0000950149-01-501395.txt : 20011008
0000950149-01-501395.hdr.sgml : 20011008
ACCESSION NUMBER: 0000950149-01-501395
CONFORMED SUBMISSION TYPE: 497
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20010917
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SCHWAB CHARLES FAMILY OF FUNDS
CENTRAL INDEX KEY: 0000857156
STANDARD INDUSTRIAL CLASSIFICATION: []
STATE OF INCORPORATION: MA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 033-31894
FILM NUMBER: 1739114
BUSINESS ADDRESS:
STREET 1: 101 MONTGOMERY ST
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94104
BUSINESS PHONE: 4156277000
MAIL ADDRESS:
STREET 1: 101 MONTGOMERY ST
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94104
497
1
f75792e497.txt
SCHWAB FAMILY OF FUNDS AMENDED SAIS
1
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB GOVERNMENT CASH RESERVES FUND
APRIL 30, 2001
AS AMENDED SEPTEMBER 13, 2001
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the fund's prospectus dated April 30, 2001 (as amended
from time to time).
To obtain a free copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, or write to the fund at P.O. Box 7575, San
Francisco, California 94120-7575. For TDD service call 800-345-2550, 24 hours a
day. The prospectus also may be available on the Internet at:
http://www.schwab.com/schwabfunds.
The fund's most recent annual report is a separate document supplied with the
SAI and includes the fund's audited financial statements, which are incorporated
by reference into this SAI.
The fund is a series of The Charles Schwab Family of Funds (the trust).
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES, SECURITIES,
RISKS AND LIMITATIONS .......................................................... 2
MANAGEMENT OF THE FUND ......................................................... 8
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES ............................ 12
INVESTMENT ADVISORY AND OTHER SERVICES ......................................... 12
BROKERAGE ALLOCATION AND OTHER PRACTICES ....................................... 14
DESCRIPTION OF THE TRUST ....................................................... 15
PURCHASE, REDEMPTION AND PRICING OF SHARES AND DELIVERY OF SHAREHOLDER DOCUMENTS 16
TAXATION ....................................................................... 18
CALCULATION OF PERFORMANCE DATA ................................................ 19
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INVESTMENT OBJECTIVES, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVES
The fund's investment objective is to provide current income consistent with
liquidity and stability of capital. The fund's investment objective may be
changed only by vote of a majority of its outstanding voting shares. There is no
guarantee the fund will achieve its objectives.
The following investment securities, risks and limitations supplement those set
forth in the prospectus and may be changed without shareholder approval unless
otherwise noted. Also, policies and limitations that state a maximum percentage
of assets that may be invested in a security or other asset, or that set forth a
quality standard, shall be measured immediately after and as a result of the
fund's acquisition of such security or asset unless otherwise noted. Any
subsequent change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with the fund's
investment policies and limitations. Additionally, for purposes of calculating
any restriction, an issuer shall be the entity deemed to be ultimately
responsible for payments of interest and principal on the security pursuant to
Rule 2a-7 under the Investment Company Act of 1940 (the 1940 Act), unless
otherwise noted. The fund will invest in securities or engage in techniques that
are intended to help achieve its investment objective.
INVESTMENT SECURITIES AND RISKS
BORROWING may subject the fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. The fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money.
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, the
fund assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. Typically, no interest will accrue to the fund until the
security is delivered. The fund will segregate appropriate liquid assets to
cover its delayed-delivery purchase obligations. When
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the fund sells a security on a delayed-delivery basis, the fund does not
participate in further gains or losses with respect to that security. If the
other party to a delayed-delivery transaction fails to deliver or pay for the
securities, the fund could suffer losses.
DIVERSIFICATION involves investing in a wide range of securities and thereby
spreading and reducing the risks of investment. The fund is a series of an
open-end investment management company. The fund is a diversified mutual fund.
The fund also follows the regulations set forth by the Securities and Exchange
Commission (SEC) that dictate the diversification requirements for money market
mutual funds. These requirements prohibit the fund from purchasing a security if
more than 5% of its total assets would be invested in the securities of a single
issuer, although the fund may invest up to 25% of its total assets in the first
tier securities of a single issuer for up to three business days. U.S.
government and certain other securities are not subject to this particular
regulation.
ILLIQUID SECURITIES generally are any securities that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which the fund has valued the instruments. The liquidity of the fund's
investments is monitored under the supervision and direction of the Board of
Trustees. Investments currently not considered liquid include repurchase
agreements not maturing within seven days and certain restricted securities.
INTERFUND BORROWING AND LENDING. A fund may borrow money from and/or lend money
to other funds/portfolios in the Schwab complex ("SchwabFunds"). All loans are
for temporary or emergency purposes and the interest rates to be charged will be
the average of the overnight repurchase agreement rate and the short-term bank
loan rate. All loans are subject to numerous conditions designed to ensure fair
and equitable treatment of all participating funds/portfolios. The interfund
lending facility is subject to the oversight and periodic review of the Board of
Trustees of the SchwabFunds.
LENDING of portfolio securities is a common practice in the securities industry.
The fund will engage in security lending arrangements with the primary objective
of increasing its income. For example, the fund may receive cash collateral and
it may invest in short-term, interest-bearing obligations, but will do so only
to the extent that it will not lose the tax treatment available to regulated
investment companies. Lending portfolio securities involves risks that the
borrower may fail to return the securities or provide additional collateral.
Also, voting rights with respect to the loaned securities may pass with the
lending of the securities.
The fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash equivalents or other appropriate instruments maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (2) the fund may at any time call the loan and obtain
the return of the securities loaned; (3) the fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of
securities loaned will not at any time exceed one-third of the total assets of
the fund, including collateral received from the loan (at market value computed
at the time of the loan).
Although voting rights with respect to loaned securities pass to the borrower,
the lender retains the right to recall a security (or terminate a loan) for the
purpose of exercising the security's voting rights. Efforts to recall such
securities promptly may be unsuccessful, especially for foreign securities or
thinly traded securities such as small-cap stocks. In addition, because
recalling a security may involve expenses to the fund, it is expected that the
fund will do so only
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where the items being voted upon, in the judgment of Charles Schwab Investment
Management, Inc. ("CSIM" or the investment adviser), either are material to the
economic value of the security or threaten to materially impact the issuer's
corporate governance policies or structure.
MATURITY OF INVESTMENTS. The fund follows the regulations set forth by the SEC
that dictate the maturity requirements for money market mutual funds. These
requirements prohibit a fund from purchasing a security with a remaining
maturity or more than 397 days or maintaining a dollar-weighted average
portfolio maturity that exceeds 90 days.
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,
promissory notes, certificates of deposit, banker's acceptances, notes and time
deposits.
Money market securities pay fixed, variable or floating rates of interest and
are generally subject to credit and interest rate risks. The maturity date or
price of and financial assets collateralizing a security may be structured in
order to make it qualify as or act like a money market security. These
securities may be subject to greater credit and interest rate risks than other
money market securities because of their structure. Money market securities may
be issued with puts or these can be sold separately.
PUTS are sometimes called demand features or guarantees, and are agreements that
allow the buyer of the put to sell a security at a specified price and time to
the seller or "put provider." When the fund buys a security with a put feature,
losses could occur if the put provider does not perform as agreed. Standby
commitments are types of puts.
QUALITY OF INVESTMENTS. The fund follows regulations set forth by the SEC that
dictate the quality requirements for money market mutual funds. These require
the fund to invest exclusively in high-quality securities. Generally,
high-quality securities are securities that present minimal credit risks and are
rated in one of the two highest rating categories by two nationally recognized
statistical rating organizations (NRSROs), or by one if only one NRSRO has rated
the securities, or, if unrated, determined to be of comparable quality by the
investment adviser pursuant to guidelines adopted by the Board of Trustees.
High-quality securities may be "first tier" or "second tier" securities. First
tier securities may be rated within the highest category or determined to be of
comparable quality by the investment adviser. Money market fund shares and U.S.
government securities also are first tier securities.
REPURCHASE AGREEMENTS. Repurchase agreements involve the fund buying securities
(usually U.S. government securities) from a seller and simultaneously agreeing
to sell them back at an agreed-upon price (usually higher) and time. There are
risks that losses will result if the seller does not perform as agreed.
Repurchase agreements will be collateralized by first tier securities. In
addition, repurchase agreements collateralized entirely by U.S. government
securities may be deemed to be collateralized fully pursuant to Rule 2a-7. Under
certain circumstances, repurchase agreements that are fully collateralized by
U.S. government securities may be deemed to be investments in U.S. Government
Securities.
SECURITIES OF OTHER INVESTMENT COMPANIES may be purchased and sold by the fund
including those managed by its investment adviser. Because other investment
companies employ investment advisers and other service providers, investments by
the fund may cause shareholders to pay duplicative fees.
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STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by
Fannie Mae, Freddie Mac, the Student Loan Marketing Association (SLMA or SALLIE
MAE), and the Federal Home Loan Bank (FHLB), are supported by a line of credit
the issuing entity has with the U.S. Treasury. Others are supported solely by
the credit of the issuing agency or instrumentality such as obligations issued
by the Federal Farm Credit Banks Funding Corporation (FFCB). There can be no
assurance that the U.S. government will provide financial support to U.S.
government securities of its agencies and instrumentalities if it is not
obligated to do so under law. Of course U.S. government securities, including
U.S. Treasury securities, are among the safest securities, however, not unlike
other debt securities, they are still sensitive to interest rate changes, which
will cause their prices and yields to fluctuate.
VARIABLE AND FLOATING RATE DEBT SECURITIES pay an interest rate, which is
adjusted either periodically or at specific intervals or which floats
continuously according to a formula or benchmark. Although these structures
generally are intended to minimize the fluctuations in value that occur when
interest rates rise and fall, some structures may be linked to a benchmark in
such a way as to cause greater volatility to the security's value.
Some variable rate securities may be combined with a put or demand feature
(variable rate demand securities) that entitles the holder to the right to
demand repayment in full or to resell at a specific price and/or time. While the
demand feature is intended to reduce credit risks, it is not always
unconditional, and may make the securities more difficult to sell quickly
without losses. There are risks involved with these securities because there may
be no active secondary market for a particular variable rate demand security
purchased by the fund. In addition, the fund may exercise only its demand rights
at certain times. The fund could suffer losses in the event that the issuer
defaults on its obligation.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of the fund's outstanding voting shares.
THE FUND MAY NOT:
(1) Purchase securities of any issuer unless consistent with its status as
a diversified investment management company as defined by the 1940 Act
or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time.
(2) Concentrate investments in a particular industry or group of
industries, or within one state, as concentration is defined under the
1940 Act or the rules or regulations thereunder, as such statute, rules
or regulations may be amended from time to time.
(3) Purchase or sell commodities, commodities contracts, futures contracts,
or real estate, except 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.
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(4) Lend or borrow money, except 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.
(5) Underwrite securities, except 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.
(6) Pledge, mortgage or hypothecate any of its assets, except 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 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.
The following descriptions of the 1940 Act may assist investors in understanding
the above fundamental policies and restrictions.
Diversification. Under the 1940 Act, a diversified fund, with respect to 75% of
its total assets, may not purchase securities (other than U.S. government
securities or securities of other investment companies) if, as a result, more
than 5% of its total assets would be invested in the securities of such issuer
or it would own more than 10% of such issuer's outstanding voting securities.
Borrowing. The 1940 Act presently restricts 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 make loans only if expressly permitted
by its investment policies.
Concentration. The Securities and Exchange Commission presently defines
concentration as investing 25% or more of a fund's net assets in an industry or
group of industries, with certain exceptions.
Underwriting. Under 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.
Real Estate. The 1940 Act does not directly restrict a fund's ability to invest
in real estate, but does require that every fund have a fundamental investment
policy governing such investments. The funds have adopted a fundamental policy
that would permit direct investment in real estate. However, the funds have a
non-fundamental investment limitation that prohibits them from
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investing directly in real estate. This non-fundamental policy may be changed
only by vote of the fund's Board of Trustees.
THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.
THE FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government securities or securities subject to
a guarantee issued by a person not controlled by the issuer) if, as a
result, more than 5% of total assets would be invested in the
securities of such issuer; provided that the fund may invest up to 25%
of its total assets in the first tier securities of a single issuer for
up to three business days.
(2) Purchase securities of any issuer (other than securities subject to a
guarantee issued by a person not controlled by the issuer) if, as a
result, more than the greater of 1% of its total assets or $1 million
would be invested in second tier securities of such issuer.
(3) With respect to 75% of total assets, purchase a guarantee or securities
subject to a guarantee of any issuer if, as a result, more than 10% of
its total assets would be invested in securities issued by or subject
to a guarantee of such issuer (except with respect to guarantees and
securities subject to guarantees issued by a non-controlled person).
(4) Purchase a second tier guarantee or second tier security subject to a
guarantee of any issuer if, as a result, more than 5% of its total
assets would be invested in securities issued by or subject to a
guarantee of such issuer.
(5) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
(6) Borrow money except that the fund may (i) borrow money from banks or
through an interfund lending facility, if any, only for temporary or
emergency purposes (and not for leveraging) and (ii) engage in reverse
repurchase agreements with any party; provided that (i) and (ii) in
combination do not exceed 33 1/3% of its total assets (any borrowings
that come to exceed this amount will be reduced to the extent necessary
to comply with the limitation within three business days).
(7) Purchase securities of any issuer (other than obligations of, or
guaranteed by the U.S. government its agencies or instrumentalities)
if, as a result, 25% or more of its total assets would be invested in
the securities of an issuer from a single industry or group of
industries.
(8) Lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of debt securities or
repurchase agreements).
(9) Purchase securities of any issuer if, as a result, more than 10% of its
net assets would be invested in illiquid securities.
(10) Sell securities short unless it owns the security or the right to
obtain the security or equivalent securities (transactions in futures
contracts and options are not considered selling securities short).
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(11) Purchase securities on margin, except that the fund may obtain
short-term credits that are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
MANAGEMENT OF THE FUND
The officers and trustees, their principal occupations during the past five
years and their affiliations, if any, with The Charles Schwab Corporation,
Charles Schwab & Co., Inc. (Schwab) and Charles Schwab Investment Management,
Inc., are as follows:
POSITION(S) WITH PRINCIPAL OCCUPATIONS &
NAME/DATE OF BIRTH THE TRUST AFFILIATIONS
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CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Schwab Holdings,
Inc.; Chairman, Director, Charles Schwab & Co.,
Inc., Charles Schwab Investment Management,
Inc.; Director, The Charles Schwab Trust
Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc.
(full-service audio solutions for the internet),
Vodaphone AirTouch PLC (a telecommunications
company) and Siebel Systems (a software company).
JOHN P. COGHLAN* President and Trustee Vice Chairman and Executive Vice President, The
May 6, 1951 Charles Schwab Corporation; Vice Chairman and
Enterprise President, Retirement Plan Services
and Services for Investment Managers, Charles
Schwab & Co., Inc.; Chief Executive Officer and
Director, Charles Schwab Investment Management,
Inc.; President, Chief Executive Officer and
Director, The Charles Schwab Trust Company;
Director, Charles Schwab Asset Management
(Ireland) Ltd.; Director, Charles Schwab
Worldwide Funds PLC.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
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* This trustee is an "interested person" of the trusts.
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marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments). Prior to 1996, Chairman and
Chief Executive Officer of North American Trust
(real estate investment trust).
MICHAEL W. WILSEY Trustee Chairman and Chief Executive Officer, Wilsey
August 18, 1943 Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
JEREMIAH H. CHAFKIN* Executive Vice Executive Vice President, Asset Management
May 9, 1959 President, Chief Products and Services, Charles Schwab & Co.,
Operating Officer and Inc.; President and Chief Operating Officer,
Trustee 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 Affairs and Chief
August 13, 1960 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 Eureka 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), and is Director of Stanford
Hospitals and Clinics, SRI International
(research) and LookSmart, Ltd. (an Internet
infrastructure company).
WILLIAM A. HASLER Trustee Co-Chief Executive Officer, Aphton Corporation
November 22, 1941 (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).
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* This trustee is an "interested person" of the trusts.
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GERALD B. SMITH Trustee Chairman and Chief Executive Officer and founder
September 28, 1950 of Smith Graham & Co. (investment advisors).
Mr. Smith is also on the Board of Directors of
Pennzoil-Quaker State Company (oil and gas) and
Rorento N.V. (investments - Netherlands), and is
a member of the audit committee of Northern
Border Partners, L.P., a subsidiary of Enron
Corp. (energy).
TAI-CHIN TUNG Treasurer and Principal Senior Vice President and Chief Financial
March 7, 1951 Financial Officer Officer, Charles Schwab Investment Management,
Inc. From 1994 to 1996, Ms. Tung was Controller
for Robertson Stephens Investment Management,
Inc.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
KOJI E. FELTON Secretary Vice President, Chief Counsel and Assistant
March 13, 1961 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to June 1998, Mr. Felton
was a Branch Chief in Enforcement at the U.S.
Securities and Exchange Commission in San
Francisco.
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.
The fund is overseen by a Board of Trustees. The Board of Trustees meets
regularly to review the fund's activities, contractual arrangements and
performance. The Board of Trustees is responsible for protecting the interests
of a fund's shareholders. The following table provides information as of the
fiscal year ended December 31, 2000, concerning compensation of the trustees.
Unless otherwise stated, information is for the fund complex, which included 44
funds as of December 31, 2000.
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Name of Trustee ($) Pension or ($)
Aggregate Retirement Total
Compensation Benefits Compensation
from the Fund Accrued as from Fund
Part of Fund Complex
Expenses
-------------------------------------------------------------------
Charles R. Schwab 0 N/A 0
Steven L. Scheid 1 0 N/A 0
Jeremiah H. Chafkin 2 0 N/A 0
John P. Coughlan 3 0 N/A 0
Mariann Byerwalter 2 $1,765 N/A $ 73,770
Donald F. Dorward $3,264 N/A $137,850
William A. Hasler 2 $1,765 N/A $ 73,770
Robert G. Holmes $3,264 N/A $137,850
Gerald B. Smith 2 $1,765 N/A $ 73,770
Donald R. Stephens $3,264 N/A $137,850
Michael W. Wilsey $3,264 N/A $137,850
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.
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1 Resigned from the Board effective November 21, 2000.
2 This trustee was first elected by shareholders on June 1, 2000.
3 Appointed to the Board on November 21, 2000.
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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 3, 2001, the officers and trustees of the trust, as a group owned of
record or beneficially 1.9% of the fund's total outstanding shares.
As of April 3, 2001, no person or entity owned, of record or beneficially, more
than 5% of the shares of the 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 fund's investment adviser and
administrator pursuant to an Investment Advisory and Administration Agreement
(Advisory Agreement) between it and the trust. Schwab is an affiliate of the
investment adviser and is the trust's distributor, shareholder services agent
and transfer agent. Charles R. Schwab is the founder, Chairman, Co-Chief
Executive Officer and Director of The Charles Schwab Corporation. As a result of
his ownership of and interests in The Charles Schwab Corporation, Mr. Schwab may
be deemed to be a controlling person of the investment adviser and Schwab.
For its advisory and administrative services to the fund, the investment adviser
is entitled to receive graduated annual fee payable monthly based on the fund's
average daily net assets as described below.
First $1 billion - 0.38%
More than $1 billion but not exceeding $10 billion - 0.35%
More than $10 billion but not exceeding $20 billion - 0.32%
More than $20 billion - 0.30%
Prior to April 30, 1999, for its advisory and administrative services to the
fund, the investment adviser was entitled to receive a graduated annual fee,
payable monthly, of 0.46% of the fund's average daily net assets of the first $1
billion, 0.41% of the next $1 billion, and 0.40% of net assets over $2 billion.
For the period from April 1, 1998 (commencement of operations) to December 31,
1998 and for the fiscal years ended December 31, 1999 and 2000, the fund paid
investment and advisory fees of $0 (fees were reduced by $31,000), $205,000 (fee
were reduced by $111,000) and $160,000 (fees were reduced by $965,000),
respectively.
The investment adviser and Schwab have contractually guaranteed that, through at
least April 30, 2002, the total operating expenses (excluding interest, taxes
and certain non-routine expenses) will not exceed 1.25% of the fund's average
daily net assets. The amount of the expense cap is determined in coordination
with the Board of Trustees, and the expense cap is intended to 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.
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DISTRIBUTOR
Pursuant to an agreement, Schwab is the principal underwriter for shares of the
fund and is the trust's agent for the purpose of the continuous offering of the
fund's shares. The fund pays the cost of the prospectuses and shareholder
reports to be prepared and delivered to existing shareholders. Schwab pays such
costs when the described materials are used in connection with the offering of
shares to prospective investors and for supplemental sales literature and
advertising. Schwab receives no fee under the agreement.
SHAREHOLDER SERVICES AND TRANSFER AGENT
Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
fund's prospectuses, financial reports and other informational literature about
the fund. Schwab maintains the office space, equipment and personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds(R)
and provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these services.
For the services performed as transfer agent under its contract with the fund,
Schwab is entitled to receive an annual fee from the fund. The fee is payable
monthly in the amount of 0.25% of the fund's average daily net assets. For the
services performed as shareholder services agent under its contract with the
fund, Schwab is entitled to receive an annual fee from the fund. The fee is
payable monthly in the amount of 0.20% of the average daily net assets of the
fund.
TRANSACTION SERVICES
Pursuant to a Transaction Services Agreement, Schwab arranges for fund
shareholders to have various manual and electronic means by which they can use
their fund accounts to cover obligations incident to checking account, Automated
Clearing House, automated teller machine and debit card transactions. For its
services under the Transaction Services Agreement, Schwab receives
transaction-based fees for which it bills the fund monthly. For the fiscal year
ended December 31, 2000, Schwab received $1,429,000 as compensation under the
Transaction Services Agreement.
CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, 8800 Tinicum Blvd., Third Floor Suite 200, Philadelphia, PA
19153, serves as custodian for the fund and PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809 serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the fund. The fund accountant maintains all books and records
related to the fund's transactions.
INDEPENDENT ACCOUNTANTS
The fund's independent accountants, PricewaterhouseCoopers LLP, audits and
reports on the annual financial statements of each series of the trusts and
reviews certain regulatory reports and each fund's federal income tax return.
They also perform other professional accounting, auditing, tax and advisory
services when a trust engages them to do so. Their address is 333 Market Street,
San
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Francisco, CA 94105. The fund's audited financial statements for the fiscal
year ended December 31, 2000, are included in the fund's annual report, which is
a separate report supplied with the SAI.
