<PAGE> 1
As filed with the Securities and Exchange Commission on April 30, 1997
File Nos. 33-31894 and 811-05954
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 27 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 29 [X]
--------------
THE CHARLES SCHWAB FAMILY OF FUNDS
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
Timothy F. McCarthy, President
The Charles Schwab Family of Funds
101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)
Copies of communications to:
<TABLE>
<S> <C>
Martin E. Lybecker, Esq. Frances Cole, Esq.
Ropes & Gray Charles Schwab Investment Management , Inc.
1301 K Street, NW, Suite 800 East 101 Montgomery Street
Washington, D.C. 20005 San Francisco, CA 94104
</TABLE>
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/X/ On April 30, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485 if
appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
DECLARATION PURSUANT TO RULE 24f-2: Pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended, Registrant has registered an
indefinite number or amount of its shares of beneficial interest under the
Securities Act of 1933, as amended. The Rule 24f-2 Notice for Registrant's
fiscal year ended December 31, 1996 was filed on February 19, 1997.
<PAGE> 2
CROSS REFERENCE SHEET
PROSPECTUS
Schwab Money Market Fund
Schwab Government Money Fund
Schwab U.S. Treasury Money Fund
Schwab Municipal Money Fund -- Sweep Shares
Schwab Value Advantage Money Fund -- Sweep Shares
PART A ITEM PROSPECTUS CAPTION
1. Cover Page Cover Page
2. Synopsis Key Features of the Funds; Summary
of Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Investment Objectives
and Policies; Organization and
Management of the Funds; Other
Important Information
5. Management of the Fund Organization and Management of the
Funds
5A. Management's Discussion of Fund
Performance How the Funds Report Performance
6. Capital Stock and Other Securities Cover Page; Investment Objectives
and Policies; Municipal Securities
and Municipal Investment Techniques;
Distributions and Taxes
7. Purchase of Securities Being Offered Share Price Calculation; Investing
in Shares of the Funds
8. Redemption or Repurchase Investing in Shares of the Funds
9. Pending Legal Proceedings Inapplicable
<PAGE> 3
SCHWAB MONEY MARKET FUND
SCHWAB GOVERNMENT MONEY FUND
SCHWAB U.S. TREASURY MONEY FUND
SCHWAB MUNICIPAL MONEY FUND - SWEEP
SHARES
SCHWAB VALUE ADVANTAGE MONEY FUND -
SWEEP SHARES*
PROSPECTUS APRIL 30, 1997
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Call Charles Schwab & Co., Inc.
("Schwab") at 800-2 NO-LOAD.
THE SCHWAB MONEY MARKET FUND, SCHWAB GOVERNMENT MONEY FUND, SCHWAB U.S. TREASURY
MONEY FUND, SCHWAB MUNICIPAL MONEY FUND AND SCHWAB VALUE ADVANTAGE MONEY FUND
(the "Funds") are designed for investors who seek current income consistent with
liquidity and stability of capital.
THIS PROSPECTUS PRESENTS IMPORTANT INFORMATION YOU SHOULD KNOW BEFORE INVESTING
IN EACH FUND. PLEASE READ IT CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. You
can find more information about each Fund in the Statement of Additional
Information ("SAI") dated April 30, 1997, (as may be amended from time to time).
The SAI has been filed with the Securities and Exchange Commission ("SEC") and
is available along with material incorporated by reference and other related
materials using the SEC's World Wide Web address: http://www.sec.gov. The SAI is
incorporated by reference into this Prospectus.
This Prospectus is available electronically by using our World Wide Web address:
http://www.schwab.com. To get a free paper copy of this Prospectus or the SAI,
call Schwab at 800-2 NO-LOAD, 24 hours a day, or write to the Funds at 101
Montgomery Street, San Francisco, California 94104. TDD users may contact Schwab
at 800-345-2550, 24 hours a day.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Key Features of the Funds............ 2
Summary of Expenses.................. 4
Financial Highlights................. 6
Investment Objectives and Policies... 7
Municipal Securities and Investment
Techniques......................... 11
Other Investment Techniques.......... 14
Organization and Management of the
Funds.............................. 15
Distributions and Taxes.............. 18
Share Price Calculation.............. 19
How the Funds Report Performance..... 20
Tax-Advantaged Retirement Plans...... 21
Investing in Shares of the Funds..... 21
Other Important Information.......... 27
</TABLE>
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 EACH FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE PER SHARE OF $1.00.
- ---------------
* SWEEP SHARES OF THE SCHWAB VALUE ADVANTAGE MONEY FUND WILL BE AVAILABLE FOR
PURCHASE ON MAY 19, 1997.
<PAGE> 4
KEY FEATURES OF THE FUNDS
CURRENT INCOME. Each Fund is designed for investors who seek current income
consistent with liquidity and stability of capital. The Schwab Municipal Money
Fund also seeks to produce income for its shareholders which is exempt from
federal regular income tax. Federal regular income tax does not include the
federal alternative minimum tax. (See "Investment Objectives and Policies.")
SAFETY. The Funds invest in high-quality, short-term debt securities. Each Fund
attempts to maintain a stable net asset value per share ("NAV") of $1.00. (See
"Investment Objectives and Policies.")
AUTOMATIC INVESTMENT/REDEMPTION FEATURE. If you elect, free credit balances in
your Schwab brokerage account (including your Schwab One(R) account) will be
automatically invested or "swept" into the Fund selected, subject to the terms
and conditions of your account agreement. Shares will also be sold as necessary
to settle securities transactions, collateralize margin obligations or cover
debit balances. This feature keeps your money working and saves you the time and
trouble of withdrawing and redepositing funds. (See "Investing in Shares of the
Funds -- How to Buy Shares" and "Investing in Shares of the Funds -- How to Sell
or Exchange Shares.")
WHO SHOULD INVEST IN THE FUNDS. The Funds may be appropriate for a variety of
investment programs which can be long-term or short-term in nature.
Because each Fund is designed to provide convenience, liquidity and stability of
capital, as well as automatic investment of free credit balances, the Funds may
be especially suitable for investors with short-term investment objectives,
including those who are awaiting an opportune time to invest in the equity
and/or bond markets.
Each Fund may also be appropriate for long-term investors seeking a low-risk
investment alternative which is designed to provide current income and, in the
case of the Schwab Municipal Money Fund, income exempt from federal regular
income tax. (See "Investment Objectives and Policies," "Municipal Securities and
Municipal Investment Techniques," and "Tax-Advantaged Retirement Plans.")
The SCHWAB MONEY MARKET FUND is Schwab's basic sweep money fund. It is ideally
suited for investors who want the advantages of the automatic sweep feature but
do not normally keep large balances in their money fund. (See "Investment
Objectives and Policies.")
The SCHWAB GOVERNMENT MONEY FUND is designed for investors who want the safety
of a portfolio consisting exclusively of obligations issued or guaranteed by the
U.S. Government and its agencies and instrumentalities, combined with the
automatic sweep feature. (See "Investment Objectives and Policies.")
The SCHWAB U.S. TREASURY MONEY FUND is a sweep money fund suited for investors
who want the safety of a portfolio invested only in direct obligations of the
U.S. Treasury. The dividends received by these investors also are exempt from
state and local income taxes in the vast majority of states. (See "Investment
Objectives and Policies.")
The SCHWAB MUNICIPAL MONEY FUND (FORMERLY KNOWN AS SCHWAB TAX-EXEMPT MONEY
FUND) - SWEEP SHARES is intended for certain investors who want dividends that
are exempt from federal regular income taxes and all the convenience and
benefits of an automatic sweep money fund. Federal regular income tax does not
include the federal alternative minimum
2
<PAGE> 5
tax. The Schwab Municipal Money Fund would not be an appropriate investment for
retirement plans such as IRAs and Keogh plans. (See "Investment Objectives and
Policies" and "Municipal Securities and Municipal Investment Techniques.")
The SCHWAB VALUE ADVANTAGE MONEY FUND - SWEEP SHARES offers certain investors
with more substantial balances in their money funds (minimum investment $25,000)
all the advantages of the automatic sweep feature plus a higher potential yield
due to the lower overall expense ratio of this Fund. This minimum requirement
may be changed at any time and is not applicable to certain types of investors.
The Sweep Shares of the Value Advantage Money Fund are available to certain
investors qualifying for preferred services under the Schwab Priority or Active
Trader programs, and certain customers of Schwab Institutional's Services for
Investment Managers or Schwab's Retirement Plan Services. Please contact your
preferred customer representative or your local Schwab office for more
information. (See "Investment Objectives and Policies," "Investing in Shares of
the Funds" and "Other Important Information.")
LIQUIDITY. You can conveniently sell your shares of each Fund at any time. (See
"Investing in Shares of the Funds - How to Sell or Exchange Shares.")
LOW COST INVESTING. Each Fund imposes no sales or transaction fees on purchases
or redemptions of shares. (See "Summary of Expenses.") In addition, the total
operating expenses of the Schwab Money Market Fund, Schwab Government Money
Fund, Schwab U.S. Treasury Money Fund, Sweep Shares of the Schwab Municipal
Money Fund and Sweep Shares of the Schwab Value Advantage Money Fund will not
exceed 0.75%, 0.75%, 0.65%, 0.66% and 0.50% of average net assets, respectively,
as guaranteed by Charles Schwab Investment Management, Inc. (the "Investment
Manager") and Schwab through April 30, 1998. The effect of these guarantees is
to maintain or lower the expenses and thus maintain or increase total return to
shareholders. (See "Summary of Expenses" and "Organization and Management of the
Funds.")
MINIMUM INVESTMENT. All of the Funds or classes of Shares, except the Schwab
Value Advantage Money Fund - Sweep Shares, require a minimum initial investment
of $1,000. The Schwab Value Advantage Money Fund - Sweep Shares generally
require a minimum initial investment of $25,000 and are available only to
certain Schwab customers. Generally, a minimum account balance of $20,000 must
be maintained for the Sweep Shares of the Value Advantage Fund. (See "Minimum
Investment Requirements" in the "Investing in Shares of the Funds" section of
the Prospectus and "Other Important Information.")
PROFESSIONAL MANAGEMENT. The Investment Manager currently provides investment
management services to the SchwabFunds(R), a family of 29 mutual funds with over
$47 billion in assets as of April 1, 1997. (See "Organization and Management of
the Funds.")
SHAREHOLDER SERVICE. Schwab's professional representatives are available
toll-free 24 hours a day at 800-2 NO-LOAD to service your account. As a discount
broker, Schwab gives you investment choices and lets you make your own
decisions. Schwab has many services that help you make the most informed
investment decisions. (See "Investing in Shares of the Funds - How to Buy
Shares" and "Invest-
3
<PAGE> 6
ing in Shares of the Funds - How to Sell or Exchange Shares.")
SPECIAL RISK CONSIDERATIONS. An investment in the Schwab Municipal Money Fund is
subject to certain risks arising out of the Fund's investments in municipal
securities, municipal leases, participation interests and certain other
securities. (See "Municipal Securities and Investment Techniques.")
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity in one report.
NATIONWIDE NETWORK OF SCHWAB OFFICES. Schwab has over 241 offices throughout the
U.S. where customers can place purchase and sale orders.
SUMMARY OF EXPENSES
SHAREHOLDER TRANSACTION EXPENSES: None
<TABLE>
<CAPTION>
SCHWAB
SCHWAB VALUE
SCHWAB SCHWAB MUNICIPAL ADVANTAGE
SCHWAB GOVERN- U.S. MONEY MONEY
MONEY MENT TREASURY FUND - FUND -
MARKET MONEY MONEY SWEEP SWEEP
FUND FUND FUND SHARES 1 SHARES 1
------ ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
ANNUAL OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Management fees
(after fee
reductions) 2...... 0.29% 0.29% 0.19% 0.20% 0.35%
12b-1 Fees.......... None None None None None
Other Expenses
(after fee reduction
and/or expense
reimbursement) 3.... 0.46% 0.46% 0.46% 0.46% 0.15%
----- ----- ----- ----- -----
TOTAL OPERATING
EXPENSES 3.......... 0.75% 0.75% 0.65% 0.66% 0.50%
</TABLE>
1 For information regarding the key differences between the multiple classes
of shares of the Schwab Municipal Money Fund and the Schwab Value Advantage
Money Fund, see "Other Important Information."
2 These amounts reflect voluntary waivers of a portion of the management fee
by the Investment Manager. If there were no such waivers, the management fee
for the Schwab Money Market Fund, Schwab Government Money Fund, Schwab U.S.
Treasury Money Fund and Schwab Municipal Money Fund - Sweep Shares would
have been 0.41%, 0.44%, 0.45% and 0.42% of average net assets, respectively.
If there were no such waiver for the Schwab Value Advantage Money
Fund - Sweep Shares, the management fee would be 0.42% of average net
assets. (See "Organization and Management of the Funds - Operating Fees and
Expenses.")
3 These amounts reflect the guarantee by the Investment Manager and Schwab
that, through at least April 30, 1998, total operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses) of the
Schwab Money Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury
Money Fund, Schwab Municipal Money Fund - Sweep Shares and Schwab Value
Advantage Money Fund - Sweep Shares will not exceed 0.75%, 0.75%, 0.65%,
0.66% and 0.50% of average net assets, respectively. Without the guarantee,
other expenses and total operating expenses of the Schwab Money Market Fund,
Schwab Government Money Fund, Schwab U.S. Treasury Money Fund and Schwab
Municipal Money Fund - Sweep Shares would have been 0.48% and 0.89%, 0.48%
and 0.92%, 0.49% and 0.94%, and 0.48% and 0.90% of average net assets,
respectively. Without the guarantee, the estimated other expenses and total
operating expenses of Schwab Value
4
<PAGE> 7
Advantage Money Fund - Sweep Shares
would be 0.50% and 0.92% of average
net assets. These amounts do not
include any fees that you may be
charged if you do not maintain the
minimum balance required by your
Schwab account or the $45 annual
account fee for Schwab Keogh Plans.
(See "Tax-Advantaged Retirement
Plans" and "Investing in Shares of
the Funds")
EXAMPLE. Based on the expenses in
the table above, you would pay the
following expenses on a $1,000
investment, assuming (1) a 5% annual
return and (2) redemption at the end
of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Schwab Money Market
Fund.................... $8 $24 $42 $ 93
Schwab Government Money
Fund.................... $8 $24 $42 $ 93
Schwab U.S. Treasury
Money Fund.............. $7 $21 $36 $ 81
Schwab Municipal Money
Fund - Sweep Shares..... $7 $21 $37 $ 82
Schwab Value Advantage
Money Fund - Sweep
Shares.................. $5 $16
</TABLE>
THE PURPOSE OF THE PRECEDING TABLE
IS TO ASSIST INVESTORS IN
UNDERSTANDING THE VARIOUS COSTS AND
EXPENSES THAT AN INVESTOR IN ANY OF
THE FUNDS WILL BEAR DIRECTLY OR
INDIRECTLY. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
THE HYPOTHETICAL RATE OF RETURN IS
NOT INTENDED TO BE REPRESENTATIVE OF
PAST OR FUTURE PERFORMANCE.
5
<PAGE> 8
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified report is included in the Funds' Annual Reports,
which contain additional financial data and related notes. The financial
highlights, financial statements and reports of the auditor are incorporated by
reference into the SAI. A free copy of the SAI and the Funds' Annual Reports may
be obtained by calling the telephone number or writing to the address on the
first page of this Prospectus.
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------ ----------------------------
NET DISTRIBUTIONS
REALIZED & TOTAL FROM NET
FISCAL NET ASSET NET UNREALIZED FROM DIVIDENDS REALIZED ASSET
PERIOD VALUE INVEST- GAINS INVEST- FROM NET GAIN ON VALUE
ENDED BEGINNING MENT (LOSSES) ON MENT INVESTMENT INVEST- TOTAL END OF
DEC. 31 OF YEAR INCOME INVESTMENT OPERATION INCOME MENT DISTRIBUTIONS YEAR
- ------- --------- ------ ----------- --------- ---------- ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SCHWAB
MONEY
MARKET FUND
1996 $1.00 $0.05 -- $0.05 $(0.05) -- $ (0.05) $ 1.00
1995 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00
1994 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
1993 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1992 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1991 1.00 0.06 -- 0.06 (0.06) -- (0.06) 1.00
1990 3 1.00 0.07 -- 0.07 (0.07) -- (0.07) 1.00
SCHWAB
GOVERNMENT
MONEY FUND
1996 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00
1995 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00
1994 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
1993 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1992 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1991 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00
1990 3 1.00 0.07 -- 0.07 (0.07) -- (0.07) 1.00
SCHWAB
U.S.
TREASURY
MONEY FUND
1996 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00
1995 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00
1994 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
1993 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1992 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1991 4 1.00 0.01 -- 0.01 (0.01) -- (0.01) 1.00
SCHWAB
MUNICIPAL
MONEY
FUND-SWEEP
SHARES 2
1996 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1995 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1994 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1993 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1992 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1991 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
1990 3 1.00 0.05 -- 0.05 (0.05) -- (0.05) 1.00
<CAPTION>
RATIOS/SUPPLEMENTAL DATA RATIO OF
-------------------------------------- NET
RATIO OF INVESTMENT
EXPENSES INCOME
FISCAL TO AVERAGE TO AVERAGE
PERIOD TOTAL NET ASSETS NET NET
ENDED RETURN 5 END OF YEAR ASSETS 1 ASSETS 1
DEC. 31 (%) (000'S) (%) (%)
- ------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
SCHWAB
MONEY
MARKET
FUND
1996 4.91 $18,083,671 0.75 4.80
1995 5.41 14,010,387 0.75 5.27
1994 3.68 11,227,305 0.74 3.68
1993 2.67 8,164,599 0.73 2.64
1992 3.48 6,134,167 0.70 3.40
1991 5.70 4,866,584 0.78 5.52
1990 3 7.23 4,058,408 0.82 6 7.51 6
SCHWAB
GOVERNMENT
MONEY FUND
1996 4.83 1,986,862 0.75 4.73
1995 5.34 1,884,569 0.75 5.21
1994 3.62 1,897,328 0.74 3.56
1993 2.66 1,744,603 0.73 2.63
1992 3.42 1,592,793 0.72 3.36
1991 5.53 1,458,705 0.70 5.38
1990 3 7.23 1,424,377 0.70 6 7.51 6
SCHWAB
U.S.
TREASURY
MONEY FUND
1996 4.77 1,421,672 0.65 4.67
1995 5.25 1,193,689 0.65 5.11
1994 3.52 803,871 0.65 3.60
1993 2.54 378,143 0.65 2.50
1992 3.26 178,895 0.59 2.91
1991 4 0.68 16,906 0.24 6 4.11 6
SCHWAB
MUNICIPAL
MONEY
FUND-SWEEP
SHARES 2
1996 2.92 3,868,919 0.66 2.89
1995 3.30 3,403,837 0.66 3.25
1994 2.32 3,015,951 0.65 2.31
1993 1.93 2,423,317 0.63 1.92
1992 2.49 1,744,903 0.63 2.45
1991 4.01 1,359,121 0.63 3.91
1990 3 5.08 1,185,974 0.63 6 5.33 6
</TABLE>
(1) The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and
6
<PAGE> 9
Schwab. Had these expenses not been reduced and absorbed, the ratios of
expense and net investment income to average net assets would have been:
<TABLE>
<CAPTION>
SCHWAB SCHWAB SCHWAB SCHWAB
MONEY GOVERNMENT U.S. TREASURY MUNICIPAL MONEY
MARKET FUND MONEY FUND FUND FUND - SWEEP SHARES 2
(WITHOUT REDUCTION) (WITHOUT REDUCTION) (WITHOUT REDUCTION) (WITHOUT REDUCTION)
----------------------- ----------------------- ----------------------- -----------------------
FISCAL PERIOD RATIO OF RATIO OF RATIO OF RATIO OF RATIO OF RATIO OF RATIO OF RATIO OF
ENDED DEC. 31 EXPENSES INCOME EXPENSES INCOME EXPENSES INCOME EXPENSES INCOME
- ------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 0.89% 4.66% 0.92% 4.56% 0.94% 4.38% 0.90% 2.65%
1995 0.90% 5.12% 0.92% 5.04% 0.96% 4.80% 0.91% 3.00%
1994 0.90% 3.52% 0.92% 3.38% 1.00% 3.25% 0.91% 2.05%
1993 0.91% 2.46% 0.93% 2.43% 1.05% 2.10% 0.93% 1.62%
1992 0.92% 3.18% 0.94% 3.14% 1.15% 2.35% 0.94% 2.14%
1991 0.94% 5.36% 0.95% 5.13% 4.11% 6 0.24% 6 0.95% 3.59%
1990 0.95% 6 7.38% 6 0.96% 6 7.25% 6 n/a n/a 0.95% 6 5.01% 6
</TABLE>
2 Prior to June 6, 1995, the Schwab Municipal Money Fund did not offer
multiple classes of shares of beneficial interest. The information contained
in this table regarding the Sweep Shares of the Schwab Municipal Money Fund
relates to shares which were redesignated as Sweep Shares as of June 6,
1995. Prior to January 2, 1997, the Schwab Municipal Money Fund was known as
the Schwab Tax-Exempt Money Fund.
3 For the period January 26, 1990 (commencement of operations) to December 31,
1990.
4 For the period November 6, 1991 (commencement of operations) to December 31,
1991.
5 Not annualized.
6 Annualized.
INVESTMENT OBJECTIVES AND POLICIES
THE SCHWAB MONEY MARKET FUND AND SCHWAB
VALUE ADVANTAGE MONEY FUND -- SWEEP
SHARES
The Schwab Money Market Fund and the Schwab Value Advantage Money Fund seek
maximum current income consistent with stability of capital. The Funds pursue
their objective by investing exclusively in the following types of U.S.
dollar-denominated money market instruments which the Investment Manager has
determined to present minimal credit risk:
- - Certificates of deposit, time deposits, notes and bankers' acceptances of
domestic banks (including their foreign branches), Canadian chartered banks,
U.S. branches of foreign banks and foreign branches of foreign banks having
capital, surplus and undivided profits in excess of $100 million.
- - Commercial paper, including asset-backed commercial paper, rated in one of the
two highest rating categories by Moody's Investors Service ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch
Investors Service, Inc. ("Fitch"), or any other nationally recognized
statistical rating organization ("NRSRO"), or commercial paper or notes of
issuers with an unsecured debt issue outstanding currently rated in one of the
7
<PAGE> 10
two highest rating categories by any NRSRO where the obligation is on the same
or a higher level of priority and collateralized to the same extent as the
rated issue. Each Fund may also invest in commercial paper or other corporate
obligations such as publicly traded bonds, debentures and notes rated in one
of the two highest rating categories by any NRSRO and other similar securities
which, if unrated by any NRSRO, are determined by the Investment Manager,
using guidelines approved by the Board of Trustees, to be at least equal in
quality to one or more of the above referenced securities.
- - Obligations of, or guaranteed by, the U.S. or Canadian governments, their
agencies or instrumentalities.
- - Repurchase agreements involving obligations that are suitable for investment
under the categories listed above.
MATURITY. The Schwab Money Market Fund will only purchase securities which are
deemed to mature in 12 months or less in accordance with federal securities
regulations. The Schwab Value Advantage Money Fund will only purchase 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.
EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES. The Schwab Money
Market Fund and the Schwab Value Advantage Money Fund may purchase Eurodollar
certificates of deposit and other similar obligations. However, when purchasing
such certificates, consideration will be given to the fact that these issuers
may not be subject to the same regulatory requirements as U.S. issuers,
including U.S. banks.
Investments in securities of foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political
and legal developments. Furthermore, issuers of foreign securities are subject
to different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The securities of some foreign companies and
foreign securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. There are also special tax considerations which apply to
securities of foreign issuers and securities principally traded overseas.
CONCENTRATION. Pursuant to fundamental policies set forth in the SAI, each Fund
will not 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 will not apply to certificates of deposit or bankers'
acceptances issued by domestic branches of U.S. banks and U.S. branches of
certain foreign banks or obligations of or guaranteed by the U.S. Government or
its agencies or instrumentalities.
PRIVATE PLACEMENTS. The Schwab Money Market Fund and the Schwab Value Advantage
Money Fund may invest in commercial paper and other securities that are exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933
("Section 4(2) paper"). Federal securities laws restrict the disposition of
Section 4(2) paper. Neither Fund will invest more than 10% of its net assets in
Section 4(2) paper and other illiquid securities unless the Investment Manager
determines, by continuous reference to the
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appropriate trading markets and pursuant to guidelines approved by the Board of
Trustees, that any Section 4(2) paper held by the Fund in excess of this level
is liquid.
A Fund's ownership of Section 4(2) paper could have the effect of reducing that
Fund's liquidity to the extent that qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
ASSET-BACKED COMMERCIAL PAPER. The Funds may invest in asset-backed commercial
paper. Repayment of this type of commercial paper is intended to be obtained
from an identified pool of assets, including automobile receivables, credit-card
receivables and other types of assets. Asset-backed commercial paper is issued
by a special purpose vehicle (usually a corporation) that has been established
for the purpose of issuing the commercial paper and purchasing the underlying
pool of assets. The issuer of commercial paper bears the direct risk of
prepayment on the receivables constituting the underlying pool of assets. Credit
support for asset-backed securities may be based on the underlying assets or
provided by a third party. Credit enhancement techniques include letters of
credit, insurance bonds, limited guarantees and over-collateralization.
For more information regarding a Fund's investments, see "Share Price
Calculation."
THE SCHWAB GOVERNMENT MONEY FUND
The Schwab Government Money Fund seeks maximum current income consistent with
stability of capital. The Fund pursues its objective by investing exclusively
in: (1) U.S. Treasury bills, notes, bonds and other obligations of the U.S.
Treasury that are backed by the "full faith and credit" of the U.S. Government;
and (2) other obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements covering such
obligations. All securities purchased are deemed to mature within 12 months or
less under federal securities regulations. Some securities issued by U.S.
Government agencies or instrumentalities are supported only by the credit of the
agency or instrumentality, while others have an additional line of credit with
the U.S. Treasury. Short-term U.S. Government obligations generally are
considered to be among the safest short-term investments. The Government
guarantee of certain securities owned by the Schwab Government Money Fund,
however, does not guarantee the net asset value of the Fund's shares, which the
Fund seeks to maintain at $1.00 per share. (See "Share Price Calculation.") With
respect to securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the U.S. Treasury, 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.
THE SCHWAB U.S. TREASURY MONEY FUND
The investment objective of the Schwab U.S. Treasury Money Fund is high current
income consistent with liquidity and stability of capital. The Fund pursues its
objective by investing solely in U.S. Treasury notes, bills and other direct
obligations of the U.S. Treasury that are backed by the "full faith and credit"
of the U.S. Government. The Fund will only purchase securities that are deemed
to mature in 397 days or less in accordance with federal securities regulations,
or which have a variable rate of interest readjusted no less frequently than
every
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397 days. Fund shares themselves are not subject to any U.S. Government
guarantee. The Fund does not enter into repurchase agreements, nor does it
purchase obligations of agencies or instrumentalities of the U.S. Government.
The Fund may hold its investments to maturity and receive the entire face amount
of the security, or the Fund may sell its investments at a gain or loss before
maturity to meet redemptions or for other investment purposes.
THE SCHWAB MUNICIPAL MONEY FUND
The investment objective of the Schwab Municipal Money Fund is maximum current
income that is exempt from federal regular income taxes consistent with
stability of capital. The Fund pursues its objective primarily by investing in
short-term, high-quality municipal obligations, the income from which is exempt
from federal regular income taxes. Federal regular income tax does not include
the federal alternative minimum tax.
MUNICIPAL SECURITIES. Under normal market conditions, the Fund attempts to
invest 100% of its total assets in debt obligations issued by or on behalf of
states, territories and possessions of the United States (including the District
of Columbia) and their political subdivisions, agencies and instrumentalities
that generate interest exempt from federal regular income tax ("Municipal
Securities").
Dividends representing net interest income received by the Schwab Municipal
Money Fund on Municipal Securities generally will be exempt from federal regular
income tax when distributed to the Fund's shareholders. Such dividend income may
be subject to the alternative minimum tax, state and local taxes. (See
"Distributions and Taxes -- The Schwab Municipal Money Fund.")
The Schwab Municipal Money Fund will invest only in Municipal Securities which
at the time of purchase: (a) are rated in one of the two highest rating
categories for municipal commercial paper or short-term municipal securities
assigned by any NRSRO; (b) are guaranteed or insured by the U.S. Government as
to the payment of principal and interest; (c) are fully collateralized by an
escrow of U.S. Government securities acceptable to the Fund's Investment
Manager; or (d) are unrated by any NRSRO, if they are determined by the
Investment Manager, using guidelines approved by the Board of Trustees, to be at
least equal in quality to one or more of the above referenced securities.
The Fund may continue to hold a Municipal Security that, after its purchase by
the 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, the Fund will keep such a
security in its portfolio only if the Board of Trustees or its properly
authorized delegate determines that keeping the security is in the best
interests of the Fund.
Pursuant to a fundamental policy, the Fund will not 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.
TEMPORARY INVESTMENTS. The Fund may from time to time, as a defensive measure,
invest any or all of its assets in taxable "temporary investments" which
include: obligations of the U.S. Government, its agencies or instrumentalities;
debt securities (other than Municipal Securities) rated in one of the two
highest
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rating categories by any NRSRO; commercial paper (other than Municipal
Securities) rated in one of 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 temporary investments could
cause the Fund to generate dividends taxable to shareholders as ordinary income,
it is the Fund's primary intention to produce dividends which are not subject to
federal regular income taxes.
The investment objective of each Fund is fundamental. All investment policies
above are also fundamental for the Schwab Money Market Fund, Schwab Government
Money Fund and Schwab U.S. Treasury Money Fund. They, along with certain
investment restrictions adopted by the Funds (see "Investment Restrictions" in
the SAI), cannot be changed without approval by holders of a majority of a
Fund's outstanding voting shares, as defined in the Investment Company Act of
1940, as amended (the "1940 Act").
MUNICIPAL SECURITIES AND
INVESTMENT TECHNIQUES
Municipal Securities in which the Schwab Municipal Money Fund 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: (1) a particular facility or class of facilities; (2) a specific
revenue source such as a special excise tax; or (3) another specific revenue
source, such as the user of the facility being financed.
Revenue securities may include private activity bonds and industrial development
bonds. Such bonds may be issued by or on behalf of public authorities to finance
various privately operated facilities and 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, the Fund may invest more than
25% of its total assets in industrial development and private activity bonds.
Among other types of instruments, the Fund may purchase tax-exempt commercial
paper and short-term municipal notes such as tax anticipation notes, bond
anticipation notes, revenue anticipation notes, construction loan notes and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of bond
placements, or other revenues. The Fund has the ability to invest all of its
assets in Municipal Securities that generate interest which is a tax preference
item for purposes of the federal alternative minimum tax. Thus, if you are
subject to the federal alternative minimum tax, all or a portion of your income
from the Fund may be subject to the federal alternative minimum tax.
MORAL OBLIGATION SECURITIES. The Fund 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
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moral commitment but not a legal obligation to restore the reserve fund.
MUNICIPAL LEASES. The Fund may invest up to 25% of its 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. Investments in municipal leases may
be considered to be illiquid. Municipal leases are subject to "non-appropriation
risk," which is the risk that the municipality may terminate the lease in the
event that the municipality's appropriating body does not allocate the funds
necessary to make lease payments. In such circumstances, the lessor is typically
entitled to repossess the property. The private sector value of the property is,
however, generally less than the value of the property to the municipality. The
Investment Manager, pursuant to guidelines established by the Board of Trustees,
is responsible for determining the credit quality of unrated municipal leases,
on an ongoing basis, including an assessment of the likelihood that the lease
will not be terminated.
SYNTHETIC VARIABLE OR FLOATING-RATE MUNICIPAL SECURITIES. The Fund also may
invest up to 25% of its total 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 a remarketing agent 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 also 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
generally are structured as private placements and, accordingly, may be deemed
to be restricted securities for purposes of the Fund's investment limitations.
VARIABLE RATE DEMAND INSTRUMENTS. The Fund may invest in variable rate demand
instruments issued by industrial development authorities and other government
entities. In the event a variable rate demand instrument to be purchased by the
Fund is not rated by credit rating agencies, the 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 or 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, the Fund may, at any time or during
specified periods not exceeding one year (depending upon the
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instrument involved), demand payment in full of the principal of the instrument
and may resell the instrument to a third party.
The Fund 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 the 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.
PARTICIPATION INTERESTS. The Fund 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 instruments.
The Fund 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 the Fund's previously described quality
standards for Municipal Securities; and (c) the instrument is issued with an
opinion of counsel or is the subject of a ruling of the Internal Revenue
Service, stating that the interest earned on the participation interest is
exempt from federal income tax.
STAND-BY COMMITMENTS. The Schwab Municipal Money Fund also may acquire "stand-by
commitments" for Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase at the Fund's option specified Municipal
Securities at a price equal to their amortized cost value plus accrued interest.
The Fund will acquire stand-by commitments solely to improve portfolio
liquidity. The Fund does not intend to exercise its stand-by rights solely for
trading purposes.
GOVERNMENT SECURITIES. The Fund 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, while others 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.
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. Bond counsel will
render such opinions to the issuers of Municipal Securities at the time the
securities are issued. The Fund and the Investment Manager will not review the
proceedings on the issuance of Municipal Securities or the bases for such
opinions.
MATURITY. The Fund will purchase only securities that are deemed to mature in
397 days or less in accordance with federal securities regulations or securities
that have a variable rate of interest that is readjusted no less frequently than
every 397 days.
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SECURITIES SUBJECT TO A PUT FEATURE. A "put" feature permits the Fund to sell a
security at a fixed price prior to maturity to the put issuer. Because of this
feature, Municipal Securities subject to a put generally may be sold to third
parties at market rates. Generally, a premium is paid for a security subject to
a put feature. Investments in Municipal Securities subject to puts are limited
by federal securities laws and expose the Fund to a credit risk associated with
the put provider.
SPECIAL RISK CONSIDERATIONS. Participation interests in Municipal Securities
eligible for purchase by the Schwab Municipal Money Fund and other derivative
securities eligible for purchase by the Funds involve special risks, including a
risk that the Internal Revenue Service may characterize some or all of the
interest paid on such securities to the Fund as taxable. There is also an
increased risk, most typically associated with "municipal lease" obligations,
that a municipality will not appropriate the funds necessary to make the
scheduled payments on, or may seek to cancel or otherwise avoid its obligations
under, the lease that supports the security owned by the Fund.
The Schwab Municipal Money Fund may invest more than 25% of its total assets in
Municipal Securities that produce interest that is paid solely from revenues on
similar projects. However, the Fund does not presently intend to invest in such
securities on a regular basis, but will do so if such investment is deemed
necessary or appropriate by the Investment Manager. To the extent that the
Fund's assets are invested in Municipal Securities that produce interest that is
payable solely from revenues on similar projects, the Fund will be subject to
the risks presented by such projects to a greater extent than it would be if the
Fund's assets were not so invested.
OTHER INVESTMENT TECHNIQUES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase securities
on a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. A Fund generally will not pay for such securities or start earning
interest on them until they are received. Securities purchased on a when-issued
or delayed delivery basis are recorded as an asset. The value of such securities
may change as the general level of interest rate changes.
Each Fund will not invest more than 25% of its assets in when-issued or delayed
delivery securities. The Funds will not purchase such securities for speculative
purposes and will expect to actually acquire the securities when purchased.
However, each Fund reserves the right to sell any such securities before their
settlement dates if the Investment Manager deems such a sale advisable.
REPURCHASE TRANSACTIONS. Each Fund, except the Schwab U.S. Treasury Money Fund,
may engage in repurchase agreements, which are instruments under which 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 (which price is
higher than the purchase price), thereby determining the yield during the Fund's
holding period. Maturity of the securities subject to repurchase may exceed one
year.
If the seller of a repurchase agreement becomes bankrupt or otherwise defaults,
a Fund might incur expenses in enforcing its rights and could experience losses,
including a decline in the value of the underlying securities and loss of
income. The Fund will enter
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into repurchase agreements only with banks and other recognized financial
institutions that the Investment Manager deems creditworthy.
ILLIQUID SECURITIES. A Fund will not purchase illiquid securities, including
time deposits and repurchase agreements maturing in more than 7-days, if, as a
result thereof, more than 10% of the Fund's net assets valued at the time of the
transaction are invested in such securities. The investment policy, as set forth
in the SAI, on the purchase of illiquid securities is fundamental for the Schwab
Money Market Fund and the Schwab Government Money Fund.
VARIABLE RATE SECURITIES. Each Fund may invest in instruments having rates of
interest 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 ordinarily is 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.
As interest rates decrease or increase, Variable Rate Securities experience less
appreciation or depreciation than fixed rate obligations.
VARIABLE RATE DEMAND INSTRUMENTS. Some Variable Rate Securities ("Variable Rate
Demand Securities") have a demand feature entitling the purchaser to resell the
securities at an amount approximately equal to amortized cost, or the principal
amount thereof plus accrued interest. As is the case for other Variable Rate
Securities, the interest rate on Variable Rate Demand Securities varies
according to some objective standard intended to minimize fluctuation in the
values of the instruments. Each Fund determines the maturity of Variable Rate
Securities in accordance with SEC rules.
BORROWING POLICY. Pursuant to fundamental policies set forth in the SAI, none of
the Funds may borrow money except as a temporary measure for extraordinary or
emergency purposes and then only in an amount up to one-third of the value of
its total assets in order to meet redemption requests. Any borrowings under this
provision will not be collateralized, except that each of Schwab Municipal Money
Fund and Schwab Value Advantage Money Fund may pledge up to 10% of its net
assets and Schwab U.S. Treasury Money Fund may pledge up to 33% of its net
assets, to secure borrowings. No Fund will borrow for leverage purposes.
ADDITIONAL INFORMATION. Please see the SAI for further information regarding
investment restrictions for the Funds.
ORGANIZATION AND
MANAGEMENT OF THE FUNDS
GENERAL OVERSIGHT. The Board of Trustees and officers meet regularly to review
investments, performance, expenses and other business affairs.
THE INVESTMENT MANAGER. Professional investment management for each Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, California 94104. The Investment Manager
provides a continuous investment program, including general investment and
economic advice regarding each Fund's investment strategies; manages each Fund's
investment portfolio and performs expense management, accounting and record
keeping; and provides other services necessary to the operation of each Fund.
The Investment
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Manager, formed in 1989, is a wholly-owned subsidiary of The Charles Schwab
Corporation and is the investment adviser and administrator of the mutual funds
in the SchwabFunds(R), a family of 29 mutual funds. As of April 1, 1997, the
SchwabFunds(R) had aggregate net assets in excess of $47 billion.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Charles Schwab & Co., Inc. ("Schwab" or
the "Transfer Agent"), 101 Montgomery Street, San Francisco, California 94104,
serves as shareholder services agent and transfer agent for the Funds. Schwab
provides information and services to shareholders, which include reporting share
ownership, sales and dividend activity (and associated tax consequences),
responding to daily inquiries, effecting the transfer of Fund shares and
facilitating effective cash management of shareholders' Schwab account balances.
It furnishes such office space and equipment, telephone facilities, personnel
and informational literature distribution as is necessary or appropriate in
providing shareholder and transfer agency information and services.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 4.1 million active customer accounts and has over 241 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, Chief Executive Officer and a Director of
The Charles Schwab Corporation. As a result of his beneficial ownership
interests in and other relationships with The Charles Schwab Corporation and its
affiliates, Mr. Schwab may be deemed to be a controlling person of Schwab and
the Investment Manager.
OPERATING FEES AND EXPENSES
Pursuant to its Investment Advisory and Administration Agreements with the
Funds, the Investment Manager is entitled to receive from the Schwab Money
Market Fund and Schwab Value Advantage Money Fund a graduated annual fee,
payable monthly, of 0.46% of each Fund's average daily net assets not in excess
of $1 billion, 0.45% of such assets over $1 billion but not in excess of $3
billion, 0.40% of such assets over $3 billion but not in excess of $10 billion,
0.37% of such assets over $10 billion but not in excess of $20 billion and 0.34%
of such assets over $20 billion; and the Investment Manager is entitled to
receive from the Schwab Government Money Fund, the Schwab Municipal Money Fund
and the Schwab U.S. Treasury Money Fund a graduated annual fee, payable monthly,
of 0.46% of each Fund's average net assets not in excess of $1 billion, 0.41% of
such assets over $1 billion but not in excess of $2 billion and 0.40% of such
assets over $2 billion. For the fiscal year ended December 31, 1996, the Schwab
Money Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury Money Fund
and Schwab Municipal Money Fund paid management fees of 0.29%, 0.29%, 0.19% and
0.20% of average daily net assets, respectively.
For transfer agency services provided to the Schwab Money Market Fund, Schwab
Government Money Fund, Schwab U.S. Treasury Money Fund, the Sweep Shares of the
Schwab Municipal Money Fund and the Sweep Shares of the Schwab Value Advantage
Money Fund, the Transfer Agent is entitled to receive an annual fee, payable
monthly, of 0.25% of each Fund's or Class's average net assets. Schwab is also
entitled to receive for shareholder services an annual fee provided to the
Schwab Money
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Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury Money Fund, the
Sweep Shares of the Schwab Municipal Money Fund and the Sweep Shares of the
Schwab Value Advantage Money Fund, payable monthly, of 0.20% of each Fund's or
Class's average net assets. For information regarding the transfer agency and
shareholder servicing fees for the other classes of shares of the Schwab
Municipal Money Fund and the Schwab Value Advantage Money Fund, see "Other
Important Information" in this Prospectus. Schwab is also the Funds'
distributor, but receives no compensation for its services as such.
OTHER EXPENSES. The Charles Schwab Family of Funds (the "Trust") pays the
expenses of its operations, including: the fees and expenses for independent
accountants, legal counsel and the custodian of its assets; the cost of
maintaining books and records of account; registration fees; the fees and
expenses of qualifying its shares for distribution under federal and state
securities laws; and industry association membership dues. These expenses
generally are allocated among each Fund, or class of shares of a Fund, in
proportion to their relative net assets at the time the expense is incurred.
However, expenses directly attributable to a particular Fund or class of a Fund
will be charged to that Fund or class, respectively. The differing expenses
applicable to the Sweep Shares and the Value Advantage Shares of the Schwab
Municipal Money Fund and the Investor Shares and the Sweep Shares of the Schwab
Value Advantage Money Fund will cause the performance of these classes of shares
to differ.
OTHER INFORMATION
The Trust is an open-end investment management company 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 9 Funds or "Series" which may
be organized into one or more classes of shares of beneficial interest. The
Board of Trustees may authorize the issuance of shares of additional Series or
classes if it deems it desirable. Shares within each Series or class have equal,
noncumulative voting rights and equal rights as to distributions, assets and
liquidation of such Series, except to the extent such voting rights or rights as
to distributions, assets and liquidation vary among classes of a Series.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. The Trust is not required to hold annual
shareholders' meetings and does not intend to do so. It will, however, hold
special meetings as required or deemed desirable by the Board of Trustees for
such purposes as changing fundamental policies, electing or removing Trustees or
approving or amending an investment advisory agreement. In addition, a Trustee
may be removed by shareholders at a special meeting called by written request of
shareholders owning in the aggregate at least 10% of the outstanding shares of
the Trust.
Shareholders will vote by Series and not in the aggregate (for example, when
voting to approve the investment advisory agreement), except when voting in the
aggregate is permitted under the 1940 Act, such as for the election of Trustees.
In addition, shareholders of the Sweep Shares of the Schwab Municipal Money Fund
and the Sweep Shares of the Schwab Value Advantage Money Fund will vote
exclusively as a class on any matter relating solely to the Sweep Shares and on
any matter in which the Sweep Shares' sharehold-
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ers' interests differ from the interests of shareholders of the other Shares of
the Funds.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS. On each day that NAV is determined (a
"Business Day"), net investment income of each Fund or class is declared at the
close of trading on the New York Stock Exchange (the "Exchange")(generally 4:00
p.m. Eastern time) as a dividend to shareholders of record at that time.
Dividends are normally paid (and, where applicable, reinvested) on the 15th of
each month, if a Business Day, otherwise on the next Business Day, with the
exception of the dividend paid in December, which is scheduled to be paid on the
last Business Day in December.
FEDERAL INCOME TAX INFORMATION. Each Fund has elected to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), qualified as such and intends to continue to so qualify. In order
to so qualify, each Fund will distribute on a current basis substantially all of
its investment company taxable income, its net exempt-interest income (if any)
and its net capital gains (if any) and will meet certain other requirements.
Such qualification relieves a Fund of liability for federal income taxes to the
extent the Fund's earnings are distributed.
Generally, all distributions are taxable to shareholders as ordinary income,
except for distributions for the Schwab Municipal Money Fund which are exempt
from federal income tax.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' Schwab account statements. The Funds will notify
shareholders at least annually as to the federal income tax consequences of
distributions made each year.
THE SCHWAB U.S. TREASURY MONEY FUND. Because this Fund will invest exclusively
in U.S. Treasury obligations and other securities backed by the full faith and
credit of the U.S. Government, its dividends are free from state and local
income taxes in the vast majority of states. Potential investors in this Fund
should consult their tax advisers with specific reference to their own tax
situations.
THE SCHWAB MUNICIPAL MONEY FUND. Dividends derived from exempt-interest income
(known as "exempt-interest dividends") will be treated by the Fund's
shareholders as items of interest excludable from their federal gross income. To
the extent dividends paid to shareholders are derived from taxable income or
from capital gains, such dividends will be subject to federal income tax,
whether received in cash or reinvested.
The Fund, may at times, purchase Municipal Securities at a discount from the
price at which they were initially issued. For federal income tax purposes, some
or all of this market discount will be included in the Fund's ordinary income
and will be taxable to shareholders as such when it is distributed to them.
If the Fund holds certain private activity bonds ("industrial development bonds"
under prior law), dividends derived from interest on such obligations will be
classified as an item of tax preference which could subject certain shareholders
to alternative minimum tax liability. Corporate shareholders must also take all
exempt-interest dividends into account in determining "adjusted current
earnings" for
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<PAGE> 21
purposes of calculating their alternative minimum tax.
Private activity bonds and industrial development bonds generally are bonds
issued by or on behalf of public authorities to obtain funds to provide certain
privately owned or operated facilities. Private activity bonds and industrial
development bonds also generally are limited obligation (or revenue) securities,
which means that they are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from some other
specific revenue source. (See "Municipal Securities" in the SAI.)
Distributions by the Schwab Municipal Money Fund may be taxable to investors
under state or local law as dividend income, even though all or a portion of
such distributions may be derived from interest on tax-exempt obligations which,
if realized directly, would be exempt from such income taxes.
Shareholders receiving Social Security benefits or Railroad Retirement Act
benefits should note that exempt-interest dividends will be taken into account
in determining the taxability of such benefits.
The foregoing is only a brief summary of some of the federal and state income
tax considerations affecting the Funds and their shareholders. Accordingly,
potential investors should consult their tax advisers with specific reference to
their own tax situations.
SHARE PRICE CALCULATION
The price of a share on any given day is its net asset value per share or "NAV."
For the Schwab Money Market Fund, Schwab Government Money Fund and Schwab U.S.
Treasury Money Fund, NAV is computed by taking total Fund assets, subtracting
any liabilities of the Fund and dividing the resulting amount by the number of
shares of the Fund outstanding. For the Sweep Shares of the Schwab Municipal
Money Fund and the Sweep Shares of the Value Advantage Money Fund, NAV is
computed by taking total Fund assets allocable to that class, subtracting any
liabilities allocable to the class and dividing the resulting amount by the
number of Sweep Shares of the Fund outstanding. NAV is determined on each day
that both the Federal Reserve Bank of New York and the Exchange are open for
business, first at 10:00 a.m. (Eastern time), then again at the close of normal
trading on the Exchange (generally 4:00 p.m. Eastern time). Purchase or
redemption orders and exchange requests will be executed at the NAV next
determined after receipt by the Transfer Agent or its authorized agent. While
each Fund or class attempts to maintain its NAV at a constant $1.00, your shares
are not insured against losses.
Each Fund values its portfolio securities at amortized cost, which means that
they are valued at their acquisition cost (as adjusted for amortization of
premium or discount) rather than at current market value. Calculations are made
to compare the value of the Fund's investments using the amortized cost method
with market values. Except, as described below, market valuations are obtained
by using: (1) actual quotations provided by third-party pricing services or
market makers; (2) estimates of market value; or (3) values obtained from yield
data relating to comparable classes of money market instruments published by
reputable sources at the mean between the bid and asked prices for the
instruments. If a deviation of 1/2 of 1% or more were to occur between the NAV
of a Fund or
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<PAGE> 22
class, as calculated by reference to market values, and the amortized cost value
of a Fund or class, or if there were any other deviation which the Board of
Trustees believed would result in a material dilution to shareholders or
purchasers, the Board of Trustees would promptly consider what action, if any,
should be initiated.
HOW THE FUNDS REPORT
PERFORMANCE
From time to time, the Schwab Money Market Fund, Schwab Government Money Fund,
Schwab U.S. Treasury Money Fund and the Sweep Shares of the Schwab Value
Advantage Money Fund may advertise yield, effective yield and total return. In
the case of the Sweep Shares of the Schwab Municipal Money Fund only, the Fund
may advertise yield, effective yield, taxable equivalent yield, taxable
equivalent effective yield and total return of the Sweep Shares. Performance
figures are based upon historical results and are not intended to indicate
future performance.
YIELD refers to the income generated by a hypothetical investment in a Fund (or,
in the case of the Schwab Municipal Money Fund and the Schwab Value Advantage
Money Fund, the Sweep Shares of the Funds) over a specific 7-day period. This
income is then annualized, which means that the income generated during the
7-day period is assumed to be generated each week over an annual period and is
shown as a percentage of the hypothetical investment. Because money market funds
seek a stable NAV of $1.00, current 7-day yields are the most common
illustration of their performance.
EFFECTIVE YIELD is calculated similarly, but the income earned by the investment
is assumed to be compounded weekly when annualized. Effective yield will be
slightly higher than yield due to this compounding effect.
TAXABLE EQUIVALENT YIELD is the yield that a taxable investment must generate in
order to equal (after applicable taxes are deducted) the Sweep Shares of the
Schwab Municipal Money Fund's yield for an investor in a stated federal income
tax bracket (normally assumed to be the applicable maximum tax rate). Taxable
equivalent yield will be higher than the tax-exempt yield of the Sweep Shares of
the Schwab Municipal Money Fund. (See "Yield" in the Statement of Additional
Information.)
TAXABLE EQUIVALENT EFFECTIVE YIELD is computed in the same manner as is the
taxable equivalent yield, except that the effective yield is substituted for
yield in the calculation.
TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total returns smooth
out variations in performance; they are not the same as actual year-by-year
results.
The performance of the Schwab Money Market Fund, Schwab Government Money Fund,
Schwab U.S. Treasury Money Fund, Sweep Shares of the Schwab Municipal Money Fund
and the Sweep Shares of the Schwab Value Advantage Money Fund may be compared to
20
<PAGE> 23
that of other mutual funds tracked by mutual fund rating services, various
indices of investment performance, U.S. Government obligations, bank
certificates of deposit, other investments for which reliable performance data
is available and the consumer price index.
Additional performance information about the Schwab Money Market Fund, Schwab
Government Money Fund, Schwab U.S. Treasury Money Fund, Sweep Shares of the
Schwab Municipal Money Fund and the Sweep Shares of the Schwab Value Advantage
Money Fund is stated in the Funds' Annual Reports, which are sent to all
shareholders. To request a free copy, call Schwab at 800-2 NO-LOAD.
TAX-ADVANTAGED RETIREMENT PLANS
Schwab offers tax-advantaged retirement plans for which the Schwab Money Market
Fund, Schwab Government Money Fund, Schwab U.S. Treasury Money Fund and the
Sweep Shares of the Schwab Value Advantage Money Fund may be appropriate
investments. It is not recommended that the Schwab Municipal Money Fund be used
as an investment vehicle for an Individual Retirement Account ("IRA") or
qualified retirement plan. Schwab's retirement plans allow participants to defer
taxes while helping them build their retirement savings.
SCHWAB IRA. A retirement plan with a wide choice of investments offering people
with earned income the opportunity to compound earnings on a tax-deferred basis.
Currently, Schwab's $29 annual IRA account fee is assessed on September 15th of
each year and Schwab IRA accounts with balances of $10,000 or more, on or before
that date, will not be charged the fee for the life of the account.
SCHWAB KEOGH. A tax-advantaged plan for self-employed individuals and their
employees that permits the employer to make annual tax-deductible contributions
of up to $30,000. Schwab Keogh plans are currently charged an annual fee of $45.
SCHWAB CORPORATE RETIREMENT PLANS. A well designed retirement program can help a
company attract and retain valuable employees. Call Schwab at 800-2 NO-LOAD for
more information.
INVESTING IN
SHARES OF THE FUNDS
SHAREHOLDER SERVICES. You may place Fund purchase orders and orders to sell
shares as well as exchange requests by calling 800-2 NO-LOAD, where trained
representatives are available to answer questions about the Funds and your
account. The right to initiate transactions by telephone is automatically
available through your Schwab account. TDD users may contact Schwab at
800-345-2550, 24 hours a day.
Each Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If each Fund follows telephone orders
that it reasonably believes to be genuine, it will not be liable for any losses
a shareholder may experience. If each Fund does not follow reasonable procedures
to confirm that a telephone order is genuine, each Fund may be liable for any
losses a shareholder may suffer from unauthorized or fraudulent orders. These
procedures may include:
- - requiring a form of personal identification prior to acting upon instructions
received by telephone;
21
<PAGE> 24
- - providing written confirmation of such instructions; and
- - tape recording telephone transactions.
Investors should remember that it may be difficult to complete transactions by
telephone during periods of drastic economic or market changes, when our phone
lines may become very busy with calls from other investors. If you want to buy,
sell or exchange shares but have trouble reaching a Fund by telephone, you may
want to use one of the other ways offered for completing the transactions
discussed below, even though these procedures may mean that completing your
transaction may take longer.
To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.
In an effort to reduce each Fund's mailing costs, the Funds consolidate
shareholder mailings by household. This consolidation means that a household
having multiple accounts with the identical address of record will receive a
single package during each shareholder mailing. If you do not wish this
consolidation to apply to your account(s), please write to Schwab at 101
Montgomery Street, San Francisco, California 94104 to that effect.
Telephone purchase or redemption orders or exchange requests received prior to
8:00 p.m. (Eastern time) on any Business Day, once they have been verified as to
the caller's identity and account ownership, will be deemed to be received by
the Transfer Agent, or its authorized agent, prior to the next NAV
determination. Subsequent telephone orders received prior to the first NAV
determination on the following day will be deemed received prior to that day's
second NAV determination.
OPENING A SCHWAB ACCOUNT. You may buy shares of the Funds or classes through an
account maintained with Schwab or any other entity designated by Schwab. Payment
for shares should be made directly to Schwab. If you do not presently maintain a
Schwab account and wish to establish one, simply complete a Schwab Account
Application (available by calling 800-2 NO-LOAD, 24 hours a day). You may also
mail the application to Schwab at 101 Montgomery Street, San Francisco,
California 94104. Corporations and other organizations should contact their
local Schwab office to determine which additional forms may be necessary to open
a Schwab account. With your Schwab account, you have access to other investments
available at Schwab, such as stocks, bonds and other mutual funds.
The Securities Investor Protection Corporation ("SIPC") will provide account
protection, in an amount up to $500,000, for securities, including Fund or class
shares, which you hold in a Schwab account. Of course, SIPC account protection
does not protect shareholders from share price fluctuations. If you already have
a Schwab account, you may buy shares of each Fund as described below and need
not open a new account.
SCHWAB ACCOUNT MINIMUMS AND ASSOCIATED FEES. Schwab accounts require an initial
minimum investment and a minimum maintenance balance of $1,000 ($500 for
custodial accounts). A fee of $7.50 will be charged to Schwab brokerage accounts
that fall below this minimum for three consecutive months in any quarter. This
fee, if applicable, will be charged at the end of each quarter and will be
waived if there has been at least one commissionable
22
<PAGE> 25
trade within the last 6 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 12 months.
DEPOSITING FUNDS. You may make deposits into your Schwab account by check, wire
or many other forms of electronic funds transfer. Securities also may be
deposited. All deposit checks should be made payable to Charles Schwab & Co.,
Inc. Schwab will charge a $15 service fee against an investor's Schwab account
should a check be returned because of insufficient or uncollected funds or a
stop payment order. If you would like to wire funds into or from your Schwab
account, please call 800-2 NO-LOAD. A service fee will be charged to your Schwab
account for each wire sent.
HOW TO BUY SHARES
SWEEP SHARES OF THE SCHWAB VALUE ADVANTAGE MONEY FUND WILL BE AVAILABLE FOR
PURCHASE ON MAY 19, 1997.
If funds (including those transmitted by wire) are received by Schwab before the
Fund's or class's last NAV calculation (normally 4:00 p.m. Eastern time), they
will be available for investment on that day. If funds arrive after that time,
they will be available for investment the next Business Day.
AUTOMATIC SWEEP INVESTMENT. When opening a Schwab account, you will be asked to
select a SchwabFunds class or Series with sweep privileges as a "primary fund."
When a Fund or class is selected as a primary fund, free credit balances in your
Schwab account will be invested automatically in shares of the Fund or class
according to the procedures described in the account agreement with the
investor. Depending on the type of Schwab account, the automatic sweep
investment of free credit balances will be effected daily, weekly or at other
times and may be subject to minimum investment and other requirements. (See
"Minimum Investment Requirements")
An investor with an existing Schwab account may add the automatic sweep
investment feature to his or her account by completing the appropriate section
of the Schwab Account Application available at any Schwab office. A shareholder
may change primary funds by writing Schwab at the address referenced on the
cover of this Prospectus. Note that the automatic sweep investment feature is
not available for all classes of shares of all Funds.
DIRECT PURCHASE. A Schwab account holder may buy shares of a Fund or class (if
it is not his or her primary fund) in several ways.
Whether you buy shares by phone, by mail or electronically, the following
information is always needed:
- - your Schwab account number and your name for verification;
- - the name of the Fund and class in which you wish to invest;
- - the amount you wish to invest; and
- - for initial share purchases only, the distribution option you have selected
(see below).
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<PAGE> 26
BY TELEPHONE
- - Call 800-2 NO-LOAD.
- - Place a buy order for your account.
- - TDD users may contact Schwab at 800-345-2550, 24 hours a day.
BY MAIL
- - Include a letter of instruction with the information requested above, signed
by one of the registered account holders in the exact form specified on the
account.
- - You may direct that funds already in your Schwab account be used to make
initial and subsequent share purchases, or your purchase instructions may be
accompanied by a check made payable to Charles Schwab & Co., Inc., which will
be deposited into your Schwab account and used, as necessary, to cover all or
part of your purchase order.
- - Mail to 101 Montgomery Street, San Francisco, California 94104.
- - Once your letter is mailed, you may not modify or cancel your instructions.
ELECTRONICALLY
- - Refer to product information on StreetSmart(TM), e.Schwab(TM), The
Equalizer(R) and TeleBroker(R) for details.
- - World Wide Web: http://www.schwab.com
BY WIRE
- - Contact Schwab at 800-2 NO LOAD for instructions.
MINIMUM INVESTMENT REQUIREMENTS. The minimum initial investment for the Schwab
Money Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury Fund and
the Sweep Shares of the Schwab Municipal Money Fund is $1,000 and subsequent
investments must be at least $100 for direct purchases and $1.00 for sweep
purchases.
The Sweep Shares of the Schwab Value Advantage Money Fund require a minimum
initial investment of $25,000 and subsequent investments must be at least $5,000
for direct purchases and $1.00 for sweep purchases. A minimum balance of $20,000
must be maintained. These minimums may not be applicable to certain customers of
Schwab Institutional's Services for Investment Managers or Schwab's Retirement
Plan Services.
If your balance in a Fund or class falls to zero, you will be required to meet
the applicable minimum initial investment requirement again ($25,000 for the
Sweep Shares of the Value Advantage Money Fund and $1,000 for the other Funds or
classes). For information regarding the minimum investment requirements of the
other classes of shares of the Schwab Municipal Money Fund and the Schwab Value
Advantage Money Fund, see "Other Important Information" in this Prospectus.
DISTRIBUTION OPTIONS. The distribution option that you selected in your Schwab
Account Application will determine which of the two distribution options listed
below will apply to you. Fund distributions will be automatically reinvested,
unless the Transfer Agent, or its authorized agent, has received instructions
that distributions be mailed to you as they are paid. Please contact Schwab at
800-2 NO LOAD if you already have a Schwab account and wish to change your
distribution option account standing instructions.
- - AUTOMATIC REINVESTMENT: For all the Funds or classes of Shares, distributions
will be reinvested in additional full Shares of the applicable Fund or class
of Shares at the net
24
<PAGE> 27
asset value next determined after their payable date; or
- - RECEIVE YOUR DIVIDENDS BY MAIL: All distributions will be credited to your
Schwab account as of the payable date. If your account instructs that
dividends be mailed immediately, checks will normally be mailed the Business
Day after distributions are credited.
HOW TO SELL OR
EXCHANGE SHARES
AUTOMATIC REDEMPTION. A sale of Fund shares will be automatically effected to
satisfy debit balances in an investor's Schwab account, to provide necessary
cash collateral for an investor's margin obligation to Schwab and to settle
securities transactions in the account. All such sales will be effected in
accordance with the procedures described in the investor's Schwab Account
Agreement.
DIRECT REDEMPTION. You can sell or exchange your shares at any time by
telephone, by mail, or electronically, subject to the following terms and
conditions:
- - orders to sell shares received by Schwab in good order by the close of the
Exchange (generally 4:00 p.m. Eastern time) will be processed that day;
- - 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 the Transfer Agent, or its authorized agent, 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 Exchange is restricted; the Exchange is closed for
any reason other than its normal weekend or holiday closings; emergency
circumstances exist as determined by the SEC; or for any other circumstances
as the SEC may permit.
