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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)
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PROSPECTUS June 6, 1995, as amended September 29, 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 TAX-EXEMPT MONEY FUND (THE "TAX-EXEMPT FUND"), SCHWAB CALIFORNIA
TAX-EXEMPT MONEY FUND (THE "CALIFORNIA FUND"), AND SCHWAB NEW YORK TAX-EXEMPT
MONEY FUND (THE "NEW YORK FUND") (the "Funds") are designed to provide you with
the highest possible current income consistent with each Fund's investment
objective while seeking to preserve your investment and provide you with
liquidity. As a matter of fundamental policy, the Tax-Exempt Fund is a
diversified investment portfolio, and the New York Fund and California Fund are
non-diversified investment portfolios, of The Charles Schwab Family of Funds
(the "Trust"), a no-load, open-end management investment company. Shares of the
California Fund are offered to California residents and the residents of
selected other states. Shares of the New York Fund are offered to New York
residents and the residents of selected other states. This Prospectus relates to
the Value Advantage Shares of each Fund. For a prospectus describing the other
class of shares of the Fund (the "Sweep Shares"), call your local Schwab office
or 800-2 NO-LOAD.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS PROVIDES YOU WITH CONCISE INFORMATION
THAT YOU SHOULD KNOW BEFORE YOU DECIDE IF THE FUNDS PROVIDE THE INVESTMENT
OPPORTUNITY YOU WANT. READ IT CAREFULLY, AND RETAIN IT FOR FUTURE REFERENCE.
This Prospectus may be available via electronic mail. For a free paper copy call
800-2 NO-LOAD. You can find more detailed information in the Statement of
Additional Information, dated June 6, 1995, as amended September 29, 1995 (and
as may be amended from time to time). The Statement has been filed with the SEC
and is incorporated in this Prospectus by reference (which means that it is
legally considered part of this Prospectus even though it is not printed here).
You can get your own free copy of the Statement of Additional Information by
calling Schwab at 800-2 NO-LOAD, or by writing the Funds at 101 Montgomery
Street, San Francisco, California 94104.
ATTENTION OHIO INVESTORS. THE OHIO ADMINISTRATIVE CODE REQUIRES US TO MAKE THE
FOLLOWING DISCLOSURE. UNLIKE OTHER MUTUAL FUNDS WHICH MAY INVEST NO MORE THAN
15% OF THEIR TOTAL ASSETS IN THE SECURITIES OF ISSUERS WHICH TOGETHER WITH ANY
PREDECESSORS HAVE A RECORD OF LESS THAN THREE YEARS CONTINUOUS OPERATIONS OR
SECURITIES OF ISSUERS WHICH ARE RESTRICTED AS TO DISPOSITION, THE TAX-EXEMPT
FUND AND THE NEW YORK FUND MAY EACH INVEST UP TO 50% OF THEIR TOTAL ASSETS IN
SUCH SECURITIES.
TABLE OF CONTENTS
<TABLE>
<S> <C>
KEY FEATURES OF THE FUNDS..................................................... 2
SUMMARY OF EXPENSES........................................................... 3
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS................................... 4
INVESTMENT OBJECTIVES AND POLICIES............................................ 6
INVESTMENT TECHNIQUES USED BY THE FUNDS....................................... 10
SPECIAL RISK CONSIDERATIONS................................................... 12
ORGANIZATION AND MANAGEMENT OF THE FUNDS...................................... 13
INVESTING IN SHARES OF THE FUNDS.............................................. 15
IMPORTANT INFORMATION ABOUT YOUR INVESTMENT................................... 19
GLOSSARY OF IMPORTANT TERMS................................................... 23
</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 EACH FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT ANY OF THE FUNDS WILL BE
ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
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KEY FEATURES OF THE FUNDS
MAXIMUM CURRENT INCOME AND SAFETY. Our goal is to provide you with the highest
possible current income consistent with the investment objectives of each Fund
while preserving your investment and providing you with quick access to your
money. To achieve this goal, the Funds invest in high-quality, short-term debt
securities. The Tax-Exempt Fund seeks to provide you with current income that is
exempt from Federal income taxes. The California Fund seeks to provide you with
current income that is exempt from Federal income taxes and California personal
income taxes. The New York Fund seeks to provide you with current income that is
exempt from Federal income taxes and personal income taxes imposed by New York
State and New York municipalities. (See "Investment Objectives and Policies.")
PRESERVATION OF INVESTMENT. Each Fund seeks to maintain a stable net asset value
(known as the Fund's "NAV") of $1.00 per share.
READY ACCESS TO YOUR CASH. You can conveniently sell your shares of any Fund at
any time. Generally, your redemption check will be available the next Business
Day at your local Schwab office, or it can be mailed directly to you.
LOW COST INVESTING. The Value Advantage Shares of the Funds were designed with
operating expenses well below the industry average. (See "Matching the Funds to
Your Investment Needs.") Additionally, you pay no sales fee when you buy shares
of the Funds. Fees may be charged for balances and transactions under the
required minimums.
PROFESSIONAL MANAGEMENT OF THE FUNDS. Charles Schwab Investment Management, Inc.
(referred to in this Prospectus as the "Investment Manager") currently manages
the mutual funds in the SchwabFunds Family(R), a family of 21 mutual funds with
over $29 billion in assets as of September 25, 1995. (See "Organization and
Management of the Funds--The Investment Manager.")
SHAREHOLDER SERVICES. Schwab's professional representatives are available
toll-free 24 hours a day at 800-2 NO-LOAD to service your account, or you can
call your local Schwab office during regular business hours. (See "Investing in
Shares of the Funds.")
CONVENIENT REPORTING. You receive one consolidated account statement for all of
your account activity that combines all of your mutual fund activity into one
report.
READING THIS PROSPECTUS. For your ease of reading, we have italicized certain
terms which have been included in the glossary at the end of this Prospectus. If
you are unsure of the meaning of any italicized term, check the glossary.
References to "you" and "your" in this Prospectus refer to prospective investors
and/or current shareholders, while references to "us", "our", or "our Funds"
refer to the Value Advantage Shares or to the three Funds generally.
SPECIAL RISK CONSIDERATIONS. An investment in any of the Funds is subject to
certain risks arising out of each such Fund's investments in Municipal
Securities issued by a single state, municipal leases, participation interests
and certain other securities, as discussed in this Prospectus. (See "Investment
Techniques Used by the Funds" and "Special Risk Considerations" for more
information.)
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SUMMARY OF EXPENSES
ANNUAL OPERATING EXPENSES
Each class of our Funds pays its own annual operating expenses. These expenses
include management fees paid to the Investment Manager, transfer agency fees,
and other expenses. These expenses cover, for example, services such as
investment research and management of the portfolios, and maintaining
shareholder records. Because these fees are paid from the income and assets of
the Value Advantage Shares of each Fund, they are factored into the price of
each Fund's Value Advantage Shares and into the annual dividends paid to holders
of Value Advantage Shares. As a shareholder, you are not charged any of these
fees directly.
YOUR FEES FOR BUYING AND SELLING SHARES
You pay no sales fee when you buy shares of our Funds. Because the Value
Advantage Shares of the Funds are designed for individuals who maintain high
balances in their Schwab accounts, the Transfer Agent charges a $5
administrative fee if you sell or exchange shares worth less than $5,000. The
Transfer Agent charges a $5 fee each month that your Fund account balance falls
below the required $20,000 minimum. The Transfer Agent will notify you in
writing 15 days before this fee is assessed in order to give you time to bring
your account balance up to the minimum amount.
