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STATEMENT OF ADDITIONAL INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
101 Montgomery Street, San Francisco, CA 94104
SCHWAB NEW JERSEY MUNICIPAL MONEY FUND
SCHWAB PENNSYLVANIA MUNICIPAL MONEY FUND
JANUARY 20, 1998,
AS AMENDED FEBRUARY 4, 1998
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the Prospectus dated January 20, 1998 (and as may be
amended from time to time) for Schwab New Jersey Municipal Money Fund (the NJ
Fund) and Schwab Pennsylvania Municipal Money Fund (the PA Fund) (together the
Funds).
To obtain a copy of the Prospectus, 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............................................... 2
INVESTMENT POLICIES AND RESTRICTIONS................................ 5
MANAGEMENT OF THE TRUST............................................. 8
PORTFOLIO TRANSACTIONS AND TURNOVER................................. 13
DISTRIBUTIONS AND TAXES............................................. 14
SHARE PRICE CALCULATION............................................. 19
HOW THE FUNDS REPORT PERFORMANCE.................................... 19
GENERAL INFORMATION................................................. 21
PURCHASE AND REDEMPTION OF SHARES................................... 23
OTHER INFORMATION................................................... 23
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INVESTMENT SECURITIES
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 are generally classified as "general obligation" or
"revenue" and may be purchased directly or through participation interests.
General obligation securities are typically secured by the issuer's pledge of
its full faith and credit and taxing power for the payment of principal and
interest. Revenue securities are typically 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 Funds may
purchase other municipal securities similar to the foregoing, which are or may
become
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available, including securities issued to pre-refund other outstanding
obligations of municipal issuers.
The 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.
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.
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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.
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, which 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 only exercise 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 bonds.
TAXABLE SECURITIES. Under normal conditions, the Funds do not intend to invest
in securities the interest on which 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 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, which 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 which 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 is intended to be obtained from an identified pool of assets,
typically receivables related to a particular industry, such an asset-backed
securities related to credit card receivables, automobile receivables, trade
receivables or diversified financial assets. Based on the
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primary characteristics of the various types of asset-backed securities, for
purposes of each Fund's concentration policy, each of the Funds has selected the
following asset-backed securities industries: credit card receivables,
automobile receivables, trade receivables and diversified financial assets, and
each Fund will limit its investments in each such industry to less than 25% of
its total assets.
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.
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.
QUALITY OF INVESTMENTS. The Funds will invest in high-quality securities.
Generally, high-quality securities are securities that are rated in one of the
two highest rating categories by two nationally recognized statistical rating
organizations (NRSROs), or by one if only one NRSRO has rated the securities,
or, if unrated, determined to be of comparable quality by the Investment Manager
pursuant to guidelines adopted by the Board of Trustees. High-quality securities
may be "first tier" or "second tier" securities. First tier securities are rated
within the highest category, and second tier securities are rated within the
second highest category.
Should a security's high-quality rating change after purchase by a Fund, the
Investment Manager would take such action, including no action, as determined to
be in the best interest of the Fund by the Board of Trustees. For more
information about the ratings assigned by some NRSROs, refer to the Appendix
section of the SAI.
MATURITY OF INVESTMENTS. The Funds will purchase only short-term debt
securities. Basically, a short-term security is a security that is deemed to
mature within 397 days or less.
INVESTMENT POLICIES AND RESTRICTIONS
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 FUND MAY NOT:
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(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) concentrate investments in a particular industry or group of industries,
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.
(6) 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 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. The 1940 Act presently defines concentration as investing 25% or
more of a Fund's total assets in an industry or group of industries, with
certain exceptions. This means that the Funds 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.
THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS.
EACH FUND MAY NOT:
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(a) with respect to 75% of its total assets, purchase securities of any issuer
(other than 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 not invest more than 5% of its
total assets in securities of a single issuer unless such securities are
first tier securities.
(b) purchase second tier conduit securities of any issuer (other than
securities subject to an unconditional demand feature 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 conduit
securities of such issuer.
(c) purchase securities of other investment companies, except as permitted
by the 1940 Act.
(d) borrow money except that the Fund may (i) borrow money from banks for
temporary or emergency purposes 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 the Fund will not
purchase securities while borrowings represent more than 5% of its
total assets.
(e) 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.
(f) 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).
(g) purchase securities of any issuer if, as a result, more than 10% of its
net assets would be invested in illiquid securities.
(h) 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).
(i) 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.
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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:
POSITION WITH
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NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------ --------- --------------------
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).
TOM D. SEIP* President and Executive Vice President, The
February 15, 1950 Trustee Charles Schwab 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
September 23, 1931 Managing Director, 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
May 15, 1931 Officer and Director, Semloh
Financial, Inc. Semloh
Financial is an international
financial services and
investment advisory firm.