EXCHANGE. The exchange privilege allows you to exchange your SchwabFunds(R)
shares for shares of another SchwabFunds Series or class available to investors
in your state, provided you meet the initial and subsequent investment
requirements and any other requirements relating to the Series or class of
shares you wish to buy. Thus, you can conveniently modify your investments if
your goals or market conditions change. For federal income tax and certain other
purposes, an exchange of shares between funds will be treated as a sale of
shares in one fund and the purchase of shares in another fund. An exchange of
shares between classes of the same fund should not be treated as a sale of
shares. Each Fund reserves the right to modify, limit or terminate the exchange
privilege upon 60 days' written notice.
METHODS OF SELLING OR
EXCHANGING SHARES
Whether you sell or exchange shares by phone, mail or electronically, the
following
25
<PAGE> 28
information is always needed in order to process your sale or exchange request:
- - your Schwab account number and your name for verification;
- - the number of shares you want to sell or exchange;
- - the name of the Fund and class from which you wish to sell or exchange shares;
and
- - if you are exchanging shares, the name of the Fund and class into which shares
are to be exchanged and the distribution option you select.
BY TELEPHONE
- - Call 800-2 NO-LOAD.
- - Place a sell or exchange request for your account. TDD users may contact
Schwab at 800-345-2550, 24 hours a day.
BY MAIL
- - Include a letter of instruction with the information requested above, signed
by one of the registered account holders in the exact form specified in the
account.
- - Mail to 101 Montgomery Street, San Francisco, California 94104.
- - Once your letter is mailed, you may not modify or cancel your instructions.
ELECTRONICALLY
- - Refer to product information on StreetSmart(TM), e.Schwab(TM), The
Equalizer(R) and TeleBroker(R) for details.
- - World Wide Web address: http://www.schwab.com
MINIMUM INVESTMENT REQUIREMENTS. The Sweep Shares of the Value Advantage Fund
require maintenance of a $20,000 balance. The other Funds or classes of Funds
require maintenance of a $1,000 balance. If your balance in a Fund or class
falls to zero, you will be required to meet the applicable initial minimum
investment requirement again ($25,000 for the Sweep Shares of the Value
Advantage Money Fund and $1,000 for the other Funds or classes). These minimums
may not be applicable to certain customers of Schwab Institutional's Services
for Investment Managers or Schwab's Retirement Plan Services.
Due to the relatively high cost of maintaining smaller holdings, each Fund or
class reserves the right to redeem a shareholder's shares, if as a result of
redemptions, their aggregate value drops below the $100 minimum balance
requirement for the Schwab Money Market Fund, Schwab Government Money Fund,
Schwab U.S. Treasury Money Fund and the Sweep Shares of the Schwab Municipal
Money Fund or below the $20,000 minimum balance requirement for the Sweep Shares
of the Schwab Value Advantage Money Fund. A Fund will notify shareholders in
writing, 30 days before taking such action, to allow them to increase their
holdings to at least the minimum level. Also note that, because they can only be
held in Schwab accounts, Fund shares will be automatically redeemed should the
Schwab account in which they are carried be closed.
SCHWAB ONE(R) ACCOUNT FEATURES. Shareholders who hold shares of the Schwab
Municipal Money Fund in Schwab One accounts are entitled to sell shares of the
Fund through debit cards and checks. Investors should contact Schwab if they are
interested in the benefits and requirements of a Schwab One account.
26
<PAGE> 29
OTHER IMPORTANT INFORMATION
Each Fund reserves the right, in its sole discretion and without prior notice to
shareholders, to withdraw or suspend all or any part of the offering made by
this Prospectus, to reject purchase orders or to change or waive minimum
investment or eligibility requirements. All orders to buy shares of a Fund are
subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing.
In addition to the Sweep Shares offered by this Prospectus, Schwab also offers
Value Advantage Shares of the Schwab Municipal Money Fund and Investor Shares of
the Schwab Value Advantage Money Fund, pursuant to a multiple class plan adopted
by the Board of Trustees of the Schwab Fund Family. The Value Advantage Shares
of the Schwab Municipal Money Fund and Investor Shares of the Schwab Value
Advantage Money Fund are not available through automatic sweep investment
programs. The minimum initial investment requirement for both of these classes
of shares is $25,000 and the minimum balance required is $20,000. Sales and
exchanges in amounts less than $5,000 and balances below $20,000 may be charged
a $5.00 administrative fee. The transfer agency fees for the Value Advantage
Shares of the Schwab Municipal Money Fund and for the Investor Shares of the
Schwab Value Advantage Money Fund is 0.05% of each classes average net assets;
the shareholder services fee for each of these classes is 0.20% of that class's
average net assets.
The Schwab Money Market Fund, Schwab Government Money Fund and Schwab U.S.
Treasury Money Fund are not offered in multiple classes of shares. For a
prospectus describing the other class of shares of the Schwab Municipal Money
Fund (the "Value Advantage Shares") or the Schwab Value Advantage Money Fund
(the "Investor Shares"), call Schwab at 800-2 NO-LOAD.
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR.
- --------------------------------------------------------------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
- --------------------------------------------------------------------------------
27
<PAGE> 30
--------------
[SCHWABFUNDS(R) LOGO] BULK RATE
101 Montgomery Street U.S. POSTAGE
San Francisco, California 94104 PAID
CHARLES SCHWAB
--------------
625-18 (4/97) Printed on recycled paper.
SCHWAB
MONEY FUNDS -
SWEEP INVESTMENTS(TM)
PROSPECTUS April 30, 1997
[DOLLAR SIGN GRAPHIC]
[SCHWABFUNDS LOGO(R)]
<PAGE> 31
CROSS REFERENCE SHEET
PROSPECTUS
Schwab Municipal Money Fund -- Value Advantage Shares
Schwab California Municipal Money Fund -- Value Advantage Shares
Schwab California Municipal Money Fund -- Value Advantage Shares
PART A ITEM PROSPECTUS CAPTION
1. Cover Page Cover Page
2. Synopsis Key Features of the Funds; Summary
of Expenses; Matching the Funds to
Your Investment Needs
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Matching the Funds to
Your Investment Needs; Investment
Objectives and Policies;
Organization and Management of the
Funds
5. Management of the Fund Organization and Management of the
Funds
5A. Management's Discussion of Fund
Performance Important Information About Your
Investment
6. Capital Stock and Other Securities Cover Page; Investment Objectives
and Policies; Investment Techniques
Used by the Funds; Special Risk
Considerations; Important
Information About Your Investment
7. Purchase of Securities Being Offered Matching the Funds to Your
Investment Needs; Investing in
Shares of the Funds; Important
Information About Your Investment
8. Redemption or Repurchase Investing in Shares of the Funds
9. Pending Legal Proceedings Inapplicable
<PAGE> 32
SCHWAB MONEY FUNDS
VALUE ADVANTAGE INVESTMENTS(R)
SCHWAB MUNICIPAL MONEY FUND -
VALUE ADVANTAGE SHARES(TM)
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND -
VALUE ADVANTAGE SHARES(TM)
SCHWAB NEW YORK MUNICIPAL MONEY FUND -
VALUE ADVANTAGE SHARES(TM)
PROSPECTUS APRIL 30, 1997
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact Charles Schwab & Co., Inc.
("Schwab") office at 800-2 NO-LOAD.
THE SCHWAB MUNICIPAL MONEY FUND (THE "MUNICIPAL FUND"), SCHWAB CALIFORNIA
MUNICIPAL MONEY FUND (THE "CALIFORNIA FUND") AND SCHWAB NEW YORK MUNICIPAL 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. Prior
to January 2, 1997, the Municipal Fund was known as the Schwab Tax-Exempt Money
Fund, the California Fund was known as the Schwab California Tax-Exempt Money
Fund and the New York Fund was known as the Schwab New York Tax-Exempt Money
Fund.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUNDS. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. You can find more detailed information about the
Funds in the Statement of Additional Information ("SAI") dated April 30, 1997
(as may be amended from time to time). The SAI has been filed with the
Securities and Exchange Commission ("SEC") and is available along with material
incorporated by reference and other related materials using the SEC's World Wide
Web address: http://www.sec.gov. The SAI is incorporated by reference into this
Prospectus.
This Prospectus may be available electronically by using our World Wide Web
address: http://www.schwab.com. To receive a free paper copy of this Prospectus
or the SAI, call Schwab at 800-2 NO-LOAD, 24 hours a day, or write to the Funds
at 101 Montgomery Street, San Francisco, California 94104. TDD users may contact
Schwab at 800-345-2550, 24 hours a day.
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.
SPECIAL RISK CONSIDERATIONS. Each of the California Fund and the New York Fund
may invest a significant percentage of its assets in the securities of a single
issuer, and therefore investment in each Fund may be riskier than other types of
money market funds.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Key Features of the Funds................ 2
Summary of Expenses...................... 3
Financial Highlights..................... 4
Matching the Funds to Your
Investment Needs....................... 5
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.............. 20
</TABLE>
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 PER SHARE OF $1.00.
<PAGE> 33
KEY FEATURES OF THE FUNDS
MAXIMUM CURRENT INCOME AND SAFETY. Each Fund's 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. (See "Investment Objectives and Policies.")
The Municipal Fund seeks to provide you with current income that is exempt from
federal regular income tax. The California Fund seeks to provide you with
current income that is exempt from federal regular income taxes and California
state personal income taxes. The New York Fund seeks to provide you with current
income that is exempt from federal regular income and personal income taxes
imposed by New York state and New York municipalities. Federal regular income
tax does not include the federal alternative minimum tax.
PRESERVATION OF INVESTMENT. Each Fund seeks to maintain a stable net asset value
per share (known as the Fund's "NAV") of $1.00. (See "Important Information
About Your Investment.")
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. (See
"Investing in Shares of the Funds -- How to Sell or Exchange Your Shares.")
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. (See "Investing in Shares of the Funds.")
PROFESSIONAL MANAGEMENT OF THE FUNDS. Charles Schwab Investment Management, Inc.
(the "Investment Manager") currently manages the mutual funds in the
SchwabFunds(R), a family of 29 mutual funds with over $47 billion in assets as
of April 1, 1997. (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 accounts. (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.
SPECIAL RISK CONSIDERATIONS. Each of the California Fund and the New York Fund
may invest a significant percentage of its assets in the securities of a single
issuer, and therefore investment in each Fund may be riskier than other types of
money market funds. (See "Investment Techniques Used by the Funds.")
2
<PAGE> 34
SUMMARY OF EXPENSES
ANNUAL OPERATING EXPENSES. Each class of the Funds incurs 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 of the Value Advantage Shares of each Fund, they are factored into
the dividends paid to holders of Value Advantage Shares. As a shareholder, you
are not charged any of these fees directly.
<TABLE>
<CAPTION>
MUNICIPAL CALIFORNIA NEW YORK
VALUE ADVANTAGE SHARES(1) FUND FUND FUND
- --------------------------- --------- ---------- --------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES(2):.............. $5.00 $5.00 $5.00
ANNUAL FUND OPERATING
EXPENSES
(AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fee
(after fee
reduction)(3).......... 0.20% 0.19% 0.20%
12b-1 Fee................ None None None
Other Expenses (after
fee reductions
and/or expense
reimbursements(4)...... 0.25% 0.26% 0.25%
--------- ---------- --------
TOTAL FUND OPERATING
EXPENSES(4).............. 0.45% 0.45% 0.45%
</TABLE>
(1) For information regarding the key differences between the multiple classes
of shares of the Funds, see "Matching the Funds to Your Investment Needs."
(2) You will be subject to a $5 administrative fee if you sell or exchange
shares in an amount less than $5,000.
(3) This amount reflects a reduction by the Investment Manager, guaranteed
through at least April 30, 1998. If there were no such reduction, the
management fee for the Municipal Fund, California Fund and New York Fund
would be 0.42%, 0.44% and 0.46% of average net assets, respectively.
(4) This amount reflects the guarantee by Schwab and the Investment Manager
that, through at least April 30, 1998, the total operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) of the Value Advantage Shares of each Fund will not exceed 0.45%
of average net assets. If there were no such reduction for the Municipal
Fund, the California Fund and the New York Fund, other expenses and total
operating expenses would be 0.33% and 0.75%, 0.33% and 0.77% and 0.55% and
1.01% of average net assets, respectively. The effect of this voluntary
expense limitation is to maintain or increase each Fund's total return to
shareholders.
EXAMPLE. Based on the expenses in the table above, you would pay the following
expenses on a $1,000 investment in the Value Advantage Shares of each Fund
assuming (1) a 5% annual return; and (2) redemption at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEAR 10 YEAR
------ ------- ------ -------
<S> <C> <C> <C> <C>
Municipal 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.
3
<PAGE> 35
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified reports are included in the Funds' Annual Report,
which contains additional financial data and related notes. The financial
highlights, financial statements and reports of the auditor are incorporated by
reference into the SAI. Free copies of the SAI and Annual Report may be obtained
by calling the telephone number or writing to the address on the first page of
this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED FOR THE PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------- -----------------------------------
MUNICIPAL CALIFORNIA NEW YORK MUNICIPAL CALIFORNIA NEW YORK
VALUE ADVANTAGE SHARES FUND FUND FUND FUND(1) FUND(2) FUND(1)
--------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income............ 0.03 0.03 0.03 0.02 0.01 0.02
Net realized and unrealized gain
(loss) on investments.......... -- -- -- -- -- --
-------- -------- ------- -------- -------- -------
Total from investment
operations..................... 0.03 0.03 0.03 0.02 0.01 0.02
LESS DISTRIBUTIONS
Dividends from net investment
income........................... (0.03) (0.03) (0.03) (0.02) (0.01) (0.02)
Distributions from realized gain on
investments...................... -- -- -- -- -- --
-------- -------- ------- -------- -------- -------
Total distributions................ (0.03) (0.03) (0.03) (0.02) (0.01) (0.02)
-------- -------- ------- -------- -------- -------
Net asset value at end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- -------- -------- -------
Total return (not annualized)...... 3.14% 3.01% 2.99% 1.68% 0.84% 1.62%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s)... $ 608,080 $ 507,486 $66,683 $ 160,682 $ 108,008 $15,143
Ratio of expenses to average net
assets*........................ 0.45% 0.45% 0.45% 0.45%(3) 0.45%(3) 0.45%(3)
Ratio of net investment income to
average net assets*............ 3.10% 2.98% 2.98% 3.50%(3) 3.48%(3) 3.42%(3)
</TABLE>
* The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net
assets......................... 0.75% 0.77% 1.01% 0.95%(3) 1.04%(3) 1.81%(3)
Ratio of net investment income to
average net assets............. 2.80% 2.66% 2.42% 3.00%(3) 2.89%(3) 2.06%(3)
</TABLE>
(1) Period from July 7, 1995 (commencement of operations) to December 31, 1995.
(2) Period from October 3, 1995 (commencement of operations) to December 31,
1995.
(3) Annualized.
4
<PAGE> 36
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, their operating
expenses may be lower than the industry average, which helps provide more
competitive yields. The table below shows the total operating expenses of the
Value Advantage Shares of each Fund compared to the industry average for similar
type funds.
<TABLE>
<CAPTION>
VALUE
ADVANTAGE INDUSTRY
SHARES AVERAGES*
--------- ---------
<S> <C> <C>
Municipal Fund 0.45% 0.65%
California Fund 0.45% 0.59%
New York Fund 0.45% 0.63%
</TABLE>
*Industry averages as reported by IBC/Financial Data Quarterly Report on Money
Fund Performance, 4th Quarter, 1996, for Municipal Money Market Funds,
California Municipal Funds and New York Municipal Funds.
Note: These amounts represent total operating expenses after fee waivers for
first tier money funds, not including institutional money funds.
The 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, but do not offer the "sweep" services described
above. The transfer agent is entitled to receive an annual fee of 0.25% of the
Sweep Shares' average daily net asset. In addition, the minimum initial
investment and minimum account balance requirements are higher for the Value
Advantage Shares than for the Sweep Shares. The Sweep shares of the Funds
require a minimum initial investment of $1,000 and subsequent investments must
be at least $100 for direct purchases and $1.00 for sweep purchases. For more
information regarding the Sweep Shares of the Funds, call 800-2 NO-LOAD. You may
also obtain information about Sweep Shares from your Schwab broker.
5
<PAGE> 37
INVESTMENT OBJECTIVES
AND POLICIES
THE MUNICIPAL FUND
The investment objective of the Municipal Fund is to provide you with maximum
current income that is exempt from federal regular income tax consistent with
stability of capital. Federal regular income tax does not include the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations. The investment objective is fundamental to the Municipal Fund.
Because any investment involves risk, the Fund cannot guarantee that it will
achieve its objective.
To achieve its investment objective, the Fund normally will attempt to invest
100% of 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 regular income taxes ("Municipal Securities").
Provided that the Fund meets certain minimum conditions (described in the SAI
under "Investment Restrictions"), dividends that represent interest income
received on Municipal Securities will be exempt from federal regular income tax
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 SAI.
THE CALIFORNIA FUND
The investment objective of the California Fund is to provide you with maximum
current income that is exempt from federal regular income and California state
personal income taxes, consistent with stability of capital. Federal regular
income tax does not include the federal alternative minimum tax. The investment
objective is fundamental to the California Fund. Because any investment involves
risk, the Fund cannot guarantee that it will achieve its objective.
To achieve its objective, the Fund normally will attempt to invest 100% of its
total assets in Municipal Securities. Absent unusual market conditions, the Fund
will invest at least 65% of its total assets in such obligations that also
generate interest which, in the opinion of bond counsel, is exempt from
California state personal income taxes ("California Municipal Securities").
Provided that the Fund meets certain minimum conditions (described in the SAI
under "Distributions and Taxes"), dividends that represent interest income
received on California Municipal Securities and on certain federal obligations
will be exempt from California state personal income tax. See "Important
Information About Your Investment - Income Tax Information" and the SAI.
THE NEW YORK FUND
The investment objective of the New York Fund is to provide you with maximum
income that is exempt from federal regular income tax and personal income taxes
imposed by New York state and New York municipalities, consistent with stability
of capital. Federal regular income tax does not include the federal alternative
minimum tax. The investment objective is fundamental to the New York Fund.
Because any investment involves risk, the Fund cannot guarantee achieving its
objective.
To achieve its objective, the Fund normally will attempt to invest 100% of its
total assets in
6
<PAGE> 38
Municipal Securities. Absent unusual market conditions, the Fund will invest at
least 65% of its total assets in such obligations that also generate interest
which, in the opinion of bond counsel, is exempt from New York state and New
York municipalities personal income taxes ("New York Municipal Securities").
Provided that the Funds meets certain minimum conditions (described in the SAI
under "Investment Restrictions"), dividends that represent interest income
received on New York Municipal Securities will be exempt from New York state and
New York municipalities personal income taxes when paid to New York residents.
See "Important Information About Your Investment - Income Tax Information" and
the SAI.
MUNICIPAL SECURITIES. The 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 SAI.)
The Funds may purchase a security that, after being purchased, ceases to have a
rating or is downgraded to a rating below that required for purchase by a Fund.
Neither event would necessarily require a Fund to sell the security. However, a
Fund 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 the Fund.
Municipal Securities in which the Funds 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.
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 the Funds may invest
more than 25% of its total assets in industrial development and private activity
bonds.
The Funds also may 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.
7
<PAGE> 39
The Funds also may 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.
The Funds also may invest up to 25% of total 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 generally
are structured as private placements and, accordingly, may be deemed to be
restricted securities for purposes of the Funds' investment limitations.
The Funds 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 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.
A Fund could suffer a loss from a variable rate demand instrument because of the
absence of
8
<PAGE> 40
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.
The Funds 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.
The Funds 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.
The Funds also may 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. The Funds will acquire stand-by commitments
solely to improve portfolio liquidity. We do not intend to exercise our stand-by
rights solely for trading purposes.
Each Fund has the ability to invest all of its assets in Municipal Securities,
and the California Fund and the New York Fund may invest all of their assets in
California Municipal Securities and New York Municipal Securities, respectively,
that generate interest subject to the federal alternative minimum tax. Thus, if
you are subject to the federal alternative minimum tax, all or a portion of your
income may be subject to federal income tax.
VARIABLE RATE SECURITIES. The Funds 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.
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
9
<PAGE> 41
Variable Rate Securities in accordance with SEC rules.
ILLIQUID SECURITIES. The Funds may purchase illiquid securities, including
repurchase agreements maturing in more than 7 days, provided that no more than
10% of net assets valued at the time of the transaction are invested in such
securities.
GOVERNMENT SECURITIES. The Funds 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 only 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. The Funds 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. The Funds 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, the Funds will not pay for such securities or start earning
interest on them until they are received. Securities purchased on a when-issued
or delayed delivery basis are recorded as an asset. The value of such securities
may change as the general level of interest rates changes.
Each Fund will invest no more than 25% of its total assets in when-issued or
delayed delivery securities. The Funds will not purchase such securities for
speculative purposes, and will expect to actually acquire the securities when
purchased. However, each Fund reserves the right to sell any such securities
before their settlement dates, if the Investment Manager deems such a sale
advisable.
REPURCHASE AGREEMENTS. Each of the 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.
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.
If the seller of a repurchase agreement becomes bankrupt or otherwise defaults,
the Funds might incur expenses in enforcing our rights and could experience
losses, including a decline in the value of the underlying securities and a loss
of income. The Funds will enter into repurchase agreements only with banks and
other recognized financial institutions that the Investment Manager deems
creditworthy.
TEMPORARY INVESTMENTS. Each Fund may, from time to time, as a defensive measure
under
10
<PAGE> 42
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 regular 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. The Funds 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. The Funds' borrowing
and pledging policies set forth in the SAI are fundamental.
LIMITATIONS ON INVESTMENTS. The Funds are subject to the following limitations,
which apply to all investments 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 Municipal 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, each Fund will not 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 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
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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 the
investment return on 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,
the Funds do not presently intend to invest in such securities on a regular
basis, but will do so if deemed necessary or appropriate by the 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 and local
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 SAI.)
The Funds 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. The Board of Trustees and officers meet regularly to review
the Funds' investments, performance, expenses and other business affairs.
THE INVESTMENT MANAGER. The Investment Manager, Charles Schwab Investment
Management, Inc., manages the Funds, subject to the authority of the trustees
and officers of the Trust.
The Investment Manager, founded in 1989, is a wholly owned subsidiary of The
Charles Schwab Corporation and is the investment adviser and administrator of
the mutual funds in the SchwabFunds, a family of 29 mutual funds. As of April 1,
1997, the SchwabFunds had aggregate net assets in excess of $47 billion.
Through a professional staff of portfolio managers and securities analysts, the
Investment Manager provides the Funds with a continuous investment program,
including general investment and economic advice regarding our investment
strategies, manages the investment portfolio, performs expense management,
accounting/record keeping and provides other services necessary to the Funds'
operation.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab serves as the Shareholder
Services Agent and Transfer Agent. Schwab provides information to 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 4.1 million active customer accounts and has over 241 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, Chief Executive Officer and a Director of
The Charles Schwab Corporation. As a result of his beneficial ownership
interests in and other relationships with The Charles Schwab Corporation and its
affiliates, Mr. Schwab may be deemed to be a controlling person of Schwab and
the Investment Manager.
OPERATING FEES AND EXPENSES
For investment management services, under the terms of its Investment Advisory
and Administration Agreement, the Investment Manager is entitled to receive from
the Funds a graduated annual fee. This fee is based on the value of the average
daily net assets of each Fund and is payable monthly in the amount of 0.46% of
each Fund's average daily net assets not in excess of $1 billion; 0.41% of such
assets over $1 billion, but not more than $2 billion; and 0.40% of such assets
over $2 billion.
For the fiscal period ended December 31, 1996, the Municipal Fund, California
Fund and New York Fund paid an investment management fee of 0.20%, 0.19% and
0.20% of average net assets respectively; and the Value Advantage Shares of each
Fund paid total operating expenses of 0.45% of average net assets.
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For its services as Transfer Agent, Schwab is entitled to receive an annual fee
of 0.05% of the average net assets of each Fund's Value Advantage Shares. In
addition, for shareholder services provided, Schwab is entitled to receive an
annual fee of 0.20% of the average daily assets of each Fund's Value Advantage
Shares.
Schwab serves as the Funds' principal underwriter/distributor but receives no
compensation for this service.
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 its individual investment
portfolios ("Series"), or classes of shares within these Series, in proportion
to their relative net assets at the time the expense is incurred. However,
expenses directly attributable to a Series or class of a Series will be 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 is an open-end investment management company, 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 9 Series, which may be
organized into one or more classes of shares of beneficial interest. The Board
of Trustees may authorize the issuance of shares of additional Series or
classes, if it deems it to be desirable to do so. Shares within each Series have
equal, noncumulative voting rights and equal rights as to distributions, assets
and liquidation of such Series, except to the extent such voting rights or
rights as to distributions, 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. It will, however, hold special meetings as
required or deemed desirable by the Board of Trustees for such purposes as
changing a Fund's fundamental policies, electing or removing Trustees or
approving or amending an investment advisory agreement. In addition, a Trustee
may be 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.
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
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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 800-2 NO-LOAD. The right to initiate transactions by
telephone is automatically available through your Schwab account. TDD users may
contact Schwab at 800-345-2550, 24 hours a day.
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.
To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.
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, 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 800-2
NO-LOAD.
OPENING A SCHWAB ACCOUNT. You may buy shares through a Schwab account or through
an account with any other entity designated by Schwab. 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
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securities, including 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 account ($500 for custodial
accounts). A fee of $7.50 will be charged to Schwab brokerage accounts that fall
below this minimum for three consecutive months in any quarter. This fee, if
applicable, will be charged at the end of each quarter and will be waived if
there has been at least one commissionable trade within the last 6 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.
DEPOSITING FUNDS. You may deposit funds into your Schwab account by check, wire
or many other forms of electronic funds transfer (securities may also be
deposited). All deposit checks should be made payable to Charles Schwab & Co.,
Inc. Schwab will charge your Schwab account a $15 service fee for any check
returned because of insufficient or uncollected funds, or because of a stop
payment order. If you would like to wire funds into or from your Schwab account,
contact your local Schwab office for instructions. You can request that your
Schwab office wire funds from your Schwab account to your bank account. There is
a fee for each wire transfer of funds.
HOW TO BUY SHARES
WHEN YOU CAN BUY SHARES. Funds (including those which are transmitted by wire)
received by Schwab before 4:00 p.m. (Eastern time) can be used to buy shares on
that day. Funds that arrive after that time can be used to buy shares the next
Business Day.
Schwab offers you several convenient ways to purchase Fund shares. You may
choose the one that works best for you, and Schwab will confirm execution of
your purchase order.
BY TELEPHONE
Call 800-2 NO-LOAD, 24 hours a day. TDD users may contact Schwab at
800-345-2550, 24 hours a day.
BY MAIL
Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, California 94104 and should:
- - reference your Schwab account number;
- - specify the name of the Fund and class and the dollar amount of shares you
would like to purchase; and
- - (initial share purchase only) select one of the distribution options listed
below.
ELECTRONICALLY
For more information regarding how to buy shares electronically using
StreetSmart(R), The Equalizer(R) and TeleBroker(R), call 800-2 NO-LOAD.
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
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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 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 SAI for more details.
Each Fund, in its sole discretion and without prior notice to you, reserves the
right to reject orders to buy shares, to change or waive 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, each Fund reserves 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 Schwab, and orders are
not binding until Schwab confirms or accepts them in writing.
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 per share 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 800-2 NO-LOAD.
HOW TO SELL OR EXCHANGE YOUR SHARES
You can sell or exchange shares at any time by telephone, by mail or
electronically, subject to the following terms and conditions:
- - if your sale or exchange order is received by Schwab before 4:00 p.m. Eastern
time, it will be processed that day;
- - if you bought your shares by check, your money will be sent 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;
- - a check for your shares will be ready on the Business Day after the Transfer
Agent 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
- - Each Fund 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.
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The Transfer Agent will charge you a $5 administrative fee if you sell or
exchange Value Advantage Shares equal to or less than $5,000 and may sell
additional shares from your account to pay the administrative fee. 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.
You can exchange your SchwabFunds(R) shares for shares of other SchwabFunds
Series or classes available to investors in your state provided you meet the
minimum initial or subsequent investment requirements and any other requirements
relating to the Series or class of shares you wish to purchase. Thus, you can
conveniently modify your investments if your goals or market conditions change.
We reserve the right to modify, limit, or terminate the exchange privilege upon
60 days' written notice. For federal income tax and other purposes, an exchange
is treated as a sale of your shares and a purchase of other shares.
BY TELEPHONE
You can sell or exchange shares by telephone by calling 800-2 NO-LOAD. TDD users
may contact Schwab at 800-345-2550, 24 hours a day.
We need the following information in order to process your telephone request:
- - your Schwab account number and your name for verification;
- - the number of shares you want to sell or exchange;
- - the name of the Fund and class from which you are selling or exchanging
shares;
- - if exchanging, the name of the fund and class into which you want to exchange
shares and the distribution option you select.
BY MAIL
You can sell or exchange shares by writing to the address on the cover of this
Prospectus.
We need the following information in a letter from you in order to process your
mail request:
- - your Schwab account number;
- - the number of shares you want to sell or exchange,
- - the name of the Fund and class from which you are selling or exchanging
shares;
- - if exchanging, the name of the fund and class into which you want to exchange
shares and the distribution option you select;
- - the signature of at least one of the registered Schwab account holders of your
account in the exact form specified in the account.
Once mailed, redemption and exchange requests are irrevocable and may not be
modified or canceled.
ELECTRONICALLY
For more information regarding how to sell shares electronically using
StreetSmart(R), The Equalizer(R) and TeleBroker(R), call 800-2 NO-LOAD.
NON-SWEEP LIQUIDATION POLICY. If no cash assets or margin credit balance is
available in your Schwab Account, Schwab will redeem shares without prior
notification to you to cover (a) debits in your account resulting from
transactions in securities; (b) payment of your Schwab One(R) checks; (c)
payment of
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charges made on your Visa(R) debit card; (d) purchases made under an Automatic
Investment Plan; and (e) debits due to electronic fund transactions. Schwab may
charge you a $10 fee each time Schwab must redeem your shares in one of these
circumstances.
If your account contains more than one Value Advantage Investments, shares will
be redeemed from the Value Advantage Investments in your account with the
highest balance at the time of the settlement of the transaction. If those
shares are insufficient to satisfy the total amount due, then the Value
Advantage Investments with the next highest balance in your account will be used
until no Value Advantage Investments shares remain in your account. If the sum
of the Value Advantage Investments you own is insufficient to satisfy the total
amount due, none of your Value Advantage Investments shares will be redeemed.
For redemptions made under the circumstances outlined above, you will not be
charged an administrative fee for automatic redemptions which are less than the
amount required to satisfy each Fund's minimum redemption requirement.
IMPORTANT INFORMATION ABOUT
YOUR INVESTMENT
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Business Day each class's net investment income is computed by subtracting
the expenses from the income related to the Value Advantage Shares of a Fund.
Dividends are declared from this net investment income each Business Day for
those who were shareholders of record at the previous NAV calculation. Dividends
are paid, or reinvested, on the 15th day of each month if it is a Business Day.
If the 15th day of the month is not a Business Day, dividends are paid on the
next Business Day with the exception of the dividend scheduled to be paid in
December, which is paid on the last Business Day in December.
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 each Fund and its shareholders.
Therefore, it is important that you consult with advisers about your own tax
situation.
Our Funds have qualified as regulated investment companies under the Code. In
order for our Funds to continue to so qualify, each Fund will distribute to its
shareholders on a current basis substantially all of that Fund's net investment
income and its net capital gains (if any), and we will cause each Fund to meet
certain other requirements. As regulated investment companies, the Funds 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 they distribute their earnings to their
shareholders.
THE MUNICIPAL FUND. Dividends representing net exempt-interest income received
by the Municipal Fund on Municipal Securities will generally be exempt from
federal regular 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
obliga-
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tions which, if received directly by you, would be exempt from such income
taxes.
THE CALIFORNIA FUND. Dividends representing net exempt-interest income received
by the California Fund on Municipal Securities will generally be exempt from
federal regular income tax when distributed to you. However, such dividends may
be subject to the federal alternative minimum tax. Dividends paid to the extent
of exempt-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, the interest on which is exempt
from California state personal income tax when owned by an individual. 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 exempt-interest income received by
the New York Fund on Municipal Securities will generally be exempt from federal
regular income tax when distributed to you. However, such dividends may be
subject to the federal alternative minimum tax. Dividends paid to New York
residents to the extent of exempt-interest income received on New York Municipal
Securities will also be exempt from New York state 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
capital gains, such dividends will be taxable to you as ordinary income 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 (and California and New York) income tax consequences
of all distributions made that year to your account.
HOW WE DETERMINE THE PRICE OF YOUR SHARES
The price of a Value Advantage Share is its NAV, which is determined each
Business Day at the close of trading on the Exchange, generally at 4:00 p.m.,
Eastern time. The price of a Value Advantage Share is determined by taking the
total assets of each Fund allocable to the Value Advantage Shares, subtracting
any liabilities allocable to the Value Advantage
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Shares of the Fund, and then dividing the resulting amount by the number of each
Fund's Value Advantage Shares outstanding. Purchase or redemption orders and
exchange requests will be executed at the NAV next determined after receipt by
the Transfer Agent or its authorized agent. While the Funds try to maintain a
stable NAV of $1.00, it cannot guarantee this value. The Funds' portfolio
securities are valued at the price we paid when we bought them, adjusting this
price to reflect amortization of premium or any discount (amortized cost
method). This value is then compared with the market value of the Funds'
investments.
If a deviation of 1/2 of 1% or more between our net asset value per share as
calculated by market values and the $1.00 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, the Funds may advertise the yield and effective yield,
taxable equivalent yield, taxable equivalent effective yield and total return of
the 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 a Fund or class performs in any given year will depend on the
type and quality of securities in which the Fund invests, the market and the
operating expenses of the Fund or class. Because the Value Advantage Shares are
subject to different expenses than Sweep Shares, the performance of the two
classes of each Fund will differ. Since money market funds seek to maintain a
stable $1.00 share price, current 7-day yields are the most common illustration
of money market fund performance.
YIELD. When yield is calculated, some hypothetical assumptions are made about
how a Fund or class will do for one year. The income generated over one 7-day
period by a hypothetical investment is assumed to be generated each week for one
year. This income for the year is then shown as a percentage of the hypothetical
investment.
EFFECTIVE YIELD. Effective yield is calculated the same way, but the income
generated by the hypothetical investment is compounded weekly over the 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 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.
TOTAL RETURN. Total return is the change in value of an investment in a fund
over a given period, assuming reinvestment of any dividends and capital gains. A
cumulative total
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return reflects actual performance over a stated period of time. An average
annual total return is a hypothetical rate of return that, if achieved annually,
would have produced the same cumulative total return if performance had been
constant over the entire period. Average annual total returns smooth out
variations in performance; they are not the same as actual year-by-year results.
COMPARING THE PERFORMANCE OF THE VALUE ADVANTAGE SHARES OF THE FUNDS WITH OTHER
FUNDS. The Funds may compare the performance of the Value Advantage Shares 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.
22
<PAGE> 54
GLOSSARY OF IMPORTANT TERMS
AMORTIZED COST METHOD: the method of calculating a money market mutual fund's
NAV 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 would happen if the
results were hypothetically extended to cover an entire year.
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 9:30
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
relative to the original purchase price. A gain is realized when the security
that has increased in value is 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 or class 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 that cannot be changed without the approval of a majority
(as defined in the 1940 Act) of the shareholders of a fund.
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.
23
<PAGE> 55
NET ASSET VALUE PER SHARE (NAV): the value of one share of a fund or 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.
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.
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,
California 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.
24
<PAGE> 56
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, California 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.
- ------------------------------------------------------
25
<PAGE> 57
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 58
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 59
==============
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
==============
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, CA 94104
2400-5 (4/97) Printed on recycled paper.
Schwab Money Funds
VALUE ADVANTAGE
INVESTMENTS(R)
Prospectus April 30, 1997
[SCHWABFUNDS LOGO]
<PAGE> 60
CROSS REFERENCE SHEET
PROSPECTUS
Schwab California Municipal Money Fund -- Sweep Shares
PART A ITEM PROSPECTUS CAPTION
1. Cover Page Cover Page
2. Synopsis Key Features of the Fund; Summary of
Expenses; Matching the Fund to Your
Investment Needs
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Matching the Fund to
Your Investment Needs; Investment
Objective and Policies; Organization
and Management of the Fund
5. Management of the Fund Organization and Management of the
Fund
5A. Management's Discussion of Fund
Performance How the Fund Reports Performance
6. Capital Stock and Other Securities Cover Page; Matching the Fund to
Your Investment Needs; Investment
Objective and Policies; Municipal
Securities and Investment
Techniques; Distributions and Taxes
7. Purchase of Securities Being Offered Share Price Calculation; Investing
in Shares of the Fund;
8. Redemption or Repurchase Investing in Shares of the Fund
9. Pending Legal Proceedings Inapplicable
<PAGE> 61
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND - SWEEP SHARES
PROSPECTUS APRIL 30, 1997
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact your local Charles Schwab &
Co., Inc. ("Schwab") office or call 800-2 NO-LOAD.
THE SCHWAB CALIFORNIA MUNICIPAL MONEY FUND (the "Fund") is designed for
investors who seek maximum current income that is exempt from federal regular
income tax and California state personal income tax consistent with stability of
capital. Federal regular income tax does not include the federal alternative
minimum tax. Prior to January 2, 1997, the Fund was known as the Schwab
California Tax-Exempt Money Fund.
SPECIAL RISK CONSIDERATIONS. The Fund may invest a significant percentage of its
assets in the securities of a single issuer, and therefore investment in the
Fund may be riskier than other types of money market funds. (See "Municipal
Securities and Investment Techniques.")
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. You can find more detailed information about the
Fund in the Statement of Additional Information ("SAI") dated April 30, 1997 (as
may be amended from time to time). The SAI has been filed with the Securities
and Exchange Commission ("SEC") and is available along with material
incorporated by reference and other related materials using the SEC's World Wide
Web address: http://www.sec.gov. The SAI is incorporated by reference into this
Prospectus.
This Prospectus may be available electronically by using our World Wide Web
address: http://www.schwab.com. To receive a free paper copy of this Prospectus
or the SAI, call Schwab at 800-2 NO-LOAD, 24 hours a day, or write to the Fund
at 101 Montgomery Street, San Francisco, California 94104. TDD users may contact
Schwab at 800-345-2550, 24 hours a day.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Key Features of the Fund................. 2
Summary of Expenses...................... 3
Financial Highlights..................... 4
Matching the Fund to Your
Investment Needs....................... 5
Investment Objective and Policies........ 5
Municipal Securities and Investment
Techniques............................. 6
Organization and Management of the
Fund................................... 11
Distributions and Taxes.................. 13
Share Price Calculation.................. 15
How the Fund Reports Performance......... 15
Investing in Shares of the Fund.......... 16
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE PER SHARE OF $1.00.
<PAGE> 62
KEY FEATURES OF THE FUND
MAXIMUM DOUBLE TAX-EXEMPT INCOME AND SAFETY. The Schwab California Municipal
Money Fund is designed for investors who seek maximum current after-tax income
consistent with stability of capital. The Fund invests in high-quality,
short-term debt securities, the interest on which is exempt from federal regular
income tax and California state personal income tax. Federal regular income tax
does not include the federal alternative minimum tax. The Fund attempts to
maintain a stable net asset value per share ("NAV") of $1.00. (See "Investment
Objective and Policies.")
AUTOMATIC INVESTMENT/REDEMPTION FEATURE. For the Sweep Shares of the Fund, if
you elect, free credit balances in your Schwab brokerage account (including your
Schwab One(R) account) will be automatically invested or "swept" into the Fund,
subject to the terms and conditions of your brokerage account agreement. Shares
will also be sold as necessary to settle securities transactions, collateralize
margin obligations or cover debit balances. This feature keeps your money
working and saves you the time and trouble of withdrawing and redepositing
funds. (See "Investing in Shares of the Fund - How to Buy Shares" and "Investing
in Shares of the Fund - How to Sell or Exchange Shares.")
LIQUIDITY. You can conveniently sell your shares of the Fund at any time. (See
"Investing in Shares of the Fund - How to Sell or Exchange Shares.")
LOW COST INVESTING. The Fund imposes no sales or transaction fees on purchases
or redemptions of shares of the Fund. (See "Summary of Expenses.") In addition,
the Sweep Shares' total operating expenses will not exceed 0.65% of the Sweep
Shares' average daily net assets, as guaranteed by Charles Schwab Investment
Management, Inc. (the "Investment Manager") and Schwab through at least April
30, 1998. (See "Matching the Fund to Your Investment Needs.")
PROFESSIONAL MANAGEMENT. The Investment Manager currently provides investment
management services to the SchwabFunds(R), a family of 29 mutual funds with over
$47 billion in assets as of April 1, 1997. (See "Organization and Management of
the Fund.")
SHAREHOLDER SERVICE. Schwab's professional representatives are available
toll-free 24 hours a day to receive your Fund orders. Call 800-2 NO-LOAD. As a
discount broker, Schwab gives you investment choices and lets you make your own
decisions. Schwab has many services that help you make the most informed
investment decisions. (See "Investing in Shares of the Fund - How to Buy Shares"
and "Investing in Shares of the Fund - How to Sell or Exchange Shares.")
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity in one report.
SPECIAL RISK CONSIDERATIONS. The Fund may invest a significant percentage of its
assets in the securities of a single issuer, and therefore investment in the
Fund may be riskier than other types of money market funds. (See "Municipal
Securities and Investment Techniques.")
2
<PAGE> 63
SUMMARY OF EXPENSES(1)
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES: None
ANNUAL OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS):
Management Fees (after fee
reduction)(2)................... 0.19%
12b-1 Fees......................... None
Other Expenses (after fee reduction
and/or expense
reimbursement)(3)............... 0.46%
-----
TOTAL OPERATING EXPENSES(3).......... 0.65%
</TABLE>
(1) See "Matching the Fund to Your Investment Needs" for information regarding
the key differences between the multiple classes of shares of the Fund.
(2) This amount reflects a reduction by the Investment Manager, which is
guaranteed at least through April 30, 1998. If there were no such reduction,
the management fee for the Fund would have been 0.44% of the Fund's average
daily net assets. (See "Organization and Management of the Fund - Operating
Fees and Expenses.")
(3) This amount reflects the guarantee by the Investment Manager and Schwab
that, at least through April 30, 1998, total operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses) will not
exceed 0.65% of the Sweep Shares' average daily net assets. Without this
guarantee, other expenses and total operating expenses would have been 0.48%
and 0.92%, respectively, of the Sweep Shares' average daily net assets. The
effect of these guarantees is to maintain or lower the expenses of the Sweep
Shares and thus maintain or increase total return to shareholders. This
amount does not include any fees that you may be charged if you do not
maintain the minimum balance required in your Schwab account. (See
"Investing in Shares of the Fund.")
EXAMPLE. Based on the expenses in the above table, you would pay the following
expenses on a $1,000 investment in the Sweep Shares of the Fund, assuming (1) a
5% annual return and (2) redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$7 $21 $36 $ 81
</TABLE>
THE PURPOSE OF THE PRECEDING TABLE IS TO ASSIST INVESTORS IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE SWEEP SHARES OF THE FUND WILL
BEAR DIRECTLY OR INDIRECTLY. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. THIS HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF
PAST OR FUTURE PERFORMANCE.
3
<PAGE> 64
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified report is included in the Fund's Annual Report,
which contains additional financial data and related notes. The financial
highlights, financial statements and report of the auditor are incorporated by
reference into the SAI. Free copies of the SAI and Annual Report may be obtained
by calling the telephone number or writing to the address on the first page of
this Prospectus.
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND -- SWEEP SHARES
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------ ----------------------------
NET DISTRIBUTIONS
REALIZED & TOTAL FROM NET
FISCAL NET ASSET NET UNREALIZED FROM DIVIDENDS REALIZED ASSET
PERIOD VALUE INVEST- GAINS INVEST- FROM NET GAIN ON VALUE
ENDED BEGINNING MENT (LOSSES) ON MENT INVESTMENT INVEST- TOTAL END OF
DEC. 31 OF YEAR INCOME INVESTMENT OPERATION INCOME MENT DISTRIBUTIONS YEAR
- ------- --------- ------ ----------- --------- ---------- ------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $1.00 $0.03 -- $0.03 $(0.03) -- $ (0.03) $ 1.00
1995 1.00 0.03 -- 0.03 (0.03) -- (0.03) 1.00
1994 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1993 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1992 1.00 0.02 -- 0.02 (0.02) -- (0.02) 1.00
1991 1.00 0.04 -- 0.04 (0.04) -- (0.04) 1.00
1990(2) 1.00 0.01 -- 0.01 (0.01) -- (0.01) 1.00
<CAPTION>
RATIOS/SUPPLEMENTAL DATA RATIO OF
-------------------------------------- NET
RATIO OF INVESTMENT
EXPENSES INCOME
FISCAL TO AVERAGE TO AVERAGE
PERIOD TOTAL NET ASSETS NET NET
ENDED RETURN(3) END OF YEAR ASSETS(1) ASSETS(1)
DEC. 31 (%) (000'S) (%) (%)
- ------- ------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
1996 2.80 $ 1,816,112 0.65 2.77
1995 3.20 1,577,695 0.65 3.15
1994 2.26 1,293,883 0.64 2.25
1993 1.91 1,062,042 0.63 1.89
1992 2.35 691,176 0.63 2.31
1991 3.77 494,214 0.61 3.70
1990( 0.77 339,292 0.28(4) 5.06(4)
</TABLE>
(1) The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<CAPTION>
RATIO OF EXPENSES RATIO OF NET INVESTMENT
TO INCOME
FISCAL PERIOD ENDED AVERAGE NET ASSETS TO AVERAGE NET ASSETS
DECEMBER 31 (BEFORE REDUCTION) (BEFORE REDUCTION)
- -------------------- -------------------- ------------------------------
<S> <C> <C>
1996 0.92% 2.50%
1995 0.94% 2.86%
1994 0.94% 1.95%
1993 0.96% 1.56%
1992 0.97% 1.97%
1991 0.98% 3.33%
1990 1.17%(4) 4.17%(4)
</TABLE>
(2) For the period from November 6, 1990 (commencement of operations) to
December 31, 1990.
(3) Not annualized.
(4) Annualized.
Prior to June 6, 1995, the Fund did not offer multiple classes of shares of
beneficial interest. The information contained in this table relates to shares
which were redesignated as Sweep Shares as of June 6, 1995.
4
<PAGE> 65
MATCHING THE FUND TO YOUR
INVESTMENT NEEDS
The Fund may be appropriate for a variety of investment programs which can be
long-term or short-term in nature. While the Fund is not a substitute for
building an investment portfolio tailored to an individual's investment needs
and risk tolerance, it can be used as a high-quality, conveniently liquid money
market investment for your brokerage account cash when it is not fully invested
in other securities. The Fund would not be an appropriate investment for
retirement plans such as IRAs and Keogh plans.
Because the Fund is designed to provide liquidity and stability of capital, as
well as automatic investment of free credit balances, it may be especially
suitable for investors with short-term investment objectives, including those
who are awaiting an opportune time to invest in the equity and/or bond markets.
The Fund may also be appropriate for long-term investors seeking a low-risk
investment alternative which is designed to provide double tax-free income which
is exempt from federal regular income and California state personal income
taxes.
In addition to the Sweep Shares of the Fund, Schwab also offers Value Advantage
Shares of the Fund, pursuant to a multiple class plan (the "Plan") adopted by
the Board of Trustees of the Schwab Fund Family. Under the Plan, Value Advantage
Shares of the Fund, which are not available through automatic ("sweep")
investment programs, are subject to lower transfer agency expenses than the
Sweep Shares of the Fund. The transfer agent is entitled to receive an annual
fee of 0.05% of the average daily net assets of the Value Advantage Shares of
the Fund. In addition, the Value Advantage Shares of the Fund require a minimum
initial investment of $25,000, $5,000 minimum subsequent investments and a
$20,000 minimum account balance. Sales and exchanges of Value Advantage Shares
in amounts less than $5,000 are subject to a $5.00 administrative fee, as well
as balances of less than $20,000.
For information regarding Value Advantage Shares, call 800-2 NO-LOAD. You may
also obtain information about Value Advantage Shares from your Schwab broker.
INVESTMENT OBJECTIVE
AND POLICIES
The Fund's investment objective is maximum current income that is exempt from
federal regular income and California state personal income taxes, consistent
with stability of capital. This investment objective is fundamental and cannot
be changed without shareholder approval. To achieve its objective, the Fund
primarily invests in short-term, high-quality municipal obligations, the income
from which is exempt from federal regular income and California state personal
income taxes. Federal regular income tax does not include the federal
alternative minimum tax.
Under normal market conditions, the Fund attempts to invest 100% of its total
assets in debt obligations issued by or on behalf of California and other
states, territories and possessions of the United States (including 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 regular income tax ("Municipal Securities"). Absent unusual market
conditions, the Fund will invest at least 65% of its total assets in such
obligations that also generate interest, which in the opinion of bond counsel is
exempt from California state personal income tax ("California Municipal
Securities").
5
<PAGE> 66
Provided that we meet certain conditions (described in the SAI under
"Distributions and Taxes"), dividends that represent interest income received on
California Municipal Securities and on certain federal obligations will be
exempt from California state personal income taxes.
The Fund invests only in Municipal Securities which at the time of purchase: (a)
are rated in one of the two highest rating categories for municipal commercial
paper or short-term municipal securities assigned by 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 the
Investment Manager; or (d) are unrated by any NRSRO, if they are determined by
the Investment Manager, using guidelines approved by the Board of Trustees, to
be at least equal in quality to one or more of the above referenced securities.
(For a description of the ratings, see "Appendix - Ratings of Investment
Securities" in the SAI.)
The Fund may continue to hold a Municipal Security that, after its purchase by
the 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, the Fund will keep such a
security in its portfolio only if the Board of Trustees or its properly
authorized delegate determines that keeping the security is in the best
interests of the Fund.
With the exception of securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, the Fund may not:
1. Purchase the securities of any issuer, if as a result more than 5% of the
value of the Fund's total assets would be invested in the securities of that
issuer. However, provided that no more than 25% of the value of the Fund's
total assets are invested in the securities of any one issuer, up to 50% of
the value of the Fund's total assets may be invested without regard to this
5% limitation. For purposes of this limitation, a security is considered to
be issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to an industrial revenue bond that is
backed only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a security
may also be considered to be an issuer in connection with such guarantee.
2. Purchase any securities which would cause 25% or more of the value of the
Fund's total assets at the time of purchase to be invested in the securities
of issuers conducting their principal business activities in the same
industry. However, this limitation shall not apply to Municipal Securities
issued by governmental entities.
MUNICIPAL SECURITIES AND
INVESTMENT TECHNIQUES
Municipal Securities in which the Fund 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
6
<PAGE> 67
payment of principal and interest. Revenue securities are secured only by the
revenues derived from: (1) a particular facility or class of facilities; (2) a
specific revenue source such as a special excise tax; or (3) another specific
revenue source, such as the user of the facility being financed.
Revenue securities may include private activity bonds and industrial development
bonds. Such bonds may be issued by or on behalf of public authorities to finance
various privately operated facilities and are not payable from the unrestricted
revenues of the issuer. As a result, the credit quality of private activity
bonds is frequently related directly to the credit standing of private
corporations or other entities. From time to time, the Fund may invest more than
25% of its total assets in industrial development and private activity bonds.
Among other types of instruments, the Fund may purchase tax-exempt commercial
paper and short-term municipal notes such as tax anticipation notes, bond
anticipation notes, revenue anticipation notes, construction loan notes and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of bond
placements, or other revenues. The Fund has the ability to invest all of its
assets in Municipal Securities that generate interest which is a tax preference
item for purposes of the federal alternative minimum tax. Thus, if you are
subject to the federal alternative minimum tax, all or a portion of your income
from the Fund may be subject to the federal alternative minimum tax.
MORAL OBLIGATION SECURITIES. The Fund 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.
MUNICIPAL LEASES. The Fund may invest up to 25% of its 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. Investments in municipal leases may
be considered to be illiquid. Municipal leases are subject to "non-appropriation
risk," which is the risk that the municipality may terminate the lease in the
event that the municipality's appropriating body does not allocate the funds
necessary to make lease payments. In such circumstances, the lessor is typically
entitled to repossess the property. The private sector value of the property is,
however, generally less than the value of the property to the municipality. The
Investment Manager, pursuant to guidelines established by the Board of Trustees,
is responsible for determining the credit quality of unrated municipal leases,
on an ongoing basis, including an assessment of the likelihood that the lease
will not be terminated.
SYNTHETIC VARIABLE OR FLOATING-RATE MUNICIPAL SECURITIES. The Fund also may
invest up to 25% of its total 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
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synthetic security; and (iii) a contractual agreement pursuant to which the
investing Fund and a remarketing agent 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 that
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 generally
are structured as private placements and, accordingly, may be deemed to be
restricted securities for purposes of the Fund's investment limitations.
VARIABLE RATE SECURITIES. The Fund 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
ordinarily is 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. As interest
rates decrease or increase, Variable Rate Securities experience less
appreciation or depreciation than fixed-rate obligations.
VARIABLE RATE DEMAND INSTRUMENTS. The Fund may invest in variable rate demand
instruments issued by industrial development authorities and other government
entities. In the event a variable rate demand instrument to be purchased by the
Fund is not rated by credit rating agencies, the 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 or 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, the Fund may, at any time or during
specified periods not exceeding one year (depending upon the instrument
involved), demand payment in full of the principal of the instrument and may
resell the instrument to a third party.
The Fund 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 the 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.
PARTICIPATION INTERESTS. The Fund 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
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undivided interest in the securities underlying the instrument.
The Fund 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 the Fund's previously described quality
standards for Municipal Securities; and (c) the instrument is issued with an
opinion of counsel or is the subject of a ruling of the Internal Revenue
Service, stating that the interest earned on the participation interest is
exempt from federal income tax.
STAND-BY COMMITMENTS. The Fund also may acquire "stand-by commitments" for
Municipal Securities held in its portfolio. Under a stand-by commitment, a
dealer agrees to purchase at the Fund's option specified Municipal Securities at
a price equal to their amortized cost value plus accrued interest. The Fund will
acquire stand-by commitments solely to improve portfolio liquidity. The Fund
does not intend to exercise its stand-by rights solely for trading purposes.
ILLIQUID SECURITIES. The Fund will not purchase illiquid securities, including
repurchase agreements maturing in more than 7-days, if, as a result thereof,
more than 10% of the Fund's net assets valued at the time of the transaction are
invested in such securities.
GOVERNMENT SECURITIES. The Fund 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, while others 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.
MATURITY. The Fund will purchase only securities that are deemed to mature in
397 days or less in accordance with federal securities regulations 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. The Fund may purchase securities on
a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, the Fund will not pay for such securities or start earning
interest on them until the Fund receives 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.
The Fund will not invest more than 25% of its total assets in when-issued or
delayed delivery securities. The Fund will not purchase such securities for
speculative purposes and will expect to actually acquire the securities when it
purchases them. However, the Fund reserves the right to sell any such securities
before their settlement dates, if the Investment Manager deems such a sale
advisable.
REPURCHASE AGREEMENTS. The Fund may engage in "repurchase agreements." In
entering into a repurchase agreement, the Fund acquires ownership of a security
from a broker-dealer or bank that agrees to repurchase the security at a
mutually agreed upon time and price (which price is higher than the
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purchase price), thereby determining the yield during the Fund's holding period.
Maturity of the securities subject to repurchase may exceed one year.
If the seller of a repurchase agreement becomes bankrupt or otherwise defaults,
the Fund might incur expenses in enforcing its rights and could experience
losses, including a decline in the value of the underlying securities and a loss
of income. The Fund will enter into repurchase agreements only with banks and
other recognized financial institutions that the Investment Manager deems
creditworthy.
TEMPORARY INVESTMENTS. The 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 in one of the two highest rating categories by any NRSRO; commercial paper
(other than Municipal Securities) rated in one of 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 the Fund to generate dividends taxable to
shareholders as ordinary income, it is the Fund's primary intention to produce
dividends which are not subject to federal regular income or California state
personal income taxes.
SECURITIES SUBJECT TO A PUT FEATURE. A "put" feature permits the Fund to sell a
security at a fixed price, prior to maturity to the put issuer. Because of this
feature, Municipal Securities subject to a put generally may be sold to third
parties at market rates. Generally, a premium is paid for a security subject to
a put feature. Investments in Municipal Securities subject to puts are limited
by federal securities laws and expose the Fund to a credit risk associated with
the put provider.
BORROWING POLICY. The Fund may not borrow money except for temporary purposes to
meet redemption requests that could not otherwise be met without immediately
selling portfolio securities. The Fund may borrow an amount up to one-third of
the value of its total assets and may pledge up to 10% of the Fund's net assets
to secure borrowings. The Fund may not borrow for leverage purposes. The Fund's
borrowing and pledging policies as set forth in the SAI are fundamental.
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 Municipal Securities is exempt from California state
personal income tax. Bond counsel will render such opinions to the issuers of
Municipal Securities at the time the securities are issued. The Fund 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 Fund is a non-diversified portfolio. The
investment return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of issuers, relative to the number of issuers
held in a diversified portfolio. In the event of changes in the financial
condition or in the market's assessment of certain issuers, the Fund's policy of
acquiring large positions in the obligations of a relatively small number
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of issuers may affect the value of the Fund's portfolio to a greater extent than
that of a diversified portfolio.
The Fund may invest more than 25% of its total assets in Municipal Securities
that produce interest that is paid solely from revenues on similar projects.
However, the Fund does not presently intend to invest in such securities on a
regular basis, but will do so if such investment is deemed necessary or
appropriate by the Investment Manager. To the extent that the Fund's assets are
invested in Municipal Securities that produce interest that is payable solely
from revenues on similar projects, the Fund will be subject to the particular
risks presented by such projects to a greater extent than it would be if the
Fund's assets were not so invested.
Certain California constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could result in adverse
consequences affecting California Municipal Securities. For example, in recent
years "Proposition 13" and similar California constitutional and statutory
amendments and initiatives have restricted the ability of California taxing
entities to increase real property tax revenues. Other initiative measures
approved by California voters, through limiting various other taxes, have
resulted in a substantial reduction in state and local revenues. Decreased state
revenues may result in reductions in allocations of state revenues to local
governments. It is not possible to determine the impact of these initiatives on
the ability of California issuers to pay interest or repay principal on their
obligations. There is no assurance that any California issuer will make full or
timely payments of principal and interest or remain solvent. For example, in
December 1994, Orange County filed for bankruptcy. In addition, from time to
time, federal legislative proposals have threatened the tax-exempt status or use
of municipal securities. (An expanded discussion of the risks associated with
municipal securities and California issuers is contained in the SAI.)
Participation interests in Municipal Securities and other derivative securities
eligible for purchase by the Fund involve special risks, including a risk that
the Internal Revenue Service may characterize some or all of the interest paid
on such securities to the Fund as taxable. There is also an increased risk, most
typically associated with "municipal lease" obligations, that a municipality
will not appropriate the funds necessary to make the scheduled payments on, or
may seek to cancel or otherwise avoid its obligations under the lease that
supports the security owned by the Fund.
ORGANIZATION AND
MANAGEMENT OF THE FUND
GENERAL OVERSIGHT. The Board of Trustees and officers meet regularly to review
investments, performance, expenses and other business affairs.
THE INVESTMENT MANAGER. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, California 94104. The Investment Manager
provides a continuous investment program, including general investment and
economic advice regarding the Fund's investment strategies; manages the Fund's
investment portfolio; performs expense management, accounting and record
keeping; and provides other services necessary to the operation of the Fund. The
Investment Man-
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ager, formed in 1989, is a wholly-owned subsidiary of The Charles Schwab
Corporation and is the investment adviser and administrator of the mutual funds
in the SchwabFunds(R), a family of 29 mutual funds. As of April 1, 1997, the
SchwabFunds(R) had aggregate net assets in excess of $47 billion.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Charles Schwab & Co., Inc. ("Schwab" or
the "Transfer Agent"), 101 Montgomery Street, San Francisco, California 94104,
serves as shareholder services agent and transfer agent for the Fund. Schwab
provides information and services to shareholders, which include reporting share
ownership, sales and dividend activity (and associated tax consequences),
responding to daily inquiries, effecting the transfer of Fund shares and
facilitating effective cash management of shareholders' Schwab account balances.
It furnishes office space and equipment, telephone facilities, personnel and
informational literature distribution as is necessary or appropriate in
providing shareholder and transfer agency information and services. Schwab is
also the Fund's distributor, but receives no compensation for its services as
such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 4.1 million active customer accounts and has over 241 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, Chief Executive Officer and a Director of
The Charles Schwab Corporation. As a result of his beneficial ownership
interests in and other relationships with The Charles Schwab Corporation and its
affiliates, Mr. Schwab may be deemed to be a controlling person of Schwab and
the Investment Manager.
OPERATING FEES AND EXPENSES
Pursuant to its Investment Advisory and Administration Agreement with the Fund,
the Investment Manager is entitled to receive from the Fund a graduated annual
fee, payable monthly, of 0.46% of the Fund's average daily net assets not in
excess of $1 billion, 0.41% of such net assets over $1 billion but not in excess
of $2 billion and 0.40% of such net assets over $2 billion.
For the fiscal year ended December 31, 1996, the Fund paid a management fee of
0.19% of its average daily net assets and paid total operating expenses of 0.65%
of the Sweep Shares' average daily net assets.
For the transfer agency services provided, the Transfer Agent is entitled to
receive an annual fee, payable monthly, of 0.25% of the average daily net assets
of the Sweep Shares. In addition, for shareholder services provided, Schwab is
entitled to receive an annual fee, payable monthly, of 0.20% of the average
daily net assets of the Sweep Shares.
OTHER EXPENSES. The Charles Schwab Family of Funds (the "Trust") pays the
expenses of its operations, including: the fees and expenses for independent
accountants, legal counsel and the custodian of its assets; the cost of
maintaining books and records of account; registration fees; the fees and
expenses of qualifying its shares for distribution under
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federal and state securities laws; and industry association membership dues.
