<PAGE> 1
As filed with the Securities and Exchange Commission on September 9, 1996;
File Nos. 33-74534 and 811-8314
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 5 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 6 /X/
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SCHWAB ANNUITY PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
101 Montgomery Street, San Francisco, California 94104
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(415) 627-7000
Timothy F. McCarthy, President
Schwab Annuity Portfolios
101 Montgomery Street, San Francisco, California 94104
(Name and Address of Agent for Service)
Copies of communications to:
Martin E. Lybecker, Esq. Frances Cole, Esq.
Ropes & Gray Charles Schwab Investment Management, Inc.
1301 K Street, N.W., Suite 800 East 101 Montgomery Street
Washington, D.C. 20005 San Francisco, CA 94104
It is proposed that this filing will become effective (check appropriate box):
/X/ Immediately upon filing pursuant to paragraph (b)
/ / On (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / On (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / On (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check appropriate box:
/ / This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
DECLARATION PURSUANT TO RULE 24f-2: Pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended, Registrant has registered an
indefinite number or amount of its shares of beneficial interest under the
Securities Act of 1933, as amended. The Rule 24f-2 Notice for Registrant's
fiscal year ended December 31, 1995 was filed February 20, 1996.
<PAGE> 2
PART A
SCHWAB ANNUITY PORTFOLIOS:
Schwab Money Market Portfolio
The information required by Items 1 through 9 for Schwab Money Market
Portfolio, a separate portfolio of the Registrant, is hereby incorporated by
reference to the Prospectus for this Portfolio filed with the Securities and
Exchange Commission pursuant to Rule 497(e) on April 29, 1996.
<PAGE> 3
CROSS REFERENCE SHEET
PART A
SCHWAB ANNUITY PORTFOLIOS:
Schwab Asset Director(R)-High Growth Portfolio
and Schwab S&P 500 Portfolio
<TABLE>
<CAPTION>
Part A Item Prospectus Caption
- ----------- ------------------
<S> <C>
Cover Page Cover Page
Synopsis Key Features of the Funds; Expenses
Condensed Financial Information Not Applicable
General Description of Registrant Investment Objective and Policies; Investment
Techniques Used by the Funds; Other Investment
Techniques Used by the Funds; General Information
Management of the Fund Organization and Management of the Funds; General
Information
Management's Discussion of Fund Performance How the Funds Report Performance
Capital Stock and Other Securities Cover Page; Organization and Management of the Funds;
Important Information about the Funds; Share Price
Calculation
Purchase of Securities Being Offered Investing in the Funds
Redemption or Repurchase Investing in the Funds
Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE> 4
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH PORTFOLIO
SCHWAB S&P 500 PORTFOLIO
PROSPECTUS [ ]
Contents Page
- -------- ----
Key Features of the Funds 2
Expenses 3
Investment Objectives and Policies 3
Investment Techniques Used by the Funds 4
Other Investment Techniques Used by the Funds
Investing in the Funds 7
Purchasing and Selling Shares 7
Important Information About the Funds 8
Dividends and Other Distributions 8
Federal Income Tax Information 8
Share Price Calculation 8
How the Funds Report Performance 9
Organization and Management of the Funds 9
Operating Fees and Expenses 10
General Information 10
READING THIS PROSPECTUS. References to "you" and "your" in this Prospectus refer
to prospective investors and/or current shareholders, while references to "we,"
"us," "our" and "our Funds" refer to the two Funds generally.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Schwab Annuity Portfolios (the "Trust") is a no-load, open-end management
investment company which offers three diversified investment funds managed by
Charles Schwab Investment Management, Inc. (the "Investment Manager" or "CSIM").
This Prospectus relates to the shares of two of the Trust's three portfolios,
the Schwab Asset Director - High Growth Portfolio and the Schwab S&P 500
Portfolio (the "Funds"). The Funds are intended as an investment vehicle for
variable annuity contracts ("Contracts") and variable life insurance policies
("VLI Policies") to be offered by separate accounts ("Separate Accounts") of
participating life insurance companies ("Participating Insurance Companies") and
for pension and retirement plans qualified under the Internal Revenue Code of
1986, as amended (the "Plans").
SCHWAB ASSET DIRECTOR - HIGH GROWTH PORTFOLIO (the "High Growth Fund"). The
investment objective of the High Growth Fund is to provide high capital growth
with less volatility than an all stock portfolio. The High Growth Fund seeks to
meet its investment objective by investing in a mix of stocks, bonds, and
cash-equivalents.
SCHWAB S&P 500 PORTFOLIO (the "S&P 500 Fund"). The S&P 500 Fund seeks to track
the price and dividend performance (total return) of common stocks of U. S.
companies, as represented by the Standard & Poor's Composite Index of 500 Stocks
(the "Index"). The S&P 500 Fund invests primarily in the common stocks of
companies composing the Index.
INVESTING IN THE FUNDS. The Funds are designed to serve as an investment vehicle
to fund benefits under Contracts issued through Separate Accounts of
Participating Insurance Companies. Shares of both Funds are currently offered to
Participating Insurance Companies and their Separate Accounts to fund benefits
under Contracts. In the future, shares of both Funds may be offered to
Participating Insurance Companies and their Separate Accounts to fund benefits
under other Contracts, VLI Policies and Plans.
ABOUT THIS PROSPECTUS. THIS PROSPECTUS CONCISELY PRESENTS IMPORTANT INFORMATION
THAT YOU SHOULD KNOW BEFORE INVESTING IN EITHER OF THE FUNDS. PLEASE READ IT
CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. You can find more detailed
information about these Funds in the Statement of Additional Information ("SAI")
dated [ ] (as amended from time to time). The SAI has been filed
with the Securities and Exchange Commission ("SEC") and is incorporated by
reference into this Prospectus (which means that it is legally considered part
of this Prospectus even though it is not printed here). To receive a free copy
of this Prospectus or SAI, call the Annuity Service Center at Charles Schwab &
Co., Inc. ("Schwab") at 800-838-0650 or write to P.O. Box 7785, San Francisco,
CA 94120-9420; in New York State, call 800-838-0649 or write the Annuity Service
Center at P.O. Box 7806, San Francisco, CA 94120-9327.
1
<PAGE> 5
KEY FEATURES OF THE FUNDS
Both Funds are designed to provide investors with exposure to the growth
potential of the stock market. The High Growth Fund seeks to achieve this
through the use of an asset allocation strategy. In the past, common stocks have
outperformed most other types of securities over time. The Funds may be
appropriate for investors who have a long-term investment horizon and want the
growth potential of stock investments or an asset allocation strategy.
Common stock prices can be volatile in the short-term. Market conditions or
other company, political and economic news often can cause large changes in a
stock's price. You should be comfortable with the volatility of investment in
stocks and the risks of the stock market. When you sell your shares, they may be
worth more or less than what you paid for them. For more details on each Fund's
investments and the risks associated with them, see "Investment Objectives and
Policies" and "Investments and Techniques Used by the Funds."
HIGH GROWTH FUND: invests in a diversified mix of stocks, bonds and
cash-equivalents. It targets a mix of investments designed to provide exposure
to the growth potential of the stock market with less volatility than an all
stock portfolio. This mix among major asset classes will vary within defined
ranges based on the Investment Manager's determination of relative
attractiveness of securities in the financial markets. For more detailed
information, see "Investment Objectives and Policies."
Research shows that the greatest impact on investment returns is due to the
asset allocation decision (the mix of stocks, bonds and cash-equivalents) rather
than market timing or individual stock and bond selections. A study of the
performance of pension portfolios indicated that over 90% of the performance was
determined by asset mix.*
*Financial Analysts Journal; Brinson, Singer, Beebower; May - June 1991
STRATEGY: to invest in a diversified mix of stocks (large companies, small
companies and international), bonds, and cash equivalents.
[The following is a pie chart of the target mix of investments for the
High Growth Fund.]
Target Mix
Cash 5%
Bonds 15%
Stocks 80%
(Defined range 65%-95%)
Large companies 40%
Small companies 20%
International 20%
This Fund will invest in foreign securities and small company stocks, which may
pose special risks. Foreign securities may present unique investment
opportunities; however, international investing involves risks not associated
with domestic investing. Foreign securities markets are not always as efficient
as those in the United States and are often less liquid and more volatile. Small
company stocks have historically been characterized by greater total returns,
greater volatility of returns and lower dividend yields than large company
stocks. For more detailed information on the High Growth Fund's investments and
the risks associated with them, see "Investment Objective and Policies" and
"Investments Techniques Used by the Funds."
S&P 500 FUND: seeks to track the price and dividend performance (total return)
of common stocks of U.S. companies as represented by the Index. The Index is a
widely recognized, unmanaged index of the prices of 500 large company common
stocks selected by Standard & Poor's ("Index Stocks"). These stocks represent
approximately 70% of the market value of all common stocks publicly traded in
the United States.*
*Source: Standard & Poor's, December 1995.
STRATEGY: To invest in common stocks of companies composing the Index and to
minimize trading and other costs.
MANAGEMENT: Charles Schwab Investment Management, Inc. (the "Investment
Manager") currently provides investment management services to 25 mutual funds,
in excess of $39 billion in assets as of August 16, 1996. (See "Organization and
Management of the Funds.")
MARKET PERFORMANCE: For the 23 years ended 1995, the Index provided an average
annual total return of 11.9%*. Total return figures for the Index assume
reinvestment of all dividends paid by stocks included in the Index. These
figures do not include fees such as those charged by the Fund or any Separate
Account or Contract charges. They also do not include taxes, brokerage or other
fees that you would pay if
2
<PAGE> 6
you directly invested in all the stocks of the Index. Additional asset
categories to be used by the High Growth Fund have provided the following
average annual returns:**
<TABLE>
<S> <C>
Large company stocks (the Index) 11.9 %
Small company stocks (Ibbotson and BARRA small 14.8 %
cap index)
International stocks (MSCI EAFE) 11.8 %
Bonds (Ibbotson and Lehman long-term 9.6 %
government bond index)
Cash-equivalents (commercial paper A1P1) 8.4 %
</TABLE>
*Source: Standard & Poor's, December 1995. Past performance of the Index does
not necessarily reflect future performance results of the Index or the Funds.
**Source: BARRA, Inc. Indices do not include fees such as those charged by the
Funds or any Separate Account or Contract charges. Past performance of indices
does not necessarily reflect future performance results of the Funds.
PURCHASE, SALE AND AVAILABILITY OF SHARES OF THE FUNDS. You cannot buy or sell
shares of the Funds directly, but you may nevertheless allocate account value
under your Contract to and from the Funds in accordance with the terms of your
Contract. Please refer to the appropriate Separate Account Prospectus for
further information on how to make such allocations. (See "Investing in the
Funds.")
SHAREHOLDER COMMUNICATIONS. A representative of the Schwab Annuity Service
Center is available toll-free to assist you at 800-838-0650 or in New York State
at 800-838-0649. (See "Investing in the Funds.")
Both Funds are designed for long-term investors. Investors should not use the
Funds to speculate on short-term market movements. Doing so can disrupt the
investment strategy and operations. It also raises costs for other Fund
investors.
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES. Shareholder transaction expenses are the fees
and charges an investor pays for buying or selling shares of a fund. Investors
pay no sales fees or charges when buying or selling shares of our Funds.
ANNUAL FUND OPERATING EXPENSES. Annual fund operating expenses include
management fees paid to the Investment Manager, transfer agency fees and other
expenses. These expenses cover services such as investment research, management
of the Funds and issuing shareholder statements. Each Fund pays its own annual
operating expenses from its income, which is factored into the dividends paid to
shareholders and into the Fund's share price. Investors are not charged any of
these fees directly.
<TABLE>
<CAPTION>
High Growth S&P 500
Fund Fund
<S> <C> <C>
Shareholder Transaction None None
Expenses
Annual Fund Operating
Expenses (as a percentage of
average daily net assets)
Management Fee (after 0.60% 0.20%
fee reduction)1
12b-1 Fees None None
Other Expenses (after 0.15% 0.15%
expense
(reimbursement) 2
Total Fund Operating Expenses 0.75% 0.35%
(after fee reduction and
expense reimbursement) 2, 3
</TABLE>
1 This amount reflects a reduction guaranteed by the Investment Manager,
through at least July 1, 1997. If there were no such reduction, the maximum
management fee would be 0.74% and 0.36% of the average daily net assets of
the High Growth Fund of the S&P 500 Fund, respectively. (See "Organization
and Management of the Funds - Operating Fees and Expenses.")
2 "Other Expenses" are based on estimated amounts for the current fiscal year
for each Fund after expense and reimbursement.
3 This amount reflects the guarantee by Schwab and the Investment Manager
that, through at least July 1, 1997, total average daily net assets fund
operating expenses will not exceed 0.75% of the average daily net assets of
the High Growth Fund and 0.35% of the average daily net assets of the S&P
500 Fund. Without this guarantee, estimated total fund operating expenses
would be 0.89% of the average daily net assets of the High Growth Fund and
0.51% of the average daily net assets of the S&P 500 Fund.
EXAMPLES. You would pay the following expenses on a $1,000 investment in the
Funds, assuming (1) 5% annual return and (2) redemption at the end of each
period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------- --------
<S> <C> <C>
High Growth Fund............. $8 $24
S&P 500 Fund.................. $4 $11
</TABLE>
THIS IS AN EXAMPLE ONLY AND DOES NOT REPRESENT PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THE EXPENSES SHOWN IN THE EXAMPLE. This
example reflects the guarantee by Schwab and the Investment Manager that,
through at least July 1, 1997, total fund operating expenses will not exceed
0.75% and 0.35% of the average daily net assets for the High Growth Fund and S&P
500 Fund, respectively. This example does not reflect Separate Account or
Contract charges. Please remember that, while this example assumes a 5% annual
return on investment, each Fund's actual returns may be more or less than the 5%
used in this example.
THE PURPOSE OF THE TABLE ABOVE IS TO HELP YOU UNDERSTAND THE VARIOUS COSTS AND
EXPENSES YOU WILL BEAR DIRECTLY OR INDIRECTLY WHEN YOU INVEST IN THE FUNDS. (See
"Organization and Management of the Funds - Operating Fees and Expenses.")
INVESTMENT OBJECTIVE AND POLICIES
3
<PAGE> 7
THE HIGH GROWTH FUND
The investment objective of the High Growth Fund is to provide high capital
growth with less volatility than an all stock portfolio. The High Growth Fund
seeks to meet its investment objective by investing in a mix of stocks, bonds
and cash-equivalents. It is designed to provide exposure to the growth potential
of the stock market with less risk than an all stock investment.
A target mix of the percentage of the High Growth Fund's assets which may be
invested in stocks, bonds and cash-equivalents and the maximum and minimum
ranges in which the Fund may invest in these asset categories (the "defined
range") have been established for the High Growth Fund. Although there is a
target mix for each of the stock sub-categories, there are no defined ranges.
The amount invested in stock sub-categories could vary widely from their
targets, but not beyond the defined range of the stock category as a whole. The
Investment Manager will allocate assets among stocks, bonds and
cash-equivalents, emphasizing investment in the most attractive asset category.
Symphony Asset Management, Inc. (the "Sub-Adviser") uses a Tactical Asset
Allocation model to measure the relative value of each asset category and make
recommendations for allocations within the defined ranges. The High Growth Fund
also may make other investments that do not fall within the asset categories.
(See "Other Investments.") The High Growth Fund provides significant exposure to
various stock categories, including domestic large and small company stocks and
international stocks.
The High Growth Fund's target mix as well as the defined ranges for the
different asset categories are as follows:
<TABLE>
<CAPTION>
TARGET DEFINED
MIX RANGES
------ ---------
<S> <C> <C>
STOCKS 80% 65%--95%
Large company stocks 40%
Small company stocks 20%
International stocks 20%
BONDS 15% 0%--30%
Cash-Equivalents 5% 0%--35%
</TABLE>
THE S&P 500 FUND
The S&P 500 Fund's investment objective is to seek to track the price and
dividend performance (total return) of common stocks of U.S. companies, as
represented by the Index. The S&P 500 Fund seeks investment results that track,
rather than beat, the total return of the Index. Thus, it does not "actively"
choose investments in the same way as actively managed stock portfolios do.
Those portfolios choose investments based on economic, financial and market
factors and investment judgment. In contrast, the S&P 500 Fund uses a "passive"
or "indexing" strategy. It buys and sells stocks primarily to match the Index,
to invest cash from S&P 500 Fund share purchases or to obtain cash for
redemptions of S&P 500 Fund shares. Thus, the Investment Manager normally does
not judge the merits of any particular stock.
Under normal market conditions, the S&P 500 Fund invests at least 80% of its
total assets in Index Stocks. The S&P 500 Fund generally tries to match its
Index Stock holdings to those Stocks' weightings in the Index. In extraordinary
circumstances, the S&P 500 Fund may exclude an Index Stock from its holdings or
include a similar stock in its place if it believes that doing so will help
achieve its investment objective. The S&P 500 Fund may purchase securities of
companies with which it may be affiliated to the extent that these companies are
represented in the Index.
Although the S&P 500 Fund focuses on Index Stocks, it may buy and sell other
equity securities and other types of instruments. It also buys and sells
short-term debt securities for cash management purposes. In addition, it may use
options and futures contracts to adjust its correlation to the Index.
The S&P 500 Fund typically will not track the performance of the Index
perfectly. Fund costs, fees and expenses impair its correlation, as do the
amounts and timing of cash inflows and outflows. Changes in the securities
markets can also inhibit perfect tracking. Over the long term, the S&P 500 Fund
will attempt to achieve a correlation between its performance and that of the
Index of 0.9 or better. A figure of 1.0 would indicate perfect correlation. The
Investment Manager monitors performance of the S&P 500 Fund and the Index on a
regular basis. In the unlikely event that the S&P 500 Fund cannot achieve a
long-term correlation of 0.9 or better, the Board of Trustees will consider
alternative arrangements.
Each Fund's investment objective is fundamental and cannot be changed without
shareholder approval. Each Fund's investment policies and techniques discussed
below are non-fundamental, unless otherwise noted. See "Investment Restrictions"
in the SAI for details. Because any investment involves risk, we cannot
guarantee achieving either Fund's objective.
INVESTMENT TECHNIQUES USED BY THE FUNDS
THE HIGH GROWTH FUND
4
<PAGE> 8
The High Growth Fund will invest in stocks, bonds, and cash-equivalents in
varying proportions, according to the Fund's target mixes and defined ranges.
STOCK ALLOCATION. The common stocks in which the High Growth Fund invests will
be a diversified portfolio within each stock sub-category (large company, small
company and international stocks). Common stocks represent an ownership, or
equity interest, in a company. Although common stocks have a history of
long-term growth in value, their prices tend to fluctuate in the short-term.
LARGE COMPANY STOCKS. The High Growth Fund's large company stock allocation will
be invested in all or a representative sample of the stocks which comprise the
Index.
SMALL COMPANY STOCKS. The High Growth Fund's small company stock allocation will
be invested in all or a representative sample of stocks selected from a universe
consisting of the second 1,000 largest U.S. operating corporations, as measured
by market capitalization. Small company stocks have historically been
characterized by greater total returns, greater volatility of returns, and lower
dividend yields than large company stocks.
INTERNATIONAL STOCKS. The High Growth Fund's international stock allocation will
be invested in all or a representative sample of stocks selected from a universe
consisting of 350 of the largest non-U.S. operating corporations, as measured by
market capitalization. These international stocks are issued by large, publicly
traded companies from countries around the world with major developed securities
markets, excluding the United States. The High Growth Fund may also invest up to
5% of its net assets in the stocks and bonds of issuers in developing countries;
see "Other Investments" for details.
BOND ALLOCATION. Bond investments for the High Growth Fund will consist
primarily of U.S. Government obligations, highly rated corporate debt
obligations, and highly rated asset-backed securities. The debt securities in
which the High Growth Fund invests are obligations issued or guaranteed by the
U.S. Government and its agencies and instrumentalities, including bills, notes,
bonds, discount notes, stripped government securities, and other debt
securities. Not all obligations issued or guaranteed by U.S. Government agencies
are backed by the full faith and credit of the United States. The High Growth
Fund may also buy domestic and foreign issues of corporate debt obligations
having floating or fixed rates of interest. Asset-backed securities, including
mortgage-related securities, may also be included in the High Growth Fund's
portfolio. Asset-backed securities are secured by company receivables, home
equity loans, truck and auto loans, leases and credit card receivables. The
collateral backing asset-backed securities cannot be foreclosed upon.
Mortgage-backed securities are securities collateralized by pools of mortgage
loans and are assembled by various governmental agencies and organizations, such
as Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC"). When
interest rates decline, there is increased likelihood that the mortgages
underlying a mortgage-backed security will be pre-paid, resulting in the loss of
any unamortized premium paid for the securities and the probability of having to
reinvest the proceeds at lower rates. The bond category also includes repurchase
agreements collateralized by eligible investments.
The corporate debt obligations or the asset-backed obligations in which the High
Growth Fund invests will be rated in one of the three highest categories ("A" or
better) by a nationally recognized statistical rating organization ("NRSRO").
CASH-EQUIVALENT ALLOCATION. The High Growth Fund may invest in the following
types of U.S. dollar denominated short-term money market instruments that the
Investment Manager has determined to present moderate credit risk:
1. Bank certificates of deposit, time deposits, or bankers' acceptances of
domestic banks (including their foreign branches), U.S. branches of foreign
banks, and foreign branches of foreign banks, having capital, surplus, and
undivided profits in excess of $100 million.
2. Commercial paper rated in one of the two highest rating categories by an
NRSRO, or commercial paper or notes of issuers with an unsecured debt issue
outstanding currently rated in one of the two highest rating categories by any
NRSRO where the obligation is on the same or a higher level of priority and
collateralized to the same extent as the rated issue.
3. Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
4. Repurchase agreements involving obligations that are suitable for investment
under the categories set forth above.
OTHER INVESTMENTS. The High Growth Fund may also make other investments that do
not fall within the asset classes described above. These may include warrants,
convertible securities, preferred stocks, real-estate related investments,
precious metal related investments, American and European Depository Receipts,
and stocks and bonds of issuers in developing countries. Each of these
investments is limited to 5% of the High Growth Fund's net assets. In addition,
the High Growth Fund may invest in other securities, in the
5
<PAGE> 9
future, not presently contemplated or which are not currently available. These
additional investments must be consistent with the High Growth Fund's investment
objective and must be legally permissible investments for the High Growth Fund.
RISK CONSIDERATIONS. The High Growth Fund seeks to reduce overall risk by
diversifying investments among major asset categories and sub-categories.
However, depending on the Investment Manager's asset allocation decisions with
regard to the mix of stocks, bonds and cash-equivalents, shareholders in the
High Growth Fund may be exposed to the risks associated with each particular
asset type. Diversification among asset categories will not necessarily protect
the High Growth Fund from loss.
Stock risk is the possibility that stock prices will decline over short or even
extended periods. Small-company and international stocks will typically be
included in the mix and pose special risks.
International risk includes the possibility that the value of the High Growth
Fund's international investments will be affected by changes in currency
exchange rates versus the U.S. dollar since these investments will be
denominated in a foreign currency, in addition to normal market fluctuations.
The rate of exchange between the U.S. dollar and other currencies is determined
by the forces of supply and demand in the foreign exchange market, by changes in
interest rates, as well as by political and economic factors. Other risks and
considerations of international investing include: differences in accounting,
auditing and financial reporting standards; generally higher transaction costs
on foreign portfolio transactions; small trading volumes and generally lower
liquidity of foreign stock markets, which may result in greater price
volatility; foreign withholding taxes payable on the High Growth Fund's security
holdings, which may reduce dividend income payable to shareholders; the
possibility of expropriation, nationalization or confiscatory taxation; adverse
changes in investment or exchange control regulations; political instability
which could affect U.S. investment in foreign countries; and potential
restrictions on the flow of international capital.
Bond risk is the potential for decline in the market value of bonds due to
interest rate changes or the ability of an issuer to meet its obligations. The
market value of the High Growth Fund's debt investments will change in response
to interest rate fluctuations and other factors. During periods of falling
interest rates, the values of outstanding debt securities generally rise;
conversely, during periods of rising interest rates, the values of such
securities generally decline. While securities with longer maturities tend to
produce higher yields, the prices of longer maturity securities are also subject
to greater market fluctuations as a result of changes in interest rates. Changes
by NRSROs in the rating of any debt security and in the ability of an issuer to
make payments of interest and principal also affect the value of these
investments. Except under condition of default, changes in the value of
portfolio securities will not affect cash income derived from these securities
but will affect the High Growth Fund's net asset value.
THE S&P 500 FUND
In seeking its objective, the S&P 500 Fund may buy and sell the investments and
employ the techniques described below. Please see the SAI for more details. The
S&P 500 Fund's investment policies and restrictions apply at the time the S&P
500 Fund makes an investment. Except with respect to futures and options, later
changes, such as changed market values, do not require the S&P 500 Fund to sell
an investment even if it could not then make the same investment.
EQUITY SECURITIES. Equity securities are ownership interests in the net worth of
a corporation. They include common stocks, preferred stocks, convertible
securities and warrants. In the past, they have outperformed most other
securities over time, though their prices can be volatile in the short term.
Market conditions or other company, political and economic news often can cause
large changes in a stock's price for the short term or long term. Smaller
company securities are especially sensitive to these factors.
OTHER INVESTMENTS. While the S&P 500 Fund tries to remain invested in Index
Stocks as fully as possible, it must manage cash flows resulting from the
purchase and sale of Fund shares. Thus, the S&P 500 Fund also may invest in U.S.
dollar denominated short-term bonds and money market instruments. The S&P 500
Fund may buy debt securities of or guaranteed by the U.S. Government, its
agencies or related bodies. It also may use certificates of deposit, time
deposits and bankers' acceptances. The S&P 500 Fund also may buy commercial
paper if the commercial paper has one of an NRSRO'S top two ratings or has
comparable quality if it is unrated. The S&P 500 Fund may enter into repurchase
agreements using any of these debt securities. It also may buy and sell shares
of other mutual funds to manage its cash flows.
RISK CONSIDERATIONS. Investing in the S&P 500 Fund will expose investors to
stock risk because it invests in substantially all of the 500 common stocks
composing the Index. Prices of many stocks or of a single stock may decline over
short or even long periods. However, diversity of stock holdings tends to reduce
stock risk. Because the Fund owns so many different stocks, it is less sensitive
to the decline of any one of them than if it invested in fewer stocks. Their
wide range of industries also tends to lessen the impact of
6
<PAGE> 10
one industry's decline. Even so, these factors cannot protect from all possible
losses. Also, to better track the investment results of the Index, the S&P 500
Fund may engage in certain stock futures contracts and options, which are types
of derivative transactions. Their potential return and risk can vary widely from
type to type. See "Investment Securities" in the SAI for details about the
derivatives that the S&P 500 Fund uses and the limits on them. You should pay
special attention to these descriptions of derivatives, for these investments
carry more risk potential than the S&P 500 Fund's other investments.
OTHER INVESTMENT TECHNIQUES USED BY THE FUNDS
FUTURES CONTRACTS AND OPTIONS. Each of the Funds may use futures contracts and
options in order to remain effectively fully invested in proportions consistent
with the Investment Manager's current asset allocation and to track the Index in
an efficient and cost effective manner. Specifically, each Fund may enter into
futures contracts and options thereon provided that the aggregate deposits
required on these contracts do not exceed 5% of each Fund's total assets. In
addition, certain provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), may limit the Funds' use of futures contracts and options.
Futures contracts and options may be used for several reasons: to reallocate the
High Growth Fund's assets among stocks, bonds and money market instruments while
minimizing transaction costs; to maintain cash reserves while simulating full
investment; to facilitate trading; or to seek higher investment returns or
simulate full investment when a futures contract is priced more attractively or
is otherwise considered more advantageous than the underlying security or index.
In addition, the S&P 500 Fund may use futures contracts and options to more
closely track the performance of the Index, or to re-allocate its assets among
Index Stocks while minimizing transaction costs.
Because the transaction costs of futures contracts and options may be lower than
the costs of investing in stocks or bonds directly, it is expected that the use
of futures contracts may reduce the Fund's total transaction costs. Also,
because futures contracts require only a small initial margin deposit, the Funds
would then be able to simultaneously maintain a cash reserve for potential
redemptions and simulate full investment. In the event of net redemptions from a
Fund, sufficient futures contracts would be sold to avoid any leveraging of the
Fund's assets.
Futures contracts and options pose certain risks. The primary risks associated
with the use of futures contracts and options include: imperfect correlation
between the change in market value of the securities held by the Funds and the
prices of futures contracts and options, and possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect correlation will be
minimized by investing only in those contracts whose behavior is expected to
resemble that of the Funds' underlying securities. The risk that the Funds will
be unable to close out a futures position will be minimized by entering into
such transactions on a national exchange with an active and liquid secondary
market. While futures contracts and options can be used as leveraged
instruments, the Funds may not use futures contracts or options to leverage
their portfolios.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (or gain) to the investor. When investing in futures contracts, the Funds
will segregate cash or cash-equivalents in the amount of the underlying
obligation.
ADJUSTING INVESTMENT EXPOSURE. In addition to futures and options, the High
Growth Fund may use a variety of techniques to increase or decrease its exposure
to changing security prices, interest rates, currency exchange rates, commodity
prices, or other factors that affect security values. These techniques may
involve entering into spot foreign currency exchange contracts, forward foreign
currency exchange contracts and swap agreements. These techniques may be
referred to as derivative transactions.
The Funds may also sell securities short if at the time of the short sale the
Fund owns or has the right to own securities equivalent in kind and amount to
the securities sold short at no additional cost. The Investment Manager can use
these practices to adjust the risk and return characteristics of a Fund's
portfolio. If the Investment Manager judges market conditions incorrectly or
employs a strategy that does not correlate well with a Fund's investments, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These techniques may increase the volatility of
the Funds and may involve a small investment of cash relative to the magnitude
of the risk assumed. In addition, these techniques could result in a loss if the
counterparty to the transaction does not perform as agreed. Each of these
techniques will be limited to 5% of each Fund's net assets. Please refer to the
sections in the SAI entitled "Investment Securities" and "Investment
Restrictions" for a more detailed discussion of these techniques and the risks
associated with them.
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<PAGE> 11
Illiquid Securities. Each Fund may invest up to 10% of its net assets in
illiquid securities. Generally, an "illiquid security" is any security that
cannot be disposed of promptly and in the ordinary course of business at
approximately the amount at which a Fund has valued the instrument. The absence
of a trading market can make it difficult to ascertain the market value of
illiquid securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each of the Funds may purchase
securities on a "when-issued" or "delayed delivery" basis. When-issued or
delayed delivery securities are securities purchased for future delivery at a
stated price and yield. Generally, the Funds will not pay for such securities or
start earning interest on them until the Fund receives them. Securities
purchased on a when-issued or delayed delivery basis are recorded as assets.
During the period between the agreement date and the settlement date, the value
of such securities may change as the prices of securities in the stock market
increase or decrease, or as interest rates change. Default by the other party to
the agreement may result in a loss to a Fund.
REPURCHASE AGREEMENTS. The Funds may engage in repurchase agreements. In a
repurchase agreement, a Fund buys a security at one price and simultaneously
agrees to sell it back at a higher price. In the event of a bankruptcy or other
default of a repurchase agreement counterparty, the Fund may incur expenses in
enforcing its rights, and could experience losses, including a decline in the
value of the underlying securities and loss of income.
BORROWING POLICY. The Funds may not borrow money except for temporary purposes
to meet redemption requests that could not otherwise be met without immediately
selling portfolio securities. The Funds may borrow an amount up to one-third of
the value of the Fund's total assets and may pledge up to 33 1/3% of the Fund's
net assets to secure such borrowings. The Funds may not borrow for leverage
purposes. The Funds' borrowing and pledging policies, as set forth in the SAI,
are fundamental. Borrowing money may cause greater fluctuations in a Fund's
share price.
SECURITIES LENDING. The Funds may lend up to 33 1/3% of their portfolio
securities to broker-dealers as a means of increasing income. These loans must
be fully collateralized at all times. As with any collateralized loan, there are
risks of delay in recovery or even losses of rights in the assets loaned should
the borrower fail financially.
TURNOVER. The Investment Manager anticipates that the S&P 500 Fund's annual
turnover rate will not exceed 100%. The Investment Manager anticipates that the
High Growth Fund's annual turnover rates for the stock and bond categories of
its portfolio will not exceed 100%.
INVESTING IN THE FUNDS
PURCHASING AND SELLING SHARES
Shares of the Funds are currently sold on a continuous, no-load basis to the
Separate Accounts of Participating Insurance Companies to fund benefits under
Contracts issued by the Participating Insurance Companies.
Although shares of the Funds are not available for purchase directly by the
general public, you may nevertheless allocate account value under your Contract
to and from the Funds in accordance with the terms of your Contract. Please
refer to the appropriate Separate Account Prospectus for further information on
how to make an allocation and how to purchase or surrender your Contract.
The Funds reserve the right, in their sole discretion and without prior notice
to shareholders, to withdraw or suspend all or any part of the offering made by
this Prospectus or to reject purchase orders. All orders to purchase shares of
the Funds are subject to acceptance by the Funds and are not binding until
confirmed or accepted in writing.
The Funds may suspend redemption rights or postpone payments at time when
trading on the New York Stock Exchange ( the "Exchange") is restricted, the
Exchange is closed for any reason other than its customary weekend or holiday
closings, emergency circumstances as determined by the SEC exist or for such
other circumstances as the SEC may permit.
In the future, shares of the Funds are expected to be offered on a continuous,
no-load basis to affiliated and unaffiliated Participating Insurance Companies
and their Separate Accounts to fund benefits under Contracts and VLI Policies as
well as to Plans. The relationships of Plans and Plan participants to the Funds
would be subject, in part, to the provisions of the individual Plans and
applicable law. Accordingly, such relationships could be different from those
described in this Prospectus for Separate Accounts and Contract owners in such
areas, for example, as tax matters and voting privileges.
The Funds do not foresee any disadvantage to Contract or VLI Policy owners or
Plan participants arising out of these arrangements. Nevertheless, differences
in treatment under tax and other laws, as well as other considerations, could
cause the interests of various purchasers of Contracts and VLI Policies (and the
interests of any Plan participants) to conflict. Material irreconcilable
conflicts between the interests of Contract owners, VLI Policy owners or Plan
participants possibly may arise. For example, violation of the federal tax laws
by one Separate Account investing in the
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<PAGE> 12
Funds could cause the Contracts funded through another Separate Account to lose
their tax-deferred status, unless remedial action were taken. The Funds and the
Separate Accounts (and any Plans investing in the Funds) would be subject to
conditions imposed by the SEC, which are designed to prevent or remedy any such
conflicts.
If shares of the Funds are offered to affiliated and unaffiliated Participating
Insurance Companies and their Separate Accounts to fund benefits under VLI
Policies and other Contracts and to Plans, the Board of Trustees will monitor
events in order to identify the existence of any material irreconcilable
conflict that may possibly arise and to determine what action, if any, should be
taken in response to any such conflict. If a material irreconcilable conflict
arises involving Separate Accounts or Plans, a Separate Account or Plan may be
required to withdraw its participation in either Fund.
Shares of the Funds are sold at the net asset value next determined after
receipt by the Funds of purchase requests in proper form.
Shares will be redeemed at the net asset value per share next determined after
receipt by the Funds of proper redemption instructions, as set forth below.