OTHER EXPENSES
The funds pay other expenses that typically are connected with the trust's
operations, and include legal, audit and custodian fees, as well as the costs of
accounting and registration of the funds. Expenses not directly attributable to
a particular fund will generally be allocated among the funds in the trust on
the basis of each fund's relative net assets at the time the expense is
incurred.
BROKERAGE ALLOCATION AND OTHER PRACTICES
PORTFOLIO TURNOVER
Because securities with maturities of less than one year are excluded from
required portfolio turnover rate calculations, the fund's portfolio turnover
rate for reporting purposes is expected to be zero.
PORTFOLIO TRANSACTIONS
In effecting securities transactions for a fund, the investment adviser seeks to
obtain best execution. Subject to the supervision of the Board of Trustees, the
investment adviser will select brokers and dealers for the fund on the basis of
a number of factors, including, for example, price paid for securities,
clearance, settlement, reputation, financial strength and stability, efficiency
of execution and error resolution, block trading and block positioning
capabilities, willingness to execute related or unrelated difficult transactions
in the future, and order of call.
When the execution capability and price offered by two or more broker-dealers
are comparable, the investment adviser may, in its discretion utilize the
services of broker-dealers that provide it with investment information and other
research resources. Such resources also may be used by the investment adviser
when providing advisory services to its other clients, including mutual funds.
The fund expects that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices.
The investment decisions for the fund are reached independently from those for
other accounts managed by the investment adviser. Such other accounts also may
make investments in instruments or securities at the same time as a fund. When
two or more accounts managed by the investment adviser have funds available for
investment in similar instruments, available instruments are allocated as to
amount in a manner considered equitable to each account. In some cases, this
procedure may affect the size or price of the position obtainable for a fund.
However, it is the opinion of the Board of Trustees that the benefits conferred
by the investment adviser outweigh any disadvantages that may arise from
exposure to simultaneous transactions.
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DESCRIPTION OF THE TRUST
The fund is a series of The Charles Schwab Family of Funds, an open-end
investment management company organized as a Massachusetts business trust on
October 20, 1989.
The Declaration of Trust provides that shares may be automatically redeemed if
held by a shareholder in an amount less than the minimum required by the fund or
share class. The fund's or class's minimum initial investment, minimum
additional investment and minimum balance requirements are set forth in the
prospectus. These minimums may be waived for certain investors, including
trustees, officers and employees of Schwab, or changed without prior notice. The
minimums may also be waived for investment programs such as those programs
designated for college savings or graduation gifts.
The fund may hold special meetings, which may cause the fund 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 the fund are
represented at the meeting or (b) more than 50% of the outstanding voting shares
of the fund. Any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting, without the necessity of further notice. The
Declaration of Trust specifically authorizes the Board of Trustees to terminate
the trust (or any of its investment portfolios) by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the trust solely by reason of being or having been a shareholder. Moreover,
the trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
trust itself is unable to meet its obligations. There is a remote possibility
that the fund could become liable for a misstatement in the prospectus or SAI
about another fund.
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As more fully described in each Declaration of Trust, the trustees may each
year, or more frequently, distribute to the shareholders of each series accrued
income less accrued expenses and any net realized capital gains less accrued
expenses. Distributions of each year's income of each series shall be
distributed pro rata to shareholders in proportion to the number of shares of
each series held by each of them. Distributions will be paid in cash or shares
or a combination thereof as determined by the trustees. Distributions paid in
shares will be paid at net asset value per share as determined in accordance
with the bylaws.
PURCHASE, REDEMPTION AND PRICING OF SHARES AND DELIVERY OF
SHAREHOLDER DOCUMENTS
PURCHASING AND REDEEMING SHARES OF THE FUND
The fund is open each day that both the Federal Reserve Bank of New York (New
York Fed) and New York Stock Exchange (NYSE) are open (business days). The
following holiday closings are currently scheduled for 2001: New Year's Day,
Martin Luther King Jr.'s Birthday (observed), Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day (observed), Thanksgiving
Day and Christmas Day. On any day that the New York Fed, NYSE or principal
government securities markets close early, such as days in advance of holidays,
the funds reserve the right to advance the time by which purchase, redemption
and exchanges orders must be received on that day.
As long as the fund or Schwab follows reasonable procedures to confirm that your
telephone or Internet order is genuine, they will not be liable for any losses
an investor may experience due to unauthorized or fraudulent instructions. These
procedures may include requiring a form of personal identification or
confirmation before acting upon any telephone or Internet order, providing
written confirmation of telephone or Internet orders and tape recording all
telephone orders.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
The 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.
EXCHANGING SHARES OF THE FUND
Shares of any SchwabFund, including any class of shares, may be sold and shares
of any other SchwabFund 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(R) and shares of non-Sweep Investments. Shares of Sweep Investments
may be bought and sold
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automatically pursuant to the terms and conditions of your Schwab account
agreement or by direct order as long as you meet the minimums for direct
investments.
PRICING OF SHARES
The fund values its portfolio instruments at amortized cost, which means they
are valued at their acquisition cost, as adjusted for amortization of premium or
discount, rather than at current market value. Calculations are made to compare
the value of the fund's investments at amortized cost with market values. When
determining market values for portfolio securities, the fund uses market quotes
if they are readily available. In cases where quotes are not readily available,
the fund may value securities based on fair values developed using methods
approved by the Board of Trustees. Fair values may be determined by using actual
quotations or estimates of market value, including pricing service estimates of
market values or values obtained from yield data relating to classes of
portfolio securities.
The amortized cost method of valuation seeks to maintain a stable net asset
value per share (NAV) of $1.00, even where there are fluctuations in interest
rates that affect the value of portfolio instruments. Accordingly, this method
of valuation can in certain circumstances lead to a dilution of a shareholder's
interest.
If a deviation of 1/2 of 1% or more were to occur between the NAV calculated
using market values and a fund's $1.00 NAV calculated using amortized cost, or
if there were any other deviation that the Board of Trustees believed would
result in a material dilution to shareholders or purchasers, the Board of
Trustees would promptly consider what action, if any, should be initiated.
If a fund's NAV calculated using market values declined, or were expected to
decline, below the fund's $1.00 NAV calculated using amortized cost, the Board
of Trustees might temporarily reduce or suspend dividend payments in an effort
to maintain the fund's $1.00 NAV. As a result of such reduction or suspension of
dividends or other action by the Board of Trustees, an investor would receive
less income during a given period than if such a reduction or suspension had not
taken place. Such action could result in investors receiving no dividend for the
period during which they hold their shares and receiving, upon redemption, a
price per share lower than that which they paid. On the other hand, if a fund's
NAV calculated using market values were to increase, or were anticipated to
increase above the fund's $1.00 NAV calculated using amortized cost, the Board
of Trustees might supplement dividends in an effort to maintain the fund's $1.00
NAV.
DELIVERY OF SHAREHOLDER DOCUMENTS
Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order to eliminate duplicate
mailings of shareholder documents, each household may receive one copy of these
documents, under certain conditions. This practice is commonly called
"householding." If you want to receive multiple copies, you may write or call
your fund at the address or telephone number on the front of this SAI. Your
instructions will be effective within 30 days of receipt by Schwab.
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TAXATION
FEDERAL TAX INFORMATION FOR THE FUND
It is the fund's policy to qualify for taxation as a "regulated investment
company" (RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, the fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If the fund does not qualify as a RIC under the Code, it
will be subject to federal income tax on its net investment income and any net
realized capital gains.
The Code imposes a non-deductible excise tax on RICs that do not distribute in a
calendar year (regardless of whether they otherwise have a non-calendar taxable
year) an amount equal to 98% of their "ordinary income" (as defined in the Code)
for the calendar year plus 98% of their net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. For
the foregoing purposes, the fund is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
FEDERAL INCOME TAX INFORMATION FOR SHAREHOLDERS
The discussion of federal income taxation presented below supplements the
discussion in the fund's prospectus and only summarizes some of the important
federal tax considerations generally affecting shareholders of the fund.
Accordingly, prospective investors (particularly those not residing or domiciled
in the United States) should consult their own tax advisers regarding the
consequences of investing in the fund.
On each business day that the NAV of the fund is determined, the fund's net
investment income will be declared after the close of trading on the New York
Stock Exchange (normally 4:00 p.m. Eastern time) as a daily dividend to
shareholders of record. Your daily dividend is calculated each business day by
applying the daily dividend rate by the number of shares owned, and is rounded
to the nearest penny. The daily dividend is accrued each business day, and the
sum of the daily dividends are paid monthly. For the fund, dividends will
normally be reinvested monthly in shares of the fund at the NAV on the 15th day
of each month, if a business day, otherwise on the next business day, except in
December when dividends are reinvested on the last business day of December. If
cash payment is requested, checks will normally be mailed on the business day
following the reinvestment date. The fund will pay shareholders, who redeem all
of their shares, all dividends accrued to the time of the redemption within 7
days.
The fund calculates its dividends based on its daily net investment income. For
this purpose, the net investment income of the fund consists of: (1) accrued
interest income, plus or minus amortized discount or premium, minus (2) accrued
expenses allocated to that fund. If the fund realizes any capital gains, they
will be distributed at least once during the year as determined by the Board of
Trustees. Any realized capital losses, to the extent not offset by realized
capital gains, will be carried forward.
Any dividends declared by the fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. A fund may
adjust its schedule for the reinvestment of
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distributions for the month of December to assist in complying with the
reporting and minimum distribution requirements of the Code.
The fund does not expect to realize any long-term capital gains. However,
long-term capital gains distributions are taxable as long-term capital gains,
regardless of how long you have held your shares. If you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss.
Distributions by a fund also may be subject to state, local and foreign taxes,
and its treatment under applicable tax laws may differ from the federal income
tax treatment. Note that most states grant tax-exempt status to distributions
paid to shareholders from U.S. government securities.
A fund may engage in techniques that may alter the timing and character of its
income. A fund may be restricted in its use of these techniques by rules
relating to its qualification as a regulated investment company.
The fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
Foreign shareholders (i.e., nonresident alien individuals and foreign
corporations, partnerships, trusts and estates) are generally subject to U.S.
withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions
derived from net investment income and short-term capital gains. Distributions
to foreign shareholders of long-term capital gains and any gains from the sale
or other disposition of shares of the fund generally are not subject to U.S.
taxation, unless the recipient is an individual who either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more per year as determined under certain IRS rules. Different tax
consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a
foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above.
CALCULATION OF PERFORMANCE DATA
The fund's current seven-day yield based on the seven days ended December 31,
2000 is stated below and was calculated by determining the net change, exclusive
of capital changes and income other than investment income, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent.
Seven-day Yield as of December 31, 2000
Government Cash Reserves 5.32%
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The fund's effective yield based on the seven days ended December 31, 2000 is
stated below and was calculated by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result, with the resulting yield figure carried to at least the
nearest one hundredth of one percent.
Seven-day Effective Yield as of December 31, 2000
Government Cash Reserves 5.46%
The fund also may advertise its average annual total return and cumulative total
return. Average annual total return is a standardized measure of performance
calculated using methods prescribed by SEC rules. It is calculated by
determining the ending value of a hypothetical initial investment of $1,000 made
at the beginning a specified period. The ending value is then divided by the
initial investment, which is annualized and expressed as a percentage. It is
reported for periods of one, five and 10 years or since commencement of
operations for periods not falling on those intervals. In computing average
annual total return, a fund assumes reinvestment of all distributions at net
asset value on applicable reinvestment dates. Cumulative total return is
calculated using the same formula that is used for average annual total return
except that, rather than calculating the total return based on a one-year
period, cumulative total return is calculated from commencement of operations to
the fiscal year ended December 31, 2000.
The performance of the fund may be compared with the performance of other mutual
funds by comparing the ratings of mutual fund rating services, various indices,
U.S. government obligations, bank certificates of deposit, the consumer price
index and other investments for which reliable data is available. An index's
performance data assumes the reinvestment of dividends but does not reflect
deductions for administrative, management and trading expenses. The fund will be
subject to these costs and expenses, while an index does not have these
expenses. In addition, various factors, such as holding a cash balance, may
cause the fund's performance to be higher or lower than that of an index.
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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND(R)
SCHWAB RETIREMENT MONEY FUND(R)
APRIL 30, 2001
AS AMENDED SEPTEMBER 13, 2001
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated April 30, 2001 (as amended
from time to time).
To obtain a free copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, or write to the funds at P.O. Box 7575, San
Francisco, California 94120-7575. For TDD service call 800-345-2550, 24 hours a
day. The prospectus also may be available on the Internet at:
http://www.schwab.com/schwabfunds.
The funds' most recent annual reports are separate documents supplied with the
SAI and include the funds' audited financial statements, which are incorporated
by reference into this SAI.
The funds are a series of The Charles Schwab Family of Funds (the trust).
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVES, SECURITIES,
RISKS AND LIMITATIONS ................................................ 2
MANAGEMENT OF THE FUNDS .............................................. 10
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES .................. 14
INVESTMENT ADVISORY AND OTHER SERVICES ............................... 14
BROKERAGE ALLOCATION AND OTHER PRACTICES ............................. 16
DESCRIPTION OF THE TRUST ............................................. 17
PURCHASE, REDEMPTION AND PRICING OF SHARES AND DELIVERY OF SHAREHOLDER
DOCUMENTS ............................................................ 18
TAXATION ............................................................. 20
CALCULATION OF PERFORMANCE DATA ...................................... 21
APPENDIX - RATINGS OF INVESTMENT SECURITIES .......................... 23
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INVESTMENT OBJECTIVES, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVES
Each fund's investment objective is to seek maximum current income consistent
with liquidity and stability of capital. Each fund's investment objective may be
changed only by vote of a majority of its outstanding voting shares. There is no
guarantee the funds will achieve their objectives.
The following investment securities, risks and limitations supplement those set
forth in the prospectus and may be changed without shareholder approval unless
otherwise noted. Also, policies and limitations that state a maximum percentage
of assets that may be invested in a security or other asset, or that set forth a
quality standard, shall be measured immediately after and as a result of a
fund's acquisition of such security or asset unless otherwise noted. Any
subsequent change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with a fund's
investment policies and limitations. Additionally, for purposes of calculating
any restriction, an issuer shall be the entity deemed to be ultimately
responsible for payments of interest and principal on the security pursuant to
Rule 2a-7 under the Investment Company Act of 1940 (the 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 SECURITIES AND RISKS
ASSET-BACKED SECURITIES are securities that are backed by the loans or accounts
receivables of an entity, such as a bank or credit card company. These
securities are obligations which the issuer intends to repay using the assets
backing them (once collected). Therefore, repayment depends largely on the cash
flows generated by the assets backing the securities. The rate of principal
payments on asset-backed securities generally depends on the rate of principal
payments received on the underlying assets, which in turn may be affected by a
variety of economic and other factors. As a result, the yield on any
asset-backed security is difficult to predict with precision, and actual yield
to maturity may be more or less than the anticipated yield to maturity.
Sometimes the credit quality of these securities is limited to the support
provided by the underlying assets, but, in other cases, additional credit
support also may be provided by a third party via a letter of credit or
insurance guarantee. Such credit support falls into two classes: liquidity
protection and protection against ultimate default on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that scheduled payments on
the underlying pool are made in a timely fashion. Protection against ultimate
default ensures payment on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or letters of
credit obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches.
The degree of credit support provided on each issue is based generally on
historical information respecting the level of credit risk associated with such
payments. Delinquency or loss in excess of that anticipated could adversely
affect the return on an investment in an asset-backed security.
Based on the primary characteristics of the various types of asset-backed
securities, for purposes of a fund's concentration policy, the following
asset-backed securities industries have been selected:
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credit card receivables, automobile receivables, trade receivables and
diversified financial assets. A fund will limit its investments in each such
industry to less than 25% of its net assets.
BANKERS' ACCEPTANCES or notes are credit instruments evidencing a bank's
obligation to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. A fund will invest only in bankers' acceptances of
banks that have capital, surplus and undivided profits in excess of $100
million.
BORROWING may subject a fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money.
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 consists of short-term, promissory notes issued by banks,
corporations and other institutions to finance short-term credit needs. These
securities generally are discounted but sometimes may be interest bearing.
Commercial paper, which also may be unsecured, is subject to credit risk.
CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure to industry risk. For example, the automobile industry may have a
greater exposure to a single factor, such as an increase in the price of oil,
which may adversely affect the sale of automobiles and, as a result, the value
of the industry's securities. Based on the primary characteristics of non-U.S.
(foreign) banks, the funds have identified each foreign country as a separate
bank industry for purposes of a fund's concentration policy. A fund will limit
its investments in securities issued by foreign banks in each country to less
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
3
24
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 respect to that security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, the fund could suffer
losses.
DIVERSIFICATION involves investing in a wide range of securities and thereby
spreading and reducing the risks of investment. Each fund is a series of an
open-end investment management company. Each fund is a diversified mutual fund.
Each fund also follows the regulations set forth by the Securities and Exchange
Commission (SEC) that dictate the diversification requirements for money market
mutual funds. These requirements prohibit a taxable money fund from purchasing a
security if more than 5% of its total assets would be invested in the securities
of a single issuer, although a fund may invest up to 25% of its total assets in
the first tier securities of a single issuer for up to three business days. U.S.
government and certain other securities are not subject to this particular
regulation.
FOREIGN SECURITIES involve additional risks, because they are issued by foreign
entities, including foreign governments, banks, corporations or because they are
traded principally overseas. Foreign entities are not subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. corporations. In addition,
there may be less publicly available information about foreign entities. Foreign
economic, political and legal developments could have more dramatic effects on
the value of foreign securities.
On January 1, 1999, 11 of the 15 member states of the European union introduced
the "euro" as a common currency. During a three-year transitional period, the
euro will coexist with each member state's currency. By July 1, 2002, the euro
will have replaced the national currencies of the following member countries:
Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal and Spain. During the transition period, each country
will treat the euro as a separate currency from that of any member state.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins will
replace the bills and coins of the participating countries.
The new European Central Bank has control over each country's monetary policies.
Therefore, the participating countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.
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25
The conversion may impact the trading in securities of issuers located in, or
denominated in the currencies of, the member states, as well as foreign
exchanges, payments, the settlement process, custody of assets and accounting.
The introduction of the euro is also expected to affect derivative and other
financial contracts in which the funds may invest in so far as price sources
such as day-count fractions or settlement dates applicable to underlying
instruments may be changed to conform to the conventions applicable to euro
currency.
The overall impact of the transition of the member states' currencies to the
euro cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general short and long-term
consequences can be expected, such as changes in economic environment and change
in behavior of investors, all of which will impact each fund's euro-denominated
investments.
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 a 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.
INTERFUND BORROWING AND LENDING. A fund may borrow money from and/or lend money
to other funds/portfolios in the Schwab complex ("SchwabFunds"). All loans are
for temporary or emergency purposes and the interest rates to be charged will be
the average of the overnight repurchase agreement rate and the short-term bank
loan rate. All loans are subject to numerous conditions designed to ensure fair
and equitable treatment of all participating funds/portfolios. The interfund
lending facility is subject to the oversight and periodic review of the Board of
Trustees of the SchwabFunds.
LENDING of portfolio securities is a common practice in the securities industry.
A fund will engage in security lending arrangements with the primary objective
of increasing its income. For example, a fund may receive cash collateral and it
may invest in short-term, interest-bearing obligations, but will do so only to
the extent that it will not lose the tax treatment available to regulated
investment companies. Lending portfolio securities involve risks that the
borrower may fail to return the securities or provide additional collateral.
Also, voting rights with respect to the loaned securities may pass with the
lending of the securities.
A fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash equivalents or other appropriate instruments maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (2) a fund may at any time call the loan and obtain
the return of the securities loaned; (3) a fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of
securities loaned will not at any time exceed one-third of the total assets of a
fund, including collateral received from the loan (at market value computed at
the time of the loan).
Although voting rights with respect to loaned securities pass to the borrower,
the lender retains the right to recall a security (or terminate a loan) for the
purpose of exercising the security's voting rights. Efforts to recall such
securities promptly may be unsuccessful, especially for foreign securities or
thinly traded securities such as small-cap stocks. In addition, because
recalling a security may involve expenses to the fund, it is expected that the
fund will do so only where the items being voted upon, in the judgement of
Charles Schwab Investment Management,
5
26
Inc. ("CSIM" or the investment adviser), either are material to the economic
value of the security or threaten to materially impact the issuer's corporate
governance policies or structure.
MATURITY OF INVESTMENTS. Each fund follows the regulations set forth by the SEC
that dictate the maturity requirements for money market mutual funds. These
requirements prohibit a fund from purchasing a security with a remaining
maturity of more than 397 days or maintaining a dollar-weighted average
portfolio maturity that exceeds 90 days.
MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be
issued by entities such as the U.S. government, corporations and financial
institutions (like banks). Money market securities include commercial paper,
promissory notes, certificates of deposit, banker's acceptances, notes and time
deposits.
Money market securities pay fixed, variable or floating rates of interest and
are generally subject to credit and interest rate risks. The maturity date or
price of and financial assets collateralizing a security may be structured in
order to make it qualify as or act like a money market security. These
securities may be subject to greater credit and interest rate risks than other
money market securities because of their structure. Money market securities may
be issued with puts or these can be sold separately.
PROMISSORY NOTES are written agreements committing the maker or issuer to pay
the payee a specified amount either on demand or at a fixed date in the future,
with or without interest. These 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 of the put to sell a security at a specified price and time to
the seller or "put provider." When a fund buys a security with a put feature,
losses could occur if the put provider does not perform as agreed. Standby
commitments are types of puts.
QUALITY OF INVESTMENTS. The funds follow regulations set forth by the SEC that
dictate the quality requirements for money market mutual funds. These require
the funds to invest exclusively in high-quality securities. Generally,
high-quality securities are securities that present minimal credit risks and are
rated in one of the two highest rating categories by two nationally recognized
statistical rating organizations (NRSROs), or by one if only one NRSRO has rated
the securities, or, if unrated, determined to be of comparable quality by the
investment adviser pursuant to guidelines adopted by the Board of Trustees.
High-quality securities may be "first tier" or "second tier" securities. First
tier securities may be rated within the highest category or determined to be of
comparable quality by the investment adviser. Money market fund shares and U.S.
government securities also are first tier securities. Second tier securities
generally are rated within the second-highest category. Each fund's holdings of
second tier securities will not exceed 5% of its assets, and investments in
second tier securities of any one issuer will be limited to the greater of 1% of
the fund's assets or $1 million.
