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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
AS AMENDED JULY 12, 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
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INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES,
RISKS AND LIMITATIONS.............................................. 2
MANAGEMENT OF THE FUNDS............................................ 14
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES................ 18
INVESTMENT ADVISORY AND OTHER SERVICES............................. 18
BROKERAGE ALLOCATION AND OTHER PRACTICES........................... 21
DESCRIPTION OF THE TRUST........................................... 22
PURCHASE, REDEMPTION, DELIVERY OF SHAREHOLDER REPORTS
AND PRICING OF SHARES.............................................. 23
TAXATION........................................................... 24
CALCULATION OF PERFORMANCE DATA.................................... 28
APPENDIX........................................................... 31
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INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVES
Schwab Municipal Money Fund seeks maximum current income exempt from federal
income tax consistent with liquidity and stability of capital.
Schwab California Municipal Money Fund seeks maximum current income exempt from
federal and California state personal income taxes consistent with liquidity and
stability of capital.
Schwab New York Municipal Money Fund seeks to provide maximum current income
exempt from federal and New York state and local personal income taxes
consistent with 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 under the Investment Company Act of 1940 (1940 Act),
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, including time deposits, 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 rates 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 than 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 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
depositories began pricing, trading and settling in euro even if the securities
traded are not denominated in euro. Each securities transaction that requires
conversion 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
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purchasing a security with a remaining maturity of more than 397 days or
maintaining a dollar-weighted average portfolio maturity that exceeds 90 days.
MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be
issued by entities such as the U.S. government, corporations and financial
institutions (like banks). Money market securities include commercial paper,
certificates of deposit, banker's acceptances, notes and time deposits.
Money market securities pay fixed, variable or floating rates of interest and
are generally subject to credit and interest rate risks. The maturity date or
price of and financial assets collateralizing a security may be structured in
order to make it qualify as or act like a money market security. These
securities may be subject to greater credit and interest rate risks than other
money market securities because of their structure. Money market securities may
be issued with puts or these can be sold separately.
MUNICIPAL SECURITIES are debt securities issued by a state, its counties,
municipalities, authorities and other subdivisions, or the territories and
possessions of the United States and the District of Columbia, including their
subdivisions, agencies and instrumentalities and corporations. These securities
may be issued to obtain money for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, public utilities, schools,
streets, and water and sewer works. Other public purposes 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.
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Examples of municipal securities that are issued with original maturities of 397
days or less are short-term tax anticipation notes, bond anticipation notes,
revenue anticipation notes, construction loan notes, pre-refunded municipal
bonds and tax-free commercial paper. Tax anticipation notes typically are sold
to finance working capital needs of municipalities in anticipation of the
receipt of property taxes on a future date. Bond anticipation notes are sold on
an interim basis in anticipation of a municipality's issuance of a longer-term
bond in the future. Revenue anticipation notes are issued in expectation of the
receipt of other types of revenue, such as that available under the Federal
Revenue Sharing Program. Construction loan notes are instruments insured by the
Federal Housing Administration with permanent financing by "Fannie Mae" (the
Federal National Mortgage Association) or "Ginnie Mae" (the Government National
Mortgage Association) at the end of the project construction period.
Pre-refunded municipal bonds are bonds that are not yet refundable, but for
which securities have been placed in escrow to refund an original municipal bond
issue when it becomes refundable. Tax-free commercial paper is an unsecured
promissory obligation issued or guaranteed by a municipal issuer. The funds may
purchase other municipal securities similar to the foregoing that are or may
become available, including securities issued to pre-refund other outstanding
obligations of municipal issuers.
The funds also may invest in moral obligation securities, which are normally
issued by special purpose public authorities. If the issuer of a moral
obligation security is unable to meet its obligation from current revenues, it
may draw on a reserve fund. The state or municipality that created the entity
has only a moral commitment, not a legal obligation, to restore the reserve
fund.
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.
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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 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 taxable 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. For municipal money funds, the
same percentage limits apply with respect to second tier securities that are
"conduit securities."
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
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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 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 money 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 money 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 or FANNIE
MAE), 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
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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 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 risk, 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 its demand rights only 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) Concentrate investments in a particular industry or group of industries,
as concentration is defined under the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.
