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STATEMENT OF ADDITIONAL INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
101 Montgomery Street, San Francisco, CA 94104
THE SCHWAB MONEY FUNDS: VALUE ADVANTAGE SHARES
SCHWAB TAX-EXEMPT MONEY FUND -- VALUE ADVANTAGE SHARES(TM)
SCHWAB CALIFORNIA TAX-EXEMPT MONEY FUND -- VALUE ADVANTAGE SHARES(TM)
SCHWAB NEW YORK TAX-EXEMPT MONEY FUND -- VALUE ADVANTAGE SHARES(TM)
JUNE 6, 1995
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus dated June 6, 1995, which may be
amended from time to time, for the Value Advantage Shares of the Schwab
Tax-Exempt Money Fund, Schwab California Tax-Exempt Money Fund, and Schwab New
York Tax-Exempt Money Fund (each a "Fund" and collectively, the "Funds"), three
separately managed investment portfolios of The Charles Schwab Family of Funds
(the "Trust"). This Statement of Additional Information relates to the Value
Advantage Shares of the Funds. To obtain a copy of the above-referenced
Prospectus, please contact Charles Schwab & Co., Inc. ("Schwab") at 800-2 NO-
LOAD (800-266-5623), 24 hours a day or 101 Montgomery Street, San Francisco, CA
94104.
SCHWABFunds(R)
800-2 NO-LOAD
(800-266-5623)
TABLE OF CONTENTS
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MUNICIPAL SECURITIES...................................................... 2
INVESTMENT RESTRICTIONS................................................... 7
MANAGEMENT OF THE TRUST................................................... 10
PORTFOLIO TRANSACTIONS AND TURNOVER....................................... 15
DISTRIBUTIONS AND TAXES................................................... 16
SHARE PRICE CALCULATION................................................... 20
YIELD..................................................................... 20
GENERAL INFORMATION....................................................... 22
PURCHASE AND REDEMPTION OF SHARES......................................... 23
OTHER INFORMATION......................................................... 24
APPENDIX - RATINGS OF INVESTMENT SECURITIES............................... 25
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MUNICIPAL SECURITIES
"Municipal Securities" are debt securities issued by a state, its
political subdivisions, agencies, authorities and corporations. Municipal
Securities issued by or on behalf of the State of California, its subdivisions,
agencies or authorities are referred to herein as "California Municipal
Securities." Municipal Securities issued by or on behalf of the State of New
York, its subdivisions, agencies or instrumentalities are referred to herein as
"New York Municipal Securities."
Municipal Securities that the Funds may purchase include, without
limitation, debt obligations issued to obtain funds 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
for which Municipal Securities may be issued include refunding outstanding
obligations, obtaining funds for general operating expenses and obtaining funds
to loan to other public institutions and facilities.
Municipal Securities include securities issued to finance various
private activities, including certain types of private activity bonds
("industrial development bonds" under prior law). These securities may be issued
by or on behalf of public authorities to obtain funds to provide certain
privately owned or operated facilities. The Funds may not be desirable
investments for "substantial users" of facilities financed by private activity
bonds or industrial development bonds or for "related persons" of substantial
users for whom dividends attributable to interest on such bonds may not be
tax-exempt. Shareholders should consult their own tax advisers regarding the
potential effect on them (if any) of any investment in these Funds.
Municipal Securities generally are classified as "general obligation"
or "revenue." General obligation bonds are secured by the issuer's pledge of its
full credit and taxing power for the payment of principal and interest. Revenue
bonds are payable only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Private activity bonds and industrial development
bonds that are Municipal Securities are in most cases revenue bonds and
generally do not constitute the pledge of the credit of the issuer of such
bonds.
Examples of Municipal Securities that are issued with original
maturities of one year or less are short-term tax anticipation notes, bond
anticipation notes, revenue anticipation notes, construction loan notes,
pre-refunded municipal bonds and tax-free commercial paper. Tax anticipation
notes typically are sold to finance working capital needs of municipalities in
anticipation of receiving property taxes on a future date. Bond anticipation
notes are sold on an interim basis in anticipation of a municipality issuing a
longer term bond in the future. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as those 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
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guaranteed by a municipal issuer. The Funds may purchase other Municipal
Securities similar to the foregoing, which are or may become available,
including securities issued to pre-refund other outstanding obligations of
municipal issuers.
The federal bankruptcy statutes relating to the adjustments of debts of
political subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities may be
authorized to initiate bankruptcy proceedings without prior notice to or consent
of creditors, which proceedings could result in material adverse changes in the
rights of holders of obligations issued by such subdivisions or authorities.
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.
RISK FACTORS
The Schwab California Tax-Exempt Money Fund and the Schwab New York
Tax-Exempt Money Fund's concentration in securities issued by a single state and
its political subdivisions provides a greater level of risk than does a fund
that is diversified across numerous states and municipal entities. The ability
of a single state and its municipalities to meet their obligations will depend
on the availability of tax and other revenues, economic, political, and
demographic conditions within the state, and the underlying fiscal condition of
the state and its municipalities.
CALIFORNIA MUNICIPAL SECURITIES
In addition to general economic pressures which affect the State of
California's ability to raise revenues to meet its financial obligations,
certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could also result in
the adverse effects described below. The following information constitutes only
a brief summary, does not purport to be a complete description and is based on
information drawn from official statements and prospectuses relating to
securities offerings of the State of California that have come to the attention
of the Trust and were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in such official statements and prospectuses has not been
independently verified by the Trust.
As used in this section, "California Municipal Security" includes not
only issues which are secured by a direct payment obligation of the State, but
also obligations of issuers that rely in whole or in part on State revenues for
payment of their obligations. A portion of the State's General Fund surplus are
distributed to counties, cities and their various taxing entities; whether and
to what extent a portion of the State's General Fund will be distributed in the
future to them is unclear.
Overview. From mid-1990 to late 1993, the State suffered a recession
with the worst economic, fiscal and budget conditions since the 1930's.
Construction, manufacturing (especially aerospace), exports and financial
services, among others, all have been severely affected. Job losses were the
worst of any post-war recession.
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The recession seriously affected State tax revenues and caused an
increase in expenditures for health and welfare programs. As a result, the State
has experienced recurring budget deficits. The State Controller reports that
expenditures exceeded revenues for four of the five fiscal years ending with
1991-92. Revenues and expenditures were essentially equal in 1992-93. The State
General Fund ended the 1993-94 fiscal year with an estimated accumulated deficit
of about $1.8 billion. A further consequence of the large budget imbalances has
been that the State depleted its available cash resources and has had to use a
series of external borrowings to meet its cash needs.
As a result of the deterioration in the State's budget and cash
situation, the State's credit ratings have been reduced. Since October, 1992,
all three major nationally recognized statistical rating organizations have
lowered the State's general obligation bond rating from the highest ranking of
"AAA" to "A" by Standard and Poor's Corporation, "A1" by Moody's Investors
Service, Inc. and "A" by Fitch Investors Service, Inc.
State Appropriations Limit. Subject to certain exceptions, the State is
subject to an annual appropriations limit imposed by Article XIII B of the State
Constitution on "proceeds of taxes." Various expenditures, including but not
limited to debt service on certain bonds and appropriations for qualified
capital outlay projects, are not included in the appropriations limit.
