<PAGE> 1
As filed with the Securities and Exchange Commission on April 30, 2000
File Nos. 33-31894 and 811-5954
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 38 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 40 [X]
--------------
THE CHARLES SCHWAB FAMILY OF FUNDS
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
Steven L. Scheid, President
The Charles Schwab Family of Funds
101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)
Copies of communications to:
<TABLE>
<S> <C> <C>
John H. Grady, Jr. Esq. Martin E. Lybecker Frances Cole, Esq.
Morgan Lewis & Bockius LLP Ropes & Gray Charles Schwab Investment
1701 Market Street One Franklin Square Management, Inc.
Philadelphia, PA 19103 1301 Franklin, NW, Suite 800 101 Montgomery Street 120K-14-109
East San Francisco, CA 94104
Washington, DC 20005
</TABLE>
It is proposed that this filing will become effective (check appropriate box):
/ / Immediately upon filing pursuant to paragraph (b)
/X/ On April 30, 2000 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485
if appropriate, check the following box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
1
<PAGE> 2
SCHWAB
Money Funds
Sweep Investments(TM)
PROSPECTUS
April 30, 2000
SCHWAB MONEY MARKET FUND
SCHWAB GOVERNMENT MONEY FUND
SCHWAB U.S. TREASURY MONEY FUND
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[SCHWAB LOGO]
<PAGE> 3
SCHWAB
Money Funds
Sweep Investments(TM)
About The Funds
4 Schwab Money Market Fund
8 Schwab Government Money Fund
12 Schwab U.S. Treasury Money Fund
16 Fund Management
Investing In The Funds
18 Buying Shares
19 Selling/Exchanging Shares
20 Transaction Policies
21 Dividends and Taxes
<PAGE> 4
ABOUT THE FUNDS
The Schwab Money Funds seek to provide HIGH CURRENT YIELDS while offering the
LIQUIDITY, STABILITY AND CONVENIENCE traditionally associated with money market
mutual funds.
All of the funds invest exclusively in MONEY MARKET INVESTMENTS. The Schwab
Money Market Fund has greater investment risk but higher yield potential than
the Schwab Government Money Fund, which in turn has greater investment risk but
potentially higher yields than the Schwab U.S. Treasury Money Fund. This last
fund offers the highest degree of safety but the lowest potential yield of the
Schwab Money Funds.
The funds are designed primarily for use as SWEEP INVESTMENTS, in conjunction
with a Schwab brokerage account. Customers with such an account can designate
one of these funds as their account's primary fund.
<PAGE> 5
SCHWAB TICKER SYMBOL
SWMXX
Money Market Fund
THE FUND SEEKS THE HIGHEST CURRENT INCOME CONSISTENT WITH STABILITY OF CAPITAL
AND LIQUIDITY.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN HIGH-QUALITY SHORT-TERM MONEY MARKET
INVESTMENTS issued by U.S. and foreign issuers, such as:
- - commercial paper, including asset-backed commercial paper
- - certificates of deposit
- - variable - and floating - rate debt securities
- - bank notes
- - repurchase agreements
All of these investments must be denominated in U.S. dollars, including those
that are issued by foreign issuers.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's
exposure to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security
whose effective maturity is longer than 397 days (approximately 13
months).
Money Market Fund 4
<PAGE> 6
This fund is appropriate for investors interested in high money market returns.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default generally is considered unlikely (even among foreign
investments, which carry additional risks), any default on the part of a
portfolio investment could cause the fund's share price or yield to fall. The
additional risks of foreign investments are due to reasons ranging from a lack
of issuer information to the risk of political uncertainties.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
5 Money Market Fund
<PAGE> 7
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
Annual total returns (%) as of 12/31
[BAR CHART]
<TABLE>
<S> <C>
91 5.70
92 3.47
93 2.67
94 3.68
95 5.41
96 4.91
97 5.04
98 4.99
99 4.64
</TABLE>
BEST QUARTER: 1.38% Q2 1991
WORST QUARTER: 0.64% Q2 1993
Average annual total returns (%) as of 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION 1
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Schwab Money
Market Fund 4.64 5.00 4.80
</TABLE>
1 Inception: 1/26/1990.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
Fee table (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- --------------------------------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------------
Management fees 0.32
Distribution (12b-1) fees None
Other expenses 0.47
----
TOTAL ANNUAL OPERATING EXPENSES 0.79
EXPENSE REDUCTION (0.04)
----
NET OPERATING EXPENSES* 0.75
====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-----------------------------------------------------------------
<S> <C> <C> <C>
$77 $248 $435 $974
</TABLE>
Visit www.schwab.com/schwabfunds or call toll-free 800-435-4000 for a current
seven-day yield.
Money Market Fund 6
<PAGE> 8
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
YEAR ENDED 12/31 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
-----------------------------------------------
From investment operations:
Net investment income 0.05 0.05 0.05 0.05 0.05
-----------------------------------------------
Total from investment operations 0.05 0.05 0.05 0.05 0.05
Less distributions:
Dividends from net investment income (0.05) (0.05) (0.05) (0.05) (0.05)
-----------------------------------------------
Total distributions (0.05) (0.05) (0.05) (0.05) (0.05)
-----------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
-----------------------------------------------
Total return (%) 4.64 4.99 5.04 4.91 5.41
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.75 0.75 0.75 0.75 0.75
Reductions reflected in above expense ratio 0.06 0.11 0.12 0.14 0.15
Ratio of net investment income to
average net assets 4.56 4.87 4.93 4.80 5.27
Net assets, end of period ($ X 1,000,000) 36,099 27,439 21,421 18,084 14,010
</TABLE>
7 Money Market Fund
<PAGE> 9
SCHWAB TICKER SYMBOL
SWGXX
GOVERNMENT MONEY FUND
THE FUND SEEKS THE HIGHEST CURRENT INCOME CONSISTENT WITH STABILITY OF CAPITAL
AND LIQUIDITY.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN U.S. GOVERNMENT SECURITIES, such as:
- - U.S. Treasury bills, notes and bonds
- - other obligations that are issued or guaranteed by the U.S. government,
its agencies or instrumentalities, including Fannie Maes, Freddie Macs
and Sallie Maes
- - repurchase agreements
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's
exposure to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security
whose effective maturity is longer than 397 days (approximately 13
months).
Government Money Fund 8
<PAGE> 10
This fund is appropriate for investors looking for high money market returns
along with the added margin of safety provided by a portfolio of U.S. government
securities.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Many of the
U.S. government securities that the fund invests in are not backed by the full
faith and credit of the U.S. government. Also, any government guarantees on
securities the fund owns do not extend to shares of the fund itself. Although
the risk of default with U.S. government securities is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
9 Government Money Fund
<PAGE> 11
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
Annual total returns (%) as of 12/31
[BAR CHART}
<TABLE>
<S> <C>
91 5.53
92 3.43
93 2.67
94 3.62
95 5.34
96 4.83
97 4.95
98 4.88
99 4.50
</TABLE>
BEST QUARTER: 1.35% Q2 1995
WORST QUARTER: 0.65% Q3 1993
Average annual total returns (%) as of 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION 1
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Schwab Government
Money Fund 4.50 4.90 4.73
</TABLE>
1 Inception: 1/26/1990.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
Fee table (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- -----------------------------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- -----------------------------------------------------------------------------
Management fees 0.36
Distribution (12b-1) fees None
Other expenses 0.47
-----
Total annual operating expenses 0.83
EXPENSE REDUCTION (0.08)
-----
NET OPERATING EXPENSES* 0.75
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
Expenses on a $10,000 investment
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------
<S> <C> <C> <C>
$77 $257 $453 $1,018
</TABLE>
Visit www.schwab.com/schwabfunds or call toll-free 800-435-4000 for a current
seven-day yield.
GOVERNMENT MONEY FUND 10
<PAGE> 12
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
Year ended 12/31 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
-----------------------------------------------
From investment operations:
Net investment income 0.04 0.05 0.05 0.05 0.05
-----------------------------------------------
Total from investment operations 0.04 0.05 0.05 0.05 0.05
Less distributions:
Dividends from net investment income (0.04) (0.05) (0.05) (0.05) (0.05)
-----------------------------------------------
Total distributions (0.04) (0.05) (0.05) (0.05) (0.05)
-----------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
-----------------------------------------------
Total return (%) 4.50 4.88 4.95 4.83 5.34
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.75 0.75 0.75 0.75 0.75
Reductions reflected in above expense ratio 0.10 0.17 0.17 0.17 0.17
Ratio of net investment income to
average net assets 4.42 4.76 4.84 4.73 5.21
Net assets, end of period ($ X 1,000,000) 2,545 2,207 1,982 1,987 1,885
</TABLE>
11 GOVERNMENT MONEY FUND
<PAGE> 13
SCHWAB TICKER SYMBOL
SWUXX
U.S. Treasury Money Fund
The fund seeks the highest current income consistent with stability of capital
and liquidity.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS EXCLUSIVELY IN SECURITIES BACKED BY THE
FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT. Typically, the fund's assets will
be invested in U.S. Treasury bills, notes, and bonds. The full faith and credit
backing is the strongest backing offered by the U.S. government, and
traditionally is considered by investors to be the highest degree of safety as
far as the payment of principal and interest.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. By
limiting its portfolio to full faith and credit U.S. government investments, the
fund seeks to provide maximum safety as to its assets. The fund is distinct from
certain other types of government money funds in that, for tax and credit
quality reasons, it does not invest in repurchase agreements. The managers may
adjust the fund's average maturity based on current and anticipated changes in
interest rates. To preserve its investors' capital, the fund seeks to maintain a
stable $1 share price.
Because the income from U.S. Treasury securities is exempt from state and local
income taxes, the fund generally expects that the dividends it pays will be
exempt from those taxes as well. (Dividends still will be subject to federal
income tax.)
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's
exposure to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security
whose effective maturity is longer than 397 days (approximately 13
months).
U.S. TREASURY MONEY FUND 12
<PAGE> 14
WITH ITS PORTFOLIO OF SECURITIES BACKED BY THE FULL FAITH AND CREDIT OF THE U.S.
GOVERNMENT, THIS FUND IS DESIGNED TO PROVIDE INVESTORS WITH THE HIGHEST DEGREE
OF SAFETY OF ALL THE SCHWAB MONEY FUNDS, AS WELL AS CURRENT MONEY MARKET
RETURNS.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Government
guarantees on securities the fund owns do not extend to the shares of the fund
itself. Although the risk of default with U.S. Treasury securities is considered
extremely unlikely, any default on the part of a portfolio investment could
cause the fund's share price or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
13 U.S. TREASURY MONEY FUND
<PAGE> 15
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
[BAR CHART]
ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<S> <C>
92 3.26
93 2.54
94 3.52
95 5.25
96 4.77
97 4.85
98 4.69
99 4.25
</TABLE>
BEST QUARTER: 1.33% Q2 1995
WORST QUARTER: 0.61% Q2 1993
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION 1
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Schwab U.S. Treasury
Money Fund 4.25 4.76 4.14
</TABLE>
1 Inception: 11/6/1991.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- -----------------------------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- -----------------------------------------------------------------------------
Management fees 0.36
Distribution (12b-1) fees None
Other expenses 0.48
-----
TOTAL ANNUAL OPERATING EXPENSES 0.84
EXPENSE REDUCTION (0.19)
-----
NET OPERATING EXPENSES* 0.65
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$66 $249 $447 $1,020
</TABLE>
VISIT www.schwab.com/schwabfunds OR CALL TOLL-FREE 800-435-4000 FOR A CURRENT
SEVEN-DAY YIELD.
U.S. TREASURY MONEY FUND 14
<PAGE> 16
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
YEAR ENDED 12/31 1999 1998 1997 1996 1995
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
----------------------------------------------
From investment operations:
Net investment income 0.04 0.05 0.05 0.05 0.05
----------------------------------------------
Total from investment operations 0.04 0.05 0.05 0.05 0.05
Less distributions:
Dividends from net investment income (0.04) (0.05) (0.05) (0.05) (0.05)
----------------------------------------------
Total distributions (0.04) (0.05) (0.05) (0.05) (0.05)
----------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
==============================================
Total return (%) 4.25 4.69 4.85 4.77 5.25
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.65 0.65 0.65 0.65 0.65
Reductions reflected in above expense ratio 0.21 0.26 0.28 0.29 0.31
Ratio of net investment income to
average net assets 4.18 4.58 4.75 4.67 5.11
Net assets, end of period ($ X 1,000,000) 2,592 2,131 1,765 1,422 1,194
</TABLE>
15 U.S. Treasury Money Fund
<PAGE> 17
FUND MANAGEMENT
The funds' investment adviser, Charles Schwab Investment Management, Inc., has
more than $107 billion under management.
THE INVESTMENT ADVISER for the Schwab Money Funds is Charles Schwab Investment
Management, Inc., 101 Montgomery Street, San Francisco, CA 94104. Founded in
1989, the firm today serves as investment adviser for all of the SchwabFunds.(R)
The firm manages assets for more than 5 million shareholder accounts. (All
figures on this page are as of 12/31/1999).
As the investment adviser, the firm oversees the asset management and
administration of the Schwab Money Funds. As compensation for these services,
the firm receives a management fee from each fund. For the 12 months ended
12/31/1999, these fees were 0.27% for the Schwab Money Market Fund, 0.28% for
the Schwab Government Money Fund and 0.17% for the Schwab U.S. Treasury Money
Fund. These figures, which are expressed as a percentage of each fund's average
daily net assets, represent the actual amounts paid, including the effects of
reductions.
Fund Management 16
<PAGE> 18
INVESTING IN THE FUNDS
As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us.
On the following pages, you will find information on BUYING, SELLING AND
EXCHANGING shares using the method that is most CONVENIENT for you. You also
will see how to choose a distribution option for your investment. Helpful
information on TAXES
is included as well.
17 Investing in the Funds
<PAGE> 19
BUYING SHARES
The information on these pages outlines how Schwab brokerage account investors
can place "good orders" to buy, sell and exchange shares of the funds.
These funds are designed for use in conjunction with a Schwab brokerage account.
Different types of Schwab brokerage accounts are available, with varying account
opening and balance requirements.
When you designate one of these funds as the "primary fund" on your Schwab
brokerage account, your uninvested cash balances will be invested automatically
in that fund, according to the terms and conditions of your account agreement.
Similarly, when you use your account to purchase other investments or make
payments, shares of your primary fund will be sold automatically to cover these
transactions.
For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
BUYING SHARES THROUGH DIRECT ORDERS
In addition to automatic sweep purchases, it is possible to buy shares of a fund
by placing a direct order, as you would with any other Schwab mutual fund.
Each fund's minimum for initial direct investments is $10,000 ($5,000 for
retirement and custodial accounts). The minimum additional direct investment is
$1,000.
For initial direct purchases, you'll need to choose whether you want your
dividends reinvested or paid to you. If you don't indicate a choice, your
dividends will be reinvested.
Place direct orders using any of the methods described at right.
Investing in the Funds 18
<PAGE> 20
SELLING/EXCHANGING SHARES
When selling or exchanging shares, please be aware of the following policies:
- - A fund may take up to seven days to pay sale proceeds.
- - If you are selling shares that were recently purchased by check, the
proceeds may be delayed until the check for purchase clears; this may
take up to 15 days from the date of purchase.
- - Exchange orders are limited to other Schwab Sweep Investments(R) and
must meet the minimum investment and other requirements for the fund
and share class into which you are exchanging.
- - You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.
- - You will need to keep at least $100 in any fund you are not closing.
You may place direct orders to sell shares using any of the methods described
below. For automatic sweep sales, see your account agreement.
WHEN PLACING ORDERS
With every direct order to buy, sell or exchange shares you will need to include
the following information:
- - Your name
- - Your account number (for SchwabLink transactions, include the master
account and subaccount numbers)
- - The name and share class of the fund whose shares you want to buy or
sell
- - The dollar amount you would like to buy, sell or exchange
- - For exchanges, the name and share class of the fund into which you want
to exchange and the distribution option you prefer
- - When selling shares, how you would like to receive the proceeds
Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.
METHODS FOR PLACING DIRECT ORDERS
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
SCHWABLINK
Investment professionals should follow the transaction instructions in the
SchwabLink manual; for technical assistance, call 800-367-5198.
MAIL
Write to SchwabFunds(R) at:
P.O. Box 7575
San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab branch office.
19 Investing in the Funds
<PAGE> 21
TRANSACTION POLICIES
THE FUNDS ARE OPEN FOR BUSINESS EACH DAY THAT BOTH THE NEW YORK STOCK EXCHANGE
(NYSE) AND THE FEDERAL RESERVE BANK OF NEW YORK ARE OPEN. The funds calculate
their share prices twice each business day, first at 10 a.m. Eastern time and
again after the close of the NYSE (generally 4 p.m. Eastern time). A fund's
share price is its net asset value per share, or NAV, which is the fund's net
assets divided by the number of its shares outstanding. The funds seek to
maintain a stable NAV of $1.
Orders that are received in good order are executed at the next NAV to be
calculated. However, phone orders received after 8 p.m. Eastern time will be
executed at the next day's closing NAV, not at the morning NAV. Orders to buy
shares that are accepted prior to the morning NAV calculation generally receive
that day's dividend. Orders to buy that are accepted after the morning NAV but
prior to the closing NAV generally will receive the next day's dividend. Shares
sold or exchanged at the morning NAV generally don't receive that day's
dividend, but those sold or exchanged at the closing NAV generally do.
The funds value their investment holdings on the basis of amortized cost (cost
plus any discount, or minus any premium, accrued since purchase). Most money
market funds use this method to calculate NAV.
THE FUNDS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following:
- - To automatically redeem your shares if the account they are held in is
closed for any reason or your balance falls below the minimum for the
fund as a result of selling or exchanging your shares
- - To modify or terminate the exchange privilege upon 60 days' written
notice to shareholders
- - To refuse any purchase or exchange order
- - To change or waive a fund's investment minimums
- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or
halted, or otherwise as permitted by the SEC
- - To withdraw or suspend any part of the offering made by this prospectus
Investing in the Funds 20
<PAGE> 22
DIVIDENDS AND TAXES
ANY INVESTMENT IN THE FUND TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in the fund. You also can
visit the Internal Revenue Service web site at www.irs.gov.
AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS YOUR FUND
EARNS. Each fund distributes to its shareholders substantially all of its net
investment income. Each fund declares a dividend every business day, based on
its determination of its net investment income. The funds pay their dividends on
the 15th of every month (or next business day, if the 15th is not a business
day), except that in December dividends are paid on the last business day of the
month. If your daily dividend is less than $.01, you may not receive a dividend
payment. The funds do not expect to pay any capital gain distributions.
UNLESS YOU ARE INVESTING THROUGH A TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT, YOUR
FUND DIVIDENDS GENERALLY HAVE TAX CONSEQUENCES. Each fund's net investment
income is distributed as dividends and is taxable as ordinary income. Dividends
paid by the U.S. Treasury Money Fund are subject to federal income tax but
typically are free from any state and local personal income taxes. Income
dividends generally are taxable in the tax year in which they are declared,
whether you reinvest them or take them in cash.
AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DIVIDENDS the fund declared during the previous
calendar year. Schwab brokerage account customers also receive information on
dividends and transactions in their monthly account statements.
21 Investing in the Funds
<PAGE> 23
Notes
<PAGE> 24
Notes
<PAGE> 25
TO LEARN MORE
This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the SEC's Public Reference Room
or by computer using the SEC's EDGAR database at www.sec.gov.
SEC FILE NUMBER
Schwab Money Funds --
Sweep Investments(TM) 811-5954
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0102
800-SEC-0330 (Public Reference Section)
202-942-8090
www.sec.gov
[email protected]
SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
WWW.SCHWAB.COM/SCHWABFUNDS
MKT3850-1FLT
SCHWAB
Money Funds
Sweep Investments(TM)
PROSPECTUS
April 30, 2000
[CHARLES SCHWAB LOGO]
<PAGE> 26
SCHWAB
Schwab Institutional
Advantage Money Fund(R)
Schwab Retirement
Money Fund(R)
PROSPECTUS
April 30, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[CHARLES SCHWAB LOGO]
<PAGE> 27
SCHWAB
Schwab Institutional
Advantage Money Fund(R)
Schwab Retirement
Money Fund(R)
About The Funds
4 Schwab Institutional Advantage
Money Fund(R)
8 Schwab Retirement Money Fund(R)
12 Fund Management
Investing In The Funds
14 Buying Shares
15 Selling/Exchanging Shares
16 Transaction Policies
17 Dividends and Taxes
<PAGE> 28
ABOUT THE FUNDS
<PAGE> 29
SCHWAB TICKER SYMBOL
SWIXX
Institutional Advantage
Money Fund(R)
The fund seeks the highest current income consistent with stability of capital
and liquidity.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN HIGH-QUALITY SHORT-TERM MONEY MARKET
INVESTMENTS issued by U.S. and foreign issuers, such as:
- - commercial paper, including asset-backed commercial paper
- - certificates of deposit
- - variable - and floating - rate debt securities
- - bank notes
- - repurchase agreements
All of these investments must be denominated in U.S. dollars, including those
that are issued by foreign issuers.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality securities
(generally those that are in the top two tiers of credit quality).
- - Diversification: requirements for diversification limit the fund's exposure
to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months).
INSTITUTIONAL ADVANTAGE MONEY FUND 4
<PAGE> 30
This fund was created for retirement plans, plan participants and other
INSTITUTIONAL INVESTORS investing on their own behalf or as a fiduciary, agent
or custodian.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default generally is considered unlikely (even among foreign
investments, which carry additional risks), any default on the part of a
portfolio investment could cause the fund's share price or yield to fall. The
additional risks of foreign investments are due to reasons ranging from a lack
of issuer information to the risk of political uncertainties.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
5 INSTITUTIONAL ADVANTAGE MONEY FUND
<PAGE> 31
PERFORMANCE
Fund Fees and Expenses
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
Annual total returns (%) as of 12/31
[BAR GRAPH]
<TABLE>
<S> <C>
95 5.65
96 5.15
97 5.31
98 5.26
99 4.90
</TABLE>
BEST QUARTER: 1.41% Q2 1995
WORST QUARTER: 1.13% Q2 1999
Average annual total returns (%) as of 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION 1
- ------------------------------------------------------
<S> <C> <C> <C>
Schwab Institutional
Advantage Money Fund 4.90 5.26 5.03
</TABLE>
1 Inception: 1/4/1994.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
Fee table (%)
SHAREHOLDER FEES
- ----------------------------------------------------
None
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES (% of average net assets)
- ----------------------------------------------------
<S> <C>
Management fees 0.38
Distribution (12b-1) fees None
Other expenses 0.31
----
Total annual operating expenses 0.69
EXPENSE REDUCTION (0.19)
NET OPERATING EXPENSES* 0.50
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------
<S> <C> <C> <C>
$51 $202 $365 $841
</TABLE>
Visit www.schwab.com/schwabfunds or call toll-free 800-435-4000 for a current
seven-day yield.
INSTITUTIONAL ADVANTAGE MONEY FUND 6
<PAGE> 32
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
YEAR ENDED 12/31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
----------------------------------------------
From investment operations:
Net investment income 0.05 0.05 0.05 0.05 0.06
----------------------------------------------
Total from investment operations 0.05 0.05 0.05 0.05 0.06
Less distributions:
Dividends from net investment income (0.05) (0.05) (0.05) (0.05) (0.06)
----------------------------------------------
Total distributions (0.05) (0.05) (0.05) (0.05) (0.06)
----------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
----------------------------------------------
Total return (%) 4.90 5.26 5.31 5.15 5.65
</TABLE>
<TABLE>
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of net operating expenses to
average net assets 0.50 0.50 0.50 0.50 0.53
Reductions reflected in above expense ratio 0.21 0.29 0.34 0.38 0.37
Ratio of net investment income to
average net assets 4.84 5.12 5.20 5.03 5.50
Net assets, end of period ($ X 1,000,000) 604 369 275 139 81
</TABLE>
7 INSTITUTIONAL ADVANTAGE MONEY FUND
<PAGE> 33
SCHWAB
Retirement Money Fund
TICKER SYMBOL
SWRXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME CONSISTENT WITH STABILITY OF CAPITAL
AND LIQUIDITY.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN HIGH-QUALITY SHORT-TERM MONEY MARKET
INVESTMENTS issued by U.S. and foreign issuers, such as:
- - commercial paper, including asset-backed commercial paper
- - certificates of deposit
- - variable - and floating - rate debt securities
- - bank notes
- - repurchase agreements
All of these investments must be denominated in U.S. dollars, including those
that are issued by foreign issuers.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
MONEY FUND
REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality securities
(generally those that are in the top two tiers of credit quality).
- - Diversification: requirements for diversification limit the fund's exposure
to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months).
RETIREMENT MONEY FUND 8
<PAGE> 34
This fund was created for retirement plans, plan participants and other
INSTITUTIONAL INVESTORS investing on their own behalf or as a fiduciary, agent
or custodian.
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default generally is considered unlikely (even among foreign
investments, which carry additional risks), any default on the part of a
portfolio investment could cause the fund's share price or yield to fall. The
additional risks of foreign investments are due to reasons ranging from a lack
of issuer information to the risk of political uncertainties.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
9 RETIREMENT MONEY FUND
<PAGE> 35
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
ANNUAL TOTAL RETURNS (%) as of 12/31
<TABLE>
<S> <C>
95 5.43
96 4.93
97 5.07
98 5.03
99 4.68
</TABLE>
BEST QUARTER: 1.37% Q2 1995
WORST QUARTER: 1.08% Q2 1999
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION 1
- ------------------------------------------------------
<S> <C> <C> <C>
Schwab Retirement
Money Fund 4.68 5.03 4.88
</TABLE>
1 Inception: 3/2/1994.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
SHAREHOLDER FEES
None
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES (% of average net assets)
---------------------------------------------------
<S> <C>
Management fees 0.38
Distribution (12b-1) fees None
Other expenses 0.34
----
TOTAL ANNUAL OPERATING EXPENSES* 0.72
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 not to
exceed 0.73% (excluding interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year. The
expenses would be the same whether you stayed in the fund or sold your shares at
the end of each period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------
<S> <C> <C> <C>
$74 $230 $401 $894
</TABLE>
VISIT www.schwab.com/schwabfunds OR CALL TOLL-FREE 800-435-4000 FOR A CURRENT
SEVEN-DAY YIELD.
RETIREMENT MONEY FUND 10
<PAGE> 36
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
YEAR ENDED 12/31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
--------------------------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
---------------------------------------------
From investment operations:
Net investment income 0.05 0.05 0.05 0.05 0.05
---------------------------------------------
Total from investment operations 0.05 0.05 0.05 0.05 0.05
Less distributions:
Dividends from net investment income (0.05) (0.05) (0.05) (0.05) (0.05)
---------------------------------------------
Total distributions (0.05) (0.05) (0.05) (0.05) (0.05)
---------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
=============================================
Total return (%) 4.68 5.03 5.07 4.93 5.43
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA (%)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of net operating expenses to
average net assets 0.72 0.73 0.73 0.73 0.73
Reductions reflected in above expense ratio 0.02 0.07 0.11 0.15 0.19
Ratio of net investment income to
average net assets 4.62 4.88 4.96 4.83 5.28
Net assets, end of period ($ X 1,000,000) 322 225 155 136 99
</TABLE>
11 RETIREMENT MONEY FUND
<PAGE> 37
FUND MANAGEMENT
The funds' INVESTMENT
ADVISER, Charles Schwab
Investment Management,
Inc., has more than $107
billion under management.
THE INVESTMENT ADVISER for the Schwab Institutional Advantage Money Fund(R) and
Schwab Retirement Money Fund(R) is Charles Schwab Investment Management, Inc.,
101 Montgomery Street, San Francisco, CA 94104. Founded in 1989, the firm today
serves as investment adviser for all of the SchwabFunds.(R) The firm manages
assets for more than 5 million shareholder accounts. (All figures on this page
are as of 12/31/1999).
As the investment adviser, the firm oversees the asset management and
administration of the Schwab Institutional Advantage Money Fund and Schwab
Retirement Money Fund. As compensation for these services, the firm receives a
management fee from each fund. For the 12 months ended 12/31/1999, these fees
were 0.20% for the Schwab Institutional Advantage Money Fund and 0.38% for the
Schwab Retirement Money Fund. These figures, which are expressed as a percentage
of each fund's average daily net assets, represent the actual amounts paid,
including the effects of any reductions.
FUND MANAGEMENT 12
<PAGE> 38
INVESTING IN THE FUNDS
As a SchwabFunds(R) investor,
you have a number of WAYS TO
DO BUSINESS with us.
On the following pages, you will find information on BUYING, SELLING AND
EXCHANGING shares using the method that is most CONVENIENT for you. You also
will see how to choose a distribution option for your investment. Helpful
information on TAXES is included as well.
13 INVESTING IN THE FUNDS
<PAGE> 39
BUYING SHARES
Shares of the funds may be purchased through a Schwab brokerage account or
through certain third-party investment providers, such as other financial
institutions, investment professionals and workplace retirement plans.
The information on these pages outlines how Schwab brokerage account investors
can place "good orders" to buy, sell and exchange shares of the funds. If you
are investing through a third-party investment provider, some of the
instructions, minimums and policies may be different. Some investment providers
may charge transaction or other fees. Contact your investment provider for more
information.
STEP 1
DECIDE HOW MUCH YOU WANT TO INVEST.
<TABLE>
<CAPTION>
MINIMUM INITIAL MINIMUM ADDITIONAL
INVESTMENT INVESTMENTS MINIMUM BALANCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional Advantage
Money Fund $25,000 $1 $25,000
Retirement Money Fund $1 $1 $1
</TABLE>
STEP 2
CHOOSE AN OPTION FOR DIVIDENDS. The two options are described below. If you
don't indicate a choice, you will receive the first option.
OPTION FEATURES
- --------------------------------------------------------------------------------
Reinvestment All dividends are invested automatically in shares of your
fund.
- --------------------------------------------------------------------------------
Cash You receive payment for all dividends.
- --------------------------------------------------------------------------------
STEP 3
PLACE YOUR ORDER USING ANY OF THE METHODS DESCRIBED AT RIGHT.
INVESTING IN THE FUNDS 14
<PAGE> 40
SELLING/EXCHANGING SHARES
USE ANY OF THE METHODS DESCRIBED BELOW TO SELL SHARES OF A FUND.
