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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB MUNICIPAL MONEY FUNDS - SWEEP SHARES
SCHWAB MUNICIPAL MONEY FUND
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND
SCHWAB NEW YORK MUNICIPAL MONEY FUND
SCHWAB NEW JERSEY MUNICIPAL MONEY FUND
SCHWAB PENNSYLVANIA MUNICIPAL MONEY FUND
SCHWAB FLORIDA MUNICIPAL MONEY FUND
APRIL 30, 1999
AS AMENDED ON NOVEMBER 5, 1999
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated April 30, 1999 (as amended
from time to time).
To obtain a copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, day or night, or write to the funds at P.O. Box 7575, San
Francisco, California 94120-7575. For TDD service call 800-345-2550, 24 hours a
day. The prospectus also may be available on the Internet at:
http://www.schwab.com/schwabfunds.
The funds' most recent annual report is a separate document supplied with the
SAI and includes the funds' audited financial statements, which are incorporated
by reference into this SAI.
The funds are a series of The Charles Schwab Family of Funds (the trust).
TABLE OF CONTENTS
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INVESTMENT OBJECTIVES, STRATEGIES,
SECURITIES, RISKS AND LIMITATIONS.................................... 2
MANAGEMENT OF THE FUNDS.............................................. 14
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.................. 17
INVESTMENT ADVISORY AND OTHER SERVICES............................... 17
BROKERAGE ALLOCATION AND OTHER PRACTICES............................. 19
DESCRIPTION OF THE TRUST............................................. 20
PURCHASE, REDEMPTION AND PRICING OF SHARES........................... 21
TAXATION............................................................. 22
CALCULATION OF PERFORMANCE DATA...................................... 27
APPENDIX............................................................. 31
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INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVES
Schwab Municipal Money Fund seeks maximum current income exempt from federal
income tax consistent with liquidity and stability of capital.
Schwab California Municipal Money Fund seeks maximum current income exempt from
federal and California state personal income taxes, consistent with liquidity
and stability of capital.
Schwab New York Municipal Money Fund seeks to provide maximum current income
exempt from federal and New York state and local personal income taxes,
consistent with stability of capital.
Schwab New Jersey Municipal Money Fund seeks to provide maximum current income
exempt from federal and New Jersey state personal income taxes, consistent with
liquidity and stability of capital.
Schwab Pennsylvania Municipal Money Fund seeks to provide maximum current income
exempt from federal and Pennsylvania state personal income taxes, consistent
with liquidity and stability of capital.
Schwab Florida Municipal Money Fund seeks to provide maximum current income
exempt from federal income taxes, consistent with liquidity and stability of
capital, and also seeks to have its shares exempt from the Florida intangible
tax.
Each fund's investment objective may be changed only by vote of a majority of
its shareholders.
INVESTMENT SECURITIES AND RISKS
The following investment strategies, securities, risks and limitations
supplement those set forth in the prospectus and may be changed without
shareholder approval unless otherwise noted. Also, policies and limitations that
state a maximum percentage of assets that may be invested in a security or other
asset, or that set forth a quality standard, shall be measured immediately after
and as a result of a fund's acquisition of such security or asset unless
otherwise noted. Any subsequent change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with the fund's investment policies and limitations. Additionally, for
purposes of calculating any restriction, an issuer shall be the entity deemed to
be ultimately responsible for payments of interest and principal on the security
pursuant to Rule 2a-7, unless otherwise noted. Not all investment securities or
techniques discussed below are eligible investments for each fund. A fund will
invest in securities or engage in techniques that are intended to help achieve
its investment objective.
INVESTMENT STRATEGIES
Schwab Municipal Money Fund (a national municipal money fund) seeks to achieve
its investment objective by investing in municipal money market securities. The
fund will normally invest 100% of its total assets in municipal money market
securities. In addition, the fund may invest more than 25% of its total assets
in municipal securities financing similar projects.
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Schwab California Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in California municipal
money market securities. The fund will normally invest 100% of its total assets
in municipal money market securities. In addition, the fund may invest more than
25% of its total assets in municipal securities financing similar projects. The
fund will normally invest at least 65% of its total assets in municipal money
market securities of California issuers.
Schwab New York Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in New York municipal
money market securities. The fund will normally invest 100% of its total assets
in municipal money market securities. In addition, the fund may invest more than
25% of its total assets in municipal securities financing similar projects. The
fund will normally invest at least 65% of its total assets in municipal money
market securities of New York issuers.
Schwab New Jersey Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in New Jersey municipal
money market securities. The fund will normally invest at least 80% of its total
assets in municipal money market securities. In addition, the fund may invest
more than 25% in municipal securities financing similar projects. The fund will
normally invest at least 65% of its total assets in municipal money market
securities of New Jersey issuers.
Schwab Pennsylvania Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in Pennsylvania municipal
money market securities. The fund will normally invest at least 80% of its total
assets in municipal money market securities. In addition, the fund may invest
more than 25% in municipal securities financing similar projects. The fund will
normally invest at least 65% of its total assets in municipal money market
securities of Pennsylvania issuers.
Schwab Florida Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in Florida municipal
money market securities. The fund will normally invest at least 80% of its total
assets in municipal money market securities. In addition, the fund may invest
more than 25% in municipal securities financing similar projects. The fund will
normally invest at least 65% of its total assets in municipal money market
securities of Florida issuers.
BORROWING may subject a fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money. To avoid this, each fund will
not purchase securities while borrowings are outstanding.
COMMERCIAL PAPER consist of short-term, promissory notes issued by banks,
corporations and other institutions to finance short-term credit needs. These
securities generally are discounted but sometimes may be interest bearing.
Commercial paper, which also may be unsecured, is subject to credit risk.
CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure to industry risk. For example, the automobile industry may have a
greater exposure to a single factor, such as an increase in the price of oil,
which may adversely affect the sale of automobiles and, as a result, the value
of the industry's securities.
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CREDIT AND LIQUIDITY SUPPORTS or enhancements may be employed by issuers to
reduce the credit risk of their securities. Credit supports include letters of
credit, insurance and guarantees provided by foreign and domestic entities, as
well as moral obligations, which are sometimes issued with municipal securities.
Liquidity supports include puts, demand features, and lines of credit. Most of
these arrangements move the credit risk of an investment from the issuer of the
security to the support provider. Changes in the credit quality of a support
provider could cause losses to a fund.
DEBT SECURITIES are obligations issued by domestic and foreign entities,
including governments and corporations, in order to raise money. They are
basically "IOUs," but are commonly referred to as bonds or money market
securities. These securities normally require the issuer to pay a fixed,
variable or floating rate of interest on the amount of money borrowed (the
"principal") until it is paid back upon maturity.
Debt securities experience price changes when interest rates change. For
example, when interest rates fall, the prices of debt securities generally rise.