Redemption proceeds will normally be wired to a Participating Insurance Company
on the next Business Day after receipt of the redemption instructions by the
Funds but in no event later than 7 days following receipt of instructions.
Please refer to the appropriate Separate Account Prospectus for information on
how to allocate Contract values to or withdraw Contract values from a Fund.
To obtain additional information regarding the Funds, call the Schwab Annuity
Service Center at 800-838-0650 or in New York State at 800-838-0649, where
trained representatives are available to answer questions about the Funds.
IMPORTANT INFORMATION ABOUT THE FUNDS
DIVIDENDS AND OTHER DISTRIBUTIONS
Each of the Funds will distribute substantially all of their net investment
income each year, as determined by the Board of Trustees. The Funds will
distribute net investment income and capital gains, if any, to the Participating
Insurance Company Separate Accounts annually in December. Distributions are
normally paid or reinvested pursuant to elections by Separate Accounts.
FEDERAL INCOME TAX INFORMATION
Each Fund intends to qualify as a regulated investment company under the Code.
In order to so qualify, the Funds will distribute on a current basis
substantially all of their investment company taxable income and their net
capital gains (if any) on an annual basis and will meet certain other
requirements. Such qualification relieves each Fund of liability for federal
income taxes to the extent each Fund's earnings are distributed. Income received
by either Fund from sources within certain foreign countries, however, may be
subject to foreign taxes withheld at the source.
Internal Revenue Service regulations applicable to Separate Accounts generally
require that portfolios that serve as the funding vehicles for Separate Accounts
invest no more than 55% of the value of their total assets in one investment,
70% in two investments, 80% in three investments and 90% in four investments.
Alternatively, a portfolio will be treated as meeting these requirements for any
quarter of its taxable year if, as of the close of such quarter, the portfolio
meets the diversification requirements applicable to regulated investment
companies (see "Federal Income Taxes" in the SAI) and no more than 55% of the
value of its total assets consists of cash and cash items (including
receivables), U.S. Government securities and securities of other regulated
investment companies. The Funds intend to meet these requirements. Internal
Revenue Service regulations also limit the types of investors that may invest in
such a portfolio. The Funds intend to meet this limitation by offering shares
only to Participating Insurance Companies and their Separate Accounts in
connection with the purchase of Contracts and VLI Policies and to Plans.
For more information regarding the federal income tax consequences of investing
in the Funds, see "Federal Income Taxes" in the SAI. For information concerning
the tax consequences of Contract ownership, Contract owners should consult the
appropriate Separate Account Prospectus.
SHARE PRICE CALCULATION
The price of a single share of each Fund on any given day is the net asset value
("NAV") per share of that Fund. The NAV is determined each Business Day at the
close of trading on the Exchange (generally at 4:00 p.m. Eastern time). The
price of each Fund is determined by first valuing the total assets of each Fund,
then subtracting any liabilities and dividing the balance by the number of
shares outstanding.
The Funds value their portfolio securities based on market quotes if they are
readily available. If they are not readily available, the Investment Manager
assigns fair values to its assets in good faith under Board of Trustees
guidelines. Each
9
<PAGE> 13
Fund values illiquid and restricted securities in this way. The Board of
Trustees regularly reviews these values. Each Fund uses prices furnished by
pricing services if it believes that they reflect market values.
HOW THE FUNDS REPORT PERFORMANCE
From time to time the Funds may advertise their total return and yield. These
figures reflect past results and are not intended to predict future performance.
We will often compare the performance to the Index and other indices.
Total return measures the percentage change in the value of an investment over
time. It reflects all share price movements, distributions and expenses. It
assumes the reinvestment of all distributions. Average annual total return is a
measure of the yearly changes in the value of the investment. It is the constant
compound rate of return, which, if applied to the investment each year, would
result in the actual total return over that time. Other total return figures we
show may differ. We may base them on non-standard periods. We may also show
aggregate or cumulative returns.
Yield refers to the income generated by an investment in a Fund over a given
period. It is expressed as an annualized percentage rate. Each Fund calculates
yields according to an SEC standard for all stock and bond portfolios. Because
this differs from other accounting methods, the Funds may quote a yield not
equal to the income actually paid out by the Funds.
Performance information quoted for each Fund includes the effect of deducting
the Fund's expenses but may not include charges and expenses attributable to a
particular Contract. You cannot purchase shares of the Funds directly, but you
may allocate account value under your Contract to and from the Fund in
accordance with the terms of your Contract. You should carefully review the
appropriate Separate Account Prospectus for information on charges and expenses
relevant to your Contract. Excluding these charges from quotations of a Fund's
performance has the effect of increasing the performance quoted. You should bear
in mind the effect of these charges when comparing the Funds' performance to
those of other mutual funds.
ORGANIZATION AND
MANAGEMENT OF THE FUNDS
GENERAL OVERSIGHT OF OUR FUNDS. The Board of Trustees and officers meet
regularly to review each Fund's investments, performance, expenses and other
business affairs.
THE INVESTMENT MANAGER. The Investment Manager, Charles Schwab Investment
Management, Inc., manages each Fund's business affairs. Its actions are subject
to the authority of the Board of Trustees and officers of the Trust. The
Investment Manager also manages each Fund's investments. It places all orders
for each Fund's securities transactions. The Investment Manager, founded in
1989, is a wholly owned subsidiary of The Charles Schwab Corporation and is the
investment adviser and administrator of the Schwab mutual fund complex, which as
of August 16, 1996, had aggregate net assets in excess of $39 billion.
Geri Hom is the portfolio manager for the S&P 500 Fund and for the equity
portions of the High Growth Fund. She joined Schwab in March 1995 as Fund
Manager - Equities and currently manages the 5 Schwab index funds and the equity
portions of the 3 Schwab Asset Director(R) funds with combined assets of over
$1.7 billion. For 4 years before joining Schwab, she was a Principal for Wells
Fargo Nikko Investment Advisors. For the prior 7 years, she was Vice President
and Manager of the Domestic Equity Fund Management Group for Wells Fargo Nikko.
Andrea Regan is the portfolio manager for the bond portion of the High Growth
Fund. She joined Schwab in January 1991 and is currently Fund Manager - Fixed
Income. She currently manages 3 money market funds and 2 bond funds with
combined assets of approximately $3 billion.
Stephen B. Ward, Senior Vice President and Chief Investment Officer, has overall
responsibility for the day-to-day operations of the Funds. He is the supervising
Portfolio Manager for the Investment Manager.
TRANSFER AGENT AND SHAREHOLDER SERVICES. Schwab, 101 Montgomery Street, San
Francisco, California 94104, serves as shareholder services agent, transfer
agent and distributor for the Funds. Schwab was established in 1971 and is one
of America's largest discount brokers. The firm provides low-cost securities
brokerage and related financial services to over 3.3 million active customer
accounts and has over 230 branch offices. Schwab also offers convenient access
to financial information services and provides products and services that help
investors make investment decisions. Schwab is a wholly owned subsidiary of The
Charles Schwab Corporation. Charles R. Schwab is the founder, Chairman, Chief
Executive Officer and a Director of The Charles Schwab Corporation. As a result
of his beneficial ownership interests in and other relationships with The
Charles Schwab Corporation and its affiliates, Mr. Schwab may be deemed to be a
controlling person of Schwab and the Investment Manager.
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<PAGE> 14
THE SUB-ADVISER. The Investment Manager has retained Symphony Asset Management,
Inc. to serve as Sub-Adviser to the High Growth Fund. The Sub-Adviser, will
recommend to the Investment Manager the asset mix within the defined ranges for
the Fund. The Sub-Adviser employs a Tactical Asset Allocation model to measure
relative values among asset categories. Using this model, the Sub-Adviser
recommends asset allocations it believes will provide the highest returns for a
given level of risk. The Sub-Adviser does not recommend the purchase or sale of
individual securities.
The Sub-Adviser was established in 1994 as a wholly-owned subsidiary of BARRA,
Inc. ("BARRA"). BARRA, founded in 1975, provides innovative analytical models,
software and services that enable its more than 800 clients in 30 countries to
make superior investment decisions. BARRA's software and services analyze
equity, fixed income, currency and other financial markets. The Sub-Adviser
presently serves as Sub-Adviser to two other investment companies and manages
directly and indirectly over $700 million in institutional and private account
assets.
OPERATING FEES AND EXPENSES
The Investment Manager provides investment management services under the terms
of its Investment Advisory and Administration Agreement with the Trust. For
these services, it is entitled to a graduated annual fee payable monthly from
each Fund. For the High Growth Fund the rate is 0.74% of the first $1 billion of
its average daily net assets; 0.69% of the next $1 billion; and 0.64% of net
assets over $2 billion. For the S&P 500 Fund, the rate is 0.36% of the first $1
billion of its average daily net assets; 0.33% of the next $1 billion; and 0.31%
of net assets over $2 billion.
The Investment Manager guarantees that, through at least July 1, 1997, the
management fees for the High Growth Fund will not exceed 0.60% of its average
daily net assets. Likewise, for the S&P 500 Fund, the management fees will not
exceed 0.20% of its average daily net assets.
The Investment Manager and Schwab also guarantee that, through at least July 1,
1997, total operating expenses of the High Growth Fund will not exceed 0.75% of
its average daily net assets and total operating expenses of the S&P 500 Fund
will not exceed 0.35% of its average daily net assets. For purposes of this
guarantee, "operating expenses" do not include interest expenses, taxes, foreign
taxes paid or withheld and capital items such as costs of purchase or sale of
portfolio securities, including brokerage fees or commissions. The effect of
this voluntary expense limitation is to maintain or increase total return to
shareholders.
The Investment Manager pays the Sub-Adviser an annual fee, payable monthly,
ranging from 0.08% to 0.02% of the High Growth Fund's combined average daily net
assets, declining as assets increase. The Sub-Adviser does not receive
compensation directly from the High Growth Fund.
Schwab serves as the distributor for the Funds but receives no compensation for
this service. The High Growth Fund's custodian is State Street Bank, and the S&P
500 Fund's custodian is PNC Bank, NA.
OTHER EXPENSES. The Trust pays the expenses of each Fund's operations. These
expenses include the fees and expenses for independent accountants, legal
counsel and custodians; the costs of maintaining books and records of account;
the fees and expenses of qualifying the Trust and its shares for distribution
under federal and state securities laws; and industry association membership
dues. The Funds seek to keep transaction costs and other expenses low. These
expenses generally will be allocated among the Trust's investment portfolios on
the basis of relative net assets at the time the expense is incurred. However,
such expenses directly attributable to a particular Fund will be charged to that
Fund.
FUND BROKERAGE. When placing orders for each Fund's securities transactions, the
Investment Manager uses its judgment to obtain the best price and execution. It
considers the full range and quality of brokerage services available in making
these determinations. For securities transactions in which Schwab is not a
principal, the Investment Manager may use Schwab or other qualified affiliated
brokers or dealers to execute each Fund's transactions. To do so, it must
reasonably believe that commissions or prices paid to and transaction quality
received from Schwab or other qualified affiliated brokers or dealers will be at
least comparable to those available from qualified non-affiliated brokers or
dealers.
GENERAL INFORMATION
The Trust was organized as a business trust under the laws of Massachusetts on
January 21, 1994 and may issue an unlimited number of shares of beneficial
interest in one or more investment portfolios or series ("Series"). Currently, 3
Series are offered. The Board of Trustees may authorize the issuance of shares
of additional Series, if it deems it desirable. Shares within each Series have
equal, noncumulative voting rights, and have equal rights as to within
distributions, assets and liquidation.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. The Trust is not required to hold annual
shareholders' meetings. It will, however, hold special meetings as required or
deemed
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<PAGE> 15
desirable by the Board of Trustees for purposes such as changing a Fund's
fundamental policies, electing or removing Trustees, or approving or amending an
investment advisory agreement. In addition, a Trustee may be removed by
shareholders at a special meeting called upon written request of shareholders
owning in the aggregate at least 10% of the outstanding shares of the Trust. The
Funds acknowledge that the voting rights held by Participating Insurance
Companies and their Separate Accounts will be passed through to Contract owners.
Contract owners will vote by Series and not in the aggregate (for example, when
voting to approve the investment advisory agreement), except when voting in the
aggregate is permitted under the 1940 Act, such as for the election of Trustees.
S&P 500 LICENSE. The S&P 500 Fund is not sponsored, endorsed, sold or promoted
by Standard & Poor's ("S&P"). S&P makes no representation or warranty, express
or implied, to the shareholders of the S&P 500 Fund or any member of the public
regarding the advisability of investing in securities generally or in the S&P
500 Fund particularly or the ability of the Index to track general stock market
performance. S&P's only relationship to the S&P 500 Fund is the licensing of
certain trademarks and trade names of S&P and of the Index, which is determined,
composed and calculated by S&P without regard to the S&P 500 Fund. S&P has no
obligation to take the needs of the S&P 500 Fund or its shareholders into
consideration in determining, composing or calculating the Index. S&P is not
responsible for and has not participated in the determination of the prices and
amount of S&P 500 Fund shares, the timing of the issuance or sale of S&P 500
Fund shares or in the determination or calculation of the equation by which the
S&P 500 Fund's shares are to be converted into cash. S&P has no obligation or
liability in connection with the administration, marketing or trading of the S&P
500 Fund's shares.
S&P does not guarantee the accuracy and/or the completeness of the Index or any
data included therein, and S&P shall have no liability for any errors, omissions
or interruptions therein. S&P makes no warranty, express or implied, as to
results to be obtained by the S&P 500 Fund, its shareholders or any other person
or entity from the use of the Index or any data included therein. S&P makes no
express or implied warranties and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
Index or any data included therein. Without limiting any of the foregoing, in no
event shall S&P have any liability for any special, punitive, indirect or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR
THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE
LAWFULLY MADE.
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CROSS REFERENCE SHEET
PART B
SCHWAB ANNUITY PORTFOLIOS
<TABLE>
<CAPTION>
<S> <C>
Statement of Additional
Part B Item Information Caption
- ----------- -----------------------
Cover Page Cover Page
Table of Contents Table of Contents
General Information and History General Information; The Benefits of International
Investing; Indexing and the Schwab Index Funds;
Other Information
Investment Objectives and Policies Investment Objectives
Management of the Fund Management of the Trust
Control Persons and Principal Holders of Securities Management of the Trust
Investment Advisory and Other Services Management of the Trust
Brokerage Allocation and Other Practices Portfolio Transactions and Turnover
Capital Stock and Other Securities General Information; Investment Objectives
Purchase, Redemption and Pricing of Securities Being Offered Share Price Calculation; Purchase and Redemption
of Shares
Tax Status Distributions and Taxes
Underwriters Management of the Trust
Calculation of Performance Data Yield; How the Funds Reflect Performance
Financial Statements Financial Statements
</TABLE>
<PAGE> 17
STATEMENT OF ADDITIONAL INFORMATION
SCHWAB ANNUITY PORTFOLIOS
101 Montgomery Street, San Francisco, CA 94104
SCHWAB MONEY MARKET PORTFOLIO
SCHWAB ASSET DIRECTOR(R) - HIGH GROWTH PORTFOLIO
SCHWAB S&P 500 PORTFOLIO
[ ]
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectuses, dated April 29, 1996 (as amended
from time to time) for the Schwab Money Market Portfolio (the "Money Market
Fund"), and the joint Prospectus dated September 30, 1996 (as amended from time
to time), for the Schwab Asset Director-High Growth Portfolio (the "High Growth
Fund") and the Schwab S&P 500 Portfolio (the "S&P 500 Fund"), three separately
managed investment portfolios (collectively the "Funds") of Schwab Annuity
Portfolios (the "Trust"). The Funds are designed to serve as investment vehicles
for variable annuity contracts ("Contracts") issued through separate accounts
("Separate Accounts") of participating life insurance companies ("Participating
Insurance Companies").
These Funds are intended for retirement savings or other long-term
investment purposes. In the future, shares of the Funds may be offered to other
Participating Insurance Companies and their Separate Accounts as an investment
vehicle for variable life insurance policies and to qualified pension and
retirement plans ("Plans"). To obtain a free copy of the Prospectuses, please
contact the Schwab Annuity Service Center at Charles Schwab & Co., Inc.
("Schwab") at 800-838-0650 or P.O. Box 7785, San Francisco, CA 94120-9420; in
New York State call 800-838-0649 or write P.O. Box 7806, San Francisco, CA
94120-9327.
TABLE OF CONTENTS
<TABLE>
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Page
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INVESTMENT OBJECTIVES......................................................................................... 2
MANAGEMENT OF THE TRUST....................................................................................... 31
PORTFOLIO TRANSACTIONS AND TURNOVER........................................................................... 38
DISTRIBUTIONS AND TAXES....................................................................................... 39
SHARE PRICE CALCULATION....................................................................................... 42
HOW THE FUNDS REFLECT PERFORMANCE............................................................................. 43
YIELD......................................................................................................... 43
THE BENEFITS OF INTERNATIONAL INVESTING....................................................................... 44
INDEXING AND THE SCHWAB INDEX FUNDS........................................................................... 45
GENERAL INFORMATION........................................................................................... 46
PURCHASE AND REDEMPTION OF SHARES............................................................................. 48
OTHER INFORMATION............................................................................................. 48
APPENDIX - RATINGS OF INVESTMENT SECURITIES................................................................... 49
FINANCIAL STATEMENTS.......................................................................................... F-1
</TABLE>
<PAGE> 18
INVESTMENT OBJECTIVES
SCHWAB MONEY MARKET PORTFOLIO
The Money Market Fund's investment objective is maximum current income
consistent with liquidity and stability of capital.
SCHWAB ASSET DIRECTOR(R)-
HIGH GROWTH PORTFOLIO
The investment objective of the High Growth Fund is to provide high
capital growth with less volatility than an all-stock portfolio. This Fund
provides significant exposure to various stock categories, including domestic
large and small company stocks, and international stocks.
SCHWAB S&P 500 PORTFOLIO
The S&P 500 Fund's investment objective is to track the price and
dividend performance (total return) of common stocks of United States companies,
as represented by the S&P 500 Index(R).
The investment objectives stated above for each of the Funds, along
with certain investment restrictions adopted by the Funds, are fundamental and
cannot be changed without approval by holders of a majority of the Funds'
outstanding voting shares, as defined in the Investment Company Act of 1940 (the
"1940 Act").
INVESTMENT TECHNIQUES
USED BY THE MONEY MARKET FUND
EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES
Before investing in Eurodollar certificates of deposit, the Money
Market Fund will consider their marketability, possible restrictions on
international currency transactions and any regulations imposed by the domicile
country of the foreign issuer. Eurodollar certificates of deposit may not be
subject to the same regulatory requirements as certificates of deposit issued by
U.S. banks and associated income may be subject to the imposition of foreign
taxes.
Investments in securities of foreign issuers or securities principally
traded overseas may involve certain special risks due to foreign economic,
political and legal developments, including expropriation of assets or
nationalization, imposition of withholding taxes on dividend or interest
payments, and possible difficulty in obtaining and enforcing judgments against
foreign entities.
SECTION 4(2) PAPER
Commercial paper and other securities are issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as
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<PAGE> 19
amended ("Section 4(2) paper"). Federal securities laws restrict the disposition
of Section 4(2) paper. Section 4(2) paper generally is sold to institutional
investors, such as the Fund, who agree that they are purchasing the paper for
investment and not for public distribution. Any resale by the purchaser must be
in an exempt transaction and may be accomplished in accordance with Rule 144A.
Section 4(2) paper normally is resold to other institutional investors such as
the Money Market Fund through or with the assistance of the issuer or investment
dealers who make a market in the Section 4(2) paper, thus providing liquidity.
Because it is not possible to predict with assurance exactly how this market for
Section 4(2) paper sold and offered under Rule 144A will continue to develop,
Charles Schwab Investment Management, Inc. (the "Investment Manager"), pursuant
to guidelines approved by the Board of Trustees, will carefully monitor the
Money Market Fund's investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
ASSET-BACKED COMMERCIAL PAPER
AND OTHER SECURITIES
The Money Market Fund can invest a portion of its assets in
asset-backed commercial paper and other money market fund Eligible Securities.
(See Money Market Investment Policies and Restrictions.) The credit quality of
most asset-backed commercial paper depends primarily on the credit quality of
the assets underlying such securities, how well the entity issuing the security
is insulated from the credit risk of the originator (or any other affiliated
entities) and the amount and quality of any credit support provided to the
securities.
Asset-backed commercial paper is often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support. 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.
Bank notes are notes used to represent debt obligations issued by banks
in large denominations.
MONEY MARKET FUND INVESTMENT
POLICIES AND RESTRICTIONS
Except as otherwise noted, the restrictions below are fundamental and
cannot be changed without approval of the holders of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Money Market
Fund.
THE MONEY MARKET FUND MAY NOT:
(1) Purchase securities or make investments other than in accordance with
its investment objective and policies.
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<PAGE> 20
(2) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of its assets would be
invested in securities of that issuer.
(3) Purchase more than 10% of any class of securities of any issuer. All
debt securities and all preferred stocks are each considered as one
class.
(4) Concentrate 25% or more of the value of its assets in any one industry;
provided, however, that the Money Market Fund 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 Money Market 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.
(5) Invest more than 5% of its total net assets in securities of issuers
(other than obligations of, or guaranteed by, the U.S. government, its
agencies or instrumentalities) that, with their predecessors, have a
record of less than three years of continuous operation.
(6) Enter into repurchase agreements if, as a result thereof, more than 10%
of its net assets valued at the time of the transaction would be
subject to repurchase agreements maturing in more than seven days and
invested in securities restricted as to disposition under the federal
securities laws (except commercial paper issued under Section 4(2) of
the Securities Act of 1933, as amended, hereinafter the "1933 Act").
The Money Market Fund will invest no more than 10% of its net assets in
illiquid securities.
(7) Invest more than 5% of its total assets in securities restricted as to
disposition under the federal securities laws (except commercial paper
issued under Section 4(2) of the 1933 Act).
(8) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the Trust or its Investment Manager
individually own beneficially more than 1/2 of 1% of the securities of
that issuer and together beneficially own more than 5% of the
securities of such issuer.
(9) Invest in commodities or commodity contracts, including futures
contracts, real estate or real estate limited partnerships, although it
may invest in securities which are secured by real estate and
securities of issuers which invest or deal in real estate.
(10) Invest for the purpose of exercising control or management of another
issuer.
(11) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of
assets.1
- ------------------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" in this Statement of Additional Information
for an exception to this investment restriction.
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<PAGE> 21
(12) Make loans to others, except the Money Market Fund may (i) purchase a
portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) that are publicly
distributed or customarily purchased by institutional investors, and
(ii) lend its portfolio securities (up to one-third of the Money Market
Fund's total assets) in accordance with its investment objectives and
policies.
(13) Borrow money except as a temporary measure for extraordinary or
emergency purposes and then only in an amount up to one-third of the
value of its total assets in order to meet redemption requests without
immediately selling any portfolio securities. The Money Market Fund
will not borrow for leverage purposes or purchase securities or make
investments while reverse repurchase agreements or borrowings are
outstanding. If, for any reason, the current value of the Money Market
Fund's total net assets falls below an amount equal to three times the
amount of its indebtedness from money borrowed, the Money Market Fund
will, within three business days, reduce its indebtedness to the extent
necessary.
(14) Write, purchase or sell puts, calls or combinations thereof.
(15) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the
clearance of transactions.
(16) Invest in interests in oil, gas, mineral leases or other mineral
exploration or development programs, although it may invest in the
securities of issuers which invest in or sponsor such programs.
(17) Underwrite securities issued by others except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
(18) Issue senior securities as defined in the 1940 Act.
Except for restrictions (4) and (13), if a percentage restriction is
adhered to at the time of investment, a later increase in percentage resulting
from a change in values or net assets will not be considered a violation.
The Money Market Fund will only purchase securities that present
minimal credit risks and which are First Tier or Second Tier Securities
(otherwise referred to as "Eligible Securities").1 An Eligible Security is:
(1) a security with a remaining maturity of 397 days or less: (a) that is
rated by the requisite nationally recognized statistical rating
organizations ("NRSROs") (currently Moody's Investors Service, Standard
& Poor's Corporation, Duff and Phelps Credit Rating Co., Fitch
Investors Service, Inc., Thomson Bankwatch, and, with respect to debt
issued by banks, bank holding companies, United Kingdom building
societies, broker-dealers and broker-dealers' parent companies, and
bank-supported debt, IBCA Limited and its affiliate, IBCA, Inc.)
designated by the
- -------------------------
1 See the description of the Trustees' deferred compensation plan under
"Management of the Trust" in this Statement of Additional Information
for an exception to this investment restriction.
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<PAGE> 22
Securities and Exchange Commission (the "SEC") in one of the two
highest rating categories for short-term debt obligations (the
requisite NRSROs being any two or, if only rated by one, that one
NRSRO), or (b) that itself was unrated by any NRSRO, but was issued by
an issuer that has outstanding a class of short-term debt obligations
(or any security within that class) meeting the requirements of
subparagraph 1(a) above that is of comparable priority and security;
(2) a security that at the time of issuance was a long-term security but
has a remaining maturity of 397 days or less and: (a) whose issuer
received a rating in one of the two highest rating categories from the
requisite NRSROs for short-term debt obligations with respect to a
class of short-term debt obligations (or any security within that
class) that is now comparable in priority and security with the subject
security or (b) that has long-term ratings from the requisite NRSROs
that are in one of the two highest categories; or
(3) a security not rated by an NRSRO but deemed by the Investment Manager,
pursuant to guidelines adopted by the Board of Trustees, to be of
comparable quality to securities described in (1) and (2) and to
represent minimal credit risks.
A First Tier Security is any Eligible Security that carries (or other
relevant securities issued by its issuer carry) top NRSRO ratings from at least
two NRSROs (a single top rating is sufficient if only one NRSRO rates the
security), or that the Investment Manager has determined, pursuant to guidelines
adopted by the Board of Trustees, to be of comparable quality to such a
security. A Second Tier Security is any other Eligible Security.
The Money Market Fund will limit its investments in the First Tier
Securities of any one issuer to no more than 5% of its assets. (Repurchase
agreements collateralized by non-Government securities will be taken into
account when making this calculation.) Moreover, the Money Market Fund's total
holdings of Second Tier Securities will not exceed 5% of its assets, with
investment in the Second Tier Securities of any one issuer being limited to the
greater of 1% of the Money Market Fund's assets or $1 million. In addition, the
underlying securities involved in repurchase agreements collateralized by
non-Government securities will be First Tier Securities at the time the
repurchase agreements are executed.
As noted above, the Money Market Fund will not purchase securities of
any issuer (other than obligations of, or guaranteed by, the U.S. Government,
its agencies or instrumentalities) if, as a result thereof, more than 5% of the
value of its assets would be invested in securities of that issuer. However,
pursuant to an exception under the 1940 Act, the Money Market Fund may invest up
to 25% of the value of its total assets in First Tier securities of a single
issuer for a period of up to 3 Business Days after the purchase thereof.
Also as noted above, the Money Market Fund may not borrow money except
as a temporary measure for extraordinary or emergency purposes. Such borrowing
will magnify declines as well as increases in the net asset value of the Money
Market Fund's shares and in the net yield on the Money Market Fund's
investments. Borrowing also increases the Money Market Fund's exposure to
capital risk.
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<PAGE> 23
INVESTMENT TECHNIQUES USED
BY THE HIGH GROWTH FUND
AND THE S&P 500 FUND
FOREIGN INVESTMENTS
The High Growth Fund expects to invest in stocks of foreign issuers.
Investing in foreign issuers involves certain special considerations, including
those set forth below, which are not typically associated with investing in U.S.
issuers. Since investments in the securities of foreign issuers are usually made
and held in foreign currencies, and since the High Growth Fund may hold cash in
foreign currencies, they may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversions between various currencies. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange market as well as by political and
economic factors.
Since foreign companies are not subject to uniform accounting, auditing
and financial reporting standards, practices and requirements comparable to
those applicable to U.S. companies, there may be less publicly available
information about a foreign company than about a U.S. company. Securities of
foreign companies have less volume, are less liquid and are more volatile than
securities of U.S. companies. Fixed commissions on foreign securities exchanges
are generally higher than negotiated commissions on U.S. exchanges, although the
High Growth Fund endeavors to achieve the most favorable net results on their
portfolio transactions. There is generally less government supervision and
regulation of foreign securities exchanges, brokers, dealers and listed
companies than in the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Such delays in settlement could result
in temporary periods when a portion of the assets of the High Growth Fund is
uninvested and no return is earned thereon. The inability to make intended
security purchases due to settlement problems could cause the High Growth Fund
to miss attractive investment opportunities. Losses to the High Growth Fund
arising out of the inability to fulfill a contract to sell such securities could
result in potential liability to the High Growth Fund.
In addition, with respect to those countries in which the High Growth
Fund may invest or other countries which may have a significant impact on the
companies in which the High Growth Fund may invest, there is the possibility of
expropriation or confiscatory taxation, political or social instability,
diplomatic developments, change of government or war which could affect the High
Growth Fund's investments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
The High Growth Fund may invest up to 5% of its total assets in
companies located in developing countries. Compared to the United States and
other developed countries, developing countries may have relatively unstable
governments, economies based on only a few industries and securities markets
that trade a small number of securities. Prices on these
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<PAGE> 24
exchanges tend to be volatile, and securities in these countries have
historically offered greater potential for gain (as well as loss) than
securities of companies located in developed countries.
Hong Kong. In addition to the risks discussed above, it is impossible
to currently foresee what risk, if any, may exist to the High Growth Fund's
investments as a result of the planned 1997 incorporation of the British Crown
Colony of Hong Kong into the People's Republic of China. Shareholders should
note that the risks discussed above may increase depending on political and
economic developments as the scheduled time for the change in government in Hong
Kong draws nearer.
DEPOSITARY RECEIPTS
The High Growth Fund may invest up to 5% of its total assets in
American Depositary Receipts and European Depositary Receipts (ADRs and EDRs)
which are receipts representing ownership of shares of a foreign-based issuer
held in trust by a bank or similar financial institution. These are designed for
U.S. and European securities markets as alternatives to purchasing underlying
securities in their corresponding national markets and currencies. ADRs and EDRs
can be sponsored or unsponsored. Sponsored ADRs and EDRs are certificates in
which a bank or financial institution participates with a custodian. Issuers of
unsponsored ADRs and EDRs are not contractually obligated to disclose material
information in the United States. Therefore, there may not be a correlation
between such information and the market value of the unsponsored ADR or EDR.
OPTIONS ON SECURITIES
Writing Covered Options. Both the High Growth Fund and the S&P 500 Fund
may write (sell) covered call and put options on any securities in which they
may invest. The High Growth Fund and S&P 500 Fund may purchase and write such
options on securities that are listed on domestic or foreign securities
exchanges or traded in the over-the-counter market. All call options written by
the High Growth Fund and S&P 500 Fund are covered, which means that the High
Growth Fund and S&P 500 Fund will own the securities subject to the option so
long as the option is outstanding. The purpose of writing covered call options
is to realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, the High Growth Fund and S&P 500 Fund may forego the opportunity to
profit from an increase in the market price of the underlying security.
All put options written by the High Growth Fund and S&P 500 Fund will
be covered, which means that each of the High Growth Fund and S&P 500 Fund will
have deposited with its custodian cash, U.S. government securities or other
high-grade debt securities (i.e., securities rated in one of the top three
categories by Moody's Investor Service ("Moody's") or Standard & Poor's
Corporation ("S&P") or, if unrated, determined by the High Growth Fund and S&P
500 Funds' Investment Manager to be of comparable credit quality) with a value
at least equal to the exercise price of the put option. The purpose of writing
such options is to generate additional income for the High Growth Fund and S&P
500 Fund. However, in return for the option premium, the High Growth Fund and
S&P 500 Fund accept the risk that they may be required to purchase the
underlying securities at a price in excess of the securities market value at the
time of purchase.
The High Growth Fund and S&P 500 Fund may terminate their obligations
under a written call or put option by purchasing an option identical to the one
it has written. Such
8
<PAGE> 25
purchases are referred to as "closing purchase transactions."
Purchasing Options. The High Growth Fund and S&P 500 Fund may purchase
put and call options on any securities in which they may invest or options on
any securities index based on securities in which they may invest. The High
Growth Fund and S&P 500 Fund may also enter into closing sale transactions in
order to realize gains or minimize losses on options they have purchased.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option, since, with regard to certain options, the writer may be
assigned an exercise notice at any time prior to the termination of the
obligation. Whether or not an option expires unexercised, the writer retains the
amount of the premium. This amount may, in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer experiences a profit or
loss from the sale of the underlying security. If a put option is exercised, the
writer must fulfill its obligation to purchase the underlying security at the
exercise price, which will usually exceed the then market value of the
underlying security.
The purchase of a call option would entitle the High Growth Fund and
S&P 500 Fund, in return for the premium paid, to purchase specified securities
at a specified price during the option period. The High Growth Fund and S&P 500
Fund would ordinarily realize a gain if, during the option period, the value of
such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the High Growth Fund and S&P 500 Fund would realize
either no gain or a loss on the purchase of the call option.
Risks Associated With Options Transactions. There is no assurance that
a liquid secondary market on a domestic or foreign options exchange will exist
for any particular exchange-traded option or at any particular time. If the High
Growth Fund and S&P 500 Fund are unable to effect a closing purchase transaction
with respect to covered options they have written, the High Growth Fund and S&P
500 Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if the High Growth Fund and S&P 500 Fund are unable to effect a
closing sale transaction with respect to options they have purchased, they would
have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation (the "OCC") may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), although
outstanding options on that exchange that had been issued by the OCC as a result
of trades on that exchange would continue to be exercisable in accordance with
their terms.
The High Growth Fund and S&P 500 Fund may purchase and sell both
options that are traded on U.S. and foreign exchanges and options
9
<PAGE> 26
traded over-the-counter with broker-dealers who make markets in these options.
The ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the High Growth Fund and
S&P 500 Fund will treat purchased over-the-counter options and all assets used
to cover written over-the-counter options as illiquid securities, except that
with respect to options written with primary dealers in U.S. government
securities pursuant to an agreement requiring a closing purchase transaction at
a formula price, the amount of illiquid securities may be calculated with
reference to a formula approved by the staff of the SEC. Both the High Growth
Fund and S&P 500 Fund will write or purchase an option only where the market
value of that option, when aggregated with the market value of all other options
transactions made on behalf of the Funds, does not exceed 5% of the High Growth
Fund's and S&P 500 Fund's total assets.
FOREIGN CURRENCY TRANSACTIONS
Forward Foreign Currency Exchange Contracts. The High Growth Fund may
enter into forward foreign currency exchange contracts in several circumstances.
The High Growth Fund may engage in foreign currency exchange transactions to
protect against uncertainty in the level of future exchange rates. The High
Growth Fund expects to engage in foreign currency exchange transactions in
connection with the purchase and sale of portfolio securities (so-called
"transaction hedging") and to protect the value of specific portfolio positions
("position hedging").
For transaction hedging purposes, the High Growth Fund enters into
foreign currency transactions with respect to specific receivables or payables
of the funds arising in connection with the purchase or sale of portfolio
securities. By transaction hedging, the High Growth Fund will attempt to protect
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the applicable foreign currency during the period
between the date on which the security is purchased or sold, and the
transaction's settlement date. When engaging in position hedging, the High
Growth Fund enters into foreign currency exchange transactions to protect
against a decline in the values of the foreign currencies in which portfolio
securities are denominated (or against an increase in the value of currency for
securities which the High Growth Fund expects to purchase).