When selling or exchanging shares, please be aware of the following policies:
- - A fund may take up to seven days to pay sale proceeds.
- - If you are selling shares that were recently purchased by check, the proceeds
may be delayed until the check for purchase clears; this may take up to 15
days from the date of purchase.
- - Exchange orders must meet the minimum investment and other requirements for
the fund and share class into which you are exchanging.
- - You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.
METHODS FOR PLACING DIRECT ORDERS
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
SCHWABLINK
Investment professionals should follow the transaction instructions in the
SchwabLink manual; for technical assistance, call 800-367-5198.
MAIL
Write to SchwabFunds(R) at:
P.O. Box 7575
San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab branch office.
WHEN PLACING ORDERS
With every order to buy, sell or exchange shares you will need to include the
following information:
- - Your name or, for internet orders, your account number/"Login ID"
- - Your account number (for SchwabLink transactions, include the master account
and subaccount numbers) or, for internet orders, your confidential password
- - The name and share class of the fund whose shares you want to buy
or sell
- - The dollar amount you would like to buy, sell or exchange
- - For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer
- - When selling shares, how you would like to receive the proceeds
Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.
15 INVESTING IN THE FUNDS
<PAGE> 41
TRANSACTION POLICIES
THE FUNDS ARE OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
AND THE FEDERAL RESERVE BANK OF NEW YORK ARE OPEN. The funds calculate their
share prices each business day, after the close of the NYSE (generally 4 p.m.
Eastern time). A fund's share price is its net asset value per share, or NAV,
which is the fund's net assets divided by the number of its shares outstanding.
The funds seek to maintain a stable NAV of $1.
Orders that are received in good order are executed at the next NAV to be
calculated. Orders to buy shares that are accepted prior to the close of the
fund generally will receive the next day's dividend. On special request, orders
to invest $100,000 or more in shares of the Schwab Institutional Advantage Money
Fund(R) that are accepted by Schwab (including Charles Schwab Trust Company) by
1:30 p.m. Eastern time may receive that day's dividend. Orders to sell or
exchange shares that are accepted and executed prior to the close of the fund on
a given day generally will receive that day's dividend.
The funds value their investment holdings on the basis of amortized cost (cost
plus any discount, or minus any premium, accrued since purchase). Most money
market funds use this method to calculate NAV.
THE FUNDS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following:
- - To automatically redeem your shares if the account they are held in is closed
for any reason or your balance falls below the minimum for your share class
as a result of selling or exchanging your shares
- - To modify or terminate the exchange privilege upon 60 days' written notice to
shareholders
- - To refuse any purchase or exchange order, including those that appear to be
associated with short-term trading activities
- - To change or waive a fund's investment minimums
- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC
- - To withdraw or suspend any part of the offering made by this prospectus
INVESTING IN THE FUNDS 16
<PAGE> 42
DIVIDENDS AND TAXES
ANY INVESTMENT IN THE FUND TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in the fund. You also can
visit the Internal Revenue Service web site at www.irs.gov.
AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS YOUR FUND
EARNS. Each fund distributes to its shareholders substantially all of its net
investment income. Each fund declares a dividend every business day, based on
its determination of its net investment income. The funds pay their dividends on
the 15th of every month (or next business day, if the 15th is not a business
day), except that in December dividends are paid on the last business day of the
month. If your daily dividend is less than $.01, you may not receive a dividend
payment. The funds do not expect to pay any capital gain distributions.
AS LONG AS YOU ARE INVESTING THROUGH A TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT,
FUND DIVIDENDS GENERALLY DO NOT HAVE TAX CONSEQUENCES. Each fund's net
investment income is distributed as dividends. If you are investing in a taxable
account, the funds' dividends are taxable as ordinary income. Taxable income
dividends generally are taxable in the tax year in which they are declared,
whether you reinvest them or take them in cash.
AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DIVIDENDS the fund declared during the previous
calendar year. Schwab brokerage account customers also receive information on
dividends and transactions in their monthly account statements.
17 INVESTING IN THE FUNDS
<PAGE> 43
Notes
<PAGE> 44
Notes
<PAGE> 45
TO LEARN MORE
This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the SEC's Public Reference Room
or by computer using the SEC's EDGAR data base at www.sec.gov.
SEC FILE NUMBERS
Schwab Institutional
Advantage Money Fund(R) 811-5954
Schwab Retirement Money Fund(R) 811-5954
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0102
800-SEC-0330 (Public Reference Section)
202-942-8090
www.sec.gov
[email protected]
SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
www.schwab.com/schwabfunds
MKT3854FLT-1
SCHWAB
Schwab Institutional
Advantage Money Fund(R)
Schwab Retirement
Money Fund(R)
PROSPECTUS
April 30, 2000
[CHARLES SCHWAB LOGO]
<PAGE> 46
SCHWAB
Municipal Money Funds
Sweep Investments(TM)
Prospectus
April 30, 2000
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
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[Charles Schwab Logotype]
<PAGE> 47
SCHWAB
Municipal Money Funds
Sweep Investments(TM)
ABOUT THE FUNDS
4 Schwab Municipal
Money Fund
8 Schwab California
Municipal Money Fund
12 Schwab New York
Municipal Money Fund
16 Schwab New Jersey
Municipal Money Fund
20 Schwab Pennsylvania
Municipal Money Fund
24 Schwab Florida Municipal
Money Fund
28 Fund Management
INVESTING IN THE FUNDS
30 Buying Shares
31 Selling/Exchanging Shares
32 Transaction Policies
33 Dividends and Taxes
<PAGE> 48
ABOUT THE FUNDS
The Schwab Municipal Money Funds seek to provide HIGH CURRENT YIELDS while
offering the LIQUIDITY, STABILITY AND CONVENIENCE traditionally associated with
money market mutual funds.
Because these funds invest in municipal MONEY MARKET INVESTMENTS, their
dividends generally are free from federal income tax. Dividends from the
state-specific funds generally are free from state income tax as well.
The funds are designed primarily for use as SWEEP INVESTMENTS, in conjunction
with a Schwab brokerage account. Customers with such an account can designate
one of these funds as their account's primary fund.
<PAGE> 49
SCHWAB TICKER SYMBOL
SWEEP SHARES SWXXX
MUNICIPAL MONEY FUND
THE FUND SEEKS THE HIGHEST CURRENT INCOME THAT IS CONSISTENT WITH STABILITY OF
CAPITAL AND LIQUIDITY, AND IS EXEMPT FROM FEDERAL INCOME TAX.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN MUNICIPAL MONEY MARKET SECURITIES, from
state issuers around the country and from municipal agencies, U.S. territories
and possessions. These may include general obligation issues, which typically
are backed by the issuer's ability to levy taxes, and revenue issues, which
typically are backed by a stream of revenue from a given source, such as a toll
highway or a public water system. These also may include municipal notes as well
as municipal leases, which municipalities may use to finance construction or to
acquire equipment.
Many of the fund's securities will be subject to credit or liquidity
enhancements, which are designed to provide incremental levels of
creditworthiness or liquidity. Some municipal securities have been structured to
resemble variable- and floating-rate securities so that they meet the
requirements for being considered money market instruments.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
The fund intends to invest 100% of its assets in municipal money market
securities. However, during unusual market conditions, the fund may invest in
taxable money market securities as a temporary defensive measure. In this case,
the fund would not be pursuing its goal.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's
exposure to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security
whose effective maturity is longer than 397 days (approximately 13
months).
MUNICIPAL MONEY FUND 4
<PAGE> 50
This fund is designed for individuals in higher tax brackets who are seeking
TAX-EXEMPT INCOME.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Some of the
fund's investments, in particular those that have been structured as municipal
money market securities, may have greater risks than securities in non-municipal
money funds. Although the risk of default generally is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
SOME OF THE FUND'S INCOME COULD BE TAXABLE. If certain types of investments
the fund buys as tax-exempt are later ruled to be taxable, a portion of the
fund's income could be taxable. This risk, although generally considered low, is
somewhat higher for investments that have been structured as municipal money
market securities than for investments in other types of municipal money market
securities. Any defensive investments in taxable securities also could generate
taxable income. Also, some types of municipal securities produce income that is
subject to the federal alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
5 MUNICIPAL MONEY FUND
<PAGE> 51
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
[BAR CHART]
ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<S> <C>
91 4.01
92 2.48
93 1.93
94 2.32
95 3.30
96 2.92
97 3.11
98 2.92
99 2.70
</TABLE>
BEST QUARTER: 0.96% Q3 1991
WORST QUARTER: 0.44% Q1 1994
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION 1
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Schwab Municipal
Money Fund 2.70 2.99 3.09
</TABLE>
1 Inception: 1/26/1990.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
- ---------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- ---------------------------------------------------------------------------
Management fees 0.35
Distribution (12b-1) fees None
Other expenses 0.48
-----
Total annual operating expenses 0.83
Expense reduction (0.17)
-----
Net operating expenses* 0.66
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
<S> <C> <C> <C>
$67 $248 $444 $1,010
</TABLE>
VISIT www.schwab.com/schwabfunds OR CALL TOLL-FREE 800-435-4000 FOR A CURRENT
SEVEN-DAY YIELD.
MUNICIPAL MONEY FUND 6
<PAGE> 52
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
SWEEP SHARES YEAR ENDED 12/31 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
-----------------------------------------------
From investment operations:
Net investment income 0.03 0.03 0.03 0.03 0.03
-----------------------------------------------
Total from investment operations 0.03 0.03 0.03 0.03 0.03
Less distributions:
Dividends from net investment income (0.03) (0.03) (0.03) (0.03) (0.03)
-----------------------------------------------
Total distributions (0.03) (0.03) (0.03) (0.03) (0.03)
-----------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
===============================================
Total return (%) 2.70 2.92 3.11 2.92 3.30
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.66 0.66 0.66 1 0.66 0.66
Reductions reflected in above expense ratio 0.19 0.22 0.24 0.24 0.25
Ratio of net investment income to
average net assets 2.67 2.87 3.06 2.89 3.25
Net assets, end of period ($ X 1,000,000) 6,090 5,247 4,424 3,869 3,404
</TABLE>
1 Would have been 0.67% if certain extraordinary expenses had been included.
7 MUNICIPAL MONEY FUND
<PAGE> 53
SCHWAB TICKER SYMBOL
SWEEP SHARES SWCXX
California Municipal
Money Fund
THE FUND SEEKS THE HIGHEST CURRENT INCOME THAT IS CONSISTENT WITH STABILITY OF
CAPITAL AND LIQUIDITY, AND IS EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL INCOME
TAX.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN MONEY MARKET SECURITIES FROM CALIFORNIA
ISSUERS AND FROM MUNICIPAL AGENCIES, U.S. territories and possessions. These may
include general obligation issues, which typically are backed by the issuer's
ability to levy taxes, and revenue issues, which typically are backed by a
stream of revenue from a given source, such as a toll highway or a public water
system. These also may include municipal notes as well as municipal leases,
which municipalities may use to finance construction or to acquire equipment.
Many of the fund's securities will be subject to credit or liquidity
enhancements, which are designed to provide incremental levels of
creditworthiness or liquidity. Some municipal securities have been structured to
resemble variable - and floating - rate securities so that they meet the
requirements for being considered money market instruments.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
The fund intends to invest 100% of its assets in municipal money market
securities, at least 65% of which will be California municipal money market
securities. However, during unusual market conditions, the fund may invest in
taxable money market securities as a temporary defensive measure. In this case,
the fund would not be pursuing its goal.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's
exposure to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security
whose effective maturity is longer than 397 days (approximately 13
months).
CALIFORNIA MUNICIPAL MONEY FUND 8
<PAGE> 54
For California taxpayers, especially those in higher tax brackets who are
seeking DOUBLE TAX-EXEMPT INCOME, this fund may be an appropriate investment.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Some of the
fund's investments, in particular those that have been structured as municipal
money market securities, may have greater risks than securities in non-municipal
money funds. Although the risk of default generally is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA AND
ITS MUNICIPALITIES. The fund's share price and performance could be affected by
local, state and regional factors, including erosion of the tax base and changes
in the economic climate. National governmental actions also could affect
performance.
SOME OF THE FUND'S INCOME COULD BE TAXABLE. If certain types of investments the
fund buys as tax-exempt are later ruled to be taxable, a portion of the fund's
income could be taxable. This risk, although generally considered low, is
somewhat higher for investments that have been structured as municipal money
market securities than for investments in other types of municipal money market
securities. Any defensive investments in taxable securities also could generate
taxable income. Also, some types of municipal securities produce income that is
subject to the federal alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
9 CALIFORNIA MUNICIPAL MONEY FUND
<PAGE> 55
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
[BAR CHART]
ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<S> <C>
91 3.77
92 2.34
93 1.91
94 2.26
95 3.20
96 2.80
97 2.95
98 2.64
99 2.42
</TABLE>
Best quarter: 0.97% Q1 1991
Worst quarter: 0.43% Q1 1994
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION 1
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Schwab California
Municipal Money Fund 2.42 2.80 2.74
</TABLE>
1 Inception: 11/6/1990.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
- ----------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- ----------------------------------------------------------------------------
Management fees 0.36
Distribution (12b-1) fees None
Other expenses 0.47
-----
TOTAL ANNUAL OPERATING EXPENSES 0.83
EXPENSE REDUCTION (0.18)
-----
NET OPERATING EXPENSES* 0.65
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$66 $247 $443 $1,009
</TABLE>
VISIT www.schwab.com/schwabfunds OR CALL TOLL-FREE 800-435-4000 FOR A CURRENT
SEVEN-DAY YIELD.
CALIFORNIA MUNICIPAL MONEY FUND 10
<PAGE> 56
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
SWEEP SHARES YEAR ENDED 12/31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ---------------------------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
------------------------------------------------
From investment operations:
Net investment income 0.02 0.03 0.03 0.03 0.03
Total from investment operations 0.02 0.03 0.03 0.03 0.03
------------------------------------------------
Less distributions:
Dividends from net investment income (0.02) (0.03) (0.03) (0.03) (0.03)
------------------------------------------------
Total distributions (0.02) (0.03) (0.03) (0.03) (0.03)
------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
================================================
Total return (%) 2.42 2.64 2.95 2.80 3.20
RATIOS/SUPPLEMENTAL DATA (%)
- ---------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.65 0.65 0.65 1 0.65 0.65
Reductions reflected in above expense ratio 0.20 0.24 0.26 0.27 0.29
Ratio of net investment income to
average net assets 2.41 2.60 2.91 2.77 3.15
Net assets, end of period ($ X 1,000,000) 3,457 2,611 2,155 1,816 1,578
</TABLE>
1 Would have been 0.66% if certain extraordinary expenses had been included.
11 CALIFORNIA MUNICIPAL MONEY FUND
<PAGE> 57
SCHWAB TICKER SYMBOL
NEW YORK MUNICIPAL MONEY FUND SWEEP SHARES SWNXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME THAT IS CONSISTENT WITH STABILITY OF
CAPITAL AND LIQUIDITY, AND IS EXEMPT FROM FEDERAL AND NEW YORK STATE AND LOCAL
PERSONAL INCOME TAX.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN MONEY MARKET SECURITIES FROM NEW YORK
ISSUERS AND FROM MUNICIPAL AGENCIES, U.S. territories and possessions. These may
include general obligation issues, which typically are backed by the issuer's
ability to levy taxes, and revenue issues, which typically are backed by a
stream of revenue from a given source, such as a toll highway or a public water
system. These also may include municipal notes as well as municipal leases,
which municipalities may use to finance construction or to acquire equipment.
Many of the fund's securities will be subject to credit or liquidity
enhancements, which are designed to provide incremental levels of
creditworthiness or liquidity. Some municipal securities have been structured to
resemble variable - and floating - rate securities so that they meet the
requirements for being considered money market instruments.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
The fund intends to invest 100% of its assets in municipal money market
securities, at least 65% of which will be New York municipal money market
securities. However, during unusual market conditions, the fund may invest in
taxable money market securities as a temporary defensive measure. In this case,
the fund would not be pursuing its goal.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's
exposure to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security
whose effective maturity is longer than 397 days (approximately 13
months).
NEW YORK MUNICIPAL MONEY FUND 12
<PAGE> 58
For New York taxpayers, especially those in higher tax brackets who are seeking
TRIPLE TAX-EXEMPT INCOME, this fund may be an appropriate investment.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Some of the
fund's investments, in particular those that have been structured as municipal
money market securities, may have greater risks than securities in non-municipal
money funds. Although the risk of default generally is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF NEW YORK AND
ITS MUNICIPALITIES. The fund's share price and performance could be affected by
local, state and regional factors, including erosion of the tax base and changes
in the economic climate. National governmental actions also could affect
performance.
SOME OF THE FUND'S INCOME COULD BE TAXABLE. If certain types of investments
the fund buys as tax-exempt are later ruled to be taxable, a portion of the
fund's income could be taxable. This risk, although generally considered low, is
somewhat higher for investments that have been structured as municipal money
market securities than for investments in other types of municipal money market
securities. Any defensive investments in taxable securities also could generate
taxable income. Also, some types of municipal securities produce income that is
subject to the federal alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
13 NEW YORK MUNICIPAL MONEY FUND
<PAGE> 59
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
[BAR CHART]
ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<S> <C>
96 2.74
97 2.96
98 2.78
99 2.59
</TABLE>
BEST QUARTER: 0.78% Q2 1997
WORST QUARTER: 0.55% Q1 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
- ------------------------------------------------------------------------
<S> <C> <C>
Schwab New York
Municipal Money Fund 2.59 2.86
</TABLE>
1 Inception: 2/27/1995.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------
Management fees* 0.38
Distribution (12b-1) fees None
Other expenses 0.50
-----
TOTAL ANNUAL OPERATING EXPENSES 0.88
EXPENSE REDUCTION (0.19)
-----
NET OPERATING EXPENSES* 0.69
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------
<S> <C> <C> <C>
$70 $262 $469 $1,067
</TABLE>
VISIT www.schwab.com/schwabfunds OR CALL TOLL-FREE 800-435-4000 FOR A CURRENT
SEVEN-DAY YIELD.
NEW YORK MUNICIPAL MONEY FUND 14
<PAGE> 60
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
1/1/99- 1/1/98- 1/1/97- 1/1/96- 2/27/95-
SWEEP SHARES 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
- ----------------------------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
-----------------------------------------------
From investment operations:
Net investment income 0.03 0.03 0.03 0.03 0.03
-----------------------------------------------
Total from investment operations 0.03 0.03 0.03 0.03 0.03
Less distributions:
Dividends from net investment income (0.03) (0.03) (0.03) (0.03) (0.03)
-----------------------------------------------
Total distributions (0.03) (0.03) (0.03) (0.03) (0.03)
-----------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
===============================================
Total return (%) 2.59 2.78 2.96 2.74 2.75 1
RATIOS/SUPPLEMENTAL DATA (%)
- -----------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.69 0.69 0.69 3 0.69 0.63 2
Reductions reflected in above expense ratio 0.22 0.28 0.33 0.35 0.41 2
Ratio of net investment income to
average net assets 2.57 2.73 2.93 2.71 3.20 2
Net assets, end of period ($ X 1,000,000) 604 468 357 271 205
</TABLE>
1 Not annualized.
2 Annualized.
3 Would have been 0.70% if certain extraordinary expenses had been included.
15 NEW YORK MUNICIPAL MONEY FUND
<PAGE> 61
SCHWAB TICKER SYMBOL
NEW JERSEY MUNICIPAL MONEY FUND SWEEP SHARES SWJXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME THAT IS CONSISTENT WITH STABILITY OF
CAPITAL AND LIQUIDITY, AND IS EXEMPT FROM FEDERAL AND NEW JERSEY PERSONAL INCOME
TAX.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN MONEY MARKET SECURITIES FROM NEW JERSEY
ISSUERS AND FROM MUNICIPAL AGENCIES, U.S. territories and possessions. These may
include general obligation issues, which typically are backed by the issuer's
ability to levy taxes, and revenue issues, which typically are backed by a
stream of revenue from a given source, such as a toll highway or a public water
system. These also may include municipal notes as well as municipal leases,
which municipalities may use to finance construction or to acquire equipment.
Many of the fund's securities will be subject to credit or liquidity
enhancements, which are designed to provide incremental levels of
creditworthiness or liquidity. Some municipal securities have been structured to
resemble variable-and floating-rate securities so that they meet the
requirements for being considered money market instruments.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
The fund intends to invest 80% of its assets in municipal money market
securities, at least 65% of which will be New Jersey municipal money market
securities. However, during unusual market conditions, the fund may invest in
taxable money market securities as a temporary defensive measure. In this case,
the fund would not be pursuing its goal.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's exposure
to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months).
NEW JERSEY MUNICIPAL MONEY FUND 16
<PAGE> 62
For New Jersey taxpayers, especially those in higher tax brackets who are
seeking DOUBLE TAX-EXEMPT INCOME, this fund may be an appropriate investment.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Some of the
fund's investments, in particular those that have been structured as municipal
money market securities, may have greater risks than securities in non-municipal
money funds. Although the risk of default generally is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF NEW JERSEY AND
ITS MUNICIPALITIES. The fund's share price and performance could be affected by
local, state and regional factors, including erosion of the tax base and changes
in the economic climate. National governmental actions also could affect
performance.
SOME OF THE FUND'S INCOME COULD BE TAXABLE. If certain types of investments the
fund buys as tax-exempt are later ruled to be taxable, a portion of the fund's
income could be taxable. This risk, although generally considered low, is
somewhat higher for investments that have been structured as municipal money
market securities than for investments in other types of municipal money market
securities. Any defensive investments in taxable securities also could generate
taxable income. Also, some types of municipal securities produce income that is
subject to the federal alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
17 NEW JERSEY MUNICIPAL MONEY FUND
<PAGE> 63
PERFORMANCE
Below are a chart and a table showing the fund's performance. These figures
assume that all distributions were reinvested. Keep in mind that future
performance may differ from past performance.
[BAR CHART]
ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<S> <C>
99 2.58
</TABLE>
BEST QUARTER: 0.73% Q4 1999
WORST QUARTER: 0.56% Q1 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
- -----------------------------------------------------------------------------
<S> <C> <C>
Schwab New Jersey
Municipal Money Fund 2.58 2.71
</TABLE>
1 Inception: 2/2/1998.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
- -------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- -------------------------------------------------------------------------
Management fees 0.38
Distribution (12b-1) fees None
Other expenses 0.54
-----
TOTAL ANNUAL OPERATING EXPENSES 0.92
EXPENSE REDUCTION (0.27)
-----
NET OPERATING EXPENSES* 0.65
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------
<S> <C> <C> <C>
$66 $266 $483 $1,107
</TABLE>
VISIT www.schwab.com/schwabfunds OR CALL TOLL-FREE 800-435-4000 FOR A CURRENT
SEVEN-DAY YIELD.
NEW JERSEY MUNICIPAL MONEY FUND 18
<PAGE> 64
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
1/1/99- 2/2/98-
SWEEP SHARES 12/31/99 12/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
PER-SHARE DATA ($)
- --------------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00
------------------
From investment operations:
Net investment income 0.03 0.03
------------------
Total from investment operations 0.03 0.03
Less distributions:
Dividends from net investment income (0.03) (0.03)
------------------
Total distributions (0.03) (0.03)
------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00
==================
Total return (%) 2.58 2.60 1
RATIOS/SUPPLEMENTAL DATA (%)
- -------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.65 0.65 2
Reductions reflected in above expense ratio 0.29 0.48 2
Ratio of net investment income to
average net assets 2.60 2.75 2
Net assets, end of period ($ X 1,000,000) 206 98
</TABLE>
1 Not annualized.
2 Annualized.
19 NEW JERSEY MUNICIPAL MONEY FUND
<PAGE> 65
SCHWAB TICKER SYMBOL
PENNSYLVANIA MUNICIPAL MONEY FUND SWEEP SHARES SWEXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME THAT IS CONSISTENT WITH STABILITY OF
CAPITAL AND LIQUIDITY, AND IS EXEMPT FROM FEDERAL AND PENNSYLVANIA PERSONAL
INCOME TAX.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN MONEY MARKET SECURITIES FROM
PENNSYLVANIA ISSUERS AND FROM MUNICIPAL AGENCIES, U.S. TERRITORIES AND
POSSESSIONS. These may include general obligation issues, which typically are
backed by the issuer's ability to levy taxes, and revenue issues, which
typically are backed by a stream of revenue from a given source, such as a toll
highway or a public water system. These also may include municipal notes as well
as municipal leases, which municipalities may use to finance construction or to
acquire equipment.
Many of the fund's securities will be subject to credit or liquidity
enhancements, which are designed to provide incremental levels of
creditworthiness or liquidity. Some municipal securities have been structured to
resemble variable-and floating-rate securities so that they meet the
requirements for being considered money market instruments.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
The fund intends to invest 80% of its total assets in municipal money market
securities; and at least 65% in Pennsylvania's municipal money market
securities. However, during unusual market conditions, the fund may invest in
taxable money market securities as a temporary defensive measure. In this case,
the fund would not be pursuing its goal.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's exposure
to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months).
PENNSYLVANIA MUNICIPAL MONEY FUND 20
<PAGE> 66
For Pennsylvania taxpayers, especially those in higher tax brackets who are
seeking DOUBLE TAX-EXEMPT INCOME, this fund may be an appropriate investment.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Some of the
fund's investments, in particular those that have been structured as municipal
money market securities, may have greater risks than securities in non-municipal
money funds. Although the risk of default generally is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE COMMONWEALTH OF
PENNSYLVANIA AND ITS MUNICIPALITIES. The fund's share price and performance
could be affected by local, state and regional factors, including erosion of the
tax base and changes in the economic climate. National governmental actions also
could affect performance.
SOME OF THE FUND'S INCOME COULD BE TAXABLE. If certain types of investments
the fund buys as tax-exempt are later ruled to be taxable, a portion of the
fund's income could be taxable. This risk, although generally considered low, is
somewhat higher for investments that have been structured as municipal money
market securities than for investments in other types of municipal money market
securities. Any defensive investments in taxable securities also could generate
taxable income. Also, some types of municipal securities produce income that is
subject to the federal alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
21 PENNSYLVANIA MUNICIPAL MONEY FUND
<PAGE> 67
PERFORMANCE
Below are a chart and a table showing the fund's performance. These figures
assume that all distributions were reinvested. Keep in mind that future
performance may differ from past performance.
[BAR CHART]
ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<S> <C>
99 2.71
</TABLE>
BEST QUARTER: 0.76% Q4 1999
WORST QUARTER: 0.59% Q1 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
- ------------------------------------------------------------------------
<S> <C> <C>
Schwab Pennsylvania
Municipal Money Fund 2.71 2.84
</TABLE>
1 Inception: 2/2/1998.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------
Management fees 0.38
Distribution (12b-1) fees None
Other expenses 0.53
TOTAL ANNUAL OPERATING EXPENSES 0.91
-----
EXPENSE REDUCTION (0.26)
-----
NET OPERATING EXPENSES* 0.65
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$66 $264 $478 $1,096
</TABLE>
VISIT www.schwab.com/schwabfunds OR
CALL TOLL-FREE 800-435-4000 FOR A CURRENT SEVEN-DAY YIELD.
PENNSYLVANIA MUNICIPAL MONEY FUND 22
<PAGE> 68
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
1/1/99- 2/2/98-
Sweep Shares 12/31/99 12/31/98
<S> <C> <C>
PER-SHARE DATA ($)
- -----------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00
-----------------
From investment operations:
Net investment income 0.03 0.03
-----------------
Total from investment operations 0.03 0.03
Less distributions:
Dividends from net investment income (0.03) (0.03)
-----------------
Total distributions (0.03) (0.03)
-----------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00
==================
Total return (%) 2.71 2.72 1
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.65 0.65 2
Reductions reflected in above expense ratio 0.29 0.51 2
Ratio of net investment income to
average net assets 2.68 2.85 2
Net assets, end of period ($ X 1,000,000) 164 122
</TABLE>
1 Not annualized.
2 Annualized.
23 PENNSYLVANIA MUNICIPAL MONEY FUND
<PAGE> 69
SCHWAB TICKER SYMBOL
FLORIDA MUNICIPAL MONEY FUND SWEEP SHARES SWFXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME EXEMPT FROM FEDERAL INCOME TAX THAT IS
CONSISTENT WITH STABILITY OF CAPITAL AND LIQUIDITY, AND ALSO SEEKS TO HAVE ITS
SHARES EXEMPT FROM THE FLORIDA INTANGIBLE TAX.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN MONEY MARKET SECURITIES FROM FLORIDA
ISSUERS AND FROM MUNICIPAL AGENCIES, U.S. territories and possessions. These may
include general obligation issues, which typically are backed by the issuer's
ability to levy taxes, and revenue issues, which typically are backed by a
stream of revenue from a given source, such as a toll highway or a public water
system. These also may include municipal notes as well as municipal leases,
which municipalities may use to finance construction or to acquire equipment.
Many of the fund's securities will be subject to credit or liquidity
enhancements, which are designed to provide incremental levels of
creditworthiness or liquidity. Some municipal securities have been structured to
resemble variable - and floating - rate securities so that they meet the
requirements for being considered money market instruments.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
The fund intends to invest 80% of its total assets in municipal money market
securities; and at least 65% in Florida municipal money market securities.
However, during unusual market conditions, the fund may invest in taxable money
market securities as a temporary defensive measure. In this case, the fund would
not be pursuing its goal.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - quality: money funds must invest exclusively in high-quality securities
(generally those that are in the top two tiers of credit quality).
- - Diversification: requirements for diversification limit the fund's exposure
to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months).
FLORIDA MUNICIPAL MONEY FUND 24
<PAGE> 70
For Florida taxpayers, especially those in higher tax brackets who are seeking
TAX-EXEMPT INCOME, this fund may be an appropriate investment.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Some of the
fund's investments, in particular those that have been structured as municipal
money market securities, may have greater risks than securities in non-municipal
money funds. Although the risk of default generally is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF FLORIDA AND
ITS MUNICIPALITIES. The fund's share price and performance could be affected by
local, state and regional factors, including erosion of the tax base and changes
in the economic climate. National governmental actions also could affect
performance.