Issuers tend to pre-pay their outstanding debts and issue new ones paying lower
interest rates. Conversely, in a rising interest rate environment, prepayment on
outstanding debt securities generally will not occur. This is known as extension
risk and may cause the value of debt securities to depreciate as a result of the
higher market interest rates. Typically, longer-maturity securities react to
interest rate changes more severely than shorter-term securities (all things
being equal), but generally offer greater rate of interest. Debt securities also
are subject to the risk that the issuers will not make timely interest and/or
principal payments or fail to make them at all.
DELAYED-DELIVERY TRANSACTIONS include purchasing and selling securities on a
delayed-delivery or when-issued basis. 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 a fund until the security is
delivered. A fund will segregate appropriate liquid assets to cover its
delayed-delivery purchase obligations. When a fund sells a security on a
delayed-delivery basis, the fund does not participate in further gains or losses
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.
DIVERSIFICATION involves investing in a wide range of securities and thereby
spreading and reducing the risks of investment. Each fund is a series of an
open-end investment management company. Each fund, except the Schwab Municipal
Money Market Fund, is a non-diversified mutual fund. Each fund follows the
regulations set forth by the SEC that dictate the diversification requirements
for money market mutual funds. These requirements prohibit national municipal
money funds from purchasing a security if more that 5% of a fund's total assets
would be invested in the securities of a single issuer. State-specific municipal
money funds are subject to the same prohibition, with respect to 75% of a fund's
total assets. The regulation also allows funds to invest up to 25% of the fund's
total assets in the first tier securities of a single issuer for up to three
business days. U.S. government and certain other securities are not subject to
this particular regulation.
FOREIGN SECURITIES involve additional risks, because they are issued by foreign
entities, including foreign governments, banks, corporations or because they are
traded principally overseas. Credit and liquidity supports also may be provided
by foreign entities. Foreign entities are not subject to
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uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. corporations. In addition,
there may be less publicly available information about foreign entities. Foreign
economic, political and legal developments could have more dramatic effects on
the value of foreign securities.
In addition to the risks discussed above, it is unforeseeable what risk, if any,
may exist to investments as a result of the conversion of the 11 of the 15
Economic Union Member States from their respective local currency to the
official currency of the Economic and Monetary Union (EMU). After January 3,
1999, the euro will be the official currency of the EMU, the rate of exchange
will have been set between the euro and the currency of each converting country
and the European Central Bank, all national central banks and all stock
exchanges and depositories will price, trade and settle in euro even if the
securities traded are not denominated in euro. Each securities transaction that
requires converting to euro may involve rounding that could affect the value of
the security converted. In addition, issuers of securities that require
converting may experience increased costs as a result of the conversion, which
may affect the value of their securities. It is possible that uncertainties
related to the conversion will affect investor expectations and cause
investments to shift away from European countries, thereby making the European
market less liquid. All of these factors could affect the value of a fund's
investments and/or increase its expenses. While the investment adviser is taking
steps to minimize the impact of the conversion on the funds, it is not possible
to know precisely what impact the conversion will have on the funds, if any, nor
is it possible to eliminate the risks completely.
ILLIQUID SECURITIES generally are any securities that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which the fund has valued the instruments. The liquidity of a fund's investments
is monitored under the supervision and direction of the board of trustees.
Investments currently not considered liquid include repurchase agreements not
maturing within seven days and certain restricted securities.
MATURITY OF INVESTMENTS. Each fund follows the regulations set forth by the SEC
that dictate the maturity requirements for money market mutual funds. These
requirements prohibit a fund from purchasing a security with a remaining
maturity of more than 397 days or maintaining a dollar-weighted average
portfolio maturity that exceeds 90 days.
MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be
issued by entities such as the U.S. government, corporations and financial
institutions (like banks). Money market securities include commercial paper,
certificates of deposit, banker's acceptances, notes and time deposits.
Money market securities pay fixed, variable or floating rates of interest and
are generally subject to credit and interest rate risks. The maturity date or
price of and financial assets collateralizing a security may be structured in
order to make it qualify as or act like a money market security. These
securities may be subject to greater credit and interest rate risks than other
money market securities because of their structure. Money market securities may
be issued with puts or these can be sold separately.
MUNICIPAL SECURITIES are debt securities issued by a state, its counties,
municipalities, authorities and other subdivisions, or the territories and
possessions of the United States and the District of Columbia, including their
subdivisions, agencies and instrumentalities 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
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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 may be owned directly or through participation interests,
and include general obligation or revenue securities, tax-exempt commercial
paper, notes and leases. The maturity date or price of and financial assets
collateralizing a municipal money market security may be structured in order to
make it qualify as or act like a municipal money market security. These
securities may be subject to greater credit and interest rate risks than other
municipal money market securities because of their structure.
Municipal securities generally are classified as "general obligation" or
"revenue" and may be purchased directly or through participation interests.
General obligation securities typically are secured by the issuer's pledge of
its full faith and credit and taxing power for the payment of principal and
interest. Revenue securities typically are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special tax or other specific revenue source. Private
activity bonds and industrial development bonds are, in most cases, revenue
bonds and generally do not constitute the pledge of the credit of the issuer of
such bonds. The credit quality of private activity bonds is frequently related
to the credit standing of private corporations or other entities.
Examples of municipal securities that are issued with original maturities of 397
days 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 that are or may
become 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.
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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.
Municipal securities pay fixed, variable or floating rates of interest, which is
meant to be exempt from federal income tax, and, typically personal income tax
of a state or locality.
The investment adviser 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 validity and tax status, to be purchased by a fund.
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.
PUTS are sometimes called demand features or guarantees, and 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 security with a put feature, losses could
occur if the put provider does not perform as agreed. Standby commitments are
types of puts.
QUALITY OF INVESTMENTS. The funds follow regulations set forth by the SEC that
dictate the quality requirements for money market mutual funds. These require
the funds to invest exclusively in high-quality securities. Generally
high-quality securities are securities that present minimal credit risks and 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 adviser pursuant to guidelines adopted by the board of trustees.
High-quality securities may be "first tier" or "second tier" securities. First
tier securities may be rated within the highest category or determined to be of
comparable quality by the investment adviser. Money market fund shares and U.S.
government securities also are first tier securities. Second tier securities
generally are rated within the second-highest category. Each fund's holdings of
second tier securities will not exceed 5% of its assets, and investments in
second tier securities of any one issuer will be limited to the greater of 1% of
the fund's assets or $1 million.
Should a security's high-quality rating change after purchase by a fund, the
investment adviser would take such action, including no action, as determined to
be in the best interest of the fund by
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the board of trustees. For more information about the ratings assigned by some
NRSROs, refer to the Appendix section of the SAI.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. For example, tender option bonds may be issued under Section 4(2) of
the Securities Act of 1933 and may only be sold to qualified institutional
buyers, such as the funds, under Securities Act Rule 144A.
