<PAGE> 1
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
KEY FEATURES......................... 2
EXPENSES............................. 3
PERFORMANCE.......................... 4
ORGANIZATION & MANAGEMENT............ 5
INVESTMENT OBJECTIVE, POLICIES &
RISKS.............................. 7
INVESTING IN SHARES.................. 10
</TABLE>
The Prospectus provides concise information that you should know before
investing. Retain it for future reference.
The Statement of Additional Information (SAI), dated April 1, 1998, contains
additional information and is incorporated by reference into the Prospectus. The
SAI has been filed with the Securities and Exchange Commission (SEC). The SEC
maintains a World Wide Web site (http://www.sec.gov) that contains the SAI,
material incorporated by reference and other information. The SAI is available
without charge by calling 1-800-435-4000 (1-800-345-2550 for TDD users) or
writing to 101 Montgomery Street, San Francisco, CA 94104.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SCHWAB GOVERNMENT
CASH RESERVES
PROSPECTUS
APRIL 1, 1998
THE FUND IS A MONEY MARKET FUND THAT SEEKS CURRENT INCOME CONSISTENT WITH
LIQUIDITY AND STABILITY OF CAPITAL BY INVESTING IN U. S. GOVERNMENT SECURITIES.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE PER SHARE OF $1.00.
<PAGE> 2
KEY FEATURES
MATCHING THE FUND TO YOUR INVESTMENT NEEDS: The Fund seeks income while
preserving the value of your investment, and, therefore, may be appropriate for
a variety of investment programs.
The Fund is designed to provide convenience through automatic investment of
uninvested cash balances in your Schwab One Access account (the Sweep Feature),
although shares also may be position traded (purchased directly). The Sweep
Feature makes the Fund especially suitable for investors with short-term
investment needs, such as for periods between other investments. The Fund also
may be appropriate for investors seeking long-term, low-risk investments for
cash balances.
GOAL: The Fund seeks current income, while maintaining a stable share price of
$1.00. There is no guarantee that the Fund will achieve its goal.
STRATEGY: The Fund invests in short-term U. S. Government securities. The Fund
is a diversified mutual fund.
RISKS: While the Fund invests in U.S. Government securities, which are
considered among the safest securities, these securities and, therefore, the
Fund, are subject to risks associated with interest rate changes, which may
affect yield.
MANAGEMENT: Charles Schwab Investment Management, Inc. (the Investment Manager),
101 Montgomery Street, San Francisco, CA 94104, currently provides investment
management services to the SchwabFunds(R), a family of 34 mutual funds with more
than $60 billion in assets as of February 28, 1998.
SHAREHOLDER SERVICE: Charles Schwab & Co., Inc. (Schwab), 101 Montgomery Street,
San Francisco, CA 94104, provides professional representatives 24 hours a day at
1-800-435-4000 to service your account. Read the "Investing in Shares" section
of the prospectus for information on how to buy, sell and exchange shares of the
Fund.
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EXPENSES
ANNUAL OPERATING EXPENSES are paid by the Fund. These expenses include
management fees paid to the Investment Manager, and other fees for services such
as maintaining shareholder records and furnishing shareholder statements and
financial reports. These expenses are factored into the dividends paid to
shareholders. As a shareholder, you are not charged any of these fees directly.
The annual operating expenses stated below are based on estimated other expenses
and are stated as a percentage of average daily net assets of the Fund.
<TABLE>
<S> <C>
Management fee (after reduction) 0.07%
12b-1 fee NONE
Other expenses (after reduction) 0.88%
(transaction services expenses 0.30%)
TOTAL OPERATING EXPENSES (AFTER REDUCTION) 0.95%
</TABLE>
EXAMPLE. If the Fund were to provide an annual return of 5%, you would pay the
following expenses on a $1,000 investment, whether you redeemed your shares at
the end of each period or left your shares invested.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
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<S> <C>
$10 $30
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
The Investment Manager and Schwab have voluntarily agreed to reduce total
operating expenses (excluding interest, taxes and extraordinary expenses) to
0.95% of the Fund's average daily net assets. If this reduction was not in
effect, the management fee, other expenses and total operating expenses would be
estimated to be 0.46%, 1.28% and 1.74% of average daily net assets,
respectively. Read the "Organization & Management" section of the prospectus for
more information on expenses.
3
<PAGE> 4
PERFORMANCE
Typically, money market funds report performance in terms of total return or
yield.
TOTAL RETURN is the actual return of an investment assuming both the
reinvestment of any income earned and any change in share price. A cumulative
total return is the actual total return of an investment over a stated period of
time, while an average annual total return is a hypothetical rate of return,
which, if achieved annually would have produced the same cumulative total
return. An average annual total return will smooth out the actual year-to-year
fluctuations of an investment's return.
YIELD is the actual income earned on an investment over a stated period of time
and annualized (assumed to be generated over a year). For example, a seven-day
yield measures the income earned on an investment over a seven-day period,
annualizes it and expresses that income as a percentage of the original
investment.