Should a security's high-quality rating change after purchase by a fund, the
investment adviser would take such action, including no action, as determined to
be in the best interest of a 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-
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27
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. Under certain circumstances, repurchase agreements that are fully
collateralized by U.S. government securities may be deemed to be investments in
U.S. Government Securities.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. For example, commercial paper and other promissory notes may be
issued under Section 4(2) of the Securities Act of 1933 and may be sold only to
qualified institutional buyers, such as the funds, under Securities Act Rule
144A.
Restricted securities may be deemed liquid or illiquid. In order to be deemed
liquid, a fund must be able to dispose of the security in the ordinary course of
business at approximately the amount the fund has valued the security. In
addition, the investment adviser must determine that an institutional or other
market exists for these securities. In making this determination, the investment
adviser may take into account any liquidity support associated with the
security. It is not possible to predict with assurance whether the market for
any restricted security will continue. Therefore, the investment adviser
monitors a fund's investments in these securities, focusing on factors, such as
valuation, liquidity and availability of information. To the extent a fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in a fund's portfolio may increase if buyers in that market become
unwilling to purchase the securities.
STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities. Not all U.S. government securities are backed by the full
faith and credit of the United States. Some U.S. government securities, such
as those issued by Fannie Mae, Freddie Mac, the Student Loan Marketing
Association (SLMA or SALLIE MAE), and the Federal Home Loan Bank (FHLB), are
supported by a line of credit the issuing entity has with the U.S. Treasury.
Others are supported solely by the credit of the issuing agency or
instrumentality such as obligations issued by the Federal Farm Credit Banks
Funding Corporation (FFCB). There can be no assurance that the U.S.
government will provide financial support to U.S. government securities of
its agencies and instrumentalities if it is not obligated to do so under
law. Of course U.S. government securities, including U.S. Treasury
securities, are among the safest securities, however, not unlike other debt
securities, they are still sensitive to interest rate changes, which will
cause their prices and yields to fluctuate.
VARIABLE AND FLOATING RATE DEBT SECURITIES pay an interest rate, which is
adjusted either periodically or at specific intervals or which floats
continuously according to a formula or benchmark. Although these structures
generally are intended to minimize the fluctuations in value that occur when
interest rates rise and fall, some structures may be linked to a benchmark in
such a way as to cause greater volatility to the security's value.
Some variable rate securities may be combined with a put or demand feature
(variable rate demand securities) that entitles the holder to the right to
demand repayment in full or to resell at a specific price and/or time. While the
demand feature is intended to reduce credit risks, it is not always
unconditional, and may make the securities more difficult to sell quickly
without losses.
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There are risks involved with these securities because there may be no active
secondary market for a particular variable rate demand security purchased by a
fund. In addition, a fund may exercise only its demand rights at certain times.
A fund could suffer losses in the event that the issuer defaults on its
obligation.
INVESTMENT LIMITATIONS
THE FOLLOWING INVESTMENT LIMITATIONS MAY BE CHANGED ONLY BY A VOTE OF A MAJORITY
OF EACH FUND'S OUTSTANDING SHARES.
EACH FUND MAY NOT:
(1) Purchase securities of an issuer, except as consistent with the
maintenance of its status as an open-end diversified company 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) 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.
(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) Borrow money, 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) 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.
(7) 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.
(8) Purchase securities or make investments other than in accordance with its
investment objectives and policies.
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.
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Concentration. The Securities and Exchange Commission presently defines
concentration as investing 25% or more of a fund'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. Under 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.
Real Estate. The 1940 Act does not directly restrict a fund's ability to invest
in real estate, but does require that every fund have a fundamental investment
policy governing such investments. The funds have adopted a fundamental policy
that would permit direct investment in real estate. However, the funds have a
non-fundamental investment limitation that prohibits them from investing
directly in real estate. This non-fundamental policy may be changed only by vote
of the funds' Board of Trustees.
THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.
EACH FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government, its agencies or instrumentalities, or
securities of other investment companies) if, as a result more than 5% of
the value of its assets would be invested in the securities of such
issuer, except that the fund may invest up to 25% of its total assets in
the first tier securities of a single issuer for up to three business
days.
(2) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that it reserves the freedom of action to invest up
to 100% of its assets in certificates of deposit or bankers'
acceptances issued by domestic branches of U.S. banks and U.S. branches
of foreign banks (which the fund has determined to be subject to the
same regulation as U.S. banks), or obligations of, or guaranteed by,
the U.S. government, its agencies or instrumentalities in accordance
its investment objective and policies.
(3) Invest more than 10% of its net assets in illiquid securities.
(4) Invest in commodities or commodity contracts, futures contracts, real
estate or real estate limited partnerships, although it may invest in
securities which are secured by real estate and securities of issuers
which invest or deal in real estate.
(5) Invest for the purpose of exercising control or management of another
issuer.
(6) Purchase securities of other investment companies, except as permitted by
the Investment Company Act of 1940, the rules or regulations thereunder or
any exemption therefrom, as such statute, rules or regulations may be
amended from time to time.
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30
(7) 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).
(8) Borrow money except that the fund may (i) borrow money from banks or
through an interfund lending facility, if any, only for temporary or
emergency purposes (and not for leveraging) and (ii) engage in reverse
repurchase agreements with any party; provided that (i) and (ii) in
combination do not exceed 33 1/3% of its total assets (any borrowings that
come to exceed this amount will be reduced to the extent necessary to
comply with the limitation within three business days) and the fund will
not purchase securities while borrowings represent more than 5% of its
total assets.
(9) Write, purchase or sell puts, calls or combinations thereof.
(10) 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.
(11) Invest in interests in oil, gas, mineral leases or other mineral
exploration or development programs, although it may invest in the
securities of issuers which invest in or sponsor such programs.
Except with respect to borrowings, concentration of investments and investments
in illiquid securities, later changes in values or net assets do not require a
fund to sell an investment even if it could not then make the same investment.
MANAGEMENT OF THE FUNDS
The officers and trustees, their principal occupations during the past five
years and their affiliations, if any, with The Charles Schwab Corporation,
Charles Schwab & Co., Inc. (Schwab) and Charles Schwab Investment Management,
Inc., are as follows:
POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUST
------------------------------------------------------------------------------------------------------------------
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Schwab Holdings,
Inc.; Chairman, Director, Charles Schwab & Co.,
Inc., Charles Schwab Investment Management,
Inc.; Director, The Charles Schwab Trust
Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc.
(full-service audio solutions for the internet),
Vodaphone AirTouch PLC (a telecommunications
company) and Siebel Systems (a software company).
JOHN P. COGHLAN* President and Trustee Vice Chairman and Executive Vice President, The
May 6, 1951 Charles Schwab Corporation; Vice Chairman
---------------
* This trustee is an "interested person" of the trusts.
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31
and Enterprise President, Retirement Plan Services
and Services for Investment Managers, Charles
Schwab & Co., Inc.; Chief Executive Officer and
Director, Charles Schwab Investment Management,
Inc.; President, Chief Executive Officer and
Director, The Charles Schwab Trust Company;
Director, Charles Schwab Asset Management
(Ireland) Ltd.; Director, Charles Schwab
Worldwide Funds PLC.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments). Prior to 1996, Chairman and
Chief Executive Officer of North American Trust
(real estate investment trust).
MICHAEL W. WILSEY Trustee Chairman and Chief Executive Officer, Wilsey
August 18, 1943 Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
JEREMIAH H. CHAFKIN* Executive Vice Executive Vice President, Asset Management
May 9, 1959 President, Chief Products and Services, Charles Schwab & Co.,
Operating Officer and Inc.; President and Chief Operating Officer,
Trustee 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 Affairs and Chief
August 13, 1960 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 Eureka Holdings, Inc. (holding company).
Ms. Byerwalter also is on the Board of Directors
---------------
* This trustee is an "interested person" of the trusts.
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32
of America First Companies, Omaha, NE (venture
capital/fund management) and Redwood Trust, Inc.
(mortgage finance), and is Director of Stanford
Hospitals and Clinics, SRI International
(research) and LookSmart, Ltd. (an Internet
infrastructure company).
WILLIAM A. HASLER Trustee Co-Chief Executive Officer, Aphton Corporation
November 22, 1941 (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 Officer and founder
September 28, 1950 of Smith Graham & Co. (investment advisors).
Mr. Smith is also on the Board of Directors of
Pennzoil-Quaker State Company (oil and gas) and
Rorento N.V. (investments - Netherlands), and is
a member of the audit committee of Northern
Border Partners, L.P., a subsidiary of Enron
Corp. (energy).
TAI-CHIN TUNG Treasurer and Principal Senior Vice President and Chief Financial
March 7, 1951 Financial Officer Officer, Charles Schwab Investment Management,
Inc. From 1994 to 1996, Ms. Tung was Controller
for Robertson Stephens Investment Management,
Inc.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
KOJI E. FELTON Secretary Vice President, Chief Counsel and Assistant
March 13, 1961 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to June 1998, Mr. Felton
was a Branch Chief in Enforcement at the U.S.
Securities and Exchange Commission in San
Francisco.
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.
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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, 2000, concerning compensation of the trustees.
Unless otherwise stated, information is for the fund complex, which included 44
funds as of December 31, 2000.
($) Pension or ($)
Aggregate Compensation Retirement Total
Name of Trustee From each Benefits Compensation
Fund Accrued as from Fund
Part of Fund Complex
Expenses
Institutional Retirement
-----------------------------------------------------------------------------------------------------------
Charles R. Schwab 0 0 N/A 0
Steven L. Scheid 1 0 0 N/A 0
Jeremiah H. Chafkin 2 0 0 N/A 0
John P. Coghlan 3 0 0 N/A 0
Mariann Byerwalter 2 $1,841 $1,785 N/A $ 73,770
Donald F. Dorward $3,404 $3,290 N/A $137,850
William A. Hasler 2 $1,841 $1,785 N/A $ 73,770
Robert G. Holmes $3,404 $3,290 N/A $137,850
Gerald B. Smith 2 $1,841 $1,785 N/A $ 73,770
Donald R. Stephens $3,404 $3,290 N/A $137,850
Michael W. Wilsey $3,404 $3,290 N/A $137,850
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.
---------------
1 Resigned from the Board effective November 21, 2000.
2 This trustee was first elected by shareholders on June 1, 2000.
3 Appointed to the Board on November 21, 2000.
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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 3, 2001, the officers and trustees of the trust, as a group owned,
of record or beneficially, less than 1% of the outstanding voting securities of
the fund.
As of April 3, 2001, the following represents persons or entities that owned, of
record or beneficially, more than 5% of the shares of the funds:
SCHWAB INSTITUTIONAL ADVANTAGE MONEY FUND
The Charles Schwab Trust Co. 76.89%
1 Montgomery Street, San Francisco, CA
SCHWAB RETIREMENT MONEY FUND
The Charles Schwab Trust Co. 64.63%
1 Montgomery Street, San Francisco, CA
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. Schwab is an affiliate of the
investment adviser and is the trust's distributor, shareholder services agent
and transfer agent. Charles R. Schwab is the founder, Chairman, Co-Chief
Executive Officer and Director of The Charles Schwab Corporation. As a result of
his ownership of and interests in The Charles Schwab Corporation, Mr. Schwab may
be deemed to be a controlling person of the investment adviser and Schwab.
For its advisory and administrative services to the funds, the investment
adviser is entitled to receive graduated annual fee payable monthly based on
each fund's average daily net assets as described below.
First $1 billion - 0.38%
More than $1 billion but not exceeding $10 billion - 0.35%
More than $10 billion but not exceeding $20 billion - 0.32%
More than $20 billion - 0.30%
Prior to April 30, 1999, for its advisory and administrative services to the
fund, the investment adviser is entitled to receive a graduated annual fee,
payable monthly, of 0.46% of each fund's average daily net assets of the first
$1 billion, 0.45% of the next $1 billion but not in excess of $3 billion, 0.40%
of net assets over $3 billion but not in excess of $10 billion, 0.37% of such
assets over $10 billion but not in excess of $20 billion and 0.34% of such
assets over $20 billion.
For the fiscal years ended December 31, 1998, 1999 and 2000, Schwab
Institutional Advantage Money Fund paid investment advisory fees of $570,000
(fees were reduced by $939,000), $940,000 (fees were reduced by $990,000) and
$1,200,000 (fees were reduced by $1,108,000), respectively.
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For the fiscal years ended December 31, 1998, 1999 and 2000, Schwab Retirement
Money Fund paid investment advisory fees of $721,000 (fees were reduced by
$138,000), $989,000 (fees were reduced by $46,000) and $1,362,000 (fees were
reduced by $0), respectively.
The investment adviser and Schwab have contractually guaranteed that, through at
least April 30, 2002, the total operating expenses (excluding interest, taxes,
certain non-routine and money fund insurance expenses, if any) of the Schwab
Institutional Advantage Money Fund and Schwab Retirement Money Fund will not
exceed 0.50% and 0.73% of the average daily net assets, respectively. The amount
of the expense cap is determined in coordination with the Board of Trustees, and
the expense cap is intended to 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, taxes and money fund insurance, nor does it
cover extraordinary or non-routine expenses, if any, 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.
SHAREHOLDER SERVICES AND TRANSFER AGENT
Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
funds' prospectuses, financial reports and other informational literature about
the funds. Schwab maintains the office space, equipment and personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds(R)
and provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these services.
For the services performed as transfer agent under its contract with each fund,
Schwab is entitled to receive an annual fee from each fund payable monthly in
the amount of 0.05% of its average daily net assets. For the services performed
as shareholder services agent under its contract with each fund, Schwab is
entitled to receive an annual fee from each fund, payable monthly in the amount
of 0.20% of its average daily net assets.
CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, 8800 Tinicum Blvd., Third Floor Suite 200, Philadelphia, PA
19153, serves as custodian for the funds and PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The fund accountant maintains all books and records
related to each fund's transactions.
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INDEPENDENT ACCOUNTANTS
The funds' independent accountants, PricewaterhouseCoopers LLP, audits and
reports on the annual financial statements of each series of the trusts and
reviews certain regulatory reports and each fund's federal income tax return.
They also perform other professional accounting, auditing, tax and advisory
services when a trust engages them to do so. Their address is 333 Market Street,
San Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ended December 31, 2000, are included in the fund's annual report, which is
a separate report supplied with the SAI.
OTHER EXPENSES
The funds pay other expenses that typically are connected with the trust's
operations, and include legal, audit and custodian fees, as well as the costs of
accounting and registration of the funds. Expenses not directly attributable to
a particular fund will generally be allocated among the funds in the trust on
the basis of each fund's relative net assets at the time the expense is
incurred.
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 its other clients, including mutual funds.
The funds expect that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices.
The investment decisions for each fund are reached independently from those for
other accounts managed by the investment adviser. Such other accounts also may
make investments in instruments or securities at the same time as a fund. When
two or more accounts managed by the investment adviser have funds available for
investment in similar instruments, available instruments are allocated as to
amount in a manner considered equitable to each account. In some cases, this
procedure may affect the size or price of the position obtainable for a fund.
However, it is the opinion of the Board of Trustees that the benefits conferred
by the investment manager
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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 minimum initial investment, minimum
additional investment and minimum balance requirements are set forth in the
prospectus. These minimums may be waived for certain investors, including
trustees, officers and employees of Schwab, or changed without prior notice. The
minimums may also be waived for investment programs such as those programs
designated for college savings or graduation gifts.
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 a 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.
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As more fully described in each Declaration of Trust, the trustees may each
year, or more frequently, distribute to the shareholders of each series accrued
income less accrued expenses and any net realized capital gains less accrued
expenses. Distributions of each year's income of each series shall be
distributed pro rata to shareholders in proportion to the number of shares of
each series held by each of them. Distributions will be paid in cash or shares
or a combination thereof as determined by the trustees. Distributions paid in
shares will be paid at the net asset value per share as determined in accordance
with the bylaws.
PURCHASE, REDEMPTION AND PRICING OF SHARES AND DELIVERY OF SHAREHOLDER
DOCUMENTS
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 2001: New Year's Day,
Martin Luther King Jr.'s Birthday (observed), Presidents' 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 follows reasonable procedures to confirm that
your telephone or Internet order is genuine, they will not be liable for any
losses an investor may experience due to unauthorized or fraudulent
instructions. These procedures may include requiring a form of personal
identification or confirmation before acting upon any telephone or Internet
order, providing written confirmation of telephone or Internet orders and tape
recording all telephone orders.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
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.
EXCHANGING SHARES OF THE FUNDS
Shares of any SchwabFund, including any class of shares, may be sold and the
shares of any other SchwabFund or class purchased, provided the minimum
investment and any other requirement of the fund or class or class purchased
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(R) and shares of non-Sweep Investments. Shares of Sweep
Investments may be
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bought and sold automatically pursuant to the terms and conditions of your
Schwab account agreement or by direct order as long as you meet the minimums for
direct investments.
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 a 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 a 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 a fund's $1.00 NAV calculated using amortized cost, the Board of
Trustees might supplement dividends in an effort to maintain a fund's $1.00 NAV.
DELIVERY OF SHAREHOLDER DOCUMENTS
Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order to eliminate duplicate
mailings of shareholder documents, each household may receive one copy of these
documents, under certain conditions. This practice is commonly called
"householding." If you want to receive multiple copies, you may write or call
your fund at the address or telephone number on the front of this SAI. Your
instructions will be effective within 30 days of receipt by Schwab.
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TAXATION
FEDERAL TAX INFORMATION FOR THE FUNDS
It is each fund's policy to qualify for taxation as a "regulated investment
company" (RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, each fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If a fund does not qualify as a RIC under the Code, it will
be subject to federal income tax on its net investment income and any net
realized capital gains.
The Code imposes a non-deductible excise tax on RICs that do not distribute in a
calendar year (regardless of whether they otherwise have a non-calendar taxable
year) an amount equal to 98% of their "ordinary income" (as defined in the Code)
for the calendar year plus 98% of their net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. For
the foregoing purposes, a fund is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
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 realized capital losses, to the extent not offset by realized
capital gains, will be carried forward.
Any dividends declared by a fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. A fund may
adjust its schedule for the reinvestment of
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distributions for the month of December to assist in complying with the
reporting and minimum distribution requirements of the Code.
The funds do not expect to realize any long-term capital gains. However
long-term capital gains distributions are taxable as long-term capital gains,
regardless of how long you have held your shares. If you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss. Distributions by a fund also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.
A fund may engage in techniques that may alter the timing and character of its
income. A fund may be restricted in its use of these techniques by rules
relating to its qualification as a regulated investment company.
A fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." 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 per year as determined under certain IRS rules. Different tax
consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a
foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above.
CALCULATION OF PERFORMANCE DATA
The funds' seven-day yields based on the seven days ended December 31, 2000 are
stated below and were calculated by determining the net change, exclusive of
capital changes and income other than investment income, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent.
Seven-Day Yield as of December 31, 2000
Schwab Institutional Advantage Money Fund 6.20%
Schwab Retirement Money Fund 5.99%
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The funds' seven-day effective yields based on the seven days ended December 31,
2000 are stated below and were calculated by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, with the resulting yield
figure carried to at least the nearest one hundredth of one percent.
Seven-Day Effective Yield as of December 31, 2000
Schwab Institutional Advantage Money Fund 6.39%
Schwab Retirement Money Fund 6.16%
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, 2000.
The performance of the funds may be compared with the performance of other
mutual funds by comparing the ratings of mutual fund rating services, various
indices, U.S. government obligations, bank certificates of deposit, the consumer
price index and other investments for which reliable data is available. An
index's performance data assumes the reinvestment of dividends but does not
reflect deductions for administrative, management and trading expenses. The
funds will be subject to these costs and expenses, while an index does not have
these expenses. In addition, various factors, such as holding a cash balance,
may cause the funds' performance to be higher or lower than that of an index.
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APPENDIX - RATINGS OF INVESTMENT SECURITIES
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers (or
related supporting institutions) of commercial paper with this rating are
considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
An S&P A-1 commercial paper rating 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.
FITCH, INC. (FORMERLY FITCH 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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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB MONEY FUNDS - SWEEP INVESTMENTS(R)
SCHWAB MONEY MARKET FUND
SCHWAB GOVERNMENT MONEY FUND
SCHWAB U.S. TREASURY MONEY FUND
APRIL 30, 2001
AS AMENDED SEPTEMBER 13, 2001
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated April 30, 2001 (as amended
from time to time).
To obtain a free copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, 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
Page
INVESTMENT OBJECTIVES, SECURITIES, RISKS AND LIMITATIONS ............................................................ 2
MANAGEMENT OF THE FUNDS ............................................................................................. 11
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES ................................................................. 15
INVESTMENT ADVISORY AND OTHER SERVICES .............................................................................. 15
BROKERAGE ALLOCATION AND OTHER PRACTICES ............................................................................ 17
DESCRIPTION OF THE TRUST ............................................................................................ 18
PURCHASE, REDEMPTION AND PRICING OF SHARES AND DELIVERY OF SHAREHOLDER DOCUMENTS .................................... 19
TAXATION ............................................................................................................ 21
CALCULATION OF PERFORMANCE DATA ..................................................................................... 23
APPENDIX - RATINGS OF INVESTMENT SECURITIES ......................................................................... 24
45
INVESTMENT OBJECTIVES, SECURITIES, RISKS AND LIMITATIONS
INVESTMENT OBJECTIVES
Schwab Money Market Fund seeks maximum current income consistent with stability
of capital.
Schwab Government Money Fund seeks maximum current income consistent with
stability of capital.
Schwab U.S. Treasury Money Fund seeks high current income consistent with
liquidity and stability of capital.
Each fund's investment objective may be changed only by vote of a majority of
its outstanding voting shares. There is no guarantee the funds will achieve
their objectives.
The following investment securities, risks and limitations supplement those set
forth in the prospectus and may be changed without shareholder approval unless
otherwise noted. Also, policies and limitations that state a maximum percentage
of assets that may be invested in a security or other asset, or that set forth a
quality standard, shall be measured immediately after and as a result of a
fund's acquisition of such security or asset unless otherwise noted. Any
subsequent change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with a fund's
investment policies and limitations. Additionally, for purposes of calculating
any restriction, an issuer shall be the entity deemed to be ultimately
responsible for payments of interest and principal on the security pursuant to
Rule 2a-7 under the Investment Company Act of 1940 (the 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 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.
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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 less than 25% of its
net assets.
BANKERS' ACCEPTANCES or notes are credit instruments evidencing a bank's
obligation to pay a draft drawn on it by a customer. These instruments reflect
the obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. A fund will invest only in bankers' acceptances of
banks that have capital, surplus and undivided profits in excess of $100
million.
BORROWING may subject a fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money.
