<PAGE> 1
Supplement Dated
June 13, 1995
to the Prospectus dated June 6, 1995 for the
SCHWAB CALIFORNIA TAX-EXEMPT MONEY FUND -- SWEEP SHARES
While the Sweep Shares of the Schwab California Tax-Exempt Money Fund (the
"Fund") are available for purchase by the public, as of the date of this
Supplement, the Value Advantage Shares of the Fund are not being offered to the
public.
TF-3569 (6/95) CRS 3830.
<PAGE> 2
SCHWAB CALIFORNIA TAX-EXEMPT MONEY FUND--SWEEP SHARES
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PROSPECTUS June 6, 1995
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD.
THE SCHWAB CALIFORNIA TAX-EXEMPT MONEY FUND (the "Fund") is designed for
investors who seek maximum current income that is exempt from federal income and
State of California personal income taxes to the extent consistent with
liquidity and stability of capital. The Fund is a non-diversified investment
portfolio of The Charles Schwab Family of Funds (the "Schwab Fund Family"), a
no-load, open-end, management investment company. Shares of the Fund are offered
to California residents and the residents of selected other states. This
Prospectus describes the Sweep Shares of the Fund, one of the two classes of
shares of the Fund (the "Sweep Shares") offered by Schwab. Prior to the date of
this Prospectus, the Fund was not offered in two classes of shares. The existing
Shares of the Fund are redesignated as Sweep Shares. For a prospectus describing
the other class of shares of the Fund (the "Value Advantage Shares"), call your
local Schwab office or 800-2 NO-LOAD.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. This Prospectus may be available via electronic
mail. For a free paper copy of this Prospectus call 800-2 NO-LOAD. You can find
more detailed information pertaining to this Fund in the Statement of Additional
Information, dated June 6, 1995 (as may be amended from time to time), and filed
with the Securities and Exchange Commission. The Statement of Additional
Information is incorporated by reference into this Prospectus, and may be
obtained without charge by contacting Schwab at 800-2 NO-LOAD or 101 Montgomery
Street, San Francisco, CA 94104.
TABLE OF CONTENTS
<TABLE>
<S> <C>
KEY FEATURES OF THE FUND............................................................... 2
SUMMARY OF EXPENSES.................................................................... 3
FINANCIAL HIGHLIGHTS................................................................... 4
MATCHING THE FUND TO YOUR INVESTMENT NEEDS............................................. 4
INVESTMENT OBJECTIVE AND POLICIES...................................................... 5
MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES......................................... 7
MANAGEMENT OF THE FUND................................................................. 10
DISTRIBUTIONS AND TAXES................................................................ 12
SHARE PRICE CALCULATION................................................................ 14
HOW THE FUND SHOWS PERFORMANCE......................................................... 15
GENERAL INFORMATION.................................................................... 16
SHAREHOLDER GUIDE...................................................................... 16
HOW TO PURCHASE SHARES............................................................... 17
HOW TO EXCHANGE SHARES............................................................... 19
HOW TO REDEEM SHARES................................................................. 20
OTHER IMPORTANT INFORMATION.......................................................... 21
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 3
KEY FEATURES OF THE FUND
MAXIMUM DOUBLE TAX-EXEMPT INCOME AND SAFETY. The Schwab California Tax-Exempt
Money Fund is designed for investors who seek maximum after-tax current income
consistent with liquidity and stability of capital. The Fund invests in high
quality, short-term debt securities the interest on which is exempt from federal
income and State of California personal income taxes. The Fund attempts to
maintain a stable net asset value of $1.00 per share. (See "Investment Objective
and Policies.")
AUTOMATIC INVESTMENT/REDEMPTION FEATURE. If you elect, free credit balances in
your Schwab brokerage account (including your Schwab One(R) account) will be
automatically invested or "swept" into the Fund, subject to the terms and
conditions of your brokerage account agreement. Shares will also be sold as
necessary to settle securities transactions, collateralize margin obligations or
cover debit balances. This feature keeps your money working and saves you the
time and trouble of withdrawing and redepositing funds. (See "How to Purchase
Shares" and "How to Redeem Shares.")
LIQUIDITY. You can conveniently place orders to redeem your investment in the
Fund at any time. (See "How to Redeem Shares.")
LOW COST INVESTING. The Fund imposes no sales or transaction fees on purchases
or redemptions of shares of the Fund. (See "Summary of Expenses.") In addition,
the total fund operating expenses of the Sweep Shares of the Fund will not
exceed 0.65% through at least August 31, 1995, as guaranteed by Charles Schwab
Investment Management, Inc. (See "Matching the Fund to Your Investment Needs,"
and "Management of the Fund.")
PROFESSIONAL MANAGEMENT. Charles Schwab Investment Management, Inc. (the
"Investment Manager") currently provides investment management services to the
SchwabFunds(R), a family of 19 mutual funds with over $26 billion in assets as
of June 3, 1995. (See "Management of the Fund.")
SHAREHOLDER SERVICE. Schwab's professional representatives are available
toll-free 24 hours a day to receive your Fund orders. Call your local Schwab
office during business hours or 800-2 NO-LOAD. As a discount broker, Schwab
gives you investment choices and lets you make your own decisions. Schwab has
many services that help you make the most informed investment decisions. (See
"How to Purchase Shares," "How to Exchange Between Funds" and "How to Redeem
Shares.")
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity on one report.
SPECIAL RISK CONSIDERATIONS. An investment in the Fund is subject to certain
risks arising out of the Fund's investments in California Municipal Securities,
municipal leases, participation interests and certain other securities. (See
"Municipal Securities and Investment Techniques.")
NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 200 offices throughout the
U.S. where customers can place purchase and redemption orders.
2
<PAGE> 4
SUMMARY OF EXPENSES--SWEEP SHARES
SHAREHOLDER TRANSACTION EXPENSES: NONE
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee reduction)(1)............................................ 0.19%
12b-1 Fees.......................................................................... None
Other Expenses (after expense reimbursement)(2)..................................... 0.46%
TOTAL FUND OPERATING EXPENSES(2,3,4).................................................. 0.65%
</TABLE>
(1) This amount reflects a reduction by the Investment Manager, which is
guaranteed through at least August 31, 1995. If there were no such reduction,
the maximum management fee for the Fund would have been 0.45% for the fiscal
year ended December 31, 1994. (See Management of the Fund--Fees and Expenses.)
(2) See "Management of the Fund--Fees and Expenses" for information regarding
the differing expenses for the multiple classes of shares of the Fund.
(3) Schwab currently imposes no fees for opening a standard brokerage account,
including a Schwab One(R) account with a minimum of $5,000 account equity.
Schwab One accounts of less than $5,000 account equity are subject to a fee of
$5 per month if there have been fewer than two commissionable trades within the
last twelve months. See "How to Purchase Shares" for information regarding the
differing minimum balance and minimum investment requirements of the multiple
classes of shares of the Fund.
