<PAGE> 1
File Nos. 33-37459 and 811-6200
As filed with the Securities and Exchange Commission on July 21, 1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 29 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 33 [X]
SCHWAB INVESTMENTS
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
(Address of Principal Executive Offices) (zip code)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
William J. Klipp
101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)
Copies of communications to:
<TABLE>
<S> <C> <C>
John H. Grady, Jr. Esq. Martin E. Lybecker, Esq. Frances Cole, Esq.
Morgan Lewis & Bockius LLP Ropes & Gray Charles Schwab Investment Management, Inc.
1701 Market Street One Franklin Square 101 Montgomery Street
Philadelphia, PA 19103 1301 K Street, N.W., Suite 800 120K-14-109
East
Washington, D.C. 20005 San Francisco, CA 94104
</TABLE>
It is proposed that this filing will become effective (check
appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[X] On July 21, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] On (date), pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] On (date), pursuant to paragraph (a)(ii) of Rule 485 if
appropriate, check appropriate box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment
Part C
<PAGE> 2
PROSPECTUS
July 21, 1999
SCHWAB
YIELDPLUS FUND(TM)
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
SCHWABFUNDS(R)
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<PAGE> 4
ABOUT THE FUND
Schwab YieldPlus Fund(TM)
ABOUT THE FUND
4 Strategy
5 Main Risks
6 Performance
6 Fees and Expenses
7 Fund Management
INVESTING IN THE FUND
9 Buying Shares
11 Selling/Exchanging Shares
12 Transaction Policies
13 Distributions and Taxes
<PAGE> 5
SCHWAB YIELDPLUS FUND(TM)
TICKER SYMBOLS INVESTOR SHARES: SWYPX SELECT SHARES: SWYSX
GOAL
THE FUND SEEKS HIGH CURRENT INCOME WITH MINIMAL CHANGES IN SHARE PRICE.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE (HIGH AND CERTAIN
MEDIUM QUALITY) BONDS. These may include fixed-, variable- or floating-rate
corporate, mortgage-backed and asset-backed debt securities from U.S. and
foreign issuers.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit and maturity policies. To help maintain a
very high degree of share price stability and preserve investors' capital, the
fund seeks to keep the average effective maturity of its overall portfolio at
one year or less. However, in seeking to enhance its potential yields, the fund
may invest in bonds with effective or final maturities of any length and may
invest up to 25% of assets in lower quality bonds (sometimes called junk bonds)
that are rated as low as BB or Ba by at least one nationally recognized rating
service or are the unrated equivalent.
The investment adviser's credit research department analyzes and monitors the
securities that the fund owns or is considering buying. The manager may adjust
the fund's holdings or its average effective maturity based on actual or
anticipated changes in interest rates or credit quality. In the event a
portfolio security was downgraded below B, the manager would promptly sell the
security. The manager also may use risk management techniques, including
derivatives, in seeking to reduce share price volatility and otherwise manage
the fund's exposure to investment risks.
The fund's investment strategy is designed to offer the potential for somewhat
higher yields than a money market fund, although unlike a money market fund, its
share price will fluctuate. In exchange for seeking minimal fluctuation in share
price, the fund may offer lower long-term performance than stock investments or
certain other bond investments.
RISK MANAGEMENT
Because the fund seeks to keep any changes in its share price to a minimum,
it may use a variety of techniques to manage risk. Certain types of derivatives
(investments whose value is based on one or more securities, rates or indices)
can be cost-effective risk management tools.
For example, the fund may make investments that are designed to offset changes
in the price of a given security when interest rates rise. By doing this, the
fund has the potential to receive a security's yield while reducing the share
price volatility that tends to be a characteristic of bond funds.
These investments also may produce additional income for the fund.
4 YIELDPLUS FUND(TM)
<PAGE> 6
Investors with investment horizons of one year or more who are seeking an
alternative to a money fund or other fixed-income fund may want to consider this
fund.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
may be low. Changes in interest rates also may affect the fund's share price: a
sharp rise in interest rates could cause the fund's share price to fall. This
risk is greater when the fund holds bonds with longer maturities.
THE FUND IS NOT A MONEY MARKET FUND OR A BANK DEPOSIT. Its shares are not
insured or guaranteed. Because the fund's share price may move up and down, the
value of your investment in the fund will fluctuate, which means you could lose
money.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default is generally considered unlikely, any default on the part of a
portfolio investment could cause the fund's share price or yield to fall. This
risk is greater with lower-quality bonds.
SOME INVESTMENTS CARRY ADDITIONAL RISKS. To the extent that the manager decides
to invest in foreign or lower quality bonds, the fund takes on a greater
exposure to certain risks. Prices of foreign bonds may be more volatile than
those of comparable bonds from U.S. issuers, for reasons ranging from lack of
reliable issuer information to the risk of political upheaval. Prices of
lower-quality bonds tend to be more volatile than those of investment-grade
bonds, and may fall based on bad news about an issuer, an industry or the
overall economy. With certain mortgage- and asset-backed bonds, a primary risk
is the possibility that the bonds may be paid off earlier or later than
expected. Either situation could cause the fund to hold securities paying lower
than market rates of interest, which could hurt the fund's yield or share price.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the
extent that the manager anticipates interest rate trends imprecisely, the fund
could miss yield opportunities or its share price could fall.
OTHER MAIN RISK FACTORS
While the fund intends to use techniques to manage risk, they could hurt the
fund's performance if they don't perform as expected.
For example, if the fund uses a technique involving a derivative for the purpose
of offsetting the price change in another investment, but the technique does not
precisely offset the price change, the fund's share price could fall. The fund's
performance also could be hurt if the counterparty to a derivative did not honor
its contractual obligations to the fund.
The cost of derivatives may have the effect of increasing fund expenses. While
the decision to use or not use a given risk management technique depends on
market conditions, these costs could at times outweigh the benefits the fund
realizes from these techniques.
YIELDPLUS FUND(TM) 5
<PAGE> 7
PERFORMANCE
Because this is a new fund, no performance figures or financial highlights are
given. Information will appear in a future version of the fund's prospectus.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 10.
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FEE TABLE (%)
- --------------------------------------------------------------------------------
INVESTOR SELECT
SHARES SHARES
- --------------------------------------------------------------------------------
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SHAREHOLDER FEES (% of transaction amount)
- --------------------------------------------------------------------------------
Redemption fee, charged only on shares
you sell within 90 days of buying them 0.25 0.25
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.35 0.35
- --------------------------------------------------------------------------------
Distribution (12b-1) fees None None
Other expenses* 0.39 0.24
- --------------------------------------------------------------------------------
Total annual operating expenses 0.74 0.59
EXPENSE REDUCTION 0.19 0.19
- --------------------------------------------------------------------------------
NET OPERATING EXPENSES** 0.55 0.40
- --------------------------------------------------------------------------------
</TABLE>
* Based on estimated expenses for the current fiscal year.
** Guaranteed by Schwab and the investment adviser through 10/31/2000.
ESTIMATED EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions
as all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
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<CAPTION>
1 YEAR 3 YEARS
- ------------------------------------------------------
<S> <C> <C>
Investor Shares $59 $221
Select Shares $44 $173
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6 YIELDPLUS FUND(TM)
<PAGE> 8
FUND MANAGEMENT
The fund's investment adviser, Charles Schwab Investment Management, Inc., has
more than $92 billion under management.
THE INVESTMENT ADVISER for the Schwab YieldPlus Fund(TM) is Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.
Founded in 1989, the firm today serves as investment adviser for all of the
SchwabFunds(R). The firm manages assets for more than 4 million accounts. (All
figures on this page are as of 6/23/1999).
As the investment adviser, the firm oversees the asset management and
administration of the Schwab YieldPlus Fund(TM) Fund. As compensation for these
services, the firm receives a management fee from the fund. This fee is
calculated as follows: 0.35% of the fund's assets up to $500 million, and 0.30%
of the fund's assets over $500 million.
KIMON DAIFOTIS, CFA, a vice president of the investment adviser, has overall
responsibility for fund management. Prior to joining the firm in October 1997,
he worked for more than 17 years in research and asset management.
YEAR 2000 ISSUE
One issue with the potential to disrupt fund operations and affect performance
is the inability of some computers to recognize the year 2000.
The investment adviser will continue to take steps to enable its systems to
handle the year 2000 problem. The investment adviser also is seeking assurances
that its service providers and business partners are taking similar steps as
well. However, it is impossible to know in advance exactly how this issue will
affect fund administration, fund performance or securities markets in general.
FUND MANAGEMENT 7
<PAGE> 9
INVESTING IN THE FUND
As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us.
On the following pages, you will find information on buying, selling and
exchanging shares using the method that is most convenient for you. You also
will see how to choose a share class and a distribution option for your
investment. Helpful information on taxes is included as well.
8 INVESTING IN THE FUND
<PAGE> 10
SCHWAB ACCOUNTS
DIFFERENT TYPES OF SCHWAB BROKERAGE ACCOUNTS ARE AVAILABLE, with varying account
opening and balance requirements. Some Schwab brokerage account features can
work in tandem with features offered by the fund.
For example, when you sell shares in the fund, the proceeds automatically are
paid to your Schwab brokerage account. From your account, you can use features
such as MoneyLink,(TM) which lets you move money between your brokerage accounts
and bank accounts, and Automatic Investment Plan (AIP), which lets you set up
periodic investments.
For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
INVESTING IN THE FUND 9
<PAGE> 11
BUYING SHARES
Shares of the fund may be purchased through a Schwab brokerage account or
through certain third-party investment providers, such as other financial
institutions, investment professionals and workplace retirement plans.
The information on these pages outlines how Schwab brokerage account investors
can place "good orders" to buy, sell and exchange shares of the funds. If you
are investing through a third-party investment provider, some of the
instructions, minimums and policies may be different. Some investment providers
may charge transaction or other fees. Contact your investment provider for more
information.
Because this is a new fund, Schwab is first seeking investors during an initial
offering period. As of the date of this prospectus, Schwab anticipates that this
period will begin on 8/2/1999 and end on 9/30/1999, although the period may be
extended or otherwise changed. Shares in the fund are not actually purchased
until the completion of the initial offering period.
STEP 1
CHOOSE A SHARE CLASS. Your choice may depend on the amount of your investment.
The minimums shown below are for each share class.
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MINIMUM INITIAL MINIMUM ADDITIONAL
SHARE CLASS INVESTMENT INVESTMENTS MINIMUM BALANCE
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<S> <C> <C> <C>
Investor Shares $1,000 ($500 for $100 $1,000 ($500 for
retirement and retirement and
custodial accounts) custodial accounts)
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Select Shares(TM) $50,000 $1,000 $40,000
</TABLE>
STEP 2
CHOOSE AN OPTION FOR FUND DISTRIBUTIONS. The three options are described below.
If you don't indicate a choice, you will receive the first option.
OPTION FEATURES
------------------------------------------------------------------------------
Reinvestment All dividends and capital gain distributions are invested
automatically in shares of your share class.
------------------------------------------------------------------------------
Cash/reinvestment You receive payment for dividends, while any capital gain
mix distributions are invested in shares of your share class.
------------------------------------------------------------------------------
Cash You receive payment for all dividends and capital gain
distributions.
STEP 3
PLACE YOUR ORDER using any of the methods described at right. Make checks
payable to Charles Schwab & Co., Inc.
10 INVESTING IN THE FUND
<PAGE> 12
SELLING/EXCHANGING SHARES
Use any of the methods described below to sell shares of the fund. When selling
or exchanging shares, please be aware of the following policies:
- - The fund may take up to seven days to pay sale proceeds.
- - If you are selling shares that were recently purchased by check, the
proceeds may be delayed until the check for purchase clears; this may take
up to 15 days from the date of purchase.
- - The fund reserves the right to honor redemptions in portfolio securities
instead of cash if they exceed 1% of the fund's assets or $250,000 in any
90 day period.
- - As indicated in the fund's fee table, the fund charges a redemption fee,
payable to the fund, on the sale or exchange of any shares that have been
held for less than 90 days; in attempting to minimize this fee, the fund
will first sell any shares in your account that aren't subject to the fee
(including shares acquired through reinvestment or exchange).
- - There is no redemption fee when you exchange between share classes within
this fund.
- - Exchange orders must meet the minimum investment and other requirements for
the fund and share class into which you are exchanging.
- - You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.
WHEN PLACING ORDERS
With every order to buy, sell or exchange shares, you will need to include the
following information:
- - Your name
- - Your account number (for SchwabLink transactions, include the master
account and subaccount numbers)
- - The name and share class of the fund whose shares you want to buy or sell
- - The dollar amount you would like to buy, sell or exchange
- - For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer
- - When selling shares, how you would like to receive the proceeds
Please note that orders to buy, sell or exchange become irrevocable at the
time you mail them.
METHODS FOR PLACING ORDERS
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
SCHWABLINK
Investment professionals should follow the transaction instructions in the
SchwabLink manual; for technical assistance, call 800-367-5198.
MAIL
Write to SchwabFunds(R) at:
P.O. Box 7575, San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab branch office.
INVESTING IN THE FUND 11
<PAGE> 13
TRANSACTION POLICIES
THE FUND IS OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
IS OPEN. The fund calculates its share price each business day, for each share
class, after the close of the NYSE (generally 4 p.m. Eastern time). The fund's
share price is its net asset value per share, or NAV, which is the fund's net
assets divided by the number of its shares outstanding.
Orders that are received in good order are executed at the next NAV to be
calculated. Orders to buy shares that are accepted prior to the close of the
fund generally will receive the next day's dividend. Orders to sell or exchange
shares that are accepted and executed prior to the close of the fund on a given
day generally will receive that day's dividend.
In valuing its securities, the fund uses market quotes if they are readily
available. In cases where quotes are not readily available, the fund may value
securities based on fair values developed using methods approved by the fund's
Board of Trustees.
Because foreign markets are often open on weekends and other days when the fund
is closed, the value of the fund's portfolio may change on days when it is not
possible to buy or sell shares of the fund.
THE FUND AND SCHWAB RESERVE CERTAIN RIGHTS,
including the following:
- - To automatically redeem your shares if the account they are held in is
closed for any reason or your balance falls below the minimum for your
share class as a result of selling or exchanging your shares
- - To modify or terminate the exchange privilege upon 60 days' written notice
to shareholders
- - To refuse any purchase or exchange order, including those that appear to be
associated with short-term trading activities
- - To change or waive a fund's investment minimums
- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC
- - To withdraw or suspend any part of the offering made by this prospectus
12 INVESTING IN THE FUND
<PAGE> 14
DISTRIBUTIONS AND TAXES
ANY INVESTMENT IN THE FUND TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in the fund. You also can
visit the Internal Revenue Service (IRS) web site at www.irs.ustreas.gov.
AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS AND GAINS YOUR
FUND EARNS. The fund distributes to its shareholders substantially all of its
net investment income and net capital gains, if any. The fund declares a
dividend every business day, based on its determination of its net investment
income The fund pays its dividends on the 25th of every month (or next business
day, if the 25th is not a business day), except that in December dividends are
paid on the last business day of the month. The fund expects to pay any capital
gain distributions every year, typically in December, to all shareholders of
record.
UNLESS YOU ARE INVESTING THROUGH A TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT, YOUR
FUND DISTRIBUTIONS GENERALLY HAVE TAX CONSEQUENCES. The fund's net investment
income and short-term capital gains are distributed as dividends and are taxable
as ordinary income. Other capital gain distributions are taxable as long-term
capital gains, regardless of how long you have held your shares in the fund.
Distributions generally are taxable in the tax year in which they are declared,
whether you reinvest them or take them in cash.
GENERALLY, ANY SALE OF YOUR SHARES IS A TAXABLE EVENT. A sale may result in a
capital gain or loss for you. The gain or loss generally will be treated as
short term if you held the shares for 12 months or less, long term if you held
the shares longer.
FOR TAX PURPOSES, AN EXCHANGE BETWEEN FUNDS IS DIFFERENT FROM AN EXCHANGE
BETWEEN CLASSES. An exchange between funds is considered a sale. An exchange
between classes within a fund is not reported as a taxable sale.
AT THE BEGINNING OF EVERY YEAR, THE FUND PROVIDES SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DISTRIBUTIONS the fund declared during the
previous calendar year. Schwab brokerage account customers also receive
information on distributions and transactions in their monthly account
statements.
SCHWAB BROKERAGE ACCOUNT CUSTOMERS WHO SELL FUND SHARES typically will receive a
report that calculates their gain or loss using the "average cost"
single-category method. This information is not reported to the IRS, and you
still have the option of calculating gains or losses using any other methods
permitted by the IRS.
INVESTING IN THE FUND 13
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NOTES
14 NOTES
<PAGE> 16
NOTES 15
<PAGE> 17
SCHWAB
YieldPlus Fund(TM)
TO LEARN MORE
This prospectus contains important information on the fund and should be read
and kept for reference. You also can obtain more information from the following
sources.
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the SEC's Public Reference
Room.
SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
WWW.SCHWAB.COM/SCHWABFUNDS
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-6009
800-SEC-0330 (Public Reference Section)
www.sec.gov
SEC FILE NUMBER
Schwab YieldPlus Fund 811-6200
PROSPECTUS
July 21, 1999
SCHWABFUNDS(R)
MKT4087FLD
<PAGE> 18
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB INVESTMENTS
SCHWAB YIELDPLUS FUND
JULY 21, 1999
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the fund's prospectus dated July 21, 1999 (as amended
from time to time).
To obtain a copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, day or night, or write to the fund at P.O. Box 7575, San
Francisco, CA 94120-7575. For TDD service call 800-345-2550, day or night. The
prospectus also may be available on the Internet at:
http://www.schwab.com/schwabfunds.
The Schwab YieldPlus Fund is a series of Schwab Investments (the trust).
