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STATEMENT OF ADDITIONAL INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
101 Montgomery Street, San Francisco, CA 94104
SWEEP INVESTMENTS (TM)
SCHWAB MUNICIPAL MONEY FUND-SWEEP SHARES (TM)
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND-SWEEP SHARES (TM)
SCHWAB NEW YORK MUNICIPAL MONEY FUND-SWEEP SHARES (TM)
VALUE ADVANTAGE INVESTMENTS(R)
SCHWAB MUNICIPAL MONEY FUND-VALUE ADVANTAGE SHARES (TM)
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND- VALUE ADVANTAGE SHARES (TM)
SCHWAB NEW YORK MUNICIPAL MONEY FUND- VALUE ADVANTAGE SHARES (TM)
SCHWAB VALUE ADVANTAGE MONEY FUND(R)-INVESTOR SHARES
APRIL 30, 1998,
AS AMENDED DECEMBER 2, 1998
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the Prospectus dated April 30, 1998 (as may be amended
from time to time), for Schwab Municipal Money Fund-Sweep Shares, Schwab
California Municipal Money Fund-Sweep Shares and Schwab New York Municipal Money
Fund-Sweep Shares or the Prospectus, dated April 30, 1998 (as may be amended
from time to time), for Schwab Municipal Money Fund-Value Advantage Shares,
Schwab California Municipal Money Fund-Value Advantage Shares, Schwab New York
Municipal Money Fund-Value Advantage Shares ( each a "Fund" and together the
"Municipal Funds") and Schwab Value Advantage Money Fund-Investor Shares (a
"Fund' and altogether the "Funds").
To obtain a copy of the Prospectuses, call 1-800-435-4000 (1-800-345-2550 for
TDD Users), or write to the Funds at 101 Montgomery Street, San Francisco,
California 94104.
TABLE OF CONTENTS
PAGE
INVESTMENT SECURITIES AND RESTRICTIONS................................ 2
MANAGEMENT OF THE TRUST............................................... 15
PORTFOLIO TRANSACTIONS AND TURNOVER................................... 20
DISTRIBUTIONS AND TAXES............................................... 21
SHARE PRICE CALCULATION............................................... 23
HOW THE FUNDS REPORT PERFORMANCE...................................... 24
GENERAL INFORMATION................................................... 25
PURCHASE AND REDEMPTION OF SHARES..................................... 27
OTHER INFORMATION..................................................... 27
APPENDIX - RATINGS OF INVESTMENT SECURITIES........................... 28
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INVESTMENT SECURITIES AND RESTRICTIONS
The following investment securities, risks and restrictions limitations
supplement those set forth in the Funds' prospectuses and may be changed without
shareholder approval unless otherwise noted. Also, policies and restrictions
that state a maximum percentage of assets that may be invested in a security or
other asset, or that set forth a quality standard, shall be measured immediately
after and as a result of a Fund's acquisition of such security or asset unless
otherwise noted. Thus, any subsequent change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with a Fund's investment policies and restrictions. Additionally, for
purposes of calculating any restriction, an issuer shall be the entity deemed to
be ultimately responsible for payments of interest and principal on the security
pursuant to Rule 2a-7, unless otherwise noted. Not all securities discussed
below are eligible investments for each Fund. A Fund will invest in securities
that are intended to help achieve its investment objective.
MUNICIPAL SECURITIES. Municipal securities are securities issued by a state, its
political subdivisions, agencies, authorities and corporations. These securities
may be issued to obtain money 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 include refunding
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to loan to other public institutions and facilities.
Municipal securities also may be issued to finance various private activities,
including certain types of private activity bonds ("industrial development
bonds" under prior law). These securities may be issued by or on behalf of
public authorities to obtain funds to provide certain privately owned or
operated facilities. The Funds may not be desirable investments for "substantial
users" of facilities financed by private activity bonds or industrial
development bonds or for "related persons" of substantial users because
distributions from the Funds attributable to interest on such bonds may not be
tax exempt. Shareholders should consult their own tax advisors regarding the
potential effect on them (if any) of any investment in these Funds.
Municipal securities generally are classified as "general obligation" or
"revenue" and may be purchased directly or through participation interests.
General obligation securities typically are secured by the issuer's pledge of
its full faith and credit and taxing power for the payment of principal and
interest. Revenue securities typically 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 tax or other specific revenue source. Private
activity bonds and industrial development bonds are, in most cases, revenue
bonds and generally do not constitute the pledge of the credit of the issuer of
such bonds. The credit quality of private activity bonds is frequently related
to the credit standing of private corporations or other entities.
Examples of municipal securities that are issued with original maturities of one
year or less are short-term tax anticipation notes, bond anticipation notes,
revenue anticipation notes, construction loan notes, pre-refunded municipal
bonds and tax-free commercial paper. Tax anticipation notes typically are sold
to finance working capital needs of municipalities in anticipation of the
receipt of property taxes on a future date. Bond anticipation notes are sold on
an interim basis in anticipation of a municipality's issuance of a longer-term
bond in the future. Revenue anticipation notes are issued in expectation of the
receipt of other types of revenue, such as that available under the Federal
Revenue Sharing Program. Construction loan notes are instruments insured by the
Federal Housing Administration with permanent financing by "Fannie Mae" (the
Federal National Mortgage Association) or "Ginnie Mae" (the Government National
Mortgage Association) at the end of the project construction period.
Pre-refunded municipal bonds are bonds that are not yet refundable, but for
which securities have been placed in escrow to refund an original municipal bond
issue when it becomes refundable. Tax-free commercial paper is an unsecured
promissory obligation issued or guaranteed by a municipal issuer. The Municipal
Funds may purchase other municipal securities similar
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to the foregoing that are or may become available, including securities issued
to pre-refund other outstanding obligations of municipal issuers.
The Municipal Funds also may invest in moral obligation securities, which are
normally issued by special purpose public authorities. If the issuer of a moral
obligation security is unable to meet its obligation from current revenues, it
may draw on a reserve fund. The state or municipality that created the entity
has only a moral commitment, not a legal obligation, to restore the reserve
fund.
The value of municipal securities may be affected by uncertainties with respect
to the rights of holders of municipal securities in the event of bankruptcy or
the taxation of municipal securities as a result of legislation or litigation.
For example, under federal law, certain issuers of municipal securities may be
authorized in certain circumstances to initiate bankruptcy proceedings without
prior notice to or the consent of creditors. Such action could result in
material adverse changes in the rights of holders of the securities. In
addition, litigation challenging the validity under the state constitutions of
present systems of financing public education has been initiated or adjudicated
in a number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances, there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law, which ultimately could
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.
The Investment Manager relies on the opinion of the issuer's counsel, which is
rendered at the time the security is issued, to determine whether the security
is fit, with respect to its tax status, to be purchased by a Fund.
CALIFORNIA MUNICIPAL SECURITIES. In addition to general economic pressures that
affect the State of California's (the "State") ability to raise revenues to meet
its financial obligations, certain State constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives
also could 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 that have come to the attention of the Trust
and were available before the date of this SAI. 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" includes 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. Property tax revenues and part of the State's General Fund surplus
are distributed to counties, cities and their various taxing entities; whether
and to what extent a portion of the State's General Fund will be distributed in
the future to them is unclear.
Overview. After suffering through a severe recession, California's economy has
been on a steady recovery since the beginning of 1994. The rate of economic
growth in California in 1996 in terms of job gains, exceeded that of the rest of
the United States in terms of job growth. The State added nearly 350,000 jobs
during 1996, surpassing its pre-recession employment peak of 12.7 million jobs.
Another 380,000 jobs are expected to be created in 1997. The unemployment rate,
while still higher than the national average, fell to the low 6 % range in
mid-1997, compared to more than 10 % during the recession. Many of the new jobs
were created in such industries as computer services, software design, motion
pictures and high technology manufacturing. Business services, export trade and
other manufacturing also experienced growth. All major economic regions of the
State grew, with particularly large gains in the Silicon Valley region of
Northern California. The unsettled financial situation occurring in certain
Asian economies may adversely affect the State's export related industries.
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The recession seriously affected State tax revenues and caused an increase in
expenditures for health and welfare programs. As a result, from the late 1980s
through 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 on June 30, 1993.
One consequence of the large budget imbalances significantly reduced the State's
available cash resources and force the State to use a series of external
borrowings to meet its cash needs. With the end of the recession, the State's
financial condition has improved in the 1995-96, 1996-97 and 1997-98 fiscal
years, with a combination of better-than-expected revenues, a slowdown in growth
of social welfare programs and continued spending restraint. No deficit
borrowing has occurred at the end of the last two fiscal years and the State's
cash flow borrowing was limited to $3 billion in 1996-1997.
As a result of the deterioration in the State's budget and cash situation, the
State's credit ratings were reduced. All three major nationally recognized
statistical rating organizations lowered the State's general obligation bond
rating from the highest ranking of "AAA." The State's general obligation bonds
are now rated "A+" by Standard and Poor's Corporation ("S&P"), "A1" by Moody's
Investors Service, Inc. ("Moody's") and "AA-" by Fitch Investors Service, Inc.
("Fitch").
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.
Mortgages and Deeds of Trust. Some issues may be secured in whole or in part by
mortgages or deeds of trust on real property. California law limits the remedies
of a creditor secured by a mortgage or deed of trust, which may result in delays
in the flow of revenues to an issuer.
Lease Financings. Some local governments and districts finance certain
activities through lease arrangements. It is uncertain whether such lease
financings are debt that require voter approval.
Seismic Risk. It is impossible to predict the time, magnitude or location of a
major earthquake or its effect on the California economy. In January 1994, a
major earthquake struck Los Angeles, causing significant damage to structures
and facilities in a four county area. The possibility exists that another such
earthquake could create a major dislocation of the California economy.
1995-1996 FISCAL YEAR
Revenues. The 1995-1996 Budget Act projected General Fund revenues and transfers
of $44.1 billion, a 3.5% increase from 1994-1995. The 1995-1996 Budget Act
projected that the General Fund would end the 1995-1996 fiscal year with a
slight surplus of $28 million at June 30, 1996, and that all of the accumulated
budget deficits will have been repaid. In May 1996, the State Department of
Finance updated the 1995-1996 projections, and estimated that there would be
revenues and transfers of about $46.1 billion but, due to increased
expenditures, there would instead be a deficit of about $70 million in the
budget reserve at June 30, 1996. Principal features of the 1995-1996 Budget Act
included an increase in Proposition 98 funding for K-14 schools of about $1.2
billion, reductions in health and welfare costs of about $900 million (about
$500 million of which depends upon federal legislative approval), and receipt of
an additional $494 million in federal aid for costs of illegal immigrants (above
commitments already made by the federal government; only $31 million of this was
received in 1995-1996). Special Fund revenues were estimated at $12.7 billion.