An effective yield is calculated similarly, but income earned is assumed to be
reinvested. Because of this compounding effect, effective yields are generally
higher.
Because money market funds seek to maintain a stable share price, yields
generally are considered a better method of measuring performance than total
return.
Fund strategies, performance and holdings are detailed in financial reports,
which are sent to shareholders twice a year.
4
<PAGE> 5
ORGANIZATION & MANAGEMENT
THE FUND IS A DIVERSIFIED MUTUAL FUND. The Fund is a series of The Charles
Schwab Family of Funds (the Trust).
THE FUND IS OVERSEEN BY A BOARD OF TRUSTEES. The Board of Trustees meets
regularly to review the Fund's activities, contractual arrangements and
performance. The Board of Trustees is responsible for protecting the interests
of the Fund's shareholders.
THE FUND MAY HOLD SPECIAL MEETINGS. These meetings may be called for purposes
such as electing Trustees, changing fundamental policies and amending management
contracts. Shareholders are entitled to one vote for each share owned and may
vote by proxy or in person. Proxy materials will be mailed to shareholders prior
to any meetings, and will include a voting card and information explaining the
matters to be voted upon.
THE FUND IS MANAGED BY THE INVESTMENT MANAGER. The Investment Manager is
responsible for managing the Fund's day-to-day business affairs, including
picking the Fund's investments. The Investment Manager, however, is subject to
the overall authority of the Board of Trustees.
For the services performed under its contract with the Fund, the Investment
Manager is entitled to receive a graduated annual fee, payable monthly, of 0.46%
of the Fund's average daily net assets not in excess of $1 billion, 0.41% of
such assets over $1 billion but not in excess of $2 billion and 0.40% of such
assets over $2 billion.
SCHWAB IS THE FUND'S SHAREHOLDER SERVICES AND TRANSFER AGENT. Schwab provides
Fund information to shareholders, including share price, reporting shareholder
ownership and account activities and distributing the Fund's prospectuses,
financial reports and other informational literature. Schwab also maintains the
office space, equipment and personnel necessary to provide these services.
Schwab also distributes and markets SchwabFunds(R) and provides other services.
For the services performed as transfer agent under its contract with the Fund,
Schwab is entitled to receive an annual fee from the Fund, payable monthly in
the amount of 0.25% of the Fund's average daily net assets. For the services
performed as shareholder services agent under its contract with the Fund, Schwab
is entitled to receive an annual fee from the Fund, payable monthly in the
amount of 0.20% of the Fund's average daily net assets.
THE FUND PAYS OTHER EXPENSES. These expenses typically are connected with the
Trust's operations, and include legal, audit and custodian fees, as well as the
costs of accounting and registration of the Fund. Expenses not directly
attributable to a
5
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particular fund generally will be allocated among the funds in the Trust on the
basis of each fund's relative net assets at the time the expense is incurred.
The Fund also may have other expenses that include fees paid to entities that
provide transaction services to the Fund, including checking, Automated Clearing
House and Automatic Teller Machine.
The Charles Schwab Corporation is the parent company of the Investment Manager
and Schwab. Charles R. Schwab is the founder, Chairman, Co-Chief Executive
Officer and Director of The Charles Schwab Corporation. As a result of his
ownership of and interests in The Charles Schwab Corporation, Mr. Schwab may be
deemed a controlling person of the Investment Manager and Schwab.
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INVESTMENT OBJECTIVE, POLICIES & RISKS
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide current income consistent with
liquidity and stability of capital.
The Fund's investment objective may be changed only by vote of a majority of its
shareholders. Unless otherwise noted, policies and limitations may be changed
without shareholder approval.
INVESTMENT STRATEGY
The Fund intends to achieve its objective by investing exclusively in short-term
U.S. Government securities and repurchase agreements for these securities.
Please remember that the Fund is not insured or guaranteed by the U.S.
Government.
The Fund seeks to maintain a stable share price of $1.00, although there is no
guarantee that it will be able to do so. The Fund follows regulations set forth
by the SEC that dictate the quality, maturity and diversification of the Fund's
investments. These requirements are designed to help the Fund maintain a stable
share price of $1.00.
The Fund earns income at current money market rates and its yield will fluctuate
from day to day. The Fund emphasizes capital preservation, so it will not
provide the higher yield or capital appreciation that a more aggressive mutual
fund or other investment may provide.
INVESTMENT RISKS
Investment in the Fund will be subject to risks associated with investing in
money market securities, i.e., high-quality, short-term debt securities.
Generally speaking, there are four types of risk attendant to investing in debt
securities.
PREPAYMENT or CALL RISK is the likelihood that, during periods of falling
interest rates, debt securities will be prepaid (or "called") prior to maturity
requiring the proceeds to be invested at a generally lower interest rate. The
holders of these securities will then be forced to invest their proceeds in
securities paying lower rates of interest.