Restricted securities may be deemed liquid or illiquid. In order to be deemed
liquid, the fund must be able to dispose of the security in the ordinary course
of business at approximately the amount the fund has valued the security. In
addition, the investment adviser must determine that an institutional or other
market exists for these securities. In making this determination, the investment
adviser may take into account any liquidity support associated with the
security. It is not possible to predict with assurance whether the market for
any restricted security will continue. Therefore, the investment adviser
monitors a fund's investments in these securities, focusing on factors, such as
valuation, liquidity and availability of information. To the extent a fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the fund's portfolio may increase if buyers in that market become
unwilling to purchase the securities.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by a fund
including those managed by its investment adviser. Because other investment
companies employ investment advisers and other service providers, investments by
a fund may cause shareholders to pay duplicative fees. The funds intend to
purchase securities of other investment companies in compliance with the
requirements of section 12(d)(1)(F) of the 1940 Act or any applicable exemptive
relief received from the SEC. Under that section, a fund is prohibited from
purchasing the securities of other investment companies if, as a result, the
fund together with its affiliates would own more than 3% of the total
outstanding securities of those investment companies. In addition, a fund will
vote proxies in accordance with the instructions received or vote proxies in the
same proportion as the vote of all other shareholders of the Investment Company.
If exemptive relief is received from the SEC, a fund may purchase more than 3%
of certain securities of other investment companies and will only hold such
securities in conformity with any applicable order from the SEC.
STATE-SPECIFIC MUNICIPAL MONEY FUNDS are municipal money market funds that
invest primarily and generally predominately in municipal money market
securities issued by or on behalf of one state or one state's counties,
municipalities, authorities or other subdivisions.
These funds' securities are subject to the same general risks associated with
other municipal money market funds' securities. In addition, their values will
be particularly affected by economic, political, geographic and demographic
conditions and developments within the appropriate state. A fund that invests
primarily in securities issued by a single state and its political subdivisions
provides a greater level of risk than a fund that is diversified across numerous
states and municipal entities. The ability of the state or its municipalities to
meet their obligations will depend on the availability of tax and other
revenues; economic, political and demographic conditions within the state; and
the underlying fiscal condition of the state and its municipalities.
These funds are not suitable for investors who would not benefit from the
tax-exempt character of each fund's investments, such as holders of IRAs,
qualified retirement plans or other tax-exempt entities.
TAXABLE SECURITIES. Under normal conditions, the funds do not intend to invest
in securities in which interest is subject to federal income and/or state and
local personal income taxes. However,
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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.
VARIABLE AND FLOATING RATE DEBT SECURITIES pay an interest rate, which is
adjusted either periodically or at specific intervals or which floats
continuously according to a formula or benchmark. Although these structures
generally are intended to minimize the 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 to the right to
demand repayment in full or to resell at a specific price and/or time. 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
without losses. 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, a fund may exercise only its demand rights at
certain times. A fund could suffer losses in the event that the issuer defaults
on its obligation. Synthetic variable or floating rate securities include tender
option bond receipts.
Tender option bond receipts are derived from fixed-rate municipal bonds that are
placed in a trust from which two classes of trust receipts are issued. These
receipts represent proportionate interest in the underlying bonds. Interest
payments are made on the bonds based upon a predetermined rate. Under certain
circumstances, the holder of a trust receipt also may participate in any gain or
loss on the sale of such bonds. Tender option bond trust receipts generally are
structured as private placements and, accordingly, may be deemed to be
restricted securities for purposes of a fund's investment limitations.
YEAR 2000 presents uncertainties and possible risks to the smooth operations of
the funds and the provision of services to shareholders. Many computer programs
use only two digits to identify a specific year and therefore may not accurately
recognize the upcoming change in the next century. If not corrected, many
computer applications could fail or create erroneous results by or at year 2000.
Due to the funds' and their service providers' dependence on computer technology
to operate, the nature and impact of year 2000 processing failures on the funds
could be material. The funds' investment adviser is taking steps to minimize the
risks of year 2000 for the funds, including obtaining assurances from the funds'
service providers that they are analyzing their systems, testing them for
potential problems and remediating them to the extent possible. There can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
funds, however, minimizing year 2000 risk for the funds is a priority of the
Investment Manager.
The investment adviser generally attempts to take into account all material
information about issuers, including the extent to which they have prepared or
are preparing for the Year 2000 problem. The degree to which the investment
adviser inquires into an issuer's Year 2000 preparedness falls within the
discretion of the particular representatives of credit/investment research and
portfolio management involved and generally depends on various factors,
including the size of a fund's holdings in the issuer and the investment
adviser's assessment of the significance of the Year 2000 problem to the
issuer's business. Issuers whose securities represent a significant portion of a
fund's holdings or for which the Year 2000 problem is seen as posing the most
material risks generally receive the greatest scrutiny, while issuers at the
other end of the continuum receive lesser (if any) scrutiny. The investment
adviser obtains information about issuers' Year 2000 preparedness from issuers,
reports filed with the SEC, rating agencies,
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securities analysts and various publications. The investment adviser generally
is not in a position to verify and cannot guarantee the completeness or accuracy
of this information. Information regarding issuers' Year 2000 preparedness may
be of limited usefulness in many important respects. Some issuers may not file
reports with the SEC and may not have made meaningful disclosure about Year 2000
preparedness. Disclosure by issuers who do file reports with the SEC has varied
in level of detail, may be qualified without providing sufficient information to
assess the significance of the qualifications, and may convey the magnitude of
possible problems but not the probability of their occurrence. Altogether, these
constraints limit the investment adviser's ability to form an accurate,
independent judgment of issuer Year 2000 preparedness and may require the
investment adviser to rely on publicly-available assessments made by issuers and
others. These assessments may prove incorrect. Accordingly, the Investment
adviser's assessment of any issuer's Year 2000 preparedness does not assure that
the issuer is or will be Year 2000 compliant or that Year 2000 related problems
will not result in a material adverse effect on the issuer's business and,
correspondingly, on a fund.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of each fund's shareholders
EACH OF SCHWAB MUNICIPAL MONEY FUND, SCHWAB CALIFORNIA MONEY FUND AND SCHWAB NEW
YORK MONEY FUND MAY NOT:
(1) Purchase securities or make investments other than in accordance with
investment objectives and policies.
(2) Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, 25% or
more of its total assets would be invested in any industry (although
securities issued by governments or political subdivisions of
governments are not considered to be securities subject to this
industry concentration restriction) or in any one state (although the
limitation as to investments in a state or its political subdivision
shall not apply to Schwab California Municipal Money Fund or Schwab New
York Municipal Money Fund), nor may it enter into a repurchase
agreement if more than 10% of its net assets would be subject to
repurchase agreements maturing in more than 7-days.).
(3) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the trust or its investment adviser
individually own beneficially more than 1/2 of 1% of the securities of
such issuer and together own more than 5% of the securities of such
issuer.
(4) Invest in commodities or commodity futures contracts or in real estate,
except that each fund may invest in municipal securities secured by
real estate or interests therein.
(5) Invest for the purpose of exercising control or management of another
issuer.
(6) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in municipal securities of
issuers which invest in or sponsor such programs.