The following fees (except the administrative fee) are stated as a percentage of
how much the Value Advantage Shares of each Fund are worth on an average day.
<TABLE>
<CAPTION>
NEW YORK CALIFORNIA TAX-EXEMPT
FUND FUND FUND
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Administrative Fee(1).................................... $ 5.00 $5.00 $5.00
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
Management Fee (after fee reduction)(2).................. 0.20% 0.19% 0.20%
12b-1 Fees............................................... None None None
Other Expenses (after fee reductions and/or
expense reimbursements(3).............................. 0.25% 0.26% 0.25%
TOTAL FUND OPERATING EXPENSES(4)(5)........................... 0.45% 0.45% 0.45%
</TABLE>
(1) If you sell or exchange shares in an amount less than $5,000, you will be
subject to a $5 administrative fee.
(2) This amount reflects a reduction by the Investment Manager, which is
guaranteed through at least April 30, 1996. If there were no such reduction, the
maximum management fee would be 0.46% of each Fund's average daily net assets.
(3) "Other Expenses" are based on estimated amounts for the current fiscal year
for each Fund. See "Matching the Fund to Your Investment Needs" for information
regarding the differing Transfer Agency fees for the multiple classes of shares
of the Funds.
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(4) This amount reflects the guarantee by Schwab and our Investment Manager
that, through at least April 30, 1996, the total operating expenses of the Value
Advantage Shares of each Fund will not exceed 0.45% of average daily net assets
of the Value Advantage Shares of each Fund. If there were no such reduction, the
estimated maximum total operating expenses would be 0.70% of the average daily
net assets of the Value Advantage Shares of each Fund.
(5) You may be charged a fee if applicable minimum balances are not maintained
in your Schwab brokerage account or Schwab One(R) account. (see "Investing in
Shares of the Funds--How to Buy Shares--Schwab Account Minimums and Associated
Fees.") Schwab Individual Retirement Accounts with balances of $10,000 or more
by September 15, 1996 will not be charged Schwab's $29 annual IRA account fee
for the life of the account. Schwab Keogh plans are currently charged an annual
fee of $45. See "How To Buy Shares" for information regarding the differing
minimum balance and minimum investment requirements of the multiple classes of
shares of the Funds.
EXAMPLE. You would pay the following expenses on a $1,000 investment in the
Value Advantage Shares of each Fund assuming (1) 5% annual return; and (2)
redemption at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Tax-Exempt Fund....................................... $5 $14 $25 $57
California Fund....................................... $5 $14 $25 $57
New York Fund......................................... $5 $14 $25 $57
</TABLE>
THE PRECEDING TABLE IS AN EXAMPLE ONLY, AND DOES NOT REPRESENT PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE
EXAMPLE. This example reflects the guarantee by Schwab and the Investment
Manager that, through at least April 30, 1996, total operating expenses for the
Value Advantage Shares of each Fund will not exceed 0.45% of the class' average
daily net assets. Also, this example does not include the $5 administrative fee
on sales or exchanges of Fund shares equal to or less than $5,000. Nor does this
example include the $5 monthly fee charged on balances that fall below $20,000.
Please remember, that while this example assumes a 5% annual return on
investment, the actual return for the Value Advantage Shares of each Fund may be
more or less than the 5% annual return used in this example.
The purpose of the preceding table is to help you understand the various costs
and expenses you will bear directly or indirectly when you invest in the Value
Advantage Shares of the Funds. (See "Organization and Management of the
Funds--Operating Fees and Expenses.")
MATCHING THE FUNDS TO YOUR INVESTMENT NEEDS
Because the Value Advantage Shares of the Funds are designed for Schwab accounts
with larger balances and less frequent shareholder transactions, we can keep the
operating expenses lower than the industry average, which helps provide more
competitive yields. The table below shows the
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anticipated total operating expenses of the Value Advantage Shares of each Fund
compared to the industry average for similar type funds.
<TABLE>
<CAPTION>
VALUE ADVANTAGE SHARES INDUSTRY AVERAGES*
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<S> <C> <C> <C>
Tax-Exempt Fund................... 0.45% Tax-Exempt Money Market Funds..... 0.70%
California Tax-Exempt
California Fund................... 0.45% Money Market Funds.............. 0.53%
New York Tax-Exempt
New York Fund..................... 0.45% Money Market Funds.............. 0.58%
</TABLE>
Note: These amounts represent total operating expenses after fee waivers for
first tier money market funds, not including institutional money funds.
* Fourth quarter industry averages as reported by IBC/Donoghue Quarterly Report
on Money Fund Performance, 4th Quarter, 1994.
Our Funds invest in high-quality money market instruments and are designed for
high current yields. Keep in mind, however, that because the Value Advantage
Shares of the Funds are intended for larger balance accounts, you may be charged
a fee for redemptions or exchanges under the required minimum or if your balance
falls below the required minimum. These fees are designed to keep shareholder
transactions to a minimum which contributes to the Value Advantage Shares lower
operating expense ratio.
Schwab also offers an additional class of shares of each of the Funds ("Sweep
Shares") which automatically invest the uninvested cash balances in your Schwab
account in a Schwab money fund which you select. Sweep Shares may be more
suitable for providing income on fluctuating cash balances in your account in
between other investments. The Funds may be appropriate for a variety of
investment programs. Unlike the Sweep Shares, however, the Value Advantage
Shares have been designed for cash reserves which may be held for longer periods
of time and may not require frequent investor access. The Funds should not be a
substitute for building an investment portfolio tailored to your individual
investment needs and risk tolerance. Additionally, the Funds are not suitable
for tax-advantaged plans such as Individual Retirement Plans and Keogh plans.
Schwab offers these multiple classes of shares pursuant to a multiple class plan
(the "Plan") adopted by the Board of Trustees of the Trust. Pursuant to the
Plan, Value Advantage Shares of each Fund are subject to lower transfer agency
expenses than the Sweep Shares, as the Sweep Shares offer the "sweep" services
described above not available to investors in Value Advantage Shares. In
addition, the minimum initial investment and minimum account balance
requirements are higher for the Value Advantage Shares than for the Sweep
Shares. See "Organization and Management of the Funds--Operating Fees and
Expenses" and "How to Buy Shares." For more information regarding the Sweep
Shares of the Funds, call your local Schwab office or 800-2 NO-LOAD. You may
also obtain information about Sweep Shares from your Schwab broker.
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INVESTMENT OBJECTIVES AND POLICIES
THE TAX-EXEMPT FUND
The investment objective of the Tax-Exempt Fund is to provide you with maximum
current income that is exempt from federal income taxes consistent with
stability of capital. Because any investment involves risk, we cannot guarantee
achieving this objective.
To achieve our investment objective, we normally will attempt to invest 100%,
and will invest at least 80%, of our total assets in short-term, high-quality
debt obligations issued by or on behalf of 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 taxes and not treated
as a tax preference item for purposes of the federal alternative minimum tax
("Municipal Securities").
The investment objective and policies stated above are fundamental to the
Tax-Exempt Fund.