INTEREST RATE RISK is the potential for fluctuations in the prices of debt
securities due to changing interest rates. For example, when interest rates
rise, prices of debt securities generally decline or "fall" and when interest
rates fall, prices of debt securities generally rise.
INCOME RISK is the potential for a decline in income due to falling interest
rates, and is a component of both prepayment or call risk and interest rate
risk.
CREDIT RISK is the possibility that an issuer will fail to make timely payments
of either interest or principal.
The amount of each type of risk the Fund will be subject to depends on its
portfolio of investments. The Fund may purchase only high-quality, short-term
debt securities that the Investment Manager believes present minimal credit
risk. The Fund's investments in U.S. Government securities
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<PAGE> 8
makes it even less sensitive to credit risks. In addition, the short maturity of
the Fund's portfolio is designed to minimize interest rate and prepayment or
call risks, and thereby reduce income risk.
PRINCIPAL SECURITIES AND INVESTMENT TECHNIQUES
The different types of securities in which the Fund may invest are described
below.
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.
VARIABLE AND FLOATING RATE SECURITIES pay an interest rate, which is adjusted
either periodically or at specific intervals or floats continuously according to
a formula or benchmark. Although these structures are intended to minimize
fluctuations in value that occur when interest rates rise and fall, some
structures may be linked to a benchmark in such a way as to cause greater
volatility to the security's value. Some variable rate securities may be
combined with a put or demand feature (variable rate demand securities) that
entitles the holder the right to demand repayment in full. While the demand
feature is intended to reduce credit risks, it is not always unconditional and
may make the securities more difficult to sell quickly or without losses.
STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities
typically are subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
REPURCHASE AGREEMENTS involve the Fund buying securities (usually U.S.
Government securities) from a seller and simultaneously agreeing to sell them
back at an agreed-upon price and time. There are risks that losses will result
if the seller does not perform as agreed.
PUTS, sometimes called demand features or guarantees, are agreements that allow
the buyer to sell a security at a specified price and time to the seller or "put
provider." When a Fund buys a put, losses could occur as a result of the costs
of the put or if it exercises its rights under the put and the put provider does
not perform as agreed. Standby commitments are types of puts.
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<PAGE> 9
ILLIQUID SECURITIES are securities that are not actively traded and, therefore,
may be difficult to sell quickly or without losses.
Restriction: The Fund will not invest more than 10% of its net assets in
illiquid securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES are securities that are purchased at
a specified price and yield, but delivered to the buyer at a later than
customary date. Generally, the purchaser does not pay for these securities or
earn interest on them until they are delivered, but their value could change
prior to delivery.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased by the Fund. These
investments will cause the Fund to bear duplicative fees for certain services.
The Fund also employs the policies described below.
DIVERSIFICATION involves investing in a wide range of securities and, thereby,
spreading and reducing the risks of investment.
BORROWING money is a form of leveraging if the Fund continues to make
investments while borrowings remain outstanding. Borrowing subjects the Fund to
interest costs, which may exceed the interest received on the securities
purchased with the borrowed funds.
Restriction: The Fund may borrow up to 33 1/3% of its total assets for temporary
or emergency purposes; provided that the Fund will not purchase securities while
borrowings represent more than 5% of total assets.
LENDING securities or money may earn the Fund income, but could result in losses
to the Fund, and possibly affect the share price.
Restriction: The Fund will limit lending to no more than 33 1/3% of its total
assets.
9
<PAGE> 10
INVESTING IN SHARES
BUSINESS DAYS
The Fund is open each day that both the Federal Reserve Bank of New York (New
York Fed) and New York Stock Exchange (NYSE) are open (business days). The
following holiday closings are currently scheduled: New Year's Day, Martin
Luther King's Birthday (observed), President's Day, Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Columbus Day (observed), Veterans Day,
Thanksgiving Day and Christmas Day. On any day that the New York Fed, NYSE or
principal government securities markets closes early, such as days in advance of
holidays, the Fund reserves the right to advance the time by which purchase and
redemption orders must be received on that day.
NET ASSET VALUE
The price of each share of the Fund is its net asset value per share (NAV). NAV
is determined each business day, first at 10 a.m. Eastern time, then again at
the close of the NYSE, generally 4 p.m. Eastern time. NAV is calculated by
adding the value of the Fund's assets, subtracting its liabilities and dividing
the result by the number of outstanding shares.
Investment holdings are valued on the basis of amortized cost, which means that
the Fund's securities are valued at cost plus or minus any premium or discount
that has accrued since purchase. The amortized cost method is designed for money
market funds that seek to maintain a stable share price, and most money market
funds use this method to calculate NAV.
HOW TO BUY, SELL OR EXCHANGE SHARES
Shares may be purchased and redeemed only through a Schwab One Access account.