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 consists of short-term, promissory notes issued by banks,
corporations and other institutions to finance short-term credit needs. These
securities generally are discounted but sometimes may be interest bearing.
Commercial paper, which also may be unsecured, is subject to credit risk.
CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure to industry risk. For example, the automobile industry may have a
greater exposure to a single factor, such as an increase in the price of oil,
which may adversely affect the sale of automobiles and, as a result, the value
of the industry's securities. Based on the primary characteristics of non-U.S.
(foreign) banks, the funds have identified each foreign country as a separate
bank industry for purposes of a fund's concentration policy. A fund will limit
its investments in securities issued by foreign banks in each country to less
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.
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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 respect to that security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, the fund could suffer
losses.
DIVERSIFICATION involves investing in a wide range of securities and thereby
spreading and reducing the risks of investment. Each fund is a series of an
open-end investment management company. Each fund is a diversified mutual fund.
Each fund also follows the regulations set forth by the Securities and Exchange
Commission (SEC) that dictate the diversification requirements for money market
mutual funds. These requirements prohibit a taxable money fund from purchasing a
security if more than 5% of its total assets would be invested in the securities
of a single issuer, although a fund may invest up to 25% of its total assets in
the first tier securities of a single issuer for up to three business days. U.S.
government and certain other securities are not subject to this particular
regulation.
FOREIGN SECURITIES involve additional risks, because they are issued by foreign
entities, including foreign governments, banks, corporations or because they are
traded principally overseas. Foreign entities are not subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. corporations. In addition,
there may be less publicly available information about foreign entities. Foreign
economic, political and legal developments could have more dramatic effects on
the value of foreign securities.
On January 1, 1999, 11 of the 15 member states of the European union introduced
the "euro" as a common currency. During a three-year transitional period, the
euro will coexist with each member state's currency. By July 1, 2002, the euro
will have replaced the national currencies of the following member countries:
Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal and Spain. During the transition period, each country
will treat the euro as a separate currency from that of any member state.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins will
replace the bills and coins of the participating countries.
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The new European Central Bank has control over each country's monetary policies.
Therefore, the participating countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.
The conversion may impact the trading in securities of issuers located in, or
denominated in the currencies of, the member states, as well as foreign
exchanges, payments, the settlement process, custody of assets and accounting.
The introduction of the euro is also expected to affect derivative and other
financial contracts in which the funds may invest in so far as price sources
such as day-count fractions or settlement dates applicable to underlying
instruments may be changed to conform to the conventions applicable to euro
currency.
The overall impact of the transition of the member states' currencies to the
euro cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general short and long-term
consequences can be expected, such as changes in economic environment and
changes in behavior of investors, all of which will impact each fund's
euro-denominated investments.
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 a 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.
INTERFUND BORROWING AND LENDING. The fund may borrow money from and/or lend
money to other funds/portfolios in the Schwab complex ("SchwabFunds"). All loans
are for temporary or emergency purposes and the interest rates to be charged
will be the average of the overnight repurchase agreement rate and the
short-term bank loan rate. All loans are subject to numerous conditions designed
to ensure fair and equitable treatment of all participating funds/portfolios.
The interfund lending facility is subject to the oversight and periodic review
of the Board of Trustees of the SchwabFunds.
LENDING of portfolio securities is a common practice in the securities industry.
A fund will engage in security lending arrangements with the primary objective
of increasing its income. For example, a fund may receive cash collateral and it
may invest in short-term, interest-bearing obligations, but will do so only to
the extent that it will not lose the tax treatment available to regulated
investment companies. Lending portfolio securities involves risks that the
borrower may fail to return the securities or provide additional collateral.
Also, voting rights with respect to the loaned securities may pass with the
lending of the securities.
A fund may loan portfolio securities to qualified broker-dealers or other
institutional investors provided: (1) the loan is secured continuously by
collateral consisting of U.S. government securities, letters of credit, cash or
cash equivalents or other appropriate instruments maintained on a daily
marked-to-market basis in an amount at least equal to the current market value
of the securities loaned; (2) a fund may at any time call the loan and obtain
the return of the securities loaned; (3) a fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of
securities loaned will not at any time exceed one-third of the total assets of a
fund, including collateral received from the loan (at market value computed at
the time of the loan).
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Although voting rights with respect to loaned securities pass to the borrower,
the lender retains the right to recall a security (or terminate a loan) for the
purpose of exercising the security's voting rights. Efforts to recall such
securities promptly may be unsuccessful, especially for foreign securities or
thinly traded securities such as small-cap stocks. In addition, because
recalling a security may involve expenses to the fund, it is expected that the
fund will do so only where the items being voted upon, in the judgement of
Charles Schwab Investment Management, Inc. ("CSIM" or the investment adviser),
either are material to the economic value of the security or threaten to
materially impact the issuer's corporate governance policies or structure.
MATURITY OF INVESTMENTS. Each fund follows the regulations set forth by the SEC
that dictate the maturity requirements for money market mutual funds. These
requirements prohibit a fund from purchasing a security with a remaining
maturity of more than 397 days or maintaining a dollar-weighted average
portfolio maturity that exceeds 90 days.
MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be
issued by entities such as the U.S. government, corporations and financial
institutions (like banks). Money market securities include commercial paper,
promissory notes, certificates of deposit, banker's acceptances, notes and time
deposits.
Money market securities pay fixed, variable or floating rates of interest and
are generally subject to credit and interest rate risks. The maturity date or
price of and financial assets collateralizing a security may be structured in
order to make it qualify as or act like a money market security. These
securities may be subject to greater credit and interest rate risks than other
money market securities because of their structure. Money market securities may
be issued with puts or these can be sold separately.
PROMISSORY NOTES are written agreements committing the maker or issuer to pay
the payee a specified amount either on demand or at a fixed date in the future,
with or without interest. These 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 of the put to sell a security at a specified price and time to
the seller or "put provider." When a fund buys a security with a put feature,
losses could occur if the put provider does not perform as agreed. Standby
commitments are types of puts.
QUALITY OF INVESTMENTS. The funds follow regulations set forth by the SEC that
dictate the quality requirements for money market mutual funds. These require
the funds to invest exclusively in high-quality securities. Generally,
high-quality securities are securities that present minimal credit risks and are
rated in one of the two highest rating categories by two nationally recognized
statistical rating organizations (NRSROs), or by one if only one NRSRO has rated
the securities, or, if unrated, determined to be of comparable quality by the
investment adviser pursuant to guidelines adopted by the Board of Trustees.
High-quality securities may be "first tier" or "second tier" securities. First
tier securities may be rated within the highest category or determined to be of
comparable quality by the investment adviser. Money market fund shares and U.S.
government securities also are first tier securities. Second tier securities
generally are rated within the second-highest category. Each fund's holdings of
second tier securities will not exceed 5% of its assets, and investments in
second tier securities of any one issuer will be limited to the greater of 1% of
the fund's assets or $1 million.
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Should a security's high-quality rating change after purchase by a fund, the
investment adviser would take such action, including no action, as determined to
be in the best interest of a 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. Under certain circumstances,
repurchase agreements that are fully collateralized by U.S. government
securities may be deemed to be investments in U.S. Government Securities.
RESTRICTED SECURITIES are securities that are subject to legal restrictions on
their sale. For example, commercial paper and other promissory notes may be
issued under Section 4(2) of the Securities Act of 1933 and may be sold only to
qualified institutional buyers, such as the funds, under Securities Act Rule
144A.
Restricted securities may be deemed liquid or illiquid. In order to be deemed
liquid, a fund must be able to dispose of the security in the ordinary course of
business at approximately the amount a fund has valued the security. In
addition, the investment adviser must determine that an institutional or other
market exists for these securities. In making this determination, the investment
adviser may take into account any liquidity support associated with the
security. It is not possible to predict with assurance whether the market for
any restricted security will continue. Therefore, the investment adviser
monitors a fund's investments in these securities, focusing on factors such as
valuation, liquidity and availability of information. To the extent a fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in a fund's portfolio may increase if buyers in that market become
unwilling to purchase the securities.
STRIPPED SECURITIES are securities whose income and principal components are
detached and sold separately. While the risks associated with stripped
securities are similar to other money market securities, stripped securities are
typically subject to greater changes in value. U.S. Treasury securities that
have been stripped by a Federal Reserve Bank are obligations of the U.S.
Treasury.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities.
Not all U.S. government securities are backed by the full faith and credit of
the United States. Some U.S. government securities, such as those issued by
Fannie Mae, Freddie Mac, the Student Loan Marketing Association (SLMA or SALLIE
MAE), and the Federal Home Loan Bank (FHLB), are supported by a line of credit
the issuing entity has with the U.S. Treasury. Others are supported solely by
the credit of the issuing agency or instrumentality such as obligations issued
by the Federal Farm Credit Banks Funding Corporation (FFCB). There can be no
assurance that the U.S. government will provide financial support to U.S.
government securities of its agencies and instrumentalities if it is not
obligated to do so under law. Of course U.S. government securities, including
U.S. Treasury securities, are among the safest securities, however, not unlike
other debt securities, they are still sensitive to interest rate changes, which
will cause their prices and yields to fluctuate.
U.S. TREASURY SECURITIES are obligations of the U.S. Treasury and include bills,
notes and bonds. U.S. Treasury securities are backed by the full faith and
credit of the United States Government.
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VARIABLE AND FLOATING RATE DEBT SECURITIES pay an interest rate, which is
adjusted either periodically or at specific intervals or which floats
continuously according to a formula or benchmark. Although these structures
generally are intended to minimize the fluctuations in value that occur when
interest rates rise and fall, some structures may be linked to a benchmark in
such a way as to cause greater volatility to the security's value.
Some variable rate securities may be combined with a put or demand feature
(variable rate demand securities) that entitles the holder to the right to
demand repayment in full or to resell at a specific price and/or time. While the
demand feature is intended to reduce credit risks, it is not always
unconditional, and may make the securities more difficult to sell quickly
without losses. There are risks involved with these securities because there may
be no active secondary market for a particular variable rate demand security
purchased by a fund. In addition, a fund may exercise only its demand rights at
certain times. A fund could suffer losses in the event that the issuer defaults
on its obligation.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of each fund's outstanding voting shares.
SCHWAB MONEY MARKET FUND AND SCHWAB GOVERNMENT MONEY FUND MAY NOT:
(1) Purchase securities of an issuer, except as consistent with the
maintenance of its status as an open-end diversified company 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) 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.
(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) Borrow money, 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) 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.
(7) 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.
(8) Purchase securities or make investments other than in accordance with
its investment objectives and policies.
SCHWAB U.S. TREASURY MONEY FUND MAY NOT:
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(1) Purchase securities of an issuer, except as consistent with the
maintenance of its status as an open-end diversified company 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) 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.
(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) Borrow money, 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) 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.
(7) 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.
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 a fund'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. Under 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,
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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.
Real Estate. The 1940 Act does not directly restrict a fund's ability to invest
in real estate, but does require that every fund have a fundamental investment
policy governing such investments. The funds have adopted a fundamental policy
that would permit direct investment in real estate. However, the funds have a
non-fundamental investment limitation that prohibits them from investing
directly in real estate. This non-fundamental policy may be changed only by vote
of the funds' Board of Trustees.
THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.
SCHWAB MONEY MARKET FUND AND SCHWAB GOVERNMENT 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,
or securities of other investment companies) if, as a result more than
5% of the value of its assets would be invested in the securities of
such issuer, except that the fund may invest up to 25% of its total
assets in the first tier securities of a single issuer for up to three
business days.
(2) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that it reserves the freedom of action to invest up
to 100% of its assets in certificates of deposit or bankers' acceptances
issued by domestic branches of U.S. banks and U.S. branches of foreign
banks (which the fund has determined to be subject to the same
regulation as U.S. banks), or obligations of, or guaranteed by, the U.S.
government, its agencies or instrumentalities in accordance with its
investment objective and policies.
(3) Invest in commodities or commodity contracts, futures contracts, real
estate or real estate limited partnerships, although it may invest in
securities which are secured by real estate and securities of issuers
which invest or deal in real estate.
(4) Invest for the purpose of exercising control or management of another
issuer.
(5) Invest more than 10% of its net assets in illiquid securities.
(6) Purchase securities of other investment companies, except as permitted
by the 1940 Act, the rules or regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended from
time to time.
(7) 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).
(8) Borrow money except that the fund may (i) borrow money from banks or
through an interfund lending facility, if any, only for temporary or
emergency purposes (and not for leveraging) and (ii) engage in reverse
repurchase agreements with any party; provided that (i) and (ii) in
combination do not exceed 33 1/3% of its total assets (any borrowings
that come to exceed this amount will be reduced to the extent necessary
to comply with the limitation within three business days).
(9) Write, purchase or sell puts, calls or combinations thereof.
(10) 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.
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(11) Invest in interests in oil, gas, mineral leases or other mineral
exploration or development programs, although it may invest in the
securities of issuers which invest in or sponsor such programs.
(12) Purchase money market securities deemed to mature in more than 397 days.
SCHWAB U.S. TREASURY MONEY FUND MAY NOT:
(1) Purchase securities other than obligations issued by the U.S. Treasury
and securities backed by the "full faith and credit" guarantee of the
U.S. government that mature in 397 days or less.
(2) 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).
(3) Invest in commodities or in real estate.
(4) Invest for the purpose of exercising control over management of another
company.
(5) Borrow money except that the fund may (i) borrow money from banks or
through an interfund lending facility, if any, only for temporary or
emergency purposes (and not for leveraging) and (ii) engage in reverse
repurchase agreements with any party; provided that (i) and (ii) in
combination do not exceed 33 1/3% of its total assets (any borrowings
that come to exceed this amount will be reduced to the extent necessary
to comply with the limitation within three business days).
(6) Invest more than 10% of its net assets in securities which are not
readily marketable, including securities which are restricted as to
disposition; or
(7) Engage in short sales, except for short sales against the box.
Except with respect to borrowings, concentration of investments and investments
in illiquid securities, later changes in values or net assets do not require a
fund to sell an investment even if it could not then make the same investment.
MANAGEMENT OF THE FUNDS
The officers and trustees, their principal occupations during the past five
years and their affiliations, if any, with The Charles Schwab Corporation,
Charles Schwab & Co., Inc. (Schwab) and Charles Schwab Investment Management,
Inc., are as follows:
POSITION(S) WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATIONS & AFFILIATIONS
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CHARLES R. SCHWAB* Chairman, Chief Executive Chairman and Co-Chief Executive Officer, Director, The
July 29, 1937 Officer and Trustee Charles Schwab Corporation; Chief Executive Officer,
Director, Schwab Holdings, Inc.; Chairman, Director,
Charles Schwab & Co., Inc., Charles Schwab Investment
Management, Inc.; Director, The Charles Schwab Trust
Company; Chairman, Schwab Retirement Plan Services,
Inc.; Chairman and Director until January 1999, Mayer &
Schweitzer, Inc. (a
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* This trustee is an "interested person" of the trusts.
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securities brokerage subsidiary of The Charles Schwab
Corporation); Director, The Gap, Inc. (a clothing
retailer), Audiobase, Inc. (full-service audio solutions
for the internet), Vodaphone AirTouch PLC (a
telecommunications company) and Siebel Systems (a
software company).
JOHN P. COGHLAN* President and Trustee Vice Chairman and Executive Vice President, The Charles
May 6, 1951 Schwab Corporation; Vice Chairman and Enterprise
President, Retirement Plan Services and Services for
Investment Managers, Charles Schwab & Co., Inc.; Chief
Executive Officer and Director, Charles Schwab
Investment Management, Inc.; President, Chief Executive
Officer and Director, The Charles Schwab Trust Company;
Director, Charles Schwab Asset Management (Ireland)
Ltd.; Director, Charles Schwab Worldwide Funds PLC.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates (corporate
September 23, 1931 management, marketing and communications consulting
firm). From 1996 to 1999, Executive Vice President and
Managing Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive Officer,
Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director, Semloh
May 15, 1931 Financial, Inc. (international financial services and
investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments). Prior to 1996, Chairman and Chief
Executive Officer of North American Trust (real estate
investment trust).
MICHAEL W. WILSEY Trustee Chairman and Chief Executive Officer, Wilsey Bennett,
August 18, 1943 Inc. (truck and air transportation, real estate
investment and management, and investments).
JEREMIAH H. CHAFKIN* Executive Vice President, Executive Vice President, Asset Management Products and
May 9, 1959 Chief Operating Officer and Services, Charles Schwab & Co., Inc.; President and
Trustee Chief Operating Officer, Charles Schwab Investment
Management, Inc. Prior to September 1999, Mr. Chafkin
was Senior Managing Director, Bankers Trust Company.
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* This trustee is an "interested person" of the trusts.
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MARIANN BYERWALTER Trustee Vice President for Business Affairs and Chief Financial
August 13, 1960 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 Eureka 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),
and is Director of Stanford Hospitals and Clinics, SRI
International (research) and LookSmart, Ltd. (an
Internet infrastructure company).
WILLIAM A. HASLER Trustee Co-Chief Executive Officer, Aphton Corporation
November 22, 1941 (biopharmaceuticals). 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 Officer and founder of
September 28, 1950 Smith Graham & Co. (investment advisors). Mr. Smith is
also on the Board of Directors of Pennzoil-Quaker State
Company (oil and gas) and Rorento N.V. (investments -
Netherlands), and is a member of the audit committee of
Northern Border Partners, L.P., a subsidiary of Enron
Corp. (energy).
TAI-CHIN TUNG Treasurer and Principal Senior Vice President and Chief Financial Officer,
March 7, 1951 Financial Officer Charles Schwab Investment Management, Inc. From 1994 to
1996, Ms. Tung was Controller for Robertson Stephens
Investment Management, Inc.
STEPHEN B. WARD Senior Vice President and Senior Vice President and Chief Investment Officer,
April 5, 1955 Chief Investment Charles Schwab Investment Management, Inc.
Officer
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KOJI E. FELTON Secretary Vice President, Chief Counsel and Assistant Corporate
March 13, 1961 Secretary, Charles Schwab Investment Management, Inc.
Prior to June 1998, Mr. Felton was a Branch Chief in
Enforcement at the U.S. Securities and Exchange
Commission in San Francisco.
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, 2000, concerning compensation of the trustees.
Unless otherwise stated, information is for the fund complex, which included 44
funds as of December 31, 2000.
($) Pension or ($)
Aggregate Compensation Retirement Total
Name of Trustee from each Benefits Compensation
Fund Accrued as from Fund
------------------------------------------------- Part of Fund Complex
Money Market Government U.S. Expenses
Money Treasury
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Charles R. Schwab 0 0 0 N/A 0
Steven L. Scheid 1 0 0 0 N/A 0
Jeremiah H. Chafkin 2 0 0 0 N/A 0
John P. Coghlan 3 0 0 0 N/A 0
Mariann Byerwalter 2 $10,972 $2,280 $2,267 N/A $73,770
Donald F. Dorward $20,377 $4,264 $4,234 N/A $137,850
William A. Hasler 2 $10,972 $2,280 $2,267 N/A $73,770
Robert G. Holmes $20,377 $4,264 $4,234 N/A $137,850
Gerald B. Smith 2 $10,972 $2,280 $2,267 N/A $73,770
Donald R. Stephens $20,377 $4,264 $4,234 N/A $137,850
Michael W. Wilsey $20,377 $4,264 $4,234 N/A $137,850
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1 Resigned from the Board effective November 21, 2000.
2 This trustee was first elected by shareholders on June 1, 2000.
3 Appointed to the Board on November 21, 2000.
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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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 3, 2001, the officers and trustees of the trust, as a group, owned
of record or beneficially, less than 1% of the outstanding voting securities of
the funds.
As of April 3, 2001, no person or entity owned, of record or beneficially, more
than 5% of the shares of the 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. Schwab is an affiliate of the
investment adviser and is the trust's distributor, shareholder services agent
and transfer agent. Charles R. Schwab is the founder, Chairman, Co-Chief
Executive Officer and Director of The Charles Schwab Corporation. As a result of
his ownership of and interests in The Charles Schwab Corporation, Mr. Schwab may
be deemed to be a controlling person of the investment adviser and Schwab.
For its advisory and administrative services to the funds, the investment
adviser is entitled to receive a graduated annual fee payable monthly based on
each fund's average daily net assets as described below.
First $1 billion - 0.38%
More than $1 billion but not exceeding $10 billion - 0.35%
More than $10 billion but not exceeding $20 billion - 0.32%
More than $20 billion - 0.30%
Prior to April 30, 1999, for its advisory and administrative services to the
Schwab Money Market Fund, the investment adviser was entitled to receive a
graduated annual fee, payable monthly, of 0.46% of the fund's average daily net
assets of the first $1 billion, 0.45% of net assets over $1 billion but not in
excess of $3 billion, 0.40% of net assets over $3 billion but not in excess of
$10 billion, 0.37% of such assets over $10 billion but not in excess of $20
billion and 0.34% of such assets over $20 billion.
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For the fiscal years ended December 31, 1998, 1999 and 2000, the Schwab Money
Market Fund paid investment advisory fees of $66,955,000 (fees were reduced by
$25,922,000), $87,724,000 (fees were reduced by $20,382,000) and $106,875,000
(fees were reduced by $17,969,000), respectively.
Prior to April 30, 1999, for its advisory and administrative services to the
Schwab Government Money Fund and Schwab U.S. Treasury Money Fund, the investment
adviser was entitled to receive a graduated annual fee, payable monthly, of
0.46% of each fund's average daily net assets of the first $1 billion, 0.41% of
net assets over $1 billion not in excess of $2 billion, and 0.40% of net assets
over $2 billion.
For the fiscal years ended December 31, 1998, 1999 and 2000, Schwab Government
Money Fund paid investment advisory fees of $5,598,000 (fees were reduced by
$3,539,000), $6,572,000 (fees were reduced by $2,455,000) and $6,855,000 (fees
were reduced by $2,215,000), respectively.
For the fiscal years ended December 31, 1998, 1999 and 2000, U.S. Treasury Money
Fund paid investment advisory fees of $3,266,000 (fees were reduced by
$5,004,000), $3,998,000 (fees were reduced by $4,790,000) and $4,363,000 (fees
were reduced by $4,575,000), respectively.
The investment adviser and Schwab have contractually guaranteed that, through at
least April 30, 2002, the total operating expenses (excluding interest, taxes,
certain non-routine and money fund insurance expenses, if any) of the Schwab
Money Market Fund will not exceed 0.75% of the average daily net assets. For the
Schwab Government Money Fund and Schwab U.S. Treasury Money Fund, the investment
adviser and Schwab have contractually guaranteed that, through at least April
30, 2002, the total operating expenses (excluding interest, taxes and certain
non-routine expenses) will not exceed 0.75% and 0.65% respectively, of the
average daily net assets. The amount of the expense cap is determined in
coordination with the Board of Trustees, and the expense cap is intended to
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,
taxes and money fund insurance, if any, 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.
