<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:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
Schwab Investments
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Matthew M. O'Toole, Esq.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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 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)
[PHOTO CHARLES R. SCHWAB]
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 opportunity to take advantage of the many benefits offered by an indexing
strategy, including a more broadly diversified bond investment. 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,
/s/ Charles R. Schwab
Charles R. Schwab
Chairman
Schwab Investments
SchwabFunds(R)
<PAGE> 3
IMPORTANT VOTING INFORMATION FOR SHAREHOLDERS
OF THE SCHWAB GOVERNMENT BOND FUNDS.
Please read the full text of this proxy statement.
Below is a brief overview of the matters to be voted upon.
YOUR VOTE IS IMPORTANT. Please return your vote in a timely fashion.
If Fund shareholders don't return their proxies, your Fund
incurs the expense of follow-up solicitations.
Q. WHAT PROPOSALS AM I BEING ASKED TO VOTE ON?
A. The proposals you are being asked to vote on are the following:
- To elect seven Trustees.
- To amend 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 eliminate, reclassify or amend each Fund's fundamental investment
restrictions.
- To transact such other business as may properly come before the Meeting.
Q. WHY IS THE BOARD OF TRUSTEES PROPOSING THAT THE FUNDS BE CHANGED TO INDEX
FUNDS?
A. 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 objective of an index fund, unlike an actively managed fund, is to
closely track the total return of a benchmark or index for 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 broadly diversified 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.
2
<PAGE> 4
In addition, the Board of Trustees believes 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.
Q. IF PROPOSAL 2 IS APPROVED, THE FUNDS WILL BECOME INDEX FUNDS. CAN YOU
DESCRIBE THE INDICES THE FUNDS WILL SEEK TO TRACK?
A. 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 represents approximately 1,939
securities as of June 30, 1997.
The chart below compares the composition of the Fund and the Index as of June
30, 1997:
<TABLE>
<CAPTION>
CURRENT
SCHWAB LEHMAN BROTHERS SHORT
SHORT/INTERMEDIATE (1-5)
GOVERNMENT BOND GOVERNMENT/CORPORATE
FUND INDEX
------------------ ---------------------
<S> <C> <C>
U.S. Treasury and agency securities 94.0% 85.0%
Agency mortgage-backed securities 6.0% 0.0%
Corporate bonds 0.0% 13.0%
International (dollar-denominated) bonds 0.0% 2.0%
Asset-backed securities 0.0% 0.0%
Dollar-weighted average maturity 2.7 years 2.7 years
</TABLE>
THE 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.
3
<PAGE> 5
As the following chart 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 agency
mortgage-backed securities and asset-backed securities with maturities or
weighted-average maturities greater than one year, which represents
approximately 6,055 securities as of June 30, 1997.
The chart below compares the composition of the Fund and the Index as of June
30, 1997:
<TABLE>
<CAPTION>
CURRENT
SCHWAB LONG-TERM
GOVERNMENT BOND LEHMAN BROTHERS
FUND AGGREGATE BOND INDEX
---------------- --------------------
<S> <C> <C>
U.S. Treasury and agency securities 100.0% 50.0%
Agency mortgage-backed securities 0.0% 30.0%
Corporate bonds 0.0% 15.0%
International (dollar-denominated) bonds 0.0% 4.0%
Asset-backed securities 0.0% 1.0%
Dollar-weighted average maturity 10.2 years 8.7 years
</TABLE>
Q. IF PROPOSAL 2 IS APPROVED, THE FUNDS WILL NO LONGER INVEST AS MUCH IN
GOVERNMENT AND AGENCY SECURITIES. WILL THIS MAKE INVESTING IN THE FUNDS MORE
RISKY?
A. As shown in the two preceding charts, as of June 30, 1997, both of the
proposed index Funds would maintain significant positions in U.S. Treasury
and agency, and agency mortgage-backed securities -- 85.0% for the Short-Term
Bond Market Index Fund and 80.0% 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 fixed income securities, the portfolio management team
anticipates that the proposed Funds would have a slightly higher level of
credit risk than the current Funds.