Expenditures. The 1995-1996 Budget Act projected General Fund expenditures of
$43.4 billion, a 4% increase from 1994-1995. Special Fund expenditures of $13
billion have been appropriated. The May 1996 State Department of Finance
revisions projected that expenditures for 1995-1996 would increase to about
$45.4 billion.
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1996-97 FISCAL YEAR
The Governor's proposed budget for 1996-1997 projected General Fund revenues and
transfers of about $45.6 billion and proposed total General Fund appropriations
of about $45.2 billion. The Governor's proposed budget renewed a proposal, which
had been rejected by the Legislature in 1995, for a 15% cut in personal and
corporate tax rates, phased in over a three-year period. In May 1996, the State
Department of Finance updated revenue estimates to $47.1 billion for 1996-1997,
assuming enactment of the Governor's proposed tax cut, and expenditure estimates
to $46.5 billion.
Revenues. The 1996-1997 Budget Act, enacted on July 15, 1996, rejected the
Governor's proposed 15% tax cut (but did include a 5% cut in bank and
corporation taxes). Consequently, revenues for 1996-1997 were increased to an
estimated $47.6 billion. Special fund revenues are estimated to be $13.3
billion. The 1996-1997 Budget Act appropriated a budget reserve of $305 million
at June 30, 1997. This budget reserve assumed savings of about $660 million in
the State's health and welfare costs based on changes to federal law, including
welfare reform. The federal welfare reform legislation passed in August 1996 is
projected to provide only about $360 million of the assumed $660 million in
savings, however, subject to further adjustment based on how the State
implements changes to its welfare system. Other principal features of the
1996-1997 Budget Act include an increase in Proposition 98 funding for K-14
schools of about $1.6 billion, and about $700 million in new federal aid for
costs of illegal immigrants (with about $540 million to be received during
1996-1997).
Expenditures. The 1996-1997 Budget Act included General Fund appropriations of
about $47.2 billion, a 4% increase over the final estimated 1995-1996
expenditures. Special Fund expenditures were budgeted at $12.6 billion.
1997-98 FISCAL YEAR
Revenues. The 1997-1998 Budget Act anticipates General Fund revenues and
transfers of $52.5 billion (a 6.8 % increase over the final 1996-1997 levels)
and Special Fund revenues of $14.0 billion. Following enactment of the Budget
Act, the State implemented its annual cash flow borrowing program, issuing $3
billion of notes, which mature on June 30, 1998.
Expenditures. The 1997-1998 Budget includes General Fund expenditures of $52.8
billion (an 8.0 % increase from the 1996-1997 levels). Special Fund expenditures
of $14.4 billion, and $2.1 billion of expenditures from various Bond Funds. On a
budgetary basis, the budget reserve is projected to decrease from $408 million
at June 30, 1997 to $112 million at June 30, 1998. The 1997-98 Budget Act
increases funding for K-14 education, reflects a $1.235 billion pension case
judgment payment, increases funding for the University of California and
California State University and continues most other State programs at 1996-1997
levels. Unlike prior years, this Budget Act does not depend on uncertain federal
budget actions. After enactment of the Budget Act, and prior to the end of the
Legislative Session, the Legislature and the Governor reached certain agreements
related to State expenditures and taxes. Legislation signed by the Governor
includes a variety of phased-in tax cuts, conformity with certain provisions of
the federal tax reform law passed earlier in the year, and reform of funding for
county trails courts, with the state to assume greater responsibility.
The Governor's proposed budget for fiscal year 1998-1999 proposes total state
spending of $70.6 billion (excluding the expenditure of federal funds and
selected bond funds), which is up 4.7% from the current year's budget. This
total includes $55.4 billion in General Fund spending (a 4.5% increase from the
current year) and $15.2 billion in special funds spending (a 5.3% increase). The
Governor's proposed budget anticipates a $296 million reserve for economic
uncertainties. The new budget reflects agreements reached in the prior year in
the areas of welfare reform, education, state tax relief, and the financial
restructuring of
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the State's trial court system. The budget contains no tax changes and
relatively few major programmatic changes.
The foregoing discussion of the 1995-1996, 1996-1997 and 1997-1998 Budgets is
based upon the Budget Acts for these years, 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 IN CALIFORNIA.
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 tax revenues.
With certain exceptions, the maximum ad valorem tax on real property is limited
to 1% of the full cash value to be collected by the counties and apportioned
according to law. One exception is for debt service on bonded indebtedness if
such is approved by two-thirds of the votes cast by voters voting on the
proposition. The full cash value may be adjusted annually to reflect inflation
at a rate not to exceed 2% per year, or reduction in the consumer price index or
comparable local data, or reduced in the event of declining property value
caused by substantial damage, destruction or other factors, or adjusted when
there is a "change in ownership" or "new construction."
Proposition 62. This initiative, approved by voters in 1986, placed further
restrictions on the ability of local governments to raise taxes and allocate
approved tax revenues. Although some of the California Courts of Appeal held
that parts of Proposition 62 were unconstitutional, the California Supreme Court
upheld Proposition 62's requirement that special taxes be approved by a
two-thirds vote of the voters voting in an election on the issue. This recent
decision may invalidate other taxes that have been imposed by local governments
in California and make it more difficult for local governments to raise taxes.
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.
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.
Appropriations Limit. Local governmental entities also are 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 following two years.
Conclusion. The effect of these constitutional and statutory changes and of
budget developments on the ability of California issuers to pay interest and
principal on their obligations remains unclear, and may depend on whether a
particular bond is a general obligation or limited obligation bond (limited
obligation bonds are 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. Concentration in California Municipal Securities provides a greater
level of risk than a fund that is diversified across numerous states and
municipal entities.
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NEW YORK MUNICIPAL SECURITIES. The State of New York ("NY State") has
experienced fiscal problems for several years as a result of negligible growth,
increased human service needs and the lingering recession that hit the State
harder than others. Although the State enjoyed good growth throughout the early
to mid-1980's, unemployment continues to be a problem. The State's economy is
highly developed and diverse, with a large emphasis in service, trade, financial
services and real estate; however, extensive job losses in each of these areas
has placed a burden on the State to maintain employment, company development and
a stable tax base.
The State has a large accumulated deficit, as reflected in its financial
results. The overall wealth of the State's population, as reflected by its per
capita income, offers a positive credit enhancement, and is among the highest in
the nation. The debt per capita, however, also is among the highest and, as a
result, 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 that 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.
MUNICIPAL LEASES. Municipal leases are obligations issued to finance the
construction or acquisition of equipment or facilities. These obligations may
take the form of a lease, an installment purchase contract, a conditional sales
contract or a participation interest in any of these obligations. Municipal
leases may be considered illiquid investments. Additionally, municipal leases
are subject to "nonappropriation risk," which is the risk that the municipality
may terminate the lease because funds have not been allocated to make the
necessary lease payments. The lessor would then be entitled to repossess the
property, but the value of the property may be less to private sector entities
than it would be to the municipality.
DELAYED-DELIVERY TRANSACTIONS. Each Fund may buy or sell securities on a
delayed-delivery or when-issued bases. These transactions involve a commitment
to buy or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security. When purchasing securities on a delayed-delivery basis, a Fund
assumes the rights and risks of ownership, including the risk of price and yield
fluctuations. Typically, no interest will accrue to the Fund until the security
is delivered. If the Fund remains substantially fully invested at a time when
delayed-delivery securities are outstanding, the Fund will set aside appropriate
liquid assets in a notationally segregated custodial account to cover its
purchase obligations.
When a Fund has sold a security on a delayed-delivery basis, the Fund does not
participate in further gains or loses with respect to that security. If the
other party to a delayed-delivery transaction fails to deliver or pay for the
securities, the Fund could suffer losses.
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ILLIQUID SECURITIES. Investments that cannot be sold or disposed of in the
normal course of business within seven days at their approximate value will be
considered illiquid. The Investment Manager determines the liquidity of a Fund's
investments under the supervision and direction of the Board of Trustees.
Investments currently considered illiquid include repurchase agreements not
maturing within seven days, some restricted securities and municipal lease
obligations.
VARIABLE AND FLOATING RATE SECURITIES. Some variable rate securities have a
demand feature that entitles the holder to resell the securities at a specified
price and/or times. There are risks involved with these securities because there
may be no active secondary market for a particular variable rate demand security
purchased by a Fund. In addition, the Fund may exercise only its demand rights
at certain times. The Fund could suffer losses in the event that the issuer
defaults on its obligation. Synthetic variable or floating rate securities
include tender option bond receipts.
Tender option bond trust receipts are derived from fixed-rate municipal bonds
that are placed in a trust from which two classes of trust receipts are issued.
These receipts represent proportionate interest in the underlying bonds.
Interest payments are made on the bonds based upon a predetermined rate. Under
certain circumstances, the holder of a trust receipt may also participate in any
gain or loss on the sale of such bonds. Tender option bond trust receipts
generally are structured to as private placements and, accordingly, may be
deemed to be restricted securities for purposes of the Fund's investment
limitations.
TAXABLE SECURITIES. Under normal conditions, the Municipal Funds do not intend
to invest in securities in which interest is subject to federal income and/or
state and local personal income taxes. However, from time to time, as a
defensive measure or under abnormal market conditions, the Municipal Funds may
make temporary investments in securities, the interest on which is subject to
federal income and/or state and local personal income taxes.
U.S. GOVERNMENT SECURITIES. U.S. government securities are securities issued
by the U.S. Treasury or issued or guaranteed by the U.S. government or any of
its agencies or instrumentalities. U.S. Treasury securities are backed by
the full faith and credit of the United States. Not all U.S. government
securities are backed by the full faith and credit of the United States.
Some U.S. government securities are supported by a line of credit the issuing
entity has with the U.S. Treasury. Others are supported solely by the credit
of the issuing agency or instrumentality. Of course, U.S. government
securities are among the safest securities, but they are still sensitive to
interest rate changes that will cause their yields to fluctuate.
