and Vice
President - Finance of Schwab. 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.
Frances Cole, born September 9, 1955, is Secretary of the Funds. Ms.
Cole is Vice President, Chief Counsel, Chief Compliance Officer and Assistant
Corporate Secretary of the Investment Manager and has been an employee of the
Investment Manager since 1991.
Each of the above-referenced officers and Messrs. McCarthy and Klipp
are also officers of each Affiliated Trust. All Trustees, nominees and
executive officers as a group beneficially owned less than 1% of each Fund's
outstanding shares on June 25, 1997.
The Trust has an Audit/Portfolio Compliance Committee comprised of all
of the Trustees who are not "interested persons" of the Trust (the "Independent
Trustees"), which quarterly (and, as necessary, more frequently) reviews
financial statements and other audit-related matters for each series of the
Trust. The Trust has no standing nominating or compensation committee or any
committee performing similar functions.
Remuneration of Trustees, Officers and Others
Trustees and officers of the Funds who are also directors, officers or
employees of the Investment Manager or any of its affiliates receive no
remuneration from the Funds. Each other Trustee receives a quarterly retainer
fee of $2,900 and an additional $800 for each regular Board of Trustees and
Audit Committee meeting attended and is reimbursed for reasonable out-of-pocket
expenses. Five Board meetings were held during the last fiscal year. The
Trustees as a group received fees and expenses from the Trust totaling $64,600.
Each Trustee, except Mr. Schwab, attended at least 75% of the meetings of the
Board. Each Fund has no bonus, pension, profit-sharing or retirement plan,
although each Fund has adopted a deferred compensation plan for its Trustees, as
described below.
-7-
<PAGE> 13
The compensation each Trustee receives from the Trust, as shown in the
table below, is for services rendered to all seven series of the Trust,
including the two Funds. In addition, the compensation that the Trustees
receive from the complex (also shown on the table below) is for their services
to the SchwabFunds Family, a family of 30 mutual funds with assets of
approximately $49 billion as of June __, 1997.
COMPENSATION TABLE1
<TABLE>
<CAPTION>
Pension or
Retirements Benefits
accrued as Part of Estimated Annual Total
Aggregate Fund Expenses from Benefits Upon Retirement Compensation
Name of Person, Compensation from the the Fund from the Fund from the Fund
Position 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. McCarthy, 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice President,
Chief Operating
Officer and Trustee
Donald F. Dorward, 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 30 funds of the Trust, The
Charles Schwab Family of Funds, Schwab Capital Trust and
Schwab Annuity Portfolios.
Pursuant to exemptive relief the Trust received from the Securities
and Exchange Commission ("SEC"), the Trust may enter into a deferred
compensation plan (the "Plan") with the Independent Trustees. As of the date
of this Proxy Statement, none of the Independent Trustees has elected to
participate in the Plan. If an Independent Trustee does elect to participate
-8-
<PAGE> 14
in the Plan, the Plan would operate as described herein. 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
amount 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 shares of beneficial interest of the Trust, The Charles
Schwab Family of Funds, and Schwab Capital Trust. 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.
Information Pertaining to Certain Interests in Matters of the Funds
The Investment Manager (who also serves as the Funds' administrator),
located at 101 Montgomery Street, San Francisco, California 94104, serves as
investment adviser to the Funds pursuant to an Investment Advisory and
Administration Agreement (the "Advisory Agreement") between it and the Trust.
The Board of Trustees, including a majority of the Trustees who are not
"interested persons," last voted to approve the Advisory Agreement on May 20,
1997.
The Investment Manager was formed in 1989, is a wholly-owned subsidiary
of The Charles Schwab Corporation, and has served as the investment adviser to
each series of the Trust, including the Funds, as well as each series of the
Affiliated Trusts. The Chairman of the Board of Directors of the Investment
Manager is Charles R. Schwab. As a result of his beneficial ownership interests
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.
The Advisory Agreement will continue in effect for successive
one-year terms for the Fund to which it relates, subject to annual approval
by: (1) the Board of Trustees or (2) a vote of the majority (as defined in the
Investment Company Act of 1940, as amended ("1940 Act")) of the outstanding
voting securities of each Fund subject thereto. In either event, the
continuance must also be approved by a majority of the Independent Trustees, 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 subject thereto, and will terminate automatically upon assignment.
Pursuant to the Advisory Agreement, as may be amended from time to
time, the Investment Manager is entitled to receive from the Schwab
Short/Intermediate Government Bond Fund and the Schwab Long-Term Government
Bond Fund a graduated annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. For the fiscal year ended August 31, 1996, the
investment advisory fees paid by the Schwab Short/Intermediate Government Bond
Fund and the Schwab Long-Term Government Bond Fund were $453,000 (fees were
reduced by $149,000) and $0 (fees were reduced by $68,000), respectively.
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<PAGE> 15
Currently, the Investment Manager has voluntarily guaranteed that the
management fee paid by each Fund will not exceed 0.31% of the Schwab
Short/Intermediate Government Bond Fund's average daily net assets and 0.12% of
the Schwab Long-Term Government Bond Fund's average daily net assets. The
Investment Manager and Schwab have voluntarily guaranteed that the total
operating expenses will not exceed 0.49% of the Schwab Short/Intermediate
Government Bond Fund's average daily net assets and 0.30% of the Schwab
Long-Term Government Bond Fund's average daily net assets. Each of these
guarantees is voluntary and may be discontinued at any time.
The Trust pays the expenses of its operations, including: the fees and
expenses of independent accountants, counsel and the custodian of its assets;
the cost of maintaining books and records of account; taxes; registration fees;
the fees and expenses of qualifying the Trust and its shares for distribution
under federal and state securities laws; and industry association membership
dues. The Trust generally allocates expenses among individual series of the
Trust, including the Funds, on the basis of relative net assets at the time the
expense is incurred, except that expenses directly attributable to a particular
series or class of a series are charged to that series or class, respectively.
Required Vote and Board of Trustees' Recommendation
Approval of this Proposal requires the affirmative vote of the holders
of a majority of a Fund's outstanding voting securities which, as used in this
Proxy Statement, means the vote of the lesser of (a) more than 50% of the
outstanding shares of a Fund, or (b) 67% of the shares of the Fund present at
the Meeting if the holders of more than 50% of the outstanding shares of the
Fund are present or represented by proxy at the Meeting.
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" EACH NOMINATED TRUSTEE.
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<PAGE> 16
PROPOSAL 2
AMENDING EACH FUND'S FUNDAMENTAL INVESTMENT OBJECTIVE
The Board of Trustees has proposed amending each Fund's fundamental
investment objective to allow each Fund to use an indexing strategy. If the
change in the investment objective is approved, the Board of Trustees has
approved a change in the name of the Schwab Short/Intermediate Government Bond
Fund to "Short-Term Bond Market Index Fund" and of the Schwab Long-Term
Government Bond Fund to "Total Bond Market Index Fund."
Each Fund's current fundamental investment objective 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. For a number of reasons, the Board of Trustees and
the Investment Manager believe that it would be advantageous to shareholders to
change this investment objective. Two primary factors considered by the Board
of Trustees and the Investment Manager were the current low assets of each
Fund, possibly indicating a lack of shareholder interest in either the type of
fund or the Funds' performance, and the expected lower expense ratios normally
associated with an indexing strategy.