TABLE OF CONTENTS
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Page
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<S> <C>
INVESTMENT OBJECTIVE, SECURITIES, RISKS AND LIMITATIONS........................................ 2
MANAGEMENT OF THE FUND......................................................................... 25
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES............................................ 27
INVESTMENT ADVISORY AND OTHER SERVICES......................................................... 28
BROKERAGE ALLOCATION AND OTHER PRACTICES....................................................... 29
DESCRIPTION OF THE TRUST....................................................................... 30
PURCHASE, REDEMPTION AND PRICING OF SHARES..................................................... 31
TAXATION....................................................................................... 32
CALCULATION OF PERFORMANCE DATA................................................................ 33
APPENDIX - RATINGS OF INVESTMENT SECURITIES.................................................... 34
</TABLE>
1
<PAGE> 19
INVESTMENT OBJECTIVE, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVE
The fund's investment objective is to seek high current income with minimal
changes in share price.
The fund's investment objective may be changed by vote of a majority of its
shareholders. The following investment securities, risks and limitations
supplement those set forth in the prospectus and may be changed without
shareholder approval unless otherwise noted. Also, policies and limitations that
state a maximum percentage of assets that may be invested in a security or other
asset, or that set forth a quality standard, shall be measured immediately after
and as a result of the fund's acquisition of such security or asset unless
otherwise noted. Any subsequent change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with the fund's investment policies and limitations. The fund will
invest in securities or engage in techniques that are intended to help achieve
its investment objective.
INVESTMENT SECURITIES AND RISKS
BANKERS' ACCEPTANCES or notes are credit instruments evidencing a bank's
obligation to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. A fund will invest only in bankers' acceptances of
banks that have capital, surplus and undivided profits in excess of $100
million.
BORROWING may subject the fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. The fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money. The fund may borrow money from
banks and make other investments or engage in other transactions permissible
under the 1940 Act which may be considered a borrowing (such as mortgage dollar
rolls and reverse repurchase agreements). However, the fund may not purchase
securities when bank borrowings exceed 5% of the fund's total assets. Presently,
the fund only intends to borrow from banks for temporary purposes.
The fund has established an uncommitted lines-of-credit (LOC) with certain banks
by which it may borrow funds for temporary or emergency purposes. A borrowing is
presumed to be for temporary or emergency purposes if it is repaid by the fund
within 60 days and is not extended or renewed. The fund intends to use the LOC
to meet large or unexpected redemptions that would otherwise force the fund to
liquidate securities under circumstances which are unfavorable to the fund's
remaining shareholders. The fund will pay a fee to the bank for using a LOC.
CERTIFICATES OF DEPOSIT or time deposits are issued against funds deposited in a
banking institution for a specified period of time at a specified interest rate.
A fund will invest only in certificates of deposit of banks that have capital,
surplus and undivided profits in excess of $100 million.
COMMERCIAL PAPER consists of short-term, promissory notes issued by banks,
corporations and other institutions to finance short-term credit needs. These
securities generally are discounted but sometimes may be interest bearing.
Commercial paper, which also may be unsecured, is subject
2
<PAGE> 20
to credit risk.
CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure. For example, the automobile industry may have a greater exposure to a
single factor, such as an increase in the price of oil, which may adversely
affect the sale of automobiles and, as a result, the value of the industry's
securities. Based on the primary characteristics of non-U.S. (foreign) banks,
the fund has identified each foreign country as a separate bank industry for
purposes of the fund's concentration policy. The fund will limit its investments
in securities issued by foreign banks in each country to less than 25% of its
total assets.
Based on the primary characteristics of the various types of asset-backed
securities, for purposes of the fund's concentration policy, the following
asset-backed securities industries have been selected: credit card receivables,
automobile receivables, trade receivables and diversified financial assets. The
fund will limit its investments in each such industry to less than 25% of its
total assets.
CONVERTIBLE SECURITIES are typically preferred stock or bonds that are
exchangeable for a specific number of another form of security (usually the
issuer's common stock) at a specified price or ratio. A corporation may issue a
convertible security that is subject to redemption after a specified date and
usually under certain circumstances. A holder of a convertible security that is
called for redemption would be required to tender it for redemption to the
issuer, convert it to the underlying common stock or sell it to a third party.
Convertible bonds typically pay a lower interest rate than nonconvertible bonds
of the same quality and maturity, because of the convertible feature. This
structure allows the holder of the convertible bond to participate in share
price movements in the company's common stock. The actual return on a
convertible bond may exceed its stated yield if the company's common stock
appreciates in value and the option to convert to common shares becomes more
valuable.
Convertible preferred stocks are nonvoting equity securities that pay a fixed
dividend. These securities have a convertible feature similar to convertible
bonds, however, they do not have a maturity date. Due to their fixed income
features, convertible securities provide higher income potential than the
issuer's common stock, but typically are more sensitive to interest rate changes
than the underlying common stock. In the event of liquidation, bondholders have
claims on company assets senior to those of stockholders; preferred stockholders
have claims senior to those of common stockholders.
Convertible securities typically trade at prices above their conversion value,
which is the current market value of the common stock received upon conversion,
because of their higher yield potential than the underlying common stock. The
difference between the conversion value and the price of a convertible security
will vary depending on the value of the underlying common stock and interest
rates. When the underlying value of the common stocks decline, the price of the
issuer's convertible securities will tend not to fall as much because the
convertible security's income potential will act as a price support. While the
value of a convertible security also tends to rise when the underlying common
stock value rises, it will not rise as much because their conversion value is
more narrow. The value of convertible securities also is affected by changes in
interest rates. For example, when interest rates fall, the value of convertible
securities may rise because of their fixed income component.
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
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and domestic entities. Liquidity supports include puts, demand features, and
lines of credit. Most of these arrangements move the credit risk of an
investment from the issuer of the security to the support provider. Changes in
the credit quality of a support provider could cause losses to a fund.
DEBT SECURITIES are obligations issued by domestic and foreign entities,
including governments and corporations, in order to raise money. They are
basically "IOUs," but are commonly referred to as bonds or money market
securities. These securities 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 upon maturity.
Debt securities experience price changes when interest rates change. For
example, when interest rates fall, the prices of debt securities generally rise.
Also, issuers tend to pre-pay their outstanding debts and issue new ones paying
lower interest rates. This is especially true for bonds with sinking fund
provisions, which commit the issuer to set aside a certain amount of money to
cover timely repayment of principal and typically allow the issuer to annually
repurchase certain of its outstanding bonds from the open market or at a pre-set
call price.
Conversely, in a rising interest rate environment, prepayment on outstanding
debt securities generally will not occur. This is known as extension risk and
may cause the value of debt securities to depreciate as a result of the higher
market interest rates. Typically, longer-maturity securities react to interest
rate changes more severely than shorter-term securities (all things being
equal), but generally offer greater rate of interest.
Debt securities also are subject to the risk that the issuers will not make
timely interest and/or principal payments or fail to make them at all. This is
called credit risk. Debt securities also may be subject to price volatility due
to market perception of future interest rates, the creditworthiness of the
issuer and general market liquidity (market risk). Investment-grade debt
securities are considered medium- or and high-quality securities, although some
still possess varying degrees of speculative characteristics and risks. Debt
securities rated below investment-grade are riskier, but may offer higher
yields. These securities are sometimes referred to as high yield securities or
"junk bonds."
See the Appendix for a full description of the various ratings assigned to debt
securities by various Nationally recognized statistical rating organization.
DELAYED-DELIVERY TRANSACTIONS include purchasing and selling securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
to buy or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. When purchasing securities on a delayed-delivery basis, the
fund assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. Typically, no interest will accrue to the fund until the
security is delivered. The fund will segregate appropriate liquid assets to
cover its delayed-delivery purchase obligations. When the fund sells a security
on a delayed-delivery basis, the fund does not participate in further gains or
losses with respect to that security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, the fund could suffer
losses.
DEMAND FEATURES, which may include guarantees, are used to shorten a security's
effective maturity and/or enhance its creditworthiness. If a demand feature
provider were to refuse to permit the feature's exercise or otherwise terminate
its obligations with respect to such feature,
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however, the security's effective maturity may be lengthened substantially,
and/or its credit quality may be adversely impacted. In either event, the fund
may experience an increase in share price volatility. This also could lengthen
the fund's overall average effective maturity.
DEPOSITARY RECEIPTS include American or European Depositary Receipts (ADRs or
EDRs), Global Depositary Receipts or Shares (GDRs or GSSs) or other similar
global instruments that are receipts representing ownership of shares of a
foreign-based issuer held in trust by a bank or similar financial institution.
These securities are designed for U.S. and European securities markets as
alternatives to purchasing underlying securities in their corresponding national
markets and currencies. Depositary receipts can be sponsored or unsponsored.
Sponsored depositary receipts are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored depositary
receipts are not contractually obligated to disclose material information in the
United States. Therefore, there may not be a correlation between such
information and the market value of an unsponsored depositary receipt.
DIVERSIFICATION involves investing in a wide range of securities and thereby
spreading and reducing the risks of investment. The fund is a series of an
open-end investment management company. The fund is a diversified mutual fund.
DURATION was developed as a more precise alternative to the concept of
"maturity." Traditionally, a debt obligations' maturity has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "volatility" of the security). However, maturity
measures only the time until a debt obligation provides its final payment,
taking no account of the pattern of the security's payments prior to maturity.
In contrast, duration incorporates a bond's yield, coupon interest payments,
final maturity and call features into one measure. Duration management is one of
the fundamental tools used by the investment adviser.
Duration is a measure of the expected life of a debt obligation on a present
value basis. Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable bond, the time the principal payments are expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For debt obligations with interest payments occurring
prior to the payment of principal, duration will usually be less than maturity.
In general, all else being equal, the lower the stated or coupon rate of the
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of a fixed income security, the
shorter the duration of the security.
Futures, options, and options on futures have durations which, in general, are
closely related to the duration of the securities which underlie them. Holding
long futures or call option positions will lengthen the duration of the fund's
portfolio by approximately the same amount of time that holding an equivalent
amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have the
effect of reducing portfolio duration by approximately the same amount of time
that selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often
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have final maturities of ten or more years; however, their interest rate
exposure corresponds to the frequency of the coupon reset. Another example where
the interest rate exposure is not properly captured by duration is mortgage
pass-through securities. The stated final maturity of such securities is
generally 30 years, but current prepayment rates are more critical in
determining the securities' interest rate exposure. Finally, the duration of the
debt obligation may vary over time in response to changes in interest rates and
other market factors.
FOREIGN SECURITIES involve additional risks, including foreign currency exchange
rate risks, because they are issued by foreign entities, including foreign
governments, banks, corporations or because they are traded principally
overseas. Foreign entities are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. corporations. In addition, there may be less publicly
available information about foreign entities. Foreign economic, political and
legal developments, as well as fluctuating foreign currency exchange rates and
withholding taxes, could have more dramatic effects on the value of foreign
securities. For example, conditions within and around foreign countries, such as
the possibility of expropriation or confiscatory taxation, political or social
instability, diplomatic developments, change of government or war could affect
the value of foreign investments. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Foreign securities typically have less volume and are generally less liquid and
more volatile than securities of U.S. companies. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although the fund will endeavor to achieve the most favorable overall
results on portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed companies than in the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. There may be difficulties in obtaining or enforcing judgments
against foreign issuers as well. These factors and others may increase the risks
with respect to the liquidity of the fund, and its ability to meet a large
number of shareholder redemption requests.
Foreign markets also have different clearance and settlement procedures and, in
certain markets, there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Such delays in settlement could result in temporary periods
when a portion of the assets of the fund is uninvested and no return is earned
thereon. The inability to make intended security purchases due to settlement
problems could cause the fund to miss attractive investment opportunities.
Losses to the fund arising out of the inability to fulfill a contract to sell
such securities also could result in potential liability for the fund.
Investments in the securities of foreign issuers may be made and held in foreign
currencies. In addition, the fund may hold cash in foreign currencies. These
investments may be affected favorably or unfavorably by changes in currency
rates and in exchange control regulations, and may cause the fund to incur costs
in connection with conversions between various currencies. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange market as well as by political and
economic factors. Changes in the foreign currency exchange rates also may affect
the value of dividends and interest earned, gains and losses realized on the
sale of securities, and net investment income and gains, if any, to be
distributed to shareholders by the fund.
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In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the conversion of the 11 of the 15
Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union (EMU). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the currency of each converting country and the
European Central Bank, all national central banks and all stock exchanges and
depositories began pricing, trading and settling in euro even if the securities
traded are not denominated in euro. Each securities transaction that requires
converting to euro may involve rounding that could affect the value of the
security converted. In addition, issuers of securities that require converting
may experience increased costs as a result of the conversion, which may affect
the value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift from
or to European countries, thereby making the European market less liquid or more
expensive. All of these factors could affect the value of the fund's investments
and/or increase its expenses. While the investment adviser has taken steps to
minimize the impact of the conversion on the fund, it is not possible to know
precisely what impact the conversion will have on the fund, if any, nor is it
possible to eliminate the risks completely.
FORWARD CONTRACTS are sales contracts between a buyer (holding the "long",
position and the seller (holding the "short" position) for an asset with
delivery deferred to a future date. The buyer agrees to pay a fixed price at the
agreed future date and the seller agrees to deliver the asset. The seller hopes
that the market price on the delivery date is less than the agreed upon price,
while the buyer hopes for the contrary. The change in value of a forward-based
derivative generally is roughly proportional to the change in value of the
underlying asset.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS involve the purchase or sale of
foreign currency at an established exchange rate, but with payment and delivery
at a specified future time. Many foreign securities markets do not settle trades
within a time frame that would be considered customary in the U.S. stock market.
Therefore, the fund may engage in forward foreign currency exchange contracts in
order to secure exchange rates for portfolio securities purchased or sold, but
waiting settlement. These transactions do not seek to eliminate any fluctuations
in the underlying prices of the securities involved. Instead, the transactions
simply establish a rate of exchange that can be expected when the fund settles
its securities transactions in the future.
The fund also may engage in forward foreign currency exchange contracts to
protect the value of specific portfolio positions, which is called "position
hedging." When engaging in position hedging, the fund may enter into forward
foreign currency exchange transactions to protect against a decline in the
values of the foreign currencies in which portfolio securities are denominated
(or against an increase in the value of currency for securities that the fund
expects to purchase).
Buying and selling foreign currency exchange contracts involve costs and may
result in losses. The ability of the fund to engage in these transactions may be
limited by tax considerations. Although these techniques tend to minimize the
risk of loss due to decline in the value of the hedged currency, they tend to
limit any potential gain that might result from an increase in the value of such
currency. Transactions in these contracts involve certain other risks.
Unanticipated fluctuations in currency prices may result in a poorer overall
performance for the fund than if it had not engaged in any such transactions.
Moreover, there may be imperfect correlation between the fund's holdings of
securities denominated in a particular currency and forward contracts into which
the fund enters. Such imperfect correlation may cause the fund to sustain
losses, which will prevent
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it from achieving a complete hedge or expose it to risk of foreign exchange
loss. Losses to the fund will affect its performance.
FUTURES CONTRACTS are securities that represent an agreement between two parties
that obligates one party to buy and the other party to sell specific securities
at an agreed-upon price on a stipulated future date. In the case of futures
contracts relating to an index or otherwise not calling for physical delivery at
the close of the transaction, the parties usually agree to deliver the final
cash settlement price of the contract. The fund may purchase and sell futures
contracts based on securities, securities indices and foreign currencies or any
other futures contracts traded on U.S. exchanges or boards of trade that the
Commodities Future Trading Commission (the "CFTC") licenses and regulates on
foreign exchanges.
The fund must maintain a small portion of its assets in cash to process
shareholder transactions and to pay its expenses. In order to reduce the effect
this otherwise uninvested cash would have on its performance, the fund may
purchase futures contracts. Such transactions allow the fund's cash balance to
produce a return similar to that of the underlying security or index on which
the futures contract is based. Also, the fund may purchase or sell futures
contracts on a specified foreign currency to "fix" the price in U.S. dollars of
the foreign security it has acquired or sold or expects to acquire or sell. The
fund may enter into futures contracts for these or other reasons.
When buying or selling futures contracts, the fund must place a deposit with its
broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and must be in the form of liquid debt instruments, including
cash, cash-equivalents and U.S. government securities. Subsequent payments to
and from the broker, known as "variation margin" may be made daily, if
necessary, as the value of the futures contracts fluctuate. This process is
known as "marking-to-market." The margin amount will be returned to the fund
upon termination of the futures contracts assuming all contractual obligations
are satisfied. The fund's aggregate initial and variation margin payments
required to establish its futures positions may not exceed 5% of its net assets.
Because margin requirements are normally only a fraction of the amount of the
futures contracts in a given transaction, futures trading can involve a great
deal of leverage. In order to avoid this, the fund will segregate assets in a
separate account in an amount equal to the notional value of its outstanding
futures contracts.
While the fund intends to purchase and sell futures contracts in order to
simulate full investment, there are risks associated with these transactions.
Adverse market movements could cause the fund to experience substantial losses
when buying and selling futures contracts. Of course, barring significant market
distortions, similar results would have been expected if the fund had instead
transacted in the underlying securities directly. There also is the risk of
losing any margin payments held by a broker in the event of its bankruptcy.
Additionally, the fund incurs transaction costs (i.e. brokerage fees) when
engaging in futures trading.
When interest rates are rising or securities prices are falling, the fund may
seek, through the sale of futures contracts, to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising,
the fund, through the purchase of futures contracts, may attempt to secure
better rates or prices than might later be available in the market when they
effect anticipated purchases. Similarly, the fund may sell futures contracts on
a specified currency to protect against a decline in the value of that currency
and its portfolio securities that are denominated in that currency. The fund may
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in that currency that the fund has acquired or
expects to acquire.
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Futures contracts normally require actual delivery or acquisition of an
underlying security or cash value of an index on the expiration date of the
contract. In most cases, however, the contractual obligation is fulfilled before
the date of the contract by buying or selling, as the case may be, identical
futures contracts. Such offsetting transactions terminate the original contracts
and cancel the obligation to take or make delivery of the underlying securities
or cash. There may not always be a liquid secondary market at the time the fund
seeks to close out a futures position. If the fund is unable to close out its
position and prices move adversely, the fund would have to continue to make
daily cash payments to maintain its margin requirements. If the fund had
insufficient cash to meet these requirements it may have to sell portfolio
securities at a disadvantageous time or incur extra costs by borrowing the cash.