Shares are purchased or sold at the NAV next determined after your purchase,
redemption or exchange order is received in good order. Shares purchased at the
10 a.m. NAV generally receive a dividend that day, although shares purchased at
the 4 p.m. NAV generally receive a dividend the next day. Shares sold or
exchanged at the 10 a.m. NAV generally do not receive a dividend that day,
although shares sold or exchanged at the 4 p.m. NAV generally do receive a
dividend that day.
SWEEP FEATURE. Uninvested cash balances in your Schwab One Access account will
be invested automatically in shares of the Fund, according to the terms and
conditions of the account agreement. Shares of the Fund will be sold to cover
any negative cash balance in your Schwab One Access account, according to the
terms and conditions of the account agreement.
DIRECT PURCHASE, REDEMPTION AND EXCHANGE. Shares of the Fund also may be
position traded. The minimum initial investment is $1,000. Subsequent direct
purchases, redemptions and exchanges must be in amounts of at least $100.
- - BY TELEPHONE. Call 1-800-435-4000, 24 hours a day (1-800-345-2550 for TDD
users). Telephone orders received in good order after the close of the NYSE,
but prior to 8 p.m. Eastern time will be executed at the 10 a.m. NAV.
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<PAGE> 11
Telephone orders received in good order after 8 p.m. Eastern time will be
executed at the 4 p.m. NAV.
- - BY MAIL. Write to the Funds at 101 Montgomery Street, San Francisco, CA
94104.
- - BY WIRE. Call 1-800-435-4000 for wire instructions.
Please provide the following information:
- - your name and account number;
- - the name of the Fund;
- - the dollar amount you would like to purchase, sell or exchange; and
- - for initial purchases only, one of the two distribution choices below:
AUTOMATIC REINVESTMENT. All distributions will be reinvested in full shares
of the Fund you are purchasing. If you do not choose an option, this option
will be assigned to you; or
CASH OPTION. All distributions will be paid to your account and, if
requested, mailed to you the next business day.
- - for exchanges, the name of the Fund and class, if applicable, into which you
want to exchange shares and the distribution option you select; and
- - if selling or exchanging by mail, a signature of at least one of the persons
named on your account.
PLEASE NOTE THE FOLLOWING WHEN SELLING OR EXCHANGING SHARES OF THE FUND:
- - the Fund requires a minimum balance of $1;
- - your shares may be automatically redeemed if, as a result of selling or
exchanging shares, you no longer meet the Fund's minimum balance
requirements, although you will be given 30 days' notice prior to redemption
to increase your holdings to the required minimum balance;
- - redemption and exchange requests by mail are irrevocable and, once mailed,
may not be modified or canceled;
- - payment for redeemed shares will be made to your account within seven days,
and a check may be mailed to you upon request;
- - if you bought your shares by check, a check for your redemption proceeds will
be issued as soon as your check clears, which may take up to 15 days from the
date of purchase;
- - depending on the type of Schwab account you have, your money may earn
interest during any holding period;
- - you may exchange your shares for shares of other SchwabFunds(R), provided you
meet the Fund's minimum investment or other requirements;
- - an exchange of the Fund's shares for shares of other SchwabFunds will be
treated as a taxable event for federal income tax purposes;
- - the Fund and Schwab reserve the right to modify, limit or terminate the
exchange privilege upon 60 days' written notification; and
- - the Fund may suspend the right to sell shares or postpone payment for a sale
of shares when trading on the NYSE is restricted, the NYSE is closed for any
reason other than its customary weekend and holiday closings, emergency
circumstances exist as determined by the SEC or as otherwise permitted by the
SEC.
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DIVIDENDS & TAXES
Each business day, the Fund's net investment income is determined as of the
close of the NYSE as a dividend to shareholders of record. Net investment income
is calculated by subtracting its expenses from the income earned on its
investments that day. Dividends are declared each business day based on the net
investment income determined and are paid on the 15th of each month, if it is a
business day, except in December when dividends are paid on the last business
day of the month. If the 15th is not a business day, dividends are paid on the
next business day.
The following is only a brief summary of some of the federal and state income
tax consequences that may affect the Fund and its shareholders. You should
consider the tax implications of investing in the Fund, and consult with your
own tax advisor.
The Fund will distribute its net investment income and capital gains, if any, to
shareholders each year. All distributions received by shareholders are subject
to federal income tax, and may be subject to state and/or local income taxes.
Note that most states grant tax-exempt status to distributions paid to
shareholders from interest income derived from U.S. Government securities.
Distributions are taxable when paid, whether they are received in cash or
reinvested, although distributions declared in December, but paid in January,
are taxable as if they were paid on December 31.
Shareholders receive a record of all distributions by the Fund, as well as
purchases and sales they have made, via their monthly Schwab One Access account
statement. Each year, the Fund notifies shareholders of the federal tax
treatment of all distributions made that year, including the percentage of
dividends paid which may qualify for tax-exempt status.
OPENING A SCHWAB ONE ACCESS ACCOUNT
Schwab was established in 1971 and is one of America's largest discount brokers.