1994-95 FISCAL YEAR
Revenues. The 1994-95 Budget Act projected General Fund revenues and
transfers in 1994-95 of $41.9 billion, or about $2.1 billion more than 1993-94,
as revised. This projection includes the receipt of approximately $360 million
in new federal aid to reimburse the State for certain costs related to
undocumented foreign immigrants. The State's initial analysis of the federal
1995 fiscal year budget indicates that about $98 million was appropriated to the
State for certain of those costs, but that only about $33 million of that amount
will be received by the State during its 1994-95 fiscal year, with the remainder
to be received in its 1995-96 fiscal year. The 1994-95 Budget Act also projected
Special Fund revenues of $12.1 billion, a decrease of 2.4 percent from 1993-94.
Expenditures. The 1994-95 Budget Act projected General Fund
expenditures of $40.9 billion (a 1.6 percent increase from projected 1993-94
expenditures), in order to keep a balanced budget which pays off the accumulated
deficit, within available revenues. The 1994-95 Budget Act also projected
Special Fund expenditures of $12.3 billion, a 4.7 percent decrease from 1993-94.
The 1994-95 Budget Act balanced the budget with a number of major adjustments,
including the receipt of about $1.1 billion in health and welfare costs, and an
increase of about $526 million in Proposition 98 General Fund support for K-14
schools.
Cash resources at the beginning of the 1994-95 fiscal year were
insufficient to meet all obligations without external borrowing, such as
occurred in 1992. The 1994-95 Budget Act assumed that the State would use a cash
flow borrowing program in 1994-95 which combined one-year notes and two-year
warrants, which have now been issued. Issuance of the warrants allows the State
to defer repayment of about $1 billion of its accumulated budget deficit into
the 1995-96 fiscal year. Additional legislation was passed with the 1994-95
Budget Act designed to ensure that the warrants will be repaid in the 1995-96
fiscal year.
The 1995-96 Governor's proposed Budget contains a reforecast of
revenues and expenditures for the 1994-95 fiscal year. The reforecast estimates
that General Fund revenues
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and transfers will increase from the 1994-95 Budget Act estimate of $41.9
billion to over $42.3 billion, but also estimates that General Fund expenditures
will increase to $41.7 billion from the 1994-95 Budget Act estimate of $40.9
billion.
1995-96 FISCAL YEAR
Revenues. The Governor's proposed budget for 1995-96 estimates General
Fund revenues and transfers of $42.5 billion, a slight increase over 1994-95, as
revised. This slight increase reflects a proposal to shift to the counties
greater responsibility for welfare and social services (including a transfer of
about $1 billion in State revenues to counties) and the first year of a proposal
to cut personal and corporate income tax rates by 15 percent. Without these two
proposals, General Fund revenues and transfers would be projected at
approximately $43.8 billion. Special Fund revenues are estimated at $13.5
billion, an increase of 10.7 percent from 1994-95 revenues.
Expenditures. The Governor's proposed budget for 1995-96 estimates
General Fund expenditures of $41.7 billion. Special Fund expenditures are
estimated at $13.8 billion, an increase of 12.2 percent from 1994-95. The
proposed budget projects that the General Fund will end the 1995-96 fiscal year
with a slight surplus, and that all of the accumulated budget deficits will have
been repaid. A report issued in February 1995 by the California Legislative
Analyst, however, notes that the Governor's proposed budget for 1995-96 is
subject to a number of major risks, including receipt of expected federal
immigration aid and other federal actions that would allow State health and
welfare cuts.
The foregoing discussions of the 1994-95 Budget and the proposed
1995-96 Budget are based upon the Budget Act for 1994-95 and the Governor's
proposed 1995-96 Budget, respectively, and should not be construed as a
statement of fact. The assumptions used to construct a budget, which include
estimates and projections of revenues and expenditures, may be affected by
numerous factors, including future economic conditions in the State and the
nation. There can be no assurances that any estimates will be achieved.
ISSUES AFFECTING LOCAL
GOVERNMENTS AND SPECIAL DISTRICTS
Proposition 13. Certain California Municipal Securities may be
obligations of issuers that rely in whole or in part on ad valorem real property
taxes as a source of revenue. In 1978, California voters approved Proposition
13, which limits ad valorem taxes on real property and restricts the ability of
taxing entities to increase property tax revenues.
With certain exceptions, the maximum ad valorem tax on real property is
limited to 1% of the full cash value to be collected by the counties and
apportioned according to law. One exception is for debt service on bonded
indebtedness if approved by two-thirds of the votes cast by voters voting on the
proposition. The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by substantial damage, destruction or other factors or adjusted when
there is a "change in ownership " or "new construction".
The State, in response to the significant reduction in local property
tax revenues as a result of the passage of Proposition 13, enacted legislation
to provide local government with increased expenditures from the General Fund.
This post-proposition 13 fiscal relief has ended.
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Proposition 62. This initiative, approved by voters in 1986, placed
further restrictions on the ability of local governments to raise taxes and
allocate approved tax receipts. Several recent decisions of the California
Courts of Appeal have held that parts of Proposition 62 are unconstitutional,
however.
Propositions 98 and 111. These initiatives changed the State
appropriations limit and State funding of public education below the university
level by guaranteeing K-14 schools a minimum share of General Fund revenues. The
initiatives require that the State establish a prudent state reserve fund for
public education.
Appropriations Limit. Local governmental bodies are also subject to
annual appropriations limits. If a local government's revenues in any year
exceed the amount permitted to be spent, the excess would have to be returned to
the public through a revision of tax rates or fee schedules over the subsequent
two years.
Conclusion. The effect of these constitutional and statutory changes
and of budget developments on the ability of California issuers to pay interest
and principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds being generally less affected). There is no assurance that any
California issuer will make full or timely payments of principal or interest or
remain solvent. For example, in December 1994, Orange County filed for
bankruptcy. The California Tax-Exempt Money Fund's concentration in California
municipal securities provides a greater level of risk than a fund that is
diversified across numerous states and municipal entities.
ADDITIONAL ISSUES
Mortgages and Deeds of Trust. The California Tax-Exempt Money Fund may
invest in issues which are secured in whole or in part by a mortgage or deed of
trust on real property. California law limits the remedies of a creditor secured
by a mortgage or deed of trust, which may result in delays in the flow of
revenues to an issuer.
Lease Financings. Some local governments and districts finance certain
activities through lease arrangements. It is uncertain whether such lease
financings are debt that require voter approval.
Seismic Risk. It is impossible to predict the time, magnitude or
location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck Los Angeles, causing significant damage
to structures and facilities in a four county area. The possibility exists that
another such earthquake could create a major dislocation of the California
economy.
NEW YORK MUNICIPAL SECURITIES
The State of New York has experienced fiscal problems for several years
as a result of negligible growth, increased human service needs and the
lingering recession that hit the State harder than others. Though the State
enjoyed good growth throughout the early to mid-1980's, unemployment has risen
drastically and over 250,000 jobs have been lost in the past four years. The
State's economy is highly developed with a large emphasis in service, trade,
financial services, and real estate. While very diverse, extensive job losses in
each of these areas has placed a burden on the State to maintain employment,
company development and a stable tax base.
