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File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on September 26, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 18 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22 [X]
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SCHWAB INVESTMENTS
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
Timothy F. McCarthy, President
Schwab Investments
101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)
Copies of communications to:
Martin E. Lybecker, Esq. Frances Cole, Esq.
Ropes & Gray Charles Schwab Investment
One Franklin Square Management, Inc.
1301 K Street, N.W., 101 Montgomery Street
Suite 800 East San Francisco, California 94104
Washington, D.C. 20005
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/ / On [date] pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(i)
/X/ On December 15, 1997, pursuant to paragraph (a)(i)
/ / 75 days after filing pursuant to paragraph (a)(ii)
/ / On [date], pursuant to paragraph (a)(ii) of Rule 485
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if appropriate, check appropriate box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended,
Registrant has registered an indefinite number or amount of shares of beneficial
interest under the Securities Act of 1933, as amended. The Rule 24f-2 Notice for
Registrant's fiscal year ended August 31, 1997 will be filed on or about October
31, 1997.
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SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB 1000 FUND - INVESTORS SHARES
SCHWAB 1000 FUND - SELECT SHARES
SCHWAB LONG-TERM GOVERNMENT BOND FUND
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
The information required by Items 1 through 9 for Schwab Long-Term
Government Bond Fund and Schwab Short/Intermediate Government Bond Fund, each a
separate portfolio of the Registrant, is hereby incorporated by reference to the
Prospectus for each of these Portfolios filed with the Securities and Exchange
Commission pursuant to Rule 497(e) on December 31, 1996
The information required by Items 1 through 9 for Schwab 1000 Fund -
Investor Shares and Schwab 1000 Fund Select Shares, a portfolio of the
Registrant, is hereby incorporated by reference to the Prospectus for this
Portfolio filed with the Securities and Exchange Commission pursuant to Rule
497(e) on March 26, 1997
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SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
<TABLE>
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Part A Item Prospectus Caption
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1. Cover Page Cover Page
2. Synopsis Key Features;
Expenses
3. Condensed Financial Information Not applicable
4. General Description of Registrant Organization & Management;
Investment Objective & Policies
5. Management of the Fund Organization & Management
5. (a) Management's Discussion of Fund Performance Not applicable
6. Capital Stock and Other Securities Organization & Management;
Investing in Shares
7. Purchase of Securities Being Offered Investing in Shares
8. Redemption or Repurchase Investing in Shares
9. Pending Legal Proceedings Not applicable
</TABLE>
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TABLE OF CONTENTS
PAGE
Key Features...................... 2
Expenses.......................... 3
Financial Highlights.............. 5
Performance....................... 6
Organization & Management......... 7
Investment Objectives, Policies &
Risks............................. 9
Investing in Shares............... 12
The Prospectus provides concise information that you should know before
investing. Please retain it for future reference.
The Statement of Additional Information (SAI), dated December 15, 1997, contains
additional information and is incorporated by reference into the Prospectus. The
SAI has been filed with the Securities and Exchange Commission (SEC). The SEC
maintains a World Wide Web site (http://www.sec.gov) that contains the SAI,
material incorporated by reference and other information. The SAI is available
without charge by calling 1-800-435-4000 (800-345-2550 for TDD users) or writing
to 101 Montgomery Street, San Francisco, California 94104.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SCHWAB CALIFORNIA
SHORT/INTERMEDIATE TAX-FREE
BOND FUND
SCHWAB CALIFORNIA LONG-TERM
TAX-FREE BOND FUND
PROSPECTUS
DECEMBER 15, 1997
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
(Short/Intermediate Tax-Free Fund) seeks income exempt from federal and
California personal income taxes, while maintaining a dollar-weighted
average maturity between two and five years.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND (Long-Term Tax-Free
Fund) seeks income exempt from federal and California personal income
taxes, while maintaining a dollar-weighted average maturity of at least
ten years.
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KEY FEATURES
MATCHING A FUND TO YOUR INVESTMENT NEEDS: Each Fund may be appropriate for a
variety of investment programs. While an investment in a Fund is not a
substitute for an investment portfolio tailored to an individual's investment
needs and risk tolerance, each Fund could serve as a component of a long-term
investment portfolio designed to accumulate assets for major goals.
The Funds are designed to provide income exempt from federal and California
personal income taxes. The Funds are not suitable for investors who would not
benefit from the tax-exempt character of each Fund's investments, such as IRAs,
qualified retirement plans or other tax-exempt entities.
GOALS: Each Fund seeks income exempt from federal and California personal income
taxes, while maintaining a specific dollar-weighted average maturity (DWAM).
There is no guarantee the Funds will achieve their goals.
STRATEGY: Each Fund intends to achieve its goal by investing in securities, the
interest on which is free from federal and California personal income taxes.
Each Fund is a non-diversified mutual fund.
RISKS: Because each Fund invests substantially in municipal securities issued by
a single state, the performance of each Fund may be especially affected by the
state's economic conditions and political developments, as well as the ability
of issuers to meet their obligations.
MANAGEMENT: Charles Schwab Investment Management, Inc. (the Investment Manager)
currently provides investment management services to the SchwabFunds(R), a
family of [xx] mutual funds with over $[xx] billion in assets as of [date].
SHAREHOLDER SERVICE: Charles Schwab & Co., Inc. (Schwab) provides professional
representatives 24 hours a day at 1-800-435-4000 to service your accounts.
Schwab was established in 1971 and is one of America's largest discount brokers.
Schwab helps over [XX] million customers make investment decisions by offering
them low cost brokerage services and providing them with financial products and
information. Visit one of Schwab's [number] branch offices or Schwab's World
Wide Website (http://www.schwab.com/funds) for information on investment
products and services. Read the "Investing in Shares" section of the prospectus
for information on "How to Buy" and "How to Sell" shares of the Fund.
LOW COST INVESTING: The Investment Manager and Schwab have voluntarily
guaranteed that, through at least [____], total operating expenses of each Fund
will not exceed [0.49]% of each Fund's daily net assets.
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EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are charges you may pay when you buy, sell or
exchange shares of the Funds.
Maximum sales charge on purchases
and reinvested dividends NONE
Deferred sales charge
on redemptions NONE
Redemption fee NONE*
Exchange fee NONE
Account maintenance
fees NONE**
The information on shareholder transaction expenses is for transactions through
a Schwab account. If you are purchasing, selling (exchanging) or maintaining
shares of a Fund through an entity other than Schwab, other transaction expenses
may be charged by that entity.
* Read the "Investing in Shares" section of the prospectus for information
concerning wire redemption fees.
** Read the "Investing in Shares" section of the prospectus for information
concerning fees that may be charged if you do not maintain the required minimums
in the Fund or in your Schwab account.
ANNUAL OPERATING EXPENSES are paid by the Fund. These expenses include
management fees paid to the Investment Manager and other fees for services such
as maintaining shareholder records and furnishing shareholder statements and
financial reports. These expenses are factored into the price of the Fund's
shares and into the dividends paid to shareholders. As a shareholder, you are
not charged any of these fees directly.
The following figures are based on historical expenses and are stated as a
percentage of average daily net assets of each Fund.
SHORT/INTERMEDIATE TAX-FREE FUND
Management fee (after reduction) [0.XX]%
12b-1 fee None
Other expenses (after reduction) [0.XX]%
TOTAL OPERATING EXPENSES (AFTER REDUCTION) [0.XX]%
LONG-TERM TAX-FREE FUND
Management fee (after reduction) [0.XX]%
12b-1 fee None
Other expenses (after reduction) [0.XX]%
TOTAL OPERATING EXPENSES (AFTER REDUCTION) [0.XX]%
EXAMPLE: If each Fund were to provide an annual return of 5%, you would pay the
following expenses on a $1,000 investment, whether you redeem your shares at the
end of each period or left your shares invested.
SHORT/INTERMEDIATE TAX-FREE FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
[$ ] [$ ] [$ ] [$ ]
LONG-TERM TAX-FREE FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
[$ ] [$ ] [$ ] [$ ]
THE EXPENSE TABLES AND EXAMPLES ABOVE ARE SUPPOSED TO HELP YOU UNDERSTAND THE
COSTS OF OWNING SHARES IN THE FUNDS. ACTUAL EXPENSES MAY BE GREATER OR LESSER
THAN THOSE SHOWN.
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The Investment Manager and Schwab have voluntarily agreed to guarantee, at least
through [____], that total operating expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) of each Fund will not exceed
[0.XX]% of each Fund's average daily net assets. If these guarantees were not in
effect, the management fee, other expenses and total operating expenses for the
Short/Intermediate Tax-Free Fund and Long-Term Tax-Free Fund would have been
[0.XX]%, [0.XX]% and [0.XX]% and [0.XX]% [0.XX]% and [0.XX]%, respectively, of
each Fund's average daily net assets. Read the "Organization and Management"
section of this prospectus for more information on expenses.
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FINANCIAL HIGHLIGHTS
The following information has been audited by _____________, independent
accountants for the Funds. Their Report is included in the Annual Report for the
Funds, which is a separate report that contains additional financial
information.
The report, financial highlights and financial statements are incorporated by
reference into the SAI. For free copies of the Annual Report and/or the SAI,
call 1-800-435-4000.
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PERFORMANCE
Typically, mutual funds report performance in terms of total return or yield.
TOTAL RETURN is the actual annual return of an investment assuming both the
reinvestment of any income earned and any change in share price. A cumulative
total return is the actual total return of an investment over a stated period of
time, while an average annual total return is a hypothetical rate of return,
which, if achieved annually would have produced the same cumulative total
return. An average annual total return will smooth out the actual year-to-year
fluctuations of an investment's return.
YIELD is the actual income earned on an investment over a stated period of time
and annualized (assumed to be generated over a year). For example, a thirty-day
yield measures the income earned on an investment over thirty days, annualizes
it and expresses that income as a percentage of the original investment. An
effective yield is calculated similarly, but income earned is assumed to be
reinvested. Because of this compounding effect, effective yields are generally
higher.
TAXABLE EQUIVALENT YIELD shows the yield that a taxable investment would have to
generate in order to equal a tax-free yield. A taxable equivalent effective
yield is calculated similarly, except that the effective yield is used in the
calculation.
Fund strategies, performance and holdings are detailed in financial reports,
which are sent to shareholders twice a year. For a free copy of the most recent
financial report, call 1-800-435-4000.
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ORGANIZATION & MANAGEMENT
EACH FUND IS A NON-DIVERSIFIED MUTUAL FUND. Each Fund is a series of Schwab
Investments (the Trust).
THE FUNDS ARE OVERSEEN BY A BOARD OF TRUSTEES. The Board of Trustees meets
regularly to review each Fund's activities, contractual arrangements and
performance. The Board of Trustees is responsible for protecting the interests
of each Fund's shareholders.
THE FUNDS MAY HOLD SPECIAL MEETINGS. These meetings may be called for purposes
such as electing Trustees, changing fundamental policies and amending management
contracts. Shareholders are entitled to one vote for each share owned and may
vote by proxy or in person. Proxy materials will be mailed to shareholders prior
to any meetings, and will include a voting card and information explaining the
matters to be voted upon.
THE FUNDS ARE MANAGED BY THE INVESTMENT MANAGER. The Investment Manager is
responsible for managing each Fund's day-to-day business affairs, including
picking each Fund's investments; although the Investment Manager is subject to
the overall authority of the Board of Trustees.
Joanne Larkin is a Vice President of Schwab and Senior Portfolio Manager for the
Funds. Ms. Larkin has primary responsibility for the day-to-day portfolio
management of each Fund, and has since each Fund commenced operation. Prior to
February 1992, Ms. Larkin was portfolio manager for the Shearson Lehman
California Municipal Bond Fund and E.F. Hutton's Municipal Cash Reserve
Management. Ms. Larkin graduated from Rosemont College with a Bachelor of Arts
in Sociology.
Stephen B. Ward is the Trust's Senior Vice President and Chief Investment
Officer. Mr. Ward has overall responsibility for the portfolio management of the
Funds. Mr. Ward joined the Investment Manager as Vice President and Portfolio
Manager in April 1991 and was promoted to his current position in August 1993.
Prior to joining the Investment Manager, Mr. Ward was Vice President and
Portfolio Manager at Federated Investors. Mr. Ward graduated with a Masters of
Business Administration from the Wharton School and a Bachelor of Arts in
Economics from Virginia Tech, and has been a Chartered Financial Analyst since
1985.
For the services performed under its contract with each Fund, the Investment
Manager is entitled to receive an annual fee, payable monthly from each Fund.
For the fiscal year ended August 31, 1997, the Short/Intermediate Tax-Free Fund
and the Long-Tax-Free Fund paid the Investment Manager investment management
fees of [0.XX]% and [0.XX]%, respectively, of each Fund's daily net assets.
SCHWAB IS THE FUNDS' SHAREHOLDER SERVICES AND TRANSFER AGENT. Schwab provides
Fund information to shareholders, including calculating share price, reporting
shareholder ownership and account activities and distributing the Fund's
prospectuses, financial reports and other informational literature about the
Funds. Schwab also maintains the office space, equipment and personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds and
services.
For the services performed as transfer agent under its contract with each Fund,
Schwab is entitled to receive annual fees from the Funds. The fees are payable
monthly in the amount of 0.05% of each Fund's average daily net assets. For the
services performed as shareholder services agent under its contract with the
funds, Schwab is entitled to receive annual fees from the Funds. The fees are
payable
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monthly in the amount of 0.20% of the average daily net assets of the Funds.
For the fiscal year ended August 31, 1997, the Short/Intermediate Tax-Free Fund
and the Long-Term Tax-Free Fund, respectively, paid total operating expenses in
the amounts of [0.XX]% and [0.XX]% of each Fund's average daily net assets.
THE FUNDS PAY OTHER EXPENSES. These expenses are typically connected with the
Trust's operations, and include legal, audit and custodian fees, as well as the
costs of accounting and registration of the Funds. Expenses not directly
attributable to a particular Fund will be allocated equitably among the Funds in
the Trust.
The Charles Schwab Corporation is the parent company of the Investment Manager
and Schwab. Charles R. Schwab is the founder, Chairman, Chief Executive Officer
and Director of The Charles Schwab Corporation. As a result of his ownership of
and interests in The Charles Schwab Corporation, Mr. Schwab may be deemed to be
a controlling person of the Investment Manager and Schwab.
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INVESTMENT OBJECTIVES, POLICIES & RISKS
INVESTMENT OBJECTIVES
Each Fund's investment objective is to seek a high level of current income that
is exempt from federal income and State of California personal income taxes,
consistent with preservation of capital.
Each Fund's investment objective is fundamental, which means that it may be
changed only by vote of a majority of a Fund's shareholders. Unless otherwise
noted, policies and limitations are non-fundamental and may be changed without
shareholder approval.
INVESTMENT STRATEGIES
Each Fund intends to achieve its objective by investing in investment-grade
California municipal securities. Each Fund will normally invest at least 80% of
its total assets in these securities.
THE MATURITY of a security generally determines its sensitivity to interest rate
changes. In general, the longer the maturity, the more sensitive the security
will be to interest rate changes. For example, money market securities are
high-quality, short-term debt securities that reflect short-term interest rates
and normally carry little risk of fluctuation of principal value.
The Short/Intermediate Tax-Free Fund is designed to provide higher yields than a
tax-free money market fund by investing in investment-grade, short- and
intermediate-term California municipal securities that carry more risk of
fluctuation of principal. The Short/Intermediate Tax-Free Fund will normally
seek to maintain a DWAM of between two and five years.
The Long-Term Tax-Free Fund is designed to provide even higher yields by
investing in investment-grade, long-term California municipal securities that
carry an even higher risk of fluctuation of principal value. The Long-Term
Tax-Free Fund is expected to maintain a DWAM of at least ten years. Either Fund
may invest in securities of any maturity.
THE RISKS for each Fund are basically those risks associated with investing in
debt securities, although each risk factor may be intensified by the Funds'
concentrated investments in California municipal securities.
Generally speaking, there are four types of risk attendant to investing in debt
securities.
INTEREST RATE RISK is the potential for fluctuations in bond prices due to
changing interest rates. Generally, the longer a security's maturity or a fund's
DWAM, the more sensitive its value will be to interest rate changes.
INCOME RISK is the potential for a decline in income due to falling interest
rates.
CREDIT RISK is the possibility that a bond issuer will fail to make timely
payments of either interest or principal.
PREPAYMENT RISK or CALL RISK is the likelihood that, during periods of falling
interest rates, bonds will be prepaid (or "called") prior to maturity, requiring
the proceeds to be invested at a generally lower interest rate.
The amount of each type of risk each Fund will be subject to will depend on its
portfolio of investments. Because the Funds invest substantially in California
municipal securities, they are expected to face income, credit and interest rate
risks, although the Long-Term Tax-Free Fund will face greater interest rate
risks as a result of its longer DWAM. Prepayment or call risks are not
predominant risk factors for California municipal securities.
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PRINCIPAL SECURITIES AND INVESTMENT TECHNIQUES
The different types of securities in which the Funds may invest are described
below.
DEBT SECURITIES are obligations, issued by various entities, including
governments and corporations, in order to raise money. They are basically
"IOUs," but are commonly referred to as bonds. Bonds normally require the issuer
to pay a fixed, variable or floating rate of interest on the amount of money
borrowed (the "principal") until it is paid back (at "maturity"). Upon maturity,
the principal must be repaid.