(4) This amount reflects the Investment Manager's guarantee that, through at
least August 31, 1995, the total fund operating expenses of the Sweep Shares
of the Fund will not exceed 0.65%. Without a similar guarantee, which was in
effect during the fiscal year ended December 31, 1994, total fund operating
expenses for the Sweep Shares of the Fund would have been 0.94%.
EXAMPLE. You would pay the following expenses on a $1,000 investment in the
Sweep Shares of the Fund, assuming (1) a 5% annual return and (2) redemption at
the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$7 $21 $36 $81
</TABLE>
The purpose of the preceding table is to assist investors in understanding the
various cost and expenses that an investor in the Sweep Shares of the Fund will
bear directly or indirectly. This example reflects the Investment Manager's
guarantee that, through at least August 31, 1995, the total fund operating
expenses for the Sweep Shares of the Fund will not exceed 0.65%. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. The example assumes a 5% annual rate of
return pursuant to requirements of the Securities and Exchange Commission. THIS
HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR
FUTURE PERFORMANCE.
3
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FINANCIAL HIGHLIGHTS
The following information with respect to per share data and ratios has been
audited by Price Waterhouse LLP, independent accountants, whose unqualified
report covering each of the periods presented is incorporated by reference
herein. This information should be read in conjunction with the financial
statements and accompanying notes which are also incorporated by reference to
the Statement of Additional Information.
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------ ------------------------
NET DIVIDENDS
REALIZED & TOTAL FROM NET
NET ASSET NET UNREALIZED FROM DIVIDENDS REALIZED ASSET
PERIOD VALUE INVEST- GAINS INVEST- FROM NET GAIN ON VALUE
ENDED BEGINNING MENT (LOSSES) ON MENT INVESTMENT INVEST- TOTAL END OF
DEC. 31 OF YEAR INCOME INVESTMENT OPERATION INCOME MENT DISTRIBUTIONS YEAR
- ------- --------- ------ ----------- --------- ---------- --------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 $1.00 $0.02 -- $0.02 $(0.02) -- $ (0.02) $ 1.00
1993 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1992 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1991 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
19901 1.00 0.01 -- 0.01 (0.01) -- (0.01) 1.00
<CAPTION>
RATIOS/SUPPLEMENTAL DATA RATIO OF
------------------------------------------- NET
RATIO OF INVESTMENT
EXPENSES INCOME
PERIOD TOTAL NET ASSETS TO AVERAGE TO AVERAGE
ENDED RETURN END OF YEAR NET ASSETS NET ASSETS
DEC. 31 (%) (000'S) (%) (%)
- ------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1994 2.26 $ 1,293,883 0.64 2.25
1993 1.91 1,062,042 0.63 1.89
1992 2.35 691,176 0.63 2.31
1991 3.77 494,214 0.61 3.70
19901 0.77 339,292 0.28* 5.06*
</TABLE>
(1) For the period from November 6, 1990 (commencement of operations) to
December 31, 1990.
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses of the Fund. Had these fees and expenses not been
reduced and absorbed, the ratio of expenses to average net assets for the
periods ended December 31, 1994, 1993, 1992, 1991 and 1990 would have been
0.94%, 0.96%, 0.97%, 0.98% and 1.17%*, respectively, and the ratio of net
investment income to average net assets would have been 1.95%, 1.56%, 1.97%,
3.33% and 4.17%*, respectively.
Prior to June 6, 1995, the Fund did not offer multiple classes of shares of
beneficial interest. The information contained in this table relates to shares
which were redesignated as Sweep Shares as of June 6, 1995.
MATCHING THE FUND TO YOUR INVESTMENT NEEDS
The Fund may be appropriate for a variety of investment programs which can be
long-term or short-term in nature. While the Fund is not a substitute for
building an investment portfolio tailored to an individual's investment needs
and risk tolerance, it can be used as a high quality, conveniently liquid money
market investment for your brokerage account cash when it is not fully invested
in other securities. The Fund would not be an appropriate investment for
retirement plans such as IRAs and Keogh plans.
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THE FUND MAY BE ESPECIALLY SUITABLE FOR SHORT-TERM INVESTORS.
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Because the Fund is designed to provide liquidity and stability of capital, as
well as automatic investment of free credit balances, it may be especially
suitable for investors with short-term investment objectives, including those
who are awaiting an opportune time to invest in the equity and/or bond markets.
* Annualized
4
<PAGE> 6
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THE FUND MAY ALSO BE APPROPRIATE FOR LONG-TERM INVESTORS.
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The Fund may also be appropriate for long-term investors seeking a low-risk
investment alternative which is designed to provide double tax-free income.
In addition to the Sweep Shares of the Fund, Schwab also offers Value Advantage
Shares of the Fund, pursuant to a multiple class plan (the "Plan") adopted by
the Board of Trustees of the Schwab Fund Family. Under the Plan, Value Advantage
Shares of the Fund, which are not available through automatic ("sweep")
investment programs, are subject to lower transfer agency expenses than the
Sweep Shares of the Fund. In addition, the minimum investment and minimum
account balance requirements of the Value Advantage Shares of the Fund are
higher than those applicable to the Sweep Shares. See "Management of the
Fund -- Fees and Expenses" and "How to Purchase Shares."
For information regarding Value Advantage Shares, call your local Schwab office
or 800-2 NO-LOAD. You may also obtain information about Value Advantage Shares
from your Schwab broker.
INVESTMENT OBJECTIVE AND POLICIES
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THE FUND SEEKS MAXIMUM CURRENT INCOME CONSISTENT WITH
STABILITY OF CAPITAL THAT IS EXEMPT FROM FEDERAL INCOME
AND STATE OF CALIFORNIA PERSONAL INCOME TAXES.
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The investment objective of the Fund is maximum current income that is exempt
from federal income and State of California personal income taxes, to the extent
consistent with stability of capital. This investment objective is fundamental,
and cannot be changed without approval by holders of a majority of the Fund's
outstanding voting shares, as defined in the Investment Company Act of 1940 (the
"1940 Act"). The Fund pursues its objective primarily by investing in short-term
high quality municipal obligations, the income from which is exempt from federal
income and California personal income taxes.
Under normal market conditions, the Fund attempts to invest 100%, and will
invest at least 80%, of its total assets in debt obligations issued by or on
behalf of California and other states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities that generate interest which, in the opinion of bond
counsel, is exempt from federal income tax ("Municipal Securities") and will
invest at least 65% of its total assets in such obligations which also generate
interest which, in the opinion of bond counsel, is exempt from State of
California personal income tax ("California Municipal Securities").
Dividends paid to California residents to the extent of interest income received
on California Municipal Securities will be exempt from State of California
personal income taxes provided that at the end of each quarter of its taxable
year at least 50% of the Fund's total assets are invested in California
Municipal Securities and obligations of the U.S. Government, its agencies and
instrumentalities which are by federal law exempt from local income taxes.
5
<PAGE> 7
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THE FUND WILL ONLY INVEST IN HIGH QUALITY SECURITIES.