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As reflected in its financial results, the State has a large
accumulated deficit. The overall wealth of the State's population as reflected
by the per capita income offers a positive credit enhancement and is among the
highest in the nation. The debt per capita, though, is also among the highest
and poses a large burden on its residents.
The importance of New York City to the State's economy is also an
important consideration since it represents a significant portion of the overall
economy of the State. The City has struggled to maintain fiscal stability and
has performed adequately in contrast to the difficult economic conditions in the
New York/New Jersey metropolitan area. Any major changes to the financial
condition of the City would ultimately have an effect on the State. The overall
financial condition of the State can also be illustrated by the changes of its
debt ratings. During the last several years during which the State experienced
its financial difficulties, its general obligation long-term debt ratings as
determined by Moody's declined from A1 to A in 1990 while S&P downgraded the
State's debt from A to A- in early 1992. The State has the second lowest long
term debt rating among those states with outstanding general obligation ratings.
The short-term debt ratings are within the top two rating categories: MIG-2 for
Moody's and SP-1 for S&P. In February 1991, Moody's lowered its rating on New
York City general obligation bonds from A to Baa1.
The Schwab New York Tax-Exempt Money Fund's concentration in securities
issued by the State of New York and its political subdivisions provides a
greater level of risk than a fund which is diversified across numerous states
and municipal entities. The ability of the State of New York or its
municipalities to meet their obligations will depend on the availability of tax
and other revenues; economic, political, and demographic conditions within the
state; and the underlying fiscal condition of the state and its municipalities.
INVESTMENT RESTRICTIONS
EXCEPT AS OTHERWISE NOTED, THE RESTRICTIONS BELOW ARE FUNDAMENTAL AND CANNOT BE
CHANGED WITHOUT APPROVAL OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING VOTING
SECURITIES (AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED,
HEREINAFTER THE "1940 ACT") OF THE FUND TO WHICH THEY APPLY. THE FUNDS MAY NOT:
(1) Purchase securities or make investments other than in accordance with
its investment objectives and policies.
(2) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities)
if as a result more than 5% of the value of its assets would be
invested in the securities of that issuer, except that, with respect to
the Schwab California Tax-Exempt Money Fund and the Schwab New York
Tax-Exempt Money Fund, provided no more than 25% of the Fund's total
assets would be invested in the securities of a single issuer, up to
50% of the value of the Fund's assets may be invested without regard to
this 5% limitation. For purposes of this limitation, the Fund will
regard the entity which has the primary responsibility for the payment
of interest and principal as the issuer.
(3) Purchase securities (other than securities of the U.S. Government, its
agencies or instrumentalities) if as a result of such purchase 25% or
more of its total assets would be invested in any industry
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(although securities issued by governments or political subdivisions of
governments are not considered to be securities subject to this
industry concentration restriction) or in any one state (although the
limitation as to investments in a state or its political subdivision
shall not apply to the Schwab California Tax-Exempt Money Fund or the
Schwab New York Tax-Exempt Money Fund), nor may it enter into a
repurchase agreement if more than 10% of its net assets would be
subject to repurchase agreements maturing in more than seven days.
(4) Invest more than 5% of its total assets in industrial development bonds
sponsored by companies which with their predecessors have less than
three years continuous operation, although each Fund may invest more
than 25% of its total net assets in industrial development bonds.
(5) Invest more than 5% of its total assets in securities restricted as to
disposition under the federal securities laws, although this limitation
shall be 10% with respect to the Schwab California Tax-Exempt Money
Fund and the Schwab New York Tax-Exempt Money Fund.
(6) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the Trust or of its Investment Manager
individually owns beneficially more than 1/2 of 1% of the securities of
such issuer and together own more than 5% of the securities of such
issuer.
(7) Invest in commodities or commodity futures contracts or in real estate
except that each Fund may invest in Municipal Securities secured by
real estate or interests therein.
(8) Invest for the purpose of exercising control or management of another
issuer.
(9) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.*
(10) Make loans to others (except through the purchase of debt obligations
or repurchase agreements in accordance with its investment objective
and policies).
(11) Borrow money except from banks for temporary purposes (but not for the
purpose of purchase of investments) and then only in an amount not to
exceed one-third of the value of its total assets (including the amount
borrowed) in order to meet redemption requests which otherwise might
result in the untimely disposition of securities; or pledge its
securities or receivables or transfer or assign or otherwise encumber
them in an amount to exceed 10% of the Fund's net assets to secure
borrowings. Reverse repurchase agreements entered into by the Fund are
permitted within the limitations of this paragraph. No such Fund will
purchase securities or make investments while reverse repurchase
agreements or borrowings are outstanding.
(12) Write, purchase or sell puts, calls or combinations thereof, although
it may purchase Municipal Securities subject to standby commitments,
variable rate demand notes or repurchase agreements in accordance with
its investment objective and policies.
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* See the description of the Trustees' deferred compensation plan under
"Management of the Trust" in this Statement of Additional Information for an
exception to this investment restriction.
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(13) Make short sales of securities or purchase securities on margin, except
to obtain such short-term credits as may be necessary for the clearance
of transactions.
(14) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in Municipal Securities of
issuers which invest in or sponsor such programs.
(15) Underwrite securities issued by others except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
(16) Issue senior securities as defined in the 1940 Act.
Except for restrictions (6) and (11), if a percentage restriction is adhered to
at the time of investment, a later increase in percentage resulting from a
change in values or net assets will not be considered a violation. None of the
Funds has a present intention of borrowing during the coming year and, in any
event, each Fund would limit borrowings as required by the restrictions
previously stated.
Each Fund will only purchase securities that present minimal credit risks and
which are First Tier or Second Tier Securities (otherwise referred to as
"Eligible Securities")*. An Eligible Security is:
(1) a security with a remaining maturity of 397 days or less: (a) that is
rated by the requisite nationally recognized statistical rating
organizations ("NRSROs") designated by the Securities and Exchange
Commission (the "SEC") (currently Moody's Investors Service, Standard &
Poor's Corporation, Duff and Phelps, Inc., Fitch Investors Services,
Inc., Thomson Bankwatch, and, with respect to debt issued by banks,
bank holding companies, United Kingdom building societies,
broker-dealers and broker-dealers' parent companies, and bank-supported
debt, IBCA Limited and its affiliate, IBCA, Inc.) in one of the two
highest rating categories for short-term debt obligations (the
requisite NRSROs being any two or, if rated by one, that one NRSRO), or
(b) that itself was unrated by any NRSRO, but was issued by an issuer
that has outstanding a class of short-term debt obligations (or any
security within that class) meeting the requirements of subparagraph
1(a) above that is of comparable priority and security;
(2) a security that at the time of issuance was a long-term security but
has a remaining maturity of 397 days or less and (a) whose issuer
received a rating within one of the two highest rating categories from
the requisite NRSROs for short-term debt obligations with respect to a
class of short-term debt obligations (or any security within that
class) that is now comparable in priority and security with the subject
security; or (b) that has long-term ratings from the requisite NRSROs
that are in one of the two highest categories; or
(3) a security not rated by an NRSRO but deemed by the Investment Manager,
pursuant to guidelines adopted by the Board of Trustees, to be of
comparable quality to securities described in (1) and (2) and to
represent minimal credit risks.