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(7) Underwrite securities issued by others, except to the extent as
permitted by the Investment Company Act of 1940 or the rules or
regulations thereunder, as such statute, rules or regulations may be
amended from time to time.
(8) Lend or borrow money, except to the extent permitted by the Investment
Company Act of 1940 or the rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to time.
(9) Pledge, mortgage or hypothecate any of its assets, except to the extent
as permitted by the Investment Company Act of 1940 or the rules or
regulations thereunder, as such statute, rules or regulations may be
amended from time to time.
(10) Issue senior securities, except to the extent as permitted by the
Investment Company Act of 1940 or the rules or regulations thereunder,
as such statute, rules or regulations may be amended from time to time.
(11) Purchase securities of any issuer unless consistent with the
maintenance of its respective status as a diversified company (in the
case of Schwab Municipal Money Fund) or non-diversified company (in the
case of Schwab California Municipal Money Fund and Schwab New York
Municipal Money Fund) under the Investment Company Act of 1940 or the
rules or regulations thereunder, as such statute, rules or regulations
may be amended from time to time.
EACH OF SCHWAB NEW JERSEY MUNICIPAL MONEY FUND, SCHWAB PENNSYLVANIA MUNICIPAL
MONEY FUND AND SCHWAB FLORIDA MUNICIPAL MONEY FUND MAY NOT:
(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.
11
<PAGE> 12
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 Securities and Exchange Commission presently defines
concentration as investing more than 25% of an investment company's net assets
in an industry or group of industries, with certain exceptions. Municipal
securities are not deemed to be issued by an issuer from a single industry or
group of industries.
Underwriting. As defined by the 1940 Act, underwriting securities involves a
fund purchasing securities directly from an issuer for the purpose of selling
(distributing) them or participating in any such activity either directly or
indirectly. Under the 1940 Act, a diversified fund may not make any commitment
as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of
issuers (other than investment companies) of which it owns more than 10% of the
outstanding voting securities, exceeds 25% of the value of its total assets.
Senior Securities. Senior securities may include any obligation or instrument
issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds
from issuing senior securities, although it provides allowances for certain
borrowings and certain other investments, such as short sales, reverse
repurchase agreements, firm commitment agreements and standby commitments, with
appropriate segregation of assets.
The following restrictions are non-fundamental, and may be changed by the board
of trustees.
EACH OF THE SCHWAB MUNICIPAL MONEY FUND, SCHWAB CALIFORNIA MUNICIPAL MONEY FUND
AND SCHWAB NEW YORK MONEY FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of its assets would be
invested in the securities of that issuer, except that, with respect to
Schwab California Municipal Money Fund and Schwab New York Municipal
Money Fund, provided no more than 25% of the fund's total assets would
be invested in the securities of a single issuer, up to 50% of the
value of the fund's assets may be invested without regard to this 5%
limitation. For purposes of this limitation, the fund will regard the
entity which has the primary responsibility for the payment of interest
and principal as the issuer.
(2) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
(3) Make loans to others (except through the purchase of debt obligations
or repurchase agreements in accordance with its investment objective
and policies).
(4) Borrow money, except from banks for temporary purposes (but not for the
purpose of purchasing investments), and then only in an amount not to
exceed one-third of the value of its total assets (including the amount
borrowed) in order to meet redemption requests which otherwise might
result in the untimely disposition of securities; or pledge its
securities or receivables or transfer or assign or otherwise encumber
them in an amount to exceed 10% of the fund's net assets to secure
borrowings. Reverse repurchase agreements entered into by
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<PAGE> 13
the fund are permitted within the limitations of this paragraph. No
such fund will purchase securities or make investments while reverse
repurchase agreements or borrowings are outstanding.
(5) Write, purchase or sell puts, calls or combinations thereof, although
it may purchase Municipal Securities subject to standby commitments,
variable rate demand notes or repurchase agreements in accordance with
its investment objective and policies.
(6) Make short sales of securities or purchase securities on margin, except
to obtain such short-term credits as may be necessary for the clearance
of transactions.
(7) Issue senior securities as defined in the 1940 Act.
SCHWAB FLORIDA MUNICIPAL MONEY FUND, SCHWAB NEW JERSEY MUNICIPAL MONEY FUND AND
SCHWAB PENNSYLVANIA MUNICIPAL MONEY FUND MAY NOT:
(1) 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.
(2) Purchase second tier conduit 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 conduit
securities of such issuer.
(3) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
(4) Borrow money for temporary or emergency purposes 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 the Fund will not
purchase securities while borrowings represent more than 5% of its
total assets.
(5) 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.
(6) 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 securities or repurchase
agreements).
(7) Purchase securities of any issuer if, as a result, more than 10% of its
net assets would be invested in illiquid securities.
(8) 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).
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<PAGE> 14
(9) 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.
Except with respect to borrowings, concentration of investments and investments
in illiquid securities, later changes in values or net assets do not require a
fund to sell an investment even if it could not then make the same investment.
MANAGEMENT OF THE FUNDS
The officers and trustees, their principal occupations during the past five
years and their affiliations, if any, with The Charles Schwab Corporation,
Charles Schwab & Co., Inc. (Schwab) and Charles Schwab Investment Management,
Inc. (CSIM or the investment adviser), are as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUST
- --------------------------------------- ------------------------- --------------------------------------------------
<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).
STEVEN L. SCHEID* President and Trustee Executive Vice President and Chief Financial
June 28, 1953 Officer, The Charles Schwab Corporation;
Enterprise President - Financial Products and
Services and Chief Financial Officer, Charles Schwab
& Co., Inc.; Chief Executive Officer, Chief
Financial Officer and Director, Charles Schwab
Investment Management, Inc. From 1994 to 1996, Mr.
Scheid was
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C>
Executive Vice President of Finance for First
Interstate Bancorp and Principal Financial Officer
from 1995 to 1996. Prior to 1994, Mr. Scheid was
Chief Financial Officer, First Interstate Bank of
Texas.
DONALD F. DORWARD Trustee Executive Vice President and Managing Director,
September 23, 1931 Grey Advertising. From 1990 to 1996, Mr.
Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising
and marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (Investments) and Chairman and Chief Executive
Officer of North American Trust (real estate
investment trust).
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air
transportation, real estate investment,
management, and investments).
TAI-CHIN TUNG Treasurer and Principal Vice President, Treasurer and Controller,
March 7, 1951 Financial Officer 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.
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.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
</TABLE>
- -------------------------
* This trustee is an "interested person" of the Trust.
<PAGE> 16
<TABLE>
<S> <C> <C>
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>
Each fund is overseen by a board of trustees. The board of trustees meets
regularly to review each fund's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of a fund's shareholders. The following table provides information as of fiscal
year ended December 31, 1998, concerning compensation of the trustees. Unless
otherwise stated, information is for the fund complex, which included 38 funds
as of December 31, 1998.