The table below summarizes four types of risk to which bond funds are
typically 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 1.5 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).
4
<PAGE> 6
<TABLE>
<CAPTION>
ESTIMATED RISK PROFILES
SCHWAB SHORT/ LEHMAN BROTHERS SCHWAB
INTERMEDIATE SHORT (1-5) LONG-TERM LEHMAN BROTHERS
GOVERNMENT GOVERNMENT/ GOVERNMENT AGGREGATE BOND
BOND FUND CORPORATE 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>
1. Interest Rate Risk and Income Risk are related to each portfolio's
dollar-weighted average maturity. Shorter maturities reduce the relative
interest rate risk and increase the relative income risk.
2. Credit Risk is related to each portfolios' exposure to U.S. Treasury and
agency securities. Exposure to U.S. Treasury and agency securities reduces
the Funds' relative credit risk.
3. Prepayment/Call Risk is related to the percentage of each portfolio's
exposure to corporate and mortgage-backed securities. Exposure to
corporate and mortgage-backed securities increases prepayment/call risk.
Q. IF THE PROXY PROPOSALS ARE APPROVED, WHAT IS THE EXPECTED IMPACT ON FUND
YIELDS?
A. THE 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.
THE 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.
Q. HAS EACH FUND'S BOARD OF TRUSTEES APPROVED THE PROPOSALS?
A. Yes. The Board of Trustees unanimously has approved the proposals and
recommends that the shareholders vote "For" all of the proposals.
5
<PAGE> 7
Q. HOW DO I VOTE MY SHARES?
A. 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.
6
<PAGE> 8
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 amend each Fund's fundamental investment objective;
3. To eliminate, reclassify or amend 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,
/S/ FRANCES COLE
FRANCES COLE
Secretary
July 28, 1997
7
<PAGE> 9
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
8
<PAGE> 10
at the Meeting other than the matters referred to in the Notice of Special
Meeting accompanying this Proxy Statement.
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 13,096,508 and 2,274,753, 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.
9
<PAGE> 11
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 guarantees.
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.
10
<PAGE> 12
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>
TRUSTEE
NAME/BIRTHDAY SINCE PRINCIPAL OCCUPATION
- ----------------------- ------- -----------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* July 1991 Chairman, Chief Executive Officer and
29, 1937 Director, The 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
September 23, 1931 Director, Grey Advertising, Inc. Prior to
November, 1996, Mr. Dorward was President
and Chief Executive Officer, Dorward &
Associates (advertising and
marketing/consulting).
ROBERT G. HOLMES May 1991 Chairman, Chief Executive Officer and
15, 1931 Director, Semloh Financial, Inc. Semloh
Financial, Inc. is an international
financial services and investment
advisory firm.
WILLIAM J. KLIPP* 1995 Executive Vice President of Schwab;
December 9, 1955 President and 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.
- ---------------
* An "interested person" of the Trust as defined in the 1940 Act.
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
TRUSTEE
NAME/BIRTHDAY SINCE PRINCIPAL OCCUPATION
- ----------------------- ------- -----------------------------------------
<S> <C> <C>
TIMOTHY F. MCCARTHY* 1995 Executive Vice President - Mutual Funds
September 19, 1951 of Schwab 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 June 1991 Managing Partner, D.R. Stephens & Co.
28, 1938 (investment 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
August 18, 1943 Director, Wilsey Bennett, Inc. (truck and
air transportation, real estate
investment and management, and
investments).
</TABLE>
- ---------------
* An "interested person" of the Trust as defined in the 1940 Act.
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.
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 Control-
12
<PAGE> 14
ler 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.
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 29 mutual funds with assets of more than $50 billion as of
July 15, 1997.