A First Tier Security is any Eligible Security that carries (or other relevant
securities issued by its issuer carry) top NRSRO ratings from at least two
NRSROs (a single top rating is sufficient if only one NRSRO rates the security)
or has been determined by the Investment Manager, pursuant to guidelines adopted
by
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* See the description of the Trustees' deferred compensation plan under
"Management of the Trust" in this Statement of Additional Information for an
exception to this investment restriction.
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the Board of Trustees, to be of comparable quality to such a security. A Second
Tier Security is any other Eligible Security.
MANAGEMENT OF THE TRUST
Officers and Trustees. The officers and trustees of the Trust, their principal
occupations over the past five years and their affiliations, if any, with The
Charles Schwab Corporation, Schwab, and Charles Schwab Investment Management,
Inc., are as follows:
<TABLE>
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POSITION WITH
NAME THE TRUST PRINCIPAL OCCUPATION
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CHARLES R. SCHWAB* Chairman and Trustee Founder, Chairman, Chief Executive Officer and
Age: 57 Director, The Charles Schwab Corporation; Founder,
Chairman and Director, Charles Schwab & Co., Inc.
and Charles Schwab Investment Management, Inc.;
Chairman and Director, The Charles Schwab Trust
Company and 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) and AirTouch Communications
(a telecommunications company).
ELIZABETH G. SAWI* President and Trustee Executive Vice President - Mutual Funds, Charles
Age: 43 Schwab & Co., Inc. and The Charles Schwab
Corporation; President, Charles Schwab Investment
Management, Inc. Prior to April 1994, Ms. Sawi was
Executive Vice President - Marketing and
Advertising for Charles Schwab & Co., Inc. and The
Charles Schwab Corporation.
DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
Age: 63 Associates (advertising and marketing/consulting).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
Age: 63 Semloh Financial, Inc. (international financial
services).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (real estate
Age: 56 investment). Prior to 1993, Chairman and Chief
Executive Officer, Bank of San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
Age: 51 Wilsey Bennett, Inc. (truck and air transportation,
real estate investment and management,
investments).
</TABLE>
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* Mr. Schwab is an "interested person" of the Trust.
* Ms. Sawi is an "interested person" of the Trust.
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<TABLE>
<S> <C> <C>
A. JOHN GAMBS Treasurer and Principal Executive Vice President - Finance and Chief
Age: 49 Financial Officer Financial Officer, The Charles Schwab Corporation;
Executive Vice President, Chief Financial Officer
and Director, Charles Schwab & Co., Inc.; Chief
Financial Officer and Director, Charles Schwab
Investment Management, Inc.; and Chief Financial
Officer, The Charles Schwab Trust Company.
WILLIAM J. KLIPP* Senior Vice President, Senior Vice President, Charles Schwab & Co., Inc.,
Age: 39 Chief Operating Officer Chief Operating Officer, Charles Schwab Investment
and Trustee Management, Inc. Prior to 1993, Mr. Klipp was
Treasurer of Charles Schwab & Co., Inc. and Mayer &
Schweitzer, Inc. Prior to 1990, he was Vice
President, Director Funding, Merrill Lynch & Co.,
Inc.
STEPHEN B. WARD Senior Vice President & Senior Vice President, Charles Schwab Investment
Age: 39 Chief Investment Management, Inc. Prior to 1991, Mr. Ward was Vice
Officer President and Portfolio Manager for Federated
Investors.
FRANCES COLE Secretary Chief Counsel and Compliance Officer, Assistant
Age: 39 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to 1991, Ms. Cole was
Senior Counsel for Equitec Securities Company.
TIMOTHY B. PAWLOSKI Assistant Treasurer Vice President of Finance- SchwabFunds(R), 1991 to
Age: 36 1993, Mr. Pawloski was Director of Finance for
Charles Schwab & Co., Inc. and from 1987 to 1991,
Mr. Pawloski served as a Senior Manager at Price
Waterhouse.
PAMELA E. HERLICH Assistant Secretary Assistant Corporate Secretary, The Charles Schwab
Age: 41 Corporation and Charles Schwab & Co., Inc.;
Corporate Secretary, Charles Schwab Investment
Management, Inc., Mayer & Schweitzer and The
Charles Schwab Trust Company. Prior to 1993, Ms.
Herlich was Assistant Corporate Secretary for Mayer
& Schweitzer, Inc. and The Charles Schwab Trust
Company.
DAVID H. LUI Assistant Secretary Senior Counsel - Charles Schwab Investment
Age: 34 Management, Inc.; from 1991 to 1992, Assistant
Secretary and Assistant Corporate Counsel, Franklin
Group of Mutual Funds. Prior to 1991, Mr. Lui was
an Associate for Thelen, Marrin, Johnson &
Bridges, a San Francisco law firm.
CHRISTINA M. PERRINO Assistant Secretary Senior Counsel - Charles Schwab Investment
Age: 33 Management, Inc. Prior to 1994, Ms. Perrino was
Counsel and Assistant Secretary for North American
Security Life Insurance Company and Secretary for
North American Funds.
</TABLE>
- ----------------------
* Mr. Klipp is an "interested person" of the Trust.
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<PAGE> 12
Each of the above-referenced Officers and/or Trustees also serves in
the same capacity as described for the Trust for Schwab Investments, Schwab
Capital Trust, Schwab Annuity Portfolios, and Schwab Advantage Trust (which has
not commenced operations). The address of each Officer and/or Trustee listed
above is 101 Montgomery Street, San Francisco, California 94104.
<TABLE>
<CAPTION>
COMPENSATION TABLE(1)
Pension or
Retirement
Benefits Accrued Estimated Annual
as Part of Fund Benefits Upon
Aggregate Expenses from the Retirement from Total Compensation
Name of Person, Compensation from Fund the Fund from the
Position the Trust Complex(2) Complex(2) Fund Complex(2)
- --------------- ----------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Elizabeth G. Sawi, 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Senior Vice President, Chief
Operating Officer, and
Trustee
Donald F. Dorward, 26,000 N/A N/A 58,000
Trustee
Robert G. Holmes, 26,000 N/A N/A 58,000
Trustee
Donald R. Stephens, 26,000 N/A N/A 58,000
Trustee
Michael W. Wilsey, 26,000 N/A N/A 58,000
Trustee
</TABLE>
1. Figures are for the Trust's fiscal year ended December 31,
1994.
2. "Fund Complex" comprises all 19 funds of the Trust, Schwab
Investments, Schwab Capital Trust, and Schwab Annuity
Portfolios.
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<PAGE> 13
TRUSTEE DEFERRED COMPENSATION PLAN
Pursuant to exemptive relief received by the Trust from the SEC, the
Trust may enter into deferred fee arrangements (the "Fee Deferral Plan" or the
"Plan") with the Trust's trustees who are not "interested persons" of any of the
Funds of the Trust (the "Independent Trustees" or the "Trustees").