ASSET-BACKED SECURITIES. Asset-backed securities are securities that are backed
by the loans or account receivables of an entity, such as a bank or credit card
company. These securities are obligations that the issuer intends to repay using
the assets backing them (once collected). Therefore, repayment may depend
largely on the cash flows generated by the assets backing the securities.
Sometimes the credit support for these securities is limited to the underlying
assets, but, in other cases, may be provided by a third party via a letter of
credit or insurance guarantee. Asset-backed securities are subject to credit and
prepayment risks. Currently, there are no tax-exempt asset-backed securities in
the Funds.
Repayment of these securities is intended to be obtained from an identified pool
of assets, typically receivables related to a particular industry, such as
asset-backed securities related to credit card receivables, automobile
receivables, trade receivables or diversified financial assets. 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 not more than 25%
of its total assets.
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REPURCHASE AGREEMENTS. Repurchase agreements involve a Fund buying securities
(usually U.S. government securities) from a seller and simultaneously agreeing
to sell them back at an agreed-upon price (usually higher) and time. There are
risks that losses will result if the seller does not perform as agreed.
Repurchase agreements will be collateralized by First Tier Securities. In
addition, repurchase agreements collateralized entirely by U.S. government
securities may be deemed to be collateralized fully pursuant to Rule 2a-7.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a Fund sells
portfolio securities to another party and simultaneously agrees to buy them back
at an agreed-upon price and time. These agreements may increase the possibility
of the Fund's NAV to fluctuate and may be viewed as a form of leveraging.
LENDING. Loans of portfolio securities made by a Fund will be fully
collateralized with U.S. government securities, letters of credit, cash and
cash-equivalents, and will be marked to market daily.
CERTIFICATES OF DEPOSIT AND BANKER'S ACCEPTANCES. Certificates of deposit are
certificates issued against funds deposited in a banking institution for a
specified period of time at a specified interest rate. Bankers' acceptances are
credit instruments evidencing a bank's obligation to pay a draft drawn on it by
a customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the full amount of the instrument upon maturity. A Fund will
invest only in certificates of deposit and bankers' acceptances of banks that
have capital, surplus and undivided profits in excess of $100 million.
PROMISSORY NOTES. Notes are written agreements committing the maker or issuer to
pay the payee a specified amount either on demand or at a fixed date in the
future, with or without interest. These are sometimes called negotiable notes or
instruments and are subject to credit risk. Bank notes are notes used to
represent debt obligations issued by banks in large denominations.
COMMERCIAL PAPER. Commercial paper consists of short-term, promissory notes
issued by banks, corporations and other institutions to finance short-term
credit needs. These securities generally are discounted but sometimes may be
interest bearing. Commercial paper, which also may be unsecured, is subject to
credit risk.
FOREIGN SECURITIES. 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. 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.
In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the upcoming conversion of the 11 of the
15 Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union (EMU). Exchange rates
between the U.S. dollar and the local currencies involved in the conversion may
become more volatile as the conversion date of January 1, 1999 approaches. There
also may be increased volatility in the exchange rates for currencies of other
European countries. After January 3, 1999, the euro will be the official
currency of the EMU, the rate of exchange will have been set between the euro
and the currency of each converting country and the European Central Bank, all
national central banks and all stock exchanges and depositories will price,
trade and settle in euro even if the securities traded are not denominated in
euro. Each securities transaction that requires converting to euro may involve
rounding that could affect the value of the security
9
<PAGE> 10
converted. In addition, issuers of securities that require converting may
experience increased costs as a result of the conversion, which may affect the
value of their securities. It is possible that uncertainties related to the
conversion will affect investor expectations and cause investments to shift away
from European countries, thereby making the European market less liquid. While
each Fund's investments are U.S. dollar denominated, these factors could affect
the value of a Fund's investments and/or increase its expenses. While the
Investment Manager is taking steps to minimize the impact of the conversion on
the Funds, it is not possible to know precisely what impact the conversion will
have on the Funds, if any, nor is it possible to eliminate the risks completely.
RESTRICTED SECURITIES. Commercial paper and other securities are issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended, and resold
to qualified institutional buyers under Securities Act Rule 144A ("Section 4(2)
paper"). Federal securities laws restrict the disposition of Section 4(2) paper.
Section 4(2) paper generally is sold to institutional investors, such as the
Funds, who agree that they are purchasing the paper for investment and not for
public distribution. Any resale by the purchaser must be in an exempt
transaction and may be accomplished in accordance with Rule 144A. Section 4(2)
paper normally is resold to other institutional investors, such as the Funds,
through or with the assistance of the issuer or investment dealers who make a
market in the Section 4(2) paper, thus providing liquidity. Because it is not
possible to predict with assurance exactly how this market for Section 4(2)
paper sold and offered under Rule 144A will continue to develop, Charles Schwab
Investment Management, Inc. (the "Investment Manager"), pursuant to guidelines
approved by the Board of Trustees, will carefully monitor a Fund's investments
in these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information.
CONCENTRATION. Based on the primary characteristics of non-U.S. (foreign) banks,
the Funds have identified each foreign country as a separate bank industry for
purposes of a Fund's concentration policy. A Fund will limit its investments in
securities issued by foreign banks in each country to no more than 25% of total
assets.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased by the Municipal
Funds. These investments will cause a fund to bear duplicative fees for certain
services. The Municipal Funds intend to purchase securities of other investment
companies in compliance with the requirements of section 12(d)(1)(F) of the 1940
Act or any applicable exemptive relief received from the SEC. Under that
section, a Fund is prohibited from purchasing the securities of other investment
companies if, as a result, the Fund together with its affiliates would own more
than 3% of the total outstanding securities of those investment companies. In
addition, a Fund will vote proxies in accordance with the instructions received
or vote proxies in the same proportion as the vote of all other shareholders of
the Investment Company. If exemptive relief is received from the SEC, a Fund may
purchase more than 3% of certain securities of other investment companies and
will only hold such securities in conformity with any applicable order from the
SEC.
QUALITY AND MATURITY. Each Fund will only purchase securities that present
minimal credit risks and 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 (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
- ----------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" for an exception to this investment restriction.
10
<PAGE> 11
NRSROs are required but one rating suffices if only one NRSRO rates the
security), or (b) that itself was unrated by any NRSRO, but was issued by an
issuer that has outstanding a class of short-term debt obligations (or any
security within that class) meeting the requirements of subparagraph 1(a) above
that is of comparable priority and security;
(2) a security that at the time of issuance was a long-term security but has a
remaining maturity of 397 days or less and (a) whose issuer received a rating
within one of the two highest rating categories from the requisite NRSROs for
short-term debt obligations with respect to a class of short-term debt
obligations (or 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), that
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, that is a
money market mutual fund security or that is a U.S. government security. A
Second Tier Security is any other Eligible Security.
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.
THE FOLLOWING INVESTMENT POLICIES AND RESTRICTIONS MAY BE CHANGED ONLY BY
APPROVAL OF A MAJORITY OF A FUND'S SHAREHOLDERS. ALL OTHER INVESTMENT POLICIES
AND RESTRICTIONS CONTAINED IN THE SAI MAY BE CHANGED WITHOUT SHAREHOLDER
APPROVAL OR PRIOR NOTICE.
EACH MUNICIPAL FUND MAY:
(1) not purchase securities or make investments other than in accordance with
investment objectives and policies.
(2) 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) 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) 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) not invest for the purpose of exercising control or management of another
issuer.
(6) 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.
11
<PAGE> 12
(7) not underwrite securities issued by others, except to the extent as
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.
(8) 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) pledge, mortgage or hypothecate any of its assets, to the extent as
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) issue senior securities, to the extent as 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) 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.
SCHWAB VALUE ADVANTAGE MONEY FUND(R) MAY, EXCEPT WHERE NOTED:
(1) Not underwrite securities issued by others, except to the extent it may be
deemed to be an underwriter under the federal securities laws in
connection with the disposition of securities from its investment
portfolio.
(2) Not invest in commodities or commodity contracts, including futures
contracts, or in real estate, although it may invest in securities that
are secured by real estate and securities of issuers that invest or deal
in real estate.
(3) Not concentrate 25% or more of the value of its assets in any one
industry; provided, however, that the Fund reserves freedom of action to
invest up to 100% of its assets in certificates of deposit or banker's
acceptances issued by U.S. banks and U.S. branches of those foreign banks
that 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) Not make loans to others (except through the purchase of debt obligations
or repurchase agreements in accordance with its investment objective and
policies).
(5) Not issue senior securities as defined in the 1940 Act.
(6) 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) 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.
12
<PAGE> 13
THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING
THE ABOVE POLICIES AND RESTRICTIONS.
Borrowing. The 1940 Act presently restricts a Fund from borrowing (including
pledging, mortgaging or hypothecating assets) in excess of 33 1/3% of its total
assets (not including temporary borrowings not in excess of 5% of its total
assets).
Lending. Under the 1940 Act, a Fund may only make loans if expressly
permitted by its investment policies.
Concentration. Concentration is currently determined as investing 25% or more of
a Fund's total assets in an industry or group of industries, with certain
exceptions. This means that each Fund currently may not purchase securities of
any issuer (other than U.S. government securities) if, as a result, 25% or more
of its total assets would be invested in the securities of an issuer from a
single industry or group of industries. Municipal securities are not deemed to
be issued by an issuer from a single industry or group of industries.
THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS.
EACH MUNICIPAL FUND MAY NOT:
(1) purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities) if,
as a result, more than 5% of the value of its assets would be invested in
the securities of that issuer, except that, with respect to Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund,
provided no more than 25% of the Fund's total assets would be invested in
the securities of a single issuer, up to 50% of the value of the Fund's
assets may be invested without regard to this 5% limitation. For purposes
of this limitation, the Fund will regard the entity which has the primary
responsibility for the payment of interest and principal as the issuer.
(2) Purchase securities of other investment companies, except as permitted by
the 1940 Act.
(3) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and
policies).
(4) 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.
(5) 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.
(6) 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.
(7) Issue senior securities as defined in the 1940 Act.
13
<PAGE> 14
SCHWAB VALUE ADVANTAGE 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
securities of that issuer.