SOME OF THE FUND'S INCOME COULD BE TAXABLE. If certain types of investments
the fund buys as tax-exempt are later ruled to be taxable, a portion of the
fund's income could be taxable. This risk, although generally considered low, is
somewhat higher for investments that have been structured as municipal money
market securities than for investments in other types of municipal money market
securities. Any defensive investments in taxable securities also could generate
taxable income or cause an investment in the fund to be subject to the Florida
Intangibles Tax. Also, some types of municipal securities produce income that is
subject to the federal alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
25 FLORIDA MUNICIPAL MONEY FUND
<PAGE> 71
PERFORMANCE
Below are a chart and a table showing the fund's performance. These figures
assume that all distributions were reinvested. Keep in mind that future
performance may differ from past performance.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR CHART]
<TABLE>
<S> <C>
99 2.78
</TABLE>
BEST QUARTER: 0.78% Q4 1999
WORST QUARTER: 0.60% Q1 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
<S> <C> <C>
Schwab Florida
Municipal Money Fund 2.78 2.88
</TABLE>
1 Inception: 3/18/1998.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
- --------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- --------------------------------------------------------------------------
Management fees 0.38
Distribution (12b-1) fees None
Other expenses 0.51
-----
TOTAL ANNUAL OPERATING EXPENSES 0.89
EXPENSE REDUCTION (0.30)
-----
NET OPERATING EXPENSES* 0.59
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$60 $254 $464 $1,068
</TABLE>
VISIT www.schwab.com/schwabfunds OR CALL TOLL-FREE 800-435-4000 FOR A CURRENT
SEVEN-DAY YIELD.
26 FLORIDA MUNICIPAL MONEY FUND
<PAGE> 72
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
1/1/99- 3/18/98-
SWEEP SHARES 12/31/99 12/31/98
<S> <C> <C>
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00
------------------------
From investment operations:
Net investment income 0.03 0.02
------------------------
Total from investment operations 0.03 0.02
Less distributions:
Dividends from net investment income (0.03) (0.02)
------------------------
Total distributions (0.03) (0.02)
------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00
========================
Total return (%) 2.78 2.37 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.59 0.59 2
Reductions reflected in above expense ratio 0.33 0.41 2
Ratio of net investment income to
average net assets 2.75 2.95 2
Net assets, end of period ($ X 1,000,000) 1,215 1,016
</TABLE>
1 Not annualized.
2 Annualized.
27 FLORIDA MUNICIPAL MONEY FUND
<PAGE> 73
FUND MANAGEMENT
The funds' INVESTMENT
ADVISER, Charles Schwab
Investment Management,
Inc., has more than $107
billion under management.
THE INVESTMENT ADVISER for the Schwab Municipal Money Funds is Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.
Founded in 1989, the firm today serves as investment adviser for all of the
SchwabFunds.(R) The firm manages assets for more than 5 million shareholder
accounts. (All figures on this page are as of 12/31/1999).
As the investment adviser, the firm oversees the asset management and
administration of the Schwab Municipal Money Funds. As compensation for these
services, the firm receives a management fee from each fund. For the 12 months
ended 12/31/1999, these fees were 0.18% for the Schwab Municipal Money Fund,
0.17% for the Schwab California Municipal Money Fund, 0.19% for the Schwab New
York Municipal Money Fund, 0.11% for the Schwab New Jersey Municipal Money Fund,
0.11% for the Schwab Pennsylvania Municipal Money Fund and 0.08% for the Florida
Municipal Fund. These figures, which are expressed as a percentage of each
fund's average daily net assets, represent the actual amounts paid, including
the effects of reductions.
FUND MANAGEMENT 28
<PAGE> 74
INVESTING IN THE FUNDS
As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us.
On the following pages, you will find information on BUYING, SELLING AND
EXCHANGING shares using the method that is most CONVENIENT for you. You also
will see how to choose a distribution option for your investment. Helpful
information on TAXES is included as well.
29 INVESTING IN THE FUNDS
<PAGE> 75
BUYING SHARES
The information on these pages outlines how Schwab brokerage account investors
can place "good orders" to buy, sell and exchange shares of the funds.
These funds are designed for use in conjunction with a Schwab brokerage account.
Different types of Schwab brokerage accounts are available, with varying account
opening and balance requirements.
When you designate one of these funds as the "primary fund" on your Schwab
brokerage account, your uninvested cash balances will be invested automatically
in that fund, according to the terms and conditions of your account agreement.
Similarly, when you use your account to purchase other investments or make
payments, shares of your primary fund will be sold automatically to cover these
transactions.
For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
Buying shares through direct orders
In addition to automatic sweep purchases, it is possible to buy shares of a fund
by placing a direct order, as you would with any other Schwab mutual fund.
Each fund's minimum for initial direct investments is $10,000 ($5,000 for
custodial accounts). The minimum additional direct investment is $1,000.
For initial direct purchases, you'll need to choose whether you want your
dividends reinvested or paid to you. If you don't indicate a choice, your
dividends will be reinvested.
Place direct orders using any of the methods described at right.
Municipal money funds are not appropriate investments for IRAs and other
tax-differed accounts. Please consult with your tax advisor about your
situation.
INVESTING IN THE FUNDS 30
<PAGE> 76
SELLING/EXCHANGING SHARES
When selling or exchanging shares, please be aware of the following policies:
- - A fund may take up to seven days to pay sale proceeds.
- - If you are selling shares that were recently purchased by check, the proceeds
may be delayed until the check for purchase clears; this may take up to 15
days from the date of purchase.
- - Exchange orders are limited to other Schwab Sweep Investments(R) and must
meet the minimum investment and other requirements for the fund and share
class into which you are exchanging.
- - You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.
- - You will need to keep at least $100 in any fund account you are not closing.
You may place direct orders to sell shares using any of the methods described
below. For automatic sweep sales, see your account agreement.
Methods for placing direct orders
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
SCHWABLINK
Investment professionals should follow the transaction instructions in the
SchwabLink manual; for technical assistance, call 800-367-5198.
MAIL
Write to SchwabFunds(R) at:
P.O. Box 7575
San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab branch office.
When placing orders
With every direct order to buy, sell or exchange shares you will need to include
the following information:
- - Your name
- - Your account number (for SchwabLink transactions, include the master account
and subaccount numbers)
- - The name and share class of the fund whose shares you want to buy or sell
- - The dollar amount you would like to buy, sell or exchange
- - For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer
- - When selling shares, how you would like to receive the proceeds
Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.
31 INVESTING IN THE FUNDS
<PAGE> 77
TRANSACTION POLICIES
The funds are open for business each day that both the New York Stock Exchange
(NYSE) and the Federal Reserve Bank of New York are open. The funds calculate
their share prices twice each business day, first at 10 a.m. Eastern time and
again after the close of the NYSE (generally 4 p.m. Eastern time). A fund's
share price is its net asset value per share, or NAV, which is the fund's net
assets divided by the number of its shares outstanding. The funds seek to
maintain a stable NAV of $1.
Orders that are received in good order are executed at the next NAV to be
calculated. However, phone orders received after 8 p.m. Eastern time will be
executed at the next day's closing NAV, not at the morning NAV. Orders to buy
shares that are accepted prior to the morning NAV calculation generally receive
that day's dividend. Orders to buy that are accepted after the morning NAV but
prior to the closing NAV generally will receive the next day's dividend. Shares
sold or exchanged at the morning NAV generally don't receive that day's
dividend, but those sold or exchanged at the closing NAV generally do.
The funds value their investment holdings on the basis of amortized cost (cost
plus any discount, or minus any premium, accrued since purchase). Most money
market funds use this method to calculate NAV.
The funds and Schwab reserve certain rights, including the following:
- - To automatically redeem your shares if the account they are held in is closed
for any reason or your balance falls below the minimum for the fund as a
result of selling or exchanging your shares
- - To modify or terminate the exchange privilege upon 60 days' written notice to
shareholders
- - To refuse any purchase or exchange order
- - To change or waive a fund's investment minimums
- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC
- - To withdraw or suspend any part of the offering made by this prospectus
INVESTING IN THE FUNDS 32
<PAGE> 78
DIVIDENDS AND TAXES
Any investment in the fund typically involves several tax considerations. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in the fund. You also can
visit the Internal Revenue Service web site at www.irs.gov.
As a shareholder, you are entitled to your share of the dividends your fund
earns. Each fund distributes to its shareholders substantially all of its net
investment income. Each fund declares a dividend every business day, based on
its determination of its net investment income. The funds pay their dividends on
the 15th of every month (or next business day, if the 15th is not a business
day), except that in December dividends are paid on the last business day of the
month. If your daily dividend is less than $.01, you may not receive a dividend
payment. The funds do not expect to pay any capital gain distributions.
Some funds may have tax consequences. Municipal Money Fund's dividends typically
are free from federal income tax, but are subject to any state and local
personal income taxes. Dividends from state-specific funds typically are free
from federal, state and local personal income taxes. Shares of the Florida
Municipal Money Fund are intended to be exempt from the Florida intangible tax.
Taxable income dividends generally are taxable in the tax year in which they are
declared, whether you reinvest them or take them in cash.
While interest from municipal securities generally is free from federal income
tax, some types of securities produce income that is subject to the federal
alternative minimum tax (AMT). To the extent that a fund invests in these
securities, shareholders who are subject to the AMT may have to pay this tax on
some or all dividends received from that fund.
At the beginning of every year, the funds provide shareholders with information
detailing the tax status of any dividends the fund declared during the previous
calendar year. Schwab brokerage account customers also receive information on
dividends and transactions in their monthly account statements.
33 INVESTING IN THE FUNDS
<PAGE> 79
NOTES
<PAGE> 80
NOTES
<PAGE> 81
TO LEARN MORE
This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the SEC's Public Reference Room
or by computer using the SEC's EDGAR data base at www.sec.gov.
SEC File Number
Schwab Municipal Money Funds --
Sweep Investments(TM) 811-5954
Securities and Exchange Commission
Washington, D.C. 20549-0102
800-SEC-0330 (Public Reference Section)
202-942-8090
www.sec.gov
[email protected]
SchwabFunds
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
www.schwab.com/schwabfunds
MKT3851-1FLT
SCHWAB
MUNICIPAL MONEY FUNDS
SWEEP INVESTMENTS(TM)
PROSPECTUS
April 30, 2000
[CHARLES SCHWAB LOGO]
<PAGE> 82
SCHWAB
VALUE ADVANTAGE
INVESTMENTS(R)
PROSPECTUS
April 30, 2000
SCHWAB VALUE ADVANTAGE MONEY FUND(R)
SCHWAB MUNICIPAL MONEY FUND
SCHWAB CALIFORNIA MUNICIPAL
MONEY FUND
SCHWAB NEW YORK MUNICIPAL
MONEY FUND
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
CHARLES SCHWAB
<PAGE> 83
SCHWAB
VALUE ADVANTAGE
INVESTMENTS(R)
ABOUT THE FUNDS
4 Schwab Value Advantage
Money Fund(R)
8 Schwab Municipal Money Fund
12 Schwab California Municipal Money Fund
16 Schwab New York Municipal Money Fund
20 Fund Management
INVESTING IN THE FUNDS
22 Buying Shares
23 Selling/Exchanging Shares
24 Transaction Policies
25 Dividends and Taxes
<PAGE> 84
ABOUT THE FUNDS
The Schwab Value Advantage Investments(R) seek to provide HIGHER CURRENT YIELDS
while offering the LIQUIDITY AND STABILITY traditionally associated with money
market mutual funds.
The Schwab Value Advantage Investments are designed to provide HIGHER YIELDS
than Sweep Investments. In exchange for LESS FREQUENT ACCESS and LARGER MINIMUM
INVESTMENTS, they offer potentially lower fund operating expenses.
Three of the funds offer income that is free from federal income tax, and two of
these funds also offer income that is TAX-FREE for residents of California and
New York.
<PAGE> 85
SCHWAB
VALUE ADVANTAGE
MONEY FUND(R)
TICKER SYMBOL
INVESTOR SHARES: SWVXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME CONSISTENT WITH STABILITY OF CAPITAL
AND LIQUIDITY.
STRATEGY
To pursue its goal, the fund invests in high-quality short-term money market
investments issued by U.S. and foreign issuers, such as:
- - commercial paper, including asset-backed commercial paper
- - certificates of deposit
- - variable- and floating-rate debt securities
- - bank notes
- - repurchase agreements
All of these investments must be denominated in U.S. dollars, including those
that are issued by foreign issuers.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
MONEY FUND
REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's exposure
to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months).
VALUE ADVANTAGE MONEY FUND(R) 4
<PAGE> 86
THIS FUND IS APPROPRIATE FOR INVESTORS INTERESTED IN HIGH MONEY MARKET RETURNS.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although
the risk of default generally is considered unlikely (even among foreign
investments, which carry additional risks), any default on the part of a
portfolio investment could cause the fund's share price or yield to fall. The
additional risks of foreign investments are due to reasons ranging from a lack
of issuer information to the risk of political uncertainties.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
5 VALUE ADVANTAGE MONEY FUND(R)
<PAGE> 87
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<CAPTION>
93 94 95 96 97 98 99
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3.02 4.09 5.80 5.26 5.40 5.35 5.01
</TABLE>
BEST QUARTER: 1.45% Q2 1995
WORST QUARTER: 0.72% Q2 1993
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION(1)
- -----------------------------------------------------------
<S> <C> <C> <C>
Schwab Value Advantage
Money Fund 5.01 5.36 4.73
</TABLE>
1 Inception: 4/30/1992.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ---------------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- ---------------------------------------------------------------
Management fees 0.33
Distribution (12b-1) fees None
Other expenses 0.26
----
Total annual operating expenses 0.59
EXPENSE REDUCTION (0.19)
NET OPERATING EXPENSES(*) 0.40
----
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------
<S> <C> <C> <C>
$41 $170 $310 $720
</TABLE>
Visit WWW.SCHWAB.COM/SCHWABFUNDS or call toll-free 800-435-4000 for a current
seven-day yield.
VALUE ADVANTAGE MONEY FUND(R) 6
<PAGE> 88
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
YEAR ENDED 12/31 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
From investment operations:
Net investment income 0.05 0.05 0.05 0.05 0.06
-----------------------------------------------
Total from investment operations 0.05 0.05 0.05 0.05 0.06
Less distributions:
Dividends from net investment income (0.05) (0.05) (0.05) (0.05) (0.06)
-----------------------------------------------
Total distributions (0.05) (0.05) (0.05) (0.05) (0.06)
-----------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
-----------------------------------------------
Total return (%) 5.01 5.35 5.40 5.26 5.80
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.40 0.40 0.40 0.40 0.40
Reductions reflected in above expense ratio 0.21 0.27 0.29 0.30 0.32
Ratio of net investment income to
average net assets 4.91 5.21 5.28 5.14 5.63
Net assets, end of period ($ x 1,000,000) 27,265 22,196 13,662 10,477 6,924
</TABLE>
7 VALUE ADVANTAGE MONEY FUND(R)
<PAGE> 89
SCHWAB
MUNICIPAL MONEY FUND
TICKER SYMBOL
VALUE ADVANTAGE SHARES:
SWTXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME THAT IS CONSISTENT WITH STABILITY OF
CAPITAL AND LIQUIDITY, AND IS EXEMPT FROM FEDERAL INCOME TAX.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN MUNICIPAL MONEY MARKET SECURITIES, from
state issuers around the country and from municipal agencies, U.S. territories
and possessions. These may include general obligation issues, which typically
are backed by the issuer's ability to levy taxes, and revenue issues, which
typically are backed by a stream of revenue from a given source, such as a toll
highway or a public water system. These also may include municipal notes as well
as municipal leases, which municipalities may use to finance construction or to
acquire equipment.
Many of the fund's securities will be subject to credit or liquidity
enhancements, which are designed to provide incremental levels of
creditworthiness or liquidity. Some municipal securities have been structured to
resemble variable - and floating - rate securities so that they meet the
requirements for being considered money market instruments.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
The fund intends to invest 100% of its assets in municipal money market
securities. However, during unusual market conditions, the fund may invest in
taxable money market securities as a temporary defensive measure. In this case,
the fund would not be pursuing its goal.
MONEY FUND
REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's exposure
to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months).
MUNICIPAL MONEY FUND 8
<PAGE> 90
THIS FUND IS DESIGNED FOR INDIVIDUALS IN HIGHER TAX BRACKETS WHO ARE SEEKING
TAX-EXEMPT INCOME.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Some of the
fund's investments, in particular those that have been structured as municipal
money market securities, may have greater risks than securities in non-municipal
money funds. Although the risk of default generally is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
SOME OF THE FUND'S INCOME COULD BE TAXABLE. If certain types of investments the
fund buys as tax-exempt are later ruled to be taxable, a portion of the fund's
income could be taxable. This risk, although generally considered low, is
somewhat higher for investments that have been structured as municipal money
market securities than for investments in other types of municipal money market
securities. Any defensive investments in taxable securities also could generate
taxable income. Also, some types of municipal securities produce income that is
subject to the federal alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
9 MUNICIPAL MONEY FUND
<PAGE> 91
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<CAPTION>
96 97 98 99
- --------------------------------------
<S> <C> <C> <C>
3.14 3.32 3.14 2.91
</TABLE>
BEST QUARTER: 0.87% Q2 1997
WORST QUARTER: 0.64% Q1 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
- --------------------------------------------------------
<S> <C> <C>
Schwab Municipal
Money Fund 2.91 3.17
</TABLE>
1 Inception: 7/7/1995.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- -------------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- -------------------------------------------------------------
Management fees 0.35
Distribution (12b-1) fees None
Other expenses 0.28
----
Total annual operating expenses 0.63
EXPENSE REDUCTION (0.18)
----
NET OPERATING EXPENSES * 0.45
====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------
<S> <C> <C> <C>
$46 $184 $333 $769
</TABLE>
Visit www.schwab.com/schwabfunds or call toll-free 800-435-4000 for a current
seven-day yield.
MUNICIPAL MONEY FUND 10
<PAGE> 92
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
1/1/99- 1/1/98- 1/1/97- 1/1/96- 7/7/95-
VALUE ADVANTAGE SHARES 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- --------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD 1.00 1.00 1.00 1.00 1.00
------------------------------------------------------
From investment operations:
Net investment income 0.03 0.03 0.03 0.03 0.02
------------------------------------------------------
Total from investment operations 0.03 0.03 0.03 0.03 0.02
Less distributions:
Dividends from net investment income (0.03) (0.03) (0.03) (0.03) (0.02)
------------------------------------------------------
Total distributions (0.03) (0.03) (0.03) (0.03) (0.02)
------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
======================================================
Total return (%) 2.91 3.14 3.32 3.14 1.68 1
RATIOS/SUPPLEMENTAL DATA (%)
- --------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.45 0.45 0.45 3 0.45 0.45 2
Reductions reflected in above expense ratio 0.20 0.24 0.27 0.30 0.50 2
Ratio of net investment income to
average net assets 2.89 3.08 3.29 3.10 3.50 2
Net assets, end of period ($ x 1,000,000) 2,270 1,620 1,085 608 161
</TABLE>
1 Not annualized.
2 Annualized.
3 Would have been 0.46% if certain extraordinary expenses had been included.
11 MUNICIPAL MONEY FUND
<PAGE> 93
SCHWAB
CALIFORNIA MUNICIPAL
MONEY FUND
TICKER SYMBOL
VALUE ADVANTAGE SHARES:
SWKXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME THAT IS CONSISTENT WITH STABILITY OF
CAPITAL AND LIQUIDITY, AND IS EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL INCOME
TAX.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN MONEY MARKET SECURITIES FROM CALIFORNIA
ISSUERS AND FROM MUNICIPAL AGENCIES, U.S. TERRITORIES AND POSSESSIONS. These may
include general obligation issues, which typically are backed by the issuer's
ability to levy taxes, and revenue issues, which typically are backed by a
stream of revenue from a given source, such as a toll highway or a public water
system. These also may include municipal notes as well as municipal leases,
which municipalities may use to finance construction or to acquire equipment.
Many of the fund's securities will be subject to credit or liquidity
enhancements, which are designed to provide incremental levels of
creditworthiness or liquidity. Some municipal securities have been structured to
resemble variable- and floating-rate securities so that they meet the
requirements for being considered money market instruments.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
The fund intends to invest 100% of its assets in municipal money market
securities, at least 65% of which will be California municipal money market
securities. However, during unusual market conditions, the fund may invest in
taxable money market securities as a temporary defensive measure. In this case,
the fund would not be pursuing its goal.
MONEY FUND
REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's exposure
to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months).
CALIFORNIA MUNICIPAL MONEY FUND 12
<PAGE> 94
FOR CALIFORNIA TAXPAYERS, ESPECIALLY THOSE IN HIGHER TAX BRACKETS WHO ARE
SEEKING DOUBLE TAX-EXEMPT INCOME, THIS FUND MAY BE AN APPROPRIATE INVESTMENT.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Some of the
fund's investments, in particular those that have been structured as municipal
money market securities, may have greater risks than securities in non-municipal
money funds. Although the risk of default generally is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA AND
ITS MUNICIPALITIES. The fund's share price and performance could be affected by
local, state and regional factors, including erosion of the tax base and changes
in the economic climate. National governmental actions also could affect
performance.
SOME OF THE FUND'S INCOME COULD BE TAXABLE. If certain types of investments the
fund buys as tax-exempt are later ruled to be taxable, a portion of the fund's
income could be taxable. This risk, although generally considered low, is
somewhat higher for investments that have been structured as municipal money
market securities than for investments in other types of municipal money market
securities. Any defensive investments in taxable securities also could generate
taxable income. Also, some types of municipal securities produce income that is
subject to the federal alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
13 CALIFORNIA MUNICIPAL MONEY FUND
<PAGE> 95
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
Annual total returns (%) as of 12/31
<TABLE>
<CAPTION>
96 97 98 99
- -----------------------------------
<S> <C> <C> <C>
3.01 3.15 2.84 2.62
</TABLE>
BEST QUARTER: 0.83% Q2 1997
WORST QUARTER: 0.56% Q1 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
- ---------------------------------------------------------
<S> <C> <C>
Schwab California
Municipal Money Fund 2.62 2.94
</TABLE>
1 Inception: 10/3/1995.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- ----------------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% of average net assets)
- ----------------------------------------------------------------
Management fees 0.36
Distribution (12b-1) fees None
Other expenses 0.27
-----
TOTAL ANNUAL OPERATING EXPENSES 0.63
EXPENSE REDUCTION (0.18)
-----
NET OPERATING EXPENSES* 0.45
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------
<S> <C> <C> <C>
$46 $184 $333 $769
</TABLE>
Visit www.schwab.com/schwabfunds or call toll-free 800-435-4000 for a current
seven-day yield.
CALIFORNIA MUNICIPAL MONEY FUND 14
<PAGE> 96
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
1/1/99- 1/1/98- 1/1/97- 1/1/96- 10/3/95-
VALUE ADVANTAGE SHARES 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
-------------------------------------------------------------
From investment operations:
Net investment income 0.03 0.03 0.03 0.03 0.01
Total from investment operations 0.03 0.03 0.03 0.03 0.01
Less distributions:
Dividends from net investment income (0.03) (0.03) (0.03) (0.03) (0.01)
-------------------------------------------------------------
Total distributions (0.03) (0.03) (0.03) (0.03) (0.01)
-------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
=============================================================
Total return (%) 2.62 2.84 3.15 3.01 0.84 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.45 0.45 0.45 3 0.45 0.45 2
Reductions reflected in above expense ratio 0.20 0.25 0.27 0.32 0.59 2
Ratio of net investment income to
average net assets 2.60 2.79 3.12 2.98 3.48 2
Net assets, end of period ($ x 1,000,000) 1,604 1,359 937 507 108
</TABLE>
1 Not annualized.
2 Annualized.
3 Would have been 0.46% if certain extraordinary expenses had been included.
15 CALIFORNIA MUNICIPAL MONEY FUND
<PAGE> 97
SCHWAB
NEW YORK MUNICIPAL
MONEY FUND
TICKER SYMBOL
VALUE ADVANTAGE SHARES:
SWYXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME THAT IS CONSISTENT WITH STABILITY OF
CAPITAL AND LIQUIDITY, AND IS EXEMPT FROM FEDERAL AND NEW YORK STATE AND LOCAL
PERSONAL INCOME TAX.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN MONEY MARKET SECURITIES FROM NEW YORK
ISSUERS AND FROM MUNICIPAL AGENCIES, U.S. TERRITORIES AND POSSESSIONS. These may
include general obligation issues, which typically are backed by the issuer's
ability to levy taxes, and revenue issues, which typically are backed by a
stream of revenue from a given source, such as a toll highway or a public water
system. These also may include municipal notes as well as municipal leases,
which municipalities may use to finance construction or to acquire equipment.
Many of the fund's securities will be subject to credit or liquidity
enhancements, which are designed to provide incremental levels of
creditworthiness or liquidity. Some municipal securities have been structured to
resemble variable - and floating-rate securities so that they meet the
requirements for being considered money market instruments.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Some of
these policies may be stricter than the federal regulations that apply to all
money funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
The fund intends to invest 100% of its assets in municipal money market
securities, at least 65% of which will be New York municipal money market
securities. However, during unusual market conditions, the fund may invest in
taxable money market securities as a temporary defensive measure. In this case,
the fund would not be pursuing its goal.
MONEY FUND
REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's exposure
to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security whose
effective maturity is longer than 397 days (approximately 13 months).
NEW YORK MUNICIPAL MONEY FUND 16
<PAGE> 98
FOR NEW YORK TAXPAYERS, ESPECIALLY THOSE IN HIGHER TAX BRACKETS WHO ARE SEEKING
TRIPLE TAX-EXEMPT INCOME, THIS FUND MAY BE AN APPROPRIATE INVESTMENT.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Some of the
fund's investments, in particular those that have been structured as municipal
money market securities, may have greater risks than securities in non-municipal
money funds. Although the risk of default generally is considered unlikely, any
default on the part of a portfolio investment could cause the fund's share price
or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF NEW YORK AND
ITS MUNICIPALITIES. The fund's share price and performance could be affected by
local, state and regional factors, including erosion of the tax base and changes
in the economic climate. National governmental actions also could affect
performance.
SOME OF THE FUND'S INCOME COULD BE TAXABLE. If certain types of investments the
fund buys as tax-exempt are later ruled to be taxable, a portion of the fund's
income could be taxable. This risk, although generally considered low, is
somewhat higher for investments that have been structured as municipal money
market securities than for investments in other types of municipal money market
securities. Any defensive investments in taxable securities also could generate
taxable income. Also, some types of municipal securities produce income that is
subject to the federal alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
17 NEW YORK MUNICIPAL MONEY FUND
<PAGE> 99
PERFORMANCE
Below are a chart and table showing how the fund's performance has varied from
year to year and how it averages out over time. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
<TABLE>
<CAPTION>
96 97 98 99
- ------------------------------------------
<S> <C> <C> <C>
2.99 3.21 3.03 2.83
</TABLE>
BEST QUARTER: 0.84% Q2 1997
WORST QUARTER: 0.61% Q1 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
- ----------------------------------------------------------
<S> <C> <C>
Schwab New York
Municipal Money Fund 2.83 3.05
</TABLE>
1 Inception: 7/7/1995.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
- -----------------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees 0.38
Distribution (12b-1) fees None
Other expenses 0.30
----
Total annual operating expenses 0.68
EXPENSE REDUCTION (0.23)
----
NET OPERATING EXPENSES(*) 0.45
====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 4/30/2001 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------
<S> <C> <C> <C>
$46 $194 $356 $825
</TABLE>
Visit WWW.SCHWAB.COM/SCHWABFUNDS or call toll-free 800-435-4000 for a current
seven-day yield.
New York Municipal Money Fund 18
<PAGE> 100
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
1/1/99- 1/1/98- 1/1/97- 1/1/96- 7/7/95-
VALUE ADVANTAGE SHARES 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 1.00 1.00 1.00 1.00 1.00
---------------------------------------------------------
From investment operations:
Net investment income 0.03 0.03 0.03 0.03 0.02
---------------------------------------------------------
Total from investment operations 0.03 0.03 0.03 0.03 0.02
Less distributions:
Dividends from net investment income (0.03) (0.03) (0.03) (0.03) (0.02)
---------------------------------------------------------
Total distributions (0.03) (0.03) (0.03) (0.03) (0.02)
---------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00 1.00 1.00 1.00
---------------------------------------------------------
Total return (%) 2.83 3.03 3.21 2.99 1.62 1
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.45 0.45 0.45 3 0.45 0.45 2
Reductions reflected in above expense ratio 0.26 0.33 0.40 0.56 1.36 2
Ratio of net investment income to
average net assets 2.81 2.96 3.18 2.98 3.42 2
Net assets, end of period ($ x 1,000,000) 296 238 126 67 15
</TABLE>
1 Not annualized.
2 Annualized.
3 Would have been 0.46% if certain extraordinary expenses had been included.
19 NEW YORK MUNICIPAL MONEY FUND
<PAGE> 101
FUND MANAGEMENT
THE FUNDS' INVESTMENT ADVISER, CHARLES SCHWAB INVESTMENT MANAGEMENT, INC., HAS
MORE THAN $107 BILLION UNDER MANAGEMENT.
THE INVESTMENT ADVISER for the Schwab Value Advantage Investments(R) is Charles
Schwab Investment Management, Inc., 101 Montgomery Street, San Francisco, CA
94104. Founded in 1989, the firm today serves as investment adviser for all of
the SchwabFunds.(R) The firm manages assets for more than 5 million shareholder
accounts. (All figures on this page are as of 12/31/1999).
As the investment adviser, the firm oversees the asset management and
administration of the Schwab Value Advantage Investments. As compensation for
these services, the firm receives a management fee from each fund. For the 12
months ended 12/31/1999, these fees were 0.14% for the Schwab Value Advantage
Money Fund, 0.18% for the Schwab Municipal Money Fund, 0.17% for the Schwab
California Municipal Money Fund and 0.19% for the Schwab New York Municipal
Money Fund. These figures, which are expressed as a percentage of each fund's
average daily net assets, represent the actual amounts paid, including the
effects of reductions.
FUND MANAGEMENT 20
<PAGE> 102
INVESTING IN THE FUNDS
AS A SCHWABFUNDS(R) INVESTOR, YOU HAVE A NUMBER OF WAYS TO DO BUSINESS WITH US.
On the following pages, you will find information on BUYING, SELLING AND
EXCHANGING shares using the method that is most CONVENIENT for you. You also
will see how to choose a distribution option for your investment. Helpful
information on TAXES is included as well.