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* This Trustee is an "interested person" of the Trust.
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DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens
June 28, 1938 & Co. (investment banking).
Prior to 1995, Mr. Stephens was
Chairman and Chief Executive
Officer of North American Trust (a
real estate investment trust).
Prior to 1992, Mr. Stephens was
Chairman and Chief Executive
Officer of the Bank of San
Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive
August 18, 1943 Officer and Director, Wilsey
Bennett, Inc. (truck and air
transportation, real estate
investment and management, and
investments).
TAI-CHIN TUNG Treasurer and Vice President - Finance,
March 7, 1951 Principal Charles Schwab & Co., Inc.;
Financial Officer Controller, Charles Schwab
Investment Management, Inc.
From 1994 to 1996, Ms. Tung was
Controller for Robertson
Stephens Investment Management,
Inc. From 1993 to 1994, she was
Vice President of Fund
Accounting, Capital Research and
Management Co. Prior to 1993,
Ms. Tung was Senior Vice
President of the Sierra Funds
and Chief Operating Officer of
Great Western Financial
Securities.
WILLIAM J. KLIPP* Executive Vice Executive Vice 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. Prior to 1993, Mr. Klipp
was Treasurer of Charles Schwab
& Co., Inc. and Mayer &
Schweitzer, Inc.
STEPHEN B. WARD Senior Vice Senior Vice President and Chief
April 5, 1955 President and Investment Officer, Charles
Chief Investment Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief
September 9, 1955 Counsel, Chief Compliance
Officer and Assistant Corporate
Secretary, Charles Schwab
Investment Management, Inc.
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* This Trustee is an "interested person" of the Trust.
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DAVID H. LUI Assistant Vice President and Senior
October 14, 1960 Secretary Counsel, Charles Schwab
Investment Management, Inc.
From 1991 to 1992, he was
Assistant Secretary for the
Franklin Group of Mutual Funds
and Assistant Corporate Counsel
for Franklin Resources, Inc.
KAREN L. SEAMAN Assistant Corporate Counsel, Charles
February 27, 1968 Secretary Schwab Investment 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 Corporate Counsel, Charles
September 26, 1964 Secretary Schwab Investment 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 Corporate Counsel, Charles
January 5, 1969 Secretary Schwab Investment Management,
Inc. From April 1995 to March
1997, she was a Legal Product
Manager for Fidelity Investments.
Each of the above-referenced Officers and/or Trustees also serves in the same
capacity as described for the Trust for The Charles Schwab Family of Funds,
Schwab Capital Trust and Schwab Annuity Portfolios. The address of each
individual listed above is 101 Montgomery Street, San Francisco, California
94104.
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COMPENSATION TABLE(1)
Pension or
Retirement Estimated
Benefits Annual Total
Aggregate Accrued as Benefits Upon Compensation
Name of Person, Compensation Part of Fund Retirement from the
Position from the Expenses from from the Fund Fund Complex 2
Trust the Fund Complex 2
Complex 2
Charles R. Schwab, 0 N/A N/A 0
Chairman and
Trustee
Timothy F. 0 N/A N/A 0
McCarthy,
President and
Trustee
William J. Klipp, 0 N/A N/A 0
Executive Vice
President, Chief
Operating Officer
and Trustee
Donald F. Dorward, $47,850 N/A N/A $83,950
Trustee
Robert G. Holmes, $47,850 N/A N/A $83,950
Trustee
Donald R. Stephens, $47,850 N/A N/A $83,950
Trustee
Michael W. Wilsey, $47,850 N/A N/A $83,950
Trustee
1 Figures are for the Trust's fiscal year ended December 31, 1996.
2 "Fund Complex" comprises all 31 funds of the Trust, Schwab
Investments, Schwab Capital Trust and Schwab Annuity Portfolios,
as of December 31, 1996.
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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.
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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 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(R), a
family of 31 mutual funds with over $55 billion in net assets as of November 30,
1997. 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 each 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 limit, or
reimburse, if necessary, a Fund's total operating expenses to 0.65% of its
average daily net assets.
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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 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 Funds' 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
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
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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 will generally
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.
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 as of the
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last calculation of NAV prior to the declaration. Shareholders will receive
dividends in additional shares unless they elect to receive cash. Dividends
normally will 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. 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 either 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) 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, which 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)
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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 significant amount of long-term capital
gain. However, any distributions of long-term capital gain will be taxable to
the shareholders as long-term capital gain, regardless of how long a shareholder
has held the 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.
As noted in the prospectus, 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
imposed by Section 55 of the Code (AMT) or the environmental tax imposed by
Section 59A of the Code (environmental tax). 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
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to AMT and the environmental tax) 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 and environmental tax.