Schwab helps more than 4.1 million customers make investment decisions by
offering low-cost brokerage services and providing financial products and
information. Visit one of Schwab's 277 branch offices or Schwab's web site
(http://www.schwab.com) for information on investment products and services.
Qualifying investors may open a Schwab One Access account by simply completing
an application, although institutional investors should contact Schwab for more
information. Read your account agreement and application for specific account
details, including minimum initial investment requirements and fees.
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The Securities Investor Protection Corporation (SIPC) provides account
protection of up to $500,000 for the securities held in a Schwab account,
including shares of the Funds. It is important to remember that SIPC account
protection does not protect against losses due to market or economic conditions.
Deposits to your account may be made by check, wire and other forms of
electronic funds transfer. All checks should be made out to Charles Schwab &
Co., Inc. Schwab will charge a $15 service fee for any checks returned as a
result of insufficient or uncollected funds or a stop order.
Monies received by Schwab before 4 p.m. Eastern time will be available for
investment that day. Monies received by Schwab after 4 p.m. Eastern time will be
available for investment the next business day.
Contact Schwab for instructions and any applicable fees if you would like to
wire money from your account.
GENERAL INFORMATION
The right to initiate transactions by telephone is automatically available
through your account. As long as the Fund or Schwab follow reasonable procedures
to confirm that your telephone order is genuine, they will not be liable for any
losses an investor may experience due to unauthorized or fraudulent
instructions. These procedures may include:
- - requiring a form of personal identification before acting upon any telephone
order;
- - providing written confirmation of telephone orders; and
- - tape-recording all telephone orders.
It may be difficult to place orders by telephone during periods of drastic
economic or market changes because Schwab's phone lines may become very busy
with calls from other investors. Consider other methods for placing an order,
such as writing to the Fund.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
Twice a year, financial reports will be mailed to shareholders describing the
Fund's performance and investment holdings. In order to reduce these mailing
costs, each household will receive one consolidated mailing. If you do not want
to receive consolidated mailings, you may write to the Fund and request that
your mailings not be consolidated.
The Fund, in its sole discretion and without prior notice, reserves the right to
reject orders to purchase shares, change or waive minimum investment
requirements or withdraw or suspend any part of the offering made by this
prospectus.
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- ---------------------------------------------------
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY STATEMENTS
ABOUT THIS OFFERING OTHER THAN THE INFORMATION CONTAINED IN THIS PROSPECTUS AND
IN OFFICIAL SALES MATERIALS. IF ANYONE GIVES ANY OTHER INFORMATION OR MAKES ANY
OTHER REPRESENTATIONS, DO NOT RELY ON SUCH INFORMATION OR REPRESENTATIONS.
- ---------------------------------------------------
THIS PROSPECTUS IS NOT AN OFFER IN ANY STATE IN WHICH SUCH AN OFFER MAY NOT
LAWFULLY BE MADE, NOR IS IT AN OFFER TO ANY PERSON TO WHOM SUCH AN OFFER MAY NOT
BE MADE.
- ---------------------------------------------------
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[SCHWAB FUNDS LOGO]
(C) 1998 Charles Schwab & Co., Inc.
All rights reserved. Member SIPC/NYSE.
CRS 12120 MKT3476(3/98)
PROSPECTUS APRIL 1 1998
=======================================
Schwab
Government
Cash Reserves
[SCHWAB FUNDS LOGO]
<PAGE> 16
STATEMENT OF ADDITIONAL INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
101 Montgomery Street, San Francisco, CA 94104
SCHWAB GOVERNMENT CASH RESERVES
APRIL 1, 1998
This Statement of Additional Information (SAI) is not a prospectus. It
should be read in conjunction with the Prospectus dated April 1, 1998 (and as
may be amended from time to time) for Schwab Government Cash Reserves (the
Fund).
To obtain a copy of the Prospectus, call 800-435-4000 (800-345-2550 for
TDD Users), or write to 101 Montgomery Street, San Francisco, California 94104.
TABLE OF CONTENTS
Page
----
INVESTMENT POLICIES AND RESTRICTIONS....................................... 2
MANAGEMENT OF THE TRUST.................................................... 5
PORTFOLIO TRANSACTIONS AND TURNOVER........................................ 10
DISTRIBUTIONS AND TAXES.................................................... 11
SHARE PRICE CALCULATION.................................................... 13
HOW THE FUND REPORTS PERFORMANCE........................................... 13
GENERAL INFORMATION........................................................ 15
PURCHASE AND REDEMPTION OF SHARES.......................................... 16
OTHER INFORMATION.......................................................... 16
<PAGE> 17
INVESTMENT POLICIES AND RESTRICTIONS
THE FOLLOWING INVESTMENT POLICIES AND RESTRICTIONS ARE FUNDAMENTAL AND
MAY BE CHANGED ONLY BY APPROVAL OF A MAJORITY OF THE FUND'S SHAREHOLDERS. ALL
OTHER INVESTMENT POLICIES AND RESTRICTIONS CONTAINED IN THE SAI ARE
NON-FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL OR PRIOR NOTICE.
