<PAGE> 1
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,
AS AMENDED OCTOBER 17, 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 MAY NOT BE AVAILABLE FOR
PURCHASE. CALL 1-800-930-4379 FOR UPDATED INFORMATION.
<PAGE> 2
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
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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-
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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
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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.
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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
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
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
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
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
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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
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<PAGE> 8
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. 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
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<PAGE> 9
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.
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. 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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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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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
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<PAGE> 21
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;
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<PAGE> 22
- - 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
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<PAGE> 23
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 MAY NOT BE AVAILABLE FOR
PURCHASE. CALL 1-800-930-4379 FOR UPDATED INFORMATION.
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).
23
<PAGE> 24
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
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<PAGE> 25
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> 26
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.
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<PAGE> 27
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> 28
--------------
[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> 29
SCHWABFUNDS(R)
101 Montgomery Street
San Francisco, California 94104
625-19 (10/97) Printed on recycled paper.
- ---------------------------
SCHWAB
MONEY FUNDS--
Sweep Investments(TM)
PROSPECTUS April 30, 1997
as amended October 17, 1997
[DOLLAR MARK ARTWORK]
SCHWABFUNDS(R)
<PAGE> 30
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, AS AMENDED OCTOBER 17, 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 16
PORTFOLIO TRANSACTIONS AND TURNOVER 22
DISTRIBUTIONS AND TAXES 23
SHARE PRICE CALCULATION 28
HOW THE FUNDS REPORT PERFORMANCE 28
GENERAL INFORMATION 32
PURCHASE AND REDEMPTION OF SHARES 35
OTHER INFORMATION 35
APPENDIX - RATINGS OF INVESTMENT SECURITIES 37
FINANCIAL STATEMENTS 38
<PAGE> 31
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, 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
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<PAGE> 32
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.
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
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<PAGE> 33
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 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
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<PAGE> 34
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 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
5
<PAGE> 35
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.
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.
SECTION 4(2) PAPER
Commercial Paper and other securities are issued in reliance on the
so-called "private
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<PAGE> 36
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. Based on the
primary characteristics of the various types of asset-backed securities, for
purposes of each Fund's concentration policy, each of the Funds has selected the
following asset-backed securities industries: credit card receivables,
automobile receivables, trade receivables and diversified financial assets, and
each Fund will limit its investments in each such industry to less than 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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<PAGE> 37
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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<PAGE> 38
(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) May not purchase securities or make investments other than in accordance
with investment objectives and policies.
- ----------
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.
9
<PAGE> 39
(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:
(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
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<PAGE> 40
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.
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.
- ----------
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.
11
<PAGE> 41
(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
(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
- ----------
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.
12
<PAGE> 42
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.
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
- ----------
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.
13
<PAGE> 43
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 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.
The Schwab Money Market Fund and Schwab Government Money Fund are limited to
purchasing securities with a remaining maturity of 12 months or less. For this
purpose only, the Schwab Money Market Fund and Schwab Government Money Fund will
calculate maturity from the security's settlement date. At all times, the Schwab
Money Market Fund and Schwab Government Money Fund will not purchase a security
with a remaining maturity in excess of the limits of Rule 2a-7 under the 1940
Act.
- ----------
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> 44
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 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
15
<PAGE> 45
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> 46
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
July 29, 1937 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 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).
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
</TABLE>
- ----------
* Mr. Schwab is an "interested person" of the Trust.
* Mr. McCarthy is an "interested person" of the Trust.
17
<PAGE> 47
<TABLE>
<S> <C> <C>
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 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
</TABLE>
- ----------
* Mr. Klipp is an "interested person" of the Trust.
18
<PAGE> 48
<TABLE>
<S> <C> <C>
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> 49
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 Securities"). SchwabFunds
include the series or classes of beneficial interest of the Trust, Schwab
Investments and Schwab Capital Trust.
20
<PAGE> 50
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.
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.
21
<PAGE> 51
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, 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
22
<PAGE> 52
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 also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
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<PAGE> 53
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.
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
24
<PAGE> 54
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.
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
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<PAGE> 55
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 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
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<PAGE> 56
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 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
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<PAGE> 57
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 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
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<PAGE> 58
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 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.
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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 January 26, 1990 3.17% 22.05% 2.92%
Shares
Schwab California Municipal Money November 6, 1990 2.77% 18.31% 2.80%
Fund-Sweep Shares
Schwab Retirement Money Fund(R) March 2, 1994 4.81% 14.27% 4.93%
Schwab Institutional Advantage January 4, 1994 4.89% 15.38% 5.15%
Money Fund(R)
Schwab New York Municipal Money February 27, 1995 2.97% 5.56% 2.74%
Fund-Sweep Shares
Schwab Value Advantage Money N/A N/A N/A N/A
Fund-Sweep Shares*
</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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<PAGE> 60
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 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
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<PAGE> 61
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 Advantage 5.09% 5.22% N/A N/A
Money Fund(R)
Schwab Retirement Money 4.86% 4.99% N/A N/A
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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<PAGE> 62
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 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
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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(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
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
Intitutional'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, 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
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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.
IBCA
Obligations supported by the highest capacity for timely repayment are
rated A1+.
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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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