Debt securities experience price changes when interest rates change. As a rule,
when interest rates rise, bond prices decline or "fall", and when interest rates
fall bond prices rise. Typically, longer-maturity bonds react to interest rate
changes more severely than shorter-term bonds (all else being equal) but
generally offer a greater rate of interest. Debt securities also are subject to
the risk that their issuer will fail to meet its obligation to pay interest
and/or principal, and their prices also may be affected by the credit quality of
their issuer.
Investment-grade debt securities are medium- and high-quality securities,
although some still possess varying degrees of speculative characteristics and
risk.
MUNICIPAL SECURITIES are debt securities issued by or on behalf of a state,
including its counties, municipalities, authorities and other subdivisions, or
the territories and possessions of the United States and the District of
Columbia, including their subdivisions, agencies and instrumentalities. These
securities are issued to raise money for various public purposes or private
activities such as general financing for state and local governments or
financing for specific projects or facilities. Municipal securities are meant to
produce interest exempt from federal income tax, and, typically, personal income
tax of a state or locality.
Restriction: As a fundamental policy, each Fund will normally invest at least
80% of its total assets in municipal securities the interest on which is free
from federal income tax including federal alternative minimum tax. Each Fund may
invest more than 25% in municipal securities financing similar projects.
CALIFORNIA MUNICIPAL SECURITIES are municipal securities issued by or on behalf
of the state of California or its counties, municipalities, authorities or other
subdivisions. These securities are subject to the same general risks associated
with other municipal securities, although their value will be particularly
affected by economic, political, geographic and demographic conditions and
developments within California. Additionally, like all securities, the value of
California municipal securities may be affected by any change in the perceived
ability of issuers to meet their obligations.
CREDIT AND LIQUIDITY SUPPORTS may be employed by issuers to reduce the credit
risk of their securities. Credit supports include letters of credit, insurance
and guarantees provided by foreign and domestic entities. Municipal securities
are sometimes issued with moral obligations, which are a type of credit support.
Liquidity supports include puts and demand features. These arrangements move the
credit risk of an investment from the issuer of the security to the support
provider. In addition, credit and liquidity supports provided by foreign
entities may be affected by foreign economic, political and legal developments.
ASSET-BACKED SECURITIES are securities that are
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backed by the loans or account receivables of an entity, such as a bank or
credit card company. Payment may depend largely on the cash flows generated by
the assets backing the securities.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY SECURITIES are securities that are
purchased but are to be delivered to the buyer at a later than customary date,
price and yield. Generally, the purchaser does not pay for these securities or
earn interest on them until they are delivered, but their value could change
prior to delivery.
ILLIQUID AND RESTRICTED SECURITIES are securities which are not actively traded
or are subject to legal restrictions and, therefore, may be difficult to sell
quickly or without losses.
Restriction: Each Fund will not purchase illiquid securities if, as a result,
more than 10% of its net assets would be invested in illiquid securities.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased by a Fund. These
investments will cause a Fund to bear duplicative fees for certain services.
The Funds also may employ the policies described below.
DIVERSIFICATION involves investing in a wide range of securities and, thereby,
spreading and reducing the risks of investment. Non-diversified mutual funds are
more sensitive to changes that affect a single security.
Restriction: Each Fund is a non-diversified mutual fund. In order to meet
federal tax requirements, each Fund will not invest more than 25% of its total
assets in the securities of a single issuer, and, with respect to 50% of its
total assets, will not invest more than 5% in a single issuer. This limitation
does not apply to U.S. Government Securities.
BORROWING money may be construed as a form of leveraging if the Fund continues
to make investments while borrowings remain outstanding. Borrowing subjects the
Fund to interest received on the securities purchased with the borrowed funds.
Restriction: As a fundamental policy, each Fund may borrow up to 33 1/3% of its
total assets for temporary or emergency purposes; provided that neither Fund
will purchase securities while borrowings represent more than 5% of its total
assets.
LENDING securities may earn income for a Fund, but could result in losses to the
Fund, and possibly affect share price.
TEMPORARY INVESTMENTS in U.S. Government securities, money market securities,
repurchase agreements and other taxable securities may be made by each Fund as a
defensive measure or under abnormal market conditions.
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INVESTING IN SHARES
BUSINESS DAYS
The Funds are open each day the New York Stock Exchange (NYSE) is open (business
days).
NET ASSET VALUE
The price of each share of each Fund is its net asset value per share (NAV). NAV
is determined each business day at the close of the NYSE, generally 4:00 p.m.
Eastern time. NAV is calculated by adding the value of each Fund's assets,
subtracting its liabilities and dividing the result by the number of outstanding
shares. Each Fund's NAV will fluctuate and neither Fund is insured against loss
in its NAV.
Each Fund values its portfolio securities based on market quotes if they are
readily available. If market quotes are not readily available, portfolio
securities are assigned fair market values pursuant to guidelines adopted by the
Board of Trustees.
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MINIMUM INVESTMENTS
<S> <C>
INITIAL INVESTMENT $ 1,000
for Custodial accounts $ 500
ADDITIONAL SHARES $ 100
MINIMUM BALANCE* $ 500
for Custodial accounts: $ 250
</TABLE>
* Your shares may be automatically redeemed if you do not meet a Fund's minimum
balance requirements.
These minimums may not be applicable to certain customers of Schwab
Institutional Services for Investment Managers or Schwab's Retirement Plan
Services.
These minimums may be different if you are buying, selling [exchanging] or
maintaining shares of a Fund through an entity other than Schwab.
HOW TO BUY SHARES
Shares may be purchased through a Schwab account or through an account with any
other entity designated by Schwab. The information on how to buy, sell or
exchange shares is for shares bought, sold or exchanged through an account at
Schwab. Shares are purchased at the NAV next determined after your purchase
order has been received and accepted. Purchase orders received and accepted by
Schwab prior to 4:00 p.m. Eastern time will be executed that day. Shares begin
to earn dividends on the next business day.
BY TELEPHONE. Call 1-800-435-4000, 24 hours a day (1-800-345-2550 for TDD
users).
BY MAIL. Write to the Funds at 101 Montgomery Street, San Francisco, CA 94104.
ELECTRONICALLY. Visit Schwab's World Wide Website for more information about
StreetSmart(R), The Equalizer(R) and Telebroker(R), call 1-800-435-4000.
TO PURCHASE SHARES OF THE FUNDS. Please provide the following information:
- - your name and Schwab account number;
- - the name of the Fund and the dollar amount you would like to purchase;
and
- - for initial purchases only, one of the two distribution choices below:
- - AUTOMATIC REINVESTMENT. Dividends will be reinvested in shares of your
Fund. If you do not choose an option, this option will be assigned to
you; or
- - CASH OPTION. Dividends will be paid to your Schwab account and, if
requested, mailed to you the next business day.
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HOW TO SELL OR EXCHANGE SHARES
Shares are sold or exchanged at the NAV next determined after your sale or
exchange order has been received and accepted. Sale and exchange orders received
and accepted by Schwab prior to 4:00 p.m. Eastern time will be executed that
day. Shares sold or exchanged earn dividends on that day.
BY TELEPHONE. Call 1-800-435-4000, 24 hours a day (1-800-345-2550 for TDD
users).
BY MAIL. Write to either Fund at 101 Montgomery Street, San Francisco, CA 94104.
ELECTRONICALLY. Visit Schwab's World Wide Website for more information about
StreetSmart(R), The Equalizer(R) and Telebroker(R), call 1-800-435-4000.
TO SELL OR EXCHANGE SHARES OF THE FUNDS. Please provide the following
information:
- - your name and Schwab account number;
- - the name of the Fund you would like to sell or exchange from and the
number of shares;
- - for exchanges only, the name of the Fund and class, if applicable, into
which you would like to exchange and a distribution choice; and
- - if selling or exchanging by mail, a signature of at least one of the
persons named on your Schwab account.
Once mailed, redemption and exchange requests are irrevocable and may not be
modified or canceled.
Contact Schwab for instructions and any applicable fees if you would like to
wire money from your Schwab account.
PLEASE NOTE THE FOLLOWING WHEN SELLING OR EXCHANGING SHARES OF THE FUNDS:
- - a check for your shares will be issued on the business day following
receipt and acceptance of your sale order, and will be mailed to you
upon request;
- - if you bought your shares by check, a check will be issued as soon as
your check clears your bank, which may take up to 15 days;
- - depending on the type of Schwab account you have, your money may earn
interest during any holding period;
- - you may exchange your shares for shares of any other Schwab Fund,
provided you meet its minimum investment and any other requirements;
- - the Funds and Schwab reserve the right to modify, limit or terminate
the exchange privilege upon 60 days' written notification; and
- - the Funds may suspend the right to sell shares or postpone payment for
a sale of shares when trading on the NYSE is restricted, the NYSE is
closed for any reason other than its customary weekend and holiday
closings, emergency circumstances exist as determined by the SEC or as
otherwise permitted by the SEC.
OPENING A SCHWAB ACCOUNT
Investors may open a Schwab account by simply completing an application,
although institutional investors should contact Schwab to find out if any
additional forms need to be completed.
Using a Schwab account, investors have access to investments other than just
mutual funds, such as stocks and bonds. The Securities Investor Protection
Corporation (SIPC) provides insurance protection of up to $500,000 for the
securities held in a Schwab account, including shares of the Funds. It is
important to remember that SIPC insurance does not protect against losses due to
market or economic conditions.
Schwab accounts require a $1,000 minimum investment and account balance ($500
for custodial accounts). A fee of $7.50 will be charged to Schwab accounts that
fall below this minimum for three consecutive months in a quarter. The fee, if
applicable, will be charged at the end of each quarter,
13
<PAGE> 18
but will be waived if there has been at least one commissionable trade within
the previous six months, or if the investor's combined Schwab accounts equal
$10,000 or more.
Schwab One(R) accounts require a $5,000 minimum investment and account balance.
A monthly fee of $5.00 will be charged to Schwab One accounts that fall below
this minimum, unless there have been at least two commissionable trades within
the previous twelve months.
Deposits may be made to Schwab accounts by check, wire and other forms of
electronic funds transfer. Securities also may be deposited. All checks should
be made out to Charles Schwab & Co., Inc. Schwab will charge a $15 service fee
for any checks returned as a result of insufficient or uncollected funds or a
stop order. Monies received by Schwab before 4:00 p.m. Eastern time will be
available for investment in the Fund that day. Monies received by Schwab after
4:00 p.m. Eastern time will be available for investment in the Fund the next
business day.
Contact Schwab for instructions and any applicable fees if you would like to
wire money from your Schwab account.
SPECIAL CONSIDERATIONS FOR SCHWAB ACCOUNTS
If your Schwab account contains no cash or margin credits, Schwab may redeem
shares of the Fund without prior notification to you to cover the following
items:
- - negative balances in your Schwab account as a result of any securities
transactions;
- - payment of any Schwab One checks you have written;
- - payment of any charges you have made using your Visa(R) debit card;
- - purchases you have made under an Automatic Investment Plan;
- - negative balances in your Schwab account as a result of any electronic
funds transactions.
Schwab may charge you a fee each time it must redeem shares of a Fund under any
of these circumstances. However, you will not be charged transaction fees for
redemptions in amounts less than the required minimum, if any, if such
redemptions are made under any of these circumstances.
SCHWAB AUTOMATIC INVESTMENT PLAN
Schwab's Automatic Investment Plan ("AIP") allows you to make periodic
investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. You can make automatic
investments in any amount, from $100 to $50,000, once you meet a Fund's
investment minimum. Automatic investments are made from your Schwab account, and
you may select from the following methods to make automatic investments: using
the uninvested cash in your Schwab account; using the proceeds of redemption of
shares of the Schwab money fund linked to your Schwab account; or using the
Schwab MoneyLink(R) Transfer Service. As long as you are purchasing a Fund's
shares through AIP, all dividends and distributions paid to you by the Fund must
be reinvested in additional shares of that Fund.
For more detailed information about this service, or to establish your AIP, call
1-800-435-4000, 24 hours a day.
DIVIDENDS & TAXES
Each business day each Fund's net investment income is determined by subtracting
its expenses from the income earned on its investments that day. Dividends are
declared each business day based on the net investment income determined and are
paid on the 25th of each month, if it is a business day, except in December when
dividends are paid on the last business day of the month. If the 25th is not a
business day, dividends are paid on the next business day.
The following is only a brief summary of some of the
14
<PAGE> 19
federal and state income tax consequences that may affect each Fund and its
shareholders. You should consider the tax implications of investing, and consult
with your own tax adviser.
Each Fund will distribute its net investment income and capital gains, if any,
to shareholders each year. Dividends derived from exempt-interest income will be
exempt from federal income tax when distributed to shareholders. In addition,
dividends paid by each Fund are expected to be exempt from California personal
income tax. Some distributions received by shareholders may be subject to
federal or state and/or local income taxes. For example, distributions derived
from the gain on the sale of tax-free bonds is typically subject to federal
income tax. To the extent distributions are subject to federal or state and/or
local income taxes, they are taxable when paid, whether received in cash or
reinvested, although distributions declared in December, but paid in January,
are taxable as if they were paid on December 31.
The interest from some municipal securities is subject to the federal
alternative minimum tax. Each Fund may invest up to 20% of its total assets in
these securities; provided that the total income earned on these securities does
not exceed 20% of the total income earned by the Fund. Shareholders subject to
federal alternative minimum tax must take this interest into account in
computing their federal alternative minimum tax liability.
Shareholders receive a record of all distributions by a Fund, as well as
purchases and sales they have made, via their monthly Schwab account statement.
Each year, the Funds notify shareholders of all distributions made by the Funds
that year, including the federal income and California personal income tax
consequences of the distributions.
GENERAL INFORMATION
As long as either Fund or Schwab follows reasonable procedures to confirm that
your telephone order is genuine, they will not be liable for any losses an
investor may experience. These procedures may include:
- - requiring a form of personal identification before acting upon any
telephone order;
- - providing written confirmation of telephone orders; and
- - tape recording all telephone orders.
It may be difficult to place orders by telephone during periods of drastic
economic or market changes because Schwab's phone lines may become very busy
with calls from other investors. Consider other methods for placing an order,
such as writing to the Funds.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
Twice a year, financial reports will be mailed to shareholders describing each
Fund's performance and investment holdings. In order to reduce these mailing
costs, each household will receive one consolidated mailing. If you do not want
to receive consolidated mailings, you may write to your Fund and request that
your mailings not be consolidated. Each Fund, in its sole discretion and without
prior notice, reserves the right to reject orders to purchase shares, change
minimum investment requirements or withdraw or suspend any part of the offering
made by the prospectus.
15
<PAGE> 20
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS AND
IN OFFICIAL SALES MATERIALS. IF ANYONE GIVES ANY OTHER INFORMATION OR MAKES ANY
OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION OR REPRESENTATIONS.
THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
BE MADE.
16
<PAGE> 21
TABLE OF CONTENTS
PAGE
Key Features...................... 2
Expenses.......................... 3
Financial Highlights.............. 5
Performance....................... 6
Organization & Management......... 7
Investment Objectives, Policies &
Risks ............................ 9
Investing in Shares............... 12
The Prospectus provides concise information that you should know before
investing. Please retain it for future reference.
The Statement of Additional Information (SAI), dated December 15, 1997, contains
additional information and is incorporated by reference into the Prospectus. The
SAI has been filed with the Securities and Exchange Commission (SEC). The SEC
maintains a World Wide Web site (http://www.sec.gov) that contains the SAI,
material incorporated by reference and other information. The SAI is available
without charge by calling 1-800-435-4000 (800-345-2550 for TDD users) or writing
to 101 Montgomery Street, San Francisco, California 94104.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB LONG-TERM TAX-FREE BOND FUND
PROSPECTUS
DECEMBER 15, 1997
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND (Short/Intermediate
Tax-Free Fund) seeks income exempt from federal income tax, while
maintaining a dollar-weighted average maturity between two and five
years.
SCHWAB LONG-TERM TAX-FREE BOND FUND (Long-Term Tax-Free Fund) seeks
income exempt from federal income tax, while maintaining a
dollar-weighted average maturity of at least ten years.
<PAGE> 22
KEY FEATURES
MATCHING A FUND TO YOUR INVESTMENT NEEDS: Each Fund may be appropriate for a
variety of investment programs. While an investment in a Fund is not a
substitute for an investment portfolio tailored to an individual's investment
needs and risk tolerance, each Fund could serve as a component of a long-term
investment portfolio designed to accumulate assets for major goals.
The Funds are designed to provide income exempt from federal income tax. The
Funds are not suitable for investors who would not benefit from the tax-exempt
character of each Fund's investments, such as IRAs, qualified retirement plans
or tax-exempt entities.
GOALS: Each Fund seeks income exempt from federal income tax, while maintaining
a specific dollar-weighted average maturity (DWAM).
There is no guarantee the Funds will achieve their goals.
STRATEGY: Each Fund intends to achieve its goal by investing in securities, the
interest on which is exempt from federal income tax.
Each Fund is a non-diversified mutual fund.
RISKS: Because each Fund invests substantially in municipal securities, the
performance of each Fund may be especially affected by state and local economic
conditions and political developments, as well as the ability of issuers to meet
their obligations.
MANAGEMENT: Charles Schwab Investment Management, Inc. (the Investment Manager)
currently provides investment management services to the SchwabFunds(R), a
family of [xx] mutual funds with over $[xx] billion in assets as of [date].
SHAREHOLDER SERVICE: Charles Schwab & Co., Inc. (Schwab) provides professional
representatives 24 hours a day at 1-800-435-4000 to service your accounts.
Schwab was established in 1971 and is one of America's largest discount brokers.