Also, the fund may be required to make or take delivery and incur extra
transaction costs buying or selling the underlying securities. The fund seeks to
reduce the risks associated with futures transactions by buying and selling
futures contracts that are traded on national exchanges or for which there
appears to be a liquid secondary market.
HIGH YIELD SECURITIES are frequently issued by companies without long track
records of sales and earnings, or by those of questionable credit strength, and
are more speculative and volatile (though typically higher yielding) than
investment grade bonds. In addition, the high yield market is relatively new and
its growth has paralleled a long period of economic expansion and an increase in
merger, acquisition and leveraged buyout activity. Adverse economic developments
could disrupt the market for high yield securities, and severely affect the
ability of issuers, especially highly-leveraged issuers, to service their debt
obligations or to repay their obligations upon maturity.
Also, the secondary market for high yield securities at times may not be as
liquid as the secondary market for higher-quality debt securities. As a result,
the investment adviser could find it difficult to sell these securities or
experience difficulty in valuing certain high yield securities at certain times.
Prices realized upon the sale of such lower rated securities, under these
circumstances, may be less than the prices at which the fund purchased them.
Thus, high yield securities are more likely to react to developments affecting
interest rates and market and credit risk than are more highly rated securities,
which primarily react to movements in the general level of interest rates. When
economic conditions appear to be deteriorating, medium to lower quality debt
securities may decline in value more than higher-quality debt securities due to
heightened concern over credit quality, regardless of prevailing interest rates.
Prices for high yield securities also could be affected by legislative and
regulatory developments. These laws could adversely affect the fund's net asset
value and investment practices, the secondary market value for high yield
securities, the financial condition of issuers of these securities and the value
of outstanding high yield securities.
ILLIQUID SECURITIES generally are any securities that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which the fund has valued the instruments. The liquidity of the fund's
investments is monitored under the supervision and direction of the board of
trustees. Investments currently not considered liquid include repurchase
agreements not maturing within seven days and certain restricted securities.
LENDING of portfolio securities is a common practice in the securities industry.
The fund may engage in security lending arrangements with the primary objective
of increasing its income. For example, the fund may receive cash collateral and
it may invest it in short-term, interest-bearing
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obligations, but will do so only to the extent that it will not lose the tax
treatment available to mutual funds. Lending portfolio securities involves risks
that the borrower may fail to return the securities or provide additional
collateral. Also, voting rights with respect to the loaned securities may pass
with the lending of the securities and efforts to call such securities promptly
may be unsuccessful, especially for foreign securities. The fund may loan
portfolio securities to qualified broker-dealers or other institutional
investors provided: (1) the loan is secured continuously by collateral
consisting of U.S. government securities, letters of credit, cash or cash
equivalents maintained on a daily marked-to-market basis in an amount at least
equal to the current market value of the securities loaned; (2) the fund may at
any time call the loan and obtain the return of the securities loaned; (3) the
fund will receive any interest or dividends paid on the loaned securities; and
(4) the aggregate market value of securities loaned will not at any time exceed
one-third of the total assets of the fund.
Although voting rights with respect to loaned securities pass to the borrower,
the lender retains the right to recall a security (or terminate a loan) for the
purpose of exercising the security's voting rights. Efforts to recall such
securities promptly may be unsuccessful, especially for foreign securities or
thinly traded securities such as small-cap stocks. In addition, because
recalling a security may involve expenses to the fund, it is expected that the
fund will do so only where the items being voted upon are, in the judgment of
the investment adviser, either material to the economic value of the security or
threaten to materially impact the issuer's corporate governance policies or
structure.
LOAN INTERESTS and other direct debt instruments or interests therein may be
acquired by the fund. A loan interest is typically originated, negotiated, and
structured by a U.S. or foreign commercial bank, insurance company, finance
company, or other financial institution ("Agent") for a lending syndicate of
financial institutions. The Agent typically administers and enforces the loan on
behalf of the other lenders in the syndicate. In addition, an institution
typically but not always the Agent ("Collateral Bank"), holds collateral (if
any) on behalf of the lenders. These loan interests may take the form of
participation interests in, assignments of or novations of a loan during its
second distribution, or direct interests during a primary distribution. Such
loan interests may be acquired from U.S. or foreign banks, insurance companies,
finance companies, or other financial institutions who have made loans or are
members of a lending syndicate or from other holders of loan interests. The fund
may also acquire loan interests under which the fund derives its rights directly
from the borrower. Such loan interests are separately enforceable by the fund
against the borrower and all payments of interest and principal are typically
made directly to the fund from the borrower. In the event that the fund and
other lenders become entitled to take possession of shared collateral, it is
anticipated that such collateral would be held in the custody of Collateral Bank
for their mutual benefit. The fund may not act as an Agent, a Collateral Bank, a
guarantor or sole negotiator or structurer with respect to a loan.
The investment adviser will analyze and evaluate the financial condition of the
borrower in connection with the acquisition of any Loan Interest. The investment
adviser also analyzes and evaluates the financial condition of the Agent and, in
the case of Loan Interests in which the fund does not have privity with the
borrower, those institutions from or through whom the fund derives its rights in
a loan ("Intermediate Participants").
In a typical loan, the Agent administers the terms of the loan agreement. In
such cases, the Agent is normally responsible for the collection of principal
and interest payments from the borrower and the apportionment of these payments
to the credit of all the institutions which are parties to the loan agreement.
The fund will generally rely upon the Agent or Intermediate Participant to
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receive and forward to the fund its portion of the principal and interest
payments on the loan. Furthermore, unless under the terms of a participation
agreement the fund has direct recourse against the borrower, the fund will rely
on the Agent and the other members of the lending syndicate to use appropriate
credit remedies against the borrower. The Agent is typically responsible for
monitoring compliance with covenants contained in the loan agreement based upon
reports prepared by the borrower. The seller of the Loan Interest usually does,
but is often not obligated to, notify holders of Loan Interests of any failures
of compliance. The Agent may monitor the value of the collateral and, if the
value of the collateral declines, may accelerate the loan, may give the borrower
an opportunity to provide additional collateral or may seek other protection for
the benefit of the participants in the loan. The Agent is compensated by the
borrower for providing these services under a loan agreement, and such
compensation may include special fees paid upon structuring and funding the loan
and other fees paid on a continuing basis. With respect to Loan Interests for
which the Agent does not perform such administrative and enforcement functions,
the Fund will perform such tasks on its own behalf, although a Collateral Bank
will typically hold any collateral on behalf of the Fund and the other pursuant
to the applicable loan agreement.
A financial institution's appointment as Agent may usually be terminated in the
event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor agent
generally would be appointed to replace the terminated Agent, and assets held by
the Agent under the loan agreement should remain available to holders of Loan
Interests. However, if assets held by the Agent for the benefit of the Fund were
determined to be subject to the claims of the Agent's general creditors, the
Fund might incur certain costs and delays in realizing payment on a loan
interest, or suffer a loss of principal and/or interest. In situations involving
Intermediate Participants, similar risks may arise.
Purchasers of Loan Interests depend primarily upon the creditworthiness of the
borrower for payment of principal and interest. If the fund does not receive a
scheduled interest or principal payments on such indebtedness, the fund's share
price and yield could be adversely affected. Loans that are fully secured offer
the fund more protections than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance that the
liquidation of collateral from a secured loan would satisfy the borrower's
obligation, or that the collateral can be liquidated. Indebtedness of borrowers
whose creditworthiness is poor involves substantially greater risks, and may be
highly speculative. Borrowers that are in bankruptcy or restructuring may never
pay off their indebtedness, or may pay only a small fraction of the amount owed.
Direct indebtedness of developing countries also will involve a risk that the
governmental entities responsible for the repayment of the debt may be unable,
or unwilling, to pay interest and repay principal when due.
MATURITY OF INVESTMENTS will generally be determined using the portfolio
securities' final maturity dates. However for certain securities, maturity will
be determined using the security's effective maturity date. The effective
maturity date for a security subject to a put or demand feature is the demand
date, unless the security is a variable- or floating-rate security. If it is a
variable-rate security, its effective maturity date is the later of its demand
date or next interest rate change date. For variable-rate securities not subject
to a put or demand feature and floating-rate securities, the effective maturity
date is the next interest rate change date. The effective maturity of
mortgage-backed and certain other asset-backed securities is determined on an
"expected life" basis by the investment adviser and securities being hedged with
futures contracts may be deemed to have a longer maturity, in the case of
purchases of future contracts, and a
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shorter maturity, in the case of sales of futures contracts, than they would
otherwise be deemed to have. In addition, a security that is subject to
redemption at the option of the issuer on a particular date ("call date"), which
is prior to the security's stated maturity, may be deemed to mature on the call
date rather than on its stated maturity date. The call date of a security will
be used to calculate average portfolio maturity when the investment adviser
reasonably anticipates, based upon information available to it, that the issuer
will exercise its right to redeem the security. The average portfolio maturity
of the fund is dollar-weighted based upon the market value of the fund's
securities at the time of the calculation. The fund may invest in securities
with final or effective maturities of any length. However, the fund intends to
maintain an overall average effective portfolio maturity of one year or less.
There may be times when the portfolio's overall average effective maturity is
more than one year.
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, notes and time deposits.
Money market securities pay fixed, variable or floating rates of interest and
are generally subject to credit and interest rate risks. The maturity date or
price of and financial assets collateralizing a security may be structured in
order to make it qualify as or act like a money market security. These
securities may be subject to greater credit and interest rate risks than other
money market securities because of their structure. Money market securities may
be issued with puts or these can be sold separately.
MORTGAGE-BACKED SECURITIES ("MBS") and other ASSET-BACKED SECURITIES may be
purchased by the fund. MBS represent participations in mortgage loans, and
include pass-through securities and collateralized mortgage obligations. MBS may
be issued or guaranteed by U.S. government agencies or instrumentalities, such
as the Government National Mortgage Association and the Fannie Mae or Freddie
Mac, or by private issuers, generally originators and investors in mortgage
loans, including savings associations, mortgage banks, commercial banks, and
special purpose entities (collectively, "private lenders"). MBS issued by
private lenders may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any governmental guarantee of the underlying mortgage assets but
with some form of credit enhancement.
Asset-backed securities ("ABS") have structural characteristics similar to MBS.
Asset-backed debt obligations represent direct or indirect participation in
assets such as automobile loans, credit card receivables, trade receivables,
home equity loans (which sometimes are categorized as MBS) or other financial
assets. Therefore, repayment depends largely on the cash flows generated by the
assets backing the securities. The credit quality of most ABS depends primarily
on the credit quality of the assets underlying such securities, how well the
entity issuing the security is insulated from the credit risk of the originator
or any other affiliated entities, and the amount and quality of any credit
enhancement of the securities. Payments or distributions of principal and
interest on asset-backed debt obligations may be supported by credit
enhancements including letters of credit, an insurance guarantee, reserve funds
and overcollateralization.
The rate of principal payment on MBS and ABS generally depends on the rate of
principal payments received on the underlying assets which in turn may be
affected by a variety of economic and other factors. As a result, the price and
yield on any MBS or ABS is difficult to
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predict with precision and price and yield to maturity may be more or less than
the anticipated yield to maturity. If the fund purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if the fund
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will reduce yield to maturity. Amounts available for reinvestment
by the fund are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates.
While many MBS and ABS are issued with only one class of security, many are
issued in more than one class, each with different payment terms. Multiple class
MBS and ABS are issued as a method of providing credit support, typically
through creation of one or more classes whose right to payments on the security
is made subordinate to the right to such payments of the remaining class or
classes. In addition, multiple classes may permit the issuance of securities
with payment terms, interest rates, or other characteristics differing both from
those of each other and from those of the underlying assets. Examples include
stripped securities, which are MBS and ABS entitling the holder to
disproportionate interest or principal compared with the assets backing the
security, and securities with classes having characteristics different from the
assets backing the securities, such as a security with floating interest rates
with assets backing the securities having fixed interest rates. The market value
of such securities generally is more or less sensitive to changes in prepayment
and interest rates than is the case with traditional MBS and ABS, and in some
cases such market value may be extremely volatile.
MUNICIPAL LEASES are obligations issued to finance the construction or
acquisition of equipment or facilities. These obligations may take the form of a
lease, an installment purchase contract, a conditional sales contract or a
participation interest in any of these obligations. Municipal leases may be
considered illiquid investments. Additionally, municipal leases are subject to
"nonappropriation risk," which is the risk that the municipality may terminate
the lease because funds have not been allocated to make the necessary lease
payments. The lessor would then be entitled to repossess the property, but the
value of the property may be less to private sector entities than it would be to
the municipality.
MUNICIPAL SECURITIES are debt securities issued by a state, 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 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.
Municipal securities may be owned directly or through participation interests,
and include general obligation or revenue securities, tax-exempt commercial
paper, notes and leases.
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Municipal securities generally are classified as "general obligation" or
"revenue" and may be purchased directly or through participation interests.
General obligation securities typically are secured by the issuer's pledge of
its full faith and credit and taxing power for the payment of principal and
interest. Revenue securities typically 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 tax 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. The credit quality of private activity bonds is frequently related
to the credit standing of private corporations or other entities.
Examples of municipal securities that are issued with original maturities of 397
days 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 typically are 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 fund may
purchase other municipal securities similar to the foregoing that are or may
become available, including securities issued to pre-refund other outstanding
obligations of municipal issuers.
The fund also may invest in moral obligation securities, which are normally
issued by special purpose public authorities. If the issuer of a moral
obligation security is unable to meet its obligation from current revenues, it
may draw on a reserve fund. The state or municipality that created the entity
has only a moral commitment, not a legal obligation, to restore the reserve
fund.
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.
Municipal securities pay fixed, variable or floating rates of interest, which
may to be exempt from federal income tax and, typically, personal income tax of
a state or locality. Some municipal securities are taxable. These securities are
issued by state and local governments and
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instrumentalities thereof that pay interest that is not exempt from federal
income tax. States and municipalities issue taxable instruments for various
reasons, relating in some cases to the nature of the project being financed and
to various specific ceilings on debt issuance in others. The rate of interest
payable on such instruments typically reflects its taxable nature.
OPTIONS CONTRACTS generally provide the right to buy or sell a security,
commodity, futures contract or foreign currency in exchange for an agreed upon
price. If the right is not exercised after a specified period, the option
expires and the option buyer forfeits the money paid to the option seller.
A call option gives the buyer the right to buy a specified number of shares of a
security at a fixed price on or before a specified date in the future. For this
right, the call option buyer pays the call option seller, commonly called the
call option writer, a fee called a premium. Call option buyers are usually
anticipating that the price of the underlying security will rise above the price
fixed with the call writer, thereby allowing them to profit. If the price of the
underlying security does not rise, the call option buyer's losses are limited to
the premium paid to the call option writer. For call option writers, a rise in
the price of the underlying security will be offset by the premium received from
the call option buyer. If the call option writer does not own the underlying
security, however, the losses that may ensue if the price rises could be
potentially unlimited. If the call option writer owns the underlying security or
commodity, this is called writing a covered call. All call options written by
the portfolios will be covered, which means that the portfolios will own the
securities subject to the option so long as the option is outstanding.
A put option is the opposite of a call option. It gives the buyer the right to
sell a specified number of shares of a security at a fixed price on or before a
specified date in the future. Put option buyers are usually anticipating a
decline in the price of the underlying security, and wish to offset those losses
when selling the security at a later date. All put options the portfolios write
will be covered, which means that the portfolio will deposit with its custodian
cash, U.S. government securities or other high-grade debt securities (i.e.,
securities rated in one of the top three categories by Moody's Investor Service
("Moody's") or Standard & Poor's ("S&P") or, if unrated, determined by the
investment adviser to be of comparable credit quality) with a value at least
equal to the exercise price of the put option. The purpose of writing such
options is to generate additional income for the fund. However, in return for
the option premium, the fund accepts the risk that it may be required to
purchase the underlying securities at a price in excess of the securities market
value at the time of purchase.
The fund may purchase and write put and call options on any securities in which
it may invest or any securities index based on securities in which it may
invest. The fund may purchase and write such options on securities that are
listed on domestic or foreign securities exchanges or traded in the
over-the-counter market. Like futures contracts, option contracts are rarely
exercised. Option buyers usually sell the option before it expires. Option
writers may terminate their obligations under a written call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." The fund may enter into closing
sale transactions in order to realize gains or minimize losses on options it has
purchased or wrote.
An exchange-traded currency option position may be closed out only on an options
exchange that provides a secondary market for an option of the same series.
Although the fund generally will purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option or at any
particular time. If fund is unable to effect a closing purchase transaction with
respect to options it has written, it will not be able to sell the underlying
securities or dispose of assets held in a segregated account
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until the options expire or are exercised. Similarly, if the fund is unable to
effect a closing sale transaction with respect to options it has purchased, it
would have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (1) there may be insufficient trading interest in certain options;
(2) an exchange may impose restrictions on opening transactions or closing
transactions or both; (3) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (4) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of an exchange or the Options Clearing Corporation (the OCC) may
not at all times be adequate to handle current trading volume; or (6) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), although outstanding options on that exchange that had been
issued by the OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
The ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the Securities and Exchange Commission (the SEC)
changes its position, the fund will treat purchased over-the-counter options and
all assets used to cover written over-the-counter options as illiquid
securities, except that with respect to options written with primary dealers in
U.S. government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to a formula the staff of the SEC approves.
Additional risks are involved with options trading because of the low margin
deposits required and the extremely high degree of leverage that may be involved
in options trading. There may be imperfect correlation between the change in
market value of the securities held by the fund and the prices of the options,
possible lack of a liquid secondary markets, and the resulting inability to
close such positions prior to their maturity dates.
The fund may write or purchase an option only when the market value of that
option, when aggregated with the market value of all other options transactions
made on behalf of the fund, does not exceed 5% of its net assets.