Each Fund's proposed investment objective is to attempt to provide a
high level of current income consistent with preservation of capital by seeking
to track the investment results of a particular investment grade bond index
through the use of index sampling techniques. The Short-Term Bond Market Index
Fund ("Short Bond Fund") would seek to track the performance of a
market-weighted bond index with a prescribed short maturity, while the Total
Bond Market Index Fund ("Total Bond Fund") would seek to track the performance
of a broad market-weighted bond index (the "Indexes"). Under normal market
conditions, each Fund will invest at least 80% of its assets in securities in
its respective Index ("Index Securities").
As stated above, if shareholders approve Proposal 2, the Investment
Manager and Schwab have voluntarily guaranteed that, through at least September
30, 1998, the total operating expenses of the Short Bond Fund and the Total Bond
Fund will not exceed 0.38% and 0.30%, respectively, of that Fund's average daily
net assets. The Board of Trustees' approval of the change in investment
objective and the Investment Manager's and Schwab's total operating expense
ratio limits were based upon certain factors. In particular, the proposed
investment objective may permit the Funds to be more effectively marketed, which
could result in certain economies of scale if assets grow. With the proposed
investment objective, the Funds may be more attractive to a greater number of
investors as indexing strategies grow in popularity. If the change were to
facilitate greater sales, the Funds would be expected to grow in net assets,
which would likely result in an increase in the Investment Manager's and
Schwab's overall compensation. Economies of scale could then be achieved by
spreading the Funds' fixed costs over a larger asset base, which could be
expected to potentially lower the Funds' operating expenses. Of course, none of
these developments will necessarily result from adoption of the proposed
investment objective.
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<PAGE> 17
The Indexes
If its proposed investment objective is approved, the Short Bond Fund
would invest in a portfolio of fixed-income securities that seeks to track the
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index (the
"Short-Term Index"). The Short-Term Index currently is a market-weighted index
which encompasses the following classes of investment grade fixed-income
securities: U.S. Treasury and agency securities, corporate bonds, and
international (dollar-denominated) bonds, all with maturities between one and
five years.
If its proposed investment objective is approved, the Total Bond Fund
would invest in a portfolio of fixed-income securities that seeks to track the
Lehman Brothers Aggregate Bond Index (the "Aggregate Bond Index"). The
Aggregate Bond Index currently is a broad market-weighted index which
encompasses the following classes of investment grade fixed-income securities:
U.S. Treasury and agency securities, corporate bonds, international
(dollar-denominated) bonds, mortgage-backed securities and asset-backed
securities, all with maturities greater than one year.
Of course the composition and average maturity of the Indexes, and of
the Funds tracking them, will change as market conditions change. In addition,
while neither Fund has any intention to change the Index it seeks to track,
each Fund reserves the right to do so if the Board of Trustees believes a
change is necessary, but would inform shareholders prior to making any change.
The following table illustrates the portfolio composition and average
maturity of the Indexes and the Funds as of [June 30, 1997]:
TABLE I [Current data as of 12/31/96; DATA WILL BE UPDATED as of 6/30/97]
<TABLE>
<CAPTION>
Short-Term Index Schwab Aggregate Bond Schwab Long-Term
Short/Intermediate Index Government Bond
Government Bond Fund Fund
<S> <C> <C> <C> <C>
U.S. Treasury and 86.0% 87.3% 51.6% 100.0%
agency securities
Corporate Bonds 12.0% 0.0% 14.1% 0.0%
International 2.0% 0.0% 3.7% 0.0%
Bonds
Mortgage-backed 0.0% 12.7% 29.6% 0.0%
securities
Asset-backed 0.0% 0.0% 1.0% 0.0%
securities
Dollar-weighted 2.7 years 2.9 years 8.8 years 11.1 years
average maturity
</TABLE>
As shown in Table I, based on data as of [June 30, 1997,] the
portfolio composition of the Short Bond Fund would change slightly, while the
composition of the Total Bond Fund would change significantly. Additionally,
the Short Bond Fund's maturity would be only slightly shorter, while Total Bond
Fund would have a significantly shorter maturity, based on this data. Of
course, the composition and average maturity of the Indexes, and of the Funds
tracking them, will
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<PAGE> 18
change as market conditions change. In addition, while neither Fund has any
current intention to change the Index it seeks to track, each Fund reserves the
right to do so if the Investment Manager believes a change is necessary, but
would inform shareholders prior to making any such change.
The Securities To Be Purchased to Track the Indexes
As Table I shows, based upon the composition of the Indexes as of
[June 30, 1997,] each Fund would invest in different securities if the proposed
investment objective is approved. The Short Bond Fund would continue to
purchase primarily U.S. Treasury and agency securities, but would lessen its
holdings of mortgage-backed securities and increase its holdings of corporate
bonds and international (dollar-denominated) bonds. The Total Bond Fund would
likely continue to invest significantly in U.S. Treasury and agency securities,
however, it would also begin to purchase corporate bonds, international
(dollar-denominated) bonds and asset-backed securities, as well as significant
amounts of mortgage-backed securities.
The securities included in the Indexes are required by Lehman Bothers
to meet certain general standards and principles, such as: an outstanding
market value of at least $100 million; a fixed coupon rate; and investment
grade quality, i.e., rated a minimum of Baa3 by Moody's Investors Service, Inc.
("Moody's") or BBB- by Standard & Poor's Corporation ("S&P"). Private
placement securities (including securities issued pursuant to Rule 144A under
the Securities Act of 1933) are excluded from the Indexes.
In addition to purchasing Index Securities, as a cost effective means
of attempting to track the performance of its Index, each Fund expects to
invest in certain securities that are known as "derivatives." Derivatives are
instruments whose values are linked to or derived from an underlying security
or index. The most common and conventional types of derivative securities are
futures and options. In addition to the use of futures and options, each Fund
also expects to utilize "swap" transactions to track the performance of its
Index. Each Fund also may invest in other conventional derivatives designed to
replicate the risk/return characteristics of a conventional fixed-income note
or bond. Such derivatives would be managed, in both structure and
concentration, to adhere to the Funds' investment policy restrictions regarding
interest rate and credit risk.
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<PAGE> 19
Risk Profiles Of Securities To Be Purchased
TABLE II
<TABLE>
<CAPTION>
Schwab
Short-Term Short/Intermediate Aggregate Schwab Long-Term
Index Government Bond Fund Bond Index Government Bond Fund
---------- -------------------- ---------- --------------------
<S> <C> <C> <C> <C>
Interest Rate Low Low Medium High
Risk
Income Risk High High Medium Low
Credit Risk Low Low Low Low
Prepayment/ Low Low Medium Medium
Call Risk
</TABLE>
As Table II illustrates, shareholders of bond funds are generally
exposed to four types of risk from fixed-income securities: (i) INTEREST RATE
RISK is the potential for fluctuations in bond prices due to changing interest
rates; (ii) INCOME RISK is the potential for a decline in income due to falling
market interest rates; (iii) CREDIT RISK is the possibility that a bond issuer
will fail to make timely payments of either interest or principal; and (iv)
PREPAYMENT RISK (for mortgage-backed securities) or CALL RISK (for corporate
bonds) is the likelihood that, during periods of falling interest rates,
securities with high stated interest rates will be prepaid (or "called") prior
to maturity, requiring reinvestment of the proceeds at generally lower interest
rates. As explained in greater detail below, if the proposed investment
objective is approved, the Short Bond Fund is expected to have relatively lower
prepayment risk (as mortgage-backed securities are currently not included in its
Index) and a corresponding increase in call risk (due to proposed investment in
corporate bonds). The Total Bond Fund is expected to have greater income and
relatively higher prepayment/call risk because it will begin to invest in
mortgage-backed securities and corporate bonds, albeit with a lower interest
rate risk due to the expected shorter maturity. If the proposed investment
objective is approved, the Funds will revise their prospectus to disclose the
indexing strategy and the risks of the securities to be purchased before using
the proposed strategy.