Aggregate Compensation from each Fund
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits ($)Total
Accrued as Compensation
Municipal New New Part of Fund from Fund
Name of Trustee Money California York Jersey Pennsylvania Florida Expenses Complex
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles R. 0 0 0 0 0 0 N/A 0
Schwab
Steven L. 0 0 0 0 0 0 N/A 0
Scheid(1)
Tom D. Seip(2) 0 0 0 0 0 0 N/A 0
William J. 0 0 0 0 0 0 N/A 0
Klipp
Donald F. $4,844 $3,707 $2,460 $2,221 $2,223 $2,363 N/A $103,700
Dorward
Robert G. $4,448 $3,707 $2,460 $2,221 $2,223 $2,363 N/A $103,700
Holmes
Donald R. $4,448 $3,707 $2,460 $2,221 $2,223 $2,363 N/A $103,700
Stephens
Michael W. $4,448 $3,407 $2,265 $2,046 $2,049 $2,176 N/A $ 95,000
Wilsey
</TABLE>
DEFERRED COMPENSATION PLAN
Trustees who are not "interested persons" of a trust ("independent trustees")
may enter into a fee deferral plan. Under this plan, deferred fees will be
credited to an account established by the trust as of the date that such fees
would have been paid to the trustee. The value of this account will
- -------------------------
1 Effective August 18, 1998, Mr. Scheid was elected President and trustee. Mr.
Seip served as President and trustee until May 15, 1998.
16
<PAGE> 17
equal the value that the account would be if the fees credited to the account
had been invested in the shares of SchwabFunds selected by the trustee.
Currently, none of the independent trustees have elected to participate in this
plan.
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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 1, 1999, the officers and trustees of the trust, as a group owned of
record or beneficially less than 1% of the outstanding voting securities of each
fund.
As of April 1, 1999, the Brian W. Clements and Julie L. Clements, 300 N. Elm,
Wernersville, PA. directly or beneficially owned, 9.3% of shares of the Schwab
Pennsylvania Municipal Money Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as the funds' investment adviser and
administrator pursuant to an Investment Advisory and Administration Agreement
(Advisory Agreement) between it and the trust. Charles Schwab & Co., Inc.
(Schwab) is an affiliate of the investment adviser and is the trust's
distributor, shareholder services agent and transfer agent. 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 to be a controlling person of the
investment adviser and Schwab.
For its advisory and administrative services to each municipal fund, the
investment adviser is entitled to receive graduated annual fee payable monthly
based on each fund's average daily net assets as described below.
First $1 billion - 0.38%
More than $1 billion but not exceeding $10 billion - 0.35%
More than $10 billion but not exceeding $20 billion - 0.32%
More than $20 billion - 0.30%.
Prior to April 30, 1999, for its advisory and administrative services to each
fund, the investment adviser was entitled to receive a graduated annual fee,
payable monthly, of 0.46% of the fund's average daily net assets of the first $1
billion, 0.41% of the next $1 billion, and 0.40% of net assets over $2 billion.
For the fiscal years ended December 31, 1996, 1997 and 1998, Schwab Municipal
Money Fund paid investment and advisory fees of $8,034,000 (fees were reduced
$8,734,000), $9,331,000 (fees were reduced by $10,977,000) and $11,593,000 (fees
were reduced by $13,780,000), respectively.
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<PAGE> 18
For the fiscal years ended December 31, 1996, 1997 and 1998, Schwab California
Municipal Money fund paid investment and advisory fees of $3,737,000 (fees were
reduced $4,819,000), $4,824,000 (fees were reduced by $6,548,000) and $6,118,000
(fees were reduced by $8,464,000), respectively.
For the fiscal years ended December 31, 1996, 1997 and 1998, Schwab New York
Municipal Money Fund paid investment and advisory fees of $535,000 (fees were
reduced $696,000), $675,000 (fees were reduced by $1,192,000) and $1,069,000
(fees were reduced by $1,677,000), respectively.
For the period of February 2, 1998 (commencement of operations) to December 31,
1998, Schwab New Jersey Municipal Fund paid investment and advisory fees of $0
(fees were reduced $268).
For the period of February 2, 1998 (commencement of operations) to December 31,
1998, Schwab Pennsylvania Municipal Fund paid investment and advisory fees of $0
(fees were reduced $271).
For the period of March 18, 1998 (commencement of operations) to December 31,
1998, Schwab Florida Municipal Fund paid investment and advisory fees of
$171,000 (fees were reduced $1,353,000).
The investment adviser and Schwab have voluntarily guaranteed that through at
least April 30, 2000, total operating expenses (excluding interest, taxes and
extraordinary expenses) of the Sweep Shares of the Schwab Municipal Money Fund,
the Schwab California Municipal Money Fund, the Schwab New York Municipal Money
Fund, the Schwab New Jersey Municipal Money Fund, the Schwab Pennsylvania
Municipal Money Fund and the Schwab Florida Municipal Money Fund will not exceed
0.66%, 0.65%, 0.69%, 0.65%, 0.65% and 0.59%, respectively, of average daily net
assets.
DISTRIBUTOR
Pursuant to an agreement, Schwab is the principal underwriter for shares of the
funds and is the trust's agent for the purpose of the continuous offering of the
funds' shares. Each fund pays the cost of the prospectuses and shareholder
reports to be prepared and delivered to existing shareholders. Schwab pays such
costs when the described materials are used in connection with the offering of
shares to prospective investors and for supplementary sales literature and
advertising. Schwab receives no fee under the agreement. Terms of continuation,
termination and assignment under the agreement are identical to those described
above with respect to the Advisory Agreement.
The funds pay other expenses that are typically connected with the trust's
operations, and include legal, audit and custodian fees, as well as the costs of
accounting and registration of the funds. Expenses not directly attributable to
a particular fund will generally 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.
SHAREHOLDER SERVICES AND TRANSFER AGENT
Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
funds' prospectuses, financial reports and other informational literature about
the funds. Schwab maintains the office space, equipment and
18
<PAGE> 19
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 each fund,
Schwab is entitled to receive an annual fee from each fund, payable monthly in
the amount of 0.25% of each fund's average daily net assets. For the services
performed as shareholder services agent under its contract with each fund,
Schwab is entitled to receive an annual fee from the Sweep Shares of each fund,
payable monthly in the amount of 0.20% of the average daily net assets of each
fund.
CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, Airport Business Center, 200 Stevens Drive, Suit 440, Lester
Pennsylvania, 19113, serves as custodian for the funds and PFPC, Inc., 103
Bellevue Parkway, Wilmington DE 19809, serves as fund accountant.
The custodians are responsible for the daily safekeeping of securities and cash
held or sold by the funds. The accountants maintain all books and records
related to each fund's transactions.
INDEPENDENT ACCOUNTANT
The funds' independent accountant, PricewaterhouseCoopers LLP, audits and
reports on the annual financial statements of the funds and review certain
regulatory reports and each funds' federal income tax return. It also performs
other professional accounting, auditing, tax and advisory services when the
trust engages it to do so. Their address is 333 Market Street, San Francisco, CA
94105. Each fund's audited financial statements for the fiscal year ended
December 31, 1998, are included in the funds' annual report, which is a separate
report supplied with the SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
PORTFOLIO TURNOVER
Because securities with maturities of less than one year are excluded from
required portfolio turnover rate calculations, the funds' portfolio turnover
rate for reporting purposes is expected to be zero.
