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STATEMENT OF ADDITIONAL INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
101 Montgomery Street, San Francisco, CA 94104
THE SCHWAB MONEY FUNDS:
SCHWAB MONEY MARKET FUND
SCHWAB GOVERNMENT MONEY FUND
SCHWAB U.S. TREASURY MONEY FUND
SCHWAB MUNICIPAL MONEY FUND-SWEEP SHARES
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND-SWEEP SHARES
SCHWAB RETIREMENT MONEY FUND(R)
SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R)
SCHWAB NEW YORK MUNICIPAL MONEY FUND-SWEEP SHARES
SCHWAB VALUE ADVANTAGE MONEY FUND(R)-SWEEP SHARES
APRIL 30, 1997
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectuses dated April 30, 1997 (and as may be
amended from time to time), for Schwab Money Market Fund, Schwab Government
Money Fund, Schwab U.S. Treasury Money Fund, Schwab Municipal Money Fund-Sweep
Shares (formerly known as Schwab Tax-Exempt Money Fund-Sweep Shares), Schwab
California Municipal Money Fund-Sweep Shares (formerly known as Schwab
California Tax-Exempt Money Fund-Sweep Shares) and Schwab New York Municipal
Money Fund-Sweep Shares (formerly known as Schwab New York Tax-Exempt Money
Fund-Sweep Shares), Schwab Retirement Money Fund, Schwab Institutional Advantage
Money Fund and Schwab Value Advantage Money Fund-Sweep Shares (each a "Fund" and
collectively, the "Funds"), 9 separately managed investment portfolios of The
Charles Schwab Family of Funds (the "Trust"). With respect to Schwab Municipal
Money Fund, Schwab California Municipal Money Fund, Schwab New York Municipal
Money Fund and Schwab Value Advantage Money Fund, each of which is offered in
two classes of shares, this Statement of Additional Information relates to the
Sweep Shares of each of those Funds. Prior to June 6, 1995, Schwab Municipal
Money Fund, Schwab California Municipal Money Fund and Schwab New York Municipal
Money Fund were not offered in multiple classes of shares. The existing shares
of those Funds were redesignated as Sweep Shares. Prior to April 30, 1997,
Schwab Value Advantage Money Fund was not offered in multiple classes of shares.
The existing shares of the Fund are redesignated as Investor Shares. The other
Funds listed above are not offered in multiple classes of shares. To obtain a
copy of any of these Prospectuses, please contact Charles Schwab & Co., Inc.
("Schwab") at 800-2 NO-LOAD, 24 hours a day, or 101 Montgomery Street, San
Francisco, California 94104. TDD users may contact Schwab at 800-345-2550, 24
hours a day. These Prospectuses are also available electronically by using our
World Wide Web address: http://www.schwab.com.
SCHWABFunds(R)
800-2 NO-LOAD (800-266-5623)
TABLE OF CONTENTS
Page
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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
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MUNICIPAL SECURITIES
"Municipal Securities" are debt securities issued by a state, its
political subdivisions, agencies, authorities and corporations. Municipal
Securities issued by or on behalf of the State of California, its subdivisions,
agencies or authorities are referred to herein as "California Municipal
Securities." Municipal Securities issued by or on behalf of the State of New
York, its subdivisions, agencies or instrumentalities are referred to herein as
"New York Municipal Securities."
Municipal Securities that 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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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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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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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
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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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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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INVESTMENT RESTRICTIONS
EXCEPT AS OTHERWISE NOTED, THE RESTRICTIONS BELOW ARE FUNDAMENTAL AND CANNOT BE
CHANGED WITHOUT APPROVAL OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING VOTING
SECURITIES (AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED,
HEREINAFTER THE "1940 ACT") OF THE FUND TO WHICH THEY APPLY.
EACH OF SCHWAB MONEY MARKET FUND, SCHWAB GOVERNMENT MONEY FUND, SCHWAB
RETIREMENT MONEY FUND(R) AND SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R) MAY
NOT:
(1) Purchase securities or make investments other than in accordance with its
investment objectives and policies.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result
thereof, more than 5% of the value of its assets would be invested in the
securities of such issuer.
(3) Purchase, in the aggregate with all other Schwab Money Funds, more than 10%
of any class of securities of any issuer. All debt securities and all preferred
stocks are each considered as one class.