As of the date of this Statement of Additional Information, none of the
Independent Trustees has elected to participate in the Fee Deferral Plan. In the
event an Independent Trustee does elect to participate in the Plan, the Plan
would operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account"), as of the
date such fees would have been paid to such Trustee. The value of the Deferred
Fee Account as of any date will be equal to the value the Account would have had
as of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the SchwabFund or SchwabFunds selected by the
participating Trustee (the "Selected SchwabFund Securities"). "SchwabFunds"
include certain series of beneficial interest of the Trust, Schwab Investments,
Schwab Capital Trust, and Schwab Advantage Trust (which has not yet commenced
operations).
Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. These transactions would otherwise be limited or
prohibited by the investment policies and/or restrictions of the Funds. See
"Investment Restrictions."
INVESTMENT MANAGER
Charles Schwab Investment Management, Inc. (the "Investment Manager"),
a wholly-owned subsidiary of The Charles Schwab Corporation, serves as the
Funds' investment adviser and administrator pursuant to two separate yet
otherwise substantially similar Investment Advisory and Administration
Agreements (the "Advisory Agreements") between it and the Trust. The Investment
Manager is registered as an investment adviser under the Investment Advisers Act
of 1940, as amended, and currently provides investment management services to
the SchwabFunds(R), a family of 19 mutual funds with over $26 billion in assets
as of June 3, 1995. The Investment Manager is an affiliate of Schwab, the
Trust's distributor and shareholder services and transfer agent.
Each Advisory Agreement will continue in effect for one-year terms for
each Fund to which it relates, subject to annual approval by: (1) the Trust's
Board of Trustees or (2) a vote of the majority (as defined in the 1940 Act) of
the outstanding voting securities of each Fund subject thereto. In either event,
the continuance must also be approved by a majority of the Trust's Board of
Trustees who are not parties to the Agreement or interested persons (as defined
in the 1940 Act) of any such party by vote cast in person at a meeting called
for the purpose of voting on such approval. Each Advisory Agreement may be
terminated at any time upon 60 days notice by either party, or by a majority
vote of the outstanding shares of a Fund subject thereto, and will terminate
automatically upon assignment.
Pursuant to an Advisory Agreement dated June 15, 1994, as may be
amended from time to time, the Investment Manager is entitled to receive an
annual fee, payable monthly, of 0.46% of the Schwab Tax-Exempt Fund's average
daily net
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<PAGE> 14
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.
Pursuant to a separate Advisory Agreement dated June 15, 1994, as may
be amended from time to time, the Investment Manager is entitled to an annual
fee, payable monthly from the Schwab California Tax-Exempt Money Fund and the
Schwab New York Tax-Exempt Money Fund of 0.46% of each 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.
No investment advisory fees were paid by the Value Advantage Shares of
each Fund as of the date of this Statement of Additional Information because the
Shares had not yet been offered.
EXPENSES
The Trust pays the expenses of its operations, including the fees and
expenses of independent accountants, counsel, custodian and the cost of reports
and notices to shareholders, costs of calculating net asset value, brokerage
commissions or transaction costs, taxes, registration fees, the fees and
expenses of qualifying the Trust and its shares for distribution under federal
and state securities laws and membership dues in the Investment Company
Institute or any similar organization. The Trust's expenses generally are
allocated among the Funds on the basis of relative net assets at the time of
allocation, except that expenses directly attributable to a particular Fund or
class of shares are charged to that Fund or class, respectively.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal
underwriter for shares of the Trust and is the Trust's agent for the purpose of
the continuous offering of the Funds' shares. Each Fund pays the cost for the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under the
Distribution Agreement. Terms of continuation, termination and assignment under
the Distribution Agreement are identical to those described above with respect
to the Advisory Agreements.
CUSTODIAN AND FUND ACCOUNTANT
PNC Bank, National Association, at the Airport Business Center, 200
Stevens Drive, Suite 440, Lester, Pennsylvania 19113, serves as Custodian for
the Trust.
PFPC, Inc., at 103 Bellevue Parkway Wilmington, Delaware 19809, serves
as Fund Accountant for the Trust.
ACCOUNTANTS AND REPORTS
TO SHAREHOLDERS
The Trust's independent accountants, Price Waterhouse LLP, audit and
report on the annual financial statements of each series of the Trust and review
certain regulatory reports and the Trust's federal income tax return. Price
Waterhouse LLP also performs other professional accounting, auditing, tax and
advisory services when engaged to do so by the Trust. Shareholders will be sent
audited annual and unaudited semi-annual financial statements. The address of
Price Waterhouse LLP is 555 California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, 1001 Pennsylvania Avenue, N.W., Suite 1200 South,
Washington, D.C. 20004, is counsel to the Trust.
14
<PAGE> 15
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the
objective of each Fund in relation to movements in the general level of interest
rates, to invest money obtained from the sale of Fund shares, to reinvest
proceeds from maturing portfolio securities and to meet redemptions of Fund
shares. Portfolio transactions may increase or decrease the yield of a Fund
depending upon management's ability to correctly time and execute them.
The Investment Manager, in effecting purchases and sales of portfolio
securities for the account of each Fund, seeks to obtain best price and
execution. Subject to the supervision of the Board of Trustees, the Investment
Manager generally selects broker-dealers for the Funds primarily on the basis of
the quality and reliability of services provided, including execution capability
and financial responsibility.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, utilize the services
of broker-dealers that provide it with investment information and other research
resources. Such resources may also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
The Trust 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 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 each Fund are reached independently from
those for other accounts managed by the Investment Manager. Such other accounts
may also make investments in instruments or securities at the same time as a
Fund. When two or more accounts managed by the Investment Manager 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
a 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.
PORTFOLIO TURNOVER
Because securities with maturities of less than one year are excluded
from required portfolio turnover rate calculations, each Fund's portfolio
turnover rate for reporting purposes is expected to be zero.
15
<PAGE> 16
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
On each day that the net asset value per share of the Value Advantage Shares
of a Fund is determined ("Business Day"), such Shares' net investment income
will be declared as of the close of trading on the New York Stock Exchange
(normally 4:00 p.m. Eastern time) as a daily dividend to shareholders of record
as of the last calculation of net asset value prior to the declaration. For the
Value Advantage Shares of each Fund, dividends will normally be reinvested
monthly in full and fractional Value Advantage Shares of the Fund at the net
asset value on the fifteenth day of each month, if a Business Day, otherwise on
the next Business Day. If cash payment is requested, checks will normally be
mailed on the Business Day following the reinvestment date. Each Fund will pay
shareholders, who redeem all of their shares, all dividends accrued to the time
of the redemption within seven days.
Each Fund calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of the Value Advantage
Shares of a Fund consists of: (1) accrued interest income, plus or minus
amortized discount or premium, excluding market discount, minus (2) accrued
expenses allocated to the Value Advantage Shares of that Fund. If a Fund
realizes any capital gains, such gains will be distributed at least once during
the year as determined by the Board of Trustees. Any realized short-term capital
losses to the extent not offset by realized capital gains will be carried
forward. It is not anticipated that a Fund will realize any long-term capital
gains, but if it does so, these gains will be distributed annually. Expenses of
the Trust are accrued each day. Should the net asset value of the Value
Advantage Share of a Fund deviate significantly from market value, the Board of
Trustees could decide to value the investments at market value and any
unrealized gains and losses could affect the amount of the Fund's distributions
to holders of Value Advantage Shares.