21 INVESTING IN THE FUNDS
<PAGE> 103
BUYING SHARES
Shares of the funds may be purchased through a Schwab brokerage account or
through certain third-party investment providers, such as other financial
institutions, investment professionals and workplace retirement plans.
The information on these pages outlines how Schwab brokerage account investors
can place "good orders" to buy, sell and exchange shares of the funds. If you
are investing through a third-party investment provider, some of the
instructions, minimums and policies may be different. Some investment providers
may charge transaction or other fees. Contact your investment provider for more
information.
STEP 1
DECIDE HOW MUCH YOU WANT TO INVEST.
<TABLE>
<CAPTION>
MINIMUM INITIAL MINIMUM ADDITIONAL
INVESTMENT INVESTMENTS MINIMUM BALANCE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
$25,000 $5,000 $20,000
($15,000 for retirement and ($2,000 for retirement and ($15,000 for retirement and
custodial accounts)1 custodial accounts) custodial accounts)
</TABLE>
Step 2
CHOOSE AN OPTION FOR DIVIDENDS. The two options are described below. If you
don't indicate a choice, you will receive the first option.
<TABLE>
<CAPTION>
OPTION FEATURES
- ------------------------------------------------------------------------------------------
<S> <C>
Reinvestment All dividends are invested automatically in shares of your fund.
Cash You receive payment for all dividends.
</TABLE>
Step 3
PLACE YOUR ORDER USING ANY OF THE METHODS DESCRIBED AT RIGHT.
1 Municipal money funds are not appropriate investments for IRAs and other
tax-deferred accounts. Please consult with your tax advisor about your
situation.
SCHWAB ACCOUNTS
Different types of Schwab brokerage accounts are available, with varying account
opening and balance requirements. Some Schwab brokerage account features can
work in tandem with features offered by the funds.
For example, when you sell shares in a fund, the proceeds automatically are paid
to your Schwab brokerage account. From your account, you can use features such
as MoneyLink,(TM) which lets you move money between your brokerage accounts and
bank accounts, and Automatic Investment Plan (AIP), which lets you set up
periodic investments.
For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
INVESTING IN THE FUNDS 22
<PAGE> 104
SELLING/EXCHANGING SHARES
Use any of the methods described below to sell shares of a fund.
When selling or exchanging shares, please be aware of the following policies:
- - A fund may take up to seven days to pay sale proceeds.
- - If you are selling shares that were recently purchased by check, the
proceeds may be delayed until the check for purchase clears; this may take
up to 15 days from the date of purchase.
- - Exchange orders are limited to other Schwab non-Sweep Investments as well
as variable NAV funds and must meet the minimum investment and other
requirements for the fund and share class into which you are exchanging.
- - You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.
- - You may be charged a $5 fee if you sell or exchange less than $5,000 worth
of shares ($2,000 for retirement and custodial accounts) or fail to
maintain the required minimum balance.
METHODS FOR PLACING DIRECT ORDERS
<TABLE>
<CAPTION>
PHONE MAIL
<S> <C>
Call 800-435-4000, day or night (for Write to SchwabFunds(R) at:
TDD service, call 800-345-2550). P.O. Box 7575
San Francisco, CA 94120-7575
INTERNET
www.schwab.com/schwabfunds When selling or exchanging shares,
be sure to include the signature of at
SCHWABLINK least one of the persons whose name
Investment professionals should follow is on the account.
the transaction instructions in the
SchwabLink manual; for technical IN PERSON
assistance, call 800-367-5198. Visit the nearest Charles Schwab
branch office.
</TABLE>
WHEN PLACING ORDERS
With every direct order to buy, sell or exchange shares you will need to include
the following information:
- - Your name or, for internet orders, your account number/"LoginID"
- - Your account number (for SchwabLink transactions, include the master
account and subaccount numbers) or, for internet orders, your confidential
password
- - The name and share class of the fund whose shares you want to buy or sell
- - The dollar amount you would like to buy, sell or exchange
- - For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer
- - When selling shares, how you would like to receive the proceeds
Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.
23 INVESTING IN THE FUNDS
<PAGE> 105
TRANSACTION POLICIES
THE FUNDS ARE OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK EXCHANGE (NYSE)
AND THE FEDERAL RESERVE BANK OF NEW YORK ARE OPEN. The funds calculate their
share prices each business day, after the close of the NYSE (generally 4 p.m.
Eastern time). A fund's share price is its net asset value per share, or NAV,
which is the fund's net assets divided by the number of its shares outstanding.
The funds seek to maintain a stable NAV of $1.
Orders that are received in good order are executed at the next NAV to be
calculated. Orders to buy shares that are accepted prior to the close of the
fund generally will receive the next day's dividend. Orders to sell or exchange
shares that are accepted and executed prior to the close of the fund on a given
day generally will receive that day's dividend.
The funds value their investment holdings on the basis of amortized cost (cost
plus any discount, or minus any premium, accrued since purchase). Most money
market funds use this method to calculate NAV.
SPECIAL CONSIDERATIONS FOR SCHWAB ACCOUNTS
If your Schwab account contains no cash or Sweep Shares of a fund, Schwab may
redeem Value Advantage Shares or Investor Shares of a fund without prior
notification to you to cover the following items:
- - negative balances in your Schwab account as a result of any securities
transactions, including electronic funds transactions
- - payment of your Schwab account checks or Visa debit card charges
- - purchases you have made under an Automatic Investment Plan
Schwab may charge you a fee each time it must redeem shares of a fund under any
of these circumstances.
Schwab will redeem shares from the fund with the highest balance first, unless
the sum of your investments in the funds will not satisfy the total amount due.
In that case, none of your shares in the funds will be redeemed.
THE FUNDS AND SCHWAB RESERVE CERTAIN RIGHTS, including the following:
- - To automatically redeem your shares if the account they are held in is
closed for any reason or your balance falls below the minimum for your
share class as a result of selling or exchanging your shares
- - To modify or terminate the exchange privilege upon 60 days' written notice
to shareholders
- - To refuse any purchase or exchange order, including those that appear to be
associated with short-term trading activities.
- - To change or waive a fund's investment minimums
- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC
- - To withdraw or suspend any part of the offering made by this prospectus
INVESTING IN THE FUNDS 24
<PAGE> 106
DIVIDENDS AND TAXES
ANY INVESTMENT IN THE FUND TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in the fund. You also can
visit the Internal Revenue Service web site at www.irs.gov.
AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS YOUR FUND
EARNS. Each fund distributes to its shareholders substantially all of its net
investment income. Each fund declares a dividend every business day, based on
its determination of its net investment income. The funds pay their dividends on
the 15th of every month (or next business day, if the 15th is not a business
day), except that in December dividends are paid on the last business day of the
month. If your daily dividend is less than $.01, you may not receive a dividend
payment. The funds do not expect to pay any capital gain distributions.
UNLESS YOU ARE INVESTING THROUGH A TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT, FUND
DIVIDENDS FROM VALUE ADVANTAGE MONEY FUND AND MUNICIPAL MONEY FUND GENERALLY
HAVE TAX CONSEQUENCES. Each fund's net investment income is distributed as
dividends. Value Advantage Money Fund dividends are taxable as ordinary income.
Municipal Money Fund's dividends typically are free from federal income tax, but
are subject to any state and local personal income taxes. Dividends from the
state-specific funds typically are free from federal, state and local personal
income taxes. Taxable income dividends generally are taxable in the tax year in
which they are declared, whether you reinvest them or take them in cash.
While interest from municipal securities generally is free from federal income
tax, some types of securities produce income that is subject to the federal
alternative minimum tax (AMT). To the extent that a fund invests in these
securities, shareholders who are subject to the AMT may have to pay this tax on
some or all dividends received from that fund.
AT THE BEGINNING OF EVERY YEAR, THE FUNDS PROVIDE SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DIVIDENDS the fund declared during the previous
calendar year. Schwab brokerage account customers also receive information on
dividends and transactions in their monthly account statements.
25 INVESTING IN THE FUNDS
<PAGE> 107
NOTES
<PAGE> 108
NOTES
<PAGE> 109
TO LEARN MORE
This prospectus contains important information on the funds and should be read
and kept for reference. You also can obtain more information from the following
sources.
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the SEC's Public Reference Room
or by computer using the SEC's EDGAR data base at www.sec.gov.
SEC FILE NUMBER
Schwab Value Advantage
Investments(R) 811-5954
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0102
800-SEC-0330 (Public Reference Section)
202-942-8090
www.sec.gov
[email protected]
SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
WWW.SCHWAB.COM/SCHWABFUNDS
SCHWAB
VALUE ADVANTAGE
INVESTMENTS(R)
PROSPECTUS
April 30, 2000
CHARLES SCHWAB
MKT3852FLT-1
<PAGE> 110
SCHWAB
GOVERNMENT CASH
RESERVES
PROSPECTUS
April 30, 2000
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
[CHARLES SCHWAB LOGO]
<PAGE> 111
SCHWAB
GOVERNMENT
CASH RESERVES
<TABLE>
<CAPTION>
ABOUT THE FUND
<S> <C>
4 Strategy
5 Main Risks
6 Performance
6 Fund Fees and Expenses
7 Financial Highlights
8 Fund Management
INVESTING IN THE FUND
10 Buying and Selling Shares
11 Transaction Policies
12 Dividends and Taxes
</TABLE>
<PAGE> 112
ABOUT THE FUND
<PAGE> 113
SCHWAB
GOVERNMENT CASH
RESERVES
TICKER SYMBOL
SWHXX
THE FUND SEEKS THE HIGHEST CURRENT INCOME CONSISTENT WITH STABILITY OF CAPITAL
AND LIQUIDITY.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN U.S. GOVERNMENT SECURITIES, such as:
- - U.S. Treasury bills, notes and bonds
- - other obligations that are issued or guaranteed by the U.S. government,
its agencies or instrumentalities, including Fannie Maes, Freddie Macs
and Sallie Maes
- - repurchase agreements
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit, maturity and issuer policies. Many of
these policies are stricter than the federal regulations that apply to all money
funds.
The investment adviser's credit research department analyzes and monitors
the securities that the fund owns or is considering buying. The manager may
adjust the fund's holdings or its average maturity based on actual or
anticipated changes in interest rates or credit quality. To preserve its
investors' capital, the fund seeks to maintain a stable $1 share price.
MONEY FUND REGULATIONS
Money market funds in the United States are subject to rules that are designed
to help them maintain a stable share price:
- - Credit quality: money funds must invest exclusively in high-quality
securities (generally those that are in the top two tiers of credit
quality).
- - Diversification: requirements for diversification limit the fund's
exposure to any given issuer.
- - Maturity: money funds must maintain a dollar-weighted average portfolio
maturity of no more than 90 days, and cannot invest in any security
whose effective maturity is longer than 397 days (approximately 13
months).
GOVERNMENT CASH RESERVES 4
<PAGE> 114
This fund is designed as a convenient sweep investment for the Schwab access
(TM) account, and seeks current money market yields while providing an ADDED
MARGIN OF SAFETY through a portfolio of U.S. government securities.
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
will be low.
YOUR INVESTMENT IS NOT A BANK DEPOSIT. An investment in the fund is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency. Although the fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the
fund.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Many of the
U.S. government securities that the fund invests in are not backed by the U.S.
government. Also, any government guarantees on securities the fund owns do not
extend to shares of the fund itself. Although the risk of default with U.S.
government securities is considered unlikely, any default on the part of a
portfolio investment could cause the fund's share price or yield to fall.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S YIELD, and in
unusual circumstances potentially could affect its share price. To the extent
that the manager anticipates interest rate trends imprecisely, the fund's yields
at times could lag those of other money market funds. The fund's emphasis on
quality and stability also could cause it to underperform other money funds,
particularly those that take greater maturity and credit risks.
THE FUND IS NOT DESIGNED TO OFFER CAPITAL APPRECIATION. In exchange for their
emphasis on stability and liquidity, money market investments may offer lower
long-term performance than stock or bond investments.
5 GOVERNMENT CASH RESERVES
<PAGE> 115
PERFORMANCE
Below are a chart and a table showing the fund's performance. These figures
assume that all distributions were reinvested. Keep in mind that future
performance may differ from past performance.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<S> <C>
99 4.28
</TABLE>
BEST QUARTER: 1.17% Q4 1999
WORST QUARTER: 0.98% Q2 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION 1
- ---------------------------------------------------------
<S> <C> <C>
Schwab Government
Cash Reserves 4.28 4.42
</TABLE>
1 Inception: 4/1/1998.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder Fees" are one-time expenses charged to you directly by the fund.
"Annual Operating Expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
- -----------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees 0.38
Distribution (12b-1) fees None
Other expenses* 1.22
----
TOTAL ANNUAL OPERATING EXPENSES 1.60
EXPENSE REDUCTION (0.35)
----
NET OPERATING EXPENSES** 1.25
====
</TABLE>
* Includes transaction services expenses of 0.60%.
** Guaranteed by Schwab and the investment adviser through 4/30/2001. Schwab and
the investment adviser have agreed to further reduce the fund's expenses so
that net operating expenses do not exceed 0.95% through 06/15/2000 (excluding
interest, taxes and certain non-routine expenses).
EXPENSES ON A $10,000 INVESTMENT
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------
<S> <C> <C> <C>
$127 $471 $838 $1,871
</TABLE>
VISIT www.schwab.com/schwabfunds OR CALL TOLL-FREE 800-435-4000 FOR A CURRENT
SEVEN-DAY YIELD.
GOVERNMENT CASH RESERVES 6
<PAGE> 116
FINANCIAL HIGHLIGHTS
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
1/1/99 4/1/98
12/31/99 12/31/98
- -------------------------------------------------------------------------
<S> <C> <C>
PER-SHARE DATA ($)
- -------------------------------------------------------------------------
Net asset value at beginning of period 1.00 1.00
---------------------
From investment operations:
Net investment income 0.04 0.03
---------------------
Total from investment operations 0.04 0.03
Less distributions:
Dividends from net investment income (0.04) (0.03)
---------------------
Total distributions (0.04) (0.03)
---------------------
NET ASSET VALUE AT END OF PERIOD 1.00 1.00
=====================
Total return (%) 4.28 3.46 1
RATIOS/SUPPLEMENTAL DATA (%)
- -------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.95 0.95 2
Reductions reflected in above expense ratio 0.14 0.77 2
Ratio of net investment income to
average net assets 4.34 4.41 2
Net assets, end of period ($ x 1,000,000) 198 25
</TABLE>
1 Not annualized.
2 Annualized.
7 GOVERNMENT CASH RESERVES
<PAGE> 117
FUND MANAGEMENT
The fund's INVESTMENT ADVISER, CHARLES SCHWAB INVESTMENT MANAGEMENT, Inc., has
more than $107 billion under management.
THE INVESTMENT ADVISER for the Schwab Government Cash Reserves is Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, CA 94104.
Founded in 1989, the firm today serves as investment adviser for all of the
SchwabFunds.(R) The firm manages assets for more than 5 million shareholder
accounts. (All figures on this page are as of 12/31/1999).
As the investment adviser, the firm oversees the asset management and
administration of the Schwab Government Cash Reserves. As compensation for these
services, the firm receives a management fee from the fund. For the 12 months
ended 12/31/99, these fees were 0.25% for the fund. This figure, which is
expressed as a percentage of the fund's average daily net assets, represents the
actual amount paid, including the effect of reductions.
FUND MANAGEMENT 8
<PAGE> 118
INVESTING IN THE FUND
As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us.
On the following pages, you will find information on BUYING AND SELLING SHARES
using the method that is most CONVENIENT for you. You also will see how to
choose a distribution option for your investment. Helpful information on TAXES
is included as well.
9 INVESTING IN THE FUND
<PAGE> 119
BUYING AND SELLING SHARES
This fund is designed to be used as the "primary fund" on your Schwab Access(TM)
Account. Uninvested cash balances will be invested automatically in the fund,
according to the terms and conditions of your account agreement. Similarly, when
you use your account to make payments, shares of the fund will be sold
automatically to cover these transactions.
For information on other types of Schwab accounts, call 800-435-4000 or visit
the Schwab web site at www.schwab.com.
SELLING SHARES
For automatic sweep sales, see your account materials. Please be aware of the
following policies:
- - The fund may take up to seven days to pay sale proceeds.
- - If you are selling shares that were recently purchased by check, the proceeds
may be delayed until the check for purchase clears; this may take up to 15
days from the date of purchase.
- - You will need to keep at least $1 in any fund account you are not closing.
DEPOSITS TO YOUR SCHWAB ACCESS ACCOUNT
Schwab provides you several easy ways to deposit money into your account,
including:
Phone
Call 800-435-4000, day or night (for TDD service, call 800-345-2550) to
move money between Schwab accounts or to set up Direct Deposits or Schwab
MoneyLink(R).
Investment Manager
clients contact your Investment Manager
Internet
www.schwab.com to move money between Schwab accounts or to set up Direct
Deposits or Schwab MoneyLink(R)
Mail
Use the mailing labels and deposit slips that come with your checks.
In person
Visit the nearest Charles Schwab branch office.
INVESTING IN THE FUND 10
<PAGE> 120
TRANSACTION POLICIES
THE FUND IS OPEN FOR BUSINESS EACH DAY THAT BOTH THE NEW YORK STOCK EXCHANGE
(NYSE) AND THE FEDERAL RESERVE BANK OF NEW YORK ARE OPEN. The fund calculates
its share price twice each business day, first at 10 a.m. Eastern time and again
after the close of the NYSE (generally 4 p.m. Eastern time). A fund's share
price is its net asset value per share, or NAV, which is the fund's net assets
divided by the number of its shares outstanding. The fund seeks to maintain a
stable NAV of $1.
Orders that are received in good order are executed at the next NAV to be
calculated. However, phone orders received after 8 p.m. Eastern time will be
processed at the next day's closing NAV, not at the morning NAV. Orders to buy
shares that are accepted prior to the morning NAV calculation generally receive
that day's dividend. Orders to buy that are accepted after the morning NAV but
prior to the closing NAV generally will receive the next day's dividend. Shares
sold or exchanged at the morning NAV generally don't receive that day's
dividend, but those sold or exchanged at the closing NAV generally do.
The fund values its investment holdings on the basis of amortized cost (cost
plus any discount, or minus any premium, accrued since purchase). Most money
market funds use this method to calculate NAV.
THE FUND AND SCHWAB RESERVE CERTAIN RIGHTS, including the following:
- - To automatically redeem your shares if the account they are held in is closed
for any reason or your balance falls below the minimum for the fund as a
result of selling your shares
- - To refuse any purchase order
- - To change or waive a fund's investment minimums
- - To suspend the right to sell shares back to the fund, and delay sending
proceeds, during times when trading on the NYSE is restricted or halted, or
otherwise as permitted by the SEC
- - To withdraw or suspend any part of the offering made by this prospectus
11 INVESTING IN THE FUND
<PAGE> 121
DIVIDENDS AND TAXES
ANY INVESTMENT IN THE FUND TYPICALLY INVOLVES SEVERAL TAX CONSIDERATIONS. The
information below is meant as a general summary for U.S. citizens and residents.
Because each person's tax situation is different, you should consult your tax
advisor about the tax implications of your investment in the fund. You also can
visit the Internal Revenue Service web site at www.irs.gov.
AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS THE FUND
EARNS. The fund distributes to its shareholders substantially all of its net
investment income. The fund declares a dividend every business day, based on its
determination of its net investment income. The fund pays its dividends on the
15th of every month (or next business day, if the 15th is not a business day),
except that in December dividends are paid on the last business day of the
month. If your daily dividend is less than $.01, you may not receive a dividend
payment. The fund does not expect to pay any capital gain distributions.
UNLESS YOU ARE INVESTING THROUGH A TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT, YOUR
FUND DIVIDENDS GENERALLY HAVE TAX CONSEQUENCES. The fund's net investment income
is distributed as dividends and is taxable as ordinary income. Income dividends
generally are taxable in the tax year in which they are declared, whether you
reinvest them or take them in cash.
AT THE BEGINNING OF EVERY YEAR, THE FUND PROVIDES SHAREHOLDERS WITH INFORMATION
DETAILING THE TAX STATUS OF ANY DIVIDENDS the fund declared during the previous
calendar year. Schwab Access(TM) Account customers also receive information on
dividends and transactions in their monthly account statements.
INVESTING IN THE FUND 12
<PAGE> 122
NOTES
<PAGE> 123
NOTES
<PAGE> 124
NOTES
<PAGE> 125
TO LEARN MORE
This prospectus contains important information on the fund and should be read
and kept for reference. You also can obtain more information from the following
sources.
SHAREHOLDER REPORTS, which are mailed to current fund investors, discuss recent
performance and portfolio holdings.
The STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. The SAI is incorporated by reference into the prospectus, making it
legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review these materials in person at the SEC's Public Reference Room
or by computer using the SEC's EDGAR database at www.sec.gov.
SEC FILE NUMBER
Schwab Government
Cash Reserves 811-5954
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0102
800-SEC-0330 (Public Reference Section)
202-942-8090
www.sec.gov
[email protected]
SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94120-7575
800-435-4000
www.schwab.com/schwabfunds
MKT3853-1FLT
SCHWAB
GOVERNMENT CASH RESERVES
PROSPECTUS
April 30, 2000
[Charles Schwab Logo]
<PAGE> 126
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB MONEY FUNDS - SWEEP INVESTMENTS(TM)
SCHWAB MONEY MARKET FUND
SCHWAB GOVERNMENT MONEY FUND
SCHWAB U.S. TREASURY MONEY FUND
APRIL 30, 2000
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated April 30, 2000 (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
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES,
RISKS AND LIMITATIONS....................................................................... 2
MANAGEMENT OF THE FUNDS..................................................................... 10
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES......................................... 13
INVESTMENT ADVISORY AND OTHER SERVICES...................................................... 14
BROKERAGE ALLOCATION AND OTHER PRACTICES.................................................... 16
DESCRIPTION OF THE TRUST.................................................................... 17
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES....................................................................... 18
TAXATION.................................................................................... 19
CALCULATION OF PERFORMANCE DATA............................................................. 21
APPENDIX - RATINGS OF INVESTMENT SECURITIES................................................. 23
</TABLE>
1
<PAGE> 127
INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVES
Schwab Money Market Fund seeks maximum current income consistent with stability
of capital.
Schwab Government Money Fund seeks maximum current income consistent with
stability of capital.
Schwab U.S. Treasury Money Fund seeks high current income consistent with
liquidity and stability of capital.
Each fund's investment objective may be changed only by vote of a majority of
its outstanding voting shares. There is no guarantee the funds will achieve
their objectives.
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 a 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 Money Market Fund (a taxable money fund) seeks to achieve its objective
by investing exclusively in high-quality, U.S. dollar-denominated money market
securities, which mature in twelve months or less, including U.S. government
securities and repurchase agreements for these securities.
Schwab Government Money Fund (a taxable money fund) seeks to achieve its
objective by investing exclusively in U.S. government securities, which mature
in twelve months or less, and repurchase agreements for these securities.
Schwab U.S. Treasury Money Fund (a taxable money fund) seeks to achieve its
objective by investing exclusively in U.S. Treasury securities and other
obligations that are backed by the full faith and credit of the U.S.
government.
Each fund's investment strategy is a policy that may be changed only by vote of
a majority of its shareholders.
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<PAGE> 128
INVESTMENT SECURITIES AND RISKS
ASSET-BACKED SECURITIES are securities that are backed by the loans or accounts
receivables of an entity, such as a bank or credit card company. These
securities are obligations which the issuer intends to repay using the assets
backing them (once collected). Therefore, repayment depends largely on the cash
flows generated by the assets backing the securities. The rate of principal
payments on asset-backed securities generally depends on the rate of principal
payments received on the underlying assets, which in turn may be affected by a
variety of economic and other factors. As a result, the yield on any
asset-backed security is difficult to predict with precision, and actual yield
to maturity may be more or less than the anticipated yield to maturity.
Sometimes the credit quality of these securities is limited to the support
provided by the underlying assets, but, in other cases, additional credit
support also may be provided by a third party via a letter of credit or
insurance guarantee. Such credit support falls into two classes: liquidity
protection and protection against ultimate default on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that scheduled payments on
the underlying pool are made in a timely fashion. Protection against ultimate
default ensures payment on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches.
The degree of credit support provided on each issue is based generally on
historical information respecting the level of credit risk associated with such
payments. Delinquency or loss in excess of that anticipated could adversely
affect the return on an investment in an asset-backed security.
Based on the primary characteristics of the various types of asset-backed
securities, for purposes of a fund's concentration policy, the following
asset-backed securities industries have been selected: credit card receivables,
automobile receivables, trade receivables and diversified financial assets. A
fund will limit its investments in each such industry to no more than 25% of its
net assets.
BANKERS' ACCEPTANCES or notes are credit instruments evidencing a bank's
obligation to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. A fund will invest only in bankers' acceptances of
banks that have capital, surplus and undivided profits in excess of $100
million.
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.
CERTIFICATES OF DEPOSIT or time deposits are issued against funds deposited in a
banking institution for a specified period of time at a specified interest rate.
A fund will invest only in certificates of deposit of banks that have capital,
surplus and undivided profits in excess of $100 million.
COMMERCIAL PAPER consists of short-term, promissory notes issued by banks,
corporations and other institutions to finance short-term credit needs. These
securities generally are discounted but
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<PAGE> 129
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. Based on the primary characteristics of non-U.S.
(foreign) banks, the funds have identified each foreign country as a separate
bank industry for purposes of a fund's concentration policy. A fund will limit
its investments in securities issued by foreign banks in each country to no more
than 25% of its net assets.
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.
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 is a diversified mutual fund.
Each fund also follows the regulations set forth by the SEC that dictate the
diversification requirements for money market mutual funds. These requirements
prohibit a taxable money fund from purchasing a security if more that 5% of
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<PAGE> 130
its total assets would be invested in the securities of a single issuer,
although a fund may invest up to 25% of its total assets in the first tier
securities of a single issuer for up to three business days. 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. Foreign entities are not subject to 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). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the converted currencies of each country. The European
Central Bank, all national central banks and all stock exchanges and began
pricing, trading and settling 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 from or to
European countries, thereby making the European market less liquid or more
expensive. All of these factors could affect the value of a fund's investments
and/or increase its expenses. While the investment adviser has taken 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. Pursuant to policies that may be
changed only by vote of a majority of its shareholders, each of the Schwab Money
Market Fund and Schwab U.S. Government Money Fund may not purchase securities
deemed to mature in more than 365 days. For purposes of this policy only, Schwab
Money Market Fund and Schwab U.S. Government Money Fund will calculate maturity
from the security's settlement date.
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
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<PAGE> 131
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.
PROMISSORY NOTES are written agreements committing the maker or issuer to pay
the payee a specified amount either on demand or at a fixed date in the future,
with or without interest. These are sometimes called negotiable notes or
instruments and are subject to credit risk. Bank notes are notes used to
represent obligations issued by banks in large denominations.
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 manager. 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 the board of trustees. For more
information about the ratings assigned by some NRSROs, refer to the Appendix
section of the SAI.
REPURCHASE AGREEMENTS. Repurchase agreements involve a fund buying securities
(usually U.S. government securities) from a seller and simultaneously agreeing
to sell them back at an agreed-upon price (usually higher) and time. There are
risks that losses will result if the seller does not perform as agreed.
Repurchase agreements will be "collateralized" by first tier securities in which
the fund could invest directly. In addition, repurchase agreements
collateralized entirely by U.S. government securities may be deemed to be
collateralized fully pursuant to Rule 2a-7.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. For example, commercial paper and other promissory notes may be
issued under Section 4(2) of the Securities Act of 1933 and may be sold only 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
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<PAGE> 132
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.
STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by the
Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation (FHLMC or FREDDIE MAC), the Student Loan Marketing Association (SLMA
or SALLIE MAE), and the Federal Home Loan Banks (FHLB), are supported by a line
of credit the issuing entity has with the U.S. Treasury. Others are supported
solely by the credit of the issuing agency or instrumentality such as
obligations issued by the Federal Farm Credit Banks Funding Corporation (FFCB).
There can be no assurance that the U.S. government will provide financial
support to U.S. government securities of its agencies and instrumentalities if
it is not obligated to do so under law. Of course U.S. government securities,
including U.S. Treasury securities, are among the safest securities, however,
not unlike other debt securities, they are still sensitive to interest rate
changes, which will cause their yields to fluctuate.
U.S. TREASURY SECURITIES are obligations of the U.S. Treasury and include bills,
notes and bonds. U.S. Treasury securities are backed by the full faith and
credit of the United States Government.
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.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of each fund's outstanding voting shares.
SCHWAB MONEY MARKET FUND AND SCHWAB GOVERNMENT MONEY FUND MAY NOT:
(1) Purchase securities or make investments other than in accordance with
its investment objectives and policies.
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<PAGE> 133
(2) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government, its agencies or instrumentalities)
if, as a result thereof, more than 5% of the value of its assets would
be invested in the securities of such issuer.
(3) Purchase, in the aggregate with all other Schwab Money Funds, more than
10% of any class of securities of any issuer. All debt securities and
all preferred stocks are each considered as one class. (For purposes of
this limitation, the following funds constitute the Schwab Money Funds:
Schwab Money Market Fund, Schwab Government Money Fund, Schwab
Retirement Money Fund and Schwab Institutional Advantage Money Fund.)
(4) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that it reserves the freedom of action to invest up
to 100% of its assets in certificates of deposit or bankers'
acceptances issued by domestic branches of U.S. banks and U.S. branches
of foreign banks (which the fund has determined to be subject to the
same regulation as U.S. banks), or obligations of, or guaranteed by,
the U.S. government, its agencies or instrumentalities in accordance
its investment objective and policies.
(5) Invest more than 5% of its total assets in securities of issuers (other
than obligations of, or guaranteed by, the U.S. government, its
agencies or instrumentalities) that, with their predecessors, have a
record of less than three years of continuous operation.
(6) Enter into repurchase agreements if, as a result thereof, more than 10%
its net assets valued at the time of the transaction would be subject
to repurchase agreements maturing in more than 7-days and invested in
securities restricted as to disposition under the federal securities
laws (except commercial paper issued under Section 4(2) of the
Securities Act of 1933, as amended). Each fund will invest no more than
10% of its net assets in illiquid securities.
(7) Invest more than 5% of its total assets in securities restricted as to
disposition under the federal securities laws (except commercial paper
issued under Section 4(2) of the Securities Act of 1933, as amended).