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 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 NEW JERSEY AND PENNSYLVANIA FUNDS
The NJ and PA 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, but may have federal
alternative minimum tax consequences.
Current federal law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which 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.
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NEW JERSEY TAX CONSIDERATIONS
Under current law, investors in the NJ Fund will not be subject to the New
Jersey Gross Income Tax on distributions from the Fund attributable to interest
income from (and net gain, if any, from the disposition of) New Jersey Municipal
Securities or obligations of the United States, its territories and possessions
and certain of its agencies and instrumentalities ("Federal Securities") held by
the Fund, either when received by the Fund or when credited or distributed to
the investors, provided that the Fund meets the requirements for a qualified
investment fund by: 1) maintaining its registration as a registered investment
company with the Securities and Exchange Commission; 2) investing at least 80%
of the aggregate principal amount of the Fund's investments, excluding financial
options, futures, forward contracts, or other similar financial instruments
relating to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto to the extent such instruments are authorized under
the regulated investment company rules under the Code, cash and cash items,
which cash items shall include receivables, in New Jersey Municipal Securities
or Federal Securities at the close of each quarter of the tax year; 3) investing
100% of its assets in interest-bearing obligations, discount obligations, cash
and cash items, including receivables, financial options, futures forward
contracts, or other similar financial instruments relating to interest-bearing
obligations, discount obligations or bond indexes related thereto; and 4)
complying with certain continuing reporting requirements.
However, in Colonial Trust III and Investment Company Institute v. Director,
Division of Taxation, DKT No. 009777-93 (NJ Tax Court, Feb. 21, 1997) the New
Jersey Tax Court nullified the New Jersey threshold requirements stated above.
The court ruled that New Jersey could not impose its gross income tax on
shareholder distributions attributable to interest paid on obligations of the
United States Government from a mutual fund that did not meet the requirements
to be a qualified investment fund.
For New Jersey Gross Income Tax purposes, net income or gains and distributions
derived from investments in other than New Jersey Municipal Securities and
Federal Securities, and distributions from net realized capital gains in respect
of such investments, will be taxable.
Gain on the disposition of Shares is not subject to New Jersey Gross Income Tax,
provided that the Fund meets the requirements for qualified investment fund set
forth above.
PENNSYLVANIA TAX CONSIDERATIONS
For purposes of the Pennsylvania Personal Income Tax and Philadelphia School
District Investment Net Income Tax, distributions which are attributable to
interest received by the PA Fund from its investments in Pennsylvania Municipal
Securities or Federal Securities are not taxable. Distributions by the PA Fund
to a Pennsylvania resident that are attributable to most other sources may be
subject to the Pennsylvania Personal Income Tax and (for residents of
Philadelphia) to the Philadelphia School District Investment Net Income Tax.
Distributions paid by the PA Fund, which are excludable as exempted income for
federal tax purposes, are not subject to the Pennsylvania corporate net income
tax. An additional deduction from Pennsylvania taxable income is permitted for
the amount of distributions paid by the PA Fund attributable to interest
received by the Fund from its investments in Pennsylvania Municipal
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Securities and Federal Securities to the extent included in federal taxable
income, but such a deduction is reduced by any interest on indebtedness incurred
to carry the securities and other expenses incurred in the production of such
interest income, including expenses deducted on the federal income tax return
that would not have been allowed under the Code if the interest were exempt from
federal income tax. Distributions by the PA Fund attributable to most other
sources may be subject to the Pennsylvania corporate net income tax. It is the
current position of the Pennsylvania Department of Revenue that Fund shares are
considered exempt assets (with a pro rata exclusion based on the value of the
Fund attributable to its investments in Pennsylvania Municipal Securities and
Federal Securities) for purposes of determining a corporation's stock value
subject to the Commonwealth's capital stock or franchise tax.
The PA Fund intends to invest primarily in obligations which produce interest
exempt from federal and Pennsylvania taxes. If the PA Fund invests in
obligations that are not exempt for Pennsylvania purposes but are exempt for
federal purposes, a portion of the Fund's distributions will be subject to
Pennsylvania personal income tax.
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
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.
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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.
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.
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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 New Jersey income taxes at a rate of
6.37% and Pennsylvania income taxes at a rate of 2.8%.)
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 will
actually 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 twelve
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, Schwab Institutional Advantage Money Fund, Schwab
Retirement Money Fund, Schwab New York Municipal Money Fund, Schwab California
Municipal Money Fund, Schwab Government Cash Reserves, Schwab New Jersey
Municipal Money Fund and Schwab Pennsylvania 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.
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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
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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 January 1, 1998, no person owns of record directly or beneficially 5% of
either Fund's shares.
In addition, as of January 1, 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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