FEDERAL INCOME TAXES
It is the policy of each Fund to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). By following this policy, each
Fund expects to eliminate or reduce to a nominal amount the federal income tax
to which it is subject.
In order to qualify as a regulated investment company, each of the
Funds must, among other things, (1) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stocks, securities, foreign currencies or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
derive less than 30% of its gross income from gains from the sale or other
disposition of certain assets (including stocks and securities) held for less
than three months; and (3) diversify its holdings so that at the end of each
quarter of its taxable year (i) at least 50% of the market value of the Fund's
total assets is represented by cash or cash items, United States Government
securities, securities of other regulated investment companies and other
securities limited, in respect of any one issuer, to a value not greater than 5%
of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than United States
Government securities or securities of any other regulated
16
<PAGE> 17
investment company) or of two or more issuers that the Fund controls, within the
meaning of the Code, and that are engaged in the same, similar or related trades
or businesses. These requirements may restrict the degree to which a Fund may
engage in short-term trading and certain hedging transactions and may limit the
range of the Fund's investments. If a Fund qualifies as a regulated investment
company, it will not be subject to federal income tax on the part of its net
investment income and net realized capital gains, if any, which it distributes
to shareholders, provided that the Fund meets certain minimum distribution
requirements. To comply with these requirements, a Fund must distribute at least
(a) 90% of its "investment company taxable income" (as that term is defined in
the Code) and (b) 90% of the excess of its (i) tax-exempt interest income over
(ii) certain deductions attributable to that income (with certain exceptions),
for its taxable year. Each Fund intends to make sufficient distributions to
shareholders to meet these requirements.
If a Fund fails to distribute in a calendar year (regardless of whether
it has a non-calendar taxable year) substantially all of its (i) ordinary income
for such year; and (ii) capital gain net income for the year ending October 31
(or later if the Fund is permitted so to elect and so elects), plus any retained
amount from the prior year, the Fund will be subject to a nondeductible 4%
excise tax on the undistributed amounts. Each Fund intends generally to make
distributions sufficient to avoid imposition of this excise tax.
Any distributions declared by the Funds in October, November or
December to shareholders of record during those months and paid during the
following January are treated, for tax purposes, as if they were received by
each shareholder on December 31 of the year declared. A Fund may adjust its
schedule for the reinvestment of distributions for the month of December to
assist in complying with the reporting and minimum distribution requirements of
the Code.
The Funds do not expect to realize any significant amount of long-term
capital gain. However, any distributions of long-term capital gain will be
taxable to the shareholders as long-term capital gain, regardless of how long a
shareholder has held the Fund's shares. If a shareholder disposes of shares at a
loss before holding such shares for longer than six months, the loss will be
treated as a long-term capital loss to the extent the shareholder received a
capital gain dividend on the shares.
A Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends paid to any shareholder (1) who
fails to provide a correct taxpayer identification number certified under
penalty of perjury; (2) who provides an incorrect taxpayer identification
number; (3) who is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (4) who
fails to provide a certified statement that he or she is not subject to "backup
withholding." This "backup withholding" is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
The Funds may engage in investment techniques that may alter the timing
and character of the Funds' income. The Funds may be restricted in their use of
these techniques by rules relating to their qualification as regulated
investment companies.
The foregoing discussion relates only to federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) generally are subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on
17
<PAGE> 18
distributions derived from net investment income and short-term capital gains.
Distributions to foreign shareholders of long-term capital gains 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.
Distributions by a Fund may also be subject to state, local and foreign taxes,
and their treatment under applicable tax laws may differ from the federal income
tax treatment.
The Code permits a regulated investment company that invests at least
50% of its assets at the close of each quarter in Municipal Securities to pass
through to its investors, on a tax-exempt basis, net Municipal Securities
interest income. An exempt-interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by any Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of such Fund's taxable year, but not to exceed in the aggregate the net
Municipal Securities interest income received by each such Fund during the
taxable year. The percentage of the total dividends paid for any taxable year
that qualified as exempt-interest dividends will be the same for all
shareholders receiving dividends from each Fund during such year, regardless of
the period for which the Shares were held. If for any taxable year any Fund does
not qualify for the special federal tax treatment afforded regulated investment
companies, all of its taxable income will be subject to federal tax at regular
corporate rates (without any deduction for distributions to its shareholders)
when distributed, and Municipal Securities interest income, although not taxed
to the Funds, would be taxable to shareholders.
This discussion of federal income taxation presented above only
summarizes some of the important federal tax considerations generally affecting
purchasers of Fund shares. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund and its shareholders,
and the discussion is not intended as a substitute for careful tax planning.
Accordingly, prospective investors (particularly those not residing or domiciled
in the United States) should consult their own tax advisers regarding the
consequences of investing in a Fund.
STATE TAXES
With respect to the Schwab California Tax-Exempt Money Fund, if, at the
close of each quarter of its taxable year, at least 50% of the value of the
total assets of the Fund consists of obligations the interest on which is exempt
from California personal income taxation under the Constitution or laws of
California or of the United States ("California Exempt Obligations"), then the
Fund will be qualified to pay dividends exempt from State of California personal
income tax to its non-corporate shareholders (hereinafter referred to as
"California exempt-interest dividends"). The Schwab California Tax-Exempt Money
Fund intends to qualify under the above requirement so that it can pay
California exempt-interest dividends. If the Schwab California Tax-Exempt Money
Fund fails to so qualify, no part of its dividends will be exempt from State of
California personal income tax.
With respect to the Schwab New York Tax-Exempt Money Fund, there is no
analogous requirement, so all dividends representing interest on New York
Municipal Securities that is exempt from New York personal income taxation will
be exempt from New York personal income taxes in the hands of non-corporate
shareholders ("New York exempt-interest dividends").
18
<PAGE> 19
Not later than 60 days after the close of its taxable year, the Schwab
California and New York Tax-Exempt Money Funds will notify each shareholder of
the portion of the dividends paid by it to the shareholder with respect to such
taxable year which is exempt from State of California personal income tax or New
York personal income tax, respectively.
The total amount of California exempt-interest dividends paid by the
Schwab California Tax-Exempt Money Fund to all of its shareholders with respect
to any taxable year cannot exceed the amount of interest received by the Fund
during such year on California Exempt Obligations, less any expenses or
expenditures (including any expenditures attributable to the acquisition of
additional securities for the Schwab California Tax-Exempt Money Fund) that are
deemed to have been paid from such interest. Dividends paid by the Schwab
California Tax-Exempt Money Fund in excess of this limitation will be treated as
ordinary dividends subject to State of California personal income tax at
ordinary rates. For purposes of this limitation, expenses or other expenditures
paid during any year generally will be deemed to have been paid with funds
attributable to interest received by the Fund from California Exempt Obligations
for such year in the same ratio as such interest from California Exempt
Obligations for such year bears to the total gross income earned by the Fund for
the year. The effect of this accounting convention is that amounts of interest
from California Exempt Obligations received by the Schwab California Tax-Exempt
Money Fund that would otherwise be available for distribution as California
exempt-interest dividends will be reduced by the expenses and expenditures
deemed to have been paid from such amounts.