13
<PAGE> 15
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
NAME OF PERSON, AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
POSITION FROM THE TRUST THE FUND COMPLEX(2)
- ----------------------------- ---------------------- -----------------------
<S> <C> <C>
Donald F. Dorward, Trustee 16,150 81,100
Robert G. Holmes, Trustee 16,150 81,100
Donald R. Stephens, Trustee 16,150 81,100
Michael W. Wilsey, Trustee 16,150 81,100
</TABLE>
- ---------------
(1) Figures are for the Trust's fiscal year ended August 31, 1996.
(2) "Fund Complex" comprises all 29 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 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 independent Trustees, last voted to
approve the Advisory Agreement on May 20, 1997.
14
<PAGE> 16
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.
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
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<PAGE> 17
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.
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.
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<PAGE> 18
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 bond index through the use of an indexing
strategy. 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 total
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 determination to establish these 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.
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
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<PAGE> 19
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 current 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 such change.
The following table illustrates the portfolio composition and average maturity
of the Indexes and the Funds as of June 30, 1997:
TABLE I
<TABLE>
<CAPTION>
SCHWAB
SHORT/ SCHWAB
INTERMEDIATE LONG-TERM
SHORT-TERM GOVERNMENT AGGREGATE GOVERNMENT
INDEX BOND FUND BOND INDEX BOND FUND
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
securities............... 85.0% 94.0% 50.0% 100.0%
Agency mortgage-backed
securities............... 0.0% 6.0% 30.0% 0.0%
Corporate bonds............ 13.0% 0.0% 15.0% 0.0%
International bonds........ 2.0% 0.0% 4.0% 0.0%
Asset-backed securities.... 0.0% 0.0% 1.0% 0.0%
Dollar-weighted average
maturity................. 2.7 years 2.7 years 8.7 years 10.2 years
</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 approximately the same, while the Total Bond Fund would
have a significantly shorter maturity, based on this data.
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
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<PAGE> 20
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 Brothers 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. As described in greater detail below, a Fund may purchase futures and
options, enter into swaps, or purchase other derivatives in addition to Index
Securities in order to more closely approximate its Index's "characteristics,"
resulting in better tracking of performance of the Index.
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<PAGE> 21
ESTIMATED RISK PROFILES OF SECURITIES TO BE PURCHASED
TABLE II
<TABLE>
<CAPTION>
SCHWAB
SHORT/ SCHWAB
SHORT- INTERMEDIATE LONG-TERM
TERM GOVERNMENT AGGREGATE GOVERNMENT
INDEX BOND FUND BOND INDEX BOND FUND
------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Interest rate risk.............. Low Low Medium High
Income risk..................... High High Medium Low
Credit risk..................... Low Low Low Low
Prepayment/call risk............ Low Low Medium Medium
</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 investment 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 ninety-four 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,
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<PAGE> 22
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.
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.
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<PAGE> 23
If as a result of a change in a Fund's investment objective the Fund's average
maturity changes, then 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 (8.7 years
versus 10.2 years). The expected maturity of the Short Bond Fund, however, is
expected to be approximately the same (2.7 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 and
other procedures. The Funds would be unable to hold all of the individual issues
which comprise the Indexes because of the large number of securities in the
Indexes. Each Fund would 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 would analyze each security's
characteristics and determine whether purchasing or selling the security would
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's interest rate risk would come
from such securities. Similarly, if corporate bonds represent 20% of the Index's
interest rate risk, then they would represent approximately 20% of the Fund's
interest rate risk. This technique is expected to enable each Fund to track the
coupon income and price movements of its respective Index, while minimizing
transaction, 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, unrealized gains can accumulate in the Fund
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<PAGE> 24
until shares are sold by an investor, 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. 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.