Schwab helps over [XX] million customers make investment decisions by offering
them low cost brokerage services and providing them with financial products and
information. Visit one of Schwab's [number] branch offices or Schwab's World
Wide Website (http://www.schwab.com/funds) for information on investment
products and services. Read the "Investing in Shares" section of the prospectus
for information on "How to Buy" and "How to Sell" shares of the Fund.
LOW COST INVESTING: The Investment Manager and Schwab have voluntarily
guaranteed that, through at least [_____], total operating expenses of each Fund
will not exceed [0.XX]% of each Fund's daily net assets.
2
<PAGE> 23
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES are charges you may pay when you buy, sell or
exchange shares of the Funds.
Maximum sales charge on purchases
and reinvested dividends NONE
Deferred sales charge
on redemptions NONE
Redemption fee NONE*
Exchange fee NONE
Account maintenance
fees NONE**
The information on shareholder transaction expenses is for transactions through
a Schwab account. If you are purchasing, selling (exchanging) or maintaining
shares of a Fund through an entity other than Schwab, other transaction expenses
may be changed by that entity.
* Read the "Investing in Shares" section of the prospectus for information
concerning wire redemption fees.
** Read the "Investing in Shares" section of the prospectus for information
concerning fees that may be charged if you do not maintain the required minimums
in the Fund or in your Schwab account.
ANNUAL OPERATING EXPENSES are paid by the Fund. These expenses include
management fees paid to the Investment Manager and other fees for services such
as maintaining shareholder records and furnishing shareholder statements and
financial reports. These expenses are factored into the price of the Fund's
shares and into the dividends paid to shareholders. As a shareholder, you are
not charged any of these fees directly.
The following figures are based on historical expenses and are stated as a
percentage of average daily net assets of each Fund.
SHORT/INTERMEDIATE TAX-FREE FUND
Management fee (after reduction) [x.xx%]
12b-1 fee None
Other expenses (after reduction) [x.xx%]
------
TOTAL OPERATING EXPENSES (AFTER REDUCTION) [0.XX%]
LONG-TERM TAX-FREE FUND
Management fee (after reduction) [x.xx%]
12b-1 fee None
Other expenses (after reduction) [x.xx%]
------
TOTAL OPERATING EXPENSES (AFTER REDUCTION) [0.XX%]
EXAMPLE: If each Fund were to provide an annual return of 5%, you would pay the
following expenses on a $1,000 investment, whether you redeem your shares at the
end of each period or left your shares invested.
SHORT/INTERMEDIATE TAX-FREE FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
LONG-TERM TAX-FREE FUND
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
THE EXPENSE TABLES AND EXAMPLES ABOVE ARE SUPPOSED TO HELP YOU UNDERSTAND THE
COSTS OF OWNING SHARES IN THE FUNDS. ACTUAL EXPENSES MAY BE GREATER OR LESSER
THAN THOSE SHOWN.
3
<PAGE> 24
The Investment Manager and Schwab have voluntarily agreed to guarantee, at least
through [____], that total operating expenses (excluding interest, taxes,
brokerage commissions and extraordinary expenses) of each Fund will not exceed
[0.XX]% of each Fund's average daily net assets. If these guarantees were not in
effect, the management fee, other expenses and total operating expenses for the
Short/Intermediate Tax-Free Fund and Long-Term Tax-Free Fund would have been
[0.XX%], [0.XX%]and [0.XX%] and [0.XX%], [0.XX%] and [0.XX%], respectively, of
each Fund's average daily net assets. Read the "Organization and Management"
section of this prospectus for more information on expenses.
4
<PAGE> 25
FINANCIAL HIGHLIGHTS
The following information has been audited by _____________, independent
accountants for the Funds. Their Report is included in the Annual Report for the
Funds, which is a separate report that contains additional financial
information.
The report, financial highlights and financial statements are incorporated by
reference into the SAI. For free copies of the Annual Report and/or the SAI,
call 1-435-4000.
5
<PAGE> 26
PERFORMANCE
Typically, mutual funds report performance in terms of total return or yield.
TOTAL RETURN is the actual annual return of an investment assuming both the
reinvestment of any income earned and any change in share price. A cumulative
total return is the actual total return of an investment over a stated period of
time, while an average annual total return is a hypothetical rate of return,
which, if achieved annually would have produced the same cumulative total
return. An average annual total return will smooth out the actual year-to-year
fluctuations of an investment's return.
YIELD is the actual income earned on an investment over a stated period of time
and annualized (assumed to be generated over a year). For example, a thirty-day
yield measures the income earned on an investment over thirty days, annualizes
it and expresses that income as a percentage of the original investment. An
effective yield is calculated similarly, but income earned is assumed to be
reinvested. Because of this compounding effect, effective yields are generally
higher.
TAXABLE EQUIVALENT YIELD shows the yield that a taxable investment would have to
generate in order to equal a tax-free yield. A taxable equivalent effective
yield is calculated similarly, except that the effective yield is used in the
calculation.
Fund strategies, performance and holdings are detailed in financial reports,
which are sent to shareholders twice a year. For a free copy of the most recent
financial report, call 1-800-435-4000.
6
<PAGE> 27
ORGANIZATION & MANAGEMENT
EACH FUND IS A NON-DIVERSIFIED MUTUAL FUND. Each Fund is a series of Schwab
Investments (the Trust).
THE FUNDS ARE OVERSEEN BY A BOARD OF TRUSTEES. The Board of Trustees meets
regularly to review each Fund's activities, contractual arrangements and
performance. The Board of Trustees is responsible for protecting the interests
of each Fund's shareholders.
THE FUNDS MAY HOLD SPECIAL MEETINGS. These meetings may be called for purposes
such as electing Trustees, changing fundamental policies and amending management
contracts. Shareholders are entitled to one vote for each share owned and may
vote by proxy or in person. Proxy materials will be mailed to shareholders prior
to any meetings, and will include a voting card and information explaining the
matters to be voted upon.
THE FUNDS ARE MANAGED BY THE INVESTMENT MANAGER. The Investment Manager is
responsible for managing each Fund's day-to-day business affairs, including
picking each Fund's investments; although the Investment Manager is subject to
the overall authority of the Board of Trustees.
Joanne Larkin is a Vice President of Schwab and Senior Portfolio Manager for the
Funds. Ms. Larkin has primary responsibility for the day-to-day portfolio
management of each Fund, and has since each Fund commenced operation. Prior to
February 1992, Ms. Larkin was portfolio manager for the Shearson Lehman
California Municipal Bond Fund and E.F. Hutton's Municipal Cash Reserve
Management. Ms. Larkin graduated from Rosemont College with a Bachelor of Arts
in Sociology.
Stephen B. Ward is the Trust's Senior Vice President and Chief Investment
Officer. Mr. Ward has overall responsibility for the portfolio management of the
Funds. Mr. Ward joined the Investment Manager as Vice President and Portfolio
Manager in April 1991 and was promoted to his current position in August 1993.
Prior to joining the Investment Manager, Mr. Ward was Vice President and
Portfolio Manager at Federated Investors. Mr. Ward graduated with a Masters of
Business Administration from the Wharton School and a Bachelor of Arts in
Economics from Virginia Tech, and has been a Chartered Financial Analyst since
1985.
For the services performed under its contract with each Fund, the Investment
Manager is entitled to receive an annual fee, payable monthly from each Fund.
For the fiscal year ended August 31, 1997, the Short/Intermediate Tax-Free Fund
and the Long- Term Tax-Free Fund paid the Investment Manager investment
management fees of [0.XX]% and [0.XX]%, respectively, of each Fund's daily net
assets.
SCHWAB IS THE FUNDS' SHAREHOLDER SERVICES AND TRANSFER AGENT. Schwab provides
Fund information to shareholders, including calculating share price, reporting
shareholder ownership and account activities and distributing the Fund's
prospectuses, financial reports and other informational literature about the
Funds. Schwab also maintains the office space, equipment and personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds and
services.
For the services performed as transfer agent under its contract with each Fund,
Schwab is entitled to receive annual fees from the Funds. The fees are payable
monthly in the amount of 0.05% of each Fund's average daily net assets. For the
services performed as shareholder services agent under its contract with the
funds, Schwab is entitled to receive annual fees from the Funds. The fees are
payable monthly in the amount of 0.20% of the average daily
7
<PAGE> 28
net assets of the Funds.
For the fiscal year ended August 31, 1997, the Short/Intermediate Tax-Free Fund
and the Long-Term Tax-Free Fund, respectively, paid total operating expenses in
the amounts of [0.XX]% and [0.XX]% of each Fund's average daily net assets.
THE FUNDS PAY OTHER EXPENSES. These expenses are typically connected with the
Trust's operations and include legal, audit and custodian fees, as well as the
costs of accounting and registration of the Funds. Expenses not directly
attributable to a particular Fund will be allocated equitably among the Funds in
the Trust.
The Charles Schwab Corporation is the parent company of the Investment Manager
and Schwab. Charles R. Schwab is the founder, Chairman, Chief Executive Officer
and Director of The Charles Schwab Corporation. As a result of his ownership of
and interests in The Charles Schwab Corporation, Mr. Schwab may be deemed to be
a controlling person of the Investment Manager and Schwab.
8
<PAGE> 29
INVESTMENT OBJECTIVES, POLICIES & RISKS
INVESTMENT OBJECTIVES
Each Fund's investment objective is to seek a high level of current income that
is exempt from federal income tax, consistent with preservation of capital.
Each Fund's investment objective is fundamental, which means that it may be
changed only by vote of a majority of a Fund's shareholders. Unless otherwise
noted, policies and limitations are non-fundamental and may be changed without
shareholder approval.
INVESTMENT STRATEGIES
Each Fund intends to achieve its objective by investing in investment-grade
municipal securities. Each Fund will normally invest at least 80% of its total
assets in these securities.
THE MATURITY of a security generally determines its sensitivity to interest rate
changes. In general, the longer the maturity, the more sensitive the security
will be to interest rate changes. For example, money market securities are
high-quality, short-term debt securities that reflect short-term interest rates
and normally carry little risk of fluctuation of principal value.
The Short/Intermediate Tax-Free Fund is designed to provide higher yields than a
tax-free money market fund by investing in investment-grade, short- and
intermediate-term municipal securities that carry more risk of fluctuation of
principal. The Short/Intermediate Tax-Free Fund will normally seek to maintain a
DWAM of between two and five years.
The Long-Term Tax-Free Fund is designed to provide even higher yields by
investing in investment-grade, long-term municipal securities that carry an even
higher risk of fluctuation of principal value. The Long-Term Tax-Free Fund will
normally expect to maintain a DWAM of at least ten years.
Either Fund may invest in securities of any maturity.
THE RISKS for each Fund are basically those risks associated with investing in
debt securities, although each risk factor may be intensified by the Funds'
concentrated investments in municipal securities.
Generally speaking, there are four types of risk attendant to investing in debt
securities.
INTEREST RATE RISK is the potential for fluctuations in bond prices due to
changing interest rates. Generally, the longer a security's maturity or a Fund's
DWAM, the more sensitive its value will be to interest rate changes.
INCOME RISK is the potential for a decline in income due to falling interest
rates.
CREDIT RISK is the possibility that a bond issuer will fail to make timely
payments of either interest or principal.
PREPAYMENT RISK or CALL RISK is the likelihood that, during periods of falling
interest rates, bonds will be prepaid (or "called") prior to maturity, requiring
the proceeds to be invested at a generally lower interest rate.
The amount of each type of risk each Fund will be subject to will depend on its
portfolio of investments. Because the Funds invest substantially in municipal
securities, they are expected to face income, credit and interest rate risks,
although the Long Term Tax-Free Fund will face greater interest rate risks as a
result of its longer DWAM. Prepayment or call risks are not predominant risk
factors for municipal securities.
9
<PAGE> 30
PRINCIPAL SECURITIES AND INVESTMENT TECHNIQUES
The different types of securities in which the Funds may invest are described
below.
DEBT SECURITIES are obligations, issued by various entities, including
governments and corporations, in order to raise money. They are basically
"IOUs," but are commonly referred to as bonds. Bonds normally require the issuer
to pay a fixed, variable or floating rate of interest on the amount of money
borrowed (the "principal") until it is paid back (at "maturity"). Upon maturity,
the principal must be repaid.
Debt securities experience price changes when interest rates change. As a rule,
when interest rates rise, bond prices decline or "fall", and when interest rates
fall bond prices rise. Typically, longer-maturity bonds react to interest rate
changes more severely than shorter-term bonds (all else being equal) but
generally offer a greater rate of interest. Debt securities also are subject to
the risk that their issuer will fail to meet its obligation to pay interest
and/or principal, and their prices also may be affected by the credit quality of
their issuer.
Investment-grade debt securities are medium- and high-quality securities,
although some still possess varying degrees of speculative characteristics and
risk.
MUNICIPAL SECURITIES are debt securities issued by or on behalf of a state,
including its counties, municipalities, authorities and other subdivisions, or
the territories and possessions of the United States and the District of
Columbia, including their subdivisions, agencies and instrumentalities. These
securities are issued to raise money for various public purposes or private
activities such as general financing for state and local governments or
financing for specific projects or facilities.
Municipal securities are meant to produce interest free from federal income tax,
and, typically, personal income tax of a state or locality.
Restriction: As a fundamental policy, each Fund will normally invest at least
more than 80% of its total assets in municipal securities the interest on which
is free from federal income tax including federal alternative minimum tax. Each
Fund also may invest more than 25% in municipal securities financing similar
projects.
CREDIT AND LIQUIDITY SUPPORTS may be employed by issuers to reduce the credit
risk of their securities. Credit supports include letters of credit, insurance
and guarantees provided by foreign and domestic entities. Municipal securities
are sometimes issued with moral obligations, which are a type of credit support.
Liquidity supports include puts and demand features. These arrangements move the
credit risk of an investment from the issuer of the security to the support
provider. In addition, credit and liquidity supports provided by foreign
entities may be affected by foreign economic, political and legal developments.
ASSET-BACKED SECURITIES are securities that are backed by the loans or account
receivables of an entity, such as a bank or credit card company. Payment may
depend largely on the cash flows generated by the assets backing the securities.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY SECURITIES are securities that are
purchased but are to be delivered to the buyer at a later than customary date,
price and yield. Generally, the purchaser does not pay for these securities or
earn interest on them until they are delivered, but their value could change
prior to delivery.
ILLIQUID AND RESTRICTED SECURITIES are securities
10
<PAGE> 31
which are not actively traded or are subject to legal restrictions and,
therefore, may be difficult to sell quickly or without losses.
Restriction: Each Fund will not purchase illiquid securities if, as a result,
more than 10% of its net assets would be invested in illiquid securities.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased by a Fund. These
investments will cause a Fund to bear duplicative fees for certain services.
The Funds also may employ the policies described below.
DIVERSIFICATION involves investing in a wide range of securities and, thereby,
spreading and reducing the risks of investment. Non-diversified mutual funds are
more sensitive to changes that affect a single security.
Restriction: Each Fund is a non-diversified mutual fund. In order to meet
federal tax requirements, each Fund will not invest more than 25% of its total
assets in the securities of a single issuer, and, with respect to 50% of its
total assets, will not invest more than 5% in a single issuer. This limitation
does not apply to U.S. Government Securities.
BORROWING money may be construed as a form of leveraging if the Fund continues
to make investments while borrowings remain outstanding. Borrowing subjects the
Fund to interest received on the securities purchased with the borrowed funds.
Restriction: As a fundamental policy, each Fund may borrow up to 33 1/3% of its
total assets for temporary or emergency purposes; provided that neither Fund
will purchase securities while borrowings represent more than 5% of its total
assets.
LENDING securities may earn income for a Fund, but could result in losses to the
Fund, and possibly affect share price.
TEMPORARY INVESTMENTS in U.S. Government securities, money market securities,
repurchase agreements and other taxable securities may be made by each Fund as a
defensive measure or under abnormal market conditions.
11
<PAGE> 32
INVESTING IN SHARES
BUSINESS DAYS
The Funds are open each day the New York Stock Exchange (NYSE) is open (business
days).
NET ASSET VALUE
The price of each share of each Fund is its net asset value per share (NAV). NAV
is determined each business day at the close of the NYSE, generally 4:00 p.m.
Eastern time. NAV is calculated by adding the value of each Fund's assets,
subtracting its liabilities and dividing the result by the number of outstanding
shares. Each Fund's NAV will fluctuate and neither Fund is insured against loss
in its NAV.
Each Fund values its portfolio securities based on market quotes if they are
readily available. If market quotes are not readily available, portfolio
securities are assigned fair market values pursuant to guidelines adopted by the
Board of Trustees.
<TABLE>
<CAPTION>
MINIMUM INVESTMENTS
<S> <C>
INITIAL INVESTMENT $ 1,000
for Custodial accounts $ 500
ADDITIONAL SHARES $ 100
MINIMUM BALANCE* $ 500
for Custodial accounts: $ 250
</TABLE>
* Your shares may be automatically redeemed if you do not meet a Fund's minimum
balance requirements.
These minimums may not be applicable to certain customers of Schwab
Institutional Services for Investment Managers or Schwab's Retirement Plan
Services.
These minimums may be different if you are buying, selling [exchanging] or
maintaining shares of a Fund through an entity other than Schwab.
HOW TO BUY SHARES
Shares may be purchased through a Schwab account or through an account with any
other entity designated by Schwab. The information on how to buy, sell or
exchange shares is for shares bought, sold or exchanged through an account at
Schwab. Shares are purchased at the NAV next determined after your purchase
order has been received and accepted. Purchase orders received and accepted by
Schwab prior to 4:00 p.m. Eastern time will be executed that day. Shares begin
to earn dividends on the next business day.