The risks associated with U.S. Treasury and agency securities,
generally considered the least risky form of fixed-income security in terms of
credit risk, are detailed in the Funds' current prospectus. The Schwab
Short/Intermediate Government Bond Fund and the Schwab Long-Term Government
Bond Fund currently invest eighty-six percent and one hundred percent,
respectively, of net assets in these types of securities. If Proposal 2 is
approved, the Funds also would invest in corporate bonds, which are debt
instruments issued by corporations. Although a higher return is expected from
corporate bonds, these securities will generally not be of the same credit
quality and risk as U.S. Treasury and agency securities because they are not
issued or guaranteed as to principal and interest by the federal government or
its agencies or instrumentalities.
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<PAGE> 20
International fixed-income securities may also involve additional
risks, including risks relating to political or economic conditions in a
foreign country, and the potentially less stringent investor protection and
disclosure standards of foreign markets. Further, a governmental issuer may be
unwilling to repay principal and interest when due, and may require that the
conditions for payment be renegotiated. These factors could make international
fixed-income securities more volatile, although the Funds would not be exposed
to currency risks because the international fixed-income securities would be
dollar-denominated.
Mortgage-backed securities and asset-backed securities also may
involve additional risks. Interest payments on these securities are dependent
upon the underlying mortgage pool or asset pool, respectively. The primary
risk of these securities is "prepayment risk," namely that during periods of
changing interest rates, the payment streams in the underlying pools will be
paid faster (e.g., prepayment of mortgage principal) than anticipated. If the
proposed investment objective is approved, these securities would be described
more fully in the Funds' revised prospectus.
Although each Fund may currently invest in futures and options, the
Investment Manager anticipates that it would use futures and options more often
to seek to achieve each Fund's proposed investment objective. As explained
more fully in the Funds' current prospectus, the risk of loss with futures can
be substantial, although the Investment Manager will attempt to mitigate these
risks through the use of a variety of investment techniques described in the
current prospectus. The primary risks associated with their use are an
imperfect correlation between the change in market value of the bonds held by a
Fund and the prices of the futures and options, and the possible lack of a
liquid secondary market that may give rise to an inability to close a position
prior to maturity. Additionally, each Fund may enter into swap transactions as
a cost-effective means to track the return and maturity of its Index. Interest
rate swaps involve the exchange by a Fund with another party of the Fund's
commitment to pay or receive interest (for example, an exchange of floating rate
payments for fixed rate payments) with respect to a notional amount of
principal. In a swap transaction, a Fund is exposed to the risk that the
counterparty will not fulfill its obligations.
If as a result of a change in a Fund's investment objective is
approved for a Fund, any change to the Fund's average maturity changes would
affect the Fund's risk profile is likely to change as well. As shown in Table
I, based on data as of [June 30, 1997], the average weighted maturity of the
Total Bond Fund initially is expected to be shorter (8.8 years versus 11.1
years). The expected maturity of the Short Bond Fund, however, is expected to
shorten only slightly (2.7 years versus 2.9 years). Generally, as a Fund's
maturity shortens one would expect price volatility as well as return to
decrease. In previous periods, the Indexes have had considerable fluctuations
in average maturity.
The Investment Process of Indexing
If the proposed investment objective is approved, the Funds would not
be managed according to traditional methods of "active" investment management,
which involve the buying and selling of securities based upon economic,
financial, and market analyses and investment judgment. Instead, the
Investment Manager would utilize a "passive" or "indexing" investment
approach, to attempt to track the investment performance of each Fund's Index
through statistical sampling procedures. The Funds will be unable to hold all
of the individual issues which comprise
-15-
<PAGE> 21
the Indexes because of the large number of securities in the Indexes. Each
Fund will hold a portfolio of fixed-income securities that is managed to
closely approximate its Index's "characteristics" of coupon rate, duration,
sector, quality and optionality (or convexity). Before purchasing or selling a
security, the Investment Manager will analyze each security's characteristics
and determine whether purchasing or selling the security will help the Fund's
portfolio approximate the characteristics of the Index. As a result, when the
Fund's portfolio as a whole is considered, the Fund's performance and risk is
expected to be similar to its Index's performance and risk.
For example, with respect to the "sector characteristic," if U.S.
Treasury and agency securities represent approximately 60% of an Index's
interest rate risk, then approximately 60% of the respective Fund will come
from such securities. Similarly, if corporate bonds represent 20% of the
interest rate risk of an Index, then they will represent approximately 20% of
the interest rate risk of the Fund. This sampling technique is expected to
enable each Fund to track the dividend income and price movements of its
respective Index, while minimizing brokerage, custodial and accounting costs.
To the extent consistent with each Fund's investment objective and
policies, the Investment Manager also will employ specific investment policies
designed to minimize capital gain distributions. By deferring the tax on
capital gains, where possible, until shares are sold by an investor, unrealized
gains can accumulate in the Fund, helping to build the value of a shareholder's
investment.
Finally, each Fund, from time to time, may follow a policy of
substituting one type of investment grade bond for another (a "corporate
substitution policy"). For instance, a Fund may hold more short-term corporate
bonds (and fewer short-term U.S. Treasury Bonds) than represented in the Index
so as to increase income. This corporate substitution strategy would entail the
assumption of additional credit risk. However, substantial diversification
within the corporate sector may mitigate any issue-specific credit risk. In
addition, each Fund intends to adopt a non-fundamental investment policy
restricting corporate substitutions to issues with less than 4 years remaining
to maturity, and in the aggregate to not more than 15% of net assets. Overall,
credit risk is expected to be relatively low for each Fund.
The Investment Manager has extensive experience employing indexing
strategies. The Investment Manager currently manages four equity index
strategy funds and the equity and bond portions of asset allocation funds using
an indexing strategy. The Board of Trustees expects that the Investment
Manager's experience with managing other funds using an indexing strategy will
be advantageous for the Funds and their shareholders if Proposal 2 were
approved.
REQUIRED VOTE AND BOARD OF TRUSTEES' RECOMMENDATION
The Board of Trustees has considered various factors and believes that
this Proposal will increase investment opportunities for, and is in the best
interests of, each Fund and its shareholders. If the Proposal is not approved,
each Fund's current fundamental investment objective will remain in effect and
another shareholder vote would be required before the Fund could engage in any
activities deemed to be prohibited under the current investment objective.
-16-
<PAGE> 22
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" AMENDING THEIR FUND'S FUNDAMENTAL
INVESTMENT OBJECTIVE AS DESCRIBED ABOVE.
PROPOSAL 3
ELIMINATING, RECLASSIFYING OR AMENDING EACH FUND'S
FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS
In addition to the fundamental investment objective described above in
Proposal 2, each Fund has fundamental investment policies and investment
restrictions. The 1940 Act requires each Fund to have certain investment
restrictions which can be changed only by a shareholder vote. A mutual fund may
also self-designate other restrictions which may be changed only by a
shareholder vote. These restrictions are referred to as "fundamental"
restrictions. With the passage of time, the Investment Manager has noted and
reported to the Board of Trustees that certain restrictions self-designated by
each Fund as fundamental reflect certain regulatory, business or industry
conditions which are no longer up to date (each a "current self-designated
restriction").
Accordingly, the Board of Trustees authorized a comprehensive review
and revision of the Funds' current self-designated restrictions to: (1)
simplify and modernize those restrictions which are required to be fundamental;
(2) eliminate any fundamental restrictions which are no longer required to be
fundamental under state securities laws or the positions of the staff of the
SEC in interpreting the 1940 Act; and (3) allow the Investment Manager more
flexibility in selecting appropriate investments for each Fund in a changing
regulatory and investment environment. A Fund's other investment restrictions,
which also govern a Fund's investment activities, are "nonfundamental
restrictions." Nonfundamental restrictions may be changed only by a majority
vote of the Board of Trustees.
