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STATEMENT OF ADDITIONAL INFORMATION
SCHWAB ANNUITY PORTFOLIOS
101 Montgomery Street, San Francisco, CA 94104
SCHWAB MONEY MARKET PORTFOLIO
APRIL 29, 1996
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus dated April 29, 1996 (as amended from time to
time) for the Schwab Money Market Portfolio (the "Fund"), a separately managed
investment portfolio of Schwab Annuity Portfolios (the "Trust"). The Fund is
currently the only investment portfolio of the Trust. The Fund is designed to
serve as an investment vehicle for variable annuity contracts ("Contracts")
issued through separate accounts ("Separate Accounts") of participating life
insurance companies ("Participating Insurance Companies").
This Fund is intended for retirement savings or other long-term investment
purposes. In the future, Fund shares 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 Prospectus, 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
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INVESTMENT TECHNIQUES........................................................................................... 2
INVESTMENT POLICIES AND RESTRICTIONS............................................................................ 3
MANAGEMENT OF THE TRUST......................................................................................... 7
PORTFOLIO TRANSACTIONS AND TURNOVER............................................................................. 13
DISTRIBUTIONS AND TAXES......................................................................................... 14
SHARE PRICE CALCULATION......................................................................................... 15
YIELD ...........................................................................................................16
GENERAL INFORMATION............................................................................................. 17
PURCHASE AND REDEMPTION OF SHARES............................................................................... 19
OTHER INFORMATION............................................................................................... 19
RATINGS OF INVESTMENT SECURITIES................................................................................ 20
FINANCIAL STATEMENTS........................................................................................... F-1
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INVESTMENT TECHNIQUES
EURODOLLAR CERTIFICATES OF DEPOSIT AND FOREIGN SECURITIES
Before investing in Eurodollar certificates of deposit, the 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 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 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 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 Fund can invest a portion of its assets in asset-backed commercial
paper and other money market fund Eligible Securities (as that term is defined
on pages 5 and 6). 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
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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.
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 Investment Company Act of 1940,
as amended, hereinafter the "1940 Act") of the Fund.
THE FUND MAY NOT:
(1) Purchase securities or make investments other than in accordance with
its investment objective and policies.
(2) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities)
if, as a result, 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 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 Fund has determined to
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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 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)
(12) Make loans to others, except the 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,
_________________
(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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and (ii) lend its portfolio securities (up to one-third of the 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 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 Fund's total net assets falls
below an amount equal to three times the amount of its indebtedness
from money borrowed, the Fund will, within three business days, reduce
its indebtedness to the extent necessary.
(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 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
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(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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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 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 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 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 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 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, the Fund may
invest more than 5% of the value of its assets in securities of a single issuer
for a period of up to 3 days in certain limited circumstances.
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Also as noted above, the 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 Fund's
shares and in the net yield on the Fund's investments. Borrowing also increases
the Fund's exposure to capital risk.
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:
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POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
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CHARLES R. SCHWAB* Chairman and Trustee Chairman, Chief Executive Officer
July 29, 1937 and Director, The 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), and AirTouch
Communications (a
telecommunications company)
and Siebel Systems (a software
company).
TIMOTHY F. McCARTHY** President and Trustee Executive Vice President -
September 19, 1951 Mutual Funds, Charles 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.
</TABLE>
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*Mr. Schwab is an "interested person" of the Trust.
**Mr. McCarthy is an "interested person" of the Trust.
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POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
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DONALD F. DORWARD Trustee President and Chief Executive Officer, Dorward &
September 23, 1931 Associates (advertising and marketing/consulting).
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).
A. JOHN GAMBS Treasurer and Principal Executive Vice President - Finance and Chief
November 16, 1945 Financial Officer Financial Officer, The Charles Schwab Corporation;
Executive Vice President, Chief Financial Officer
and Director, Charles Schwab & Co., Inc.; Chief
Financial Officer and Director, Charles Schwab
Investment Management, Inc.; and Chief Financial
Officer, The Charles Schwab Trust Company.
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 & Senior Vice President and Chief Investment Officer,
April 5, 1955 Chief Investment Charles Schwab Investment Management, Inc.
Officer
</TABLE>
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*Mr. Klipp is an "interested person" of the Trust.
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<TABLE>
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POSITION WITH
NAME/DATE OF BIRTH THE TRUST PRINCIPAL OCCUPATION
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FRANCES COLE Secretary Vice President, Chief Counsel, Chief Compliance
September 9, 1955 Officer and Assistant Corporate Secretary, Charles
Schwab Investment Management, Inc.
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
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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.")
COMPENSATION TABLE(1)
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Pension or
Retirement
Benefits Accrued Estimated Annual
as Part of Fund Benefits Upon Total
Aggregate Expenses from Retirement from Compensation
Name of Person, Compensation the Fund the Fund from the Fund
Position from the Trust Complex(2) Complex(2) Complex(2)
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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
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<CAPTION>
Pension or
Retirement
Benefits Accrued Estimated Annual
as Part of Fund Benefits Upon Total
Aggregate Expenses from Retirement from Compensation
Name of Person, Compensation the Fund the Fund from the Fund
Position from the Trust Complex(2) Complex(2) Complex(2)
- -------------------- -------------- ---------------- ---------------- -----------------
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Donald R. Stephens, $1,300 N/A N/A $73,000
Trustee
Michael W. Wilsey, $1,300 N/A N/A $73,000
Trustee
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1 Figures are for the Trust's fiscal year ended December 31,
1995.