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
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SchwabFunds(R) and provides other services. At its own expense, Schwab may
engage third party entities, as appropriate, to perform some or all of these
services.
For the services performed as transfer agent under its contract with each fund,
Schwab is entitled to receive an annual fee from each fund, payable monthly in
the amount of 0.25% of each fund's average daily net assets. For the services
performed as shareholder services agent under its contract with each fund,
Schwab is entitled to receive an annual fee from each fund, payable monthly in
the amount of 0.20% of the average daily net assets of each fund.
CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, 8800 Tinicum Blvd, Third Floor Suite 200, Philadelphia, PA
19153, serves as custodian for the funds and PFPC, Inc., 400 Bellevue Parkway,
Wilmington DE 19809, serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The fund accountant maintains all books and records
related to each fund's transactions.
INDEPENDENT ACCOUNTANTS
The funds' independent accountants, PricewaterhouseCoopers LLP, audits and
reports on the annual financial statements of each series of the trusts and
reviews certain regulatory reports and each fund's federal income tax return.
They also perform other professional accounting, auditing, tax and advisory
services when a trust engages them to do so. Their address is 333 Market Street,
San Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ended December 31, 2000, are included in the funds' annual report, which is
a separate report supplied with the SAI.
OTHER EXPENSES
The funds pay other expenses that typically are connected with the trust's
operations, and include legal, audit and custodian fees, as well as the costs of
accounting and registration of the funds. Expenses not directly attributable to
a particular fund will generally be allocated among the funds in the trust on
the basis of each fund's relative net assets at the time the expense is
incurred.
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.
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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 its other clients, including mutual funds.
The funds expect that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices
The investment decisions for each fund are reached independently from those for
other accounts managed by the investment adviser. Such other accounts also may
make investments in instruments or securities at the same time as a fund. When
two or more accounts managed by the investment adviser have funds available for
investment in similar instruments, available instruments are allocated as to
amount in a manner considered equitable to each account. In some cases, this
procedure may affect the size or price of the position obtainable for a fund.
However, it is the opinion of the Board of Trustees that the benefits conferred
by the investment manager outweigh any disadvantages that may arise from
exposure to simultaneous transactions.
DESCRIPTION OF THE TRUST
Each fund is a series of The Charles Schwab Family of Funds, an open-end
investment management company organized as a Massachusetts business trust on
October 20, 1989.
The Declaration of Trust provides that shares may be automatically redeemed if
held by a shareholder in an amount less than the minimum required by each fund
or share class. Each fund's or class's minimum initial investment, minimum
additional investment and minimum balance requirements are set forth in the
prospectus. These minimums may be waived for certain investors, including
trustees, officers and employees of Schwab, or changed without prior notice. The
minimums may also be waived for investment programs such as those programs
designated for college savings or graduation gifts.
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 a 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,
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without the necessity of further notice. The Declaration of Trust specifically
authorizes the Board of Trustees to terminate the trust (or any of its
investment portfolios) by notice to the shareholders without shareholder
approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for the trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the trust or the trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the trust solely by reason of being or having been a shareholder. Moreover,
the trust will be covered by insurance which the trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
trust itself is unable to meet its obligations. There is a remote possibility
that a fund could become liable for a misstatement in the prospectus or SAI
about another fund.
As more fully described in each Declaration of Trust, the trustees may each
year, or more frequently, distribute to the shareholders of each series accrued
income less accrued expenses and any net realized capital gains less accrued
expenses. Distributions of each year's income of each series shall be
distributed pro rata to shareholders in proportion to the number of shares of
each series held by each of them. Distributions will be paid in cash or shares
or a combination thereof as determined by the trustees. Distributions paid in
shares will be paid at net asset value per share as determined in accordance
with the bylaws.
PURCHASE, REDEMPTION AND PRICING OF SHARES AND DELIVERY OF
SHAREHOLDER DOCUMENTS
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 2001: New Year's Day,
Martin Luther King Jr.'s Birthday (observed), Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day (observed), Thanksgiving
Day and Christmas Day. On any day that the New York Fed, NYSE or principal
government securities markets close early, such as days in advance of holidays,
the funds reserve the right to advance the time by which purchase, redemption
and exchanges orders must be received on that day.
As long as the funds or Schwab follows 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 or
confirmation before acting upon any telephone order, providing written
confirmation of telephone orders and tape recording all telephone orders.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
The funds have made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1%
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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.
EXCHANGING SHARES OF THE FUNDS
Shares of any SchwabFund, including any class of shares, may be sold and shares
of any other SchwabFund 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(R) and shares of non-Sweep Investments. Shares of Sweep Investments
may be bought and sold automatically pursuant to the terms and conditions of
your Schwab account agreement or by direct order as long as you meet the
minimums for direct investments.
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 a 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 a 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
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increase, or were anticipated to increase above a fund's $1.00 NAV calculated
using amortized cost, the Board of Trustees might supplement dividends in an
effort to maintain a fund's $1.00 NAV.
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.
TAXATION
FEDERAL TAX INFORMATION FOR THE FUNDS
It is each fund's policy to qualify for taxation as a "regulated investment
company" (RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, each fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If a fund does not qualify as a RIC under the Code, it will
be subject to federal income tax on its net investment income and any net
realized capital gains.
The Code imposes a non-deductible excise tax on RICs that do not distribute in a
calendar year (regardless of whether they otherwise have a non-calendar taxable
year) an amount equal to 98% of their "ordinary income" (as defined in the Code)
for the calendar year plus 98% of their net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. For
the foregoing purposes, a fund is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
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
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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 generally consists of: (1)
accrued interest income, plus or minus amortized discount or premium, minus (2)
accrued expenses allocated to that fund. If a fund realizes any capital gains,
they will be distributed at least once during the year as determined by the
Board of Trustees. Any realized capital losses, to the extent not offset by
realized capital gains, will be carried forward.
Any dividends declared by a fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. A fund may
adjust its schedule for the reinvestment of distributions for the month of
December to assist in complying with the reporting and minimum distribution
requirements of the Code.
The funds do not expect to realize any long-term capital gains. However,
long-term capital gains distributions are taxable as long-term capital gains,
regardless of how long you have held your shares. If you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss.
Distributions by a fund also may be subject to state, local and foreign taxes,
and its treatment under applicable tax laws may differ from the federal income
tax treatment. Note that most states grant tax-exempt status to distributions
paid to shareholders from earnings received on direct investment on U.S.
government securities, subject to certain restrictions.
A fund may engage in techniques that may alter the timing and character of its
income. A fund may be restricted in its use of these techniques by rules
relating to its qualification as a regulated investment company.
A fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a certified statement that he or she is not subject to "backup
withholding." Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
Foreign shareholders (i.e., nonresident alien individuals and foreign
corporations, partnerships, trusts and estates) are generally subject to U.S.
withholding tax at the rate of 30% (or a lower tax treaty rate) on distributions
derived from net investment income and short-term capital gains. Distributions
to foreign shareholders of long-term capital gains and any gains from the sale
or other disposition of shares of the funds generally are not subject to U.S.
taxation, unless the recipient is an individual who either (1) meets the Code's
definition of "resident alien" or (2) who is physically present in the U.S. for
183 days or more per year as determined under certain IRS rules. 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.
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CALCULATION OF PERFORMANCE DATA
The funds' seven-day yields based on the seven days ended December 31, 2000 are
stated below and were calculated by determining the net change, exclusive of
capital changes and income other than investment income, in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, subtracting a hypothetical charge reflecting deductions from
shareholder accounts, and dividing the difference by the value of the account at
the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7), with the resulting yield figure
carried to at least the nearest hundredth of one percent.
Seven-day Yield as of December 31, 2000
Schwab Money Market Fund 5.95%
Schwab Government Money Fund 5.78%
Schwab U.S. Treasury Money Fund 5.60%
The funds' effective seven-day yields based on the seven days ended December 31,
2000 are stated below and were calculated by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account having a balance of one share at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding 1, raising the sum to a power equal
to 365 divided by 7, and subtracting 1 from the result, with the resulting yield
figure carried to at least the nearest one hundredth of one percent.
Seven-day Effective Yield as of December 31, 2000
Schwab Money Market Fund 6.13%
Schwab Government Money Fund 5.95%
Schwab U.S. Treasury Money Fund 5.76%
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, 2000.
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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.
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.
FITCH, INC. (FORMERLY FITCH 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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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB MUNICIPAL MONEY FUNDS - SWEEP SHARES
SCHWAB MUNICIPAL MONEY FUND
SCHWAB CALIFORNIA MUNICIPAL MONEY FUND
SCHWAB NEW YORK MUNICIPAL MONEY FUND
SCHWAB NEW JERSEY MUNICIPAL MONEY FUND
SCHWAB PENNSYLVANIA MUNICIPAL MONEY FUND
SCHWAB FLORIDA MUNICIPAL MONEY FUND
APRIL 30, 2001
AS AMENDED SEPTEMBER 13, 2001
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated April 30, 2001 (as amended
from time to time).
To obtain a free copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, 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
Page
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 AND PRICING OF SHARES AND
DELIVERY OF SHAREHOLDER DOCUMENTS.......................................23
TAXATION................................................................25
CALCULATION OF PERFORMANCE DATA.........................................30
APPENDIX................................................................33
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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 New Jersey Municipal Money Fund seeks to provide maximum current income
exempt from federal and New Jersey state personal income taxes, consistent with
liquidity and stability of capital.
Schwab Pennsylvania Municipal Money Fund seeks to provide maximum current income
exempt from federal and Pennsylvania state personal income taxes, consistent
with liquidity and stability of capital.
Schwab Florida Municipal Money Fund seeks to provide maximum current income
exempt from federal income taxes, consistent with liquidity and stability of
capital, and also seeks to have its shares exempt from the Florida intangible
tax.
Each fund's investment objective may be changed only by vote of a majority of
its outstanding voting shares. There is no guarantee the funds will achieve
their objectives.
The following investment strategies, securities, risks and limitations
supplement those set forth in the prospectus and may be changed without
shareholder approval unless otherwise noted. Also, policies and limitations that
state a maximum percentage of assets that may be invested in a security or other
asset, or that set forth a quality standard, shall be measured immediately after
and as a result of a fund's acquisition of such security or asset unless
otherwise noted. Any subsequent change in values, net assets or other
circumstances will not be considered when determining whether the investment
complies with a fund's investment policies and limitations. Additionally, for
purposes of calculating any restriction, an issuer shall be the entity deemed to
be ultimately responsible for payments of interest and principal on the security
pursuant to Rule 2a-7 under the Investment Company Act of 1940 (the 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.
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Schwab California Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in California municipal
money market securities. The fund will normally invest 100% of its total assets
in municipal money market securities. In addition, the fund may invest more than
25% of its total assets in municipal securities financing similar projects. The
fund will normally invest at least 65% of its total assets in municipal money
market securities of California issuers.
Schwab New York Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in New York municipal
money market securities. The fund will normally invest 100% of its total assets
in municipal money market securities. In addition, the fund may invest more than
25% of its total assets in municipal securities financing similar projects. The
fund will normally invest at least 65% of its total assets in municipal money
market securities of New York issuers.
Schwab New Jersey Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in New Jersey municipal
money market securities. The fund will normally invest at least 80% of its total
assets in municipal money market securities. In addition, the fund may invest
more than 25% in municipal securities financing similar projects. The fund will
normally invest at least 65% of its total assets in municipal money market
securities of New Jersey issuers.
Schwab Pennsylvania Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in Pennsylvania municipal
money market securities. The fund will normally invest at least 80% of its total
assets in municipal money market securities. In addition, the fund may invest
more than 25% in municipal securities financing similar projects. The fund will
normally invest at least 65% of its total assets in municipal money market
securities of Pennsylvania issuers.
Schwab Florida Municipal Money Fund (a state-specific municipal money fund)
seeks to achieve its investment objective by investing in Florida municipal
money market securities. The fund will normally invest at least 80% of its total
assets in municipal money market securities. In addition, the fund may invest
more than 25% in municipal securities financing similar projects. The fund will
normally invest at least 65% of its total assets in municipal money market
securities of Florida issuers.
INVESTMENT SECURITIES AND RISKS
BORROWING may subject a fund to interest costs, which may exceed the interest
received on the securities purchased with the borrowed funds. A fund normally
may borrow at times to meet redemption requests rather than sell portfolio
securities to raise the necessary cash. Borrowing can involve leveraging when
securities are purchased with the borrowed money.
COMMERCIAL PAPER consists of short-term, promissory notes issued by banks,
corporations and other institutions to finance short-term credit needs. These
securities generally are discounted but sometimes may be interest bearing.
Commercial paper, which also may be unsecured, is subject to credit risk.
CONCENTRATION means that substantial amounts of assets are invested in a
particular industry or group of industries. Concentration increases investment
exposure to industry risk. For example, the automobile industry may have a
greater exposure to a single factor, such as an increase in the
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price of oil, which may adversely affect the sale of automobiles and, as a
result, the value of the industry's securities.
CREDIT AND LIQUIDITY SUPPORTS or enhancements may be employed by issuers to
reduce the credit risk of their securities. Credit supports include letters of
credit, insurance and guarantees provided by foreign and domestic entities as
well as moral obligations, which are sometimes issued with municipal securities.
Liquidity supports include puts, demand features, and lines of credit. Most of
these arrangements move the credit risk of an investment from the issuer of the
security to the support provider. Changes in the credit quality of a support
provider could cause losses to a fund.
DEBT SECURITIES are obligations issued by domestic and foreign entities,
including governments and corporations, in order to raise money. They are
basically "IOUs," but are commonly referred to as bonds or money market
securities. These securities normally require the issuer to pay a fixed,
variable or floating rate of interest on the amount of money borrowed (the
"principal") until it is paid back upon maturity.
Debt securities experience price changes when interest rates change. For
example, when interest rates fall, the prices of debt securities generally rise.
Issuers tend to pre-pay their outstanding debts and issue new ones paying lower
interest rates. Conversely, in a rising interest rate environment, prepayment on
outstanding debt securities generally will not occur. This is known as extension
risk and may cause the value of debt securities to depreciate as a result of the
higher market interest rates. Typically, longer-maturity securities react to
interest rate changes more severely than shorter-term securities (all things
being equal), but generally offer greater 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 respect to that security. If the other party to a delayed-delivery
transaction fails to deliver or pay for the securities, the fund could suffer
losses.
DIVERSIFICATION involves investing in a wide range of securities and thereby
spreading and reducing the risks of investment. Each fund is a series of an
open-end investment management company. Each fund, except the Schwab Municipal
Money Market Fund, is a non-diversified mutual fund. Each fund follows the
regulations set forth by the Securities and Exchange Commission (SEC) that
dictate the diversification requirements for money market mutual funds. These
requirements prohibit national municipal money funds from purchasing a security
if more than 5% of a fund's total assets would be invested in the securities of
a single issuer. State-specific municipal money funds are subject to the same
prohibition, with respect to 75% of a fund's total assets. The regulation also
allows funds to invest up to 25% of a fund's total assets in the first tier
securities of a single issuer for up to three business days. U.S. government and
certain other securities are not subject to this particular regulation.
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FOREIGN SECURITIES involve additional risks, because they are issued by foreign
entities, including foreign governments, banks, corporations or because they are
traded principally overseas. Credit and liquidity supports also may be provided
by foreign entities. Foreign entities are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. corporations. In addition, there may be
less publicly available information about foreign entities. Foreign economic,
political and legal developments could have more dramatic effects on the value
of foreign securities.
On January 1, 1999, 11 of the 15 member states of the European union introduced
the "euro" as a common currency. During a three-year transitional period, the
euro will coexist with each member state's currency. By July 1, 2002, the euro
will have replaced the national currencies of the following member countries:
Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal and Spain. During the transition period, each country
will treat the euro as a separate currency from that of any member state.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins will
replace the bills and coins of the participating countries.
The new European Central Bank has control over each country's monetary policies.
Therefore, the participating countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.
The conversion may impact the trading in securities of issuers located in, or
denominated in the currencies of, the member states, as well as foreign
exchanges, payments, the settlement process, custody of assets and accounting.
The introduction of the euro is also expected to affect derivative and other
financial contracts in which the funds may invest in so far as price sources
such as day-count fractions or settlement dates applicable to underlying
instruments may be changed to conform to the conventions applicable to euro
currency.
The overall impact of the transition of the member states' currencies to the
euro cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general short and long-term
consequences can be expected, such as changes in economic environment and change
in behavior of investors, all of which will impact each fund's euro-denominated
investments.
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.
INTERFUND BORROWING AND LENDING. A fund may borrow money from and/or lend money
to other funds/portfolios in the Schwab complex ("SchwabFunds"). All loans are
for temporary or emergency purposes and the interest rates to be charged will be
the average of the overnight repurchase agreement rate and the short-term bank
loan rate. All loans are subject to numerous conditions designed to ensure fair
and equitable treatment of all participating funds/portfolios. The interfund
lending facility is subject to the oversight and periodic review of the Board of
Trustees of the SchwabFunds.
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MATURITY OF INVESTMENTS Each fund follows the regulations set forth by the SEC
that dictate the maturity requirements for money market mutual funds. These
requirements prohibit a fund from purchasing a security with a remaining
maturity of more than 397 days or maintaining a dollar-weighted average
portfolio maturity that exceeds 90 days.
MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be
issued by entities such as the U.S. government, corporations and financial
institutions (like banks). Money market securities include commercial paper,
promissory notes, 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 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.
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.
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Municipal securities generally are classified as "general obligation" or
"revenue" and may be purchased directly or through participation interests.
General obligation securities typically are secured by the issuer's pledge of
its full faith and credit and taxing power for the payment of principal and
interest. Revenue securities typically are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special tax or other specific revenue source. Private
activity bonds and industrial development bonds are, in most cases, revenue
bonds and generally do not constitute the pledge of the credit of the issuer of
such bonds. The credit quality of private activity bonds is frequently related
to the credit standing of private corporations or other entities.
Examples of municipal securities that are issued with original maturities of 397
days or less are short-term tax anticipation notes, bond anticipation notes,
revenue anticipation notes, construction loan notes, pre-refunded municipal
bonds and tax-free commercial paper. Tax anticipation notes typically are sold
to finance working capital needs of municipalities in anticipation of the
receipt of property taxes on a future date. Bond anticipation notes are sold on
an interim basis in anticipation of a municipality's issuance of a longer-term
bond in the future. Revenue anticipation notes are issued in expectation of the
receipt of other types of revenue, such as that available under the Federal
Revenue Sharing Program. Construction loan notes are instruments insured by the
Federal Housing Administration with permanent financing by Fannie Mae 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.
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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.
PUTS are sometimes called demand features or guarantees, and are agreements that
allow the buyer of the put to sell a security at a specified price and time to
the seller or "put provider." When a fund buys a security with a put feature,
losses could occur if the put provider does not perform as agreed. Standby
commitments are types of puts.
QUALITY OF INVESTMENTS. The funds follow regulations set forth by the SEC that
dictate the quality requirements for money market mutual funds. These require
the funds to invest exclusively in high-quality securities. Generally
high-quality securities are securities that present minimal credit risks and are
rated in one of the two highest rating categories by two nationally recognized
statistical rating organizations (NRSROs), or by one if only one NRSRO has rated
the securities, or, if unrated, determined to be of comparable quality by the
investment adviser pursuant to guidelines adopted by the Board of Trustees.
High-quality securities may be "first tier" or "second tier" securities. First
tier securities may be rated within the highest category or determined to be of
comparable quality by the investment adviser. Money market fund shares and U.S.
government securities also are first tier securities. Second tier securities
generally are rated within the second-highest category. Each fund's holdings of
second tier "Conduit Securities" will not exceed 5% of its assets, and
investments in second tier "Conduit Securities" of any one issuer will be
limited to the greater of 1% of a fund's assets or $1 million.
Should a security's high-quality rating change after purchase by a fund, the
investment adviser would take such action, including no action, as determined to
be in the best interest of the fund by the Board of Trustees. For more
information about the ratings assigned by some NRSROs, refer to the Appendix
section of the SAI.
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, a fund must be able to dispose of the security in the ordinary course of
business at approximately the amount a fund has valued the security. In
addition, the investment adviser must determine that an institutional or other
market exists for these securities. In making this determination, the investment
adviser may take into account any liquidity support associated with the
security. It is not possible to predict with assurance whether the market for
any restricted security will continue. Therefore, the investment adviser
monitors a fund's investments in these securities, focusing on factors, such as
valuation, liquidity and availability of information. To the extent a fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in a 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
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own more than 3% of the total outstanding securities of those investment
companies. In addition, a fund will vote proxies in accordance with the
instructions received or vote proxies in the same proportion as the vote of all
other shareholders of the Investment Company. If exemptive relief is received
from the SEC, a fund may purchase more than 3% of certain securities of other
investment companies and will only hold such securities in conformity with any
applicable order from the SEC.
STATE-SPECIFIC MUNICIPAL MONEY FUNDS are municipal money market funds that
invest primarily and generally predominately in municipal money market
securities issued by or on behalf of one state or one state's counties,
municipalities, authorities or other subdivisions.
These funds' securities are subject to the same general risks associated with
other municipal money market funds' securities. In addition, their values will
be particularly affected by economic, political, geographic and demographic
conditions and developments within the appropriate state. A fund that invests
primarily in securities issued by a single state and its political subdivisions
provides a greater level of risk than a fund that is diversified across numerous
states and municipal entities. The ability of the state or its municipalities to
meet their obligations will depend on the availability of tax and other
revenues; economic, political and demographic conditions within the state; and
the underlying fiscal condition of the state and its municipalities.
These funds are not suitable for investors who would not benefit from the
tax-exempt character of each fund's investments, such as holders of IRAs,
qualified retirement plans or other tax-exempt entities.
CALIFORNIA MUNICIPAL SECURITIES. The Schwab California Municipal Money Fund is a
state-specific municipal fund that invests substantially all of its assets in
municipal securities issued by or on behalf of one state, the State of
California, or California's counties, municipalities, authorities or other
subdivisions.
A fund that invests primarily in securities issued by a single state and its
political subdivisions entails a greater level of risk than a fund that is
diversified across numerous states and their 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 other conditions
within the State; and the underlying fiscal condition of the State and its
municipalities.