By reducing to a minimum and modernizing those restrictions which can
be changed only by shareholder vote, each Fund may be able to avoid the costs
and delays associated with a future shareholder meeting. The Board of Trustees
believes that this change would enhance the Investment Manager's ability to
manage the Funds' portfolios in a changing regulatory or investment
environment. Accordingly, your Fund's investment management opportunities may
be increased.
For example, from 1969 until 1992, a mutual fund could invest no more
than 10% of its net assets in "illiquid securities" under an SEC
interpretation. In 1992, the SEC raised the percentage limit to 15% of a
mutual fund's net assets. Unfortunately, many mutual funds, such as the Funds,
had adopted a fundamental investment policy limiting their investment in
"illiquid securities" to 10% and were thus faced with the difficult dilemma of
either bearing the expense of a shareholders' meeting to change their
fundamental investment policy or foregoing the investment opportunities
afforded by the SEC's change in the percentage limitations. The
-17-
<PAGE> 23
proposed revision of the Funds' current self-designated restrictions is
designed to avoid this type of dilemma.
In addition, many of the proposed changes, as individually described
below, reflect each Fund's desire to eliminate requirements imposed by certain
administrators of state securities laws. In 1996, Federal legislation was
enacted which preempts the state securities laws that substantively regulate
investment companies.
Each proposed change to each Fund's current self-designated
restrictions recommended by the Board of Trustees is discussed in detail below.
The proposed changes take three forms: (i) the adoption of a required
fundamental restriction in a more flexible form and reclassification of the
current self-designated restriction as nonfundamental; (ii) the
reclassification of the current self-designated restriction as a nonfundamental
restriction; and (iii) the elimination of certain current self-designated
restrictions. The Board of Trustees has determined that it is not necessary to
change all of each Fund's current self-designated restrictions. Therefore,
certain self-designated restrictions will be retained in their current form as
fundamental restrictions. A full list of the current self-designated
restrictions is set forth in Exhibit A.
In the first case, a new fundamental investment restriction is
proposed by the Board of Trustees ("proposed restriction"). The proposed
restriction, which will amend or replace the current self-designated
restriction, is designed to meet all of the requirements of the 1940 Act and to
provide the Investment Manager with the flexibility described above. To the
extent that a restriction reclassified as nonfundamental is more restrictive
than the proposed restriction, the more restrictive provision will govern the
investment activities of each Fund. A nonfundamental restriction, including a
more restrictive nonfundamental restriction, may be changed by the Board of
Trustees at any time.
With respect to the other two forms of the proposed changes, the
current self-designated restrictions being reclassified or eliminated are not
required by the 1940 Act to be fundamental. The Board of Trustees believes
that reclassifying or eliminating the current self-designated restriction will
achieve the flexibility described above and that shareholders will continue to
be protected by the requirements of the 1940 Act. In the case of reclassified
restrictions, the Board of Trustees and the Investment Manager presently
believe that each Fund should continue to operate under the restriction.
However, by reclassifying the restriction the flexibility goals described above
are achieved. Significantly, the Board of Trustees, by a majority vote, has
the ability to change or remove nonfundamental investment restrictions,
including the reclassified restrictions, without obtaining shareholder
approval. The Board of Trustees has no present intention of eliminating any of
the current self-designated restrictions which have been reclassified as
nonfundamental. If the Board of Trustees were to decide in the future to
change or eliminate a reclassified nonfundamental restriction, such a change
would be disclosed in the Fund's Prospectus or Statement of Additional
Information.
For each proposed change or element of this Proposal the relevant
current self-designated restriction is described below. The effect of a "FOR"
vote on each element of Proposal 3 is detailed, i.e., whether the current
self-designated restriction will be: (i) reclassified as
-18-
<PAGE> 24
nonfundamental with an amended form adopted as fundamental; (ii) simply
reclassified as nonfundamental; or (iii) eliminated entirely. If a proposed
restriction will replace or amend the current self-designated restriction, then
such proposed replacement or amendment is also described in detail. The
current requirements, limitations and prohibitions of the 1940 Act upon the
types of investments or portfolio management techniques subject to the Funds'
investment restriction are described. Any anticipated effects on the
operations of each Fund are also set forth below. The Board of Trustees
believes that, by examining each of the current self-designated restrictions,
the proposed restrictions, and any presently anticipated effects of the
proposed changes, you will vote "FOR" each element of Proposal 3.
The entire slate of proposed restrictions is provided in Exhibit B for
your reference when deciding whether to vote on the proposed changes as a group
or individually. Each proposed fundamental restriction also is specifically
discussed below where appropriate. Each Fund's current self-designated
restrictions, which are found in its Statement of Additional Information, are
also set forth in Exhibit A hereto. Each Fund may adopt additional or
supplemental fundamental investment restrictions if required by federal
regulators or if determined by the Board of Trustees to be necessary or
desirable. The proposed restrictions meet all of the requirements of the 1940
Act and no other fundamental investment restrictions beside those set forth in
Exhibit B are presently required by the 1940 Act.
Voting Procedures and Board of Trustees' Recommendation
Each element of Proposal 3, as discussed below and presented on the
proxy card, may be voted on either (i) as a group or (ii) by each element (not
both). If the entire slate of Proposal 3 is approved, each Fund will have no
fundamental investment policies or investment restrictions except those set
forth in Exhibit B (which includes those current self-designated restrictions
that the Board of Trustees has decided to retain as fundamental). If each
element of Proposal 3 is disapproved, each Fund's current restrictions, as set
forth in Exhibit A, will remain in effect.
If shareholders of a Fund approve some, but not all, of the proposed
modifications, a Fund will have a combination of certain current self-designated
restrictions and certain proposed restrictions. In that event, each Fund would
have as its only fundamental restrictions the combination of (i) current
self-designated restrictions not voted on, (ii) approved proposed restrictions,
and (iii) current self-designated restrictions which were retained by
shareholder vote.
A vote on the entire group of proposed modifications will be counted as
if it were a vote on each separate proposed modification. For example, a vote
"FOR" the entire group of proposed modifications on the proxy card will be
counted as a vote "FOR" each proposed modification. In the event that a proxy
card is returned with a vote on the entire slate and a vote on a specific
element of Proposal 3, the vote on the entire slate of proposed changes will be
considered determinative of, and counted as, the shareholder's intended vote. If
any part of Proposal 3 is adopted, then the affected Fund's Prospectus and
Statement of Additional Information will be revised to reflect the changes in
the Fund's fundamental investment policies and restrictions.
-19-
<PAGE> 25
The Board of Trustees believes that submitting each element of Proposal
3 to each Fund's shareholders at this time is in the shareholders' and each
Fund's best interest because it takes advantage of the opportunity afforded by
the need to submit Proposal 2 above to each Fund's shareholders. This will
potentially spare each Fund the extra cost and time delay of having a subsequent
shareholder meeting to consider changes to each Fund's current self-designated
restrictions.
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" ELIMINATING, RECLASSIFYING OR AMENDING
EACH FUND'S FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS IN THEIR ENTIRETY.
DISCUSSION OF EACH PROPOSED CHANGE IN FUNDAMENTAL RESTRICTION
1. PROPOSED CHANGES TO RESTRICTIONS REGARDING BORROWING AND LENDING
Current Restrictions:
Each Fund may not:
(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 for temporary
purposes 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.