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The Fund will invest only in Municipal Securities which at the time of purchase:
(a) are rated in one of the two highest rating categories for municipal
commercial paper or short-term municipal securities assigned by Moody's
Investors Service ("Moody's"), Standard & Poor's Corporation ("S&P") or any
other nationally recognized statistical rating organization ("NRSRO"); (b) are
guaranteed or insured by the U.S. Government as to the payment of principal and
interest; (c) are fully collateralized by an escrow of U.S. Government
securities acceptable to the Investment Manager; or (d) are unrated by any
NRSRO, if they are determined by the Investment Manager, using guidelines
approved by the Board of Trustees, to be at least equal in quality to one or
more of the above referenced securities. (For a description of the ratings, see
"Appendix--Ratings of Investment Securities" in the Statement of Additional
Information.)
After its purchase by the Fund, a Municipal Security may cease to be rated or
its rating may be reduced below that required for purchase by the Fund. Neither
event would necessarily require the elimination of such an obligation from the
Fund's investment portfolio. However, the obligation generally would be retained
only if such retention was determined by the Board of Trustees to be in the best
interests of the Fund.
With the exception of securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, the Fund may not:
1. Purchase the securities of any issuer if as a result more than 5% of the
value of the Fund's total assets would be invested in the securities of that
issuer. However, provided no more than 25% of the value of the Fund's total
assets are invested in the securities of any one issuer, up to 50% of the
value of the Fund's total assets may be invested without regard to this 5%
limitation. For purposes of this limitation, a security is considered to be
issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to an industrial revenue bond that is
backed only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a security
may also be considered to be an issuer in connection with such guarantee.
2. Purchase any securities which would cause 25% or more of the value of the
Fund's total assets at the time of purchase to be invested in the securities
of issuers conducting their principal business activities in the same
industry. However, this limitation shall not apply to Municipal Securities.
From time to time, as a defensive measure or under abnormal market conditions,
the Fund may invest any or all of its assets in taxable "temporary investments"
which include: obligations of the U.S. Government, its agencies or
instrumentalities; debt securities (other than Municipal Securities) rated in
one of the two highest categories by any NRSRO; commercial paper (other than
Municipal Securities) rated in one of the two highest grades by any NRSRO;
certificates of deposit of domestic banks having capital, surplus, and undivided
profits in excess of $100 million; and any of the foregoing temporary
investments subject to repurchase agreements. While purchases by the Fund of
certain temporary investments could cause it to generate dividends taxable to
shareholders as ordinary
6
<PAGE> 8
income (see "Distributions And Taxes"), it is the Fund's primary intention to
produce dividends which are not subject to federal income or State of California
personal income taxes.
The investment policies set forth above (except for the policy regarding
temporary investments, or as otherwise noted) are fundamental. They, along with
certain investment restrictions adopted by the Fund (see "Investment
Restrictions" in the Statement of Additional Information), cannot be changed
without approval by holders of a majority of the Fund's outstanding voting
shares, as defined in the 1940 Act.
MUNICIPAL SECURITIES AND INVESTMENT TECHNIQUES
The two principal classifications of Municipal Securities which may be held by
the Fund are "general obligation" securities and "revenue" securities. General
obligation securities are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue
securities are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being
financed. Revenue securities may include private activity bonds (and industrial
development bonds). Such bonds may be issued by or on behalf of public
authorities to finance various privately operated facilities, and are not
payable from the unrestricted revenues of the issuer. As a result, the credit
quality of private activity bonds is frequently related directly to the credit
standing of private corporations or other entities. From time to time, the Fund
may invest more than 25% of its total assets in industrial development and
private activity bonds.
The Fund's portfolio may also include "moral obligation" securities, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
Municipal Securities purchased by the Fund may include variable rate demand
instruments issued by industrial development authorities and other government
entities. In the event variable rate demand instruments which the Fund can
purchase are not rated by credit rating agencies, such instruments must be
determined by the Investment Manager, using guidelines approved by the Board of
Trustees, to be of comparable quality at the time of purchase to rated
instruments which the Fund can purchase. In some cases, the Fund may require
that the issuer's obligation to pay the principal of the note be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
Although there may be no active secondary market with respect to a particular
variable rate demand instrument purchased by the Fund, the Fund may (at any time
or during specified periods not exceeding one year, depending upon the
instrument involved) demand payment in full of the principal of the instrument
and may resell the instrument to a third party. The absence of such an active
secondary market, however, could make it difficult for the Fund to dispose of a
variable rate demand instrument in the event the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights, and the Fund could, for this or other reasons, suffer a loss with
respect to such instruments. To the extent that the absence of an active
secondary market for such securities causes them to be "illiquid," such
securities will be subject to the Fund's restrictions on acquiring and holding
illiquid securities.
7
<PAGE> 9
Participation interests in Municipal Securities with fixed, floating or variable
rates of interest may be purchased by the Fund from financial institutions. The
buyer of a participation interest receives an undivided interest in the
securities underlying the instrument. The Fund will only purchase a
participation interest if: (a) the Municipal Securities subject to it mature in
one year or less or the instrument includes a right to demand payment, usually
within seven days, from the Seller, (b) the instrument meets the Fund's
previously described quality standards for Municipal Securities, and (c) the
instrument is issued with an opinion of counsel or is the subject of a ruling of
the Internal Revenue Service, stating that the interest earned on the
participation interest is exempt from federal income tax.
The Fund may invest in municipal leases, which are obligations issued by state
and local governments or authorities to finance the acquisition of equipment and
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 the above. Investments in municipal leases may be considered to be
illiquid. The Fund will limit its investment in municipal leases to no more than
25% of its total assets (no more than 10% of which may be illiquid municipal
leases). Municipal leases are subject to "nonappropriation risk," which is the
risk that the municipality may terminate the lease in the event that the
municipality's appropriating body does not allocate the funds necessary to make
lease payments. In such circumstances, the lessor is typically entitled to
repossess the property. The private sector value of the property is, however,
generally less than the value of the property to the municipality. The
Investment Manager, pursuant to guidelines established by the Board of Trustees,
is responsible for determining the credit quality of unrated municipal leases,
on an ongoing basis, including an assessment of the likelihood of whether the
lease will be terminated.
The Fund may also invest up to 25% of its assets in synthetic variable rate
municipal securities. These securities generally comprise the following elements
in a trust: (i) a fixed-rate municipal bond (of any duration); (ii) a right to
put the bond at par value on seven days notice or after a specific interval of
time depending on the terms of the synthetic security; and (iii) a contractual
agreement pursuant to which the investing Fund and the issuer determine the
lowest rate that would permit the bond to be remarketed at par, taking into
account the put right. The trustee of the trust is generally a bank trust
department.
These securities may include tender option bond trust receipts, in which a
fixed-rate municipal bond (or group of bonds) is placed into a trust from which
two classes of trust receipts are issued, which represent proportionate
interests in the underlying bond(s). Interest payments are made on the bond(s)
based upon a predetermined rate. Under certain circumstances, the holder of a
trust receipt may also participate in any gain or loss on the sale of such
bond(s). Tender option bond trust receipts are considered to be Municipal
Securities for purposes of the Fund's policy to invest at least 80% of its total
assets in Municipal Securities. Tender option bond trust receipts generally are
structured as private placements and, accordingly, may be deemed to be
restricted securities for purposes of the Fund's investment limitations.