Certain of the State's significant industries, such as high technology, are
sensitive to economic disruptions in their export markets and the State's rate
of economic growth, therefore, could be adversely affected by any such
disruption. A significant downturn in U.S. stock market prices could adversely
affect California's economy by reducing household spending and business
investment, particularly in the important high technology sector. Moreover, a
large and increasing share of the State's General Fund revenue in the form of
income and capital gains taxes is directly related to, and would be adversely
affected by a significant downturn in the performance of, the stock markets.
Because of capacity constraints in electric generation and transmission,
California electric utilities have been forced to purchase wholesale power at
high prices this past summer and more recently. Under current deregulation rules
for the electric industry enacted in 1996, two of the State's large
investor-owned utility ("IOU") companies are not allowed to charge customers the
full cost of service, while rates in a third IOU's service area were cut back
after rising sharply to cover wholesale power costs. Legislation was enacted to
streamline the process for siting new power plants, but it will be several years
until a significant number of new suppliers will enter the California market. In
January, 2001, two of the IOUs were granted temporary rate increases in
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the face of reportedly serious financial difficulties, including concerns about
possible bankruptcy. While the Governor of California, the State Legislature,
the State Public Utilities Commission and the Federal Energy Regulatory
Commission all are considering further actions to deal with shortcomings in the
State's deregulated energy market, it is not possible to predict at this time
what the long-term impact of these developments will be on California's economy.
California is subject to seismic risks and it is impossible to predict the time,
magnitude or location of a major earthquake or its effect on the California
economy. In January 1994, a major earthquake struck Los Angeles, causing
significant damage to structures and facilities in a four county area. The
possibility exists that another such earthquake could cause a major dislocation
of the California economy.
TAXABLE SECURITIES. Under normal conditions, the funds do not intend to invest
in securities in which interest is subject to federal income and/or state and
local personal income taxes. However, from time to time, as a defensive measure
or under abnormal market conditions, the funds may make temporary investments in
securities, the interest on which is subject to federal income and/or state and
local personal income taxes.
VARIABLE AND FLOATING RATE DEBT SECURITIES pay an interest rate, which is
adjusted either periodically or at specific intervals or which floats
continuously according to a formula or benchmark. Although these structures
generally are intended to minimize the fluctuations in value that occur when
interest rates rise and fall, some structures may be linked to a benchmark in
such a way as to cause greater volatility to the security's value.
Some variable rate securities may be combined with a put or demand feature
(variable rate demand securities) that entitles the holder to the right to
demand repayment in full or to resell at a specific price and/or time. While the
demand feature is intended to reduce credit risks, it is not always
unconditional, and may make the securities more difficult to sell quickly
without losses. There are risks involved with these securities because there may
be no active secondary market for a particular variable rate demand security
purchased by a fund. In addition, a fund may exercise only its demand rights at
certain times. A fund could suffer losses in the event that the issuer defaults
on its obligation.
Synthetic variable or floating rate securities include tender option bond
receipts. Tender option bond receipts are derived from fixed-rate municipal
bonds that are placed in a trust from which two classes of trust receipts are
issued. These receipts represent proportionate interest in the underlying bonds.
Interest payments are made on the bonds based upon a predetermined rate. Under
certain circumstances, the holder of a trust receipt also may participate in any
gain or loss on the sale of such bonds. Tender option bond trust receipts
generally are structured as private placements and, accordingly, may be deemed
to be restricted securities for purposes of a fund's investment limitations.
INVESTMENT LIMITATIONS
The following investment limitations may be changed only by vote of a majority
of each fund's outstanding voting shares.
EACH OF SCHWAB MUNICIPAL MONEY FUND, SCHWAB CALIFORNIA MONEY FUND AND SCHWAB NEW
YORK MONEY FUND MAY NOT:
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(1) 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.
(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) 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.
(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) 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.
(6) 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.
(7) Purchase securities or make investments other than in accordance with
investment objectives and policies.
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.
EACH OF SCHWAB NEW JERSEY MUNICIPAL MONEY FUND, SCHWAB PENNSYLVANIA MUNICIPAL
MONEY FUND AND SCHWAB FLORIDA MUNICIPAL MONEY FUND MAY NOT:
(1) Concentrate investments in a particular industry or group of
industries, as concentration is defined under the 1940 Act or the rules
or regulations thereunder, as such statute, rules or regulations may be
amended from time to time.
(2) Purchase or sell commodities, commodities contracts, futures contracts,
or real estate, except 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.
(3) Lend or borrow money, except 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.
(4) Underwrite securities, except 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.
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(5) Pledge, mortgage or hypothecate any of its assets, except 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.
(6) Issue senior securities, except 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.
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 a fund'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. Under 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.
Real Estate. The 1940 Act does not directly restrict a fund's ability to invest
in real estate, but does require that every fund have a fundamental investment
policy governing such investments. The funds have adopted a fundamental policy
that would permit direct investment in real estate. However, the funds have a
non-fundamental investment limitation that prohibits them from investing
directly in real estate. This non-fundamental policy may be changed only by vote
of the funds' Board of Trustees.
THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY
BE CHANGED BY THE BOARD OF TRUSTEES.
EACH OF THE SCHWAB MUNICIPAL MONEY FUND, SCHWAB CALIFORNIA MUNICIPAL MONEY FUND
AND SCHWAB NEW YORK MONEY FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of its
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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 a fund's total
assets would be invested in the securities of a single issuer, up to
50% of the value of a 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.
(4) 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).
(5) Borrow money except that the fund may (i) borrow money from banks or
through an interfund lending facility, if any, only for temporary or
emergency purposes (and not for leveraging) and (ii) engage in reverse
repurchase agreements with any party; provided that (i) and (ii) in
combination do not exceed 33 1/3% of its total assets (any borrowings
that come to exceed this amount will be reduced to the extent necessary
to comply with the limitation within three business days).
(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.
EACH OF 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 FLORIDA MUNICIPAL MONEY FUND, SCHWAB NEW JERSEY MUNICIPAL MONEY FUND AND
SCHWAB PENNSYLVANIA MUNICIPAL MONEY FUND MAY NOT:
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(1) With respect to 75% of its total assets, purchase securities of any
issuer (other than U.S. government securities or securities subject to
a guarantee issued by a person not controlled by the issuer) if, as a
result, more than 5% of total assets would be invested in the
securities of such issuer; provided that the Fund may not invest more
than 5% of its total assets in securities of a single issuer unless
such securities are first tier securities.
(2) Purchase second tier conduit securities of any issuer (other than
securities subject to a guarantee issued by a person not controlled by
the issuer) if, as a result, more than the greater of 1% of its total
assets or $1 million would be invested in second tier conduit
securities of such issuer.
(3) Purchase securities of other investment companies, except as permitted
by the 1940 Act.
(4) Borrow money except that the fund may (i) borrow money from banks or
through an interfund lending facility, if any, only for temporary or
emergency purposes (and not for leveraging) and (ii) engage in reverse
repurchase agreements with any party; provided that (i) and (ii) in
combination do not exceed 33 1/3% of its total assets (any borrowings
that come to exceed this amount will be reduced to the extent necessary
to comply with the limitation within three business days).
(5) Purchase securities of any issuer (other than obligations of, or
guaranteed by the U.S. government its agencies or instrumentalities),
if, as a result, 25% or more of its total assets would be invested in
the securities of an issuer from a single industry or group of
industries.
(6) Lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties (this
restriction does not apply to purchases of debt securities or
repurchase agreements).
(7) Purchase securities of any issuer if, as a result, more than 10% of its
net assets would be invested in illiquid securities.
(8) Sell securities short unless it owns the security or the right to
obtain the security or equivalent securities (transactions in futures
contracts and options are not considered selling securities short).
(9) Purchase securities on margin, except that the Fund may obtain
short-term credits that are necessary for the clearance of
transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
Except with respect to borrowings, concentration of investments and investments
in illiquid securities, a later increase in percentage resulting from a change
in values or net assets does 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. (Schwab) and Charles Schwab Investment Management,
Inc., are as follows:
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POSITION(S) WITH PRINCIPAL OCCUPATIONS & AFFILIATIONS
NAME/DATE OF BIRTH THE TRUST
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Schwab Holdings,
Inc.; Chairman, Director, Charles Schwab & Co.,
Inc., Charles Schwab Investment Management,
Inc.; Director, The Charles Schwab Trust
Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc.
(full-service audio solutions for the internet),
Vodaphone AirTouch PLC (a telecommunications
company) and Siebel Systems (a software company).
JOHN P. COGHLAN* President and Trustee Vice Chairman and Executive Vice President, The
May 6, 1951 Charles Schwab Corporation; Vice Chairman and
Enterprise President, Retirement Plan Services
and Services for Investment Managers, Charles
Schwab & Co., Inc.; Chief Executive Officer and
Director, Charles Schwab Investment Management,
Inc.; President, Chief Executive Officer and
Director, The Charles Schwab Trust Company;
Director, Charles Schwab Asset Management
(Ireland) Ltd.; Director, Charles Schwab
Worldwide Funds PLC.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
marketing/consulting firm).
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments). Prior to 1996, Chairman and
Chief Executive Officer of North American
Trust (real
------------------------
*This trustee is an "interested person" of the trusts.
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83
estate investment trust).
MICHAEL W. WILSEY Trustee Chairman and Chief Executive Officer, Wilsey
August 18, 1943 Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
JEREMIAH H. CHAFKIN* Executive Vice Executive Vice President, Asset Management
May 9, 1959 President, Chief Products and Services, Charles Schwab & Co.,
Operating Officer and Inc.; President and Chief Operating Officer,
Trustee 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 Affairs and Chief
August 13, 1960 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 Eureka 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), and is Director of Stanford
Hospitals and Clinics, SRI International
(research) and LookSmart, Ltd. (an Internet
infrastructure company).
WILLIAM A. HASLER Trustee Co-Chief Executive Officer, Aphton Corporation
November 22, 1941 (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 Officer and founder
September 28, 1950 of Smith Graham & Co. (investment advisors).
Mr. Smith is also on the Board of Directors of
Pennzoil-Quaker State Company (oil and gas) and
Rorento N.V. (investments - Netherlands), and is
a member of the audit committee of Northern
Border Partners, L.P., a subsidiary of Enron
Corp. (energy).
------------------------
* This trustee is an "interested person" of the trusts.
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TAI-CHIN TUNG Treasurer and Principal Senior Vice President and Chief Financial
March 7, 1951 Financial Officer Officer, Charles Schwab Investment Management,
Inc. From 1994 to 1996, Ms. Tung was Controller
for Robertson Stephens Investment Management,
Inc.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
KOJI E. FELTON Secretary Vice President, Chief Counsel and Assistant
March 13, 1961 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to June 1998, Mr. Felton
was a Branch Chief in Enforcement at the U.S.
Securities and Exchange Commission in San
Francisco.
Each of the above-referenced officers and/or trustees also serves in the same
capacity as described for the trust, for Schwab Capital Trust, Schwab
Investments and Schwab Annuity Portfolios. The address of each individual listed
above is 101 Montgomery Street, San Francisco, California 94104.
Each fund is overseen by a Board of Trustees. The Board of Trustees meets
regularly to review each fund's activities, contractual arrangements and
performance. The Board of Trustees is responsible for protecting the interests
of a fund's shareholders. The following table provides information as of fiscal
year ended December 31, 2000, concerning compensation of the trustees. Unless
otherwise stated, information is for the fund complex, which included 44 funds
as of December 31, 2000.
Name of ($) Pension or ($)
Trustee Aggregate Compensation Retirement Total
from each Fund Benefits Compensation
----------------------------------------------------------- Accrued as from Fund Complex
Municipal California New New Pennsyl- Florida Part of Fund
Money York Jersey vania Expenses
Charles R. 0 0 0 0 0 0 N/A 0
Schwab
Steven L. 0 0 0 0 0 0 N/A 0
Scheid 1
Jeremiah H. 0 0 0 0 0 0 N/A 0
Chafkin 2
John P. 0 0 0 0 0 0 N/A 0
Coghlan 3
------------------------
1 Resigned from the Board effective November 21, 2000.
2 This trustee was first elected by shareholders on June 1, 2000.
3 Appointed to the Board on November 21, 2000.
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Mariann $3,760 $3,026 $1,945 $1,761 $1,741 $1,870 N/A $73,770
Byerwalter 2
Donald F. $7,015 $5,594 $3,588 $3,249 $3,220 $3,483 N/A $137,850
Dorward
William A. $3,760 $3,026 $1,945 $1,761 $1,741 $1,870 N/A $73,770
Hasler 2
Robert G. $7,015 $5,594 $3,588 $3,249 $3,220 $3,483 N/A $137,850
Holmes
Gerald B. $3,760 $3,026 $1,945 $1,761 $1,741 $1,870 N/A $73,770
Smith 2
Donald R. $7,015 $5,594 $3,588 $3,249 $3,220 $3,483 N/A $137,850
Stephens
Michael W. $7,015 $5,594 $3,588 $3,249 $3,220 $3,483 N/A $137,850
Wilsey
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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 3, 2001, the officers and trustees of the trust, as a group, owned
of record or beneficially, less than 1% of the outstanding voting securities of
the funds.
As of April 3, 2001, Wilson H. Taylor, 1980 Rochambeau Drive, Malvern, PA,
owned, of record or beneficially, 6.97% of the Schwab Pennsylvania Municipal
Money Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc. (CSIM or the investment adviser), a
wholly owned subsidiary of The Charles Schwab Corporation, 101 Montgomery
Street, San Francisco CA 94104, serves as the funds' investment adviser and
administrator pursuant to an Investment Advisory and Administration Agreement
(Advisory Agreement) between it and the trust. Schwab is an affiliate of the
investment adviser and is the trust's distributor, shareholder services agent
and transfer agent. Charles R. Schwab is the founder, Chairman, Co-Chief
Executive Officer and Director of The Charles Schwab Corporation. As a result of
his ownership of and interests in The Charles Schwab Corporation, Mr. Schwab may
be deemed to be a controlling person of the investment adviser and Schwab.
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For its advisory and administrative services to each municipal fund, the
investment adviser is entitled to receive graduated annual fee payable monthly
based on each fund's average daily net assets as described below.
First $1 billion - 0.38%
More than $1 billion but not exceeding $10 billion - 0.35%
More than $10 billion but not exceeding $20 billion - 0.32%
More than $20 billion - 0.30%.
Prior to April 30, 1999, for its advisory and administrative services to each
fund, the investment adviser was entitled to receive a graduated annual fee,
payable monthly, of 0.46% of a 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, 1998, 1999 and 2000, Schwab Municipal
Money Fund paid investment advisory fees of $11,593,000 (fees were reduced by
$13,780,000), $13,623,000 (fees were reduced by $14,529,000) and $16,243,000
(fees were reduced by $14,994,000), respectively.
For the fiscal years ended December 31, 1998, 1999 and 2000, Schwab California
Municipal Money fund paid investment advisory fees of $6,118,000 (fees were
reduced by $8,464,000), $7,639,000 (fees were reduced by $8,816,000) and
$10,171,000 (fees were reduced by $9,824,000), respectively.
For the fiscal years ended December 31, 1998, 1999 and 2000, Schwab New York
Municipal Money Fund paid investment advisory fees of $1,069,000 (fees were
reduced by $1,677,000), $1,458,000 (fees were reduced by $1,708,000) and
$2,053,000 (fees were reduced by $1,900,000), respectively.
For the period of February 2, 1998 (commencement of operations) to December 31,
1998 and fiscal years ended December 31, 1999 and 2000, Schwab New Jersey
Municipal Money Fund paid investment and advisory fees of $0 (fees were reduced
by $268,000), $155,000 (fees were reduced by $404,000) and $299,000 (fees were
reduced by $696,000), respectively.
For the period of February 2, 1998 (commencement of operations) to December 31,
1998 and fiscal years ended December 31, 1999 and 2000, Schwab Pennsylvania
Municipal Money Fund paid investment and advisory fees of $0 (fees were reduced
by $271,000), $157,000 (fees were reduced by $399,000) and $203,000 (fees were
reduced by $522,000), respectively.
For the period of March 18, 1998 (commencement of operations) to December 31,
1998 and fiscal years ended December 31, 1999 and 2000, Schwab Florida Municipal
Money Fund paid investment advisory fees of $171,000 (fees were reduced by
$1,353,000), $450,000 (fees were reduced by $1,931,000) and $709,000 (fees were
reduced by $2,216,000), respectively.
The investment adviser and Schwab have contractually guaranteed that through at
least April 30, 2002, total operating expenses (excluding interest, taxes,
certain non-routine and money fund insurance expenses, if any) of the Sweep
Shares of the Schwab Municipal Money Fund, the Schwab California Municipal Money
Fund, the Schwab New York Municipal Money Fund, the Schwab New Jersey Municipal
Money Fund, the Schwab Pennsylvania Municipal Money Fund and the Schwab Florida
Municipal Money Fund will not exceed 0.66%, 0.65%, 0.69%, 0.65%, 0.65% and
0.59%, respectively, of average daily net assets. The amount of the expense cap
is
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determined in coordination with the Board of Trustees, and the expense cap is
intended to limit the effects on shareholders of expenses incurred in the
ordinary operation of a fund. The expense cap is not intended to cover all fund
expenses, and a fund's expenses may exceed the expense cap. For example, the
expense cap does not cover investment-related expenses, such as brokerage
commissions, interest, taxes and money fund insurance, if any, 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.
SHAREHOLDER SERVICES AND TRANSFER AGENT
Schwab provides fund information to shareholders, including share price,
reporting shareholder ownership and account activities and distributing the
funds' prospectuses, financial reports and other informational literature about
the funds. Schwab maintains the office space, equipment and personnel necessary
to provide these services. Schwab also distributes and markets SchwabFunds(R)
and provides other services. At its own expense, Schwab may engage third party
entities, as appropriate, to perform some or all of these services.
For the services performed as transfer agent under its contract with each fund,
Schwab is entitled to receive an annual fee from each fund, payable monthly in
the amount of 0.25% of each fund's average daily net assets.
For the services performed as shareholder services agent under its contract with
each fund, Schwab is entitled to receive an annual fee from the Sweep Shares of
each fund, payable monthly in the amount of 0.20% of the average daily net
assets of each fund.
CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, 8800 Tinicum Blvd, Third Floor Suite 200, Philadelphia, PA
19153, serves as custodian for the funds and PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The fund accountant maintains all books and records
related to each fund's transactions.
INDEPENDENT ACCOUNTANTS
The funds' independent accountants, PricewaterhouseCoopers LLP, audits and
reports on the annual financial statements of each series of the trusts and
reviews certain regulatory reports and each fund's federal income tax return.
They also perform other professional accounting, auditing, tax and advisory
services when a trust engages them to do so. Their address is 333 Market Street,
San Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ended December 31, 2000, are included in the funds' annual report, which is
a separate report supplied with the SAI.
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OTHER EXPENSES
The funds pay other expenses that typically are connected with the trust's
operations, and include legal, audit and custodian fees, as well as the costs of
accounting and registration of the funds. Expenses not directly attributable to
a particular fund will generally be allocated among the funds in the trust on
the basis of each fund's relative net assets at the time the expense is
incurred.
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 its other clients, including mutual funds.
The funds expect that purchases and sales of portfolio securities will usually
be principal transactions. Securities will normally be purchased directly from
the issuer or from an underwriter or market maker for the securities. Purchases
from underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers serving as market makers will
include the spread between the bid and asked prices.
The investment decisions for each fund are reached independently from those for
other accounts managed by the investment adviser. Such other accounts also may
make investments in instruments or securities at the same time as a fund. When
two or more accounts managed by the investment adviser have funds available for
investment in similar instruments, available instruments are allocated as to
amount in a manner considered equitable to each account. In some cases, this
procedure may affect the size or price of the position obtainable for a fund.
However, it is the opinion of the Board of Trustees that the benefits conferred
by the investment adviser outweigh any disadvantages that may arise from
exposure to simultaneous transactions.
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DESCRIPTION OF THE TRUST
Each fund is a series of The Charles Schwab Family of Funds, an open-end
investment management company organized as a Massachusetts business trust on
October 20, 1989.
The Declaration of Trust provides that shares may be automatically redeemed if
held by a shareholder in an amount less than the minimum required by each fund
or share class. Each fund's or class's minimum initial investment, minimum
additional investment and minimum balance requirements are set forth in the
prospectus. These minimums may be waived for certain investors, including
trustees, officers and employees of Schwab, or changed without prior notice. The
minimums may also be waived for investment programs such as those programs
designated for college savings or graduation gifts.
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 a 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.
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As more fully described in each Declaration of Trust, the trustees may each
year, or more frequently, distribute to the shareholders of each series accrued
income less accrued expenses and any net realized capital gains. Distributions
of each year's income of each series shall be distributed pro rata to
shareholders in proportion to the number of shares of each series held by each
of them. Distributions will be paid in cash or shares or a combination thereof
as determined by the trustees. Distributions paid in shares will be paid at net
asset value per share as determined in accordance with the bylaws.
PURCHASE, REDEMPTION AND PRICING OF SHARES AND DELIVERY OF SHAREHOLDER DOCUMENTS
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 2001: New Year's Day,
Martin Luther King Jr.'s Birthday (observed), Presidents' 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 or confirmation 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 are designed
to provide convenience through automatic investment of uninvested cash balances
in your Schwab account, although shares also may be purchased directly. The
Value Advantage Shares, which are not offered through this SAI, do not have a
sweep feature, but rather must be purchased directly.
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EXCHANGING SHARES OF THE FUNDS
Shares of any SchwabFund, including any class of shares, may be sold and shares
of any other SchwabFund 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(R) and shares of non-Sweep Investments. Shares of Sweep Investments
may be bought and sold automatically pursuant to the terms and conditions of
your Schwab account agreement or by direct order as long as you meet the
minimums for direct investments.
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 a 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 a 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 a 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 a fund's $1.00 (calculated using amortized cost), the Board of
Trustees might supplement dividends in an effort to maintain a fund's $1.00 NAV.
DELIVERY OF SHAREHOLDER DOCUMENTS
Typically once a year, an updated prospectus will be mailed to shareholders
describing each fund's investment strategies, risks and shareholder policies.
Twice a year, financial reports will be mailed to shareholders describing each
fund's performance and investment holdings. In order
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to eliminate duplicate mailings of shareholder documents, each household may
receive one copy of these documents, under certain conditions. This practice is
commonly called "householding." If you want to receive multiple copies, you may
write or call your fund at the address or telephone number on the front of this
SAI. Your instructions will be effective within 30 days of receipt by Schwab.