2 "Fund Complex" comprises all 23 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 Fund's investment adviser 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 23 mutual funds,
including the Fund, with over $35 billion in assets as of April 15, 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
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vote of the outstanding shares of the Fund, and will terminate automatically
upon assignment.
Pursuant to the Advisory Agreement, the Investment Manager is entitled
to receive from the 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, the
Fund paid investment advisory and administration fees of $608 (fees were reduced
by $52,949).
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;
registration fees; 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.
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 Fund's shares. Currently, the Fund is designed as an
investment vehicle for Separate Accounts of Participating Insurance Companies
and is intended for retirement savings or other long-term investment purposes.
The Fund pays the cost for the prospectuses and shareholder reports to be
prepared and delivered to existing Participating Insurance Company Contract
owners with investment allocations in the Schwab Money Market Portfolio
sub-account. 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 Trust.
PFPC, Inc., at 400 Bellevue Parkway Wilmington, Delaware 19809, serves
as Fund Accountant for the Trust.
ACCOUNTANTS AND REPORTS
TO SHAREHOLDERS
The Trust's independent accountants, Price Waterhouse LLP, audit and
report on the annual financial
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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
objective of the Fund in relation to movements in the general level of interest
rates; invest money obtained from the sale of Fund shares; reinvest proceeds
from maturing portfolio securities; and meet redemptions of Fund shares.
Portfolio transactions may increase or decrease the yield of the Fund depending
upon management's ability to correctly time and execute them.
The Investment Manager, in effecting purchases and sales of portfolio
securities for the Fund, 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 Fund 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 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 will
usually be principal transactions. Securities will normally be purchased
directly from the issuer or from an underwriter or market maker for the
securities.
The investment decisions for the Fund 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 Fund.
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 Fund.
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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.
PORTFOLIO TURNOVER
Because securities with maturities of less than one year are excluded
from required portfolio turnover rate calculations, the Fund's portfolio
turnover rate for reporting purposes is expected to be zero.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The Fund calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of the Fund consists of: (1)
accrued interest income plus or minus amortized discount or premium, minus (2)
accrued expenses allocated to the Fund. If the Fund realizes any capital gains,
they will be distributed at least once during the year as determined by the
Board of Trustees. Any realized short-term 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 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.
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 Fund are available only through Separate
Accounts of Participating Insurance Companies and Plans.
It is the policy of the 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
Fund expects to eliminate or reduce to a nominal amount the federal income tax
to which it is subject.
In order to qualify as a regulated investment company, the 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
14
<PAGE> 15
(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
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 Fund may engage in short-term trading and
certain hedging transactions and may limit the range of the Fund's investments.
If the 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, the 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
Fund intends to make sufficient distributions to shareholders to meet these
requirements.
The Fund may engage in investment techniques that may alter the timing
and character of the Fund's income. The 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.
SHARE PRICE CALCULATION
The Fund values its portfolio instruments at amortized cost, which
means they are valued at their acquisition cost, as adjusted for amortization of
premium or discount, rather than at current market value. Calculations are made
to compare the value of the Fund's investments 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
15
<PAGE> 16
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 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 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 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.
YIELD
The historical performance of the 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 Fund's effective yield
was 5.27%.
Yields quoted for the Fund include the effect of deducting the 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 Fund through
Participating Insurance Companies'
16
<PAGE> 17
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 Fund's performance has the effect of increasing
the performance quoted. You should bear in mind the effect of these charges when
comparing the Fund's performance to those of other mutual funds.
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 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.
17
<PAGE> 18
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, 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 March 31, 1996, Transamerica Occidental, Separate Account VA-5,
Variable Annuity Dept. B-100, 1150 South Olive, Los Angeles, California 90015
legally or beneficially owned 95.62% of the Fund's shares of beneficial
interest. In addition, as of April 15, 1996, the officers and Trustees of the
Trust, as a group, owned less than 1% of the Trust's outstanding voting
securities.
18
<PAGE> 19
PURCHASE AND REDEMPTION OF SHARES
You cannot purchase shares of the Fund directly, but you may allocate
account value under your Contract to and from the Fund 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.
Since the Fund is intended as an investment vehicle for Participating
Insurance Companies' Separate Accounts, it is anticipated these Separate
Accounts will be the Fund's only shareholders. On each day that the net asset
value per share of the Fund is determined ("Business Day"), the 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 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 Fund intends 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 Fund.
OTHER INFORMATION
The Fund's Prospectus 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 Prospectus 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 Prospectus 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
19
<PAGE> 20
filed as an exhibit to the Registration Statement of which the Prospectus and
this Statement of Additional Information form a part, each such statement being
qualified in all respects by such reference.
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.
20
<PAGE> 21
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.
21
<PAGE> 22
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.
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.
22
<PAGE> 23
________
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--100.0% (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> 24
________
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> 25
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 . . . . . . . . . . . . . . . . . . . . . . . 24,643
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> 26
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)
DECEMBER 31, TO 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> 27
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 on 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> 28
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 OF
YEAR ENDED 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
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<PAGE> 29
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