Provided that we meet certain minimum conditions (described in the Statement of
Additional Information under "Investment Restrictions"), dividends that
represent interest income received on Municipal Securities will be exempt from
federal income taxes when paid to you. However, such dividend income may be
subject to state and local taxes. See "Important Information About Your
Investment--Income Tax Information" and the Statement of Additional Information.
THE CALIFORNIA FUND
The investment objective of the California Fund is to provide you with maximum
current income that is exempt from federal income and State of California
personal income taxes, to the extent consistent with stability of capital.
Because any investment involves risk, we cannot guarantee achieving this
objective.
To achieve our objective, we normally will attempt to invest 100%, and will
invest at least 80%, of our total assets in Municipal Securities.
Absent unusual market conditions, we will invest at least 65% of our total
assets in such obligations which also generate interest which, in the opinion of
bond counsel, is exempt from State of California personal income taxes
("California Municipal Securities").
The investment objective and policies stated above are fundamental to the
California Fund.
Provided that we meet certain minimum conditions (described in the Statement of
Additional Information under "Investment Restrictions"), dividends that
represent interest income received on California Municipal Securities will be
exempt from State of California personal income taxes when paid to California
residents. See "Important Information About Your Investment--Income Tax
Information" and the Statement of Additional Information.
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THE NEW YORK FUND
The investment objective of the New York Fund is to provide you with maximum
current income that is exempt from federal income taxes and personal income
taxes imposed by New York State and New York municipalities, to the extent
consistent with liquidity and stability of capital. Because any investment
involves risk, we cannot guarantee achieving this objective.
To achieve our objective, we normally will attempt to invest 100%, and will
invest at least 80%, of our total assets in Municipal Securities.
Absent unusual market conditions, we will invest at least 65% of our total
assets in such obligations which also generate interest which, in the opinion of
bond counsel, is exempt from State of New York and New York municipalities
personal income taxes ("New York Municipal Securities").
The investment objective and policies stated above are fundamental to the New
York Fund.
Provided that we meet certain minimum conditions (described in the Statement of
Additional Information under "Investment Restrictions"), dividends that
represent interest income received on New York Municipal Securities will be
exempt from State of New York and New York municipalities personal income taxes
when paid to New York residents. See "Important Information About Your
Investment--Income Tax Information" and the Statement of Additional Information.
MUNICIPAL SECURITIES. Our Funds will invest only in Municipal Securities which
at the time of purchase: (a) are rated within the two highest rating categories
for municipal commercial paper or short-term municipal securities assigned by
any 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 our Investment Manager; or (d) are unrated by any
NRSRO, if they are determined by our Investment Manager, using guidelines
approved by the Board of Trustees, to be at least equal in quality to one or
more of the securities mentioned above. (See "Appendix--Ratings of Investment
Securities" in the Statement of Additional Information.)
We may purchase a security that, after being purchased by a Fund, ceases to have
a rating, or is downgraded, causing its rating to fall below that required for
purchase by the Fund. Neither event would necessarily require the Fund to sell
the security. However, we will keep such a security in its portfolio only if the
Board of Trustees determines that keeping the security is in the best interests
of that Fund.
Municipal Securities in which we may invest are generally classified in one of
two categories: "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 secured only by the revenues derived from a particular
facility or class of facilities, or from a specific revenue source such as a
special excise tax or from the user of the facility being financed.
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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 they 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, each of our Funds may invest
more than 25% of its total assets in industrial development and private activity
bonds.
We may also invest in "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 state or municipality which created the
issuer has a moral commitment but not a legal obligation to restore the reserve
fund.
Our Funds may also invest up to 25% of their total assets in municipal leases,
no more than 10% of which may be in illiquid leases. Municipal leases 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. Some investments in municipal leases
may be considered to be illiquid. 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 value of the property to the
municipality. The Investment Manager, pursuant to guidelines established by the
Board of Trustees, is responsible for continuously determining the credit
quality of unrated municipal leases, including an assessment of the likelihood
that the lease will not be terminated.
Our Funds may also invest up to 25% of their assets in synthetic variable or
floating-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 7-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 synthetic floating-rate municipal 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 each 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
Funds' investment limitations.
We may invest in variable rate demand instruments issued by industrial
development authorities and other government entities. In the event that a
variable rate demand instrument to be purchased by a
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Fund is not rated by credit rating agencies, our Investment Manager, using
guidelines approved by the Board of Trustees, must determine that such
instrument is of comparable quality at the time of purchase to a rated
instrument that would be eligible for purchase by the Fund. 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, line of credit, guarantee, or
commitment to lend.
Although there may be no active secondary market for a particular variable rate
demand instrument purchased by the Fund, each 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.
We could suffer a loss from a variable rate demand instrument because of the
absence of an active secondary market, because it may be difficult for the Fund
to dispose of the instrument in the event an issuer defaults on its payment
obligation, because the Fund is only entitled to exercise its demand rights at
certain times, or for other reasons.
Variable rate demand instruments will be subject to each Fund's restrictions on
acquiring and holding illiquid securities to the extent that the absence of an
active secondary market for such securities causes them to be illiquid.
We may purchase from financial institutions participation interests in Municipal
Securities with fixed, floating, or variable rates of interest. The buyer of a
participation interest receives an undivided interest in the securities
underlying the instrument.
We will purchase a participation interest only if: (a) the instrument subject to
the participation interest matures in one year or less, or the instrument
includes a right to demand payment, usually within 7-days, from the seller; (b)
the instrument meets our 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.
We may also acquire "stand-by commitments" for Municipal Securities held in our
portfolios. Under a stand-by commitment, a dealer agrees to purchase at our
option specified Municipal Securities at a price equal to their amortized cost
value plus accrued interest. We will acquire stand-by commitments solely to
improve portfolio liquidity. We do not intend to exercise our stand-by rights
solely for trading purposes.
VARIABLE RATE SECURITIES. We may invest in instruments which have interest rates
that are adjusted periodically, or which "float" continuously according to
formulas intended to minimize any fluctuation in the values of the instruments
("Variable Rate Securities"). The interest rate of Variable Rate Securities is
ordinarily determined by reference to, or is a percentage of, an objective
standard such as a bank's prime rate, the 90-day U.S. Treasury bill rate, or the
rate of return on commercial paper or bank certificates of deposit.
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Generally, changes in the interest rate on Variable Rate Securities reduce the
fluctuation of their market value. Accordingly, as interest rates decrease (or
increase), Variable Rate Securities experience less capital appreciation (or
depreciation) than fixed-rate obligations.
Some Variable Rate Securities ("Variable Rate Demand Securities") allow the
purchaser to resell the securities at an amount approximately equal to amortized
cost, or to the principal amount plus accrued interest. Like other Variable Rate
Securities, the interest rate on Variable Rate Demand Securities varies
according to some objective standard that is intended to minimize fluctuations
in the values of the securities. We determine the maturity of Variable Rate
Securities in accordance with SEC rules.
ILLIQUID SECURITIES. We may purchase illiquid securities, including repurchase
agreements maturing in more than 7-days, provided that no more than 10% of a
Fund's net assets valued at the time of the transaction are invested in such
securities.
GOVERNMENT SECURITIES. We may invest in government securities, including U.S.