The Fund will limit its investments in tender option bond trust receipts and
other synthetic floating rate municipal securities to no more than 25% of its
total assets.
8
<PAGE> 10
The Fund may purchase securities on a "when-issued" or "delayed delivery" basis.
When-issued or delayed delivery securities are securities purchased for future
delivery at a stated price and yield. The Fund will generally not pay for such
securities or start earning interest on them until they are received. Securities
purchased on a when-issued or delayed delivery basis are recorded as an asset
and are subject to changes in value based upon changes in the general level of
interest rates. The Fund will not invest more than 25% of its assets in
when-issued or delayed delivery securities, does not intend to purchase such
securities for speculative purposes and will make commitments to purchase
securities on a when-issued or delayed delivery basis with the intention of
actually acquiring the securities. However, the Fund reserves the right to sell
acquired when-issued or delayed delivery securities before their settlement
dates if deemed advisable.
The Fund may also acquire "stand-by commitments" with respect to Municipal
Securities held in its portfolio. Under a stand-by commitment, a dealer agrees
to purchase at the Fund's option specified Municipal Securities at a price equal
to their amortized cost value plus accrued interest. The Fund will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder solely for trading purposes.
The Fund may engage in "repurchase agreements." In entering into a repurchase
agreement, the Fund acquires ownership of a security from a broker-dealer or
bank that agrees to repurchase the security at a mutually agreed upon time and
price (which price is higher than the purchase price), thereby determining the
yield during the Fund's holding period. Repurchase agreements with broker-dealer
firms will be limited to obligations of the U.S. Government, its agencies or
instrumentalities. Maturity of the securities subject to repurchase may exceed
one year.
As a matter of fundamental policy, the Fund may borrow money for temporary
purposes, but not for the purpose of purchasing investments, in an amount up to
one-third of the value of the Fund's total assets and may pledge up to 10% of
the Fund's net assets to secure borrowings. The Fund will not purchase illiquid
securities, including repurchase agreements maturing in more than seven days,
if, as a result thereof, more than 10% of the Fund's net assets valued at the
time of the transaction would be invested in such securities.
Opinions relating to the validity of Municipal Securities and to the exemption
of interest thereon from federal income tax (and, with respect to California
Municipal Securities, to the exemption of interest thereon from State of
California personal income taxes) are rendered by bond counsel to the respective
issuers at the time of issuance. The Fund and the Investment Manager will not
review the proceedings relating to the issuance of Municipal Securities or the
bases for such opinions.
SPECIAL RISK CONSIDERATIONS. The Fund intends to follow the diversification
standards set forth in the 1940 Act, except to the extent that, in the
Investment Manager's judgment, non-diversification is appropriate to maximize
the percentage of the Fund's assets that are California Municipal Securities.
The investment return on a non-diversified portfolio typically is dependent upon
the performance of a smaller number of issuers relative to the number of issuers
held in a diversified portfolio. In the event of changes in the financial
condition or in the market's assessment of certain issuers, the Fund's policy of
acquiring large positions in the obligations of a relatively small number of
issuers may affect the value of the Fund's portfolio to a greater extent than
that of a diversified portfolio.
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<PAGE> 11
Although the Fund does not presently intend to do so on a regular basis, it may
invest more than 25% of its assets in Municipal Securities the interest on which
is paid solely from revenues on similar projects if such investment is deemed
necessary or appropriate by the Investment Manager. To the extent that the
Fund's assets are concentrated in Municipal Securities payable from revenues on
similar projects, the Fund will be subject to the particular risks presented by
such projects to a greater extent than it would be if the Fund's assets were not
so concentrated.
Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could result in adverse
consequences affecting California Municipal Securities. For example, in recent
years "Proposition 13" and similar California constitutional and statutory
amendments and initiatives have restricted the ability of California taxing
entities to increase real property tax revenues. Other initiative measures
approved by California voters, through limiting various other taxes, have
resulted in a substantial reduction in state revenues. Decreased state revenues
may result in reductions in allocations of state revenues to local governments.
It is not possible to determine the impact of these initiatives on the ability
of California issuers to pay interest or repay principal on their obligations.
There is no assurance that any California issuer will make full or timely
payments of principal and interest or remain solvent. For example, in December
1994, Orange County filed for bankruptcy. In addition, from time to time,
federal legislative proposals have threatened the tax-exempt status or use of
municipal securities. (An expanded discussion of the risks associated with
municipal securities and California issuers is contained in the Statement of
Additional Information.)
Participation interests in Municipal Securities and other derivative securities
eligible for purchase by the Fund involve special risks, including a risk that
the Internal Revenue Service may characterize some or all of the interest paid
on such securities to the Fund as taxable. There is also an increased risk, most
typically associated with "municipal lease" obligations, that a municipality
will not appropriate the funds necessary to make the scheduled payments on, or
may seek to cancel or otherwise avoid its obligations under, the lease that
supports the security owned by the Fund.
For more information, see the section of this Prospectus entitled "Share Price
Calculation."
MANAGEMENT OF THE FUND
Responsibility for overall management of the Fund rests with the trustees and
officers of the Schwab Fund Family. Professional investment management for the
Fund is provided by the Investment Manager, Charles Schwab Investment
Management, Inc., 101 Montgomery Street, San Francisco, CA 94104. The Investment
Manager provides a continuous investment program, including general investment
and economic advice regarding the Fund's investment strategies, manages the
Fund's investment portfolio and performs expense management, accounting and
recordkeeping, and other services necessary to the operation of the Fund and the
Schwab Fund Family. The Investment Manager, formed in 1989, is a wholly owned
subsidiary of The Charles Schwab Corporation and is the investment adviser and
administrator of the SchwabFunds(R) mutual funds. As of June 3, 1995, the Schwab
Funds had aggregate net assets in excess of $26 billion.
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<PAGE> 12
Charles Schwab & Co., Inc. ("Schwab" or the "Transfer Agent"), 101 Montgomery
Street, San Francisco, CA 94104, serves as shareholder services agent and
transfer agent for the Fund. Schwab provides information and services to
shareholders, which include reporting share ownership, sales and dividend
activity (and associated tax consequences), responding to daily inquiries,
effecting the transfer of Fund shares and facilitating effective cash management
of shareholders' Schwab account balances. It furnishes such office space and
equipment, telephone facilities, personnel and informational literature
distribution as is necessary or appropriate in providing shareholder and
transfer agency information and services. Schwab is also the Fund's distributor,
but receives no compensation for its services as such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 2.5 million active customer accounts and has over 200 offices. Schwab
also offers convenient access to financial information services and provides
products and services that help investors make investment decisions. Schwab is a
wholly-owned subsidiary of The Charles Schwab Corporation. Charles R. Schwab is
the founder, Chairman and Chief Executive Officer and a director of The Charles
Schwab Corporation and, as of March 10, 1995, the beneficial owner of
approximately 23.3% of the outstanding shares of that corporation. Mr. Schwab
may be deemed to be a controlling person of Schwab and the Investment Manager.