These expenses generally are allocated among the Trust's investment portfolios
("Series"), or classes of shares within these Series, in proportion to their
relative net assets at the time the expense is incurred. However, expenses
directly attributable to a particular Series or class of a Series will be
charged to that Series or class, respectively.
OTHER INFORMATION
The Trust is an open-end investment management company 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 9 Series which may be
organized into one or more classes of shares of beneficial interest. The Board
of Trustees may authorize the issuance of shares of additional Series or
classes, if it deems it desirable. Shares within each Series or class have
equal, noncumulative voting rights and equal rights as to distributions, assets
and liquidation of such Series, except to the extent such voting rights or
rights as to distributions, assets and liquidation vary among classes of a
Series.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. The Trust is not required to hold annual
shareholders' meetings and does not intend to do so. It will, however, hold
special meetings as required or deemed desirable by the Board of Trustees, for
such purposes as changing fundamental policies, electing or removing Trustees or
approving or amending an investment advisory agreement. In addition, a Trustee
may be removed by shareholders at a special meeting called upon by written
request of shareholders owning in the aggregate at least 10% of the outstanding
shares of the Trust.
Shareholders will vote by Series and not in the aggregate (for example, when
voting to approve the investment advisory agreement), except when voting in the
aggregate is permitted under the 1940 Act, such as for the election of Trustees.
In addition, shareholders of the Sweep Shares will vote exclusively as a class
on any matter relating solely to the Sweep Shares and on any matter in which the
interests of the shareholders of the Sweep Shares differ from the interests of
the shareholders of Value Advantage Shares.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS. On each day that the NAV is determined
("Business Day"), net investment income is declared at the close of trading on
the New York Stock Exchange (the "Exchange") (generally 4:00 p.m. Eastern time)
as a dividend to shareholders of record at that time. Dividends are normally
paid (and where applicable, reinvested) on the 15th of each month, if a Business
Day, otherwise on the next Business Day, with the exception of the dividend paid
in December, which is scheduled to be paid on the last Business Day in December.
TAX INFORMATION. The Fund has elected to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"),
qualified as such and intends to continue to so qualify. In order to so qualify,
the Fund will distribute on a current basis substantially all of its investment
company taxable income, its net exempt-interest income and its net capital gains
(if any) and will meet certain other requirements. Such qualification relieves
the Fund of liability for
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federal and California income taxes to the extent the Fund's earnings are
distributed.
FEDERAL INCOME TAXES: Dividends derived from exempt-interest income (known as
"exempt-interest dividends") may be treated by the Fund's shareholders as items
of interest excludable from their federal gross income.
To the extent dividends paid to shareholders are derived from taxable interest
or capital gains, such dividends will be subject to federal income tax, whether
received in cash or reinvested.
The Fund may at times purchase Municipal Securities at a discount from the price
at which they were initially issued. For federal income tax purposes, some or
all of this market discount will be included in the Fund's ordinary income and
will be taxable to shareholders as such when it is distributed to them.
If the Fund holds certain "private activity bonds" ("industrial development
bonds" under prior law), dividends derived from interest on such obligations and
other securities will be classified as an item of tax preference which could
subject certain shareholders to federal alternative minimum tax liability.
Corporate shareholders must also take all exempt-interest dividends into account
in determining "adjusted current earnings" for purposes of calculating their
alternative minimum tax.
Private activity bonds and industrial development bonds generally are bonds
issued by or on behalf of public authorities to obtain funds to provide certain
privately owned or operated facilities. Private activity bonds and industrial
development bonds also generally are limited obligation (or revenue) securities,
which means that they are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from some other
specific revenue source. (See "Municipal Securities" in the SAI.)
Shareholders receiving Social Security or Railroad Retirement Act benefits
should note that exempt interest dividends will be taken into account in
determining the taxability of such benefits.
CALIFORNIA INCOME TAXES: Dividends paid by the Fund to non-corporate
shareholders and derived from interest on California Municipal Securities or
federal obligations are also exempt from California state personal income tax.
For this purpose, federal obligations are obligations the interest on which
would be excludable from gross income for California state personal income tax
purposes, if the obligations were owned by an individual. However, dividends
paid to shareholders that are corporations subject to California franchise tax
or income tax will be taxed as ordinary income to such shareholders,
notwithstanding that all or a portion of such dividends are exempt from
California state personal income tax. Moreover, to the extent that the Fund's
dividends are derived from sources other than California Municipal Securities or
federal obligations, such dividends will be subject to California state personal
income tax, even though such dividends may be exempt from federal regular income
tax.
Except as noted with respect to California state personal income tax,
distributions may be taxable to investors under state or local law as dividend
income, even though all or a portion of such distributions may be derived from
interest on obligations, which, if realized directly, would be exempt from such
income taxes. In addition, to the extent, if any, that dividends paid to
shareholders are derived from taxable interest, market discount or capi-
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tal gains, such dividends will not be exempt from California state personal
income tax whether received in cash or reinvested.
Interest on private activity bonds is not subject to the California alternative
minimum tax. In addition, California does not impose its personal income tax on
Social Security or Railroad Retirement Act benefits.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' Schwab statements. The Fund will notify shareholders
at least annually as to the federal income and California state personal income
tax consequences of distributions made each year.
The foregoing is only a brief summary of some of the federal and California
state personal income tax considerations affecting the Fund and its
shareholders. Accordingly, potential investors should consult their tax advisers
with specific reference to their own tax situations.
SHARE PRICE CALCULATION
The price of a Sweep Share of the Fund on any given day is its net asset value
per share or "NAV." This figure is computed by taking total Fund assets
allocable to the Sweep Shares, subtracting any liabilities allocable to that
class and dividing the resulting amount by the number of Sweep Shares
outstanding. NAV is determined on each day that both the Federal Reserve Bank of
New York and the Exchange are open for business, first at 10:00 a.m. (Eastern
time), then again at the close of normal trading on the Exchange (generally 4:00
p.m. Eastern time). Purchase or redemption orders and exchange requests will be
executed at the NAV next determined after receipt by the Transfer Agent or its
authorized agent. While the Fund attempts to maintain its NAV at a constant
$1.00, Fund shares are not insured against losses.
The Fund values its portfolio securities at amortized cost, which means that
they are valued at their acquisition cost (as adjusted for amortization of
premium or discount) rather than at current market value. Calculations are made
to compare the value of the Fund's investments using the amortized cost method
with market values. Except as described below, market valuations are obtained by
using: (1) actual quotations provided by third-party pricing services or market
makers; (2) estimates of market value; or (3) values obtained from yield data
relating to comparable classes of money market instruments published by
reputable sources at the mean between the bid and asked prices for the
instruments. If a deviation of 1/2 of 1% or more were to occur between NAV, as
calculated by reference to market values and the $1.00 per share amortized cost
value of the Sweep Shares of the Fund, or if there were any other deviation
which the Board of Trustees believed would result in a material dilution to
shareholders or purchasers, the Board of Trustees would promptly consider what
action, if any, should be initiated.
HOW THE FUND REPORTS PERFORMANCE
From time to time the Fund may advertise the yield, effective yield, taxable
equivalent yield, taxable equivalent effective yield and total return of the
Sweep Shares. Performance figures are based upon historical results and are not
intended to indicate future performance. Since money market funds seek to
maintain a stable $1.00 share price, current 7-day yields are the most common
illustration of money market fund performance.
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YIELD refers to the income generated by a hypothetical investment in the Sweep
Shares of the Fund over a specific 7-day period. This income is then annualized,
which means that the income generated during the 7-day period is assumed to be
generated each week over an annual period and is shown as a percentage of the
hypothetical investment.
EFFECTIVE YIELD is calculated similarly, but the income earned by the investment
is assumed to be compounded weekly when annualized. Effective yield will be
slightly higher than yield due to this compounding effect.
TAXABLE EQUIVALENT YIELD is the yield that a taxable investment must generate in
order to equal (after applicable taxes are deducted) the yield for an investor
in stated federal income and California state tax brackets (normally assumed to
be the applicable maximum tax rate). Taxable equivalent yield will be higher
than tax-exempt yield. (See "Yield" in the Statement of Additional Information.)
TAXABLE EQUIVALENT EFFECTIVE YIELD is computed in the same manner as is taxable
equivalent yield, except that effective yield is substituted for yield in the
calculation.
TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total returns smooth
out variations in performance; they are not the same as actual year-by-year
results.
The performance of the Sweep Shares may be compared to that of other mutual
funds tracked by mutual fund rating services, various indices of investment
performance, U.S. Government obligations, bank certificates of deposit, other
investments for which reliable performance data is available and the consumer
price index.
Because the Sweep Shares of the Fund are subject to different expenses than the
Value Advantage Shares, the performance of the two classes of shares will
differ.
Additional performance information about the Sweep Shares is available in the
Fund's Annual Report, which is sent to all shareholders. To request a free copy,
call 800-2 NO-LOAD.
INVESTING IN SHARES OF THE FUND
SHAREHOLDER SERVICE. You may place Fund purchase orders and orders to sell
shares as well as exchange requests at any one of over 241 Schwab offices
nationwide or by calling 800-2 NO-LOAD, where trained representatives are
available to answer questions about the Fund and your account. The right to
initiate transactions by telephone is automatically available through your
Schwab account. TDD users may contact Schwab at 800-345-2550, 24 hours a day.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If the Fund follows telephone orders that
it reasonably believes to be genuine, it will not be liable for any losses a
shareholder may experience. If the Fund does not follow reasonable procedures to
confirm that a telephone order is genuine, the Fund may be liable for any losses
the share-
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holder may suffer from unauthorized or fraudulent orders. These procedures may
include:
- - requiring a form of personal identification prior to acting upon instructions
received by telephone;
- - providing written confirmation of such instructions; and
- - tape recording telephone transactions.
Investors should remember that it may be difficult to complete transactions by
telephone during periods of drastic economic or market changes, when our phone
lines may become very busy with calls from other investors. If you want to buy,
sell or exchange shares but have trouble reaching the Fund by telephone, you may
want to use one of the other ways offered for completing the transactions
discussed below, even though these procedures may mean that completing your
transaction may take longer.
To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.
In an effort to reduce the Fund's mailing costs, the Fund consolidates
shareholder mailings by household. This consolidation means that a household
having multiple accounts with the identical address of record will receive a
single package during each shareholder mailing. If you do not wish this
consolidation to apply to your account(s), write to SchwabFunds(R) at 101
Montgomery Street, San Francisco, California 94104 to that effect.
Telephone purchase or redemption orders and exchange requests received prior to
8:00 p.m. (Eastern time) on any Business Day, once they have been verified as to
the caller's identity and account ownership, will be deemed to be received by
the Transfer Agent, or its authorized agent, prior to the next NAV
determination. Subsequent telephone orders received prior to the first NAV
determination on the following day will be deemed received prior to that day's
second NAV determination.
OPENING A SCHWAB ACCOUNT. You may buy shares of the Fund through an account
maintained with Schwab or any other entity designated by Schwab. Payment for
shares should be made directly to Schwab. If you do not presently maintain a
Schwab account and wish to establish one, simply complete a Schwab Account
Application, available by calling 800-2 NO-LOAD, 24 hours a day. You may mail
the application to Schwab at 101 Montgomery Street, San Francisco, California
94104. Corporations and other organizations should contact their local Schwab
office to determine which additional forms may be necessary to open a Schwab
account. With your Schwab account, you have access to other investments
available at Schwab, such as stocks, bonds and other mutual funds.
The Securities Investor Protection Corporation ("SIPC") will provide account
protection, in an amount up to $500,000, for securities, including Fund shares,
which you hold in a Schwab account. Of course, SIPC account protection does not
protect shareholders from share price fluctuations. If you already have a Schwab
account, you may buy shares in the Fund as described below and need not open a
new account.
SCHWAB ACCOUNT MINIMUMS AND ASSOCIATED FEES. Schwab requires a $1,000 minimum
initial investment and minimum ongoing balance to maintain a Schwab account
($500 for custodial accounts). A fee of $7.50 will be charged to Schwab accounts
that fall below this minimum for three consecutive months in
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any quarter. This fee, if applicable, will be charged at the end of each quarter
and will be waived if there has been at least one commissionable trade within
the last 6 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 12 months.
DEPOSITING FUNDS. You may deposit funds into your Schwab account by check, wire
or many other forms of electronic funds transfer. Securities may also be
deposited. All checks should be made payable to Charles Schwab & Co., Inc.
Schwab will charge a $15 service fee against an investor's Schwab account should
his or her check be returned because of insufficient or uncollected funds or a
stop payment order. If you would like to wire funds into or from your existing
Schwab account, call 800-2 NO-LOAD. A service fee will be charged against your
Schwab account for each wire sent.
WHEN YOU CAN BUY SHARES. If funds (including those transmitted by wire) are
received by Schwab before the time of the Fund's last daily NAV calculation
(normally 4:00 p.m. Eastern time), they will be available for investment on that
day. If funds arrive after that time, they will be available for investment the
next Business Day.
HOW TO BUY SHARES
AUTOMATIC INVESTMENT. When opening a Schwab brokerage account, an investor will
be asked to select a SchwabFunds class or series with sweep privileges as a
"primary fund." If the Fund is selected as a primary fund, free credit balances
in the investor's brokerage account will be invested automatically in shares of
the Fund according to the procedures described in the account agreement with the
investor. Depending on the type of account, the automatic investment of free
credit balances will be effected daily, weekly or at other times and may be
subject to minimum investment and other requirements.
An investor with an existing Schwab brokerage account may add the automatic
investment feature to his or her account by completing the appropriate section
of the Schwab Account Application. A shareholder may change primary funds by
calling or writing Schwab at the address referenced on the cover of this
Prospectus. Note that the automatic investment feature is not available for
Value Advantage Shares.
DIRECT PURCHASE. A Schwab account holder may buy shares of the Fund (if it is
not his or her primary fund) in several ways.
BY TELEPHONE
You may use existing funds in your Schwab account to make initial and subsequent
share purchases. To place your order, call 800-2 NO-LOAD, 24 hours a day. TDD
users may contact Schwab at 800-345-2550, 24 hours a day.
BY MAIL
You may direct that funds already in your Schwab account be used to make initial
and subsequent share purchases. Alternatively, your purchase instructions may be
accompanied by a check made payable to Charles
18
<PAGE> 79
Schwab & Co., Inc., which will be deposited into your Schwab account and used,
as necessary, to cover all or part of your purchase order.
Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, California 94104 and should:
- - reference your Schwab account number (unless a Schwab Account Application is
enclosed);
- - specify the name of the Fund and class and the dollar amount of shares you
would like to buy; and
- - for initial share purchases only, select one of the distribution options
listed below.
Once mailed, a purchase request is irrevocable and may not be modified or
canceled.
ELECTRONICALLY
For more information regarding how to buy shares electronically using
StreetSmart(R), The Equalizer(R) and TeleBroker(R), call 800-2 NO-LOAD.
MINIMUM BALANCE REQUIREMENTS. The minimum initial investment for Sweep Shares of
the Fund is $1,000 and subsequent investments must be at least $100 for Schwab
brokerage accounts and $1.00 for Schwab One(R) accounts.
Due to the relatively high cost of maintaining smaller holdings, the Fund
reserves the right to redeem a shareholder's shares if, as a result of
redemptions, their aggregate value drops below the $100 minimum balance
requirement for the Sweep Shares of the Fund. The Fund will notify shareholders
in writing 30 days before taking such action to allow them to increase their
holdings to at least the minimum level. Also note that, because they can only be
held in Schwab accounts, Fund shares will be automatically redeemed should the
Schwab account in which they are carried be closed.
DISTRIBUTION OPTIONS. The Schwab account standing instructions that you selected
in your Schwab Account Application will determine which of the two distribution
options listed below will apply to you. Fund distributions will be automatically
reinvested, unless the Transfer Agent, or its authorized agent, has received
instructions that distributions be mailed to you as they are paid. Call 800-2
NO-LOAD if you already have a Schwab account and wish to change your account
standing instructions.
AUTOMATIC REINVESTMENT: All distributions will be reinvested in additional
full Sweep Shares of the Fund at the net asset value next determined after
their payable date; or
RECEIVE YOUR DIVIDENDS BY MAIL: All distributions will be credited to your
Schwab account as of the payable date. If your account is coded to have
dividends mailed immediately, checks will normally be mailed the Business
Day after distributions are credited.
To change the distribution option you have selected, call 800-2 NO-LOAD.
19
<PAGE> 80
WAIVERS AND OTHER PURCHASE INFORMATION. The minimum amounts required for
automatic investment or direct purchase may be reduced or waived on certain
occasions. For example, free credit balances in accounts of certain categories
of investors, such as holders of Schwab One(R) and Schwab custodial accounts,
may be invested automatically irrespective of amount. The Fund may also waive
the required minimums for purchases by trustees, directors, officers or
employees of Schwab, the Investment Manager or the Fund. The Fund reserves the
right, in its sole discretion and without prior notice to shareholders, to
withdraw or suspend all or any part of the offering made by this Prospectus, to
reject purchase orders or to change the minimum investment requirements. All
orders to buy shares of the Fund are subject to acceptance by the Fund and are
not binding until confirmed or accepted in writing.
HOW TO SELL OR
EXCHANGE SHARES
The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of another SchwabFunds Series or classes available to investors in your
state, provided you meet the initial and subsequent investment requirements and
any other requirements relating to the Series or class of shares you wish to
buy. Thus, you can conveniently modify your investments if your goals or market
conditions change. For federal income tax and certain other purposes, an
exchange of shares between funds will be treated as a sale of shares in one fund
and the purchase of shares in another fund. An exchange of shares between
classes of the same fund should not be treated as a sale of shares. The Fund
reserves the right to modify, limit or terminate the exchange privilege upon 60
days' written notice.
AUTOMATIC REDEMPTION. A sale of Fund shares will be automatically effected to
satisfy debit balances in an investor's Schwab account, to provide necessary
cash collateral for an investor's margin obligation to Schwab and to settle
securities transactions in the account. All such sales will be effected in
accordance with the procedures described in the investor's Schwab Account
Agreement.
DIRECT REDEMPTION OR EXCHANGE. You can sell or exchange your shares at any time
by telephone, by mail or electronically, subject to the following terms and
conditions:
- - 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 on the Business Day after the Transfer
Agent, or its authorized agent, 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
20
<PAGE> 81
- - we may suspend the right to sell shares or postpone payment for a sale of
shares when trading on 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.
BY TELEPHONE
You can sell or exchange your shares by telephone by calling 800-2 NO-LOAD, 24
hours a day. TDD users may contact Schwab at 800-345-2550, 24 hours a day.
We need the following information in order to process your telephone sale or
exchange request:
- - your Schwab account number and your name for verification;
- - the number of shares you want to sell or exchange;
- - the name of the Fund and class from which you are selling or exchanging
shares;
- - the name of the Fund and class into which shares are to be exchanged; and
- - the distribution option you select, if you are exchanging shares.
BY MAIL
You can also sell or exchange shares by writing to the address on the cover of
this Prospectus.
We need the following information in order to process your mail sale or exchange
request:
- - your Schwab account number and name for verification;
- - the number of shares you want to sell or exchange;
- - the name of the Fund and class from which you are selling or exchanging
shares;
- - the name of the Fund and class into which shares are to be exchanged;
- - the distribution option you select, if you are exchanging shares; and
- - the signature of at least one of the registered Schwab account holders in the
exact form specified in the account.
Once mailed, a sale or exchange request is irrevocable and may not be modified
or canceled.
ELECTRONICALLY
For more information regarding how to sell or exchange shares electronically
using StreetSmart(R), The Equalizer(R)and TeleBroker(R), call 800-2 NO-LOAD.
SCHWAB ONE(R) ACCOUNT FEATURES. Shareholders who hold shares of the Fund in
Schwab One accounts are entitled to sell Fund shares through debit cards and
checks. Investors should contact Schwab if they are interested in the benefits
and requirements of a Schwab One account.
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR.
- ------------------------------------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
- ------------------------------------------------------
21
<PAGE> 82
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 83
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 84
==============
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
==============
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, CA 94104
725-12 (4/97) Printed on recycled paper.
SCHWAB CALIFORNIA
MUNICIPAL
MONEY FUND-
Sweep Shares
Prospectus April 30, 1997
[SCHWABFUNDS LOGO]
<PAGE> 85
CROSS REFERENCE SHEET
PROSPECTUS
Schwab New York Municipal Money Fund -- Sweep Shares
PART A ITEM PROSPECTUS CAPTION
1. Cover Page Cover Page
2. Synopsis Key Features of the Fund; Summary of
Expenses; Matching the Fund to Your
Investment Needs
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Matching the Fund to
Your Investment Needs; Investment
Objective and Policies; Organization
and Management of the Fund
5. Management of the Fund Organization and Management of the
Fund
5A. Management's Discussion of Fund
Performance How the Fund Reports Performance
6. Capital Stock and Other Securities Cover Page; Matching the Fund to
Your Investment Needs; Investment
Objective and Policies; Municipal
Securities and Investment
Techniques; Distributions and Taxes
7. Purchase of Securities Being Offered Share Price Calculation; Investing
in Shares of the Fund;
8. Redemption or Repurchase Investing in Shares of the Fund
9. Pending Legal Proceedings Inapplicable
<PAGE> 86
SCHWAB NEW YORK MUNICIPAL MONEY FUND - SWEEP SHARES
PROSPECTUS APRIL 30, 1997
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION:
Contact your local Charles Schwab & Co., Inc. ("Schwab") office or call 800-2
NO-LOAD.
THE SCHWAB NEW YORK MUNICIPAL MONEY FUND (the "Fund") is designed for investors
who seek maximum current income that is exempt from federal regular income tax
and personal income taxes imposed by New York state and New York municipalities
consistent with stability of capital. Federal regular income tax does not
include the federal alternative minimum tax. Prior to January 2, 1997, the Fund
was known as the Schwab New York Tax-Exempt Money Fund.
SPECIAL RISK CONSIDERATIONS. The Fund may invest a significant percentage of its
assets in the securities of a single issuer, and therefore investment in the
Fund may be riskier than other types of money market funds.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. You can find more detailed information about the
Fund in the Statement of Additional Information; ("SAI") dated April 30, 1997
(as may be amended from time to time). The SAI has been filed with the
Securities and Exchange Commission ("SEC") and is available along with material
incorporated by reference and other related materials using the SEC's World Wide
Web address: http://www.sec.gov. The SAI is incorporated by reference into this
Prospectus.
This Prospectus may be available electronically by using our World Wide Web
address: http://www.schwab.com. To receive a free paper copy of this Prospectus
or the SAI, call Schwab at 800-2 NO-LOAD, 24 hours a day, or write to the Fund
at 101 Montgomery Street, San Francisco, California 94104. TDD users may contact
Schwab at 800-345-2550, 24 hours a day.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Key Features of the Fund................. 2
Summary of Expenses...................... 3
Financial Highlights..................... 4
Matching the Fund to Your Investment
Needs.................................. 5
Investment Objective and Policies........ 5
Municipal Securities and Investment
Techniques............................. 7
Organization and Management of the
Fund................................... 11
Distributions and Taxes.................. 13
Share Price Calculation.................. 15
How the Fund Reports Performance......... 15
Investing in Shares of the Fund.......... 16
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE PER SHARE OF $1.00.
<PAGE> 87
KEY FEATURES OF THE FUND
TRIPLE TAX-EXEMPT INCOME AND SAFETY. The Schwab New York Municipal Money Fund is
designed for investors who seek maximum after-tax current income consistent with
stability of capital. The Fund invests in high-quality, short-term debt
securities, the interest on which is exempt from federal regular income tax and
personal income taxes imposed by New York state and New York municipalities.
Federal regular income tax does not include the federal alternative minimum tax.
The Fund attempts to maintain a stable net asset value per share ("NAV") of
$1.00. (See "Investment Objective and Policies.")
AUTOMATIC INVESTMENT/REDEMPTION FEATURE. For the Sweep Shares of the Fund, if
you elect, free credit balances in your Schwab brokerage account (including your
Schwab One(R) account) will be automatically invested or "swept" into the Fund,
subject to the terms and conditions of your brokerage account agreement. Shares
will also be sold as necessary to settle securities transactions, collateralize
margin obligations or cover debit balances. This feature keeps your money
working and saves you the time and trouble of withdrawing and redepositing
funds. (See "Investing in Shares of the Fund - How to Buy Shares" and "Investing
in Shares of the Fund - How to Sell or Exchange Shares.")
LIQUIDITY. You can conveniently sell your shares of the Fund at any time. (See
"Investing in Shares of the Fund - How to Sell or Exchange Shares.")
LOW COST INVESTING. The Fund imposes no sales or transaction fees on purchases
or redemptions of shares of the Fund. (See "Summary of Expenses.") In addition,
the Sweep Shares' total operating expenses will not exceed 0.69% of the Sweep
Shares' average daily net assets, as guaranteed by Charles Schwab Investment
Management, Inc. (the "Investment Manager") and Schwab through at least April
30, 1998. (See "Matching the Fund to Your Investment Needs" and "Organization
and Management of the Fund.")
PROFESSIONAL MANAGEMENT. The Investment Manager currently provides investment
management services to the SchwabFunds(R), a family of 29 mutual funds with over
$47 billion in assets as of April 1, 1997. (See "Organization and Management of
the Fund.")
SHAREHOLDER SERVICE. Schwab's professional representatives are available
toll-free 24 hours a day to receive your Fund orders. Call 800-2 NO-LOAD. As a
discount broker, Schwab gives you investment choices and lets you make your own
decisions. Schwab has many services that help you make the most informed
investment decisions. (See "Investing in Shares of the Fund - How to Buy Shares"
and "Investing in Shares of the Fund - How to Sell or Exchange Shares.")
CONVENIENT REPORTING. Customers receive regular Schwab statements that combine
all their mutual fund investment activity in one report.
SPECIAL RISK CONSIDERATIONS. The Fund may invest a significant percentage of its
assets in the securities of a single issuer, and therefore investment in the
Fund may be riskier than other types of money market funds. (See "Municipal
Securities and Investment Techniques.")
2
<PAGE> 88
SUMMARY OF EXPENSES(1)
SHAREHOLDER TRANSACTION EXPENSES: None
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS):
Management Fees
(after fee reduction)(2)....... 0.20%
12b-1 Fees........................ None
Other Expenses (after fee
reduction and/or expense
reimbursement)(3).............. 0.49%
------
TOTAL FUND OPERATING
EXPENSES(3,4)..................... 0.69%
</TABLE>
(1) See "Matching the Fund to Your Investment Needs" for information regarding
the key differences between the multiple classes of shares of the Fund.
(2) This amount reflects a reduction by the Investment Manager, which is
guaranteed at least through April 30, 1998. If there were no such reduction,
the management fee for the Fund would have been 0.46% of the Fund's average
daily net assets for the fiscal year ended December 31, 1996. (See
"Organization and Management of the Fund - Operating Fees and Expenses.")
(3) This amount reflects the guarantee by the Investment Manager and Schwab
that, at least through April 30, 1998, total operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses) will not
exceed 0.69% of the Sweep Shares' average daily net assets. Without this
guarantee, other expenses and total operating expenses would have been 0.58%
and 1.04% respectively, of the Sweep Shares' average daily net assets, for
the fiscal year ended December 31, 1996. The effect of these guarantees is
to maintain or lower the expenses of the Sweep Shares and thus maintain or
increase total return to shareholders.
(4) This amount does not include any fees that you may be charged if you do not
maintain the minimum balance required in your Schwab account. (See
"Investing in Shares of the Fund.")
EXAMPLE. Based on the expenses in the above table, you would pay the following
expenses on a $1,000 investment in the Sweep Shares of the Fund, assuming (1) a
5% annual return and (2) redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$7 $22 $38 $ 86
</TABLE>
THE PURPOSE OF THE PRECEDING TABLE IS TO ASSIST INVESTORS IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE SWEEP SHARES OF THE FUND WILL
BEAR DIRECTLY OR INDIRECTLY. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. THIS HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF
PAST OR FUTURE PERFORMANCE.
3
<PAGE> 89
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified report is included in the Fund's Annual Report,
which contains additional financial data and related notes. The financial
highlights, financial statements and report of the auditor are incorporated by
reference into the SAI. Free copies of the SAI and Annual Report may be obtained
by calling the telephone number or writing to the address on the first page of
this Prospectus.
SCHWAB NEW YORK MUNICIPAL MONEY FUND - SWEEP SHARES
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 27, 1995
FOR THE (COMMENCEMENT
PERIOD ENDED OF OPERATIONS) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Net asset value at beginning of period $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03 0.03
Net realized and unrealized gain (loss) on investments -- --
-------- --------
Total from investment operations 0.03 0.03
LESS DISTRIBUTIONS
Dividends from net investment income (0.03) (0.03)
Distributions from realized gain on investments -- --
-------- --------
Total distributions (0.03) (0.03)
======== ========
Net asset value at end of period $ 1.00 $ 1.00
======== ========
Total return (not annualized) 2.74% 2.75%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 270,612 $ 204,863
Ratio of expenses to average net assets(1) 0.69% 0.63%(2)
Ratio of net investment income to average net assets(1) 2.71% 3.20%(2)
</TABLE>
(1) The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C>
Ratio of expenses to average net assets 1.04% 1.04%(2)
Ratio of net investment income to average net assets 2.36% 2.79%(2)
</TABLE>
(2) Annualized
4
<PAGE> 90
MATCHING THE FUND TO YOUR INVESTMENT NEEDS
The Fund may be appropriate for a variety of investment programs which can be
long-term or short-term in nature. While the Fund is not a substitute for
building an investment portfolio tailored to an individual's investment needs
and risk tolerance, it can be used as a high-quality, conveniently liquid money
market investment for your brokerage account cash when it is not fully invested
in other securities. The Fund would not be an appropriate investment for
retirement plans such as IRAs and Keogh plans.
Because the Fund is designed to provide liquidity and stability of capital, as
well as automatic investment of free credit balances, it may be especially
suitable for investors with short-term investment objectives, including those
who are awaiting an opportune time to invest in the equity and/or bond markets.
The Fund may also be appropriate for long-term investors seeking a low-risk
investment alternative which is designed to provide income which is exempt from
federal regular income taxes and personal income taxes imposed by New York state
and New York municipalities.
In addition to the Sweep Shares of the Fund, Schwab also offers Value Advantage
Shares of the Fund, pursuant to a multiple class plan (the "Plan") adopted by
the Board of Trustees of the Schwab Fund Family. The Value Advantage Shares of
the Fund are not available through automatic ("sweep") investment programs. The
Value Advantage Shares of the Fund are subject to lower transfer agency expenses
than the Sweep Shares of the Fund; the transfer agent is entitled to an annual
fee of 0.05% of the Value Advantage Shares' average daily net assets. In
addition, the Value Advantage Shares of the Fund require a $25,000 minimum
investment, $5,000 minimum subsequent investments and a $20,000 minimum account
balance.
For information regarding Value Advantage Shares, call 800-2 NO-LOAD. You may
also obtain information about Value Advantage Shares from your Schwab broker.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is maximum current income that is exempt from
federal regular income tax and personal income taxes imposed by New York state
and New York municipalities, consistent with stability of capital. This
investment objective is fundamental and cannot be changed without shareholder
approval. To achieve its objective, the Fund primarily invests in short-term
high-quality municipal obligations, the income from which is exempt from federal
regular income tax and personal income taxes imposed by New York state and New
York municipalities. Federal regular income tax does not include the federal
alternative minimum tax.
Under normal market conditions, the Fund attempts to invest 100% of its total
assets in debt obligations issued by or on behalf of New York and other states,
territories and possessions of the United States (including 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
regular income tax ("Municipal Securities"). Absent unusual market conditions,
the Fund will invest at least 65% of its total assets in such obligations that
also generate interest, which in the opinion of bond counsel, is exempt from
5
<PAGE> 91
New York state and New York municipal personal income tax ("New York Municipal
Securities"). Under normal market conditions, the Fund is authorized to invest
in "private activity bonds." (See "Distributions and Taxes - Federal Income
Taxes.") The Fund's investment in private activity bonds will not be included in
the amount deemed to be invested in New York Municipal Securities.
Provided that the Fund meets certain conditions (described in the SAI under
"Distributions and Taxes"), dividends paid to New York residents consisting of
interest income received on New York Municipal Securities will be exempt from
New York state personal income tax and personal income taxes imposed by New York
City and other New York municipalities.
The Fund invests only in Municipal Securities which at the time of purchase: (a)
are rated in one of the two highest rating categories for municipal commercial
paper or short-term municipal securities assigned by 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 the
Investment Manager; or (d) are unrated by any NRSRO, if they are determined by
the Investment Manager, using guidelines approved by the Board of Trustees, to
be at least equal in quality to one or more of the above referenced securities.
(For a description of the ratings, see "Appendix - Ratings of Investment
Securities" in the SAI.)
The Fund may continue to hold a Municipal Security that, after its purchase by
the 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, the Fund will keep such a
security in its portfolio only if the Board of Trustees or its properly
authorized delegate determines that keeping the security is in the best
interests of the Fund.
With the exception of securities issued or guaranteed by the U.S. Government,
its agencies and instrumentalities, the Fund may not:
1. Purchase the securities of any issuer if as a result more than 5% of the
value of the Fund's total assets would be invested in the securities of that
issuer. However, provided that no more than 25% of the value of the Fund's
total assets are invested in the securities of any one issuer, up to 50% of
the value of the Fund's total assets may be invested without regard to this
5% limitation. For purposes of this limitation, a security is considered to
be issued by the governmental entity (or entities) whose assets and revenues
back the security, or, with respect to an industrial revenue bond that is
backed only by the assets and revenues of a non-governmental user, by such
non-governmental user. In certain circumstances, the guarantor of a security
may also be considered to be an issuer in connection with such guarantee.
2. Purchase any securities which would cause 25% or more of the value of the
Fund's total assets at the time of purchase to be invested in the securities
of issuers conducting their principal business activities in the same
industry. However, this limitation shall not apply to Municipal Securities
issued by governmental entities.
6
<PAGE> 92
MUNICIPAL SECURITIES
AND INVESTMENT TECHNIQUES
Municipal Securities in which the Fund 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: (1) a
particular facility or class of facilities; (2) a specific revenue source such
as a special excise tax; or (3) another specific revenue source, such as the
user of the facility being financed.
Revenue securities may include private activity bonds and industrial development
bonds. Such bonds may be issued by or on behalf of public authorities to finance
various privately operated facilities and are not payable from the unrestricted
revenues of the issuer. As a result, the credit quality of private activity
bonds is frequently related directly to the credit standing of private
corporations or other entities. From time to time, the Fund may invest more than
25% of its total assets in industrial development and private activity bonds.
Among other types of instruments, the Fund may purchase tax-exempt commercial
paper and short-term municipal notes such as tax anticipation notes, bond
anticipation notes, revenue anticipation notes, construction loan notes and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax payments, the proceeds of bond
placements, or other revenues. The Fund has the ability to invest all of its
assets in Municipal Securities that generate interest that is a tax preference
item for purposes of the federal alternative minimum tax. Thus, if you are
subject to the federal alternative minimum tax, all or a portion of your income
from the Fund may be subject to the federal alternative minimum tax.
MORAL OBLIGATION SECURITIES. The Fund 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.
MUNICIPAL LEASES. The Fund may invest up to 25% of its 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. Investments in municipal leases may
be considered to be illiquid. Municipal leases are subject to "non-appropriation
risk," which is the risk that the municipality may terminate the lease in the
event that the municipality's appropriating body does not allocate the funds
necessary to make lease payments. In such circumstances, the lessor is typically
entitled to repossess the property. The private sector value of the property is,
however, generally less than the value of the property to the municipality. The
Investment Manager, pursuant to guidelines established by the Board of Trustees,
is responsible for determining the credit quality of unrated municipal leases,
on an ongoing basis, including an assessment of the likelihood that the lease
will not be terminated.
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SYNTHETIC VARIABLE OR FLOATING-RATE MUNICIPAL SECURITIES. The Fund may also
invest up to 25% of its total 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 a remarketing agent 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 that
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 generally
are structured as private placements and, accordingly, may be deemed to be
restricted securities for purposes of the Fund's investment limitations.
VARIABLE RATE SECURITIES. The Fund 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
ordinarily is 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. As interest
rates decrease or increase, Variable Rate Securities experience less
appreciation or depreciation than fixed-rate obligations.
VARIABLE RATE DEMAND INSTRUMENTS. The Fund 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
the Fund is not rated by credit rating agencies, the 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 or 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, the Fund may, at any time or during
specified periods not exceeding one year (depending upon the instrument
involved), demand payment in full of the principal of the instrument and may
resell the instrument to a third party.
The Fund 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.
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Variable rate demand instruments will be subject to the 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.
PARTICIPATION INTERESTS. The Fund 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.
The Fund 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 the Fund's previously described quality
standards for Municipal Securities; and (c) the instrument is issued with an
opinion of counsel or is the subject of a ruling of the Internal Revenue
Service, stating that the interest earned on the participation interest is
exempt from federal income tax.
STAND-BY COMMITMENTS. The Fund also may acquire "stand-by commitments" for
Municipal Securities held in its portfolio. Under a stand-by commitment, a
dealer agrees to purchase at the Fund's option specified Municipal Securities at
a price equal to their amortized cost value plus accrued interest. The Fund will
acquire stand-by commitments solely to improve portfolio liquidity. The Fund
does not intend to exercise its stand-by rights solely for trading purposes.
ILLIQUID SECURITIES. The Fund will not purchase illiquid securities, including
repurchase agreements maturing in more than 7-days, if, as a result thereof,
more than 10% of the Fund's net assets valued at the time of the transaction are
invested in such securities.
GOVERNMENT SECURITIES. The Fund 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, while others 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.
MATURITY. The Fund will purchase only securities that are deemed to mature in
397 days or less in accordance with federal securities regulations 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. The Fund may purchase securities on
a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, the Fund will not pay for such securities or start earning
interest on them until the Fund receives 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.
The Fund will not invest more than 25% of its total assets in when-issued or
delayed delivery securities. The Fund will not purchase such securities for
speculative purposes and will expect to actually acquire the securities when it
purchases them. However, the Fund
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reserves the right to sell any such securities before their settlement dates, if
the Investment Manager deems such a sale advisable.
REPURCHASE AGREEMENTS. The Fund may engage in "repurchase agreements." In
entering into a repurchase agreement, the Fund acquires ownership of a security
from a broker-dealer or bank that agrees to repurchase the security at a
mutually agreed upon time and price (which price is higher than the purchase
price), thereby determining the yield during the Fund's holding period. Maturity
of the securities subject to repurchase may exceed one year.
If the seller of a repurchase agreement becomes bankrupt or otherwise defaults,
the Fund might incur expenses in enforcing its rights and could experience
losses, including a decline in the value of the underlying securities and a loss
of income. The Fund will enter into repurchase agreements only with banks and
other recognized financial institutions that the Investment Manager deems
creditworthy.
TEMPORARY INVESTMENTS. The 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 in one of the two highest rating categories by any NRSRO; commercial paper
(other than Municipal Securities) rated in one of 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 the Fund to generate dividends taxable to
shareholders as ordinary income, it is the Fund's primary intention to produce
dividends which are not subject to federal regular income tax or personal income
taxes imposed by New York State and New York municipalities.
SECURITIES SUBJECT TO A PUT FEATURE. A "put" feature permits the Fund to sell a
security at a fixed price, prior to maturity to the put issuer. Because of this
feature, Municipal Securities subject to a put generally may be sold to third
parties at market rates. Generally, a premium is paid for a security subject to
a put feature. Investments in Municipal Securities subject to puts are limited
by federal securities laws and expose the Fund to a credit risk associated with
the put provider.
BORROWING POLICY. The Fund may not borrow money except for temporary purposes to
meet redemption requests that could not otherwise be met without immediately
selling portfolio securities. The Fund may borrow an amount up to one-third of
the value of its total assets and may pledge up to 10% of the Fund's net assets
to secure borrowings. The Fund may not borrow for leverage purposes. The Fund's
borrowing and pledging policies as set forth in the SAI are fundamental.
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 New York Municipal Securities is exempt from New York state and
New York municipal personal income taxes. Bond counsel will render such opinions
to the issuers of Municipal Securities at the time the securities are issued.
The Fund and the Investment Manager will not review the proceedings on the
issuance of Municipal Securities or the bases for such opinions.
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SPECIAL RISK CONSIDERATIONS. The Fund is a non-diversified portfolio. The
investment return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of issuers, relative to the number of issuers
held in a diversified portfolio. In the event of changes in the financial
condition or in the market's assessment of certain issuers, the Fund's policy of
acquiring large positions in the obligations of a relatively small number of
issuers may affect the value of the Fund's portfolio to a greater extent than
that of a diversified portfolio.
The Fund may invest more than 25% of its total assets in Municipal Securities
that produce interest that is paid solely from revenues on similar projects.
However, the Fund does not presently intend to invest in such securities on a
regular basis, but will do so if such investment is deemed necessary or
appropriate by the Investment Manager. To the extent that the Fund's assets are
invested in Municipal Securities that produce interest that is payable solely
from revenues on similar projects, the Fund will be subject to the particular
risks presented by such projects to a greater extent than it would be if the
Fund's assets were not so invested.
Certain New York constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could result in adverse
consequences affecting New York Municipal Securities. (See "Municipal
Securities" in the SAI for more information about these significant financial
considerations.)
Participation interests in Municipal Securities and other derivative securities
eligible for purchase by the Fund involve special risks, including a risk that
the Internal Revenue Service may characterize some or all of the interest paid
on such securities to the Fund as taxable. There is also an increased risk, most
typically associated with "municipal lease" obligations, that a municipality
will not appropriate the funds necessary to make the scheduled payments on, or
may seek to cancel or otherwise avoid its obligations under the lease that
supports the security owned by the Fund.
ORGANIZATION AND
MANAGEMENT OF THE FUND
GENERAL OVERSIGHT. The Board of Trustees and officers meet regularly to review
investments, performance, expenses and other business affairs.
THE INVESTMENT MANAGER. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, California 94104. The Investment Manager
provides a continuous investment program, including general investment and
economic advice regarding the Fund's investment strategies; manages the Fund's
investment portfolio; performs expense management, accounting and record
keeping; and provides other services necessary to the operation of the Fund. The
Investment Manager, formed in 1989, is a wholly-owned subsidiary of The Charles
Schwab Corporation and is the investment adviser and administrator of the mutual
funds in the SchwabFunds(R), a family of 29 mutual funds. As of April 1, 1997,
the SchwabFunds(R) had aggregate net assets in excess of $47 billion.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Charles Schwab & Co., Inc. ("Schwab" or
the "Transfer Agent"), 101 Montgomery Street, San Francisco, California 94104,
serves as shareholder services agent and transfer agent
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for the Fund. Schwab provides information and services to shareholders, which
include reporting share ownership, sales and dividend activity (and associated
tax consequences), responding to daily inquiries, effecting the transfer of Fund
shares and facilitating effective cash management of shareholders' Schwab
account balances. It furnishes office space and equipment, telephone facilities,
personnel and informational literature distribution as is necessary or
appropriate in providing shareholder and transfer agency information and
services. Schwab is also the Fund's distributor, but receives no compensation
for its services as such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 4.1 million active customer accounts and has over 241 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, Chief Executive Officer and a Director of
The Charles Schwab Corporation. As a result of his beneficial ownership
interests in and other relationships with The Charles Schwab Corporation and its
affiliates, Mr. Schwab may be deemed to be a controlling person of Schwab and
the Investment Manager.
OPERATING FEES AND EXPENSES
Pursuant to its Investment Advisory and Administration Agreement with the Fund,
the Investment Manager is entitled to receive from the Fund a graduated annual
fee, payable monthly, of 0.46% of the Fund's average daily net assets not in
excess of $1 billion, 0.41% of such assets over $1 billion but not in excess of
$2 billion and 0.40% of such assets over $2 billion.
For the fiscal year ended December 31, 1996, the Fund paid a management fee of
0.20% of its average daily net assets and paid total operating expenses of 0.69%
of the Sweep Shares' average daily net assets.
For the transfer agency services provided, the Transfer Agent receives an annual
fee, payable monthly, of 0.25% of the average daily net assets of the Sweep
Shares. In addition, for shareholder services provided, Schwab receives an
annual fee, payable monthly, of 0.20% of the average daily net assets of the
Sweep Shares.
OTHER EXPENSES. The Charles Schwab Family of Funds (the "Trust") pays the
expenses of its operations, including: the fees and expenses for independent
accountants, legal counsel and the custodian of its assets; the cost of
maintaining books and records of account; registration fees; the fees and
expenses of qualifying its shares for distribution under federal and state
securities laws; and industry association membership dues. These expenses
generally are allocated among the Trust's investment portfolios ("Series"), or
classes of shares within these Series, in proportion to their relative net
assets at the time the expense is incurred. However, expenses directly
attributable to a particular Series or class of a Series will be charged to that
Series or class, respectively.
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OTHER INFORMATION
The Trust is an open-end investment management company 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 9 Series which may be
organized into one or more classes of shares of beneficial interest. The Board
of Trustees may authorize the issuance of shares of additional Series or
classes, if it deems it desirable. Shares within each Series or class have
equal, noncumulative voting rights and equal rights as to distributions, assets
and liquidation of such Series, except to the extent such voting rights or
rights as to distributions, assets and liquidation vary among classes of a
Series.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. The Trust is not required to hold annual
shareholders' meetings and does not intend to do so. It will, however, hold
special meetings as required or deemed desirable by the Board of Trustees, for
such purposes as changing fundamental policies, electing or removing Trustees or
approving or amending an investment advisory agreement. In addition, a Trustee
may be removed by shareholders at a special meeting called by written request of
shareholders owning in the aggregate at least 10% of the outstanding shares of
the Trust.
Shareholders will vote by Series and not in the aggregate (for example, when
voting to approve the investment advisory agreement), except when voting in the
aggregate is permitted under the 1940 Act, such as for the election of Trustees.
In addition, shareholders of the Sweep Shares will vote exclusively as a class
on any matter relating solely to the Sweep Shares and on any matter in which the
interests of the shareholders of the Sweep Shares differ from the interests of
the shareholders of Value Advantage Shares.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS. On each day that the NAV is determined
("Business Day"), net investment income is declared at the close of trading on
the New York Stock Exchange (the "Exchange") (generally 4:00 p.m. Eastern time)
as a dividend to shareholders of record at that time. Dividends are normally
paid (and where applicable, reinvested) on the 15th of each month, if a Business
Day, otherwise on the next Business Day, with the exception of the dividend paid
in December, which is scheduled to be paid on the last Business Day in December.
TAX INFORMATION. The Fund has elected to be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"),
qualified as such and intends to continue to so qualify. In order to so qualify,
the Fund will distribute on a current basis substantially all of its investment
company taxable income, its net exempt-interest income and its net capital gains
(if any) and will meet certain other requirements. Such qualification relieves
the Fund of liability for federal and New York income taxes to the extent the
Fund's earnings are distributed.
FEDERAL INCOME TAX. Dividends derived from exempt-interest income (known as
"exempt-interest dividends") may be treated by the Fund's shareholders as items
of interest excludable from their federal gross income. To the extent dividends
paid to shareholders are derived from taxable interest or capital gains, such
dividends will be subject to federal
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income tax, whether received in cash or reinvested.
The Fund may at times purchase Municipal Securities at a discount from the price
at which they were initially issued. For federal income tax purposes, some or
all of this market discount will be included in the Fund's ordinary income and
will be taxable to shareholders as such when it is distributed to them.
If the Fund holds certain "private activity bonds" ("industrial development
bonds" under prior law), dividends derived from interest on such obligations and
other securities will be classified as an item of tax preference which could
subject certain shareholders to federal alternative minimum tax liability.
Corporate shareholders also must take all exempt-interest dividends into account
in determining "adjusted current earnings" for purposes of calculating their
alternative minimum tax.
Private activity bonds and industrial development bonds generally are bonds
issued by or on behalf of public authorities to obtain funds to provide certain
privately owned or operated facilities. Private activity bonds and industrial
development bonds also generally are limited obligation (or revenue) securities,
which means that they are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from some other
specific revenue source. (See "Municipal Securities" in the SAI.)
Shareholders receiving Social Security or Railroad Retirement Act benefits
should note that exempt interest dividends will be taken into account in
determining the taxability of such benefits.
NEW YORK INCOME TAXES: Dividends paid by the Fund to non-corporate shareholders
and derived from interest on New York Municipal Securities or federal
obligations also are exempt from New York state, New York City and other New
York municipalities' personal income taxes. For this purpose, federal
obligations are obligations the interest on which would be excludable from gross
income for New York state personal income tax purposes if the obligations were
owned by an individual. However, dividends paid to shareholders that are
corporations subject to New York franchise tax or income tax will be taxed as
ordinary income to such shareholders, notwithstanding that all or a portion of
such dividends are exempt from New York state personal income tax. Moreover, to
the extent that the Fund's dividends are derived from sources other than New
York Municipal Securities or federal obligations, such dividends will be subject
to New York state personal income tax, even though such dividends may be exempt
from federal regular income tax.
To the extent, if any, that dividends paid to shareholders are derived from
taxable interest, market discount or capital gains, such dividends will not be
exempt from New York state, New York City and other New York municipalities'
personal income taxes whether received in cash or reinvested.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' Schwab statements. The Fund will notify shareholders
at least annually as to the federal income and New York state, New York City and
other New York municipalities' personal income tax consequences of distributions
made each year.
The foregoing is only a brief summary of some of the federal and New York state,
New York City and other New York municipalities' income tax considerations
affecting the Fund
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and its shareholders. Accordingly, potential investors should consult their tax
advisers with specific reference to their own tax situations.
SHARE PRICE CALCULATION
The price of a Sweep Share of the Fund on any given day is its net asset value
per share or "NAV." This figure is computed by taking total Fund assets
allocable to the Sweep Shares, subtracting any liabilities allocable to that
class and dividing the resulting amount by the number of Sweep Shares
outstanding. NAV is determined on each day that both the Federal Reserve Bank of
New York and the Exchange are open for business, first at 10:00 a.m. (Eastern
time), then again at the close of normal trading on the Exchange (generally 4:00
p.m. Eastern time). Purchase or redemption orders and exchange requests will be
executed at the NAV next determined after receipt by the Transfer Agent or its
authorized agent. While the Fund attempts to maintain its NAV at a constant
$1.00, Fund shares are not insured against losses.
The Fund values its portfolio securities at amortized cost, which means that
they are valued at their acquisition cost (as adjusted for amortization of
premium or discount) rather than at current market value. Calculations are made
to compare the value of the Fund's investments using the amortized cost method
with market values. Except as described below, market valuations are obtained by
using: (1) actual quotations provided by third-party pricing services or market
makers; (2) estimates of market value; or (3) values obtained from yield data
relating to comparable classes of money market instruments published by
reputable sources at the mean between the bid and asked prices for the
instruments. If a deviation of 1/2 of 1% or more were to occur between NAV, as
calculated by reference to market values and the $1.00 per share amortized cost
value of the Sweep Shares of the Fund, or if there were any other deviation
which the Board of Trustees believed would result in a material dilution to
shareholders or purchasers, the Board of Trustees would promptly consider what
action, if any, should be initiated.
HOW THE FUND REPORTS PERFORMANCE
From time to time, the Fund may advertise the yield, effective yield, taxable
equivalent yield, taxable equivalent effective yield and total return of the
Sweep Shares. Performance figures are based upon historical results and are not
intended to indicate future performance. Since money market funds seek to
maintain a stable $1.00 share price, current 7-day yields are the most common
illustration of money market fund performance.
YIELD refers to the income generated by a hypothetical investment in the Sweep
Shares of the Fund over a specific 7-day period. This income is then annualized,
which means that the income generated during the 7-day period is assumed to be
generated each week over an annual period and is shown as a percentage of the
hypothetical investment.
EFFECTIVE YIELD is calculated similarly, but the income earned by the investment
is assumed to be compounded weekly when annualized. Effective yield will be
slightly higher than yield due to this compounding effect.
TAXABLE EQUIVALENT YIELD is the yield that a taxable investment must generate in
order to equal (after applicable taxes are deducted) the yield for an investor
in stated federal, New York state, and New York municipal
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income tax brackets (normally assumed to be the applicable maximum tax rate).
Taxable equivalent yield will be higher than tax-exempt yield. (See "Yield" in
the SAI.)
TAXABLE EQUIVALENT EFFECTIVE YIELD is computed in the same manner as is taxable
equivalent yield, except that effective yield is substituted for yield in the
calculation.
TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total returns smooth
out variations in performance; they are not the same as actual year-by-year
results.
The performance of the Sweep Shares may be compared to that of other mutual
funds tracked by mutual fund rating services, various indices of investment
performance, U.S. Government obligations, bank certificates of deposit, other
investments for which reliable performance data is available and the consumer
price index.
Because the Sweep Shares of the Fund are subject to different expenses than the
Value Advantage Shares, the performance of the two classes of shares will
differ.
Additional performance information about the Sweep Shares is available in the
Fund's Annual Report, which is sent to all shareholders. To request a free copy,
call 800-2 NO-LOAD.
INVESTING IN SHARES OF THE FUND
SHAREHOLDER SERVICE. You may place Fund purchase orders and orders to sell
shares as well as exchange requests at any one of over 241 Schwab offices
nationwide or by calling 800-2 NO-LOAD, where trained representatives are
available to answer questions about the Fund and your account. The right to
initiate transactions by telephone is automatically available through your
Schwab account. TDD users may contact Schwab at 800-345-2550, 24 hours a day.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If the Fund follows telephone orders that
it reasonably believes to be genuine, it will not be liable for any losses a
shareholder may experience. If the Fund does not follow reasonable procedures to
confirm that a telephone order is genuine, the Fund may be liable for any losses
the shareholder may suffer from unauthorized or fraudulent orders. These
procedures may include:
- - requiring a form of personal identification prior to acting upon instructions
received by telephone;
- - providing written confirmation of such instructions; and
- - tape recording telephone transactions.
Investors should remember that it may be difficult to complete transactions by
telephone during periods of drastic economic or market changes, when our phone
lines may become very busy with calls from other investors. If you want to buy,
sell or exchange shares but have trouble reaching the Fund by telephone, you may
want to use one of the other ways offered for completing the transactions
discussed below, even though these procedures
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may mean that completing your transaction may take longer.
To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.
In an effort to reduce the Fund's mailing costs, the Fund consolidates
shareholder mailings by household. This consolidation means that a household
having multiple accounts with the identical address of record will receive a
single package during each shareholder mailing. If you do not wish this
consolidation to apply to your account(s), write to SchwabFunds(R) at 101
Montgomery Street, San Francisco, California 94104 to that effect.
Telephone purchase or redemption orders and exchange requests received prior to
8:00 p.m. (Eastern time) on any Business Day, once they have been verified as to
the caller's identity and account ownership, will be deemed to be received by
the Transfer Agent, or its authorized agent, prior to the next NAV
determination. Subsequent telephone orders received prior to the first NAV
determination on the following day will be deemed received prior to that day's
second NAV determination.
OPENING A SCHWAB ACCOUNT. You may buy shares of the Fund through an account
maintained with Schwab or any other entity designated by Schwab. Payment for
shares should be made directly to Schwab. If you do not presently maintain a
Schwab account and wish to establish one, simply complete a Schwab Account
Application, available by calling 800-2 NO-LOAD, 24 hours a day. You may mail
the application to Schwab at 101 Montgomery Street, San Francisco, California
94104. Corporations and other organizations should contact their local Schwab
office to determine which additional forms may be necessary to open a Schwab
account. With your Schwab account, you have access to other investments
available at Schwab, such as stocks, bonds and other mutual funds.
The Securities Investor Protection Corporation ("SIPC") will provide account
protection, in an amount up to $500,000, for securities, including Fund shares,
which you hold in a Schwab account. Of course, SIPC account protection does not
protect shareholders from share price fluctuations. If you already have a Schwab
account, you may buy shares in the Fund as described below and need not open a
new account.
SCHWAB ACCOUNT MINIMUMS AND ASSOCIATED FEES. Schwab requires a $1,000 minimum
initial investment and minimum maintenance balance to maintain a Schwab account
($500 for custodial accounts). A fee of $7.50 will be charged to Schwab accounts
that fall below this minimum for three consecutive months in any quarter. This
fee, if applicable, will be charged at the end of each quarter and will be
waived if there has been at least one commissionable trade within the last 6
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 12 months.
DEPOSITING FUNDS. You may deposit funds into your Schwab account by check, wire
or many other forms of electronic funds transfer. Secu-
17
<PAGE> 103
rities may also be deposited. All deposit checks should be made payable to
Charles Schwab & Co., Inc. Schwab will charge a $15 service fee against an
investor's Schwab account should a check be returned because of insufficient or
uncollected funds or a stop payment order. If you would like to wire funds into
or from your Schwab account, call 800-2 NO-LOAD. A service fee will be charged
against your Schwab account for each wire sent.
WHEN YOU CAN BUY SHARES. If funds (including those transmitted by wire) are
received by Schwab before the time of the Fund's last daily NAV calculation
(normally 4:00 p.m. Eastern time), they will be available for investment on that
day. If funds arrive after that time, they will be available for investment the
next Business Day.
HOW TO BUY SHARES
AUTOMATIC INVESTMENT. When opening a Schwab brokerage account, an investor will
be asked to select a SchwabFunds class or series with sweep privileges as a
"primary fund." If the Fund is selected as a primary fund, free credit balances
in the investor's brokerage account will be invested automatically in shares of
the Fund according to the procedures described in the account agreement with the
investor. Depending on the type of account, the automatic investment of free
credit balances will be effected daily, weekly or at other times and may be
subject to minimum investment and other requirements.
An investor with an existing Schwab brokerage account may add the automatic
investment feature to his or her account by completing the appropriate section
of the Schwab Account Application. A shareholder may change primary funds by
calling or writing Schwab at the address referenced on the cover of this
Prospectus. Note that the automatic investment feature is not available for
Value Advantage Shares.
DIRECT PURCHASE. A Schwab account holder may buy shares of the Fund (if it is
not his or her primary fund) in several ways. The minimum initial investment for
Sweep Shares of the Fund is $1,000 and subsequent investments must be at least
$100 for Schwab brokerage accounts and $1.00 for Schwab One(R) accounts.
BY TELEPHONE
You may use existing funds in your Schwab account to make initial and subsequent
share purchases. To place your order, call 800-2 NO-LOAD, 24 hours a day. TDD
users may contact Schwab at 800-345-2550, 24 hours a day.
BY MAIL
You may direct that funds already in your Schwab account be used to make initial
and subsequent share purchases. Alternatively, your purchase instructions may be
accompanied by a check made payable to Charles Schwab & Co., Inc., which will be
deposited into your Schwab account and used, as necessary, to cover all or part
of your purchase order.
Written purchase orders (along with any checks) should be mailed to Schwab at
101 Montgomery Street, San Francisco, California 94104 and should:
- - reference your Schwab account number (unless a Schwab Account Application is
enclosed);
- - specify the name of the Fund and class and the dollar amount of shares you
would like to buy; and
18
<PAGE> 104
- - for initial share purchases only, select one of the distribution options
listed below.
Once mailed, a purchase request is irrevocable and may not be modified or
canceled.
ELECTRONICALLY
For more information regarding how to buy shares electronically using
StreetSmart(R), The Equalizer(R) and TeleBroker(R), call 800-2 NO-LOAD.
MINIMUM BALANCE REQUIREMENTS. Due to the relatively high cost of maintaining
smaller holdings, the Fund reserves the right to redeem a shareholder's shares
if, as a result of redemptions, their aggregate value drops below the $100
minimum balance requirement for the Sweep Shares of the Fund. The Fund will
notify shareholders in writing 30 days before taking such action to allow them
to increase their holdings to at least the minimum level. Also note that,
because they can only be held in Schwab accounts, Fund shares will be
automatically redeemed should the Schwab account in which they are carried be
closed.
DISTRIBUTION OPTIONS. The Schwab account standing instructions that you selected
in your Schwab Account Application will determine which of the two distribution
options listed below will apply to you. Fund distributions will be automatically
reinvested, unless the Transfer Agent, or its authorized agent, has received
instructions that distributions be mailed to you as they are paid. Call 800-2
NO-LOAD if you already have a Schwab account and wish to change your account
standing instructions.
AUTOMATIC REINVESTMENT: All distributions will be reinvested in additional
full Sweep Shares of the Fund at the net asset value next determined after
their payable date; or
RECEIVE YOUR DIVIDENDS BY MAIL: All distributions will be credited to your
Schwab account as of the payable date. If your account is coded to have
dividends mailed immediately, checks will normally be mailed the Business
Day after distributions are credited.
To change the distribution option you have selected, call 800-2 NO-LOAD.
WAIVERS AND OTHER PURCHASE INFORMATION. The minimum amounts required for
automatic investment or direct purchase may be reduced or waived on certain
occasions. For example, free credit balances in accounts of certain categories
of investors, such as holders of Schwab One(R) and Schwab custodial accounts,
may be invested automatically irrespective of amount. The Fund also may waive
the required minimums for purchases by trustees, directors, officers or
employees of Schwab, the Investment Manager or the Fund. The Fund reserves the
right, in its sole discretion and without prior notice to shareholders, to
withdraw or suspend all or any part of the offering made by this Prospectus, to
reject purchase orders or to change the minimum investment requirements. All
orders to buy shares of the Fund are subject to acceptance by the Fund and are
not binding until confirmed or accepted in writing.
HOW TO SELL OR
EXCHANGE SHARES
The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of another SchwabFunds Series or classes available to investors in your
state, provided you meet the initial and subsequent investment requirements and
any other requirements relating to the Series or class of
19
<PAGE> 105
shares you wish to buy. Thus, you can conveniently modify your investments if
your goals or market conditions change. For federal income tax and certain other
purposes, an exchange of shares between funds will be treated as a sale of
shares in one fund and the purchase of shares in another fund. An exchange of
shares between classes of the same fund should not be treated as a sale of
shares. The Fund reserves the right to modify, limit or terminate the exchange
privilege upon 60 days' written notice.
AUTOMATIC REDEMPTION. A sale of Fund shares will be automatically effected to
satisfy debit balances in an investor's Schwab account, to provide necessary
cash collateral for an investor's margin obligation to Schwab and to settle
securities transactions in the account. All such sales will be effected in
accordance with the procedures described in the investor's Schwab Account
Agreement.