Treasury notes, bills, and bonds, which are backed by the full faith and credit
of the U.S. Government. Some securities issued by U.S. Government agencies or
instrumentalities are supported by the credit of the agency or instrumentality,
for example, those issued by the Federal Home Loan Bank, while others, such as
those issued by the Federal National Mortgage Association, Farm Credit System,
and Student Loan Marketing Association have an additional line of credit with
the U.S. Treasury. However, there is no guarantee that the U.S. Government will
provide support to such agencies or instrumentalities. Accordingly, such
securities may involve risk of loss of principal and interest.
INVESTMENT TECHNIQUES USED BY THE FUNDS
MATURITY. We will purchase only securities that mature in 397 days or less, or
securities which have a variable rate of interest that is readjusted no less
frequently than every 397 days.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. We 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. Generally, we will not pay for such securities or start earning interest
on them until we receive them. Securities purchased on a when-issued or delayed
delivery basis are recorded as an asset. The value of such securities may change
as the general level of interest rates changes.
Each Fund will not invest more than 25% of its assets in when-issued or delayed
delivery securities. We will not purchase such securities for speculative
purposes, and will expect to actually acquire the securities when we purchase
them. However, we reserve the right to sell any such securities before their
settlement dates, if our Investment Manager deems such a sale advisable.
REPURCHASE AGREEMENTS. Each of our Funds may engage in repurchase agreements. By
entering into a repurchase agreement, a 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. The repurchase price is higher than the
purchase price, thereby determining the yield during the Fund's holding period.
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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.
TEMPORARY INVESTMENTS. Each Fund may, from time to time, as a defensive measure
under abnormal market conditions, 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 within the two highest rating categories by any NRSRO;
commercial paper (other than "Municipal Securities") rated in the two highest
rating categories 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 a
temporary investment could cause a Fund to generate dividends taxable to
shareholders as ordinary income, it is the Funds' primary intention to produce
dividends which are not subject to federal income taxes, or state personal
income taxes, in the case of the California Fund and the New York Fund. (See
"Important Information about Your Investment--Income Tax Information.")
BORROWING POLICY. We may not borrow money except for temporary purposes to meet
redemption requests that could not otherwise be met without immediately selling
portfolio securities. A Fund may borrow an amount up to one-third of the value
of its total assets and may pledge up to 10% of its net assets to secure such
borrowings. No Fund may borrow for leverage purposes. This borrowing policy is
fundamental to each Fund.
LIMITATIONS ON INVESTMENTS. We are subject to the following limitations, which
apply to all investments by our Funds other than securities issued or guaranteed
by the U.S. Government, its agencies, and instrumentalities:
1. DIVERSIFICATION. Except as provided in this paragraph, no Fund may invest
more than 5% of the value of its total assets in the securities of one issuer.
The California Fund and the New York Fund, which are non-diversified portfolios,
may each invest up to 50% of the value of their total assets without regard to
this 5% limitation, provided no more than 25% of the value of each Fund's total
assets is invested in the securities of any one issuer. The Tax-Exempt Fund,
which is a diversified portfolio, may invest up to 25% of the value of its
assets without regard to this 5% limitation.
For purposes of this limitation with respect to each Fund, a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security. An industrial revenue bond that is backed only
by the assets and revenues of a non-governmental user is considered to be issued
by the non-governmental user. In certain circumstances, the guarantor of a
security may also be considered to be an issuer in connection with such a
guarantee.
2. CONCENTRATION. As a matter of fundamental policy, no Fund will invest 25% or
more of the value of its total assets in the securities of issuers conducting
their principal business activities in the same industry. However, this
limitation shall not apply to Municipal Securities issued by governmental
entities.
LEGAL OPINIONS. Bond counsel will render opinions on the validity of Municipal
Securities. Bond counsel will also render opinions on whether the interest paid
on Municipal Securities is exempt from federal income tax, and whether the
interest paid on California or New York Municipal Securities is
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exempt from California State or New York State and New York municipalities
personal income taxes. Bond counsel will render such opinions to the issuers of
Municipal Securities at the time the securities are issued. The Funds and the
Investment Manager will not review the proceedings on the issuance of Municipal
Securities or the bases for such opinions.
SPECIAL RISK CONSIDERATIONS
The California Fund and the New York Fund are non-diversified portfolios of the
Trust. The investment return on a non-diversified portfolio typically is
dependent on the performance of a smaller number of issuers, while a diversified
portfolio is dependent on a larger number of issuers. If financial conditions
change, or if the market's assessment of certain issuers changes, a Fund's
policy of acquiring large positions in the obligations of a relatively small
number of issuers may affect the value of that Fund's portfolio to a greater
extent than that of a diversified portfolio.
Each Fund may invest more than 25% of its assets in Municipal Securities that
produce interest that is paid solely from revenues on similar projects. However,
we do not presently intend to invest in such securities on a regular basis, but
will do so if deemed necessary or appropriate by our Investment Manager. To the
extent that each Fund's assets are invested in Municipal Securities payable from
revenues on similar projects, that Fund will be subject to the particular risks
presented by such projects to a greater extent than it would be if that Fund's
assets were not so invested.
Certain California or New York constitutional amendments, legislative measures,
executive orders, administrative regulations, and voter initiatives could result
in adverse consequences affecting California or New York 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 substantial reductions 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, California 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 and
New York issuers is contained in the Statement of Additional Information.)
We may purchase participation interests in Municipal Securities and other
derivative securities that involve special risks, including the risk that the
Internal Revenue Service may characterize some or all of the interest paid on
such securities 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 the lease that
supports the security owned by the Funds, or it may seek to cancel or otherwise
avoid its obligations under the lease. (See "Important Information about Your
Investment--How We Determine the Price of Your Shares.")
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ORGANIZATION AND MANAGEMENT OF THE FUNDS
MANAGEMENT FUNCTIONS AND RESPONSIBILITIES
GENERAL OVERSIGHT. Our Board of Trustees and officers meet regularly to review
our investments, performance, expenses and other business affairs.
THE INVESTMENT MANAGER. Our Investment Manager, Charles Schwab Investment
Management, Inc., manages our Funds, subject to the authority of the trustees
and officers of the Trust. Our Investment Manager, founded 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 September 25, 1995,
the SchwabFunds had aggregate net assets in excess of $29 billion.
Through a professional staff of portfolio managers and securities analysts, our
Investment Manager provides us with a continuous investment program, including
general investment and economic advice regarding our investment strategies,
manages our investment portfolio, performs expense management, accounting, and
record keeping, and provides other services necessary to our operation.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab serves as our Transfer Agent and
Shareholder Services Agent. Schwab provides information to our shareholders,
reports share ownership and all account activities, and responds to all
inquiries from shareholders. Schwab also distributes informational literature,
and furnishes the office space and equipment, telephone facilities, and
personnel that is necessary in providing shareholders services.
Schwab was established in 1971 and is one of America's largest discount brokers.
Schwab provides low-cost securities brokerage and related financial services to
over 2.5 million active customer accounts and has over 200 branch 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 August 31, 1995, was the beneficial
owner of approximately 20.4% of the outstanding shares of that corporation. Mr.
Schwab may be deemed to be a controlling person of Schwab and our Investment
Manager.