(3) Purchase or sell commodities or real estate, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time.
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<PAGE> 11
(4) Underwrite securities issued by other persons, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time.
(5) Lend or borrow money, except to the extent permitted by the 1940 Act or
the rules or regulations thereunder, as such statute, rules or regulations
may be amended from time to time.
(6) Pledge, mortgage or hypothecate any of its assets, except to the extent as
permitted by the 1940 Act or the rules or regulations thereunder, as such
statute, rules or regulations may be amended from time to time.
(7) Issue senior securities, except to the extent as permitted by the 1940 Act
or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
SCHWAB MUNICIPAL MONEY FUND MAY NOT:
(1) Purchase securities of any issuer unless consistent with the maintenance
of its status as a diversified company under the 1940 Act 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 other persons, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time.
(2) Purchase or sell commodities or real estate, except to the extent
permitted under the 1940 Act, the rules or regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time.
(3) Concentrate investments in a particular industry or group of industries,
as concentration is defined under the 1940 Act, the rules or regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.
(4) Make loans to other persons, except to the extent permitted under the 1940
Act, the rules or regulations thereunder or any exemption therefrom, as
such statute, rules or regulations may be amended or interpreted from time
to time.
(5) Issue senior securities, except to the extent permitted under the 1940
Act, the rules or regulations thereunder or any exemption therefrom, as
such statute, rules or regulations may be amended or interpreted from time
to time.
(6) Purchase securities of any issuer unless consistent with the maintenance
of its status as a diversified company under the 1940 Act 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 1940 Act or the rules
or regulations thereunder, as such statute, rules or regulations may be
amended from time to time.
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<PAGE> 12
THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING
THE ABOVE POLICIES AND RESTRICTIONS.
Borrowing. The 1940 Act presently restricts a fund from borrowing (including
pledging, mortgaging or hypothecating assets) in excess of 33 1/3% of its total
assets (not including temporary borrowings not in excess of 5% of its total
assets).
Lending. Under the 1940 Act, a fund may only make loans if expressly
permitted by its investment policies.
Concentration. The Securities and Exchange Commission presently defines
concentration as investing 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, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.
EACH MUNICIPAL MONEY FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government, its agencies or instrumentalities) if,
as a result, more than 5% of the value of its assets would be invested in
the securities of that issuer, except that, with respect to Schwab
California Municipal Money Fund and Schwab New York Municipal Money Fund,
provided no more than 25% of the fund's total assets would be invested in
the securities of a single issuer, up to 50% of the value of the fund's
assets may be invested without regard to this 5% limitation. For purposes
of this limitation, the fund will regard the entity which has the primary
responsibility for the payment of interest and principal as the issuer.
(2) Purchase securities (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 any one state or its political subdivisions shall not apply
to Schwab California Municipal Money Fund or Schwab New York Municipal
Money Fund).
(3) Purchase securities of other investment companies, except as permitted by
the 1940 Act.
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<PAGE> 13
(4) Make loans to others (except through the purchase of debt obligations or
repurchase agreements in accordance with its investment objective and
policies).
(5) 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.
(6) 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.
(7) 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.
(8) Issue senior securities as defined in the 1940 Act.
(9) 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.
(10) Invest for the purpose of exercising control or management of another
issuer.
(11) Invest more than 10% of its net assets in illiquid securities.
(12) 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.
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND AND SCHWAB NEW YORK MUNICIPAL MONEY
FUND MAY NOT:
(1) Purchase securities of any issuer unless consistent with the maintenance
of its respective status as a non-diversified company under the 1940 Act
or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
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.
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<PAGE> 14
(5) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.(1)
(6) Write, purchase or sell puts, calls or combinations thereof.
(7) Make short sales of securities or purchase any securities on margin,
except to obtain such short-term credits as may be necessary for the
clearance of transactions.
(8) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of issuers
which invest in or sponsor such programs. Except 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.
(9) 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.
(10) 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.S. banks, or obligations of or guaranteed by the U.S. government, its
agencies or instrumentalities.
(11) 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).