DIRECT REDEMPTION OR EXCHANGE. You can sell or exchange your shares at any time
by telephone, by mail or electronically, subject to the following terms and
conditions:
- - 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;
- - a check for your shares will be issued on the Business Day after the Transfer
Agent, or its authorized agent, 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
- - the Fund may suspend the right to sell shares or postpone payment for a sale
of shares when trading on the Exchange is restricted; the Exchange is closed
for any reason other than its normal weekend or holiday closings; emergency
circumstances exist as determined by the SEC; or for any other circumstances
as the SEC may permit.
BY TELEPHONE
You can sell or exchange your shares by telephone by calling 800-2 NO-LOAD, 24
hours a day. TDD users may contact Schwab at 800-345-2550, 24 hours a day.
We need the following information in order to process your telephone sale or
exchange request:
- - your Schwab account number and your name for verification;
- - the number of shares you want to sell or exchange;
- - the name of the Fund and class from which you are selling or exchanging
shares; and
- - if you are exchanging your shares, the name of the Fund and class into which
shares are to be exchanged and the distribution option you select.
BY MAIL
You can also sell or exchange shares by writing to the address on the cover of
this Prospectus.
We need the following information in order to process your sale or exchange
request:
- - your Schwab account number and name for verification;
- - the number of shares you want to sell or exchange;
20
<PAGE> 106
- - the name of the Fund and class from which you are selling or exchanging
shares;
- - if you are exchanging your shares, the name of the Fund and class into which
shares are to be exchanged and the distribution option you select; and
- - the signature of at least one of the registered Schwab account holders in the
exact form specified in the account.
Once mailed, a sale or exchange request is irrevocable and may not be modified
or canceled.
ELECTRONICALLY
For more information regarding how to sell or exchange shares electronically
using StreetSmart(R), The Equalizer(R) and TeleBroker(R), call 800-2 NO-LOAD.
SCHWAB ONE(R) ACCOUNT FEATURES. Shareholders who hold shares of the Fund in
Schwab One accounts are entitled to sell Fund shares through debit cards and
checks. Investors should contact Schwab if they are interested in the benefits
and requirements of a Schwab One account.
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR.
- ------------------------------------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
- ------------------------------------------------------
21
<PAGE> 107
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 108
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 109
==============
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
==============
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, CA 94104
2239-5 (4/97) Printed on recycled paper.
SCHWAB NEW YORK
MUNICIPAL MONEY FUND-
Sweep Shares
Prospectus April 30, 1997
[SCHWABFUNDS LOGO]
<PAGE> 110
CROSS REFERENCE SHEET
PROSPECTUS
Schwab Value Advantage Money Fund -- Investor Shares
PART A ITEM PROSPECTUS CAPTION
1. Cover Page Cover Page
2. Synopsis Key Features of the Fund; Summary of
Expenses; Matching the Fund to Your
Investment Needs
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Matching the Fund to
Your Investment Needs; Investment
Objective and Policies; Organization
and Management of the Fund
5. Management of the Fund Organization and Management of the
Fund
5A. Management's Discussion of Fund
Performance Important Information About Your
Investment
6. Capital Stock and Other Securities Cover Page; Investment Objective and
Policies; Investment Techniques Used
by the Fund; Important Information
About Your Investment
7. Purchase of Securities Being Offered Matching the Fund to Your Investment
Needs; Investing in Shares of the
Fund; Important Information About
Your Investment
8. Redemption or Repurchase Investing in Shares of the Fund
9. Pending Legal Proceedings Inapplicable
<PAGE> 111
SCHWAB VALUE ADVANTAGE
MONEY FUND(R)-INVESTOR SHARES
PROSPECTUS APRIL 30, 1997
TO PLACE ORDERS AND FOR ACCOUNT INFORMATION: Contact Charles Schwab & Co., Inc.
("Schwab") office at 800-2 NO-LOAD.
THE SCHWAB VALUE ADVANTAGE MONEY FUND, (the "Fund") is designed to provide you
with the highest possible current income consistent with the Fund's investment
objective while seeking to preserve your investment and provide you with
liquidity.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUNDS. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. You can find more detailed information about the
Fund in the Statement of Additional Information ("SAI") dated April 30, 1997 (as
may be amended from time to time). The SAI has been filed with the Securities
and Exchange Commission ("SEC") and is available along with material
incorporated by reference and other related materials using the SEC's World Wide
Web address: http://www.sec.gov. The SAI is incorporated by reference into this
Prospectus.
This Prospectus may be available electronically by using our World Wide Web
address: http://www.schwab.com. To receive a free paper copy of this Prospectus
or the SAI, call Schwab at 800-2 NO-LOAD, 24 hours a day, or write to the Fund
at 101 Montgomery Street, San Francisco, California 94104. TDD users may contact
Schwab at 800-345-2550, 24 hours a day.
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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Key Features of the Fund................. 2
Summary of Expenses...................... 3
Financial Highlights..................... 4
Matching the Fund to Your
Investment Needs....................... 5
Investment Objective and Policies........ 5
Investment Techniques Used by the Fund... 8
Organization and Management
of the Fund............................ 9
Investing in Shares of the Fund.......... 11
Important Information About
Your Investment........................ 15
Glossary of Important Terms.............. 18
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE PER SHARE OF $1.00.
<PAGE> 112
KEY FEATURES OF THE FUND
MAXIMUM CURRENT INCOME AND SAFETY. The Fund's goal is to provide you with the
highest possible current income consistent with the investment objectives of the
Fund while preserving your investment and providing you with quick access to
your money. To achieve this goal, the Fund invests in high-quality, short-term
debt securities. (See "Investment Objectives and Policies.")
PRESERVATION OF INVESTMENT. The Fund seeks to maintain a stable net asset value
per share (known as the Fund's "NAV") of $1.00. (See "Investment Objectives and
Policies.")
READY ACCESS TO YOUR CASH. You can conveniently sell your shares of the 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. (See
"Investing in Shares of the Fund - How to Sell or Exchange Your Shares.")
LOW COST INVESTING. The Investor Shares of the Fund were designed with operating
expenses well below the industry average. (See "Matching the Fund to Your
Investment Needs.") Additionally, you pay no sales fee when you buy shares of
the Fund. Fees may be charged for balances and transactions under the required
minimums. (See "Investing in Shares of the Fund - How to Buy Shares" and
"Investing in Shares of the Fund - How to Sell Shares.")
PROFESSIONAL MANAGEMENT OF THE FUND. Charles Schwab Investment Management, Inc.
(the "Investment Manager") currently manages the mutual funds in the
SchwabFunds(R), a family of 29 mutual funds with over $47 billion in assets as
of April 1, 1997. (See "Organization and Management of the Fund - 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 accounts. (See
"Investing in Shares of the Fund.")
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.
2
<PAGE> 113
SUMMARY OF EXPENSES
ANNUAL OPERATING EXPENSES. The Investor Shares of the Fund pay annual operating
expenses from the class's income and assets. 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 portfolio and maintaining shareholder records. Because these
fees are paid from the Investor Shares' income and assets, they are factored
into the price of the shares and into the dividends paid to shareholders. As a
shareholder, you are not charged any of these fees directly.
<TABLE>
<S> <C>
INVESTOR SHARES(1)
Shareholder Transaction Expenses................... $5(2)
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS):
Management Fee (after fee reduction)(3).......... 0.35%
12b-1 Fees....................................... None
Other Expenses (after fee reductions and/or
expense reimbursements)(4)..................... 0.05%
-----
TOTAL FUND OPERATING EXPENSES(4)................... 0.40%
</TABLE>
(1) For information regarding the key differences between the multiple classes
of shares of the Fund, see "Matching the Fund to Your Investment Needs."
(2) You will be subject to a $5 administrative fee if you sell or exchange
shares in an amount less than $5,000.
(3) This amount reflects a reduction by the Investment Manager, which is
guaranteed through at least April 30, 1998. If there were no such reduction,
the management fee would be 0.42% of average net assets.
(4) This amount reflects the guarantee by Schwab and the Investment Manager
that, through at least April 30, 1998, total operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses) will not
exceed 0.40% of average net assets. If there were no such reduction, other
expenses and total operating expenses would be 0.28% and 0.70% of average
net assets, respectively. The effect of this voluntary expense limitation is
to maintain or increase the Fund's total return to shareholders. This amount
does not include any fees that you may be charged if you do not maintain the
minimum balance required in your Schwab account. (See "Investing in Shares
of the Fund."
EXAMPLE. Based on the expenses in the table above, you would pay the following
expenses on a $1,000 investment assuming (1) .5% annual return; and (2)
redemption at the end of each period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- -------- -------- --------
<S> <C> <C> <C>
$4 $13 $22 $51
</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.
3
<PAGE> 114
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified reports are included in the Fund's Annual Report,
which contains additional financial data and related notes. The financial
highlights, financial statements and report of the auditor are incorporated by
reference into the SAI. Free copies of the SAI and Annual Report may be obtained
by calling the telephone number or writing to the address on the first page of
this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992(1)
----------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income..................... 0.05 0.06 0.04 0.03 0.02
Net realized & unrealized gains (losses)
on investment........................... -- -- -- -- --
----------- ---------- ---------- -------- --------
Total from investment operation........... 0.05 0.06 0.04 0.03 0.02
Less distributions:
Dividends from net investment income...... (0.05) (0.06) (0.04) (0.03) (0.02)
Dividends from realized gain on
investments............................. -- -- -- -- --
----------- ---------- ---------- -------- --------
Total distributions......................... (0.05) (0.06) (0.04) (0.03) (0.02)
----------- ---------- ---------- -------- --------
Net asset value at end of period............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return (not annualized)............... 5.26% 5.80% 4.09% 3.02% 2.33%
=========== ========== ========== ======== ========
Ratios/Supplemental data:
Net assets at end of period (000's)....... $10,476,537 $6,923,890 $3,731,629 $729,356 $319,024
Ratio of expenses to average net
assets*................................. 0.40% 0.40% 0.40% 0.39% 0.29%(2)
Ratio of net investment income to average
net assets*............................. 5.14% 5.63% 4.40% 2.97% 3.27%(2)
</TABLE>
*The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios would
have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets..... 0.70% 0.72% 0.79% 0.82% 0.94%(2)
Ratio of net investment income to average
net assets................................ 4.84% 5.31% 4.01% 2.54% 2.62%(2)
</TABLE>
(1) Period from April 30, 1992 (commencement of operations) to December 31,
1992.
(2) Annualized
4
<PAGE> 115
MATCHING THE FUND TO YOUR INVESTMENT NEEDS
Because the Fund is designed for larger balance accounts and less frequent
shareholder transactions, it can keep the operating expenses lower than the
industry average, which helps provide more competitive yields. The table below
shows the total operating expenses compared to the industry average for similar
type funds.
<TABLE>
<CAPTION>
THE FUND INDUSTRY AVERAGE*
- -------------------- --------------------
<S> <C>
0.40% 0.70%
</TABLE>
*Industry averages as reported by IBC/Financial Data Quarterly Report on Money
Fund Performance, 4th Quarter, 1996.
Note: These amounts represent total operating expenses after fee waivers for
first tier money funds, not including institutional money funds.
The Fund invests in high-quality money market securities and is designed for
high current yields. Because shares of the Fund are held in your Schwab account,
the proceeds from redemptions you make are available for other investment
purchases you make in your account. Keep in mind, however, that because the Fund
is 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.
The Fund may be appropriate for a variety of investment programs which can be
long-term or short-term in nature. The Fund should not be a substitute for
building an investment portfolio tailored to your individual investment needs
and risk tolerance.
In addition to the Investor Shares offered by this Prospectus, Schwab also
offers Sweep Shares of the Fund, pursuant to a multiple class plan adopted by
the Board of Trustees of the Schwab Fund Family. The Sweep Shares of the Fund
are available through automatic sweep investment programs. A "sweep" money fund
may be more suitable for providing income on fluctuating cash balances in your
account in between other investments. Generally, the minimum initial investment
requirement for the Sweep Shares of the Fund is $25,000 and the minimum balance
is $20,000. The Sweep shares of the Fund are not subject to certain
administrative fees and pay an annual transfer agent fee of 0.25% of its average
net assets.
The Sweep Shares of the Fund are available to certain investors qualifying for
preferred services under the Schwab Priority or Active Trader programs, and
certain customers of Schwab Institutional's Services for Investment Managers or
Schwab's Retirement Plan Services. For a prospectus describing the other class
of shares of the Fund, call Schwab at 800-2 NO-LOAD.
INVESTMENT OBJECTIVE
AND POLICIES
The Fund's investment objective is to provide maximum current income consistent
with liquidity and stability of capital. Because any investment involves risk,
we cannot guarantee achieving its objective. This investment objective is
fundamental. To achieve this objective, the Fund normally will invest in the
following types of U.S. dollar-denominated debt instruments, which the
Investment Manager has determined present minimal credit risk:
1. Bank certificates of deposit, time deposits or bankers' acceptances of
domestic banks (including their foreign branches), U.S.
5
<PAGE> 116
branches of foreign banks and foreign branches of foreign banks having
capital, surplus and undivided profits in excess of $100 million.
2. Commercial paper rated in one of the two highest rating categories by
Moody's, S&P, Duff, Fitch, or any other nationally recognized statistical
rating organization (referred to in this Prospectus as an "NRSRO") and
commercial paper or notes of issuers who have an outstanding unsecured debt
issue that is currently rated in one of the two highest rating categories by
any NRSRO. The obligation also must be on the same or a higher level of
priority as the rated issue and it must be collateralized to the same extent
as the rated issue. The Fund may invest in other corporate obligations such
as publicly traded bonds, debentures and notes rated in one of the two
highest rating categories by any NRSRO, as well as other similar securities
which, if unrated by any NRSRO, the Investment Manager, using guidelines
approved by the Board of Trustees, determines to be at least equal in quality
to one or more of the securities mentioned above. (For a description of the
ratings, see "Appendix -- Ratings of Investment Securities" in the SAI.)
3. Obligations of, or obligations guaranteed by, the United States government,
the Canadian government or their agencies or instrumentalities.
4. Repurchase agreements involving obligations that are suitable for investment
under the categories listed above.
PRIVATE PLACEMENT SECURITIES. The Fund may invest in commercial paper that is
exempt from registration according to Section 4(2) of the Securities Act of 1933
and that is resold to qualified institutional buyers under Securities Act Rule
144A (known as "Section 4(2) paper").
Federal securities laws restrict the disposition of Section 4(2) paper. Such
commercial paper is generally sold to institutional investors who agree that
they are purchasing the paper for investment and not for public distribution.
Section 4(2) paper normally is resold to other institutional investors through
or with the assistance of the issuer or investment dealers who make a market in
the Section 4(2) paper, thus providing liquidity.
Because it is not possible to predict with assurance exactly how the market for
Section 4(2) paper will develop, our Investment Manager, pursuant to guidelines
approved by the Board of Trustees, will carefully monitor the Fund's investments
in these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. The Fund's liquidity could
be reduced if qualified institutional buyers become temporarily uninterested in
purchasing these restricted securities.
The Fund will not invest more than 10% of its net assets in Section 4(2) paper
and other illiquid securities, including repurchase agreements maturing in more
than seven days, unless the Investment Manager determines, by continuously
referring to the appropriate trading markets and following the guidelines
approved by the Board of Trustees, that any Section 4(2) paper held in excess of
this level is at all times liquid.
ASSET-BACKED COMMERCIAL PAPER. The Fund may invest in asset-backed commercial
paper. Repayment of this type of commercial paper is intended to be obtained
from an identified pool of assets, including automobile receiv-
6
<PAGE> 117
ables, credit card receivables and other types of receivables. Asset-backed
commercial paper is issued by a special purpose vehicle (usually a corporation)
that has been established for the purpose of issuing the commercial paper and
purchasing the underlying pool of assets. The issuer of the commercial paper
bears the direct risk of prepayment on the receivables constituting the
underlying pool of assets. Credit support for such asset-backed commercial paper
may be based on the underlying assets or it may be provided by a third party.
Credit enhancement techniques include letters of credit, insurance bonds,
limited guarantees (which are generally provided by the seller) and
over-collateralization. The Fund applies the same quality requirements to
asset-backed commercial paper as to other securities purchased.
EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES. To the extent that
the Fund purchases Eurodollar certificates of deposit and other similar
obligations, consideration will be given to the fact that these issuers may not
be subject to the same regulatory requirements as U.S. issuers, including U.S.
banks.
Investments in securities of foreign issuers or securities principally traded
overseas may involve certain special risks due to foreign economic, political
and legal developments. Furthermore, issuers of foreign securities are subject
to different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The securities of some foreign companies and
foreign securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. There are also special tax considerations which apply to
securities of foreign issuers and securities principally traded overseas.
CONCENTRATION. Pursuant to a fundamental policy set forth in the SAI, the Fund
will not 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 will not apply to certificates of deposit or bankers'
acceptances issued by domestic branches of U.S. banks and U.S. branches of
certain foreign banks or obligations of or guaranteed by the U.S. Government or
its agencies or instrumentalities.
VARIABLE RATE SECURITIES. The Fund 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.
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
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intended to minimize fluctuations in the values of the securities. We determine
the maturity of Variable Rate Securities in accordance with SEC rules.
GOVERNMENT SECURITIES. The Fund 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 only 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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities on
a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. Generally, we will not pay for such securities or start earning interest
on them until they are received. Securities purchased on a when-issued or
delayed delivery basis are recorded as an asset. The value of such securities
may change as the general level of interest rates changes.
The Fund will invest no more than 25% of its total assets in when-issued or
delayed delivery securities. The Funds will not purchase such securities for
speculative purposes, and will expect to actually acquire the securities when
purchased. However, the Fund reserves the right to sell any such securities
before their settlement dates, if the Investment Manager deems such a sale
advisable.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreements. By entering
into a repurchase agreement, the Fund acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price. The repurchase price is higher than the purchase
price, thereby determining the yield during the Fund's holding period.
Repurchase agreements with broker-dealer firms will be limited to obligations of
the U.S. Government, its agencies or instrumentalities. Maturity of the
securities subject to repurchase may exceed one year.
If the seller of a repurchase agreement becomes bankrupt or otherwise defaults,
the Fund might incur expenses in enforcing our rights and could experience
losses, including a decline in the value of the underlying securities and a loss
of income. We will enter into repurchase agreements only with banks and other
recognized financial institutions that the Investment Manager deems
creditworthy.
INVESTMENT TECHNIQUES USED
BY THE FUND
MATURITY. The Fund 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.
BORROWING POLICY. The Fund may not borrow money except for temporary purposes to
meet redemption requests that could not otherwise be met without immediately
selling portfolio securities. The Fund may borrow an amount up to one-third of
the value of our total assets and may pledge up to 10% of our net assets to
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secure such borrowings. The Fund will not borrow for leverage purposes. This
borrowing policy is fundamental.
LIMITATION ON INVESTMENTS. The Fund is subject to the following limitation,
which applies to all its investments other than securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities:
Except as provided in this paragraph, the Fund may not invest more than 5% of
the value of its total assets in the securities of one issuer. However, the Fund
may invest more than 5% of its total assets in the First Tier securities of a
single issuer for a period of up to three Business Days after the purchase
thereof, provided further that the Fund may not make more than one investment in
accordance with the foregoing proviso at any time. For purposes of this
limitation, a security is considered to be issued by the governmental entity (or
entities) whose assets and revenues back the security. In certain circumstances,
the guarantor of a security may also be considered to be an issuer in connection
with such a guarantee.
ORGANIZATION AND
MANAGEMENT OF THE FUND
GENERAL OVERSIGHT. The 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 the Fund, subject to the authority of the trustees and
officers of the Trust. The Investment Manager, founded in 1989, is a wholly
owned subsidiary of The Charles Schwab Corporation and is the investment adviser
and administrator of the mutual funds in the SchwabFunds, a family of 29 mutual
funds. As of April 1, 1997, the SchwabFunds had aggregate net assets in excess
of $47 billion.
Through a professional staff of portfolio managers and securities analysts, the
Investment Manager provides the Fund with a continuous investment program,
including general investment and economic advice regarding our investment
strategies, manages the investment portfolio, performs expense management,
accounting/record keeping and provides other services necessary to the Fund's
operation.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab serves as the Shareholder
Services Agent and Transfer Agent. Schwab provides information to 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 4.1 million active customer accounts and has over 241 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, Chief Executive Officer and a Director of
The Charles Schwab Corporation. As a result of his beneficial ownership
interests in and other relationships with The Charles Schwab Corporation and its
affiliates, Mr. Schwab may be deemed to be a control-
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ling person of Schwab and the Investment Manager.
OPERATING FEES AND EXPENSES
For investment management services, under the terms of its Investment Advisory
and Administration Agreement, the Investment Manager is entitled to receive a
graduated annual fee from the Fund. This fee is based on the value of the
average daily net assets of the Fund and is payable monthly by the Fund in the
amount of 0.46% of the Fund's average daily net assets not in excess of $1
billion; 0.45% of such assets over $1 billion, but not in excess of $3 billion;
0.40% of such assets over $3 billion but not in excess of $10 billion; 0.37% of
such assets over $10 billion but not in excess of $20 billion and 0.34% of such
assets over $20 billion.
For the fiscal period ended December 31, 1996, the Fund paid an investment
management fee of 0.35% of average net assets and total operating expenses of
0.40% of average net assets.
For its services as Transfer Agent, Schwab is entitled to receive an annual fee
of 0.05% of average net assets. In addition, for shareholder services provided,
Schwab is entitled to receive an annual fee of 0.20% of average net assets.
Schwab serves as the Fund's principal underwriter/distributor but receives no
compensation for this service.
OTHER EXPENSES. The Trust pays the expenses of our Fund's 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 its individual investment
portfolios ("Series"), or classes of shares within these Series, in proportion
to their relative net assets at the time the expense is incurred. However,
expenses directly attributable to a Series or class of a Series will be charged
to that Series or class, respectively.
OTHER INFORMATION
The Trust is an open-end investment management company, 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 9 Series, which may be
organized into one or more classes of shares of beneficial interest. The Board
of Trustees may authorize the issuance of shares of additional Series or
classes, if it deems it to be desirable to do so. Shares within each Series have
equal, noncumulative voting rights and equal rights as to distributions, assets
and liquidation of such Series, except to the extent such voting rights or
rights as to distributions, 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. It will, however, hold special meetings as
required or deemed desirable by the Board of Trustees for such purposes as
changing a Fund's fundamental policies, electing or removing Trustees or
approving or amending an investment advisory agreement. In addition, a Trustee
may be removed by
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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.
YOUR VOTING RIGHTS. If we were to make changes to our 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. The differing expenses
applicable to the Investor Shares and Sweep Shares of the Fund will cause the
performance of the two classes to differ.
INVESTING IN SHARES
OF THE FUND
You may place purchase and redemption orders as well as exchange requests by
telephone by calling 800-2 NO-LOAD. The right to initiate transactions by
telephone is automatically available through your Schwab account. TDD users may
contact Schwab at 800-345-2550, 24 hours a day.
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.
To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.
Twice a year, we will provide a report to all shareholders describing the Fund's
performance and outlining the investments held in the portfolio. 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, write to SchwabFunds(R) at the address on the front of this Prospectus.
To request a free copy of our
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Annual Report (or Semi-Annual Report) to Shareholders, call 800-2 NO-LOAD.
OPENING A SCHWAB ACCOUNT. You may buy shares through a Schwab account or through
an account with any other entity designated by Schwab. 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 shares of the
Fund 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 account ($500 for custodial
accounts). A fee of $7.50 will be charged to Schwab brokerage accounts that fall
below this minimum for three consecutive months in any quarter. This fee, if
applicable, will be charged at the end of each quarter and will be waived if
there has been at least one commissionable trade within the last 6 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.
DEPOSITING FUNDS. You may deposit funds into your Schwab account by check, wire
or many other forms of electronic funds transfer (securities may also be
deposited). All deposit checks should be made payable to Charles Schwab & Co.,
Inc. Schwab will charge your Schwab account a $15 service fee for any check
returned because of insufficient or uncollected funds, or because of a stop
payment order. If you would like to wire funds into or from your Schwab account,
contact your local Schwab office for instructions. You can request that your
Schwab office wire funds from your Schwab account to your bank account. There is
a fee for each wire transfer of funds.
HOW TO BUY SHARES
WHEN YOU CAN BUY SHARES. Funds (including those which are transmitted by wire)
received by Schwab before 4:00 p.m. (Eastern time) can be used to buy shares on
that day. Funds that arrive after that time can be used to buy shares the next
Business Day.
Schwab offers you several convenient ways to purchase Fund shares. You may
choose the one that works best for you, and Schwab will confirm execution of
your purchase order.
BY TELEPHONE
Call 800-2 NO-LOAD, 24 hours a day. TDD users may contact Schwab at
800-345-2550, 24 hours a day.
BY MAIL
Written purchase orders (along with any checks) should be mailed to Schwab at
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101 Montgomery Street, San Francisco, California 94104 and should:
- - reference your Schwab account number;
- - specify the name of the Fund and class and the dollar amount of shares you
would like to purchase; and
- - (initial share purchase only) select one of the distribution options listed
below.
ELECTRONICALLY
For more information regarding how to buy shares electronically using
StreetSmart(R), The Equalizer(R) and TeleBroker(R), call 800-2 NO-LOAD.
The minimum initial investment in the Investor Share of the Fund is $25,000 or
$15,000 for an IRA or other retirement plan. After you have bought the minimum
amount of shares for your initial investment, you can buy additional shares in
amounts of at least $5,000 or $2,000 for an IRA or other retirement plan. The
Transfer Agent imposes a $5 fee for each month your Fund account balance falls
below the required $20,000 minimum or $15,000 for an IRA or other retirement
plan. 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 SAI for more details.
The Fund, in its sole discretion and without prior notice to you, reserves the
right to reject orders to buy shares, to change or waive 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, the Fund reserves the right to refuse your future orders to buy shares
in order to minimize the costs to the Fund associated with these practices. All
orders to buy shares must be accepted by Schwab, and orders are not binding
until Schwab confirms or accepts them in writing.
DISTRIBUTION OPTIONS. When you first buy shares, you may choose one of the two
following distribution options:
AUTOMATIC REINVESTMENT: All distributions will be reinvested in additional
full and fractional shares of the Fund at the net asset value per share
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 800-2 NO-LOAD.
HOW TO SELL OR EXCHANGE YOUR SHARES
You can sell or exchange shares at any time by telephone, by mail or
electronically, subject to the following terms and conditions:
- - if your sale or exchange order is received by Schwab before 4:00 p.m. Eastern
time, it will be processed that day;
- - if you bought your shares by check, your money will be sent 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;
- - a check for your shares will be issued on the Business Day after the Transfer
Agent
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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
- - The Fund 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 exist 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 or
exchange shares equal to or less than $5,000 and may sell additional shares from
your account to pay the administrative fee. 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.
You can exchange your SchwabFunds(R) shares for shares of other SchwabFunds
Series or classes available to investors in your state provided you meet the
minimum initial or subsequent investment requirements and any other requirements
relating to the Series or class of shares you wish to purchase. Thus, you can
conveniently modify your investments if your goals or market conditions change.
We reserve the right to modify, limit, or terminate the exchange privilege upon
60 days' written notice. For federal income tax and other purposes, an exchange
is treated as a sale of your shares and a purchase of other shares.
BY TELEPHONE
You can sell or exchange shares by telephone by calling 800-2 NO-LOAD. TDD users
may contact Schwab at 800-345-2550, 24 hours a day.
We need the following information in order to process your telephone request:
- - your Schwab account number and your name for verification;
- - the number of shares you want to sell or exchange;
- - the name of the Fund and class from which you are selling or exchanging
shares;
- - if exchanging, the name of the fund and class into which you want to exchange
shares and the distribution option you select.
BY MAIL
You can sell or exchange shares by writing to the address on the cover of this
Prospectus.
We need the following information in a letter from you in order to process your
mail request:
- - your Schwab account number;
- - the number of shares you want to sell or exchange,
- - the name of the Fund and class from which you are selling or exchanging
shares;
- - if exchanging, the name of the fund and class into which you want to exchange
shares and the distribution option you select;
- - the signature of at least one of the registered Schwab account holders of your
account in the exact form specified in the account.
Once mailed, redemption and exchange requests are irrevocable and may not be
modified or canceled.
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ELECTRONICALLY
For more information regarding how to sell shares electronically using
StreetSmart(R), The Equalizer(R) and TeleBroker(R), call 800-2 NO-LOAD.
NON-SWEEP LIQUIDATION POLICY. If no cash assets or margin credit balance is
available in your Schwab Account, Schwab will redeem shares of the Fund without
prior notification to you to cover (a) debits in your account resulting from
transactions in securities; (b) payment of your Schwab One(R) checks; (c)
payment of charges made on your Visa(R) debit card; (d) purchases made under an
Automatic Investment Plan; and (e) debits due to electronic fund transactions.
Schwab may charge you a $10 fee each time Schwab must redeem your shares in one
of these circumstances.
If your account contains more than one Value Advantage Investments, shares will
be redeemed from the Value Advantage Investments in your account with the
highest balance at the time of the settlement of the transaction. If those
shares are insufficient to satisfy the total amount due, then the Value
Advantage Investments with the next highest balance in your account will be used
until no Value Advantage Investments shares remain in your account. If the sum
of the Value Advantage Investments you own is insufficient to satisfy the total
amount due, none of your shares will be redeemed.
For redemptions made under the circumstances outlined above, you will not be
charged an administrative fee for automatic redemptions which are less than the
amount required to satisfy the Fund's minimum redemption requirement.
IMPORTANT INFORMATION ABOUT
YOUR INVESTMENT
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Business Day the Fund's net investment income is determined by subtracting
the Fund's expenses for that day from the amount the Fund earned on its
investments on that day. Dividends from this net investment income each Business
Day for those who were shareholders of record at the previous NAV calculation.
Dividends are paid, or reinvested, on the 15th day of each month, if it is a
Business Day. If the 15th day of the month is not a Business Day, dividends are
paid on the next Business Day with the exception of the dividend scheduled to be
paid in December, which is paid on the last Business Day in December.
INCOME TAX INFORMATION
The following is only a very brief summary of some of the federal income tax
consequences that affect the Fund and its shareholders. Therefore, it is
important that you consult with advisers about your own tax situation.
The Fund has qualified as a regulated investment company under the Code. In
order for the Fund to continue to so qualify, the Fund will distribute to its
shareholders on a current basis substantially all of the Fund's net investment
income and net capital gains, if any and we will cause the Fund to meet certain
other requirements. As a regulated investment company, the Fund will pay no
federal income taxes to the extent that the Fund distributes earnings to its
shareholders.
All distributions made that are attributable to taxable interest or short-term
capital gains are taxable to shareholders as ordinary income. Reinvested
distributions will be taxable as if
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they had been received by shareholders in cash.
The Fund 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 the Fund will notify you of the federal income tax consequences of
all distributions made that year to your account.
HOW WE DETERMINE THE PRICE OF YOUR SHARES
The price of a share is its net asset value per share, which we determine each
Business Day at the close of trading on the Exchange, generally at 4:00 p.m.,
Eastern time. NAV is determined by taking the total assets, subtracting any
liabilities and then dividing the resulting amount by the number of shares
outstanding. Purchase or redemption orders and exchange requests will be
executed at the NAV next determined after receipt by the Transfer Agent or its
authorized agent. While the Fund tries to maintain its NAV at a constant $1.00,
your shares are not guaranteed against losses of value.
The Fund's portfolio securities are valued at the price paid when bought,
adjusting to reflect amortization of premium or any discount (amortized cost
method). This value is then compared to the market value of the Fund's
investments.
If a deviation of 1/2 of 1% or more between NAV as calculated by market values
and the $1.00 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, the Fund or the Investor Shares of the Fund may advertise the
yield and effective yield, taxable equivalent yield, taxable equivalent
effective yield and total return. The Fund's actual performance will, of course,
vary from year to year and past performance in no way represents or guarantees
future performance. How the Fund performs in any given year will depend on the
type and quality of securities in which we invest, the market and the operating
expenses of the Fund. Since money market funds seek to maintain a stable $1.00
share price, current 7-day yields are the most common illustration of money
market fund performance.
YIELD. When calculating the yield, some hypothetical assumptions are made about
how the Fund will do for one year. The income generated over one 7-day period by
a hypothetical investment is to be generated each week for one year. This income
for the year is then shown as a percentage of the hypothetical investment.
Because money market funds attempt to maintain a stable NAV of $1.00, yield is
the most common way to report performance. (See the section entitled "Yield" in
the SAI for more information.)
EFFECTIVE YIELD. Effective yield is calculated the same way, but the income
generated by our hypothetical investment is compounded weekly over the
hypothetical year. Because of the effect of compounding, the effective yield
will be slightly higher than the yield.
TOTAL RETURN. Total return is the change in value of an investment in a fund
over a given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total
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return is a hypothetical rate of
return that, if achieved annually,
would have produced the same
cumulative total return if
performance had been constant over
the entire period. Average annual
total returns smooth out variations
in performance; they are not the
same as actual year-by-year results.
COMPARING THE FUND'S PERFORMANCE
WITH OTHER FUNDS. The Fund may
compare the performance of the Fund
or class 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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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 would happen if the
results were hypothetically extended to cover an entire year.
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 9:30
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
relative to the original purchase price. A gain is realized when the security
that has increased in value is 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 the Fund makes to shareholders. There are two kinds of
distributions: dividends, or the profits (after expenses) from the 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 FUND - Limitations on Investments - Diversification."
DUFF: Duff & Phelps Credit Rating Co., an NRSRO.
FITCH: Fitch Investor Services, Inc., an NRSRO.
FUND: The Schwab Value Advantage Money Fund.
FUNDAMENTAL: a policy that cannot be changed without the approval of a majority
(as defined in the 1940 Act) of the shareholders of a fund.
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 PER SHARE (NAV): the value of one share of a fund or a class of
a fund.
18
<PAGE> 129
This value is determined by adding the total Fund assets, subtracting all
liabilities and then dividing the resulting number by the number of shares
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.
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.
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.
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,
California 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 the Fund's portfolio investments, maturing in 397
days or less.
TRANSFER AGENT: Charles Schwab & Co., Inc., 101 Montgomery Street, San
Francisco, California 94104.
TRUST: The Charles Schwab Family of Funds.
YIELD: the dividend or interest paid by a security. The yield is calculated as a
percentage of the security's current market price. A stock selling for $80 per
share and paying dividends of $6.40 is yielding 8 percent ($6.40 / $80 = .08).
Likewise, a bond with a par or face value of $1,000 and a 9 percent interest
rate selling for $600 is yielding 15 percent ($90 / $600 = .15). Interest on a
bond is always based on the par or face value of the bond, while the yield or
return is based on the market price.
19
<PAGE> 130
- ------------------------------------------------------
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS AND
IN OFFICIAL SALES MATERIALS. IF ANYONE GIVES ANY OTHER INFORMATION OR MAKES ANY
OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION OR REPRESENTATIONS.
- ------------------------------------------------------
THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
LAWFULLY BE MADE.
- ------------------------------------------------------
20
<PAGE> 131
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 132
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 133
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 134
==============
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
==============
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, CA 94104
840-8 (4/97) Printed on recycled paper.
SCHWAB VALUE
ADVANTAGE
MONEY FUND(R)
Prospectus April 30, 1997
[SCHWABFUNDS LOGO]
<PAGE> 135
CROSS REFERENCE SHEET
PROSPECTUS
Schwab Institutional Advantage Money Fund
PART A ITEM PROSPECTUS CAPTION
1. Cover Page Cover Page
2. Synopsis Key Features of the Fund; Summary of
Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Investment Objective and
Policies; Organization and
Management of the Fund
5. Management of the Fund Organization and Management of the
Funds
5A. Management's Discussion of Fund
Performance How the Fund Reports Performance
6. Capital Stock and Other Securities Cover Page; Investment Objective and
Policies; Distributions and Taxes
7. Purchase of Securities Being Offered Share Price Calculation; Investing
in Shares of the Fund - How to Buy
Shares
8. Redemption or Repurchase Investing in Shares of the Fund -
How to Exchange Shares; Investing in
Shares of the Fund - How to Sell
Shares;
9. Pending Legal Proceedings Inapplicable
<PAGE> 136
SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R)
PROSPECTUS APRIL 30, 1997
THE SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND (the "Fund") is designed for
retirement plans, plan participants and other institutional investors who seek
maximum current income consistent with liquidity and stability of capital, for
investment of their own funds or funds for which they act in a fiduciary, agency
or custodial capacity.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. You can find more detailed information about the
Fund in the Fund's Statement of Additional Information ("SAI"), dated April 30,
1997 (as may be amended from time to time). The SAI has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference into
this Prospectus.
This Prospectus may be available electronically by using our World Wide Web
address: http://www.schwab.com. This Prospectus, the SAI, materials incorporated
by reference and other related information is also available at the SEC's World
Wide Web address: http://www.sec.gov. To receive a free paper copy of this
Prospectus or the SAI, call the Fund at 800-2 NO-LOAD, 24 hours a day, or write
to the Fund at 101 Montgomery Street, San Francisco, California 94104. TDD users
may contact Schwab at 800-345-2550, 24 hours a day.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Key Features of the Fund.............. 2
Summary of Expenses................... 3
Financial Highlights.................. 4
Investment Objective and Policies..... 5
Organization and Management of the
Fund................................ 8
Distributions and Taxes............... 10
Share Price Calculation............... 10
How the Fund Reports Performance...... 11
Investing in Shares of the Fund....... 11
How to Buy Shares................... 12
How to Exchange Shares.............. 13
How to Sell Shares.................. 13
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE PER SHARE OF $1.00.
<PAGE> 137
KEY FEATURES OF THE FUND
MAXIMUM CURRENT INCOME AND SAFETY. The Fund is designed for retirement plans,
plan participants and other institutional investors who seek maximum current
income consistent with liquidity and stability of capital, for investment of
their own funds or funds for which they act in a fiduciary, agency or custodial
capacity. The Fund invests in high-quality, short-term debt securities. (See
"Investment Objective and Policies.")
STABILITY OF PRINCIPAL. The Fund seeks to maintain a stable net asset value
("NAV") per share of $1.00. (See "Share Price Calculation.")
LIQUIDITY. You can conveniently sell your shares of the Fund at any time. (See
"Investing in Shares of the Fund - How to Sell Shares.")
LOW COST INVESTING. The Fund imposes no sales or transaction fees on purchases
of Fund shares. (See "Summary of Expenses.") In addition, total fund operating
expenses will not exceed 0.50% of the Fund's average daily net assets, as
guaranteed by Charles Schwab Investment Management, Inc. (the "Investment
Manager") and Schwab through at least April 30, 1998. (See "Summary of
Expenses.")
PROFESSIONAL MANAGEMENT. The Investment Manager currently provides investment
management services to the SchwabFunds(R), a family of 29 mutual funds with over
$47 billion in assets as of April 1, 1997. (See "Organization and Management of
the Fund.")
SHAREHOLDER SERVICE. A representative of Schwab and/or of The Charles Schwab
Trust Company ("Schwab Representative" or the "Trust Company") is available
toll-free to receive your Fund orders. (See "Investing in Shares of the
Fund - How to Buy Shares," "Investing in Shares of the Fund - How to Exchange
Shares" and "Investing in Shares of the Fund - How to Sell Shares.")
CONVENIENT RECORD KEEPING. Individual investors receive one consolidated account
statement for all their account activity including records of all Fund
transactions.
2
<PAGE> 138
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES: None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS):
Management Fees
(after fee reduction)1......... 0.26%
12b-1 Fees........................ None
Other Expenses (after fee
reduction and/or expense
reimbursement)2................ 0.24%
------
TOTAL FUND OPERATING EXPENSES2...... 0.50%
</TABLE>
1 This amount reflects a reduction by the Investment Manager, which is
guaranteed at least through April 30, 1998. If there were no such reduction,
the maximum management fee for the Fund would have been 0.46% of the Fund's
average daily net assets. (See "Organization and Management of the
Fund - Operating Fees and Expenses.")
2 This amount reflects the guarantee by the Investment Manager and Schwab that,
at least through April 30, 1998, the total operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses) will not
exceed 0.50% of the Fund's average daily net assets. Without this guarantee,
the Fund's other expenses and total fund operating expenses would have been
0.42% and 0.88%, respectively, of the Fund's average daily net assets.
EXAMPLE. Based on the expenses in the above table, you would pay the following
expenses on a $1,000 investment, assuming (1) a 5% annual return and (2)
redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$5 $16 $28 $ 63
</TABLE>
THE PURPOSE OF THE PRECEDING TABLE IS TO ASSIST INVESTORS IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR
INDIRECTLY. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR
FUTURE PERFORMANCE.
3
<PAGE> 139
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified report is included in the Fund's Annual Report,
which contains additional financial data and related notes. The Financial
Highlights, financial statements and report of the auditor are incorporated by
reference into the SAI. A free copy of the SAI and the Annual Report may be
obtained by calling the telephone number or writing to the address on the first
page of this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE PERIOD ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994(1)
------------------ ------------------ ---------------------
<S> <C> <C> <C>
Net asset value at beginning of period............ $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................... 0.05 0.06 0.04
Net realized and unrealized gain (loss)
on investments................................ -- -- --
------------------ ---------- ----------
Total from investment operations................ 0.05 0.06 0.04
LESS DISTRIBUTIONS
Dividends from net investment income............ (0.05) (0.06) (0.04)
Distributions from realized gain on
investments................................... -- -- --
------------------ ---------- ----------
Total distributions............................. (0.05) (0.06) (0.04)
------------------ ---------- ----------
Net asset value at end of period.................. $ 1.00 $ 1.00 $ 1.00
============= ============= ==============
Total Return (not annualized)..................... 5.15% 5.65% 3.86%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s)................ $139,021 $ 80,746 $60,088
Ratio of expenses to average net assets(2)...... 0.50% 0.53% 0.55%(3)
Ratio of net investment income to average
net assets(2)................................. 5.03% 5.50% 4.04%(3)
(1) Period from January 4, 1994 (commencement of operations) to December 31, 1994.
(2) The information contained in the above table is based on actual expenses for the periods, after giving effect to
the portion of expenses reduced by the Investment Manager and Schwab. Had these expenses not been reduced, the
Fund's expense and net investment income ratios would have been:
Ratio of expenses to average net assets......... 0.88% 0.90% 0.92%(3)
Ratio of net investment income to average net
assets........................................ 4.65% 5.13% 3.67%(3)
(3) Annualized
</TABLE>
4
<PAGE> 140
INVESTMENT OBJECTIVE AND
POLICIES
The Fund's investment objective is maximum current income consistent with
liquidity and stability of capital. This investment objective is fundamental,
and cannot be changed without shareholder approval. The Fund will only purchase
securities that are deemed to mature in 397 days or less in accordance with
federal securities regulations, or which have a variable rate of interest
readjusted no less frequently than every 397 days. The Fund pursues its
objective by investing in the following types of U.S. dollar-denominated debt
instruments which are determined by the Investment Manager to present minimal
credit risk:
- - Certificates of deposit, time deposits, notes and bankers' acceptances of
domestic banks (including their foreign branches), U.S. branches of foreign
banks and foreign branches of foreign banks having capital, surplus and
undivided profits in excess of $100 million.
- - Commercial paper, including asset-backed commercial paper, rated in one of the
two highest rating categories by any nationally recognized statistical rating
organization ("NRSRO"), including Moody's Investors Service, Standard & Poor's
Corporation, Duff & Phelps, Inc., Fitch Investor Services, Inc., or commercial
paper or notes of issuers with an unsecured debt issue outstanding currently
rated in one of the two highest rating categories of any NRSRO, where the
obligation is on the same or a higher level of priority and collateralized to
the same extent as the rated issue. The Fund may also invest in other
corporate obligations such as publicly traded bonds, debentures and notes
rated in one of the two highest rating categories by any NRSRO and other
similar securities which, if unrated by any NRSRO, are determined by the
Investment Manager, using guidelines approved by the Board of Trustees, to be
at least equal in quality to one or more of the above referenced securities.
Notwithstanding the foregoing, the Fund may invest no more than 5% of its
total assets in securities that are given the second highest rating by any
NRSRO.
- - Obligations of, or guaranteed by, the U.S. or Canadian governments, their
agencies or instrumentalities.
- - Repurchase agreements involving obligations that are suitable for investment
under the categories listed above.
U.S. GOVERNMENT SECURITIES. U.S. Treasury securities, including notes, bills and
bonds 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
only by the credit of the agency or instrumentality, while others have an
additional line of credit with the U.S. Treasury. With respect to securities
supported only by the credit of the issuing agency or instrumentality or by an
additional line of credit with the U.S. Treasury, 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.
EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES. To the extent that
the Fund purchases Eurodollar certificates of deposit and other similar
obligations, consideration will be given to the fact that these issuers may not
be subject to the same regulatory requirements as U.S. issuers, including U.S.
banks.
Investments in securities of foreign issuers or securities principally traded
overseas, may
5
<PAGE> 141
involve certain special risks due to foreign economic, political and legal
developments. Furthermore, issuers of foreign securities are subject to
different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The securities of some foreign companies and
foreign securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. There are also special tax considerations which apply to
securities of foreign issuers and securities principally traded overseas.
CONCENTRATION. Pursuant to a fundamental policy set forth in the SAI, the Fund
will not 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 will not apply to certificates of deposit or bankers'
acceptances issued by domestic branches of U.S. banks and U.S. branches of
certain foreign banks or obligations of or guaranteed by the U.S. Government or
its agencies or instrumentalities.
PRIVATE PLACEMENTS. The Fund may invest in commercial paper and other securities
that are exempt from registration pursuant to Section 4(2) of the Securities Act
of 1933 ("Section 4(2) paper"). Federal securities laws restrict the disposition
of Section 4(2) paper. The Fund will not invest more than 10% of its net assets
in Section 4(2) paper and other illiquid securities unless the Investment
Manager determines, by continuous reference to the appropriate trading markets
and pursuant to guidelines approved by the Board of Trustees, that any Section
4(2) paper held by the Fund in excess of this level is liquid. The Fund will
invest no more than 15% of its net assets in restricted securities.
The Fund's ownership of Section 4(2) paper could have the effect of reducing the
Fund's liquidity to the extent that qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
ASSET-BACKED COMMERCIAL PAPER. The Fund may invest in asset-backed commercial
paper. Repayment of this type of commercial paper is intended to be obtained
from an identified pool of assets, including automobile receivables, credit card
receivables and other types of assets. Asset-backed commercial paper is issued
by a special purpose vehicle (usually a corporation) that has been established
for the purpose of issuing commercial paper and purchasing the underlying pool
of assets. The issuer of the commercial paper bears the direct risk of
prepayment on the receivables constituting the underlying pool of assets. Credit
support for asset-backed securities may be based on the underlying assets or it
may be provided by a third party. Credit enhancement techniques include letters
of credit, insurance bonds, limited guarantees and over-collateralization.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities on
a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. The Fund generally will not pay for such securities or start earning
interest on them until they are received. Securities purchased on a when-issued
or delayed delivery basis are recorded as an asset. The value of such securities
may change as the general level of interest rate changes.
6
<PAGE> 142
The Fund will not invest more than 25% of its total assets in when-issued or
delayed delivery securities. The Fund will not purchase such securities for
speculative purposes and will expect to actually acquire the securities when
purchased. However, the Fund reserves the right to sell any such securities
before their settlement dates if the Investment Manager deems such a sale
advisable.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreements, which are
instruments under which the Fund acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price (which price is higher than the purchase price),
thereby, determining the yield during the Fund's holding period. Maturity of the
securities subject to repurchase may exceed one year.
If the seller of a repurchase agreement becomes bankrupt or otherwise defaults,
the Fund might incur expenses in enforcing its rights, and could experience
losses, including a decline in the value of the underlying securities and loss
of income. The Fund will enter into repurchase agreements, only with banks and
other recognized financial institutions that the Investment Manager deems
creditworthy.
ILLIQUID SECURITIES. Pursuant to a fundamental policy set forth in the SAI, the
Fund will not purchase illiquid securities, including time deposits and
repurchase agreements maturing in more than 7-days, if, as a result thereof,
more than 10% of the Fund's net assets valued at the time of the transaction are
invested in such securities.
VARIABLE RATE SECURITIES. The Fund may invest in instruments having rates of
interest that are adjusted periodically, or which "float" continuously according
to formulas intended to minimize any fluctuation in values of the instruments
("Variable Rate Securities"). The interest rate of Variable Rate Securities
ordinarily is 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.
Some Variable Rate Securities ("Variable Rate Demand Securities") have a demand
feature entitling the purchaser to resell the securities at an amount
approximately equal to amortized cost or the principal amount thereof plus
accrued interest. As is the case for other Variable Rate Securities, the
interest rate on Variable Rate Demand Securities varies according to some
objective standard intended to minimize fluctuation in the values of the
instruments. The Fund determines the maturity of Variable Rate Securities in
accordance with SEC rules. As interest rates decrease or increase, Variable Rate
Securities experience less appreciation or depreciation than fixed-rate
obligations.
SECURITIES LENDING. To increase its income, the Fund may lend its portfolio
securities to brokers, dealers and other financial institutions that borrow
securities. No more than one-third of the Fund's total assets may be represented
by loaned securities. The Fund's loans of portfolio securities will be fully
collateralized by cash, letters of credit or U.S. Government securities equal at
all times to at least 100% of the loaned securities' market value plus accrued
interest. As with other extensions of credit, there are risks of delay in
recovery or even losses of rights in the securities loaned should the borrower
of the securities fail financially. However, such loans will be made only to
firms deemed by the Investment Manager to be of good standing and when, in
7
<PAGE> 143
the judgment of the Investment Manager, the income which can be earned currently
from such loans justifies the attendant risk.
BORROWING POLICY. Pursuant to a fundamental policy set forth in the SAI, the
Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount up to one-third of the value of
its total assets, in order to meet redemption requests without immediately
selling any portfolio securities. The Fund will not borrow for leverage
purposes.
ADDITIONAL INFORMATION. Please see the SAI for further information regarding
foreign securities, Section 4(2) paper, the investment rating categories
employed by various NRSROs and other investment techniques used by the Fund.
ORGANIZATION AND
MANAGEMENT OF THE FUND
GENERAL OVERSIGHT. The Board of Trustees and officers meet regularly to review
investments, performance, expenses and other business affairs.
THE INVESTMENT MANAGER. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, California 94104. The Investment Manager
provides a continuous investment program, including general investment and
economic advice regarding the Fund's investment strategies; manages the Fund's
investment portfolio and performs expense management, accounting and record
keeping; and provides other services necessary to the operation of the Fund. The
Investment Manager, formed in 1989, is a wholly-owned subsidiary of The Charles
Schwab Corporation and is also the investment adviser to and administrator of
the mutual funds in the SchwabFunds(R), a family of 29 mutual funds. As of April
1, 1997, the SchwabFunds(R) had aggregate net assets in excess of $47 billion.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Charles Schwab & Co., Inc. ("Schwab" or
the "Transfer Agent"), 101 Montgomery Street, San Francisco, California 94104,
serves as shareholder services agent and transfer agent for the Fund. Schwab
provides information and services to shareholders, which include reporting share
ownership, sales and dividend activity (and associated tax consequences),
responding to daily inquiries and effecting the transfer of Fund shares. It
furnishes such office space and equipment, telephone facilities, personnel and
informational literature distribution as is necessary or appropriate in
providing the described shareholder and transfer agency information and
services. Schwab is also the Fund's distributor, but receives no compensation
for its services as such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 4.1 million active customer accounts and has over 241 branch offices.
Schwab is a wholly-owned subsidiary of The Charles Schwab Corporation. Charles
R. Schwab is the founder, Chairman, Chief Executive Officer and a Director of
The Charles Schwab Corporation. As a result of his beneficial ownership
interests in and other relationships with The Charles Schwab Corporation and its
affiliates, Mr. Schwab may be deemed to be a controlling person of Schwab and
the Investment Manager.
8
<PAGE> 144
OPERATING FEES AND EXPENSES
Pursuant to its Investment Advisory and Administration Agreement with the Fund,
the Investment Manager is entitled to receive from the Fund a graduated annual
fee, payable monthly of: 0.46% of the Fund's average daily net assets not in
excess of $1 billion; 0.45% of such assets over $1 billion but not in excess of
$3 billion; 0.40% of such assets over $3 billion but not in excess of $10
billion; 0.37% of such assets over $10 billion but not in excess of $20 billion;
and 0.34% of such net assets over $20 billion.
For the fiscal year ended December 31, 1996, the Fund paid a management fee of
0.26% of the Fund's average daily net assets and paid total fund operating
expenses of 0.50% of the Fund's average daily net assets.
For transfer agency services provided to the Fund, Schwab is entitled to receive
an annual fee, payable monthly, of 0.05% of the Fund's average daily net assets.
In addition, for shareholder services provided, Schwab is entitled to receive an
annual fee, payable monthly, of 0.20% of the Fund's average daily net assets.
OTHER EXPENSES. The Charles Schwab Family of Funds (the "Trust") pays the
expenses of its operations, including: the fees and expenses for independent
accountants, legal counsel and the custodian of its assets; the cost of
maintaining books and records of account; registration fees; the fees and
expenses of qualifying its shares for distribution under federal and state
securities laws; and industry association membership dues. The expenses
generally are allocated among the Trust's investment portfolios ("Series") or
classes of shares within these Series, in proportion to their relative net
assets at the time the expense is incurred. However, expenses directly
attributable to a particular Series or class of a Series will be charged to that
Series or class, respectively.
OTHER INFORMATION
The Trust is an open-end investment management company 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 9 Series which may be
organized into one or more classes of shares of beneficial interest. The Board
of Trustees may authorize the issuance of shares of additional Series or classes
if it deems it desirable. Shares within each Series or class have equal,
noncumulative voting rights and equal rights as to distributions, assets and
liquidation of such Series, except to the extent such voting rights or rights as
to distributions, assets and liquidation vary among classes of a Series.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. The Trust is not required to hold annual
shareholders' meetings and does not intend to do so. It will, however, hold
special meetings as required or deemed desirable by the Board of Trustees for
such purposes as changing fundamental policies, electing or removing Trustees or
approving or amending an investment advisory agreement. In addition, a Trustee
may be removed by shareholders at a special meeting called upon by written
request of shareholders owning in the aggregate at least 10% of the outstanding
shares of the Trust.
Shareholders will vote by Series and not in the aggregate (for example, when
voting to approve the investment advisory agreement), except when voting in the
aggregate is permit-
9
<PAGE> 145
ted under the 1940 Act, such as for the election of Trustees.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS. On each day that the NAV is determined
("Business Day"), the Fund's net investment income is declared at the close of
trading on the New York Stock Exchange (the "Exchange") (generally 4:00 p.m.
Eastern time) as a dividend to shareholders of record at that time. Dividends
are normally paid (and, where applicable, reinvested) on the 15th of each month,
if a Business Day, otherwise on the next Business Day, with the exception of the
dividend paid in December, which is scheduled to be paid on the last Business
Day in December.
FEDERAL INCOME TAX INFORMATION. The Fund has elected to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), qualified as such and intends to continue to so qualify. In order
to so qualify, the Fund will distribute on a current basis substantially all of
its investment company taxable income and net capital gains and will meet
certain other requirements. Such qualification relieves the Fund of liability
for federal income taxes to the extent the Fund's earnings are distributed.
Generally, distributions are taxable to shareholders as ordinary income.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' account statements. The Fund will notify shareholders
at least annually as to the federal income tax consequences of distributions
made each year.
The foregoing is only a brief summary of some of the federal income tax
considerations affecting the Fund and its shareholders. Accordingly, potential
investors in the Fund should consult their tax advisers with specific reference
to their own tax situations.
SHARE PRICE CALCULATION
The price of a share on any given day is its net asset value per share or "NAV."
This figure is computed by taking total Fund assets, subtracting any
liabilities, and dividing the resulting amount by the number of Fund shares
outstanding. The NAV is determined on each day that both the Federal Reserve
Bank of New York and the Exchange are open for business (generally as of 4:00
p.m. Eastern time). Purchase or redemption orders and exchange requests will be
executed at the NAV next determined after receipt by the Transfer Agent or its
authorized agent. While the Fund attempts to maintain its NAV at a constant
$1.00, Fund shares are not insured against losses.
The Fund values its portfolio securities at amortized cost, which means that
they are valued at their acquisition cost (as adjusted for amortization of
premium or discount) rather than at current market value. Calculations are made
to compare the value of the Fund's investments using the amortized cost method
with market values. Market valuations are obtained by using: (1) actual
quotations provided by third-party pricing services or market makers; (2)
estimates of market value; or (3) values obtained from yield data relating to
comparable classes of money market instruments published by reputable sources at
the mean between the bid and asked prices for the instruments. If a deviation of
1/2 of 1% or more were to occur between the Fund's NAV as calculated by
reference to market values and the Fund's $1.00 per share amortized cost value,
or if there were any other deviation
10
<PAGE> 146
which the Board of Trustees believed would result in a material dilution to
shareholders or purchasers, the Board of Trustees would promptly consider what
action, if any, should be initiated.
HOW THE FUND REPORTS PERFORMANCE
From time to time the Fund may advertise its yield, effective yield and total
return. Performance figures are based upon historical results and are not
intended to indicate future performance. Because money market funds seek to
maintain a stable $1.00 share price, current 7-day yields are the most common
illustration of money market fund performance.
YIELD refers to the income generated by a hypothetical investment in the Fund
over a specific 7-day period. This income is then annualized, which means that
the income generated during the 7-day period is assumed to be generated each
week over an annual period and is shown as a percentage of the hypothetical
investment.
EFFECTIVE YIELD is calculated similarly, but the income earned by the investment
is assumed to be compounded weekly when annualized. Effective yield will be
slightly higher than yield due to this compounding effect. (See "Yield" in the
Statement of Additional Information.)
TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total returns smooth
out variations in performance; they are not the same as actual year-by-year
results.
The performance of the Fund may be compared to that of other mutual funds
tracked by mutual fund rating services, various indices of investment
performance, U.S. Government obligations, bank certificates of deposit, other
investments for which reliable performance data is available and the consumer
price index.
Additional performance information about the Fund is available in the Fund's
Annual Report, which is sent to all shareholders. To request a free copy, call
800-2 NO-LOAD.
INVESTING IN SHARES OF THE FUND
SHAREHOLDER SERVICE. You may place Fund purchase orders and orders to sell
shares as well as exchange requests by calling, writing or visiting your Schwab
Representative, who is available to answer questions about the Fund and your
account. The right to initiate transactions by telephone is automatically
available through your Schwab account. TDD users may contact Schwab at
800-345-2550, 24 hours a day.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If the Fund follows telephone orders that
it reasonably believes to be genuine, it will not be liable for any losses a
shareholder may experience. If the Fund does not follow reasonable procedures to
confirm that a telephone order is genuine, the Fund may be liable for any losses
the share-
11
<PAGE> 147
holder may suffer from unauthorized or fraudulent orders. These procedures may
include:
- - requiring a form of personal identification prior to acting upon instructions
received by telephone;
- - providing written confirmation of such instructions; and
- - tape recording telephone transactions.
Investors should remember that it may be difficult to complete transactions by
telephone during periods of drastic economic or market changes, when our phone
lines may become very busy with calls from other investors. If you want to buy,
sell or exchange shares but have trouble reaching the Fund by telephone, you may
want to use one of the other ways offered for completing the transactions
discussed below, even though these procedures may mean that completing your
transaction may take longer.
To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.
In an effort to reduce the Fund's mailing costs, the Fund consolidates
shareholder mailings by household. This consolidation means that a household
having multiple accounts with the identical address of record will receive a
single package during each shareholder mailing. If you do not wish this
consolidation to apply to your account(s), write to Schwab (at the address
listed on the Prospectus cover page) to that effect.
HOW TO BUY SHARES
OPENING A SCHWAB ACCOUNT. You may purchase shares of the Fund through an account
maintained with Schwab, the Trust Company or any other entity designated by
Schwab. You may deposit funds into your account by check or wire. All deposit
checks should be made payable to Charles Schwab & Co., Inc. or The Charles
Schwab Trust Company. Schwab will charge a $15 service fee against an investor's
Schwab account should his or her check be returned because of insufficient or
uncollected funds or a stop payment order. If you would like to wire funds into
or from your account, contact your Schwab Representative for instructions. A
service fee will be charged against your account for each wire sent.
DEPOSITING FUNDS AND MEETING THE FUND'S INVESTMENT MINIMUMS. The minimum initial
investment in the Fund is $25,000, and subsequent investments must be at least
$1. Due to the relatively high cost of maintaining smaller holdings, the Fund
reserves the right to redeem a shareholder's shares if, as a result of
redemptions, their aggregate value drops below the Fund's $25,000 minimum
balance requirement. The Fund will notify shareholders in writing 30 days before
taking such action to allow them to increase their holding to at least the
minimum level. These minimum requirements may be changed at any time and are not
applicable to certain types of investors.
WHEN SHARES WILL BE BOUGHT. If funds (including those transmitted by wire) are
received by Schwab or the Trust Company before 4:00 p.m. (Eastern time), they
will be available for investment on the day of receipt and will generally begin
earning dividends the next Business Day. If funds arrive after that time, they
will be available for investment the next Business Day.
Investors with $100,000 or more to invest, may upon special request, be invested
in the Fund and receive a distribution for the day on which the order is
received by the Transfer
12
<PAGE> 148
Agent or its authorized agent. This request must be received by Schwab or the
Trust Company before 1:30 p.m. Eastern time and must be accompanied by payment
in immediately available funds.
AUTOMATIC REINVESTMENT. Distributions will be reinvested in additional full and
fractional shares of the Fund at the NAV next determined on their payable date.
OTHER PURCHASE INFORMATION. The Fund reserves the right, in its sole discretion
and without prior notice to shareholders, to withdraw or suspend all or any part
of the offering made by this Prospectus, to reject purchase orders or to change
the minimum investment requirements. All orders to buy shares of the Fund are
subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing.