PORTFOLIO TRANSACTIONS
In effecting securities transactions for a fund, the investment adviser seeks to
obtain best price and execution. Subject to the supervision of the board of
trustees, the investment adviser will generally select brokers and dealers for
the funds primarily on the basis of the quality and reliability of brokerage
services, including execution capability and financial responsibility.
When the execution capability and price offered by two or more broker-dealers
are comparable, the investment adviser 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 adviser
when providing advisory services to other investment advisory clients, including
mutual funds.
The funds expects that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or
19
<PAGE> 20
concession paid be 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 adviser. 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 adviser 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 adviser outweigh any disadvantages that may arise from
exposure to simultaneous transactions.
DESCRIPTION OF THE TRUST
Each fund, is a series of the Charles Schwab Family of Funds, an open-end
investment management company organized as a Massachusetts business trust on
October 20, 1989.
Each Declaration of Trust provides that shares may be automatically redeemed if
held by a shareholder in an amount less than the minimum required by each fund
or share class. Each fund's or class's initial and subsequent minimum investment
and balance requirements are set forth in the prospectus. These minimums may be
waived for certain investors, including trustees, officers and employees of
Schwab, or changed without prior notice.
The funds 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 bylaws of the trust 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, or of the Declaration of Trust or of the bylaws
permits or requires that (1) 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 (2) 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
20
<PAGE> 21
considered remote, because it is limited to circumstances in which a disclaimer
is inoperative and the trust itself is unable to meet its obligations. There is
a remote possibility that a fund could become liable for a misstatement in the
prospectus or SAI about another fund.
As more fully described in each Declaration of Trust, the trustees may each
year, or more frequently, distribute to the shareholders of each series accrued
income less accrued expenses and any net realized capital gains. Distributions
of each year's income of each series shall be distributed pro rata to
shareholders in proportion to the number of shares of each series held by each
of them. Distributions will be paid in cash or shares or a combination thereof
as determined by the trustees. Distributions paid in shares will be paid at net
asset value per share as determined in accordance with the bylaws.
PURCHASE, REDEMPTION AND PRICING OF SHARES
PURCHASING AND REDEEMING SHARES OF THE FUNDS
The funds are 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 for 1999: New Year's Day,
Martin Luther King's Birthday (observed), President's Day, Good Friday, Memorial
Day (observed), Independence Day (observed), 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 close early, such as days
in advance of holidays, the funds reserve the right to advance the time by which
purchase, redemption and exchanges orders must be received on that day.
As long as the funds 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.
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
funds' performance and investment holdings. In order to reduce these mailing
costs, each household will receive one consolidated mailing. If you would like
additional copies, you may call or write your fund at the telephone number or
address on the cover of this SAI.
The funds have 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 these limits may be paid, in whole or in part,
in investment securities or in cash, as the board of trustees may deem
advisable. Payment will be made wholly in cash unless the board of trustees
believes that economic or market conditions exist that would make such payment a
detriment to the best interests of a fund. If redemption proceeds are paid in
investment securities, such securities will be valued as set forth in "Pricing
of Shares". A redeeming shareholder would normally incur brokerage expenses if
he or she were to convert the securities to cash.
Each of Schwab Municipal Money Fund, Schwab California Municipal Money Fund and
Schwab New York Municipal Money Fund is composed of two classes of shares, which
share a common
21
<PAGE> 22
investment portfolio and objective. The Sweep Shares are designed to provide
convenience through automatic investment of uninvested cash balances in your
Schwab account, although shares also may be purchased directly. The Value
Advantage Shares, which are not offered through this SAI, do not have a sweep
feature, but rather must be purchased directly.
PRICING OF SHARES
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. When
determining market values for portfolio securities, the funds use market quotes
if they are readily available. In cases where quotes are not readily available,
a fund may value securities based on fair values developed using methods
approved by the fund's board of trustees. Fair values may be determined by using
actual quotations or estimates of market value, including pricing service
estimates of market values or values obtained from yield data relating to
classes of portfolio securities.
The amortized cost method of valuation seeks to maintain a stable net asset
value per share (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
using market values and a fund's $1.00 NAV calculated using amortized cost or if
there were any other deviation that the board of trustees believed would result
in a material dilution to shareholders or purchasers, the board of trustees
would promptly consider what action, if any, should be initiated.
If a fund's NAV calculated using market values declined, or were expected to
decline, below the fund's $1.00 NAV calculated using amortized cost, the board
of trustees might temporarily reduce or suspend dividend payments in an effort
to maintain the fund's $1.00 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 (calculated using market values) were to increase, or were anticipated to
increase above the fund's $1.00 (calculated using amortized cost), the board of
trustees might supplement dividends in an effort to maintain the fund's $1.00
NAV.
TAXATION
FEDERAL TAX INFORMATION FOR THE FUNDS
It is each fund's policy to qualify for taxation as a "regulated investment
company" (RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, each fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If a fund does not qualify as a RIC under the Code, it will
be subject to federal income tax on its net investment income and any net
realized capital gains.
The Code imposes a non-deductible excise tax on RICs that do not distribute in a
calendar year (regardless of whether they otherwise have a non-calendar taxable
year) an amount equal to 98%
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of their "ordinary income" (as defined in the Code) for the calendar year plus
98% of their net capital gain for the one-year period ending on October 31 of
such calendar year, plus any undistributed amounts from prior years. The
non-deductible excise tax is equal to 4% of the deficiency. For the foregoing
purposes, a fund is treated as having distributed any amount on which it is
subject to income tax for any taxable year ending in such calendar year.
FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS
The discussion of federal income taxation presented below supplements the
discussion in the funds' prospectus and only summarizes some of the important
federal tax considerations generally affecting shareholders of the funds.
Accordingly, prospective investors (particularly those not residing or domiciled
in the United States) should consult their own tax advisers regarding the
consequences of investing in a fund.
On each business day that the NAV of a fund is determined, such fund's net
investment income will be declared after the close of trading on the New York
Stock Exchange (normally 4:00 p.m. Eastern time) as a daily dividend to
shareholders of record. For each fund, dividends will normally be reinvested
monthly in shares of the fund at the NAV on the 15th day of each month, if a
business day, otherwise on the next business day, except in December when
dividends are reinvested on the last business of December. If cash payment is
requested, checks will normally be mailed on the business day following the
reinvestment date. Each fund will pay shareholders, who redeem all of their
shares, all dividends accrued to the time of the redemption within 7 days.
Each fund calculates its dividends based on its daily net investment income. For
this purpose, the net investment income of a fund consists of: (1) accrued
interest income, plus or minus amortized discount or premium, minus (2) accrued
expenses allocated to that fund. If a fund realizes any capital gains, they will
be distributed at least once during the year as determined by the board of
trustees.