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<PAGE> 26
Proposed Restrictions:
1. THE FUND MAY LEND OR BORROW MONEY TO THE EXTENT PERMITTED BY
THE INVESTMENT COMPANY ACT OF 1940 OR THE RULES OR REGULATIONS
THEREUNDER, AS SUCH STATUTE, RULES OR REGULATIONS MAY BE
AMENDED FROM TIME TO TIME.
2. THE FUND MAY PLEDGE, MORTGAGE OR HYPOTHECATE ANY OF ITS ASSETS
TO THE EXTENT PERMITTED BY THE INVESTMENT COMPANY ACT OF 1940
OR THE RULES OR REGULATIONS THEREUNDER, AS SUCH STATUTE, RULES
OR REGULATIONS MAY BE AMENDED FROM TIME TO TIME.
Analysis of Proposed Change
Under the current self-designated restrictions, each Fund may only
borrow (including entering into reverse repurchase agreements) up to one-third
of the value of its total assets for temporary, extraordinary, or emergency
purposes, may not make any loans except to purchase short term debt obligations
or enter into repurchase agreements, and may only pledge, mortgage, and
hypothecate up to 33% of its net assets. Under the Proposal, these current
self-designated restrictions will be replaced by two proposed restrictions.
The proposed restrictions would simply permit any lending, borrowing, and
pledging, mortgaging and hypothecating of assets to the extent permitted by the
1940 Act.
The 1940 Act presently limits a Fund's ability to borrow more than one
third of the value of its total assets. The positions of the SEC staff on the
ability of a mutual fund to borrow have evolved in recent years with the
development of new investment practices, such as reverse repurchase agreements.
While the current self-designated restriction on borrowing specifically
identifies reverse repurchase agreements as a practice subject to the
limitations of this policy, if new investment practices arise in the future
that were considered a form of borrowing, it would not be entirely clear
whether such new practices would be within the scope of the current
restriction. Therefore, the proposed restriction on borrowing would revise the
current restriction to allow each Fund the ability to consider engaging in new
investment practices to the extent permitted by the 1940 Act as interpretations
of the 1940 Act are further developed.
Borrowing by a Fund is a form of leveraging its portfolio which will
expose it to certain risks. Leveraging will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Fund's net asset
value, and money borrowed will be subject to interest costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the interest received from the securities purchased with
borrowed funds.
The 1940 Act also restricts the ability of any mutual fund to lend.
Under the 1940 Act a Fund may only make loans if expressly permitted to do so
by the Fund's investment policies; and may not make loans to persons who
control or are under common control with the Fund. Thus,
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the 1940 Act effectively prohibits a Fund from making loans to certain persons
where conflicts of interest or undue influence are most likely present. As the
proposed restrictions would prohibit lending made impermissible by the 1940
Act, the Funds would be prohibited from making such loans. However, if in the
future a Fund were to decide that it would be advantageous to have the
opportunity to make loans within the restrictions of the 1940 Act, under the
proposed restriction the Funds would be positioned to make such a loan. Under
the current self-designated restriction, a Fund could only make such a loan if
the loan was to purchase debt obligations or enter into repurchase agreements.
If for any other purpose, the Fund presently could not take advantage of the
opportunity.
The 1940 Act, and in particular certain liquidity restrictions, limits
a Fund's ability to pledge, mortgage or hypothecate its assets. To the extent
that pledged assets are encumbered for more than seven days, such assets would
be considered illiquid and, therefore, each Fund's use of such techniques would
be limited to 15% of net assets. Additionally, under the 1940 Act, a Fund is
limited to pledging, mortgaging or hypothecating no more than one-third of its
assets. Each Fund desires the ability to consider using portfolio management
techniques involving pledging, mortgaging or hypothecating assets to the full
extent presently permitted by the 1940 Act. Each Fund also desires the
flexibility to adapt to new conditions if present limitations on pledging,
mortgaging or hypothecating of assets are modified.
If approved, each Fund will adopt the proposed restriction as
fundamental and the current self-designated restrictions will be reclassified
as nonfundamental restrictions. The Funds will continue to operate under these
nonfundamental restrictions until such time as the Board of Trustees decides to
eliminate the nonfundamental restrictions. The Board of Trustees has no such
present intention.
Required Vote and Board of Trustees' Recommendation
Approval of this element of Proposal 3 requires the affirmative vote
of the holders of a majority of a Fund's outstanding voting securities. If
this element or the entire slate of Proposal 3 is disapproved with respect to a
Fund, the current self-designated restrictions addressed by this element will
remain fundamental. The Board of Trustees has considered various factors and
believes that this element of Proposal 3 will increase investment management
flexibility and is in the best interests of each Fund and its shareholders.
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THIS ELEMENT OF PROPOSAL 3, AS
DESCRIBED ABOVE.
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2. PROPOSED CHANGE IN RESTRICTION REGARDING UNDERWRITING OF SECURITIES
Current Self-Designated Restriction:
Each Fund may not:
(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.
Proposed Restriction:
4. The Fund may underwrite securities to the extent
permitted by the Investment Company Act of 1940 or
the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to
time.
Analysis of Proposed Change
Each Fund's current restrictions generally prohibit the underwriting
of securities. Under the Proposal this current self-designated restriction
will be replaced by a more flexible proposed restriction. The proposed
restriction would allow underwriting of securities to the extent permitted by
the 1940 Act.
At present, the 1940 Act prohibits a diversified mutual fund from
underwriting securities in excess of 25% of its total assets. Therefore, under
the proposed restriction, each Fund would be prohibited by statute from
underwriting securities in an amount in excess of 25% of its portfolio. At
present, the Investment Manager is unaware of any underwriting activities that
would be desirable or appropriate for either of the Funds. The Board of
Trustees believes, however, that replacement of the current self-designated
restriction will enable each Fund to avoid future situations where a
fundamental restriction will prevent the Funds, absent another shareholder
vote, from taking advantage of new opportunities that appear to be both legally
permissible and advantageous to shareholders. Under the proposed restriction
each Fund would have the ability in the future, if the regulatory or market
environments change, to avail themselves of such opportunities.
If approved, each Fund will adopt the proposed restriction as
fundamental, and the current self-designated restriction will be reclassified
as a nonfundamental restriction. The Funds presently intend to continue to
operate under the nonfundamental restriction until such time as the Board of
Trustees decides to eliminate the nonfundamental restriction. The Board of
Trustees has no such present intention.
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<PAGE> 29
Required Vote and Board of Trustees' Recommendation
Approval of this element of Proposal 3 requires the affirmative vote
of the holders of a majority of a Fund's outstanding voting securities. If
this element or the entire slate of Proposal 3 is not approved with respect to a
Fund, the current self-designated restriction addressed by this element will
remain fundamental. The Board of Trustees has considered various factors and
believes that this element of Proposal 3 will increase investment management
flexibility and is in the best interests of each Fund and its shareholders.
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THIS ELEMENT OF PROPOSAL 3, AS
DESCRIBED ABOVE.
3. PROPOSED CHANGE IN RESTRICTION REGARDING CONCENTRATION OF A FUND'S
INVESTMENTS
Current Self-Designated Restriction:
Each Fund may not:
(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. Securities issued by
governments or political subdivisions or authorities
of governments are not considered to be securities
subject to this industry concentration restriction.
Proposed Restriction:
3. Each Fund may not concentrate investments in a
particular industry or group of industries, or within
one state (except with respect to the Total Bond
Market Index Fund and the Short Term Bond Market
Index Fund, to the extent that the index which each
Fund seeks to track is also so concentrated) as
concentration is defined under the Investment Company
Act of 1940 or the rules or regulations thereunder,
as such statute, rules or regulations may be amended
from time to time.