HOW TO EXCHANGE SHARES
The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of another SchwabFunds Series or class available to investors in your
state, provided you meet the initial and subsequent investment requirements and
any other requirements relating to the Series or class of shares you wish to
buy. Thus, you can conveniently modify your investments if your goals or market
conditions change. For federal income tax and certain other purposes, an
exchange will be treated as a sale of Fund shares and the purchase of shares of
another fund. The Fund reserves the right to modify, limit or terminate the
exchange privilege upon 60 days' written notice.
METHODS OF EXCHANGING SHARES
BY TELEPHONE
To exchange shares between funds by telephone, call Schwab at 800-2 NO-LOAD.
We need the following information to process your telephone exchange request:
- - your Schwab account number and your name for verification;
- - the number of shares you want to exchange;
- - the name of the fund and class, if applicable, into which shares are to be
exchanged; and
- - the distribution option you select.
BY MAIL
You may also exchange shares by writing Schwab at the address listed on the
Prospectus cover page.
We will need the following information in order to process your mailed exchange
request:
- - your Schwab account number and name;
- - the number of shares you want to exchange;
- - the name of the fund and class, if applicable, into which shares are to be
exchanged;
- - the distribution option you select; and
- - the signature of at least one of the registered Schwab account holders, in the
exact form specified in the account.
Once mailed, an exchange request is irrevocable and may not be modified or
canceled.
HOW TO SELL SHARES
Shares will be sold at the NAV next determined after receipt by the Transfer
Agent, or its authorized agent, of proper redemption instructions, as set forth
below. Investors will receive dividends declared for the day on which orders to
sell shares are executed.
13
<PAGE> 149
The Fund may suspend a shareholder's rights to sell shares or postpone payments
at times when trading on the Exchange is restricted, the Exchange is closed for
any reason other than its customary weekend or holiday closings, emergency
circumstances as determined by the SEC exist, or for such other circumstances as
the SEC may permit. The Fund may also elect to invoke a 7-day period for cash
settlement of requests to sell shares in excess of $250,000 or 1% of the Fund's
net assets, whichever is less.
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR.
- ------------------------------------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
- ------------------------------------------------------
14
<PAGE> 150
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 151
==============
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
==============
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, CA 94104
2025-6 (4/97) Printed on recycled paper.
SCHWAB INSTITUTIONAL
ADVANTAGE MONEY FUND(R)
Prospectus April 30, 1997
[SCHWABFUNDS LOGO]
<PAGE> 152
CROSS REFERENCE SHEET
PROSPECTUS
Schwab Retirement Money Fund
PART A ITEM PROSPECTUS CAPTION
1. Cover Page Cover Page
2. Synopsis Key Features of the Fund; Summary of
Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page; Investment Objective and
Policies; Organization and
Management of the Fund
5. Management of the Fund Organization and Management of the
Funds
5A. Management's Discussion of Fund
Performance How the Fund Reports Performance
6. Capital Stock and Other Securities Cover Page; Investment Objective and
Policies; Distributions and Taxes
7. Purchase of Securities Being Offered Share Price Calculation; Investing
in Shares of the Fund -- How to Buy
Shares
8. Redemption or Repurchase Investing in Shares of the Fund --
How to Exchange Shares; Investing in
Shares of the Fund -- How to Sell
Shares;
9. Pending Legal Proceedings Inapplicable
<PAGE> 153
SCHWAB RETIREMENT MONEY FUND(R)
PROSPECTUS APRIL 30, 1997
THE SCHWAB RETIREMENT MONEY FUND (the "Fund") is designed for retirement plans,
plan participants and other institutional investors who seek maximum current
income consistent with liquidity and stability of capital, for investment of
their own funds or funds for which they act in a fiduciary, agency or custodial
capacity.
ABOUT THIS PROSPECTUS: THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
YOU SHOULD KNOW BEFORE INVESTING IN THE FUND. PLEASE READ IT CAREFULLY AND
RETAIN IT FOR FUTURE REFERENCE. You can find more detailed information about the
Fund in the Fund's Statement of Additional Information ("SAI"), dated April 30,
1997 (as may be amended from time to time). The SAI has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference into
this Prospectus.
This Prospectus may be available electronically by using our World Wide Web
address: http://www.schwab.com. This Prospectus, the SAI, material incorporated
by reference and other related information is also available at the SEC's World
Wide Web address: http://www.sec.gov. To receive a free paper copy of this
Prospectus or the SAI, call the Fund at 800-2 NO-LOAD, 24 hours a day, or write
to the Fund at 101 Montgomery Street, San Francisco, California 94104. TDD users
may contact Schwab at 800-345-2550, 24 hours a day.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Key Features of the Fund................. 2
Summary of Expenses...................... 3
Financial Highlights..................... 4
Investment Objective and Policies........ 5
Organization and Management
of the Fund............................ 8
Distributions and Taxes.................. 10
Share Price Calculation.................. 10
How the Fund Reports Performance......... 11
Investing in Shares of the Fund.......... 11
How to Buy Shares...................... 12
How to Exchange Shares................. 13
How to Sell Shares..................... 13
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE PER SHARE OF $1.00.
<PAGE> 154
KEY FEATURES OF THE FUND
MAXIMUM CURRENT INCOME AND SAFETY. The Fund is designed for retirement plans,
plan participants and other institutional investors who seek maximum current
income consistent with liquidity and stability of capital, for investment of
their own funds or funds for which they act in a fiduciary, agency or custodial
capacity. The Fund invests in high-quality, short-term debt securities. (See
"Investment Objective and Policies.")
STABILITY OF PRINCIPAL. The Fund seeks to maintain a stable net asset value
("NAV") per share of $1.00.
LIQUIDITY. You can conveniently sell your shares of the Fund at any time. (See
"Investing in Shares of the Fund - How to Sell Shares.")
LOW COST INVESTING. The Fund imposes no sales or transaction fees on purchases
of Fund shares. (See "Summary of Expenses.") In addition, the total fund
operating expenses will not exceed 0.73% of the Fund's average daily net assets
as guaranteed by Charles Schwab Investment Management, Inc. (the "Investment
Manager") and Schwab through at least April 30, 1998. (See "Organization and
Management of the Fund.")
PROFESSIONAL MANAGEMENT. The Investment Manager currently provides investment
management services to the SchwabFunds(R), a family of 29 mutual funds with over
$47 billion in assets as of April 1, 1997. (See "Organization and Management of
the Fund.")
SHAREHOLDER SERVICE. A representative of Schwab and/or of The Charles Schwab
Trust Company ("Schwab Representative" or the "Trust Company") is available
toll-free to receive your Fund orders. (See "Investing in Shares of the
Fund - How to Buy Shares," "Investing in Shares of the Fund - How to Exchange
Shares" and "Investing in Shares of the Fund - How to Sell Shares.")
CONVENIENT RECORD KEEPING. Individual investors receive one consolidated account
statement for all their account activity including records of all Fund
transactions.
2
<PAGE> 155
SUMMARY OF EXPENSES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES: None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS):
Management Fees
(after fee reduction)(1)....... 0.44%
12b-1 Fees........................ None
Other Expenses (after fee
reduction and/or expense
reimbursement)(2).............. 0.29%
------
TOTAL FUND OPERATING EXPENSES(2).... 0.73%
</TABLE>
(1) This amount reflects a reduction by the Investment Manager, which is
guaranteed at least through April 30, 1998. If there were no such reduction,
the maximum management fee for the Fund would have been 0.46% of the Fund's
average daily net assets. (See "Organization and Management of the
Fund - Operating Fees and Expenses.")
(2) This amount reflects the guarantee by the Investment Manager and Schwab
that, at least through April 30, 1998, total operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses) will not
exceed 0.73% of the Fund's average daily net assets. Without this guarantee,
other expenses and total operating expenses would have been 0.42% and 0.88%,
respectively, of the Fund's average daily net assets.
EXAMPLE. Based on the expenses in the above table, you would pay the following
expenses on a $1,000 investment in the Fund, assuming (1) a 5% annual return and
(2) redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
<S> <C> <C> <C>
$7 $23 $41 $ 91
</TABLE>
THE PURPOSE OF THE PRECEDING TABLE IS TO ASSIST INVESTORS IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR
INDIRECTLY. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
HYPOTHETICAL RATE OF RETURN IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR
FUTURE PERFORMANCE.
3
<PAGE> 156
FINANCIAL HIGHLIGHTS
The following information has been audited by Price Waterhouse LLP, independent
accountants, whose unqualified report is included in the Fund's Annual Report,
which contains additional financial data and related notes. The Financial
Highlights, financial statements and report of the auditor are incorporated by
reference into the SAI. A free copy of the SAI and the Annual Report may be
obtained by calling the telephone number or writing to the address on the first
page of this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR ENDED
ENDED ENDED DECEMBER 31,
DECEMBER 31, 1996 DECEMBER 31, 1995 1994(1)
----------------- ----------------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period... $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.................. 0.05 0.05 0.03
Net realized and unrealized gain (loss)
on investments...................... -- -- --
-------- ------- -------
Total from investment operations....... 0.05 0.05 0.03
LESS DISTRIBUTIONS
Dividends from net investment income... (0.05) (0.05) (0.03)
Distributions from realized gain
on investments...................... -- -- --
Total distributions.................... (0.05) (0.05) (0.03)
-------- ------- -------
Net asset value at end of period......... $ 1.00 $ 1.00 $ 1.00
======== ======= =======
Total return (not annualized)............ 4.93% 5.43% 3.29%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000s)....... $ 136,319 $98,992 $31,415
Ratio of expenses to average net
assets(2)........................... 0.73% 0.73% 0.73%(3)
Ratio of net investment income to
average net assets(2)............... 4.83% 5.28% 4.04%(3)
</TABLE>
(1) Period from March 2, 1994 (commencement of operations) to December 31, 1994.
(2) The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced by the
Investment Manager and Schwab. Had these expenses not been reduced, the
Fund's expense and net investment income ratios would have been:
<TABLE>
<S> <C> <C> <C>
Ratio of expenses to average net
assets................................. 0.88% 0.92% 1.05%(3)
Ratio of net investment income to average
net assets............................. 4.68% 5.09% 3.72%(3)
</TABLE>
(3) Annualized
4
<PAGE> 157
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is maximum current income consistent with
liquidity and stability of capital. This investment objective is fundamental,
and cannot be changed without shareholder approval. The Fund will only purchase
securities that are deemed to mature in 397 days or less in accordance with
federal securities regulations, or which have a variable rate of interest
readjusted no less frequently than every 397 days. The Fund pursues its
objective by investing in the following types of U.S. dollar-denominated debt
instruments which are determined by the Investment Manager to present minimal
credit risk:
- - Certificates of deposit, time deposits, notes and bankers' acceptances of
domestic banks (including their foreign branches), U.S. branches of foreign
banks and foreign branches of foreign banks having capital, surplus and
undivided profits in excess of $100 million.
- - Commercial paper, including asset-backed commercial paper, rated in one of the
two highest rating categories by any nationally recognized statistical rating
organization ("NRSRO"), including Moody's Investors Service, Standard & Poor's
Corporation, Duff & Phelps, Inc., Fitch Investor Services, Inc., or commercial
paper or notes of issuers with an unsecured debt issue outstanding currently
rated in one of the two highest rating categories of any NRSRO, where the
obligation is on the same or a higher level of priority and collateralized to
the same extent as the rated issue. The Fund may also invest in other
corporate obligations such as publicly traded bonds, debentures and notes
rated in one of the two highest rating categories of any NRSRO and other
similar securities which, if unrated by any NRSRO, are determined by the
Investment Manager, using guidelines approved by the Board of Trustees, to be
at least equal in quality to one or more of the above referenced securities.
Notwithstanding the foregoing, the Fund may invest no more than 5% of its
total assets in securities that are given the second highest rating by any
NRSRO.
- - Obligations of, or guaranteed by, the U.S. or Canadian governments, their
agencies or instrumentalities.
- - Repurchase agreements involving obligations that are suitable for investment
under the categories listed above.
U.S. GOVERNMENT SECURITIES. U.S. Treasury securities, including notes, bills and
bonds, 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
only by the credit of the agency or instrumentality, while others have an
additional line of credit with the U.S. Treasury. With respect to securities
supported only by the credit of the issuing agency or instrumentality or by an
additional line of credit with the U.S. Treasury, 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.
EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES. To the extent that
the Fund purchases Eurodollar certificates of deposit and other similar
obligations, consideration will be given to the fact that these issuers may not
be subject to the same regulatory requirements as U.S. issuers, including U.S.
banks.
Investments in securities of foreign issuers or securities principally traded
overseas may
5
<PAGE> 158
involve certain special risks due to foreign economic, political and legal
developments. Furthermore, issuers of foreign securities are subject to
different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The securities of some foreign companies and
foreign securities markets are less liquid and at times more volatile than
securities of comparable U.S. companies and U.S. securities markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. There are also special tax considerations which apply to
securities of foreign issuers and securities principally traded overseas.
CONCENTRATION. Pursuant to a fundamental policy set forth in the SAI, the Fund
will not 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 will not apply to certificates of deposit or bankers'
acceptances issued by domestic branches of U.S. banks and U.S. branches of
certain foreign banks or obligations of or guaranteed by the U.S. Government or
its agencies or instrumentalities.
PRIVATE PLACEMENTS. The Fund may invest in commercial paper and other securities
that are exempt from registration pursuant to Section 4(2) of the Securities Act
of 1933 ("Section 4(2) paper"). Federal securities laws restrict the disposition
of Section 4(2) paper. The Fund will not invest more than 10% of its net assets
in Section 4(2) paper and other illiquid securities unless the Investment
Manager determines, by continuous reference to the appropriate trading markets
and pursuant to guidelines approved by the Board of Trustees, that any Section
4(2) paper held by the Fund in excess of this level is liquid. The Fund will
invest no more than 15% of its net assets in restricted securities.
The Fund's ownership of Section 4(2) paper could have the effect of reducing the
Fund's liquidity to the extent that qualified institutional buyers become for a
time uninterested in purchasing these restricted securities.
ASSET-BACKED COMMERCIAL PAPER. The Fund may invest in asset-backed commercial
paper. Repayment of this type of commercial paper is intended to be obtained
from an identified pool of assets, including automobile receivables, credit card
receivables and other types of assets. Asset-backed commercial paper is issued
by a special purpose vehicle (usually a corporation) that has been established
for the purpose of issuing commercial paper and purchasing the underlying pool
of assets. The issuer of the commercial paper bears the direct risk of
prepayment on the receivables constituting the underlying pool of assets. Credit
support for asset-backed securities may be based on the underlying assets or it
may be provided by a third party. Credit enhancement techniques include letters
of credit, insurance bonds, limited guarantees and over-collateralization.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase securities on
a "when-issued" or "delayed delivery" basis. When-issued or delayed delivery
securities are securities purchased for future delivery at a stated price and
yield. The Fund generally will not pay for such securities or start earning
interest on them until they are received. Securities purchased on a when-issued
or delayed delivery basis are recorded as an asset. The value of such securities
may change as the general level of interest rate changes.
6
<PAGE> 159
The Fund will not invest more than 25% of its total assets in when-issued or
delayed delivery securities. The Fund will not purchase such securities for
speculative purposes and will expect to actually acquire the securities when
purchased. However, the Fund reserves the right to sell any such securities
before their settlement dates if the Investment Manager deems such a sale
advisable.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreements, which are
instruments under which the Fund acquires ownership of a security from a
broker-dealer or bank that agrees to repurchase the security at a mutually
agreed upon time and price (which price is higher than the purchase price),
thereby determining the yield during the Fund's holding period. Maturity of the
securities subject to repurchase may exceed one year.
If the seller of a repurchase agreement becomes bankrupt or otherwise defaults,
the Fund might incur expenses in enforcing its rights, and could experience
losses, including a decline in the value of the underlying securities and loss
of income. The Fund will enter into repurchase agreements only with banks and
other recognized financial institutions that the Investment Manager deems
creditworthy.
ILLIQUID SECURITIES. Pursuant to a fundamental policy as set forth in the SAI,
the Fund will not purchase illiquid securities, including time deposits and
repurchase agreements maturing in more than 7-days, if, as a result thereof,
more than 10% of the Fund's net assets valued at the time of the transaction are
invested in such securities.
VARIABLE RATE SECURITIES. The Fund may invest in instruments having rates of
interest that are adjusted periodically, or which "float" continuously according
to formulas intended to minimize any fluctuation in values of the instruments
("Variable Rate Securities"). The interest rate of Variable Rate Securities
ordinarily is 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.
Some Variable Rate Securities ("Variable Rate Demand Securities") have a demand
feature entitling the purchaser to resell the securities at an amount
approximately equal to amortized cost or the principal amount thereof plus
accrued interest. As is the case for other Variable Rate Securities, the
interest rate on Variable Rate Demand Securities varies according to some
objective standard intended to minimize fluctuation in the values of the
instruments. The Fund determines the maturity of Variable Rate Securities in
accordance with SEC rules. As interest rates decrease or increase, Variable Rate
Securities experience less appreciation or depreciation than fixed rate
obligations.
SECURITIES LENDING. To increase its income, the Fund may lend its portfolio
securities to brokers, dealers and other financial institutions that borrow
securities. No more than one-third of the Fund's total assets may be represented
by loaned securities. The Fund's loans of portfolio securities will be fully
collateralized by cash, letters of credit or U.S. Government securities equal at
all times to at least 100% of the loaned securities' market value plus accrued
interest. As with other extensions of credit, there are risks of delay in
recovery or even losses of rights in the securities loaned should the borrower
of the securities fail financially. However, such loans will be made only to
firms deemed by the Investment
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Manager to be of good standing and when, in the judgment of the Investment
Manager, the income which can be earned currently from such loans justifies the
attendant risk.
BORROWING POLICY. Pursuant to a fundamental policy as set forth in the SAI, the
Fund may not borrow money except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount up to one-third of the value of
its total assets, in order to meet redemption requests without immediately
selling any portfolio securities. The Fund will not borrow for leverage
purposes.
ADDITIONAL INFORMATION. Please see the SAI for further information regarding
foreign securities, Section 4(2) paper, the investment rating categories
employed by various NRSROs and other investment techniques used by the Fund.
ORGANIZATION AND
MANAGEMENT OF THE FUND
GENERAL OVERSIGHT. The Board of Trustees and officers meet regularly to review
investments, performance, expenses and other business affairs.
THE INVESTMENT MANAGER. Professional investment management for the Fund is
provided by the Investment Manager, Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, California 94104. The Investment Manager
provides a continuous investment program, including general investment and
economic advice regarding the Fund's investment strategies; manages the Fund's
investment portfolio and performs expense management, accounting and record
keeping; and provides other services necessary to the operation of the Fund. The
Investment Manager, formed in 1989, is a wholly-owned subsidiary of The Charles
Schwab Corporation and is also the investment adviser to and administrator of
the mutual funds in the SchwabFunds(R), a family of 29 mutual funds. As of April
1, 1997, the SchwabFunds(R) had aggregate net assets in excess of $47 billion.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Charles Schwab & Co., Inc. ("Schwab" or
the "Transfer Agent"), 101 Montgomery Street, San Francisco, California 94104,
serves as shareholder services agent and transfer agent for the Fund. Schwab
provides information and services to shareholders, which include reporting share
ownership, sales and dividend activity (and associated tax consequences),
responding to daily inquiries and effecting the transfer of Fund shares. It
furnishes such office space and equipment, telephone facilities, personnel and
informational literature distribution as is necessary or appropriate in
providing the described shareholder and transfer agency information and
services. Schwab is also the Fund's distributor, but receives no compensation
for its services as such.
Schwab was established in 1971 and is one of America's largest discount brokers.
The firm provides low-cost securities brokerage and related financial services
to over 4.1 million active customer accounts and has over 241 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, Chief Executive Officer and a Director of
The Charles Schwab Corporation. As a result of his beneficial ownership
interests in and other relationships with The Charles Schwab Corporation and its
affiliates,
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Mr. Schwab may be deemed to be a controlling person of Schwab and the Investment
Manager.
OPERATING FEES AND EXPENSES
Pursuant to its Investment Advisory and Administration Agreement with the Fund,
the Investment Manager is entitled to receive from the Fund a graduated annual
fee, payable monthly of 0.46% of the Fund's average daily net assets not in
excess of $1 billion; 0.45% of such assets over $1 billion but not in excess of
$3 billion; 0.40% of such assets over $3 billion but not in excess of $10
billion; 0.37% of such assets over $10 billion but not in excess of $20 billion;
and 0.34% of such net assets over $20 billion.
For the fiscal year ended December 31, 1996, the Fund paid a management fee of
0.44% of the Fund's average daily net assets and paid total fund operating
expenses of 0.73% of the Fund's average daily net assets.
For transfer agency services provided to the Fund, Schwab receives an annual
fee, payable monthly, of 0.05% of the Fund's average daily net assets. In
addition, for shareholder services provided, Schwab receives an annual fee,
payable monthly, of 0.20% of the Fund's average daily net assets.
OTHER EXPENSES. The Charles Schwab Fund Family of Funds (the "Trust") pays the
expenses of its operations, including: the fees and expenses for independent
accountants, legal counsel and the custodian of its assets; the cost of
maintaining books and records of account; registration fees; the fees and
expenses of qualifying its shares for distribution under federal and state
securities laws; and industry association membership dues. The expenses
generally are allocated among the Trust's investment portfolios ("Series") or
classes of shares within these Series, in proportion to their relative net
assets at the time the expense is incurred. However, expenses directly
attributable to a particular Series or class of a Series will be charged to that
Series or class, respectively.
OTHER INFORMATION
The Trust is an open-end investment management company 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 9 Series which may be
organized into one or more classes of shares of beneficial interest. The Board
of Trustees may authorize the issuance of shares of additional Series or classes
if it deems it desirable. Shares within each Series or class have equal,
noncumulative voting rights and equal rights as to distributions, assets and
liquidation of such Series, except to the extent such voting rights or rights as
to distributions, assets and liquidation vary among classes of a Series.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. The Trust is not required to hold annual
shareholders' meetings and does not intend to do so. It will, however, hold
special meetings as required or deemed desirable by the Board of Trustees for
such purposes as changing fundamental policies, electing or removing Trustees or
approving or amending an investment advisory agreement. In addition, a Trustee
may be 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.
Shareholders will vote by Series and not in the aggregate (for example, when
voting to approve the investment advisory agreement),
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except when voting in the aggregate is permitted under the 1940 Act, such as for
the election of Trustees.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS. On each day that the NAV is determined
("Business Day"), the Fund's net investment income is declared at the close of
trading on the New York Stock Exchange (the "Exchange") (generally 4:00 p.m.
Eastern time) as a dividend to shareholders of record at that time. Dividends
are normally paid (and, where applicable, reinvested) on the 15th of each month,
if a Business Day, otherwise on the next Business Day, with the exception of the
dividend paid in December, which is scheduled to be paid on the last Business
Day in December.
FEDERAL INCOME TAX INFORMATION. The Fund has elected to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), qualified as such and intends to continue to so qualify. In order
to so qualify, the Fund will distribute on a current basis substantially all of
its investment company taxable income and net capital gains and will meet
certain other requirements. Such qualification relieves the Fund of liability
for federal income taxes to the extent the Fund's earnings are distributed.
Generally, distributions are taxable to shareholders as ordinary income.
Records of dividends and other distributions, purchases and redemptions will be
reflected on shareholders' account statements. The Fund will notify shareholders
at least annually as to the federal income tax consequences of distributions
made each year.
The foregoing is only a brief summary of some of the federal income tax
considerations affecting the Fund and its shareholders. Accordingly, potential
investors in the Fund should consult their tax advisers with specific reference
to their own tax situations.
SHARE PRICE CALCULATION
The price of a share on any given day is its net asset value per share or "NAV."
This figure is computed by taking total Fund assets, subtracting any
liabilities, and dividing the resulting amount by the number of Fund shares
outstanding. The NAV is determined on each day that both the Federal Reserve
Bank of New York and the Exchange are open for business (generally as of 4:00
p.m. Eastern time). Purchase or redemption orders and exchange requests will be
executed at the NAV next determined after receipt by the Transfer Agent or its
authorized agent. While the Fund attempts to maintain its NAV at a constant
$1.00, Fund shares are not insured against losses.
The Fund values its portfolio securities at amortized cost, which means that
they are valued at their acquisition cost (as adjusted for amortization of
premium or discount) rather than at current market value. Calculations are made
to compare the value of the Fund's investments using the amortized cost method
with market values. Market valuations are obtained by using: (1) actual
quotations provided by third-party pricing services or market makers; (2)
estimates of market value; or (3) values obtained from yield data relating to
comparable classes of money market instruments published by reputable sources at
the mean between the bid and asked prices for the instruments. If a deviation of
1/2 of 1% or more were to occur between the Fund's NAV as calculated by
reference to market values and the Fund's $1.00 per share amortized cost value,
or if there were any other deviation which the Board of Trustees believed would
result in a material dilution to sharehold-
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ers or purchasers, the Board of Trustees would promptly consider what action, if
any, should be initiated.
HOW THE FUND REPORTS
PERFORMANCE
From time to time the Fund may advertise its yield, effective yield and total
return. Performance figures are based upon historical results and are not
intended to indicate future performance. Because money market funds seek to
maintain a stable $1.00 share price, current 7-day yields are the most common
illustration of money market fund performance.
YIELD refers to the income generated by a hypothetical investment in the Fund
over a specific 7-day period. This income is then annualized, which means that
the income generated during the 7-day period is assumed to be generated each
week over an annual period and is shown as a percentage of the hypothetical
investment.
EFFECTIVE YIELD is calculated similarly, but the income earned by the investment
is assumed to be compounded weekly when annualized. Effective yield will be
slightly higher than yield due to this compounding effect. (See "Yield" in the
SAI.)
TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period. Average annual total returns smooth
out variations in performance; they are not the same as actual year-by-year
results.
The performance of the Fund may be compared to that of other mutual funds
tracked by mutual fund rating services, various indices of investment
performance, U.S. Government obligations, bank certificates of deposit, other
investments for which reliable performance data is available and the consumer
price index.
Additional performance information about the Fund is available in the Fund's
Annual Report, which is sent to all shareholders. To request a free copy, call
800-2 NO-LOAD.
INVESTING IN SHARES OF THE FUND
SHAREHOLDER SERVICE. You may place Fund purchase orders and orders to sell
shares as well as exchange requests by calling, writing or visiting your Schwab
Representative, who is available to answer questions about the Fund and your
account. The right to initiate transactions by telephone is automatically
available through your Schwab account. TDD users may contact Schwab at
800-345-2550, 24 hours a day.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If the Fund follows telephone orders that
it reasonably believes to be genuine, it will not be liable for any losses a
shareholder may experience. If the Fund does not follow reasonable procedures to
confirm that a telephone order is genuine, the Fund may be liable for any losses
the shareholder may suffer from unauthorized or fraudulent orders. These
procedures may include:
- - requiring a form of personal identification prior to acting upon instructions
received by telephone;
- - providing written confirmation of such instructions; and
- - tape recording telephone transactions.
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Investors should remember that it may be difficult to complete transactions by
telephone during periods of drastic economic or market changes, when our phone
lines may become very busy with calls from other investors. If you want to buy,
sell or exchange shares but have trouble reaching the Fund by telephone, you may
want to use one of the other ways offered for completing the transactions
discussed below, even though these procedures may mean that completing your
transaction may take longer.
To assist in minimizing administrative costs, share certificates will not be
issued. Records regarding share ownership are maintained by the Transfer Agent.
In an effort to reduce the Fund's mailing costs, the Fund consolidates
shareholder mailings by household. This consolidation means that a household
having multiple accounts with the identical address of record will receive a
single package during each shareholder mailing. If you do not wish this
consolidation to apply to your account(s), write to Schwab (at the address
listed on the Prospectus cover page) to that effect.
HOW TO BUY SHARES
OPENING A SCHWAB ACCOUNT. You may purchase shares of the Fund through an account
maintained with Schwab, the Trust Company or any other entity designated by
Schwab. You may deposit funds into your account by check or wire. All deposit
checks should be made payable to Charles Schwab & Co., Inc. or The Charles
Schwab Trust Company. Schwab will charge a $15 service fee against an investor's
Schwab account should his or her check be returned because of insufficient or
uncollected funds or a stop payment order. If you would like to wire funds into
or from your account, contact your Schwab Representative for instructions. A
service fee will be charged against your account for each such wire sent.
A $1,000 minimum deposit of cash and/or securities is required to open and
maintain an account with Schwab or the Trust Company.
DEPOSITING FUNDS AND MEETING THE FUND'S INVESTMENT MINIMUMS. The minimum initial
investment in the Fund is $1.00, and subsequent investments must be at least $1.
The Fund will notify shareholders in writing 30 days before taking such action
to allow them to increase their holding to at least the minimum level. These
minimum requirements may be changed at any time and are not applicable to
certain types of investors.
WHEN SHARES WILL BE BOUGHT. If funds, including those transmitted by wire, are
received by Schwab or the Trust Company before 4:00 p.m. (Eastern time), they
will be available for investment on the day of receipt and will generally begin
earning dividends the next Business Day. If funds arrive after that time, they
will be available for investment the next Business Day.
Investors with $100,000 or more to invest, may upon special request, be invested
in the Fund and receive a distribution for the day on which the order is
received by the Transfer Agent or its authorized agent. This request must be
received by Schwab or the Trust Company before 1:30 p.m. Eastern time and must
be accompanied by payment in immediately available funds.
AUTOMATIC REINVESTMENT. Distributions will be reinvested in additional full and
fractional shares of the Fund at the NAV next determined on their payable date.
OTHER PURCHASE INFORMATION. The Fund reserves the right, in its sole discretion
and
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<PAGE> 165
without prior notice to shareholders, to withdraw or suspend all or any part of
the offering made by this Prospectus, to reject purchase orders or to change the
minimum investment requirements. All orders to buy shares of the Fund are
subject to acceptance by the Fund and are not binding until confirmed or
accepted in writing.
HOW TO EXCHANGE SHARES
The exchange privilege allows you to exchange your SchwabFunds(R) shares for
shares of another SchwabFunds Series or class available to investors in your
state, provided you meet the initial and subsequent investment requirements and
any other requirements relating to the Series or class of shares you wish to
buy. Thus, you can conveniently modify your investments if your goals or market
conditions change. For federal income tax and certain other purposes, an
exchange will be treated as a sale of Fund shares and the purchase of shares of
another fund. The Fund reserves the right to modify, limit or terminate the
exchange privilege upon 60 days' written notice.
METHODS OF EXCHANGING SHARES
BY TELEPHONE
To exchange shares between funds by telephone, call Schwab at 800- 2NO-LOAD.
We need the following information to process your telephone exchange request:
- - your Schwab account number and your name for verification;
- - the number of shares you want to exchange;
- - the name of the fund and class, if applicable, into which shares are to be
exchanged; and
- - the distribution option you select.
BY MAIL
You may also exchange shares by writing Schwab at the address listed on the
Prospectus cover page.
We will need the following information in order to process your mailed exchange
request:
- - your Schwab account number and name;
- - the number of shares you want to exchange;
- - the name of the fund and class, if applicable, into which shares are to be
exchanged;
- - the distribution option you select; and
- - the signature of at least one of the registered Schwab account holders, in the
exact form specified in the account.
Once mailed, an exchange request is irrevocable and may not be modified or
canceled.
HOW TO SELL SHARES
Shares will be sold at the NAV next determined after receipt by the Transfer
Agent, or its authorized agent, of proper redemption instructions, as set forth
below. Investors will receive dividends declared for the day on which orders to
sell shares are executed.
The Fund may suspend a shareholder's rights to sell shares or postpone payments
at times when trading on the Exchange is restricted, the Exchange is closed for
any reason other than its customary weekend or holiday closings, emergency
circumstances as determined by the SEC exist, or for such other circumstances as
the SEC may permit. The Fund may also elect to invoke a 7-day period for cash
settlement of requests to sell shares in excess of $250,000 or 1% of the Fund's
net assets, whichever is less.
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- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR
ITS DISTRIBUTOR.
- ------------------------------------------------------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
- ------------------------------------------------------
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THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 168
==============
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
==============
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, CA 94104
2026-6 (4/97) Printed on recycled paper.
SCHWAB RETIREMENT
MONEY FUND(R)
Prospectus April 30, 1997
[SCHWABFUNDS LOGO]
<PAGE> 169
CROSS REFERENCE SHEET
STATEMENT OF ADDITIONAL INFORMATION
Schwab Money Market Fund
Schwab Government Money Fund
Schwab U.S. Treasury Money Fund
Schwab Municipal Money Fund -- Sweep Shares
Schwab Value Advantage Money Fund -- Sweep Shares
Schwab Retirement Money Fund
Schwab Institutional Advantage Money Fund
Schwab California Municipal Money Fund -- Sweep Shares
Schwab New York Municipal Money Fund -- Sweep Shares
PART B STATEMENT OF ADDITIONAL INFORMATION
ITEM CAPTION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Policies Investment Restrictions
14. Management of the Fund Management of the Trust
15. Control Persons and Principal
Holders of Securities Management of the Trust
16. Investment Advisory and Other
Services Management of the Trust
17. Brokerage Allocation and Other
Practices Portfolio Transactions and Turnover
18. Capital Stock and Other Securities General Information
19. Purchase, Redemption and
Pricing of Securities Being Offered Share Price Calculation; Purchase
and Redemption of Shares
20. Tax Status Distributions and Taxes
21. Underwriters Management of the Trust
22. Calculation of Performance Data Yield
23. Financial Statements Financial Statements
<PAGE> 170
STATEMENT OF ADDITIONAL INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
101 Montgomery Street, San Francisco, CA 94104
THE SCHWAB MONEY FUNDS:
Schwab Money Market Fund
Schwab Government Money Fund
Schwab U.S. Treasury Money Fund
Schwab Municipal Money Fund -- Sweep Shares
Schwab California Municipal Money Fund -- Sweep Shares
Schwab Retirement Money Fund(R)
Schwab Institutional Advantage Money Fund(R)
Schwab New York Municipal Money Fund -- Sweep Shares
Schwab Value Advantage Money Fund(R) -- Sweep Shares
APRIL 30, 1997
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectuses dated April 30, 1997 (and as may be
amended from time to time), for Schwab Money Market Fund, Schwab Government
Money Fund, Schwab U.S. Treasury Money Fund, Schwab Municipal Money Fund-Sweep
Shares (formerly known as Schwab Tax-Exempt Money Fund-Sweep Shares), Schwab
California Municipal Money Fund-Sweep Shares (formerly known as Schwab
California Tax-Exempt Money Fund-Sweep Shares) and Schwab New York Municipal
Money Fund-Sweep Shares (formerly known as Schwab New York Tax-Exempt Money
Fund-Sweep Shares), Schwab Retirement Money Fund, Schwab Institutional Advantage
Money Fund and Schwab Value Advantage Money Fund-Sweep Shares (each a "Fund" and
collectively, the "Funds"), 9 separately managed investment portfolios of The
Charles Schwab Family of Funds (the "Trust"). With respect to Schwab Municipal
Money Fund, Schwab California Municipal Money Fund, Schwab New York Municipal
Money Fund and Schwab Value Advantage Money Fund, each of which is offered in
two classes of shares, this Statement of Additional Information relates to the
Sweep Shares of each of those Funds. Prior to June 6, 1995, Schwab Municipal
Money Fund, Schwab California Municipal Money Fund and Schwab New York Municipal
Money Fund were not offered in multiple classes of shares. The existing shares
of those Funds were redesignated as Sweep Shares. Prior to April 30, 1997,
Schwab Value Advantage Money Fund was not offered in multiple classes of shares.
The existing shares of the Fund are redesignated as Investor Shares. The other
Funds listed above are not offered in multiple classes of shares. To obtain a
copy of any of these Prospectuses, please contact Charles Schwab & Co., Inc.
("Schwab") at 800-2 NO-LOAD, 24 hours a day, or 101 Montgomery Street, San
Francisco, California 94104. TDD users may contact Schwab at 800-345-2550, 24
hours a day. These Prospectuses are also available electronically by using our
World Wide Web address: http://www.schwab.com.
SchwabFunds(R)
800-2 NO-LOAD (800-266-5623)
TABLE OF CONTENTS
Page
MUNICIPAL SECURITIES 2
INVESTMENT TECHNIQUES 6
INVESTMENT RESTRICTIONS 8
MANAGEMENT OF THE TRUST 17
PORTFOLIO TRANSACTIONS AND TURNOVER 23
DISTRIBUTIONS AND TAXES 24
SHARE PRICE CALCULATION 29
HOW THE FUNDS REPORT PERFORMANCE 29
GENERAL INFORMATION 33
PURCHASE AND REDEMPTION OF SHARES 36
OTHER INFORMATION 36
APPENDIX - RATINGS OF INVESTMENT SECURITIES 38
FINANCIAL STATEMENTS 39
<PAGE> 171
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 Schwab Municipal Money Fund, Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund 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. Schwab Municipal Money Fund, Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund 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 are generally classified as "general obligation"
or "revenue." General obligation securities are secured by the issuer's pledge
of its full credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise 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.
Municipal notes are instruments issued by or on behalf of governments
and political sub-divisions thereof. Examples include: tax anticipation notes
("TANS"), which are short-term debt instruments issued by a municipality or
state to finance working capital needs of the issuer in anticipation of
receiving taxes on a future date; revenue anticipation notes ("RANS"), which are
short-term debt instruments issued by a municipality or state to provide cash
prior to receipt of expected non-tax revenues from a specific source; bond
anticipation notes ("BANS"), which are short-term debt instruments issued by a
municipality or state that will be paid off with the proceeds of an upcoming
bond issue; and tax revenue anticipation notes ("TRANS"), which are short-term
debt instruments issued by a municipality or state to finance working capital
needs in anticipation of receiving taxes or other revenues. 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. Tax-free commercial paper is an unsecured
promissory obligation issued or guaranteed by a municipal issuer. Schwab
Municipal Money Fund,
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Schwab California Municipal Money Fund and Schwab New York Municipal Money Fund
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.
Taxable municipal securities are municipal securities, the interest on
which is not exempt from federal income tax. Taxable municipal securities may
include "private activity bonds" that are issued by or on behalf of states or
political subdivisions thereof to finance privately-owned or operated facilities
for business and manufacturing, housing, sports, pollution control and to
finance facilities for charitable institutions. The payment of the principal and
interest on private activity bonds is not backed by a pledge of tax revenues and
is dependent solely on the ability of the facility's user to meet its financial
obligations. Taxable municipal securities also may include remarketed
certificates of participation.
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.
RISK FACTORS
Schwab California Municipal Money Fund's and Schwab New York Municipal
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 is only a brief
summary, is not a complete description and is based on information drawn from
official statements and prospectuses relating to securities offerings of the
State of California that have come to the attention of the Trust and were
available before the date of this Statement of Additional Information. The Trust
has not independently verified the accuracy and completeness of the information
contained in those statements and prospectuses.
As used in this section, "California Municipal Securities" include
issues that are secured by a direct payment obligation of the State and
obligations of issuers that rely in whole or in part on State revenues for
payment of their obligations. Part of the State's General Fund surplus is
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 to them
in the future is unclear.
Overview. After suffering through a severe recession, since the start
of 1994, California's economy has been on a steady recovery. Non-farm employment
increased by over 300,000 jobs in 1996. The State's economic expansion is being
fueled by strong growth in high-technology industries, including software,
electronics manufacturing and motion picture production, which have offset the
recession-related losses which were heaviest in aerospace and defense-related
industries, finance, and insurance.
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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, from the
late 1980s through 1992-1993, the State experienced recurring budget deficits.
During this period, expenditures exceeded revenues in four out of six years, and
the State accumulated a budget deficit of about $2.8 billion at its peak at June
30, 1993. A further consequence of the large budget imbalances was that the
State depleted its available cash resources and 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 were reduced. Since October 1992, all
three major nationally recognized statistical rating organizations lowered the
State's general obligation bond rating from the highest ranking of "AAA" to "A"
by S&P, "A1" by Moody's Investors Service ("Moody's") and "A+" by Fitch
Investors Service, Inc. ("Fitch"). However, since the start of 1994,
California's economy has been on a steady recovery. Employment grew
significantly in 1994 and 1995, especially in export-related industries,
business services, electronics, entertainment and tourism. Fitch recognized this
rebound by raising the State's rating from "A" to "A+" on February 26, 1996. S&P
followed suit with a rating upgrade from "A" to "A+" on July 30, 1996.
State Appropriations Limit. Subject to certain exceptions, the State is
subject to an annual appropriations limit, imposed by its Constitution, on
"proceeds of taxes." Various expenditures, including but not limited to debt
service on certain bonds and appropriations for qualified capital outlay
projects, are not included in the appropriations limit.
1996-97 FISCAL YEAR
Revenues. The 1996-1997 Budget Act, enacted on July 15, 1996, rejected
the Governor's proposed 15% cut in personal income tax rates (but did include a
5% cut in bank and corporation tax rates). Revenues for 1996-1997 were estimated
to be $47.643 billion, a 3.3% increase over the final estimated 1995-96
revenues. Special fund revenues were estimated to be $13.3 billion. The 1996-97
Budget Act appropriated a budget reserve of $305 million at June 30, 1997. This
budget reserve assumed certain savings in health and welfare costs and costs
relating to illegal immigrants based on changes to federal law. The amount of
the actual savings for 1996-97 may not reach the assumed amount, however.
Expenditures. The 1996-1997 Budget Act includes General Fund
appropriations of about $47.2 billion, a 4% increase over the final estimated
1995-1996 expenditures. Special Fund expenditures are budgeted at $12.6 billion.
1997-98 FISCAL YEAR
The Governor's proposed budget for 1997-98 projected General Fund
revenues and transfers of $50.7 billion (a 4.6% increase from revised 1996-97
figures) and expenditures of $50.3 billion (a 3.9% increase from 1996-97), and
also projected a balance in the budget reserve of $553 million on June 30, 1998.
The Governor's proposed budget also projects external cash flow borrowing of
about $3 billion during the year.
The foregoing discussions of the 1996-97 Budget and the proposed Budget
are based upon the Budget Act for 1996-97 and the Governor's proposed 1997-98
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
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Proposition 13, which limits ad valorem taxes on real property and restricts the
ability of taxing entities to increase property tax and other revenues.
With certain exceptions, the maximum ad valorem tax on real property is
limited to 1% of the property's 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; reduced in the event of declining property value caused
by substantial damage, destruction or other factors; or adjusted when there is a
"change in ownership" or "new construction."
Proposition 62. This initiative restricted the ability of local
governments to raise taxes and allocate approved tax receipts. Although some
decisions of the California Courts of Appeal held that parts of Proposition 62
were unconstitutional, the California Supreme Court has upheld Proposition 62's
requirement that special taxes be approved by a two-thirds vote of the voters
voting in an election on the issue. This decision may invalidate other taxes
that have been imposed by local governments in California and make it more
difficult for them to raise taxes.
Proposition 218. Passed in November 1996, this initiative places
additional limitations on the ability of California local governments to
increase or impose general taxes, special assessments, and many fees by
requiring voter approval of such items. General taxes and many assessments and
fees that were passed without public approval after 1994 and before November 6,
1996 must now be approved by voters by either July 1, 1997 or November 6, 1998
to continue in effect.
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 governments are also subject to annual
appropriations limits. If a local government's revenues in any year exceed the
amount permitted to be spent, the excess must be returned to the public through
a revision of tax rates or fee schedules over the subsequent two years.
Conclusion. The effect of these constitutional and statutory changes
and 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. California Municipal 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 Municipal 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
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struck Los Angeles, causing significant damage to structures and facilities in
four counties. Another 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. Although the State
enjoyed good growth throughout the early to mid-1980's, unemployment continues
to be a problem. The State's economy is highly developed and diverse, with a
large emphasis in service, trade, financial services and real estate; however,
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.
The State has a large accumulated deficit, as reflected in its
financial results. The overall wealth of the State's population, as reflected by
its 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 State 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 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 be illustrated by the changes of its debt rating during the last
several years of financial difficulties: Moody's downgraded the State's general
obligation long-term debt from A1 to A in 1990 and further refined the rating to
A2 on February 2, 1997 and S&P downgraded it from A to Ain early 1992. The State
also carries a rating of A+ from Fitch. The short-term rating assigned by S&P of
A1 is within that NRSRO's two highest rating categories. Moody's rating on New
York City general obligation bonds is Baa1, while S&P rates them BBB+.
Schwab New York Municipal 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 TECHNIQUES
EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES
Before investing in Eurodollar certificates of deposit, a Fund will
consider their marketability, possible restrictions on international currency
transactions, and any regulations imposed by the domicile country of the foreign
issuer. Eurodollar certificates of deposit may not be subject to the same
regulatory requirements as certificates of deposit issued by U.S. banks and
associated income may be subject to the imposition of foreign taxes.
Investments in securities of foreign issuers or securities principally
traded overseas may involve certain special risks due to foreign economic,
political and legal developments, including expropriation of assets or
nationalization, imposition of withholding taxes on dividend or interest
payments and possible difficulty in obtaining and enforcing judgments against
foreign entities.
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SECTION 4(2) PAPER
Commercial Paper and other securities are issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and resold to qualified
institutional buyers under Securities Act Rule 144A ("Section 4(2) paper").
Federal securities laws restrict the disposition of Section 4(2) paper. Section
4(2) paper generally is sold to institutional investors, such as the Funds, who
agree that they are purchasing the paper for investment and not for public
distribution. Any resale by the purchaser must be in an exempt transaction and
may be accomplished in accordance with Rule 144A. Section 4(2) paper normally is
resold to other institutional investors, such as the Funds, through or with the
assistance of the issuer or investment dealers who make a market in the Section
4(2) paper, thus providing liquidity. Because it is not possible to predict with
assurance exactly how this market for Section 4(2) paper sold and offered under
Rule 144A will continue to develop, Charles Schwab Investment Management, Inc.
(the "Investment Manager"), pursuant to guidelines approved by the Board of
Trustees, will carefully monitor a Fund's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information.
ASSET-BACKED COMMERCIAL PAPER AND OTHER SECURITIES
Schwab Money Market Fund, Schwab Retirement Money Fund(R), Schwab
Institutional Advantage Money Fund(R) and Schwab Value Advantage Money Fund(R)
can invest a portion of their assets in asset-backed commercial paper and other
money market fund Eligible Securities (as that term is hereinafter defined).
Repayment of these securities is intended to be obtained from an identified pool
of diversified assets, typically receivables related to a particular industry,
such as asset-backed securities related to credit card receivables, automobile
receivables, trade receivables or diversified financial assets. Each of the
Funds has identified asset-backed securities related to the industries mentioned
above, as well as foreign asset-backed securities, and each Fund intends to
limit its investments in each such industry to 25% of its total assets. The
credit quality of most asset-backed commercial paper depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator (or any
other affiliated entities) and the amount and quality of any credit support
provided to the securities.
Asset-backed commercial paper is often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support.
Such credit support falls into two classes: liquidity protection and
protection against ultimate default on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that scheduled payments on the
underlying pool are made in a timely fashion. Protection against ultimate
default ensures payment on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. The degree of credit
support provided on each issue is based generally on historical information
respecting the level of credit risk associated with such payments. Delinquency
or loss in excess of that anticipated could adversely affect the return on an
investment in an asset-backed security.
Bank notes are notes used to represent debt obligations issued by banks
in large denominations.
Tax-exempt commercial paper is an unsecured short-term obligation
issued by a government or political sub-division thereof.
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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.
EACH OF SCHWAB MONEY MARKET FUND, SCHWAB GOVERNMENT MONEY FUND, SCHWAB
RETIREMENT MONEY FUND(R) AND SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R) 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
thereof, more than 5% of the value of its assets would be invested in the
securities of such issuer.
(3) Purchase, in the aggregate with all other Schwab Money Funds, more than 10%
of any class of securities of any issuer. All debt securities and all preferred
stocks are each considered as one class.
(4) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that it reserves the freedom of action to invest up to 100%
of its assets in certificates of deposit or bankers' acceptances issued by
domestic branches of U.S. banks and U.S. branches of foreign banks (which the
Fund has determined to be subject to the same regulation as U.S. banks), or
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities in accordance its investment objective and policies.
(5) Invest more than 5% of its total net assets in securities of issuers (other
than obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities) that, with their predecessors, have a record of less than
three years of continuous operation.
(6) Enter into repurchase agreements if, as a result thereof, more than 10% its
net assets valued at the time of the transaction would be subject to repurchase
agreements maturing in more than 7-days and invested in securities restricted as
to disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the Securities Act of 1933, as amended). Each Fund will
invest no more than 10% of its net assets in illiquid securities.
(7) Invest more than 5% of its total assets in securities restricted as to
disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the Securities Act of 1933, as amended).
(8) Purchase or retain securities of an issuer if any of the officers, trustees
or directors of the Trust or its Investment Manager or the Sub-Adviser
individually own beneficially more than 1/2 of 1% of the securities of such
issuer and together beneficially own more than 5% of the securities of such
issuer.
(9) Invest in commodities or commodity contracts, futures contracts, real estate
or real estate limited partnerships, although it may invest in securities which
are secured by real estate and securities of issuers which invest or deal in
real estate.
(10) Invest for the purpose of exercising control or management of another
issuer.
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(11) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.1
(12) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objectives and
policies), except that Schwab Retirement Money Fund(R) and Schwab Institutional
Advantage Money Fund(R) may (i) purchase a portion of an issue of short-term
debt securities or similar obligations (including repurchase agreements) that
are publicly distributed or customarily purchased by institutional investors,
and (ii) lend its portfolio securities.
(13) Borrow money, except as a temporary measure for extraordinary or emergency
purposes, and then only in an amount up to one-third of the value of its total
assets in order to meet redemption requests without immediately selling any
portfolio securities. The Fund will not borrow for leverage purposes or purchase
securities or make investments while reverse repurchase agreements or borrowings
are outstanding. Any borrowings by Schwab Money Market Fund or Schwab Government
Money Fund will not be collateralized. If for any reason the current value of
the total net assets of any Fund falls below an amount equal to three times the
amount of indebtedness from money borrowed, such Fund will, within three
business days, reduce its indebtedness to the extent necessary.
(14) Write, purchase or sell puts, calls or combinations thereof.
(15) Make short sales of securities, or purchase any securities on margin,
except to obtain such short-term credits as may be necessary for the clearance
of transactions.
(16) Invest in interests in oil, gas, mineral leases or other mineral
exploration or development programs, although it may invest in the securities of
issuers which invest in or sponsor such programs.
(17) 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.
(18) Issue senior securities as defined in the 1940 Act.
Except for restrictions (4) and (13), 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.
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.
EACH OF SCHWAB MUNICIPAL MONEY FUND, SCHWAB CALIFORNIA MUNICIPAL MONEY FUND AND
SCHWAB NEW YORK MUNICIPAL MONEY FUND:
- ------------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" on page 17 for an exception to this investment
restriction.
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(1) May not purchase securities or make investments other than in accordance
with investment objectives and policies.
(2) May not 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 (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 Schwab California Municipal Money Fund
or Schwab New York Municipal 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 7-days.
(3) May not purchase or retain securities of an issuer if any of the officers,
trustees or directors of the Trust or its Investment Manager individually own
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.
(4) May not 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.
(5) May not invest for the purpose of exercising control or management of
another issuer.
(6) May not 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.
(7) May not 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.
(8) Each Fund may lend or borrow money to the extent permitted by the Investment
Company Act of 1940 or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
(9) Each Fund may pledge, mortgage or hypothecate any of its assets to the
extent permitted by the Investment Company Act of 1940 or the rules or
regulations thereunder, as such statute, rules or regulations may be amended
from time to time.
(10) Each Fund may issue senior securities to the extent permitted by the
Investment Company Act of 1940 or the rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to time.
(11) May purchase securities of any issuer only when consistent with the
maintenance of its respective status as a diversified company (in the case of
Schwab Municipal Money Fund) or non-diversified company (in the case of Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund) under
the Investment Company Act of 1940 or the rules or regulations thereunder, as
such statute, rules or regulations may be amended from time to time.
THE FOLLOWING RESTRICTIONS ARE NON-FUNDAMENTAL, AND MAY BE CHANGED BY THE BOARD
OF TRUSTEES. EACH OF SCHWAB MUNICIPAL MONEY FUND, SCHWAB CALIFORNIA MUNICIPAL
MONEY FUND AND SCHWAB NEW YORK MUNICIPAL MONEY FUND MAY NOT:
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(1) 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 Schwab California Municipal Money Fund
and Schwab New York Municipal 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.
(2) 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 Schwab California Municipal Money Fund and Schwab New York
Municipal Money Fund.
(3) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets.1
(4) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and policies).
(5) Borrow money, except from banks for temporary purposes (but not for the
purpose of purchasing 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.
(6) 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.
(7) 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.
(8) Issue senior securities as defined in the 1940 Act.
Except for fundamental restriction (3) and non-fundamental restriction (5), 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.
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.
- ------------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" on page 17 for an exception to this investment
restriction.
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THE SCHWAB VALUE ADVANTAGE MONEY FUND(R):
(1) May not 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.
(2) May not invest in commodities or commodity contracts, including futures
contracts, or in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in real
estate.
(3) May not concentrate 25% or more of the value of its assets in any one
industry; provided, however, that the Fund reserves the freedom of action to
invest up to 100% of its assets in certificates of deposit or bankers'
acceptances issued by domestic branches of U.S. banks and U.S. branches of
foreign banks which the Investment Manager has determined to be subject to the
same regulation as U.S. banks, or obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities.
(4) May not make loans to others (except through the purchase of debt
obligations or repurchase agreements in accordance with its investment
objectives and policies).
(5) May not issue senior securities as defined in the 1940 Act.
(6) May purchase securities of any issuer only when consistent with the
maintenance of its respective status as a diversified company under the
Investment Company Act of 1940 or the rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to time.
(7) May borrow money to the extent permitted by the Investment Company Act of
1940 or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
THE FOLLOWING RESTRICTIONS ARE NON-FUNDAMENTAL FOR THE SCHWAB VALUE ADVANTAGE
MONEY FUND AND MAY BE CHANGED BY THE BOARD OF TRUSTEES. THE FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the value of its assets would be invested in securities
of that issuer.
(2) Invest more than 10% of its net assets in illiquid securities, including
repurchase agreements maturing in more than 7-days.
(3) Purchase or retain securities of an issuer if any of the officers, trustees
or directors of the Schwab Fund Family or its Investment Manager beneficially
own more than -1/2 of 1% of the securities of such issuer, and together
beneficially own more than 5% of the securities of such issuer.
(4) Invest for the purpose of exercising control or management of another
issuer.
(5) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets.1
- ------------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" on page 17 for an exception to this investment
restriction.
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(6) Write, purchase or sell puts, calls or combinations thereof.
(7) Make short sales of securities or purchase any securities on margin except
to obtain such short-term credits as may be necessary for the clearance of
transactions.
(8) 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. Except as otherwise noted, if a percentage
restriction is adhered to at the time of investment, a later increase in
percentage beyond the specified limit resulting from a change in values or net
assets will not be considered a violation.
Except for fundamental investment restriction (7) and non-fundamental
investment restriction (3), 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.
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.
SCHWAB U.S. TREASURY MONEY FUND MAY NOT:
(1) Purchase securities other than obligations issued by the U.S. Treasury and
securities backed by the "full faith and credit" guarantee of the U.S.
Government that mature in 397 days or less.1
(2) Make loans to others (except through the purchase of debt obligations).
(3) Issue senior securities as defined in the 1940 Act.
(4) 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.
(5) Invest in commodities or in real estate.
(6) Invest for the purpose of exercising control over management of another
company.
(7) Borrow money, except as a temporary measure for extraordinary or emergency
purposes, and then only in an amount up to one-third of the value of the Fund's
total assets in order to meet redemption requests without immediately selling
any portfolio securities; or pledge its securities or receivables or transfer or
assign or otherwise encumber them in an amount to exceed 33% of the Fund's net
assets to secure borrowings. The Fund will not borrow for leverage purposes or
purchase securities or make investments while reverse repurchase agreements or
borrowings are outstanding. If for any reason the current value of the total net
assets of the Fund falls below an amount equal to three times the amount of its
indebtedness from money borrowed, the Fund will, within three business days,
reduce its indebtedness to the extent necessary.
- ------------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" on page 17 for an exception to this investment
restriction.
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THE FOLLOWING RESTRICTIONS ARE NON-FUNDAMENTAL, AND MAY BE CHANGED BY THE BOARD
OF TRUSTEES. SCHWAB U.S. TREASURY MONEY FUND MAY NOT:
(1) Invest more than 10% of its assets in securities which are not readily
marketable, including securities which are restricted as to disposition; or
(2) Engage in short sales, except for short sales against the box.
QUALITY AND MATURITY
Each Schwab Money Fund will only purchase securities that present minimal credit
risks and (except in the case of Schwab U.S. Treasury Money Fund) which are
First Tier or Second Tier Securities (otherwise referred to as "Eligible
Securities").1 An Eligible Security is:
(1) a security with a remaining maturity of 397 days or less (12 months or less
in the case of Schwab Money Market and Schwab Government Money Funds): (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, S&P, Duff and Phelps Credit Rating Co., Fitch, 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 (two
NRSROs are required but one rating suffices if only one NRSRO rates the
security), 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 (12 months or less in the case of Schwab
Money Market and Schwab Government Money Funds), 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) above 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 suffices if only one NRSRO rates the security) or
has been determined by the Investment Manager, pursuant to guidelines adopted by
the Board of Trustees, to be of comparable quality to such a security. A Second
Tier Security is any other Eligible Security.
Schwab Money Market Fund, Schwab Government Money Fund, Schwab Retirement Money
Fund(R), Schwab Institutional Advantage Money Fund(R) and Schwab Value Advantage
Money Fund(R) will limit
- ------------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" on page 17 for an exception to this investment
restriction.
14
<PAGE> 184
their investments in the First Tier Securities of any one issuer to no more than
5% of their assets. (Repurchase agreements collateralized by non-Government
securities will be taken into account when making this calculation.) Moreover,
each Fund's total holdings of Second Tier Securities will not exceed 5% of its
assets, with investment in the Second Tier Securities of any one issuer being
limited to the greater of 1% of the Fund's assets or $1 million. In addition,
the underlying securities involved in repurchase agreements collateralized by
non-Government securities will be First Tier Securities at the time the
repurchase agreements are executed.
1940 ACT LIMITATIONS
Fundamental investment restrictions (8), (9), (10) and (11) for the
Schwab Municipal Money Funds and fundamental investment restrictions (6) and (7)
for Schwab Value Advantage Money Fund permit the Funds to engage in certain
investment practices and purchase securities to the extent permitted by, or
consistent with, the 1940 Act. Relevant limitations of the 1940 Act are
described below. Each Fund is also subject to more restrictive non-fundamental
investment restrictions. Non-fundamental investment restrictions may be changed
by the Board of Trustees. The Board of Trustees has no current intention of
changing any non-fundamental investment restrictions. Shareholders would be
notified prior to any change in non-fundamental investment restrictions.
Fundamental investment restriction (8). (Fundamental investment
restriction (7) for Schwab Value Advantage Money Fund.) The 1940 Act presently
limits a Fund's ability to borrow more than one-third of the value of its total
assets. The positions of the SEC staff on the ability of a mutual fund to borrow
have evolved in recent years with the development of new investment practices,
such as reverse repurchase agreements. Fundamental investment restriction (8)
allows each Fund the ability to consider engaging in new investment practices to
the extent permitted by the 1940 Act as interpretations of the 1940 Act are
further developed.
Borrowing by a Fund is a form of leveraging of its portfolio which will
expose it to certain risks. Leveraging will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Fund's net asset
value, and money borrowed will be subject to interest costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the interest received from the securities purchased with
borrowed funds.
The 1940 Act also restricts the ability of any mutual fund to lend.
Under the 1940 Act, a Fund may only make loans if expressly permitted to do so
by the Fund's investment policies, and a Fund may not make loans to persons who
control or are under common control with the Fund. Thus, the 1940 Act
effectively prohibits a Fund from making loans to certain persons when conflicts
of interest or undue influence are most likely present. The Funds may, however,
make other loans which if made would expose shareholders to certain additional
risks.
Fundamental investment restriction (9). The 1940 Act, and, in
particular, certain liquidity restrictions, limits a Fund's ability to pledge,
mortgage or hypothecate its assets. To the extent that pledged assets are
encumbered for more than seven days, such assets would be considered illiquid
and therefore, each Fund's use of such techniques would be limited to 10% of its
net assets. Additionally, under the 1940 Act, a Fund is limited to pledging,
mortgaging or hypothecating no more than one-third of its assets.
Fundamental investment restriction (10). The ability of a mutual fund
to issue senior securities, which has evolved somewhat in recent years, is
severely circumscribed by complex regulatory
15
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constraints under the 1940 Act that restrict, for instance, the amount, timing,
and form of senior securities that may be issued. In addition, portfolio
management techniques involving the issuance of senior securities, such as the
purchase of securities on margin, short sales, or the writing of puts on
portfolio securities, are all techniques that involve the leveraging of a
portfolio and would not be consistent with the current SEC rules governing money
market funds.
Fundamental investment restriction (11). (Fundamental investment
restriction (6) for Schwab Value Advantage Money Fund.) Under Section 5(b) of
the 1940 Act, an investment company is diversified if, as to 75% of its total
assets, no more than 5% of the value of its total assets is invested in the
securities of a single issuer and no more than 10% of the issuer's voting
securities is held by the investment company. As non-diversified Funds, Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund are not
subject to this diversification requirement. However, each of the Funds,
including Schwab California Municipal Money Fund and Schwab New York Municipal
Money Fund, is subject to the "per issuer" diversification requirements of the
Code. Under the Code, the 5% "per issuer" limit is applied only to 50% of a
Fund's total assets (not 75% of total assets as under the 1940 Act).
16
<PAGE> 186
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 the Investment Manager, are as
follows:
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Chief Executive Officer and Director,
July 29, 1937 The Charles Schwab Corporation; Chairman and
Director, Charles Schwab & Co., Inc. and
Charles Schwab Investment Management, Inc.;
Chairman and Director, The Charles Schwab Trust
Company; Chairman and Director (current board
positions), and Chairman (officer position)
until December 1995, Mayer & Schweitzer, Inc.