BY TELEPHONE. Call 1-800-435-4000, 24 hours a day (1-800-345-2550 for TDD
users).
BY MAIL. Write to the Funds at 101 Montgomery Street, San Francisco, CA 94104.
ELECTRONICALLY. Visit Schwab's World Wide Website for more information about
StreetSmart(R), The Equalizer(R) and Telebroker(R), call 1-800-435-4000.
TO PURCHASE SHARES OF THE FUNDS. Please provide the following information:
- - your name and Schwab account number;
- - the name of the Fund and the dollar amount you would like to purchase;
and
- - for initial purchases only, one of the two distribution choices below:
- - AUTOMATIC REINVESTMENT. Dividends will be reinvested in shares of your
Fund. If you do not choose an option, this option will be assigned to
you; or
- - CASH OPTION. Dividends will be paid to your Schwab account and, if
requested, mailed to you the next business day.
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HOW TO SELL OR EXCHANGE SHARES
Shares are sold or exchanged at the NAV next determined after your sale or
exchange order has been received and accepted. Sale and exchange orders received
and accepted by Schwab prior to 4:00 p.m. Eastern time will be executed that
day. Shares sold or exchanged earn dividends on that day.
BY TELEPHONE. Call 1-800-435-4000, 24 hours a day (1-800-345-2550 for TDD
users).
BY MAIL. Write to either Fund at 101 Montgomery Street, San Francisco, CA 94104.
ELECTRONICALLY. Visit Schwab's World Wide Website for more information about
StreetSmart(R), The Equalizer(R) and Telebroker(R), call 1-800-435-4000.
TO SELL OR EXCHANGE SHARES OF THE FUNDS. Please provide the following
information:
- - your name and Schwab account number;
- - the name of the Fund you would like to sell or exchange from and the
number of shares;
- - for exchanges only, the name of the Fund and class, if applicable, into
which you would like to exchange and a distribution choice; and
- - if selling or exchanging by mail, a signature of at least one of the
persons named on your Schwab account.
Once mailed, redemption and exchange requests are irrevocable and may not be
modified or canceled.
Contact Schwab for instructions and any applicable fees if you would like to
wire money from your Schwab account.
PLEASE NOTE THE FOLLOWING WHEN SELLING OR EXCHANGING SHARES OF THE FUNDS:
- - a check for your shares will be issued on the business day following
receipt and acceptance of your sale order, and will be mailed to you
upon request;
- - if you bought your shares by check, a check will be issued as soon as
your check clears your bank, which may take up to 15 days;
- - depending on the type of Schwab account you have, your money may earn
interest during any holding period;
- - you may exchange your shares for shares of any other Schwab Fund,
provided you meet its minimum investment and any other requirements;
- - the Funds and Schwab reserve the right to modify, limit or terminate
the exchange privilege upon 60 days' written notification; and
- - the Funds may suspend the right to sell shares or postpone payment for
a sale of shares when trading on the NYSE is restricted, the NYSE is
closed for any reason other than its customary weekend and holiday
closings, emergency circumstances exist as determined by the SEC or as
otherwise permitted by the SEC.
OPENING A SCHWAB ACCOUNT
Investors may open a Schwab account by simply completing an application,
although institutional investors should contact Schwab to find out if any
additional forms need to be completed.
Using a Schwab account, investors have access to investments other than just
mutual funds, such as stocks and bonds. The Securities Investor Protection
Corporation (SIPC) provides insurance protection of up to $500,000 for the
securities held in a Schwab account, including shares of the Funds. It is
important to remember that SIPC insurance does not protect against losses due to
market or economic conditions.
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<PAGE> 34
Schwab accounts require a $1,000 minimum investment and account balance ($500
for custodial accounts). A fee of $7.50 will be charged to Schwab accounts that
fall below this minimum for three consecutive months in a quarter. The fee, if
applicable, will be charged at the end of each quarter, but will be waived if
there has been at least one commissionable trade within the previous six months,
or if the investor's combined Schwab accounts equal $10,000 or more.
Schwab One(R) accounts require a $5,000 minimum investment and account balance.
A monthly fee of $5.00 will be charged to Schwab One accounts that fall below
this minimum, unless there have been at least two commissionable trades within
the previous twelve months.
Deposits may be made to Schwab accounts by check, wire and other forms of
electronic funds transfer. Securities also may be deposited. All checks should
be made out to Charles Schwab & Co., Inc. Schwab will charge a $15 service fee
for any checks returned as a result of insufficient or uncollected funds or a
stop order. Monies received by Schwab before 4:00 p.m. Eastern time will be
available for investment in the Fund that day. Monies received by Schwab after
4:00 p.m. Eastern time will be available for investment in the Fund the next
business day.
Contact Schwab for instructions and any applicable fees if you would like to
wire money from your Schwab account.
SPECIAL CONSIDERATIONS FOR SCHWAB ACCOUNTS If your Schwab account contains no
cash or margin credits, Schwab may redeem shares of the Fund without prior
notification to you to cover the following items:
- - negative balances in your Schwab account as a result of any securities
transactions;
- - payment of any Schwab One checks you have written;
- - payment of any charges you have made using your Visa(R) debit card;
- - purchases you have made under an Automatic Investment Plan;
- - negative balances in your Schwab account as a result of any electronic
funds transactions.
Schwab may charge you a fee each time it must redeem shares of a Fund under any
of these circumstances. However, you will not be charged transaction fees for
redemptions in amounts less than the required minimum, if any, if such
redemptions are made under any of these circumstances.
SCHWAB AUTOMATIC INVESTMENT PLAN
Schwab's Automatic Investment Plan ("AIP") allows you to make periodic
investments in non-money market SchwabFunds(R) (and certain other funds
available through Schwab) automatically and conveniently. You can make automatic
investments in any amount, from $100 to $50,000, once you meet a Fund's
investment minimum. Automatic investments are made from your Schwab account, and
you may select from the following methods to make automatic investments: using
the uninvested cash in your Schwab account; using the proceeds of redemption of
shares of the Schwab money fund linked to your Schwab account; or using the
Schwab MoneyLink(R) Transfer Service. As long as you are purchasing a Fund's
shares through AIP, all dividends and distributions paid to you by the Fund must
be reinvested in additional shares of that Fund. For more detailed information
about this service, or to establish your AIP, call 1-800-435-4000, 24 hours a
day.
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DIVIDENDS & TAXES
Each business day each Fund's net investment income is determined by subtracting
its expenses from the income earned on its investments that day. Dividends are
declared each business day based on the net investment income determined and are
paid on the 25th of each month, if it is a business day, except in December when
dividends are paid on the last business day of the month. If the 25th is not a
business day, dividends are paid on the next business day.
The following is only a brief summary of some of the federal income tax
consequences that may affect each Fund and its shareholders. You should consider
the tax implications of investing, and consult with your own tax adviser.
Each Fund will distribute its net investment income and capital gains, if any,
to shareholders each year. Dividends that are derived from exempt-interest
income will be exempt from federal income tax when distributed to shareholders.
Some distributions received by shareholders may be subject to federal or state
and/or local income taxes. For example, distributions derived from the gain on
the sale of tax-free bonds is typically subject to federal income tax. To the
extent distributions are subject to federal or state and/or local income taxes,
they are taxable when paid, whether received in cash or reinvested, although
distributions declared in December, but paid in January, are taxable as if they
were paid on December 31.
The interest from some municipal securities is subject to the federal
alternative minimum tax. Each Fund may invest up to 20% of its total assets in
these securities; provided that the total income earned on these securities does
not exceed 20% of the total income earned by the Fund. Shareholders subject to
federal alternative minimum tax must take this interest into account in
computing their federal alternative minimum tax liability.
Shareholders receive a record of all distributions by a Fund, as well as
purchases and sales they have made, via their monthly Schwab account statement.
Each year, the Funds notify shareholders of all distributions made by the Funds
that year, including the federal income tax consequences of the distributions.
GENERAL INFORMATION
As long as either Fund or Schwab follows reasonable procedures to confirm that
your telephone order is genuine, they will not be liable for any losses an
investor may experience.
These procedures may include:
- - requiring a form of personal identification before acting upon any
telephone order;
- - providing written confirmation of telephone orders; and
- - tape recording all telephone orders.
It may be difficult to place orders by telephone during periods of drastic
economic or market changes because Schwab's phone lines may become very busy
with calls from other investors. Consider other methods for placing an order,
such as writing to the Funds.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
Twice a year, financial reports will be mailed to shareholders describing each
Fund's performance and investment holdings. In order to reduce these mailing
costs, each household will receive one consolidated mailing. If you do not want
to receive consolidated mailings, you may write to your Fund and request that
your mailings not be consolidated.
Each Fund, in its sole discretion and without prior notice, reserves the right
to reject orders to purchase
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<PAGE> 36
shares, change minimum investment requirements or withdraw or suspend any part
of the offering made by the prospectus.
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS AND
IN OFFICIAL SALES MATERIALS. IF ANYONE GIVES ANY OTHER INFORMATION OR MAKES ANY
OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION OR REPRESENTATIONS.
THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
BE MADE.
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<PAGE> 37
SCHWAB INVESTMENTS
CROSS REFERENCE SHEET
FOR
SCHWAB LONG-TERM TAX-FREE BOND FUND
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
<TABLE>
<CAPTION>
Part B Item Statement of Additional Information Caption
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Policies Investment Policies & Restrictions
14. Management of the Fund Management of the Trust
15. Control Persons and Principal Holders of Securities General Information
16. Investment Advisory and Other Services Management of the Trust
17. Brokerage Allocation and Other Practices Portfolio Transactions and Turnover
18. Capital Stock and Other Securities General Information
19. Purchase, Redemption and Pricing of Securities Share Price Calculation;
Being Offered Purchase and Redemption of Shares
20. Tax Status Taxes
21. Underwriters Management of the Trust
22. Calculation of Performance Data Total Return and Yield
23. Financial Statements Financial Statements
</TABLE>
<PAGE> 38
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB INVESTMENTS
101 Montgomery Street, San Francisco, CA 94104
DECEMBER 15, 1997
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the Prospectus for the Schwab Long-Term Tax-Free Bond
Fund (the Long Term Tax-Free Fund) and the Schwab Short/Intermediate Tax-Free
Bond Fund (the Short/Intermediate Tax-Free Fund), dated December 15, 1997, and
the Prospectus for the Schwab California Long-Term Tax-Free Bond Fund (the
California Long Term Tax-Free Fund) and the Schwab California Short/Intermediate
Tax-Free Bond Fund (the California Short/Intermediate Tax-Free Fund), dated
December 15, 1997, (the Funds).
To obtain a copy of either Prospectus, please contact Charles Schwab & Co., Inc.
(Schwab) at 1-800-435-4000, 24 hours a day or 101 Montgomery Street, San
Francisco, California 94104. TDD users may contact Schwab at 800-345-2550, 24
hours a day. These Prospectuses also may be available electronically by using
the SchwabFunds(R) World Wide Web address: http://www.schwab.com/funds.
SCHWABFunds(R)
800-2 NO-LOAD
TABLE OF CONTENTS
Page
INVESTMENT SECURITIES. . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . 7
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . 10
PORTFOLIO TRANSACTIONS AND TURNOVER. . . . . . . . . . . . . . . . 15
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SHARE PRICE CALCULATION. . . . . . . . . . . . . . . . . . . . . . 19
TOTAL RETURN AND YIELD . . . . . . . . . . . . . . . . . . . . . . 20
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 21
PURCHASE AND REDEMPTION OF SHARES. . . . . . . . . . . . . . . . . 23
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . 23
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . 23
APPENDIX - RATINGS OF INVESTMENT SECURITIES. . . . . . . . . . . . 23
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<PAGE> 39
INVESTMENT SECURITIES
MUNICIPAL SECURITIES. Municipal securities are debt securities issued by a
state, its political subdivisions, agencies, authorities and corporations. These
securities may be issued to obtain money for various public purposes, including
the construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, public utilities, schools,
streets, and water and sewer works. Other public purposes include refunding
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to loan to other public institutions and facilities.
Municipal securities also may be issued to finance various private activities,
including certain types of private activity bonds ("industrial development
bonds" under prior law). These securities may be issued by or on behalf of
public authorities to obtain funds to provide certain privately owned or
operated facilities. The Funds may not be desirable investments for "substantial
users" of facilities financed by private activity bonds or industrial
development bonds or for "related persons" of substantial users because
distributions from the Funds attributable to interest on such bonds may not be
tax-exempt. Shareholders should consult their own tax advisers regarding the
potential effect on them (if any) of any investment in these Funds.
Municipal securities are generally classified as "general obligation" or
"revenue." General obligation notes are secured by the issuer's pledge of its
full credit and taxing power for the payment of principal and interest. Revenue
notes are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Private activity bonds and industrial development
bonds are, in most cases, revenue bonds and generally do not constitute the
pledge of the credit of the issuer of such bonds.
Examples of municipal securities that are issued with original maturities of one
year or less are short-term tax anticipation notes, bond anticipation notes,
revenue anticipation notes, construction loan notes, pre-refunded municipal
bonds and tax-free commercial paper. Tax anticipation notes are typically sold
to finance working capital needs of municipalities in anticipation of the
receipt of property taxes on a future date. Bond anticipation notes are sold on
an interim basis in anticipation of a municipality's issuance of a longer-term
bond in the future. Revenue anticipation notes are issued in expectation of the
receipt of other types of revenue such as that available under the Federal
Revenue Sharing Program. Construction loan notes are instruments insured by the
Federal Housing Administration with permanent financing by "Fannie Mae" (the
Federal National Mortgage Association) or "Ginnie Mae" (the Government National
Mortgage Association) at the end of the project construction period.
Pre-refunded municipal bonds are bonds that are not yet refundable, but for
which securities have been placed in escrow to refund an original municipal bond
issue when it becomes refundable. Tax-free commercial paper is an unsecured
promissory obligation issued or guaranteed by a municipal issuer. The Funds may
purchase other municipal securities similar to the foregoing, which are or may
become available, including securities issued to pre-refund other outstanding
obligations of municipal issuers.
The value of municipal securities may be affected by uncertainties with respect
to the rights of holders of municipal securities in the event of bankruptcy or
the taxation of municipal securities as a result of legislation or litigation.
For example, under federal law, certain issuers of municipal securities may be
authorized in certain circumstances to initiate bankruptcy proceedings without
prior notice to or the consent of creditors. Such action could result in
material adverse changes in the rights of holders of the securities. In
addition, litigation challenging the validity under the state constitutions of
present systems of financing public education has been initiated or adjudicated
in a number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law, which ultimately could
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.
The Investment Manager relies on the opinion of the issuer's counsel, which is
rendered at the time the security is issued, to determine whether the security
is fit, with respect to its tax status, to be purchased by a Fund.
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<PAGE> 40
ILLIQUID SECURITIES. Investments that cannot be sold or disposed of in the
normal course of business within seven days at their approximate value will be
considered illiquid. The Investment Manager determines the liquidity of a fund's
investments under the supervision and direction of the Board of Trustees.
Investments currently considered illiquid include repurchase agreements not
maturing within seven days, some restricted securities and municipal lease
obligations.
TAXABLE SECURITIES. Under normal conditions, the Funds do not intend to invest
in securities the interest on which is subject to federal income and/or state
and local personal income taxes. However, from time to time, as a defensive
measure or under abnormal market conditions, the Funds may make temporary
investments in securities the interest on which is subject to federal income
and/or state and local personal income taxes.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are securities issued by
the U.S. Treasury or issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities. U.S. Treasury securities are backed by the full
faith and credit of the United States. Not all U.S. Government securities are
backed by the full faith and credit of the United States. Some U.S. Government
securities are supported by a line of credit the issuing entity has with the
U.S. Treasury. Others are supported solely by the credit of the issuing agency
or instrumentality. Of course U.S. Government securities are among the safest
securities, but they are still sensitive to interest rate changes, which will
cause their yields to fluctuate.
ASSET-BACKED SECURITIES. Asset-Backed securities are securities that are backed
by the loans or account receivables of an entity, such as a bank or credit card
company. These securities are obligations which the issuer intends to repay
using the assets backing them (once collected). Therefore, repayment may depend
largely on the cash-flows generated by the assets backing the securities.
Sometimes the credit support for these securities is limited to the underlying
assets, but, in other cases, may be provided by a third party via a letter of
credit or insurance guarantee. Asset-backed securities are subject to credit and
prepayment risks.
Repayment of these is intended to be obtained from an identified pool of assets,
typically receivables related to a particular industry, such an asset-backed
securities related to credit card receivables, automobile receivables, trade
receivables or diversified financial assets. Based on the primary
characteristics of the various types of asset-backed securities, for purposes of
each Fund's concentration policy, each of the Funds has selected the following
asset-backed securities industries: credit card receivables, automobile
receivables, trade receivables and diversified financial assets, and each Fund
will limit its investments in each such industry to less than 25% of its total
assets.
MONEY MARKET SECURITIES. Money market securities are high-quality, short-term
debt securities that may be issued by entities such as the U.S. Government,
corporations and financial institutions (like banks). Money market securities
include commercial paper, certificates of deposit, banker's acceptances and time
deposits.
REPURCHASE AGREEMENTS. Repurchase agreements involve a Fund buying securities
(usually U.S. Government securities) from a seller and simultaneously agreeing
to sell them back at an agreed-upon price (usually higher) and time. There are
risks that losses will result if the seller does not perform as agreed.
LENDING. Loans of portfolio securities made by a Fund will be fully
collateralized and will be marked-to-market daily.