ACCOUNTANTS. Price Waterhouse LLP is our independent accountant. Their address
is 555 California Street, San Francisco, California 94104.
OPERATING FEES AND EXPENSES
For investment management services, under the terms of its Investment Advisory
and Administration Agreement with the Trust, our Funds pay a graduated annual
fee to the Investment Manager. This fee is based on the value of the average
daily net assets of each Fund, and is payable monthly by each Fund in the amount
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 more than $2 billion, and
0.40% of such net assets over $2 billion.
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Our Investment Manager guarantees that, through at least April 30, 1996, our
management fee will not exceed 0.20%, 0.19%, and 0.20% of the average daily net
assets of the New York Fund, the California Fund, and the Tax-Exempt Fund,
respectively, and total operating expenses will not exceed 0.45% of average
daily net assets of the Value Advantage Shares of each Fund. The effect of this
voluntary expense limitation is to maintain or increase each Fund's total return
to shareholders. The following expenses are not included as "operating expenses"
for purposes of this guarantee: interest expenses, taxes and capital items such
as costs of purchase or sale of portfolio securities, including brokerage fees
or commissions.
For its services as Transfer Agent, Schwab receives an annual fee of 0.05% of
the average daily net assets of each Fund's Value Advantage Shares. For transfer
agency services to each Fund's Sweep Shares, Schwab receives an annual fee of
0.25% of the average daily net assets of each Fund's Sweep Shares. In addition,
for shareholder services provided, Schwab receives an annual fee of 0.20% of the
average daily net assets of each Fund's Value Advantage Shares.
Schwab serves as our Funds' distributor but receives no compensation for this
service. PNC Bank, N.A. is our Funds' custodian.
OTHER EXPENSES. The Trust pays the expenses of our Funds' operations, including
the fees and expenses for independent auditors, legal counsel, custodians, the
cost of maintaining books and records of account, taxes, registration fees, and
the fees and expenses of qualifying the Trust and its shares for distribution
under federal and state securities laws, and industry association membership
dues.
The Trust generally allocates these expenses among the individual investment
portfolios ("Series"). This allocation is based on the relative net assets of
the Series at the time the expenses are incurred. However, expenses directly
attributable to a particular Series or class of a Series are charged to that
Series or class, respectively. The differing expenses applicable to the Value
Advantage Shares and Sweep Shares of the Funds will cause the performance of the
two classes to differ.
OTHER INFORMATION
The Trust 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 Trust offers
shares of nine Series, which may be organized into one or more classes of shares
of beneficial interest. The Tax-Exempt Fund was formerly known as the Schwab
Tax-Exempt Fund. The California Fund was formerly known as the Schwab California
Tax-Free Money Fund. The Board of Trustees may authorize the issuance of shares
of additional Series or classes, if it deems it to be desirable to do so. Shares
within 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.
ANNUAL SHAREHOLDER MEETINGS. The Trust is not required to hold annual meetings
and does not intend to do so except in connection with certain matters, such as
a change in a Fund's fundamental policies, election of Trustees or approval of a
new investment advisory agreement. In addition, a Trustee may be elected or
removed by shareholders at a special meeting called upon written request of
shareholders owning in the aggregate at least 10% of the outstanding shares of
the Trust.
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YOUR VOTING RIGHTS. If we were to make changes to a Fund's management or
fundamental policies, you would be asked to vote as a shareholder because
shareholders have voting rights on these matters. If a meeting is held and you
cannot attend, you may vote by proxy. Before the meeting, we will send you proxy
materials that explain the issues to be decided and include a voting card for
you to mail back. You are entitled to one vote for each share owned. Unless
permitted by the 1940 Act, shareholders vote by Series and not in the aggregate.
For example, when voting to approve an investment advisory agreement for a
Series, only shareholders of that Series may vote; when voting to elect
Trustees, shareholders of all the Series vote in the aggregate. In addition,
holders of Value Advantage Shares will vote exclusively as a class on any matter
relating solely to their arrangement as a class, and on any matter in which the
interests of the Value Advantage Shares of a Fund differ from the interests of
any other class of the Fund.
INVESTING IN SHARES OF THE FUNDS
You may place purchase and redemption orders as well as exchange requests by
telephone by calling your local Schwab office during regular business hours, or
by calling 800-2 NO-LOAD. The right to initiate transactions by telephone is
automatically available through your Schwab account.
We will follow reasonable procedures to confirm that your telephone instructions
are genuine. If we follow telephone orders that we reasonably believe to be
genuine, we will not be liable for any losses you may experience. If we do not
follow reasonable procedures to confirm that your telephone order is genuine, we
may be liable for any losses you may suffer from unauthorized or fraudulent
orders. These procedures may include:
- requiring a form of personal identification before we act upon any
instructions received by telephone;
- providing written confirmation of your telephone instructions; and
- tape recording all telephone transactions.
You should remember that it may be difficult to reach us by telephone during
periods of drastic economic or market changes, when our phone lines become very
busy with calls from other investors. If you want to purchase, redeem or
exchange shares but have trouble reaching us by telephone, you may want to use
one of the other ways we offer for completing the transactions discussed below,
even though these procedures may mean that completing your transaction may take
longer.
HOW TO BUY SHARES
OPENING A SCHWAB ACCOUNT. You may buy our shares only through a Schwab account.
You can open a Schwab account by completing the appropriate account application.
(Corporations and other organizations should contact a Schwab office to find out
the additional forms that must be completed to open an account.)
Within your Schwab account, you have access to other investments available at
Schwab such as stocks, bonds and other mutual funds. Additionally, the
Securities Investor Protection Corporation (known as "SIPC") will provide
account protection up to $500,000 for your securities, including
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shares of the Funds, which you hold in a Schwab account. However, SIPC account
protection does not protect you from any loss of principal due to market or
economic conditions.
SCHWAB ACCOUNT MINIMUMS AND ASSOCIATED FEES. Schwab requires a $1,000 deposit
and account balance minimum to maintain a Schwab brokerage account ($500 for
custodial accounts). A quarterly fee of $7.50 will be charged on Schwab
brokerage accounts that fall below the minimum. This fee, if applicable, will be
charged at the end of each quarter and will be waived if there has been one
commissionable trade within the last six months, or if the shareholder's
combined account balances at Schwab total $10,000 or more.
Schwab currently imposes no fee for opening a Schwab One(R) account with a
minimum of $5,000 account equity. Schwab One accounts containing less than
$5,000 account equity are subject to a fee of $5 per month imposed by Schwab if
there have been fewer than two commissionable trades within the last twelve
months. Note that, in addition to these Schwab One account minimums, there are
higher minimum investment and other requirements applicable to the Value
Advantage Shares of the Funds, which are described below.
DEPOSITING FUNDS AND MEETING THE FUNDS' INVESTMENT MINIMUMS. Once you have
opened your account or if you already have a Schwab account, you can deposit
funds by check or wire. Your check should be made payable to Charles Schwab &
Co., Inc. Contact your Schwab representative for instructions on how to deposit
funds by wire.