Analysis of Proposed Change
The current self-designated restriction specifically limits a Fund's
investments to less than 25% of a Fund's total assets in a particular industry.
Under the Proposal, this current self-designated restriction will be replaced
by a more flexible proposed restriction. The proposed
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<PAGE> 30
restriction would continue to prevent each Fund from "concentrating" its
investments in a single industry or in a state, except if the Index that the
Fund tracks is "concentrated" in a particular industry or state. Further, to
provide flexibility, the concept of "concentration" in a Fund's proposed
restriction is articulated so as to always track the current meaning of
"concentration" under the 1940 Act.
At present, "concentration" is generally interpreted under the 1940
Act in a manner consistent with each Fund's current self-designated restriction
(25% or more). However, in order to achieve greater flexibility (if for
instance the percentage limitation were to be changed by the SEC), the proposed
restriction would eliminate the specific percentage reference and instead
define the term "concentration" with respect to the meaning conferred under the
1940 Act. Because the present interpretation of the percentage limit of
"concentration" under the 1940 Act is the same as the current concentration
restriction, it is not expected that there would be any immediate impact on a
Fund's operations as a result of approving this aspect of the proposed
concentration restriction. Any future change in operations would occur only if
the SEC staff changed its interpretation of what constitutes "concentration."
In addition, each Fund has reserved the freedom of action to be
"concentrated" when the Index it seeks to track is "concentrated." In order to
more fully employ the indexing strategy proposed for each Fund, the Investment
Manager must have the flexibility to concentrate a Fund's portfolio to the same
extent the relevant Index is concentrated. To retain that flexibility under
guidelines of the SEC staff, the Funds are required to reserve that freedom of
action in their fundamental policy and have therefore proposed to do so.
If approved, each Fund will reclassify the current self-designated
restriction as nonfundamental. The Funds presently intend to continue to
operate under the nonfundamental restriction until such time as the Board of
Trustees decides to eliminate the nonfundamental restriction. The Board of
Trustees has no such present intention.
Required Vote and Board of Trustees' Recommendation
Approval of this element of Proposal 3 requires the affirmative vote
of the holders of a majority of a Fund's outstanding voting securities. If
this element or the entire slate of Proposal 3 is disapproved with respect to a
Fund, the current self-designated restriction addressed by this element will
remain fundamental. The Board of Trustees has considered various factors and
believes that this element of Proposal 3 will increase investment management
flexibility and is in the best interests of each Fund and its shareholders.
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THIS ELEMENT OF PROPOSAL 3, AS
DESCRIBED ABOVE.
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4. PROPOSED CHANGE IN RESTRICTION REGARDING INVESTMENT IN "ILLIQUID
SECURITIES"
Current Self-Designated Restriction:
Each Fund may not:
(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.
Analysis of Proposed Change
The current self-designated restriction limits investments in
"illiquid securities" (securities which may not be sold or disposed of in the
ordinary course of business within seven days at approximately the value at
which the Fund has valued the security) to 10% of each Fund's total assets.
Under the Proposal, the current self-designated restriction will be eliminated.
The current self-designated restriction is based on past requirements
of the SEC. As explained above, from 1969 until 1992, a mutual fund could
invest no more than 10% of its net assets in "illiquid securities" under an SEC
interpretation. In 1992, the SEC raised the percentage limit to 15% of a
mutual fund's net assets. Unfortunately, the Funds had adopted a fundamental
self-designated restriction limiting their investments to 10% of total assets.
As a result the Funds have been unable to avail themselves of potentially
advantageous investment opportunities allowed by the change in the SEC's
restrictions.
By eliminating the current self-designated restriction, the Funds will
be able to take advantage of investment opportunities currently unavailable to
them. Further, the Funds will be able to take advantage of any future changes
in the percentage limitations on investment in illiquid securities.
Shareholders will continue to be protected by the requirements of the SEC, and,
should the SEC in the future decide to tighten the limits on investments in
illiquid securities (for example, to 5% of net assets), elimination of the
Funds' current self-designated restriction would reduce confusion between the
Funds' policy (10% of total assets currently) and the hypothetical SEC
limitation (e.g., 5% of net assets).
Required Vote and Board of Trustees' Recommendation
Approval of this element of Proposal 3 requires the affirmative vote
of the holders of a majority of a Fund's outstanding voting securities. If
this element or the entire slate of Proposal 3 is disapproved with respect to a
Fund, the current self-designated restriction addressed by this element will
remain fundamental. The Board of Trustees has considered various factors and
believes that this element of Proposal 3 will increase investment management
flexibility and is in the best interests of each Fund and its shareholders.
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<PAGE> 32
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THIS ELEMENT OF PROPOSAL 3, AS
DESCRIBED ABOVE.
5. PROPOSED CHANGE IN RESTRICTION REGARDING PURCHASING SECURITIES IN
WHICH CERTAIN AFFILIATED PERSONS ALSO INVEST
Current Self-Designated Restriction:
Each Fund may not:
(4) Purchase or retain securities of an issuer if any of
the officers, trustees or directors of the Trust or
the Investment Manager individually own beneficially
more than 1/2 of 1% of the securities of such issuer
and together beneficially own more than 5% of the
securities of such issuer.
Analysis of Proposed Change
This current self-designated restriction prohibits a Fund from
purchasing or retaining securities of issuers if Trustees, Trust officers or
certain other affiliated persons own more than a specific percentage of that
issuer's securities. Under the Proposal the current self-designated
restriction will be eliminated.
This current self-designated restriction is based on a Blue Sky
position taken by certain administrators of state securities laws that have
been preempted by Federal law under recent Federal legislation. The 1940 Act
does not require the current self-designated restriction to be fundamental and
does not flatly prohibit such transactions. The 1940 Act does, however, have
strict prohibitions on and requirements regarding many forms of transactions
with affiliated persons (such as the Trustees and officers of a Fund).
Further, the Investment Manager (which is an affiliated person of the Funds)
maintains a code of ethics to monitor transactions with each Fund and to
provide a measure of protection against improper transactions that may be
perceived to be inconsistent with the Funds' and their shareholders' best
interests.
Required Vote and Board of Trustees' Recommendation
Approval of this element of Proposal 3 requires the affirmative vote
of the holders of a majority of a Fund's outstanding voting securities. If
this element or the entire slate of Proposal 3 is disapproved with respect to a
Fund, the current self-designated restriction addressed by this element will
remain fundamental. The Board of Trustees has considered various factors and
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<PAGE> 33
believes that this element of Proposal 3 will increase investment management
flexibility and is in the best interests of each Fund and its shareholders.
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THIS ELEMENT OF PROPOSAL 3, AS
DESCRIBED ABOVE.
6. PROPOSED CHANGE IN RESTRICTION REGARDING INVESTMENT IN COMMODITIES AND
REAL ESTATE
Current Self-Designated Restriction:
Each Fund may not:
(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.
Proposed Restriction:
5. The Fund may purchase or sell commodities,
commodities contracts, futures contracts, or real
estate to the extent permitted by the Investment
Company Act of 1940 or the rules or regulations
thereunder, as such statute, rules or regulations may
be amended from time to time.
Analysis of Proposed Change
The current self-designated restriction entirely prohibits a Fund from
purchasing or selling commodities or real estate, except for certain purchases
and sales of futures and options contracts. Under the Proposal this current
self-designated restriction will be replaced by a more flexible proposed
restriction. The proposed restriction would permit investment in commodities,
commodities contracts, futures contracts, or real estate to the extent
permitted by the 1940 Act.