FEES AND EXPENSES. Pursuant to its Investment Advisory and Administration
Agreement with the Schwab Fund Family, the Investment Manager receives from the
Fund a graduated annual fee, payable monthly, of 0.46% of the Fund's average
daily net assets not in excess of $1 billion, 0.41% of such net assets over $1
billion but not in excess of $2 billion and 0.40% of such net assets over $2
billion. The Investment Manager may reduce its management fee from time to time
in the future. Fee reductions lower the Fund's expenses and thus increase the
total return it provides shareholders. At least through August 31, 1995, the
Investment Manager guarantees that the management fee will not exceed 0.19% of
the Fund's average daily net assets and total fund operating expenses will not
exceed 0.65% of the average daily net assets of the Sweep Shares of the Fund.
The effect of this guarantee is to maintain or lower the expenses of the Sweep
Shares of the Fund and thus maintain or increase total return to shareholders.
For the fiscal year ended December 31, 1994, the Fund paid investment management
fees of 0.18% of its average daily net assets and paid total expenses of 0.64%
of its average daily net assets.
For the transfer agency services provided, the Transfer Agent receives an annual
fee, payable monthly, of 0.25% of the average daily net assets of the Sweep
Shares of the Fund. In addition, for shareholder services provided, Schwab
receives an annual fee, payable monthly, of 0.20% of the average daily net
assets of the Sweep Shares of the Fund. For the Value Advantage Shares, the
Transfer Agent receives an annual fee of 0.05% of the average daily net assets
of that class' shares of beneficial interest. PNC Bank is the Fund's Custodian.
The Schwab Fund Family pays the expenses of its operations. These expenses are
generally allocated among the Schwab Fund Family's investment portfolios
("Series") on the basis of relative net assets at the time of allocation.
However, expenses directly attributable to a particular Series or class of a
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<PAGE> 13
Series are charged to that Series or class, respectively. The differing expenses
applicable to the Sweep Shares and the Value Advantage Shares will cause the
performance of the two classes of shares of the Fund to differ.
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
THE FUND DECLARES DAILY DIVIDENDS WHICH ARE PAID MONTHLY.
- --------------------------------------------------------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS. On each day that the net asset value per
share of the Fund is determined ("Business Day"), the Fund's net investment
income will be declared as of the close of trading on the New York Stock
Exchange (the "Exchange") (generally 4:00 p.m. Eastern time) as a dividend to
shareholders already of record at the previous net asset value calculation.
Dividends are normally paid (and, where applicable, reinvested) on the 15th of
each month, if a Business Day, otherwise on the next Business Day.
TAX INFORMATION. The Fund has elected to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"),
qualified as such, and intends to continue to so qualify. In order to so
qualify, the Fund will distribute on a current basis substantially all of its
investment company taxable income, its net exempt-interest income and its
capital gain net income (if any), and will meet certain other requirements. Such
qualification relieves the Fund of liability for federal and California income
taxes to the extent the Fund's earnings are distributed. In addition, if the
Fund does not distribute 98% of its taxable investment income and capital gains,
it will be subject to a non-deductible 4% excise tax on such undistributed
amounts.
FEDERAL INCOME TAXES: Dividends derived from exempt-interest on state and local
obligations (known as "exempt-interest dividends") may be treated by the Fund's
shareholders as items of interest excludable from their federal gross income. A
shareholder should consult his or her own tax adviser with respect to whether
exempt-interest dividends would be excludable from gross income if the
shareholder were treated as a "substantial user" of facilities financed by an
obligation held by the Fund or a "related person" to such user under the Code.
Any loss on the sale or exchange of any share held for six months or less will
be disallowed to the extent of the amount of the exempt-interest dividend
received with respect to such share. The U.S. Treasury Department is authorized
to issue regulations reducing the period to not less than 31 days for certain
regulated investment companies, but no such regulations have been issued as of
the date of this Prospectus. To the extent dividends paid to shareholders are
derived from taxable interest or short-term or long-term capital gains, such
dividends will be subject to federal income tax whether paid in the form of cash
or additional shares. Fund dividends derived from interest on U.S. Treasury and
agency obligations are subject to federal income tax.
The Fund may at times purchase Municipal Securities or California Municipal
Securities at a discount from the price at which they were initially issued. For
federal income tax purposes, some or all of this market discount will be
included in the Fund's ordinary income and will be taxable to shareholders as
such when it is distributed to them.
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<PAGE> 14
If the Fund holds certain "private activity bonds" ("industrial development
bonds" under prior law), dividends derived from interest on such obligations
will be classified as an item of tax preference which could subject certain
shareholders to federal alternative minimum tax liability. Corporate
shareholders must also take all exempt-interest dividends into account in
determining "adjusted current earnings" for purposes of calculating their
alternative minimum tax.
Private activity bonds and industrial development bonds generally are bonds
issued by or on behalf of public authorities to obtain funds to provide certain
privately owned or operated facilities. Private activity bonds and industrial
development bonds also are generally limited obligation (or revenue) securities,
which means that they are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from some other
specific revenue source. (See "Municipal Securities" in the Statement of
Additional Information.)
Reinvested distributions will be taxable as if they had been received by
shareholders in cash. It is not expected that any portion of the dividends paid
by the Fund will be eligible for the corporate dividends received deduction.
Shareholders should note that all exempt-interest dividends will be taken into
account in determining the taxability of Social Security benefits or Railroad
Retirement Act benefits. (See "Distributions and Taxes" in the Statement of
Additional Information.)
CALIFORNIA INCOME TAXES: Dividends paid by the Fund to non-corporate
shareholders and derived from interest on California Municipal Securities or
federal obligations are also exempt from State of California personal income
tax. For this purpose, federal obligations are obligations the interest on which
is excludable from gross income for state income tax purposes under the
Constitution or laws of the United States. However, dividends paid to
shareholders that are corporations subject to California franchise tax or
corporate income tax will be taxed as ordinary income to such shareholders,
notwithstanding that all or a portion of such dividends are exempt from State of
California personal income tax. Moreover, to the extent that the Fund's
dividends are derived from interest on debt obligations other than California
Municipal Securities or federal obligations, such dividends will be subject to
State of California personal income tax, even though such dividends may be
exempt for federal income tax purposes.
Except as noted with respect to State of California personal income tax,
distributions of net investment income may be taxable to investors under state
or local law as dividend income even though all or a portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes. In addition, to the
extent, if any, that dividends paid to shareholders are derived from taxable
interest or from long-term or short-term capital gains, such dividends will not
be exempt from State of California personal income tax whether received in cash
or reinvested in shares.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' regular Schwab brokerage statements. The Fund will
notify shareholders at least annually as to the federal income and State of
California personal income tax consequences of distributions made each year.