The minimum initial investment in the Value Advantage Shares of each Fund is
$25,000. After you have bought the minimum amount of Value Advantage Shares for
your initial investment, you can buy additional Value Advantage Shares in
amounts of at least $5,000. The Transfer Agent imposes a $5 fee for each month
your Fund account balance falls below the required $20,000 minimum. The minimum
initial investment to purchase Sweep Shares of each Fund is $1,000, and
subsequent investments in Sweep Shares must be at least $100. The Transfer
Agent reserves the right to waive these minimums from time to time for clients
of Schwab Institutional, a division of Schwab, and for certain other investors.
See the Statement of Additional Information for more details.
We, in our sole discretion and without prior notice to you, reserve the right to
reject orders to buy shares, to change the minimum investment requirements, and
to withdraw or suspend any part of the offering made by this Prospectus. In
particular, if you engage in excessive exchange or redemption activity, we
reserve the right to refuse your future orders to buy shares in order to
minimize the costs to the Funds associated with these practices. All orders to
buy shares must be accepted by us, and orders are not binding until we confirm
or accept them in writing. Schwab will charge your Schwab brokerage account a
$15 service fee for any check returned because of insufficient or uncollected
funds, or because of a stop payment order.
WHEN YOU CAN BUY SHARES. You must have funds in your Schwab account in order to
buy our shares. Funds received by Schwab before 4:00 p.m. (Eastern time) can be
used to buy our shares on that day. Funds that arrive after that time can be
used to buy shares the next Business Day.
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DISTRIBUTION OPTIONS. When you first buy our shares, you may choose one of the
two following distribution options:
AUTOMATIC REINVESTMENT: All distributions will be reinvested in
additional full and fractional Value Advantage Shares of the Fund at the
net asset value next determined on their payable date; or
RECEIVE YOUR DIVIDENDS IN CASH: All distributions will be credited to
your Schwab account on the date distributions are payable. If you choose
to have your dividends mailed, a check normally will be mailed to you
the Business Day after distributions are credited to your account.
To change the distribution option you have selected, call your local Schwab
office or 800-2 NO-LOAD.
You can request that your Schwab office wire funds from your Schwab account to
your bank account. There is a $15 fee for each wire transfer of funds.
HOW TO EXCHANGE SHARES
You can exchange your SchwabFunds(R) shares for shares of other SchwabFunds
Series or classes available in your state provided you meet the minimum
investment and any other requirements relating to the Series or class of shares
you wish to purchase.
To exchange your Shares:
- The shares you seek to buy must be available in your state and your
purchase must meet that fund's eligibility requirements; and
- The Transfer Agent will charge you a $5 administrative fee if you are
exchanging less than $5,000 of Value Advantage Shares.
We reserve the right to modify, limit, or terminate the exchange privilege upon
60 days' written notice. For federal income tax purposes, an exchange is treated
as a sale of shares.
EXCHANGING SHARES BY TELEPHONE. We need the following information in order to
process your telephone exchange request:
- your Schwab account number and your name for verification;
- the number of our shares you want to exchange and the name of the Fund
from which you are exchanging shares;
- the name of the fund into which you want to exchange shares; and
- the distribution option you select.
EXCHANGING SHARES BY MAIL. You can also exchange shares by writing to your
local Schwab office or to the address on the cover of this Prospectus.
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We need the following information in a letter from you in order to process your
mail exchange request:
- your Schwab account number;
- the number of our shares you want to exchange and the name of the Fund
from which you are exchanging shares;
- the name of the fund into which you want to exchange shares;
- the signature of at least one of the registered Schwab account holders
of your account in the exact form specified in the account; and
- the distribution option you select.
HOW TO SELL YOUR SHARES
You can sell our shares at any time, in person, by telephone, or by mail,
subject to the following terms and conditions:
- the Transfer Agent may sell additional shares from your account to pay
the administrative fee;
- if you bought your shares by check, we will send you your money as
soon as your check clears your bank, which may take up to 15 days;
- depending on the type of Schwab account you have, your money may earn
interest during any holding period;
- you will receive the dividends declared for the day on which you sell
your shares;
- we will have a check for your shares at your local Schwab office on
the Business Day after Schwab's Mutual Fund Transfer Agency Department
receives proper instructions to sell your shares;
- a check normally will be mailed to you on the Business Day following
the sale of your shares if you specifically request that it be mailed;
and
- we may suspend the right to sell shares or postpone payment for a sale
of shares when trading on the New York Stock Exchange (the "Exchange")
is restricted, the Exchange is closed for any reason other than its
normal weekend or holiday closings, emergency circumstances as
determined by the SEC, or for any other circumstances as the SEC may
permit.
The Transfer Agent will charge you a $5 administrative fee if you sell Value
Advantage Shares equal to or less than $5,000. The Transfer Agent will waive
this minimum for certain clients of Schwab Institutional, a division of Schwab,
and for certain other investors. See the Statement of Additional Information for
more details.
SELLING YOUR SHARES BY TELEPHONE. You can sell your shares by telephone by
calling your local Schwab office during regular business hours, or by calling
800-2 NO-LOAD.
We need the following information in order to process your telephone sale
request:
- your Schwab account number and your name for verification; and
- the number of shares you want to sell and the name of the Fund from
which you are selling shares.
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IMPORTANT INFORMATION ABOUT YOUR INVESTMENT
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Business Day we determine our net investment income, which we compute by
subtracting the expenses of the Value Advantage Shares of a Fund for that day
from the amount the Fund earned on its investments on that day. We declare
dividends from this net investment income each Business Day for those who were
shareholders of record at the previous net asset value calculation. We pay, or
reinvest, dividends on the 15th day of each month if it is a Business Day. If
the 15th is not a Business Day, we pay dividends on the next Business Day.
INCOME TAX INFORMATION
The following is only a very brief summary of some of the federal, California
and New York income tax consequences that affect us and our shareholders.
Therefore, it is important that you consult with advisers about your own tax
situation.
We have qualified as a regulated investment company under the Code. In order to
continue to qualify, we will distribute to our shareholders on a current basis
substantially all of our investment company taxable income, its net
exempt-interest income, and its net capital gains (if any), and we will meet
certain other requirements. As a regulated investment company, we will pay no
federal income taxes (or California State or New York State or municipal income
taxes, in the case of the California Fund and the New York Fund, respectively)
to the extent that we distribute our earnings to our shareholders.
THE TAX-EXEMPT FUND. Dividends representing net interest income received by the
Tax-Exempt Fund on Municipal Securities will generally be exempt from federal
income tax when distributed to you. However, such dividends may be subject to
the federal alternative minimum tax. Such dividend income may also be taxable to
you under state and 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 received directly by you, would be exempt from such income taxes.
THE CALIFORNIA FUND. Dividends representing net interest income received by the
California Fund on Municipal Securities will generally be exempt from federal
income tax when distributed to you. However, such dividends may be subject to
the federal alternative minimum tax. Dividends paid to California residents to
the extent of interest income received on California Municipal Securities will
also be exempt from 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. Fund dividends derived from interest on U.S. Treasury
and agency obligations, if any, are subject to federal income tax. 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
for California State tax purposes.
THE NEW YORK FUND. Dividends representing net interest income received by the
New York Fund on Municipal Securities will generally be exempt from federal
income tax when distributed to you.
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However, such dividends may be subject to the federal alternative minimum tax.