PROMISSORY NOTES are written agreements committing the maker or issuer to pay
the payee a specified amount either on demand or at a fixed date in the future,
with or without interest. These are sometimes called negotiable notes or
instruments and are subject to credit risk. Bank notes are notes used to
represent obligations issued by banks in large denominations.
PUTS are agreements that allow the buyer to sell a security at a specified price
and time to the seller or "put provider." When a fund buys a security with a put
feature, losses could occur if the put provider does not perform as agreed. If a
put provider fails to honor its commitment upon the fund's attempt to exercise
the put, the fund may have to treat the security's final maturity as its
effective maturity. If that occurs, the security's price may be negatively
impacted, and its sensitivity to interest rate changes may be increased,
possibly contributing to increased share price volatility for the fund. This
also could lengthen the fund's overall average effective maturity. Standby
commitments are types of puts.
QUALITY OF INVESTMENTS will be investment grade for at least 75% of the fund's
assets.
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Investment-grade quality securities are rated by at least one NRSRO in one of
the four highest rating categories (within which there may be sub-categories or
gradations indicating relative standing) or have been determined to be of
equivalent quality by the investment adviser pursuant to procedures adopted by
the board of trustees. Sometimes an investment-grade quality security may be
downgraded to a below investment-grade quality rating. If a security no longer
had at least one investment-quality rating from an NRSRO, the investment adviser
would reanalyze the security in light of the downgrade and determine whether the
fund should continue to hold the security. However, such a downgrade would not
require the investment adviser to sell the security on behalf of the fund.
The fund also may invest up to 25% of its assets in lower-quality securities
that are rated by at least one NRSRO in the fifth highest rating category
(within which there may be sub-categories or gradations indicating relative
standing) or have been determined to be of equivalent quality by the investment
adviser pursuant to procedures adopted by the board of trustees. Sometimes
lower-quality securities may be downgraded to an even lower quality rating. If
any of the fund's lower-quality securities were downgraded to below the sixth
rating category, the investment adviser will promptly sell the security on
behalf of the fund.
REPURCHASE AGREEMENTS. Repurchase agreements involve the 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. Under
certain circumstances, repurchase agreements that are fully collateralized by
U.S. government securities may be deemed to be investments in U.S. government
securities.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. Restricted securities may be considered to be liquid if an
institutional or other market exists for these securities. In making this
determination, the fund, under the direction and supervision of the board of
trustees, will take into account the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). To the
extent the fund invests in restricted securities that are deemed liquid, the
general level of illiquidity in the fund's portfolios may be increased if
qualified institutional buyers become uninterested in purchasing these
securities.
REVERSE REPURCHASE AGREEMENTS AND MORTGAGE DOLLAR ROLLS may be used by the fund.
The fund may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry, or for arbitrage
transactions as discussed below. In a reverse repurchase agreement, the fund
would sell a security and enter into an agreement to repurchase the security at
a specified future date and price. The fund generally retains the right to
interest and principal payments on the security. Because the fund receives cash
upon entering into a reverse repurchase agreement, it may be considered a
borrowing. When required by guidelines of the SEC, the fund will set aside
permissible liquid assets in a segregated account to secure its obligations to
repurchase the security.
The fund also may enter into mortgage dollar rolls, in which the fund would sell
MBS for delivery in the current month and simultaneously contract to purchase
substantially similar securities on a specified future date. While the fund
would forego principal and interest paid on the MBS during the roll period, the
fund would be compensated by the difference between the current sales price and
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the lower price for the future purchase as well as by any interest earned on the
proceeds of the initial sale. The fund also could be compensated through the
receipt of fee income equivalent to a lower forward price. At the time the fund
would enter into a mortgage dollar roll, it would set aside permissible liquid
assets in a segregated account to secure its obligation for the forward
commitment to buy MBS. Mortgage dollar roll transactions may be considered a
borrowing by the fund.
The mortgage dollar rolls and reverse repurchase agreements entered into by the
fund may be used as arbitrage transactions in which the fund will maintain an
offsetting position in investment grade debt obligations or repurchase
agreements that mature on or before the settlement date on the related mortgage
dollar roll or reverse repurchase agreements. Since the fund will receive
interest on the securities or repurchase agreements in which it invests the
transaction proceeds, such transactions may involve leverage. However, since
such securities or repurchase agreements will be high quality and will mature on
or before the settlement date of the mortgage dollar roll or reverse repurchase
agreement, the investment adviser believes that such arbitrage transactions do
not present the risks to the fund that are associated with other types of
leverage.
RISK MANAGEMENT TECHNIQUES used by the fund may include buying and selling
futures and options contracts, entering into swap and wrap agreements and
investing in various types of derivative instruments. The fund may use risk
management techniques, including derivative instruments, for any lawful purpose
consistent with its investment objective, such as hedging or managing risk.
Derivative instruments are commonly defined to include securities or contracts
whose values depend on (or "derive" from) the value of one or more other assets
such as securities, currencies, or commodities. These "other assets" are
commonly referred to as "underlying assets."
A derivative instrument generally consists of, is based upon, or exhibits
characteristics similar to options or forward contracts. Options and forward
contracts are considered to be the basic "building blocks" of derivative. For
example, forward-based derivatives include forward contracts, as well as
exchange-traded futures. Option-based derivatives include privately negotiated,
over-the-counter (OTC) options (including caps, floors, collars, and options on
forward and swap contracts) and exchange-traded options on futures. Diverse
types of derivatives may be created by combining options or froward contracts in
different ways, and applying these structures to a wide range of underlying
assets.
Risk management strategies include investment techniques designed to facilitate
the sale of portfolio securities, manage the average effective maturity of the
portfolio or create or alter exposure to certain asset classes, such as equity,
other debt or foreign securities.
In addition to the derivative instruments and strategies described in the SAI,
the investment adviser expects to discover additional derivative instruments and
other hedging or risk management techniques. The investment adviser may utilize
these new derivative instruments and techniques to the extent that they are
consistent with the fund's investment objective and permitted by the fund's
investment limitations, operating policies, and applicable regulatory
authorities.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by the fund,
including those issued by foreign investment companies. Mutual funds are
registered investment companies, which may issue and redeem their shares on a
continuous basis (open-end mutual funds) or may offer a fixed number of shares
usually listed on an exchange (closed-end mutual funds). Mutual funds generally
offer investors the advantages of diversification and professional investment
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management, by combining shareholders' money and investing it in various types
of securities, such as stocks, bonds and money market securities. Mutual funds
also make various investments and use certain techniques in order to enhance
their performance. These may include entering into delayed-delivery and
when-issued securities transactions or swap agreements; buying and selling
futures contracts, illiquid and restricted securities and repurchase agreements
and borrowing or lending money and/or portfolio securities. The risks of
investing in mutual funds generally reflect the risks of the securities in which
the mutual funds invest and the investment techniques they may employ. Also,
mutual funds charge fees and incur operating expenses.
The fund intends to purchase shares of mutual funds in compliance with the
requirements of federal law or any applicable exemptive relief received from the
SEC. Mutual fund investments for the fund are currently restricted under federal
regulations, and therefore, the extent to which the fund may invest in another
mutual fund may be limited. In addition, the fund intends to vote any proxies of
underlying mutual funds in accordance with the instructions received, or in the
same proportion as the vote of all other shareholders of the underlying mutual
fund.
Funds in which the fund also may invest include unregistered or privately-placed
funds, such as hedge funds and off-shore funds, and unit investment trusts.
Hedge funds and off-shore funds are not registered with the SEC, and therefore
are largely exempt from the regulatory requirements that apply to registered
investment companies (mutual funds). As a result, these funds may have greater
ability to make investments or use investment techniques that offer a higher
degree of investment return, such as leveraging, which also may subject fund
assets to substantial risk to the investment principal. These funds, while not
regulated by the SEC like mutual funds, may be indirectly supervised by the
sources of their assets, which tend to be commercial and investment banks and
other financial institutions. Investments in these funds also may be more
difficult to sell, which could cause losses to the fund. For example, hedge
funds typically require investors to keep their investment in a hedge fund for
some period of time, such as one month. This means investors would not be able
to sell their shares of a hedge fund until such time had past.
SHORT SALES may be used by the fund (1) to hedge unrealized gains on portfolio
securities or (2) if it covers such short sales with liquid assets as required
by the current rules and positions of the SEC or its staff. Selling securities
short against the box involves selling a security that the fund owns or has the
right to acquire, for the delivery at a specified date in the future. If the
fund sells securities short against the box, it may protect unrealized gains,
but will lose the opportunity to profit on such securities if the price rises.
SPREAD TRANSACTIONS may be used for hedging or managing risk. The fund may
purchase covered spread options from securities dealers. Such covered spread
options are not presently exchange-listed or exchange-traded. The purchase of a
spread option gives the fund the right to put, or sell, a security that it owns
at a fixed dollar spread or fixed yield spread in relation to another security
that the fund does not own, but which is used as a benchmark. The risk to the
fund in purchasing covered spread options is the cost of the premium paid for
the spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options will
be used to protect the fund against adverse changes in prevailing credit quality
spreads, i.e., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury
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securities that have been stripped by a Federal Reserve Bank are obligations of
the U.S. Treasury.
SWAP AGREEMENTS can be structured to increase or decrease a fund's exposure to
long- or short-term interest rates, mortgage securities, corporate borrowing
rates or other conditions, such as security prices or inflation rates. For
example, if a fund agreed to pay a fixed rate in exchange for a floating rate
while holding fixed-rate bonds, the swap would tend to decrease the fund's
exposure to long-term interest rates. Swap agreements tend to increase or
decrease the overall volatility of the fund's investments and its share price
and yield. Changes in interest rates, or other factors determining the amount of
payments due to and from the fund, can be the most significant factors in the
performance of a swap agreement. If a swap agreement calls for payments from the
fund, the fund must be prepared to make such payments when they are due. In
order to help minimize risks, the fund will segregate appropriate assets for any
accrued but unpaid net amounts owed under the terms of a swap agreement entered
into on a net basis. All other swap agreements will require the fund to
segregate appropriate assets in the amount of the accrued amounts owned under
the swap. The fund could sustain losses if a counterparty does not perform as
agreed under the terms of the swap. The fund will enter into swap agreements
with counterparties deemed creditworthy by the investment adviser.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or its agencies or instrumentalities. U.S.
Treasury securities include bills, notes and bonds and 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. Securities issued by
government agencies or instrumentalities include obligations of the following:
The Farm Credit System, Small Business Administration, and the Government
National Mortgage Association (GNMA or Ginnie Mae), including GNMA certificates
and mortgage-backed securities, whose securities are supported by the full faith
and credit of the United States; the Federal Home Loan Banks and the Tennessee
Valley Authority, whose securities are supported by the right to borrow from the
U.S. Treasury; Freddie Mac (formerly known as the Federal Home Loan Mortgage
Association or FHLMC) and Fannie Mae (formerly known as the Federal National
Mortgage Association or FNMA), or the Student Loan Marketing Association (Sallie
Mae or SLMA), whose securities are supported by the discretionary authority of
the U.S. government to purchase certain obligations of the agency or
instrumentality.
There can be no assurance that the U.S. government will provide full financial
support to U.S. government-sponsored agencies or instrumentalities if the U.S.
government is not obligated to do so under law. While U.S. government
securities, including U.S. Treasury securities, are among the safest securities,
like other fixed-income securities, they are sensitive to interest rate changes,
which will cause their yield and value of such securities to fluctuate.
VARIABLE AND FLOATING RATE DEBT SECURITIES pay an interest rate, which is
adjusted either periodically or at specific intervals or which floats
continuously according to a formula or benchmark. Although these structures
generally are intended to minimize the fluctuations in value that occur when
interest rates rise and fall, some structures may be linked to a benchmark in
such a way as to cause greater volatility to the security's value.
Some variable rate securities may be combined with a put or demand feature
(variable rate demand securities) that entitles the holder to the right to
demand repayment in full or to resell at a specific price and/or time. While the
demand feature is intended to reduce credit risks, it is not always
unconditional, and may make the securities more difficult to sell quickly
without losses. There are risks involved with these securities because there may
be no active secondary market for a
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particular variable rate demand security purchased by a fund. In addition, the
fund may exercise only its demand rights at certain times. The fund could suffer
losses in the event that the issuer defaults on its obligation.
WARRANTS are a type of security usually issued with bonds and preferred stock
that entitles the holder to a proportionate amount of common stock at specified
price for a specific period of time. The prices of warrants do not necessarily
move parallel to the prices of the underlying common stock. Warrants have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer. If a warrant is not exercised within the specified time
period, it will become worthless and the fund will lose the purchase price it
paid for the warrant and the right to purchase the underlying security.
WRAP AGREEMENTS may be entered into by the fund with insurance companies, banks
or other financial institutions (wrapper providers). A wrap agreement typically
obligates the wrapper provider to maintain the value of the assets covered under
the agreement (covered assets) up to a specified maximum dollar amount upon the
occurrence of certain specified events. The value is pre-determined using the
purchase price of the securities plus interest at a specified rate minus an
adjustment for any defaulted securities. The specified interest rate may be
adjusted periodically under the terms of the agreement. While the rate typically
will reflect movements in the market rates of interest, it may at times be less
or more than the actual rate or income earned on the covered assets. The rate
also can be impacted by defaulted securities and by purchase and redemption
levels in the fund. The fund also pays a fee under the agreement, which reduces
the rate as well.
Wrap agreements may be used as a risk management technique intended to help
minimize fluctuations in the fund's NAV. However, the fund's NAV will typically
fluctuate at least minimally, and may fluctuate more at times when interest
rates are fluctuating. Additionally, wrap agreements do not protect against
losses the fund may incur if the issuers of portfolio securities do not make
timely payments of interest and/or principal. A wrap agreement provider also
could default on its obligations under the agreement. There is no active trading
market for wrap agreements and none is expected to develop. Therefore, wrap
agreements are considered illiquid investments. There is no guarantee that the
fund will be able to purchase any wrap agreements or replace ones that
defaulted. Wrapper agreements are valued using procedures adopted by the board
of trustees. There are risks that the value of a wrapper agreement may not be
sufficient to minimize the fluctuations in the fund's NAV. All of these factors
might result in a decline in the value of the fund's shares.
YEAR 2000 presents uncertainties and possible risks to the smooth operations of
the fund and the provision of services to shareholders. Many computer programs
use only two digits to identify a specific year and therefore may not accurately
recognize the upcoming change in the next century. If not corrected, many
computer applications could fail or create erroneous results by or at year 2000.
Due to the fund's and its service providers' dependence on computer technology
to operate, the nature and impact of Year 2000 processing failures on the fund
could be material. The fund's investment adviser is taking steps to minimize the
risks of Year 2000 for the fund, including seeking assurances from the fund's
service providers that they are analyzing their systems, testing them for
potential problems and remediating them to the extent possible. There can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
fund, however, minimizing Year 2000 risk for the fund is a priority of the
investment adviser.
The investment adviser generally attempts to take into account all material
information about issuers, including the extent to which they have prepared or
are preparing for the year 2000
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<PAGE> 39
problem. The degree to which the investment adviser inquires into an issuer's
year 2000 preparedness falls within the discretion of the particular
representatives of credit/investment research and portfolio management involved
and generally depends on various factors, including the size of the fund's
holdings in the issuer and the investment adviser's assessment of the
significance of the Year 2000 problem to the issuer's business. Issuers whose
securities represent a significant portion of the fund's holdings or for which
the Year 2000 problem is seen as posing the most material risks generally
receive the greatest scrutiny, while issuers at the other end of the continuum
receive lesser (if any) scrutiny. The investment adviser obtains information
about issuers' Year 2000 preparedness from issuers, reports filed with the SEC,
rating agencies, securities analysts and various publications. The investment
adviser generally is not in a position to verify and cannot guarantee the
completeness or accuracy of this information. Information regarding issuers'
Year 2000 preparedness may be of limited usefulness in many important respects.
Some issuers may not file reports with the SEC and may not have made meaningful
disclosure about Year 2000 preparedness. Disclosure by issuers who do file
reports with the SEC has varied in level of detail, may be qualified without
providing sufficient information to assess the significance of the
qualifications, and may convey the magnitude of possible problems but not the
probability of their occurrence. Altogether, these constraints limit the
investment adviser's ability to form an accurate, independent judgment of issuer
Year 2000 preparedness and may require the investment adviser to rely on
publicly-available assessments made by issuers and others. These assessments may
prove incorrect. Accordingly, the investment adviser assessment of any issuer's
Year 2000 preparedness does not assure that the issuer is or will be Year 2000
compliant or that Year 2000 related problems will not result in a material
adverse effect on the issuer's business and, correspondingly, on the fund.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES are debt securities that do
not make regular cash interest payments. Zero-coupon and step-coupon securities
are sold at a deep discount to their face value. Pay-in-kind securities pay
interest through the issuance of additional securities. Because such securities
do not pay current cash income, the price of these securities can be volatile
when interest rates fluctuate. While these securities do not pay current cash
income, federal income tax law requires the holders of zero-coupon, step-coupon,
and pay-in-kind securities to include in income each year the portion of the
original issue discount (or deemed discount) and other non-cash income on such
securities accruing that year. In order to continue to qualify as a "regulated
investment company" or "RIC" under the Internal Revenue Code and avoid a certain
excise tax, the fund may be required to distribute a portion of such discount
and income and may be required to dispose of other portfolio securities, which
may occur in periods of adverse market prices, in order to generate cash to meet
these distribution requirements.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of the fund's shareholders.
THE FUND MAY NOT:
1) Purchase securities of any issuer, unless consistent with the
maintenance of its status as a diversified investment management
company under the Investment Company Act of 1940 Act (the 1940 Act), or
the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time;
22
<PAGE> 40
2) Concentrate investments in a particular industry or group of
industries, as concentration is defined under the 1940 Act, or the
rules or regulations thereunder, as such statute, rules and regulations
may be amended from time to time; and
3) (i) Purchase or sell commodities, commodities contracts, futures
contracts or real estate, (ii) lend or borrow, (iii) issue senior
securities, (iv) underwrite securities or (v) pledge, mortgage or
hypothecate any of its assets, except as permitted by the 1940 Act, or
the rules or regulations thereunder, as such statute, rules and
regulations may be amended from time to time.
THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING
THE ABOVE POLICIES AND RESTRICTIONS.
Diversification. Under the 1940 Act, a diversified investment management
company, as to 75% of its total assets, may not purchase securities of any
issuer (other than U.S. government securities of other investment companies) if,
as a result, more than 5% of its total assets would be invested in the
securities of such issuer, or more than 10% of the issuer's outstanding voting
securities would be held by the fund.
Concentration. The SEC has presently defined concentration as investing 25% or
more of an investment company's total assets in an industry or group of
industries, with certain exceptions.
Borrowing. The 1940 Act presently allows the fund to borrow from any bank
(including pledging, mortgaging or hypothecating assets) in amount up to 33 1/3%
of its total assets. The 1940 Act presently excludes temporary borrowings not in
excess of 5% of a fund's total assets from this limitation on borrowings.
Lending. Under the 1940 Act, the fund may only make loans if expressly permitted
by its investment policies. The fund's non-fundamental investment policy on
lending is set forth below.
Underwriting. Under the 1940 Act, underwriting securities involves a fund
purchasing securities directly from an issuer for the purpose of selling
(distributing) them or participating in any such activity either directly or
indirectly. Under the 1940 Act, a diversified fund may not make any commitment
as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of
issuers (other than investment companies) of which it owns more than 10% of the
outstanding voting securities, exceeds 25% of the value of its total assets.
Senior Securities. Senior securities may include any obligation or instrument
issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds
from issuing senior securities, although it provides allowances for certain
borrowings and certain other investments, such as short sales, reverse
repurchase agreements, firm commitment agreements and standby commitments, with
appropriate segregation of assets.
NON-FUNDAMENTAL INVESTMENT POLICIES.
The following investment policies and restrictions are non-fundamental and may
be changed by the Trust's Board of Trustees. The fund may not:
1) Purchase securities of any issuer, if as a result, more than 15% of its
net assets would be invested in illiquid securities.
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<PAGE> 41
2) Invest for the purpose of exercising control or management of another
issuer.
3) Purchase securities of other investment companies, except as permitted
by the 1940 Act, including any exemptive relief granted by the SEC.
4) Sell securities short unless it owns the security or the right to
obtain the security or equivalent securities, or unless it covers such
short sale as required by current SEC rules and positions (transactions
in futures contracts, options and other derivative instruments are not
considered selling securities short).
5) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities and
provided that margin payments in connection with futures contracts,
options on futures or other derivative instruments shall not constitute
purchasing securities on margin.
6) Borrow money except that the fund may (i) borrow money from banks and
(ii) engage in reverse repurchase agreements or mortgage dollar rolls
with any party; provided that (i) and (ii) in combination do not exceed
33 1/3% of its total assets (any borrowings that come to exceed this
amount will be reduced to the extent necessary to comply with the
limitation within three business days) and the fund will not purchase
securities while bank borrowings represent more than 5% of its total
assets.
7) Purchase securities of any issuer (other than U.S. government and
municipal securities) if, as a result, more than 25% of its net assets
would be invested in the securities of issuers in a single industry or
group of industries.
8) Lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of debt securities or
repurchase agreements).
Except with respect to non-fundamental limitations (1) illiquid securities and
(6) borrowing, any subsequent change in net assets or other circumstances will
not be considered when determining whether the investment complies with the
fund's investment policies and limitations.
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<PAGE> 42
MANAGEMENT OF THE FUND
The officers and trustees, their principal occupations during the past five
years and their affiliations, if any, with The Charles Schwab Corporation,
Charles Schwab & Co., Inc. (Schwab) and Charles Schwab Investment Management,
Inc. (CSIM or the investment adviser), are as follows:
<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS &
OF BIRTH THE TRUST AFFILIATIONS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Co-Chief Executive Officer and Director,
July 29, 1937 The Charles Schwab Corporation; Chairman, Chief
Executive Officer and Director, Charles Schwab
Holdings, Inc.; Chairman and Director, Charles Schwab
& Co., Inc., Charles Schwab Investment Management,
Inc., The Charles Schwab Trust Company and Schwab
Retirement Plan Services, Inc.; 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).
STEVEN L. SCHEID* President and Trustee Executive Vice President and Chief Financial Officer,
June 28, 1953 The Charles Schwab Corporation; Enterprise President
- Financial Products and Services and Chief Financial
Officer, Charles Schwab & Co., Inc.; Chief Executive
Officer, Chief Financial Officer and Director,
Charles Schwab Investment Management, Inc. From 1994
to 1996, Mr. Scheid was Executive Vice President of
Finance for First Interstate Bancorp and Principal
Financial Officer from 1995 to 1996. Prior to 1994,
Mr. Scheid was Chief Financial Officer, First
Interstate Bank of Texas.
DONALD F. DORWARD Trustee Executive Vice President and Managing Director, Grey
September 23, 1931 Advertising. From 1990 to 1996, Mr. Dorward was
President and Chief Executive Officer, Dorward &
Associates (advertising and marketing/consulting
firm).
</TABLE>
* This trustee is an "interested person" of the trust.
25
<PAGE> 43
<TABLE>
<CAPTION>
NAME/DATE POSITION(S) WITH PRINCIPAL OCCUPATIONS &
OF BIRTH THE TRUST AFFILIATIONS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments) and Chairman and Chief Executive
Officer of North American Trust (real estate
investment trust).
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air transportation,
real estate investment, management, and investments).
TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller, Charles
March 7, 1951 Financial Officer 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.
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.
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 Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</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.
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<PAGE> 44
The fund is overseen by a board of trustees. The board of trustees meets
regularly to review the fund's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of the fund's shareholders. The following table provides information concerning
compensation of the trustees.
<TABLE>
<CAPTION>
($) Pension or ($)
Aggregate Retirement Total
Name of Trustee Compensation Benefits Accrued Compensation
from the Fund(1) as Part of Fund from Fund
Expenses Complex(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charles R. Schwab 0 N/A 0
Timothy F. McCarthy 3 0 N/A 0
Tom D. Seip 4 0 N/A 0
Steven L. Scheid 5 0 N/A 0
William J. Klipp 0 N/A 0
Donald F. Dorward $1,758 N/A $99,550
Robert G. Holmes $1,758 N/A $99,550
Donald R. Stephens $1,758 N/A $99,550
Michael W. Wilsey $1,758 N/A $99,550
</TABLE>
1 Estimated compensation for the fiscal year ended August 31, 2000.
2 Unless otherwise stated, information is for the fund complex, which
included 39 funds as of April 15, 1999.
3 Mr. McCarthy served as President and trustee until November 24, 1997.
4 Mr. Seip served as President and trustee until May 15, 1998.
5 Mr. Scheid became President and trustee on August 18, 1998.
DEFERRED COMPENSATION PLAN
Trustees who are not "interested persons" of a trust ("independent trustees")
may enter into a fee deferral plan. Under this plan, deferred fees will be
credited to an account established by the trust as of the date that such fees
would have been paid to the trustee. The value of this account will equal the
value that the account would be if the fees credited to the account had been
invested in the shares of SchwabFunds selected by the trustee. Currently, none
of the independent trustees have elected to participate in this plan.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of July 1, 1999, the officers and trustees of the fund, as a group owned of
record or beneficially less than 1% of the outstanding voting securities of the
fund.
27
<PAGE> 45
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as the fund's investment adviser and
administrator pursuant to Investment Advisory and Administration Agreements
(Advisory Agreements) between it and the trust. Charles Schwab & Co., Inc.
(Schwab) is an affiliate of the investment adviser and is the trust's
distributor, shareholder services agent and transfer agent. Charles R. Schwab is
the founder, Chairman, Co-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 adviser and Schwab.
For its advisory and administrative services to the fund, the investment adviser
is entitled to receive an annual fee, accrued daily and paid monthly, of 0.35%
of the fund's average daily net assets not in excess of $500 million, and 0.30%
of such net assets over $500 million.
The investment adviser and Schwab have voluntarily guaranteed that, through at
least October 31, 2000, the total operating expenses (excluding interest, taxes
and extraordinary expenses) of the Investor Shares and Select Shares of the fund
will not exceed 0.55% and 0.40%, respectively, of average daily net assets.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of the fund and is the trust's agent for the purpose of the continuous
offering of the fund's shares. The 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.
SHAREHOLDER SERVICES AND TRANSFER AGENT
Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
fund's prospectuses, financial reports and other informational literature about
the fund. Schwab maintains the office space, equipment and personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds and
provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these services.
For the services performed as transfer agent under the contract with the fund,
Schwab is entitled to receive an annual fee, payable monthly from the fund, in
the amount of 0.05% of the fund's average daily net assets. For the services
performed as shareholder services agent under its contract with the fund, Schwab
is entitled to receive an annual fee, payable monthly from each class of shares
of the fund, in the amount of 0.20% of the Investor Shares' average daily net
assets and 0.05% of the Select Shares' average daily net assets.
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<PAGE> 46
CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, Airport Business Center, 200 Stevens Drive, Suite 440,
Lester Pennsylvania, 19113, serves as custodian for the funds and PFPC, Inc.,
103 Bellevue Parkway, Wilmington DE 19809, serves as fund accountant.
The custodians are responsible for the daily safekeeping of securities and cash
held or sold by the fund. The accountants maintain all books and records related
to the fund's transactions.
INDEPENDENT ACCOUNTANT
The fund's independent accountant, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trust and review
certain regulatory reports and the fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
the trust engages them to do so. Their address is 333 Market Street, San
Francisco, California 94105. The fund's audited financial statements for the
fiscal year ending August 31, 2000, will be included in the fund's annual report
that is supplied with the SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
PORTFOLIO TURNOVER
For reporting purposes, the fund's turnover rate is calculated by dividing the
value of purchases or sales of portfolio securities for the fiscal year,
whichever is less, by the monthly average value of portfolio securities the fund
owned during the fiscal year. When making the calculation, all securities whose
maturities at the time of acquisition were one year or less (short-term
securities) are excluded.
A 100% portfolio turnover rate would occur, for example, if all portfolio
securities (aside from short-term securities) were sold and either repurchased
or replaced once during the fiscal year. The fund may experience a high
portfolio turnover rate in its first year of operation.
The fund's portfolio turnover rates will be set forth in the financial highlight
tables in the prospectus in the future. The fund does not anticipate significant
variations in its portfolio turnover rate from one year to the next.
PORTFOLIO TRANSACTIONS
In effecting securities transactions for the fund, the investment adviser seeks
to obtain best price and execution. Subject to the supervision of the board of
trustees, the investment adviser will generally select brokers and dealers for
the fund primarily on the basis of the quality and reliability of brokerage
services, including execution capability and financial responsibility.
When the execution capability and price offered by two or more broker-dealers
are comparable, the investment adviser may, in its discretion, in agency
transactions (and not principal transactions) utilize the services of
broker-dealers that provide it with investment information and other research
resources. Such resources also may be used by the investment adviser when
providing advisory services to its clients.
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<PAGE> 47
The fund expects that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by be the issuer
to the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices
The investment decisions for the fund are reached independently from those for
other accounts managed by the investment adviser. Such other accounts also may
make investments in instruments or securities at the same time as the fund. When
two or more accounts managed by the investment adviser have funds available for
investment in similar instruments, available instruments are allocated as to
amount in a manner considered equitable to each account. In some cases, this
procedure may affect the size or price of the position obtainable for the fund.
However, it is the opinion of the board of trustees that the benefits conferred
by the investment manager outweigh any disadvantages that may arise from
exposure to simultaneous transactions.
In an attempt to obtain best execution for the fund, the investment adviser may
place orders directly with market makers or with third market brokers, Instinet
or brokers on an agency basis. Placing orders with third market brokers or
through Instinet may enable the fund to trade directly with other institutional
holders on a net basis. At times, this may allow the fund to trade larger blocks
than would be possible trading through a single market maker.
DESCRIPTION OF THE TRUST
The fund is a series of Schwab Investments.
The Declaration of Trust provides that shares may be automatically redeemed if
held by a shareholder in an amount less than the minimum required by the fund or
share class. The fund's initial and subsequent minimum investment and balance
requirements are set forth in the prospectus. These minimums may be waived for
certain investors, including trustees, officers and employees of Schwab, or
changed without prior notice.
The fund 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 bylaws of the trust provides that a majority of shares entitled to vote
shall be a quorum for the transaction of business at a shareholders' meeting,
except that where any provision of law, or of the Declaration of Trust or of the
bylaws permits or requires that (1) holders of any series shall vote as a
series, then a majority of the aggregate number of shares of that series
entitled to vote shall be necessary to constitute a quorum for the transaction
of business by that series, or (2) holders of any class shall vote as a class,
then a majority of the aggregate number of shares of that class entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that class. Any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting, without the necessity of further notice. 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.
30
<PAGE> 48
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. There is a remote possibility
that the fund could become liable for a misstatement in the prospectus or SAI
about another fund.
As more fully described in the Declaration of Trust, the trustees may each year,
or more frequently, distribute to the shareholders of each series accrued income
less accrued expenses and any net realized capital gains less accrued expenses.
Distributions of each year's income of each series shall be distributed pro rata
to shareholders in proportion to the number of shares of each series held by
each of them. Distributions will be paid in cash or shares or a combination
thereof as determined by the trustees. Distributions paid in shares will be paid
at the net asset value as determined in accordance with the bylaws.
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASING AND REDEEMING SHARES OF THE FUND
As long as the fund or Schwab follow reasonable procedures to confirm that your
telephone order is genuine, they will not be liable for any losses an investor
may experience due to unauthorized or fraudulent instructions. 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.
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 the
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.
The fund reserves the right to waive the early redemption fee for certain
tax-advantaged retirement plans.
The fund 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 these limits may be paid, in whole or in part,
in investment securities or in cash, as the board of trustees may deem
advisable. Payment will be made wholly in cash unless the board of trustees
believes that economic or market conditions exist that would make such payment a
detriment to the best interests of a fund. If redemption
31
<PAGE> 49
proceeds are paid in investment securities, such securities will be valued as
set forth in "Pricing of Shares". A redeeming shareholder would normally incur
brokerage expenses if he or she were to convert the securities to cash.
PRICING OF SHARES
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. Securities for which
market quotations or closing values are not readily available (including
restricted securities that are subject to limitations on their sale and illiquid
securities) are valued at fair value as determined in good faith pursuant to
guidelines and procedures adopted by the board of trustees. These procedures
require that securities be valued on the basis of prices provided by approved
pricing services, except when a price appears manifestly incorrect or events
occurring between the time a price is furnished by a service and the time a fund
calculates its share price materially affect the furnished price. The board of
trustees regularly reviews fair values assigned to portfolio securities under
these circumstances and also when no prices from approved pricing services are
available.
TAXATION
FEDERAL TAX INFORMATION FOR THE FUND
It is the fund's policy to qualify for taxation as a RIC by meeting the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the Code). By qualifying as a RIC, the fund expects to eliminate or reduce to a
nominal amount the federal income tax to which it is subject. If a fund does not
qualify as a RIC under the Code, it will be subject to federal income tax on its
net investment income and any net realized capital gains.
The Code imposes a non-deductible excise tax on RICs 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 net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. 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.
The fund's transactions in futures contracts, options and certain other
investment activities may be restricted by the Code and are subject to special
tax rules. In a given case, these rules may accelerate income to the 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. The fund will
endeavor to make any available elections pertaining to these transactions in a
manner believed to be in the best interest of the fund and its shareholders.
FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS
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<PAGE> 50
The discussion of federal income taxation presented below supplements the
discussion in the fund's prospectus and only summarizes some of the important
federal tax considerations generally affecting shareholders of the fund.
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 the fund.
Any dividends declared by the fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. Long-term
capital gains distributions are taxable as long-term capital gains, regardless
of how long you have held your shares. However, if you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss. Distributions by the fund also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.
The 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." Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
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 generally are 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.
CALCULATION OF PERFORMANCE DATA
Average annual total return is a standardized measure of performance calculated
using methods prescribed by SEC rules. It is calculated by determining the
ending value of a hypothetical initial investment of $1,000 made at the
beginning of a specified period. The ending value is then divided by the initial
investment, which is annualized and expressed as a percentage. It is reported
for periods of one, five and 10 years or since commencement of operations for
periods not falling on those intervals. In computing average annual total
return, a fund assumes reinvestment of all distributions at net asset value on
applicable reinvestment dates.
An after-tax total return for the fund may be calculated by taking that fund's
total return and subtracting applicable federal taxes from the portions of the
fund's total return attributable to capital gain and ordinary income
distributions. This after-tax total return may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.
33
<PAGE> 51
The fund may advertise the percentage of its total return that would be paid to
taxes annually (at the applicable federal personal income and capital gains tax
rates) before redemption of fund shares. This proportion may be compared to that
of other mutual funds with similar investment objectives as reported by
independent sources.
The fund also may 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 commencement of
operations to the end of the fiscal year.
A 30-day yield is calculated by dividing the net investment per share earned
during a 30-day period by the income per share earned during the 30-day period
by the fund's share price on the last day of the period.
The performance of the fund may be compared with the performance of other mutual
funds by comparing the ratings of mutual fund rating services, various indices,
U.S. government obligations, bank certificates of deposit, the consumer price
index and other investments for which reliable data is available. An index's
performance data assumes the reinvestment of dividends but does not reflect
deductions for administrative, management and trading expenses. The fund will be
subject to these costs and expenses, while an index does not have these
expenses. In addition, various factors, such as holding a cash balance, may
cause the fund's performance to be higher or lower than that of an index.
APPENDIX - RATINGS OF INVESTMENT SECURITIES
From time to time, the fund may report the percentage of its assets that fall
into the rating categories set forth below.
BONDS
MOODY'S INVESTORS SERVICE
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an 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 such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear
34
<PAGE> 52
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
35
<PAGE> 53
STANDARD & POOR'S CORPORATION
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated debt only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB' and 'B' is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rate 'B' has greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions would likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
36
<PAGE> 54
DUFF & PHELPS CREDIT RATING CO.