When engaging in position and/or transaction hedging, the High Growth
Fund may purchase or sell foreign currencies on a spot (or cash) basis at the
prevailing spot rate and may also enter into contracts to purchase or sell
foreign currencies at a future date ("forward contracts") and purchase and sell
foreign currency futures contracts ("futures contracts"). The High Growth Fund
may also purchase exchange-listed and over-the-counter call and put options on
futures contracts and on foreign currencies. A put option on a futures contract
gives the High Growth Fund the right to assume a short position in the futures
contract until expiration of the option. A put option on currency gives the High
Growth Fund the right to sell a currency at an exercise price until the
expiration of the option. A call option on a futures contract gives the High
Growth Fund the right to assume a long position in the futures contract until
the expiration of the option. A call option on currency gives the High Growth
Fund the right to purchase a currency at the exercise price until the expiration
of the option.
Hedging transactions involve costs and may result in losses, and the
ability of the High Growth Fund to engage in hedging transactions
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<PAGE> 27
may be limited by tax considerations. Transaction and position hedging do not
eliminate fluctuations in the underlying prices of the securities which the High
Growth Fund owns or expects to purchase or sell. They simply establish a rate of
exchange that one can achieve at some future point in time. Additionally,
although these techniques tend to minimize the risk of loss due to decline in
the value of the hedged currency, they tend to limit any potential gain that
might result from an increase in the value of such currency.
Although the contracts are not presently regulated by the Commodity
Futures Trading Commission (the "CFTC"), the CFTC may in the future assert
authority to regulate these contracts. In such event, the ability of the High
Growth Fund to utilize forward foreign currency exchange contracts may be
restricted.
The High Growth Fund will enter into a forward foreign currency
exchange contract only when the market value of such contract, when aggregated
with the market value of all other such contracts held by the High Growth Fund,
does not exceed 5% of the High Growth Fund's total assets.
The High Growth Fund generally will not enter into a forward contract
with a term of greater than one year.
While the High Growth Fund will enter into forward contracts to reduce
currency exchange rate risks, transactions in such contracts involve certain
other risks. Thus, while the High Growth Fund may benefit from such
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the High Growth Fund than if it had not engaged in any
such transactions. Moreover, there may be imperfect correlation between the High
Growth Portfolio's portfolio holdings of securities denominated in a particular
currency and forward contracts entered into by the High Growth Fund. Such
imperfect correlation may cause the High Growth Fund to sustain losses, which
will prevent the High Growth Fund from achieving a complete hedge or expose the
High Growth Fund to risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The High Growth
Fund may write covered put and call options and purchase put and call options on
foreign currencies for the purpose of protecting against declines in the dollar
value of portfolio securities and against increases in the dollar cost of
securities to be acquired. A call option written by the High Growth Fund
obligates the High Growth Fund to sell specified currency to the holder of the
option at a specified price at any time before the expiration date. A put option
written by the High Growth Fund would obligate the High Growth Fund to purchase
specified currency from the option holder at a specified time before the
expiration date. The writing of currency options involves a risk that the High
Growth Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
The High Growth Fund may terminate their obligations under a call or
put option by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." The High Growth
Fund would also be able to enter into closing sale transactions in order to
realize gains or minimize losses on options purchased by the High Growth Fund.
The purchase of a call option would entitle the High Growth Fund, in
return for the premium paid, to purchase specified currency at a specified price
during the option period. The
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<PAGE> 28
High Growth Fund would ordinarily realize a gain or a loss on the purchase of
the call option.
The purchase of a put option would entitle the High Growth Fund, in
exchange for the premium paid, to sell specific currency at a specified price
during the option period. The purchase of protective puts is designed merely to
offset or hedge against a decline in the dollar value of the High Growth Fund's
portfolio securities due to currency exchange rate fluctuations. The High Growth
Fund would ordinarily realize a gain, if, during the option period, the value of
the underlying currency decreased below the exercise price sufficiently to more
than cover the premium and transaction costs; otherwise the High Growth Fund
would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of the underlying currency.
Special Risks Associated With Options on Foreign Currency. An exchange
traded option position may be closed out only on an options exchange that
provides a secondary market for an option of the same series. Although the High
Growth Fund will generally purchase or write only those options for which there
appears to be an active secondary market, there is no assurance that a liquid
secondary market on an exchange will exist for any particular option or at any
particular time. For some options, no secondary market on an exchange may exist.
In such event, it might not be possible to effect closing transactions in
particular options, with the result that the High Growth Fund would have to
exercise its options in order to realize any profit and would incur transaction
costs upon the sale of underlying securities pursuant to the exercise of put
options. If the High Growth Fund, as a covered call option writer, is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying currency (or security denominated in that currency) until
the option expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the OCC inadequate. This could result in an exchange instituting special
procedures that may interfere with the timely execution of customers' orders.
The High Growth Fund will purchase and write over-the-counter options
only to the extent consistent with its limitations on investments in illiquid
securities, as described in its Prospectus. Trading in over-the-counter options
is subject to the risk that the other party will be unable or unwilling to
close-out purchasing and writing activities.
FUTURES CONTRACTS
AND OPTIONS ON FUTURES CONTRACTS
Both the High Growth Fund and S&P 500 Fund may purchase and sell
various kinds of futures contracts and options on futures contracts. The futures
contracts may be based on various securities (such as U.S. government
securities), securities indices, foreign currencies and other financial
instruments and indices. All futures contracts entered into by the High Growth
Fund and S&P 500 Fund are traded on U.S. exchanges or boards of trade that are
licensed and regulated by the CFTC or on foreign exchanges. The High Growth Fund
and S&P 500 Fund are not permitted to engage in speculative futures trading.
Futures Contracts. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
for an agreed upon price during a designated month (or to deliver the final
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cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, the
High Growth Fund and S&P 500 Fund can seek, through the sale of futures
contracts, to offset a decline in the value of their current portfolio
securities. When rates are falling or prices are rising, the High Growth Fund
and S&P 500 Fund, through the purchase of futures contracts, can attempt to
secure better rates or prices than might later be available in the market when
they effect anticipated purchases. Similarly, the High Growth Fund can sell
futures contracts on a specified currency to protect against a decline in the
value of such currency and their portfolio securities that are denominated in
such currency. The High Growth Fund can purchase futures contracts on a foreign
currency to fix the price in U.S. dollars of a security denominated in such
currency that the High Growth Fund has acquired or expect to acquire.
Although futures contracts by their terms generally call for the actual
delivery or acquisition of underlying securities or the cash value of the index,
in most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take such delivery. The contractual
obligation is offset by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities or the cash value of
the index underlying the contractual obligations. The High Growth Fund and S&P
500 Fund may incur brokerage fees when they purchase or sell futures contracts.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting transactions, which may
result in a profit or a loss. While the High Growth Fund and S&P 500 Funds'
futures contracts on securities or currency will usually be liquidated in this
manner, the High Growth Fund and S&P 500 Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for them to do so. A clearing corporation associated with the
exchange on which futures on securities or currencies are traded guarantees
that, if still open, the sale or purchase will be performed on the settlement
date.
Options on Futures Contracts. The acquisition of put and call options
on futures contracts will give the High Growth Fund and S&P 500 Fund the right
(but not the obligation), for a specified price, to sell or to purchase,
respectively, the underlying futures contract at any time during the option
period. As the purchaser of an option on a futures contract, the High Growth
Fund and S&P 500 Fund obtain the benefit of the futures position if prices move
in a favorable direction but limit their risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
that may partially offset a decline in the value of the High Growth and S&P 500
Funds' assets. By writing a call option, the High Growth and S&P 500 Funds'
become obligated, in exchange for the premium, to sell a futures contract that
may have a value lower than the exercise price. Thus, the loss incurred by the
High Growth Fund and S&P 500 Fund in writing options on futures is potentially
unlimited and may exceed the amount of the premium received. The High Growth
Fund and S&P 500 Fund will incur transaction costs in connection with the
writing of options on futures.
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The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option on the same series.
There is no guarantee that such closing transactions can be effected. The High
Growth Fund and S&P 500 Funds' ability to establish and close out positions on
such options will be subject to the development and maintenance of a liquid
market.
Hedging Strategies With Futures. Hedging by use of futures contracts
seeks to establish more certainty than would otherwise be possible with respect
to the effective price, rate of return or currency exchange rate on portfolio
securities or securities that the High Growth Fund and S&P 500 Fund own or
propose to acquire.
Such futures contracts may include contracts for the future delivery of
securities held by the High Growth Fund and S&P 500 Fund or securities with
characteristics similar to those of the High Growth Fund and S&P 500 Funds'
portfolio securities. Similarly, the High Growth Fund may sell futures contracts
on currency in which its portfolio securities are denominated or in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency if there is an established historical pattern of correlation
between the two currencies. If, in the opinion of the Investment Manager, there
is a sufficient degree of correlation between price trends for the High Growth
Fund and S&P 500 Funds' portfolio securities and futures contracts based on
other financial instruments, securities indices or other indices, the High
Growth Fund and S&P 500 Fund may also enter into such futures contracts as part
of their hedging strategy. Although under some circumstances, prices of
securities in the High Growth Fund and S&P 500 Funds' portfolio may be more or
less volatile than prices of such futures contracts, the Investment Manager will
attempt to estimate the extent of this difference in volatility based on
historical patterns and to compensate for it by having the High Growth Fund and
S&P 500 Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a particular hedge against price changes affecting
the High Growth Fund and S&P 500 Funds' portfolio securities. When hedging of
this character is successful, any depreciation in the value of the portfolio
securities will be substantially offset by appreciation in the value of the
futures position. On the other hand, any unanticipated appreciation in the value
of the High Growth Fund and S&P 500 Funds' portfolio securities will be
substantially offset by a decline in the value of the futures position.
On other occasions, the High Growth Fund and S&P 500 Fund may take
"long" positions by purchasing such futures contracts. This would be done, for
example, when the High Growth Fund and S&P 500 Fund anticipate the subsequent
purchase of particular securities when they have the necessary cash but expect
the prices or currency exchange rates then available in the applicable market to
be less favorable than prices that are currently available.
When buying or selling futures contracts, a Fund must deposit an amount
of cash, cash equivalents, or liquid, high-quality debt instruments with its
broker equal to a fraction of the contract amount. This amount is known as
"initial margin" and is in the nature of a performance bond or good faith
deposit on the contract, which will be returned to the Fund upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin," will be
made at least daily as the price of the futures contract fluctuates and the
Fund's position in the contract becomes more or less valuable, a process known
as "marking-to-market."
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Regulations of the Commodities Futures Trading Commission ("CFTC")
applicable to the High Growth Fund and S&P 500 Fund generally require that all
of their futures transactions constitute "bona fide" hedging transactions. As a
result, a Fund normally will sell futures contracts to protect against a
decrease in the price of securities it owns but intends to sell or purchase
futures contracts to protect against an increase in the price of securities it
intends to purchase. In addition, the High Growth Fund and S&P 500 Fund may
purchase and sell futures contracts and options as a substitute for a comparable
market position in the underlying securities. Futures transactions need not
constitute "bona fide" hedging under CFTC regulations if the aggregate initial
margin and premiums required to establish such positions do not exceed 5% of
each Fund's net assets.
Risks Involved in Futures and Options Transactions. Futures and options
transactions involve risks which, in some strategies, can be substantial, due to
the low margin deposits required and the extremely high degree of leverage
involved in futures and options trading. However, to the extent the High Growth
Fund and S&P 500 Funds' futures and options practices are limited to hedging
purposes, the Investment Manager does not believe that the High Growth Fund and
S&P 500 Fund are subject to the degree of risk frequently associated with
futures and options transactions. To the extent the High Growth Fund and S&P 500
Fund engage in the use of futures and options on futures other than for hedging
purposes, the High Growth Fund and S&P 500 Fund may be subject to additional
risk.
Three principal areas of risk are present when futures and options
contracts are used even in a hedging context. First, there may not always be a
liquid secondary market for a futures or option contract at the time when a Fund
seeks to "close out" its position. If a Fund were unable to "close out" a
futures or option position and prices moved adversely, the Fund would have to
continue to make daily cash payments to maintain its required margin, and if the
Fund had insufficient cash to meet this requirement, it may have to sell
portfolio securities at a disadvantageous time. In addition, the Fund might be
required to deliver the securities underlying futures or options contracts it
holds. Both the High Growth Fund and S&P 500 Fund will seek to reduce the risk
that they will be unable to "close out" contracts by only entering into futures
or options contracts that are traded on national exchanges and for which there
appears to be a liquid secondary market.
It is also possible that changes in the prices of futures or options
contracts might correlate imperfectly, or not at all, with changes in the market
values of the securities being hedged. This situation could result from price
distortions in the futures or options markets due to, among other things, active
trading by speculators and use of offsetting "closing" transactions by other
investors seeking to avoid meeting additional margin deposit requirements. In
the event of significant market distortions, it is possible that the High Growth
Fund and S&P 500 Fund could lose money on futures or options contracts and
experience appreciation in the value of their portfolio securities, or vice
versa.
Finally, adverse market movements could cause the High Growth Fund and
S&P 500 Fund to lose up to their full investment in an options contract and/or
to experience substantial losses on an investment in a futures contract.
However, barring such significant market distortions, a similar result could be
expected were the Funds to invest directly in the securities being hedged. There
is also the risk of loss by either Fund of margin deposits in the event of
bankruptcy of a broker with whom the Funds have an open position in a futures
contract or option.
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The extent to which the High Growth Fund and S&P 500 Fund may purchase
and sell futures, options, equity index participations and index participation
contracts may be limited by the fact that each Fund intends to meet Internal
Revenue Code of 1986, as amended (the "Code"), requirements for qualification as
a regulated investment company. See "Federal Income Tax."
SWAPS
The High Growth Fund may enter into swaps on various securities (such
as U.S. government securities), securities indices, interest rates, prepayment
rates, foreign currencies or other financial instruments or indices in order to
protect the value of the High Growth Fund from interest rate fluctuations and to
hedge against fluctuations in the floating rate market in which the High Growth
Fund's investments are traded, for both hedging and non-hedging purposes. While
swaps are different from futures contracts (and options on futures contracts) in
that swap contracts are individually negotiated with specific counterparties,
the High Growth Fund will use swap contracts for purposes similar to the
purposes for which they use options, futures and options on futures. Those uses
of swap contracts (i.e., risk management and hedging) present the Fund with
risks and opportunities similar to those associated with options contracts,
futures contracts and options on futures. See "Futures Contracts and Options on
Futures Contracts" in this Statement of Information.
The High Growth Fund may enter into these transactions to manage their
exposure to changing interest rates and other market factors. Some transactions
may reduce the High Growth Fund's exposure to market fluctuations while others
may tend to increase market exposure.
The use of swaps involves investment techniques and risks different
from and potentially greater than those associated with ordinary fund securities
transactions. If the Investment Manager is incorrect in its expectations of
market values, interest rates, or currency exchange rates, the investment
performance of the High Growth Fund would be less favorable than it would have
been if this investment technique were not used. The High Growth Fund will only
invest in swaps up to 5% of its total assets.
PREFERRED STOCK
The High Growth Fund may invest in preferred stock. Preferred stock has
priority as to income and generally as to assets of the issuer; however, income
is usually limited to a definitive percentage regardless of the issuer's
earnings. Preferred stock usually has limited voting rights. The High Growth
Fund will only invest in preferred stock up to 5% of its net assets.
CONVERTIBLE SECURITIES
The High Growth Fund may invest up to 5% of its net assets in
securities that are convertible into common stock, including convertible bonds
that are investment grade, convertible preferred stocks and warrants. The S&P
500 Fund will not purchase convertible securities directly. It may, however,
hold convertible securities to the extent that such holdings are incident to its
ownership of common stocks.
Convertible bonds are issued with lower coupons than nonconvertible
bonds of the same quality and maturity, but they give holders the option to
exchange their bonds for a specific number of shares of the company's common
stock at a predetermined price. This structure allows the convertible bond
holder to participate in share price movements in the company's common stock.
The actual return on a convertible bond may exceed its stated yield if
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the company's common stock appreciates in value and the option to convert to
common shares becomes more valuable.
Convertible preferred stocks are nonvoting equity securities that pay a
fixed dividend. These securities have a convertible feature similar to
convertible bonds; however, they do not have a maturity date. Due to their
fixed-income features, convertible issues typically are more sensitive to
interest rate changes than the underlying common stock. In the event of
liquidation, bondholders would have claims on company assets senior to those of
stockholders; preferred stockholders would have claims senior to those of common
stockholders.
The High Growth Fund and S&P 500 Fund may invest in warrants. Warrants
entitle the holder to buy the issuer's stock at a specific price for a specific
period of time. The price of a warrant tends to be more volatile than, and does
not always track, the price of its underlying stock. Warrants are issued with
expiration dates. Once a warrant expires, it has no value in the market.
REAL ESTATE-RELATED INVESTMENTS
The High Growth Fund may invest up to 5% of its total assets in real
estate-related investments. Real estate-related instruments include real estate
investment trusts, commercial and residential mortgage-backed securities and
real estate financings. Real estate-related instruments are sensitive to factors
such as changes in real estate values and property taxes, interest rates, cash
flow of underlying real estate assets, overbuilding and the management skill and
creditworthiness of the issuer. Real estate-related instruments may also be
affected by tax and regulatory requirements, such as those relating to the
environment.
PRECIOUS METAL-RELATED INVESTMENTS
The High Growth Fund may invest up to 5% of its total assets in
precious metal-related investments. The High Growth Fund and the S&P 500 Fund
may invest in common stocks of domestic companies principally engaged in
precious metal-related activities which include companies principally engaged in
the extraction, processing, distribution or marketing of precious metals if at
the time of investment the Investment Manager considers that at least 50% of the
company's assets, revenues or profits are derived from the precious metal
industry. The High Growth Fund may also invest in securities of foreign
companies principally engaged in the precious metals industry. For further
disclosure on foreign securities, see "Foreign Investments" in this Statement of
Additional Information.
The High Growth Fund and the S&P 500 Fund may also invest in futures on
precious metals, such as gold futures, and options thereon. Such investments are
subject to the investment limitations for investments in futures and options for
the High Growth Fund and the S&P 500 Fund as set forth in "Futures Contracts and
Options on Futures Contracts" in this Statement of Additional Information.
Prices of precious metals can be expected to respond to changes in
rates of inflation and to perceptions of economic and political instability.
Historically, the prices of precious metals and of securities of companies
engaged in the precious metal-related activities may be subject to extreme
fluctuations, reflecting wider economic or political instability or for other
reasons.
U.S. GOVERNMENT SECURITIES
The High Growth Fund and S&P 500 Fund may purchase U.S. government
securities. Direct obligations of the U.S. government are
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supported by the full faith and credit of the U.S. Treasury. While obligations
of certain U.S. government agencies and instrumentalities are similarly backed,
those of others, such as the Federal National Mortgage Association and the
Student Loan Marketing Association, are only supported by the right of the
issuer to borrow from the U.S. Treasury, the discretionary authority of the U.S.
government to purchase the agency's obligations or the credit of the issuing
agency or instrumentality. There can be no assurance that the U.S. government
would provide financial support to U.S. government sponsored agencies or
instrumentalities if it were not obligated to do so by law. A Fund will invest
in U.S. government securities not backed by the full faith and credit of the
U.S. Treasury only when the Investment Manager is satisfied that the credit risk
with respect to their issuer is minimal.
GOVERNMENT
"MORTGAGE BACKED" SECURITIES
Among the U.S. government securities in which the High Growth Fund and
S&P 500 Fund may invest are government "mortgage-backed" (or government
guaranteed mortgage-related) securities. Mortgages backing the securities
purchased by the High Growth Fund and S&P 500 Fund include, among others,
conventional thirty-year fixed rate mortgages, graduated payment mortgages,
fifteen-year mortgages and adjustable rate mortgages. All of these mortgages can
be used to create pass-through securities. A pass-through security is formed
when mortgages are pooled together and undivided interests in the pool or pools
are sold. The cash flow from the mortgages is passed through to the holders of
the securities in the form of periodic payments of interest, principal and
prepayments (net of a service fee). Prepayments occur when the holder of an
individual mortgage prepays the remaining principal before the mortgage's
scheduled maturity date. As a result of the pass-through of prepayments of
principal on the underlying securities, mortgage-backed securities are often
subject to more rapid prepayment of principal then their stated maturity
indicates. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of pass-through certificates. Prepayment rates are
important because of their effect on the yield and price of the securities.
Accelerated prepayments adversely impact yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. The High Growth Fund and S&P 500 Fund may purchase
mortgage-related securities at a premium or at a discount. Principal and
interest payments on the mortgage-related securities are government guaranteed
to the extent described below. Such guarantees do not extend to the value or
yield of the mortgage-related securities themselves or of a Fund's shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the High Growth
Fund and S&P 500 Fund may purchase are the "modified pass-through" type, which
entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
The National Housing Act authorized GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The
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GNMA guarantee is backed by the full faith and credit of the U.S. government.
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. The FHLMC issues two types of mortgage
pass-through securities ("FHLMC Certificates"): mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble
GNMA Certificates in that each PC represents a pro rata share of all interest
and principal payments made and owed on the underlying pool. The FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return principal once
a year in guaranteed minimum payments. The expected average life of these
securities is approximately ten years. The FHLMC guarantee is not backed by the
full faith and credit of the U.S. government.
FNMA Securities. The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages insured by the
FHA. FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
and principal on FNMA Certificates. The FNMA guarantee is not backed by the full
faith and credit of the U.S. government.
OTHER ASSET-BACKED SECURITIES
The High Growth Fund may invest a portion of its assets in debt
obligations known as "Asset-Backed Securities" that are rated in one of the
three highest rating categories by a nationally recognized statistical rating
organization (e.g., Standard & Poor's Corporation or Moody's Investors Service,
Inc.) or, if not so rated, deemed to be of equivalent quality by the Investment
Manager pursuant to guidelines adopted by the Board of Trustees. The credit
quality of most Asset-Backed Securities depends primarily on the credit quality
of the assets underlying such securities, how well the entity issuing the
security is insulated from the credit risk of the originator (or any other
affiliated entities), and the amount and quality of any credit support provided
to 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. Asset-Backed Securities may be classified as
"Pass-Through Certificates" or "Collateralized Obligations."
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"Pass-Through Certificates" are asset-backed securities that represent
undivided fractional ownership interests in the underlying pool of assets.
Pass-Through Certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
Pass-Through Certificates represent ownership interests in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support.
Asset-Backed Securities issued in the form of debt instruments, also
known as Collateralized Obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The assets collateralizing such Asset-Backed Securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
Asset-Backed Securities and any credit support provided. As a result, although
payments on such Asset-Backed Securities are obligations of the issuers, in the
event of default on the underlying assets not covered by any credit support, the
issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related Asset-Backed Securities.
METHODS OF ALLOCATING
CASH FLOWS
While many Asset-Backed Securities are issued with only one class of
security, many others are issued in more than one class, each with different
payment terms. Multiple class Asset-Backed Securities are issued for two main
reasons. First, multiple classes may be used as a method of providing credit
support. This is accomplished typically through creation of one or more classes
whose right to payments on the Asset-Backed Security is made subordinate to the
right to such payments of the remaining class or classes. Second, multiple
classes may permit the issuance of securities with payment terms, interest rates
or other characteristics differing both from those of each other and from those
of the underlying assets. Examples include so-called "multi-tranche CMOs"
(collateralized mortgage obligations) with serial maturities such that all
principal payments received on the mortgages underlying the securities are first
paid to the class with the earliest stated maturity, and then sequentially to
the class with the next stated maturity), "Strips" (Asset-Backed Securities
entitling the holder to disproportionate interests with respect to the
allocation of interest and principal of the assets backing the security), and
securities with a class or classes having characteristics that mimic the
characteristics of non-Asset-Backed Securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
TYPES OF CREDIT SUPPORT
Asset-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on these underlying assets to make payments, such
securities may contain elements of credit support. 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
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approaches. Examples of Asset-Backed Securities with credit support arising out
of the structure of the transaction include "senior-subordinated securities"
(multiple class Asset-Backed Securities with certain classes subordinate to
other classes as to the payment of principal thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class) and Asset-Backed Securities that have "reserve funds" (where
cash or investments, sometimes funded from a portion of the initial payments on
the underlying assets, are held in reserve against future losses) or that have
been "overcollateralized" (where the scheduled payments on, or the principal
amount of, the underlying assets substantially exceed that required to make
payment on the Asset-Backed Securities and pay any servicing or other fees). 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.
CREDIT CARD RECEIVABLE SECURITIES
The High Growth Fund may invest in Asset-Backed Securities backed by
receivables from revolving credit card agreements ("Credit Card Receivable
Securities"). Most of the Credit Card Receivable Securities issued publicly to
date have been Pass-Through Certificates. In order to lengthen the maturity of
Credit Card Receivable Securities, most such securities provide for a fixed
period during which only interest payments on the underlying accounts are passed
through to the security holder and principal payments received on such accounts
are used to fund the transfer of additional credit card charges made on an
account to the pool of assets supporting the related Credit Card Receivable
Securities. The initial fixed period usually may be shortened upon the
occurrence of specified events that signal a potential deterioration in the
quality of the assets backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life of an issue of
Credit Card Receivable Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during the initial
period and the non-occurrence of specified events. Competitive and general
economic factors could adversely affect the rate at which new receivables are
created in an account and conveyed to an issuer, shortening the expected
weighted average life of the related Credit Card Receivable Security, and
reducing its yield. An acceleration in cardholders' payment rates or any other
event that shortens the period during which additional credit card charges on an
account may be transferred to the pool of assets supporting the related Credit
Card Receivable Security could have a similar effect on the weighted average
life and yield.
Credit card holders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holders the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on accounts. In addition, unlike most other Asset-Backed
Securities, accounts are unsecured obligations of the cardholder.
CERTIFICATES OF DEPOSIT
AND BANKERS' ACCEPTANCES
The High Growth Fund and S&P 500 Fund may invest in certificates of
deposit, which are certificates issued against funds deposited in a banking
institution for a specified period of time at a specified interest rate.
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
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maturity. Each Fund will only invest in certificates of deposit and bankers'
acceptances of banks having capital, surplus and undivided profits in excess of
$100 million.
COMMERCIAL PAPER
The High Growth Fund and S&P 500 Fund may invest in Commercial Paper,
which consists of short-term, unsecured promissory notes issued to finance
short-term credit needs. The High Growth Fund and S&P 500 Fund will only invest
in commercial paper that at the time of purchase is rated Prime-1 or Prime-2 by
Moody's, A-1 or A-2 by S&P, "Duff 2" or higher by Duff & Phelps, Inc. ("Duff"),
or "F2" or higher by Fitch Investors Services, Inc. ("Fitch") or if unrated by
Moody's, S&P, Duff or Fitch, is determined by the Investment Manager, using
guidelines approved by the Board of Trustees, to be at least equal in quality to
one or more of the above ratings.
OTHER INVESTMENT POLICIES
Securities that are acquired by the High Growth Fund outside the United
States and that are publicly traded in the the United States, on a foreign
securities exchange or in a foreign securities market are not considered by the
High Growth Fund to be illiquid assets provided that: (i) the High Growth Fund
acquire and hold the securities with the intention of reselling the securities
in the foreign trading market, (ii) the High Growth High Growth Fund reasonably
believes it can readily dispose of the securities in the foreign trading market
or for cash in the United States, or (iii) foreign market and current market
quotations are readily available. Investments may be in securities of foreign
issuers, whether located in developed or undeveloped countries. Investments in
foreign securities where delivery takes place outside the United States will
have to be made in compliance with any applicable United States and foreign
currency restrictions and tax laws (including laws imposing withholding taxes on
any dividend or interest income) and laws limiting the amount and types of
foreign investments. Changes of government administrations or of economic or
monetary policies, in the United States or abroad, or changed circumstances
regarding convertibility or exchange rates could result in investment losses for
the High Growth Fund. Investments in foreign securities may also subject the
High Growth Fund to losses due to nationalization, expropriation or differing
accounting practices and treatments. Moreover, investors should recognize that
foreign securities are often traded with less frequency and volume, and
therefore may have greater price volatility, than is the case with many U.S.
securities. Notwithstanding the fact that the High Growth Fund generally intends
to acquire the securities of foreign issuers where there are public trading
markets, investments by the High Growth Fund in the securities of foreign
issuers may tend to increase the risks with respect to the liquidity of the High
Growth Fund's portfolio and the its ability to meet a large number of
shareholder redemption requests should there be economic or political turmoil in
a country in which the High Growth Fund have a substantial portion of their
assets invested or should relations between the United States and foreign
countries deteriorate markedly. Furthermore, the reporting and disclosure
requirements applicable to foreign issuers may differ from those applicable to
domestic issuers, and there may be difficulties in obtaining or enforcing
judgments against foreign issuers.
Loans of Fund Securities. The High Growth Fund and S&P 500 Fund may
loan securities to qualified broker-dealers or other institutional investors
provided that such loans do not exceed one-third of the value of the High Growth
Fund and S&P 500 Funds' total assets at the time of the most recent loan, and
that the borrower deposits and maintains with the High
22
<PAGE> 39
Growth Fund and S&P 500 Fund cash collateral or U.S. government securities with
a value equal to 102% of the value of the securities loaned. The lending of
securities is a common practice in the securities industry. The High Growth Fund
and S&P 500 Fund will engage in security lending arrangements with the primary
objective of increasing the High Growth Fund and S&P 500 Funds' income through
investment of the cash collateral in short-term, interest-bearing obligations
but will do so only to the extent that the High Growth Fund and S&P 500 Fund
will not lose the tax treatment available to regulated investment companies. The
High Growth Fund and S&P 500 Fund will be entitled to all dividends or interest
on any loaned securities.
Repurchase Transactions. Repurchase agreements are instruments under
which a buyer acquires ownership of a security from a seller that agrees to
repurchase the security at a mutually agreed upon time and price (which price is
higher than the purchase price), thereby determining the yield during the
buyer's holding period. Under the 1940 Act, a repurchase agreement is deemed to
be the loan of money by a Fund to the seller, collateralized by the underlying
security. The interest rate is effective for the period of time in which the
High Growth Fund and S&P 500 Fund are invested in the agreement and is not
related to the coupon rate on the underlying security. Any repurchase agreements
entered into by either Fund will involve the Fund as the buyer and banks or
broker-dealers as sellers (repurchase agreements with broker-dealers will be
limited to obligations of the U.S. government, its agencies or
instrumentalities). The period of these repurchase agreements will usually be
short, from overnight to one week, and at no time will the High Growth Fund and
S&P 500 Fund invest in repurchase agreements for more than one year. However,
securities subject to repurchase agreements may have maturity dates in excess of
one year from the effective date of the repurchase agreements. The transaction
requires the initial collateralization of the seller's obligation with
securities having a market value, including accrued interest, equal to at least
102% of the dollar amount invested by the High Growth Fund and S&P 500 Fund,
with the value marked-to-market daily to maintain 100% coverage. A default by
the seller might cause the High Growth Fund and S&P 500 Fund to experience a
loss or delay in the liquidation of the collateral securing the repurchase
agreement. The High Growth Fund and S&P 500 Fund might also incur disposition
costs in liquidating the collateral. The High Growth Fund and S&P 500 Fund will
make payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of its custodian bank. The High Growth Fund and
S&P 500 Fund may not enter into a repurchase agreement of more than seven days
duration if, as a result, the market value of the High Growth Fund and S&P 500
Funds' net assets, together with investments in other securities deemed to be
not readily marketable, would be invested in excess of the High Growth Fund and
S&P 500 Funds' policy on investments in illiquid securities.
In the event of a bankruptcy or other default of a repurchase
agreement's seller, a Fund might incur expenses in enforcing its rights, and
could experience losses, including a decline in the value of the underlying
securities and loss of income. Each Fund will not invest more than 10% of its
net assets at the time of purchase in repurchase agreements maturing in more
than seven days and other illiquid securities.
Illiquid Securities. Each Fund reserves the right to invest up to 10%
of its net assets in illiquid securities. Generally an "illiquid security" is
any security that cannot be disposed of promptly and in the ordinary course of
business at approximately the amount at which the High Growth and S&P 500 Fund
have valued the instrument. Subject to this limitation, the High
23
<PAGE> 40
Growth Fund and S&P 500 Fund may invest in restricted securities where such
investment is consistent with the High Growth and S&P 500 Funds' investment
objectives, and such securities may be considered to be liquid to the extent the
High Growth and S&P 500 Funds' Investment Manager determines that there is a
liquid institutional or other market for such securities. In determining whether
a restricted security is properly considered a liquid security, the High Growth
Fund and S&P 500 Funds' Investment Manager, under the direction of the Board of
Trustees, will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of potential purchasers; (iii)
dealer undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). To the extent the High Growth Fund and S&P 500 Fund invest in
restricted securities that are deemed liquid, the general level of illiquidity
in the High Growth Fund and S&P 500 Funds' portfolios may be increased if
qualified institutional buyers become uninterested in purchasing these
securities contracts. The High Growth Fund and S&P 500 Fund will limit their
investments in liquid restricted securities to 5% of their net assets.
INVESTMENT RESTRICTIONS & POLICIES
FOR THE HIGH GROWTH FUND AND THE
S&P 500 FUND
FUNDAMENTAL INVESTMENT RESTRICTIONS
The restrictions numbered (1), (2) and (3) immediately below are
fundamental and cannot be changed without approval of the holders of a majority
of the outstanding voting securities (as defined in the 1940 Act). For more
detailed information see "1940 Act Restrictions" and "Other Investment
Policies." The High Growth Fund and the S&P 500 Fund:
(1) May purchase securities of any issuer only when consistent with the
maintenance of its status as a diversified company under the 1940 Act.
(2) May not concentrate investments in a particular industry or group of
industries as concentration is defined under the 1940 Act, or the rules
or regulations thereunder; except that the S&P 500 Fund may concentrate
investments only to the extent that the S&P 500 Index(R) is also so
concentrated.
(3) May (i) purchase or sell commodities, commodities contracts or real
estate; (ii) lend or borrow money; (iii) issue senior securities; (iv)
underwrite securities; or (v) pledge, mortgage or hypothecate any of
its assets, only if permitted by the 1940 Act or the rules or
regulations thereunder.
The High Growth Fund and the S&P Fund also have adopted non-fundamental
investment policies, set forth below, which generally are more restrictive than
the fundamental investment policies of the Funds. The High Growth Fund's or the
S&P 500 Fund's non-fundamental investment policies may be changed by a vote of
the Board of Trustees. Any changes in either the High Growth Fund's or the S&P
500 Fund's non-fundamental investment policies will be communicated to the
Fund's shareholders prior to effectiveness.
1940 ACT RESTRICTIONS
Under the 1940 Act, and the rules, regulations and interpretations
thereunder, a "diversified company," as to 75% of its total assets, may not
purchase securities of any issuer
24
<PAGE> 41
(other than obligations of, or guaranteed by, the U.S. Government, its agencies
or its instrumentalities) if, as a result, more than 5% of the value of its
total assets would be invested in the securities of such issuer or more than 10%
of the issuer's voting securities would be hold by the fund. "Concentration" is
generally interpreted under the 1940 Act to be investing more than 25% of net
assets in an industry or group of industries. The 1940 Act limits the ability of
investment companies to borrow and lend money and to underwrite securities. The
1940 Act currently prohibits an open-end fund from issuing senior securities, as
defined in the 1940 Act, except under very limited circumstances.