(2) Invest more than 10% of its net assets in illiquid securities, including
repurchase agreements maturing in more than seven days.
(3) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Schwab Fund Family or the Investment Manager
beneficially own more than 1/2 of 1% of the securities of such issuer, and
together beneficially own more than 5% of the securities of such issuer.
(4) Invest for the purpose of exercising control or management of another
issuer.
(5) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets. 1
(6) Write, purchase or sell puts, calls or combinations thereof.
(7) Make short sales of securities or purchase any securities on margin,
except to obtain such short-term credits as may be necessary for the
clearance of transactions.
(8) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of issuers
which invest in or sponsor such programs.
Except with respect to borrowings and investments in illiquid securities, later
changes in values do not require a Fund to sell the investment even if it could
not then make the same investment.
- ----------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" for an exception to this investment restriction.
14
<PAGE> 15
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 PRINCIPAL OCCUPATIONS &
NAME/DATE OF BIRTH THE TRUST AFFILIATIONS
- -------------------------------------------------------------------------------
CHARLES R. SCHWAB* Chairman and Chairman, Co-Chief Executive
July 29, 1937 Trustee Officer and Director, The
Charles Schwab Corporation;
Chairman, Chief Executive Officer
and Director, Charles Schwab
Holdings, Inc.; Chairman and
Director, Charles Schwab & Co.,
Inc., Charles Schwab Investment
Management, Inc., The Charles
Schwab Trust Company and Schwab
Retirement Plan Services, Inc.;
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).
STEVEN L. SCHEID*+ President and President and Executive Vice Chief
June 28, 1953 Trustee Financial Officer, The Charles
Schwab Corporation; Enterprise
President - Financial Products and
Services and Chief Financial
Officer, Charles Schwab & Co.,
Inc.; Chief Executive Officer,
Chief Financial Officer and
Director, Charles Schwab Investment
Management, Inc. From 1994 to 1996,
Mr. Scheid was Executive Vice
President of Finance for First
Interstate Bancorp and Principal
Financial Officer from 1995 to
1996. Prior to 1994, Mr. Scheid was
Chief Financial Officer, First
Interstate Bank of Texas.
DONALD F. DORWARD Trustee Executive Vice President and
Managing
- ----------
* This trustee is an "interested person" of the trust.
+ Effective August 18, 1998, Mr. Scheid was elected as President and Trustee.
15
<PAGE> 16
September 23, 1931 Director, Grey Advertising. From
1990 to 1996, Mr. Dorward was
President and Chief Executive
Officer, Dorward & Associates
(advertising and marketing/
consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive
May 15, 1931 Officer and Director, Semloh
Financial, Inc. (international
financial services and
investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens
June 28, 1938 & Company (Investments) and
Chairman and Chief Executive
Officer of North American Trust
(real estate investment trust).
MICHAEL W. WILSEY Trustee Chairman, Chief Executive
August 18, 1943 Officer and Director, Wilsey
Bennett, Inc. (truck and air
transportation, real estate
investment, management, and
investments).
TAI-CHIN TUNG Treasurer and Vice President, Treasurer and
March 7, 1951 Principal Controller, Charles Schwab
Financial Officer 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.
WILLIAM J. KLIPP* Executive Vice Executive Vice President,
December 9, 1955 President, Chief SchwabFunds(R), Charles Schwab &
Operating Co., Inc.; President and Chief
Officer and Operating Officer, Charles
Trustee Schwab Investment Management,
Inc.
STEPHEN B. WARD Senior Vice Senior Vice President and Chief
April 5, 1955 President and Investment Officer, Charles
Chief Investment Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief
September 9, 1955 Counsel and Assistant Corporate
Secretary, Charles Schwab
Investment Management, Inc.
- ------
* This trustee is an "interested person" of the trust.
16
<PAGE> 17
Each of the above-referenced Officers and/or Trustees also serves in the same
capacity as described for the Trust, for Schwab Capital Trust, Schwab
Investments and Schwab Annuity Portfolios. The address of each individual listed
above is 101 Montgomery Street, San Francisco, California 94104.
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Estimated
Accrued as Annual
Aggregate Part of Fund Benefits Upon Total
Name of Person, Compensation Expenses from Retirement Compensation
Position from the the Fund from the Fund from the
Trust Complex 2 Complex 2 Fund Complex 2
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Timothy F 0 N/A N/A 0
McCarthy,
President and
Trustee 3
Tom D. Seip, 0 N/A N/A 0
President and
Trustee 4
William J. Klipp, 0 N/A N/A 0
Executive Vice
President, Chief
Operating Officer
and Trustee
Donald F. Dorward, $51,500 N/A N/A $93,450
Trustee
Robert G. Holmes, $51,500 N/A N/A $93,450
Trustee
Donald R. Stephens, $51,500 N/A N/A $93,450
Trustee
Michael W. Wilsey, $51,500 N/A N/A $93,450
Trustee
</TABLE>
1 Information is as of the Trust's fiscal year ended December 31, 1997.
2 "Fund Complex" comprises all 31 funds of the Trust, Schwab Investments,
Schwab Capital Trust and Schwab Annuity Portfolios, as of December 31,
1997.
3 Mr. McCarthy served as President and Trustee until November 24, 1997.
4 Mr. Seip began serving as President and Trustee on November 24, 1997.
17
<PAGE> 18
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 SAI, 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 Schwab Fund or Funds selected by the
participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds(R)
include the series or classes of beneficial interest of the Trust, Schwab
Investments and Schwab Capital Trust.
Pursuant to the exemptive relief granted to the Trust, each Fund will purchase
and maintain the Selected SchwabFund Securities in an amount equal to the deemed
investments in that Fund of the Deferred Fee Accounts of the Independent
Trustees. The exemptive relief granted to the Trust permits the Funds and the
Trustees to purchase the Selected SchwabFund Securities, which transactions
would otherwise be limited or prohibited by the investment policies and/or
restrictions of the Funds.
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as each Fund's investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the SchwabFunds, a family
of 34 mutual funds with over $62 billion in net assets as of March 31, 1998. The
Investment Manager is an affiliate of Schwab; the Trust's distributor and the
shareholder services and transfer agent.
The Advisory Agreement will continue in effect for one-year terms subject to
annual approval by: (1) the Trust's Board of Trustees or (2) a vote of a
majority of the Fund's shareholders. In either event, the continuance also must
be approved by a majority of the Trust's Board of Trustees who are not parties
to the Agreement or interested persons of any such party by vote cast in person
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated at any time upon 60 days' notice by either party, or
by a majority vote of the Fund's shareholders and will terminate automatically
upon assignment.
Pursuant to the Advisory Agreement dated May 1, 1997, as may be amended form
time to time, the Investment Manager is entitled to receive from Municipal Money
Fund a graduated annual fee payable monthly, of 0.46% or the Fund's average
daily net assets over $1 billion, 0.41 % of such assets over $1 billion but not
in excess of $2 billion, 0.40% of such assets over $2 billion.
For the fiscal years ended December 31, 1995, 1996 and 1997 Schwab Municipal
Money Fund paid investment and advisory fees of $6,465,000 (fees were reduced by
7,229,000); $8,034,000 (fees were reduced by $8,734,000) and $9,331,000 (fees
were reduced by $10,977,000).
18
<PAGE> 19
Pursuant to the Advisory Agreement dated June 15, 1994, as may be amended from
time to time, the Investment Manager is entitled to receive from Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund, a
graduated annual fee, payable monthly, of 0.46% of each Fund's average daily net
assets not in excess of $1 billion, 0.41% 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 years ended December 31, 1995, 1996 and 1997 Schwab California
Municipal Money Fund paid investment and advisory fees of $2,748,000 (fees were
reduced by $3,697,000); $3,737,000 (fees were reduced by $4,819,000); and
$4,824,000 (fees were reduced by $6,548,000).
For the period of February 27, 1995 (commencement of operations) to December 31,
1995 and for the fiscal years ended December 31, 1996 and 1997 Schwab New York
Municipal Money Fund paid investment and advisory fees of $464,000 (fees reduced
by $277,000); $535,000 (fees were reduced by $696,000) and $675,000 (fees were
reduced by $1,192,000).
Pursuant to the Advisory Agreement June 15, 1994, as may be amended from time to
time, the Investment Manager is entitled to receive from Schwab Value Advantage
Money Fund a graduated annual fee, payable monthly, of 0.46% of the Fund's
average daily net assets not in excess of $1 billion, 0.45% of such net assets
over $1 billion but not in excess of $3 billion, 0.40% of such net assets over
$3 billion but not in excess of $10 billion, 0.37% of such net assets over $10
billion but not in excess of $20 billion and 0.34% of such net assets over $20
billion.
For the fiscal years ended December 31, 1995, 1996 and 1997 Schwab Value
Advantage Money Fund paid investment and advisory fees of $15,877,000 (fees were
reduced by $7,922,000); $30,667,000 (fees were reduced by $6,081,000) and
$23,972,000 (fees were reduced by $27,753,000).
The Investment Manager and Schwab have voluntarily agreed to limit, or
reimburse, if necessary, a Fund's total operating expenses to 0.66%, 65% and 69%
of its average daily net assets for the Sweep Investments for Municipal Money
Fund, California Municipal Money Fund and New York Municipal Money Fund and
0.45%, 0.45% and 0.40% for the Value Advantage Investment Municipal Money Fund,
California Municipal Money Fund and Value Advantage Money Fund.
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 per share
(NAV); 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 each Fund's shares. Each Fund pays the cost of its prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective investors and for supplementary sales
literature and advertising. Schwab receives no fee
19
<PAGE> 20
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 Agreement.
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, 555 California
Street, San Francisco CA 94104 audit and report on the annual financial
statements of each series of the Trust and review certain regulatory reports and
the Funds' federal income tax return. It also performs other professional
accounting, auditing, tax and advisory services when the Trust engages it to do
so. Each Fund's financial statements and financial highlights for the fiscal
year ended December 31, 1997, are included in each Fund's Annual Report, which
are separate reports supplied with this SAI. Each Fund's financial statements
and financial highlights are incorporated herein by reference. Shareholders will
be sent audited annual and unaudited semi-annual financial statements.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the objective of the
Funds 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 a Fund, seeks to obtain best price and execution. Subject to
the supervision of the Board of Trustees, the Investment Manager generally will
select brokers and dealers for a Fund 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 also may be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
The Trust expects that purchases and sales of portfolio securities usually will
be principal transactions. Securities normally will 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.