TAXATION
FEDERAL TAX INFORMATION FOR THE FUNDS
It is each fund's policy to qualify for taxation as a "regulated investment
company" (RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, each fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If a fund does not qualify as a RIC under the Code, it will
be subject to federal income tax on its net investment income and any net
realized capital gains.
The Code imposes a non-deductible excise tax on RICs that do not distribute in a
calendar year (regardless of whether they otherwise have a non-calendar taxable
year) an amount equal to 98% of their "ordinary income" (as defined in the Code)
for the calendar year plus 98% of their net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. For
the foregoing purposes, a fund is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
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 generally 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.
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Any dividends declared by a fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. A fund may
adjust its schedule for the reinvestment of distributions for the month of
December to assist in complying with the reporting and minimum distribution
requirements of the Code.
The funds do not expect to realize any long-term capital gains. However,
long-term capital gains distributions are taxable as long-term capital gains,
regardless of how long you have held your shares. If you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss. Distributions by a fund also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.
Each fund may engage in investment techniques that may alter the timing and
character of its income. Each fund may be restricted in its use of these
techniques by rules relating to its qualifications as regulated investment
companies.
A fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a 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 per year as determined under certain IRS rules. Different tax
consequences may result if the foreign shareholder is engaged in a trade or
business within the United States. In addition, the tax consequences to a
foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above.
If, at the close of each quarter of its taxable year, at least 50% of the value
of a fund's assets consist of obligations the interest on which is excludable
from gross income, the fund may pay "exempt-interest dividends" to its
shareholders. Those dividends constitute the portion of the aggregate dividends
as designated by the fund, equal to the excess of the excludable interest over
certain amounts disallowed as deductions. Exempt-interest dividends are
excludable from a shareholder's gross income for federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the federal alternative
minimum tax (AMT) imposed by Section 55 of the Code. The AMT is imposed at rates
of 26% and 28%, in the case of non-corporate taxpayers, and at the rate of 20%,
in the case of corporate taxpayers, to the extent it exceeds the taxpayer's
federal income tax liability. The AMT may be imposed in the following two
circumstances. First, exempt-interest dividends derived from certain private
activity bonds issued after August 7, 1986, will generally be an item of tax
preference (and, therefore, potentially subject to AMT) for both corporate and
non-corporate taxpayers. Second,
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in the case of exempt-interest dividends received by corporate shareholders, all
exempt-interest dividends, regardless of when the bonds from which they are
derived were issued or whether they are derived from private activity bonds,
will be included in the corporation's "adjusted current earnings," as defined in
Section 56(g) of the Code, in calculating the corporations' alternative minimum
taxable income for purposes of determining the AMT.
Current federal law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest that may have an effect on the ability
of a fund to purchase sufficient amounts of tax-exempt securities to satisfy the
Code's requirements for the payment of "exempt-interest dividends."
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of the funds is not deductible for federal income tax
purposes. Furthermore, these funds may not be an appropriate investment for
persons (including corporations and other business entities) who are
"substantial users" (or persons related to "substantial users") or facilities
financed by industrial development private activity bonds. Such persons should
consult their tax advisors before purchasing shares. A "substantial user" is
defined generally to include "certain persons" who regularly use in their trade
or business a part of a facilities financed from the proceeds of such bonds.
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 Schwab California Municipal Money 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 to
shareholders, dividends distributed to shareholders will be considered
California exempt-interest dividends (1) if they are designated as
exempt-interest dividends by the fund in a written notice to shareholders mailed
within 60 days of the close of the fund's taxable year and (2) to the extent the
interest received by the fund during the year on California Tax Exempt
Obligations exceeds expenses of the fund that would be disallowed under
California personal income tax law as allocable to tax exempt interest if the
fund were an individual. If the aggregate dividends so designated exceed the
amount that may be treated as California exempt-interest dividends, only that
percentage of each dividend distribution equal to the ratio of aggregate
California exempt-interest dividends to aggregate dividends so designated will
be treated as a California exempt-interest dividend. 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.
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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.
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 Schwab New York Municipal Money Fund that are derived from
interest on municipal securities issued by New York State and its 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 its 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 the entity receiving the dividends has a
sufficient nexus with New York State or New York City.
Other dividends and distributions from other state's municipal securities, U.S.
Government obligations, taxable income and capital gains that are not exempt
from state taxation under federal law and distributions attributable to capital
gains, will be subject to New York State personal income tax and New York City
personal income tax. Gain from the sale, exchange or other disposition of shares
will be subject to the New York State personal income and franchise taxes and
the New York City personal income, unincorporated business and general
corporation taxes. In addition, interest or indebtedness incurred by a
shareholder to purchase or carry shares of the fund is not deductible for New
York personal income tax purposes to the extent that it relates to New York
exempt-interest dividends distributed to a shareholder during the taxable year.
NEW JERSEY TAX CONSIDERATIONS
Under current law, investors in the Schwab New Jersey Municipal Money Fund will
not be subject to the New Jersey Gross Income Tax on distributions from the fund
attributable to interest income from (and net gain, if any, from the disposition
of) New Jersey Municipal Securities or obligations of the United States, its
territories and possessions and certain of its agencies and instrumentalities
("Federal Securities") held by the fund, either when received by the fund or
when credited or distributed to the investors, provided that the fund meets the
requirements for a qualified investment fund by: (1) maintaining its
registration as a registered investment company with the SEC; (2) investing at
least 80% of the aggregate principal amount of the fund's investments, excluding
financial options, futures, forward contracts, or other similar financial
instruments relating to interest-bearing obligations, obligations issued at a
discount or bond indexes related thereto to the extent such instruments are
authorized under the regulated investment company rules under the Code, cash and
cash items, which cash items shall include
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receivables, in New Jersey municipal securities or federal securities at the
close of each quarter of the tax year; (3) investing 100% of its assets in
interest-bearing obligations, discount obligations, cash and cash items,
including receivables, financial options, futures forward contracts, or other
similar financial instruments relating to interest-bearing obligations, discount
obligations or bond indexes related thereto; and 4) complying with certain
continuing reporting requirements.
However, in Colonial Trust III and Investment Company Institute v. Director,
Division of Taxation, DKT No. 009777-93 (NJ Tax Court, Feb. 21, 1997) the New
Jersey Tax Court nullified the New Jersey threshold requirements stated above.
The court ruled that New Jersey could not impose its gross income tax on
shareholder distributions attributable to interest paid on obligations of the
United States government from a mutual fund that did not meet the requirements
to be a qualified investment fund.
For New Jersey Gross Income Tax purposes, net income or gains and distributions
derived from investments in other than New Jersey municipal securities and
federal securities, and distributions from net realized capital gains in respect
of such investments, will be taxable.
Gain on the disposition of shares is not subject to New Jersey Gross Income Tax,
provided that the fund meets the requirements for qualified investment fund set
forth above.
PENNSYLVANIA TAX CONSIDERATIONS
For purposes of the Pennsylvania Personal Income Tax and the Philadelphia School
District Investment Net Income Tax, distributions which are attributable to
interest received by the Schwab Pennsylvania Municipal Money Fund from its
investments in Pennsylvania Municipal Securities or obligations of the United
States, its territories and possessions and certain of its agencies and
instrumentalities (Federal Securities) are not taxable. Distributions by the
fund to a Pennsylvania resident that are attributable to most other sources may
be subject to the Pennsylvania Personal Income Tax and (for residents of
Philadelphia) to the Philadelphia School District Investment Net Income Tax.
Distributions paid by the fund, which are excludable as exempt income for
federal tax purposes, are not subject to the Pennsylvania corporate net income
tax. An additional deduction from Pennsylvania taxable income is permitted for
the amount of distributions paid by the fund attributable to interest received
by the fund from its investments in Pennsylvania municipal securities and
federal securities to the extent included in federal taxable income, but such a
deduction is reduced by any interest on indebtedness incurred to carry the
securities and other expenses incurred in the production of such interest
income, including expenses deducted on the federal income tax return that would
not have been allowed under the Code if the interest were exempt from federal
income tax. Distributions by the fund attributable to most other sources may be
subject to the Pennsylvania corporate net income tax. It is the current position
of the Pennsylvania Department of Revenue that fund shares are considered exempt
assets (with a pro rata exclusion based on the value of the fund attributable to
its investments in Pennsylvania municipal securities and federal securities) for
purposes of determining a corporation's stock value subject to the
Commonwealth's capital stock tax or franchise tax.
The fund intends to invest primarily in obligations which produce interest
exempt from federal and Pennsylvania taxes. If the fund invests in obligations
that are not exempt for Pennsylvania purposes but are exempt for federal
purposes, a portion of the fund's distributions will be subject to Pennsylvania
personal income tax.
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FLORIDA INTANGIBLE TAX
Florida does not currently impose an income tax on individuals; therefore
distributions made by the Schwab Florida Municipal Money Fund to Florida
residents will not be subject to state income taxes in Florida. Distributions
made to shareholders which are Florida corporations may be subject to Florida's
corporate income tax. If you are subject to income tax in a state other than
Florida, the dividends derived from Florida state and municipal obligations may
be taxable.
Florida imposes an intangible personal property tax of 0.10% on all intangible
personal property owned by Florida residents on January 1st of each year,
including stocks and other securities. Certain types of property are exempt from
the intangible tax such as, securities issued by the United States government or
its agencies and obligations issued by the State of Florida or its
municipalities or counties. The shares of the Florida fund will be exempt from
Florida's intangible tax for any given year, if as of the close of business on
December 31st of the previous year, 90% or more of the net asset value of the
fund's assets consists of exempt securities.
Therefore, in order for the fund and its shareholders to benefit from the
exemption, the fund may have to sell any non-exempt securities which it holds in
its portfolio prior to the close of business on December 31st of each year. This
may cause the fund to liquidate certain of its investments when it would be
disadvantageous to do so in order to qualify for the exemption thereby reducing
the fund's aggregate investment return.
CALCULATION OF PERFORMANCE DATA
The funds' seven-day yields based on the seven days ended December 31, 2000 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.
Seven-Day Yield as of December 31, 2000
Municipal Money Fund - Sweep Shares 4.01%
California Municipal Money Fund - Sweep Shares 3.46%
New York Municipal Money Fund - Sweep Shares 3.81%
New Jersey Municipal Money Fund - Sweep Shares 3.77%
Pennsylvania Municipal Money Fund - Sweep Shares 3.96%
Florida Municipal Money Fund - Sweep Shares 4.00%
The funds' effective seven-day yields based on the seven days ended December 31,
2000 are stated below and were calculated by determining the net change,
exclusive of capital changes, in the value
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of a hypothetical pre-existing account having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then compounding the base period return by adding 1, raising the sum to a
power equal to 365 divided by 7, and subtracting 1 from the result, with the
resulting yield figure carried to at least the nearest one hundredth of one
percent.
Seven-Day Effective Yield as of December 31, 2000
Municipal Money Fund - Sweep Shares 4.09%
California Municipal Money Fund - Sweep Shares 3.52%
New York Municipal Money Fund - Sweep Shares 3.88%
New Jersey Municipal Money Fund - Sweep Shares 3.82%
Pennsylvania Municipal Money Fund - Sweep Shares 4.04%
Florida Municipal Money Fund - Sweep Shares 4.08%
The funds' taxable-equivalent seven-day yields based on the seven-days ended
December 31, 2000 are stated below and were calculated by dividing that portion
of the funds' seven-day yield (as described above) that is tax-exempt by 1 minus
a stated income tax rate and adding the quotient to that portion, if any, of the
funds' yield that is not tax-exempt.
Seven-Day Taxable-Equivalent Yield as of December 31, 2000
Municipal Money Fund - Sweep Shares 6.64%
California Municipal Money Fund - Sweep Shares 6.32%
New York Municipal Money Fund - Sweep Shares 7.06%
New Jersey Municipal Money Fund - Sweep Shares 6.67%
Pennsylvania Municipal Money Fund - Sweep Shares 6.75%
Florida Municipal Money Fund - Sweep Shares 6.62%
The funds' taxable-equivalent effective seven-day yields based on the seven-days
ended December 31, 2000 are stated below and were calculated by dividing that
portion of the funds' effective seven-day yield (as described above) that is
tax-exempt by 1 minus a stated income tax rate and adding the quotient to that
portion, if any, of the funds' yield that is not tax-exempt.
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Seven-Day Taxable-Equivalent Effective Yield as of December 31, 2000
Municipal Money Fund - Sweep Shares 6.77%
California Municipal Money Fund - Sweep Shares 6.43%
New York Municipal Money Fund - Sweep Shares 7.19%
New Jersey Municipal Money Fund - Sweep Shares 6.76%
Pennsylvania Municipal Money Fund - Sweep Shares 6.88%
Florida Municipal Money Fund - Sweep Shares 6.75%
The above taxable-equivalent yields assume a 2000 maximum federal income tax
rate of 39.60% for the Schwab Municipal Money Fund and the Schwab Florida Money
Fund, and a combined federal, state and local (if any) personal income tax of
45.22% for the Schwab California Municipal Money Fund, 43.45% for the Schwab New
Jersey Municipal Money Fund, 41.29% for the Schwab Pennsylvania Municipal Money
Fund, and 46.02% for the Schwab New York Municipal Money Fund.
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, 2000.
The performance of the funds may be compared with the performance of other
mutual funds by comparing the ratings of mutual fund rating services, various
indices, U.S. government obligations, bank certificates of deposit, the consumer
price index and other investments for which reliable data is available. An
index's performance data assumes the reinvestment of dividends but does not
reflect deductions for administrative, management and trading expenses. The
funds will be subject to these costs and expenses, while an index does not have
these expenses. In addition, various factors, such as holding a cash balance,
may cause the funds' performance to be higher or lower than that of an index.
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APPENDIX - RATINGS OF INVESTMENT SECURITIES
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers (or
related supporting institutions) of commercial paper with this rating are
considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
An S&P A-1 commercial paper rating 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.
FITCH, INC. (FORMERLY FITCH 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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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, 2001
AS AMENDED SEPTEMBER 13, 2001
The Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the funds' prospectus dated April 30, 2001 (as amended
from time to time).
To obtain a free copy of the prospectus, please contact SchwabFunds(R) at
800-435-4000, 24 hours a day, 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
Page
----
INVESTMENT OBJECTIVES, STRATEGIES, SECURITIES,
RISKS AND LIMITATIONS.................................................... 2
MANAGEMENT OF THE FUNDS.................................................. 16
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...................... 20
INVESTMENT ADVISORY AND OTHER SERVICES................................... 20
BROKERAGE ALLOCATION AND OTHER PRACTICES................................. 22
DESCRIPTION OF THE TRUST................................................. 23
PURCHASE, REDEMPTION AND PRICING OF SHARES AND DELIVERY OF
SHAREHOLDER DOCUMENTS.................................................... 24
TAXATION................................................................. 26
CALCULATION OF PERFORMANCE DATA.......................................... 30
APPENDIX................................................................. 33
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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 a fund's investment policies and limitations. Additionally, for
purposes of calculating any restriction, an issuer shall be the entity deemed to
be ultimately responsible for payments of interest and principal on the security
pursuant to Rule 2a-7 under the Investment Company Act of 1940 (the 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 less 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.
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
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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 less
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 as
well as moral obligations, which are sometimes issued with municipal securities.
Liquidity supports include puts, demand features, and lines of credit. Most of
these arrangements move the credit risk of an investment from the issuer of the
security to the support provider. Changes in the credit quality of a support
provider could cause losses to a fund.
DEBT SECURITIES are obligations issued by domestic and foreign entities,
including governments and corporations, in order to raise money. They are
basically "IOUs," but are commonly referred to as bonds or money market
securities. These securities normally require the issuer to pay a fixed,
variable or floating rate of interest on the amount of money borrowed (the
"principal") until it is paid back upon maturity.
Debt securities experience price changes when interest rates change. For
example, when interest rates fall, the prices of debt securities generally rise.
Issuers tend to pre-pay their outstanding debts and issue new ones paying lower
interest rates. Conversely, in a rising interest rate environment, prepayment on
outstanding debt securities generally will not occur. This is known as extension
risk and may cause the value of debt securities to depreciate as a result of the
higher market interest rates. Typically, longer-maturity securities react to
interest rate changes more severely than shorter-term securities (all things
being equal), but generally offer greater 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 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.
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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 Securities and Exchange Commission (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
a fund's total assets would be invested in the securities of a single issuer.
State-specific municipal money funds are subject to the same prohibition with
respect to 75% of a fund's total assets. The regulation also allows funds to
invest up to 25% of a 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.
On January 1, 1999, 11 of the 15 member states of the European union introduced
the "euro" as a common currency. During a three-year transitional period, the
euro will coexist with each member state's currency. By July 1, 2002, the euro
will have replaced the national currencies of the following member countries:
Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Portugal and Spain. During the transition period, each country
will treat the euro as a separate currency from that of any member state.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins will
replace the bills and coins of the participating countries.
The new European Central Bank has control over each country's monetary policies.
Therefore, the participating countries no longer control their own monetary
policies by directing independent interest rates for their currencies. The
national governments of the participating countries, however, have retained the
authority to set tax and spending policies and public debt levels.
The conversion may impact the trading in securities of issuers located in, or
denominated in the currencies of, the member states, as well as foreign
exchanges, payments, the settlement process, custody of assets and accounting.
The introduction of the euro is also expected to affect derivative and other
financial contracts in which the funds may invest in so far as price sources
such as day-count fractions or settlement dates applicable to underlying
instruments may be changed to conform to the conventions applicable to euro
currency.
The overall impact of the transition of the member states' currencies to the
euro cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general short and long-term
consequences can be expected, such as changes in economic
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environment and change in behavior of investors, all of which will impact each
fund's euro-denominated investments.
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.
INTERFUND BORROWING AND LENDING. A fund may borrow money from and/or lend money
to other funds/portfolios in the Schwab complex ("SchwabFunds"). All loans are
for temporary or emergency purposes and the interest rates to be charged will be
the average of the overnight repurchase agreement rate and the short-term bank
loan rate. All loans are subject to numerous conditions designed to ensure fair
and equitable treatment of all participating funds/portfolios. The interfund
lending facility is subject to the oversight and periodic review of the Board of
Trustees of the SchwabFunds.
MATURITY OF INVESTMENTS. Each fund follows the regulations set forth by the SEC
that dictate the maturity requirements for money market mutual funds. These
requirements prohibit a fund from purchasing a security with a remaining
maturity of more than 397 days or maintaining a dollar-weighted average
portfolio maturity that exceeds 90 days.
MONEY MARKET SECURITIES are high-quality, short-term debt securities that may be
issued by entities such as the U.S. government, corporations and financial
institutions (like banks). Money market securities include commercial paper,
promissory notes, 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 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.
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.
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Municipal securities also may be issued to finance various private activities,
including certain types of private activity bonds ("industrial development
bonds" under prior law). These securities may be issued by or on behalf of
public authorities to obtain funds to provide certain privately owned or
operated facilities. The funds may not be desirable investments for "substantial
users" of facilities financed by private activity bonds or industrial
development bonds or for "related persons" of substantial users because
distributions from the funds attributable to interest on such bonds may not be
tax exempt. Shareholders should consult their own tax advisors regarding the
potential effect on them (if any) of any investment in these funds.
Municipal securities may be owned directly or through participation interests,
and include general obligation or revenue securities, tax-exempt commercial
paper, notes and leases. The maturity date or price of and financial assets
collateralizing a municipal money market security may be structured in order to
make it qualify as or act like a municipal money market security. These
securities may be subject to greater credit and interest rate risks than other
municipal money market securities because of their structure.
Municipal securities generally are classified as "general obligation" or
"revenue" and may be purchased directly or through participation interests.
General obligation securities typically are secured by the issuer's pledge of
its full faith and credit and taxing power for the payment of principal and
interest. Revenue securities typically are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special tax or other specific revenue source. Private
activity bonds and industrial development bonds are, in most cases, revenue
bonds and generally do not constitute the pledge of the credit of the issuer of
such bonds. The credit quality of private activity bonds is frequently related
to the credit standing of private corporations or other entities.
Examples of municipal securities that are issued with original maturities of 397
days or less are short-term tax anticipation notes, bond anticipation notes,
revenue anticipation notes, construction loan notes, pre-refunded municipal
bonds and tax-free commercial paper. Tax anticipation notes typically are sold
to finance working capital needs of municipalities in anticipation of the
receipt of property taxes on a future date. Bond anticipation notes are sold on
an interim basis in anticipation of a municipality's issuance of a longer-term
bond in the future. Revenue anticipation notes are issued in expectation of the
receipt of other types of revenue, such as that available under the Federal
Revenue Sharing Program. Construction loan notes are instruments insured by the
Federal Housing Administration with permanent financing by Fannie Mae 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
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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.
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 of the put 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 a 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
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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. Under certain circumstances,
repurchase agreements that are fully collateralized by U.S. government
securities may be deemed to be investments in U.S. Government Securities.
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, a fund must be able to dispose of the security in the ordinary course of
business at approximately the amount a fund has valued the security. In
addition, the investment adviser must determine that an institutional or other
market exists for these securities. In making this determination, the investment
adviser may take into account any liquidity support associated with the
security. It is not possible to predict with assurance whether the market for
any restricted security will continue. Therefore, the investment adviser
monitors a fund's investments in these securities, focusing on factors, such as
valuation, liquidity and availability of information. To the extent a fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in a 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.
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CALIFORNIA MUNICIPAL SECURITIES. The Schwab California Municipal Money Fund is a
state-specific municipal fund that invests substantially all of its assets in
municipal securities issued by or on behalf of one state, the State of
California, or California's counties, municipalities, authorities or other
subdivisions.
A fund that invests primarily in securities issued by a single state and its
political subdivisions entails a greater level of risk than a fund that is
diversified across numerous states and their 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 other conditions
within the State; and the underlying fiscal condition of the State and its
municipalities.
Certain of the State's significant industries, such as high technology, are
sensitive to economic disruptions in their export markets and the State's rate
of economic growth, therefore, could be adversely affected by any such
disruption. A significant downturn in U.S. stock market prices could adversely
affect California's economy by reducing household spending and business
investment, particularly in the important high technology sector. Moreover, a
large and increasing share of the State's General Fund revenue in the form of
income and capital gains taxes is directly related to, and would be adversely
affected by a significant downturn in the performance of, the stock markets.