THE FUND MAY NOT:
(1) purchase securities of any issuer unless consistent with its status as
a diversified investment management company as defined 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.
(2) lend or borrow money, except 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.
(3) pledge, mortgage or hypothecate any of its assets, except 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.
(4) issue senior securities, except 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.
(5) underwrite securities, except 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.
(6) concentrate investments in a particular industry or group of
industries, or within one state, as concentration is defined 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) purchase or sell commodities, commodities contracts, futures contracts,
or real estate, except 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.
THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING
THE ABOVE FUNDAMENTAL POLICIES AND RESTRICTIONS.
Diversification. Under the 1940 Act, a diversified investment management
company, with respect to 75% of its total assets, may not purchase securities
(other than U.S. government securities or securities of other investment
companies) if, as a result, more than 5% of its total assets would be invested
in the securities of such issuer or it would own more than 10% of such issuer's
outstanding voting securities.
2
<PAGE> 18
Borrowing. The 1940 Act presently restricts an investment management company
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, an investment management company may make loans
only if expressly permitted by its investment policies.
Concentration. The 1940 Act presently defines concentration as investing 25% or
more of an investment company's total assets in an industry or group of
industries, with certain exceptions.
THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS.
THE FUND MAY NOT:
(a) purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government securities or securities subject to
a guarantee issued by a person not controlled by the issuer) if, as a
result, more than 5% of total assets would be invested in the
securities of such issuer; provided that the Fund may invest up to 25%
of its total assets in the first tier securities of a single issuer for
up to three business days.
(b) purchase securities of any issuer (other than securities subject to a
guarantee issued by a person not controlled by the issuer) if, as a
result, more than the greater of 1% of its total assets or $1 million
would be invested in second tier securities of such issuer.
(c) with respect to 75% of total assets, purchase a guarantee or securities
subject to a guarantee of any issuer if, as a result, more than 10% of
its total assets would be invested in securities issued by or subject
to a guarantee of such issuer (except with respect to guarantees and
securities subject to guarantees issued by a non-controlled person).
(d) purchase a second tier guarantee or second tier security subject to a
guarantee of any issuer if, as a result, more than 5% of its total
assets would be invested in securities issued by or subject to a
guarantee of such issuer.
(e) purchase securities of other investment companies, except as permitted
by the 1940 Act.
(f) borrow money except that the Fund may (i) borrow money from banks and
(ii) engage in reverse repurchase agreements with any party; provided
that (i) and (ii) in combination do not exceed 33 1/3% of its total
assets (any borrowings that come to exceed this amount will be reduced
to the extent necessary to comply with the limitation within three
business days) and provided that the Fund will not purchase securities
while borrowings represent more than 5% of total assets.
(g) purchase securities of any issuer (other than obligations of, or
guaranteed by the U.S. government its agencies or instrumentalities)
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.
3
<PAGE> 19
(h) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of debt securities or
repurchase agreements).
(i) purchase securities of any issuer if, as a result, more than 10% of its
net assets would be invested in illiquid securities.
(j) sell securities short unless it owns the security or the right to
obtain the security or equivalent securities (transactions in futures
contracts and options are not considered selling securities short).
(k) purchase securities on margin, except that the Fund may obtain
short-term credits that are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
4
<PAGE> 20
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The Officers and Trustees of the Trust, their principal
occupations over the past five years and their affiliations, if any, with The
Charles Schwab Corporation, Schwab and Charles Schwab Investment Management,
Inc., the Investment Manager, are as follows:
<TABLE>
<CAPTION>
POSITION WITH
-------------
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Co-Chief Executive Officer and
July 29, 1937 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).
TOM D. SEIP* President and Trustee Executive Vice President, The Charles Schwab
February 15, 1950 Corporation; Enterprise President -
International and Mutual Funds, Charles
Schwab & Co., Inc.; Chief Executive Officer,
Charles Schwab Investment Management, Inc.
DONALD F. DORWARD Trustee Executive Vice President and Managing Director,
September 23, 1931 Grey Advertising. From 1990 to 1996, Mr.
Dorward was President and Chief Executive
Officer, Dorward & Associates. Dorward &
Associates is an advertising and
marketing/consulting firm.
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. Semloh Financial is an
international financial services and investment
advisory firm.
</TABLE>
5
<PAGE> 21
<TABLE>
<S> <C> <C>
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co.
June 28, 1938 (investment banking). Prior to 1995, Mr.
Stephens was Chairman and Chief Executive
Officer of North American Trust (a real
estate investment trust). Prior to 1992, Mr.
Stephens was Chairman and Chief Executive
Officer of the Bank of San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air
transportation, real estate investment and
management, and investments).