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The investment decisions for each Fund are reached independently from those for
other accounts managed by the Investment Manager. Such other accounts may also
make investments in instruments or securities at the same time as a Fund. When
two or more accounts managed by the Investment Manager have funds available for
investment in similar instruments, available instruments are allocated as to
amount in a manner considered equitable to each account. In some cases, this
procedure may affect the size or price of the position obtainable for a Fund.
However, it is the opinion of the Board of Trustees that the benefits conferred
by the Investment Manager outweigh any disadvantages that may arise from
exposure to simultaneous transactions.
PORTFOLIO TURNOVER
Because securities with maturities of less than one year are excluded from
required portfolio turnover rate calculations, each Fund's portfolio turnover
rate for reporting purposes is expected to be zero.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
On each day that the NAV of a Fund is determined ("Business Day"), that Fund's
net investment income will be declared as of the close of trading on the New
York Stock Exchange ("NYSE") (normally 4 p.m. Eastern time) as a daily dividend
to shareholders of record. Shareholders will receive dividends in additional
shares unless they elect to receive cash. Dividends normally will be reinvested
monthly in shares of the Fund at the NAV on the 15th day of each month, if a
Business Day, otherwise on the next Business Day except for December when the
dividend is reinvested on the last business day of the month. If cash payment is
requested, checks normally will be mailed on the Business Day following the
reinvestment date. Each Fund will pay shareholders, who redeem all of their
shares, all dividends accrued to the time of the redemption within seven days.
Each Fund calculates its dividends based on its daily net investment income. For
this purpose, the net investment income of a Fund consists of: (1) accrued
interest income, plus or minus amortized discount or premium, minus (2) accrued
expenses allocated to 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 the Fund will
realize any long-term capital gains. Expenses of the Trust are accrued each day.
Should the NAV 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, a Fund must, among other
things, (1) derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stocks, securities, foreign currencies or other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in stocks, securities or currencies; (2) diversify its
holdings so that at the end of each quarter of its taxable year (i)
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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 certain hedging transactions and may limit the range of its
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, that it distributes to shareholders,
provided that the Fund meets certain minimum distribution requirements. To
comply with these requirements, each 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 exception), for its
taxable year. Each Fund intends to make sufficient distributions to shareholders
to meet these requirements.
If a Fund fails to distribute in a calendar year (regardless of whether it has a
non-calendar taxable year) substantially all of its (i) ordinary income for such
year; and (ii) capital gain net income for the year ending October 31 (or later
if the Fund is permitted so to elect and so elects), plus any retained amount
from the prior year, the Fund will be subject to a nondeductible 4% excise tax
on the undistributed amounts. Each Fund intends generally to make distributions
sufficient to avoid imposition of this excise tax.
Any distributions declared by a Fund 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 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 Funds'
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.
Each Fund may engage in investment techniques that may alter the timing and
character of its income. Each Fund may be restricted in its use of these
techniques by rules relating to its qualification as regulated investment
companies.
Each 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)
generally are subject to U.S. withholding tax at the rate of 30% (or a lower tax
treaty rate) on distributions derived from net investment income and short-term
capital gains. Distributions to foreign
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shareholders of long-term capital gains and any gains from the sale or other
disposition of shares of the Funds generally are not subject to U.S. taxation,
unless the recipient is an individual who meets the Code's definition of
"resident alien." Different tax consequences may result if the foreign
shareholder is engaged in a trade or business within the United States. In
addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described above.
Distributions by the Funds 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.
ADDITIONAL CONSIDERATIONS FOR MUNICIPAL FUNDS
The Municipal Funds will each distribute all of their net investment income
(including net short-term capital gain) to their respective shareholders. If, at
the close of each quarter of its taxable year, at least 50% of the value of a
Fund's assets consist of obligations the interest on which is excludable from
gross income, the Fund may pay "exempt-interest dividends" to its Shareholders.
Those dividends constitute the portion of the aggregate dividends as designated
by the Fund, equal to the excess of the excludable interest over certain amounts
disallowed as deductions. Exempt-interest dividends are excludable from a
shareholder's gross income for federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the federal alternative
minimum tax (AMT) imposed by Section 55 of the Code. The AMT is imposed at rates
of 26% and 28%, in the case of non-corporate taxpayers, and at the rate of 20%,
in the case of corporate taxpayers, to the extent it exceeds the taxpayer's
federal income tax liability. The AMT and the environmental tax may be imposed
in the following two circumstances. First, exempt-interest dividends derived
from certain private activity bonds issued after August 7, 1986, will generally
be an item of tax preference (and, therefore, potentially subject to AMT) for
both corporate and non-corporate taxpayers. Second, in the case of
exempt-interest dividends received by corporate shareholders, all
exempt-interest dividends, regardless of when the bonds from which they are
derived were issued or whether they are derived from private activity bonds,
will be included in the corporation's "adjusted current earnings," as defined in
Section 56(g) of the Code, in calculating the corporations' alternative minimum
taxable income for purposes of determining the AMT.
Current federal law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest that may have an effect on the ability
of a Fund to purchase sufficient amounts of tax-exempt securities to satisfy the
Code's requirements for the payment of "exempt-interest dividends."
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of the Funds is not deductible for federal income tax
purposes. Furthermore, these funds may not be an appropriate investment for
persons (including corporations and other business entities) who are
"substantial users" (or persons related to "substantial users") or facilities
financed by industrial development private activity bonds. Such persons should
consult their tax advisors before purchasing shares. A "substantial user" is
defined generally to include "certain persons" who regularly use in their trade
or business a part of a facilities financed from the proceeds of such bonds.
SHARE PRICE CALCULATION
Each Fund values its portfolio instruments at amortized cost, which means they
are valued at their acquisition cost, as adjusted for amortization of premium or
discount, rather than at current market value. Calculations are made to compare
the value of a Fund's investments at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value or values obtained from yield data relating to classes
of money market instruments published by reputable sources at the mean between
the bid and asked prices for the instruments. The amortized cost method of
valuation seeks to maintain a stable NAV of $1.00, even where there are
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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 NAV calculated by reference to market values and a Fund's
NAV of $1.00, 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 Fund's NAV (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 NAV. As a result of such reduction or suspension of dividends or other
action by the Board of Trustees, an investor would receive less income during a
given period than if such a reduction or suspension had not taken place. Such
action could result in investors receiving no dividend for the period during
which they hold their shares and receiving, upon redemption, a price per share
lower than that which they paid. On the other hand, if a Fund's NAV (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 NAV at $1.00.
HOW THE FUNDS REPORT PERFORMANCE
The historical performance of the Funds may be shown in the form of total
return, yield and 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, each Fund assumes the reinvestment of all distributions at
NAV on applicable reinvestment dates.
Nonstandardized Total Return. Nonstandardized total return for a Fund differs
from standardized total return in that it relates to periods other than the
period for standardized total return and/or that it represents aggregate (rather
than average) total return.
In addition, an after-tax total return for a Fund may be calculated by taking
the Fund's standardized or non-standardized total return and subtracting
applicable federal taxes from the portions of the Fund's total return
attributable to capital gains distributions and ordinary income. This after-tax
total return may be compared to that of other mutual funds with similar
investment objectives as reported by independent sources.
Each Fund also may report the percentage of the 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.
Each Fund also may 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.
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YIELD
A Fund's yield refers to the net investment income generated by a hypothetical
investment in the Fund over a specific seven-day period. This net investment
income is then annualized, which means that the net investment income generated
during the seven-day period is assumed to be generated in each seven-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.
TAX-EQUIVALENT YIELD
The tax-equivalent yield for the Funds is computed by dividing that portion of a
Fund's yield which is tax-exempt by one minus a stated federal and/or state
income tax rate and adding the product to that portion, if any, of the Fund's
yield that is not tax-exempt. (Tax equivalent yields assume the payment of
federal income taxes at a rate of 39.6% and California income taxes at a rate of
45.22% and New York income taxes at a rate of 46.43%.)
Yields are one basis upon which investors may compare the Funds with other
funds; however, yields of other funds and other investment vehicles may not be
comparable because of the factors set forth above and differences in the methods
used in valuing portfolio instruments.
The yield of these Funds fluctuates, and the annualization of a week's dividend
is not a representation by the Trust as to what an investment in the Fund
actually will yield in the future. Actual yields will depend on such variables
as asset quality, average asset maturity, the type of instruments the Fund
invests in, changes in interest rates on money market instruments, changes in
the expenses of the Fund and other factors.
GENERAL INFORMATION
The Trust is an open-end investment management company organized as a
Massachusetts business trust on October 20, 1989. Currently, there are thirteen
Funds of the Trust: Schwab Money Market Fund, Schwab Government Money Fund,
Schwab Municipal Money Fund, Schwab U.S. Treasury Money Fund, Schwab Value
Advantage Money Fund(R), Schwab Institutional Advantage Money Fund(R), Schwab
Retirement Money Fund(R), Schwab New York Municipal Money Fund, Schwab
California Municipal Money Fund, Schwab Government Cash Reserves, Schwab
Pennsylvania Municipal Money Fund, Schwab New Jersey Municipal Money Fund and
Schwab Florida Municipal Money Fund. The Declaration of Trust permits the
Trustees to create additional Funds. There is a remote possibility that one Fund
might become liable for a misstatement in the prospectus or SAI about another
Fund. 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
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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 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 SAI
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.
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PRINCIPAL HOLDERS OF SECURITIES
As of April 15, 1998, Igal Lichtman and Michal Lichtman, Livingston, NJ as joint
tenants directly or beneficially owned 5.77% of Schwab Value Advantage Money
Fund(R) - Investor shares. James M. McCormick and Marsha E. McCormack, New
Rochelle, NY as joint tenants directly or beneficially owned 5.24% of Schwab New
York Municipal Money Fund - Value Advantage Shares(TM).
In addition, as of April 17, 1998, the officers and Trustees of the Trust, as a
group, owned less than 1% of each Fund's outstanding voting securities.
PURCHASE AND REDEMPTION OF SHARES
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 a Fund. If redemption proceeds
are paid in investment securities, such securities will be valued as set forth
in "Share Price Calculation" and a redeeming shareholder would normally incur
brokerage expenses if he or she converted the securities to cash.