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest but
AA- may vary slightly from time to time because of economic conditions.
A+ Protection factors are average but adequate. However, risk factors are
A- more variable and greater in periods of economic stress.
BBB+ Below average protection factors but still considered sufficient for
BBB- prudent investment. Considerable variability in risk during
economic cycles.
BB+ Below investment grade but deemed likely to meet obligations when due.
BB- Present or BB prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall
quality may move up or down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not
B be met when due. Financial protection factors will fluctuate widely
B- according to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
FITCH IBCA, INC.
INVESTMENT GRADE BOND
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA'. Because
bonds rated in the 'AAA' and 'AA' categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issuers is generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
37
<PAGE> 55
ratings of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
SPECULATIVE GRADE BOND
BB Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified
which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issue.
DESCRIPTION OF IBCA'S LONG-TERM RATINGS
AAA Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
substantially.
AA Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
A Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
BBB Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
BB Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions.
B Obligations for which investment risk exists. Timely repayment of
principal and interest is not sufficiently protected against adverse
changes in business, economic or financial conditions.
DESCRIPTION OF THOMSON BANKWATCH'S LONG-TERM DEBT RATINGS
INVESTMENT GRADE
38
<PAGE> 56
AAA The highest category; indicates that the ability to repay principal and
interest on a timely basis is very high.
AA The second-highest category; indicates a superior ability to repay
principal and interest on a timely basis, with limited incremental risk
compared to issues rated in the highest category.
A The third-highest category; indicates the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.
BBB The lowest investment-grade category; indicates an acceptable capacity
to repay principal and interest. Issues rated "BBB" are, however, more
vulnerable to adverse developments (both internal and external) than
obligations with higher ratings.
NON-INVESTMENT GRADE
BB While not investment grade, the "BB" rating suggests that the
likelihood of default is considerably less than for lower-rated issues.
However, there are significant uncertainties that could affect the
ability to adequately service debt obligations.
B Issues rated "B" show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse
developments could well negatively affect the payment of interest and
principal on a timely basis.
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.
FITCH IBCA, INC.
Obligations supported by the highest capacity for timely repayment are rated
F1+. An F1 rating indicates that the obligation is supported by a very strong
capacity for timely repayment. Obligations rated F2 are supported by a good
capacity for timely repayment, although adverse changes in business, economic,
or financial conditions may affect this capacity.
39
<PAGE> 57
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers (or
related supporting institutions) of commercial paper with this rating are
considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
An S&P A-1 commercial paper rating indicates a strong degree of safety regarding
timely payment of principal and interest. Issues determined to possess
overwhelming safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
Duff-1 is the highest commercial paper rating assigned by Duff. Three gradations
exist within this rating category: A Duff-1+ rating indicates the highest
certainty of timely payment (issuer short-term liquidity is found to be
outstanding and safety is deemed to be just below that of risk-free short-term
U.S. Treasury obligations), a Duff-1 rating signifies a very high certainty of
timely payment (issuer liquidity is determined to be excellent and risk factors
are considered minor) and a Duff-1- rating denotes high certainty of timely
payment (issuer liquidity factors are strong and risk is very small). A Duff-2
rating indicates a good certainty of timely payment. Liquidity factors and
company fundamentals are sound and risk factors are small.
FITCH IBCA, INC.
F-1+ is the highest category, and indicates the strongest degree of assurance
for timely payment. Issues rated F-1 reflect an assurance of timely payment only
slightly less than issues rated F-1+. Issues assigned an F-2 rating have a
satisfactory degree of assurance for timely payment, but the margin of safety is
not as great as for issues in the first two rating categories.
COMMERCIAL PAPER, SHORT-TERM OBLIGATIONS
AND DEPOSIT OBLIGATIONS ISSUED BY BANKS
THOMSON BANKWATCH
TBW-1 is the highest category and indicates the degree of safety regarding
timely repayment of principal and interest is very high. TBW-2 is the second
highest category and while the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as high
as for issues rated "TBW-1."
40
<PAGE> 58
PART C
OTHER INFORMATION
SCHWAB INVESTMENTS
Item 23. Exhibits.
(a) Articles of Agreement and Declaration of Trust,
Incorporation dated October 26, 1990, was
electronically filed and is
incorporated by reference to
Exhibit 1 of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form
N-1A, filed on December 30, 1997.
(b) By-Laws Amended and Restated By-Laws were
electronically filed and are
incorporated by reference to
Exhibit 2 of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form
N-1A, filed on December 30, 1997.
(c) Instruments Defining (i) Article III, Section 5, Article V,
Rights of Security Article VI, Article VIII, Section 4
Holders and Article IX, Sections 1, 5 and 7
of the Agreement and Declaration of
Trust were filed and are
incorporated by reference to
Exhibit 1 of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form
N-1A, filed on December 30, 1997.
(ii) Article 9, Article 10, Section 6,
and Article 11 of the Amended and
Restated By-Laws were filed and are
incorporated by reference to
Exhibit 2 of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form N-1A
filed on December 30, 1997.
(d) Investment Advisory (i) Investment Advisory and
Contracts Administration Agreement between
Registrant and Charles Schwab
Investment Management, Inc. (the
"Investment Manager") and Schedules
B and C were electronically filed
and are incorporated by reference
to Exhibit 5(a) of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form
N-1A, filed on December 30, 1997.
(ii) Amended Schedules A and D to
Investment Advisory and
Administration Agreement referred
to at Exhibit (d)(i) above are
electronically filed herein as
Exhibit (d)(ii).
(e) Underwriting (i) Distribution Agreement between
Contracts Registrant and Charles Schwab &
Co., Inc. ("Schwab") was
electronically filed and is
incorporated by reference to
Exhibit 6 of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form
N-1A, filed on December 30, 1997.
Part C
<PAGE> 59
(ii) Amended Schedule A to the
Distribution Agreement is
electronically filed herein as
Exhibit (e)(ii).
(f) Bonus or Profit Inapplicable.
Sharing Contracts
(g) Custodian Agreements (i) Custodian Services Agreement
between Registrant and PNC Bank,
National Association (formerly
Provident National Bank) was
electronically filed and is
incorporated by reference to
Exhibit 8(a) of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form
N-1A, filed on December 30, 1997.
(ii) Amendment No. 1 to Custodian
Services Agreement referred to at
Exhibit 8(a) above was filed and is
incorporated by reference to
Exhibit 8(b) of Post-Effective
Amendment No. 13 to Registrant's
Registration Statement on Form
N-1A, filed on December 29, 1996.
(iii) Amendment No. 2 to Custodian
Services Agreement referred to at
Exhibit 8(a) above was filed and is
incorporated by reference to
Exhibit 8(c) of Post-Effective
Amendment No.14 to Registrant's
Registration Statement on Form
N-1A, filed on December 30, 1996.
(iv) Amended Schedule A to the Custodian
Services Agreement referred to at
Exhibit 8(a) above is
electronically filed herein as
Exhibit (g)(iv).
(v) Transfer Agency Agreement between
the Registrant and Schwab and
Schedule B were electronically
filed and are incorporated by
reference to Exhibit 8(e) of
Post-Effective Amendment No. 22 to
Registrant's Registration Statement
on Form N-1A, filed on December 30,
1997.
(vi) Amended Schedules A and C to the
Transfer Agency Agreement referred
to at Exhibit 8(e) above are
electronically filed herein as
Exhibit (g)(vi).
(vii) Shareholder Service Agreement
between the Registrant and Schwab
and Schedule B were electronically
filed and are incorporated by
reference to Exhibit 8(g) of
Post-Effective Amendment No. 22 to
Registrant's Registration Statement
on Form N-1A, filed on December 30,
1997.
Part C
<PAGE> 60
(viii) Schedules A and C to the
Shareholder Service Agreement
between the Registrant and Schwab
referenced at Exhibit (g)(ix) above
are electronically filed herein as
Exhibit (g)(viii).
(ix) Accounting Services Agreement
between Registrant and Provident
Financial Processing Corporation
was electronically filed and is
incorporated by reference to
Exhibit 8(i) of Post-Effective
Amendment No. 22 to Registrant's
Registration Statement on Form N-1A
filed on December 30, 1997.
(x) Amendment No. 1 to Accounting
Services Agreement referred to at
Exhibit 8(xii) above was filed and
is incorporated by reference to
Exhibit 8(j) of Post-Effective
Amendment No. 13 to Registrant's
Registration Statement on Form
N-1A, filed on December 29, 1996.
(xi) Amendment No. 2 to Accounting
Services Agreement referred to at
Exhibit 8(xiii) above was filed and
is incorporated by reference to
Exhibit 8(k) of Post-Effective
Amendment No. 14 to Registrant's
Registration Statement on Form
N-1A, filed on December 30, 1996.
(xii) Amended Schedule A to the
Accounting Services Agreement
referred to at Exhibit 8(xiii)
above is electronically filed
herein as Exhibit (g)(xii).
(xiii) Amended Custodian Services Fee
Agreement dated November 1, 1998 by
and between the Registrant and PNC
Bank, National Association, is
incorporated herein by reference to
Exhibit g(xii)of Post-Effective
Amendment No. 27 to Registrant's
Registration Statement on Form
N-1A, electronically filed on
December 30, 1998.
(xiv) Schedule A to the Custodian
Services Fee Agreement between the
registrant and PNC Bank, National
Association and PFPC, Inc. are
electronically filed herein as
Exhibit (g)(xvii).
(xv) Accounting Services Agreement with
SEI Fund Resources dated April 1,
1998, is incorporated herein by
reference to Exhibit g(xiii) of
Post-Effective Amendment No. 27 to
Registrant's Registration Statement
on Form N-1A, electronically filed
on December 30, 1998.
(xvi) Amended Schedule A of the
Accounting Services Agreement
between the Registrant and SEI Fund
Resources is electronically filed
herein as Exhibit (g)(xvi).
Part C
<PAGE> 61
(xvii) Amendment No. 1 to the Accounting
Services Agreement dated December
17, 1998, by and between Schwab
Capital Trust, Schwab Annuity
Portfolios, Schwab Investments and
SEI Fund Resources is
electronically filed herein as
Exhibit (xvii).
(h) Other Material Inapplicable.
Contracts
(i) Legal Opinion Opinion of Counsel is
electronically filed herein as
Exhibit (i).
(j) Other Opinions Inapplicable.
(k) Omitted Financial Inapplicable.
Statements
(l) Initial Capital (i) Purchase Agreement relating to
Agreement shares of the Schwab 1000 Fund is
electronically filed herein as
Exhibit (l)(i).
(ii) Purchase Agreement relating to
shares of the Schwab Short-Term
Bond Market Index Fund (formerly
Schwab Short/Intermediate
Government Bond Fund) is
electronically filed herein as
Exhibit (l)(ii).
(iii) Purchase Agreement relating to
shares of the Schwab California
Long-Term Tax-Free Bond Fund
(formerly Schwab California Tax
Free Bond Fund) is electronically
filed herein as Exhibit (l)(iii).
(iv) Purchase Agreement relating to
shares of the Schwab Long-Term
Tax-Free Bond Fund (formerly Schwab
National Tax Free Bond Fund) is
electronically filed herein as
Exhibit (l)(iv).
(v) Purchase Agreement relating to
shares of the Schwab
Short/Intermediate Tax-Free Bond
Fund, Schwab California
Short/Intermediate Tax-Free Bond
Fund and Schwab Total Bond Market
Index Fund (formerly, Schwab
Long-Term Government Bond Fund) was
filed and is incorporated by
reference to Exhibit 13 to
Post-Effective Amendment No. 22 to
Registrant's Registration Statement
on Form N-1A filed on December 30,
1997.
(vi) Purchase Agreement relating to
shares of the Schwab Yield Plus
Fund is electronically filed herein
as Exhibit (l)(vi).
(m) Rule 12b-1 Plan Inapplicable.
Part C
<PAGE> 62
(n) Financial Data (i) Inapplicable.
Schedule
(o) Rule 18f-3 Plan Registrant's Amended and Restated
Multiple Class Plan for Investor
and Select Shares of Schwab 1000
Fund(R) and Schwab YieldPlus Fund
(TM) is electronically filed herein
as Exhibit (o)(i).
Item 24. 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 25. Indemnification.
Article VIII of Registrant's Agreement and Declaration of Trust (Exhibit (1)
hereto, which is incorporated herein by reference) provides in effect that
Registrant will indemnify its officers and trustees against all liabilities and
expenses, including but not limited to amounts paid in satisfaction of
judgments, in compromise, or as fines and penalties, and counsel fees reasonably
incurred by any such officer or trustee in connection with the defense or
disposition of any action, suit, or other proceeding. However, in accordance
with Section 17(h) and 17(i) of the 1940 Act and its own terms, said Agreement
and Declaration of Trust does not protect any person against any liability to
Registrant or its shareholders to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office. In any
event, Registrant will comply with 1940 Act Releases No. 7221 and 11330
respecting the permissible boundaries of indemnification by an investment
company of its officers and trustees.
Insofar as indemnification for liability arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that, in the opinion of the Securities
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 26. Business and Other Connections of Investment Adviser
Registrant's Investment Manager, Charles Schwab Investment Management, Inc., a
Delaware corporation, organized in October 1989 to serve as Investment Manager
to Registrant, also serves as the
Part C
<PAGE> 63
Investment Manager to The Charles Schwab Family of Funds, 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, The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab
Annuity Portfolios and any other investment companies that Schwab may sponsor in
the future.
The business, profession, vocation or employment of a substantial nature in
which each director and/or senior or executive officer of the Investment Manager
(CSIM) and/or Schwab & Co. Inc. (principal underwriter) is or has been engaged
during the past two fiscal years 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, Co-Chief Executive
Officer and Director
Charles Schwab Investment Management, Inc. Chairman and Director
The Charles Schwab Trust Company Chairman and Director
Mayer & Schweitzer, Inc. Chairman and Director until
January 1999
Schwab Retirement Plan Services, Inc. Chairman and Director until
January 1999
Charles Schwab Limited Chief Executive Officer
Performance Technologies, Inc. Chairman and Director until
January 1999
TrustMark, Inc. Chairman and Director until
January 1999
The Gap, Inc. Director
Transamerica Corporation Director
AirTouch Communications Director
Siebel Systems Director
David S. Pottruck Charles Schwab & Co., Inc. Chief Executive Officer and
Director
The Charles Schwab Corporation President, Co-Chief Executive
Officer and Director
Schwab Retirement Plan Services, Inc. Director until January 1999
</TABLE>
Part C
<PAGE> 64
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab Limited Director until January 1999
Charles Schwab Investment Management, Inc. Director
Mayer & Schweitzer, Inc. Director until January 1999
Performance Technologies, Inc. Director until January 1999
TrustMark, Inc. Director until January 1999
Steven L. Scheid Charles Schwab & Co., Inc. Enterprise President - Financial
President and Trustee Products and Services, Chief
Financial Officer and Director
The Charles Schwab Corporation Executive Vice President and
Chief Financial Officer
Charles Schwab Investment Management, Inc. Chief Executive Officer, Chief
Financial Officer and Director
The Charles Schwab Trust Company Director until July 1998
Charles Schwab Limited Finance Officer
Schwab Retirement Plan Services, Inc. Director until January 1999
Performance Technologies, Inc. Director until January 1999
Mayer & Schweitzer, Inc. Director until January 1999
Willie C. Bogan The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Assistant Corporate Secretary
Charles Schwab Investment Management, Inc. Corporate Secretary
Karen W. Chang Charles Schwab & Co., Inc. Enterprise President - General
Investor Services
The Charles Schwab Corporation Executive Vice President
John P. Coghlan Charles Schwab & Co., Inc. Enterprise President - Retirement
Plan Services and Services to
Investment Managers
The Charles Schwab Corporation Executive Vice President
The Charles Schwab Trust Company President, Chief Executive Officer
and Director
</TABLE>
Part C
<PAGE> 65
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Schwab Retirement Plan Services, Inc. Director
Frances Cole, Charles Schwab Investment Management, Inc. Senior Vice President, Chief
Secretary Counsel and Assistant Corporate
Secretary
Linnet F. Deily Charles Schwab & Co., Inc. President - Schwab Retail Group
The Charles Schwab Corporation Executive Vice President
Christopher V. Dodds Charles Schwab & Co., Inc. Executive Vice President - Finance
The Charles Schwab Corporation Executive Vice President and
Controller
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President -
Corporate Oversight and Corporate
Secretary
The Charles Schwab Corporation Executive Vice President, General
Counsel and Corporate Secretary
Wayne W. Fieldsa Charles Schwab & Co., Inc. Enterprise President - Brokerage
Operations
Lon Gorman Charles Schwab & Co., Inc. Enterprise President - Capital
Markets and Trading
The Charles Schwab Corporation Executive Vice President
James M. Hackley Charles Schwab & Co., Inc. Executive Vice President - Retail
Client Services
Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President - Mutual
Fund Operations
William J. Klipp, Charles Schwab & Co., Inc. Executive Vice President -
Trustee, Executive Vice SchwabFunds
President and Chief
Operating Officer
Charles Schwab Investment Management, Inc. Executive Vice President,
President and Chief Operating
Officer
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President and Chief
Strategy Officer
Charles Schwab & Co., Inc. Executive Vice President and Chief
Strategy Officer
</TABLE>
Part C
<PAGE> 66
<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
Susanne D. Lyons Charles Schwab & Co., Inc. Enterprise President - Retail
Client Services
The Charles Schwab Corporation Executive Vice President
Frederick E. Matteson Charles Schwab & Co., Inc. Executive Vice President - Schwab
Technology Services
John P. McGonigle Charles Schwab & Co., Inc. Executive Vice President - Third
Party Funds
Geoffrey Penney Charles Schwab & Co., Inc. Executive Vice President -
Financial Products and
International Technology
George Rich Charles Schwab & Co., Inc. Executive Vice President - Human
Resources
Gideon Sasson Charles Schwab & Co., Inc. Enterprise President - Electronic
Brokerage
The Charles Schwab Corporation Executive Vice President
Elizabeth Sawi Charles Schwab & Co., Inc. Executive Vice President
Leonard Short Charles Schwab & Co., Inc. Executive Vice President - CRS
Advertising and Branch Management
Luis E. Valencia Charles Schwab & Co., Inc. Enterprise President -
International
The Charles Schwab Corporation Executive Vice President
Stephen B. Ward, Charles Schwab Investment Management, Inc. Senior Vice President and Chief
Senior Vice President and Investment Officer
Chief Investment Officer
</TABLE>
Item 27. Principal Underwriters.