TAI-CHIN TUNG Treasurer and Principal Vice President - Finance, Charles Schwab & Co.,
March 7, 1951 Financial Officer Inc.; Controller, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Ms. Tung
was Controller for Robertson Stephens Investment
Management, Inc. From 1993 to 1994, she was
Vice President of Fund Accounting, Capital
Research and Management Co. Prior to 1993, Ms.
Tung was Senior Vice President of the Sierra
Funds and Chief Operating Officer of Great
Western Financial Securities.
WILLIAM J. KLIPP* Executive Vice Executive Vice President, SchwabFunds(R),
December 9, 1955 President, Chief Charles Schwab & Co., Inc.; President and Chief
Operating Officer and Operating Officer, Charles Schwab Investment
Trustee Management, Inc. Prior to 1993, Mr. Klipp was
Treasurer of Charles Schwab & Co., Inc. and
Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief Counsel, Chief
September 9, 1955 Compliance Officer and Assistant Corporate
Secretary, Charles Schwab Investment Management,
Inc.
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel, Charles
October 14, 1960 Schwab Investment Management, Inc.
</TABLE>
6
<PAGE> 22
<TABLE>
<S> <C> <C>
KAREN L. SEAMAN Assistant Secretary Corporate Counsel, Charles Schwab Investment
February 27, 1968 Management, Inc. From October 1994 to July
1996, she was an Attorney for Franklin
Resources, Inc. Prior to 1994, Ms. Seaman was
an Attorney for The Benham Group.
MATTHEW O'TOOLE Assistant Secretary Corporate Counsel, Charles Schwab Investment
September 26, 1964 Management, Inc. From November 1995 to April
1997, Mr. O'Toole was Assistant General Counsel
for Chancellor LGT Asset Management, Inc. Prior
there to, Mr. O'Toole was Senior Counsel at the
U.S. Securities and Exchange Commission in
Washington, D.C.
AMY L. MAUK Assistant Secretary Corporate Counsel, Charles Schwab Investment
January 5, 1969 Management, Inc. From April 1995 to March 1997,
she was a Legal Product Manager for Fidelity
Investments.
</TABLE>
* This Trustee is an "interested person" of the Trust.
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.
7
<PAGE> 23
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Estimated
Pension or Annual
Retirement Benefits Benefits Upon Total
Aggregate Accrued as Part of Retirement Compensation
Name of Person, Compensation Fund Expenses from from the Fund from the Fund
Position from the Trust the Fund Complex 2 Complex 2 Complex 2
- -------- --------- ------------------- ---------- ----------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Tom D. Seip, 0 N/A N/A 0
President and Trustee 3
Timothy F. McCarthy, 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 Figures are for 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. Seip became a Trustee of the Trust on November 24, 1997.
4 Mr. McCarthy ceased serving as a 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").
8
<PAGE> 24
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.
INVESTMENT MANAGER
The Investment Manager, a wholly owned subsidiary of The Charles Schwab
Corporation, serves as the Fund's investment adviser and administrator pursuant
to an Investment Advisory and Administration Agreement (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the SchwabFunds(R), a
family of 34 mutual funds with more than $60 billion in assets as of February
28, 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, the Investment Manager is entitled
to receive a graduated annual fee, payable monthly, of 0.46% of the Fund's
average daily net assets not in excess of $1 billion, 0.41% of such assets over
$1 billion but not in excess of $2 billion and 0.40% of such assets over $2
billion.
The Investment Manager and Schwab have voluntarily agreed to reduce the
Fund's total operating expenses to 0.95% of its average daily net assets.
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
9
<PAGE> 25
among the Funds on the basis of relative net assets at the time the expense is
incurred, except expenses directly attributable to a particular Fund or class of
a Fund which 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 Fund's shares. The Fund pays the cost of the
prospectuses and shareholder reports to be prepared and delivered to existing
shareholders. Schwab pays such costs when the described materials are used in
connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under the
Distribution Agreement. Terms of continuation, termination and assignment under
the Distribution Agreement are identical to those described above with respect
to the Advisory 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 audit and report on the annual
financial statements of each series of the Trust and review certain regulatory
reports and the Fund's federal income tax return. It also performs other
professional accounting, auditing, tax and advisory services when the Trust
engages it to do so. Shareholders will be sent audited annual and unaudited
semi-annual financial statements.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to pursue the
objective of the Fund in relation to movements in the general level of interest
rates; 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 the 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 the 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
10
<PAGE> 26
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.
The investment decisions for the Fund are reached independently from
those for other accounts managed by the Investment Manager. Such other accounts
also may 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 the Fund. However, it is the opinion of the Board of Trustees that the
benefits conferred by the Investment Manager outweigh any disadvantages that may
arise from exposure to simultaneous transactions.