QUALITY OF INVESTMENTS. The Funds will invest in investment-grade quality
securities. Investment-grade quality includes securities that are rated in one
of the four highest rating categories by any nationally recognized statistical
rating organization (NRSRO). When securities are unrated, the Investment Manager
may deem them to be of comparable quality pursuant to guidelines adopted by the
Board of Trustees. Should a security's investment-grade quality change after
purchase by a Fund, the Investment Manager would take such action, including no
action, as determined to be in the best interest of the Fund by the Board of
Trustees. For more information about the ratings assigned by some NRSROs, refer
to the Appendix section of the SAI.
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<PAGE> 41
RISK FACTORS FOR CALIFORNIA MUNICIPAL SECURITIES. In addition to general
economic pressures which affect the State of California's (the "State") ability
to raise revenues to meet its financial obligations, certain State
constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could also result in the
adverse effects described below. The following information is only a brief
summary, is not a complete description and is based on information drawn from
official statements and prospectuses relating to securities offerings of the
State that have come to the attention of the Trust and were available before the
date of this SAI. The Trust has not independently verified the accuracy and
completeness of the information contained in those statements and prospectuses.
As used in this section, "California Municipal Securities" includes issues that
are secured by a direct payment obligation of the State and obligations of
issuers that rely in whole or in part on State revenues for payment of their
obligations. Property tax revenues and part of the State's General Fund surplus
are distributed to counties, cities and their various taxing entities; whether
and to what extent a portion of the State's General Fund will be distributed in
the future to them is unclear.
Overview. After suffering through a severe recession, since the start of 1994
California's economy has been on a steady recovery. The rate of economic growth
in California in 1996, in terms of job gains, exceeded that of the rest of the
United States. The State added nearly 350,000 jobs during 1996, surpassing its
pre-recession employment peak of 12.7 million jobs. Another 380,000 jobs are
expected to be created in 1997. The unemployment rate, while still higher than
the national average, fell to the low 6 percent range in mid-1997, compared to
over 10 percent during the recession. Many of the new jobs were created in such
industries as computer services, software design, motion pictures and high
technology manufacturing. Business services, export trade and other
manufacturing also experienced growth. All major economic regions of the State
grew, with particularly large gains in the Silicon Valley region of Northern
California.
The recession seriously affected State tax revenues and caused an increase in
expenditures for health and welfare programs. As a result, from the late 1980s
through 1992-1993, the State experienced recurring budget deficits. During this
period, expenditures exceeded revenues in four out of six years, and the State
accumulated a budget deficit of about $2.8 billion at its peak at June 30, 1993.
One consequence of the large budget imbalances was to significantly reduce the
State's available cash resources and force the State to use a series of external
borrowings to meet its cash needs. With the end of the recession, the State's
financial condition has improved in the 1995-96 and 1996-97 fiscal years, with a
combination of better than expected revenues, slowdown in growth of social
welfare programs, and continued spending restraint. As of June 30, 1997, the
State's budget reserve had a positive cash balance of $281 million. No deficit
borrowing has occurred at the end of the last two fiscal years and the State's
cash flow borrowing was limited to $3 billion in 1996-1997.
As a result of the deterioration in the State's budget and cash situation, the
State's credit ratings have been reduced. Since October 1992, all three major
nationally recognized statistical rating organizations lowered the State's
general obligation bond rating from the highest ranking of "AAA." The State's
general obligation bonds are now rated "A+" by Standard and Poor's Corporation
("S&P"), "A1" by Moody's Investors Service, Inc. ("Moody's") and "A+" by Fitch
Investors Service, Inc. ("Fitch").
State Appropriations Limit. Subject to certain exceptions, the State is subject
to an annual appropriations limit imposed by its Constitution on "proceeds of
taxes." Various expenditures, including but not limited to debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
1995-1996 FISCAL YEAR
Revenues. The 1995-1996 Budget Act projected General Fund revenues and transfers
of $44.1 billion, a 3.5% increase from 1994-1995. The 1995-1996 Budget Act
projected that the General Fund would end the 1995-1996 fiscal year with a
slight surplus of $28 million at June 30, 1996, and that all of the accumulated
budget deficits will have been
4
<PAGE> 42
repaid. In May 1996, the State Department of Finance updated the 1995-1996
projections, and estimated that there would be revenues and transfers of about
$46.1 billion but, due to increased expenditures, there would instead be a
deficit of about $70 million in the budget reserve at June 30, 1996. Principal
features of the 1995-1996 Budget Act included an increase in Proposition 98
funding for K-14 schools of about $1.2 billion, reductions in health and welfare
costs of about $900 million (about $500 million of which depends upon federal
legislative approval), and receipt of an additional $494 million in federal aid
for costs of illegal immigrants (above commitments already made by the federal
government; only $31 million of this was received in 1995-1996). Special Fund
revenues were estimated at $12.7 billion.
Expenditures. The 1995-1996 Budget Act projected General Fund expenditures of
$43.4 billion, a 4% increase from 1994-1995. Special Fund expenditures of $13
billion have been appropriated. The May 1996 State Department of Finance
revisions projected that expenditures for 1995-1996 would increase to about
$45.4 billion.
1996-97 FISCAL YEAR
The Governor's proposed budget for 1996-1997 projected General Fund revenues and
transfers of about $45.6 billion and proposed total General Fund appropriations
of about $45.2 billion. The Governor's proposed budget renewed a proposal, which
had been rejected by the Legislature in 1995, for a 15% cut in personal and
corporate tax rates, phased in over a three-year period. In May 1996, the State
Department of Finance updated revenue estimates to $47.1 billion for 1996-1997,
assuming enactment of the Governor's proposed tax cut, and expenditure estimates
to $46.5 billion.
Revenues. The 1996-1997 Budget Act, enacted on July 15, 1996, rejected the
Governor's proposed 15% tax cut (but did include a 5% cut in bank and
corporation taxes). Consequently, revenues for 1996-1997 were increased to an
estimated $47.6 billion. Special fund revenues are estimated to be $13.3
billion. The 1996-1997 Budget Act appropriated a budget reserve of $305 million
at June 30, 1997. This budget reserve assumed savings of about $660 million in
the State's health and welfare costs based on changes to federal law, including
welfare reform. The federal welfare reform legislation passed in August 1996 is
projected to provide only about $360 million of the assumed $660 million in
savings, however, subject to further adjustment based on how the State
implements changes to its welfare system. Other principal features of the
1996-1997 Budget Act include an increase in Proposition 98 funding for K-14
schools of about $1.6 billion, and about $700 million in new federal aid for
costs of illegal immigrants (with about $540 million to be received during
1996-1997).
Expenditures. The 1996-1997 Budget Act included General Fund appropriations of
about $47.2 billion, a 4% increase over the final estimated 1995-1996
expenditures. Special Fund expenditures were budgeted at $12.6 billion.
1997-98 FISCAL YEAR
Revenues. The 1997-1998 Budget Act anticipates General Fund revenues and
transfers of $52.5 billion (a 6.8 percent increase over the final 1996-1997
levels) and Special Fund revenues of $14.0 billion. Following enactment of the
Budget Act, the State implemented its annual cash flow borrowing program,
issuing $3 billion of notes which mature on June 30, 1998.
Expenditures. The 1997-1998 Budget includes General Fund expenditures of $52.8
billion (an 8.0 percent increase from the 1996-1997 levels). Special Fund
expenditures of $14.4 billion, and $2.1 billion of expenditures from various
Bond Funds. On a budgetary basis, the budget reserve is projected to decrease
from $408 million at June 30, 1997 to $112 million at June 30, 1998. The 1997-98
Budget Act increases funding for K-14 education, reflects a $1.235 billion
pension case judgment payment, increases funding for the University of
California and California State University and continues most other State
programs at 1996-1997 levels. Unlike prior years, this Budget Act does not
depend on uncertain federal budget actions.
Subsequent to the adoption and signature of the Budget Act, the Governor and
Legislature reached certain agreements related to State expenditures and taxes,
including, on an annual basis, support for a $931 million tax cut
5
<PAGE> 43
(by full implementation in the 1999-2000 fiscal year) aimed primarily at middle
income families but also including businesses, and for $480 million to provide
health insurance for uninsured children, $450 million to pay for county courts,
$300 million for pay raises for state employees, and $52 million tuition cuts
for California public universities and community colleges. These agreements
mostly will affect budgets in future fiscal years and their impact on the
State's budget and the State's support for local government is uncertain.
The foregoing discussion of the 1995-1996, 1996-1997 and 1997-1998 Budgets is
based upon the Budget Acts for these years, and should not be construed as a
statement of fact. The assumptions used to construct a budget, which include
estimates and projections of revenues and expenditures, may be affected by
numerous factors, including future economic conditions in the State and the
Nation. There can be no assurances that any estimates will be achieved.
ISSUES AFFECTING LOCAL GOVERNMENTS AND SPECIAL DISTRICTS IN CALIFORNIA.
Proposition 13. Certain California Municipal Securities may be obligations of
issuers that rely in whole or in part on ad valorem real property taxes as a
source of revenue. In 1978, California voters approved Proposition 13, which
limits ad valorem taxes on real property and restricts the ability of taxing
entities to increase property tax and other tax revenues.
With certain exceptions, the maximum ad valorem tax on real property is limited
to 1% of the full cash value to be collected by the counties and apportioned
according to law. One exception is for debt service on bonded indebtedness if
such is approved by two-thirds of the votes cast by voters voting on the
proposition. The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by substantial damage, destruction or other factors, or adjusted when
there is a "change in ownership" or "new construction."
Proposition 62. This initiative, approved by voters in 1986, placed further
restrictions on the ability of local governments to raise taxes and allocate
approved tax revenues. Although some of the California Courts of Appeal held
that parts of Proposition 62 were unconstitutional, the California Supreme Court
recently issued a decision that upheld Proposition 62's requirement that special
taxes be approved by a two-thirds vote of the voters voting in an election on
the issue. This recent decision may invalidate other taxes that have been
imposed by local governments in California and make it more difficult for local
governments to raise taxes.
Propositions 98 and 111. These initiatives changed the State appropriations
limit and State funding of public education below the university level by
guaranteeing K-14 schools a minimum share of General Fund revenues. The
initiatives require that the State establish a prudent state reserve fund for
public education.
Proposition 218. Passed in November 1996, this initiative places additional
limitations on the ability of California local governments to increase or impose
general taxes, special assessments, and many fees by requiring voter approval of
such items. General taxes and many assessments and fees that were passed without
public approval after 1994 and before November 6, 1996 must now be approved by
voters by either July 1, 1997 or November 6, 1998 to continue in effect.
Appropriations Limit. Local governmental entities are also subject to annual
appropriations limits. If a local government's revenues in any year exceed the
amount permitted to be spent, the excess must be returned to the public through
a revision of tax rates or fee schedules over the following two years.
Conclusion. The effect of these constitutional and statutory changes and of
budget developments on the ability of California issuers to pay interest and
principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds are generally less affected). There is no assurance that any
California issuer will make full or timely payments of principal or interest or
remain solvent. For example, in December 1994, Orange County filed for
bankruptcy. The California Municipal Bond Funds' concentration in California
Municipal Securities provides a greater level of risk than a fund that is
diversified across numerous states and municipal entities.
6
<PAGE> 44
ADDITIONAL RISK FACTORS FOR CALIFORNIA MUNICIPAL SECURITIES.
Mortgages and Deeds of Trust. The California Municipal Bond Funds may invest in
issues which are secured in whole or in part by mortgages or deeds of trust on
real property. California law limits the remedies of a creditor secured by a
mortgage or deed of trust, which may result in delays in the flow of revenues to
an issuer.
Lease Financings. Some local governments and districts finance certain
activities through lease arrangements. It is uncertain whether such lease
financings are debt that require voter approval.
Seismic Risk. It is impossible to predict the time, magnitude or location of a
major earthquake or its effect on the California economy. In January 1994, a
major earthquake struck Los Angeles, causing significant damage to structures
and facilities in a four county area. The possibility exists that another such
earthquake could create a major dislocation of the California economy.
INVESTMENT RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund to which
they apply.
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 California Long Term Tax-Free 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 California
Short/Intermediate Tax-Free Fund, Long Term Tax-Free Fund and Short-Intermediate
Tax-Free 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. 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 net assets in
illiquid securities, including repurchase agreements with maturities in excess
of seven days.
4) Purchase or retain securities of an issuer if any of the
officers, trustees or directors of the Trust or the Investment Manager
individually own beneficially more than 1/2 of 1% of the securities of such
issuer and together beneficially own more than 5% of the securities of such
issuer.
5) Purchase or sell commodities or real estate, including
interests in real estate limited partnerships, provided that each Fund may (i)
purchase securities of companies that deal in real estate or interests therein,
and (ii) purchase or sell futures contracts, options contracts, equity index
participations and index participation contracts.
6) Invest for the purpose of exercising control or management of
another issuer.
7
<PAGE> 45
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
10% of its net assets.
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.
The following restrictions are non-fundamental and may be changed by the Board
of Trustees.
EACH FUND MAY NOT:
1) Purchase more than 10% of any class of securities of any
issuer if, as a result of such purchase, it would own more than 10% of such
issuer's outstanding voting securities.
2) Invest more than 5% of its total assets in securities of
issuers (other than obligations of, or guaranteed by the U.S. Government, its
agencies or instrumentalities) that with their predecessors have a record of
less than three years continuous operation.
3) Purchase securities that would cause more than 5% of its net
assets to be invested in restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that
have been determined to be liquid under procedures adopted by the Trust's Board
of Trustees based upon the trading markets for the securities.
4) Invest more than 5% of its net assets in warrants, valued at
the lower of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the American
Stock Exchange, provided, however, that for purposes of this restriction,
warrants acquired by a Fund in units or attached to other securities are deemed
to be without value.
5) Purchase puts, calls, straddles, spreads or any combination
thereof if by reason of such purchase the value of its aggregate investment in
such securities would exceed 5% of the Fund's total assets.
6) Make short sales, except for short sales against the box.
7) Purchase or sell interests in oil, gas or other mineral
development programs or leases, although it may invest in companies that own or
invest in such interests or leases.
8) Purchase securities on margin, except such short-term credits
as may be necessary for the clearance of purchases and sales of securities.
8
<PAGE> 46
9) Purchase securities the income of which is subject to federal
alternative minimum tax if, by reason of such purchase, the total income earned
by such securities would exceed 20% of all income earned by the Fund.
10) Purchase an unrated security, if, as a result, more than 20%
of its net assets would be invested in unrated securities.
11) Invest more than 25% of its total assets in when-issued and
delayed-delivery securities, or purchase such securities for speculative
purposes.
9
<PAGE> 47
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The Officers and Trustees of the Trust, their principal
occupations over the past five years and their affiliations, if any, with The
Charles Schwab Corporation, Schwab and Charles Schwab Investment Management,
Inc., the Investment Manager, are as follows:
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Chief Executive Officer and Director,
July 29, 1937 The Charles Schwab Corporation; Chairman and
Director, Charles Schwab & Co., Inc. and Charles
Schwab Investment Management, Inc.; Chairman
and Director, The Charles Schwab Trust Company;
Chairman and Director (current board positions),
and Chairman (officer position) until December
1995, Mayer & Schweitzer, Inc. (a securities
brokerage subsidiary of The Charles Schwab
Corporation); Director, The Gap, Inc. (a clothing
retailer), Transamerica Corporation (a financial
services organization), AirTouch Communications
(a telecommunications company) and Siebel Systems
(a software company).
TIMOTHY F. McCARTHY* President and Trustee Executive Vice President and President -
September 19, 1951 Financial Products and International Group,
Charles Schwab & Co., Inc.; Executive Vice
President - President, Financial Products and
International Group, the Charles Schwab
Corporation; Chief Executive Officer,
Charles Schwab Investment Management, Inc.; Vice
Chairman and Chief Operating Officer, Charles Schwab
Limited; Director, Mayer & Schweitzer. 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.
</TABLE>
10
<PAGE> 48
<TABLE>
<S> <C> <C>
DONALD F. DORWARD Trustee Executive Vice President and Managing Director,
September 23, 1931 Grey Advertising. From 1990 to 1996, Mr.
Dorward was President and Chief Executive
Officer, Dorward & Associates. Dorward &
Associates is an advertising and
marketing/consulting firm.
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. Semloh Financial is an
international financial services and investment
advisory firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co.
June 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 Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air
transportation, real estate investment and
management, and investments).
TAI-CHIN TUNG Treasurer and Principal Vice President - Finance, Charles Schwab & Co.,
March 7, 1951 Financial Officer Inc.; Controller, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Ms. Tung
was Controller for Robertson Stephens Investment
Management, Inc. From 1993 to 1994, she was
Vice President of Fund Accounting, Capital
Research and Management Co. Prior to 1993, Ms.
Tung was Senior Vice President of the Sierra
Funds and Chief Operating Officer of Great
Western Financial Securities.
</TABLE>
11
<PAGE> 49
<TABLE>
<S> <C> <C>
WILLIAM J. KLIPP* Executive Vice Executive Vice President, SchwabFunds(R), Charles
December 9, 1955 President, Chief Schwab & Co., Inc.; President and Chief
Operating Officer and Operating Officer, Charles Schwab Investment
Trustee Management, Inc. Prior to 1993, Mr. Klipp was
Treasurer of Charles Schwab & Co., Inc. and
Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Vice President, Chief Counsel, Chief Compliance
September 9, 1955 Officer and Assistant Corporate Secretary,
Charles Schwab Investment Management, Inc.
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel, Charles
October 14, 1960 Schwab Investment Management, Inc. From 1991 to
1992, he was Assistant Secretary for the
Franklin Group of Mutual Funds and Assistant
Corporate Counsel for Franklin Resources, Inc.