Except with respect to borrowings, concentration of investments and investments
in illiquid securities 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
July 29, 1937 Executive Officer, Director, The Charles
Officer and Schwab Corporation; Chief
Trustee Executive Officer, Director,
Charles Schwab Holdings, Inc.;
Chairman, Director, Charles Schwab
& Co., Inc., Charles Schwab
</TABLE>
--------
(1) See the description of the Trustees' deferred compensation plan under
"Management of the Trust" for an exception to this investment restriction.
-14-
<PAGE> 15
<TABLE>
<S> <C> <C>
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), Audiobase, Inc.,
Vodaphone AirTouch PLC (a
telecommunications company) and
Siebel Systems (a software
company).
STEVEN L. SCHEID* President and Vice Chairman and Executive Vice
June 28, 1953 Trustee President, The 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
September 23, 1931 & Associates (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
May 15, 1931 Officer and Director, Semloh
Financial, Inc. (international
financial services and
investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens
June 28, 1938 & Company (investments). Prior
to 1996, Chairman and Chief
Executive Officer of North American
Trust (real estate investment
trust).
</TABLE>
----------
* This trustee is an "interested person" of the trusts.
-15-
<PAGE> 16
<TABLE>
<S> <C> <C>
MICHAEL W. WILSEY Trustee Chairman, Chief Executive
August 18, 1943 Officer and Director, Wilsey
Bennett, Inc. (truck and air
transportation, real estate
investment, management, and
investments).
JEREMIAH H. CHAFKIN* Executive Vice Executive Vice President, Asset
May 5, 1959 President, Chief Management Products and
Operating Services, Charles Schwab & Co.,
Officer and Inc.; President and Chief
Trustee Operating Officer, Charles
Schwab Investment Management,
Inc. Prior to September 1999,
Mr. Chafkin was Senior Managing
Director, Bankers Trust Company.
MARIANN BYERWALTER Trustee Vice President for Business
August 13, 1960 Affairs and Chief Financial
Officer, Stanford University
(higher education). Prior to
February 1996, Ms. Byerwalter
was Chief Financial Officer of
Eureka Bank (savings and loans)
and Chief Financial Officer and
Chief Operating Officer of
America First Holdings, Inc.
(holding company). Ms.
Byerwalter also is on the Board
of Directors of America First
Companies, Omaha, NE (venture
capital/fund management) and
Redwood Trust Inc. (mortgage
finance).
WILLIAM A. HASLER Trustee Co-Chief Executive Officer,
November 22, 1941 Aphton Corporation
(bio-pharmaceuticals). Prior to
August 1998, Mr. Hasler was Dean
of the Haas School of Business
at the University of California,
Berkeley (higher education).
Mr. Hasler also is on the Board
of Directors of Solectron
Corporation (manufacturing),
Tenera, Inc. (services and
software), Airlease, Ltd.
(aircraft leasing) and Mission
West Properties (commercial real
estate).
GERALD B. SMITH Trustee Chairman and Chief Executive
September 28, 1950 Officer, Smith Graham & Co.
(investment management). Mr.
Smith also is on the Board of
Directors of Pennzoil-Quaker
State Company (automotive).
TAI-CHIN TUNG Treasurer and Senior Vice President, Treasurer
and
</TABLE>
----------
* This trustee is an "interested person" of the trusts.
-16-
<PAGE> 17
<TABLE>
<S> <C> <C>
March 7, 1951 Principal Controller, Charles Schwab
Financial Officer Investment Management, Inc.
From 1994 to 1996, Ms. Tung was
Controller for Robertson
Stephens Investment Management,
Inc. From 1993 to 1994, she was
Vice President of Fund
Accounting, Capital Research and
Management Co.
STEPHEN B. WARD Senior Vice Senior Vice President and Chief
April 5, 1955 President and Investment Officer, Charles
Chief Investment Schwab Investment Management,
Officer Inc.
FRANCES COLE Secretary Senior Vice President, Chief
September 9, 1955 Counsel and Assistant Corporate
Secretary, Charles Schwab
Investment Management, Inc.