Any dividends declared by a fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. A fund may
adjust its schedule for the reinvestment of distributions for the month of
December to assist in complying with the reporting and minimum distribution
requirements of the Code.
The funds do not expect to realize any long-term capital gains. However,
long-term capital gains distributions are taxable as long-term capital gains,
regardless of how long you have held your shares. If you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss. Distributions by a fund also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.
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 qualifications as regulated investment
companies.
A fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a
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<PAGE> 24
certified statement that he or she is not subject to "backup withholding."
Backup withholding is not an additional tax and any amounts withheld may be
credited against the shareholder's ultimate U.S. tax liability.
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 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.
If, at the close of each quarter of its taxable year, at least 50% of the value
of a fund's assets consist of obligations the interest on which is excludable
from gross income, the fund may pay "exempt-interest dividends" to its
shareholders. Those dividends constitute the portion of the aggregate dividends
as designated by the fund, equal to the excess of the excludable interest over
certain amounts disallowed as deductions. Exempt-interest dividends are
excludable from a shareholder's gross income for federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the federal alternative
minimum tax (AMT) imposed by Section 55 of the Code. The AMT is imposed at rates
of 26% and 28%, in the case of non-corporate taxpayers, and at the rate of 20%,
in the case of corporate taxpayers, to the extent it exceeds the taxpayer's
federal income tax liability. The AMT and the environmental tax may be imposed
in the following two circumstances. First, exempt-interest dividends derived
from certain private activity bonds issued after August 7, 1986, will generally
be an item of tax preference (and, therefore, potentially subject to AMT) for
both corporate and non-corporate taxpayers. Second, in the case of
exempt-interest dividends received by corporate shareholders, all
exempt-interest dividends, regardless of when the bonds from which they are
derived were issued or whether they are derived from private activity bonds,
will be included in the corporation's "adjusted current earnings," as defined in
Section 56(g) of the Code, in calculating the corporations' alternative minimum
taxable income for purposes of determining the AMT.
Current federal law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest that may have an effect on the ability
of a fund to purchase sufficient amounts of tax-exempt securities to satisfy the
Code's requirements for the payment of "exempt-interest dividends."
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of the funds is not deductible for federal income tax
purposes. Furthermore, these funds may not be an appropriate investment for
persons (including corporations and other business entities) who are
"substantial users" (or persons related to "substantial users") or facilities
financed by industrial development private activity bonds. Such persons should
consult their tax advisors before purchasing shares. A "substantial user" is
defined generally to include "certain persons" who regularly use in their trade
or business a part of a facilities financed from the proceeds of such bonds.
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CALIFORNIA TAX CONSIDERATIONS
The fund intends to qualify to pay dividends to shareholders that are exempt
from California personal income tax ("California exempt-interest dividends").
The fund will qualify to pay California exempt-interest dividends if (1) at the
close of each quarter of the fund's taxable year, at least 50% of the value of
the fund's total assets consists of obligations the interest on which would be
exempt from California personal income tax if the obligations were held by an
individual ("California Tax Exempt Obligations") and (2) the fund continues to
qualify as a regulated investment company.
If the fund qualifies to pay California exempt-interest dividends, dividends
distributed to shareholders will be considered California exempt-interest
dividends if they meet certain requirements. The fund will notify its
shareholders of the amount of exempt-interest dividends each year.
Corporations subject to California franchise tax that invest in the fund may not
be entitled to exclude California exempt-interest dividends from income.
Dividend distributions that do not qualify for treatment as California
exempt-interest dividends (including those dividend distributions to
shareholders taxable as long-term capital gains for federal income tax purposes)
will be taxable to shareholders at ordinary income tax rates for California
personal income tax purposes to the extent of the fund's earnings and profits.
Interest on indebtedness incurred or continued by a shareholder in connection
with the purchase of shares of the fund will not be deductible for California
personal income tax purposes if the fund distributes California exempt-interest
dividends.
If a fund qualifies to pay dividends to shareholders that are exempt from
California personal income tax ("California exempt-interest dividends"),
dividends distributed to shareholders will be considered California
exempt-interest dividends (1) if they are designated as exempt-interest
dividends by the fund in a written notice to shareholders mailed within 60 days
of the close of the fund's taxable year and (2) to the extent the interest
received by the fund during the year on California Tax Exempt Obligations
exceeds expenses of the fund that would be disallowed under California personal
income tax law as allocable to tax exempt interest if the fund were an
individual. If the aggregate dividends so designated exceed the amount that may
be treated as California exempt-interest dividends, only that percentage of each
dividend distribution equal to the ratio of aggregate California exempt-interest
dividends to aggregate dividends so designated will be treated as a California
exempt-interest dividend.
NEW YORK TAX CONSIDERATIONS
The following is a general, abbreviated summary of certain of the provisions of
the New York tax code presently in effect as they directly govern the taxation
of shareholders subject to New York personal income tax. These provisions are
subject to change by legislative or administrative action, and any such change
may be retroactive.
Dividends paid by the fund that are derived from interest on Municipal
Securities issued by New York State and political subdivisions or any agency or
instrumentality thereof which interest would be exempt from New York State if
held by an individual, will be exempt from New York State and New York City
personal income taxes, but not corporate franchise taxes. Other
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dividends and distributions from other Municipal Securities, U.S. Government
obligations, taxable income and capital gains will not be exempt from New York
State and New York City taxes. In addition, interest or indebtedness incurred by
a shareholder to purchase or carry shares of the fund is not deductible for New
York personal income tax purposes to the extent that it relates to New York
exempt-interest dividends distributed to a shareholder during the taxable year.
NEW JERSEY TAX CONSIDERATIONS
Under current law, investors in the 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 SEC; 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 fund from its investments in Pennsylvania Municipal
Securities or federal securities are not taxable. Distributions by the 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 fund, which are excludable as exempted income for
federal tax purposes, are not subject to the Pennsylvania corporate net income
tax. An additional deduction
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from Pennsylvania taxable income is permitted for the amount of distributions
paid by the fund attributable to interest received by the fund from its
investments in Pennsylvania municipal 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 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 fund intends to invest primarily in obligations which produce interest
exempt from federal and Pennsylvania taxes. If the 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.
FLORIDA INTANGIBLE TAX
Florida does not currently impose an income tax on individuals; therefore
distributions made by the fund to Florida residents will not be subject to any
state income taxes. Distributions made to shareholders which are Florida
corporations may be subject to Florida's corporate income tax.
Florida imposes an intangible personal property tax of 0.20% on all intangible
personal property owned by Florida residents on January 1st of each year,
including stocks and other securities. Certain types of property are exempt from
the intangibles tax such as, securities issued by the United States government
or its agencies and obligations issued by the State of Florida or its
municipalities or counties. The Florida Department of Revenue has released
several Technical Assistance Advisements which state that a fund will be exempt
from Florida's intangibles tax for any given year, if as of the close of
business on December 31st of the previous year, the fund's portfolio consists
solely of exempt securities.