(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab currently also acts as principal underwriter for the
Schwab Fund Family, Schwab Capital Trust, Schwab Annuity Portfolios and intends
to act as such for any other investment company which Schwab may sponsor in the
future.
Part C
<PAGE> 67
(b) See Item 26(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 28. 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; 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; Registrant's fund accountants, PFPC,
Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809 or SEI Fund Resources,
Oaks,Pennsylvania; or Ropes & Gray, 1301 K Street, N.W., Suite 800 East,
Washington, District of Columbia, 20005.
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
Part C
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
Item Document
- ---- --------
<S> <C>
(d)(ii) Schedules A and D to the Investment Advisory and
Administration Agreement.
(e)(ii) Schedule A to the Distribution Agreement
(g)(iv) Schedule A to the Custodian Services Agreement
(g)(vi) Schedules A and C to the Transfer Agency Agreement
(g)(viii) Schedules A and C to the Shareholder Services Agreement
(g)(xii) Schedule A to the Accounting Services Agreement
(g)(xiv) Schedule A to the Custodian Services Fee Agreement
(g)(xvi) Schedule A to Accounting Services Agreement with SEI
(g)(xvii) Amendment No.1
(i) Opinion of Counsel
(l)(i)-(iv) and (vi) Purchase Agreements
(o) Amended and Restated Multiple Class Plan
</TABLE>
Part C
<PAGE> 1
EXHIBIT (d)(ii)
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
AMENDED SCHEDULE A
FUND FUND EFFECTIVE DATE
- ---- -------------------
Schwab 1000 Fund April 2, 1991
Schwab Short/Intermediate November 4, 1991
Government Bond Fund
Schwab California Long-Term February 20, 1992
Tax-Free Bond Fund
Schwab Long-Term Tax-Free July 30, 1992
Bond Fund
Schwab Long-Term Government March 1, 1993
Bond Fund
Schwab Short/Intermediate Tax-Free March 1, 1993
Bond Fund
Schwab California Short/Intermediate March 1, 1993
Tax-Free Bond Fund
Schwab YieldPlus Fund July 21, 1999
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
-----------------------------------
Name: William J. Klipp
Title: Executive Vice President,
Chief Operating Officer and Trustee
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ Stephen B. Ward
------------------------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer
<PAGE> 2
AMENDED SCHEDULE D
ADVISORY FEE SCHEDULE
<TABLE>
<CAPTION>
FUND FUND EFFECTIVE DATE
- ---- -------------------
<S> <C>
SCHWAB 1000 FUND APRIL 2, 1991
- ----------------
The annual fee, payable monthly, is 0.30% of the Fund's average daily net assets
not in excess of $500 million and 0.22% of such assets over $500 million.
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND NOVEMBER 4, 1991
- ----------------------------------------------
The annual fee, payable monthly, is 0.41% of the Fund's average daily net
assets.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND FEBRUARY 20, 1992
- ----------------------------------------------
The annual fee, payable monthly, is 0.41% of the Fund's average daily net
assets.
SCHWAB LONG-TERM TAX-FREE BOND FUND JULY 30, 1992
- -----------------------------------
The annual fee, payable monthly, is 0.41% of the Fund's average daily net
assets.
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND MARCH 1, 1993
- --------------------------------------------
The annual fee, payable monthly, is 0.41% of the Fund's average daily net
assets.
SCHWAB LONG-TERM GOVERNMENT BOND FUND MARCH 1, 1993
- -------------------------------------
The annual fee, payable monthly, is 0.41% of the Fund's average daily net
assets.
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND MARCH 1, 1993
- -------------------------------------------------------
The annual fee, payable monthly, is 0.41% of the Fund's average daily
net assets.
SCHWAB YIELDPLUS FUND JULY 21, 1999
- ---------------------
The annual fee, payable monthly, is 0.35% of the Fund's average daily
net assets not in excess of $500 million and 0.30% of such assets over
$500 million.
</TABLE>
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
---------------------------------
Name: William J. Klipp
Title: Executive Vice President,
Chief Operating Officer and Trustee
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ Stephen B. Ward
---------------------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer
<PAGE> 1
EXHIBIT (e)(ii)
AMENDED SCHEDULE A
TO THE DISTRIBUTION AGREEMENT
BETWEEN SCHWAB INVESTMENTS AND
CHARLES SCHWAB & CO., INC.
FUND FUND EFFECTIVE DATE
- ---- -------------------
Schwab 1000 Fund April 2, 1991
Schwab Short/Intermediate Government November 4, 1991
Bond Fund
Schwab California Long-Term Tax-Free February 20, 1992
Bond Fund
Schwab Long-Term Tax-Free Bond Fund July 30, 1992
Schwab Short/Intermediate Tax-Free March 1, 1993
Bond Fund
Schwab Long-Term Government March 1, 1993
Bond Fund
Schwab California Short/Intermediate March 1, 1993
Tax-Free Bond Fund
Schwab YieldPlus Fund July 21, 1999
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: Executive Vice President,
Chief Operating Officer and
Trustee
CHARLES SCHWAB & CO., INC.
By: /s/ Ron Carter
----------------------------
Name: Ron Carter
Title: Senior Vice President
<PAGE> 1
EXHIBIT (g)(iv)
CUSTODIAN SERVICES AGREEMENT
SCHEDULE A
<TABLE>
<CAPTION>
PORTFOLIO INCEPTION DATE
- ------------------------------------------------------- --------------
<S> <C>
Schwab 1000 Fund April 4, 1991
Schwab Short Intermediate Government Bond Fund November 4, 1991
Schwab California Long-Term Tax-Free Bond Fund February 20, 1992
Schwab Long-Term Tax-Free Bond Fund September 11, 1992
Schwab Long-Term Government Bond Fund March 5, 1993
Schwab Short/Intermediate Tax-Free Bond Fund April 21, 1993
Schwab California Short/Intermediate Tax-Free Bond Fund April 21, 1993
Schwab YieldPlus Fund October 1, 1999
</TABLE>
SCHWAB INVESTMENTS
BY: /s/ Tai-Chin Tung
---------------------------------------
NAME: Tai-Chin Tung
---------------------------------------
TITLE: Treasurer and Principal Finance Officer
---------------------------------------
PNC BANK, NATIONAL ASSOCIATION
BY: /s/ Brian Burns
---------------------------------------
NAME: Brian Burns
---------------------------------------
TITLE: Senior Vice President
---------------------------------------
Dated: July 14, 1999
--------------
<PAGE> 1
EXHIBIT (g)(vi)
TRANSFER AGENCY AGREEMENT
AMENDED SCHEDULE A
Fund Effective Date
- ---- --------------
Schwab 1000 Fund January 1, 1994
Schwab Long-Term Government May 1, 1993
Bond Fund
Schwab Short/Intermediate May 1, 1993
Government Bond Fund
Schwab Long-Term California May 1, 1993
Tax-Free Bond Fund
Schwab Short/Intermediate May 1, 1993
California Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund May 1, 1993
Schwab Short/Intermediate May 1, 1993
Tax-Free Bond Fund
Schwab YieldPlus Fund July 21, 1999
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
--------------------------------
William J. Klipp
Executive Vice President,
Chief Operating Officer and Trustee
CHARLES SCHWAB & CO., INC.
By: /s/ Ron Carter
--------------------------------
Ron Carter
Senior Vice President
Dated:
-----------------------
<PAGE> 2
AMENDED
SCHEDULE C
TRANSFER AGENT FEES
Fund Fee
- ---- ---
Schwab 1000 Fund Five one-hundredths of one percent (.05%) of
the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Long-Term Government Five one-hundredths of one percent (.05%) of
Bond Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Short/Intermediate Five one-hundredths of one percent (.05%) of
Government Bond Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Long-Term California Five one-hundredths of one percent (.05%) of
Tax-Free Bond Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Short/Intermediate Five one-hundredths of one percent (.05%) of
California Tax-Free Bond Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Long-Term Tax-Free Five one-hundredths of one percent (.05%) of
Bond Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Short/Intermediate Tax- Five one-hundredths of one percent (.05%) of
Free Bond Fund the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab YieldPlus Fund Five one-hundredths of one percent (.05%) of
the Fund's average annual net assets,
calculated and payable on a monthly basis
<PAGE> 3
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
--------------------------------------
William J. Klipp
Executive Vice President,
Chief Operating Officer and Trustee
CHARLES SCHWAB & CO., INC.
By: /s/ Ron Carter
--------------------------------------
Ron Carter
Senior Vice President
Dated:
------------------------
<PAGE> 1
EXHIBIT (g)(viii)
SHAREHOLDER SERVICE AGREEMENT
AMENDED
SCHEDULE A
Name of Fund Effective Date
- ------------ --------------
Schwab 1000 Fund May 1, 1993
Schwab Long-Term Government
Bond Fund May 1, 1993
Schwab Short/Intermediate
Government Bond Fund May 1, 1993
Schwab Long-Term California
Tax-Free Bond Fund May 1, 1993
Schwab Short/Intermediate
California Tax-Free Bond Fund May 1, 1993
Schwab Long-Term Tax-Free Bond Fund May 1, 1993
Schwab Short/Intermediate
Tax-Free Bond Fund May 1, 1993
Schwab YieldPlus Fund July 21, 1999
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
---------------------------------
Name: William J. Klipp
Title: Executive Vice President,
Chief Operating Officer and Trustee
CHARLES SCHWAB & CO., INC.
By: /s/ Ron Carter
----------------------------------
Name: Ron Carter
Title: Senior Vice President
Dated:
------------------------
<PAGE> 2
AMENDED
SCHEDULE C
SHAREHOLDER SERVICE FEES
<TABLE>
<CAPTION>
Name of Fund Fee
- ------------ ---
<S> <C>
Schwab 1000 Fund - Investor Shares Twenty one-hundredths of one percent (.20%) of the
class's average annual net assets, calculated and
payable on a monthly basis
Schwab 1000 Fund - Select Shares(TM) Five one-hundredths of one percent (.05%) of the
class's average annual net assets, calculated and
payable on a monthly basis
Schwab Long-Term Government Twenty one-hundredths of one percent (.20%) of the
Bond Fund Fund's average annual net assets, calculated and
payable on a monthly basis
Schwab Short/Intermediate Twenty one-hundredths of one percent (.20%) of the
Government Bond Fund Fund's average annual net assets, calculated and
payable on a monthly basis
Schwab Long-Term California Twenty one-hundredths of one percent (.20%) of the
Tax-Free Bond Fund Fund's average annual net assets, calculated and
payable on a monthly basis
Schwab Short/Intermediate Twenty one-hundredths of one percent (.20%) of the
California Tax-Free Bond Fund's average annual net assets, calculated and
Fund payable on a monthly basis
Schwab Long-Term Tax-Free Bond Fund Twenty one-hundredths of one percent (.20%)
of the Fund's average annual net assets,
calculated and payable on a monthly basis
Schwab Short/Intermediate Twenty one-hundredths of one percent (.20%) of the
Tax-Free Bond Fund Fund's average annual net assets, calculated and
payable on a monthly basis
Schwab YieldPlus Fund - Investor Shares Twenty one-hundredths of one percent (.20%)
of the class's average annual net assets,
calculated and payable on a monthly basis
Schwab YieldPlus Fund - Select Shares Five one-hundredths of one percent (.05%) of the
class's average annual net assets, calculated and
payable on a monthly basis
</TABLE>
<PAGE> 3
SCHWAB INVESTMENTS
By: /s/ William J. Klipp
---------------------------------
Name: William J. Klipp
Title: Executive Vice President
and Chief Operating Officer
CHARLES SCHWAB & CO., INC.
By: /s/ Ron Carter
---------------------------------
Name: Ron Carter
Title: Senior Vice President
Dated:
--------------------
<PAGE> 1
EXHIBIT (g)(xii)
AMENDED
SCHEDULE A
Accounting Services Agreement
Date
Schwab Short-Term Bond Market Index Fund November 5, 1991
Schwab Total Bond Market Index Fund March 5, 1993
Schwab California Short/Intermediate Tax-Free Bond Fund April 21, 1993
Schwab California Long-Term Tax-Free Bond Fund February 24, 1992
Schwab Short/Intermediate Tax-Free Bond Fund April 21, 1993
Schwab Long-Term Tax-Free Bond Fund September 11, 1992
Schwab YieldPlus Fund October 1, 1999
SCHWAB INVESTMENTS
By: /s/ Tai-Chin Tung
------------------------------------------
Name: Tai-Chin Tung
------------------------------------------
Title: Treasurer and Principal Financial Officer
------------------------------------------
PFPC, INC.
By: /s/ Joseph T. Gramlich
------------------------------------------
Name: Joseph T. Gramlich
------------------------------------------
Title: Senior Vice President
------------------------------------------
July 14, 1999
<PAGE> 1
Exhibit (g)(xiv)
AMENDED
SCHEDULE A
Custodian and Accounting Services Fees
Portfolio
Schwab Short-Term Bond Market Index Fund
Schwab Total Bond Market Index Fund
Schwab California Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab YieldPlus Fund
SCHWAB INVESTMENTS
On behalf of each of the
Funds listed above.
By: /s/ Tai-Chin Tung
________________________________
Name: Tai-Chin Tung
________________________________
Title: Treasurer and Principal
Financial Officer
________________________________
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Brian Burns
________________________________
Name: Brian Burns
______________________________
Title: Senior Vice President
_____________________________
PFPC INC.
By: /s/ Joseph T. Gramlich
________________________________
Name: Joseph T. Gramlich
________________________________
Title: Senior Vice President
________________________________
July 14, 1999
<PAGE> 1
EXHIBIT (g)(xvi)
SCHEDULE A
ACCOUNTING SERVICES AGREEMENT
BETWEEN
SCHWAB INVESTMENTS,
SCHWAB CAPITAL TRUST,
SCHWAB ANNUITY PORTFOLIOS AND
SEI FUND RESOURCES
LIST OF FUNDS
-------------
<TABLE>
<CAPTION>
Name of Fund Date
- ------------ ----
<S> <C>
Schwab MarketTrack Growth Portfolio 4/30/98
Schwab MarketTrack Balanced Portfolio 4/30/98
Schwab MarketTrack Conservative Portfolio 4/30/98
Schwab MarketTrack All Equity Portfolio 4/15/98
Schwab International Index Fund: Investor Shares, Select Shares 4/30/98
Schwab Small-Cap Index Fund: Investor Shares, Select Shares 4/30/98
Schwab MarketManager International Portfolio 4/30/98
Schwab MarketManager Balanced Portfolio 4/30/98
Schwab MarketManager Growth Portfolio 4/30/98
Schwab MarketManager Small Cap Portfolio 4/30/98
Schwab MarketTrack Growth Portfolio II 4/30/98
Schwab S&P 500 Fund: Select Shares, Investor Shares, e.Shares 11/1/98
Schwab S&P 500 Portfolio 11/1/98
Schwab 1000 Fund: Select Shares, Investor Shares 11/1/98
Schwab Analytics Fund 11/1/98
Institutional Select S&P 500 Fund 2/1/99
Institutional Select Large-Cap Value Index Fund 2/1/99
Institutional Select Small-Cap Value Index Fund 2/1/99
Schwab Total Stock Market Index Fund - Select Shares, Investor Shares 6/1/99
</TABLE>
<PAGE> 2
SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
By /s/ William J. Klipp
----------------------------------
Name: William J. Klipp
Title: Executive Vice President and Chief
Operating Officer
SEI FUND RESOURCES
By /s/ Todd Cipperman
----------------------------------
Name: Todd Cipperman
Title: Vice President
<PAGE> 1
EXHIBIT (g)(xvii)
AMENDMENT NO. 1 TO THE
ACCOUNTING SERVICES AGREEMENT
DATED APRIL 1, 1998
BY AND AMONG SCHWAB CAPITAL TRUST,
SCHWAB ANNUITY PORTFOLIOS AND
SEI FUND RESOURCES
This Amendment No. 1 to the Accounting Services Agreement is made as of
the 17th day of December 1998 by and between Schwab Capital Trust, Schwab
Annuity Portfolios, Schwab Investments and SEI Fund Resources.
Whereas, Schwab Capital Trust, Schwab Annuity Portfolios (collectively,
the "Trusts") and SEI Fund Resources ("SEI") entered into an Accounting Services
Agreement (the "Agreement") as of April 1, 1998, as amended, with respect to the
provision of various fund accounting services to the portfolios listed on
Schedule A, as amended, to the Agreement;
Whereas, the Trusts and SEI now desire to amend the Agreement to
include Schwab Investments as a party to the Agreement, subject to the terms and
conditions set forth therein, effective December 17, 1998. Except as set forth
herein, the terms and conditions of the Agreement remain in full force and
effect.
In Witness Whereof, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
written above.
SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
By /s/ Tai-Chin Tung
-------------------------------------------
Name: Tai-Chin Tung
Title: Treasurer and Principal Financial Officer
SEI FUND RESOURCES
By /s/ Todd Cipperman
-------------------------------------------
Name: [Todd Cipperman]
Title: [Vice President]
<PAGE> 1
Exhibit (i)
[Letterhead of Morgan, Lewis & Bockius LLP]
July 21, 1999
Schwab Investments
101 Montgomery Street
San Francisco, CA 94104
Re: Opinion of Counsel regarding Post-Effective Amendment No. 29 to the
Registration Statement filed on Form N-1A under the Securities Act of
1933 (File No. 33-37459).