PORTFOLIO TURNOVER
Because securities with maturities of less than one year are excluded
from required portfolio turnover rate calculations, the Fund's portfolio
turnover rate for reporting purposes is expected to be zero.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
On each day that the NAV of the Fund is determined ("Business Day"),
the Fund's net investment income will be declared as of the close of trading on
the New York Stock Exchange ("NYSE") (normally 4:00 p.m. Eastern time) as a
daily dividend to shareholders of record as of the last calculation of NAV prior
to the declaration. Shareholders will receive dividends in additional shares
unless they elect to receive cash. Dividends will normally be reinvested monthly
in full shares of the Fund at the NAV on the 15th day of each month, if a
business day, otherwise on the next business day. If cash payment is requested,
checks normally will be mailed on the business day following the reinvestment
date. The Fund will pay shareholders, who redeem all of their shares, all
dividends accrued to the time of the redemption within seven days.
The Fund calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of the Fund consists of: (1)
accrued interest income, plus or minus amortized discount or premium, minus (2)
accrued expenses allocated to that Fund. If the Fund realizes any capital gains,
they will be distributed at least once during the year as determined by the
Board of Trustees. Any realized capital losses, to the extent not offset by
realized capital gains, will 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 the Fund deviate significantly from market value,
the Board of Trustees could decide to value the investments at market value and
any unrealized gains and losses could affect the amount of the Fund's
distributions.
11
<PAGE> 27
FEDERAL INCOME TAXES
It is the 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, the
Fund expects to eliminate or reduce to a nominal amount the federal income tax
to which it is subject.
In order to qualify as a regulated investment company, the Fund must,
among other things, (1) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks, securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
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 the Fund may
engage in certain hedging transactions and may limit the range of the Fund's
investments. If the Fund qualifies as a regulated investment company, it will
not be subject to federal income tax on the part of its net investment income
and net realized capital gains, if any, which it distributes to shareholders,
provided that the Fund meets certain minimum distribution requirements. To
comply with these requirements, the 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. The Fund intends to make sufficient distributions to shareholders to meet
these requirements.
If the Fund fails to distribute in a calendar year (regardless of
whether it has a non-calendar taxable year) substantially all of its (i)
ordinary income for such year; and (ii) capital gain net income for the year
ending October 31 (or later if the Fund is permitted so to elect and so elects),
plus any retained amount from the prior year, the Fund will be subject to a
nondeductible 4% excise tax on the undistributed amounts. The Fund generally
intends to make distributions sufficient to avoid imposition of this excise tax.
Any distributions declared by the 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. The Fund may
adjust its schedule for the reinvestment of distributions for the month of
December to assist in complying with the reporting and minimum distribution
requirements of the Code.
The Fund does not expect to realize any long-term capital gains.
However, any distributions of long-term capital gains will be taxable to the
shareholders as long-term capital gains, 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 Fund may engage in investment techniques that may alter the timing
and character of the Fund's income. The Fund may be restricted in its use of
these techniques by rules relating to their qualification as regulated
investment companies.
The 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
12
<PAGE> 28
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 shareholders of long-term
capital gains and any gains from the sale or other disposition of shares of the
Fund generally are not subject to U.S. taxation, unless the recipient is an
individual who meets the Code's definition of "resident alien." Different tax
consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a
foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above. Distributions by the Fund 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
The 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 the Fund's investments at amortized cost with market
values. Market valuations are obtained by using actual quotations provided by
market makers, estimates of market value or values obtained from yield data
relating to classes of money market instruments published by reputable sources
at the mean between the bid and asked prices for the instruments. The amortized
cost method of valuation seeks to maintain a stable NAV of $1.00, 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 NAV calculated by reference to market values and
the 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 the 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 the
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 FUND REPORTS PERFORMANCE
The historical performance of the Fund may be shown in the form of total return,
yield and effective yield. These measures of performance are described below.
13
<PAGE> 29
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 the Fund made at the beginning of the period, then
calculating the average annual compounded rate of return that would produce the
same investment return on the $1,000 over the same period. In computing average
annual total return, the Fund assumes the reinvestment of all distributions at
NAV on applicable reinvestment dates.
Nonstandardized Total Return. Nonstandardized total return for the Fund differs
from standardized total return in that it relates to periods other than the
period for standardized total return and/or that it represents aggregate (rather
than average) total return.
The 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.
The Fund also may advertise its cumulative total return. Cumulative total return
measures the change in value of an investment over a stated period of time. In
computing the cumulative total return, the Fund assumes reinvestment of all
distributions at NAV or at applicable reinvestment dates.
YIELD
The 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
The 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.
Yields are one basis upon which investors may compare the Fund 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 the Fund 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.
14
<PAGE> 30
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: the Fund, Schwab Money Market Fund, Schwab Government Money
Fund, Schwab Municipal Money Fund, Schwab U.S. Treasury Money Fund, Schwab Value
Advantage Money Fund, Schwab Institutional Advantage Money Fund, Schwab
Retirement Money Fund, Schwab New York Municipal Money Fund, and Schwab
California Municipal Money Fund, 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
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.
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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 March 2, 1998, no person owned of record directly or beneficially
5% of the Fund's shares.
In addition, as of March 31, 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 the 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
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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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