(a securities brokerage subsidiary of The
Charles Schwab Corporation); Director, The Gap,
Inc. (a clothing retailer), Transamerica
Corporation (a financial services
organization), AirTouch Communications (a
telecommunications company) and Siebel Systems
(a software company).
TIMOTHY F. McCARTHY** President and Trustee Executive Vice President and President,
September 19, 1951 Financial Products and International Group,
Charles Schwab & Co., Inc.; Executive Vice
President and President, Financial Products and
International Group, The Charles Schwab
Corporation; Chief Executive Officer, Charles
Schwab Investment Management, Inc.; Vice
Chairman and Chief Operating Officer, Charles
Schwab Limited; Director, Mayer & Schweitzer.
From 1994 to 1995, Mr. McCarthy was Chief
Executive Officer, Jardine Fleming Unit Trusts
Ltd.; Executive Director, Jardine Fleming
Holdings Ltd.; Chairman, Jardine Fleming Taiwan
Securities Ltd.; and Director of JF India and
Fleming Flagship, Europe. Prior to 1994, he was
President of Fidelity Investments Advisor
Group, a division of Fidelity Investments in
Boston.
DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
September 23, 1931 Associates (advertising and marketing/consulting).
</TABLE>
- ------------------
* Mr. Schwab is an "interested person" of the Trust.
** Mr. McCarthy is an "interested person" of the Trust.
17
<PAGE> 187
<TABLE>
<CAPTION>
<S> <C> <C>
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. Semloh Financial is an
international financial services and investment
advisory firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (investment
June 28, 1938 banking). Prior to 1995, Mr. Stephens was Chairman
and Chief Executive Officer of North American Trust
(a real estate investment trust). Prior to 1992,
Mr. Stephens was Chairman and Chief Executive
Officer of the Bank of San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
TAI-CHIN TUNG Treasurer and Principal Vice President - Finance, Charles Schwab & Co.,
March 7, 1951 Financial Officer Inc.; Controller, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Ms. Tung was
Controller for Robertson Stephens Investment
Management, Inc. From 1993 to 1994, she was Vice
President of Fund Accounting, Capital Research and
Management Co. Prior to 1993, Ms. Tung was Senior
Vice President of the Sierra Funds and Chief
Operating Officer of Great Western Financial
Securities.
WILLIAM J. KLIPP* Executive Vice President, Executive Vice President-SchwabFunds(R), Charles
December 9, 1955 Chief Operating Officer Schwab & Co., Inc.; President and Chief Operating
and Trustee Officer, Charles Schwab Investment Management, Inc.
Prior to 1993, Mr. Klipp was Treasurer of Charles
Schwab & Co., Inc. and Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice President and Senior Vice President and Chief Investment Officer,
April 5, 1955 Chief Investment Officer Charles Schwab Investment Management, Inc.
FRANCES COLE Secretary Vice President, Chief Counsel, Chief Compliance
September 9, 1955 Officer and Assistant Corporate Secretary, Charles
Schwab Investment Management, Inc.
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel, Charles Schwab
October 14, 1960 Investment Management, Inc. From 1991 to 1992, he
was Assistant Secretary and Assistant Corporate
Counsel for the Franklin Group of
</TABLE>
- ------------------
* Mr. Klipp is an "interested person" of the Trust.
18
<PAGE> 188
<TABLE>
<CAPTION>
<S> <C> <C>
Mutual Funds.
CHRISTINA M. PERRINO Assistant Secretary Vice President and Senior Counsel, Charles Schwab
June 16, 1961 Investment Management, Inc. Prior to 1994, she was
Counsel and Assistant Secretary for North American
Security Life Insurance Company and Secretary for
North American Funds.
KAREN L. SEAMAN Assistant Secretary Corporate Counsel, Charles Schwab Investment
February 27, 1968 Management, Inc. From October, 1994 to July 1996,
Ms. Seaman was Attorney for Franklin Resources,
Inc. Prior to 1994, Ms. Seaman was an attorney
for The Benham Group.
</TABLE>
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
and Schwab Annuity Portfolios. The address of each individual listed above is
101 Montgomery Street, San Francisco, California 94104.
19
<PAGE> 189
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Pension or
Retirement Benefits Estimated Annual
Aggregate Accrued as Part of Benefits Upon Total Compensation
Name of Person, Compensation from Fund Expenses from Retirement from the from the Fund
Position the Trust the Fund Complex 2 Fund Complex 2 Complex 2
- -------- --------- ----------------- ------------- --------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Timothy F. McCarthy, 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice President,
Chief Operating Officer
and Trustee
Donald F. Dorward, $47,100 N/A N/A $83,950
Trustee
Robert G. Holmes, $47,100 N/A N/A $83,950
Trustee
Donald R. Stephens, $47,100 N/A N/A $83,950
Trustee
Michael W. Wilsey, $47,100 N/A N/A $83,950
Trustee
</TABLE>
1 Figures are for the Trust's fiscal year ended December 31, 1996.
2 "Fund Complex" comprises all 29 funds of the Trust, Schwab
Investments, Schwab Capital Trust and Schwab Annuity Portfolios.
--------------------------------------------------------
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. If an
Independent Trustee does elect to participate in the Plan, the Plan would
operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account"), as of the
date such fees would have been paid to such Trustee. The value of the Deferred
Fee Account, as of any date, will be equal to the value the Account would have
had as of that date, if the amounts credited to the Account had been invested
and reinvested in the securities of the SchwabFund or SchwabFunds(R) selected by
the participating Trustee (the "Selected SchwabFund
20
<PAGE> 190
Securities"). SchwabFunds include the series or classes of beneficial interest
of the Trust, Schwab Investments and Schwab Capital Trust.
Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. The exemptive relief granted to the Trust permits the
Funds and the Trustees to purchase the Selected SchwabFund Securities, which
transactions would otherwise be limited or prohibited by the investment policies
and/or restrictions of the Funds. See "Investment Restrictions."
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to 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 29 mutual funds with over
$47 billion in assets as of April 1, 1997. The Investment Manager is an
affiliate of Schwab; the Trust's distributor; and the 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 a majority (as defined in the 1940 Act) of
the outstanding voting securities of a Fund. In either event, the continuance
must also be approved by a majority of the Trust's Board of Trustees who are not
parties to the Agreement or interested persons (as defined in the 1940 Act) of
any such party by vote cast in person at a meeting called for the purpose of
voting on such approval. 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, and will terminate automatically upon assignment.
Pursuant to an Advisory Agreement dated May 1, 1997, the Investment
Manager is entitled to receive from Schwab Money Market Fund a graduated annual
fee, payable monthly, of 0.46% of the Fund's average daily net assets not in
excess of $1 billion, 0.45% of net assets over $1 billion but not in excess of
$3 billion, 0.40% of net assets over $3 billion but not in excess of $10
billion, 0.37% of net assets over $10 billion but not in excess of $20 billion
and 0.34% of net assets over $20 billion. Pursuant to an Advisory Agreement
dated May 1, 1997, the Investment Manager is entitled to receive from Schwab
Government Money Fund and Schwab Municipal Money Fund a graduated annual fee,
payable monthly, of 0.46% of the average daily net assets of each such 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.
For the fiscal year ended December 31, 1994, the investment advisory
fees paid by Schwab Money Market Fund, Schwab Government Money Fund and Schwab
Municipal Money Fund were $28,697,000 (fees were reduced by $13,405,000);
$5,434,000 (fees were reduced by $2,922,000); and $5,421,000 (fees were reduced
by $6,646,000), respectively.
For the fiscal year ended December 31, 1995, the investment advisory
fees paid by Schwab Money Market Fund, Schwab Government Money Fund and Schwab
Municipal Money Fund were $36,652,000 (fees were reduced by $15,603,000);
$1,901,000 (fees were reduced by $2,777,000); and $6,465,000 (fees were reduced
by $7,229,000), respectively.
21
<PAGE> 191
For the fiscal year ended December 31, 1996, the investment advisory
fees paid by Schwab Money Market Fund, Schwab Government Money Fund and Schwab
Municipal Money Fund were $46,270,000 (fees were reduced by $19,250,000);
$5,671,000 (fees were reduced by $2,847,000); and $8,034,000 (fees were reduced
by $8,734,000), respectively.
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 each of Schwab California Municipal
Money Fund, Schwab New York Municipal Money Fund and Schwab U.S. Treasury Money
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. In addition, the Investment Manager is entitled to
receive from Schwab Retirement Money Fund(R), Schwab Institutional Advantage
Money Fund(R) and Schwab Value Advantage Money Fund(R) a graduated annual fee,
payable monthly, of 0.46% of each such Fund's average daily net assets not in
excess of $1 billion, 0.45% of net assets over $1 billion but not in excess of
$3 billion, 0.40% of net assets over $3 billion but not in excess of $10
billion, 0.37% of net assets over $10 billion but not in excess of $20 billion
and 0.34% of net assets over $20 billion.
For the fiscal year ended December 31, 1994, the investment advisory
fees paid by Schwab California Municipal Money Fund, Schwab U.S. Treasury Money
Fund, Schwab Institutional Advantage Money Fund, Schwab Retirement Money Fund
and Schwab Value Advantage Money Fund were $2,254,000 (fees were reduced by
$3,274,000); $1,016,000 (fees were reduced by $1,442,000); $124,000 (fees were
reduced by $96,000); and $75,000 (fees were reduced by $21,000); and $2,144,000
(fees were reduced by $6,741,000), respectively.
For the fiscal year ended December 31, 1995, the investment advisory
fees paid by Schwab California Municipal Money Fund, Schwab U.S. Treasury Money
Fund, Schwab Institutional Advantage Money Fund, Schwab Retirement Money Fund,
and Schwab Value Advantage Money Fund were $2,748,000 (fees were reduced by
$3,697,000); $2,748,000 (fees were reduced by $2,674,000); $202,000 (fees were
reduced by $162,000); $338,000 (fees were reduced by $16,000); and $15,877,000
(fees were reduced by $7,922,000), respectively. For the period February 27,
1995 (commencement of operations) to December 31, 1995, the investment advisory
fee paid by Schwab New York Municipal Money Fund was $464,000 (fees were reduced
by $277,000).
For the fiscal year ended December 31, 1996, the investment advisory
fees paid by Schwab California Municipal Money Fund, Schwab U.S. Treasury Money
Fund, Schwab Institutional Advantage Money Fund, Schwab Retirement Money Fund,
Schwab New York Municipal Money Fund, and Schwab Value Advantage Money Fund were
$3,737,000 (fees were reduced by $4,819,000); $2,420,000 (fees were reduced by
$3,302,000); $292,000 (fees were reduced by $225,000); $494,000 (fees were
reduced by $22,000); $535,000 (fees were reduced by $696,000); and $30,667,000
(fees were reduced by $6,081,000), respectively.
EXPENSES
The Trust pays the expenses of its operations, including: the fees and
expenses of independent accountants, counsel and the custodian; the cost of
reports and notices to shareholders; the cost of calculating net asset value;
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 the expense is incurred,
22
<PAGE> 192
except that expenses directly attributable to a particular Fund or class of a
Fund 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 of the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under the
Distribution Agreement. Terms of continuation, termination and assignment under
the Distribution Agreement are identical to those described above with respect
to the Advisory 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 400 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 each Fund's federal income tax return. Price
Waterhouse LLP also performs other professional accounting, auditing, tax and
advisory services when the Trust engages it to do so. Shareholders will be sent
audited annual and unaudited semi-annual financial statements. The address of
Price Waterhouse LLP is 555 California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, D.C. 20005, 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; invest money obtained from the sale of Fund shares; reinvest proceeds
from maturing portfolio securities; and 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 will generally select brokers and dealers for the Funds primarily on the
basis of the quality and reliability of brokerage services, 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
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<PAGE> 193
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 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 Schwab Money Fund's
portfolio turnover rate for reporting purposes is expected to be zero.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
On each day that the net asset value per share of a Fund is determined
("Business Day"), such Fund's 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. In the case of Schwab Institutional
Advantage Money Fund(R), for shareholders satisfying certain conditions,
investment income will be declared as a daily dividend to shareholders of record
as of that day's calculation of net asset value. Conditions which must be met in
order to receive a dividend for the day on which the order is received by the
Transfer Agent or its authorized agent are: (1) a minimum investment of
$100,000; (2) receipt by Schwab or the Charles Schwab Trust Company before 1:30
p.m. Eastern time; and (3) payment in immediately available funds. Shareholders
will receive dividends in additional shares unless they elect to receive cash.
For each Fund except Schwab Retirement Money Fund(R) and Schwab Institutional
Advantage Money Fund, dividends will normally be reinvested monthly in full
shares of the Fund (for Schwab Municipal Money Fund, Schwab California Municipal
Money Fund and Schwab New York Municipal Money Fund, dividends will normally be
reinvested monthly in full Sweep Shares of the Fund) at the net asset value on
the 15th day of each month, if a Business Day, otherwise on the next Business
Day. For Schwab Retirement Money Fund(R) and Schwab Institutional Advantage
Money Fund(R), dividends will normally be reinvested monthly in full shares of
the Fund at the net asset value on the 15th 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 7 days.
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Each Fund calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of a Fund (other than Schwab
Municipal Money Fund, Schwab California Municipal Money Fund, Schwab New York
Municipal Money Fund and Schwab Value Advantage Money Fund) consists of: (1)
accrued interest income, plus or minus amortized discount or premium, minus (2)
accrued expenses allocated to that Fund. For this purpose, for Schwab Municipal
Money Fund, Schwab California Municipal Money Fund, Schwab New York Municipal
Money Fund and Schwab Value Advantage Money Fund, the net investment income of
the Sweep Shares of each Fund consists of: (1) accrued interest income plus or
minus amortized discount or premium, allocated to the Sweep Shares of that Fund
minus (2) accrued expenses allocated to the Sweep Shares of that Fund. If a Fund
realizes any capital gains, they will be distributed at least once during the
year as determined by the Board of Trustees. Any realized 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. Expenses of
the Trust are accrued each day. Should the net asset value 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.
FEDERAL INCOME TAXES
It is each Fund's policy 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, U.S. Government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of any other regulated investment company) or of two or more issuers
that the Fund controls, within the meaning of the Code, and that are engaged in
the same, similar or related trades or businesses. These requirements may
restrict the degree to which a Fund may engage in short-term trading and certain
hedging transactions and may limit the range of a Fund's investments. If a Fund
qualifies as a regulated investment company, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, which it distributes to shareholders, provided that the Fund
meets certain minimum distribution requirements. To comply with these
requirements, a Fund must distribute at least (a) 90% of its "investment company
taxable income" (as that term is defined in the Code) and (b) 90% of the excess
of its (i) tax-exempt interest income over (ii) certain deductions attributable
to that income (with certain exceptions), for its taxable year. Each Fund
intends to make sufficient distributions to shareholders to meet these
requirements.
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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 in which they were 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.
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.
A Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." This "backup withholding" is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
The foregoing discussion relates only to federal income tax law as
applicable to U.S. citizens or residents. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from net investment income and
short-term capital gains. Distributions to foreign shareholders of long-term
capital gains and any gains from the sale or other disposition of shares of the
Funds are generally not subject to U.S. taxation, unless the recipient is an
individual who meets the Code's definition of "resident alien." Different tax
consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a
foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above. Distributions by a Fund also may be
subject to state, local and foreign taxes, and its treatment under applicable
tax laws may differ from the federal income tax treatment.
SCHWAB MUNICIPAL MONEY FUND,
SCHWAB CALIFORNIA MUNICIPAL MONEY
FUND AND SCHWAB NEW YORK MUNICIPAL MONEY FUND
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
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than a capital gain dividend) paid by Schwab Municipal Money Fund, Schwab
California Municipal Money Fund or Schwab New York Municipal Money 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, Schwab
Municipal Money Fund, Schwab California Municipal Money Fund or Schwab New York
Municipal Money 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.
A shareholder should consult his or her own tax adviser with respect to
whether exempt-interest dividends would be excludable from gross income if the
shareholder were treated as a "substantial user" of facilities financed by an
obligation held by a Fund or a "related person" to such user under the Code. Any
loss on the sale or exchange of any share held for six months or less will be
disallowed to the extent of the amount of the exempt-interest dividend received
with respect to such share. The U.S. Treasury Department is authorized to issue
regulations reducing the period to not less than 31 days for certain regulated
investment companies, but no such regulations have been issued as of the date of
this Statement of Additional Information.
All or part of interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of a Fund will not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of that Fund's total distributions (excluding distributions of the excess of net
long-term capital gains over net short-term capital losses) paid to the
shareholder that are exempt-interest dividends. Under rules used by the Internal
Revenue Service, the purchase of shares of a Fund may be considered to have been
made with borrowed funds even though such funds are not directly traceable to
the purchase of the shares.
The discussion of federal income taxation presented above summarizes
only some of the important federal tax considerations generally affecting
purchasers of Fund shares. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund and its shareholders,
and the discussion is not intended as a substitute for careful tax planning.
Accordingly, prospective investors (particularly those not residing or domiciled
in the United States) should consult their own tax advisers regarding the
consequences of investing in a Fund.
STATE TAXES
With respect to Schwab California Municipal 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 when held by an individual ("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"). Schwab
California Municipal Money Fund intends to qualify under the above requirement
so that it can pay California exempt-interest dividends. If Schwab California
Municipal Money Fund fails to so
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qualify, no part of its dividends will be exempt from State of California
personal income tax.
With respect to Schwab New York Municipal 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 State and municipal income taxes in the hands of
non-corporate shareholders ("New York exempt-interest dividends").
Not later than 60 days after the close of its taxable year, Schwab
California and New York Municipal 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 Schwab
California Municipal 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 Schwab California Municipal Money Fund) that are allocable to
such interest. Dividends paid by Schwab California Municipal 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 allocable 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 Schwab
California Municipal Money Fund that would otherwise be available for
distribution as California exempt-interest dividends will be reduced by the
expenses and expenditures be allocable from such amounts.
To the extent, if any, dividends paid to shareholders by Schwab
California Municipal Money Fund or New York Municipal 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 Schwab California Municipal Money Fund or New York
Municipal Money Fund is not deductible for California or New York personal
income tax purposes, if the Fund distributes California or New York
exempt-interest dividends, respectively, to the shareholder during his or her
taxable year.
The foregoing is a summary of only some of the important state personal
income tax considerations generally affecting Schwab California Municipal and
New York Municipal Money Funds and their shareholders. No attempt is made to
present a detailed explanation of the state personal income tax treatment of
Schwab California Municipal and New York Municipal 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 Schwab California
Municipal and New York Municipal Money Funds' dividends constituting California
or New York exempt-interest dividends, respectively, is only excludable from
income for State of California or State of New York personal income tax
purposes, respectively.
Any dividends paid to shareholders of the Funds subject to California
or New York franchise or corporate income tax will be taxed as ordinary
dividends to such shareholders, notwithstanding that all or a portion of such
dividends is exempt from California or New
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York personal income tax. Accordingly, potential investors in the Schwab
California Municipal Money Fund or New York Municipal Money Fund, including, in
particular, corporate investors which may be subject to California or New York
franchise or corporate income 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 Schwab Money Fund values its portfolio instruments at amortized
cost, which means 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 Schwab Money Fund's $1.00 per share net asset value, 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 a Schwab Money
Fund's net asset value per share (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. 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 Schwab Money Fund's net asset value per share
(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.
HOW THE FUNDS REPORT PERFORMANCE
The historical performance of a Fund may be shown in the form of total
return, yield, effective yield and, for the Sweep Shares of Schwab Municipal
Money Fund, Schwab California Municipal Money Fund and Schwab New York Municipal
Money Fund, taxable equivalent yield and taxable equivalent effective yield.
These measures of performance are described below.
TOTAL RETURN
Standardized Total Return. Average annual total return for a period is
determined by calculating the actual dollar amount of investment return on a
$1,000 investment in a Fund made at the beginning of the period, then
calculating the average annual compounded rate of return that would produce the
same
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investment return on the $1,000 over the same period. In computing average
annual total return, a Fund assumes the reinvestment of all distributions at net
asset value on applicable reinvestment dates.
Nonstandardized Total Return. Nonstandardized total return for a Fund
differs from standardized total return in that it relates to periods other than
the period for standardized total return and/or that it represents aggregate
(rather than average) total return.
In addition, an after-tax total return for each Fund may be calculated
by taking that Fund's standardized or non-standardized total return and
subtracting applicable federal taxes from the portions of each Fund's total
return attributable to capital gains distributions and ordinary income. This
after-tax total return may be compared to that of other mutual funds with
similar investment objectives as reported by independent sources.
Each Fund may also report the percentage of that Fund's standardized or
non-standardized total return that would be paid to taxes annually (at the
applicable federal personal income and capital gains tax rates before redemption
of Fund shares). This proportion may be compared to that of other mutual funds
with similar investment objectives as reported by independent sources.
A Fund may also advertise its cumulative total return since inception.
This number is calculated using the same formula that is used for average annual
total return except that, rather than calculating the total return based on a
one-year period, cumulative total return is calculated from inception to the
date specified.
From Commencement of Operations to December 31, 1996
<TABLE>
<CAPTION>
Commencement Average Annual Cumulative One Year Total Return
of Operations Total Return Total Return as of December 31, 1996
------------- ------------ ------------ -----------------------
<S> <C> <C> <C> <C>
Schwab Money Market Fund January 26, 1990 4.76% 38.06% 4.91%
Schwab Government Money Fund January 26, 1990 4.70% 37.49% 4.83%
Schwab U.S. Treasury Money Fund November 6, 1991 3.87% 21.64% 4.77%
Schwab Municipal Money Fund-Sweep
Shares January 26, 1990 3.17% 22.05% 2.92%
Schwab California Municipal Money
Fund-Sweep Shares November 6, 1990 2.77% 18.31% 2.80%
Schwab Retirement Money Fund(R) March 2, 1994 4.81% 14.27% 4.93%
Schwab Institutional Advantage
Money Fund(R) January 4, 1994 4.89% 15.38% 5.15%
Schwab New York Municipal Money
Fund-Sweep Shares February 27, 1995 2.97% 5.56% 2.74%
Schwab Value Advantage Money
Fund-Sweep Shares* N/A N/A N/A N/A
</TABLE>
- ------------------
* The Sweep Shares of the Schwab Value Advantage Money Fund will not commence
operations until on or about May 19, 1997.
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YIELD
A Fund's yield refers to the net investment income generated by a
hypothetical investment in the Fund (or, in the case of Schwab Municipal Money
Fund, Schwab California Municipal Money Fund, Schwab New York Municipal Money
Fund and Schwab Value Advantage Money Fund, the Sweep Shares of the Fund) over a
specific 7-day period. This net investment income is then annualized, which
means that the net investment income generated during the 7-day period is
assumed to be generated in each 7-day period over an annual period, and is shown
as a percentage of the investment.
EFFECTIVE YIELD
A Fund's 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.
TAXABLE EQUIVALENT YIELD AND
TAXABLE EQUIVALENT EFFECTIVE YIELD
The taxable equivalent yield of the Sweep Shares of Schwab Municipal
Fund is computed by dividing that portion of the yield of the class (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 class that is not tax-exempt. The taxable equivalent yield of the Sweep
Shares of Schwab California Municipal Money Fund is calculated by dividing that
portion of the yield of the class (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 9.3%,
although other rates may be used at times), and adding the result to that
portion, if any, of the yield of the class that is not tax-exempt. The taxable
equivalent yield of the Sweep Shares of Schwab New York Municipal Money Fund is
calculated by dividing that portion of the yield of the class (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 6.85% and the New York City municipal marginal rate of
4.457%, although other rates may be used at times), and adding the result to
that portion, if any, of the yield of the class that is not tax-exempt.
Taxable equivalent effective yields are computed in the same manner as
taxable equivalent yields, except that effective yield is substituted for yield
in the calculation. In calculating taxable equivalent yields and effective
yields, Schwab Municipal Money Fund generally assumes an effective tax rate of
39.6%, Schwab California Municipal Money Fund generally assumes an effective tax
rate (combining the federal 39.6% rate and the California 9.3% rate, and
assuming the taxpayer deducts California state taxes paid) of 45.22%, and Schwab
New York Municipal Money Fund generally assumes an effective tax rate (combining
the federal 39.6% rate, the New York state 6.85% rate and the New York City
municipal 4.457% rate, and assuming the taxpayer deducts New York state and New
York City municipal taxes paid) of 46.43%. Investors in Schwab New York
Municipal Money Fund should understand that, under legislation enacted in New
York State and New York City, the maximum effective tax rates for 1998 and 1999
will be 44.89% and 44.58%, respectively. The effective tax rates used in
determining such yields do not reflect the tax costs resulting from the full or
partial loss of the benefits of personal exemptions, itemized deductions and
California exemption credits that may result from the receipt of additional
taxable income by single taxpayers or married
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taxpayers filing jointly with adjusted gross incomes exceeding $121,200,
($60,600 for married filing separate returns) in 1997. Actual taxable equivalent
yields and taxable 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 taxable
equivalent yield or taxable equivalent effective yield, simply divide the yield
or effective yield of Sweep Shares of Schwab Municipal Money Fund, Schwab
California Municipal Money Fund or Schwab New York Municipal Money Fund by one
minus your marginal federal tax rate (or combined state and federal tax rate in
the case of Schwab California Municipal Money Fund, or combined municipal,
state, and federal tax rate in the case of Schwab New York Municipal 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 Sweep Shares of the Fund in
question.
Performance information, except Sweep Shares of Schwab Value Advantage
Money Fund, for the 7-day period ended December 31, 1996, is presented below.
The taxable equivalent yield and taxable equivalent effective yield figures are
based, in the case of Schwab Municipal Money Fund, upon an assumed 1996
effective tax rate of 39.6%; in the case of Schwab California Municipal Money
Fund, upon an assumed 1996 effective tax rate of 45.22%; in the case of Schwab
New York Municipal Money Fund, upon an assumed effective tax rate of 46.27%. The
yields below are based on the maximum rates in effect for 1996. Tax rates in
effect for 1997 are different. See the discussion above relating to federal,
State of California and State of New York tax rates.
<TABLE>
<CAPTION>
Taxable Taxable
Effective Equivalent Equivalent
Yield Yield Yield Effective Yield
----- ----- ----- ---------------
<S> <C> <C> <C> <C>
Schwab Money Market 4.80% 4.91% N/A N/A
Fund
Schwab Government 4.74% 4.85% N/A N/A
Money Fund
Schwab U.S. Treasury 4.69% 4.80% N/A N/A
Money Fund
Schwab Municipal 3.29% 3.34% 5.45% 5.53%
Money Fund-Sweep Shares
Schwab California 3.20% 3.25% 5.84% 5.93%
Municipal Money
Fund-Sweep Shares
Schwab New York 3.15% 3.20% 5.86% 5.96%
Municipal Money
Fund-Sweep Shares
Schwab Institutional 5.09% 5.22% N/A N/A
Advantage Money Fund(R)
Schwab Retirement 4.86% 4.99% N/A N/A
Money Fund(R)
Schwab Value Advantage N/A N/A N/A N/A
Money Fund-Sweep Shares*
</TABLE>
- ------------------
* The Sweep Shares of the Schwab Value Advantage Money Fund does not commence
operations until on or about May 19, 1997.
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GENERAL INFORMATION
The Trust generally is not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
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)
determination of 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 ten or more shareholders who have been such
for at least six months and who hold shares constituting at least 1% of the
Trust's outstanding shares, stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more Trustees, the Trust has undertaken to
disseminate appropriate materials at the expense of the requesting shareholders.
The Bylaws provide that a majority of shares entitled to vote shall be
a quorum for the transaction of business at a shareholders' meeting, except that
where any provision of law, of the Declaration of Trust or of the Bylaws permits
or requires that (i) holders of any series shall vote as a series, then a
majority of the aggregate number of shares of that series entitled to vote shall
be necessary to constitute a quorum for the transaction of business by that
series, or (ii) holders of any class shall vote as a class, then a majority of
the aggregate number of shares of that class entitled to vote shall be necessary
to constitute a quorum for the transaction of business by that class. Any lesser
number shall be sufficient for adjournments. Any adjourned session or sessions
may be held, within a reasonable time after the date set for the original
meeting, without the necessity of further notice. The Declaration of Trust
specifically authorizes the Board of Trustees to terminate the Trust (or any of
its investment portfolios) by notice to the shareholders without shareholder
approval.
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
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<PAGE> 203
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 April 14, 1997, The Charles Schwab Trust Company FBO Mutual Fund
FSI2 Trading, 101 Montgomery Street, San Francisco, California 94104 directly or
beneficially owned 73.85% of Schwab Retirement Money Fund(R). As of April 14,
1997, The Charles Schwab Trust Company TTEE Technology Financial Assoc. Inc.,
Retirement Savings Plan, FBO Henry H. Hoffman, 101 Montgomery Street, San
Francisco, California 94104 directly or beneficially owned 87.24%% of Schwab
Institutional Advantage Money Fund(R).
In addition, as of April 14, 1997 the officers and Trustees of the
Trust, as a group, owned less than 1% of each Fund's outstanding voting
securities.
ACCESS TO SCHWAB'S MUTUAL
FUND ONESOURCE(R) SERVICE
With Schwab's Mutual Fund OneSource Service ("OneSource"), a
shareholder can invest in over 650 mutual funds from many fund companies,
subject to the following. Schwab's standard transaction fee will be charged on
each redemption of fund shares held for 90 days or less to discourage short-term
trading. Mutual fund shares held for more than 90 days are exempt from the
short-term redemption policy and may be sold without penalty. Up to 15
short-term redemption of fund shares per calendar year are permitted. If you
exceed this number, you will no longer be able to buy or sell fund shares
without paying a transaction fee. As a courtesy, we will notify you in advance
if your short-term redemptions are nearing the point where all of your future
trades will be subject to transaction fees. Schwab reserves the right to modify
OneSource's terms and conditions at any time. For more information, a
shareholder should contact his or her Schwab office during its regular business
hours or call 800-2 NO-LOAD, 24 hours a day.
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SCHWABFUNDS(R)
SchwabFunds offers a variety of series and classes of shares of beneficial
interest to help you with your investment needs.
EQUITY FUNDS
Schwab 1000 Fund(R) -- Investor Shares 1
Schwab 1000 Fund -- Select Shares 1
Schwab International Index Fund(R) -- Investor Shares 2
Schwab International Index Fund -- Select Shares 2
Schwab Small-Cap Index Fund(R) -- Investor Shares 2
Schwab Small-Cap Index Fund -- Select Shares 2
Schwab Asset Director(R) -- High Growth Fund 2
Schwab Asset Director -- Balanced Growth Fund 2
Schwab Asset Director -- Conservative Growth Fund 2
Schwab S&P 500 Fund -- Investor Shares 2
Schwab S&P 500 Fund -- e.Shares(TM) 2,3
Schwab S&P 500 Fund -- Select Shares 2
Schwab Analytics Fund(TM) 2
Schwab OneSource Portfolios -- International 2
Schwab OneSource Portfolios -- Growth Allocation 2
Schwab OneSource Portfolios -- Balanced Allocation 2
FIXED INCOME FUNDS 1
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund 4
Schwab California Long-Term Tax-Free Bond Fund 4
MONEY MARKET FUNDS 5
Schwab Money Market Fund
Schwab Government Money Fund
Schwab Institutional Advantage Money Fund(R) 6
Schwab Retirement Money Fund(R) 6
Schwab U.S. Treasury Money Fund
Schwab Value Advantage Money Fund(R) -- Sweep Shares
Schwab Value Advantage Money Fund -- Investor Shares
Schwab Municipal Money Fund -- Sweep Shares
Schwab Municipal Money Fund -- Value Advantage Shares(TM)
Schwab California Municipal Money Fund -- Sweep Shares
Schwab California Municipal Money Fund -- Value Advantage Shares(TM)
Schwab New York Municipal Money Fund -- Sweep Shares
Schwab New York Municipal Money Fund -- Value Advantage Shares(TM)
1 The Schwab 1000 Fund and all fixed income funds are separate investment
portfolios of Schwab Investments.
2 The Funds are separate investment portfolios or classes of shares of
Schwab Capital Trust.
3 Available only through SchwabLink(R).
4 Available only to California residents and residents of selected other
states.
5 All listed money market funds are separate investment portfolios of the
Trust.
6 Designed for institutional investors only.
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PURCHASE AND REDEMPTION OF SHARES
With the exception of Schwab Retirement Money Fund(R), Schwab
Institutional Advantage Money Fund(R), and Schwab Value Advantage Money Fund(R),
each Fund's minimum initial investment is $1,000 and subsequent minimum
investments of $100 or more may be made. For Schwab Retirement Money Fund,
Schwab Institutional Advantage Money Fund, and Schwab Value Advantage Money
Fund, the minimum initial investment is $1, $25,000 and $25,000 for each Fund,
respectively, and subsequent investments of $1 or more may be made. In addition,
the Sweep Shares of the Schwab Value Advantage Money Fund are available to
certain Schwab investors qualifying for preferred services under the Schwab
Priority or Active Trader programs, and certain customers of Schwab
Institutional's Services for Investment Managers or Schwab's Retirement Plan
Services. Please contact your preferred customer representative or your local
Schwab office for more information. These minimum requirements may be changed at
any time and are not applicable to certain types of investors. For all
retirement plan, Schwab One(R) and certain other types of accounts, any account
credit balance in excess of $1.00 and subsequent amounts of $1.00 on any
Business Day will be automatically invested on a daily basis in the Schwab Money
Fund selected (except that this feature is not available for Schwab Retirement
Money Fund or Schwab Institutional Advantage Money Fund). The Trust may waive
the minimums for purchases by Trustees, Directors, officers or employees of the
Trust, Schwab or the Investment Manager. The Trust has made an election with the
SEC to pay in cash all redemptions requested by any shareholder of record
limited in amount during any 90-day period to the lesser of $250,000 or 1% of
its net assets at the beginning of such period. This election is irrevocable
without the SEC's prior approval. Redemption requests in excess of the stated
limits may be paid, in whole or in part, in investment securities or in cash, as
the Trust's Board of Trustees may deem advisable; however, payment will be made
wholly in cash unless the Board of Trustees believes that economic or market
conditions exist that would make such a practice detrimental to the best
interests of the Fund. If redemption proceeds are paid in investment securities,
such securities will be valued as set forth in the Prospectus of the Fund
affected under "Share Price Calculation" and a redeeming shareholder would
normally incur brokerage expenses if he or she converted the securities to cash.
Schwab Institutional Advantage Money Fund and Schwab Retirement Money Fund may
also elect to invoke a 7-day period for cash settlement of individual redemption
requests in excess of $250,000 or 1% of each Fund's net assets, whichever is
less.
OTHER INFORMATION
The Prospectuses 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, as amended, with
respect to the securities offered by the Prospectuses.
Certain portions of the Registration Statement have been omitted from
the Prospectuses and this 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 Prospectuses 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,
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reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which the Prospectuses 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.
Issuers (or related supporting institutions) of commercial paper with this
rating are considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
An S&P A-1 commercial paper rating indicated a strong degree of safety
regarding timely payment of principal and interest. Issues determined to possess
overwhelming safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
Duff-1 is the highest commercial paper rating assigned by Duff & 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 U.S. Treasury obligations), a Duff-1 rating
signifies a very high certainty of timely payment (issuer liquidity is
determined to be excellent and risk factors are considered minor) and a Duff-1-
rating denotes high certainty of timely payment (issuer liquidity factors are
strong and risk is very small). A Duff-two 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.
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
very strong safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a strong capacity to pay principal and interest
is denoted by an SP-2 rating.
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IBCA
Obligations supported by the highest capacity for timely repayment are
rated A1+. An A1 rating indicates that the obligation is supported by a very
strong capacity for timely repayment. Obligations rated A2 are supported by a
good capacity for timely repayment, although adverse changes in business,
economic, or financial conditions may affect this capacity.
BONDS
MOODY'S INVESTORS SERVICE
Moody's rates the bonds it judges to be of the best quality as 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 protections, fluctuations of protective elements may
be of greater amplitude or there may be other factors present which make them
appear to be subject to somewhat greater long-term risks.
STANDARD & POOR'S CORPORATION
AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree.
DUFF & PHELPS CREDIT RATING CO.
Duff confers an AAA designation to bonds of issuers with the highest
credit quality. The risk factors associated with these bonds are negligible,
being only slightly more than for risk-free U.S. Treasury debt. AA rated bonds
are of high credit quality and have strong protection factors. The risks
associated with them are modest but may vary slightly from time to time because
of economic conditions.
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 high. TBW-2 is
the second highest category and while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
FINANCIAL STATEMENTS
Each Fund's financial statements and financial highlights for the
fiscal year ended December 31,1996, are included in each Fund's Annual Report,
which are separate reports supplied with this Statement of Additional
Information. Each Fund's financial statements and financial highlights are
incorporated herein by reference.
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CROSS REFERENCE SHEET
STATEMENT OF ADDITIONAL INFORMATION
Schwab Value Advantage Investments
Schwab Municipal Money Fund -- Value Advantage Shares
Schwab California Municipal Money Fund -- Value Advantage Shares
Schwab New York Municipal Money Fund -- Value Advantage Shares
PART B STATEMENT OF ADDITIONAL INFORMATION
ITEM CAPTION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Policies Investment Restrictions
14. Management of the Fund Management of the Trust
15. Control Persons and Principal
Holders of Securities Management of the Trust
16. Investment Advisory and Other
Services Management of the Trust
17. Brokerage Allocation and Other
Practices Portfolio Transactions and Turnover
18. Capital Stock and Other Securities General Information
19. Purchase, Redemption and
Pricing of Securities Being Offered Share Price Calculation; Purchase
and Redemption of Shares
20. Tax Status Distributions and Taxes
21. Underwriters Management of the Trust
22. Calculation of Performance Data Yield
23. Financial Statements Financial Statements
<PAGE> 210
STATEMENT OF ADDITIONAL INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
THE SCHWAB MONEY FUNDS: VALUE ADVANTAGE INVESTMENTS
SCHWAB MUNICIPAL MONEY FUND-VALUE ADVANTAGE SHARES(TM)
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND-VALUE ADVANTAGE SHARES(TM)
SCHWAB NEW YORK MUNICIPAL MONEY FUND-VALUE ADVANTAGE SHARES(TM)
APRIL 30, 1997
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus dated April 30, 1997 (as may be amended
from time to time), for the Value Advantage Shares of the Schwab Municipal Money
Fund (formerly known as Schwab Tax-Exempt Money Fund), Schwab California
Municipal Money Fund (formerly known as Schwab California Tax-Exempt Money
Fund), and Schwab New York Municipal Money Fund (formerly known as 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 Prospectus, please contact Charles
Schwab & Co., Inc. ("Schwab") at 800-2 NO-LOAD, 24 hours a day, or 101
Montgomery Street, San Francisco, California 94104. TDD users may contact Schwab
at 800-345-2550, 24 hours a day. The Prospectus is also available electronically
by using our World Wide Web address:
http://www.schwab.com.
SCHWABFunds(R)
800-2 NO-LOAD
(800-266-5623)
TABLE OF CONTENTS
Page
MUNICIPAL SECURITIES.........................................................2
INVESTMENT RESTRICTIONS......................................................6
MANAGEMENT OF THE TRUST.....................................................11
PORTFOLIO TRANSACTIONS AND TURNOVER.........................................16
DISTRIBUTIONS AND TAXES.....................................................17
SHARE PRICE CALCULATION.....................................................21
HOW THE FUNDS REPORT PERFORMANCE............................................22
GENERAL INFORMATION.........................................................25
PURCHASE AND REDEMPTION OF SHARES...........................................28
OTHER INFORMATION...........................................................28
APPENDIX - RATINGS OF INVESTMENT SECURITIES.................................29
FINANCIAL STATEMENTS........................................................30
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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 are generally classified as "general obligation" or
"revenue." General obligation securities are secured by the issuer's pledge of
its full credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise 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.
Municipal notes are instruments issued by or on behalf of governments and
political sub-divisions thereof. Examples include: tax anticipation notes
("TANS"), which are short-term debt instruments issued by a municipality or
state to finance working capital needs of the issuer in anticipation of
receiving taxes on a future date; revenue anticipation notes ("RANS"), which are
short-term debt instruments issued by a municipality or state to provide cash
prior to receipt of expected non-tax revenues from a specific source; bond
anticipation notes ("BANS"), which are short-term debt instruments issued by a
municipality or state that will be paid off with the proceeds of an upcoming
bond issue; and tax revenue anticipation notes ("TRANS"), which are short-term
debt instruments issued by a municipality or state to finance working capital
needs in anticipation of receiving taxes or other revenues. 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. Tax-free commercial paper is an unsecured
promissory obligation issued or guaranteed by a municipal issuer. The Funds may
purchase other Municipal Securities similar to the foregoing, which are, or may
become available, including securities issued to pre-refund other outstanding
obligations of municipal issuers.
Taxable municipal securities are municipal securities, the interest on
which is not exempt from federal income tax. Taxable municipal securities may
include "private activity
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bonds" that are issued by or on behalf of states or political subdivisions
thereof to finance privately-owned or operated facilities for business and
manufacturing, housing, sports, pollution control and to finance facilities for
charitable institutions. The payment of the principal and interest on private
activity bonds is not backed by a pledge of tax revenues and is dependent solely
on the ability of the facility's user to meet its financial obligations. Taxable
municipal securities also may include remarketed certificates of participation.
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.
RISK FACTORS
Schwab California Municipal Money Fund and Schwab New York Municipal 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, is not 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 before the date of this Statement of Additional Information. The Trust
has not independently verified the accuracy and completeness of the information
contained in those statements and prospectuses.
As used in this section, "California Municipal Securities" include issues
that are secured by a direct payment obligation of the State and obligations of
issuers that rely in whole or in part on State revenues for payment of their
obligations. Part of the State's General Fund surplus is distributed to
counties, cities and their various taxing entities; whether and to what extent a
portion of the State's General Fund will be distributed in the future to them is
unclear.
Overview. After suffering through a severe recession, since the start of
1994 California's economy has been on a steady recovery. Non-farm employment
increased by over 300,000 jobs in 1996. The State's economic expansion is being
fueled by strong growth in high-technology industries, including software,
electronics manufacturing and motion picture production, which have offset the
recession-related losses which were heaviest in aerospace and defense-related
industries, finance, and insurance.
The recession seriously affected State tax revenues and caused an increase
in expenditures for health and welfare programs. As a result, from the late
1980s through 1992-1993, the State experienced recurring budget deficits. During
this period, expenditures exceeded revenues in four out of six years, and the
State accumulated a budget deficit of about $2.8 billion at its peak at June 30,
1993. A further consequence of the large budget imbalances was that the State
depleted its available cash resources and 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 were reduced. Since October 1992,
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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 S&P, "A1" by Moody's Investors Service ("Moody's") and "A+" by
Fitch Investors Service, Inc. ("Fitch"). However, since the start of 1994,
California's economy has been on a steady recovery. Employment grew
significantly in 1994 and 1995, especially in export-related industries,
business services, electronics, entertainment and tourism. Fitch recognized this
rebound by raising the State's rating from "A" to "A+" on February 26, 1996. S&P
followed suit with a rating upgrade from "A" to "A+" on July 30, 1996.
State Appropriations Limit. Subject to certain exceptions, the State is
subject to an annual appropriations limit, imposed by its Constitution, on
"proceeds of taxes." Various expenditures, including but not limited to debt
service on certain bonds and appropriations for qualified capital outlay
projects, are not included in the appropriations limit.
1996-97 FISCAL YEAR
Revenues. The 1996-1997 Budget Act, enacted on July 15, 1996, rejected the
Governor's proposed 15% cut in personal income tax rates (but did include a 5%
cut in bank and corporation tax rates). Revenues for 1996-1997 were estimated to
be $13.3 billion. The 1996-97 Budget Act appropriated a budget reserve of $305
million at June 30, 1997. This budget reserve assumed certain savings in health
and welfare costs and costs relating to illegal immigrants based on changes to
federal law. The amount of the actual savings for 1996-97 may not reach the
assumed amounts, however.
Expenditures. The 1996-97 Budget Act includes General Fund appropriations
of $47.2 billion, a 4% increase over the final estimated 1995-1996 expenditures.
Special Fund expenditures are budgeted at $12.6 billion.
1997-98 FISCAL YEAR
The Governor's proposed budget for 1997-98 projected General Fund revenues
and transfers of about $50.7 billion (a 4.6% increase from revised 1996-97
figures) and expenditures of $50.3 billion (a 3.9% increase from 1996-97), and
also projected a balance in the budget reserve of $553 million on June 30, 1998.
The Governor's proposed budget also projects external cash flow borrowing of
about $3 billion during the year.
The foregoing discussions of the 1996-97 Budget and the proposed 1997-98
Budget are based upon the Budget Act for 1996-97 and the Governor's proposed
1997-98 Budget, respectively, and should not be construed as 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 and other revenues.
With certain exceptions, the maximum ad valorem tax on real property is
limited to 1% of the property's 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; reduced in the event of declining property value caused
by substantial
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damage, destruction or other factors; or adjusted when there is a "change in
ownership" or "new construction."
Proposition 62. This initiative further restricted the ability of local
governments to raise taxes and allocate approved tax receipts. Although some
decisions of the California Courts of Appeal held that parts of Proposition 62
were unconstitutional, the California Supreme Court has upheld Proposition 62's
requirement that special taxes be approved by a two-thirds vote of the voters
voting in an election on the issue. This recent decision may invalidate other
taxes that have been imposed by local governments in California and make it more
difficult for them to raise taxes.
Proposition 218. Passed in November 1996, this initiative places
additional limitations on the ability of California local governments to
increase or impose general taxes, special assessments, and many fees requiring
voter approval of such items. General taxes and many assessments and fees that
were passed without public approval after 1994 and before November 6, 1996 must
now be approved by voters by either July 1, 1997 or November 6, 1998 to continue
in effect.
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 governments are also subject to annual
appropriations limits. If a local government's revenues in any year exceed the
amount permitted to be spent, the excess must be returned to the public through
a revision of tax rates or fee schedules over the 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. California Municipal 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 Municipal 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 four counties. Another 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. Although the State enjoyed good
growth throughout the early to mid-1980's, unemployment continues to be a
problem. The State's economy is highly developed and diverse, with a large
emphasis in service, trade, financial services and real estate; however,
extensive job
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losses in each of these areas has placed a burden on the State to maintain
employment, company development and a stable tax base.
The State has a large accumulated deficit, as reflected in its financial
results. The overall wealth of the State's population, as reflected by its 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 State 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 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 be illustrated by the changes of its debt rating during the last
several years of financial difficulties: Moody's downgraded the State's general
obligation long-term debt from A1 to A in 1990 and further refined the rating to
A2 on February 2, 1997 and S&P downgraded it from A to A- in early 1992. The
State also carries a rating of A+ from Fitch. The short-term rating assigned by
S&P of A1 is within that NRSRO's two highest rating categories. Moody's rating
on New York City general obligation bonds is Baa1, while S&P rates them BBB+.
Schwab New York Municipal 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.
OTHER ISSUES
Repurchase Agreements. If the seller of a repurchase agreement becomes
bankrupt or otherwise defaults, a Fund might incur expenses in enforcing its
rights and could experience losses, including a decline in the value of the
underlying securities and a loss of income. Therefore, a Fund will enter in
repurchase agreements only with banks and other recognized financial
institutions that the Investment Manger deems creditworthy.
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:
(1) May not purchase securities or make investments other than in accordance
with investment objectives and policies.
(2) May not 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 (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 Schwab California Municipal Money Fund
or Schwab New York Municipal 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 7-days.
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<PAGE> 216
(3) May not purchase or retain securities of an issuer if any of the officers,
trustees or directors of the Trust or its Investment Manager individually own
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.
(4) May not 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.
(5) May not invest for the purpose of exercising control or management of
another issuer.
(6) May not 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.
(7) May not 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.
(8) May lend or borrow money to the extent permitted by the Investment Company
Act of 1940 or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
(9) May pledge, mortgage or hypothecate any of its assets to the extent
permitted by the Investment Company Act of 1940 or the rules or regulations
thereunder, as such statute, rules or regulations may be amended from time to
time.
(10) May issue senior securities to the extent permitted by the Investment
Company Act of 1940 or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
(11) May purchase securities of any issuer only when consistent with the
maintenance of its respective status as a diversified company (in the case of
Schwab Municipal Money Fund) or non-diversified company (in the case of Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund) under
the Investment Company Act of 1940 or the rules or regulations thereunder, as
such statute, rules or regulations may be amended from time to time.
THE FOLLOWING RESTRICTIONS ARE NON-FUNDAMENTAL, AND MAY BE CHANGED BY THE
BOARD OF TRUSTEES:
EACH FUND MAY NOT:
(1) 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 Schwab California Municipal Money Fund
and Schwab New York Municipal 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.
(2) 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 Schwab California Municipal Money Fund and Schwab New York
Municipal Money Fund.
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<PAGE> 217
(3) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets.(1)
(4) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and policies).
(5) Borrow money, except from banks for temporary purposes (but not for the
purpose of purchasing 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.
(6) 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.
(7) 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.
(8) Issue senior securities as defined in the 1940 Act.
Except for fundamental restriction (3) and non-fundamental restriction
(5), 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, S&P, Duff and Phelps Credit Rating Co., Fitch, 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 (two
NRSROs are required but one rating suffices if only one NRSRO rates the
security), 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
- ------------
(1) See the description of the Trustees' deferred compensation plan under
"Management of the Trust" on page 11 for an exception to this investment
restriction.
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<PAGE> 218
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) above 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 suffices if only one NRSRO rates the security)
or has been determined by the Investment Manager, pursuant to guidelines adopted
by the Board of Trustees, to be of comparable quality to such a security. A
Second Tier Security is any other Eligible Security.
1940 ACT LIMITATIONS
Fundamental investment restrictions (8), (9), (10) and (11) permit the Funds to
engage in certain investment practices and purchase securities to the extent
permitted by, or consistent with, the 1940 Act. Relevant limitations of the 1940
Act are described below. Each Fund is also subject to more restrictive
non-fundamental investment restrictions. Non-fundamental investment restrictions
may be changed by the Board of Trustees. The Board of Trustees has no current
intention of changing any non-fundamental investment restrictions. Shareholders
would be notified prior to any change in non-fundamental investment
restrictions.
Fundamental investment restriction (8). The 1940 Act presently limits a
Fund's ability to borrow more than one-third of the value of its total assets.
The positions of the SEC staff on the ability of a mutual fund to borrow have
evolved in recent years with the development of new investment practices, such
as reverse repurchase agreements. Fundamental investment restriction (8) allows
each Fund the ability to consider engaging in new investment practices to the
extent permitted by the 1940 Act as interpretations of the 1940 Act are further
developed.
Borrowing by a Fund is a form of leveraging of its portfolio which will
expose it to certain risks. Leveraging will exaggerate the effect of any
increase or decrease in the value of portfolio securities on Fund's net asset
value, and money borrowed will be subject to interest costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the interest received from the securities purchased with
borrowed funds.
The 1940 Act also restricts the ability of any mutual fund to lend. Under
the 1940 Act, a Fund may only make loans if expressly permitted to do so by the
Fund's investment policies; and may not make loans to persons who control or are
under common control with the Fund. Thus, the 1940 Act effectively prohibits a
Fund from making loans to certain persons where conflicts of interest or undue
influence are most likely present. The Funds' may, however, make other loans
which if made would expose shareholders to certain additional risks.
Fundamental investment restriction (9). The 1940 Act, and in particular
certain liquidity restrictions, limit a Fund's ability to pledge, mortgage or
hypothecate its assets. To the extent that pledged assets are encumbered for
more than seven days such assets would be considered illiquid and, therefore,
each Fund's use of such techniques would be limited to 10% of net assets.
Additionally, under the 1940 Act, a Fund is limited to pledging, mortgaging or
hypothecating no more than one-third of its assets.
Fundamental investment restriction (10). The ability of a mutual fund to
issue senior securities, which has evolved somewhat in recent years, is severely
circumscribed by complex regulatory constraints under the 1940 Act, restricting,
for instance, the amount, timing, and form of senior securities that may be
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<PAGE> 219
issued. In addition, portfolio management techniques involving the issuance of
senior securities, such as the purchase of securities on margin, short sales, or
writing puts on portfolio securities, are all techniques that involve the
leveraging of a portfolio and would not be consistent with the current SEC rules
governing money market funds.
Fundamental investment restriction (11). Under Section 5(b) of the 1940
Act, an investment company is diversified if, as to 75% of its total assets, no
more than 5% of the value of its total assets is invested in the securities of a
single issuer and no more than 10% of the issuer's voting securities is held by
the investment company. As non-diversified Funds, Schwab California Municipal
Money Fund and Schwab New York Municipal Money Fund are not subject to this
diversification requirement. However, each of the Funds, including Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund, is
subject to the "per issuer" diversification requirements of the Code. Under the
Code, the 5% "per issuer" limit is applied only to 50% of a Fund's total assets
(not 75% of total assets as under the 1940 Act).
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<PAGE> 220
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 the Investment Manager, are as
follows:
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
CHARLES R. SCHWAB* Chairman and Chairman, Chief Executive Officer
July 29, 1937 Trustee and Director, The Charles Schwab
Corporation; Chairman and Director,
Charles Schwab & Co., Inc. and
Charles Schwab Investment Management,
Inc.; Chairman and Director, The
Charles Schwab Trust Company;
Chairman and Director (current board
positions), and Chairman (officer
position) until December 1995, Mayer
& Schweitzer, Inc. (a securities
brokerage subsidiary of The Charles
Schwab Corporation); Director, The
Gap, Inc. (a clothing retailer),
Transamerica Corporation (a financial
services organization), AirTouch
Communications (a telecommunications
company) and Siebel Systems (a
software company).
TIMOTHY F. McCARTHY* President and Executive Vice President and
September 19, 1951 Trustee President, Financial Products and
International Group, Charles Schwab &
Co., Inc.; Executive Vice President
and President, Financial Products and
International Group, The Charles
Schwab Corporation; Chief Executive
Officer, Charles Schwab Investment
Management, Inc.; President, Chief
Financial Officer and Director,
Charles Schwab Limited; Director,
Mayer & Schweitzer. From 1994 to
1995, Mr. McCarthy was Chief
Executive Officer, Jardine Fleming
Unit Trusts Ltd.; Executive Director,
Jardine Fleming Holdings Ltd.;
Chairman, Jardine Fleming Taiwan
Securities Ltd.; and Director of JF
India and Fleming Flagship, Europe.
Prior to 1994, he was President of
Fidelity Investments Advisor Group, a
division of Fidelity Investments in
Boston.
DONALD F. DORWARD Trustee President and Chief Executive
September 23, 1931 Officer, Dorward & Associates
(advertising and
marketing/consulting).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer
May 15, 1931 and Director, Semloh Financial,
Inc. Semloh Financial is an
international financial services
and investment advisory firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens &
June 28, 1938 Co. (investment banking). Prior
to 1995, Mr. Stephens was Chairman
and Chief Executive Officer of
North American Trust (a real
estate investment trust). Prior
to 1992, Mr. Stephens was Chairman
- -------------
* Mr. Schwab is an "interested person" of the Trust.
* Mr. McCarthy is an "interested person" of the Trust.
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<PAGE> 221
and Chief Executive Officer of the
Bank of San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer
August 18, 1943 and Director, Wilsey Bennett, Inc.
(truck and air transportation,
real estate investment and
management, and investments).
TAI-CHIN TUNG Treasurer and Vice President - Finance, Charles
March 7, 1951 Principal Schwab & Co., Inc.; Controller,
Financial Officer Charles Schwab Investment
Management, Inc. From 1994 to
1996, Ms. Tung was Controller for
Robertson Stephens Investment
Management, Inc. From 1993 to
1994, she was Vice President of
Fund Accounting, Capital Research
and Management Co. Prior to 1993,
Ms. Tung was Senior Vice President
of the Sierra Funds and Chief
Operating Officer of Great Western
Financial Securities.
WILLIAM J. KLIPP* Executive Vice Executive Vice
December 9, 1955 President, Chief President-SchwabFunds(R), Charles
Operating Officer Schwab & Co., Inc.; President and
and Trustee Chief Operating Officer, Charles
Schwab Investment Management, Inc.
Prior to 1993, Mr. Klipp was
Treasurer of Charles Schwab & Co.,
Inc. and Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice Senior Vice President and Chief
April 5, 1955 President and Investment Officer, Charles Schwab
Chief Investment Investment Management, Inc.
Officer
FRANCES COLE Secretary Vice President, Chief Counsel,
September 9, 1955 Chief Compliance Officer and
Assistant Corporate Secretary,
Charles Schwab Investment
Management, Inc.
DAVID H. LUI Assistant Vice President and Senior Counsel,
October 14, 1960 Secretary Charles Schwab Investment
Management, Inc. From 1991 to
1992, he was Assistant Secretary
for the Franklin Group of Mutual
Funds and Assistant Corporate
Counsel of Franklin Resources, Inc.
CHRISTINA M. PERRINO Assistant Vice President and Senior Counsel,
June 16, 1961 Secretary Charles Schwab Investment
Management, Inc. Prior to 1994,
she was Counsel and Assistant
Secretary for North American
Security Life Insurance Company
and Secretary for North American
Funds.
KAREN L. SEAMAN Assistant Corporate Counsel, Charles Schwab
February 27, 1968 Secretary Investment Management, Inc. From
October, 1994 to July 1996, Ms.
Seaman was Attorney for Franklin
Resources, Inc. Prior to 1994,
Ms. Seaman was an attorney for
The Benham Group.
Each of the above-referenced Officers and/or Trustees also serves in the
same capacity as described for the Trust, Schwab Investments, Schwab Capital
Trust and Schwab Annuity Portfolios. The address of each individual listed above
is 101 Montgomery Street, San Francisco, California 94104.
- --------------
* Mr. Klipp is an "interested person" of the Trust.
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<PAGE> 222
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 Fund
Position from the Trust Complex(2) Complex(2) Complex(2)
- --------------- -------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Timothy F. McCarthy, 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice
President, Chief
Operating Officer
and Trustee
Donald F. Dorward, $47,100 N/A N/A $83,950
Trustee
Robert G. Holmes, $47,100 N/A N/A $83,950
Trustee
Donald R. Stephens, $47,100 N/A N/A $83,950
Trustee
Michael W. Wilsey, $47,100 N/A N/A $83,950
Trustee
</TABLE>
(1) Figures are for the Trust's fiscal year ended December 31, 1996.
(2) "Fund Complex" comprises all 29 funds of the Trust, Schwab
Investments, Schwab Capital Trust and Schwab Annuity Portfolios.
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<PAGE> 223
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(R) selected by the
participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, Schwab
Investments and Schwab Capital Trust.
Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. The exemptive relief granted to the Trust permits the
Funds and the Trustees to purchase the Selected SchwabFund Securities, which
transactions would otherwise be limited or prohibited by the investment policies
and/or restrictions of the Funds. See "Investment Restrictions."
INVESTMENT MANAGER
The Investment Manager, a wholly-owned subsidiary of The Charles Schwab
Corporation, serves as the Funds' investment adviser and administrator pursuant
to 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 29 mutual funds with over
$47 billion in assets as of April 1, 1997. The Investment Manager is an
affiliate of Schwab; the Trust's distributor; and the 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 a majority (as defined in the 1940 Act) of the
outstanding voting securities of a Fund. In either event, the continuance must
also be approved by a majority of the Trust's Board of Trustees who are not
parties to the Agreement or interested persons (as defined in the 1940 Act) of
any such party by vote cast in person at a meeting called for the purpose of
voting on such approval. 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, and will terminate automatically upon assignment.
Pursuant to an Advisory Agreement dated June 15, 1994, as may be amended from
time to time, the Investment Manager is entitled to receive an annual fee,
payable monthly, of 0.46% of the Schwab Municipal 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.
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<PAGE> 224
For the fiscal year ended December 31, 1994, 1995, and 1996, the investment
advisory fees paid by the Schwab Municipal Money Fund were $5,421,000 (fees were
reduced by $6,646,000), $6,482,000 (fees were reduced by $7,237,000), and
$8,034,000 (fees were reduced by $8,734,000), respectively.
Pursuant to a separate 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 each of Schwab California Municipal
Money Fund and Schwab New York Municipal Money Fund 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.
For the fiscal year ended December 31, 1994, 1995, and 1996 the investment
advisory fees paid by the Schwab California Municipal Money Fund were $2,254,000
(fees were reduced by $3,274,000), $2,748,000 (fees were reduced by $3,703,000),
and $3,737,000 (fees were reduced by $4,819,000), respectively.
For the Schwab New York Municipal Money Fund, for the period from February
27, 1995 (commencement of operations) to the period ended December 31, 1995, and
the fiscal year ended December 31, 1996, the investment advisory fees paid were
$464,000 (fees were reduced by $277,000), and $535,000 (fees were reduced by
$696,000), respectively.
EXPENSES
The Trust pays the expenses of its operations, including: the fees and
expenses of independent accountants, counsel and the custodian; the cost of
reports and notices to shareholders; the cost of calculating net asset value;
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 the expense is incurred, except that expenses directly
attributable to a particular Fund or class of a Fund 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 of the prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective investors and for supplementary sales
literature and advertising. Schwab receives no fee under the Distribution
Agreement. Terms of continuation, termination and assignment under the
Distribution Agreement are identical to those described above with respect to
the Advisory 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 400 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 each Fund's federal income tax return. Price
Waterhouse LLP also performs other
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<PAGE> 225
professional accounting, auditing, tax and advisory services when the Trust
engages it to do so. Shareholders will be sent audited annual and unaudited
semi-annual financial statements. The address of Price Waterhouse LLP is 555
California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, D.C. 20005, 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;
invest money obtained from the sale of Fund shares; reinvest proceeds from
maturing portfolio securities; and 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 will generally select brokers and dealers for the Funds primarily on the
basis of the quality and reliability of brokerage services, 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.