KAREN L. SEAMAN Assistant Secretary Corporate Counsel, Charles Schwab Investment
February 27, 1968 Management, Inc. From October 1994 to July
1996, she was an Attorney for Franklin
Resources, Inc. Prior to 1994, Ms. Seaman was
an Attorney for The Benham Group.
MATTHEW O'TOOLE Assistant Secretary Corporate Counsel, Charles Schwab Investment
September 26, 1964 Management, Inc. From November 1995 to April
1997, Mr. O'Toole was Assistant General Counsel
for Chancellor LGT Asset Management, Inc. Prior
there to, Mr. O'Toole was Senior Counsel at the
U.S. Securities and Exchange Commission in
Washington, D.C.
</TABLE>
Each of the above-referenced Officers and/or Trustees also serves in the same
capacity as described for the Trust for The Charles Schwab Family of Funds,
Schwab Capital Trust and Schwab Annuity Portfolios. The address of each
individual listed above is 101 Montgomery Street, San Francisco, California
94104.
- ----------
* This Trustee is an "interested person" of the Trust.
12
<PAGE> 50
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or
----------
Retirement Benefits Estimated Annual
------------------- ----------------
Accrued as Part of Benefits upon Total
------------------ ------------- -----
Aggregate Fund Expenses Retirement from Compensation from
--------- ------------- --------------- -----------------
Name of Person, Compensation from from the Fund the Fund the Fund Complex(2)
- --------------- ------------------ ----------------- -------- -------------------
Position the Trust Complex(2) Complex(2)
- -------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Timothy F. McCarthy , 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice President,
Chief Operating Officer
and Trustee
Donald F. Dorward, [xxxx] N/A N/A [xxxxx]
Trustee
Robert G. Holmes, [xxxx] N/A N/A [xxxxx]
Trustee
Donald R. Stephens, [xxxx] N/A N/A [xxxxx]
Trustee
Michael W. Wilsey, [xxxx] N/A N/A [xxxxx]
Trustee
</TABLE>
1. Figures are as of August 31, 1997.
2. Fund Complex comprises all 30 funds in the Trust, The Charles Schwab
Family of Funds, Schwab Capital Trust and Schwab Annuity Portfolios.
13
<PAGE> 51
TRUSTEE DEFERRED COMPENSATION PLAN
Pursuant to exemptive relief received by the Trust from the Securities and
Exchange Commission (the "SEC"), the Trust may enter into deferred fee
arrangements (the "Fee Deferral Plan" or the "Plan") with the Trust's Trustees
who are not "interested persons" of any of the Funds of the Trust (the
"Independent Trustees" or the "Trustees").
As of the date of this SAI, none of the Independent Trustees has elected to
participate in the Fee Deferral Plan. In the event an Independent Trustee does
elect to participate in the Plan, the Plan would operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book reserve
account established by the Trust (the "Deferred Fee Account") as of the date
such fees would have been paid to such Trustee. The value of the Deferred Fee
Account as of any date will be equal to the value the Account would have had as
of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the SchwabFund or SchwabFunds(R) selected by the
participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, The Charles
Schwab Family of Funds 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. The exemptive relief granted to the Trust permits the Funds and the
Trustees to purchase the Selected SchwabFund Securities, which transactions
would otherwise be limited or prohibited by the investment policies and/or
restrictions of the Funds. See "Investment Restrictions."
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the SchwabFunds Family(R),
a family of __ mutual funds with over $__ billion in assets as of ______. The
Investment Manager is an affiliate of Schwab, the Trust's distributor; the
shareholder services agent; and the transfer agent.
The Advisory Agreement will continue in effect until May 20, 1998, with respect
to each Fund, and thereafter will continue for one year terms subject to annual
approval by: (1) the Trust's Board of Trustees or (2) a vote of a majority (as
defined in the 1940 Act) of the outstanding voting securities of a Fund. In
either event, the continuance must also be approved by a majority of the Trust's
Board of Trustees who are not parties to the Agreement or interested persons (as
defined in the 1940 Act) of any such party by vote cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated at any time upon 60 days' notice by either party, or by a majority
vote of the outstanding shares of a Fund, and will terminate automatically upon
assignment.
The Advisory Agreement entitles the Investment Manager to receive an annual fee,
payable monthly from each Fund of 0.41% of each Fund's net assets. The
Investment Manager and Schwab have voluntarily agreed to guarantee at least
through December 31, 1998 that total operating expenses (excluding ....) will
not exceed 0.49% of each Fund's average net assets.
For the fiscal years ended August 31, 1995, 1996 and 1997, the investment
advisory fees incurred by the Long Term Tax-Free Fund were $89,000 (fees were
reduced by $80,000), $102,000 (fees were reduced by $75,000) and $___,___ (fees
were reduced by $__,___), respectively.
14
<PAGE> 52
For the fiscal years ended August 31, 1995, 1996 and 1997, the investment
advisory fees incurred by the Short/Intermediate Tax-Free Fund were $97,000
(fees were reduced by $130,000), $131,000 (fees were reduced by $85,000) and
$___,___ (fees were reduced by $__,___), respectively.
For the fiscal years ended August 31, 1995, 1996 and 1997, the investment
advisory fees incurred by the California Long Term Tax-Free Fund were $245,000
(fees were reduced by $130,000), $297,000 (fees were reduced by $104,000) and
$___,___ (fees were reduced by $___,___), respectively.
For the fiscal years ended August 31, 1995, 1996 and 1997, the investment
advisory fees incurred by the California Short/Intermediate Tax-Free Fund were
$77,000 (fees were reduced by $94,000), $118,000 (fees were reduced by $57,000)
and $___,___ (fees were reduced by $__,____), respectively.
From time to time, each Fund may compare its total operating expense ratio to
the total operating expense ratio of other mutual funds or mutual fund averages
with similar investment objectives as reported by Lipper Analytical Service,
Inc., Morningstar, Inc. or other independent sources of such information
("independent sources").
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of the Trust and is the Trust's agent for the purpose of the continuous
offering of the Funds' shares. Each Fund pays the cost of the prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective investors and for supplementary sales
literature and advertising. Schwab receives no fee under the Distribution
Agreement. Terms of continuation, termination and assignment under the
Distribution Agreement are identical to those described above with respect to
the Advisory Agreement.
CUSTODIAN AND FUND ACCOUNTANT
PNC Bank, National Association, at the Airport Business Center, 200 Stevens
Drive, Suite 440, Lester, Pennsylvania 19113, serves as Custodian for the Trust.
PFPC, Inc., at 103 Bellevue Parkway Wilmington, Delaware 19809, serves as Fund
Accountant for the Trust.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
Brokerage Commissions. The Funds paid no brokerage commissions for each such
Fund's last three fiscal years.
PORTFOLIO TURNOVER
A Fund's portfolio turnover rate will vary from year to year depending on market
conditions and purchase and redemption patterns of a Fund's shareholders. A
turnover rate of 100% means that all portfolio securities (aside from short-term
securities) were sold and replaced once during a period of one year. Typically,
funds with high turnover (like 100% or more) tend to generate higher capital
gains and transaction costs, such as brokerage commissions.
From time to time, each Fund may compare its portfolio turnover rate with that
of other mutual funds as reported by independent sources.
15
<PAGE> 53
The portfolio turnover rates for the Long Term Tax-Free Fund for the fiscal
years ended August 31, 1996 and 1997 were 50% and __%, respectively. The
portfolio turnover rates for the Short/Intermediate Tax-Free Fund for the fiscal
years ended August 31, 1996 and 1997 were 44% and __%, respectively.
The portfolio turnover rates for the California Long Term Tax-Free Fund for the
fiscal years ended August 31, 1996 and 1997 were 36% and __%, respectively. The
portfolio turnover rates for the California Short/Intermediate Tax-Free Fund for
the fiscal years ended August 31, 1996 and 1997 were 20% and __%, respectively.
TAXES
FEDERAL INCOME TAX
Each Fund intends to qualify for taxation as a "regulated investment company" by
meeting the requirements of Subchapter M of the Code. By following this policy,
each Fund expects to eliminate or reduce to a nominal amount the federal income
tax to which it is subject.
In order to qualify as a regulated investment company, each Fund must, among
other things, (1) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks, securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
for taxable years beginning on or before August 5, 1997, derive less than 30% of
its gross income from gains from the sale or other disposition of certain assets
(including stocks and securities) held for less than three months; and (3)
diversify its holdings so that at the end of each quarter of its taxable year
(i) at least 50% of the market value of the Fund's total assets is represented
by cash or cash items, U.S. Government securities, securities of other regulated
investment companies and other securities limited, in respect of any one issuer,
to a value not greater than 5% of the value of the Fund's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities or securities of any other regulated
investment company) or of two or more issuers that the Fund controls, within the
meaning of the Code, and that are engaged in the same, similar or related trades
or businesses.
These requirements may restrict the degree to which a Fund may engage in certain
hedging transactions and may limit the range of a Fund's investments. If a Fund
qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, which it distributes to shareholders, provided that the Fund
meets certain minimum distribution requirements. To comply with these
requirements, a Fund must distribute at least (a) 90% of its "investment company
taxable income" (as that term is defined in the Code) and (b) 90% of the excess
of its (i) tax-exempt interest income over (ii) certain deductions attributable
to that income (with certain exceptions), for its taxable year. Each Fund
intends to make sufficient distributions to shareholders to meet these
requirements.
The Code imposes a non-deductible excise tax on regulated investment companies
that do not distribute in a calendar year (regardless of whether they otherwise
have a non-calendar taxable year) an amount equal to 98% of their "ordinary
income" (as defined in the Code) for the calendar year plus 98% of their capital
gain net income for the one-year period ending on October 31 of such calendar
year, plus any undistributed amounts from prior years. For the foregoing
purposes, a Fund is treated as having distributed any amount on which it is
subject to income tax for any taxable year ending in such calendar year. If the
distributions during a calendar year are less than the required amount, the Fund
is subject to a non-deductible excise tax equal to 4% of the deficiency.
Any dividends declared by the Funds in October, November or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder
16
<PAGE> 54
on December 31 of the year declared. A Fund may adjust its schedule for the
reinvestment of distributions for the month of December to assist in complying
with the reporting and minimum distribution requirements of the Code.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." This "backup withholding" is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
A Fund's transactions in futures contracts and options and certain other
investment and hedging activities are subject to special tax rules. In a given
case, these rules may accelerate income to a Fund, defer its losses, cause
adjustments in the holding periods of the Fund's assets, convert short-term
capital losses into long-term capital losses or otherwise affect the character
of the Fund's income. These rules could therefore affect the amount, timing and
character of distributions to shareholders. Income earned as a result of these
transactions would, in general, not be eligible for the corporate dividends
received deduction when distributed to corporate shareholders. The Funds will
endeavor to make any available elections pertaining to these transactions in a
manner believed to be in the best interest of the Funds and their shareholders.
The foregoing discussion relates only to federal income tax law as applicable to
U.S. citizens or residents. Foreign shareholders (i.e., nonresident alien
individuals and foreign corporations, partnerships, trusts and estates) are
generally subject to U.S. withholding tax at the rate of 30% (or a lower tax
treaty rate) on distributions derived from net investment income and short-term
capital gains. Distributions to foreign shareholders of long-term capital gains
and any gains from the sale or other disposition of shares of the Funds are
generally not subject to U.S. taxation, unless the recipient is an individual
who meets the Code's definition of "resident alien." Different tax consequences
may result if the foreign shareholder is engaged in a trade or business within
the United States. In addition, the tax consequences to a foreign shareholder
entitled to claim the benefits of a tax treaty may be different than those
described above. Distributions by a Fund may also be subject to state, local and
foreign taxes, and their treatment under applicable tax laws may differ from the
federal income tax treatment.
The Code permits a regulated investment company that invests at least 50% of its
assets at the close of each quarter in Municipal Securities to pass through to
its investors, on a tax-exempt basis, net Municipal Securities interest income.
An exempt-interest dividend is any dividend or part thereof (other than a
capital gain dividend) paid by a Fund and designated as an exempt-interest
dividend in a written notice mailed to shareholders after the close of such
Fund's taxable year, but not to exceed in the aggregate the net Municipal
Securities interest income received by each such Fund during the taxable year.
The percentage of the total dividends paid during any taxable year that is
designated as exempt-interest dividends will be uniform throughout such year for
all shareholders receiving dividends from each Fund during such year, and may
differ from the percentage of exempt income actually received by a Fund during
the period for which the Shares were held. If for any taxable year a Fund does
not qualify for the special federal tax treatment afforded regulated investment
companies, all of its taxable income will be subject to federal tax at regular
corporate rates (without any deduction for distributions to its shareholders)
when distributed, and Municipal Securities interest income, although not taxed
to the Funds, would be taxable to shareholders. To the extent dividends paid to
shareholders are derived from taxable interest or short-term or long-term
capital gains, such dividends will be subject to federal income tax whether such
dividends are paid in the form of cash or additional shares.
A shareholder should consult his or her own tax adviser with respect to whether
exempt-interest dividends would be excludable from gross income if the
shareholder were treated as a "substantial user" of facilities financed by an
obligation held by either Fund or a "related person" to such user under the
Code. Any loss on the sale or exchange of any share held for six months or less
will be disallowed to the extent of the amount of the exempt-interest dividend
received with respect to such share. The U.S. Treasury Department is authorized
to issue regulations reducing the period to not less than 31 days for certain
regulated investment companies. No such regulations have been issued as of the
date of this SAI.
17
<PAGE> 55
All or part of interest on indebtedness incurred or continued by a shareholder
to purchase or carry shares of a Fund will not be deductible by the shareholder.
The portion of interest that is not deductible is equal to the total interest
paid or accrued on the indebtedness multiplied by the percentage of that Fund's
total distributions (excluding distributions of the excess of net long-term
capital gains over net short-term capital losses) paid to the shareholder that
are exempt-interest dividends. Under rules used by the Internal Revenue Service,
the purchase of shares of a Fund may be considered to have been made with
borrowed funds even though such funds are not directly traceable to the purchase
of the shares.
The discussion of federal income taxation presented above summarizes only some
of the important federal tax considerations generally affecting purchasers of
Fund shares. No attempt has been made to present a detailed explanation of the
federal income tax treatment of a Fund and its shareholders, and the discussion
is not intended as a substitute for careful tax planning. Accordingly,
prospective investors (particularly those not residing or domiciled in the
United States) should consult their own tax advisers regarding the consequences
of investing in a Fund.
STATE OF CALIFORNIA TAXES
With respect to the California Long Term Tax-Free Fund and the California
Short/Intermediate Tax-Free Fund (the California Tax-Free Funds), if, at the
close of each quarter of its taxable year, at least 50% of the value of the
total assets of a Fund consists of obligations the interest on which, if held by
an individual, would be exempt from California personal income taxation under
the laws of California ("California Exempt Obligations"), then the Fund will be
qualified to pay dividends exempt from State of California personal income tax
to its non-corporate shareholders (hereinafter referred to as "California
exempt-interest dividends"). The California Tax-Free Funds intend to qualify
under the above requirement so that they can pay California exempt-interest
dividends. If a California Tax-Free Fund fails to so qualify, none of its
dividends will be exempt from State of California personal income tax.
Not later than 60 days after the close of its taxable year, each California
Tax-Free Fund will notify each shareholder of the portion of the dividends paid
by it to the shareholder with respect to such taxable year which is a California
exempt-interest dividend. The total amount of California exempt-interest
dividends paid by a California Tax-Free Fund to all of its shareholders with
respect to any taxable year cannot exceed the amount of interest received by the
Fund during such year on California Exempt Obligations, less any expenses or
expenditures (including any expenditures attributable to the acquisition of
additional securities for the California Tax-Free Funds) that are deemed to have
been paid from such interest. Dividends paid by the California Tax-Free Funds in
excess of this limitation will be subject to State of California personal income
tax. For purposes of this limitation, expenses or other expenditures paid during
any year generally will be deemed to have been paid with funds attributable to
interest received by the Fund from California Exempt Obligations for such year
in the same ratio as such interest from California Exempt Obligations for such
year bears to the total gross income earned by the Fund for the year. The effect
of this accounting convention is that amounts of interest from California Exempt
Obligations received by the California Tax-Free Funds that would otherwise be
available for distribution as California exempt-interest dividends will be
proportionately reduced by the expenses and expenditures deemed to have been
paid from such amounts.
To the extent, if any, dividends paid to shareholders are derived from long-term
and short-term capital gains, such dividends will not constitute California
exempt-interest dividends. Rules similar to those regarding the treatment of
such dividends for federal income tax purposes are also applicable for State of
California personal income tax purposes. Moreover, interest on indebtedness
incurred by a shareholder to purchase or carry shares of a California Tax-Free
Fund is not deductible for State of California personal income tax purposes if
the Fund distributes California exempt-interest dividends to the shareholder
during his or her taxable year.
The foregoing is a summary of only some of the important State of California
personal income tax considerations generally affecting the California Tax-Free
Funds and their shareholders. No attempt is made to present a detailed
explanation of the State of California personal income tax treatment of the
California Tax-Free Funds or their shareholders, and this discussion is not
intended as a substitute for careful planning. Further, it should be noted that
the portions of the California Tax-Free Funds' dividends constituting California
exempt-interest dividends are
18
<PAGE> 56
excludable from income for State of California personal income tax purposes
only. Any dividends paid to shareholders of the California Tax-Free Funds
subject to State of California franchise or corporate income tax will be taxed
as ordinary dividends to such shareholders, notwithstanding that all or a
portion of such dividends are exempt from State of California personal income
tax. Accordingly, potential investors in the California Tax-Free Funds,
including, in particular, corporate investors that may be subject to California
franchise or corporate income tax, should consult their tax advisers with
respect to the application of such tax to the receipt of the California Tax-Free
Funds' dividends and as to their own State of California tax situation, in
general.