OTHER INVESTMENT POLICIES
The following investment policies and restrictions are non-fundamental
and may be changed by the Trust's Board of Trustees. The High Growth Fund and
the S&P Fund may not:
(1) Purchase or sell commodities, commodities contracts or real estate,
including interests in real estate limited partnerships, provided that
each Fund may (i) purchase securities of companies that deal in real
estate or interests therein, (ii) purchase or sell futures contracts,
options contracts, equity index participations and index participation
contracts, and (iii) purchase securities of companies that deal in
precious metals or interests therein.
(2) Lend money to any person, except that each Fund may (i) purchase a
portion of an issue of short-term debt securities or similar
obligations (including repurchase agreements) that are publicly
distributed or customarily purchased by institutional investors, and
(ii) lend its portfolio securities.
(3) Borrow money or issue senior securities except that each Fund may
borrow from banks as a temporary measure to satisfy redemption requests
or for extraordinary or emergency purposes and then only in an amount
not to exceed one-third of the value of its total assets (including the
amount borrowed), provided that each Fund will not purchase securities
while borrowings represent more than 5% of its total assets.
(4) Pledge, mortgage or hypothecate any of its assets except that, to
secure allowable borrowings, each Fund may do so with respect to no
more than one-third of the value of its total assets.
(5) Underwrite securities issued by others except to the extent it may be
deemed to be an underwriter, under the federal securities laws, in
connection with the disposition of securities from its investment
portfolio.
(6) Invest more than 10% of its net assets in illiquid securities,
including repurchase agreements with maturities in excess of seven
days.
(7) Purchase or retain securities of an issuer if any of the officers,
trustees or directors of the Trust or the Investment Manager
individually own beneficially more than 1/2 of 1% of the securities of
such issuer and together beneficially own more than 5% of the
securities of such issuer.
(8) Invest for the purpose of exercising control or management of another
issuer.
(9) Purchase securities of other investment companies, except as
permitted by the
25
<PAGE> 42
1940 Act, including any exemptive relief granted by the SEC.
(10) Purchase more than 10% of any class of securities of any issuer if,
as a result of such purchase, it would own more than 10% of such
issuer's outstanding voting securities.
(11) Invest more than 5% of its net assets in warrants, valued at the lower
of cost or market, and no more than 40% of this 5% may be invested in
warrants that are not listed on the New York Stock Exchange or the
American Stock Exchange, provided, however, that for purposes of this
restriction, warrants acquired by a Fund in units or attached to other
securities are deemed to be without value.
(12) Purchase puts, calls, straddles, spreads or any combination thereof if
by reason of such purchase the value of its aggregate investment in
such securities would exceed 5% of the Fund's total assets.
(13) Make short sales, except for short sales against the box.
(14) Purchase or sell interests in oil, gas or other mineral development
programs or leases, although it may invest in companies that own or
invest in such interests or leases.
(15) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities.
26
<PAGE> 43
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES. The officers and Trustees of the Trust, their
principal occupations over the past five years and their affiliations, if any,
with The Charles Schwab Corporation, Schwab and the Investment Manager, are as
follows:
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- ------------------- -------------- --------------------
<S> <C> <C>
CHARLES R. SCHWAB* Chairman and Trustee Chairman, Chief Executive Officer and Director, The
July 29, 1937 Charles Schwab Corporation; Chairman and Director,
Charles Schwab & Co., Inc. and Charles Schwab
Investment Management, Inc.; Chairman and Director,
The Charles Schwab Trust Company; Chairman and
Director (current board positions), and Chairman
(officer position) until December 1995, Mayer &
Schweitzer, Inc. (a securities brokerage subsidiary of
The Charles Schwab Corporation); Director, The Gap,
Inc. (a clothing retailer), Transamerica Corporation
(a financial services organization), AirTouch
Communications (a telecommunications company) and
Siebel Systems (a software company).
TIMOTHY F. McCARTHY** President and Trustee Executive Vice President - Mutual Funds, Charles
September 19, 1951 Schwab & Co., Inc. and The Charles Schwab
Corporation; Chief Executive Officer, Charles Schwab
Investment Management, Inc. From 1994 to 1995, Mr.
McCarthy was Chief Executive Officer, Jardine Fleming
Unit Trusts Ltd.; Executive Director, Jardine Fleming
Holdings Ltd.; Chairman, Jardine Fleming Taiwan
Securities Ltd.; and Director of JF India and Fleming
Flagship, Europe. Prior to 1994, he was President of
Fidelity Investments Advisor Group, a division of
Fidelity Investments in Boston.
DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
September 23, 1931 Associates (advertising and marketing/consulting).
</TABLE>
- -----------------------------
*Mr. Schwab is an "interested person" of the Trust.
**Mr. McCarthy is an "interested person" of the Trust.
27
<PAGE> 44
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- --------------------- ------------------------ ---------------------------------------------------
<S> <C> <C>
ROBERT G. HOLMES Trustee Chairman, Chief Executive Officer and Director,
May 15, 1931 Semloh Financial, Inc. (international financial
services); and International Investment Consultant,
Cannon Street, Inc. (private investigative firm).
DONALD R. STEPHENS Trustee Managing Partner, D.R. Stephens & Co. (real estate
June 28, 1938 investment). Prior to 1993, Mr. Stephens was
Chairman and Chief Executive Officer of the Bank of
San Francisco.
MICHAEL W. WILSEY Trustee Chairman, Chief Executive Officer and Director,
August 18, 1943 Wilsey Bennett, Inc. (truck and air transportation,
real estate investment and management, and
investments).
WILLIAM J. KLIPP* Senior Vice President, Senior Vice President, Charles Schwab & Co., Inc.;
December 9, 1955 Chief Operating Officer President and Chief Operating Officer, Charles
and Trustee Schwab Investment Management, Inc. Prior to 1993,
Mr. Klipp was Treasurer of Charles Schwab & Co., Inc.
and Mayer & Schweitzer, Inc.
STEPHEN B. WARD Senior Vice President and Senior Vice President and Chief Investment Officer,
April 5, 1955 Chief Investment Charles Schwab Investment Management, Inc.
Officer
FRANCES COLE Secretary Vice President, Chief Counsel, Chief Compliance
September 9, 1955 Officer and Assistant Corporate Secretary, Charles
Schwab Investment Management, Inc.
TAI-CHIN TUNG Treasurer and Principal Vice President - Finance, Charles Schwab & Co.,
March 7, 1951 Financial Officer Inc.; Controller, Charles Schwab Investment
Management, Inc. From 1994 to 1996, Ms. Tung was
Controller for Robertson Stephens Investment
Management, Inc. From 1993 to 1994, she was Vice
President of Fund Accounting, Capital Research and
Management Co. Prior to 1993, Ms. Tung was Senior Vice
President of the Sierra Funds and Chief Operating
Officer of Great Western Financial Securities.
</TABLE>
- ---------------------------
*Mr. Klipp is an "interested person" of the Trust.
28
<PAGE> 45
<TABLE>
<CAPTION>
POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
- --------------------- ------------------------ ---------------------------------------------------
<S> <C> <C>
DAVID H. LUI Assistant Secretary Vice President and Senior Counsel - Charles Schwab
October 14, 1960 Investment Management, Inc. From 1991 to 1992, he
was Assistant Secretary and Assistant Corporate
Counsel for the Franklin Group of Mutual Funds.
CHRISTINA M. PERRINO Assistant Secretary Vice President and Senior Counsel - Charles Schwab
June 16, 1961 Investment Management, Inc. Prior to 1994, she was
Counsel and Assistant Secretary for North American
Security Life Insurance Company and Secretary for
North American Funds.
</TABLE>
Each of the above-referenced individuals also serves in the same
capacity as described for the Trust, The Charles Schwab Family of Funds, Schwab
Investments and Schwab Capital Trust. The address of each individual listed
above is 101 Montgomery Street, San Francisco, California 94104.
TRUSTEE DEFERRED COMPENSATION PLAN
Pursuant to exemptive relief received by the Trust from the SEC, the
Trust may enter into deferred fee arrangements (the "Fee Deferral Plan" or the
"Plan") with the Trust's Trustees who are not "interested persons" of any of the
Funds of the Trust (the "Independent Trustees" or the "Trustees").
As of the date of this Statement of Additional Information, none of the
Independent Trustees has elected to participate in the Fee Deferral Plan. In the
event an Independent Trustee does elect to participate in the Plan, the Plan
would operate as described below.
Under the Plan, deferred Trustee's fees will be credited to a book
reserve account established by the Trust (the "Deferred Fee Account"), as of the
date such fees would have been paid to the Trustee. The value of the Deferred
Fee Account as of any date will be equal to the value the Account would have had
as of that date if the amounts credited to the Account had been invested and
reinvested in the securities of the SchwabFund or SchwabFunds(R) selected by the
participating Trustee (the "Selected SchwabFund Securities"). SchwabFunds
include the series or classes of shares of beneficial interest of The Charles
Schwab Family of Funds, Schwab Investments and Schwab Capital Trust.
Pursuant to the exemptive relief granted to the Trust, each Fund will
purchase and maintain the Selected SchwabFund Securities in an amount equal to
the deemed investments in that Fund of the Deferred Fee Accounts of the
Independent Trustees. These transactions would otherwise be limited or
prohibited by the investment policies and/or restrictions of the Funds. (See
"Investment Policies and Restrictions.")
29
<PAGE> 46
COMPENSATION TABLE 1
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Estimated Annual
as Part of Fund Benefits Upon
Expenses from Retirement from
Aggregate the Fund Complex 2 the Fund Total Compensation
Name of Person, Compensation ------------------- Complex 2 from the Fund
Position from the Trust ---------- Complex 2
- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Charles R. Schwab, 0 N/A N/A 0
Chairman and Trustee
Elizabeth G. Sawi 3, 0 N/A N/A 0
President and Trustee
Timothy F. McCarthy 4, 0 N/A N/A 0
President and Trustee
William J. Klipp, 0 N/A N/A 0
Sr. Vice President, Chief
Operating Officer and
Trustee
Donald F. Dorward, $1,300 N/A N/A $73,000
Trustee
Robert G. Holmes, $1,300 N/A N/A $73,000
Trustee
Donald R. Stephens, $1,300 N/A N/A $73,000
Trustee
Michael W. Wilsey, $1,300 N/A N/A $73,000
Trustee
</TABLE>
1 Figures are for the Trust's fiscal year ended December 31,
1995.
2 "Fund Complex" comprises all 24 funds of the Trust, The
Charles Schwab Family of Funds, Schwab
Investments and Schwab Capital Trust.
3 Ms. Sawi served as President and Trustee until October 1995.
4 Mr. McCarthy became President and Trustee in October 1995.
INVESTMENT MANAGER
Charles Schwab Investment Management, Inc., a wholly-owned subsidiary
of The Charles Schwab Corporation, serves as the
30
<PAGE> 47
investment adviser for all the Funds and administrator pursuant to an Investment
Advisory and Administration Agreement dated March 28, 1994 (the "Advisory
Agreement") between it and the Trust. The Investment Manager is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
currently provides investment management services to the Schwab mutual fund
complex, a family of 25 mutual funds, including the Fund, with over $39 billion
in assets as of August 16, 1996. The Investment Manager is an affiliate of
Schwab, the Trust's distributor and shareholder services and transfer agent.
The Advisory Agreement will be in effect for an initial two year term
and thereafter will continue in effect for one year terms, subject to annual
approval by: (1) the Trust's Board of Trustees or (2) a vote of the majority (as
defined in the 1940 Act) of the outstanding voting securities of the Fund. In
either event, the continuance must also be approved by a majority of the Trust's
Board of Trustees who are not parties to the Agreement or interested persons (as
defined in the 1940 Act) of any such party, by vote cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement may be
terminated at any time upon 60 days' notice by either party, or by a majority
vote of the outstanding shares of the Funds', and will terminate automatically
upon assignment.
EXPENSES
The Trust pays the expenses of its operations, including: the fees and
expenses of independent accountants, legal counsel and custodian; the cost of
reports and notices to shareholders; costs of calculating net asset value; the
fees and expenses of qualifying the Trust and its shares for distribution under
federal and state securities laws; and membership dues in the Investment Company
Institute or any similar organization. The Trust's expenses generally are
allocated among Funds on the basis of relative net assets at the time the
expense is incurred, except that expenses directly attributable to a particular
Fund are charged to that Fund.
Money Market Fund. Pursuant to the Advisory Agreement, the Investment
Manager is entitled to receive from the Money Market Fund a graduated annual
fee, payable monthly, of 0.46% of the Fund's average daily net assets not in
excess of $2 billion, 0.45% of such net assets over $2 billion but not in excess
of $3 billion, and 0.40% of such net assets over $3 billion. For the fiscal
period ended December 31, 1995 and for the fiscal period from May 3, 1994
(commencement of operations) to December 31, 1994, the Fund paid investment
advisory and administration fees of $53,557 and $608, respectively (fees were
reduced by $60,678 and $52,949, respectively).
High Growth Fund. For its advisory and administrative services to the
High Growth Fund, the Investment Manager is entitled to receive a graduated
annual fee, payable monthly, of 0.74% of the Fund's average daily net assets not
in excess of $1 billion, and 0.69% of the next $1 billion; and 0.64% of such net
assets over $2 billion.
The Investment Manager and Schwab have guaranteed that, through at
least July 1, 1997, the total fund operating expenses for the High Growth Fund
will not exceed 0.75% of the Fund's average daily net assets.
S&P 500 Fund. For its advisory and administrative services to the S&P
500 Fund, the Investment Manager is entitled to receive a graduated annual fee,
payable monthly, of 0.36% of the Fund's average daily net assets not in excess
of $1 billion, and 0.33% of the next $1 billion; and 0.31% of such net assets
over $2 billion.
31
<PAGE> 48
The Investment Manager and Schwab have guaranteed that, through at
least July 1, 1997, the total Fund operating expenses will not exceed 0.35% of
the average daily net assets of the Fund.
Additional Information. The Advisory Agreement provides that the fees
to be paid to the Investment Manager will be less than the amount that would
cause the aggregate operating expenses of a Fund (excluding interest, taxes, net
brokerage commissions and extraordinary expenses) in any year to exceed the most
stringent limits prescribed by any state in which shares of a Fund are offered
for sale. The most stringent current limit for such expenses is 2.5% of a fund's
first $30 million of average net assets, 2.0% of a fund's next $70 million of
average net assets and 1.5% of a fund's average net assets in excess of $100
million.
From time to time, each Fund may compare its total operating expense
ratio to the total operating expense ratio of other mutual funds or mutual fund
averages with similar investment objectives as reported by Lipper Analytical
Service, Inc., Morningstar, Inc. or other independent sources of such
information ("independent sources").
SUB-ADVISER
The Investment Manager has entered into an investment sub-advisory
agreement (the "Sub-Advisory Agreement") with respect to the High Growth Fund
with Symphony Asset Management, Inc. (the "Sub-Adviser"), pursuant to which it
will act as the High Growth Fund's sub-adviser. The Sub-Adviser is registered as
an investment adviser under the Investment Advisers Act of 1940 and currently
manages directly and indirectly approximately $700 million in institutional and
private account assets.
The Sub-Adviser furnishes investment advice through direct assistance
to the Investment Manager in the development and execution of quantitatively
based investment strategies. The Sub-Adviser uses a sophisticated optimization
technique known as "Tactical Asset Allocation" in evaluating the optimal
allocation of the High Growth Fund's assets among asset categories: stocks,
bonds and cash-equivalents.
Tactical Asset Allocation is a value-oriented strategy which seeks the
highest reward for a given level of risk. Expected returns are measured for each
asset category; for stocks, the internal rate of return is measured on
forecasted dividend stream; for bonds, the yield to maturity is evaluated on
representative long corporate bonds; and for cash-equivalents, yield to maturity
is evaluated on representative money market instruments. Risks and correlations
of the asset categories are measured from long-term return histories.
The Investment Manager pays the Sub-Adviser an annual investment
sub-advisory fee, payable monthly, of 0.08% of the first $100 million of the
aggregate average daily net assets of the High Growth Fund, 0.06% of the next
$150 million, 0.04% of the next $600 million and 0.02% of the Fund's aggregate
average daily net assets over $850 million.
DISTRIBUTOR
Pursuant to a Distribution Agreement, Schwab is the principal
underwriter for shares of the Trust and the Trust's agent for the purpose of the
continuous offering of the Funds' shares. Currently, the Funds are designed as
an investment vehicle for Separate Accounts of Participating Insurance Companies
and are intended for retirement savings or other long-term investment purposes.
The Funds pay the cost for the prospectuses and shareholder reports to be
prepared and delivered to existing Participating
32
<PAGE> 49
Insurance Company Contract owners with investment allocations in either of the
three sub-accounts. Schwab pays such costs when the described materials are used
in connection with the offering of shares to prospective investors and for
supplementary sales literature and advertising. Schwab receives no fee under the
Distribution Agreement. Terms of continuation, termination and assignment under
the Distribution Agreement are identical to those described above with respect
to the Advisory Agreement.
CUSTODIAN AND FUND ACCOUNTANT
PNC Bank, National Association, at the Airport Business Center, 200
Stevens Drive, Suite 440, Lester, Pennsylvania 19113, serves as Custodian for
the Money Market Fund and S&P 500 Fund.
PFPC, Inc., at 400 Bellevue Parkway Wilmington, Delaware 19809, serves
as Fund Accountant for the Money Market Fund and S&P 500 Fund.
State Street Bank and Trust Company, at 1 Heritage Drive, North Quincy,
Massachusetts 02171-2197 serves as Custodian and as Fund Accountant for the High
Growth Fund.
ACCOUNTANTS AND REPORTS
TO SHAREHOLDERS
The Trust's independent accountants, Price Waterhouse LLP, audit and
report on the annual financial statements of each series of the Trust and review
certain regulatory reports and each Fund's federal income tax return. Price
Waterhouse LLP also performs other professional accounting, tax and advisory
services when engaged to do so by the Trust. Shareholders will be sent audited
annual and unaudited semi-annual financial statements. The address of Price
Waterhouse LLP is 555 California Street, San Francisco, California 94104.
LEGAL COUNSEL
Ropes & Gray, One Franklin Square, 1301 K Street, N.W., Suite 800 East,
Washington, D.C. 20005, is counsel to the Trust.
PORTFOLIO TRANSACTIONS AND TURNOVER
PORTFOLIO TRANSACTIONS
Portfolio transactions are undertaken principally to: pursue the Funds'
objective in relation to movements in the general level of interest rates;
invest money obtained from the sale of the Funds' shares; reinvest proceeds from
maturing portfolio securities; and meet redemptions of Fund shares. Portfolio
transactions may increase or decrease the yield of the Funds depending upon
management's ability to correctly time and execute them.
The Investment Manager, in effecting purchases and sales of portfolio
securities for the Funds, seeks to obtain best price and execution. Subject to
the supervision of the Board of Trustees, the Investment Manager generally
selects broker-dealers for the Funds primarily on the basis of the quality and
reliability of brokerage services provided, including execution capability and
financial responsibility.
When the execution and price offered by two or more broker-dealers are
comparable, the Investment Manager may, in its discretion, utilize the services
of broker-dealers that provide it with
33
<PAGE> 50
investment information and other research resources. The Investment Manager also
may use such resources when providing advisory services to other investment
advisory clients, including mutual funds.
The Trust expects that purchases and sales of portfolio securities
usually will be principal transactions. Securities normally will be purchased
directly from the issuer or from an underwriter or market maker for the
securities.
The investment decisions for the Funds are reached independently from
those for other accounts the Investment Manager manages. Such other accounts may
also make investments in instruments or securities at the same time as the
Funds. When two or more accounts the Investment Manager manages 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
the Funds. However, it is the Board of Trustees' opinion that the benefits
conferred by the Investment Manager outweigh any disadvantages that may arise
from exposure to simultaneous transactions. 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.
FUND TURNOVER
For reporting purposes, each Fund's turnover rate is calculated by
dividing the value of purchases or sales of portfolio securities for the fiscal
year, whichever is less, by the monthly average value of portfolio securities
owned by each Fund during the fiscal year. When making the calculation, all
securities whose maturities at the time of acquisition were one year or less
("short-term securities") are excluded.
Because securities with maturities of less than one year are excluded
from required portfolio turnover rate calculations, the Money Market Fund's
portfolio turnover rate for reporting purposes is expected to be zero.
A 100% portfolio turnover rate would occur, for example, if all
portfolio securities (aside from short-term securities) were sold and either
repurchased or replaced once during the fiscal year. The High Growth Fund and
S&P 500 Fund expect that their portfolio turnover rate will not exceed 100% in
any given year. In the case of the High Growth Fund, this 100% portfolio
turnover rate applies to the Fund's stock and bond categories separately. A high
portfolio turnover rate may increase a Fund's transaction costs.
From time to time, each Fund may compare its portfolio turnover rate
with that of other mutual funds as reported by independent sources.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The Money Market 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 the Fund. If the Money Market
Fund realizes any capital gains, they will be distributed
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<PAGE> 51
at least once during the year as determined by the Board of Trustees. Any
realized capital losses to the extent not offset by realized capital gains will
be carried forward. It is not anticipated that the Fund will realize any
long-term capital gains, but if it does so, these gains will be distributed
annually. Trust expenses are accrued each day. Should the net asset value of the
Money Market Fund deviate significantly from market value, the Board of Trustees
could decide to value the investments at market value and any unrealized gains
and losses could affect the amount of the Fund's distributions.
Since the Funds are intended as an investment vehicle for Plans and
Participating Insurance Companies' Separate Accounts, it is anticipated these
Plans and Separate Accounts will be the Funds' only shareholders. On each day
that the net asset value per share of the Money Market Fund is determined
("Business Day"), the Money Market Fund's net investment income will be declared
as of 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 as of the last
calculation of net asset value prior to the declaration. Shareholders will
receive dividends in additional shares unless they elect to receive cash.
Dividends normally will be reinvested monthly in full shares of the Money Market
Fund at the net asset value on the 25th day of each month if a Business Day,
otherwise on the next Business Day, with the exception of dividends reinvested
in December, which are scheduled on the last Business Day in December.
The High Growth Fund and S&P 500 Fund will distribute substantially all
of their net investment income each year, as determined by the Board of
Trustees. The High Growth Fund and S&P 500 Fund will distribute net investment
income and capital gains, if any, to the Plans and Participating Insurance
Company Separate Accounts annually in December. The Participating Insurance
Company Separate Accounts will automatically reinvest all distributions in
additional shares at the net asset value next determined after their record
date.
FEDERAL INCOME TAXES
For a discussion of the tax status of a particular Contract and the tax
consequences of ownership of such a Contract, refer to the appropriate Separate
Account Prospectus. Shares of the Funds are available only through Separate
Accounts of Participating Insurance Companies and Plans.
It is the policy of each Fund to qualify for taxation as a "regulated
investment company" by meeting the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). By following this policy, the
Funds expect to eliminate or reduce to a nominal amount the federal income tax
to which they are subject.
In order to qualify as a regulated investment company, each Fund must,
among other things: (1) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks, securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in stocks, securities or currencies; (2)
derive less than 30% of its gross income from gains from the sale or other
disposition of certain assets (including stocks and securities) held for less
than 3 months; and (3) diversify its holdings so that at the end of each quarter
of its taxable year, (i) at least 50% of the market value of the Fund's total
assets is represented by cash or cash items, U.S. government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to a value not greater than 5% of the value of the
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<PAGE> 52
Fund's total assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. government securities or
securities of any other regulated investment company) or of two or more issuers
that the Fund controls, within the meaning of the Code, and that are engaged in
the same, similar or related trades or businesses. These requirements may
restrict the degree to which the Funds may engage in short-term trading and
certain hedging transactions and may limit the range of the Funds' investments.
If a Fund qualifies as a regulated investment company, it will not be subject to
federal income tax on the part of its net investment income and net realized
capital gains, if any, which it distributes to shareholders, provided the Fund
meets certain minimum distribution requirements. To comply with these
requirements, each Fund must distribute at least (a) 90% of its "investment
company taxable income" (as that term is defined in the Code); and (b) 90% of
the excess of (i) its tax-exempt interest income over (ii) certain deductions
attributable to that income (with certain exceptions), for its taxable year. The
Funds intend to make sufficient distributions to shareholders to meet these
requirements.
The Funds may engage in investment techniques that may alter the timing
and character of the Funds' income. Each Fund may be restricted in its use of
these techniques by rules relating to its qualification as a regulated
investment company.
The foregoing discussion relates only to U.S. federal income tax law.
Although the High Growth Fund will attempt not to invest in any
non-U.S. corporation which could be treated as a passive foreign investment
company ("PFIC"), or become a PFIC, under the Code, it might inadvertently do
so. This could result in adverse tax consequences upon the disposition of, or
the receipt of "excess distributions" with respect to, such equity investments.
To the extent the High Growth Fund does invest in PFICs, it may adopt certain
tax strategies to reduce or eliminate the adverse effects of certain federal tax
provisions governing PFIC investments. Many non-U.S. banks and insurance
companies may not be treated as PFICs if they satisfy certain technical
requirements under the Code. To the extent that the High Growth Fund does invest
in foreign securities which are determined to be PFIC securities and are
required to pay a tax on such investments, a credit for this tax would not be
allowed to be passed through to the High Growth Portfolio's shareholders.
Therefore, the payment of this tax would reduce the High Growth Portfolio's
economic return from its PFIC shares and excess distributions received with
respect to such shares are treated as ordinary income rather than capital gains.
The discussion of federal income taxation presented above only
summarizes some of the important federal tax considerations generally affecting
purchasers of Funds' shares. No attempt has been made to present a detailed
explanation of the federal income tax treatment of a Fund and its shareholders,
and the discussion is not intended as a substitute for careful tax planning.
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 Funds.
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<PAGE> 53
SHARE PRICE CALCULATION
The Money Market 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 Money Market Fund's
investments valued at amortized cost with market values. Market valuations are
obtained by using actual quotations provided by market makers, estimates of
market value or values obtained from yield data relating to classes of money
market instruments published by reputable sources at the mean between the bid
and asked prices for the instruments. The amortized cost method of valuation
seeks to maintain a stable $1.00 per share net asset value 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 net asset value per share calculated by reference to market
values and the Money Market Fund's $1.00 per share net asset value, or if there
were any other deviation that the Board of Trustees of the Trust believed would
result in a material dilution to shareholders or purchasers, the Board of
Trustees would promptly consider what action, if any,should be initiated. If the
Money Market Fund's net asset value per share (computed using market values)
declined, or were expected to decline, below $1.00 (computed using amortized
cost), the Board of Trustees might temporarily reduce or suspend dividend
payments in an effort to maintain the net asset value at $1.00 per share. 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 the Money Market Fund's net asset value per
share (computed using market values) were to increase, or were anticipated to
increase above $1.00 (computed using amortized cost), the Board of Trustees
might supplement dividends in an effort to maintain the net asset value at $1.00
per share.
The High Growth Fund's and S&P 500 Fund's net asset value per share is
determined each day the New York Stock Exchange is open for trading as of 4:00
p.m., Eastern time. Currently, the New York Stock Exchange is closed on the
following holidays: New Year's Day (observed), Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The High Growth Fund and S&P 500 Fund value their portfolio securities daily
based on their market value. Each security held by the High Growth Fund and S&P
500 Fund that is listed on a securities exchange and for which market quotations
are available is valued at the last quoted sale price for a given day, or if a
sale is not reported for that day, at the mean between the most recent quoted
bid and asked prices. Price information on each listed security is taken from
the exchange where the security is primarily traded. Unlisted securities for
which market quotations are readily available are valued at the mean between the
most recent bid and asked prices. The value of other assets for which no
quotations are readily available (including any restricted securities) are
valued at fair value as determined in good faith by the Investment Manager
pursuant to Board of Trustees guidelines. Securities may be valued on the basis
of prices provided by pricing services when such prices are believed to reflect
fair market value.
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<PAGE> 54
HOW THE FUNDS REFLECT PERFORMANCE
STANDARDIZED TOTAL RETURN
Average annual total return for a period is determined by calculating
the actual dollar amount of investment return on a $1,000 investment in a Fund
made at the beginning of the period, then calculating the average annual
compounded rate of return that would produce the same investment return on the
$1,000 over the same period. In computing average annual total return, each Fund
assumes the reinvestment of all distributions at net asset value on applicable
reinvestment dates.
NONSTANDARDIZED TOTAL RETURN
Nonstandardized total return for a Fund differs from standardized total
return in that it relates to periods other than the period for standardized
total return and/or that it represents aggregate (rather than average) total
return.
YIELD
The historical performance of the Money Market Fund may be shown in the
form of yield or effective yield. These measures of performance are described
below.
YIELD
Yield refers to the net investment income generated by a hypothetical
investment in the Fund over a specific 7-day period. This net investment income
is then annualized, which means that the net investment income generated during
the 7-day period is assumed to be generated in each 7-day period over an annual
period, and is shown as a percentage of the investment. For the 7-day period
ended December 31, 1995, the Fund's yield was 5.14%.
EFFECTIVE YIELD
Effective yield is calculated similarly, but the net investment income
earned by the investment is assumed to be compounded weekly when annualized.
Effective yield will be slightly higher than yield due to this compounding
effect. For the 7-day period ended December 31, 1995, the Money Market Fund's
effective yield was 5.27%.
Yields quoted for the Money Market Fund include the effect of deducting
the Money Market Fund's expenses, but may not include charges and expenses
attributable to a Separate Account or a Contract. Since you can only purchase
shares of the Money Market Fund through Participating Insurance Companies'
Separate Accounts, you should carefully review the appropriate Separate Account
Prospectus for information on relevant charges and expenses. Excluding these
charges from quotations of the Money Market Fund's performance has the effect of
increasing the performance quoted. You should bear in mind the effect of these
charges when comparing the Money Market Fund's performance to those of other
mutual funds.
COMPARING THE PERFORMANCE OF THE FUNDS WITH OTHER MUTUAL FUNDS AND INDICES
The performance of the Funds may be compared with the performance of
other mutual funds by comparing the ratings and rankings of mutual fund rating
services, various indices of investment performance, U.S. government
obligations, bank certificates of deposit, the
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<PAGE> 55
consumer price index and other investments for which reliable data is available.
The High Growth Fund may also compare its historical performance
figures to the performance of indices similar to its asset categories and
sub-categories, such as those indices named in the High Growth Fund's Prospectus
under "Market Performance."
THE BENEFITS OF INTERNATIONAL INVESTING
INCREASED DIVERSIFICATION
CAN LOWER RISK
To some extent, all U.S.-based investments -- stocks, bonds, mutual
funds and CDs -- are affected by the same economic forces. Tax cuts, interest
rate changes and the performance of the U.S. stock market can all influence U.S.
investments. Adding international (or overseas) investments to a U.S.-based
portfolio has historically reduced the portfolio's overall volatility. Although
U.S. and international markets may be interrelated, they do not move in tandem
- -- so losses in one market can be offset by gains in another.
POTENTIALLY HIGHER
OVERALL PERFORMANCE
During the past 10 years ending December 31, 1994, international equity
markets outperformed the U.S. equity market and most other U.S. securities
investments -- corporate bonds, CDs and U.S. Treasuries. The returns produced by
the international markets have also kept investors well ahead of inflation. This
historical performance means that investors diversified overseas earned a higher
level of return.
INDEXING AND THE SCHWAB INDEX FUNDS
Because the unmanaged performance of a broad-based equity index has
often proven superior to that of many individually selected stock portfolios, a
growing percentage of assets invested in the equity markets are being placed in
"index" portfolios. Institutional investors often devote a substantial
percentage of their assets to indexed strategies.
An index typically tracks the performance of a group of securities
selected to represent a particular market, and is most often used to gauge that
market's performance. The Dow Jones Industrial Average (the "DJIA") and Standard
& Poor's 500 Index(R) (the "Index") are two indices designed to measure the
performance of U.S. stocks. When investment managers invest indexed separate
accounts or index fund assets, they attempt to replicate the performance of the
applicable target index by holding all or a representative sample of the
securities included in the index.
The S&P 500 Fund performance data assumes the reinvestment of
dividends, but does not reflect deductions for administrative and
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<PAGE> 56
management expenses. The S&P 500 Fund will be subject to these costs and
expenses, while the Index does not have these expenses. In addition, various
factors, such as holding a cash balance, may cause the S&P 500 Fund's
performance to be higher or lower than that of the Index.
The S&P 500 Fund is intended to make indexed investing easily available to
Schwab customers with the highest level of convenience and economy thereby
facilitating their ability to participate in the long-term performance of the
United States stock market.
THE S&P 500 INDEX(R)
The Index is representative of the performance of the U.S. stock
market. The Index consists of 500 stocks chosen for market size, liquidity and
industry group representation. It is a market-value weighted index (stock price
times number of shares outstanding), with each stock's weight in the Index
proportionate to its market value. The Index does not contain the 500 largest
stocks, as measured by market capitalization. Although many of the stocks in the
Index are among the largest, there are also some relatively small companies in
the Index. Those companies, however, are generally established companies within
their industry group. The Index identifies important industry groups within the
U.S. economy and then allocates a representative sample of stocks with each
group to the Index. There are four major industry sectors within the Index:
Industrials, Utilities, Financial and Transportation.
ASSET ALLOCATION STRATEGIES
USING THE HIGH GROWTH FUND
Shareholders may choose to invest in the High Growth Fund, which offers
the benefits of asset allocation in a single fund.
OTHER INFORMATION
Each Fund may, from time to time, refer to recent studies that analyze
certain techniques and strategies which the Funds may use. In addition, each
Fund may, from time to time, promote the advantages of investing in a series
that is part of a large, diverse mutual fund complex.
GENERAL INFORMATION
The Trust generally is not required to hold shareholder meetings.
However, as provided in its Agreement and Declaration of Trust and Bylaws,
shareholder meetings will be held in connection with the following matters: (1)
election or removal of Trustees if a meeting is requested in writing by a
shareholder or shareholders who beneficially own(s) 10% or more of the Trust's
shares; (2) adoption of any contract for which shareholder approval is required
by the 1940 Act; (3) any termination of the Trust to the extent and as provided
in the Declaration of Trust; (4) any amendment of the Declaration of Trust
(other than amendments changing the name of the Trust or any of its investment
portfolios, supplying any omission, curing any ambiguity or curing, correcting
or supplementing any defective or inconsistent provision thereof); (5)
determining whether a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on behalf of the Trust
or the shareholders, to the same extent as the stockholders of a Massachusetts
business corporation; and (6) such additional matters as may be required by law,
the Declaration of Trust, the Bylaws or any registration of the Trust with the
SEC or any state or as the Board of Trustees
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<PAGE> 57
may consider desirable. The shareholders also would vote upon changes to the
Fund's fundamental investment objective, policies or restrictions.
Each Trustee serves until the next meeting of shareholders, if any,
called for the purpose of electing Trustees and until the election and
qualification of his or her successor or until death, resignation, retirement or
removal by a majority vote of the shares entitled to vote (as described below)
or of a majority of the Trustees. In accordance with the 1940 Act: (i) the Trust
will hold a shareholder meeting for the election of Trustees when less than a
majority of the Trustees have been elected by shareholders; and (ii) if, as a
result of a vacancy in the Board of Trustees, less than two-thirds of the
Trustees have been elected by the shareholders, that vacancy will be filled by a
vote of the shareholders.