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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, shareholders will receive dividends in
additional shares unless they elect to receive cash. Dividends will normally be
reinvested monthly in full and fractional Value Advantage Shares of the Fund at
the net asset value on the 15th 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 7 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, allocated to the Value Advantage Shares of that Fund minus (2)
accrued expenses allocated to the Value Advantage Shares of that Fund. If a Fund
realizes any capital gains, they will be distributed at least once during the
year as determined by the Board of Trustees. Any realized 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. 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 each Fund's policy 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, U.S. Government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of any other regulated investment company) or of two or more issuers
that the Fund controls, within the meaning of the Code, and that are engaged in
the same, similar or related trades or businesses. These
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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 a Fund's
investments. If a Fund qualifies as a regulated investment company, it will not
be subject to federal income tax on the part of its net investment income and
net realized capital gains, if any, which it distributes to shareholders,
provided that the Fund meets certain minimum distribution requirements. To
comply with these requirements, a Fund must distribute at least (a) 90% of its
"investment company taxable income" (as that term is defined in the Code) and
(b) 90% of the excess of its tax-exempt interest income over 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.
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.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." This "backup withholding" is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S.
tax liability.
The foregoing discussion relates only to federal income tax law as applicable
to U.S. citizens or residents. Foreign shareholders (i.e., nonresident alien
individuals and foreign corporations, partnerships, trusts and estates) are
generally subject to U.S. withholding tax at the rate of 30% (or a lower tax
treaty rate) on distributions derived from net investment income and short-term
capital gains. Distributions to foreign shareholders of long-term capital gains
and any gains from the sale or other disposition of shares of the Funds are
generally not subject to U.S. taxation, unless the recipient is an individual
who meets the Code's definition of "resident alien." Different tax consequences
may result if the foreign shareholder is engaged in a trade or business within
the United States. In
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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 also may be subject to state, local and foreign taxes,
and its treatment under applicable tax laws may differ from the federal income
tax treatment.
The 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.
A shareholder should consult his or her own tax adviser with respect to
whether exempt-interest dividends would be excludable from gross income if the
shareholder were treated as a "substantial user" of facilities financed by an
obligation held by a Fund or a "related person" to such user under the Code. Any
loss on the sale or exchange of any share held for six months or less will be
disallowed to the extent of the amount of the exempt-interest dividend received
with respect to such share. The U.S. Treasury Department is authorized to issue
regulations reducing the period to not less than 31 days for certain regulated
investment companies, but no such regulations have been issued as of the date of
this Statement of Additional Information.
All or part of interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of a Fund will not be deductible by the
shareholder. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness multiplied by the percentage
of that Fund's total distributions (excluding distributions of the excess of net
long-term capital gains over net short-term capital losses) paid to the
shareholder that are exempt-interest dividends. Under rules used by the Internal
Revenue Service, the purchase of shares of a Fund may be considered to have been
made with borrowed funds even though such funds are not directly traceable to
the purchase of the shares.
The discussion of federal income taxation presented above summarizes only
some of the important federal tax considerations generally affecting purchasers
of Fund shares. No attempt has been made to present a detailed explanation of
the federal income tax treatment of a Fund and its shareholders, and the
discussion is not intended as a substitute for careful tax planning.
Accordingly, prospective investors (particularly those not residing or domiciled
in the United States) should consult their own tax advisers regarding the
consequences of investing in a Fund.
STATE TAXES
With respect to Schwab California Municipal 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 when held by an individual
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<PAGE> 229
("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"). Schwab California Municipal Money Fund intends to
qualify under the above requirement so that it can pay California
exempt-interest dividends. If Schwab California Municipal Money Fund fails to so
qualify, no part of its dividends will be exempt from State of California
personal income tax.
With respect to Schwab New York Municipal 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 State and municipal income taxes in the hands of non-corporate
shareholders ("New York exempt-interest dividends").
Not later than 60 days after the close of its taxable year, Schwab California
and New York Municipal 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 Schwab
California Municipal 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 Schwab California Municipal Money Fund) that are allocable to
such interest. Dividends paid by Schwab California Municipal 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 allocable 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 Schwab
California Municipal Money Fund that would otherwise be available for
distribution as California exempt-interest dividends will be reduced by the
expenses and expenditures be allocable from such amounts.
To the extent, if any, dividends paid to shareholders by Schwab California
Municipal Money Fund or New York Municipal 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 Schwab California Municipal Money Fund or New York Municipal Money Fund is
not deductible for California or New York personal income tax purposes, if the
Fund distributes California or New York exempt-interest dividends, respectively,
to the shareholder during his or her taxable year.
The foregoing is a summary of only some of the important state personal
income tax considerations generally affecting Schwab California Municipal and
New York Municipal Money Funds and their shareholders. No attempt is made to
present a detailed explanation of the state personal income tax treatment of
Schwab California Municipal and New York Municipal Money Funds or their
shareholders, and this discussion is not intended as a substitute for careful
planning. Further, it should be noted that
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the portion of Schwab California Municipal and New York Municipal Money Funds'
dividends constituting California or New York exempt-interest dividends,
respectively, is only excludable from income for State of California or State of
New York personal income tax purposes, respectively.
Any dividends paid to shareholders of the Funds subject to California or New
York franchise or corporate income tax will be taxed as ordinary dividends to
such shareholders, notwithstanding that all or a portion of such dividends is
exempt from California or New York personal income tax. Accordingly, potential
investors in the Schwab California Municipal Money Fund or New York Municipal
Money Fund, including, in particular, corporate investors which may be subject
to California or New York franchise or corporate income 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
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.
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HOW THE FUNDS REPORT PERFORMANCE
The historical performance of the Value Advantage Shares of each Fund may be
shown in the form of total return, yield, effective yield, taxable equivalent
yield and taxable equivalent effective yield. These measures of performance are
described below.
TOTAL RETURN
Standardized Total Return. Average annual total return for a period is
determined by calculating the actual dollar amount of investment return on a
$1,000 investment in a Fund made at the beginning of the period, then
calculating the average annual compounded rate of return that would produce the
same investment return on the $1,000 over the same period. In computing average
annual total return, a Fund assumes the reinvestment of all distributions at net
asset value on applicable reinvestment dates.
Nonstandardized Total Return. Nonstandardized total return for a Fund differs
from standardized total return in that it relates to periods other than the
period for standardized total return and/or that it represents aggregate (rather
than average) total return. In addition, an after-tax total return for each Fund
may be calculated by taking that Fund's standardized or non-standardized total
return and subtracting applicable federal taxes from the portions of each Fund's
total return attributable to capital gains distributions and ordinary income.
This after-tax total return may be compared to that of other mutual funds with
similar investment objectives as reported by independent sources.
Each Fund also may report the percentage of that Fund's standardized or
non-standardized total return which would be paid to taxes annually (at the
applicable federal personal income and capital gains tax rates) before
redemption of Fund shares. This proportion may be compared to that of other
mutual funds with similar investment objectives as reported by independent
sources.
A Fund may also advertise its cumulative total return since inception. This
number is calculated using the same formula that is used for average annual
total return except that, rather than calculating the total return based on a
one-year period, cumulative total return is calculated from inception to the
date specified.
From Commencement of Operations to December 31, 1996
<TABLE>
<CAPTION>
Commencement of Average Annual Cumulative Total One Year Total Return
Operations Total Return Return as of December 31, 1996
---------- ------------ ------ -----------------------
<S> <C> <C> <C> <C>
Schwab Municipal Money
Fund-Value Advantage Shares July 7, 1995 3.24% 4.87% 3.14%
Schwab California Municipal
Money Fund-Value Advantage
Shares October 3, 1995 3.08% 3.87% 3.01%
Schwab New York Municipal
Money Fund-Value Advantage
Shares July 7, 1995 3.10% 4.66% 2.99%
</TABLE>
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YIELD
A Fund's yield refers to the net investment income generated by a
hypothetical investment in the Value Advantage Shares of a Fund over a specific
7-day period. This net investment income is then annualized, which means that
the net investment income generated during the 7-day period is assumed to be
generated in each 7-day period over an annual period, and is shown as a
percentage of the investment.
EFFECTIVE YIELD
A Fund's 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.
TAXABLE EQUIVALENT YIELD AND
TAXABLE EQUIVALENT EFFECTIVE YIELD
The taxable equivalent yield of the Value Advantage Shares of the Schwab
Municipal Money 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 taxable equivalent yield of the Value Advantage Shares of the
Schwab California Municipal 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 9.3%,
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 taxable equivalent yield of the Value Advantage Shares of Schwab New York
Municipal 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 6.85% and the New
York City municipal marginal rate of 4.457%, 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.
Taxable equivalent effective yields are computed in the same manner as
taxable equivalent yields, except that effective yield is substituted for yield
in the calculation. In calculating taxable equivalent yields and effective
yields, Schwab Municipal Money Fund generally assumes an effective tax rate of
39.6%, Schwab California Municipal Money Fund generally assumes an effective tax
rate (combining the federal 39.6% rate and the California 9.30% rate, and
assuming the taxpayer deducts California state taxes paid) of 45.22%, and Schwab
New York Municipal Money Fund generally assumes an effective tax rate (combining
the federal 39.6% rate, the New York state 6.85%, rate and the New York City
municipal 4.457%, rate, and assuming the taxpayer deducts New York state and New
York City municipal taxes paid) of 46.43%. Investors in Schwab New York
Municipal Money Fund should understand that, under legislation enacted in New
York State and New York City, the maximum effective tax rates for 1998 and 1999
will be 44.89% and 44.58%, respectively. 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
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deductions and California exemption credits that may result from the receipt of
additional taxable income by single taxpayers or married taxpayers filing
jointly with adjusted gross incomes exceeding certain levels $121,200, ($60,600
for married filing separate returns) in 1997). Actual taxable equivalent yields
and taxable 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 taxable equivalent yield or
taxable equivalent effective yield, simply divide the yield or effective yield
of the Value Advantage Shares of a Fund by one minus your marginal federal tax
rate (or combined state and federal tax rate in the case of Schwab California
Municipal Money Fund, or combined municipal, state, and federal tax rate in the
case of Schwab New York Municipal 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.
Performance information for each of the Funds for the 7-day period ended
December 31, 1996 is presented below. The taxable equivalent yield and taxable
equivalent effective yield figures are based, in the case of Schwab Municipal
Money Fund, upon an assumed 1996 effective tax rate of 39.6%; in the case of
Schwab California Municipal Money Fund, upon an assumed effective tax rate of
45.22%; and in the case of Schwab New York Municipal Money Fund, upon an assumed
effective tax rate of 46.27%. The yields below are based on the maximum rates in
effect for 1996. Tax rates in effect for 1997 are different. See the discussion
above relating to federal, State of California and State of New York tax rates.
<TABLE>
<CAPTION>
Taxable
Taxable Equivalent
Yield Effective Yield Equivalent Yield Effective Yield
----- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Schwab Municipal Money
Fund-Value Advantage Shares 3.50% 3.56% 5.79% 5.89%
Value Advantage Shares
Schwab California Municipal Money 3.40% 3.46% 6.21% 6.32%
Fund-Value Advantage Shares
Schwab New York Municipal Money 3.39% 3.45% 6.31% 6.42%
Fund-Value Advantage Shares
</TABLE>
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GENERAL INFORMATION
The Trust generally is not required to hold shareholder meetings. However, as
provided in its Agreement and Declaration of Trust and Bylaws, shareholder
meetings will be held in connection with the following matters: (1) 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)
determination of 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 ten or more shareholders, who have been such for
at least six months and who hold shares constituting at least 1% of the Trust's
outstanding shares, stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more Trustees, the Trust has undertaken to
disseminate appropriate materials at the expense of the requesting shareholders.
The Bylaws provide that a majority of shares entitled to vote shall be a
quorum for the transaction of business at a shareholders' meeting, except that
where any provision of law, of the Declaration of Trust or of the Bylaws permits
or requires that (i) holders of any series shall vote as a series, then a
majority of the aggregate number of shares of that series entitled to vote shall
be necessary to constitute a quorum for the transaction of business by that
series, or (ii) holders of any class shall vote as a class, then a majority of
the aggregate number of shares of that class entitled to vote shall be necessary
to constitute a quorum for the transaction of business by that class. Any lesser
number shall be sufficient for adjournments. Any adjourned session or sessions
may be held, within a reasonable time after the date set for the original
meeting, without the necessity of further notice. The Declaration of Trust
specifically authorizes the Board of Trustees to terminate the Trust (or any of
its investment portfolios) by notice to the shareholders without shareholder
approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain
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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 April 14, 1997, there were no persons directly or beneficially that
owned 5% or more of each Fund's Value Advantage Shares.
As of April 14, 1997, the officers and Trustees of the Trust, as a group,
owned of record or beneficially less than 1% of the outstanding voting
securities of the remaining series of the Trust.
ACCESS TO SCHWAB'S MUTUAL
FUND ONESOURCE(R) SERVICE
With Schwab's Mutual Fund OneSource Service ("OneSource"), a shareholder can
invest in over 650 mutual funds from many fund companies, subject to the
following. Schwab's standard transaction fee will be charged on each redemption
of fund shares held for 90 days or less to discourage short-term trading. Mutual
fund shares held for more than 90 days are exempt from the short-term redemption
policy and may be sold without penalty. Up to 15 short-term redemption of fund
shares per calendar year are permitted. If you exceed this number, you will no
longer be able to buy or sell fund shares without paying a transaction fee. As a
courtesy, we will notify you in advance if your short-term redemptions are
nearing the point where all of your future trades will be subject to transaction
fees. Schwab reserves the right to modify OneSource's terms and conditions at
any time. For more information, a shareholder should contact his or her Schwab
office during its regular business hours or call 800-2 NO-LOAD, 24 hours a day.
-26-
<PAGE> 236
SCHWABFUNDS(R)
SchwabFunds offers a variety of series and classes of shares of beneficial
interest to help you with your investment needs.
EQUITY FUNDS
Schwab 1000 Fund(R)-Investor Shares(1)
Schwab 1000 Fund-Select Shares(1)
Schwab International Index Fund(R)-Investor Shares(2)
Schwab International Index Fund-Select Shares(2)
Schwab Small-Cap Index Fund(R)-Investor Shares(2)
Schwab Small-Cap Index Fund-Select Shares(2)
Schwab Asset Director(R)-High Growth Fund(2)
Schwab Asset Director(R)-Balanced Growth Fund(2)
Schwab Asset Director(R)-Conservative Growth Fund(2)
Schwab S&P 500 Fund-Investor Shares(2)
Schwab S&P 500 Fund-e.Shares(TM)(2),(3)
Schwab S&P 500 Fund-Select Shares(2)
Schwab Analytics Fund(TM)(2)
Schwab OneSource Portfolios-International(2),(7)
Schwab OneSource Portfolios-Growth Allocation(2),(7)
Schwab OneSource Portfolios-Balanced Allocation(2),(7)
FIXED INCOME FUNDS(1)
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund(4)
Schwab California Long-Term Tax-Free Bond Fund(4)
MONEY MARKET FUNDS(5)
Schwab Money Market Fund
Schwab Government Money Fund
Schwab Institutional Advantage Money Fund(R)(6)
Schwab Retirement Money Fund(R)(6)
Schwab U.S. Treasury Money Fund
Schwab Value Advantage Money Fund(R)-Investor Shares
Schwab Value Advantage Money Fund-Sweep Shares
Schwab Municipal Money Fund-Sweep Shares
Schwab Municipal Money Fund-Value Advantage Shares(TM)
Schwab California Municipal Money Fund-Sweep Shares
Schwab California Municipal Money Fund-Value Advantage Shares(TM)
Schwab New York Municipal Money Fund-Sweep Shares
Schwab New York Municipal Money Fund-Value Advantage Shares(TM)
(1) The Schwab 1000 Fund and all fixed income funds are separate investment
portfolios of Schwab Investments.
(2) The Funds are separate investment portfolios or classes of shares of
Schwab Capital Trust.
(3) Available only through SchwabLink(R).
(4) Available only to California residents and residents of selected other
states.
(5) All listed money market funds are separate investment portfolios of the
Trust.
(6) Designed for institutional investors only.
(7) The Asset Director Funds may not invest in these funds.
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<PAGE> 237
PURCHASE AND REDEMPTION OF SHARES
The minimum initial investment for the Value Advantage Shares of each Fund is
$25,000 and subsequent minimum investments of $5,000 or more may be made. These
minimum requirements may be changed at any time and are not applicable to
certain types of investors. The Trust may waive the minimums for purchases by
Trustees, Directors, officers or employees of the Trust, Schwab or the
Investment Manager. The Trust has made an election with the SEC to pay 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, as amended, 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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<PAGE> 238
APPENDIX - RATINGS OF INVESTMENT SECURITIES
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers
(or related supporting institutions) of commercial paper with this rating are
considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
An S&P A-1 commercial paper rating indicates a strong degree of safety
regarding timely payment of principal and interest. Issues determined to possess
overwhelming safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
Duff-1 is the highest commercial paper rating assigned by Duff & 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 U.S. Treasury obligations), a Duff-1 rating
signifies a very high certainty of timely payment (issuer liquidity is
determined to be excellent and risk factors are considered minor) and a Duff-1
rating denotes high certainty of timely payment (issuer liquidity factors are
strong and risk is very small). A Duff-2 rating indicates a good certainty of
timely payment; liquidity factors and company fundamentals are sound and risk
factors are small.
FITCH 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.
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 very
strong safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a satisfactory capacity to pay principal and
interest is denoted by an SP-2 rating.
-29-
<PAGE> 239
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 by a good 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 as Aaa. These
bonds carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or extraordinarily
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of these issues. Bonds carrying an Aa
designation are deemed to be of high quality by all standards. Together with Aaa
rated bonds, they comprise what are generally known as high grade bonds. Aa
bonds are rated lower than the best bonds because they may enjoy relatively
lower margins of protection, fluctuations of protective elements may be of
greater amplitude or there may be other factors present which make them appear
to be subject to somewhat greater long-term risks.
STANDARD & POOR'S CORPORATION
AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree.
DUFF & PHELPS CREDIT RATING CO.
Duff confers an AAA designation to bonds of issuers with the highest credit
quality. The risk factors associated with these bonds are negligible, being only
slightly more than for risk-free U.S. Treasury debt. AA rated bonds are of high
credit quality and have strong protection factors. The risks associated with
them are modest but may vary slightly from time to time because of economic
conditions.
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 high. TBW-2 is the second
highest category and while the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as high
as for issues rated TBW-1.
FINANCIAL STATEMENTS
Each Fund's financial statements and financial highlights for the fiscal year
ended December 31, 1996, are included in each Fund's Annual Report, which are
separate reports supplied with this Statement of Additional Information. Each
Fund's financial statements and financial highlights are incorporated herein by
reference.
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<PAGE> 240
CROSS REFERENCE SHEET
STATEMENT OF ADDITIONAL INFORMATION
Schwab Value Advantage Money Fund -- Investor Shares
PART B STATEMENT OF ADDITIONAL INFORMATION
ITEM CAPTION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Policies Investment Restrictions
14. Management of the Fund Management of the Trust
15. Control Persons and Principal
Holders of Securities Management of the Trust
16. Investment Advisory and Other
Services Management of the Trust
17. Brokerage Allocation and Other
Practices Portfolio Transactions and Turnover
18. Capital Stock and Other Securities General Information
19. Purchase, Redemption and
Pricing of Securities Being Offered Share Price Calculation; Purchase
and Redemption of Shares
20. Tax Status Distributions and Taxes
21. Underwriters Management of the Trust
22. Calculation of Performance Data Yield
23. Financial Statements Financial Statements
<PAGE> 241
STATEMENT OF ADDITIONAL INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
101 Montgomery Street, San Francisco, CA 94104
SCHWAB VALUE ADVANTAGE MONEY FUND(R)-INVESTOR SHARES
APRIL 30, 1997
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus dated April 30, 1997 (as may be
amended from time to time) for the Investor Shares of the Schwab Value Advantage
Money Fund (the "Fund"), a separately managed investment portfolio of The
Charles Schwab Family of Funds (the "Schwab Fund Family" or the "Trust"). This
Statement of Additional Information relates to the Investor Shares of the Fund.
Prior to April 30, 1997 the Fund was not offered in multiple classes of shares.
The existing shares of the Fund are redesignated as Investor Shares. To obtain a
copy of the Prospectus, please contact Charles Schwab & Co., Inc. ("Schwab") at
800-2 NO-LOAD, 24 hours a day, or 101 Montgomery Street, San Francisco, CA
94104. TDD users may contact Schwab at 800-345-2550, 24 hours a day. The
Prospectus may be available electronically by using our World Wide Web address:
http://www.schwab.com.
SCHWABFunds(R)
800-2 NO-LOAD
(800-266-5623)
TABLE OF CONTENTS
Page
----
INVESTMENT RESTRICTIONS.................................................... 2
INVESTMENT SECURITIES...................................................... 4
MANAGEMENT OF THE TRUST.................................................... 6
PORTFOLIO TRANSACTIONS AND TURNOVER........................................ 11
DISTRIBUTIONS AND TAXES.................................................... 12
SHARE PRICE CALCULATION.................................................... 14
HOW THE FUND REPORTS PERFORMANCE........................................... 15
GENERAL INFORMATION........................................................ 16
PURCHASE AND REDEMPTION OF SHARES.......................................... 20
OTHER INFORMATION.......................................................... 20
APPENDIX - RATINGS OF INVESTMENT SECURITIES................................ 21
FINANCIAL STATEMENTS....................................................... 23
<PAGE> 242
INVESTMENT RESTRICTIONS
EXCEPT AS NOTED, THE RESTRICTIONS SET FORTH 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.
THE FUND MAY NOT:
(1) 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.
(2) Invest in commodities or commodity contracts, including futures contracts,
or in real estate, although it may invest in securities which are secured by
real estate and securities of issuers which invest or deal in real estate.
(3) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that the Fund reserves freedom of action to invest up to 100%
of its assets in certificates of deposit or bankers' acceptances issued by U.S.
banks and U.S. branches of those foreign banks which the Investment Manager has
determined to be subject to the same regulation as U. S. banks, or obligations
of or guaranteed by the U.S. Government, its agencies or instrumentalities.
(4) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and policies).
(5) Issue senior securities as defined in the 1940 Act.
(6) May purchase securities of any issuer only when consistent with the
maintenance of its respective status as a diversified company under the
Investment Company Act of 1940 or the rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to time.
(7) May borrow money to the extent permitted by the Investment Company Act of
1940 or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
THE FOLLOWING RESTRICTIONS ARE NON-FUNDAMENTAL AND MAY BE CHANGED BY
THE BOARD OF TRUSTEES.
THE FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the United States Government, its agencies or instrumentalities) if, as a
result, more than 5% of the value of its assets would be invested in securities
of that issuer.
(2) Invest more than 10% of its net assets in illiquid securities, including
repurchase agreements maturing in more than 7-days.
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<PAGE> 243
(3) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Schwab Fund Family or the Investment Manager
beneficially own more than 1/2 of 1% of the securities of such issuer, and
together beneficially own more than 5% of the securities of such issuer.
(4) Invest for the purpose of exercising control or management of another
issuer.
(5) Purchase securities of other investment companies, except in connection with
a merger, consolidation, reorganization or acquisition of assets.(1)
(6) Write, purchase or sell puts, calls or combinations thereof.
(7) Make short sales of securities or purchase any securities on margin, except
to obtain such short-term credits as may be necessary for the clearance of
transactions.
(8) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in the securities of issuers which invest in or
sponsor such programs. Except as otherwise noted, if a percentage restriction is
adhered to at the time of investment, a later increase in percentage beyond the
specified limit resulting from a change in values or net assets will not be
considered a violation.
Except for fundamental investment restriction (7) and non-fundamental
investment restriction (3), 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.
1940 ACT LIMITATIONS
Fundamental investment restrictions (6) and (7) permit the Fund to
engage in certain investment practices and purchase securities to the extent
permitted by, or consistent with, the 1940 Act. Relevant limitations of the 1940
Act are described below. The Fund is also subject to more restrictive
non-fundamental investment restrictions. Non-fundamental investment restrictions
may be changed by the Board of Trustees. The Board of Trustees has no current
intention of changing any non-fundamental investment restrictions. Shareholders
would be notified prior to any change in non-fundamental investment
restrictions.
Fundamental investment restriction (7). The 1940 Act presently limits
the Fund's ability to borrow more than one-third of the value of its total
assets. The positions of the SEC staff on the ability of a mutual fund to borrow
have evolved in recent years with the development of new investment practices,
such as reverse repurchase agreements. Fundamental investment restriction (8)
allows each Fund the ability to consider engaging in new investment practices to
the extent permitted by the 1940 Act as interpretations of the 1940 Act are
further developed.
Borrowing by the Fund is a form of leveraging of its portfolio which
will expose it to certain risks. Leveraging will exaggerate the effect of any
increase or decrease in the value of portfolio securities on the Fund's net
asset value, and money borrowed will be subject to interest costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the interest received from the securities purchased
with borrowed funds.
- ----------
(1) See the description of the Trustees' deferred compensation plan under
"Management of the Trust" on page 6 for an exception to this investment
restriction.
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<PAGE> 244
The 1940 Act also restricts the ability of any mutual fund to lend.
Under the 1940 Act, the Fund may only make loans if expressly permitted to do so
by the Fund's investment policies, and the Fund may not make loans to persons
who control or are under common control with the Fund. Thus, the 1940 Act
effectively prohibits the Fund from making loans to certain persons when
conflicts of interest or undue influence are most likely present. The Funds may,
however, make other loans which, if made would expose shareholders to certain
additional risks.
Fundamental investment restriction (6). Under Section 5(b) of the 1940
Act, an investment company is diversified if, as to 75% of its total assets, no
more than 5% of the value of its total assets is invested in the securities of a
single issuer and no more than 10% of the issuer's voting securities is held by
the investment company. The Fund is also subject to the "per issuer"
diversification requirements of the Code. Under the Code, the 5% "per issuer"
limit is applied only to 50% of a Fund's total assets (not 75% of total assets
as under the 1940 Act).
INVESTMENT SECURITIES
The Fund will only purchase securities that present minimal credit
risks and which are First Tier or Second Tier Securities (otherwise referred to
"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 Credit Inc., Fitch Investors Services, Inc., Thomson Bankwatch; and, IBCA
Limited and its affiliate, IBCA, Inc. 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) 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 an 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) above and to represent minimal
credit risks.
A First Tier Security is any Eligible Security which 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 the Board of Trustees, to be of comparable quality to such
a security. A Second Tier Security is any other Eligible Security.
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<PAGE> 245
The Fund will limit its investments in the First Tier Securities of any
one issuer to no more than five percent of its assets. (Repurchase agreements
collateralized by non-Government securities will be taken into account when
making this calculation.) Moreover, the Fund's total holdings of Second Tier
Securities will not exceed 5% of its assets, with investment in the Second Tier
Securities of any one issuer being limited to the greater of 1% of the Fund's
assets or $1 million. In addition, the underlying securities involved in
repurchase agreements collateralized by non-Government securities will be First
Tier Securities at the time the repurchase agreements are executed.
ASSET-BACKED COMMERCIAL PAPER AND OTHER SECURITIES
The Schwab Value Advantage Money Fund(R) can invest a portion of its
assets in asset-backed commercial paper and other money market fund Eligible
Securities (as that term is defined). Repayment of these securities is intended
to be obtained from an identified pool of assets, typically receivables related
to a particular industry, such as asset-backed securities related to credit card
receivables, automobile receivables, trade receivables or diversified financial
assets. Each of the Funds has identified asset-backed securities related to the
industries mentioned above and each Fund intends to limit its investments in
each such industry to 25% of its total assets. The credit quality of most
asset-backed commercial paper depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator (or any other affiliated
entities), and the amount and quality of any credit support provided to the
securities.
Asset-backed commercial paper is often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two classes: liquidity protection and protection against ultimate default
on the underlying assets. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that scheduled payments on the underlying pool are made in a timely fashion.
Protection against ultimate default ensures payment on at least a portion of the
assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction, or through a combination of such
approaches. The degree of credit support provided on each issue is based
generally on historical information respecting the level of credit risk
associated with such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-backed security.
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<PAGE> 246
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 the Investment Manager, are as
follows:
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Chairman, Chief Executive
July 29, 1937 Trustee Officer and Director, The
Charles Schwab Corporation;
Chairman and Director, Charles
Schwab & Co., Inc. and Charles
Schwab Investment Management, Inc.;
Chairman and Director, The Charles
Schwab Trust Company; Chairman and
Director (current board positions),
and Chairman (officer position)
until December 1995, Mayer &
Schweitzer, Inc. (a securities
brokerage subsidiary of The Charles
Schwab Corporation); Director, The
Gap, Inc. (a clothing retailer),
Transamerica Corporation (a
financial services organization),
AirTouch Communications (a
telecommunications company) and
Siebel Systems (a software
company).
TIMOTHY F. McCARTHY* President and Executive Vice President and
September 19, 1951 Trustee President, Financial Products
and International Group, Charles
Schwab & Co., Inc.; Executive Vice
President and President, Financial
Products and International Group,
The Charles Schwab Corporation;
Chief Executive Officer, Charles
Schwab Investment Management, Inc.;
Vice Chairman and Chief Operating
Officer, Charles Schwab Limited;
Director, Mayer & Schweitzer. From
1994 to 1995, Mr. McCarthy was
Chief Executive Officer, Jardine
Fleming Unit Trusts Ltd.; Executive
Director, Jardine Fleming Holdings
Ltd.; Chairman, Jardine Fleming
Taiwan Securities Ltd.; and
Director of JF India and Fleming
Flagship, Europe. Prior to 1994, he
was President of Fidelity
Investments Advisor Group, a
division of Fidelity Investments in
Boston.
</TABLE>
- ----------
* Mr. Schwab is an "interested person" of the Trust.
* Mr. McCarthy is an "interested person" of the Trust.
-6-
<PAGE> 247
<TABLE>
<CAPTION>
<S> <C> <C>
DONALD F. DORWARD Trustee President and Chief Executive
September 23, 1931 Officer, Dorward & Associates
(advertising and
marketing/consulting).
ROBERT G. HOLMES Trustee Chairman, Chief Executive
May 15, 1931 Officer and Director, Semloh
Financial, Inc. Semloh
Financial is an international
financial services and
investment advisory firm.
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens
June 28, 1938 & Co. (investment banking).
Prior to 1995, Mr. Stephens has
been Chairman and Chief Executive
Officer of North American Trust (a
real estate investment trust).
Prior to 1992, Mr. Stephens was
Chairman and Chief Executive
Officer of the Bank of San
Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive
August 18, 1943 Officer and Director, Wilsey
Bennett, Inc. (truck and air
transportation, real estate
investment and management, and
investments).
TAI-CHIN TUNG Treasurer and Vice President - Finance,
March 7, 1951 Principal Charles Schwab & Co., Inc.;
Financial Officer Controller, Charles Schwab
Investment Management, Inc.
From 1994 to 1996, Ms. Tung was
Controller for Robertson
Stephens Investment Management,
Inc. From 1993 to 1994, she was
Vice President of Fund
Accounting, Capital Research and
Management Co. Prior to 1993,
Ms. Tung was Senior Vice
President of the Sierra Funds
and Chief Operating Officer of
Great Western Financial
Securities.
WILLIAM J. KLIPP* Executive Vice Executive Vice
December 9, 1955 President, Chief President-SchwabFunds, Charles
Operating Schwab & Co., Inc.; President
Officer and and Chief Operating Officer,
Trustee Charles Schwab Investment
Management, Inc. Prior to 1993,
Mr. Klipp was Treasurer of
Charles Schwab & Co., Inc. and
Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice Senior Vice President and Chief
April 5, 1955 President and Investment Officer, Charles
Chief Investment Schwab Investment Management,
Officer Inc.
</TABLE>
- ----------
* Mr. Klipp is an "interested person" of the Trust.
-7-
<PAGE> 248
<TABLE>
<CAPTION>
<S> <C> <C>
FRANCES COLE Secretary Vice President, Chief Counsel,
September 9, 1955 Chief Compliance Officer and
Assistant Corporate Secretary,
Charles Schwab Investment
Management, Inc.
DAVID H. LUI Assistant Vice President and Senior
October 14, 1960 Secretary Counsel - Charles Schwab
Investment Management, Inc.
Prior to 1992, he was Assistant
Secretary and Assistant
Corporate Counsel for the
Franklin Group of Mutual Funds.
CHRISTINA M. PERRINO Assistant Vice President and Senior
June 16, 1961 Secretary Counsel - Charles Schwab
Investment Management, Inc.
Prior to 1994, she was Counsel
and Assistant Secretary for
North American Security Life
Insurance Company and Secretary
for North American Funds.
KAREN L. SEAMAN Assistant Corporate Counsel - Charles
February 27, 1968 Secretary Schwab Investment Management,
Inc. From October 1994 to July
1996, Ms. Seaman was Attorney
for Franklin Resources, Inc.
Prior to 1994, Ms. Seaman was an
attorney for The Benham Group.
</TABLE>
Each of the above-referenced individuals also serves in the same
capacity as described for the Trust, Schwab Investments, Schwab Capital Trust,
Schwab Annuity Portfolios, and Schwab Advantage Trust (which has not commenced
operations). The address of each individual listed above is 101 Montgomery
Street, San Francisco, California 94104.
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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 Fund
Position from the Trust Complex(2) Complex(2) Complex(2)
- -------------------- -------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Timothy F. McCarthy, 0 N/A N/A 0
President and
Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice
President, Chief
Operating Officer
and Trustee
Donald F. Dorward, $47,100 N/A N/A $83,950
Trustee
Robert G. Holmes, $47,100 N/A N/A $83,950
Trustee
Donald R. Stephens, $47,100 N/A N/A $83,950
Trustee
Michael W. Wilsey, $47,100 N/A N/A $83,950
Trustee
</TABLE>
(1) Figures are for the Trust's fiscal year ended December 31,
1996.
(2) "Fund Complex" comprises all 29 funds of the Trust, Schwab
Investments, Schwab Capital Trust and Schwab Annuity
Portfolios.
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
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equal to the value the Account would have had as of that date, if the amounts
credited to the Account had been invested and reinvested in the securities of
the SchwabFund or SchwabFunds(R) selected by the participating Trustee (the
"Selected SchwabFund Securities"). "SchwabFunds" include the series or classes
of shares of beneficial interest of the Trust, Schwab Investments, Schwab
Capital Trust, and Schwab Advantage Trust (which has not 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
Fund's investment adviser and administrator pursuant to an Investment Advisory
and Administration Agreement (the "Advisory Agreement") between it and the
Trust. The Investment Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended and currently provides investment
management services to the SchwabFunds(R), a family of 29 mutual funds with over
$47 billion in assets as of April 1, 1997. The Investment Manager is an
affiliate of Schwab, the Trust's distributor and shareholder services and
transfer agent.
The 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. The Advisory Agreement may be
terminated at any time upon 60 days notice by either party, or by a majority
vote of the outstanding shares of a Fund subject thereto, and will terminate
automatically upon assignment.
Pursuant to the Advisory Agreement, the Investment Manager is entitled
to receive a graduated annual fee, payable monthly, of 0.46% of the Fund's
average daily net assets not in excess of $1 billion, 0.45% of such net assets
over $1 billion but not in excess of $3 billion, 0.40% of such net assets over
$3 billion but not in excess of $10 billion, 0.37% of such net assets in excess
of $10 billion but not in excess of $20 billion and 0.34% of such net assets
over $20 billion.
For the fiscal years ended December 31, 1994, 1995, and 1996, the
investment advisory and administration fees paid by the Fund were $2,144,000
(fees were reduced by $6,741,000), $15,877,000 (fees were reduced by
$7,922,000), and $30,667,000 (fees were reduced by $6,081,000), respectively.
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.
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<PAGE> 251
The Trust's expenses generally are allocated among the Funds on the basis of
relative net assets at the time the expense is incurred, 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 its
prospectus 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 400 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 each Fund's federal income tax return. Price
Waterhouse LLP also performs other professional accounting, auditing, tax and
advisory services when engaged to do so by the Trust. Shareholders will be sent
audited annual and unaudited semi-annual financial statements. The address of
Price Waterhouse LLP is 555 California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, 1301 K Street, N.W., Suite 800 East, Washington, D.C.
20005, is counsel to the Trust.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the
objective of the 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 the 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 the Fund, seeks to obtain best price and
execution. Subject to the supervision of the Board of Trustees, the Investment
Manager generally selects broker-dealers primarily on the basis of the quality
and reliability of services
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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 the 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 the 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 the Fund. However, it is the
opinion of the Board of Trustees that the benefits conferred by the Investment
Manager outweigh any disadvantages that may arise from exposure to simultaneous
transactions.
PORTFOLIO TURNOVER
Because securities with maturities of less than one year are excluded
from required portfolio turnover rate calculations, the Fund's portfolio
turnover rate for reporting purposes is expected to be zero.
DISTRIBUTIONS AND TAXES
On each day that the net asset value per share of the Fund is
determined ("Business Day"), the Fund's net investment income will be declared
as of the close of trading on the New York Stock Exchange (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. Shareholders will
receive dividends in additional shares unless they elect to receive cash.
Dividends will normally be reinvested monthly in full and fractional shares of
the Fund at the net asset value on the 15th 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. The Fund
will pay shareholders who redeem all of their shares all dividends accrued to
the time of the redemption within 7 days.
The Fund calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of the Fund consists of: (1)
accrued interest income, plus or minus amortized discount or premium, minus (2)
accrued expenses allocated to the Fund. If the Fund realizes any capital gains,
they will be distributed at least once during the year as determined by the
Board of Trustees. Any realized capital losses, to the extent not offset by
realized capital gains, will
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<PAGE> 253
be carried forward. It is not anticipated that the Fund will realize any
long-term capital gains. Expenses of the Trust are accrued each day. Should the
net asset value of the 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 distributions.
FEDERAL INCOME TAXES
It is the policy of the 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, the
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, the Fund must,
among other things, (1) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks, securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
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 the Fund qualifies as a regulated investment company,
it will not be subject to federal income tax on the part of its net investment
income and net realized capital gains, if any, which it distributes to
shareholders, provided that the Fund distributes during its taxable year at
least 90% of its "investment company taxable income" (as defined in the Code).
The Fund intends to make sufficient distributions to shareholders to meet this
requirement.
If the 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. The Fund intends
generally to make distributions sufficient to avoid imposition of this excise
tax.
Any distribution declared in October, November or December to
shareholders of record during those months and paid during the following January
is treated, for tax purposes, as if it were received by each shareholder on
December 31 of the year declared . The 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 Fund does not expect to realize any significant amount of long-term
capital gain. However, any distributions of long-term capital gain will be
taxable to shareholders as long-term capital gain, regardless of how long a
shareholder has held the Fund's shares. If a shareholder
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<PAGE> 254
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.
The Fund may engage in investment techniques that may alter the timing
and character of the Fund's income. The Fund may be restricted in its use of
these techniques by rules relating to its qualification as a regulated
investment company.
The 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 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 distributions derived from net investment income and
short-term capital gains. Distributions to foreign shareholders of long-term
capital gains and any gains from the sale or disposition of shares of the Fund
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 the 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 discussion of federal income taxation presented above only
summarizes some of the important federal tax considerations generally affecting
purchasers of shares of the Fund. No attempt has been made to present a detailed
explanation of the federal income tax treatment of the 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 the Fund.
SHARE PRICE CALCULATION
The 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 the 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%
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<PAGE> 255
or more were to occur between the net asset value per share calculated by
reference to market values and the Fund's $1.00 per share net asset value, 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 Fund's net asset value per share (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. 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 the Fund's net asset value per share (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.
HOW THE FUND REPORTS PERFORMANCE
The historical performance of the Fund may be shown in the form of
total return, yield and effective yield. These measures of performance are
described below.
STANDARDIZED TOTAL RETURN
Average annual total return for a period is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in the Fund
made at the beginning of the period, then calculating the average annual
compounded rate of return that would produce the same investment return on the
$1,000 over the same period. In computing average annual total return, the Fund
assumes the reinvestment of all distributions at net asset value on applicable
reinvestment dates.
NONSTANDARDIZED TOTAL RETURN
Nonstandardized total return for the Fund differs from standardized
total return in that it relates to periods other than the period for
standardized total return and/or that it represents aggregate (rather than
average) total return.
In addition, an after-tax total return for the Fund may be calculated
by taking the Fund's standardized or non-standardized total return and
subtracting applicable federal taxes from the portions of the Fund's total
return attributable to capital gains distributions and ordinary income. This
after-tax total return may be compared to that of other mutual funds with
similar investment objectives as reported by independent sources.
The Fund may also advertise its cumulative total return since
inception. This number is calculated using the same formula that is used for
average annual total return except that, rather than calculating the total
return based on a one-year period, cumulative total return is calculated from
inception to the date specified.
The Fund's average annual and cumulative total return since inception
(April 30, 1992 through December 31, 1996) was 4.38% and 22.21%, and its one
year total return as of December 31, 1996 was 5.26%.
YIELD
Yield refers to the net investment income generated by a hypothetical
investment in the 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. The Fund's 7-day
yield for the period ended December 31, 1996 was 5.14%.
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. The Fund's 7-day effective yield for the period ended December 31, 1996
was 5.27%.
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 the 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 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.
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<PAGE> 257
The Bylaws provide that a majority of shares entitled to vote shall be
a quorum for the transaction of business at a shareholders' meeting, except that
where any provision of law, of the Declaration of Trust or of these Bylaws
permits or requires that (i) holders of any series shall vote as a series, then
a majority of the aggregate number of shares of that series entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that series; or (ii) holders of any class shall vote as a class, then a majority
of the aggregate number of shares of that class entitled to vote shall be
necessary to constitute a quorum for the transaction of business by that class.
Any lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting, without the necessity of further notice. The Declaration of
Trust specifically authorizes the Board of Trustees to terminate the Trust (or
any of its investment portfolios) by notice to the shareholders without
shareholder approval.
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 April 14, 1997, there were no persons directly or beneficially
that owned 5% or more of the outstanding shares of the Value Advantage Money
Fund.
As of April 14, 1997, the officers and trustees of the Trust, as a
group, owned of record or beneficially less than 1% of the outstanding voting
securities of the remaining series of the Trust.
ACCESS TO SCHWAB'S MUTUAL
FUND ONESOURCE(R) SERVICE
With Schwab's Mutual Fund OneSource service ("OneSource"), a
shareholder can invest in over 650 mutual funds from many fund companies,
subject to the following. Schwab's standard transaction fee will be charged on
each redemption of fund shares held for 90 days or less to discourage short-term
trading. Mutual fund shares held for more than 90 days are
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exempt from the short-term redemption policy and may be sold without penalty. Up
to 15 short-term redemption of fund shares per calendar year are permitted. If
you exceed this number, you will no longer be able to buy or sell fund shares
without paying a transaction fee. As a courtesy, we will notify you in advance
if short-term redemptions are nearing the point where all future trades will be
subject to transaction fees. Schwab reserves the right to modify OneSource's
terms and conditions at any time. For more information, a shareholder should
contact his or her Schwab office during its regular business hours or call 800-2
NO-LOAD, 24 hours a day.
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SCHWABFUNDS(R)
SchwabFunds offers a variety of series and classes of shares of beneficial
interest to help you with your investment needs.
EQUITY FUNDS
Schwab 1000 Fund(R)-Investor Shares(1)
Schwab 1000 Fund-Select Shares(1)
Schwab International Index Fund(R)-Investor Shares(2)
Schwab International Index Fund-Select Shares(2)
Schwab Small-Cap Index Fund(R)-Investor Shares(2)
Schwab Small-Cap Index Fund-Select Shares(2)
Schwab Asset Director(R)-High Growth Fund(2)
Schwab Asset Director(R)-Balanced Growth Fund(2)
Schwab Asset Director(R)-Conservative Growth Fund(2)
Schwab S&P 500 Fund-Investor Shares(2)
Schwab S&P 500 Fund-e.Shares(TM)(2)(3)
Schwab S&P 500 Fund-Select Shares(2)
Schwab Analytics Fund(TM)(2)
Schwab OneSource Portfolios-International(2)(7)
Schwab OneSource Portfolios-Growth Allocation(2)(7)
Schwab OneSource Portfolios-Balanced Allocation(2)(7)
FIXED INCOME FUNDS(1)
Schwab Short/Intermediate Government Bond Fund
Schwab Long-Term Government Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund(4)
Schwab California Long-Term Tax-Free Bond Fund(4)
MONEY MARKET FUNDS(5)
Schwab Money Market Fund
Schwab Government Money Fund
Schwab Institutional Advantage Money Fund(R)(6)
Schwab Retirement Money Fund(R)(6)
Schwab U.S. Treasury Money Fund
Schwab Value Advantage Money Fund(R)-Investor Shares
Schwab Value Advantage Money Fund-Sweep Shares
Schwab Municipal Money Fund-Sweep Shares
Schwab Municipal Money Fund-Value Advantage Shares(TM)
Schwab California Municipal Money Fund-Sweep Shares
Schwab California Municipal Money Fund-Value Advantage Shares(TM)
Schwab New York Municipal Money Fund-Sweep Shares
Schwab New York Municipal Money Fund-Value Advantage Shares(TM)
(1) The Schwab 1000 Fund and all fixed income funds are separate investment
portfolios of Schwab Investments.
(2) The Funds are separate investment portfolios or classes of shares of
Schwab Capital Trust.
(3) Available only through SchwabLink(R).
(4) Available only to California residents and residents of selected other
states.
(5) All listed money market funds are separate investment portfolios of the
Trust.
(6) Designed for institutional investors only.
(7) The Asset Director Funds may not invest in these funds.
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PURCHASE AND REDEMPTION OF SHARES
The minimum initial investment for both classes of shares of the Schwab
Value Advantage Money Fund(R) is $25,000 ($15,000 for IRAs and other retirement
plans) and subsequent investments of $5,000 ($2,000 for IRAs and other
retirement plans) or more may be made. These minimum requirements may be changed
at any time.
A Fund shareholder may request that the Trust waive the minimum initial
and subsequent investment requirements, as well as the minimum balance
requirement and the minimum redemption amount described in the Fund's
Prospectus, if (a) that shareholder owns Fund shares equaling an aggregate of $5
million or more; or (b) that shareholder is the customer of a financial adviser
whose assets under management include a current aggregate balance of $5 million
or more invested in Fund shares and an average balance of at least $20,000 per
customer account. In addition, the Trust may waive the minimums for purchases by
trustees, directors, officers or employees of the Trust, Schwab or the
Investment Manager.
The Trust has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90 day
period to the lesser of $250,000 or 1% of its net assets at the beginning of
such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of the stated limits may be paid, in whole or in
part, in investment securities or in cash, as the Trust's Board of Trustees may
deem advisable; however, payment will be made wholly in cash unless the Board of
Trustees believes that economic or market conditions exist that would make such
a practice detrimental to the best interests of the Fund. If redemption proceeds
are paid in investment securities, such securities will be valued as set forth
in the Prospectus of the Fund affected under "Share Price Calculation" and a
redeeming shareholder would normally incur brokerage expenses if he or she
converted the securities to cash.
OTHER INFORMATION
The Prospectus of the Fund 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, as amended, 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.
Fitch Investors Service, Inc.'s ("Fitch") 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.
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.
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<PAGE> 262
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 as 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 protections, fluctuations of protective elements may be of
greater amplitude or there may be other factors present which make them appear
to be subject to somewhat greater long-term risks.
STANDARD & POOR'S CORPORATION
AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree.
DUFF & PHELPS CREDIT RATING CO.
Duff confers an AAA designation to bonds of issuers with the highest
credit quality. The risk factors associated with these bonds are negligible,
being only slightly more than for risk-free United States Treasury debt. AA
rated bonds are of high credit quality and have strong protection factors. The
risks associated with them are modest but may vary slightly from time to time
because of economic conditions.
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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<PAGE> 263
FINANCIAL STATEMENTS
The Fund's financial statements and financial highlights for the fiscal
year ended December 31, 1996, are included in the Fund's Annual Report, which is
a separate report supplied with this Statement of Additional Information. The
Fund's financial statements and financial highlights are incorporated herein by
reference.
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<PAGE> 264
PART C
OTHER INFORMATION
April 30, 1997
THE CHARLES SCHWAB FAMILY OF FUNDS
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
(1) Financial statements and financial highlights included in the
Annual Report for Schwab Money Market Fund, Schwab Government
Money Fund and Schwab U.S. Treasury Money Fund for the fiscal
year ended December 31, 1996, are incorporated by reference into
the SAI, were filed on March 6, 1997, pursuant to Rule 30d-1
under the Investment Company Act of 1940 ("1940 Act"), and are
incorporated herein by reference
(2) Financial statements and financial highlights included in the
Annual Report for Schwab Municipal Money Fund -- Value Advantage
Shares, Schwab California Municipal Money Fund -- Value
Advantage Shares and Schwab New York Municipal Money Fund --
Value Advantage Shares for the fiscal year ended December 31,
1996, are incorporated by reference into the SAI, were filed on
March 6, 1997, pursuant to Rule 30d-1 under the 1940 Act, and
are incorporated herein by reference
(3) Financial statements and financial highlights included in the
Annual Report for Schwab New York Municipal Money Fund -- Sweep
Shares for the fiscal year ended December 31, 1996, are
incorporated by reference into the SAI, were filed on March 6,
1997, pursuant to Rule 30d-1 under the 1940 Act, and are
incorporated herein by reference
(4) Financial statements and financial highlights included in the
Annual Report for Schwab California Municipal Money Fund --
Sweep Shares for the fiscal year ended December 31, 1996, are
incorporated by reference into the SAI, were filed on March 6,
1997, pursuant to Rule 30d-1 under the 1940 Act, and are
incorporated herein by reference
(5) Financial statements and financial highlights included in the
Annual Report for Schwab Municipal Money Fund -- Sweep Shares
for the fiscal year ended December 31, 1996, are incorporated by
reference into the SAI, were filed on March 6, 1997, pursuant to
Rule 30d-1 under the 1940 Act, and are incorporated herein by
reference
(6) Financial statements and financial highlights included in the
Annual Report for Schwab Value Advantage Money Fund -- Investor
Shares (formerly known as Schwab Value Advantage Money Fund) for
the fiscal year ended December 31, 1996, are incorporated by
reference into the SAI, were filed on March 6, 1997, pursuant to
Rule 30d-1 under the 1940 Act, and are incorporated herein by
reference
(7) Financial statements and financial highlights included in the
Annual Report for Schwab Retirement Money Fund for the fiscal
year ended December 31, 1996, are incorporated by reference into
the SAI, were filed on March 6, 1997, pursuant to Rule 30d-1
under the 1940 Act, and are incorporated herein by reference
(8) Financial statements and financial highlights included in the
Annual Report for Schwab Institutional Advantage Money Fund for
the fiscal year ended December 31, 1996, are incorporated by
reference into the SAI, were filed on March 6, 1997, pursuant to
Rule 30d-1 under the 1940 Act, and are incorporated herein by
reference
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<PAGE> 265
Exhibits:
(1) Amended and Restated Agreement and Declaration of Trust is
incorporated by reference to Exhibit (1) to Post-Effective
Amendment No. 19 to Registrant's Registration Statement on Form
N-1A, filed on June 6, 1995.
(2) Amended and Restated By-Laws are incorporated by reference to
Exhibit (2) to Post-Effective Amendment No. 23 to Registrant's
Registration Statement on Form N-1A, filed on March 29, 1996.
(3) Inapplicable.
(4) (a) Article III, Sections 4 and 5; Article IV, Section 1;
Article V; Article VI, Section 2; Article VIII, Section 4;
and Article IX, Sections 1, 4 and 7 of the Agreement and
Declaration of Trust are incorporated by reference to
Exhibit (1) to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A, filed on
June 6, 1995.
(b) Article 9 and Article 11 of the By-Laws are incorporated by
reference to Exhibit (2) to Post-Effective Amendment No. 23
to Registrant's Registration Statement on Form N-1A, filed
on March 29, 1996.
(5) (a) Form of Investment Advisory and Administration Agreement
between Registrant and Charles Schwab Investment Management,
Inc. (the "Investment Manager") with respect to Schwab Money
Market Fund, Schwab Government Money Fund and Schwab
Municipal Money Fund, dated May 1, 1997, is electronically
filed herein as Exhibit 5(a).
(b) Schedule A to the Investment Advisory and Administration
Agreement between Registrant and Charles Schwab Investment
Management, Inc. (the "Investment Manager") with respect to
Schwab Money Market Fund, Schwab Government Money Fund and
Schwab Municipal Money Fund, dated May 1, 1997, is
electronically filed herein as Exhibit 5(b).
(c) Schedule B to the Investment Advisory and Administration
Agreement between Registrant and Charles Schwab Investment
Management, Inc. (the "Investment Manager") with respect to
Schwab Money Market Fund, Schwab Government Money Fund and
Schwab Municipal Money Fund, dated May 1, 1997, is
electronically filed herein as Exhibit 5(c).
(d) Investment Advisory and Administration Agreement between
Registrant and the Investment Manager with respect to Schwab
California Municipal Money Fund, Schwab U.S. Treasury Money
Fund, Schwab Value Advantage Money Fund, Schwab
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<PAGE> 266
Institutional Advantage Money Fund(R), Schwab Retirement
Money Fund(R) and New York Municipal Money Fund, dated June
15, 1995, is electronically filed herein as Exhibit (5)(d).
(e) Form of Schedule A, amended May 1, 1997, to the Investment
Advisory and Administration Agreement between Registrant and
the Investment Manager with respect to Schwab California
Municipal Money Fund, Schwab U.S. Treasury Money Fund,
Schwab Value Advantage Money Fund, Schwab Institutional
Advantage Money Fund(R), Schwab Retirement Money Fund(R) and
New York Municipal Money Fund, dated June 15, 1995, is
electronically filed herein as Exhibit (5)(e).
(f) Schedule B to the Investment Advisory and Administration
Agreement between Registrant and the Investment Manager with
respect to Schwab California Municipal Money Fund, Schwab
U.S. Treasury Money Fund, Schwab Value Advantage Money Fund,
Schwab Institutional Advantage Money Fund(R), Schwab
Retirement Money Fund(R) and New York Municipal Money Fund,
dated June 15, 1995, is electronically filed herein as
Exhibit (5)(f).
(g) Schedule C to the Investment Advisory and Administration
Agreement between Registrant and the Investment Manager with
respect to Schwab California Municipal Money Fund, Schwab
U.S. Treasury Money Fund, Schwab Value Advantage Money Fund,
Schwab Institutional Advantage Money Fund(R), Schwab
Retirement Money Fund(R) and New York Municipal Money Fund,
dated June 15, 1995, is electronically filed herein as
Exhibit (5)(g).
(h) Form of Schedule D, amended May 1, 1997, to the Investment
Advisory and Administration Agreement between Registrant and
the Investment Manager with respect to Schwab California
Municipal Money Fund, Schwab U.S. Treasury Money Fund,
Schwab Value Advantage Money Fund, Schwab Institutional
Advantage Money Fund(R), Schwab Retirement Money Fund(R) and
New York Municipal Money Fund, dated June 15, 1995, is
electronically filed herein as Exhibit (5)(h).
(6) (a) Distribution Agreement between Registrant and Charles Schwab
& Co., Inc. ("Schwab"), dated June 15, 1995, is incorporated
by reference to Exhibit (6)(a) to Post-Effective Amendment
No. 13 to Registrant's Registration Statement on Form N-1A,
filed on June 29, 1995.
(b) Amended Schedule to the Distribution Agreement between
Registrant and Schwab referred to at Exhibit (6)(a) above is
incorporated by reference to Exhibit (6)(b) to
Post-Effective Amendment No. 16 to Registrant's Registration
Statement on Form N-1A, filed on February 28, 1995.
(7) Inapplicable.
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<PAGE> 267
(8) (a) Accounting Services Agreement between Registrant and PFPC
Inc. (formerly, Provident Financial Processing Corporation)
dated April 8, 1991 is incorporated by reference to Exhibit
(8)(c) to Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A, filed on December 10,
1991.
(b) Amended Schedule to the Accounting Services Agreement
referred to at Exhibit (8)(a) above is incorporated by
reference to Exhibit (8)(b) to Post-Effective Amendment No.
16 to Registrant's Registration Statement on Form N-1A,
filed on February 28, 1995.
(c) Amendment Nos. 1 and 2 to the Accounting Services Agreement
referred to at Exhibit (8)(a) above are incorporated by
reference to Exhibit (8)(c) to Post-Effective Amendment No.
23 to Registrant's Registration Statement on Form N-1A,
filed on March 29, 1996.
(d) Amended and Restated Transfer Agency Agreement between
Registrant and Schwab dated June 5, 1995 is incorporated by
reference to Exhibit (8)(c) to Post-Effective Amendment No.
19 to Registrant's Registration Statement on Form N-1A,
filed on June 6, 1995.
(e) Form of Amended Schedules to the Amended and Restated
Transfer Agency Agreement referred to at Exhibit (6)(d)
above is incorporated by reference to Exhibit (8)(e) to
Post-Effective Amendment No. 24 to Registrant's Registration
Statement on Form N-1A, filed on April 26, 1996.
(f) Shareholder Service Agreement between Registrant and Schwab
dated May 1, 1993 is incorporated by reference to Exhibit
(8)(f) to Post-Effective Amendment No. 10 to Registrant's
Registration Statement on Form N-1A, filed on September 28,
1993.
(g) Amended Schedules to the Shareholder Service Agreement
between Registrant and Schwab referred to at Exhibit (8)(f)
above are incorporated by reference to Exhibit (8)(f) to
Post-Effective Amendment No. 16 to Registrant's Registration
Statement on Form N-1A, filed on February 28, 1995.
(h) Form of Amended Schedules to the Shareholder Service
Agreement referred to at Exhibit (6)(f) above is
incorporated by reference to Exhibit (8)(h) to
Post-Effective Amendment No. 24 to Registrant's Registration
Statement on Form N-1A, filed on April 26, 1996.
(i) Custodian Services Agreement between Registrant and PNC
Bank, N.A. (formerly, Provident National Bank) dated April
8, 1991 is incorporated by reference to Exhibit (8)(b) to
Post-Effective Amendment No. 5 to Registrant's Registration
Statement on Form N-1A, filed on December 10, 1991.
(j) Amended Schedule to the Custodian Services Agreement
referred to at Exhibit (8)(i) above is incorporated by
reference to
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<PAGE> 268
Exhibit (8)(h) to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A, filed on
February 28, 1995.
(k) Amendment Nos. 1 and 2 to the Custodian Services Agreement
referred to at Exhibit (8)(i) above are incorporated by
reference to Exhibit (8)(i) to Post-Effective Amendment No.
23 to Registrant's Registration Statement on Form N-1A,
filed on March 29, 1996.
(9) Inapplicable.
(10) Opinion and Consent of Ropes & Gray as to legality of the
securities being registered is incorporated by reference to
Registrant's Rule 24f-2 Notice, filed on February 19, 1997.
(11) (a) Consent of Ropes & Gray is filed herewith.
(b) Consent of Price Waterhouse LLP, Independent Accountants, is
filed herewith.
(12) Inapplicable.
(13) (a) Purchase Agreement between Registrant and Schwab relating to
the Schwab U.S. Treasury Money Fund is incorporated by
reference to Exhibit (13)(a) to Post-Effective Amendment No.
5 to Registrant's Registration Statement on Form N-1A, filed
on December 10, 1992.
(b) Purchase Agreement between Registrant and Schwab relating to
the Schwab Value Advantage Money Fund is incorporated by
reference to Exhibit (13)(b) to Post-Effective Amendment No.
6 to Registrant's Registration Statement on Form N-1A, filed
on March 3, 1992.
(c) Purchase Agreement between Registrant and Schwab relating to
the Schwab Retirement Money Fund(R) and the Schwab
Institutional Advantage Money Fund(R) is incorporated by
reference to Exhibit (13)(c) to Post-Effective Amendment No.
11 to Registrant's Registration Statement on Form N-1A,
filed on December 1, 1993.
(d) Purchase Agreement between Registrant and Schwab relating to
the Schwab New York Municipal Money Fund is incorporated by
reference to Exhibit (13)(d) to Post-Effective Amendment No.
16 to Registrant's Registration Statement on Form N-1A,
filed on February 28, 1995.
(e) Purchase Agreement between Registrant and Schwab relating to
the Schwab Municipal Money Fund -- Value Advantage Shares is
incorporated by reference to Exhibit (13)(e) to
Post-Effective Amendment No. 19 to Registrant's Registration
Statement on Form N-1A, filed on June 6, 1995.
(f) Purchase Agreement between Registrant and Schwab relating to
the Schwab California Municipal Money Fund -- Value
Advantage
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<PAGE> 269
Shares is incorporated by reference to Exhibit (13)(f) to
Post-Effective Amendment No. 19 to Registrant's Registration
Statement on Form N-1A, filed on June 6, 1995.
(g) Purchase Agreement between Registrant and Schwab relating to
the Schwab New York Municipal Money Fund -- Value Advantage
Shares is incorporated by reference to Exhibit (13)(g) to
Post-Effective Amendment No. 19 to Registrant's Registration
Statement on Form N-1A, filed on June 6, 1995.
(14) (a) Model Charles Schwab & Co., Inc. Individual Retirement Plan
is incorporated by reference to Exhibit (14)(a) to
Post-Effective Amendment No. 14 to Registrant's Registration
Statement on Form N-1A, filed on August 25, 1995.
(b) Model Charles Schwab & Co., Inc. KEOGH Plan is incorporated
by reference to Exhibit (14)(b) to Post-Effective Amendment
No. 14 to Registrant's Registration Statement on Form N-1A,
filed on August 25, 1995.
(15) Inapplicable.
(16) (a) Performance Calculations for Schwab Money Market Fund,
Schwab Government Money Fund, Schwab Municipal Money Fund,
Schwab California Municipal Money Fund and Schwab U.S.
Treasury Money Fund are incorporated by reference to Exhibit
(16) to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form N-1A, filed on March 3, 1992.
(b) Performance Calculations for Schwab Value Advantage Money
Fund are incorporated by reference to Exhibit (16) to
Post-Effective Amendment No. 7 to Registrant's Registration
Statement on Form N-1A, filed on August 7, 1992.
(c) Performance Calculations for Schwab Institutional Advantage
Money Fund(R) and Schwab Retirement Money Fund(R) are
incorporated by reference to Exhibit (16) to Post-Effective
Amendment No. 17 to Registrant's Registration Statement on
Form N-1A, filed on April 6, 1995.