(8) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the Trust or its investment adviser or the
Sub-Adviser individually own beneficially more than 1/2 of 1% of the
securities of such issuer and together beneficially own more than 5% of
the securities of such issuer.
(9) Invest in commodities or commodity contracts, futures contracts, real
estate or real estate limited partnerships, although it may invest in
securities which are secured by real estate and securities of issuers
which invest or deal in real estate.
(10) Invest for the purpose of exercising control or management of another
issuer.
(11) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of
assets.1
(12) Make loans to others (except through the purchase of debt obligations
or repurchase agreements in accordance with its investment objectives
and policies).
(13) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount up to one-third of the
value of its total assets in order to meet redemption requests without
immediately selling any portfolio securities. The funds will not borrow
for leverage purposes or purchase securities or make investments while
reverse repurchase agreements or borrowings are outstanding. Any
borrowings will not be collateralized. If for any reason the current
value of the total net assets of any fund falls below an amount equal
to three times the amount of indebtedness from money borrowed, such
fund will, within three business days, reduce its indebtedness to the
extent necessary.
- --------
1 See the description of the trustees' deferred compensation plan in the
"Management of the Funds" section of the SAI for an exception to this investment
restriction.
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(14) Write, purchase or sell puts, calls or combinations thereof.
(15) Make short sales of securities, or purchase any securities on margin,
except to obtain such short-term credits as may be necessary for the
clearance of transactions.
(16) Invest in interests in oil, gas, mineral leases or other mineral
exploration or development programs, although it may invest in the
securities of issuers which invest in or sponsor such programs.
(17) Underwrite securities issued by others except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
(18) Issue senior securities as defined in the 1940 Act.
SCHWAB U.S. TREASURY MONEY FUND MAY NOT:
(1) Purchase securities other than obligations issued by the U.S. Treasury
and securities backed by the "full faith and credit" guarantee of the
U.S. government that mature in 397 days or less.1
(2) Make loans to others (except through the purchase of debt obligations).
(3) Issue senior securities as defined in the 1940 Act.
(4) Underwrite securities issued by others, except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
(5) Invest in commodities or in real estate.
(6) Invest for the purpose of exercising control over management of another
company.
(7) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then only in an amount up to one-third of the
value of the Fund's total assets in order to meet redemption requests
without immediately selling any portfolio securities; or pledge its
securities or receivables or transfer or assign or otherwise encumber
them in an amount to exceed 33% of the Fund's net assets to secure
borrowings. The Fund will not borrow for leverage purposes or purchase
securities or make investments while reverse repurchase agreements or
borrowings are outstanding. If for any reason the current value of the
total net assets of the Fund falls below an amount equal to three times
the amount of its indebtedness from money borrowed, the Fund will,
within three business days, reduce its indebtedness to the extent
necessary.
THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.
SCHWAB U.S. TREASURY MONEY FUND MAY NOT:
(1) Invest more than 10% of its net assets in securities which are not
readily marketable, including securities which are restricted as to
disposition; or
(2) Engage in short sales, except for short sales against the box.
- --------
1 See the description of the trustees' deferred compensation plan under
"Management of the Funds" section of the SAI for an exception to this investment
restriction.
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<PAGE> 135
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. and Charles Schwab Investment Management, Inc., are
as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATIONS & AFFILIATIONS
- ------------------ --------- ------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, 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 Vice Chairman and Executive Vice President, The
June 28, 1953 Charles Schwab Corporation; Vice Chairman and
Enterprise President - Financial Products and
Services, Director, Charles Schwab & Co., Inc.;
Chief Executive Officer and Chief Financial
Officer, Director, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Mr. Scheid was
Executive Vice President of Finance for First
Interstate Bancorp and Principal Financial
Officer from 1995 to 1996.
</TABLE>
* This trustee is an "interested person" of the trusts.
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<PAGE> 136
<TABLE>
<S> <C> <C>
Prior to 1994, Mr. Scheid was Chief Financial Officer,
First Interstate Bank of Texas.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive 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 and
management, and investments).
WILLIAM J. KLIPP*1 Trustee From 1991 to 1999, Mr. Klipp was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; President and Chief Operating Officer,
Charles Schwab Investment Management, Inc.
</TABLE>
* This trustee is an "interested person" of the trusts.
1 Mr. Klipp departed Charles Schwab & Co., Inc. in 1999 and is expected to
resign from the Board of Trustees prior to June 1, 2000.
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<PAGE> 137
<TABLE>
<S> <C> <C>
JEREMIAH H. CHAFKIN Executive Vice Executive Vice President, SchwabFunds(R),
May 5, 1959 President and Chief Charles Schwab & Co., Inc.; President and Chief
Operating Officer Operating Officer, Charles Schwab Investment
Management, Inc. Prior to November 1999, Mr.
Chafkin was Senior Managing Director, Bankers
Trust Company.
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.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>
Each of the above-referenced officers and/or trustees also serves in the same
capacity as described for the trust, for Schwab Capital Trust, Schwab
Investments and Schwab Annuity Portfolios. The address of each individual listed
above is 101 Montgomery Street, San Francisco, California 94104.
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 the
fiscal year ended December 31, 1999, concerning compensation of the trustees.
Unless otherwise stated, information is for the fund complex, which included 40
funds as of December 31, 1999.
<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Accrued Compensation from
from each as Part of Fund Fund Complex
Fund Expenses ------------
---- --------
Money Government U.S. Treasury
Market Fund Money Fund Fund
----------- ---------- ----
<S> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 N/A 0
</TABLE>
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<PAGE> 138
<TABLE>
<CAPTION>
Pension or ($)
($) Retirement Total
Name of Trustee Aggregate Compensation Benefits Accrued Compensation from
from each as Part of Fund Fund Complex
Fund Expenses ------------
---- --------
Money Government U.S. Treasury
Market Fund Money Fund Fund
----------- ---------- ----
<S> <C> <C> <C> <C> <C>
Steven L. Scheid 0 0 0 N/A 0
William J. Klipp, 0 0 0 N/A 0
Donald F. Dorward $16,218 $3,558 $3,527 N/A $121,600
Robert G. Holmes $16,218 $3,558 $3,527 N/A $121,600
Donald R. Stephens $16,218 $3,558 $3,527 N/A $121,600
Michael W. Wilsey $14,735 $3,237 $3,206 N/A $111,600
</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 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 3, 2000, 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.
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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 the funds, the investment
adviser is entitled to receive a graduated annual fee payable monthly based 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 the
Schwab Money Market 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, 0.45% of net assets over $1 billion but not in
excess of $3 billion, 0.40% of net assets over $3 billion but not in excess of
$10 billion, 0.37% of such assets over $10 billion but not in excess of $20
billion and 0.34% of such assets over $20 billion.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Schwab Money
Market Fund paid investment and advisory fees of $55,434,000 (fees were reduced
by $23,541,000), $66,955,000 (fees were reduced by $25,922,000) and $87,724,000
(fees were reduced $20,382,000), respectively.
Prior to April 30, 1999, for its advisory and administrative services to the
Schwab Government Money Fund and Schwab U.S. Treasury Money Fund, the investment
adviser was entitled to receive a graduated annual fee, payable monthly, of
0.46% of each fund's average daily net assets of the first $1 billion, 0.41% of
net assets over $1 billion not in excess of $2 billion, and 0.40% of net assets
over $2 billion.
For the fiscal years ended December 31, 1997, 1998 and 1999, Schwab Government
Money Fund paid investment and advisory fees of $5,471,000 (fees were reduced by
$3,208,000), $5,598,000 (fees were reduced by $3,539,000) and $6,572,000 (fees
were reduced $2,455,000), respectively.
For the fiscal years ended December 31, 1997, 1998 and 1999, U.S. Treasury Money
Fund paid investment and advisory fees of $2,674,000 (fees were reduced by
$4,184,000), $3,266,000 (fees were reduced by $5,004,000) and $3,998,000 (fees
were reduced $4,790,000), respectively.
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The investment adviser and Schwab have guaranteed that, through at least April
30, 2001, the total operating expenses (excluding interest, taxes and certain
non-routine expenses) of the Schwab Money Market Fund, Schwab Government Money
Fund and Schwab U.S. Treasury Money Fund will not exceed 0.75%, 0.75% and 0.65%
respectively, of the average daily net assets, respectively.
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 supplemental 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 typically are connected with the trust's
operations, and include legal, audit and custodian fees, as well as the costs of
accounting and registration of the 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 personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds(R)
and provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these 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 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, 8800 Tinicum Blvd, Third Floor Suite 200, Philadelphia, PA
19153, serves as custodian for the funds and PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The fund accountant maintains all books and records
related to each fund's transactions.
INDEPENDENT ACCOUNTANTS
The funds' independent accountants, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trusts and review
certain regulatory reports and each fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
a trust engages them to do so. Their address is 333 Market Street, San
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Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ended December 31, 1999, 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 execution. Subject to the supervision of the board of trustees, the
investment adviser will select brokers and dealers for the funds on the basis of
a number of factors, including, for example, price paid for securities,
clearance, settlement, reputation, financial strength and stability, efficiency
of execution and error resolution, block trading and block positioning
capabilities, willingness to execute related or unrelated difficult transactions
in the future, and order of call.
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 expect that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices.
The investment decisions for each fund are reached independently from those for
other accounts managed by the investment 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 manager 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.
The 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.
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The funds may hold special meetings, which may cause the funds to incur
non-routine expenses. 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.
A majority of the outstanding voting shares of the fund means the affirmative
vote of the lesser of: (a) 67% or more of the voting shares represented at the
meeting, if more than 50% of the outstanding voting shares of a fund are
represented at the meeting or (b) more than 50% of the outstanding voting shares
of a fund. Any lesser number shall be sufficient for adjournments. Any adjourned
session or sessions may be held, within a reasonable time after the date set for
the original meeting, without the necessity of further notice. The Declaration
of Trust specifically authorizes the board of trustees to terminate the trust
(or any of its investment portfolios) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the trust solely by reason of being or having been a shareholder. Moreover,
the trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
trust itself is unable to meet its obligations. 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 less accrued
expenses. 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, DELIVERY OF SHAREHOLDER REPORTS
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
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closings are currently scheduled for 2000: Martin Luther King's Birthday
(observed), President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day (observed), 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 fund or Schwab follows reasonable procedures to confirm that your
telephone or internet 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 or other
confirmation before acting upon any telephone or internet order, providing
written confirmation of telephone or internet 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.
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 transaction costs if he
or she were to convert the securities to cash.
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DELIVERY OF SHAREHOLDER DOCUMENTS
Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order to eliminate duplicate
mailings of shareholder documents, each household may receive one copy of these
documents, under certain conditions. This practice is commonly called
"householding." If you want to receive multiple copies, you may write or call
your fund at the address or telephone number on the front of this SAI. Your
instructions will be effective within 30 days of receipt by Schwab.
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 NAV 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
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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% 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. Your daily dividend is calculated each business day by
applying the daily dividend rate by the number of shares owned, and is rounded
to the nearest penny. The daily dividend is accrued each business day, and the
sum of the daily dividends are paid monthly. 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 day of December. If
cash payment is requested, checks will normally be mailed on the business day
following the reinvestment date. Each fund will pay shareholders, who redeem all
of their shares, all dividends accrued to the time of the redemption within 7
days.
Each fund calculates its dividends based on its daily net investment income. For
this purpose, the net investment income of a fund consists of: (1) accrued
interest income, plus or minus amortized discount or premium, minus (2) accrued
expenses allocated to that fund. If a fund realizes any capital gains, they will
be distributed at least once during the year as determined by the board of
trustees. Any realized capital losses, to the extent not offset by realized
capital gains, will be carried forward.
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.
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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. Note that most states grant tax-exempt status to distributions
paid to shareholders from U.S. government securities.
A fund may engage in techniques that may alter the timing and character of its
income. A fund may be restricted in its use of these techniques by rules
relating to its qualification as a regulated investment company.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." 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 either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more. 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.
CALCULATION OF PERFORMANCE DATA
The funds' current 7-day yields based on the seven days ended December 31, 1999
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 then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent.
7-day Current Yield as of December 31, 1999
<TABLE>
<S> <C>
Schwab Money Market Fund 5.31%
Schwab Government Money Fund 4.88%
Schwab U.S. Treasury Money Fund 4.63%
</TABLE>
The funds' effective yields based on the seven days ended December 31, 1999 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
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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, 1999
<TABLE>
<S> <C>
Schwab Money Market Fund 5.45%
Schwab Government Money Fund 5.00%
Schwab U.S. Treasury Money Fund 4.74%
</TABLE>
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, 1999.
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 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.
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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.
D-1 is the highest commercial paper rating assigned by Duff & Phelps Credit
Rating Co. ("Duff"). Three gradations exist within this rating category: a D-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 D-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 D-1- rating denotes high
certainty of timely payment (issuer liquidity factors are strong and risk is
very small). A D-2 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.
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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R)
SCHWAB RETIREMENT MONEY FUND(R)
APRIL 30, 2000
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated April 30, 2000 (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 reports are separate documents supplied with the
SAI and include 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
<TABLE>
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Page
<S> <C>
INVESTMENT OBJECTIVES, SECURITES,
RISKS AND LIMITATIONS......................................................... 2
MANAGEMENT OF THE FUNDS....................................................... 9
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES........................... 12
INVESTMENT ADVISORY AND OTHER SERVICES........................................ 12
BROKERAGE ALLOCATION AND OTHER PRACTICES...................................... 14
DESCRIPTION OF THE TRUST...................................................... 15
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES......................................................... 16
TAXATION...................................................................... 17
CALCULATION OF PERFORMANCE DATA............................................... 19
APPENDIX - RATINGS OF INVESTMENT SECURITIES................................... 21
</TABLE>
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INVESTMENT OBJECTIVES, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVES
Each fund's investment objective is to seek maximum current income consistent
with liquidity and stability of capital. Each fund's investment objective may be
changed only by vote of a majority of its outstanding voting shares. There is no
guarantee the funds will achieve their objectives.
The following investment 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 a 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 SECURITIES AND RISKS
ASSET-BACKED SECURITIES are securities that are backed by the loans or accounts
receivables of an entity, such as a bank or credit card company. These
securities are obligations which the issuer intends to repay using the assets
backing them (once collected). Therefore, repayment depends largely on the cash
flows generated by the assets backing the securities. The rate of principal
payments on asset-backed securities generally depends on the rate of principal
payments received on the underlying assets, which in turn may be affected by a
variety of economic and other factors. As a result, the yield on any
asset-backed security is difficult to predict with precision, and actual yield
to maturity may be more or less than the anticipated yield to maturity.
Sometimes the credit quality of these securities is limited to the support
provided by the underlying assets, but, in other cases, additional credit
support also may be provided by a third party via a letter of credit or
insurance guarantee. Such credit support falls into two classes: liquidity
protection and protection against ultimate default on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that scheduled payments on
the underlying pool are made in a timely fashion. Protection against ultimate
default ensures payment on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches.
The degree of credit support provided on each issue is based generally on
historical information respecting the level of credit risk associated with such
payments. Delinquency or loss in excess of that anticipated could adversely
affect the return on an investment in an asset-backed security.
Based on the primary characteristics of the various types of asset-backed
securities, for purposes of a fund's concentration policy, the following
asset-backed securities industries have been selected:
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credit card receivables, automobile receivables, trade receivables and
diversified financial assets. A fund will limit its investments in each such
industry to no more than 25% of its net assets.
BANKERS' ACCEPTANCES or notes are credit instruments evidencing a bank's
obligation to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. A fund will invest only in bankers' acceptances of
banks that have capital, surplus and undivided profits in excess of $100
million.
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.
CERTIFICATES OF DEPOSIT or time deposits are issued against funds deposited in a
banking institution for a specified period of time at a specified interest rate.
A fund will invest only in certificates of deposit of banks that have capital,
surplus and undivided profits in excess of $100 million.
COMMERCIAL PAPER consists of short-term, promissory notes issued by banks,
corporations and other institutions to finance short-term credit needs. These
securities generally are discounted but sometimes may be interest bearing.
Commercial paper, which also may be unsecured, is subject to credit risk.
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. Based on the primary characteristics of non-U.S.
(foreign) banks, the funds have identified each foreign country as a separate
bank industry for purposes of a fund's concentration policy. A fund will limit
its investments in securities issued by foreign banks in each country to no more
than 25% of its net assets.
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.
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
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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 is a diversified mutual fund.
Each fund also follows the regulations set forth by the SEC that dictate the
diversification requirements for money market mutual funds. These requirements
prohibit a taxable money fund from purchasing a security if more that 5% of its
total assets would be invested in the securities of a single issuer, although a
fund may invest up to 25% of its total assets in the first tier securities of a
single issuer for up to three business days. 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. Foreign entities are not subject to 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). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the converted currencies of each country. The European
Central Bank, all national central banks and all stock exchanges and began
pricing, trading and settling 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 from or to
European countries, thereby making the European market less liquid or more
expensive. All of these factors could affect the value of a fund's investments
and/or increase its expenses. While the investment adviser has taken 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.
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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.
LENDING of portfolio securities is a common practice in the securities industry.
A fund will engage in security lending arrangements with the primary objective
of increasing its income through investment of the cash collateral in
short-term, interest-bearing obligations, but will do so only to the extent that
it will not lose the tax treatment available to regulated investment companies.
Lending portfolio securities involve risks that the borrower may fail to return
the securities or provide additional collateral. Also, voting rights with
respect to the loaned securities may pass with the lending of the securities.
A fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash equivalents maintained on a daily marked-to-market basis in an amount at
least equal to the current market value of the securities loaned; (2) the fund
may at any time call the loan and obtain the return of the securities loaned;
(3) the fund will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the fund.
Although voting rights with respect to loaned securities pass to the borrower,
the lender retains the right to recall a security (or terminate a loan) for the
purpose of exercising the security's voting rights. Efforts to recall such
securities promptly may be unsuccessful, especially for foreign securities or
thinly traded securities such as small-cap stocks. In addition, because
recalling a security may involve expenses to the fund, it is expected that the
fund will do so only where the items being voted upon are, in the judgement of
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser),
either material to the economic value of the security or threaten to materially
impact the issuer's corporate governance policies or structure.
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.
PROMISSORY NOTES are written agreements committing the maker or issuer to pay
the payee a specified amount either on demand or at a fixed date in the future,
with or without interest. These
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are sometimes called negotiable notes or instruments and are subject to credit
risk. Bank notes are notes used to represent obligations issued by banks in
large denominations.
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 the board of trustees. For more
information about the ratings assigned by some NRSROs, refer to the Appendix
section of the SAI.
REPURCHASE AGREEMENTS. Repurchase agreements involve a fund buying securities
(usually U.S. government securities) from a seller and simultaneously agreeing
to sell them back at an agreed-upon price (usually higher) and time. There are
risks that losses will result if the seller does not perform as agreed.
Repurchase agreements will be "collateralized" by first tier securities in which
the fund could invest directly. In addition, repurchase agreements
collateralized entirely by U.S. government securities may be deemed to be
collateralized fully pursuant to Rule 2a-7.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. For example, commercial paper and other promissory notes may be
issued under Section 4(2) of the Securities Act of 1933 and may be sold only 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.
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STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by the
Federal National Mortgage Association (FNMA), are supported by a line of credit
the issuing entity has with the U.S. Treasury. Others are supported solely by
the credit of the issuing agency or instrumentality. These include obligations
issued by the Federal Home Loan Mortgage Corporation (FHLMC or FREDDIE MAC), the
Student Loan Marketing Association (SLMA or SALLIE MAE), the Federal Farm Credit
Banks Funding Corporation (FFCB) and the federal Home Loan Banks (FHLB). There
can be no assurance that the U.S. government will provide financial support to
U.S. government securities of its agencies and instrumentalities if it is not
obligated to do so under law. Of course U.S. government securities, including
U.S. Treasury securities, are among the safest securities, however, not unlike
other debt securities, they are still sensitive to interest rate changes, which
will cause their yields to fluctuate.
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.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by a vote of a majority
of each fund's outstanding shares.
EACH FUND MAY NOT:
(1) Purchase securities or make investments other than in accordance with its
investment objectives and policies.
(2) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. government, its agencies or instrumentalities) if, as a result
thereof, more than 5% of the value of its assets would be invested in the
securities of such issuer.
(3) Purchase, in the aggregate with all other Schwab Money Funds, more than 10%
of any class of securities of any issuer. All debt securities and all
preferred stocks are each considered as one class. (For purposes of this
limitation, the following funds constitute the Schwab
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Money Funds: Schwab Money Market Fund, Schwab Government Money Fund, Schwab
Retirement Money Fund and Schwab Institutional Advantage Money Fund.)
(4) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that it reserves the freedom of action to invest up to
100% of its assets in certificates of deposit or bankers' acceptances
issued by domestic branches of U.S. banks and U.S. branches of foreign
banks (which the fund has determined to be subject to the same regulation
as U.S. banks), or obligations of, or guaranteed by, the U.S. government,
its agencies or instrumentalities in accordance its investment objective
and policies.
(5) Invest more than 5% of its total assets in securities of issuers (other
than obligations of, or guaranteed by, the U.S. government, its agencies or
instrumentalities) that, with their predecessors, have a record of less
than three years of continuous operation.
(6) Enter into repurchase agreements if, as a result thereof, more than 10% its
net assets valued at the time of the transaction would be subject to
repurchase agreements maturing in more than 7-days and invested in
securities restricted as to disposition under the federal securities laws
(except commercial paper issued under Section 4(2) of the Securities Act of
1933, as amended). Each fund will invest no more than 10% of its net assets
in illiquid securities.
(7) Invest more than 5% of its total assets in securities restricted as to
disposition under the federal securities laws (except commercial paper
issued under Section 4(2) of the Securities Act of 1933, as amended).
(8) Purchase or retain securities of an issuer if any of the officers, trustees
or directors of the Trust or its investment adviser or the Sub-Adviser
individually own beneficially more than 1/2 of 1% of the securities of such
issuer and together beneficially own more than 5% of the securities of such
issuer.
(9) Invest in commodities or commodity contracts, futures contracts, real
estate or real estate limited partnerships, although it may invest in
securities which are secured by real estate and securities of issuers which
invest or deal in real estate.
(10) Invest for the purpose of exercising control or management of another
issuer.
(11) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.1
(12) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objectives and
policies), except each fund may (1) purchase a portion of an issue of
short-term debt securities or similar obligations (including repurchase
agreements) that are publicly distributed or customarily purchased by
institutional investors; and (2) lend its portfolio securities.
(13) Borrow money, except as a temporary measure for extraordinary or emergency
purposes, and then only in an amount up to one-third of the value of its
total assets in order to meet redemption requests without immediately
selling any portfolio securities. The funds will not borrow for leverage
purposes or purchase securities or make investments while reverse
repurchase agreements or borrowings are outstanding. If for any reason the
current value of the total net assets of any fund falls below an amount
equal to three times the amount of indebtedness from money borrowed, such
fund will, within three business days, reduce its indebtedness to the
extent necessary.
(14) Write, purchase or sell puts, calls or combinations thereof.
1 See the description of the trustees' deferred compensation plan under
"Management of the Funds" for an exception to this investment restriction.
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(15) Make short sales of securities, or purchase any securities on margin,
except to obtain such short-term credits as may be necessary for the
clearance of transactions.
(16) Invest in interests in oil, gas, mineral leases or other mineral
exploration or development programs, although it may invest in the
securities of issuers which invest in or sponsor such programs.
(17) Underwrite securities issued by others except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
(18) Issue senior securities as defined in the 1940 Act.
Except 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. and Charles Schwab Investment Management, Inc., are
as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUST
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, 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 Vice Chairman and Executive Vice President, The
June 28, 1953 Charles Schwab Corporation; Vice Chairman and
Enterprise President - Financial Products and
Services, Director, Charles Schwab & Co., Inc.;
Chief Executive Officer and Chief Financial
Officer, Director, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Mr. Scheid was
Executive Vice President of Finance
</TABLE>
* This trustee is an "interested person" of the trusts.
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<TABLE>
<CAPTION>
<S> <C> <C>
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 Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive 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 and
management, and investments).
WILLIAM J. KLIPP*1 Trustee From 1991 to 1999, Mr. Klipp was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; President and Chief Operating Officer,
Charles Schwab Investment Management, Inc.
JEREMIAH H. CHAFKIN Executive Vice Executive Vice President, SchwabFunds(R),
May 5, 1959 President and Chief Charles Schwab & Co., Inc.; President and Chief
Operating Officer Operating Officer, Charles Schwab Investment
Management, Inc. Prior to November 1999, Mr.
Chafkin was Senior Managing Director, Bankers
Trust Company.
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.
</TABLE>
* This trustee is an "interested person" of the trusts.
1 Mr. Klipp departed Charles Schwab & Co., Inc. in 1999 and is expected to
resign from the Board of Trustees prior to June 1, 2000.
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<TABLE>
<CAPTION>
<S> <C> <C>
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>
Each of the above-referenced officers and/or trustees also serves in the same
capacity as described for the trust, for Schwab Capital Trust, Schwab
Investments and Schwab Annuity Portfolios. The address of each individual listed
above is 101 Montgomery Street, San Francisco, California 94104.
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 the
fiscal year ended December 31, 1999, concerning compensation of the trustees.
Unless otherwise stated, information is for the fund complex, which included 40
funds as of December 31, 1999.
<TABLE>
<CAPTION>
Name of Trustee ($) Pension or Retirement ($)
Aggregate Compensation Benefits Accrued as Total Compensation from
from each Part of Fund Expenses Fund Complex
Fund
Institutional Retirement
<S> <C> <C> <C> <C>
Charles R. Schwab 0 0 N/A 0
Steven L.Scheid 0 0 N/A 0
William J. Klipp 0 0 N/A 0
Donald F. Dorward $2,745 $2,651 N/A $121,600
Robert G. Holmes $2,745 $2,651 N/A $121,600
Donald R. Stephens $2,745 $2,651 N/A $121,600
Michael W. Wilsey $2,493 $2,410 N/A $111,600
</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 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
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restrictions of the funds.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 3, 2000, 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 3, 2000, the following represents persons or entities that owned of
record or beneficially, more than 5% of shares of a fund:
<TABLE>
<CAPTION>
<S> <C>
Schwab Institutional Advantage Money Fund
The Charles Schwab Trust Co., 82.42%
Schwab Retirement Money Fund
The Charles Schwab Trust Co., 65.67%
</TABLE>
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 the funds, 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 the
fund, the investment adviser is entitled to receive a graduated annual fee,
payable monthly, of 0.46% of each fund's average daily net assets of the first
$1 billion, 0.45% of the next $1 billion but not in excess of $3 billion, 0.40%
of net assets over $3 billion but not in excess of $10 billion, 0.37% of such
assets over $10 billion but not in excess of $20 billion and 0.34% of such
assets over $20 billion.
For the fiscal years ended December 31, 1997, 1998, and 1999 Schwab
Institutional Advantage Fund paid investment and advisory fees of $388,000 (fees
were reduced by $768,000), $570,000 (fees were reduced by $939,000) and $940,000
(fees were reduced by $990,000), respectively.
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For the fiscal years ended December 31, 1997, 1998, and 1999, Schwab Retirement
Fund paid investment and advisory fees of $557,000 (fees were reduced by
$114,000), $721,000 (fees were reduced by $138,000) and $989,000 (fees were
reduced by $46,000), respectively.
The investment adviser and Schwab have guaranteed that, through at least April
30, 2001, the total operating expenses (excluding interest, taxes and certain
non-routine expenses) of the Schwab Institutional Advantage Money Fund and
Schwab Retirement Money Fund will not exceed 0.50% and 0.73% of the average
daily net assets, respectively.
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 supplemental 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 typically are connected with the trust's
operations, and include legal, audit and custodian fees, as well as the costs of
accounting and registration of the 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 personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds(R)
and provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these 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 0.05% of its 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 each fund, payable monthly in the amount
of 0.20% of its average daily net assets.
CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, 8800 Tinicum Blvd., Third Floor Suite 200, Philadelphia, PA
19153, serves as custodian for the funds and PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The fund accountant maintains all books and records
related to each fund's transactions.
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INDEPENDENT ACCOUNTANTS
The funds' independent accountants, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trusts and review
certain regulatory reports and each fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
a trust engages them 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, 1999, are included in the fund's 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 execution. Subject to the supervision of the board of trustees, the
investment adviser will select brokers and dealers for the funds on the basis of
a number of factors, including, for example, price paid for securities,
clearance, settlement, reputation, financial strength and stability, efficiency
of execution and error resolution, block trading and block positioning
capabilities, willingness to execute related or unrelated difficult transactions
in the future, and order of call.
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 expect that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices.
The investment decisions for each fund are reached independently from those for
other accounts managed by the investment 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 manager outweigh any disadvantages that may arise from
exposure to simultaneous transactions.
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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.
The 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, which may cause the funds to incur
non-routine expenses. 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.
A majority of the outstanding voting shares of the fund means the affirmative
vote of the lesser of: (a) 67% or more of the voting shares represented at the
meeting, if more than 50% of the outstanding voting shares of a fund are
represented at the meeting or (b) more than 50% of the outstanding voting shares
of a fund. Any lesser number shall be sufficient for adjournments. Any adjourned
session or sessions may be held, within a reasonable time after the date set for
the original meeting, without the necessity of further notice. The Declaration
of Trust specifically authorizes the board of trustees to terminate the trust
(or any of its investment portfolios) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the trust solely by reason of being or having been a shareholder. Moreover,
the trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
trust itself is unable to meet its obligations. 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 less accrued
expenses. 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
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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 the net asset value per share as determined in accordance with
the bylaws.
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS 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 2000: Martin Luther
King's Birthday (observed), President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day (observed), 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.
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 transaction costs if he
or she were to convert the securities to cash.
DELIVERY OF SHAREHOLDER DOCUMENTS
Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order to eliminate duplicate
mailings of shareholder documents, each household may receive one copy of these
documents, under certain conditions. This practice is commonly called
"householding." If you want to receive multiple copies, you may write or call
your fund at the address or telephone number on the front of this SAI. Your
instructions will be effective within 30 days of receipt by Schwab.
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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 NAV 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% 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.