Over the long term, the Investment Manager will seek a correlation between the
performance of each Fund, as measured by its net asset value, including the
value of its dividend and capital gain distributions, and that of its Index of
0.9 or better. A correlation of 1.0 would indicate perfect correlation, but
since each Fund incurs operating expenses, unlike its respective Index, a
perfect correlation is unlikely to be achieved. The Investment Manager will
monitor the performance of each Fund versus that of its Index on a regular
basis. If a tracking error develops, each Fund is rebalanced to help bring it in
line with the Index. In the unlikely event that a correlation of 0.9 or better
is not achieved, the Board of Trustees of a Fund will consider alternative
arrangements.
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.
THE BOARD OF TRUSTEES, INCLUDING THE "INDEPENDENT" TRUSTEES, RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" AMENDING THEIR FUND'S FUNDAMENTAL INVESTMENT OBJECTIVE
AS DESCRIBED ABOVE.
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<PAGE> 25
PROPOSAL 3
ELIMINATE, RECLASSIFY OR AMEND
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 shareholders' 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
24
<PAGE> 26
investment policy or foregoing the investment opportunities afforded by the
SEC's change in the percentage limitations. The 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 or elimination 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
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<PAGE> 27
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 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, after examining each of the
current self-designated restrictions, the proposed restrictions, and any
presently anticipated effects of the proposed changes, you should vote "FOR"
each element of Proposal 3.
The entire slate of proposed restrictions as well as those other fundamental
restrictions being retained are 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
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<PAGE> 28
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.
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.
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<PAGE> 29
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.
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
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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. Under this proposed
restriction, the Funds would be able to engage in reverse repurchase agreements,
considered by the Funds as a form of borrowing, to the extent permitted by the
1940 Act. 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. In addition, each Fund intends to adopt a non-fundamental policy
restricting the Fund from purchasing securities while borrowings represent more
than 5% of its total assets.
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, 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
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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.
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.
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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.
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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3. PROPOSED CHANGE IN RESTRICTION REGARDING CONCENTRATION OF 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 eliminated and
replaced by a more flexible proposed restriction. The proposed 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 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 immedi-
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ate 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.
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.
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.
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<PAGE> 35
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).
If the proposal is approved, the Funds could also have a greater exposure to
restricted securities (which may be illiquid or liquid). The maximum potential
exposure would be the difference between 10% of a Fund's total assets (the
current restriction) and 15% of net assets (the current SEC limit under the
proposal). Restricted securities are sold directly to a small number of
investors, usually institutions. Unlike public offerings, such securities are
not registered with the SEC. Although certain of these securities may be readily
sold, for example under Rule 144A, the sale of others may involve substantial
delays and additional costs.
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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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 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.
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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 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
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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.
Commodities, as opposed to commodity futures, represent the actual underlying
bulk goods, such as grains, metals and food stuffs. Real estate-related
instruments include real estate investment trusts, commercial and residential
mortgage-backed securities, and real estate financings, and such instruments are
generally sensitive to factors such as changes in real estate values and
property taxes, interest rates, cash flow of underlying real estate assets,
overbuilding, and the management skill and creditworthiness of the issuer. Given
the Funds' proposed investment objective, the Funds do not expect to invest in
these types of investments; however, if a Fund did so invest, it would be
exposed to these types of risks associated with the underlying security.
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
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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 25, 1997, there were no shareholders owning in excess of 5% of a Fund.
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.
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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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.
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(1) Please note that 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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(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 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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EXHIBIT B
PROPOSED FUNDAMENTAL INVESTMENT
POLICIES AND RESTRICTIONS OF THE FUNDS
If the entire slate of Proposal 3 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.
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(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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(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-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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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.
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THANK YOU FOR MAILING IN YOUR PROXY CARD PROMPTLY!
We appreciate you placing your trust in
SchwabFunds(R) and look forward to helping you achieve
your financial goals.
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
SCHWAB LONG-TERM GOVERNMENT BOND FUND
TF4847 (7/97) SchwabFunds(R) Printed on Recycled Paper
<PAGE> 46
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 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 below 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 AND RETURN 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 the 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 PROPOSAL 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
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> 47
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 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 below 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 AND RETURN 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 the 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 PROPOSAL 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
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]