SHARE PRICE CALCULATION
Each Fund's net asset value per share (NAV) is determined each day the New York
Stock Exchange (NYSE) is open for trading as of the close of the NYSE,
generally. Currently, the NYSE is closed on the following holidays in 1997: New
Year's Day, Dr. Martin Luther King Jr.'s Birthday (observed), Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
On any day that the New York Stock Exchange or principal government securities
markets close early, such as days in advance of holidays, the Funds reserve the
right to advance the time by which purchase, redemption and exchange orders must
be received on that day.
The Funds value their portfolio securities daily based on their fair value.
Investments in mutual funds are valued at their respective net asset values, as
determined by those Funds. Securities traded on stock exchanges are valued at
the last quoted sales price on the exchange on which such securities are
primarily traded, or, lacking any sales, at the mean between the bid and ask
prices. Securities traded in the over-the-counter market are valued at the last
sales price that day, or if no sales that day, at the mean between the bid and
ask prices. In addition, securities that are primarily traded on foreign
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges with these values then translated into
U.S. dollars at the current exchange rate. Foreign securities for which the
closing values are not readily available are valued at fair value as determined
in good faith pursuant to the Board of Trustees guidelines. Securities for which
market quotations are not readily available (including restricted securities
that are subject to limitations on their sale) are valued at fair value as
determined in good faith pursuant to the Trust's Board of Trustees guidelines.
Securities may be valued on the basis of prices provided by pricing services
when such prices are believed to reflect fair market value.
From time to time, each Fund may report its NAV over a specified period. Each
Fund's NAV, for the periods set forth, may be compared to NAVs of other mutual
funds with similar investment objectives as reported by independent sources.
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<PAGE> 57
TOTAL RETURN AND YIELD
STANDARDIZED TOTAL RETURN
Average annual total return for a period is determined by calculating the actual
dollar amount of investment return on a $1,000 investment in a Fund made at the
beginning of the period, then calculating the average annual compounded rate of
return that would produce the same investment return on the $1,000 over the same
period. In computing average annual total return, a Fund assumes the
reinvestment of all distributions at net asset value on applicable reinvestment
dates.
<TABLE>
<CAPTION>
Average annual Average annual total Average annual total return
-------------- -------------------- ---------------------------
total return for return for 5 years from commencement of
---------------- ------------------ --------------------
1 year ended ended August 31, 1997 operations to August 31,
------------- --------------------- ------------- ----------
August 31, 1997 1997*
--------------- -----
<S> <C> <C> <C>
Long Term Tax-Free Fund
Short/Intermediate Tax-Free Fund
California Short/Intermediate
Tax-Free Fund
California Long Term Tax-Free
Fund
</TABLE>
* April 21, 1993 for Short/Intermediate Tax-Free Fund and California
Short/Intermediate Tax-Free Fund, February 24, 1992 for California Long
Term Tax-Free Fund and September 11, 1992 for Long Term Tax-Free Fund.
NONSTANDARDIZED TOTAL RETURN
Nonstandardized total return for a Fund differs from standardized total return
in that it relates to periods other than the period for standardized total
return and/or that it represents aggregate (rather than average) total return.
A Fund may also advertise its cumulative total return since inception. This
number is calculated using the same formula that is used for average annual
total return except that, rather than calculating the total return based on a
one-year period, cumulative total return is calculated from inception to the
date specified.
YIELD
A Fund's yield refers to the net investment income generated by a hypothetical
investment in the Fund over a specific 30-day period. This net investment income
is then annualized, which means that the net investment income generated during
the 30-day period is assumed to be generated in each 30-day period over an
annual period, and is shown as a percentage of the investment.
<TABLE>
<CAPTION>
Fund 30-day period ended August 31, 1997
- ---- ----------------------------------
<S> <C>
Long Term Tax-Free Fund
Short/Intermediate Tax-Free Fund
California Long Term Tax-Free Fund
California Short/Intermediate Tax-Free Fund
</TABLE>
20
<PAGE> 58
EFFECTIVE YIELD
A Fund's effective yield is calculated similarly, but the net investment income
earned by the investment is assumed to be compounded monthly when annualized.
The effective yield will be slightly higher than the yield due to this
compounding effect.
TAX EQUIVALENT YIELD AND TAX EQUIVALENT EFFECTIVE YIELD
The tax equivalent yield of the Funds is calculated by dividing that portion of
the applicable fund's yield (computed as described above) that is tax-exempt by
an amount equal to one minus the applicable effective tax rate, and adding the
result to that portion, if any, of the yield of the Fund that is not tax-exempt.
For the Tax-Free Funds, the maximum federal marginal rate of 39.6% is normally
used; for the California Tax-Free Funds, a combined rate of the maximum federal
marginal rate of 39.6% and the California marginal rate of 9.3% is normally
used.
Tax equivalent effective yields are computed in the same manner as tax
equivalent yields, except that effective yield is substituted for yield in the
calculation. In calculating tax equivalent yields and effective yields the
California Tax-Free Funds generally assume an effective tax rate (combining the
federal 39.6% rate and the California 9.3% rate, and assuming the taxpayer
deducts California state taxes paid) of 45.22%. The effective tax rates used in
determining such yields do not reflect the tax costs resulting from the full or
partial loss of the benefits of personal exemptions, itemized deductions and
California exemption credits that may result from the receipt of additional
taxable income by single taxpayers or married taxpayers filing jointly with
adjusted gross incomes exceeding certain levels, $121,000 ($60,000 for married
filing separate returns) in 1997. Actual tax equivalent yields and tax
equivalent effective yields may be higher for taxpayers subject to the loss of
these benefits than the rates reported by the Funds.
<TABLE>
<CAPTION>
Taxable equivalent yield for
30-day period
Fund ended August 31, 1997
---- ---------------------
<S> <C>
Long Term Tax-Free Fund %
Short/Intermediate Tax-Free Fund %
California Long Term Tax-Free Fund %
California Short/Intermediate Tax-Free Fund %
</TABLE>
TAX-EXEMPT VERSUS TAXABLE YIELD
Investors may want to determine which investment, tax-exempt or taxable, will
provide a higher after-tax return. To determine the tax equivalent yield, or tax
equivalent effective yield, simply divide the yield or effective yield of the
Funds by 1 minus your marginal federal tax rate (or combined state and federal
tax rate in the case of the California Tax-Free Funds). Note, however, that as
discussed above, full or partial loss by certain investors of the described
federal tax benefits could cause the resulting figure to understate the
after-tax return produced by the Fund in question.
From time to time, each Fund may report on the dividends paid to shareholders
over a specified period of time.
GENERAL INFORMATION
Schwab Investments (the Trust) was organized as a Massachusetts business trust
on October 26, 1990, and may issue an unlimited number of shares of beneficial
interest in one or more investment portfolios (Series or Funds). Currently,
shares of seven Funds are offered: Long Term Tax-Free Fund, California Long Term
Tax-Free Fund, Short/Intermediate Tax-Free Fund, California Short/Intermediate
Tax-Free Fund, Schwab Total Bond Market Index Fund (formerly Schwab Long-Term
Government Bond Fund), Schwab Short-Term Bond Market Index Fund (formerly Schwab
Short/Intermediate Government Bond Fund) and Schwab 1000 Fund(R). The Board of
Trustees may authorize the issuance of shares of additional Funds. There is a
remote possibility that one fund might become liable for a
21
<PAGE> 59
misstatement in the prospectus or SAI about another fund. Shares within each
Fund have equal, noncumulative voting rights and equal rights as to dividends,
assets and liquidation of such Fund.
The Trust generally is not required to hold shareholder meetings. However, as
provided in its Agreement and Declaration of Trust and Bylaws, shareholder
meetings will be held in connection with the following matters: (1) removal of
Trustees if a meeting is requested in writing by a shareholder or shareholders
who beneficially own(s) 10% or more of the Trust's shares; (2) adoption of any
contract for which shareholder approval is required by the 1940 Act; (3) any
termination of the Trust to the extent and as provided in the Declaration of
Trust; (4) any amendment of the Declaration of Trust (other than amendments
changing the name of the Trust or any of its investment portfolios, supplying
any omission, curing any ambiguity or curing, correcting or supplementing any
defective or inconsistent provision thereof); (5) determining whether a court
action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust or the shareholders, to
the same extent as the stockholders of a Massachusetts business corporation; and
(6) such additional matters as may be required by law, the Declaration of Trust,
the Bylaws or any registration of the Trust with the SEC or any state or as the
Board of Trustees may consider desirable. The shareholders also would vote upon
changes to a Fund's fundamental investment objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing Trustees and until the election and qualification of his
or her successor or until death, resignation, retirement or removal by a
majority vote of the shares entitled to vote (as described below) or of a
majority of the Trustees. In accordance with the 1940 Act, (i) the Trust will
hold a shareholder meeting for the election of Trustees when less than a
majority of the Trustees have been elected by shareholders and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
Trustee have been elected by the shareholders, that vacancy will be filled by a
vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such for at
least six months and who hold shares constituting at least 1% of the Trust's
outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more Trustees, the Trust has undertaken to
disseminate appropriate materials at the expense of the requesting shareholders.
The Bylaws provide that the presence at a shareholder meeting in person or by
proxy of at least 30% of the shares entitled to vote on a matter shall
constitute a quorum, unless otherwise provided by the 1940 Act or other
applicable law. Thus, even if less than a majority of shareholders were
represented, a meeting of the Trust's shareholders could occur. Attending
shareholders would in such case be permitted to take action not requiring the
vote of more than a majority of a quorum. Some matters requiring a larger vote
under the Declaration of Trust, such as termination or reorganization of the
Trust, and certain amendments of the Declaration of Trust, could not be decided
at such a meeting; nor could matters which under the 1940 Act require the vote
of a "majority of the outstanding voting securities" as defined in the 1940 Act.
The Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Trust (or any of its investment portfolios) by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the Trust solely by reason of being or having been a shareholder. Moreover,
the Trust will be covered by insurance, which the Trustees consider adequate to
cover foreseeable tort claims.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote, because it is limited to
circumstances in which a disclaimer is inoperative and the Trust itself is
unable to meet its obligations.
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<PAGE> 60
PRINCIPAL HOLDERS OF SECURITIES
As of [xxx], 1997, [xxx] directly or beneficially owned approximately
___% of the ______Fund.
In addition, as of [xxx], 1997, the officers and trustees of the Trust,
as a group, owned less than 1% of each Fund's outstanding voting securities.
PURCHASE AND REDEMPTION OF SHARES
Each Fund and class has set minimum initial and subsequent investment
requirements, as disclosed in their Prospectuses. These minimum investment
requirements may be changed at any time and are not applicable to certain types
of investors. The Trust may waive the minimums for purchases by Trustees,
Directors, officers or employees of the Trust, Schwab or the Investment Manager.
The Trust has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of its net assets at the beginning of
such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of the stated limits may be paid, in whole or in
part, in investment securities or in cash, as the Trust's Board of Trustees may
deem advisable; however, payment will be made wholly in cash unless the Board of
Trustees believes that economic or market conditions exist that would make such
a practice detrimental to the best interests of the Fund. If redemption proceeds
are paid in investment securities, such securities will be valued as set forth
in the Prospectus of the Fund affected under "Share Price Calculation" and a
redeeming shareholder would normally incur brokerage expenses if he or she were
to convert the securities to cash.
OTHER INFORMATION
The Funds' Prospectuses and SAI do not contain all the information included in
the Registration Statement filed with the SEC under the Securities Act of 1933,
as amended, with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this SAI pursuant to the rules and regulations of the SEC. For further
information, please refer to the registration statement and exhibits for the
Trust on file with the SEC in Washington, D.C. and available upon payment of a
copying fee. The statements in the Prospectus and this SAI concerning the
contents of contracts or other documents, copies of which are filed as exhibits
to the registration statement, are qualified by reference to such contracts or
documents.
FINANCIAL STATEMENTS
The Trust's independent accountants audit and report on the annual financial
statements of each series of the Trust and review certain regulatory reports and
each Fund's federal income tax return. It also performs other professional
accounting, auditing, tax and advisory services when the Trust engages it to do
so. Each Fund's financial statements and financial highlights for the fiscal
year ended August 31, 1997, are included in each Fund's Annual Report, which are
separate reports supplied with this SAI. Each Fund's financial statements and
financial highlights are incorporated herein by reference.
APPENDIX - RATINGS OF INVESTMENT SECURITIES
Lower-quality debt securities are sometimes referred to as "junk bonds," and are
considered more speculative and subject to greater risk. Some junk bonds may
already be in default, i.e., failed to meet their interest and/or principal
23
<PAGE> 61
payment obligations. From time to time, each Fund may report the percentage of
its assets that fall into the rating categories set forth below.
BONDS
MOODY'S INVESTORS SERVICE
Moody's rates the bonds it judges to be of the best quality Aaa. These bonds
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues. Bonds carrying an Aa designation
are deemed to be of high quality by all standards. Together with Aaa rated
bonds, they comprise what are generally known as high-grade bonds. Aa bonds are
rated lower than the best bonds because they may enjoy relatively lower margins
of protection, fluctuations of protective elements may be of greater amplitude
or there may be other factors present which make them appear to be subject to
somewhat greater long-term risks. A rated bonds are considered as upper-medium
grade obligations as they possess many favorable investment attributes. Bonds
designated Baa are considered medium grade in that they are not highly protected
or poorly secured. Interest payments and principal security appear to be
adequate at the present, but they may lack certain protective elements or be
characteristically unreliable over any great length of time. Baa bonds do not
have any outstanding investment characteristics and do have speculative
characteristics.
STANDARD & POOR'S CORPORATION
AAA is the highest rating assigned by S&P to a bond and indicates the issuer's
extremely strong capacity to pay interest and repay principal. An AA rating
denotes a bond whose issuer has a very strong capacity to pay interest and repay
principal and differs from an AAA rating only in small degree. A ratings are
given to debt which has a strong capacity to pay interest and repay principal
but is somewhat more susceptible to adverse effects of changes in circumstances
and economic conditions than higher rated debt. BBB debt indicates the issuer is
regarded by S&P as having an adequate capacity to pay interest and repay
principal. These securities appear to have adequate protection, however adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal in this category than in
higher categories.
DUFF & PHELPS CREDIT RATING CO.
Duff confers an AAA designation to bonds of issuers with the highest credit
quality. The risk factors associated with these bonds are negligible, being only
slightly more than for risk-free U.S. Treasury debt. AA rated bonds are of high
credit quality and have strong protection factors. The risks associated with
them are modest but may vary slightly from time to time because of economic
conditions. An A rating indicates that the protection factors are average but
adequate. The risk factors, however, are more variable and greater in periods of
economic stress. BBB rated debt has protection factors that are below average
but still sufficient for prudent investment. There is considerable variability
in the risk of BBB rated debt during economic cycles.
FITCH INVESTOR SERVICES, INC.
AAA is the highest rating Fitch assigns to bonds, and indicates the obligor's
exceptionally strong ability to pay interest and repay principal. Bonds which
Fitch considers of very high credit quality, and the obligor's ability to pay
interest and repay principal is very strong, although not as strong as AAA, is
rated AA. An A rating is given to show high credit quality and the issuer's
ability to pay interest and repay principal is strong, but there is more
vulnerability to economic conditions and circumstances than higher rated debt.
BBB bonds are considered investment grade, where the issuer has
24
<PAGE> 62
adequate ability to pay interest and repay principal. Bonds rated BBB are more
susceptible to adverse changes in economic conditions and circumstances, thus
these bonds are more likely to fall below investment grade or have the
timeliness of their payments impaired.
SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS
MOODY'S INVESTORS SERVICE
Short-term notes/variable rate demand obligations bearing the designations
MIG-1/VMIG-1 are considered to be of the best quality, enjoying strong
protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-3 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.
STANDARD & POOR'S CORPORATION
An S&P SP-1 rating indicates that the subject securities' issuer has a strong
capacity to pay principal and interest. Issues determined to possess very strong
safety characteristics are given a plus (+) designation. S&P's determination
that an issuer has a satisfactory capacity to pay principal and interest is
denoted by an SP-2 rating.
IBCA
Obligations supported by the highest capacity for timely repayment are rated
A1+. An A1 rating indicates that the obligation is supported by a very strong
capacity for timely repayment. Obligations rated A2 are supported by a good
capacity for timely repayment, although adverse changes in business, economic,
or financial conditions may affect this capacity.
THE SAI DOES NOT CONSTITUTE AN OFFERING BY THE TRUST, ANY SERIES THEREOF, OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY
MADE.
25
<PAGE> 63
PART C
OTHER INFORMATION
September 26, 1997
SCHWAB INVESTMENTS
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
1. Financial Statements for Schwab 1000 Fund were electronically
filed and are incorporated by reference to the statement of
additional information for Schwab Investments in
Post-Effective Amendment No. 16.
2. Financial Statements for Schwab Short/Intermediate Tax-Free
Bond Fund, Schwab Long Term Tax-Free Bond Fund, Schwab
California Short/Intermediate Tax-Free Bond Fund, Schwab
California Long Term Tax-Free Bond Fund, Schwab
Short/Intermediate Government Bond Fund and Schwab Long-Term
Government Bond Fund to be filed by subsequent amendment.