OTHER INFORMATION
The Prospectus and SAI do not contain all the information included in the
Registration Statement filed with the SEC under the Securities Act of 1933, as
amended, with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
the SAI pursuant to the rules and regulations of the SEC. The Registration
Statement including the exhibits filed therewith may be examined at the office
of the SEC in Washington, D.C.
Statements contained in the Prospectus or SAI as to the contents of any contract
or other document referred to are not necessarily complete, and in each
instance, reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement of which the Prospectus and SAI form
a part, each such statement being qualified in all respects by such reference.
THIS SAI DOES NOT CONSTITUTE AN OFFERING BY THE TRUST, ANY SERIES THEREOF, OR BY
THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY
MADE.
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APPENDIX - RATINGS OF INVESTMENT SECURITIES
Lower-quality debt securities are sometimes referred to as "junk bonds,"
and are considered more speculative and subject to greater risk. Some junk bonds
already may be in default, i.e., failed to meet their interest and/or principal
payment obligations. From time to time, each Fund may report the percentage of
its assets that fall into the rating categories set forth below.
BONDS
MOODY'S INVESTORS SERVICE
Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and generally are referred to
as "gilt edge." Interest payments are protected by a large or exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of these issues. Bonds carrying an Aa
designation are deemed to be of high quality by all standards. Together with
Aaa-rated bonds, they comprise what are generally known as high-grade bonds. Aa
bonds are rated lower than the best bonds because they may enjoy relatively
lower margins of protection, fluctuations of protective elements may be of
greater amplitude or there may be other factors present that make them appear to
be subject to somewhat greater long-term risks. A-rated bonds are considered as
upper-medium grade obligations as they possess many favorable investment
attributes. Bonds designated Baa are considered medium grade in that they are
not highly protected nor poorly secured. Interest payments and principal
security appear to be adequate at the present, but they may lack certain
protective elements or be characteristically unreliable over any great length of
time. Baa bonds do not have any outstanding investment characteristics and do
have speculative characteristics.
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. A
ratings are given to debt that has a strong capacity to pay interest and repay
principal but is somewhat more susceptible to adverse effects of changes in
circumstances and economic conditions than higher-rated debt. BBB debt indicates
the issuer is regarded by S&P as having an adequate capacity to pay interest and
repay principal. These securities appear to have adequate protection, however
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal in this category than in
higher categories.
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. An A rating indicates that the protection factors are
average but adequate. The risk factors, however, are more variable and greater
in periods of economic stress. BBB-rated debt has protection factors that are
below average but still sufficient for prudent investment. There is considerable
variability in the risk of BBB-rated debt during economic cycles.
FITCH IBCA
AAA is the highest rating Fitch assigns to bonds, and indicates the
obligor's exceptionally strong ability to pay interest and repay principal.
Bonds that Fitch considers of very high credit quality, and the obligor's
ability to pay interest and repay principal is very strong, although not as
strong as AAA, is rated
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AA. An A rating is given to show high credit quality and the issuer's ability to
pay interest and repay principal is strong, but there is more vulnerability to
economic conditions and circumstances than higher rated debt. BBB bonds are
considered investment grade, where the issuer has adequate ability to pay
interest and repay principal. Bonds rated BBB are more susceptible to adverse
changes in economic conditions and circumstances, thus these bonds are more
likely to fall below investment grade or have the timeliness of their payments
impaired.
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-3 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
strong capacity to pay principal and interest. Issues determined to possess very
strong safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a satisfactory capacity to pay principal and
interest is denoted by an SP-2 rating.
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 normally will be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
A Standard & Poor's Corporation ("S&P") A-1 commercial paper rating
indicates 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. Three
gradations exist within this rating category: A Duff-1+ rating indicates the
highest certainty of timely payment (issuer short-term liquidity is found to be
outstanding and safety is deemed to be just below that of risk-free short-term
U.S. Treasury obligations), a Duff-1 rating signifies a very high certainty of
timely payment (issuer liquidity is determined to be excellent and risk factors
are considered minor) and a Duff-1- rating denotes high certainty of timely
payment (issuer liquidity factors are strong and risk is very small). A Duff-2
rating indicates a
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good certainty of timely payment. Liquidity factors and company fundamentals are
sound and risk factors are small.
FITCH IBCA
F1+ is the highest category, and indicates the strongest degree of
assurance for timely payment. Issues rated F1 reflect an assurance of timely
payment only slightly less than issues rated F1+. Issues assigned an F2 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.
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."
30
<PAGE> 31
STATEMENT OF ADDITIONAL INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
101 Montgomery Street, San Francisco, CA 94104
SCHWAB MONEY MARKET FUND
SCHWAB GOVERNMENT MONEY FUND
SCHWAB U.S. TREASURY MONEY FUND
SCHWAB RETIREMENT MONEY FUND(R)
SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R)
APRIL 30, 1998, AS AMENDED DECEMBER 2, 1998
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the Prospectus, dated April 30, 1998 (as may be amended
from time to time), for Schwab Money Market Fund (Money Fund), Schwab Government
Money Fund (Government Fund) and Schwab U.S. Treasury Money Fund (Treasury
Fund); the Prospectus, dated April 30, 1998 (as may be amended from time to
time), for Schwab Retirement Money Fund (Retirement Fund); or the Prospectus,
dated April 30, 1998 (as may be amended from time to time), for Schwab
Institutional Advantage Money Fund (Institutional Fund).
To obtain a copy of the Prospectus for Money Fund, Government Fund and Treasury
Fund, please contact Charles Schwab & Co., Inc. (Schwab) at 800-435-4000, 24
hours a day, or 101 Montgomery Street, San Francisco, California 94104. For the
Prospectus for Retirement Fund or Institutional Fund, please call 800-772-4900
or 800-435-4000 or write to the above address. TDD users may contact Schwab at
800-345-2550, 24 hours a day. The Prospectuses also may be available
electronically by using our Web address: http://www.schwab.com/schwabfunds.
SCHWABFunds(R)
800-435-4000
TABLE OF CONTENTS
INVESTMENT SECURITIES AND RESTRICTIONS.............................. 2
MANAGEMENT OF THE TRUST............................................. 8
PORTFOLIO TRANSACTIONS AND TURNOVER................................. 14
DISTRIBUTIONS AND TAXES............................................. 15
SHARE PRICE CALCULATION............................................. 16
HOW THE FUNDS REPORT PERFORMANCE.................................... 17
GENERAL INFORMATION................................................. 18
PURCHASE AND REDEMPTION OF SHARES................................... 20
OTHER INFORMATION................................................... 20
APPENDIX - RATINGS OF INVESTMENT SECURITIES......................... 21
1
<PAGE> 32
INVESTMENT SECURITIES AND RESTRICTIONS
The following investment securities, risks and restrictions supplement those set
forth in the Funds' prospectuses and may be changed without shareholder approval
unless otherwise noted. Also, policies and restrictions that state a maximum
percentage of assets that may be invested in a security or other asset, or that
set forth a quality standard, shall be measured immediately after and as a
result of a Fund's acquisition of such security or asset unless otherwise noted.
Thus, any subsequent change in values, net assets or other circumstances will
not be considered when determining whether the investment complies with a Fund's
investment policies and restrictions. Additionally, for purposes of calculating
any restriction, an issuer shall be the entity deemed to be ultimately
responsible for payments of interest and principal on the security pursuant to
Rule 2a-7, unless otherwise noted. Not all securities discussed below are
eligible investments for each Fund. A Fund will invest in securities that are
intended to help achieve its investment objective.
FOREIGN SECURITIES. 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. 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.
In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the upcoming conversion of the 11 of the
15 Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union (EMU). Exchange rates
between the U.S. dollar and the local currencies involved in the conversion may
become more volatile as the conversion date of January 1, 1999 approaches. There
also may be increased volatility in the exchange rates for currencies of other
European countries. After January 3, 1999, the euro will be the official
currency of the EMU, the rate of exchange will have been set between the euro
and the currency of each converting country and the European Central Bank, all
national central banks and all stock exchanges and depositories will price,
trade and settle in euro even if the securities traded are not denominated in
euro. Each securities transaction that requires converting to euro may involve
rounding that could affect the value of the security converted. In addition,
issuers of securities that require converting may experience increased costs as
a result of the conversion, which may affect the value of their securities. It
is possible that uncertainties related to the conversion will affect investor
expectations and cause investments to shift away from European countries,
thereby making the European market less liquid. While each Fund's investments
are U.S. dollar denominated, these factors could affect the value of a Fund's
investments and/or increase its expenses. While the Investment Manager is taking
steps to minimize the impact of the conversion on the Funds, it is not possible
to know precisely what impact the conversion will have on the Funds, if any, nor
is it possible to eliminate the risks completely.
RESTRICTED SECURITIES. Commercial Paper and other securities are issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended, and resold
to qualified institutional buyers under Securities Act Rule 144A ("Section 4(2)
paper"). Federal securities laws restrict the disposition of Section 4(2) paper.
Section 4(2) paper generally is sold to institutional investors, such as the
Funds, who agree that they are purchasing the paper for investment and not for
public distribution. Any resale by the purchaser must be in an exempt
transaction and may be accomplished in accordance with Rule 144A. Section 4(2)
paper normally is resold to other institutional investors, such as the Funds,
through or with the assistance of the issuer or investment dealers who make a
market in the Section 4(2) paper, thus providing liquidity. Because it is not
possible to predict with
2
<PAGE> 33
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 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.
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 a Fund's concentration policy, the following asset-backed securities
industries have been selected: credit card receivables, automobile receivables,
trade receivables and diversified financial assets. A Fund will limit its
investments in each such industry to not more 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.
ILLIQUID SECURITIES. Investments that cannot be sold or disposed of in the
normal course of business within seven days at their approximate value will be
considered illiquid. The Investment Manager determines the liquidity of a Fund's
investments under the supervision and direction of the Board of Trustees.
Investments currently considered illiquid include repurchase agreements not
maturing within seven days, some restricted securities and municipal lease
obligations.
LENDING. Loans of portfolio securities made by a Fund will be fully
collateralized with U.S. government securities, letters of credit, cash and
cash-equivalents, and will be marked to market daily.