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<PAGE> 15
The foregoing is only a brief summary of some of the federal and State of
California income tax considerations affecting the Fund and its shareholders.
Accordingly, potential investors should consult their tax advisers with specific
reference to their own tax situations.
SHARE PRICE CALCULATION
- ------------------------------------------------------------------
THERE ARE NO SALES CHARGES OR TRANSACTION FEES TO
PURCHASE OR REDEEM SHARES OF THE FUND.
- ------------------------------------------------------------------
The price of a Sweep Share of the Fund on any given day is its "net asset value"
or "NAV." This figure is computed by dividing total Fund assets allocable to
that class, less any liabilities allocable to the class, by the number of shares
of the class outstanding. The net asset value per share of the Sweep Shares of
the Fund is determined on each day both the Federal Reserve Bank of New York and
the Exchange are open for business, first at 10:00 a.m. (Eastern time), then
again as of the close of normal trading on the Exchange (generally 4:00 p.m.
Eastern time).
The Fund values its portfolio securities at amortized cost, which means that
they are valued at their acquisition cost (as adjusted for amortization of
premium or discount) rather than at current market value. Calculations are made
to compare the value of the Fund's investments using the amortized cost method
with market values. Except as described below, market valuations are obtained by
using actual quotations provided by third-party pricing services, market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market instruments published by reputable sources at the mean
between the bid and asked prices for the instruments. If a deviation of 1/2 of
1% or more were to occur between the net asset value per share of the Sweep
Shares of the Fund calculated by reference to market values and the $1.00 per
share amortized cost value of the Sweep Shares of the Fund, or if there were any
other deviation which the Board of Trustees believed would result in a material
dilution to shareholders or purchasers, the Board of Trustees would promptly
consider what action, if any, should be initiated. While the Fund attempts to
maintain a net asset value at a constant $1.00 per share, Fund shares are not
insured against a reduction in net asset value.
The Fund has entered into a transaction with Bank of America National Trust and
Savings Association ("Bank of America") pursuant to which the Fund is a
beneficiary of an irrevocable Letter of Credit (the "Letter of Credit") issued
by Bank of America. The Letter of Credit provides a degree of credit support for
certain securities held by the Fund, currently including certain obligations of
Orange County, California and issuers that participated in the investment pool
maintained by Orange County (each a "Covered Security"). Orange County and the
investment pool maintained by the County have filed for protection under Chapter
9 of the federal Bankruptcy Code. Pursuant to the Letter of Credit, Bank of
America will make certain payments to the Fund (each a "Payment") upon
presentation of a certificate as required under the Letter of Credit in the
event that (i) the issuer of a Covered Security defaults on a repayment to the
Fund of the principal amount of the Covered Security, or (ii) the proceeds
received by the Fund in the disposition of a Covered Security are less than a
specified percentage of the Covered Security's par amount. The Fund has no
obligation to reimburse Bank of America for any amount drawn under the Letter of
Credit. The Letter of Credit,
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<PAGE> 16
however, does not ensure that the Fund will receive Payments equal to the
aggregate amount of all Covered Securities. Accordingly, although the Board of
Trustees has determined that the Covered Securities subject to the Letter of
Credit currently present minimal credit risks, the Fund could incur losses as a
result of its holdings of Covered Securities.
The Letter of Credit will continue in effect until the earlier of (i) the date
on which Bank of America has made Payments to the Fund equaling the total amount
available under the Letter of Credit, or (ii) August 1, 1995, after each Covered
Security is scheduled to mature.
The Board of Trustees has approved the payment of fees by the Fund for the
availability of the Letter of Credit, as well as revised pricing procedures that
take into account the effect of the Letter of Credit on the value of the Covered
Securities (the "Pricing Procedures"). Pursuant to the Pricing Procedures, the
value of a Covered Security may be determined in good faith after consideration
of the credit support provided by the Letter of Credit in order to cause the
calculation of the Fund's market-based net asset value per share to accurately
reflect the actual value of all of its assets.
HOW THE FUND SHOWS PERFORMANCE
From time to time the Fund may advertise the yield, effective yield,
tax-equivalent yield and tax-equivalent effective yield of the Sweep Shares of
the Fund. Performance figures are based upon historical results and are not
intended to indicate future performance.
The yield of the Sweep Shares of the Fund refers to the income generated by a
hypothetical investment in the Sweep Shares of the Fund over a specific 7-day
period. This income is then annualized, which means that the income generated
during the 7-day period is assumed to be generated each week over an annual
period and is shown as a percentage of the hypothetical investment.
Effective yield is calculated similarly, but the income earned by the investment
is assumed to be compounded weekly when annualized. The effective yield will be
slightly higher than the yield due to this compounding effect.
Tax-equivalent yield is the yield that a taxable investment must generate in
order to equal (after applicable taxes are deducted) the Sweep Share's yield for
an investor in stated federal income and State of California tax brackets
(normally assumed to be the applicable maximum tax rate). Tax-equivalent yield
is based upon, and will be higher than, the portion of the Sweep Share's yield
that is tax-exempt. (See "Yield" in the Statement of Additional Information.)
The tax-equivalent effective yield is computed in the same manner as is the
tax-equivalent yield, except that the effective yield is substituted for yield
in the calculation.
The performance of the Sweep Shares of the Fund may be compared to that of other
mutual funds tracked by mutual fund rating services, various indices of
investment performance, United States government obligations, bank certificates
of deposit, other investments for which reliable performance data is available
and the consumer price index.
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<PAGE> 17
Because the Sweep Shares of the Fund are subject to different expenses than the
Value Advantage Shares of the Fund, the performance of the two classes of shares
will differ.
Additional performance information about the Sweep Shares of the Fund is
available in the Fund's Annual Report, which is sent to all shareholders. To
request a free copy, call your local Schwab office at 800-2 NO-LOAD.
GENERAL INFORMATION
The Schwab Fund Family was organized as a business trust under the laws of
Massachusetts on October 20, 1989 and may issue an unlimited number of shares of
beneficial interest or classes of shares in one or more Series. Currently, the
Schwab Fund Family offers shares of nine Series which may be organized into one
or more classes of shares of beneficial interest. The Board of Trustees may
authorize the issuance of shares of additional Series or classes if it deems it
desirable to do so. Shares of each Series have equal, noncumulative voting
rights, and equal rights as to dividends, assets, and liquidation of such
Series, except to the extent such voting rights or rights as to dividends,
assets and liquidation vary among classes of a Series. The Schwab California
Tax-Exempt Money Fund was formerly known as the Schwab California Tax-Free Money
Fund.