Dividends paid to New York residents to the extent of interest income received
on New York Municipal Securities will also be exempt from State of New York and
New York municipalities personal income taxes. Fund dividends derived from
interest on U.S. Treasury and agency obligations, if any, are subject to federal
income tax. Dividends paid to shareholders that are corporations subject to New
York franchise tax or corporate income tax will be taxed as ordinary income to
such shareholders for New York State tax purposes.
ADDITIONAL INFORMATION. Further, if you receive Social Security or railroad
retirement benefits, an investment in any of the Funds may affect the taxation
of your benefits.
Each Fund may at times purchase Municipal Securities, California Municipal
Securities, or New York Municipal Securities, as the case may be, at a discount
from the original issue price. 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 you as this ordinary income is distributed.
To the extent dividends are attributable to taxable interest or short-term or
long-term capital gains, such dividends will be taxable to you whether you
receive them as cash or as additional Value Advantage Shares.
We will provide you with a record of all dividends, distributions, purchases,
and sales on your regular Schwab brokerage account statement. At least once a
year we will notify you of the federal (and California and New York) income tax
consequences of all distributions made that year to your account. The Funds do
not expect to realize any net long-term capital gains and, therefore, do not
foresee paying any capital gains dividends.
HOW WE DETERMINE THE PRICE OF YOUR SHARES
The price of a Value Advantage Share is its net asset value, which we determine
each Business Day at the close of trading on the Exchange, generally at 4:00
p.m., Eastern time. We determine the price of a Value Advantage Share by taking
the total assets of each Fund allocable to the Value Advantage Shares,
subtracting any liabilities allocable to the Value Advantage Shares of the Fund,
and then dividing the resulting number by the number of each Fund's Value
Advantage Shares outstanding. Purchase or redemption orders and exchange
requests will be executed at the net asset value next determined after receipt
by Schwab's Mutual Fund Transfer Agency Department. While we try to maintain our
net asset value at a constant $1 per share, we cannot guarantee this value.
We do not price the securities in our portfolios at market value. Instead, we
value our portfolio securities at the price we paid when we bought them,
adjusting this price to reflect amortization of premium or any discount. After
using this amortized cost method to determine the value of our investments, we
then compare this value with the market value of our investments.
We calculate the market value of our investments using one of the following
three methods: (1) we may use actual quotations provided by third-party pricing
services or market makers; (2) we may estimate the market value of the
instruments; or (3) we may use a value obtained from the yield data
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(published by reputable sources) of money market instruments that are comparable
to the securities we are valuing, using the mean between the bid and asked
prices for the instruments as the value of the instruments.
If deviation of 1/2 of 1% or more between our net asset value per share as
calculated by market values and our $1 per share amortized cost value, or if
there is any other deviation which the Board of Trustees believes would result
in a material dilution to shareholders or purchasers, the Board of Trustees will
promptly consider what action, if any, should be taken.
HOW THE FUNDS REPORT PERFORMANCE
From time to time, we may advertise the yield and effective yield, taxable
equivalent yield and taxable equivalent effective yield of our Value Advantage
Shares. Our actual performance will, of course, vary from year to year, and past
performance in no way represents or guarantees future performance. How we
perform in any given year will depend on the type and quality of securities in
which we invest, the market, and the operating expenses of each Fund's Value
Advantage Shares. Because the Value Advantage Shares are subject to different
expenses than Sweep Shares, the performance of the two classes of each Fund will
differ.
YIELD. When we calculate the yield of the Value Advantage Shares, we make some
hypothetical assumptions about how the Fund will do for one year. Using the
income generated over one 7-day period by a hypothetical investment, we assume
that this amount of income is generated each week for one year. This income for
the year is then shown as a percentage of our hypothetical investment. (See the
section entitled "Yield" in the Statement of Additional Information for more
information.)
EFFECTIVE YIELD. We calculate effective yield the same way, but we assume that
the income generated by our hypothetical investment is compounded weekly over
our hypothetical year. Because of the effect of compounding, the effective yield
will be slightly higher than the yield.
TAXABLE EQUIVALENT YIELD. The taxable equivalent yield is the yield that a
taxable investment must generate in order to equal (after applicable taxes are
deducted, assuming the investor is in the highest federal income tax bracket)
the yield for a tax-free investment. The taxable equivalent yield may be
reported for the Value Advantage Shares of our Funds and will be based on, and
will be higher than, the yield for the Sweep Shares of our Funds.
TAXABLE EQUIVALENT EFFECTIVE YIELD. The taxable equivalent effective yield is
computed in the same manner as the taxable equivalent yield, except that the
effective yield is substituted for yield in the calculation.
COMPARING THE PERFORMANCE OF THE VALUE ADVANTAGE SHARES OF THE FUNDS WITH OTHER
FUNDS. We may compare the performance of the Value Advantage Shares of our Funds
with the performance of other mutual funds by comparing the ratings of mutual
fund rating services, various indices of investment performance, United States
Government obligations, bank certificates of deposit, the consumer price index,
and other investments for which reliable data is available.
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ANNUAL REPORT AND SEMI-ANNUAL REPORT MAILINGS. Twice a year, we will provide a
report to all shareholders describing the performance of the Value Advantage
Shares of the Funds and outlining the investments held in the portfolios. In
order to reduce mailing costs, we consolidate these shareholder mailings by
household. If a household has multiple accounts and the same address of record
for all the accounts, we will send mailings for all accounts at that address in
a single package. If you do not want this consolidation of mailings to apply to
your account, please write to SchwabFunds(R) at the address on the front of this
Prospectus. To request a free copy of our Annual Report (or Semi-Annual Report)
to Shareholders, call your local Schwab office or call 800-2 NO-LOAD.
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GLOSSARY OF IMPORTANT TERMS
AMORTIZED COST METHOD: the method of calculating a money market mutual fund's
net asset value whereby portfolio securities are valued at the fund's
acquisition cost, as adjusted for amortization or premium or accretion of
discount, rather than at their value based on current market factors.
ANNUALIZED: calculated to represent a year; a statement produced by calculating
financial results covering less than a year to show what might happen when the
results are hypothetically extended to cover an entire year.
BOND: a debt obligation that requires the issuer to pay a fixed sum of money
each year (the interest payments) until maturity, the date on which the bond
comes due and the principal (the amount borrowed) must be paid. Floating or
variable rate bonds have an interest rate that rises or falls if general
interest rates or some other security (such as Treasury bills) rises or falls.
BUSINESS DAY: any day both the Federal Reserve Bank of New York and the New York
Stock Exchange are open for business. A Business Day normally begins at 9 a.m.
(Eastern time) when the Exchange opens, and usually ends at 4 p.m. (Eastern
time) when the Exchange closes.
CAPITAL GAIN OR LOSS: the increase or decrease in the value of a security over
the original purchase price. A gain is realized when the security that has
increased in value is sold. An unrealized gain or loss occurs when the value of
a security increases or decreases but the security is not sold. If a security is
held for more than 12 months and then sold at a profit, that profit is a
realized long-term capital gain. If it is sold at a profit after being held for
less than 12 months, that profit is a realized short-term capital gain.
CODE: The Internal Revenue Code of 1986, as amended.
COMMERCIAL PAPER: unsecured debt obligations issued by businesses and sold at a
discount but redeemed at par within 2 to 270 days.
DISTRIBUTION: payment a fund makes to shareholders. There are two kinds of
distributions: dividends, or the profits (after expenses) from a fund's
investments, and capital gains distributions.