(d) Performance Calculations for Schwab New York Municipal Money
Fund -- Sweep Shares are incorporated by reference to
Exhibit (16)(d) to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, filed on
August 25, 1995.
(17) (a) Financial Data Schedule for Schwab Money Market Fund is
filed herewith.
(b) Financial Data Schedule for Schwab Government Money Fund is
filed herewith.
(c) Financial Data Schedule for Schwab Municipal Money
Fund -- Sweep Shares is filed herewith.
(d) Financial Data Schedule for Schwab Municipal Money
Fund -- Value Advantage Shares is filed herewith.
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<PAGE> 270
(e) Financial Data Schedule for Schwab California Municipal
Money Fund -- Sweep Shares is filed herewith.
(f) Financial Data Schedule for Schwab California Municipal
Money Fund -- Value Advantage Shares is filed herewith.
(g) Financial Data Schedule for Schwab U.S. Treasury Money Fund
is filed herewith.
(h) Financial Data Schedule for Schwab Value Advantage Money
Fund -- Investor Shares is filed herewith.
(i) Financial Data Schedule for Schwab Institutional Advantage
Money Fund(R) is filed herewith.
(j) Financial Data Schedule for Schwab Retirement Money Fund(R)
is filed herewith.
(k) Financial Data Schedule for Schwab New York Municipal Money
Fund -- Sweep Shares is filed herewith.
(l) Financial Data Schedule for Schwab New York Municipal Money
Fund -- Value Advantage Shares is filed herewith.
(18) Form of Amended and Restated Multiple Class Plan of
Registrant is incorporated by reference to Exhibit (18) to
Post-Effective Amendment No. 25 to Registrant's Registration
Statement on Form N-1A, filed on February 21, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant.
Schwab Investments, Schwab Capital Trust, and Schwab Annuity
Portfolios each are Massachusetts business trusts registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); are advised
by the Investment Manager; and employ Schwab as their principal
underwriter, transfer agent and shareholder services agent. As a result,
Schwab Investments, Schwab Capital Trust, and Schwab Annuity Portfolios
may be deemed to be under common control with Registrant.
Item 26. Number of Holders of Securities.
As of April 14, 1997, the number of record holders of shares
of beneficial interest for the series of Registrant was:
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Schwab Money Market Fund 1 (for the benefit of 1,894,341)
Schwab Government Money Fund 1 (for the benefit of 128,196)
Schwab U.S. Treasury Money Fund 1 (for the benefit of 61,972)
Schwab Municipal Money Fund -- Sweep Shares 1 (for the benefit of 141,113)
Schwab Municipal Money Fund -- Value Advantage Shares 1 (for the benefit of 2,925)
Schwab California Municipal Money Fund-Sweep Shares 1 (for the benefit of 54,000)
</TABLE>
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<PAGE> 271
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Schwab California Municipal Money Fund -- Value Advantage Shares 1 (for the benefit of 2,349)
Schwab Value Advantage Money Fund -- Investor Shares 1 (for the benefit of 108,728)
Schwab Retirement Money Fund(R) 1 (for the benefit of 824)
Schwab Value Advantage Money Fund -- Sweep Shares 0
Schwab Institutional Advantage Money Fund(R) 1 (for the benefit of 370)
Schwab New York Municipal Money Fund -- Sweep Shares 1 (for the benefit of 11,005)
Schwab New York Municipal Money Fund -- Value Advantage Shares 1 (for the benefit of 481)
</TABLE>
Item 27. Indemnification.
Article VIII of Registrant's Amended and Restated Agreement
and Declaration of Trust (Exhibit (1) hereto, which is incorporated herein by
reference) provides in effect that Registrant will indemnify its officers and
trustees against all liabilities and expenses, including but not limited to
amounts paid in satisfaction of judgments, in compromise, or as fines and
penalties, and counsel fees reasonably incurred by any such officer or trustee
in connection with the defense or disposition of any action, suit, or other
proceeding. However, in accordance with Section 17(h) and 17(i) of the 1940 Act
and its own terms, said Agreement and Declaration of Trust does not protect any
person against any liability to Registrant or its shareholders to which he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office. In any event, Registrant will comply with 1940 Act Releases
Nos. 7221 and 11330 respecting the permissible boundaries of indemnification by
an investment company of its officers and trustees.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
trustees, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a trustee, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Manager.
(a) Information pertaining to business and other connections
of Registrant's Investment Manager is hereby incorporated by reference to the
section of the Prospectuses for Schwab Money Market Fund, Schwab Government
Money Fund, Schwab U.S. Treasury Money Fund, Schwab Municipal Money Fund --
Sweep Shares, Schwab California Municipal Money Fund -- Sweep Shares, Schwab New
York Municipal Money Fund -- Sweep Shares, Schwab Institutional Advantage Money
Fund(R) and Schwab Retirement Money Fund(R) captioned "Management of the
Fund(s);" the section of the Prospectuses for Schwab Value Advantage Money Fund,
Schwab
8
<PAGE> 272
Municipal Money Fund -- Value Advantage Shares, Schwab California Municipal
Money Fund -- Value Advantage Shares and Schwab New York Municipal Money Fund --
Value Advantage Shares captioned "Organization and Management of the Fund(s);"
and the section of the Statements of Additional Information captioned
"Management of the Trust."
Registrant's Investment Manager, Charles Schwab Investment
Management, Inc., a Delaware corporation, organized in October 1989 to serve as
Investment Manager to Registrant, also serves as the Investment Manager to
Schwab Investments, Schwab Capital Trust, and Schwab Annuity Portfolios, each an
open-end, management investment company. The principal place of business of the
Investment Manager is 101 Montgomery Street, San Francisco, California 94104.
The only business in which the Investment Manager engages is that of investment
manager and administrator to Registrant, Schwab Investments, Schwab Capital
Trust, Schwab Annuity Portfolios and any other investment companies that Schwab
may sponsor in the future.
(b) The business, profession, vocation or employment of a
substantial nature in which each director and/or executive officer of Schwab
and/or the Investment Manager is or has been engaged during the past two fiscal
years for his or her own account in the capacity of director, officer, employee,
partner or trustee is as follows:
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Chief Executive Officer
and Director
Charles Schwab Investment Management, Chairman and Director
Inc.
The Charles Schwab Trust Chairman and Director
Company
Mayer & Schweitzer, Inc. Chairman and Director
The Gap, Inc. Director
Transamerica Corporation Director
AirTouch Communications Director
Siebel Systems Director
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February 1995; Vice
Chairman until August 1994
The Charles Schwab Corporation Vice Chairman and Director; Chief
</TABLE>
9
<PAGE> 273
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Operating Officer until March 1994
Mayer & Schweitzer, Inc. Director until February 1995
The Charles Schwab Trust Director
Company
David S. Pottruck Charles Schwab & Co., Inc. President, Chief Executive Officer
and Director
The Charles Schwab Corporation President, Chief Operating Officer
and Director
Charles Schwab Investment Management, Director
Inc.
Mayer & Schweitzer, Inc. Chairman, Chief Executive Officer
and Director
Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman and Director until
January 1996; Senior Executive Vice
President and Chief Operating
Officer until January 1995
The Charles Schwab Corporation Executive Vice President until
January 1996; Senior Executive Vice
President until January 1995
Mayer & Schweitzer, Inc. Director until January 1996
John P. Coghlan Charles Schwab & Co., Inc. Executive Vice President - Schwab
Institutional
The Charles Schwab Corporation Executive Vice President - Schwab
Institutional
The Charles Schwab Trust Company Director and Executive Vice President
A. John Gambs, Charles Schwab & Co., Inc. Executive Vice President, Chief
Treasurer and Financial Officer and Director
Principal
Financial Officer
The Charles Schwab Corporation Executive Vice President and Chief
Financial Officer
Charles Schwab Investment Management, Chief Financial Officer and Director
Inc.
The Charles Schwab Trust Chief Financial Officer
Company
Mayer & Schweitzer, Inc. Director
</TABLE>
10
<PAGE> 274
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Dawn G. Lepore Charles Schwab & Co., Inc. Executive Vice President and Chief
Information Officer
The Charles Schwab Corporation Executive Vice President and Chief
Information Officer
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President - Business
Strategy
Charles Schwab & Co., Inc. Executive Vice President - Business
Strategy
Timothy F. McCarthy, Charles Schwab Investment Management, Chief Executive Officer
Trustee and President Inc.
Charles Schwab & Co., Inc. Executive Vice President - Mutual
Funds
The Charles Schwab Corporation Executive Vice President - Mutual
Funds
Jardine Fleming Unit Trusts Ltd. Chief Executive Officer until
October 1995
Fidelity Investment Advisor Group President until 1994
Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President -
Electronic Brokerage
The Charles Schwab Corporation Executive Vice President -
Electronic Brokerage
Tom D. Seip Charles Schwab & Co., Inc. Executive Vice President - Retail
Brokerage
The Charles Schwab Corporation Executive Vice President - Retail
Brokerage
Charles Schwab Investment Management, President and Chief Operating
Inc. Officer until 1994
John N. Tognino Charles Schwab & Co., Inc. Executive Vice President - Capital
Markets and Trading until February
1996
The Charles Schwab Corporation Executive Vice President - Capital
Markets and Trading until February
1996
Mayer & Schweitzer, Inc. Director and Vice Chairman until
February 1996
</TABLE>
11
<PAGE> 275
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President - Human
Resources and Corporate Support
The Charles Schwab Corporation Executive Vice President and Chief
Administrative Officer
Commercial Credit Corporation Managing Director until February 1994
Christopher V. Dodds Charles Schwab & Co., Inc. Treasurer and Senior Vice President
The Charles Schwab Corporation Treasurer and Senior Vice President
Mayer & Schweitzer, Inc. Treasurer
William J. Klipp, Charles Schwab & Co., Inc. Senior Vice President - SchwabFunds
Trustee, Senior Vice
President and Chief
Operating Officer
Charles Schwab Investment Management, President and Chief Operating Officer
Inc.
Stephen B. Ward, Charles Schwab Investment Management, Senior Vice President and Chief
Senior Vice President Inc. Investment Officer
and Chief Investment
Officer
Frances Cole, Charles Schwab Investment Management, Vice President, Chief Counsel, Chief
Secretary Inc. Compliance Officer and Assistant
Corporate Secretary
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Assistant Corporate Secretary
Charles Schwab Investment Management, Corporate Secretary
Inc.
The Charles Schwab Trust Assistant Corporate Secretary
Company
David J. Neuman The Charles Schwab Trust Corporate Secretary
Company
Mary B. Templeton Charles Schwab Investment Management, Assistant Corporate Secretary
Inc.
The Charles Schwab Corporation Senior Vice President, General
Counsel and Corporate Secretary
Charles Schwab & Co., Inc. Senior Vice President, General
Counsel and Corporate Secretary
Mayer & Schweitzer Assistant Corporate Secretary
</TABLE>
12
<PAGE> 276
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
--------------- --------------- --------
<S> <C> <C>
The Charles Schwab Trust Assistant Corporate Secretary until
Company February 1996
David H. Lui Charles Schwab Investment Management, Vice President and Senior Counsel
Assistant Secretary Inc.
Christina M. Perrino Charles Schwab Investment Management, Vice President and Senior Counsel
Assistant Secretary Inc.
Karen L. Seaman Charles Schwab Investment Corporate Counsel
Assistant Secretary Management, Inc.
</TABLE>
13
<PAGE> 277
Item 29. Principal Underwriters.
(a) Schwab acts as principal underwriter and distributor
of Registrant's shares. Schwab currently also acts as principal underwriter for
Schwab Investments, Schwab Capital Trust, and Schwab Annuity Portfolios and
intends to act as such for any other investment company which Schwab may sponsor
in the future.
(b) See Item 28(b) for information on the officers and
directors of Schwab. The principal business address of Schwab is 101 Montgomery
Street, San Francisco, California 94104.
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be
maintained pursuant to Section 31(a) of the 1940 Act and the Rules thereunder
are maintained at the offices of: Registrant (transfer agency and shareholder
records); Registrant's investment manager and administrator, Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's sub-investment adviser, Dimensional Fund Advisors Inc., 1299
Ocean Avenue, Suite 1100, Santa Monica, California 90401; Registrant's principal
underwriter, Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco,
California 94104; Registrant's Custodian, PNC Bank, National Association, Broad
and Market Streets, Philadelphia, Pennsylvania 19104 (ledgers, receipts and
brokerage orders); Registrant's fund accountants, PFPC, Inc., 400 Bellevue
Parkway, Wilmington, Delaware 19809; or Ropes & Gray, counsel to Registrant,
1301 K Street, N.W., Suite 800 East, Washington, D.C. 20005 (minute books,
bylaws and declaration of trust).
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Registrant undertakes to call a meeting of
Shareholders, at the request of at least 10% of registrant's outstanding shares,
for the purpose of voting upon the question of removal of a trustee or trustees
and to assist in communications with other Shareholders as required by Section
(16) of the 1940 Act.
(b) Registrant undertakes to furnish to each person to
whom a prospectus is delivered a copy of Registrant's latest Annual Report to
Shareholders upon request and without charge.
<PAGE> 278
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended, Registrant
certifies that it meets all of the requirements for effectiveness of this
Post-Effective Amendment No. 27 to Registrant's Registration Statement on Form
N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this
Post-Effective Amendment No. 27 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the District of Columbia, on this 28th day of
April, 1997.
THE CHARLES SCHWAB FAMILY OF FUNDS
Registrant
Charles R. Schwab*
----------------------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 27 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 28th day
of April, 1997.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman and Trustee
- -----------------------------
Charles R. Schwab
Timothy F. McCarthy* President and Trustee
- -----------------------------
Timothy F. McCarthy
William J. Klipp* Executive Vice President,
- ----------------------------- Chief Operating Officer and Trustee
William J. Klipp
Donald F. Dorward* Trustee
- -----------------------------
Donald F. Dorward
Robert G. Holmes* Trustee
- -----------------------------
Robert G. Holmes
Donald R. Stephens* Trustee
- -----------------------------
Donald R. Stephens
Michael W. Wilsey* Trustee
- -----------------------------
Michael W. Wilsey
Tai-Chin Tung* Treasurer and Principal Financial Officer
- -----------------------------
Tai-Chin Tung
*By /s/ Alan G. Priest
------------------------------
Alan G. Priest, Attorney-In-Fact pursuant
to Powers of Attorney filed previously
</TABLE>
<PAGE> 279
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE
5(a) Form of Investment Advisory and Administration
Agreement
5(b) Schedule A to the Investment Advisory and
Administration Agreement
5(c) Schedule B to the Investment Advisory and
Administration Agreement
5(d) Investment Advisory and Administration Agreement
5(e) Form of Schedule A to the Investment Advisory and
Administration Agreement
5(f) Schedule B to the Investment Advisory and
Administration Agreement
5(g) Schedule C to the Investment Advisory and
Administration Agreement
5(h) Form of Schedule D to the Investment Advisory and
Administration Agreement
11(a) Consent of Ropes & Gray
11(b) Consent of Price Waterhouse LLP
17(a) Financial data Schedule for Schwab Money Market Fund
17(b) Financial data Schedule for Schwab Government Money
Fund
17(c) Financial data Schedule for Schwab Municipal Money
Fund -- Sweep Shares
17(d) Financial data Schedule for Schwab Municipal Money
Fund -- Value Advantage Shares
17(e) Financial data Schedule for Schwab California
Municipal Money Fund -- Sweep Shares
17(f) Financial data Schedule for Schwab California
Municipal Money Fund -- Value Advantage Shares
17(g) Financial data Schedule for Schwab U.S. Treasury
Money Fund
17(h) Financial data Schedule for Schwab Value Advantage
Money Fund -- Investor Shares
17(i) Financial data Schedule for Schwab Institutional
Advantage Money Fund
17(j) Financial data Schedule for Schwab Retirement Money
Fund
17(k) Financial data Schedule for Schwab New York Municipal
Money Fund -- Sweep Shares
17(l) Financial data Schedule for Schwab New York Municipal
Money Fund -- Value Advantage Shares
<PAGE> 1
Exhibit 5(a)
FORM OF
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
(THE SCHWAB MONEY FUNDS)
AGREEMENT made as of May 1, 1997 between THE CHARLES SCHWAB FAMILY OF
FUNDS, a Massachusetts business trust (herein called the "Trust"), and CHARLES
SCHWAB INVESTMENT MANAGEMENT, INC., a Delaware corporation (the "Investment
Adviser").
WHEREAS, the Trust is registered as an open-end diversified, management
investment company under the Investment Company Act of 1940, as amended ("1940
Act"); and
WHEREAS, the Trust desires to retain the Investment Adviser to furnish
investment advisory, administrative, and certain accounting and record-keeping
services to three investment portfolios of the Trust: the Schwab Money Market
Fund, the Schwab Government Money Fund (formerly, the Schwab Government
Securities Fund), and the Schwab Municipal Money Fund (formerly, the Schwab
Tax-Exempt Money Fund or Schwab Tax-Exempt Fund) (each a "Money Fund" and
collectively, the "Money Funds"), and the Investment Adviser is willing and
believes that it possesses the legal authority to so furnish such services,
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints the Investment Adviser to act
as investment adviser and administrator to the Money Funds for the period and on
the terms set forth in this Agreement. The Investment Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. The Trust has furnished the Investment
Adviser with copies properly certified or authenticated of each of the
following:
(a) the Trust's Agreement and Declaration of Trust, as filed
with the Secretary of State of The Commonwealth of Massachusetts on
October 20, 1989, and all amendments thereto or restatements thereof
(such Agreement and Declaration, as presently in effect and as it shall
from time to time be amended or restated, is herein called the
<PAGE> 2
"Declaration of Trust");
(b) the Trust's By-Laws and amendments thereto;
(c) resolutions of the Trust's Board of Trustees authorizing
the appointment of the Investment Adviser and approving this Agreement;
(d) the Trust's Notification of Registration on Form N-8A
under the 1940 Act, as filed with the Securities and Exchange
Commission ("SEC") on November 1, 1989 and all amendments thereto;
(e) the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended ("1933 Act"), (File No. 33-31894)
and under the 1940 Act as filed with the "SEC" and all amendments
thereto; and
(f) the Trust's most recent prospectus and Statement of
Additional Information for the Money Funds (such prospectuses and
Statement of Additional Information, as presently in effect, and all
amendments and supplements thereto are herein collectively called the
"Prospectus").
The Trust will furnish the Investment Adviser from time to time with copies of
all amendments of or supplements to the foregoing.
3. Management. Subject to the direction and control of the Board of
Trustees of the Trust, the Investment Adviser will supervise or perform for the
Money Funds all aspects of the operations of the Money Funds except for those
performed by the custodian for the Money Funds under the Custody Agreement,
provide general economic and financial analysis and advice to the Money Funds,
and provide a continuous investment program for the Money Funds, including
investment research and management as to all securities and investments and cash
equivalents in the Money Funds. More particularly, the Investment Adviser will:
determine from time to time what securities and other investments will be
purchased, retained, or sold by the Money Funds; maintain office facilities
(which may be in the offices of the Investment Adviser or a corporate affiliate
but shall be in such location as the Trust reasonably determines); furnish
statistical and research data, clerical services and stationery and office
supplies; compile data for, prepare for execution by the Money Funds and file
all the Money Funds' federal and state tax returns
<PAGE> 3
and required tax filings other than those required to be made by the Money
Funds' custodian and transfer agent; prepare compliance filings pursuant to
state securities laws with the advice of the Trust's counsel; prepare the
Trust's Annual and Semi-Annual Reports to Shareholders and amendments to its
Registration Statements (on Form N-1A or any replacement therefor); compile data
for, prepare and file timely Notices to the SEC required pursuant to Rule 24f-2
under the 1940 Act; perform at the expense of the Money Funds the daily pricing
of portfolio securities and computation of the net asset value and the net
income of each Money Fund in accordance with the Prospectus and resolutions of
the Trust's Board of Trustees; keep and maintain the financial accounts and
records of the Money Funds and provide the Trust with certain reports, all as
more specifically set forth on Schedule A hereto; and generally assist in all
aspects of the operations of the Money Funds.
Subject to the provisions of the Agreement and Declaration of
Trust and the 1940 Act, the Investment Adviser, at its expense, may select and
contract with investment advisers (the "Sub-Advisers") for one or more of the
Money Funds. So long as any Sub-Adviser serves as Sub-Adviser to a Money Fund,
it must be a party to a Sub-Investment Advisory Agreement in substantially the
form attached hereto as Schedule B (the "Sub-Adviser Agreement") and will be
obligated to (i) furnish continuously an investment program as to those assets
of the Trust and the Money Funds involved allocated by the Investment Adviser,
(ii) in connection therewith, adhere to such guidelines as may be established by
the Investment Adviser from time to time to insure compliance with applicable
investment objectives, policies and restrictions of the Trust and the Money
Funds and (iii) place all orders for the purchase and sale of Investments. The
Investment Adviser may also delegate or subcontract some or all of the
Investment Adviser's other duties enumerated in this Agreement. The Investment
Adviser will be responsible for payment of all compensation to all Sub-Advisers
and other persons and entities to which Investment Adviser delegates any duties
hereunder.
The Investment Adviser further agrees that it:
(a) will use the same skill and care in providing such
services as it would use in providing services to fiduciary accounts if
it had investment responsibilities for such accounts;
(b) will conform with all applicable Rules and Regulations of
the SEC and will in addition conduct its activities under this
Agreement in accordance with any applicable regulations of any
<PAGE> 4
governmental authority pertaining to the investment advisory activities
of the Investment Adviser;
(c) will not make loans to any person to purchase or carry
units of beneficial interest in the Trust or make loans to the Trust;
(d) will place orders pursuant to its investment
determinations for the Money Funds either directly with the issuer or
with an underwriter, market maker, or broker or dealer. In placing
orders with brokers and dealers the Investment Adviser will attempt to
obtain prompt execution of orders in an effective manner at the most
favorable price. Consistent with this obligation, when the execution
and price offered by two or more brokers or dealers are comparable, the
Investment Adviser may, in its discretion, purchase or sell portfolio
securities to and from brokers and dealers who provide the Investment
Adviser or any Sub-Adviser with research advice and other services. In
no instance will portfolio securities be purchased from or sold to the
Investment Adviser or any Sub-Adviser, or any affiliated person of
either the Trust, the Investment Adviser, or any Sub-Adviser, except as
may be permitted under the 1940 Act;
(e) will treat confidentially and as proprietary information
of the Trust all records and other information relative to the Trust,
and will not use such records and information for any purpose other
than performance of its responsibilities and duties hereunder, except
after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld
where the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested
by the Trust; and
(f) will direct its personnel when making investment
recommendations for the Trust, not to inquire or take into
consideration whether the issuers of securities proposed for purchase
or sale for the Trust's accounts are customers of the Investment
Adviser or of its parent or its subsidiaries or affiliates. In dealing
with such customers, the Investment Adviser and its parent,
subsidiaries, and affiliates will not inquire or take into
consideration whether securities of those customers are held by the
Trust.
<PAGE> 5
4. Services to Others. The Trust understands that the Investment
Adviser may in the future act as an investment adviser to fiduciary and other
managed accounts, and as investment adviser, sub-investment adviser, and/or
administrator to other investment companies. The Trust has no objection to the
Investment Adviser's acts in such capacities, provided that whenever one of the
Money Funds and one or more other investment companies advised by the Investment
Adviser have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with a formula believed by
the Investment Adviser to be equitable to each company. The Trust recognizes
that in some cases this procedure may adversely affect the size of the position
that a Money Fund may obtain in a particular security. In addition, the Trust
understands that the persons employed by the Investment Adviser to assist in the
Investment Adviser's duties under this Agreement will not devote their full time
to such service and nothing contained in this Agreement will be deemed to limit
or restrict the right of the Investment Adviser or any of its affiliates to
engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Investment Adviser hereby agrees that all records it
maintains for the Trust are the property of the Trust and further agrees to
surrender promptly to the Trust any of such records upon the Trust's request and
will require the same type of agreement from each Sub-Adviser. The Investment
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, the Investment Adviser
will pay all expenses incurred by it in providing general economic and financial
analysis and advice to the Money Funds and providing a continuous investment
program for the Money Funds pursuant to Section 3 above and in providing its
activities under this Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Trust. The Investment Adviser
will also pay all compensation of any person or person employed by or associated
with the Investment Adviser to assist in the performance of the Investment
Adviser's obligations under this Agreement, whether or not such person is also a
officer or employee of the Trust, and the Investment Adviser will not cause any
obligation to be incurred on behalf of the Trust in respect of any such
compensation. Other expenses to be incurred in the operation of the Money Funds
- -- including without
<PAGE> 6
limitation taxes, interest, brokerage fees and commissions, if any, fees of
Trustees who are not officers, directors, shareholders, or employees of the
Investment Adviser or any Sub-Adviser, SEC fees and state "blue sky"
qualification fees, advisory and administration fees, costs of performing the
pricing of portfolio securities, transfer and dividend disbursing agents' fees,
certain insurance premiums, outside auditing and legal expenses, costs of
maintaining the Trust's existence as a Massachusetts business trust, typesetting
and printing prospectuses for regulatory purposes and for distribution to
current shareholders of the Money Funds, costs of shareholders' and Trustees'
reports and meetings and any extraordinary expenses -- will be borne by the
Money Funds; provided however, that the Money Funds will not bear, directly or
indirectly, the cost of any activity that is primarily intended to result in the
distribution of shares of the Money Funds.
7. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement for each Money Fund, the Trust will pay the
Investment Adviser out of the assets of such Money Fund and the Investment
Adviser will accept as full compensation therefor an annual fee, computed daily
and paid monthly in arrears, equal to the percentages of such Money Fund's
average daily net assets set forth below.
Schwab Money Market Fund
<TABLE>
<S> <C>
$1 billion or less 0.46%
Over $1 billion through $3 billion 0.45%
Over $3 billion through $10 billion 0.40%
Over $10 billion through $20 billion 0.37%
Over $20 billion 0.34%
</TABLE>
Schwab Government Money Fund and the Schwab Municipal Money Fund
<TABLE>
<S> <C>
$1 billion or less 0.46%
Over $1 billion through $2 billion 0.41%
Over $2 billion 0.40%
</TABLE>
If in any fiscal year the aggregate expenses (as defined under
the securities regulations of any state having jurisdiction over the Trust) of a
Money Fund exceed the expense limitations of any such state, the Investment
Adviser will reimburse such Money Fund for a portion of such excess expenses
equal to such excess times the ratio of the fees otherwise payable by such Money
Fund to the Investment Adviser hereunder to the aggregate fees otherwise payable
by such Money Fund to the Investment Adviser hereunder, and to Charles Schwab &
Co., Inc. under the Transfer Agency and Shareholder Servicing Agreement between
it and the Trust. The obligation of the Investment
<PAGE> 7
Adviser to reimburse a Money Fund hereunder is limited in any fiscal year to the
amount of its fee hereunder from such Money Fund for such fiscal year, provided,
however, that notwithstanding the foregoing, the Investment Adviser will
reimburse each Money Fund for such proportion of such excess expenses regardless
of the amount of fees paid to it during such fiscal year to the extent that the
securities regulations of any state having jurisdiction over the Trust so
require. Such expense reimbursement, if any, will be estimated daily and
reconciled and paid on a monthly basis.
8. Limitation of Liability. The Investment Adviser will not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the performance of this Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Investment Adviser in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement.
9. Duration and Termination. This Agreement will become effective as to
each Money Fund as of the date first written above, provided that it has been
approved by a vote of a majority of the outstanding voting securities of such
Money Fund, in accordance with the requirements under the 1940 Act.
Thereafter, if not terminated as to a Money Fund, this
Agreement will continue in effect as to such Money Fund for successive periods
each ending on May 30 of each year, provided such continuance is specifically
approved at least annually (a) by the vote of a majority of those members of the
Trust's Board of Trustees who are not parties to this Agreement or interested
persons of the Trust, the Investment Adviser, or any Sub-Adviser, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
Trust's Board of Trustees or by vote of a majority of the outstanding voting
securities of such Money Fund. Notwithstanding the foregoing, this Agreement may
be terminated at any time on sixty days' written notice, without the payment of
any penalty, by the Trust (by vote of the Trust's Board of Trustees or by vote
of a majority of the outstanding voting securities of such Money Fund) or by the
Investment Adviser. This Agreement will immediately terminate in the event of
its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment" shall have
the same meaning of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing
<PAGE> 8
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by the laws of the State of California.
The names "The Charles Schwab Family of Funds" and "Trustees
of The Charles Schwab Family of Funds" refer respectively to the Trust created
and the Trustees, as trustees but not individually or personally, acting from
time to time under the Declaration of Trust, to which reference is hereby made
and a copy of which is on file at the office of the Secretary of The
Commonwealth of Massachusetts and elsewhere as required by law, and to any and
all amendments thereto so filed or hereafter filed. The obligations of "The
Charles Schwab Family of Funds" entered into in the name or on behalf thereof by
any of the Trustees, representatives or agents are made not individually, but in
such capacities, and are not binding upon any of the Trustees, interest holders
or representatives of the Trust personally, but bind only the assets of the
Trust, and all persons dealing with any series of units of interest of the Trust
must look solely to the assets of the Trust belonging to such series for the
enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE CHARLES SCHWAB FAMILY OF FUNDS
By: ________________________________
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: ________________________________
Name: William J. Klipp
Title: President and Chief
Operating Officer
<PAGE> 1
Exhibit 5(b)
SCHEDULE A
The Investment Adviser will keep and maintain the following books and
records of each Money Fund pursuant to Rule 31a-1 under the Investment Company
Act of 1940 (the "Rule"):
a. Journals containing an itemized daily record in detail of all purchases
and sales of securities, all receipts and disbursements of cash, and all other
debits and credits, as required by subsection (b)(1) of the Rule;
b. General and auxiliary ledgers reflecting all asset, liability, reserve,
capital, income and expense accounts, including interest accrued and interest
received, as required by subsection (b)(2)(i) of the Rule;
c. Separate ledger accounts required by subsection (b)(2)(ii) and (iii) of
the Rule; and
d. A monthly trial balance of all ledger accounts (except shareholder
accounts) as required by subsection (b)(8) of the Rule.
In addition to the maintenance of the books and records specified above,
the Investment Adviser will perform the following accounting services daily for
each Money Fund:
a. Calculate the yield;
b. Provide the following reports:
(i) a current security position report;
(ii) a summary report of transactions and pending
maturities (including the principal, cost, and
accrued interest on each portfolio security in
maturity date order); and
(iii) a current cash position report (including cash
available from portfolio sales and maturities
and sales of a Portfolio's Shares less cash
needed for redemptions and settlement of
portfolio purchases);
c. Such other similar services with respect to a Money Fund as may be
reasonably requested by Trust.
<PAGE> 1
Exhibit 5(c)
SCHEDULE B
NOT APPLICABLE
<PAGE> 1
Exhibit 5(d)
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT
AGREEMENT made as of June 15, 1994 between THE CHARLES SCHWAB FAMILY OF
FUNDS, a Massachusetts business trust (herein called the "Trust"), and CHARLES
SCHWAB INVESTMENT MANAGEMENT, INC., a Delaware corporation (the "Investment
Adviser").
WHEREAS, the Trust is registered as an open-end diversified, management
investment company under the Investment Company Act of 1940, as amended ("1940
Act"); and
WHEREAS, the Trust desires to retain the Investment Adviser to furnish
investment advisory, administrative, and certain accounting and record-keeping
services to the investment portfolios of the Trust listed on Schedule A hereto
(each a "Schwab Fund" and collectively, the "Schwab Funds"),
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints the Investment Adviser to act
as investment adviser and administrator to the Schwab Funds for the period and
on the terms set forth in this Agreement. The Investment Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Delivery of Documents. The Trust has furnished the Investment
Adviser with copies properly certified or authenticated of each of the
following:
(a) the Trust's Agreement and Declaration of Trust, as filed
with the Secretary of State of The Commonwealth of Massachusetts on
October 20, 1989, and all amendments thereto or restatements thereof
(such Agreement and Declaration, as presently in effect and as it shall
from time to time be amended or restated, is herein called the
"Declaration of Trust");
(b) the Trust's By-Laws and amendments thereto;
(c) resolutions of the Trust's Board of Trustees authorizing
the appointment of the Investment Adviser and approving this Agreement;
(d) the Trust's Notification of Registration on Form N-8A
under the 1940 Act, as
<PAGE> 2
filed with the Securities and Exchange Commission ("SEC") on November
1, 1989 and all amendments thereto;
(e) the Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended ("1933 Act"), (File No. 33-31894)
and under the 1940 Act as filed with the SEC and all amendments
thereto; and
(f) the Trust's most recent prospectus and Statement of
Additional Information for the Schwab Funds (such prospectuses and
Statement of Additional Information, as presently in effect, and all
amendments and supplements thereto are herein collectively called the
"Prospectus").
The Trust will furnish the Investment Adviser from time to time with copies of
all amendments of or supplements to the foregoing.
3. Management. Subject to the direction and control of the Board of
Trustees of the Trust, the Investment Adviser will supervise or perform for the
Schwab Funds all aspects of the operations of the Schwab Funds except for those
performed by the custodian for the Schwab Funds under the Custody Agreement,
provide general economic and financial analysis and advice to the Schwab Funds,
and provide a continuous investment program for the Schwab Funds, including
investment research and management as to all securities and investments and cash
equivalents in the Schwab Funds. More particularly, the Investment Adviser will:
determine from time to time what securities and other investments will be
purchased, retained, or sold by the Schwab Funds; maintain office facilities
(which may be in the offices of the Investment Adviser or a corporate affiliate
but shall be in such location as the Trust reasonably determines); furnish
statistical and research data, clerical services and stationery and office
supplies; compile data for, prepare for execution by the Schwab Funds and file
all the Schwab Funds' federal and state tax returns and required tax filings
other than those required to be made by the Schwab Funds' custodian and transfer
agent; prepare compliance filings pursuant to state securities laws with the
advice of the Trust's counsel; prepare the Trust's Annual and Semi-Annual
Reports to Shareholders and amendments to its Registration Statements (on Form
N-1A or any replacement therefor); compile data for, prepare and file timely
Notices to the SEC required pursuant to Rule 24f-2 under the 1940 Act; perform
at the expense of the Schwab Funds the daily pricing of portfolio securities and
computation of the net asset value and the net income of each Schwab Fund in
accordance with the Prospectus and resolutions of the Trust's Board of
-2-
<PAGE> 3
Trustees; keep and maintain the financial accounts and records of the Schwab
Funds and provide the Trust with certain reports, all as more specifically set
forth on Schedule B hereto; and generally assist in all aspects of the
operations of the Schwab Funds.
Subject to the provisions of the Agreement and Declaration of
Trust and the 1940 Act, the Investment Adviser, at its expense, may select and
contract with investment advisers (the "Sub-Advisers") for one or more of the
Schwab Funds. So long as any Sub-Adviser serves as Sub-Adviser to a Schwab Fund,
it must be a party to a Sub-Investment Advisory Agreement in substantially the
form attached hereto as Schedule C (the "Sub-Adviser Agreement") and will be
obligated to (i) furnish continuously an investment program as to those assets
of the Trust and the Schwab Funds involved allocated by the Investment Adviser,
(ii) in connection therewith, adhere to such guidelines as may be established by
the Investment Adviser from time to time to insure compliance with applicable
investment objectives, policies and restrictions of the Trust and the Schwab
Funds and (iii) place all orders for the purchase and sale of Investments. The
Investment Adviser may also delegate or subcontract some or all of the
Investment Adviser's other duties enumerated in this Agreement. The Investment
Adviser will be responsible for payment of all compensation to all Sub-Advisers
and other persons and entities to which Investment Adviser delegates any duties
hereunder.
The Investment Adviser further agrees that it:
(a) will use the same skill and care in providing such
services as it would use in providing services to fiduciary accounts if
it had investment responsibilities for such accounts;
(b) will conform with all applicable Rules and Regulations of
the SEC and will in addition conduct its activities under this
Agreement in accordance with any applicable regulations of any
governmental authority pertaining to the investment advisory activities
of the Investment Adviser;
(c) will not make loans to any person to purchase or carry
units of beneficial interest in the Trust or make loans to the Trust;
-3-
<PAGE> 4
(d) will place orders pursuant to its investment
determinations for the Schwab Funds either directly with the issuer or
with an underwriter, market maker, or broker or dealer. In placing
orders with brokers and dealers the Investment Adviser will attempt to
obtain prompt execution of orders in an effective manner at the most
favorable price. Consistent with this obligation, when the execution
and price offered by two or more brokers or dealers are comparable, the
Investment Adviser may, in its discretion, purchase or sell portfolio
securities to and from brokers and dealers who provide the Investment
Adviser or any Sub-Adviser with research advice and other services. In
no instance will portfolio securities be purchased from or sold to the
Investment Adviser or any Sub-Adviser, or any affiliated person of
either the Trust, the Investment Adviser, or any Sub-Adviser, except as
may be permitted under the 1940 Act;
(e) will treat confidentially and as proprietary information
of the Trust all records and other information relative to the Trust,
and will not use such records and information for any purpose other
than performance of its responsibilities and duties hereunder, except
after prior notification to and approval in writing by the Trust, which
approval shall not be unreasonably withheld and may not be withheld
where the Investment Adviser may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested
by the Trust; and
(f) will direct its personnel when making investment
recommendations for the Trust, not to inquire or take into
consideration whether the issuers of securities proposed for purchase
or sale for the Trust's accounts are customers of the Investment
Adviser or of its parent or its subsidiaries or affiliates. In dealing
with such customers, the Investment Adviser and its parent,
subsidiaries, and affiliates will not inquire or take into
consideration whether securities of those customers are held by the
Trust.
4. Services to Others. The Trust understands that the Investment
Adviser may in the future act as an investment adviser to fiduciary and other
managed accounts, and as investment adviser, sub-investment adviser, and/or
administrator to other investment companies. The Trust has no objection to the
Investment Adviser's acts in such
-4-
<PAGE> 5
capacities, provided that whenever one of the Schwab Funds and one or more other
investment companies advised by the Investment Adviser have available funds for
investment, investments suitable and appropriate for each will be allocated in
accordance with a formula believed by the Investment Adviser to be equitable to
each company. The Trust recognizes that in some cases this procedure may
adversely affect the size of the position that a Schwab Fund may obtain in a
particular security. In addition, the Trust understands that the persons
employed by the Investment Adviser to assist in the Investment Adviser's duties
under this Agreement will not devote their full time to such service and nothing
contained in this Agreement will be deemed to limit or restrict the right of the
Investment Adviser or any of its affiliates to engage in and devote time and
attention to other businesses or to render services of whatever kind or nature.
5. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, the Investment Adviser hereby agrees that all records it
maintains for the Trust are the property of the Trust and further agrees to
surrender promptly to the Trust any of such records upon the Trust's request and
will require the same type of agreement from each Sub-Adviser. The Investment
Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
6. Expenses. During the term of this Agreement, the Investment Adviser
will pay all expenses incurred by it in providing general economic and financial
analysis and advice to the Schwab Funds and providing a continuous investment
program for the Schwab Funds pursuant to Section 3 above and in providing its
activities under this Agreement other than the cost of securities (including
brokerage commissions, if any) purchased for the Trust. The Investment Adviser
will also pay all compensation of any person or person employed by or associated
with the Investment Adviser to assist in the performance of the Investment
Adviser's obligations under this Agreement, whether or not such person is also a
officer or employee of the Trust, and the Investment Adviser will not cause any
obligation to be incurred on behalf of the Trust in respect of any such
compensation. Other expenses to be incurred in the operation of the Schwab Funds
- -- including without limitation taxes, interest, brokerage fees and commissions,
if any, fees of Trustees who are not officers, directors, shareholders, or
employees of the Investment Adviser or any Sub-Adviser, SEC fees and state "blue
sky" qualification fees, advisory and administration fees, costs of performing
the pricing of portfolio securities, transfer and dividend disbursing agents'
fees, certain insurance premiums,
-5-
<PAGE> 6
outside auditing and legal expenses, costs of maintaining the Trust's existence
as a Massachusetts business trust, typesetting and printing prospectuses for
regulatory purposes and for distribution to current shareholders of the Schwab
Funds, costs of shareholders' and Trustees' reports and meetings and any
extraordinary expenses -- will be borne by the Schwab Funds; provided however,
that the Schwab Funds will not bear, directly or indirectly, the cost of any
activity that is primarily intended to result in the distribution of shares of
the Schwab Funds.
7. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Trust will pay the Investment Adviser and the
Investment Adviser will accept as full compensation therefor, an advisory fee,
accrued daily and payable monthly, in accordance with Schedule D hereto.
If in any fiscal year the aggregate expenses (as defined under
the securities regulations of any state having jurisdiction over the Trust) of a
Schwab Fund exceed the expense limitations of any such state, the Investment
Adviser will reimburse such Schwab Fund for a portion of such excess expenses
equal to such excess times the ratio of the fees otherwise payable by such
Schwab Fund to the Investment Adviser hereunder to the aggregate fees otherwise
payable by such Schwab Fund to the Investment Adviser hereunder, and to Charles
Schwab & Co., Inc. under the Transfer Agency and Shareholder Servicing Agreement
between it and the Trust. The obligation of the Investment Adviser to reimburse
a Schwab Fund hereunder is limited in any fiscal year to the amount of its fee
hereunder from such Schwab Fund for such fiscal year, provided, however, that
notwithstanding the foregoing, the Investment Adviser will reimburse each Schwab
Fund for such proportion of such excess expenses regardless of the amount of
fees paid to it during such fiscal year to the extent that the securities
regulations of any state having jurisdiction over the Trust so require. Such
expense reimbursement, if any, will be estimated daily and reconciled and paid
on a monthly basis.
8. Limitation of Liability. The Investment Adviser will not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the performance of this Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Investment Adviser in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement.
9. Duration and Termination. This Agreement will become effective as to
each Schwab Fund as of the date set
-6-
<PAGE> 7
forth opposite each Fund's name on Schedule A, provided that it has been
approved by a vote of a majority of the outstanding voting securities of such
Schwab Fund, in accordance with the requirements under the 1940 Act.
Thereafter, if not terminated as to a Schwab Fund, this
Agreement will continue in effect as to such Schwab Fund for successive periods
each ending on May 30 of each year, provided such continuance is specifically
approved at least annually (a) by the vote of a majority of those members of the
Trust's Board of Trustees who are not parties to this Agreement or interested
persons of the Trust, the Investment Adviser, or any Sub-Adviser, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
Trust's Board of Trustees or by vote of a majority of the outstanding voting
securities of such Schwab Fund. Notwithstanding the foregoing, this Agreement
may be terminated at any time on sixty days' written notice, without the payment
of any penalty, by the Trust (by vote of the Trust's Board of Trustees or by
vote of a majority of the outstanding voting securities of such Schwab Fund) or
by the Investment Adviser. This Agreement will immediately terminate in the
event of its assignment. (As used in this Agreement, the terms "majority of the
outstanding voting securities," "interested persons" and "assignment" shall have
the same meaning of such terms in the 1940 Act.)
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by the laws of the State of California.
The names "The Charles Schwab Family of Funds" and "Trustees
of The Charles Schwab Family of Funds" refer respectively to the Trust created
and the Trustees, as trustees but not individually or personally, acting from
time to time under the Declaration of Trust, to which reference is hereby made
and a copy of which is on file at the office of the Secretary of The
Commonwealth of Massachusetts and elsewhere as required by law, and to any
-7-
<PAGE> 8
and all amendments thereto so filed or hereafter filed. The obligations of "The
Charles Schwab Family of Funds" entered into in the name or on behalf thereof by
any of the Trustees, representatives or agents are made not individually, but in
such capacities, and are not binding upon any of the Trustees, interest holders
or representatives of the Trust personally, but bind only the assets of the
Trust, and all persons dealing with any series of units of interest of the Trust
must look solely to the assets of the Trust belonging to such series for the
enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE CHARLES SCHWAB FAMILY OF FUNDS
By: /s/ Elizabeth G. Sawi
----------------------------
Name: Elizabeth G. Sawi
Title: President
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ William J. Klipp
----------------------------
Name: William J. Klipp
Title: Senior Vice President and
Chief Operating Officer
-8-
<PAGE> 1
Exhibit 5(e)
FORM OF
SCHEDULE A
AMENDED MAY 1, 1997
FUND FUND EFFECTIVE DATE
Schwab California Municipal Money Fund November 5, 1990
(formerly Schwab California
Tax-Exempt Money Fund)
Schwab U.S. Treasury Money Fund November 5, 1991
Schwab Value Advantage Money Fund February 7, 1992
Schwab Institutional Advantage Money Fund November 26, 1993
Schwab Retirement Money Fund November 26, 1993
Schwab New York Municipal Money Fund November 10, 1994
(formerly Schwab New York
Tax-Exempt Money Fund)
THE CHARLES SCHWAB FAMILY OF FUNDS
By: _______________________________
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: _______________________________
Name: William J. Klipp
Title: President and Chief
Operating Officer
<PAGE> 1
Exhibit 5(f)
SCHEDULE B
The Investment Adviser will keep and maintain the following books and
records of each Schwab Fund pursuant to Rule 31a-1 under the Investment Company
Act of 1940 (the "Rule"):
a. Journals containing an itemized daily record in detail of all
purchases and sales of securities, all receipts and disbursements of cash, and
all other debits and credits, as required by subsection (b)(1) of the Rule;
b. General and auxiliary ledgers reflecting all asset, liability,
reserve, capital, income and expense accounts, including interest accrued and
interest received, as required by subsection (b)(2)(i) of the Rule;
c. Separate ledger accounts required by subsection (b)(2)(ii) and (iii)
of the Rule; and
d. A monthly trial balance of all ledger accounts (except shareholder
accounts) as required by subsection (b)(8) of the Rule.
In addition to the maintenance of the books and records specified
above, the Investment Adviser will perform the following accounting services
daily for each Schwab Fund:
a. Calculate the yield;
b. Provide the following reports:
(i) a current security position report;
(ii) a summary report of transactions and pending
maturities (including the principal, cost, and
accrued interest on each portfolio security in
maturity date order); and
(iii) a current cash position report (including cash
available from portfolio sales and maturities and
sales of a Portfolio's Shares less cash needed for
redemptions and settlement of portfolio
purchases);
c.Such other similar services with respect to a Schwab Fund as may be
reasonably requested by Trust.
<PAGE> 1
Exhibit 5(g)
SCHEDULE C
Form of Sub-Investment Advisory
Agreement
(Omitted)
<PAGE> 1
Exhibit 5(h)
FORM OF
SCHEDULE D - ADVISORY FEE SCHEDULE
AMENDED MAY 1, 1997
THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS
AGREEMENT AND ARE TO BE ACCRUED DAILY AND PAID MONTHLY IN ARREARS:
FUND DATE
SCHWAB CALIFORNIA TAX-EXEMPT MONEY FUND NOVEMBER 5, 1990
Forty-six one-hundredths of one percent
(.46%) of the Schwab California Tax-Exempt
Money Fund's average daily net assets not in
excess of $1 billion; forty-one
one-hundredths of one percent (.41%) of such
net assets over $1 billion but not in excess
of $2 billion; and forty one-hundredths of
one percent (.40%) of such net assets over $2
billion.
SCHWAB U.S. TREASURY MONEY FUND NOVEMBER 5, 1991
Forty-six one-hundredths of one percent
(.46%) of the Schwab U.S. Treasury Money
Fund's average daily net assets not in excess
of $1 billion; forty-one one-hundredths of
one percent (.41%) of such net assets over $1
billion but not in excess of $2 billion; and
forty one-hundredths of one percent (.40%) of
such net assets over $2 billion.
SCHWAB VALUE ADVANTAGE MONEY FUND FEBRUARY 7, 1992
Forty-six one-hundredths of one percent
(.46%) of the Schwab Value Advantage Money
Fund's average daily net assets not in excess
of $1 billion; forty-five one-hundredths of
one percent (.45%) of such net assets over $1
billion but not in excess of $3 billion;
forty one-hundredths of one percent (.40%) of
such net assets over $3 billion but not in
excess of $10 billion; thirty-seven
one-hundredths of one percent (.37%) of such
net assets over $10 billion but not in excess
of $20 billion; and thirty-four
one-hundredths of one percent (.34%) of such
net assets over $20 billion.
SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND NOVEMBER 26, 1993
Forty-six one-hundredths of one percent
(.46%) of the Schwab Institutional Advantage
Money Fund's average daily net assets not in
excess of $1 billion; forty-five
one-hundredths of one percent (.45%) of such
net assets over $1 billion but not in excess
of $3 billion; forty one-hundredths of one
percent (.40%) of such net assets over $3
billion but not in excess of $10 billion;
thirty-seven one-hundredths of one percent
(.37%) of such net assets over $10 billion
but not in excess of $20 billion; and
thirty-four one-hundredths of one percent
(.34%) of such net assets over $20 billion.
<PAGE> 2
Exhibit 5(h)
FUND DATE
SCHWAB RETIREMENT MONEY FUND NOVEMBER 26, 1993
Forty-six one-hundredths of one percent
(.46%) of the Schwab Retirement Money Fund's
average daily net assets not in excess of $1
billion; forty-five one-hundredths of one
percent (.45%) of such net assets over $1
billion but not in excess of $3 billion;
forty one-hundredths of one percent (.40%) of
such net assets over $3 billion but not in
excess of $10 billion; thirty-seven
one-hundredths of one percent (.37%) of such
net assets over $10 billion but not in excess
of $20 billion; and thirty-four
one-hundredths of one percent (.34%) of such
net assets over $20 billion.
SCHWAB NEW YORK TAX-EXEMPT MONEY FUND NOVEMBER 10, 1994
Forty-six one-hundredths of one percent
(.46%) of the Schwab New York Tax-Exempt
Money Fund's average daily net assets not in
excess of $1 billion; forty-one
one-hundredths of one percent (.41%) of such
net assets over $1 billion but not in excess
of $2 billion; and forty one-hundredths of
one percent (.40%) of such net assets over $2
billion.
THE CHARLES SCHWAB FAMILY OF FUNDS
By: ______________________________
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: ______________________________
Name: William J. Klipp
Title: President and Chief
Operating Officer
<PAGE> 1
Exhibit 11(a)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the caption "Legal Counsel" included in or made a part of
Post-Effective Amendment No. 27 to the Registration Statement of The Charles
Schwab Family of Funds on Form N-1A (Nos. 33-31894 and 811-05954) under the
Securities Act of 1933, as amended.
ROPES & GRAY
Washington, D.C.
April 28, 1997
<PAGE> 1
EXHIBIT 11(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 27 to the registration statement on Form N-1A (the "Registration
Statement") of The Charles Schwab Family of Funds of our reports dated January
31, 1997, relating to the financial statements and financial highlights
appearing in the December 31, 1996 Annual Reports to Shareholders of Schwab
Money Market Fund, Schwab Government Money Fund, Schwab U.S. Treasury Money
Fund, Schwab Value Advantage Money Fund, Schwab Municipal Money Fund, Schwab
California Municipal Money Fund, Schwab New York Municipal Money Fund, Schwab
Institutional Advantage Money Fund and Schwab Retirement Money Fund, which are
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the headings "Financial Highlights" in the
Prospectuses and under the headings "Accountants and Reports to Shareholders" in
the Statements of Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
San Francisco, California
April 29, 1997
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 1
[NAME] SCHWAB MONEY MARKET FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 14040471
[INVESTMENTS-AT-VALUE] 14040471
[RECEIVABLES] 67867
[ASSETS-OTHER] 2426
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 14110764
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 100377
[TOTAL-LIABILITIES] 100377
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 14010737
[SHARES-COMMON-STOCK] 14070737
[SHARES-COMMON-PRIOR] 11227659
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (350)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 14010387
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 760926
[OTHER-INCOME] 0
[EXPENSES-NET] 94788
[NET-INVESTMENT-INCOME] 666138
[REALIZED-GAINS-CURRENT] 4
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 666142
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 666138
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 35277474
[NUMBER-OF-SHARES-REDEEMED] 33124743
[SHARES-REINVESTED] 630347
[NET-CHANGE-IN-ASSETS] 2783082
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (354)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 52254
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 113420
[AVERAGE-NET-ASSETS] 12638433
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .05
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .75
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 2
[NAME] SCHWAB GOVERNMENT MONEY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 1879758
[INVESTMENTS-AT-VALUE] 1879758
[RECEIVABLES] 18397
[ASSETS-OTHER] 104
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1898259
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 13690
[TOTAL-LIABILITIES] 13690
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1884838
[SHARES-COMMON-STOCK] 1884838
[SHARES-COMMON-PRIOR] 1897435
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (269)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 1884569
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 113106
[OTHER-INCOME] 0
[EXPENSES-NET] 14233
[NET-INVESTMENT-INCOME] 98873
[REALIZED-GAINS-CURRENT] (162)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 98711
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 98873
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4120476
[NUMBER-OF-SHARES-REDEEMED] 4229013
[SHARES-REINVESTED] 95940
[NET-CHANGE-IN-ASSETS] (12759)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (107)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 8280
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 17501
[AVERAGE-NET-ASSETS] 1897685
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .05
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .75
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 3
[NAME] SCHWAB MUNICIPAL MONEY FUND - SWEEP SHARES
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 3586104
[INVESTMENTS-AT-VALUE] 3586104
[RECEIVABLES] 33431
[ASSETS-OTHER] 717
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 3620252
[PAYABLE-FOR-SECURITIES] 37735
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 17998
[TOTAL-LIABILITIES] 55733
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 3405684
[SHARES-COMMON-STOCK] 3405684
[SHARES-COMMON-PRIOR] 3017778
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1847)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 3403837
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 125455
[OTHER-INCOME] 0
[EXPENSES-NET] 21167
[NET-INVESTMENT-INCOME] 104288
[REALIZED-GAINS-CURRENT] (20)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 104268
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 104288
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 9911852
[NUMBER-OF-SHARES-REDEEMED] 9623759
[SHARES-REINVESTED] 99813
[NET-CHANGE-IN-ASSETS] 387886
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (1827)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 13504
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 29309
[AVERAGE-NET-ASSETS] 3207145
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .03
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .03
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .66
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 4
[NAME] SCHWAB MUNICIPAL MONEY FUND - VALUE ADVANTAGE SHARES
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 3586104
[INVESTMENTS-AT-VALUE] 3586104
[RECEIVABLES] 33431
[ASSETS-OTHER] 717
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 3620252
[PAYABLE-FOR-SECURITIES] 37735
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 17998
[TOTAL-LIABILITIES] 55733
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 160683
[SHARES-COMMON-STOCK] 160683
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 160682
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 1635
[OTHER-INCOME] 0
[EXPENSES-NET] 186
[NET-INVESTMENT-INCOME] 1449
[REALIZED-GAINS-CURRENT] (1)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 1448
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 1449
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 236471
[NUMBER-OF-SHARES-REDEEMED] 76542
[SHARES-REINVESTED] 754
[NET-CHANGE-IN-ASSETS] 160682
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 190
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 419
[AVERAGE-NET-ASSETS] 84933
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .02
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .02
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .45
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 5
[NAME] SCHWAB CALIFORNIA MUNICIPAL MONEY FUND - SWEEP SHARES
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 1674011
[INVESTMENTS-AT-VALUE] 1674011
[RECEIVABLES] 19731
[ASSETS-OTHER] 200
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1693942
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 8239
[TOTAL-LIABILITIES] 8239
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1578359
[SHARES-COMMON-STOCK] 1578359
[SHARES-COMMON-PRIOR] 1294555
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (664)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 1577695
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 54646
[OTHER-INCOME] 0
[EXPENSES-NET] 9344
[NET-INVESTMENT-INCOME] 45302
[REALIZED-GAINS-CURRENT] 8
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 45310
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 45302
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4257465
[NUMBER-OF-SHARES-REDEEMED] 4016813
[SHARES-REINVESTED] 43152
[NET-CHANGE-IN-ASSETS] 283812
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (672)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 6388
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 13561
[AVERAGE-NET-ASSETS] 1437526
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .03
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .03
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .65
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 6
[NAME] SCHWAB CALIFORNIA MUNICIPAL MONEY FUND - VALUE ADVANTAGE SHARES
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 1674011
[INVESTMENTS-AT-VALUE] 1674011
[RECEIVABLES] 19731
[ASSETS-OTHER] 200
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1693942
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 8239
[TOTAL-LIABILITIES] 8239
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 108008
[SHARES-COMMON-STOCK] 108008
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 108008
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 488
[OTHER-INCOME] 0
[EXPENSES-NET] 56
[NET-INVESTMENT-INCOME] 432
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 432
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 432
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 125848
[NUMBER-OF-SHARES-REDEEMED] 17914
[SHARES-REINVESTED] 74
[NET-CHANGE-IN-ASSETS] 108008
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 57
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 136
[AVERAGE-NET-ASSETS] 50342
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .01
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .01
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .45
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 7
[NAME] SCHWAB U.S. TREASURY MONEY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 1184456
[INVESTMENTS-AT-VALUE] 1184456
[RECEIVABLES] 17149
[ASSETS-OTHER] 52
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1201657
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 7968
[TOTAL-LIABILITIES] 7968
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1193821
[SHARES-COMMON-STOCK] 1193821
[SHARES-COMMON-PRIOR] 803943
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (132)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 1193689
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 57635
[OTHER-INCOME] 0
[EXPENSES-NET] 6503
[NET-INVESTMENT-INCOME] 51132
[REALIZED-GAINS-CURRENT] (60)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 51072
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 51132
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2979266
[NUMBER-OF-SHARES-REDEEMED] 2635740
[SHARES-REINVESTED] 46352
[NET-CHANGE-IN-ASSETS] 389818
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (72)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4575
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 9653
[AVERAGE-NET-ASSETS] 1000438
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .05
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .65
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 8
[CIK]
[NAME] SCHWAB VALUE ADVANTAGE MONEY FUND - INVESTOR SHARES
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 6956238
[INVESTMENTS-AT-VALUE] 6956238
[RECEIVABLES] 65417
[ASSETS-OTHER] 800
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 7022455
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 98565
[TOTAL-LIABILITIES] 98565
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 6924021
[SHARES-COMMON-STOCK] 6924021
[SHARES-COMMON-PRIOR] 3731755
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (131)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 6923890
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 333064
[OTHER-INCOME] 0
[EXPENSES-NET] 22099
[NET-INVESTMENT-INCOME] 310965
[REALIZED-GAINS-CURRENT] (5)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 310960
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 310965
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 10404416
[NUMBER-OF-SHARES-REDEEMED] 7474576
[SHARES-REINVESTED] 262426
[NET-CHANGE-IN-ASSETS] 3192261
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (126)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 23799
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 39853
[AVERAGE-NET-ASSETS] 5524637
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .06
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .06
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .40
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 9
[NAME] SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 80518
[INVESTMENTS-AT-VALUE] 80518
[RECEIVABLES] 864
[ASSETS-OTHER] 67
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 81449
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 703
[TOTAL-LIABILITIES] 703
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 80747
[SHARES-COMMON-STOCK] 80747
[SHARES-COMMON-PRIOR] 60088
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 80746
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 4774
[OTHER-INCOME] 0
[EXPENSES-NET] 420
[NET-INVESTMENT-INCOME] 4354
[REALIZED-GAINS-CURRENT] (1)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 4353
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 4354
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 281164
[NUMBER-OF-SHARES-REDEEMED] 262289
[SHARES-REINVESTED] 1784
[NET-CHANGE-IN-ASSETS] 18874
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 364
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 710
[AVERAGE-NET-ASSETS] 79107
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .06
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .06
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .53
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 10
[NAME] SCHWAB RETIREMENT MONEY FUND
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 99911
[INVESTMENTS-AT-VALUE] 99911
[RECEIVABLES] 573
[ASSETS-OTHER] 59
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 100543
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1551
[TOTAL-LIABILITIES] 1551
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 98992
[SHARES-COMMON-STOCK] 98992
[SHARES-COMMON-PRIOR] 31415
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 98992
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 4616
[OTHER-INCOME] 0
[EXPENSES-NET] 561
[NET-INVESTMENT-INCOME] 4055
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 4055
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 4055
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 173890
[NUMBER-OF-SHARES-REDEEMED] 109877
[SHARES-REINVESTED] 3564
[NET-CHANGE-IN-ASSETS] 67577
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 354
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 705
[AVERAGE-NET-ASSETS] 76879
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .05
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .73
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 11
[NAME] SCHWAB NEW YORK MUNICIPAL MONEY FUND - SWEEP SHARES
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 218648
[INVESTMENTS-AT-VALUE] 218648
[RECEIVABLES] 2486
[ASSETS-OTHER] 65
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 221199
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1193
[TOTAL-LIABILITIES] 1193
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 204869
[SHARES-COMMON-STOCK] 204869
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (6)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 220006
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 6041
[OTHER-INCOME] 0
[EXPENSES-NET] 995
[NET-INVESTMENT-INCOME] 5046
[REALIZED-GAINS-CURRENT] (6)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 5040
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 5046
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 671692
[NUMBER-OF-SHARES-REDEEMED] 470949
[SHARES-REINVESTED] 4126
[NET-CHANGE-IN-ASSETS] 204863
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 724
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1637
[AVERAGE-NET-ASSETS] 186583
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .03
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .03
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .63
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
<PAGE> 1
[ARTICLE] 6
[SERIES]
[NUMBER] 12
[NAME] SCHWAB NEW YORK MUNICIPAL MONEY FUND - VALUE ADVANTAGE SHARES
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 218648
[INVESTMENTS-AT-VALUE] 218648
[RECEIVABLES] 2486
[ASSETS-OTHER] 65
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 221199
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1193
[TOTAL-LIABILITIES] 1193
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 15143
[SHARES-COMMON-STOCK] 15143
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 220006
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 137
[OTHER-INCOME] 0
[EXPENSES-NET] 16
[NET-INVESTMENT-INCOME] 121
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 121
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 121
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 21284
[NUMBER-OF-SHARES-REDEEMED] 6196
[SHARES-REINVESTED] 55
[NET-CHANGE-IN-ASSETS] 15143
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 17
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 64
[AVERAGE-NET-ASSETS] 7262
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .02
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .02
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .45
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