The Schwab Fund Family is not required to hold annual shareholders' meetings. It
will, however, hold special meetings as required or deemed desirable by the
Board of Trustees for such purposes as electing trustees, changing fundamental
policies, or approving an investment advisory or sub-advisory agreement. In
addition, a Trustee may be elected or removed by shareholders at a special
meeting called upon written request of shareholders owning at least 10% of the
outstanding shares of the Schwab Fund Family. Shareholders will vote by Series
and not in the aggregate (for example, when voting to approve the investment
advisory agreement), except when voting in the aggregate is permitted under the
1940 Act, such as for the election of Trustees. In addition, holders of the
Sweep Shares will vote exclusively as a class on any matter relating solely to
the Sweep Shares' arrangement as a class and on any matter in which the
interests of the holders of the Sweep Shares differ from the interests of the
holders of Value Advantage Shares.
SHAREHOLDER GUIDE
- -----------------------------------------------------------
SCHWAB'S OFFICES ACCEPT ORDERS AND PROVIDE
SHAREHOLDER SERVICE AND INFORMATION.
- -----------------------------------------------------------
SHAREHOLDER SERVICE. You may place Fund purchase and redemption orders as well
as request exchanges at any one of over 200 Schwab offices nationwide or by
calling 800-2 NO-LOAD, where trained representatives are available to answer
questions about the Fund and your account. The privilege to initiate
transactions by telephone, as discussed below, is automatically available
through your Schwab account. The Fund will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If these
procedures are not followed, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. These procedures may include requiring
a form of personal identification prior to acting upon instructions received by
telephone, providing written confirmation of such instructions and tape
recording telephone transactions.
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HOW TO PURCHASE SHARES
- -------------------------------------------------------------------------
YOU MAY PURCHASE SHARES OF THE FUND ONLY THROUGH A
SCHWAB ACCOUNT.
- -------------------------------------------------------------------------
Shares of the Fund are designed for sale to California residents only.
You may purchase shares of the Fund exclusively through an account maintained
with Schwab, and payment for shares must be made directly to Schwab. Schwab
brokerage accounts are free of maintenance fees. (See "Summary of Expenses.")
The Securities Investor Protection Corporation ("SIPC") will provide account
protection, in an amount up to $500,000, for securities, including Fund shares,
which you hold in a Schwab brokerage account. Of course, SIPC account protection
does not protect shareholders from principal fluctuations.
If you already have a Schwab brokerage account, you may purchase shares in the
Fund as described below and need not open a new account.
If you do not presently maintain a Schwab brokerage account and wish to
establish one, simply complete a Schwab Brokerage Account Application available
at any Schwab office. Corporations and other organizations should contact their
local Schwab office to determine which additional forms may be necessary to open
a Schwab brokerage account.
You may deposit funds into your Schwab brokerage account by check or wire. All
deposit checks should be made payable to Charles Schwab & Co., Inc. If you would
like to wire funds into your Schwab brokerage account, please contact your local
Schwab office for instructions.
WHEN AND AT WHAT PRICE SHARES WILL BE PURCHASED. You must have funds in your
Schwab brokerage account in order to purchase Fund shares. If funds (including
those transmitted by wire) are received by Schwab before 4:00 p.m. (Eastern
time), they will be available for investment on the day of receipt. If funds
arrive after that time, they will be available for investment the next Business
Day.
Orders to purchase shares will be executed at the next determined net asset
value after receipt by Schwab's Mutual Fund Transfer Agency Department. (See
"Share Price Calculation.")
- ---------------------------------------------------------------------------
THE FUND MAY BE USED TO "SWEEP" FREE CREDIT BALANCES
IN YOUR SCHWAB BROKERAGE ACCOUNT.
- ---------------------------------------------------------------------------
METHODS OF PURCHASING SHARES. Automatic Investment: When opening a Schwab
brokerage account, an investor will be asked to select a SchwabFunds(R) class or
series with sweep privileges as a "primary fund." (If a selection is not made,
the Schwab Money Market Fund will automatically become then investor's primary
fund.) An initial purchase of shares of the primary fund selected will be made
automatically pursuant to the procedures described below when the free credit
balance in the investor's Schwab brokerage account (including deposits, proceeds
of sales of securities, and miscellaneous cash dividends and interest, but not
amounts held by Schwab as collateral for margin obligations to Schwab) exceeds
$1,000 on the last Business Day of the week. Thereafter, free credit balances in
the investor's Schwab brokerage account which, in total, equal or exceed $100 on
the last Business Day of any week will be automatically invested in the primary
fund on the first Business Day
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<PAGE> 19
of the following week. If an investor's free credit balance is less than $100,
it will not be invested in the primary fund, but will remain a credit to the
investor's Schwab brokerage account. In certain limited circumstances, free
credit balances in certain accounts may be automatically invested at different
times. Upon request, a free credit balance in a Schwab brokerage account
totalling $20,000 or more may be invested in the appropriate primary fund on the
Business Day following receipt by the Transfer Agent of investor instructions.
An investor with an existing Schwab brokerage account may add the automatic
investment feature to his or her account by completing the appropriate section
of the Schwab brokerage account application available at any Schwab office. A
shareholder may change primary funds by calling or writing his or her local
Schwab office or writing Schwab at the above address. Note that the automatic
investment feature is not available for Value Advantage Shares of any Fund.
- ----------------------------------------------------------------------
SHARES OF THE FUND MAY ALSO BE PURCHASED DIRECTLY.
- ----------------------------------------------------------------------
DIRECT PURCHASE: A Schwab brokerage account holder may buy shares of the Fund
(if it is not his or her primary fund) by placing an order directly with a
Schwab registered representative. The minimum initial investment for such
"secondary fund" purchase is $1,000, and subsequent investments must be at least
$100. The minimum initial investment for the Value Advantage Shares is $25,000
and the minimum account balance for the Value Advantage Shares is $20,000.
- -----------------------------------------------------------------------
TWO DISTRIBUTION OPTIONS ARE AVAILABLE.
- -----------------------------------------------------------------------
DISTRIBUTION OPTIONS. The brokerage account standing instructions that you
selected in your Schwab Brokerage Account Application will determine which of
the two distribution options listed below will apply to you. Fund distributions
will be automatically reinvested, unless the Transfer Agent has received
instructions that distributions be mailed to you as they are paid. Please
contact your local Schwab office if you already have a Schwab brokerage account
and wish to change your brokerage account standing instructions.
1. AUTOMATIC REINVESTMENT: All distributions will be reinvested in additional
full Sweep Shares of the Fund at the net asset value next determined after
their payable date.
2. RECEIVE DIVIDENDS BY MAIL: All distributions will be credited to your Schwab
account as of the payable date. If your account is coded to have dividends
mailed immediately, checks will normally be mailed the Business Day after
distributions are credited.
For information on how to wire funds from your Schwab brokerage account to your
bank, see "Other Important Information--Wire Transfers to Your Bank."
OTHER PURCHASE INFORMATION. The minimum amounts required for automatic
investment/direct purchase may be reduced or waived on certain occasions. (See
"Purchase and Redemption of Shares" in the Statement of Additional Information.)