Because of the Funds' investment objectives and the nature of
commodities, commodities futures and real estate it is unlikely, if the
proposed restriction is approved, that a Fund could make such investments
beyond the limit of the current self-designated restriction. However, each
Fund would like the ability to consider using these investment techniques
consistent with any future changes in the 1940 Act, as interpretations of the
1940 Act are further developed, or if the opportunity arises to invest in such
an instrument that is consistent with the Funds' investment
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<PAGE> 34
objectives and policies.
A futures contract is an agreement to buy or sell a specific amount of
a commodity or a financial instrument at a particular price on a stipulated
future date. To the extent the Funds were to invest in such instruments they
would be exposed to certain risks associated with such instruments, namely that
the underlying commodity or instrument would be worth less or more than
expected at the time of settlement. Financial futures may be used to hedge a
portfolio against adverse fluctuations in interest rates and because such
contracts usually move under the influence of interest rates, if interest rates
move adversely to the expectations of the Investment Manager, a Fund would
likely suffer a loss on such instrument.
If approved, each Fund will adopt the proposed restriction as
fundamental, and the current self-designated restriction will be reclassified
as a nonfundamental restriction. The Funds presently intend to continue to
operate under the nonfundamental restriction until such time as the Board of
Trustees decides to eliminate the nonfundamental restriction. The Board of
Trustees has no such present intention.
Required Vote and Board of Trustees' Recommendation
Approval of this element of Proposal 3 requires the affirmative vote
of the holders of a majority of a Fund's outstanding voting securities. If
this element or the entire slate of Proposal 3 is disapproved with respect to a
Fund, the current self-designated restriction addressed by this element will
remain fundamental. The Board of Trustees has considered various factors and
believes that this element of Proposal 3 will increase investment management
flexibility and is in the best interests of each Fund and its shareholders.
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THIS ELEMENT OF PROPOSAL 3, AS
DESCRIBED ABOVE.
OTHER MATTERS
The Board of Trustees is not aware of any other matter which may come
before the Meeting. However, should any such matters properly come before the
Meeting, the persons named in the accompanying form of proxy intend to vote the
proxy in accordance with their judgment on such matters.
The Trust is not required to hold annual shareholders' meetings and
does not intend to do so. It will, however, hold special meetings, such as the
Meeting, as required or deemed desirable by the Board of Trustees for such
purposes as changing fundamental policies, electing or removing Trustees, or
approving or amending an investment advisory agreement. In addition, a Trustee
may be removed by shareholders at a special meeting called upon written request
of shareholders owning in the aggregate at least 10% of the outstanding shares
of the Trust. As of June ___, 1997, the only
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<PAGE> 35
shareholder owning in excess of 5% of a Fund was ____________________________.
Their address, in care of Schwab Investments, is 101 Montgomery Street, San
Francisco, California 94104.
Shareholders wishing to submit proposals for inclusion in a proxy
statement for a subsequent shareholders' meeting should send their written
submissions to the principal executive offices of the Fund at Schwab
Investments, 101 Montgomery Street, San Francisco, California 94104, Attention:
Secretary. Proposals must be received a reasonable time in advance of a proxy
solicitation to be included. The mere submission of a proposal does not
guarantee inclusion in the proxy statement because the proposal must comply
with certain federal securities regulations.
Each Fund will furnish, without charge, a copy of its most recent
Annual Report and Semi-Annual Report succeeding the Annual Report (if any) to
any shareholder upon request. Shareholders desiring to obtain a copy of such
reports should direct all written requests to: Frances Cole, Secretary, Schwab
Investments, 101 Montgomery Street, San Francisco, California 94104, or should
call Schwab Shareholder Services at 1-800-2 NO-LOAD.
NOTICE TO BANKS, BROKER/DEALERS AND VOTING TRUSTEES
AND THEIR NOMINEES
Please advise a Fund, in care of Schwab Investments, 101 Montgomery
Street, San Francisco, California 94104, Attention: Secretary, whether other
persons are the beneficial owners of the shares for which proxies are being
solicited, and if so, the number of copies of the Proxy Statement, other
soliciting material, and Annual Report (or Semi-Annual Report) you wish to
receive in order to supply copies to the beneficial owners of shares.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY, THEREFORE, SHAREHOLDERS WHO
DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED TO COMPLETE, DATE, SIGN
AND RETURN THE PROXY CARD IN THE ENCLOSED STAMPED ENVELOPE.
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<PAGE> 36
SCHWABFUNDS(R)
Thank you for mailing your proxy card promptly!
We appreciate your placing your trust in SchwabFunds and look forward to
helping you achieve your financial goals.
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<PAGE> 37
EXHIBIT A
CURRENT FUNDAMENTAL INVESTMENT
RESTRICTIONS OF THE FUNDS
Under the current fundamental investment restrictions of each Fund,(1) each 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 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
______________________________
(1) Some of the current fundamental investment restrictions apply not only to
the Funds, but also to other series of the Trust, such as the Schwab California
Long-Term Tax-Free Bond Fund.
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<PAGE> 38
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 Municipal Bond Funds and the
California Municipal 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.
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<PAGE> 39
EXHIBIT B
PROPOSED FUNDAMENTAL INVESTMENT
POLICIES AND RESTRICTIONS OF THE FUNDS
If the entire slate of the Proposal is approved, the following fundamental
investment policies and restrictions will be the only fundamental investment
policies and restrictions of each Fund:(2)
1. The Fund may lend or borrow money to the extent permitted by the
Investment Company Act of 1940 or the rules or regulations
thereunder, as such statute, rules or regulations may be amended
from time to time.
2. The Fund may pledge, mortgage or hypothecate any of its assets to
the extent permitted by the Investment Company Act of 1940 or the
rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
3. Each Fund may not concentrate investments in a particular
industry or group of industries, or within one state (except with
respect to the Total Bond Market Index Fund and the Short Term
Bond Market Index Fund, to the extent that the index which each
Fund seeks to track is also so concentrated) as concentration is
defined under the Investment Company Act of 1940 or the rules or
regulations thereunder, as such statute, rules or regulations may
be amended from time to time.
4. The Fund may underwrite securities to the extent permitted by the
Investment Company Act of 1940 or the rules or regulations
thereunder, as such statute, rules or regulations may be amended
from time to time.
5. The Fund may purchase or sell commodities, commodities contracts,
futures contracts, or real estate to the extent permitted by the
Investment Company Act of 1940 or the rules or regulations
thereunder, as such statute, rules or regulations may be amended
from time to time.
6. As to 75% of the Fund's assets, it may not 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-
- ------------------------------------
(2) Fundamental investment restrictions numbered 1-5 in this Exhibit are
proposed restrictions being presented to shareholders for their consideration.
The Board of Trustees has determined to retain the other fundamental
restrictions set forth in this Exhibit as fundamental.
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<PAGE> 40
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.
7. The Fund may not invest for the purpose of exercising control or
management of another issuer.
8. The Fund may not purchase securities of other investment
companies, except as permitted by the 1940 Act.
9. The Fund may issue senior securities to the extent permitted by
the Investment Company Act of 1940 or the rules or regulations
thereunder, as such statute, rules or regulations may be amended
from time to time.