Ladies and Gentlemen:
We have acted as counsel to Schwab Investments, a Massachusetts
business trust (the "Trust"), in connection with the above-referenced
Registration Statement on Form N-1A (as amended, the "Registration Statement")
which relates to the Trust's shares of beneficial interest, par value $.00001
per share (collectively, the "Shares") of the Schwab YieldPlus Fund. This
opinion is being delivered to you in connection with the Trust's filing of
Post-Effective Amendment No. 29 to the Registration Statement (the "Amendment")
to be filed with the Securities and Exchange Commission pursuant to Rule 485(b)
of the Securities Act of 1933 (the "1933 Act"). With your permission, all
assumptions and statements of reliance herein have been made without any
independent investigation or verification on our part except to the extent
otherwise expressly stated, and we express no opinion with respect to the
subject matter or accuracy of such assumptions or items relied upon.
In connection with this opinion, we have reviewed, among other things,
executed copies of the following documents:
(a) a certificate of the Commonwealth of Massachusetts as to the
existence and good standing of the Trust;
(b) copies of the Fund's Agreement and Declaration of Trust and of
all amendments and all supplements thereto (the "Declaration
of Trust");
<PAGE> 2
(c) a certificate executed by Frances Cole, the Secretary of the
Trust, certifying as to, and attaching copies of, the Trust's
Declaration of Trust and Amended and Restated By-Laws (the
"By-Laws"), and certain resolutions adopted by the Board of
Trustees of the Trust authorizing the issuance of the Shares;
and
(d) a printer's proof of the Amendment.
In our capacity as counsel to the Trust, we have examined the
originals, or certified, conformed or reproduced copies, of all records,
agreements, instruments and documents as we have deemed relevant or necessary as
the basis for the opinion hereinafter expressed. In all such examinations, we
have assumed the legal capacity of all natural persons executing documents, the
genuineness of all signatures, the authenticity of all original or certified
copies, and the conformity to original or certified copies of all copies
submitted to us as conformed or reproduced copies. As to various questions of
fact relevant to such opinion, we have relied upon, and assume the accuracy of,
certificates and oral or written statements of public officials and officers or
representatives of the Fund. We have assumed that the Registration Statement, as
filed with the Securities and Exchange Commission, will be in substantially the
form of the printer"s proof referred to in paragraph (d) above.
Based upon, and subject to, the limitations set forth herein, we are of
the opinion that the Shares, when issued and sold in accordance with the Trust"s
Declaration of Trust and By-Laws, and for the consideration described in the
Registration Statement, will be legally issued, fully paid and nonassessable
under the laws of the Commonwealth of Massachusetts.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not concede that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE> 1
EXHIBIT (l)(i)
PURCHASE AGREEMENT
SCHWAB INVESTMENTS ("Schwab Investments"), a Massachusetts business
trust, and CHARLES SCHWAB & CO., INC. ("Schwab"), a California corporation,
hereby agree with each other as follows:
1. Schwab Investments hereby offers Schwab and Schwab hereby purchases
10,000 Series A units of beneficial interest (representing interests in the
Schwab 1000 Fund) in Schwab Investments (such 10,000 units of beneficial
interest being hereinafter collectively known as "Shares") at a price of $10.00
per Share. Schwab hereby acknowledges purchase of the Shares and Schwab
Investments hereby acknowledges receipt from Schwab of funds in the amount of
$100,000 in full payment for the Shares.
2. Schwab represents and warrants to Schwab Investments that the Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.
3. Schwab agrees that if it or any direct or indirect transferee of any
of the Shares redeems any of the Shares prior to the second anniversary of the
date Schwab Investments begins its investment activities, Schwab will pay to
Schwab Investments an amount equal to the number resulting from multiplying
Schwab Investments' total unamortized organizational expenses by a fraction, the
numerator of which is equal to the number of Shares redeemed by Schwab or such
transferee and the denominator of which is equal to the number of Shares
outstanding as of the date of such redemption, as long as the administrative
position of the staff of the Securities and Exchange Commission requires such
reimbursement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 21st day of March, 1991.
Attest: SCHWAB INVESTMENTS
[illegible] BY: Tom D. Seip
- ------------------------- -----------------------------
Name: /s/ Tom D.Seip
-----------------------------
Title: Chief Operating Officer
-----------------------------
Attest: CHARLES SCHWAB & CO., INC.
[illegible] By: David S. Pottruck
- ------------------------- -----------------------------
Name: /s/ David S. Pottruck
-----------------------------
Title: President
-----------------------------
sipuragr.cs
<PAGE> 1
EXHIBIT (l)(ii)
PURCHASE AGREEMENT
Schwab Investments (the "Fund"), a Massachusetts business trust, and
Charles Schwab & Co., Inc. ("Schwab"), a California corporation, hereby agree as
follows:
1. The Fund hereby offers and Schwab hereby purchases 100 Series B
units of beneficial interest (representing interests in the Schwab U.S.
Government Bond Fund (Short/Intermediate Term) of the Fund (such 100 units of
beneficial interest being hereafter collectively known as "Shares") at a price
of $10.00 per Share. Schwab hereby acknowledges purchase of the Shares and the
Fund hereby acknowledges receipt: from Schwab of funds in the amount of $1,000
in full payment for the Shares. It is further agreed that no certificate for the
Shares will be issued by the Fund.
2. Schwab represents and warrants to the Fund that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
3. The names "Schwab Investments" and "Trustees of Schwab Investments"
refer, respectively to the Trust created and the Trustees as Trustees but not
individually or personally, acting from time to time under an Agreement and
Declaration of Trust dated as of October 26, 1990, to which reference is hereby
made and a copy of which is on file at the Office of the Secretary of State of
the Commonwealth of Massachusetts and elsewhere as required by law, and to any
and all amendments thereto so filed or hereafter filed. The obligations of
"Schwab Investments" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are not made individually, but only in such
capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the assets of the Trust,
and all persons dealing with any series of Shares of the Trust must look solely
to the assets of the Trust must look solely to the assets for the Trust
belonging to such series for the enforcement of any claims against the Trust.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as
of the 29th day of October, 1991.
Attest: SCHWAB INVESTMENTS
/s/ Fran Cole
- --------------------------------
By: /s/ Tom D. Seip
-----------------------------
Name: Tom D. Seip
Title: Chief Operating Officer
Attest: CHARLES SCHWAB & CO., INC.
/s/ Tim Cox
- --------------------------------
By: /s/ David S. Pottruck
-----------------------------
Name: David S. Pottruck
Title: President
<PAGE> 1
EXHIBIT (l)(iii)
PURCHASE AGREEMENT
Schwab Investments (the "Trust"), a Massachusetts business trust, and
Charles Schwab & Co., Inc. ("Schwab") a California corporation, hereby agree as
follows:
1. The Trust hereby offers and Schwab hereby purchases 100 Series C
units of beneficial interest (representing interests in the Schwab California
Tax-Free Bond Fund) of the Trust (such 100 units of beneficial interest being
hereafter collectively known as "Shares") at a price of $10.00 per Share. Schwab
hereby acknowledges purchase of the Shares and the Trust hereby acknowledges
receipt from Schwab of funds in the amount of $1,000 in full payment for the
Shares. It is further agreed that no certificate for the Shares will be issued
by the Trust.
2. Schwab represents and warrants to the Trust that the Shares are
being acquired for investment purposes and not with a view to the distribution
thereof.
3. The names "Schwab Investments" and "Trustees of Schwab Investments"
refer, respectively to the Trust created and the Trustees as Trustees but not
individually or personally, acting from time to time under an Agreement and
Declaration of Trust dated as of October 25, 1990, to which reference is hereby
made and a copy of which is on file at the Office of the Secretary of State of
the Commonwealth of Massachusetts and elsewhere as required by law, and to any
and all amendments thereto so filed or hereafter filed. The obligations of
"Schwab Investments" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are not made individually, but only in such
capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the assets of the Trust,
and all persons dealing with any series of Shares of the Trust must look solely
to the assets of the Trust must look solely to the assets for the Trust
belonging to such series for the enforcement of any claims against the Trust.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as
of the 5th day of February, 1992.
Attest: SCHWAB INVESTMENTS
/s/ Fran Cole
- --------------------------------
By: /s/ Tom D. Seip
-------------------------------
Name: Tom D. Seip
Title: Chief Operating officer
Attest: CHARLES SCHWAB & CO., INC.
/s/ Fran Cole
- --------------------------------
By: /s/ David S. Pottruck
-------------------------------
Name: David S. Pottruck
Title: President
<PAGE> 1
EXHIBIT (l)(iv)
PURCHASE AGREEMENT
Schwab Investments (the "Fund"), a Massachusetts business trust, and
Charles Schwab & Co., Inc. ("Schwab"), a California corporation, hereby agree as
follows:
1. The Fund hereby offers and Schwab hereby purchases 100 Series D
units of beneficial interest (representing interests in the Schwab National
Tax-Free Bond Fund of the Fund (such 100 units of beneficial interest being
hereafter collectively known as "Shares") at a price of $10.00 per Share. Schwab
hereby acknowledges purchase of the Shares and the Fund hereby acknowledges
receipt from Schwab Of funds in the amount of $1,000 in full payment for the
Shares. It is further agreed that no certificate for the Shares will be issued
by the Fund.
2. Schwab represents and warrants to the Fund that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
3. The names "Schwab Investments" and "Trustees of Schwab Investments"
refer, respectively to the Trust created and the Trustees as Trustees but not
individually or personally, acting from time to time under an Agreement and
Declaration of Trust dated as of October 26, 1990, to which reference is hereby
made and a copy of which is on file at the Office of the Secretary of State of
the Commonwealth of Massachusetts and elsewhere as required by law, and to any
and all amendments thereto so filed or hereafter filed. The obligations of
"Schwab Investments" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are not made individually, but only in such
capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the assets of the Trust,
and all persons dealing with any series of Shares of the Trust must look solely
to the assets of the Trust must look solely to the assets for the Trust
belonging to such series for the enforcement of any claims against the Trust.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as
of the 23rd day of July, 1992.
Attest: SCHWAB INVESTMENTS
- -------------------------
By: /s/ Frances Cole
---------------------------------
Name: Frances Cole
Title: Assistant Secretary
Attest: CHARLES SCHWAB & CO., INC.
- -------------------------
By: /s/ Tom D. Seip
---------------------------------
Name: Tom D. Seip
Title: Executive Vice President
<PAGE> 1
EXHIBIT (l)(vi)
PURCHASE AGREEMENT
Schwab Investments (the "Trust"), a Massachusetts business trust, and
Charles Schwab & Co., Inc. ("Schwab"), a California corporation, hereby agree as
follows:
1. The Trust hereby offers and Schwab hereby purchases one unit of
beneficial interest in each class of Series H, representing interests in the
Investor Shares and Select Shares, respectively, of the Schwab YieldPlus Fund
(the "Fund") at a price of $10.00 per Share (such units of beneficial interest
being hereafter collectively known as "Shares"). Schwab hereby acknowledges
purchase of the Shares and the Fund hereby acknowledges receipt from Schwab of
funds in the amount of $20 in full payment for the Shares. It is further agreed
that no certificate for the Shares will be issued by the Fund.
2. Schwab represents and warrants to the Fund that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
3. The names "Schwab Investments" and "Trustees of Schwab Investments"
refer, respectively to the Trust created and the Trustees as Trustees but not
individually or personally, acting from time to time under an Agreement and
Declaration of Trust dated as of October 26, 1990, to which reference is hereby
made and a copy of which is on file at the Office of the Secretary of State of
the Commonwealth of Massachusetts and elsewhere as required by law, and to any
and all amendments thereto so filed or hereafter filed. The obligations of
"Schwab Investments" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are not made individually, but only in such
capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the assets of the Trust,
and all persons dealing with any series of Shares of the Trust must look solely
to the assets of the Trust belonging to such series for the enforcement of any
claims against the Trust.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed the Agreement as
of the 13th day of July 1999.
Attest: SCHWAB INVESTMENTS
By: /s/ William J. Klipp
- -------------------------- ---------------------------------
Name: William J. Klipp
Title: Executive Vice President, Chief
Operating Officer and Trustee
Attest: CHARLES SCHWAB & CO., INC.
By: /s/ Ron Carter
- -------------------------- ---------------------------------
Name: Ron Carter
Title: Senior Vice President
<PAGE> 1
EXHIBIT (o)
AMENDED AND RESTATED
SCHWAB INVESTMENTS
MULTIPLE CLASS PLAN
This constitutes an amended and restated MULTIPLE CLASS PLAN (the
"Plan") of SCHWAB INVESTMENTS, a Massachusetts business trust (the "Trust"),
adopted pursuant to Rule 18f-3(d) under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Plan is applicable to the Trust's investment
portfolio(s) identified on Schedule A hereto, as such Schedule may be amended
from time to time (each a "Fund", collectively the "Funds").
WHEREAS, it is desirable to enable the Trust to have flexibility in
meeting the investment and shareholder servicing needs of its current and future
investors; and
WHEREAS, the Board of Trustees of the Trust (the "Board of Trustees"),
including a majority of the Trustees who are not "interested persons" of the
Trust, as such term is defined by the 1940 Act, mindful of the requirements
imposed by Rule 18f-3(d) under the 1940 Act, has determined to adopt this Plan
to enable each Fund to provide appropriate services to certain designated
classes of shareholders of each Fund;
NOW, THEREFORE, the Trust designates the Plan as follows:
1. Designation of Classes. Each Fund shall offer its units of
beneficial interest ("Shares") in two classes: Investor Shares and Select
Shares.
2. Redesignation of Existing Shares. As applicable on or after April
30, 1997, outstanding Shares of each Fund on that date shall be redesignated as
Investor Shares.
3. Shareholder Services Specific to Each Class. As a result of costs
and expenses attributable to servicing shareholders of Investor Shares and the
services rendered to Investor Shares, the shareholder service fees charged to
Investor Shares shall be higher than those charged to Select Shares as set forth
on Schedule A hereto and in the Shareholder Service Agreement and schedules,
dated April 30, 1997, as amended from time to time, between the Trust and
Charles Schwab & Co., Inc. (the "Shareholder Servicing Agent").
4. Minimum Transaction Requirements. The minimum initial investment and
Fund balance requirements applicable to the Select Shares shall be higher than
those applicable to Investor Shares, as determined from time to time by Charles
Schwab Investment Management, Inc. ("CSIM"). Minimum initial investment and
balance requirements may be waived for certain investors and for trustees,
officers and employees of Schwab.
5. Exchange Privilege. Each class of Shares shall be exchangeable for
shares of any Fund of the Trust or of Schwab Capital Trust and The Charles
Schwab Family of Funds, including all classes of shares of such Funds, provided
that the minimum investment and any other requirements of the Fund or class for
which the shares are exchanged are satisfied.
6. Allocation of Expenses. Each class shall pay all of the expenses of
its distribution and shareholder services arrangement (such arrangements for
shareholder services or distribution, or both, shall be a different arrangement
from other classes). At the Board of Trustees' discretion,
<PAGE> 2
each class may pay a different share of other expenses, not including advisory
or custodial fees or other expenses related to the management of the Fund's
assets, if these expenses are actually incurred in a different amount by that
class, or if the class receives services of a different kind or to a different
degree than other classes. All other expenses, including (i) advisory or
custodial fees or other expenses related to the management of the Fund's assets
and (ii) costs of implementing this plan, shall be allocated to each class on
the basis of the relative net asset value of that class in relation to the net
asset value of the Fund. If, in the future, new class(es) are added to a Fund,
any costs of implementing this plan for such new class(es) shall be allocated to
those classes of the Fund then in existence before the addition of the new class
structure and shall not be charged to the new class(es).
7. Voting Rights. Each Share held entitles the Shareholder of record to
one vote. Each Fund will vote separately on matters submitted to Shareholders
that relate solely to that Fund. Each class of a Fund shall have exclusive
voting rights on any matter submitted to Shareholders that relates solely to
that class, and shall have separate voting rights on any matter submitted to
Shareholders in which the interests of one class differ from the interests of
any other class. However, all Fund Shareholders will have equal voting rights on
matters that affect all Fund Shareholders equally.
8. Distributions. The amount of dividends payable on each class will be
calculated pro rata on the basis of net asset value per share. Dividends
declared will be paid monthly or annually, subject to the Board of Trustees'
discretion. Capital gains will be distributed to each class in accordance with
Rule 18f-3.
9. Termination and Amendment. This Plan may be terminated or materially
amended at any time by vote of a majority of the Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust, as such
term is defined by the 1940 Act. Any non-material amendment of this Plan may be
made by CSIM.
10. The names "Schwab Investments" and "Board of Trustees" refer
respectively to the Trust created and the Trustees, as Trustees but not
individually or personally, acting from time to time under a Declaration of
Trust, to which reference is hereby made and a copy of which is on file at the
office of the Secretary of the Commonwealth of Massachusetts and elsewhere as
required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of Schwab Investments entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, Shareholders or representatives of the Trust personally, but bind only
the assets of the Trust, and all persons dealing with any series and/or class of
Shares of the Trust must look solely to the assets of the Trust belonging to
such series and/or class for the enforcement of any claims against the Trust.
SCHWAB INVESTMENTS
Signature: /s/ William J. Klipp
--------------------------------
Name: William J. Klipp
Title: Executive Vice President, Chief
Operating Officer and Trustee
Date: July 13, 1999
<PAGE> 3
AMENDED
SCHEDULE A TO THE
MULTIPLE CLASS PLAN OF
SCHWAB INVESTMENTS
<TABLE>
<CAPTION>
Name of Fund and Class Shareholder Service Fee (as a Transfer Agent Fee (as a
percentage of average daily net percentage of average daily net
assets of the Fund Class) assets of the Fund Class)
<S> <C> <C>
Schwab 1000 Fund Investor Shares 0.20% 0.05%
Schwab 1000 Fund Select Shares 0.05% 0.05%
Schwab Yield Plus Fund - Investor Shares 0.20% 0.05%
Schwab Yield Plus Fund - Select Shares 0.05% 0.05%
</TABLE>
SCHWAB INVESTMENTS
Signature: /s/ William J. Klipp
---------------------------
Name: William J. Klipp
Title: Executive Vice President,
Chief Operating Officer and Trustee
Date: July 13, 1999