To the extent, if any, dividends paid to shareholders by the Schwab
California Tax-Exempt Money Fund or New York Tax-Exempt Money Fund are derived
from long-term and short-term capital gains, such dividends will not constitute
California or New York exempt-interest dividends. Rules similar to those
regarding the treatment of such dividends for federal income tax purposes are
also applicable for State of California and New York personal income tax
purposes. Moreover, interest on indebtedness incurred by a shareholder to
purchase or carry shares of the Schwab California Tax-Exempt Money Fund or New
York Tax-Exempt Money Fund is not deductible for state personal income tax
purposes if the Fund distributes California or New York exempt-interest
dividends to the shareholder during his or her taxable year.
The foregoing is only a summary of some of the important state personal
income tax considerations generally affecting the Schwab California Tax-Exempt
and New York Tax-Exempt Money Funds and their shareholders. No attempt is made
to present a detailed explanation of the state personal income tax treatment of
the Schwab California Tax-Exempt and New York Tax-Exempt Money Funds or their
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that the portion of the Schwab California
Tax-Exempt and New York Tax-Exempt Money Funds' dividends constituting
California or New York exempt-interest dividends, respectively, is excludable
from income for State of California or State of New York personal income tax
purposes only.
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<PAGE> 20
Any dividends paid to shareholders of the Funds subject to state
franchise tax will be taxed as ordinary dividends to such shareholders,
notwithstanding that all or a portion of such dividends is exempt from state
personal income tax. Accordingly, potential investors in the Schwab California
Tax-Exempt or New York Tax-Exempt Money Funds, including, in particular,
corporate investors which may be subject to California or New York franchise
tax, should consult their tax advisers with respect to the application of such
tax to the receipt of dividends from the Funds and as to their own state tax
situation, in general.
SHARE PRICE CALCULATION
Each Fund values its portfolio instruments 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 a Fund's investments at amortized
cost with market values. Market valuations are obtained by using actual
quotations provided by 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. The amortized cost method of valuation seeks to maintain a
stable $1.00 per share net asset value even where there are fluctuations in
interest rates that affect the value of portfolio instruments. Accordingly, this
method of valuation can in certain circumstances lead to a dilution of a
shareholder's interest. If a deviation of 1/2 of 1% or more were to occur
between the net asset value per share calculated by reference to market values
and a Fund's $1.00 per share net asset value for its Value Advantage Shares, or
if there were any other deviation that the Board of Trustees of the Trust
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. If the net asset value per share for a Fund's Value Advantage Shares
(computed using market values) declined, or were expected to decline, below
$1.00 (computed using amortized cost), the Board of Trustees might temporarily
reduce or suspend dividend payments in an effort to maintain the net asset value
at $1.00 per share for a Fund's Value Advantage Shares. As a result of such
reduction or suspension of dividends or other action by the Board of Trustees,
an investor would receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could result in
investors receiving no dividend for the period during which they hold their
shares and receiving, upon redemption, a price per share lower than that which
they paid. On the other hand, if a Fund's net asset value per share for its
Value Advantage Shares (computed using market values) were to increase, or were
anticipated to increase above $1.00 (computed using amortized cost), the Board
of Trustees might supplement dividends in an effort to maintain the net asset
value at $1.00 per share for its Value Advantage Shares.
YIELD
The historical performance of the Value Advantage Shares of each Fund
may be shown in the form of yield, effective yield, tax- equivalent yield and
tax-equivalent effective yield. These measures of performance are described
below.
20
<PAGE> 21
YIELD
Yield refers to the net investment income generated by a hypothetical
investment in the Value Advantage Shares of a Fund over a specific 7-day period.
This net investment income is then annualized, which means that the net
investment income generated during the 7-day period is assumed to be generated
in each 7-day period over an annual period, and is shown as a percentage of the
investment.
EFFECTIVE YIELD
Effective yield is calculated similarly, but the net investment 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 AND
TAX-EQUIVALENT EFFECTIVE YIELD
The tax-equivalent yield of the Value Advantage Share of the Schwab
Tax-Exempt Fund is computed by dividing that portion of the Value Advantage
Shares' yield (computed as described above) that is tax-exempt by an amount
equal to one minus the stated federal income tax rate (normally assumed to be
the maximum applicable marginal tax bracket rate) and adding the result to that
portion, if any, of the yield of the Value Advantage Shares that is not
tax-exempt. The tax-equivalent yield of the Value Advantage Shares of the Schwab
California Tax-Exempt Money Fund is calculated by dividing that portion of the
Value Advantage Shares' yield (computed as described above) which is tax-exempt
by an amount equal to one minus the stated combined State of California and
federal income tax rate (normally assumed to be the maximum federal marginal
rate of 39.6% and the California marginal rate of 11.0%, although other rates
may be used at times), and adding the result to that portion, if any, of the
Value Advantage Shares' yield that is not tax-exempt. The tax-equivalent yield
of the Value Advantage Shares of the Schwab New York Tax-Exempt Money Fund is
calculated by dividing that portion of the Value Advantage Shares' yield
(computed as described above) which is tax-exempt by an amount equal to one
minus the stated combined New York municipal, State of New York and federal
income tax rate (normally assumed to be the maximum federal marginal rate of
39.6%, the State of New York marginal rate of 7.875% and the New York municipal
marginal rate of 4.46%, although other rates may be used at times), and adding
the result to that portion, if any, of the Value Advantage Shares' yield that is
not tax-exempt.
Tax-equivalent effective yields are computed in the same manner as
tax-equivalent yields, except that effective yield is substituted for yield in
the calculation. In calculating tax-equivalent yields and effective yields, the
Schwab Tax-Exempt Money Fund generally assumes an effective tax rate of 39.6%,
the Schwab California Tax-Exempt Money Fund generally assumes an effective tax
rate (combining the federal 39.6% rate and the California 11.0% rate, and
assuming the taxpayer deducts California state taxes paid) of 46.24%, and the
Schwab New York Tax-Exempt Money Fund generally assumes an effective tax rate
(combining the federal 39.6% rate, the New York state 7.875% rate and the New
York municipal 4.46% rate, and assuming the taxpayer deducts New York state and
municipal taxes paid) of 47.05%. Investors in the Schwab New York Tax-Exempt
Money Fund should understand that, under legislation enacted in New York State
and New York City, the maximum effective tax rate for 1995 will be 46.88%, and
the rates for 1996 and 1997 will be 45.25% and 44.85%, respectively. The tax
rate cuts reflected herein are subject to postponement or elimination. The
effective tax rates used in determining such yields do not reflect the tax costs
resulting from the full or partial loss of the
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<PAGE> 22
benefits of personal exemptions, itemized deductions and California exemption
credits that may result from the receipt of additional taxable income by
taxpayers with adjusted gross incomes exceeding $114,700 (for joint returns) or
$57,350 (for separate returns) in 1995. Actual tax-equivalent yields and
tax-equivalent effective yields may be higher for taxpayers subject to the loss
of these benefits than the rates reported by the Funds.