Because of capacity constraints in electric generation and transmission,
California electric utilities have been forced to purchase wholesale power at
high prices this past summer and more recently. Under current deregulation rules
for the electric industry enacted in 1996, two of the State's large
investor-owned utility ("IOU") companies are not allowed to charge customers the
full cost of service, while rates in a third IOU's service area were cut back
after rising sharply to cover wholesale power costs. Legislation was enacted to
streamline the process for siting new power plants, but it will be several years
until a significant number of new suppliers will enter the California market. In
January, 2001, two of the IOUs were granted temporary rate increases in the face
of reportedly serious financial difficulties, including concerns about possible
bankruptcy. While the Governor of California, the State Legislature, the State
Public Utilities Commission and the Federal Energy Regulatory Commission all are
considering further actions to deal with shortcomings in the State's deregulated
energy market, it is not possible to predict at this time what the long-term
impact of these developments will be on California's economy.
California is subject to seismic risks and it is impossible to predict the time,
magnitude or location of a major earthquake or its effect on the California
economy. In January 1994, a major earthquake struck Los Angeles, causing
significant damage to structures and facilities in a four county area. The
possibility exists that another such earthquake could cause a major dislocation
of the California economy.
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.
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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
Fannie Mae, Freddie Mac, the Student Loan Marketing Association (SLMA or SALLIE
MAE), and the Federal Home Loan Bank (FHLB), are supported by a line of credit
the issuing entity has with the U.S. Treasury. Others are supported solely by
the credit of the issuing agency or instrumentality such as obligations issued
by the Federal Farm Credit Banks Funding Corporation (FFCB). There can be no
assurance that the U.S. government will provide financial support to U.S.
government securities of its agencies and instrumentalities if it is not
obligated to do so under law. Of course U.S. government securities, including
U.S. Treasury securities, are among the safest securities, however, not unlike
other debt securities, they are still sensitive to interest rate changes, which
will cause their prices and 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) 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.
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(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) 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.
(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) 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.
(6) 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.
(7) Purchase securities or make investments other than in accordance with
investment objectives and policies.
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.
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(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.
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 a fund'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. Under 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.
Real Estate. The 1940 Act does not directly restrict a fund's ability to invest
in real estate, but does require that every fund have a fundamental investment
policy governing such investments. The funds have adopted a fundamental policy
that would permit direct investment in real estate. However, the funds have a
non-fundamental investment limitation that prohibits them from investing
directly in real estate. This non-fundamental policy may be changed only by vote
of the funds' Board of Trustees.
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
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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 a fund's total
assets would be invested in the securities of a single issuer, up to
50% of the value of a 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.
(4) 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).
(5) Borrow money except that the fund may (i) borrow money from banks or
through an interfund lending facility, if any, only for temporary or
emergency purposes (and not for leveraging) and (ii) engage in reverse
repurchase agreements with any party; provided that (i) and (ii) in
combination do not exceed 33 1/3% of its total assets (any borrowings
that come to exceed this amount will be reduced to the extent necessary
to comply with the limitation within three business days).
(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.
EACH OF 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.
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SCHWAB VALUE ADVANTAGE MONEY FUND MAY NOT:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of its assets would be
invested in securities of that issuer.
(2) Invest more than 10% of its net assets in illiquid securities,
including repurchase agreements maturing in more than seven days.
(3) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Schwab Fund Family or the investment
adviser beneficially own more than 1/2 of 1% of the securities of such
issuer, and together beneficially own more than 5% of the securities of
such issuer.
(4) Invest for the purpose of exercising control or management of another
issuer.
(5) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of
assets. 1
(6) Write, purchase or sell puts, calls or combinations thereof.
(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).
(13) Borrow money except that the fund may (i) borrow money from banks or
through an interfund lending facility, if any, only for temporary or
emergency purposes (and not for leveraging) and (ii) engage in reverse
repurchase agreements with any party; provided that (i) and (ii) in
combination do not exceed 33 1/3% of its total assets (any borrowings
that come to exceed this amount will be reduced to the extent necessary
to comply with the limitation within three business days).
----------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" for an exception to this investment restriction.
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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. (Schwab) and Charles Schwab Investment Management,
Inc., are as follows:
POSITION(S) WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATIONS & AFFILIATIONS
----------------------------------------------------------------------------------------------------
CHARLES R. SCHWAB* Chairman, Chief Chairman and Co-Chief Executive Officer,
July 29, 1937 Executive Officer and Director, The Charles Schwab Corporation; Chief
Trustee Executive Officer, Director, Schwab Holdings,
Inc.; Chairman, Director, Charles Schwab & Co.,
Inc., Charles Schwab Investment Management,
Inc.; Director, The Charles Schwab Trust
Company; Chairman, Schwab Retirement Plan
Services, Inc.; Chairman and Director until
January 1999, Mayer & Schweitzer, Inc. (a
securities brokerage subsidiary of The Charles
Schwab Corporation); Director, The Gap, Inc. (a
clothing retailer), Audiobase, Inc.
(full-service audio solutions for the internet),
Vodaphone AirTouch PLC (a telecommunications
company) and Siebel Systems (a software company).
JOHN P. COGHLAN* President and Trustee Vice Chairman and Executive Vice President, The
May 6, 1951 Charles Schwab Corporation; Vice Chairman and
Enterprise President, Retirement Plan Services
and Services for Investment Managers, Charles
Schwab & Co., Inc.; Chief Executive Officer and
Director, Charles Schwab Investment Management,
Inc.; President, Chief Executive Officer and
Director, The Charles Schwab Trust Company;
Director, Charles Schwab Asset Management
(Ireland) Ltd.; Director, Charles Schwab
Worldwide Funds PLC.
DONALD F. DORWARD Trustee Chief Executive Officer, Dorward & Associates
September 23, 1931 (corporate management, marketing and
communications consulting firm). From 1996 to
1999, Executive Vice President and Managing
Director, Grey Advertising. From 1990 to 1996,
Mr. Dorward was President and Chief Executive
Officer, Dorward & Associates (advertising and
marketing/consulting firm).
----------
* This trustee is an "interested person" of the trusts.
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ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services and investment advisory firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Company
June 28, 1938 (investments). Prior to 1996, Chairman and
Chief Executive Officer of North American
Trust (real estate investment trust).
MICHAEL W. WILSEY Trustee Chairman and Chief Executive Officer, Wilsey
August 18, 1943 Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
JEREMIAH H. CHAFKIN* Executive Vice Executive Vice President, Asset Management
May 9, 1959 President, Chief Products and Services, Charles Schwab & Co.,
Operating Officer and Inc.; President and Chief Operating Officer,
Trustee 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 Affairs and Chief
August 13, 1960 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 Eureka 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), and is Director of Stanford
Hospitals and Clinics, SRI International
(research) and LookSmart, Ltd. (an Internet
infrastructure company).
WILLIAM A. HASLER Trustee Co-Chief Executive Officer, Aphton Corporation
November 22, 1941 (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).
----------
* This trustee is an "interested person" of the trusts.
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GERALD B. SMITH Trustee Chairman and Chief Executive Officer and founder
September 28, 1950 of Smith Graham & Co. (investment advisors).
Mr. Smith is also on the Board of Directors of
Pennzoil-Quaker State Company (oil and gas) and
Rorento N.V. (investments - Netherlands), and is
a member of the audit committee of Northern
Border Partners, L.P., a subsidiary of Enron
Corp. (energy).
TAI-CHIN TUNG Treasurer and Principal Senior Vice President and Chief Financial
March 7, 1951 Financial Officer Officer, Charles Schwab Investment Management,
Inc. From 1994 to 1996, Ms. Tung was Controller
for Robertson Stephens Investment Management,
Inc.
STEPHEN B. WARD Senior Vice President Senior Vice President and Chief Investment
April 5, 1955 and Chief Investment Officer, Charles Schwab Investment Management,
Officer Inc.
KOJI E. FELTON Secretary Vice President, Chief Counsel and Assistant
March 13, 1961 Corporate Secretary, Charles Schwab Investment
Management, Inc. Prior to June 1998, Mr. Felton
was a Branch Chief in Enforcement at the U.S.
Securities and Exchange Commission in San
Francisco.
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, 2000, concerning compensation of the trustees.
Unless otherwise stated, information is for the fund complex, which included 44
funds as of December 31, 2000.
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Pension or ($)
($) Retirement Total
Name of Aggregate Compensation Benefits Compensation
Trustee from each Fund Accrued as from Fund
Part of Complex
Fund
Expenses
----------------------------------------------
Municipal California New York Value
Money Advantage
------------------------------------------------------------------------------------------
Charles R. 0 0 0 0 N/A 0
Schwab
Steven L. 0 0 0 0 N/A 0
Scheid 1
Jeremiah H. 0 0 0 0 N/A 0
Chafkin 2
John P. 0 0 0 0 N/A 0
Coghlan 3
Mariann $ 3,760 $ 3,026 $ 1,945 $ 9,123 N/A $ 73,770
Byerwalter 2
Donald F. $ 7,015 $ 5,594 $ 3,588 $16,569 N/A $137,850
Dorward
William A. $ 3,760 $ 3,026 $ 1,945 $ 9,123 N/A $ 73,770
Hasler 2
Robert G. $ 7,015 $ 5,594 $ 3,588 $16,569 N/A $137,850
Holmes
Gerald B. $ 3,760 $ 3,026 $ 1,945 $ 9,123 N/A $ 73,770
Smith 2
Donald R. $ 7,015 $ 5,594 $ 3,588 $16,569 N/A $137,850
Stephens
Michael W. $ 7,015 $ 5,594 $ 3,588 $16,569 N/A $137,850
Wilsey
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.
----------
1 Resigned from the Board effective November 21, 2000.
2 This trustee was first elected by shareholders on June 1, 2000.
3 Appointed to the Board on November 21, 2000.
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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of April 3, 2001, the officers and trustees of the trust, as a group, owned
of record or beneficially, less than 1% of the outstanding voting securities of
the funds.
As of April 3, 2001, no person or entity owned, of record or beneficially, more
than 5% of the shares of the 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. Schwab is an affiliate of the
investment adviser and is the trust's distributor, shareholder services agent
and transfer agent. Charles R. Schwab is the founder, Chairman, Co-Chief
Executive Officer and Director of The Charles Schwab Corporation. As a result of
his ownership of and interests in The Charles Schwab Corporation, Mr. Schwab may
be deemed to be a controlling person of the investment adviser and Schwab.
For its advisory and administrative services to each fund, the investment
adviser is entitled to receive graduated annual fee payable monthly based on
each fund's average daily net assets as described below.
First $1 billion - 0.38%
More than $1 billion but not exceeding $10 billion - 0.35%
More than $10 billion but not exceeding $20 billion - 0.32%
More than $20 billion - 0.30%
Prior to April 30, 1999, for its advisory and administrative services to each
municipal fund, the investment adviser was entitled to receive a graduated
annual fee payable monthly of 0.46% of the fund's average daily net assets of
the first $1 billion, 0.41% of the next $1 billion, and 0.40% of net assets over
$2 billion.
For the fiscal years ended December 31, 1998, 1999 and 2000, Schwab Municipal
Money Fund paid investment advisory fees of $11,593,00 (fees were reduced by
$13,780,000), $13,623,000 (fees were reduced by $14,529,000) and $16,243,000
(fees were reduced by $14,994,000), respectively.
For the fiscal years ended December 31, 1998, 1999 and 2000, Schwab California
Municipal Money fund paid investment advisory fees of $6,118,000 (fees were
reduced by $8,464,00), $7,639,000 (fees were reduced by $8,816,000) and
$10,171,000 (fees were reduced by $9,824,000), respectively.
For the fiscal years ended December 31, 1998, 1999 and 2000, Schwab New York
Municipal Money Fund paid investment advisory fees of $1,069,000 (fees were
reduced by $1,677,000), $1,458,000 (fees were reduced by $1,708,000) and
$2,053,000 (fees were reduced by $1,900,000), respectively.
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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, 1998, 1999 and 2000, Schwab Value
Advantage Money Fund paid investment advisory fees of $22,577,000 (fees were
reduced by $49,156,000), $35,270,000 (fees were reduced by $54,235,000) and
$41,196,000 (fees were reduced by $61,859,000), respectively.
The investment adviser and Schwab have contractually guaranteed that through at
least April 30, 2002, the total operating expenses (excluding interest, taxes,
certain non-routine and money fund insurance expenses, if any) 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 Schwab Value Advantage Money Fund 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 limit the effects on shareholders of expenses
incurred in the ordinary operation of a fund. The expense cap is not intended to
cover all fund expenses, and a fund's expenses may exceed the expense cap. For
example, the expense cap does not cover investment-related expenses, such as
brokerage commissions, interest, taxes and money fund insurance, if any, 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.
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.
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CUSTODIAN AND FUND ACCOUNTANT
PFPC Trust Company, 8800 Tinicum Blvd, Third Floor Suite 200, Philadelphia, PA
19153 serves as custodian for the funds and PFPC, Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, serves as fund accountant.
The custodian is responsible for the daily safekeeping of securities and cash
held or sold by the funds. The fund accountant maintains all books and records
related to each fund's transactions.
INDEPENDENT ACCOUNTANTS
The funds' independent accountants, PricewaterhouseCoopers LLP, audits and
reports on the annual financial statements of each series of the trust and
reviews certain regulatory reports and each fund's federal income tax return.
They also perform other professional accounting, auditing, tax and advisory
services when a trust engages them to do so. Their address is 333 Market Street,
San Francisco, CA 94105. Each fund's audited financial statements for the fiscal
year ended December 31, 2000, are included in the fund's annual report, which is
a separate report supplied with the SAI.
OTHER EXPENSES
The funds pay other expenses that typically are connected with the trust's
operations, and include legal, audit and custodian fees, as well as the costs of
accounting and registration of the funds. Expenses not directly attributable to
a particular fund will generally be allocated among the funds in the trust on
the basis of each fund's relative net assets at the time the expense is
incurred.
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 its other 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
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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 minimum initial investment, minimum
additional investment and minimum balance requirements are set forth in the
prospectus. These minimums may be waived for certain investors, including
trustees, officers and employees of Schwab, or changed without prior notice. The
minimums may also be waived for investment programs such as those programs
designated for college savings or graduation gifts.
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 a 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
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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.
PURCHASE, REDEMPTION, AND PRICING OF SHARES AND DELIVERY OF
SHAREHOLDER DOCUMENTS
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 2001: New Year's Day,
Martin Luther King Jr.'s Birthday (observed), Presidents' 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 or Internet order is genuine, they will not be liable for any losses
an investor may experience due to unauthorized or fraudulent instructions. These
procedures may include requiring a form of personal identification or
confirmation before acting upon any telephone or Internet order, providing
written confirmation of telephone or Internet orders and tape recording all
telephone orders.
Share certificates will not be issued in order to avoid additional
administrative costs, however, share ownership records are maintained by Schwab.
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
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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 SchwabFund, including any class of shares, may be sold and shares
of any other SchwabFund 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(R) and shares of non-Sweep Investments. Shares of Sweep Investments
may be bought and sold automatically pursuant to the terms and conditions of
your Schwab account agreement or by direct order as long as you meet the
minimums for direct investments.
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 a 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 a 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 a 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
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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 a fund's $1.00
(calculated using amortized cost), the Board of Trustees might supplement
dividends in an effort to maintain a fund's $1.00 NAV.
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.
TAXATION
FEDERAL TAX INFORMATION FOR THE FUNDS
It is each fund's policy to qualify for taxation as a "regulated investment
company" (RIC) by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). By qualifying as a RIC, each fund
expects to eliminate or reduce to a nominal amount the federal income tax to
which it is subject. If a fund does not qualify as a RIC under the Code, it will
be subject to federal income tax on its net investment income and any net
realized capital gains.
The Code imposes a non-deductible excise tax on RICs that do not distribute in a
calendar year (regardless of whether they otherwise have a non-calendar taxable
year) an amount equal to 98% of their "ordinary income" (as defined in the Code)
for the calendar year plus 98% of their net capital gain for the one-year period
ending on October 31 of such calendar year, plus any undistributed amounts from
prior years. The non-deductible excise tax is equal to 4% of the deficiency. For
the foregoing purposes, a fund is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year.
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
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reinvestment date. Each fund will pay shareholders, who redeem all of their
shares, all dividends accrued to the time of the redemption within 7 days.
Each fund calculates its dividends based on its daily net investment income. For
this purpose, the net investment income of a fund consists of: (1) accrued
interest income, plus or minus amortized discount or premium, minus (2) accrued
expenses allocated to that fund. If a fund realizes any capital gains, they will
be distributed at least once during the year as determined by the Board of
Trustees.
Any dividends declared by a fund in October, November or December and paid the
following January are treated, for tax purposes, as if they were received by
shareholders on December 31 of the year in which they were declared. A fund may
adjust its schedule for the reinvestment of distributions for the month of
December to assist in complying with the reporting and minimum distribution
requirements of the Code.
The funds do not expect to realize any long-term capital gains. However,
long-term capital gains distributions are taxable as long-term capital gains,
regardless of how long you have held your shares. If you receive a long-term
capital gains distribution with respect to fund shares held for six months or
less, any loss on the sale or exchange of those shares shall, to the extent of
the long-term capital gains distribution, be treated as a long-term capital
loss. Distributions by a fund also may be subject to state, local and foreign
taxes, and its treatment under applicable tax laws may differ from the federal
income tax treatment.
Each fund may engage in investment techniques that may alter the timing and
character of its income. Each fund may be restricted in its use of these
techniques by rules relating to its qualifications as regulated investment
companies.
A fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who (1) fails to
provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the Internal Revenue Service for
failure to properly report all payments of interest or dividends; or (3) fails
to provide a 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 per year as determined under certain IRS rules. 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
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aggregate dividends as designated by the fund, equal to the excess of the
excludable interest over certain amounts disallowed as deductions.
Exempt-interest dividends are excludable from a shareholder's gross income for
federal income tax purposes.
Exempt-interest dividends may nevertheless be subject to the federal alternative
minimum tax (AMT) imposed by Section 55 of the Code. The AMT is imposed at rates
of 26% and 28%, in the case of non-corporate taxpayers, and at the rate of 20%,
in the case of corporate taxpayers, to the extent it exceeds the taxpayer's
federal income tax liability. The AMT may be imposed in the following two
circumstances. First, exempt-interest dividends derived from certain private
activity bonds issued after August 7, 1986, will generally be an item of tax
preference (and, therefore, potentially subject to AMT) for both corporate and
non-corporate taxpayers. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless of
when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporations' alternative minimum taxable income for purposes of
determining the AMT.
Current federal law limits the types and volume of bonds qualifying for the
federal income tax exemption of interest that may have an effect on the ability
of a fund to purchase sufficient amounts of tax-exempt securities to satisfy the
Code's requirements for the payment of "exempt-interest dividends."
Interest on indebtedness incurred or continued by a shareholder in order to
purchase or carry shares of the funds is not deductible for federal income tax
purposes. Furthermore, these funds may not be an appropriate investment for
persons (including corporations and other business entities) who are
"substantial users" (or persons related to "substantial users") or facilities
financed by industrial development private activity bonds. Such persons should
consult their tax advisors before purchasing shares. A "substantial user" is
defined generally to include "certain persons" who regularly use in their trade
or business a part of a facilities financed from the proceeds of such bonds.
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 Schwab California Municipal Money 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 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
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within 60 days of the close of the fund's taxable year and (2) to the extent the
interest received by the fund during the year on California Tax Exempt
Obligations exceeds expenses of the fund that would be disallowed under
California personal income tax law as allocable to tax exempt interest if the
fund were an individual. If the aggregate dividends so designated exceed the
amount that may be treated as California exempt-interest dividends, only that
percentage of each dividend distribution equal to the ratio of aggregate
California exempt-interest dividends to aggregate dividends so designated will
be treated as a California exempt-interest dividend. 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.
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 Schwab New York Municipal Money 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.
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CALCULATION OF PERFORMANCE DATA
The funds' seven-day yields based on the seven days ended December 31, 2000 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.
Seven-Day Yield as of December 31, 2000
Schwab Municipal Money Fund - 4.22%
Value Advantage Shares
Schwab California Municipal Money Fund - 3.66%
Value Advantage Shares
Schwab New York Municipal Money Fund - 4.05%
Value Advantage Shares
Schwab Value Advantage Money Fund 6.32%
The funds' effective seven-day yields based on the seven days ended December 31,
2000 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.
Seven-Day Effective Yield as of December 31, 2000
Schwab Municipal Money Fund - 4.31%
Value Advantage Shares
Schwab California Municipal Money Fund - 3.72%
Value Advantage Shares
Schwab New York Municipal Money Fund - 4.13%
Value Advantage Shares
Schwab Value Advantage Money Fund 6.52%
The funds' taxable-equivalent seven-day yields based on the seven-days ended
December 31, 2000 are stated below and were calculated by dividing that portion
of the fund's seven-day yield
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(as described above) that is tax-exempt by 1 minus a stated income tax rate and
adding the quotient to that portion, if any, of a fund's yield that is not
tax-exempt.
Seven-Day Taxable-Equivalent Yield as of December 31, 2000
Schwab Municipal Money Fund - 6.99%
Value Advantage Shares
Schwab California Municipal Money Fund - 6.68%
Value Advantage Shares
Schwab New York Municipal Money Fund - 7.50%
Value Advantage Shares
The funds' taxable-equivalent effective seven-day yields based on the seven days
ended December 31, 2000 are stated below and were calculated by dividing that
portion of a fund's effective yield (as described above) that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the funds' effective yield that is not tax-exempt.
Seven-Day Taxable-Equivalent Effective Yield as of December 31, 2000
Schwab Municipal Money Fund - 7.14%
Value Advantage Shares
Schwab California Municipal Money Fund - 6.79%
Value Advantage Shares
Schwab New York Municipal Money Fund - 7.65%
Value Advantage Shares
The above taxable-equivalent yields assume a 2000 maximum federal income tax
rate of 39.60% for Schwab Municipal Money Fund, and a combined federal, state
and local (if any) personal income tax rate of 45.22% for the Schwab California
Municipal Money Fund, and 46.02% for the Schwab New York Municipal Money Fund.
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, 2000.
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
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dividends but does not reflect deductions for administrative, management and
trading expenses. The funds will be subject to these costs and expenses, while
an index does not have these expenses. In addition, various factors, such as
holding a cash balance, may cause the funds' performance to be higher or lower
than that of an index.
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APPENDIX - RATINGS OF INVESTMENT SECURITIES
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers (or
related supporting institutions) of commercial paper with this rating are
considered to have a superior ability to repay short-term promissory
obligations. Issuers (or related supporting institutions) of securities rated
Prime-2 are viewed as having a strong capacity to repay short-term promissory
obligations. This capacity will normally be evidenced by many of the
characteristics of issuers whose commercial paper is rated Prime-1 but to a
lesser degree.
STANDARD & POOR'S CORPORATION
An S&P A-1 commercial paper rating 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.
FITCH, INC. (FORMERLY FITCH 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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