(b) Exhibits:
(1) -- Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1) to
the Registration Statement on Form N-1A of
Schwab Investments ("Registrant"), filed on
October 29, 1990 (the "Agreement and
Declaration of Trust").
(2) -- Amended and Restated By-Laws are
incorporated by reference to Exhibit (2) to
Post-Effective Amendment No. 12, to
Registrant's Registration Statement on Form
N-1A, filed on December 30, 1994.
(3) -- Inapplicable.
(4) (a) -- Article III, Section 5, Article V, Article
VI, Article VIII, Section 4 and Article IX,
Sections 1, 5 and 7 of the Agreement and
Declaration of Trust is incorporated by
reference to Exhibit (1) to Registrant's
Registration Statement on Form N-1A, filed
on October 29, 1990.
(b) -- Article 9, Article 10, Section 6, and
Article 11 of the Amended and Restated
By-Laws are incorporated by reference to
Exhibit (2) to Post-Effective Amendment No.
12, to Registrant's Registration Statement
on Form N-1A, filed on December 30, 1994.
(5) (a) -- Investment Advisory and Administration
Agreement between Registrant and Charles
Schwab Investment Management, Inc. (the
"Investment Manager") is incorporated by
reference to Exhibit (5) (a) to
Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form
N-1A, filed on December 30, 1994.
(b) -- Amended Schedule to Investment Advisory and
Administration Agreement referred to at
Exhibit (5)(a) above is incorporated by
reference to Exhibit 5(a) to Post-Effective
Amendment No.14 to Registrant's Registration
Statement on Form N-1A, filed on December
30, 1994.
C-1
<PAGE> 64
(6) -- Distribution Agreement between Registrant
and Charles Schwab & Co., Inc. ("Schwab") is
incorporated by reference to Exhibit (6)(a)
to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form
N-1A, filed on December 30, 1994.
(7) -- Inapplicable.
(8) (a) -- Custodian Services Agreement between
Registrant and PNC Bank, National
Association (formerly Provident National
Bank) is incorporated by reference to
Exhibit (8)(a) to Post-Effective Amendment
No.2 to Registrant's Registration Statement
on Form N-1A, filed on December 23, 1991.
(b) -- Amendment No. 1 to Custodian Services
Agreement referred to at Exhibit (8)(a)
above is incorporated by reference to
Exhibit (8)(b) to Post-Effective Amendment
No. 13 to Registrant's Registration
Statement on Form N-1A, filed on December
29, 1996.
(c) -- Amendment No. 2 to Custodian Services
Agreement referred to at Exhibit (8)(a)
above is incorporated by reference to
Exhibit 8(c) to Post-Effective Amendment
No.14 to Registrant's Registration Statement
on Form N-1A, filed on December 30, 1996.
(d) -- Amended Schedule to the Custodian Services
Agreement referred to at Exhibit (8)(a)
above is incorporated by reference to
Exhibit (8)(b) to Post-Effective Amendment
No. 12 to Registrant's Registration
Statement on Form N-1A, filed on December
30, 1994.
(e) -- Transfer Agency Agreement between the
Registrant and Schwab is incorporated by
reference to Exhibit (8)(b) to
Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form
N-1A, filed on August 27, 1993.
(f) -- Amended Schedule to the Transfer Agency
Agreement referred to at Exhibit (8)(e)
above is incorporated by reference to
Exhibit 8(d) to Post-Effective Amendment No.
11 to Registrant's Registration Statement on
Form N-1A, filed on December 28, 1993.
(g) -- Shareholder Service Agreement between the
Registrant and Schwab is incorporated by
reference to Exhibit (8)(c) to
Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form
N-1A, filed on August 27, 1993.
(h) -- Form of Amended Schedule to the Shareholder
Services Agreement referred to at Exhibit
(8)(g) above is incorporated by reference to
Exhibit 8(g) to Post-Effective Amendment No.
16 to Registrant's Registration Statement on
Form N-1A, filed on March 26, 1997.
(i) -- Accounting Services Agreement between
Registrant and Provident Financial
Processing Corporation is incorporated by
reference to Exhibit (8)(c) to
Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form
N-1A, filed on December 23, 1991.
(j) -- Amendment No. 1 to Accounting Services
Agreement referred to at Exhibit (8)(i)
above is incorporated by reference to
Exhibit (8)(i) to Post-Effective
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<PAGE> 65
Amendment No. 13 to Registrant's
Registration Statement on Form N-1A, filed
on December 29, 1996.
(k) -- Amendment No. 2 to Accounting Services
Agreement referred to at Exhibit (8)(i)
above is incorporated by reference to
Exhibit (8)(k) to Post-Effective Amendment
No. 14 to Registrant's Registration
Statement on Form N-1A, filed on December
30, 1996.
(l) -- Amended Schedule to the Accounting Services
Agreement referred to at Exhibit (8)(i)
above is incorporated by reference to
Exhibit (8)(h) to Post-Effective Amendment
No. 12 to Registrant's Registration
Statement on Form N-1A, filed on December
30, 1994.
(9) -- Inapplicable.
(10) -- Opinion and Consent of Ropes & Gray as to
legality of the securities being registered
is incorporated by reference to the
Registrant's Rule 24f-2 Notice to be filed
by subsequent amendment.
(11) (a) -- Inapplicable.
(b) -- Inapplicable.
(12) -- Inapplicable.
(13) -- Purchase Agreement relating to shares of the
Schwab Short/Intermediate Tax-Free Bond
Fund, Schwab California Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term
Government Bond Fund (formerly, Schwab
Long-Term U.S. Government Bond Fund) is
incorporated by reference to Exhibit (13) to
Post Effective Amendment No. 9 to
Registrant's Registration Statement on Form
N-1A, filed on August 27, 1993.
(14) -- Inapplicable.
(15) -- Inapplicable.
(16) -- Performance Calculations to be filed by
subsequent amendment.
(17) (a) -- Financial Data Schedule for Schwab 1000
Fund(R)was electronically filed and is
incorporated by reference to Exhibit 17 to
Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form
N-1A, filed on March 26, 1997.
(b) -- Financial Data Schedule for Schwab
Short/Intermediate Government Bond Fund to
be filed by subsequent amendment.
(c) -- Financial Data Schedule for Schwab Long-Term
Government Bond Fund to be filed by
subsequent amendment.
(d) -- Financial Data Schedule for Schwab
Short/Intermediate Tax-Free Bond Fund to be
filed by subsequent amendment.
(e) -- Financial Data Schedule for Schwab Long-Term
Tax-Free Bond Fund to be filed by subsequent
amendment.
C-3
<PAGE> 66
(f) -- Financial Data Schedule for Schwab
California Short/Intermediate Tax-Free Bond
Fund to be filed by subsequent amendment.
(g) -- Financial Data Schedule for Schwab
California Long-Term Tax-Free Bond Fund to
be filed by subsequent amendment.
(18) -- Registrant's Multiple Class Plan for Schwab
1000 Fund Investor Shares and Schwab 1000
Fund Select Shares is incorporated by
reference to Post-Effective Amendment No. 17
to the Registrant's Registration Statement
on Form N-1A filed on August 15, 1997.
Item 25. Persons Controlled by or under Common Control with the Registrant.
The Charles Schwab Family of Funds (the "Schwab Fund Family"), Schwab
Capital Trust and Schwab Annuity Portfolios are each Massachusetts business
trusts registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). Each is advised by the Investment Manager and employs Schwab as
principal underwriter, transfer agent and shareholder services agent. As a
result, the Schwab Fund Family, Schwab Capital Trust and Schwab Annuity
Portfolios may each be deemed to be under common control with Registrant.
Item 26. Number of Holders Securities.
As of September [ ], 1997 the number of record holders of shares of
beneficial interest for the Series of Registrant:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Schwab 1000 Fund(R)- Investor Shares 1 (for the benefit of [ ] accounts)
Schwab 1000 Fund - Select Shares(TM) 1 (for the benefit of [ ] accounts)
Schwab Long-Term Government Bond Fund 1 (for the benefit of [ ] accounts)
Schwab Short/Intermediate Government Bond Fund 1 (for the benefit of [ ] accounts)
Schwab Long-Term Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
Schwab Short/Intermediate Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
Schwab California Long-Term Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
Schwab California Short/Intermediate Tax-Free Bond Fund 1 (for the benefit of [ ] accounts)
</TABLE>
Item 27. Indemnification.
Article VIII of Registrant's Agreement and Declaration of Trust
(Exhibit (1) hereto, which is incorporated herein by reference) provides in
effect that Registrant will indemnify its officers and trustees against all
liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise, or as fines and penalties, and counsel
fees reasonably incurred by any such officer or trustee in connection with the
defense or disposition of any action, suit, or other proceeding. However, in
accordance with Section 17(h) and 17(i) of the 1940 Act and its own terms, said
Agreement and Declaration of Trust does not protect any person against any
liability to Registrant or its shareholders to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
In any event, Registrant will comply with 1940 Act Releases No. 7221 and 11330
respecting the permissible boundaries of indemnification by an investment
company of its officers and trustees.
C-4
<PAGE> 67
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Manager.
(a) Information pertaining to business and other connections of
Registrant's Investment Manager is hereby incorporated by reference to the
section of the Prospectuses captioned "Management of the Fund(s)" and to the
section of the Statement of Additional Information captioned "Management of the
Trust."
Registrant's Investment Manager, Charles Schwab Investment Management,
Inc., a Delaware corporation, organized in October 1989 to serve as Investment
Manager to the Schwab Fund Family, also serves as the Investment Manager to
Schwab Capital Trust and Schwab Annuity Portfolios, each an open-end management
investment company. The principal place of business of the Investment Manager is
101 Montgomery Street, San Francisco, California 94104. The only business in
which the Investment Manager engages is that of investment manager and
administrator to Registrant, Schwab Fund Family, Schwab Capital Trust, Schwab
Annuity Portfolios and any other investment companies that Schwab may sponsor in
the future.
(b) The business, profession, vocation or employment of a substantial
nature in which each director and/or executive officer of Schwab and/or the
Investment Manager is or has been engaged during the past two fiscal years for
his or her own account in the capacity of director, officer, employee, partner
or trustee is as follows:
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Chief Executive Officer
and Director
Charles Schwab Investment Management, Inc. Chairman and Director
The Charles Schwab Trust Company Chairman and Director
Mayer & Schweitzer, Inc. Director and Chairman of Board of
Directors; Director until
December 1995
The Gap, Inc. Director
Transamerica Corporation Director
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
AirTouch Communications Director
Siebel Systems Director
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February 1995;
Vice Chairman until August 1994
The Charles Schwab Corporation Vice Chairman and Director; Chief
Operating Officer until March 1994
Mayer & Schweitzer, Inc. Director until February 1995
The Charles Schwab Trust Company Director
David S. Pottruck Charles Schwab & Co., Inc. President, Chief Executive
Officer and Director
The Charles Schwab Corporation President, Chief Operating
Officer and Director
Charles Schwab Investment Director
Management, Inc.
Mayer & Schweitzer, Inc. Chairman, Chief Executive Officer
and Director
Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman and Director until
January 1996; Senior Executive
Vice President and Chief
Operating Officer until January
1995
The Charles Schwab Corporation Executive Vice President until
January 1996; Senior Executive
Vice President until January 1995
Mayer & Schweitzer, Inc. Director until January 1996
John P. Coghlan Charles Schwab & Co., Inc. Executive Vice President
The Charles Schwab Corporation Executive Vice President
The Charles Schwab Trust Company Director and Executive Vice
President
</TABLE>
C-6
<PAGE> 69
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
Dawn G. Lepore Charles Schwab & Co., Inc. Executive Vice President and
Chief Information Officer
The Charles Schwab Corporation Executive Vice President and
Chief Information Officer
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President
Charles Schwab & Co., Inc. Executive Vice President
Timothy F. McCarthy, Charles Schwab Investment Management, Inc. Chief Executive Officer
Trustee and President
Charles Schwab & Co., Inc. Executive Vice President
The Charles Schwab Corporation Executive Vice President,
President
Jardine Fleming Unit Trusts Ltd. Chief Executive Officer until
October 1995
Fidelity Investment Advisor Group President until 1994
Mayer & Schweitzer, Inc. Director
Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President
The Charles Schwab Corporation Executive Vice President
Steven L. Scheid Charles Schwab & Co., Inc. Director and Chief Financial
Officer
The Charles Schwab Corporation Executive Vice President - Chief
Financial Officer
Charles Schwab Investment Management, Inc. Executive Vice President,
Director and Chief Financial
Officer
The Charles Schwab Trust Company Chief Financial Officer
Schwab Retirement Plan Services, Inc. Director
Performance Technologies, Inc. Director
Mayer & Schweitzer, Inc. Director
Tom D. Seip Charles Schwab & Co., Inc. Executive Vice President
</TABLE>
C-7
<PAGE> 70
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
The Charles Schwab Corporation Executive Vice President
Charles Schwab Investment Management, Inc. President and Chief Operating
Officer until 1994
John N. Tognino Charles Schwab & Co., Inc. Executive Vice President
The Charles Schwab Corporation Executive Vice President
Mayer & Schweitzer, Inc. Director and Vice Chairman until
February 1996
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President
The Charles Schwab Corporation Executive Vice President and
Chief Administrative Officer
Commercial Credit Corporation Managing Director until February
1994
Christopher V. Dodds Charles Schwab & Co., Inc. Treasurer and Senior Vice
President
The Charles Schwab Corporation Treasurer and Senior Vice
President
Mayer & Schweitzer, Inc. Treasurer
William J. Klipp, Charles Schwab & Co., Inc. Executive Vice President
Trustee, Executive Vice President
and Chief Operating Officer
Charles Schwab Investment Management, Inc. President and Chief Operating
Officer
Stephen B. Ward, Charles Schwab Investment Management, Inc. Senior Vice President and Chief
Senior Vice President and Chief Investment Officer
Investment Officer
Frances Cole, Charles Schwab Investment Management, Inc. Senior Vice President, Chief
Secretary Counsel, Chief Compliance Officer
and Assistant Corporate Secretary
</TABLE>
C-8
<PAGE> 71
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
<S> <C> <C>
Tai-Chin Tung, Charles Schwab & Co., Inc. Vice President
Treasurer and Principal
Financial Officer
Charles Schwab Investment Management, Inc. Controller
Robertson Stephens Investment Management, Controller until 1996
Inc.
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Assistant Corporate Secretary
Charles Schwab Investment Management, Inc. Corporate Secretary
The Charles Schwab Trust Company
Assistant Corporate Secretary
Mayer & Schweitzer Secretary
Mary B. Templeton Charles Schwab Investment Management, Inc. Assistant Corporate Secretary
The Charles Schwab Corporation Senior Vice President, General
Counsel and Corporate Secretary
Charles Schwab & Co., Inc. Senior Vice President, General
Counsel and Corporate Secretary
Mayer & Schweitzer Assistant Corporate Secretary
The Charles Schwab Trust Company Assistant Corporate Secretary
until February 1996
David H. Lui, Charles Schwab Investment Management, Inc. Vice President and Senior Counsel
Assistant Secretary
Matthew M. O'Toole, Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
Karen L. Seaman, Charles Schwab Investment Management, Inc. Corporate Counsel
Assistant Secretary
</TABLE>
Item 29. Principal Underwriters.
(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab currently also acts as principal underwriter for the
Schwab Fund Family, Schwab Capital Trust, Schwab
C-9
<PAGE> 72
Annuity Portfolios and intends to act as such for any other investment company
which Schwab may sponsor in the future.
(b) See Item 28(b) for information on the officers and directors of
Schwab. The principal business address of Schwab is 101 Montgomery Street, San
Francisco, California 94104.
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of: Registrant (transfer agency and shareholder
records); Registrant's investment manager and administrator, Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's principal underwriter, Charles Schwab & Co., Inc., 101
Montgomery Street, San Francisco, California 94104; Registrant's Custodian, PNC
Bank, National Association, Broad and Market Streets, Philadelphia, Pennsylvania
19809 (ledgers, receipts, and brokerage orders); Registrant's fund accountants,
PFPC, Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809; or Ropes & Gray,
counsel to Registrant, 1301 K Street, N.W., Suite 800 East, Washington, District
of Columbia, 20005 (minute books, bylaws, and declaration of trust).
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Registrant undertakes to call a meeting of Shareholders, at the
request of at least 10% of Registrant's outstanding shares, for the purpose of
voting upon the question of removal of a trustee or trustees and to assist in
communications with other Shareholders as required by Section (16) of the 1940
Act.
(b) Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of Registrant's latest Annual Report to
Shareholders upon request and without charge.
C-10
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended, has duly
caused this Post-Effective Amendment No. 18 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, District of
Colombia on the 26th day of September, 1997.
SCHWAB INVESTMENTS
Registrant
Charles R. Schwab*
---------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 18 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 26th day
of September, 1997.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman and Trustee
- --------------------------
Charles R. Schwab
Timothy F. McCarthy* President and Trustee
- --------------------------
Timothy F. McCarthy
William J. Klipp* Executive Vice President, Trustee and
- --------------------------
William J. Klipp Chief Operating Officer
Donald F. Dorward* Trustee
- --------------------------
Donald F. Dorward
Robert G. Holmes* Trustee
- --------------------------
Robert G. Holmes
Donald R. Stephens* Trustee
- --------------------------
Donald R. Stephens
Michael W. Wilsey* Trustee
- --------------------------
Michael W. Wilsey
Tai-Chin Tung** Treasurer and Principal Financial Officer
- --------------------------
Tai-Chin Tung
</TABLE>
*By: /s/ Alan G. Priest
--------------------------
Alan G. Priest, Attorney-in-Fact
pursuant to Powers of Attorney previously filed.