Upon the written request of 10 or more shareholders who have been such
for at least 6 months and who hold shares constituting at least 1% of the
Trust's outstanding shares stating that they wish to communicate with the other
shareholders for the purpose of obtaining signatures necessary to demand a
meeting to consider removal of one or more Trustees, the Trust has undertaken to
disseminate appropriate materials at the expense of the requesting shareholders.
The Bylaws provide that a majority of shares entitled to vote shall be
a quorum for the transaction of business at a shareholders' meeting, except that
where any provision of law, of the Declaration of Trust or of these Bylaws
permits or requires that (i) holders of any series shall vote as a series, then
a majority of the aggregate number of shares of that series entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that series; or (ii) holders of any class shall vote as a class, then a majority
of the aggregate number of shares of that class entitled to vote shall be
necessary to constitute a quorum for the transaction of business by that class.
Any lesser number shall be sufficient for adjournments. Any adjourned session or
sessions may be held, within a reasonable time after the date set for the
original meeting, without the necessity of further notice. The Declaration of
Trust specifically authorizes the Board of Trustees to terminate the Trust (or
any of its investment portfolios) by notice to the shareholders without
shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the Trust's
obligations. The Declaration of Trust, however, disclaims shareholder liability
for the Trust's acts or obligations and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. In addition, the Declaration of Trust provides for
indemnification out of the property of an investment portfolio in which a
shareholder owns or owned shares for all losses and expenses of such shareholder
or former shareholder if he or she is held personally liable for the obligations
of the Trust solely by reason of being or having been a shareholder. Moreover,
the Trust will be covered by insurance which the Trustees consider adequate to
cover foreseeable tort claims. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered remote, because
it is limited to circumstances in which a disclaimer is inoperative and the
Trust itself is unable to meet its obligations.
For further information, please refer to the registration statement and
exhibits for the Trust on file with the SEC in Washington, D.C. and available
upon payment of a copying fee. The statements in the Prospectus and this
Statement of Additional Information concerning the contents of contracts or
other documents,
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copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
PRINCIPAL HOLDERS OF SECURITIES
As of September [ ], 1996, Transamerica Occidental, Separate Account
VA-5, Variable Annuity Dept. B-100, 1150 South Olive, Los Angeles, California
90015 legally or beneficially owned [ ]% of the Money Market Fund's shares of
beneficial interest. In addition, as of September [ ], 1996, the officers and
Trustees of the Trust, as a group, owned less than 1% of the Trust's outstanding
voting securities.
PURCHASE AND REDEMPTION
OF SHARES
You cannot purchase shares of the Funds directly, but you may allocate
account value under your Contract to and from the Funds in accordance with the
terms of your Contract. Please refer to the appropriate Separate Account
Prospectus for information on how to purchase units of a Contract and how to
select specific portfolios as investment options.
The Funds intend to pay in cash all redemptions requested by any
shareholder of record. The Trust has made an election with the SEC to pay in
cash all redemptions requested by any shareholder of record limited in amount
during any 90-day period to the lesser of $250,000 or 1% of its net assets at
the beginning of such period. This election is irrevocable without the SEC's
prior approval. Redemption requests in excess of the stated limits may be paid,
in whole or in part, in investment securities or in cash, as the Trust's Board
of Trustees may deem advisable; however, payment will be made wholly in cash
unless the Board of Trustees believes that economic or market conditions exist
that would make such a practice detrimental to the best interests of the Funds.
OTHER INFORMATION
The Funds' Prospectuses and this Statement of Additional Information do
not contain all the information included in the Registration Statement filed
with the SEC under the 1933 Act with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectuses and this Statement of Additional Information pursuant to
SEC rules and regulations. The Registration Statement including the exhibits
filed therewith may be examined at the SEC's office in Washington, D.C.
Statements contained in the Prospectuses or in this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectuses and this Statement of
Additional Information form a part, each such statement being qualified in all
respects by such reference.
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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
Investors Service ("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 normally will 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
A Standard & Poor's Corporation ("S&P") A-1 commercial paper rating
indicates either an overwhelming or very 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 strong, but the relative degree of
safety is not as high as for issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
Duff-1 is the highest commercial paper rating assigned by Duff & Phelps
Credit Rating Co. ("Duff"). Three gradations exist within this rating category:
a Duff-1+ rating indicates the highest certainty of timely payment (issuer
short-term liquidity is found to be outstanding and safety is deemed to be just
below that of risk-free short-term U.S. Treasury obligations); a Duff-1 rating
signifies a very high certainty of timely payment (issuer liquidity is
determined to be excellent and risk factors are considered minor); and a Duff-1-
rating denotes high certainty of timely payment (issuer liquidity factors are
strong and risk is very small). A Duff-2 rating indicates a good certainty of
timely payment. Liquidity factors and company fundamentals are sound and risk
factors are small.
FITCH INVESTORS SERVICE, INC.
A Fitch Investors Service, Inc.'s ("Fitch") F-1+ is the highest
commercial paper rating, and indicates the strongest degree of assurance for
timely payment. Issues rated F-1 reflect an assurance of timely payment only
slightly less than issues rated F-1+. Issues assigned an F-2 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.
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SHORT-TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS
MOODY'S
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.
S&P
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
overwhelming safety characteristics are given a plus (+) designation. S&P's
determination that an issuer has a satisfactory capacity to pay principal and
interest is denoted by an SP-2 rating.
IBCA
Obligations supported by the highest capacity for timely repayment are
rated A1+. An A1 rating indicates that the obligation is supported by a very
strong capacity for timely repayment. Obligations rated A2 are supported by a
strong capacity for timely repayment, although adverse changes in business,
economic or financial conditions may affect this capacity.
BONDS
MOODY'S
Moody's rates the bonds it judges to be of the best quality Aaa. These
bonds carry the smallest degree of investment risk and generally are referred to
as "gilt edge." Interest payments are protected by a large or extraordinarily
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of these issues. Bonds carrying an Aa
designation are deemed to be of high quality by all standards. Together with Aaa
rated bonds, they comprise what generally are known as "high grade bonds." Aa
bonds are rated lower than the best bonds because they may enjoy relatively
lower margins of protections, fluctuations of protective elements may be of
greater amplitude or there may be other factors present which make them appear
to be subject to somewhat greater long-term risks.
S&P
AAA is the highest rating assigned by S&P to a bond and indicates the
issuer's extremely strong capacity to pay interest and repay principal. An AA
rating denotes a bond whose issuer has a very strong capacity to pay interest
and repay principal and differs from an AAA rating only in small degree.
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DUFF
Duff confers an AAA designation to bonds of issuers with the highest
credit quality. The risk factors associated with these bonds are negligible,
being only slightly more than for risk-free U.S. Treasury debt. AA rated bonds
are of high credit quality and have strong protection factors. The risks
associated with them are modest but may vary slightly from time to time because
of economic conditions.
COMMERCIAL PAPER, SHORT-TERM OBLIGATIONS
AND DEPOSIT OBLIGATIONS ISSUED BY BANKS
THOMSON BANKWATCH (TBW)
TBW-1 is the highest category and indicates the degree of safety
regarding timely repayment of principal and interest is very strong. TBW-2 is
the second highest category, and while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated TBW-1.
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SCHWABFUNDS(R)
SCHWAB MONEY MARKET PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
AGENCY OBLIGATIONS - 78.8% PAR VALUE
- --------------------------------------------------------------------
<S> <C> <C>
DISCOUNT NOTES
Federal Farm Credit Bank
5.67%, 01/08/96 .......................... $ 600,000 $ 599,342
5.66%, 01/12/96 .......................... 1,450,000 1,447,506
5.68%, 01/31/96 .......................... 400,000 398,127
Federal Home Loan Bank
5.68%, 01/25/96 .......................... 1,325,000 1,320,027
5.65%, 01/25/96 .......................... 445,000 443,345
5.62%, 02/02/96 .......................... 565,000 562,223
Federal Home Loan Mortgage Corp.
5.52%, 01/10/96 .......................... 1,270,000 1,268,254
5.68%, 01/16/96 .......................... 1,520,000 1,516,428
5.67%, 01/22/96 .......................... 170,000 169,442
Federal National Mortgage Assoc.
5.68%, 01/18/96 .......................... 245,000 244,346
5.52%, 01/18/96 .......................... 1,625,000 1,620,780
5.60%, 02/12/96 .......................... 810,000 804,765
5.60%, 02/22/96 .......................... 1,350,000 1,339,197
Tennessee Valley Authority
5.65%, 01/12/96 .......................... 1,020,000 1,018,258
5.59%, 02/13/96 .......................... 1,220,000 1,211,927
----------
TOTAL AGENCY OBLIGATIONS (Cost $13,963,967). 13,963,967
----------
U.S. TREASURY OBLIGATIONS - 21.2%
- --------------------------------------------------------------------------
U.S. TREASURY BILLS
5.37%, 01/11/96 .......................... 95,000 94,860
5.50%, 02/08/96 .......................... 230,000 228,683
5.40%, 02/08/96 .......................... 385,000 382,830
5.39%, 02/08/96 .......................... 525,000 522,055
5.43%, 02/15/96 .......................... 1,635,000 1,624,035
5.29%, 02/15/96 .......................... 95,000 94,377
5.39%, 02/22/96 .......................... 105,000 104,193
5.45%, 03/07/96 .......................... 75,000 74,267
5.02%, 03/07/96 .......................... 265,000 262,585
4.88%, 03/14/96 .......................... 160,000 158,435
5.02%, 03/28/96 .......................... 220,000 217,360
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $3,763,680) ..................... 3,763,680
-----------
TOTAL INVESTMENTS - 100% (Cost $17,727,647). $17,727,647
===========
</TABLE>
- -----------
Notes to Schedule of Investments.
Yields shown are effective yields at the time of purchase and are stated
according to the market convention for the security type. For each security,
cost (for financial reporting and federal income tax purposes) and carrying
value are the same.
See accompanying Notes to Financial Statements.
F-1
<PAGE> 63
SCHWABFUNDS(R)
SCHWAB MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- ---------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost: $17,727,647) .................... $17,727,647
Cash ....................................................... 3,850
Receivable for fund shares sold ............................ 223,817
Deferred organization costs ................................ 25,732
Prepaid expenses ........................................... 98
----------
Total assets ............................................. 17,981,144
----------
LIABILITIES
Payable for:
Dividends .................................................. 80,464
Fund shares redeemed ....................................... 970,101
Investment advisory fee .................................... 105
Other ...................................................... 18,042
----------
Total liabilities ........................................ 1,068,712
----------
NET ASSETS applicable to outstanding shares .................... $16,912,432
----------
NET ASSETS CONSIST OF:
Capital paid in .............................................. $16,912,496
Accumulated net realized loss on investments sold ............ (64)
-----------
$16,912,432
===========
THE PRICING OF SHARES
Outstanding shares, $0.00001 par value (unlimited shares
authorized) ............................................... 16,912,496
NET ASSET VALUE, offering and redemption price per share .... $1.00
</TABLE>
- -----------
See accompanying Notes to Financial Statements.
F-2
<PAGE> 64
SCHWABFUNDS(R)
SCHWAB MONEY MARKET PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended December 31, 1995
- ---------------------------------------------------------------------------
<TABLE>
<S> <C>
Interest income ............................................... $660,502
--------
EXPENSES
Investment advisory and administration fee ................. 53,557
Custodian fees ............................................. 12,415
Registration fees .......................................... 92
Professional fees .......................................... 26,643
Shareholder reports ........................................ 11,735
Trustees' fees ............................................. 5,214
Amortization of deferred organization costs ................ 7,665
Insurance and other expenses ............................... 3,572
-------
118,893
Less expenses reduced and absorbed ............................ (60,678)
-------
Total expenses incurred by Fund ............................ 58,215
-------
Net investment income ......................................... 602,287
Net realized gain on investments sold ......................... 33
-------
Net increase in net assets resulting from operations .......... $602,320
</TABLE>
- -----------------
See accompanying Notes to Financial Statements.
F-3
<PAGE> 65
SCHWABFUNDS(R)
SCHWAB MONEY MARKET PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 3, 1994
FOR THE (COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income ..................... $ 602,287 $ 81,012
Net realized gain (loss) on
investments sold ........................ 33 (97)
----------- -----------
Increase in net assets resulting from
operations ............................ 602,320 80,915
----------- -----------
Dividends to shareholders from net
investment income ....................... (602,287) (81,012)
----------- -----------
CAPITAL SHARE TRANSACTIONS (dollar amounts
and number of shares are the same)
Proceeds from shares sold ................ 68,313,915 16,565,781
Net asset value of shares issued in
reinvestment of dividends .............. 552,602 50,171
Less payments for shares redeemed ........ (59,363,572) (9,206,401)
----------- -----------
Increase in net assets from
capital share transactions .......... 9,502,945 7,409,551
----------- -----------
Total increase in net assets ............... 9,502,978 7,409,454
NET ASSETS
Beginning of period ...................... 7,409,454 --
----------- -----------
End of period ........................... $16,912,432 $ 7,409,454
----------- -----------
</TABLE>
- -----------
See accompanying Notes to Financial Statements.
F-4
<PAGE> 66
SCHWABFUNDS(R)
SCHWAB MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 1995
1. DESCRIPTION OF THE FUND
The Schwab Money Market Portfolio (the "Fund") is a series of Schwab
Annuity Portfolios (the "Trust"), a diversified, no-load, open-end, management
investment company organized as a Massachusetts business trust on January 21,
1994 and registered under the Investment Company Act of 1940, as amended. The
Fund commenced operations on May 3, 1994.
The Fund invests primarily in a portfolio of high quality, debt
securities which mature within 397 days. The Fund is intended exclusively as an
investment vehicle for Schwab Investment Advantage(TM), a variable annuity
program.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
SECURITY VALUATION: Investments are stated at amortized cost which
approximates market value.
SECURITY TRANSACTIONS AND INTEREST INCOME: Security transactions are
accounted for on a trade date basis (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis and includes
amortization of premium and accretion of discount on investments. Realized
gains and losses from security transactions are determined or an identified
cost basis.
REPURCHASE AGREEMENTS: Repurchase agreements are fully collateralized
by U.S. Treasury or government agency securities. All collateral is held by the
Fund's custodian and is monitored daily to ensure that its market value at
least equals the repurchase price under the agreement.
DIVIDENDS TO SHAREHOLDERS: The Fund declares a daily dividend, equal to
its net investment income for that day, payable monthly.
DEFERRED ORGANIZATION COSTS: Costs incurred in connection with the
organization of the Fund and its initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five-year period from the Fund's commencement of operations.
EXPENSES: Expenses arising in connection with the Fund are charged
directly to the Fund. As the Trust offers additional funds, expenses common to
all series of the Trust will be allocated to each series in proportion to their
relative net assets.
FEDERAL INCOME TAXES: It is the Fund's policy to meet the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute all net investment income and realized net capital gains, if any,
to shareholders. Therefore, no federal income tax provision is required. The
Fund intends to qualify under the Code with respect to the diversification
requirements related to the tax-deferred status of insurance company separate
accounts. The Fund is considered a separate entity for tax purposes.
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS: The Trust has an
investment advisory and administration agreement with Charles Schwab Investment
Management, Inc. (the "Investment Manager"). For advisory services and
facilities furnished, the Fund pays an annual fee, payable monthly, of .46% of
the first $2 billion of average daily net assets, .45% of such assets over $2
billion and .40% of such assets in excess of $3 billion. Under this agreement,
the Fund incurred investment advisory and administration fees of $53,557 for
the year ended December 31, 1995, before the Investment Manager reduced its
fee (see Note 4).
OFFICERS AND TRUSTEES: Certain officers and trustees of the Trust are
also officers or directors of the Investment Manager. During the year ended
December 31, 1995, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Fund incurred fees of $5,214 related to
the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER
The Investment Manager reduced a portion of its fee and absorbed
certain expenses in order to limit the Fund's ratio of operating expenses to
average net assets. For the year ended December 31, 1995, the total of such
fees and expenses reduced and absorbed by the Investment Manager was $60,678.
F-5
<PAGE> 67
SCHWABFUNDS(R)
SCHWAB MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended December 31, 1995
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities for the year
ended December 31, 1995, aggregated $117,667,482 and $107,376,242, respectively.
6. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout
the period:
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 3, 1994
FOR THE (COMMENCEMENT
YEAR ENDED OF OPERATIONS) TO
DECEMBER 31, DECEMBER 31,
1995 1994
-------------- ----------------
<S> <C> <C>
Net asset value at beginning of period.... $1.00 $1.00
Income from investment operations
Net investment income................... .05 .03
Net realized and unrealized gain (loss)
on investments........................ -- --
--------- ----------
Total from investment operations..... .05 .03
Less distributions
Dividends from net investment income.... (.05) (.03)
Distributions from realized gain
on investments........................ -- --
--------- ----------
Total distributions.................. (.05) (.03)
--------- ----------
Net asset value at end of period.......... $1.00 $1.00
========= =========
Total return.............................. 5.26% 2.55%
Ratios/Supplemental data
Net assets, end of period............... $16,912,432 $7,409,454
Ratio of expenses to average net assets. .50% .50%*
Ratio of net investment income to
average net assets.................... 5.17% 4.16%*
</TABLE>
The Investment Manager has reduced a portion of its fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced
and absorbed, the ratio of expenses to average net assets for the periods ended
December 31, 1995 and 1994, would have been 1.02% and 2.10%*, respectively, and
the ratio of net investment income to average net assets would have been 4.65%
and 2.56%*, respectively.
- ---------------------
* Annualized
F-6
<PAGE> 68
SCHWABFUNDS(R)
SCHWAB MONEY MARKET PORTFOLIO
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of the Schwab Money Market Portfolio
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Schwab Money Market Portfolio
(one of the series constituting Schwab Annuity Portfolios, hereafter referred
to as the "Trust") at December 31, 1995, the results of its operations for the
year then ended, the changes in its net assets and the financial highlights for
the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1995 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Francisco, California
January 31, 1996
F-7
<PAGE> 69
PART C
OTHER INFORMATION
September 9, 1996
SCHWAB ANNUITY PORTFOLIOS
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Included in Part B, Statement of Additional Information:
Incorporated by reference to the Statement of Additional
Information of Schwab Money Market Portfolio filed with the
Securities and Exchange Commission pursuant to Rule 497(e) on
April 29, 1996:
-- Schwab Money Market Portfolio Schedule of Investments, dated
December 31, 1995 (Audited)
-- Schwab Money Market Portfolio Statement of Assets and
Liabilities, dated December 31, 1995 (Audited)
-- Schwab Money Market Portfolio Statement of Operations for the
year ended December 31, 1995 (Audited)
-- Schwab Money Market Portfolio Statement of Changes in Net Assets
for the fiscal periods ended December 31, 1995 and 1994 (Audited)
-- Schwab Money Market Portfolio Notes to Financial Statements for
the year ended December 31, 1995 (Audited)
-- Report of Independent Accountants for Schwab Money Market
Portfolio, dated January 31, 1996
C-1
<PAGE> 70
(b) Exhibits:
(1) Agreement and Declaration of Trust is incorporated by
reference to Exhibit (1) to the Registration Statement on
Form N-1A of Schwab Annuity Portfolios ("Registrant"),
filed on January 27, 1994
(2) Amended and Restated Bylaws are incorporated by reference
to Exhibit (2) to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A, filed on
April 29, 1996
(3) Inapplicable
(4) (a) Article III, Sections 4 and 5; Article IV, Section 1;
Article V; Article VIII, Section 4; and Article IX,
Sections 1, 4, and 7 of the Agreement and Declaration of
Trust is incorporated by reference to Exhibit (1) to
Registrant's Registration Statement on Form N-1A, filed on
January 27, 1994
(b) Article 9 and Article 11 of the Amended and Restated
Bylaws are incorporated by reference to Exhibit (2) to
Post-Effective Amendment No. 3 to Registrant's Registration
Statement on Form N-1A, filed on April 29, 1996
(5) (a) Investment Advisory and Administration Agreement
between Registrant and Charles Schwab Investment
Management, Inc. (the "Investment Manager") dated June 15,
1994 is incorporated by reference to Exhibit (5) to
Post-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A, filed on November 1, 1994
(b) Amended Schedule to Investment Advisory and
Administration Agreement referred to at Exhibit (5)(a)
above is filed herewith
(c) Investment Sub-Advisory Agreement between Investment
Manager and Symphony Asset Management, Inc. ("Symphony") is
filed herewith
(6) (a) Distribution Agreement between Registrant and Charles
Schwab & Co., Inc. ("Schwab") dated March 29, 1994 is
incorporated by reference to Exhibit (6) to Post-Effective
Amendment No. 1 to Registrant's Registration Statement on
Form N-1A, filed on November 1, 1994
(b) Amended Schedule to Distribution Agreement referred to
at Exhibit (6)(a) above is filed herewith
(7) Inapplicable
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<PAGE> 71
(8) (a) Custodian Services Agreement between Registrant and PNC
Bank, National Association, dated March 29, 1994, is
incorporated by reference to Exhibit (8)(a) to
Post-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A, filed on November 1, 1994
(b) Amendment No. 1 to the Custodian Services Agreement
referred to at Exhibit (8)(a) above is incorporated by
reference to Exhibit (8)(b) to Post-Effective Amendment No.
3 to Registrant's Registration Statement on Form N-1A,
filed on April 29, 1996
(c) Amended Schedule to the Custodian Services Agreement
referred to at Exhibit (8)(a) above is filed herewith
(d) Custodian Services Agreement between Registrant and
State Street Bank and Trust Company is filed herewith
(e) Transfer Agency Agreement between Registrant and Schwab
dated March 29, 1994 is incorporated by reference to
Exhibit (8)(b) to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, filed on
November 1, 1994
(f) Amended Schedules to the Transfer Agency Agreement
referred to at Exhibit (8)(e) above is filed herewith
(g) Shareholder Service Agreement between Registrant and
Schwab dated March 29, 1994 is incorporated by reference to
Exhibit (8)(c) to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, filed on
November 1, 1994
(h) Amended Schedules to the Shareholder Service Agreement
referred to at Exhibit (8)(g) above is filed herewith
(9) License Agreement between Registrant and Standard & Poor's
Corporation is filed herewith
(10) Opinion and Consent of Ropes & Gray as to legality of the
securities being registered is incorporated by reference to
Registrant's Rule 24f-2 Notice, filed on February 20, 1996
(11) (a) Consent of Ropes & Gray is filed herewith
(b) Consent of Price Waterhouse LLP, Independent
Accountants, is filed herewith
(12) Inapplicable
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<PAGE> 72
(13) (a) Purchase Agreement between Registrant and Schwab
relating to Schwab Money Market Portfolio is incorporated
by reference to Exhibit (13) to Pre-Effective Amendment No.
1 to Registrant's Registration Statement on Form N-1A,
filed on March 25, 1994
(b) Purchase Agreement between Registrant and Schwab
relating to Schwab Asset Director(R)-High Growth Portfolio
and Schwab S&P 500 Portfolio is filed herewith
(14) Inapplicable
(15) Inapplicable
(16) Performance Calculations for Schwab Money Market Portfolio
is incorporated by reference to Exhibit (8)(b) to
Post-Effective Amendment No. 3 to Registrant's Registration
Statement on Form N-1A, filed on April 29, 1996
(17) Financial Data Schedule for Schwab Money Market Portfolio
is filed herewith
(18) Inapplicable
Item 25. Persons Controlled by or under Common Control with Registrant.
The Charles Schwab Family of Funds ("Schwab Fund Family"), Schwab
Investments and Schwab Capital Trust each are Massachusetts business trusts
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); are advised by the Investment Manager; and employ Schwab as its principal
underwriter, transfer agent, and shareholder services agent. As a result, the
Schwab Fund Family, Schwab Investments and Schwab Capital Trust may be deemed to
be under common control with Registrant.
Item 26. Number of Holders of Registrant's Securities.
As of August 16, 1996, the number of record holders of Registrant
was 4.
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<PAGE> 73
Item 27. Indemnification.
Article VIII of Registrant's Agreement and Declaration of Trust
(Exhibit (1) hereto, which is incorporated herein by reference) provides in
effect that Registrant will indemnify its officers and trustees against all
liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise, or as fines and penalties, and counsel
fees reasonably incurred by any such officer or trustee in connection with the
defense or disposition of any action, suit, or other proceeding. However, in
accordance with Section 17(h) and 17(i) of the 1940 Act and its own terms, said
Agreement and Declaration of Trust does not protect any person against any
liability to Registrant or its shareholders to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or her office.
In any event, Registrant will comply with 1940 Act Releases No. 7221 and 11330
respecting the permissible boundaries of indemnification by an investment
company of its officers and trustees.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
trustees, officers, and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a trustee, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
Item 28. Business and Other Connections of Investment Manager.
(a) Information pertaining to business and other connections of
Registrant's Investment Manager is hereby incorporated by reference to the
section of the Prospectuses captioned "Organization and Management of the Fund"
and to the section of the Statements of Additional Information captioned
"Management of the Trust." For Schwab Asset Director(R)-High Growth Portfolio,
information pertaining to business and other connections of this Fund's
sub-adviser is hereby incorporated by reference to the section of its Prospectus
captioned "Organization and Management of the Fund" and to the section of the
Statement of Additional Information captioned "Management of the Trust."
Registrant's Investment Manager, Charles Schwab Investment
Management, Inc., a Delaware corporation organized in October 1989 to serve as
investment manager to the Schwab Fund Family, also serves as the investment
manager to Schwab Investments and Schwab Capital Trust, each an open-end,
management investment company. The principal place of business of the Investment
Manager is 101 Montgomery Street, San Francisco, California 94104. The only
business in which the Investment Manager engages is that of investment manager
and
C-5
<PAGE> 74
administrator to Registrant, the Schwab Fund Family, Schwab Investments, Schwab
Capital Trust and any other investment companies that Schwab may sponsor in the
future.
Registrant's sub-investment adviser for Schwab Asset
Director(R)-High Growth Portfolio is Symphony.
(b) The business, profession, vocation or employment of a substantial
nature in which each director and/or executive officer of Schwab and/or the
Investment Manager is or has been engaged during the past two fiscal years for
his or her own account in the capacity of director, officer, employee, partner
or trustee is as follows:
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Charles R. Schwab, Charles Schwab & Co., Inc. Chairman and Director
Chairman and Trustee
The Charles Schwab Corporation Chairman, Chief Executive Officer
and Director
Charles Schwab Investment Management, Chairman and Director
Inc.
The Charles Schwab Trust Chairman and Director
Company
Mayer & Schweitzer, Inc. Chairman and Director
The Gap, Inc. Director
Transamerica Corporation Director
AirTouch Communications Director
Siebel Systems Director
Lawrence J. Stupski Charles Schwab & Co., Inc. Director until February 1995; Vice
Chairman until August 1994
The Charles Schwab Corporation Vice Chairman and Director; Chief
Operating Officer until March 1994
</TABLE>
C-6
<PAGE> 75
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Mayer & Schweitzer, Inc. Director until February 1995
The Charles Schwab Trust Director
Company
David S. Pottruck Charles Schwab & Co., Inc. President, Chief Executive Officer
and Director
The Charles Schwab Corporation President, Chief Operating Officer
and Director
Charles Schwab Investment Management, Director
Inc.
Mayer & Schweitzer, Inc. Chairman, Chief Executive Officer
and Director
Ronald W. Readmond Charles Schwab & Co., Inc. Vice Chairman and Director until
January 1996; Senior Executive Vice
President and Chief Operating
Officer until January 1995
The Charles Schwab Corporation Executive Vice President until
January 1996; Senior Executive Vice
President until January 1995
Mayer & Schweitzer, Inc. Director until January 1996
John P. Coghlan Charles Schwab & Co., Inc. Executive Vice President - Schwab
Institutional
The Charles Schwab Corporation Executive Vice President - Schwab
Institutional
The Charles Schwab Trust Company Director and Executive Vice President
</TABLE>
C-7
<PAGE> 76
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Dawn G. Lepore Charles Schwab & Co., Inc. Executive Vice President and Chief
Information Officer
The Charles Schwab Corporation Executive Vice President and Chief
Information Officer
Daniel O. Leemon The Charles Schwab Corporation Executive Vice President - Business
Strategy
Charles Schwab & Co., Inc. Executive Vice President - Business
Strategy
Timothy F. McCarthy, Charles Schwab Investment Management, Chief Executive Officer
Trustee and President Inc.
Charles Schwab & Co., Inc. Executive Vice President - Mutual
Funds
The Charles Schwab Corporation Executive Vice President - Mutual
Funds
Jardine Fleming Unit Trusts Ltd. Chief Executive Officer until
October 1995
Fidelity Investment Advisor Group President until 1994
Elizabeth G. Sawi Charles Schwab & Co., Inc. Executive Vice President -
Electronic Brokerage
The Charles Schwab Corporation Executive Vice President -
Electronic Brokerage
Steven L. Scheid The Charles Schwab Corporation Executive Vice President - Chief
Financial Officer
Charles Schwab & Co., Inc. Director and Chief Financial Officer
</TABLE>
C-8
<PAGE> 77
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Charles Schwab Investment Management, Director and Chief Financial Officer
Inc.
The Charles Schwab Trust Company Chief Financial Officer
Schwab Retirement Plan Services, Inc. Director
TrustMark, Inc. Director
ShareLink Investment Services, PLC Director
Performance Technologies, Inc. Director
Tom D. Seip Charles Schwab & Co., Inc. Executive Vice President - Retail
Brokerage
The Charles Schwab Corporation Executive Vice President - Retail
Brokerage
Charles Schwab Investment Management, President and Chief Operating
Inc. Officer until 1994
John N. Tognino Charles Schwab & Co., Inc. Executive Vice President - Capital
Markets and Trading until February
1996
The Charles Schwab Corporation Executive Vice President - Capital
Markets and Trading until February
1996
Mayer & Schweitzer, Inc. Director and Vice Chairman until
February 1996
Luis E. Valencia Charles Schwab & Co., Inc. Executive Vice President - Human
Resources and Corporate Support
</TABLE>
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<PAGE> 78
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
The Charles Schwab Corporation Executive Vice President and Chief
Administrative Officer
Commercial Credit Corporation Managing Director until February 1994
Christopher V. Dodds Charles Schwab & Co., Inc. Treasurer and Senior Vice President
The Charles Schwab Corporation Treasurer and Senior Vice President
Mayer & Schweitzer, Inc. Treasurer
William J. Klipp, Charles Schwab & Co., Inc. Senior Vice President - SchwabFunds
Trustee, Senior Vice President
and Chief Operating Officer
Charles Schwab Investment Management, President and Chief Operating Officer
Inc.
Stephen B. Ward, Charles Schwab Investment Management, Senior Vice President and Chief
Senior Vice President and Chief Inc. Investment Officer
Investment Officer
Frances Cole, Charles Schwab Investment Management, Vice President, Chief Counsel, Chief
Secretary Inc. Compliance Officer and Assistant
Corporate Secretary
Tai-Chin Tung Charles Schwab & Co., Inc. Vice President-Finance
Treasurer and
Principal Financial Officer
Charles Schwab Investment Management, Controller
Inc.
Robertson Stephens Investment Controller
Management, Inc.
</TABLE>
C-10
<PAGE> 79
<TABLE>
<CAPTION>
Name and Position
with Registrant Name of Company Capacity
- ----------------- --------------- --------
<S> <C> <C>
Cynthia K. Holbrook The Charles Schwab Corporation Assistant Corporate Secretary
Charles Schwab & Co., Inc. Assistant Corporate Secretary
Charles Schwab Investment Management, Corporate Secretary
Inc.
The Charles Schwab Trust Assistant Corporate Secretary
Company
David J. Neuman The Charles Schwab Trust Corporate Secretary
Company
Mary B. Templeton Charles Schwab Investment Management, Assistant Corporate Secretary
Inc.
The Charles Schwab Corporation Senior Vice President, General
Counsel and Corporate Secretary
Charles Schwab & Co., Inc. Senior Vice President, General
Counsel and Corporate Secretary
Mayer & Schweitzer Assistant Corporate Secretary
The Charles Schwab Trust Assistant Corporate Secretary until
Company February 1996
David H. Lui Charles Schwab Investment Management, Vice President and Senior Counsel
Assistant Secretary Inc.
Christina M. Perrino Charles Schwab Investment Management, Vice President and Senior Counsel
Assistant Secretary Inc.
</TABLE>
(b) The following information, which is believed to be accurate, is based
upon information provided by Symphony. The business, profession, vocation or
employment of a substantial nature in which each director and/or officer of
Symphony is or has been engaged during the past two
C-11
<PAGE> 80
fiscal years for his or her own account in the capacity of director, officer,
employee, partner or trustee is as follows:
<TABLE>
<CAPTION>
Name Name of Company Capacity
- ---- --------------- --------
<S> <C> <C>
Andrew T. Rudd Symphony Asset Management, Inc. Director and Chairman
BARRA, Inc. Director, Chief Executive Officer and
Chairman
Jeffrey L. Skelton Symphony Asset Management, Inc. Director, Chief Executive Officer and
President
BARRA, Inc. President, BARRA Ventures Div. until 1994
Neil L. Rudolph Symphony Asset Management, Inc. Chief Operating Officer/Chief Compliance
Officer
Wells Fargo Nikko Investment Advisors Managing Director, Chief Operating
Officer -- Mutual Fund Group until 1994
Praveen K. Gottipalli Symphony Asset Management, Inc. Director of Investments
BARRA, Inc. Director of Active Strategies, 1994
Michael J. Henman Symphony Asset Management, Inc. Director of Business Development
Wells Fargo Nikko Investment Advisors Managing Director until 1994
</TABLE>
Item 29. Principal Underwriter.
(a) Schwab acts as principal underwriter and distributor of Registrant's
shares. Schwab currently also acts as a principal underwriter for the Schwab
Fund Family, Schwab Investments, and Schwab Capital Trust, and intends to act as
such for any other investment company which Schwab may sponsor in the future.
(b) See Item 28(b) for information on the officers and directors of Schwab.
The principal business address of Schwab is 101 Montgomery Street, San
Francisco, California 94104.
(c) Not applicable.
C-12
<PAGE> 81
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the 1940 Act and the Rules thereunder are
maintained at the offices of: Registrant (transfer agency and shareholder
records); Registrant's investment manager and administrator, Charles Schwab
Investment Management, Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's sub-investment adviser for the Schwab Asset Director(R)-High
Growth Portfolio, Symphony Asset Management, Inc., 555 California Street, Suite
2975, San Francisco, California 94104; Registrant's principal underwriter,
Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, California
94104; Registrant's custodians and fund accountants, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02180 and PNC Bank, National
Association/PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809
(ledgers, receipts, and brokerage orders); or Ropes & Gray, counsel to
Registrant, 1301 K Street, N.W., Suite 800 East, Washington, District of
Columbia 20005 (minute books, bylaws, and declaration of trust).
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Registrant undertakes to call a meeting of Shareholders, at the request
of at least 10% of registrant's outstanding shares, for the purpose of voting
upon the question of removal of a trustee or trustees and to assist in
communications with other Shareholders as required by Section (16) of the 1940
Act.
(b) Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of Registrant's latest Annual Report to Shareholders upon
request and without charge.
(c) Registrant undertakes to file a post-effective amendment using
financial statements, which need not be audited, within four to six months from
the commencement of operations for each of the Schwab Asset Director-High Growth
Portfolio and Schwab S&P 500 Portfolio.
C-13
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended, Registrant
certifies that it meets all of the requirements for effectiveness of this
Post-Effective Amendment No. 5 to Registrant's Registration Statement pursuant
to rule 485(b) under the 1933 Act and has duly caused this Post-Effective
Amendment No. 5 to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Washington, District of Columbia, on the 5th day of
September 1996.