CERTIFICATES OF DEPOSIT AND BANKER'S ACCEPTANCES. Certificates of deposit are
certificates issued against funds deposited in a banking institution for a
specified period of time at a specified interest rate. Bankers' acceptances are
credit instruments evidencing a bank's obligation to pay a draft drawn on it by
a customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the full amount of the instrument upon maturity. A Fund will
invest only in certificates of deposit and bankers' acceptances of banks that
have capital, surplus and undivided profits in excess of $100 million.
PROMISSORY NOTES. Notes are written agreements committing the maker or issuer to
pay the payee a specified amount either on demand or at a fixed date in the
future, with or without interest. These are sometimes called negotiable notes or
instruments and are subject to credit risk. Bank notes are notes used to
represent debt obligations issued by banks in large denominations.
3
<PAGE> 34
COMMERCIAL PAPER. Commercial paper consists of short-term, promissory notes
issued by banks, corporations and other institutions to finance short-term
credit needs. These securities generally are discounted but sometimes may be
interest bearing. Commercial paper, which also may be unsecured, is subject to
credit risk.
REPURCHASE AGREEMENTS. Repurchase agreements involve a Fund buying securities
(usually U.S. government securities) from a seller and simultaneously agreeing
to sell them back at an agreed-upon price (usually higher) and time. There are
risks that losses will result if the seller does not perform as agreed.
Repurchase agreements will be collateralized by First Tier Securities. In
addition, repurchase agreements collateralized entirely by U.S. government
securities may be deemed to be collateralized fully pursuant to Rule 2a-7.
CONCENTRATION. Based on the primary characteristics of non-U.S. (foreign) banks,
the Funds have identified each foreign country as a separate bank industry for
purposes of a Fund's concentration policy. A Fund will limit its investments in
securities issued by foreign banks in each country to no more than 25% of total
assets.
QUALITY AND MATURITY. Each Fund will only purchase securities that present
minimal credit risks and which are First Tier or Second Tier Securities
(otherwise referred to as "Eligible Securities"). 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 Money Fund and Government Fund): (a) that is rated by the
requisite nationally recognized statistical rating organizations ("NRSROs")
designated by the Securities and Exchange Commission (the "SEC"), 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 Money
Fund and Government Fund), 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 an 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), that
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, that is a
money market mutual fund security or that is a U.S. government security. A
Second Tier Security is any other Eligible Security.
Each Fund's holdings of Second Tier Securities will not exceed 5% of its assets,
with investments in the Second Tier Securities of any one issuer being limited
to the greater of 1% of the Fund's assets or $1 million.
- ----------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" for an exception to this investment restriction.
4
<PAGE> 35
Money Fund and Government Fund are limited to purchasing securities with a
remaining maturity of 12 months or less. For this purpose only, Money Fund and
Government Fund will calculate maturity from the security's settlement date. At
all times, Money Fund and Government Fund will not purchase a security with a
remaining maturity in excess of the limits of Rule 2a-7 under the 1940 Act.
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.
MONEY FUND, GOVERNMENT FUND, RETIREMENT FUND AND INSTITUTIONAL FUND 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 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.
5
<PAGE> 36
(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 Retirement Fund and Institutional Fund may (1) 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 (2) 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 Money Fund or Government 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.
For purposes of restriction (3), the following Funds constitute the Schwab Money
Funds: Money Fund, Government Fund, Retirement Fund, and Institutional Fund. For
purposes or restriction (7), commercial paper shall include any promissory notes
issued under Section 4(2).
TREASURY 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.
- ----------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" for an exception to this investment restriction.
6
<PAGE> 37
(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. TREASURY FUND MAY NOT:
(1) Invest more than 10% of its net 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.
Except with respect to borrowing and investments in illiquid securities, later
changes in values do not require a Fund to sell the investment even if it could
not then make the same investment.
7
<PAGE> 38
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 PRINCIPAL OCCUPATIONS &
NAME/DATE OF BIRTH THE TRUST AFFILIATIONS
- -------------------------------------------------------------------------------
CHARLES R. SCHWAB* Chairman and Chairman, Co-Chief Executive
July 29, 1937 Trustee Officer and Director, The
Charles Schwab Corporation;
Chairman, Chief Executive Officer
and Director, Charles Schwab
Holdings, Inc.; Chairman and
Director, Charles Schwab & Co.,
Inc., Charles Schwab Investment
Management, Inc., The Charles
Schwab Trust Company and Schwab
Retirement Plan Services, Inc.;
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).
STEVEN L. SCHEID*+ President and Executive Vice President and
June 28, 1953 Trustee Chief Financial Officer, The
Charles Schwab Corporation;
Enterprise President - Financial
Products and Services and Chief
Financial Officer, Charles Schwab &
Co., Inc.; Chief Executive Officer,
Chief Financial Officer and
Director, Charles Schwab Investment
Management, Inc. From 1994 to 1996,
Mr. Scheid was Executive Vice
President of Finance for First
Interstate Bancorp and Principal
Financial Officer from 1995 to
1996. Prior to 1994, Mr. Scheid was
Chief Financial Officer, First
Interstate Bank of Texas.
- ----------
* This trustee is an "interested person" of the trust.
+ Effective August 18, 1998, Mr. Scheid was elected as President and Trustee.
8
<PAGE> 39
DONALD F. DORWARD Trustee Executive Vice President and
September 23, 1931 Managing Director, Grey
Advertising. From 1990 to 1996,
Mr. Dorward was President and
Chief Executive Officer, Dorward
& Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive
May 15, 1931 Officer and Director, Semloh
Financial, Inc. (international
financial services and
investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens
June 28, 1938 & Company (Investments) and
Chairman and Chief Executive
Officer of North American Trust
(real estate investment trust).
MICHAEL W. WILSEY Trustee Chairman, Chief Executive
August 18, 1943 Officer and Director, Wilsey
Bennett, Inc. (truck and air
transportation, real estate
investment, management, and
investments).
TAI-CHIN TUNG Treasurer and Vice President, Treasurer and
March 7, 1951 Principal Controller, Charles Schwab
Financial Officer 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.
WILLIAM J. KLIPP* Executive Vice Executive Vice President,
December 9, 1955 President, Chief SchwabFunds(R), Charles Schwab &
Operating Co., Inc.; President and Chief
Officer and Operating Officer, Charles
Trustee Schwab Investment Management,
Inc.
STEPHEN B. WARD Senior Vice Senior Vice President and Chief
April 5, 1955 President and Investment Officer, Charles
Chief Investment Schwab Investment Management,
Officer Inc.
- ----------
* This trustee is an "interested person" of the trust.
9
<PAGE> 40
FRANCES COLE Secretary Senior Vice President, Chief
September 9, 1955 Counsel and Assistant Corporate
Secretary, Charles Schwab
Investment Management, Inc.
Each of the above-referenced Officers and/or Trustees also serves in the same
capacity as described for the Trust, for Schwab Capital Trust, Schwab
Investments and Schwab Annuity Portfolios. The address of each individual
listed above is 101 Montgomery Street, San Francisco, California 94104.
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Estimated
Accrued as Annual Total
Aggregate Part of Fund Benefits Upon Compensation
Name of Person, Compensation Expenses from Retirement from the
Position from the the Fund from the Fund Fund Complex 2
Trust Complex 2 Complex 2
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Timothy F 0 N/A N/A 0
McCarthy,
President and
Trustee 3
Tom D. Seip, 0 N/A N/A 0
President and
Trustee 4
William J. Klipp, 0 N/A N/A 0
Executive Vice
President, Chief
Operating Officer
and Trustee
Donald F. Dorward, $51,500 N/A N/A $93,450
Trustee
Robert G. Holmes, $51,500 N/A N/A $93,450
Trustee
Donald R. Stephens, $51,500 N/A N/A $93,450
Trustee
Michael W. Wilsey, $51,500 N/A N/A $93,450
Trustee
</TABLE>
1. Information is as of the Trust's fiscal year ended December 31, 1997.
10
<PAGE> 41
2. "Fund Complex" comprises all 31 funds of the Trust, Schwab Investments,
Schwab Capital Trust and Schwab Annuity Portfolios.
3. Mr. McCarthy served as President and Trustee of the Trust until November 24,
1997.
4. Mr. Seip began serving as President and Trustee of the Trust on November 24,
1997
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 SAI, 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.
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 34 mutual funds with over
$62 billion in assets as of March 31, 1998. The Investment Manager is an
affiliate of Schwab; the Trust's distributor; and shareholder services and
transfer agent.
Each Advisory Agreement will continue in effect for one-year terms for each Fund
to which it relates, subject to annual approval by: (1) the Trust's Board of
Trustees or (2) a vote of 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, as may be amended from time
to time, the Investment Manager is entitled to receive from Money 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.
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<PAGE> 42
For fiscal years ended December 31, 1995, 1996, and 1997 Money Fund paid
investment and advisory fees of $36,652,000 (fees were reduced by $15,603,000);
$46,270,000 (fees were reduced by $19,250,000); and $55,434,000 (fees were
reduced by $23,541,000).
Pursuant to an Advisory Agreement dated May 1, 1997, as may be amended from time
to time, the Investment Manager is entitled to receive from Government Fund a
graduated annual fee, payable monthly, of 0.46% of the average daily net assets
of the Fund's 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 fiscal years ended December 31, 1995, 1996 and 1997 Government Fund paid
investment and advisory fees of $1,901,000 (fees were reduced by $2,777,000);
$5,671,000 (fees were reduced by $2,847,000); and $5,471,000 (fees were reduced
by $3,208,000).
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 Treasury 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 fiscal years ended December 31, 1995, 1996 and 1997, Treasury Fund paid,
respectively investment and advisory fees of $2,748,000 (fees were reduced by
$2,674,000; $2,420,000 (fees were reduced by $3,302,000) and $2,674,000 (fees
were reduced by $4,184,000).
Pursuant to an Advisory Agreement dated June 15, 1994, the Investment Manager is
entitled to receive from Retirement Fund and Institutional 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.
For fiscal years ended December 31, 1995, 1996, and 1997 Retirement Fund paid
investment and advisory fees of $338,000 (fees were reduced by $16,000);
$494,000 (fees were reduced by $22,000); and $557,000 (fees were reduced by
$114,000).
For fiscal years ended December 31, 1995, 1996 and 1997 Institutional Fund paid
investment and advisory fees of $202,000 (fees were reduced by $162,000);
$292,000 (fees were reduced by $225,000); and $388,000 (fees were reduced by
$768,000).