(4) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that it reserves the freedom of action to invest up to 100%
of its assets in certificates of deposit or bankers' acceptances issued by
domestic branches of U.S. banks and U.S. branches of foreign banks (which the
Fund has determined to be subject to the same regulation as U.S. banks), or
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities in accordance its investment objective and policies.
(5) Invest more than 5% of its total net assets in securities of issuers (other
than obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities) that, with their predecessors, have a record of less than
three years of continuous operation.
(6) Enter into repurchase agreements if, as a result thereof, more than 10% its
net assets valued at the time of the transaction would be subject to repurchase
agreements maturing in more than 7-days and invested in securities restricted as
to disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the Securities Act of 1933, as amended). Each Fund will
invest no more than 10% of its net assets in illiquid securities.
(7) Invest more than 5% of its total assets in securities restricted as to
disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the Securities Act of 1933, as amended).
(8) Purchase or retain securities of an issuer if any of the officers, trustees
or directors of the Trust or its Investment Manager or the Sub-Adviser
individually own beneficially more than 1/2 of 1% of the securities of such
issuer and together beneficially own more than 5% of the securities of such
issuer.
(9) Invest in commodities or commodity contracts, futures contracts, real estate
or real estate limited partnerships, although it may invest in securities which
are secured by real estate and securities of issuers which invest or deal in
real estate.
(10) Invest for the purpose of exercising control or management of another
issuer.
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(11) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets. 1
(12) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objectives and
policies), except that Schwab Retirement Money Fund(R) and Schwab Institutional
Advantage Money Fund(R) may (i) purchase a portion of an issue of short-term
debt securities or similar obligations (including repurchase agreements) that
are publicly distributed or customarily purchased by institutional investors,
and (ii) lend its portfolio securities.
(13) Borrow money, except as a temporary measure for extraordinary or emergency
purposes, and then only in an amount up to one-third of the value of its total
assets in order to meet redemption requests without immediately selling any
portfolio securities. The Fund will not borrow for leverage purposes or purchase
securities or make investments while reverse repurchase agreements or borrowings
are outstanding. Any borrowings by Schwab Money Market Fund or Schwab Government
Money Fund will not be collateralized. If for any reason the current value of
the total net assets of any Fund falls below an amount equal to three times the
amount of indebtedness from money borrowed, such Fund will, within three
business days, reduce its indebtedness to the extent necessary.
(14) Write, purchase or sell puts, calls or combinations thereof.
(15) Make short sales of securities, or purchase any securities on margin,
except to obtain such short-term credits as may be necessary for the clearance
of transactions.
(16) Invest in interests in oil, gas, mineral leases or other mineral
exploration or development programs, although it may invest in the securities of
issuers which invest in or sponsor such programs.
(17) Underwrite securities issued by others except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of securities from its investment portfolio.
(18) Issue senior securities as defined in the 1940 Act.
Except for restrictions (4) and (13), if a percentage restriction is adhered to
at the time of investment, a later increase in percentage resulting from a
change in values or net assets will not be considered a violation.
EXCEPT AS OTHERWISE NOTED, THE RESTRICTIONS BELOW ARE FUNDAMENTAL AND CANNOT BE
CHANGED WITHOUT APPROVAL OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING VOTING
SECURITIES (AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED,
HEREINAFTER THE "1940 ACT") OF THE FUND TO WHICH THEY APPLY.
EACH OF SCHWAB MUNICIPAL MONEY FUND, SCHWAB CALIFORNIA MUNICIPAL MONEY FUND AND
SCHWAB NEW YORK MUNICIPAL MONEY FUND:
(1) 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.
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(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
10
<PAGE> 11
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> 12
(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> 13
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> 14
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.
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
- --------------
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> 15
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 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).
15
<PAGE> 16
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The officers and Trustees of the Trust, their
principal occupations over the past five years and their affiliations, if any,
with The Charles Schwab Corporation, Schwab and the Investment Manager, are as
follows:
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Chief
July 29, 1937 Executive Officer
and Director, The
Charles Schwab
Corporation;
Chairman and
Director, Charles
Schwab & Co., Inc.
and Charles Schwab
Investment
Management, Inc.;
Chairman and
Director, The
Charles Schwab Trust
Company; Chairman
and Director
(current board
positions), and
Chairman (officer
position) until
December 1995, Mayer
& Schweitzer, Inc.