Free credit balances in accounts of certain categories of investors, such as
holders of Schwab custodial accounts, may be invested automatically irrespective
of amount. The Fund reserves the right, in its sole discretion and without prior
notice to shareholders, to withdraw or suspend all or any part of the offering
made by this Prospectus, to reject
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<PAGE> 20
purchase orders or to change the minimum investment requirements. All orders to
purchase shares of the Fund are subject to acceptance by the Fund and are not
binding until confirmed or accepted. Schwab will charge a $15 service fee
against an investor's Schwab brokerage account should his or her check be
returned because of insufficient or uncollected funds or a stop payment order.
HOW TO EXCHANGE SHARES
- ----------------------------------------------------------------------
SHARES OF THE FUND MAY BE EXCHANGED FOR SHARES OF
OTHER FUNDS SPONSORED BY SCHWAB WITHOUT CHARGE.
- ----------------------------------------------------------------------
The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of any other SchwabFunds class or series available to investors in your
state. Thus, you can conveniently modify your investments if your goals or
market conditions change. An exchange will involve the redemption of shares at
the net asset value next determined after receipt by the Transfer Agent of an
exchange request (on the same day as the Transfer Agent received the request, if
it was received by 4:00 p.m. (Eastern time) and on the next Business Day if the
request was received after that time) and the purchase of shares at their net
asset value next determined after sale of the shares involved in the exchange
(on the same day as the Transfer Agent received the request, if it was received
by 4:00 p.m. (Eastern time) and on the next Business Day if the request was
received after that time). An exchange of shares will be treated as a sale of
the shares for federal income tax purposes. Note that you must meet the minimum
initial or subsequent investment requirements applicable to the shares you wish
to receive in an exchange. The Fund reserves the right on 60 days' written
notice to modify, limit or terminate the exchange privilege.
METHODS OF EXCHANGING SHARES.
BY PHONE:
To exchange between funds by telephone, please call your local Schwab office
during regular business hours or 800-2 NO-LOAD. Investors should be aware that
telephone exchanges may be difficult to implement during periods of drastic
economic or market changes.
To properly process your telephone exchange request, we will need the
following information:
- your Schwab brokerage account number;
- the name of the fund into which shares are to be exchanged; and
- the number of shares of the Fund to be exchanged.
BY MAIL:
You may also request an exchange by writing your local Schwab office or Schwab
at the address listed on the Prospectus cover page.
To properly process your mailed exchange request, we will need a letter from
you which:
- references your Schwab brokerage account number;
- specifies that you would like to exchange shares from the Fund;
- indicates the fund into which shares are to be exchanged;
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<PAGE> 21
- describes the number of shares of the Fund to be exchanged; and
- is signed by at least one of the registered Schwab account holders, in
the exact form specified in the account.
IN PERSON AT A SCHWAB OFFICE:
You can also place your exchange request in person at your local Schwab
office.
HOW TO REDEEM SHARES
THE PRICE AT WHICH SHARES WILL BE REDEEMED. Sweep Shares will be redeemed at the
net asset value per share next determined after receipt by the Transfer Agent of
proper redemption instructions, as set forth below. Investors will receive
dividends declared for the day on which shares are redeemed.
AUTOMATIC REDEMPTION: Redemptions will be automatically effected by the Transfer
Agent to satisfy debit balances in an investor's Schwab brokerage account or to
provide necessary cash collateral for an investor's margin obligation to Schwab.
Redemptions will also be automatically effected to settle securities
transactions with Schwab if an investor's free credit balance on the day before
settlement is insufficient to settle the transactions. Each Schwab brokerage
account will, as of the close of business each Business Day, be automatically
scanned for debits and pending securities settlements, and, after application of
any free credit balances in the account to such debits, a sufficient number of
shares of the primary fund and, to the extent necessary, any other Schwab Money
Fund(s) in the account, will be redeemed the following Business Day to satisfy
any remaining debits.
DIRECT REDEMPTION: Shareholders may also place redemption orders directly by
contacting their local Schwab office by telephone, mail or in person, or by
mailing written instructions to Schwab (at the address listed on the Prospectus
cover page). Investors should be aware that telephone redemption may be
difficult to implement during periods of drastic economic or market changes.
Shareholders who experience difficulties in redeeming by telephone can utilize
one of the above-noted alternatives to place their redemption orders.
Telephone redemption orders received prior to 6:00 p.m. (Eastern time) on any
Business Day, once they have been verified as to the caller's identity and
account ownership, will be deemed to be received by Schwab's Mutual Fund
Transfer Agency Department prior to the next net asset value determination. All
subsequent telephone redemption orders received prior to the first net asset
value determination on the following day will be deemed received prior to that
day's second net asset value determination.
Normally a check for a shareholder's redemption proceeds will be available at
the investor's local Schwab office on the Business Day after the Transfer Agent
receives proper redemption instructions. Checks will normally be mailed to
investors who specifically request such mailing on the Business Day following
share redemption. If you purchased shares by check, your redemption proceeds may
be held in your Schwab brokerage account until your check clears (which may take
up to 15 days). Depending on the type of Schwab brokerage account you have, your
money may earn interest during any holding period.
The Fund may suspend redemption rights or postpone payments at times when
trading on the Exchange is restricted, the Exchange is closed for any reason
other than its customary weekend or
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holiday closings, emergency circumstances as determined by the Securities and
Exchange Commission exist, or for such other circumstances as the Commission may
permit.
OTHER IMPORTANT INFORMATION
MINIMUM BALANCE AND BROKERAGE ACCOUNT REQUIREMENTS. Due to the relatively high
cost of maintaining smaller holdings, the Fund reserves the right to redeem a
shareholder's shares if, as a result of redemptions, their aggregate value drops
below the $100 minimum balance requirement for the Sweep Shares of the Fund. The
Fund will notify shareholders in writing 30 days before taking such action to
allow them to increase their holdings to at least the minimum level. Also note
that, because they can only be held in Schwab brokerage accounts, Fund shares
will be automatically redeemed should the Schwab brokerage account in which they
are carried be closed.
CONSOLIDATED MAILINGS. In an effort to reduce the Fund's mailing costs, the Fund
consolidates shareholder mailings by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single package during each shareholder mailing. If you do not wish
this consolidation to apply to your account(s), please write to SchwabFunds at
101 Montgomery Street, San Francisco, CA 94104 to that effect.
WIRE TRANSFERS TO YOUR BANK. If you so instruct your local Schwab office, funds
can be wired from your Schwab brokerage account to your bank account. Call your
local Schwab office for additional information. A $15 service fee will be
charged against your Schwab brokerage account for each wire sent.
SCHWAB ONE(R) ACCOUNT FEATURES. Shareholders who hold shares of the Fund in
Schwab One accounts are entitled to redeem Fund shares through debit cards and
checks. Investors should contact Schwab if they are interested in the benefits
and requirements of a Schwab One account.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
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THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 24
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 25
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 26
SCHWAB CALIFORNIA
TAX-EXEMPT
MONEY FUND-
Sweep Shares
PROSPECTUS JUNE 6, 1995
[SchwabFunds Logo]
[SchwabFunds Logo]
101 Montgomery Street
San Francisco, California 94104
725-5 (6/95) CRS 3830 Printed on recycled paper