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<PAGE> 41
SCHWABFUNDS(R)
PROXY SERVICES
P.O. BOX 9139
FARMINGDALE, NY 11735
SCHWAB LONG TERM GOVERNMENT BOND FUND
(A SERIES OF SCHWAB INVESTMENTS)
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF TRUSTEES OF
TRUSTEES OF SCHWAB INVESTMENTS
KNOW ALL BY THESE PRESENTS: That the undersigned, revoking previous proxies for
such shares, hereby appoints William J. Klipp and Frances Cole, or any of them,
attorneys of the undersigned with full power of substitution, to vote all
shares of the above-referenced fund (the "Fund") which the undersigned is
entitled to vote at the Special Meeting of Shareholders of the Fund (the
"Meeting") to be held on September 22, 1997 at 101 Market Street, San
Francisco, California 94105, commencing at 10:00 a.m., Pacific time, and at any
and all adjournment(s) thereof. Receipt of the Notice of and Proxy Statement for
said Meeting is acknowledged.
The shares represented by this proxy will be voted as specified on the reverse
side by the undersigned. Note: This proxy must be returned in order for your
shares to be voted for you at the Meeting.
The Board of Trustees recommends a vote FOR the following matters and FOR the
election of the proposed Trustees. IF NO SPECIFICATION IS MADE, THIS PROXY WILL
BE VOTED FOR ALL SUCH MATTERS AND FOR THE ELECTION OF THE PROPOSED TRUSTEES.
- --------------------------------------------------------------------------------
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE
- --------------------------------------------------------------------------------
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: / / SCHLON
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
DETACH THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
SCHWAB LONG TERM GOVERNMENT BOND FUND
PLEASE SIGN EXACTLY AS YOUR NAME OR NAME(S) APPEAR ABOVE. IF SIGNING IS BY
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE.
VOTE ON TRUSTEES:
1. Nominees for the Board of Trustees: Charles R. Schwab, Donald F. Dorward,
Robert G. Holmes, William J. Klipp, Timothy G. McCarthy, Donald R.
Stephens and Michael W. Wilsey.
FOR WITHHOLD FOR ALL
ALL ALL EXCEPT
/ / / / / /
To withhold authority to vote, mark "For All Except" and
write the nominee's name on the line below.
- --------------------------------------------------------------------------------
VOTE ON PROPOSALS:
2. To approve amending the Fund's investment objective to seek to track the
investment results of bond index as described in Proposal 2 of the Proxy
Statement:
For Against Abstain
/ / / / / /
3. To approve eliminating, reclassifying or amending the Fund's fundamental
investment restrictions as described in Proposal 3 of the Proxy Statement:
For Against Abstain
/ / / / / /
To vote on the entire slate of Proposal 3 in the aggregate:
STOP HERE UNLESS YOU WOULD LIKE TO VOTE THE ELEMENTS OF PROSPOSAL 3
INDIVIDUALLY.
To vote on each change separately:
3.1 Proposed Changes to Restrictions Regarding Borrowing and Lending:
For Against Abstain
/ / / / / /
3.2 Proposed Change in Restriction Regarding Underwriting of Securities:
For Against Abstain
/ / / / / /
3.3 Proposed Change in Restriction Regarding Concentration of a Fund's
Investments:
For Against Abstain
/ / / / / /
3.4 Proposed Change in Restriction Regarding Investment in "Illiquid
Securities":
For Against Abstain
/ / / / / /
3.5 Proposed Change in Restriction Regarding Purchasing Securities
in Which Certain Affiliated Persons Also Invest:
For Against Abstain
/ / / / / /
3.6 Proposed Change in Restriction Regarding Investment in Commodities
and Real Estate:
For Against Abstain
/ / / / / /
AS TO ANY OTHER MATTER, SAID ATTORNEYS SHALL VOTE IN ACCORDANCE WITH THEIR
JUDGMENT.
- ------------------------ ----------- ------------------------ ----------
Signature [PLEASE SIGN Date Signature (Joint Owners) Date
WITHIN BOX]
<PAGE> 42
SCHWABFUNDS(R)
PROXY SERVICES
P.O. BOX 9139
FARMINGDALE, NY 11735
SCHWAB SHORT INTERMEDIATE GOVERNMENT BOND FUND
(A SERIES OF SCHWAB INVESTMENTS)
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF TRUSTEES OF
TRUSTEES OF SCHWAB INVESTMENTS
KNOW ALL BY THESE PRESENTS: That the undersigned, revoking previous proxies for
such shares, hereby appoints William J. Klipp and Frances Cole, or any of them,
attorneys of the undersigned with full power of substitution, to vote all
shares of the above-referenced fund (the "Fund") which the undersigned is
entitled to vote at the Special Meeting of Shareholders of the Fund (the
"Meeting") to be held on September 22, 1997 at 101 Market Street, San
Francisco, California 94105, commencing at 10:00 a.m., Pacific time, and at any
and all adjournment(s) thereof. Receipt of the Notice of and Proxy Statement for
said Meeting is acknowledged.
The shares represented by this proxy will be voted as specified on the reverse
side by the undersigned. Note: This proxy must be returned in order for your
shares to be voted for you at the Meeting.
The Board of Trustees recommends a vote FOR the following matters and FOR the
election of the proposed Trustees. IF NO SPECIFICATION IS MADE, THIS PROXY WILL
BE VOTED FOR ALL SUCH MATTERS AND FOR THE ELECTION OF THE PROPOSED TRUSTEES.
- --------------------------------------------------------------------------------
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE
- --------------------------------------------------------------------------------
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: / / SCHLON
KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
DETACH THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
SCHWAB SHORT INTERMEDIATE GOVERNMENT BOND FUND
PLEASE SIGN EXACTLY AS YOUR NAME OR NAME(S) APPEAR ABOVE. IF SIGNING IS BY
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE.
VOTE ON TRUSTEES:
1. Nominees for the Board of Trustees: Charles R. Schwab, Donald F. Dorward,
Robert G. Holmes, William J. Klipp, Timothy G. McCarthy, Donald R.
Stephens and Michael W. Wilsey.
FOR WITHHOLD FOR ALL
ALL ALL EXCEPT
/ / / / / /
To withhold authority to vote, mark "For All Except" and
write the nominee's name on the line below.
- --------------------------------------------------------------------------------
VOTE ON PROPOSALS:
2. To approve amending the Fund's investment objective to seek to track the
investment results of bond index as described in Proposal 2 of the Proxy
Statement:
For Against Abstain
/ / / / / /
3. To approve eliminating, reclassifying or amending the Fund's fundamental
investment restrictions as described in Proposal 3 of the Proxy Statement:
For Against Abstain
/ / / / / /
To vote on the entire slate of Proposal 3 in the aggregate:
STOP HERE UNLESS YOU WOULD LIKE TO VOTE THE ELEMENTS OF PROSPOSAL 3
INDIVIDUALLY.
To vote on each change separately:
3.1 Proposed Changes to Restrictions Regarding Borrowing and Lending:
For Against Abstain
/ / / / / /
3.2 Proposed Change in Restriction Regarding Underwriting of Securities:
For Against Abstain
/ / / / / /
3.3 Proposed Change in Restriction Regarding Concentration of a Fund's
Investments:
For Against Abstain
/ / / / / /
3.4 Proposed Change in Restriction Regarding Investment in "Illiquid
Securities":
For Against Abstain
/ / / / / /
3.5 Proposed Change in Restriction Regarding Purchasing Securities
in Which Certain Affiliated Persons Also Invest:
For Against Abstain
/ / / / / /
3.6 Proposed Change in Restriction Regarding Investment in Commodities
and Real Estate:
For Against Abstain
/ / / / / /
AS TO ANY OTHER MATTER, SAID ATTORNEYS SHALL VOTE IN ACCORDANCE WITH THEIR
JUDGMENT.
- ------------------------ ----------- ------------------------ ----------
Signature [PLEASE SIGN Date Signature (Joint Owners) Date
WITHIN BOX]