(a securities
brokerage subsidiary
of The Charles
Schwab Corporation);
Director, The Gap,
Inc. (a clothing
retailer),
Transamerica
Corporation (a
financial services
organization),
AirTouch
Communications (a
telecommunications
company) and Siebel
Systems (a software
company).
TIMOTHY F. McCARTHY* President and Trustee Executive Vice
September 19, 1951 President and
President, Financial
Products and
International Group,
Charles Schwab &
Co., Inc.; Executive
Vice President and
President, Financial
Products and
International Group,
The Charles Schwab
Corporation; Chief
Executive Officer,
Charles Schwab
Investment
Management, Inc.;
Vice Chairman and
Chief Operating
Officer, Charles
Schwab Limited;
Director, Mayer &
Schweitzer. From
1994 to 1995, Mr.
McCarthy was Chief
Executive Officer,
Jardine Fleming Unit
Trusts Ltd.;
Executive Director,
Jardine Fleming
Holdings Ltd.;
Chairman, Jardine
Fleming Taiwan
Securities Ltd.; and
Director of JF India
and Fleming
Flagship, Europe.
Prior to 1994, he
was President of
Fidelity Investments
Advisor Group, a
division of Fidelity
Investments in
Boston.
DONALD F. DORWARD Trustee President and Chief
September 23, 1931 Executive Officer,
Dorward & Associates
(advertising and
marketing/
consulting).
ROBERT G. HOLMES Trustee Chairman, Chief
May 15, 1931 Executive Officer
and Director, Semloh
Financial, Inc.
Semloh Financial is
an international
financial services
and investment
*Mr. Schwab is an "interested person" of the Trust.
*Mr. McCarthy is an "interested person" of the Trust.
16
<PAGE> 17
advisory firm.
DONALD R. STEPHENS Trustee Managing Partner,
June 28, 1938 D.R. Stephens & Co.
(investment
banking). Prior to
1995, Mr. Stephens
was Chairman and
Chief Executive
Officer of North
American Trust (a
real estate
investment trust).
Prior to 1992, Mr.
Stephens was
Chairman and Chief
Executive Officer of
the Bank of San
Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief
August 18, 1943 Executive Officer
and Director, Wilsey
Bennett, Inc. (truck
and air
transportation, real
estate investment
and management, and
investments).
TAI-CHIN TUNG Treasurer and Principal Vice President -
March 7, 1951 Financial Officer Finance, Charles
Schwab & Co., 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
December 9, 1955 Chief Operating Officer President-
and Trustee SchwabFunds(R),
Charles Schwab &
Co., Inc.; President
and Chief Operating
Officer, Charles
Schwab Investment
Management, Inc.
Prior to 1993, Mr.
Klipp was Treasurer
of Charles Schwab &
Co., Inc. and Mayer
& Schweitzer, Inc.
STEPHEN B. WARD Senior Vice President and Senior Vice
April 5, 1955 Chief Investment Officer President and Chief
Investment Officer,
Charles Schwab
Investment
Management, Inc.
FRANCES COLE Secretary Vice President,
September 9, 1955 Chief Counsel, Chief
Compliance Officer
and Assistant
Corporate Secretary,
Charles Schwab
Investment
Management, Inc.
DAVID H. LUI Assistant Secretary Vice President and
October 14, 1960 Senior Counsel,
Charles Schwab
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
June 16, 1961 Senior Counsel,
Charles Schwab
Investment
Management, Inc.
Prior to 1994, she
was Counsel and
Assistant Secretary
for
*Mr. Klipp is an "interested person" of the Trust.
17
<PAGE> 18
North American
Security Life
Insurance Company
and Secretary for
North American
Funds.
KAREN L. SEAMAN Assistant Secretary Corporate Counsel,
February 27, 1968 Charles Schwab
Investment
Management, Inc.
From October, 1994
to July 1996, Ms.
Seaman was Attorney
for Franklin
Resources, Inc.
Prior to 1994, Ms.
Seaman was an
attorney for The
Benham Group.
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.
18
<PAGE> 19
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.
19
<PAGE> 20
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.