TAX-EXEMPT VERSUS TAXABLE YIELD
Investors may want to determine which investment--tax exempt or
taxable--will provide a higher after-tax return. To determine the tax-equivalent
yield, or tax-equivalent effective yield, simply divide the yield or effective
yield of the Value Advantage Shares of the Fund by 1 minus your marginal federal
tax rate (or combined state and federal tax rate in the case of the Schwab
California Tax-Exempt Money Fund, or combined municipal, state, and federal tax
rate in the case of the Schwab New York Tax-Exempt Money Fund). Note, however,
that as discussed above full or partial loss by certain investors of the
described federal tax benefits could cause the resulting figure to understate
the after-tax return produced by the Value Advantage Shares of the Fund in
question.
GENERAL INFORMATION
The Trust is generally not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
election or removal of trustees if a meeting is requested in writing by a
shareholder or shareholders who beneficially own(s) 10% or more of the Trust's
shares; (2) adoption of any contract for which shareholder approval is required
by the 1940 Act; (3) any termination of the Trust to the extent and as provided
in the Declaration of Trust; (4) any amendment of the Declaration of Trust
(other than amendments changing the name of the Trust or any of its investment
portfolios, supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision thereof); (5)
determining whether a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the shareholders, to the same extent as the stockholders of a Massachusetts
business corporation; and (6) such additional matters as may be required by law,
the Declaration of Trust, the Bylaws or any registration of the Trust with the
SEC or any state or as the Board of Trustees may consider desirable. The
shareholders also would vote upon changes to a Fund's fundamental investment
objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing trustees and until the election and
qualification of his or her successor or until death, resignation, retirement or
removal by a majority vote of the shares entitled to vote (as described below)
or of a majority of the Trustees. In accordance with the 1940 Act (i) the Trust
will hold a shareholder meeting for the election of trustees when less than a
majority of the trustees have been elected by shareholders, and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
trustees have been elected by the shareholders, that vacancy will be filled by a
vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such
for at least six months and who hold shares constituting at least 1% of the
Trust's outstanding shares stating that
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they wish to communicate with the other shareholders for the purpose of
obtaining signatures necessary to demand a meeting to consider removal of one or
more trustees, the Trust has undertaken to disseminate appropriate materials at
the expense of the requesting shareholders.
The Bylaws provide that the presence at a shareholder meeting in person
or by proxy of at least 30% of the shares entitled to vote on a matter shall
constitute a quorum, unless otherwise provided by the 1940 Act or other
applicable law. Thus, even if less than a majority of shareholders were
represented, a meeting of the Trust's shareholders could occur. Attending
shareholders would in such case be permitted to take action not requiring the
vote of more than a majority of a quorum. Some matters requiring a larger vote
under the Declaration of Trust, such as termination or reorganization of the
Trust, and certain amendments of the Declaration of Trust, could not be decided
at such a meeting, nor could matters which under the 1940 Act require the vote
of a "majority of the outstanding voting securities," as defined in the 1940
Act. The Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Trust (or any of its investment portfolios) by notice to the
shareholders without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the Trust solely by reason of being or having been a shareholder. Moreover,
the Trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
Trust itself is unable to meet its obligations.
For further information, please refer to the registration statement and
exhibits for the Trust on file with the SEC in Washington, D.C. and available
upon payment of a copying fee. The statements in the Prospectus and this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.
PRINCIPAL HOLDERS OF SECURITIES
As of June 6, 1995, Charles Schwab & Co., Inc., 101 Montgomery Street,
San Francisco, Ca 94104, directly or beneficially owned 100% of each Fund's
Value Advantage Shares.
PURCHASE AND REDEMPTION OF SHARES
The minimum initial investment for the Value Advantage Shares of each
Fund is $25,000 and subsequent investments of $5,000 or more may be made. These
minimum requirements may be changed at any time and are not applicable to
certain types of investors. The Trust may waive the minimums for purchases by
trustees, directors, officers or employees of the Trust, Schwab or the
Investment Manager. The Trust has made an election with the SEC to pay
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in cash all redemptions requested by any shareholder of record limited in amount
during any 90-day period to the lesser of $250,000 or 1% of its net assets at
the beginning of such period. This election is irrevocable without the SEC's
prior approval. Redemption requests in excess of the stated limits may be paid,
in whole or in part, in investment securities or in cash, as the Trust's Board
of Trustees may deem advisable; however, payment will be made wholly in cash
unless the Board of Trustees believes that economic or market conditions exist
that would make such a practice detrimental to the best interests of the Fund.
If redemption proceeds are paid in investment securities, such securities will
be valued as set forth in the Prospectus of the Fund affected under "Share Price
Calculation" and a redeeming shareholder would normally incur brokerage expenses
if he or she converted the securities to cash.
OTHER INFORMATION
The Prospectus of the Funds and this Statement of Additional
Information do not contain all the information included in the Registration
Statement filed with the SEC under the Securities Act of 1933 with respect to
the securities offered by the Prospectus. Certain portions of the Registration
Statement have been omitted from the Prospectus and this Statement of Additional
Information pursuant to the rules and regulations of the SEC. The Registration
Statement including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectus and this Statement of Additional
Information form a part, each such statement being qualified in all respects by
such reference.
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN
OFFERING BY THE TRUST, ANY SERIES THEREOF, OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
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APPENDIX - RATINGS OF INVESTMENT SECURITIES
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service ("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
A Standard & Poor's Corporation ("S&P") A-1 commercial paper rating
indicates either an overwhelming or very 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 strong, 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 & Phelps
Credit Rating Co. ("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 United States 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 INVESTORS SERVICE, 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.
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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-2 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
very strong capacity to pay principal and interest. Issues determined to possess
overwhelming safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a satisfactory capacity to pay principal and
interest is denoted by an SP-2 rating.
IBCA
Obligations supported by the highest capacity for timely repayment are
rated A1+. An A1 rating indicates that the obligation is supported by a very
strong capacity for timely repayment. Obligations rated A2 are supported by a
strong capacity for timely repayment, although adverse changes in business,
economic, or financial conditions may affect this capacity.
BONDS
MOODY'S INVESTORS SERVICE
Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or extraordinarily
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of these issues. Bonds carrying an Aa
designation are deemed to be of high quality by all standards. Together with Aaa
rated bonds, they comprise what are generally known as high grade bonds. Aa
bonds are rated lower than the best bonds because they may enjoy relatively
lower margins of protection, fluctuations of protective elements may be of
greater amplitude or there may be other factors present which make them appear
to be subject to somewhat greater long-term risks.
STANDARD & POOR'S CORPORATION
AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree.
DUFF & PHELPS CREDIT RATING CO.
Duff confers an AAA designation to bonds of issuers with the highest
credit quality. The risk factors associated with these bonds are negligible,
being only slightly more than for risk-free United States Treasury debt. AA
rated bonds are of high credit quality and have strong protection factors. The
risks associated with them are modest but may vary slightly from time to time
because of economic conditions.
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COMMERCIAL PAPER, SHORT-TERM OBLIGATIONS AND DEPOSIT
OBLIGATIONS ISSUED BY BANKS
THOMSON BANKWATCH (TBW)
TBW-1 is the highest category and indicates the degree of safety
regarding timely repayment of principal and interest is very
strong. 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.
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