SCHWAB ANNUITY PORTFOLIOS
Registrant
Charles R. Schwab*
----------------------------
Charles R. Schwab, Chairman
Pursuant to the requirements of the 1933 Act, this Post-Effective Amendment
No. 5 to Registrant's Registration Statement on Form N-1A has been signed below
by the following persons in the capacities indicated this 5th day of September
1996.
Signature Title
Charles R. Schwab* Chairman and Trustee
- ---------------------
Charles R. Schwab
Timothy F. McCarthy* President and Trustee
- ---------------------
Timothy F. McCarthy
William J. Klipp* Senior Vice President, Chief
- ---------------------
William J. Klipp Operating Officer,and Trustee
Donald F. Dorward* Trustee
- ---------------------
Donald F. Dorward
Robert G. Holmes* Trustee
- ---------------------
Robert G. Holmes
Donald R. Stephens* Trustee
- ---------------------
Donald R. Stephens
Michael W. Wilsey* Trustee
- ---------------------
Michael W. Wilsey
Tai-Chin Tung** Treasurer and Principal
- ---------------------
Tai-Chin Tung Financial Officer
*By: /s/ Alan G. Priest
-----------------------------------------------
Alan G. Priest, Attorney-in-Fact pursuant
to Powers of Attorney previously filed.
** Power of Attorney filed herewith.
<PAGE> 83
POWER OF ATTORNEY
I, the undersigned trustee and officer of The Charles Schwab Family of
Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and
Schwab Advantage Trust (each a "Trust" and collectively the "Trusts"),
Massachusetts business trusts, do hereby constitute and appoint William J.
Klipp, Frances Cole, Martin E. Lybecker and Alan G. Priest, and each of them
singly, my true and lawful attorneys, with full power to them and each of them,
to sign for me and in my name and in the capacity listed below, any and all
amendments to the Registration Statement on Form N-1A of each Trust, and to file
the same with all exhibits thereto, and other documents in connection
thereunder, with the Securities and Exchange Commission, granting unto my said
attorneys, and each of them acting alone, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in the
premises, as fully as to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue thereof.
WITNESS my hand on the date set forth below.
August 13, 1996 /s/ Tai-Chin Tung
-------------------------
Tai-Chin Tung
Principal Financial Officer
<PAGE> 84
Exhibit Index
-------------
Exh. No. Document
-------- --------
5(b) Amended Schedules to Investment Advisory and Administration
Agreement
5(c) Investment Sub-Advisory Agreement
6(b) Amended Schedule to Distribution Agreement
8(c) Amended Schedule to the Custodian Services Agreement
8(d) Custodian Services Agreement
8(f) Amended Schedules to the Transfer Agency Agreement
8(h) Amended Schedules to the Shareholder Service Agreement
9 License Agreement
11(a) Consent of Ropes & Gray
11(b) Consent of Price Waterhouse LLP
13(b) Purchase Agreement
17 Financial Data Schedule for Schwab Money Market Portfolio
<PAGE> 1
EXHIBIT 5(B)
AMENDED SCHEDULE A
TO INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT
FOR SCHWAB ANNUITY PORTFOLIOS
FUND FUND EFFECTIVE DATE
- ---- -------------------
Schwab Money Market Portfolio March 29, 1994
Schwab Asset Director-High Growth Portfolio August 4, 1996
Schwab S&P 500 Portfolio August 4, 1996
SCHWAB ANNUITY PORTFOLIOS
By: /s/ Timothy F. McCarthy
-----------------------
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
By: /s/ Stephen B. Ward
-------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer
A-1
<PAGE> 2
AMENDED SCHEDULE B
TO INVESTMENT ADVISORY AND
ADMINISTRATION AGREEMENT
FOR SCHWAB ANNUITY PORTFOLIOS
THE FEES LISTED BELOW ARE FOR SERVICES PROVIDED UNDER THIS
AGREEMENT AND ARE TO BE ACCRUED DAILY AND PAID MONTHLY IN
ARREARS:
FUND FEE
- ---- ---
Schwab Money Market Portfolio Forty-six one-hundredths of one
percent (0.46%) of the Fund's average
daily net assets not in excess of $2
billion, forty-five one-hundredths of
one percent (0.45%) of such net assets
over $2 billion and not in excess of
$3 billion and forty one-hundredths of
one percent (0.40%) of such net assets
over $3 billion.
Schwab Asset Director-High Growth Seventy-four one-hundredths of one
Portfolio percent (0.74%) of the Fund's average
daily net assets not in excess of $1
billion, sixty-nine one-hundredths of
one percent (0.69%) of such net assets
over $1 billion and not in excess of
$2 billion and sixty-four
one-hundredths of one percent (0.64%)
of such net assets over $2 billion.
B-1
<PAGE> 3
FUND FEE
- ---- ---
Schwab S&P 500 Portfolio Thirty-six one-hundredths of one
percent (0.36%) of the Fund's average
daily net assets not in excess of $1
billion, thirty-three one-hundredths
of one percent (0.33%) of such net
assets over $1 billion and not in
excess of $2 billion and thirty-one
one-hundredths of one percent (0.31%)
of such net assets over $2 billion.
SCHWAB ANNUITY PORTFOLIOS
By: /s/ Timothy F. McCarthy
-----------------------
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
By: /s/ Stephen B. Ward
-------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer
B-2
<PAGE> 1
EXHIBIT 5(C)
AMENDED AND RESTATED
INVESTMENT SUB-ADVISORY AGREEMENT
AGREEMENT executed and effective as of September 12,1995 and amended
and restated May 16, 1996 by and between CHARLES SCHWAB INVESTMENT MANAGEMENT,
INC., a Delaware corporation and registered investment adviser ("CSIM"), and
SYMPHONY ASSET MANAGEMENT, INC., a California corporation and registered
investment adviser ("Symphony").
WHEREAS, CSIM is the investment manager for Schwab Annuity Portfolios
and Schwab Capital Trust (each a "Trust"), open-end management investment
companies registered under the Investment Company Act of 1940, as amended ("1940
Act"); and
WHEREAS, CSIM desires to retain Symphony as CSIM's agent to furnish
various services to the investment portfolios of each Trust listed on Schedule A
hereto (each a "Fund" and collectively the "Funds"); and
WHEREAS, the services to be provided by Symphony under this Agreement
may be construed to be investment advisory services;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Appointment. CSIM hereby appoints Symphony to provide services to
the Funds for the period and on the terms set forth in this Agreement. Symphony
accepts such appointment and agrees to furnish the services herein set forth for
the compensation herein provided.
2. Delivery of Documents. CSIM has furnished Symphony with copies
properly certified or authenticated of each of the following:
(a) each Trust's Agreement and Declaration of the Trust, as filed
with the Secretary of State of The Commonwealth of Massachusetts, and
all amendments thereto or restatements thereof (such Declaration, as
presently in effect and as it shall from time to time be amended or
restated, is herein called the "Declaration of Trust");
-1-
<PAGE> 2
(b) each Trust's By-Laws and amendments thereto;
(c) resolutions of each Trust's Board of Trustees authorizing the
appointment of Symphony and approving this Agreement;
(d) each Trust's Notification of Registration on Form N-8A under
the 1940 Act as filed with the Securities and Exchange Commission (the
"SEC") on May 10, 1993 and all amendments thereto;
(e) each Trust's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended ("1933 Act") as filed with the SEC
and all amendments thereto insofar as such Registration Statement and
such amendments relate to the Funds; and
(f) each Trust's most recent prospectus and Statement of
Additional Information for the Funds (such prospectus and Statement of
Additional Information, as presently in effect, and all amendments and
supplements thereto, are herein collectively called the "Prospectus").
CSIM will furnish Symphony from time to time with copies of all
amendments of or supplements to the foregoing.
3. Services. Subject always to the supervision of each respective
Trust's Board of Trustees and CSIM, Symphony will provide information and
services to the Fund in connection with evaluating the optimal allocation of the
Funds' assets among major asset categories e.g., stocks, bonds and cash, based
on a computer-based optimization model known as Tactical Asset Allocation which
is managed and run on a daily basis.
Symphony will furnish to CSIM for each Fund a written report on a
daily basis, which includes (i)a detailed description of the financial data
input to the Asset Allocation Model, e.g., historical data on expected returns
for each asset category, yield data and other assumptions used to run the
model,and (ii) recommendations as to the percentage of each Funds'
-2-
<PAGE> 3
assets that should be invested among major asset categories, as well as
sub-categories. CSIM agrees to use the recommended asset mix from the Tactical
Asset Allocation Model solely in connection with the Schwab Asset Director Funds
listed on Schedule A hereto, except as consented to by Symphony.
Symphony will provide additional information and services to the
Funds as may be agreed upon from time to time by Symphony and CSIM. Symphony and
CSIM will each make its officers and employees available to the other from time
to time at reasonable times to review investment policies of the Funds and to
consult with each other regarding the investment affairs of the Funds. Symphony
will report to the Board of Trustees and to CSIM with respect to the services
provided under this Agreement.
Symphony further agrees that it:
(a) will use the same skill and care in providing such services
as it uses in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) will conform with all applicable statutes,rules and
regulations of the SEC and states pertaining to its investment advisory
activities and services provided under this Agreement;
(c) will report regularly to CSIM and to each respective Board of
Trustees and will make appropriate persons available for the purpose of
reviewing with representatives of CSIM and the Board of Trustees on a
regular basis at reasonable times the services provided to the Funds,
including, without limitation, review of the general investment
strategy of the Funds, the performance of the Funds in relation to
standard industry indices, interest rate considerations and general
conditions affecting the marketplace and will provide various other
reports from time to time as requested by CSIM;
(d) will furnish CSIM and each Trust's Board of Trustees such
periodic and/or special reports as the Board or CSIM may request;
-3-
<PAGE> 4
(e) will act upon instructions from CSIM not inconsistent with
its fiduciary duties hereunder;
(f) will treat confidentially and as proprietary information of
each Trust and CSIM or its affiliates all such records and other
information relative to the Trust, or CSIM and its affiliates, as
applicable, maintained by Symphony, and will not use such records and
information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification
to and approval in writing by each Trust, or CSIM and its affiliates,
as applicable, which approval shall not be unreasonably withheld and
may not be withheld where Symphony may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, or when so requested
by the Trust;
4. Books and Records. In compliance with the requirements of Rule 31a-3
under the 1940 Act, and applicable requirements of the Investment Advisers Act
of 1940 and rules thereunder, Symphony hereby agrees Symphony agrees to maintain
and preserve all required accounts, books and records with respect to Symphony's
duties related to the Funds and the Trust. Symphony understands and agrees that
all accounts, books and records it maintains for the Trust are the property of
the Trust and further agrees to surrender promptly to the Trust any of such
records upon the Trust's request.
5. Expenses. During the term of this Agreement, Symphony will pay all
expenses incurred by it in connection with its activities under this Agreement.
6. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, CSIM will pay Symphony, and Symphony agrees to
accept as full compensation therefor, the fee, accrued daily and payable
monthly, as described on Schedule B hereto. From time to time, Symphony may
agree to waive or reduce some or all of the compensation to which it is entitled
under this Agreement.
-4-
<PAGE> 5
7. Limitation of Liability. Symphony will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of Symphony's duties under this Agreement, except a loss
resulting from Symphony willful misfeasance, bad faith, or gross negligence in
the performance of its duties under this Agreement.
8. Indemnification. CSIM and Symphony each agree to indemnify the other
against any claim against, loss or liability to such other party (including
reasonable attorneys' fees) arising out of any action on the part of the
indemnifying party which constitutes willful misfeasance, bad faith or gross
negligence.
9. Duration and Termination. This Agreement will become effective as to
each Fund as of the date set forth opposite each Fund's name on Schedule A,
provided that it has been approved by a vote of a majority of the outstanding
voting securities of such Fund in accordance with the requirements under the
1940 Act and, unless sooner terminated as provided herein, will continue in
effect for two years from such date.
Thereafter, if not terminated as to a Fund, this Agreement will
continue in effect as to a Fund for successive periods of 12 months, provided
that such continuation is specifically approved at least annually (a) by the
vote of a majority of those members of the respective Trust's Board of Trustees
who are not interested persons of the Trust, Symphony, or CSIM, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
respective Trust's Board of Trustees or by vote of a majority of the outstanding
voting securities of such Fund. Notwithstanding the foregoing, this Agreement
may be terminated as to the Fund at any time, without the payment of any
penalty, on sixty days' written notice by the respective Trust or by CSIM or on
ninety days' written notice by Symphony. This Agreement will immediately
terminate in the event of its assignment. (As used in this Agreement, the terms
"majority of the outstanding voting securities", "interested persons" and
"assignment" have the same meaning of such terms in the 1940 Act.)
-5-
<PAGE> 6
10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be affected
thereby. This Agreement will be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and will be governed by the
laws of the State of California.
The names "Schwab Capital Trust", "Schwab Annuity Portfolios",
"Trustees of Schwab Annuity Portfolios" and "Trustees of Schwab Capital Trust"
refer respectively to the Trust created by, and the Trustees, as trustees but
not individually or personally, acting from time to time under the Declaration
of the Trust, to which reference is hereby made and a copy of which is on file
at the office of the Secretary of State of The Commonwealth of Massachusetts and
elsewhere as required by law, and to any and all amendments thereto so filed or
hereafter filed. The obligations of the "Schwab Capital Trust" and the "Schwab
Annuity Portfolios" entered in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually but only in such
capacities and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the assets of the Trust,
and persons dealing with the Fund must look solely to the assets of the Trust
belonging to such Fund for the enforcement of any claims against the Trust.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ William J. Klipp
-------------------------------------------
Name: William J. Klipp
Title: President and Chief Operating Officer
SYMPHONY ASSET MANAGEMENT, INC.
By: /s/ Neil Rudolph
-------------------------------------------
Name: Neil Rudolph
Title: Chief Operating Officer
-7-
<PAGE> 8
SCHEDULE A
Fund Effective Date
Schwab Capital Trust
Schwab Asset Director Funds September 25, 1995
(i.e., Schwab Asset Director-
High Growth Fund,Schwab Asset
Director-Balanced Growth Fund,
and Schwab Asset Director-
Conservative Growth Fund)
Schwab Annuity Portfolios
Schwab Asset Director-High Growth August 5, 1996
Portfolio
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ William J. Klipp
-------------------------------------------
Name: William J. Klipp
Title: President and Chief Operating Officer
SYMPHONY ASSET MANAGEMENT, INC.
By: /s/ Neil Rudolph
-------------------------------------------
Name: Neil Rudolph
Title: Chief Operating Officer
-8-
<PAGE> 9
SCHEDULE B
Fund Fee
Schwab Asset Director Funds Eight one-hundredths of one
(i.e., Schwab Asset Director- percent (0.08%) of the Funds'
High Growth Fund, Schwab aggregate average daily net
Asset Director-Balanced assets not in excess of $100
Growth Fund, and Schwab Asset million and six one-hundredths
Director-Conservative Growth of one percent (0.06%) of the
Fund) and Schwab Asset next $150 million and four one-
Director-High Growth Portfolio hundredths of one percent
(0.04%) of the next $600
million and two one-hundredths
of one percent (0.02%) over
$850 million
CHARLES SCHWAB INVESTMENT
MANAGEMENT, INC.
By: /s/ William J. Klipp
-------------------------------------------
Name: William J. Klipp
Title: President and Chief Operating Officer
SYMPHONY ASSET MANAGEMENT, INC.
By: /s/ Neil Rudolph
-------------------------------------------
Name: Neil Rudolph
Title: Chief Operating Officer
-9-
<PAGE> 1
EXHIBIT 6(B)
AMENDED SCHEDULE A
TO DISTRIBUTION AGREEMENT
FOR SCHWAB ANNUITY PORTFOLIOS
FUND FUND EFFECTIVE DATE
- ---- -------------------
Schwab Money Market Portfolio March 29, 1994
Schwab Asset Director-High Growth Portfolio August 4, 1996
Schwab S&P 500 Portfolio August 4, 1996
SCHWAB ANNUITY PORTFOLIOS
By:/s/ Timothy F. McCarthy
--------------------------
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB & CO., INC.
By:/s/ Colleen M. Hummer
--------------------------
Name: Colleen M. Hummer
Title: Senior Vice President
A-1
<PAGE> 1
EXHIBIT 8(C)
AMENDED SCHEDULE A
TO THE CUSTODIAN SERVICES
AGREEMENT FOR SCHWAB
ANNUITY PORTFOLIOS
FUND DATE
- ---- ----
Schwab Money Market Portfolio March 29, 1994
Schwab S&P 500 Portfolio August 4, 1996
SCHWAB ANNUITY PORTFOLIOS
By: /s/ Tai-Chin Tung
-----------------------
Name: Tai-Chin Tung
Title: Controller
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Joseph T. Gramlich
-------------------------
Name: Joseph T. Gramlich
Title: Vice President
<PAGE> 1
EXHIBIT 8(D)
CUSTODIAN CONTRACT
Between
SCHWAB ANNUITY PORTFOLIOS
and
STATE STREET BANK AND TRUST COMPANY
21D593
WP2363C
<PAGE> 2
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be
Held By It.......................................................1
2. Duties of the Custodian with Respect to Property of
the Funds Held by the Custodian in the United States.............1
2.1 Holding Securities......................................1
2.2 Delivery of Securities..................................2
2.3 Registration of Securities..............................4
2.4 Bank Accounts...........................................4
2.5 Availability of Federal Funds...........................5
2.6 Collection of Income....................................5
2.7 Payment of Fund Monies..................................5
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased.........................6
2.9 Appointment of Agents...................................6
2.10 Deposit of U.S. Securities in Securities System.........7
2.10A Fund Assets Held in the Custodian's Direct
Paper System............................................8
2.11 Segregated Account......................................9
2.12 Ownership Certificates for Tax Purposes.................9
2.13 Proxies ...............................................9
2.14 Communications Relating to Portfolio Securities.........9
2.15 Reports to Trust by Independent Public
Accountants............................................10
3. Duties of the Custodian with Respect to Property of
the Funds Held Outside of the United States.....................10
3.1 Appointment of Foreign Sub-Custodians..................10
3.2 Assets to be Held......................................10
3.3 Foreign Securities Depositories........................10
3.4 Holding Securities.....................................11
3.5 Agreements with Foreign Banking Institutions...........11
3.6 Access of Independent Accountants of the Trust.........11
3.7 Reports by Custodian...................................11
3.8 Transactions in Foreign Custody Account................11
3.9 Liability of Foreign Sub-Custodians....................12
3.10 Liability of Custodian.................................12
3.11 Monitoring Responsibilities............................12
3.12 Branches of U.S. Banks.................................13
3.13 Tax Law................................................13
<PAGE> 3
4. Payments for Repurchases or Redemptions and Sales
of Shares of a Fund.............................................13
5. Proper Instructions.............................................14
6. Actions Permitted Without Express Authority.....................14
7. Evidence of Authority...........................................14
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income......................................................15
9. Settlement Provisions...........................................17
10. Records.........................................................21
11. Opinion of Trust's Independent Accountant.......................21
12. Compensation of Custodian.......................................22
13. Responsibility of Custodian.....................................22
14. Effective Period, Termination and Amendment.....................23
15. Successor Custodian.............................................24
16. Interpretive and Additional Provisions..........................25
17. Massachusetts Law to Apply......................................25
18. Prior Contracts.................................................25
19. Limitation of Liability.........................................25
20. Shareholder Communications Election.............................25
2
<PAGE> 4
CUSTODIAN CONTRACT
This Contract between Schwab Annuity Portfolios, a business trust
organized and existing under the laws of The Commonwealth of Massachusetts,
having its principal place of business at 101 Montgomery Street, San Francisco,
California 94104 , hereinafter called the "Trust", and State Street Bank and
Trust Company, a Massachusetts trust company, having its principal place of
business at 225 Franklin Street, Boston, Massachusetts 02110, hereinafter called
the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
Pursuant to the provisions of the Trust's Agreement and Declaration of
Trust, the Trust hereby employs the Custodian as the custodian of the assets of
the portfolios of the Trust listed on Schedule C hereto, each a "Fund" and
collectively, the "Funds", including securities it desires to be held in places
within the United States ("domestic securities") and securities it desires to be
held outside the United States ("foreign securities") as permitted by paragraph
(c) (1) of Rule 17f-5 under the 1940 Act, as amended (the "1940 Act"). Each Fund
agrees to deliver to the Custodian all securities and cash owned by it, and all
payments of income, payments of principal or capital distributions received by
it with respect to all securities owned by the Fund from time to time, and the
cash consideration received by it for such new or treasury shares of capital
stock, $.00001 par value, ("Shares") of such Fund as may be issued or sold from
time to time. The Custodian shall not be responsible for any property of a Fund
held or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the Board of Trustees of the Trust, and provided that each agreement between the
Custodian and any sub-custodian shall provide that the sub-custodian will be
liable to the Custodian for losses arising from the negligence or willful
misconduct of the sub-custodian and the Custodian shall be responsible and
liable to the Fund on account of any actions or omissions of any sub-custodian
so employed to the same extent as such sub-custodian is liable to the Custodian.
The Custodian may employ as sub-custodians for the Fund's foreign securities and
other assets the foreign banking institutions and foreign securities
depositories designated in Schedule "A" hereto, but only in accordance with the
provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Funds Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Fund all non-cash property to be held by it in
the United States, including all domestic securities owned by the Fund,
other than (a) securities which are maintained
<PAGE> 5
pursuant to Section 2.10 in a clearing agency which acts as a
securities depository or in a book-entry system authorized by the U.S.
Department of the Treasury, collectively referred to herein as "U.S.
Securities System" and (b) commercial paper of an issuer for which
State Street Bank and Trust Company acts as issuing and paying agent
("Direct Paper") which is deposited and/or maintained in the Direct
Paper System of the Custodian pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Fund held by the Custodian or in a U.S.
Securities System account of the Custodian or in the Custodian's Direct
Paper book-entry system account ("Direct Paper System Account") only
upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, and only in the
following cases:
1) Upon sale of such securities for the account of the Fund and
simultaneous receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such
2
<PAGE> 6
securities, or pursuant to any deposit agreement; provided
that, in any such case, the new securities and cash, if any,
are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the Fund
and as set forth in the operating resolutions adopted by the
Trust's Board of Trustees or in the Fund's prospectus, which
may be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities, it being
understood that in connection with any loans for which
collateral is to be credited to the Custodian's account in the
book-entry system authorized by the U.S. Department of the
Treasury, the Custodian may rely on advice of credit received
from the book-entry system as evidence of receipt of such
collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the Trust's transfer agent
("Transfer Agent"), for delivery to such Transfer Agent or to
the holders of shares in connection with distributions in
kind, as may be described from time to time in a Fund's
currently effective prospectus and statement of additional
information ("prospectus"), in satisfaction of requests by
holders of Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Trustees or
3
<PAGE> 7
of a duly authorized Committee thereof signed by an officer of
the Trust and certified by the Secretary or an Assistant
Secretary, specifying the securities to be delivered, setting
forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such
securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee name
of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of a Fund under the
terms of this Contract shall be in "street name" or other good delivery
form. If, however, a Fund directs the Custodian to maintain securities
in "street name", the Custodian shall utilize its best efforts only to
timely collect income due the Fund on such securities and to notify the
Fund on a best efforts basis only of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by the Fund in a
bank account established and used in accordance with Rule 17f-3 under
the 1940 Act. Funds held by the Custodian for a Fund may be deposited
by it to its credit as Custodian in the Banking Department of the
Custodian or in such other banks or trust companies as it may in its
discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a custodian
under the 1940 Act and that each such bank or trust company and the
funds to be deposited with each such bank or trust company shall be
approved by vote of a majority of the Board of Trustees of the Trust.
Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that
capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between a Fund
and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of
specified times agreed upon from time to time by the Fund and the
Custodian in the amount of checks received in payment for Shares of
the Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to United States registered securities held hereunder to
which the Fund shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all income
4
<PAGE> 8
and other payments with respect to United States bearer securities if,
on the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring presentation as
and when they become due and shall collect interest when due on
securities held hereunder. Income due the Fund on domestic securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will promptly supply to the
Trust each list of Passive Foreign Investment Companies ("PFICs")
received by the Custodian from the Investment Company Institute from
time to time (it being understood that neither the Investment Company
Institute nor the Custodian has independently verified any of the
information contained in such lists).
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties
hereto, the Custodian shall pay out monies of a Fund in the following
cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the simultaneous delivery of
such securities, or evidence of title to such options, futures
contracts or options on futures contracts, to the Custodian
(or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the 1940
Act to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
U.S. Securities System, in accordance with the conditions set
forth in Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against simultaneous delivery of the
securities either in certificate form or through a prior or
simultaneous entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against
simultaneous delivery of the receipt evidencing purchase by
the Fund of securities owned by the Custodian along with
written evidence of the agreement by the Custodian to
repurchase such securities from the Fund or (e) for transfer
to a time deposit account of the Fund in any bank, whether
domestic or foreign if authorized in advance by Charles Schwab
Investment Management Inc. ("CSIM"); such transfer may be
effected prior to receipt of a confirmation from a broker
and/or the applicable bank, but only pursuant to Proper
Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
5
<PAGE> 9
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Trustees of the Trust or of a duly
authorized Committee thereof signed by an officer of the Trust
and certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions
from the Fund to so pay in advance, the Custodian shall be absolutely
liable to the Fund for such securities to the same extent as if the
securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the 1940 Act to act as a
custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in U.S. Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by a Fund in a
clearing agency registered with the Securities and Exchange Commission
under Section 17A of the Exchange Act, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "U.S. Securities System" in accordance with
applicable Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following provisions:
6
<PAGE> 10
1) The Custodian may keep domestic securities of the Fund in a
U.S. Securities System, provided that such securities are
represented in an account ("Account") of the Custodian in the
U.S. Securities System which shall not include any assets of
the Custodian other than assets held as a fiduciary, custodian
or otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a U.S.
Securities System shall identify by book-entry those
securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer domestic securities sold for the account of the Fund
upon (i) receipt of advice from the U.S. Securities System
that payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account
of the Fund. Copies of all advices from the U.S. Securities
System of transfers of domestic securities for the account of
the Fund shall identify the Fund, be maintained for the Fund
by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the
Fund in the form of a written advice or notice and shall
furnish to the Fund copies of daily transaction sheets
reflecting each day's transactions in the U.S. Securities
System for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for
safeguarding domestic securities deposited in the U.S.
Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 14
hereof; and
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the U.S. Securities System
by reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
U.S. Securities System; at the election of the Fund, it shall
be entitled to be subrogated to the rights of the Custodian
with respect to any claim against the U.S. Securities System
or any other person which the Custodian
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<PAGE> 11
may have as a consequence of any such loss or damage if and to
the extent that the Fund has not been made whole for any such
loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by a Fund in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the account of the
Fund; and
6) The Custodian shall promptly provide the Trust with any report
on its system of internal accounting control received by the
Custodian.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of a Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in
an account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of
The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or
organizations, regarding escrow or other
8
<PAGE> 12
arrangements in connection with transactions by the Fund, (ii) for
purposes of segregating cash or government securities in connection
with options purchased, sold or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund,
(iii) for the purposes of compliance by the Fund with the procedures
required by Investment Company Act Release No. 10666, or any subsequent
release or releases of the Securities and Exchange Commission relating
to the maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in
the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of Trustees
of the Trust or a duly authorized Committee thereof signed by an
officer of the Trust and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of a Fund held by it and
in connection with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the securities held by it
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name of a Fund or a nominee of a Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly
deliver to the Fund's sub-advisor, Dimensional Fund Advisors, such
proxies, all proxy soliciting materials and all notices relating to
such securities.
2.14 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to a
Fund all written information (including, without limitation, pendency
of calls and maturities of domestic securities and expirations of
rights in connection therewith and notices of exercise of call and put
options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers
of the domestic securities being held for the Fund. With respect to
tender or exchange offers, the Custodian shall transmit promptly to the
Fund all written information received by the Custodian from issuers of
the domestic securities whose tender or exchange is sought and from the
party (or his agents) making the tender or exchange offer. If the Fund
desires to take action with respect to any tender offer, exchange offer
or any other similar transaction, the Fund shall notify the Custodian
at least three business days prior to the date on which the Custodian
is to take such action.
2.15 Reports to Trust by Independent Public Accountants. The Custodian shall
provide the Trust, at such times as the Trust may reasonably require,
with reports by independent public accountants on the accounting
system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts,
including domestic securities deposited and/or maintained in a U.S.
Securities System, relating to the services provided by the Custodian
under this Contract; such reports shall be of
9
<PAGE> 13
sufficient scope and in sufficient detail as may be required by the
Trust to provide reasonable assurance that any material inadequacies
would be disclosed by such examination, and, if there are no such
inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Funds Held
Outside of the United States.
3.1 Appointment of Foreign Sub-Custodians. The Trust hereby authorizes and
instructs the Custodian to employ as sub-custodians for each Fund's
foreign securities and other assets maintained outside the United
States the foreign banking institutions and foreign securities
depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of Proper Instructions, as defined in
Section 5 of this Contract, together with a certified resolution of the
Trust's Board of Trustees, the Custodian and the Trust may agree to
amend Schedule A hereto from time to time to designate additional
foreign banking institutions and foreign securities depositories to act
as sub-custodian. Upon receipt of Proper Instructions, a Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of such Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the 1940 Act, and (b) cash and cash equivalents in such amounts
as the Custodian or a Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions. The Custodian shall
identify on its books as belonging to the Fund, the foreign securities
of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Trust, assets of a Fund shall be
maintained in a clearing agency which acts as a Securities depository
or in a book-entry system for the central handling of securities
located outside of the United States (each a "Foreign Securities
System") only through arrangements implemented by the foreign banking
institutions serving as foreign sub-custodians pursuant to the terms of
Section 3.1 (Foreign Securities Systems and U.S. Securities Systems are
collectively referred to herein as the "Securities Systems."). Unless
otherwise authorized by the Board of Trustees of the Trust, such
arrangements shall include entry into written agreements containing the
provisions set forth in Section 3.5 hereof.
3.4 Holding Securities. The Custodian may hold securities and other
non-cash property for all of its customers, including the Trust, with a
foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers, provided
however, that (i) the records of the Custodian with respect to
securities and other non-cash property of the Fund which are maintained
in such account shall identify by book-entry those securities and other
non-cash property belonging to the Fund and (ii) the Custodian shall
require that
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<PAGE> 14
securities and other non-cash property so held by the foreign
sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) a Fund's assets
will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of the foreign banking institution or its
creditors or agents, except a claim of payment for their safe custody
or administration; (b) beneficial ownership of a Fund's assets will be
freely transferable without the payment of money or value other than
for custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to each Fund; (d) officers of,
auditors employed by, or other representatives of the Custodian,
including to the extent permitted under applicable law the independent
public accountants for the Trust, will be given access to the books and
records of the foreign banking institution relating to its actions
under its written agreement with the Custodian; and (e) assets of a
Fund held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Trust. Upon request of the
Trust, the Custodian will use its best efforts to arrange for the
independent accountants of the Trust to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its written
agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Trust a daily
list of foreign securities and other assets of each Fund held by
foreign sub-custodians. In addition, the Custodian will supply to the
Trust periodic statements, on a monthly basis or more frequently if
agreed upon by the Trust and the Custodian, in respect of the foreign
securities and other assets of each Fund held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of each Fund's securities and other assets
and advices or notifications of any transfers of securities to or from
each custodial account maintained by a foreign banking institution for
the Custodian on behalf of each Fund indicating, as to securities
acquired for such Fund, the identity of the entity having physical
possession of such securities.
3.8 Transactions in Foreign Custody Account (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of a Fund held outside the United States by
foreign sub-custodians. (b) Notwithstanding any provision of this
Contract to the contrary, settlement and payment for securities
received for the account of a Fund and delivery of securities
maintained for the account of a Fund may be effected in accordance with
the customary established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an
agent for such purchaser or dealer) against a receipt with the
expectation of
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<PAGE> 15
receiving later payment for such securities from such purchaser or
dealer. (c) Foreign securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's nominee to
the same extent as set forth in Section 2.3 of this Contract. The Trust
agrees to hold any such nominee harmless from any liability as a holder
of record of such securities other than liabilities arising out of the
negligence or willful misconduct of such nominee.
3.9 Liability of Foreign Sub-Custodians. Each written agreement pursuant to
which the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify and hold harmless the
Custodian and each Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institutions performance of such obligations. At the election of a
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. Bank as contemplated by paragraph 3.12 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
respecting a Fund's foreign securities and cash and cash equivalents
held by a foreign sub-custodian pursuant to Section 3.2 hereof
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism or where the sub-custodian has otherwise
exercised reasonable care. Notwithstanding the foregoing provisions of
this paragraph 3.10, in delegating custody duties to State Street
London Ltd., the Custodian shall not be relieved of any responsibility
to a Fund for any loss due to such delegation, except such loss as may
result from (a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses
(excluding a bankruptcy or insolvency of State Street London Ltd. not
caused by political risk) due to Acts of God, nuclear incident or other
losses under circumstances where the Custodian and State Street London
Ltd. have exercised reasonable care.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to
the Trust, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Trust in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Trust in the event that the Custodian learns
of a material adverse change in the financial condition of a foreign
sub-custodian or any material loss involving the assets of a Fund or in
the case of any foreign sub-custodian not the subject of an exemptive
order from the Securities and Exchange Commission, is notified by such
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foreign sub-custodian that there appears to be a substantial likelihood
that its shareholders' equity will decline below $200 million (U.S.
dollars or the equivalent thereof) or that its shareholders' equity has
declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of a
Fund's assets is maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the 1940
Act meeting the qualifications set forth in Section 26(a) of said Act.
The appointment of any such branch as a sub-custodian shall be governed
by Article 1 of this Contract. (b) Cash held for the Fund in the United
Kingdom shall be maintained in an interest bearing account established
for the Fund with the Custodian's London branch, which account shall be
subject to the direction of the Custodian, State Street London Ltd. or
both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on a Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or
any state or political subdivision thereof. It shall be the
responsibility of the Trust to notify the Custodian of the obligations
imposed on a Fund or the Custodian as custodian of the Fund by the tax
law of jurisdictions other than those mentioned in the above sentence,
including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental
reporting. The sole responsibility of the Custodian with regard to such
tax law shall be to use reasonable efforts to assist a Fund with
respect to any claim for exemption, reclaim or refund under the tax law
of jurisdictions for which the Fund has provided such information.
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4. Payments for Repurchases or Redemptions and Sales of Shares of a Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Trust's Agreement and Declaration of Trust and any applicable
votes of the Board of Trustees of the Trust pursuant thereto, the Custodian
shall, upon receipt of instructions from the Transfer Agent, make funds
available for payment to holders of Shares who have delivered to the Transfer
Agent a request for redemption or repurchase of their Shares. In connection with
the redemption or repurchase of Shares of a Fund, the Custodian is authorized
upon receipt of instructions from the Transfer Agent to wire funds to or through
a commercial bank designated by the redeeming shareholder(s). In connection with
the redemption or repurchase of Shares of a Fund, the Custodian shall honor
checks drawn on the Custodian by a holder of Shares, which checks have been
furnished by the Fund to the holder of Shares, when presented to the Custodian
in accordance with such procedures and controls as are mutually agreed upon from
time to time between the Trust and the Custodian. The Custodian shall receive
from the distributor for the Trust's Shares or from the Transfer Agent and
deposit into a Fund's account such payments as are received for Shares of the
Fund issued or sold from time to time by the Fund. The Custodian will provide
timely notification to a Fund and the Transfer Agent of any receipt by it of
payments for Shares of the Fund.