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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. Your daily dividend is calculated each business day by
applying the daily dividend rate by the number of shares owned, and is rounded
to the nearest penny. The daily dividend is accrued each business day, and the
sum of the daily dividends are paid monthly. 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 day of December. If
cash payment is requested, checks will normally be mailed on the business day
following the reinvestment date. Each fund will pay shareholders, who redeem all
of their shares, all dividends accrued to the time of the redemption within 7
days.
Each fund calculates its dividends based on its daily net investment income. For
this purpose, the net investment income of a fund consists of: (1) accrued
interest income, plus or minus amortized discount or premium, minus (2) accrued
expenses allocated to that fund. If a fund realizes any capital gains, they will
be distributed at least once during the year as determined by the board of
trustees. Any realized capital losses, to the extent not offset by realized
capital gains, will be carried forward.
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.
A fund may engage in techniques that may alter the timing and character of its
income. A fund may be restricted in its use of these techniques by rules
relating to its qualification as a regulated investment company.
A Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding."
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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 either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more. 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.
CALCULATION OF PERFORMANCE DATA
The funds' current 7-day yields based on the seven days ended December 31, 1999
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 then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent.
<TABLE>
<CAPTION>
7-Day Current Yields as of December 31, 1999
<S> <C>
Schwab Institutional Advantage 5.52 %
Money Fund
Schwab Retirement Money Fund 5.32 %
</TABLE>
The funds' effective yields based on the seven days ended December 31, 1999 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.
<TABLE>
<CAPTION>
7-Day Effective Yields as of December 31, 1999
<S> <C>
Schwab Institutional Advantage 5.67 %
Money Fund
Schwab Retirement Money Fund 5.46 %
</TABLE>
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
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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, 1999.
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 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.
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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.
D-1 is the highest commercial paper rating assigned by Duff & Phelps Credit
Rating Co. ("Duff"). Three gradations exist within this rating category: a D-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 D-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 D-1- rating denotes high
certainty of timely payment (issuer liquidity factors are strong and risk is
very small). A D-2 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.
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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, 2000
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated April 30, 2000 (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
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT OBJECTIVES, STRATEGIES,
SECURITIES, RISKS AND LIMITATIONS ......................................................... 2
MANAGEMENT OF THE FUNDS ................................................................... 13
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES ....................................... 16
INVESTMENT ADVISORY AND OTHER SERVICES .................................................... 16
BROKERAGE ALLOCATION AND OTHER PRACTICES .................................................. 19
DESCRIPTION OF THE TRUST .................................................................. 20
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES ..................................................................... 21
TAXATION .................................................................................. 22
CALCULATION OF PERFORMANCE DATA ........................................................... 28
APPENDIX .................................................................................. 31
</TABLE>
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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 outstanding voting shares. There is no guarantee the funds will achieve
their objectives.
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.
INVESTMENT SECURITIES AND RISKS
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 consists of short-term, promissory notes issued by banks,
corporations and other institutions to finance short-term credit needs. These
securities generally are discounted but sometimes may be interest bearing.
Commercial paper, which also may be unsecured, is subject to credit risk.
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
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price of oil, which may adversely affect the sale of automobiles and, as a
result, the value of the industry's securities.
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.
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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 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). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the converted currencies of each country. The European
Central Bank, all national central banks and all stock exchanges and began
pricing, trading and settling 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 from or to
European countries, thereby making the European market less liquid or more
expensive. All of these factors could affect the value of a fund's investments
and/or increase its expenses. While the investment adviser has taken 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
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securities may be issued to obtain money for various public purposes, including
the construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, public utilities, schools,
streets, and water and sewer works. Other public purposes include refunding
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to loan to other public institutions and facilities.
Municipal securities also may be issued to finance various private activities,
including certain types of private activity bonds ("industrial development
bonds" under prior law). These securities may be issued by or on behalf of
public authorities to obtain funds to provide certain privately owned or
operated facilities. The funds may not be desirable investments for "substantial
users" of facilities financed by private activity bonds or industrial
development bonds or for "related persons" of substantial users because
distributions from the funds attributable to interest on such bonds may not be
tax exempt. Shareholders should consult their own tax advisors regarding the
potential effect on them (if any) of any investment in these funds.
Municipal securities 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
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obligation from current revenues, it may draw on a reserve fund. The state or
municipality that created the entity has only a moral commitment, not a legal
obligation, to restore the reserve fund.
The value of municipal securities may be affected by uncertainties with respect
to the rights of holders of municipal securities in the event of bankruptcy or
the taxation of municipal securities as a result of legislation or litigation.
For example, under federal law, certain issuers of municipal securities may be
authorized in certain circumstances to initiate bankruptcy proceedings without
prior notice to or the consent of creditors. Such action could result in
material adverse changes in the rights of holders of the securities. In
addition, litigation challenging the validity under the state constitutions of
present systems of financing public education has been initiated or adjudicated
in a number of states, and legislation has been introduced to effect changes in
public school finances in some states. In other instances, there has been
litigation challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or federal law, which ultimately could
affect the validity of those municipal securities or the tax-free nature of the
interest thereon.
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.
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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 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.
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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, 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.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of each fund's outstanding voting shares.
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.).
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(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.
(7) Underwrite securities issued by others, except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
(8) 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.
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(4) Underwrite securities, except as permitted by the Investment Company
Act of 1940 or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
(5) Concentrate investments in a particular industry or group of
industries, as concentration is defined under the Investment Company
Act of 1940 or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
(6) Purchase or sell commodities, commodities contracts, futures contracts,
or real estate, except as permitted by the Investment Company Act of
1940 or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING
THE ABOVE POLICIES AND RESTRICTIONS.
Borrowing. The 1940 Act presently restricts a fund from borrowing (including
pledging, mortgaging or hypothecating assets) in excess of 33 1/3% of its total
assets (not including temporary borrowings not in excess of 5% of its total
assets).
Lending. Under the 1940 Act, a fund may only make loans if expressly permitted
by its investment policies.
Concentration. The Securities and Exchange Commission presently defines
concentration as investing 25% or more 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 INVESTMENT POLICIES AND
RESTRICTIONS, 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,
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provided no more than 25% of the fund's total assets would be invested
in the securities of a single issuer, up to 50% of the value of the
fund's assets may be invested without regard to this 5% limitation. For
purposes of this limitation, the fund will regard the entity which has
the primary responsibility for the payment of interest and principal as
the issuer.
(2) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
(3) Make loans to others (except through the purchase of debt obligations
or repurchase agreements in accordance with its investment objective
and policies).
(4) Borrow money, except from banks for temporary purposes (but not for the
purpose of purchasing investments), and then only in an amount not to
exceed one-third of the value of its total assets (including the amount
borrowed) in order to meet redemption requests which otherwise might
result in the untimely disposition of securities; or pledge its
securities or receivables or transfer or assign or otherwise encumber
them in an amount to exceed 10% of the fund's net assets to secure
borrowings. Reverse repurchase agreements entered into by the fund are
permitted within the limitations of this paragraph. No such fund will
purchase securities or make investments while reverse repurchase
agreements or borrowings are outstanding.
(5) Write, purchase or sell puts, calls or combinations thereof, although
it may purchase Municipal Securities subject to standby commitments,
variable rate demand notes or repurchase agreements in accordance with
its investment objective and policies.
(6) Make short sales of securities or purchase securities on margin, except
to obtain such short-term credits as may be necessary for the clearance
of transactions.
(7) Issue senior securities as defined in the 1940 Act.
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
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<PAGE> 184
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).
(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. and Charles Schwab Investment Management, Inc., are
as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUST
- --------------------------------------- ------------------------- --------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, 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).
</TABLE>
13
<PAGE> 185
<TABLE>
<S> <C> <C>
STEVEN L. SCHEID* President and Trustee Vice Chairman and Executive Vice President, The
June 28, 1953 Charles Schwab Corporation; Vice Chairman and
Enterprise President - Financial Products and
Services, Director, Charles Schwab & Co., Inc.;
Chief Executive Officer and Chief Financial
Officer, Director, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Mr. Scheid
was Executive Vice President of Finance for
First Interstate Bancorp and Principal Financial
Officer from 1995 to 1996. Prior to 1994,
Mr. Scheid was Chief Financial Officer, First
Interstate Bank of Texas.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive 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 and
management, and investments).
WILLIAM J. KLIPP*1 Trustee From 1991 to 1999, Mr. Klipp was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; President and Chief Operating Officer,
Charles Schwab Investment Management, Inc.
JEREMIAH H. CHAFKIN Executive Vice Executive Vice President, SchwabFunds(R),
May 5, 1959 President and Chief Charles Schwab & Co., Inc.; President and Chief
Operating Officer Operating Officer, Charles Schwab Investment
</TABLE>
- --------
* This trustee is an "interested person" of the trusts.
* This trustee is an "interested person" of the trusts.
1 Mr. Klipp departed Charles Schwab & Co., Inc. in 1999 and is expected to
resign from the Board of Trustees prior to June 1, 2000.
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<PAGE> 186
<TABLE>
<S> <C> <C>
Management, Inc. Prior to November 1999, Mr.
Chafkin was Senior Managing Director, Bankers
Trust Company.
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.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>
Each of the above-referenced officers and/or trustees also serves in the same
capacity as described for the trust, for Schwab Capital Trust, Schwab
Investments and Schwab Annuity Portfolios. The address of each individual listed
above is 101 Montgomery Street, San Francisco, California 94104.
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, 1999, concerning compensation of the trustees. Unless
otherwise stated, information is for the fund complex, which included 40 funds
as of December 31, 1999.
<TABLE>
<CAPTION>
Name of Aggregate Compensation from each Fund Pension or ($)Total
Trustee Retirement Compensation
Benefits from Fund Complex
Accrued as
Part of Fund
Expenses
Municipal Cali- New New Penn- Florida
Money fornia York Jersey sylvania
<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
William J. 0 0 0 0 0 0 N/A 0
Klipp
Donald F. $5,815 $4,420 $2,878 $2,600 $2,603 $2,797 N/A $121,600
Dorward
Robert G. $5,815 $4,420 $2,878 $2,600 $2,603 $2,797 N/A $121,600
Holmes
Donald R. $5,815 $4,420 $2,878 $2,600 $2,603 $2,797 N/A $121,600
Stephens
Michael W. $5,304 $4,021 $2,617 $2,363 $2,367 $2,546 N/A $111,600
Wilsey
</TABLE>
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<PAGE> 187
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 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 3, 2000, 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 3, 2000, the following represents persons or entities that owned of
record or beneficially, more than 5% of shares of a fund:
<TABLE>
<CAPTION>
Schwab Pennsylvania Municipal Money Fund-Sweep Shares
<S> <C>
Washburn S. Oberwager
Financial Advisor 6.06%
</TABLE>
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%.
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<PAGE> 188
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, 1997, 1998 and 1999, Schwab Municipal
Money Fund paid investment and advisory fees of $9,331,000 (fees were reduced by
$10,977,000), $11,593,000 (fees were reduced by $13,780,000) and $13,623,000
(fees were reduced by $14,529,000), respectively.
For the fiscal years ended December 31, 1997, 1998 and 1999, Schwab California
Municipal Money fund paid investment and advisory fees of $4,824,000 (fees were
reduced by $6,548,000), $6,118,000 (fees were reduced by $8,464,000) and
$7,639,000 (fees were reduced by $8,816,000), respectively.
For the fiscal years ended December 31, 1997, 1998 and 1999, Schwab New York
Municipal Money Fund paid investment and advisory fees of $675,000 (fees were
reduced by $1,192,000) $1,069,000 (fees were reduced by $1,677,000) and
$1,458,000 (fees were reduced by $1,708,000), respectively.
For the period of February 2, 1998 (commencement of operations) to December 31,
1998 and fiscal year end December 31, 1999, Schwab New Jersey Municipal Money
Fund paid investment and advisory fees of $0 (fees were reduced $268,000) and
$155,000 (fees were reduced by $404,000), respectively.
For the period of February 2, 1998 (commencement of operations) to December 31,
1998 and fiscal year end December 31, 1999, Schwab Pennsylvania Municipal Money
Fund paid investment and advisory fees of $0 (fees were reduced $271,000) and
$157,000 (fees were reduced by $399,000), respectively.
For the period of March 18, 1998 (commencement of operations) to December 31,
1998 and fiscal year December 31, 1999, Schwab Florida Municipal Money Fund paid
investment and advisory fees of $171,000 (fees were reduced $1,353,000) and
$450,000 (fees were reduced by $1,931,000), respectively.
The investment adviser and Schwab have guaranteed that through at least April
30,2001, total operating expenses (excluding interest, taxes and certain
non-routine 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 supplemental sales literature and
advertising. Schwab
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<PAGE> 189
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 personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds(R)
and provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these 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, 8800 Tinicum Blvd, Third Floor Suite 200, Philadelphia, PA
19153, serves as custodian for the funds and PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The fund accountant maintains all books and records
related to each fund's transactions.
18
<PAGE> 190
INDEPENDENT ACCOUNTANTS
The funds' independent accountants, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trusts and review
certain regulatory reports and each fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
a trust engages them 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, 1999, 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 execution. Subject to the supervision of the board of trustees, the
investment adviser will select brokers and dealers for the funds on the basis of
a number of factors, including, for example, price paid for securities
clearance, settlement, reputation, financial strength and stability, efficiency
of execution and error resolution, block trading and block positioning
capabilities, willingness to execute related or unrelated difficult transactions
in the future, and order of call.
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 expect that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices.
The investment decisions for each fund are reached independently from those for
other accounts managed by the investment 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.
19
<PAGE> 191
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.
The 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, which may cause the funds to incur
non-routine expenses. 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.
A majority of the outstanding voting shares of the fund means the affirmative
vote of the lesser of: (a) 67% or more of the voting shares represented at the
meeting, if more than 50% of the outstanding voting shares of a fund are
represented at the meeting or (b) more than 50% of the outstanding voting shares
of a fund. Any lesser number shall be sufficient for adjournments. Any adjourned
session or sessions may be held, within a reasonable time after the date set for
the original meeting, without the necessity of further notice. The Declaration
of Trust specifically authorizes the board of trustees to terminate the trust
(or any of its investment portfolios) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the trust solely by reason of being or having been a shareholder. Moreover,
the trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
trust itself is unable to meet its obligations. 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
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<PAGE> 192
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 2000: Martin Luther
King's Birthday (observed), President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day (observed), 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.
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 transaction costs 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 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.
DELIVERY OF SHAREHOLDER DOCUMENTS
Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order to eliminate duplicate
mailings of shareholder documents, each household may receive one copy of these
documents, under certain conditions. This practice is commonly called
"householding."
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<PAGE> 193
If you want to receive multiple copies, you may write or call your fund at the
address or telephone number on the front of this SAI. Your instructions will be
effective within 30 days of receipt by Schwab.
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% of their "ordinary income" (as defined in the Code)
for the calendar year plus 98% of their net
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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. Your daily dividend is calculated each business day by
applying the daily dividend rate by the number of shares owned, and is rounded
to the nearest penny. The daily dividend is accrued each business day, and the
sum of the daily dividends are paid monthly. 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 day 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
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number certified under penalty of perjury; (2) is subject to withholding by the
Internal Revenue Service for failure to properly report all payments of interest
or dividends; or (3) fails to provide a certified statement that he or she is
not subject to "backup withholding." 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 either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more. 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 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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STATE TAX CONSIDERATION
The following tax discussion summarizes general state tax laws which are
currently in effect and are subject to change by legislative or administrative
action; any such changes may be retroactive with respect to the applicable
Fund's transactions. Investors should consult a tax adviser for more detailed
information about state taxes to which they may be subject.
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 California exempt-interest dividends to shareholders,
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 individual income, corporate and
unincorporated business tax. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive.
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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 under federal law from
New York State tax if held by an individual, will be exempt from New York State
and New York City personal income and unincorporated business taxes. Dividends
paid by the fund that are derived from interest on Municipal Securities issued
by New York and political subdivisions or any agency or instrumentality thereof
will be subject to the New York State corporate franchise tax and the New York
City general corporation tax only if they have a sufficient nexus with New York
State or New York City.
Other dividends and distributions from other Municipal Securities, U.S.
Government obligations, taxable income and capital gains that are not exempt
from state taxation under federal law and distributions attributable to capital
gains, will be subject to New York State personal income tax and New York City
personal income tax. Gain from the sale, exchange or other disposition of shares
will be subject to the New York State personal income and franchise taxes and
the New York City personal income, unincorporated business and general
corporation 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.
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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 the 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 obligations of the United States, its territories and possessions
and certain of its agencies and instrumentalities (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 exempt income for
federal tax purposes, are not subject to the Pennsylvania corporate net income
tax. An additional deduction from Pennsylvania taxable income is permitted for
the amount of distributions paid by the 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 tax 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. 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, 90% or more of the net asset value of the fund's assets consists
of exempt securities.
Therefore, in order for the fund and its shareholders to benefit from the
exemption, the fund may 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
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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, 1999
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.
7-Day Current Yield as of December 31, 1999
<TABLE>
<S> <C>
Municipal Money Fund Sweep Shares - Sweep Shares 3.83%
California Municipal Money Fund - Sweep Shares 3.37%
New York Municipal Money Fund - Sweep Shares 3.64%
New Jersey Municipal Money Fund - Sweep Shares 3.66%
Pennsylvania Municipal Money Fund - Sweep Shares 3.81%
Florida Municipal Money Fund - Sweep Shares 3.82%
</TABLE>
The funds' effective yields based on the seven days ended December 31, 1999 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, 1999
<TABLE>
<S> <C>
Municipal Money Fund - Sweep Shares 3.90%
California Municipal Money Fund - Sweep Shares 3.43%
New York Municipal Money Fund - Sweep Shares 3.71%
New Jersey Municipal Money Fund - Sweep Shares 3.73%
Pennsylvania Municipal Money Fund - Sweep Shares 3.88%
</TABLE>
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<TABLE>
<S> <C>
Florida Municipal Money Fund - Sweep Shares 3.89%
</TABLE>
The fund's tax-equivalent current 7-day yields based on the 7-days ended
December 31, 1999 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, 1999
<TABLE>
<S> <C>
Municipal Money Fund - Sweep Shares 6.34%
California Municipal Money Fund - Sweep Shares 6.15%
New York Municipal Money Fund - Sweep Shares 6.75%
New Jersey Municipal Money Fund - Sweep Shares 6.47%
Pennsylvania Municipal Money Fund - Sweep Shares 6.49%
Florida Municipal Money Fund - Sweep Shares 6.32%
</TABLE>
The fund's tax-equivalent effective 7-day yields based on the 7-days ended
December 31, 1999 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, 1999
<TABLE>
<S> <C>
Municipal Money Fund - Sweep Shares 6.46%
California Municipal Money Fund - Sweep Shares 6.26%
New York Municipal Money Fund - Sweep Shares 6.88%
New Jersey Municipal Money Fund - Sweep Shares 6.60%
Pennsylvania Municipal Money Fund - Sweep Shares 6.61%
Florida Municipal Money Fund - Sweep Shares 6.44%
</TABLE>
The above tax-equivalent yields assume payment of federal income tax at a rate
of 39.60% and a California income tax rate of 45.22% or a New York income tax
rate of 46.05% or a New Jersey income tax rate of 43.45% 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.
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<PAGE> 201
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, 1999.
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 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.
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<PAGE> 202
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.
D-1 is the highest commercial paper rating assigned by Duff & Phelps Credit
Rating Co. ("Duff"). Three gradations exist within this rating category: a D-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 D-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 D-1- rating denotes high
certainty of timely payment (issuer liquidity factors are strong and risk is
very small). A D-2 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.
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STATEMENT OF ADDITIONAL INFORMATION
VALUE ADVANTAGE INVESTMENTS(R)
SCHWAB MUNICIPAL MONEY FUND - VALUE ADVANTAGE SHARES(TM)
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND - VALUE ADVANTAGE SHARES(TM)
SCHWAB NEW YORK MUNICIPAL MONEY FUND - VALUE ADVANTAGE SHARES(TM)
SCHWAB VALUE ADVANTAGE MONEY FUND(R) - INVESTOR SHARES
APRIL 30, 2000
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated April 30, 2000 (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
<TABLE>
<CAPTION>
Page
----
<S> <C>
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.........................................................18
BROKERAGE ALLOCATION AND OTHER PRACTICES.......................................................20
DESCRIPTION OF THE TRUST.......................................................................21
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES..........................................................................22
TAXATION.......................................................................................23
CALCULATION OF PERFORMANCE DATA................................................................27
APPENDIX.......................................................................................30
</TABLE>
-1-
<PAGE> 205
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 liquidity and stability of capital.
Schwab Value Advantage Money Fund seeks maximum current income consistent with
liquidity and stability of capital.
Each fund's investment objective may be changed only by vote of a majority of
its outstanding voting shares. There is no guarantee the funds will achieve
their objectives.
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.
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
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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 Value Advantage Money Fund (a taxable money fund) seeks to achieve its
investment objective by investing in high-quality, U.S. dollar-denominated money
market securities, including U.S. government securities and repurchase
agreements for these securities.
INVESTMENT SECURITIES AND RISKS
ASSET-BACKED SECURITIES are securities that are backed by the loans or accounts
receivables of an entity, such as a bank or credit card company. These
securities are obligations which the issuer intends to repay using the assets
backing them (once collected). Therefore, repayment depends largely on the cash
flows generated by the assets backing the securities. The rate of principal
payments on asset-backed securities generally depends on the rate of principal
payments received on the underlying assets, which in turn may be affected by a
variety of economic and other factors. As a result, the yield on any
asset-backed security is difficult to predict with precision, and actual yield
to maturity may be more or less than the anticipated yield to maturity.
Sometimes the credit quality of these securities is limited to the support
provided by the underlying assets, but, in other cases, additional credit
support also may be provided by a third party via a letter of credit or
insurance guarantee. Such credit support falls into two classes: liquidity
protection and protection against ultimate default on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that scheduled payments on
the underlying pool are made in a timely fashion. Protection against ultimate
default ensures payment on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches.
The degree of credit support provided on each issue is based generally on
historical information respecting the level of credit risk associated with such
payments. Delinquency or loss in excess of that anticipated could adversely
affect the return on an investment in an asset-backed security.
Based on the primary characteristics of the various types of asset-backed
securities, for purposes of a fund's concentration policy, the following
asset-backed securities industries have been selected: credit card receivables,
automobile receivables, trade receivables and diversified financial assets. A
fund will limit its investments in each such industry to no more than 25% of its
net assets.
BANKERS' ACCEPTANCES are credit instruments evidencing a bank's obligation to
pay a draft drawn on it by a customer. These instruments reflect the obligation
both of the bank and of the drawer to pay the full amount of the instrument upon
maturity. A fund will invest only in bankers' acceptances of banks that have
capital, surplus and undivided profits in excess of $100 million.
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.
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CERTIFICATES OF DEPOSIT or time deposits are issued against funds deposited in a
banking institution for a specified period of time at a specified interest rate.
A fund will invest only in certificates of deposit of banks that have capital,
surplus and undivided profits in excess of $100 million.
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. Based on the primary characteristics of non-U.S.
(foreign) banks, the funds have identified each foreign country as a separate
bank industry for purposes of a fund's concentration policy. A fund will limit
its investments in securities issued by foreign banks in each country to no more
than 25% of its net assets.
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.
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
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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 of Schwab Municipal Money Fund and
Schwab Value Advantage Money Fund is a diversified mutual fund. Each of Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund is a
non-diversified mutual fund. Each fund also follows the regulations set forth by
the SEC that dictate the diversification requirements for money market mutual
funds. These requirements prohibit taxable and national municipal money funds
from purchasing a security if more that 5% of the 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 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). As of January 3,
1999, the euro became the official currency of the EMU, the rate of exchange was
set between the euro and the converted currencies of each country. The European
Central Bank, all national central banks and all stock exchanges and began
pricing, trading and settling 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 from or to
European countries, thereby making the European market less liquid or more
expensive. All of these factors could affect the value of a fund's investments
and/or increase its expenses. While the investment adviser has taken 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.
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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 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
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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.
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.
PROMISSORY NOTES are written agreements committing the maker or issuer to pay
the payee a specified amount either on demand or at a fixed date in the future,
with or without interest. These
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are sometimes called negotiable notes or instruments and are subject to credit
risk. Bank notes are notes used to represent obligations issued by banks in
large denominations.
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 the board of trustees. For more
information about the ratings assigned by some NRSROs, refer to the Appendix
section of the SAI.
REPURCHASE AGREEMENTS. Repurchase agreements involve a fund buying securities
(usually U.S. government securities) from a seller and simultaneously agreeing
to sell them back at an agreed-upon price (usually higher) and time. There are
risks that losses will result if the seller does not perform as agreed.
Repurchase agreements will be "collateralized" by first tier securities in which
the fund could invest directly. In addition, repurchase agreements
collateralized entirely by U.S. government securities may be deemed to be
collateralized fully pursuant to Rule 2a-7.
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.
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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 fund's 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.
STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
TAXABLE SECURITIES. Under normal conditions, the municipal funds do not intend
to invest in securities in which interest is subject to federal income and/or
state and local personal income taxes. However, from time to time, as a
defensive measure or under abnormal market conditions, the municipal funds may
make temporary investments in securities, the interest on which is subject to
federal income and/or state and local personal income taxes.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by the
Federal National Mortgage Association (FNMA), are supported by a line of credit
the issuing entity has with the U.S. Treasury. Others are supported solely by
the credit of the issuing agency or instrumentality. These include obligations
issued by the Federal Home Loan Mortgage Corporation (FHLMC or FREDDIE MAC), the
Student Loan Marketing Association (SLMA or SALLIE MAE), the Federal Farm Credit
Banks Funding Corporation (FFCB) and the Federal Home Loan Bank (FHLB). There
can be no assurance that the U.S. government will provide financial support to
U.S. government securities of its agencies and
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instrumentalities if it is not obligated to do so under law. Of course U.S.
government securities, including U.S. Treasury securities, are among the safest
securities, however, not unlike other debt securities, they are still sensitive
to interest rate changes, which will cause their yields to fluctuate.
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.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of each fund's outstanding voting shares.
EACH MUNICIPAL 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), or 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.).
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(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.
(7) Underwrite securities issued by others, except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
(8) 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.
SCHWAB VALUE ADVANTAGE MONEY FUND(R) MAY NOT:
(1) Underwrite securities issued by others, except to the extent it may be
deemed to be an underwriter under the federal securities laws in
connection with the disposition of securities from its investment
portfolio.
(2) Invest in commodities or commodity contracts, including futures
contracts, or in real estate, although it may invest in securities that
are secured by real estate and securities of issuers that invest or
deal in real estate.
(3) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that the fund reserves freedom of action to invest
up to 100% of its assets in certificates of deposit or banker's
acceptances issued by U.S. banks and U.S. branches of those foreign
banks that the investment adviser has determined to be subject to the
same regulation as U.
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S. banks, or obligations of or guaranteed by the U.S. government, its
agencies or instrumentalities.
(4) Make loans to others (except through the purchase of debt obligations
or repurchase agreements in accordance with its investment objective
and policies).
(5) Issue senior securities as defined in the 1940 Act.
(6) Purchase securities of any issuer unless only when consistent with the
maintenance of its respective status as a diversified company under the
Investment Company Act of 1940 or the rules or regulations thereunder,
as such statute, rules or regulations may be amended from time to time.
(7) Borrow money, 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.
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 25% or more 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 ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS.
EACH MUNICIPAL MONEY FUND MAY NOT:
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(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of its assets would be
invested in the securities of that issuer, except that, with respect to
Schwab California Municipal Money Fund and Schwab New York Municipal
Money Fund, provided no more than 25% of the fund's total assets would
be invested in the securities of a single issuer, up to 50% of the
value of the fund's assets may be invested without regard to this 5%
limitation. For purposes of this limitation, the fund will regard the
entity which has the primary responsibility for the payment of interest
and principal as the issuer.
(2) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
(3) Make loans to others (except through the purchase of debt obligations
or repurchase agreements in accordance with its investment objective
and policies).
(4) Borrow money, except from banks for temporary purposes (but not for the
purpose of purchasing investments), and then only in an amount not to
exceed one-third of the value of its total assets (including the amount
borrowed) in order to meet redemption requests which otherwise might
result in the untimely disposition of securities; or pledge its
securities or receivables or transfer or assign or otherwise encumber
them in an amount to exceed 10% of the fund's net assets to secure
borrowings. Reverse repurchase agreements entered into by the fund are
permitted within the limitations of this paragraph. No such fund will
purchase securities or make investments while reverse repurchase
agreements or borrowings are outstanding.
(5) Write, purchase or sell puts, calls or combinations thereof, although
it may purchase Municipal Securities subject to standby commitments,
variable rate demand notes or repurchase agreements in accordance with
its investment objective and policies.
(6) Make short sales of securities or purchase securities on margin, except
to obtain such short-term credits as may be necessary for the clearance
of transactions.
(7) Issue senior securities as defined in the 1940 Act.
SCHWAB VALUE ADVANTAGE MONEY FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of its assets would be
invested in securities of that issuer.
(2) Invest more than 10% of its net assets in illiquid securities,
including repurchase agreements maturing in more than seven days.
(3) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Schwab Fund Family or the investment
adviser beneficially own more than 1/2 of 1% of the securities of such
issuer, and together beneficially own more than 5% of the securities of
such issuer.
(4) Invest for the purpose of exercising control or management of another
issuer.
(5) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.1
(6) Write, purchase or sell puts, calls or combinations thereof.
- --------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" for an exception to this investment restriction.
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<PAGE> 217
(7) Make short sales of securities or purchase any securities on margin,
except to obtain such short-term credits as may be necessary for the
clearance of transactions.
(8) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of
issuers which invest in or sponsor such programs. Except as otherwise
noted, if a percentage restriction is adhered to at the time of
investment, a later increase in percentage beyond the specified limit
resulting from a change in values or net assets will not be considered
a violation.
Except with respect to borrowings, investment in illiquid securities and, for
Schwab Value Advantage Money Fund, concentration of investments, a later
increase in percentage resulting from a change in values or net assets do not
require a fund to sell an investment 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. and Charles Schwab Investment Management, Inc., are
as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH PRINCIPAL OCCUPATIONS &
NAME/DATE OF BIRTH THE TRUST AFFILIATIONS
- ------------------ --------- ------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, 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).