</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 Aggregate Compensation from each Fund Pension or ($)Total
Retirement Compensation
Benefits from Fund
Accrued as Complex
Part of
Municipal California New York Value Fund
Money Advantage Expenses
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Schwab 0 0 0 0 N/A 0
Steven L. Scheid 0 0 0 0 N/A 0
William J. Klipp(1) 0 0 0 0 N/A 0
Jeremiah H. Chafkin(2) 0 0 0 0 N/A 0
</TABLE>
----------
(1) Mr. Klipp departed Charles Schwab & Co., Inc. in 1999 and resigned from the
board of trustees effective April 30, 2000.
(2) This trustee was first elected by shareholders on June 1, 2000.
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<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Mariann Byerwalter(2) 0 0 0 0 N/A 0
William A. Hasler(2) 0 0 0 0 N/A 0
Gerald B. Smith(2) 0 0 0 0 N/A 0
Donald F. Dorward $5,815 $4,420 $ 2,878 $ 13,715 N/A $121,600
Robert G. Holmes $5,815 $4,420 $ 2,878 $ 13,715 N/A $121,600
Donald R. Stephens $5,815 $4,420 $ 2,878 $ 13,715 N/A $121,600
Michael W. Wilsey $5,304 $4,021 $ 2,617 $ 12,463 N/A $111,600
</TABLE>
----------
(2) This trustee was first elected by shareholders on June 1, 2000.
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 June 14, 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.
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
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<PAGE> 19
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 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 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 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.
For the fiscal years ended December 31, 1997, 1998 and 1999, Schwab Value
Advantage Money Fund paid investment 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 contractually 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. The amount of the expense cap
is determined in coordination with the board of trustees, and the expense cap is
intended to
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<PAGE> 20
limit the effects on shareholders of expenses incurred in the ordinary operation
of the fund. The expense cap is not intended to cover all fund expenses, and the
fund's expenses may exceed the expense cap. For example, the expense cap does
not cover investment-related expenses, such as brokerage commissions, interest
and taxes, nor does it cover extraordinary or non-routine expenses, such as
shareholder meeting costs.
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 a 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.
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
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<PAGE> 21
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.
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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<PAGE> 22
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 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.
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<PAGE> 23
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
Jr.'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 exchange
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.
Each 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.
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.
EXCHANGING SHARES OF THE FUNDS
Shares of any Schwab Fund, including any class of shares, may be sold and shares
of any other Schwab Fund or class purchased, provided the minimum investment and
any other requirements of the fund or class purchased are satisfied. Without
limiting this privilege, "an exchange order," which is a simultaneous order to
sell shares of one fund or class and automatically invest the proceeds in
another fund or class, may not be executed between shares of Sweep
Investments(TM) and shares of non-Sweep Investments. Shares of Sweep Investments
may be bought and sold automatically pursuant to the terms and conditions of
your account agreement or by direct order as long as you meet the minimums for
direct investments.
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<PAGE> 24
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 was 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
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<PAGE> 25
(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.
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 is 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
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<PAGE> 26
may be subject to state, local and foreign taxes, and its treatment under
applicable tax laws may differ from the federal income tax treatment.
Each fund may engage in investment techniques that may alter the timing and
character of its income. Each fund may be restricted in its use of these
techniques by rules relating to its qualifications as regulated investment
companies.
A fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a 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
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<PAGE> 27
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.
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
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<PAGE> 28
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.
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>
<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
</TABLE>
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<PAGE> 29
<TABLE>
<S> <C>
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,
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>
<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' taxable-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 taxable-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 Taxable-Equivalent Current Yield as of December 31, 1999
<TABLE>
<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 taxable-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 Taxable-Equivalent Effective Yield as of December 31, 1999
<TABLE>
<S> <C>
Schwab Municipal Money Fund - Value 6.82%
Advantage Shares
Schwab California Municipal Money Fund - 6.63%
Value Advantage Shares
Schwab New York Municipal Money Fund - 7.32%
Value Advantage Shares
</TABLE>
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<PAGE> 30
The above taxable-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 of $1,000 made
at the beginning of 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> 31
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 indicates a strong degree of safety regarding
timely payment of principal and interest. Issues determined to possess
overwhelming safety characteristics are denoted A-1+. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but the relative degree
of safety is not as high as for issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
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.
FITCH (FORMERLY 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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<PAGE> 32
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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