5. Proper Instructions.
Unless otherwise provided in this Contract, the Custodian shall act
only upon Proper Instructions. Proper Instructions as used herein means a
writing signed or initialled by one or more person or persons as the Board of
Trustees or a duly authorized committee thereof shall have from time to time
authorized. Each such writing shall set forth the specific transaction or type
of transaction involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. Each Fund shall cause all oral instructions to be confirmed in
writing. The fact that confirming written instructions are not received by the
Custodian shall in no way invalidate the transactions authorized by the oral
instructions. Upon receipt of a certificate of the Secretary or an Assistant
Secretary of the Trust as to the authorization by the Board of Trustees of the
Trust or a duly authorized committee thereof accompanied by a detailed
description of procedures approved by the Board of Trustees, Proper Instructions
may include communications effected directly between electro-mechanical or
electronic devices provided that the Board of Trustees and the Custodian are
satisfied that such procedures afford adequate safeguards for a Fund's assets.
For purposes of this Section, Proper Instructions shall include duly authorized
instructions received by the Custodian pursuant to any three-party agreement
which requires a segregated asset account in accordance with Section 2.11.
6. Actions Permitted without Express Authority.
The Custodian may in its discretion and without express authority from
the Trust: 1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for
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<PAGE> 18
to the Trust; 2) surrender securities in temporary form for securities in
definitive form; 3) endorse for collection, in the name of a Fund, checks,
drafts and other negotiable instruments; and 4) in general, attend to all
non-discretionary details in connection with the sale, exchange, substitution,
purchase, transfer and other dealings with the securities and property of a Fund
except as otherwise directed by the Board of Trustees of the Trust or a duly
authorized committee thereof.
7. Evidence of Authority.
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper reasonably
believed by it to be genuine and to have been properly executed by or on behalf
of the Trust or a Fund. The Custodian may receive and accept a certified copy of
a vote of the Board of Trustees of the Trust or a duly authorized committee
thereof as conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by the
Board of Trustees pursuant to the Trust's Agreement and Declaration of Trust as
described in such vote, and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Trust to keep
the books of account of each Fund and compute the net asset value per share of
the outstanding shares of each Fund and unless directed in writing to do
otherwise by the Trust, shall itself keep such books of account and compute such
net asset value per share. Such records and calculations prepared and maintained
by the Custodian shall be made available to the Trust, in both written and
electronic format, each day within the time and delivery requirements specified
by the Trust. Unless otherwise directed in writing by the Trust, the Custodian
shall also calculate daily the net income of each Fund as described in the
Fund's currently effective prospectus and shall advise the Fund and the Transfer
Agent daily of the total amount of such net income and, if instructed in writing
by an officer of the Trust to do so, shall advise the Transfer Agent
periodically of the division of such net income among its various components.
The calculations of net asset value per share and the daily income of each Fund
shall be made at the time or times described from time to time in each Fund's
currently effective prospectus. The records to be kept by the Custodian shall
include, but not be limited to:
(a) all books and records with respect to each Fund's books of
account;
(b) records of each Fund's securities transactions;
(c) all other books and records as the Custodian is required to
maintain pursuant to Rule 31a-1 of the 1940 Act including, but
not necessarily limited to the following:
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(i) Journals containing an itemized daily record in
detail of all purchases and sales of securities, all
receipts and disbursements of cash, and all other
debits and credits, as required by subsection (b)(1)
of the Rule;
(ii) General and auxiliary ledgers reflecting all asset,
liability, reserve, capital, income and expense
accounts including interest accrued and interest
received, as required by subsection (b)(2)(i) of the
Rule;
(iii) Separate ledger accounts required by subsection
(b)(2)(ii) and (iii) of the Rule; and
(iv) A monthly trial balance of all ledger accounts except
shareholder account as required by subsection (b)(8)
of the Rule.
The Custodian will perform continuing accounting functions for each
Fund, including, without limitation, the following:
(i) Journalize each Fund's investment, capital share and
income and expense activities;
(ii) Verify investment buy/sell trade tickets when
received from the Fund's sub-adviser or investment
adviser for proper settlement;
(iii) Maintain individual ledgers for investment
securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of the Fund
with the Custodian, and provide the Fund's investment
adviser with the beginning cash balance available for
investment purposes;
(vi) Update the cash availability throughout the day as
required by the Fund's investment adviser;
(vii) Post to and prepare the Fund's Statement of Assets
and Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g.,
advisory and custody fees);
(ix) Utilize expense accruals provided by the Fund's
investment adviser;
(x) Control all disbursements from the Fund and authorize
such disbursements upon Proper Instructions;
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(xi) Calculate realized and unrealized capital gains and
losses both for market and currency fluctuations;
(xii) Determine the Fund's net income;
(xiii) Obtain security market quotes from independent
pricing services approved by the Fund's investment
adviser pursuant to the price service authorization
letter attached hereto as Exhibit 2. If such quotes
are unavailable, then obtain such prices from the
Fund's investment adviser, and in either case
calculate the market value of each Fund's
investments;
(xiv) Electronically transmit and/or mail a copy of the
daily portfolio valuation to the Fund's investment
adviser;
(xv) Compute the net asset value of the Fund;
(xvi) As appropriate, compute the Fund's yields, total
return, expense ratios, Portfolio turnover rate, and,
if required, average dollar-weighted maturity; and
(xvii) Prepare a monthly financial statement, which will
include the following items:
Schedule of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses
The Custodian will provide the Fund's investment adviser with the
following services:
(i) Assist with preparation of: Federal and State Tax
Returns, Excise Tax Returns, Annual and Semi-Annual
Shareholder Reports, Rules 24 (e)-2 and 24 (f)-2
Notices;
(ii) Assist in the review of registration statements; and
(iii) Assist in monitoring compliance with SubChapter M of
the Internal Revenue Code.
9. Settlement Provisions.
9.1 Except as otherwise provided in this Section 9, the Custodian shall
credit or debit the appropriate cash account of each Fund in connection
with the purchase, sale, maturity,
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redemption, or other disposition of securities and other assets held
for the time being in such Fund on an actual settlement basis.
9.2 Unless a Fund instructs the Custodian in writing that transactions in a
specified market shall be settled on an actual settlement basis, the
purchase, sale, maturity, redemption or other disposition of securities
by such Fund in the markets listed on Schedule A hereto shall be
settled in the manner and subject to the terms and limitations
described in Sections 9.3 through 9.10 below. A transaction to which
these contractual settlement provisions applies shall be called a
"Covered Transaction".
9.3 With respect to a Covered Transaction that represents a purchase, the
Custodian shall debit the Fund's cash account in accordance with Proper
Instructions as of the time and date that monies would ordinarily be
required to settle such a transaction in the applicable market as set
forth on Schedule B hereto. Such amounts shall be recredited to the
Fund's appropriate cash account upon the Fund's notice to the Custodian
that it has canceled the Covered Transaction.
9.4 With regard to the settlement of a Covered Transaction which is a sale,
maturity, redemption or other disposition, provisional credit of an
amount equal to the net sale, maturity, redemption or other disposition
proceeds of the transaction (hereinafter called the "Settlement
Amount") shall be made to the Fund as if the Settlement Amount is
received as of the time and date that monies would ordinarily be
required to settle such transaction in the applicable market as set
forth on Schedule B. The provisional credit will be made if the
Custodian has received Proper Instructions or reasonable notice of the
Covered Transaction, as applicable, and if the Custodian or its agents
are in possession of the asset associated with the Covered Transaction
in good deliverable form and are not aware of any facts which would
lead them to reasonably believe that the Covered Transaction will not
settle in the time period ordinarily applicable to transactions in the
applicable market as set forth on Schedule B. In the event that the
Custodian determines not to provide a provisional credit in respect of
a particular transaction, the Custodian will promptly notify the Fund
of this determination. The provisional credit shall not be more than
the Settlement Amount.
9.5 With respect to each Covered Transaction for which the Custodian shall
procure that the Settlement Amount be credited to the Fund, the
following provisions shall apply.
(a) Simultaneously with the making of the provisional credit, all
right and title to any asset purchased or sold, as applicable
in the Covered Transaction together with the Fund's
contractual rights against the Fund's counterparty in the
Covered Transaction shall vest in the Custodian.
(b) Subject to the general terms of this Agreement, the Custodian
shall perform the Fund's obligations to a counterparty under
any contract that is associated with the Covered Transaction.
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(c) Notwithstanding Section 9.5(b), the Custodian shall remain the
beneficial owner of the assets concerned under a Covered
Transaction and the beneficiary of any contract associated
therewith and shall not be bound to complete such Covered
Transaction until (i) actual receipt of the Settlement Amount
for which provisional credit shall have been given in
accordance with Subsection 9.4 or, (ii) where such provisional
credit is reversed in accordance with Subsection 9.6 or 9.7,
the Fund's liability to the Custodian in respect of such
reversal shall have been satisfied in full. In relation to any
such securities located in Germany, the ownership held by the
Custodian shall be governed by the German law and shall be
agreed to be "Sicherungseiggentum".
(d) Upon the satisfaction of Subsection 9.5(c)(i) the legal and
beneficial ownership in the securities concerned shall pass
from the Custodian in accordance with the terms of the
contract associated with the Covered Transaction and the
Settlement Amount received in accordance with the contract
shall inure to the benefit of the Custodian. In such event,
the benefit of all dividends, interest and other distributions
which are declared, or which are paid or payable on the
securities under the terms of the contract associated with the
Covered Transaction shall pass in accordance with the terms of
such contract.
9.6 The Custodian shall have the right, upon sending notice to the Fund, to
reverse any provisional credit given in accordance with Subsection 9.4
above in the event that the actual proceeds of such transaction have
not been received by the Custodian, its agents or its sub-custodians
within thirty days of having made the provisional credit or at any time
when the Custodian believes for reasonable cause that such Covered
Transaction will not settle in accordance with its terms (in which case
the notice required here will contain a description of such cause),
whereupon a sum equal to the Settlement Amount shall become payable by
the Fund to the Custodian and, if not paid by the Fund within five (5)
days after receipt of the notice required hereunder, may be debited
from any cash account held for benefit of the Fund in accordance with
the terms of any notice given hereunder. In the case that the Custodian
shall make the debit allowed by this subsection or that the Fund shall
otherwise return the Settlement Amount, in consideration for such debit
or other return, Custodian shall transfer to the account of the Fund
assets of the same type, nominal value, description, issue and amount
as the assets transferred to the Custodian under subsection 9.5(a)
above ("Equivalent Assets"), which assets shall be described in the
notice given to the Fund as provided above in this Section 9.6. Further
in such event, the Custodian shall subrogate to the Fund the rights
involved in any contract associated with the Covered Transaction that
were assigned to it under Subsection 9.5(a). The amount of any
dividends, interest and other distributions with respect to assets
associated with the Covered Transactions that have accrued to the
benefit of the Custodian shall be set off against the Settlement
Amount.
9.7 In the event that the Custodian is unable to debit the Fund and the
Fund fails to pay any sums due to the Custodian at the time the same
becomes payable in accordance with Section 9.5 and such failure is not
cured upon notice of such failure to the Fund or if any
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of the following conditions occurs, the Custodian may charge the Fund
for reasonable costs and expenses associated with the provisional
credit and the provisions of Section 9.8 will apply:
(a) If a final judgment for the payment of money shall be rendered
against the Fund and such judgment shall not have been
discharged or its execution stayed pending appeal within sixty
days of entry or such judgment shall not have been discharged
within sixty days of expiration of any such stay;
(b) the Fund passing a resolution for its voluntary winding-up
(otherwise than for the purpose of corporate reconstruction or
amalgamation);
(c) the presentation of a petition for the winding-up of or the
making of an administration order in relation to the Fund;
(d) the appointment of a receiver or administrator over any of the
assets of the Fund;
(e) the Fund ceasing or threatening to cease to carry on its
business;
(f) the Fund calling a meeting of its creditors pursuant to
Section 98 of the Insolvency Act 1986 (or any statutory
modification or re-enactment thereof for the time being in
force) or any similar law affecting the Fund in its own
jurisdiction.
9.8 If an event outlined in Subsection 9.7 occurs:
(a) The obligation of the Custodian to deliver Equivalent Assets
in accordance with Section 9.6 shall cease;
(b) the value of the Equivalent Assets shall be established by
reference to the last available bid price thereof on the most
appropriate market at the date and time of such event ("Value
Date");
(c) the value of the Fund's obligations in respect of payment of
any sums which have become repayable in accordance with
Subsection 9.5 and 9.6 shall be established as of the Value
Date), such value to be increased by any cost of funds expense
allowable to the Custodian under Subsection 9.7 and reduced by
the amount of any dividends, interest or other distributions
in connection with the assets associated with the Covered
Transaction that have accrued to the Custodian under these
settlement provisions, any amount in non-U.S. currency shall
be converted into US dollars at the Custodian's prevailing
exchange rate for the currencies concerned on Value Date;
(d) the values established under Subsection 9.8(b) shall be offset
against the value established under 9.8(c) as of the Value
Date;
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(e) the amount by which the greater of the amounts calculated
pursuant to Subsection 9.8(b) and (c) exceeds the lower amount
so calculated shall be payable as of Value Date by the party
having the claim valued at the lower amount pursuant to the
foregoing.
9.9 The Custodian shall not be obliged to transfer any sums credited to the
Fund in accordance with Subsection 9.4 to or to the order or benefit of
the Fund while any amount which is payable to the Custodian under the
terms of Sections 9.5 through 9.8.
9.10 The operation of the set-off provisions in accordance with Subsection
9.6 or 9.7 shall be without prejudice to any other remedies provided
herein or under any applicable law. The Fund agrees that the Custodian
shall have a right of set-off against cash held for the Fund in any
currency for any amount provided to the Fund by the Custodian hereunder
or from time to time arising out of or in connection with this Contract
and/or the operation of any account hereunder and the Custodian shall
have the right to debit the Fund with all or part of such sums and
apply or appropriate the cash in or towards the discharge of such
amounts in such manner and order as the Custodian reasonably sees fit.
For the purposes of this right of set-off, the Custodian may make such
currency conversions or effect any transactions in such currencies at
then prevailing rates as it thinks fit at such times as it reasonably
thinks proper and may effect any transfers between, or entries on, any
account comprised in the Account as the Custodian considers proper.
10. Records.
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Trust and each Fund under the 1940 Act, with particular
attention to Section 31 thereof and Rules 31a-1 and 31a-2 and Rule 17f-5
thereunder. All such records shall be the property of the Trust and shall at all
times during the regular business hours of the Custodian be open for inspection
and copying by duly authorized officers, employees or agents of the Trust, the
Trust's independent accountants and employees and agents of the Securities and
Exchange Commission. The Custodian shall (on a daily basis) supply the Fund with
a tabulation of securities owned by the Fund and held by the Custodian. The
Custodian shall make available to the Trust such tabulations of securities owned
by each Fund, in both written and electronic format, each day within the time
and delivery requirements specified by the Trust. The Custodian agrees to keep
confidential all records of the Funds and information relative to each Fund and
its shareholders (past, present and potential), unless the release of such
records or information is otherwise consented to, in writing, by the Trust. The
Trust agrees that such consent shall not be unreasonably withheld. The Trust
further agrees that, should the Custodian be required to provide such
information or records to duly constituted authorities (who may institute civil
or criminal contempt proceedings for failure to comply), the Custodian shall not
be required to seek the Trust's prior written consent before disclosing such
information, but shall instead notify an officer of the Trust and obtain the
officer's oral consent prior to disclosing the information, which consent shall
be timely and not unreasonably withheld.
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11. Opinion of Trust's Independent Accountant.
The Custodian shall take all reasonable action to assist the Trust in
obtaining from year to year favorable opinions from the Trust's independent
accountants with respect to its activities hereunder in connection with the
preparation of the Trust's Form N-1A, and Form N-SAR and/or other reports to the
Securities and Exchange Commission and with respect to any other requirements of
the Commission. The Custodian shall act as liaison with the Fund's independent
accountants and shall provide them with account analyses, fiscal year summaries,
and other audit-related schedules. The Custodian shall take all reasonable
action in the performance of its obligations under this Contract to assure that
the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Trust from time to
time. The Custodian will also provide Fund information to, and act as the
liaison with industry reporting services such as NASDAQ, Morningstar and Lipper
Analytical Services as designated by the Trust from time to time.
12. Compensation of Custodian.
The Custodian shall be entitled to such compensation for its services
and expenses as Custodian as set forth in Exhibit 1 hereto, as amended as agreed
upon from time to time between the Trust and the Custodian.
13. Responsibility of Custodian.
So long as and to the extent that it exercises reasonable care, the
Custodian shall not be responsible to the Trust for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Trust for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel acceptable to the Trust
(who may be counsel for the Trust) on all matters pertaining to its
responsibilities hereunder, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
If any Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the reasonable opinion of the Custodian, result in the Custodian or its nominee
being liable for the payment of money or incurring material liability of some
other form, the Trust, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If any Fund requires the Custodian or its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign
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exchange contracts and assumed settlement), or in the event that the Custodian
or its nominee shall incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own negligent
action, negligent failure to act or willful misconduct, any property at any time
held for the account of such Fund shall be security therefor and should such
Fund fail to repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of such Fund's assets to the extent
necessary to obtain reimbursement. The Custodian shall give the Fund prior
written notice of its intention to utilize Fund assets pursuant to this Section
13 and the Fund shall have the right to pay or to designate to the Custodian the
assets to be utilized; provided, that if the Fund does not do so promptly, the
Custodian shall be entitled to designate the assets to be utilized.
14. Effective Period, Termination and Amendment.
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual, written agreement of the parties hereto, and
may be terminated by either party by an instrument in writing delivered or
mailed, postage prepaid, to the other party, such termination to take effect on
the date stated therein, which date shall not be sooner than sixty (60) days
after the date of such delivery or mailing; provided, however that the Custodian
shall not act under Section 2.10 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Trustees of the Trust has approved the initial use of a particular Securities
System as required by Rule 17f-4 under the 1940 Act and that the Custodian shall
not act under Section 2.10A hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Trustees has approved the initial use of the Direct Paper System; provided
further, however, that the Trust shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Trust's Agreement and Declaration of Trust, and further provided, that
the Trust may at any time by action of its Board of Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its reasonable and related costs, expenses
and disbursements.
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15. Successor Custodian.
If a successor custodian shall be appointed by the Board of Trustees of
the Trust, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of each Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Trustees of the Trust, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the 1940 Act, doing business in Boston,
Massachusetts, of its own selection, having an aggregate capital, surplus, and
undivided profits, as shown by its last published report, of not less than
$25,000,000, all securities, funds and other properties held by the Custodian
and all instruments held by the Custodian relative thereto and all other
property held by it under this Contract and to transfer to an account of such
successor custodian all of each Fund's securities held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Trust to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions.
In connection with the operation of this Contract, the Custodian and
the Trust may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Agreement and Declaration of Trust of the Trust. No interpretive or
additional provision made as provided in the preceding sentence shall be deemed
to be an amendment of this Contract.
17. Massachusetts Law to Apply
24
<PAGE> 28
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
18. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
19. Limitation of Liability
The names "Schwab Annuity Portfolios" and "Trustees of Schwab Annuity
Portfolios" refer respectively to the Trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under the
Declaration of Trust, to which reference is hereby made and a copy of which is
on file at the office of the Secretary of the Commonwealth of Massachusetts and
elsewhere as required by law, and to any and all amendments thereto so filed or
hereafter filed. The obligations of "Schwab Annuity Portfolios" entered into in
the name or on behalf thereof by any of the Trustees, representatives or agents
are made not individually, but in such capacities, and are not binding upon any
of the Trustees, interest holders or representatives of the Trust personally,
but bind only the assets of the Trust, and all persons dealing with any series
of units of interest of the Trust must look solely to the assets of the Trust
belonging to such series for the enforcement of any claims against the Trust.
20. Shareholder Communications Election
Exchange Act Rule 14b-2 requires banks which hold securities for the
account of customers to respond to requests by issuers of securities for the
names, addresses and holdings of beneficial owners of securities of that issuer
held by the bank unless the beneficial owner has expressly objected to
disclosure of this information. In order to comply with the rule, the Custodian
needs the Fund to indicate whether it authorizes the Custodian to provide the
Fund's name, address, and share position to requesting companies whose
securities the Fund owns. If the Fund tells the Custodian "no", the Custodian
will not provide this information to requesting companies. If the Fund tells the
Custodian "yes" or does not check either "yes" or "no" below, the Custodian is
required by the rule to treat the Fund as consenting to disclosure of this
information for all securities owned by the Fund or any funds or accounts
established by the Fund. For the Fund's protection, the Rule prohibits the
requesting company from using the Fund's name and address for any purpose other
than corporate communications. Please indicate below whether the Fund consents
or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
25
<PAGE> 29
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 7th day of August, 1996.
ATTEST SCHWAB ANNUITY PORTFOLIOS
/s/ David H. Lui By /s/ Stephen B. Ward
- --------------------- ---------------------------
Stephen B. Ward
Senior Vice President and Chief Investment Officer
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Glen Cott By /s/ Ronald E. Logue
- -------------- ----------------------------
Ronald E. Logue
Executive Vice President
<PAGE> 30
EXHIBIT 1
STATE STREET BANK AND TRUST COMPANY
Fee Schedule
Schwab Asset Director(R) - High Growth Portfolio
1. Administration
Custody, Portfolio and Fund Accounting Service - Maintain custody of
fund assets. Settle portfolio purchases and sales. Report buy and sell
fails. Determine and collect portfolio income. Make cash disbursements
and report cash transactions. Maintain investment ledgers, provide
selected portfolio transactions, position and income reports. Maintain
general ledger and capital stock accounts. Prepare daily trials
balance. Calculate net asset value daily. Provide selected general
ledger reports. Market value quotations will be provided via State
Street's Automated Pricing Service.
The administration fee shown below is an annual charge, billed and
payable monthly, based on average monthly net assets
<TABLE>
<CAPTION>
ANNUAL FEES PER PORTFOLIO
<S> <C> <C>
Fund Net Assets Annual fees
(in basis points)
First $50 Million 3 Basis Points
Next $50 Million 2 Basis Points
Excess over $100 Million 1 Basis Point
</TABLE>
ALL ASSET BASED ADMINISTRATION FEES WILL BE WAIVED FOR THREE
MONTHS FROM THE COMMENCEMENT OF OPERATIONS OF THE FUND.
<TABLE>
<CAPTION>
II. Global Custody - Comprised of asset charges and transaction charges
<S> <C> <C>
Asset charges all foreign locations
(in Basis Points)
First $50 Million 7 Basis Points
Over $50 Million 5 Basis Points
Transaction Charges
(all foreign equity and bond trades) $28.00
III. Portfolio Trades - For each line item processed
State Street Bank Repos $ 7.00
DTC or Fed Book Entry $10.00
New York Physical Settlements $20.00
Maturity Collections $ 8.00
PTC Purchase, Sale, Deposit or Withdrawal $20.00
All other trades $16.00
</TABLE>
<PAGE> 31
<TABLE>
<S> <C> <C>
IV. Options
Option charge for each option written or
closing contract, per issue per broker $25.00
Option expiration charge, per issue,
per broker $15.00
Option exercised charge, per issue,
per broker $15.00
V. Interest Rate Futures
Transactions - no security movement $ 8.00
VI. Holding Charge
For each issue maintain - monthly charge $ 1.00
VII. Principal Reduction Payments
Per Paydown $10.00
VIII. Dividend Charges
(For items held at the request of traders
over record date in street form) $50.00
IX. Special Services
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security shipments and the
preparation of special reports will be subject to negotiation. Fees for
automated pricing, yield calculation and other special items will be negotiated
separately.
X. Automated Pricing: This service provides daily securities pricing.
Monthly base fee per portfolio $375.00
Monthly Quote Charge (based on the average number of positions in the portfolio)
- Municipal Bond via Muller Data $ 16.00
- Municipal Bond via Kenny information System $ 16.00
- Government, Corporate and Convertible
Bonds via Merrill Lynch $ 11.00
- Corporate and Government Bonds via
Muller Data $ 11.00
- Options, Futures and Private Placements $ 6.00
- Foreign Equities and Bonds via Extel Ltd $ 6.00
- Listed Equities, DTC Equities and Bonds $ 2.00
- Corporate, Municipal, Convertible and
Government Bonds, Adjustable Rate
Preferred Stocks via IDSI $ 6.00
</TABLE>
<PAGE> 32
XI. Balance Credits
A balance credit will be applied against the custody fee above based on
the 90 day T-Bill rate adjusted by the current Federal Reserve
requirements. The rate will be utilized against the average collected
balances in the Custody Demand Deposit Account maintained at State Street.
Excess balance credits will be carried forward from month to month until
December 31st.
XII. Out-of-Pocket Expenses
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
Telephone
Wire Charges ($5.25 per wire in and $5.00 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfers - $8.00 each
Transfer Fees
Sub-custodian Charges (Out of Pockets issued by Sub-Custodians)
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15.00 each
PTC Deposit/Withdrawal for same day turnaround - $50.00
<TABLE>
<S> <C>
Schwab Asset Director(R)- High Growth Portfolio State Street Bank & Trust Company
Signed: /s/ Tai-Chin Tung Signed: /s/ N. Grady
----------------------------------- ---------------------------------
Name: Tai-Chin Tung Name: N. Grady
----------------------------------- ---------------------------------
Title: Controller Title: Vice President
--------------------------------- ---------------------------------
Date: 7/31/96 Date: 7/23/96
----------------------------------- ---------------------------------
</TABLE>
<PAGE> 33
EXHIBIT 2
To: Mutual Fund Client
Re: PRICE SOURCE AUTHORIZATION
Reference is made to the Custodian Agreement dated __________________ between
Schwab Annuity Portfolios (the "Fund") and State Street Bank and Trust Company
("State Street"). Pursuant to the Custodian Agreement, the Fund has directed
State Street to calculate the net asset value of the Fund in accordance with the
terms of the Fund's currently effective prospectus.
The Fund hereby authorizes State Street to use the pricing sources specified on
the attached forms(s) as sources for securities' prices in calculating the net
asset value of the Fund. The Fund further agrees that State Street shall have no
liability for the incorrect data provided by the Fund's choice of pricing
sources, except as may arise from State Street's lack of reasonable care in:
- performing agreed upon tolerance checks as to the data furnished,
- calculating the net asset value of the Fund in accordance with the data
furnished to State Street, and
- State Street's performance of the agreed upon tolerance checks.
Kindly acknowledge the Fund's acceptance of the terms of this letter in the
space provided below.
Sincerely,
STATE STREET BANK AND TRUST COMPANY
By:_______________________________________
Vice President
Date:_____________________________________
The foregoing terms are hereby accepted.
SCHWAB ANNUITY PORTFOLIOS
By: ________________________________________
Title: _____________________________________
Date: ______________________________________
<PAGE> 34
STATE STREET BANK - MUTUAL FUNDS
PRICE SOURCE AUTHORIZATION
<TABLE>
<S> <C> <C>
FUND: Schwab Annuity Portfolios: Schwab Asset Director-High Growth Portfolio SIGNATURE:
----------------------------------------------------------------------- ------------------------------------
<CAPTION>
SECURITY TELEKURS OPTIONS PRICE (3)
TYPE NYSE NASDAQ REPORTING AUTHORITY MANUAL
AMEX BID MEAN LS/BID LS/MEAN TELEKURS LS BID LS/MEAN QUOTES
------------ ---------- -------- ------- ---------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FP
I. LISTED EQUITIES
------------ ---------- -------- ------- ---------- ------------- ------------- ------------- ----------
OA
II. OTC EQUITIES
------------ ---------- -------- ------- ---------- ------------- ------------- ------------- ----------
FE,CN
III. FOREIGN EQUITIES
------------ ---------- -------- ------- ---------- ------------- ------------- ------------- ----------
IV. EQUITY OPTIONS
------------ ---------- -------- ------- ---------- ------------- ------------- ------------- ----------
V. FUTURES N/A
------------ ---------- -------- ------- ---------- ------------- ------------- ------------- ----------
SECURITY (2) (1) (1)
TYPE BACK-UP TOLERANCE
SOURCE INDEX PERCENTAGE
---------- ---------- ---------------
<S> <C> <C> <C>
I. LISTED EQUITIES
Bridge S&P 500 5%
II. OTC EQUITIES
- ---------- ---------- ---------------
Bridge S&P 500 5%
III. FOREIGN EQUITIES - ---------- ---------- ---------------
Reuters EAFE 5%
IV. EQUITY OPTIONS - ---------- ---------- ---------------
V. FUTURES N/A - ---------- ---------- ---------------
</TABLE>
INSTRUCTIONS: For each security type, allowed by the Fund prospectus, please
indicate the primary price source and a back-up source to be used in calculating
Net Asset Value for the Fund identified above. Also, please indicate a published
market index and tolerance range (in terms of percent) to be used for
reasonability testing. If you do not wish to use a published index please
indicate N/A but do not leave blank.
(1) * INDEX/TOLERANCE CHECK: The price movement for a particular security is
compared to the index movement. If the security price movement exceeds the index
movement by more than the percentage authorized on this form, then the security
price will be verified using the back-up source authorized. The index and
tolerance information authorized here will be the basis for this reasonability
test.
(2) BACK-UP SOURCE: The following sources are available for back-up, price
verification and historical price and yield information: Bloomberg, Bridge,
Reuters, and Telerate. Please do not leave blank.
(3) MANUAL QUOTES AND PRIVATE PLACEMENTS: Please specify the source for private
placements or manual quotes as necessary. See page 3 to list additional
information if needed.
<PAGE> 35
WP1404C
Page 2 of 3
STATE STREET BANK - MUTUAL FUNDS
PRICE SOURCE AUTHORIZATION
<TABLE>
<CAPTION>
------------ --------------- ----- ---------- ----- --------------- ----- ---------------- --------
SECURITY TYPE MERRILL INTERACTIVE
LYNCH STANDARD MULLER DATA KENNY
CAPITAL & POORS DATA SERVICES INFORMATION IDC/
MARKETS MEAN BID MEAN BID MEAN BID SYSTEMS EXTEL
------------ --------------- ----- ---------- ----- --------------- ----- ---------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
VI. LISTED BONDS IS
LAST SALE
REQUIRED WHEN
AVAILABLE
YES_____
NO_______
------------ --------------- ----- ---------- ----- --------------- ----- ---------------- --------
VII. CORPORATE BONDS
------------ --------------- ----- ---------- ----- --------------- ----- ---------------- --------
VIII. U.S. GOVERNMENT U2
OBLIGATIONS
------------ --------------- ----- ---------- ----- --------------- ----- ---------------- --------
IX. MORTGAGE -
BACKED
SECURITIES
------------ --------------- ----- ---------- ----- --------------- ----- ---------------- --------
X. MUNICIPAL BONDS
------------ --------------- ----- ---------- ----- --------------- ----- ---------------- --------
XI. FIXED INCOME
OPTIONS
------------ --------------- ----- ---------- ----- --------------- ----- ---------------- --------
XII. FOREIGN BONDS
------------ --------------- ----- ---------- ----- --------------- ----- ---------------- --------
</TABLE>
<TABLE>
SECURITY TYPE --------- ------------ ------------- --------------
(3) (2) (1) (1)
MANUAL BACK-UP TOLERANCE
QUOTES QUOTES INDEX PERCENTAGE
--------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
VI. LISTED BONDS IS
LAST SALE
REQUIRED WHEN
AVAILABLE
YES_____
NO_______
--------- ------------ ------------- --------------
VII. CORPORATE BONDS
--------- ------------ ------------- --------------
VIII. U.S. GOVERNMENT
OBLIGATIONS Bloomberg US Treasury 3%
--------- ------------ ------------- --------------
IX. MORTGAGE -
BACKED
SECURITIES
--------- ------------ ------------- --------------
X. MUNICIPAL BONDS
--------- ------------ ------------- --------------
XI. FIXED INCOME
OPTIONS
--------- ------------ ------------- --------------
XII. FOREIGN BONDS
--------- ------------ ------------- --------------
</TABLE>
<PAGE> 36
WP1404C/2
Page 3 of 3
STATE STREET BANK - MUTUAL FUNDS
PRICE SOURCE AUTHORIZATION
XIII. Private Placements and Other Manual Quotes Information
<TABLE>
<S> <C> <C> <C> <C>
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
SECURITY TYPE ADVISOR BROKER OTHER ADDITIONAL INFORMATION:
CONTACT NAME, TELEPHONE NUMBER
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
FX London Close
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
---------------------------- ------------------------- ------------------------ ------------------ --------------------------------
</TABLE>
INSTRUCTIONS: For all securities types which require manual quotes, please list
the source of the quotes and any additional information needed to obtain these
quotes.
<PAGE> 37
SCHEDULE A
17F-5 APPROVAL
The Board of Directors/Trustees of Schwab Annuity Portfolios has approved
certain foreign banking institutions and foreign securities depositories within
State Street's Global Custody Network for use as subcustodians for the Fund's
securities, cash and cash equivalents held outside of the United States. Board
approval is as indicated by the Fund's Authorized Officer:
<TABLE>
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
<S> <C> <C> <C>
______ Argentina Citibank, N.A. Caja de Valores S.A.
/s/ TCT Australia Westpac Banking Corporation Austraclear Limited;
Reserve Bank Information and
Transfer System (RITS)
/s/ TCT Austria GiroCredit Bank Aktiengesellschaft Oesterreichische Kontrollbank AG
der Sparkassen (Wertpapiersammelbank Division)
______ Bangladesh Standard Chartered Bank None
/s/ TCT Belgium Generale Bank Caisse Interprofessionnelle de Depots
et de Virements de Titres S.A. (CIK);
Banque Nationale de Belgique
______ Botswana Barclays Bank of Botswana Limited None
______ Brazil Citibank, N.A. Bolsa de Valores de Sao Paulo (Bovespa);
Banco Central do Brasil,
Systema Especial de Liquidacao e
Custodia (SELIC)
/s/ TCT Canada Canada Trustco Mortgage Company The Canadian Depository
for Securities Limited (CDS)
______ Chile Citibank, N.A. None
</TABLE>
<PAGE> 38
SCHEDULE A: 17F-5 APPROVAL
PAGE 2
<TABLE>
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
<S> <C> <C> <C>
______ People's Republic The Hongkong and Shanghai Shanghai Securities Central Clearing and
of China Banking Corporation Limited, Registration Corporation (SSCCRC);
Shanghai and Shenzhen branches Shenzhen Securities Central Clearing Co., Ltd. (SSCC)
______ Colombia Cititrust Colombia S.A. None
Sociedad Fiduciaria
______ Cyprus Barclays Bank PLC None
Cyprus Offshore Banking Unit
______ Czech Republic Ceskoslovenska Obchodni Stredisko cennych papiru(SCP);
Banka A.S.
Czech National Bank (CNB)
/s/TCT Denmark Den Danske Bank Vaerdipapircentralen - The Danish
______ Securities Center (VP)
______ Ecuador Citibank, N.A. None
______ Egypt National Bank of Egypt None
/s/ TCT Finland Merita Bank Limited The Central Share Register of
Finland
/s/ TCT France Banque Paribas Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM);
Banque de France,
Saturne System
/s/ TCT Germany Dresdner Bank AG The Deutscher Kassenverein AG
______ Ghana Barclays Bank of Ghana Limited None
______ Greece National Bank of Greece S.A The Central Securities Depository
. (Apothetirion Titlon A.E.)