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<PAGE> 21
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
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<PAGE> 22
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> 23
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
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<PAGE> 24
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> 25
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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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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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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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
Shares January 26, 1990 3.17% 22.05% 2.92%
Schwab California Municipal Money
Fund-Sweep Shares November 6, 1990 2.77% 18.31% 2.80%
Schwab Retirement Money Fund(R) March 2, 1994 4.81% 14.27% 4.93%
Schwab Institutional Advantage
Money Fund(R) January 4, 1994 4.89% 15.38% 5.15%
Schwab New York Municipal Money
Fund-Sweep Shares February 27, 1995 2.97% 5.56% 2.74%
Schwab Value Advantage Money
Fund-Sweep Shares* N/A N/A N/A N/A
</TABLE>
- ----------------
* The Sweep Shares of the Schwab Value Advantage Money Fund will not commence
operations until on or about May 19, 1997.
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YIELD
A Fund's yield refers to the net investment income generated by a
hypothetical investment in the Fund (or, in the case of Schwab Municipal Money
Fund, Schwab California Municipal Money Fund, Schwab New York Municipal Money
Fund and Schwab Value Advantage Money Fund, the Sweep Shares of the Fund) over a
specific 7-day period. This net investment income is then annualized, which
means that the net investment income generated during the 7-day period is
assumed to be generated in each 7-day period over an annual period, and is shown
as a percentage of the investment.
EFFECTIVE YIELD
A Fund's effective yield is calculated similarly, but the net
investment income earned by the investment is assumed to be compounded weekly
when annualized. The effective yield will be slightly higher than the yield due
to this compounding effect.
TAXABLE EQUIVALENT YIELD AND
TAXABLE EQUIVALENT EFFECTIVE YIELD
The taxable equivalent yield of the Sweep Shares of Schwab Municipal
Fund is computed by dividing that portion of the yield of the class (computed as
described above) that is tax-exempt by an amount equal to one minus the stated
federal income tax rate (normally assumed to be the maximum applicable marginal
tax bracket rate) and adding the result to that portion, if any, of the yield of
the class that is not tax-exempt. The taxable equivalent yield of the Sweep
Shares of Schwab California Municipal Money Fund is calculated by dividing that
portion of the yield of the class (computed as described above) which is
tax-exempt by an amount equal to one minus the stated combined State of
California and federal income tax rate (normally assumed to be the maximum
federal marginal rate of 39.6% and the California marginal rate of 9.3%,
although other rates may be used at times), and adding the result to that
portion, if any, of the yield of the class that is not tax-exempt. The taxable
equivalent yield of the Sweep Shares of Schwab New York Municipal Money Fund is
calculated by dividing that portion of the yield of the class (computed as
described above) which is tax-exempt by an amount equal to one minus the stated
combined New York municipal, State of New York and federal income tax rate
(normally assumed to be the maximum federal marginal rate of 39.6%, the State of
New York marginal rate of 6.85% and the New York City municipal marginal rate of
4.457%, although other rates may be used at times), and adding the result to
that portion, if any, of the yield of the class that is not tax-exempt.
Taxable equivalent effective yields are computed in the same manner as
taxable equivalent yields, except that effective yield is substituted for yield
in the calculation. In calculating taxable equivalent yields and effective
yields, Schwab Municipal Money Fund generally assumes an effective tax rate of
39.6%, Schwab California Municipal Money Fund generally assumes an effective tax
rate (combining the federal 39.6% rate and the California 9.3% rate, and
assuming the taxpayer deducts California state taxes paid) of 45.22%, and Schwab
New York Municipal Money Fund generally assumes an effective tax rate (combining
the federal 39.6% rate, the New York state 6.85% rate and the New York City
municipal 4.457% rate, and assuming the taxpayer deducts New York state and New
York City municipal taxes paid) of 46.43%. Investors in Schwab New York
Municipal Money Fund should understand that, under legislation enacted in New
York State and New York City, the maximum effective tax rates for 1998 and 1999
will be 44.89% and 44.58%, respectively. The effective tax rates used in
determining such yields do not reflect the tax costs resulting from the full or
partial loss of the benefits of personal exemptions, itemized deductions and
California exemption credits that may result from the receipt of additional
taxable income by single taxpayers or married 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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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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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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<PAGE> 33
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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<PAGE> 34
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 FUNDS1
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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<PAGE> 36
Information form a part, each such statement being qualified in all respects by
such reference.
THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN
OFFERING BY THE TRUST, ANY SERIES THEREOF, OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE.
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<PAGE> 37
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.
38