DIVERSIFIED: Under the 1940 Act, a diversified money market fund generally may
not invest more than 5% of its assets in the securities of any one issuer, and
may not hold more than 10% of the voting shares of any one issuer. Certain minor
exceptions apply to this policy, which are described under "INVESTMENT
TECHNIQUES USED BY THE FUNDS--Limitations on Investments--Diversification."
DUFF: Duff & Phelps Credit Rating Co., an NRSRO.
FIRST-TIER: The highest ratings category assigned by an NRSRO. A first-tier
money market fund invests only in securities that are rated first-tier.
FITCH: Fitch Investor Services, Inc., an NRSRO.
FUNDAMENTAL: a policy which can not be changed without the approval of a
majority (as defined in the 1940 Act) of the shareholders of a fund.
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HIGH-QUALITY: rated in one of the two highest ratings categories assigned by any
NRSRO.
INVESTMENT MANAGER: Charles Schwab Investment Management, Inc.
LIQUIDITY: ability to convert assets into cash or cash equivalents within 7-days
at a fair value.
MATURITY: the date on which the principal of a debt obligation such as a bond
comes due and must be repaid.
MONEY MARKET INSTRUMENT: short-term, liquid debt such as Treasury bills and
commercial paper, which is sold at a discount but redeemed at par. See
Commercial Paper.
MOODY'S: Moody's Investors Service, an NRSRO.
NET ASSET VALUE (NAV): on a per share basis, the value of one share of a class
of a fund. This value is determined by adding the total fund assets, subtracting
all liabilities applicable to the class, and then dividing the resulting number
by the number of shares of the class outstanding.
1940 ACT: the Investment Company Act of 1940, as amended.
NONCUMULATIVE VOTING RIGHTS: the right of a shareholder to vote only the number
of shares owned at the time of voting.
NON-DIVERSIFIED: under the 1940 Act no fund may invest more than 5% of the value
of its total assets in the securities of one issuer except that, a
non-diversified money market fund may invest up to 50% of the value of its total
asset without regard to the 5% limitation, provided no more than 25% of the
Fund's total assets are invested in the securities of any one issuer.
NRSRO: a Nationally Recognized Statistical Rating Organization, such as Moody's,
S&P, Duff or Fitch.
PAR: for a stock, par is the value assigned to the stock at the time it is
issued. It does not reflect either the intrinsic value of the security nor its
market value. For a bond, par is the price at which the bond will be redeemed at
its date of maturity, and the value on which the calculation interest payments
is based.
PORTFOLIO: the total stocks, bonds, and other securities held by an individual
investor, a mutual fund, or a financial institution.
PRINCIPAL: capital; the original value of an investment or a debt; the face
value of a bond.
PRIVATE PLACEMENT: the sale of stocks or bonds directly to an investor without
the services of an underwriter or without registering them with the SEC.
PUT: an option that allows the holder to sell the stated amount of a specified
stock or commodity for a specific amount within a certain time period.
RESTRICTED SECURITY: securities that cannot be sold publicly without prior
agreement with the issuer to register the securities under the Securities Act of
1933, which permits only limited sale under specified conditions.
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RISK: the possibility of losing all or part of an investment, that the value of
the investment will decrease, or that the investor will receive little or no
return on the investment.
S&P: Standard & Poor's Corporation, an NRSRO.
SCHWAB: Charles Schwab & Co., Inc. 101 Montgomery Street, San Francisco, CA
94104.
SECURITIES AND EXCHANGE COMMISSION (SEC): established by Congress to administer
the Securities Act of 1933 and other securities-related laws.
SECURITIES INVESTOR PROTECTION CORPORATION (SIPC): a government sponsored
private corporation that insures securities accounts held in brokerages for up
to $500,000 in the event of the bankruptcy or financial failure of the
brokerage. The insurance does not cover loss due to financial risk.
SHORT-TERM: with respect to a fund's portfolio investments, maturing in 397 days
or less.
SYNTHETIC: an investment instrument (such as a fixed rate municipal bond) and an
option contract (such as a put) combined to create a security with desired
maturity or risk/return characteristics that may not be achievable through other
available investments.
TRANSFER AGENT: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, CA 94104.
TRUST: The Charles Schwab Family of Funds.
===============================================================================
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 FUNDS OR THEIR
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH AN OFFER MAY NOT BE LAWFULLY
MADE.
===============================================================================
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<PAGE> 26
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 27
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 28
Schwab Money Funds
VALUE ADVANTAGE
INVESTMENTS(TM)
Prospectus June 6, 1995, as amended September 29, 1995
[SchwabFunds Logo]
2400-2 (6/95) CRS 3880 Printed on recycled paper.
[SchwabFunds Logo]
101 Montgomery Street
San Francisco, California 94104
<PAGE> 29
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, AS AMENDED SEPTEMBER 29, 1995
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus dated June 6, 1995, as amended
September 29, 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
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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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<PAGE> 33
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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<PAGE> 36
(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.
- -----------------------------
* 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.
8
<PAGE> 37
(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
- ---------------------
* 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.
9
<PAGE> 38
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>
<CAPTION>
POSITION WITH
-------------
NAME THE TRUST PRINCIPAL OCCUPATION
- ---- --------- --------------------
<S> <C> <C>
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
Age: 56 estate 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>
- -----------------------
* Mr. Schwab is an "interested person" of the Trust.
** Ms. Sawi is an "interested person" of the Trust.
10
<PAGE> 39
<TABLE>
<CAPTION>
<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.,
Age: 39 Chief Operating Officer Inc., Chief Operating Officer, Charles Schwab
and Trustee Investment 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
Officer Vice 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
Age: 41 Schwab 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.
11
<PAGE> 40
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.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Estimated
as Part of Fund Annual Benefits Total
Aggregate Expenses from Upon Retirement Compensation
Name of Person, Compensation the Fund from the Fund from the
Position from 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.
12
<PAGE> 41
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 21 mutual funds with over $29 billion in assets
as of September 25, 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
13
<PAGE> 42
Schwab Tax-Exempt 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.
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.
14
<PAGE> 43
LEGAL COUNSEL
Ropes & Gray, 1001 Pennsylvania Avenue, N.W., Suite 1200 South,
Washington, D.C. 20004, is counsel to the Trust.
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> 44
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 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
16
<PAGE> 45
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> 46
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> 47
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.
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
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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.
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
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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 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
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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 they wish to communicate with the other
shareholders for the purpose of obtaining
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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
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Trust, Schwab or the Investment Manager. The Trust has made an election with the
SEC to pay in cash all redemptions requested by any shareholder of record
limited in amount during any 90-day period to the lesser of $250,000 or 1% of
its net assets at the beginning of such period. This election is irrevocable
without the SEC's prior approval. Redemption requests in excess of the stated
limits may be paid, in whole or in part, in investment securities or in cash, as
the Trust's Board of Trustees may deem advisable; however, payment will be made
wholly in cash unless the Board of Trustees believes that economic or market
conditions exist that would make such a practice detrimental to the best
interests of the Fund. If redemption proceeds are paid in investment securities,
such securities will be valued as set forth in the Prospectus of the Fund
affected under "Share Price Calculation" and a redeeming shareholder would
normally incur brokerage expenses if he or she 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.
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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