</TABLE>
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<PAGE> 218
<TABLE>
<CAPTION>
<S> <C> <C>
STEVEN L. SCHEID* President and Trustee Vice Chairman and Executive Vice President, The
June 28, 1953 Charles Schwab Corporation; Vice Chairman and
Enterprise President - Financial Products and
Services, Director, Charles Schwab & Co., Inc.;
Chief Executive Officer and Chief Financial
Officer, Director, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Mr. Scheid
was Executive Vice President of Finance for
First Interstate Bancorp and Principal
Financial Officer from 1995 to 1996. Prior to
1994, Mr. Scheid was Chief Financial Officer,
First Interstate Bank of Texas.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive 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 and
</TABLE>
- --------------
* This trustee is an "interested person" of the trusts.
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<PAGE> 219
<TABLE>
<CAPTION>
<S> <C> <C>
management, and investments).
WILLIAM J. KLIPP*1 Trustee From 1991 to 1999, Mr. Klipp was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; President and Chief Operating Officer,
Charles Schwab Investment Management, Inc.
JEREMIAH H. CHAFKIN Executive Vice Executive Vice President, SchwabFunds(R),
May 5, 1959 President and Chief Charles Schwab & Co., Inc.; President and Chief
Operating Officer Operating Officer, Charles Schwab Investment
Management, Inc. Prior to November 1999, Mr.
Chafkin was Senior Managing Director, Bankers
Trust Company.
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.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>
Each of the above-referenced officers and/or trustees also serves in the same
capacity as described for the trust, for Schwab Capital Trust, Schwab
Investments and Schwab Annuity Portfolios. The address of each individual listed
above is 101 Montgomery Street, San Francisco, California 94104.
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 the
fiscal year ended December 31, 1999, concerning compensation of the trustees.
Unless otherwise stated, information is for the fund complex, which included 40
funds as of December 31, 1999.
- --------------
* This trustee is an "interested person" of the trusts.
1 Mr. Klipp departed Charles Schwab & Co., Inc. in 1999 and is expected to
resign from the Board of Trustees prior to June 1, 2000.
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<PAGE> 220
<TABLE>
<CAPTION>
Name of Trustee Aggregate Compensation from each Fund Pension or ($)Total
Retirement Compensation
Benefits from Fund
Accrued as Complex
Municipal California New York Value Part of Fund
Money Advantage Expenses
<S> <C> <C> <C> <C> <C> <C>
Charles R. 0 0 0 0 N/A 0
Schwab
Steven L. 0 0 0 0 N/A 0
Scheid
William J. 0 0 0 0 N/A 0
Klipp
Donald F. $5,815 $4,420 $2,878 $13,715 N/A $121,600
Dorward
Robert G. $5,815 $4,420 $2,878 $13,715 N/A $121,600
Holmes
Donald R. $5,815 $4,420 $2,878 $13,715 N/A $121,600
Stephens
Michael W. $5,304 $4,021 $2,617 $12,463 N/A $111,600
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 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 3, 2000, 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.
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<PAGE> 221
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 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
municipal 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, 1997, 1998 and 1999, Schwab Municipal
Money Fund paid investment and advisory fees of $9,331,000 (fees were reduced by
$10,977,000), $11,593,00 (fees were reduced by $13,780,000) and $13,623,000
(fees were reduced by $14,529,000), respectively.
For the fiscal years ended December 31, 1997, 1998 and 1999, Schwab California
Municipal Money fund paid investment and advisory fees of $4,824,000 (fees were
reduced by $6,548,000) $6,118,000 (fees were reduced by 8,464,00) and $7,639,000
(fees were reduced by $8,816,000), respectively.
For the fiscal years ended December 31, 1997, 1998 and 1999, Schwab New York
Municipal Money Fund paid investment and advisory fees of $675,000 (fees were
reduced by $1,192,000), $1,069,000 (fees were reduced by $1,677,000) and
$1,458,000 (fees were reduced $1,708,000), respectively.
Prior to April 30, 1999, for its advisory and administrative services to Schwab
Value Advantage Money 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, 0.45% of net assets over $1 billion but not in
excess of $3 billion, 0.40% of net assets over $3 billion but not in excess of
$10 billion, 0.37% of net assets over $10 billion but not in excess of $20
billion and 0.34% of net assets over $20 billion.
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<PAGE> 222
For the fiscal years ended December 31, 1997, 1998 and 1999, Schwab Value
Advantage Money Fund paid investment and advisory fees of $23,972,000 (fees were
reduced by $27,753,000), $22,577,000 (fees were reduced by $49,156,000) and
$35,270,000 (fees were reduced $54,235,000), respectively.
The investment adviser and Schwab have guaranteed that through at least April
30, 2001, the total operating expenses (excluding interest, taxes and certain
non-routine expenses) of the Schwab Municipal Money Fund - Value Advantage
Shares, Schwab California Municipal Money Fund - Value Advantage Shares, Schwab
New York Municipal Money Fund - Value Advantage Shares and Value Advantage Money
Fund - Investor Shares will not exceed 0.45%, 0.45%, 0.45% and 0.40%, of average
daily net assets, respectively.
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 supplemental 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 personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds(R)
and provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these 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 0.05% of average daily net assets. For the services performed as
shareholder services agent under its contract with each class, Schwab is
entitled to receive an annual fee from the Value Advantage Shares or Investor
Shares of each fund, payable monthly in the amount of 0.20% of average daily net
assets.
CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, 8800 Tinicum Blvd, Third Floor Suite 200, Philadelphia, PA
19152, serves as custodian for the funds and PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The fund accountant maintains all books and records
related to each fund's transactions.
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<PAGE> 223
INDEPENDENT ACCOUNTANTS
The funds' independent accountants, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trust and review
certain regulatory reports and each fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
a trust engages them 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, 1999, are included in the fund's 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 execution. Subject to the supervision of the board of trustees, the
investment adviser will select brokers and dealers for the funds on the basis of
a number of factors, including, for example, price paid for securities,
clearance, settlement, reputation, financial strength and stability, efficiency
of execution and error resolution, block trading and block positioning
capabilities, willingness to execute related or unrelated difficult transactions
in the future, and order of call.
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 expect that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices.
The investment decisions for each fund are reached independently from those for
other accounts managed by the investment 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.
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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.
The 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, which may cause the funds to incur
non-routine expenses. 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.
A majority of the outstanding voting shares of the fund means the affirmative
vote of the lesser of: (a) 67% or more of the voting shares represented at the
meeting, if more than 50% of the outstanding voting shares of a fund are
represented at the meeting or (b) more than 50% of the outstanding voting shares
of a fund. Any lesser number shall be sufficient for adjournments. Any adjourned
session or sessions may be held, within a reasonable time after the date set for
the original meeting, without the necessity of further notice. The Declaration
of Trust specifically authorizes the board of trustees to terminate the trust
(or any of its investment portfolios) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the trust solely by reason of being or having been a shareholder. Moreover,
the trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
trust itself is unable to meet its obligations. 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
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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 the net asset value per share as determined in accordance with the bylaws.
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
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 2000: Martin Luther
King's Birthday (observed), President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day (observed), 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.
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 transaction costs 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 investment portfolio and objective. The Sweep Shares, which are
not offered through this SAI, are designed to provide convenience through
automatic investment of uninvested cash balances and automatic redemptions for
transactions in your Schwab account, although shares also may be purchased
directly. The Value Advantage Shares do not have a sweep feature, but rather
must be purchased directly.
DELIVERY OF SHAREHOLDER DOCUMENTS
Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order
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to eliminate duplicate mailings of shareholder documents, each household may
receive one copy of these documents, under certain conditions. This practice is
commonly called "householding." If you want to receive multiple copies, you may
write or call your fund at the address or telephone number on the front of this
SAI. Your instructions will be effective within 30 days of receipt by Schwab.
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.
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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% 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. Your daily dividend is calculated each business day by
applying the daily dividend rate by the number of shares owned, and is rounded
to the nearest penny. The daily dividend is accrued each business day, and the
sum of the daily dividends are paid monthly. 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 day 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.
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A fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." 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 either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more. 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.
ADDITIONAL CONSIDERATIONS FOR MUNICIPAL FUNDS
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 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
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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.
STATE TAX CONSIDERATION
The following tax discussion summarizes general state tax laws which are
currently in effect and are subject to change by legislative or administrative
action; any such changes may be retroactive with respect to the applicable
Fund's transactions. Investors should consult a tax adviser for more detailed
information about state taxes to which they may be subject.
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 California exempt-interest dividends to shareholders,
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.
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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 individual income, corporate and
unincorporated business 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 under federal law from
New York State tax if held by an individual, will be exempt from New York State
and New York City personal income and unincorporated business taxes, but not
corporate franchise taxes. Dividends paid by the fund that are derived from
interest on Municipal Securities issued by New York and political subdivisions
or any agency or instrumentality thereof will be subject to the New York State
corporate franchise tax and the New York City general corporation tax only if
they have a sufficient nexus with New York State or New York City.
Other dividends and distributions from other Municipal Securities, U.S.
Government obligations, taxable income and capital gains that are not exempt
from state taxation under federal law and distributions attributable to capital
gains, will be subject to New York State personal income tax and New York City
personal income tax. Gain from the sale, exchange or other disposition of shares
will be subject to the New York State personal income and franchise taxes and
the New York City personal income, unincorporated business and general
corporation 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.
CALCULATION OF PERFORMANCE DATA
The funds' current 7-day yields based on the seven days ended December 31, 1999
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.
7-Day Current Yield as of December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Schwab Municipal Money Fund - Value 4.04%
Advantage Shares
Schwab California Municipal Money Fund - 3.57%
Value Advantage Shares
Schwab New York Municipal Money Fund - 3.88%
Value Advantage Shares
Schwab Value Advantage Money Fund - 5.63%
Investor Shares
</TABLE>
The funds' effective 7-day yields based on the seven days ended December 31,
1999 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,
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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, according to the
following formula with the resulting yield figure carried to at least the
nearest one hundredth of one percent.
7-Day Effective Yield as of December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Schwab Municipal Money Fund - Value 4.12%
Advantage Shares
Schwab California Municipal Money Fund - 3.63%
Value Advantage Shares
Schwab New York Municipal Money Fund - 3.95%
Value Advantage Shares
Schwab Value Advantage Money Fund - 5.79%
Investor Shares
</TABLE>
The funds' tax-equivalent current 7-day yields based on the 7-days ended
December 31, 1999 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, 1999
<TABLE>
<CAPTION>
<S> <C>
Schwab Municipal Money Fund - Value 6.69%
Advantage Shares
Schwab California Municipal Money Fund - 6.52%
Schwab Value Advantage Shares
Schwab New York Municipal Money Fund - 7.19%
Value Advantage Shares
</TABLE>
The funds' tax equivalent effective yields based on the seven days ended
December 31, 1999 are stated below and were calculated by dividing that portion
of the fund's effective 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
funds' effective yield that is not tax-exempt.
7-Day Tax-Equivalent Effective Yield as of December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Schwab Municipal Money Fund - Value Advantage Shares 6.82%
Schwab California Municipal Money Fund - 6.63%
Value Advantage Shares
Schwab New York Municipal Money Fund - 7.32%
Value Advantage Shares
</TABLE>
The above tax-equivalent yields assume payment of federal income tax at a rate
of 39.60% and a California income tax rate of 45.22% or a New York income tax
rate of 46.05%.
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
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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, 1999.
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 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.
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<PAGE> 233
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.
D-1 is the highest commercial paper rating assigned by Duff & Phelps Credit
Rating Co. ("Duff"). Three gradations exist within this rating category: a D-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 D-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 D-1- rating denotes high
certainty of timely payment (issuer liquidity factors are strong and risk is
very small). A D-2 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.
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<PAGE> 235
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB GOVERNMENT CASH RESERVES FUND
APRIL 30, 2000
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the fund's prospectus dated April 30, 2000 (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 fund 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 fund's most recent annual report is a separate document supplied with the
SAI and includes the fund's audited financial statements, which are incorporated
by reference into this SAI.
The fund is a series of The Charles Schwab Family of Funds (the trust).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVES, SECURITIES,
RISKS AND LIMITATIONS ............................... 2
MANAGEMENT OF THE FUND .............................. 8
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES . 11
INVESTMENT ADVISORY AND OTHER SERVICES .............. 11
BROKERAGE ALLOCATION AND OTHER PRACTICES ............ 13
DESCRIPTION OF THE TRUST ............................ 14
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES ............................... 15
TAXATION ............................................ 17
CALCULATION OF PERFORMANCE DATA ..................... 18
</TABLE>
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INVESTMENT OBJECTIVES, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVES
The fund's investment objective is to provide current income consistent with
liquidity and stability of capital. The fund's investment objective may be
changed only by vote of a majority of its outstanding voting shares. There is no
guarantee the fund will achieve its objectives.
The following investment 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 the
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. The fund will invest in securities or engage
in techniques that are intended to help achieve its investment objective.
INVESTMENT SECURITIES AND RISKS
BORROWING may subject the fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. The 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, the fund will
not purchase securities while borrowings represent more than 5% of its total
assets.
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, the
fund assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. Typically, no interest will accrue to the fund until the
security is delivered. The fund
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<PAGE> 237
will segregate appropriate liquid assets to cover its delayed-delivery purchase
obligations. When the 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. The fund is a series of an
open-end investment management company. The fund is a diversified mutual fund.
The fund also follows the regulations set forth by the SEC that dictate the
diversification requirements for money market mutual funds. These requirements
prohibit the fund from purchasing a security if more than 5% of its total assets
would be invested in the securities of a single issuer, although the fund may
invest up to 25% of its total assets in the first tier securities of a single
issuer for up to three business days. U.S. government and certain other
securities are not subject to this particular regulation.
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 the 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.
LENDING of portfolio securities is a common practice in the securities industry.
The fund will engage in security lending arrangements with the primary objective
of increasing its income through investment of the cash collateral in
short-term, interest-bearing obligations, but will do so only to the extent that
it will not lose the tax treatment available to regulated investment companies.
Lending portfolio securities involves risks that the borrower may fail to return
the securities or provide additional collateral. Also, voting rights with
respect to the loaned securities may pass with the lending of the securities.
The fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash equivalents maintained on a daily marked-to-market basis in an amount at
least equal to the current market value of the securities loaned; (2) the fund
may at any time call the loan and obtain the return of the securities loaned;
(3) the fund will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the fund.
Although voting rights with respect to loaned securities pass to the borrower,
the lender retains the right to recall a security (or terminate a loan) for the
purpose of exercising the security's voting rights. Efforts to recall such
securities promptly may be unsuccessful, especially for foreign securities or
thinly traded securities such as small-cap stocks. In addition, because
recalling a security may involve expenses to the fund, it is expected that the
fund will do so only where the items being voted upon are, in the judgement of
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser),
either material to the economic value of the security or threaten to materially
impact the issuer's corporate governance policies or structure.
MATURITY OF INVESTMENTS. The 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 or more than 397 days or maintaining a dollar-weighted average
portfolio maturity that exceeds 90 days.
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<PAGE> 238
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.
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 the 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 fund follows regulations set forth by the SEC that
dictate the quality requirements for money market mutual funds. These require
the fund 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.
REPURCHASE AGREEMENTS. Repurchase agreements involve the fund buying securities
(usually U.S. government securities) from a seller and simultaneously agreeing
to sell them back at an agreed-upon price (usually higher) and time. There are
risks that losses will result if the seller does not perform as agreed.
Repurchase agreements will be collateralized by first tier securities. In
addition, repurchase agreements collateralized entirely by U.S. government
securities may be deemed to be collateralized fully pursuant to Rule 2a-7.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by the fund
including those managed by its investment adviser. Because other investment
companies employ investment advisers and other service providers, investments by
the fund may cause shareholders to pay duplicative fees.
STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by the
Federal National Mortgage Association (FNMA), are supported by a line of credit
the issuing entity has with the U.S. Treasury. Others are supported solely by
the credit of the issuing agency or instrumentality. These include obligations
issued by the Federal Home
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Loan Mortgage Corporation (FHLMC or FREDDIE MAC), the Student Loan Marketing
Association (SLMA or SALLIE MAE), the Federal Farm Credit Banks Funding
Corporation (FFCB) and the Federal Home Loan Bank (FHLB). There can be no
assurance that the U.S. government will provide financial support to U.S.
government securities of its agencies and instrumentalities if it is not
obligated to do so under law. Of course U.S. government securities, including
U.S. Treasury securities, are among the safest securities, however, not unlike
other debt securities, they are still sensitive to interest rate changes, which
will cause their yields to fluctuate.
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 the fund. In addition, the fund may exercise only its demand rights
at certain times. The fund could suffer losses in the event that the issuer
defaults on its obligation.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of the fund's outstanding voting shares.
THE FUND MAY NOT:
(1) Purchase securities of any issuer unless consistent with its status as
a diversified investment management company as defined by the
Investment Company Act of 1940 or the rules or regulations thereunder,
as such statute, rules or regulations may be amended from time to time.
(2) Lend or borrow money, except as permitted by the Investment Company Act
of 1940 or the rules or regulations thereunder, as such statute, rules
or regulations may be amended from time to time.
(3) Pledge, mortgage or hypothecate any of its assets, except as permitted
by the Investment Company Act of 1940 or the rules or regulations
thereunder, as such statute, rules or regulations may be amended from
time to time.
(4) Issue senior securities, except as permitted by the Investment Company
Act of 1940 or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
(5) Underwrite securities, except as permitted by the Investment Company
Act of 1940 or the rules or regulations thereunder, as such statute,
rules or regulations may be amended from time to time.
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(6) Concentrate investments in a particular industry or group of
industries, or within one state, as concentration is defined under the
Investment Company Act of 1940 or the rules or regulations thereunder,
as such statute, rules or regulations may be amended from time to time.
(7) Purchase or sell commodities, commodities contracts, futures contracts,
or real estate, except as permitted by the Investment Company Act of
1940 or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
The following descriptions of the 1940 Act may assist investors in understanding
the above fundamental policies and restrictions.
Diversification. Under the 1940 Act, a diversified investment management
company, with respect to 75% of its total assets, may not purchase securities
(other than U.S. government securities or securities of other investment
companies) if, as a result, more than 5% of its total assets would be invested
in the securities of such issuer or it would own more than 10% of such issuer's
outstanding voting securities.
Borrowing. The 1940 Act presently restricts an investment management company
from borrowing (including pledging, mortgaging or hypothecating assets) in
excess of 33 1/3% of its total assets (not including temporary borrowings not in
excess of 5% of its total assets).
Lending. Under the 1940 Act, an investment management company may make loans
only if expressly permitted by its investment policies.
Concentration. The Securities and Exchange Commission presently defines
concentration as investing 25% or more of an investment company's net assets in
an industry or group of industries, with certain exceptions.
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 ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.
THE FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the 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
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of such issuer; provided that the fund may invest up to 25% of its
total assets in the first tier securities of a single issuer for up to
three business days.
(2) Purchase securities of any issuer (other than securities subject to a
guarantee issued by a person not controlled by the issuer) if, as a
result, more than the greater of 1% of its total assets or $1 million
would be invested in second tier securities of such issuer.
(3) With respect to 75% of total assets, purchase a guarantee or securities
subject to a guarantee of any issuer if, as a result, more than 10% of
its total assets would be invested in securities issued by or subject
to a guarantee of such issuer (except with respect to guarantees and
securities subject to guarantees issued by a non-controlled person).
(4) Purchase a second tier guarantee or second tier security subject to a
guarantee of any issuer if, as a result, more than 5% of its total
assets would be invested in securities issued by or subject to a
guarantee of such issuer.
(5) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
(6) Borrow money except that the fund may (i) borrow money from banks and
(ii) engage in reverse repurchase agreements with any party; provided
that (i) and (ii) in combination do not exceed 33 1/3% of its total
assets (any borrowings that come to exceed this amount will be reduced
to the extent necessary to comply with the limitation within three
business days) and provided that the fund will not purchase securities
while borrowings represent more than 5% of total assets.
(7) 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.
(8) Lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of debt securities or
repurchase agreements).
(9) Purchase securities of any issuer if, as a result, more than 10% of its
net assets would be invested in illiquid securities.
(10) 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).
(11) Purchase securities on margin, except that the fund may obtain
short-term credits that are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
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MANAGEMENT OF THE FUND
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. and Charles Schwab Investment Management, Inc., are
as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATIONS & AFFILIATIONS
- --------------------------------------- ------------------------- --------------------------------------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Charles Schwab
Holdings, Inc.; Chairman, Director, Charles
Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab
Trust Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, 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 Vice Chairman and Executive Vice President, The
June 28, 1953 Charles Schwab Corporation; Vice Chairman and
Enterprise President - Financial Products
and Services, Director, Charles Schwab &
Co., Inc.; Chief Executive Officer and Chief
Financial Officer, Director, Charles Schwab
Investment Management, Inc. From 1994 to
1996, Mr. Scheid was Executive Vice
President of Finance for First Interstate
Bancorp and Principal Financial Officer from
1995 to 1996. Prior to 1994, Mr. Scheid was
Chief Financial Officer, First Interstate
Bank of Texas.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
</TABLE>
- ----------
* This trustee is an "interested person" of the trusts.
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<PAGE> 243
<TABLE>
<S> <C> <C>
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 and
management, and investments).
WILLIAM J. KLIPP*1 Trustee From 1991 to 1999, Mr. Klipp was Executive Vice
December 9, 1955 President, SchwabFunds(R), Charles Schwab & Co.,
Inc.; President and Chief Operating Officer,
Charles Schwab Investment Management, Inc.
JEREMIAH H. CHAFKIN Executive Vice Executive Vice President, SchwabFunds(R),
May 5, 1959 President and Chief Charles Schwab & Co., Inc.; President and Chief
Operating Officer Operating Officer, Charles Schwab Investment
Management, Inc. Prior to November 1999, Mr.
Chafkin was Senior Managing Director, Bankers
Trust Company.
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.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment Officer,
April 5, 1955 and Chief Investment Charles Schwab Investment Management, Inc.
Officer
FRANCES COLE Secretary Senior Vice President, Chief Counsel and
September 9, 1955 Assistant Corporate Secretary, Charles Schwab
Investment Management, Inc.
</TABLE>
Each of the above-referenced officers and/or trustees also serves in the same
capacity as described for the trust, for Schwab Capital Trust, Schwab
Investments and Schwab Annuity Portfolios. The address of each individual listed
above is 101 Montgomery Street, San Francisco, California 94104.
- ----------
* This trustee is an "interested person" of the trusts.
1 Mr. Klipp departed Charles Schwab & Co., Inc. in 1999 and is expected to
resign from the Board of Trustees prior to June 1, 2000.
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The fund is overseen by a board of trustees. The board of trustees meets
regularly to review the fund's activities, contractual arrangements and
performance. The board of trustees is responsible for protecting the interests
of a fund's shareholders. The following table provides information as of the
fiscal year ended December 31, 1999, concerning compensation of the trustees.
Unless otherwise stated, information is for the fund complex, which included 40
funds as of December 31, 1999.
<TABLE>
<CAPTION>
Name of Trustee Aggregate Pension or Retirement ($) Total
Compensation Benefits Accrued as Compensation from
from the Fund Part of Fund Expenses Fund Complex
- --------------------------------- --------------- --------------------- -------------------
<S> <C> <C> <C>
Charles R. Schwab 0 N/A 0
Steven L. Scheid 0 N/A 0
William J. Klipp, 0 N/A 0
Donald F. Dorward $2,573 N/A $121,600
Robert G. Holmes $2,573 N/A $121,600
Donald R. Stephens $2,573 N/A $121,600
Michael W. Wilsey $2,338 N/A $111,600
</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 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, the 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 fund 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 fund.
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<PAGE> 245
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 3, 2000, the officers and trustees of the trust, as a group owned of
record or beneficially 1.28% of the fund's total outstanding shares.
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 fund's 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 the fund, the investment adviser
is entitled to receive graduated annual fee payable monthly based on the 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 the
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 period from April 1, 1998 (commencement of operations) to December 31,
1998 and for the fiscal year ended December 31, 1999, the fund paid investment
and advisory fees of $0 (fees were reduced $31,000) and $205,000 (fee were
reduced $111,000), respectively.
The investment adviser and Schwab have guaranteed that, through at least April
30, 2001, the total operating expenses (excluding interest, taxes and certain
non-routine expenses) will not exceed 1.25% of the fund's average daily net
assets. The investment adviser and Schwab have agreed to further reduce the
fund's expenses so that the total operating expenses do not exceed 0.95% of its
average daily net assets through June 15, 2000.
DISTRIBUTOR
Pursuant to an agreement, Schwab is the principal underwriter for shares of the
fund and is the trust's agent for the purpose of the continuous offering of the
fund's shares. The fund pays the cost of the prospectuses and shareholder
reports to be prepared and delivered to existing shareholders. Schwab pays such
costs when the described materials are used in connection with the offering of
shares to prospective investors and for supplemental sales literature and
advertising. Schwab
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<PAGE> 246
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 fund pays other expenses that typically are connected with the trust's
operations, and include legal, audit and custodian fees, as well as the costs of
accounting and registration of the fund. Expenses not directly attributable to a
particular fund will be allocated among the funds in the trust on the basis of
each fund's relative net assets at the time the expense is incurred.
SHAREHOLDER SERVICES AND TRANSFER AGENT
Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
fund's prospectuses, financial reports and other informational literature about
the fund. Schwab maintains the office space, equipment and personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds(R)
and provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these services.
For the services performed as transfer agent under its contract with the fund,
Schwab is entitled to receive an annual fee from the fund. The fee is payable
monthly in the amount of 0.25% of the fund's average daily net assets. For the
services performed as shareholder services agent under its contract with the
fund, Schwab is entitled to receive an annual fee from the fund. The fee is
payable monthly in the amount of 0.20% of the average daily net assets of the
fund.
TRANSACTION SERVICES
Pursuant to a Transaction Services Agreement, Schwab arranges for fund
shareholders to have various manual and electronic means by which they can use
their fund accounts to cover obligations incident to checking account, Automated
Clearing House, automated teller machine and debit card transactions. For its
services under the Transaction Services Agreement, Schwab receives
transaction-based fees for which it bills the fund monthly. For the fiscal year
ended December 31, 1999, Schwab received $66,000 as compensation under the
Transaction Services Agreement.
CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, 8800 Tinicum Blvd., Third Floor Suite 200, Philadelphia, PA
19153, serves as custodian for the fund and PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809 serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the fund. The fund accountant maintains all books and records
related to the fund's transactions.
INDEPENDENT ACCOUNTANTS
The fund's independent accountants, PricewaterhouseCoopers LLP, audit and report
on the annual financial statements of each series of the trusts and review
certain regulatory reports and each fund's federal income tax return. They also
perform other professional accounting, auditing, tax and advisory services when
a trust engages them to do so. Their address is 333 Market Street, San
Francisco, CA 94105. The fund's audited financial statements for the fiscal year
ended December 31, 1999, are included in the fund's annual report, which is a
separate report supplied with the SAI.
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<PAGE> 247
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 fund's 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 execution. Subject to the supervision of the board of trustees, the
investment adviser will select brokers and dealers for the fund on the basis of
a number of factors, including, for example, price paid for securities,
clearance, settlement, reputation, financial strength and stability, efficiency
of execution and error resolution, block trading and block positioning
capabilities, willingness to execute related or unrelated difficult transactions
in the future, and order of call.
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 fund expects that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices.
The investment decisions for the 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
The 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.
The Declaration of Trust provides that shares may be automatically redeemed if
held by a shareholder in an amount less than the minimum required by the fund or
share class. The 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 fund may hold special meetings, which may cause the funds to incur
non-routine expenses. These meetings may be called for purposes such as electing
trustees, changing fundamental policies
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<PAGE> 248
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.
A majority of the outstanding voting shares of the fund means the affirmative
vote of the lesser of: (a) 67% or more of the voting shares represented at the
meeting, if more than 50% of the outstanding voting shares of a fund are
represented at the meeting or (b) more than 50% of the outstanding voting shares
of a fund. Any lesser number shall be sufficient for adjournments. Any adjourned
session or sessions may be held, within a reasonable time after the date set for
the original meeting, without the necessity of further notice. The Declaration
of Trust specifically authorizes the board of trustees to terminate the trust
(or any of its investment portfolios) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the trust solely by reason of being or having been a shareholder. Moreover,
the trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
trust itself is unable to meet its obligations. There is a remote possibility
that the 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 less accrued
expenses. 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, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES
PURCHASING AND REDEEMING SHARES OF THE FUND
The fund is open each day that both the Federal Reserve Bank of New York (New
York Fed) and New York Stock Exchange (NYSE) are open (business days). The
following holiday closings are currently scheduled for 2000: Martin Luther
King's Birthday (observed), President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day (observed), Thanksgiving
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<PAGE> 249
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 fund or Schwab follow reasonable procedures to confirm that your
telephone order is genuine, they will not be liable for any losses an investor
may experience due to unauthorized or fraudulent instructions. These procedures
may include requiring a form of personal identification before acting upon any
telephone order, providing written confirmation of telephone orders and tape
recording all telephone orders.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
The fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of its net assets at the beginning of
such period. This election is irrevocable without the SEC's prior approval.
Redemption requests in excess of 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 transaction costs if he
or she were to convert the securities to cash.
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<PAGE> 250
DELIVERY OF SHAREHOLDER DOCUMENTS
Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order to eliminate duplicate
mailings of shareholder documents, each household may receive one copy of these
documents, under certain conditions. This practice is commonly called
"householding." If you want to receive multiple copies, you may write or call
your fund at the address or telephone number on the front of this SAI. Your
instructions will be effective within 30 days of receipt by Schwab.
PRICING OF SHARES
The fund values its portfolio instruments at amortized cost, which means they
are valued at their acquisition cost, as adjusted for amortization of premium or
discount, rather than at current market value. Calculations are made to compare
the value of the fund's investments at amortized cost with market values. When
determining market values for portfolio securities, the fund uses market quotes
if they are readily available. In cases where quotes are not readily available,
the fund may value securities based on fair values developed using methods
approved by the 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 NAV calculated using amortized cost, the board
of trustees might supplement dividends in an effort to maintain the fund's $1.00
NAV.
16
<PAGE> 251
TAXATION
FEDERAL TAX INFORMATION FOR THE FUND
It is the 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, the fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If the 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% 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, the 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 fund's prospectus and only summarizes some of the important
federal tax considerations generally affecting shareholders of the fund.
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 the fund.