Therefore, in order for the fund and its shareholders to benefit from the
exemption, the fund will have to sell any non-exempt securities which it holds
in its portfolio prior to the close of business on December 31st of each year.
This may cause the fund to liquidate certain of its investments when it would be
disadvantageous to do so in order to qualify for the exemption thereby reducing
the fund's aggregate investment return.
CALCULATION OF PERFORMANCE DATA
The funds' current 7-day yields based on the seven days ended December 31, 1998
are stated below and were calculated by determining the net change, exclusive of
capital changes and income other than investment income, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base period return, and the
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent.
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7-Day Current Yield as of December 31, 1998
<TABLE>
<S> <C>
Municipal Money Fund Sweep Shares - Sweep Shares 3.02%
California Municipal Money Fund - Sweep Shares 2.76%
New York Municipal Money Fund - Sweep Shares 2.97%
New Jersey Municipal Money Fund - Sweep Shares 2.96%
Pennsylvania Municipal Money Fund - Sweep Shares 3.09%
Florida Municipal Money Fund - Sweep Shares 2.99%
</TABLE>
The funds' effective yields based on the seven days ended December 31, 1998 are
stated below and were calculated by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result, with the resulting yield figure carried to at least the
nearest one hundredth of one percent.
7-Day Effective Yield as of December 31, 1998
<TABLE>
<S> <C>
Municipal Money Fund - Sweep Shares 3.06%
California Municipal Money Fund - Sweep Shares 2.80%
New York Municipal Money Fund - Sweep Shares 3.01%
New Jersey Municipal Money Fund - Sweep Shares 3.00%
Pennsylvania Municipal Money Fund - Sweep Shares 3.13%
Florida Municipal Money Fund - Sweep Shares 3.04%
</TABLE>
The fund's tax-equivalent current 7-day yields based on the 7-days ended
December 31, 1998 are stated below and were calculated by dividing that portion
of the fund's current 7-day yield (as described above) that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the fund's yield that is not tax-exempt.
7-Day Tax-Equivalent Current Yield as of December 31, 1998
<TABLE>
<S> <C>
Municipal Money Fund - Sweep Shares 5.00%
California Municipal Money Fund - Sweep Shares 5.04%
</TABLE>
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<TABLE>
<S> <C>
New York Municipal Money Fund - Sweep Shares 5.54%
New Jersey Municipal Money Fund - Sweep Shares 5.23%
Pennsylvania Municipal Money Fund - Sweep Shares 5.26%
Florida Municipal Money Fund - Sweep Shares 4.95%
</TABLE>
The fund's tax-equivalent effective 7-day yields based on the 7-days ended
December 31, 1998 are stated below and were calculated by dividing that portion
of the fund's effective 7-day yield (as described above) that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the fund's yield that is not tax-exempt.
7-Day Tax-Equivalent Effective Yield as of December 31, 1998
<TABLE>
<S> <C>
Municipal Money Fund - Sweep Shares 5.07%
California Municipal Money Fund - Sweep Shares 5.11%
New York Municipal Money Fund - Sweep Shares 5.62%
New Jersey Municipal Money Fund - Sweep Shares 5.31%
Pennsylvania Municipal Money Fund - Sweep Shares 5.33%
Florida Municipal Money Fund - Sweep Shares 5.03%
</TABLE>
The above tax-equivalent yields assume payment of federal income tax at a rate
of 39.6% and a California income tax rate of 45.22% or a New York income tax
rate of 46.43% or a New Jersey income tax rate of 43.54% or a Pennsylvania
income tax rate of 41.29.
A fund also may advertise its average annual total return and cumulative total
return. Average annual total return is a standardized measure of performance
calculated using methods prescribed by SEC rules. It is calculated by
determining the ending value of a hypothetical initial investment of $1,000 made
at the beginning a specified period. The ending value is then divided by the
initial investment, which is annualized and expressed as a percentage. It is
reported for periods of one, five and 10 years or since commencement of
operations for periods not falling on those intervals. In computing average
annual total return, a fund assumes reinvestment of all distributions at net
asset value on applicable reinvestment dates. Cumulative total return 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 commencement of operations to
the fiscal year ended December 31, 1998.
The performance of the funds may be compared with the performance of other
mutual funds by comparing the ratings of mutual fund rating services, various
indices, U.S. government obligations, bank certificates of deposit, the consumer
price index and other investments for which reliable data is available. An
index's performance data assumes the reinvestment of dividends but does not
reflect deductions for administrative, management and trading expenses. The
funds will be subject to these costs and expenses, while an index does not have
these
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expenses. In addition, various factors, such as holding a cash balance, may
cause the funds' performance to be higher or lower than that of an index.
30
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APPENDIX - RATINGS OF INVESTMENT SECURITIES
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers (or
related supporting institutions) of commercial paper with this rating are
considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
An S&P A-1 commercial paper rating indicated a strong degree of safety regarding
timely payment of principal and interest. Issues determined to possess
overwhelming safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
Duff-1 is the highest commercial paper rating assigned by Duff & Phelps Credit
Rating Co. ("Duff"). Three gradations exist within this rating category: a
Duff-1+ rating indicates the highest certainty of timely payment (issuer
short-term liquidity is found to be outstanding and safety is deemed to be just
below that of risk-free short-term U.S. Treasury obligations), a Duff-1 rating
signifies a very high certainty of timely payment (issuer liquidity is
determined to be excellent and risk factors are considered minor) and a Duff-1-
rating denotes high certainty of timely payment (issuer liquidity factors are
strong and risk is very small). A Duff-two rating indicates a good certainty of
timely payment; liquidity factors and company fundamentals are sound and risk
factors are small.
IBCA
F1+ is the highest category, and indicates the strongest degree of assurance for
timely payment. Issues rated F1 reflect an assurance of timely payment only
slightly less than issues rated F1+. Issues assigned an F2 rating have a
satisfactory degree of assurance for timely payment, but the margin of safety is
not as great as for issues in the first two rating categories.
SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS
MOODY'S INVESTORS SERVICE
Short-term notes/variable rate demand obligations bearing the designations
MIG-1/VMIG-1 are considered to be of the best quality, enjoying strong
protection from established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing. Obligations rated
MIG-2/VMIG-2 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.
STANDARD & POOR'S CORPORATION
An S&P SP-1 rating indicates that the subject securities' issuer has a very
strong capacity to pay principal and interest. Issues determined to possess very
strong safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a strong capacity to pay principal and interest
is denoted by an SP-2 rating.
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COMMERCIAL PAPER, SHORT-TERM OBLIGATIONS AND DEPOSIT OBLIGATIONS ISSUED BY BANKS
THOMSON BANKWATCH (TBW)
TBW-1 is the highest category and indicates the degree of safety regarding
timely repayment of principal and interest is very high. TBW-2 is the second
highest category and while the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as high
as for issues rated TBW-1.
32