</TABLE>
<PAGE> 39
SCHEDULE A: 17F-5 APPROVAL
PAGE 3
<TABLE>
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
<S> <C> <C> <C>
/s/ TCT Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System (CCASS)
______ Hungary Citibank Budapest Rt. The Central Depository and Clearing
House (Budapest) Ltd. (KELER Ltd.)
______ India Deutsche Bank AG None
______ The Hongkong and Shanghai None
Banking Corporation Limited
/s/ TCT Indonesia Standard Chartered Bank None
______ Ireland Bank of Ireland None;
The Central Bank of Ireland,
The Gilt Settlement Office (GSO)
______ Israel Bank Hapoalim B.M. The Clearing House of the
Tel Aviv Stock Exchange
/s/ TCT Italy Morgan Guaranty Trust Company Monte Titoli S.p.A.;
(Present Subcustodian)
Banca d'Italia
______ Banque Paribas Monte Titoli S.p.A.;
(Future Subcustodian)
Banca d'Italia
_________ Ivory Coast Societe Generale de Banques None
en Cote d'Ivoire
/s/ TCT Japan The Daiwa Bank, Limited Japan Securities Depository
Center (JASDEC);
Bank of Japan Net System
______ The Fuji Bank, Limited Japan Securities Depository
Center (JASDEC);
Bank of Japan Net System
______ The Sumitomo Trust Japan Securities Depository
& Banking Co., Ltd. Center (JASDEC);
Bank of Japan Net System
</TABLE>
<PAGE> 40
SCHEDULE A: 17F-5 APPROVAL
PAGE 4
<TABLE>
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
<S> <C> <C> <C>
______ Jordan The British Bank of the Middle East None
______ Kenya Barclays Bank of Kenya Limited None
______ Republic of Korea SEOULBANK Korea Securities Depository (KSD)
/s/ TCT Malaysia Standard Chartered Bank Malaysian Central Depository Sdn.
Malaysia Berhad Bhd. (MCD)
______ Mauritius The Hongkong and Shanghai None
Banking Corporation Limited
______ Mexico Citibank Mexico, S.A. S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores);
Banco de Mexico
______ Morocco Banque Commerciale du Maroc None
/s/ TCT Netherlands MeesPierson N.V. Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
/s/ TCT New Zealand ANZ Banking Group New Zealand Central Securities
(New Zealand) Limited Depository Limited (NZCSD)
/s/ TCT Norway Christiania Bank og Verdipapirsentralen - The Norwegian
Kreditkasse Registry of Securities (VPS)
______ Pakistan Deutsche Bank AG None
______ Peru Citibank, N.A. Caja de Valores (CAVAL)
/s/ TCT Philippines Standard Chartered Bank None
______ Poland Citibank Poland S.A. The National Depository of Securities
(Krajowy Depozyt Papierow
Wartosciowych);
National Bank of Poland
</TABLE>
<PAGE> 41
SCHEDULE A: 17F-5 APPROVAL
PAGE 5
<TABLE>
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
<S> <C> <C> <C>
______ Portugal Banco Comercial Portugues Central de Valores Mobiliarios (Central)
______ Russia Credit Suisse, Zurich None
via Credit Suisse (Moscow) Limited
/s/ TCT Singapore The Development Bank The Central Depository (Pte)
of Singapore Ltd. Limited (CDP)
______ Slovak Republic Ceskoslovenska Obchodna Stredisko Cennych Papierov (SCP);
Banka A.S.
National Bank of Slovakia
______ South Africa Standard Bank of South Africa Limited The Central Depository Limited
/s/ TCT Spain Banco Santander, S.A. Servicio de Compensacion y
Liquidacion de Valores, S.A. (SCLV);
Banco de Espana,
Anotaciones en Cuenta
______ Sri Lanka The Hongkong and Shanghai Central Depository System
Banking Corporation Limited (Pvt) Limited
______ Swaziland Barclays Bank of Swaziland Limited None
/s/ TCT Sweden Skandinaviska Enskilda Banken Vardepapperscentralen VPC AB -
The Swedish Central Securities Depository
/s/ TCT Switzerland Union Bank of Switzerland Schweizerische Effekten - Giro AG
(SEGA)
______ Taiwan - R.O.C. Central Trust of China The Taiwan Securities Central
Depository Company, Ltd. (TSCD)
/s/ TCT Thailand Standard Chartered Bank Thailand Securities Depository
Company Limited (TSD)
______ Turkey Citibank, N.A. Takas ve Saklama Bankasi A.S.
(TAKASBANK);
Central Bank of Turkey
</TABLE>
<PAGE> 42
SCHEDULE A: 17F-5 APPROVAL
PAGE 6
<TABLE>
<CAPTION>
FUND
OFFICER
INITIALS COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
<S> <C> <C> <C>
/s/ TCT United Kingdom State Street Bank and Trust Company None;
The Bank of England,
The Central Gilts Office (CGO);
The Central Moneymarkets Office (CMO)
______ Uruguay Citibank, N.A. None
______ Venezuela Citibank, N.A. None
______ Zambia Barclays Bank of Zambia Limited Lusaka Central Depository (LCD)
______ Zimbabwe Barclays Bank of Zimbabwe Limited None
______ Euroclear (The Euroclear System)/State Street London Limited
______ Cedel (Cedel Bank, societe anonyme)/State Street London Limited
</TABLE>
CERTIFIED BY:
/S/ TAI-CHIN TUNG 7/23/96
---------------------------------- ------------------------------
FUND'S AUTHORIZED OFFICER DATE
<PAGE> 43
SCHEDULE B
The standard settlement periods for securities transactions in foreign
markets for purposes of Section 9 of the Custodian Contract between Schwab
Annuity Portfolios and State Street Bank and Trust Company shall be as follows:
<TABLE>
<S> <C> <C>
Country Settlement Period
(TD = Trade Date)
Australia TD plus 5
Austria Second Monday after TD
Belgium Forward market equities- next
fortnightly settlement period
Cash market securities-
TD plus 3
Canada TD plus 5
Denmark TD plus 3
France Forward market equities-
last business day of month
Cash market securities-
TD plus 5
Germany TD plus 2
Hong Kong TD plus 2
Italy Forward market equities- next two-
week settlement cycle
Cash market equities-
TD plus 3
Japan TD plus 3
Netherlands TD plus 5
New Zealand TD plus 5
Norway TD plus 3
Singapore TD plus 5
</TABLE>
<PAGE> 44
<TABLE>
<S> <C> <C>
Spain Friday of week following TD
Sweden TD plus 3
Switzerland Forward market equities-
Last trading day of month
Cash market securities-
TD plus 3
United Kingdom Next fixed fortnightly
settlement date
Euroclear-Cedel Book-entry entirely within
Euroclear- Cedel-TD plus 5
Cross-border or physical
settlements-applicable
market settlement period
</TABLE>
<PAGE> 45
SCHEDULE C
PORTFOLIO
Schwab Asset Director(R) - High Growth Portfolio
<PAGE> 1
EXHIBIT 8(f)
AMENDED SCHEDULE A
TO THE TRANSFER AGENCY
AGREEMENT FOR SCHWAB
ANNUITY PORTFOLIOS
FUND FUND EFFECTIVE DATE
- ---- -------------------
Schwab Money Market Portfolio March 29, 1994
Schwab Asset Director-High Growth Portfolio August 4, 1996
Schwab S&P 500 Portfolio August 4, 1996
SCHWAB ANNUITY PORTFOLIOS
By:/s/ Timothy F. McCarthy
------------------------------
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB & CO., INC.
By:/s/ Colleen M. Hummer
------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President
A-1
<PAGE> 2
AMENDED SCHEDULE C
TO THE TRANSFER AGENCY
AGREEMENT FOR SCHWAB
ANNUITY PORTFOLIOS
FUND FEE
- ---- ---
Schwab Money Market Portfolio None
Schwab Asset Director-High Growth Portfolio None
Schwab S&P 500 Portfolio None
SCHWAB ANNUITY PORTFOLIOS
By:/s/ Timothy F. McCarthy
------------------------------
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB & CO., INC.
By:/s/ Colleen M. Hummer
------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President
C-1
<PAGE> 1
EXHIBIT 8(h)
AMENDED SCHEDULE A
TO THE SHAREHOLDER SERVICE
AGREEMENT FOR SCHWAB
ANNUITY PORTFOLIOS
FUND FUND EFFECTIVE DATE
- ---- -------------------
Schwab Money Market Portfolio March 29, 1994
Schwab Asset Director-High Growth Portfolio August 4, 1996
Schwab S&P 500 Portfolio August 4, 1996
SCHWAB ANNUITY PORTFOLIOS
By:/s/ Timothy F. McCarthy
------------------------------
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB & CO., INC.
By:/s/ Colleen M. Hummer
------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President
A-1
<PAGE> 2
AMENDED SCHEDULE C
TO THE SHAREHOLDER SERVICE
AGREEMENT FOR SCHWAB
ANNUITY PORTFOLIOS
FUND FEE
- ---- ---
Schwab Money Market Portfolio None
Schwab Asset Director-High Growth Portfolio None
Schwab S&P 500 Portfolio None
SCHWAB ANNUITY PORTFOLIOS
By:/s/ Timothy F. McCarthy
------------------------------
Name: Timothy F. McCarthy
Title: President and Trustee
CHARLES SCHWAB & CO., INC.
By:/s/ Colleen M. Hummer
------------------------------
Name: Colleen M. Hummer
Title: Senior Vice President
C-1
<PAGE> 1
EXHIBIT 9
LICENSE AGREEMENT
LICENSE AGREEMENT, dated as of August 1, 1996 (the "Commencement Date")
by and between STANDARD & POOR'S, a division of The McGraw-Hill Companies, Inc.
("S&P"), a New York corporation, having an office at 25 Broadway, New York, New
York 10004, and SCHWAB ANNUITY PORTFOLIOS ("Licensee"), a Massachusetts business
trust having an office 101 Montgomery Street, San Francisco, CA 94104.
WHEREAS, S&P compiles, calculates, maintains and owns rights in and to
the S&P 500 Composite Stock Price Index and to the proprietary data therein
contained (such rights being hereinafter individually and collectively referred
to as the "S&P 500 Index"); and
WHEREAS, S&P uses in commerce and has trade name and trademark rights
to the designations "Standard & Poor's(R)", "S&P(R)", "Standard & Poor's 500",
"S&P 500(R)" and "500", in connection with the S&P 500 Index (such rights being
hereinafter individually and collectively referred to as the "S&P Marks"); and
WHEREAS, Licensee wishes to use the S&P 500 Index as a component of the
product or products described in Exhibit A attached hereto and made a part
hereof (individually and collectively referred to as the "Product"); and
WHEREAS, Licensee wishes to use the S&P Marks in connection with the
marketing and/or promotion of the Product and in connection with making
disclosure about the Product under applicable law, rules and regulations in
order to indicate that S&P is the source of the S&P 500 Index; and
<PAGE> 2
WHEREAS, Licensee wishes to obtain S&P's authorization to use the S&P
500 Index and the S&P Marks in connection with the Product pursuant to the terms
and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of License.
(a) Subject to the terms and conditions of this Agreement, S&P
hereby grants to Licensee a non-transferable, non-exclusive license (i) to use
the S&P 500 Index as a component of the Product to be marketed and/or promoted
by Licensee and (ii) to use and refer to the S&P Marks in connection with the
distribution, marketing and promotion of the Product (including in the name of
the Product) and in connection with making such disclosure about the Product as
Licensee deems necessary or desirable under any applicable law, rules,
regulations or provisions of this Agreement, but, in each case, only to the
extent necessary to indicate the source of the S&P 500 Index. It is expressly
agreed and understood by Licensee that no rights to use the S&P 500 Index and
the S&P Marks are granted hereunder other than those specifically described and
expressly granted herein.
(b) S&P agrees that no person or entity (other than the
Licensee) shall need to obtain a license from S&P with respect to the Product.
2. Term.
The term of this Agreement shall commence on the Commencement
Date and shall continue in effect thereafter until it is terminated in
accordance with its terms.
-2-
<PAGE> 3
3. License Fees.
(a) Licensee shall pay to S&P the license fees ("License
Fees") specified and provide the data called for in Exhibit B, attached hereto
and made a part hereof.
(b) During the term of this Agreement and for a period of one
(1) year after its termination, S&P shall have the right, during normal business
hours and upon reasonable notice to Licensee, to audit on a confidential basis
the relevant books and records of Licensee to determine that License Fees have
been accurately determined. The costs of such audit shall be borne by S&P unless
it determines that it has been underpaid by five percent (5%) or more; in such
case, costs of the audit shall be paid by Licensee.
4. Termination.
(a) At any time during the term of this Agreement, either
party may give the other party sixty (60) days prior written notice of
termination if the terminating party believes in good faith that material damage
or harm is occurring to the reputation or goodwill of that party by reason of
its continued performance hereunder, and such notice shall be effective on the
date specified therein of such termination, unless the other party shall correct
the condition causing such damage or harm within the notice period.
(b) In the case of breach of any of the material terms or
conditions of this Agreement by either party, the other party may terminate this
Agreement by giving sixty (60) days prior written notice of its intent to
terminate, and such notice shall
-3-
<PAGE> 4
be effective on the date specified therein for such termination unless the
breaching party shall correct such breach within the notice period.
(c) S&P shall have the right, in its sole discretion, to cease
compilation and publication of the S&P 500 Index and, in such event, to
terminate this Agreement if S&P does not offer a replacement or substitute
index. In the event that S&P intends to discontinue the S&P 500 Index, S&P shall
give Licensee at least one (1) year's written notice prior to such
discontinuance, which notice shall specify whether a replacement or substitute
index will be made available. Licensee shall have the option hereunder within
sixty (60) days after receiving such written notice from S&P to notify S&P in
writing of its intent to use the replacement or substitute index, if any, under
the terms of this Agreement. In the event that Licensee does not exercise such
option or no substitute or replacement index is made available, this Agreement
shall be terminated as of the date specified in the S&P notice and the License
Fees to the date of such termination shall be computed as provided in Subsection
4(f).
(d) Licensee may terminate this Agreement upon ninety (90)
days prior written notice to S&P if (i) Licensee is informed of the final
adoption of any legislation or regulation or the issuance of any interpretation
that in Licensee's reasonable judgment materially impairs Licensee's ability to
market and/or promote the Product; (ii) any material litigation or regulatory
proceeding regarding the Product is threatened or commenced; or (iii) Licensee
elects to terminate the public offering or other distribution of the Product, as
may be applicable. In such event
-4-
<PAGE> 5
the License Fees to the date of such termination shall be computed as provided
in Subsection 4(f).
(e) S&P may terminate this Agreement upon ninety (90) days (or
upon such lesser period of time if required pursuant to a court order) prior
written notice to Licensee if (i) S&P is informed of the final adoption of any
legislation or regulation or the issuance of any interpretation that in S&P's
reasonable judgment materially impairs S&P's ability to license and provide the
S&P 500 Index and S&P Marks under this Agreement in connection with such
Product; or (ii) any litigation or proceeding is threatened or commenced and S&P
reasonably believes that such litigation or proceeding would have a material and
adverse effect upon the S&P Marks and/or the S&P 500 Index or upon the ability
of S&P to perform under this Agreement. In such event the License Fees to the
date of such termination shall be computed as provided in Subsection 4(f).
(f) In the event of termination of this Agreement as provided
in Subsections 4(a), (b), (c), (d) or (e), the License Fees to the date of such
termination shall be computed by prorating the amount of the applicable annual
License Fees shown in Exhibit B on the basis of the number of elapsed days in
the current term. Any excess License Fees amount paid by Licensee for the
current term shall be refunded by S&P.
(g) Upon termination of this Agreement, Licensee shall cease
to use the S&P 500 Index and the S&P Marks in connection with the Product;
provided that Licensee may continue to utilize any previously printed materials
which contain the S&P Marks for a period of ninety (90) days following such
termination.
-5-
<PAGE> 6
5. S&P's Obligations.
(a) It is the policy of S&P to prohibit its employees
who are directly responsible for changes in the components of the S&P 500 Index
from purchasing or beneficially owning any interest in the Product and S&P
believes that its employees comply with such policy. Licensee shall have no
responsibility for ensuring that such S&P employees comply with such S&P policy
and shall have no duty to inquire whether any purchasers or sellers of the
Product are such S&P employees. S&P shall have no liability to the Licensee with
respect to its employees' adherence or failure to adhere to such policy.
(b) S&P shall not and is in no way obliged to engage in any
marketing or promotional activities in connection with the Product or in making
any representation or statement to investors or prospective investors in
connection with the promotion by Licensee of the Product.
(c) S&P agrees to provide reasonable support for Licensee's
development and educational efforts with respect to the Product as follows: (i)
S&P shall provide Licensee, upon request but subject to any agreements of
confidentiality with respect thereto, copies of the results of any marketing
research conducted by or on behalf of S&P with respect to the S&P 500 Index; and
(ii) S&P shall respond in a timely fashion to any reasonable requests for
information by Licensee regarding the S&P 500 Index.
(d) S&P or its agent shall calculate and disseminate the S&P
500 Index at least once each fifteen (15) seconds in
-6-
<PAGE> 7
accordance with its current procedures, which procedures may be modified by S&P.
(e) S&P shall promptly correct or instruct its agent to
correct any mathematical errors made in S&P's computations of the S&P 500 Index
which are brought to S&P's attention by Licensee, provided that nothing in this
Section 5 shall give Licensee the right to exercise any judgment or require any
changes with respect to S&P's method of composing, calculating or determining
the S&P 500 Index; and, provided further, that nothing herein shall be deemed to
modify the provisions of Section 9 of this Agreement.
6. Informational Materials Review.
Licensee shall use its best efforts to protect the
goodwill and reputation of S&P and of the S&P Marks in connection with its use
of the S&P Marks under this Agreement. Licensee shall submit to S&P for its
review and approval all informational materials pertaining to and to be used in
connection with the Product, including, where applicable, all prospectuses,
plans, registration statements, advertisements, brochures and promotional and
any other similar informational materials (including documents required to be
filed with governmental or regulatory agencies) that in any way use or refer to
S&P, the S&P 500 Index, or the S&P Marks (the "Informational Materials"). S&P's
approval shall be required with respect to the use of and description of S&P,
the S&P Marks and the S&P 500 Index and shall not be unreasonably withheld or
delayed by S&P. Specifically, S&P shall notify Licensee, by facsimile
transmission in accordance with Subsection 12(d) hereof, of its approval or
disapproval of any Informational Materials within twenty-four (24) hours
(excluding
-7-
<PAGE> 8
Saturday, Sunday and New York Stock Exchange Holidays) following receipt thereof
from Licensee. Any disapproval shall state S&P's reasons therefor. Any failure
by S&P to respond within such twenty-four (24) hour period shall be deemed to
constitute a waiver of S&P's right to review such Informational Materials.
Informational Materials shall be addressed to S&P, c/o Shirley Petersen,
Director - International Indices - Index Services, at the address specified in
Subsection 12(d) or via FAX: 212-412-0429 or 212-208-8911. Once Informational
Materials have been approved by S&P, subsequent Informational Materials which do
not alter the use or description of S&P, the S&P Marks or the S&P 500 Index need
not be submitted for review and approval by S&P.
7. Protection of Value of License.
(a) During the term of this Agreement, S&P shall use its best
efforts to maintain in full force and effect federal registrations for "Standard
& Poor's(R)", "S&P(R)", and "S&P 500(R)". S&P shall at S&P's own expense and
sole discretion exercise S&P's common law and statutory rights against
infringement of the S&P Marks, copyrights and other proprietary rights.
(b) Licensee shall cooperate with S&P in the maintenance of
such rights and registrations and shall take such actions and execute such
instruments as S&P may from time to time reasonably request, and shall use the
following notice when referring to the S&P 500 Index or the S&P Marks in any
Informational Material:
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's
500", and "500" are trademarks of The McGraw-Hill Companies, Inc. and
have been licensed for use by Schwab Annuity Portfolios. The Product is
not
-8-
<PAGE> 9
sponsored, endorsed, sold or promoted by Standard & Poor's and Standard
& Poor's makes no representation regarding the advisability of
investing in the Product.
or such similar language as may be approved in advance by S&P, it being
understood that such notice need only refer to the specific S&P Marks referred
to in the Informational Material.
8. Proprietary Rights.
(a) Licensee acknowledges that the S&P 500 Index is selected,
coordinated, arranged and prepared by S&P through the application of methods and
standards of judgment used and developed through the expenditure of considerable
work, time and money by S&P. Licensee also acknowledges that the S&P 500 Index
and the S&P Marks are the exclusive property of S&P, that S&P has and retains
all proprietary rights therein (including, but not limited to trademarks and
copyrights) and that the S&P 500 Index and its compilation and composition and
changes therein are in the control and discretion of S&P.
(b) S&P reserves all rights with respect to the S&P 500 Index
and the S&P Marks except those expressly licensed to Licensee hereunder.
(c) Each party shall treat as confidential and shall not
disclose or transmit to any third party any documentation or other written
materials that are marked as "Confidential and Proprietary" by the providing
party ("Confidential Information"). Confidential Information shall not include
(i) any information that is available to the public or to the receiving party
-9-
<PAGE> 10
hereunder from sources other than the providing party (provided that such source
is not subject to a confidentiality agreement with regard to such information)
or (ii) any information that is independently developed by the receiving party
without use of or reference to information from the providing party.
Notwithstanding the foregoing, either party may reveal Confidential Information
to any regulatory agency or court of competent jurisdiction if such information
to be disclosed is (a) approved in writing by the other party for disclosure or
(b) required by law, regulatory agency or court order to be disclosed by a
party, provided, if permitted by law, that prior written notice of such required
disclosure is given to the other party and provided further that the providing
party shall cooperate with the other party to limit the extent of such
disclosure. The provisions of this Subsection 8(c) shall survive any termination
of this Agreement for a period of five (5) years from disclosure by either party
to the other of the last item of such Confidential Information.
9. Warranties; Disclaimers.
(a) S&P represents and warrants that S&P has the right to
grant the rights granted to Licensee herein and that, subject to the terms and
conditions of this Agreement, the license granted herein shall not infringe any
trademark, copyright or other proprietary right of any person not a party to
this Agreement.
(b) Licensee agrees expressly to be bound itself by and
furthermore to include all of the following disclaimers and limitations in each
prospectus relating to the Product and upon request to furnish a copy thereof to
S&P:
-10-
<PAGE> 11
The Product is not sponsored, endorsed, sold or promoted by
Standard & Poor's ("S&P"). S&P makes no representation or warranty, express or
implied, to the owners of the Product or any member of the public regarding the
advisability of investing in securities generally or in the Product particularly
or the ability of the S&P 500 Index to track general stock market performance.
S&P's only relationship to the Licensee is the licensing of certain trademarks
and trade names of S&P and of the S&P 500 Index which is determined, composed
and calculated by S&P without regard to the Licensee or the Product. S&P has no
obligation to take the needs of the Licensee or the owners of the Product into
consideration in determining, composing or calculating the S&P 500 Index. S&P is
not responsible for and has not participated in the determination of the prices
and amount of the Product or the timing of the issuance or sale of the Product
or in the determination or calculation of the equation by which the Product is
to be converted into cash. S&P has no obligation or liability in connection with
the administration, marketing or trading of the Product.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY
FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE
PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY
DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH
-11-
<PAGE> 12
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Any changes in the foregoing disclaimers and limitations must
be approved in advance in writing by an authorized officer of S&P.
(c) Each party represents and warrants to the other that it
has the authority to enter into this Agreement according to its terms and that
its performance does not violate any laws, regulations or agreements applicable
to it.
(d) Licensee represents and warrants to S&P that the Product
shall at all times comply with the description in Exhibit A.
(e) Licensee represents and warrants to S&P that the Product
shall not violate any material applicable law, which violation has or can be
expected to have a material adverse effect on S&P, including but not limited to
any material banking, commodities and securities laws.
(f) Neither party shall have any liability for lost profits or
indirect, punitive, special, or consequential damages arising out of this
Agreement, even if notified of the possibility of such damages. Without
diminishing the disclaimers and limitations set forth in Subsection 9(b), or the
indemnification obligations of either party under Subsections
-12-
<PAGE> 13
10(a) or 10(b), in no event shall the cumulative liability of either party
exceed the average annual License Fees actually paid to S&P hereunder.
(g) Use of any marks by Licensee in connection with its
Product (including in the name of such Product) which are not the S&P Marks is
at Licensee's sole risk.
(h) The provisions of this Section 9 shall survive any
termination of this Agreement.
10. Indemnification.
(a) Licensee shall indemnify and hold harmless S&P, its
affiliates and their officers, directors, employees and agents against any and
all judgments, damages, costs or losses of any kind (including reasonable
attorneys' and experts' fees) as a result of any claim, action or proceeding
that arises out of or relates to (a) any breach by Licensee of its
representations or warranties under this Agreement, or (b) the Product;
provided, however, that S&P notifies Licensee promptly of any such claim, action
or proceeding. Licensee shall periodically reimburse S&P for its reasonable
expenses incurred under this Subsection 10(a). S&P shall have the right, at its
own expense, to participate in the defense of any claim, action or proceeding
against which it is indemnified hereunder; provided, however, it shall have no
right to control the defense, consent to judgment, or agree to settle any such
claim, action or proceeding without the written consent of Licensee without
waiving the indemnity hereunder. Licensee, in the defense of any such claim,
action or proceeding except with the written consent of S&P, shall not consent
to entry of any judgment or enter into any settlement which either
-13-
<PAGE> 14
(a) does not include, as an unconditional term, the grant by the claimant to S&P
of a release of all liabilities in respect of such claims or (b) otherwise
adversely affects the rights of S&P. This provision shall survive the
termination or expiration of this Agreement.
(b) S&P shall indemnify and hold harmless Licensee, its
affiliates and their officers, directors, employees and agents against any and
all judgments, damages, costs or losses of any kind (including reasonable
attorneys' and experts' fees) as a result of any claim, action, or proceeding
that arises out of or relates to any breach by S&P of its representations or
warranties under this Agreement; provided, however, that (a) Licensee notifies
S&P promptly of any such claim, action or proceeding; (b) Licensee grants S&P
control of its defense and/or settlement; and (c) Licensee cooperates with S&P
in the defense thereof. S&P shall periodically reimburse Licensee for its
reasonable expenses incurred under this Subsection 10(b). Licensee shall have
the right, at its own expense, to participate in the defense of any claim,
action or proceeding against which it is indemnified hereunder; provided,
however, it shall have no right to control the defense, consent to judgment, or
agree to settle any such claim, action or proceeding without the written consent
of S&P without waiving the indemnity hereunder. S&P, in the defense of any such
claim, action or proceeding, except with the written consent of Licensee, shall
not consent to entry of any judgment or enter into any settlement which either
(a) does not include, as an unconditional term, the grant by the claimant to
Licensee of a release of all liabilities in respect of such claims or (b)
otherwise adversely affects the rights of Licensee. This
-14-
<PAGE> 15
provision shall survive the termination or expiration of this Agreement.
11. Suspension of Performance.
Neither S&P nor Licensee shall bear responsibility or
liability for any losses arising out of any delay in or interruptions of their
respective performance of their obligations under this Agreement due to any act
of God, act of governmental authority, act of the public enemy or due to war,
the outbreak or escalation of hostilities, riot, fire, flood, civil commotion,
insurrection, labor difficulty (including, without limitation, any strike, or
other work stoppage or slow down), severe or adverse weather conditions,
communications line failure, or other similar cause beyond the reasonable
control of the party so affected.
12. Other Matters.
(a) This Agreement is solely and exclusively between the
parties hereto and shall not be assigned or transferred by either party, without
prior written consent of the other party, and any attempt to so assign or
transfer this Agreement without such written consent shall be null and void.
(b) This Agreement constitutes the entire agreement of the
parties hereto with respect to its subject matter and may be amended or modified
only by a writing signed by duly authorized officers of both parties. This
Agreement supersedes all previous agreements between the parties with respect to
the subject matter of this Agreement. There are no oral or written collateral
representations, agreements, or understandings except as provided herein.
-15-
<PAGE> 16
(c) No breach, default, or threatened breach of this Agreement
by either party shall relieve the other party of its obligations or liabilities
under this Agreement with respect to the protection of the property or
proprietary nature of any property which is the subject of this Agreement.
(d) Except as set forth in Section 6 hereof with respect to
Informational Materials, all notices and other communications under this
Agreement shall be (i) in writing, (ii) delivered by hand, by registered or
certified mail, return receipt requested, or by facsimile transmission to the
address or facsimile number set forth below or such address or facsimile number
as either party shall specify by a written notice to the other and (iii) deemed
given upon receipt.
Notice to S&P: Standard & Poor's
25 Broadway
New York, New York 10004
Attn: James G. Branscome
Senior Vice President
Equity Information Services
Fax #: 212-412-0294
Notice to Licensee: Schwab Annuity Portfolios
101 Montgomery Street
San Francisco, CA 94104
Attn: Frances Cole, Secretary
Fax #: 415-974-7651
(e) This Agreement shall be interpreted, construed and
enforced in accordance with the laws of the State of New York.
(f) Each party agrees that in connection with any legal action
or proceeding arising with respect to this
-16-
<PAGE> 17
Agreement, they will bring such action or proceeding only in the United States
District Court for the Southern District of New York or in the Supreme Court of
the State of New York in and for the First Judicial Department and each party
agrees to submit to the jurisdiction of such court and venue in such court and
to waive any claim that such court is an inconvenient forum.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first set forth above.
SCHWAB ANNUITY PORTFOLIOS STANDARD & POOR'S
a division of
The McGraw-Hill Companies, Inc.
BY: /s/Stephen B. Ward BY: /s/Elliot Shurgin
---------------------------- ----------------------------
NAME: Stephen B. Ward NAME: Elliot Shurgin
-------------------------- --------------------------
Vice President &
TITLE: Senior Vice President TITLE: General Manager
------------------------- -------------------------
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<PAGE> 18
EXHIBIT A
Product: The Schwab S&P 500 Portfolio (the "Product") is an investment portfolio
designed to serve as an investment vehicle to fund benefits under variable
insurance contracts whose investment objective is to track the price and
dividend performance (total return) of publicly-traded common stocks of US
companies as represented by the S&P 500 Index.
-18-
<PAGE> 19
EXHIBIT B
LICENSE FEES
Licensee shall pay S&P License Fees computed as follows:
The License Fee shall be one basis point (.0001) of the average daily
net assets of the Product computed quarterly. The License Fee shall be payable
to S&P within thirty (30) days after the close of each calendar quarter in which
it is incurred; each such payment shall be accompanied by a statement setting
forth the basis for its calculation.
-19-
<PAGE> 1
EXHIBIT 11(A)
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference to our
firm under the caption "Legal Counsel" included in or made a part of
Post-Effective Amendment No. 5 to the Registration Statement of Schwab Annuity
Portfolios on Form N-1A (Nos. 33-74534 and 811-8314) under the Securities Act of
1933, as amended.
/s/Ropes & Gray
ROPES & GRAY
Washington, D.C.
September 5, 1996
<PAGE> 1
Exhibit 11.b
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 5 to the registration
statement on Form N-1A of Schwab Annuity Portfolios (the "Registration
Statement") of our report dated January 31, 1996, relating to the financial
statements and financial highlights of Schwab Money Market Portfiolio, which
appears in such Statement of Additional Information, and to the incorporation by
reference of our report into the Schwab Money Market Portfolio Prospectus which
constitutes part of this Registration Statement. We also consent to the
reference to us under the heading "Accountants and Reports to Shareholders" in
such Statement of Additional Information.
/s/Price Waterhouse LLP
- -----------------------
Price Waterhouse LLP
San Francisco, California
September 5, 1996
<PAGE> 1
EXHIBIT 13(B)
PURCHASE AGREEMENT
Schwab Annuity Portfolios (the "Trust"), a Massachusetts business
trust, and Charles Schwab & Co., Inc. ("Schwab"), a California corporation,
hereby agree as of August 5, 1996, as follows:
1. The Trust hereby offers and Schwab hereby purchases 1,000 units of
beneficial interest of each Series B and C of the Trust representing interests
in the series of shares known as SCHWAB ASSET DIRECTOR-HIGH GROWTH PORTFOLIO
and SCHWAB S&P 500 PORTFOLIO, respectively (each such 1,000 units of beneficial
interest being hereafter collectively known as "Shares") at a price of $1.00
per Share. Schwab hereby acknowledges purchase of the Shares and the Trust
hereby acknowledges receipt from Schwab of funds in the amount of $1,000 for
each such series of the Trust in full payment for the Shares. It is further
agreed that no certificate for the Shares will be issued by the Trust.
2. Schwab represents and warrants to the Trust that the Shares are
being acquired for investment purposes and not with a view to the distribution
thereof.
3. The names "Schwab Annuity Portfolios" and "Trustees of Schwab
Annuity Portfolios" refer, respectively to the Trust created and the Trustees
as Trustees but not individually or personally, acting from time to time under
an Agreement and Declaration of Trust dated as of January 21, 1994, to which
reference is hereby made and a copy of which is on file at the Office of the
Secretary of State of the Commonwealth of Massachusetts and elsewhere as
required by law, and to any and all amendments thereto so filed or hereafter
filed. The obligations of "Schwab Annuity Portfolios" entered into in the name
or on behalf thereof by any of the Trustees, representatives or agents are not
made individually, but only in such capacities, and are not binding upon any of
the Trustees, Shareholders or representatives of the Trust personally, but bind
only the assets of the Trust, and all persons dealing with any series of Shares
of the Trust must look solely to the assets of the Trust belonging to such
series for the enforcement of any claims against the Trust.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed the Agreement to
be duly executed day and year first written above.
Attest: SCHWAB ANNUITY PORTFOLIOS
/s/ David H. Lui By: /s/ Stephen B. Ward
- ----------------------- -------------------
Name: Stephen B. Ward
Title: Senior Vice President and
Chief Investment Officer
Attest: CHARLES SCHWAB & CO., INC.
/s/ Heidi A. Wagner By: /s/ Timothy F. McCarthy
- ----------------------- -----------------------
Name: Timothy F. McCarthy
Title: Executive Vice President
<PAGE> 1
[ARTICLE] 6
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-START] JAN-01-1995
[PERIOD-END] DEC-31-1995
[INVESTMENTS-AT-COST] 17727647
[INVESTMENTS-AT-VALUE] 17727647
[RECEIVABLES] 223817
[ASSETS-OTHER] 29680
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 17981144
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1068712
[TOTAL-LIABILITIES] 1068712
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 16912496
[SHARES-COMMON-STOCK] 16912496
[SHARES-COMMON-PRIOR] 7409551
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (64)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 16912432
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 660502
[OTHER-INCOME] 0
[EXPENSES-NET] 58215
[NET-INVESTMENT-INCOME] 602287
[REALIZED-GAINS-CURRENT] 33
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 602320
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 602287
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 68313915
[NUMBER-OF-SHARES-REDEEMED] 59363572
[SHARES-REINVESTED] 552602
[NET-CHANGE-IN-ASSETS] 9502978
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (97)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 53557
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 118893
[AVERAGE-NET-ASSETS] 11643203
[PER-SHARE-NAV-BEGIN] 1.00
[PER-SHARE-NII] .05
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] .05
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.00
[EXPENSE-RATIO] .50
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