On each business day that the NAV of the fund is determined, the 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. Your daily dividend is calculated each business day by
applying the daily dividend rate by the number of shares owned, and is rounded
to the nearest penny. The daily dividend is accrued each business day, and the
sum of the daily dividends are paid monthly. For the 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 day of December. If
cash payment is requested, checks will normally be mailed on the business day
following the reinvestment date. The fund will pay shareholders, who redeem all
of their shares, all dividends accrued to the time of the redemption within 7
days.
The fund calculates its dividends based on its daily net investment income. For
this purpose, the net investment income of the fund consists of: (1) accrued
interest income, plus or minus amortized discount or premium, minus (2) accrued
expenses allocated to that fund. If the fund realizes any capital gains, they
will be distributed at least once during the year as determined by the board of
trustees. Any realized capital losses, to the extent not offset by realized
capital gains, will be carried forward.
Any dividends declared by the 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.
17
<PAGE> 252
The fund does 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. Note that most states grant tax-exempt status to distributions
paid to shareholders from U.S. government securities.
A fund may engage in techniques that may alter the timing and character of its
income. A fund may be restricted in its use of these techniques by rules
relating to its qualification as a regulated investment company.
The fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." 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 fund generally are not subject to U.S.
taxation, unless the recipient is an individual who either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more. 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.
CALCULATION OF PERFORMANCE DATA
The fund's current 7-day yield based on the seven days ended December 31, 1999
is stated below and was 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 then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent.
<TABLE>
<CAPTION>
7-day Current Yield as of December 31, 1999
<S> <C>
Government Cash Reserves 4.67%
</TABLE>
The fund's effective yield based on the seven days ended December 31, 1999 is
stated below and was 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,
18
<PAGE> 253
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.
<TABLE>
<CAPTION>
7-day Effective Yield as of December 31, 1999
<S> <C>
Government Cash Reserves 4.78%
</TABLE>
The 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, 1999.
The performance of the fund 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 fund will be
subject to these costs and expenses, while an index does not have these
expenses. In addition, various factors, such as holding a cash balance, may
cause the fund's performance to be higher or lower than that of an index.
19
<PAGE> 254
PART C
OTHER INFORMATION
THE CHARLES SCHWAB FAMILY OF FUNDS
Item 23. Financial Statements and Exhibits.
<TABLE>
<CAPTION>
<S> <C> <C>
(b) Exhibits
(a) Articles of Amended and Restated Agreement and Declaration of Trust to Registrant's
Incorporation Registration Statement on Form N-1A,dated May 9, 1995, was
electronically filed and is incorporated by reference to Exhibit (1) file 811-
5954 to Post-Effective Amendment No. 33.
(b) By-laws Amended and Restated By-Laws are incorporated by reference to Exhibit (2)
file 811-5954 to Post-Effective Amendment No. 23 to Registrant's
Registration Statement on Form N-1A, electronically filed on March 29, 1996.
(c) Instruments (i) Article III, Sections 4 and 5; Article IV, Section 1; Article V;
Defining Article VI, Section 2; Article VIII, Section 4; and Article IX,
Rights of Sections 1, 4 and 7 of the Agreement and Declaration of Trust are
Shareholders incorporated by reference to Exhibit (1) file 811-5954 above.
(ii) Article 9 and Article 11 of the By-Laws are incorporated by
reference to Exhibit (2) file 811-5954 above.
(d) Investment (i) Investment Advisory and Administration Agreement between Registrant and
Advisory Charles Schwab Investment Management, Inc. (the "Investment Manager")
Contracts with respect to Schwab Money Market Fund, Schwab Government Money Fund
and Schwab Municipal Money Fund, dated April 30, 1999, was electronically filed
and is incorporated herein by reference to Exhibit (d) (i) file 811-5954 to
Post-Effective Amendment No. 37.
(ii) Schedule A to the Investment Advisory and Administration Agreement between
Registrant and Charles Schwab Investment Management, Inc. (the "Investment
Manager") with respect to Schwab Money Market Fund, Schwab Government Money
Fund and Schwab Municipal Money Fund was electronically filed and is incorporated
herein by reference to Exhibit 5(b) file 811-5954 to Post-Effective Amendment No.
27.
</TABLE>
2
<PAGE> 255
<TABLE>
<S> <C> <C>
(iii) Schedule B to the Investment Advisory and Administration Agreement between
Registrant and Charles Schwab Investment Management, Inc. (the "Investment
Manager") with respect to Schwab Money Market Fund, Schwab Government Money
Fund and Schwab Municipal Money Fund was electronically filed and is incorporated
herein by reference to Exhibit 5(c) file 811-5954 to Post-Effective Amendment No.
27.
(iv) Investment Advisory and Administration Agreement between Registrant and the
Investment Manager, dated June 15, 1994, was electronically filed and is
incorporated herein by reference to Exhibit (5)(d) file 811-5954 to
Post-Effective Amendment No. 27.
(v) Schedule A to the Investment Advisory and Administration Agreement Registrant
and the Investment Manager dated June 15, 1994 was electronically filed and is
incorporated herein by reference to Exhibit (d)(v) file 811-5954 to
Post-Effective Amendment No. 37.
(vi) Schedule B to the Investment Advisory and Administration Agreement between
Registrant and the Investment Manager, dated June 15, 1994, was electronically
filed and is incorporated herein by reference to Exhibit (5)(f) file
811-5954 to Post-Effective Amendment No. 27.
(vii) Schedule C to the Investment Advisory and Administration Agreement
between Registrant and the Investment Manager with respect to Schwab
California Municipal Money Fund, Schwab U.S. Treasury Money Fund,
Schwab Value Advantage Money Fund, Schwab Institutional Advantage Money
Fund(R), Schwab Retirement Money Fund(R), and Schwab New York Municipal
Money Fund, dated June 15, 1994, was electronically filed and is
incorporated herein by reference to Exhibit (5)(g) file 811-5954 to
Post-Effective Amendment No. 27.
(viii) Schedule D to the Investment Advisory and Administration Agreement between
Registrant and the Investment Manager dated June 15, 1994 was electronically
filed and is incorporated herein by reference to Exhibit (d)(viii) file
811-5954 Post-Effective Amendment No. 37.
(e) Underwriting (i) Distribution Agreement between Registrant and Charles Schwab & Co.,
Contracts Inc. ("Schwab"), dated June 15, 1994, to Registrant's Registration
Statement on Form N-1A, was electronically filed and is incorporated
by reference to Exhibit (6)(a) file 811-5954 to Post-Effective Amendment
No. 33.
</TABLE>
3
<PAGE> 256
<TABLE>
<S> <C> <C>
(ii) Schedule A to the Distribution Agreement between Registrant and Schwab was
electronically filed and is incorporated by reference to Exhibit (6)(b) file
811-5954 to Post-Effective Amendment No. 35.
(f) Bonus or Inapplicable.
Profit Sharing
Contracts
(g) Custodian (i) Custodian Services Agreement between Registrant and PNC Bank, N.A.
Agreements (formerly, Provident National Bank) dated April 8, 1991 to Registrant's
Registration Statement on Form N-1A, was electronically filed and is incorporated
by reference to Exhibit (8)(k) file 811-5954 to Post-Effective Amendment No.
33.
(ii) Schedule A to the Custodian Services Agreement is electronically filed herein as
Exhibit (g)(ii) file 811-5954.
(iii) Amendment Nos. 1 and 2 to the Custodian Services Agreement referred to
at Exhibit (8)(k) above was electronically filed and is incorporated by
reference to Exhibit (8)(n) file 811-5954 to Post-Effective Amendment
No. 33.
(iv) Accounting Services Agreement between Registrant and PFPC Inc. (formerly,
Provident Financial Processing Corporation) dated April 8, 1991 to
Registrant's Registration Statement on Form N-1A, was electronically filed and
is incorporated by reference to Exhibit (8)(a) file 811-5954 to Post-Effective
Amendment No. 33.
(v) Schedule B to the Accounting Services Agreement referred to at Exhibit (8)(a)
was electronically filed and is incorporated by reference to Exhibit
(8)(b) file 811-5954 to Post-Effective Amendment No. 35.
(vi) Amendment Nos. 1 and 2 to the Accounting Services Agreement referred to
at Exhibit (8)(a) above was electronically filed and is incorporated by
reference to Exhibit (8)(d) file 811-5954 to Post-Effective Amendment
No. 33.
(vii) Amended and Restated Transfer Agency Agreement and Schedule B between
Registrant and Schwab dated June 5, 1995 to Registrant's Registration Statement
on Form N-1A, was electronically filed and is incorporated by reference to
Exhibit (8)(e) file 811-5954 to Post-Effective Amendment No. 33.
</TABLE>
4
<PAGE> 257
<TABLE>
<S> <C> <C>
(viii) Schedule A and Schedule C to the Amended and Restated Transfer Agency Agreement
was electronically filed and is incorporated by reference to Exhibit
(8)(e) file 811-5954 to Post-Effective Amendment No. 35.
(ix) Shareholder Service Agreement between Registrant and Schwab dated May 1, 1993
to Registrant's Registration Statement on Form N-1A, was electronically filed
and is incorporated by reference to Exhibit (8)(h) file 811-5954 to
Post-Effective Amendment No. 33.
(x) Schedules A, B, and C to the Shareholder Service Agreement between Registrant and
Schwab referred to at Exhibit (8)(h) above to Registrant's Registration
Statement on Form N-1A, was electronically filed and is incorporated
by reference to Exhibit (8)(I) file 811-5954 to Post-Effective Amendment No.
33.
(xi) Schedules A and C to the Shareholder Service Agreement were electronically
filed and are incorporated by reference to Exhibit (8)(j) file 811-5954 to
Post-Effective Amendment No. 35.
(h) Other Material Inapplicable.
Contracts
(i) Legal Opinion Opinion of counsel is filed herein as Exhibit (i) file 811-5954.
(j) Other Opinion Consent of independent accountants is filed herein as Exhibit (j) file
811-5954.
(k) Omitted Inapplicable.
Financial
Statements
(l) Initial Capital (i) Purchase Agreement between Registrant and Schwab relating to
Agreements the Schwab U.S. Treasury Money Fund to Registrant's
Registration Statement on Form N-1A, was electronically filed
and is incorporated by reference to Exhibit (13)(a) file 811-5954
to Post-Effective Amendment No. 33.
(ii) Purchase Agreement between Registrant and Schwab relating to the Schwab Value
Advantage Money Fund to Registrant's Registration Statement on Form N-1A, was
electronically filed and is incorporated by reference to Exhibit (13)(b) file
811-5954 to Post-Effective Amendment No. 33.
</TABLE>
5
<PAGE> 258
<TABLE>
<S> <C> <C>
(iii) Purchase Agreement between Registrant and Schwab relating to the Schwab
Retirement Money Fund(R) and the Schwab Institutional Advantage Money Fund(R) to
Registrant's Registration Statement on Form N-1A, was electronically filed and
is incorporated by reference to Exhibit (13)(c) file 811-5954 to Post-Effective
Amendment No. 33.
(iv) Purchase Agreement between Registrant and Schwab relating to the Schwab New
York Municipal Money Fund to Registrant's Registration Statement on
Form N-1A, was electronically filed and is incorporated by reference to Exhibit
(13)(d) file 811-5954 to Post-Effective Amendment No. 33.
(v) Purchase Agreement between Registrant and Schwab relating to the Schwab
Municipal Money Fund-Value Advantage Shares to Registrant's Registration
Statement on Form N-1A, was electronically filed and is incorporated
by reference to Exhibit (13)(e) file 811-5954 to Post-Effective Amendment No. 33.
(vi) Purchase Agreement between Registrant and Schwab relating to the Schwab
California Municipal Money Fund-Value Advantage Shares to Registrant's
Registration Statement on Form N-1A, was electronically filed and is incorporated
by reference to Exhibit (13)(f) file 811-5954 to Post-Effective Amendment No. 33.
(vii) Purchase Agreement between Registrant and Schwab relating to the Schwab New
York Municipal Money Fund-Value Advantage Shares to Registrant's
Registration Statement on Form N-1A, was electronically filed and is incorporated
by reference to Exhibit (13)(g) file 811-5954 to Post-Effective Amendment No. 33.
(viii) Purchase Agreement between Registrant and Schwab relating to the Schwab
Government Cash Reserves Fund was electronically filed and is incorporated
by reference to Exhibit (13)(h) file 811-5954 to Post-Effective Amendment No.36.
(ix) Purchase Agreement between Registrant and Schwab relating to the Schwab New
Jersey Municipal Money Fund was electronically filed and is incorporated
by reference to Exhibit (13)(i) file 811-5954 to Post-Effective Amendment No. 33.
(x) Purchase Agreement between Registrant and Schwab relating to the Schwab
Pennsylvania Municipal Money Fund was electronically filed and is incorporated
by reference to Exhibit (13)(j) file 811-5954 to Post-Effective Amendment No.
33.
</TABLE>
6
<PAGE> 259
<TABLE>
<S> <C> <C>
(xi) Purchase Agreement between Registrant and Schwab relating to the Schwab
Florida Municipal Money Fund was electronically filed and is incorporated
by reference to Exhibit (13)(k) file 811-5954 to Post-Effective Amendment No.
36.
(m) Rule 12-b1 Plan Inapplicable
(n) Financial Data Inapplicable
Schedules
(o) Rule 18f-3 Plan (i) Form of Amended and Restated Multiple Class Plan of
Registrant and Schedule A are incorporated by reference to Exhibit
(18) file 811-5954 to Post-Effective Amendment No. 25 to Registrant's
Registration Statement on Form N-1A, filed on February 21, 1997.
(p) Powers of (i) Powers of attorney for each trustee and the chief
financial officer were electronically filled and are
incorporated herein by reference to Exhibit (p) 811-5954 to Post-Effective
Amendment No. 37.
(ii) Power of Attorney for the Executive Vice President and Chief Operating Officer
are filed herein.
</TABLE>
Item 24. Persons Controlled by or under Common Control with Registrant.
Schwab Investments, Schwab Capital Trust, and Schwab Annuity Portfolios each are
Massachusetts business trusts registered under the Investment Company Act of
1940, as amended (the "1940 Act"); are advised by the Investment Manager; and
employ Schwab as their principal underwriter, transfer agent and shareholder
services agent. As a result, Schwab Investments, Schwab Capital Trust, and
Schwab Annuity Portfolios may be deemed to be under common control with
Registrant.
Item 25. Indemnification.
Article VIII of Registrant's Amended and Restated Agreement and Declaration of
Trust (Exhibit (1) hereto, which is incorporated herein by reference) provides
in effect that Registrant will indemnify its officers and trustees against all
liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise, or as fines and penalties, and counsel
fees reasonably incurred by any such officer or trustee in connection with the
defense or disposition of any action, suit, or other proceeding. However, in
accordance with Section 17(h) and 17(i) of the 1940 Act and its own terms, said
Agreement and Declaration of Trust does not protect any person against any
liability to Registrant or its shareholders to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
In any event, Registrant will comply with 1940 Act Releases Nos. 7221 and 11330
respecting the permissible boundaries of indemnification by an investment
company of its officers and trustees.
Insofar as indemnification for liability arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
7
<PAGE> 260
by Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Manager
Registrant's investment adviser, Charles Schwab Investment Management, Inc., a
Delaware corporation, organized in October 1989 to serve as investment manager
to Registrant, also serves as the investment manager to The Charles Schwab
Family of Funds, each an open-end, management investment company. The principal
place of business of the investment adviser is 101 Montgomery Street, San
Francisco, California 94104. The only business in which the investment adviser
engages is that of investment adviser and administrator to Registrant, The
Charles Schwab Family of Funds and any other investment companies that Schwab
may sponsor in the future as well as provider of advisory services to the Schwab
Fund for Charitable Giving and to Charles Schwab Asset Management (Ireland)
Limited.
The business, profession, vocation or employment of a substantial nature in
which each director and/or senior or executive officer of the investment adviser
(CSIM) is or has been engaged during the past two fiscal years is listed below.
The name of any company for which any director and/or senior or executive
officer of the investment adviser serves as director, officer, employee, partner
or trustee is also listed below. In addition, the name and position of each
director and/or senior or executive officer of the Registrant's principal
underwriter Schwab & Co. Inc. is listed below.
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman, Director
Chairman, Chief Executive
Officer and Trustee
The Charles Schwab Corporation Chairman and Co-Chief Executive
Officer, Director
Charles Schwab Investment Management, Inc. Chairman, Director
The Charles Schwab Trust Company Director
Mayer & Schweitzer, Inc. Chairman and Director until
January 1999
Schwab Retirement Plan Services, Inc. Chairman, Director until January
1999
</TABLE>
8
<PAGE> 261
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab Limited (U.K.) Chairman and Chief Executive
Officer
Schwab Holdings, Inc. Chief Executive Officer
Schwab International Holdings, Inc. Chairman and Chief Executive
Officer
Schwab (SIS) Holdings, Inc. I Chairman and Chief Executive
Officer
Performance Technologies, Inc. Chairman, Director until January
1999
TrustMark, Inc. Chairman and Director until
January 1999
The Gap, Inc. Director
Audiobase, Inc. Director
Vodaphone AirTouch PLC Director
Siebel Systems Director
David S. Pottruck Charles Schwab & Co., Inc. Chief Executive Officer, Director
The Charles Schwab Corporation President and Co-Chief Executive
Officer, Director
Schwab Retirement Plan Services, Inc. Director until January 1999
Charles Schwab Limited (U.K.) Director until January 1999
Charles Schwab Investment Management, Inc. Director
Mayer & Schweitzer, Inc. Director until January 1999
Performance Technologies, Inc. Director until January 1999
TrustMark, Inc. Director until January 1999
</TABLE>
9
<PAGE> 262
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Steven L. Scheid Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President and Trustee President - Financial Products
and Services, Director
The Charles Schwab Corporation Vice Chairman and Executive Vice
President
Charles Schwab Investment Management, Inc. Chief Executive Officer and
Chief Financial Officer, Director
The Charles Schwab Trust Company Director until July 1998
Charles Schwab Limited (U.K.) Finance Officer
Schwab Retirement Plan Services, Inc. Director until January 1999
Performance Technologies, Inc. Director until January 1999
Mayer & Schweitzer, Inc. Director until January 1999
Willie C. Bogan The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Vice President and Assistant
Corporate Secretary
Charles Schwab Investment Management, Inc. Assistant Corporate Secretary
The Charles Schwab Trust Company Assistant Corporate Secretary
Jeremiah H. Chafkin, Executive Charles Schwab & Co., Inc. Executive Vice President -
Vice President and Chief SchwabFunds. Prior to November
Operating Officer 1999, Mr. Chafkin was Senior
Managing Director, Bankers Trust
Company.
Charles Schwab Investment Management, Inc. President and Chief Operating
Officer
</TABLE>
10
<PAGE> 263
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Karen W. Chang Charles Schwab & Co., Inc. Enterprise President - General
Investor Services
John P. Coghlan Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President - Retirement Plan
Services and Services for
Investment Managers
Frances Cole, Charles Schwab Investment Management, Inc. Senior Vice President, Chief
Secretary Counsel and Assistant Corporate
Secretary
Linnet F. Deily Charles Schwab & Co., Inc. Vice Chairman and President -
Schwab Retail Group
Christopher V. Dodds Charles Schwab & Co., Inc. Executive Vice President and Chief
Financial Officer
Carrie Dwyer Charles Schwab & Co., Inc. Executive Vice President -
Corporate Oversight and Corporate
Secretary
Wayne W. Fieldsa Charles Schwab & Co., Inc. Enterprise President - Brokerage
Operations
Lon Gorman Charles Schwab & Co., Inc. Vice Chairman and Enterprise
President - Capital Markets and
Trading
James M. Hackley Charles Schwab & Co., Inc. Executive Vice President - Retail
Client Services
Colleen M. Hummer Charles Schwab & Co., Inc. Senior Vice President - Mutual
Funds Operations
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President and Chief
Strategy Officer
Dawn G. Lepore Charles Schwab & Co., Inc. Vice Chairman, Executive Vice
President and Chief Information
Officer
</TABLE>
11
<PAGE> 264
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Susanne D. Lyons Charles Schwab & Co., Inc. Enterprise President - Retail
Client Services
Frederick E. Matteson Charles Schwab & Co., Inc. Executive Vice President - Schwab
Technology Services
John P. McGonigle Charles Schwab & Co., Inc. Executive Vice President - Asset
Management Products and Services
Geoffrey Penney Charles Schwab & Co., Inc. Executive Vice President -
Financial Products and
International Technology
George A. Rich Charles Schwab & Co., Inc. Executive Vice President - Human
Resources
Gideon Sasson Charles Schwab & Co., Inc. Enterprise President - Electronic
Brokerage
Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President and Chief
Administrative Officer
Leonard Short Charles Schwab & Co., Inc. Executive Vice President - CRS
Advertising and Branch Management
Stephen B. Ward, Charles Schwab Investment Management, Inc. Senior Vice President and Chief
Senior Vice President and Investment Officer
Chief Investment Officer
</TABLE>
Item 27. Principal Underwriters.
(a) Schwab acts as principal underwriter and distributor of
Registrant's shares. Schwab also acts as principal underwriter for The Charles
Schwab Family of Funds and intends to act as such for any other investment
company which Schwab may sponsor in the future.
(b) See Item 26(b) for information on each director and/or senior or
executive officer of Schwab. The principal business address of Schwab is 101
Montgomery Street, San Francisco, California 94104.
(c) Not applicable.
12
<PAGE> 265
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained pursuant to
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of: Registrant (transfer agency and shareholder records); Registrant's
investment manager and administrator, Charles Schwab Investment Management,
Inc., 101 Montgomery Street, San Francisco, California 94104; Registrant's
sub-investment adviser, Dimensional Fund Advisors Inc., 1299 Ocean Avenue, Suite
1100, Santa Monica, California 90401; Registrant's principal underwriter,
Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's Custodian, PNC Bank, National Association, Broad and Market
Streets, Philadelphia, Pennsylvania 19104 (ledgers, receipts and brokerage
orders); Registrant's fund accountants, PFPC, Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809; or Ropes & Gray, counsel to Registrant, 1301 K
Street, N.W., Suite 800 East, Washington, D.C. 20005 (minute books, bylaws and
declaration of trust).
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
13
<PAGE> 266
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended,
Registrant certifies that it meets all of the requirements for the effectiveness
of this Post Effective Amendment No. 38 to Registrant's Registration Statement
on Form N-1A pursuant to Rule 485(b) under the 1933 Act and has duly caused this
Post Effective Amendment No. 38 to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Washington, District of Columbia, on the
26th day of April, 2000.
THE CHARLES SCHWAB FAMILY OF FUNDS
Registrant
Charles R. Schwab*
----------------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 38 to Registrant's Registration Statement on Form N-1A has been
signed below by the following persons in the capacities indicated this 26th day
of April, 2000.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
Charles R. Schwab* Chairman and Trustee
- ----------------------
Charles R. Schwab
Steve Scheid* President and Trustee
- ----------------------
Steve Scheid
Jeremiah H. Chafkin* Executive Vice President and Chief Operating Officer
- ----------------------
Jeremiah H. Chafkin
William J. Klipp* Trustee
- ----------------------
William J. Klipp
Donald F. Dorward* Trustee
- ----------------------
Donald F. Dorward
Robert G. Holmes* Trustee
- ----------------------
Robert G. Holmes
Donald R. Stephens* Trustee
- ----------------------
Donald R. Stephens
Michael W. Wilsey* Trustee
- ----------------------
Michael W. Wilsey
Tai-Chin Tung* Treasurer and Principal Financial Officer
- ----------------------
Tai-Chin Tung
*By: /s/John H. Grady, Jr.
------------------------------------
John H. Grady, Jr., Attorney-in-Fact
pursuant to Powers of Attorney
</TABLE>
<PAGE> 267
EXHIBIT INDEX
Exhibit No. Document
(g)(ii) Schedule A to the Custodian Services Agreement
(i) Opinion of counsel
(j) Opinion of independent accountants
(p)(ii) Power of attorney
14
<PAGE> 1
EXHIBIT (g)(ii)
SCHEDULE A
CUSTODIAN SERVICES AGREEMENT
<TABLE>
<S> <C> <C>
1. Schwab California Municipal Money Fund November 6, 1990
(formerly Schwab California Tax-Exempt Money Fund)
2. Schwab Money Market Fund April 8, 1991
3. Schwab Government Money Fund April 8, 1991
4. Schwab Municipal Money Fund May 3, 1991
5. Schwab US Treasury Money Fund November 5, 1991
6. Schwab Value Advantage Money Fund February 7, 1992
7. Schwab Institutional Advantage Money Fund November 26, 1993
8. Schwab Retirement Money Fund November 26, 1993
9. Schwab New York Municipal Money Fund November 8, 1994
(formerly Schwab New York Tax-Exempt Money Fund)
10. Schwab Government Cash Reserves Fund October 20, 1997
11. Schwab New Jersey Municipal Money Fund January 20, 1998
12. Schwab Pennsylvania Municipal Money Fund January 20, 1998
13. Schwab Florida Municipal Money Fund February 16, 1998
</TABLE>
PNC Bank
By: /s/ Joseph T. Gramlich
----------------------
Joseph T. Gramlich
Title: Senior Vice President
THE CHARLES SCHWAB FAMILY OF FUNDS
By: /s/ William J. Klipp
--------------------
William J. Klipp
Title: Executive Vice President and Chief
Operating Officer
<PAGE> 1
EXHIBIT (i)
1701 Market Street MORGAN, LEWIS
Philadelphia, PA 19103 & BOCKIUS LLP
(215)963-5000 COUNSELORS AT LAW
Fax: (215)963-5299
April 26, 2000
The Charles Schwab Family of Funds
101 Montgomery Street
San Francisco, CA 94104
Re: Opinion of Counsel regarding Post-Effective Amendment No. 38 to the
Registration Statement filed on Form N-1A under the Securities Act of 1933
(File No. 33-31894).
Ladies and Gentlemen:
We have acted as counsel to The Charles Schwab Family of Funds, a Massachusetts
trust (the "Trust"), in connection with the above-referenced Registration
Statement (as amended, the "Registration Statement") which relates to the
Trust's units of beneficial interest, par value $.00001 per share (collectively,
the "Shares"). This opinion is being delivered to you in connection with the
Trust's filing of Post-Effective Amendment No. 38 to the Registration Statement
(the "Amendment") to be filed with the Securities and Exchange Commission
pursuant to Rule 485(b) of the Securities Act of 1933 (the "1933 Act"). With
your permission, all assumptions and statements of reliance herein have been
made without any independent investigation or verification on our part except to
the extent otherwise expressly stated, and we express no opinion with respect to
the subject matter or accuracy of such assumptions or items relied upon.
In connection with this opinion, we have reviewed, among other things, executed
copies of the following documents:
(a) a certificate of the Commonwealth of Massachusetts as to the
existence and good standing of the Trust;
(b) the Agreement and Declaration of Trust for the Trust and all
amendments and supplements thereto (the "Declaration of Trust");
(c) a certificate executed by Frances Cole, the Secretary of the Trust,
certifying as to, and attaching copies of, the Trust's Declaration
of Trust and Amended and Restated By-Laws (the "By-Laws"), and
certain resolutions adopted by the Board of Trustees of the Trust
authorizing the issuance of the Shares; and
<PAGE> 2
(d) a printer's proof of the Amendment.
In our capacity as counsel to the Trust, we have examined the originals, or
certified, conformed or reproduced copies, of all records, agreements,
instruments and documents as we have deemed relevant or necessary as the basis
for the opinion hereinafter expressed. In all such examinations, we have assumed
the legal capacity of all natural persons executing documents, the genuineness
of all signatures, the authenticity of all original or certified copies, and the
conformity to original or certified copies of all copies submitted to us as
conformed or reproduced copies. As to various questions of fact relevant to such
opinion, we have relied upon, and assume the accuracy of, certificates and oral
or written statements of public officials and officers or representatives of the
Fund. We have assumed that the Amendment, as filed with the Securities and
Exchange Commission, will be in substantially the form of the printer's proof
referred to in paragraph (d) above.
Based upon, and subject to, the limitations set forth herein, we are of the
opinion that the Shares, when issued and sold in accordance with the Declaration
of Trust and By-Laws, and for the consideration described in the Registration
Statement, will be legally issued, fully paid and nonassessable under the laws
of the Commonwealth of Massachusetts.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not concede that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Very truly yours,
/s/Morgan, Lewis and Bockius LLP
- --------------------------------
Morgan, Lewis and Bockius LLP
<PAGE> 1
EXHIBIT (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our reports dated February 4, 2000, relating to the
financial statements and financial highlights which appear in the December 31,
1999 Annual Reports to Shareholders of 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, Schwab Value Advantage Money Fund, Schwab
Government Money Fund, Schwab Money Market Fund, Schwab U.S. Treasury Money
Fund, Schwab Government Cash Reserves Fund, Schwab Institutional Advantage Money
Fund and Schwab Retirement Money Fund (constituting The Charles Schwab Family of
Funds) which are also incorporated by reference into the Registration Statement.
We also consent to the references to us under the headings "Financial
Highlights" and "Independent Accountants" in such Registration Statement.
San Francisco, California
April 30, 2000
<PAGE> 1
EXHIBIT (p)(ii)
THE CHARLES SCHWAB FAMILY OF FUNDS
SCHWAB INVESTMENTS
SCHWAB CAPITAL TRUST
SCHWAB ANNUITY PORTFOLIOS
POWER OF ATTORNEY
I, the undersigned trustee and/or officer of The Charles Schwab Family
of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios
(each a "Trust" and collectively the "Trusts"), and each a Massachusetts
business trust, do hereby constitute and appoint Frances Cole, Matthew O'Toole,
Richard W. Grant and John H. Grady, Jr., and each of them singly, my true and
lawful attorneys, with full power to them and each of them, to sign for me and
in my name and the capacity listed below, any and all amendments to the
Registration Statement on Form N1-A of each Trust, and to file the same with all
exhibits thereto, and other documents in connection thereunder, with the
Securities and Exchange Commission, granting unto my said attorneys, and each of
them, acting alone, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in the premises, as fully as to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys or any of them may lawfully do
or cause to be done by virtue thereof.
WITNESS my hand on the date set forth below.
/s/ Jeremiah H. Chafkin Date: 12/6/1999
- ------------------------------ ---------
Jeremiah H. Chafkin
Executive Vice President and Chief Operating Officer