The Investment Manager and Schwab have guaranteed that, through at least April
30, 1999, Money Fund, Government Fund, Treasury Fund, Retirement Fund and
Institutional Fund will not exceed 0.75%, 0.75%, 0.65%, 0.73% and 0.50% of each
Fund's average daily net assets, respectively.
EXPENSES
The Trust pays the expenses of its operations, including: the fees and expenses
of independent accountants, counsel and the custodian; the cost of reports and
notices to shareholders; the cost of calculating net asset value; registration
fees; the fees and expenses of qualifying the Trust and its shares for
distribution under federal and state securities laws; and membership dues in the
Investment Company Institute or any similar organization. The Trust's expenses
generally are allocated among the Funds on the basis of relative net assets at
the time the expense is incurred, except that expenses directly attributable to
a particular Fund or class of a Fund are charged to that Fund or class,
respectively.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal underwriter for
shares of the Trust and is the Trust's agent for the purpose of the continuous
offering of the Funds' shares. Each Fund pays the cost of the prospectuses and
shareholder reports to be prepared and delivered to existing shareholders.
Schwab pays such costs when the described materials are used in connection with
the offering of shares to prospective
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<PAGE> 43
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
also performs other professional accounting, auditing, tax and advisory services
when the Trust engages it to do so. Each Fund's financial statements and
financial highlights for the fiscal year ended December 31, 1997, are included
in each Fund's Annual Report, which are separate reports supplied with the SAI.
Each Fund's financial statements and financial highlights are incorporated
herein by reference. Shareholders will be sent audited annual and unaudited
semi-annual financial statements. The address of Price Waterhouse LLP is 555
California Street, San Francisco CA 94104.
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<PAGE> 44
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the objective of
each Fund in relation to movements in the general level of interest rates;
invest money obtained from the sale of Fund shares; reinvest proceeds from
maturing portfolio securities; and meet redemptions of Fund shares. Portfolio
transactions may increase or decrease the yield of a Fund depending upon
management's ability to correctly time and execute them.
The Investment Manager, in effecting purchases and sales of portfolio securities
for the account of each Fund, seeks to obtain best price and execution. Subject
to the supervision of the Board of Trustees, the Investment Manager will
generally select brokers and dealers for the Funds primarily on the basis of the
quality and reliability of brokerage services, including execution capability
and financial responsibility.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, utilize the services
of broker-dealers that provide it with investment information and other research
resources. Such resources may also be used by the Investment Manager when
providing advisory services to other investment advisory clients, including
mutual funds.
The Trust expects that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities.
Purchases from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers serving as market makers
will include the spread between the bid and asked prices.
The investment decisions for each Fund are reached independently from those of
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 Fund's portfolio turnover
rate for reporting purposes is expected to be zero.
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<PAGE> 45
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. In the case of
Institutional Fund, 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 be 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,
dividends will normally be reinvested monthly in 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 except in December when dividends are re-invested on the last
business of December. 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 consists of: (1) accrued
interest income, plus or minus amortized discount or premium, minus (2) accrued
expenses allocated to 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 per share 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)
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 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)
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<PAGE> 46
certain deductions attributable to that income (with certain exceptions), for
its taxable year. Each Fund intends to make sufficient distributions to
shareholders to meet these requirements.
If a Fund fails to distribute in a calendar year (regardless of whether it has a
non-calendar taxable year) substantially all of its (i) ordinary income for such
year; and (ii) capital gain net income for the year ending October 31 (or later
if the Fund is permitted so to elect and so elects), plus any retained amount
from the prior year, the Fund will be subject to a nondeductible 4% excise tax
on the undistributed amounts. Each Fund intends generally to make distributions
sufficient to avoid imposition of this excise tax.
Any distributions declared by the Funds in October, November or December to
shareholders of record during those months and paid during the following January
are treated, for tax purposes, as if they were received by each shareholder on
December 31 of the year 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 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.
SHARE PRICE CALCULATION
Each Fund values its portfolio instruments at amortized cost, which means they
are valued at their acquisition cost, as adjusted for amortization of premium or
discount, rather than at current market value. Calculations are made to compare
the value of a Fund's investments at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value or values obtained from yield data relating to classes
of money market instruments published by reputable sources at the mean between
the bid and asked prices for the instruments. The amortized cost method of
valuation seeks to maintain a stable $1.00 per share net asset value, even where
there are fluctuations in interest rates that affect the value of portfolio
instruments. Accordingly, this method of valuation can in certain circumstances
lead to a dilution of a shareholder's interest. If a deviation of 1/2 of 1% or
more were to occur between the net asset value per share calculated by reference
to market values and
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<PAGE> 47
a 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 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 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,
and yield, effective yield. These measures of performance are described below.
TOTAL RETURN
Standardized Total Return. Average annual total return for a period is
determined by calculating the actual dollar amount of investment return on a
$1,000 investment in a Fund made at the beginning of the period, then
calculating the average annual compounded rate of return that would produce the
same investment return on the $1,000 over the same period. In computing average
annual total return, a Fund assumes the reinvestment of all distributions at net
asset value on applicable reinvestment dates.
Nonstandardized Total Return. Nonstandardized total return for a Fund differs
from standardized total return in that it relates to periods other than the
period for standardized total return and/or that it represents aggregate (rather
than average) total return.
In addition, an after-tax total return for each Fund may be calculated by taking
that Fund's standardized or non-standardized total return and subtracting
applicable federal taxes from the portions of each Fund's total return
attributable to capital gains distributions and ordinary income. This after-tax
total return may be compared to that of other mutual funds with similar
investment objectives as reported by independent sources.
Each Fund 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, 1997
<TABLE>
<CAPTION>
1 Year 5 Year Since Cumulative
Commencement Total Total Commencement Total
Of Operations Return Return Return
<S> <C> <C> <C> <C> <C>
Money Fund 1/26/90 5.04% 4.34% 4.79% 45.01%
</TABLE>
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<PAGE> 48
From Commencement of Operations to December 31, 1997
<TABLE>
<CAPTION>
1 Year 5 Year Since Cumulative
Commencement Total Total Commencement Total
Of Operations Return Return Return
<S> <C> <C> <C> <C> <C>
Government Fund 1/26/90 4.95% 4.28% 4.73% 44.30%
Treasury Fund 11/6/91 4.85% 4.18% 4.03% 27.54%
Retirement Fund 3/2/94 5.07% N/A 4.88% 20.06%
Institutional Fund 1/4/94 5.31% N/A 5.00% 21.51%
</TABLE>
YIELD
A Fund's yield refers to the net investment income generated by a hypothetical
investment in 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.
GENERAL INFORMATION
The Trust is an open-end investment management company organized as a
Massachusetts business trust on October 20, 1989. Currently, there are 13 Funds
of the Trust: Schwab Money Market Fund, Schwab Government Money Fund, Schwab
Municipal Money Fund, Schwab U.S. Treasury Money Fund, Schwab Value Advantage
Money Fund(R), Schwab Institutional Advantage Money Fund(R), Schwab Retirement
Money Fund(R), Schwab New York Municipal Money Fund, Schwab California Municipal
Money Fund, Schwab Government Cash Reserves, Schwab Pennsylvania Municipal Money
Fund, Schwab New Jersey Municipal Money Fund and Schwab Florida Municipal Money
Fund. The Declaration of Trust permits to Trustees to create additional Funds.
There is a remote possibility that one Fund might become liable for a
misstatement in the prospectus or SAI about another Fund. 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.
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<PAGE> 49
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 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 15, 1998, Schwab One Access Marketing directly or beneficially owned
approximately 8.7% of Government Fund. The Charles Schwab Trust Company directly
or beneficially owned 67.2% of Retirement Fund and 85.92% of Institutional Fund.
In addition, as of April 1, 1998 the officers and Trustees of the Trust, as a
group, owned less than 1% of each Fund's outstanding voting securities.
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<PAGE> 50
PURCHASE AND REDEMPTION OF SHARES
Each Fund's minimum investment requirements are disclosed in its prospectus.
These minimum requirements may be changed at any time and are not applicable to
certain types of investors. For all retirement plans, 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 Fund selected. The Trust may waive the minimums for
purchases by Trustees, Directors, officers or employees of the Trust, Schwab or
the Investment Manager. The Trust has made an election with the SEC to pay in
cash all redemptions requested by any shareholder of record limited in amount
during any 90-day period to the lesser of $250,000 or 1% of its net assets at
the beginning of such period. This election is irrevocable without the SEC's
prior approval. Redemption requests in excess of the stated limits may be paid,
in whole or in part, in investment securities or in cash, as the Trust's Board
of Trustees may deem advisable; however, payment will be made wholly in cash
unless the Board of Trustees believes that economic or market conditions exist
that would make such a practice detrimental to the best interests of the Fund.
If redemption proceeds are paid in investment securities, such securities will
be valued as set forth in the Prospectus of the Fund affected under "Share Price
Calculation" and a redeeming shareholder would normally incur brokerage expenses
if he or she converted the securities to cash.
OTHER INFORMATION
The Fund Prospectus and this SAI do not contain all the information included in
the Registration Statement filed with the SEC under the Securities Act of 1933,
as amended, with respect to the securities offered by the Prospectus.
Certain portions of the Registration Statement have been omitted from the
Prospectus and this SAI 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 SAI as to the contents of
any contract or other document referred to are not necessarily complete, and in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement of which the Prospectus and
this SAI form a part, each such statement being qualified in all respects by
such reference.
THIS SAI 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> 51
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.
IBCA
F1+ is the highest category, and indicates the strongest degree of assurance for
timely payment. Issues rated F1 reflect an assurance of timely payment only
slightly less than issues rated F1+. Issues assigned an F2 rating have a
satisfactory degree of assurance for timely payment, but the margin of safety is
not as great as for issues in the first two rating categories.
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SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS
MOODY'S INVESTORS SERVICE
Short-term notes/variable rate demand obligations bearing the designations
MIG-1/VMIG-1 are considered to be of the best quality, enjoying strong
protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-2 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.
STANDARD & POOR'S CORPORATION
An S&P SP-1 rating indicates that the subject securities' issuer has a very
strong capacity to pay principal and interest. Issues determined to possess 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.
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.
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